This article is written by Abhiraam Shukla, 3rd Year Student, B.A., LL.B. [Hons.], National Law Institute University, Bhopal.
The jus naturale of Arbitral Jurisprudence, whether it is anent Domestic Arbitration or Foreign Arbitration, is that the award-making powers of the sole arbitrator / Arbitral Tribunal are decided by the terms of the principal contract between the parties. In most cases, the judicial standpoint shows that the extent and nature of powers by which an Arbitral Tribunal can make an award is exclusively according to the outline demarcated by provisions of the contract between the parties. The UNICTRAL Rules on Arbitration and the Arbitration and Conciliation Act, 1996 [hereinafter “1996 Act”] provide that an arbitrator shall act as amiable compositeuror ex aequo et bono only if the parties have expressly authorized the arbitral tribunal to do so. In all cases, the Arbitral Tribunal shall decide based on the terms of the contract. Recently, in the BCCI Arbitration, the Hon’ble Bombay High Court noted that principles of public law [Article 14 in the said case] do not apply to arbitration matters. The Court held noted that “A writ court may well hold against a public body on a public law principle or by invoking Article 14; but an arbitrator, constrained as he or she is by the contract, has no such power”.
However, a 2006 judgment of the Supreme Court titled K.N. Sathyapalan (Dead) by Lrs. vs. State of Kerala and Orsobserved an exception to the powers of an arbitrator vis-à-vis extent of jurisdiction of an arbitrator in case a party is unable to fulfill its obligations causing the obligations of the other party to be affected. The arbitrator, in such a case, shall be able to adjudicate in such a manner that is not provided for by the contract.
The crux of this article is the analysis of the stance of the Hon’ble Court which although, is justified on the ends of justice and fairness, might be construed to be against the nature of arbitral proceedings in the country. Further, the author ventures to analyze the award-making power of the arbitrator by the way of judicial scrutiny and contrasts the same to the rationale adopted in KN Sathyapalan. Apart from this, the author compares the KN Sathyapalan rationale with arbitral jurisprudence in the USA and concludes the piece by evaluating the implications of this judgment on the future of arbitration in India.
View of the Court in KN Sathyapalan judgment
The facts of KN Sathyapalan are briefly as follows: The Appellant/Claimant was awarded a contract of construction, but he could not fulfill the work due to certain disruptions. A supplemental agreement was signed between the parties which extended the time limit for construction but did not provide for any extra compensation in case prices hike during the extended period. Disputes arose between the parties and the matter was passed to Superintending Engineer who acted as the sole arbitrator. The sole arbitrator passed the award in favor of the Appellant/Claimant while allowing his claims regarding interruption of work, price rise of materials, losses incurred due to Respondents not handing over a suitable dumping yard. The Respondents appealed in the High Court against the award. The High Court held that the arbitrator had gone beyond his authority to grant claims of the appellant. High Court only allowed claims of the appellant regarding the non-availability of dumping yard. Hence, the Appellant/Claimant filed an appeal in the Supreme Court. (Para 1-4)
The question which arose before the Supreme Court was – “Whether in the absence of any price escalation clause in the Original Agreement and a specific prohibition to the contrary in the Supplemental Agreement, the appellant could have made any claim on account of escalation of costs and whether the Arbitrator exceeded his jurisdiction in allowing such claims as had been found by the High Court?”(Para 19)
The Hon’ble Court after analyzing various arguments and judgments submitted by both of the parties observed that in the ordinary course of nature, the parties would be bound by only the terms of the contract and the arbitrator shall have no jurisdiction to move away from the contract. The Court further held – “However, in the event, one of the parties to the contract is unable to fulfill its obligations under the contract which has a direct bearing on the work to be executed by the other party, the Arbitrator is vested with the authority to compensate the second party for the extra costs incurred by him as a result of the failure of the first party to live up to its obligations.”(Para 20)
Therefore, it is clear that the Supreme Court in this case increased the ambit of powers and jurisdiction of the arbitrator by not restricting itself only to the provisions of the 1996 Act or the terms of the contract. It was provided in the contract that there was no provision as to the escalation of the costs, even if it was due to the fault of either of the parties(Para 3). However, the Hon’ble Court read into the material facts of the case and ascertained the liability of the Respondents in not being able to prevent the delay in the work of the Appellant/Claimant. Thus, the Respondents were asked to compensate the Appellant/Claimant.
Limits of Arbitral Jurisdiction: Terms of Contract vs Case to Case Circumstances
In India, the judicial stance regarding the limits of the award-making powers of the arbitrator has been mixed. In some cases, the Supreme Court has held that the arbitrator cannot rule over what has been stipulated by the terms of the contract. Whereas in other cases the Supreme Court has backed the award given by the arbitrator even when it is not according to the terms of the contract.
- Judgments in Favour of the Increased Power of Arbitrator
In PM Paul vs Union of India, the Supreme Court perused the question of whether the arbitrator has exceeded his authority by awarding escalated costs and charges even when there was no escalation clause in the contract. The Court held that – “Arbitratorhad not misconducted himself in awarding the amount as he had done. Once it was found that there was a delay in execution of the contract due to the conduct of the respondent, respondent was liable for the consequences of the delay, namely, increase in prices.” It was held that the claim of the Appellants was not outside the purview of the contract and the arbitrator could make such an award.
Similarly, in TP Geroge v State of Kerala, a similar situation arose in which there was a supplemental agreement between a contractor and the State. The questions put before the Court was whether the contractor was debarred from pursuing his claims due to the Supplemental contract. The Supreme Court held that the arbitrator was well within his jurisdiction allowing the claims of the claimant although they were contrary to the Supplemental agreement between the appellant and the State government.
- Judgments Against the Increased Power of the Arbitrator
In few cases, the Supreme Court has also set aside the awards made by the arbitrator which were not according to the terms of the contract.
In M/S Alopi Parshad & Sons Limited v. The Union of India the provision for payment of charges at a specified rate had been made in the contract between the parties and the arbitrators could not ignore the express terms of the contract stating amounts not agreed to be paid. It was observed by the Apex Court that – “Courts have no general power to absolve a party from the performance of his part of the contract merely because its performance has become onerous on account of an unforeseen turn of events.”
Similarly, in State of UP vs Patel Engineering and Co. Ltd. And Ors, a question arose as to whether on the basis of a modified contract that specifically excluded payments of freight charges, any claim for variation of payment of such charges could be awarded by the arbitrator. The Court held that the arbitrator had not acted within its jurisdiction in granting freight charges and the District Judge had correctly held that the award made was not sustainable as the claimant was not entitled to such freight charges. The Supreme Court correctly held as follows- – “When no provision had been made in the contract for escalation of costs and the Supplemental Agreement entered into between the parties specifically provided that the contractor would not claim any enhanced rate for the work performed during the extended period of the contract, the Arbitrator had wrongly allowed some of the claims made by the appellant on account of escalation of costs and the High Court had rightly disallowed the same.”
Therefore, the jurisprudence regarding the limits of powers of arbitrators is filled with loopholes in the Indian context. In some cases, the Supreme Court has allowed the arbitrator to make an award outside the terms of the contract. Whereas in other cases, the power of the arbitrator has been restricted.
Limits of Arbitral Jurisdiction: US Jurisprudence
There have been several arbitration cases, particularly in the USA where the Courts have struck down awards that were made by arbitrators over the terms of the contract.
In Aspic Eng’g & Constr. Co. v. ECC Centcom Constructors the United States Court of Appeals for the Ninth Circuit held that in cases where awards resolving contract claims are not based on the real terms of the contract but on the individual arbitrator’s sense of “justice” and “public policy” they can be struck down by the Courts.
It has been explained by the US Supreme Court in Stolt-Nielsen S.A. v. Animal Feeds Int’l Corp. – “The task of an arbitrator is to interpret and enforce a contract, not to make public policy,” and where it does the latter, “an arbitration decision may be vacated under §10(a)(4) of the FAA Federal Arbitration Act”
In other words, it is acceptable when the arbitrator is interpreting the contract of parties, but not when he is re-writing it.
Therefore, it is clear that the US judicial bodies, unlike their Indian counterparts, are firm that the arbitrator can only pass awards according to the terms of the contract and nothing more. Furthermore, the approach of US Courts in interpreting the powers of arbitrators is specifically different from the approach of the Supreme Court in KN Sathyapalan as there have been few cases in which the US Courts have gone outside the provisions of the contract to ascertain the liabilities of the parties in case of arbitration matters. However, in KN Sathyapalan, both the sole arbitrator and the Supreme Court had rightly compensated the claimant for being unable to complete the contract due to the fault of the other party.
Conclusion – Some Loopholes yet to be Filled
In the conclusion of this article, it is concluded by the author that the rationale behind rulings of the Indian Supreme Court regarding the said powers of the arbitrator can be listed in two points:
- In cases, where the obligation cannot be fulfilled by one party in due time limit due to certain unforeseen circumstances, which cannot be attributed to the other party, the arbitrator shall resolve the claims according to the terms of the contract only.
- In cases, where one party was unable to fulfill his obligations due to a certain act of the other party the arbitrator shall compensate the claimant even if there is no such provision given in the contract.
However, this is by no means, a rule which can be said to be backed by a judgment and there are still quite a few loopholes in this regard.
Furthermore, the judgment of KN Sathyapalan is a valuable addition to the handful of cases in which the arbitrators and Courts have gone outside the limits of their powers to endorse the legality of the arbitral awards which are not entirely confined by the terms of the contract. Although scrutiny of the Indian judiciary shows that there is no definite approach of the courts regarding awards that are not stipulated in the contract, KN Sathyapalan is a salient ruling which can be efficaciously used as a precedent in future cases in which, due to fault of one party, the other party is not able to fulfill its obligations. This ruling shall be helpful to compensate claimants even in those cases where they have suffered monetarily due to unforeseeable fault of the other party. This shall also be beneficial where one party acts in a non-complying manner just because the contract and the arbitration agreement do not take specific cognizance of such non-compliance and thus there can be no remedy according to the textbook approach of arbitrational law.