SETTING ASIDE OF ARBITRAL AWARD UNDER SECTION 34 OF THE ARBITRATION AND CONCILIATION ACT 1996

This article is written by Ayushi Mahawar, an intern under Legal Vidhiya

ABSTRACT

The evolution of arbitration in India traces back to ancient times, with the modern legal framework drafted by the East India Company. An Arbitration Award which is similar to a court judgment, can be challenged under specific grounds outlined in Section 34 of the Arbitration and Conciliation Act, 1996. These include incapacity of parties, invalid arbitration agreements, improper notice, disputes beyond the scope of reference, procedural irregularities, and conflicts with public policy. Parties must file applications within three months of receiving the award. The Act allows for remission by the tribunal to rectify defects. Arbitration serves as an efficient alternative to litigation, emphasizing fast and cost-effective dispute resolution. However, excessive court involvement can hinder its effectiveness. The Act aims to balance judicial oversight with promoting arbitration.

KEYWORDS

Arbitration, Arbitration and Conciliation Act, 1996, Arbitration Award, UNCITRAL Model Law, Arbitral Tribunal, Natural Justice

INTRODUCTION

Arbitration is a dispute resolution process that has been in existence since ancient and medieval India. The modern law of arbitration was drafted by the East India Company, which developed a regulatory framework for courts to refer suits for the arbitration process. An Arbitration Award is a verdict given by an Arbitration Tribunal and can be associated with a court of law’s judgment. However, aggrieved parties can take advantage of remedies available against arbitral awards on certain grounds. Section 34 of the Arbitration and Conciliation Act, 1996 deals with the procedure for setting aside an arbitral award based on specific grounds. The party desiring to set aside the award must file an application, provide proof of the occurrence of situations mentioned in clause 2 of Section 34, and ensure that the application has been filed within three months of receiving the award. The court may entertain the application based on its satisfaction with the necessity of setting aside such awards.

An arbitral award may only be set aside by the court if it is against public policy or if the subject matter of the dispute is not capable of settlement by arbitration. The court may also adjourn proceedings and direct the arbitral tribunal to resume the proceedings further or take necessary steps to eliminate the grounds for setting aside the award. India’s arbitration law is based on the English Arbitration Law and the United Nations Commission on International Trade Law (UNCITRAL Model Law). The Arbitration and Conciliation Act, of 1996, removed many defects from earlier arbitration laws and incorporated modern concepts of arbitration internationally. The arbitral award is treated at par with the court decree, making it enforceable in the same manner as a law court decree.
There is no provision for appeal against an arbitral award, and it is final and binding between the parties. However, an aggrieved party may seek legal recourse for setting aside the arbitration award on certain grounds specified in Section 34 of the Arbitration and Conciliation Act, 1996. The Indian arbitration law is based on the UNCITRAL Model Law, which allows parties to substitute domestic tribunals with arbitrators of their choice. Arbitration is a private dispute resolution process where disputes are proposed for resolution by one or more arbitrators who make binding decisions based on facts and evidence. The decision called an ‘award’, is cognate to a court’s decision or judgment. The excessive burden of the judiciary due to lengthy court procedures has made arbitration a time-efficient and reliable way for dispute resolution worldwide. The main focus of introducing arbitration as a dispute redressal mechanism was to provide a fast and cost-effective dispute resolution process. However, the influence of courts in matters related to setting aside arbitral awards has hampered the primary objective of arbitration, i.e., fast and speedy settlement of disputes outside the court. The provisions for setting aside arbitral awards are specified in Section 34 of the Arbitration and Conciliation Act, of 1996.

SECTION 34

Section 34 of the Arbitration and Conciliation Act outlines the process for challenging an arbitral award in court. According to this section, a party can only seek recourse to a court to set aside an arbitral award through a specific application process. An arbitral award can be set aside by the court if the party making the application can provide evidence for certain grounds, such as incapacity of a party, invalidity of the arbitration agreement, lack of proper notice or opportunity to present one’s case, or if the award addresses matters beyond the scope of the arbitration agreement. However, if the award contains decisions on both matters submitted to arbitration and those not submitted, only the part related to matters not submitted can be set aside. Additionally, the court can set aside an award if it determines that the subject matter of the dispute is not suitable for arbitration under the law or if the award conflicts with India’s public policy. It clarifies that an award is in conflict with public policy if it was influenced by fraud or corruption, violates specific legal provisions, or goes against fundamental principles of Indian law, morality, or justice. Furthermore, in arbitrations other than international commercial arbitrations, an award can also be set aside if it is tainted by a glaring legal error evident on its face. However, a mere mistake in applying the law or re-evaluation of evidence is not sufficient grounds for setting aside the award[1].

EVOLUTION OF ARBITRATION SYSTEM

The evolution of the arbitration system in India began with the first Indian Arbitration Act of 1899, followed by the Indian Arbitration Act of 1940, and finally the Arbitration & Conciliation Act, of 1966[2]. Arbitration is a process where parties resolve disputes out of the court through an Arbitral Tribunal, which can be appointed by parties or by the court at their request. The United Nations Commission on International Trade Law is considered the basis of the Indian Arbitration Law. Arbitration is a process where a contract dispute is resolved through an arbitration clause, which specifies whether the decision is binding or non-binding. If binding, the parties must consider the arbitrator’s decision as final, while non-binding allows them to litigate the issue before the court.

An arbitral award is an award granted in the decision made by the arbitration tribunal in an arbitration proceeding. It can be monetary or non-monetary, and it must be certain, contain the decision, be written and signed by the arbitrator, clearly state the duties and liabilities imposed on the parties, and be clear and final in the context of the issues and claims of the dispute. To set aside an arbitral award, an aggrieved party may resort to the law court for setting aside the award on certain grounds mentioned under the Arbitration and Conciliation Act, 1966[3].

SETTING ASIDE THE ARBITRAL AWARD

Parties are unable to challenge an arbitral award based on its substance, and the court is restricted from intervening on such grounds. As per the Supreme Court, an arbitrator functions akin to a judge appointed by the parties, thus implying that an award rendered by the arbitrator should not be readily subject to interference. However, this does not imply that there is no check on the arbitrator’s conduct. The law provides several remedies against an award to ensure that the proceeding is carried out properly. Under the repealed 1940 Act, three remedies were available against an award: modification, remission, and set aside. The 1996 Act categorized these remedies into two classes. The correction of errors is now within the jurisdiction of the parties and the Tribunal, whereas setting aside an award entails sending it back to the Tribunal for the correction of any flaws.

Section 34 allows courts to set aside an arbitral award on certain grounds, including a party’s incapacity, invalid arbitration agreement, improper notice of proceedings, the nature of the dispute not falling within the terms of submission to arbitration, and the arbitration procedure not being in accordance with the agreement. The Court has two further criteria for determining whether to annul the award: if the dispute cannot be resolved through arbitration or if the award violates public policy in India. In cases where decisions on matters submitted to arbitration can be distinguished from those not submitted, only the portion of the arbitral award dealing with matters not submitted may be invalidated[4].

The aggrieved party must file an application under Section 34, explaining the reasons for the challenge. A party to the arbitration agreement must file an application seeking to set aside the award. However, a legal representative can apply for it because he is claiming under their name. There is no unique form provided for making an application under Section 34 of the act, other than that it must be a written statement filed within the time limit.

Set-aside awards are no longer legally enforceable. The parties’ positions on their respective claims in the dispute have been restored as to their claims in the dispute. Setting aside an award means rejecting it as invalid. The award is avoided, and the case is reopened for further consideration. The parties are free to return to arbitration or have the dispute determined in court.

INCAPACITY OF PARTIES

Arbitration proceedings can be challenged if a party is not capable of protecting their interests or is not represented by someone who can protect them. If a minor or person of unsound mind is a party, they must be properly represented by a guardian to avoid the award being set aside. Section 9[5] of the 1996 Act allows them to apply for the appointment of a guardian for such parties. When an incompetent person is represented by a guardian, the ground of incompetence no longer applies.

INVALIDITY OF AGREEMENT

An agreement’s validity can be contested on any of the same grounds on which a contract can be challenged. If the arbitration clause is included in a contract, it will be invalid if the contract is also invalid[6].

NOTICE NOT GIVEN TO PARTIES

Section 34(2)(a)(iii)[7] allows a party to appeal an award if he or she was not given proper notice of the appointment of an arbitrator, was not given proper notice of the arbitral proceedings, or was unable to submit his case for any reason.

Section 23(1)[8] requires the Arbitral Tribunal to decide the time within which the statements must be filed. This determination must be disclosed to the parties via sufficient notice. Section 24(2) requires that the parties be provided reasonable advance notice of any Tribunal hearing or conference for the inspection of papers, goods, or other property.

Suppose a party is barred from appearing and presenting his case before the Tribunal for whatever reason. In that case, the award may be thrown aside because the party was denied the opportunity to be heard under the concept of natural justice.

AWARD BEYOND THE SCOPE OF REFERENCE

The reference of a dispute under an agreement defines the arbitrator’s authority and jurisdiction. If the arbitrator asserted jurisdiction that he did not have, the award would be null and void to the extent to which it is beyond the arbitrator’s jurisdiction and would be invalid and liable to be set aside.

Section 34(2)(a)(iv)[9] of the Act states that an arbitral award may be set aside if it deals with a dispute not contemplated by the reference, or if it does not fall within the provisions of the reference, or if it contains a decision in areas beyond the reference

Section 16[10] of the Arbitration and Conciliation Act of 1996 states that the Tribunal is responsible for making the initial decision regarding jurisdiction. The party shall immediately object to the excess of jurisdiction. If the Tribunal rejects the objection, the aggrieved party may seek to set aside under Section 34(2)(a)(iv) on the grounds of excess of jurisdiction.

An arbitrator cannot go against the terms of the contract. Where the contract terms are not clear or unambiguous, the arbitrator has the authority to interpret them.

ILLEGALITY IN ARBITRAL PROCEDURE

Section 34(2)(a)(v)[11] provides that an award can be challenged if the composition of the Tribunal was not in accordance with the agreement, or the procedure agreed to by the parties was not followed in the conduct of proceedings. Failure to adhere to the agreed procedure or the procedure mandated by the Act constitutes procedural misconduct.

DISPUTE IS NOT ARBITRABLE

An arbitrator’s ability to exercise power is contingent on the existence of an arbitral dispute. Only issues of indifference between the parties to a lawsuit that affects their private rights can be sent to arbitration. Arbitration cannot be used to resolve criminal disputes, insolvency processes, or public rights issues.

AWARD AGAINST PUBLIC POLICY

Section 34(2)(b)(ii)[12] allows for an application to set aside an arbitral ruling if it conflicts with Indian public policy.

The explanation for clause (b) states that an award gained by fraud or corruption is likewise an award against India’s national policies. An award reached by suppressing facts, misrepresenting or manipulating the arbitrator, bribing the arbitrator, putting pressure on the arbitrator, and so on could be overturned.

The term “public policy” refers to issues affecting the public good and interest.

If the award is contrary to the substantive provisions of law, the provisions of the Act, or the conditions of the contract, it is unconstitutional and may be challenged under Section 34. The award can be set aside if it is deemed excessively unjust and unreasonable to the extent that it profoundly offends the court’s conscience or contravenes public policy.

LIMITATION FOR FILING APPLICATION

Section 34(3)[13] provides that an application for setting aside an arbitral award must be made within three months of receiving the award or disposition of the application by the arbitral tribunal. The importance of this is emphasized by Section 36, which provides that the award becomes enforceable as soon as the limitation period under Section 34 expires. The provision in Section 34(3) grants the party an additional duration of 30 days following the lapse of three months if the court is convinced that there was a valid reason preventing the party from submitting the application.

REMISSION BY THE TRIBUNAL

When a motion to set aside an arbitral award is brought, the court may delay the proceedings for a specified time to allow the tribunal to address and eliminate the grounds cited. Upon such adjournment, the Arbitral Tribunal shall restart the arbitral proceedings and take the necessary action to eliminate the grounds. The resumed proceedings must only pertain to the grounds stated in the application pursuant to Section 34. It may become essential to record new findings and change the award. The court would then evaluate whether the grounds mentioned had been eliminated and whether the award should be set aside.

CONCLUSION

In conclusion, the evolution of arbitration in India showcases a journey from ancient practices to the modern legal framework established by the Arbitration and Conciliation Act of 1996. This legislation, drawing from international models like the UNCITRAL Model Law, emphasizes the efficiency and effectiveness of arbitration as an alternative dispute resolution mechanism. However, the Act also provides grounds for challenging arbitral awards under Section 34, ensuring a balance between promoting arbitration and maintaining judicial oversight. The grounds for setting aside an arbitral award, as outlined in Section 34, encompass various aspects such as incapacity of parties, invalid arbitration agreements, procedural irregularities, and conflicts with public policy. Additionally, the Act imposes a time limit of three months for parties to file applications for setting aside awards, with provisions for extension under specific circumstances. Furthermore, the Act allows for remission by the tribunal to rectify defects identified in the award, emphasizing the importance of addressing procedural shortcomings without nullifying the entire arbitration process. This highlights the Act’s commitment to ensuring fairness and integrity in arbitration proceedings while maintaining the efficiency and finality of arbitral awards. Overall, the Arbitration and Conciliation Act of 1996 serves as a comprehensive legal framework that facilitates arbitration as a preferred method of dispute resolution in India. However, continuous efforts to streamline procedures, enhance transparency, and address emerging challenges are essential to further strengthen the arbitration ecosystem and promote confidence in the system among stakeholders.

REFERENCES

1. The Arbitration And Conciliation Act, 1996, § 34, No. 26, Acts of Parliament, 1996 (India).
2. iPleaders, https://blog.ipleaders.in/what-is-the-application-for-setting-aside-the-arbitral-awards/ (last visited Feb. 12, 2024).
3. Legal Service India, https://www.legalserviceindia.com/legal/article-2423-section-34-of-arbitraton-and-conciliation-act-1996-the-journey-of-curtailing-judicial-intervention-in-the-arbitral-process.html (last visited Feb. 11, 2024).
4. Lawctopus, https://www.lawctopus.com/academike/arbitral-award-setting-aside/ (last visited Feb. 12, 2024).
5. iPleaders, https://blog.ipleaders.in/what-is-the-application-for-setting-aside-the-arbitral-awards/#5_Composition_of_Tribunal-_Not_in_accordance_with_Agreement (last visited Feb. 10, 2024).

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[1] The Arbitration And Conciliation Act, 1996, § 34, No. 26, Acts of Parliament, 1996 (India).

[2] iPleaders, https://blog.ipleaders.in/what-is-the-application-for-setting-aside-the-arbitral-awards/ (last visited Feb. 12, 2024).

[3] Legal Service India, https://www.legalserviceindia.com/legal/article-2423-section-34-of-arbitraton-and-conciliation-act-1996-the-journey-of-curtailing-judicial-intervention-in-the-arbitral-process.html (last visited Feb. 11, 2024).

[4] Lawctopus, https://www.lawctopus.com/academike/arbitral-award-setting-aside/ (last visited Feb. 12, 2024).

[5] Lawctopus, https://www.lawctopus.com/academike/arbitral-award-setting-aside/ (last visited Feb. 12, 2024).

[6] Lawctopus, https://www.lawctopus.com/academike/arbitral-award-setting-aside/ (last visited Feb. 12, 2024).

[7] iPleaders, https://blog.ipleaders.in/what-is-the-application-for-setting-aside-the-arbitral-awards/ (last visited Feb. 12, 2024).

[8] iPleaders, https://blog.ipleaders.in/what-is-the-application-for-setting-aside-the-arbitral-awards/ (last visited Feb. 12, 2024).

[9] Lawctopus, https://www.lawctopus.com/academike/arbitral-award-setting-aside/ (last visited Feb. 12, 2024).

[10] Lawctopus, https://www.lawctopus.com/academike/arbitral-award-setting-aside/ (last visited Feb. 12, 2024).

[11] iPleaders, https://blog.ipleaders.in/what-is-the-application-for-setting-aside-the-arbitral-awards/#5_Composition_of_Tribunal-_Not_in_accordance_with_Agreement (last visited Feb. 10, 2024).

[12] iPleaders, https://blog.ipleaders.in/what-is-the-application-for-setting-aside-the-arbitral-awards/#5_Composition_of_Tribunal-_Not_in_accordance_with_Agreement (last visited Feb. 10, 2024).

[13] Legal Service India, https://www.legalserviceindia.com/legal/article-2423-section-34-of-arbitraton-and-conciliation-act-1996-the-journey-of-curtailing-judicial-intervention-in-the-arbitral-process.html (last visited Feb. 11, 2024).

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