The Madhya Pradesh High Court has held that an arbitral award cannot be held against public policy merely because the department failed to inform the contractor of a High Court stay with respect to land on which construction was to be done, before floating the tender, in the absence of fraud, corruption, breach of fundamental policy of Indian law, or conflict with basic notions of morality or justice.

It was held that such a case did not call for interference by the Court exercising jurisdiction under Section 34 of the Arbitration and Conciliation Act, 1996, and accordingly set aside the order of the 23rd District Judge, Jabalpur.

The Bench of Justice Vivek Agarwal observed, "Even the explanation-2, when examined, does not point out that anything which was induced or affected by fraud or corruption or being in contravention with the fundamental policy of India or being in conflict with the most basic notions of morality or justice, can be said to be against the "public policy" and when tested, then for the fault of the respondent/department in not bringing this fact to the notice of the contractor that there was a stay by the High Court and that before floating the NIT and collecting different amounts under different heads of earnest money and security etc. and not verifying the status of the land on which they propose to construct, it cannot be said that the impugned award suffers from any vice of violation of public policy of India calling for interference by the Court of first instance i.e. the Court empowered to hear the matter under Section 34 of the Arbitration and Conciliation Act, 1996, therefore, impugned order pass by learned 23rd District Judge, Jabalpur deserves to be set aside."

Advocate Falgun Yadav appeared for the Appellant, while Dy. Solicitor General Suyash Mohan Guru appeared for the Respondents

Brief Facts of the Case

An arbitration appeal was filed by the Appellant under Section 37 of the Arbitration and Conciliation Act, aggrieved by the order passed by the District Judge whereby an application filed by the Union of India under Section 34 of the Arbitration and Conciliation Act, 1996 was allowed on the ground that the impugned award passed by the Arbitrator is against public policy.

The Central Public Works Department issued a Notice Inviting Tender for construction of a Kendriya Vidyalaya. On the strength of the payment authorisation and the tender so floated, the appellant deposited a sum of Rs.20,00,000/- with the concerned authorities. The Collector, Jabalpur had duly allotted land measuring 1.963 hectares, comprised in Khasra No.118, for the said project, and thereafter the CPWD uploaded an e-tender on its official website inviting bids.

The appellant submitted its tender on the e-tender platform and was declared the successful bidder. The work was allotted for an estimated cost of Rs.9,64,66,285/-. The appellant deposited the earnest money and furnished a performance guarantee. The contractual period for completion of the work was twelve months from the stipulated date of commencement.

The Executive Engineer formally awarded the work to the appellant. A joint inspection of the site was thereafter carried out, whereupon it was found that this Court, in a writ petition, had earlier directed the parties to maintain status quo with respect to possession of the disputed land. In these circumstances, a dispute arose between the appellant and the respondents, which was referred to the learned Arbitrator.

The Arbitrator passed an award. The Union of India challenged the award under Section 34 of the Act. The learned District Judge allowed the application and set aside the award as being against public policy; hence the present appeal.

Contentions of the Appellant

The appellant contended that the Union of India had not taken any ground of violation of public policy before the learned Arbitrator, and this was an admitted fact. Arbitrator, and this was an admitted fact. It was further contended that the plea of an award being vitiated on account of public policy was no longer res integra.

Observations/Findings of the Court

The Court noted that the chronology of events revealed that it was the Union of India and its instrumentalities which decided to issue the NIT and thereafter asked the appellant to deposit certain amounts. The land was duly allotted by the Collector, Jabalpur for construction of the Kendriya Vidyalaya, and the CPWD thereafter uploaded the e-tender. The Executive Engineer then formally awarded the work to the successful bidder. It was only on a joint inspection of the site that it was found that this Court had directed the parties to maintain status quo.

"Thus, it is evident that none of the facets of gross negligence on the part of the authorities of the Central Government will fall within the ambit of violation of fundamental policy of India. In fact, the instrumentalities of the Central Government should not have ventured to float NIT, call offers and allot the work to a successful bidder, without ensuring the correct status of the project/land in the courts of law", the Court held.

It was observed that it is evident that the Union of India and others, who are instrumentalities of the Union of India, challenged the award on the ground of violation of fundamental policies of India, which was not made out.

The Court further noted that, by way of an amendment to the Act, an Explanation had been added to Section 34(2)(b)(ii), clarifying that an award is in conflict with the public policy of India only if its making was induced or affected by fraud or corruption or was in violation of Section 75 or Section 81, or if it was in contravention of the fundamental policy of Indian law, or if it was in conflict with the most basic notions of morality or justice.

The Court observed that nothing was pointed out to show that the award was induced or affected by fraud or corruption, or was in contravention of the fundamental policy of India, or was in conflict with the most basic notions of morality or justice, so as to bring it within the ambit of “public policy”.

The Court found that the District Judge had failed to consider what was covered within the ambit of “public policy” and the fundamental policy of India. There being no finding that the floating of the NIT was induced or affected by fraud or corruption on the part of the appellant, the fault of the instrumentalities of the State could not be brought within the head of the award being against the public policy.

Accordingly, the Court allowed the Appeal and set aside the impugned order passed by the District Judge as being unsustainable.

Cause Title: Laxman Sharma v. Union of India & Others. [Neutral Citation:2026:MPHC-JBP:78446]

Appearances:

Appellant: Advocate Falgun Yadav 

Respondents: Dy. Solicitor General Suyash Mohan Guru and Advocate Shrikrishna Sharma

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