By

Kartik Kalra^*

Earlier this year, the Indian Supreme Court (herein “SC/Court”) delivered its judgment in a curative plea of the Delhi Metro Rail Corporation Ltd. (herein “DMRC”)—a state-owned corporation tasked to develop and run the metro rail in and around the national capital—finding an arbitral award validating a corporation’s termination of its metro-development agreement with DMRC “patently illegal”.¹ This corporation—Delhi Airport Metro Express Pvt. Ltd. (herein “DAMEPL”)—was a consortium that entered a Public-Private-Partnership with DMRC to do perform much of the work to develop the metro rail connecting the Delhi Airport with parts of the city. While DMRC was to design the rail’s “basic civil structure,” DAMEPL was to do everything else, including constructing the train tracks, electrifying them, and completing the stations’ “architectural finishing.” This agreement was of a “Build, Operate and Transfer” variety, enabling DAMEPL to regain its Rs. 2,802 crore investment (approximately $3 bn.) by operating the metro rail after its construction.

DAMEPL detected multiple defects in DMRC’s construction of this “basic civil structure,” choosing to exercise its right to terminate, and to consequently obtain from DMRC the termination-based sum.² Pursuant to their agreement, DAMEPL could exercise termination based on DMRC’s breach—which included its inability to develop safe rail infrastructure—if such breach “ha[d] a material adverse effect on [DAMEPL], and [DMRC] . . . failed to cure such breach or take effective steps for curing such breach within 90 (ninety) days of . . . notice . . .”³ The Tribunal upheld DAMEPL’s claim, holding that DMRC’s failures to develop safe rail infrastructure—evident, inter alia, from twisted and damaged rail girders—satisfied grounds for termination.⁴ At the fifth level of challenge to this award—two at the High Court, two at SC, and then finally a “curative petition” before the latter—the award’s flailing life has been put to rest, with SC concluding that the award was “patently illegal.”⁵

In this post, I discuss the last (and final) judgment of the Supreme Court, arguing that apart from (wrongly) engaging in the award’s factual reconsideration to find perversity, it creates a distinct class of state-owned commercial entities in navigating arbitral awards’ validity, encouraging courts to be overly protectionist in assessing awards’ contents if they undermine state-entities’ interests. I make this argument in the following manner—first, I propose that the Court’s interference in finding the award illegal was based on a wholesale factual reconsideration—an exercise prohibited by statute; second, that the Court’s interference on factual grounds was, in fact, incorrect, and that the Tribunal rightly adjudged the termination valid; and third, that SC’s preservationist objectives in DMRC’s favour appear to have trumped considerations of non-interference, creating a separate class of state-owned entities to be specially protected from awards contrary to their interests.

I. Reappreciating Evidence, Perversity and Patent Illegality — Confusion Sufficient to Manipulate

In the instant case, the Court found the arbitral award “patently illegal”—a ground to set aside domestic awards u/s 34(2-A) of the Arbitration and Conciliation Act (herein “A&C Act”)⁶—for the Tribunal’s interpretation of the termination clause reproduced above, enabling DAMEPL to terminate the agreement if DMRC “failed to cure” or did not “take effective steps for curing” the breach, was an interpretation that was “not even a possible view”, something that “could not have been arrived at on any objective assessment”.⁷ This was because the Tribunal entirely ignored DMRC’s ability to “take effective steps for curing” the breach under the termination agreement, and wrongly found the termination valid solely based on DMRC’s eventual inability to cure them. On facts, it found that a certificate issued by the Commissioner of Metro Rail Safety (herein “CMRS”)—a state body—after DAMEPL’s termination evinced DMRC’s “effective steps,” for the metro could have been safe only if DMRC had, in fact, taken steps to cure defects.⁸

The Court’s powers to engage in this analysis are traced to the award’s “patent illegality”, which was inserted as distinct a ground to set aside awards through the Arbitration and Conciliation (Amendment) Act 2015 (herein “2015 Amendment”).⁹ Priorly, in ONGC v. SAW Pipes, in interpreting the term “public policy” as a ground to set aside awards, the Court found the term to consist of four things: first, the “fundamental policy of Indian law;” second, the “interests of India,” third, “justice or morality,” and fourth, “patent illegality.”¹⁰ Subsequently, in ONGC v. Western Geco, it interpreted the first segment—the “fundamental policy of Indian law”—to further consist of three things for an award to comply therewith: first, that it must follow a “judicial approach;” second, that it must comply with natural justice; and third, that it must not be “patently illegal,” i.e., it must not be perverse or irrational to the “Wednesbury unreasonableness” extent.¹¹ Reports of the Law Commission of India, on which the 2015 Amendment was based, proposed the deletion of perversity, i.e., Western Geco’s third ground, for it would enable a “review on merits” and “open floodgates”, since all parties—without determining principle—could allege an award’s unreasonableness.¹²

In Ssangyong Engineering v. NHAI, in interpreting the changes brought by the 2015 Amendment, the Court held that while “public policy” had been confined to its first and third components—the “fundamental policy of Indian law” and “justice or morality”, with “interests of India” and “patent illegality” removed therefrom—the newly created Section 34(2-A), enabling challenges on “patent illegality,” would now incorporate Western Geco’s “perversity” grounds.¹³ “Perversity”—according to Western Geco—was a component of the “fundamental policy of Indian law” u/s 34(2)(b), but as a consequence of Ssangyong, would now stand transplanted to “patent illegality” u/s 34(2-A).¹⁴ This interpretation, however, renders the reasons offered by the Law Commission for removing “perversity” from the domain of “public policy” redundant, for it continues to be a reason enabling the setting aside of awards—just shifting from one section to another.¹⁵

In the instant case, in setting aside the award, the Court relies on Ssangyong’s construction of “perversity,” holding that the Tribunal’s construction of the termination agreement ignored the legal relevance of DMRC’s attempts to cure defects by “taking effective steps” (focussing entirely on the question of their ultimate curing), and was accordingly, an interpretation that “no reasonable person would have accepted”.¹⁶ This holding, however, was arrived at through a substantive, factual reconsideration of the award, and a wholesale relook at parties’ compliance with the termination clause. In following Ssangyong, the Court also acts contrary to the clear legislative mandate in removing “perversity” from the domain of “public policy”, assessing the award’s substance to determine its validity.¹⁷ While this exercise may still have been acceptable if the Tribunal did, in fact, commit an error of the proportions the Court describes, a reading of its publicly available segments suggests otherwise.

II. DMRC’s Steps to Cure Defects — Arbitrator Ignorance or Judicial Fiction?

As discussed above, the Court holds that the Tribunal ignored a part of the agreement forbidding termination if DMRC “took effective steps” within the 90-day cure period to remedy the defects that DAMEPL detected.¹⁸ While the Tribunal rejected the evidentiary value of the CMRS certificate in assessing DMRC’s attempts to cure defects, the Court finds it determinative.¹⁹ This was because the defects concerned——in the ultimate——issues of “safety”, and if CMRS itself found the metro safe to operate, it would inevitably mean that DMRC had taken effective steps for curing safety-related defects.²⁰ The Court’s reasoning, however, is incorrect on three grounds.

First, the Tribunal did distinguish between the “complete curing” of defects and the steps taken in pursuance thereof. It must be noted that DAMEPL issued its cure notice on 9 July 2012, listing eight “non-exhaustive” defects in the metro’s civil structure, giving DMRC ninety days to take steps for curing them.²¹ This ninety-day period elapsed on 7 October 2012, enabling DAMEPL—in line with the agreement’s termination clause—to validly terminate the agreement (if effective steps were not taken) and recover its investment.²² Accordingly, DAMEPL sent its termination notice the next day, on 8 October 2012.²³  The issue before the Tribunal, therefore, was whether DMRC cured, or took effective steps to cure the eight (non-exhaustive) defects pointed by DAMEPL within the cure period, between 9 July 2012 and 7 October 2012.²⁴ In doing this analysis, the Tribunal classifies defects into five categories—first, “cracks at the bottom of girders;” second, “twist in girders;” third, “gaps between girders,” fourth, “inaccessibility of bearings;” and fifth, the “incorrect location of bearings.”²⁵ For all five, the Tribunal undertakes a respectable analysis of the steps taken by DMRC to cure them, finding its steps to be insincere, trivial and nonchalant.²⁶ The existence of a reasoned analysis into specific steps taken by DMRC to cure defects, decipherable from specific paragraphs, was—perhaps for policy-based reasons discussed below—found insufficient, with the Court noting that the Tribunal was “completely silent” on “whether effective steps were taken,” and that an analysis of this issue was “conspicuously absent.”²⁷ Its holding on the Tribunal’s ignorance of the clause disabling termination based on the taking of “effective steps,” therefore, falls substantially within in the realm of fiction.

Second, even if the CMRS certificate is accorded evidentiary value, it does little to establish that DMRC took “effective steps” to cure the eight (non-exhaustive) defects listed by DAMEPL within the cure period.²⁸ Prior to issuing its cure notice, DAMEPL closed operations of the metro line in July 2012, citing dangers in continuation.²⁹ Accordingly, the metro line was largely non-operational thereafter, and the sanction of a state authority—the CMRS—was essential to restart it.³⁰ This sanction, referred to as the “CMRS certificate,” was granted on 18 January 2013, on the condition that metro would function at the speed of 50 km/h (as opposed to the 120 km/h speed agreed between DMRC and DAMEPL), which also noted DMRC’s steps towards curing two defects: first, that DMRC had repaired the bearings in a particular variety of girders; and second, it repaired cracks in some girders of the same variety.³¹ The part-remedying of two among the multiple defects listed by DAMEPL in an unspecified duration, i.e., without information of whether steps towards such remedying were taken within the 90-day cure period, does not assist in a finding either way. This is because the steps must both have been effective in character, and taken within the 90-day cure period for termination to have been illegal. Since no factual finding of this proposition—one that finds these two steps taken by DMRC to have been “effective” in character towards curing the breach, as well as being within the cure period—is present, there existed little factual basis for the Supreme Court’s undermining of the award.³² The Tribunal’s holding on the CMRS certificate’s irrelevance in proving DMRC’s case, it is submitted, was correct, and the Supreme Court’s finding thereof as perverse and unreasoned unwarranted.³³

Third, the above discussion establishes—at the very least—the subjective possibility of a finding that DMRC did not take “effective steps” within the cure period, and that the CMRS certificate did little to prove DMRC’s claims. Even if “perversity” is accepted as a ground to set aside awards, its threshold—even in other legal contexts—is extremely high. In State of Rajasthan v. Union of India, the Supreme Court—in offering an example of the perversity standard—stated that if a Minister is dismissed on the ground that he is “below five feet in height,” such dismissal would be perverse because it would be “absurd, extraneous, and irrelevant.”³⁴ Perversity, therefore, relates to conclusions that are wholly absurd and senseless, not refinements in reasonably acceptable reasoning.³⁵ The Court’s interference with the award on grounds of perversity, therefore, was incorrect.

III. Sovereign Immunity Masquerading as Perversity?

It is, however, unlikely that the Court was unaware of either the highly shaky grounds on which its reasoning stood, or that an interference of this kind would align little with the A&C Act’s prohibition on factual reconsideration. In actuality, it appears to be the activation of the Court’s preservationist instincts towards a state-owned entity that repeatedly expressed its inability to pay the award’s sum, as well as the state’s refusal to authorize an attachment of its properties to allow for the award’s enforcement, which caused it to take the stand it took in the instant case.³⁶ Previously, in proceedings concerning the award’s enforcement, the government (DMRC’s sole shareholder) informed the High Court that DMRC’s finances disabled it from honouring the award, and that it could not allow attachment of metro properties—the trains and stations—for it would “bring the city to a halt.”³⁷ In the instant case, the Court criticizes the award’s tendency to harm DMRC’s financial health, finding this to warrant an exercise of its curative jurisdiction.³⁸

The Court’s “curative jurisdiction”—a third knock on its door—is reserved for the “rarest of the rare” cases, and is to be exercised only if natural justice, or at least considerations of its variety, are violated.³⁹ Here, the Court holds that a “grave miscarriage of justice” occurred due to the patently illegal award, for a “public utility” was “saddle . . . with an exorbitant liability. . . .”⁴⁰ This proposition appears to recognize state-owned commercial entities as a distinct class, one that must be specially immunized from potentially incorrect awards.⁴¹ The Supreme Court, therefore, encourages a protectionist approach towards navigating the liability of state-owned entities, and by exercising its curative jurisdiction to set aside an award, shows the extent to which a court may go to safeguard their interests.⁴² This is, therefore, unlikely to augur well for Indian arbitration, especially for parties considering seating their arbitrations with Indian state entities in India.⁴³

IV. Conclusion

On this basis, I submit that the Supreme Court’s decision in DMRC v. DAMEPL—apart from its incompatibility with perversity-based standards for setting aside awards—might be an unwise move in promoting Indian arbitration, for five appellate stages after an award’s delivery—with most coming to mutually contrary findings—does little to show values of certainty and finality. It creates a separate class of arbitral parties, i.e., state-owned commercial entities, encouraging courts to be overly protectionist in assessing the validity of awards contrary to their interests, going to the extent of remarking that a “grave miscarriage of justice” would occur by tribunals’ recognition of their liability.

* Kartik Kalra is a student at the National Law School of India University, Bengaluru.