Arbitration Project - Its a law school assignment PDF

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School of Law University of Petroleum and Energy Studies Dehradun B, LL (TL) SEMESTER ARBITRATION , CONCILIATION ADR MECHANISMS SETTING ASIDE ARBITRAL AWARD SUBMITTED TO MS. ANJALI BHATT Tushar Sharma R1291216099 Arbitration Project Sec 34 of Arbitration Concilliation Recourse to Arbitral Award As P...

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School of Law University of Petroleum and Energy Studies Dehradun

B.COM, LL.B (TL) SEMESTER VIII ARBITRATION , CONCILIATION & ADR MECHANISMS SETTING ASIDE ARBITRAL AWARD SUBMITTED TO MS. ANJALI BHATT

Tushar Sharma R1291216099 500055171

Arbitration Project

Sec 34 of Arbitration & Concilliation Act- Recourse to Arbitral Award As Per the Act, 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) (2) an arbitral award may be set aside by the court only if (a) the party making the application furnishes proof that i.

A party was under some incapacity ;or

ii.

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

iii.

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

iv.

The arbitral award deals with a dispute not contemplated by or not falling within the terms 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 arbitral award which contains decisions on matters not submitted to arbitration may be set aside ; or

v.

The composition of the arbitral tribunal or the arbitral proceeding was nit in accordance with agreement of the parties , unless such agreement of the parties was in conlict with a provision of this part from which the parties cannot derogate, or, failing such agreement , was not in accordance with this part. (b) the court finds that i. the subject matter of the dispute is not cabale of settlement by arbitrarion under the la for the time being in force , or buy arbitration under the law for the time being in force , or ii. the arbitral award is in conflict with the public policy of india.

(3) An application for setting aside may not be made after three months have elapsed from the date on which the party making that application had received the arbitral

award or , if a request had been made under section 33 froom the date on which the request had been disposed by the arbitral tribunal Provuded that if the court is satisfied that the applicant was prevented by sufficient cause from making the application within further period of thirty days , but not thereafter. (4) on receipt of n application under section 1 of the court ay , where it is appropriate and it is so requested by aparty , 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.

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 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 the 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 is 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. 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 the 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 moulded 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 6) Section 34(2)(b) mentions two more grounds which are left with the Court itself to decide whether to set aside the arbitral award: 7) Dispute is not capable of settlement by arbitral process 8) The award is in conflict with the public policy of India 9) 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. INCAPACITY OF PARTIES If a party to the 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.

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

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. 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.6 the court observed “it is a typical case where the arbitrator misconducted the proceedings and also misconducted 4 (2003) 7 SCC 396 5 (2004) 1 SCC 73 6 www.lobis.nic.in/phhc

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 the 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)(iv) 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 & Fisherie Ltd v. National Bank for Agriculture and Rural Development7, 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 India8, 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)(a)(iv) 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

7 AIR 2000 SC 3018 8 AIR 1999 SC 463

Rajasthan v. Nav Bharat Construction Co.9, 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 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. 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 Commerce10 , 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 11the 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 Ltd12 , 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

9 AIR 2005 SC 4430 10 AIR 1981 Cal. 440 11 www.lobis.nic.in/phhc 12 AIR 2003 SC 2629

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 Krishna13 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. 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 Jain14 , 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

13 AIR 2000 J&K 79 14 AIR 1991 Del 13

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. The concept of public policy connotes some matter which concerns public good and public interest. In Venture Global Engg v. Satyam Computer Service Ltd 15, 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) Ltd 16, 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.

15 2008 (4) SCC 190 16 (2004) 1 SCC 540

In Union of India v. Shring Construction Co (P) Ltd 17, sometime was lost in challenging the award in a writ court which was declared to be not maintainable because the...