Arbitration - 2015 Amendment Won't Apply To Section 34 Applications Filed Prior To It : Supreme Court

The Supreme Court has held that the 2015 amendment to Section 34 of the Arbitration and Conciliation Act 1996 will apply only to Section 34 applications that have been made after the date of the amendment.

A Bench of Justices Sanjay Kishan Kaul and M.M.Sundaresh made the above observations in a case where the applicability of S.34 to international commercial dispute was in question.

The judgement, authored by Justice Kaul in a case titled Ratnam Sudesh Iyer v Jackie Kakubhai Shroff- examined the question whether an arbitration award can be challenged on the grounds of 'patent illegality if the arbitration proceedings had commenced before the 2015 Amendment Award coming into force.

Factual Background:

The appellant and respondent agreed to a Deed of Settlement to settle some pending disputes. The Deed of Settlement contained an arbitration clause for the resolution of disputes. Some facts triggered the arbitral proceedings and ultimately on 10.11.2014, the arbitrator made the final award awarding a claim of liquidated damages in favor of the appellant. The respondent moved a petition under S.34 of the Act before the Bombay High Court. The learned Single Judge of the High Court set aside the award in terms of the judgment dated 19.05.2020. The appeal filed by the respondent under Section 37 of the said Act was dismissed by the Division Bench in terms of the impugned judgment dated 20.04.2021.

The appellant argued that the Award could not be challenged under S.34 of the Act on the grounds of patent illegality since post the 2015 Amendment, patent illegality could not be used as a ground to challenge award in international commercial arbitration matters.

Court's Reasoning

On the nature of Award.

The Court noted that since the appellant was a party based out of Singapore, thus in terms of S.2)f) of the Act, the arbitration would be an international commercial arbitration and the award in question would be a domestic award arising out of an international commercial agreement.

This is an important finding in light of the changes in the position of law under S.34 post-2015 Amendment.

On 2015 Amendment and S.34 of the Act

The court noted that with the 2015 Amendment which inserted Explanations to S.34(2) of the Act as well as Sub-section 2A of S.34, "the scope of interference by the Court became more restrictive with the amendments coming into force."

The Court notes that by way of the 2015 Amendment a distinction is sought to be carved out between a domestic award arising from an international commercial arbitration and a purely domestic award. The test for interference was sought to be made more stringent by the amendment in respect of a domestic award arising from an international commercial arbitration. (Para 13)

The Court notes, that the crux of the Amendment is that:

" While the plea of the award being vitiated by patent illegality is available for an arbitral award, such an award has to be a purely domestic award, i.e. the plea of patent illegality is not available for an award which arises from international commercial arbitration post the amendment." (Para 17)

The Court notes that the judgments of the Single Judge and Division Bench decided the award of the plea of patent illegality without making note of this change in position of law post the 2015 Amendment.

This distinction is crucial because the appellant had argued that the award must be scrutinised in the post-amendment scenario and thus both forums erred in applying the test of patent illegality which would be applicable only for pre-amendment scenario. The appellant claimed that the patent illegality test would have no application to the award in question.

Against this backdrop, the Court analyses whether the 2015 Amendment would be applicable in this case.

Whether 2015 Amendment would apply to the present case

The Court notes that it is not disputed that S.34 proceedings commenced prior to 23.10.2015-which is when the Amendment came into force.

The Court relies on Board of Control for Cricket in India v Kochi Cricket Pvt Ltd & Ors, which had held that 2015 Amendment Act is prospective in nature and would apply to arbitral proceedings commended on or after 2015 Amendment Act. It further relied on Ssangyong Engineering and Construction Company Ltd. v. National Highways Authority of India , where the SC categorically opined that Section 34 as amended will apply only to Section 34 applications that have been made to the Court on or after 23.10.2015, irrespective of the fact that the arbitration proceedings may have commenced prior to that.

At this point, it is important to note that the appellant tried to rely on the wording of clause 9 of the Deed of Settlement signed between parties which provided that "the Arbitration proceedings shall be governed by the Arbitration and Conciliation Act, 1996 of India or any amendment thereto." The submission of the appellant was that the phrase used would include the possibility of any future amendment of the said Act. The appellant relied on Thyssen Stahlunion Gmbh v Steel Authority of India Limited.

In light of this submission, the Court noted that:

"the general observations aforesaid cannot come to the aid of the appellant in view of a number of judicial pronouncements by this Court which deal with a similar issue." (Para 28)

The Court referred to S.P.Singla Constructions Pvt ltd s State of Himachal Pradesh, where the SC had held that general conditions of the contract cannot be taken to be an agreement between parties to apply the provisions of 2015 Amendment Act and as a result, 2015 Amendment Act would apply only in relation to arbitral proceedings commenced or or after the date of commencement. (Para 29)

To further repel the argument of the appellant and the reliance sought to be made to the Thyssen Stahlunion Gmbh case, the Court referred to the Delhi High Court judgement in ABB India Ltd v Bharat Heavy Electricals Ltd, which in a similar case, had distinguished the judgment in Thyssen Stahlunion Gmbh.

The Court reproduced Para 17 of the ABB India Ltd case:

"in Thyssen Stahlunion GMBH, there was no provision, similar to Section 26 of the 2015 Amendment Act, which is crucial to adjudication of the dispute in the present case. In this context, it is necessary to distinguish the structure of Section 85(2)(a) of the 1996 Act, with Section 26 of the 2015 Amendment Act. Whereas Section 85 (2)(a) of the 1996 Act made, inter alia, the 1940 Act applicable to arbitral proceedings which commenced before the coming into force of the 1996 Act, unless otherwise agreed to by the parties. Section 26 of the 2015 Amendment Act starts with a negative covenant, to the effect that nothing contained in the 2015 Amendment Act – which would include the insertion of Section 12(5) of the 1996 Act – would apply to arbitral proceedings, commenced before the 2015 Amendment Act came into force, i.e. before 23rd October, 2015. This negative covenant was subject to an exception in the case of agreement, otherwise, by the parties. Structurally and conceptually therefore, Section 26 of the 2015 Amendment Act is fundamentally different from S.85(2) of the 1996 Act and requires, therefore, to be interpreted, keeping this distinction in mind." (Para 30)

In light of the above cases which govern the issue at hand, the Court held that the pre-2015 legal position would prevail and that the respondent could challenge the domestic award in an international commercial arbitration on the ground of patent illegality.

It notes:

"In this case, the Section 34 proceedings had already commenced when the 2015 Amendment Act came into effect. The court proceedings were already subject to the pre-2015 legal position. In a conspectus of the aforesaid, a generally worded clause such as Clause 9 of the Deed of Settlement cannot be said to constitute an agreement to change the course of law that the Section 34 proceedings were subject to." (Para 30)

The Court then examines the Arbitration Award and holds that the arbitrator's conclusions are not in accordance with the fundamental policy of Indian Law can thus be set aside as per the pre-2015 interpretation of S.34 of the Act.

The court affirms the judgment of the Single Judge and Division Bench to the extent it interfered with the award and sets aside the award.

Case Name: Ratnam Sudesh Iyer v Jackie Kakubhai Shroff

Coram: Justices Sanjay Kishan Kaul and M.M.Sundaresh

Case No: CIVIL APPEAL NO. 6112 OF 2021

Citation : LL 2021 SC 637

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