The chronicles of perversity and patent illegality for setting aside arbitral awards in India: Through the lens of the BCCI v. DCHL judgment
A recent judgment rendered by the Bombay High Court has garnered interest from the arbitration community owing to contentious legal issues decided therein as well as the huge pecuniary value of the award.
While deciding a petition filed under Section 34 of the Arbitration & Conciliation Act, 1996 (the Act), a Single Judge Bench of Justice GS Patel set aside an arbitral award which directed the Board of Control of Cricket in India (BCCI) to pay a sum of Rs 4814,17,00,000 to Deccan Chronicle Holdings (Deccan), on the ground of being perverse and patently illegal
The Single Judge in his inimitable style opined that the view taken by the sole arbitrator cannot be a possible view under the guiding principles laid down by the Supreme Court in Ssangyoung Engineering & Construction Co. Ltd vs National Highway Authority of India, as it rewarded Deccan for an unquestionable breach of its contractual obligations towards BCCI and awarded damages without establishing adequate causality as required under Section 73 of the Indian Contract Act, 1872.
In this article, we delve into the reasonings supplemented by the High Court to arrive at the conclusion of ‘perversity’ and ‘patent illegality’ in the award and discern the legal principles that emerge.
Genesis of the Dispute
In 2007, India embraced the concept of Indian Premier League (IPL), a revolutionary idea starkly different from the conventional form of cricket played across the globe until then. IPL is a cricket league in the Twenty 20 or T20 format, working on a franchise-based model of hiring players from across the world. Every team is owned and sponsored by a particular franchise and its revenue and rights are governed contractually between the franchise and the BCCI.
Pursuantly, BCCI and Deccan entered into a Franchise Agreement dated April 10, 2008. There was an exclusive and restrictive clause in the Franchise Agreement stipulating that “the Franchisee shall not without first obtaining BCCI-IPL’s prior written consent to charge, pledge, grant any security over or otherwise encumber the Franchise or any of the rights granted to the Franchisee hereunder whether or not such encumbrance is in the ordinary course of business,” which was binding on Deccan. The Franchise Agreement further set out the events on occurrence of which parties may terminate the agreement in the manner prescribed under the termination clause.
The termination clause read:
Any party may terminate the agreement, by giving 30 days advance notice to other party, to rectify and remedy the highlighted breaches. Non-payment by the franchise under the Agreement, shall deemed to be a material breach of the Agreement. BCCI-IPL may terminate the Agreement with immediate effect by written notice if there is (i) change in control of the franchise not as per the accordance of the Agreement; (ii) Franchise transfers its material part of business not in accordance with the Agreement; (iii) Franchise or any of its grounds acted in manner prejudicial to the reputation of the league or standing of the League, BCCI-IPL, BCCI, the Franchisee, the Team (or any other team in the League) and/or the game of cricket;
Either party may terminate this Agreement with immediate effect by written notice if the other party commits or permits an irremediable breach of this Agreement or if it is the subject of an Insolvency Event. The insolvency events shall occur if (i) a bona fide petition is presented or served upon the party seeking order of winding up of that party; (ii) petition filed seeking appointment of an administrator for that party; (iii) administrator, receiver or manager is appointed to manage the assets of that party; (iv) party entered in any kind of composition, compromise or arrangement involving that composition, compromise or arrangement involving that party and any of its creditors, including but not limited to a voluntary arrangement under the Act.
Since the beginning of 2012, Deccan was in financial doldrums, due to which one of its contractual obligations under the Franchise Agreement to make payment to its players within a definite time-period, was effectively delayed. Further, Industrial Finance Corporation of India (IFCI), Deccan’s creditor, filed winding up proceedings against Deccan in the High Court at Hyderabad and initiated recovery proceedings before the Debt Recovery Tribunal, Delhi.
Subsequently, dozens of financial institutions like Yes Bank, Kotak Mahindra Bank, ICCI Bank etc, wrote to the BCCI, informing that Deccan availed financial assistance from them and hypothecated all its rights and receivables under the Franchise Agreement. They contended that they have an exclusive first charge on all the cash flow to Deccan, including the receivables, which Deccan is entitled to under the Franchise Agreement. In fact, Kotak Mahindra Bank registered its charge on Deccan’s franchise with the Registrar of Companies.
Consequently, BCCI sent a letter dated August 16, 2012 to Deccan, stating that Deccan has breached the terms of the Franchise Agreement, which could lead to immediate termination of the Franchise Agreement. BCCI further contended that if Deccan failed to cure the aforesaid breaches within 30 days period i.e., on or before September 15, 2012, the Franchise Agreement will be terminated. The BCCI issued a letter without prejudice to its right under the Franchise Agreement, for immediate termination on occurrence of insolvency.
As such, on September 14, 2012, Deccan wrote three different letters to BCCI, admitting taking recourse to the financial assistance provided by Yes Bank to discharge its financial due to the players and other supporting staff. Deccan also informed that Kotak Mahindra Bank, which created charge on Deccan’s franchise, agreed to vacate and cancelled it with Registrar of Companies. Also, IFCI entered an amicable settlement with Deccan and agreed to withdraw the winding up proceedings and other recovery proceedings pending before DRT-Delhi. Hence, Deccan substantially cured and remedied all the breaches, as highlighted by BCCI in its August 2012 letter.
Strangely, another letter of even date from Deccan’s lawyer was also sent to BCCI merely stating that Deccan has not committed any breach and BCCI is called upon to not terminate the Franchise Agreement. This led BCCI to terminate the Franchise Agreement with immediate effect by issuing the termination notice dated September 14, 2012.
Deccan sought an interim stay on the termination of the Franchise Agreement by filing a petition under Section 9 of the Act before the High Court. The same was granted with the pre-condition that Deccan shall execute an unconditional bank guarantee of Rs 100 crore in BCCI’s favour, failing which the interim stay will stand vacated. On a petition filed by Deccan under Section 11 of the Act, the Bombay High Court appointed former Supreme Court Judge, Justice (Retd) CK Thakker as the sole arbitrator to resolve the dispute that had arisen. Finally, the arbitrator made and published the arbitral award on July 17, 2020 in favour of Deccan, ordering BCCI to pay a total compensation of Rs 4,814.67 crores, along with 10% interest and cost of legal fees.
Analysis of the award and grounds for setting aside award under Section 34 of the Act
Mandatory Show-Cause Notice
The award stated that BCCI was mandatorily required to issue a show cause notice to Deccan to cure any defect in 30 days, before termination of the Franchise Agreement, failing which there cannot be any termination. The Bombay High Court rejected this view taken by the arbitrator as an impossible one and ascertained that on a plain interpretation of the termination clause, it provides two types of breaches: (i) remediable i.e., delay in payment to the franchise player and (ii) irremediable breach i.e., occurrence of insolvency event.
Though BCCI was not bound to send any show-cause notice before termination of the Franchise Agreement, on occurrence of Insolvency Event, BCCI sent a notice dated August 16, 2012 to Deccan to cure the defect. But this does not and cannot by itself mean that a ‘show-cause notice’ was necessary. Thus, the arbitrator failed to make any distinction between breaches that can be remedied, and those that cannot. The Court thus opined that the view of the arbitrator is not a possible view.
The award stated that the termination letter dated September 14, 2012 issued by BCCI was premature and it came one day before the expiry of the 30-day cure period on September 15. The Bombay High Court nullified this view and held that the arbitrator failed to consider vital evidence on record that in the letter, Deccan categorically admitted its default and breaches, which were said to have been substantially cured and rectified and no longer existed. It was opined that ‘premature’ means not just waiting for a calendar day to pass for the sake of it, but to give the fullness of opportunity to the noticed party to comply with the demand.
Further, the award remained completely silent and failed to even notice the events that transpired while adjudicating the interim stay application filed by Deccan under Section 9 of the Act, wherein BCCI on September 15, 2012, confirmed its termination of the Franchise Agreement. Indubitably, it was vital evidence, the ignoring of which was totally inexplicable. Thus, it was held that the award suffers from perversity, which is a subset of patent illegality.
Deccan took a plea that all the breaches and shortfalls highlighted by BCCI were met with substantial compliance and therefore, the termination of the Franchise Agreement was illegal and invalid. The arbitrator accepted this submission and proceeded on the assumption that substantial compliance is enough under the Franchise Agreement. This approach was castigated by the High Court, which held that substantial compliance is not enough to meet ends in the Franchise Agreement as the generalized principle of ‘substantial compliance’ may have some significance in public law matters, but, by definition, those would fall outside the purview of contract-constrained arbitration law.
In the realm of private law, this concept has no role to play at all unless it is part of the contract. If it is not, then there is either compliance, or there is not. There is no principle of ‘substantial compliance’ in private contract law unless the contract itself allows for it. Moreover, as soon as the arbitrator concluded that the players’ payments had not actually been made, there was no possibility of returning a finding that the requirement achieved ‘substantial compliance’.
Further, the arbitrator completely overlooked Deccan’s settlement agreement with IFIC, which was part of evidentiary record, which hinges upon the fact that winding up proceedings against Deccan will be on hold/abeyance and be withdrawn only after Deccan successfully pays the default amount in three deferred instalments. Deccan's slightest failure to meet even a single instalment would retrigger the winding up proceedings. Therefore, the arbitral tribunal’s finding that the insolvency event was no more in existence and stands resolved, is not possible as it was only in abeyance. Thus, the High Court opined that finding of the arbitrator is entirely unsustainable and falls within the legal definition of perversity.
No pleadings and invocation of Public Law principle of unfair discrimination
The award conceded that BCCI acted in a discriminatory manner in terminating the Franchise Agreement and withholding payments due to Deccan in an unfair and wrongful manner. However there were no pleadings in support thereof. To substantiate the discriminatory conduct of BCCI, the arbitrator stated that non-payment of player’s fees by other franchises - Rajasthan Royals (RR) as well as Chennai Super Kings (CSK) - did not result in termination of the Franchise Agreements by BCCI and the pick and choose approach in terminating Deccan’s franchise was arbitrary and unfair.
The Bombay High Court, at the outset, rejected the invocation of public law principles of unfair discrimination and arbitrariness in a dispute which was entirely governed and regulated by the terms of the Franchise Agreement and which falls in the realm of a private law dispute. It was opined that since the arbitrator is a creature of the contract, he has no powers other than those the parties confer on him by their contract. If he ventures beyond the boundaries or acts in disregard to the contract, he acts without jurisdiction. He has no power to widen his jurisdictional remit by deciding a question not referred to him or deciding contrary to the contract. It was categorically held that in absence of pleadings as well as contractual mandate, the view taken by the arbitrator is prima facie perverse and patently illegal.
Arbitrator as ‘amiable compositeur’: decision ex aequoet bono
The award was defended by taking refuge to Section 28 of the Act and invoking the principles of ex aequo et bono (according to what is equitable (or just) and good) and amiable compositeur (arbitrator may follow equitable principles and need not be bound by legal rules). However, the High Court stated that as per Section 28(2) and (3) of the Act, the arbitrator shall decide according to what is equitable (or just) and good, only if the parties have expressly authorised him to do so. The statute itself stands clear and unambiguous by judicial interpretation in the Associate Builder Case that commercial arbitrators are not entitled to settle a dispute by applying what they conceive is ‘fair and reasonable,’ absent specific authorization in an arbitration agreement. Thus, the arbitrator’s finding that BCCI’s termination was unfairly discriminatory suffers from the vices of patent illegality. It was further observed that it was not possible for the arbitrator to hold a particular rule or regulation as bad in law.
Damages in lieu of Specific Performance
The award granted damages to Deccan to the tune of Rs 630 crore in “addition to or lieu of specific performance”. Deccan had abandoned its prayer for specific performance of the Franchise Agreement in arbitration proceedings, as was duly recorded in the award. The Bombay High Court, while setting aside the damages granted by the arbitrator, opined that the damages in lieu of specific performance can only be granted if specific performance is pressed and if there was a specific finding that Deccan is entitled to specific performance and the same is impossible to achieve. It was opined that if the first step fails and specific performance is not pressed, the remaining steps, up to the granting of damages in lieu of specific performance, do not materialise.
Similarly, damages in addition to specific performance could be granted only if specific performance is found to be a relief capable of being granted, if pressed. It is impermissible to construe a prayer seeking damages, if the relief for specific performance was rejected, as being equivalent to a prayer for damages in lieu of specific performance.
The High Court further observed that the arbitrator granted damages of Rs 630 crore to Deccan, in lieu of specific performance, without recording any reasons or examining or appreciating any evidence on record to ascertain Deccan’s willingness to perform the contract and without recording any findings that Deccan is entitled to specific performance. In other words, the arbitrator granted compensatory damages, and not damages in lieu of specific performance. It was opined that grant of such relief by the arbitrator falls within the realm of violation of the fundamental policy of Indian law under Section 34 of the Act.
The arbitrator granted a substantial amount of Rs 4150 crore to Deccan over and above Rs 41.6 crore, under several heads such as (i) loss of profit, (ii) Loss of Value of franchise, (iii) Revenue expenditure over revenue incurred for running the franchise for last five years, (iv) loss of “Deccan Chargers” brand, along with damage to business reputation, and (v) loss to licensing and merchandising and trademark registration etc, without imparting any reason or finding or evidence based upon which such an omnibus and undifferentiated award was rendered.
The High Court opined that though it is not suggested that separate computations of different heads were required, the reasons behind computing the compensation under each head ought to be different and had to be explained and recorded with reasonable evidence supporting it. Moreover, the arbitrator recorded no reasons or evidence to support a finding of loss of reputation by Deccan. It simply assumed that there was a reputation, and it was lost. Neither the reputation nor the loss are matters of presumption. They are matters of fact and demand some level of proof, which requires some discussion of evidence and reasons.
Finally, it was observed that a broad evaluation of loss of profits is possible, but the figure must be reasonable. Granting a substantial amount of Rs 4150 crore by the arbitrator without any reason or evidence in support of it, could not be the possible view taken, and hence it is patently illegal and perverse.
Gleaning the principles of Patent Illegality & Perversity
The principle of patent illegality resulted out of a judicial interpretation of the term ‘public policy’ as prescribed under Section 34 of the Act. The Supreme Court in the case of ONGC Ltd v. Saw Pipes Ltd, expounded the juristic principle of patent illegality as one of the wings of public policy, to vitiate the validity of an arbitral award, which is on the face of it, so unfair and unreasonable that it shocks the conscience of the court. Subsequently, the Supreme Court in ONGC Ltd. v. Western Geco International Ltd, introduced another juristic principle of perversity, which articulates that the arbitral award would be violative of fundamental policy of India as featured under Section 34 of the Act, if a finding in the award is based on no evidence or; if the arbitral tribunal takes into account something irrelevant to the decision which it arrives at; or ignores vital evidence in arriving at its decision.
In order to rationalize the expansive judicial interpretation of the term patent illegality, the Supreme Court in Associate Builders v. Delhi Development Authority, trimmed out three sub-grounds, under which the arbitral award could be said to be patently illegal i.e. firstly, if the award is in contravention to the substantive law of India, as provided under the Section 28(1)(a) of the Act; secondly, if the award suffers from vice of patent illegality i.e. if the arbitrator fails to accord reasons to reach a particular conclusion, in view of the statutory mandate imposed under Section 31(3) of the Act; and lastly, when the arbitrator fails to decide the dispute in accordance with the terms of the contract, which is violative of Section 28(3) of the Act.
Notably, with the incorporation of the 2015 Amendment in the Act, the ground of patent illegality, as propounded by the judicial interpretation in the Saw Pipes case (supra), was dislodged from the house of public policy and introduced separately by statutory adoption under Section 34(2A) of the Act, with an inbuilt exception as a ground of challenge to domestic arbitration awards. Resultantly, vide the said amendment, the applicability of the ground of patent illegality was restricted to domestic awards passed under Part-I of the Act and the same was made inapplicable to challenges to an ‘international commercial award’ or ‘foreign award’ as defined under the Act.
The principle of perversity as expounded by the judicial interpretation in Western Geco International Ltd (supra), amounting to breach of public policy of India, again fell under the radar of judicial scrutiny in Ssangyong, wherein the Supreme Court observed that the juristic principle of perversity as explained in Associate Builders Case (supra) was dislodged and could no longer be a ground for challenge under the “public policy of India” and thus, would certainly amount to patent illegality appearing on the face of the award. It was authoritatively held that “patent illegality” is an illegality which goes to the root of the matter but excludes erroneous application of law by an arbitral tribunal or re-appreciation of evidence by an appellate court.
This ground may be invoked if (a) no reasons are given for an award, (b) the view taken by an arbitrator is an impossible view while construing a contract, (c) an arbitrator decides questions beyond a contract or his terms of reference, and (d) if a perverse finding is arrived at based on no evidence, or overlooking vital evidence, or based on documents taken as evidence without notice of the parties
Thus, a finding based on no evidence at all or an award ignoring 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 characterized as perverse.
The High Court came down heavily on the award for wandering outside the territory of the contract and dealing with matters not referred to it and held that the same amounts to a jurisdictional error under the ambit of ‘patent illegality’ as discussed in Ssangyong (supra). The judgment meticulously delved into the scope of challenge under Section 34(2A) of the Act and affirms that ‘perversity’ acts as a dimension under the ground of ‘patent illegality’. The judgment is significant in its clarification that the role of an arbitrator is restricted within the strict confines of the contractual provisions and no transgression is allowed therefrom.
The judgment also serves as a primer on principles of quantification and grant of damages in arbitration governed substantially by Indian law. It reaffirms the principle that an arbitrator is not required to provide minute calculations as a lumpsum award is permissible under Indian law. However, the arbitrator must disclose reasons for accepting or rejecting each head of the claim. Assessment of causality remains a sine qua non for grant of compensation under Section 73 of the Indian Contract Act, 1872, failing which an award becomes susceptible to a challenge under section 34 of the Act.
Suvigya Awasthy is an Associate Partner and Love Gupta is an Associate at PSL Advocates & Solicitors.
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