Award Quashed for Arbitrator’s Apparent Partiality, Unreasoned Findings, and Contractual Violations; Court Emphasizes Need for Reasoned Awards under Arbitration and Conciliation Act, 1996
In a significant judgment delivered on May 12, 2026, the Delhi High Court, presided over by Justice Jasmeet Singh, set aside the arbitral award dated March 14, 2008, in the long-pending dispute between Tarapore & Company and the National Thermal Power Corporation Ltd. (NTPC). The case arose from a contract awarded to Tarapore for construction work at NTPC’s Farakka Super Thermal Power Project, which later resulted in multiple claims and counterclaims arbitrated under the Arbitration and Conciliation Act, 1996.
The Court found the arbitral process and the award fundamentally flawed on multiple grounds, principally the apprehension of bias against the arbitrators, the absence of reasoned findings, and the award’s violation of explicit contractual provisions. The judgment underscores the mandatory nature of a reasoned award under Section 31(3) of the Arbitration Act and delineates the limited but vital scope for judicial review under Section 34.
Background:
NTPC awarded Tarapore a contract valued at Rs. 6.57 crores in 1988 for constructing an ash bund structure for fly ash disposal. The stipulated contract completion period was 22 months. However, the project experienced significant delays, alleged interference by local political and trade union elements, and eventual abandonment of the site by Tarapore. NTPC terminated the contract and entrusted the remaining work to another agency, incurring additional costs.
Apprehension of Bias:
The arbitration clause empowered NTPC’s General Manager to act as sole arbitrator, or, if unavailable, to appoint a substitute. The original arbitrator, Mr. T. Shankarlingam, was a senior NTPC employee directly connected to the project. Upon his promotion to Chairman and Managing Director of NTPC, he appointed Mr. G.J. Deshpande, another NTPC General Manager, as the substitute arbitrator. The Court held that this hierarchical appointment, with both arbitrators being senior employees of NTPC and involved in the project, raised a reasonable apprehension of bias.
The Court noted prior challenges to Mr. Shankarlingam’s impartiality and found that the conduct of fixing inconvenient hearing venues, contrary to Court orders, which effectively barred Tarapore’s participation in crucial hearings, further eroded the arbitral process’s fairness. This alone warranted setting aside the entire award.
Lack of Reasoned Findings:
The Court extensively analyzed the arbitrator’s treatment of preliminary issues concerning delays and abandonment. Despite framing critical issues on interference by third parties and adverse site conditions, the arbitrator merely reproduced pleadings and documents without adequate analysis or intelligible reasoning. The findings were cryptic and failed to explain how conclusions were reached, violating Section 31(3) of the Arbitration Act.
The judgment relied on Supreme Court precedents such as Dyna Technologies v. Crompton Greaves and OPG Power Generation v. Enexio Power Cooling Solutions, emphasizing that awards without proper reasoning are vulnerable to being set aside as unintelligible or inadequate.
Violation of Contractual Terms and Patent Illegality:
Several claims allowed or disallowed by the arbitrator were found contrary to explicit contract clauses:
- The arbitrator allowed 50% price escalation despite Clause 53.7 barring escalation for delays attributable to Tarapore, thereby rewriting the contract and acting beyond jurisdiction.
- Miscellaneous works claimed by Tarapore were held by the Court to be the contractor’s responsibility under Clause 17.1; thus, the award in favor of Tarapore for these works was patently illegal.
- The arbitrator’s apportionment of diesel generating set charges and idling charges on an equitable basis without contractual mandate was disapproved.
- Several claims and counterclaims, including those for idling charges, loss of profit, and liquidated damages, were dismissed or allowed without adequate reasoning or application of mind.
The Court reiterated that arbitrators cannot decide disputes based on equity or conscience (ex aequo et bono) unless expressly authorized, per Section 28(2) of the Arbitration Act.
Scope of Judicial Review:
While acknowledging that courts do not act as appellate authorities in arbitration matters, the Court affirmed that awards can be set aside under Section 34 if they are patently illegal or violate the fundamental policy of Indian law. The present award exhibited patent illegality by allowing and rejecting claims contrary to contract terms and failed to meet the statutory requirement for reasoned awards.
Outcome:
The Court set aside the arbitral award entirely, emphasizing the critical importance of independence and impartiality in arbitration and the necessity of reasoned awards to uphold justice and fairness. Both parties were directed to bear their own costs.
This judgment serves as a reminder of the judiciary's role in safeguarding the arbitration process’s integrity and ensuring adherence to contractual terms, while not encroaching on arbitral autonomy except where fundamental legal principles are breached.
Bottom line:-
Challenge to Arbitral Award - Arbitral Award set aside on grounds of bias, lack of reasoned findings, and patent illegality in contract claims and counterclaims adjudication.
Statutory provision(s): Arbitration and Conciliation Act, 1996 Sections 31(3), 34, 28(2)
