In a significant ruling reaffirming the principles governing arbitration in India, the Supreme Court, in Punjab State Civil Supplies Corporation Ltd. & Anr. v. M/S Sanman Rice Mills & Ors., has overturned a decision of the Punjab and Haryana High Court that had set aside an arbitral award. The Supreme Court emphasized that judicial interference in arbitration awards should be minimal, and courts should not disturb the findings of an arbitral tribunal unless the award is in conflict with public policy or contains serious legal flaws.
Background of the Case
The dispute arose from a contract dated October 6, 2008, between the Punjab State Civil Supplies Corporation Ltd. (PUNSUP) and M/S Sanman Rice Mills. Under this agreement, PUNSUP supplied paddy to the Rice Mill for milling. However, after milling, there was a significant shortfall in the rice supplied back to the corporation. Specifically, the Rice Mill failed to return rice equivalent to 35,110.39 quintals of paddy, valued at ₹7,16,15,716.
Sanman Rice Mills paid ₹5 crore through several cheques, leaving a balance of ₹2,16,15,716. The dispute regarding this balance was referred to arbitration, where the arbitrator awarded ₹2,67,66,804 in favor of PUNSUP along with interest at 12% per annum.
The award was challenged by Sanman Rice Mills before the Additional District Judge under Section 34 of the Arbitration and Conciliation Act, 1996 (the Act), but the challenge was dismissed. The Rice Mill subsequently appealed to the High Court under Section 37 of the Act, which set aside both the arbitral award and the order under Section 34. PUNSUP then appealed to the Supreme Court.
Legal Issues Involved
The primary legal question before the Supreme Court concerned the scope of judicial intervention under Sections 34 and 37 of the Arbitration Act. The Court had to decide whether the High Court was justified in interfering with the arbitral award, especially given that the trial court had already upheld the award under Section 34.
The Court underscored that the Arbitration Act seeks to provide an effective and quick alternative to traditional litigation, with limited room for judicial interference. Section 5 of the Act makes it clear that courts can only intervene in arbitration proceedings in the specific circumstances outlined in the Act.
Supreme Court’s Decision
A bench comprising Justice Pamidighantam Sri Narasimha and Justice Pankaj Mithal allowed the appeal filed by PUNSUP, restoring the arbitral award and setting aside the High Court’s judgment. The Court held that the High Court had overstepped its jurisdiction by reassessing the merits of the award, a task reserved for the arbitrator. The Supreme Court reiterated that the scope of interference under Sections 34 and 37 of the Act is extremely narrow.
Quoting from previous judgments, the Court observed:
“When the arbitrator has applied his mind to the pleadings, the evidence adduced before him, and the terms of the contract, there is no scope for the court to reappraise the matter as if this were an appeal, and even if two views are possible, the view taken by the arbitrator would prevail.”
The Court further elaborated that even if the award appeared unreasonable or contained some errors, it would not be a sufficient ground for the courts to intervene. The interference is permissible only in cases where the award is against public policy or contains patent illegality.
Key Observations by the Court
– Finality of Arbitration: The Supreme Court emphasized that the purpose of arbitration is to offer a final and binding resolution to disputes, and frequent judicial interference would defeat this objective.
– Limited Scope under Section 37: The appellate powers under Section 37 are limited to examining whether the trial court exceeded its jurisdiction under Section 34. The Court cannot reassess the merits of the arbitral award.
Citing its own previous decision in MMTC Limited v. Vedanta Limited, the Court remarked:
“The court does not sit in appeal over the arbitral award and may interfere on merits on the limited ground provided under Section 34(2)(b)(ii) i.e., if the award is against the public policy of India. Interference under Section 37 cannot travel beyond the restrictions laid down under Section 34.”
Case Details:
– Case Name: Punjab State Civil Supplies Corporation Ltd. & Anr. v. M/S Sanman Rice Mills & Ors.
– Case No.: Civil Appeal No. of 2024 (arising out of SLP (C) No. 27699 of 2018)
– Bench: Justice Pamidighantam Sri Narasimha, Justice Pankaj Mithal
– Lawyers: Advocates representing the parties included counsel for PUNSUP and counsel for M/S Sanman Rice Mills.
