Supreme Court Restores Arbitrator’s Award in Land Development Dispute: Jagjeet Singh Lyallpuri vs. Unitop Apartments (2019)

Introduction

Date of the Judgment: December 03, 2019

Citation: (2019) INSC 1234

Judges: R. Banumathi, A.S. Bopanna, and Hrishikesh Roy, JJ.

Can an arbitral award be overturned because a party later claims they didn’t get a chance to cross-examine witnesses, even if they agreed to the procedure? This is the core question the Supreme Court of India tackled in a recent case. The Court examined whether the High Court was correct in setting aside an arbitrator’s award, focusing on the agreed-upon procedure. The Supreme Court bench comprised Justices R. Banumathi, A.S. Bopanna, and Hrishikesh Roy. The judgment was authored by Justice A.S. Bopanna.

Case Background

The appellants, joint owners of land in Ludhiana, entered into an agreement on December 14, 1996, with the respondent company for a joint venture to construct a residential-cum-commercial complex. The respondent was to complete construction within three years of obtaining the sanctioned plan, which was secured on July 4, 1997. The project was to be funded by the respondent, who also deposited Rs. 45,00,000 with the appellants as a guarantee. The sale proceeds were to be shared in a 48:52 ratio between the appellants and the respondent.

Construction began in August 1997 but was halted by March 31, 1999. The appellants, noting the lack of progress, issued a legal notice on November 1, 2001, terminating the agreement. A cancellation agreement was made on October 26, 2004, and Rs. 40,00,000 was returned to the respondent. Subsequently, the respondent invoked the arbitration clause on November 23, 2004, leading to the appointment of a sole arbitrator.

Timeline

Course of Proceedings

The matter was referred to a sole arbitrator, who, after considering the evidence and arguments, dismissed both the claim and counter-claim on January 13, 2010. The respondent then filed a petition under Section 34 of the Arbitration and Conciliation Act, 1996, in the Additional District Judge’s Court, which was also dismissed on September 13, 2012. The respondent appealed to the High Court under Section 37 of the Act, 1996. The High Court remanded the matter back to the arbitrator, citing a lack of opportunity for the parties to lead evidence and cross-examine witnesses.

Legal Framework

The case primarily revolves around the interpretation of the Arbitration and Conciliation Act, 1996, specifically:

• Section 19: “(1) The arbitral tribunal shall not be bound by the Code of Civil Procedure, 1908 (5 of 1908) or the Indian Evidence Act, 1872 (1 of 1872). (2) Subject to this Part, the parties are free to agree on the procedure to be followed by the arbitral tribunal in conducting its proceedings. (3) Failing any agreement referred to in sub-section (2), the arbitral tribunal may, subject to this Part, conduct the proceedings in the manner it considers appropriate. (4) The power of the arbitral tribunal under sub-section (3) includes the power to determine the admissibility, relevance, materiality and weight of any evidence.” This section allows flexibility in arbitration procedures.
• Section 34(2)(a)(iii): “the party making the application furnishes proof that – (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;” This section specifies grounds for setting aside an arbitral award, including the inability of a party to present their case.

Arguments

Appellant’s Arguments:

• The arbitrator has the power to determine the rules of procedure as per Section 19 of the Arbitration and Conciliation Act, 1996.
• The parties, represented by senior counsel, agreed to rely on affidavits and documents, dispensing with cross-examination.
• The High Court should not have expanded the scope of review under Section 37 of the Act, 1996, beyond the limited grounds under Section 34.
• The arbitrator had considered all aspects, including the cancellation agreement and the respondent’s claim of expenses incurred.

Respondent’s Arguments:

• The arbitrator did not decide each of the twelve claims separately.
• The delay in the project was due to the appellants not providing title documents, hindering the respondent’s ability to raise funds.
• The respondent incurred a loss of Rs. 1,22,00,000 due to the cost of construction.
• The arbitrator did not properly appreciate clause 11 of the agreement, which relates to expenditure incurred.
• The respondent was not given a proper opportunity to present their case, including cross-examining witnesses.

Issues Framed by the Supreme Court

The Supreme Court framed the following issues for consideration:

1. Whether the High Court, in an appeal under Section 37 of the Act, 1996, could have delved into the merits of the case beyond the scope available under Section 34(2) of the Act, 1996, to set aside the award and remand the matter.
2. Whether the contentions raised to assail the award by pointing out procedural lapses are acceptable, keeping in view the scope of Section 34(2) of the Act, 1996.

Treatment of the Issue by the Court

Authorities

The Supreme Court considered the following authorities:

• Section 19 of the Arbitration and Conciliation Act, 1996: This section outlines the procedure for arbitral proceedings and the flexibility provided to the arbitral tribunal.
• Section 34(2)(a)(iii) of the Arbitration and Conciliation Act, 1996: This section specifies the grounds for setting aside an arbitral award, particularly concerning the inability of a party to present their case.
• Oil and Natural Gas Corporation Ltd. vs. SAW Pipes Limited [2003 (5) SCC 705]: This case was cited by the High Court to justify remanding the matter. However, the Supreme Court found its reliance misplaced.

Judgment

How each authority was viewed by the Court:

• Section 19 of the Arbitration and Conciliation Act, 1996: The Court relied on this section to emphasize that the arbitral tribunal has the power to determine its own procedure and is not bound by the Code of Civil Procedure or the Indian Evidence Act.
• Section 34(2)(a)(iii) of the Arbitration and Conciliation Act, 1996: The Court clarified that this section provides a ground for setting aside an arbitral award only if a party was genuinely unable to present their case, which was not the situation here.
• Oil and Natural Gas Corporation Ltd. vs. SAW Pipes Limited [2003 (5) SCC 705]: The Court held that the High Court’s reliance on this case was misplaced, as the facts and circumstances were different.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the fact that the parties had agreed to the arbitration procedure, including the decision not to cross-examine witnesses. The Court emphasized that once parties consent to a procedure, they cannot later claim prejudice due to that same procedure. The Court also noted that the arbitrator had considered all relevant aspects of the case, including the claims of the respondent. The Court’s reasoning was also influenced by the fact that the respondent had not pursued their claims diligently, by not producing the erstwhile directors as witnesses.

Logical Reasoning:

The Court considered the respondent’s argument that they were not given a proper opportunity to present their case. However, the Court rejected this argument, noting that the respondent had agreed to the procedure and had not raised any objections during the arbitration proceedings. The Court also noted that the arbitrator had considered all the claims and counter-claims and had given a reasoned award.

The Court also considered the argument that the arbitrator had not considered the expenses incurred by the respondent. However, the Court noted that the arbitrator had considered this claim and had found no reliable evidence to support it. The Court also noted that the respondent had not produced any expert evidence to support their claim of expenses.

The Supreme Court stated, “From a perusal of the proceedings dated 28.11.2009 it would be clear that both contentions raised by the learned counsel for the respondent herein and which were accepted by the learned Single Judge to ultimately remand the matter, would not be justified. Firstly, in the presence of the parties and their learned counsel it has been recorded that they do not wish to cross-examine any of the witnesses whose affidavits have been filed by the parties concerned and one of the witness who was present was discharged without being cross examined and no grievance was made either by the parties or their learned counsel who were present.”

The Court further observed, “In that circumstance having consented to the said procedure, it would not be open for the respondent herein to approbate and reprobate so as to raise a different contention at this point. Having accepted the said procedure the respondent is estopped from raising such contention before the learned Single Judge that the arbitrator misconducted himself by not permitting the parties to cross-examine the witness and also that the learned Arbitrator being more than 70 years of age and suffering from knee problem has pressurized the respondent to speed up the matter and the evidence was closed.”

The Court also noted, “In that circumstance when the learned Arbitrator has noticed the contention and recorded a finding of fact it cannot be accepted that the learned Arbitrator has not adverted to the same so as to require reconsideration.”

Key Takeaways

✓ Parties in arbitration must adhere to the procedures they agree upon.

✓ Courts should not interfere with arbitral awards on procedural grounds when parties have consented to the procedure.

✓ The scope of review under Section 37 of the Arbitration and Conciliation Act, 1996, is limited and should not extend to a re-evaluation of the merits of the case.

✓ Arbitrators have the power to determine their own procedure, and parties must raise objections promptly.

✓ A party cannot claim prejudice if they have not diligently pursued their case or produced necessary evidence.

This judgment reinforces the principle of party autonomy in arbitration and limits the scope for judicial interference in arbitral awards. It emphasizes that parties must be diligent in pursuing their claims and cannot later challenge a procedure to which they had previously agreed.

Directions

The Supreme Court directed the appellant to pay Rs. 45,00,000 to the respondent within three months. Upon payment, the appellant would be entitled to resume possession of the subject land.

Specific Amendments Analysis

Not Applicable.

Development of Law

The ratio decidendi of this case is that parties are bound by the procedure they agree to in arbitration, and courts should not interfere with arbitral awards on procedural grounds when those procedures have been mutually agreed upon. This ruling reinforces the principle of party autonomy in arbitration and limits the scope for judicial interference. There is no change in the previous position of law, but rather a reaffirmation of the principles laid down in the Arbitration and Conciliation Act, 1996.

Conclusion

The Supreme Court set aside the High Court’s order and restored the arbitrator’s award. The Court emphasized that parties are bound by the procedures they agree to in arbitration and that courts should not interfere with arbitral awards on procedural grounds when those procedures have been mutually agreed upon. The Court also directed the appellant to pay Rs. 45,00,000 to the respondent, in full quit of all claims.