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Challenging arbitral awards: Supreme Court's verdict in Reliance-Goa case
Reliance Infrastructure Limited v. State of Goa, 2023 SCC OnLine SC 604 is a landmark judgment of the Supreme Court of India on the scope and extent of judicial interference with arbitral awards under the Arbitration and Conciliation Act, 1996 (the Act). The case involved a dispute arising out of a power purchase agreement (PPA) between Reliance Infrastructure Limited (Reliance) and the State of Goa (State) for the supply of electricity from a gas-based power plant. The PPA was executed in 1997 and was amended by three supplementary agreements in 1997, 2000 and 2001.
Background of the case
The case arose out of a dispute between Reliance Infrastructure Limited (RIL), a power generation company, and the State of Goa (Goa), a power purchaser, regarding the terms and conditions of a Power Purchase Agreement (PPA) and its supplementary agreements executed between them in 1997 and 2001. The PPA was for the supply of power by RIL from its gas-based power plant in Goa to the state grid for 15 years. The PPA stipulated the tariff structure, the fuel supply arrangement, the payment mechanism, the dispute resolution clause and other relevant aspects of the contract. However, due to various factors such as changes in fuel availability, change in fuel price, change in plant configuration, change in demand and supply scenario, changes in the regulatory framework and changes in market conditions, the parties faced several disputes and differences over the implementation and interpretation of the PPA and its supplementary agreements.
The main issues in dispute were:
- Was Reliance entitled to charge variable charges on the use of alternate fuel (naphtha) when there was a shortage of natural gas, as per Clause 5.2 of the PPA?
- Is Reliance entitled to charge variable charges on the supply of an additional 4 MW power over and above the contracted capacity of 48 MW, as per Clause 5.3 of the PPA?
- Reliance was entitled to claim compensation for the downrating of the plant from 48 MW to 43 MW due to technical reasons, as per Clause 5.4 of the PPA.
- Reliance was entitled to apply the netting-out principle for adjusting the payments due from the State against the payments due to Reliance, as per Clause 9.1 of the PPA.
Arbitration proceedings and award
The dispute was referred to arbitration by a sole arbitrator, who passed an award in favour of Reliance on 16.02.2018, granting a total sum of Rs. 278.29 crores towards the principal amount plus interest up to 31.10.2017. The arbitrator also awarded future interest at the rate of 15% per annum from 01.11.2017 till the date of payment or realisation.
Challenge to the award under Section 34 of the Arbitration Act
The State challenged the award under Section 34 of the Act before the Principal District & Sessions Judge, North Goa, who dismissed the challenge by an order dated 12.09.2019. The State then filed an appeal under Section 37 of the Act before the High Court of Bombay, Goa Bench, which allowed the appeal by an order dated 08.03.2021 and set aside the award on various grounds.
The Appeal Under Section 37 of the Arbitration Act
Reliance and the State filed appeals before the Supreme Court against the High Court's order. The Supreme Court heard both appeals together and passed a common judgment on 10.05.2023, restoring the award passed by the arbitrator and dismissing the appeals filed by the State.
The Supreme Court made several important observations and rulings on various aspects of arbitration law, such as:
- The scope of challenge to an arbitral award under Section 34 and the scope of appeal under Section 37 of the Act are very limited and narrow and do not permit re-appreciation or re-assessment of evidence or interference with findings of fact or contractual interpretation by the arbitrator unless they are perverse or irrational or contrary to public policy.
- The court cannot substitute its view for that of the arbitrator, even if it is possible to take a different view on the same facts or law, as long as the arbitrator's view is plausible and reasonable.
- The court cannot interfere with an arbitral award on grounds of erroneous application of law or misinterpretation of the contract unless it results in patent illegality or injustice.
- The court cannot interfere with an arbitral award on grounds of procedural irregularities or violations unless they have caused substantial prejudice or injustice to a party.
- The court cannot interfere with an arbitral award on grounds of excessive or inadequate interest awarded by the arbitrator unless it is exorbitant unconscionable or contrary to law.
The Supreme Court applied these principles to each of the issues in dispute and upheld the findings and conclusions of the arbitrator on all counts. The Supreme Court held that:
- Reliance was entitled to charge variable charges on the use of alternate fuel (naphtha) when there was a shortage of natural gas, as per Clause 5.2 of the PPA, which was an unambiguous contractual provision that allowed such charges based on the actual cost incurred by Reliance.
- Reliance was entitled to charge variable charges on the supply of additional 4 MW power over and above the contracted capacity of 48 MW, as per Clause 5.3 of the PPA, which was also an unambiguous contractual provision that allowed such charges based on actual cost incurred by Reliance.
- Reliance was entitled to claim compensation for the downrating of the plant from 48 MW to 43 MW due to technical reasons, as per Clause 5.4 of the PPA, which was a reasonable and equitable contractual provision that allowed such compensation based on the difference between the contracted and actual capacity charges.
- Reliance was entitled to apply the netting-out principle for adjusting the payments due from the State against the payments due to Reliance, as per Clause 9.1 of the PPA, which was a valid and enforceable contractual provision that allowed such adjustment based on mutual debts and credits.
The Supreme Court also upheld the interest awarded by the arbitrator at the rate of 15% per annum, which was by the PPA and the prevailing market rates. The Supreme Court observed that the interest awarded by the arbitrator was neither exorbitant nor unconscionable nor contrary to law, and did not warrant any interference by the court.
The Supreme Court, therefore, restored the award passed by the arbitrator and dismissed the appeals filed by the State. The Supreme Court also imposed costs of Rs. 50 lakh on the State, payable to Reliance, for filing frivolous and vexatious appeals.
The judgment of the Supreme Court in Reliance Infrastructure Limited v. State of Goa, 2023 SCC OnLine SC 604 is a significant and welcome decision that reaffirms the pro-arbitration approach of the Indian judiciary and reinforces the principles of minimal judicial interference with arbitral awards. The judgment also provides clarity and guidance on various aspects of arbitration law, such as contractual interpretation, patent illegality, public policy, procedural irregularities, and interest. The judgment is likely to have a positive impact on the arbitration landscape in India and boost the confidence of parties in choosing arbitration as a preferred mode of dispute resolution.
- Supreme Court reaffirms minimal judicial intervention and party autonomy in arbitration and clarifies legal issues on contract interpretation, force majeure, challenge and appeal of arbitral awards
- High Court exceeded its jurisdiction and scope under Section 37 of the Act by re-appreciating evidence and substituting findings
- Supreme Court reminds courts and tribunals to respect arbitral awards unless patently illegal or perverse or in conflict with public policy
