Challenging Arbitral Award
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. 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.
Section 34 provides for the manner and grounds for challenge of the arbitral award. The time period for the challenge is before the expiry of 3 months from the date of receipt of the arbitral award (and a further period of 30 days on sufficient cause being shown for condonation of delay). If that period expires, the award holder can apply for execution of the arbitral award as a decree of the court. But as long as this period has not elapsed, enforcement is not possible.
Under Section 34 of the Act, a party can challenge the arbitral award on the following grounds
i. the parties to the agreement are under some incapacity;
ii. the agreement is void;
iii. the award contains decisions on matters beyond the scope of the arbitration agreement;
iv. the composition of the arbitral authority or the arbitral procedure was not in accordance with the arbitration agreement;
v. the award has been set aside or suspended by a competent authority of the country in which it was made;
vi. the subject matter of dispute cannot be settled by arbitration under Indian law; or vii. the enforcement of the award would be contrary to Indian public policy.
The Supreme Court, in Kinnari Mullick v. Ghanshyam Das Damani,100 has held that a court can relegate the parties to the arbitral tribunal, only if there is a specific written application from one party to this effect; and relegation has to happen before the arbitral award passed by the same arbitral tribunal is set aside by the court. Once the award is set aside, the dispute cannot be remanded back to the arbitral tribunal.
Public Policy under the Act :
There has been significant debate on the scope of ‘public policy’ under the Act. Following a series of judgments on the interpretation of ‘public policy’, the 2015 Amendment Act has added an explanation to Section 34 of the Act. In the explanation, public policy of India has been clarified to mean only if: (a) the making of the award was induced or affected by fraud or corruption or was in violation of Section 75 or 81; or (b) it is in contravention with the fundamental policy of Indian law; or (c) it is in contravention with the most basic notions of the morality or justice.
The 2015 Amendment Act clarifies that an award will not be set aside by the court merely on erroneous application of law or by re-appreciation of evidence. A court will not review the merits of the dispute in deciding whether the award is in contravention with the fundamental policy of Indian law, and unless absolutely necessary, the courts should not go beyond the record before the arbitrator in deciding an application for setting aside an award.
The principles laid down by the Supreme Court in the case of Associate Builders v. Delhi Development Authority (“Associate Builders”), provides guidance as to what constitutes ‘public policy’ under the Act. In Associate Builders, this Hon’ble Supreme Court has held that:
a. a decision which is based on no evidence or which ignores vital evidence would be perverse and contrary to the fundamental policy of Indian law which is a facet of Public Policy of India under Section 48(2)(b).
b. if an arbitral award is without any acceptable reason or justification it would shock the judicial conscience and would consequently be contrary to Justice and as such refused enforcement.
c. a decision which was passed in contravention of “judicial approach” would be contrary to the fundamental policy of Indian law which is a facet of Public Policy of India under Section 48(2)(b).
Further, in Associate Builders, this Hon’ble Court set out the contours of what constitutes a “judicial approach”that is a prerequisite for an award being found to conform to the fundamental policy of Indian law:
a. Decision is to be fair, reasonable and objective;
b. Arbitrator must apply his mind;
c. Principle of audi alteram partem was to be observed;
d. Decision cannot be perverse or so irrational that no reasonable person would have arrived at the same. Where,
i. a finding is based on no evidence;
ii. irrelevant considerations are taken into account while arriving at a decision or
iii. a decision ignores vital evidence,
iv. such a decision would be perverse and contrary to the fundamental policy of Indian law.
The 2015 Amendment Act has also introduced a new section providing that the award may be set aside if the court finds that it is vitiated by patent illegality which appears on the face of the award, in case of domestic arbitrations. For ICA seated in India, ‘patent illegality’ has been kept outside the purview of the arbitral challenge. A challenge under this section can be filed only after providing prior notice to the opposite party, but this procedural provision has been held to be directory, and not mandatory, in nature. A challenge has to be disposed of expeditiously, and, in any event, within a period of one year from the date of the prior notice referred above. The amended section also states that where the time for making an application under section 34 has expired, then, subject to the provisions of the CPC, the award can be enforced.
The Supreme Court, in the case of Ssangyong Engineering & Construction Co. Ltd. v. National Highways Authority of India, interpreted the post-2015 Amendment Act grounds for challenge of an arbitral award under Section 34 of the Act and the grounds for refusal of enforcement of an arbitral award under Section 48 of the Act. The Supreme Court has held that the ground of “patent illegality” is available only for challenge of domestic arbitral awards under Section 34 of the Act. Inter alia, patent illegality would include the following:
i. Patent illegality appearing on the face of the award, which goes into the root of the matter, and is not a merely an erroneous application of law. Contravention of a statute not lined to public policy or public interest cannot be brought in by the backdoor for setting aside an award on the ground of patent illegality.
ii. If the arbitrator fails to give reasons for an award.
iii. If the arbitrator construes the contract in a manner no fair minded or reasonable person would.
iv. When a decision is perverse, based on no evidence or ignores vital evidence in arriving at the decision.
Under the Act, there was an automatic stay once an application to set aside the award under Section 34 of the Act had been filed before the Indian courts. The Amendment Act now requires parties to file an additional application, and specifically seek a stay by demonstrating the need for such stay, to an Indian court, and the court can impose certain conditions on granting such stay, in the exercise of its discretion. However, there was lack of clarity on whether a challenge initiated after 23 October 2015 to an arbitral award passed prior to that date would result in an automatic stay because of conflicting High Court decisions on the same.
Recently, the Supreme Court, in the case of Board of Control for Cricket in India v. Kochi Cricket Pvt. Ltd. (“BCCI”), has held that law as amended by the Amendment Act will apply to those arbitral proceedings which commenced on or after October 23, 2015, and will apply to those court proceedings (which relate to arbitration) which commenced on or after October 23, 2015. The judgment particularly provided that the Section 36 as amended would apply to even pending applications under Section 34 of the Act for setting aside the awards. Although the 2019 Amendment Act introduced Section 87 to the Act which modifies the interpretation of the applicability of the 2015 Amendment Act, the Supreme Court in the case of Hindustan Construction Company Limited
v. Union of India, has struck down Section 87 of the Act as being unconstitutional. Consequently, the position laid down by the Supreme Court in BCCI continues to prevail.
Further, the Supreme Court has clarified that the corporate insolvency resolution process under the Insolvency and Bankruptcy Code, 2016 cannot be initiated if there is a pending application under Section 34 of the Act.
Grounds For Challenge
a. Party was under some incapacity;
b. Arbitration agreement not valid under the governing law of the agreement;
c. Applicant not given proper notice and not able to present its case;
d. Award deals with a dispute not contemplated by terms of the submission to arbitration, or beyond the scope of the submission to arbitration;
e. Composition of Arbitral Tribunal or the arbitral procedure not in accordance with the agreement or not in accordance with Part I of the Act;
f. Subject-matter of the dispute not capable of settlement by arbitration under the law;
g. In the explanation to Section 34 of the Act, public policy of India has been clarified to mean only if: (a) the making of the award was induced or affected by fraud or corruption or was in violation of Section 75 or 81; or (b) it is in contravention with the fundamental policy of Indian law; or (c) it is in contravention with the most basic notions of the morality or justice;
h. A new section has been inserted providing that the award may be set aside if the court finds it vitiated by patent illegality which appears on the face of the award. For international commercial arbitrations seated in India, ‘patent illegality’ has been keep outside the purview of the arbitral challenge;
i. An award will not be set aside by the court merely on erroneous application of law or by re-appreciation of evidence; j. A court will not review the merits of the dispute in deciding whether the award is in contravention with the fundamental policy of Indian law.
Challenge can be filed only after providing prior notice to the opposite party and has to be disposed of expeditiously and in any event within a period of one year from the date of the prior notice.