SECTION 34(4) OF THE ARBITRATION AND CONCILIATION ACT, 1996

Section 34 of the Arbitration and Conciliation Act, 1996 (Act) lays down grounds for setting aside an arbitral award. Section 34(4) of the Act, which seldom assumes centre-stage in contemporary writings and discussions, confers pertinent power on the court. Where the court deems it appropriate and it is so requested by a party, it may give an opportunity to the arbitral tribunal to resume the arbitral proceedings or to take such other action as in its opinion would eliminate the grounds for setting aside the arbitral award.

JUDGMENT PASSED BY THE HON'BLE SUPREME COURT IN 'I-PAY CLEARING SERVICES PRIVATE LIMITED VS. ICICI BANK LIMITED'

A Division Bench of the Hon'ble Supreme Court comprising of Hon'ble Mr. Justice R. Subhash Reddy and Hon'ble Mr. Justice Hrishikesh Roy, in I-Pay Clearing Services Private Limited vs. ICICI Bank Limited,1 has delivered a significant judgment on January 03, 2022, while examining the confines of Section 34(4) of the Act.

BACKGROUND OF THE CASE

Arrangement between the Parties

I-Pay Clearing Services Private Limited (Appellant) and ICICI Bank Limited (Respondent) entered into an agreement dated 04.11.2002, whereby the Appellant was required to provide services related to technology and operations of Smart Card based loyalty programs for Hindustan Petroleum Corporation Ltd. The parties entered into another agreement dated 04.02.2003 whereby the Appellant was required to develop a 'Drive Smart Software'. Thereafter, the Respondent requested the Appellant to develop another software 'Drive Track Fleet Card' and treat it as an extension of the Service Provider Agreement dated 04.11.2002.

The Award

The Appellant, aggrieved by the abrupt termination of the agreement dated 04.11.2002 by the Respondent, initiated arbitration proceedings claiming a loss of ₹95 Crores. The award dated 13.11.2017 came to be passed in favour of the Appellant whereby the Respondent was directed to pay ₹50 Crores with interest and costs to the Appellant (Impugned Award).

Challenge under Section 34(1) of the Act

The Respondent filed an application under Section 34(1) of the Act before the Hon'ble Bombay High Court seeking setting aside of the Impugned Award on the ground that it suffered from patent illegality insofar the arbitrator failed to provide any finding on the issue "Whether the contract was illegally and abruptly terminated by the respondent?" (Issue No. 1 out of the five issues for determination framed by the arbitrator). The Respondent contended that the arbitrator proceeded to award damages to the Appellant without considering the evidence on record to ascertain if there was 'accord and satisfaction' between the parties with respect to the contractual obligations.

Application under Section 34(4) of the Act

Pertinently, in the abovementioned Section 34 proceedings, the Appellant filed an application under Section 34(4) of the Act seeking adjournment of the proceedings and a direction to the arbitrator to take appropriate action to eliminate the ground of setting aside the Impugned Award.

Impugned Order

The Hon'ble High Court, vide the Impugned Order dated 16.07.2019, dismissed the Section 34(4) application filed by the Appellant, holding that the arbitrator could not have proceeded to record findings in the Impugned Award on the claims without recording a finding on Issue No. 1. The Hon'ble High Court further observed that the said defect in the award is not a curable defect.

Aggrieved by the above Impugned Order, the Appellant filed the instant appeal before the Hon'ble Supreme Court. It was the Appellant's case that the arbitrator rightly awarded damages in view that contract was illegally terminated by the Respondent but failed to record detailed reasons in the Impugned Award. Such omission, as per the Appellant, was a curable defect under Section 34(4) of the Act.

JUDGMENT

The Hon'ble Supreme Court upheld the dismissal of application under Section 34(4) of the Act by the Hon'ble High Court. Significant observations made by the apex court in the said judgment are as follows:

  1. Observation on Section 31 of the Act: The Court made a brief reference to Section 31 of the Act, specifying that an arbitral award shall state reasons on which it is based, unless parties agree that no reasons are to be given or award is on agreed terms under Section 30 of the Act.
  2. Earlier case laws on Section 34(4): The Court distinguished the present case with other decisions of the Hon'ble Supreme Court relied on by the Appellant in relation to Section 34(4) of the Act, on facts, viz. Kinnari Mullick v. Ghanshyam Das Damani, 2 Dyna Technologies Pvt. Ltd. v. Crompton Greaves Ltd., 3 and Som Datt Builders v. State of Kerala.4
  3. Differentiation between 'findings' and 'reasons': The Hon'ble Supreme Court held that Section 34(4) of the Act can be resorted-to to record reasons on the finding already given in the arbitral award, in order to fill up the gaps. However, if there is no finding on an issue in the arbitral award, remission is not permissible. The Court placed reliance on its judgment in 'Income Tax Officer, A Ward, Sitapur v. Murlidhar Bhagwan Das',5 wherein the Court defined a 'finding' as 'a decision on an issue'. The Court further relied on the judgment in 'J. Ashoka v. University of Agricultural Sciences',6 and observed that 'reasons are the links between materials on which conclusions are based and the actual conclusions.
    The Hon'ble Court, therefore, observed that a harmonious reading of Sections 31, 34(1), 34(2A) and 34(4) of the Act indicates that a Court can give an opportunity to the arbitrator to resume arbitral proceedings to give 'reasons' in support of a 'finding' already rendered in the arbitral award.
  4. Absence of finding, an acceptable ground for setting aside: Pertinently, the apex court observed that if there are no 'findings' in the award or the 'findings' are recorded ignoring the material evidence, the same are acceptable grounds for setting aside the arbitral award under Section 34 of the Act.
  5. Discretionary power of the court: The Hon'ble Supreme Court held that the words "where it is appropriate" in Section 34(4) of the Act indicate that it is the discretion of the court to remit the matter to the arbitrator. It further observed that, while ruling on an application under Section 34(4) of the Act, the court has to consider: (a) grounds for filing the setting aside application under Section 34(1) of the Act; and (b) grounds raised in the Section 34(4) application and reply thereto. It is not obligatory on the court to remit the matter to the arbitrator merely because an application under Section 34(4) has been filed. If it appears prima facie, that no 'finding' is recorded on an issue, the court may not accede to an application under Section 34(4) of the Act.

CONCLUSION

 In the light of the above judgment, omission to record 'findings' in the arbitral award is not a curable defect while omission to record 'reasons' with respect to a 'finding' is a curable defect. The above judgment is significant from the perspective of passing an arbitral award by an arbitral tribunal. It lays down an important guideline for the arbitral tribunals to record 'findings' with respect to all the issues framed in the arbitration matter. An omission to record a 'finding' may well result in the arbitral award getting set aside under Section 34 of the Act on the ground of patent illegality, particularly when such issues are integral in deciding the claims.

Footnotes

1. Civil Appeal No. 7 of 2022 arising out of S.L.P. (C) No. 24278 of 2019.

2. (2018) 11 SCC 328.

3. (2019) SCC ONLINE SC 1656.

4. (2009) 10 SCC 259.

5. AIR 1965 SC 342.

6. (2017) 2 SCC 609.

Originally published January 2022

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