[Arbitration Act] Retroactive Application Of Judicial Decisions To Arbitral Awards Would Create Legal & Procedural Chaos: Allahabad High Court

Elucidating on the applicability of the judgment of the Supreme Court in Union of India v. Tarsem Singh and Ors 2019, the Allahabad High Court has held that “retroactive application of judicial decisions to arbitral awards would create legal and procedural chaos.”

For context, in Tarsem Singh (supra), the Apex Court held that the provisions regarding solatium and interest provided in the Land Acquisition Act would apply to acquisitions made under the National Highways Act. The court also held that this ruling of the Supreme Court shall apply to all pending cases.

The High Court was essentially dealing with an arbitration that had concluded in 2008. The Court held that reopening an arbitration because of a subsequent judicial decision would lead to instability and unpredictability in arbitral proceedings.

It was held that though Supreme Court decisions are retrospectively applicable, reopening concluded arbitrations based on subsequent judgements would lead to “a flood of claims seeking to modify or overturn arbitral awards.”

Further, the Court held that non-consideration of issues raised by the parties amounts to patent illegality subjecting such an arbitral award and subsequent order under Section 34 of the Arbitration and Conciliation Act, 1996, to challenge under Section 37 of the 1996 Act.

It was held that when the arbitrator leaves issues between the parties undecided, it raises questions about the arbitrator's impartiality, thus striking at the fairness associated with arbitration proceedings.

“When an arbitral tribunal fails to consider an issue raised by the parties and provides no reason for such omission, it creates a situation where the affected party is left without a clear understanding of why their argument was disregarded. This lack of reasoning can lead to a perception of arbitrariness and bias, further eroding the credibility of the arbitral award. In such cases, the affected party is left with no option but to challenge the award on the grounds of patent illegality,” held Justice Shekhar B. Saraf.

Factual Background

The appellant's plot and residential building were acquired for the construction of National Highway No. 28 under the National Highways Act of 1956. Since the appellant was aggrieved with the compensation awarded, she submitted an application before the District Magistrate on February 15, 2008. The District Magistrate directed the Special Land Acquisition Officer (SLAO) to take necessary action.

The SLAO obtained two contradictory reports from PWD. The SLAO held that the valuation report sent by the Project Director, NHAI, would be the appropriate one as construction was being carried out by NHAI. Dissatisfied with the SLAO's order, the Appellant filed an application for arbitration under Section 3G(5) of the National Highways Act.

The arbitrator awarded an enhanced compensation of Rs. 18,67,881/- to the appellant towards the value of the building only. Aggrieved, the appellant filed an application under Section 34 of the Arbitration Act, which was dismissed. Subsequently, the appellant approached the High Court under Section 37 of the Arbitration Act.

Counsel for the appellant argued that the Arbitrator had recorded submissions regarding compensation for land but had not dealt with such submissions and awarded compensation only for the building. It was argued that the arbitral award and the order of the Trial Court under Section 34 suffered from patent illegality as the arbitrator did not deal with all submissions made by the appellant.

Further, it was argued that the appellant's land was not agricultural but residential, located at the intersection of two roads. Neither the Arbitrator nor the trial Court returned any finding to that effect.

The Supreme Court's judgment in Tarsem Singh (supra) was relied upon to grant solatium. It was argued that for all cases pending between 1997 and 2015, the judgment of Tarsem Singh would apply for the grant of solatium and interest upon the lands acquired even if the plea for grant of solatium and interest had not been taken in proceedings under Section 34 of the Arbitration Act.

It was argued that in Sunita Mehra v. Union of India, the Apex Court had held that the provisions of the Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act, 2013 would apply to all cases where proceedings were pending in any court of law on 28^th March, 2008. Accordingly, the appellant submitted that she was liable to be awarded solatium and interest in terms of the Act of 2013.

High Court Verdict

The Court framed two issues for its determination: whether the arbitral award and the order passed under Section 34 of the Arbitration Act were patently illegal and whether the judgment of Tarsem Singh would apply to the appellant.

The Court held that invoking public policy in arbitral awards aims to prevent violations of the principles of justice, morality, and equity. However, the Court held that public policy must be carefully applied because of its subjective and complex nature. It was held that public policy must be applied while considering the principles of party autonomy and the finality of arbitration.

Justice Saraf held that public policy “acts as a safeguard against arbitral awards that are fundamentally unjust or that violate core principles of justice. To mitigate the risks associated with its application, courts must adopt a careful and principled approach when determining if an arbitral award conflicts with public policy.”

The Court held that not considering the issues raised by the parties goes to the root of the matter as the substantive rights of the party raising such issue may remain undecided. Such non-consideration constitutes patent illegality.

The Court held that the non-consideration of the issue regarding the valuation of land for determining compensation led to the injustice being caused to the appellant. It was held that non-consideration of arguments raised by the parties “creates an impression of partiality or neglect, which can seriously damage the credibility of the arbitration process.”

Accordingly, the Court held that the arbitrator's award under the NHAI Act and the trial court's subsequent order under Section 34 of the Arbitration Act warranted the Court's interference.

Regarding the applicability of the Supreme Court's judgment in Tarsem Singh (supra), the Court held that applying the judgment retrospectively to arbitrations that had concluded before the judgment date would open Pandora's box as it would lead to opening arbitrations that had already concluded.

“The arbitrators, the parties, and the legal community operate within the legal framework and judicial precedents available at the time of the arbitration. Imposing future judicial decisions on past arbitrations would disrupt the stability and predictability that arbitration aims to provide.”

The Court held that arbitrators cannot be expected to foresee and apply future judicial decisions to the arbitrations before them when passing awards. It was held that if the law prevalent at the time of passing the arbitral award has been followed, the arbitral award cannot be overturned as patently illegal because of subsequent judicial decisions.

Accordingly, the Court set aside the arbitral award and the order under Section 34 only to the extent of non-consideration of appellant's submissions regarding valuation of land for determination of compensation. The matter was remitted to the Arbitrator to redetermine the compensation to be paid to the appellant for the land in accordance with law.

Case Title: Savitri Devi v. Union of India and others 2024 LiveLaw (AB) 430 [APPEAL UNDER SECTION 37 OF ARBITRATION AND CONCILIATION ACT 1996 No. – 210 of 2023]

Case Citation: 2024 LiveLaw (AB) 430

Counsel for Appellant: Rahul Agarwal, Akashi Agarwal

Counsel for Respondent: Vaibhav Tripathi

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