Supreme Court allows additional evidence in Arbitration cases: Alpine Housing vs. Ashok Dhariwal (2023)

Introduction

Date of the Judgment: 19 January 2023

Citation: (2023) INSC 49

Judges: M.R. Shah, J. and C.T. Ravikumar, J.

Can a party present new evidence in court when challenging an arbitration award, especially on grounds of public policy? The Supreme Court of India addressed this crucial question, focusing on the scope of judicial review under Section 34 of the Arbitration and Conciliation Act, 1996. This case clarifies when additional evidence can be introduced in court proceedings challenging an arbitral award, particularly when the award’s enforceability is questioned due to public policy concerns. The judgment was delivered by a two-judge bench comprising Justice M.R. Shah and Justice C.T. Ravikumar.

Case Background

The dispute arose from an arbitration award dated 12 March 1998, which was an ex-parte award, where the respondents (Ashok S. Dhariwal and Others) did not present evidence. The respondents challenged this award by filing an application under Section 34 of the Arbitration & Conciliation Act, 1996. They also filed an interim application (IA No. 4) seeking permission to present additional evidence. The appellant (M/s Alpine Housing Development Corporation Pvt. Ltd.) objected, arguing that such evidence was not permissible under the Arbitration Act of 1996. The respondents sought to introduce evidence regarding the rejection of their application for amalgamation of land plots, which they argued made the award unenforceable due to conflict with public policy and local laws.

Timeline

Course of Proceedings

The Additional City Civil and Sessions Judge, Bengaluru, rejected the respondents’ interim application to adduce evidence, stating it would delay the proceedings and contradict the 2019 amendment to Section 34(2)(a) of the Arbitration & Conciliation Act, 1996, which limits judicial review to the record of the arbitral tribunal. The High Court of Karnataka at Bengaluru, however, allowed the respondents’ writ petition, setting aside the lower court’s order. The High Court relied on the Supreme Court’s decision in Fiza Developers and Inter-Trade Private Limited v. AMCI (India) Private Limited & Another [(2009) 17 SCC 796], permitting the respondents to present evidence in the proceedings under Section 34 of the Act. The High Court noted that the appellant had conceded that the pre-amendment version of Section 34(2)(a) applied.

Legal Framework

The core legal framework revolves around Section 34 of the Arbitration & Conciliation Act, 1996, which outlines the grounds for challenging an arbitral award. The judgment discusses the pre- and post-amendment versions of Section 34(2)(a). Before the 2019 amendment, Section 34(2)(a) allowed a court to set aside an award if the party making the application “furnishes proof” of certain grounds. The 2019 amendment replaced “furnishes proof” with “establishes on the basis of the record of the arbitral tribunal,” limiting the scope of judicial review. The court also considered Section 34(2)(b), which allows the court to set aside an award if the subject matter of the dispute is not arbitrable or if the award conflicts with the public policy of India. The court also considered Section 56 of the Indian Contract Act, which deals with agreements that become impossible to perform.

Relevant Provisions:

• Section 34(2)(a) of the Arbitration & Conciliation Act, 1996: “An arbitral award may be set aside by the Court only if—(a) the party making the application furnishes proof that—(i) a party was under some incapacity, or (ii) 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 (iii) 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 (iv) 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: Provided that, if the decisions on matters submitted to arbitration can be separated from those not so submitted, only that part of the arbitral award which contains decisions on matters not so submitted may be set aside; or (v) 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.”
• Section 34(2)(b) of the Arbitration & Conciliation Act, 1996: “An arbitral award may be set aside by the Court only if—(b) the Court finds that—(i) the subject-matter of the dispute is not capable of settlement by arbitration under the law for the time being in force, or (ii) the arbitral award is in conflict with the public policy of India.”
• Section 56 of the Indian Contract Act: “An agreement to do an act impossible in itself is void. A contract to do an act which, after the contract is made, becomes impossible, or, by reason of some event which the promisor could not prevent, unlawful, becomes void when the act becomes impossible or unlawful.”

Arguments

Appellant’s Arguments (M/s Alpine Housing Development Corporation Pvt. Ltd.):

• The High Court erred in allowing the respondents to adduce evidence under Section 34 of the Arbitration & Conciliation Act, 1996.
• The 2019 amendment to Section 34(2)(a), which replaced “furnishes proof” with “establishes on the basis of record of the arbitral tribunal,” should apply. This amendment aims to expedite arbitration proceedings and limit judicial review to the existing record.
• The concession made before the High Court that the pre-amendment version of Section 34(2)(a) applied is not binding, as it is against the law.
• Even if the pre-amendment version applies, the requirement to “furnish proof” under Section 34(2)(a) does not extend to grounds under Section 34(2)(b), which includes conflict with public policy.
• The court can decide on its own based on the arbitral award whether the dispute was not arbitrable or if the award conflicts with public policy under Section 34(2)(b).
• The decision in Fiza Developers was for framing issues, which is not required in Section 34 proceedings. Emkay Global Financial Services Limited v. Girdhar Sondhi [(2018) 9 SCC 49] clarifies that only Section 34(2)(a) contemplates furnishing proof.
• The 2019 amendment is clarificatory and applies to Section 48(1) (enforcement of foreign awards), which is similar to Section 34(2)(a) and (b).
• There is no legal bar to having different procedures for different grounds in a proceeding.
• Even if proof is required under Section 34(2)(b), it doesn’t apply to alleged conflict with statute, which can be decided on the award itself.
• The respondents’ claim that the award is frustrated due to the corporation’s refusal to allow clubbing of khatas does not fall under the conflict with public policy ground. It is the award, not its execution, that must conflict with public policy.
• The respondents are bound by their failure to participate in the arbitration proceedings and cannot use their own wrong to lead evidence.

Respondents’ Arguments (Ashok S. Dhariwal and Others):

• The respondents did not participate in the arbitration proceedings because they challenged the constitution of the arbitral tribunal.
• The arbitration proceedings began under the old Arbitration Act, 1940, but were arbitrarily continued under the Arbitration Act, 1996.
• The ex-parte award for specific performance of the agreement reserved liberty to apply for amalgamation of khatas, which the appellant failed to do.
• The respondents applied for amalgamation twice, but the applications were rejected due to the presence of a rain water drain.
• The respondents sought to produce evidence of the final rejection of amalgamation, which they argue makes the award incapable of implementation/execution under Section 34(2)(b)(i) and (ii) of the Arbitration Act, 1996, and Section 56 of the Indian Contract Act.
• The enforcement of the award is contrary to public policy, local law, and void arbitration proceedings, leading to Section 56 of the Indian Contract Act.
• The pre-amendment version of Section 34(2)(a) applies, and the words “furnish proof” apply to both Section 34(2)(a) and 34(2)(b).
• They relied on Fiza Developers, Emkay Global, Canara Nidhi, and S.P. Singla Constructions Pvt. Ltd. v. State of Himachal Pradesh [(2019) 2 SCC 488] to support their submissions.

Issues Framed by the Supreme Court

The main issue framed by the Supreme Court was:

1. Whether an applicant can be permitted to adduce evidence to support the ground relating to Public Policy in an application filed under Section 34 of the Arbitration & Conciliation Act, 1996?

Treatment of the Issue by the Court

The following table demonstrates as to how the Court decided the issues

Authorities

Cases Considered by the Court:

Legal Provisions Considered by the Court:

• Section 34 of the Arbitration & Conciliation Act, 1996: Discussed the grounds for challenging an arbitral award.
• Section 34(2)(a) of the Arbitration & Conciliation Act, 1996: Focused on the requirement to “furnish proof” and the 2019 amendment.
• Section 34(2)(b) of the Arbitration & Conciliation Act, 1996: Addressed the grounds of non-arbitrability and conflict with public policy.
• Section 56 of the Indian Contract Act: Related to the impossibility of performance of a contract.

Judgment

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

• The Court relied on Fiza Developers [(2009) 17 SCC 796] to establish that Section 34 applications are summary proceedings where issues are not framed, but evidence is necessary to prove grounds for setting aside an award.
• The Court used Emkay Global [(2018) 9 SCC 49] to clarify that “furnishing proof” is primarily for Section 34(2)(a) and that additional evidence can be brought through affidavits, with limited cross-examination. This case clarified the ratio of Fiza Developers.
• The Court cited Canara Nidhi [(2019) 9 SCC 462] to reinforce that Section 34 applications should not require extensive evidence beyond the arbitral record, approving the interpretation of Section 34(2)(a) in Emkay Global.
• The Court referred to Gemini Bay Transcription [(2022) 1 SCC 753] to support its view that the 2019 amendment was clarificatory, while considering Section 48(1).
• The Court referred to S.P. Singla Constructions [(2019) 2 SCC 488] to support the submission that the amending arbitration act shall not be applicable with respect to arbitration proceedings commenced before the commencement of the amending act, unless the parties otherwise agree.

What weighed in the mind of the Court?

The Supreme Court was primarily concerned with ensuring a fair opportunity for the respondents to present their case, especially given that the arbitration award was ex-parte and the key evidence (rejection of amalgamation) arose after the award. The court emphasized that Section 34 applications are summary proceedings but also recognized that in exceptional cases, additional evidence may be necessary to establish grounds for setting aside an award, particularly concerning public policy. The Court also considered the need for speedy resolution of arbitration disputes, as well as the importance of not allowing an award to stand if it is unenforceable or against public policy.

Logical Reasoning:

The Court rejected the appellant’s argument that the 2019 amendment to Section 34(2)(a) should apply, holding that the pre-amendment version applies because the arbitration proceedings and award occurred before the amendment. It also rejected the argument that the “furnish proof” requirement does not apply to Section 34(2)(b), stating that evidence may be necessary to establish conflict with public policy. The Court emphasized that while Section 34 applications are summary proceedings, additional evidence may be necessary in exceptional cases, especially when the evidence arises after the award and is critical to the grounds for setting aside the award. The Court allowed the respondents to present evidence of the rejection of the amalgamation of plots, which occurred after the award, as this evidence was crucial to their claim that the award was unenforceable and against public policy. The Court also allowed the appellant to cross-examine and lead counter evidence.

The court’s decision was unanimous, with both Justice M.R. Shah and Justice C.T. Ravikumar concurring.

“Therefore, in an exceptional case being made out and if it is brought to the court on the matters not containing the record of the arbitrator that certain things are relevant to the determination of the issues arising under section 34(2)(a), then the party who has assailed the award on the grounds set out in section 34(2)(a) can be permitted to file affidavit in the form of evidence. However, the same shall be allowed unless absolutely necessary.”

“From the affidavit, which is sought to be placed in the proceedings under Section 34 of the Act, it is seen that the respondents want to place on record the communication from the appropriate authority by which the application for amalgamation of the plots is rejected.”

“In that view of the matter, a strong exceptional case is made out by the respondents to permit them to file affidavits/adduce additional evidence. However, at the same time, the appellant also can be permitted to cross-examine and/or produce contrary evidence.”

Key Takeaways

• Pre-amendment Section 34(2)(a) Applies: For arbitration proceedings commenced before the 2019 amendment, the pre-amendment version of Section 34(2)(a) of the Arbitration & Conciliation Act, 1996, applies.
• “Furnish Proof” Extends to Section 34(2)(b): The requirement to “furnish proof” is not limited to grounds under Section 34(2)(a) but can also extend to grounds under Section 34(2)(b), such as conflict with public policy.
• Additional Evidence in Exceptional Cases: In exceptional circumstances, particularly when evidence arises after the arbitral award and is relevant to the grounds for setting aside the award, courts may permit parties to adduce additional evidence through affidavits.
• Summary Proceedings with Flexibility: While Section 34 applications are summary proceedings, courts have the discretion to allow additional evidence when necessary for a fair adjudication.
• Public Policy Grounds: The ground of conflict with public policy can be agitated in a Section 34 application itself and does not need to wait till the execution stage.

Directions

The Supreme Court directed that the appellant may also be permitted to cross-examine and/or lead contrary evidence including the permission for clubbing khatas where there are nalas. The court also directed that the court dealing with the Section 34 application should finally decide and dispose of the application expeditiously.

Development of Law

The ratio decidendi of this case is that in arbitration proceedings commenced before the 2019 amendment to Section 34(2)(a), the pre-amendment version applies, and the requirement to “furnish proof” can extend to grounds under Section 34(2)(b), including conflict with public policy. The court clarified that while Section 34 applications are summary proceedings, additional evidence may be permitted in exceptional cases, particularly when evidence arises after the arbitral award. This judgment clarifies that the grounds of conflict with public policy can be agitated in the Section 34 application itself and does not have to wait till the execution stage. This judgment reinforces the principle that while speedy resolution of disputes is important, a fair opportunity to present one’s case is equally crucial.

Conclusion

The Supreme Court dismissed the appeal, upholding the High Court’s decision to allow the respondents to adduce additional evidence in their application under Section 34 of the Arbitration & Conciliation Act, 1996. The Court clarified that the pre-amendment version of Section 34(2)(a) applies in this case and that additional evidence can be permitted in exceptional circumstances, particularly when the evidence is crucial to the grounds for setting aside the award, such as conflict with public policy. The judgment emphasizes the importance of a fair opportunity to present one’s case, even in summary proceedings, and provides clarity on the scope of judicial review under Section 34 of the Act, especially concerning public policy grounds. This ruling ensures that arbitral awards are not upheld when they are unenforceable or against public policy, while also respecting the need for speedy resolution of arbitration disputes.