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Section 34 of the Arbitration & Conciliation Act, 1996: An Analysis

The present article is an analysis of Section 34 of the Arbitration and Conciliation Act, 1996.

Introduction

Arbitration is a dispute resolution mechanism wherein the parties to a dispute agree in a written contract to submit their disputes, if any, to arbitration for settlement. The settlement is known as the arbitral award which is given by the arbitrator(s). The arbitral award is the award granted by the arbitrator and it is final. There is only one recourse available to an aggrieved party that is approaching a court of law.

Section 34 of the Arbitration & Conciliation Act, 1996 is of great significance because it provides for setting aside an arbitral award by the intervention of courts. Now, there has always been an immense hue and cry for keeping the jurisdiction of courts away from alternative dispute resolution mechanisms because that would essentially defeat the purpose of introducing alternative dispute resolution mechanisms if the entire burden of cases still falls on the judiciary.

Section 34 of the Arbitration & Conciliation Act, 1996 has been formulated in accordance with the UNCITRAL Model Law. The courts, however, do not have the authority to alter or modify the award or consider the case on any matter of law or fact other than the award itself.

Under the Arbitration Act of 1940, a major issue was the vagueness of the legislative intent of the expression “public policy of India”, which eventually gave opportunities to the judiciary to interfere and to interpret according to their understanding. Section 34 of the Arbitration and Conciliation Act, 1996 after the Amendment Acts of 2015 and 2019 seems to have resolved certain issues pertaining to the judicial intervention, however, further analysis is required to understand the scope of Section 34.

Highlights of the 2015 and 2019 Amendments to the Arbitration & Conciliation Act

Before the Amendment Act of 2015, the courts would often treat an application under Section 34 of the Arbitration & Conciliation Act as a regular civil suit appeal and would follow the lengthy procedure which would result in pendency of cases, defeating the purpose of alternative dispute resolution mechanisms. Moreover, “public policy of India” was also a vague term and subject to interpretation.

The Apex Court in 2009 in the case of Fiza Developers and Inter-Trade P. Ltd v AMCI(I) Pvt. Ltd. held that – it is difficult and unnecessary to consider an application under Section 34 of the Arbitration and Conciliation Act, 1996 to be an application or suit under the Code of Civil Procedure. Applications under Section 34 of the Act are for the purpose of proving the existence of grounds in order to remove the arbitral award only.

The Law Commission in 2014 and 2019 quoted the Supreme Court’s above intent and recommended to amend Section 34 of the Arbitration and Conciliation Act, 1996. Following are the amendments included by the Amendment Acts of 2015 and 2019:

  • Public Policy of India – Since in the 1996 Act, there was no definition of Public Policy of India, courts had the liberty to interpret the term according to their whims and fancies which resulted in a lot of judicial intervention in arbitration. The addition of a specific explanation for the “public policy of India” was the need of the hour.

It is very difficult to define the term “public policy” as the term is vague and leads to ambiguity. Each jurist would interpret the above term in their way according to their understanding.

The first case where a mention of the scope of public policy was seen was – Renusagar Power Co. Ltd. v General Electric Co. The court here restricted the meaning of the term “public policy” in an International Commercial Arbitration case to

  1. The fundamental policy of India,
  2. The interest of India, and
  3. Justice & Morality

In 2003, in the case of ONGC Ltd v Saw Pipes, the Supreme Court gave a broader meaning to the term “public policy” and said that since the public policy has not been defined in any act, it is likely to be interpreted widely or narrowly, depending upon the context in which it is being used.

Under Explanation 1 & 2, public policy was defined to be an arbitral award that was won by fraud or corruption or in violation of the fundamental policy of Indian law or the basic features of Natural Law and Morality.

  • Prior Issuance of Notice to Opposite Party and Timely Disposal –  The need to issue a notice to the opposite party was mandated to avoid delay and the time limit for disposal of such applications was limited to one year.
  • Section 34 – A Mechanism to Monitor, not a Trial – In order to prevent courts to create a mini-trial out of an application under Section 34, the Legislature curtailed all possibility of submission of evidence and cross-examination under Section 34 and elaborated “furnishes proof” as “what the court can establish based on what evidence the arbitrator had on record.”
  • Patent Illegality – The Amendment Act of 2015 also brought forward another ground for setting aside the arbitral award – patent illegality. This ground applies only to domestic arbitrations and not to International Commercial Arbitration Awards. Patent Illegality can be explained as – an error that is apparent on the face of the record.

If an arbitral award is not consistent with the provisions of the Arbitration & Conciliation Act, it would be considered to be a patent error. As said by Lord RadCliff – such an award bears on its forehead, the brand of invalidity.

In the case of Associate Builders v Delhi Development Authority, the Supreme Court elaborated on what constitutes patent illegality –

  1. Fraud or corruption,
  2. Contravention of Substantive Law,
  3. An error of law by the arbitrator,
  4. Contravention of the Arbitration & Conciliation Act, 1996,
  5. Failure of Arbitrator to provide reasoning for the award, or
  6. Failure of Arbitrator to give due consideration to terms of the contract and usages.

Grounds under Section 34

Section 34 of the Arbitration & Conciliation Act, 1996 provides for grounds of setting aside the arbitral award. Section 34 states the following:

  • Subsection (1) of Section 34 states that the recourse against the arbitral award is available only by filing an application against such award in accordance with the next two subsections.
  • Subsection (2) of Section 34 provides for the grounds on which the arbitral award can be set aside:
  • Where the party making the application establishes on basis of the evidence on record of the arbitral tribunal that –
    • The party was under some incapacity, or
    • The party was not given proper notice of appointment of arbitrator (s), or
    • The party was unable to present their case, or
    • The award deals with a dispute which has not been expressly mentioned in the arbitration agreement.
  • Where the Court finds or is of the opinion that –
  • The subject matter is not arbitrable under Indian law for the time being in force, or
  • The award is against the public policy of India, it further goes on to explain what is envisaged by the public policy of India.
  • Subsection (2A) of Section 34 empowers the courts to set aside any award other than the ones given in International Commercial Arbitration on the grounds of prima facie patent illegality.
  • Subsection (3) of Section 34 provides for a limitation period for filing an application for setting aside of the arbitral award. The time for making an application cannot be more than 3 months from the date on which the party received the arbitral award.
  • Subsection (4) of Section 34 under this subsection the court has the authority to adjourn the proceedings and allow the arbitral tribunal to resume the arbitral proceedings in order to remove the defect that prompted a party to file an application under Section 34.
  • Subsection (5) of Section 34 mandates prior issuance of notice to the opposite party before making an application under Section 34. (introduced by the Amendment Act, 2015)
  • Subsection (6) of Section 34 provides the time limit for the disposal of an application under Section 34 which is as expeditiously as possible within a time period of one year.

Conclusion

As discussed earlier, the main intent of the legislature in framing the Arbitration & Conciliation Act, 1996 was to lessen the burden of the courts and provide for a speedier recourse.

The Amendment Act of 2015 brought about changes to Section 34 which have resolved several issues and have also attempted to minimize judicial intervention.

Alternative Dispute Resolution Mechanisms provide for an alternative to litigation and both systems need to co-exist. Presently many of the arbitrators are retired judges who are conditioned to using the procedural codes, wherein arbitration, principles of natural justice apply rather than procedural codes.

The parties to the dispute have chosen to approach an arbitral tribunal instead of a court of law, hence, there should be limited judicial intervention. Hence, a balance needs to be struck between judicial intervention and arbitration to bring out the true object of the Act.

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