The Arbitration and Conciliation Act 1996 (hereinafter referred to as ‘the Act') was enacted to consolidate and amend the law governing Domestic Arbitration, International Commercial Arbitration, and the enforcement of Foreign Arbitral Awards and other similar matters. The Act has two fundamental provisions that make any act governing arbitration efficient and effective i.e. Minimum Judicial Interference1 and, Finality2 and Enforcement3 of Award. The importance of these two in the Act cannot be understated as they are the foundation behind every successful Arbitration Proceedings. However, there are instance when the Court has to interfere like Appointment of Arbitrator when parties fail to appoint one themselves, Interim Measures, Setting Aside of Arbitral Award, etc.

The Courts in India have always maintained and accepted that Section 5 of the Act has very clear interpretation that there should be minimal judicial interference in Arbitral Proceedings, this extends to the Arbitral Award granted with respect to its finality and enforcement. The Supreme Court even went as far as to say that the courts are not justified in replacing its views with that of Arbitrator, and once an Arbitrator has applied its mind given an out an award, the court cannot reappraise the matter as if it were an appeal4. Therefore, this Article sheds some light on the scope of Section 34 of the Act and the grounds on which the Arbitral Award can be set aside.

Section 34: Setting aside of Arbitral Award

Section 34 provides for setting aside of an Arbitral Award by the way of filing an application before the competent court. This provision has a narrow scope which is subject to certain limitations. The grounds given in the section primarily taken into account the very procedure through Arbitral proceedings were conducted or if there is an illegality contained therein. Even the intervention of High Court by the way of writ petitions is not accepted as there is already a mechanism for recourse in case of any grievances arising out of Arbitral Award.

Limitation Under Section 34

Section 34(3) provides that an application for setting aside an award. It states that the application should be made within 3 months from the date on which the applicant had received the arbitral award.

The proviso under this Section states that if the Court is satisfied that the applicant was prevented by sufficient cause from making the application within the prescribed time, it may extend the application submission time for a period of 30 days only. The grounds for setting aside an arbitral award under Section 34 of the Arbitration and Conciliation Act, 1996 have been discussed below:

  1. Award Set Aside due to failing to constitute Arbitral Tribunal as per Agreement The Hon'ble Supreme Court in the case Narayan Prasad Lohia vs. Nikunj Kumar Lohia & Ors5, held that in the presence of an agreement wherein the composition/procedure of the Arbitral Tribunal are provided and the composition of such tribunal is not in compliance with the agreement however is in accordance with provisions of the Act then the award cannot be challenged before the Court. The Court further observed that when there is no clause for composition/procedure of the Arbitral Tribunal and the composition of Arbitral tribunal is also not in compliance with the provision of the Act, then the Arbitral Award can be challenged. “19….In other words, even if the composition of the arbitral tribunal or the arbitral procedure is not in accordance with the agreement of the parties but if such composition or procedure is in accordance with the provisions of the said Act, then the party cannot challenge the award. The words "failing such agreement" have reference to an agreement providing for the composition of the arbitral tribunal or the arbitral procedure. They would come into play only if there is no agreement providing for the composition of the arbitral tribunal or the arbitral procedure. If there is no agreement providing for the composition of the arbitral tribunal or the arbitral procedure and the composition of the arbitral tribunal or the arbitral procedure was not in accordance with Part I of the said Act then also a challenge to the award would be available. Thus so long as the composition of the arbitral tribunal or the arbitral procedure are in accordance with the agreement of the parties, Section 34 does not permit challenge to an award merely on the ground that the composition of the arbitral tribunal was in conflict with the provisions of Part I of the said Act. This also indicates that Section 10 is a derogable provision”

  2. Award Set Aside due to Unilateral Appointment of Arbitrator As per Section 11(2) of the Act the parties to Arbitration Proceedings are free to choose the procedure for appointment of Arbitrator/s however, for one party to claim the absolute right to appoint an Arbitrator while the other party having no say is bad in law and against the very essence of Alternate Dispute Resolution. The Hon'ble Supreme Court's decision in Perkins Eastman Architects DPC and Ors. vs. HSCC (India) Ltd.6, deliberates over the equal power of parties to appoint the arbitrator. The Court further observed that the exclusive right to appoint an Arbitrator would ultimately introduce an element of partiality and bias which will spill over to the Arbitral Award granted by that Arbitrator.

  3. Award Set Aside due to being in conflict with the Public Policy of India After the amendment in 2015 clarified that an award is in conflict with the public policy of India, only if, the making of the award was induced or affected by fraud or corruption or was in violation of Section 75 or Section 81, or it is in contravention with the fundamental policy of Indian law, or it is in conflict with the most basic notions of morality or justice. It was further emphasised that 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 Apex Court stated that it does not matter that the principle of unjust enrichment is a part of the public policy of India or not, since plaintiff cannot succeed because the unjust enrichment must relate to the enforcement of the award and not to its merits.7 The relevant excerpt of the decision given in Renusagar Power Co. Ltd vs. General Electric Co. are as follows:“100. We do not consider it necessary to go into the question whether the principle of unjust enrichment is a part of the public policy of India since we are of the opinion that even if it be assumed that unjust enrichment is contrary to public policy of India, Renusagar cannot succeed because the unjust enrichment must relate to the enforcement of the award and not to its merits in view of the limited scope of enquiry in proceedings for the enforcement of a foreign award under the Foreign Awards Act.”The Hon'ble Supreme Court in its recent judgement also reiterated that it is settled position of law as laid down by the various decisions of the Apex Court that an award can be set aside only if the award is against the public policy of India. The Arbitral award can be set aside under Sections 34 and 37 of the Act, if the award is found to be contrary to, (a) fundamental policy of Indian Law, or (b) the interest of India, or (c) justice or morality, or (d) if it is patently illegal.8“8. As per settled position of law laid down by this Court in a catena of decisions, an award can be set aside only if the award is against the public policy of India. The award can be set aside under Sections 34/37 of the Arbitration Act, if the award is found to be contrary to, (a) fundamental policy of Indian Law; or (b) the interest of India; or (c) justice or morality; or (d) if it is patently illegal……”

  4. Award Set Aside due to Patent Illegality The Hon'ble Supreme Court in the case of Ssangyong Engineering & Construction Co. Ltd. vs. National Highways Authority of India (NHAI)9, observed that when an Arbitrator strays and deals with issues that are outside the contract between parties, correction of such jurisdiction error would be a ground for Award to be set aside under Section 34 of the Act. However, this principle would not apply on International Commercial Arbitrations that are decided under Part II of the Act.“43. ……If an arbitrator is alleged to have wandered outside the contract and dealt with matters not allotted to him, this would be a jurisdictional error which could be corrected on the ground of “patent illegality”, which, as we have seen, would not apply to international commercial arbitrations that are decided under Part II of the 1996 Act.”

  5. Award Set Aside due to violation of Principle of Natural Justic
    • Bias of ArbitratorThe Delhi High Court in the case of M/s. Lanco-Rani (JV) vs. National Highways Authority of India10, observed that the statutory requirement for an Arbitrator to disclose details not only at the beginning of the arbitral proceedings but also at all stages is based on one of the principles of natural justice concerning bias. Even if the present arbitration case may have nothing to do with the Arbitrator's past relationship with the party but still such circumstance certainly would give rise to justifiable doubts as to his independence and impartiality. Therefore, the Delhi High Court set the Arbitral Award aside.“25. Turning to the facts of the present case, it is plain that there was a mandatory requirement that Mr. Basant Kumar should have made a disclosure in terms of Section 12(2) of the Act to the parties about him being engaged as an advisor/technical expert in some other arbitration cases of NHAI. Those arbitration cases may have nothing to do with the case in which he was acting as an Arbitrator but that is not the point. This was a circumstance that certainly would give rise to - justifiable doubts as to his independence and impartiality. …. Therefore, there was no excuse for Mr. Basant Kumar to not have made a similar voluntary disclosure when the proceedings in the present arbitration were in progress.”
    • Audi Alteram Partem The Kerala High Court in the case of Impex Corporation And Ors. vs. Elenjikal Aquamarine Exports11, observed that the opportunity of fair hearing was denied to the party as no proper and sufficient notice was given to appellants by arbitrator before they were declared ex parte. The basic principle ‘audi alteram partem' i.e. hear the other side, is fundamental to fair proceedings and principles of natural justice. Natural justice is the essence of fair adjudication and to be ranked as fundamental. The purpose of following the principles of natural justice is the prevention of miscarriage of justice. Therefore, even though under the Act, Court has only a limited power to interfere i.e. only on the grounds specified in Section 34, the arbitration award was set aside by the Court under Section 34(2)(iii) for violation of principles of natural justice and not on merit.“8. Apart from the violation of basic principles of natural justice, here is violation of statutory provisions covered in Sections 18 and 24 of the Act. It is true that under the 1996 Act Court has only a limited power to interfere in the arbitration awarded only on the grounds specified in Section 34. Here impugned arbitration award is liable to be set aside under Section 34(2)(iii). Accordingly we set aside the award only for violation of principles of natural justice and not on merit…”

Conclusion

It is once again reiterated that Section 34 of the Arbitration and Conciliation Act, 1996 has a narrow scope i.e., the grounds on which the award can be set aside is limited. The legislative intent is to maintain and preserve the sanctity of the Arbitration Proceedings and restrict judicial interference in the same. The Recent judgements are progressive and have shown that if Section 34 does not have narrow scope, the whole object of the Arbitration and Conciliation Act would be defeated. The legislative intent behind Section 34 is also reflected in decisions of High Courts and Supreme Court. The guiding and brooding spirit of arbitration, i.e, party autonomy and minimum interference of the courts are manifested under Section 34 of the Act.

Footnotes

1. Section 5 of The Arbitration and Conciliation Act 1996

2. Section 35 of The Arbitration and Conciliation Act 1996

3. Section 36 of The Arbitration and Conciliation Act 1996

4. M/s. Navodaya Mass Entertainment Ltd. vs. M/s. J.M. Combines Civil Appeal Nos. 7128-7129 of 2011

5. 2002 (1) RAJ 381 (SC)

6. (2020) 20 SCC 760

7. Renusagar Power Co. Ltd vs. General Electric Co. (1994) AIR 860

8. Haryana Tourism Limited vs. M/S Kandhari Beverages Limited Civil Appeal No. 266 of 2022

9. Civil Appeal No. 4779 of 2019

10. (2016) SCC OnLine Del 6267

11. AIR 2008 Ker 11

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