COURT’S DECISION
The High Court set aside both the arbitral award dated 16 January 1998 and the District Judge’s impugned order dated 21 October 2011, holding that the award suffered from gross violations of natural justice, absence of a judicial approach, lack of reasons, and was passed under the wrong statute. The Court declared that the 1996 Arbitration Act applied and that the challenge under Section 34 was within limitation due to the earlier Liberty Order. The Court held that the arbitral award was in conflict with public policy, violated Section 34(2)(a)(iii), ignored material evidence, and failed to provide reasons despite the contract mandating a reasoned award. The appeal was allowed and no costs were imposed.
FACTS
The matter arose from a supply contract relating to meat procurement for the armed forces for the 1995–96 period. The supplier had participated in a tender, deposited a security amount, and supplied meat until May 1995, after which it stated that market shortages and price increases made further supplies impossible. This led to a show-cause notice, forfeiture of the security deposit, and eventually to the Government appointing an arbitrator in April 1996—after the 1996 Act came into force. The arbitrator, a Lt. Colonel, allowed the Government’s damages claim in full for approximately Rs. 35.42 lakhs without analysis, without providing documents sought by the supplier, and without reasoning. A civil suit was later dismissed with a Liberty Order holding that the 1996 Act applied, and the challenge had to be filed under Section 34. The supplier accordingly filed the Section 34 application within 30 days, yet the District Judge inexplicably held the challenge as time-barred and decided the matter as if under the 1940 Act.
ISSUES
- Whether the arbitral proceedings were governed by the Arbitration Act, 1996 or the 1940 Act.
- Whether the Section 34 challenge was barred by limitation.
- Whether the arbitral award suffered from denial of natural justice, including refusal to provide material documents.
- Whether the arbitrator failed to adopt a judicial approach, rendering the award contrary to public policy.
- Whether the award could be sustained when it lacked reasoning despite an explicit contractual requirement.
PETITIONER’S ARGUMENTS
The petitioner argued that no formal contract existed under Article 299 of the Constitution and that the tender acceptance was cyclostyled. They submitted that the arbitrator denied crucial documents—including market rates, quotations, supply records—paralysing their defence. They relied heavily on the Liberty Order, arguing that the Civil Judge had already ruled that the 1996 Act applied and that the Section 34 application was filed within the granted time, making the District Judge’s limitation finding untenable. They contended that the presenting officer was of superior rank to the arbitrator, compromising neutrality, and that the award lacked reasoning despite the contract mandating reasons for claims exceeding Rs. 30,000.
RESPONDENT’S ARGUMENTS
The Government argued that the contract was validly executed since the supplier had participated in the tender, furnished deposits, delivered supplies, and raised invoices. It contended that the 1940 Act applied because the cause of action arose prior to 1996 and that the Section 34 petition was hopelessly delayed. It defended the award, asserting that limitation bars precluded examination on merits and that no sufficient cause existed under the Limitation Act. They maintained that the arbitrator’s approach was proper and that the petitioner could have sourced market information independently.
ANALYSIS OF THE LAW
The Court held that under Section 21, arbitration proceedings commence when a request for reference is received. Since the arbitrator was appointed on 4 April 1996 and entered reference on 8 April 1996, the 1996 Act unquestionably applied. Section 85(2)(a) expressly excludes the 1940 Act for proceedings commenced after 25 January 1996.
The Court affirmed that the Liberty Order correctly concluded this legal position and that both sides had bona fide pursued remedies under the wrong Act due to confusion created by the Government’s own stand.
On limitation, the Court held that the filing within 30 days of the Liberty Order made the Section 34 application well within time.
On merits, the Court applied the Section 34 standard as reiterated in Konkan Railway (2023) and MMTC v. Vedanta, holding that the appellate court under Section 37 must apply the same restrictive standard.
PRECEDENT ANALYSIS
Malluru Mallapa (2020) 4 SCC 313
Reaffirmed that an appellate authority must reconsider all issues of law and fact, ensuring reasoned findings. Applied here to justify a detailed re-examination under Section 37.
Konkan Railway (2023) 11 SCR 215
Clarified that Section 37 appeals mirror Section 34’s restrictive scope. Used to apply the public-policy and natural-justice tests.
Associate Builders v. DDA (2015) 3 SCC 49
Laid down the “judicial approach” doctrine and tests for perversity. Applied here to show that the arbitrator acted arbitrarily, ignored evidence, and denied equal opportunity.
ONGC v. Discovery (2022) 8 SCC 42
Held that denial of discovery/inspection before deciding jurisdiction/merits violates natural justice. Applied directly since the arbitrator here refused crucial documents.
COURT’S REASONING
The Court observed that the arbitrator denied essential material such as quotations, market rates, vouchers, and supply records—documents that directly affected the quantification of damages. Despite the contract mandating a reasoned award, the arbitrator awarded the Government’s claim in toto without any analysis of price, mitigation, market conditions, or whether procurement was comparable. Such refusal to disclose documents and the absence of reasons showed a complete denial of natural justice under Section 34(2)(a)(iii). It also violated public policy, as the award was arbitrary, unreasoned, and contrary to contractual mandates. The arbitrator adopted no judicial approach, instead producing a summary decision unsupported by evidence.
CONCLUSION
The High Court held that the entire arbitral process was vitiated. The arbitrator operated under the wrong statute, denied discovery, failed to provide reasons, ignored essential evidence, and awarded claims mechanically. The Section 34 petition was within limitation due to the Liberty Order. Consequently, the arbitral award and the impugned order were quashed in full.
IMPLICATIONS
This judgment reaffirms strict adherence to natural justice, the requirement of reasoned awards, and the obligation of arbitrators—especially government-appointed ones—to disclose all material documents. It also clarifies that the 1996 Act applies to all arbitrations commenced after January 1996 regardless of when the cause of action arose. The ruling strengthens judicial scrutiny over public-policy violations, particularly in damage-assessment cases.
FAQs
1. When can an arbitration award be set aside for denial of natural justice?
An award can be set aside under Section 34(2)(a)(iii) if a party is denied documents, evidence, or opportunity to present its case, as reaffirmed in this Bombay High Court ruling.
2. Does the 1996 Arbitration Act apply when the cause of action predates 1996?
Yes. What matters is the commencement of arbitration proceedings, not the cause of action. If arbitration starts after 25 January 1996, the 1996 Act applies.
3. Is a reasoned award mandatory in arbitration?
If the contract requires it or if claims exceed the statutory threshold, the arbitrator must provide reasons. Failure renders the award vulnerable under Section 34.