17 January 2022 | Southern Railway v. Santhosh Babu | Arb A No 36 of 2020 | PB Suresh Kumar & CS Sudha JJ | Kerala High Court | 2022 SCC OnLine Ker 189

A 2-judge bench of the Kerala High Court has ruled that the tribunal had the jurisdiction to allow claims of additional expenses for work done during the extended period, rejecting the argument that the contract did not provide for it, and a subsequent agreement precluded it. It ruled that while doing so, the tribunal did not contravene Section 28 (3) ACA or commit patent illegality.

The respondent had not completed the work in the original timeline, and the term was extended. A “rider agreement” was executed to provide that the respondent would complete the work on the original terms. After the completion, with 923 days delay, the respondent claimed in arbitration compensation for cost escalation and additional expenses for work done during the extended period. The tribunal found that the respondent was entitled to the claims above because the delay was attributable to Railways (hindrances and instructions to execute new work and extra quantities in assigned work). The set-aside court dismissed the challenge.

Before the appellate court, Railways invoked Section 28 (3) ACA to argue that the tribunal decided contrary to the contract terms. Rejecting the challenge, the court noted the scope of the provision and reiterated that the tribunal’s interpretation of the contract could not be interfered with unless it is patently illegal. See our note below on the scope of Section 28 (3) ACA.

The court rejected Railways’ main defence that voluntarily executed rider agreements were ignored by the tribunal. The court cited those authorities where the Supreme Court had upheld the tribunal’s jurisdiction to award the claim in similar circumstances [TP George (2001) 2 SCC 758, KN Sathyapalan (2007) 13 SCC 43]. Even though the rider agreements in the cited cases were without prejudice, that was not considered an impediment because the point about rider agreements was not raised before the tribunal, depriving the respondent of a chance to establish that they were without prejudice. In addition, the court considered the rider agreements an unconscionable bargain [citing Central Inland (1986) 3 SCC 156].

The court also rejected Railways’ arguments that other special terms (SCC) and general terms (GCC) precluded any claims for delay, whatever be the reason for delay. One, the court noted, no one had brought those provisions to the notice of the tribunal. Two, on analysis, those provisions had no application.

On the question of award of interest, the court ruled that 18% post-award interest per annum was not compensatory but penal in nature which was not permissible. It was also unreasonable and did not consider prevailing economic conditions. In the court’s view, set-aside courts could modify interest rates [citing Vedanta (2019) 11 SCC 465]. Though Hakeem (2021) 9 SCC 1 ruled that set-aside courts could not modify an award, the decision was not on interest, which is an ancillary matter per SL Arora (2010) 3 SCC 690.

Scope of Section 28 (3) ACA

What does the post-2015 Amendment Section 28 (3) ACA mean when it states that “while deciding and making an award, the arbitral tribunal shall, in all cases, take into account the terms of the contract …” (emphasis added).

Before the amendment, the provision stated that the tribunal “shall decide in accordance with the terms of the contract.” (emphasis added)

The old provision was explained in Associate (2015) 3 SCC 49 [paras 42.3 to 45]. The court had said that contravention of Section 28 (3) ACA (old) was a ground to set aside an award for “patent illegality” but with a caveat. Based on Associate, the 246^th Law Commission Report suggested amending the provision. The amended provision was explained in Ssangyong (2019) 15 SCC 131.

The caveat of Associate and the subsequent explanation in Ssangyong is the law today (as of 11.02.2022) on Section 28 (3) ACA.

Associate para 42.3, after which the court cites other decisions until para 45, reads:

“This … contravention [of Section 28 (3)] must be understood with a caveat. An Arbitral Tribunal must decide in accordance with the terms of the contract, but if an arbitrator construes a term of the contract in a reasonable manner, it will not mean that the award can be set aside on this ground. Construction of the terms of a contract is primarily for an arbitrator to decide unless the arbitrator construes the contract in such a way that it could be said to be something that no fair-minded or reasonable person could do.” (emphasis added)

Ssangyong para 40 reads [see also para 69 that clarifies how wandering outside contract might be “patent illegality” but not a ground under Section 34 (2) (a) (iv) ACA]:

“The change made in Section 28(3) by the Amendment Act really follows what is stated in paras 42.3 to 45 in Associate … in short, that the arbitrator's view is not even a possible view to take. Also, if the arbitrator wanders outside the contract and deals with matters not allotted to him, he commits an error of jurisdiction. This ground of challenge will now fall within the new ground added under Section 34(2-A).” (Emphasis added)

Southern notes this scope and reiterates it.

Read the decision here.