POWER OF HIGH COURT IN DECIDING THE APPEAL UNDER SECTION 37 OF THE ARBITRATION AND CONCILIATION ACT, 1996

[Mr. M. GOVINDARAJAN]

The Arbitration and Conciliation Act, 1996 (‘Act’ for short) provides the alternative dispute resolution measures which reduces the time and cost in litigation and advantageous to the business community.  Arbitration agreement is a must in the contract entered into between the business entities. 

When the dispute arises the arbitrator may be appointed in accordance with the provisions of the contract.  When the arbitrator could not be appointed by the parties to the agreement then the Court may appoint the arbitrator on the application of either of the party.  The arbitrator will receive the claims from the applicant and also the objections of the other party.  There is no specific procedure enumerated in the Act on the conduct of Arbitration.  The arbitrator may frame its own method in conducting the arbitration after observing the principles of Natural Justice.

The arbitrator will pass an award after hearing both the parties to the agreement and considering the evidence submitted by them.  The award is binding on the parties to the proceedings.

Section 34 of the Act provides that recourse to a Court against an arbitral award may be made only by an application for setting aside such award within three months from the date of receipt of the award.   An arbitral award may be set aside by the Court only if-

• the party making the application establishes on the basis of the record of the arbitral tribunal that-

• a party was under some incapacity, or
•  the arbitration agreement is not valid under the law to which the parties have subjected it or, failing any indication thereon, under the law for the time being in force; or
• the party making the application was not given proper notice of the appointment of an arbitrator or of the arbitral proceedings or was otherwise unable to present his case; or
• the arbitral award deals with a dispute not contemplated by or not falling within the terms of the submission to arbitration, or it contains decisions on matters beyond the scope of the submission to arbitration:
• the composition of the arbitral tribunal or the arbitral procedure was not in accordance with the agreement of the parties, unless such agreement was in conflict with a provision of this Part from which the parties cannot derogate, or, failing such agreement, was not in accordance with this Part;

• the Court finds that-

•  the subject-matter of the dispute is not capable of settlement by arbitration under the law for the time being in force, or
•  the arbitral award is in conflict with the public policy of India.

If a party aggrieved against the order of the Court on the appeal filed to set aside the award, an appeal may be filed before the  High Court as second appeal.  In the second appeal after hearing the parties to the case may order suitably based on the facts and circumstances of the case.  The High Court as the second appellate authority is not a fact finding court.  It cannot decide the merits of the case or claim made before the Arbitrator. 

In HARYANA TOURISM LIMITED VERSUS M/S KANDHARI BEVERAGES LIMITED [2022 (1) TMI 558 - SUPREME COURT] the Supreme Court set aside the judgment of the High Court which entered into the merits of the claim of the claimant. 

The appellant, in this case,  invited tenders for the supply of aerated cold drinks at its tourist complexes for one year from 15.05.2001 to 14.05.2002.  The tender of the respondent was accepted by the appellant.  As per the agreement reached between the said parties, the respondent is to pay ₹ 20 lakhs to the appellant for the brand promotion that was required to be spent as per their agreement.

The appellant conducted a mango mela for two days on 07.07.2001 and 08.07.2001.  Both the parties agreed to conduct a musical nights.  The respondent spent ₹ 13.92 lakhs.   The appellant, vide their letter dated 20.09.2001, directed to deposit ₹ 19 lakhs as sponsorship money.  The respondent did not adhere to this direction but terminated the contract on 17.01.2002.

Therefore a dispute has been arisen between the parties.  The matter was referred to the sole arbitrator.  The appellant made a claim before the arbitrator.  The respondent also made a counter claim for ₹ 13.92 lakhs spent by it.  The arbitrator directed the respondent to pay a sum of ₹ 9.5 lakhs.  The counter claim of the respondent was dismissed by the arbitrator.

Aggrieved against the award of arbitrator the respondent filed an appeal under section 34 of the Act before the Additional District Judge.  The Additional District Judge dismissed the appeal filed by the respondent.  Aggrieved against this order also the respondent filed an appeal before the High Court under section 37 of the Act.  The High Court allowed the appeal.  The High Court entered into the merits of the case and quashed the order of the arbitrator.

Against the order of High Court the appellant filed the present appeal.  The appellant submitted the following before the Supreme Court-

• The High Court has materially erred in quashing and setting aside the award in exercise of its powers under Section 37 of the Act and exceeded its jurisdiction.
• The High Court had very little scope while deciding the appeal under section 37 of the Act.
• The High Court has no jurisdiction to enter into the merits of the claim awarded by the arbitrator, confirmed by the first appellate Court under Section 34 of the Act.
• The High Court has decided the appeal as if the High Court was deciding the first appeal against the judgment and decree passed by the learned trial Court which as such is not permissible.

The appellant prayed to set aside the judgment of High Court.

The respondent submitted the following before the Supreme Court-

• The arbitrator had no jurisdiction at all to pass the award as no amount was due and payable as nothing was spent on marketing activities by the appellant.
• The appointment of the sole arbitrator and his competence was challenged by the respondent, which was summarily rejected.
• The arbitrator rejected the counter claim of ₹ 13.92 spent by the respondent.

The respondent, therefore, prayed to dismiss the appeal filed by the appellant.

The Supreme Court observed that the jurisdiction of the arbitrator was also considered by the High Court.  The High Court over ruled the question of jurisdiction posed by the respondent before the High Court.  Therefore the respondent could not challenge the jurisdiction of the arbitrator in the appeal filed by the appellant.

The Supreme Court observed that the High Court has entered into the merits of the claims of the appellant.  This is not permissible while exercising its power under section 37 of the Act. 

The Supreme Court now indicated on what grounds the award of the arbitrator may be set aside in the appeal filed under the purview of section 34 or 37 of the Act.  The award can be set aside if the award is found contrary to-

• fundamental policy of Indian law; or
• the interest of India; or
• justice or morality; or
• if it is patently illegal.

In this case none of the above exception is applicable.   The High Court has entered into the merits of the claim and has decided the appeal under Section 37 of the Act as if the High Court was deciding the appeal against the judgment and decree passed by the trial Court.   The High Court has exercised the jurisdiction not vested in it under Section 37 of the Arbitration Act.

The Supreme Court allowed the appeal setting aside the judgment of High Court and restored the original award of the arbitrator.