Supreme Court Upholds Setting Aside of Arbitral Award in Business Dispute: Ratnam Sudesh Iyer vs. Jackie Kakubhai Shroff (2021)

Date of the Judgment: November 10, 2021

Citation: 2021 INSC 726

Judges: Sanjay Kishan Kaul, J., M.M. Sundresh, J.

Can a seemingly minor breach of a settlement agreement justify nullifying substantial financial benefits? The Supreme Court of India recently addressed this question in a dispute between two shareholders of an investment holding company. The core issue revolved around whether an arbitral award, which penalized one party for an alleged breach of a settlement, was rightly set aside by the High Court. The Supreme Court examined the nature of the arbitral award, the applicability of amendments to the Arbitration and Conciliation Act, 1996, and whether the award conflicted with the fundamental policy of Indian law. The bench comprised Justices Sanjay Kishan Kaul and M.M. Sundresh, with Justice Sanjay Kishan Kaul authoring the judgment.

Case Background

The dispute arose from a business association between Ratnam Sudesh Iyer (the appellant) and Jackie Kakubhai Shroff (the respondent), who were shareholders in Atlas Equifin Private Limited (‘Atlas’). Atlas held shares in Multi Screen Media Pvt. Ltd. (‘MSM’). The appellant had been trying to sell the MSM shares since 2002. On November 15, 2005, the parties authorized Standard Chartered Bank (‘SCB’) to find a buyer for the appellant’s shares in Atlas. The respondent later claimed his signatures on the placement instructions were forged and filed a complaint with the Economic Offences Wing, Mumbai Police (‘EOW’) on April 19, 2010, against the appellant and SCB.

To resolve the dispute, the parties entered into a Deed of Settlement on January 3, 2011. The deed included clauses for the respondent to withdraw complaints against the appellant, refrain from making further complaints, and receive payments. Specifically, US$1.5 million was to be held in escrow and released to the respondent upon confirmation from the EOW that the appellant had withdrawn his complaint. An additional US$2 million was to be paid to the respondent within seven days of the sale of MSM shares. The Deed of Settlement also contained an arbitration clause for resolving disputes.

Timeline:

Course of Proceedings

Following the alleged breaches of the Deed of Settlement, the appellant initiated arbitration proceedings. In July 2012, after a share purchase agreement was executed for MSM’s shares, the appellant filed a petition under Section 9 of the Arbitration & Conciliation Act, 1996, seeking interim relief against the respondent, his wife, and the escrow agent. The appellant argued that the US$1.5 million should not be released to the respondent due to the breach of the Deed of Settlement through the email sent by the respondent’s wife on June 15, 2011. A consent order was passed on August 6, 2012, dropping the respondent’s wife from the proceedings and referring the disputes to a sole arbitrator, a former Judge of the Supreme Court of India. The escrow agent was directed to hand over the US$1.5 million cheque only after the arbitrator’s direction.

The appellant lodged a claim before the arbitrator seeking a refund of US$1.5 million with 18% interest. The respondent challenged the arbitrator’s jurisdiction, but the arbitrator rejected this challenge. After MSM’s shares were sold in March 2013 and Atlas declared a dividend, the appellant sought to attach US$1.5 million of the respondent’s share of the proceeds. This application was rejected. The respondent then filed a petition seeking the release of the US$2 million held in escrow, which was also dismissed. The arbitrator made a final award on November 10, 2014, awarding US$1.5 million in liquidated damages to the appellant and denying the respondent the second escrow cheque of US$2 million.

The respondent challenged the award under Section 34 of the Arbitration & Conciliation Act, 1996, before the Bombay High Court, while the appellant filed for execution of the award. The High Court set aside the award on May 19, 2020. The appeal filed by the appellant under Section 37 of the said Act was dismissed by the Division Bench on April 20, 2021. The High Court granted interim protection against withdrawal of the amount specified under the Deed of Settlement for a limited period of time. The Supreme Court issued notice on August 2, 2021, and extended the interim arrangement by the High Court.

Legal Framework

The Supreme Court examined the nature of the arbitral award, specifically whether it was an international commercial arbitration. Section 2(1)(f) of the Arbitration & Conciliation Act, 1996, defines “international commercial arbitration” as:

“2. Definitions. — (1) In this Part, unless the context otherwise requires,— xxxx xxxx xxxxxxxx (f)“international commercial arbitration” means an arbitration relating to disputes arising out of legal relationships, whether contractual or not, considered as commercial under the law in force in India and where at least one of the parties is— (i) an individual who is a national of, or habitually resident in, any country other than India; or (ii) a body corporate which is incorporated in any country other than India; or (iii) an association or a body of individuals whose central management and control is exercised in any country other than India; or (iv) the Government of a foreign country;”

Since the appellant was based in Singapore, the arbitration was considered an international commercial arbitration. The Court noted that the award was not a foreign award under Section 44 of the Arbitration & Conciliation Act, 1996. The Court also discussed Section 34 of the Arbitration & Conciliation Act, 1996, which provides grounds for setting aside an arbitral award. The Arbitration and Conciliation (Amendment) Act, 2015, amended Section 34, narrowing the scope of interference by the Court. Explanation 1 to Section 34(2) clarifies the meaning of “in conflict with the public policy of India”:

“Explanation 1.-For the avoidance of any doubt, it is clarified that an award is in conflict with the public policy of India, only if,- (i) the making of the award was induced or affected by fraud or corruption or was in violation of section 75 or section 81; or (ii) it is in contravention with the fundamental policy of Indian law; or (iii) it is in conflict with the most basic notions of morality or justice.”

Explanation 2 clarifies that a review on the merits of the dispute is not allowed. Section 34(2A) of the Arbitration & Conciliation Act, 1996, allows for setting aside an arbitral award arising out of arbitrations other than international commercial arbitrations if the award is vitiated by patent illegality appearing on the face of the award. However, this provision does not apply to awards arising from international commercial arbitrations.

Arguments

The appellant argued that the arbitral award should be scrutinized under the post-amendment scenario of the Arbitration & Conciliation Act, 1996, contending that the lower courts erred by applying the pre-amendment test of patent illegality. The appellant claimed that the arbitration clause in the Deed of Settlement, which stated that “the Arbitration proceedings shall be governed by the Arbitration and Conciliation Act, 1996 of India or any amendment thereto,” implied that any future amendments to the Act would apply to the arbitration.

The respondent contended that the 2015 Amendment Act would not apply to the arbitral proceedings as the Section 34 proceedings had commenced prior to 23.10.2015. The respondent argued that the general wording of the arbitration clause could not be interpreted to mean that the parties had agreed to change the course of law applicable to the Section 34 proceedings.

The Supreme Court considered the effect of the phrase “any amendment thereto” in the arbitration clause. The court analyzed various judgments, including Board of Control for Cricket in India v. Kochi Cricket Pvt. Ltd. & Ors. [ (2018) 6 SCC 287], Ssangyong Engineering and Construction Company Ltd. v. National Highways Authority of India [(2019) 15 SCC 131], and Hindustan Construction Company Ltd. and Anr. v. Union of India & Ors. [2019 SCC OnLine 1520], which clarified that the 2015 Amendment Act applies prospectively to arbitral proceedings commenced on or after the date of the amendment and to court proceedings commenced on or after the amendment came into force.

The Court noted that in S.P. Singla Constructions Pvt. Ltd. v. State of Himachal Pradesh & Anr. [ (2019) 2 SCC 488], a similar plea that the amended provisions would apply based on a general clause was rejected. The Court also referred to Union of India v. Parmar Construction Company [(2019) 15 SCC 682], where a similar clause was held not to bring the arbitral proceedings under the ambit of the 2015 Amendment Act. The Court concluded that a generally worded clause cannot change the course of law applicable to Section 34 proceedings.

The Court also discussed the observations in ABB India Ltd. v. Bharat Heavy Electricals Ltd. [OMP (T) (Comm) No.48/2020], which distinguished the judgment in Thyssen Stahlunion Gmbh v. Steel Authority of India Limited [(1999) 9 SCC 334] and clarified that Section 26 of the 2015 Amendment Act is structurally different from Section 85(2)(a) of the Arbitration & Conciliation Act, 1996. The Court held that the 2015 Amendment Act would not apply to the present case as the Section 34 proceedings commenced before the amendment.

Issues Framed by the Supreme Court

• What is the nature of the arbitral award? Is it an international commercial arbitration award or a domestic award?
• Whether the 2015 Amendment Act to the Arbitration & Conciliation Act, 1996, applies to the present case, given that the Section 34 proceedings commenced before the amendment came into force?

Treatment of the Issue by the Court:

Authorities

The Supreme Court considered various authorities to determine the issues at hand:

On the applicability of the 2015 Amendment Act:

• Board of Control for Cricket in India v. Kochi Cricket Pvt. Ltd. & Ors. [(2018) 6 SCC 287] – Supreme Court of India: This case clarified that the 2015 Amendment Act applies prospectively to arbitral proceedings commenced on or after the date of the amendment and to court proceedings commenced on or after the amendment came into force.
• Ssangyong Engineering and Construction Company Ltd. v. National Highways Authority of India [(2019) 15 SCC 131] – Supreme Court of India: This case further elucidated the applicability of Section 34 as amended, stating that it applies only to Section 34 applications made on or after 23.10.2015.
• Hindustan Construction Company Ltd. and Anr. v. Union of India & Ors. [2019 SCC OnLine 1520] – Supreme Court of India: This case reiterated that the amendments made by the 2015 Amendment Act apply to all court proceedings initiated after 23.10.2015.
• S.P. Singla Constructions Pvt. Ltd. v. State of Himachal Pradesh & Anr. [(2019) 2 SCC 488] – Supreme Court of India: The Court held that a general clause in a contract cannot be taken as an agreement between the parties to apply the provisions of the 2015 Amendment Act.
• Union of India v. Parmar Construction Company [(2019) 15 SCC 682] – Supreme Court of India: The Court opined that the provisions of the 2015 Amendment Act do not apply to arbitral proceedings commenced before the amendment unless the parties otherwise agree.
• ABB India Ltd. v. Bharat Heavy Electricals Ltd. [OMP (T) (Comm) No.48/2020] – Delhi High Court: This case distinguished the judgment in Thyssen Stahlunion Gmbh v. Steel Authority of India Limited [(1999) 9 SCC 334] and clarified that Section 26 of the 2015 Amendment Act is structurally different from Section 85(2)(a) of the Arbitration & Conciliation Act, 1996.

On the definition of international commercial arbitration:

• Section 2(1)(f) of the Arbitration & Conciliation Act, 1996: Defines “international commercial arbitration.”

On the grounds for setting aside an arbitral award:

• Section 34 of the Arbitration & Conciliation Act, 1996: Provides grounds for setting aside an arbitral award.
• Explanation 1 to Section 34(2) of the Arbitration & Conciliation Act, 1996: Clarifies the meaning of “in conflict with the public policy of India.”
• Section 34(2A) of the Arbitration & Conciliation Act, 1996: Allows for setting aside an arbitral award arising out of arbitrations other than international commercial arbitrations if the award is vitiated by patent illegality.

Judgment

How each authority was viewed by the Court:

• Board of Control for Cricket in India v. Kochi Cricket Pvt. Ltd. & Ors. [(2018) 6 SCC 287]* – Followed to establish that the 2015 Amendment Act applies prospectively.
• Ssangyong Engineering and Construction Company Ltd. v. National Highways Authority of India [(2019) 15 SCC 131]* – Followed to determine the applicability of amended Section 34.
• Hindustan Construction Company Ltd. and Anr. v. Union of India & Ors. [2019 SCC OnLine 1520]* – Followed to reiterate the prospective nature of the 2015 Amendment Act.
• S.P. Singla Constructions Pvt. Ltd. v. State of Himachal Pradesh & Anr. [(2019) 2 SCC 488]* – Followed to conclude that a general clause cannot be interpreted as an agreement to apply the 2015 Amendment Act.
• Union of India v. Parmar Construction Company [(2019) 15 SCC 682]* – Followed to conclude that the 2015 Amendment Act does not apply to arbitral proceedings commenced before the amendment.
• ABB India Ltd. v. Bharat Heavy Electricals Ltd. [OMP (T) (Comm) No.48/2020]* – Used to distinguish Thyssen Stahlunion Gmbh and clarify the structure of Section 26 of the 2015 Amendment Act.

The Supreme Court held that the pre-2015 legal position would prevail in this case, as the Section 34 proceedings commenced before the 2015 Amendment Act came into force. The Court examined the facts and found that the respondent had complied with the necessary conditions of the Deed of Settlement. The Court noted that the respondent had withdrawn all complaints and proceedings against the appellant, and the US$1.5 million was kept in escrow to ensure that these proceedings came to an end. The Court also noted that the second stage was the sale of shares, which did take place. The Court found that the arbitrator’s award, which deprived the respondent of the benefits of the Deed of Settlement based on the emails sent by his wife, was not in accordance with the fundamental policy of Indian law.

The Court observed that the emails sent by the respondent’s wife contained some indiscreet language but did not justify depriving the respondent of his dues. The Court agreed with the High Court’s observation that the consequences of the arbitral award were inappropriate and that it would be a travesty of justice to uphold such an award. The Court also agreed with the High Court that clause 6 of the Deed of Settlement could not have been relied on to award liquidated damages in favor of the appellant.

The Court stated: “The aforesaid scenario cannot be countenanced and this is what has been responsible for interference with the award of the learned arbitrator in the context of the legal position applicable to the award pre the amendment. We find that the arbitrator’s conclusions are not in accordance with the fundamental policy of Indian law, and can thus be set aside under the pre-2015 interpretation of S. 34 of the said Act.”

The Court also stated: “In fact, the consequences are so inappropriate that the same appears to be the reason that both the learned Single Judge and the Division Bench have opined that whatever be the position that is applicable – pre or post amendment, in these facts the award would not stand, something with which we agree.”

The Court concluded that there was no fault with the judgment of the High Court to the extent it interferes with the award and sets aside the award.

What weighed in the mind of the Court?

The Supreme Court’s decision was heavily influenced by the inappropriate consequences of the arbitral award. The Court found that the arbitrator’s decision to deprive the respondent of his dues based on the emails sent by his wife, who was not a party to the Deed of Settlement, was unjust. The Court emphasized that the respondent had fulfilled his obligations under the Deed of Settlement, including withdrawing complaints and allowing the sale of shares. The Court also highlighted that the emails, while containing some indiscreet language, did not justify the severe penalty imposed by the arbitrator. The Court’s reasoning was also influenced by the need to ensure that the award was in accordance with the fundamental policy of Indian law, and that the consequences of the award were fair and reasonable.

Final Decision

The Supreme Court dismissed the appeal filed by the appellant. The Court upheld the decision of the High Court, which had set aside the arbitral award. The Court found no fault with the High Court’s judgment to the extent it interfered with the award and set it aside. The Court held that the arbitrator’s conclusions were not in accordance with the fundamental policy of Indian law.

Flowchart of the Case

Key Takeaways

• Fundamental Policy of Indian Law: The case underscores the importance of ensuring that arbitral awards align with the fundamental policy of Indian law. Awards that are found to be in conflict with this policy can be set aside.
• Scope of Arbitration: While arbitration is a mechanism for resolving disputes, it is not without limits. Arbitrators must adhere to the principles of justice and fairness, and their decisions are subject to judicial review.
• Interpretation of Contracts: The case highlights the importance of interpreting contracts in a manner that is consistent with the intentions of the parties and the principles of justice. The Court found that the arbitrator’s interpretation of the Deed of Settlement was incorrect.
• Applicability of Amendments: The case clarifies that amendments to arbitration laws are generally applied prospectively. A general clause in a contract cannot change the course of law applicable to Section 34 proceedings.
• Judicial Review: Courts have the power to review arbitral awards to ensure that they are not contrary to law or public policy. This power is essential to maintain the integrity of the legal system.