Shri Lal Mahal Ltd vs Progetto Grano Spa, Civil Appeal No.

5085 of 2013

Facts:
Shri Lal Mahal Limited (Appellant) entered into a contract with Progetto Grano Spa
(Respondent) for the supply of a specific type of wheat. The agreement provided that the
wheat had to be certified by a named authority which was certified to the effect by the
appellant. The respondent relied on a certificate of quality provided by a certifying agency at
the port of loading in India to argue that the wheat supplied was of the requisite quality. The
appellant contended that the reliability of the quality certificate at the port of loading was not
consistent with the agreement that the quality of wheat was below that which was
contractually agreed.

Procedural History:

The dispute was filed and heard by an arbitral tribunal called Grain and Feed Trade
Association (GAFTA) which was seated in London. The arbitral tribunal ruled in favor of the
respondent and awarded damages. The award of the tribunal appealed by the appellant was
unsuccessful before the Board of Appeal of the GAFTA. An application before the High
Court of Justice in London to set aside the award was also rejected.
The respondent sought to enforce the award before the Delhi High Court but was opposed by
the appellant on the ground of opposing public policy as the arbitral award granted was
contrary to the express provision in the contract. The High Court did not interfere with the
award on the basis that it was not expected to re-determine questions of fact in enforcement
proceedings. The seller finally appealed against this decision to the Supreme Court of India.

Issue:

Whether the Court could look at the merits of the case if it is contrary to the ‘public policy of
India’ and whether it should interfere in foreign seated arbitration awards on the grounds of
‘patent illegality’.

Holding:
The Supreme Court upheld the decision of the High Court and held in favor of the respondent
as the challenge raised by the appellant required reconsideration of the merits of the case and
re-looking at the facts. Such a challenge can be raised only if it is contrary to ‘public policy
of India’ and is covered by one of the three categories enumerated in Renusagar.

Rationale:

The Supreme Court in Renusagar Power Co. Limited v. General Electric Company,
recognized that merely a violation of Indian laws would not suffice to attract the bar of public
policy. In the case of ONGC v. Saw Pipes, the Supreme Court expanded the test of ‘public
policy’ to mean an award that violates the statutory provisions of Indian law or terms of the
contract. The judgment in ONGC diverged from the interpretation given to the expression
“public policy” in Renusagar on the ground that Renusagar dealt with enforcement of an
award which had attained finality, whereas the issue before the court in ONGC was
concerning the validity of the arbitral award itself, which was under challenge under Section
34 of the Act. In Phulchand Exports Limited v. O.O.O. Patriot, the Supreme Court expanded
the meaning of the expression ‘public policy’ under section 48 of the Act, and held that the
scope and purport of the expression under section 34 and 48 are the same. Thus, even in a
scenario where the award attains finality, upon an action for enforcement of the foreign
award being instituted, the parties by virtue of the decision in Phulchand could apply the
extremely broad standard of ‘public policy’ in ONGC and almost re-open the entire matter.
This case overruled the Phulchand case and held that the expression ‘public policy’ as
found under Section 48 of the Act would not bring within its folds the ground of ‘patent
illegality’and such a ground is limited to section 34 of the Act where the issue is whether the
award should be set aside or not.
The Court further held that the applicability of the doctrine of ‘public policy’ is
comparatively limited in cases involving conflict of laws and foreign seated arbitrations. It
ruled that the expression ‘public policy of India’ under Section 34 was required to be
interpreted in the context of the jurisdiction of the court where the validity of the award is
challenged, before it becomes final and executable in contrast to enforcement of an award
after it becomes final.

Rule:
Public policy for awards in foreign seated arbitration would mean against:

a) Fundamental policy of Indian law; or

b) The interest of India; or
c) Justice or morality.

Oil & Natural Gas Corporation Ltd. v. Saw Pipes Ltd 2003 (5) SCC 705

Facts:

ONGC had placed an order to Saw Pipes limited for supply of equipment for an off shore
exploration, to be bought from approved European manufacturers. The supply was delayed
due to a strike of steel mill workers in Europe. ONGC granted extension of time, but raised
the causes of recovery of liquidated damages. It withheld the amount from the payment to the
supplier (saw pipes), as timely delivery was the key principle of the contract.

Procedural History:

The case resulted after an appeal passed by a division bench of the High Court of Judicature
at Bombay with regard to a dispute relating to supply of equipment for an off shore oil
exploration by the respondent.

Issue:

Whether the court would have jurisdiction under Section 34 of the Act to set aside an award
passed by the Arbitral Tribunal which is patently illegal or in violation of the provisions of
the Act or any other substantive law governing the parties or is against the terms of the
contract?

Holding:
The first question that the court dealt with was to look at whether a court can set aside an
award if the arbitral tribunal has not followed the set procedure as prescribed by the Act. The
provision states that the arbitral tribunal has to decide dispute in accordance with the
substantive law according to section 28. When section 28 is read along with Section 34 of the
Act, the legislative intent is that the award could be set aside as it would mean that tribunal
has acted beyond its jurisdiction. Hence when an award is contrary to the substantive
provision of law or the provisions of the Act or against the terms of the contract, it would be
patently illegal, which could be restricted under Section 34. The court further addressed the
concept of ‘public policy of India’ that was added in the Renusagar case. The petitioner in the
Renusagar case challenged that the phrase ‘public policy of India’ was in the context of
enforcement of a foreign award while here it is a question of setting aside of domestic award
and hence the term has to be given a broader scope.
When an award is said to be patently illegal it cannot be in favour of public interest and
therefore the court ruled an extra condition to adjudicate an award unenforceable under
Section 34 on the principle of being against the public policy that was patent illegality. The
courts in this case ruled that the award here was patently illegal as the tribunal had not based
its ruling on the terms of the contract and on the substantive law of India.

Rationale:

The Supreme Court read patent illegality as any violation of the substantive law administered
in India, or as an award conflicting the terms of contract. The judgment expanded the concept
of Public policy to add to that the award would be contrary to public policy if it is patently
illegal. Public policy is a principle that holds that no subject can do, which has a tendency to
be detrimental to the public or against the public good, which may be characterized as it
sometimes has been policy of the law or public policy in relation to administration of the law.
Public policy signifies same matter, which concerns public good and public interest. The
three-judge bench decision of the Renusagar case had construed the ground for public policy
narrowly as confined to the fundamental policy of Indian law, the Interest of India, justice or
morality. This came as a clear violation of the doctrine of precedents as this case involved a
foreign award whereas the Renusagar case dealt with a domestic award.

Rule: Following are the grounds on which the court can set aside the award under S. 34 if its
is against public policy:
a) Fundamental policy of Indian law; or
b) The interest of India; or
c) Justice or morality, or
d) In addition, if it is patently illegal.

Illegality must go to the root of the matter and if the illegality is of trivial nature it cannot be
held that award is against the public policy. Award could also be set aside if it is so unfair and
unreasonable that it shocks the conscience of the court. Such award is opposed to public
policy and is required to be adjudged void.

Ravindra Kumar v Union of India, (2010) 1 SCC 409

Facts:

The appellant was a contractor who was allotted certain civil works to be completed within a
specified time, which they kept extending from time to time by mutual agreement. After
completion of work, dispute arose between the parties regarding the work and its payment.
The contractor invoked the arbitration clause in the agreement and filed an application before
the sole arbitrator under the Indian Arbitration Act of 1940. Both the parties participated in
the proceedings. The arbitrator passed a reasoned award in favour of the contractor.

Procedural History:

The Union Of India filed a suit in the Civil Court to set aside the award by contending that
the arbitrator had acted beyond the scope of his authority in allowing contractors claim
contrary to the provisions in the agreement relating to hold ups and losses suffered due to
delay. The UOI contended that the delay in execution of work was due to default of the
contractor himself. He had not employed sufficient manpower and resources to complete the
work in time.
The civil court rejected these contentions and passed the reasoned award. This was
challenged by the UOI in an appeal before the High Court to set aside the award under
Section 30 of the Indian Arbitration Act of 1940 . HC set aside the findings recorded by the
arbitrator and held that the arbitrator has acted unreasonably and irrationally in ignoring the
limits and the provisions of the contract. The contractor filed the present appeal by Special
Leave.

Issue: Can the court re-appreciate the evidence led by the parties before the arbitrator and
interfere with the arbitration award passed by the arbitrator?

Holding:

The HC committed a ‘serious error in re-appreciating the evidence led by the parties before
the arbitrator’. The arbitrator had recorded a firm finding under the said claim that there was
default and delay on the part of UOI. This evidence was duly examined and evaluated by the
arbitrator. Subsequently he passed the award in favour of the appellant after giving elaborate
reasons for the same. Therefore, finding recorded by the arbitrator cannot be said to be either
perverse or based on no evidence.
The HC erroneously substituted the decision of the arbitrator with its own opinion on
appreciation of evidence. Such a course was not permissible to the High Court while
examining objections to the award under Section 30 of the Arbitration Act, 1940. Appeal was
allowed.

Rationale:

The court referred to various earlier judgments of the Apex Court and based its decision on
the following considerations:
 _The arbitrator is the final arbiter for the dispute between the parties and it is not open to
challenge the award on the ground that the arbitrator has drawn his own conclusion or has
failed to appreciate the facts.
 _Where the arbitrator has given the reasons in making the award, the court cannot examine
the reasonableness of the reasons.
 _The power to assess evidence lies with the forum that is decided by the parties and it is
not for the court to judge the evidence before the arbitrator. Thus, the arbitrator is the sole
judge of the quality as well as the quantity of evidence.
 _Interference with the arbitration award is not available within the jurisdiction of the Court
unless there exist a total perversity in the award or the judgment is based on a wrong
proposition of law.
 _The common phraseology "error apparent on the face of the record" does not entail a
closer scrutiny of the merits of documents and materials on record. Court cannot substitute its
own evaluation of the conclusion of law or fact to come to the conclusion that the arbitrator
had acted contrary to the agreement between the parties.
 _When two views are possible with regard to interpretation of statutory provisions and or
facts the court would not be justified in interfering with the award of the arbitrator if the view
taken by the arbitrator is a possible view if not the only correct view.

Rule:

Test of Perversity: The court can re-appreciate the evidence led by the parties before the
arbitrator and set aside the award passed by him, if there is a total perversity i.e. a gross error
in the award or the judgment is based on a wrong proposition of law.

Relevance of the Case w.r.t Arbitration & Conciliation Act, 1996:

In this case the law with regard to the scope and ambit of jurisdiction of court to interfere
with the Arbitration award has been discussed in detail. The principles that governed the
setting aside of awards under Section 30 of the 1940 act also apply to Section 34 of the 1996
act, barring the changes being made to the grounds for setting aside such an award.

National Aluminium Co. Ltd. v. Pressteel & Fabrications (P) Ltd. and Another [(2004) 1
SCC 540

The original appeal from which this application arises for consideration namely, C.A.
No.2522/99 was preferred by the respondent herein questioning the unilateral appointment of
an arbitrator made by the present applicant under the Arbitration Act, 1940. The Court in the
said appeal after hearing the parties and with the agreement of the parties appointed Hon. Mr.
Justice A.M. Ahmadi, former Chief Justice of India as the sole arbitrator. Before the said
arbitrator both the parties by consent agreed that the proceedings should be governed by the
provisions of the Arbitration & Conciliation Act, 1996. It is on that basis the learned
arbitrator proceeded and gave a final award. In this application, namely, I.A. No.2 in C.A.
No.2522/99 made under sections 15, 17 and 29 of the Indian Arbitration Act, 1940 praying
for modification of the said award made by the arbitrator, the applicant contends that since
the dispute between the parties and the agreement of the parties to refer such dispute to an
arbitrator was prior to the coming into force of the 1996 Act, all further proceedings
subsequent to the award should be governed by the 1940 Act and under the said Act an
aggrieved party which wants to seek modification has to move the court which appointed the
arbitrator, hence, the applicant contends that this is the only Court before which such an
application is maintainable. It is to be noted at this stage that the respondent in this
application was appellant in C.A. No.2522/99. The said respondent being aggrieved by this
award, itself has filed objections to the said award before the appropriate Civil Court under
section 34 read with section 2(e) of the 1996 Act.

ISSUE: -

(i) Whether the proceedings in which an impugned award has come to be made, are
governed by the 1940 Act or the 1996 Act ?

(ii) Whether the appropriate court for the purpose of challenging the said award or
seeking modification of the said award is this Court, being the court which
appointed the arbitrator or an appropriate court as contemplated under Section
34 of the 1996 Act read with section 2(e) of the said Act which contemplates said
court to be the principal civil court of original jurisdiction ?

Judgement: -

The argument of learned counsel appearing for the applicant was that since this Court had
appointed the sole arbitrator in the abovesaid civil appeal under the provisions of the 1940
Act, this Court alone had the jurisdiction to modify the impugned award. While the
respondent in this application contends that the proceedings before the arbitrator admittedly
having proceeded under the provisions of the 1996 Act by consent of parties, for the purpose
of seeking modification of the award in such proceedings, it will only be a court
contemplated under the 1996 Act. It is an admitted fact that after the arbitrator was appointed
by this Court, the parties by consent agreed before the arbitrator that the proceedings should
go on under the provisions of the 1996 Act though the dispute arose prior to coming into
force of this Act. Such a procedure is permissible under section 85(2)(a) of the 1996 Act. In
the normal course having agreed to this procedure, the applicant should not have been
permitted to raise a plea at such a stage that the provisions of the 1940 Act would apply for
challenging or seeking modification of the award made under the 1996 Act.

According to the applicant, for the purpose of making an award a rule of the Court it can only
be the court which appointed the arbitrator in view of the provisions of sections 2(e) and
14(2) of the 1940 Act. An order was made by this Court on 23.4.1999 in the above said civil
appeal.

As per the above order, this Court has not retained any power or control over the arbitration
proceedings while appointing the arbitrator by consent of parties, on the contrary, it seems
this Court has merely recorded a submission of the parties as to their agreement in appointing
a particular arbitrator. Even the time limit fixed therein is only a request to the learned
arbitrator to conclude the proceedings within 3 months from the day he enters upon the
arbitration and it is not a mandate in the sense that the failure to do so would have entitled the
parties to approach this Court for suitable remedy. On facts, it is admitted that the learned
arbitrator has extended the time suo motu a few times before making the award, without
reference to this Court, therefore, it is clear on facts of this case that it is the arbitrator who
had the control over the proceedings and not this Court. The next question to be considered
by the court was that whether provisions of the 1940 Act would still be applicable for making
an application for the modification of the award given that the 1996 act was there, and if so,
before which court. On admitted fact it was contended that by consent of the parties
provisions of 1996 Act have been made applicable to the proceedings which is in conformity
with Section 85(2)(a) of 1996 Act, hence, it is futile to contend that for the purpose of
challenge to the Award 1940 Act will apply.

Hence, the court rejected this contention. In regard to the forum before which the application
for modification or setting aside the award is concerned, the court found no difficulty in
coming to the conclusion that in view of the provisions of section 34 read with section 2(e) of
the 1996 Act that it is not this Court which has the jurisdiction to entertain an application for
modification of the award and it could only be the principal civil court of original jurisdiction
as contemplated under section 2(e) of the Act, therefore, in their our opinion, this application
is not maintainable before this Court.

 The courts notice that when there is an automatic suspension of the execution of the award,
the moment an application challenging the said award is filed under section 34 of the Act it
leaves no discretion in the court to put the parties on terms and in their opinion, defeats the
very objective of the alternate dispute resolution system to which arbitration belongs. Thus
this application failed and the same was dismissed with a direction to the applicant to file its
objections to the award before the court concerned and if the same was filed within 30 days
from date of this judgement, the delay in regard to the filing of the objections as
contemplated under section 34 of the 1996 Act shall would be condoned by the said court
since the time consumed was in bona fide prosecution of the application in a wrong forum.

Renusagar Power Plant Ltd. V. General Electric Co.

https://prezi.com/_nkhupwkt2sw/renusagar-power-plant-co-ltd-v-general-electric-co/

Short Facts:

Renusagar Power Plant Ltd. had entered into a contract with General Electric Co., a company
incorporated under the laws. of State of New York in USA under which it had to supply
equipment and power services. for setting up a thermal power plant. The said contract was
approved by the Government of India. The total price of the contract was US$13,195,000. All
the items were to be delivered. in 15 months from the effective date and the completion of the
plant was to be done within 30 months. The contract provided for payment in installments
and also required execution of unconditional negotiable promissory notes for all the
installments. The contract. contained an arbitration clause which provides that any
disagreement arising out of or related to the contract which the parties are unable to resolve
by sincere negotiation. shall be finally settled in accordance with the Arbitration Rules of the
International Chamber of Commerce. It seems there was some delay on the part of General
Electric in adhering to the time schedule. for supply of equipment and consequently
Renusagar rescheduled the payment installments .and certain installments were unpaid under
due dates.

Case Proceedings:

Renusagar. approached the Government of India for approval of the revised schedule
regarding the payment of installments which was not approved by the Government of India
and Renusagar was asked. to take necessary action to make the payment of the past
installments immediately. At this stage General Electric initiated arbitration proceedings
before the Arbitration Court of ICC. Both the sides filed civil suits in Bombay and Calcutta
High Courts. The arbitration proceedings. resulted in an award in favour of General Electric
and it also awarded compensatory damages and computed the same by applying the average
prime rate to the amount withheld. The award came to be challenged on several grounds and
one of them was that it was contrary to public. policy of India, the reason being the order
relating to the payment of interest in. particular in foreign exchange would be contrary to the
Foreign Exchange Regulation Act. This case arose .in particular under Section 7 of the
Foreign Awards (Recognition and Enforcement) Act, 1961. The Supreme Court was faced
with the question whether to give the words ‘public policy' a. narrow or a broad meaning.

Final Judgment:

After referring .to the various decisions of the English, and American courts and quoting
classic textbooks on international. commercial arbitration the Supreme Court went on to very
rightly give narrow interpretation to the words public policy and held that

1. the payment of interest on interest (compound interest),

2. possibility of violation of FERA,
3. payment of damages,
4. possibility of unjust enrichment by General Electric

did not amount to or was not contrary to the public policy of India.

The Supreme Court concluded that “it is obvious that since the Act is calculated and designed
to subserve the cause of facilitating international trade and promotion thereof by providing
for speedy settlement of disputes arising in such trade through arbitration, any expression or
phrase occurring therein should receive, consisting with its literal and grammatical sense, a
liberal construction.”

Renusagar thus was very correctly decided; when it took a narrow view of the word ‘public
policy' thus leaving little scope of judicial interference in arbitration proceedings and the final
determination of awards.

Phulchand exports ltd. vs. ooo patriot (2011)

Background:

The case involved a dispute between the appellant, an Indian company, and a Russian
company. Under a contract made privately between them, the appellant had agreed to supply
the respondent with a certain quantity of polished rice on a cost, insurance and cargo basis.
The respondent paid the appellant for the rice but never received it.

As a result, the respondent lodged a claim against the appellant before a Russian arbitral
tribunal and asked for recovery of the amount set out by the contract. The appellant raised a
defence, but ultimately the tribunal was not convinced by its arguments.

The respondent then filed an arbitration petition before the Bombay High Court. It asked for
enforcement of the award under the Act.

Under section48(2) of the Act, "[e]nforcement of an arbitral award may be refused if the
Court finds that – (a) the subject-matter of the difference is not capable of settlement by
arbitration under the law of India; or (b) the enforcement of the award would be contrary to
the public policy of India".

The appellant challenged the petition, claiming enforcement of the award was against public
policy and therefore that the award should be set aside. The Bombay High Court rejected this
and resolved that the award could be enforced as a decree of the Court.
The appellant then appealed to the division bench of the Bombay High Court but again the
appeal was dismissed.

The appellant then appealed to the Indian Supreme Court. It argued that the meaning of
"public policy" credited by the Supreme Court in the Oil and Natural Gas Corporation Ltd v
Saw Pipes Ltd (2003) 5 SCC 705, in the context of setting aside a domestic award, should
also be applied to the definition of the same expression.

Decision:

The Supreme Court accepted the wider meaning of "public policy" that was set out in the
Saw Pipes Case over the constricted range of meaning set out in Renusagar Power Co Ltd v
General Electric Co AIR 1994 SC 860. The Supreme Court decided that a foreign award can
be set aside under section 48(2) of the Act if it is considered to be patently illegal.
Specifically, Justice R M Lodha approved the following statement of the Supreme Court in
the Saw Pipes Case:

"In our view, the phrase "public policy of India"...is required to be given a wider meaning. It
can be stated that the concept of public policy connotes some matter which concerns public
good and the public interest. What is for public good or in public interest or what would be
injurious or harmful to the public good or public interest has varied from time to time.
However, the award which is, on the face of it, patently in violation of statutory provisions
cannot be said to be in public interest. Such award/judgment/decision is likely to adversely
affect the administration of justice. Hence, in our view in addition to narrower meaning given
to the term "public policy" in Renusagar case it is required to be held that the award could be
set aside if it is patently illegal. The result would be – award could be set aside if it is
contrary to:

(a) fundamental policy of Indian law; or

(b) the interest of India; or

(c) justice or morality, or

(d) in addition, if it is patently illegal.

Illegality must go to the root of the matter and if the illegality is of trivial nature it cannot be
held that award is against the public policy. Award could also be set aside if it is so unfair and
unreasonable that it shocks the conscience of the court. Such award is opposed to public
policy and is required to be adjudged void."

The court then examined the arbitral award in this case on the basis of patent illegality, but
did not find it to be patently illegal. Accordingly, the court dismissed the appellant's appeal.

Conclusion:

Although in this case the award in question was not found to be patently illegal, the decision
is still concerning.

The Supreme Court defined the scope of the term "public policy" such that an award could be
set aside if it is against the public policy of India, that is to say, if it is contrary to the
fundamental policy of Indian law, the interest of India, justice or mortality or if it is patently
illegal. The move towards widening the possibilities for rejecting claims for enforcement of
foreign arbitral awards means that there is less certainty for those who contract with India
companies.

Centrotrade Mineral & Metals Inc. vs. Hindustan Copper Ltd.

MANU/SC/8146/2006

Facts:
Centrotrade was incorporated in United States of America and it dealt with sale and purchase
of non-precious metals including copper. Whereas Hindustan Copper Ltd. is a Government of
India undertaking and its business included purchase of copper concentrate. They entered into
an agreement on 16th of January 1996 where Centrotrade was the seller and the HCL was the
purchaser of copper concentrate. Clause 14 of the agreement provides for arbitration in. case
any differences or disputes arise between the parties. Clause 14 of the agreement reads as
under:
“All disputes and differences whatsoever arising between the parties out of, or relating to the
construction meaning and operation or effect of the contract or the breach thereof shall be
settled by arbitration in India through the arbitration panel of the Indian Council of
Arbitration in accordance with the Rules of arbitration of the Indian Council of Arbitration.
If either party is in disagreement with the arbitration result in India, either party will have the
right to appeal to a second arbitrator in London, U.K. in accordance with the rules of
conciliation and arbitration of the International Chamber of Commerce in effect on the date
hereof and the result of this second arbitration will be binding on both the parties. Judgment
upon the award may be entered in any Court of Jurisdiction.”
Procedural History:
Disputes arose between the parties to the agreement in 1998 and pursuant to Clause 14 of the
agreement; disputes were referred to Indian Council of Arbitration where Centrotrade was the
claimant. The Indian Council of Arbitration appointed an arbitrator before whom Centrotrade
claimed an award.
The arbitrator appointed by the Indian Council of Arbitration, however, made a 'NIL' award.
Disagreeing with the award passed by the arbitrator appointed by the Indian Council of
Arbitration, and relying on the second part of Clause 14 of the agreement, Centrotrade
approached the International Chamber of Commerce (in short 'ICC'). The arbitrator appointed
by the ICC passed an award in favor of the Centrotrade
After the ICC arbitrator passed the award, an application was filed by HCL seeking
declaration of the award passed by the ICC as void and not enforceable. At the same time,
Centrotrade filed an application for enforcement of the ICC Award. These applications were
transferred to the original side of the Calcutta High Court, which were heard and disposed of
by the judgment and order of the learned Single Judge of that Court. The learned. Single
Judge held that, the ICC Award was enforceable in law and therefore direction was made to
HCL to make payment to Centrotrade.
An appeal was further made to the Division Bench of the High Court. The Division Bench set
the judgment of the learned Single Judge aside. Aggrieved thereby, Centrotrade has filed
Special Leave Petition against the aforesaid judgment of the Division Bench of the Calcutta
High Court and at the same time HCL has also filed another Special Leave Petition against
the same judgment. In both the Special Leave Petitions notices were issued and they were
taken up for final hearing together for decision.
Issue:
  Whether the provision for appeal to a second arbitration in Clause 14 of the
Arbitration Agreement is permissible and valid?
 Whether the two-tier agreements are opposed to the public policy?

Holding:
There is a difference of opinion between the 2 judges in this case, due to which this case is
referred to a larger bench.
But both the Judges answered the issues in hand and that will be looked after in the next
section of the brief.
Rationale:
Issue 1: Whether the provision for appeal to a second arbitration in Clause 14 of the
Arbitration Agreement is permissible and valid?
Justice S.B.Sinha held that the 1996 Act envisages only one award under one set of rules i.e.
under Part I and Part II of the Act. It does not contemplate multilayer awards (a mixture of
domestic and foreign awards) governed by different set of rules.
In this case, for the first part of arbitration the Indian law is applicable (ICA Rules) whereas
ICC Rules would govern the second part. Therefore, both parts cannot be carried out under
the same institution. Two different natures of the awards are not contemplated only because
there is a provision for appeal. If by fiction of law an award becomes a decree without the
intervention of the Court, the nature of an award, which can be passed by the appellate
arbitrator, would lose the character of an award.
Justice Sinha further held that the Doctrine of merger will not apply here as it envisages an
Appellate authority who can pass the same type of order which could be passed by the
original authority. As soon as the award becomes enforceable, it becomes final and binding.
If the first award in the present case was to be enforced, it had to be done according to Part I.
The time limit to make it final under Part I would not cease to run if second part of the
arbitration agreement is invoked. Therefore, Act does not contemplate that the arbitrator
would be entitled to sit in appeal over an executable decree. If during the proceedings for
second arbitration, the award from first arbitration becomes a decree, the appellate arbitrator
cannot set aside the decree.
Applying the same to the facts, since the parties agreed that the Indian law shall apply, the
validity of the contract may be judged as per S. 23 of Contract Act, 1872. This will make the
two-tier arbitration invalid in law in the context of the 1996 Act when read with S. 23 of the
Contract Act as statutory jurisdiction cannot be waived by contract.
Thus, the order passed by a tribunal lacking inherent jurisdiction would be a nullity.
On the other hand, Justice Tarun Chatterjee held that a two-tier arbitration entered into before
or after the 1996 Act is valid and permissible in India as there is no prohibition given under
the Act. He held that the Act does not prohibit the parties from entering into an agreement
whereby the first arbitration proceedings is conducted under Part I and appeal therefrom is
conducted under Part II.
According to him, Clause 14 clearly states that second arbitration is an appeal to be exercised
by the party aggrieved by the award of first arbitration and the award from second arbitration
shall be final and binding on the parties. Therefore the second arbitration was not an
independent proceeding. By applying the doctrine of merger, the original award merges with
the appellate award making this award valid and capable of enforcement. Here, S. 35 cannot
serve as a bar to appellate arbitration as this section only comes into operation once the
arbitration proceedings as a whole, which must include appellate arbitrations, if any, have
ended.
Therefore, the second award is a foreign award as it satisfies the conditions laid down in S.
44.
Issue 2: Whether the two-tier agreements are opposed to the public policy?
Justice Sinha held that the Two-tier agreements are opposed to public policy if they oust/
create the jurisdiction of the court as mentioned in Clause 14 of the Arbitration Agreement in
this case. This is in violation of S. 23 of ICA, 1857 and therefore against the public policy of
India.
On the other hand, Justice Chatterjee held that the award is valid and binding and not
opposed to public policy as there is not express prohibition against two-tier agreements under
the 1996 Act.
Rule:
Since this particular case did not reach to any consensus whatsoever due to a difference in the
opinion of the two Judges, there is no particular rule, which can be followed throughout. But,
either of the following interpretation can be used till the time a larger bench gives away a
more concrete judgment.

1. Supreme Court’s decision in Centrotrade of December 15, 2016

Facts:
The case has a chequeredhistory which began when M/s Centrotrade Minerals & Metals Inc
and Hindustan Copper Limited (HCL)(3) entered into a contract for the sale of copper
concentrate, which was to be used in the HCL's Khetri plant. Differences arose between the
parties regarding the dry weight of the goods and Centrotrade invoked the arbitration clause
which read as follows:
"All disputes or differences whatsoever arising between the parties out of, or relating to, the
construction, meaning and operation or effect of the contract or the breach thereof shall be
settled by arbitration in India through the arbitration panel of the Indian Council of
Arbitration in accordance with the Rules of Arbitration of the Indian Council of Arbitration.
If either party is in disagreement with the arbitration result in India, either party will have the
right to appeal to a second arbitration in London, UK in accordance with the Rules of
Conciliation and Arbitration of the International Chamber of Commerce in effect on the date
hereof and the results of this second arbitration will be binding on both the parties. Judgment
upon the award may be entered in any court in jurisdiction."
On June 15 1999 an award was rendered under the rules of the Indian Council of Arbitration
(ICA). Centrotrade appealed the ICA award by initiating proceedings before the International
Chamber of Commerce (ICC) on February 22 2000. The arbitral tribunal, which comprised
Jeremy Cooke as the sole arbitrator, rendered its award in 2001, upholding the validity of the
arbitration clause and Centrotrade's claims. Thereafter, Centrotrade applied for enforcement
of the ICC award, which was allowed by a single bench of the Calcutta High Court via a
March 10 2004 judgment. HCL appealed this decision and, on July 28 2004, the division
bench declared the ICC award to be nonexecutable as long as the ICA award stood.(4) This
judgment was challenged before a twojudge bench of the Supreme Court, which referred the
matter to a threejudge bench in 2006 because of a difference in opinion.(5)
Decision:
This set of facts resulted in the recent judgment, which considered the following issues:
 Are twotier arbitration clauses prohibited under the Arbitration and Conciliation Act
1996?
 Do twotier arbitration clauses violate India's public policy?

The court considered both issues in detail and held that the Arbitration Act does not prevent,
either explicitly or implicitly, the parties' autonomy mutually to agree to a procedure whereby
the arbitral award might be reconsidered by another arbitrator or panel of arbitrators by way
of an appeal, and the same cannot be held to be against India's public policy. The judgment
also clarifies that irrespective of the fact that the parties used the term 'arbitration result' to
describe the first arbitral award, the same would nevertheless be considered an arbitral award
under the Arbitration Act. A differing interpretation would not allow the enforcement of the
ICA award in the event that neither party challenged the arbitration result.

Associate Builders v. DDA, (2015) 3 SCC 49

Recently, the Supreme Court of India (“Supreme Court”) in Associate Builders v. Delhi
Development Authority,1 has dealt with some of the key issues involving challenge of an
arbitral award in an arbitration seated in India. The Supreme Court discussed and clarified
some of the earlier rulings on the scope of ‘public policy’ in Section 34 of the Arbitration and
Conciliation Act, 1996 (“Act”), under several headings (viz. patent illegality, contrary to
justice, contrary to morality, interest of India and fundamental policy of Indian law).
FACTS:
Associate Builder (“Appellant”) was awarded a construction contract for 168 middle income
group houses and 56 lower income group houses in trilok puri in the trans-yamuna area by
the Delhi Development Authority (“DDA/Respondent”). The understanding was that the
contract will be completed in nine months for INR 87,66,678. However, the work came to be
completed only after 34 months.
The Appellant alleged that the delay arose at the instance of the Respondent and subsequently
made fifteen claims and consequently, Shri K.D. Bali was appointed as the sole arbitrator by
the Delhi High Court to arbitrate the dispute (“Ld Arbitrator”). Ld Arbitrator allowed four
claims of the Appellant and further, scaled down two claims on the reasoning that DDA was
responsible for the delay in the execution of the contract.
Thereafter, DDA moved an application before the single judge of the Delhi High Court under
Section 34 of the Act to set aside the award, which was dismissed on April 3, 2006. Against
this order, an appeal was filed under Section 37 of the Act before the Division Bench of the
Delhi High Court (“Division Bench”) and vide an order dated February 8, 2012, the Division
Bench found the arbitral award to be incorrect and rejected the four claims and further scaled
down Claims 12 and 13 (“Impugned Judgment”). Aggrieved by the Impugned Judgment, the
Appellant approach the Supreme Court by way of a Special Leave Petition.
ISSUES:
The primary issue before the Supreme Court was to decide the correctness of the Impugned
Judgment. While deciding the same, the Supreme Court looked into the scope of ‘public
policy’ as a ground for setting aside an award under Section 34(2)(b)(ii) of the Act. Supreme
Court also considered the extent to which a court can replace the Ld Arbitrator’s conclusion
with its own conclusion by way of judicial interference.
CONTENTIONS
Appellant’s submissions:
The Division Bench has lost sight of the law laid down by the Supreme Court when it comes
to challenges made to arbitral awards under Section 34 of the Act.
The Division Bench has acted as a court of first appeal and taken into consideration facts
which were neither pleaded nor proved before the Ld Arbitrator.
The Division Bench has wrongfully interfered with the award as no error of law arises
thereunder. Further, it has failed to appreciate the legal position that the arbitrator is the sole
judge of the quality and quantity of evidence to arrive at a finding.
Respondent’s Submissions:
The Ld Arbitrator’s award was in ignorance of the contractual provisions and that such an
award amounts to a jurisdictional error by the Arbitrator and hence, the Division Bench has
rightfully interfered with the award.
JUDGMENT
The Supreme Court allowed the appeal and set aside the Impugned Judgment. In effect, the
Supreme Court refused to interfere with the arbitral award with the following reasoning:
First, Supreme Court observed that the grounds for interfering with an arbitral award are
limited to those mentioned in Section 34 of the Act and held that merits of the award can be
looked into only under the broad head of ‘public policy’. The Supreme Court relied on the
landmark judgments like, Renusagar2, Saw Pipes3, McDermott International4, Western Geco
International Ltd5. and others, and laid down the heads under the ground of ‘public policy’
as:
“Fundamental Policy of Indian law” would include factors such as a) disregarding orders of
superior courts; b) judicial approach, which is an antithesis to an arbitrary approach; c)
principles of natural justice; d) decision of arbitrators cannot be perverse and irrational in so
far as no reasonable person would come to the same conclusion. Supreme Court held that an
arbitrator is the sole judge with respect to quality and quantity of facts and therefore an award
is not capable of being set aside solely on account of little evidence or if the quality of
evidence is of inferior quality. Supreme Court further held that when a court is applying the
“public policy” test to an arbitration award, it does not act as a court of appeal and
consequently “errors of fact” cannot be corrected unless the arbitrators approach is arbitrary
or capricious.
Supreme Court described “Interest of India” as something which deals with India in world
community and its relations with foreign nations. Notably, the Supreme Court did not
illustrate this ground in detail as the same is a dynamic concept which needs to evolve on a
case by case basis.
Supreme Court held that the term “award is against justice and morality” would include the
following: a) with regard to justice, the award should not be such that it shocks the
conscience of the court; b) with regard to morality, there can be no universal standard
however, Supreme Court observed that both the English and the Indian courts have restricted
the scope of morality to “sexual immorality” only; c) With respect to an arbitration, it would
be a valid ground when the contract is not illegal but against the mores of the day, however,
held that this would only apply when it shocks the conscience of the court.
Supreme Court further held that “Patent Illegality” would include: a) fraud or corruption; b)
contravention of substantive law, which goes to the root of the matter; c) error of law by the
arbitrator; d) contravention of the Act itself; e) where the arbitrator fails to consider the terms
of the contract and usages of the trade as required under Section 28(3) of the Act; and f) if
arbitrator does not give reasons for his decision.
Second, the Supreme Court held that the Division Bench has lost sight of the fact that it is not
a first appellate court and cannot interfere with errors of fact.
ANALYSIS
This ruling marks an important step in the line with the pro arbitration decisions of the
Supreme Court in the last couple of years. It is a welcome decision in so far as ‘public policy’
had been clarified in order to provide guidance on the level of interference sought to be made
under Section 34 of the Act. This marks a rare occasion where Supreme Court has discussed
“morality” in a challenge under Section 34 of the Act. Further, in Western Geco International
Ltd6, Supreme Court elaborated the scope of “fundamental policy of Indian law” for
challenge of arbitral award, and consequently the legal community was skeptical, as it was
felt that this would open flood gates of challenge to arbitration awards. Therefore, this
judgment provides much needed assistance as it defines the narrow boundaries of challenge
under Section 34 of the Act.
Supreme Court`s finding that an arbitral award cannot be set aside on the grounds of “error in
facts”, unless the arbitrators approach is arbitrary or capricious, is indeed praiseworthy as it
would narrow judicial intervention. Another aspect which needs some attention is that the
jurisprudence on ‘public policy’ laid down in this case would apply only to awards arising
out of arbitrations seated in India, as Section 34 of the Act would only be applicable in such a
situation.

ONGC v Western Geco international Ltd.,  2014 (9) SCC 263.

FACTS

In mid - 2001 a tender was awarded to the Respondent for technical upgrade of a Seismic
Survey Vessel [“Vessel”]. The Respondent had submitted a bid, which included equipping
the Vessel with “Geopoint” Hydrophones of U.S. origin [“US Hydrophones”].
In due course, the Respondent was unable to fit the US Hydrophones, since it was unable to
obtain the requisite license from the concerned authority in U.S.A. The Respondent
accordingly requested the Appellant to consent to replace the US Hydrophones with those of
Canadian origin. However, the Appellant insisted that US Hydrophones be used, and only
when the application for US Hydrophones had been formally rejected by the concerned
authority in U.S.A. the Appellant consented to the use of Canadian Hydrophones.
Owing to this issue the Vessel could not be returned to the Appellant on the stipulated date of
July 9, 2001 and was eventually returned on May 6, 2002.
While making payments to the Respondent, the Appellant, inter alia, deducted amount
towards excess engagement charges under the Contract. Disputes arose between the parties
on account of the deductions, which were then adjudicated upon by an Arbitral Tribunal.
The Tribunal held that the excess engagement charges for the period from November 1, 2001
to March 22, 2002 deducted by the Appellant from the payments made to the Respondent
were unjustified. The Tribunal held that this period of delay in delivery of Vessel could not
be attributed to the Respondent - as it had by October 31, 2001, informed the Appellant of its
inability to procure the requisite license and had provided the details regarding the alternate
Canadian hydrophones.
The Appellant aggrieved by the award of the tribunal challenged the decision under Section
34 of the Act.
It was contested by the Respondent that none of the grounds for setting aside an award
under Section 34of the Act existed in the present case and therefore, the Court did not have
the jurisdiction to set aside / interfere with the Award. It was also urged that the Court could
not, in the absence of any compelling reason, interfere with the view taken by the Arbitrators
as if it was sitting in appeal over the Award.

JUDGMENT

The Court examined if the Award was in conflict with the “public policy of India”, under
Section 34(2)(b)(ii)of the Act. Reliance was placed on the judgment in ONGC Ltd. v. Saw
Pipes Ltd.2 [“Saw Pipes Case”] while interpreting the phrase “public policy of India”
wherein it has been held that an arbitral award should be “set aside if it is contrary to:
 fundamental policy of Indian law; or
 the interest of India; or
 justice or morality, or
 in addition, if it is patently illegal.

Interpretation of “fundamental policy of Indian law”

The Court observed that the phrase “fundamental policy of Indian law” had not been
elaborated by the Court. Interpreting it in this case, the Court held that the phrase
included, inter alia, the following three principles:

a. Judicial Approach: No Tribunal, court or other authority should act in an arbitrary,

capricious or whimsical manner or be influenced by any extraneous consideration while
making any determination which would affect the rights of citizens or have civil
consequences.

b. Principles of Natural Justice: These principles should be followed by all courts and quasi
– judicial authorities while determining the rights and obligations of parties. The parties to
the dispute should be given the opportunity to be heard. The decision – makers should make
reasoned decisions which reflects application of mind to the facts and circumstances of the
case.

c. Wednesbury’s principle of reasonableness: Where a decision by a court or tribunal is so

perverse or irrational that no reasonable person would have arrived at it [the Wednesbury
principle], then such decision shall not be sustained it a court of law and maybe challenged.
The Court stated that the aforementioned principles were applicable to the awards passed in
arbitrations.

Application of principles to the facts in the case

The Court considered the facts of the case to determine if the excess engagement charges
deducted by the Appellant were justified. The Court held that while on the one hand, the
Appellant was held responsible for the delay as it did not act in right earnest, the same test
was not applied to the Respondent.
In this regard, the period from November 1, 2001 to March 22, 2002 was considered.
Regarding the period from October 24, 2001 to November 26, 2001 (when the Appellant had
failed to provide prompt directions for making application for the requisite license for the
hydrophones) it was held that the Tribunal had rightly attributed the delay to the Appellant.
Thereafter, the period from November 26, 2001 (when the Appellant issued instructions for
making of a formal request for the grant of license) to January 8, 2002 (when the application
was actually made by the Respondent) was considered. This delay was attributed to the
Respondent by the Court, for its lack of diligence in making a timely application. Since under
the Award this delay was attributed to the Appellant instead of the Respondent, the Court
held that the Tribunal had failed to appreciate the facts, leading to miscarriage of justice. It
was held that the Tribunal had failed to apply consistently the test for determining the
liability for the delays.
The delay for the period from January 8, 2002 to March 7, 2002 (time taken by US authority
to process the application and reject the same) was attributed to the Appellant, as it was on
their insistence that an application had been made.
Further, the delay from March 8, 2002 (when the application was rejected) to March 22, 2002
(when such rejection was conveyed by the Respondent to the Appellant) was attributed by the
Court to the Respondent, contrary to the Tribunal’s finding.
The Court, conclusively, held that if arbitrators fail to draw an inference which ought to have
been drawn; or if they draw an inference which is prima facie untenable, and results in
miscarriage of justice then such an award is liable to be challenged cast away or modified, as
necessitated.
In light of this, the Award was modified such that the Respondent was held liable for the
delay for the periods being November 26, 2001 to January 8, 2002; and March 8, 2002 to
March 22, 2002.
Part II – Section 48

MSM Satellite (Singapore) Pvt. Ltd. vs. World Sport Group (Mauritius) Ltd. Appeal
(Lodging) No. 534 of 2010 in Notice of Motion No. 1809 of 2010 in Suit No. 1828 of 2010

ALLEGATIONS OF FRAUD NOT A BAR TO FOREIGN SEATED ARBITRATION

· Supreme Court held that allegation of Fraud is not a bar to refer parties to foreign
seated arbitrations;
· The law does not require a formal application to refer parties to arbitration;
· If an arbitration agreement exists and a party seeks reference to a foreign seated
arbitration, court is obliged to refer the parties to arbitration;
· The only exception is in cases where the court finds the arbitration agreement to be
null and void or inoperative or incapable of being performed.
INTRODUCTION
In a landmark decision the Supreme Court of India has expressly removed allegations of
fraud as a bar to refer parties to foreign seated arbitrations. The Supreme Court by its
decision dated January 24, 2014 in World Sport Group (Mauritius) Ltd (“WSG”) v. MSM
Satellite (Singapore) Pte. Ltd (“MSM”) set aside the judgment of the Division Bench of the
Bombay High Court (“Bombay HC”) in MSM Satellite (Singapore) Pte. Ltd v. World Sport
Group (Mauritius) Ltd dated September 17, 2010 (“Impugned Judgment”). Previously as the
law stood, allegations of fraud were arguably not arbitrable under Indian Law. The Supreme
Court has now clarified the position, removing another possible hurdle that one could face
while arbitration against Indian Parties outside India.
BACKGROUND
The dispute pertained to obtaining media rights for the Indian sub-continent from the Board
of Cricket Control of India. In this regards WSG and MSM entered into a Deed for Provision
of Facilitation Services (Facilitation Deed”), where under MSM was to pay WSG ₹
4,250,000,000 as facilitation fees. The Facilitation Deed was governed by English Law and
parties had agreed to settle their disputes through arbitration before the International Chamber
of Commerce (“ICC”), with a seat of arbitration in Singapore (“Arbitration Agreement”).
Eventually, MSM rescinded the Facilitation Deed alleging certain misrepresentations and
fraud against WSG and initiated a civil action before the Bombay HC for inter alia a
declaration that the Facilitation Deed was void an for recovery of sums already paid to WSG.
WSG filed a request for arbitration with ICC and ICC issued notice to the MSM to file its
answer. In response MSM filed initiated a fresh action seeking an anti-arbitration injunction
against WSG from proceeding with the ICC arbitration.
MSM’S CASE
It was MSM’s case that since the Facilitation Deed, which contained the Arbitration
Agreement, in null and void on account of the misrepresentation and fraud of WSG, the
Arbitration Agreement itself was void and could not be invoked.
WSG’S CASE
It was WSG’s case unless the Arbitration Agreement, itself, apart from the Facilitation Deed,
is assailed as vitiated by fraud or misrepresentation; the Arbitral Tribunal will have
jurisdiction to decide all issues including validity and scope of the arbitration agreement.
IMPUGNED JUDGMENT
The Bombay HC had, in the impugned Judgment, held that disputes where allegation of fraud
and serious malpractice on the part of a party are in issue, it is only the court which can
decide these issues through furtherance of judicial evidence by the party and these issues
cannot be properly gone into by the arbitrator, thereby granting the anti-arbitration injunction
sought for. This decision of the Bombay HC was the only judgment where an Indian Court
had held allegations of fraud as a bar to foreign seated arbitrations, though such findings were
prevalent in the sphere of domestic arbitrations.
JUDGMENT OF THE SUPREME COURT
The Supreme Court, by re-enforcing its pro-arbitration approach, set aside the Impugned
Judgment and held that only bar to refer parties to foreign seated arbitrations are those which
are specified in Section 45 of the Indian Arbitration and Conciliation Act, 1996 (“Act”) i.e. in
cases where the arbitration agreement is either (i) null and void or (ii) inoperative or (iii)
incapable of being performed.
While explaining the term null and void, the Supreme Court clarified that the arbitration
agreement being a separate agreement does not stand vitiated if the main contract is
terminated, frustrated or is voidable at the option of one party. The Supreme Court held that a
court will have to see in each case whether the arbitration agreement is also void along with
the main agreement or whether the arbitration agreement stands apart from the main
agreement and is not null and void, thus accepting the submissions of WSG.
The Supreme Court interpreted the terms inoperative and incapable narrowly, adopting the
interpretation of the international authors of these terms in Article II (3) of the Convention on
the Recognition and Enforcement of Foreign Arbitral Awards, 1958 (“New York
Convention”). The expression ‘inoperative’ is understood to cover situations where the
arbitration agreement has ceased to have effect such as where parties may have by conduct or
otherwise revoked the arbitration agreement. Further, ‘incapable of being performed’ covers
situations where the arbitration cannot be effectively set into motion and covers the practical
aspects of the prospective arbitration. Accordingly, the court held that arbitration agreements
do not become “inoperative and incapable of being performed” where allegations of fraud
have to be inquired into and the court cannot refuse to refer the parties to arbitration as
provided in Section 45 of the Act.
The Supreme Court also opined that no formal application is necessary to request a court to
refer the matter to arbitration under Section 45 of the Act and in case a party so requests even
through affidavit, a court is obliged to refer the matter to arbitration with the only exception
being cases where the arbitration agreement is null and void, inoperative and incapable of
being performed, thus limiting the scope of judicial scrutiny at the stage of referring a dispute
to foreign seated arbitrations.