Author: Jatin Kochhar and Shaurya Dhoundiyal at RPV Legal
Introduction
The Supreme Court of India in State of Chhattisgarh & Anr. v. Sal Udyog Private Limited (2021) SCC OnLine SC 1027 (“Sal Udyog“) has held that new grounds for setting aside an arbitral award for being patently illegal, can be raised for the first time in an appeal filed under Section 37 of the Arbitration and Conciliation Act 1996 (“the Act“) even when the said ground was not raised in the petition filed under Section 34 of the Act.
The Court has interpreted the phrase “the Court finds that“ appearing in Section 34(2A) of the Act to hold that a Court, while considering an appeal under Section 37, can independently examine the ground of patent illegality including wholly new grounds raised for the first time, to challenge the Arbitral Award.
This article briefly discusses the Sal Udyog judgment and also analyses its impact on future litigation.
Background
The Appellant State entered into an agreement dated 30.04.1992 (“Agreement“) with the Respondent for the supply of 10,000 tons of Sal seeds per annum for a period of 12 years. Thereafter, in 1996, the Appellant State notified the M.P. Van Upaj Ke Kararon Ka Punarikshan Adhiniyam No. 32 of 1987. Pursuant to Section 5A (Cessation of agreements and contracts) of the said legislation, the Appellant State terminated the Agreement on 21.12.199 and consequently the Respondent invoked arbitration against the Appellant State. Thereafter, an Arbitral Award (“Award“) dated 17.02.2005 was passed in favor of the Respondent whereby a sum of Rs. 7,43,46,772 (including interest at 18% per annum from the date of the Agreement up to February 2005 along with future interest at 18% per annum payable with effect from March 2005 till the date of payment) was awarded. The Award was challenged by the Appellant State under Section 34 of the Act before the District Judge, Raipur (“District Judge“). The District Judge did not set aside but only modified the Award by making the interest awarded to the Respondent payable from the date when the notice invoking arbitration was sent to the Appellant State instead of the date of the Agreement between the two parties.
The Order passed by the District Judge was challenged by the Appellant under Section 37 of the Act, wherein the Appellant raised several new grounds that were not raised earlier in the petition filed under Section 34 of the Act before the District Judge. The said appeal under Section 37 was dismissed by the Hon’ble High Court of Chhattisgarh (“High Court“) on the ground that the Appellant cannot raise new grounds for setting aside the Arbitral Award in an appeal filed under Section 37 of the Act.
Decision of the Hon’ble Supreme Court
Aggrieved by the decision of the High Court, the Appellant filed an Appeal before the Hon’ble Supreme Court, wherein the Court held that a party is allowed to raise new grounds of patent illegality in an appeal filed under Section 37 of the Act. The relevant excerpt of the Court’s judgment is reproduced hereunder:
“23. We are afraid, the plea of waiver taken against the appellant-State on the ground that it did not raise such an objection in the grounds spelt out in the Section 34 petition and is, therefore, estopped from taking the same in the appeal preferred under Section 37 or before this Court, would also not be available to the respondent-Company having regard to the language used in Section 34(2A) of the 1996 Act that empowers the Court to set aside an award if it finds that the same is vitiated by patent illegality appearing on the face of the same. Once the appellant-State had taken such a ground in the Section 37 petition and it was duly noted in the impugned judgment, the High Court ought to have interfered by resorting to Section 34(2A) of the 1996 Act2, a provision which would be equally available for application to an appealable order under Section 37 as it is to a petition filed under Section 34 of the 1996 Act. In other words, the respondent-Company cannot be heard to state that the grounds available for setting aside an award under sub-section (2A) of Section 34 of the 1996 Act could not have been invoked by the Court on its own, in exercise of the jurisdiction vested in it under Section 37 of the 1996 Act. Notably, the expression used in the sub-rule is “the Court finds that”. Therefore, it does not stand to reason that a provision that enables a Court acting on its own in deciding a petition under Section 34 for setting aside an Award, would not be available in an appeal preferred under Section 37 of the 1996 Act.“
(Emphasis Supplied)
Analysis
In the Sal Udgyog judgment, the Court’s interpretation of the language of Section 34(2A) formed the basis of its decision. As per the said judgment, the language of Section 34(2A) enables the Court to act in its own in deciding as to whether an award suffers from patently illegality. In Ssangyong Engineering and Construction Co. Pvt. Ltd. v. NHAI (2019) 15 SCC 131 the term ‘patent illegality’ was defined as “such illegality as goes to the root of the matter“.
The decision of the Court in Sal Udyog seems to be influenced by the policy consideration that the Court cannot be allowed to perpetuate an illegality in the Arbitral Award. Thus, where patent illegality is prima-facie apparent in the Arbitral Award, then even the Court exercising jurisdiction under Section 37 of the Act ought to be empowered to set aside such Arbitral Awards under Section 34(2A). However, it is pertinent to note that the aforesaid policy consideration has not been noted by the Court in its decision. Pertinently, the Court could have specifically noted, for the sake of clarity in future interpretation, that while exercising jurisdiction under Section 37, such power to set aside Arbitral Awards must be sparingly used by the Court in limited cases wherein patent illegality in the Arbitral Award is prima facie evident. However, in the absence of such clarity, the said judgment has raised the following issues, which may require subsequent clarification by the Hon’ble Supreme Court:
1. Applicability of the Court’s interpretation to the phrase ‘the Court finds that‘ to other grounds enshrined under Section 34
Similar to Section 34(2A), Section 34(2)(b) contains the phrase “the Court finds that” and provides that an Arbitral Award can be set aside when the Court finds that:
- the subject matter of the dispute is not being capable of settlement by arbitration under the law for the time being in force; and
- the Arbitral Award is in conflict with the public policy of India.
Therefore, it will be interesting to consider if the Court’s interpretation of the phrase “the Court finds that” will equally apply to the grounds for setting aside an Arbitral Award provided under Section 34(2)(b). If the same interpretation is applied in the context of Section 34(2)(b), then it would be open to parties to raise new grounds for challenging the Award at the appellate stage under Section 37, not only for being patently illegal but also for being incapable of settlement through arbitration as per the prevailing law and for being in conflict with the public policy of India.
2. Expansion in the scope of enquiry under Section 37
Under Section 37(1)(c) of the Act, the appellate Courts can hear appeals against the original decrees for setting aside or refusing to set aside an Arbitral Award under Section 34 passed by the lower Court. Therefore, the language of the provision implies that the appellate Court’s jurisdiction under Section 37 is limited to ascertaining the validity/legality of the original decree passed by the lower Court while dealing with the petition filed under Section 34 of the Act. The Hon’ble Supreme Court in MMTC Limited v. Vedanta Ltd. (2019) 4 SCC 163 (“MMTC“), while discussing the scope of Court’s jurisdiction under Section 37 of the Act, has held that “…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.” Furthermore, the Division Bench of the Hon’ble Delhi High Court in Sidhi Industries and Ors. v. M/s Religare Finvest Ltd. and Ors. (2017) SCC OnLine 12685 dismissed a Section 37 appeal by reasoning that the grounds sought to be raised in the appeal, although mentioned in the Section 34 petition, were not urged before the lower Court. The aforesaid judgment clearly indicates that the scope of enquiry under Section 37 is restricted to the grounds discussed in the Order passed by the lower Court. In view of the above, it is noteworthy that allowing new grounds to be pleaded in a Section 37 appeal is contrary to the said provision as it necessarily entails the appellate Court to travel beyond the grounds discussed in the Order passed by the lower Court.
Concluding Remarks
The law laid down in the Sal Udyog judgment should be applied by the Courts sparingly, i.e. the Courts should entertain new grounds pleaded in a Section 37 appeal or act on its own for setting aside Arbitral Awards as being patently illegal, only when such illegality is apparent on the face of the Arbitral Awards. However, the said judgment should not be interpreted as a source for setting up entirely difference cases for setting aside Arbitral Awards in the petition filed under Section 34 and in the appeal filed under Section 37 of the Act. Such interpretation of the Sal Udyog judgment may drastically expand the scope of enquiry of the appellate Court which is not only in contravention to the position laid down by the Hon’ble Supreme Court in the MMTC judgment but also contrary to the scheme of minimal court intervention prescribed under the Act.
