The Hon'ble Supreme Court in a recent decision in Ratnam Sudesh Iyer v. Jackie Kakubhai Shroff1 reiterated that the Arbitration and Conciliation (Amendment) Act 2015 (2015 Amendment Act) is prospective in nature and would apply to only those arbitral proceedings or court proceedings commencing on or after the 2015 Amendment Act coming into force. Therefore, the Apex Court held that the plea of 'patent illegality' was not available for an award that was rendered in an international commercial arbitration post the 2015 Amendment Act. Further, the Apex Court clarified that a generally worded arbitration clause could not constitute an agreement to allow retrospective application of the 2015 Amendment Act contrary to the legislative intent. In this article, we briefly navigate through the facts and findings which led to the aforementioned judgment.
The appellant and the respondent were shareholders in an investment holding company called Atlas Equifin Private Ltd., India (Atlas) which held 11,05,829 equity shares of INR 10 each in Multi Screen Media Pvt. Ltd. (MSM). The appellant had been attempting to sell the shares in MSM since 2002. In furtherance of the said objective, a placement instruction dated 15 November 2005 was signed by the parties authorizing Standard Chartered Bank (SCB) as their agent to identify the purchaser. The dispute arose amongst the parties when the respondent claimed that his signatures on the placement instructions had been forged. Accordingly, the respondent lodged a complaint with the Economic Offences Wing, Mumbai Police (EOW) on 19 April 2010 against both the appellant and the SCB.
Eventually, the parties decided to mutually resolve their disputes by entering into a Deed of Settlement (Settlement Deed) dated 3 January 2011. The Settlement Deed provided that the respondent would withdraw all complaints filed against the appellant. Further the respondent was forbidden from writing letters, communications, or complaints to any person about the subject matter of the Settlement Deed.
As a monetary incentive, the appellant agreed to pay respondent an amount of USD 1.5 million when the respondent brought the complaints to an end. The said amount was to be held in an escrow account and handed over to the respondent on confirmation by the EOW of the respondent having withdrawn his complaint dated 19 April 2010. Apart from the monetary incentive of USD 1.5 million, the respondent was to be paid a sum of USD 2 million within 7 days of the receipt of the proceeds from the sale of MSM's shares.
The appellant claimed that the Settlement Deed was breached vide an email dated 09 June 2011 from the respondent's wife which read that "once again you (appellant) are not being straight with us, and I'm concerned about this". Thereafter, the appellant claimed that a second breach of the Settlement Deed followed through an email dated 15 June 2011 wherein the respondent's wife stated that she had "no wish to continue to fraternize with a forger". The email sought to refer to the Settlement Deed and alleged failure of the appellant to not give updates to the respondent. The Settlement Deed contained an arbitration clause for resolution of disputes under the Arbitration Act or any amendment thereto.
In July 2012, a share purchase agreement was executed for MSM's shares and the transfer was pending approval by the Foreign Investment Promotion Board. The appellant filed a petition under Section 9 of the Arbitration Act seeking interim relief against the respondent, his wife and the escrow agent. The appellant claimed that the amount should not be released to the respondent on account of the breach of the Settlement Deed through the email dated 15 June 2011. A consent order was passed on 6 August 2012 in terms whereof the respondent's wife was dropped from the array of the parties. The disputes were referred by consent of the parties to arbitration. The appellant lodged a claim of USD 1.5 million before the arbitrator with an interest of 18 percent per annum w.e.f. 7 July 2011 till the date of payment.
MSM's shares were sold in March 2013, and on 6 April 2013, Atlas declared and paid dividend to its shareholders from the proceeds. The appellant immediately thereafter filed an application under Section 17 of the said Act seeking to attach an amount of USD 1.5 million which the respondent was to receive as his share of the said proceeds. That application was rejected and further proceedings in respect of the same also met the same fate in the High Court of Bombay (High Court). The respondent filed a petition under Section 9 of the Arbitration Act seeking directions to the escrow agent to hand over USD 2 million on account of sale of MSM's shares. However, the same was dismissed on 2 April 2014 inter alia on the ground that the appellant was resisting the payment and seeking a refund, and the appeal against the same was dismissed as withdrawn.
The arbitrator made the final award on 10 November 2014, awarding a claim for liquidated damages of USD 1.5 million in favour of the appellant, as per the Settlement Deed. The award also held that the respondent would not be entitled to the second cheque of USD 2 million held in escrow, on account of the respondent's breach of the Settlement Deed.
The respondent moved a petition under Section 34 of the Arbitration Act before the High Court while the appellant filed for execution of the award. The Single Judge of the High Court set aside the award in terms of the judgment dated 19 May 2020. The appeal filed by the respondent under Section 37 was dismissed by the Division Bench of the High Court on 20 April 2021. The matter eventually reached the Hon'ble Supreme Court.
The Hon'ble Supreme Court noted that it was an admitted position that the appellant was a party based out of Singapore, and thus, the arbitration in the instant case would fall within the ambit of 'international commercial arbitration' as defined under Section 2(1)(f) of the Arbitration Act. Further, the Apex Court noted that none of the parties argued that the arbitral award in the present case was a foreign award within the meaning of Section 44 of Part II in the Arbitration Act.
For domestic awards, the Apex Court observed that Section 34 provided for an application for setting aside the award and specified the grounds available to a party for the same. Through the 2015 Amendment Act, the scope of interference by courts became more restricted. A distinction was carved out between a domestic award arising from an international commercial arbitration and a purely domestic award. The Apex Court observed that the crux of Section 2A of the 2015 Amendment Act is that while the plea of the award being vitiated by patent illegality was available for a purely domestic award. In other words, the plea of patent illegality was not available for an award which arises from international commercial arbitration post the amendment.
It was observed that the judgments of both the Single Judge and the Division Bench of the High Court proceeded without noticing the distinction between the position of a domestic award and an award arising out of international commercial arbitration. That being said, both the judgments had proceeded on the basis that in either situation, the award could not be sustained.
On the date of application of the amendment, the Hon'ble Supreme Court held that the amendment would apply prospectively. The Apex Court relied on the decision in Board of Control for Cricket in India (BCCI) v. Kochi Cricket Pvt. Ltd. & Ors.2 which held that the intention of the legislature was clear that the 2015 Amendment Act was prospective in nature and would apply to only those arbitral proceedings or court proceedings under the Arbitration Act commencing on or after the 2015 Amendment Act coming into force.
The applicability of Section 34(2A) was also dealt with in Ssangyong Engineering and Construction Company Ltd. v. National Highways Authority of India3 where the Apex Court had opined that Section 34 as amended would apply only to Section 34 applications that were made to the courts on or after 23 October 2015 (the date of 2015 Amendment Act) irrespective of the fact that arbitration proceedings may have commended prior to that date.
The appellant's case solely rested on the wording of the arbitration clause in the Settlement Deed which provided that the arbitration proceedings shall be governed by the Arbitration Act "or any amendment thereto". The Apex Court referred to the decision in Union of India v. Parmar Construction Company4 which held that a conjoint reading of Section 21 and 26 of the Arbitration Act left no doubt that the provisions of the 2015 Amendment Act shall not apply to proceedings which had already commenced prior to date of amendment. Thus, the Hon'ble Supreme Court held that a generally worded arbitration clause could not be said to constitute an agreement to change the course of law under Section 34 of the Arbitration Act. A clause which sought to include any amendment of the Arbitration Act would expand the scope of scrutiny of an award as it would run contrary to the legislative intent of the 2015 Amendment Act. Based on this analysis, the Apex Court concluded that in the instant case, the pre-amendment legal position would prevail.
On the factual front, the Hon'ble Supreme Court noted that the respondent's wife was dropped from the arbitration proceedings as she was not a party to the Settlement Deed. In that sense, the Settlement Deed accepted that the respondent's wife had no role to play and the respondent could not be penalized for her conduct. Further, the Apex Court noted that the respondent in the present matter did not do anything which ratified the emails of his wife. Even otherwise, the Apex Court observed that the complaints of respondent's wife would at best fall in category of some indiscreet language.
The Section 34 proceedings in this case had already commenced when the 2015 Amendment Act came into effect. Accordingly, the Hon'ble Supreme Court held that the pre-amendment position would prevail in the case. In the aforesaid scenario, the Apex Court found that the arbitrator's conclusions were not in accordance with the fundamental policy of Indian law, and could thus be set aside under the pre-amendment interpretation of Section 34 of the Arbitration Act. Hence, the Hon'ble Supreme Court found no fault with the judgments of the Single Judge and the Division Bench to the extent that they interfered with the award. Consequently, the appeal was dismissed.
It is a well-established position that the 2015 Amendment Act would apply prospectively only onto the arbitral or court proceedings which commenced after the 2015 Amendment Act coming into force. Since the proceedings under Section 34 of the Arbitration Act in the present case had begun prior to the 2015 Amendment Act, the Apex Court has rightly held that the pre-amendment interpretation of Section 34 would be applicable. Accordingly, the ground of 'patent illegality' was applicable to the impugned award even though the same was rendered in an international commercial arbitration.
1. Ratnam Sudesh Iyer v. Jackie Kakubhai Shroff, Civil Appeal No. 6112 of 2021.
2. Board of Control for Cricket in India v. Kochi Cricket Pvt. Ltd. & Ors., 2018 6 SCC 287.
3. Ssangyong Engineering and Construction Company Ltd. v. National Highways Authority of India, 2019 15 SCC 131.
4. Union of India v. Parmar Construction Company, 2019 15 SCC 682.
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