NATIONAL HIGHWAYS AUTHORITY OF INDIA V. SRI P. NAGARAJU @ CHELUVAIAH & ANR.

FACTS:

The National Highways Authority of India (‘NHAI’) is appealing the judgement of High Court
of Karnataka dt. 26.07.2021, which upheld two previous decisions by the Principal District
Sessions Judges of Ramanagara and Bengaluru Rural District. These decisions had upheld the
arbitration awards that increased the compensation for land acquired for the expansion of
National Highway-275, for which the NHAI had claimed some land.

The landowners (‘claimants’) challenged the initial compensation set by the Special Land
Acquisition Officer (‘SLAO’), which was Rs. 2,026/- and Rs. 17,200/- per sq. m. He reached
this conclusion after looking into the Right to Fair Compensation and Transparency in Land
Acquisition, Rehabilitation and Resettlement Act, 2013 (RFCTLARR Act, 2013) as well as
sale exemplars, but came to his decision based on a prior guideline value given by the
Department of Stamps and Registration.

Claimants were not satisfied and brought the case to arbitration. The Arbitrator has changed
these amounts to Rs. 15,400/- and Rs. 25,800/- per sq. m. The Arbitrator considered the method
used by the SLAO for determining compensation and adopted a similar approach by using the
guideline value from the Department of Stamps and Registration. However, the Arbitrator
referenced subsequent notifications to determine the guideline the value and kept in mind the
fact that the acquired lands were converted from agricultural to residential and industrial
purposes. Instead of applying the specific village’s guideline value, the Arbitrator used the
value indicated for a nearby residential layout, determining the market value at Rs.15,400 per
sq. mtr. For land in another area converted for industrial use, an additional 50% was added to
the residential property value, resulting in Rs.25,800 per sq. mtr. The total compensation was
calculated based on this market value and the land’s total extent.

NHAI challenged the decision of the Arbitrator, arguing that the Arbitrator used inappropriate
guideline values from a subsequent notification which came at a later stage, rather than the
notification dated prior. NHAI contended that the SLAO had correctly used earlier sales data
and guideline values.

The Principal District and Sessions Judges, however, upheld the arbitral awards. They found
that the Arbitrators’ approach was consistent with legal principles and the RFCTLARR Act,
2013. The High Court further supported this view, stating that there was no reason to overturn
the Arbitrators’ decisions given the limited scope of review under Sections 34 and 37 of the
Arbitration and Conciliation Act, 1996 (‘Act, 1996’).

NHAI, dissatisfied with these outcomes, has brought the matter before the Supreme Court,
seeking a review of the compensation awards and the method used to determine them.

THE LAW INVOLVED:

1. Section 34 and 37(1)(c) of the Act, 1996. This revolves around the ability of the court
to set aside an arbitral award under section 34 and the power of the appellant under
section 37(1)(c) to appeal a judgement wherein an arbitral award has either been set
aside or not been set aside.

2. Section 3G(7) of National Highways Act, 1956 (‘NH Act, 1956’) and section 28 of the
RFCTLARR Act, 2013 discuss parameters to be considered while determining the price
of the land. The case involved arguments that they cannot coincide with each other and
only section 3G(7) shall apply due to section 3J of the NH Act, 1956 which states that
the provisions of the Land Acquisition Act shall not apply. The Court looked into the
case of Union of India v. Tarsem Singh, (2019) 9 SCC 304 where they made the
provisions of the Land Acquisition Act apply under the NH Act, 1956 in cases of
solatium and interest as otherwise, it would be contrary to Article 14 of the Indian
Constitution. The same was applied to the aforementioned sections and the provisions
of RFCTLARR, 2013 was made applicable to the NH Act, 1956 to all cases
determination of compensation.

INTERFERENCE BY COURTS IN ARBITRAL PROCEEDINGS:

Section 34 of the Act, 1996 lists down the criteria which is to be satisfied for an arbitral award
to be set aside by Court.

The case in question was related to section 34(2A) of the Act, 1996 which states “An arbitral
award arising out of arbitrations other than international commercial arbitrations, may also
be set aside by the Court, if the Court finds that the award is vitiated by patent illegality
appearing on the face of the award: Provided that an award shall not be set aside merely on
the ground of an erroneous application of the law or by reappreciation of evidence.”

Firstly, the court found no patent illegality in the Arbitrator’s decision because the guideline
value from the notification guideline subsequent to the date of notification of acquisition
reflected the relevant market conditions. Secondly, the court noted that using the earlier
guideline would have justified an escalation for market value, which the 2016 guideline
effectively represented. The guidelines provided by the Department of Stamps and Registration
are legitimate for determining market value. Thirdly, there was no compelling alternative
market value, and the process for the notification guideline was transparent and credible. Thus,
the Arbitrator’s reliance on the latest guideline was had no illegality, let alone any patent
illegality. Hence, the Court did no interfere with the arbitral award.

However, in the aspect of the guideline value fixed in respect of the residential extension known
as ‘city green’ and ‘Zunadu’ for which the guideline value for registration purpose was fixed
at Rs.15,400/- per sq. mtr., the Court determined that there was a lack of reasoning provided
by the Arbitrator. The pleadings in the claim petition and the portion extracted from the award,
which served as the sole basis for the Arbitrator’s decision, indicate that the NHAI was not
given sufficient opportunity to contest the material relied upon by the Arbitrator and the
Arbitrator failed to provide adequate reasoning in the award. This lack of opportunity and
insufficient reasoning point to a patent illegality in the Arbitrator’s decision, as it contravenes
Sections 28(2) and 31(3) of the Act, 1996.

POWER OF COURT TO MODIFY AN AWARD AND ALTER THE COMPENSATION PAYABLE UNDER
THE ARBITRAL AWARD:

In the present case, the court considered the factual circumstances and the clear legal position
that courts cannot modify an award under section 34 or on appeal under section 37 of the Act,
1996. The appropriate course of action determined by the Court was to set aside the award and
remit the matter back to the Arbitrator under section 34(4).

In the cases of MMTC Ltd., Ssangyoung Engg. & Construction Ltd. v. NHAI (2019) 15 SCC
131 and McDermott International Inc. v. Burn Standard Co. Ltd. (2006) 11 SCC 181, the
Court established that section 34 of the Arbitration Act provides only limited grounds for
challenging an arbitral award. Courts are not empowered to correct errors made by arbitrators;
their authority is restricted to quashing or setting aside the award, leaving the parties to resolve
the dispute through arbitration or other appropriate means.

In Project Director, NHAI v. M Hakeem (2021) 9 SCC 1, the Supreme Court clarified that
courts have no power to modify an award under the Act, 1996.

This position of law is in furtherance of section 35 of Act, 1996, which binds the arbitral award
on the parties involved. This embodies the entire object of the act and arbitration as a whole.
Courts having the power to alter arbitral awards would go against this object.