The Bombay High Court has strongly ruled that the denial of an opportunity for Hindustan Petroleum Corporation (Petitioner) to raise the issue of procurement of contract by fraud and refusal to adjudicate the issue of validity of contract, vitiates the entire Award. The Court opined that it is not possible to sever good part of the Award or the preserve the same by setting aside the bad part, when there is no good part in the Award.
The High Court observed that an arbitral award is liable to be set aside under Section 34 of the Arbitration and Conciliation Act, 1996, on grounds of patent illegality and for being in conflict with the fundamental policy of Indian law, when: (i) the Arbitral Tribunal conducts the proceedings using a procedure unknown to law; (ii) exhibits a non-judicious approach; (iii) and denies a party a full opportunity to present its case, particularly by refusing to allow a vital defence (such as the invalidity of the contract due to fraud) to be raised.
The Court also clarified that the award grants claim for damages, such as loss of profits, without the claimant leading any credible oral or documentary evidence to prove the loss, which is a prerequisite for such claims. Accordingly, the Court referred the entire award as “riddled with egregious errors, patent illegalities and gross perversities”, and set aside the arbitral award.
A Single Judge Bench of Justice Sandeep V. Marne found that a “blatantly false declaration” was submitted by the lead consortium member (Nice Projects Ltd.) about not undergoing insolvency proceedings. It observed that the issue of suppression of CIRP went to the “root of the matter” as it reflected on the validity of the contract itself.
On the Arbitrator’s approach, the Bench noted the Arbitrator adopted a “procedure unknown to law” by treating mere emails from the Petitioner as formal applications (under Section 16 for jurisdiction and for amendment) and rejecting them without allowing proper applications to be filed. The reasons provided by the Arbitrator for rejecting the jurisdictional challenge were found to be “grossly perverse, patently illegal and disclose absence of judicious approach”.
The Bench observed that the Arbitrator awarded substantial claims for damages and loss of profits in the “absence of oral evidence by any of the parties”, and opined that a claim for loss of profits cannot be awarded without credible evidence. The Bench also noted that the Arbitrator directing parties to file evidence before framing issues, was an “unusual course of action”.
The Bench further found that most of the Arbitrator’s findings on the key issues (delay, termination, breach of contract) were recorded without referring to any documentary evidence, based on “mere arithmetic exercise”, “guesswork”, or the Arbitrator’s “ipse-dixit”, which were patently perverse.
Briefly, the Petitioner, Hindustan Petroleum Corporation Ltd. (HPCL), a Government of India Undertaking, issued a tender for civil, structural, and piping work at its Ethanol Bio-Refinery in Bathinda. The Respondent is a Joint Venture (JV) between Om Construction (a proprietary concern) and Nice Projects Ltd. (a public limited company). As the Respondent JV was the successful bidder, and HPCL issued a Purchase Order and Letter of Award for a contract value of Rs. 111.40 Crores.
Prior to the tender notice, the NCLT initiated the Corporate Insolvency Resolution Proceedings (CIRP) against Nice Projects Ltd., one of the JV partners. The Petitioner alleged this fact was suppressed, and the JV agreement was signed by a suspended director of Nice Projects Ltd., not the appointed Interim Resolution Professional (IRP). Furthermore, a false declaration was submitted on behalf of Nice Projects Ltd. stating it was not undergoing any insolvency resolution process.
Since disputes arose during the execution of the work concerning slow progress, the Petitioner terminated the contract. Aggrieved, the Respondent invoked arbitration, and a sole Arbitrator was appointed. Later, the Petitioner discovered the suppression of CIRP and raised an objection to the Arbitrator’s jurisdiction, alleging the contract was void due to fraud. The Arbitrator rejected this objection via a procedural order. Further, the Petitioner’s subsequent attempts to amend its Statement of Defence to formally include the ground of fraud were also rejected by the Arbitrator.
Thereafter, the Arbitral Tribunal passed an award, allowing the Respondent’s claim for a net amount of Rs. 19.82 Crores and rejecting the Petitioner’s major counterclaims. The award also directed the release of the security deposit and barred the Petitioner from executing work at the Respondent’s risk and cost.
Appearances:
Senior Advocate Zubin Behramkamdin, along with Advocates Vijay Purohit, Pratik Jhaveri, and Samkit Jain, for the Petitioner
Advocates Akshay Ringe, Akash Menon, and Anjana Vijay, for the Respondent
