"An award which is, on the face of it, patently in violation of statutory provisions cannot be said to be in public interest. Such an award is likely to adversely affect the administration of justice" observed the Jammu and Kashmir High Court while scrutinizing the arbitral award challenged in this petition.
The case revolves around a lease dispute concerning ‘Enso Tower’ in Anantnag, where the petitioner, the owner of the premises, sought to terminate the respondent’s lease for an alleged failure to meet sales expectations. The dispute escalated to arbitration, resulting in an award favoring the respondent, which the petitioner now challenged under Section 34 of the Jammu and Kashmir Arbitration and Conciliation Act, 1997. The Court, while deliberating on the grounds of public policy, patent illegality, and fundamental principles of justice, closely examined the limits of judicial intervention in arbitral proceedings.
Brief Facts:
The petitioner, owner of ‘Enso Tower’ in Anantnag, leased 3800 sq. ft. of space to the respondent for a supermarket under an agreement dated 04.05.2013. The agreement had a revenue-sharing model with a renewal clause for five years if sales were satisfactory. Disputes arose when the petitioner issued a termination notice on 21.03.2018, citing unsatisfactory sales. The respondent challenged this through legal proceedings, leading to arbitration by Hon’ble Mr. Justice Mohd. Yaqoob Mir. The Arbitrator ruled in favor of the respondent, awarding compensation, loss of profits, and renewal of the agreement. The petitioner now seeks to set aside the award under Section 34 of the Jammu and Kashmir Arbitration and Conciliation Act, 1997.
Contentions of the Petitioner:
The petitioner argued that the agreement was determinable and could not have been renewed without a fresh contract. The Arbitrator’s interpretation allegedly extends the contract indefinitely, violating contract law. The petitioner also contended that no compensation for business loss should have been awarded in a lessor-lessee relationship. Further, the petitioner denies liability for stock removal, attributing it to municipal authorities. Lastly, it is claimed that the Arbitrator impermissibly rewrote the contract by redefining ‘satisfactory sales.’
Contentions of the Respondent:
The respondent maintained that the agreement was validly renewed as sales met the contractual criteria. It is argued that the petitioner’s unilateral termination was unlawful and caused financial losses. The respondent asserted that the premises were locked by the petitioner, leading to loss of stock and profits. Compensation was awarded based on clear evidence, and the Arbitrator’s interpretation of the agreement was legally sound.
Observation of the Court:
The Court examined the impugned arbitral award, legal records, and arguments. It determined that the applicable law is the J&K Arbitration and Conciliation Act, 1997, as "the law that was applicable on the date of issuance of communication dated 15.05.2018 would govern the instant case."
Under Section 34 of the Act of 1997, the Court emphasized that an arbitral award may be set aside if it is in conflict with the public policy of the State. Citing the Supreme Court’s ruling in ONGC Ltd. v. Saw Pipes Ltd. (2003), it reiterated that "an award which is, on the face of it, patently in violation of statutory provisions cannot be said to be in public interest. Such an award is likely to adversely affect the administration of justice."
The Court reaffirmed that an arbitral award can be set aside if it is "(a) Contrary to the fundamental policy of Indian law; (b) Against the interest of India; (c) Contrary to justice or morality; or (d) Patently illegal." It was emphasized that patent illegality must "go to the root of the matter," and an award that "shocks the conscience of the Court" can be adjudged void. The Court concluded that the non-incorporation of the 2016 amendments to Section 34 of the 1997 Act did not alter its power to set aside an award on public policy grounds.
The Supreme Court in Associate Builders v. Delhi Development Authority (2015), extensively discussed the expressions “fundamental policy of Indian law,” “the interest of India,” “justice or morality,” and “patent illegality.”
On the fundamental policy of Indian law, the Court noted that "the duty to adopt a judicial approach arises from the very nature of the power exercised by the court or the authority... Judicial approach ensures that the authority acts bona fide and deals with the subject in a fair, reasonable and objective manner." It stressed the importance of natural justice, stating that "besides the celebrated audi alteram partem rule... Non-application of mind is a defect that is fatal to any adjudication."
The Court reiterated that "a decision which is perverse or so irrational that no reasonable person would have arrived at the same will not be sustained in a court of law." If an arbitral tribunal "fails to draw an inference which ought to have been drawn or if they have drawn an inference which is on the face of it, untenable resulting in miscarriage of justice... the adjudication... will be open to challenge."
Regarding the interest of India, the Court observed that "obviously, this concerns itself with India as a member of the world community in its relations with foreign powers. As at present advised, we need not dilate on this aspect as this ground may need to evolve on a case-by-case basis."
On justice, the Court held that "an award can be said to be against justice only when it shocks the conscience of the court." It cited an example where "the arbitral award ultimately awards him 45 lakhs without any acceptable reason or justification. Obviously, this would shock the conscience of the court."
Discussing morality, the Court noted that "the case law both in England and India confines the operation of the doctrine to sexual immorality." It listed examples of immoral contracts, including "settlements in consideration of concubinage, contracts of sale or hire of things to be used in a brothel or by a prostitute for purposes incidental to her profession... agreements to pay money for future illicit cohabitation."
The Court acknowledged that morality could extend beyond sexual morality if an agreement "would not be enforced given the prevailing mores of the day," but interference would only occur "if something shocks the court's conscience."
Under the explanation to Section 34(2)(b), an award conflicts with public policy if "the making of the award was induced or affected by fraud or corruption."
The Court reiterated that "an arbitral tribunal is the sole and final judge of all questions both of law and of fact," except in cases of "corruption or fraud" or where "the question of law necessarily arises on the face of the award."
It clarified that ‘patent illegality’ includes "(a) A contravention of the substantive law of India" that goes to "the root of the matter." It also includes "(b) A contravention of the Arbitration Act itself," such as failing to provide reasons for an award in violation of Section 31(3), and "(c) A contravention of Section 28(3)," where an arbitrator does not decide "in accordance with the terms of the contract" unless the interpretation is so unreasonable that "no fair-minded or reasonable person could do."
In OPG Power Generation Private Ltd v. Enexio Power Cooling Solutions India Private Limited, the Supreme Court held that "a mere infraction of the municipal laws of India is not enough" for an award to violate public policy. Instead, it must contravene "fundamental policy of Indian law," which includes "(a) Violation of principles of natural justice, (b) Disregarding orders of superior courts, (c) Violating laws linked to public good or public interest."
The Court emphasized that "patent illegality" refers to an "illegality that goes to the root of the matter" and does not include a "mere erroneous application of law."
The Court reiterated that judicial interference with arbitral awards is "extremely limited" under Section 34 of the Arbitration Act. It emphasized that a court cannot act as an appellate body and "cannot re-appreciate the evidence" or "undo the interpretation given by the arbitrator" if it is "plausible and reasonable."
The Court underscored judicial restraint in arbitration: "Arbitration is one such jurisdiction, where the temptation for a judge to straighten that proverbial crooked picture is immense."
It reaffirmed that courts must follow the principle of minimal intervention, except in cases of extreme misconduct: "The exception to this approach should be: that obvious case of fraud, compromised integrity of arbitrators and plainly erroneous awards, which go against the stated position of law and, hence, border on perversity and/or, those awards, which go against public policy."
On contractual interpretation, the Court observed: "If a term of the contract is capable of two interpretations and the view taken by the Arbitrator is one of the possible views, the same cannot be interfered with by a Court."
The Court laid special emphasis on its ruling that "once an Arbitrator has taken a view with regard to the interpretation of a particular clause of the agreement between the parties, which is plausible and not opposed to reason and logic, the Court cannot interfere with such an interpretation, even if another view is also possible." In the instant case, "the learned Arbitrator has recorded his reasons for taking the view that the agreement between the parties was compulsorily renewable after the expiry of first five years if the sales remained satisfactory. The said view, being plausible and possible, cannot be interfered with by this Court while exercising its powers under Section 34 of the Act."
The decision of the Court:
The petition was partly allowed. The relief granted to the respondent under paragraph (19)(a) of the impugned award was set aside. However, the award was upheld concerning the reliefs granted under paragraphs (19)(b), (19)(c), (19)(d), (19)(e), (19)(f), and (19)(g).
Case Title: Zaffar Abbas Din v. Nasir Hamid Khan
Case no: Arb P No. 6/2023
Coram: Hon’ble Mr. Justice Sanjay Dhar
Advocate for Petitioner: Adv. Mr. Shariq J Riyaz
Advocate for Respondent: Sr. Adv. Mr. Z.A.Shah with Mr. Hanan. Sr. Adv. Mr. Jahangir Iqbal Ganai with Adv. Mr. Owais Dar and Adv. Ms Mehnaz Rather
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