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Dichotomy between public policy concerns and certainity of arbitral award – wether an arbitral award induced by fraud or corruption be allowed to sustain if not challenged on such a ground in first instace during the limitation period: An analysis

August 13, 2024
  1. Ironically, the most unambiguous legislative provisions, at times, present such a dilemma and contradictions with established cannons of law, that judicial intervention becomes imminent.

 

  1. One such instance is the story of Explanation I(i) to Section 34(2)(b)(ii) and Section 34(3) of the Arbitration and Conciliation Act, 1996 (“Indian Arbitration Act”). The Explanation I under reference was not there from the beginning when the Indian Arbitration Act came into force on 22ndAugust 1996. The provision was introduced by way of Arbitration and Conciliation (Amendment) Act, 2015 which came into effect from 23rd October 2015. However, in so far as an arbitral award having been “induced or affected by fraud or corruption” was considered being against the public policy of India since the beginning.

 

 

  1. In the matter of State of Maharashtra v. Hindustan Construction Co.[1](“HCC Case”) the issue arose before the Apex Court whether at the time of hearing a statutory appeal under Section 37 of the Indian Arbitration Act, 1996 can the Appellant be permitted to amend the memorandum of appeal and incorporate fresh grounds of challenge which were not pleaded at the stage of preferring the challenge under Section 34 of the Indian Arbitration Act. Here the history and scheme of the Indian Arbitration Act supported the conclusion that the time-limit prescribed under Section 34 to challenge an award is absolute and unextendible and by allowing new grounds of challenge to be moved after lapse of the outer limit of 120 days, this statutory dicta would be breached by necessary implication.

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  1. The Apex Court came to the conclusion that:

“25. …Whether incorporation of additional grounds by way of amendment in the application under Section 34 tantamounts to filing a fresh application in all situations and circumstances. If that were to be treated so, it would follow that no amendment in the application for setting aside the award howsoever material or relevant it may be for consideration by the Court can be added nor existing ground amended after the prescribed period of limitation has expired although application for setting aside the arbitral award has been made in time. This is not and could not have been the intention of Legislature while enacting Section 34. Moreso, Section 34(2)(b) enables the Court to set aside the arbitral award if it 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. The words in Clause (b) “the Court finds that” do enable the Court, where the application under Section 34 has been made within prescribed time, to grant leave to amend such application if the very peculiar circumstances of the case so warrant and it is so required in the interest of justice. L.J. Leach and Company Ltd. (1957) SCR 438 and Pirgonda Hongonda Patil (1957) SCR 595 seem to enshrine clearly that courts would, as a rule, decline to allow amendments, if a fresh claim on the proposed amendments would be barred by limitation on the date of application but that would be a factor for consideration in exercise of the discretion as to whether leave to amend should be granted but that does not affect the power of the court to order it, if that is required in the interest of justice. There is no reason why the same rule should not be applied when the Court is called upon to consider the application for amendment of grounds in the application for setting aside the arbitral award or the amendment in the grounds of appeal under Section 37 of 1996 Act. (emphasis supplied)

 

 

“28. The question then arises, whether in the facts and circumstances of the present case, the High Court committed any error in rejecting the appellant’s application for addition of new grounds in the memorandum of arbitration appeal. As noticed above, in the application for setting aside the award, appellant set up only five grounds viz., waiver, acquiescence, delay, laches and res judicata. The grounds sought to be added in the memorandum of arbitration appeal by way of amendment are absolutely new grounds for which there is no foundation in the application for setting aside the award. Obviously, such new grounds containing new material/facts could not have been introduced for the first time in an appeal when admittedly these grounds were not originally raised in the arbitration petition for setting aside the award. Moreover, no prayer was made by the appellant for amendment in the petition under Section 37 before the concerned court or at the appellate stage. As a matter of fact, the learned Single Judge in paragraph 6 of the impugned order has observed that the grounds of appeal which are now sought to be advanced were not originally raised in the arbitration petition and that the amendment that is sought to be effected is not even to the grounds contained in the application under Section 37 but to the memo of appeal. In the circumstances, it cannot be said that discretion exercised by learned Single Judge in refusing to grant leave to appellant to amend the memorandum of arbitration appeal suffers from any illegality.”

 

  1. The decision in HCC Case lays down the principle that the Court of First instance and second instance while deciding a challenge to an arbitral award have the power to look beyond the pleaded grounds by virtue of phares, “the court finds that” appearing in Sections 34(2)(b) and 34(2A) of the Indian Arbitration Act. Consequently, an amendment to the grounds of challenge can be moved beyond the period of limitation if the same falls in any of the pigeonhole recognized under 34(2)(b) and 34(2A), i.e.
    1. Subject-matter of dispute not capable of settlement by arbitration.
    2. The arbitral award being in conflict with public policy of India.
    3. The arbitral award is vitiated by patent illegality.

 

  1. By virtue of the judgment in HCC Case an amendment on any other account, moved beyond the period of limitation, would tantamount to moving a fresh challenge to the award and is not likely to be entertained. However, there is no straight answer and “facts and circumstance” of the case will have to be considered.

 

  1. The same issue again came up for consideration before Apex Court in the matter of State of Chhattisgarh v. Sal Udyog[2](“Sal Udyog case”) where the controversy was that whether the Appellant under Section 37 of Indian Arbitration Act can be allowed to plead grounds of “patent illegality” which were not specifically pleaded in the first instance under Secti