Setting aside of arbitral award only if against public policy: Supreme Court clarifies the extent of the role played by High Courts in hearing appeals

In a recent case bought before the Apex Court, it has been evidently defined that an arbitral award can only be set aside if the award is against the public policy of India. The case, Haryana Tourism Limited (“Appellant” or “Corporation”) V. M/s Kandhari Beverages Limited (“Respondents” or “Company”) is the product of a dispute that arose between both the parties in a transaction that dates back to 2001. The present appeal was heard and adjudged by a bench of Justices M.S. Shah and B V Nagarathna on 11 Jan 2022, filed by the Appellant against an order of the Punjab and Haryana High Court (“High Court”) that set aside an arbitral award passed by the sole arbitrator in 2005 which was later sustained by the Additional District Judge, Chandigarh (“ADJ”) in 2014.

Rundown of events leading up to the present appeal

• The Appellant had invited tenders/quotations for the supply of Aerated Cold Drinks at its Tourist Complexes for the period 15.05.2001 to 14.05.2002.
• After the tender submitted by the Respondent was accepted by the Corporation, an agreement was mutually agreed upon that mandated the Company to pay a sum of Rs. 20 lakhs to the Corporation in place for brand promotion.
• The Corporation spent a sum of Rs. 1 lakh for brand promotion events, however, The Company felt that it spent a sum of Rs. 13.92 lakhs.
• The Appellant demanded a sum of Rs. 19 lakhs to be sent by the Respondent as sponsorship money.
• The Corporation- Appellant terminated the agreement wide a letter dated 17 Jan 2002.
• As a dispute arose between the parties, the sole arbitrator was approached.

Judgments over the years

The Sole Arbitrator-

Vide award dated 17 Nov 2005, the Arbitrator directed the Respondent- Company to pay a sum of Rs. 9.5 lakhs, while rejecting their counterclaim of Rs. 13.92 from the Appellant.

ADJ u/ Section 34-

Aggrieved by the arbitrator’s decision, the Respondent filed an opposition petition before the ADJ which was dismissed vide order dated 25 Sept 2014.

High Court-

Yet again disquiet from the decision, the Respondent further appealed to the High Court under Section 37 of the Arbitration and Conciliation Act, 1996 (“Arbitration Act”). The High Court divulged into the merits of the claim, quashed and set aside the award passed by the arbitration in 2005 further upheld by the ADJ in 2014.

Supreme Court-

This series of legal battles brings us to the appeal filed before the Supreme Court of India to quash the impugned judgment of the High Court.

Arguments put forth by both parties

The Corporation-Appellant submitted that the High Court has seriously erred in setting aside the award passed by the arbitrator in the exercise of its power under Section 37 of the Arbitration Act. It was further submitted that u/37 the High Court has limited scope and no jurisdiction to enter the merits of the claim award.

On the other hand, the Respondent-Company submitted that in fact, the arbitrator has no jurisdiction to pass the award as no amount was due or payable and that the very constitution of the Arbitral Tribunal was not in accordance with the relevant clause in their agreement. They insisted that as no amount was spent by the Corporate, therefore, no question of any payment arises.

Final Judgment

After hearing both sides, the bench allowed the appeal with clarification on the following aspects of the law:

Jurisdiction of the arbitrator

As the matter had already been dealt with by the courts before, there arises no instance for the Respondents to now put up the question of jurisdiction. Moreover, as the present appeal has been preferred by the Appellant, the Respondents cannot do so.

Impugned Judgment of High Court

The Court said, “the High Court has decided the appeal as if the High Court was deciding the first appeal against the judgment and decree passed by the learned trial Court which as such is not permissible while exercising the power under Section 37 of the Arbitration Act.” The High Court entered into the merit of the claims which is not permissible under the said section of law.

Setting Aside only if against public policy

The Supreme Court, as it has precedented in numerous cases, stands that an award can be set aside only if the award is against the public policy of India. “The award can be set aside under Sections 34/37 of the Arbitration Act, if the award is found to be contrary to, (a) fundamental policy of Indian Law; or (b) the interest of India; or (c) justice or morality; or (d) if it is patently illegal”, said the bench.

As none of the aforesaid is present in this case, the High Court acted outside the ambit of its powers u/ Section 37 of the Act.

Quashing and setting aside the impugned order, the Apex Court upheld the order passed by the arbitrator that falls in favour of the Appellant. Therefore, unless the arbitral award is found to be contrary to the fundamental policy of Indian Law, the interest of the country, justice, or morality or if it is patently illegal, only then will the question of setting aside arise.