The Karnataka High Court recently set aside an arbitration award of ₹178.98 crore granted against the State of Karnataka in a dispute involving a government educational technology project worth ₹412 crore [State of Karnataka v. Siddharth Infotech].

The Court ruled that the arbitration proceedings suffered from a fundamental flaw due to the non-joinder of Karnataka State Electronics Development Corporation (KEONICS), a necessary party, rendering the entire award legally unsustainable.

Stating that the same amounted to patent illegality, a Division Bench of Justices Anu Sivaraman and K Manmadha Rao held,

"This omission deprived the proceedings of completeness, led to adjudication without consideration of vital obligations and evidence, and rendered the award inherently defective."

The dispute originated from the Information and Communication Technologies (ICT) scheme launched by the Government of India, designed to cover 4,396 schools across Karnataka at a total cost of ₹412 crore. The State government entered into an agreement with KEONICS on July 22, 2011, designating it as the implementing agency through the Department of Educational Research and Training (DSERT). Everonn, which won the bid for the project, formed a consortium with Siddharth Infotech and Ricoh India to execute the project obligations.

The project faced significant delays, leading to requests from the consortium for cancellation and return of bank guarantees. Due to these delays and other issues, the State issued a termination letter on August 11, 2016, effectively ending the project.

Following the termination, Siddharth Infotech filed a petition before the Karnataka High Court seeking appointment of an arbitrator under the arbitration clause in the agreement between the State and KEONICS. The Court appointed an arbitrator, and arbitration proceedings commenced in September 2021.

The arbitrator found the termination to be arbitrary and unfair, and awarded ₹178.98 crore with 18% annual interest to Siddharth Infotech.

The State challenged this award before the commercial court, which dismissed the application under Section 34 of the Arbitration and Conciliation Act, 1996, and confirmed the arbitral award on July 31, 2023.

The High Court identified a fundamental flaw in the arbitration proceedings - the absence of KEONICS, which it characterised as a necessary party.

"The record is clear that KEONICS was the nodal agency through which the entire project was conceived, tendered, contracted and supervised. The agreement was between the State and KEONICS; the claimant derived its position only through KEONICS."

It emphasised that KEONICS was not merely a peripheral entity, but the central party through which all obligations flowed.

"Without KEONICS, there would have been no contract at all. Yet, KEONICS was not impleaded before the Tribunal," the judgment stated, highlighting the procedural defect.

Addressing the issue of privity of contract, the Court categorically stated:

"There is no privity of contract between the State and the claimant, as the contract is with the KEONICS and not with the State. The claimant's rights and liabilities were derived solely through KEONICS, and in its absence, there was no direct contractual nexus with the State that could give rise to an arbitrable dispute."

Concluding its analysis, the Court held:

"By proceeding without KEONICS, the Tribunal, in the opinion of this court committed an error of law that goes to the root of the matter. This omission deprived the proceedings of completeness, led to adjudication without consideration of vital obligations and evidence, and rendered the award inherently defective. Such a foundational flaw does not amount to a mere error of law, but an illegality that goes to the root of the matter in the view of this Court and thereby, qualifying as patent illegality under the statutory framework and therefore, the Award is unsustainable under law."

The State was represented by Additional Advocate General Kiran V Ron and Advocate Aditya Vikram Bhat.

Siddharth Infotech was represented by Advocate Chintan Chinnappa.

Everonn was represented by Advocate KS Mahadevan.

[Read Judgment]