Allahabad High Court: Retroactive Application Of Judicial Decisions To Arbitral Awards Would Create Legal And Procedural Chaos

Allahabad High Court: Retroactive Application Of Judicial Decisions To Arbitral Awards Would Create Legal And Procedural Chaos

The Allahabad High Court, reflecting on the implications of the Supreme Court's ruling in Union of India v. Tarsem Singh and Ors. 2019, has emphasized that applying judicial decisions retrospectively to arbitral awards could lead to legal and procedural chaos.

In the Tarsem Singh case, the Supreme Court determined that provisions concerning solatium and interest under the Land Acquisition Act should extend to acquisitions under the National Highways Act. This ruling was to apply universally, including to pending cases.

The High Court addressed a specific arbitration concluded in 2008, highlighting that reopening such arbitrations due to subsequent court rulings would introduce instability and unpredictability into arbitral processes.

It underscored that while Supreme Court judgments have retrospective effect, reopening finalized arbitrations based on later decisions would likely result in a flood of claims seeking to revise or nullify arbitral awards.

Furthermore, the Court ruled that failing to address issues raised by the parties constitutes a clear legal error, subjecting the arbitral award and any subsequent orders under Section 34 of the Arbitration and Conciliation Act, 1996, to challenge under Section 37 of the same Act.

The Court noted that when arbitrators leave significant issues unresolved, it raises concerns about their impartiality, undermining the perceived fairness of arbitration proceedings.

Justice Shekhar B. Saraf. observed that “when an arbitral tribunal fails to consider an issue raised by the parties and provides no reason for such omission, it creates a situation where the affected party is left without a clear understanding of why their argument was disregarded. This lack of reasoning can lead to a perception of arbitrariness and bias, further eroding the credibility of the arbitral award. In such cases, the affected party is left with no option but to challenge the award on the grounds of patent illegality.”

The appellant's plot and residential building were acquired under the National Highways Act of 1956 for the construction of National Highway No. 28. Dissatisfied with the compensation awarded, the appellant filed an application before the District Magistrate on February 15, 2008. The District Magistrate directed the Special Land Acquisition Officer (SLAO) to take the necessary action.

The SLAO received conflicting reports from the Public Works Department (PWD). Eventually, the SLAO decided to adopt the valuation report submitted by the project director of NHAI, considering NHAI's role in the construction. Unhappy with this decision, the appellant invoked arbitration under Section 3G(5) of the National Highways Act.

The arbitrator awarded enhanced compensation amounting to Rs. 18,67,881/- solely for the value of the building. Dissatisfied with the arbitral award, the appellant filed an application under Section 34 of the Arbitration Act, which was dismissed. Subsequently, the appellant approached the High Court under Section 37 of the Arbitration Act.

The appellant's counsel contended that although the arbitrator had acknowledged submissions regarding compensation for the land, there was no consideration of these submissions in the award, which focused only on compensation for the building. It was argued that this omission constituted a patent illegality, rendering both the arbitral award and the trial court's decision under Section 34 flawed.

Furthermore, it was argued that the appellant's land, which was located at a crossroads, was not agricultural but residential. However, neither the arbitrator nor the trial court addressed this crucial aspect.

Reference was made to the Supreme Court's judgment in Tarsem Singh, which was cited to support the appellant's claim for solatium. It was argued that the principles laid down in Tarsem Singh should apply retroactively to all cases pending between 1997 and 2015, irrespective of whether the plea for solatium and interest had been raised during Section 34 proceedings under the Arbitration Act.

Citing the precedent in Sunita Mehra v. Union of India, it was further argued that the provisions of the Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation, and Resettlement Act, 2013 should apply to all cases pending in courts of law as of March 28, 2008. Therefore, the appellant asserted her entitlement to solatium and interest under the provisions of the 2013 Act.

The Court framed two issues for its determination: firstly, whether the arbitral award and the order under Section 34 of the Arbitration Act were patently illegal; and secondly, whether the judgment in Tarsem Singh would be applicable to the appellant's case.

The Court emphasized that invoking public policy in arbitral awards is aimed at preventing violations of principles such as justice, morality, and equity. However, it cautioned that public policy must be applied judiciously due to its subjective and intricate nature. The Court underscored the importance of upholding party autonomy and the finality of arbitration while considering public policy concerns.

Justice Saraf highlighted that public policy serves as a safeguard against fundamentally unjust arbitral awards or those that contravene core principles of justice. To mitigate the risks associated with its application, the Court stressed the need for a cautious and principled approach in assessing whether an arbitral award conflicts with public policy.

The Court ruled that failing to consider issues raised by the parties strikes at the heart of the matter, potentially leaving substantive rights unresolved. Such omissions were deemed to constitute patent illegality in the arbitration process. Non-consideration of crucial arguments, according to the Court, could create perceptions of bias or negligence, undermining the credibility of arbitration proceedings.

Consequently, the Court found grounds for intervening in both the arbitrator's award under the NHAI Act and the subsequent order under Section 34 of the Arbitration Act.

Regarding the applicability of the Supreme Court's decision in Tarsem Singh, the Court held that retroactively applying this judgment to concluded arbitrations would disrupt the established legal framework and judicial precedents. Such an approach, the Court argued, would unsettle arbitrations that were concluded under the prevailing legal norms and undermine the stability and predictability that arbitration seeks to uphold.

The Court emphasized that arbitrators cannot be expected to anticipate and apply future judicial decisions retroactively to awards issued before those decisions were made. It reiterated that as long as the arbitral awards adhere to the legal standards in place at the time of their issuance, they should not be deemed patently illegal due to subsequent judicial developments.

Accordingly, the Court set aside the arbitral award and the Section 34 order only insofar as they failed to consider the appellant's submissions on the valuation of land for compensation determination. The matter was remanded to the arbitrator for reconsideration of the compensation owed to the appellant in accordance with the law.