CHALLENGE OF ARBITRAL AWARD'S
Updated: Mar 27
Author: Avimanyu Roy Chowdhury, V Year of B.A.,LL.B, from Shyambazar Law College.
The court cannot interfere in an arbitral award based on its merits nor do the parties have the right to appeal on its merits. The Supreme Court has observed in the case of InduEngineering& Textiles Ltd. Vs. Delhi Development Authority that"an arbitrator is a judge appointed by the parties and as such an award passed by him is not to be lightly interfered with". But this doesn't imply that there is no check on the arbitrator's conduct. To ensure fair conduct of the proceeding, the law allows certain remedies against an award which are modification, remission and setting aside of an award.
Foundation of Section 34
The Supreme Court in Olympus Superstructures Pvt. Ltd. v. Meena Vijay Khetan& others, observed that Section 34 of the Arbitration and Conciliation Act, 1996 is based on Article 34 of the UNCITRAL(United Nations Commission on International Trade Law) Model Law and it has been noticed that under the 1996 Act the scope of the provisions for setting aside the award is almost the same under Section 30 or Section 33 of the Arbitration Act, 1940.
Grounds for Challenge
Section 34 provides that an arbitral award may be set aside by a court on certain grounds specified therein. Under Section 34(2)(a) of the Act, a party can challenge the arbitral award on the following grounds-
The parties to the agreement are under some sort of incapacity.
The arbitration agreement is not valid under the law to which the parties have subjected it and thus the agreement tends to be void.
The party making the application was not provided with proper notice of the appointment of an arbitrator or the arbitral proceedings or was otherwise unable to present his case.
The arbitral award deals with a dispute which does not fall within the terms of the submission to arbitration, or it contains decisions on matters beyond the scope of the submission to arbitration.
The composition of the arbitral authority or the arbitration procedure was not per the arbitration agreement.
Section 34(2)(b) reveals two additional grounds which are left with the Court itself to conclude whether to put aside the arbitral award
The subject-matter of the dispute is not capable of settlement by arbitration under the law for the time being in force.
The arbitral award conflicts with the public policy of India.
Relevant facts in Section 34
Section 34(1) states that for an application to set aside an arbitral award, it needs to be under subsection (2) and (3) of section 34.
But on several occasions, the Supreme Court has said that as a general rule, the court should approach the award with a desire to support it, if that is reasonably possible, rather than completely taking it off, by calling it illegal. The court is not authorised to set-aside the award suo moto.
Section 34(2)(a)(iv) relies on the principle that an arbitral tribunal is not competent to go beyond the scope of the submission of arbitration. It is a creature of the agreement between parties and it does not have its jurisdiction therefore it is not a judicial body which can exercise power judicial of the state. However, the reasonableness of the reasons given by the tribunal cannot be challenged.
This sub-section is based on the “principles of severability”, thus if the reasonable good and the bad part of the arbitral award can be separated the whole award should not be set aside. Therefore, if the reasonable bad part of an arbitral award is severable, only the bad portion may be set aside.
Section 34(2)(i) and (ii) states that if the procedure adopted to make an arbitral award or the arbitral award itself oppose the public policy of India, it would be capable of being set aside by the court, on an application made to the court by the party.
Section 34(3) states the time-limit within which an application for setting aside an arbitral award should be presented before a competent court. The prescribed period is of three months as provided under sub-section (3) and that commences from the date on which the applicant receives the award and expires three months thereafter.
Section 34(4) provides that on an application under sub-section (1), the Court may, where it is appropriate and it is so requested by a party, suspend the procedures for a period decided by it to permit the arbitral tribunal to continue the arbitral procedures or to take certain steps for the assessment of the arbitral tribunal to dispose of the reasons for putting aside the arbitral award. It intends that the court should first mark the remediable defects in the arbitral award and then refer the same to the arbitral tribunal so that the arbitral tribunal can resume the proceeding. Clearly the object behind this remission procedure is to give a reasonable opportunity to the tribunal to escalate rectified arbitration proceedings.
The Allahabad High Court in State v. Reshma Deviruled that the sub-section (4) of Section 34, does not contemplate that the court could confirm part of the award and remit the rest to the arbitral tribunal.
The Court also may direct the arbitral tribunal to resume the proceedings or to take certain measures which are necessary for removal of the grounds for setting aside the arbitral award.
Meaning of the expression "Public Policy of India"
To understand the phrase ‘public-policy’ and its implication it is necessary to consider the case of GherulalParakh v. MahadeodasMaiyev, in which the court observed that Public policy or the policy of the law is an illusive concept; it has been depicted as a dishonest guide and an unruly horse. The essential obligation of the court is to guarantee the promises the parties have made and to maintain the sacredness of agreements which forms the basis of society, however, in specific cases, the court may mitigate them of their obligation on a rule founded on public policy; the doctrine of public policy is stretched out not exclusively to harmful cases yet in addition to harmful tendencies; this doctrine of public policy is only a branch of common law, and, just like any other branch of common law, it is guided by precedents; the guideline has been solidified under various heads despite the fact that it is reasonable for courts to clarify and apply them to various circumstances, it should only be used in a clear and incontestable cases of harm to the public policy, however the heads are not shut and however hypothetically it might be admissible to advance another head under extraordinary conditions of an evolving world, it is fitting in light of a legitimate concern for solidness of society not to make any endeavour to find new heads in nowadays.
The Supreme Court in the case Oil and Natural Gas Corporation Ltd. v. SAW Pipes Ltd..,clarified that the expression "public policy of India" is not required to be given a narrow meaning. The said phrase is susceptible to narrow or wide meaning depending upon the object and purpose of the legislation. Hence, the award passed in violation of the existing provisions of law is liable to be set aside.
The concept of "public policy" infers matters which are concerns with the public good and the public interest. What is for the public good or in the public interest or what might be damaging or harmful to the public good or public interest has shifted now and again. However, the award which is, apparently, evidently disregarding legal provisions cannot be said to be in the public interest. Such award/judgment/decision is likely to harm the administration of justice. Hence, in the Court’s view, the narrow meaning is given to the term "public policy" in Renusagar’s case is required to be held that the award could be set aside if it is patently illegal.
Setting aside the award If it is against the terms of the contract
In the case of oil and Natural Gas Corporation Ltd. v. SAW Pipes Ltd, the Supreme court explained that the court may set aside an award if :
If the composition of the arbitral tribunal is not per the agreement of the parties.
If the arbitral procedure is not per the agreement of the party.
If the award passed by the arbitral tribunal is in contravention of the provisions of the Act or any other substantive law governing the parties or is against the terms of the contract.
Concept of public policy—"Fraud" in making of an arbitral award
The Supreme Court in Venture Global Engineering vs Satyam Computer Services Ltd &Anrobserved that "Fraud” being of “infinite variety” may take many forms and expression. The creation of the award should be perused related to whether the award was prompted or influenced by the misrepresentation.
The court further observed that concealment of relevant and material facts, which should have been disclosed before the arbitrator is an act of fraud. But the conceded must have a causative link, if the concealed facts which are disclosed after the passing of the award have a causative link with the facts constituting or influence the award, such facts are pertinent in a setting aside proceeding and the award may set aside as it has been affected or influenced by fraud.
Misconduct—Setting aside of the arbitral award
Section 34 of the Act, 1996 clearly shows that an arbitral award may be set aside by the court on the proven misconduct on the part of the arbitrator or while conducting arbitral proceedings.
Thus, misconduct can be personal or in various cases, it might be related to the proceeding. The term "personal misconduct" connotes corruption, bias, bribery and having an interest in the subject-matter of reference, all involving an element of moral turpitude. Whereas misconduct in proceeding means—
Proceeding ex-parte without sufficient cause.
Proceeding without serving due notice to the parties regarding time and place of arbitration.
Improper reception/rejection of evidence.
Denial of opportunity to party to present his case fairly and fully.
Non-compliance of the mandate given under the agreement.
It is to be noted that sometimes the term "legal misconduct" is used in course of argument and also in delivering the judgment. The term "legal misconduct" means misconduct in the judicial sense arising from some honest though erroneous breach or neglect or denial of responsibility resulting in miscarriage of justice. In the view of the Supreme Court, legal misconduct is complete if the “arbitrator on the fact of the award arrives at an inconsistent conclusion even on his findings or comes at a decision by disregarding the material documents which illuminate the controversy to help an equitable and reasonable decision.
Challenging of arbitral award—Limitation period
The Calcutta High Court in Union of India v. M/s. Mukherjee and Mukherjee Pvt Ltd. ruled that where an application for setting aside of arbitral award is filed beyond the period of 30 days as mentioned in Section 34 of the Act, the Court has no power to entertain such application. It was further held that the provision of Section 5 of the Limitation Act, 1963 will have no manner of the application because of Section 29 of the Limitation Act, 1963.
Although in the case of Coal India Ltd. & another v. Ujjal Transport Agency & others, the Apex court ruled that neither section 34(3) of the Act, 1996 nor any other provision of the Act excludes the application of Section 14 of the Limitation Act, 1963.
Effect of an arbitral award is set aside
Once the arbitral award is set aside by the court while exercising the power under Section 34, it becomes unenforceable by law. As soon as the award becomes unenforceable by law the parties get reverted to their former position in respect of the subject-matter of the dispute.
It is a settled legal position that as soon as the arbitral award is made, an arbitral tribunal is functus officio, thus it ceases to function, on the authority of the court’s order as provided under Section 34(4) the arbitral tribunal may resume its power and may conduct fresh arbitral proceedings when the matter has been remitted back to the tribunal. The Apex Court in Narain Das v. Narsingh Das observed that the court is empowered to order the arbitral tribunal to correct or modify parts of the arbitral award which is flawed in its form, but the court cannot substitute its order for the arbitrator’s award.
It can be said that India has in place a modern and effective Arbitration Act. Although there have been some decisions which are not in tune with the spirit of the Act but hopefully these would be addressed by the judiciary soon and the popularity of arbitration would be served by a truly efficient ADR mechanism.