Respondent (Moonlit):

1. Whether setting aside the arbitration award under Section 34 is valid?

- The competence of the arbitrator.

2. Whether the present arbitration award is valid?

- The primary violation of obligation arising from the contract.
- The arbitration award being violative of public policy.

Issue 1: Whether setting aside the arbitration award under Section 34 is valid?

The setting aside of the arbitration under Section 34 is valid by the reasoning that the arbitrator is
a direct party to the main contract and the Arbitration Agreement is valid.

Clause 12.1 of the Settlement of Dispute Clause clearly states that upon any kind of disputes or
differences arising out of or in connection with the contract, whether during the progress of work
or after its completion, and whether before or after determination of the contract shall be referred
by the Claimant to the “Chief Engineer” through ‘Notice of Dispute’. Through this the parties
shall try to achieve an amicable solution to the dispute.

Clause 12.2 of the Settlement of Dispute Clause on the other hand states that in the event of any
dispute or difference between the parties hereto as to the construction or operation of this
contract, or the respective rights and liabilities of the parties on any matter in question, shall
demand in writing by means of Notice of Arbitration.

Upon examining Settlement of Dispute Clauses 12.1 and 12.2, it is evident that the arbitration
agreement in the instant case shows on it that the authors have expressed alternative intentions
upon the arising of a dispute, without deciding in favor of either[1].

Ambiguity is therefore patent and Clauses 12.1 and 12.2 of the Contract must be held to be void
for uncertainty, unless the ambiguity can be cured by election. However, in the instant case, it is
not curable by election where there is nothing to indicate who is to have the option.
In the counsel’s judgment, the arbitration agreement is void for uncertainty.

Therefore, on the grounds of the contentions made above, the settlement of the award under
Section 34(ii) as the Arbitration Agreement is valid in the instant case.

- The competence of the arbitrator.

The competence of the arbitrator in the instant case can be challenged on the grounds that he is a
direct party to the main contract.

The unilaterally nominated arbitrator is the product of realism, doubtless, indispensable in a

complex world of inter-communal transactions, as a way of making arbitration acceptable —
though in a manner which immediately dilutes its purity.

The genesis of this lies in the principle of equal treatment of parties, which is one of the core
principles of justice deliverance.

The landmark judgment of the French Cour De Cassation in Societes BKMI & Siemens v.
Societe Dutco (hereinafter “DUTCO”) has clarified and strengthened its applicability to
arbitrations.

Perkins Eastman Architects DPC v. HSCC (India) Ltd.[2] The Court relied upon the observations
in DUTCO case that, an independent mind is indispensable in the exercise of judicial power,
whatever the source of that power may be, and it is one of the essential qualities of an arbitrator.

Clause 12.4 of The Settlement of Dispute states that the parties may waive off the applicability
of Section 12(5) of The Arbitration and Conciliation Act, 1996 (which deals with the
ineligibilities of an arbitrator), if they agree for such waiver in writing, after dispute have arisen
between them, in the format given under Annexure XV of these conditions.
In the instant case, no such agreement agreeing for such waiver of the applicability of the act has
been signed by both the parties indicating the significance of the applicability of the act in the
appointment of the arbitrator.

The arbitrator being a direct party to the main contract and a vicariously interested party in the
completion of the main contract violates Section 12(5) read along with the Seventh Schedule of
The Arbitration and Conciliation Act, 1996, ultimately making the appointment of the arbitrator
invalid.

The counsel further takes precedence from the case of Bharat Broadband Network Ltd. v. United
Telecoms Ltd[3], where the said procedure of appointment was challenged on the ground of
violation of Section of the amended Arbitration Act in 2015, read with Seventh Schedule thereto.

The Supreme Court in this case held that under the new provision of Section what is clear is that
where under any agreement between the parties, a person falls within any of the categories set
out in the Seventh Schedule, he is, as a matter of law, ineligible to be appointed as an arbitrator.
In such a scenario, the party can straightaway apply under Section for declaration of the same
and for a declaration that the mandate of the arbitrator stands terminated under Section of the Act
itself.

Furthermore, the respondent in the instant case has violated the Settlement of Dispute Clause
(12.1 and 12.5) by not referring the dispute between SPL and Moonlit to either the Chief
Engineer as mentioned in clause 12.1 or sending a Notice of Arbitration as under clause 12.2 but
rather imposing an arbitrary fine on the petitioner, Moonlit.

To establish a breach, it has to be adjudicated upon, and not merely decided by the parties[4].
Hence, imposing the penalty without any scope of amicable solution is violative of Settlement of
Dispute Clause.

The dispute between the two parties arose once Moonlit refused to further continue the work
until the full payment was done by SPL. At this point in the case, SPL must have either invoked
clause 12.1 or 12.2 with the intention of amicably solving the dispute.

But failing to do so, indicates that the condition precedents to seeking arbitration have not been
fulfilled and hence, the appointment of the arbitrator stemming out of such an arbitration can be
rejected as held in the case of Dharmdas Tirthdas Construction Pvt Ltd v. Government of India,
where the High Court of Madhya Pradesh held that if the conditions precedent to seeking
arbitration have not been complied with, then the appointment of the arbitrator can be rejected.

The contentions above establish the invalidity of the appointment of arbitrator in the instant case.

Issue 2: Whether the present arbitration award is valid?

In the instant case, the award given by the arbitrator is invalid under the grounds that,
o The primary violation of obligation arising from the contract is on accord to SPL, when
the payment was not made to moonlit.
o The award stands in violation of the public policy of Isepor.
o The ineligibility of the arbitrator for the reasons of him being a vicariously interested
party in the completion of the main contract.

- The primary violation of obligation arising from the contract.

The primary violation of obligation arising from the contract is on accord to SPL in the instant
case.
Liability to pay damages would arise only in the event a breach of contract[5]. In this instant case,
SPL becomes liable to pay damages to Moonlit through payment of arrears with 12% interest for
the delay in payment, resulting in breach of contract.
It is the contractual obligation of SPL to pay the dues timely in order for the smooth functioning
of work which upon failing to do so, resulted in difficulties for Moonlit in purchasing essential
raw materials and to continue further developing the highway.
In cases of breach of contract, the burden to prove that no loss was likely to be suffered is on the
party committing breach[6]. From the facts of the instant case, it is evident that had SPL not
delayed their payments to Moonlit, there would have been continuous work towards and
fulfilment of the contractual obligations of Moonlit.
Hence, it is the liability of the appellant in the present case to prove that Moonlit was not
affected from their breach of contract of delayed payments and that the primary violation of
contractual obligations was on accord to SPL.
From the facts of the instant case, there is no doubt that had SPL fulfilled its contractual
obligations, Moonlit would have resumed the development of the Highway. SPL by delaying the
payment of dues, breached its contractual obligations and further made it an arduous task to
further resume the work for Moonlit, depriving them of sufficient resources and raw materials to
continue the work.
From the contentions above, it is established that the primary violation of contractual obligations
was on accord of SPL.

- The arbitration award being violative of public policy.

In the instant case, the arbitration award passed is violative of the public policy of Isepor on the
grounds of its arbitrary and irrational nature.
Sub-section (3) in section 31 of The Arbitration and Conciliation Act, 1996 mandates that the
arbitral award shall state the reasons, upon which it is based unless, inter alia, it is to be made as
per the clauses (a) and (b) in the sub-section. Said clauses do not apply in the facts and
circumstances, as parties had not agreed to have the award without reasons or that it was an
award based on agreed terms.
The reasoning given behind the arbitral award in the instant case, of the application under
Section 34 not being maintainable under the jurisdiction of Isepor as the main contract is
governed by the arbitration laws of Mordor, and hence, the court cannot to entertain a petition
within the territorial jurisdiction of Isepor is legally incorrect and fallacious.
The dispute in this case is very much appropriately covered under its jurisdiction as the
agreement between SPL and Moonlit is distinct from the Main Contract.
In addition, the reasoning that the dispute arose out of non-fulfilment of contractual obligations
by Moonlit is distorted.
The point of dispute arising may have been when Moonlit refused to resume work until the entire
payment was done. But the dispute arising solely out of the failure to fulfil contractual
obligations by Moonlit is a groundless reasoning as the very act of Moonlit not being able to
resume their work was because of the failure to fulfil the contractual obligation of timely
payment by SPL.
Acknowledging the fact, the contract between SPL and Moonlit affects third party interests, SPL
becomes liable to ensure sufficient flow of funds for continuation of the work by Moonlit with
includes purchase of essential raw materials.
Failure to do so and not paying the dues on time by SPL is a evident breach of their contractual
duties towards Moonlit, making the primary violations of obligation on accord of SPL.
The reasoning behind the arbitration award itself not being justifiable and fallacious further
reflects on its lack of reasoning and arbitrary nature, violating the Public Policy of Isepor.
The counsel takes further precedence from the case of Jayaram Panda v. National Highway
Authority of India & Ors. (ARBA No.58 of 2018) in establishing the above contention where the
Orissa High Court held that an arbitral award passed without assigning any reasons for the
conclusion reached therein would be against the mandate of Section 31 of the Act and opposed to
public policy.
The term public policy can be seen further discussed in the landmark case of Renusagar Power
Co. Ltd. Vs. General Electric Co. [1994], wherein the Hon'ble Supreme Court held that the
award passed by the arbitrator will be against the public policy if the award was in contravention
of “Fundamental policy of Indian law, Interest of India and Justice and Morality”.
The ground “fundamental policy of Indian law” was given another wide interpretation in ONGC
Vs. Western Geco [2015], wherein the court held this ground encompasses three distinct parts
i.e., “Duty (of the tribunal) to adopt a judicial approach, adhering to the principles of natural
justice (by the tribunal) and the decision (of the tribunal) should not be perverse or so irrational
that no reasonable person would have arrived at the same”.
In Venture Global Engineering LLC and Ors. Vs. Tech Mahindra Ltd. and Ors. [2017], the court
emphasised that “the award of an arbitral tribunal can be set aside only on the grounds specified
in section 34 of the Act and no other ground” which is applicable to the instant case.
This view has been taken in another judgment of Sutlej Construction vs. The Union Territory of
Chandigarh [2017].
From the contentions above, the counsel substantiates that the award being bereft of reason, goes
against the mandate of the Act and therefore is against public policy.

//
In Steel Authority of India Ltd. v. Primetals Technologies (2020), the award was partially set
aside as being against public policy because an extraordinarily high-interest rate of 14 percent
per annum was given without any justification in comparison to current interest rates.
Furthermore, the high interest rate looked to be punitive in character given the circumstances. As
a result, the interest rate was cut to 10% per year.

The Court concluded in Oil & Natural Gas Corporation Ltd. v. SAW Pipes Ltd., 2003, that in the
instance of an application under Section 34 to set aside an award, the Court’s position was seen
to be that of an appellate/revision court, giving it broad powers. Furthermore, it was mentioned
that the term “public policy” refers to something that concerns the public benefit and interest.
However, the award cannot be argued to be in the public interest because it is patently in breach
of legislative prohibitions. The administration of justice is likely to be harmed by such an award
or decision.
In Mohan Steels Ltd. v. Steel Authority of India (SAIL), (2017), the court set aside the arbitral
award because the Arbitrator construed the contract based on circumstances unrelated to contract
terms by relying on Regulator’s notifications, which were first brought on record after the
parties’ closing arguments. Even while it was clearly denied in its statement of claims, this was
done without giving the petitioner a chance to refute its application to the case.
In the case of Project Director, National Highway Authority of India v. M. Hakeem & Anr. ,
(2021), a division bench comprising Justice R.F. Nariman and Justice B.R. Gavai of the Supreme
Court of India decided in favor of minimum judicial intervention, declaring that courts cannot
amend, revise, or alter an arbitral judgment under Section 34 of the Arbitration Act. However,
under Article 142 of the Constitution of India, the Court has allowed awards to be modified in
the interest of comprehensive justice which clearly states that the court hasn’t retreated in
altering the award but is giving respect to Section 34 by representing minimum judicial
involvement.

//

//

The Supreme Court in Central Organisation for Railway Electrification v. ECI-SPIC-SMO-

MCML (JV)7, a joint venture company observed at para 35, relying on para 21 of the Perkins4
judgment, that in a three-member panel, the right to appoint arbitrator by the party is
counterbalanced by the other side also by appointing an arbitrator of its choice and, therefore, it
is allowed.

Voestalpine Schienen GmbH v. Delhi Metro Rail Corpn. Ltd- The Supreme Court considered the
amendments made in the 2015 Act, as well as the recommendations of the Law Commission on
the subject of “Neutrality of Arbitrators”. At paras 15 to 23 of the judgment, the Supreme Court
discussed in detail, the principles regarding independence and impartiality of the arbitrators, and
it held that: (SCC pp. 687-88, para 20)
3. 20. Independence and impartiality of the arbitrator are the hallmarks of any arbitration
proceedings. Rule against bias is one of the fundamental principles of natural justice
which applied to all judicial and quasi-judicial proceedings. It is for this reason that
notwithstanding the fact that relationship between the parties to the arbitration and the
arbitrators themselves are contractual in nature, and the source of an arbitrator’s
appointment is deduced from the agreement entered between the parties, notwithstanding
the same non-independence and non-impartiality of such arbitrator (though contractually
agreed upon) would render him ineligible to conduct the arbitration. The genesis behind
this rationale is that even when an arbitrator is appointed in terms of contract and by the
parties to the contract, he is independent of the parties. Functions and duties require him
to rise above the partisan interests of the parties and not to act in, or so as to further, the
particular interest of either party. After all, the arbitrator has adjudicatory role to perform
and, therefore, he must be independent of parties as well as impartial.
Central Organisation for Railway Electrification v. ECI-SPIC-SMO-MCML (JV)
(Central Organisation for Railway Electrification case7, SCC pp. 731-32

Hans Smit comments,

The presence of a partisan arbitrator on a panel will normally reduce, if not eliminate, the free
exchange of ideas amongst the members of the panel. The chair will be less receptive to
arguments that appear to be moved by partisan considerations or made join one of the arbitrators.

Pravin Electricals Pvt. Ltd vs Galaxy Infra and Engineering Pvt

//

[1]
Arbn. Seth Kerorimal Adwani vs Union of India (Uoi), AIR 1959 Cal 430
[2]
(2020) 20 SCC 760 : 2019 SCC OnLine SC 1517
[3]
. (2019) 5 SCC 755
P Radhakrishna Murthy v. NBCC Ltd. (2013) 3 SCC 747; J.G. Engineers (P) Ltd., v. Union of
[4]

India (2011) 5 SCC 758

Managing Director, Army Welfare Housing Organisation v. Sumangal Services Pvt. Ltd.
[5]

(2004) 9 SCC 619

Oil and Natural Gas Corporation Ltd v. Saw Pipes Ltd AIR 2003 SC 2629; Construction &
[6]

Design Services v. DDA (2015) 14 SCC 263