Leading evidence in a Section 34 challenge to an award – The Supreme Court clarifies what is permissible

Shalaka Patil explains what the Supreme Court of India has clarified what is permissible with respect to leading evidence in a challenge under Section 34 of the Arbitration and Conciliation Act to an arbitral award.

The case of Emkay Global Financial Services Ltd. v. Girdhar Sondhi¹ arose out of a dispute between a registered broker with the National Stock Exchange (NSE) and its client involving certain transactions. The client had initiated arbitration against the broker which claim was rejected by the nominated sole arbitrator by way of an award dated December 8, 2009. The arbitration clause in the agreement from where the dispute arose stated that the parties would resolve the differences between them by way of arbitration as specified by the bye laws of CDSL. The agreement also provided that the parties agree to submit themselves to the exclusive jurisdiction of courts in Mumbai, Maharashtra. Despite this provision, the arbitration took place under the NSE bye-laws which provided that if the dispute involved the NSE, civil courts of Mumbai would have exclusive jurisdiction and if the dispute did not involve the NSE then the bye-laws did not prohibit any court from having jurisdiction. NSE appointed an arbitrator who held hearings and decided the dispute in Delhi. Against the award the client filed a Section 34 application before the Delhi district court in Karkardooma. The district court relying on the exclusive jurisdiction clause of the agreement found that it did not have jurisdiction and dismissed the petition against which the client filed an appeal before the Delhi High Court.

The Delhi High Court held that the district court was wrong in deciding the disputed question of fact (of jurisdiction) without allowing parties to lead depositions supported by documentary evidence, cross examination and framing of an issue to determine whether there exists territorial jurisdiction of Delhi courts. On this basis the Delhi High Court remanded the matter back to the district court of Karkardooma with directions that the district judge would now mark the objections under Section 34 to a competent court for disposal.

Against this order, a challenge was raised before the Supreme Court where court examined the nature of its jurisdiction in a Section 34 challenge to an award. The appellant (client) argued that both the bye laws and the agreement contained an exclusive jurisdiction clause for Mumbai, that a mini trial was impermissible under Section 34 and that the only proof that could be allowed would be in the form of affidavits setting only the new facts that arose before the arbitrator that did not form a part of the record. The Appellant relied on the decision of Indus Mobile Distribution Pvt. Ltd. v. Datawind Innovations Pvt. Ltd. and Ors.² (“Indus Mobile”) The Respondent argued that the seat of arbitration was Delhi and that therefore Delhi courts would have exclusive jurisdiction.

The Supreme Court firstly relying on the Indus Mobile decision held that given the exclusive jurisdiction clause, the courts of Mumbai would alone have jurisdiction to hear a Section 34 petition. The next question was as to whether in a Section 34 application, evidence may be led, issues framed and a matter may be decided in the form of a mini trial. In arriving at its decision, the Supreme Court examined a number of decisions of various high courts and in particular its own decision in the case of Fiza Developers & Inter-Trade Pvt. Ltd. v. AMCI (India) Pvt. Ltd. and Anr.³ (“Fiza Developers”). The case of Fiza Developers had held that a Section 34 challenge is in the nature of a summary proceeding and that although evidence can be led in such matters, no issues are framed. The question before the Supreme Court in the present case was also regarding the nature of a Section 34 petition.

The Supreme Court other than considering decisions of various courts also considered the newly proposed amendment to Section 34 in the 2018 Amendments to the Act which aims at substituting the words “furnishes proof that” with “establishes on the basis of the record of the arbitral tribunal that” thereby indicating that the matter is required to proceed on the basis of the documents and evidence on record and that fresh evidence would not be taken at that stage.

The court also emphasized on the language of Section 34 (5) and (6) which indicates that a Section 34 challenge application should be served on the other side and prior notice given and ideally be completed within a period of 1 year thereby further indicating that the proceedings are to be expeditious and of a summary nature, not contemplating any trial. The court was of the view that the whole object of expeditious disposal would be defeated if framing of issues were to be allowed and in fact if the 2018 amendments were to be enacted, evidence would be done away with altogether. On this basis the Supreme Court overturned a decision of the Punjab and Haryana High Court in M/s Punjab State Industrial Development Corporation v. Mr. Sunil K. Kansal⁴ on the basis that the detailed trial process it contemplated under Section 34 was untenable under the new Act. The court also altered the reading of Fiza Developers to hold that evidence should not be taken and cross examination should not be conducted at the Section 34 stage ordinarily. However if the issues to be addressed are relevant in the context of Section 34(2)(a), and such evidence is not ordinarily on record, parties may file affidavits on the basis of which the matter may proceed without cross-examination and in exceptional cases cross examination may be considered. Even in those the entire proceeding should be conducted keeping the timeline of 1 year set out in Section 34 (6). On this basis the court set aside the decision of the Delhi High Court and reinstated the decision of the district court.

This case deals with an important question. There may be aspects of a Section 34 proceeding which require evidence to be led such as any evidence regarding the conduct of the proceeding by the arbitrator involving denial of natural justice, issues regarding how the arbitrator may have exceeded his jurisdiction etc. Still other issues require leading evidence such as reasons that may have come to the notice of a party giving rise to justifiable doubt regarding the independence of an arbitrator all of which will require evidence and cross examination to prove. In all such cases, the nature of the Section 34 proceeding becomes relevant and leading evidence (including cross examination given the serious nature of the allegations) becomes critical. However given that such petitions have been languishing in courts for several years, narrowing down the scope of their application and exercise will certainly go a long way in expediting matters and truly complying with the spirit of Section 34 (6). The court has done well in leaving the window of limited evidence open in cases where there is a compelling need to so lead it.