RECOURSE AGAINST ARBITRAL AWARD: SECTION 34 OF ARBITRATION & CONCILIATION ACT, 1996

By: -- Shrijan Shukla

 

“With the opening of the economy and the simplification of procedures, the need for harmonization of laws can never be over-emphasized unless necessary changes are introduced in the relevant laws ....... The updating and streamlining of economic laws is undoubtedly imperative, but that by itself may not be enough unless it is backed by an effective dispute resolution system...................... The outdated Arbitration Act is no solace because arbitration often proves to be an expensive added cycle to litigation.............. The judiciary is sensitive to the need for early resolution of disputes for a successful implementation of the economic reforms1.” As, one can infer from the statement of the then CJI mentioned above, that the need of the hour is the change in the old Arbitration & Conciliation Act, 1940 & as a result of this the new act of Arbitration & Conciliation Act, 1996 was enacted.

As, the Section 352 of the Arbitration & Conciliation Act, 1996 deals with the finality of the award passed by an arbitral tribunal. But at the same time it also sets some conditions where the party can approach the court for the recourse against the arbitral award, which has been delivered by the Arbitral Tribunal.

Arbitration comes into being as a result of an enforceable agreement.  An agreement enforceable under law is called a contract3 .  To be enforceable the agreement must be made by free consent of the parties.  Parties are said to consent when they agree upon the same thing in the same sense.  Consent can be said to be free when it is not induced by coercion, undue influence, fraud, mis-representation or mistake as to matter of fact essential to the agreement4 . An arbitration agreement is void if a party is a minor or is not of sound mind or is disqualified from contracting by any law to which he is subject.  When both the parties to the agreement are under a mutual mistake as to a matter of fact essential to the agreement, the agreement is void.  An arbitration agreement of which the object or consideration is unlawful is void.  The consideration or object is unlawful if it is forbidden by law or is of such a nature that if permitted it would defeat the provisions of any law or is fraudulent or involves or implies injury to the person or property of another or the courts regard it as immoral or opposed to public policy. After that, the valid notice must be served to the parties, before the award is made. The arbitral tribunal constituted for the delivery of the award of the dispute must be a valid constitution & should be in compliance with the Chapter III of the Arbitration & Conciliation Act, 1996. Lastly, the award passed by the arbitral tribunal must not be in conflict with the public policy laid down for the development of the common public. These are the grounds on which the individual can approach the court for setting aside the arbitral award.

BACK DROP OF S.34: -- Section 30(a) of the Arbitration & Conciliation Act, 1940 opens with the restrictive wording: “an arbitral award shall not be set aside except on one or more” of the three grounds set forth in it. These grounds were: --

  1. An arbitrator or umpire has misconducted himself or the proceeding.
  2. An award has been made after the issue of on order by the court superseding the arbitration or after arbitration proceedings have become invalid under S.35, &
  3. An award has been improperly procured or is otherwise invalid.

Whereas S.16 (1) of the 1940 Act, empowers the court to remit the award to the arbitral tribunal for reconsideration. But now this two sections i.e. Sec. 30 & 16 (1) of the 1940 act has now been replaced by Sec. 34 of the Arbitration & Conciliation Act, 1996. this provision reinforces the current trend in the Indian law to allow judicial scrutiny of the merits of arbitral awards only on an exceptional basis. As, it can be inferred from the various judicial pronouncements of the courts.

JUDICIAL DEVELOPMENTS : -- The convenient point for beginning the discussion of judicial developments relating to setting aside arbitral awards may be the decision of Privy Council in Champsey Bhara & Co. v. Jivraj Balloo Spg & Wvg Co. ltd.5. Dealing with the corresponding provisions under the Arbitration Act, 1889, Lord Dunedin said “Court has no jurisdiction to investigate into the merits of the case or to examine the documentary & oral record for the purpose of finding out whether or not the arbitrator has committed an error of law”. Following the same decision the SC has also stated “The award of the arbitrator is ordinarily final & conclusive, unless a contrary intention is disclosed by the agreement”6 . The award is the decision of a domestic tribunal chosen by the parties, & the civil courts which are entrusted with the power to facilitate arbitration & to effectuate the awards.

As, the SC has said in the case of Sudarsan Trading Co. v. Govt. of Kerala7 the extend of the court's intervention is limited to the determination, whether there is a distinction between disputes as to the jurisdiction of the arbitrator, & the dispute as to in what way that jurisdiction should be exercised.

Even in the award where the reasoning has been given by the tribunal, the court will usually not intervene, unless the reasons asr totally preserve, or the judgement is based on a wrong proposition of law. As in the case of State of U.P. v. Allied Construction8 the arbitrator made a speaking order supported by cogent reasons. He interpreted the arbitration clause in the contract, having regard to the fact of the case. The SC, noted that the award was a speaking one, & the arbitrator had assigned sufficient & cogent reason to support it. Interpretation of a contract is a matter for the arbitrator to determine. As the provision of the .30 of the Arbitration Act, 1940 are restrictive in operation, an award cannot be set aside unless one of the other conditions contained in that provision is satisfied. Following this desion only the Supreme Court of India has affirmed the arbitral award in Hari Om Maheshwari v. Vinitkumar Parikh9.

Similarly, in Indian oil Corp. v. Indian Carbon Ltd10 . the court observed that where reasons for giving the award are stated in the award & no error of law could be pointed out in those reasons, & the view taken by the arbitrator was a possible view to take, & when the arbitrator has made his mind known on the basis of which he has acted, then the requirements of reasoned award would be met sufficiently & the award would not be liable to be set aside merely because a detailed judgment had not been given. In Rajasthan State Mines & Minerals Ltd. v. Eastern Engineering Enterprises11 a case under S.30 of the Act of 1940, on an exhaustive review of the earlier dicta, a two judge bench of the SC set forth the following guidelines for the courts in reviewing the arbitral awards: --

(a)  It is not open to the Court to speculate, where no reasons are given by the arbitrator, as to what impelled arbitrator to arrive at his conclusion.

(b)  It is not open to the Court to admit to probe the mental process by which the arbitrator has reached his conclusion where it is not disclosed by the terms of the award.

(c)  If the arbitrator has committed a mere error of fact or law in reaching his conclusion on the disputed question submitted for his adjudication then the Court cannot interfere.

(d)  If no specific question of law is referred, the decision of the Arbitrator on that question is not final, however much it may be within his jurisdiction and indeed essential for him to decide the question incidentally. In a case where specific question of law touching upon the jurisdiction of the arbitrator was referred for the decision of the arbitrator by the parties, then the finding of the arbitrator on the said question between the parties may be binding.

(e)  In a case of non-speaking award, the jurisdiction of the Court is limited. The award can be set aside if the arbitrator acts beyond his jurisdiction.

(f)  To find out whether the arbitrator has traveled beyond his jurisdiction, it would be necessary to consider the agreement between the parties containing the arbitration clause. Arbitrator acting beyond his jurisdiction--Is a different ground from the error apparent on the face of the award.

(g) In order to determine whether arbitrator has acted in excess of his jurisdiction what has to be seen is whether the claimant could raise a particular claim before the arbitrator. If there is a specific term in the contract or the law which does not permit or give the arbitrator the power to decide the dispute raised by the claimant or there is a specific bar in the contract to the raising of the particular claim then the award passed by the arbitrator in respect thereof would be in excess of jurisdiction.

(h)  The award made by the Arbitrator disregarding the terms of the reference or the arbitration agreement or the terms of the contract would be a jurisdictional error which requires ultimately to be decided by the Court. He cannot award an amount which is ruled out or prohibited by the terms of the agreement. Because of specific bar stipulated by the parties in the agreement, that claim could not be raised. Even if it is raised and referred to arbitration because of wider arbitration clause such claim amount cannot be awarded as agreement is binding between the parties and the arbitrator has to adjudicate as per the agreement.

(i) The arbitrator could not act arbitrarily, irrationally, capriciously or independently of the contract. A deliberate departure or conscious disregard of the contract not only manifests the disregard of his authority or misconduct on his part but it may tantamount to mala fide action.

(j) The arbitrator is not a conciliator and cannot ignore the law or misapply it in order to do what he thinks just and reasonable; the arbitrator is a tribunal selected by the parties to decide the disputes according to law.

Therefore, the principles evolved by the courts under S. 16 & 34 of the Act, 1940 will apply to the scope of jurisdiction of the reviewing court under S.34 (2) of the Act of, 1996. Accordingly, the reviewing court under S.34 (2) has to approach an award to support it, if it is reasonably possible, rather than to destroy it by terming it illegal12 .

RECOURSE AGAINST ARBITRAL AWARD: -- The purpose of arbitration is to ensure effective, quick and consensual decision making process avoiding the arduous process of courts. The need for such a procedure is greater in a country like India where delay has ingrained itself as part of the system of administration of justice. While arbitration is indeed a quick procedure, the interference by court in the process acts as a clog to its development. The enactment of the Arbitration Act, 1940, was a reflection of the legislature's determination to ensure speedy resolution of disputes. However, the 1940 Act, though sound in principle, was bogged down by procedural delays. There was no uniform procedure in terms of a unified code for the enforcement of foreign awards under the New York Convention and the Geneva Convention. The Foreign Awards (Recognition and Enforcement) Act, 1961 for the enforcement of arbitral awards under the New York Convention and the Arbitration (Protocol and Convention), Act 1937 hitherto held the field. With the adoption, by the United Nations Commission for International Trade Law of the UNCITRAL Model Arbitration Law and the subsequent adoption of the same by various countries in the world, it was but necessary that India adopt the Model Law to govern arbitrations and this saw the genesis of the more dynamic Arbitration and Conciliation Ordinance leading to the Arbitration and Conciliation Act, 1996. Whereas, the new Act of 1996, has consolidated and amended the law relating to arbitration and is comprehensive in the sense that it covers both domestic and foreign arbitrations.

ENFORCEMENT OF ARBITRAL AWARD: -- Under the 1996 Act, the procedure for enforcement stands simplified to a very great extent when compared to the provisions of the old Act. Section 35 of the new Act makes the award final and binding on parties and persons claiming under them. Section 36 provides for enforcement of the arbitral award as though it were a decree of the court, and a party is entitled to enforce the arbitral award, when the time for making an application to set aside the arbitral award had expired or such application having been made, had been refused. This saves the time spent under the old Act to make an award a decree of court. Therefore under the new Act, after an award is made or passed, the party in whose favor an award is made has nothing to do but just wait whereas under the old Act the winning party had to file an application within 30 days of receipt of the award for getting it made a rule of the court.

But, the Act of 1996 also provides the

RECOURSE AGAINST THE ARBITRAL AWARD: -- Sec.5 regulates the court intervention in the arbitral process. It provides that notwithstanding anything contained in any other law for the time being in force in India , in matters governed by Part I of the 1996 Act, the court will not intervene except where so provided in this part. The wordings of the bill introduced in the parliament, had the intention to carve the judicial interference in the arbitral proceedings. This act indented to reduce the legal challenge to arbitral award. As can be inferred from S. 35 of the Act13 which talks about the finality of the Arbitral Award. But Sec.34 of the act calls for the need of the judicial intervention as, the objection filed under Sec.34 of Arbitration & Conciliation Act, 1996 has to be first tested on the touchstone of the provisions of S.34 of the Act & only when the court finds that the objections raise3d in the petition are covered by any of the grounds mentioned therein, may the court consider the same & proceed to dispose them off on merits14 .Pursuant to this policy S.34 also imposes certain restrictions on the right of the courts to set aside an arbitral award. These grounds for challenge of an arbitral award are strictly limited. Indeed the five grounds contained in S.34(2) on which the party making the application to set aside the award is entitled to rely on, are concerned with largely procedural irregularities, either in the arbitral proceedings or in the award itself. If a challenge is successful, the award generally will be set aside, in whole or in part- although there is a possibility of ‘rescue' by remission to the arbitral tribunal for reconsideration. However the objection that the award has become null & void in view of subsequent agreement between the parties is not one of the grounds available under S.35(2) to challenge the award15 .

a. Where a party making the application was under some incapacity.

b. The arbitration agreement is not valid under the law to which the parties are subjected or failing such indication thereon, under the law for the time being in force.

c. The party making the application was not given proper notice of the appointment of arbitrators or of the Arbitral Tribunal or was otherwise unable to present his case.

d. Arbitral award deals with a dispute not contemplated by the parties or beyond the terms of submission.

e. Composition of the Arbitral Tribunal was not in accordance with the agreement of the parties.

f. Subject-matter of dispute is not capable of settlement by arbitration under the law for the time being in force.

g. The arbitral award is in conflict with the public policy of the country16.

RECOURCE AGAINST THE ARBITRAL AWARD: -- INCAPACITY OF THE PARTIES: -- The Indian Contract Act, 1872 purports to cover not only natural persons but also covers legal persons to enter into contracts as well, as was held in the case of State of U.P. v. Kanhaiya Lal Makund Lal Sarraf17 Section 11 of the Indian Contract Act specifically deals anly with the individuals. It provides that ‘every person is competent to contract who is of the age of majority according to the law to which he is subject, & who is of sound mind & is not disqualified from contracting by any law to which he is subject'. This provision specifically deals with 3 ways of disqualification: --

  1. Incapacity by infancy
  2. Incapacity by insanity
  3. Incapacity by personal law to which he is subject
The Companies Act, 1957 also assumes that a company can contract, & in S.46, provides the mode of executing contracts by the company, & also that such contracts shall bind the company. Further S.7 of the Arbitration & Conciliation Act, 1996 provides that an arbitration agreement shall be in writing & it may be in the form of an ‘arbitration clause' or in a contractor in the form of a separate agreement. As, S. 34 (2) (a) (i) further speaks that an arbitral award may be set aside by the court, if the party making the application for setting aside the award furnishes proof that a party to the agreement on which the award is based. The parties should be given full ‘opportunity to present his case'18 through a proper representative. If the tribunal proceeds with the arbitration in the absence of the representation of the party under incapacity, the resulting award will again be liable to be set aside. Hence the, the incapacity of the party is an important ground to set aside the arbitral award passed by the tribunal

NON-EXISTANCE OR INVALIDITY OF ARBITRATION AGREEMENT - Arbitration being a consensual adjudication by a private judge the jurisdiction of the tribunal is inferred from the arbitral agreement only. Therefore this clause becomes an important consideration for the courts to consider while setting aside the arbitral award. If the arbitration clause is absent from the arbitration agreement then such an agreement is an invalid agreement. The tribunal will have no jurisdiction over the dispute which will be referred for the evolvement, as that contract between the parties will be considered as an invalid contract & will bard the arbitral tribunal to look over the merits of the dispute. Secondly, the arbitration agreement will be an illegal agreement if the parties of the agreement are not capable of signing the same. As also has been deled in the above ground. The validity of the arbitration agreement, at the first instance has to be acknowledged by the arbitral tribunal19. If the tribunal finds that there exists the invalid arbitration agreement, it will have no jurisdiction to precede with the arbitral proceedings. However, the decision of the tribunal accepting the objection is reviewable by the courts in appeal20. Such award is likely to be set aside by the courts under S. 34 (2) (a) (i) & (ii). The appealing party just has to prove that the parties of contract were incompetent or the arbitration agreement was void.

NON-COMPLIANCE OF DUE PROCESS: -- Sec. 34(2)(a)(iii) provides the third ground for setting aside an arbitral award. It requires the three conditions to be fulfilled to invoke the clause. They are : --

Proper Notice- First of all, the party can claim for recourse of the award if the proper notice was not served for the appointment of the arbitrator. But, no where in the Act of 1996, describes the term proper notice, hence it has to be construed from the judial pronouncement. As, the SC said in Dulal Poddar v. Executive Engineer21 for an improper notice of the appointment of the arbitrator, their should be an complete unawareness of the appointment to the other party & the principle of natural justice, i.e. the opportunity to hear the other side is not given. Hence the proper notice is required to be given to the other party.

Inability of party to present his case- Secondly, the other party must be given an appropriate opportunity to present his case, for this the three condition are required to be fulfilled, respectively, they are (i) the party appointing the arbitrator should give notice of the arbitral proceedings. (ii) the notice of time & place must be given (iii) opportunity must be given to each party to present his case.

Representation through lawyer – Section 30 of the Advocates Act, 1961 entitles every advocate as of right to practice throughout the territory of India , before any tribunal etc. hence it is the matter of right of the party to be represented through a lawyer before the tribunal.

LACK OR EXCESS OF JURISDICTION- Section 34(2)(a)(iv) annulment the grounds of lack or excess of jurisdiction. This provision contemplates two different situations. First, the case where the award deals with a dispute not contemplated or not falling within the terms of the arbitration agreement, where tribunal acts outside its jurisdiction or without jurisdiction ( extra petita ) & second, where the award contains decision on matters beyond the scope of the arbitration ( ultra petita ). There is an difference between, the jurisdiction mentioned under S.16(1) & the jurisdiction mention under S.34(2)(a)(iv). As the phrase ‘submission to arbitration' in S.16(1) is in contradistinction to the ‘Arbitration agreement'. Where as ‘Arbitration agreement' in S.34(2)(a)(ii) is an agreement between the parties to submit disputes arising between them, while ‘submission to arbitration' is a factual submission of certain specified disputes by the parties to the tribunal for arbitration. As for instance the SC in UOI v. Banwari Lal & Sons22 (P) Ltd. The arbitrator, relying on the evidence of laypersons, failed to apply correct principles of valuation & to take relevant documents & other factors into account. The SC held that the award was vitiated & liable to be set aside.

IMPROPER COMPOSITION OF ARBITRAL TRIBUNAL – The parties are free to determine the no. of arbitrators subject to the condition that the number must not be an even number23. The parties are also free to agree on the procedure ‘for the appointment of the arbitrators'. If the appointment of the arbitral tribunal is not in accordance with the number determined by them or the procedure adopted by them in the agreement, the arbitral proceeding will be invalid & the resulting award will be liable to be set aside as nullity. As in the case of Narayan Prasd Lohiya v. Nikunj Kumar Lohiya24 the SC has pointed out that the opening words of S.34(2)(a)(v) makes it clear that if the composition of the arbitral tribunal or procedure is in accordance with the agreement of the parties, then there can be no challenge under this provision. Similarly in UOI v. Prabhat Kumar & bros25 the SC observed that a govt. officer, who has been appointed as an arbitrator in arbitration by the govt., ceases to be arbitrator on his retirement from govt. service.

IMPROPER PROCEDURE – As the parties are free to adopt the arbitral procedure26 , but, if the tribunal fails to follow the procedure as greed upon by the parties, its award will be liable to set aside27. If there is an valid agreement between the parties with respect to the procedure to be followed by the arbitral tribunal, that procedure will have to be adhered to. As was also affirmed by the HC of Bom, in the case of Shanska Cementation India Ltd. V. Bajranglal Agarwal 28

PUBLIC POLICY – As the ‘public policy' cannot be defined with any degree of precision. Making full use of this the Indian Courts, quite unlike their global counterparts, have somewhat liberally interpreted ‘public policy'. Whatever tends to injustice of operation, restraint of liberty, commerce, natural or legal rights, whatever tends to the obstruction of justice or to the violation of a statute and whatever is against good moral when made the object of contract is against ‘public policy', and, therefore, void and not susceptible to enforcement. As also in the opinion of D.P. Mittal “ public policy is equivalent to the policy of the land ”. As the Sc has held that “the expression ‘public

IMPROPER COMPOSITION OF ARBITRAL TRIBUNAL – The parties are free to determine the no. of arbitrators subject to the condition that the number must not be an even number. The parties are also free to agree on the procedure ‘for the appointment of the arbitrators'. If the appointment of the arbitral tribunal is not in accordance with the number determined by them or the procedure adopted by them in the agreement, the arbitral proceeding will be invalid & the resulting award will be liable to be set aside as nullity. As in the case of Narayan Prasd Lohiya v. Nikunj Kumar Lohiya the SC has pointed out that the opening words of S.34(2)(a)(v) makes it clear that if the composition of the arbitral tribunal or procedure is in accordance with the agreement of the parties, then there can be no challenge under this provision. Similarly in UOI v. Prabhat Kumar & bros the SC observed that a govt. officer, who has been appointed as an arbitrator in arbitration by the govt., ceases to be arbitrator on his retirement from govt. service.

IMPROPER PROCEDURE – As the parties are free to adopt the arbitral procedure , but, if the tribunal fails to follow the procedure as greed upon by the parties, its award will be liable to set aside. If there is an valid agreement between the parties with respect to the procedure to be followed by the arbitral tribunal, that procedure will have to be adhered to. As was also affirmed by the HC of Bom, in the case of Shanska Cementation India Ltd. V. Bajranglal Agarwal

PUBLIC POLICY – As the ‘public policy' cannot be defined with any degree of precision. Making full use of this the Indian Courts, quite unlike their global counterparts, have somewhat liberally interpreted ‘public policy'. Whatever tends to injustice of operation, restraint of liberty, commerce, natural or legal rights, whatever tends to the obstruction of justice or to the violation of a statute and whatever is against good moral when made the object of contract is against ‘public policy', and, therefore, void and not susceptible to enforcement. As also in the opinion of D.P. Mittal “ public policy is equivalent to the policy of the land ”. As the Sc has held that “the expression ‘public policy' refers to the public policy India and the recognition and enforcement of the award of the arbitral tribunal in India cannot be questioned on the ground that it is contrary to the public policy of the country” in Renusagar Power Co.29 v. General Electric Co . Recently, the SC has also held in the matter of Oil and Natural Gas Corpn. Ltd. V. Saw Pipes ltd30. that if an award is ‘patently illegal' or if it is in contravention with any provision of the Arbitration and Conciliation Act 1996, then it could be set aside under section 34 of the said act. Thus, the term ‘public policy' has to be used in a narrow sense. In order to attract the bar of public policy the enforcement of the award must invoke something more than the violation of the law of India . Thus ‘public policy' should be only so interpreted as far as it aims to broaden the public interest of honesty and fair-dealing, of not violating a basic notion of Indian law .

 

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1. Justice A.M. Ahmadi , 22nd National Convention of the Institute of Company Secretaries of India , Goa 1994

2. Subject to this part an arbitral award shall be final & binding on the parties & persons, claiming under them respectively

3. Sec. 2 (h), Indian Contract Act, 1872

4. Sec. 14, Indian Contract Act, 1872

5. AIR 1923 PC 66

6. UOI v. AL Rallia Ram, [1964] 3 SCR 164

7. (1989) 2 SCC 38

8. (2003) 7 SCC 396

9. (2005) 1 SCC 379

10. (1988) 3 SCC 36

11. (1999) 9 SCC 283

12. Santa Sila v. Dhirendranath, [1964] 3 SCR 410

13. Finality of arbitral awards. -Subject to this Part an arbitral award shall be final and binding on the parties and persons, claiming under them respectively

14. UOI v. Hakam Chand ad Co., 2003 (Supp) Arb LR 537 ( Del )

15. MAnasuya Devi v. M Manik Reddy , (2003) 8 SCC 565

16. Section 34 (2), Arbitration & Conciliation Act, 1996

17. AIR 1956 All 383

18. S.18, Arbitration & Conciliation Act, 1996

19. S.16 (1), Arbitration & Conciliation Act, 1996

20. Ibid, S.37 (2) (a)

21. (2004) 1 SCC 73

22. (2004) 5 SCC 304

23. S.10(1), Arbitration & Conciliation Act, 1996

24. (2002) 3 SCC 572

25. (1995) Supp. 4 SCC 525

26. S.19 (2), Arbitration & Conciliation Act, 1996

27. Ibid. S.34(2)(a)(v)

28. 2004 (2) Arb LR 67, 74 (Bom).

29. AIR 1994 SC 860

30 . AIR 2003 SC 2629