Arbitration has emerged as a preferred method for resolving disputes due to its efficiency, confidentiality, and the expertise of arbitrators. However, there are situations where the outcome of arbitration may not be satisfactory or just, leading parties to seek recourse through the courts. Section 34 of the Indian Arbitration and Conciliation Act, 1996, provides the framework for setting aside an arbitral award under specific circumstances. This article delves into the nuances of Section 34, elucidating the grounds on which an arbitral award can be challenged and set aside by a court.

Legal Framework: Section 34(1) of the Act

Section 34(1) of the Act states that recourse to a court against an arbitral award may only be made through an application for setting aside such an award in accordance with subsections (2) and (3). This provision ensures that parties cannot indiscriminately challenge arbitral awards and must adhere to the specific grounds and procedures laid out in the Act.

Detailed Grounds for Setting Aside an Arbitral Award

Section 34(2) and Section 34(3) outline specific grounds under which an arbitral award can be set aside. These grounds are divided into two main categories: party-based grounds and court-based grounds.

Section 34(2)(a): Party-Based Grounds:

  1. Incapacity (Section 34(2)(a)(i))

An arbitral award can be set aside if a party was under some incapacity. According to Section 11 of the Indian Contract Act, 1872, a person must meet the following qualifications to enter into a contract:

  • Age of Majority: The person must have attained the age of majority as per the law of their country.
  • Sound Mind: The person must be of sound mind at the time of entering into the contract.
  • Not Disqualified by Law: The person should not be disqualified under any law to which they are subject.

If any of these conditions are not met, the arbitration agreement can be deemed invalid, rendering any arbitral award based on it void. Incapacity includes scenarios where a person is a minor, mentally unsound, or otherwise legally incompetent.

  1. Invalid Arbitration Agreement (Section 34(2)(a)(ii))

The arbitration agreement must be valid under the law to which the parties have subjected it, or, if there is no indication, under the law in force at the time. Section 7 of the Indian Arbitration and Conciliation Act, 1996, requires an arbitration agreement to be in writing. Section 10 lays down additional requirements for the validity of such agreements. An arbitration agreement may be invalid if:

  • It does not meet the conditions specified under the applicable law.
  • It lacks essential elements like mutual consent or is based on fraud or misrepresentation.

If an arbitration agreement is found to be invalid, any award based on it cannot be enforced, and the parties may need to pursue alternative methods of dispute resolution.

  1. Lack of Proper Notice (Section 34(2)(a)(iii))

Proper notice and the opportunity to present one’s case are fundamental to natural justice and due process. Section 18(1) of the Indian Arbitration and Conciliation Act, 1996, mandates that parties must be given written notice of the appointment of an arbitrator and of the arbitral proceedings. If a party is not given proper notice or is otherwise unable to present their case, they may argue that their right to natural justice has been violated. This violation can result in:

  • An unfair or biased outcome.
  • The inability of a party to effectively participate in the arbitration process.

If a party believes they have been deprived of natural justice, they can challenge the award in court under Section 34, which allows for an award to be set aside if there has been a failure to observe natural justice during the arbitration proceedings.

  1. Excess of Jurisdiction (Section 34(2)(a)(iv))

An award can be set aside if it deals with a dispute not contemplated by or not falling within the terms of the submission to arbitration. This includes scenarios where:

  • The arbitral award addresses issues not covered by the arbitration agreement.
  • The arbitrator makes decisions on matters beyond the scope of what the parties submitted to arbitration.

In legal terms, this is known as ‘ultra vires’ the arbitration agreement, meaning ‘beyond the powers’. If an arbitrator exceeds their authority, the resulting award is invalid.

  1. Improper Composition of Arbitral Tribunal (Section 34(2)(a)(v))

The composition of the arbitral tribunal or the arbitral procedure must conform to the agreement of the parties, provided such agreement is not in conflict with any non-derogable provisions of the Act. Issues arise when:

  • The arbitral tribunal is not constituted according to the agreed terms.
  • The arbitration procedure deviates from what was agreed upon by the parties.

Non-compliance with the agreed tribunal composition or procedures can render the award invalid, especially if these deviations are significant and affect the fairness of the proceedings.

The award in Bharat Sanchar Nigam Ltd. v. Maharashtra Knowledge Corporation Ltd. (2019) was partially set aside due to the arbitrator’s failure to review material facts prior to rendering a decision that led to the formation of the Arbitral Tribunal resulting in the breach of terms of the contract.

Section 34(2)(b): Court-Based Grounds:

  1. Non-Arbitrable Subject-Matter (Section 34(2)(b)(i))

The court may set aside an award if the subject matter of the dispute is not capable of settlement by arbitration under the law in force. Certain disputes are inherently non-arbitrable and require judicial intervention. These include:

  • Criminal offenses.
  • Matrimonial matters.
  • Insolvency and bankruptcy issues.

These types of disputes require judicial scrutiny to ensure public interest and legal propriety.

  1. Conflict with Public Policy (Section 34(2)(b)(ii))

An award that conflicts with the public policy of India can be set aside. Courts in India have interpreted “public policy” broadly to include:

  • Awards based on fraud or corruption.
  • Awards violating fundamental rights.
  • Awards contrary to basic notions of morality or decency.
  • Awards that enforce illegal contracts or actions against India’s sovereignty or security.

Public policy considerations ensure that arbitration remains a fair and just method of dispute resolution, aligned with societal values and legal principles.

Specific Provisions and Legal Interpretations:

Incapacity Under Section 34(2)(a)(i)

The incapacity of a party at the time of entering into the arbitration agreement renders the agreement and any resulting award void. This includes:

    • Minors: Persons who have not attained the age of majority.
    • Mentally Unsound Persons: Those who cannot understand the nature and consequences of the agreement.
  • Legally Disqualified Persons: Those disqualified by specific laws, such as bankrupt individuals or those declared incompetent by a court.

Invalid Arbitration Agreement Under Section 34(2)(a)(ii)

An arbitration agreement must comply with the legal requirements to be valid. This includes:

  • Writing Requirement: Section 7 mandates that the agreement must be in writing.
  • Essential Elements: The agreement must have mutual consent, lawful consideration, and a lawful object.

If these elements are missing, the agreement is invalid, and any arbitral award based on it can be set aside. 

In Adarsh Kumar Khera v. Kewal Kishan Khera, 2007, the arbitral award was set aside since it was made without giving the parties a chance to be heard, it was deemed void, and both parties wanted it overturned. 

Proper Notice and Opportunity Under Section 34(2)(a)(iii)

Proper notice and the opportunity to present one’s case are crucial for a fair arbitration process. If a party is not given proper notice or is otherwise unable to present their case, they may argue that their right to natural justice has been violated. This can include:

  • Failure to notify a party of the appointment of an arbitrator.
  • Failure to notify a party of the arbitral proceedings.
  • Denying a party the opportunity to present evidence or arguments.

These violations can lead to the setting aside of the arbitral award.

In AKM Enterprises Pvt. Ltd. v. Ahluwalia Contract (India) Ltd. (2016), arbitral award was set aside on the grounds that the arbitrator would not hear a counter case of the applicant on merits because no notice had been given prior to the subject assertion. This is contrary to established legal precedent, which states that the purpose of the counter-case is to restrict the number of procedures and that in such cases, the court would have the authority to arbitrate upon them even in the absence of prior notification.

Excess of Jurisdiction Under Section 34(2)(a)(iv)

An arbitral award must not exceed the scope of the arbitration agreement. If it does, it is considered ‘ultra vires’ the agreement. This includes:

  • Addressing issues not covered by the arbitration agreement.
  • Making decisions on matters not submitted to arbitration by the parties.

Such awards can be challenged and set aside for exceeding the arbitrator’s authority.

Improper Composition of Arbitral Tribunal Under Section 34(2)(a)(v)

The composition of the arbitral tribunal and the arbitration procedure must conform to the agreement between the parties. Any deviation can render the award invalid. This includes:

  • The appointment of arbitrators not in accordance with the agreement.
  • Following arbitration procedures that differ from those agreed upon by the parties.

If the composition or procedure deviates significantly and affects the fairness of the proceedings, the award can be set aside.

The arbitral decision in Yamaha Motor Pvt. Ltd. v. Divya Ashish Jamwal, 2019, was overturned because it was made in accordance with the terms of the contract, without considering pertinent evidence that was on file, and on the basis of assumption. Further, in Rulia Mal Amarchand v. Hindustan Petroleum Corporation Ltd., 2019, it was held that the arbitrator ought to have restricted his consideration to the issues and agreement that were brought up for arbitration.

Non-Arbitrable Subject-Matter Under Section 34(2)(b)(i)

Certain disputes are inherently non-arbitrable and require judicial intervention. These include:

  • Criminal Offenses: Matters involving criminal law cannot be arbitrated.
  • Matrimonial Matters: Issues related to marriage, divorce, and child custody require judicial scrutiny.
  • Insolvency and Bankruptcy: These matters are governed by specific laws that require court intervention.

These disputes are excluded from arbitration to ensure appropriate judicial scrutiny and protection of public interest. 

Conflict with Public Policy Under Section 34(2)(b)(ii)

An arbitral award must not conflict with the public policy of India. This includes:

  • Fraud and Corruption: Awards based on fraudulent or corrupt practices are against public policy.
  • Fundamental Rights Violations: Awards that violate fundamental rights are not enforceable.
  • Morality and Decency: Awards contrary to basic notions of morality or decency can be set aside.
  • Illegal Contracts: Awards enforcing illegal contracts or actions against India’s sovereignty or security are invalid.

Public policy considerations ensure that arbitration remains aligned with societal values and legal principles. 

In Steel Authority of India Ltd. v. Primetals Technologies, 2020, the award was partially set aside as being against public policy because an extraordinarily high-interest rate of 14 percent per annum was given without any justification in comparison to current interest rates. Furthermore, the high interest rate looked to be punitive in character given the circumstances. As a result, the interest rate was cut to 10% per year.

Conclusion

Section 34 of the Indian Arbitration and Conciliation Act, 1996, provides essential safeguards to ensure that arbitral awards are just, fair, and in accordance with legal principles. It balances the need for finality in arbitration with the necessity of judicial oversight to prevent unjust outcomes. By outlining specific grounds for setting aside an arbitral award, Section 34 ensures that arbitration remains a credible and reliable method of dispute resolution. It upholds the integrity of the arbitration process while protecting the rights and interests of the parties involved. This legal framework is crucial for maintaining the trust and confidence of parties in the arbitration system, fostering a fair and just dispute resolution environment.

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Views expressed above are the author's own.

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