‘General phraseology of a contract cannot constitute agreement to apply statutory amendments retrospectively’; SC holds contractual clauses cannot run contrary to legislative intent

Supreme Court: The Division Bench of Sanjay Kishan Kaul and M.M. Sundresh, JJ., held that a generally worded clause of a contract or Deed of Settlement cannot be said to constitute an agreement to change the course of law that the Section 34 proceedings are subject to. The Bench expressed,

“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 appellant and respondent were shareholders of Atlas Equifin Private Limited, India (Atlas) which held 11,05,829 equity shares of Rs.10 each in Multi Screen Media Pvt. Ltd. (MSM). Evidently, the appellant had attempted to sell the shares in MSM by forging the signatures of the respondent, pursuant to which a complaint was lodged against the appellant with the Economic Offences Wing, Mumbai Police.

However, the parties entered into a Deed of Settlement dated 03-01-2011 according to which the respondent agreed to withdraw all complaints and proceedings against the appellant. The respondent was further forbidden from writing letters, communications, or complaints to any person about the subject matter of the Deed. In return an amount of US$ 1.5 million was to be paid to the respondent which was kept in escrow till the withdrawal of complaints. Further, as per the deed, US$ 2 million was to be paid to the respondent within seven (7) days of the receipt of the proceeds from the sale of MSM’s shares.

Trigger for arbitration

The appellant claimed breach of the aforesaid Deed of Settlement by an e-mail from the wife of the respondent informing the appellant that “I have no wish to continue to fraternise with a forger.” The appellant, on being asked to complete the sale of shares for release of the second escrow cheque of US$ 2 million, stated that the respondent could not push him to sell. Therefore, the conduct of the parties triggered the arbitration clause of the deed.

Meanwhile, MSM’s shares were sold in March, 2013, and the appellant immediately filed an application seeking to attach an amount of US$ 1.5 million which the respondent was to receive as his share of the said proceeds which was rejected by the Arbitrator. The Arbitrator awarded a claim for liquidated damages of US$ 1.5 million in favour of the appellant and 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.

In appeal, the award was set aside by the Single Bench or the High Court which was further affirmed by the Division Bench.

The nature of arbitral proceedings

The appellant sought for a distinction to be carved out between a domestic award arising from an international commercial arbitration and a purely domestic award; by claiming that since he was based in Singapore, it was an award arising out of an international commercial arbitration. The appellant argued that the award had to be scrutinised in the post amendment scenario and, thus, the High Court had fell into error by applying the test applicable in the pre-amendment scenario.

The contention of the appellant solely rested on the wording of clause 9 of the Deed of Settlement, which provides that “the Arbitration proceedings shall be governed by the Arbitration and Conciliation Act, 1996 of India or any amendment thereto.” The appellant contended that the phraseology of clause 9 included the possibility of any future amendments to the said Act being made applicable to the arbitration in question.

In other words, the appellant claimed that the plea of the award being vitiated by patent illegality was available against the award, as the same is not available for an award which arises from international commercial arbitration post the Amendment, 2015 of the Arbitration and Conciliation Act, 1996.

Noticeably, the Single Judge and the Division Bench had decided the challenge to the award on the plea of patent illegality without noticing the distinction.

Whether the amendment would apply in the facts of the present case

It was not in dispute that Section 34 proceedings commenced prior to 23-10-2015, which was the crucial date. The applicability of Section 34(2A) was elucidated in Ssangyong Engineering and Construction Company Ltd. v. National Highways Authority of India, 4 (2019) 15 SCC 131, where the Court had categorically opined 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 Court had opined that to prevent any uncertainty in law, while seeking to fine tune the law to restrict the scope of interference in awards the legislature took a conscious decision to make applicable the amendments only from the date it came into force.

Reliance was placed by the Court on S.P. Singla Constructions Pvt. Ltd. v. State of Himachal Pradesh, (2019) 2 SCC 488, wherein 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. A plea was raised that the amended provisions would apply in accordance with Section 26 of the 2015 Amendment Act. This contention was repelled by the Court which 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. As a result, the Court held that 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.

In the backdrop of above, the Bench opined that a generally worded clause such as Clause 9 of the Deed of Settlement could not be said to constitute an agreement to change the course of law that the Section 34 proceedings were subject to.  Accordingly, the Bench held that the pre-2015 legal position would prevail and 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.

Factual Analysis

Noticing that the respondent complied with the deed and all such proceedings were brought to an end and that though there was some delay in the sale of shares, the sale did take place, the Bench opined that the necessary conditions of the Deed of Settlement stood satisfied.

Evidently, though the wife was initially impleaded in the proceedings under Section 9 of the said Act, she was later dropped from the arbitration proceedings as she was not a party to the agreement, therefore the Bench opined that in a sense the agreement accepted that the wife of the respondent had no role to play and the respondent could not be penalised for her conduct. The Bench added,

“Even if we turn to the complaints of the wife, at best they would fall in the category of some indiscreet language…certainly, the sentence “I have no wish to fraternise with a forger.” must be called wholly inappropriate. But then, that by itself cannot deny the respondent of his dues merely because of such an indiscreet e-mail by his wife, who was not even party to the proceedings nor party to the Deed of Settlement which contained the arbitration clause.”

Conclusion

In the light of the above, the Bench held that clause 6 of the Deed of Settlement could not have been relied on to award liquidated damages in favour of the appellant. Further, opining that the effect of the 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 Bench held that the arbitrator’s conclusions were not in accordance with the fundamental policy of Indian law, and could thus be set aside under the pre-2015 interpretation of S. 34 of the said Act. The views taken by the High Court were upheld. [Ratnam Sudesh Iyer v. Jackie Kakubhai Shroff, 2021 SCC OnLine SC 1032, decided on 10-11-2021]


Kamini Sharma, Editorial Assistant has put this report together 


*Judgment by:  Justice Sanjay Kishan Kaul

Know Thy Judge| Justice Sanjay Kishan Kaul

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