Delhi Airport Metro Express Pvt. … vs Delhi Metro Rail Corporation Ltd. on 9 September, 2021


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Supreme Court of India

Delhi Airport Metro Express Pvt. … vs Delhi Metro Rail Corporation Ltd. on 9 September, 2021

Author: L. Nageswara Rao

Bench: L. Nageswara Rao, S. Ravindra Bhat

                                                REPORTABLE

         IN THE SUPREME COURT OF INDIA
          CIVIL APPELLATE JURISDICTION

             Civil Appeal No. 5627 of 2021
       (Arising out of SLP (C) No. 4115 of 2019)

Delhi Airport Metro Express Pvt. Ltd.
                                            .... Appellant(s)
                           Versus

Delhi Metro Rail Corporation Ltd.
                                         …. Respondent (s)
                           WITH
             Civil Appeal No. 5628 of 2021
       (Arising out of SLP (C) No. 8311 of 2019)




                   JUDGMENT

L. NAGESWARA RAO, J.

Leave granted.

1. Whether in exercise of its power under Section 37 of

the Arbitration and Conciliation Act, 1996 (hereinafter, ‘ the

1996 Act’), the Division Bench of the Delhi High Court was

right in interfering with the award dated 11.05.2017 passed

by the Arbitral Tribunal in favour of the Appellant – Delhi

1 | Page
Airport Metro Express Pvt. Ltd. (hereinafter, ‘ DAMEPL’ or the

‘Concessionaire’), is the question that arises for

consideration in these Appeals.

2. Delhi Metro Rail Corporation Ltd. (hereinafter, ‘ DMRC’),

a joint venture of the Government of India and the

Government of National Capital Territory of Delhi, proposed

implementation of the Airport Metro Express Line project in

New Delhi, from New Delhi Railway Station to Dwarka Sector

21 via Indira Gandhi International Airport, New Delhi

(hereinafter, ‘AMEL’). The approximate length of the project

was 22.7 kilometers. It was decided to develop the project

by engaging a concessionaire for financing, design,

procurement, installation of all systems (including but not

limited to rolling stock, overhead electrification, track,

signaling and telecommunication, ventilation and air

conditioning, automatic fare collection, baggage check-in and

handling, depot and other facilities). DMRC had to

undertake design and construction of basic civil structure for

the project, which was in the nature of a public private

partnership.

3. The bid of a consortium comprising Reliance Energy

Limited (renamed as Reliance Infrastructure Limited) and M/s

Construcciones y Auxiliar de Ferrocarriles, S.A. was accepted

2 | Page
by DMRC, by issuing a letter of acceptance on 21.01.2008.

Thereafter, on 25.08.2008, a Concession Agreement was

entered into between DMRC and DAMEPL for design,

installation, commissioning, operation and maintenance of

the AMEL. It was agreed between the parties that all civil

works as well as appointment of consultants, land acquisition

and other clearances from the Government and other

authorities have to be obtained by DMRC and the design,

supply, installation, testing and commissioning of various

systems like rolling stock, power supply, overhead

equipment, signalling, track system, platform, screen doors,

ventilation, architectural finishing etc. were to be provided by

DAMEPL. As the work could not be completed in time,

extensions were granted and finally, safety clearances were

obtained from the Commissioner of Metro Railway Safety

(hereinafter, the ‘CMRS’ or ‘Commissioner’) on 10.01.2011.

The date of commercial operation was achieved on

23.02.2011.

4. On 22.03.2012, DAMEPL requested DMRC for a joint

inspection of viaduct and its bearings before expiry of the

defect liability period of the civil contractors. Another letter

was written by DAMEPL on 23.05.2012, complaining of issues

relating to the design and quality in the installation of viaduct

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bearings. It was mentioned in the said letter that there were

signs of girders having sunk at some locations as a result of

deformations/cracks. DMRC responded to the said letter of

DAMEPL on 08.06.2012 by which DAMEPL was informed that

inspections were carried out at the locations pointed out by

DAMEPL and no bearings were found damaged. However,

DMRC admitted that grouting material filled above/below the

bearings was damaged/loosened for which action would be

taken to repair them on priority. Due to the said defects,

DMRC advised DAMEPL to impose speed restrictions as

deemed necessary in the interest of safety.

5. The Ministry of Urban Development, Government of

India convened a meeting of all the stakeholders on

02.07.2012. The views of all the parties relating to the

defects were obtained and a Joint Inspection Committee was

formed. An interim report was submitted by the Joint

Inspection Committee after inspection on 4 th & 5th July, 2012.

Subsequently, DAMEPL stopped operations of the Line on

08.07.2012.

6. A notice was issued by DAMEPL on 09.07.2012, asking

DMRC to cure the defects in DMRC’s works within a period of

90 days from the date of the notice, failing which it shall be

treated as a breach having Material Adverse Effect on the

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Concessionaire under the Concession Agreement. In the said

notice dated 09.07.2012, ‘a non-exhaustive list of defects’

was set out by DAMEPL. Thereafter, a number of meetings

were conducted between the parties which were attended by

SYSTRA, the original design consultant for the viaduct

sections. It appears from the record that DMRC had also

engaged some other agencies for carrying out the repair

work.

7. DAMEPL issued a notice dated 08.10.2012 terminating

the Concession Agreement as, according to it, the defects

that were pointed out in the notice dated 09.07.2012 were

not cured within a period of 90 days, resulting in an Event of

Default under the Concession Agreement. DMRC invoked

arbitration under Article 36.2 of the Concession Agreement

on 23.10.2012. On 22.01.2013, the Line was restarted with

reduced speed after a certificate sanctioning resumption was

issued by the Commissioner on 18.01.2013. According to

DAMEPL, it agreed to operate the Line only as an agent in

public interest and on instructions of DMRC, although

DAMEPL’s stance was not accepted by DMRC. DAMEPL

stopped its operations on 30.06.2013 and handed over the

Line to DMRC on the next day.

5 | Page

8. At this stage, it is relevant to refer to Article 36 of the

Concession Agreement which refers to dispute resolution.

Article 36.2.2, read with Article 36.2.3, provides that all

disputes, whatsoever arising between the parties, out of,

touching upon or relating to construction, measuring,

operation or effect of the Concession Agreement or the

breach thereof, shall be settled through arbitration by

reference to a sole arbitrator, where the total value of claims

do not exceed Rs.1,500,000/-. Beyond this limit, the dispute

shall be referred to three arbitrators who will be selected

from a panel of engineers with requisite qualifications and

professional experience relevant in the field to which the

Concession Agreement relates. The panel shall be from

serving or retired engineers of government departments or of

public sector.

9. The main issue that arose for determination before the

Arbitral Tribunal constituted under the Concession Agreement

is the validity of the termination notice dated 08.10.2012.

DMRC claimed that the termination notice issued by DAMEPL

is illegal, as DMRC had taken various steps honouring its

obligations under the Concession Agreement. A direction

was sought from the Arbitral Tribunal to DAMEPL to take over

operations of the AMEL under the Concession Agreement,

6 | Page
and in the alternative, to grant compensation of Rs.3,173

crore with interest of 18% per annum. Further monetary

reliefs were sought by DMRC. The claim of compensation

sought by DMRC was dependent on the determination of the

main issue, i.e., the validity of the termination notice dated

08.10.2012. DMRC also raised an issue on the real motive of

DAMEPL to terminate the Concession Agreement. DAMEPL

justified the termination as being in conformity with the

Concession Agreement and consequently, filed a counter

claim seeking an amount of Rs.3,470 crore as termination

payment along with interest and further amounts as detailed

in the counter claim, on the ground that DMRC did not cure

the defects in the civil structure in terms of the cure notice

dated 09.07.2012. As DMRC did not comply with its

obligations under Article 29.5.1(i), DAMEPL justified the

termination notice dated 08.10.2012 and the consequent

claim of termination payment from DMRC under Article

29.5.2.

10. The Arbitral Tribunal formulated the following primary

issues for consideration in relation to the termination notice

dated 08.10.2012: –

“i) Were there any defects in the civil structure of the

airport metro line?

7 | Page

(ii) If there were defects, did such defects have a

material adverse effect on the performance of the

obligation of DAMEPL under CA?

(iii) If there were defects in the civil structure, which

had a material adverse effect on the performance of

the obligations under the CA by DAMEPL, have such

defects been cured by DMRC and / or have any

effective steps been taken within a period of 90 days

from the date of notice by DAMEPL to cure the defects

by DMRC and thus were DMRC in breach of the CA as

per 29.5.1 (i)?”

11. In assessing whether the defects pointed out by

DAMEPL were cured and/or effective steps to cure them were

taken by DMRC within the time stipulated in the notice dated

09.07.2012, the Arbitral Tribunal undertook an in-depth

analysis of the defects in the civil structure and steps taken

for their repair/rectification. Insofar as the existence of

defects is concerned, the Arbitral Tribunal concluded that

there were as many as 1551 cracks in 367 girders, i.e., 72 %

of the girders were affected by such cracks. Reports of

inspections conducted at the behest of DMRC, giving

mapping data of the cracks, were relied upon by the Tribunal

to hold that such cracks were spread in a large number of

8 | Page
girders. The Tribunal referred to the meeting dated

02.07.2012 conducted by the Ministry of Urban Development

during which the Managing Director, DMRC expressed his

views that the cracks occurred during “lowering” and not

during operations. The evidence of Mr. Muls of Systra was

considered by the Arbitral Tribunal to hold that they were not

sure of the cause of the cracks. On account of such large

numbers of cracks in the base slab of the pre-stressed

concrete girders in about a year of train operation, coupled

with unreliable measurement of crack depth and non-serious

inspection of the repairs by an agency appointed by DMRC,

the Arbitral Tribunal was of the opinion that these defects

adversely impacted the integrity of the structure. As

effective steps were not taken within the cure period of 90

days, the Tribunal held that DMRC was in breach of the

Concession Agreement, resulting in Material Adverse Effect

on the Concessionaire.

12. As far as twist in the girders were concerned, the

Arbitral Tribunal found that there were about 80 girders with

twists varying between 10 to 20 mm which had not been

rectified and no effective steps were taken to cure the

defects in such girders. The defects pointed out by DAMEPL

regarding gaps between the shear key and the girder being

9 | Page
more than 25 mm and between 10 mm to 25 mm were not

addressed and only gaps below 10 mm were addressed by

some grinding, detailed methodology for which was not

brought out by DMRC in its evidence, as per the findings of

the Arbitral Tribunal. Therefore, the Tribunal concluded that

these defects were neither cured nor effective steps taken by

DMRC within the cure period up to 08.10.2012, constituting a

material breach on the part of DMRC. On the basis of the

above findings and findings in relation to other defects,

deficiencies and constraints in the civil structure of the AMEL

which are not referred to herein, the Arbitral Tribunal

concluded that the defects had not been cured within the

cure period of 90 days from 09.07.2012 nor had effective

steps been taken to cure such defects. Ergo, the termination

notice issued by DAMEPL on 08.10.2012 was valid.

13. Having decided on the validity of the termination

notice, the Tribunal went on to consider certain legal issues

so as to determine questions around specific performance of

the contract, or alternatively, the award of damages and the

outcome of the counter claim filed by DAMEPL. One such

issue considered by the Arbitral Tribunal was whether the

issue of certificate by the Commissioner on 18.01.2013,

giving clearance for resuming operations of the AMEL,

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showed that the defects were duly cured. After examining

the certificate issued by the Commissioner, the Arbitral

Tribunal held that while the Commissioner had sanctioned

resumption of services, certain conditions were imposed,

essentially relating to the restriction of speed up to 50 km

per hour, which had a material bearing on the prime purpose

of the AMEL intended to serve as a high-speed connectivity

line. Moreover, the Commissioner himself recognized that the

operation of the Line had to be regularly monitored. The

subsequent operation of the Line by DMRC was found to be

not relevant for determining the validity of the termination

notice dated 09.07.2012. The Arbitral Tribunal answered this

issue in favour of DAMEPL. On consideration of the counter

claim of DAMEPL, the principal issue that came up before the

Arbitral Tribunal was on determination of the amount of

Termination Payment payable by DMRC under the Concession

Agreement. In this regard, the Tribunal had to determine the

quantum payable under each component of Termination

Payment, one of which was ‘Adjusted Equity’. DAMEPL

sought payment of an amount of Rs.3,470 crore as

Termination Payment. In this total, an amount of Rs.685

crore, which had been infused by DAMEPL’s promoter, was

factored in by DAMEPL for the purposes of calculating

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‘Adjusted Equity’. Relying on the relevant clauses of the

Concession Agreement, the Tribunal first sought to determine

the portion of funds that would qualify as ‘Equity’ under the

Concession Agreement, which would then be used for

arriving at the figure of ‘Adjusted Equity’. Out of Rs.685 crore

which was sought to be slotted under the head ‘Equity’ by

DAMEPL, an amount of Rs.611.95 crore was determined to be

‘Equity’ by the Tribunal, on the basis of the evidence

produced and the construction of the relevant provisions of

the Concession Agreement. Thereafter, the Tribunal worked

out ‘Adjusted Equity’ at Rs.983.02 crore and awarded a total

amount of Rs.2782.33 crore, along with further interest, as

Termination Payment to be made to DAMEPL.

14. DMRC filed a petition under Section 34 of the 1996 Act

for setting aside the award of the Arbitral Tribunal dated

11.05.2017 in the Delhi High Court, which was dismissed by

the learned Single Judge of the High Court by a judgement

dated 06.03.2018 observing that grounds for interference

had not been made out by DMRC. The learned Single Judge

held that the findings recorded by the Arbitral Tribunal on

facts, law and interpretation of the Concession Agreement

were all within the realm of the Arbitral Tribunal and they

needed no intervention by the Court exercising its power

12 | P a g e
under Section 34 of the 1996 Act. He was also of the view

that the Court cannot substitute its view when there are two

views possible and the view taken by the Arbitral Tribunal is a

plausible one.

15. DMRC filed an appeal under Section 37 of the 1996 Act

read with Section 13 of the Commercial Courts, Commercial

Division and Commercial Appellate Division of High Courts

Act, 2015 (the title since amended to Commercial Courts Act,

2015), challenging the correctness of the judgment passed

by the learned Single Judge on 06.03.2018 dismissing the

objections filed by DMRC under Section 34 of the 1996 Act.

The Division Bench reversed the judgement of the learned

Single Judge and allowed the appeal filed by DMRC. The

award passed by the Arbitral Tribunal was partly set aside.

The parties were left to invoke the arbitration clause for

adjudication of the issues that were not decided by the

Division Bench. The judgement of the Division Bench dated

15.01.2019 is assailed in these Appeals.

16. DMRC has also filed SLP (C) No.8311 of 2019

challenging the correctness of the aforesaid judgement of the

Division Bench in relation to the issues of grant of interest,

waiver of the termination notice due to DAMEPL’s conduct of

operating the project for more than five months from

13 | P a g e
22.01.2013, refusal by the Division Bench to grant relief of

specific performance of the Concession Agreement and non-

consideration of the issue pertaining to the real reason for

the termination of the Concession Agreement by DAMEPL.

Reasons given by the Division Bench for setting aside

the award

17. The Division Bench of the High Court held that the

award of the Arbitral Tribunal had recorded two different

termination dates. As the Tribunal had based its reasoning on

the validity of the termination notice on two different dates

leading to confusion and ambivalence as to the termination

notice and the date of termination, the award was found to

be suffering from the vices of perversity, irrationality and

patent illegality. The High Court observed that in deciding

the question on defects in the civil structure and whether

effective steps were taken to cure the defects, the Arbitral

Tribunal had committed serious error by holding, without

‘reason’, that the vital evidence of the sanction granted by

the CMRS for resumption of commercial operations of the

AMEL and the fact that DMRC had successfully operated the

AMEL from 30.06.2013 till the date of the award without any

adverse incident were inconsequential. The High Court found

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fault with the Arbitral Tribunal in virtually negating the

certificate issued by the CMRS under the Delhi Metro Railway

(Operation and Maintenance) Act, 2002 (hereinafter, ‘the

Delhi Metro Act’) and held that the cumulative effect of the

findings of the award on this issue ‘shocked the conscience

of the court’.

18. On the issue of Adjusted Equity, while considering the

approach taken by the Arbitral Tribunal for computation of

the amounts payable under Article 29.5.2, the High Court

was of the opinion that the Tribunal’s reasoning was

completely flawed and perverse. The High Court ruled that

the reasoning adopted by the Tribunal was patently illegal

and the conclusion reached after doing so, was one which no

reasonable person would have come to. According to the

High Court, the treatment of Rs.611.95 crore as ‘Equity’ by

the Tribunal, on the ground that such a project could not

have been executed with only Rs.1 lakh as equity funded by

DAMEPL’s promoter (in terms of share capital), was based on

an assumption that the debt-to-equity ratio is commonly

60:40 or 80:20, contrary to the evidence on record. This was

held to be an egregious mistake committed by the Tribunal.

The High Court also found fault with the award which ignored

the resolution passed by the board of directors of DAMEPL on

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16.03.2011, by which the amount of Rs. 611.95 crore was

converted to subordinated debt. The High Court held that

‘Adjusted Equity’ under the Concession Agreement does not

contemplate funds recognized as subordinated debt to be

treated as ‘Equity’. With respect to the interpretation of

the various provisions of the Concession Agreement and the

resultant conclusions on ‘Adjusted Equity’, the High Court

held that the findings of the Tribunal on this issue were in

violation of Sections 28(1)(a) and 28(3) of the 1996 Act, as

elaborated in Associate Builders v. Delhi Development

Authority1, as contractual provisions had been interpreted

in a way no fair-minded and reasonable person would.

19. In light of the reasons mentioned, the High Court set

aside the conclusions of the Arbitral Tribunal on the validity

of the termination notice and that Rs.611.95 crore was

‘Equity’ for the purpose of Article 29.5.2 of the Concession

Agreement. Consequently, the award of Rs.2,782.33 crore to

DAMEPL was set aside. In view of the above findings, the

High Court considered the direction for payment of interest

to have become infructuous. The High Court felt that it

would be inappropriate to hear the parties on the issue of

restitution at that stage and granted liberty to the parties to

1 (2015) 3 SCC 49

16 | P a g e
move appropriate applications under the 1996 Act to seek

remedies available to them.

Contours of the Court’s power to review arbitral

awards

20. The 1996 Act was enacted to consolidate and amend

the law relating to domestic arbitration, international

commercial arbitration and enforcement of foreign arbitral

awards and also to define the law relating to conciliation and

for matters connected therewith, by taking into account the

United Nations Commission on International Trade Law

(UNCITRAL) Model Law on International Commercial

Arbitration and the UNCITRAL Conciliation Rules. One of the

principal objectives of the 1996 Act is to minimize the

supervisory role of courts in the arbitral process. With

respect to Part I of the 1996 Act, Section 5 imposes a bar on

intervention by a judicial authority except where provided

for, notwithstanding anything contained in any other law for

the time being in force. An application for setting aside an

arbitral award can only be made in accordance with

provisions of Section 34 of the 1996 Act. Relevant

provisions of Section 34 (as they were prior to the Arbitration

and Conciliation (Amendment) Act, 2015) read as under:-

17 | P a g e
“34. Application for setting aside arbitral award.
— (1) Recourse to a Court against an arbitral award
may be made only by an application for setting aside
such award in accordance with sub-section (2) and sub-
section (3).

(2) An arbitral award may be set aside by the Court
only if—

(a) the party making the application furnishes proof
that—

(i) a party was under some incapacity, or

(ii) the arbitration agreement is not valid under
the law to which the parties have subjected it or,
failing any indication thereon, under the law for
the time being in force; or

(iii) the party making the application was not
given proper notice of the appointment of an
arbitrator or of the arbitral proceedings or was
otherwise unable to present his case; or

(iv) the arbitral award deals with a dispute not
contemplated by or not falling within the terms of
the submission to arbitration, or it contains
decisions on matters beyond the scope of the
submission to arbitration:

Provided that, if the decisions on matters
submitted to arbitration can be separated from
those not so submitted, only that part of the
arbitral award which contains decisions on
matters not submitted to arbitration may be set
aside; or

(v) the composition of the arbitral tribunal or the
arbitral procedure was not in accordance with the
agreement of the parties, unless such agreement

18 | P a g e
was in conflict with a provision of this Part from
which the parties cannot derogate, or, failing such
agreement, was not in accordance with this Part;
or

(b) the Court finds that—

(i) the subject-matter of the dispute is not capable
of settlement by arbitration under the law for the
time being in force, or

(ii) the arbitral award is in conflict with the public
policy of India.

Explanation.—Without prejudice to the generality
of sub-clause (ii), it is hereby declared, for the
avoidance of any doubt, that an award is in conflict
with the public policy of India if the making of the
award was induced or affected by fraud or corruption
or was in violation of section 75 or section 81.
…”

21. An amendment was made to Section 34 of the 1996 Act

by the Arbitration and Conciliation (Amendment) Act, 2015

(hereinafter, ‘the 2015 Amendment Act’). A perusal of the

statement of objects and reasons of the 2015 Amendment

Act would disclose that the amendment to the 1996 Act

became necessary in view of the interpretation of the

provisions of the 1996 Act by courts in certain cases which

had resulted in delay of disposal of arbitration proceedings

and increase in interference by courts in arbitration matters,

which had the tendency to defeat the object of the 1996 Act.

19 | P a g e
Initially, the matter was referred to the Law Commission of

India to review the shortcomings in the 1996 Act in detail.

The Law Commission of India submitted its 176 th Report,

recommending various amendments to the 1996 Act.

However, the Justice Saraf Committee on Arbitration

constituted by the Government, was of the view that the

proposed amendments gave room for substantial

intervention by the court and were also contentious.

Thereafter, on reference, the Law Commission undertook a

comprehensive study of the amendments proposed by the

Government, keeping in mind the views of the Justice Saraf

Committee and other stakeholders. The 246 th Report of the

Law Commission was submitted on 05.08.2014. Acting on

the recommendations made by the Law Commission in its

246th Report, amendments by way of the 2015 Amendment

Act were made to several provisions of the 1996 Act,

including Section 34. The amended Section 34 reads as

under: –

“34. Application for setting aside arbitral award.
— (1) Recourse to a Court against an arbitral award
may be made only by an application for setting aside
such award in accordance with sub-section (2) and sub-
section (3).

20 | P a g e
(2) An arbitral award may be set aside by the Court
only if—

(a) the party making the application furnishes proof
that—

(i) a party was under some incapacity, or

(ii) the arbitration agreement is not valid under
the law to which the parties have subjected it or,
failing any indication thereon, under the law for
the time being in force; or

(iii) the party making the application was not
given proper notice of the appointment of an
arbitrator or of the arbitral proceedings or was
otherwise unable to present his case; or

(iv) the arbitral award deals with a dispute not
contemplated by or not falling within the terms of
the submission to arbitration, or it contains
decisions on matters beyond the scope of the
submission to arbitration:

Provided that, if the decisions on matters
submitted to arbitration can be separated from
those not so submitted, only that part of the
arbitral award which contains decisions on
matters not submitted to arbitration may be set
aside; or

(v) the composition of the arbitral tribunal or the
arbitral procedure was not in accordance with the
agreement of the parties, unless such agreement
was in conflict with a provision of this Part from
which the parties cannot derogate, or, failing such
agreement, was not in accordance with this Part;
or

(b) the Court finds that—

21 | P a g e

(i) the subject-matter of the dispute is not capable
of settlement by arbitration under the law for the
time being in force, or

(ii) the arbitral award is in conflict with the public
policy of India.

Explanation 1. —For the avoidance of any doubt, it is
clarified that an award is in conflict with the public
policy of India, only if,—

(i) the making of the award was induced or
affected by fraud or corruption or was in violation
of section 75 or section 81; or

(ii) it is in contravention with the fundamental
policy of Indian law; or

(iii) it is in conflict with the most basic notions of
morality or justice.

Explanation 2. —For the avoidance of doubt, the test
as to whether there is a contravention with the
fundamental policy of Indian law shall not entail a
review on the merits of the dispute.

(2-A) 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 re-appreciation of evidence.

…”

22. A cumulative reading of the UNCITRAL Model Law and

Rules, the legislative intent with which the 1996 Act is made,

Section 5 and Section 34 of the 1996 Act would make it clear

22 | P a g e
that judicial interference with the arbitral awards is limited to

the grounds in Section 34. While deciding applications filed

under Section 34 of the Act, courts are mandated to strictly

act in accordance with and within the confines of Section 34,

refraining from appreciation or re-appreciation of matters of

fact as well as law. (See: Uttarakhand Purv Sainik Kalyan

Nigam Limited. v. Northern Coal Field Limited. 2,

Bhaven Construction Through Authorised Signatory

Premjibhai K. Shah v. Executive Engineer Sardar

Sarovar Narmada Nigam Ltd. and Another3 and

Rashtriya Ispat Nigam Limited v. Dewan Chand Ram

Saran4).

23. For a better understanding of the role ascribed to courts

in reviewing arbitral awards while considering applications

filed under Section 34 of the 1996 Act, it would be relevant to

refer to a judgment of this Court in Ssangyong

Engineering and Construction Company Limited v.

National Highways Authority of India (NHAI) 5 wherein

R.F. Nariman, J. has in clear terms delineated the limited area

for judicial interference, taking into account the amendments

brought about by the 2015 Amendment Act. The relevant

2 (2020) 2 SCC 455
3 2021 SCC OnLine SC 8
4 (2012) 5 SCC 306
5 (2019) 15 SCC 131

23 | P a g e
passages of the judgment in Ssangyong (supra) are noted

as under: –

“34. What is clear, therefore, is that the expression
“public policy of India”, whether contained in
Section 34 or in Section 48, would now mean the
“fundamental policy of Indian law” as explained in
paras 18 and 27 of Associate Builders [Associate
Builders v. DDA
, (2015) 3 SCC 49: (2015) 2 SCC
(Civ) 204] i.e. the fundamental policy of Indian law
would be relegated to “Renusagar” understanding
of this expression. This would necessarily mean
that Western Geco [ONGC v. Western Geco
International Ltd., (2014) 9 SCC 263 : (2014) 5 SCC
(Civ) 12] expansion has been done away with. In
short, Western Geco [ONGC v. Western Geco
International Ltd., (2014) 9 SCC 263 : (2014) 5 SCC
(Civ) 12] ,as explained in paras 28 and 29
of Associate Builders [Associate Builders v. DDA,
(2015) 3 SCC 49 : (2015) 2 SCC (Civ) 204] , would
no longer obtain, as under the guise of interfering
with an award on the ground that the arbitrator has
not adopted a judicial approach, the Court’s
intervention would be on the merits of the award,
which cannot be permitted post amendment.

However, insofar as principles of natural justice are
concerned, as contained in Sections 18 and 34(2)

(a)(iii) of the 1996 Act, these continue to be
grounds of challenge of an award, as is contained
in para 30 of Associate Builders [Associate

24 | P a g e
Builders v. DDA, (2015) 3 SCC 49 : (2015) 2 SCC
(Civ) 204] .

35. It is important to notice that the ground for
interference insofar as it concerns “interest of
India” has since been deleted, and therefore, no
longer obtains. Equally, the ground for interference
on the basis that the award is in conflict with
justice or morality is now to be understood as a
conflict with the “most basic notions of morality or
justice”. This again would be in line with paras 36
to 39 of Associate Builders [Associate
Builders v. DDA
, (2015) 3 SCC 49 : (2015) 2 SCC
(Civ) 204] , as it is only such arbitral awards that
shock the conscience of the court that can be set
aside on this ground.

36. Thus, it is clear that public policy of India is
now constricted to mean firstly, that a domestic
award is contrary to the fundamental policy of
Indian law, as understood in paras 18 and 27
of Associate Builders [Associate Builders v. DDA,
(2015) 3 SCC 49: (2015) 2 SCC (Civ) 204], or
secondly, that such award is against basic notions
of justice or morality as understood in paras 36 to
39 of Associate Builders [Associate Builders v. DDA,
(2015) 3 SCC 49 : (2015) 2 SCC (Civ) 204] .

Explanation 2 to Section 34(2)(b)(ii) and
Explanation 2 to Section 48(2)(b)(ii) was added by
the Amendment Act only so that Western
Geco [ONGC v. Western Geco International Ltd.,

25 | P a g e
(2014) 9 SCC 263 : (2014) 5 SCC (Civ) 12] ,as
understood in Associate Builders [Associate
Builders v. DDA
, (2015) 3 SCC 49 : (2015) 2 SCC
(Civ) 204] , and paras 28 and 29 in particular, is
now done away with.

37. Insofar as domestic awards made in India are
concerned, an additional ground is now available
under sub-section (2-A), added by the Amendment
Act
, 2015, to Section 34. Here, there must be
patent illegality appearing on the face of the
award, which refers to such illegality as goes to the
root of the matter but which does not amount to
mere erroneous application of the law. In short,
what is not subsumed within “the fundamental
policy of Indian law”, namely, the contravention of
a statute not linked to public policy or public
interest, cannot be brought in by the backdoor
when it comes to setting aside an award on the
ground of patent illegality.

38. Secondly, it is also made clear that
reappreciation of evidence, which is what an
appellate court is permitted to do, cannot be
permitted under the ground of patent illegality
appearing on the face of the award.

39. To elucidate, para 42.1 of Associate
Builders [Associate Builders v. DDA
, (2015) 3 SCC
49 : (2015) 2 SCC (Civ) 204] , namely, a mere
contravention of the substantive law of India, by
itself, is no longer a ground available to set aside

26 | P a g e
an arbitral award. Para 42.2 of Associate
Builders [Associate Builders v. DDA
, (2015) 3 SCC
49 : (2015) 2 SCC (Civ) 204] , however, would
remain, for if an arbitrator gives no reasons for an
award and contravenes Section 31(3) of the 1996
Act, that would certainly amount to a patent
illegality on the face of the award.

40. The change made in Section 28(3) by the
Amendment Act really follows what is stated in
paras 42.3 to 45 in Associate Builders [Associate
Builders v. DDA
, (2015) 3 SCC 49 : (2015) 2 SCC
(Civ) 204] , namely, that the construction of the
terms of a contract is primarily for an arbitrator to
decide, unless the arbitrator construes the contract
in a manner that no fair-minded or reasonable
person would; in short, that the arbitrator’s view is
not even a possible view to take. Also, if the
arbitrator wanders outside the contract and deals
with matters not allotted to him, he commits an
error of jurisdiction. This ground of challenge will
now fall within the new ground added under
Section 34(2-A).

41. What is important to note is that a decision
which is perverse, as understood in paras 31 and
32 of Associate Builders [Associate Builders v. DDA,
(2015) 3 SCC 49 : (2015) 2 SCC (Civ) 204] , while
no longer being a ground for challenge under
“public policy of India”, would certainly amount to a
patent illegality appearing on the face of the

27 | P a g e
award. Thus, a finding based on no evidence at all
or an award which ignores vital evidence in arriving
at its decision would be perverse and liable to be
set aside on the ground of patent illegality.
Additionally, a finding based on documents taken
behind the back of the parties by the arbitrator
would also qualify as a decision based on no
evidence inasmuch as such decision is not based
on evidence led by the parties, and therefore,
would also have to be characterised as perverse.”

24. This Court has in several other judgments interpreted

Section 34 of the 1996 Act to stress on the restraint to be

shown by courts while examining the validity of the arbitral

awards. The limited grounds available to courts for

annulment of arbitral awards are well known to legally

trained minds. However, the difficulty arises in applying the

well-established principles for interference to the facts of

each case that come up before the courts. There is a

disturbing tendency of courts setting aside arbitral awards,

after dissecting and reassessing factual aspects of the cases

to come to a conclusion that the award needs intervention

and thereafter, dubbing the award to be vitiated by either

perversity or patent illegality, apart from the other grounds

available for annulment of the award. This approach would

lead to corrosion of the object of the 1996 Act and the

28 | P a g e
endeavours made to preserve this object, which is minimal

judicial interference with arbitral awards. That apart, several

judicial pronouncements of this Court would become a dead

letter if arbitral awards are set aside by categorising them as

perverse or patently illegal without appreciating the contours

of the said expressions.

25. Patent illegality should be illegality which goes to the

root of the matter. In other words, every error of law

committed by the Arbitral Tribunal would not fall within the

expression ‘patent illegality’. Likewise, erroneous application

of law cannot be categorised as patent illegality. In addition,

contravention of law not linked to public policy or public

interest is beyond the scope of the expression ‘patent

illegality’. What is prohibited is for courts to re-appreciate

evidence to conclude that the award suffers from patent

illegality appearing on the face of the award, as courts do not

sit in appeal against the arbitral award. The permissible

grounds for interference with a domestic award under

Section 34(2-A) on the ground of patent illegality is when the

arbitrator takes a view which is not even a possible one, or

interprets a clause in the contract in such a manner which no

fair-minded or reasonable person would, or if the arbitrator

commits an error of jurisdiction by wandering outside the

29 | P a g e
contract and dealing with matters not allotted to them. An

arbitral award stating no reasons for its findings would make

itself susceptible to challenge on this account. The

conclusions of the arbitrator which are based on no evidence

or have been arrived at by ignoring vital evidence are

perverse and can be set aside on the ground of patent

illegality. Also, consideration of documents which are not

supplied to the other party is a facet of perversity falling

within the expression ‘patent illegality’.

26. Section 34 (2) (b) refers to the other grounds on which

a court can set aside an arbitral award. If a dispute which is

not capable of settlement by arbitration is the subject-matter

of the award or if the award is in conflict with public policy of

India, the award is liable to be set aside. Explanation (1),

amended by the 2015 Amendment Act, clarified the

expression ‘public policy of India’ and its connotations for the

purposes of reviewing arbitral awards. It has been made

clear that an award would be in conflict with public policy of

India only when it is induced or affected by fraud or

corruption or is in violation of Section 75 or Section 81 of the

1996 Act, if it is in contravention with the fundamental

policy of Indian law or if it is in conflict with the most basic

notions of morality or justice. In Ssangyong (supra), this

30 | P a g e
Court held that the meaning of the expression ‘fundamental

policy of Indian law’ would be in accordance with the

understanding of this Court in Renusagar Power Co. Ltd.

v. General Electric Co.6 In Renusagar (supra), this Court

observed that violation of the Foreign Exchange Regulation

Act, 1973, a statute enacted for the ‘national economic

interest’, and disregarding the superior courts in India would

be antithetical to the fundamental policy of Indian law.

Contravention of a statute not linked to public policy or

public interest cannot be a ground to set at naught an

arbitral award as being discordant with the fundamental

policy of Indian law and neither can it be brought within the

confines of ‘patent illegality’ as discussed above. In other

words, contravention of a statute only if it is linked to public

policy or public interest is cause for setting aside the award

as being at odds with the fundamental policy of Indian law. If

an arbitral award shocks the conscience of the court, it can

be set aside as being in conflict with the most basic notions

of justice. The ground of morality in this context has been

interpreted by this Court to encompass awards involving

elements of sexual morality, such as prostitution, or awards

6 1994 Supp (1) SCC 644

31 | P a g e
seeking to validate agreements which are not illegal but

would not be enforced given the prevailing mores of the day. 7

27. In light of the principles elucidated herein for

interference with an arbitral award by a court in exercise of

its jurisdiction under Section 34 of the 1996 Act, we proceed

to consider the questions that arise in these Appeals as to

whether the Division Bench of the High Court was right in

setting aside the award of the Arbitral Tribunal dated

11.05.2017.

Validity of the termination notice and consequences of

the CMRS sanction

28. Mr. Harish Salve, learned Senior Counsel appearing for

the Appellant (DAMEPL), submitted that the High Court

committed an error in setting aside the award of the Arbitral

Tribunal by deviating from the well-settled principles for

interference under Sections 34 and 37 of the 1996 Act. The

findings recorded by the Arbitral Tribunal in relation to the

existence of defects in the civil structure and failure on the

part of DMRC in curing those defects/not taking effective

steps to cure the defects are findings of fact which cannot be

made subject to review by the court exercising its jurisdiction

under Section 34. He asserted that interpretation of the
7 Ssangyong (supra)

32 | P a g e
provisions of the Concession Agreement is within the domain

of the Arbitral Tribunal and even if such interpretation is not

the most accurate interpretation in the opinion of the court,

the award cannot be set aside if the Arbitral Tribunal has

taken a possible view. He contended that the certificate

issued by the CMRS, which was relied upon by DMRC, was

considered by the Tribunal to rightly conclude that the

conditions imposed for restarting the AMEL showed that the

defects were not cured. He further submitted that the cure

notice was issued on 09.07.2012 demanding the rectification

of defects within a period of 90 days from the date of the

notice, as per the Concession Agreement. After the expiry of

90 days, the termination notice dated 08.10.2012 had been

issued. He stated that there cannot be any doubt that the

defects had to be cured within 90 days from the date of the

cure notice. He emphasized that the observations of the High

Court as regards confusion in the mind of the Arbitral Tribunal

regarding the date of the termination notice are unfounded.

The relevant portions of the award were shown to the Court

to argue that the Arbitral Tribunal was clear in its mind that

the defects had to be cured within 90 days from the date of

cure notice dated 09.07.2012. On the defects not being

cured within the 90-day period, the termination notice was

33 | P a g e
issued on 08.10.2012, with the effective date of termination

as 07.01.2013. The further submission made on behalf of

DAMEPL is that the subsequent successful operation of the

AMEL for nearly four years is not relevant for adjudication of

the disputes between the parties by the Arbitral Tribunal.

Finally, according to Mr. Salve, the High Court committed a

palpable error in setting aside the award.

29. Mr. P.S. Narasimha and Mr. Parag Tripathi, learned

Senior Counsel appearing for DMRC, on the other hand,

supported the judgment of the Division Bench of the High

Court by arguing that the award is contrary to public policy.

Mr. Narasimha relied upon the Delhi Metro Act and the Rules

made thereunder to submit that the CMRS is the sole

authority to determine the safety of the Metro Railway and

the certificate issued by the Commissioner on 18.01.2013 is

conclusive proof of the fact that the defects pointed out by

DAMEPL had been rectified. It was contended on behalf of

DMRC that the period for curing the defects did not lapse on

expiry of 90 days from the initial notice dated 09.07.2012 but

extended for another 90 days from the termination notice

dated 08.10.2012. According to the Respondent, a serious

error was committed by the Arbitral Tribunal in its

interpretation of Article 29.5.1 of the Concession Agreement.

34 | P a g e
Abundant material placed by DMRC to show effective steps

were taken to cure the defects was not considered by the

Arbitral Tribunal. The Commissioner in exercise of his powers

conferred by the Delhi Metro Act permitted the opening of

the AMEL on 18.01.2013 after considering all safety aspects

and the AMEL has been in operation since then without any

adverse event. The subsequent smooth functioning of the

AMEL is a relevant consideration which was ignored by the

Arbitral Tribunal. DAMEPL’s participation in several meetings

that were conducted which led to inspections and steps

taken to address the defects as well as the AMEL being run

by DAMEPL from 22.01.2013 to 30.06.2013 would show that

even DAMEPL was aware that effective steps had been taken

to cure the defects.

30. Termination by DAMEPL for DMRC Event of Default is

dealt with in Article 29.5.1 which reads as under: –

“29.5 Termination for DMRC Event of Default
29.5.1 The Concessionaire may after giving 90

(ninety) days notice in writing to DMRC terminate this

Agreement upon the occurrence and continuation of any

of the following events (each a “DMRC Event of

Default”), unless any such DMRC Event of Default has

35 | P a g e
occurred as a result of Concessionaire Event of Default

or due to a Force Majeure Event.

(i) DMRC is in breach of this Agreement and such

breach has a Material Adverse Effect on the

Concessionaire and DMRC has failed to cure such

breach or take effective steps for curing such

breach within 90 (ninety) days of receipt of notice

in this behalf from the Concessionaire;

(ii) DMRC repudiates this Agreement or otherwise

evidences an irrevocable intention not to be

bound by this Agreement;

(iii) GoI or GNCTD or any Governmental Agency have

by an act of commission or omission created

circumstances that have a Material Adverse Effect

on the performance of its obligations by the

Concessionaire and have failed to cure the same

within 90 (ninety) days of receipt of notice by

DMRC in this behalf from the Concessionaire;

(iv) DMRC has delayed any payment that has fallen

due under this Agreement if such delay exceeds

90 (ninety) days.”

36 | P a g e

31. By referring to certain paragraphs of the award, the

Division Bench of the High Court held that there was

confusion in the mind of the Arbitral Tribunal relating to the

actual date of termination, which would have a material

bearing on the exegesis of Article 29.5.1. The confusion

around the date of termination is highlighted by the High

Court by referring to the award of the Arbitral Tribunal in

which it was held that the defects were not cured within the

90-day period from the date of the cure notice dated

09.07.2012. However, in paragraphs 128, 130 and 131, the

Arbitral Tribunal, while considering the counter claim,

referred to 07.01.2013 as the date of termination of the

Concession Agreement. It is clear from a careful examination

of the award that the Arbitral Tribunal had in precise terms

held that the defects had to be cured within 90 days from the

date of the cure notice dated 09.07.2012. Further, the

Arbitral Tribunal held that the termination notice dated

08.10.2012 was issued as defects were not cured. The

Tribunal expressed its view that consequently, the effective

date of termination was 07.01.2013, which is 90 days from

the termination notice. As there is no ambiguity in the

findings of the Arbitral Tribunal regarding the time given for

curing the defects and the effective date of termination of

37 | P a g e
the Concession Agreement, we are not in agreement with the

findings of the Division Bench that there is an ambivalence in

the award concerning the date of termination, having a

bearing on the final outcome of the award. The ancillary

issue that arises for consideration is whether the period for

curing the defects is 180 days or 90 days under Article 29.5.1

of the Concession Agreement. The Arbitral Tribunal in its

award has clearly held that DMRC failed to cure the defects

before the expiry of 90 days from the initial notice laying

down the non-exhaustive list of defects issued on

09.07.2012. The said conclusion is the outcome of

interpretation of Article 29.5.1 of the Concession Agreement

by the Tribunal. An attempt was made by the learned Senior

Counsel appearing for the Respondent to impress upon this

Court that as the termination notice would become effective

only after 90 days from the date of its issue, i.e., 08.10.2012,

DMRC could avail this period as well to address the defects

and if the defects stood cured or effective steps were taken

within this additional 90-day period, the termination notice

became defunct and should not be effectuated.

Construction of a provision of the Concession Agreement is

within the domain of the Arbitral Tribunal. The view taken by

the Arbitral Tribunal that the defects have to be cured within

38 | P a g e
90 days from the date of the cure notice, failing which

DAMEPL is entitled to terminate the Concession Agreement,

is a possible interpretation of Article 29.5.1. We refuse to

interfere with the findings of the Arbitral Tribunal on this

point, even assuming a different view can be taken on a

reading of the said Article.

32. The High Court was of the view that the Tribunal

committed a grave error in ignoring the CMRS certificate, as

the Tribunal lost sight of the binding nature of the certificate.

According to the Division Bench, the Arbitral Tribunal went

wrong in considering the issue of the CMRS certificate as a

separate issue, distinct from the questions pertaining to the

termination of the Concession Agreement. The Delhi Metro

Act was promulgated for the operation, maintenance and

regulation of the working of the metro railway in the National

Capital Region, metropolitan city and metropolitan area. The

Commissioner of Metro Railway Safety, appointed under

Section 7 of the said Act, has the duty to inspect the metro

railway with a view to determine whether it is fit to be

opened for the public carriage of passengers and report

thereon to the Central Government as required thereunder.

Section 15 of the Delhi Metro Act provides that before

granting sanction to the opening of the metro railway by the

39 | P a g e
Central Government under Section 14, a report has to be

obtained from the Commissioner certifying fitness of the

metro railway so as not to be of any danger to the public.

Rule 11 of the Opening of Delhi Metro Railway for Public

Carriage of Passengers Rules, 2002 imposes a duty on the

Commissioner to inquire into all relevant matters concerning

safety before coming to a conclusion that the metro railway

should be opened. Sanction to open the metro railway line

for public carriage of passengers is granted by the Central

Government after considering the report of the

Commissioner on the fitness and safety aspects. The

contention on behalf of DMRC is that the certificate issued by

the Commissioner is binding on the Arbitral Tribunal and the

Tribunal could not have taken a different view. In addition

thereto, the certificate is conclusive of the fact that there

were no defects in the civil structure, as otherwise, the

Commissioner would not have permitted the AMEL to be

opened. On the basis of the certificate issued by the

Commissioner, the Respondent has argued that all defects

pointed out by DAMEPL had been cured. In any event,

effective steps had been taken to cure the defects by

periodical meetings and inspections being held.

40 | P a g e

33. The Arbitral Tribunal was called upon by the parties to

decide whether there was a breach of the Concession

Agreement due to the fault of DMRC and whether the defects

pointed out by DAMEPL were cured within the period

specified in the notice dated 09.07.2012. Safety of the

AMEL was not an issue that fell for determination by the

Arbitral Tribunal, though DAMEPL had insisted on not

continuing operations of the Line citing safety concerns

arising from the defects in its structural integrity. It is no

doubt true that the Commissioner is the competent authority

to determine the safety of the AMEL. It is also beyond cavil

that the Commissioner would not have granted permission to

restart the AMEL unless it was of the opinion that restarting

of commercial operations would not pose a danger to the

public. However, the certificate by itself cannot come to the

rescue of DMRC to show that the defects pointed out by

DAMEPL were cured within the expiry of 90 days from

09.07.2012. The finding of the Arbitral Tribunal that the

defects were not cured is one of fact which cannot be

interfered with by the court.

34. The CMRS certificate dated 18.01.2013 was relied upon

by DMRC before the Arbitral Tribunal as a strong piece of

evidence to support its case that the defects were cured.

41 | P a g e
DMRC did not contend before the Tribunal that the CMRS

certificate is binding and is conclusive of the defects being

cured/effective steps taken to cure the defects. The

conditions imposed by the Commissioner relating to speed

restrictions and close monitoring of the Line, according to the

Tribunal, support the contention of DAMEPL that the defects

were not fully cured. The issue before the Tribunal was

whether the defects were cured within 90 days from the

notice dated 09.07.2012 and the certificate dated

18.01.2013 is relevant for deciding the said issue. We are not

in agreement with the High Court’s view that the issue of the

CMRS certificate being dealt with separately has a bearing on

the Tribunal’s determination of the validity of the termination

notice. The members of the Arbitral Tribunal, nominated in

accordance with the agreed procedure between the parties,

are engineers and their award is not meant to be scrutinised

in the same manner as one prepared by legally trained

minds. In any event, it cannot be said that the view of the

Tribunal is perverse. Therefore, we do not concur with the

High Court’s opinion that the award of the Tribunal on the

legality of the termination notice is vitiated due to the vice of

perversity.

42 | P a g e

35. The Division Bench referred to various factors leading

to the termination notice, to conclude that the award shocks

the conscience of the court. The discussion in paragraph 97

of the impugned judgement amounts to appreciation or re-

appreciation of the facts which is not permissible under

Section 34 of the 1996 Act. The Division Bench further held

that the fact of the AMEL being operated without any adverse

event for a period of more than four years since the date of

issuance of the CMRS certificate, was not given due

importance by the Arbitral Tribunal. As the arbitrator is the

sole judge of the quality as well as the quantity of the

evidence, the task of being a judge on the evidence before

the Tribunal does not fall upon the court in exercise of its

jurisdiction under Section 34.8 On the basis of the issues

submitted by the parties, the Arbitral Tribunal framed issues

for consideration and answered the said issues. Subsequent

events need not be taken into account.

36. For the aforementioned reasons, the conclusion of the

Division Bench that the award of the Arbitral Tribunal suffers

from patent illegality and shocks the conscience of the court

is held to be erroneous.

Adjusted Equity

8 State of Rajasthan v. Puri Construction Co. Ltd. and Another (1994) 6 SCC
485

43 | P a g e

37. Article 29.5.2 of the Concession Agreement which deals

with Termination Payment is as follows:-

“29.5.2 Upon termination by the Concessionaire on
account of DMRC Event of Default, DMRC shall pay to the
Concessionaire, by way of Termination Payment, an
amount equal to

a) Debt Due;

b) 130 % of the Adjusted Equity;

c) Depreciated Value of the Project Assets, if any,
acquired and installed on the Project after the 10 th
anniversary of the COD.”

38. It is relevant to note the definitions of ‘Adjusted Equity’,

‘Concessionaire’s Capital Costs’, ‘Debt Due’, ‘Equity’, and

‘Subordinate debt’ as provided in the Concession Agreement,

which read as follows: –

“Adjusted Equity” means the Equity funded in Indian
Rupees and adjusted on the first day of the current month
(the “Reference Date”), in the manner set forth below, to
reflect the change in its value on account of depreciation
and variations in WPI, and for any Reference Date
occurring:

a) on or before COD, the Adjusted Equity shall be a sum
equal to the Equity funded in Indian Rupees and
expended on the Project, revised to the extent of one
half of the variation in WPI occurring between the first
day of the month of Appointed Date and the Reference
Date;

44 | P a g e

b) from COD and until the 4th (fourth) anniversary thereof,
an amount equal to the Adjusted Equity as on COD shall
be deemed to be the base (the “Base Adjusted Equity”)
and the Adjusted Equity hereunder shall be a sum equal
to the Base Adjusted Equity, revised at the
commencement of each month following COD to the
extent of variation in WPI occurring between COD and
the Reference Date;

c) after the 4th (fourth) anniversary of COD, the Adjusted
Equity hereunder shall be a sum equal to the Base
Adjusted Equity, reduced by 0.42% (zero point four two
per cent) (This number shall be substituted in each
case by the product of 100 divided by the number of
months comprising the Concession Period. For
example, the figure for a 20 year Concession Period
shall be 100/240 = 0.416 rounded off to decimal points
i.e. 0.42) thereof at the commencement of each month
following the 4th (fourth) anniversary of the Project
Completion Date and the amount so arrived at shall be
revised to the extent of variation in WPI occurring
between COD and the Reference Date; and the
aforesaid shall apply, mutatis mutandis, to the Equity
funded in Indian Rupees. For the avoidance of doubt,
the Adjusted Equity shall, in the event of Termination,
be computed as on the Reference Date immediately
preceding the Termination Date; provided that no
reduction in the Base Adjusted Equity shall be made for
a period equal to the duration, if any, for which the
Concession Period is extended, but the revision on
account of WPI shall continue to be made.”

45 | P a g e
“Concessionaire’s Capital Costs” means following:
• Prior to COD, the cost of the Concessionaire’s Works
as set forth in the Financing Documents plus any
further additional capital cost for any Change of Scope
instructed since the finalisation of the Financing
Documents; and
• After COD, the actual capital cost of the
Concessionaire’s Works upon Project Completion as
certified by the Statutory Auditors.”

“Debt Due” means the aggregate of the following sums
expressed in Indian Rupees outstanding on the Transfer
Date:

a) the principal amount of the debt provided by the Senior
Lenders under the Financing Agreements for financing
the Total Project Cost (the “principal”) but excluding any
part of the principal that had fallen due for repayment
two years prior to the Termination Date;

b) all accrued interest, financing fees and charges payable
under the Financing Agreements on, or in respect of,
the debt referred to in Sub-clause (a) above until the
Transfer Date but excluding (i) any interest, fees or
charges that had fallen due one year prior to the
Transfer Date, (ii) any penal interest or charges payable
under the Financing Agreements to any Senior Lender,
and (iii) any pre-payment chares in relation to
accelerated repayment of debt except where such
charges have arisen due to Authority Default; and

46 | P a g e

c) any Subordinated Debt which is included in the
Financial Package and disbursed by lenders for
financing the Total Project Cost.”

“Equity” means the sum expressed in Indian Rupees
representing the equity share capital of the
Concessionaire and shall include the funds advanced by
any Member of the Consortium or by any of its
shareholders to the Concessionaire for meeting the equity
component of the Concessionaire’s Capital Costs.”

“Subordinated Debt” means the aggregate of the
following sums expressed in Indian Rupees or in the
currency of debt, as the case may be, outstanding as on
the date of termination:

a) the principal amount of debt provided by lenders or the
Concessionaire for meeting the Concessionaire’s Capital
Cost and subordinated to the financial assistance
provided by the Senior Lenders; and

b) all accrued interest on the debt referred to in Sub-
clause (a) above but restricted to the lesser of actual
interest rate and a rate equal to 5% (five per cent)
above the Bank Rate in case of loans expressed in
Indian Rupees and lesser of the actual interest rate and
six-month LIBOR (London Inter Bank Offer Rate) plus
2% (two per cent) in case of loans expressed in foreign
currency, but does not include any interest that had
fallen due one year prior to the Termination Date;

47 | P a g e
provided that if all or any part of the Subordinated Debt
is convertible into Equity at the option of the lenders and/
or the Concessionaire, it shall for the purposes of this
Agreement be deemed to be Subordinated Debt even
after such conversion and the principal thereof shall be
dealt with as if such conversion had not been
undertaken.”

39. The Tribunal focused on two components of Termination

Payment, which are (i) ‘Debt Due’, and (ii) 130 % of the

‘Adjusted Equity’. According to the Appellant, the Division

Bench committed an error in concluding that the expression

‘Adjusted Equity’ in the Concession Agreement should be

calculated by taking into account only the share capital of

DAMEPL. The Appellant contended that the Tribunal had

rightly held that the expression ‘Adjusted Equity’ should

include the money brought in by DAMEPL’s promoter and had

fairly concluded that the amount of Rs.611.95 crore was used

as expenses, thereby qualifying as ‘Concessionaire’s Capital

Costs’ under the Concession Agreement. The Tribunal was

correct in holding that the amount of Rs.611.95 crore

advanced by DAMEPL’s promoter would qualify for inclusion

under the definition of ‘Equity’ on a plain reading of the said

definition. Construction of the contract is within the

jurisdiction of the Tribunal and merely because another view

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is possible, the court cannot interfere with such construction

and substitute its own view.

40. On the other hand, it was contended by DMRC that the

amount of Rs.611.95 crore was recorded as ‘share

application money’ in the balance sheet of DAMEPL as on

31.03.2010. However, the said amount was shown as

subordinated debt in the balance sheet as on 31.03.2011.

The Respondent referred to the resolution passed by the

board of directors of DAMEPL on 16.03.2011, in which a

decision was taken to convert the share application money

into subordinated debt. DMRC urged that the conversion of

the share application money as subordinated debt was a

calculated move on the part of DAMEPL. If the share

application money had been allowed to retain the nature of

equity, DAMEPL would have lost the entire amount in the

event of termination of the Concession Agreement by DMRC

for Concessionaire Event of Default in terms of Article 29.1.1.

After electing to convert the share application money into

subordinated debt, DAMEPL should not be permitted to claim

that for the purposes of computation of ‘Adjusted Equity’, the

said amount be treated as ‘Equity’. It was further argued on

behalf of the Respondent that no material was produced by

DAMEPL to show that the amount of Rs. 611.95 crore was

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actually used for ‘Concessionaire’s Capital Costs’. Reference

was also made to the testimony of one of the witnesses

produced by DAMEPL to contend that the amount of

Rs.611.95 crore cannot be treated as equity in accordance

with the provisions of the Companies Act, 2013. DMRC

contended that the High Court aptly set aside the findings

recorded by the Tribunal in respect of computation of

‘Adjusted Equity’.

41. We do not intend to re-examine the entire material on

record for the purpose of deciding whether the High Court

was right in reversing the conclusion of the Tribunal in

relation to computation of the amount under Article 29.5.2 of

the Concession Agreement. The opinion of the Tribunal is

that the amount of Rs.611.95 crore was an amount advanced

by DAMEPL’s promoter which was not disputed by DMRC. The

contention advanced by DMRC, that it was only the equity

share capital as is understood within the meaning of the

Companies Act, 2013 which is liable to be paid by DMRC

under Article 29.5.2, was rejected by the Tribunal. The view

taken by the Tribunal that the amount contributed by a

member of the consortium or by shareholders to meet the

‘Concessionaire’s Capital Costs’ in any form, including where

such funds are classified as subordinated debt, cannot be

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treated as ‘Subordinated Debt’ in terms of its definition in the

Concession Agreement, is a reasonable and possible view.

On the other hand, the Division Bench of the High Court

relied upon the board resolution dated 16.03.2011 and held

that the Tribunal ought not to have treated the said amount

as ‘Equity’ after the share application money was converted

into subordinated debt. After a detailed consideration of the

relevant clauses of the Concession Agreement, the High

Court held that the Tribunal had committed a serious error in

its tabulation of ‘Adjusted Equity’ by completely ignoring the

evidence on record.

42. Even assuming the view taken by the High Court is not

incorrect, we are afraid that a possible view expressed by the

Tribunal on construction of the terms of the Concession

Agreement cannot be substituted by the High Court. This

view is in line with the understanding of Section 28(3) of the

1996 Act as a ground for setting aside the arbitral award, as

held in Associate Builders (supra) and thereafter upheld in

Ssangyong (supra). No case has been made out by the High

Court to establish violation of Section 28(3). Having carefully

examined the Concession Agreement, the findings recorded

by the Tribunal and the findings recorded by the Division

Bench, we are not in a position to hold that the opinion of the

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Tribunal on inclusion of Rs.611.95 crore under ‘Equity’ is a

perverse view. It cannot be said that the Tribunal did not

consider the evidence on record, especially the resolution

dated 16.03.2011 passed by DAMEPL’s board of directors.

We also do not find fault with the approach of the Tribunal

that the understanding of the term equity as per the

Companies Act, 2013 is not relevant for the purposes of

determining ‘Adjusted Equity’ in light of the express

definition of the term in the Concession Agreement. As has

been held in Ssangyong (supra), mere contravention of

substantive law as elucidated in Associate Builders (supra)

is no longer a ground available to set aside an arbitral award.

The support placed by the Division Bench on the

interpretation of Section 28(1)(a) of the 1996 Act as adopted

in Associate Builders (supra) is, therefore, no longer good

law. In view of the foregoing, we set aside the findings of the

High Court and uphold the award by the Tribunal in respect of

the computation of Termination Payment under Clause

29.5.2.

Grounds of challenge in SLP (C) No. 8311 of 2019 filed

by DMRC

43. One of the legal issues considered by the Tribunal is

whether DAMEPL waived their rights to terminate after

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participating in the reconciliation process and after operating

the AMEL for more than five months from 22.01.2013 to

30.06.2013. As the participation of DAMEPL in several

meetings held after issuance of the termination notice dated

09.07.2012 and its decision to continue operating the AMEL

was without prejudice, the Tribunal rejected the submission

of DMRC that the doctrine of waiver applied and that DAMEPL

was estopped from terminating the Concession Agreement

after having actively participated in the process of rectifying

the defects pointed out. The Division Bench of the High

Court approved the said finding on the ground that the

decision of the Tribunal could not be held to be flawed within

the limited scrutiny afforded to courts under Section 34 of

the 1996 Act. In our view, the Division Bench of the High

Court rightly refrained from interfering with the findings on

waiver by the Tribunal.

44. The prayer for a direction to DAMEPL for specific

performance of its obligations under the Concession

Agreement to operate the AMEL was refused by the Tribunal.

The Division Bench of the High Court in its judgment

observed that the said findings had not been challenged

before the High Court. Therefore, there is no reason for this

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Court to adjudicate on the point of specific performance of

the Concession Agreement.

45. The Tribunal awarded interest in accordance with the

terms of the Concession Agreement on termination payment.

DMRC contended before the High Court that the award in

respect of interest had to be set aside on the ground that it

would result in unjust enrichment. After a thorough

consideration of Article 29.8 and Article 36.2.6.1 of the

Concession Agreement, the High Court has rightly refused to

interfere with the findings by the Tribunal relating to interest

and we see no cause for interference.

46. For the aforementioned reasons, the Appeal filed by

DAMEPL is allowed and the judgment of the Division Bench of

the High Court is set aside. The Appeal arising out of SLP(C)

No. 8311 of 2019 filed by DMRC is dismissed.

……………………………….J.
[ L. NAGESWARA RAO ]

……………………………….J.

[ S. RAVINDRA BHAT ]

New Delhi,
September 09, 2021.

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