Section 34 of Arbitration & Conciliation Act 1996 | Practice & Procedure

Do I believe in arbitration? I do. But not in arbitration between the lion and the lamb, in which in the morning the lamb is found inside the lion.

– Mr. Samuel Gompers

Besides all the advantages and amenities available to refer the disputes to arbitration, it is one of the cornerstone drawbacks of the arbitration process that the award passed by the arbitrator is final and binding between the parties and the parties are not entitled to appeal against the award. It is time when section 34 of Arbitration and Conciliation Act, 1996 (Herein after referred as ‘Act of 1996’) comes in and plays a pivotal role, however under statutory bounds, to save the award-debtor by entitling him to challenge the award and allows the intervention of the courts for setting aside award. This write up will help to understand the key insights of Section 34 of Act of 1996.

Before discussing the intricacies of section 34 of Act of 1996, one must understand the Arbitration process and procedure followed in it.

What is Arbitration?

No statutory definition or meaning has been enumerated in any law in India. Arbitration is defined as the alternative mechanism to court (Litigation) which has its own attributes and characteristic unlike the traditional justice system as prevailed in India. Arbitration can be also be defined as a confidential consensual dispute mechanism whereby disputing parties resolves to submit their disputes to one or more arbitrators or Arbitral tribunal which makes a final and binding decision known as an arbitral award.

Stages of an Arbitration process:

• Intimation request of arbitration triggering the Arbitration clause;
• Appointment of Arbitrator;
• Statement of Claim (Reference) and Response including Counter-claim;
• Production and inspection of relevant documents;
• Witness Evidence and Examination;
• Legal submission;
• Final Argument;
• Arbitral Award.

Since the primitive purpose of any justice system or resolution mechanism is to serve the legitimate decision in the interest of justice, so that of Arbitration and to keep the check on legitimacy of Arbitral Award, the Act of 1996 by virtue of Chapter VII containing only Section 34 empowers the courts to keep a vigil on the Arbitrator’s award and action for the purpose of setting aside it. This Section is replica of Article 34 of UNCITRAL Model Law. This section deals with the grounds for setting aside the Arbitral Award and the procedure for making an application and also the limitation attached to it.

Jurisdiction for making an application to set aside an award:

In the process of Arbitration, the seat and venue are two major concept which embarks the jurisdiction for making an application to set aside an award u/s 34. In general parlance, the seat of arbitration must be understood in a way if seat is agreed to be in Mumbai than the exclusive jurisdiction of the Courts of Mumbai will entail. However, it is open for the parties to opt and agree for the venue for arbitration process in Delhi or at some other place as per their convenience.

In Emkay Global Financial Service Limited v. Giridhar Sondhi, (2018) 9 SCC 49, the Hon’ble Apex Court hold the view “ the moment ‘seat’ is determined, the fact that the seat is at Mumbai would vest the Mumbai courts with exclusive jurisdiction for the purpose of regulating Arbitral proceedings arising out of agreement between parties and it is the Mumbai court alone, before which the application u/s 34 can be filed.”

Grounds of Setting aside an award

An Application to set aside an Arbitral award may be made on the following grounds: [Section 34(2)(a)]

1. Incapacity of any Party to arbitration;
2. The Arbitration agreement is not valid under the law to which parties have subjected it;
3. No notice for appointment of arbitrator has been given to the party making application under section 34;
4. The arbitration award deals with a dispute which does not fall in terms of submission to Arbitration or it is beyond the scope of arbitration agreement;
5. The Composition of Arbitral Tribunal was not in accordance with Agreement between parties;

Apart from these aforesaid grounds Section 34(2)(b) also enumerates two additional grounds upon which the Court itself can set aside the award. These grounds are:

1. If the Subject-matter of dispute is not capable of settlement by arbitration under the law
2. If the arbitral Award is in conflict of Public Policy of India.

Key Highlights to Arbitration & Conciliation Amendment Act,2015 and 2019:

Before the Amendment, it was in practice that the Courts in India often treat the Section 34 Challenge to an award as a matter of Appeal and used to follow procedure adopted in regular civil suit thereby creating the pendency of cases and consequently insecurity was created among the parties which also created commercial threat to arbitration in India. Moreover, there was no specific definition of the word ‘Public Policy in India’ in the act to enable the court to travel under certain bounds.

The Hon’ble Apex Court of India in the case of Fiza Developers and inter-Trade P. Ltd. Vs. AMCI(I) Pvt. Ltd. (2009) 17 SCC 796, while discussion all the whims of section 34 of Act of 1996 held “it is difficult to envisage proceedings u/s 34 of the Act as full- fledged regular civil suits under the Code of Civil Procedure. Application u/s 34 of the Act are summary proceedings with the provision for objections by the parties, followed by an opportunity to the applicant ‘to prove’ the existence of grounds u/s 34 (2)……… 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 process of proceedings u/s 34 of the Act.”

Quoting this Apex Court view, the Law Commission of India in 2014 and again in 2017 recommended to amend the Section 34 of the Act of 1996. Following are amendments incorporated by Amendment act of 2015 and Amendment act of 2019:

1. Definition of ‘Public Policy of India’:

The Act of 1996 had no profound definition of the phrase ‘Public Policy of India’ thereby giving liberty to the courts to interpret and explain according to their judicial insights which was creating confusing and it had become the topic of discussion among practitioners. The insertion of specific definition in the act by way of amendment restricts the judicial intervention of Courts in Arbitration process as it is mechanism adopted for speedy resolution of disputes and also lesson up the pendency and time-cost of parties.

After Sub-section 2 of section 34, the meaning of the phrase ‘Public Policy of India’ has been appended and explained by way of insertion of Explanation 1 and 2 by which it is provided that the arbitration award shall be contemplated to be against public policy if the award was persuaded by fraud or corruption or in violation of the fundamental policy of India Law or the basic notions of the policy morality and justice. Now the Courts are barred to enter into the insight of award if an application u/s 34 is moved on any such ground and can set aside the award straight away.

2. Prior Issuance of Notice to the other Party and time limit for disposal of an application u/s 34:

After sub-section 4 of Section 34, Sub-section 5 and 6 were added to avoid the unduly delay of service of application on other party by making it mandatory to serve a copy of application to other party before making an application u/s 34 and also to declare this compliance on an affidavit and thereafter the timely disposal of application u/s 34 ie. Within one year.

The main purpose behind the insertion of sub-section (5) is to avoid the delay in service to the other party as the Civil Courts in India follows a very complex procedure of service to other party as contemplated under Order 5 of CPC. Now by insertion of these sub-section, the party while making an application u/s 34 of the Act is also required to make a declaration on affidavit ensuring the compliance of prior issuance of notice to the other party.

Another sub-section (6) has been added to ensure the timely disposal of Application u/s 34 which is one year in limine from the date on which notice is served on the other party. This addition is also curtailing the pendency of arbitration litigation u/s 34 and also save the indemnity cost in accordance with time of parties.

However, while affirming the views laid down by Hon’ble High Court of Bombay and Calcutta, the Hon’ble Supreme Court of India held in the case of State of Bihar and Ors. vs. Bihar Rajya Bhumi Vikas Bank Samiti (2018) 9 SCC 472 that …. the object of Section 34(5) and (6) is the requirement that an application under Section 34 be disposed of expeditiously within a period of one year from the date of service of notice. Section 34(5) is directory in nature and the vested rights of the party to challenge an award under section 34 cannot be taken away for non-compliance of provision of issuance of prior notice before filing of Arbitration petition.

3. Section 34 is not a trial but a vigil mechanism:

In Emkay Global Financial Service Limited v. Giridhar Sondhi, [Supra], an award was passed against a party afterwards it was challenged by the party u/s 34 of the Act before the District Court of Delhi, which was rejected by invoking exclusive jurisdiction clause. In an Appeal, Hon’ble High Court of Delhi remanded back the matter with the direction to district judge to first frame issues and then decide on evidence which includes the opportunity to cross examine the witnesses.

Hon’ble Supreme Court while dealing with the question of mini trial in the section 34 proceeding, interprets the words ‘Furnish Proof’ and held 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.”

Now after the enactment of Amendment Act of 2019, the Legislature curtails all the possibility of submission of evidence and in section 34 of the principal Act, in sub-section (2), in clause (a), for the words “furnishes proof that”, the words “establishes on the basis of the record of the arbitral tribunal that” is  substituted to eradicate the practice of re-appreciation of evidence by Courts, practice of framing of issues and process of taking additional evidence on Affidavits etc. while dealing the application u/s 34 and mandated the disposal of Section 34 Application on basis of Records of Arbitral tribunal and summoning of record of arbitral tribunal became sine qua non for the Courts while dealing section 34 Application.

Section 34 vis a vis Section 5 Limitation Act, 1963:

Section 34 (3) of the Act of 1996 provides that the application u/s 34 must be filed within 3 months from the date on which the party making the application received the Arbitral award. This said period of 3 months can be condoned for a further period of 30 days if the applicant satisfies the court that there was sufficient ground which prevented him to move application. Hence, the Act of 1996 is a comprehensive code.

Some of Apex Court views on Limitation u/s 34

A) Simplex Infrastructure Limited vs. Union of India, (2019) 2 SCC 455

The act of 1996 provides for 3 months’ time to file application u/34  and also provides for delay condonation procedure and the use phrase ‘but not thereafter’ makes it clear that extension cannot be beyond thirty days and therefore there can be no application of Section 5 of Limitation Act, 1963 in condoning the delay to file the Application u/s 34 of the Act.

B) State of Maharashtra vs. ARK Builders Pvt. Ltd. [(2011) 4 SCC 616]

Period of Limitation prescribed under Section 34(3) would start running only from the date of signed copy of award is delivered to/ received by the party making application for setting aside the award u/s 34(1).

C) Oriental insurance CO. Ltd. Vs. M/s Tejparas Associates and Exports Pvt. Ltd. (2019) 9 SCC 435

In this case the party filed an application u/s 34 at Jaipur but the same has been returned for the want of proper jurisdiction, then it is filed with relevant jurisdiction, The Hon’ble SC holds that Section 14 of Limitation Act 1963 would be applicable to the proceeding u/s 34 of the Act of 1996, subject to the condition that the application u/s 34 for first time was filed within time as stipulated u/s 34(3).

Conclusion:

The main purpose of enacting the law of Arbitration is to minimise the intervention of courts and provides an alternative mechanism to resolve the commercial disputes which will reduce time and provides speedy redressal system. The amendments brought in by way of amendment act of 2015 and subsequently by Amendment Act of 2019 have resolved all the possible issues. However, on one hand, the parties agree to resolve their disputes with the help of Arbitrator(s) without any intervention of Court but on the other hand to ensure the delivery of legitimate award, judicial vigil is also required to keep check on Arbitrator’s Action and therefore the Section 34 mechanism does not provide the complete departure from the judicial machinery but go hand-in hand with limited diaspora of judiciary. 

{The author i.e. Narendra Mohan is a Practicing Lawyer and can be reached at (E) narendra4legal@gmail.com and (M) 9717998362}