Indian Supreme Court sets aside half a billion dollar arbitral award to ‘cure’ miscarriage of justice

Vyapak Desai
Nishith Desai Associates, Mumbai
vyapak.desai@nishithdesai.com

Ashish Kabra
Nishith Desai Associates, Singapore
ashish.kabra@nishithdesai.com

Alipak Banerjee
Nishith Desai Associates, New Delhi
alipak.banerjee@nishithdesai.com

Parva Khare
Nishith Desai Associates, New Delhi
parva.khare@nishithdesai.com

Introduction

In a recent judgment in Delhi Metro Rail Corporation Ltd (DMRC) v Delhi Airport Metro Express Pvt Ltd (DAMEPL) (curative petition),^[1] the Supreme Court of India set aside the arbitral award dated 11 May 2017 (the ‘Award’) passed by the three-member Arbitral Tribunal, seated in New Delhi, India, (the ‘Arbitral Tribunal’) in favour of DAMEPL. What is of note here is that this judgment of the Supreme Court was passed in a curative petition.^[2]

Background to the dispute

DMRC and DAMEPL had entered into an agreement dated 25 August 2008 (the ‘Agreement’) for developing and operating the Airport Metro Express Line (the ‘Airport Metro’). The dispute began in July 2012, wherein DAMEPL sent a cure notice to DMRC regarding certain safety concerns. As DMRC had failed to cure the defects in the eyes of DAMEPL, they issued a termination letter dated 8 October 2012, terminating the Agreement. In response, DMRC initiated arbitration proceedings as envisaged under the Agreement. In the interim, the operations of Airport Metro were halted due to these safety concerns. The parties carried out inspections at the Airport Metro site to determine the extent of the safety concerns and to take necessary steps to address the concerns. Thereafter, the parties made a joint request before the Commissioner of Metro Railway Safety (CMRS) for a safety certificate under the Metro Railways (Operation and Maintenance) Act 2002 (the ‘Metro Act’). On 18 January 2013, the CMRS issued a safety certificate (the ‘Safety Certificate’) to operate the Airport Metro, albeit subject to certain speed restrictions. Accordingly, the operations of Airport Metro were reinstated. However, in June 2013, DAMEPL handed over the operations of Airport Metro to DMRC.

Arbitral proceedings

Pursuant to DMRC’s notice for arbitration, the Arbitral Tribunal was constituted in August 2013, comprising H L Bajaj, Presiding Arbitrator, S S Khurana, Arbitrator, and A P Mishra, Arbitrator. DMRC’s claim before the Arbitral Tribunal was based on the fact that DAMEPL’s termination of the Agreement was illegal. DMRC claimed that they had taken various steps to meet its obligations under the Agreement. DMRC sought directions against DAMEPL to take over the operations of Airport Metro or pay damages worth INR 3173 crores. DAMEPL asserted that their termination of the Agreement was valid under the terms of the Agreement, as DMRC had failed to cure the defects. Accordingly, DAMEPL filed a counterclaim seeking an amount of INR 3470 crores as termination payments under the Agreement, along with interests.

The primary issues before the Arbitral Tribunal were: (i) whether the termination of the Agreement by DAMEPL was valid; (ii) whether DMRC had failed to cure the defects in the cure period under the Agreement; and (iii) whether DAMEPL was entitled to receive termination payment and interest under the Agreement. The Arbitral Tribunal held that the claims of DMRC failed as they had failed to cure the defects in the stipulated time. Accordingly, the Arbitral Tribunal, vide the Award, decided all three issues in favour of DAMEPL and awarded them INR 2782.33 crores (US$330m only).

Proceedings before the Delhi High Court

Aggrieved by the Award, DMRC filed a petition under section 34 of the Arbitration and Conciliation Act 1996 (the ‘Act’) before the Delhi High Court, challenging the Award. However, the single judge of the Delhi High Court dismissed the petition, vide judgment dated 6 March 2018 (the ‘Single Judge Judgment’).^[3] DMRC, further aggrieved by the Single Judge Judgment, filed an appeal under section 37 of the Act, challenging the Single Judge Judgment. Vide judgment dated 15 January 2019 (the ‘Division Bench Judgment’),^[4] the Division Bench of the Delhi High Court reversed the Single Judge Judgment and partially set aside the Award on the grounds of ‘patent illegality’.

Proceedings before the Supreme Court

Both parties separately filed special leave petitions,^[5] which were admitted and finally decided by the Supreme Court vide judgment dated 9 September 2021 (the ‘SLP Judgment’).^[6] The Supreme Court held that the Division Bench Judgment was not good law and set it aside. The Supreme Court opined that the Division Bench of the Delhi High Court had overstepped its jurisdiction under section 37 of the Act. Furthermore, as per the Supreme Court, the Arbitral Tribunal had acted within its mandate, and the interpretation of the Agreement taken by the Arbitral Tribunal was one of the various possible interpretations. Therefore, the Division Bench ought not to have interfered with the Award. In light of the same, the Supreme Court had set aside the Division Bench Judgment and reinstated the Award. DMRC filed a review petition^[7] against the SLP Judgment, which was dismissed by the Supreme Court, vide order dated 23 November 2021 (the ‘Review Petition Order’).^[8] Finally, DMRC filed the Curative Petition before the Supreme Court against the SLP Judgment and the Review Petition Order.

Execution proceedings before the Delhi High Court

After the Supreme Court reinstated the Award, vide the SLP Judgment, DAMEPL filed an enforcement petition before the Delhi High Court to realise the amount under the Award (the ‘Enforcement Proceedings’). While DMRC had made partial payments towards the Award, they had failed to pay the balance amount on grounds of unavailability of funds. On the other hand, DAMEPL argued that the shareholders of DMRC, ie, the Union Ministry of Housing and Urban Affairs (the ‘Union Ministry’) and the Government of National Capital Territory of Delhi (GNCTD), had purposely diverted the funds of DMRC to frustrate the Award. The Delhi High Court, as a first, lifted DMRC’s corporate veil and directed the shareholders of DMRC, ie, the Union Ministry and GNCTD, to make payments to DAMEPL for realisation of the Award.^[9]

Decision of Supreme Court in curative petition

The Supreme Court, in curative petition, held that the SLP Judgment was incorrect, and upheld the Division Bench Judgment. The Supreme Court held that the interpretation of the Agreement, as taken by the Arbitral Tribunal, was not a possible interpretation that a reasonable person may take. The Arbitral Tribunal’s interpretation had the effect of rendering a portion of the Agreement otiose, thereby negating the intention of the parties to enter into the Agreement. As per the Agreement, DAMEPL could terminate the Agreement after giving 90 days’ notice to DMRC on the occurrence of any breach by DMRC, and DMRC has failed to cure the breach or failed to take effective steps for curing such breach within 90 days of receiving a cure notice.

The Arbitral Tribunal had only proceeded on the basis that DMRC did not entirely cure the various defects pointed out by DAMEPL, and had failed to consider whether DMRC had taken ‘effective steps for curing’ the defects/breaches. As per the record, the parties had carried out joint inspections of the Airport Metro site through various third-party agencies. They had jointly applied to obtain the safety certificate from CMRS under the Metro Act. However, the Arbitral Tribunal not only failed to consider any of these facts but did not provide any reasons for this non-consideration or why such steps did not constitute ‘effective steps’ under the Agreement. Therefore, the Award rendered by the Arbitral Tribunal was unreasoned in relation to the ‘effective steps’ taken by DMRC for curing the defects/breaches.

This non-consideration of the ‘effective steps’ by the Arbitral Tribunal also resulted in non-consideration of material evidence in the dispute. The fact that the CMRS had issued the Safety Certificate and allowed for the resumption of the operations of Airport Metro meant that DMRC had taken effective steps for curing the defects and breaches. This clearly shows that the Arbitral Tribunal not only gave an unreasoned Award but also failed to consider material evidence while deciding the dispute between the parties. The Supreme Court, in light of these circumstances, held that the Award was patently illegal, and liable to be set aside. Furthermore, the Supreme Court also directed that the Enforcement Proceedings be discontinued and any payments made by DMRC be refunded.

Curative petition: a Pandora’s box

Indian courts have consistently taken the least interventionist approach while considering challenges to arbitral awards, holding that it is not open for courts to re-evaluate the evidence and reconsider the factual findings arrived at by the arbitral tribunal.^[10] However, this is not an absolute rule. In fact, the Supreme Court, in another judgment, has held that an arbitral award that ignores vital evidence or rewrites the contract is liable to be set aside.^[11] The judgment of the Supreme Court in the Curative Petition follows these principles and has set aside the Award for failing to consider the Safety Certificate issued by CMRS and for rewriting the Agreement to ignore the phrase ‘effective steps for curing’ in the termination clause of the Agreement.

While the judgment of the Supreme Court is in the right direction, recognising the glaring lacunae in the Award and the SLP Judgment, it must be taken with a pinch of salt in the larger jurisprudence surrounding arbitration in India. The Supreme Court has rendered the judgment in a curative petition. A curative petition is a method of last resort to reconsider judgments/orders in review petitions.^[12] The scope of a curative petition is extremely limited and can only be entertained if a petitioner establishes: (i) a violation of principles of natural justice; (ii) bias by the judge; or (iii) abuse of the process of court. Curative petitions ought to be entertained only in the rarest of rare cases, which would require reconsideration of a final judgment ‘to set right miscarriage of justice’.^[13] Recently, in another judgment, the Supreme Court held that ‘it is difficult to accept that this Court can devise a curative jurisdiction that is expansive in character’.^[14]

The present judgment of the Supreme Court recognises the potential hazard of interfering with arbitral awards in curative jurisdiction. However, it fails to create any safeguards or distinguish why the present case was fit for interference under curative jurisdiction. The Supreme Court has attempted to assuage the concerns by holding that the SLP Judgment, which set aside the Division Bench Judgment, had resulted in a miscarriage of justice. Furthermore, the Supreme Court has opined that the interference was also necessitated by the fact that an important public utility, ie, the Delhi Metro was burdened with an exorbitant liability. However, this may open the floodgates of disgruntled parties knocking on the doors of the Supreme Court under curative jurisdiction.

This may have an adverse impact on the arbitration climate in India. Entertaining challenges to arbitral awards in review or curative petitions would result in the creation of a fourth or fifth stage of challenging an arbitral award after a party has exhausted all possible remedies, such as a petition under section 34 of the Act, an appeal under section 37 of the Act, a special leave petition under Article 136 of the Constitution or a review petition. One of the biggest advantages of arbitration has been the quick adjudication of disputes, the finality of the arbitral award and the limited scope of the appeals against the same. The present judgment of the Supreme Court may undo all three advantages of arbitration by, first, prolonging the dispute until finally decided by the Supreme Court in a curative petition; second, refusing the accord finality to arbitral award until finally upheld or set aside in a curative petition; and third, expanding the scope of challenge to arbitral award under the Supreme Court’s power to do complete justice under Article 142^[15] of the Constitution of India.

The judgment also highlights the need for selecting the right arbitrators for adjudicating disputes. Selection of the right arbitrators would ensure that arbitral awards are not passed without due consideration of all relevant evidence, as well as render the portions of the contract otiose. This can be achieved by implementing arbitral institutions in India, which can help ensure that the right arbitrators are appointed for the right disputes.