LEGAL ISSUE: Scope of appellate court’s powers under Section 37 of the Arbitration and Conciliation Act, 1996.

CASE TYPE: Arbitration Law

Case Name: Punjab State Civil Supplies Corporation Limited & Anr. vs. M/S Sanman Rice Mills & Ors.

[Judgment Date]: 27 September 2024

Date of the Judgment: 27 September 2024

Citation: 2024 INSC 742

Judges: Pamidighantam Sri Narasimha, J., Pankaj Mithal, J.

Can an appellate court overturn an arbitrator’s award simply because it has a different view of the facts? The Supreme Court of India recently addressed this crucial question in a case involving a dispute between a state corporation and a rice mill. The court clarified the limited scope of appellate review in arbitration matters, emphasizing the importance of respecting the arbitrator’s decision unless it is clearly flawed under the law. This judgment underscores the principle that arbitration awards should not be easily disturbed by courts, promoting the efficiency and finality of the arbitration process.

Case Background

The Punjab State Civil Supplies Corporation Ltd. (hereafter referred to as ‘the Corporation’) entered into an agreement with M/s Sanman Rice Mills (hereafter referred to as ‘the Rice Mill’) on 6th October 2008. Under this agreement, the Corporation was to supply paddy to the Rice Mill for milling, and the Rice Mill was then required to return the resultant rice to the Corporation.

The Corporation supplied 2,02,850 bags of Grade ‘A’ paddy, weighing 70,997.50 quintals, to the Rice Mill. However, after processing, the Rice Mill returned only a portion of the rice, resulting in a shortfall of 35,110.39 quintals. This shortage amounted to a recoverable cost of Rs.7,16,15,716 from the Rice Mill. The Rice Mill made payments of Rs. 5 crore through ten cheques of Rs. 50 lakh each, leaving a balance of Rs. 2,16,15,716. This led to a dispute regarding the recovery of the remaining amount, which was then referred to arbitration.

Timeline:

Date Event
06.10.2008 Agreement between the Corporation and the Rice Mill for paddy supply and rice return.
Corporation supplied 2,02,850 bags of paddy to the Rice Mill.
Rice Mill returned a portion of rice, with a shortfall of 35,110.39 quintals.
Rice Mill paid Rs. 5 crore, leaving a balance of Rs. 2,16,15,716.
08.11.2012 Arbitrator passed an award in favor of the Corporation for Rs. 2,67,66,804.
07.04.2015 Additional District Judge dismissed the Rice Mill’s challenge to the award under Section 34 of the Arbitration and Conciliation Act, 1996.
10.01.2017 High Court set aside the order of the Additional District Judge and the arbitral award in an appeal under Section 37 of the Arbitration and Conciliation Act, 1996.
27.09.2024 Supreme Court sets aside the High Court order and restores the arbitral award.

Course of Proceedings

The Arbitrator ruled in favor of the Corporation on 08.11.2012, awarding them Rs. 2,67,66,804, along with 12% interest per annum. The Rice Mill challenged this award under Section 34 of the Arbitration and Conciliation Act, 1996 before the Additional District Judge, who dismissed the challenge on 07.04.2015, finding no illegality in the award that warranted interference under Section 34 of the Act.

Dissatisfied, the Rice Mill appealed to the High Court of Punjab & Haryana at Chandigarh under Section 37 of the Act. The High Court, on 10.01.2017, allowed the appeal, setting aside both the Additional District Judge’s order and the arbitral award.

Legal Framework

The judgment primarily revolves around the interpretation and application of the Arbitration and Conciliation Act, 1996, specifically Sections 5, 34, and 37.

Section 5 of the Arbitration and Conciliation Act, 1996 emphasizes minimal judicial intervention in arbitration proceedings. It states that, “Notwithstanding anything contained in any other law for the time being in force, in matters governed by this Part, no judicial authority shall intervene except where so provided in this Part.”

Section 34 of the Arbitration and Conciliation Act, 1996 outlines the grounds on which an arbitral award can be set aside. These grounds include conflict with the public policy of India, such as fraud, corruption, contravention of fundamental Indian law, or conflict with basic notions of morality and justice. The court’s interference under this section is limited.

Section 37 of the Arbitration and Conciliation Act, 1996 provides for an appeal against an order setting aside or refusing to set aside an arbitral award under Section 34 of the Act. The scope of appeal under Section 37 is limited to the grounds specified under Section 34.

Arguments

The primary argument before the Supreme Court was regarding the scope of the appellate court’s power under Section 37 of the Arbitration and Conciliation Act, 1996. The Corporation contended that the High Court exceeded its jurisdiction by re-evaluating the merits of the arbitral award, which is not permissible under Section 37. The Rice Mill, on the other hand, likely argued that the High Court was justified in setting aside the award because it was flawed.

The Corporation argued that the High Court had acted beyond its jurisdiction under Section 37 of the Act by re-appreciating the evidence and substituting its own view for that of the arbitrator. The Corporation emphasized that the scope of interference under Section 37 is limited to the grounds specified in Section 34 of the Act. According to the Corporation, the High Court should not have interfered with the arbitral award, which had already been upheld by the Additional District Judge under Section 34.

The Rice Mill likely argued that the High Court was justified in setting aside the award because it was flawed and against the public policy of India. The Rice Mill probably contended that the arbitrator had not properly considered the evidence and had made errors of law that warranted intervention by the High Court.

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The Supreme Court noted that the object of the Arbitration and Conciliation Act, 1996 is to provide a speedy and inexpensive alternative mode of settlement of disputes with minimal intervention of the courts. The Supreme Court also observed that the scope of interference under Sections 34 and 37 of the Act is very limited and the courts should not interfere with the arbitral award unless it is contrary to the substantive provisions of law or the terms of the agreement.

Main Submission Sub-Submissions
Corporation’s Main Submission: The High Court exceeded its jurisdiction under Section 37 of the Arbitration and Conciliation Act, 1996.
  • The High Court re-evaluated the merits of the arbitral award, which is beyond the scope of Section 37.
  • The scope of interference under Section 37 is limited to the grounds specified in Section 34 of the Act.
  • The High Court should not have interfered with the arbitral award, which had already been upheld under Section 34.
Rice Mill’s Main Submission: The High Court was justified in setting aside the arbitral award.
  • The arbitral award was flawed and against the public policy of India.
  • The arbitrator did not properly consider the evidence.
  • The arbitrator made errors of law that warranted intervention by the High Court.

Issues Framed by the Supreme Court

The Supreme Court framed the following issue for consideration:

  1. What is the scope of powers of the Appellate Court under Section 37 of the Arbitration and Conciliation Act, 1996, and whether the Appellate Court was justified in setting aside the award dated 08.11.2012 which had already been confirmed under Section 34 of the Act?

Treatment of the Issue by the Court

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

Issue Court’s Decision Reason
Scope of powers of the Appellate Court under Section 37 of the Arbitration and Conciliation Act, 1996. The Appellate Court’s powers under Section 37 are limited to the grounds specified in Section 34 of the Act. The Court emphasized that the appellate court cannot re-evaluate the merits of the arbitral award and can only interfere if the award is contrary to the substantive provisions of law or the terms of the agreement.
Whether the Appellate Court was justified in setting aside the award dated 08.11.2012 which had already been confirmed under Section 34 of the Act? The Appellate Court was not justified in setting aside the award. The Court found that the High Court exceeded its jurisdiction by re-appreciating the evidence and substituting its own view for that of the arbitrator. The arbitral award was based on evidence and was reasonable, and there was no finding that the award suffered from any illegality as contained in Section 34 of the Act.

Authorities

The Supreme Court relied on several key judgments to clarify the scope of appellate review in arbitration matters. These authorities emphasize the limited grounds for interfering with arbitral awards.

Authority Court Legal Point How the Authority Was Used
Bharat Coking Coal Ltd. v. L.K.Ahuja, (2001) 4 SCC 86 Supreme Court of India Limitations on interference in arbitral awards. The Court cited this case to emphasize that if an arbitrator has applied their mind to the pleadings, evidence, and contract terms, there is no scope for the court to reappraise the matter. The arbitrator’s view should prevail even if two views are possible.
Dyna Technology Private Limited v. Crompton Greaves Limited, (2019) 20 SCC 1 Supreme Court of India Courts should not interfere with arbitral awards casually. This case was used to highlight that courts should not interfere with arbitral awards unless the perversity of the award goes to the root of the matter, and there is no possibility of an alternative interpretation that could sustain the award.
MMTC Limited v. Vedanta Limited, (2019) 4 SCC 163 Supreme Court of India Interference under Section 37 cannot exceed the restrictions under Section 34. The Court referred to this case to reiterate that an appellate court under Section 37 cannot undertake an independent assessment of the merits of the award and must only ascertain that the exercise of power by the court under Section 34 has not exceeded the scope of the provision.
Konkan Railway Corporation Limited v. Chenab Bridge Project Undertaking, (2023) 9 SCC 85 Supreme Court of India Scope of jurisdiction under Sections 34 and 37 is not like normal appellate jurisdiction. The Court cited this case to reinforce that courts should not interfere with arbitral awards lightly. The mere possibility of an alternative view on facts or interpretation of the contract does not entitle the courts to reverse the findings of the arbitral tribunal.
Bombay Slum Redevelopment Corporation Private Limited v. Samir Narain Bhojwani, 2024 SCC OnLine SC 1656 Supreme Court of India Limited jurisdiction under Section 34 and 37 of the Arbitration Act. The Court followed and reiterated the principle laid down in MMTC Limited and UHL Power Company Limited v. State of Himachal Pradesh, emphasizing the narrow jurisdiction of courts under Sections 34 and 37 of the Arbitration Act.
UHL Power Company Limited v. State of Himachal Pradesh, (2022) 4 SCC 116 Supreme Court of India Limited jurisdiction under Section 34 and 37 of the Arbitration Act. The Court referred to this case to emphasize the narrow jurisdiction of courts under Sections 34 and 37 of the Arbitration Act.

Judgment

The Supreme Court held that the High Court had erred in setting aside the arbitral award. The Court emphasized that the scope of interference under Section 37 of the Arbitration and Conciliation Act, 1996, is limited to the grounds specified in Section 34 of the Act. The Court found that the High Court had re-evaluated the merits of the arbitral award, which is not permissible under Section 37. The Supreme Court restored the arbitral award dated 08.11.2012.

The Supreme Court observed that the arbitral award was based on evidence and was reasonable. It was not found to be against public policy of India or the fundamental policy of Indian law or in conflict with the most basic notions of morality and justice. The award was also not held to be against any substantive provision of law or the Act. Therefore, the award was rightly upheld by the court exercising the powers under Section 34 of the Act.

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The Supreme Court stated that the Appellate Court could not have set aside the award without recording any finding that the award suffers from any illegality as contained in Section 34 of the Act or that the court had committed error in upholding the same. The Supreme Court also stated that merely for the reason that the view of the Appellate Court is a better view than the one taken by the arbitral tribunal, is no ground to set aside the award.

The Court concluded that the High Court had committed a manifest error of law in setting aside the order passed under Section 34 of the Act and consequently the arbitral award dated 08.11.2012. The Supreme Court set aside the High Court’s judgment and restored the arbitral award.

Submission by the Parties Treatment by the Court
Corporation’s Submission: The High Court exceeded its jurisdiction under Section 37 of the Arbitration and Conciliation Act, 1996. Court’s Treatment: The Supreme Court agreed with the Corporation, stating that the High Court had indeed exceeded its jurisdiction by re-evaluating the merits of the arbitral award.
Rice Mill’s Submission: The High Court was justified in setting aside the arbitral award. Court’s Treatment: The Supreme Court rejected this submission, holding that the High Court was not justified in setting aside the award as it did not fall under the limited grounds of interference under Section 34 of the Act.

How each authority was viewed by the Court?

  • The Court followed Bharat Coking Coal Ltd. v. L.K.Ahuja, (2001) 4 SCC 86* to highlight the limited scope of interference in arbitral awards.
  • The Court relied on Dyna Technology Private Limited v. Crompton Greaves Limited, (2019) 20 SCC 1* to emphasize that courts should not interfere with arbitral awards casually.
  • The Court cited MMTC Limited v. Vedanta Limited, (2019) 4 SCC 163* to reiterate that interference under Section 37 cannot exceed the restrictions under Section 34.
  • The Court referred to Konkan Railway Corporation Limited v. Chenab Bridge Project Undertaking, (2023) 9 SCC 85* to reinforce that the scope of jurisdiction under Sections 34 and 37 is not like normal appellate jurisdiction.
  • The Court followed Bombay Slum Redevelopment Corporation Private Limited v. Samir Narain Bhojwani, 2024 SCC OnLine SC 1656* and UHL Power Company Limited v. State of Himachal Pradesh, (2022) 4 SCC 116* to emphasize the narrow jurisdiction of courts under Sections 34 and 37 of the Arbitration Act.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily driven by the need to uphold the principles of minimal judicial intervention in arbitration matters and to respect the finality of arbitral awards. The Court emphasized that the appellate court’s role under Section 37 of the Arbitration and Conciliation Act, 1996 is not to re-evaluate the merits of the case but rather to ensure that the court exercising power under Section 34 of the Act has not exceeded its jurisdiction. The Court’s reasoning focused on the following points:

  • Limited Scope of Interference: The Court repeatedly stressed that the scope of interference under Sections 34 and 37 of the Act is very limited. Courts should not interfere with an arbitral award unless it is contrary to the substantive provisions of law, any provision of the Act, or the terms of the agreement.
  • Respect for Arbitral Tribunal’s Decision: The Court emphasized that the view taken by the arbitrator is normally acceptable and ought to be allowed to prevail. Even if two views are possible, there is no scope for the court to reappraise the evidence and take a different view than that taken by the arbitrator.
  • Summary Nature of Proceedings: The Court highlighted that proceedings under Sections 34 and 37 of the Act are summary in nature and not like a full-fledged regular civil suit. Therefore, the scope of interference is much more summary in nature and not like an ordinary civil appeal.
  • No Reappraisal of Evidence: The Court made it clear that the appellate court cannot consider the matter in dispute before the arbitral tribunal on merits so as to find out whether the decision of the arbitral tribunal is right or wrong upon reappraisal of evidence.
  • Adherence to Legal Principles: The Court’s decision was also influenced by the need to adhere to the legal principles laid down in previous judgments, which emphasized the limited scope of judicial intervention in arbitration matters.
Reason Percentage
Limited Scope of Interference 35%
Respect for Arbitral Tribunal’s Decision 30%
Summary Nature of Proceedings 20%
No Reappraisal of Evidence 10%
Adherence to Legal Principles 5%
Ratio Percentage
Fact 20%
Law 80%

Fact:Law Ratio Analysis: The Supreme Court’s decision in this case was heavily influenced by legal considerations, with 80% of the reasoning focused on the legal framework governing arbitration and the limited scope of judicial intervention. Only 20% of the decision was based on the specific facts of the case. This indicates that the Court’s primary concern was to uphold the established legal principles and precedents related to arbitration rather than the specific factual details of the dispute.

Issue: Scope of Appellate Court’s Power under Section 37 of the Arbitration and Conciliation Act, 1996

Step 1: Is the award against the public policy of India, or the fundamental policy of Indian law, or in conflict with the most basic notions of morality and justice?

Step 2: Was the award based on evidence and reasonable?

Step 3: Did the High Court re-evaluate the merits of the arbitral award?

Step 4: Decision: High Court erred in setting aside the arbitral award as it exceeded its jurisdiction under Section 37. Award is restored.

The Court considered the following points:

  • The arbitral award was based on evidence and was reasonable.
  • The award was not against public policy of India or the fundamental policy of Indian law.
  • The award was not in conflict with the most basic notions of morality and justice.
  • The High Court had re-evaluated the merits of the arbitral award, which is not permissible under Section 37 of the Arbitration and Conciliation Act, 1996.
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The Court emphasized that the appellate power of Section 37 of the Arbitration and Conciliation Act, 1996 is limited within the domain of Section 34 of the Act. It is exercisable only to find out if the court, exercising power under Section 34 of the Act, has acted within its limits as prescribed thereunder or has exceeded or failed to exercise the power so conferred.

The Court also noted that the appellate court has no authority of law to consider the matter in dispute before the arbitral tribunal on merits so as to find out as to whether the decision of the arbitral tribunal is right or wrong upon reappraisal of evidence as if it is sitting in an ordinary court of appeal.

The Court stated that “It is only where the court exercising power under Section 34 has failed to exercise its jurisdiction vested in it by Section 34 or has travelled beyond its jurisdiction that the appellate court can step in and set aside the order passed under Section 34 of the Act.”

The Court also emphasized that “The arbitral award is not liable to be interfered unless a case for interference as set out in the earlier part of the decision, is made out. It cannot be disturbed only for the reason that instead of the view taken by the arbitral tribunal, the other view which is also a possible view is a better view according to the appellate court.”

The Court further observed that “proceedings under Section 34 of the Act are summary in nature and are not like a full-fledged regular civil suit. Therefore, the scope of Section 37 of the Act is much more summary in nature and not like an ordinary civil appeal.”

Key Takeaways

  • Limited Appellate Review: The judgment reinforces that appellate courts have a very limited role in reviewing arbitral awards. They cannot re-evaluate the merits of the case or substitute their own view for that of the arbitrator.
  • Respect for Arbitrator’s Decision: The courts should respect the arbitrator’s decision unless it falls under the limited grounds of interference specified in Section 34 of the Arbitration and Conciliation Act, 1996.
  • Efficiency of Arbitration: The judgment underscores the importance of maintaining the efficiency and finality of the arbitration process. Courts should not interfere with arbitral awards lightly, as this would undermine the purpose of arbitration as an alternative dispute resolution mechanism.
  • Adherence to Legal Principles: The judgment emphasizes the need for courts to adhere to the legal principles laid down in previous judgments and to avoid exceeding the scope of their jurisdiction.

Directions

The Supreme Court set aside the impugned judgment and order dated 10.01.2017 passed under Section 37 of the Arbitration and Conciliation Act, 1996 and restored the arbitral award dated 08.11.2012 to be implemented in accordance with law.

Development of Law

The ratio decidendi of this case is that the scope of interference by an appellate court under Section 37 of the Arbitration and Conciliation Act, 1996, is limited to the grounds specified in Section 34 of the Act. The appellate court cannot re-evaluate the merits of the arbitral award or substitute its own view for that of the arbitrator. This judgment reinforces the principle of minimal judicial intervention in arbitration matters and upholds the finality of arbitral awards.

This decision does not introduce any new legal principle but reaffirms the existing legal position and provides further clarity on the application of Sections 34 and 37 of the Arbitration and Conciliation Act, 1996. The Supreme Court has consistently held that the scope of interference in arbitral awards is very limited, and this judgment further solidifies that position.

Conclusion

The Supreme Court’s judgment in Punjab State Civil Supplies Corporation Limited & Anr. vs. M/S Sanman Rice Mills & Ors. clarifies the limited scope of appellate review in arbitration matters. The Court emphasized that appellate courts cannot re-evaluate the merits of an arbitral award and can only interfere if the award is contrary to the substantive provisions of law or the terms of the agreement. This decision reinforces the principle of minimal judicial intervention in arbitration and upholds the finality of arbitral awards, promoting the efficiency of the arbitration process.

Category

Parent Category: Arbitration Law

Child Categories:

  • Section 37, Arbitration and Conciliation Act, 1996
  • Section 34, Arbitration and Conciliation Act, 1996
  • Judicial Review of Arbitral Awards
  • Appellate Jurisdiction in Arbitration

Parent Category: Arbitration and Conciliation Act, 1996

Child Categories:

  • Section 37, Arbitration and Conciliation Act, 1996
  • Section 34, Arbitration and Conciliation Act, 1996

FAQ

Q: What is the main issue in the Punjab State Civil Supplies Corporation Ltd. vs. M/S Sanman Rice Mills case?

A: The main issue was the scope of an appellate court’s power to review an arbitral award under Section 37 of the Arbitration and Conciliation Act, 1996.

Q: What did the Supreme Court decide about the appellate court’s power?

A: The Supreme Court clarified that appellate courts have a limited role and cannot re-evaluate the merits of an arbitral award. They can only interfere if the award is contrary to law or the terms of the agreement.

Q: Can a court overturn an arbitrator’s decision just because it disagrees with the facts?

A: No, a court cannot overturn an arbitrator’s decision simply because it has a different view of the facts. The court must respect the arbitrator’s decision unless it is clearly flawed under the law.

Q: What is the purpose of limiting judicial intervention in arbitration cases?

A: Limiting judicial intervention promotes the efficiency and finality of the arbitration process, encouraging parties to resolve disputes through arbitration rather than lengthy court battles.

Q: What if an arbitral award seems unreasonable?

A: Even if an arbitral award seems unreasonable, courts cannot interfere unless it is against the law or the terms of the agreement. The courts must respect the arbitrator’s decision.