India: Section 34 (5) Of The Arbitration And Conciliation Act, 1996: Whether Mandatory Or Directory?

Introduction

Recently, the Supreme Court in The State of Bihar and Ors. Vs. Bihar Rajya Bhumi Vikas Bank Samiti¹, had the opportunity to examine whether Section 34(5) of the Arbitration and Conciliation Act, 1996, ("Act") inserted by Amending Act 3 of 2016 (w.e.f. 23rd October, 2015), is mandatory or directory in nature. The judgment was delivered on July 30, 2018, by a two-judge Bench of Justices Rohintan Fali Nariman and Indu Malhotra, and serves as a precedent for clarifying the nature of the above-mentioned provision. The judgment highlights how the amendment has to be interpreted in the light of convenience and justice, rather than technicalities of law.

Facts of the Case

The appeal by special leave arose out of an arbitration proceeding which commenced on May 24, 2015. An arbitral award was made on January 06, 2016. A petition based on Section 34 challenging the said award was filed on April 05, 2016 before the Patna High Court, in which notice was issued to the opposite party by the Court on July 18, 2016. Despite the enforcement of Section 34(5), the common ground between the parties is 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 learned Single Judge of the Patna High Court, following the judgment of the Supreme Court in Kailash Vs. Nankhu and Ors.² held that the provision contained in Section 34 (5) was only directory in nature.

A Letters Patent Appeal was made to the Division Bench, where considering the Law Commission Report which led to the 2015 amendment to the Act, the mandatory language of Section 34 (5) together with its object, it was held that the sub- section was a condition precedent to the filing of a proper application under Section 34. Based on this conclusion and on analogy of a notice issued under Section 80 of the Code of Civil Procedure, 1908, the Division bench held that since this mandatory requirement had not been complied with, the Section 34 application itself would have to be dismissed. Thus, the appeal was allowed vide the impugned order dated October 28, 2016 and the judgment of the learned Single Judge was set aside.

Arguments of the Parties

The main argument of the Appellants was that Section 34 (5) and (6) form part of a composite scheme, the object being disposal of application under Section 34 expeditiously within one year. Since no consequence is provided if such application is not disposed of within the said period, the provisions are only directory, despite the mandatory nature of language used therein. Further, it was argued that procedural provisions must not be construed in such a manner that justice itself gets trampled upon.

On the other hand, the counsel for the Respondents argued that Section 34 (5) was a mandatory provision and an application filed under Section 34 without complying with the condition precedent is an application non-est in law. The consequence follows not from sub-section (6) of Section 34 but from subsection (3) thereof, under which such application cannot be considered if it is beyond the stipulated period/extended period mentioned in Section 34 (3) of the Act.

Observations of the Supreme Court

The Supreme Court made an in-depth analysis of the aforementioned provisions and examined the various precedents to determine the nature of Section 34 (5) and (6) of the Act. It began by examining the 246th Law Commission Report where it was stated that the addition of these provisions was to expedite the process of challenges to arbitration awards and for ensuring that parties take their remedies seriously and approach a judicial forum expeditiously and not as an afterthought.

To illustrate the legal position, the Supreme Court went on to examine various judgments on similar provisions. In Topline Shoes Vs. Corporation Bank³, the Supreme Court was called upon to decide whether Section 13 (2)(a) of the Consumer Protection Act, 1986, which spoke of a reply being filed by the opposite party "within a period of 30 days or such extended period not exceeding 15 days, as may be granted by the District Forum". Based on The Statement of Objects and Reasons of the Consumer Protection Act, 1986, and keeping in mind the principles of natural justice, it was held that the said provision was directory in nature. The provision was more by way of procedure to achieve the object of speedy disposal of such disputes. No substantive right in favor of the complainant was created by reason of which the Respondent may be barred from placing his version in defence. It was further held that no penal consequences have been provided in case extension of time exceeds 15 days and hence, the reply is not necessarily to be rejected.

Similarly, in Kailash Vs. Nankhu and Ors. (Supra), the Court dealt with the amendment of Order VIII Rule 1 of the CPC under the Amendment Act of 2002. Order VIII Rule 1 is circumscribed by the words "shall not be later than ninety days". The Court observed that the provision is procedural in nature and that its object is to curb the mischief of unscrupulous defendants adopting dilatory tactics by delaying the disposal of cases. The language of the proviso to Order VIII Rule 1 is couched in negative form, it does not specify any penal consequences flowing from the non-compliance. The provision being in the domain of the procedural law, was to be held as directory and not mandatory.

In Salem Advocates Bar Association Vs. Union of India⁴, the Supreme Court at para 20 held that the use of the word "shall" in Order 8 Rule 1 by itself is not conclusive to determine whether the provision is mandatory or directory. Having regard to the context in which it is used or having regard to the legislation, the same can be construed as directory. Rules of procedure are the handmaid of justice and not its mistress. Strict interpretation would defeat justice.

The Apex Court in the present case further went on to discuss New India Assurance Co. Ltd. Vs. Hilli Multipurpose Cold Storage Pvt. Ltd.⁵ where a three-judge Bench following the judgment of J.J. Merchant vs. Shrinath Chaturvedi⁶ struck a discordant note. However, the case of J.J. Merchant (supra) was distinguished in Kailash (supra). It stated that no focused argument in J.J. Merchant (supra) was made on whether the provision of Section 13 (2) (a) of the Consumer Protection Act, 1986 could be held to be directory.

In State Vs., N.S. Gnaneswaran⁷, the Supreme Court, while dealing with Section 154(2) of the Code of Criminal Procedure, 1973, held that despite the mandatory nature of the language used in the provision, no consequence was provided if the Section was breached. Hence, it was directory in nature.

Conclusions of the Court

The Court held Section 34 (5) to be procedural in nature, the object behind which is to dispose-off applications expeditiously and not scuttle the same. It further drew contrast between Section 80 of the Code of Civil Procedure, 1908, and Section 34 (5) of the Act by referring to Bihari Chowdhury and Anr. Vs. State of Bihar and Ors.⁸where it was held that Section 80, though a procedural provision, has been held to be mandatory as it is conceived in public interest and advancement of justice as it affords the government or public officer an opportunity to scrutinize the claim proposed to be filed against them, thereby avoiding unnecessary litigation and saving public time and money by settling the claim without driving the person who has issued the notice to file a suit.

The Court further negated the contention of the counsel on behalf of the Respondent that Section 34 (5) is a condition precedent by stating that Section 34 (1) does not refer to this sub-section. The only requirement is that an application for setting aside an award be in accordance with Sub-sections (2) and (3). Hence, even legislatively, Section 34 (5) is not a condition precedent to filing an application under Section 34 of the Act.

In contrast with Section 29 A of the Act which provides for termination of mandate of the Arbitrator as consequence of delay, the Court observed that no consequence has been provided in case the period for deciding the application under Section 34 has elapsed.

Further, the Court observed that the express language of Section 34 (6) of the Act mitigates against the submission of the counsel for the Respondents that Section 34 (5) is independent of Section 34 (6) of the Act and is a mandatory requirement of law by itself.

The Apex Court further observed that the judgments of High Courts of Patna⁹, Kerala¹⁰, Himachal Pradesh¹¹, Delhi¹² and Guwahati¹³ had all taken the view that Section 34 (5) of the Act is mandatory in nature on the premise of the mandatory nature of the language used therein and the object sought to be achieved by it. However, in Global Aviation Services Private Limited Vs. Airport Authority of India¹⁴, the Bombay High Court held that the provision is directory in nature, largely because no consequence has been provided for breach of the time limit specified. The aforesaid judgment has been followed in recent judgments of the High Courts of Bombay¹⁵ and Calcutta.¹⁶

Finally, at paragraph 27, the Apex Court set aside the judgment of Patna High Court and opined that the view propounded by the High Courts of Bombay and Calcutta represents the correct state of law. However, the endeavor of every court in which a section 34 application has been filed shall be to stick to the time limit prescribed under the Act.

Conclusion

The judgment clarifies the law as regards the nature of Section 34 (5) of the Act to be directory. The vested right of a party to challenge an award under Section 34 cannot be taken away for non-compliance of issuance of prior notice before filing of arbitration petition. To construe such a provision as mandatory would defeat the advancement of justice as applications filed without adhering to requirements of Section 34 (5) would scuttle the process of justice by burying the element of fairness.

Footnotes

1 AIR 2018 SC 3862,

2 (2005) 4 SCC 480

3 (2002) 6 SCC 33

4 (2005) 6 SCC 344

5 (2015) 16 SCC 20

6 (2002) 6 SCC 635

7 (2013) 3 SCC 594

8 (1984) 2 SCC 627

9 Bihar Rajya Bhumi Vikas Bank Samiti v. State of Bihar and Ors. L.P.A. No. 1841 of 2016 in C.W.J.C. No. 746 of 2016 [decided on 28.10.2016].

10 Shamsudeen v. Shreeram Transport Finance Co. Ltd., Arb. A. No. 49 of 2016 [decided on 16.02.2017].

11 Madhava Hytech Engineers Pvt. Ltd. v. The Executive Engineers and Ors. O.M.P. (M) No. 48 of 2016 [decided on 24.08.2017].

12 Machine Tool (India) Ltd. v. Splendor Buildwell Pvt. Ltd. and Ors. O.M.P. (COMM.) 199-200 of 2018 [decided on 29.05.2018].

13 Union of India and Ors. v. Durga Krishna Store Pvt. Ltd., Arb. A. 1 of 2018 [decided on 31.05.2018].

14 2018 SCC Online Bom 233

15 Maharashtra State Road Development Corporation Ltd. v. Simplex Gayatri Consortium and Ors. Commercial Arbitration Petition No. 453 of 2017 [decided on 19.04.2018].

16 Srei Infrastructure Finance Limited v. Candor Gurgaon Two Developers and Projects Pvt. Ltd., A.P. No. 346 of 2018 [decided on 12.07.2018].

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.