Hygiene Prescriptions on writing Arbitral Awards by Supreme Court

Contributed by: Hammurabi & Solomon Partners





Executive Summary


The absence of arbitral award writing guidelines, barring some institutional guidelines in this regard, has been a major concern for effective execution of arbitral awards across jurisdictions. Although the need for such norm-setting have been raised[1] consistently from as way back as 1949 by US Supreme Court Justice Benjamin Cardozo titled The Nature of The Judicial Process,[2] divergence in legal regimes across jurisdictions has not helped much to plug this gap. India has been no exception.


So, turning to India, the Hon’ble Supreme Court of India took note of the issue in 2019 in Dyna Technologies v. Crompton Greaves Ltd. dated 18.12.2019, albeit identifying the essential parameters for writing arbitral awards while striking down the award therein.


This paper seeks to discuss the ruling of the Supreme Court in Dyna Technologies v. Crompton Greaves Ltd.


The Hon’ble Supreme Court in the Dyna Technologies has adjudicated upon the question on the requirement of a reasoned award and has unprecedentedly cautioned arbitrators and parties to have a clear award rather than one which is (a) muddled in form and (b) implied in content. Importantly, the Judgment identifies the tenets on which an award can be termed as being unintelligible and inadequately reasoned, and provides valuable guidelines to both arbitrators as well as parties to arbitration on the importance of reasoning in arbitrations concerned with complex subject matters, such as construction contracts as was the case herein.


Without denying the importance placed in the area of reasoned awards, the presentation thereof has received limited deliberation and even lesser recognition of a binding nature. For instance, international conventions as well as various foreign legislations[3] recognize the requirements of reasons, and qualify it as the most important content of any award, including the Article 31(2) of the UNCITRAL Model Law on International Commercial Arbitration, which is identical to the Section 31(3) of the Arbitration and Conciliation Act 1996 – the Indian national arbitration law – and even the Article 34(3) of the 2010 UNCITRAL Arbitration Rules, which reads as “The arbitral tribunal shall state the reasons upon which the award is based, unless the parties have agreed that no reasons are to be given.


However, the limited literature on how arbitral awards should be written is seen in say for instance the International Bar Association’s Toolkit for Award Writing, which identifies certain key measures for ensuring that awards are passed with adequate reasoning by specifying that:


The rationale behind providing a comprehensive reasoning in an award is that it constrains the powers of the arbitrators by compelling them to base their decision on the law and facts. It reduces the risk of arbitrary decisions and indicates to the parties that the arbitral tribunal has thoughtfully considered their submissions. Furthermore, stating the reasons in the award enables a court or body in later recognition and enforcement or set-aside or annulment proceedings to understand the arbitral tribunal’s decision-making process. One way to ensure sufficient reasoning is to refer closely to the list of dispositive issues (as agreed by the parties or determined by the arbitral tribunal) and to address each of the parties’ main arguments on each issue. With regard to the dispositive issues, the award should explain the reasoning according to which the arbitral tribunal applied the applicable law to the relevant facts (including references to the factual record).

Further the Chartered Institute of Arbitrators vide its International Arbitration Practice Guideline under Article 4 of the Drafting Arbitral Awards provides that:


Article 4 – Form and content of awards
1. Arbitrators should comply with any requirements as to form and content set out in the arbitration agreement, including any arbitration rules and/or the Lex arbitri. In any event, an award should: […] ii) contain reasons for the decision, unless the parties have agreed otherwise or if it is a consent award.

The commentary to the above Article 4 further reads that:

“Arbitrators have a wide discretion to decide on the length and the level of detail of the reasons but it is good practice to keep the reasons concise and limited to what is necessary, according to the particular circumstances of the dispute. In any event, arbitrators need to set out their findings, based on the evidence and arguments presented, as to what did or did not happen. They should explain why, in the light of what they find happened, they have reached their decision and what their decision is.”[4]

The above guidelines, despite throwing light on the manner and form in which arbitral awards ought to be written has limited recognition and can at best be qualified as soft law. However the Court in Dyna Technologies while citing strictures of poorly structured awards identifies the essential elements of drafting a well-reasoned award.


Summary of Judgment and Guidelines in Dyna Technologies v. Crompton Greaves Ltd. :


a. The Hon’ble Supreme Court vide Dyna Technologies has identified three characteristics of a reasoned Arbitral Award, as being:

  • Proper - If the reasoning in the order are improper, they reveal a flaw in the decision-making process. The Hon’ble Court in this context further noted that if the challenge to an award is based on impropriety or perversity in the reasoning, then it can be challenged strictly on the grounds provided Under Section 34 of the Arbitration Act.

  • Intelligible: If the challenge to an award is based on the ground that the same is unintelligible, the same would be equivalent of providing no reasons at all.

  • Adequate: The Hon’ble Supreme Court noted that while exercising jurisdiction under Section 34 of the 1996 Act the court has to adjudicate the validity of such an award based on the degree of particularity of reasoning required having regard to the nature of issues falling for consideration. It further laid down that, the degree of particularity cannot be stated in a precise manner as the same would depend on the complexity of the issue.


b. The Hon’ble Supreme Court further laid down guidelines for courts adjudicating a petition under Section 34 by noting that:


1. In the event the Court concludes that the reasoning suffered from gaps, it must – before setting aside such award – have regard to:

  • The documents submitted by the parties; and

  • The contentions raised before the Tribunal

This is to ensure that awards with inadequate reasons are not set aside in casual and cavalier manner.


AND


2. That “ordinarily unintelligible awards” are to be set aside, subject to party autonomy to do away with the reasoned award.



Conclusively, the Hon’ble Supreme Court cautioned courts to be careful while distinguishing between (a) inadequacy of reasons in an award and (b) unintelligible awards, and in this context noted the intent behind sub-clause 4 of Section 34 of the Arbitration and Conciliation Act, 1996 (hereinafter ‘Act’) as being to giving the Arbitral Tribunal an opportunity to undo the curable defects in the Arbitral Award.



Factual Context


a. The Appellant is a Contractor and the Respondent is a Developer that had entered into a contract for an aquaculture unit to be set up for the Principal. The Respondent had invited tenders for carrying out certain works for construction of ponds, channels, drains and associated works, and after issuing a Letter of Intent dated 25.07.1994, the Respondent issued a Work Order dated 15.11.1994 in favor of the Appellant. On 05.01.1995 the Respondent instructed the Appellant to stop the work. The Appellant claimed Rs. 45,85,286/-, amongst other claims, for “Losses due to unproductivity of the men and machineries which could not work due to hindrances.”, and the Arbitral Tribunal – comprising of three arbitrators – accepted the same for a sum of Rs. 27,78,125/- with 18% interests p.a. vide award dated 05.05.1998. The award was challenged under Section 34, and the Ld. Single Judge of Madras High Court upheld the Award which was subsequently challenged by the Respondent before a Division Bench which, importantly, opined that the Award did not contain sufficient reasons and the statements of the award did not provide any reasons, discussion, or conclusion, which noting that:


  • It is of course true that an Arbitrator cannot be expected to write a detailed judgment as in a law Court. However, the present Act contemplates that the award of the Arbitrator should be supported by reason.” And

  • The basis for the right of the claimant and the basis of the liability of the present Appellant have not been indicated anywhere within four corners of the award and in spite of the best efforts it is not possible to discover even any latent reason in the award.” The Hon’ble High Court despite a plea by the Appellant to exercise the option under Section 34(4) of the Act denied the same by finding that the contract excluded possibility of payment of any compensation on account of premature termination.

b. Importantly, while analyzing the Arbitral Award the Hon’ble Supreme Court noted that:

  • The factual narration was coupled with the claimant's argument, which is bundled together.

  • The Arbitral Tribunal had mixed the arguments with the premise it intended to rely upon for the claimant's claim.

  • The Arbitral Tribunal had reduced the reasons for Respondent's defense.

c. Finding: In the instant matter the Hon’ble Supreme Court found the award to have been rendered without reasons as the Arbitrator had merely restated the contentions of both the parties thereby qualifying the same as being “muddles and confused”. The Court further noted that considering the complexity of the matter the inadequate reasoning and basing the award on approval of the Respondent rendered the award to be unintelligible and unsustainable.



Indian Jurisprudence on Unintelligible Awards and Inadequately Reasoned Awards


a. The very crux of what is required from an arbitrator is discernible from the observation that:

To satisfy the requirements of the Act, reasons should be intelligible and comprehensible, but need not be unnecessarily lengthy or elaborate. Reasons should indicate and provide a precise link between questions/issues and the conclusion reached in regard thereto. It is sufficient if the arbitrator makes his mind clear in the award on what and why decision is made. Short intelligible indications of the grounds should be discernible to indicate the mind of the arbitrator. Sufficiency of reasons depends upon facts of each case.”[5]

Further, in Indian Oil Corporation Ltd. v. Indian Carbon Ltd.[6] the Hon’ble Supreme Court has clarified that the requirements of reasons to be stated in the award is to be satisfied if the arbitrator has ‘made his mind known in the basis of which he has acted.’; in context where of a reason is essentially a short intelligible indication of the grounds to find out the mind of the Arbitrator for his action.[7]


b. To demonstrate of what would be discerned as being unintelligible, the Hon’ble Supreme Court in M/s. M.B. Patel & Co v. Oil & Natural Gas Commission[8] found the award to be unintelligible for as had been noted by the Hon’ble High Court of Gujarat in the therein impugned award that “The fact remained that the total claim set-up by the contractor was not awarded by the Umpire and in these circumstances lumpsum award becomes unintelligible”[9], and the same was found to be hit by the observations of the Hon’ble Supreme Court in Gujarat Water Supply.[10]


c. The aforementioned recent judgment of the Hon’ble Supreme Court in Dyna Technologies v. Crompton Greaves Ltd. furthers the jurisprudence and the guidance on when can an award be termed as being unintelligible by categorically laying down that an award which muddles the facts, contentions, reasoning of the arbitrator, and the conclusions arrived at therefrom will qualify the award as being unintelligible. Where, however, the arbitrator has prescribed the reasons, the court will not go into the reasonableness of the reasons.[11]


d. On the issue of Inadequately Reasoned Award, the Hon’ble Supreme Court of India has identified certain grounds on the basis of which an award can be terms to be inadequate in reasoning. To begin with this analysis however it is essential to note that as per the Hon’ble Supreme Court, “The word 'reasonable' has in law the prima facie meaning of reasonable in regard to those circumstances of which the actor, called on to act reasonably, knows or ought to know.” The Hon’ble Court has specifically in the context of Arbitrators noted that:

“An arbitrator acting as a Judge has to exercise a discretion informed by tradition, methodized by analogy, disciplined by system, and subordinated to the primordial necessity of order in the social life. Therefore, where reasons germane and relevant for the arbitrator to hold in the manner he did have been indicated, it cannot be said that it was unreasonable.”[12]

e. The recording of reasons by an arbitrator is – as rightly specified by the Hon’ble Supreme Court in Dyna Technologies[13]– subject to party autonomy and the same has been recorded in Section 31(3) of the Act, which provides that the award shall state the reasons upon which it is based, unless (a) the parties have agreed that no reasons are to be given, or (b) the award is an award on agreed settlement terms as specified under Section 30 of the Act. Prior to 1996 too, however, although the 1940 Act did not mandate reasoning from the arbitrator, a 1989 constitution bench of the Hon’ble Supreme Court in Raipur Development Authority v. Chokhamal Contractors Etc.[14] held that unless the parties expressly agree, the arbitrator is not required to give reasons in support of his award. The Court pointed out the distinction between the private award and the award touching the coffers of the public exchequer and observed that in case the contracts were entered into by and between the Government or instrumentality of the States on the one hand and private party on the other, they should incorporate in the contract that the arbitrator should give reasons in support of the award. The shift in jurisprudence to allow party autonomy to do away with reasoning rather than specifically asking for the same was introduced in the 1996 Act.


f. The Hon’ble Supreme Court has in State of Rajasthan & Anr v M/S. Ferro Concrete Construction[15] found that if the reason for finding the claim valid is the claim in itself, the award would be rendered as invalid:

In a reasoned award if the claim of a contractor is equated to proof of the claim, then it is obviously a legal misconduct and an error apparent on the face of the award. While the quantum of evidence required to accept a claim, may be a matter within the exclusive jurisdiction of the arbitrator to decide, if there was no evidence at all and if the arbitrator makes an award of the amount claimed in the claim statement, merely on the basis of the claim statement without anything more, it has to be held that the award on that account would be invalid.

g. Furthermore, if the parties do away with the requirement of the arbitrator to provide reasoning, they optimally reduce any challenge to the award for the Hon’ble Supreme Court in Tamilnadu Electricity Board vs M/S. Bridge Tunnel Constructions[16] has crucially observed that:

In the case of non-speaking award, it is not open to the court to go into the merits. Only in a speaking award the court can look into the reasoning in the award and correct wrong proposition of law or error of law. It is not open to the court to probe the mental process of the arbitrator and speculate, when no reasons have been given by the arbitrator, as to what impelled the arbitrator to arrive at his conclusion”.

This however, does not imply that a court cannot adjudicate on the validity of the arbitral award, albeit, on the limited scope of reference to the terms of the contract/arbitration agreement, as the Court would consider whether or not the arbitrator/umpire has exceeded his jurisdiction in awarding or refusing to award the sum of money awarded or omitted a consolidated lumpsum.[17]


h. In Jai Singh v. Delhi Development Authority[18]the Hon’ble High Court of Delhi has very categorically laid down that the test of ascertaining whether an award is reasoned or not is to be based on two whether the arbitrator has provided reasoning of two aspects:

  • Whether the claim is or is not in accordance with the agreement? and

  • Whether the claim has been established or not?

The above was further supported by placing reliance on College of Vocational Studies v S.S. Jaitely[19] which notes that the arbitrator is expected to indicate his mind to ascertain as to how has the arbitrator arrived at a particular conclusion. The award ought to display the trend of the thought process of the arbitrator, but not his mental meanderings; and further the Hon’ble Supreme Court in Jajodia (Overseas) Pvt. Ltd. v. Industrial Development Corporation of Orissa Ltd[20] noted that mere giving of answers to the issued in the award would not constitute a speaking and a reasoned award. This requirement is further conditioned by the finding of the Hon’ble Supreme Court in S.N. Mukherjee v. Union of India[21] that it is the recording of clear and explicit reasons by authorities exercising quasi-judicial functions, a norm applicable even to arbitrators as per Jai Singh (Supra).



The tone of prima facie respecting the decision of an arbitrator was laid down by Lord Goddard, C.J. in Mediterranean & Eastern Export Co. Ltd. v. Fortress Fabrics Ltd.[22], by remarking that “The day has long gone by when the Courts looked with jealousy on the jurisdiction of the Arbitrators. The modern tendency is in my opinion more especially in commercial arbitrations, to endeavour to uphold Awards of the skilled persons that the parties themselves have selected to decide the questions at issue between them.” Lord Goddard further nuanced that if an Arbitrator has acted within the terms of his submission and has not violated any rules of natural justice the Courts should be slow indeed to set aside his award. However, with the recent foray into the manner and mode in which arbitral awards ought to be written provides much needed transparency to the process and resonates the tendency of the Hon’ble Supreme Court of India to set a cautionary note for arbitrators.


(The paper has been authored by the Disputes Management, Mediation and Arbitration Desk @Hammurabi & Solomon Partners. Please reach out to manoj.kumar@hammurabisolomon.com)

[1] See Felix Dasser and Emmanuel O. Igbokwe, 'Chapter III: The Award and the Courts, Efficient Drafting of the Arbitral Award: Traditional Ways Revisited – Lesson Learned from the Past?', in Christian Klausegger, Peter Klein, et al. (eds), Austrian Yearbook on International Arbitration 2019, Austrian Yearbook on International Arbitration, Volume 2019 pp. 279 – 315.


[2] S.I. Strong, ‘Reasoned Awards in International Commercial Arbitration’, 19.02.2016 Kluwer Arbitration Blog, Wolters Kluwer. (Accessible at: http://arbitrationblog.kluwerarbitration.com/2016/02/19/reasoned-awards-in-international-commercial-arbitration/)


[3] Art 1506 of the French Code of Civil Procedure; English Arbitration Act 1996, s 52(4); German ZPO, Art 1054; Art 189(2) of the Swiss Law on Private International Law; Art 54 of the Chinese Arbitration Law.


[4] CIARB – International Arbitration Practice Guideline – Drafting Arbitral Awards Part-I (General) Accessible at: https://www.ciarb.org/media/4206/guideline-10-drafting-arbitral-awards-part-i-general-2016.pdf.


[5] Gujarat Water Supply and sewerage Bioard v. Unique Rector Gujarat (P) Ltd., (1989)1SCC532; AIR 1989 SC 973; see also National Highways Authority of India v. Gammon India Ltd. (2017) 1 BC 254 (DB).


[6] 1998(3)SCC36; AIR1985SC1340.


[7] 1995 DLT (58) 315.


[8] (2008) 13 SCC 25


[9] Oil And Natural Gas Commission vs M.B. Patel & Co. (2001) 1 GLR 117


[10] Supra.


[11] State of Rajasthan v. Puri Construction Co. Ltd. (1994) 6 SCC 485, as relied upon in M/s. Sharma & Associates Contractors Pvt. Ltd. Vs. Progressive Constructions Ltd. (2017) 5 SCC 743.


[12] Municipal Corporation of Delhi v. M/s. Jagan Nath Ashok Kumar & Anr., [1987]4SCC497.


[13]Dyna Technologies v. Crompton Greaves Ltd. (Civil Appeal No. 2153 of 2010) dated 18.12.2019 passed by the Hon’ble Supreme Court of India.


[14] 1990 AIR 1426, 1989 SCR (3) 144.


[15] (2009)12SCC1


[16] Tamil Nadu Electricity Board vs. Bridge Tunnel Construction & Ors. AIR 1997 SC 1376.


[17] Ibid at paragraph 36.


[18] 2008(3) Arb.L.R.667 (Delhi)


[19] AIR 1987 Delhi 134


[20] 1993 (2) SCC 106


[21] 1990 (4) SCC 594


[22] Mediterranean & Eastern Export Co. Ltd. v. Fortress Fabrics Ltd., [1948] 2 All E.R. 186 observed at pages 188/189 of the report.

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