SUPREME COURT REFUSES TO REMIT MATTER TO ARBITRATOR IN CASE OF PATENT ILLEGALITY IN ARBITRAL AWARD

A Two Judge Bench of the Hon’ble Supreme Court of India comprising of Justices R. Subhash Reddy and Hrishikesh Roy passed a Judgment dated 03-01-2022 in the case of I-Pay Clearing Services Private Limited V/s ICICI Bank Limited {Civil Appeal No. 7 of 2022 (Arising out of SLP(C) No.24278 of 2019)} and held that “When it prima facie appears that there is a patent illegality in the Arbitration Award (‘Award’) itself, .., in such cases, Court may not accede to the request of a party for giving an opportunity to the Arbitral Tribunal to resume the Arbitral Proceedings.”

It is the case of I-Pay (Appellant) that it has entered into a Service Provider Agreement dated 04.11.2002 (Agreement) with ICICI Bank (Respondent) to provide technology services and manage the operations and processing of smart card based loyalty programs for Hindustan Petroleum Corporation Limited (HPCL). Later the Respondent terminated the Agreement, as a result of which the Appellant incurred a loss of over Rs.50 Crores. Aggrieved by the action of the Respondent, the Appellant filed a Suit under Original Civil Jurisdiction of the High Court of Judicature at Bombay. However, the High Court referred the dispute to arbitration in terms of Section 8 of the Arbitration and Conciliation Act 1996 (‘the Act’), as the Agreement provided for arbitration as mode of dispute resolution. The Arbitrator passed an Award dated 13.11.2007 directing the Respondent to pay Rs. 50 Crores with interest @18%  p.a. Aggrieved by the action of the Arbitrator, the Respondent challenged the Award by filing a Petition under Section 34 of the Act before Bombay High Court.

The Bombay High Court made the following observations in this case:

i) That the main ground in the Application filed under Section 34 of the Act by the Respondent, was that the Arbitrator without recording any finding on the point “Whether the contract was illegally and abruptly terminated by the Respondent?”, awarded Rs.50 Crores to I the Appellant.

ii) Further, in the said proceedings, the Appellant filed an Application under Section 34(4) of the Act before Bombay High Court, seeking adjournment of the Section 34 proceedings for a period of three months and direct the Arbitrator to issue appropriate directions / instructions / additional reasons and/ or to take such necessary and appropriate action.

iii) The High Court held that the defect in the Award is not curable, hence, there is no merit in the Application filed under Section 34(4) of the Act and thus, dismissed the same.

Section 34(4) of the Act is defined as follows:

“On receipt of an application under sub-section (1), the Court may, where it is appropriate and it is so requested by a party, adjourn the proceedings for a period of time determined by it in order to give the arbitral tribunal an opportunity to resume the arbitral proceedings or to take such other action as in the opinion of arbitral tribunal will eliminate the grounds for setting aside the arbitral award.”

Aggrieved, the Appellant filed an Appeal before the Supreme Court and the Apex Court passed a Judgment dated 03.01.2022 and made the following observations:

1) That Section 34(4) of the Act itself makes it clear that it is the discretion vested with the Court for remitting the matter to Arbitral Tribunal in order to give an opportunity to resume the proceedings. The words “where it is appropriate” itself indicate that it is the discretion to be exercised by the Court, to remit the matter when requested by a party.

2) That when an application is filed under Section 34(4) of the Act, the same is to be considered keeping in mind the grounds raised in the application under Section 34(1) of the Act by the party, who has questioned the award of the Arbitral Tribunal and the grounds raised in the application filed under Section 34(4) of the Act and the reply thereto.

3) That merely because an application is filed under Section 34(4) of the Act by a party, it is not always obligatory on the part of the Court to remit the matter to Arbitral Tribunal. The discretionary power conferred under Section 34(4) of the Act, is to be exercised where there is inadequate reasoning or to fill up the gaps in the reasoning, in support of the findings which are already recorded in the award.

4) That if there are no findings on the contentious issues in the Award or if any findings are recorded ignoring the material evidence on record, the same are acceptable grounds for setting aside the award itself.

5) That a harmonious reading of Section 31, 34(1), 34(2A) and 34(4) of the Arbitration and Conciliation Act, 1996, make it clear that in appropriate cases, on the request made by a party, Court can give an opportunity to the arbitrator to resume the arbitral proceedings for giving reasons or to fill up the gaps in the reasoning in support of a finding, which is already rendered in the award. But at the same time, when it prima facie appears that there is a patent illegality in the award itself, by not recording a finding on a contentious issue, in such cases, Court may not accede to the request of a party for giving an opportunity to the Arbitral Tribunal to resume the arbitral proceedings.

6) That in this case, the Arbitrator held that the Agreement between the Parties was illegally and abruptly terminated by the Respondent and hence, awarded compensation/damages to the Appellant, but erred in not recording detailed reasons for the same.

7) That in the Impugned Order 13.11.2017 passed by the Bombay High Court, it has prima facie found that unless and until a finding is recorded on the first issue i.e. “Whether the award issued by the Arbitrator is a curable defect as defined in section 34(4) of the Arbitration Act.”, the learned Arbitrator could not have proceeded to record findings on the claims made by the Appellant. Hence, the learned Arbitrator has committed jurisdictional error. Further, the High Court was of the view that the defect in the Award is not curable and thus, cannot direct the Arbitrator to resume the Arbitral Proceedings. Thus, the High Court dismissed the Application filed by the Appellant under Section 34(4) of the Act.

Therefore, the Supreme Court did not find any merit in this Appeal so as to interfere with the Impugned Order passed by the High Court. Accordingly, this Civil Appeal was dismissed, with no order as to costs.

Ayush Pandey

Associate

The Indian Lawyer & Allied Services