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Setting Aside Arbitral Award: Contemporary Scenario in India

Editor’s Note: Arbitration is a form of alternate dispute resolution where the parties to a dispute settle
the dispute out of Court through an arbitral tribunal. The arbitration law in India was modeled on the
English Arbitration Law and evolution of law led to the replacement of the old Arbitration Act 1940
with the new Arbitration and Conciliation Act 1996. In India the UNCITRAL model of arbitration is
followed. The research paper analyses arbitration with reference to Section 34 of the 1994 Act which
deals with the grounds for setting aside an arbitral award. The researcher has referred to leading case
laws such as Municipal Corp. of Greater Mumbai v Prestress Products from where it is evident that the
new act has reduced the grounds for setting aside arbitral awards in order to curtail judicial
intervention. The leading case on the matter was ONGC Ltd v Saw Pipe Ltd where the Supreme Court
held that in exercising jurisdiction the Arbitral Tribunal cannot act in breach of some provisions of
substantive law. The researcher analyses the grounds i.e. incapacity of party, invalid arbitration
agreement, improper notice of proceedings, proceedings not in accordance with agreement and
evaluates the same in light of case laws so as to arrive at what the present position is. Limitation,
remission and foreign awards have also been examined. Another landmark case is Bharat Aluminium
Co. v Kaiser Aluminium where the Supreme Court reconsidered all its previous decisions and
concluded that the Indian Arbitration Act should be interpreted in a manner so as to give effect to the
intent of the Indian Parliament. However, what is important is this finding of the Supreme Court is
applicable only to arbitration agreements executed after 6 September 2012. All disputes pursuant to
arbitration agreements till 6th September shall be decided by old precedents irrespective of the fact
that these rulings were incorrect and overruled.

Introduction

Arbitration is a process of dispute resolution between the parties through arbitral tribunal appointed by
parties to the dispute or by the Court at the request by a party. In other words, it is an alternative to litigation
as a method of dispute resolution. The law relating to arbitration n India is based on the English Arbitration
Law. In 1940 the Indian Law on arbitration was drafted in the form of Arbitration Act, 1940 and remained in
force until it was replaced by the new Arbitration and Conciliation Act, 1996.

The Indian arbitration law is based on the United Nations Commission on International Trade Law
(UNCITRAL Model Law).The law of arbitration is based on the principle of withdrawing the dispute from
the ordinary court and enabling the parties to substitute a domestic tribunal consisting persons of their own
choice called as arbitrators. The Parliament enacted the Arbitration and Conciliation Act, 1996 which not
only removed many serious defects of the earlier arbitration law but also incorporated modern concepts of
arbitration which are internationally accepted. The arbitral award has been treated at par with the decree of
the Court. The arbitral award is enforceable in the same manner as a decree of a law court. This change has
enabled reduction of litigation in some areas of arbitration. Earlier an award could not be executed in its own
right unless the court ordered that award be filed and a decree issued in terms thereof.

There is no provision for appeal against an arbitral award and it is final and binding between the parties.
However, an aggrieved party may take recourse to law court for setting aside the arbitration award on certain
grounds specified in Section 34 of the Arbitration and Conciliation Act, 1996.

Setting Aside Arbitral Award

The parties cannot appeal against an arbitral award as to its merits and the court cannot interfere on its merits.
The Supreme Court has observed “an arbitrator is a judge appointed by the parties and as such an award
passed by him is not to be lightly interfered with.” But this does not mean that there is no check on the
arbitrator’s conduct. In order to assure proper conduct of proceeding, the law allows certain remedies against
an award.

Under the repealed 1940 Act three remedies were available against an award- modification, remission and
setting aside. These remedies have been put under the 1996 Act into two groups. To the extent to which the
remedy was for rectification of errors, it has been handed over to the parties and the Tribunal. The remedy
for setting aside has been moulded with returning back the award to the Tribunal for removal of defects.

Section 34 provides that an arbitral award may be set aside by a court on certain grounds specified therein.
These grounds are:

1. Incapacity of a party
2. Arbitration agreement not being valid
3. Party not given proper notice of arbitral proceedings
4. Nature of dispute not falling within the terms of submission to arbitration
5. Arbitral procedure not being in accordance with the agreement

Section 34(2)(b) mentions two more grounds which are left with the Court itself to decide whether to set
aside the arbitral award:

1. Dispute is not capable of settlement by arbitral process


2. The award is in conflict with the public policy of India

If the decision on matters submitted to arbitration can be separated from those not submitted; only that part
of the arbitral award which contains decisions on matters not submitted to arbitration may be set aside.

Section 34 of the Act is based on Article 34 of the UNCITRAL Model Law and the scope of the provisions
for setting aside the award is far less than it was under the Sections 30 or 33 of the 1940 Act. In Municipal
Corp. of Greater Mumbai v. Prestress Products (India)[i], the court held that the new Act was brought into
being with the express Parliamentary objective of curtailing judicial intervention. Section 34 significantly
reduces the extent of possible challenge to an award.

It is necessary for the aggrieved party to make an application under Section 34 stating the grounds of
challenge. An application for setting aside the award has to be made by a party to the arbitration agreement.
But a legal representative can apply for it because he is a person claiming under them. There is no special
form prescribed for making an application under Section 34 of the act except it has to be a written statement
filed within the period of limitation.

In Sanshin Chemical Industry v. Oriental Carbons & chemical Ltd.[ii], there arose a dispute between the
parties regarding the decision of the Joint Arbitration Committee relating to venue of arbitration. The Apex
Court held that a decision on the question of venue will not be either an award or an interim award so as to be
appealable under Section 34 of the act.

In Brijendra Nath v. Mayank[iii], the court held that where the parties have acted upon the arbitral award
during the pendency of the application challenging its validity, it would amount to estoppel against attacking
the award.

An award which is set aside is no longer remains enforceable by law. The parties are restored to their former
position as to their claims in the dispute. Setting aside an award means that it is rejected as invalid. The
award is avoided and the matter becomes open for decision again. The parties become free to go back to
arbitration or to have the matter decided through court.

INCAPACITY OF PARTIES

If a party to arbitration is not capable of looking after his own interests, and he is not represented by a person
who can protect his interests, the award will not be binding on him and may be set aside on his application.

If a minor or a person of unsound mind is a party he must be properly represented by a proper guardian
otherwise the award would be liable to be set aside. Such a person is not capable of binding himself by a
contract and therefore, an award under a contract does not bind him.

Section 9 of the 1996 Act enables him to apply to the court for appointment of a guardian for a minor or a
person of unsound mind for the purpose of arbitral proceedings. The ground of incapacity would cease to be
available when the incompetent person is represented by a guardian.

INVALIDITY OF AGREEMENT

The validity of an agreement can be challenged on any of the grounds on which the validity of a contract may
be challenged. In cases where the arbitration clause is contained in a contract, the arbitration clause will be
invalid if the contract is invalid.

In State of U.P. v. Allied Constructions[iv] the court held that the validity of an agreement has to be tested on
the basis of law to which the parties have subjected it. Where there is no such indication, the validity would
be examined according to the law which is in force.

NOTICE NOT GIVEN TO PARTIES

Section 34(2)(a)(iii) permits challenge to an award if the party was not given proper notice of the
appointment of an arbitrator, or the party was not given proper notice of the arbitral proceedings, or the party
was for some reasons unable to present his case.

Under Section 23(1) the Arbitral Tribunal has to determine the time within which the statements must be
filed. This determination must be communicated to the parties by a proper notice. Section 24(2) mandates
that the parties shall be given sufficient advance notice of any hearing or meeting of the Tribunal for the
purpose of inspection of documents, goods or other property.

If for any good reason a party is prevented from appearing and presenting his case before the Tribunal, the
award will be liable to be set aside as the party will be deemed to have been deprived of an opportunity of
being heard the principle of natural justice.

In Dulal Podda v. Executive Engineer, Dona Canal Division[v], the court held that appointment of an
arbitrator at the behest of the appellant without sending notice to the respondent, ex parte award given by the
arbitrator was illegal and liable to be set aside.

In Vijay Kumar v. Bathinda Central Co-operative Bank and ors.[vi] the court observed “it is a typical case
where the arbitrator misconducted the proceedings and also misconducted himself. Arbitrator held the first
and only hearing on May 17, 2010. No points for settlement or issues were framed. The bank filed affidavits
of four employees. Appellant was not given opportunity to cross examine them. He was denied the
opportunity to produce evidence. A complete go bye was given to the provisions of law, procedure and rules
of justice. It would thus be seen that appellant was unable to present his case.

AWARD BEYOND SCOPE OF REFERENCE

The reference of a dispute under an agreement defines the limits of the authority and jurisdiction of the
arbitrator. If the arbitrator had assumed jurisdiction not possessed by him, the award to the extent to which it
is beyond the arbitrator’s jurisdiction would be invalid and liable to be set aside.

Section 34(2)(a)(iv) of the Act provides that an arbitral award is liable to be set aside if it deals with a
dispute not contemplated by the reference, or not falling within the terms of the reference, or it contains a
decision in matters beyond the reference.

In Gautam Construction & Fisherie Ltd v. National Bank for Agriculture and Rural Development[vii], the
Supreme Court modified the award to the extent that the rate of construction meant for ground floor could
not be applied to the construction of the basement area.

In Rajinder Kishan Kumar v. Union of India[viii], a matter under a writ petition was referred to arbitration.
The writ petition contained no claim of compensation for damage to potentiality of the land because of the
opposing party discharging effluents and slurry on the land. The award of such compensation was held to be
outside the scope of reference hence liable to be set aside.

Section 16 of the Arbitration and Conciliation Act, 1996 provides that the initial decision as to jurisdiction
lies with the Tribunal. The party should immediately object as to excess of jurisdiction. If the Tribunal rejects
the objection, the aggrieved party may apply under Section 34(2)(a)(iv)for setting aside on the ground of
excess of jurisdiction.

An arbitrator cannot go contrary to the terms of the contract. Where the terms of the contract are not clear or
unambiguous, the arbitrator gets the power to interpret them. In State of Rajasthan v. Nav Bharat
Construction Co.[ix], a majority of claims allowed were against the terms of the contract.

ILLEGALITY IN ARBITRAL PROCEDURE

Section 34(2)(a)(v) provide 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, or in the absence of agreement as to procedure, the procedure prescribed by the Act was not
followed.

Failure to follow the agreed procedure or the procedure prescribed by the Act is a procedural misconduct. If
the arbitral tribunal takes the matter which is clearly beyond the scope of its authority, it would tantamount to
misconduct of arbitrator. An award in which the arbitrator has deliberately deviated from the terms of
reference and arbitration agreement will amount to misconduct of the arbitrator.

Section 12(3)(a) provides that an arbitrator may be challenged if there justifiable doubt as to his
independence or impartiality. Section 13 says that if the challenge is not successful and the award is made,
the party challenging the arbitrator may apply to the court under Section 34 for setting aside the award.

In State Trading Corp. v. Molasses Co., the Bengal Chamber of Commerce[x], a permanent arbitral
institution, did not allow a company to be represented by its Law Officer, who was full time employee of the
company. The Court held that it was not only misconduct of the arbitrator but also misconduct of the
arbitration proceedings.

As discussed earlier in Bathinda Central Co-operative Bank’s Case[xi] the court observed “it is a typical
case where the arbitrator misconducted the proceedings and also misconducted himself. A complete go bye
was given to the provisions of law, procedure and rules of justice.

In ONGC Ltd v. Saw Pipe Ltd[xii], the Supreme Court held that in exercising jurisdiction, the Arbitral
Tribunal cannot act in breach of some provisions of substantive law or the provision of the Act. In Section
34(2)(a)(v)of the Act, the composition of the Arbitral Tribunal should be in accordance with the agreement.
The procedure which is required to be followed by the arbitrator should also be accordance with the
agreement. If there is no such agreement then it should be in accordance with the procedure prescribed in
Part 1 of the Act.

In the above case, the losses caused by delay were deducted from the supplier’s bill. The direction of the
Arbitral Tribunal that such deduction should be refunded with interest was held to be neither in accordance
with law, nor contract. The award was set aside to that extent.

In Union of India v. Om Prakash Baldev Krishna [xiii] it was held that a non-reasoned award is liable to be
set aside by the court as contemplated by Section 31(3) which requires that arbitral award shall State reasons
upon which it is based unless the parties have mutually agreed that no reasons are to be given.

Some other examples of misconduct of proceedings are proceeding ex parte without sufficient cause; denial
of opportunity to parties; acting against the mandate given to the arbitrator under the agreement; failure or
refusal to consider counter-claim of the respondent etc.

DISPUTE NOT ARBITRABLE

The existence of an arbitral dispute is a condition precedent for exercise of power by an arbitrator.

Only matters of indifference between the parties to litigation which affect their private rights can be referred
to arbitration.

Therefore, matters of criminal nature, insolvency proceedings, and matters of public rights cannot be decided
by arbitration.

The Delhi High Court, held in PNB Finance ltd v. Shital Prasad Jain[xiv], that specific performance of an
act cannot be granted in an arbitration proceeding. The Supreme Court did not approve the view point of the
Delhi High Court. The Court held that the right to specific performance of an agreement of sale deals with
contractual rights and it is certainly open to the parties to agree to refer the issue relating to specific
performance to arbitration.

AWARD AGAINST PUBLIC POLICY

Section 34(2)(b)(ii) provides that an application for setting aside an arbitral award can be made if the arbitral
award is in conflict with the public policy of India.

The explanation to clause (b) clarifies that an award obtained by fraud or corruption would also be an award
against the public policy of India. An award obtained by suppressing facts, by misleading or deceiving the
arbitrator, by bribing the arbitrator, by exerting pressure on the arbitrator, etc. would be liable to be set aside.
The concept of public policy connotes some matter which concerns public good and public interest.

In Venture Global Engg v. Satyam Computer Service Ltd[xv], it was held that an award could be set aside if
it is contrary to fundamental policy of Indian law, or the interest of India, or justice or morality, or it is
patently illegal.

If the award is contrary to the substantive provisions of law or the provisions of the Act or against the terms
of the contract, it would be patently illegal, which could be interfered under Section 34. Award could also be
set aside if it is as unfair and unreasonable as to shock the conscience of the court as it is against public
policy.

Limitation For Filing Application

Section 34(3) provides that an application for setting aside an arbitral award must be made within 3 months
of receiving the award or disposition of 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 proviso to Section 34(3) allows the party a further period of 30 days after the expiry of three months if
the court is satisfied that the party was prevented by a sufficient cause from making the application. No
application for setting aside the award can be entertained by the court after the expiry of these additional
thirty days.

In National Aluminum Co Ltd v. Presteel Fabrication (P) Ltd[xvi], proceedings were instituted before the
Supreme Court under the wrong belief that it had jurisdiction in the matter of setting aside. Time spent 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.

In Union of India v. Shring Construction Co (P) Ltd[xvii], sometime was lost in challenging the award in a
writ court which was declared to be not maintainable because the petitioner had his remedy under Section 34
by the proceeding before the District Judge. The District Judge was then approached along with an
application for condonation of delay. He rejected it as time barred. The Supreme Court held that the District
Judge should have decided whether the application was within time after excluding the period lost in a wrong
court.

In Union of India v. Microwave Communication Ltd[xviii] the Delhi High Court noted that, in contradiction
with Section 5, Section 4 “does not enlarge the period of limitation but it only enables the party to file any
suit, application, etc. on the reopening day of the Court if the Court is closed on a day when limitation
expires.” As there was no overlap of any sort between Section 4 and Section 34(3) the Court held that
Section 4 would apply in cases where there was not any lack of due diligence on the part of the applicant.
Interestingly, the Court also held that S. 4 was applicable even to situations where the proviso to Section
34(3) was attracted – i.e., the thirty day condonation period.

A bare reading of Section 34(3) read with the proviso makes it abundantly clear that the application for
setting aside the award will have to be made within three months. The period can further be extended, on
sufficient cause being shown, by another period of thirty days but not thereafter. Section 29 (2) of the
Limitation Act, provides that when any special statute prescribes certain period of limitation as well as
provision for extension upto specified time limit, on sufficient cause being shown, then the period of
limitation prescribed under the special law shall prevail and to that extent the provisions of the Limitation
Act shall stand excluded. The provisions of Section 5 of the Limitation Act would not be applicable because
of the provisions of Section 29 (2) of the Limitation Act.

Remission By Tribunal

When an application for setting aside an arbitral award has been made, the court may, instead of adjudicating
upon the grounds raised, adjourn the proceedings for a determined period of time to enable the tribunal to
deal with the grounds on which objection have been raised and to eliminate them.

In T.N. Electricity Board v. Bridge Tunnel Constructions[xix], the court held that where an award is vitiated
by an error of jurisdiction, the court can send it back to the arbitrator for rectification of the error.

Upon such adjournment the Arbitral Tribunal shall resume the arbitral proceedings and take such action as
will eliminate the grounds. The resumed proceedings can only be relating to the grounds raised in the
application under Section 34.

It may become necessary to record fresh findings and to amend the award. Thereafter the court would
consider whether the grounds raised have been eliminated and whether the award is liable to be set aside.

Foreign Awards

The grounds to challenge of awards given in Part I (section 34) of the Indian Arbitration Act are applicable
only to Domestic Awards and not to Foreign Awards. On September 6, 2012, Supreme Court in Bharat
Aluminum Co. v. Kaiser Aluminium Technical Service Inc.[xx]reconsidering its previous decisions concluded
that the Indian Arbitration Act should be interpreted in a manner to give effect to the intent of Indian
Parliament. In this case the Court reversed its earlier rulings in cases of Bhatia International v. Bulk Trading
S.A. & Anr.[xxi] and Venture Global Engg v Satyam Computer Services Ltd & Anr.[xxii]stating that findings
in these judgments were incorrect. Part I of the Indian Arbitration Act has no application to arbitrations
seated outside India irrespective of whether parties chose to apply the Indian Arbitration Act or not. Most
importantly, these findings of the Supreme Court are applicable only to arbitration agreements executed after
6 September 2012. Thus all disputes pursuant to arbitration agreement entered into upto 6 September 2012
shall be decided by old precedents irrespective of fact that according to the Supreme Court such rulings were
incorrect and have been reversed.

Conclusively, we see that the law relating to setting aside of arbitral award in India is is consonance with the
UNCITRAL model law as the national law is based on the same only. However, the interpretation of
Supreme Court in several decisions like Bhatia International have raised serious issues which to some extent
have been resolved in the BALCo case. The judicial intervention should be minimal and this practise has to
be promoted in India so that arbitration may be successful