Anatomizing judicial intervention under Section 34 of the Arbitration and Conciliation Act,1996

The Arbitration and Conciliation Act of 1996 (hereinafter referred to as ‘the Act’) was modelled after the UNCITRAL (United Nations Commission on International Trade Law) framework of rules in an effort to modernize Indian arbitration law, bring it in line with the best worldwide practices, and make India a hub for international arbitration.[1]

The celebrated act has been a success so far. However, it is still not completely devoid of nebulous provisions. Even though the arbitral award is comparable to a court’s verdict, on specific reasons, however, the aggrieved party may utilize the existing remedies given under the act against such awards. Section 34 of the act governs the mechanism for setting aside an arbitral award, made by an arbitral tribunal, depending on the occurrence of certain circumstances specified in section 34(1)[2]. Even though the notion has always been in support of minimal judicial interference, there are several factors which call for it regardless.

In this research paper, the author has critically analysed each ground for setting aside the arbitral order and the extent to which judicial intervention is exercised by the courts in India.

1. Incapacity of the Party

If either of the parties is under the age of majority or is of unsound mind at the specific time, they are not bound to follow any agreement in place. As a result, the agreement becomes void, and any award rendered in such a case may be revoked by the court. Through their representative, unsound persons can apply for an award to be set aside. Under the Act, such a party can apply for the appointment of a guardian for a minor or person of unsound mind for the purposes of arbitral proceedings[3].

2. Invalidity of the Arbitration Agreement

The validity of an agreement can be questioned on any of the bases on which the validity of a contract could be challenged.  If an arbitration agreement is not valid or non-existent, the arbitral tribunal cannot assume jurisdiction to adjudicate upon the disputes. Appointment of an arbitrator may be refused if the arbitration agreement is not in writing, or the disputes are beyond the scope of the arbitration agreement[4].

3. Notice not given to the party

Section 34(2)(1)(iii) permits the court to set aside and arbitral award if the party making the application furnishes proof that such party was not given proper notice of the appointment of an arbitrator or of the arbitral proceedings or was otherwise unable to present his case.[5] Further, the act mandates that the parties shall be given sufficient advance notice of any hearing and of any meeting of the arbitral tribunal for the purposes of inspection of documents, goods or other property.[6]

The Supreme court affirmed the High Court’s Decision in Dulal Poddar v. Executive Engineer, Dona Canal that the arbitrator was appointed without giving any notice to the other party and thereof, the award given by the arbitrator was ex parte and hence, the award was liable to be set aside since it violated the principles of natural justice[7].

In Commonwealth Trust (India) Limited v. Union of India, the arbitral award was set aside because the arbitrator gave a short notice of the adjournment of the hearing and upon the request of the petitioner to postpone the adjournment, the arbitrator rejected the same. As a consequence, the petitioner was unable to present his case[8].

4. Award beyond the Scope of Reference

The referral of a dispute under an agreement sets the limitations of the authority and jurisdiction of the arbitrator. If the arbitrator had claimed jurisdiction not possessed by him, the award to the degree to which it is beyond the arbitrator’s jurisdiction would be illegal and subject to be set aside. This provision has a proviso which mentions, “Provided that, if the decisions on matters submitted to arbitration can be separated from those not so submitted, only that part of the arbitral award which contains decisions on matters not submitted to arbitration may be set aside.”

The court, in the case of Gautam Construction & Fisherie Ltd v. National Bank for Agriculture and Rural Development, setting aside the arbitral award held that it is not permissible for the Arbitrator or the Court dealing with the validity of the award to award a higher rate than the mutually agreed rate, which was binding on parties[9].

Under the Act, a plea that the arbitral tribunal is exceeding the scope of its authority shall be raised as soon as the matter alleged to be beyond the scope of its authority is raised during the arbitral proceedings[10] and the same can be made under Section 34(2)(a)(iv)[11].

5. Illegitimate Arbitral Procedure

An arbitral award can be set aside if the composition of the arbitral tribunal or the arbitral procedure was not in accordance with the agreement of the parties, unless such agreement was in conflict with a provision of this Part from which the parties cannot derogate, or, failing such agreement, was not in accordance with this Part[12] (of the act).

6. Dispute not Arbitrable

The well recognized examples of non-arbitrable disputes are:

1. disputes relating to rights and liabilities which give rise to or arise out of criminal offences;
2. matrimonial disputes relating to divorce, judicial separation, restitution of conjugal rights, child custody;
3. guardianship matters;
4. insolvency and winding up matters;
5. testamentary matters (grant of probate, letters of administration and succession certificate); and
6. eviction or tenancy matters governed by special statutes where the tenant enjoys statutory protection against eviction and only the specified courts are conferred jurisdiction to grant eviction or decide the disputes.[13]

7. Award against Public Policy

Section 34(2)(b)(ii) indicates that a court may set aside an arbitral judgement if the award is in conflict with India's public policy[14]. It is challenging to determine the definition of "public policy" because it is not stated in the statute. In a broader sense, however, the doctrine of "Public Policy" is equivalent to the "Policy of Law"; anything that obstructs justice, violates a statute, or is against good morals, when made the subject of a contract, would be contrary to the "Public Policy of India" and, being void, would not be enforceable.[15]

In the case of Renusagar Power Electric Company v. General Electric Company, the Supreme Court interpreted the term “public policy” in a very narrowed sense. The court opined that in order to set an arbitral award aside on the basis of violation of public policy, there must be something more than a mere violation of Indian Law. The court presented a three-pointer elucidation to the same and held that a foreign award won’t be enforced if the award is contrary to:

1. Fundamental Policy to Indian Law
2. The interests of India, or
3. Justice or Morality[16]

Nonetheless, in the landmark case of Oil and Natural Gas Corporation Limited v. SAW Pipes Limited (Hereinafter referred to as ‘ONGC v. SAW Pipes case’), the court widened the meaning of “public policy” in terms of the act and held that enforcement of a foreign award would be prohibited if it is averse to patent illegality, additional to the grounds stated in Renusagar Power Electric Company v. General Electric Company. The court held that:

“… in our view, 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…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[17].”

Later, various judgments followed the same view as propounded in the ONGC v. SAW Pipe case. This view, however, was criticized by the 246^th Law Commission Report, as a broad meaning to the term “public policy” opened a flood gate of applications against the arbitral awards, thereby refuting the purpose and intent of the act itself that is minimal interference by the court[18]. The views of the Law Commission were incorporated in the 2015 amendment of the Arbitration and Conciliation Act and ever since the amendment, the courts have preferred not giving a broad interpretation to the term “public policy” and have avoided to meddle with the case’s merits[19]. In the recent case of Government of India v. Vedanta Limited, the Court relied on the Renusagar case's interpretation of 'public policy' to determine that 'public policy' encompassed India's fundamental policy, its interests, justice, and morality[20]. The Court also ruled that a tribunal's erroneous interpretation of a contractual provision cannot serve as a basis for challenging the award on its merits.[21]

8. Patent Illegality

This parameter was added in the Arbitration and Conciliation Act by its 2015 amendment act. In Arbitration, if an arbitral award is inconsistent with any of the provisions of the Arbitration and Conciliation Act,1996 then it would amount to a patent error on its face.[22] Further, the apex court in the case of Associate Builder’s v. Delhi Development Authority, held that Patent Illegality includes:

1. 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[23]

Previously, it has been opined that the scheme of the act aims at keeping the supervisory role of the court at minimum level and this can be justified as parties to the agreement make a conscious decision to exclude the court's jurisdiction by opting for arbitration as they prefer the expediency and finality offered by it.[24] The notion holds that, after two parties have opted to select a third party by consent, the third party's award should be final and binding and should not be contested except in extremely unusual cases.[25]

In arguendo, the legislative intent to keep the judicial intervention very limited can be culled out from the act itself where it casts a negative language while mentioning, “Notwithstanding anything contained in any other law for the time being in force, in matters governed by this Part, no judicial authority shall intervene except where so provided in this Part.[26]”

The notions may clearly suggest the limited role of judiciary post-arbitral awards but there is a clear disjunct of such notions with the reality. The problem arises specially in domestic arbitrations where usually the government or its agencies are the parties. Several factors such as economic duress and one-sided arbitration clauses against the party with lesser bargaining power pave way for judicial intervention.[27] The parties also approach for the courts in cases of potential bias on the part of the named arbitrator. There have been cases where the government agencies have appointed their ex-employees as arbitrators leaving space for potential biasness. The Apex court has also addressed the issue[28] and held that it cannot allow clauses to take effect in which the other signatory to the contract, the first one being a government agency, is made to agree that it would not object to the appointment of a government servant as an arbitrator[29]. Further, the Supreme Court opined[30] that generally a named arbitrator ignites resistance from the other party, which leads to disputes. Thus, it was suggested that government agencies phase out such arbitration clauses from their future contracts, as the Act emphasizes on independence and impartiality to exhibited by an arbitrator; this will in turn promote professionalism[31].

Coming back to the contention that how such issues defeat the notion of minimum interference, it is clear that the ideal extent cannot be achieved unless the inherent possible stumbling blocks existing in the framework of arbitration are destroyed.  There are several ways to address the concerns and to ensure fast and summary disposal of arbitration cases. Currently, India lacks Institutional Arbitration and trained arbitrators to the best of its potential. Ad-hoc arbitration comes with a greater possibility of biasness, further rendering one of the parties dissatisfied with the award which eventually calls for judicial intervention. Institutional arbitration, on the other hand, is one in which a specialised institution with a permanent character intervenes and accepts the functions of assisting and administering the arbitral process, as stipulated by the institution's regulations.[32] The need has been stressed upon previously for popularizing institutional arbitration in India and called for establishment of an institution in our country in this regard which would be along international standards.[33]

Thus, where there is a discrepancy between the principle and practise of arbitration, it would not be unreasonable for the courts to interfere when the parties are faced with injustice, no matter how much it drifts us away from the ideal situation.

The Author, Smita Singh is a student of 2nd Year, BA.LLB, National Law University of Delhi. She interned with LatestLaws.com.

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