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In the recent case of Ratnam Sudesh Iyer v. Jackie Kakubhai Shroff [Civil Appeal No. 6112 of 2021], dispute arose between two parties who were shareholders in the investment holding company called Atlas Equifin Private Limited, India (‘Atlas’) which held 11,05,829 equity shares of Rs.10 each in Multi Screen Media Pvt. Ltd. (‘MSM’). The Appellant, who was based in Singapore, with an intention to sell its share in Atlas entered into a placement instruction in 2005 with the Respondent which authorised Standard Chartered Bank (‘SCB’) as their agent to identify the purchaser for the appellant’s shares in Atlas. However, the Respondent challenged the placement instruction and alleged that his signature was forged. The respondent lodged a complaint with the Economic Offences Wing, Mumbai Police (‘EOW’) in 2010 against both the appellant and the SCB.  Subsequently, the Parties decided to settle the matter and entered into a Deed of Settlement dated 03.01.2011 which provided, amongst other things, that respondent would withdraw all complaints and proceedings filed against the appellant and going forward shall not write any letter or communication or complaint to any police authority/ies and/or any other judicial, quasi-judicial authority or statutory authority or any person or entity complaining about the subject matter of the Settlement Deed.

In return, the Appellant was to pay to the Respondent an amount of US$ 1.5 million vide banker’s cheque which was to be held in an escrow account, and was to be handed over to the respondent on confirmation by the EOW that the complaint has been withdrawn. Further, the respondent was to be paid US$ 2 million within seven (7) days of the receipt of the proceeds from the sale of MSM’s shares.

On any breach on part of the respondent, the Settlement Deed was to terminate and the US$ 1.5 million kept in escrow would then be released back to the appellant. Very soon, the disputes arose and the Arbitration Clause was triggered when both the parties alleged breach of the terms of the Settlement Deed. The Appellant filed a Section 9 of the Arbitration and Conciliation Act, 1996 (the “Act”) application claiming that the amount should not be released to the respondent on account of the breach of the Deed of Settlement since the wife of the Respondent wrote an e-mails to the Appellant which were defamatory and therefore sought interim relief against the respondent, his wife, and the escrow agent. In the court proceedings the wife of the respondent was dropped from the array of parties and the matter was referred to arbitration with the direction that the escrow agent would hand over the cheque for US$ 1.5 million only after the direction of the arbitrator.

One of the claims of the Appellant before the Arbitrator was the refund of US$ 1.5 million with 18 per cent interest per annum.

The learned arbitrator made the final award on 10.11.2014, awarding a claim for liquidated damages of US$ 1.5 million in favour of the appellant, as per the Deed of Settlement. The award further held that the respondent would not be entitled to the second cheque of US$ 2 million held in escrow, on account of the respondent’s breach of the Deed of Settlement.

Against the Award, the Respondent preferred an application under Section 34 of the Act and the Appellant moved an application under section 36. Consequently, the respondent also filed for stay of the enforcement of the award which was granted and the Bombay High Court finally set aside the award vide judgment dated 19.05.2020. The Appellant filed an appeal under section 37 of the Act which was dismissed by the Division Bench of the Bombay High Court vide impugned judgment dated 20.04.2021. The High Court also granted interim protection against withdrawal of the amount specified under the Deed of Settlement for a limited period of time. In the Special Leave Petition while issuing notice on 02.08.2021, the interim arrangement by the High Court was extended.

The following questions arose for consideration:

Whether the award arose out of an international commercial arbitration and what is the distinction between a domestic award arising from an international commercial arbitration and a purely domestic award? Further, whether the test for interference was made more stringent by the amendment in respect of a domestic award arising from an international commercial arbitration?

The Court, on the nature of Award, held that since the Appellant was based out of Singapore, it would be an international commercial arbitration in term of section 7 of the Act.  The Court observed that vide  the Arbitration and Conciliation (Amendment) Act, 2015 (‘2015 Amendment Act’), Explanations to Section 34(2) of the said Act as well Sub-Section 2A to Section 34 were inserted and therefore, beyond doubt, the “scope of interference by the Court became more restrictive with the amendments coming into force. “

While interpreting the provision under sub- section 2A of Section 34 of the Act, the Court observed that “the plea of patent illegality is not available for an award which arises from international commercial arbitration post the amendment” and that “… the judgments of the learned Single Judge and the Division Bench decide the challenge to the award on the plea of patent illegality without noticing this distinction.” The Court observed that both the courts proceeded on the basis that the award cannot be sustained in either situation, i.e. for a purely domestic award or a domestic award arising from an international commercial arbitration.

The Court then proceeded to answer the question whether the 2015 Amendment Act would apply in the facts of the present case?

While observing that Section 34 proceedings in the matter commenced prior to 23.10.2015, the Court observed that the law provided under Section 26 of the 2015 Amendment Act as to when the amendment would apply in this regard was well settled.  The Court also referred to the decision in Board of Control for Cricket in India v. Kochi Cricket Pvt. Ltd. & Ors. (2018) 6 SCC 287 in this regard. The Court clarified that “The judgment derived that the intention of the legislature was to mean that the 2015 Amendment Act is prospective in nature and will apply to those arbitral proceedings that are commenced, as understood by Section 21 of the said Act, on or after the 2015 Amendment Act, and to court proceedings which had commenced on or after the 2015 Amendment Act came into force.”

The Court further referred to the decision in Ssangyong Engineering and Construction Company Ltd. v. National Highways Authority of India (2019) 15 SCC 131 and Hindustan Construction Company Ltd. and Anr. v. Union of India & Ors. 2019 SCC OnLine 1520, for understanding the applicability of sub-section 2A of section 34 of the Act. It was opined the said case that Section 34 as amended will apply only to Section 34 applications that have been made to the Court on or after 23.10.2015, irrespective of the fact that the arbitration proceedings may have commenced prior to that date.

The Appellant however, contended that as the Arbitration Clause in the Deed of Settlement, provided that “the Arbitration proceedings shall be governed by the Arbitration and Conciliation Act, 1996 of India or any amendment thereto”, and therefore, any future amendments to the said Act shall be applicable to the arbitration in question.

Therefore, the Court proceeded to examine the impact of the phraseology used in the arbitration clause, mainly, “the Arbitration proceedings shall be governed by the Arbitration and Conciliation Act, 1996 of India or any amendment thereto”.

The Court referred to S.P. Singla Constructions Pvt. Ltd. v. State of Himachal Pradesh & Anr. (2019)2SCC488 in which the arbitration clause provided that the arbitration would be subject to the provisions of the Arbitration Act, 1940 or any statutory modification or re-enactment thereof. In the matter the Supreme Court opined that such general conditions of the contract cannot be taken to be an agreement between the parties to apply the provisions of the 2015 Amendment Act and the provisions of the 2015 Amendment Act would apply only in relation to arbitral proceedings commenced on or after the date of commencement of the 2015 amendment. A similar view was taken in the case of Union of India v. Parmar Construction Company (2019) 15 SCC 682. It was further observed that the provisions of the 2015 Amendment Act shall not apply to arbitral proceedings which had commenced in terms of the provisions of Section 21 of the said Act unless the parties otherwise agree.

While the above referred cases were in relation to arbitration proceedings, the matter before the Court dealt with a section 34 application which was moved before the 2015 Amendment Act came into force. In this regard, the Court referred to the case of ABB India Ltd. v. Bharat Heavy Electricals Ltd. OMP (T) (Comm) No.48/2020 decided by the Single Bench of Delhi High Court which distinguished the judgment in Thyssen Stahlunion Gmbh v. Steel Authority of India Limited  (1999) 9 SCC 334 from Parmar Construction Company. The Court observed that Thyssen Stahlunion Gmbh dealt with Section 85(2)(a) of the said Act, which is dissimilar to Section 26 of the 2015 Amendment Act. Section 26 starts with a negative covenant which is subject to an exception in the case of an agreement between the parties, whereas the observations in Thyssen Stahlunion Gmbh were coloured by Section 85(2)(a) of the said Act which is structured differently.

The court therefore held that “the general phraseology of a clause which seeks to include any amendment to the Act would not be able to be availed of to expand the scope of scrutiny as it would appear to run contrary to the legislative intent of Section 26 of the Amendment Act..” The Court therefore reached the conclusion that it would be the pre-2015 legal position which would prevail. Keeping this in the background, the Court went on to analyse the correctness of the decisions reached by the courts below.

In the factual findings the court found that the necessary conditions of the Deed of Settlement stood satisfied since firstly, the respondent complied with the condition to withdraw all complaints and proceedings against appellant and all other named and unnamed persons before the EOW. Therefore, US $ 1.5 million, which were kept in escrow to ensure that those proceedings came to an end, had to be released to the respondent. Secondly, the sale of shares did take place, even though delayed and therefore, the respondent was also entitled to US$ 2 million which was to be paid on sale of shares. The Court further opined that it was not the case that the respondent breached clause 6 of the Settlement which provided that amount of US$ 1.5 million shall return to the Appellant in case the representations/assurances of the respondent turn out to be false or incorrect. The Court therefore concluded on facts that the effect of the arbitral award would be to deprive the respondent of the due valuation of the shares and what was paid to him to bring his complaints to an end. The court also went on to scrutinise the contents of the e-mails written by the wife of the respondent which according to the Court was never ratified by the respondent himself. Further, the wife was not party to the Deed. Although the Court found one of the wife’s e-mails as indiscreet, the Court held that this itself cannot deny the respondent of his dues.

In conclusion the court held that “We find that the arbitrator’s conclusions are not in accordance with the fundamental policy of Indian law, and can thus be set aside under the pre-2015 interpretation of S. 34 of the said Act. We may also note that clause 6 of the Deed of Settlement could not have been relied on to award liquidated damages in favour of the appellant, we agree with the observations of the Single Judge and the Division Bench in this regard.”