Supreme Court Restores Arbitrator’s Award: Haryana Tourism Ltd. vs. Kandhari Beverages Ltd. (2022)

Introduction

Date of the Judgment: January 11, 2022
Citation: 2022 INSC 32
Judges: M.R. Shah, J. and B.V. Nagarathna, J.

Can a High Court, in an appeal against an arbitration award, re-examine the merits of the case? The Supreme Court of India recently addressed this crucial question in a dispute between Haryana Tourism Limited and Kandhari Beverages Limited. The court clarified the limited scope of interference permissible under Section 37 of the Arbitration and Conciliation Act, 1996, emphasizing that High Courts should not act as regular appellate courts when reviewing arbitration awards. This judgment underscores the principle of minimal judicial intervention in arbitration matters. The judgment was authored by Justice M.R. Shah, with Justice B.V. Nagarathna concurring.

Case Background

Haryana Tourism Limited (the Corporation) invited tenders for the supply of aerated cold drinks at its tourist complexes for the period of May 15, 2001, to May 14, 2002. The tender submitted by Kandhari Beverages Limited (the respondent) was accepted. As part of the agreement, the respondent was to pay ₹20 lakhs for brand promotion, to be spent as mutually agreed.

The Corporation organized a Mango Mela on July 7-8, 2001, spending ₹1 lakh. Both parties agreed to hold musical nights. The respondent claimed to have spent ₹13.92 lakhs on these events. However, the Corporation demanded ₹19 lakhs as sponsorship money on September 20, 2001, and subsequently terminated the contract on January 17, 2002. This led to a dispute, which was referred to a sole arbitrator.

Timeline

Course of Proceedings

The arbitrator, on November 17, 2005, directed the respondent to pay ₹9.5 lakhs and dismissed the respondent’s counter-claim of ₹13.92 lakhs. The respondent then filed an objection petition under Section 34 of the Arbitration Act before the Additional District Judge, Chandigarh, which was dismissed on September 25, 2014.

Aggrieved by the dismissal, the respondent appealed to the High Court of Punjab and Haryana under Section 37 of the Arbitration Act. The High Court, on July 17, 2018, allowed the appeal, setting aside both the arbitrator’s award and the order of the Additional District Judge. This led to the Corporation filing the present appeal before the Supreme Court.

Legal Framework

The core legal issue revolves around Section 37 of the Arbitration and Conciliation Act, 1996. This section deals with appeals against orders made under Section 34, which allows for setting aside an arbitral award. The Supreme Court’s judgment emphasizes the limited scope of interference allowed under Section 37.

Section 37 of the Arbitration Act states:
“(1) An appeal shall lie from the following orders (and from no others) to the Court authorised by law to hear appeals from original decrees of the Court passing the order, namely:—
(a) granting or refusing to grant any measure under section 9;
(b) setting aside or refusing to set aside an arbitral award under section 34.”

The Supreme Court has consistently held that the scope of interference under Section 37 is very limited and is similar to the scope under Section 34. The court can only interfere if the award is against the public policy of India, which includes being contrary to the fundamental policy of Indian law, the interest of India, justice or morality, or if it is patently illegal.

Arguments

Appellant (Haryana Tourism Limited) Arguments:

• The High Court exceeded its jurisdiction under Section 37 of the Arbitration Act by re-evaluating the merits of the claim.
• The High Court’s role in an appeal under Section 37 is limited to determining if the award was against the public policy of India.
• The High Court should not have acted as a first appellate court against the arbitrator’s award.

Respondent (Kandhari Beverages Limited) Arguments:

• The arbitrator lacked jurisdiction to pass the award because no amount was due to the Corporation, as the Corporation did not spend on marketing activities.
• The composition of the Arbitral Tribunal and appointment of the sole arbitrator were not in accordance with Clause 13 of the contract.
• The question of jurisdiction can be raised under Section 16 of the Arbitration Act even after the award is passed.
• The respondent had a valid counter-claim for ₹13.92 lakhs, which was wrongly rejected by the arbitrator.

The innovativeness of the arguments was in the respondent’s challenge to the arbitrator’s jurisdiction even after the award was passed, based on Section 16 of the Arbitration Act.

Issues Framed by the Supreme Court

The primary issue framed by the Supreme Court was:

1. Whether the High Court exceeded its jurisdiction under Section 37 of the Arbitration Act while setting aside the award passed by the arbitrator and the order passed by the Additional District Judge under Section 34 of the Arbitration Act?

Treatment of the Issue by the Court

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

Authorities

The Supreme Court relied on the settled position of law that an award can be set aside only if it is against the public policy of India. This includes being contrary to:

• Fundamental policy of Indian law
• The interest of India
• Justice or morality
• Patent illegality

The Court also considered Section 34 and Section 37 of the Arbitration and Conciliation Act, 1996, to determine the scope of interference by the High Court.

Judgment

The Supreme Court analyzed how each submission was treated and how authorities were used to reach its decision.

The Court viewed the authorities as follows:

✓ Section 34 of the Arbitration and Conciliation Act, 1996* was used to define the grounds for setting aside an arbitral award.

✓ Section 37 of the Arbitration and Conciliation Act, 1996* was used to define the limited scope of appeal against an order under Section 34.

✓ Public Policy of India* was used as the benchmark to determine if the arbitral award could be set aside.

What weighed in the mind of the Court?

The Supreme Court was primarily influenced by the principle of minimal judicial interference in arbitration matters. The Court emphasized that the High Court exceeded its jurisdiction by re-evaluating the merits of the case, which is not permissible under Section 37 of the Arbitration Act. The Court reiterated that the scope of interference under Section 37 is very limited and is similar to the scope under Section 34, which allows interference only if the award is against the public policy of India.

The court’s logical reasoning for the issue is as follows:

The Court considered alternative interpretations but rejected them because the High Court had clearly overstepped the boundaries of Section 37 by re-examining the factual aspects of the case.

The Supreme Court held that the High Court should not have acted as a regular appellate court and should have only examined if the award was against the public policy of India.

The court stated, “The High Court has entered into the merits of the claim and has decided the appeal under Section 37 of the Arbitration Act as if the High Court was deciding the appeal against the judgment and decree passed by the learned trial Court.”

The court further stated, “Thus, the High Court has exercised the jurisdiction not vested in it under Section 37 of the Arbitration Act.”

The Court also stated, “As per settled position of law laid down by this Court in a catena of decisions, an award can be set aside only if the award is against the public policy of India.”

Key Takeaways

• High Courts should not re-evaluate the merits of a case when exercising appellate jurisdiction under Section 37 of the Arbitration Act.
• The scope of interference under Section 37 is limited to whether the arbitral award is against the public policy of India.
• Judicial intervention in arbitration matters should be minimal, respecting the autonomy of the arbitral process.
• The High Court cannot act as a first appellate court when exercising jurisdiction under Section 37 of the Arbitration Act.

This judgment reinforces the principle of minimal judicial intervention in arbitration and emphasizes the importance of adhering to the boundaries set by Section 37 of the Arbitration Act. It clarifies that High Courts should not re-examine the factual aspects of the case unless the award is against the public policy of India.

Directions

The Supreme Court quashed and set aside the impugned judgment and order passed by the High Court. The award passed by the arbitrator and the order passed by the Additional District Judge under Section 34 of the Arbitration Act overruling the objections were restored.

Development of Law

The ratio decidendi of this case is that the High Court’s appellate powers under Section 37 of the Arbitration Act are limited to reviewing whether the arbitral award is against the public policy of India and does not extend to re-evaluating the merits of the case. This case reinforces the previous positions of law regarding minimal judicial intervention in arbitration matters.

Conclusion

In conclusion, the Supreme Court’s decision in Haryana Tourism Limited vs. M/s Kandhari Beverages Limited clarifies the limited scope of appellate review under Section 37 of the Arbitration and Conciliation Act, 1996. The Court held that the High Court exceeded its jurisdiction by re-evaluating the merits of the case, which is not permissible under Section 37. The Supreme Court restored the arbitrator’s award and the order of the Additional District Judge, emphasizing the principle of minimal judicial intervention in arbitration matters.