To print this article, all you need is to be registered or login on Mondaq.com.
The Hon’ble Supreme Court in a recent decision in Ratnam
Sudesh Iyer v. Jackie Kakubhai Shroff1 reiterated
that the Arbitration and Conciliation (Amendment) Act 2015
(2015 Amendment Act) is prospective in nature and
would apply to only those arbitral proceedings or court proceedings
commencing on or after the 2015 Amendment Act coming into force.
Therefore, the Apex Court held that the plea of ‘patent
illegality’ was not available for an award that was rendered in
an international commercial arbitration post the 2015 Amendment
Act. Further, the Apex Court clarified that a generally
worded arbitration clause could not constitute an agreement to
allow retrospective application of the 2015 Amendment Act contrary
to the legislative intent. In this article, we briefly navigate
through the facts and findings which led to the aforementioned
judgment.
Brief Facts
The appellant and the respondent were shareholders in an
investment holding company called Atlas Equifin Private Ltd., India
(Atlas) which held 11,05,829 equity shares of INR
10 each in Multi Screen Media Pvt. Ltd. (MSM). The
appellant had been attempting to sell the shares in MSM since 2002.
In furtherance of the said objective, a placement instruction dated
15 November 2005 was signed by the parties authorizing Standard
Chartered Bank (SCB) as their agent to identify
the purchaser. The dispute arose amongst the parties when the
respondent claimed that his signatures on the placement
instructions had been forged. Accordingly, the respondent lodged a
complaint with the Economic Offences Wing, Mumbai Police
(EOW) on 19 April 2010 against both the appellant
and the SCB.
Eventually, the parties decided to mutually resolve their
disputes by entering into a Deed of Settlement (Settlement
Deed) dated 3 January 2011. The Settlement Deed provided
that the respondent would withdraw all complaints filed against the
appellant. Further the respondent was forbidden from writing
letters, communications, or complaints to any person about the
subject matter of the Settlement Deed.
As a monetary incentive, the appellant agreed to pay respondent
an amount of USD 1.5 million when the respondent brought the
complaints to an end. The said amount was to be held in an escrow
account and handed over to the respondent on confirmation by the
EOW of the respondent having withdrawn his complaint dated 19 April
2010. Apart from the monetary incentive of USD 1.5 million, the
respondent was to be paid a sum of USD 2 million within 7 days of
the receipt of the proceeds from the sale of MSM’s shares.
The appellant claimed that the Settlement Deed was breached
vide an email dated 09 June 2011 from the respondent’s
wife which read that “once again you (appellant) are not
being straight with us, and I’m concerned about
this“. Thereafter, the appellant claimed that a second
breach of the Settlement Deed followed through an email dated 15
June 2011 wherein the respondent’s wife stated that she had
“no wish to continue to fraternize with a
forger“. The email sought to refer to the Settlement Deed
and alleged failure of the appellant to not give updates to the
respondent. The Settlement Deed contained an arbitration clause for
resolution of disputes under the Arbitration Act or any amendment
thereto.
In July 2012, a share purchase agreement was executed for
MSM’s shares and the transfer was pending approval by the
Foreign Investment Promotion Board. The appellant filed a petition
under Section 9 of the Arbitration Act seeking interim relief
against the respondent, his wife and the escrow agent. The
appellant claimed that the amount should not be released to the
respondent on account of the breach of the Settlement Deed through
the email dated 15 June 2011. A consent order was passed on 6
August 2012 in terms whereof the respondent’s wife was dropped
from the array of the parties. The disputes were referred by
consent of the parties to arbitration. The appellant lodged a claim
of USD 1.5 million before the arbitrator with an interest of 18
percent per annum w.e.f. 7 July 2011 till the date of payment.
MSM’s shares were sold in March 2013, and on 6 April 2013,
Atlas declared and paid dividend to its shareholders from the
proceeds. The appellant immediately thereafter filed an application
under Section 17 of the said Act seeking to attach an amount of USD
1.5 million which the respondent was to receive as his share of the
said proceeds. That application was rejected and further
proceedings in respect of the same also met the same fate in the
High Court of Bombay (High Court). The respondent
filed a petition under Section 9 of the Arbitration Act seeking
directions to the escrow agent to hand over USD 2 million on
account of sale of MSM’s shares. However, the same was
dismissed on 2 April 2014 inter alia on the ground that
the appellant was resisting the payment and seeking a refund, and
the appeal against the same was dismissed as withdrawn.
The arbitrator made the final award on 10 November 2014,
awarding a claim for liquidated damages of USD 1.5 million in
favour of the appellant, as per the Settlement Deed. The award also
held that the respondent would not be entitled to the second cheque
of USD 2 million held in escrow, on account of the respondent’s
breach of the Settlement Deed.
The respondent moved a petition under Section 34 of the
Arbitration Act before the High Court while the appellant filed for
execution of the award. The Single Judge of the High Court set
aside the award in terms of the judgment dated 19 May 2020. The
appeal filed by the respondent under Section 37 was dismissed by
the Division Bench of the High Court on 20 April 2021. The matter
eventually reached the Hon’ble Supreme Court.
Held
The Hon’ble Supreme Court noted that it was an admitted
position that the appellant was a party based out of Singapore, and
thus, the arbitration in the instant case would fall within the
ambit of ‘international commercial arbitration’ as defined
under Section 2(1)(f) of the Arbitration Act. Further, the Apex
Court noted that none of the parties argued that the arbitral award
in the present case was a foreign award within the meaning of
Section 44 of Part II in the Arbitration Act.
For domestic awards, the Apex Court observed that Section 34
provided for an application for setting aside the award and
specified the grounds available to a party for the same. Through
the 2015 Amendment Act, the scope of interference by courts became
more restricted. A distinction was carved out between a domestic
award arising from an international commercial arbitration and a
purely domestic award. The Apex Court observed that the crux of
Section 2A of the 2015 Amendment Act is that while the plea of the
award being vitiated by patent illegality was available for a
purely domestic award. In other words, the plea of patent
illegality was not available for an award which arises from
international commercial arbitration post the amendment.
It was observed that the judgments of both the Single Judge and
the Division Bench of the High Court proceeded without noticing the
distinction between the position of a domestic award and an award
arising out of international commercial arbitration. That being
said, both the judgments had proceeded on the basis that in either
situation, the award could not be sustained.
On the date of application of the amendment, the Hon’ble
Supreme Court held that the amendment would apply prospectively.
The Apex Court relied on the decision in Board of Control for
Cricket in India (BCCI) v. Kochi Cricket Pvt. Ltd. &
Ors.2 which held that the intention of the
legislature was clear that the 2015 Amendment Act was prospective
in nature and would apply to only those arbitral proceedings or
court proceedings under the Arbitration Act commencing on or after
the 2015 Amendment Act coming into force.
The applicability of Section 34(2A) was also dealt with in
Ssangyong Engineering and Construction Company Ltd. v. National
Highways Authority of India3 where the Apex Court
had opined that Section 34 as amended would apply only to Section
34 applications that were made to the courts on or after 23 October
2015 (the date of 2015 Amendment Act) irrespective of the fact that
arbitration proceedings may have commended prior to that date.
The appellant’s case solely rested on the wording of the
arbitration clause in the Settlement Deed which provided that the
arbitration proceedings shall be governed by the Arbitration Act
“or any amendment thereto”. The Apex Court referred to
the decision in Union of India v. Parmar Construction
Company4 which held that a conjoint reading of
Section 21 and 26 of the Arbitration Act left no doubt that the
provisions of the 2015 Amendment Act shall not apply to proceedings
which had already commenced prior to date of amendment. Thus, the
Hon’ble Supreme Court held that a generally worded arbitration
clause could not be said to constitute an agreement to change the
course of law under Section 34 of the Arbitration Act. A clause
which sought to include any amendment of the Arbitration Act would
expand the scope of scrutiny of an award as it would run contrary
to the legislative intent of the 2015 Amendment Act. Based on this
analysis, the Apex Court concluded that in the instant case, the
pre-amendment legal position would prevail.
On the factual front, the Hon’ble Supreme Court noted that
the respondent’s wife was dropped from the arbitration
proceedings as she was not a party to the Settlement Deed. In that
sense, the Settlement Deed accepted that the respondent’s wife
had no role to play and the respondent could not be penalized for
her conduct. Further, the Apex Court noted that the respondent in
the present matter did not do anything which ratified the emails of
his wife. Even otherwise, the Apex Court observed that the
complaints of respondent’s wife would at best fall in category
of some indiscreet language.
The Section 34 proceedings in this case had already commenced
when the 2015 Amendment Act came into effect. Accordingly, the
Hon’ble Supreme Court held that the pre-amendment position
would prevail in the case. In the aforesaid scenario, the Apex
Court found that the arbitrator’s conclusions were not in
accordance with the fundamental policy of Indian law, and could
thus be set aside under the pre-amendment interpretation of Section
34 of the Arbitration Act. Hence, the Hon’ble Supreme Court
found no fault with the judgments of the Single Judge and the
Division Bench to the extent that they interfered with the award.
Consequently, the appeal was dismissed.
Comments
It is a well-established position that the 2015 Amendment Act
would apply prospectively only onto the arbitral or court
proceedings which commenced after the 2015 Amendment Act coming
into force. Since the proceedings under Section 34 of the
Arbitration Act in the present case had begun prior to the 2015
Amendment Act, the Apex Court has rightly held that the
pre-amendment interpretation of Section 34 would be applicable.
Accordingly, the ground of ‘patent illegality’ was
applicable to the impugned award even though the same was rendered
in an international commercial arbitration.
Footnotes
1. Ratnam Sudesh Iyer v. Jackie
Kakubhai Shroff, Civil Appeal No. 6112 of 2021.
2. Board of Control for Cricket in
India v. Kochi Cricket Pvt. Ltd. & Ors., 2018 6 SCC
287.
3. Ssangyong Engineering and
Construction Company Ltd. v. National Highways Authority of
India, 2019 15 SCC 131.
4. Union of India v. Parmar
Construction Company, 2019 15 SCC 682.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
