Transformation of Section 34 to a substantive appeal - yet another example

We have discussed in several posts how the Supreme Court of India has carved out for itself and other courts infinite powers of intereference with arbitration. We have also discussed how the definition of public policy under Section 34 and how its expansive interpretation allows courts to review decisions allows courts to revisit questions of substantive law that arbitral tribunals have already decided.

Yesterday (14th July, 2011) the Supreme Court gave its decision in Shipping Corporation Of India ... vs Mare Shipping Inc. This decision is (at least in my opinion) not a significant one for a student of arbitration. But it provides yet another example of reconsideration of substantive questions of law by courts.

The decision quotes the appellant's counsel: "Mr. Gupta submitted that the scope of a petition under Section 34 of the 1996 Act had been considered by this Court in detail in Oil and Natural Gas Corporation Ltd. Vs. Saw Pipes Ltd. [(2003) 5 SCC 705], and it was indicated therein that if the Award passed by the Arbitral Tribunal was contrary to any of the provisions of the Act or the substantive law governing the parties or was against the terms of the contract, the same could be set aside". This is the only reference in the decision to Section 34 and the permissibility and scope of intervention under that Section. Having made this passing reference, the Court proceeds directly to re-examine matters of substantive law that had already been decided by the arbitral tribunal.

While the omission of references to or discussion on the line of precedents on Section 34 is commentable on account of much needed brevity of Indian judicial decisions, it also shows how revisiting substantive questions in a Section 34 application (and appeals arising from such applications) has become an everyday affair which does not even merit elaboration upon.

Specific question doctrine in Indian law: Guest Post by Vivek Menon

The following is a guest post by Vivek Menon, third year student, National University of Juridical Sciences, Kolkata on the specific question doctrine in Indian law.

Section 34 of the Arbitration and Conciliation Act, 1996 provides for the setting aside of an arbitral award. In this regard, it is well established that a court may only go into questions of law and not of fact. However, there are certain constraints placed on the court's jurisdiction on matters of law as well. The specific question doctrine is one such example.

According to the specific question doctrine, the court's jurisdiction to review an arbitrator's decision is ousted if a question law was specifically referred to the arbitrator and the parties agreed to submit the dispute to arbitration and be bound by the consequent award. This was laid down by the Supreme Court in Seth Thawardas Pherumal v. Union of India [AIR 1955 SC 468], where it was observed:

Venture Global Engineering v Satyam Computer Services & Another: Excerpts and some observations

We had argued in one of our earlier posts, that the judgment of the AP High Court in Venture Global Engineering v. Satyam Computer Services and another was unfounded in law. We reported recently that the said judgment has been reversed by the Supreme Court in appeal. Here we reproduce the relevant portions of the judgment of the Supreme Court and make some observations on the judgment.

Guest Post: Permissibility of amendments to applications under S. 34 of the Arbitration and Conciliation Act - Supreme Court disagrees with the AP High Court's position in Satyam v Venture

I had discussed in an earlier post the decision of the Andhra Pradesh High Court in the Satyam Venture dispute that no application under Section 34 can be amended after the limitation period for filing such application has passed. I had argued that this amounted to judicial law making and had no statutory basis. Badri Srinivasan, a reader of our blog brought to our attention a recent judgment of the Honourable Supreme Court on the same point that takes a stand diametrically opposite to the position advocated by the AP High Court. In the following paragraphs, Badri provides a summary of the decision and highlights the portions relevant to the question of whether an application under Section 34 can be amended after the limitation period to file the application has passed. This decision is of interest especially given that the Satyam venture dispute is soon making its second trip to the Apex Court.

Badri is an alumnus of NUJS and currently works for a corporation. He writes on a wide range of topics on the Practical Academic blog.

Here goes Badri's post:

State of Maharashtra v. Hindustan Construction Company

RV Raveendran & RM Lodha, JJ.

01.04.2010

Civil Appeal No. 2928/ 2010 (Out of SLP (C) No. 3937/ 2009)

MANU/SC/0215/2010

The State of Maharashtra (SOM) and Hindustan Construction Company (HCC) entered into an agreement in 1992 for construction by HCC of some civil works. Certain disputes arose between the parties, which were referred to an arbitral tribunal. The arbitral tribunal rendered the award in 2003. SOM applied to the court to set aside the award. The District Court rejected SOM’s application. An appeal was filed before the High Court of Bombay on 6^th February 2007. More than a year after the filing of the appeal, on 23^rd June 2008, SOM applied to the said court for allowing amendment of the memorandum appeal.

The court had to decide whether such an appeal adding additional grounds challenging the award is allowable notwithstanding the fact that S 34(3) allows a party to file an application for setting aside the arbitral award within a maximum period of three months plus 30 days.

A brief summary of the decision of the Supreme Court is given below|:

1.         Amendment of pleadings is a matter of procedure. Granting leave for amendment             is a matter of discretion of the court, to be exercised based on settled principles.

2.         Amendments which evade the laws of limitation shall not, as a rule, be allowed.    However, even such amendments may be allowed in the interests of justice

4.         The above stated principles would apply even in case of memoranda of appeal.

5.         The period allowed for filing petition under S 34 is prescribed by S 34(3) and is     not extendable.

6.         However, amendments to file additional grounds may not always amount to filing             fresh application. If that is so, no material or relevant ground for setting aside             award may be added.

7.         Under S 34(2)(b), if the court finds that the award deals with a dispute that           is not arbitrable or if the award is against public policy. The wordings of S     34(2)(b) allow the court to grant leave for such amendments even after the period   prescribed in S 34(3).

8.         Every amendment in an application for setting aside an arbitral award cannot be    taken as a fresh application.

The court, unlike the AP HC in Satyam v. Venture Engineering seems to allow amendments adding additional grounds to an application for setting aside an arbitral award:

(a)        where justice demands it or

(b)        where such amendments do not amount to filing a fresh application.

[In Satyam v. Venture Engineering, the AP HC had made a blanket prohibition against amendments to S 34 petitions beyond period specified in S 34(3).]

Considering the structure of the Arbitration and Conciliation Act, 1996 and the liberal attitude of the courts in allowing amendments to pleadings, the court should sparingly and only when the situation absolutely demands it allow such amendments. It must also be noted that an award cannot be enforced if an application is filed for setting aside an award (S 36). Hence, a court should ideally decide a S 34 petition as soon as possible and should ensure there is no delay in finally deciding on the matter. The Court should have strictly gone by the well-established legal principle: What cannot be done directly cannot be indirectly. However, Instead the court seeks to employ a test that, I believe, is nebulous, and would result in courts allowing amendments akin to what was done with Order VI Rule 17. I would only quote the following portion of the Supreme Court’s decision in Revajeetu Builders and Developers v. Narayanaswamy and Sons and Ors.:

31. In a recently published unique, unusual and extremely informative book "Justice, Courts and Delays", the author Arun Mohan, a Senior Advocate of the High Court of Delhi and of this Court, from his vast experience as a Civil Lawyer observed that 80% applications under Rule VI Order 17 are filed with the sole objective of delaying the proceedings, whereas 15% application are filed because of lackadaisical approach in the first instance, and 5% applications are those where there is actual need of amendment. His experience further revealed that out of these 100 applications, 95 applications are allowed and only 5 (even may be less) are rejected. According to him, a need for amendment of pleading should arise in a few cases, and if proper rules with regard to pleadings are put into place, it would be only in rare cases. Therefore, for allowing amendment, it is not just costs, but the delays caused thereby, benefit of such delays, the additional costs which had to be incurred by the victim of the amendment. The Court must scientifically evaluate the reasons, purpose and effect of the amendment and all these factors must be taken into consideration while awarding the costs.

…

According to the view of the learned author Arun Mohan as observed in his book, although the proviso has improved the position, the fact remains that amendments should be permissible, but only if a sufficient ground therefore is made out, and further, only on stringent terms. To that end, the rule needs to be further tightened”.

In fact, as the said judgement notes, in 1999 Order VI Rule 17 was proposed to be deleted in on recommendations by the Justice Malimath Committee. However, due to protests from the Bar, the said provision was left unamended except for a proviso, which read:

“Provided that no application for amendment shall be allowed after the trial has commenced, unless the Court comes to the conclusion that is spite of due diligence, the party could not have raised the matter before the commencement of trial.”

On the other hand, taking an absolute view that no amendments should be permitted (as the AP HC did) may also lead to unwarranted results. For example, additional grounds that have been discovered post-expiry of limitation under S 34(3) have to be allowed. Hence, proper balancing needs to be done. It would have been better if the court had more clearly defined the circumstances that might warrant allowing such amendments. The point is that when the court allows new grounds to be added "in the interests of justice".

As a general rule in case of adding additional grounds beyond the period specified in S 34(3) should be strictly dealt with. I only cite certain provisions to state that the Act does not give a second chance to do what one had not done in the first instance. For example, in case you contend in your S 34 petition that the arbitration agreement suffered some incapacity, you'll have to make objection to the tribunal first. If the tribunal rejects such contention, you may make it subsequently before the setting aside court. S 4 is another example. What these provisions tend to do is that it negates all "afterthought"-contentions and reduce the time for settlement of the dispute finally.

As far as amendments which are not in the nature of additional grounds, they may be less strictly viewed and the directions given in Revajeetu Builders and Developers v. Narayanaswamy and Sons and Ors may strictly be followed, relevant portions of which are quoted herebelow:

“65. The Courts have consistently laid down that for unnecessary delay and inconvenience, the opposite party must be compensated with costs… The costs cannot and should not be imposed arbitrarily. In our view, the following parameters must be taken into consideration while imposing the costs. These factors are illustrative in nature and not exhaustive.

(i) At what stage the amendment was sought?

(ii) While imposing the costs, it should be taken into consideration whether the amendment has been sought at a pre-trial or post-trial stage;

(iii)The financial benefit derived by one par- ty at the cost of other party should be properly calculated in terms of money and the costs be awarded accordingly.

(iv) The imposition of costs should not be symbolic but realistic;

(v) The delay and inconvenience caused to the opposite side must be clearly evaluated in terms of additional and extra court hearings compelling the opposite party to bear the extra costs.

(vi) In case of appeal to higher courts, the victim of amendment is compelled to bear considerable additional costs.

All these aspects must be carefully taken into consideration while awarding the costs.

66. The purpose of imposing costs is to:

a) Discourage malafide amendments designed to delay the legal proceedings;

b) Compensate the other party for the delay and the inconvenience caused;

c) Compensate the other party for avoid- able expenses on the litigation which had to be incurred by opposite party for opposing the amendment; and

d) To send a clear message that the par- ties have to be careful while drafting the original pleadings.

…

[S]ome basic principles emerge [] ought to be taken into consideration while allowing or rejecting the application for amendment.

(1) Whether the amendment sought is imperative for proper and effective adjudication of the case?

(2) Whether the application for amendment is bona fide or mala fide?

(3) The amendment should not cause such prejudice to the other side which cannot be compensated adequately in terms of money;

(4) Refusing amendment would in fact lead to injustice or lead to multi- ple litigation;

(5) Whether the proposed amendment constitutionally or fundamentally changes the nature and character of the case? and

(6) As a general rule, the court should decline amendments if a fresh suit on the amended claims would be barred by limitation on the date of application.”

To paraphrase the caution which the Supreme Court in Revajeetu Builders and Developers v. Narayanaswamy and Sons and Ors gave, the decision on an application made for amending a S 34 petition is a very serious judicial exercise and the said exercise should never be undertaken in a casual manner.

Some proposed amendments to the Arbitration and Conciliation Act (Part I)

This post is a short comment on some of the proposed amendments to the Arbitration and Conciliation Act, 1996 discussed here in which the Law Ministry has attempted to nullify the effect of some Supreme Court judgments and reinforce some others. LegallyIndia has discussed the ramifications of some of these amendments. Some further issues are discussed here.

The Venture case discussed in the earlier post based its decision on the landmark, yet controversial judgment of the Supreme Court in Bhatia International v. Bulk Trading S. A., (2002) 4 SCC 105. The Court held, inter alia, on an interpretation of section 2(2) of the Act that Part I of the Act applies to arbitration taking place outside India as well. The reasoning of the Court was based on the omission of the word "only" from clause (2) of section 2, which was present in the corresponding provision in the UNCITRAL Model Law on International Commercial Arbitration on which this Act was based. The proposed amendment to section 2(2), although not inserting the word "only", brings it more into line with the UNCITRAL Model Law, thus negating the reasoning in Bhatia, to that extent. This being the argument on which the Court based its decision, undermines the decision itself, thus leaving the Venture decision, too, without legal basis.

An important aspect of the Venture decision, other than applying Part I of the Act to arbitration held outside India was applying the ratio in ONGC v. SAW Pipes, (2003) 5 SCC 705. The Court in Venture held that to test if a foreign award is contrary to public policy, the criteria laid down in SAW Pipes would be applicable. The SAW Pipes judgment, rendered in context of a domestic award, expressly excluded applicability of this "broad view" of public policy from foreign awards. The test for the same was laid down in Renusagar Power Corporation v. General Electric Co., AIR 1994 SC 860, which adhered to the "narrow view" of public policy. The new amendments to the Act clearly define public policy in the context of domestic as well as foreign awards in Explanation 2 to section 34. This gives statutory backing to what was held in Renusagar and relied on in SAW Pipes. Further, a proposed new section 34A inserts the new ground for domestic awards introduced in SAW Pipes as "patent illegality". The words used in the amendment are "error which is apparent on the face of the arbitral award giving rise to a substantial question of law". This section is applicable only in case of arbitrations other than international arbitrations. However, a reading the newly inserted definitions of "domestic arbitration" and "international arbitration" indicates that all arbitrations held in India, even if one of the parties is not Indian. Therefore a broad meaning of the term "public policy" is attracted whenever an arbitration is held in India. Here, too, the decision in Venture stands to lose effect if the aforementioned amendments are enacted into law.

Another important amendment, this time reinforcing a Supreme Court judgment, S. B. P. & Co. v. Patel Engineering Ltd., AIR 2006 SC 450, replaced the term "Chief Justice" with "High Court" and "Chief Justice of India" with "Supreme Court". This decision, too was controversial, overruling a 3 judge bench decision in Konkan Railway Corporation v. Mehul Construction Co., (2000) 7 SCC 201 and a Constitutional Bench decision in Konkan Railway Corporation v. Rani Construction Co., AIR 2002 SC 778 and with a strong dissent by Justice Thakker.

The question in all these cases was the nature of authority of the Chief Justice under section 11 of the Act in appointing arbitrators. The Konkan Railway cases held that it was an administrative function whereas Patel Engineering overturned them, holding it to be a judicial function. This matter would not be in controversy any longer, after substitution of the Chief Justice with the High Court and Supreme Court in the Act. However, the distinction between the office of the Chief Justice and the Court he presides over, which was stressed on in Patel Engineering, becomes irrelevant as the function is no more vested in the Chief Justice.

The amendments proposed are several in number, and many of them might have far reaching consequences for arbitration in India. These will be discussed in further posts.

Satyam – Venture, Phase II: A case of judicial law making by the AP High Court

Bar & Bench reports here that the Satyam – Venture dispute could land in the Supreme Court for a second time. Andhra Pradesh High court allowed a civil revision petition under Art. 227 by Satyam directed against the decision of the Civil Court permitting Venture to amend its application to set aside an award rendered by the London Court of International Arbitration in a dispute between Satyam and Venture. Amendment of the application was sought so that the letter of Mr. Ramalinga Raju, the former Chairman of Satyam, confessing to massive fraud and other documents relating to the episode could be placed on record to be considered while deciding the application to set aside the award.

The procedural history of this case up to the controversial decision in Venture Global v. Satyam Computer Services Ltd, [(2008) 4 SCC 190] is fairly well known. In short, after failing to get the award in favour of Satyam set aside before courts in Michigan and Illinois courts and after the enforcement of the award was granted in the United States, Venture filed a sought setting aside of the award in India. Though the civil court and Andhra Pradesh High court ruled that a foreign award could not be set aside under Section 34 of the Arbitration and Conciliation Act, 1996, Supreme Court in Venture Global v. Satyam Computer Services Ltd, [(2008) 4 SCC 190] held that a foreign award could be set aside under Section 34 and remanded the application under Section 34 to be decided by the Civil Court.

While the matter was pending before the Civil Court, Mr. Ramalinga Raju confessed to acts of fraud in relation to the books of Satyam and subsequently Satyam was taken over by Tech Mahindra and renamed Mahindra Satyam. An application was moved by Venture seeking amendment of the application to place on record matters relating to the fraud. This application was allowed by the Civil Court. However, in the Civil Revision mentioned above, the Andhra Pradesh High Court struck down this decision and held (i) that the fraud had no nexus with the foreign award, (ii) a court while deciding on an application to set aside an award cannot consider material that was not available to the arbitral tribunal, (iii) despite Order VI of the CPC being applicable, no application under Section 34 for setting aside an award could be amended after the time period to file such an application has elapsed.

The third observation of the Court seems to suggest a blanket rule that “[a]n amendment can be permitted if it is sought within the unextendable stipulated time under Section 34(3) and an amendment sought after a period of 120 days would not be permissible”. The Court here imposes a limitation period for an application for amendment in a proceeding under Section 34, which coincides with the limitation period for the filing of the application. The court relies in this regard on the judgments of the Bombay High Court in Pushpa P Mulchandani v Admiral Radhakrishin Tahilani [2001 (2) Arb LR 284 (Bombay)], Vastu Invest & Holdings Private Limited v Gujarat Lease Financing Limited [2001 (2) Arb LR 315 (Bombay) (DB)] and Patel Engineering Company Limited v Konkan Railway Corporation Limited [MANU/MH/0383/2009].

Does this have any statutory backing? To me the answer appears to be no. This appears to be another case of judicial law making in the arena of arbitration law in India. It is true that the decision of the Court could be sustained on other grounds independent of this observation. However, given the far reaching implications that this proposition can have for litigators if accepted as a blanket rule, it is pertinent to examine the relevant statutory provisions.

To begin with, the Court accepted that the Code of Civil Procedure, including Order VI, Rule 17 which speaks of “Amendment of pleadings” applies to proceedings under Section 34 by virtue of Rule 12 of Andhra Pradesh Arbitration Rules, 2000. Even independent of the Rules, it has been held by the Supreme Court in ITI Ltd. v Siemens Public Communications Network Ltd. [(2002) 5 SCC 510] that when a special statutes vests powers in an ordinary court of law without prescribing a special procedure, ordinary procedural laws of the land apply. Applying this principle, CPC applies to proceedings before civil courts under Section 34 as no special procedure has been provided.

Section 34(3) of the Arbitration and Conciliation Act states:

“An application for setting aside may not be made after three months have elapsed from the date on which the party making that application had received the arbitral award or, if a request had been made under section 33, from the date on which that request had been disposed of by the arbitral tribunal: Provided that if the Court is satisfied that the applicant was prevented by sufficient cause from making the application within the said period of three months it may entertain the application within a further period of thirty days, but not thereafter.”

Order VI, Rule 17 of the CPC says:

“The Court may at any stage of the proceedings allow either party o alter or amend his pleadings in such manner and on such terms as may be just, and all such amendments shall be made as may be necessary for the purpose of determining the real question in controversy between the parties. Provided that no application for amendment shall be allowed after the trial has commenced, unless the Court comes to the conclusion that in spite of due diligence, the party could not have raised the matter before the commencement of trial.”

It is clear from a plain reading of Section 34 that the limitation period imposed by this section is only on the institution of a proceeding under Section 34 and not for amending an application under Section 34 which has already been filed. Further, Order VI, Rule 17 of the CPC which has been held to be applicable by the same Court in the same decision, does not impose any limitation period beyond which a court would be incapable of accepting an application for amendment of pleadings in a case. Also, there exists no general rule that pleadings cannot be amended after the expiry of the limitation period to institute the proceedings in connection with which they are filed. Further, amendment of pleadings could be of highest necessity for parties after expiry of the limitation period as it will no more be open for them to terminate the proceedings and institute fresh ones. Under these circumstances, the construction suggested by the court is untenable unless something in the text of the Arbitration and Conciliation Act suggests such a construction. As already discussed, nothing in the text seems to suggest this. A more reasonable decision would have been to say that while courts have discretion under Order VI, Rule 17 to entertain applications at any stage, the wording of the proviso of that section in respect of amendments after the commencement of the trial should be strictly adhered to.

The only reason that the court has given in support of its decision is that the allowing amendments would defeat the intent behind Section 34(1) read with (3) of Arbitration Act. This “intent” appears to be one of speedy disposal of matters under Section 34. With an appeal against the decision of the High Court being taken to the Supreme Court with the prospect of another longwinded litigation before the Apex Court, speedy disposal seems a far cry in this case.