This article has been written by Zara pursuing a Diploma in Domestic & International Commercial Arbitration from LawSikho.

This article has been edited and published by Shashwat Kaushik.

Introduction

A panoramic look at the Arbitration and Conciliation Act 1996, two major amendments of 2015 and 2019 and court judgements makes it apparent that our judiciary is constantly striving to make it speedy and effective through its minimum intervention, which is a paradox, at one hand, restoring the independence of the arbitration, which is a positive move for the winning party but on the other hand, sowing seeds of doubt about transparency and accountability in the arbitration proceedings for the defeated party.

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Therefore, striking a balance between aspirations from the ADR and reality is an ongoing, tumultuous  journey both by the courts and the corporate /commercial commercial sectors.

In this journey, issues emerging at the final stage undermine the intended efficiency of ADR, leaving the parties disillusioned and, obviously, the counsel in a difficult position, sometimes in a quagmire. 

In this article, we will discuss the issues related to challenging and enforcing domestic arbitral courts in light of judicial pronouncements.

Challenging the award

Not everyone takes defeat in stride. So whenever an arbitral award goes against one of the parties to the dispute, he seeks ways of setting it aside. Though setting aside the whole does not seem to be possible or extremely challenging and rare, modification in part can be done much easier.

Issues related with challenging the award

Though Section 34 of the Arbitration and Conciliation Act 1996 provides for process and  grounds for challenging the domestic arbitral award, it sets a high bar for success, and this is because:

  1. Burden of proof on the applicant: The party challenging the award has the burden of proving the grounds for setting it aside. This requires convincing the court that the award falls under one of the limited exceptions.
  1. Indian courts generally show deference to the decisions of arbitral tribunals. They are hesitant to interfere unless a compelling reason/ ground exists under Section 34 therefore, it can be rightly said that the Act provides for limited grounds for challenging the award, keeping alive the spirit of effective dispute resolution.

Limited grounds under Section 34(2)(a)

Reading Section 34(2) , it is evident that an award can be set aside by the party making an application and by the court on the grounds mentioned therein.

The grounds mentioned in Section 34 (2)(a) of the Act for challenging the domestic award by the party making the application and satisfying the court only on the basis of the records of the arbitral tribunal are:

  • Incapacity of the party (e.g. on the basis of minority or unsound mind), but it is curable.
  • Invalidity of the arbitration agreement 
  • Not giving proper notice of the appointment of the arbitrator or of the arbitral proceedings 
  • The arbitral award deals with a non-arbitrable dispute in whole or in part
  • The composition of the arbitral tribunal or the arbitral procedure was not in accordance with the agreement of the parties.

All the above grounds (ii to v) question the existence, validity, and procedural fairness in appointment & conduct, as well as the scope of arbitration. Setting aside such awards serves the best interest of justice, providing  relief to the defeated party.

Following are some case laws where successful challenges were made by invoking the above mentioned grounds.

ONGC vs. Saw Pipes AIR (2003)

In this case, the Hon’ble Court first extensively discussed the court’s jurisdiction to set aside an award under Section 34 of the Arbitration and Conciliation Act 1996 and broadened the  grounds on which interference was permissible, which includes

  • Award exceeding the scope of the dispute submitted to arbitration.
  • Serious procedural irregularity affecting the rights of a party.
  • Award violating public policy of India 

But there is an instance where the Apex Court exercised limited judicial review and did not interfere with the award.

McDermott International Inc. vs. Burn Standard Co. Ltd. (2006)

In the landmark case of McDermott International Inc. vs. Burn Standard Co. Ltd. (2006), the Supreme Court of India upheld the principle of minimal judicial interference in domestic arbitration. This decision reinforced the sanctity and finality of arbitral awards, recognising their binding nature even in the presence of potential flaws in reasoning.

The case involved a dispute between McDermott International Inc., an American company, and Burn Standard Co. Ltd., an Indian company, arising from a contract for the construction of a power plant in India. The dispute was referred to arbitration in accordance with the terms of the contract.

The arbitral tribunal appointed to adjudicate the dispute issued an award in favour of McDermott International, Inc. However, Burn Standard Co. Ltd. challenged the award before the Indian courts, arguing that the tribunal had erred in its interpretation of the contract and that the award was based on insufficient evidence.

The Supreme Court, in its judgement, emphasised the importance of upholding the sanctity of arbitral awards and promoting the finality of arbitration proceedings. The Court held that judicial interference in domestic arbitration should be kept to a minimum and that courts should refrain from scrutinising the merits of arbitral decisions or reassessing the evidence considered by the tribunal.

The Court acknowledged that arbitral tribunals may occasionally make mistakes in their reasoning or interpretation of the law. However, the Court stressed that such errors, by themselves, do not render an arbitral award invalid or unenforceable. The Court emphasised that the primary objective of arbitration is to provide a swift and efficient resolution of disputes, and that this objective would be undermined if courts were to engage in a detailed review of the tribunal’s reasoning process.

The Supreme Court’s decision in McDermott International Inc. vs. Burn Standard Co. Ltd. has significantly contributed to the development of arbitration law in India. It has reinforced the principle of minimal judicial interference in domestic arbitration, ensuring that arbitral awards are respected and enforced without undue scrutiny by the courts. This decision has fostered a favourable environment for arbitration in India, making it an attractive option for resolving commercial disputes.

In Ssangyong Engineering & Construction Co. Ltd. vs. NHAI (2019), the Supreme Court of India delivered a landmark judgment that significantly impacts the landscape of arbitration in the country. The court held that, after the 2015 amendment to the Arbitration and Conciliation Act, 1996, courts cannot interfere with an arbitral award on its merits. This ruling has far-reaching implications for parties involved in arbitration proceedings and reinforces the principle of minimal judicial intervention in arbitration matters.

Prior to the 2015 amendment, courts had the authority to review arbitral awards on both legal and factual grounds. This meant that a party dissatisfied with an arbitral award could challenge it in court, arguing that the award was based on errors of law or fact. However, the 2015 amendment significantly curtailed this power of judicial review. Section 34(2A) of the amended Act now stipulates that courts can only interfere with an arbitral award in limited circumstances, such as when the award is in conflict with the public policy of India or when it is induced by fraud or corruption.

The Supreme Court’s decision in Ssangyong Engineering & Construction Co. Ltd. vs. NHAI further clarified the scope of judicial review under Section 34(2A). The court held that “merits” of an arbitral award include both questions of law and fact. This means that courts cannot examine whether the arbitral tribunal correctly interpreted the law or whether its findings of fact were supported by the evidence. The court emphasised that the role of the court is limited to ensuring that the arbitral process was conducted in accordance with the law and that there were no procedural irregularities.

This judgement is significant for several reasons. Firstly, it reinforces the sanctity of arbitral awards and enhances the enforceability of arbitration agreements. Parties can now have greater confidence that arbitral awards will be upheld by courts, unless there are compelling reasons for interference. Secondly, it promotes the efficiency and finality of arbitration proceedings by discouraging frivolous challenges to arbitral awards. Thirdly, it aligns India’s arbitration laws with international best practices, which emphasise minimal judicial intervention in arbitration.

In conclusion, the Supreme Court’s decision in Ssangyong Engineering & Construction Co. Ltd. vs. NHAI is a positive development for arbitration in India. It provides greater certainty and predictability to parties involved in arbitration and strengthens the role of arbitration as an effective means of dispute resolution.

Ambiguous and limited grounds for setting aside the arbitral award by the court 

Section 34(2) (b) when the Court finds that:

  • 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 is in conflict with the public policy of India

It is 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 (i.e principle of confidentiality  in conciliation)
  • 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.

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 additional provision empowers the Indian court to set aside domestic arbitral awards if the Court finds that the award is vitiated by patent illegality appearing on the face of the award:

Provided that an award shall not be set aside merely on the ground of an erroneous application of the law or by reappreciation of evidence.

ONGC Ltd. vs. Western Geco International Ltd. (2014)

Facts:

  • ONGC Ltd. (ONGC), an Indian state-owned oil and gas company, entered into a contract with Western Geco International Ltd. (Western Geco), a Norwegian seismic data acquisition company, for the provision of seismic data acquisition and processing services.
  • A dispute arose between ONGC and Western Geco regarding the interpretation of the contract and the amount payable by ONGC to Western Geco.
  • The parties agreed to resolve the dispute through arbitration in accordance with the rules of the International Chamber of Commerce (ICC).

Arbitration proceedings

  • The arbitral tribunal constituted under the ICC rules issued its award in favor of Western Geco, holding that ONGC was liable to pay a certain amount to Western Geco.
  • ONGC challenged the arbitral award before the Bombay High Court, arguing that the tribunal had erred in its interpretation of the contract and in the calculation of the amount payable.

Supreme Court’s decision:

  • The Supreme Court upheld the Bombay High Court’s decision and dismissed ONGC’s appeal.
  • The Supreme Court held that:
    • Courts cannot review the correctness of factual findings or interpretations by the arbitrator, as the arbitrator is the final judge of both law and facts.
    • However, courts can modify the quantum of an award when a technical error in the calculation is committed by the arbitrator.
  • In this case, the Supreme Court found that the arbitral tribunal had made a technical error in calculating the amount payable by ONGC to Western Geco.
  • The Supreme Court accordingly modified the arbitral award and reduced the amount payable by ONGC.

Significance:

  • The Supreme Court’s decision in ONGC vs. Western Geco clarifies the scope of judicial review of arbitral awards in India.
  • The decision reinforces the principle that courts should not interfere with the findings of fact and interpretations of law made by arbitrators.
  • However, courts can intervene to correct technical errors in the calculation of damages or other monetary awards made by arbitrators.

Associate Builders vs. Delhi Development Authority (2015)

Facts:

  • This case involved a dispute between Associate Builders (the appellant) and the Delhi Development Authority (DDA) (the respondent) over a construction contract.
  • The dispute arose when the DDA terminated the contract and claimed damages from Associate Builders for failing to complete the project within the stipulated time.
  • Associate Builders challenged the DDA’s claim before an arbitral tribunal, which ultimately ruled in favour of the DDA.
  • Associate Builders then filed a petition in the Delhi High Court challenging the arbitral award on various grounds, including that it was against public policy.
  • The Delhi High Court dismissed Associate Builders’ petition, holding that the arbitral award was not against public policy.

Legal Issue:

  • The main legal issue before the Supreme Court was whether an arbitral award can be challenged on the ground that it is against public policy.

Judgement:

  • The Supreme Court upheld the Delhi High Court’s decision and ruled that an arbitral award can only be challenged if it is against public policy, not merely because it contains an error of law.
  • The Court clarified that the term “public policy” in Section 34 of the Arbitration and Conciliation Act, 1996, refers to the fundamental principles of justice, morality, and fairness that are recognized by the legal system.
  • The Court held that an arbitral award will only be considered against public policy if it violates these fundamental principles.
  • In this case, the Court found that the arbitral award did not violate any fundamental principles of justice, morality, or fairness. Therefore, the Court held that the award was not against public policy and could not be challenged on that ground.

Significance:

  • The Supreme Court’s decision in Associate Builders vs. Delhi Development Authority clarified the concept of “public policy” within the context of Section 34 of the Arbitration and Conciliation Act, 1996.
  • The decision provides guidance to arbitral tribunals and courts in determining when an arbitral award can be challenged on the ground of public policy.
  • The decision also reinforces the importance of respecting the finality and enforceability of arbitral awards, as long as they are not against public policy.

It is also interesting to note that the interpretation of “public policy” has been both wide and narrow by the judiciary, and hence there is complexity and ambiguity involved when domestic and international arbitration intersect. For example, in Renusagar Power Co. Ltd. v. General Electric Co. (1994),  the concept of public policy with respect to foreign awards was constructed in a narrow manner. Whereas in ONGC vs. Saw Pipes, the Apex Court held that in a case where the validity of an award is challenged, there is no necessity of giving a narrow interpretation to the term public policy of India.

Limited duration of time for making the application

Section 34 (3) provides for a time duration of three months and extension of thirty (30) days to make the application, but not thereafter. It is quite shorter when compared to the Limitation period in civil matters or money decrees.

However, there can be instances where the applicant, despite his best efforts, could not access documentary evidence or favourable information to prove his case and is therefore prevented from making the application within the said period. 

Expeditious disposal of the Application under Section 34

Section 34(5) mandates the issuance of a prior notice to the other party before filing an application under Section 34 with the Court, along with an affidavit endorsing compliance with said requirement.

Section 34(6) prescribes a one year period for disposal of the application, starting from the date on which the notice referred to in sub-section (5) is served upon the other party. This provision was also made to overcome undue hindrance and delay in enforcing a just and fair arbitral award.

Enforcement of arbitral award

Arbitration awards play a pivotal role beyond merely resolving disputes; they embody the core principles of trust, expertise, and justice within the arbitration system, surpassing conventional adversarial litigation norms and therefore, without their smooth enforcement or execution, the spirit of ADR will greatly suffer. 

Issues related with enforcing the arbitral award

Filing of stay application in appropriate court

Section 36 prescribes for the process of enforcing the arbitral award. Prior to the amendment made on October 23, 2015, the position of law was laid down in National Aluminium Company Ltd. vs. Pressteel & Fabrications (P) Ltd. and Anr. (2004) and Fiza Developers Case,  that the moment an application challenging the arbitral award was made under Section 34, an implied automatic stay was imposed on the enforcement of an award under Section 36 of the Arbitration Act. There was no need to file an application for obtaining a stay separately once the award was challenged but the judicial approach changed in the Hindustan Construction Ltd vs. Union of India (2019)  judgement, where it was held that the award debtors will not be able to escape their liability by simply filing an application (with grounds for obtaining a stay, showing how irreparable damage or injury will be caused to the defeated party) under Section 34 as there will be no automatic stay of the award.

Court backlog

The spirit of ADR (to avoid the court and a long period of litigation) gets defeated because the party, even after obtaining the award, is now approaching the court for its successful execution and therefore has to face the long backlog and additional cost.

No clarity of judicial Intent

After the expiration of the limitation period of three months (30 days-of the condonation of the delay period), the award becomes final and can be enforced as a court decree. 

However, it is interesting to note after a deep reading of Section 34 and its interplay with Section 36, that the judicial intent appears to be dual and contradictory, as the arbitral tribunal is not empowered under the Amendment to replace the judicial courts as the Act does not provide the arbitral tribunal any power to enforce its own award like the courts.

Conclusion

At last, there is always a remedy that is kept alive for the defeated party to approach the Court—to appeal an award on grounds wide open for different interpretations. However, the process and timing for the stay application are being narrowed down to make it expeditious so as to make it appear that India is an Arbitration friendly country. But seeing the long backlog of the courts,   the road towards these mission statements appears to be full of many twists and turns the legal fraternity has yet to encounter.

Recognising the complexity of the subject, it was suggested that two recommendations might be helpful. These recommendations stem from the understanding that the subject is both intricate and constantly developing.

  • Arrive at a global standard of “public policy.”
  • Dedicate additional benches for hearing applications and appeals with regard to arbitral awards.
  • Introduce penalty for filing challenges and applications on weak or unmaintainable grounds.

References

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