Setting Aside Arbitral Award Contemporary Scenario in India

8/17/2019 Setting Aside Arbitral Award Contemporary Scenario in India

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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 n

India is based on the English Arbitration Law. In !"# the Indian Law on arbitration was drafted

in the form of Arbitration Act, !"# and remained in force until it was replaced by the new

Arbitration and Conciliation Act, !!$.

The Indian arbitration law is based on the %nited &ations Commission on International Trade

Law '%&CIT(AL )odel 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 +arliament enacted the

Arbitration and Conciliation Act, !!$ 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

eecuted 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. -owever, an aggrieved party may tae recourse to law court for setting aside the

arbitration award on certain grounds specified in /ection 0" of the Arbitration and Conciliation

Act, !!$.

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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 /upreme Court has observed 1an arbitrator is a 2udge appointed by the parties

and as such an award passed by him is not to be lightly interfered with.3 4ut this does not mean

that there is no chec on the arbitrator5s conduct. In order to assure proper conduct of

proceeding, the law allows certain remedies against an award.

%nder the repealed !"# Act three remedies were available against an award6 modification,

remission and setting aside. These remedies have been put under the !!$ Act into two groups.

To the etent 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 moulded with returning bac the

award to the Tribunal for removal of defects.

/ection 0" provides that an arbitral award may be set aside by a court on certain grounds

specified therein. These grounds are7

. Incapacity of a party

8. Arbitration agreement not being valid

0. +arty not given proper notice of arbitral proceedings

". &ature of dispute not falling within the terms of submission to arbitration

9. Arbitral procedure not being in accordance with the agreement

/ection 0"'8* 'b* mentions two more grounds which are left with the Court itself to decide

whether to set aside the arbitral award7

. :ispute is not capable of settlement by arbitral process

8. 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.

/ection 0" of the Act is based on Article 0" of the %&CIT(AL )odel Law and the scope of the

provisions for setting aside the award is far less than it was under the /ections 0# or 00 of the

!"# 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 epress +arliamentary ob2ective of curtailing

2udicial intervention. /ection 0" significantly reduces the etent of possible challenge to an

award.

It is necessary for the aggrieved party to mae an application under /ection 0" stating the

grounds of challenge. An application for setting aside the award has to be made by a party to the

arbitration agreement. 4ut a legal representative can apply for it because he is a person claiming

under them. There is no special form prescribed for maing an application under /ection 0" of

the act ecept it has to be a written statement filed within the period of limitation.

In Sanshin Chemical Industry v. Oriental Carbons chemical !td.", there arose a dispute

between the parties regarding the decision of the


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re2ected as invalid. The award is avoided and the matter becomes open for decision again. The

parties become free to go bac to arbitration or to have the matter decided through court.

INCAPACITY OF PARTIES

If a party to arbitration is not capable of looing 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. /uch a person is not capable of

binding himself by a contract and therefore, an award under a contract does not bind him.

/ection ! of the !!$ 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 AREE!ENT

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 .P. v. llied Constructions* the court held that the validity of an agreement has to be

tested on the basis of law to which the parties have sub2ected it. =here there is no such

indication, the validity would be eamined according to the law which is in force.

NOTICE NOT IVEN TO PARTIES

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/ection 0"'8*'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.

%nder /ection 80'* 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.

/ection 8"'8* 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 2ustice.

In +ulal Podda v. ,-ecutive ,nineer/ +ona Canal +ivision0, the court held that appointment of

an arbitrator at the behest of the appellant without sending notice to the respondent, e parte

award given by the arbitrator was illegal and liable to be set aside.

In i$ay 2umar v. #athinda Central Co3operative #an& and ors.?vi@ the court observed 1it is a

typical case where the arbitrator misconducted the proceedings and also misconducted himself.

Arbitrator held the first and only hearing on )ay >, 8##. &o points for settlement or issues

were framed. The ban filed affidavits of four employees. Appellant was not given opportunity

to cross eamine them. -e was denied the opportunity to produce evidence. A complete go bye

was given to the provisions of law, procedure and rules of 2ustice. It would thus be seen that

appellant was unable to present his case.

A"ARD #EYOND SCOPE OF REFERENCE

The reference of a dispute under an agreement defines the limits of the authority and 2urisdiction

of the arbitrator. If the arbitrator had assumed 2urisdiction not possessed by him, the award to the

etent to which it is beyond the arbitrator5s 2urisdiction would be invalid and liable to be set

aside.

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/ection 0"'8*'a*$ 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.

In Gautam Construction 4isherie !td v. %ational #an& for riculture and 5ural

+evelopment , the /upreme Court modified the award to the etent that the rate of construction

meant for ground floor could not be applied to the construction of the basement area.

In 5a$inder 2ishan 2umar v. nion 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.

/ection $ of the Arbitration and Conciliation Act, !!$ provides that the initial decision as to

2urisdiction lies with the Tribunal. The party should immediately ob2ect as to ecess of

2urisdiction. If the Tribunal re2ects the ob2ection, the aggrieved party may apply under /ection

0"'8*for setting aside on the ground of ecess of 2urisdiction.

An arbitrator cannot go contrary to the terms of the contract. =here the terms of the contract are

not clear or unambiguous, the arbitrator gets the power to interpret them. In State of 5a$asthan v.

%av #harat Construction Co6 , a ma2ority of claims allowed were against the terms of the

contract.

ILLEALITY IN AR#ITRAL PROCED$RE

/ection 0"'8*'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.

6 www.lobis.nic.inphhc accessed on $.#.0 at #.0# p.m.

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Bailure to follow the agreed procedure or the procedure prescribed by the Act is a procedural

misconduct. If the arbitral tribunal taes 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.

/ection 8'0*'a* provides that an arbitrator may be challenged if there 2ustifiable doubt as to his

independence or impartiality. /ection 0 says that if the challenge is not successful and the award

is made, the party challenging the arbitrator may apply to the court under /ection 0" for setting

aside the award.

In State 7radin Corp. v. Molasses Co./ the #enal Chamber of Commerce8, a permanent arbitral

institution, did not allow a company to be represented by its Law fficer, 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 #athinda Central Co3operative #an&9s Case?i@ the court observed 1it 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 2ustice.

In O%GC !td v. Sa: Pipe !td ;, the /upreme Court held that in eercising 2urisdiction, the

Arbitral Tribunal cannot act in breach of some provisions of substantive law or the provision of

the Act. In /ection 0"'8*'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 +art of the Act.

In the above case, the losses caused by delay were deducted from the supplier5s 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 etent.

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In nion of India v. Om Pra&ash #aldev 2rishna1


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The eplanation 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 eerting pressure on the

arbitrator, etc. would be liable to be set aside.

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

interest.

In enture Global ,n v. Satyam Computer Service !td 1", 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 2ustice 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

/ection 0". Award could also be set aside if it is as unfair and unreasonable as to shoc the

conscience of the court as it is against public policy.

Li%itation &or Filing A''lication

/ection 0"'0* provides that an application for setting aside an arbitral award must be made

within 0 months of receiving the award or disposition of application by the arbitral tribunal.

The importance of this is emphasiGed by /ection 0$ which provides that the award becomes

enforceable as soon as the limitation period under /ection 0" epires.

The proviso to /ection 0"'0* allows the party a further period of 0# days after the epiry of three

months if the court is satisfied that the party was prevented by a sufficient cause from maing the

application. &o application for setting aside the award can be entertained by the court after the

epiry of these additional thirty days.

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In %ational luminum Co !td v. Presteel 4abrication (P) !td 1', proceedings were instituted

before the /upreme Court under the wrong belief that it had 2urisdiction in the matter of setting

aside. Time spent on a bona fide prosecution of an application in a wrong forum was held by the

/upreme Court to be a sufficient cause for condonation of delay.

In nion of India v. Shrin Construction Co (P) !td 1*, 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 /ection 0" by the proceeding before the :istrict


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prevail and to that etent the provisions of the Limitation Act shall stand ecluded. The

provisions of /ection 9 of the Limitation Act would not be applicable because of the provisions

of /ection 8! '8* of the Limitation Act.

Re%ission b( Tribunal

=hen an application for setting aside an arbitral award has been made, the court may, instead of

ad2udicating upon the grounds raised, ad2ourn the proceedings for a determined period of time to

enable the tribunal to deal with the grounds on which ob2ection have been raised and to eliminate

them.

In 7.%. ,lectricity #oard v. #ride 7unnel Constructions1> , the court held that where an award is

vitiated by an error of 2urisdiction, the court can send it bac to the arbitrator for rectification of

the error.

%pon such ad2ournment the Arbitral Tribunal shall resume the arbitral proceedings and tae such

action as will eliminate the grounds. The resumed proceedings can only be relating to the

grounds raised in the application under /ection 0".

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 +art I 'section 0"* of the Indian Arbitration Act are

applicable only to :omestic Awards and not to Boreign Awards. n /eptember $,

8#8,/upreme Court in #harat luminum Co. v. 2aiser luminium 7echnical Service Inc.16

reconsidering its previous decisions concluded that the Indian Arbitration Act should be

interpreted in a manner to give effect to the intent of Indian +arliament. In this case the Court

16 http7www.indiananoon.orgdoc>!!90 accessed on $#8#0 at #.8$ p.m.

17 Civil Appeal &o. >#! of 8##9

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reversed its earlier rulings in cases of #hatia International v. #ul& 7radin S..

nr.18 and enture Global ,n v Satyam Computer Services !td nr 1; stating that findings in

these 2udgments were incorrect. +art 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. )ost importantly, these findings of the /upreme Court are applicable only

to arbitration agreements eecuted after $ /eptember 8#8. Thus all disputes pursuant to

arbitration agreement entered into upto $ /eptember 8#8 shall be decided by old precedents

irrespective of fact that according to the /upreme Court such rulings were incorrect and have

been reversed.

Conclusively, we see that the law relating to setting aside of arbitral award in India is is

consonance with the %&CIT(AL model law as the national law is based on the same only.

-owever, the Interpretation of /upreme Court in several decisions lie 4hatia International have

raised serious issues which to some etent have been resolved in the 4AL Co. case. The 2udicial

intervention should be minimal and this practice has to be promoted in India so that arbitration

may be successful.

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Setting Aside Arbitral Award Contemporary Scenario in India

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