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Section 34 Of Arbitraton And Conciliation Act, 1996: The Journey Of Curtailing Judicial Intervention In The Arbitral Process

An Arbitration Award is a basically a verdict given in an arbitration proceeding by an Arbitration Tribunal and can be associated to the judgement given by a court of Law. Nevertheless, the aggrieved party can take the benefit for the remedies available against arbitral awards on certain grounds.

Section 34 of Arbitration and Conciliation Act, 1996 deals with the procedure for setting aside an arbitral award, granted by an arbitral tribunal, based on the happening of certain specific grounds mentioned in 34(1). First and foremost, an application has to be filed by the party desiring to set aside the arbitral award.

The party submitting the application has to thereby furnish proof of the occurrence of situations mentioned in clause 2 of Section 34. Along with furnishing such proof, it has to be ensured by the party filing the application, that the application has been filed within three months from the date on which they have received the arbitral award. Subsequent to furnishing such proof, the court may entertain the application depending on its satisfaction on the necessity of setting aside such arbitral awards.

An arbitral award may be set aside by the Court only if the award granted is against the public policy of India or if the court feels that the subject-matter of the dispute is not capable of settlement by arbitration. Alternatively, the court may adjourn its proceedings and direct the arbitral tribunal to resume the arbitral proceedings further or to take necessary steps as per the opinion of the arbitral tribunal to eliminate the grounds for setting aside the arbitral award, if doing so is appropriate to deal with the situation and if the applicant desires so.

Need for amendments in this context in The Arbitration act, 1940

The expression public policy of India was dicey and vague according to The Arbitration Act of 1940 and the grounds authorizing setting aside of arbitral award were also not clarified properly. Therefore in the Arbitration and Conciliation Act, 1996, an opportunity is given to the judiciary to interpret the case as per their understanding and give judgement accordingly. To solve the aforementioned issue, the Act has been amended further in 2015, subsequent to which Section 34 and the grounds entitling setting arbitral awards have been made distinct and crystal clear.

As per the Arbitration and Conciliation Act, 1996, the aggrieved party has to challenge the verdict and award granted by the arbitration tribunal and has to file an application under Section 34 of the Act as the arbitral tribunal established under the 1996 Act cannot review the decision on its own.

Rationale behind Section 34:

The position of an arbitrator is quite a few times explained by the Supreme Court. The decisions rendered by an arbitral tribunal have a binding nature. Therefore its verdict can be hardly questioned. Nevertheless, at times, in certain cases, the arbitral tribunal may fail to deliver justice. Since the primary goal of law is to deliver justice, in order to ensure that, the court of law has been bestowed with the power of intervention to indemnify the aggrieved party.

Grounds enabling setting aside Arbitral Awards

Grounds on virtue of which the arbitral awards can be set aside by the court is mentioned in Section 34(2) (a) of the Arbitration and Conciliation Act, 1996.

The aggrieved Party has to prove either of the following points[i]:

  1. A party was under some incapacity
  2. The arbitration agreement is not valid in accordance with the Law to which the parties to the Agreement have subjected it
  3. the party making the application was not given proper notice of the appointment of an arbitrator or of the arbitral proceedings or was otherwise unable to present his case
  4. The dispute dealt by the arbitral award does not fall within the terms of the submission to arbitration, or the award contains a decision beyond the scope of the submission to arbitration.
  5. The composition of the tribunal or the arbitral procedure was not in accordance with the agreement of the parties.

Section 34(2) (b) mentions about two circumstances on the satisfaction of which the court may set aside the award granted by the arbitration tribunal:

  1. The subject-matter of the dispute is not capable of settlement by arbitration under the law for the time being in force.
  2. The arbitral award is in conflict with the public policy of India.

Nuances of the term Public Policy subsequent to the amendments

Prior to the amendments, the term public policy was ambiguous and dicey. As a result, the courts had the complete leverage to interpret the term as per the circumstances of each case. However it had to be ensured that it is for the larger public good or benefit. The unfettered power given to judiciary to intervene in the matters of tribunal resulted into slow dispensing of case and will add on the burden of courts.

To eliminate the ambiguity to an extent, the term public policy has been clarified in the explanatory part, subsequent to the amendments, which elucidates that an award is in conflict with the public policy of India if the making of the award was induced or affected by fraud or corruption or was in violation of section 75 or section 81[ii].

Despite the aforementioned explanatory part, the ambiguity in the term public policy still subsists though it is quite evident that the extent of judicial intervention has minimized after the amendment.

Interpretation of the term public policy in the case of Renusagar Power Co. Ltd v. General Electric Co.[iii]
The Court gave a restricted meaning to the expression public policy in the international Commercial arbitration case and it was opined that an award could be refused only when the award is against
  1. fundamental policy of India
  2. interest of India
  3. justice or morality.
This interpretation was found to be extremely narrow and restricted.
The term public policy was given a wider connotation in the case of ONGC Ltd v Saw Pipes Ltd.[iv] The court opined that:
The phrase 'Public Policy of India' used in Section 34 in context is required to be given a wider meaning. It can be stated that the concept of public policy connotes some matter which concerns public good and the public interest. What is for public good or in public interest or what would be injurious or harmful to the public good or public interest has varied from time to time. However, the award which is, on the face of it, patently in violation of statutory provisions cannot be said to be in public interest. Such award/judgment/decision is likely to adversely affect the administration of justice.

To give the term public policy a specific connotation, Law Commission in 2014 came to the rescue and put forward certain suggestions and recommendations.

246th Law Commission Report : Suggestion was given to file an application on the grounds of public policy only when the award was persuaded or affected by fraud or corruption, or was against the fundamental policy of Indian law or in contravention with the most basic notions of morality.[v]

Subsequent to the suggestions put forward by the Law Commission, the Arbitration and Conciliation Act was amended in 2015.

The 2015 amendment act[vi], clarifies that an award is in conflict with the public policy of India, only if:

  1. the making of the award was induced or affected by fraud or corruption or was in violation of section 75 or section 81; or
  2. it is in contravention with the fundamental policy of Indian law; or
  3. it is in conflict with the most basic notions of morality or justice.
For the avoidance of doubt, the test as to whether there is a contravention with the fundamental policy of Indian law shall not entail a review on the merits of the dispute.

The following sub-section shall be inserted, namely:

(2A) An arbitral award arising out of arbitrations other than international commercial arbitrations, may also be set aside by the Court, if the Court finds that the award is vitiated by patent illegality appearing on the face of the award.

Case laws clarifying the terms Public Policy and Patent Illegality

Subsequent to the amendment, Courts withhold itself from giving a wide interpretation to public policy. Supreme Court in the case of Venture Global Engineering LLC v Tech Mahindra Ltd.[vii], observed:
The Award of an arbitral Tribunal can be set aside only on the grounds specified in Section 34 of the Arbitration and Conciliation Act and on no other ground. The Court cannot act as an Appellate Court to examine the legality of Award, nor can it examine the merits of claim by entering in factual arena like an Appellate Court.

The term patent illegality was well explained by the Supreme Court in the case of Associate Builder's v. Delhi Development Authority [viii].

The court concluded that Patent Illegality constitutes the following:

  1. fraud or corruption
  2. contravention of substantive law
  3. error of law by the arbitrator
  4. contravention of the arbitration and Conciliation Act, 1996 itself
  5. the arbitrator fails to give consideration to the terms of the contract and usages of trade under section 28(3) of the Act
  6. arbitrator fails to give a reason for his decision

Limitation

  1. Filing the application: The application must be filed within 3 months from the date on which the party making that application had received the arbitral award as per section 34(3). The court may entertain an application within a further period of 30 days but not thereafter in case there is a sufficient and apt reason behind the delay caused.
  2. Disposal of application: Subsequent to the 2015 Amendment, subsection 6 has been added to section 34 to dispose the case efficiently at a fast pace, which is the principal aim of the parties opting for arbitration to resolve disputes. Taking this point into consideration, the maximum time limit allowed for disposing the application is one year from the date on which notice was served to the other party intimating the party about the filing of application by virtue of 34(5), inserted in the 2015 Amendment of the Act.

Conclusion

The principal aim of the arbitration process is to limit the intervention for courts for faster disposal of cases. On the other hand, the main aim of the Award delivered by arbitral tribunal is to ensure that the award granted is legitimate and is serving the ends of justice.

Therefore it becomes essential to balance between the two, to render complete justice to the parties to a suit. To maintain the balance, law permits the courts to intervene in the arbitral proceedings to set aside the arbitral award. Nevertheless, it has to be ensured that extent to which courts can intervene in the arbitral process is be minimal.

End-Notes:
  1. Section 34, Arbitration and Conciliation Act, 1996, available at, http://icadr.nic.in/file.php?123?12:1461580854
  2. Section 34, Arbitration and Conciliation Act, 1996, available at, http://icadr.nic.in/file.php?123?12:1461580854
  3. Renusagar Power Co. Ltd v. General Electric Co , 1994 SCC Supl. (1) 644
  4. ONGC Ltd v Saw Pipes Ltd. , (2003) 5 SCC 705
  5. Report 246- Law commission of India, available at, http://lawcommissionofindia.nic.in/reports/Supplementary_to_Report_No._246.pdf
  6. the Arbitration and Conciliation (amendment) act, 2015, available at, http://www.adrassociation.org/pdf/acact2015.pdf
  7. Venture Global Engineering LLC v Tech Mahindra Ltd, [2017] 13 SCALE 91 (SC)
  8. Associate Builder's v. Delhi Development Authority, 2014 (4) ARBLR 307(SC)
Written By: Poulomi Sen, Student Of Rajiv Gandhi School Of Intellectual Property Law, IIT Kharagpur     

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