Judgment name: I-Pay Clearing Services Private Limited v. ICICI Bank Limited
Citation: S.L.P. (C) No. 24278 of 2019
Court: Supreme Court of India
Coram: R. Subhash Reddy, J.
Date: 3rd January 2022
Keywords: Arbitration, Section 34, Arbitration and Conciliation Act 1996, patent illegality, remission.
I-Pay Clearing Services (“Appellant”), a company based in Mumbai, provided card personalisation, transaction and reconciliation management for Smart Cards. The ICICI Bank (“Respondent”) provided banking facilities and retail financial assistance. On 4th
November 2002, both the parties entered into a Service Provider Agreement (“SPA”) where the Appellant agreed to provide services to Hindustan Petroleum Corporation Limited (“HPCL”) to improve fuel sales at HPCL retail outlets. The first agreement was followed by a second agreement dated 4th February 2003, as per which the Appellant agreed to develop software and a “Drive Track Fleet Card” for HPCL to expand HPCL’s customer base. Through a letter dated 10th December 2003, the Respondent asked the Appellant to consider the second agreement as an extension of the SPA. The Appellant claimed that the Respondent abruptly terminated the SPA without any explanation, and this proved disastrous for them. The Appellant claimed damages worth Rs. 95 crores from the Respondent. The Respondent argued that the SPA was mutually dissolved and produced an agreement containing terms of closure, which was signed by them on 1st June 2010. The High Court of Bombay (“HC”) referred the case to arbitration under Section 8 of the Arbitration and Conciliation Act, 1996 (“Act”). On 13th November 2017, the Sole Arbitrator (“SA”) directed the Respondent to pay 50 crores in damages to the Appellant along with interest. The SA framed five issues of which the first examined whether the Respondent had illegally and abruptly terminated the agreement.
The Respondent challenged the Award in the High Court of Bombay (“HC”). They argued that the SA failed to give adequate reasons for his findings. The Appellant argued that the Award must be remitted to the SA under Section 34(4) of the Act. If the SA failed to give adequate reasoning on the first issue, then the defect or gap in reasoning can be curated. Per contra, the Respondent claimed that the defect could not be cured as the SA did not even consider the evidence adduced by the Respondent when he gave his decision on the first issue. As a result, the Award suffers from patent illegality and could not be altered under Section 34(4) of the Act. The Appellant filed a notice under Section 34 (4) of the Arbitration and Conciliation Act, 1996 (“Act”), requesting the HC to adjourn the proceedings. The HC rejected the notice and ruled that the SA committed a jurisdictional error in moving to further issues without resolving the first issue. The Appellant filed a suit in the Supreme Court (“SC”) challenging HC’s Order.
Whether an award can be remitted to the SA under Section 34(4) of the Act if the Award lacks reasons behind findings on crucial issues?
The SC looked at Sections 34(2A) and 34(4) of the Act. While referring to Dyna Technologies Ltd. v Crompton Greaves Ltd., the Court acknowledged that an award could be remitted to the Tribunal if it could undo the defects. However, this is possible only when there is no patent illegality. The Court said while referring to the Som Datt Builders Ltd. v State of Kerala that where no reasons are recorded on a finding in a case, the Court, in view of Section 34(4), could give the opportunity to the Tribunal to rectify such errors. This means that Section 34(4) can be used to fill the lacunae in reasoning in an award. To stress the above point, the Court drew upon the Respondent’s argument that laid down the distinction between finding and reasoning. As established in Income Tax Officer, Award, Sitapur v Murlidhar Bhagwan Dasand J. Ashoka v University of Agricultural Sciences and Ors., a finding is understood to be a definite decision on an issue, whereas reasons are “links between the materials on which certain conclusions are based”.
This case, as per the Court, was not one where additional reasons could fill the gaps in reasoning. Firstly, the Court emphasised that the discretion to remit the matter to the arbitral Tribunal is vested with the Court under Section 34(4), as the phrase “where it is appropriate” undeniably suggests. An Application under section 34(4) must be appraised in light of grounds raised in the Application under section 34(1) of the Act. It simply means that a party cannot invoke section 34(4) to relegate the power of the Court to an Arbitrator under the guise of filling up the gaps in the reasoning where there are no findings, to begin with. The Court can set aside the Award if there are no sound findings or if the findings exclude material evidence on record. Secondly, the Court also stated that if prima facie, an award appears to suffer from patent illegality due to the absence of recording a finding on a contentious issue, then the Court cannot refer the matter to the Arbitral Tribunal. In this case, the SA failed to make a sound finding by failing to consider the evidence. Therefore, there is no scope for modifying the Award.
As a result, the Court dismissed the appeal and upheld the Order passed by the HC. The Court found that the Award suffered from patent illegality because the SA failed to record a sound finding and ignored crucial evidence. Here, however, the Court failed to establish the nexus between ignoring crucial evidence and patent illegality. Since the SA failed to consider crucial evidence on record, he did not apply his mind to the issue. Therefore, the Award was said to be arbitrary and patently illegal, and it could not be considered for remittal under Section 34(4) of the Act. This Judgment has emboldened the courts to exercise their power to set aside arbitral awards and widened the scope of power of courts under Section 34(4) of the Act.
[This case note has been authored by Paritoshika Singh, an Editor at Mapping ADR.]