Supreme Court clarifies scope of Section 34(4) of the Arbitration and Conciliation Act, 1996 in I-Pay Clearing Services vs. ICICI Bank (2022)

Introduction

Date of the Judgment: January 3, 2022
Citation: 2022 INSC 1
Judges: R. Subhash Reddy, J. and Hrishikesh Roy, J.
Can a court send an arbitration award back to the arbitrator for review if it lacks a finding on a key issue? The Supreme Court of India recently addressed this question in a dispute between I-Pay Clearing Services and ICICI Bank. The core issue revolved around whether the High Court was correct in refusing to send the matter back to the arbitrator under Section 34(4) of the Arbitration and Conciliation Act, 1996, when the award lacked a crucial finding. The judgment was delivered by a two-judge bench comprising Justice R. Subhash Reddy and Justice Hrishikesh Roy.

Case Background

I-Pay Clearing Services Private Limited (I-Pay), a company specializing in card personalization and transaction management, entered into an agreement with ICICI Bank Limited on November 4, 2002, to manage loyalty programs for Hindustan Petroleum Corporation Limited (HPCL). This agreement was followed by another on February 4, 2003, for developing software for a postpaid Smart Card Loyalty Program. Later, ICICI Bank requested I-Pay to develop a “Drive Track Fleet Card” management solution, which was treated as an extension of the original agreement, by a letter dated December 10, 2003. I-Pay claimed that ICICI Bank abruptly terminated the agreement, causing significant losses, including employee retrenchment costs and paralyzed operations. I-Pay sought damages of Rs. 95 crores.

Timeline

Course of Proceedings

Initially, I-Pay filed a suit in the High Court of Judicature at Bombay, which was then referred to arbitration due to an arbitration clause in the agreement. The sole arbitrator, Mr. Justice R.G. Sindhakar (Retd.), awarded I-Pay Rs. 50 crores plus interest. ICICI Bank challenged this award under Section 34(1) of the Arbitration and Conciliation Act, 1996, arguing that there was an “accord and satisfaction” between the parties, and that the arbitrator failed to record a finding on whether the contract was illegally terminated. I-Pay then filed a motion under Section 34(4) of the Act, seeking to remit the matter back to the arbitrator for additional reasons. The High Court dismissed I-Pay’s motion, stating that the defect in the award was not curable.

Legal Framework

The case primarily revolves around Section 34 of the Arbitration and Conciliation Act, 1996, which deals with recourse against an arbitral award. Specifically, Section 34(1) allows a party to apply to a court to set aside an arbitral award. Section 34(2A) states that an award can be set aside if it is vitiated by patent illegality. Section 34(4) provides that:

“On receipt of an application under sub-section (1), the Court may, where it is appropriate and it is so requested by a party, adjourn the proceedings for a period of time determined by it in order to give the arbitral tribunal an opportunity to resume the arbitral proceedings or to take such other action as in the opinion of arbitral tribunal will eliminate the grounds for setting aside the arbitral award.”

This section allows the court to remit the matter back to the arbitral tribunal to rectify curable defects in the award, potentially avoiding the need to set aside the entire award.

Arguments

Arguments by I-Pay:

• I-Pay argued that the arbitrator’s award lacked adequate reasoning on the issue of whether ICICI Bank had illegally and abruptly terminated the contract. They contended that this lack of reasoning or “gaps in the reasoning” is a curable defect under Section 34(4) of the Arbitration and Conciliation Act, 1996.
• They relied on the judgments of the Supreme Court in Kinnari Mullick and Anr. v. Ghanshyam Das Damani, Dyna Technologies Pvt. Ltd. v. Crompton Greaves Ltd., and Som Datt Builders Limited v. State of Kerala, to support their claim that a lack of reasons is a curable defect.
• They also argued that the power to remit under Section 34(4) was conceived as an alternative to setting aside the award, and that the provision should be used to eliminate defects that would preserve the award.

Arguments by ICICI Bank:

• ICICI Bank argued that the arbitrator’s award was patently illegal because the arbitrator ignored crucial evidence showing that there was an “accord and satisfaction” between the parties, which closed the contractual obligations. They argued that the arbitrator failed to consider the letter dated 01.06.2010, which was signed by both the parties recording the terms of closure of the contract.
• They also contended that the arbitrator did not record any finding on the key issue of whether the contract was illegally and abruptly terminated by ICICI Bank.
• ICICI Bank argued that on remittal, the arbitrator cannot change his award and the same would be contrary to provision under Section 34(4) of the Act and would amount to Arbitrator assuming the role of the Court.

Issues Framed by the Supreme Court

The Supreme Court framed the following key issue:

• Whether the High Court was correct in rejecting the Notice of Motion filed by the appellant under Section 34(4) of the Arbitration and Conciliation Act, 1996, seeking to remit the matter to the Arbitrator?

Treatment of the Issue by the Court

Authorities

The Supreme Court considered the following authorities:

Judgment

The Supreme Court upheld the High Court’s decision, stating that the arbitrator’s failure to record a finding on the issue of illegal termination was not a curable defect under Section 34(4) of the Arbitration and Conciliation Act, 1996. The Court clarified that Section 34(4) is meant to be used to fill gaps in reasoning or to provide additional reasons for a finding that has already been recorded, not to address a complete absence of a finding on a crucial issue.

How each authority was viewed by the Court:

• Kinnari Mullick and Anr. v. Ghanshyam Das Damani [CITATION: (2018) 11 SCC 328]*: The Court distinguished this case, stating that it dealt with the power of the court to relegate the parties before the Arbitral Tribunal after setting aside the arbitral award, in absence of any application by the parties.
• Dyna Technologies Pvt. Ltd. v. Crompton Greaves Ltd. [CITATION: (2019) SCC ONLINE SC 1656]*: The Court distinguished this case, stating that it was not a case of patent illegality but of deficiency in the award due to lack of reasoning for a finding which was already recorded in the award.
• Som Datt Builders Limited v. State of Kerala [CITATION: (2009) 10 SCC 259]*: The Court distinguished this case, stating that it was a case where no reasons were given for the finding already recorded in the award.
• AKN & Anr. v. ALC & Ors. [CITATION: (2015) SGCA 63]*: The Court acknowledged that remission is a ‘curative alternative’ but clarified that it cannot be used when there is no finding at all on a key issue.
• Permasteelisa Pacific Holdings Ltd. v. Hyundai Engineering & Construction Co. Ltd. [CITATION: (2005) SGHC 33]*: The Court cited this case in the context of remission being a curative alternative but distinguished it on facts.
• Income Tax Officer, A Ward, Sitapur v. Murlidhar Bhagwan Das [CITATION: AIR 1965 SC 342]*: The Court relied on this case to differentiate between ‘findings’ and ‘reasons’.
• J. Ashoka v. University of Agricultural Sciences and Ors. [CITATION: (2017) 2 SCC 609]*: The Court relied on this case to explain that ‘reasons’ are the links between the materials and the conclusions.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily driven by the fact that the arbitrator had failed to record a finding on a contentious issue, i.e. whether the contract was illegally and abruptly terminated by ICICI Bank. The Court emphasized that Section 34(4) of the Arbitration and Conciliation Act, 1996, is meant to address gaps in reasoning or to provide additional reasons for a finding that has already been recorded. It cannot be used to cure the absence of a finding on a crucial issue. The Court also noted that the arbitrator had ignored crucial evidence presented by ICICI Bank, which indicated an “accord and satisfaction” between the parties. These points weighed heavily in the mind of the Court, leading to the conclusion that the High Court was correct in dismissing I-Pay’s motion under Section 34(4).

Logical Reasoning:

The Court considered the argument that the lack of reasons was a curable defect, but rejected it, stating that the absence of a finding on a key issue was a fundamental flaw that could not be cured by remitting the matter back to the arbitrator. The Court also considered the argument that Section 34(4) is a curative alternative but clarified that it is applicable only when there is a finding already recorded.

The final decision was to dismiss the appeal, upholding the High Court’s order. The Court reasoned that remitting the matter would not serve the purpose of Section 34(4) as there was no finding to be supplemented with reasons and that the arbitrator cannot change the award on remittal.

Reasons for the decision:

• The arbitrator failed to record a finding on the crucial issue of whether the contract was illegally and abruptly terminated by ICICI Bank.
• Section 34(4) of the Arbitration and Conciliation Act, 1996, is intended to address gaps in reasoning or provide additional reasons for a finding that has already been recorded, not to create a finding where none exists.
• The arbitrator ignored crucial evidence presented by ICICI Bank, which indicated an “accord and satisfaction” between the parties.
• The arbitrator cannot change the award on remittal.

“When it is the specific case of the respondent that there is no finding at all, on point no.1 viz. “whether the contract was illegally and abruptly terminated by the respondent?”, remission under Section 34(4) of the Act, is not permissible.”

“In our view, Section 34(4) of the Act, can be resorted to record reasons on the finding already given in the award or to fill up the gaps in the reasoning of the award.”

“Under guise of additional reasons and filling up the gaps in the reasoning, no award can be remitted to the Arbitrator, where there are no findings on the contentious issues in the award.”

Key Takeaways

✓ Section 34(4) of the Arbitration and Conciliation Act, 1996, cannot be used to cure the absence of a finding on a key issue in an arbitral award.

✓ Courts can only remit matters to the arbitral tribunal under Section 34(4) for additional reasoning or to fill gaps in the reasoning of a finding that has already been recorded.

✓ Arbitrators cannot change their own award on remittal.

Directions

No specific directions were given by the Supreme Court in this case, other than dismissing the appeal.

Development of Law

The ratio decidendi of the case is that Section 34(4) of the Arbitration and Conciliation Act, 1996, cannot be used to cure the absence of a finding on a key issue in an arbitral award. It clarifies that the provision is limited to addressing gaps in reasoning or providing additional reasons for a finding that has already been recorded. This clarifies the scope of Section 34(4) and limits its application.

Conclusion

The Supreme Court dismissed the appeal filed by I-Pay, upholding the High Court’s decision. The judgment clarifies that Section 34(4) of the Arbitration and Conciliation Act, 1996, cannot be used to cure the absence of a finding on a key issue in an arbitral award. The provision is limited to addressing gaps in reasoning or providing additional reasons for a finding that has already been recorded.

Category

Parent Category: Arbitration and Conciliation Act, 1996

Child Category: Section 34(4), Arbitration and Conciliation Act, 1996

Child Category: Remission of Arbitral Award

Child Category: Patent Illegality in Arbitral Award