Setting Aside Arbitral Awards for Defective Reasoning

[Aman Deep Borthakur is a 5th Year B.A. LL.B. student at the National Law School of India University, Bengaluru]

The quality of arbitral awards has been a recurring concern leading to the pursuit for professionalisation of arbitration through the 2019 amendments to the Arbitration and Conciliation Act, 1996 (the “Act”). The Supreme Court, in its recent decision in Dyna Technologies v. Crompton Greaves (18 December 2019) has clarified the standard for scrutinising awards that have an alleged deficiency in reasoning.

Facts

The appellant, Dyna Technologies, and the respondent, Crompton Greaves, entered into a contract in 1994 for Dyna Technologies to set up an aquaculture unit. After the issuance of the work order and the commencement of work, Crompton Greaves terminated the contract. Dyna Technologies sought compensation for premature termination and the dispute was referred to arbitration. One of the claims pertained to the unproductive use of machineries. The tribunal granted compensation on this ground but failed to mention any reasoning for reaching this particular conclusion.

Crompton Greaves had approached a single judge of the Madras High Court who refused to set aside the award. Subsequently, the matter went before the division bench, which set aside that part of the award for lack of reasoning on the conclusion with respect to unproductive use of machineries. The Court also noted that it was not necessary to let the tribunal resume proceedings under section 34(4) of the Act since the contract itself barred payment of compensation on account of premature termination of the contract.

Dyna Technologies appealed to the Supreme Court arguing that the finding was in fact based on factors such as log books of Dyna Technologies which showed the actual losses suffered on account of termination. It was beyond the jurisdiction of the court under section 37 to overturn the tribunal’s finding merely because a different decision on those facts was possible. Crompton Greaves, on the other hand, argued that the decision should be set aside for violating express terms of the contract.

Ruling of the Supreme Court

Section 31(3) of the Act requires an award to state the reasons on which it is based, unless the parties agree otherwise. The Court stated that the purpose of the provision is to have reasoning which is intelligible and adequate and can be inferred by the courts from a fair reading of the award. In this case, the tribunal had merely restated Crompton Greaves’s contentions and concluded accordingly. Thus, the award was to be set aside for failure to state reasons.

Analysis

Previous Supreme Court decisions on this point such as Som Datt Builders v. State of Kerala (2009) have ruled that the award must have reasoning that reveals the thought process leading to the decision. The present judgement expands on that ruling by laying down a comprehensive standard for the level of reasoning required from an award. The Court states that an award must be proper, intelligible and adequate. First, propriety would be contravened if there is a flaw in the decision-making process. Presumably, this would also encompass procedural aspects of the decision such as reliance on a particular expert witness or piece of evidence. Secondly, the award would be unintelligible if no reasons have been provided. Lastly, adequacy would be compromised if the reasoning was not specific enough, having regard to the complexity of the issue in question.

Conclusion

The decision should be seen as a step forward in enhancing the quality of arbitral awards in India. There is an international consensus in arbitration today that an appellate authority may not second-guess the tribunal and substitute its own reasoning when two different views of the law and facts are possible. It is also not necessary that in a complex arbitration with multiple rounds of pleading and documentation the tribunal address each specific argument put forth by a party. However, when the reasoning as to a major claim is either absent or is so unintelligible so as to not reveal the tribunal’s basis for a particular ruling, it can be set aside.

The Supreme Court has followed the stance of the Australian High Court in the Westport Insurance case which stated that awards are not held to a uniform standard of reasoning as in judicial decisions, but are judged according to the specific dispute in question. The delivery of a speaking order is a key ingredient of the principles of natural justice. By endorsing this requirement, the decision has helped bring greater legitimacy to, and public trust in, the arbitral process.

Aman Deep Borthakur

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