Upholding Natural Justice in Arbitration The Perils of Awards Beyond Party Pleadings and Arguments

Section 18, Arbitration and Conciliation Act (the Act), deals with the equal treatment of parties and it stipulates that parties should have an equal opportunity to present their case.

An arbitral award can be set aside on very limited grounds. Most applications focus on the umbrella of public policy under Section 34(2)(b)(ii) or patent illegality under Section 34(2-A). Primarily because these grounds are broader and have greater sub-sets or pigeonholes under which an applicant can frame its case. But what if the award has been made on arguments which were never advanced by the parties.

The High Court of Delhi was faced with this issue in BHEL v. Xiamen¹. Section 18, Arbitration and Conciliation Act mandates that each party must be given a full and fair opportunity to present its case. The Court in BHEL v. Xiamen categorically held that introducing a new determinative factor into the proceedings, without providing the parties an opportunity to address it, constitutes a violation of Section 18. The Court observed that such a procedural lapse results in manifest prejudice, as the affected party is deprived of the chance to present evidence or arguments on the newly introduced issue, thereby vitiating the arbitral award.

In this article the authors shall explain the principles of audi alteram partem, natural justice and equal treatment of parties (Section 18) which govern arbitrations. The article shall also demonstrate how the above principles are protected by Sections 34(2)(a)(iii) and 34(2)(a)(iv), Arbitration and Conciliation Act which empower courts to set aside an award which is in violation of these principles. While discussing the jurisprudence, the authors shall also take inspiration from the international jurisprudence on this issue. Finally, the authors shall provide a short and definite practical answer to what steps that a Tribunal can take, to ensure compliance with the principles of natural justice while making an award, when certain arguments or judgments, which form part of the expertise or knowledge of the Tribunal, have not been raised by either party during the trial.

Protecting natural justice in arbitration

Section 18, Arbitration and Conciliation Act (the Act), deals with the equal treatment of parties and it stipulates that parties should have an equal opportunity to present their case. While on the same lines, Section 34(2)(a)(iii) read with Section 34(2)(a)(iv)², leaves no scope for the Tribunal to go beyond the natural justice principle as stipulated in Section 18. The provisions read together broadly contain a stipulation that while deciding an issue in the award, the Arbitral Tribunal must refrain from using judgments and arguments not specifically made by the parties.

The Supreme Court in ONGC v. Western Geco International Ltd.³ had introduced the Wednesbury principles of reasonableness to give an expanded flavour of natural justice to conduct of proceedings by the Arbitral Tribunal. The Supreme Court however in Ssangyong Engg. & Construction Co. Ltd. v. NHAI⁴ clarified that the principles enunciated in Western Geco had been legislatively overruled by the 2015 amendment.⁵ It also clarified that the principles of natural justice as contained in Sections 18 and 34(2)(a)(iii), however, continued to govern arbitrator conduct and remained valid grounds for challenge of arbitral awards,⁶ as was held in Associate Builders v. DDA.⁷

In the case of Ssangyong⁸, the Supreme Court recognised that Section 18 is critical in understanding the grounds for challenging an award under Section 34(2)(a)(iii), and determined that, in this instance, the parties did not receive a full and fair chance to present their case. The Supreme Court also relied on Article V of the New York Convention, which upholds principles of natural justice such as audi alteram partem. The Court emphasised that while an Arbitral Tribunal may investigate facts independently, all parties must still be given a reasonable opportunity to respond to any arguments, documents or evidence being considered by the Tribunal, especially when it has not been raised by either side. The Supreme Court in Ssangyong referred to the judgment in Minmetals Germany GmbH v. Ferco Steel Ltd.⁹ in support of the above conclusions.

Therefore, Sections 18, 34(2)(a)(iii) and 34(2)(b)(ii) uphold the principles of natural justice, transparency, and fairness in arbitration. They permit courts to set aside awards that violate these principles of natural justice.

Consequence of making an award on pleadings not put forth.

In India, the general principle regarding pleadings is clear. The Supreme Court has held that grant of relief on non-existent pleadings is perverse. Any relief granted beyond the parties’ pleadings is liable to be set aside. The Court’s sense of justice cannot override the parties’ submissions or grant relief beyond the pleadings actually raised.¹⁰ It is a form of procedural justice which is in an integral part of the Indian legal system.

In arbitration cases in particular, the limitations are drawn by the contract and the parties’ pleadings. Similar to the law in regular civil trials, Arbitral Tribunals are bound by the pleadings of the parties and cannot rely on any reasoning outside the pleadings in the contract.¹¹ The Tribunal cannot apply fairness or reasonableness,¹² or pronounce an award on the basis of equity (unless the parties provide express consent to do the same).¹³

Globally, the Courts have struck down awards containing grounds beyond the pleadings. For instance, in Wan Sern Metal Industries v. Hua Tian Engineering¹⁴, Singapore’s Court of Appeal held that introducing an unpleaded claim in the award deprives the parties of accurate justice. Similar principles were also applied by the Courts in Hong Kong, holding that such an award violated party autonomy when unpleaded issues are included in the award.¹⁵ The commonality among all these rulings is fundamental to the understanding of whether the Tribunal considering unpleaded claims can be set aside by the judicial intervention.

Any award by the Tribunal based on issues not pleaded, is in violation of the guaranteed right of equal opportunity under Section 18, and also in violation of Section 34(2)(a)(iii) that protects against the inability to present one’s case. Therefore, arbitration depends on the concept of autonomy, but that autonomy really is only useful when it occurs within the strict parameters of openness and fairness. Acting beyond the pleadings not only taints the award but may ultimately impugn the legitimacy of the arbitral process itself.

Consequence of making an award on arguments/submissions not put forth.

Similar to the issue of framing of an award on a pleading not made is the issue of framing of an award on an argument not put forth by the parties. In other words, what fate does an arbitration award suffer if the award contains legal arguments not put forth by the parties and not discussed in arbitration proceedings.

The Court in BHEL v. Xiamen¹⁶ awarded reliefs on arguments that were not discussed in the arbitration proceedings. No arguments were presented on the point of alternate letter of credit clause but were read in favour of Xiamen and awarded certain amounts under its claim. This decision of the Tribunal denied BHEL the opportunity to respond and also ignored compulsory stipulations in the contract such as having a local office and a bank account. This dual violation triggered Sections 34(2)(a)(iii) and 34(2)(b)(ii), read with Section 18 of the Act. BHEL’s right to present their case was violated, in addition to the same being a violation of most basic notion of justice and also being in violation of public policy.

The Court analysed whether the Arbitral Tribunal can draw on extraneous sources to reach its award. It held that the Tribunal’s reliance on authorities which has not been relied on by either party in their arguments meant that the claimant was deprived of the chance to address the Tribunal on those authorities. This led to a breach of audi alteram partem and Section 18 read with Section 34(2)(a)(iii) and (iv) of the Act. The Delhi High Court was of the view that the Tribunal’s acceptance of performance, alternative to express terms of the contract rewrote the parties’ claims. The Court was therefore compelled to set aside the award as being in violation of public policy under Section 34(2)(b)(ii) of the Act. Similarly, the Madras High Court in TRULIV v. Ravishankar¹⁷ has held that deciding an issue on an argument never raised by one party and never having addressed or rebutted by the opposite party is quite astonishing and violative of the principles of natural justice.

Another parameter is when the Tribunal uses its personal knowledge and independent research to support any one party’s claim in the award.¹⁸ The Andhra Pradesh High Court ruled that the Tribunal cannot make use of its personal knowledge of facts of dispute or any such arguments, which is not a part of record, to decide dispute. But it can certainly use its expert or technical knowledge or general knowledge about particular trade, in deciding a matter.¹⁹

The Delhi High Court has, under similar principles, also held that it is not open for the Tribunal to conduct independent research to supply evidence which the party has not cared to place before it. If reliance is being placed on such evidence, it has to be put to both the parties and tested. Not doing the same would be against the aspect of fairness and a violation of Section 18 of the Act.²⁰

In the considered opinion of the authors, the above rulings rightly point to the prejudice to the parties’ rights and the distortion of arbitration’s fundamental philosophy that arises when the Tribunal relies upon unargued or externally submitted submissions. By entertaining submissions that had never been submitted, adduced, or reasoned, the Tribunal did not simply breach the parties’ rights in the sense contended but also left them with no opportunity to respond or even clarify their position. Also, even if the Tribunal possesses personal knowledge or perceives a connection between issues, it cannot independently expand or reinterpret the pleadings to introduce unargued matters. The award must strictly reflect what was raised and argued by both sides.

International jurisprudence

Barring Indian Jurisdiction, several other jurisdictions have focused on the balance between arbitral autonomy and the principles of natural justice. Under Article 34 of the UNCITRAL Model Law, the only recourse for an arbitral award is to apply to have it set aside. A court is able to set an award aside only on limited grounds including: Failure to provide proper notice or the opportunity to be heard to the parties; or, an award addressing agreements outside the terms of the submission. It is significant that where only part of the award is outside the submission, the court may set aside just that portion of the award and leave the remainder intact.

The Kenyan High Court emphasised that the Tribunal must confine itself to issues actually submitted by the parties.²¹ It was also clarified that the Tribunal exceeds jurisdiction only if he goes on a “frolic of his own” and decides matters not forming part of the submissions.²² The Court in these cases finally held that the award remained within the pleadings only because the issues framed were broad enough to cover the basis on which the arbitrator decided the matter.

Additionally, the Kenyan Supreme Court while referring to Article 34 of UNCITRAL Model Law, held that the Tribunal must stay within the scope of arguments and submissions discussed during arbitration while formulating its award.²³ The English Court of Appeal has also taken notice of the same and quoted that:

…In particular, the Tribunal must not throw his own evidence into the scale on behalf of the unrepresented party or use its own special knowledge for the benefit of the unrepresented party – at any rate it must not do so without giving the plaintiff’s experts a chance of dealing with it…²⁴

Moreover, Mauritian Law²⁵ also replicates about the content of the award which should only relate to any specific issue in the arbitration and part only of the claims or counterclaims submitted to it for decision. According to Japanese arbitration jurisprudence, the courts of Japan in various rulings reaffirmed that the Tribunal’s use of his own knowledge is permissible, only when the arguments which the Tribunal intends to rely on from its own knowledge are disclosed to parties so that they can respond.²⁶ England and Wales High Court held that knowledge, which is used in specialised fields, is permitted only after communication with the parties.²⁷ Furthermore, Singapore Court of Appeal has held that Tribunal has no jurisdiction to resolve disputes which have not been referred to it in the submission to arbitration.²⁸

The Court of Appeal of Malaysia in Sigur Ros Sdn Bhd v. Master Mulia Sdn Bhd²⁹, held that the Tribunal may not consider any evidence or arguments outside the hearing unless the parties have first been notified of the Tribunal’s intention and given an opportunity to respond. This includes points or evidence that the Tribunal unilaterally raises. This was subsequently affirmed by the Federal Court of Malaysia.³⁰

Therefore, the natural justice principles would require that as a general rule, unless the parties agreed to permit the Tribunal to use their own specialised expertise, then procedural fairness, would ensure that any new argument or reasoning that have an impact on the Tribunal’s award must be put to the parties to ensure transparency and protect their right to be heard.

Rethinking the issue: an alternate path

The Courts consistently sets aside such awards based on the provisions of Sections 18 and 34(2)(a)(iii), but cases does not specify Tribunals on how to proceed in situations where sufficient, competent facts become apparent through information, professional knowledge, or research independent of the pleadings or submissions. Tribunals are faced with unresolved tension that places them in a conundrum: They can ignore the issue, which may affect the completeness of the claim, or address it, and again risk setting aside the award for breach of natural justice.

While Tribunals may have more experience than the parties, their authority must not override principles of natural justice outlined in Sections 18 and 34 of the Act. In the considered opinion of the Authors, to avoid the aforesaid situation, the Tribunals should inform parties of any unaddressed but relevant issues, arguments or judgments after submissions, allowing them a chance to argue their applicability. This promotes fairness and efficiency in arbitration by ensuring full opportunity for argument and reducing unnecessary judicial intervention and leading to a conclusive resolution of the arbitration case.

Conclusion

If a Tribunal issues an award based on arguments, not raised by a party, it deprives the opposite party an opportunity to respond. This is a clear violation of principles of natural justice and can lead to the award being set aside, as noted in BHEL v. Xiamen³¹ and TRULIV v. Harishankar.³² The principle also being fundamentally explained by the Supreme Court in Ssangyong³³. While Tribunals may have more experience than the parties, their authority must not override principles of natural justice outlined in Sections 18 and 34 of the Act.

It is quite possible that members of the Tribunal are experienced and understand that certain legal principles which are applicable to the case have not been addressed by the parties in their arguments. It is also likely that a certain argument may not have been raised by the respondent because the same was not raised by the claimant in the first place. In this background, to ensure clarity and transparency, it is best if the Tribunal identifies a relevant legal principle (not raised by either party) and direct them to address further arguments as a matter of clarification. This allows both sides to comment on its applicability, ensures natural justice, and reduces the risk of challenges under Section 18, Arbitration and Conciliation Act, 1996.