The Calcutta High Court has delivered a critical judgment on the standards of judicial scrutiny applicable to arbitral awards under Section 34 of the Arbitration and Conciliation Act, 1996. The Court held that awards based on non-existent evidence are perverse and must be set aside, reinforcing the principle that arbitral tribunals cannot rely on documents never produced or verified.
Background & Facts
The Dispute
The appellant, Sikha Basu, opened a demat account with the respondent, BMA Wealth Creators Limited, for trading in securities on the National Stock Exchange. Disputes arose regarding unauthorised trades allegedly conducted by the respondent in the appellant’s demat account between February 7, 2014, and November 1, 2014. The appellant claimed these trades were not authorised and resulted in financial losses, leading to arbitration proceedings as mandated by the National Stock Exchange’s rules.
Procedural History
The arbitration followed a two-tier process:
- First Arbitral Tribunal (December 29, 2015): Dismissed the appellant’s claim, relying on the purported production of Electronic Contract Notes (ECNs) for the disputed period.
- Second Arbitral Tribunal (May 10, 2016): Upheld the first award without independently verifying the existence of the ECNs.
- Single Judge (June 26, 2020): Dismissed the appellant’s challenge under Section 34 of the Arbitration Act, 1996, affirming the awards.
The Parties' Positions
The appellant contended that the ECNs for the disputed period were never produced before any forum, rendering the awards perverse. The respondent argued that the ECNs were annexed to its counter-statement of defence and that SMS communications proved the appellant’s awareness of the trades.
The Legal Issue
The central question was whether arbitral awards and subsequent judicial orders under Section 34 can be sustained if they rely on evidence - such as ECNs - that was never produced or verified during the proceedings.
Arguments Presented
For the Appellant
- The ECNs for the disputed period (February 7, 2014, to November 1, 2014) were never produced before the arbitral tribunals or the court.
- The first arbitral tribunal’s minutes of meeting dated September 24, 2015, initially recorded the production of ECNs but later scored out this entry, confirming their non-production.
- The counter-statement of defence referred to ECNs as Annexure-E, but these were missing from the record, establishing a material irregularity.
- Reliance was placed on the principle that awards based on non-existent evidence are perverse and liable to be set aside under Section 34.
For the Respondent
- The respondent claimed that the ECNs were annexed to its counter-statement of defence and that the appellant’s ignorance of the trades was disproved by SMS communications.
- Cited Punjab State Civil Supplies Corporation Limited v. Sanman Rice Mills (2024 SCC OnLine SC 2632) to argue that the scope of interference under Section 37 is limited to the grounds under Section 34.
- Contended that the appellant’s challenge was meritless as the arbitral tribunals had considered the evidence.
The Court's Analysis
The Court conducted a meticulous examination of the record and held that the awards were vitiated by perversity due to reliance on non-existent evidence. Key observations included:
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Non-Production of ECNs: The Court noted that the ECNs for the disputed period were never produced before the arbitral tribunals, the Section 34 court, or the High Court. The respondent’s counter-statement of defence referred to ECNs as Annexure-E, but these were absent from the record. The minutes of the first arbitral tribunal’s meeting dated September 24, 2015, initially recorded the production of ECNs but later scored out this entry, confirming their non-production.
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Perversity of Awards: The Court held that the first arbitral tribunal’s finding that ECNs were produced was perverse, as no reasonable person could arrive at such a conclusion based on the record. The second arbitral tribunal and the Section 34 court erred by relying on the first tribunal’s flawed finding without independent verification.
"The first arbitral Tribunal recorded that ECNs were produced and considered but records establish otherwise. Finding of the first arbitral Tribunal on such score, is perverse. No person with ordinary prudence can arrive at such a finding as recorded by the first arbitral Tribunal."
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Scope of Interference Under Section 34: The Court reiterated that awards based on no evidence or perverse findings can be interfered with under Section 34. It distinguished Punjab State Civil Supplies Corporation Limited by emphasising that the limited scope of Section 37 does not preclude interference where the award itself is vitiated by perversity.
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Burden of Proof: The Court implicitly placed the burden on the respondent to substantiate its claims with documentary evidence. The failure to produce the ECNs, despite referring to them in pleadings, was fatal to the respondent’s case.
The Verdict
The Calcutta High Court allowed the appeal, setting aside:
- The award dated December 29, 2015, passed by the first arbitral tribunal.
- The award dated May 10, 2016, passed by the second arbitral tribunal.
- The order dated June 26, 2020, passed by the Single Judge under Section 34.
The Court held that the awards were perverse as they were based on non-existent evidence, warranting interference under Section 34 of the Arbitration Act, 1996.
What This Means For Similar Cases
Arbitral Awards Must Be Based on Verifiable Evidence
- Documentary Evidence is Critical: Parties must ensure that all documents relied upon in arbitration proceedings are actually produced and verified. Mere references to documents in pleadings or minutes will not suffice if the documents are missing from the record.
- Tribunals Must Scrutinise Evidence: Arbitral tribunals must independently verify the existence and authenticity of documents before relying on them. Failure to do so may render the award perverse and liable to be set aside.
Perverse Awards Are Liable to Be Set Aside
- Section 34 Grounds: Courts will interfere under Section 34 if an award is based on no evidence or perverse findings. Practitioners should argue perversity where tribunals rely on documents never produced or verified.
- Limited Scope of Section 37: Appeals under Section 37 are restricted to the grounds under Section 34. However, this does not shield awards based on non-existent evidence from scrutiny.
Procedural Compliance Is Non-Negotiable
- Annexures to Pleadings: Parties must ensure that all annexures referred to in pleadings are actually filed and form part of the record. Missing annexures can vitiate the entire proceedings.
- Minutes of Meetings: Arbitral tribunals should maintain accurate and unaltered minutes of proceedings. Scored-out entries or discrepancies in minutes can undermine the award’s validity.
Practitioners should take note of the following actionable points:
- For Claimants: Always verify that the opposing party has produced all documents relied upon in its pleadings. Challenge awards based on non-existent evidence under Section 34.
- For Respondents: Ensure that all documents referred to in pleadings are actually filed and available for scrutiny. Failure to do so may result in the award being set aside.
- For Arbitrators: Independently verify the existence and authenticity of documents before relying on them. Maintain accurate and unaltered records of proceedings.
