Not Every Legal Mistake Made by Arbitral Tribunal Is Patent Illegality, Scope Limited To Substantive Laws: Delhi High Court

The Delhi High Court Bench of Justice Neena Bansal Krishna has held that patent illegality applies only to violations of substantive law of India, the Arbitration Act, or the rules applicable to the substance of the dispute. It does not apply to every legal mistake made by the arbitral tribunal.

Additionally, the court held that the scope of a challenge under Section 34 of the Act, 1996 is limited to the grounds stipulated therein.

Brief Facts:

The petition has been filed under Section 34 of the Arbitration and Conciliation Act, 1996 challenging the Arbitral Award dated 15.02.2019. The petitioners were the Directors of the Amrit Bansapati Company Limited (“ABCL”), and they entered a Non-Compete Agreement (“NCA”) and a Business Transfer Agreement (“BTA”) collectively referred as “the Agreements”. The petitioner has received money from the respondent to transfer the whole edible oil business of ABCL to the respondent. However, an assessment order demanding was presented to the respondent demanding service tax on the fees. The petitioners contended that the respondent was responsible for Indirect tax as per the agreements, but the respondent declined.

Further, the petitioner invoked the arbitration clause since the dispute arose with respect to the interpretation of the terms of the Agreements. But the CESTAT quashed the Assessment Order and later the Arbitral Tribunal passed a Nil Award dismissing the claims of the petitioner, since CESTAT has already quashed the order making the arbitration matter “academic”. Aggrieved by this decision, the petitioner challenged the award under Section 34 on the grounds that the Award is based on extraneous consideration. Also, the petitioner argued that non-consideration of the contractual obligations and evidence, has resulted in an unjust and patently illegal Award, which is squarely against the rule of law and Public Policy of India.

Observation of the court:

The court observed that the parties could have contracted in regard to which party would be liable for any taxes that may be imposed in regard to the Agreements between the parties. However, the petitioners have not been able to show any such clause providing that any liability, whether rightly or wrongly sought to be imposed, shall be the responsibility or indemnified by the respondent. Therefore, the award given by the tribunal was justified.

Furthermore, the court noted that the respondent cannot be held responsible in any manner for the initiation of Arbitration proceedings, as it was not any of its acts which led to the issuance of Notices against the petitioners. Additionally, the respondent had even filed an application under Section 16 of the Act to assert that the arbitration had been invoked prematurely. Although it was dismissed by the Arbitrator. So, the court held that no costs of the arbitration proceedings can be recovered from the respondent because the proceedings were not started at the instance of the respondent.

Moreover, the court held that the Arbitral Tribunal has not passed the award based on extraneous considerations or without jurisdiction. Also, the decision of CESTAT that the service tax demand is non-applicable to the NCA, the Tribunal's reliance on the decision of CESTAT was valid.

Then, the court held that the scope of a challenge under Section 34 of the Act, 1996 is limited to the grounds stipulated therein. Also, the court held that patent illegality applies only to violations of substantive law of India, the Arbitration Act, or the rules applicable to the substance of the dispute. It does not apply to every legal mistake made by the arbitral tribunal. Therefore, the petitioners' arguments don't satisfy the criterion to fall in either of the categories of patent illegality or fundamental breach of Indian Law. Finally, the court dismissed the petition.

Case Title: NARESH KUMAR BAJAJ v. BUNGE INDIA PVT. LTD.

Citation: 2024 LiveLaw (Del) 1182

Case Number: O.M.P. (COMM) 228/2019

Counsel for the Petitioner: Mr. Dhruv Mehta, Senior Advocate with Mr. Anubhav Ray, Ms. Gayatri Verma and Mr. Abhishek, Advocates.

Counsel for the Respondent: Mr. Saket Singh, Senior. Advocate with Mr. Sameer Patel, Advocate.

Date of Judgment: 21.10.2024

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