Patna High Court Sets Aside Award Based On Pleadings Alone Without Evidence, Cites Natural Justice

The Patna High Court has recently set aside an arbitral award and a subsequent order upholding it, holding that an award based solely on pleadings without proof of documents violates the principles of natural justice and cannot be sustained.

It held that although arbitral proceedings are not bound by strict rules of evidence, ensuring that documents are properly admitted or denied; their contents are duly proved; and that parties are given a real opportunity to rebut the material relied upon, including through appropriate hearings under Sections 23 and 24 of the Arbitration and Conciliation Act, 1996, forms part of the fundamental policy of Indian law and cannot be bypassed.

The ruling came in a dispute arising from an excavation contract between contractor Narayan Prasad and the State of Bihar, where the contractor had been directed to pay Rs 7.41 lakh as excess payment and Rs 6.68 lakh towards rectification of a ditch, along with interest at 12% per annum.

A Division Bench of Justice Rajeev Ranjan Prasad and Justice Soni Shrivastava observed, “In the present case, it is evident from the various orders passed by the learned arbitrator that at no stage of the proceeding, the learned Arbitrator decided as to whether to hold oral hearings for the presentation of evidence or for oral argument. The pleadings in form of statement of claims and statement of defence cannot take place of the oral or documentary evidence. The minimum thing which was required to be done was to call upon the parties to admit or deny the documents submitted by both of them… Even as strict rules of evidence would not apply but these are to be followed as fundamental policy of law. It is also in consonance with the principles of natural justice.”

“In our considered opinion, the learned sole arbitrator has not followed the principles of natural justice and the findings recorded by the learned arbitrator are not based on evidences rather those are based on the pleadings alone. Since the learned arbitrator has not followed the fundamental principles of law in the matter of admissibility of evidence and appreciation thereof, we are of the considered opinion that the impugned order suffers from the vice of non-observance of the principles of natural justice and the fundamental policy of the Indian law,” the court added.

The contract, executed in May 1998 for excavation work in the Zamania Pump Canal project, ran into disputes after delays and was eventually rescinded, following which a final bill reflected recoverable dues against the contractor.

Following a writ petition, the dispute was referred to arbitration. The sole arbitrator rejected the contractor's claims and allowed the State's counterclaims.

Prasad challenged the award under Section 34, but the Commercial Court dismissed his plea on October 5, 2021, leading to the present appeal under Section 37.

Before the High Court, Prasad argued that the arbitrator entertained the State's counterclaims at the final stage and failed to follow any procedure for admission, proof, or cross-examination of documents.

The State, on the other hand, contended that both parties had filed pleadings and supporting records and that the arbitrator had acted within jurisdiction.

The High Court found that the arbitrator had neither determined whether oral hearings were required nor followed any procedure to establish the evidentiary value of documents and had instead treated pleadings and annexures as evidence without verification or proof.

Holding that the procedure adopted by the arbitral tribunal was in conflict with the most basic notions of justice, the court allowed the appeal and set aside both the arbitral award and the Commercial Court's order without costs.

For Appellant (Narayan Prasad): Advocate Manish Prakash.

For Respondent (State of Bihar): Additional Advocate General Anjani Kumar.