Arbitration| Judge Hearing Sec.34 Application Must Apply Mind To Grounds Of Challenge: Supreme Court

The Supreme Court on Friday (July 26) stressed fon the need for High Courts to ensure that orders dealing with challenges to arbitral awards precisely reflect adequate application of judicial mind on the merits of the case. 

The Bench of CJI DY Chandrachud and Justices JB Pardiwala and Manoj Misra was hearing a challenge to the order of the Division Bench of Delhi High Court which has set aside the Single Bench order upholding the arbitral award of Rs. 270 crore against cash-strapped SpiceJet and its chairman, Ajay Singh. The impugned order was challenged by Kalinithi Maran in whose favor the award stood. 

Taking note of the order passed by the Single Judge, CJI expressed displeasure at the lack of application of mind by the bench in dealing with the grounds of challenge under S. 34 of the 1996 Act. S. 34 outlines the grounds on which the Court can interfere and set aside an arbitral award.

"Interference with an arbitral award under Section 34 must be confined to the grounds which are permissible under the statute. But equally, the Judge hearing an application under Section 34 must apply their mind to the grounds of challenge and then deduce as to whether a case for interference within the parameters of Section 34 has been made out. Reading the order of the Single Judge, we find no discernible reason which has weighed with the Single Judge. There has been no consideration of the arguments which were urged before the Single Judge," the Court stated in the order.

On July 31, 2023, single judge upheld the tribunal's award and held that SpiceJet failed to demonstrate any illegality in the arbitral decision. The court dismissed Maran's request to reinstate his 58.46% stake in SpiceJet and his demand for damages.

The arbitral award directed SpiceJet to refund ₹ 270 crore to media baron Kalanithi Maran and his company, KAL Airways with additional interest rates of 12% per annum on warrants and 18% per annum on the awarded sums if not paid timely. This was challenged by SpiceJet under S. 34 of the Arbitration and Conciliation Act 1996 (Act of 1996) before the Single Judge Bench of Justice Chandra Dhari Singh.

The Supreme Court while upholding the impugned order asked the Chief Justice of Delhi High Court to reassign the matter before a Single Judge Bench other than the one which originally heard the challenge to the award. It may be noted that the impugned order had while setting the single judge order sent it back for reconsideration. 

"It is well settled that an interference with an arbitral award under S. 34 must be carefully calibrated on the grounds which are admissible under the statute. Reading the order of the Single Judge we find no discernable reason which has been made by the single judge and that there is no application of mind to the outcomes which were urged before the Single Judge. In this view of the matter, we don't find that the Division Bench of the High Court erred in remitting the matter back to the Single Judge. 

We request the learned Chief Justice of the Delhi High Court to assign the hearing of the petition under S. 34 to a judge other than the judge who had heard the case."  

The Court further clarified that all the rights and contentions of the parties are kept open.

Senior Advocate AM Singhvi appeared for Ajay Singh and SpiceJet while Kalnithi Maran was represented by Senior Advocate Maninder Singh.  

What Did The Division Bench Hold? 

The Delhi High Court division bench of Justice Yashwant Varma and Justice Ravinder Dudeja noted that an award is perverse if it fails to address contentions that could significantly impact its foundation. If a party argues that an Arbitral Tribunal's (AT) directive contradicts the contractual terms, this contention deserves thorough scrutiny unless deemed fallacious by the Section 34 Court. It held that the judgment must reflect a careful consideration of such challenges, which the Single Judge's judgment did not adequately provide. Thus, the High Court found merit in the Appellants' arguments.

The High Court noted that the Single Judge did not substantively address these arguments. The Appellants consistently maintained that without a breach on their part, the refund was unjustified, especially given AT's findings that KAL and Mr. Maran were in breach of their contractual obligations. It noted that the Single Judge merely summarized these contentions and concluded that the procedure adopted by the AT did not contravene any substantive law, without a detailed examination of the applicability of Section 65 or addressing the specific breaches by KAL and Mr. Maran.

The High Court considered the primary contention regarding the direction for the refund of INR 270,86,99,209/-. The Appellants argued that this directive must be scrutinized under Section 65 of the Indian Contract Act, of 1872, which deals with the restitution of benefits when an agreement is discovered to be void or becomes void. They contended that the refund direction violated the SSPA, under which there was no stipulation for such repayment, and any repayment obligation was intended to arise only after eight years.

The High Court noted that there was a failure to engage with the arguments pertaining to Section 65 and the contractual breaches. The Single Judge contention that the AT provided "adequate reasoning" for the refund lacked an exploration of whether the reasoning aligned with the principles of Section 65 and whether the AT's directions resulted in a de facto rewriting of the contract.

Moreover, concerning the award of interest, the Appellants argued that the AT's imposition of 12% pendente lite interest for Warrants and 18% post-award interest lacked statutory basis and sufficient reasoning. The Single Judge acknowledged the AT's discretion to award interest but did not evaluate whether this discretion was exercised correctly in light of the statutory amendments brought by the 2015 Amendment Act, which prescribed post-award interest at a rate of 2% above the prevailing "current rate of interest."

The High Court held that the statutory amendments shifted the paradigm for awarding post-award interest, yet the AT did not discuss or identify the "current rate of interest" prevailing at the time of the Award. It held that this oversight is significant and the Single Judge's judgment did not reflect a consideration of this statutory change or its implications.

Case Details : KALANITHI MARAN Versus AJAY SINGH AND ANR. SLP(C) No. 14936/2024

Citation : 2024 LiveLaw (SC) 520

Click Here To Read/Download Order