The Supreme Court of India has observed that an arbitrator is a judge appointed by the contracting parties and therefore any award pronounced by him cannot be taken lightly. Arbitration is a consensual procedure and as a rule, the courts do not take upon themselves the task of being the judge over the award given by the arbitrator. Neither the contracting parties nor the courts can question the authenticity of an arbitral award merely on grounds of its merit. However, this does not mean that the arbitral award goes absolutely unchallenged. The High Court of Calcutta in Sate of West Bengal v. Bharat Vanijaya Eastern Private Limited set aside an arbitral award by reason of it being in contravention to public policy.

An award can only be set aside on the fulfilment of certain conditions that are contained in Section 34 of the Arbitration and Conciliation Act, 1966. This provides various grounds which can be used to set aside an arbitral award. One of the grounds included in this provision is ‘opposed to public policy’. However, the term public policy is nowhere defined in the Act, and there is no straight- jacket formula for the application of this provision.

In the judgement, Justice Sanjib Banerjee and Justice Kausik Chanda observed that an award not based on proper reasoning would be against public policy, thereby not being a validly enforceable award. Any award based on unreasonable claims cannot have a standing ground.

The award in question was pronounced in an arbitration proceeding pertaining to the termination of a contract for the construction of a Highway. The State contended that the contractor, i.e. the claimant- Respondent caused undue delay to the process of construction, as a consequence of which, the State finally decided to terminate the contract. On the other hand, the Respondent insisted that the reason for the delay was due to fault on the part of the State.

While passing the award, the arbitrator upheld the Respondent’s claims. However, when the award was evaluated by the High Court, it was found to be falling short of the requirements mandated by the governing statute. The use of the phrase ‘fair estimate’ by the arbitrator clearly indicated that his subjective opinion on the matter was not entirely based on completely objective bases. The arbitrator accepted the estimate on which the contractor’s claims were based without justifying why such an extent of the estimate was appropriate. In addition to this, he also based his award on an estimate of this estimate. The award also did not reflect sufficient evaluation and assessment on the part of the arbitrator, which is fundamental to all arbitration processes.

The arbitral award cannot stand valid on the ground when it does not provide the appropriate reasons in support of any head of claim. As a consequence, finding the award to be contrary to the public policy, the court set it aside and asked the contractor to refund the entire amount along with the interest.

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Link to judgement: State of WB v. Bharat Vanijya Eastern Pvt. Ltd.