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

Nature Of Sections 34(5) & 34(6) Of Arbitration And Conciliation Act, 1996
Last Updated: 14 November 2018
Article by AMLEGALS  

IN THE SUPREME COURT OF INDIA

The State of Bihar and Ors v. Bihar Rajya Bhumi Vikas Bank Samiti
Civil Appeal No. 7314 of 2018
(Arising out of SLP (Civil) No. 4475 of 2017)
Decided On: 30.07.2018

FACTS

This appeal arose out of an arbitration arbitral award on 06.01.2016.

The award debtor in that arbitration, (the Appellant herein) challenged the said award by an application under Section 34 of the Act before Patna High Court.

A notice was issued to the opposite party by the Court on 18.07.2016.

The said Application became contentious between the parties on account of coming into force of Section 34(5); and that neither 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 Single Judge Bench of Patna High Court, by a judgment dated 06.09.2016, held that the provision contained under Section 34(5) was only directory. This judgement was based on the decision of Supreme Court in Kailash v. Nanhku and Ors.

However, the Respondent further preferred a Letters Patent Appeal (LPA) to the Division Bench of Patna High Court, which vide an order dated 28.10.2016, held that

'......Upon adverting to the Law Commission Report which led to the 2015 amendment, that the mandatory language of Section 34(5), together with its object, made it clear that the sub-section was a condition precedent to the filing of a proper application under Section 34, and, on the analogy of a notice issued Under Section 80 of the Code of Civil Procedure, 1908, being a condition precedent to the filing of a suit against the Government.......'

'......since this mandatory requirement had not been complied with, and as the period of 120 days had run out, the Section 34 application itself would have to be dismissed.'

Thus, the Appellant preferred the present appeal in Supreme Court.

ISSUE BEFORE SUPREME COURT

Whether Section 34(5) of the Arbitration and Conciliation Act, 1996, inserted by Amending Act 3 of 2016 (w.e.f 23rd October, 2015), is mandatory or directory?

RELEVANT PROVISIONS

SECTION 34. Application for setting aside arbitral award.--

(5) An application under this Section shall be filed by a party only after issuing a prior notice to the other party and such application shall be accompanied by an affidavit by the applicant endorsing compliance with the said requirement.

(6) An application under this Section shall be disposed of expeditiously, and in any event, within a period of one year from the date on which the notice referred to in Sub-section (5) is served upon the other party.

OBSERVATION

The bench of Supreme Court comprising of J. Rohinton Fali Nariman and J. Indu Malhotra made reference to specific objective of the provisions under "The 246th Law Commission Report" as under:

"......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."

The Court has also referred to numerous case laws to arrive at a conclusive stance regarding the issue in question.

The Honorable Bench referred to Topline Shoes v. Corporation Bank, where Section 13(2) (a) of the Consumer Protection Act, 1986, was dealt with, which permits the opposite party to file its reply "within a period of 30 days or such extended period not extending 15 days, as may be granted by the District Forum".

"The Court read the same in conjunction with the Statement of Objects and Reasons of the Act which provides that the principles of natural justice have to be kept in mind and thus, held the provision to be directory in nature."

The prior decision of the Apex Court in Kailash v. Nanhku and Ors, was also referred where the question the Court faced was:

"Whether, after the amendment of Order VIII Rule 1 of the Code of Civil Procedure by the Amendment Act of 2002, the said provision must be construed as being mandatory?

"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 directory and not mandatory."

Salem Advocate Bar Association v. Union of India was also taken into consideration, wherein it was 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. We have to ascertain the object which is required to be served by this provision and its design and context in which it is enacted. The use of the word "shall" is ordinarily indicative of mandatory nature of the provision but having regard to the context in which it is used or having regard to the intention of the legislation, the same can be construed as directory. The Rule in question has to advance the cause of justice and not to defeat it. The Rules of procedure are made to advance the cause of justice and not to defeat it. Construction of the Rule or procedure which promotes justice and prevents miscarriage has to be preferred. The Rules of procedure are the handmaid of justice and not its mistress. In the present context, the strict interpretation would defeat justice."

The Supreme Court has also referred to the judgement in Bihari Chowdhary and Anr. v. State of Bihar and Ors., which dealt with comparison of procedural nature of Section 80 of the Civil Procedure Code and observed that Section 80 of the CPC with Section 34(5) of the Arbitration Act.

The Court held that

"Section 80 CPC is to be contrasted with Section 34(5), also a procedural provision, the infraction of which leads to no consequence. To construe such a provision as being mandatory would defeat the advancement of justice, as it would provide the consequence of dismissing an application filed without adhering to the requirements of Section 34(5), thereby scuttling the process of justice."

Further, In Global Aviation Services Private Limited v. Airport Authorities of India, the Bombay High Court held that

 "Section 34(5) of the Arbitration and Conciliation Act is directory, because no consequence has been provided for breach of the limit specified."

CONCLUDING VIEW

The Supreme Court set aside a number of High Court judgments that have all taken the view that Section 34(5) is mandatory in nature.

The Court allowed the appeal by holding Section 34(5) to be directory and set aside the judgment of the Patna High Court.

The Court further directed that the Section 34 application will now be decided on the merits alone.

RELIED UPON DECISIONS

The Hon'ble Court put reliance upon the following decisions in forming the view:

  1. Topline Shoes v. Corporation Bank - (2002) 6 SCC 33
  2. Kailash v. Nanhku and Ors - (2005) 4 SCC 480
  3. Salem Advocate Bar Association v. Union of India - (2005) 6 SCC 344
  4. New India Assurance Co. Ltd. v. Hilli Multipurpose Cold Storage Pvt. Ltd. - (2015) 16 SCC 20.
  5. Bihari Chowdhary and Anr. v. State of Bihar and Ors - (1984) 2 SCC 627
  6. Global Aviation Services Private Limited v. Airport Authorities of India - Commercial Arbitration Petition No. 434 of 2017 [decided on 21.02.2018]

REASON OF JURISPRUDENCE

The Supreme Court emphasised upon the instructive passage in Maxwell on Interpretation of Statutes, 10th Edition, to the effect that

"......considerations of convenience and justice are uppermost, and if general inconvenience or injustice results, without promoting the real aim and object of the enactment, the provision must be declared to be directory."

In the light of the above statement, Supreme Court has held as under:

"It will thus be seen that Section 34(5) does not deal with the power of the Court to condone the non-compliance thereof. It is imperative to note that the provision is procedural, the object behind which is to dispose of applications Under Section 34 expeditiously. One must remember the wise observation contained in Kailash, where the object of such a provision is only to expedite the hearing and not to scuttle the same. All Rules of procedure are the handmaids of justice and if, in advancing the cause of justice, it is made clear that such provision should be construed as directory, then so be it."

AMLEGALS REMARKS

This jurisprudence by the Apex Court, signals that the judiciary wants a fluidic interpretation of the written word of statute, an interpretation that is not bound within the straitjacket of language used in drafting the law, and which furthers the overall aim of due administration of justice.

A similar ratio was also adopted by Supreme Court in Surendra Trading Company while interpreting the time bound proceedings, under IBC, at the end of Adjudicating authority i.e NCLT, it held that the time period of 14 days to be directive and not mandatory.

Finally, it is further a trite law that a provision in a statute which is procedural in nature even has word "shall" may not be held to be mandatory if thereby no prejudice is caused.

This content is purely an academic analysis under "Legal intelligence series".

© Copyright AMLEGALS.

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