Section 34 Court Cannot Substitute Arbitrator’s Plausible View With Its Own; Not Bound By Technical Rules Of Evidence Act: Madras High Court

"Section 34 Court cannot substitute its own views or the views of the parties in place of the view taken by the learned Arbitral Tribunal, if the view taken by the learned Arbitrator is not in conflict with the settled legal position," Madras High Court, in a decisive ruling, held that a court exercising jurisdiction under Section 34 of the Arbitration and Conciliation Act, 1996, cannot act as a court of appeal to re-appreciate evidence or substitute the Arbitrator's plausible view with its own.

A bench of Justice P. Velmurugan and Justice K. Govindarajan Thilakavadi observed that as long as the Arbitrator’s conclusion is a possible one based on the records, it does not suffer from "patent illegality" warranting judicial interference.

The case involved a dispute between India Cements Ltd (ICL) and Zuari Cement Ltd (ZCL) over a 'Marketing Agreement' which ICL claimed was a sham document intended as a mechanism to pay additional consideration for a share purchase transaction. While the Arbitrator awarded 50% of the claim to ICL, a Single Judge of the High Court had previously set aside the award, prompting this appeal.

The primary legal issues before the court were whether the technical bars under Sections 91 and 92 of the Indian Evidence Act, 1872, apply to arbitration proceedings and whether an award can be set aside on the ground of Section 77 of the Companies Act, 1956. The court was also called upon to determine the limits of judicial interference under Section 34 in the context of the 2015 Amendment.

Arbitral Tribunal Not Bound By Technical Procedures Of Evidence Act

The court emphasized that under Section 19 of the Arbitration and Conciliation Act, the Arbitral Tribunal is not bound by the Code of Civil Procedure or the Indian Evidence Act. The bench noted that while tribunals must adhere to the principles of natural justice, they are bestowed with the power to determine the admissibility, relevance, and weight of any evidence presented during the proceedings.

The judges drew sustenance from various precedents to hold that technical rules of evidence do not apply strictly to arbitration. The court observed that the Arbitral Tribunal was justified in looking beyond the written contract to understand the true nature of the transaction between the parties, especially when it was alleged that the document was a sham.

Oral Evidence Admissible To Prove True Nature Of 'Sham' Agreements

Responding to the argument that oral evidence cannot vary the terms of a written contract, the Court held that Sections 91 and 92 of the Evidence Act do not create a legal bar in arbitration to disclose the real nature of a transaction. The bench noted that Section 92 applies only to dispositive terms and does not prevent a party from showing that a document was never intended to be acted upon.

The court found that the Arbitrator correctly relied upon prior correspondence and antecedent circumstances to appreciate the transaction. The bench observed that if a marketing agreement was merely a "camouflage" for the payment of share consideration, the Arbitrator was well within his rights to admit evidence to that effect to maintain fairness and reasonableness in the procedure.

"Section 92 applies only to dispositive documents and evidence can be let in to show the real nature of transaction in respect of which the agreement was executed by the parties."

Violation Of Section 77 Companies Act Not A Total Prohibition

On the issue of Section 77 of the Companies Act, 1956, which deals with a company's purchase of its own shares, the court held that the provision is intended to prevent market manipulation and deception of the public. The bench agreed with the Arbitrator that the transaction in question did not aim to deceive the public but was a structured mechanism for payment.

Furthermore, the High Court pointed out that any violation of Section 77 is a compoundable offence under the Act, carrying a nominal fine. Therefore, the bench held that it cannot be contended that a claim for payment structured as a marketing agreement is void or hit by a total statutory prohibition that would render an arbitral award patently illegal.

Scope Of Judicial Interference Strictly Limited Post-2015 Amendment

The Court provided an extensive analysis of the 2015 Amendment to Section 34, noting that the ground of "patent illegality" is now restricted to illegalities that go to the root of the matter. The bench clarified that a mere erroneous application of law or a requirement to re-appreciate evidence is no longer a valid ground for setting aside a domestic award.

The judges reiterated the principles laid down in Ssangyong Engineering, stating that courts cannot substitute their views for those of the arbitrator. The bench observed that the Arbitrator had properly appreciated the facts, conducted a due analysis of the evidence, and reached a reasoned conclusion that was clearly a plausible view of the dispute.

"The Section 34 Court cannot substitute its own views or the views of the parties in place of the view taken by the learned Arbitral Tribunal, if the view taken by the learned Arbitrator is not in conflict with the settled legal position."

The Division Bench concluded that the respondent had miserably failed to demonstrate any patent illegality in the award. By restoring the Arbitrator's decision to award Rs. 26.40 Crores to India Cements Ltd, the Court reaffirmed the principle of minimal judicial interference in arbitration and the autonomy of the Arbitral Tribunal in matters of evidence and fact-finding.

Date of Decision: 05 June 2026