Author: Tarang Agarwal*
| Jurisdictions: India |
Topics: Arbitration Legislation UNCITRAL Model Law Arbitral Process Post-Award Remedies |
In a judgment passed in the case of Ratnam Sudesh Iyer v. Jackie Kakubhai Shroff[1] on November 10, 2021, a Division Bench of the Supreme Court of India comprised of Hon’ble Mr. Justice Sanjay Kishan Kaul and Hon’ble Mr. Justice M.M. Sundaresh held that an amendment made to Section 34 of the Arbitration and Conciliation Act, 1996 (“A&C Act”)[2] via the Arbitration and Conciliation (Amendment) Act, 2015 (“2015 Amendment”) will apply prospectively only to Section 34 applications that have been filed after the date of the 2015 Amendment, i.e., October 23, 2015. This holding further clarifies the judiciary’s stance on this issue.
Facts
The appellant, a Singapore national, and the respondent, an Indian national, were shareholders in an Indian investment holding company called Atlas Equifin Private Limited, India (“Atlas”) which held 11,05,829 equity shares in another Indian entity named Multi Screen Media Pvt. Ltd. (“MSM”).[3] At some point in 2010, a dispute arose between the parties when the respondent alleged that his signatures were forged by the appellant on a placement instruction through which the appellant sought to sell his shares in MSM.[4]
The parties, however, entered into a Deed of Settlement dated 3rd January 2011, which contained the following arbitration clause:[5]
“9. If any dispute arises between the parties hereto in relation to any provision of this Deed, the dispute shall be referred to Arbitration by a single Arbitrator to be appointed by mutual consent. The Arbitration proceedings shall be governed by the Arbitration and Conciliation Act, 1996 of India or any amendment thereto. Courts in Mumbai shall have jurisdiction in relation to any legal action or proceeding arising out of or in connection with this Deed.”
In 2012, while a sale of the parties’ shares in MSM was pending, the appellant filed an application under Section 9 of the A&C Act seeking interim relief – preventing the proceeds of the sale of shares from being released to the respondent – on account of the breach of the Deed of Settlement, through an e-mail sent by the respondent’s wife in June 2011. The dispute was then referred by the consent of the parties to a sole arbitrator, a retired judge of the Supreme Court of India.[6]
Ultimately, on November 10, 2014, the arbitrator issued a final award in favor of the appellant, awarding him liquidated damages to the tune of $1.5 million. Furthermore, the respondent was held not entitled to receive an amount of $2 million which was in escrow, on account of his breach of the Deed of Settlement.[7]
On 24th January 2015, the respondent filed an application under Section 34 of the A&C Act before the Bombay High Court to challenge the arbitral award and have it set aside on the ground of patent illegality. A Single Judge of the High Court set aside the arbitral award vide judgment dated 19th May 2020, and the appellant’s appeal before the Division Bench of the High Court was dismissed vide judgment dated 20th April 2021.[8]
However, the Division Bench of the High Court, while setting aside the arbitral award, held that “the award was not just plainly wrong, but exhibit[ed] an unmitigated perversity and [was] shocking to the conscience of the court, to say the least.”
The appellant then challenged the High Court’s decision before the Supreme Court of India. The appellant’s primary argument was that the arbitral award had to be scrutinized as per the post-2015 Amendment legal position, and subsequent to the amendment, the ground of patent illegality could not be used as a ground to challenge arbitral awards passed in international commercial arbitrations.
2015 Amendment to Section 34 of the A&C Act
Section 34 of the A&C Act is based on Article 34 of the UNCITRAL Model Law on International Commercial Arbitration, with minor contextual variations. The provision relevant to this discussion is Section 34(2)(b)(ii), which provides that an arbitral award may be set aside by the court if it is in conflict with the public policy of India. In Oil and Natural Gas Corporation (ONGC) v. Saw Pipes Ltd.,[9] the Supreme Court of India gave a broad construction to the term “public policy” and included within it the ground of “patent illegality” for setting aside a domestic award. “Patent illegality” was interpreted by the court to mean any violation of the substantive law in force in India, or opposed to the terms of the main contract. In Venture Global Engineering v. Satyam Computer Services Ltd. & Anr.,[10] the court ruled that Section 34 would be applicable even to foreign-seated awards, except if there was an express or implied exclusion of the same by the parties.
The 2015 Amendment has given a narrow meaning to the term “public policy.” Explanation 1 to Section 34(2)(b) now reads as follows:
“Explanation 1. – For the avoidance of any doubt, it is clarified that an award is in conflict with the public policy of India, only if –
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the making of the award was induced or affected by fraud or corruption or was in violation of section 75 or section 81; or
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it is in contravention with the fundamental policy of Indian law; or
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it is in conflict with the most basic notions of morality or justice.”
Furthermore, the newly inserted sub-section 2A to Section 34 provides that the ground of patent illegality can be used by the court to set aside an arbitral award with respect to arbitrations other than international commercial arbitrations. Therefore, patent illegality is no longer a ground for setting aside an award arising out of international commercial arbitrations.
Court’s Holding
The court first held that the arbitration in the instant case would be an international commercial arbitration within the meaning of Section 2(f) of the A&C Act, since the appellant was a party based in Singapore. Consequently, the arbitral award was a domestic award arising out of an international commercial arbitration.
The court then observed that by way of the 2015 Amendment, the legislature sought to create a distinction between a domestic award arising from a purely domestic arbitration between Indian parties and a domestic award arising out of an international commercial arbitration. Proceeding on this basis, the court held the crux of the amendment to Section 34 to mean that:
“[W]hile the plea of the award being vitiated by patent illegality is available for an arbitral award, such an award has to be a purely domestic award, i.e. the plea of patent illegality is not available for an award which arises from international commercial arbitration post the amendment.”[11]
The court then went on to analyze whether the 2015 Amendment would be applicable. It was not disputed by the parties that the Section 34 proceedings were initiated by the respondent prior to 23rd October 2015, i.e., the date on which the 2015 Amendment came into force.
Reliance was placed on the judgment in Board of Control for Cricket in India v. Kochi Cricket Pvt. Ltd. & Ors.,[12] where the Supreme Court held that the 2015 Amendment Act is prospective in nature and would only apply to arbitral proceedings that had been commenced on or after October 23, 2015. Further reliance was placed on the judgment in Ssangyong Engineering and Construction Company Ltd. v. National Highways Authority of India,[13] where the Supreme Court clarified that the amendment to Section 34 will apply only to Section 34 proceedings that had been initiated on or after October 23, 2015, irrespective of whether the arbitration proceedings were commenced prior to that date.
The appellant raised a contention that the wording of the arbitration clause which stated that “the Arbitration proceedings shall be governed by the Arbitration and Conciliation Act, 1996 of India or any amendment thereto,” included the possibility of any future amendment to the A&C Act. In support of this contention, the appellant relied on the judgment in Thyssen Stahlunion Gmbh v. Steel Authority of India Limited,[14] where the court had held that parties had the freedom to mutually agree to apply the procedural law in force at the relevant time, and not just at the time of entering into the arbitration agreement. The court, however, rejected this argument by referring to its earlier judgment in S.P. Singla Constructions Pvt. Ltd. v. State of Himachal Pradesh & Anr.,[15] where it was held that the general conditions of a contract cannot constitute an agreement between the parties to apply the provisions of 2015 Amendment.
The court finally concluded that since in this case, Section 34 proceedings had already been initiated by the respondent prior to the date of the 2015 Amendment, i.e., October 23, 2015, the proceedings were not subject to the 2015 amendment.
The Court then examined the arbitral award and held that the arbitrator’s conclusions were not in accordance with the fundamental policy of Indian law and could thus be set aside as per the pre-2015 interpretation of Section 34 of the A&C Act.
Conclusion
The Supreme Court has followed its prior judgments in BCCI[16] and Ssangyong,[17] and once again clarified that the 2015 Amendment would not apply to S. 34 proceedings that commenced prior to the date of the amendment. It will be interesting to see if further challenges to this legal position come before the court, and how the court deals with this issue in the future.
* Tarang Agarwal is an ARIA Student Editor, an LL.M. Candidate at Columbia Law School, and a Member of the 2021-2022 Board of the Columbia International Arbitration Association. He formerly clerked for Hon’ble Ms. Justice (Retd.) Indu Malhotra at the Supreme Court of India and was an Associate at Agarwal Jetley & Co. (AJC).
[1] Ratnam Sudesh Iyer v. Jackie Kakubhai Shroff, Civil Appeal No. 6112 of 2021 (Supreme Court, 10/11/2021).
[2] The Arbitration and Conciliation Act, 1996, § 34 (Ind.).
[3] Ratnam Sudesh Iyer, Civil Appeal No. 6112 of 2021, at 1.
[4] Ratnam Sudesh Iyer, Civil Appeal No. 6112 of 2021, at 2.
[5] Ratnam Sudesh Iyer, Civil Appeal No. 6112 of 2021, at 2-4.
[6] Ratnam Sudesh Iyer, Civil Appeal No. 6112 of 2021, at 5-6.
[7] Ratnam Sudesh Iyer, Civil Appeal No. 6112 of 2021, at 8.
[8] Ratnam Sudesh Iyer, Civil Appeal No. 6112 of 2021, at 9.
[9] Oil and Natural Gas Corporation (ONGC) v. Saw Pipes Ltd., (2003) 5 SCC 705 (India).
[10] Venture Global Engineering v. Satyam Computer Services Ltd. & Anr., (2008) 4 SCC 190 (India).
[11] Ratnam Sudesh Iyer, Civil Appeal No. 6112, at 13.
[12] Board of Control for Cricket in India v. Kochi Cricket Pvt. Ltd. & Ors., (2018) 6 SCC 287 (India).
[13] Ssangyong Engineering and Construction Company Ltd. v. National Highways Authority of India, (2019) 15 SCC 131 (India).
[14] Thyssen Stahlunion Gmbh v. Steel Authority of India Limited, (1999) 9 SCC 334 (India).
[15] S.P. Singla Constructions Pvt. Ltd. v. State of Himachal Pradesh & Anr., (2019) 2 SCC 488 (India).
[16] Supra note 12.
[17] Supra note 13.