India: Validity And Grounds For Challenging An Award

Last Updated: 15 May 2017
Article by Mahip Singh Sikarwar

Most Read Contributor in India, December 2018

PREFACE

The parties cannot appeal against an arbitral award as to its merits and the court cannot interfere on its merits. The Supreme Court has observed "an arbitrator is a judge appointed by the parties and as such an award passed by him is not to be lightly interfered with." But this does not mean that there is no check on the arbitrator's conduct. In order to assure proper conduct of proceeding, the law allows certain remedies against an award.

INDIAN SCENARIO

Under the repealed 1940 Act three remedies were available against an award- modification, remission and setting aside. These remedies have been put under the 1996 Act into two groups. To the extent to which the remedy was for rectification of errors, it has been handed over to the parties and the Tribunal. The remedy for setting aside has been moulded with returning back the award to the Tribunal for removal of defects.

Section 34 provides that an arbitral award may be set aside by a court on certain grounds specified therein. Under Section 34 of the Act, a party can challenge the arbitral award on the following grounds-

  • the parties to the agreement are under some incapacity;
  • the agreement is void;
  • the award contains decisions on matters beyond the scope of the arbitration agreement;
  • the composition of the arbitral authority or the arbitral procedure was not in accordance with the arbitration agreement;
  • the award has been set aside or suspended by a competent authority of the country in which it was made;
  • the subject matter of dispute cannot be settled by arbitration under Indian law; or
  • the enforcement of the award would be contrary to Indian public policy.

The 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:

  • the making of the award was induced or affected by fraud or corruption or was in violation of Section 75 or 81; or
  • it is in contravention with the fundamental policy of Indian law; or
  • it is in contravention with the most basic notions of the morality or justice.

Section 34(2)(b) mentions two more grounds which are left with the Court itself to decide whether to set aside the arbitral award:

  1. Dispute is not capable of settlement by arbitral Process
  2. The award is in conflict with the public policy of India

The 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.1 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.2 The 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 keep outside the purview of the arbitral challenge.3

A challenge under this section can be filed only after providing prior notice to the opposite party.4Section 34 of the Act is based on Article 34 of the UNCITRAL Model Law and the scope of the provisions for setting aside the award is far less than it was under the Sections 30 or 33 of the 1940 Act. In Municipal Corp. of Greater Mumbai v. Prestress Products (India)5, the court held that the new Act was brought into being with the express Parliamentary objective of curtailing judicial intervention. Section 34 significantly reduces the extent of possible challenge to an award.

In Sanshin Chemical Industry v. Oriental Carbons & chemical Ltd.6, there arose a dispute between the parties regarding the decision of the Joint Arbitration Committee relating to venue of arbitration. The Apex Court held that a decision on the question of venue will not be either an award or an interim award so as to be appealable under Section 34 of the act.

In Brijendra Nath v. Mayank,7 the court held that where the parties have acted upon the arbitral award during the pendency of the application challenging its validity, it would amount to estoppel against attacking the award.

INTERNATIONAL SCENARIO

Generally, the grounds for challenging an award are limited and many countries do not permit appeals from the decision of an arbitral tribunal. In countries that have adopted the UNCITRAL Model Law on International Commercial Arbitration, awards can only be challenged by seeking their 'annulment' at the seat of the arbitration. Awards may also be challenged by resisting their enforcement in a place where the successful party seeks to enforce them. Even if an award is annulled, or if enforcement is refused, this may not necessarily prevent it from being enforced in another country.

The grounds to challenge of awards given in Part I (section 34) of the Indian Arbitration Act are applicable only to Domestic Awards and not to Foreign Awards. On September 6, 2012, Supreme Court in Bharat Aluminum Co. v. Kaiser Aluminium Technical Service Inc. reconsidering its previous decisions concluded that the Indian Arbitration Act should be interpreted in a manner to give effect to the intent of Indian Parliament. In this case the Court reversed its earlier rulings in cases of Bhatia International v. Bulk Trading S.A. & Anr. and Venture Global Engg v Satyam Computer Services Ltd & Anr. stating that findings in these judgments were incorrect. Part I of the Indian Arbitration Act has no application to arbitrations seated outside India irrespective of whether parties chose to apply the Indian Arbitration Act or not. Most importantly, these findings of the Supreme Court are applicable only to arbitration agreements executed after 6 September 2012. Thus all disputes pursuant to arbitration agreement entered into upto 6 September 2012 shall be decided by old precedents irrespective of fact that according to the Supreme Court such rulings were incorrect and have been reversed.

Most challenges will be made before the courts. Although each country which has a law governing arbitration will have its own concept for challenging arbitral awards, there are three general grounds for such challenges.

  • An award may be challenged on jurisdictional grounds, i.e. the non-existence of a valid and binding arbitration clause.
  • An award may be challenged on what may be broadly described as procedural grounds, such as failure to give proper notice of the appointment of an arbitrator.
  • An award may be challenged on substantive grounds, on the basis that the arbitral tribunal made a mistake of law or on the grounds of a mistake of fact.

Some arbitration rules provide for "internal" challenges. The most extensive provision for the challenge of arbitral awards by means of an internal review procedure is to be found in the ICSID arbitration rules. In the case of an application for the annulment of the award, an ad hoc committee of three members is constituted by ICSID to determine the application. If the award is annulled, in whole or in part, either party may ask for the dispute to be submitted to a new tribunal, which Tribunal will consider the dispute again and then deliver a new (and final) award.

Footnotes

1 Proviso to section 34(2A) of the Act

2 Explanation 2 to section 48 of the Act

3 Section 34(2A) of the Act

4 Section 34(5) of the Act

5 (2003) 4 RAJ 363 (Bom)

6 AIR 2001 SC 1219

7 AIR 1994 SC 2562

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.

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