Arbitration Award Set Aside: Supreme Court Rules on Reasoned Awards and Compensation in Contract Disputes

The case of M/S Dyna Technologies Pvt. Ltd. v. M/S Crompton Greaves Ltd. is a landmark judgment on the importance of reasoned awards in arbitration proceedings. The Supreme Court, in its judgment dated December 18, 2019, examined the validity of arbitral awards when they lack clear reasoning and whether compensation could be awarded for premature contract termination under arbitration law.

Background of the Case

The dispute arose from a contract between Dyna Technologies Pvt. Ltd. (the appellant) and Crompton Greaves Ltd. (the respondent) concerning construction work related to an aquaculture unit. The contract, initially awarded by Crompton Greaves, was later terminated, leading to claims for compensation by the appellant.

The appellant filed claims totaling Rs. 53,83,980.45, citing losses due to:

• Idle charges for machinery.
• Unproductive use of machinery.
• Loss of profit due to contract termination.
• Interest and litigation costs.

The arbitration tribunal awarded compensation for unproductive use of machinery, amounting to Rs. 27,78,125/- with an 18% interest rate per annum. The respondent challenged this award before the Madras High Court, which set aside the tribunal’s decision on the grounds that it lacked clear reasoning.

Petitioner’s Arguments

The appellant contended that:

• The arbitration tribunal had duly considered the case and reached a fair conclusion.
• The tribunal relied on logbooks and records showing actual losses.
• Under Section 73 of the Indian Contract Act, damages were legally justified.
• The High Court had no jurisdiction to re-evaluate evidence or substitute its view under Section 37 of the Arbitration Act.
• Contractual provisions limiting compensation were against public policy and unenforceable.

Respondent’s Arguments

The respondent countered that:

• The contract explicitly barred compensation for premature termination.
• The arbitral tribunal had exceeded its jurisdiction by awarding damages beyond contractual terms.
• The award lacked clear reasoning and failed to justify the amount granted.
• The High Court rightly set aside the award under Section 34 of the Arbitration Act.

Supreme Court’s Analysis

The Supreme Court examined the arbitral award and found that:

• The award lacked clear reasoning, making it difficult to understand the tribunal’s basis for compensation.
• Arbitration awards must adhere to Section 31 of the Arbitration Act, which requires stated reasons unless expressly waived by parties.
• The tribunal mixed factual narration with legal conclusions without separating them properly.
• While awards should not be set aside casually, they must be intelligible and justified.

The Court observed:

“An award should be reasoned in a manner that parties and courts can understand the basis of the decision. A mere summary of facts and submissions does not suffice as reasoning.”

Key Legal Precedents Cited

The Court referred to several important rulings:

• Som Datt Builders Ltd. v. State of Kerala – Stating that an arbitral award must contain adequate reasons.
• Raipur Development Authority v. Chokhamal Contractors – Emphasizing that non-reasoned awards are invalid unless agreed upon by parties.
• Sundarsan Trading Company v. Government of Kerala – Clarifying that courts cannot substitute their reasoning in arbitration but can review if an award lacks reasons.

Final Judgment

The Supreme Court ruled:

“The arbitral award, in its present form, lacks sufficient reasoning and cannot be sustained.”

However, considering the prolonged litigation of 25 years, the Court ordered the respondent to pay Rs. 30,00,000/- as a full and final settlement within eight weeks, failing which an interest rate of 12% per annum would apply.

Impact of the Judgment

This ruling has significant implications:

• It reinforces the importance of reasoning in arbitral awards.
• It limits judicial interference but ensures awards are intelligible.
• It clarifies that compensation cannot be awarded beyond contract terms unless justified under law.
• It promotes arbitration as a valid dispute resolution mechanism by emphasizing clarity and fairness.

Conclusion

The Supreme Court’s decision in M/S Dyna Technologies Pvt. Ltd. v. M/S Crompton Greaves Ltd. underscores the necessity of well-reasoned arbitration awards to ensure fairness and transparency. While the Court upheld the High Court’s decision to set aside the arbitral award, it balanced the interests of justice by granting a compensatory settlement to avoid prolonged litigation.

Petitioner Name: M/S Dyna Technologies Pvt. Ltd..
Respondent Name: M/S Crompton Greaves Ltd..
Judgment By: Justice N.V. Ramana, Justice Mohan M. Shantanagoudar, Justice Ajay Rastogi.
Place Of Incident: Madras.
Judgment Date: 18-12-2019.

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