India is currently facing a pressing need for arbitration reform, as highlighted by a recent ruling from the Calcutta High Court. The court upheld a substantial arbitral award of ₹1,354 crore in favor of Reliance Infrastructure in a dispute with the Damodar Valley Corporation related to the construction of a thermal power plant in Raghunathpur, West Bengal.
Justice Shekhar B Saraf, in his judgment, emphasized that courts should generally exercise caution when interfering with arbitral awards under Section 34 of the Arbitration and Conciliation Act. He raised concerns about the growing trend of judicial interference at various stages of the arbitration process in India. This interference not only undermines the effectiveness of arbitration as a dispute resolution mechanism but also negatively impacts India’s reputation as a business-friendly global destination. He stressed the urgent need for arbitration reform in India, which should not only reflect in legislative changes but also in the mindset of all stakeholders involved.
The court’s ruling came in response to an appeal by Damodar Valley Corporation, challenging an arbitral tribunal’s 2019 decision directing them to pay ₹1,354 crore to Reliance Infrastructure. This dispute stemmed from a contract signed in 2007, valued at ₹2,271 crore, for the construction of the thermal power plant. When disputes arose over project-related payments, the parties turned to arbitration.
The arbitral tribunal ruled in favor of Reliance Infrastructure, ordering Damodar Valley Corporation to pay ₹1,354 crore, which included a bank guarantee of ₹354 crore. While the High Court upheld most of the award, it found some of its findings to be patently illegal.
Importantly, the Court ruled that when examining the validity of arbitral awards, courts can delve beyond the text of the award itself and consider the entire record of the arbitral proceedings, even if such records are not explicitly mentioned in the award. Justice Saraf pointed out that the law now allows courts to go beyond the award’s text and consider all documents, submissions, and evidence presented before the arbitral tribunal.
The judge acknowledged previous judgments indicating that courts should limit their examination to what is recorded in the award, but he underscored that the law has evolved since the enactment of the 1996 Arbitration Act, replacing the 1940 Arbitration Act. He emphasized that courts can only exercise this power to review arbitral awards to determine if they are perverse, patently illegal, or contain errors on the face of the record.
The judgment stated that courts can take into account documents that were part of the arbitral proceedings’ record and within the knowledge of the arbitral tribunal, even if not expressly mentioned in the award. Additionally, the Court reiterated that it is possible to sever valid portions of an arbitral award from invalid parts, encouraging the practice of partially upholding awards instead of setting aside the entire award due to a few invalid portions.