Tag Archives: Arbitrariness

Arbitral Award – Concept of Public Policy

In Oil and Natural Gas Corporation Ltd. v. Saw Pipes Ltd., (2003) 5 SCC 705 it was observed as under:

       “Therefore, in our view, the phrase “public policy of India” used in Section 34 in context is required to be given a wider meaning. It can be stated that the concept of public policy connotes some matter which concerns public good and the public interest. What is for public good or in public interest or what would be injurious or harmful to the public good or public interest has varied from time to time. However, the award which is, on the face of it, patently in violation of statutory provisions cannot be said to be in public interest. Such award/judgment/decision is likely to adversely affect the administration of justice. Hence in addition to the narrower meaning given to the term “public policy” in Renusagar Power Company Ltd. v. General Electric Company, (1994) Supp (1) SCC 644, it is required to be held that the award could be set aside if it is patently illegal. The result would be – award could be set aside if it is contrary to:

  • Fundamental policy of India law; or
  • The interest of India; or
  • Justice or morality; or
  • In addition, if it is patently illegal.

Illegality must go to the root of the matter and if the illegality is of trivial nature, it cannot be held that award is against the public policy. Award could also be set aside if it is so unfair and unreasonable, that it shocks the conscience of the Court. Such award is opposed to public policy and is required to be adjudged void.” Uttar Haryana Bijli Vitran Nigam Ltd. v. M/s P.M. Electronics Ltd., 2020 (140) ALR 852.

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Amendment of Rule – During Selection Process

In P. Mohanan Pillai v. State of Kerala, 2007 (113) FLR 4420, it was held that once a selection proceeding has been initiated and during the pendency of the selection proceeding, if rule is amended, that will not effect the selection proceeding already going on. The relevant paragraph of the judgment is as under:         “Why such a decision had been taken had been taken after the publication of the result of the written examination and after calling 36 candidates for interview is not known. Why the company intended to enlarge the zone of consideration from 1 : 3 to 1 : 4 has also not been disclosed. Why the cut off mark was also lowered remained a mystery. It may be that in a given situation, a decision of the State may be changed, but therefore good and sufficient reasons must be assigned. The company failed to do so. The decision taken in this behalf smacks of arbitrariness. It is now well settled that ordinarily rules which were prevailing at the time, when the vacancies arose would be adhered to. The qualification must be fixed at that time. The eligibility criteria as also the procedures as was prevailing on the date of vacancy should ordinarily be followed.” Naresh Chandra Gupta v. Collector, Meerut,  2019 (160) FLR 1030

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Administrative Action – Subject to Control by Judicial Review

 Judicial restraint in exercise of judicial review was considered in the State (NCT of Delhi) v. Sanjeev, (2005) 5 SCC 181 as follows:

“One can conveniently classify under three heads the grounds on which administrative action is subject to control by judicial review. The first ground is “illegality”, the second “irrationality”, and the third “procedural impropriety”. These principles were highlighted by Lord Diplock in Council of Civil Service Unions v. Minister for the Civil Service, 1985 AC 374 : (1984) 3 WLR 1174 (HL) (commonly known as CCSU case). If the power has been exercised on a non-consideration or non-application of mind to relevant factors, the exercise of power will be regarded as manifestly erroneous. If a power (whether legislative or administrative) is exercised on the basis of facts which do not exist and which are patently erroneous, such exercise of power will stand vitiated.” It needs no emphasis that complex executive decisions in economic matters are necessarily empiric and based on experimentation. Its validity cannot be tested on any rigid principles or the application of any straitjacket formula. The Court while adjudging the validity of an executive decision in economic matters must grant a certain measure of freedom or play in the joints to the executive. Not mere errors, but only palpably arbitrary decisions alone can be interfered with in judicial review. The Court should therefore be loath to interfere with such recommendation of an expert body, and accepted by the Government, unless it suffers from the vice of arbitrariness, irrationality, perversity or violates any provisions of the law under which it is constituted. The Court cannot sit as an appellate authority, entering the arena of disputed facts and figures to opine with regard to manner in which Tafrc ought to have proceeded without any finding of any violation of rules or procedure. If a statutory body has not exercised jurisdiction properly the only option is to remand the matter for fresh consideration and not to usurp the powers of the authority. Vasavi Engg. College Parents Assn. v. State of Telangana, (2019) 7 SCC 172

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Arbitral Award – Interference With

An arbitral award can be set aside if it is contrary to (a) fundamental policy of Indian law, or (b) the interest of India, or (c) justice or morality. (Renusagar Power Co. Ltd. v. General Electric Co. [Renusagar Power Co. Ltd. v. General Electric Co., 1994 Supp (1) SCC 644] ) Patent illegality was added to the above three grounds in ONGC Ltd. v. Saw Pipes Ltd., (2003) 5 SCC 705. Illegality must go to the root of the matter and in case the illegality is of trivial nature it cannot be held that the award is against the public policy. It was further observed in ONGC Ltd. v. Saw Pipes Ltd., (2003) 5 SCC 705 that an award could also be set aside if it is so unfair and unreasonable that it shocks the conscience of the Court.

In  DDA v. R.S. Sharma and Co., (2008) 13 SCC 80 it was held that an award can be interfered with by the Court under Section 34 of the Act when it is contrary to:

(a) substantive provisions of law; or

(b) provisions of the 1996 Act; or

(c) against the terms of the respective contract; or

(d) patently illegal; or

(e) prejudicial to the rights of the parties.

The fundamental policy of India was explained in  ONGC Ltd. v. Western Geco International Ltd., (2014) 9 SCC 263 as including all such fundamental principles as providing a basis for administration of justice and enforcement of law in this country. It was held inter alia, that a duty is cast on every tribunal or authority exercising powers that affect the rights or obligations of the parties to show a “judicial approach”. It was further held that judicial approach ensures that an authority acts bona fide and deals with the subject in a fair, reasonable and objective manner and its decision is not actuated by any extraneous considerations. It was also held that the requirement of application of mind on the part of the adjudicatory authority is so deeply embedded in our jurisprudence that it can be described as a fundamental policy of Indian law. The Court further observed that the award of the Arbitral Tribunal is open to challenge when the arbitrators fail to draw an inference which ought to be drawn or if they had drawn an inference which on the face of it is untenable resulting in miscarriage of justice. The Court has the power to modify the offending part of the award in case it is severable from the rest, according to the said judgment ONGC Ltd. v. Western Geco International Ltd., (2014) 9 SCC 263.

The limit of exercise of power by courts under Section 34 of the Act has been comprehensively dealt in  Associate Builders v. DDA, (2015) 3 SCC 49. Lack of judicial approach, violation of principles of natural justice, perversity and patent illegality have been identified as grounds for interference with an award of the arbitrator. The restrictions placed on the exercise of power of a court under Section 34 of the Act have been analysed and enumerated in  Associate Builders v. DDA, (2015) 3 SCC 49 which are as follows:

(a) The court under Section 34(2) of the Act, does not act as a court of appeal while applying the ground of “public policy” to an arbitral award and consequently errors of fact cannot be corrected.

(b) A possible view by the arbitrator on facts has necessarily to pass muster as the arbitrator is the sole judge of the quantity and quality of the evidence.

(c) Insufficiency of evidence cannot be a ground for interference by the court. Re-examination of the facts to find out whether a different decision can be arrived at is impermissible under Section 34(2) of the Act.

(d) An award can be set aside only if it shocks the conscience of the court.

(e) Illegality must go to the root of the matter and cannot be of a trivial nature for interference by a court. A reasonable construction of the terms of the contract by the arbitrator cannot be interfered with by the court. Error of construction is within the jurisdiction of the arbitrator. Hence, no interference is warranted.

(f) If there are two possible interpretations of the terms of the contract, the arbitrator’s interpretation has to be accepted and the court under Section 34 cannot substitute its opinion over the arbitrator’s view. M.P. Power Generation Co. Ltd. v. ANSALDO Energia SPA, (2018) 16 SCC 661.

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Arbitration – Non-signatory Affiliates

In Chloro Controls India (P) Ltd. v. Severn Trent Water Purification Inc., (2013) 1 SCC 641, it was observed that ordinarily, an arbitration takes place between persons who have been parties to both the arbitration agreement and the substantive contract underlying it. English Law has evolved the “group of companies doctrine” under which an arbitration agreement entered into by a company within a group of corporate entities can in certain circumstances bind non-signatory affiliates. The test as formulated, is as follows:

       “Though the scope of an arbitration agreement is limited to the parties who entered into it and those claiming under or through them, the courts under the English Law have, in certain cases, also applied the “group of companies doctrine”. This doctrine has developed in the international context, whereby an arbitration agreement entered into by a company, being one within a group of companies, can bind its non-signatory affiliates or sister or parent concerns, if the circumstances demonstrate that the mutual intention of all the parties was to bind both the signatories and the non-signatory affiliates. This theory has been applied in a number of arbitrations so as to justify a tribunal taking jurisdiction over a party who is not a signatory to the contract containing the arbitration agreement.

       This evolves the principle that a non-signatory party could be subjected to arbitration provided these transactions were with group of companies and there was a clear intention of the parties to bind both, the signatory as well as the non-signatory parties. In other words, “intention of the parties” is a very significant feature which must be established before the scope of arbitration can be said to include the signatory as well as the non-signatory parties.”

       The court held that it would examine the facts of the case on the touchstone of the existence of a direct relationship with a party which is a signatory to the arbitration agreement, a ‘direct commonality’ of the subject matter and on whether the agreement between the parties is a part of a composite transaction:

       “A non-signatory or third party could be subjected to arbitration without their prior consent, but this would only be in exceptional cases. The court will examine these exceptions from the touchstone of direct relationship to the party signatory to the arbitration agreement, direct commonality of the subject matter and the agreement between the parties being a composite transaction. The transaction should be of a composite nature where performance of the mother agreement may not be feasible without aid, execution and performance of the supplementary or ancillary agreements, for achieving the common object and collectively having bearing on the dispute. Besides all this, the Court would have to examine whether a composite reference of such parties would serve the ends of justice. Once this exercise is completed and the court answers the same in the affirmative, the reference of even non-signatory parties would fall within the exception afore discussed.

       Explaining the legal basis that may be applied to bind a non-signatory to an arbitration agreement, it was held thus:

       “The first theory is that of implied consent, third party beneficiaries, guarantors, assignment and other transfer mechanisms of contractual rights. This theory relies on the discernible intentions of the parties and, to a large extent, on good faith principle. They apply to private as well as public legal entities.

       The second theory includes the legal doctrines of agent-principal relations, apparent authority, piercing of veil (also called “the alter ego”), joint venture relations, succession and estoppels. They do not rely on the parties’ intention but rather on the force of the applicable law.” Cheran Properties Ltd.v. Kasturi and Sons Ltd., (2018) 6 SCC 413.

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Fairness in Government Dealings

In espousing the equitable notion of exacting fairness in Governmental dealings the Court in Food Corporation of India v. Kamdhenu Cattle Feed Industries, (1993) 1 SCC 71 proclaimed that there was no unfettered discretion in public law and that a sovereign authority possessed powers only to use them for public good. Observing that the investiture of such power imposes with it, the duty to act fairly and to adopt a procedure which is “fair play in action”, it was underlined that it also raises a reasonable or legitimate expectation in every citizen to be treated fairly in his dealings with the State and its instrumentalities.
The observance of this obligation as a part of good administration, is obligated by the requirement of non-arbitrariness in a State action, which as a corollary, makes it incumbent on the State to consider and give due weight to the reasonable or legitimate expectations of the persons, likely to be affected by the decision, so much so that any failure to do so would proclaim unfairness in the exercise of power, thus vitiating the decision by its abuse or lack of bona fides. The besieged decision would then be exposed to the challenge on the ground of arbitrariness. It was propounded that mere reasonable or legitimate expectation of a citizen, may not by itself be a distinct enforceable right in all circumstances, but the failure to consider and give due weight to it, may render the decision arbitrary. It was thus, set down that the requirement of due consideration of legitimate expectation formed a part of the principle of non-arbitrariness, a necessary concomitant of the rule of law. Lalaram and Others v. Jaipur Development Authority, (2016) 11 SCC 31.

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Service Related Claim – Based on a Continuing Wrong

In the case of Union of India v. Tarsem Singh, (2008) 8 SCC 648, it was held as under:
“To summarise, normally, a belated service related claim will be rejected on the ground of delay and laches (where remedy is sought by filing a writ petition) or limitation (where remedy is sought by an application to the Administrative Tribunal). One of the exceptions to the said rule is cases relating to a continuing wrong. Where a service related claim is based on a continuing wrong, relief can be granted even if there is a long delay in seeking remedy, with reference to the date on which the continuing wrong commenced, if such continuing wrong creates a continuing source of injury. But there is an exception to the exception. If the grievance is in respect of any order or administrative decision which related to or affected several others also, and if the reopening of the issue would affect the settled rights of third parties, then the claim will not be entertained. For example, if the issue related to payment or refixation of pay or pension, relief may be granted in spite of delay as it does not affect the rights of third parties. But if the claim involved issues relating to seniority or promotion etc. affecting others, delay would render the claim stale and doctrine of laches/limitation will be applied. Insofar as the consequential relief of recovery of arrears for a past period is concerned, the principle relating to recurring/successive wrong will apply. Habib Ali v. State of U.P., 2015 (4) AWC 4174.

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Public Employment – Transparency

An important requirement of public employment is that of transparency. Therefore, an advertisement must specify the number of posts available for selection and recruitment. The qualifications and other schedule of recruitment process should be published with certainty and clarity. The advertisement should also specify the rules under which the selection is to be made and in absence of the rules, the procedure under which the selection is likely to be undertaken. This is necessary to prevent arbitrariness and to avoid change of criteria of selection after the selection process is commenced, thereby unjustly benefiting someone at the cost of others. Renu v. District and Sessions Judge, (2014) 14 SCC 50.

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