Discuss the Requirements for a Valid Arbitral Award and the Circumstances under which an Arbitral Award can be Set Aside

Discuss the Requirements for a Valid Arbitral Award and the Circumstances under which an Arbitral Award can be Set Aside.

Ø Can an Arbitral Award be Set Aside

The 1996 Act is underpinned by two core provisions aimed at ensuring the efficiency and effectiveness of arbitration proceedings: firstly, the principle of Minimum Judicial Interference, which emphasises limited court intervention; and secondly, the principles of Finality and Enforcement of Awards, which emphasise the conclusive nature of arbitral decisions and the mechanisms for their enforcement. Therefore, when two parties enter into an arbitration agreement as outlined in Section 7 of the 1996 Act, they mutually commit to abiding by the terms of the agreement and if in the event of a future dispute where arbitration is chosen as the resolution method, the decision rendered by the arbitrator becomes conclusive and obligatory for both parties.

However, instances may arise where either one party or both parties express dissatisfaction with the decision reached through arbitration. In such circumstances, the 1996 Act provides a recourse. The 1996 Act delineates specific grounds upon which parties can file an application in the court for setting aside such an award.

It is important to note that an application for setting aside an arbitral award has to be made in an appropriate court having jurisdiction on such matters. According to Section 2 (1) (e) (i) of the 1996 Act, an application for setting aside an arbitral award rendered in an arbitration other than an international commercial arbitration must be submitted to either a District Court, specifically the principal Civil Court of original jurisdiction, or to the High Court with ordinary original civil jurisdiction. This High Court should have the authority to adjudicate on the issues central to the arbitration proceedings.

In the case of an arbitral award in an international commercial arbitration, the application to set aside the award must be submitted to the High Court with ordinary civil jurisdiction. According to Section 2 (1) (e) (ii) of the 1996 Act, the High Court should have authority to decide on the issues central to the arbitration or, in alternative situations, possess jurisdiction to hear appeals from lower court decrees. The Section further states that If a commercial division exists within the high court under the Commercial Courts Act, the application will be addressed and resolved by this specialised division.

Ø Procedure for filing an Application for Setting Aside of an Arbitral Awards

The jurisdiction of the court is generally barred from an arbitration proceeding. However, there are circumstances wherein the court can interfere to ascertain the proper conduct of the arbitration proceeding. For this purpose, certain remedies are provided under the 1996 Act against the arbitral award issued by an arbitrator. Under the provisions contained in the 1996 Act, an aggrieved party may approach a court to set aside an arbitral award on the presence of certain grounds provided under Section 34 of the 1996 Act.

Any party to an agreement who wants to challenge an arbitral award passed by an arbitrator needs to file an application for setting aside an award. The procedure for filing such an application is provided under the provisions contained in Section 34 of the 1996 Act. In accordance with Section 34 (3) of the 1996 Act, a party desiring to challenge a domestic arbitral award has to file an application within the period of 3 months from the date of the receipt of an award or the disposition of the request seeking rectification as per Section 33, whatever occurs later. Prior to filling out an application, the party is required to issue the notice to the other party and file an affidavit, which confirms that they have complied with Section 34 (5) of the 1996 Act.

After an application has been presented to the court, the applicant needs to convince the court that the grounds on the basis of which an award is challenged are just in order to set aside the arbitral award. Once the judge is satisfied, a notice is released requiring the other party to respond. Upon the completion of the pleadings, the court takes oral arguments to ensure that the grounds outlined in Subsection (2) and (2A) of Section 34 are fulfilled. Based on this, the court can either set aside the award or simply refuse the application. Usually, the court doesn’t reevaluate the evidence examined by the arbitral tribunal, which is why witness cross-examination is often a rarity.

The application to set aside a domestic arbitral award must be determined expeditiously and at the earliest opportunity, nominally within a year by virtue of Section 34 (6) of the 1996 Act. However, the Supreme Court clarified that this requirement is a directive, not mandatory.

With respect to a foreign award, the award debtor must wait for execution of the award under Section 47 read with Section 49 of the 1996 Act. Then, the debtor can object to the award under Section 48. The proceedings involve completing pleadings and oral arguments, similar to domestic awards. However, the enforcement court in India can only refuse to enforce the foreign award. It has no jurisdiction or authority to set it aside.

Whenever an application for setting aside an arbitral award is filed before an appropriate court, such court can have the authority to set aside an arbitral award only when the grounds mentioned under Section 34 are present and not otherwise.

Ø Grounds for Setting Aside of an Arbitral Award

Two parties that sign up to an arbitration agreement are mutually bound by the agreement in line with Section 7 of the 1996 Act. It means that the parties have a contractual obligation to resolve any future controversies by means of arbitration. This initial agreement sets the stage for the arbitration process and establishes a legal obligation for the parties to abide by the terms specified in the agreement.

When the dispute between the parties arises and they resolve such dispute through arbitration, an award is rendered which becomes legally binding on both parties. This means that the award passed by the adjudicating authority obligates the parties to adhere to the decision and terms outlined in the arbitration award. The finality of the award provides for the complete resolution of the dispute by the arbitrator.

However, there may arise some instances where one or both parties are not satisfied with the arbitral award, in such circumstances, the 1996 Act provides a recourse mechanism. Section 34 of the 1996 Act provides for specific grounds available to the parties on the basis of which they can apply for setting aside an award, while Section 37 establishes the provisions of appeal regarding certain orders.

Section 34 of the 1996 Act provides the provisions of certain specific grounds on the basis of which an arbitral award rendered in India can be set aside. They are-

1. Incapacity of a party while making an application to enter the agreement.

2. Arbitration agreement not being valid under the law.

3. Parties were not given proper notice of the appointed Arbitrators or the Arbitral Tribunal.

4. Nature of dispute not capable of settlement by arbitration.

5. The composition of the arbitral award was not in accordance with the agreement of the parties.

6. The arbitral award is in violation of the public policy of a state.

7. The arbitral award deals with a dispute not falling within the terms of submissions to an arbitration.

1. Incapacity of Parties

An application for setting aside an arbitral award can be passed if a party to the arbitration is incapable of taking care of their interest and they are not represented by a person who can safeguard their rights. The award can be set aside by the court if it finds that a party to a contract is a minor or an unsound person who is not being represented by a Guardian to protect his interest. Section 9 of the 1996 Act provides for the appointment of a guardian for a minor or a person of unsound mind for arbitral proceedings. Consider a situation where there is a commercial contract between a software development company (Party A) and an individual freelance developer (Party B), which includes an arbitration clause. Thereafter a dispute arises between them regarding the quality of the software delivered by Party B.

During the arbitration proceedings, it comes to the knowledge that Party B, who is the freelance developer, is of unsound mind thereby, lacking the capacity to effectively represent their interests. It was also noticed that Party B does not have any legal representative to protect their rights in the arbitration proceeding.

In the aforementioned circumstances, a party can file an application for setting aside an arbitral award on the grounds of incapacity of the party, by arguing that the incapacity of Party B to manage its affairs and the absence of legal representation warrant the court’s intervention. The court, while considering an application, looks into the matter to ensure a fair and just resolution, taking into account the need for proper representation in cases involving individuals with limited mental capacity.

2. The Invalidity of an Arbitration Agreement Under Laws

An arbitration award can be challenged on the grounds of invalidity of an arbitration agreement. This implies that if an arbitration agreement or the main agreement in which the arbitration clause is mentioned, is held invalid then an arbitration award passed by the tribunal on the matter arising out of such agreement shall also be held invalid.

If the arbitration agreement is found to be legally invalid, both the reference to it and subsequently the award based on such a reference may be invalidated and set aside. The validity of an arbitration agreement can be challenged on the same grounds that the validity of a contract can be challenged. In situations where an arbitration clause is added under a broad contract, the whole arbitration clause is invalid if the main contract is found void. Also, if one of the parties claims that there is no agreement on partnership and that the agreement is null and void, it does not preclude them from disputing the arbitral tribunal’s jurisdiction later on, even if they already participated in the arbitration proceeding. In such circumstances, the concerned party has the right to initiate the application on the basis of their argument that the arbitration agreement either doesn’t exist or is void from its inception.

3. Notice not Given to the Parties of Arbitration Proceedings

As provided under Section 34 (2) (a) (iii), if the party to a dispute in arbitral proceedings was not given proper notice regarding the appointment of an arbitrator or any other notice of arbitral proceedings, then this would be considered as a ground for setting aside the arbitral award of such proceedings.

Section 23 (1) of the 1996 Act, provides that the arbitral Tribunal has to determine the time within which the statement must be filed. This must be timely communicated to the parties by a proper notice and Section 24 (2) provides that an advance notice shall be given to the parties regarding any hearing or meeting of the Tribunal for any purpose of inspection of documents, goods, other property, etc.

4. An Award not Falling within the Terms of Submission to Arbitration

The dispute arising from an arbitration agreement serves as the basis for determining the jurisdiction of an arbitral tribunal. If any matter arising from such an agreement does not fall within the jurisdiction of an arbitral tribunal, an award passed on such matter shall be deemed invalid. Such an award can be set aside on the grounds of it not falling within the terms submitted to arbitration. An arbitrator is required to act under the authority as provided in the terms of an agreement and not beyond that.

5. Composition of Tribunal not Following Agreement

Section 34 (2) (a) (v) lays out that an award can be discarded or challenged if the composition of the arbitral tribunal is not in obedience to the agreement of the parties or if the procedure of conduct of proceedings was not followed properly. If the arbitrator passes a decision of an award which is in deviation from the terms of reference and the arbitration agreement, then this would lead to the award being set aside and will amount to the misconduct of the arbitrator.

6. Award Against Public Policy

If an award passed by an arbitral tribunal is against public policy, that is, if an award is influenced by fraud or corruption, it shall be liable to be set aside by the court. Section 34 of the 1996 Act in addition to the aforementioned grounds, provides a party can file an application to set aside an award if an award is found to be against the public policy. The context related to public policy implies public welfare and interest. As a result, as held in the case of Venture Global Engineering vs. Satyam Computer Services Ltd. (2010), in cases where an award has been obtained by means of suppressing important facts and by misleading or bribing the arbitrators, etc., an arbitral award passed shall be invalid on the grounds of it being against public policy.

7. Patent illegality

For the last couple of years, India has been working to ensure that it is easier to do business and that investors have more opportunities. The intention behind introducing several amendments to the 1996 Act was to decrease court intervention. An arbitral award can only be set aside if it is attended by material flaws or legal incorrectness. Section 34 of the 1996 Act specifies limited grounds for setting aside an award.

8. Disputes not Arbitrable

Generally, disputes that are in personam (against an individual) can be settled through arbitration, whereas disputes that relate to rights in rem (against the public at large) can be resolved through courts or tribunals. If there is an arbitration agreement between the parties then in such cases as well all the disputes that are of civil and commercial nature that a regular court could handle can be referred to arbitration. However, certain disputes are specifically defined by law and may not be suitable for resolution through arbitration. Though the 1996 Act does not expressly prohibit a particular dispute from being resolved through arbitration, Section 2(3) recognises that some disputes may not be submitted to arbitration as per the law. It is generally considered appropriate for many disputes to be resolved in public forums. Some cases, however, are decided based on a special regime, which works under specific laws and grants adjudication to these specific forums exclusively. Such disputes are seen as implicitly excluded from arbitration and are deemed non-arbitrable. Consequently, if a dispute is non-arbitrable and the parties agree to resolve it through arbitration, the court where the case is pending will decline to refer the parties to arbitration on the grounds of it being non-arbitrable. The same goes for an arbitration award. If the award has been passed by an arbitrator on the non-arbitrable subject matter, the court has the authority to set aside such an award under Section 34 of the 1996 Act.

References:

1. Characteristics of Alternate Dispute Resolution (ADR) and Advantages and Disadvantages of Alternate Dispute Resolution (ADR)

2. Legal Education in India: Challenges, Innovations, and a Vision

3. Sources of Law

4. Salient features of Arbitration and Conciliation Act, 1996.

5. Disscuss the Differences between Arbitration and Conciliation

6. What type of Matter Cannot be subject to ADR (Alternative Dispute Resolution)

7. Discuss the historical background and objectives of the Arbitration and Conciliation Act, 1996

8. What is an Interim Measure by Court Under Section 9 of the Arbitration and Conciliation Act 1996

9. Differences between Arbitration and Mediation

10. Difference between Mediation and Conciliation

11. Difference between Arbitration and Conciliation