ARTICLE
13 July 2024

DICHOTOMY BETWEEN PUBLIC POLICY CONCERNS AND CERTAINITY OF ARBITRAL AWARD – WETHER AN ARBITRAL AWARD INDUCED BY FRAUD OR CORRUPTION BE ALLOWED TO SUSTAIN IF NOT CHALLENGED ON SUCH A GROUND IN FIRST INSTACE DURING THE LIMITATION PERIOD: AN ANALYSIS

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Ironically, the most unambiguous legislative provisions, at times, present such a dilemma and contradictions with established cannons of law, that judicial intervention becomes imminent.
India Litigation, Mediation & Arbitration
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  1. Ironically, the most unambiguous legislative provisions, at times, present such a dilemma and contradictions with established cannons of law, that judicial intervention becomes imminent.

  2. One such instance is the story of Explanation I(i) to Section 34(2)(b)(ii) and Section 34(3) of the Arbitration and Conciliation Act, 1996 (“Indian Arbitration Act”). The Explanation I under reference was not there from the beginning when the Indian Arbitration Act came into force on 22nd August 1996. The provision was introduced by way of Arbitration and Conciliation (Amendment) Act, 2015 which came into effect from 23rd October 2015. However, in so far as an arbitral award having been “induced or affected by fraud or corruption” was considered being against the public policy of India since the beginning.

  3. In the matter of State of Maharashtra v. Hindustan Construction Co.1 (“HCC Case”) the issue arose before the Apex Court whether at the time of hearing a statutory appeal under Section 37 of the Indian Arbitration Act, 1996 can the Appellant be permitted to amend the memorandum of appeal and incorporate fresh grounds of challenge which were not pleaded at the stage of preferring the challenge under Section 34 of the Indian Arbitration Act. Here the history and scheme of the Indian Arbitration Act supported the conclusion that the time-limit prescribed under Section 34 to challenge an award is absolute and unextendible and by allowing new grounds of challenge to be moved after lapse of the outer limit of 120 days, this statutory dicta would be breached by necessary implication.

  4. The Apex Court came to the conclusion that:

“25. …Whether incorporation of additional grounds by way of amendment in the application under Section 34 tantamounts to filing a fresh application in all situations and circumstances. If that were to be treated so, it would follow that no amendment in the application for setting aside the award howsoever material or relevant it may be for consideration by the Court can be added nor existing ground amended after the prescribed period of limitation has expired although application for setting aside the arbitral award has been made in time. This is not and could not have been the intention of Legislature while enacting Section 34. Moreso, Section 34(2)(b) enables the Court to set aside the arbitral award if it finds 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. The words in Clause (b) "the Court finds that" do enable the Court, where the application under Section 34 has been made within prescribed time, to grant leave to amend such application if the very peculiar circumstances of the case so warrant and it is so required in the interest of justice. L.J. Leach and Company Ltd. (1957) SCR 438 and Pirgonda Hongonda Patil (1957) SCR 595 seem to enshrine clearly that courts would, as a rule, decline to allow amendments, if a fresh claim on the proposed amendments would be barred by limitation on the date of application but that would be a factor for consideration in exercise of the discretion as to whether leave to amend should be granted but that does not affect the power of the court to order it, if that is required in the interest of justice. There is no reason why the same rule should not be applied when the Court is called upon to consider the application for amendment of grounds in the application for setting aside the arbitral award or the amendment in the grounds of appeal under Section 37 of 1996 Act. (emphasis supplied)

…

“28. The question then arises, whether in the facts and circumstances of the present case, the High Court committed any error in rejecting the appellant's application for addition of new grounds in the memorandum of arbitration appeal. As noticed above, in the application for setting aside the award, appellant set up only five grounds viz., waiver, acquiescence, delay, laches and res judicata. The grounds sought to be added in the memorandum of arbitration appeal by way of amendment are absolutely new grounds for which there is no foundation in the application for setting aside the award. Obviously, such new grounds containing new material/facts could not have been introduced for the first time in an appeal when admittedly these grounds were not originally raised in the arbitration petition for setting aside the award. Moreover, no prayer was made by the appellant for amendment in the petition under Section 37 before the concerned court or at the appellate stage. As a matter of fact, the learned Single Judge in paragraph 6 of the impugned order has observed that the grounds of appeal which are now sought to be advanced were not originally raised in the arbitration petition and that the amendment that is sought to be effected is not even to the grounds contained in the application under Section 37 but to the memo of appeal. In the circumstances, it cannot be said that discretion exercised by learned Single Judge in refusing to grant leave to appellant to amend the memorandum of arbitration appeal suffers from any illegality.”

  1. The decision in HCC Case lays down the principle that the Court of First instance and second instance while deciding a challenge to an arbitral award have the power to look beyond the pleaded grounds by virtue of phares, “the court finds that” appearing in Sections 34(2)(b) and 34(2A) of the Indian Arbitration Act. Consequently, an amendment to the grounds of challenge can be moved beyond the period of limitation if the same falls in any of the pigeonhole recognized under 34(2)(b) and 34(2A), i.e.
    1. Subject-matter of dispute not capable of settlement by arbitration.
    2. The arbitral award being in conflict with public policy of India.
    3. The arbitral award is vitiated by patent illegality.
  2. By virtue of the judgment in HCC Case an amendment on any other account, moved beyond the period of limitation, would tantamount to moving a fresh challenge to the award and is not likely to be entertained. However, there is no straight answer and “facts and circumstance” of the case will have to be considered.
  3. The same issue again came up for consideration before Apex Court in the matter of State of Chhattisgarh v. Sal Udyog2 (“Sal Udyog case”) where the controversy was that whether the Appellant under Section 37 of Indian Arbitration Act can be allowed to plead grounds of “patent illegality” which were not specifically pleaded in the first instance under Section 34. The Apex Court held thus:

“23. We are afraid, the plea of waiver taken against the Appellant-State on the ground that it did not raise such an objection in the grounds spelt out in the Section 34 petition and is, therefore, estopped from taking the same in the appeal preferred Under Section 37 or before this Court, would also not be available to the Respondent-Company having regard to the language used in Section 34(2A) of the 1996 Act that empowers the Court to set aside an award if it finds that the same is vitiated by patent illegality appearing on the face of the same. Once the Appellant-State had taken such a ground in the Section 37 petition and it was duly noted in the impugned judgment, the High Court ought to have interfered by resorting to Section 34(2A) of the 1996 Act, a provision which would be equally available for application to an appealable order Under Section 37 as it is to a petition filed Under Section 34 of the 1996 Act. In other words, the Respondent-Company cannot be heard to state that the grounds available for setting aside an award Under Sub-section (2A) of Section 34 of the 1996 Act could not have been invoked by the Court on its own, in exercise of the jurisdiction vested in it Under Section 37 of the 1996 Act. Notably, the expression used in the Sub-rule is "the Court finds that". Therefore, it does not stand to reason that a provision that enables a Court acting on its own in deciding a petition Under Section 34 for setting aside an Award, would not be available in an appeal preferred Under Section 37 of the 1996 Act. (emphasis added)

24. Reliance placed by learned Counsel for the Respondent-Company on the ruling in the case of Hindustan Construction Company Limited (Supra) is found to be misplaced. In the aforesaid case, the Court was required to examine whether in an appeal preferred under Section 37 of the 1996 Act against an order refusing to set aside an Award, permission could be granted to amend the Memo of Appeal to raise additional/new grounds. Answering the said question, it was held that though an application for setting aside the Arbitral Award under Section 34 of the 1996 Act had to be moved within the time prescribed in the Statute, it cannot be held that incorporation of additional grounds by way of amendment in the Section 34 petition would amount to filing a fresh application in all situations and circumstances, thereby barring any amendment, however material or relevant it may be for the consideration of a Court, after expiry of the prescribed period of limitation. In fact, laying emphasis on the very expression "the Courts find that" applied in Section 34(2)(b) of the 1996 Act, it has been held that the said provision empowers the Court to grant leave to amend the Section 34 application if the circumstances of the case so warrant and it is required in the interest of justice. This is what has been observed in the preceding paragraph with reference to Section 34(2A) of the 1996 Act.

25. To sum up, existence of Clause 6(b) in the Agreement governing the parties, has not been disputed, nor has the application of Circular dated 27th July 1987 issued by the Government of Madhya Pradesh regarding imposition of 10% supervision charges and adding the same to cost of the Sal seeds, after deducting the actual expenditure been questioned by the Respondent-Company. We are, therefore, of the view that failure on the part of the learned Sole Arbitrator to decide in accordance with the terms of the contract governing the parties, would certainly attract the "patent illegality ground", as the said oversight amounts to gross contravention of Section 28(3) of the 1996 Act, that enjoins the Arbitral Tribunal to take into account the terms of the contract while making an Award. The said 'patent illegality' is not only apparent on the face of the Award, it goes to the very root of the matter and deserves interference. Accordingly, the present appeal is partly allowed and the impugned Award, insofar as it has permitted deduction of 'supervision charges' recovered from the Respondent-Company by the Appellant-State as a part of the expenditure incurred by it while calculating the price of the Sal seeds, is quashed and set aside, being in direct conflict with the terms of the contract governing the parties and the relevant Circular. The impugned judgment dated 21st October 2009 is modified to the aforesaid extent.”

  1. In the view of the aforesaid judicial pronouncements, there is absolute clarity on the following aspects:
    1. Proceedings under Section 37 are a continuation of proceeding sunder Section 34 of the Indian Arbitration Act, and the same grounds are available to the appellant to challenge an arbitral award.
    2. Failure of omission of a party to plead a ground of challenge while filing the petition under Section 34 does not preclude it from amending the grounds of challenge at a later stage.
    3. When the amendment to the ground is sought to invoke grounds available under Section 34(2)(b) and 34(2A) of the Indian Arbitration Act, the same is likely to be viewed favourably by Court on account of express latitude available to Court under these provisions to scrutinize the award on grounds of violation of public policy of India and patent illegality.
  2. This line of reasoning was also relied upon by the division bench of Hon'ble High Court of Delhi in Devas Employees Mauritius Pvt. Ltd. v. Antrix Corporation Limited & Ors.3 wherein the ground of fraud was sought to be introduced after filing of the challenge to the arbitral award. The amendment was allowed by the Ld. Single Judge and the same was appealed which resulted in the judgement dated 17th March 2023.
  3. The journey so far is duly supported by pronouncements and can safely be stated to cover those cases where challenge to the arbitral award is filed within the limitation stipulated under Section 34(3) of Indian Arbitration Act, i.e. 3 months and 30 days. What happens when the award is not challenged within the period of limitation and the aggrieved party subsequently discovers the award to have been induced or affected by fraud or corruption. Does the efflux of limitation render such an award unassailable? Whether such an affront to public policy of India allowed to sustain and perpetuate?
  4. At this point it is imperative to note that the purpose of alternate dispute resolution mechanism is to ensure speedy redressal and certainty. If the embargo under Section 34(3) is to be casually treated, this will have the potential of rendering arbitration as ineffectual. There is a need to strike a balance between this need for legal certainty of arbitral award and public policy concerns arising from letting awards induced by fraud or corruption sustain due to elapse of time.
  5. The public policy concern that arises can be captured by the phrase, “fraud vitiates all solemn acts”. The said principle has been recognized in so many words by the Hon'ble Supreme Court in Bhaurao Dagdu Paralkar v. State of Maharashtra and Ors.4.
  6. Such a scenario arose before High Court of Singapore in Bloomberry Resorts and Hotels Inc and Ors. Vs. Global Gaming Philippines LLC and Ors.5 (“Global Gaming Case”). The case related to challenging a Partial Arbitral Award on the grounds that the award holder / Claimant was able to secure the same by relying on forged / fabricated documents and hence the same was induced by fraud. It was also prayed that the fraud was only discovered after the delivery of Partial Arbitral Award and lapse of the limitation of 3 months under Section 34(3) of the UNCITRAL Model Law on International Commercial Arbitration. The Hon'ble High Court of Singapore held that laws of Singapore provide a strict limitation of 3 months and contradistinguished it with position under the legislations in Malaysia, New Zealand, Ireland, which provides for an independent limitation for challenging an arbitral award when the same has been induced by fraud or corruption6.
  7. In the context of Indian Arbitration Act as well, the limitation under Section 34(3) clearly puts an absolute embargo on any challenge to the arbitral award beyond the limitation. Therefore, unless the position under Indian Arbitration Act is amended by way of a legislation, it is not permissible to challenge an arbitral award even on grounds of section 34(2)(b) and 34(2A) if the same was not challenged at all during the prescribed time.
  8. However, that does not mean that the award debtor, which failed to challenge the award within limitation is remediless. In so far as the award debtor may establish based on preponderance of probabilities that the arbitral award was induced by fraud or corruption, that enforcement of the arbitral award can be challenged before the Execution Court. In the prevailing legislative scheme it is the only recourse available to harmonize public policy concern with necessity to accord certainty to arbitral award.

An application for setting aside may not be made after 3 months have elapsed from the date on which the party making that application had received the award or, if a request had been made under article 33, from the date on which that request had been disposed of by the arbitral tribunal. This paragraph does not apply to an application for setting aside on the ground that the award was induced or affected by fraud or corruption. [emphasis added]

30. In Malaysia, s. 37(5) of the Malaysian Arbitration Act 2005 (Act 646) expressly states that the three-month limit will not apply to setting aside applications based on grounds that the award was induced or affected by fraud or corruption. The relevant sub-sections of s. 37 read as follow:

(4) An application for setting aside may not be made after the expiry of ninety days from the date on which the party making the application had received the award or if a request has been made under section 35, from the date on which that request had been disposed of by the arbitral tribunal.

(5) Subsection (4) does not apply to an application for setting aside on the ground that the award was induced or affected by fraud or corruption.

31. In Ireland, s. 12 of the Arbitration Act 2010 modifies Art 34(3) of the Model Law as such:

Notwithstanding Article 34(3) , an application to the High Court to set aside an award on the grounds that the award is in conflict with the public policy of the State shall be made within a period of 56 days from the date on which the circumstances giving rise to the application became known or ought reasonably to have become known to the party concerned. [emphasis added]

This modification means that the timeline of 56 days for setting aside of the award only starts from the time when fraud as a public policy ground is discovered or ought reasonably to have been discovered.”

Footnotes

1. [(2010) 4 SCC 518]

2. [(2022) 2 SCC 275]

3. Judgment in FAO(OS)(COMM) 289/2022 dated 17th March 2023

4. (2005) 7 SCC 605

5. MANU/SGHC/0003/2020

6. “29… Unlike Malaysia, New Zealand and Ireland (all are Model Law States), Singapore has not expressly allowed for an exception to or extension of the three-month time limit in Art 34(3). There is no provision in the IAA that computes the time limit in Art 34(3) from the date of discovery of the fraud or withheld evidence or discovery of new facts or evidence post-award. The legislative approach taken in New Zealand is to modify the time limit in Art 34(3) to exclude the application of the three-month time limit in specific cases of fraud or corruption. Article 34(3) of the Arbitration Act 1996 (NZ) sch 1 ch 7 reads as follows:

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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