Authored by Hammurabi & Solomon Partners

Commercial expediency has always required an award to be intelligible and adequately reasoned in order to achieve the desired outcomes for parties using the arbitration process to resolve their business and commercial disputes. Almost all leading international commercial arbitration institutions and centres have considered how arbitrators should write their awards and have laid down detailed guidelines to achieve commercial expediency in each dispute.

The domestic arbitration framework has come closer to mandating intelligible and adequately reasoned awards with the Supreme Courtformulating guidelines in the recent judgment of Dyna Technologies Pvt Ltd v Crompton Greaves Ltd. The court plugged this gap in arbitration jurisprudence by identifying the three characteristics of a reasoned arbitral award as being: (a) proper – if the reasoning in the order is improper, it implies a flaw in the decision-making process; (b) intelligible – if the award is found to be unintelligible, it would be the equivalent of providing no reasons at all; and (c) adequate – the validity of such an award depends on the degree of particularity of the reasoning required having regard to the nature of issues under consideration. Such particularity cannot be stated precisely as it depends on the complexity of the issue.

Judicial clarity on challenging muddled and incoherent awards is long overdue. Despite previous judgments urging the need for reasoning in arbitral awards, the exact nature of the form and manner in which the reasoning should be presented was itself not clear. Significantly, inIndian Oil Corporation Ltd v Indian Carbon Ltd the Supreme Court had held that the requirement that reasons be stated in the award would be satisfied if the arbitrator “made his mind known on the basis of which he has acted.” In that case, the reasons were essentially nothing more than a short intelligible indication of the grounds. This had, nonetheless, satisfied the requirement.

The Supreme Court had come closest to discerning what would qualify as being unintelligible in M/s MB Patel & Co v Oil & Natural Gas Commission when it found the impugned award to be unintelligible, as the arbitrator had not awarded the total claim by the contractor under five headings but had awarded a lump sum. The arbitrator also ignored the contract between the parties, which stipulated that there would be no compensation or interest payable. Dyna Technologies held that an award is unintelligible when an arbitrator muddles the facts, the contentions of the parties and his reasoning. The conclusions derived therefrom will taint the award as unintelligible.

The corollary is that where the arbitrator has made a reasoned award without committing misconduct, the court will not examine the fairness of the reasons. In Municipal Corporation of Delhi v M/s Jagan Nath Ashok Kumar & Anr, the Supreme Court quoted with approval the US jurist Benjamin Cardozo: “an arbitrator as a judge has to exercise a discretion informed by tradition, methodized by analogy, disciplined by system, and subordinated to the ‘primordial necessity of order in the social life’”. The court held that the arbitrator is the sole judge of the quality and quantity of the evidence, and a court would not usurp that role. This does not however imply that the recording of reasons by an arbitrator is subject to party autonomy. Section 31(3) of the Arbitration and Conciliation Act, 1996, provides that the award shall state the reasons on which it is based, unless the parties have agreed that no reasons are to be given, or the award is an arbitral award on agreed terms under section 30 of the act. The right of the parties to agree to proceed without reasons, rather than having to make an application was introduced in the act.

These principles form the essence of arbitration in common law jurisdictions. The landmark English case of Re Poyser and Mills Arbitration suggested that an award must comprise “reasons that will not only be intelligible, but will deal with the substantial points that have been raised”. The Victoria case of Oil Basins Ltd v BHP Billiton Ltd held that it could be an error on the face of the record if the arbitrators “reached their conclusions through failure to consider some part of the evidence or as a result of rejecting or discounting it on an irrational or otherwise unlawful basis”.

The corporate and commercial legal regime has undergone sweeping changes in the past few years. This has required the commercial arbitration framework to match the commercial expediency driving parties’ interests and it is likely that changes will be made to arbitral award writing norms to align with international standards.