This article is written by Aditi, a second-year LL.B. student at ILS Law College, Pune during her internship at LeDroit India.
KEYWORDS
Arbitration and Conciliation Act, 1996, Section 34, Setting aside, Arbitral Award, Minimal Judicial Intervention, Doctrine of Severability.
ABSTRACT
The Arbitration and Conciliation Act, 1996, provides a structured framework for arbitration in India, ensuring that disputes are resolved efficiently outside traditional courts. An arbitral award is final and binding; however, Section 34 of the Act allows parties to challenge an award on specific grounds, such as incapacity, invalid arbitration agreements, lack of fair hearing, excess jurisdiction, and violations of public policy.
The Act upholds the doctrine of minimal judicial intervention while ensuring procedural fairness. Courts strictly limit their interference to the statutory grounds under Section 34, reinforcing arbitration’s efficiency and finality. The doctrine of severability allows partial annulment of an award without affecting the entire decision. Additionally, procedural safeguards such as time limitations, notice requirements, and expedited disposal ensure arbitration remains a credible dispute resolution mechanism. By balancing party autonomy with judicial oversight, the Act strengthens India’s arbitration framework, fostering confidence in alternative dispute resolution.
INTRODUCION
The Arbitration and Conciliation Act, 1996, governs arbitration proceedings in India and establishes a structured mechanism for resolving disputes outside the formal judicial system. Arbitration serves as an alternative dispute resolution (ADR) method, allowing parties to settle conflicts efficiently without resorting to traditional court litigation.
This legislation incorporates principles from the UNCITRAL (United Nations Commission on International Trade Law) Model Law on International Commercial Arbitration, ensuring that arbitral awards are recognized and enforced both domestically and internationally. Given the heavy caseload of Indian courts, ADR methods like arbitration, mediation, and negotiation provide effective solutions for dispute resolution.
Arbitration resembles judicial proceedings, as both parties present their arguments before an arbitrator, who functions similarly to a judge. The arbitrator’s decision, known as an arbitral award, is legally binding and holds the same enforceability as a court decree, requiring compliance from both parties involved.
An arbitral award is considered final and binding, with no provision for an appeal under the Arbitration and Conciliation Act, 1996. However, an aggrieved party has the option to challenge the award by seeking its annulment under Section 34 of the Act on specific legal grounds.
The law does not provide parties with the right to appeal an arbitral award based on its validity, nor does it allow courts to interfere with its merits. The Supreme Court has upheld the principle that an arbitrator, being a judge chosen by the parties, should not be subjected to unwarranted interference. However, this does not imply that an arbitrator’s conduct is beyond scrutiny. The Act ensures procedural fairness by providing remedies to parties who may be adversely affected by an award.
Under the now-repealed Arbitration Act of 1940, three primary remedies were available against an arbitral award: modification, remission, and annulment. The 1996 Act reorganized these remedies into two distinct categories. While the correction of errors was retained, the responsibility for rectification was assigned to both the parties and the arbitral tribunal. Furthermore, the provision for setting aside an award was structured to allow the tribunal to amend its decision and rectify any defects before the award could be challenged in court.
ARBITRAL AWARD
An Arbitral award is the final decision given by an Arbitration Tribunal after hearing the arguments and examining the evidence presented by both parties in an arbitration proceeding. It serves as a legally binding resolution to the dispute and is enforceable in the same manner as a court judgment. The award may settle all or some of the issues in dispute, depending on the nature of the arbitration. An arbitral award is a crucial outcome of arbitration, offering a structured and enforceable resolution to disputes. Arbitral awards play a significant role in ensuring fair and efficient dispute resolution outside traditional litigation, whether through a final decision, an interim order, or a settlement between the parties.
SETTING ASIDE AN ARBITRAL AWARD
The Arbitration and Conciliation Act, 1996, is founded on two fundamental principles that seek to enhance the efficiency and reliability of arbitration proceedings. First, the doctrine of Minimal Judicial Intervention restricts court interference in arbitral matters, ensuring that arbitration remains a swift and independent dispute resolution mechanism. Second, the principles of Finality and Enforceability of Arbitral Awards reinforce the binding nature of arbitral decisions and establish a structured process for their execution.
When parties enter into an arbitration agreement, as defined under Section 7 of the Act, they voluntarily agree to resolve disputes through arbitration. Consequently, if a conflict arises in the future and arbitration is chosen as the mode of resolution, the arbitrator’s decision attains finality and becomes legally binding on both sides.
Nevertheless, there may be instances where one or both parties contest the arbitral award, believing it to be flawed or unjust. Recognizing such possibilities, the 1996 Act provides a legal remedy. Under the Act, a party can move the court to set aside an arbitral award, but only on specific grounds laid down in the statute.
Crucially, such an application must be filed in a court with the requisite jurisdiction. Section 2(1)(e)(i) of the Act specifies that for arbitration proceedings other than international commercial arbitration, the appropriate forum for challenging an award is either the principal Civil Court of original jurisdiction (typically a District Court) or a High Court that exercises ordinary original civil jurisdiction over the matter.
For international commercial arbitration, Section 2(1)(e)(ii) mandates that the High Court with ordinary civil jurisdiction is the competent authority to entertain a challenge against the award. In cases where a Commercial Division has been constituted within the High Court under the Commercial Courts Act, such matters will be handled by this specialized division. This ensures that complex commercial disputes are adjudicated by a bench with expertise in commercial arbitration.
GROUNDS FOR SETTING ASIDE AN ARBITRAL AWARD
Section 34 of the Arbitration and Conciliation Act, 1996, provides a framework for setting aside an arbitral award under specific circumstances. Following are the grounds on which an arbitral award can be challenged and potentially set aside by the courts in India.
SECTION 34
Section 34(1) of the Arbitration and Conciliation Act stipulates that recourse to a court against an arbitral award can only be made through an application for setting aside the award, in accordance with the conditions outlined in subsections (2) and (3). This provision ensures that arbitral awards are not challenged arbitrarily and that parties adhere to specific statutory grounds when seeking to set aside an award. The grounds for setting aside an arbitral award are broadly classified into two categories:
- Party-Based Grounds (Section 34(2)(a)) – These relate to issues concerning the parties involved in arbitration, including their capacity, the validity of the arbitration agreement, and procedural fairness.
- Court-Based Grounds (Section 34(2)(b)) – These concern legal principles such as public policy and arbitrability of the subject matter.
PARTY-BASED GROUNDS UNDER SECTION 34(2)(a)
1. INCAPACITY OF A PARTY (SECTION 34(2)(a)(i))
An arbitral award can be set aside if one of the parties was under some legal incapacity at the time of entering into the arbitration agreement. As per Section 11 of the Indian Contract Act, 1872, a person must fulfil the following conditions to enter into a contract i.e., must have attained the age of majority, must be of sound mind at the time of entering into the contract and must not be disqualified from contracting under any law. Thus, if a party is a minor, mentally unsound, or otherwise legally incompetent, the arbitration agreement is rendered invalid, making any award based on it unenforceable.
2. INVALID ARBITRATION AGREEMENT (SECTION 34(2)(a)(ii))
The arbitration agreement must comply with the legal requirements of the governing law. Section 7 of the Arbitration and Conciliation Act requires an arbitration agreement to be in writing, and Section 10 mandates that it must be valid under contract law principles. An arbitration agreement may be deemed invalid if it lacks mutual consent, it was procured through fraud or misrepresentation or it does not conform to the applicable legal framework.
3. LACK OF PROPER NOTICE OR FAIR HEARING (SECTION 34(2)(a)(iii))
The principles of natural justice require that each party be given adequate notice of the arbitration proceedings and a fair opportunity to present their case. Section 18 of the Arbitration Act enshrines this principle. A violation occurs when a party was not notified about the appointment of an arbitrator, a party was denied the chance to present evidence or the arbitral proceedings were conducted unfairly or in a biased manner.
Courts have set aside awards on this basis in cases where due process was violated. For instance, in AKM Enterprises Pvt. Ltd. v. Ahluwalia Contract (India) Ltd. (2016), an award was set aside as the arbitrator failed to hear the counterclaims of the applicant.
4. EXCESS OF JURISDICTION (SECTION 34(2)(a)(iv))
An arbitral tribunal must act within the scope of the arbitration agreement. An award may be set aside if the arbitrator rules on matters beyond the terms of reference or the arbitrator decides issues not submitted for arbitration.
5. IMPROPER COMPOSITION OF THE ARBITRAL TRIBUNAL (SECTION 34(2)(a)(v))
The composition of the arbitral tribunal and the procedure followed must conform to the arbitration agreement. Any deviation can render the award invalid. An award can be challenged if the tribunal was not constituted in accordance with the agreement and the arbitration procedure deviated from what was agreed upon.
For example, in Bharat Sanchar Nigam Ltd. v. Maharashtra Knowledge Corporation Ltd. (2019), the award was partially set aside due to non-adherence to procedural fairness.
COURT-BASED GROUNDS UNDER SECTION 34(2)(b)
1. NON-ARBITRABLE SUBJECT MATTER (SECTION 34(2)(b)(i))
Certain disputes cannot be resolved through arbitration and require judicial intervention. Examples include criminal offenses, matrimonial disputes, insolvency and bankruptcy proceedings. Courts have consistently held that arbitration cannot be used to settle disputes that inherently require judicial scrutiny.
2. CONFLICT WITH PUBLIC POLICY (SECTION 34(2)(B)(ii))
An arbitral award can be set aside if it violates the public policy of India. Public policy violations include Awards obtained by fraud or corruption, Awards violating fundamental rights and Awards enforcing illegal contracts or transactions contrary to Indian law.
In Steel Authority of India Ltd. v. Primetals Technologies (2020), the Supreme Court partially set aside an award due to an unjustifiably high-interest rate imposed, which was deemed against public policy.
In the case of Venture Global Engineering V Satyam Computer Services Ltd (2010), in cases where an award has been obtained by means of suppressing important facts and by misleading or bribing arbitrators, the award passed shall be invalid on the grounds of being against public policy.
Over the years, courts have clarified that judicial intervention under Section 34 is limited to specific grounds. The Supreme Court, emphasized that courts should not review the merits of an arbitral award but should only intervene in cases where the statutory grounds under Section 34 are met. The introduction of amendments in 2015 also restricted the interpretation of “public policy” to prevent excessive judicial interference in arbitral awards.
LIMITATION FOR FILING AN APPLICATION
As per Section 34(3) of the Arbitration and Conciliation Act, an application to set aside an arbitral award must be filed within three months from the date the party receives the award or from the disposal of any application seeking corrections or interpretations of the award by the arbitral tribunal.
The significance of adhering to this limitation period is underscored in Section 36, which states that once the period under Section 34 lapses, the award becomes enforceable as a decree of the court.
However, the proviso to Section 34(3) allows for an additional grace period of 30 days beyond the initial three-month window. This extension is available only if the applicant can satisfy the court that there was a sufficient cause preventing the timely filing of the application. Beyond this additional 30-day period, no further relaxation is permitted, making it a strict limitation.
In National Aluminum Co. Ltd. v. Presteel Fabrication (P) Ltd., the Supreme Court held that the time spent in bona fide litigation before an incorrect forum constitutes a valid ground for condonation of delay. In this case, the party mistakenly approached the Supreme Court, believing it had jurisdiction over the matter. The court ruled that such an error, made in good faith, justified the exclusion of that period from the computation of limitation.
A plain reading of Section 34(3) and its proviso makes it evident that an application for setting aside an arbitral award must be submitted within three months, with a possible extension of up to 30 days if sufficient cause is demonstrated. However, no further relaxation is available. This principle is reinforced by Section 29(2) of the Limitation Act, which clarifies that when a special statute prescribes both a limitation period and a provision for a limited extension, those statutory provisions take precedence over the general provisions of the Limitation Act. Consequently, Section 5 of the Limitation Act, which allows for discretionary condonation of delay, does not apply to Section 34 proceedings.
DOCTRINE OF SEVERABILITY AND SETTING ASIDE OF AN ARBITRAL AWARD
Section 34 of the Arbitration and Conciliation Act, 1996, permits a court to partially set aside an arbitral award based on the proviso to Section 34(2)(a)(iv). When an arbitral award consists of multiple independent claims, each claim can be treated as a distinct award. Consequently, if one claim is subject to challenge, the court may set it aside without affecting the rest of the award. This principle underscores the doctrine of severability and affirms that Section 34 allows for a partial annulment rather than an all-or-nothing approach.
In NHAI v. Trichy Thanjavur Expressway Ltd. (2023), the Delhi High Court distinguished between modification and partial setting aside of an arbitral award. The court clarified that the Supreme Court’s decision in NHAI v. Hakeem & Anr. (2021) does not serve as a precedent for matters concerning partial annulment of awards.
Furthermore, the judgment elaborated on the purpose and scope of Section 34(4), emphasizing that this provision aims to rectify defects in the award without re-evaluating prior findings. This ensures a limited scope for correction while maintaining the award’s overall integrity.
NOTICE REQUIREMENT
Before filing the application, the party must issue a prior notice to the other party, and the application must be accompanied by an affidavit endorsing compliance with this requirement (Section 34(5)).
EXPEDITED DISPOSAL
The court is obligated to dispose of the application expeditiously and, in any event, within one year from the date on which the notice referred to in sub-section (5) is served upon the other party (Section 34(6)).
CONSTITUTIONAL VALIDITY OF SECTION 34
In TPI Ltd Vs Union of India , in a writ petition, it was contended by the petitioner that a right to challenge an arbitral award on merits should be present, and in the absence of the same, section 34 would be unconstitutional. The court dismissed the write petition and stated that the matter in question was not related to judicial review of a tribunal decision created under any statute or any administrative action. The arbitration is an alternate forum for redressal of disputes, and is selected by the parties of their own free will and they agree to the arbitrator’s decision by means of a mutual agreement or contract, which gives a go by to the normal judicial forum otherwise available to the parties. There is no compulsion or imposition by any statute compelling the parties to resort to arbitration if a dispute arises.
When the parties have chosen the forum of arbitration and the arbitrator of their choice, it is not necessary to make a provision for appeal against the award rendered by the arbitrator. The legislature has the power to specify the grounds on which an award can be challenged and it would be permissible for the party to challenge the award only on those grounds. If it were permissible for the court to re-examine the correctness of the award, the entire proceedings would amount to a futile exercise.
CONCLUSION
Arbitration under the Arbitration and Conciliation Act, 1996, serves as an effective alternative to litigation, ensuring efficiency and finality in dispute resolution. While arbitral awards are binding and enforceable, Section 34 provides a limited avenue for challenge on specific legal grounds, reinforcing minimal judicial interference. The Act balances party autonomy with procedural fairness, ensuring that arbitration remains a credible dispute resolution mechanism. Courts have consistently upheld the restrictive scope of intervention, maintaining arbitration’s integrity. By streamlining remedies and promoting efficiency, the Act strengthens India’s arbitration framework, making it a viable option for resolving commercial and civil disputes.
REFERENCES
Arbitration & Conciliation Act 1996
