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Ms. Batul Barodawala
Mr. Drushan Engineer
Ms. Ishita Mishra
Mr. Mahim Sharma
Ms. Rhea Sethi

The Supreme Court in M/s. Canara Nidhi Limited v. M. Shashikala and Others (decided on September 23, 2019) held that in proceedings under Section 34 of the Arbitration and Conciliation Act, 1996 (“Act”), additional evidence can be permitted to be adduced only in exceptional circumstances.

M/s. Canara Nidhi Limited (“Appellant”) is a financial institution that had advanced a secured loan to M. Shashikala, (“Respondent”), the agreement of which was subject to an arbitration clause. On failure to repay the loan, the matter was referred to arbitration. Before the arbitrator, both the parties adduced oral and documentary evidence and an award was passed in the favor of the Appellant. In the Application under Section 34 of the Act in the Court of District Judge, Mangalore, the Respondent filed an application under Section 151 of the Civil Procedure Code (“CPC”) to permit the Respondent to adduce evidence against which the Appellant filed objections. The District Judge dismissed the application holding that there was no necessity of adducing fresh evidence and the grounds urged can be met by perusing the records of the arbitration proceedings.

The Respondent then filed writ petitions before the Hon’ble Karnataka High Court under Articles 226 and 227 of the Constitution of India, which relying on the decision in Fiza Developers and Inter-Trade Private Limited v. AMCI (India) Private Limited and Another [(2009) 17 SCC 796] (“Fiza Developers”) set aside the order of the District Judge, and directed the Judge to “recast the issues”, allowing the Respondent to file affidavits of their witnesses and allow their cross-examination. Aggrieved by this judgment, the Appellant moved a Special Leave Petition before the Supreme Court.

Whether in an application under Section 34 of the Act seeking to set aside the arbitration award, the parties can adduce evidence to prove any of the specified grounds under sub-section (2) of Section 34 of the Act?

The Appellant submitted that proceedings under Section 34 of the Act is summary in nature with a limited scope, and the validity of the award has to be decided on the basis of materials produced before the arbitrator, with no scope for adducing fresh evidence before the court. Further, the High Court misread the ratio of the Supreme Court in Fiza Developers, and in any event, no exceptional grounds for permission to lead fresh evidence in the proceedings under Section 34 were made out. Additionally, the High Court has erred in interfering with the order passed by the trial court.

The counsel for the Respondent reiterated the finding of the High Court and submitted that in order to prove the grounds stated in the application filed under Section 34, adducing additional evidence is necessary. It was submitted that the scope of enquiry in the proceedings under Section 34 is restricted to a consideration whether any of the grounds mentioned, inter alia, in Section 34(2) were made out. The Respondent sought to adduce evidence to prove the grounds enumerated under Section 34(2)(a) of the Act as they were specific and therefore, necessarily need an opportunity to adduce evidence to plead and prove the grounds.

Further, the counsel for the Respondent submitted that in view of Rule 4(b) of the High Court of Karnataka Arbitration (Proceedings before the Courts) Rules, 2001, all the proceedings of the CPC shall apply to such proceedings filed under Section 34 of the Act, insofar as they could be made applicable.

The Hon’ble Supreme Court first pointed out that the Rule 4(b) of the Karnataka High Court Arbitration Rules are only procedural, and the Supreme Court in Fiza Developers made it clear that there is no wholesale or automatic import of all the provisions of the CPC into the proceedings under Section 34 of the Act as that will defeat the very purpose and object of the Act. It then considered the dicta in Fiza Developers which concerned whether the issues as contemplated under Order XIV Rule 1 of CPC should be framed in the application under Section 34 of the Act. The Court came to the conclusion that such framing of issues was not required in a Section 34 application, which proceeding is summary in nature. However, an opportunity to the aggrieved has to be afforded to prove the existence of any of the grounds under Section 34(2) of the Act, thus, allowing the filing of the affidavits.

The Supreme Court however, then observed that subsequent to the decision in Fiza Developers, section 34 was amended by Act 3 of 2016 adding sub-sections (5) and (6) that specified the time period of one year for the disposal of the application under Section 34. Additionally, noting the inconsistent practices subsequent to the Fiza Developers judgment, the Justice B. N. Srikrishna Committee suggested an amendment to Section 34(2)(a) of the Act substituting the words ‘furnishes proof that’ with the words ‘establishes on the basis of the Arbitral Tribunal’s record that’, which was implemented by the Arbitration and Conciliation (Amendment) Act, 2019.

The Supreme Court then relied on its judgment in Emkay Global Financial Services Limited v. Girdhar Sondhi [(2018) 9 SCC 49] (“Emkay”) which stated that the Fiza Developers judgment must now be read in light of the amendments made in Section 34(5) and 35(6) of the Act, and noted that speedy resolution of arbitral disputes is the object of the Act and its amendments. Therefore, “if issues are to be framed and oral evidence taken in a summary proceeding under Section 34, this object will be defeated.

The Supreme Court in relying on Emkay thus, concluded that “Section 34 application will not ordinarily require anything beyond the record before the arbitrator and that cross-examination of persons swearing in to the affidavits should not be allowed unless absolutely necessary.”

On applying the established principles, the Supreme Court concluded that there are no specific averments in the affidavit filed under Section 151 of the CPC as to the necessity and relevance of the additional evidence sought to be adduced. It did not indicate the aim of adducing additional evidence or state the specific documents or evidence required. Additionally, considering the objective of the Act, the summary nature of proceedings, and the fact that parties had sufficient opportunity to adduce oral and documentary evidence, the Supreme Court noted that the grounds urged in the application can very well be considered by the evidence adduced in the arbitration proceedings, and that the Respondents have not made out grounds that it is an exceptional case to permit them to adduce evidence.

Further, the High Court directions amount to retrial on the merits of the issues decided by the arbitrator, and the High Court in exercise of its supervisory jurisdiction under Articles 226 and 227 of the Constitution, ought not to have interfered with the order of the District judge, when it did not suffer from perversity.

Allowing the appeals, the order passed by the High Court was set aside and the order of the District Judge was affirmed. The District Judge was directed to dispose of the application under Section 34 of the Act, expeditiously in accordance with law.

Vaish Associates Advocates View
The Supreme Court has maintained the sanctity of the arbitration process by unconditionally stating the principle of “exceptional circumstances” to be applied to applications under Section 34 of the Act, in order to adduce additional evidence at that stage. Although the Supreme Court has not clearly enunciated what the principles of exceptional circumstances are, it has created ample safeguards by holding that the grounds under Section 34(2) of the Act will have to be proved from the record of the arbitral tribunal, and the need for new evidence to prove these grounds is an untenable submission.

It has been further clarified that a summary procedure shall be applicable to Section 34 applications, and as the CPC does not strictly apply to such proceedings, leading evidence would be a matter of exception. Extraordinary factual circumstances will have to be demonstrated for this exception to be allowed by the courts.

For more information please write to Mr. Bomi Daruwala at [email protected]