Arbitration and Conciliation Act, 1996: s.34, 37 – Scope of interference with an arbitral award in India – Pre and Post amendment made to s.34 in 2015, position explained. Arbitration and Conciliation Act, 1996: s.34, 37 – In terms of Arbitration agreement dated 14.12.1993, the appellant was appointed as a consignment agent from whom respondent could avail services such as storage, handling and marketing of the copper rods produced by the respondent – Appellant used to raise invoices in the name of customers and remit the sum received to the respondent after deducting its services charges – The agreement was altered later, and the amendment enabled appellant to supply goods to customers against the letter of credit and it was total responsibility of the appellant to credit the sale proceeds to the respondent – Dispute in the instant matter pertains to supplies made by the appellant to Hindustan Transmission Products Ltd. (HTPL) after the amendment of the arbitration agreement – Since the payment was not made by HTPL to appellant and who also subsequently did not make payment for the supplied goods to the respondent, the respondent invoked the arbitration clause under agreement dated 14.12.1993 – Arbitral tribunal passed award in favour of the respondent which was confirmed by the High Court – In the instant appeal, the case of the appellant was that it used to supply the goods of the respondent to customers as per agreement dated 14.12.1993 only – However, the appellant had to make deviation from this procedure at the request of the respondent by allowing the customers arranged by the respondent to lift its goods stored in the appellant’s godown and in such case, the appellant was not bound by the contract since such contract was independent from the agreement dated 14.12.1993 – Held: It is evident from the subsequent A agreement between HTPL and the respondent that a direct agreement existed between them – However, the appellant received its commission in its entirety for the HTPL transaction, and thus clearly was a beneficiary of the agreement between the respondent and HTPL – Series of correspondences amongst appellant, respondent and HTPL also revealed that the appellant was also actively involved in the transaction in question entered into between the respondent and HTPL, and as such was a beneficiary under their agreement – The issuance of letters of credit in the name of the appellant with respect to the HTPL transaction was similar to the practice adopted in case of letters of credit or demand drafts issued in all other C transactions, whether directly negotiated by the respondent, or procured through the appellant, which suggested that it was the duty of the appellant in this case as well to ensure that letter of credits issued were bona fide, and in case of stand-by letters of credit, that they were negotiated in time in case of failure of payment on the due date, in terms of agreement dated 14.12.1993 – In this view of the matter, it is not open to the appellant to argue that the agreement between the Respondent and HTPL was independent of the agreement dated 14.12.1993 between the appellant and the respondent and that the latter did not apply to such transaction – Thus, there was no reason to disturb the award on the ground that E the subject matter of the dispute was not arbitrable. Dismissing the appeal, the Court
HELD: 1.1 Interference with an arbitral award may be undertaken in terms of Section 34 or Section 37 of the Arbitration and Conciliation Act, 1996. While the former deals with challenges F to an arbitral award itself, the latter, inter alia, deals with appeals against an order made under Section 34 setting aside or refusing to set aside an arbitral award. As regards Section 34, the Court does not sit in appeal over the arbitral award and may interfere on merits on the limited ground provided under Section G 34(2)(b)(ii), i.e. if the award is against the public policy of India. Prior to the amendments to the 1996 Act in 2015, a violation of Indian public policy, in turn, includes a violation of the fundamental policy of Indian law, a violation of the interest of India, conflict with justice or morality, and the existence of patent illegality in the arbitral award. Additionally, the concept of the “fundamental policy of Indian law” would cover compliance with statutes and judicial precedents, adopting a judicial approach, compliance with the principles of natural justice, and Wednesbury reasonableness. Furthermore, “patent illegality” itself has been held to mean contravention of the substantive law of India, contravention of the 1996 Act, and contravention of the terms of the contract. It is only if one of these conditions is met that the Court may interfere with an arbitral award in terms of Section 34(2)(b)(ii), but such interference does not entail a review of the merits of the dispute, and is limited to situations where the findings of the arbitrator are arbitrary, capricious or perverse, or when the conscience of the Court is shocked, or when the illegality is not trivial but goes to the root of the matter. An arbitral award may not be interfered with if the view taken by the arbitrator is a possible view based on facts. [Paras 10, 11][1031-C-H; 1032-A]
Associate Builders v. DDA (2015) 3 SCC 49 ; ONGC Ltd. v. Saw Pipes Ltd. (2003) 5 SCC 705 : [2003] 3 SCR 691 ; Hindustan Zinc Ltd. v. Friends Coal
Carbonisation, (2006) 4 SCC 445 ; McDermott
International v. Burn Standard Co.Ltd. (2006) 11 SCC
181 : [2006] 2 Suppl. SCR 409 – relied on
1.2 After the 2015 amendments to Section 34, the position stood modified. Pursuant to the insertion of Explanation 1 to Section 34(2), the scope of contravention of Indian public policy was modified to the extent that it now means fraud or corruption in the making of the award, violation of Section 75 or Section 81 of the Act, contravention of the fundamental policy of Indian law, and conflict with the most basic notions of justice or morality. Additionally, sub-section (2A) was inserted in Section 34, which provided that in case of domestic arbitrations, violation of Indian public policy also included patent illegality appearing on the face of the award. The proviso to the same stated that an award shall not be set aside merely on the ground of an erroneous application of the law or by re-appreciation of evidence. [Para 11][1032-B-D]
1.3 Interference under Section 37 with an order made under Section 34 cannot travel beyond the restrictions laid down under Section 34. In other words, the Court cannot undertake an independent assessment of the merits of the award, and must only ascertain that the exercise of power by the Court under Section 34 has not exceeded the scope of the provision. Thus, in case an arbitral award is confirmed by the Court under Section
34 and by the Court in an appeal under Section 37, this Court must be extremely cautious and slow to disturb such concurrent findings. [Para 12][1032-D-F]
2. While interpreting the terms of a contract, the conduct of parties and correspondences exchanged would also be relevant factors and it is within the arbitrator’s jurisdiction to consider the same. The majority of the arbitral tribunal as well as the Courts found upon a consideration of the material on record, including the agreement dated 14.12.1993, the correspondence between the parties and the oral evidence adduced, that the agreement does not make any distinction within the type of customers, and furthermore that the supplies to HTPL were not made in furtherance of any independent understanding between the Appellant and the Respondent which was not governed by the agreement dated 14.12.1993. It is evident from the agreement dated 28.07.1994 between HTPL and the respondent that a direct agreement existed between them. However, the appellant received its commission in its entirety for the HTPL transaction, and thus clearly was a beneficiary of the agreement between the respondent and HTPL. Moreover, in this regard, in the Majority Award, the appellant could not show under what separate agreement it was entitled to commission from such sales other than the agreement dated 14.12.1993, and for what services, if its only role in the transaction was to allow HTPL to lift goods from its godowns. [Paras 14-16][1033-C-F]
Pure Helium India (P) Ltd. v. ONGC (2003) 8 SCC 593 : [2003] 4 Suppl. SCR 561 ; D.D. Sharma v. Union of India (2004) 5 SCC 325 : [2004] 1 Suppl. SCR 767 – relied on
3.1 The issuance of letters of credit in the name of the appellant with respect to the HTPL transaction was similar to the practice adopted in case of letters of credit or demand drafts issued in all other transactions, whether directly negotiated by the respondent, or procured through the appellant, which suggests that it was the duty of the appellant in this case as well to ensure that usance letter of credits issued were bona fide, and in case of stand-by letters of credit, that they were negotiated in time in case of failure of payment on the due date, in terms of the agreement dated 14.12.1993. The Courts also rightly relied upon the communication dated 06.12.1995 from the Respondent to the Appellant adverting to the terms and conditions of the contract between the parties and referring to the fact that in respect of the sales made to HTPL in the period of April, May and July 1995, an amount of Rs. 9.2 crores together with interest was still to be received. This communication clearly demonstrated the duty of the appellant to recover the dues from HTPL and forward the same to the respondent. [Paras 19, 20][1034-E-H; 1035-A]
3.2 Another important communication rightly relied upon by the Courts is the Appellant’s letter dated 24.01.1996 to the Respondent, informing it about the institution of a suit for damages by HTPL with respect to the quality of the goods supplied. This correspondence refers to HTPL as a customer introduced to the Appellant by the Respondent. It was addressed in terms of the agreement dated 14.12.1993, which amounts to a clear admission that the sales made to HTPL were in terms of the said agreement. In this view of the matter, it is not open to the Appellant to argue that the agreement between the Respondent and HTPL was independent of the agreement dated 14.12.1993 between the appellant and the respondent and that the latter did not apply to such transaction. Moreover, the oral evidence of the officers of the appellant indicates that the appellant did not make any effort to ensure that the letters of credits pertaining to the supplies made to HTPL were honoured, pointing towards gross negligence on the part of the Appellant. The view taken in the Majority Award, as confirmed by the High Court in the exercise of its powers under Sections 34 and 37 of the 1996 Act, is a possible view based upon a reasonable construction of the terms of the agreement dated 14.12.1993 between the Appellant and the Respondent and consideration of the material on record. The dispute was covered under the agreement between the Appellant and the Respondent dated 14.12.1993, and as such the dispute is governed by the arbitration clause under the said agreement. Thus, there is no reason to disturb the Majority Award on the ground that the subject matter of the dispute was not arbitrable. [Paras 21, 22 and 23, 24][1035-B-F]
As published in the Supreme Court Reports, Supreme Court of India. Text from the Indian Supreme Court Judgments open data set (Dattam Labs), CC BY 4.0.
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