Scope of Section 34 | Arbitration – The Blog of Daksh Pandit

The Arbitration and Conciliation Act, 1996 [“the Act”] was enacted to provide speedy resolution of disputes to the parties with the objective of minimum judicial intervention, also enshrined in Section 5 of the Act, so as to make arbitration a more alluring alternative dispute resolution mechanism. Keeping the aforesaid objective in sight, various amendments have been introduced in the Act by the Parliament to prevent the courts from interfering with the Award rendered by the Arbitrator except in accordance with the grounds of challenge mentioned in Section 34 of Act.

Section 34 of the Act provides a recourse to an aggrieved party to move an application to court for setting aside the Arbitral Award solely on grounds enlisted in Section 34(2) and Section 34(2A) of the Act. The grounds enlisted in Section 34(2)(a) inter alia strikes at the very foundation of the validity of the arbitration proceedings viz.

A party was under some incapacity,
The arbitration agreement is not valid,
The party making the application was not given proper notice of the appointment of an arbitrator or of the arbitral proceedings of was otherwise unable to present his case,
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 arbitration.
The composition of arbitral or the arbitral procedure was not in accordance with the agreement of the parties.

The grounds of challenge enlisted in Section 34(2)(a) are self-explanatory and need not be elaborated upon. Section 34(2)(b) on the other hand provides substantive grounds relating to the merits of the case, for setting aside of the arbitral award viz.-

The subject matter of the dispute is not capable of settlement by arbitration under the law for the time being in force, or;
The arbitral award is in conflict with the public policy of India.

The expression ‘Public Policy of India’ has not been specifically defined under the Act and the same has been a subject of interpretation by various courts in order to give it a definitive meaning resulting in its chequered history. The Supreme Court in Renusagar Power co. Ltd. v. General Electric Co.¹ interpreted the expression ‘Public Policy’ to mean-

Fundamental policy of Indian Law;
The interests of India;
Justice or morality.

The Supreme Court in Oil and Natural Gas vs SAW Pipes Ltd² affirmed the meaning given by the Supreme Court to the expression ‘Public Policy of India’ in Renusagar (supra) and added one more meaning to the expression i.e.-

iv. The Award could be set aside if it is patently illegal.

Later, a three judge bench of the Supreme Court in Oil and Natural Gas vs Western Geco International Ltd.³ gave a wider interpretation to the term ‘Fundamental Policy of Indian Law’ stemming from the expression ‘Public Policy of India’ as observed by the Supreme Court in Renusagar and Saw Pipes (supra) and held that the Fundamental Policy of Indian Law encompasses the following principles-

The court must adopt a ‘judicial approach’ while adjudicating a matter in the sense that the court must ensure that it acts bona fide and deals with the case in a fair, reasonable and objective manner and that its decision is not actuated by any extraneous consideration.
The court must adhere to the Principles of Natural Justice.
A decision which is perverse or irrational that no reasonable person would have arrived at the same will not be sustained in a court of law.

The aforementioned expansion of the term ‘fundamental policy of India’ by the Supreme Court was later affirmed by the Supreme Court in Associate Builders vs Delhi Development Authority⁴. At this point, the very objective and ethos of the Act were under a threat as such a wide interpretation of the term ‘Fundamental Policy of Indian Law’, in effect, opened the Award to a challeng on the merits of the case and stultified the foundation of the Act i.e. minimum judicial interpretation. In view thereof, the Law Commission in its 246^th Report suggested radical changes in the Act in order to bring it in tune with the objective of the Act. The suggestions made by the Law Commission in its 246^th Report resulted in introduction of the Arbitration and Conciliation (Amendment) Act, 2015 [“the 2015 Amendment”] which, among other changes, incorporated Explanation 1 and 2 and sub section 2A in Section 34 of the Act after Section 34(2)(b)(ii), reading as follows-

“Explanation 1.—For the avoidance of any doubt, it is clarified that an award is in conflict with the public policy of India, only if,—

(i) the making of the award was induced or affected by fraud or corruption or was in violation of section 75 or section 81; or

(ii) it is in contravention with the fundamental policy of Indian law; or

(iii) it is in conflict with the most basic notions of morality or justice.

Explanation 2.—For the avoidance of doubt, 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.

2A) An arbitral award arising out of arbitrations other than international commercial arbitrations, may also be set aside by the Court, if the Court finds that the award is vitiated by patent illegality appearing on the face of the award:

Provided that an award shall not be set aside merely on the ground of an erroneous application of the law or by reappreciation of evidence.”

The 2015 Amendment codified the interpretation of ‘Public Policy of India’ given by the Supreme Court in Renusagar and Saw Pipes (supra) barring the expression ‘the interests of India’ which the Law Commission felt to be vague and capable of interpretational misuse, especially in the context of challenge to awards arising out of International Commercial Arbitrations (under Section 34) or Foreign Awards (under Section 48). The Explanation 2 categorically overrules the expansion of the term ‘fundamental policy of India’ given by the Supreme Court in Western Geco (supra) by stipulating that a challenge to an Award on the said ground shall not entail a review on the merits of the case.

It is also pertinent to mention that Delhi High Court in Simplex Concrete Piles (India) vs Union of India ⁵ has expounded upon the term Public Policy in the context of Section 23 of the Indian Contract Act as follows-

“(i) Public policy is a changing concept, it is not static but dynamic; it changes from time to time and the Courts have been empowered while interpreting this doctrine to resort to, judicial legislation euphemistically called interpretation, to further the public interest, equity, good conscience and justice.

(ii) A law which is made for individual benefit can be waived by an individual/private person, however, when such law includes a public interest/public policy element, such rights arising from the law cannot be waived because the same becomes a matter of public policy/public interest.”

The Supreme Court in Ssangyong Engineering vs. National Highway Authority of India⁶ after going through a conspectus of cases held that the expression fundamental policy of Indian law as expanded by the Supreme Court in Wester Geco (supra) would continue to mean “Principles of Natural Justice” (also enshrined in Section 34(2)(a)(iii) of the Act) and would also take in its ambit a decision which is perverse or irrational that no reasonable person would have arrived at. Only “judicial approach” would not form part of fundamental policy of India as the court held that under the guise of interfering with an award on the ground that the arbitrator has not adopted a judicial approach, the court’s intervention would be on the merits of the award, which cannot be permitted post 2015 Amendment. The Supreme Court inter alia observed as follows-

i.) The expression “Public Policy of India” means the “Fundamental Policy of Indian Law” as explained in paragraph 18 and 27 of Associate Builders (supra) i.e. the fundamental policy of Indian law would be relegated to the Renusagar (supra) understanding of the expression. The Supreme Court in Renusagar (supra) held that violation of the Foreign Exchange Act and disregarding order of superior courts in India would be regarded as being contrary to the Fundamental Policy of Indian Law.

ii.) The expression “most basic notion of morality and justice” would adopt its meaning from para 36 to 39 of Associate Builders (supra). The Supreme Court in Associate Builders (supra) explained “Justice” and “Morality” as follows-

Justice- An Award can be said to be against justice when it shocks the conscience of the court. For Example if a claimant is content with restricting his claim to Rs 30 Lakhs in his Statement of Claim before the arbitrator and at no point does he seek to claim anything more. However, the Arbitral Tribunal awards him Rs 45 Lakhs without acceptable reason or justification.
Morality- For this, the Supreme Court referred to Section 23 of the Indian Contract Act, 1872

iii.) Patent Illegality as appearing in Section 34(2A) means patent illegality appearing on the fact of the award which refers to such illegality that goes to the root of the matter but which does not amount to mere erroneous application of the law. Re-appreciation of evidence which is what an appellate court is permitted to do, cannot be permitted under the ground of patent illegality appearing on the face of the award.

iv.) A decision which is perverse or so irrational that no reasonable person would have arrived at, would amount to patent illegality appearing on the face of the award. This includes-

A finding based on no evidence at all
An award which ignores vital evidence in arriving at its decision.
A finding based on documents taken behind the back of the parties by the arbitrator would also qualify as a decision based on no evidence.

v.) Supplementary to the above explanation of ‘Patent Illegality’, the Supreme Court also elaborated upon ‘‘Patent Illegality’’ in Associate Builders (supra) and stated that it contains three sub-heads-

A contravention of the substantive law of India would result in the death knell of the arbitral award and amount to Patent Illegality. In effect, a contravention of Section 28(1)(a) would render the amount patently illegal. However, the illegality must go to the root of the matter and must not be of a trivial nature.
A contravention of Arbitration Act itself would amount to patent illegality. For Example if an arbitrator gives no reasons for an award in contravention of Section 31(3) of the Act, such an award will be liable to be set aside.
Contravention of Section 28(3) of the Act would also amount to patent illegality.

A three judge bench of the Supreme Court in OPG Power Generation Private Ltd. vs Enexo Power Cooling Solutions India Pvt. Ltd.⁷ explained “fundamental policy of Indian law” as follows-

“The expression “in contravention with the fundamental policy of Indian law” by use of the word ‘fundamental’ before the phrase ‘policy of Indian law’ makes the expression narrower in its application than the phrase “in contravention with the policy of Indian law”, which means mere contravention of law is not enough to make an award vulnerable. To bring the contravention within the fold of fundamental policy of Indian law, the award must contravene all or any of such fundamental principles that provide a basis for administration of justice and enforcement of law in this country. Without intending to exhaustively enumerate instances of such contravention, by way of illustration, it could be said that (a) violation of the principles of natural justice; (b) disregarding orders of superior courts in India or the binding effect of the judgment of a superior court; and (c) violating law of India linked to public good or public interest, are considered contravention of the fundamental policy of Indian law.”

Therefore, to sum up, an Arbitral Award can be set aside by the court by seeking recourse to Section 34 of the Act on the following grounds subject to caveats as mentioned herein below-

Grounds enlisted in Section 34(2)(a) which strike at the very foundation of the validity of the arbitration proceedings.
If the Arbitral Award is against the Public Policy of India i.e. it is against fundamental policy of Indian Law as held by the Supreme Court in Ssangyong (supra). Supreme Court in OPG Power (supra) has further illustrated the expression “fundamental policy of Indian law” to mean-
1. violation of the principles of natural justice;
2. disregarding orders of superior courts in India or binding effect of the judgment of a superior court;
3. violating law of India linked to public good or public interest.
When the Court is applying the Public Policy test to an arbitration Award, it does not act as a court of Appeal and consequently errors of fact cannot be corrected- Associate Builders (supra).
Finding of fact by the Arbitrator cannot be a ground of challenge under Section 34. Once it is found that the arbitrators approach is not arbitrary or capricious then he is the last word on facts. A possible view by the arbitrator on facts has necessarily to pass muster as the arbitrator is the ultimate master of the quantity and quality of evidence to be relied upon when he delivers his arbitral award-Associate Builders (supra).
If the Award is erroneous on the basis of record with regard to proposition of law or its application, the court will have jurisdiction to adjudicate the same- ONGC vs Saw Pipes (supra)
If the Award is in conflict with the most basic notions of Justice or morality as explained by Supreme Court in Associate Builders (supra).
Challenging an award on the ground of Fundamental Policy of Indian Law would not entail a review on the merits of the case. (Explanation 2 of Section 34).
If the award suffers from Patent Illegality (as explained by Supreme Court in Ssangyong Engineering (supra) and Associate Builders (supra) appearing on the face of the Award. However, while entertaining a challenge on the ground of Patent Illegality, the court will not re-appreciate evidence and will not set aside the Award merely on the ground of an erroneous application of law (Proviso to Section 34(2A)).
Non-appreciation of Evidence cannot be a ground to challenge an Arbitral Award as appraisement of evidence by the arbitrator is ordinarily never a matter which the court questions and considers⁸. Sufficiency of Evidence is the domain of Arbitral Tribunal.⁹
The Award could be set aside under Section 34 if the Arbitral Tribunal has not followed the mandatory procedure prescribed under Sections 24, 28, or 31(3) of the Act- ONGC vs Saw Pipes (supra)
The Arbitral Award can be set aside u/s 34 if the Arbitrator was unilaterally appointed. Non response to an arbitration invocation notice cannot be presumed as consent for appointment of arbitrator.¹⁰
The Arbitral Award can be set aside if the Arbitrator has failed to make disclosure in terms of Section 12 of the Act.¹¹
In Section 34, court is not required to appreciate evidence. Court is only required to see whether on the face of record, there is an evident breakdown in applying basic notions of justice and ajudication on the part of the Arbitrator.¹²
It is a settled law that the Arbitrator cannot exceed the contract’s provisions. However, if an arbitrator interprets term of the contract in a reasonable manner then it will not be a ground for setting aside the award¹³. Construction of the terms of a contract is primarily for an arbitrator or Arbitral Tribunal to decide¹⁴.
The Court need not set aside an Arbitral Award merely because it is inadequately reasoned.¹⁵

Conclusion

A plain reading of Section 34 of the Act presents an extremely limited scope for setting aside an arbitral award which is further emphasised by the usage of the expressions “only by” in sub section (1) of Section 34 and “only if” in sub section (2) leaving no scope of for judicial interference with an arbitral award except on an application for setting aside an award under Sub-Section (1) which must be founded on the specified grounds mentioned under Sub-Section (2) of Section 34. The grounds of challenge as enlisted under Section 34 have further been diluted and narrowed down so as to limit their application on the arbitral award. This is done in order to keep the proceedings under Section 34 of the Act attuned with the objective of the Arbitration Act i.e. minimal judicial interference which is also embodied in Section 5 of the Act. The intention of the Legislature is that the grounds of challenge as mentioned in Section 34 of the Act ought to be strictly construed with no liberty to expand their scope. An attempt was made by the Supreme Court to expand the scope of ‘Fundamental Policy of Indian Law’ in Western Geco (supra) however, the same was met with an amendment to the Arbitration Act (the 2015 Amendment) with insertion of Explanation 2 in Section 34 of the Act, making it categorically clear that a challenge on the ground of ‘Fundamental Policy of Indian Law’ shall not entail a review on the merits of the case.

By Daksh Pandit