Submissions to court
Section 34(4) of the act
The Airports Authority of India (AAI) approached the Delhi High Court to set aside an arbitral award passed in favour of Bentwood Seating Systems Pvt Ltd (BSS) under section 34 of the Arbitration and Conciliation Act 1996 (the act).(1) BSS filed an application under section 34(4) of the act,(2) seeking an adjournment of AAI's petition so that the arbitral tribunal could resume proceedings and provide further reasons for its decision.
On 11 April 2017 the AAI issued a notice inviting tender for supply and maintenance of 4,000 stainless steel passenger baggage trolleys. As the highest bidder, BSS was awarded the tender and subsequently entered into a contract with AAI. Thereafter, on 13 July 2017, the AAI issued the purchase order to supply 4,000 passenger baggage trolleys by 20 October 2017. On 31 August 2017 the AAI informed BSS that the competent authority had accepted the inspection report and called upon BSS to start bulk production of the passenger baggage trollies. When BSS failed to complete the order within the prescribed timeline, the AAI sent letters seeking reasons for the delay, to which the AAI did not properly respond. In a letter dated 15 November 2017, the AAI called upon BSS to supply 550 passenger baggage trolleys to Guwahati Airport and Imphal Airport, which were duly delivered by BSS. Thereafter, BSS could not supply the remaining passenger baggage trolleys to the AAI as agreed, leading to the AAI terminating the purchase order on 20 February 2018 and initiating other actions. As BSS was aggrieved by the termination, it invoked arbitration and a sole arbitrator was appointed accordingly. The disputes leading to arbitration concerned, among other things:
- the delay in the supply of the trolleys;
- termination of the contract; and
- invoked bank guarantees.
The arbitral tribunal considered the following points before passing an award in favour of BSS:
- The purchase order was time bound and could have been validly terminated on 20 October 2017. However, since the AAI chose not to terminate the purchase order until 20 February 2018, the tribunal held that period of delivery of the passenger baggage trolleys under the purchase order could not be considered as the essence of the contract;
- The AAI terminated the purchase order on the ground that BSS had violated clause 4.2 of the technical specification (notice inviting tender)(NIT) as it did not produce the original invoice for the purchase of the steel material from the manufacturer. The tribunal observed that clause 4.2 pertains to the manufacture of stainless steel and not the manufacturer of passenger baggage trolleys. Thus, since BSS had supplied invoices from the stainless steel manufacturers and test certificates during inspection, it had complied with clause 4.2. Further, the tribunal also held that it was the AAI's responsibility to verify all documents prior to authorising BBS to commence bulk production, which it failed to do so. Therefore, the AAI could not insist on compliance with clause 4.2.
- As the tribunal had already set aside the termination notice which was on the ground of delay, all other actions including invoking bank guarantees and debarring BSS from participating in any of AAI's tender for three years were set aside.
The matter was referred to the Delhi High Court and the following submissions were made.
The AAI proposed that the tribunal's determination that the purchase order cannot be terminated on account of delay was perverse and blatantly illegal as the facts clearly indicated gross delay on BSS's part, thus entitling the AAI to reasonable compensation.
Further, AAI opined that the tribunal had erred by ignoring that the purchase order was procured by fraud. BSS had claimed to be participating as an Indian associate on behalf of a foreign bidder. However, on 3 May 2018 the foreign bidder, Suzhou Jinta Metal (SJM) had disassociated itself from BSS. BSS proceeded with contract after it was no longer associated with SJM. Further, the satisfactory performance certificate submitted by BSS during the tender process issued by Heathrow Airport, London was found to be false. Therefore, the fact that the contract was procured by fraud and that the AAI were deceived into performing a contract secured by fraud, defies the fundamental policy of India law.
Finally, AAI highlighted that BSS had not produced the test certificates and the invoices from the manufacturer; the tribunal had incorrectly concluded that the invoices issued by the stainless steel manufacturers and certificates presented were in accordance with clause 4.2 of the NIT.
BBS submitted that the tribunal had not accepted AAI's claim that BSS had acted fraudulently because the AAI had relied on certain emails which were not supported by an affidavit as required under section 65(B) of the Evidence Act 1872. Thus, the AAI could not establish fraud. Further, at the relevant time, BSS was duly authorised by SJM and there has been no question of fraudulent representation.
The AAI's entire claim that BSS had not complied with the tender conditions were premised on the basis that BSS was required to import the passenger baggage trolleys from SJM; however, the tender conditions did not stipulate such a requirement.
Placing reliance on the application filed by them under section 34(4) of the act, BBS submitted that if the court felt that the tribunal had not expressly indicated the reasons for its decision to reject the AAI's claim concerning procurement of the contract by fraud, the Court could allow the application and adjourn AAI's petition so that the tribunal could resume the proceedings and provide further reasons for its decision.
On receipt of an application under sub-section (1), the Court may, where it is appropriate and it is so requested by a party, adjourn the proceedings for a period of time determined by it in order to give the arbitral tribunal an opportunity to resume the arbitral proceedings or to take such other action as in the opinion of arbitral tribunal will eliminate the grounds for setting aside the arbitral award.
As per this subsection, any party may, on receipt of a challenge to an arbitral award under section 34, request that the court to refer the proceedings back to the arbitral tribunal, giving the tribunal an opportunity to resume the arbitral proceeding and actions to eliminate the grounds for setting aside the arbitral award.
The tribunal had reasoned that the AAI had condoned the delay as its actions, among other things, requiring an urgently supply of passenger baggage trolleys to Guwahati Airport and Imphal Airport demonstrated that it was not concerned with the timelines agreed between the parties. Therefore, the tribunal held that the AAI's letter of termination could not be sustained on the ground of delay and was liable to be set aside. The Court upheld the tribunal's view and determined that it did not warrant any interference.
The Court observed that there was no specific condition in the NIT that required an Indian affiliate to import manufactured passenger baggage trolleys from its foreign principal, and no document was produced indicating that the AAI had treated SJM as a party to the contract or purchase order. The AAI was fully aware that the trolleys were being manufactured by BSS and the tribunal also noted that the AAI did not terminate the contract for this reason. The AAI terminated the contract, among other things, on the ground that the documents, as required under clause 4.2 the NIT had not been produced. The Court held that the tribunal's approach could not be held as perverse or patently illegal, and so it did not warrant any interference with the arbitration award on this ground.
The tribunal had proceeded on the basis that since the reasons stated in the termination letter did not include that the purchase order was procured in a fraudulent manner, BSS was entitled to perform the contract. However, the Court observed that if it could be established that the purchase order had been procured by fraud, performing the contract would clearly defy the fundamental policy of Indian laws. Thus, the Court held that since the principal controversy of the issue was whether the purchase order had been secured by fraud and whether the AAI was entitled to avoid the contract, and the tribunal had not decided on these issues, the arbitration award could not be sustained.
As regards the application filed under section 34(4) of the act, the Court observed that this is not a case where reasons for the conclusion were questionable and required clarification. The tribunal did not decide on the principal dispute between parties and thus this defect could not be cured by adjourning the present proceedings to enable the tribunal to issue any clarification or reasons under section 34(4) of the act.
The Court held that it cannot adjourn a proceeding under section 34(4) of the act if the arbitral tribunal has failed to address the primary dispute between parties. Thus, the scope of section 34(4) of the act is limited and it can be restored only to enable the arbitral tribunal to rectify certain curable defects and not to fix the award's fundamental basis.
In view of the above, the Court set aside the arbitration award.
For further information on this topic please contact Aniketh Nair or Dev Motta at Clasis Law by telephone (+91 22 4910 0000) or email ([email protected] or [email protected]). The Clasis Law website can be accessed at www.clasislaw.com.
(1) Airports Authority of India v Bentwood Seating System Pvt Ltd in OMP (COMM) 262/2019.