In this article, Mishika Bajpai discusses the Prior Notice Requirement Under Section 34(5) of the Arbitration and Conciliation Act, 1996.

The most recent debate that reverberated in the halls of the Apex Court was on the issue whether Section 34(5) of the Arbitration and Conciliation Act, 1996, inserted by Amending Act 3 of 2016 (w.e.f. 23rd October 2015), is mandatory or directory?

Before divulging the ratio straightaway, it is rather crucial to understand the scheme of the act along-with the intention of the legislature and the purport of the language, in order to perceive how the court reached its decision.

The Arbitration and Conciliation Act, 1996 consolidates and amends the law relating to arbitration, and, as such, is a complete code.[1] Under the 1996 Act, an arbitral proceeding commences under Section 21, in respect of a particular dispute for which a request for reference to arbitration is received by the respondent[2]. The arbitral proceedings terminate[3] by the delivery of a final arbitral award. The award shall then be final and binding on the parties and such persons claiming under them[4]. The enforcement of an award[5], as per both the pre-and post-amendment regime, is in accordance with the provisions of the Code of Civil Procedure, 1908, and as such is deemed to be decree enforceable under it.[6]

The Arbitration and Conciliation (Amendment) Bill, 2015 was introduced in the light of India’s poor position in contract enforcement in the World Bank Doing Business Report wherein it ranked 178 out of 189 countries in enforcing contracts. The reason being, slow process of dispute resolution through arbitration and further pigeonholing by court interferences. The introduction entailed several debates over a possible legislation which was urgently required to diminish the snowballing pendency. The heart of the amendment was to ensure quick enforcement of contracts, easy recovery of monetary claims, and encouraging investment and economic activity. [7]

The Law Commission of India submitted its 246th Report on “Amendments to the Arbitration and Conciliation Act, 1996” in August 2014 and recommended various amendments in the Act. The Report outlined the issue of delay plaguing the arbitration process, including challenges to arbitral awards under Section 34 of the Act which remain pending for years, and then proposed amendments to facilitate expeditious disposal of these cases. For instance, the Commission proposed the addition of sections 34 (5) and 48 (4) which would require that an application under those sections shall be disposed of expeditiously and in any event within a period of one year from the date of service of notice. The Amendment Act of 2015 was, thus, enacted to provide for speedy disposal of cases relating to arbitration with least court intervention[8] and it is in this background that the addition of Section 34(5) was recommended.

Statutory regime of challenging a domestic award

The remedy against an award under Section 34 emphasizes that the recourse “may be made only by an application for setting aside such award in accordance with sub-section (2) and sub-section (3)”. While sub-section (2) enumerates the grounds under which an arbitral award can be set aside by the Court, sub-section (3) sets out the time period within which an arbitral award can be challenged under the Act. Under this, the challenge to an arbitral award may not be made after a period of 90 days from the receipt of the award, with the Court having the power to condone a delay of 30 more days, i.e. if sufficient cause is made out.

Another provision adjunct to the exercise of ‘making of an application’ under Section 34 is the newly introduced Section 34(5)[9] which reads as under –

“An application under this section shall be filed by a party only after issuing a prior notice to the other party and such application shall be accompanied by an affidavit by the applicant endorsing compliance with the said requirement.” (emphasis supplied)

Lastly, Section 34(6) states that an “application under this section shall be disposed of expeditiously, and in any event, within a period of one year from the date on which the notice referred to in sub-section (5) is served upon the other party”. Reading Sections 34(5) and (6), it seems as if they form part of a composite scheme, the object of which is that an application under Section 34 be disposed of expeditiously within one year.

Upon a perusal of the above provision and for the reasons mentioned below[10], it would appear as if service of a prior notice of an application under Section 34 is crucial to the ‘making of an application’ –

1. Not only is such notice to be given but also the application itself has to be accompanied by an affidavit of the applicant endorsing the compliance of said requirement. [11]
2. The wording used in Section 34(5) of the Act clearly shows that the intent of the legislature was that no application under Section 34 of the Act can be filed until and unless the same has been served on the other party. [12]
3. The use of the words ‘only after’ clearly demonstrates the mandatory nature of this requirement of issuance of prior notice to the other party. [13]
4. Any doubt in this regard is completely obliterated by second part of the sub-section which provides that the application ‘shall’ be accompanied by an affidavit by the applicant endorsing compliance with the said requirement. [14]
5. This requirement of the service of prior notice therefore, cannot be said to be a mere formality or directory in nature.[15]

A similar reading of the provision was given by the Patna High Court[16], Guahati High Court[17], Uttarakhand High Court[18], and Himachal Pradesh High Court[19], while holding it to be mandatory. Thus, it came to be understood that the use of the words ‘shall’ and ‘only’ rendered the provision to be mandatory.

The requirement of a prior notice became all the more necessary due to the insertion of Section 36(2) and 36(3) which provide that along-with filing of the application, the objector should also file an application for stay of the operation of the award; the purpose being to ensure that the opposite party is adequately represented when the court is considering the issue of stay. [20]

However, whether a statute is mandatory or directory depends upon the intent of the Legislature and not upon the language in which the intent is clothed. [21] The meaning and intention of the Legislature must govern, and these are to be ascertained, not only from the phraseology of the provision, but also by considering its nature, its design, and the consequences which would follow from construing it the one way or the other.[22] “Where the consequence of failure to comply with any requirement of a provision is provided by the statute itself, the consequence has to be determined with reference to the nature of the provision, the purpose of enactment and the effect of non-compliance thereof. In its absence the consequence has to be determined with reference to the effect of the non-compliance of the provision of the legislature. Mere use of the word ‘shall’ need not be given that connotation in each and every case that the provision would be invariably interpreted to be mandatory or directory.”[23] One of the well-accepted tests for determining whether a provision is directory or mandatory is to see whether the enactment provides for the consequence flowing from non-compliance with the requirement prescribed.[24]

Instantly, another perusal of Section 34(5) will show that there has been no consequence provided against its infraction, rendering it to be merely directory and not mandatory. While the section provides that an application shall be made only after making due compliance of issuing prior notice, it is not followed by a penal provision which acts as a consequence for its non-compliance. It is only a procedural provision which has been introduced to reduce delay in deciding applications under Section 34. The construction ultimately depends upon the provision itself, keeping in view the intendment of the enactment and the mischief it seeks to avoid. In the present case the only consequence of not providing prior notice would be an extension of the timeline in which the challenge against an award has to be disposed of. It is true that the legislature made a conscious decision to specifically add Section 34(5) but that by itself would not scuttle the remedy provided to a party seeking justice against an award before a court of law; that is certainly not the mischief that the provision seeks to avoid.

The same Amendment Act brought in a new Section 29A which provided that in case an award is made beyond the stipulated or extended period contained in the Section, the consequence of the same would result in the termination of the mandate of the Arbitrator. This is to be contrasted with Section 34(5), the non-compliance of which leads to no consequence.

The Bombay High Court, while dealing with the aforementioned query, noted that the provision is directory, largely because no consequence has been provided for breach of the time limit specified.[25] Furthermore, it observed, that there existed no consequence under section 34(6). Therefore, if the Court is not able to dispose of the arbitration petition under section 34 within one year from the date of service of notice, the only consequence would be that the timeline would get extended. It was further observed that the legislative intent of inserting those provisions is the speedy disposal of the proceedings and not to penalise the petitioner for non-compliance of the procedure which, in effect, is directory.[26] This view was followed by the Calcutta High Court as well.[27]

The Hon’ble Supreme Court in the case of The State of Bihar & Ors. vs. Bihar Rajya Bhumi Vikas Bank Samiti, Civil Appeal No. 7314 of 2018 on 30.07.2018 stated that it was the view propounded by the High Courts of Bombay and Calcutta that represented the correct state of the law.[28] The Court noted that the object of Section 34(5) and (6) is, as has been stated by the Law Commission, the requirement that an application under Section 34 be disposed of expeditiously within a period of one year from the date of service of notice.[29] It found it imperative to note that the provision was procedural, the object behind which is to dispose of applications under Section 34 expeditiously. It was however observed that the aforenoted by itself would not be sufficient to construe Section 34(5) as mandatory, keeping in view the fact that if the time limit of one year is not adhered to under Section 34(6), no consequence thereof is provided. “To construe such a provision as being mandatory would defeat the advancement of justice as it would provide the consequence of dismissing an application filed without adhering to the requirements of Section 34(5), thereby scuttling the process of justice by burying the element of fairness.” The Court thus, concluded by holding that Section 34(5) is a directory provision and not mandatory.

[1] Fuerst Day Lawson Ltd. v. Jindal Exports Ltd., (2011) 8 SCC 333 at 371

[2] Section 21, Arbitration and Conciliation Act, 1996 (unless the parties otherwise agree)

[3] Section 32, Arbitration and Conciliation Act, 1996 (or by any other the circumstances mentioned in Section 32(2))

[4] Section 35, Arbitration and Conciliation Act, 1996

[5] Section 36, Arbitration and Conciliation Act, 1996

[6] BCCI v Kochi Cricket Pvt. Ltd., (2018) 6 SCC 287

[7] Parliamentary Debate available at http://164.100.47.193/debatestext/16/VI/1612f.pdf @pg. 215, 216, 221, 222

[8] Statement of Objects and Reasons, Arbitration and Conciliation Act, 1996

[9]  Section 34(5), set out below, was added to the Act by the Arbitration and Conciliation (Amendment) Act, 2015, which was enacted on 31.12.2015 and deemed to come into force on 23.10.2015

[10] Machine Tool (India) Ltd v. Splendor Buildwell Pvt. Ltd. & Anr., 2018 SCC Online Del 9551

[11] Ibid

[12] Ibid

[13] Ibid

[14] Ibid

[15] Ibid

[16] Bihar Rajya Bhumi Vikas Bank Samiti v. The State of Bihar, L.P.A. No. 1841/2016

[17] Union of India and Ors. vs. Durga Krishna Store Pvt. Ltd., Arb. A. 1/2018

[18] National Highways Authority of India vs. Ashish Panwar and Ors. 2017AIR2018Utr12

[19] Madhav Hytech Engineers Pvt. Ltd. vs. The Executive Engineers and Ors., 2017 OMP (M) No. 48 of 2016

[20] Law relating to Arbitration and Conciliation, P.C Markanda, 9^thEdn., 2016

[21] Govindlal Chhaganlal Patel v. Agricultural Produce Market Committee, (1975) 2 SCC 482

[22] Ibid

[23] Lakshmanasami Gounder v. CIT, (1992) 1 SCC 91. Also See, Kailash v. Nanhku, (2005) 4 SCC 480

[24] Administrator, Municipal Committee Charkhi Dadri v. Ramji Lal Bagla, (1995) 5 SCC 272

[25] Global Aviation Services Private Limited v. Airport Authorities of India, Commercial Arbitration Petition No. 434 of 2017; See also Maharashtra State Road Development Corporation Ltd. v. Simplex Gayatri Consortium and Ors., Commercial Arbitration Petition No. 453 of 2017

[26] Ibid

[27] Srei Infrastructure Finance Limited v. Candor Gurgaon Two Developers and Projects Pvt. Ltd., A.P. No. 346 of 2018

[28] The State of Bihar & Ors. vs. Bihar Rajya Bhumi Vikas Bank Samiti, Civil Appeal No. 7314 of 2018, para 27

[29] Ibid, para 24