Arbitration; Utpal Dasgupta Vs. Mrinal Kanti Sinha [Calcutta High Court, 03-11-2016]

Arbitration and Conciliation Act, 1996 – Section 34 – Award of the Arbitrator – The Court cannot reappraise or reappreciate the evidence as if acting as an appellate authority in scrutinizing the award.

# Arbitral Award

IN THE HIGH COURT AT CALCUTTA

Ordinary Original Civil Jurisdiction

BEFORE: The Hon’ble JUSTICE SOUMEN SEN

Date : 3rd November, 2016

UTPAL DASGUPTA

Versus

MRINAL KANTI SINHA & ORS.

Appearance: Mr. Arif Ali, Adv. Mr. Tapas Majumder, Adv. Mr. Asoke Basu, Adv.

The Court : This is an application for setting aside of an award passed under the 1996 Act. The arbitration has allowed a claim for specific performance of an agreement for sale. It was not in dispute that the petitioner and the respondent no.4 as the joint owners of the property have entered into a development agreement with the respondent nos.2 and 3. The said respondent nos.2 and 3 appear to have entered into an agreement for sale with the respondent no.1 on behalf of the owners and on the basis of the power of attorney with the respondent no.1 for a valid consideration.

The respondent no.1 appears to have paid a sum little over Rs.20 lakhs as a consideration amount for purchasing the said flat. It was not in dispute that at the time when the said agreement was entered into with the respondent no.1, the authority of the respondent nos.2 and 3 to act on behalf of the owners was not terminated. The respondent nos.2 and 3 in any event were duly authorised by the owners of the property to sell their shares and to enter into such agreement on their behalf as well.

The award is challenged only by the petitioner as one of the co-owners of the property. The arbitrator on consideration of the materials on record and on appreciation of both oral and documentary evidence has returned a finding in favour of the respondent no.1. The respondent nos.2 and 3 were also directed to make certain payments to the petitioner. The award has taken care of all aspects that are required to be taken into consideration. It is well-settled that under the 1996 Act, the interference of the Court is very limited. The width and ambit of power under

# Section 34 of the Arbitration and Conciliation Act, 1996

has been recently considered by the Hon’ble Supreme Court in

# Associate Builders v. Dehli Development Authority’ reported at (2015) 3 SCC 49

Section 5 of the 1996 Act provides that notwithstanding anything contained in any other law for the time being enforce, in matters governed by Part 1, no judicial authority is to intervene, except where so provided in the said part.

Section 34, read in conjunction with Section 5 makes it clear that an arbitral award that is governed by Part 1 of the 1996 Act, can only be set aside on grounds mentioned in Section 34(2)and (3) and not otherwise.

None of the grounds contained in Sub-section 2(a) of Section 34 permit the Court to adjudicate the merits of the decision rendered by an arbitral award.

The grounds given under S.34(2)(a) are crisp and precise and lay the law as it is without the inclusion of any open-ended expression which otherwise would have given the courts an opportunity to widen their scope of interference with the arbitral awards. The only open-ended expression which can be and has been of concern is the ground of public policy of India. It has been under many cases defined as an unruly horse thus giving the interpretation that it can never be defined or be a certain thing. However, for the purpose of achieving the aim of the new Act, the Act of 1996 – the legislature while drafting the Act limited the scope of public policy in its explanation restricted it to:-

a) Fraud

b) Corruption

c) S.75 or S.81 (confidentiality breach or admissibility of evidence)

The scope of public policy was, however, widened after Supreme Court in its decision of

# Oil & Natural Gas Corporation Ltd. v. Saw Pipes Ltd., (2003) 5 SCC 705

(also referred to as : “Saw Pipes Case”) interpreted it to include “patent illegality” in its definition. The case mentioned that the term public policy can be construed and understood in a narrow or with a wider meaning and then went ahead to say that it should not have a limited meaning – thus, included the term “patent illegality” within the scope of public policy. “Patent Illegality” as explained by the Saw Pipes Case meant any error of law on the face of award, however, it did mention that the error which would be taken into consideration should not be trivial in nature. Lord Mansfield in Holman v. Johnson stated that the principle of public policy is ex dolo malo non oritur actio. No Court of law will lend its aid to a man who founds his cause of action upon an immoral or illegal act. The rule has been further illustrated by Russel by stating that grounds of public policy on which an award may be set aside include:

(1) that its effect is to enforce an illegal contract;

(2) that the arbitrator, for instance manifested obvious bias too late for an application for his removal to be effective before he made his award.

In its decision in Oil and Natural Gas Corpn. Ltd. (supra), the Supreme Court has elaborated the concept of public policy at great length. The concept was extended to permit challenge to an arbitral award which is based on an irregularity of a kind which has caused substantial injustice. It is stated:-

“Therefore, in our view, the phrase ‘public policy of India’ used in S.34 in context is required to be given a wider meaning. It can be stated 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. Hence, in our view in addition to narrower meaning given to the term ‘public policy in Renusagar’s case, it is required to be held that the award could be set aside if it is patently illegal. Result would be award could be set aside if it is contrary to:-

(a) fundamental policy of Indian law; or

(b) the interest of India; or

(c) Justice or morality, or

(d) In addition, if it is patently illegal.

Illegality must go to the root of the matter and if the illegality is of trivial nature it cannot be held that award is against the public policy. Award could also be set aside if it is so unfair and unreasonable that it shocks the conscience of the Court. Such award is opposed to public policy and is required to be adjudged void.

The expression “public policy” or “opposed to public policy” is not defined either in the Arbitration and Conciliation Act, 1996 or in the Contract Act, 1872. The reason is that these expressions are incapable of precise definition. The concept has to be taken to connote larger public interest on public good. Broadly speaking it would mean policy of law and, therefore, whatever tends to obstruct justice or violate a statute, whatever is against good morals is against public policy.

Public policy means the principles and standards regarded by the legislature or by the Court as being of fundamental concern to the state and the whole of the society. The notion of public policy is not static. Ideas on what is good for the public or what is in public interest, keeps changing with time. The enforcement of an award is to be refused as being contrary to public policy if it is contrary to the fundamental policy of Indian law, country’s interests, and its sense of justice and morality. The case in which this point was raised did not involve any such violation, nor any other ground for setting aside could be proved.

The words “public policy” are not to be confined to the Explanation appended to the provision. That would be a very narrow construction of the provision.”

In

# Centrotrade Minerals & Metals Inc. v. Hindustan Copper Ltd. reported at (2006) 11 SCC 245

the Supreme Court has interpreted public policy to include patent illegality and such patent illegality must go to the root of the matter. It should be unfair and unreasonable so as to shock the conscience of the Court. The pleadings of the parties and he materials on record are required to be considered to lay the Court if the award is against public good on public interest. The law laid down by the Supreme Court in Saw Pipes (supra) has led many other courts to interpret the law to include any error of law to be hit by S.34 including the subsequent decisions of the Hon’ble Supreme Court, for instance, in the case of

# Delhi Development Authority v. R.S. Sharma, (2008) 13 SCC 80

the Hon’ble Supreme Court summarized the law thus:-

“From the above decisions, the following principles emerge:

(a) An Award, which is

(i) Contrary to substantive provisions of law; or

(ii) The provisions of the Arbitration and Conciliation Act, 1996; or

(iii) Against the terms of the respective contract; or

(iv) Patently illegal, or

(v) Prejudicial to the rights of the parties, is open to interference by the Court under S.34(2) of the Act.

(b) 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;

(iv) The Award could also be set aside if it is so unfair and unreasonable that it shocks the conscience of the Court;

(v) It is open to the Court to consider whether the Award 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.”

In

# ONGC Ltd. v. Garware Shipping Corporation Ltd. reported at (2007) 13 SCC 434

it was held that under Section 34 of the Act, an award can be set aside on the ground that it is erroneous in law.

The Supreme Court in McDermott International (supra) has commented on the scope of the powers of the arbitrator to interpret terms of the contract, and the permissible interference by the courts on the assessment of the arbitrator. It was held:-

” It is trite that the terms of the contract can be express or implied. The conduct of the parties would also be a relevant factor in the matter of construction of a contract. The construction of the contract agreement, is within the jurisdiction of the arbitrators having regard to the wide nature, scope and ambit of the arbitration agreement and they cannot, be said to have misdirected themselves in passing the award by taking into consideration the conduct of the parties. It is also trite that correspondences exchanged by the parties are required to be taken into consideration for the purpose of construction of a contract. Interpretation of a contract is a matter for the arbitrator to determine, even if it gives rise to determination of a question of law.

The 1996 Act makes the provision for the supervisory role of courts, for the review of the arbitral award only to ensure fairness. Intervention of the Court is envisaged in few circumstances only, like, in case of fraud or bias by the arbitrator, violation of natural justice, etc. The court cannot correct the errors of the arbitrators. It can only quash the award leaving the parties free to begin the arbitration again if it is desired. So, the scheme of the provision aims at keeping the supervisory role of the court at minimum level and this can be justified as parties to the agreement make a conscious decision to exclude the court’s jurisdiction by opting for arbitration as they prefer the expediency and finality offered by it.”

The Court will not judge the reasonableness of a particular interpretation accorded by the arbitrator to the terms of the contract. Even an error in interpretation, unless patently illegal, will only amount to an error within the jurisdiction of the arbitrator.

In Bharat Coking Coal Ltd. (supra) the Hon’ble Supreme Court observed as follows:-

“11. There are limitations upon the scope of interference in awards passed by an arbitrator. When the arbitrator has applied his mind to the pleadings, the evidence adduced before him and the terms of the contract, there is no scope for the court to reappraise the matter as if this were an appeal and even if two views are possible, the view taken by the arbitrator would prevail. So long as an award made by an arbitrator can be said to be one by a reasonable person no interference is called for. However, in cases where an arbitrator exceeds the terms of agreement or passes an award in the absence of any evidence, which is apparent on the face of the award, the same could be set aside.”

In

# KV Mohd. Zakir v. Regional Sports Centre reported at AIR 2009 SC (Supp) 2517

it held that the courts should not interfere unless reasons given are outrageous in their defiance of logic or if the arbitrator has acted beyond his/her jurisdiction.

In

# P.R. Shah Shares & Stock Brothers v. M/s. B.H.H. Securities (P) Ltd. reported at 2012 (1) SCC 594

it states that a court does not sit in appeal over the award of an arbitral tribunal by re-assessing or re-approaching the evidence. An award can be challenged only on the grounds mentioned in S.34(2) of the Act.

In

# Steel Authority of India Ltd. v. Salzgitter Mannesmann; OMP No.736 of 2009

decided on 18th April, 2012 (Delhi HC) it refused to set aside the award in view of court’s limited and restricted powers for judicial intervention as under S.34 of the Act. The court relied upon the judgment in P.R. Shah Shares (supra) and held that the court cannot sit in appeal over the award of the tribunal by re-assessing and re- evaluating the evidence.

In a fairly recent decision of

# Associate Builders v. Delhi Development Authority reported at (2015) 3 SCC 49

the Hon’ble Supreme Court had the occasion to re-consider the grounds on which an award can be challenged under Section 34 of the Arbitration and Conciliation Act, 1996. In dealing with the grounds on which an award can be challenged, the Hon’ble Supreme Court has noticed the distinction between Section 34(2)(a) and Section 34(2)(b)(ii) and held that it is only when arbitral award is in conflict with Public Policy of India as per Section 34 (2)(b)(ii) that merits of an arbitral award are to be looked into under certain specified circumstances it includes if it is in conflict with Public Policy of India. The Hon’ble Supreme Court has subdivided Public Policy of India in four separate and distinct sub-heads, namely:-

i) Fundamental Policy of Indian Law;

ii) Interest of India;

iii) Justice or Morality; and

iv) Patent Illegality.

Fundamental Policy of Indian Law was again subdivided in four heads, namely,

i) Compliance with statutes and judicial precedents;

ii) Need of judicial approach;

iii) Natural justice compliance;

iv) Wednesbury reasonableness.

Patent Illegality principle was subdivided in three heads, namely,

i) Contravention of substantive law of India;

ii) Contravention of Arbitration and Conciliation Act, 1996;

iii) Contravention of the terms of the contract.

The Hon’ble Supreme Court in Associate Builders (supra) had taken into consideration the object and reason for introduction of the 1996 Act and observed that the said Act was enacted to replace the 1940 Arbitration Act in order to provide for an arbitral procedure which is fair, efficient and capable of meeting the needs of arbitration and also to provide that the Tribunal gives reasons for an arbitral award; to ensure that the Tribunal remains within the limits of its jurisdiction; and to minimize the supervisory roles of courts in the arbitral process. The Fundamental Policy of Indian Law requires compliance with statutes meaning thereby that an award which is patently in violation of statutory provisions is in conflict with Public interest and would be regarded as being contrary to the Fundamental Policy of Indian Law. Furthermore, the binding effect of the judgment of a superior Court if disregarded would be equally violative of the Fundamental Policy of Indian Law. The arbitral tribunal being vested with the power to determine the rights and obligations of the parties is required to show fidelity to judicial approach meaning thereby that they cannot act in an arbitrary, capricious or whimsical manner. Judicial approach demands that a decision should be fair, reasonable and objective and not actuated by any extraneous considerations. Equal important and indeed fundamental was that the arbitral tribunal is required to follow the principles of natural justice. Audi alteram partem principle is Fundamental to the Policy of Indian Law and is also contained in Sections 18 and 34(2)(ii) of the Arbitration and Conciliation Act. The juristic principle of wednesbury reasonableness also forms part of the Fundamental Policy of Indian Law and a decision which is perverse or so irrational that a reasonable person conversant with the facts would not have arrived at the same conclusion is part of the Fundamental Policy of Indian Law and on the ground of which an award can be challenged. It is settled law that where a finding is based on no evidence or an arbitral tribunal takes into account something irrelevant to the decision which it arrives at or includes vital evidence in arriving at its decision. Such decision would necessarily be perverse and on those grounds, an award can be set aside. This later decision of the Hon’ble Supreme Court has reaffirmed its faith in Saw Pipes Ltd. (supra) with a word of caution that when a Court is applying the public policy test to an arbitration award, it does not act as a Court of appeal and consequently errors of fact cannot be corrected. A possible view by the arbitrator on facts has necessarily to pass muster as the arbitrator is the ultimate master of the quantity and quality of evidence to be relied upon when he delivers his arbitral award. Thus, an award based on little evidence or on evidence which does not measure up in quality to a trained legal mind would not be held to be invalid on this score. Once it is found that the arbitrators approach is not arbitrary or capricious, and then he is the last word on facts.

An award can be said to be against justice or morality only when it shocks the conscience of the Court. The instance of it can be whether the Tribunal awards a sum without any acceptable reason or justification. The concept of Patent Illegality was considered by reference to the explanation under Section 34(2)(b)(ii) of the 1996 Act which states that an award is said to be in conflict with Public Policy of Indian Law if the making of the award is induced or affected by fraud or corruption. Patent Illegality would include a contravention of the substantive law of India or if an award is based in contravention of Arbitration and Conciliation Act, 1996 – for example, if an arbitrator failed to give any reason for an award in contravention of Section 31(3)of the 1996 Act and in all cases whether the Tribunal failed to decide in accordance with the terms of the contract which in effect would be really a contravention of Section 28(3) of the Arbitration and Conciliation Act. The Hon’ble Supreme Court, however, entered a caveat by stating that an arbitral tribunal must decide in accordance with the terms of the contract but if an arbitrator construes a term of the contract in a reasonable manner, it would not mean that the award can be set aside on this ground. Construction of the terms of the contract is primarily for an arbitrator to decide unless the arbitrator construes the contract in such a way that it could be said to be something that no fair minded or reasonable person would do, of course, the arbitrator cannot wander outside the contract and deals with the matters not forming the subject matter or allotted to him as in that case he would commit jurisdictional error. The said judgment also recognized and reaffirmed the settled law that where a cause or matters in differences are referred o an arbitrator, whether layer or layman, he is constituted the sole and final judge of all questions of law and of fact obviously with the limited grounds of interference as alluded to above.

As observed by the Supreme Court in Associate Builders (supra), the 1996 Act was enacted to provide for an arbitral procedure, which is fair, efficient and capable of meeting the needs of arbitration, to provide that the Arbitral Tribunal gives reasons for an arbitral award, to ensure that the Arbitral Tribunal remains within the limits of its jurisdiction and to minimize the supervisory role of Courts.

The merits of an award might only be looked into under certain specified circumstances, when an award is found to be in conflict with the public policy of India, as held by the Supreme Court in Associate Builders (supra).

An award might be set aside as patently illegal, provided the illegality goes to the root of the award. If the illegality is of a trivial nature it cannot be said that the award is against public policy. This proposition was reaffirmed by the Supreme Court in

# Hindustan Zinc Ltd. v. Friends Coal Carbonization reported at (2006) 4 SCC 445

In ONGC v. Saw Pipes Ltd (supra) the Supreme Court held that an award could also be set aside, if it was so unfair and unreasonable, that it shocked the conscience of the Court.

In Associate Builders (supra) the Supreme Court held that it must be clearly understood that when a Court is applying ‘public policy’ test to an arbitral award, it does not act as a Court of appeal and consequently the errors of fact cannot be corrected. A possible view by the arbitrator on facts has necessarily to be accepted as the arbitrator is the ultimate master of the quantity and quality of evidence to be relied upon, when he delivers his arbitral award. Thus, an award based on little evidence or no evidence, which does not measure up in quality to a trained legal mind would not be held to be invalid on this score. Once it is found that the arbitrators’ approach is not arbitrary or capricious then he is the last word on facts.

Patent illegality may render an award to be in conflict with the public policy of India. Under the explanation to Section 34(2)(b) an award may be said to be in conflict with the public policy of India if the making of the award was induced or affected by fraud or corruption.

In

# Indu Engineering & Textiles Ltd. v. Delhi Development Authority reported at (2001) 5 SCC 691

the Supreme Court held that the Arbitrator being a Judge appointed by the parties, the award passed by him is not to be interfered with lightly. When the view taken by the arbitrator was a possible or a plausible one, on his analysis of evidence and interpretation of contractual and/or statutory provisions and did not suffer from any manifest error, it was not open to the Court to interfere with the award.

Even though the judgment in Indu Engineering & Textiles Ltd. (supra) was rendered in the context of an application under Section 30 of the Arbitration Act 1940, for setting aside of an award, the same principle would apply to an application for setting aside an award, under Section 34 of the 1996 Act.

The judgment in Associate Builders (supra) clearly enunciates unless there is a patent illegality or perversity or violation of the principle of natural justice, the award cannot be interfered with. In the instant case, it cannot be said that the said award was passed without any evidence or contrary to law or perverse. It is an elaborate award with reasons. The disclosure of mind by the arbitrator is adequately demonstrated in the reasons given in the award. The arbitrator has considered all aspects of the matter and on appreciation of evidence has passed an award. The Court cannot reappraise or reappreciate the evidence as if acting as an appellate authority in scrutinizing the award.

Under such circumstances, this Court finds no reason to interfere with the impugned award. The application is, accordingly, dismissed.

The original award may be returned to the petitioner by the department upon furnishing an authenticated copy thereof.

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