Associate Builders Vs DDA Case Analysis

India:
Interpretation Of "Public Policy" U/S 34 Of The Arbitration And

Conciliation Act, 1996
Arbitration is an alternative system of dispute resolution. The system follows the

mandate of "minimal court intervention" and Courts can interfere in the arbitral
process only under the limited grounds provided under the Arbitration and
Conciliation Act, 1996. One such provision, section 34 provides grounds on which an
arbitral award can be set aside by the Court. Section 34 (2)(b)(ii) states that a Court
may set aside an arbitral award if it finds that the award is in conflict with the public
policy of India. Explanation 1 of S. 34(b) states three criteria on which an award
could be overturned on the ground of public policy – when the award was induced by
fraud, corruption or in violation S. 75 or S. 81; or it is against the fundamental policy
of Indian Law; or it is in contrast with the most basic notions of morality and justice.
The second and third grounds are vague and are susceptible to being interpreted too
widely. Accordingly, a number of Supreme Court judgments had widened the scope
of interpretation of public policy. In 2015, section 34 for amended in order to restrict
the scope of"Public Policy."
Associate Builders vs. DDA
This was a Supreme Court case decided by Hon’ble Judges Ranjan Gogoi and
Rohinton Fali Nariman on 25th November 2014. Through this case the Supreme
Court cleared and clarified the scope of ‘Public Policy’ mentioned in section 34 of the
Arbitration and Conciliation act, 1996.
FACTS
The appellant in the case was Associate Builders who was given a construction
contract by the respondent the Delhi Development Authority, for building 168 middle
income group houses and 56 lower income group houses. The contract stated that the
construction work will be completed within nine months for Rs.87,66,678. But, the
work was completed only after 36 months. The appellant alleged that the delay arose
at the instance of the respondent and subsequently fifteen claims were made. The
Delhi High Court appointed Shri K.D.Bali as the sole arbitrator for this dispute. The
arbitrator held that the Delhi Development Authority was responsible for the delay in
the enforcement of the contract. On 3rd April, 2006 the Delhi Development Authority
moved the case to the Delhi High Court in accordance to Section 34 of the Arbitration
and Conciliation act, 1996, for setting aside the award which was dismissed. The
respondent again filed an appeal under Section 37 of the Division Bench of the Delhi
High Court. The Division Bench found that the arbitral award was incorrect and
rejected the claims of the appellant. The appellant was unsatisfied by the impugned
award and approached the Supreme Court by a way of special leave petition.
Through this case the SC looked into the scope of ‘Public Policy’ for setting aside an
arbitral award under section 36. The SC also considered the extent by which the court
can set aside the sole arbitrator’s award by a way of judicial intervention.
JUDGEMENT
The SC allowed the appeal and the impugned award was set aside. The SC cautioned
that under Section 34, the courts should not set aside the arbitral award merely
because they do not agree with interpretations of the agreement given by the
arbitrator, instead it has to show that the tribunal’s decision were based on no
evidence or irrelevant evidence. Also in this case, the SC laid down the grounds of
‘public policy’ as:
‘Fundamental policy of India’ will include (a) to take no notice of the orders of the
superior courts (b) judicial approach (c) principles of natural justice (d) choice of
arbitrator cannot be unreasonable to the extent that no sensible individual would
arrive at a similar resolution
Public Policy and The Indian Courts
Under the Indian Arbitration and Conciliation Act, 1996 (the Act) a court may set
aside a domestic arbitration award if it conflicts with the public policy of India
(section 34 of the Act). The Indian courts have interpreted "public policy of India"
widely. In ONGC v Saw Pipes1(Saw Pipes) the Supreme Court said it included
circumstances where a tribunal has made an error in applying Indian law. This
interpretation has led to the courts reviewing the merits of awards, as if the arbitrators
were a lower tier of the court system.
When considering the enforcement of foreign awards, the courts have adopted a
narrower approach.2As far as domestic awards are concerned, however, the broad
view of public policy still holds sway. This has been confirmed in two recent
Supreme Court decisions.
ONGC –v- Western Geco
In ONGC –v- Western Geco,3 ONGC engaged Western Geco to upgrade a seismic

survey vessel. Western Geco was due to source hydrophones from the USA but was
denied an export licence. After a period of time, it obtained replacements from
Canada. ONGC then withheld part of its payment because of the delay. Western Geco
commenced arbitration; the arbitrators awarded it US$3m.
ONGC challenged the award on the grounds of public policy. It failed in front of a
single judge of the High Court of Bombay, and again on appeal to the Division
Bench. In a judgment handed down in September 2014, however, the Supreme Court
reversed the decisions of the lower courts and upheld (in part) ONGC's challenge to
the award. The Supreme Court thought the arbitrators "fell in a palpable error leading
to miscarriage of justice" for not considering the action that Western Geco could have
taken to make up for the delay. The Supreme Court reduced the amount awarded to
Western Geco by one-third.
In doing this, the Supreme Court restated the Saw Pipes approach to public policy. It
said this includes "all such fundamental principles as providing a basis for
administration of justice and enforcement of law in this country." In particular, a court
could assess whether a tribunal: (i) has applied a "judicial approach", i.e. has not acted
in an arbitrary manner; (ii) has acted in accordance with the principles of natural
justice, including applying its mind to the relevant facts; and (iii) has avoided
reaching a decision which is so perverse or irrational that no reasonable person would
have arrived at it (adopting the Wednesbury principle from administrative law).
Associate Builders -v- DDA
A few months later, the Supreme Court gave judgment in Associate Builders -v-
DDA4. DDA had employed Associate Builders to build houses in eastern Delhi. The
contract required completion of the houses within 9 months, but in fact it took 34
months. Associate Builders submitted various claims to arbitration. The arbitrator
ruled that DDA was responsible for the construction delay, and awarded Rs. 23.39
lakhs (about US$37,000) to Associate Builders.
DDA challenged the award in the High Court of Delhi. The challenge was dismissed
at first instance, but was upheld by the Division Bench on appeal. The Division Bench
set aside part of the award, and scaled down another part, through reductions which it
described as "rough and ready justice".
The Supreme Court reversed the Division Bench. It stated that section 34 does not
normally permit the courts to review findings of fact made by arbitrators. It therefore
restored the arbitral award. However, the Supreme Court only clarified, and did not
restrict, the law concerning public policy. In particular, the Supreme Court said an
award can be set aside if it is:
 contrary to the fundamental policy of Indian law, i.e. it is "arbitrary" or

"whimsical", as opposed to being fair, reasonable and objective, or it contains a
decision so irrational that no reasonable person would have arrived at it;
 contrary to the interest of India, i.e. it affects India's relations with other
countries;
 contrary to justice and/or morality, i.e. it "shocks the conscience of the court", or
it relates to an immoral contract; or
 patently illegal, i.e. it contains a ruling which contravenes the law of India, or it
contravenes the provisions of the Act, or it is based on an interpretation of the terms
of a contract that no fair-minded or reasonable person would adopt.
Comment
The decision of the Supreme Court is welcome as it comprehensively explains and

defines the “public policy” grounds to set aside arbitral awards under Section 34 of
the Act. The decision is not relevant to arbitrations seated outside India where they
arise out of arbitration agreements entered into post BALCO (i.e. arbitration
agreements signed on or after 6 September 2012). However, the decision will be
potentially relevant to pre-BALCO arbitration agreements, even where the arbitration
proceedings are seated outside India (given the duality in Indian jurisprudence we
discuss.
While the decision itself does not expressly set out a distinction between awards
arising out of arbitrations seated in India and arbitrations seated outside India, the
underlying rationale of the court’s decision – particularly in the context of the
infamous “patent illegality” ground for setting aside arbitral awards – is helpful.
The court’s elaboration of inherently murky grounds for challenge available under the
“public policy” heading is helpful – especially since the underlying theme appears to
be to give due weight and deference to an award issued by an arbitrator. However,
despite an encouraging ruling on the law, the fact that the court entertained arguments
on the merits of the dispute – including considering questions as to whether a
particular approach adopted by the arbitrator was valid – is less encouraging. While
the court ultimately dismissed these arguments, its willingness to consider these issues
is likely to encourage disputing parties to bring such challenges – even if merely to
delay enforcement of an award.

Associate Builders Vs DDA Case Analysis

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India:

Interpretation Of "Public Policy" U/S 34 Of The Arbitration And

Arbitration is an alternative system of dispute resolution. The system follows the

Associate Builders vs. DDA

Public Policy and The Indian Courts

ONGC –v- Western Geco

In ONGC –v- Western Geco,3 ONGC engaged Western Geco to upgrade a seismic

Associate Builders -v- DDA

 contrary to the fundamental policy of Indian law, i.e. it is "arbitrary" or

The decision of the Supreme Court is welcome as it comprehensively explains and

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