Setting Aside Domestic Arbitral Award: A Detailed Analysis

Introduction

Arbitration is a form of alternative dispute resolution; arbitration is a process where two people resolve a dispute before a neutral party. In an arbitration, the parties make their arguments before the arbitrator. The arbitrator decides which side will prevail and what decision will be made about any award or sanctions to be imposed. Arbitration is generally faster and less formal than litigation, though it can also cost more because there does not exist a right for appeal from an arbitration judgment as there is from a court judgment. The arbitration may also involve decisions that are binding or strictly enforced by law even if they are unfair to one of the parties who went to arbitration voluntarily because it required the waiver of certain legal rights. Arbitration is a legal process in which a party has the right to choose the law and the jurisdiction of arbitration. The arbitrator will have no power to alter or change a contract or agreement between the parties. The arbitrator’s decision, as long as it is not contrary to law, is binding upon both parties. This is why arbitration works as an alternative dispute resolution for those who don’t feel they can otherwise afford legal fees. In most cases, arbitration represents an agreement between the parties that there will be some form of impartial decision-maker who will resolve disputes based on procedure and reason rather than emotion.

Evolution of Arbitration in India

A few decades ago, arbitration was unheard of in India[1]. However, the time has changed and it is now becoming a growing trend to settle disputes through arbitration rather than the court system. Arbitration in India is likely to gain popularity because of the demerits of litigation which are its expense, time-consuming & lengthy procedures. Moreover, arbitration is an effective way of resolving disputes on business matters like the sale of goods, contracts, shares, partnership agreements, and others. Arbitration provides a more informal framework for dispute resolution rather than the courts. The main advantage of arbitration is its speed. Arbitration proceedings are more accessible than court litigation. Moreover, the decision is binding upon both parties, unlike court orders which are treated as advisory. Arbitration in India has seen its rise with the growth of new economy & private sector enterprises after liberalization introduced by the Government of India in 1991. The new economic policies have led to greater foreign investment especially in infrastructure projects by multinational companies. In the context of these developments, litigation is becoming expensive & lengthy. In addition, litigants are undergoing plenty of hardships in dealing with the legal profession who are not cooperative in simplifying cases. Since arbitration is a mode of dispute resolution which gives a binding decision without going to court, it is expected to improve litigants’ confidence level in arbitration proceedings. This will make them more willing to submit their disputes to the arbitrator for adjudication. It could be an opportunity for smaller firms and entrepreneurs who cannot afford costly litigation proceedings to get access to justice at desirable cost and time-saving areas. Furthermore, it could eliminate chances of fraud & intimidation which can happen during court litigation proceedings. Considering all the merits & demerits of arbitration everyone believes that arbitration would replace normal litigation in coming years.

What are Arbitral Awards?

Domestic Arbitral Award[2] is a term that denotes a final decision by arbitration proceedings. The award may be based on contract law or jurisdiction law and can signify an award of damages for breach of contract where the parties have not been able to settle. In India, domestic arbitral awards are issued under the provisions of Part IXA of the Arbitration and Conciliation Act 1996[3]. Domestic arbitral awards are issued by a domestic tribunal appointed for this purpose under Article 27A (2) of the Indian Constitution. The panel of arbitrators involves the chairman, vice-chairman, and members appointed by the Supreme Court under Article 27A (3) to adjudicate in matters relating to taxation. The tribunal is formed by the rules of natural justice prescribed by the court. Domestic arbitral awards are available for enforcement in India subject to various conditions specified in Part IXA. Once the award is issued, it comes into effect after its publication through a process called ‘proclamation’. Publication must be made within six months from the date of delivery of the award, failing which it would cease to have an effect. Domestic arbitral awards are issued in the form of a writ issued by the High Court. The final, binding decision of the domestic tribunal is only binding on parties to the award unless it has been expressly modified or appealed against by them. The Minister for Commerce and Industry has under Section 9(4) of the Arbitration and Conciliation Act 1996, the power to issue directions for the improvement of provisions relating to arbitration in India. It was argued before Parliament that there was a need to make domestic arbitration more efficient for this purpose. For this purpose, rules were framed to issue directions concerning simplification of procedures through sub-classing all documents into categories with varying time limits. The domestic arbitration award has been included in the list of documents that can be classified as a ‘Sub-class A’.

Difference Between Domestic Arbitral Awards & International Arbitral Awards[4]

Domestic Arbitral Awards are issued by arbitrators who come from India or live in India. They are issued to the people only if the contract says that they should be issued under domestic law. If it does not mention anything about domestic laws, then they cannot issue a Domestic Arbitral award unless there is some other connection with India like providing goods or services in India or Indian assets were used, etc. Then they can issue a Domestic Arbitral award. On the other hand, International Arbitral Awards are issued by arbitrators who come from outside India and have not come to India to visit any court of law. They issue international awards by either a written agreement with the parties or by any examination of facts and law that has been made in some other country or an arbitration matter has been referred from some other country. In such cases, the arbitrators have no obligation to obey any of the laws of India. But they cannot deny issues of facts and legality according to the laws of India due to some decision made in another country i.e., they cannot refuse to issue an international award unless it is barred by the laws of the country where the award has been issued.

International arbitral awards are not related to separate laws for India. Domestic arbitral awards are governed by domestic law, so they are binding on parties who have given them the awards. But the international arbitral awards are not necessarily based on separate laws for India so they are NOT binding on parties who have given them an international award even if they have agreed on following Indian laws in their agreement with their arbitrator. They can refuse to issue any legal document on principles that have been laid down by another country ruling that another country’s laws have no application in India.

The impact of this is that a person who is a party to an international award may not get protection from any of the laws in India or enforcement of any legal document on which the international award has been based, because the arbitrator of the international award does not have any duty to obey Indian law. So, it can be said that Indians are NOT always protected legally by international awards even if their agreement with their arbitrator talks about following Indian law. This is more important for foreigners who have entered into agreements with Indian courts and signed Joint Venture Agreements etc.

Constitutional Validity of Section 34 

It was held by the petitioner in TPI Ltd. V. Union of India[5], that an inherent right should be granted for setting aside arbitral awards on the grounds provided, absence of such right would make section 34[6]unconstitutional. The writ petition was dismissed by the court in the same case. The court held that arbitration is an alternative in the resolution of a dispute and there is mutual participation by both parties. There is no compulsion over parties to resort or resolve their dispute by arbitration procedure under any statute.

Grounds or Provisions allied to setting aside of Arbitration Awards

A domestic arbitral award can be set aside on the following grounds[7]

  • Incapacity of Parties: 

If the parties in the contract are found to be incapable in any manner by the courts, then the application for setting aside an arbitral award can be passed. Further, if the court finds that a party to a contract is a minor or of an unsound person who is not being represented by a Guardian then in such circumstances the court can pass the application for setting aside the arbitral award

  • The Invalidity of Arbitration Agreement under Laws:

If there is an arbitration clause present in a contract then it would be considered void if the whole contract is void. The validity of an arbitration agreement can be challenged on the same grounds as a contract.

  • Public Policy:

The court in Venture Global Engineering V. Satyam Computer Services Ltd.[8] stated that if an arbitral award conflicts with fundamental policies, then such arbitral award can be set aside on the same ground. It is provided under section 34 of Arbitration and Conciliation Act, 1996 that if there is a violation of the public policy of India then an application can be made to set aside the arbitral award. Public Policy is the policies that are introduced for the public good and Public Interest. If an arbitral award is obtained by any kind of illegal activity or any kind of activity that conflicts or is against fundamental policies then an application can be filed to set the order.

  • Disputes are not arbitrable:

Disputes of criminal nature or public rights cannot be settled by arbitration. The disputes should be capable to be settled by arbitration.

  • Lack of Jurisdiction: 

In India, jurisdiction in foreign arbitration is in general subject to an exception in favor of Indian courts. Indian courts are generally in international law excluded from exercising jurisdiction over cases which concern questions relating to (a) maritime boundaries, (b) ‘foreign debts’ incurred in respect of ‘foreign trade’ (c) ‘rights relating to foreign property, or (d) ‘rights or obligations accruing under international conventions for protecting persons or property. In “Venture Global Technology LLC v. Arvind Limited”, the Bombay High Court examined whether a service provider was ‘Indian’ or ‘foreign’ in the context of an arbitration clause referring to the law of England, which is not regarded as a ‘foreign law’. The court held that it had jurisdiction because Indian laws applied to its agreements.

  • Improper procedure for taking evidence: 

This ground has been largely dealt with by Article 34 of the Indian Arbitration and Conciliation (Amendment) Act 1996. The Act requires an arbitrator to “submit to the court” his statement of claim including any exhibits referred to in it, no later than 14 days after the date of filing of the statement of claim. The parties are also required to submit “within two months” after filing the statement of claim their evidence.

  • Excessive or inadequate damages: 

This ground relates to contempt for failure by an arbitrator or a party not to comply with requirements specified in the award. The award may also declare that failure by a party not to comply is justified.

  • Tender of insufficient damages: 

This ground has been dealt with by the court in “Chennai Petroleum Corporation Ltd v. Reliance Industries Ltd” and “Indian Oil Corporation v. Reliance Industries Ltd[9]“. The courts held that an arbitral award can be set aside if the court concludes that the award was not arrived at after consideration of all relevant facts and circumstances and there was a gross and palpable error in computation, provided no party seeks to enforce the award after challenging it.

An arbitral award can also be set aside on any other ground on which arbitration awards may be challenged in general. The Supreme Court has observed that it is not necessary “to frame specific grounds for setting aside an award” and “whether there are any special or specific grounds is not always the question. The question is whether the award itself is bad. It may well be that the ground upon which the court sets it aside, may appear to have no connection with or relevance to the merits of the dispute.”

Limitation For Filing Application

According to section 34 of the arbitration and conciliation act,1996(“the act”), the aggrieved party has to make an application for setting aside the arbitral award. Section 34(3)[10] of the act states that the limitation period for applying to set aside an arbitration order is 3 months after being given notice of being named in the award given by the arbitrator. A limitation period is a time allotted for an application to be filed with a court under various circumstances. Generally, the time limit begins to run on the date when facts giving rise to rights or obligations have occurred. However, in some circumstances, it starts from when facts were discovered or should have been discovered with the exercise of due diligence. Further the claimant would have 60 days from when they are served with notice of being named to file for this relief. 

Analysis

The question of setting aside of arbitral awards often depends on the content of the award and whether it was obtained fraudulently. For example, the courts will not set aside an award that has been obtained fraudulently as this would undermine the confidence in such awards and discourage future investors from entering into arbitration. According to me, it is, therefore, necessary to show that any fraud was perpetrated by one of the parties and not something which occurred before or during proceedings. For example, if a party later discovers that it had been a victim of fraud concerning its finances or its business, it may be able to apply for an order setting aside the award on this basis. However, if there is no evidence of fraud on behalf of either party and both parties consented to arbitration voluntarily, then generally speaking court cannot set aside arbitral awards even where they are irrational. Arbitral awards can be set aside only in very exceptional cases, for example where the award has been obtained fraudulently or it lacks competency, or if arbitrators have exceeded their jurisdiction. The court must consider all relevant circumstances to determine whether an award should be set aside.

Conclusion

India has a strong policy of encouraging mediation and reconciliation before litigation. The advent of the Arbitration and Conciliation Act, 1996 (“the Act”) has made this even more pronounced. One way in which the law tries to do this is by requiring that arbitral awards can be set aside by domestic courts on certain grounds only, one of which is failure to comply with Section 8(1) of the Act. Sections 10(3) and 11 of the Act have also been incorporated to protect arbitrators against vexatious litigation by parties after an award has been made. Other than these provisions, there are no other statutory grounds upon which domestic courts can set aside arbitral awards in India. However, the Supreme Court in an expansive interpretation of Section 10(3) of the Act has added a further ground for setting aside domestic arbitral awards. This is evident from the court’s recent decision in Vodafone International Holdings BV v. Cellular Operators Association of India and Others (Vodafone II).[11]In that case, the Supreme Court allowed the application by Vodafone, an international company incorporated in the Netherlands that has no place of business in India, to set aside a domestic arbitral award of a three-member arbitral tribunal headed by Justice B.P. Jeevan Reddy of the Supreme Court of India. This was done on the ground that there was a conflict of interest on part of a member of the tribunal. In the view of aforesaid, it can be concluded that India has a very developed and efficient statute governing Arbitration in India. Section 34 and 37 of the same acts throws light on some of the grounds which can be considered while setting aside an arbitral award. Although such grounds are common in both domestic and as well as international arbitral awards. Although arbitration has a very bright future in upcoming years for the promotion and development of arbitration in India, there should be minimal judicial intervention. 


[1] https://www.mondaq.com/india/arbitration-dispute-resolution/537190/evolution-of-arbitration-in-india

[2] https://viamediationcentre.org/readnews/MTAwMA==/Domestic-Arbitral-Award

[3] https://www.indiacode.nic.in/bitstream/123456789/1978/1/AAA1996__26.pdf

[4] https://www.sfbar.org/blog/whats-the-difference-between-domestic-and-international-adr/

[5] https://www-casemine-com.cdn.ampproject.org/v/s/www.casemine.com/judgement/in/56e66a2b607dba6b53435d4a/amp?amp_js_v=a2&amp_gsa=1&usqp=mq331AQFKAGwASA%3D#aoh=15884075132479&referrer=https%3A%2F%2Fwww.google.com&amp_tf=From%20%251%24s&ampshare=https%3A%2F%2Fwww.casemine.com%2Fjudgement%2Fin%2F56e66a2b607dba6b53435d4a

[6] https://indiankanoon.org/doc/536284/

[7] https://blog.ipleaders.in/what-is-the-application-for-setting-aside-the-arbitral-awards/#Conclusion

[8] https://indiankanoon.org/doc/867675/

[9] https://indiankanoon.org/doc/57052612/

[10] https://www.mondaq.com/advicecentre/content/3964/Limitation-Of-Time-Under-Section-34-Of-The-Arbitration-

And-Conciliation-Act-1996

[11] https://indiankanoon.org/doc/115852355/

Author

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    Hitesh Malik is a third-year law student at Amity Law School, Noida. He is deeply committed to work relating to social inequality, arbitration, migrant rights, intellectual property rights, cyber and competition law.

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