This article is written by Aradhya Gupta, pursuing B.A. LL.B.(Hons) from Teerthanker Mahaveer University. This is an exhaustive article which delves into the system of arbitration, certain provisions of arbitral awards under the Arbitration and Conciliation Act, 1996 to discuss the concept of application for setting aside the arbitral awards.
The settlement of a dispute out of the court by bringing it to a third person is very commonly known since the period of Ancient and Medieval India. So, the concept of arbitration is a way back old phenomena. The modern law of arbitration was drafted by the East India company which was developed in the regulatory framework through which the courts refer the suits for the arbitration process.
Evolution of Arbitration System
The first Indian Arbitration Act 1899 was based on the English Arbitration Act of 1889. After this, the Indian Arbitration Act 1940 came into force and then finally the Arbitration & Conciliation Act,1966 was enacted by the Parliament of India which incorporated the concept of arbitration which is even internationally accepted.
Meaning of Arbitration
- Arbitration is a process in which the parties resolve their dispute out of the court through the Arbitral Tribunal.
- An Arbitral Tribunal can be either appointed by parties to the dispute or by the court sometimes at the request of the party.
- We can also say that arbitration is a substitute for the litigation for the dispute resolution.
- The United Nations Commission on International Trade Law is considered as the basis of the Indian Arbitration Law.
- The decision of the arbitrator is considered to be as legally binding and enforceable by the court unless all the parties set forth that the arbitration process and decisions are non-binding.
Why does Arbitration take place?
Arbitration generally occurs when any dispute involving a contract contains an arbitration clause. Such a clause is signed to solve any future prospective dispute through arbitration willingly. The arbitration clause will also specify as to whether such resolving decision is binding or non-binding. If the arbitration would be binding, then the parties would have to consider the decision of the arbitrator as final over the arising dispute and if it would be non-binding then the parties have the option to litigate the issue before the court if they are discontented with the arbitrator’s decision.
- An arbitral/arbitration award is the award granted in the decision made by the arbitration tribunal in an arbitration proceeding.
- An arbitral award can be monetary or non-monetary. It can be monetary which is made for payment of a sum of money from one party to the other and it can be non-monetary when no money needs to be paid but it includes decisions like stopping a certain business practice or increasing unemployment perks and incentives.
- There are two conditions provided in the Arbitration Act, 1996 for an award to be valid-
- It must be certain, and
- It must contain the decision.
- The award must be written and signed by the arbitrator and it must contain the reasons for the passing of such award in the particular case.
- The arbitral award should clearly state the duties and liabilities imposed on the parties to the dispute and it should not leave any aspect pending of the dispute for the future discussion.
- It should be very much clear and final in the context of the issues and claims of the dispute concerned. In the case of Union of India V. Punjab Communications, the amount which was payable by one party to the other was not specified in the award and also the decision was unclear and incapable of being enforced. Therefore the arbitral award was set aside.
Application for setting aside arbitral awards
To ascertain the proper conduct of the arbitration proceedings, the law allows certain remedies against an arbitral award. An aggrieved party may resort to the law Court for setting aside the arbitral award on certain Grounds mentioned under Arbitration and Conciliation Act, 1966.
Section 34 of the Arbitration and Conciliation Act provides the provisions of certain specific grounds on the basis of which an arbitral award rendered in India can be set aside. They are-
- Incapacity of a party while making an application to enter the agreement.
- Arbitration agreement not being valid under the law.
- Parties were not given proper notice of the appointed Arbitrators or the Arbitral Tribunal.
- Nature of dispute not capable of settlement by arbitration.
- Composition of the arbitral award was not in accordance with the agreement of parties.
- The Arbitral award is in the violation of the public policy of a state.
- The Arbitral award deals with a dispute not falling within the terms of submissions to an arbitration.
(1). Incapacity of Parties
An application for setting aside an arbitral award can be passed if a party to the arbitration is incapable in taking care of their interest and they are not represented by a person who can safeguard their rights. The award can be set aside by the court if it finds that a party to a contract is a minor or of an unsound person who is not being represented by a Guardian for protecting his interest. Section 9 of the Arbitration and Conciliation Act,1996 provides that the provision of appointment of a guardian for a minor of unsound mind for his/her matter’s arbitral proceedings.
(2). The Invalidity of Arbitration Agreement under Laws
The validity of an arbitration agreement can be challenged in the same way on the same grounds on which the validity of a contract is challenged. In cases where the agreement Clause is added in a contract by the parties to it, the arbitration will be considered invalid if the contract is invalid.
(3). Notice not given to the parties of arbitration proceedings
As provided under section 34(2)(a)(iii), if the party to a dispute in arbitral proceedings was not given proper notice regarding the appointment of an arbitrator or any other notice of arbitral proceedings, then this would be considered as a ground for setting aside the arbitral award of such proceedings.
Section 23(1) of Arbitration and Conciliation Act,1966 provides that the arbitral Tribunal has to determine the time within which the statement must be filed. This must be timely communicated to the parties by a proper notice and section 24(2) provides that an advance notice shall be given to the parties regarding any hearing or meeting of the Tribunal for any purpose of inspection of documents, goods or other property etc.
In Dulal podda V. Executive Engineer, Dona Canal Division, Court held that the appointment of an arbitrator at the request of the appellant of the dispute without sending a notice to the respondent and an ex-parte decree given by the arbitration Tribunal will be held illegal and liable for setting aside.
(4). An Award not falling within the terms of Submission to Arbitration
The testimonials of a dispute in an agreement determines the limits of the authority and jurisdiction of an Arbitral Tribunal. If the jurisdiction does not come within the ambit of the Tribunal, then the award to the extent to which it is beyond the arbitrator’s jurisdictional powers would be considered as invalid and such award would be liable for setting aside. An arbitrator cannot act in contradiction to the terms of the contract.
In Rajendra Krishan Kumar V. Union of India, a matter under a writ petition was referred for arbitration proceedings. The writ petition contains no claim of compensation for damage to the perfectibility of the land because of the opposition party releasing effluents and slurry on that other party’s land. The court held that the award of any such compensation would be liable to set aside as it stands outside the scope of reference.
(5). Composition of Tribunal- Not in accordance with Agreement
Section 34(2)(a)(v) lays out that an award can be discarded or challenged if the composition of the arbitral tribunal was not in obedience with the agreement of the parties or if the procedure of conduct of proceedings was not followed properly. If the arbitrator passes a decision of an award which is in deviation from the terms of reference and the arbitration agreement, then this would lead to the award to be set aside and will amount to the misconduct of the arbitrator.
In the case of State Trading Corporation V. Molasses Co. the Bengal Chamber of Commerce, the Arbitral Tribunal did not allow a company who was a party to be represented by its law officer who was a full-time employee of the company. Here, the court held that it was the misconduct of the arbitrator as well as the violation of arbitration proceedings.
In the case of ONGC Ltd V. Saw Pipe Ltd., the Supreme Court held that the arbitral Tribunal, while exercising its jurisdiction cannot act in breach of some provisions of substantive law or provisions of the Arbitration and Conciliation Act, 1966.
(6). Disputes not arbitrable
The nature of the dispute should be capable of settlement by arbitration. Generally, all disputes which can be decided by a Civil Court involving private rights can be referred to the arbitration. Therefore, matters of criminal nature or matters of public rights cannot be decided by arbitration proceedings.
(7). Award against public policy
Section 34 provides that an application for setting aside an arbitral award can be made if such award is in violation of the public policy of India. The concept of public policy implies matters which concerns public good and Public Interest. The explanation of this section clarifies that such award which is obtained either by fraud or by corruption would be considered against the public policy of India. Also, the award which is required by suppressing the actual facts of the case either by misleading or tricking the arbitrator or by bribing the arbitrator or by using force on the arbitrator etc. would be held liable for setting aside as in contrary to the public policy.
In the case of Venture Global Engineering V. Satyam Computer Services Ltd., the Court held that an arbitral award could be set aside if it is conflicting with the fundamental policies of Indian laws or the justice, morality or interest of India.
Section 34(3) states regarding the limitation period for filing an application that an appeal to set aside an arbitration order by an aggrieved party has to be strictly made within the period of 3 months from the date of receipt of the same. The importance of this is set out by Section 36 which asserts that the award becomes enforceable as soon as the limitation period under Section 34 expires. Under section 33, the Court may, however, allow a delay of 30 days on request made by the aggrieved party if the court is satisfied on the evidence of the sufficient cause. In Case of National Aluminum Co Ltd v. Presteel Fabrication (P) Ltd, proceedings were instituted before the Supreme Court under the disbelief that it had jurisdiction in the matter of setting aside the arbitral award passed by Arbitral Tribunal. Time consumed on a bona fide prosecution of an application in a wrong forum was held by the Supreme Court to be a sufficient cause for condonation of delay.
- As in the Code of Civil Procedure, 1908, there is a general rule that an executing Court can execute the decree if there is no stay by the appellate court. In the same way, in Arbitration Act, once an application of setting aside the arbitral award is done under section 34, the executing Court has no power or authority to effectuate the award until and unless the application gets dismissed/refused under section 34.
As per section 34, a party to the arbitration agreement has to make an application for setting aside the award. But a legal representative in a case of any such party can also apply for it because he is a person claiming under that. An award which is set aside no longer remains applicable by law. Setting aside means that it is rejected as invalid. The parties get back to their former position in regard to their claims in the dispute and the matter becomes open again for decision. The parties have the option after setting aside an order to either again go for arbitration or to have the matter decided by the court of law.
Constitutional Validity of Sec 34
In the case of TPI Ltd. V. Union of India, in a writ petition, it was contended by the petitioner that an inherent right to set aside an arbitral award on the grounds provided, should be present and in the absence of the same, section 34 should be considered as unconstitutional. Here, the court dismissed the writ petition by stating that the arbitration is an alternate forum for the resolution of a dispute and it is on the wish of the parties to opt in on their free will for their matters and if they agree to the decision of the arbitral tribunal by mutual agreement. There is no compulsion by any statute forcing the parties to resort to the arbitration procedure.
Setting aside the foreign award
The Part 1 (Section 34) of the Indian Arbitration Act 1996 furnishes the grounds to challenge or set aside the award to be applicable only to the awards within a state and not to the foreign awards. On 6th September 2012, In Bharat Aluminium company V. Kaiser Aluminium Technical Service, the Supreme Court held that the Indian Arbitration Act should be interpreted in a way to give effect to the objective or purpose of the Indian parliament who drafted this legislation. Such findings of the Supreme Court are applicable only to the arbitration agreement executed after 6 September 2012.
So part 1 of the Arbitration and Conciliation Act has no application to the arbitrations occurring in matters outside India irrespective of the fact that whether parties chose to apply Indian Arbitration Act or not.
In Bhatia Int. V. Bulk Trading case, the Supreme Court held that even though there was no provision in Part 2 of the act providing for the challenge to a foreign award, a petition to set aside the same would lie under section 34 (part 1) of the act which provides provisions of the domestic award will be applicable to the foreign awards. The court held that the property in a dispute related to the shares in the Indian Company situated in India necessarily needed Indian laws to be followed to execute the award. The Court stated that in such a situation the award must be attested on the measurement of public policy of India and the Indian public policy cannot be affirmed through the implementation of the award on any foreign strand/support.
India has a modern and efficient Arbitration Act. Section 34 and 37 provides for recourse against an arbitral award which may be set aside by a court on certain specified grounds. All these Grounds are common to both domestic as well as international arbitral awards. The ground of public policy should only be interpreted as far as it aims towards broadening the public interest and not violating the basic notions of Indian laws. The judicial intervention should also be minimal for success and further promotion of Arbitration in India.
LawSikho has created a telegram group for exchanging legal knowledge, referrals and various opportunities. You can click on this link and join: