SC: Interference u/s 37 of Arbitration & Conciliation Act shall be subject to the restrictions laid down u/s 34

The Hon’ble Supreme Court, today, i.e. on 18th February 2018, in the matter of MMTC. Ltd. v. M/s Vedanta Ltd. pronounced that appellate court’s interference under Section 37 of the Arbitration and Conciliation Act cannot travel beyond the restrictions laid down under Section 34 of the said act.

The Hon’ble Supreme Court observed that:

Interference with an arbitral award in India may be undertaken in terms of Section 34 or Section 37 of the Arbitration and Conciliation Act, While the former deals with challenges 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. (Para 10)

As far as Section 34 is concerned, the Court does not sit in appeal over the arbitral award and may interfere on merits on the limited ground provided under Section 34(2)(b)(ii), i.e. if the award is against the public policy of India. (Para 11)

As per the legal position clarified through decisions of the Supreme Court 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,
  • the Arbitration and Conciliation Act, 1996, and
  • 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. (Para 11)

Pursuant to the insertion of Explanation 1 to Section 34(2), the scope of contravention of Indian public policy 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,
  • contravention of the fundamental policy of Indian law, and
  • conflict with the most basic notions of justice or morality.

Additionally, sub­section (2A) has been inserted in Section 34, which provides that in case of domestic arbitrations, violation of Indian public policy also includes patent illegality appearing on the face of the award. The proviso to the same states that an award shall not be set aside merely on the ground of an erroneous application of the law or by re­appreciation of evidence. (Para 11)

As far as interference with an order made under Section 34, as per Section 37, is concerned, it cannot be disputed that such interference under Section 37 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, it is evident that in case an arbitral award has been confirmed by the Court under Section 34 and by the Court in an appeal under Section 37, the Supreme Court must be extremely cautious and slow to disturb such concurrent findings. (Para 12)

A review of construction of the contract between the parties cannot be made in terms of re­assessment of the material on record, but only in terms of the principles governing interference with an award. (Para 13)

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. (Para 14)

Copy of judgement: Judgement_18-Feb-2019

-Tushar Kaushik

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