Telangana High Court Reiterates Limited Scope For Interference With Arbitral Awards U/S 34 Of Arbitration & Conciliation Act, 1996

Brief Facts:
The Andhra Pradesh State Trading Corporation (Appellant) entered into a subcontract dated 01.11.1995 with M/S. Hima Bindu Chemicals Pvt. Ltd. (Respondent) for the supply of 12,500 MTs of rice. The Appellant invoked the bank guarantee furnished by the Respondent upon breach of the performance of the contract. The subcontractor filed a suit seeking an order of injunction against the encashment of the bank guarantee. An interim order of status quo was granted.

Respondent moved an application under section 11(6) of the Act, seeking the appointment of an arbitrator. An arbitrator was appointed. The arbitral tribunal issued notice to the parties to appear on 22.11.1999. However, the appellant did not appear on 22.11.1999 and the proceedings before the arbitral tribunal were adjourned to 27.11.1999. On the said date, the Appellant did not appear. Thereupon, the arbitral tribunal, as an interim measure, restrained the Appellant from encashing the bank guarantee dated 11.03.1996. The proceedings were posted for 11.12.1999. However, on 11.12.1999, the proceedings were adjourned to 18.12.1999 which was attended by the appellant as well as the respondent. On 27.12.1999, the Corporation requested for grant of time to file the counter. The Corporation filed applications seeking vacation of the interim order, which was decided by the arbitral tribunal on 03.04.2000.

The arbitral tribunal by an award dated 01.06.2000 allowed some claims of the appellant and rejected others. The Appellant challenged the award under section 34 of the Act on the ground that reasonable opportunity of hearing was not given to the Corporation, the award was passed in haste, and the impugned order suffered from patent illegality. The validity of the award was also challenged on the ground that the arbitral tribunal erred in granting ex parte order restraining the Corporation from encashing the bank guarantee. The trial Court vide impugned order dated 24.07.2006 dismissed the objection filed by the appellant.

The Appellant filed the appeal under section 37(1) of the Arbitration and Conciliation Act, 1996 against the impugned order.

Observations:

The court scrutinised the decisions of the Supreme Court in Rashtriya Ispat Nigam Ltd. vs. Diwan Chand Ramasaran, Sutlej Construction Ltd. vs. Union Territory of Chandigarh and Post Graduate Institute of Medical Education and Research, Chandigarh vs. Kalsi Construction Company. The court reiterated the following principles with regard to scope of interference under Section 34 of the Act:

“(i) Even though Arbitral Tribunal may have committed mere error of fact or law in reaching its conclusion on the disputed questions of law submitted to it for adjudication, the Court has no jurisdiction to interfere with the award.

(ii) The Court while dealing with application under section 34 of the Act, cannot act as an appellate Court and substitute its own findings and cannot correct error of law or fact.

(iii) If two views are possible then, the view taken by the Arbitrator shall prevail and the court would not interfere with the Award passed.

(iv) The Arbitrator cannot re-write the contract in the guise of interpretation.

(v) If an Award on the face of it, is passed in violation of statutory provisions, it cannot be said to be in public interest, as the same is likely to affect administration of justice. Thus an award can be set aside if it is contrary to fundamental policy of Indian law, the interest of India, Justice or Morality or if it is patently illegal and such illegality goes to the root of the matter.

(vi) The Award can be interfered with even if it is contrary to terms of the contract, as the same would be patently illegal and opposed to public policy of India.

(vii) The expression 'Fundamental Policy of Indian Law' would inter alia include that every determination by Court or Authority which affects the right of citizen must adopt judicial approach, and should record reasons in support of its decision and perversity and irrationality of decision would be tested on the touch stone of Wednesbury Principle.

(viii) In the absence of agreement to the contrary between the parties section 31(7)(a) of the Act confers jurisdiction on the arbitral tribunal to award interest unless otherwise agreed by the parties, at such rate as the arbitral tribunal considers necessary.”

The court observed that the scope of Section 37 of the Act has also been delineated in State of Chattisgarh vs. Sal Udgyog Private Limited, which held that the grounds on which the award can be set aside can also be raised in an appeal. Thus, the Court while exercising jurisdiction under section 37 of the Act has power akin to a Court dealing with the objections under section 34 of the Act.

The court held that reasonable opportunity was given to the Corporation. Further, the arbitral tribunal has power to grant an interim order under section 17 of the Act. Therefore, merely because the arbitral tribunal passed an ad interim order against the corporation restraining it from enchasing the bank guarantee, the same did not vitiate either the proceeding or the award passed by the arbitral tribunal.

The court observed that in exercise of powers under section 34 of the Act, the court cannot act as court of appeal and substitute its own finding and cannot correct an error of law and fact. It concurred with the findings recorded by the trial court that no ground for interference under section 34 of the Act with the award was made out. It dismissed the appeal.

Case Title: The Andhra Pradesh State Trading Corporation Ltd. v. M/S. Hima Bindu Chemicals Pvt. Ltd.
Case Number: Civil Miscellaneous Appeal No. 1079 of 2006
Date: 5.11.2024

Click Here To Read/Download The Order