On 04.11.2020, the Government of India passed the Arbitration and Conciliation (Amendment) Ordinance, 2020 (“Ordinance”) to amend the Arbitration and Conciliation Act, 1996 (“the Act of 1996”) with immediate effect. By the said Ordinance, the Court has been given the power to unconditionally stay the enforcement of the arbitral award where an application has been made under Section 34 to set it aside and if a prima facie case is made out that the arbitration agreement or contract which is the basis of the award, or the making of the award itself was “induced or effected” by fraud or corruption. The unconditional stay shall continue until the application to set aside the award is decided by the Court.
By way of background, Section 5 of the Act of 1996 provides for limited intervention of the Courts in the arbitral proceedings. Section 35 thereof attaches ‘finality’ to the arbitral award and, as per Section 36(1), an award holder has to wait for a period of 3 (three) months after the receipt of the award prior to applying for its enforcement and execution. During the intervening period, the award may be challenged in accordance with Section 34 of the Act of 1996.
The Legislature has narrowed down the grounds for making a challenge to the arbitral award and the Courts will not interfere until and unless the findings made in the award fall within the scope of Section 34. It is pertinent to note that Section 34 uses the word ‘application’ and not, ‘appeal’ and, therefore, the proceedings are not like appellate proceedings where the Courts goes into each and every fact and observations made in the award. The proceedings are summary in nature and the Arbitral Tribunal is the final fact-finding body.
SCOPE OF INTERFERENCE WITH ARBITRAL AWARD BY COURTS
An arbitral award cannot be set aside suo moto by the Court. Perusal of Section 34 makes it clear that an arbitral award, which is governed by Part I of the Act of 1996, can be set aside only on the grounds mentioned under Sections 34(2) and (3), and as interpreted by Courts, and not otherwise. The burden lies squarely on the applicant to prove that his case falls within the scope of one of the grounds enumerated thereunder and recourse can be taken either for setting aside or for modifying or for enhancing or for varying or for revising the award.
In DDA v. R.S. Sharma and Co. [(2008) 13 SCC 80], it was observed that an arbitral award can be interfered with on the following grounds: (a) an award, which is (i) contrary to the substantive provisions of the law; or, the provisions of the Act of 1996; or (ii) against the terms of the respective contract; or (iii) patently illegal; or (iv) prejudicial to the rights of the parties; or (v) is open to interference by the Court under Section 34(2) of the Act of 1996; (b) the award could be set aside if it is contrary to: (i) fundamental policy of Indian law; or (ii) the interest of India; or (iii) justice or morality; or (iv) is so unfair and unreasonable that it shocks the conscience of the Court; or (v) is against the specific terms of contract and if so, interfere with it on the ground that it is patently illegal and opposed to the public policy of India.
PUBLIC POLICY OF INDIA
Section 34(2) (b)(ii) of the Act of 1996 sets out that if the Court finds that an arbitral award is in conflict with the ‘public policy of India’, the same can be set aside. It is interesting to note that none of the grounds as contained in sub-section (2)(a) of Section 34 actually deal with the merits of the decision rendered by an arbitral award. They only deal with the technical objections. It is only when it comes to the award being in conflict with the public policy of India that the merits of an arbitral award are looked into.
In Renusagar Power Co. Ltd. v. General Electric Co. [1994 Supp (1) SCC 644] (“Renusagar’s case”), while discussing the scope of ‘public policy’, the Supreme Court categorically held that it would mean that an award is contrary to the (i) fundamental policy of Indian laws; or (ii) the interests of India; or (iii) justice or morality. This case gave a very narrower meaning to the expression ‘public policy’ by confining the judicial review of the arbitral award only on these three grounds.
Subsequent to the decision rendered in Renusagar’s case, the expression ‘public policy of India’ again fell for interpretation before the Supreme Court in ONGC Ltd. v. Saw Pipes Ltd. [(2003) 5 SCC 705] (“Saw Pipe’s case”) where, the Court gave a wider meaning to the said expression and observed that the concept of public policy connotes some matter which concerns public good and the public interest. What is for public good or in public interest or what would be injurious or harmful to the public good or public interest has varied from time to time.
However, the award which is on the face of it patently in violation of statutory provisions cannot be said to be in public interest. Such award/judgment/decision is likely to adversely affect the administration of justice. Thus, the Court added “patent illegality” as an additional ground to set aside an arbitral award and observed that such illegality must go to the root of the matter and should be so unfair and unreasonable that it shocks the conscience of the Court.
In ONGC Ltd. v. Western Geco International Ltd.[(2014) 9 SCC 263] (“ONGC Ltd.’s case”) the Supreme Court again tried to explain the said expression in the following words: “It is neither necessary nor proper for us to attempt an exhaustive enumeration of what would constitute the fundamental policy of Indian law nor is it possible to place the expression in the straitjacket of a definition.
What is important in the context of the case at hand is that if on facts proved before them the arbitrators fail to draw an inference which ought to have been drawn or if they have drawn an inference which is on the face of it, untenable resulting in miscarriage of justice, the adjudication even when made by an Arbitral Tribunal that enjoys considerable latitude and play at the joints in making awards will be open to challenge and may be cast away or modified depending upon whether the offending part is or is not severable from the rest.”
Subsequently, by the Arbitration and Conciliation (Amendment) Act, 2015 dated 23.10.2015 (“the 2015 Amendment Act”), subsection (2A) was inserted in Section 34 which explained what is meant by an award being in conflict with the ‘public policy of India’. The said amendment also added another ground of ‘patent illegality appearing on the face of the award’ for setting aside the arbitral award. The amendment was made, inter alia, to bring the definition of ‘public policy of India’ inline with the definition propounded by the Supreme Court in Renusagar’s case.
It was in the landmark judgment rendered in Associate Builders v. DDA [(2015) 3 SCC 49] (“Associate Builder’s case”) that the Supreme Court discussed the meaning of the ‘fundamental policy of Indian Law’ and observed that there are certain juristic principles which would form a part of this expression.
It held that the juristic principle of a judicial approach demands that a decision be fair, reasonable and objective. The audi alteram partem principle which is undoubtedly a fundamental juristic principle in Indian law is also contained in Sections 18 and 34(2)(a)(iii) of the Act of 1996.
Another juristic principle is that a decision which is perverse or so irrational that no reasonable person would have arrived at the same requires some degree of explanation. Thus, where: (i) a finding is based on no evidence, or (ii) an Arbitral Tribunal takes into account something irrelevant to the decision which it arrives at; or (iii) ignores vital evidence in arriving at its decision, such decision would necessarily be perverse.
Further, with regard to the meaning of the expression “patent illegality”, the Supreme Court observed that the said expression would include: (a) a contravention of substantive law of India, (b) a contravention of the provisions of the Act of 1996 itself and, (c) a contravention of Section 28(3) of the Act of 1996.
Later, in 2019, the Supreme Court again had the occasion to revisit the law regarding the grounds for setting aside an arbitral award being contrary to the ‘public policy of India’. In MMTC Ltd. v. Vedanta Ltd. [(2019) 4 SCC 163] (MMTC Ltd.’s case), the Supreme Court, while taking note of the 2015 Amendment Act observed that, after the said amendment was made to Section 34 and pursuant to the insertion of explanation 1 to Section 34(2), the scope of contravention of public policy of India has been 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 of 1996, contravention of the fundamental policy of Indian law, and conflict with the most basic notions of justice or morality.
Clarifying the position of law further, the Supreme Court again in Ssangyong Engg. & Construction Co. Ltd. v. NHAI [(2019) 15 SCC 131] (“Ssangyong Engg.’s case”) observed that the expression ‘public policy of India’ inter alia contained in Section 34 of the Act of 1996 would mean the ‘fundamental policy of Indian law’ as explained in the Associate Builder’s caseand as understood in Renusagar’s case. Thus, by this judgment, the expansive meaning given to the said expression in ONGC Ltd.’s case was done away with.
Further, insofar as principles of natural justice are concerned, as contained in Sections 18 and 34(2)(a)(iii) of the Act of 1996, these continue to be the grounds for challenging the arbitral award. Subsequent to the judgment passed in Ssangyong Engg.’s case, an interesting issue came up for consideration before the Supreme Court in Patel Engineering Ltd. v. North Eastern Electric Power Corporation Ltd. (NEEPCO) [2020 SCC OnLine SC 466], where a challenge was made before the Supreme Court under Article 136 of the Constitution of India against an order passed by the High Court under Section 37 of the Act of 1996.
The ground for challenge was that though, the arbitral award was delivered on 29.03.2016 and order under Section 34 was passed on 27.04.2018, the High Court erroneously applied the provisions and law as applicable prior to the 2015 Amendment Act and hence, it suffers from an error apparent on the face of the record. The Supreme Court while dismissing the appeal under Section 37 observed that ‘patent illegality’ as a ground for setting aside the arbitral award was first expounded in Saw Pipe’s caseand further, has been given a statutory force by the 2015 Amendment Act in Section 34(2A) of the Act of 1996.
Similarly, construction of the terms of the contract is primarily for the arbitrator to decide unless unless the arbitrator construes a contract in a manner which no fair minded or reasonable person would take i.e. if the view taken by the arbitrator is not even a possible view to take.
The High Court had set aside the award on the ground that the arbitral award is perverse and on a holistic reading of all the terms and conditions of the contract, the view taken by the arbitrator is not even a possible view. These two grounds have also been reiterated as a ground for setting aside the arbitral award in Associate Builder’s case and Ssangyong Engg.’s case. Thus, Supreme Court dismissed the appeals filed by the appellant. The conundrum of ‘automatic stay’ & enforcement of arbitral awards: Section 36 of the Act of 1996 provides for the enforcement of an arbitral awards.
As per Section 36(1), where the time for making an application to set aside the arbitral award under Section 34 has expired, such award shall be enforced in accordance with the provisions of the Code of Civil Procedure, 1908 in the same manner as if it were a decree of the Court. Prior to 2015, Section 36 was construed (by the judgments of the Courts) as granting an ‘automatic-stay’ the moment an application under Section 34 was filed before a Court within the time as prescribed in Section 34(3).
The stay operated until the disposal of the application under Section 34 of the Act of 1996 and thus, there was an implied prohibition of enforcement of the arbitral award [Fiza Developers and Inter-trade Pvt. Ltd. v. AMCI (India) Pvt. Ltd. and Anr., (2009) 17 SCC 796]. The said observation was made despite the fact that Supreme Court had earlier in National Aluminium Co. Ltd. v. Pressteel & Fabrications (P) Ltd. [AIR 2005 SC 1514] recommended that an amendment to Section 36 is the need of the hour so as to ensure that the mere filing of an application under Section 34 does not operate as an ‘automatic stay’ on the enforcement of the arbitral award.
This specific issue was discussed by the Law Commission and it was recommended to substitute Section 36 so that the arbitral award does not become unenforceable upon making of an application under Section 34. In view thereof,Section 36 was wholly substituted by the 2015 Amendment Act, and now, as per Section 36(2), unless there is an express order of stay granted by the Court dealing with an application filed under Section 34, an arbitral award can be enforced.
Further, Section 36(3) states that a separate application for stay of the award has to be made by the applicant, which the Court will consider, as it thinks fit, and grant stay of the operation of the award for reasons to be recorded in writing. Thus, post amendment, in all cases where the Section 34 application is filed along with an application for stay under Section 36(3), the proceedings will be governed by Section 34 as amended and Section 36 as substituted.
However, the Ordinance now restricts even this discretion in certain cases. In terms of the Ordinance, a court must stay an arbitral award unconditionally if it is satisfied that a prima facie case of fraud or corruption is made out.
The jurisprudence of arbitrability of disputes where allegations of fraud have been levied is already settled by the Supreme Court in Rashid Raza’s case [(2019) 8 SCC 710] and Avitel’s case [C.A. No. 5145 of 2016] and thus, the tests laid down thereunder, will also be relevant for the purpose of deciding whether to grant unconditional stay or not.
Further, the Ordinance also grants unconditional stay in those cases where the award made, was induced by corruption. The amendment introduced by way of Ordinance is deemed to have been inserted from 23.10.2015, and applies to all court cases arising out of arbitral proceedings, irrespective of whether the arbitration or court proceedings were commenced before or after this date. The Ordinance, thus, gives effect to the judgment rendered by the Supreme Court in MMTC Ltd.’s case and casts an onerous duty upon the Arbitral Tribunal to act in a fair, independent and impartial manner. Vaibhav Niti is an Advocate on Record, Supreme Court of India.