India: SC Clarifies - New Ground Can Be Taken In Appeal Under Section 37 Of The Arbitration And Conciliation Act, 1996

The judgment dated 8 November 2021 in State of Chhattisgarh & Anr. vs. M/s. Sal Udyog Private Limited Civil Appeal No.4353 of 2010 delivered by Hon'ble Justice Hima Kohli for a three Judge Bench comprising the Hon'ble Chief Justice N V Ramana, Hon'ble Justice Surya Kant and herself, clarifies that a ground for setting aside an award could be taken at the stage of appeal even when the ground was not taken in a proceeding for setting aside the award.

Brief facts

• The State of Madhya Pradesh entered into an agreement dated 30 August 1979 with the Respondent for supply of 10,000 tones of Sal seeds per annum, which was renewed on 30 April 1992. Following events triggered by loss of revenue, the Agreement dated 30 April 1992 was terminated by the State. The Respondent initiated arbitration proceedings and by an Award dated 17 February 2005, the Respondent's claim was allowed along with interest and future interest @ 18% per annum. Aggrieved thereby, the Appellant approached the Learned District Court, Raipur under Section 34 of the Arbitration & Conciliation Act, 1996 (hereinafter referred to as the "Act"). By an order dated 14 March 2006 the petition was rejected except that the interest awarded was reduced. The State preferred an appeal under Section 37 of the Act against the order dated 14 March 2006, while the Respondent filed a cross appeal. Both the appeals were disposed of by a common order dated 21 October 2009 and the State carried the matter to the Hon'ble Supreme Court
• The Hon'ble Supreme Court only examined the aspect of payment of "supervision charges" under the Agreements, which was not contended by the Appellant before the Court at the stage of challenging the award under Section 34 of the Act.

Arguments presented

• The case made out by the State was that "supervision charges" were to be borne by the Respondent under Clause 6 (b) of the Agreement dated 30 April 1992 and also a Circular dated 27 July 1987 issued by the State on this subject. The Respondent had paid supervision charges to the State on earlier occasions without protest till the termination of the Agreement. The Learned Arbitrator considered the State's submissions on this claim, but proceeded to incorrectly reject the same. The State had also raised this ground before the Hon'ble High Court in the appeal under Section 37 of the Act but the Hon'ble High Court did not deal with the issue.
• The Respondent argued that the State had waived its right to challenge the impugned award on this ground as it was not raised in proceedings under Section 34 of the Act. It referred to State of Maharashtra vs. Hindustan Construction Company Limited (2010) 4 SCC 518 in support of its contention.
• In response, the State cited Lion Engineering Consultants vs. State of Madhya Pradesh and Others, (2018) 16 SCC 758 and contended that the objection of supervision charges was raised before the Learned Sole Arbitrator and the Hon'ble High Court in the appeal under Section 37 of the Act.
• Thus, the question which fell for consideration before the Hon'ble Supreme Court was whether patent illegality could be a ground for setting aside an Award in an appeal under Section 37 of the Act, despite this ground not being taken in the application under Section 34 of the Act.

Decision

• The Hon'ble Supreme Court referred to various cases such as Associate Builders vs. Delhi Development Authority (2015) 3 SCC 49 and Ssangyong Engineering and Construction Company Limited v. National Highways Authority of India (2019) 15 SCC 131 where principles of setting aside an Arbitral Award on the ground of "patent illegality" are laid down.
• Upon examination of the terms of both Agreements dated 30 August 1979 and 30 April 1992 and the Circular dated 27 July 1987, the Hon'ble Court concluded that supervisions charges were indeed to be borne by the Respondent. The State had specifically raised this ground in the Section 37 petition. Although the State's contentions were duly recorded in the impugned judgment, the Hon'ble High Court did not deal with the issue at all.
• Hindustan Construction (supra) was found inapplicable to the facts of this case as it was held in that case that additional grounds could be added to a petition under Section 34 of the Act in certain circumstances. In fact, the Hon'ble Court had emphasized on the expression "the Courts find that", thereby clarifying that Courts ought to apply their discretion to ascertain if new grounds sought to be added tantamount to filing a fresh application altogether.
• Failure by the Arbitrator to notice the terms of both Agreements and Circular dated 27 July 1987 is a patent illegality on the face of Award which goes to the very root of the matter and is in contravention of Section 28 (3) of the Act. Section 34(2A) of the Act provides that an Award may be set aside if the Court finds that it is vitiated by patent illegality. Patent illegality goes to the very root of the matter calling for interference of the Court sitting in appeal under Section 37 of the Act.

Comment

This judgment is significant because it clarifies that a ground not raised in a petition under Section 34 of the Act could be taken in an appeal under Section 37 of the Act. While hearing an appeal under Section 37 of the Act, Courts can give effect to Section 34 (2A) of the Act, if it concludes that the impugned award suffers from patent illegality. Therefore, simply because a ground is not taken in the application under Section 34 would not mean that it becomes unavailable in an appeal under Section 37.