PROJECT OF

ADR
ON THE TOPIC
“SETTING ASIDE THE
ARBITRAL AWARD’’

SUBMITTED TO SUBMITTED BY
PROF. SHUBHAM SINGH BAGLA ZAIBA REHMAN
GU16R0272

L.LB (III SEM)

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 CHAPTER I

1. INTRODUCTION
Arbitration is a process of dispute resolution between the parties through arbitral tribunal
appointed by parties to the dispute or by the Court at the request by a party. In other
words, it is an alternative to litigation as a method of dispute resolution. The law relating
to arbitration in India is based on the English Arbitration Law. In 1940 the Indian Law on
arbitration was drafted in the form of Arbitration Act, 1940 and remained in force until it
was replaced by the new Arbitration and Conciliation Act, 1996.

The Indian arbitration law is based on the United Nations Commission on International
Trade Law (UNCITRAL Model Law).The law of arbitration is based on the principle of
withdrawing the dispute from the ordinary court and enabling the parties to substitute a
domestic tribunal consisting persons of their own choice called as arbitrators. The
Parliament enacted the Arbitration and Conciliation Act, 1996 which not only removed
many serious defects of the earlier arbitration law but also incorporated modern concepts
of arbitration which are internationally accepted. The arbitral award has been treated at
par with the decree of the Court. The arbitral award is enforceable in the same manner as
a decree of a law court. This change has enabled reduction of litigation in some areas of
arbitration. Earlier an award could not be executed in its own right unless the court
ordered that award be filed and a decree issued in terms thereof.

There is no provision for appeal against an arbitral award and it is final and binding
between the parties. However, an aggrieved party may take recourse to law court for
setting aside the arbitration award on certain grounds specified in Section 34 of the
Arbitration and Conciliation Act, 1996.

2. AIMS AND OBJECTIVE OF STUDY-

 A literature review
 to find out the rationale for setting aside the arbitral award,
 to give certain suggestions after analyzing the topic

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3. STATEMENT OF PROBLEM-
 WHAT SECTION 34 DEALS ALL ABOUT?
 HOW THE VALIDITY OF AN AGREEMENT CAN BE CHALLENGED?
 WHAT PERMITS TO CHALLENGE THE AWARD?
 WHAT WOULD BE THE CONSEQUENCES IF THE AWARD GOES
BEYOND THE SCOPE OF REFERENCE.
 WHICH DISPUTE IS NOT ARBITRABLE?
 LIMITATION PERIOD FOR FILING THE APPLICATION.
4. RESEARCH METHODOLOGY-
This project is based upon doctrinal method of research.
 METHOD- The method of writing followed in the course of this research project
is primarily analytical.
 SOURCES OF DATA- The following secondary sources of data have been used
in the project-
Articles, Books and Websites.

5. TENTATIVE CHAPTERISATION
A. Setting aside of Arbitral Award
B. Incapacity of Party
C. Invalidity of Agreement
D. Notice Not given to parties
E. Award Beyond scope of reference
F. Illegality of Arbitral procedure
G. Dispute not Arbitrable
H. Award against Public policy
I. Limitation of filling Application
J. Remission by Tribunal
K. Foreign Awards
L. Conclusion

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 CHAPTER.II

SETTING ASIDE ARBITRAL AWARD

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.

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 molded 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. These grounds are:

1. Incapacity of a party
2. Arbitration agreement not being valid
3. Party not given proper notice of arbitral proceedings
4. Nature of dispute not falling within the terms of submission to arbitration
5. Arbitral procedure not being in accordance with the agreement

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

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If the decision on matters submitted to arbitration can be separated from those not submitted;
only that part of the arbitral award which contains decisions on matters not submitted to
arbitration may be set aside.

Section 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)1, 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.

It is necessary for the aggrieved party to make an application under Section 34 stating the
grounds of challenge. An application for setting aside the award has to be made by a party to the
arbitration agreement. But a legal representative can apply for it because he is a person claiming
under them. There is no special form prescribed for making an application under Section 34 of
the act except it has to be a written statement filed within the period of limitation.

In Sanshin Chemical Industry v. Oriental Carbons & chemical Ltd.2, 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. Mayank3, 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.

An award which is set aside is no longer remains enforceable by law. The parties are restored to
their former position as to their claims in the dispute. Setting aside an award means that it is
rejected as invalid. The award is avoided and the matter becomes open for decision again. The
parties become free to go back to arbitration or to have the matter decided through court.

1
(2003) 4 RAJ 363 (Bom)
2
AIR 2001 SC 1219
3
AIR 1994 SC 2562

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INCAPACITY OF PARTIES

If a party to arbitration is not capable of looking after his own interests, and he is not represented
by a person who can protect his interests, the award will not be binding on him and may be set
aside on his application.

If a minor or a person of unsound mind is a party he must be properly represented by a proper

guardian otherwise the award would be liable to be set aside. Such a person is not capable of
binding himself by a contract and therefore, an award under a contract does not bind him.

Section 9 of the 1996 Act enables him to apply to the court for appointment of a guardian for a
minor or a person of unsound mind for the purpose of arbitral proceedings. The ground of
incapacity would cease to be available when the incompetent person is represented by a
guardian.

INVALIDITY OF AGREEMENT

The validity of an agreement can be challenged on any of the grounds on which the validity of a
contract may be challenged. In cases where the arbitration clause is contained in a contract, the
arbitration clause will be invalid if the contract is invalid.

In State of U.P. v. Allied Constructions4 the court held that the validity of an agreement has to be
tested on the basis of law to which the parties have subjected it. Where there is no such
indication, the validity would be examined according to the law which is in force.

NOTICE NOT GIVEN TO PARTIES

Section 34(2)(a)(iii) permits challenge to an award if the party was not given proper notice of the
appointment of an arbitrator, or the party was not given proper notice of the arbitral proceedings,
or the party was for some reasons unable to present his case.

4
(2003) 7 SCC 396

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Under Section 23(1) the Arbitral Tribunal has to determine the time within which the statements
must be filed. This determination must be communicated to the parties by a proper notice.
Section 24(2) mandates that the parties shall be given sufficient advance notice of any hearing or
meeting of the Tribunal for the purpose of inspection of documents, goods or other property.

If for any good reason a party is prevented from appearing and presenting his case before the
Tribunal, the award will be liable to be set aside as the party will be deemed to have been
deprived of an opportunity of being heard the principle of natural justice.

In Dulal Podda v. Executive Engineer, Dona Canal Division5, the court held that appointment of
an arbitrator at the behest of the appellant without sending notice to the respondent, ex parte
award given by the arbitrator was illegal and liable to be set aside.

In Vijay Kumar v. Bathinda Central Co-operative Bank and ors.[vi] the court observed “it is a
typical case where the arbitrator misconducted the proceedings and also misconducted himself.
Arbitrator held the first and only hearing on May 17, 2010. No points for settlement or issues
were framed. The bank filed affidavits of four employees. Appellant was not given opportunity
to cross examine them. He was denied the opportunity to produce evidence. A complete go bye
was given to the provisions of law, procedure and rules of justice. It would thus be seen that
appellant was unable to present his case.

AWARD BEYOND SCOPE OF REFERENCE

The reference of a dispute under an agreement defines the limits of the authority and jurisdiction
of the arbitrator. If the arbitrator had assumed jurisdiction not possessed by him, the award to the
extent to which it is beyond the arbitrator’s jurisdiction would be invalid and liable to be set
aside.

Section 34(2)(a)6 of the Act provides that an arbitral award is liable to be set aside if it deals with
a dispute not contemplated by the reference, or not falling within the terms of the reference, or it
contains a decision in matters beyond the reference.

5
(2004) 1 SCC 73

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In Gautam Construction & Fisherie Ltd v. National Bank for Agriculture and Rural
Development, the Supreme Court modified the award to the extent that the rate of construction
meant for ground floor could not be applied to the construction of the basement area.

In Rajinder Kishan Kumar v. Union of India, a matter under a writ petition was referred to
arbitration. The writ petition contained no claim of compensation for damage to potentiality of
the land because of the opposing party discharging effluents and slurry on the land. The award of
such compensation was held to be outside the scope of reference hence liable to be set aside.

Section 16 of the Arbitration and Conciliation Act, 1996 provides that the initial decision as to
jurisdiction lies with the Tribunal. The party should immediately object as to excess of
jurisdiction. If the Tribunal rejects the objection, the aggrieved party may apply under Section
34(2)for setting aside on the ground of excess of jurisdiction.

An arbitrator cannot go contrary to the terms of the contract. Where the terms of the contract are
not clear or unambiguous, the arbitrator gets the power to interpret them. In State of Rajasthan v.
Nav Bharat Construction Co7, a majority of claims allowed were against the terms of the
contract.

ILLEGALITY IN ARBITRAL PROCEDURE

Section 34(2)(a)(v) provide that an award can be challenged if the composition of the Tribunal
was not in accordance with the agreement, or the procedure agreed to by the parties was not
followed in the conduct of proceedings, or in the absence of agreement as to procedure, the
procedure prescribed by the Act was not followed.

Failure to follow the agreed procedure or the procedure prescribed by the Act is a procedural
misconduct. If the arbitral tribunal takes the matter which is clearly beyond the scope of its
authority, it would tantamount to misconduct of arbitrator. An award in which the arbitrator has
deliberately deviated from the terms of reference and arbitration agreement will amount to
misconduct of the arbitrator.

6
www.lobis.nic.in/phhc accessed on 16.10.13 at 10.30 p.m.
7
AIR 2005 SC 4430

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Section 12(3)(a) provides that an arbitrator may be challenged if there justifiable doubt as to his
independence or impartiality. Section 13 says that if the challenge is not successful and the
award is made, the party challenging the arbitrator may apply to the court under Section 34 for
setting aside the award.

In State Trading Corp. v. Molasses Co., the Bengal Chamber of Commerce8, a permanent arbitral
institution, did not allow a company to be represented by its Law Officer, who was full time
employee of the company. The Court held that it was not only misconduct of the arbitrator but
also misconduct of the arbitration proceedings.

As discussed earlier in Bathinda Central Co-operative Bank’s Case[xi] the court observed “it is a
typical case where the arbitrator misconducted the proceedings and also misconducted himself.
A complete go bye was given to the provisions of law, procedure and rules of justice.

In ONGC Ltd v. Saw Pipe Ltd9, the Supreme Court held that in exercising jurisdiction, the
Arbitral Tribunal cannot act in breach of some provisions of substantive law or the provision of
the Act. In Section 34(2)(a)(v)of the Act, the composition of the Arbitral Tribunal should be in
accordance with the agreement. The procedure which is required to be followed by the arbitrator
should also be accordance with the agreement. If there is no such agreement then it should be in
accordance with the procedure prescribed in Part 1 of the Act.

In the above case, the losses caused by delay were deducted from the supplier’s bill. The
direction of the Arbitral Tribunal that such deduction should be refunded with interest was held
to be neither in accordance with law, nor contract. The award was set aside to that extent.

In Union of India v. Om Prakash Baldev Krishna10 it was held that a non-reasoned award is
liable to be set aside by the court as contemplated by Section 31(3) which requires that arbitral
award shall State reasons upon which it is based unless the parties have mutually agreed that no
reasons are to be given.

8
AIR 1981 Cal. 440
9
AIR 2003 SC 2629
10
AIR 2000 J&K 79

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Some other examples of misconduct of proceedings are proceeding ex parte without sufficient
cause; denial of opportunity to parties; acting against the mandate given to the arbitrator under
the agreement; failure or refusal to consider counter-claim of the respondent etc.

DISPUTE NOT ARBITRABLE

The existence of an arbitral dispute is a condition precedent for exercise of power by an

arbitrator.

Only matters of indifference between the parties to litigation which affect their private rights can
be referred to arbitration.

Therefore, matters of criminal nature, insolvency proceedings, and matters of public rights
cannot be decided by arbitration.

The Delhi High Court, held in PNB Finance ltd v. Shital Prasad Jain11, that specific performance
of an act cannot be granted in an arbitration proceeding. The Supreme Court did not approve the
view point of the Delhi High Court. The Court held that the right to specific performance of an
agreement of sale deals with contractual rights and it is certainly open to the parties to agree to
refer the issue relating to specific performance to arbitration.

AWARD AGAINST PUBLIC POLICY

Section 34(2)(b)(ii) provides that an application for setting aside an arbitral award can be made if
the arbitral award is in conflict with the public policy of India.

The explanation to clause (b) clarifies that an award obtained by fraud or corruption would also
be an award against the public policy of India. An award obtained by suppressing facts, by
misleading or deceiving the arbitrator, by bribing the arbitrator, by exerting pressure on the
arbitrator, etc. would be liable to be set aside.

11
AIR 1991 Del 13

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The concept of public policy connotes some matter which concerns public good and public
interest.

In Venture Global Engg v. Satyam Computer Service Ltd12, it was held that an award could be set
aside if it is contrary to fundamental policy of Indian law, or the interest of India, or justice or
morality, or it is patently illegal.

If the award is contrary to the substantive provisions of law or the provisions of the Act or
against the terms of the contract, it would be patently illegal, which could be interfered under
Section 34. Award could also be set aside if it is as unfair and unreasonable as to shock the
conscience of the court as it is against public policy.

LIMITATION FOR FILING APPLICATION

Section 34(3) provides that an application for setting aside an arbitral award must be made
within 3 months of receiving the award or disposition of application by the arbitral tribunal.

The importance of this is emphasized by Section 36 which provides that the award becomes
enforceable as soon as the limitation period under Section 34 expires.

The proviso to Section 34(3) allows the party a further period of 30 days after the expiry of three
months if the court is satisfied that the party was prevented by a sufficient cause from making the
application. No application for setting aside the award can be entertained by the court after the
expiry of these additional thirty days.

In National Aluminum Co Ltd v. Presteel Fabrication (P) Ltd13, proceedings were instituted
before the Supreme Court under the wrong belief that it had jurisdiction in the matter of setting
aside. Time spent on a bona fide prosecution of an application in a wrong forum was held by the
Supreme Court to be a sufficient cause for condonation of delay.

12
2008 (4) SCC 190
13
(2004) 1 SCC 540

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In Union of India v. Shring Construction Co (P) Ltd14, sometime was lost in challenging the
award in a writ court which was declared to be not maintainable because the petitioner had his
remedy under Section 34 by the proceeding before the District Judge. The District Judge was
then approached along with an application for condonation of delay. He rejected it as time
barred. The Supreme Court held that the District Judge should have decided whether the
application was within time after excluding the period lost in a wrong court.

In Union of India v. Microwave Communication Ltd15 the Delhi High Court noted that, in
contradiction with Section 5, Section 4 “does not enlarge the period of limitation but it only
enables the party to file any suit, application, etc. on the reopening day of the Court if the Court
is closed on a day when limitation expires.” As there was no overlap of any sort between Section
4 and Section 34(3) the Court held that Section 4 would apply in cases where there was not any
lack of due diligence on the part of the applicant. Interestingly, the Court also held that S. 4 was
applicable even to situations where the proviso to Section 34(3) was attracted – i.e., the thirty
day condonation period.

A bare reading of Section 34(3) read with the proviso makes it abundantly clear that the
application for setting aside the award will have to be made within three months. The period can
further be extended, on sufficient cause being shown, by another period of thirty days but not
thereafter. Section 29 (2) of the Limitation Act, provides that when any special statute prescribes
certain period of limitation as well as provision for extension upto specified time limit, on
sufficient cause being shown, then the period of limitation prescribed under the special law shall
prevail and to that extent the provisions of the Limitation Act shall stand excluded. The
provisions of Section 5 of the Limitation Act would not be applicable because of the provisions
of Section 29 (2) of the Limitation Act.

REMISSION BY TRIBUNAL

When an application for setting aside an arbitral award has been made, the court may, instead of
adjudicating upon the grounds raised, adjourn the proceedings for a determined period of time to

14
(2006) 8 SCC 18
15
http://www.criticaltwenties.in/corporatelawandbusiness accessed on 16/10/2012 at 10.30 p.m.

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enable the tribunal to deal with the grounds on which objection have been raised and to eliminate
them.

In T.N. Electricity Board v. Bridge Tunnel Constructions16, the court held that where an award is
vitiated by an error of jurisdiction, the court can send it back to the arbitrator for rectification of
the error.

Upon such adjournment the Arbitral Tribunal shall resume the arbitral proceedings and take such
action as will eliminate the grounds. The resumed proceedings can only be relating to the
grounds raised in the application under Section 34.

It may become necessary to record fresh findings and to amend the award. Thereafter the court
would consider whether the grounds raised have been eliminated and whether the award is liable
to be set aside.

FOREIGN AWARDS

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.17
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.18 and Venture Global Engg v Satyam Computer Services Ltd & Anr19 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

16
http://www.indiankanoon.org/doc/791953/ accessed on 16/10/2013 at 10.26 p.m.
17
Civil Appeal No. 7019 of 2005
18
2004 (2) SCC 105
19
2008 (4) SCC 190

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irrespective of fact that according to the Supreme Court such rulings were incorrect and have
been reversed.

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 CONCLUSION

Conclusively, we see that the law relating to setting aside of arbitral award in India is is
consonance with the UNCITRAL model law as the national law is based on the same only.
However, the Interpretation of Supreme Court in several decisions like Bhatia International have
raised serious issues which to some extent have been resolved in the BAL Co. case. The judicial
intervention should be minimal and this practice has to be promoted in India so that arbitration
may be successful. As it is clearly an evident that an arbitral award will be binding on parties.
However under section 34 read with section 37 of the Act it is provided that an arbitral award
can be appealed against on limited question of fact and law.Section lays down the ground on
which an award passed by the arbitral tribunal can be set aside, and at the same time section
section 37 enumerates when an award can appealed against. This includes capacity of party,
invalidity of arbitration agreement, violation of principles of natural justice and the exceeding of
terms of reference by arbitrator.The only residuary ground on which the court can go into merits
of the award is the public policy, which is always subject to circumstances and interpretation.

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