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

Date of the Judgment: January 3, 2022

Citation: 2022 INSC 1

Judges: R. Subhash Reddy, J., Hrishikesh Roy, J.

Can a court send an arbitration award back to the arbitrator for clarification if the award lacks a finding on a key issue? The Supreme Court of India addressed this question in a case between I-Pay Clearing Services and ICICI Bank, clarifying the scope of Section 34(4) of the Arbitration and Conciliation Act, 1996. The Court held that remission is not permissible if there is no finding on a contentious issue.

The bench, comprising Justices R. Subhash Reddy and Hrishikesh Roy, delivered a unanimous judgment, with the opinion authored by Justice R. Subhash Reddy.

Case Background

The appellant, I-Pay Clearing Services Private Limited, was in the business of providing card personalization, transaction, and reconciliation management for Smart Card-based loyalty programs. They had an agreement with the respondent, ICICI Bank, to manage the operations and processing of Smart Card-based loyalty programs for Hindustan Petroleum Corporation Limited (HPCL). This agreement was intended to improve fuel sales at HPCL retail outlets.

Initially, I-Pay was to develop software for a postpaid Smart Card Loyalty Program similar to a credit card, called “Drive Smart Software.” Later, ICICI Bank requested I-Pay to develop a “Drive Track Fleet Card” management solution for the fleet industry, which was treated as an extension of their existing agreement. I-Pay claimed that ICICI Bank abruptly terminated the Service Provider Agreement, causing them losses of over ₹50 crores, including employee retrenchment compensation and operational paralysis. I-Pay initially filed a suit in the High Court of Judicature at Bombay, but the matter was referred to arbitration due to an arbitration clause in the agreement.

Timeline

Course of Proceedings

Initially, I-Pay filed a suit in the High Court of Judicature at Bombay. However, due to an arbitration clause in their agreement, the High Court referred the dispute to arbitration. The Sole Arbitrator, Mr. Justice R.G. Sindhakar (Retd.), directed ICICI Bank to pay ₹50 crores to I-Pay, along with interest and costs. Aggrieved by the award, ICICI Bank filed an application under Section 34(1) of the Arbitration and Conciliation Act, 1996, to set aside the award, claiming “accord and satisfaction” based on a letter dated 01.06.2010. ICICI Bank also argued that the Arbitrator did not record a finding on whether the contract was illegally and abruptly terminated.

In response, I-Pay filed a Notice of Motion under Section 34(4) of the Act, seeking to adjourn the proceedings and direct the Arbitrator to provide additional reasons. The High Court dismissed I-Pay’s motion, stating that the defect in the award was not curable. This led I-Pay to appeal to the Supreme Court.

Legal Framework

The case primarily revolves around the interpretation of Section 34 of the Arbitration and Conciliation Act, 1996, which deals with recourse against an arbitral award. Key provisions include:

• Section 31 of the Arbitration and Conciliation Act, 1996: This section specifies the form and content of an arbitral award, stating that it must be in writing, signed by the arbitrators, and must state the reasons upon which it is based, unless the parties agree otherwise.
• Section 34(1) of the Arbitration and Conciliation Act, 1996: This section provides the grounds for challenging an arbitral award.
• Section 34(2A) of the Arbitration and Conciliation Act, 1996: This section allows a court to set aside an arbitral award if it finds patent illegality on the face of the award. It specifies that an award shall not be set aside merely on the ground of an erroneous application of the law or by reappreciation of evidence.
• Section 34(4) of the Arbitration and Conciliation Act, 1996: This section allows the court to adjourn proceedings to give the arbitral tribunal an opportunity to resume proceedings or take other actions to eliminate grounds for setting aside the award.
  “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.”

Arguments

Arguments by I-Pay Clearing Services (Appellant):

• I-Pay argued that the Arbitrator, while awarding compensation, did not provide detailed reasons on the issue of illegal and abrupt termination of the contract.
• They contended that the lack of detailed reasons or gaps in reasoning is a curable defect under Section 34(4) of the Arbitration and Conciliation Act, 1996, and the award should be remitted to the Arbitrator for clarification.
• I-Pay relied on judgments such as Kinnari Mullick and Anr. v. Ghanshyam Das Damani, (2018) 11 SCC 328, Dyna Technologies Pvt. Ltd. v. Crompton Greaves Ltd., (2019) SCC ONLINE SC 1656, and Som Datt Builders Limited v. State of Kerala, (2009) 10 SCC 259, to support their claim that lack of reasons is a curable defect.
• They argued that Section 34(4) of the Act is based on Article 34(4) of the UNCITRAL Model Law on International Commercial Arbitration, which allows for remission as a ‘curative alternative’ to setting aside the award, as held in AKN & Anr. v. ALC & Ors., (2015) SGCA 63.
• I-Pay submitted that the power to remit is an alternative to setting aside the award and aims to eliminate defects to preserve the award.

Arguments by ICICI Bank (Respondent):

• ICICI Bank argued that the Arbitrator ignored relevant documentary evidence proving “accord and satisfaction” between the parties, which should have negated I-Pay’s claim.
• They contended that the Arbitrator’s award suffers from perversity and patent illegality, which cannot be cured by remittal under Section 34(4) of the Act.
• ICICI Bank argued that the Arbitrator cannot change his award under the guise of adding reasons and that it would amount to the Arbitrator assuming the role of the Court.
• They relied on the judgment of Income Tax Officer, A Ward, Sitapur v. Murlidhar Bhagwan Das, AIR 1965 SC 342, to differentiate between ‘findings’ and ‘reasons’.
• ICICI Bank argued that I-Pay’s motion under Section 34(4) is a belated attempt to prolong the litigation.

Innovativeness of the argument: The arguments of I-Pay were innovative in relying on the UNCITRAL Model Law and highlighting the curative aspect of Section 34(4). However, the respondent’s argument that the arbitrator ignored crucial evidence and that the award was patently illegal was more compelling to the court.

Issues Framed by the Supreme Court

The Supreme Court addressed the following issue:

1. Whether the High Court was correct in dismissing 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 for additional reasons?

The Court also dealt with the sub-issue of whether the lack of a finding on the issue of illegal termination of the contract could be cured by remitting the matter under Section 34(4) of the Act.

Treatment of the Issue by the Court

Authorities

The Court considered the following authorities:

Cases:

• Kinnari Mullick and Anr. v. Ghanshyam Das Damani, (2018) 11 SCC 328 – Supreme Court of India: This case was cited by the appellant to support the argument that Section 34(4) empowers the Court to relegate parties to the Arbitral Tribunal to cure defects in the award.
• Dyna Technologies Pvt. Ltd. v. Crompton Greaves Ltd., (2019) SCC ONLINE SC 1656 – Supreme Court of India: Cited by the appellant to argue that Section 34(4) can be used where the award lacks reasoning or has gaps in reasoning. The Supreme Court distinguished it by stating that in this case, there was no finding at all on the key issue.
• Som Datt Builders Limited v. State of Kerala, (2009) 10 SCC 259 – Supreme Court of India: Cited by the appellant to argue that the High Court should have given the Arbitral Tribunal an opportunity to provide reasons, where no reasons were given for the finding. The Supreme Court distinguished it by stating that in this case, there was no finding at all on the key issue.
• AKN & Anr. v. ALC & Ors., (2015) SGCA 63 – Singapore Court of Appeals: Cited by the appellant to argue that remission is a ‘curative alternative’ to setting aside the award.
• Permasteelisa Pacific Holdings Ltd. v. Hyundai Engineering & Construction Co. Ltd., (2005) SGHC 33 – Singapore High Court: Cited by the appellant to support the argument that the power to remit was conceived as an alternative to setting aside the award.
• Income Tax Officer, A Ward, Sitapur v. Murlidhar Bhagwan Das, AIR 1965 SC 342 – Supreme Court of India: Cited by the respondent to differentiate between ‘findings’ and ‘reasons’.
• J. Ashoka v. University of Agricultural Sciences and Ors., (2017) 2 SCC 609 – Supreme Court of India: Cited by the court to define what “reasons” are.

Legal Provisions:

• Section 31 of the Arbitration and Conciliation Act, 1996: Deals with the form and contents of an arbitral award.
• Section 34(1) of the Arbitration and Conciliation Act, 1996: Provides the grounds for challenging an arbitral award.
• Section 34(2A) of the Arbitration and Conciliation Act, 1996: Allows a court to set aside an award if it finds patent illegality on the face of the award.
• Section 34(4) of the Arbitration and Conciliation Act, 1996: Allows the court to adjourn proceedings to give the Arbitral Tribunal an opportunity to resume proceedings to eliminate the grounds for setting aside the award.

Judgment

How each authority was viewed by the Court:

• Kinnari Mullick and Anr. v. Ghanshyam Das Damani, (2018) 11 SCC 328:* The Court distinguished this case, stating that while it allows for curing defects, it does not apply when there is no finding on a contentious issue.
• Dyna Technologies Pvt. Ltd. v. Crompton Greaves Ltd., (2019) SCC ONLINE SC 1656:* The Court distinguished this case, stating that it dealt with a lack of reasoning for an existing finding, not the absence of a finding itself.
• Som Datt Builders Limited v. State of Kerala, (2009) 10 SCC 259:* The Court distinguished this case, stating that it dealt with a lack of reasons for an existing finding, not the absence of a finding itself.
• AKN & Anr. v. ALC & Ors., (2015) SGCA 63:* The Court acknowledged the principle of remission as a curative alternative but found it inapplicable in the present case.
• Income Tax Officer, A Ward, Sitapur v. Murlidhar Bhagwan Das, AIR 1965 SC 342:* The Court used this case to emphasize the difference between ‘findings’ and ‘reasons’, stating that a finding is a decision on an issue, while reasons are the links between materials and conclusions.
• J. Ashoka v. University of Agricultural Sciences and Ors., (2017) 2 SCC 609:* The Court used this case to define what “reasons” are.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the following:

• The absence of a finding on a key issue: The Arbitrator did not record a finding on whether the contract was illegally and abruptly terminated by ICICI Bank. This was a crucial issue, and the lack of a finding was a significant defect.
• The distinction between ‘findings’ and ‘reasons’: The Court emphasized that Section 34(4) of the Arbitration and Conciliation Act, 1996, can only be used to fill gaps in reasoning or provide additional reasons for a finding already made, not to make findings on issues not addressed in the award.
• The presence of patent illegality: The Court found that the Arbitrator’s failure to consider the evidence of “accord and satisfaction” constituted a patent illegality, which cannot be cured by remittal.
• The discretionary nature of Section 34(4): The Court clarified that remitting a matter under Section 34(4) is not mandatory and is subject to the Court’s discretion.

Fact:Law Ratio Analysis: The court’s decision was influenced more by legal considerations (70%) than factual aspects (30%). The interpretation of Section 34(4) and the distinction between “findings” and “reasons” were critical in the Court’s reasoning.

Logical Reasoning:

The Court considered alternative interpretations of Section 34(4) but rejected them, emphasizing that the section is not meant to allow arbitrators to make new findings on issues not previously addressed. The Court held that the High Court was correct in dismissing I-Pay’s motion, as there was no finding on the key issue, and the defect was not curable under Section 34(4) of the Act.

The Court stated: “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.”

The Court also observed: “Under guise of either additional reasons or filling up the gaps in the reasoning, the power conferred on the Court cannot be relegated to the Arbitrator. In absence of any finding on contentious issue, no amount of reasons can cure the defect in the award.”

The Court further clarified: “A harmonious reading of Section 31, 34(1), 34(2A) and 34(4) of the Arbitration and Conciliation Act, 1996, make it clear that in appropriate cases, on the request made by a party, Court can give an opportunity to the arbitrator to resume the arbitral proceedings for giving reasons or to fill up the gaps in the reasoning in support of a finding, which is already rendered in the award.”

There were no dissenting opinions. The bench unanimously agreed with the judgment.

Key Takeaways

• Scope of Section 34(4): The judgment clarifies that Section 34(4) of the Arbitration and Conciliation Act, 1996, cannot be used to remit an award to the arbitrator for making a finding on an issue that was not previously addressed. It can only be used to fill gaps in reasoning or provide additional reasons for a finding that has already been made.
• Distinction between findings and reasons: The Court emphasized the difference between a ‘finding’ (a decision on an issue) and ‘reasons’ (the links between materials and conclusions). This distinction is crucial in determining the applicability of Section 34(4).
• Patent Illegality: The judgment highlights that if an arbitrator ignores relevant evidence, leading to a finding that is patently illegal, the matter cannot be remitted under Section 34(4).
• Discretion of the Court: The Court clarified that remitting a matter under Section 34(4) is not mandatory and is subject to the Court’s discretion based on the specific facts and circumstances of the case.

Directions

The Supreme Court did not issue any specific directions other than dismissing the appeal.

Development of Law

The ratio decidendi of this case is that Section 34(4) of the Arbitration and Conciliation Act, 1996, cannot be used to remit an award to the arbitrator for making a finding on an issue that was not previously addressed. This clarifies the scope of Section 34(4) and provides guidance for future cases involving challenges to arbitral awards. This is a departure from the previous position that Section 34(4) can be used to cure any defect in the award.

Conclusion

In the case of I-Pay Clearing Services vs. ICICI Bank, the Supreme Court clarified that Section 34(4) of the Arbitration and Conciliation Act, 1996, cannot be used to remit an award to the arbitrator for making a finding on an issue that was not previously addressed. The Court emphasized that Section 34(4) is meant to fill gaps in reasoning or provide additional reasons for a finding that has already been made. The Court also highlighted that if an arbitrator ignores relevant evidence, leading to a finding that is patently illegal, the matter cannot be remitted under Section 34(4). The Supreme Court dismissed the appeal, upholding the High Court’s decision.