Non-speaking arbitral award liable to be set aside

In State of UP & Ors v M/s Combined Chemicals Company Private Ltd, the Supreme Court considered if a letter could be a valid agreement for invoking arbitration and if an arbitral award could be impugned on the basis of absence of reasoning in the award.

The case in brief

The Director of Industries (DoI) of Uttar Pradesh invited bids for the supply of 2,000 tonnes of zinc sulphate of agricultural grade on a quantity basis to meet the requirement of its agriculture department. Combined Chemicals (CCL) submitted the lowest bid and consequently the purchasing committee of the DoI approved it.

A letter of approval was issued to CCL, based on which CCL deposited the security money and dispatched a signed agreement to DoI. In response to another tender for supply of zinc sulphate a lower rate of `4,500 (US$98) per tonne was quoted. In view of this lower quote, the DoI postponed the implementation of the CCL’s letter of acceptance.

Fighting it in court

When CCL learned of the DoI’s decision, it filed a petition under section 20 of the Arbitration Act, 1940, for appointment of an arbitrator to adjudicate the dispute. The DoI contended there was no agreement executed between the parties and so no arbitration clause could be invoked by CCL. Overruling the DoI’s objections the trial court held that the parties had executed a valid arbitration agreement and appointed an arbitrator.

The DoI absented itself from the arbitral proceedings, which culminated in an ex parte order favouring CCL. The DoI preferred an appeal against the ex parte award contending there was no arbitration agreement and consequently there could be no award. The DoI’s challenge to the award was rejected and the award was made a rule of the court. The DoI appealed this as well, but this appeal was also dismissed.

Last resort

Eventually, the DoI preferred an appeal before the Supreme Court on the basis that the arbitrator’s decision was erroneous; there was no arbitration agreement; the award was liable to be set aside as it was devoid of any reason. The focus of DoI’s thrust was the Supreme Court’s decision in Punjab SEB v Punjab Prestressed Concrete Works.

CCL opposed this appeal arguing that after DoI’s acceptance of the tender had been communicated to it, the complete contract came into existence and this included the arbitration clause. CCL had therefore rightly invoked the arbitration clause, and the Supreme Court’s decision in UOI & Ors v N K Pvt Ltd & Anr applied. This case had held that a binding contract is deemed to have been executed when an acceptance of offer is communicated to the offering party.

The Supreme Court held as follows:

On the existence of an agreement: The mere fact that the DoI had not signed any formal agreement was no reason for contending that no agreement was in existence. The DoI’s acceptance of CCL’s bid and communication of this decision was deemed to be treated as a formal agreement.

Reasons for award: While noting that the award was passed without assigning any reasons or recording any findings as to the loss suffered by CCL, the court held that the arbitrator was bound to examine the tenability of CCL’s claim and adjudicate it by assigning reasons. Any failure to assign reasons constitutes a valid ground for setting aside the award.

Speaking awards

Relying on Raipur Development Authority & Ors v Chokhamal Contractors & Ors the court observed: “there is no justification to leave the small area covered by the law of arbitration out of the general rule that the decision of every judicial and quasi-judicial body should be supported by reasons.”

The court further stated that “Arbitral awards in disputes to which the State and its instrumentalities are parties, affect public interest and the matter of the manner in which Government and its instrumentalities allow their interest to be affected by such arbitral adjudications involve larger questions of policy and public interest. Government and its instrumentalities cannot simply allow large financial interests of the State to be prejudicially affected by nonreviewable (except in the limited way allowed by the Statute) non-speaking arbitral awards. It will not be justifiable for Governments or their instrumentalities to enter into Arbitration agreements which do not expressly stipulate the rendering of reasoned and speaking awards. Governments and their instrumentalities should, as a matter of policy and public interest – if not as a compulsion of law – ensure that wherever they enter into agreements for resolution of disputes by resort to private arbitrations, the requirement of speaking awards is expressly stipulated and ensured.”

The Supreme Court partly allowed the appeal and directed the arbitrator to decide the dispute afresh. It directed that the parties should be given a reasonable opportunity of being heard, including an opportunity to adduce oral and documentary evidence.

Vivek Vashi is the mainstay of the litigation department at Bharucha & Partners.