In a recent judgment in State of Chhattisgarh and Anr. v. M/s Sal Udyog Pvt. Ltd.1 the Hon'ble Supreme Court held that the ground of 'patent illegality' for setting aside an arbitral award is equally applicable to an appealable order under Section 37 as it is to a petition under Section 34 of the Arbitration and Conciliation Act, 1996 ("Arbitration Act"). In this article, we briefly navigate through the facts and findings which led to the Hon'ble Supreme Court to arrive at its decision in the above-mentioned case.
In 1979, the State of Madhya Pradesh entered into an agreement with the respondent company for supply of 10,000 tonnes of Sal seeds per annum for a period of 12 years ("Agreement"). In 1987, faced with a loss of revenue, the Government of Madhya Pradesh ("State Government") decided to annul all its agreements relating to forest produce and enacted a legislation ("Act"). However, the said Act was notified only a decade later on 1 January 1997. In absence of any notification under the said enactment, the Agreement between the State of Madhya Pradesh and the respondent was renewed on 30 April 1992 and was valid until 29 April 2004. Under the renewed Agreement, the State of Madhya Pradesh agreed to supply 10,000 tonnes of Sal seeds to the respondent. When the Act was finally notified in 1996, the State of Madhya Pradesh terminated the renewed Agreement on 21 December 1998. Aggrieved by the termination, the respondent issued a notice dated 6 December 1999 invoking arbitration. Through an arbitral award dated 17 February 2005, the claim of the respondent was allowed and a sum of INR 7,43,46,772/- (Rupees seven crores forty-three lakhs forty-six thousand seven hundred seventy-two only) was awarded in its favour which included interest at the rate of 18 per cent per annum up to February, 2005 along with future interest at the rate of 18 per cent per annum payable with effect from 1 March 2005.
The appellant, aggrieved by the arbitral award, filed a petition under Section 34 of the Arbitration Act before the District Judge, Raipur. Through an order dated 14 March 2006, the learned District Judge declined to interfere with the award except for modifying the same to the extent of the interest awarded in favour of the respondent and making it payable from the date of the arbitration notice, i.e., 6 December 1999, instead of, from the date of the Agreement, till 31 December, 1999. The appellant assailed the order dated 14 March 2006 by preferring an appeal under Section 37 of the Arbitration Act. The respondent also filed a cross-appeal being aggrieved by the modification of the award and reduction of the period of interest awarded in its favour.
On 30 April 2010, the Hon'ble Supreme Court granted leave to the parties on the limited issue of disallowance of supervision charges to the tune of INR 1.49 crores (INR 14.9 million) under the award which as per the appellant was liable to be borne by the respondent. Accordingly, the Apex Court held that no other issues would be examined in the instant appeal.
Contentions of the appellant
The appellant argued that a perusal of the terms and conditions of the Agreement would make it apparent that the parties had agreed that the expenses incurred every year by the State Government for supplying Sal seeds to respondent would include handling and supervision charges.
The appellant stated that the levy of supervision charges was intimated to the respondent at the time of seeking advance payment and the respondent never raised any objection to paying the same. It was thus submitted that on account of respondent's failure to raise any objection over the years and payment of supervision charges without any demur till termination of contract, there was no reason for the arbitral tribunal to deduct supervision charges. The appellant relied upon the case in Delhi Airport Metro Express Pvt. Ltd. v. Delhi Metro Rail Corporation Ltd.2
Contentions of the respondent
The respondent argued that the appellant failed to raise any objection relating to the deduction of supervision charges in its Section 34 petition. Accordingly, the appellant must be assumed to have waived its right to take any such plea under the Section 37 petition or the civil appeal before the Hon'ble Supreme Court.
The Hon'ble Supreme Court referred to what would constitute patent illegality for an arbitral award to be set aside. Upon referring to a catena of decisions3, the Apex Court held that not every error of law committed by the arbitral tribunal would fall within the expression of patent illegality. Likewise, erroneous application of mind could not be categorized as patent illegality. In addition, contravention of law not linked to public policy or public interest is beyond the scope of the expression 'patent illegality'.
The Hon'ble Supreme Court noted that in the instant case, the moot question was whether any interference was called for in the award on the ground that the arbitral tribunal and the High Court ignored the binding terms of the contract. In the renewed Agreement, the expenses incurred towards supply of Sal seeds by the State Government were to include supervision charges. It was noted that the appellant had taken this plea in the petition filed under Section 37 of the Arbitration Act and the same was left unanswered by the High Court.
On a conspectus of the factual matrix, the Apex Court observed that the appellant did raise an objection before the arbitral tribunal on the claim of respondent seeking deduction of supervision charges. The said objection was turned down by the arbitral tribunal by giving a complete go by to the terms of the Agreement. Further, it was not denied that the supervision charges were being paid by the respondent without any demur right from the date when the parties had entered into the Agreement. Thus, the Hon'ble Supreme Court opined that the patent illegality was manifest on the face of the arbitral award since the express terms and conditions of the Agreement governing the parties were ignored completely.
The Apex Court rejected the plea taken by the respondent against the appellant on the ground that it did not raise such an objection in the grounds spelt out in the Section 34 petition and was, therefore, estopped from taking the same in the appeal preferred under Section 37. The Apex Court observed that once the appellant had taken a ground in the Section 37 petition which was also noted in the impugned judgment, the High Court acting under Section 37 ought to have interfered by resorting to Section 34(2A) of the Arbitration Act. As per the Apex Court, Section 34(2A) is a provision which would be equally available under Section 37 as it is to a petition filed under Section 34 of the Arbitration Act.
The Hon'ble Supreme Court was therefore of the view that failure on the part of the arbitral tribunal to decide in accordance with the terms of the contract would attract the patent illegality ground. The said patent illegality was not only apparent on the face of the award, but went to the very root of the matter and deserved interference. Accordingly, the appeal was partially allowed and the impugned award on deduction of supervision charges was quashed and set aside.
Section 37 of the Arbitration Act provides for the supervisory role of the courts in the arbitral process. The judicial interference under Section 37 cannot travel beyond the threshold laid under Section 34. Therefore, Hon'ble Supreme Court of India has rightly held that the ground of 'patent illegality' under Section 34(2A) would be equally apply to an appeal under Section 37.
1. State of Chhattisgarh and Anr. v. M/s Sal Udyog Pvt. Ltd., Civil Appeal No. 4353 of 2010.
2. Delhi Airport Metro Express Pvt. Ltd. v. Delhi Metro Rail Corporation Ltd., 2021 SCC Online SC 695.
3. Associate Builders v. Delhi Development Authority, 2015 3 SCC 49; Ssangyong Engineering and Construction Company Limited v. National Highways Authority of India (NHAI), 2019 15 SCC 131; Delhi Airport Metro Express Pvt. Ltd. v. Delhi Metro Rail Corporation Ltd., 2021 SCC Online SC 695.
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