Award Based On Evidence Taken Behind The Back Of A Party Is Legally Untenable

This article delves into two significant judgments rendered by Madras High Court and Bombay High Court, concerning the pivotal issue of procedural fairness and consideration of evidence by an arbitrator after conclusion of final arguments. The judgments deal with fundamental tenets of natural justice and due process to be followed in an arbitration. Emphasizing transparency, equality, and adherence to procedural norms, the courts intervened to safeguard the integrity and legitimacy of an arbitration proceeding and set aside the awards passed on the basis of evidence taken on record behind the back of the other party.

M/s. Geojit Financial Services Ltd. vs Mrs. Nalani Rajkumar & Ors.¹

In the aforesaid case, a dispute arose between a stockbroker (Appellant) and its client (Respondent) over some unauthorized share transactions. Despite an initial agreement authorizing the Appellant to trade in listed shares, the Respondent discovered discrepancies and unauthorized dealings. Particularly contentious was the claim that the Respondent held 5,05,000 shares in a company namely M/s Electro Steel Castings Ltd. as on 27.07.2009 and the Appellant allegedly failed to sell the above shares despite Respondent's instructions. Thus, Respondent sought compensation for such failure and invoked arbitration in terms of National Stock Exchange (NSE) Bye laws for the said purpose. The Arbitral Tribunal after conclusion of the hearing in the matter, called for the statements from NSE and relying upon the same concluded that Respondent did not hold the above shares as on 27.07.2009 and thus, rejected Respondent's claim vide its award.

It is imperative to note here that NSE bylaws contain a two-tiered arbitration clause, where a party has the right to challenge an arbitral award before the Appellate Tribunal within a timeframe of one month from the date of receipt of the same. Accordingly, Respondent challenged the arbitral award before the Appellate Tribunal, however, Appellate Tribunal concurred with the arbitral tribunal and upheld the arbitral award.

The Respondent challenged the aforesaid award under Section 34 of the Arbitration & Conciliation Act, 1996 ("the Act") before Madras High Court and the award was set aside by the Single Judge. The Appellant challenged the said order by filing an appeal before the Division bench. The Division Bench while upholding the decision passed by the Single Judge observed the following:

1. The Single Judge rightly concluded that action of the Arbitral Tribunal in seeking details from NSE after the conclusion of the hearing caused prejudice to the Respondent as she could not place on record her views on such details. She was not given any opportunity to explain or contest this document.
2. The Arbitral Tribunal as well as the Appellate Tribunal ignored most of the vital documents already on record which demonstrated the holdings of Respondent and proceeded merely on the basis of NSE statements obtained after conclusion of oral arguments.
3. The Division Bench also noted that certain disputed documents were referred to a hand writing expert, however, there was neither any finding on the opinion of such hand writing expert nor there was any finding whether such documents were true or not nor any evidence was produced. Accordingly, the Division Bench upheld the setting aside of the award by the Single Judge on the ground that passing an award based on a document which was obtained behind the back of a party, was legally untenable.
4. It was also held that Respondent's lack of opportunity to address the NSE statements significantly prejudiced her case. The Court also took note of Tribunal's failure to consider potentially crucial documents, particularly those related to the depository participant and raised concerns about the award's fairness. It was further noted that the Appellant had also acted as a depository participant of the Respondent and the statements of the depository participant would demonstrate the actual holdings of the Respondent in M/s Electro Steel Castings Ltd. on the crucial date, however, those documents were never produced.

The Division bench, thus, concluded that the Tribunal's action in looking into the transactions of the NSE, without affording an opportunity to the Respondent and non-consideration of available evidence on record led to the award becoming vulnerable and thus, the same was liable to be set aside on the grounds available under Section 34 of the Act.

Secretary to the Government of India vs Additional Commissioner, Nagpur²

In yet another recent matter, where the land of a person was acquired under the National Highways Act, 1956 ("NH Act") for widening & maintenance of NH-7, Nagpur-Hyderabad National Highway, the court faced a similar situation. The competent authority had awarded a compensation of ₹8,14,000/- to the landowner for his land. Feeling dissatisfied with the quantum of compensation, he invoked arbitration in terms of Section 3G(5) of the NH Act for the determination of the compensation by the arbitrator appointed by the Central Government. The arbitrator concluded the hearing on 22.04.2015 and passed an award on 20.05.2015, whereby the compensation was enhanced to ₹85,55,800/-. GOI and NHAI challenged the said award under Section 34 of the Act before the District Judge, Nagpur. On the other hand, the landowner also filed an application, seeking modification of award dated 20.05.2015 and enhancement of awarded amount.

The District Judge rejected the challenge made by GOI and NHAI and partly allowed the application filed by the landowner. The award was modified, and some further amounts were directed to be paid to the landowner in addition to the awarded amount. Feeling aggrieved by the judgment, GOI and NHAI preferred an appeal under Section 37 of the Act before the Division bench of Bombay High Court (Nagpur bench).

The two issues for determination were framed by the Division Bench:

While considering the 1^st issue, it was observed that the arbitral award enhancing the compensation, was solely based on the photocopies of two sale deeds. The aforesaid documents were the only documentary evidence considered by the Tribunal, which were placed on record on 06.05.2015 i.e., after conclusion of the hearing and behind the back of NHAI. NHAI never got the opportunity to respond to such documents, which amounted to patent illegality. The Division Bench, thus, held that the award was in contravention of Section 24 and Section 28 of the Act. While Section 24 makes it mandatory for each party to communicate to the other party every statement, document, or information being supplied to the arbitral tribunal, Section 28 provides that in a domestic arbitration, the dispute has to be decided in accordance with the substantive law for the time being in force in India. Hence, the arbitral award was held to be in contravention of the fundamental policy of Indian law and in conflict with the basic notions of morality and justice. The Court took a serious view of the manner in which the aforesaid sale deeds were taken on record by the arbitrator. The award was thus, found to be in violation of mandatory provisions of the Act and shocked the conscience of the Court being against the basic notions of morality and justice.

With respect to the 2^nd issue, it was contended by the landowner that till the time an award is set aside, the defects in an arbitral award were curable under Section 34(4) of the Act. He further contended that defect of not granting NHAI the opportunity to respond to the sale deeds was merely procedural in nature and thus, the award should be remanded back to the arbitral tribunal to cure such procedural defect. The Division Bench, however, observed that the use of the expression "where it is appropriate" in section 34(4) of the Act conveys that the power is discretionary and not mandatorily available to every party. The court relied upon the decision of the Apex Court in the case of "I-Pay Clearing Services Pvt. Ltd. vs ICICI Bank Ltd."³ whereby it was held that merely because an application is filed under Section 34(4) of the Act by a party, it is not always obligatory for the Court to remit the matter to Arbitral Tribunal. The discretionary powers conferred under Section 34(4) of the Act is to be exercised where there is inadequate reasoning or to fill up the gaps in the reasoning in support of the findings which are already recorded in the award. Hence, the Division Bench held that such power had to be exercised in an appropriate case and there could not be a cut and dried or straight jacket formula for exercise of such powers. Accordingly, even such issue was decided against the landowner.

The award was thus, set aside by the Court.

Conclusion

In conclusion, both the above judgments highlight the courts' steadfast commitment to preserve the integrity and fairness of arbitration proceedings by rigorously enforcing principles of natural justice, due process, and procedural fairness. The rejection of evidence taken behind the back of a party underlines the importance of transparency, disclosure, and equal opportunity to parties in an arbitration, which in turn safeguards the legitimacy and credibility of the dispute resolution mechanism.

Footnotes

1 MANU/TN/1414/2024

2 Arbitration Appeal No. 34 of 2019

3 (2022) 3 SCC 121