[The guest post is authored by Akshit Uniyal, fourth year law student at Institute of Law, Nirma University, Ahmedabad, Gujarat.]
The Arbitration Act, 1996 (‘Act’) provides the recourse to be taken against an arbitral award if any party is dissatisfied with it. The Act under Section 34 states several reasons for which an arbitral award can be set aside by the courts. According to this Section, an award can be set aside if the court finds that the award is patently illegal; in conflict with the fundamental policy of Indian law; against the interest of the country; or contrary to justice or morality.
Further, this decision or order can then be appealed to the High Court under Section 37 of the Act which leads us to the pertinent question of determining the extent of High Court’s powers under the Section. In the recent case of Haryana Tourism Ltd. v. M/s Kandhari Beverages Ltd. , the same issue arose and this article attempts to explain the Supreme Court’s decision on it.
II. Background of the Case
Haryana Tourism Ltd. (‘Appellant’) invited tenders for the supply of aerated cold drinks at its tourist complexes for the period of 15 March, 2001 to 14 March, 2002. M/s. Kandhari Beverages Ltd. (‘Respondent’) submitted its tender and the same was accepted by the Appellant. According to the agreement, a sum of Rs. 20 lakhs was to be paid by the Respondent for brand promotion which would be spent as per mutual agreement between the parties.
The Appellant organized a Mango Mela in July, 2001 on which it spent a sum of Rs. 1 lakh and the Respondent spent a sum of Rs. 13.92 lakhs. Further, the Appellant asked the Respondent to deposit Rs. 19 lakhs as sponsorship money through a letter dated 20 September, 2001. The Respondent didn’t adhere to this and the Appellant then terminated the agreement. Consequently, disputes arose and the matter was referred to a sole arbitrator.
The arbitrator directed the Respondent to pay a sum of Rs. 9.5 lakhs vide the award dated 17 November, 2005 and dismissed Respondent’s counter claim of Rs. 13.92 lakhs. Dissatisfied with the award, the Respondent filed an application before the Additional District Judge (‘ADJ’), Chandigarh under Section 34 of the Act to set aside the award. The ADJ also ruled in favour of the Appellant and dismissed Respondent’s application.
III. High Court’s and Supreme Court’s Decision
Still aggrieved by the ADJ’s decision, the Respondent appealed against the order in the High Court of Punjab and Haryana under Section 37 of the Act. The High Court investigated the matter and quashed the order of the ADJ along with setting aside the award passed by the arbitrator.
This led to the present appeal being filed by the Appellant in the Supreme Court against the High Court’s decision. The Appellant submitted that the High Court exceeded its jurisdiction under Section 37 of the Act as it decided the appeal on the merits of the case and has, therefore, erred in setting aside the award passed by the arbitrator.
The Supreme Court ruled in favour of the Appellant and quashed the judgment passed by the High Court. The award passed by the arbitrator and the order of the ADJ were thereby restored.
Section 37 of the Arbitration Act states that an appeal shall lie both from the original decrees of the Court passing the order and from an order of the arbitral tribunal. The present case falls under the former category because an appeal was filed before the High Court against the order of the ADJ refusing to set aside the award under Section 34. The Supreme Court reasoned that the High Court in the present case has entered into the merits of the case while deciding the appeal filed by the Respondent which is an impermissible exercise of its powers under Section 37 of the Act.
In the case of P.C.L Suncon v. NHAI (2015), it was stated by the Supreme Court that the interference of courts in the arbitral awards challenged before them has become rather routine and is worrisome because it is leading to the distinction between courts and arbitral tribunals being erased. If a court is allowed to review an arbitral tribunal’s award on its merits, the purpose of having a speedy and efficient alternative dispute mechanism will be defeated.
Further, under Section 37, the scope of judicial intervention is even narrower as compared to when the court is deciding an application under Section 34. Such intervention can only be done in certain situations. Section 37 gives the power only to quash the award without courts having the ability to amend the arbitrator’s errors. This portrays that the real intent behind the section, which is to prevent the courts from exercising too much supervisory role in the arbitral matters. Such an intent can also be verified from the action of the parties since they willingly opted for arbitration instead of going through the judicial process. This has also been recognized by the Supreme Court in the case of McDermott International Inc. v. Burn Standard Co. Ltd. And Ors. (2006).
A court hearing an appeal under Section 37 of the Act is not acting as a court of appeal over the award passed by the arbitral tribunal and thus, it shall never enter into the merits of the case. This position of law has been held frequently in cases like MMTC v. Vedanta Ltd (2019), State Trading Corporation of India Ltd. v. Toepfer International Asia Pte. (2014)and M/S L.G. Electronics India (P) Ltd v. Dinesh Kalra (2018) to name a few.
However, in the present case there was a stark contradiction to this well settled point of law as the High Court took the wrong approach and reopened the case by delving into its merits and passed an order to set aside the arbitral award. Hence, the Supreme Court in the present case re-iterated that an award can be set aside if it is against the public policy of India which covers the initially mentioned reasons (i.e., patent illegality; against fundamental policy of India; against the interest of the country; contrary to justice & morality) under it. The case of Associate Builders v. Delhi Development Authority (2014) elaborately discussed the concept of public policy and defined the terms ‘fundamental policy’; ‘against country’s interest’; ‘against justice and morality’ and ‘patent illegality’ under it. These terms will be elaborated below:
Fundamental Policy of Indian Law: The Supreme Court in the case of ONGC v. Western GECO (2014) expanded the scope of ‘public policy’ and discussed in great detail about the ‘fundamental policy of Indian law’. It held that an award can be said to be against fundamental policy of Indian law if-
- Judicial mind was not applied.
- Principles of natural justice were not followed.
- The arbitral tribunal reached a conclusion which no reasonable man would have reached.
- The binding judgments of the superior courts were ignored.
- The orders of the superior courts were disregarded.
Also, the Supreme Court in the DMRC v. DAMEPL (2021) stated that when a court applies the test of ‘public policy’ to an award, it cannot act as a court of appeal and cannot correct errors of fact. The same view was adopted by the Delhi High Court in the case of MTNL v. Fujitshu India Private Ltd (2015).
Patent Illegality: The concept of ‘patent illegality’ was first introduced in the case of ONGC v. SAW Pipes (2003) and was further developed in the case of Phulchand Exports Ltd. v. O. O. O. Patriot (2011) and Ssangyong Engg & Construction Co v. National Highway Authority of India (2019). An award which contravenes the substantive law of India; is in contravention to the provisions of the Arbitration Act and is in contravention to the express provision that the parties had agreed in their contract, would be patently illegal.
Against Country’s Interest: If the award poses any issue to the integrity or sovereignty of the Indian territory then, it would be against the interest of the country.
Against Justice and Morality: If the award contains anything which shocks the consciousness of the court or contains anything illegal, it would be against the principles of justice of morality.
In the present case, the Supreme Court decided that the award did not violate the provisions under Section 34 in any way and there was no reason for the High Court to go into the merits of the case under Section 37. Thus, such exceptions would not be applicable and there was absolutely no reason to set aside the award.
The Supreme Court through this case re-iterated the point of law which has been already crystallized but is somehow overlooked by the courts while deciding matters under Sections 34 and 37 of the Arbitration Act. It once again reminded the courts of the extent of their powers and jurisdiction in matters pertaining to arbitral awards. Another positive aspect of this case is that it reinforced the position of the arbitrators since the award passed by the tribunal will be final and the courts would refrain from interfering too much in it.