Rajasthan High Court Sets Aside Arbitral Award For Failing To Identify Disputed Facts, Consider Evidence

The Rajasthan High Court has reiterated that an arbitral award based solely on pleadings, without framing issues concerning serious disputed facts or considering evidence, violates the principles of natural justice.

It further held that such an award is against the public policy of India under Section 34 of the Arbitration and Conciliation Act, 1996. Relying on several apex court precedents, the court ruled,

“Thus, the above Legal precedents make it clear that an arbitral award issued without properly identifying key issues of serious disputed facts—and without evidence or a fair hearing—violates natural justice. When a decision is based solely on pleadings, especially where facts remain contested, it breaches fundamental principles of justice," the court ruled.

The bench of Dr. Justice Pushpendra Singh Bhati and Justice Praveer Bhatnagar further held that an arbitral award made contrary to the core procedures and principles of natural justice would be against the public policy of India under Section 34 of the Act.

The court was hearing an appeal against the Commercial Court's dismissal of a challenge to an arbitral award under Section 34 of the Act. The Commercial Court had upheld the award.

The Executive Engineer, Public Works Department, Kuchaman City, Parbatsar, District Nagaur, had issued a work order worth Rs. 6.35 crore to Trimurti Construction, the contractor, in May 2013.

However, progress of the work was halted due to resistance from local residents and villagers. The Public Works Department subsequently withdrew the work order.

The contractor thereafter raised claims before the arbitral tribunal. The Public Works Department contested the claims through a detailed written reply and raised objections under various heads.

The Tribunal ultimately passed an arbitral award in favour of the contractor. The Public Works Department challenged the award under Section 34 before the Commercial Court.

The Commercial Court dismissed the challenge and upheld the arbitral award. Aggrieved by the decision, the Public Works Department approached the High Court.

Before the High Court, the Public Works Department argued that the arbitral award was against the public policy of India. It contended that the Tribunal had failed to properly frame the issues despite serious and complex allegations in the case.

The department further argued that the disputed issues required examination of the parties' oral testimony and documentary evidence. This included witness affidavits and relevant correspondence.

The contractor, on the other hand, defended the Commercial Court's order. It contended that the Public Works Department had admitted in its written statement that the work could not commence because of persistent resistance from local villagers.

The High Court noted that the Public Works Department had filed a written reply to the claims raised before the Tribunal. The reply contained specific objections to the factual assertions made by the contractor.

The contractor had claimed Rs. 12,49,665 for idling of labour and staff. It had also raised a separate claim of Rs. 19,56,000 for machinery allegedly lying idle at the site.

The Public Works Department specifically disputed the contractor's assertion regarding the engagement of labour at the site. It stated that only one JCB machine, two supervisors, and three beldars had been brought to the site on June 19, 2013.

The department also relied on letters dated September 9 and September 20, 2013, denying the engagement of men and machinery at the site. It further pointed to a September 2, 2013, report stating that the contractor or its representative had not contacted the concerned officer to start the work.

The High Court found that the tribunal had decided the case in favour of the contractor without framing any contested questions of fact. It had also not recorded evidence regarding the parties' disagreements.

The Court further noted that, before relying on the contractor's documents, the Tribunal had not sought the Public Works Department's admission or denial of those documents.

The High Court examined Section 34(2)(b) of the Arbitration and Conciliation Act. It noted that an arbitral award can be set aside where it is in conflict with the public policy of India.

The Court referred to the Supreme Court's decision in ONGC Ltd. v. Saw Pipes Ltd., which explained the scope of "public policy of India" under Section 34. It also considered Bharat Coking Coal Ltd. v. L.K. Ahuja regarding the need for adequate evidence to support claims for loss of profit.

The High Court also relied on the Supreme Court's decision in Unibros v. All India Radio. The Supreme Court had held that an arbitral award based on no evidence could be patently illegal and outrightly perverse.

The Supreme Court further held that such an award would conflict with the public policy of India under Section 34(2)(b).

Against this backdrop, the High Court held that the Tribunal's failure to properly identify key issues involving serious disputed facts violated natural justice. The Court also held that an award made without evidence or a fair hearing violates natural justice.

The Court further held that where a decision is based solely on pleadings despite the facts remaining contested, it breaches fundamental principles of justice. An award made contrary to the core procedures and principles of natural justice would therefore be against the public policy of India under Section 34.

The High Court also found fault with the Commercial Court's approach. The Commercial Court had dismissed the Section 34 application on the ground that courts could not re-examine or re-appreciate evidence.

The High Court held that this reasoning was flawed in the circumstances of the case. The Public Works Department had specifically disputed factual issues in its written reply before the Tribunal.

The Court observed that those objections concerned disputed questions of fact. Such questions ought to have been decided on the basis of oral or documentary evidence.

The Court further observed that the arbitral award lacked crucial material because it was based only on the claim itself. It held that the evidence of both parties ought to have been considered.

The High Court concluded that the Commercial Court had failed to properly scrutinise the pleadings placed before the Tribunal. It held that the Commercial Court had instead adopted a flawed approach in dismissing the Section 34 application.

Accordingly, the appeal was allowed. The High Court set aside the Commercial Court's order confirming the award and rejecting the Section 34 application.

The arbitral award passed in favour of the contractor was also set aside.