Monday, July 3, 2017

Guest Post: The McDermott Perplexity - the Scope of Interference under Section 34 of the Arbitration Act

       [Guest post by Gursharan H Virk, who is an advocate practising in the Gujarat High Court.                    Views expressed are the author's own.]

There is a cleavage of opinion amongst various High Courts in relation to the scope and ambit of interference with an arbitral award under section 34 of the Arbitration and Conciliation Act, 1996 (“Act”).

The ‘activist’ view (which some would call ‘purposive’) is that the court under section 34 of the Act can ‘modify’ portions of the arbitrator’s award and the power under section 34 of the Act is not restricted to only setting aside the award. 

However, in what would appear to be a more sacrosanct interpretation of the Act and the legislative intent and jurisprudential spirit behind its enactment, the other view prohibits modification of an arbitral award u/s. 34 of the Act and notes that the power u/s. 34 is restricted only to the setting aside of the award.

Recently, the Gujarat High Court, in cross appeals filed by Simplex Industries Limited and Gujarat Mineral Development Corporation Limited, under section 37 of the Act, has, after having exhaustively considered the law on the subject matter adopted the latter of the two views.  

The earliest known support to this view can be found in the Supreme Court’s decision in the case of McDermott International Inc. v. Burn Standard Co. Ltd. & Ors., (2006) 11 SCC 181. Therein, the Apex Court observed:

“52. The 1996 Act makes provision for the supervisory role of courts, for the review of the arbitral award only to ensure fairness. Intervention of the court is envisaged in few circumstances only, like, in case of fraud or bias by the arbitrators, violation of natural justice, etc. The court cannot correct the errors of the arbitrators. It can only quash the award leaving the parties free to begin the arbitration again if it desired. So, the scheme of the provision aims at keeping the supervisory role of the court at minimum level and this can be justified as parties to the agreement make a conscious decision to exclude the court’s jurisdiction by opting for arbitration as they prefer the expediency and finality offered by it.”

The Bombay, Delhi and Allahabad High Courts have all propounded decisions in line with the aforementioned view of McDermott (supra.). The Bombay High Court, in Pushpa P. Mulchandani & Ors. v. Admiral Radhakrishan Tahiliani observed as under:
“…Arbitration Act, 1996 has repealed the Arbitration Act, 1940. Arbitration Act 1940 had a specific power conferred on the court to modify the award. While enacting 1996 Act, the Parliament has chosen not enact that provision. In our opinion, the intention of the Legislature, therefore, was clear not to confer on the court power to modify the award.

The Delhi Court has taken an identical view, i.e. the impermissibility of modification of an award, in Puri Construction Pvt. Ltd. & Ors. v. Larsen & Toubro Ltd.. Therein, the Delhi High Court observed:

“118…in light of the dictum in McDermott International Inc. and the difference in provisions of the 1940 Act and the present Act, this Court holds that the power to modify, vary or remit the award does not exist under Section 34 of the Act.”

The Allahabad High Court has adopted an identical stand in U.P. State Handloom Corporation Ltd. v. Asha Lata Talwar.

At this juncture, it would not be out of place to mention that, in a earlier decision, the Delhi High Court has, in Union of India v. Modern Laminators Ltd taken a view that section 34 of the Act envisages the power to modify an award and that McDermott propounded the limited scope of section 34 of the Act without discussing whether the power to modify formed part of the confines of the said scope. In this regard, the Delhi High Court observed:

“18. …The legislature, therefore, did not feel the need to expressly provide for the power in the court to ‘modify’ the award, inasmuch as, if the grounds provided for where to be found, there would be no occasion for modification and only result would be setting aside of the award. The Apex Court in McDermott International Inc. v. Burn Standard Co. Ltd…thus held that power of court under Section 34 was only to set aside the award.
20. In my opinion, the power given to the court to set aside the award, necessarily includes a power to modify the award...”

In background of, inter alia, the aforesaid decisions, the Gujarat High Court has exhaustively considered and dealt with the law on the subject matter in its recent judgment dated 09.06.2017 in First Appeal No. 618 of 2017 and First Appeal No. 778 of 2017.

The relevant facts having bearing on the discussion at hand are that Claim No. 3 (escalation) raised by Simplex against GMDC in arbitration was rejected by the Arbitrator. This rejection was challenged by Simplex u/s. 34 and the Commercial Court reversed the view of the arbitrator and allowed this claim. In this factual background, defining the scope and ambit of a court under section 34 of the Act, more particularly the power of a section 34 court to ‘modify’ the award the High Court held:
11.5. Even otherwise, the impugned judgment and order passed by the learned Commercial Court in allowing the claim no.3 in toto and that too in exercise of powers under Section 34 of the Arbitration Act, cannot be sustained. Whatever the claim was made by the claimant so stated in the statement of claim, the same has been allowed by the Commercial Court. It is required to be noted that as such SIL did not lead any oral evidence and therefore, did not prove the claim and computation by leading evidence, its claim in relation to escalation. At this stage, it is required to be noted that as such GMDC specifically denied the claim no.3 and even computation of claim no.3. Therefore, the same was required to be proved by leading evidence, by SIL.
11.7.1. …The quintessence for exercising the the power under this provision is that the Arbitral Award has not been set aside. The challenge to the said award has been set up under Section 34 of the Arbitration Act about the deficiencies in the Arbitral Award which may be curable by allowing the Arbitral Tribunal to take such measures which can eliminate the grounds for setting aside the Arbitral Award. No power has been invested by the Parliament in the Court to remand the matter to the Arbitral Tribunal except to adjourn the proceedings for the limited purpose mentioned in subsection (4) of section 34. The view which we are expressing is supported by the decision of the Hon'ble Supreme Court in the case of McDermott International Inc. vs. Burn Standard Ltd. reported in (2006) 11 SCC 181.”

On the issue of the scope of exercise of power under section 37 of the Act available to the High Courts, the Gujarat High Court observed:

“13. …The scope and exercise of jurisdiction by this Court in exercise of powers under Section 37 of the Arbitration Act by this Court will be coterminous with the scope of Section 34 of the Act and therefore, unless and until the case is made out for interference as per law laid down by the Hon'ble Supreme Court in the case of Associate Builders (supra), this Court would not be justified in interfering with the findings recorded by the learned Arbitrator, confirmed by the learned Commercial Court.”

Respectfully, the view taken by the Hon’ble High Court is absolutely correct and in line with the original intent, spirit and resolve behind the enactment of the Act of 1996.

I say this because, in our present dispute-resolution set-up, instead of becoming a tool for the speedy resolution of disputes, arbitrations have become a mere ladder that parties climb to approach the appellate hierarchy. In most cases, arbitrations have become just another step to litigation. (Of course, there are exceptions to this general position.) It is for this reason that the decision of the Gujarat High Court in Gujarat Mineral Development Corporation (supra) is a welcome relief as this judgment has attempted to point section 34 Courts back into the right direction.

The sanctity of arbitral awards, in the process, is lost. There is a state of irreversible disrepair in the present system where each and every view taken by an arbitrator in an award is cosmetically correlated with the various legal grounds available under section 34 of the Act to contend that (simply because one plausible view of the available plausible views has been adopted) the award is violative of Indian public policy, et al.

The Hon’ble Gujarat High Court, in Gujarat Mineral Development Corporation (supra.) has rightly discouraged the re-appreciation and re-assessment of facts and merits by s.34 courts. While ruling in favour of GMDC in both the cross-appeals, the Gujarat High Court has restored the tapered scope of s. 34 of the Act to its erstwhile glory and has rendered sanctity to arbitral awards. The adventurism that had inadvertently entered section 34 of the Act has been curbed. It is, therefore, a welcome step which is bound to go a long way in reducing the log-jam of commercial appeals originating from arbitral awards which have congested our appellate system.

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