Supreme Court Explains Limited Scope For Judicial Interference In Arbitral Awards Under Section 34 A&C Act Post-2015 Amendment

Supreme Court Explains Limited Scope For Judicial Interference In Arbitral Awards Under Section 34 A&C Act Post-2015 Amendment

The Supreme Court recently elaborated on the scope of judicial interference with arbitral awards under Section 34 of the Arbitration and Conciliation Act, particularly in cases involving the ground of violation of public policy. The Court emphasized that the scope of such interference is very limited, especially following the 2015 amendment to the Act.

A bench comprising Chief Justice of India DY Chandrachud, Justices JB Pardiwala, and Manoj Misra clarified that a mere violation of law is insufficient to set aside an arbitral award. For an award to be vulnerable, it must conflict with the most fundamental aspects of public policy and justice.

“The phrase ‘in contravention with the fundamental policy of Indian law’ by use of the word 'fundamental' before the phrase 'policy of Indian law' makes the expression narrower than ‘in contravention with the policy of Indian law.’ Mere contravention of law is not enough; the contravention must involve such fundamental principles that form the basis of the administration of justice and enforcement of law in India.”

The Court pointed out that the 2015 amendment to the Arbitration Act restricted the meaning of “in conflict with the public policy of India” under Section 34(2)(b)(ii). A mere violation of Indian law does not render an award invalid; the violation must involve a fundamental policy of Indian law.

“For an award to be against the public policy of India, mere infraction of municipal laws is not enough. There must be a violation of the fundamental policy of Indian law, such as those laws serving public interest or public good.”

According to Explanation 1 of Section 34(2)(b)(ii), an arbitral award can be set aside if it conflicts with the "most basic notions of justice or morality." The Court stressed that the 2015 amendment restricted the scope of this ground, stating that it should be invoked only in exceptional circumstances where the fundamental principles of justice are breached.

“These principles should be so elementary that their violation could be recognized by any prudent person, whether legally trained or not, and would shock the conscience of a legally trained mind.”

Regarding morality, the Court clarified that in judicial contexts, morality has generally been limited to sexual morality. However, if morality extends beyond this, it applies to agreements that conflict with societal norms, though not illegal. Interference based on morality would only occur if it “shocks the court’s conscience.”

The Court also explained that patent illegality, a ground under Section 34(2A) of the Act, is applicable only to domestic awards and not to international commercial arbitrations. Patent illegality involves errors apparent on the face of the award, such as violations of substantive provisions of Indian law or terms of the contract. However, reappreciation of evidence or minor errors in applying the law do not qualify as patent illegality. Courts may intervene only if the illegality is fundamental to the case.

The Court reiterated that it does not sit as an appellate body over arbitral awards. An arbitrator is the master of evidence, and as long as the award is based on a reasonable interpretation of the facts, courts should respect it.

“A possible view by the arbitrator on facts should be respected, as the arbitrator is the ultimate master of the quantity and quality of evidence to be relied upon. The award may only be set aside if it is so perverse that it shocks the conscience of the court.”

The Court also explored the extent to which insufficient, improper, or erroneous reasons and the reading of implied terms into contracts can justify interference with an arbitral award.

Section 31(3) of the Arbitration Act requires that arbitral awards must provide reasons, unless the parties have agreed otherwise or the award is based on a settlement. The Court highlighted that reasons in an arbitral award must be proper, intelligible, and adequate.

The Court categorized awards into three types:

1. No reasons or unintelligible reasons: These awards can be set aside for violating Section 31(3).

2. Improper reasons: These awards, where the reasoning is flawed, can be challenged only on grounds set out in Section 34.

3. Inadequate reasons: Courts must assess whether the reasons provided are sufficient for the complexity of the issues. An award will not be set aside merely for being incomplete if the reasons are intelligible and adequate.

“The court must carefully review the award and the documents referred to within. If the reasons are adequate and intelligible on a fair reading, the award is not to be set aside for inadequacy of reasons. However, if the gaps render the reasoning unintelligible, the court may set aside the award.”

The Court observed that if an arbitral award contradicts the contract, it would be considered patently illegal. The tribunal has the authority to interpret the contract based on its terms, the parties’ conduct, and surrounding circumstances.

“If the conclusion of the arbitrator is based on a possible view of the matter, the Court should not interfere. However, if the tribunal’s interpretation is unreasonable upon a full reading of the contract, the award may be considered perverse and thus subject to judicial interference.”

The Court stated that an implied term can be read into a contract only if it is clear that both parties intended for the term to be part of the agreement, even if not explicitly stated. Such a term must be essential for the efficacy of the contract.

An unexpressed term may only be implied if it is reasonable, equitable, and necessary to give business efficacy to the contract. It must be obvious that the term “goes without saying” and must not contradict any of the existing terms of the contract.

The Court outlined five conditions for reading an implied term into a contract:

1. It must be reasonable and equitable.

2. It must be necessary for the contract’s business efficacy.

3. It must be obvious that the parties intended it.

4. It must be clearly expressed.

5. It must not contradict any terms of the contract.

The Supreme Court thus reaffirmed the limited scope for judicial interference in arbitral awards, emphasizing that courts should intervene only in exceptional circumstances, such as where an award violates fundamental principles of justice or the basic structure of a contract.