Section 34 of the Arbitration and Conciliation Act, 1996

Introduction

While the Arbitration and Conciliation Act, 1996 is built on the principle of minimum judicial interference—emphasized in Section 5 of the act—and aims to ensure the finality and enforcement of arbitral awards, there are specific situations where court intervention becomes necessary. One such instance is the provision under Section 34, which allows a party to file an application to set aside an arbitral award. Although the Act seeks to uphold the efficiency and independence of arbitration, courts can step in to review awards on limited grounds, such as Incapacity of Parties, Invalidity of Arbitration Agreement, etc.

In this article, we will discuss the Scope of Section 34, the grounds for Setting Aside an Award and the impact of key amendments, and relevant case laws that have shaped the interpretation of this section.

Section 34 in The Arbitration and Conciliation Act, 1996

Section 34 of the Arbitration & Conciliation Act, 1996 is based on the principles of the UNCITRAL Model Law.

It provides for the setting aside of an arbitral award by filing an application in Court. It limits judicial interference to a few specific grounds, ensuring that arbitration remains a speedy and effective dispute resolution mechanism. Even the intervention of High Court by the way of writ petitions is not accepted as there is already a mechanism for recourse in case of any grievances arising out of Arbitral Award.

Scope of Section 34: NHAI vs. M. Hakeem (2021)

In NHAI vs. M. Hakeem (2021), it has been decided that the scope of power of a Court is limited to the grounds under Section 34 of the Arbitration and Conciliation Act, 1996. “The Apex Court held that Courts cannot modify or vary an arbitral award.”

The Apex Court took note of the fact that Section 34 is an appellate provision in nature and an award can be set aside only as per the grounds mentioned in subsections (2) and (3) of Section 34. The Court stated that if the power to modify an award were included in Section 34, it would exceed the boundaries Parliament intended. It observed:

“Quite obviously if one were to include the power to modify an award in Section 34, one would be crossing the Lakshman Rekha and doing what, according to the justice of a case, ought to be done. In interpreting a statutory provision, a Judge must put himself in the shoes of Parliament and then ask whether Parliament intended this result. Parliament very clearly intended that no power of modification of an award exists in Section 34 of the Arbitration Act, 1996. It is only for Parliament to amend the aforesaid provision in the light of the experience of the courts in the working of the Arbitration Act, 1996, and bring it in line with other legislations the world over.”

Under Section 34 of the Act, the court has two options: it may either dismiss the objections and uphold the arbitral award, or it may set aside the award if the grounds specified in sub-sections (2) and (2A) are satisfied. However, the court does not have the power to modify an arbitral award.

Grounds for Setting Aside an Award (Section 34(2))

Section 34 (1)provides that recourse to a Court against an arbitral award may be made only by an application for setting aside such award in accordance with sub-section (2) and sub-section (3).

1. Section 34 (2) highlights that an arbitral award may be set aside by the Court only if:

(a) the party making the application [establishes on the basis of the record of the arbitral tribunal that]: 

• a party was under some incapacity; or

• 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; or

• 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 his case; or

• the arbitral award 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 to arbitration:

Provided that, if the decisions on matters submitted to arbitration can be separated from those not so submitted, only that part of the arbitral award which contains decisions on matters not submitted to arbitration may be set aside; or

• 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 provision of this Part from which the parties cannot derogate, or, failing such agreement, was not in accordance with this Part; or

The 2019 amendment in Section 34(2)(a) substituted ‘furnishes proof that’ by ‘establishes on the basis of the record of the arbitral tribunal that’. As a result, when dealing with a petition under Section 34, courts are now limited to considering only the materials presented before the arbitral tribunal. They are not allowed to review any extraneous documents or evidence submitted by a party to challenge the award, thereby further reducing the scope for judicial intervention.

To prevent courts from turning a Section 34 application into a mini-trial, the Legislature limited the possibility of submitting new evidence or conducting cross-examinations under this section. It clarified the term “furnishes proof” to mean “what the court can determine based on the evidence available in the arbitral record, minimizing the Courts’ role in addressing award challenges.

(b) the Court finds that

(i)the subject-matter of the dispute is not capable of settlement by arbitration under the law for the time being in force, or

(ii)the arbitral award is in conflict with the public policy of India.

Concept of Public Policy: Impact of 2015 Amendment

Before the 2015 Amendment (effective from 2016), the concept of “public policy” under Section 34 of the Arbitration and Conciliation Act, 1996, was vague and open to wide judicial interpretation. Courts had significant discretion to interpret the term, leading to inconsistent rulings and uncertainty in arbitration proceedings. The Supreme Court, in several cases, contributed to this broad interpretation. For instance in Renusagar Power Co. Ltd. v. General Electric Co. (1994), the Court categorized public policy into three heads: fundamental policy of Indian law, interests of India, and justice or morality, further emphasizing the expansive interpretation of public policy.

Post-2015 Amendment: A More Defined Approach

The 2015 Amendment clarified and narrowed the scope of “public policy,” providing more certainty. The substitution of Explanation 1 to Section 34(2)(b) gave a precise definition, stating that an award is in conflict with public policy, only if,-

• the making of the award was induced or affected by fraud or corruption or was in violation of section 75 or section 81; or
• it is in contravention with the fundamental policy of Indian law; or
• it is in conflict with the most basic notions of morality or justice.

Explanation 2. – The test as to whether there is a contravention with the fundamental policy of Indian law shall not entail a review on the merits of the dispute focusing that it does not permit the court to re-examine the merits of the case.

In Haryana Tourism Limited vs. M/S Kandhari Beverages Limited (2022), it was observed,

“8. As per settled position of law laid down by this Court in a catena of decisions, an award can be set aside only if the award is against the public policy of India. The award can be set aside under Sections 34/37 of the Arbitration Act, if the award is found to be contrary to, (a) fundamental policy of Indian Law; or (b) the interest of India; or (c) justice or morality; or (d) if it is patently illegal.”

The new definition minimised the courts’ power to interfere in arbitral awards. This ensured that courts could not use “public policy” as a catch-all phrase to re-examine the merits of a case or overturn awards based on perceived errors of law.

2. Patent Illegality in Domestic Awards (Section 34(2A)):

Section 34(2A), introduced by the 2015 Amendment Act, provides an additional ground for setting aside domestic arbitral awards (excluding international commercial arbitration). A domestic award may be set aside if the court finds “patent illegality” on the face of the award. However, this ground cannot be used to challenge the award merely because of an erroneous application of the law or reappreciation of evidence.

• Patent Illegality can be referred as – an error that is apparent on the face of the record.

If an arbitral award contradicts the provisions of the Arbitration & Conciliation Act, it is regarded as a patent error.

In the case of Associate Builders v Delhi Development Authority discussed the grounds of patent illegality under public policy for setting aside a domestic award. –

1. Fraud or corruption,
2. Contravention of Substantive Law,
3. An error of law by the arbitrator,
4. Contravention of the Arbitration & Conciliation Act, 1996,
5. Failure of Arbitrator to provide reasoning for the award, or
6. Failure of Arbitrator to give due consideration to terms of the contract and usages.

Time Limits for Filing an Application (Section 34(3)):

The applicant must file for setting aside the award within three months of receiving the award, or, if an application for correction or interpretation of the award has been made under Section 33, from the date that request is disposed of.

The proviso to this section says that if the Court is satisfied that the applicant was prevented by sufficient cause from making the application within the said period of three months it may entertain the application within a further period of thirty days, but not thereafter.

Court’s Power to Adjourn (Section 34(4))

Section 34 (4) states that on receipt of an application under sub-section (1), the Court may, where it is appropriate and it is so requested by a party, adjourn the proceedings for a period of time determined by it in order to give the arbitral tribunal an opportunity to resume the arbitral proceedings or to take such other action as in the opinion of arbitral tribunal will eliminate the grounds for setting aside the arbitral award.

Requirement of Notice and Filing Procedures (Section 34(5))

Section 34(5), inserted by 2015 Amendment, states that, an application under this section shall be filed by a party only after issuing a prior notice to the other party and such application shall be accompanied by an affidavit by the applicant endorsing compliance with the said requirement.

Expeditious Disposal of Applications (Section 34(6))

Section 34 (6) states that an application under this section shall be disposed of expeditiously, and in any event, within a period of one year from the date on which the notice referred to in sub-section (5) is served upon the other party.

Conclusion

In conclusion, Section 34 of the Arbitration and Conciliation Act, 1996 represents a delicate balance between upholding the autonomy of arbitral proceedings and ensuring that courts can intervene in exceptional cases to maintain fairness and legality.

While the grounds for setting aside an award are intentionally narrow to preserve the finality and efficiency of arbitration, the amendments introduced over time, such as the 2015 and 2019 amendments, have further clarified the scope of judicial interference. The courts’ role is not to re-examine the merits of the case but to ensure that the process aligns with the established legal standards, avoiding any errors that would undermine the integrity of arbitration. By streamlining the process and limiting court intervention, Section 34 reinforces the arbitration framework in India, making it a preferred and reliable mechanism for dispute resolution.