This article is written by Archna Nair, pursuing a Certificate Course in Arbitration: Strategy, Procedure and Drafting from Lawsikho.com. Here she discusses “Most Common Reasons for Arbitration Awards Being Set Aside”.
Arbitration is one of the forms of Alternate Dispute Resolution or commonly known as ADR. This comes under the head of non-litigation, the form of proceedings of a dispute conducted outside the court of law. ADR has many types, like:
These forms of dispute resolution methods are generally used between two parties who are bound by any form of a contract. When any such dispute occurs, and the parties are bound to each other by any form of a contract, the first method through which the parties try to resolve is through ADR mechanism. In all of the above-mentioned types of ADR, arbitration is the most common form used in India.
Arbitration is typically used between private entities, although nowadays even government entities prefer it. The basis of arbitration is an arbitration agreement between the parties. There are two types of Arbitration,
Wherein the parties set their own rules of the procedure. This form is only effective when the parties act in co-operation with each other. This form is also a cost-effective method.
Wherein the parties appoint an authority to set the rules, appoint an arbitrator, etc. Generally, this form is sought when the parties do not act in co-operation with each other. This form generally has high administration fees.
Once both the parties are done with their arguments, production of evidence, cross-examination etc., of their respective sides, the final part of the procedure is the pronouncement of the award. When it comes to arbitration, the final judgment is called an award rather than a judgment. The judgment would be in favour of one party. Decree-holder is the party in whose favour the award is pronounced, and the other party is known as the judgment-debtor. The judgment-debtor has an option to challenge the arbitral award in the court. In case the court rejects the challenge, the party can go further for an appeal.
Sec. 34 of The Arbitration and Conciliation Act covers the grounds of challenging the arbitral award. To challenge an arbitral award, one has to file an application for setting aside the arbitral award under Sec. 34 of the Act for domestic awards, and Sec. 48 of the Act for foreign awards. However, after a party files an application to set aside the award in the court, it may reject or accept the application. In case the court accepts the application, it cannot review the merits of the case and is also cannot recheck the evidence. The court generally only accepts the challenge in case the application falls under any of the grounds in Sec. 34 of the Act.
Sec. 35 and Sec. 36 describe the finality and execution of the arbitral award. Therefore, the award is binding on both the parties. In case any of the parties is not satisfied with the award, such party may challenge the award in accordance with Sec. 34 of the Act.
According to Sec. 34, in order to challenge the award, the challenging party has to file the application within 3 months from the date of the award. A further extension of 30 days may be allowed by the court if it is satisfied that there was a sufficient cause for the delay.
Grounds or Provisions related to setting aside of Arbitration Awards
Sec. 34 of the Act deals with the setting aside of the arbitral award. In order to set aside an arbitral award, one needs to file an application in the court. Such an application by the party may be accepted or rejected by the court. This provision of challenging is different than the process of appeal. Appealing is generally done when a court pronounces a judgment, which is encompassed in Sec. 37 of the Act in case of the arbitration procedure. When the arbitral tribunal gives an award, it is different from the judgment which a court generally gives. Hence, Sec. 34 differs from Sec. 37. The court generally accepts an application of challenge only if it falls under any of the grounds mentioned in Sec. 34, not otherwise. Therefore, filing a bogus application might not be entertained by the Court. The section clearly gives the grounds so as to reduce unwanted or bogus applications, and in turn to reduce the burden of the court.
Therefore, a party can file an application under Sec. 34(2), on the following grounds:
- Incapacity of a party.
- Agreement not valid.
- No notice to the other party.
- Subject matter beyond the scope of the arbitration agreement.
- Composition of Tribunal not as per the agreement.
- Subject matter not under the arbitration law.
- Award in conflict with the public policy of India.
Before filing an application in the court to set aside the award, the party filing the application has to furnish a notice of such filing to the opposite party. Thereafter, on receipt of any such application under this section, the court may adjourn such proceedings in order for the arbitral tribunal to function. Such adjournment may be done on the request of a party or if the court deems fit. Any application under this section must be disposed off by the court within one year of the date of the notice, furnished to the opposite party.
(I) Incapacity of the parties
In case any of the parties is of unsound mind or is minor, then such persons are not bound to act in accordance with any agreement or contract. Therefore, the agreement itself becomes void and passing any award in such case can be set aside by the court. However, such persons have an option to apply for the appointment of a guardian, under Sec. 9(1). Hence, a party can file an application in the court in case the party was in any incapacity and yet the tribunal passed an award without considering this fact.
(II) Agreement not valid
If the contract is invalid, then the arbitration agreement will also be held to be invalid. All the essential elements of a contract have to fulfil in order for it to become enforceable. An invalid contract renders an arbitration clause also as invalid.
(III) No notice to the other party
Sec. 24(2) of the Act provides for the provision to serve a prior notice to the other party regarding the commencement of the proceedings or of invocation of the arbitral clause of the agreement. Therefore, in case any party to the proceeding does not serve prior notice of such commencement of the proceedings, then the party affected may challenge the award in the court.
(IV) Subject matter beyond the scope of Arbitration Agreement
While formulating an agreement, the parties define as to what all can be covered in the subject matter and what are the disputes that are covered under the arbitration agreement. Therefore, only those subject matters can be referred to an arbitral tribunal to resolve the dispute, not any other. However, if the tribunal acts ultra vires to the agreement and goes beyond the scope to give the award, the party affected may file an application in the court, challenging such award.
(V) Composition of the Tribunal not as per the Agreement
In case the Arbitrator is not appointed as per the agreed terms of the agreement, or the venue decided before by the parties has not been followed or any other procedural aspect that was decided prior in the agreement by the parties has not been followed through, then such affected party to the agreement may challenge the award in the court to set aside the award. In case the arbitrator has acted beyond his powers in giving the arbitral award, then he/she may be made liable for misconduct.
(VI) Subject matter not under the Arbitration law
There are certain matters that are not arbitral in nature. These matters have been explicitly excluded from the Act and are barred from bringing under the purview of arbitration. Only those matters are arbitral that are of private nature. Therefore matters like matrimonial, criminal, insolvency or any other public matters are excluded from arbitration subject matter.
(VII) Award in conflict with the Public Policy of India
This ground has further three more explanations, which was added in the 2015 amendment.
- Award through fraud or corruption.
- In contravention to fundamental policy of India.
- In conflict with morality or justice.
These explanations were further added to reduce the bogus filings in the court. Parties who could not file an application to set aside under any of the above grounds would file under this ground and the court would accept. To remove any such loophole, the legislation further defined “public policy”.
Further, the court also accepts those applications if it finds out that the award is vitiated by patent illegality, i.e., the award appears wrong on the face of it. This is only applicable for domestic awards and not to foreign awards.
The ADR mechanism saves time as well as saves a lot of money too. In India however, only Arbitration proceedings and Conciliation proceedings are codified. Other methods like Mediation and Negotiation have not yet been codified, although India has recently become a signatory to the Singapore Convention on Mediation, which means that India will soon have a binding law on mediation too. The President of India has also recently assented to the Arbitration Amendment Bill of 2019. This will bring major changes to the Act, making it more effective and reducing the bogus filing of cases in the court.
Furthermore, Sec. 34 of the Act emphasizes that there should be a minimal judicial intervention in the arbitral proceedings, which helps speedy disposal of cases in arbitration. The main motive of arbitration is the speedy disposal of cases. And filing an application or asking for judicial intervention at every stage of the arbitral proceeding diminishes that very objective. This was also stated in the case of M/S Emkay Global Financial Services Ltd. v. Girdhar Sondhi.
The above-mentioned grounds help to keep a check in the filing of applications for setting aside the awards. The court does not take into account any other reasons or grounds other than the ones mentioned in Sec. 34. These are some of the grounds that the court takes into consideration while accepting or rejecting an application to set aside an arbitral award.
While any interim measure is sought for or an application for challenging the arbitral award is filed, it is always best to keep in mind that no bogus or unnecessary filing is done so as to save the time of both the parties. The objective of the legislation is to help such private parties to get back to business without being affected by any form of contractual disputes which generally takes years in courts. Hence, these grounds serve the objective of arbitration in the best possible way.
- State of U.P v. Allied Constructions [(2003) 7 SCC 396]
- Dulal Podda v. Executive Engineer, Dona Canal Division [(2004) 1 SCC 73]
- State of Rajasthan v. Nav Bharat Construction Co. [AIR 2005 SC 4430]
- ONGC Ltd. v. Saw Pipe Ltd. [AIR 2003 SC 2629]
- PNB Finance Ltd. v. Shital Prasad Jain
- Civil Appeal No. 8367 of 2018
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