Arbitral award passed after long delay, without resolving dispute, violates public policy: Supreme Court

The Supreme Court has ruled that an arbitral award passed after undue and unexplained delay without resolving the dispute at hand, can be set aside for violating public policy [Lancor Holdings Limited v. Prem Kumar Menon and ors].

A Bench of Justices Sanjay Kumar and Satish Chandra Sharma held that while delay alone is insufficient to invalidate an arbitral award, unexplained delay that adversely impacts the final outcome of the arbitration would render it contrary to public policy.

The Court made the observation while setting aside an arbitral award delivered after nearly four years of delay, which ultimately failed to resolve the dispute.

"The very basis and public policy underlying the process of arbitration is that it is less time-consuming and results in speedier resolution of disputes between the parties. If that premise is not fulfilled by an unworkable arbitral award that does not resolve the disputes between the parties, on one hand, leaving them with no choice but to initiate a fresh round of arbitration/litigation but the arbitrator, in the meanwhile, also changed their positions, irrevocably altering the pre-existing balance between the parties prior to the arbitration, then such an arbitral award would not only be in conflict with the public policy of India but would also be patently illegal on the face of it," the October 31 ruling said.

The Bench added that it was utterly shocked by the arbitrator's "wavering attitude" in this case, and the undue delay involved, which the Court noted had culminated in a "rudderless" arbitral award.

"Owing to the pointless Award passed by him with a delay of nearly 4 years, the parties were left with no option but to litigate once again in relation to a contract dating back to the year 2004! The Award is, therefore, liable to be set aside as it is in clear conflict with the public policy of India and is also patently illegal," it said.

In this case, the Court observed that the arbitrator ultimately concluded that no equitable relief could be offered to satisfy both parties.

However, he also passed several interim directions in favour of one party which eventually left them in a better position. The other side was left with no option but to start litigating again or seek arbitration afresh.

"He (the arbitrator) conveniently opined that proper pleadings and evidence had not been placed before him and, therefore, he was constrained to relegate the parties to another round of litigation, ignoring the fact that he had already altered their positions and had benefitted one party at the expense of the other," the Court noted.

The Court said that such an approach defeats the goal of arbitration being an alternative to the time-consuming process of litigation.

"This approach on the part of the Arbitrator, after dithering for nearly 4 years, served absolutely no purpose and reflected total non-application of mind. The delay in the making of the Award resulted in nearly four valuable years passing away with no benefit to show for it. When the public policy underlying resort to arbitration is to make it a time-saving mechanism for resolving disputes, this unexplained and pointless delay of the Arbitrator in concluding the matter clearly pitted his ineffective and futile Award against the public policy of India," the Court said.

The Court further noted that the delay on the arbitrator's part had also clearly made it harder for him to finally decide the dispute.

"The repetitions ad nauseam in the Award and the vacillation by the Arbitrator as to what he should do clearly manifest that the delay on his part contributed to his demonstrable indecisiveness," it observed.

The Court ultimately set aside the arbitral award, and also invoked Article 142 of the Constitution to direct a ₹10 crore settlement in the 21-year-old property dispute.

The dispute arose from a Joint Development Agreement dated December 17, 2004, between Lancor Holdings Limited and three brothers for developing 1.116 acres of land in Chennai into a commercial building named "Menon Eternity."

The developer was to construct the building and deliver 50 per cent of the built-up area to the landowners free of cost, receiving in return a 50 per cent share in both land and building. The developer deposited ₹6.82 crores as security deposits.

The dispute concerned whether construction was completed as per the agreed terms. A controversy arose when the developer executed five sale deeds in its own favor on December 19, 2008, using a photocopy of a power of attorney while the original remained with the escrow agent, violating certain agreement terms.

Retired Justice KP Sivasubramaniam was appointed as an arbitrator in 2009 to resolve the disputes between the parties. He reserved his verdict on July 28, 2012, but pronounced it only about three years and eight months later, on March 16, 2016. The arbitrator declared the sale deeds executed by the company as illegal but rejected all monetary claims and counter-claims. He also directed the warring parties to "take appropriate further proceedings in accordance with law" through courts or fresh arbitration.

The case then went to the Madras High Court, before it eventually reached the Supreme Court, which set aside the arbitral award for violating public policy and being patently illegal.

Rather than relegating parties to go through another round of arbitration or litigation, the top court also opted to settle the dispute itself.

It validated the developer's sale deeds but penalized the company by holding that its ₹6.82 crore security deposit would stand forfeited. The Court also directed the company to pay ₹3.18 crores as compensation to landowners, bringing the total amount payable by the company to about ₹10 crores.

"This arrangement would bring the curtains down and end this litigation while doing justice to both parties, who would otherwise be required to initiate a fresh round of arbitration/litigation, involving more time and money," the Court said.

Lancor Holdings was represented by Senior Advocates Abhishek Manu Singhvi and Siddharth Bhatnagar with Advocates Amol Chitale, Pragya Baghel, Kalyani Bhide Gharote, Shrika Gautam, Yuvraj Kashyap, Nadeem Afroz, and Sarthak Sharma.

The respondents were represented by Senior Advocates Aryama Sundaram and PB Suresh with Advocates Gireesh Kumar, Ankur S Kulkarni, Vipin Nair, Sanjay Singh, Tarun, Varun Kanwal, Rohini Moosa, Zafar J., Udayaditya Banerjee, Aditya Narendranath, M.B. Ramya, Deeksha Gupta, Madhavi Yadav, V. Krithi Sahitya, and Saday Mondal.

[Read Judgment]