Arbitration In IndiaGround for setting aside Arbitral Award under Section 34

Introduction

Arbitration has emerged as a preferred mode of Alternative Dispute Resolution (ADR) in India and globally, particularly for commercial disputes. Its appeal lies in its flexibility, party autonomy, cost-effectiveness, and relative speed compared to traditional litigation. The Arbitration and Conciliation Act, 1996 (the “Act”) provides the legal framework for arbitration in India.

A central tenet of arbitration is the finality of the arbitral award, which is the decision delivered by the arbitral tribunal that conclusively determines the parties’ rights and obligations. This finality is not absolute. While courts maintain a pro-arbitration stance and are reluctant to interfere with awards, the Act recognizes that an award may be set aside in limited circumstances, such as procedural irregularities, jurisdictional errors, or conflicts with public policy.

Section 34 of the Act provides the exclusive recourse to a court against an arbitral award. This provision does not permit a review of the dispute on its merits; rather, it allows for judicial scrutiny only on specific, narrowly defined statutory grounds. The legislative intent is to balance the finality of arbitration with the need to ensure fairness, legality, and procedural integrity.

What is an Arbitral Award?

An arbitral award is the formal decision rendered by an arbitral tribunal that resolves the disputes submitted by the parties under an arbitration agreement. As per Section 2(1)(c) of the Act, an arbitral award includes interim awards. Section 31 of the Act mandates that an award must be in writing, signed by the tribunal members, state the reasons for the decision (unless waived by the parties), and state its date and the place of arbitration.

Grounds of setting aside an Arbitral Award

Section 34(2) of the Act enumerates the exhaustive grounds upon which a court may set aside an arbitral award. These are divided into two categories: grounds that a party must furnish proof of, and grounds that the court can consider on its own initiative.

Section 34(2)(a): Grounds to be Proven by the Applicant Party

1. Incapacity of a Party (Sec 34(2)(a)(i)): An award can be set aside if a party was under some legal incapacity when entering the arbitration agreement. This aligns with the Indian Contract Act, 1872, which requires parties to be of the age of majority and of sound mind.

2. Invalid Arbitration Agreement (Sec 34(2)(a)(ii)): The award can be challenged if the arbitration agreement is not valid under the law to which the parties have subjected it, or, failing any indication thereon, under the law for the time being in force in India.

3. Lack of Proper Notice or Opportunity to Present Case (Sec 34(2)(a)(iii)): An award is liable to be set aside if the party making the application was not given proper notice of the appointment of an arbitrator or of the arbitral proceedings, or was otherwise unable to present their case. This ground protects the principles of natural justice and due process.

4. Award Deals with a Dispute Beyond the Scope of Arbitration (Sec 34(2)(a)(iv)): An award may be set aside if it deals with a dispute not contemplated by or not falling within the terms of the submission to arbitration, or it contains decisions on matters beyond the scope of the submission. However, if the decisions on matters submitted to arbitration can be separated from those not so submitted, only that part of the award which contains decisions on matters not submitted may be set aside.

5. Improper Composition of the Tribunal or Procedure (Sec 34(2)(a)(v)): The award can be challenged if the composition of the arbitral tribunal or the arbitral procedure was not in accordance with the agreement of the parties, unless such agreement was in conflict with a non-derogable provision of the Act.

Section 34(2)(b): Grounds for the Court’s Sua Sponte Intervention

1. Non-Arbitrability of Subject-Matter (Sec 34(2)(b)(i)): The court may set aside an award if it finds that the subject matter of the dispute is not capable of settlement by arbitration under the law for the time being in force. Certain disputes, such as those relating to criminal offenses, matrimonial matters, or guardianship, are reserved for public forums and are non-arbitrable.

2. Conflict with the Public Policy of India (Sec 34(2)(b)(ii)): An award can be set aside if the court finds that it is in conflict with the public policy of India. The 2015 amendment to the Act significantly clarified and narrowed this ground. An award is in conflict with public policy only if:

• The making of the award was induced or affected by fraud or corruption.
• It is in contravention with the fundamental policy of Indian law.
• It is in conflict with the most basic notions of morality or justice.

Section 34(2A): Patent Illegality (For Domestic Awards Only)

Introduced by the 2015 amendment, this section provides an additional ground for setting aside domestic arbitral awards. An award may be set aside for patent illegality appearing on the face of the award. However, the law clarifies that an award shall not be set aside merely on the ground of an erroneous application of the law or by reappreciation of evidence.

Recent Judicial Interpretations

Judicial precedent continues to reinforce the principle of minimal court intervention in arbitral awards.

• Ssangyong Engineering & Construction Co. Ltd. v. NHAI (2019) 15 SCC 131: The Supreme Court provided a comprehensive analysis of the post-2015 amendment landscape. It clarified that the ground of “patent illegality” does not permit a review on the merits of the case. The Court also held that a contravention of the “fundamental policy of Indian law” must be a breach of a principle that is so fundamental as to be non-derogable. It decisively narrowed the scope of public policy, overturning the wider interpretation from the ONGC v. Western Geco decision.
• National Highways Authority of India v. M. Hakeem & Anr. (2021) 9 SCC 1: The Supreme Court definitively held that Section 34 does not empower courts to modify, vary, or remit an arbitral award. The only power available to the court is to set aside the award, leaving the parties free to begin fresh arbitration proceedings if they so desire.

• Delhi Airport Metro Express Pvt. Ltd. v. Delhi Metro Rail Corporation Ltd. (2022) 1 SCC 131: The Supreme Court reiterated that “patent illegality” must be an illegality that goes to the root of the matter and should not be a minor or trivial error. The Court emphasized that it cannot reappreciate evidence or interfere with an award simply because another reasonable interpretation of the contract is possible.

• UHL Power Company Ltd. v. State of Himachal Pradesh (2022) 4 SCC 116: Reinforcing the limited scope of judicial review, the Supreme Court held that a court hearing a Section 34 application does not sit as a court of appeal. The possible existence of an alternative view on facts or contract interpretation is not a ground to set aside an award.

Conclusion

Section 34 of the Act strikes a crucial balance between upholding the finality of arbitral awards and ensuring judicial oversight against fundamental legal breaches. The grounds for challenge are exhaustive and interpreted narrowly by the courts. The legislative amendments and subsequent judicial pronouncements have consistently moved towards strengthening India’s pro-arbitration stance.

For parties and practitioners, this underscores the importance of a meticulously drafted arbitration agreement and adherence to fair procedure, as the scope for challenging a final award on its merits is virtually non-existent.

— Team AMLEGALS

Please reach out to us at rohit.lalwani@amlegals.com in case of any query.