Can a party raise fresh grounds for setting aside an award in proceedings under Section 37 of Arbitration Act?

In Azizur Rehman v. Radio Restaurant [2023 SCC OnLine Bom 2320], the Hon’ble Bombay High Court dismissed an appeal under Section 37 of the Arbitration and Conciliation Act, 1996 (the “Act”), inter alia because the appellants raised fresh grounds of challenge that were not raised in prior proceedings under Section 34 of the Act.

While the Hon’ble Court also considered and rejected the challenges raised by the appellants on merits, it found that in any event, the appeal failed on two preliminary grounds: first, that the appellants’ entire challenge under Section 37 was against the arbitral award while the final order in the Section 34 proceedings was, in fact, not assailed; and second, that the grounds of challenge raised under Section 37 were “not taken as a ground of challenge to the Arbitral Award in the Petition filed under Section 34." As per the Hon’ble Court, either of these preliminary grounds alone constituted sufficient reason for the Section 37 appeal to fail.

The decision begs the question – where parties actually demonstrate grounds for interference that are valid in terms of Section 34 of the Act, would the court under Section 37 be precluded from interfering with the arbitral award for the only reason that such grounds were not taken in prior proceedings?

The disputes in this case concerned a partnership between three partners – Sheru, Miyaji and Suleman – for running a restaurant. Differences arose after Sheru passed away in 2002. The surviving partners initially filed a suit seeking to restrain Sheru’s heirs (the “appellants”) from dealing with the restaurant’s premises in any manner, which was dismissed in 2005. Thereafter, the surviving partners filed a fresh suit seeking recovery of possession of the restaurant’s premises from the appellants.

Arbitration: In 2006, the parties consented to having all their disputes and differences resolved through arbitration. The arbitral proceedings culminated in an award dated January 7, 2019, directing the appellants to (i) hand over vacant and peaceful possession of the restaurant’s premises to the surviving partners; and (ii) compensate the surviving partners for wrongful use and occupation of the restaurant’s premises.

Challenge and appeal: The appellants’ challenge to the arbitral award under Section 34 of the Act was dismissed in August 2019. The Section 34 decision was challenged in appeal under Section 37 of the Act. Placing reliance on MMTC Ltd. v. Vedanta Ltd. [2019 SCC OnLine SC 220; “MMTC Ltd.”] and UHL Power Company v. State of Himachal Pradesh [(2022) 4 SCC 116], the Hon’ble Bombay High Court held that the appellants could not have raised fresh arguments during proceedings under Section 37 of the Act, and rejected the appeal, inter alia, on this preliminary ground.

The preliminary grounds for the rejection of the appeal holds good at the outset, considering that in the present case, the arguments made for the first time during the Section 37 proceedings were, in any event, without merit. However, if the parties actually demonstrated grounds for interference that were valid in terms of Section 34 of the Act, would the Section 37 court be denuded of its power to interfere, only because the grounds were being raised for the first time? We think not.

Appeals contemplate rehearing on law as well as fact.

The right of appeal typically carries with it a right of rehearing on law as well as fact, unless the statute conferring the right of appeal limits the rehearing in some way [Raja Lakshmi Dyeing Works v. Rangaswamy Chettiar, (1980) 4 SCC 259]. As summed up by the Hon’ble Supreme Court in James Joseph v. State of Kerala [(2010) 9 SCC 642]:

i) In appeal, the higher forum reconsiders the decision of the lower forum, on questions of fact as well as law 

ii) The appellate jurisdiction can be limited or regulated by the legislature. The width of appellate jurisdiction depends not on whether the appeal is a first appeal or a second appeal but upon the limitations, if any, placed by the statute conferring the right of appeal.

iii) Where the statute does not place any limitations or restrictions in regard to the scope and width of the appeal, it shall be construed that the appeal provides for a rehearing on the law as well as facts.

In this context, it is useful to refer to Section 37 of the Act, which simply provides that an appeal shall lie, inter alia, from an order “setting aside or refusing to set aside an arbitral award under section 34." The provision does not prescribe any limitations or restrictions on the scope of an appeal against an order passed under Section 34 of the Act. Therefore, in the absence of any limitations placed by the Act itself, a court exercising appellate jurisdiction under Section 37 would rehear the parties on law as well as fact, albeit within the confines of Section 34. This position appears aligned with the decision in MMTC Ltd., where the Hon’ble Supreme Court held that “interference under Section 37 cannot travel beyond the restrictions laid down under Section 34."

In fact, in its decision in Haryana Tourism v. Kandhari Beverages [(2022) 3 SCC 237], the Hon’ble Supreme Court found that an “award can be set aside under Sections 34/ 37 of the Arbitration Act” on the same grounds. This implies that grounds available to a party in proceedings under Section 34 of the Act would be equally available in proceedings under Section 37 of the Act.

It naturally follows that in Section 37 proceedings, parties would be free to raise and prove any grounds that would warrant court interference in terms of Section 34. 

Pleas of law can be raised at any stage of the proceedings.

That such grounds need not have been taken in prior proceedings is supported by the principles governing estoppel, as per which, legal arguments can be raised at any stage of the proceedings [Ariance Orgachem v. Wyeth Employees Union, (2015) 7 SCC 561]. Time and again, the Hon’ble Supreme Court has held that pure questions of law can be raised at any stage of litigation [VLS Finance v. Union of India, (2013) 6 SCC 278] and that a new ground raising a purely legal issue, for which no additional inquiry or proof is required, can be raised at any stage [National Textile Corporation v. Nareshkumar Badrikumar, (2011) 12 SCC 695].

In essence, the grounds warranting interference under Section 34 are questions of law, arising from material already on record of the arbitral tribunal. They are capable of being pleaded and demonstrated solely by application of the governing law and precedent to the facts and material on record, without resort to additional inquiry or proof. It is settled that Section 34 proceedings do not require anything beyond the arbitral record and parties are not permitted to produce further affidavits or evidence, unless absolutely necessary [Canara Nidhi v. M. Shashikala, (2019) 9 SCC 462]. Therefore, a party ought to be permitted to raise fresh legal grounds in terms of Section 34 of the Act during proceedings under Section 37 of the Act, which – in any event and as demonstrated above – contemplate a complete rehearing on law as well as fact.

The decision in State of Chattisgarh v. Sal Udyog [(2022) 2 SCC 275] also lends credence to our argument. In this case, the arbitral award had directed for the refund of certain charges in favour of the respondent company. During the Section 37 proceedings, the appellant State argued for the first time that such a direction amounted to a patent illegality, since it was contrary to the parties’ contract, which obliged the respondent company to pay and entitled the appellant State to receive those charges. In this background, the Hon’ble Supreme Court held, inter alia, that:

i) The plea that a party is estopped from taking an argument during proceedings under Section 37 on the ground that it did not take such an argument in prior proceedings under Section 34 would not be available.

ii) Once such an argument was raised, even for the first time during proceedings under Section 37, the court ought to have interfered with the arbitral award by resorting to Section 34(2-A) of the Act. 

iii) It does not stand to reason that a provision that enables a court to set aside an award under Section 34 of the Act would not be available in an appeal under Section 37.

While it may appear that the Hon’ble Supreme Court’s decisions on the point are at variance with each other, we feel they are capable of being reconciled and read together in light of the law discussed above. Accordingly, we are of the view that:

i) grounds available for setting aside an award under Section 34 of the Act would be equally available in proceedings under Section 37 of the Act.

ii)  where grounds valid in terms of Section 34 are available, parties may raise them for the first time even in appeal under Section 37 of the Act.

iii) where parties demonstrate grounds for interference that are valid in terms of Section 34, the court under Section 37 ought to interfere with the arbitral award, even if such grounds were not taken in prior proceedings.

About the authors: Divyam Agarwal is a Partner and Aniket Aggarwal is an Associate at JSA.