adr project - semester v

GUJARAT NATIONAL LAW UNIVERSITY

Analysis of Section 34 of the

Arbitration and Conciliation Act:

Setting Aside of Arbitral Award and

Courts’ Interference

ALTERNATIVE DISPUTE RESOLUTION

Semester V

Submitted to Dr. Vikas Gandhi

Pavani Nath

12B091

B.A. LL.B. (Hons.)

(2012 - 2017)

Analysis of Section 34 of the Arbitration and Conciliation Act: Setting Aside of Arbitral Award and Courts’ Interference

TABLE OF CONTENTS

TOPIC PAGE

Acknowledgement 3

Abstract 4

Introduction

Incapacity of a Party

Invalidity of the Agreement

Want of Proper Notice

Award Deals with Dispute Not Referred to ArbitrationArbitral Tribunal was Defective in its Composition

Dispute was not Capable of a Settlement

‘Public Policy’ under the Act

Section 34(3) of the Arbitration Act and Limitation 5

Conclusion 20

Bibliography 21

Gujarat National Law University

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ACKNOWLEDGEMENT

It is indeed my privilege to present this project on ‘Analysis of Section 34 of the

Arbitration and Conciliation Act: Setting Aside of Arbitral Award and Courts’

Interference’, to my teacher, Dr. Vikas Gandhi.

I would like to express my deepest gratitude to Mr. Bimal Patel, Director, Gujarat

National Law University, for providing this wonderful opportunity to carry out

research on this significant topic.

I would like to thank Vikas Sir, Assistant Professor of Law, Gujarat National Law

University, for giving us the freedom to research on the topic in whatever way we

deemed fit, and for giving us valuable information and advice regarding the same.

This paper has broadened my understanding of the current scenario of arbitration in

India. Vikas Sir’s continuous support and guidance throughout the course of preparing

this project has been a morale-booster and has made me work harder.

I would also like to thank everyone – teachers, family and peers – for giving me

valuable information and helping me formulate ideas through stimulating discussions

and a cohesive work environment to turn my ideas and stray thoughts into this

coherent research paper.


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INTRODUCTION

One of the important differences between the 1940 Arbitration Act and the 1996 Act

in respect of setting aside arbitral award is that in the former the party had an access

to the court almost at every stage of arbitration, right from appointment of arbitrator

to implementation of final award and under this Act wide powers are exercised by the

courts. Especially by virtue of Section 30(c) of 1940 Act, every award was made

challengeable by raising all kinds of allegations. But the 1996 Act has laid down the

grounds only and only on which an award can be challenged which thus has curbed

the tendency of approaching the court at drop of a hat. If a party fails to establish his

case within the four corners of section 34, the award cannot be set aside.1 The new

Act has fixed the time limit on arbitral proceedings and time frame to challenge any

arbitral award. It further has prohibited courts to entertain any challenge on any

ground before passing of the award.

Provision

Under Section 34 of the new Act, an award can be set aside only by an application of

the party. An aggrieved party has to apply to the court within three months of receipt

of the award for setting aside the award which may be extended for a further period of

30 days if the party’s application satisfies the court. The grounds under which a party

may apply to the court to set aside an award are only those mentioned in Section 34(2)

of the Act. Thus the scope of interference with the award by the court is very limited

and is restricted to the following:

Incapacity of a party [Section 34 (2)(a)(i)]

Invalidity of the agreement [Section 34 (2)(a)(ii)]

Want of proper notice [Section 34 (2)(a)(iii)]

Award deals with dispute not referred to arbitration [Section 34 (2)(a)(iv)]

Arbitral Tribunal was defective in composition [Section 34 (2)(a)(v)]

Subject matter of the dispute not being capable of settlement by arbitration under the

law for the time being in force [ Section 34 (2)(b)(i)]

1 State of Rajasthan v. Nav Bharat Const. Co., AIR 2002 SC 258.


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Arbitral award being in conflict with public policy [Section 34 (2)(b)(ii)]

The party challenging the award has to establish any of these grounds beyond

reasonable doubt to set aside the award, failing which, the court will uphold the

arbitral award.

INCAPACITY OF A PARTY


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If the party challenging the award furnishes proof that he was under some incapacity

then the court if it is satisfied may set aside the award. Grounds of incapacity of a

party to enter into a valid contract under the Indian Contract Act, 1872 are squarely

applicable in deciding the cases falling under this category.

The Supreme Court by its judgment held that incapacity of a party is a good ground

for setting aside an award.2 It was held by the Madras High Court in

Lakshminarayana Tantri v. Ramachandra Tantri3 that an award which is invalid

under the law governing minors ought to be set aside.

INVALIDITY OF THE AGREEMENT2 Subhash Chandra Das Mushib v. Ganga Prosad Das Mushib and others, AIR 1967 SC 8783 AIR 1919 Mad 1029.


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On an application by the party that 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, the court can set aside the award.

The Patna High Court in Waverly Jute Mills Co. Ltd. v. Raymon and Co. (India) Pvt.

Ltd.4 held that if a contract is illegal and void, an arbitration clause which is one of the

terms thereof, must also perish along with it.

The Delhi High Court in Director General of Supplies and Disposals v. Covenry

Metals Corporation (P) Ltd.5 held that where there was no concluded contract

between the parties with respect to the disputed items, since the formal acceptance

was sent when the tender offer already stood lapsed, the arbitration clause in such a

contract was also not in existence and any award made in such a reference was liable

to be set aside.

It is from the terms of the arbitration agreement that the arbitrator derives his

authority to arbitrate, if in law there is no valid agreement the proceedings of

arbitrator would be unauthorized.6

The Supreme Court held that invalidity of an agreement can be a ground of an

application for setting aside an award which is based on such invalid agreement.7

In view of the specific objection that there was no arbitration agreement between the

parties and consequently there was not and could not have been any reference to the

arbitrators, failure of the Trial Court to order production of arbitration agreement and

of reference and to decide thereon vitiated its judgment.8

WANT OF PROPER NOTICE4 AIR 1982 Pat 238.5 AIR 1984 NOC 153 (Delhi).6 Union of India v. A.L. Rallia Ram, AIR 1963 SC 1685.7 Union of India v. Om Prakash, AIR 1976 SC 1745.8 Fulmani Devi v. Sheo Govind Prasad Agarwal, AIR 1985 Pat 156.


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If 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

then the Court can set aside the award. This ground is derived from the principle of

natural justice. Where the party to the arbitration was not served with the notice of

hearing and was not served with the copy of the award, the award would be liable to

be set aside.9 An arbitral award can be set aside by the court if the party making the

application was not given proper notice.10

One of the principles of natural justice is that the parties should be given reasonable

opportunities to be heard and therefore the arbitrator is duty bound to take this into

consideration and if he fails to do so the court can on an application set aside the

award.11

When dispute on settlement of accounts on retirement of a partner was referred to

arbitrator which was sought to be solved by him on the basis of valuation report called

by him but the arbitrator at no point of time supplied copy of valuation report to the

said retired partner, there was breach of principles of natural justice and the award of

arbitrator was liable to be set aside.12

AWARD DEALS WITH A DISPUTE

NOT REFERRED TO ARBITRATION

9 (1998)2 Mah LR 845 (848) Bom.10 Shin-Etsu Chemical Co. Ltd. v. Aksh Optifibre Ltd. and another, AIR 2005 SC 3766.11 2002 (2) Bom LR 271.12 Shri Rajendra J. Joshi v. Dilip J. Joshi & others, (2000) 1 Bom LR 615.


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If 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 then the court can set aside the award.

Arbitrator’s jurisdiction is confined to the four corners of the contract. He cannot

ignore the provisions of the contract; otherwise he would be acting without

jurisdiction.13 Where an award is contrary to the terms of the agreement, the same

could be interfered with under section 34 (2) (b) (ii) as being patently illegal and is

opposed to public policy of India. If an arbitrator makes an award, which is in conflict

with the price variation formula contained in the Purchase Order, it ought to be set

aside being in excess of the jurisdiction of the arbitrator.14

In order to determine whether the arbitrator has acted in excess of jurisdiction what

has to be seen is whether the claimants could raise a particular dispute or claim before

the arbitrator. If the answer is in affirmative, then it is clear that the arbitrator would

have the jurisdiction to deal with such a claim. On the other hand, if the arbitration

clause or a specific term in the contract or the law does not permit or give the

arbitrator the power to decide or to adjudicate on a dispute raised by the claimant or

there is a specific bar to the raising of a particular dispute or claim, then any decision

given by the arbitrator in respect thereof would clearly be in excess of jurisdiction.15

Section 34(2)(a)(iv) of the Act contains a proviso which provides for a principle of

severability that is if the decisions on matters submitted to arbitration can be separated

from those not so submitted, only that part of the arbitral award which contains

decisions on matters not submitted to arbitration may be set aside.

When an award is good in part and bad in part and the two parts are severable, the

award can be set aside in part16 however if a part of the award is closely interlinked

with the entire amount and is inseparable, the whole award should fail in law.17

13 BharatCoking Coal Ltd. v. Annapurna Const., (2003) 8 SCC 154.14 Hindustan Zinc Ltd. v. Friends Coal Carbonization, (2006) 4 SCC 445.15 Himachal Pradesh State Electricity Board v. R.J. Shah, (1999) 4 SCC 214.16 Union of India v. Apeejay Pvt. Ltd., AIR 1983 Cal 271(DB).17 Chinoy Chalani and Co. v. Anjiah, AIR 1958 AP 384.


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The assumption of jurisdiction not possessed by the arbitrator renders the award, to

the extent to which it is beyond the arbitrator’s jurisdiction invalid and if it is not

possible to sever such invalid part from the other part of the award, the award must

fail in its entirety.18

It was held by the Supreme Court in Oil and Natural Gas Corporation Ltd. v. SAW

Pipes Ltd.19 that if the arbitral tribunal has not followed the mandatory procedures

prescribed under the Act, it would mean that it has acted beyond its jurisdiction and

thereby the award would be patently illegal which could be set aside. Thus arbitrator

cannot award any amount ruled out by terms of agreement.20

ARBITRAL TRIBUNAL WAS

DEFECTIVE IN ITS COMPOSITION

The award can be set aside if:

18 Juiraj bhai Ujamshi Sheth v. Chintamanrao Balaji, AIR 1965 SC 214.19 2000 (3) SC 449.20 Shyama Charan Agarwala & Sons v. Union of India (UOI), AIR 2002 SC 2659.


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- composition of arbitral tribunal is not in accordance with the agreement;

- the arbitral procedure is not in accordance with the agreement between the parties;

- in the absence of such an agreement, the composition of arbitral tribunal or

arbitration procedure is not in accordance with Part I of the Act.

The Supreme Court in Narayan Prasad Lohia v. Nikhunj Kumar Lohia21 held that if

the composition of arbitral tribunal is not in accordance with the agreement of the

parties the award can be challenged. Where the arbitral tribunal consisted of only even

number of members contrary to the provisions of Section 10 of the Act and contrary

to the orders passed by the designate of the Chief Justice under Section 11 of the Act

the wrong composition of the arbitral tribunal would be a ground for setting aside of

an award.22

Where the arbitration clause provided for arbitration by a panel of arbitrators, the

assumption of jurisdiction by a sole arbitrator was held by the Supreme Court to be

illegal and consequently the award passed by such an arbitrator was set aside.23

It was held by the Supreme Court in Union of India v. Prabhat Kumar & Bros.24, that

when a person has been appointed as arbitrator by virtue of the office he was holding

at that time (and not named as such by the agreement of the parties), he ceases to be

the arbitrator from the time of his retirement.

DISPUTE IS NOT CAPABLE OF A

SETTLEMENT

If the subject matter of the dispute is not capable of settlement by arbitration under the

law for the time being in force then the court can set aside the award.

21 AIR 2002 SC 1139.22 (2004) 1 All MR 654 (Bom).23 Dharma Prathishthanam v. Madhok Construction Pvt. Ltd., AIR 2005 SC 214.24 AIR 1994 SC 649.


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It was held in Olympus Superstructures Pvt. Ltd. v. Meena Vijay Khetan & others25

overruling the earlier judgement of the Delhi High Court in P.N.B. Finance Ltd. v.

Shital Prasad Jain and others26 that disputes relating to specific performance of a

contract can be referred to arbitration and also that under sub clauses 2 (a) (iv) of

Section 34 of the Act, Arbitral Award may be set aside by the Court if the Award

deals with the dispute not contemplated by or not falling within the terms of the

submission to Arbitrator.

Dispute relating to claim of appellant who had submitted a supplemental bill for

electrical energy supplied but not recorded. In absence of a dispute as to whether the

matter was or was not correct such a dispute was arbitrable and was not liable to be

set aside.27

Where the respondent Corporation had raised the dispute before the arbitrator that the

claim with regard to refund / storage cannot be decided by the arbitrator and they

submitted to the jurisdiction of the arbitrator subject to said objection, the respondent

can take the plea before the High Court that to that extent the arbitrator had no

jurisdiction to go into the said controversy.28

Where the dispute or difference in relation to the agreement is arbitrable and the

question of restoration of distributorship does not arise under the agreement, the

arbitrator was in error and had no jurisdiction to direct restoration of distributorship to

respondent.29

It was held by the Supreme Court in Rajasthan State Mines & Minerals Limited v.

Eastern Engineering Enterprises & another30 that an award which is contrary to the

provisions of law will be illegal. Arbitrator cannot ignore the provisions of the

contract and give an award not related to the agreement.31

25 AIR 1999 SC 2102.26 AIR 1991 Delhi 13.27 The Tata Hydro-Electric Power Supply Co. Ltd. and Others v. Union of India (UOI), AIR 2003 SC 1581.28 1999 AIHC 1042.29 E. Venkatakrishna v. Indian Oil Corporation and anothers, 2000 (7) SCC 764.30 AIR 1999 SC 3627.31 2003 (8) SCC 154.


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‘PUBLIC POLICY’ UNDER THE ACT

If the arbitral award is in conflict with the public policy of India then the court can set

aside the award. The term public policy is not defined in the Act though it is used in

Section 34 (2) (b) (ii) of the Act. The term “public policy” was interpreted in

Renusagar Power Co. v. General Electric Co.32 by the Supreme Court while dealing

with Section 7(1) (b) (ii) of the Foreign Awards (Recognition and Enforcement) Act,

1961 relating to enforcement of a foreign award taking the view that “public policy”

32 1994 Supp (1) SCC 644.


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consisted of (a) the fundamental policy of Indian law (b) the interests of India, and (c)

justice and morality. Hence the expression public policy of India for the purpose of

this section refers to the

principles and standards constituting the general or fundamental policy of the state

established by the Constitution

the existing laws of the country and

the principles of justice and morality.33

The concept of public policy connotes some matter which concerns public good and

the public interest. However what is good in public interest or for public good or what

would be injurious or harmful to the public good or public interest would vary from

time to time.

The award which is on the face of it, patently in violation of statutory provisions

cannot be said to be in public interest. Such award is likely to adversely affect the

administration of justice.

In Oil and Natural Gas Corporation v. SAW Pipes Ltd.34, the Supreme Court added

the additional ground of “patent illegality” as being a component of “public policy”

within the meaning of Section 34 (2) (b) (ii) of the Act of 1996. Illegality must go to

the root of the matter and if the illegality is of trivial nature it cannot be held that

award is against the public policy. Such a provision in the Indian Act would permit

courts to intervene not only when the awards are a result of a procedural misconduct

on the part of the arbitral tribunal but also where there has been an irregularity of a

kind which has caused substantial injustice. Where an award is contrary to the terms

of the agreement, the same could be interfered with under section 34(2)(b)(ii) as being

patently illegal and is opposed to public policy of India.35 Award could also be set

aside if it is so unfair and unreasonable that it shocks the conscience of the court.

Such award is opposed to public policy and is required to be adjudged void. An award

33 Smita Conductors Ltd. v. Euro Alloys Ltd., (2001) 7 SCC 728.34 (2003) 5 SCC 705.35 Hindustan Zinc Ltd. v. Friends Coal Carbonization, (2006) 4 SCC 445.


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based on a contract which is void would be arbitrary and would be contrary to the

public policy of India and is liable to be set aside.36

The term 'public policy' as applicable to petitions under S. 34 of the Arbitration &

Conciliation Act, 1996 has been examined by the Delhi High Court in Ramesh

Chander Arora v. Kashmir Saree Kendra & Anr.37 The Bench, while dealing with a

challenge to an arbitral award, reiterated the priciples laid down by the Apex Court

and held that: As far as public policy and its interpretation is concerned, the law is

now well settled.

The Supreme Court in the case of in the case of ONGC v. Saw Pipes38, has been

pleased to interpret as follows:

The phrase ‘Public Policy of India’ is not defined under the Act. Hence, the said term

is required to be given meaning in context and also considering the purpose of the

section and scheme of the Act. It has been repeatedly stated by various authorities that

the expression ‘public policy’ does not admit of precise definition and may vary from

generation to generation and from time to time. Hence, the concept ‘public policy’ is

considered to be vague, susceptible to narrow or wider meaning depending upon the

context in which it is used. Lacking precedent the Court has to give its meaning in the

light and principles underlying the Arbitration Act, Contract Act and Constitutional

provisions.

While dealing with the concept of public policy, this Court in Central Inland Water

Transport Corporation Limited and Anr. v. Brojo Nath Ganguly and Anr.39, SC has

observed thus:

The Indian Contract Act does not define the expression “public policy” or

“opposed to public policy”. From the very nature of things, the expressions

“public policy”, “opposed to public policy”, or “contrary to public policy”

are incapable of precise definition. Public policy, however, is not the policy of

36 Managing Director, The Nagarjuna Co-operative Sugars Limited v. T.K. Mohan Rao, Retd. Chief Engineer and another, AIR 1995 AP 365.37 Decided On: 06.01.2011.38 2003 (5) SCC 705.39 (1986) IILLJ 171.


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a particular government. It connotes some matter which concerns the public

good and the public interest. The concept of what is for the public good or in

the public interest or what would be injurious or harmful to the public good or

the public interest has varied from time to time.

As new concepts take the place of old, transactions which were once considered

against public policy are now being upheld by the courts and similarly where there

has been a well recognised head of public policy, the courts have not shirked from

extending it to the new transactions and changed circumstances and have at times not

even flinched from inventing a new head of public policy. There are two schools of

thought – “the narrow view” school and “the broad view” school. According to the

former, courts cannot create new heads of public policy whereas the latter

countenances judicial law-making in this area. The adherents of the “the narrow

view” school would not invalidate a contract on the ground of public policy unless

that particular ground had been well- established by authorities.

It is thus clear that the principles governing public policy must be and are capable, on

proper occasion, of expansion or modification. Practices which were considered

perfectly normal at one time have today become obnoxious and oppressive to public

conscience. If there is no head of public policy which covers a case, then the court

must in consonance with public conscience and in keeping with public good and

public interest declare such practice to be opposed to public policy. Above all, in

deciding any case which may not be covered by authority our courts have before them

the beacon light of the Preamble to the Constitution. Lacking precedent, the court can

always be guided by that light and the principles underlying the Fundamental Rights

and the Directive Principles enshrined in our Constitution.

The normal rule of Common Law has been that a party who seeks to enforce an

agreement which is opposed to public policy will be non-suited. The type of contract

to which the principle formulated by us above applies are not contracts which are

tainted with illegality but are contracts which contain terms which are so unfair and

unreasonable that they shock the conscience of the court. They are opposed to public

policy and require to be adjudged void.”


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SECTION 34(3) OF THE

ARBITRATION ACT AND

LIMITATION

Recently, the Delhi High Court was called upon to adjudicate upon a few interesting

issues arising out of the interpretation of Section 34 of the Arbitration Act in general,

and its relationship with the Limitation Act in particular. In Union of India v.


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Microwave Communication Ltd.40, the question before the Court was whether, in the

event that the specified period for filing an application for setting aside an arbitral

award under S. 34 has expired, S. 4 of the Limitation Act can be applied to

nevertheless render the application admissible.

S. 34(3) of the Arbitration Act states:

“An application for setting aside may not be made after three months have

elapsed from the date on which the party making that application had received

the arbitral award or, if a request had been made under section 33, from the

date on which that request had been disposed of by the arbitral tribunal

Provided that if the Court is satisfied that the applicant was prevented by

sufficient cause from making the application within the said period of three

months it may entertain the application within a further period of thirty days,

but not thereafter.”

S. 4 of the Limitation Act states:

“When the prescribed period for any suit, appeal or application expires on a

day when the court is closed, the suit, appeal or application may be instituted,

preferred or made on the day when the court reopens.”

In order to assess the applicability of S. 4 of the Limitation Act notwithstanding the

specified period under S. 34(3), the Court was called upon to consider the 2001

decision of the Apex Court in Union of India v. M/s Popular Construction Company41.

In that case, it was held that S. 5 of the Limitation Act, which provided for a general

extension of the limitation period provided that sufficient cause was shown to the

Court, could not be used to save an application that was in breach of both the three-

month period under S. 34(3), as well as the extended time period of thirty days under

the proviso. While admittedly the Supreme Court’s decision was limited to S. 5, its

observations were “so sweeping that most of the High Courts treated it as sacrosanct

and took the view that…S.4 [was] not applicable” to an issue involving S. 34(3).

Thus, the term “and not thereafter” at the end of the proviso to S. 34(3) was

40 High Court of Delhi, 20-12-2011.41 (2001) 8 SCC 470.


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interpreted by the High Courts to mean that the specified time under S. 34 was

“absolute and unextendable”.

In 2008, however, the Supreme Court in Consolidated Engineering Enterprises v.

Principal Secretary, Irrigation Dep.42, noted that the provisions of S. 5 were impliedly

excluded by the proviso to S. 34(3). This is because S. 5 provides for a general

extension of the limitation period where sufficient cause is shown, while S. 34

specifically provides for a thirty-day extension for the very same reason. In

accordance with the well accepted principle of specific statutes overriding general

ones in cases of overlap, S. 34(3) would therefore exclude the operation of S. 5. This,

in effect, was the holding of the Court.

The Delhi High Court then noted that, in contradistinction with the object of S. 5, S. 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 S. 4 and S.

34(3) – indeed, the two dealt with completely different issues – the Court held that S.

4 was not excluded, and would continue to apply in cases where there was neither any

inaction, nor a 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 S.

34(3) was attracted – i.e., the thirty-day condonation period. In the present case,

bureaucratic delays between departments were the main reasons for the delay, and

were therefore held to constitute sufficient cause for attracting both the thirty-day

extension period, as well as consequently necessitating the application of S. 4.

The Court also had occasion to deal with another point of interest, i.e., the meaning of

“the party… [who had] received the arbitral award” under S. 34(3). Under S. 2(h) of

the Arbitration Act, the word “party” means a “party to an arbitration agreement”. An

argument was raised that, in light of a recent Supreme Court decision Teccho Trichy

Engineers, “in the context of a huge organization like Railways the copy of the Award

has to be received by the person who has knowledge of the proceedings and who

would be the best person to understand and appreciate the arbitral Award and also to

42 (2008) 7 SCC 169.


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take a decision in the matter of moving an application.” Rejecting this contention, the

Court held that supervision of the day-to-day working under the contract, as well as

being in-charge of all correspondence thereto was irrelevant in determining who the

“party” to the arbitration agreement was. Rather, it was the signatory to the arbitration

agreement who was deemed to be the requisite party, as defined under the Arbitration

Act. While that was the determining factor, other aspects such as the party in whose

name the application for setting aside the arbitral award was filed, or a subsequent

appeal, were also relevant aspects that needed to be taken into account.

In my submission, the Court is correct on both counts. It correctly identified that the

rationale of the Popular Construction Company was not the overriding or absolute

nature of S. 34(3), but rather, the fact that it excluded the operation of S. 5 due to their

overlapping nature. As S. 4 and S. 34(3) deal with two very different types of

exceptions to limitations, it is reasonable to give both their full effect. Secondly, while

the argument that an effectual, or purposive interpretation should be given to the word

“party”, it must be remembered that “party” is a term of art that has a specific legal

definition. The Court was bound both by the provisions of the Arbitration Act as well

as Teccho Trichy Engineers in rejecting the contention.

CONCLUSION

Subsequent to the decision in Saw Pipe case, the question that needs to be answered is

what exactly did the Court mean when it stated that an award would also be contrary

to public policy if it were “patently illegal”? Before that one has to know what

“illegality” means in the arbitration context. Illegality in arbitration context has

threefold meaning. Firstly, the illegal nature of the underlying contract, secondly its

subject matter and lastly, the circumstances surrounding the entering into of the


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contract or the arbitration agreement.43 But the Apex Court in Saw Pipe case gave a

whole new dimension to the term illegality in arbitration context by equating it to

mean “error of law”.44 Arbitration is a consensual adjudication process. This implies

that parties have agreed to accept the award given by the arbitrator even if it is wrong,

as long as proper procedures are followed by him.

Therefore, Courts cannot interfere with the enforcement of award on the ground of

error of law or error of fact. If the Courts are given the power to review on the ground

of error of law or error of fact then it will defeat the objectives of the Act and will also

make arbitration the first step in the process which will lead to the highest Court of

the land by way of successive appeals.

The Supreme Court itself has held in Rajasthan State Mines and Minerals Limited v.

Eastern Engineering Enterprise45 that the Court cannot interfere with the decision of

an arbitrator on the ground that his decision is based on error of law or fact. But this is

disagreed with. The Act clearly does not provide for the appeal to a court on the

merits of an arbitral award. If the wording of the Act is seen, a court hearing an

application to set aside an award under the Act is precluded from reviewing even

indirectly the merits of the award since set-aside is no longer possible for errors of

law or fact.

The Act only provides for specific heads under Section 34 on which appeals can be

made to the Court to set aside the award. If the legislators wanted to include “error of

law” as a ground for setting aside the award, they would have provided for it in

Section 34 itself. There are two legislative proposals before the Indian Parliament

which clearly show that the legislature did not intend to include “error of law” as a

public policy ground under Section 34(2)(b)(ii) of the Act. Both the April 2001 Bill

and December 2003 Bill have proposed amendments to the 1996 Act as follows:

“34A(1) In the case of an arbitral award made in an arbitration other than an

international arbitration (whether commercial or not), recourse to the

43 Darwazeh and R.F. Linnane, “Set-aside and enforcement proceedings: The 1996 Arbitration Act under threat”, 7(3) Int. A.L.R. (2004).44 Id.45 1999 (9) SCC 283.


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following additional grounds can be had in an application for setting aside an

award referred to in sub-section (1) of section 34, namely--(a) that there is an

error which is apparent on the face of the arbitral award giving rise to a

substantial question of law; ...”46

These proposed amendments unequivocally show the intention of the legislature not

to include “error of law” as a separate ground for setting aside domestic awards under

the Act. In fact, the Court’s interpretation of public policy is so broad that it

potentially opens the floodgates to more and more challenges of arbitral awards

before the Indian courts. Arguably, it is precisely this judicial review of the merits of

the case that Section 34 of the Act as well as the corresponding UNCITRAL Model

Law provisions were intended to prevent in order to ensure the finality of arbitral

awards on the merits. The ratio of the judgment is not in line with the objective of the

Act. Some authors advocate a middle path. As per them there is need to adopt the so-

called “error apparent on the face of record” test as an “all weather” solution.47

However, such a solution is unnecessary given the exhaustive nature of the grounds

given in Section 34.

BIBLIOGRAPHY

I. BOOKS REFERRED

a. Avtar Singh (2007) “Law of Arbitration and Conciliation”, Lucknow: Eastern

Book Company.

46 Ibid.47 A. Kurup: “Reposing faith in the arbitral process: A restrained exercise of judicial discretion when construing the ‘public policy of India’”, 4(3) Company Law Journal (2003), at 147.


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b. O.P. Malhotra, “The Law and Practice of Arbitration and Conciliation” (New

Delhi: Lexis Nexis Butterworths, 2002).

c. P.C. Markanda, “Law Relating to Arbitration and Conciliation”, 2001,

Wadhwa Publishers.

II. WEBSITES REFERRED

a. http://indiankanoon.org/doc/732196/

a. Last accessed on 20 March, 2014


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adr project - semester v

Documents

arbitration act

arbitral award

act section

conciliation act

new act

arbitration arbitral

implementation of final

act wide powers