Whether An Appellate Court Can Set Aside An Arbitral Award Under Section 37 Of The Arbitration And Conciliation Act, 1996 Merely Because It Has A Different Or Better View Than The Arbitrator

Summary:

[1]In the recent Supreme Court judgment, the bench consisting of Hon’ble Justice Pankaj Mithal and Hon’ble Justice Pamidighantam Sri Narasimha, addressed a statutory appeal under the Arbitration and Conciliation Act, 1996. The central issue was whether the High Court had overstepped its powers under Section 37 of the Act by setting aside an arbitral award that had already been upheld under Section 34. The dispute originated from an agreement between Punjab State Civil Supplies Corporation Ltd. and M/s Sanman Rice Mills, involving a shortfall in the delivery of milled rice. The Arbitrator awarded Rs. 2,67,66,804 in favour of the Corporation, which was later confirmed by the Additional District Judge. However, the High Court reversed this decision, prompting the Corporation’s appeal to the Supreme Court. The Court, while allowing the appeal, reinstated the original arbitral award, emphasizing the limited scope of judicial intervention in arbitration and underscoring that an award cannot be set aside merely because the appellate court holds a different view. The ruling reaffirmed the autonomy of arbitral awards and the importance of respecting the arbitral process unless there are clear grounds for interference.

Facts:

The central issue revolved around a milling agreement dated 06.10.2008 between Punjab State Civil Supplies Corporation Ltd. and M/s Sanman Rice Mills. Under this agreement, the Corporation supplied 2,02,850 bags of Grade ‘A’ paddy (weighing 70,997.50 quintals) to the Rice Mill, which was required to process the paddy and return the equivalent quantity of rice to the Corporation. However, a shortfall of 35,110.39 quintals of rice, valued at ₹7,16,15,716/-, arose after milling. Against this outstanding amount, the Rice Mill issued ten cheques totalling ₹5 crore, leaving a balance of ₹2,16,15,716/-.

A dispute emerged over the recovery of this balance amount, leading to arbitration. The Arbitrator, in an award dated 08.11.2012, ruled in favour of the Corporation, awarding ₹2,67,66,804/- plus interest at 12% per annum. The Rice Mill challenged this award under Section 34 of the Act before the Additional District Judge, who dismissed the petition on 07.04.2015, finding no grounds for interference. Dissatisfied, the Rice Mill filed an appeal under Section 37 of the Act before the High Court, which allowed the appeal on 10.01.2017, setting aside both the judgment of the Additional District Judge and the Arbitral Award. Consequently, the Corporation has brought the present appeal before the Supreme Court, seeking to overturn the High Court’s decision.

Issues:

Whether the scope of powers of the Appellate Court under Section 37 of the Arbitration and Conciliation Act, 1996, permits the setting aside of an arbitral award that has already been confirmed under Section 34 of the Act.

Judgement:

The Court affirmed the findings of the lower courts, emphasizing the limited scope of judicial interference in arbitral awards as provided under Section 34 of the Arbitration and Conciliation Act. It highlighted that the primary objective of the Act is to promote a speedy and inexpensive resolution of disputes, minimizing court intervention.

The Court reiterated that the grounds for setting aside an arbitral award are strictly defined under Section 34(2) and (3), focusing on conflicts with the public policy of India, including instances of fraud, corruption, and violations of fundamental legal principles. The onus of proof rests on the party challenging the award, and the scope of interference is narrowly confined to ensuring the arbitral tribunal adhered to its jurisdiction without reappraising the evidence or substituting its own views.

In this context, the Court emphasized that the arbitral award dated November 8, 2012, was reasonable, well-reasoned, and based on substantial evidence. It did not contravene public policy or fundamental principles of Indian law. The Appellate Court’s intervention, which set aside the arbitral award, was deemed erroneous, as there was no demonstration of illegality or error in the original court’s decision under Section 34.

The Supreme Court ruled that the Appellate Court’s actions constituted a manifest error of law and, as such, restored the arbitral award for implementation in accordance with the law. The appeal was thus allowed, with no order as to costs, reaffirming the sanctity of arbitral awards and the necessity for courts to respect the finality of arbitration as an alternative dispute resolution mechanism.

Analysis:

The Supreme Court’s ruling sets a significant precedent by emphasizing the limited scope for judicial intervention in arbitral awards, aligning with the principle that courts should honour the finality of such awards unless there are clear and compelling grounds for setting them aside. This interpretation reinforces the purpose of arbitration as an efficient and streamlined mechanism for dispute resolution, reducing the need for extensive court involvement.

Furthermore, the judgment reiterates the necessity of adhering to the specific grounds laid out in the Arbitration and Conciliation Act for challenging arbitral awards, particularly those concerning public policy and fundamental principles of justice. This creates a clear framework for when judicial intervention is permissible, indicating that mere dissatisfaction with the outcome or alternative perspectives does not justify interference. By upholding a stringent standard for setting aside awards, the ruling fosters certainty and stability in arbitration results.

[1] https://ksandk.com/wp-content/uploads/Original-pdf-punjab-state-civil-supplies-and-another-v-sanman-rice-mills-and-others-judgment-of-the-supreme-court-of-india-2024-insc-742.pdf

BEFORE THE HON’BLE SUPREME COURT

Punjab State Civil Supplies Corporation Limited & Anr. Vs M/S Sanman Rice Mills & Ors. 

SLP (C) NO. 27699 OF 2018 

Judgment dated 27rd September, 2024