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Arbitral Awards Cannot Be Set Aside Unless Patent Illegality is Clearly Proved

In a decision dated May 6, 2024, delivered by the High Court of Allahabad, in the case of State of U.P. v. Nath Construction and Another [2024 AHC 80342-DB] it was held an award passed by an arbitrator cannot be set aside for patent illegality on the basis of unsubstantiated allegations without detailed pleadings and records and further that the scope of Section 37 of the Arbitration and Conciliation Act, 1996 is limited to setting aside of an arbitral award only if it suffers from patent illegality.

In this case, the State of U.P. (the Appellant), issued a tender, for the construction of the Left Side Officer’s Camp Office at Moradabad. Nath Constructions (the Respondent), having submitted the lowest bid, was awarded the contract, and an agreement was signed between them. It is the claim of the Appellant that Nath Constructions did not complete the work within the time stipulated in the agreement, completing the work only after several extensions were provided. This led to disputes between the parties and the matter went for arbitration, where the sole arbitrator passed an award of Rs. 17, 37, 261 in favour of Nath Constructions. The present case is brought by the Appellant challenging this award under Section 37 of the Arbitration and Conciliation Act, 1996 after their appeal under Section 34 of the Arbitration and Conciliation Act, 1996 was rejected by the Commercial Court in Moradabad.

The bone of contention between the parties of this case is whether the arbitrator had committed illegality in awarding the said amount in favour of the Respondent without considering the objections raised by the Appellant.

The Court while dismissing the appeal observed that the grounds assailing the award were generic, not specific, and untenable. Further, no materials were placed on record, nor any argument advanced to establish that the award suffered from patent illegality. In fact, the court noted that the award passed by the arbitrator was a reasoned one especially because as many as 14 issues were framed and discussed in detail.

The Court held that appellate proceeding under Section 37 of the Arbitration and Conciliation Act, 1996 is limited to the scope and ambit of grounds permissible under Section 34, which do not allow for setting aside an award on grounds of reappreciation of evidence or correction of erroneous application of law unless the award suffers from patent illegality. The Court concluded that the Appellant had not been able to demonstrate any patent illegality requiring the award to be set aside and that unsubstantiated allegations without detailed pleadings and records were insufficient for interference.