Supreme Court permits evidence in Section 34 Arbitration Act: Alpine Housing vs. Ashok Dhariwal (2023)

Introduction

Date of the Judgment: 19 January 2023
Citation: 2023 INSC 57
Judges: M.R. Shah, J. and C.T. Ravikumar, J. (authored by M.R. Shah, J.)

Can a party submit new evidence when challenging an arbitration award in court? The Supreme Court of India recently addressed this crucial question, clarifying the scope of evidence allowed under Section 34 of the Arbitration and Conciliation Act, 1996, particularly concerning challenges based on public policy. This judgment clarifies the extent to which additional evidence can be introduced when challenging an arbitral award, especially on grounds of public policy.

The Supreme Court bench comprising Justices M.R. Shah and C.T. Ravikumar, with the opinion authored by Justice M.R. Shah, examined whether a party can present evidence to support claims that an arbitral award conflicts with the public policy of India, in an application under Section 34 of the Arbitration and Conciliation Act, 1996.

Case Background

The dispute arose from an arbitration award dated 12 March 1998, which was an ex-parte award. The respondents, who did not participate in the arbitration proceedings, filed an application under Section 34 of the Arbitration and Conciliation Act, 1996, seeking to set aside the award. They also filed an interim application (IA No. 4) to adduce additional evidence, arguing that the award was not executable due to the refusal of the authorities to amalgamate the plots, which was a condition for the specific performance.

The appellant, M/s Alpine Housing Development Corporation Pvt. Ltd., objected to the application to adduce additional evidence, arguing that the 2019 amendment to Section 34(2)(a) of the Arbitration and Conciliation Act, 1996, limited the scope of judicial review to the record of the arbitral tribunal. The respondents, Ashok S. Dhariwal and Others, contended that the award was unenforceable because the necessary permissions for amalgamation of land were denied, rendering the award in conflict with public policy.

Timeline

Course of Proceedings

The Additional City Civil and Sessions Judge, Bengaluru, rejected the respondents’ application to adduce evidence, stating that it would defeat the purpose of expeditious disposal of arbitration matters. The court relied on the amended Section 34(2)(a) of the Arbitration and Conciliation Act, 1996, which requires the grounds for setting aside an award to be established based on 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, which allowed for the adducing of evidence in Section 34 proceedings. The High Court permitted the respondents to adduce evidence in the proceedings under Section 34 of the Act.

Legal Framework

The case primarily revolves around Section 34 of the Arbitration and Conciliation Act, 1996, which deals with applications to set aside arbitral awards. The key provision is Section 34(2)(a), which, prior to the 2019 amendment, stated that an award could be set aside if the party making the application “furnishes proof” of certain grounds. The 2019 amendment changed this to “establishes on the basis of the record of the arbitral tribunal”.

The relevant provisions are:

• Section 34(2)(a) of the Arbitration and Conciliation Act, 1996 (pre-amendment): “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)(a) of the Arbitration and Conciliation Act, 1996 (post-amendment): “An arbitral award may be set aside by the Court only if – (a) the party making the application establishes on the basis of the record of the arbitral tribunal 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 and 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.”

The court also considered the interplay between Section 34(2)(a) and Section 34(2)(b), particularly whether the “furnish proof” requirement in the pre-amendment version of Section 34(2)(a) applies to challenges under Section 34(2)(b) as well.

Arguments

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

• The High Court erred in permitting the respondents to adduce evidence, as it goes against the object of the 2019 amendment to Section 34(2)(a) of the Arbitration and Conciliation Act, 1996, which aims for speedy disposal of arbitration proceedings.
• The 2019 amendment substituted “furnishes proof” with “establish on the basis of record of the arbitral tribunal,” limiting the scope of judicial review to the arbitral record.
• The concession made before the High Court that the pre-amendment version of Section 34(2)(a) applies is not binding, as it is against the law.
• Even if the pre-amendment version applies, the “furnish proof” requirement in Section 34(2)(a) does not apply to challenges under Section 34(2)(b), which deals with non-arbitrability and public policy. The grounds under Section 34(2)(a) and Section 34(2)(b) are separate.
• The court can decide on its own based on the arbitral award that the dispute was not arbitrable or that the award conflicts with public policy under Section 34(2)(b).
• The ratio of the Supreme Court’s decision in Fiza Developers (supra) was for framing of issues, which is not required in Section 34 proceedings. The decision in Emkay Global Financial Services Limited v. Girdhar Sondhi, (2018) 9 SCC 49, clarified that only Section 34(2)(a) contemplates furnishing proof.
• The 2019 amendment to Section 34(2)(a) is clarificatory and should be applied to Section 34(2)(b) as well, as held in Gemini Bay Transcription Private Limited v. Integrated Sales Service Limited, (2022) 1 SCC 753, while considering Section 48(1) of the Act.
• The respondents’ contention that the award is frustrated due to the refusal of permission for clubbing khatas does not fall under the “conflict with public policy” ground under Section 34(2)(b).
• The respondents failed to participate in the arbitration proceedings and should not be allowed to lead evidence now.

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, and the arbitrators arbitrarily decided to proceed under the Arbitration Act, 1996.
• The respondents applied for amalgamation of khatas twice, but the applications were rejected due to the presence of a rain water drain.
• The respondents sought to produce evidence of the final endorsement dated 17 March 2003, which rejected the amalgamation of khatas.
• The award is incapable of being implemented and/or executed under Section 34(2)(b)(i) and (ii) of the Arbitration and Conciliation Act, 1996, and Section 56 of the Indian Contract Act.
• The enforcement of the award is contrary to public policy, local law, and void, leading to Section 56 of the Indian Contract Act.
• The pre-amendment version of Section 34(2)(a) applies, which uses the words “furnish proof,” and this requirement applies to both Section 34(2)(a) and Section 34(2)(b).
• The respondents relied on the decisions in Fiza Developers (supra), Emkay Global (supra), and Canara Nidhi Limited v. M. Shashikala, (2019) 9 SCC 462, to support their claim that evidence can be adduced under Section 34.
• 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, as held in S.P. Singla Constructions Pvt. Ltd. v. State of Himachal Pradesh, (2019) 2 SCC 488.

Issues Framed by the Supreme Court

The Supreme Court framed the following issue for consideration:

1. Whether the 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

Authorities

The Supreme Court considered the following authorities:

Judgment

How each authority was viewed by the Court?

• The Supreme Court followed the ratio of Fiza Developers and Inter-Trade Private Limited v. AMCI (India) Private Limited & Another, (2009) 17 SCC 796, stating that issues need not be framed in Section 34 proceedings, but evidence can be adduced.
• The Supreme Court explained the decision in Emkay Global Financial Services Limited v. Girdhar Sondhi, (2018) 9 SCC 49, stating that only Section 34(2)(a) contemplates furnishing proof, but clarified that the pre-amendment position allows for evidence in Section 34(2)(b) as well.
• The Supreme Court approved the interpretation of Section 34(2)(a) in Canara Nidhi Limited v. M. Shashikala, (2019) 9 SCC 462, but clarified that the pre-amendment position allows for evidence in Section 34(2)(b) as well.
• The Supreme Court considered the decision in Gemini Bay Transcription Private Limited v. Integrated Sales Service Limited, (2022) 1 SCC 753, which treated the 2019 amendment to Section 34(2)(a) as clarificatory, but clarified that the pre-amendment position allows for evidence in Section 34(2)(b) as well.
• The Supreme Court relied on the decision in S.P. Singla Constructions Pvt. Ltd. v. State of Himachal Pradesh, (2019) 2 SCC 488, to hold 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’s decision was influenced by several factors:

• The arbitration proceedings commenced and the award was passed before the 2019 amendment to Section 34(2)(a) of the Arbitration and Conciliation Act, 1996.
• The need to balance the objective of speedy resolution of arbitration disputes with the need to ensure that awards are not contrary to public policy.
• The fact that the ground of public policy can arise after the award is passed, making it necessary to allow for evidence.
• The fact that the arbitral award was an ex-parte award and no evidence was led by the respondents before the arbitral tribunal.

Logical Reasoning:

The Court rejected the argument that the issue of public policy can only be raised during execution proceedings, stating that it is a valid ground to set aside the award under Section 34(2)(b). The Court also considered the fact that the arbitral award was an ex-parte award and no evidence was led by the respondents before the arbitral tribunal.

The Supreme Court, therefore, held that the High Court was correct in allowing the respondents to adduce evidence in the Section 34 application. This was because the grounds for challenging the award, specifically the conflict with public policy, arose after the award was passed. The Supreme Court also noted that the arbitral award was an ex-parte award and no evidence was led by the respondents before the arbitral tribunal.

The Court reasoned that while Section 34 of the Arbitration and Conciliation Act, 1996, aims for speedy resolution of arbitration disputes, this objective must be balanced with the need to ensure that awards are not contrary to public policy. The Court also noted that the ground of public policy can arise after the award is passed, making it necessary to allow for evidence.

The Court emphasized that 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.

The Court also noted that even for establishing that the arbitral award is in conflict with Public Policy of India, in a given case, the evidence may have to be led and by leading evidence, the person who is challenging the award on that ground can establish and prove that the arbitral award is in conflict with Public Policy of India and/or the subject matter of dispute is not capable of settlement by arbitration under the law for the time being in force. However, at the same time, from the record before the arbitrator, if the same can be established and proved 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, in that case, the person may not be permitted to file the affidavit by way of evidence/additional evidence.

The Supreme Court quoted from the judgment:

• “…in case of arbitration proceedings commenced and concluded prior to the amendment of section 34(2)(a) by Act 33/2019, pre-amendment of section 34(2)(a) shall be applicable.”
• “…the legal position is thus clarified that section 34 application will not ordinarily require anything beyond the record that was before the arbitration and that cross-examination of persons swearing in to the affidavits should not be allowed unless absolutely necessary.”
• “…the defence that the arbitral award is in conflict with the Public Policy of India itself can be a ground to set aside the award in view of section 34(2)(b) of the Act.”

Key Takeaways

• In arbitration proceedings commenced before the 2019 amendment to Section 34(2)(a) of the Arbitration and Conciliation Act, 1996, the pre-amendment provision applies.
• A party can adduce evidence to support a challenge to an arbitral award based on public policy grounds under Section 34(2)(b) of the Arbitration and Conciliation Act, 1996, especially when the grounds for challenge arise after the award is passed.
• The “furnish proof” requirement under the pre-amendment version of Section 34(2)(a) applies to challenges under Section 34(2)(b) as well.
• The refusal to grant permission for amalgamation of plots, which occurred after the award, can be a valid ground under Section 34(2)(b) as it renders the award incapable of being executed and conflicts with public policy.
• The issue of public policy can be raised in Section 34 proceedings and does not need to wait until execution proceedings.

Directions

The Supreme Court directed that the appellant may also be permitted to cross-examine the witnesses who may be examined on behalf of the respondents and the Additional City Civil and Sessions Judge, Bengaluru, to decide the application filed under Section 34 of the Arbitration and Conciliation Act, 1996, on merits, in accordance with law and in light of the observations made by the Court. The Court further directed that the proceedings before the Additional City Civil and Sessions Judge, Bengaluru, shall be expedited.

Final Decision

The Supreme Court dismissed the appeal, upholding the High Court’s decision to allow the respondents to adduce evidence in the Section 34 application. The Court clarified that the pre-amendment version of Section 34(2)(a) applies in this case and that evidence can be adduced to support a challenge based on public policy under Section 34(2)(b), especially when the grounds for challenge arise after the award is passed. The Court also directed the lower court to expedite the proceedings.