SUPREME COURT REITERATES GROUNDS FOR SETTING ASIDE INTERNATIONAL AWARD IN CASE OF ECONOMIC OFFENCES
The Supreme Court has in a case of Ratnam Sudesh Iyer vs Jackie Kakubhai Shroff passed a Judgment dated 10-11-2021 and reiterated the grounds for setting aside international arbitral award in cases of economic offences.
In this case, one, Mr. Ratnam Iyer, the Appellant herein and Mr. Jackie Shroff, the Respondent herein, were shareholders in an investment holding company, namely, Atlas Equifin Private Limited, India (Atlas) which held 11,05,829 Equity Shares of Rs.10 each in Multi Screen Media Pvt. Ltd. (Company). The Appellant was interested in selling the Shares and hence, both Parties allegedly signed a Placement Instruction dated 15-11-2005 (Placement Instruction) and authorised Standard Chartered Bank (Bank) as their Agent to look for a buyer for the Appellant’s Shares in Atlas. The dispute arose when the Respondent alleged that his signatures on the Placement Instruction were forged. Thus, the Respondent lodged a complaint with the Economic Offences Wing (EOW), Mumbai Police on 19-04-2010 (Complaint) against the Appellant and the Bank. Thereafter, the Parties entered into a Settlement Deed dated 03-01-2011 (Settlement Deed) which stated that (a) the Respondent would withdraw all complaints and proceedings filed against the Appellant; (b) the Respondent would not inform any Authority about the subject matter of the Settlement Deed; (c) USD 1.5 Million to be held in an Escrow Account and later to be released to the Respondent upon confirmation by EOW that the Complaint has been withdrawn; (d) USD 2 Million payable to the Respondent from proceeds of sale of Shares; (e) in case of disputes, Parties shall resort to arbitration.
Thereafter, various incidents of breach of Settlement Deed by the Appellant were communicated to the Appellant by Emails dated 09-06-2011, 15-06-2011, 30-06-2011, etc by the Respondent’s Wife. Thus, owing to disputes arising out of the Settlement Deed, arbitration proceedings were initiated.
During the arbitration, it was noted that a Share Purchase Agreement was executed for the Shares in the Company in July 2012 and Shares were sold in March 2013. Meanwhile, the Arbitrator directed the Bank to refrain from releasing the amounts held in the Escrow Account, till further directions of the Arbitrator. The Arbitrator then passed a Final Award dated 10-11-2014 (Award) awarding Liquidated Damages of USD 1.5 Million in favor of the Appellant and that the Respondent will not be entitled to his share in the sale proceeds of Shares, on account of his breach of Settlement Deed.
Aggrieved, the Respondent filed a Petition under Section 34 of the 1996 Act before the Bombay High Court on 24-01-2015, thereby challenging the Award. On the other hand, the Appellant filed for execution of the Award. The Respondent further filed for stay of enforcement of Award, which was granted on 06-04-2018. The High Court passed a Judgment dated 19-05-2020 and set aside the Award and also granted interim protection against withdrawal of money from the Escrow Account. An Appeal filed against the High Court Judgment dated 19-05-2020, was dismissed by the Division Bench of the High Court.
Aggrieved, the Appellant filed a Special Leave Petition before the Supreme Court in 2021. The Apex Court made the following observations in this case:
1) That the Arbitration Act 1996 was amended in 2015, with effect from 23-10-2015. The 2015 Amendment clearly states that it would not be applicable to arbitral proceedings commenced before the commencement of the 2015 Amendment Act. In this case, the disputes arose in 2011, the Arbitration commenced around 2011 and Award was passed in 2014, i.e. all before the 2015 Amendment came into force. Hence, the 1996 Act would be applicable in this case.
2) Further, it is an international commercial arbitration in terms of Section 2 (1) (f) of the 1996 Act, as the Appellant is a party based in Singapore. The relevant provision is reproduced below for easy reference:
“International commercial arbitration” means an arbitration relating to disputes arising out of legal relationships, whether contractual or not, considered as commercial under the law in force in India and where at least one of the parties is-
(i) An individual who is a national of, or habitually resident in, any country other than India; or
(ii) A body corporate which is in corporate in any country other than India; or
(iii) A company or an association or a body of individuals whose central management and control is exercised in any country other than India; or
(iv) The Government of a foreign country;
3) That the Supreme Court in the case of ONGC v. Western Geco International Ltd., (2014) 9 SCC 263 observed that an arbitral award can be set aside if it is contrary to (a) fundamental policy of Indian law, (b) the interest of India, or (c) the justice or morality of India and (d) if it is patently illegal. The Apex Court further observed that:
i) Therefore, in our view, the phrase “public policy of India” used in Section 34 in context is required to be given a wider meaning. It can be stated that the concept of public policy connotes some matter which concerns public good and the public interest. What is for public good or in public interest or what would be injurious or harmful to the public good or public interest has varied from time to time. However, the award which is, on the face of it, patently in violation of statutory provisions cannot be said to be in public interest. Such award/judgment/decision is likely to adversely affect the administration of justice.
ii) Illegality must go to the root of the matter and if the illegality is of trivial nature it cannot be held that award is against the public policy. Award could also be set aside if it is so unfair and unreasonable that it shocks the conscience of the court. Such award is opposed to public policy and is required to be adjudged void.
iii) What must be remembered is that the importance of Judicial approach in judicial and quasi judicial determination lies in the fact so long as the Court, Tribunal or the authority exercising powers that affect the rights or obligations of the parties before them shows fidelity to judicial approach, they cannot act in an arbitrary, capricious or whimsical manner.
4) That the Arbitrator in this case had the duty to take a “judicial approach” and take decisions in a fair, reasonable and objective manner.
5) In this case, although the Respondent complied with the terms of the Settlement Deed and even withdrew the Complaint, etc, the Appellant denied payment of dues to the Respondent for baseless reasons. Further, the Arbitrator having allowed such unreasonable actions of the Appellant and passing Award in his favor, establishes that it was not a fair and judicious approach.
Hence, based on the aforesaid grounds, the Supreme Court held that the Arbitral Award passed by the Arbitrator is not in accordance with the fundamental policy of Indian law and is thus, set aside.
Editor’s Comment
By this Judgment, the Supreme Court has upheld its earlier decision in ONGC v. Western Geco International Ltd., (2014) 9 SCC 263 observing that an arbitrator while passing an award cannot act in an arbitrary, capricious or whimsical manner. He has to act judiciously and fairly for the award to be final. The Apex Court was of the opinion that if an award is unfair or unreasonable and it shocks the conscience of the court, the same can be set aside by the court.
Harini Daliparthy
Senior Legal Associate
The Indian Lawyer
Edited by
Sushila Ram Varma
Chief Consultant
The Indian Lawyer