Section 34 of Arbitration and Conciliation Act, its scope, power of review and implementation.

Can Section 34(4) of the Arbitration Act be invoked to eliminate any ground under Section 34(2) of the Arbitration Act?

Section 34(2) of the Arbitration Act provides two sets of grounds on which an award may be set aside. Section 34(2)(a) sets out grounds of challenge such as incapacity of a party, invalidity of the arbitration agreement, lack of proper notice of appointment of the arbitrator or of the arbitral proceedings or inability of a party to present his case, an award which deals with disputes not submitted to arbitration, improper composition of the arbitral tribunal or arbitral procedure contrary to the agreement between the parties, etc. These grounds must be established by the party challenging the award, on the basis of the record of the arbitral tribunal.

Section 34(2)(b) of the Arbitration Act provides that an award may be set aside if the court finds that the subject-matter of the dispute is not capable of settlement by arbitration or if the award is in conflict with the public policy of India.

The grounds under Section 34(2)(b) of the Arbitration Act are substantive and go to the root of the award. If an award deals with a dispute which cannot be settled by arbitration, then this is logically not a ground that is capable of elimination and the court must set aside the award in such a case, notwithstanding an application under Section 34(4) of the Arbitration Act. The ground of conflict with public policy is also not capable of elimination by the arbitral tribunal, inter alia given that it may not only be wasteful, but possibly prejudicial, to send parties back to an arbitral tribunal which has passed an award in conflict with public policy. Even if sending back an award which is in conflict with public policy were neither wasteful nor prejudicial, the intention of the Parliament could never have been to give an arbitral tribunal a second bite at the cherry by reviewing and rewriting the award on merits.

The Supreme Court recently shed some light on this issue in Dyna Technologies Pvt. Ltd. v. Crompton Greaves Ltd.,  while dealing with an award which it found to be unintelligible and inadequately reasoned, when it held as follows:

1. If the challenge to an award is based on impropriety or perversity in reasoning, then it can be challenged strictly on the grounds provided under Section 34 of the Arbitration Act.
2. Unintelligible awards are to be set aside, subject to party autonomy to do away with reasoned awards.
3. The legislative intention of Section 34(4) of the Arbitration Act was to make the award enforceable, after giving an opportunity to the arbitral tribunal to undo curable defects.
4. In case of absence of reasoning, the utility under Section 34(4) of the Arbitration Act has been provided to cure such defects. When there is complete perversity in reasoning, then only it can be challenged under Section 34 of the Arbitration Act.
5. The power vested under Section 34(4) of the Arbitration Act to cure defects can be utilised in cases where the award does not provide any reasoning or if the award has some gap in reasoning or otherwise, and that can be cured so as to avoid a challenge based on the aforesaid curable defects under Section 34 of the Arbitration Act.

Dyna (supra) draws a clear distinction between defects in an award which are curable, and those which are not, for the purpose of Section 34 of the Arbitration Act. The court may give an opportunity to the arbitral tribunal to eliminate the former under Section 34(4) of the Arbitration Act. However, as far as the latter goes, the award must be set aside by the court.

What grounds of challenge are capable of elimination by the arbitral tribunal?

The following are some situations in which courts have found it fit to exercise their powers under Section 34(4) of the Arbitration Act.

1. A Division Bench of the Bombay High Court observed that the power under Section 34(4) of the Arbitration Act could be exercised where the arbitral tribunal overlooked a particular claim on which the parties led evidence and addressed arguments.
2. A Single Judge of the Bombay High Court also exercised his power under Section 34(4) of the Arbitration Act where the arbitral tribunal failed to consider an objection relating to its jurisdiction.
3. MMTC v. Vicnivass Agency, was a case where the Madras High Court exercised its jurisdiction under Section 34(4) of the Arbitration Act, where a party was denied the opportunity to present its case i.e. to deal with a document, which was relied upon by the arbitral tribunal.
4. Dyna (supra) classified a lack of reasoning or a gap in reasoning as a curable defect as opposed to perversity in reasoning, which cannot be cured and would necessitate the setting aside of the award.

Section 34 of the Arbitration and Conciliation Act, 1996 (“Act”) provides for setting aside of an arbitral award by making an application to the Court, on the grounds stated therein. Recently, a number of judgments have been passed while interpreting Section 34. The same have been briefly discussed in the present article.

1. Emkay Global Financial Service Limited Giridhar Sondhi, Civil Appeal No. 8367 of 2018, decided on August 20, 2018.

In the aforesaid case, an award was passed against the Respondent by the Sole Arbitrator. The award was challenged by the Respondent under Section 34 of the Act before the District Court of Delhi, which was rejected in view of the exclusive jurisdiction clause. In Appeal, the High Court of Delhi referred back the parties to the District Judge, to first frame issues and then decide on evidence, including the opportunity to cross examine witnesses who give depositions. The question before the Supreme Court was whether there is any requirement to lead evidence in an application to challenge an award under the Act?

The Supreme Court interpreted the words “furnishes proof” appearing in Section 34(2)(a) and relied on the following case-laws:

(i) Sandeep Kumar v. Dr. Ashok Hans, (2004) 3 Arb LR 306, wherein the High Court of Delhi held that there is no requirement under the provisions of Section 34 for parties to lead evidence. The record of the Arbitrator was held to be sufficient in order to furnish proof of whether the grounds mentioned in Section 34 had been made out.

(ii) Sial Bioenergie v. SBEC Systems, AIR 2005 Del 95 wherein the High Court of Delhi inter alia held:

“…the whole purpose of the 1996 Act would be completely defeated by granting permission to the applicant/JD to lead oral evidence at the stage of objections raised against an arbitral award. The 1996 Act requires expeditious disposal of the objections and the minimal interference by the Court…

… At the stage of the objections which are any way limited in scope due to the provisions of the Act to permit oral evidence would completely defeat the objects underlying the 1996 Act. The process of oral evidence would prolong the process of hearing objections and cannot be countenanced…”

(iii) Fiza Developers & Inter-Trade Pvt. Ltd. v. AMCI (India) Pvt. Ltd. and Anr., (2009) 17 SCC 796, the Supreme Court dealt with the question whether issues as contemplated under the Code of Civil Procedure, 1908 should be framed in challenge to the award under Section 34 of the Act. The Supreme Court inter alia held:

“…Applications under Section 34 of the Act are summary proceedings with provision for objections by the respondent-defendant, followed by an opportunity to the applicant to “prove” the existence of any ground under Section 34(2). The applicant is permitted to file affidavits of his witnesses in proof. A corresponding opportunity is given to the respondent-defendant to place his evidence by affidavit. Where the case so warrants, the court permits cross-examination of the persons swearing to the affidavit. Thereafter, the court hears arguments and/or receives written submissions and decides the matter. This is of course the routine procedure. The court may vary the said procedure, depending upon the facts of any particular case or the local rules. What is however clear is that framing of issues as contemplated under Rule 1 of Order 14 of the Code is not an integral part of the process of a proceeding under Section 34 of the Act.”

(iv) WEB Techniques and Net Solutions Pvt. Ltd. v. M/s. Gati Ltd. and Anr, wherein the High Court of Calcutta after referring to Fiza Developers, held that oral evidence is not required under a Section 34 application when the record before the Arbitrator would show whether the petitioners had received notice relating to his appointment.

The Court also referred to the Arbitration and Conciliation (Amendment) Bill of 2018, being Bill No.100 of 2018, which provides for an amendment to Section 34(2)(a) of the principal Act, and proposes substitution of the words “furnishes proof that”, with “establishes on the basis of the record of the arbitral tribunal that”.

In view of the above, the Supreme Court concluded that:

“An application for setting aside an arbitral award will not ordinarily require anything beyond the record that was before the Arbitrator. However, if there are matters not contained in such record, and are relevant to the determination of issues arising under Section 34(2)(a), they may be brought to the notice of the Court by way of affidavits filed by both parties. Cross-examination of persons swearing to the affidavits should not be allowed unless absolutely necessary, as the truth will emerge on a reading of the affidavits filed by both parties.”

2. Kishan v. Vijay Nirman Company, Civil Appeal No. 21824 of 2017, decided on August 14, 2018

The present case pertained to a dispute regarding claims arising out of a project which was referred to an arbitral tribunal. Whilst the arbitral award was passed in favour of the creditor, the debtor challenged the arbitral award under Section 34 of the Act. This was made by the debtor during the 10 days’ notice period which is provided under the Insolvency and Bankruptcy Code (“IBC”) for the operational creditor filings. Despite the same, an application was filed by the creditor with the NCLT. The NCLT admitted the case ruling that the petition filed under Section 34 by the debtor was irrelevant for the reason that the claim stood admitted. In Appeal, the NCLAT upheld the NCLT’s order and ruled that Section 238 of the IBC would override the Arbitration Act.

The question before the Supreme Court was whether the Insolvency and Bankruptcy Code, 2016 can be invoked in respect of an operational debt where an arbitral award has been passed against the operational debtor, which has not yet been finally adjudicated upon. The Supreme Court inter alia held that filing of a petition under Section 34 of the Act against an arbitral award shows that a pre-existing dispute which culminates at the first stage of the proceedings in an Award, continues even after the Award, at least till the final adjudicatory process under Sections 34 and 37 has taken place. The Court further held that:

“23. We may hasten to add that there may be cases where a Section 34 petition challenging an Arbitral Award may clearly and unequivocally be barred by limitation, in that it can be demonstrated to the Court that the period of 90 days plus the discretionary period of 30 days has clearly expired, after which either no petition under Section 34 has been filed or a belated petition under Section 34 has been filed. It is only in such clear cases that the insolvency process may then be put into operation.

24. We may hasten to add that there may also be other cases where a Section 34 petition may have been instituted in the wrong court, as a result of which the petitioner may claim the application of Section 14 of the Limitation Act to get over the bar of limitation laid down in Section 34(3) of the Arbitration Act. In such cases also, it is obvious that the insolvency process cannot be put into operation without an adjudication on the applicability of Section 14 of the Limitation Act.

…Section 238 of the Code would apply in case there is an inconsistency between the Code and the Arbitration Act. In the present case, we see no such inconsistency. On the contrary, the Award passed under the Arbitration Act together with the steps taken for its challenge would only make it clear that the operational debt, in the present case, happens to be a disputed one.

27. 27. …Even if it be clear that there be a record of an operational debt, it is important that the said debt be not disputed. If disputed within the parameters laid down in Mobilox Innovations Private Limited  Kirusa Software Private Limited(2018) 1 SCC 353, an insolvency petition cannot be proceeded with further.”
28. State of Bihar Bihar Rajya Bhumi Vikas Bank Samiti, Civil Appeal No. 7314 of 2018, Decided on July 30, 2018

The amended Section 34(5) of the Act (inserted by Amending Act 3 of 2016 w.e.f. October 23, 2015) provides that an application to set aside arbitral award shall be filed by a party only after issuing a prior notice to the other party and such application shall be accompanied by an affidavit by the applicant endorsing compliance with the said requirement. In the present case, a Section 34 petition challenging an award was filed on 05.04.2016 before the Patna High Court, in which notice was issued to the opposite party by the Court on 18.07.2016. Despite the coming into force of Section 34(5), the common ground between the parties was that no prior notice was issued to the other party in terms of the said Section, nor was the application under Section 34 accompanied by an affidavit that was required by the said sub-section. The Single Judge of the Patna High Court, by a judgment dated 06.09.2016, held that the provision contained in Section 34(5) was only directory. A Letters Patent Appeal to a Division Bench yielded the impugned order dated 28.10.2016, by which it was held that the mandatory language of Section 34(5), together with its object, made it clear that the sub-section was a condition precedent to the filing of a proper application under Section 34, and, on the analogy of a notice issued under Section 80 of the Code of Civil Procedure, 1908, being a condition precedent to the filing of a suit against the Government, the Division Bench held that since this mandatory requirement had not been complied with, and as the period of 120 days had run out, the Section 34 application itself would have to be dismissed. In the end, it allowed the appeal and set aside the judgment of the Single Judge.

The question before the Supreme Court was whether Section 34(5) of the Arbitration and Conciliation Act, 1996 is mandatory or directory.

The Supreme Court inter alia held that to construe such a provision as being mandatory would defeat the advancement of justice as it would provide the consequence of dismissing an application filed without adhering to the requirements of Section 34(5), thereby scuttling the process of justice by burying the element of fairness. It was further held that the provision is procedural, the object behind which is to dispose of applications under Section 34 expeditiously.

The Court however added that it shall be the endeavour of every Court in which a Section 34 application is filed, to stick to the time limit of one year from the date of service of notice to the opposite party by the applicant, or by the Court, as the case may be. In case the Court issues notice after the period mentioned in Section 34(3) has elapsed, every Court shall endeavour to dispose of the Section 34 application within a period of one year from the date of filing of the said application.

4. BCCI Kochi Cricket Pvt. Ltd., (2018) 6 SCC 287

In the present case, the dispute pertained to a franchise agreement dated 12.03.2011. A sole arbitrator was appointed, who delivered two arbitral awards dated 22.06.2015 against the appellant and in favour of the respondents. On 16.09.2015, the appellants filed an application under Section 34 of the Act in the Bombay High Court challenging the aforesaid arbitral awards. On 26.11.2015, the respondents filed two execution applications in the High Court for payment of the amounts awarded under the two awards, pending enforcement of such awards. These were resisted by two chamber summons filed by the appellants dated 03.12.2015, praying for dismissal of the aforesaid execution applications stating that the old Section 36 would be applicable, and that, therefore, there would be an automatic stay of the awards until the Section 34 proceedings had been decided. The chamber summons were argued before a Single Judge, who, by the impugned judgment [Rendezvous Sports World v. BCCI, 2016 SCC OnLine Bom 6064] in Special Leave Petitions (Civil) Nos. 19545-46 of 2016, dismissed the aforesaid chamber summons and found that the amended Section 36 would be applicable in the facts of this case.

Section 36 of the Act reads as under:

Pre-amended provision

“36.  Enforcement —Where the time for making an application to set aside the arbitral award under Section 34 has expired, or such application having been made, it has been refused, the award shall be enforced under the Code of Civil Procedure, 1908 (5 of 1908) in the same manner as if it were a decree of the Court.”

Amended provision

“36.  Enforcement — (1) Where the time for making an application to set aside the arbitral award under Section 34 has expired, then, subject to the provisions of sub-section (2), such award shall be enforced in accordance with the provisions of the Code of Civil Procedure, 1908 (5 of 1908), in the same manner as if it were a decree of the court.

(2) Where an application to set aside the arbitral award has been filed in the Court under Section 34, the filing of such an application shall not by itself render that award unenforceable, unless the Court grants an order of stay of the operation of the said arbitral award in accordance with the provisions of sub-section (3), on a separate application made for that purpose.

(3) Upon filing of an application under sub-section (2) for stay of the operation of the arbitral award, the Court may, subject to such conditions as it may deem fit, grant stay of the operation of such award for reasons to be recorded in writing:

Provided that the Court shall, while considering the application for grant of stay in the case of an arbitral award for payment of money, have due regard to the provisions for grant of stay of a money decree under the provisions of the Code of Civil Procedure, 1908 (5 of 1908).”

Section 26 of the Act, inter alia, reads as under:

“26.  Act not to apply to pending arbitral proceedings — Nothing contained in this Act shall apply to the arbitral proceedings commenced, in accordance with the provisions of Section 21 of the principal Act, before the commencement of this Act unless the parties otherwise agree….”

The question before the Supreme Court was what will happen to the petitions filed under Section 34 of the Act that had been filed before the commencement of the Amendment Act, which were governed by Section 36 of the old Act? Would Section 36, as substituted, apply to such petitions?

The Supreme Court inter alia held:

(i)  Since it is clear that execution of a decree pertains to the realm of procedure, and that there is no substantive vested right in a judgment-debtor to resist execution, Section 36, as substituted, would apply even to pending Section 34 applications on the date of commencement of the Amendment Act.

(ii) The matter can also be looked at from a slightly different angle. Section 36, prior to the Amendment Act, is only a clog on the right of the decree-holder, who cannot execute the award in his favour, unless the conditions of this section are met. This does not mean that there is a corresponding right in the judgment-debtor to stay the execution of such an award.

(iii) Being a procedural provision, it is obvious that the context of Section 36 is that the expression “has been” would refer to Section 34 petitions filed before the commencement of the Amendment Act and would be one pointer to the fact that the said section would indeed apply, in its substituted form, even to such petitions.

(iv) It would be clear that looking at the practical aspect and the nature of rights presently involved, and the sheer unfairness of the unamended provision, which granted an automatic stay to execution of an award before the enforcement process of Section 34 was over (and which stay could last for a number of years) without having to look at the facts of each case, it is clear that Section 36 as amended should apply to petitions filed under Section 34 before the commencement of the Amendment Act also for the aforesaid reasons.

 

Concluding remarks

We may attempt to further ascertain the scope of Section 34(4) of the Arbitration Act, by the process of elimination. An arbitral tribunal does not have the power to review its own award. Therefore, an arbitral tribunal cannot be allowed to review the award (or the reasoning thereunder) on merits or rewrite the award under the guise of being granted with an opportunity to eliminate the grounds for setting aside the award under Section 34(4) of the Arbitration Act. Further, Section 33 of the Arbitration Act provides a specific procedure for correction of computational, clerical, or typographical errors in the award by the arbitral tribunal and requires parties to apply for correction of such error within 30 days from the receipt of the award. This ought to rule out correction of such errors by the arbitral tribunal by resuming arbitral proceedings under Section 34(4) of the Arbitration Act.

MMTC’s (supra) finding that the arbitral tribunal itself determines the scope of enquiry so as to eliminate the grounds of objection and has wide discretion to eliminate these grounds in such manner as it deems fit, is very broad and could be subject to misuse. As pointed out above, there are only certain classes of grounds which are capable of cure or elimination by an arbitral tribunal. It would, therefore, logically follow that the court must identify the grounds of challenge, which have been made out in an application under Section 34(1) of the Arbitration Act, and resort to Section 34(4) of the Arbitration Act only if such grounds are capable of elimination by the arbitral tribunal. The absence of such protocol may lead to several issues, including the fact that the arbitral tribunal may wind up re-writing the award, which is impermissible, and may be gravely prejudicial to a party challenging the award.

Further, one could argue that Section 34(4) of the Arbitration Act should be resorted to only where it would eliminate all curable grounds of challenge, which have been identified by the court. For instance, take a situation where the court finds that the award is liable to be set aside because the arbitral tribunal overlooked a particular claim (a curable ground), but also finds that the basic reasoning in the award is contrary to the fundamental policy of Indian law. Resorting to Section 34(4) of the Arbitration Act in this situation, may be completely inappropriate, as even if the arbitral tribunal cures the (curable) ground and considers the overlooked claim, the court would still be required to set aside the award on the ground of it being contrary to the fundamental policy of Indian law.

Whilst some amount of clarity on the scope of Section 34(4) of the Arbitration Act can be pieced together from various precedents, there is still room for inconsistent application of this provision by various courts (including District Courts). If the court does not identify the curable defects before resorting to Section 34(4) of the Arbitration Act, any action taken by the arbitral tribunal to eliminate grounds for setting aside of the award could open up the possibility of further challenge by the party aggrieved by such action. This could cause inordinate delay in the enforcement of arbitral awards and would militate against the efficacy of the arbitral process. Therefore, a comprehensive exposition of the actual scope of Section 34(4) of the Arbitration Act is sorely needed.

 

-by Nandini Tripathy, Legal Intern R&S Law