Res Judicata Not Applicable To Subsequent Arbitral Proceedings If First Award Was Set Aside Due To Incompetence Of Tribunal: Kerala High Court
The Kerala High Court has held that there is no legal impediment for arbitrating parties to initiate fresh proceedings if the district court sets aside an award on any issue not yet concluded in that award. This implies that the principles of res judicata will have only a limited application in such proceedings under the Arbitration and Conciliation Act.A Division Bench of Justice P.B....
The Kerala High Court has held that there is no legal impediment for arbitrating parties to initiate fresh proceedings if the district court sets aside an award on any issue not yet concluded in that award. This implies that the principles of res judicata will have only a limited application in such proceedings under the Arbitration and Conciliation Act.
A Division Bench of Justice P.B. Suresh Kumar and Justice C.S Sudha observed that even if the earlier award was one set aside not on any ground affecting the competency of the Tribunal, the subsequent arbitral proceedings are not hit by the principles of res judicata
"Even if the earlier award was one set aside not on any ground affecting the competency of the Tribunal, we are of the view that the subsequent arbitral proceedings are not hit by the principles of res judicata. The reason being that, as rightly contended by the learned counsel for the appellant, the limited jurisdiction vested in the court in terms of the provisions of the Act is only to ensure that arbitral awards do not suffer from the errors mentioned in Section 34 of the Act."
It was also held that the court cannot correct the errors in arbitral awards by modifying them or by remitting the same to the arbitral tribunal for fresh adjudication under Section 34. The scheme of the Act is that if the court finds that an arbitral award suffers from any of the errors mentioned in Section 34, the award is to be set aside, leaving the parties to begin the arbitration afresh, if they choose to do so.
The first respondent was a member of Cochin Stock Exchange Ltd (second respondent herein) and was carrying on business as a share broker. The appellant herein availed the services of the first respondent to purchase and sell shares through the second respondent company.
A dispute arose between them concerning the transactions effected by the first respondent on behalf of the appellant. As per their agreement, disputes of this nature were to be adjudicated through arbitration by an arbitral tribunal constituted by the second respondent.
Accordingly, a tribunal was constituted by the second respondent which directed the first respondent to pay around Rs.37 lakhs to the appellant. The first respondent challenged this award in the district court and it was set aside on grounds that the arbitral tribunal was not properly constituted and that the first respondent was not given proper notice in the proceedings.
Aggrieved by this, the appellant asked the second respondent to constitute another arbitral tribunal to resolve the dispute afresh and a new tribunal was accordingly constituted. Although notice was issued by the new tribunal to the first respondent, he chose not to contest the appellant's claim. Therefore, the new tribunal also passed an award permitting the appellant to realise the amount from the first respondent.
The first respondent again challenged the award on the ground that the proceedings of the new tribunal are unsustainable in law being one hit by the principles of res judicata. This plea was accepted by the district court and the award was once again set aside.
Challenging this decision, the appellant moved the High Court.
Advocate Dinesh Mathew J. Muricken appearing for the appellant argued that the limited jurisdiction vested in the court is only to ensure that arbitral awards do not suffer from the errors mentioned in Section 34. He submitted that the court cannot correct all the errors in arbitral awards by modifying them or by remitting references to the arbitral tribunal for fresh adjudication.
It was contended that since the first award was set aside only on grounds of improper constitution of the tribunal and no proper notice to the first respondent, there was no legal impediment for the appellant to initiate fresh proceedings and that the said proceedings cannot be said to be hit by res judicata. The counsel added that the impugned decision was passed on an incorrect understanding of the scope of Section 34(4).
Therefore, according to him, Section 34(4) has no application in a case of this nature.
However, Advocate Santheep Ankarath appearing for the first respondent submitted that even if it is found that the plea of res judicata does not apply to the facts of the case, the impugned order is not liable to be interfered with.
The Court noted that a close reading of the impugned order shows that the view taken by the court is that insofar as the matter was not remitted to the arbitral tribunal in terms of Section 34(4) of the Act, the arbitral agreement and the claim do not survive for another round of arbitration.
Section 34 confers power on the court to adjourn an application for setting aside an arbitral award if so requested by a party for a certain period to give the arbitral tribunal an opportunity to resume the arbitral proceedings or to take such other actions as in the opinion of the tribunal will eliminate the grounds for setting aside the award.
Therefore, the Bench noted that only a limited power is conferred on the court to adjourn the application under Section 34; it does not confer jurisdiction on the court to remit a reference for arbitration for fresh adjudication.
"Needless to say, the reason, on the basis of which the court below held that the arbitral proceedings in which the award impugned before the court was passed was hit by the principles of res judicata, the same is unsustainable in law," it said.
The Court agreed with the appellant that the impugned order was passed by the court below on the incorrect premise that the award first passed by the arbitral tribunal was set at nought only on the ground that proper notice in the proceedings was not given to the first respondent and also that the arbitral tribunal was not properly constituted.
Moreover, as per Section 19, arbitral tribunals are not bound by the provisions contained in the Code of Civil Procedure. Thus, even if it is held that the principles of res judicata would apply to arbitral proceedings, since the earlier award was not passed by a competent tribunal, the award passed by that tribunal is non-est in law and the principles of res judicata would not apply to such cases.
After analysing the relevant law and associated precedents, it was concluded that when the court set aside an arbitral award, it only negates a decision, in whole or in part, depriving the portion negated of any legal force and returning the parties to their original litigating position, to start the proceedings afresh, if they choose to do so, in relation to issues which are not concluded.
In that view of the matter, it was held that there was no impediment at all for the first respondent in initiating arbitral proceedings afresh for the resolution of the dispute. The appeal was thereby allowed, the impugned order was set aside and the arbitral award was restored.
Case Title: M/s Bativala and Karani v. K.I. Johny & Anr.
Citation: 2022 LiveLaw (Ker) 187