An Exposition of Section 34 of the Arbitration and Conciliation Act, 1996: Grounds for Setting Aside Arbitral Awards in India

An Exposition of Section 34 of the Arbitration and Conciliation Act, 1996: Grounds for Setting Aside Arbitral Awards in India

Introduction

Section 34 of the Arbitration and Conciliation Act, 1996 ("the Act") stands as a cornerstone of India's arbitration jurisprudence, delineating the specific and limited grounds upon which a party may apply to a court to set aside an arbitral award. The provision reflects the legislative intent to foster arbitration as an efficacious and autonomous dispute resolution mechanism, with minimal judicial intervention. This article undertakes a comprehensive analysis of Section 34, tracing its evolution through judicial pronouncements and legislative amendments, examining the scope of various grounds for challenge, and elucidating the procedural nuances associated with such applications. The analysis draws heavily upon landmark judgments of the Supreme Court of India and various High Courts, which have shaped the contours of judicial review under this critical provision.

Evolution of Judicial Scrutiny and the Legislative Framework

The Arbitration and Conciliation Act, 1996, was enacted to consolidate and amend the law relating to domestic arbitration, international commercial arbitration, and enforcement of foreign arbitral awards, drawing inspiration from the UNCITRAL Model Law on International Commercial Arbitration. A primary objective was to curtail judicial interference in arbitral proceedings. Section 5 of the Act explicitly states that "Notwithstanding anything contained in any other law for the time being in force, in matters governed by this Part, no judicial authority shall intervene except where so provided in this Part." Section 34 is one such provision that permits limited judicial intervention.

Distinction from the Arbitration Act, 1940

It is pertinent to distinguish Section 34 of the 1996 Act from its namesake in the erstwhile Arbitration Act, 1940. Section 34 of the 1940 Act dealt with the power of the court to stay legal proceedings where there was an arbitration agreement.[12, 13, 16, 22, 23, 24, 25, 27, 28, 29] This provision empowered a party to an arbitration agreement, against whom legal proceedings were commenced by another party, to apply for a stay of such proceedings, contingent upon demonstrating readiness and willingness to proceed with arbitration.[22] The current Section 34 of the 1996 Act, in stark contrast, pertains exclusively to applications for setting aside an arbitral award that has already been rendered.

Pre-Amendment (2015) Judicial Interpretation

Prior to the significant amendments in 2015, the judiciary grappled with the interpretation of "public policy of India" as a ground for setting aside awards. The Supreme Court in Renusagar Power Co. Ltd. v. General Electric Co.[9], in the context of the Foreign Awards (Recognition and Enforcement) Act, 1961, narrowly construed "public policy" to encompass: (i) fundamental policy of Indian law; (ii) interests of India; or (iii) justice or morality. This interpretation was initially influential.

However, in Oil & Natural Gas Corporation Ltd. v. Saw Pipes Ltd.[11], the Supreme Court expanded the scope of "public policy" under Section 34 of the 1996 Act to include "patent illegality." An award could be set aside if it was contrary to the substantive provisions of law, the Act itself, or the terms of the contract. This significantly widened the avenues for judicial review. The Court in McDermott International Inc. v. Burn Standard Co. Ltd.[1] reiterated the limited scope of intervention but acknowledged the Saw Pipes ratio. Further, in ONGC Ltd. v. Western Geco International Ltd.[2], the Court, while discussing "fundamental policy of Indian law," emphasized adherence to principles of natural justice, a judicial approach, and avoiding perverse or irrational decisions.

The Supreme Court in Associate Builders v. Delhi Development Authority[7], delivered just before the 2015 amendments, provided a comprehensive exposition of the grounds under Section 34. It clarified that "fundamental policy of Indian law" required a judicial approach, adherence to natural justice, and absence of perversity. "Interest of India" was not to be invoked lightly. "Justice or morality" referred to basic notions and not individual perceptions. "Patent illegality" meant illegality going to the root of the matter, not mere erroneous application of law, and an award could be set aside if it shocked the conscience of the court. Importantly, the Court stressed that reappreciation of evidence was impermissible.

The Arbitration and Conciliation (Amendment) Act, 2015

Concerned that the broad interpretation of "public policy" and "patent illegality" was leading to excessive judicial interference and undermining the finality of arbitral awards, the legislature introduced the Arbitration and Conciliation (Amendment) Act, 2015 ("2015 Amendment"). The 2015 Amendment aimed to restrict the grounds for setting aside awards, particularly concerning "public policy" and "patent illegality."

Key changes included:

  • Explanation 1 to Section 34(2)(b)(ii): Clarified that an award conflicts with the public policy of India only if— (i) the making of the award was induced or affected by fraud or corruption or was in violation of Section 75 or Section 81; or (ii) it is in contravention with the fundamental policy of Indian law; or (iii) it is in conflict with the most basic notions of morality or justice.
  • Explanation 2 to Section 34(2)(b)(ii): Stipulated that the test of "fundamental policy of Indian law" shall not entail a review on the merits of the dispute.
  • Section 34(2A): Introduced a new ground of "patent illegality appearing on the face of the award" for setting aside domestic awards (not international commercial arbitrations). It explicitly stated that an award shall not be set aside merely on the ground of an erroneous application of the law or by re-appreciation of evidence.

Post-Amendment Judicial Landscape

The Supreme Court in Ssangyong Engineering & Construction Co. Ltd. v. National Highways Authority of India (NHAI)[3] provided an authoritative interpretation of the amended Section 34. The Court emphasized that the 2015 Amendment significantly narrowed the scope of "public policy." "Fundamental policy of Indian law" was confined to principles that are fundamental to the Indian legal system, such as compliance with statutes and judicial precedents, natural justice, and the Wednesbury principle of reasonableness, but without a merits review. "Basic notions of morality or justice" were equated with principles that shock the conscience of the court. The ground of "patent illegality" under Section 34(2A) was held to mean illegality that goes to the root of the matter and is apparent on the face of the award, excluding mere errors of law or fact. Contravention of contractual provisions was held to be a ground under patent illegality if it went to the root of the matter.

Subsequent judgments have consistently reinforced this narrow scope of judicial review. In Delhi Airport Metro Express Pvt. Ltd. v. Delhi Metro Rail Corporation Ltd.[6], the Supreme Court reiterated that courts should not reappraise facts or legal conclusions unless there is patent illegality or a violation of fundamental policy. Similarly, in Uhl Power Company Ltd. v. State Of Himachal Pradesh[5], the Court emphasized deference to the arbitral tribunal's findings unless the award demonstrates perversity. Recent High Court decisions, such as UNION OF INDIA v. M/S BUILD WORTH PVT. LTD.[17] and UNION OF INDIA v. M/S MK INFRASTRUCTURE (P) LTD.[20], have echoed this restrictive approach, underscoring that interference is warranted only in exceptional circumstances.

Grounds for Setting Aside an Arbitral Award under Section 34

Section 34(2) enumerates the exhaustive grounds for setting aside an arbitral award. These are broadly categorized into those that must be proven by the party making the application (Section 34(2)(a)) and those that the court may find on its own (Section 34(2)(b)). The text of these grounds is clearly laid out in the Act and has been referenced in cases like NATIONAL AGRICULTURAL COOPERATIVE MARKETING FEDERATION OF INDIA LIMITED v. V.D. AGRO TECH LTD[18] and Maharashtra Apex Corporation Ltd. v. Sandesh Kumar.[21]

Section 34(2)(a): Grounds to be Established by the Applicant

  • (i) Incapacity of a party: A party was under some incapacity.
  • (ii) Invalidity of the arbitration agreement: The arbitration agreement is not valid under the law to which the parties have subjected it or, failing any indication thereon, under the law for the time being in force.
  • (iii) Lack of proper notice or inability to present case: The party making the application was not given proper notice of the appointment of an arbitrator or of the arbitral proceedings or was otherwise unable to present his case. This aligns with the principle of natural justice, as discussed in ONGC Ltd. v. Western Geco International Ltd.[2] and Government Of Kerala v. Som Datt Builders Ltd.[14] (referring to Section 18 of the Act).
  • (iv) Award deals with disputes beyond scope: The arbitral award deals with a dispute not contemplated by or not falling within the terms of the submission to arbitration, or it contains decisions on matters beyond the scope of the submission to arbitration. The proviso allows for severability if possible.
  • (v) Improper composition of tribunal or procedure: The composition of the arbitral tribunal or the arbitral procedure was not in accordance with the agreement of the parties (unless such agreement conflicted with a mandatory provision of Part I of the Act) or, failing such agreement, was not in accordance with Part I.

Section 34(2)(b): Grounds Found by the Court

  • (i) Non-arbitrability of the subject-matter: The subject-matter of the dispute is not capable of settlement by arbitration under the law for the time being in force. For instance, criminal matters are generally non-arbitrable, as noted in Prabir Ray v. State Of West Bengal[26], though this case pertained to the 1940 Act, the principle holds.
  • (ii) Conflict with the public policy of India:

    As discussed, "public policy" is now narrowly defined by Explanation 1 to Section 34(2)(b)(ii) and interpreted by Ssangyong[3]:

    • Fraud or Corruption: If the making of the award was induced or affected by fraud or corruption, or was in violation of Section 75 (confidentiality) or Section 81 (admissibility of evidence in other proceedings).
    • Contravention with Fundamental Policy of Indian Law: This does not entail a review on the merits (Explanation 2). It includes compliance with fundamental legal principles, natural justice, and absence of perversity.
    • Conflict with Most Basic Notions of Morality or Justice: This refers to egregious cases shocking the court's conscience.

Section 34(2A): Patent Illegality

Introduced by the 2015 Amendment, this ground applies to domestic awards (not international commercial arbitrations seated in India). An award is patently illegal if the illegality appears on the face of the award. However, an award cannot be set aside merely for an erroneous application of law or by re-appreciating evidence. This codifies the principle from Saw Pipes[11] but narrows its application as clarified in Ssangyong[3] and Associate Builders[7]. The illegality must be fundamental and go to the root of the matter.

Procedural Aspects of Section 34 Applications

Summary Nature of Proceedings

The Supreme Court in Fiza Developers And Inter-Trade Private Limited v. Amci (India) Private Limited And Another[4] clarified that proceedings under Section 34 are summary in nature. Unlike regular civil suits, courts are not required to frame issues. This is to ensure expeditious disposal and align with the Act's objective of minimal judicial intervention.

Limitation Period (Section 34(3))

An application for setting aside an award must be made within three months from the date on which the party making the application received the arbitral award. The proviso allows the court to entertain an application within a further period of thirty days, but not thereafter, if satisfied that the applicant was prevented by sufficient cause from making the application within the said three months. The Supreme Court in State Of Maharashtra And Others v. Ark Builders Private Limited[10] held that the limitation period under Section 34(3) commences from the date a signed copy of the arbitral award is delivered to the party, as mandated by Section 31(5) of the Act. The Delhi High Court in UNION OF INDIA v. M/S PRAGATI CONSTRUCTION CONSULTANTS[19] emphasized the strictness of this period and the necessity of filing an application for condonation of delay if the initial three-month period is exceeded.

Remittal to Arbitral Tribunal (Section 34(4))

Section 34(4) empowers the court, if it considers it appropriate and is so requested by a party, to adjourn the proceedings for a period of time to give the arbitral tribunal an opportunity to resume the arbitral proceedings or take other action as in the tribunal's opinion will eliminate the grounds for setting aside the award. The Supreme Court in Kinnari Mullick And Another v. Ghanshyam Das Damani[8] decisively held that a court cannot suo moto remit an award to the tribunal under Section 34(4); a specific request from a party is mandatory. The purpose is curative, allowing the tribunal to address curable defects.

Expeditious Disposal (Section 34(6))

Section 34(6), inserted by the 2015 Amendment, mandates that an application under Section 34 shall be disposed of expeditiously, and in any event, within one year from the date on which notice is served upon the other party. The Supreme Court in Bharat Sanchar Nigam Ltd. And Another v. Nortel Networks India Pvt. Ltd.[15] has held this provision to be directory rather than mandatory, though emphasizing the need for swift disposal.

Scope of Judicial Review: Not an Appeal

It is a well-settled principle, reiterated in numerous judgments including Associate Builders[7], Ssangyong[3], Delhi Airport Metro Express[6], Uhl Power[5], and UNION OF INDIA v. M/S MK INFRASTRUCTURE (P) LTD.[20], that the court's jurisdiction under Section 34 is not appellate. The court cannot sit in appeal over the arbitral award and re-examine or re-appreciate the evidence or the merits of the dispute. The review is confined to the specific grounds enumerated in Section 34. The focus is on the integrity of the arbitral process and whether the award suffers from any of the vitiating factors specified, rather than the correctness of the decision itself, unless the decision is patently illegal or perverse in a manner that falls within the defined grounds.

Conclusion

Section 34 of the Arbitration and Conciliation Act, 1996, as amended and interpreted by the Indian judiciary, strikes a delicate balance between party autonomy, the finality of arbitral awards, and the need for judicial oversight to prevent manifest injustice. The legislative intent and judicial trend are unequivocally towards minimal intervention, ensuring that courts do not substitute their own judgment for that of the arbitral tribunal. The grounds for setting aside an award are narrow and specific, with "public policy" and "patent illegality" being significantly circumscribed post the 2015 Amendment. While challenges under Section 34 remain a crucial safeguard, the threshold for successfully setting aside an award is high, reflecting India's commitment to fostering a pro-arbitration environment and upholding the sanctity of the arbitral process.

References