Mere Violation Of Substantive Law By Itself Not A Valid Reason To Set Aside Arbitral Award: Jharkhand HC
The Jharkhand High Court held that a mere contravention of substantive law by itself does not constitute a valid ground for setting aside an arbitral award subsequent to the 2015 amendment in the Arbitration and Conciliation Act, 1996 (Act).
The Court dismissed an appeal challenging the Commercial Court's dismissal of a Section 34 Petition against an arbitrator's award, which directed the Appellant to reinstate the dealership within three months, stemming from objections over false information provided by the claimant in securing the dealership.
The Court noted that per Section 34 (2-A) of the Act, a Court is authorized to set aside a domestic arbitral award if it is tainted by prima facie patent illegality.
“post-2015 amendment a mere contravention of the substantive law of India, by itself, is no longer a ground available to set aside an arbitral award”, the Bench headed by Acting Chief Justice Shree Chandrashekhar and comprising Justice Anubha Rawat Choudhary observed.
Senior Advocate P. P. N. Roy appeared for the Appellant and Senior Advocate Ajit Kumar appeared for the Respondent.
The High Court was approached by way of an appeal challenging the order of the Commercial Court that dismissed a petition filed under Section 34 of the Act. This petition aimed to challenge the award issued by the Arbitrator, directing the Appellant to reinstate the dealership within three months from the award date. Failure to comply would entitle the First Respondent to damages at the rate of Rs 40,000 per month from the cancellation of the dealership until its restoration.
The dispute arose from the Appellant's advertisement for retail outlet dealers in Jharkhand, with the First Respondent securing the Barsot, Hazaribagh location. Despite concerns raised by another Applicant, Motilal Choudhary, the Letter of Intent was issued to the First Respondent.
The Court examined the extent of interference permissible in an arbitral award under Sections 34 and 37 of the Act. Notably, the award, pronounced after October 23, 2015, fell within the ambit of the 2015 Amendment to Section 34. The Court observed that the grounds outlined in sub-section (2)(a) of Section 34 did not delve into the merits of the arbitral decision. The assessment of the award's alignment with the public policy of India became relevant only under specific circumstances.
The Court, interpreting the expression "public policy" in the context of a foreign award, affirmed that an award contrary to the fundamental policy of Indian law, the interest of India, or principles of justice and morality could be set aside. Notably, contraventions of the Foreign Exchange Regulation Act were considered against the public policy, safeguarding national economic interests. Disregarding orders from superior Courts in India was also deemed a violation of the fundamental policy of Indian law.
Upon reviewing the award, the Court observed that Balgovind Prasad and Lauki Prasad, brought before the Arbitral Tribunal, provided statements largely supporting the claimant. They asserted that they had leased the land to the claimant, who was in peaceful possession and had made improvements. The arbitrator acknowledged that, in the dealership application, the claimant had mistakenly identified Jagdish Prasad and Lauki Prasad as landowners when they held special power of attorney from the family's karta, Balgovind Prasad.
In a crucial finding, the Bench observed that the arbitrator determined that statements made by Lauki Prasad and Jagdish Prasad were not false; rather, all owners, including family karta Balgovind Prasad, admitted their willingness to execute a long-term lease for 30 years, substantiated by the lease deed executed on March 3, 2012, in favour of the claimant.
The Bench noted that the Arbitrator while examining Rule 19 of the Brochure and Clause 21 of the Selection Brochure, provided detailed reasoning. The Court observed the well-reasoned award by the arbitrator, who thoroughly examined the positions of both parties. Notably, the landowners executed a lease deed in favour of the Appellant at the claimant's behest, following the claimant's successful participation in the selection process. The landowners supported the claimant's case before the arbitrator. Additionally, it was undisputed that the Appellant operated the petrol pump on the same land, utilizing infrastructure and employing staff from respondent no.1, with payment being made by the Appellant.
This Court noted that the arbitrator provided reasons for allowing certain parts of the damage claim while disallowing others, ensuring an award in compliance with Section 31(3) of the Act.
Crucially, the Bench observed that on the same property offered by the claimant, the Appellant operated the dealership with the support of the property owners. The claimant ousted based on a pre-dealership agreement complaint by an unsuccessful participant, received judicial support. Given the absence of grounds for interference under the Act, the Court concluded that the award did not exhibit any patent illegality on its face and did not warrant interference. Even if an error was assumed in the appreciation of law, specifically regarding the applicability of the provisions of the Specific Relief Act, it was not deemed an error apparent on the face of the award.
By well-established legal principles, the Court observed that the scrutiny of an award under section 34 of the Act was confined to the specified grounds. The Appellate authority's power to interfere with an award under section 37 of the Act was even more restricted, especially when the lower Court upheld the award.
The Court emphasized that a mere contravention of substantive law was no longer a ground to set aside an arbitral award. In essence, the Bench observed that the matters not falling within the fundamental policy of Indian law, excluding violations of statutes unrelated to public policy or public interest, cannot be invoked to set aside an award on grounds of patent illegality.
The Court held that contravening the Foreign Exchange Regulation Act would go against the public policy of India, emphasizing national economic interests. However, the Court noted that contraventions related to the recovery of compound interest on interest were contrary to a statute but did not violate the fundamental policy of Indian law. Therefore, not every violation of Indian law by the arbitrator warrants interference under section 34(2-A) of the Act.
Accordingly, the Court dismissed the Appeal.
Cause Title: M/s Bharat Petroleum Corporation Limited v Anant Kumar Singh
