This article has been written by Hemant Bohra of Lovely Professional University, Punjab. This article discusses in detail the provision of Section 34 of the Arbitration and Conciliation Act, 1996 which includes the grounds to challenge an award, limitation of time, judicial intervention, and more with relevant case laws.
It has been published by Rachit Garg.
In the 1990s, India made significant changes to its arbitration legislation, such as the change in the time period for concluding an arbitration proceeding, i.e., 12 months, and the disqualification of foreign arbitrators. The primary reason was that prior to arbitration, legislation was deemed to be highly problematic, resulting in unnecessary delay and expenditure. As a result, new and efficient dispute resolution regulations were required, and the Arbitration and Conciliation Act of 1996 was enacted.
Arbitration is a method of resolving commercial disputes outside of the court to reduce the burden of the case on them. International trade arbitration is favored because enforcing a foreign arbitral verdict is easier than enforcing a court judgment. However, if a claimant’s claim is unsuccessful, an arbitral award can be non-pecuniary, as neither party is required to pay any money to the other. This article gives a detailed analysis of Section 34 of the Arbitration Act and every provision related to it that a reader needs to know.
Section 34 of Arbitration and Conciliation Act, 1996
Article 34 of UNCITRAL (United Nations Commission on International Trade Law) Model Law and Section 30 of the Arbitration Act 1940 are both referenced in Section 34 of the 1996 Act as they both talk about setting aside an arbitral award. Section 34 of the Arbitration and Conciliation Act of 1996 specifies grounds for challenging an arbitral award rendered under Section 31. However, the challenge to an award under Section 34 is subject to certain limitations, such as the fact that it may only be contested within three months of receiving the award, which can be extended for another 30 days.
In Municipal Corp. of Greater Mumbai v. Prestress Products (India) (2003), the court held that the new Act (1996) was enacted with the explicit Parliamentary goal of limiting judicial participation and by which the scope of a prospective challenge to an award is greatly reduced under Section 34.
What is an Arbitral Award
An arbitral award is a decision made by an arbitration tribunal in an arbitration proceeding that is believed to be equivalent to a court of law’s judgment concerning certain exceptions. The award may provide the parties with a number of remedies, including money, consent, injunctions, and other remedies. Depending on the nature of the dispute, the award may be interim, partial, or final.
Furthermore, under Section 31 of the Arbitration and Conciliation Act of 1996, the arbitral award must include the reasons for its decision unless the parties have agreed that no reasons should be given or the ruling is an arbitral award on agreed conditions under Section 30.
Conditions in which an arbitral award can be set aside
Section 34(2)(a) and Section 34(2)(b) of the Arbitration and Conciliation Act, 1996 provide several grounds on account of which the Court can set aside the arbitral award, which are as follows:
- Incapacity of the party
If any of the parties is under the age of majority or is a minor, they are not obligated to follow any agreement in place. As a result, the agreement becomes void, and any award made in such a case may be revoked by the court. For example, a woman who is infected with schizophrenia, a psychotic disorder, can through her representative, apply for an award to be set aside.
The incompetent person can, however, apply to the court for the appointment of a guardian for arbitral proceedings under Section 9 of the arbitration act and, after that, the ground for incapacity of the party will cease to exist.
- Agreement is not valid
In order for a contract to be enforceable, all of its essential elements must be met. If the contract is illegal, the arbitration agreement will be declared void as well, and the arbitral award can be revoked. In Adarsh Kumar Khera v. Kewal Kishan Khera, 2007, the arbitral award was set aside since it was made without giving the parties a chance to be heard, it was deemed void, and both parties wanted it overturned.
- Other party was not notified
Arbitral award shall be revoked if the party filing the application was not provided with an advance notice of the arbitrator’s appointment or the arbitral procedures or was otherwise unable to submit his case.
In AKM Enterprises Pvt. Ltd. v. Ahluwalia Contract (India) Ltd. (2016), an arbitral award was set aside on the basis that the Arbitrator wouldn’t arbitrate upon a counter case of the applicant on merits on the ground that no notification had been given preceding the subject assertion and hence the council didn’t have ward to engage something very similar, which is in opposition to the settled place of regulation that reason for the counter case is to limit assortment of procedures and that in such cases the court would have the purview to arbitrate upon them even without an earlier notification.
- Subject matter beyond the arbitration clause
The arbitral award will be challenged if it deals with an issue that is not addressed by the arbitration agreement or contains decisions on subjects that are outside the scope of the arbitration agreement. Also, if the judgments on items submitted to arbitration can be differentiated from those not so submitted, only that portion of the arbitral award, including decisions on subjects not submitted to arbitration, may be set aside.
In India Yamaha Motor Pvt. Ltd. v. Divya Ashish Jamwal 2019, the arbitral award was set aside because it was issued in violation of the contract’s provisions, without taking into account relevant evidence on file, and based on assumptions. Further, in Rulia Mal Amarchand v. Hindustan Petroleum Corporation Ltd. 2019, it was held that the arbitrator should have limited himself to the problems and agreement that had been presented for arbitration.
- Composition of arbitral tribunal not as per contract
If the arbitrator is not appointed in accordance with the provisions of the agreement or by the parties, or if any other administrative aspect of the agreement that was determined earlier by the parties has not been fully implemented, the aggrieved party may seek to have the award set aside in court.
In Bharat Sanchar Nigam Ltd. v. Maharashtra Knowledge Corporation Ltd. (2019), the award was partially set aside because the arbitrator failed to examine important information while making his decision on the account of which the Arbitral Tribunal was formed and this resulted in the breach of terms of the contract.
Apart from the above grounds, there are a few other grounds that the court may use to set aside an arbitral award as mentioned under Section 34(2)(b) of the Arbitration and Conciliation Act, 1996 if the court finds that:
- Subject matter is of any other act/law – If the subject matter is related to some other law and not Arbitration Act, an arbitral award can be challenged.
- Not adhered to Public Policy of India – If the arbitral award is in conflict with the Public Policy of India, then the court can set it aside. In Steel Authority of India Ltd. v. Primetals Technologies (2020), the award was partially set aside as being against public policy because an extraordinarily high-interest rate of 14 percent per annum was given without any justification in comparison to current interest rates. Furthermore, the high interest rate looked to be punitive in character given the circumstances. As a result, the interest rate was cut to 10% per year.
Conditions in which an arbitral award cannot be set aside
Section 34 (3) of the Arbitration and Conciliation Act, 1996 talks about limitations in which an arbitral award cannot be set aside, which are as follows:
Application filed after three months of when the award was received
The Court will not consider an application to set aside an award if it is filed after three months have passed since the applicant received the arbitral award, according to Section 34(3). The caveat to this section further states that if the Court is convinced that the applicant was prevented from making the application within the necessary time by sufficient reason, the Court may hear the application for an additional 30 days but not beyond.
Erroneous application of law or misappreciation of evidence
In Haryana Urban Development Authority v. M/S Mehta Construction Company (2022), the supreme court held while quashing aside the judgment of Punjab and Haryana High Court that an arbitral award cannot be set aside simply because of erroneous application of law or misappreciation of evidence.
Rationale behind the award
Section 31(3) of the Arbitration Act states that the award must be a reasoned award unless the parties stated in their agreement that there was no need for reasons, or if it is an award made on agreed conditions under section 30 of the Act.
The court in Praveen Diwan and Others v. Himachal Pradesh Agro Industries Corporation Ltd., (2017) while setting aside the ruling under Sudarshan Trading Company v. Government of Kerala, (1989), held that the award cannot be set aside on the ground that it is not a speaking award.
Public Policy of India
The Court concluded in Oil & Natural Gas Corporation Ltd. v. SAW Pipes Ltd., 2003, that in the instance of an application under Section 34 to set aside an award, the Court’s position was seen to be that of an appellate/revision court, giving it broad powers. Furthermore, it was mentioned that the term “public policy” refers to something that concerns the public benefit and interest. However, the award cannot be argued to be in the public interest because it is patently in breach of legislative prohibitions. The administration of justice is likely to be harmed by such an award or decision.
In Mohan Steels Ltd. v. Steel Authority of India (SAIL), (2017), the court set aside the arbitral award because the Arbitrator construed the contract based on circumstances unrelated to contract terms by relying on Regulator’s notifications, which were first brought on record after the parties’ closing arguments. Even while it was clearly denied in its statement of claims, this was done without giving the petitioner a chance to refute its application to the case.
Limitation of time under Section 34 of Arbitration and Conciliation Act
The aggrieved party must request for the arbitration award to be set aside within three months after the date of the award, according to Section 34(3) of the Arbitration Act. If the applicant can demonstrate to the court that there was sufficient cause that prevented him from filing the application, the three-month timeframe might be extended for another 30 days. After “three months,” the time limit under Section 34(3) expires. The rule of thumb for constructing this time is to regard it as a calendar month rather than a 90-day span. As a result, the period would end in the third month, on the date that corresponds to the commencement date.
The Supreme Court decided in the case of Union of India v. Tecco Trichy Engineers & Contractors, (2005) that the statute of limitations for filing an application under Section 34 would begin only after a valid delivery of the judgment was made under Section 31(5) of the Arbitration Act.
In the case of State of Maharashtra v. M/S. Ark Builders Pvt. Ltd., (2011), the Supreme Court declared that Section 31(1) required arbitral tribunal members to make their awards in writing and sign them. It was held that Section 31’s sub-section (5) required the transmission of a copy of the award signed by the arbitrator’s members, not just any copy of the award. The Court further said that if Section 31(5) and Section 34(3) were read together, the time of limitation for submitting objections would begin only after the signed copy of the award was submitted to the party bringing the motion for setting aside the award.
Furthermore, according to Section 34(6) of the Arbitration Act, imposes a one-year deadline for disposing of the application from the notice period. The purpose of enacting this clause is to encourage the quick resolution of conflicts, given the large number of cases that arise in commercial arbitration. However, in the case of The State of Bihar & Ors. Vs. Bihar Rajya Bhumi Vikas Bank Samiti, (2018), the Supreme Court has reached the judgment that the revised sections are advisory rather than mandatory, based on various earlier precedents. The character of the revised clauses was determined by looking at these examples.
Can a court modify or alter the arbitral awards
The arbitral award can only be set aside by Section 34, and the findings in the arbitral judgment cannot be changed or modified. In the case of Project Director, National Highway Authority of India v. M. Hakeem & Anr., (2021), a division bench comprising Justice R.F. Nariman and Justice B.R. Gavai of the Supreme Court of India decided in favor of minimum judicial intervention, declaring that courts cannot amend, revise, or alter an arbitral judgment under Section 34 of the Arbitration Act. However, under Article 142 of the Constitution of India, the Court has allowed awards to be modified in the interest of comprehensive justice which clearly states that the court hasn’t retreated in altering the award but is giving respect to Section 34 by representing minimum judicial involvement.
It is important to keep in mind that India is not the only country where there are disputes and issues around award alteration. If a challenge is raised on a substantive issue or an appeal is filed on a matter of law in England, courts have the jurisdiction to change the decision under the English Arbitration Act, 1996.
The Arbitration Act, on the other hand, has no provision for partial annulment of arbitral judgments. As a result, it is appropriate to modify or change the arbitral award in part by putting it aside in part.
Reliability of Arbitral Award and Judicial Intervention
An arbitration award is comparable to a court verdict as it is binding on the parties and is crucial in that it aids in the resolution of the dispute between them. The most important factor in deciding to challenge an arbitration judgment is whether the arbitration decision is binding or not. If the arbitration is ineffectual and non-binding, any party or parties may appeal the award without a reasonable basis for doing so. If the arbitration is binding, however, the party or parties must have a compelling basis to dispute the award in court, just as they would in a jury trial.
A number of decisions have stated that provisions for setting aside an arbitral decision should never be entertained. Nobody should be given the right to doubt the ability of the arbitrators to conclude a matter. Whether the arbitrator’s ruling is in their best interests or not, the parties should follow it. In Eastern and North East Frontier Railway Cooperative Bank Ltd. v. B. Guha and Co., (1986), it was held that even if the arbitrator has made a mistake, the court cannot reexamine the evidence.
Arbitration is a consensual agreement in which parties agree to accept the arbitrator’s judgment, even if it is incorrect, as long as the arbitrator follows proper processes. As a result, courts cannot interfere with the enforcement of an award based on a legal or factual error, as was decided in Rajasthan State Mines and Minerals Ltd. v. Eastern Engineering Enterprise, (1999). If the courts are given the power to review based on a legal or factual error, then it will again create the problem of the burden of cases on courts of which at the first place and as a primary aim the Arbitration tribunal was established.
However, the Arbitration Act allows the court to hear any such applications for intervention in arbitration cases if the court is convinced that the applicant party does not have a copy of the arbitration agreement and will not be able to get one in the normal course of the arbitration procedure.
Section 34(4) of Arbitration and Conciliation Act, 1996
Section 34(4) of the Arbitration Act grants authority to the court to adjourn the proceedings for a period of time that is challenging the arbitral award in order to correct the flaws in an arbitral award. The extent of the court’s authority under Section 34(4), on the other hand, can only be fulfilled under certain conditions:
- A party must invoke Section 34(4) of the Arbitration Act before the award is set aside under sub-section (1).
- If the party does not ask the court to postpone the Section 34 proceedings before the award is formally set aside, the party will be barred from filing an application under Section 34(4) of the Arbitration Act.
- A party to the arbitration proceedings must submit a written application under Section 34(4) of the Arbitration Act.
- The court cannot exercise its power under Section 34(4) of the Arbitration Act on its own.
In the case of Radha Chemicals vs. Union of India, (2018) the the Supreme court of India held that the position of limitation had not been determined correctly and directed that the matter be remanded to the sole arbitrator to determine the point of limitation all over again. The court further said that a new arbitrator would have to be appointed to re-determine the case.
One should understand that the primary reason for the parties to select arbitration over litigation is to resolve their disputes and obligations quickly through an arbitral. However, most arbitral rules only specify that the award is binding on the parties. The current arbitration rules and regulations represent a suggestion rather than a clear and full legal framework addressing the conclusive effect of an arbitral award.
Arbitration as an institution is still developing, and it has not yet reached the point where it can successfully meet the demands of economic expansion. To effectively execute and achieve the act’s goal, India has to make several revisions to the rules governing the setting aside of arbitral awards, ambiguity in public policy, time limits, and more. However, the intervention of the Judiciary in arbitral awards needs to be reduced to provide the importance and reliance to Arbitration proceedings.
Frequently Asked Questions (FAQs)
What is patently illegal?
Although the term “Patently illegal” is nowhere defined in the Act, in a general sense, it is a ground to set aside an arbitral award if an award is found to be opposed to the substantive provisions of law or the requirements of the Arbitration and Conciliation Act, 1996, or against the terms of the contract.
Does the limitation period for setting aside an award begin on the date of the award or the date of receipt of the award?
The Supreme Court of India held that the limitation period under S.34(3) begins on the day the party, not the lawyer or agent, receives the signed copy of the award.
What is the difference between the partial and final award?
In partial award, some of the issues of the parties’ claim need to be resolved before passing on the verdict but in Final award, all the issues are resolved and the final claim has to be granted while stating the reasons.
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