The 8 November 2021 judgment in State of Chhattisgarh v M/s Sal Udyog Private Limited Civil,(1) as delivered by Justice Hima Kohli for a three-judge bench which also included Chief Justice NV Ramana and Justice Surya Kant, clarified that a ground for setting aside an award can be considered at the appeal stage, even when the ground was not considered at the initial proceeding for setting aside the award.
The state of Madhya Pradesh entered into an agreement dated 30 August 1979 with the respondent for an annual supply of 10,000 tonnes of sal seeds, which was renewed on 30 April 1992. Following events triggered by a loss of revenue, the 30 April 1992 agreement was terminated by Madhya Pradesh. The respondent initiated arbitration proceedings and, in an order dated 17 February 2005, was awarded their claim along with interest and future interest at 18% per year. Aggrieved, the appellant approached the Raipur District Court under section 34 of the Arbitration and Conciliation Act 1996 (the Act). By an order dated 14 March 2006, the petition was almost entirely rejected, bar the interest awarded being reduced. The state appealed under section 37 of the Act against the 14 March 2006 order, while the respondent filed a cross appeal. Both the appeals were disposed of by a common order dated 21 October 2009. The state took the matter to the Supreme Court.
The Supreme Court examined only the payment of "supervision charges" under the agreements, which was not contended by the appellant before the court at the section 34 challenge proceedings.
The case made 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 (the circular) that was issued by the state on this subject. The respondent had paid supervision charges to the state on earlier occasions without protest, until the agreement's termination. The arbitrator had considered the state's submissions on this claim but proceeded to incorrectly reject them. The state had also raised this ground before the Raipur District Court in the appeal under section 37 of the Act, but the 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 the section 34 challenge proceedings. The respondent referred to State of Maharashtra v Hindustan Construction Company Limited(2) in support of its contention.
In response, the state cited Lion Engineering Consultants v State of Madhya Pradesh(3) and contended that the objection of supervision charges was raised before the sole arbitrator and the high court in an appeal under section 37 of the Act.
Thus, the question which fell for consideration before the Supreme Court was whether patent illegality could be a ground for setting aside an award in a section 37 appeal, despite this ground not being considered under the section 34 proceedings.
The Supreme Court referred to various cases where principles for setting aside an arbitral award on the ground of patent illegality had been laid down. The case law referred to included:
- Associate Builders v Delhi Development Authority;(4) and
- Ssangyong Engineering and Construction Company Limited v National Highways Authority of India.(5)
Upon examination of the terms of both agreements, dated 30 August 1979 and 30 April 1992, and the circular, the Court concluded that the supervisions charges should be borne by the respondent. The state had specifically raised this ground in its section 37 petition. Although the state's contentions were duly recorded in the impugned judgment, the high court did not deal with the issue.
Hindustan Construction 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 court had emphasised the expression "the Courts find that", thereby clarifying that courts should apply their discretion to ascertain if new grounds sought to be added are tantamount to filing a fresh application altogether.
Failure by the arbitrator to notice the terms of both agreements and the circular was a patent illegality on the face of the award, which went to the centre of the matter and was defied 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 centre of the matter, calling for interference of the court presiding over the section 37 appeal.
This judgment is significant because it clarifies that a ground not raised in a petition under section 34 of the Act can be considered 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, just because a ground is not considered in a section 34 application, this does not mean that it becomes unavailable in an appeal under section 37 of the Act.
For further information on this topic please contact Debdatta Ray Chaudhury at Khaitan & Co by telephone (+91 120 479 1000) or email ([email protected]). The Khaitan & Co website can be accessed at www.khaitanco.com.