Supreme Court Upholds High Court Decision on Arbitration Award Remission: I-Pay vs. ICICI Bank (2022)

Introduction

Date of the Judgment: January 3, 2022

Citation: 2022 INSC 7

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

Can a court send an arbitration award back to the arbitrator for further review if the arbitrator failed to make a finding on a crucial issue? The Supreme Court of India addressed this question in a recent case involving I-Pay Clearing Services Private Limited and ICICI Bank Limited. The core issue revolved around whether the High Court was correct in refusing to remit the arbitral award back to the arbitrator under Section 34(4) of the Arbitration and Conciliation Act, 1996, when the arbitrator had not recorded a finding on a key issue. The Supreme Court upheld the High Court’s decision, clarifying the scope of Section 34(4) of the Act. The judgment was delivered by a bench comprising Justice R. Subhash Reddy and Justice Hrishikesh Roy.

Case Background

I-Pay Clearing Services Private Limited (I-Pay), the appellant, was in the business of providing card personalization and transaction management for loyalty programs. They entered into an agreement with ICICI Bank Limited (ICICI Bank), the respondent, on November 4, 2002, to manage smart card-based loyalty programs for Hindustan Petroleum Corporation Limited (HPCL). This agreement was followed by another agreement on February 4, 2003, to develop software for a postpaid Smart Card Loyalty Program. Later, ICICI Bank requested I-Pay to develop a “Drive Track Fleet Card” management solution. I-Pay claimed that ICICI Bank abruptly terminated the Service Provider Agreement, causing significant losses, including job losses and employee retrenchment costs, totaling over Rs. 50 crores. I-Pay initially 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.

Timeline:

Course of Proceedings

Initially, I-Pay filed a suit in the High Court of Judicature at Bombay, which was then referred to arbitration under Section 8 of the Arbitration and Conciliation Act, 1996. The High Court appointed Mr. Justice R.G. Sindhakar (Retd.) as the Sole Arbitrator. The Arbitrator passed an award on November 13, 2017, directing ICICI Bank to pay I-Pay Rs. 50 crores with 18% interest and Rs. 50,000 towards costs. ICICI Bank challenged this award under Section 34(1) of the Act, arguing that there was an accord and satisfaction between the parties, and the Arbitrator had not recorded 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 to the arbitrator for additional reasons. The High Court dismissed I-Pay’s motion, stating that the defect in the award was not curable, as the Arbitrator had not recorded a finding on the key issue of illegal termination.

Legal Framework

The case primarily revolves around the interpretation of Section 34 of the Arbitration and Conciliation Act, 1996. Specifically:

• Section 34(1): This section allows a party to apply to a court to set aside an arbitral award.
• Section 34(2A): This section states that an arbitral award can be set aside if it is vitiated by patent illegality appearing on the face of the award. It also clarifies that an award should not be set aside merely on the ground of an erroneous application of the law or by re-appreciation of evidence.
• Section 34(4): This section allows the court to adjourn proceedings to give the arbitral tribunal an opportunity to resume proceedings or take other action to eliminate grounds for setting aside the award.
• Section 31: This section deals with the form and contents of an arbitral award, stating that an award shall state the reasons upon which it is based, unless the parties agree otherwise.

The Supreme Court also considered Article 34(4) of the UNCITRAL Model Law on International Commercial Arbitration, which is similar to Section 34(4) of the Indian Act. The Court emphasized that the Act aims to ensure the enforceability of awards while also providing mechanisms to correct curable defects.

The relevant sections of the Arbitration and Conciliation Act, 1996 are as follows:

“34.(2A) An arbitral award arising out of arbitrations other than international commercial arbitrations, may also be set aside by the Court, if the Court finds that the award is vitiated by patent illegality appearing on the face of the award: Provided that an award shall not be set aside merely on the ground of an erroneous application of the law or by re-appreciation of evidence.”

“(4) 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

Appellant (I-Pay) Arguments:

• The Arbitrator awarded compensation based on the illegal termination of the contract, but did not provide detailed reasons for this finding.

• The lack of detailed reasoning is a curable defect under Section 34(4) of the Arbitration and Conciliation Act, 1996, and the matter should be remitted to the Arbitrator to provide additional reasons.

• Section 34(4) of the Act is based on Article 34(4) of the UNCITRAL Model Law, which allows for remission as a curative alternative to setting aside the award.

• The power to remit is an alternative to setting aside the award, and the aim is to eliminate defects to preserve the award.

• The provision under Section 34(4) can be used when the award lacks reasoning or has gaps in the reasoning.

Respondent (ICICI Bank) Arguments:

• The High Court correctly dismissed the motion to remit the matter, as the Arbitrator had not considered relevant evidence and had ignored the fact that there was an accord and satisfaction between the parties.

• The Arbitrator did not record a finding on whether the contract was illegally and abruptly terminated, which is a jurisdictional error.

• The award suffers from perversity and patent illegality due to the Arbitrator ignoring key evidence, which cannot be cured by remittal under Section 34(4) of the Act.

• The Arbitrator cannot change the award under the guise of adding reasons.

• The plea to remit is an afterthought to protract litigation.

• There is a difference between ‘findings’ and ‘reasons’, and the Arbitrator did not make a finding on the key issue.

Issues Framed by the Supreme Court

The Supreme Court considered the following key issue:

1. Whether the High Court was justified in rejecting the application filed by the appellant under Section 34(4) of the Arbitration and Conciliation Act, 1996, seeking to remit the matter to the Arbitrator for providing additional reasons, when the Arbitrator had not recorded a finding on the issue of illegal termination of the contract.

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 Court distinguished the case of Kinnari Mullick and Anr. v. Ghanshyam Das Damani [2018] 11 SCC 328*, stating that it dealt with the power to relegate parties to the Tribunal after setting aside an award, not the issue of remitting for a missing finding.
• The Court distinguished the case of Dyna Technologies Pvt. Ltd. v. Crompton Greaves Ltd. [2019] SCC ONLINE SC 1656*, stating it dealt with deficiency in the award due to lack of reasoning for a finding already recorded, not a missing finding on a contentious issue.
• The Court distinguished the case of Som Datt Builders Limited v. State of Kerala [2009] 10 SCC 259*, stating it dealt with a situation where no reasons were given for a finding already recorded, not a missing finding on a contentious issue.
• The Court cited the case of AKN & Anr. v. ALC & Ors. [2015] SGCA 63*, noting that this case held remission to be a ‘curative alternative’ to setting aside the award, but distinguished it on the facts of the present case.
• The Court cited the case of Permasteelisa Pacific Holdings Ltd. v. Hyundai Engineering & Construction Co. Ltd. [2005] SGHC 33* in the context of remission as a curative measure, but distinguished it on the facts of the present case.
• The Court cited the case of Income Tax Officer, A Ward, Sitapur v. Murlidhar Bhagwan Das AIR 1965 SC 342* to differentiate between ‘findings’ and ‘reasons’, stating that a ‘finding’ is a decision on an issue.
• The Court cited the case of J. Ashoka v. University of Agricultural Sciences and Ors. [2017] 2 SCC 609* to define ‘reasons’ as the links between materials and conclusions.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily driven by the procedural irregularity in the Arbitrator’s award. The Court emphasized that Section 34(4) of the Arbitration and Conciliation Act, 1996, is intended to address gaps in reasoning or to provide additional reasons for findings already made, not to rectify the absence of a finding on a crucial issue. The Court was also influenced by the fact that the Arbitrator had ignored key evidence presented by ICICI Bank regarding the alleged accord and satisfaction between the parties. The Court’s reasoning reflects a concern that remitting the matter would allow the Arbitrator to effectively change the award, which is not permissible under Section 34(4) of the Act. The Court also noted that the power to remit is discretionary and should not be used when there is a patent illegality in the award.

Fact:Law Ratio

The Supreme Court’s decision was heavily influenced by legal considerations (70%), focusing on the correct interpretation of Section 34(4) of the Arbitration and Conciliation Act, 1996, and the scope of the court’s power to remit matters to the arbitral tribunal. While factual aspects (30%), such as the arbitrator’s failure to consider evidence of accord and satisfaction, were also considered, the legal framework and procedural correctness were the primary drivers of the judgment.

The Supreme Court held that the High Court was correct in refusing to remit the matter back to the Arbitrator. The Court reasoned that Section 34(4) of the Arbitration and Conciliation Act, 1996, is intended to allow the Arbitrator to fill in gaps in reasoning or provide additional reasons for findings already made, not to make a finding on a contentious issue that was not addressed in the original award. The Court also noted that the Arbitrator had ignored key evidence presented by ICICI Bank regarding the alleged accord and satisfaction between the parties. The Court emphasized that the power to remit is discretionary and should not be used when there is a patent illegality in the award. The Court also pointed out that remitting the matter would allow the Arbitrator to change the award, which is not permissible under Section 34(4) of the Act.

“From a reading of Section 34(4) of the Act, it is clear that on receipt of an application under sub- section (1), in appropriate cases on a request by a party, Court may adjourn the proceedings for a period determined by it in the 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.”

“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 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.”

Key Takeaways

• Scope of Section 34(4): Section 34(4) of the Arbitration and Conciliation Act, 1996, is intended to allow the arbitral tribunal to provide additional reasons or fill gaps in the reasoning for findings already made, but not to make a finding on a contentious issue that was not addressed in the original award.
• Patent Illegality: When an arbitral award does not record a finding on a key issue or ignores material evidence, it constitutes a patent illegality that cannot be cured by remittal under Section 34(4) of the Act.
• Discretionary Power: The power to remit a matter to the arbitral tribunal under Section 34(4) is discretionary and should not be exercised when there is a patent illegality in the award or when it would allow the arbitrator to change the award.
• Distinction between Findings and Reasons: A ‘finding’ is a decision on an issue, while ‘reasons’ are the links between materials and conclusions. The absence of a finding on a key issue cannot be cured by providing additional reasons.

Directions

The Supreme Court did not give any specific directions other than dismissing the appeal and upholding the High Court’s decision.

Specific Amendments Analysis

There was no discussion on specific amendments in the judgment.

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 when there is no finding on a key contentious issue. This judgment clarifies that the section is intended for addressing gaps in reasoning or providing additional reasons for findings already made, not for creating new findings. This decision reinforces the limited scope of judicial intervention in arbitral awards and emphasizes the importance of arbitrators addressing all key issues in their awards to avoid challenges under Section 34 of the Arbitration and Conciliation Act, 1996.

Conclusion

In conclusion, the Supreme Court dismissed the appeal filed by I-Pay, upholding the High Court’s decision. The Court clarified that Section 34(4) of the Arbitration and Conciliation Act, 1996, cannot be used to remit an arbitral award when the arbitrator has failed to record a finding on a key issue. The Court emphasized that the power to remit is discretionary and should not be used when there is a patent illegality in the award or when it would allow the arbitrator to change the award. This judgment provides important guidance on the scope of Section 34(4) and the circumstances under which a court can remit a matter to the arbitral tribunal.

Category

Parent Category: Arbitration Law

Child Categories:

• Section 34, Arbitration and Conciliation Act, 1996
• Remission of Arbitral Award
• Patent Illegality
• Curable Defects

Parent Category: Arbitration and Conciliation Act, 1996

Child Categories:

• Section 34, Arbitration and Conciliation Act, 1996

FAQ

Q: What is Section 34(4) of the Arbitration and Conciliation Act, 1996?

A: Section 34(4) allows a court to adjourn proceedings to give the arbitral tribunal an opportunity to resume proceedings or take other action to eliminate grounds for setting aside the award. This is generally used to correct curable defects in the award.

Q: Can a court remit an arbitral award to the tribunal under Section 34(4) if there is no finding on a key issue?

A: No, the Supreme Court clarified that Section 34(4) can be used to record reasons on a finding already given or to fill gaps in the reasoning, but not when there is no finding on a contentious issue.

Q: What is the difference between ‘findings’ and ‘reasons’ in the context of an arbitral award?

A: A ‘finding’ is a decision on an issue, while ‘reasons’ are the links between materials and conclusions. The absence of a finding on a key issue cannot be cured by providing additional reasons.

Q: What is patent illegality in the context of an arbitral award?

A: Patent illegality refers to an error that is apparent on the face of the award. In this case, the arbitrator’s failure to record a finding on the issue of illegal termination of the contract was considered a patent illegality.

Q: What was the main reason for the Supreme Court’s decision in the I-Pay vs. ICICI Bank case?

A: The Supreme Court upheld the High Court’s decision, stating that the arbitrator’s failure to record a finding on a key issue (illegal termination of the contract) was a patent illegality that could not be cured by remittal under Section 34(4) of the Act.

Q: What is the significance of this judgment for arbitration law?

A: This judgment clarifies the scope of Section 34(4) of the Arbitration and Conciliation Act, 1996, and emphasizes the importance of arbitrators addressing all key issues in their awards. It also reinforces the limited scope of judicial intervention in arbitral awards.