Judicial Review of Arbitral Awards: Analyzing Section 34 Under the Arbitration and Conciliation Act

I. Introduction

Arbitration is basically the private process of dispute resolution and comes as a part of an alternative dispute resolution structure. In such arbitration, the disagreement arising from an agreement between two parties is submitted for resolution before one or more arbitrators. After carefully reviewing all the relevant facts and evidence, such arbitrators pass binding decisions about the dispute. The term ‘award’ is also sometimes used as a term meaning a decision of the arbitrator with the help of an arbitration tribunal comparable to the judgment or other obligation made by any other court or judicial body. However, in present days, through quick globalization and industrialization, volumes of cases to be decided by the judiciary have been piling up astonishingly due to the high number of undecided cases and as a consequence of long procedures being followed in the courts, and the arbitration has come out as time-to-day, reliable and flexible means of a dispute resolution mechanism, not only within India but all over the globe. On top of that the flexibility inherent in arbitration about procedural aspects of dispute resolution promotes a significantly greater opportunity for negotiation between the consenting parties.

The reason for the implementation of arbitration as a means of solving disputes has always been its design to solve these disputes as efficiently and promptly as possible, in addition, it is supposed to be cost-effective in comparison with litigation processes and courts. However, the influence of the court on matters related to the annulment of arbitral awards has increasingly entered the realm of litigation, thereby affecting the direct purpose of arbitration, which is to expedite and effectively finalize disputes without the aid of courts. The setting aside of the arbitral awards, as enshrined in the ACA, 1996, which is, by design narrow and exceptional.

There is no doubt that the provision has been carefully drafted to allow for judicial interference only on certain grounds, including a contravention of principles of natural justice, violation of public policy and the tribunal’s overreaching authority. However, the extent of these grounds and the threshold of judicial review under section 34 have been an important subject of debate and judicial review. Indian courts have, to the utmost degree, adopted the principle of minimal interference in the rendering of the award and, therefore, finalized the arbitration process. However, cases of judicial overreach, especially concerning public policy exceptions, have raised certain doubts regarding striking an adequate balance between finality and equity under the arbitral process.

This paper will seek to critically review the judicial review mechanism as provided under Section 34, where limitations and challenges subject evolution trends in its application. Referring to fundamental judicial decisions and reading scope within judicial review, it will analyze whether the given framework under Section 34 achieves the conjoint balance between a proper promotion of arbitration as a suitable technique for effective dispute resolution with legitimate protection for the parties involved.

II. Analysis of section 34 of the act

This legal provision allows a party a party may request the reversal of an arbitral order within three months of the date of receipt. The discretion of a thirty-day extension, on presenting a satisfactory explanation for the delay in applying, further exists in the hands of the court. The affidavit must be submitted with affirmation and advance notice furnished to the respondent. This ensures that the issue is dealt with promptly and it provides for one year in case the dispute is to be settled from the date the notice was given.

Clause (2) further outlines the ground upon which this application may be annulled. A party must fulfil, as are the records of the arbitral tribunal, that-

1. A party suffered or suffered from any kind of incapacity,

2. When the arbitration agreement is either void or void ab initio,

3. The party was not properly served or was prevented from presenting his case properly,

4. The arbitral award relates to a different dispute or includes matters that are beyond its scope or not contemplated.

However, if it is possible to distinguish the decisions relating to different issues, then that part of the arbitration award dealing with the matters for which the arbitration was beyond its competence should be set aside only.

The parties involved did not agree on the processes to be followed or the structure of the arbitral award. However, a party cannot consider this factor when the compromise is inconsistent with the first part of the Act.

In addition, the arbitration award may also be annulled because the court observes that -

1. The arbitral ruling violates India public policy,

2. The arbitration cannot settle the subject matter of the dispute.

The public policy of India includes the fundamental principles of interaction between the parties, as embodied in the Constitution of India, being contrary to morality or justice. An arbitral award fraudulent or corrupt, being against the provisions of Sections 75 or 81 is held opposed to the Indian public policy.

III. Interpretation of “public policy” & “patent illegality”

DOCTRINE OF PUBLIC POLICY

This principle of Ordre Public which translates to public policy in the international jurisprudence, therefore, deals with the choice of laws or the acceptance and implementation of awards or judgements from other countries.³

The rationale behind the public policy doctrine is that parties are entitled to a contract and arbitration; however, if the award of the tribunal conflicts with public interest, autonomy can be overridden.

As previously stated, if the award violates the public policy, it may be revoked. Public policy" is not defined by the Act. A simple explanation is found in the Legal glossary of the Ministry of Law, Justice and Company Affairs, Government of India: “Public policy refers to a set of principles that govern which way communities ought to be managed to promote the greater good of the entire community.”⁴ The definition of public policy varies tremendously with socio-cultural beliefs in the community. It, therefore, cannot be categorized. Based on their differences, the differences between the inclusive and exclusive aspects of public policy cannot be categorized. According to Article V of the New York Convention, public policy is the state’s public policy in which the award is being implemented. It is also important to remember that the courts’ only task in this situation is to decide whether it would be against public interest to recognise or enforce an arbitral ruling. Public policy has been elucidated through divergent legal minds and judgments pronounced by courts. As understood by the House of Lords, England defined public policy as “the legal maxim that prevents actions detrimental to the public interest”.⁵ Most jurists again argue that, on a comparison basis, Article V (2) of the Convention limits international public policy more than it limits domestic policy. The meaning of public policy varies depending on whether it is domestic or foreign public policy; domestic judges have the authority to interpret international public policy. Even though it differs from domestic public policy, the difference is nonetheless used to identify public policy laws at the time of international arbitral award’s assessment and execution. The basis of the mechanism of interpretation by the court on public policy is whether it follows a civil law or a common law system. Public policy is, under civil law, the term that describes base principles or values upon which society is based but remains undisclosed. In common law systems, public policy is generally associated with general ideas concerning justice, fairness, and morality.⁶

In “Gherulal Parekh v. Mahadeodas Maiya”⁷, the Court had shown a very limited appreciation of public policy in its earlier decision. It was thought that India had certain determined categories, and it would not be prudent to look for new categories.

In the case of “Renusagar Power Co. Ltd. v. General Electric Co”.⁸ The interpretation of public policy, as it referred to international awards, was very limited during this time. For the award to violate India's public policy, the award would be required to contradict either of the following:

(i) fundamental Indian legal principles,

(ii) the interests of the country,

(iii) justice and morality.

the ruling defined what came to be known as the narrow application of the term “public policy” in an award. This interpretation became part of the Act, within the provisions allowing annulment on grounds of public policy in 1996.

“ONGC v. Saw Pipes”⁹ is the Supreme Court's latest judicial pronouncement on defining public policy with utmost comprehensiveness. The court held that if the authenticity of an arbitral award is disputed, it need not interpret the expression “public policy of India” in a narrow sense. On the other hand, for the obvious injustice of the decision rendered by the tribunal to be nullified, it is necessary to interpret it broadly.

Subsequently, changes were incorporated into the judicial understanding of the term “public policy” following suggestions put forth by the 246^th Law Commission report drafted under the patronage of Hon. Justice A.P. Shah. The notion of justice and morality were further restricted in this context to axiomatic principles of justice and morality testing the legal system. Explanation 2 explained the “fundamental policy of Indian laws” which clarified that the assessment of breaches of this policy is not a review of the merits of underlying disputes.¹⁰

PARADOX OF PATENT ILLEGALITY

The complications associated with the term Patent Illegality have also extended the grounds for setting aside the Awards. In “ONGC Case,”¹¹ the Hon. Apex Court redefined the term public policy by clearly understanding the term within the particular facts of each case, thereby opening a wider ambit of its understanding. A new category of “Patent Illegality” has been created to address the problems without confronting the controversial nature of the term fundamental policy in the context of the Indian legal justice system. The concept has been adapted to public policy in cases where an arbitral award is challenged. The new ground for setting aside an arbitral award would be on grounds of patent illegality, which was added by Section 2A of the Act stating- “an arbitration award arising out of arbitration other than international commercial arbitration…”¹². This section is relevant only in arbitration proceedings to take place in India since the language of section 2A makes it relevant to arbitration under the ACA of 1996. Such an award would be illegal, patently, as it would contravene the provisions of the said Act and would thereby not be enforceable, implying such an award would be invalid.

Arbitration is a process adopted by parties to resolve a dispute. In other words, the parties will follow the arbitrator’s ruling irrespective of whether it is wrong as long as they follow the right procedures. Therefore, courts can have no occasion to interfere with the enforcement of the award on grounds of legal or factual error. Vesting courts with the power to review on grounds of legal or factual error would run counter to the purposes of the Act and encourage arbitration as the first step in litigation, ending at the United States Supreme Court of Appeals.

The Court defined the definition of patent illegality in the 2014 case of “Associate Builders v. Delhi Development Authority”¹³, stating that it encompasses the following:

1. Deception or corruption

2. Violation of substantial law

3. Legal errors committed by the Arbitrator

4. Breach of the Act of 1996.

5. The Arbitrator’s oversite about the contract’s provision and accepted business procedures, as stipulated in section 28(3) of the statute.

6. The arbitrator does not allow access to his reasons.

THE EFFECT OF SECTION 28(3)

Section 28 (3) of the ACA, 1996 holds that arbitral tribunals are limited to deciding disputes only under the contract and relevant trade usages. Arbitrators are not allowed to apply principles of ex aequo et bono (fairness) unless authorized by the parties to do so. It follows, therefore, that any award based on the arbitrator's conscience of fairness may be challenged for departing from what is enforceable in the phrases of the contract.

An arbitrator, however, must follow the clauses of the contract and certainly cannot act haphazardly or exceed the authority given by the parties. The courts stress that intentional disregard for law or terms of the contract can render the award vulnerable to being set aside, hence usually allowing for a means to challenge them¹⁴. In many such cases, the strict framework now often leads to the cancellation of awards in the event of a conflict of interpretation of the contract between the court and the arbitrator.

Thus, Section 28(3) has ushered in severe obstructions to the implementation of the arbitral award that has resulted in increasing difficulties and watering down the conclusive character of arbitration in India.

IV. Judicial intervention in arbitral awards

Judicial review of arbitration is an infrequent event. It has instead invited charges of arbitrariness and efforts to circumvent court boundaries on one hand, and arraignment of judicial intervention and hostility on the other hand. There are three principal methods to identify this source of discontent:

1. Examining the nature of arbitration;

2. To what extent is the arbitrator chosen by the parties to act allowed to do so;

3. To what extent can be or must be the arbitral process autonomous and free from judicial influence?

“Judicial review” also involves persons or a combination of persons referred to as arbitrators. It is not defined in any of the leading legal dictionaries, although it must be one of the most commonly used practices of the courts. Still, it would be useful to clarify because its users do not always share the same understanding of what it means. Undeniably, the Act identifies three circumstances under which the court may become involved in arbitral proceedings. These are:

1. Appointing arbitrators in cases in which the parties’ agreed approach fails¹⁵

2. Determine if the arbitrator’s mandate is revoked due to his incapacity to carry out his duties or his lack of diligence¹⁶

3. Aid in collecting evidence¹⁷

All three of the situations mentioned above offer backdoors through which courts can intervene in the arbitration process. “The provisions of the Act indicate that the Act limits intervention of the Court with the arbitral process to the minimum”, the court said in “Konkan Railway Corporation v. Mehul Construction Co.”¹⁸ entering into raptures over the 1996 Act on its maiden passage.

Taking the “SBP & Co. v. Patel Engineering Ltd.”¹⁹ case, the Court further extended the degree or area of judicial interference by holding that the Hon’ble CJI had the authority to render a decision on issues, for instance, whether the arbitration agreements were valid. The court further held that in case the parties failed to agree, the Chief Justice might even demand evidence to prove jurisdictional difficulties while performing the role of selecting an arbitratior. The SC declared that these decisions would be final and binding on the parties concerned. This fundamentally conflicted with the “Principle of Kompetence-Kompetence” and implied that the ability of the tribunal to determine its own jurisdiction had been compromised.

LIMITATION OF JUDICIAL INTERVENTION

Ordinarily, in most legal systems, an order or judgment obtained through the courts is greeted by a first appeal with a rehearing on the merits of the case. But this is exactly what arbitration does not do: parties appoint their arbitrators based on what the latter are competent to deal with. The UNCITRAL Model Law and the Indian ACA, of 1996, placed restrictive circumscriptions on the ambit of appeals from arbitral decisions to secure finality and eschew burdensome reappraisals. This restrictive circumscription is provided in the Act and was challenged in the “TPI Ltd. vs. Union of India”²⁰ case, by filing a writ petition per Article 226 of the Indian Constitution.

It was unconstitutional that a party could not appeal arbitral rulings on their merits, the petitioner argued. This dismissed petition led the high court to reaffirm that arbitration is a voluntary mechanism for conflict resolution. During this process, the involved parties are willing to submit their disputes to an arbitrator with a mandate of decision-making over the issues under consideration. It underlined that the legislature has the power to specify grounds for contesting awards. Section 34, therefore, was constitutional in its provisions, and courts were prohibited from interfering with the arbitral awards for only meritorious reasons.

RECOMMENDATION BY JUSTICE B.N. KRISHNA

In his report “HIGH-LEVEL COMMITTEE TO REVIEW THE INSTITUTIONALISATION OF ARBITRATION MECHANISM IN INDIA,”²¹ Justice B. N. Krishna made several recommendations:

1. the creation of an arbitrational counsel, which would serve as a body to oversee India's arbitration laws.

2. It is still not possible to form a specialised arbitration bar or give judges specialised training to handle arbitration cases in a more technically advanced manner.

3. I won't overlook a crucial suggestion here: formulate a permanent within the jurisdiction of the Arbitration Promotion Council of India (APCI) to examine the evolution of the arbitration law and practices of India, and to propose timely legislative and other modifications to the government.

The commission will thus comprise the following:

• Leading arbitrators,
• arbitration practitioners,
• arbitration institutions,
• judges,
• trade association representatives and
• experts from other jurisdictions.

4. Another suggestion was that it must be the legislature's task to act in advance so that arbitration counsel and legislation stay up to date with the arbitration’s advancements, instead of waiting for the judicial clarification of ambiguities within the legislation through judicial precedents.

It is, therefore, no surprise that the subsequently proposed further amendments under the Arbitration and Conciliation (Amendment) Bill, 2018 (“the Proposed 2018 Amendments”), primarily advocate for institutional dispute resolution in place of ad hoc arbitration, which, like the judicial system, seems to be plagued by too much delay.

V. Conclusion

Arbitration has eventually surfaced as an almost very useful substitute conflict resolution procedure that minimizes the weaknesses associated with traditional litigation. Most notably, these include cost-effectiveness, flexibility, and efficiency. Section 34 reflects a careful legislative endeavour to weigh arbitral finality against judicial scrutiny so as not to compromise the cause of justice and fairness. Even though the scope of intervention by the courts is substantially restricted to only some grounds including violation of public policy, patent illegality, or procedural irregularity, its interpretation was stretched, which dilutes the core principles of arbitration.

The emerging body of law regarding public policy and illegality has thus far best represented the robustness with which this balance is maintained. While courts have traditionally sought to preserve the autonomy of arbitration, overreach cases involving judicial concerns have cast aspersions over the potential impact on the arbitration ecosystem as a whole. To make arbitration more legitimate, the recent amendments, be it 2016 or even the recommendations by Justice B.N. Krishna's committee, focus very much on institutional arbitration and the blatant diminishing of judicial intervention. In the future, to make arbitration a viable and effective means of resolving disputes in India, there is a need for a concerted strategy with harmonious court interpretation and robust institutional structures.

*****

VI. Bibliography

STATUES

• The Arbitration and Conciliation Act, 1996

BOOKS

• Dr S.C. Tripathi, The Arbitration and Conciliation Act,1996 with Alternate Means of Disputes (Central Law Publications, Allahabad, 6^th edn., 2012)
• Saharay Madhusudan, Arbitration & Conciliation with Alternate Dispute Resolution (Universal Law Publication, 4^th edn., 2017)

ARTICLES

• Rhea Tewary, “An Analysis of Section 34 of Arbitration & Conciliation Act, 1996”, available at https://jgu.edu.in/mappingADR/an-analysis-of-section-34-of-arbitration-conciliation-act-1996/ (last visited on 05 November 2024)
• Ashima Sharma, Determining the “Lakshman Rekha’ of section 34 of the arbitration and conciliation act”, Dispute Resolution Blog, Cyril Amarchand Mangaldas, July 18, 2023, available at https://disputeresolution.cyrilamarchandblogs.com/2023/07/determining-the-lakshman-rekha-of-section-34-of-the-arbitration-and-conciliation-act/ (last visited on 05 November 2024)
• Bhumika Indulia, “Evolution of ADR mechanisms in India”, SCC Online Times, February 7, 2021, available at https://www.scconline.com/blog/post/2021/02/07/evolution-of-adr-mechanisms-in-india/amp/ (last visited on 04 November 2024)
• Vivek Narayan Sharma, “Understanding Section 34 of the Indian Arbitration Act: Grounds for setting aside an arbitral award”, The times of India, July 11, 2024, available at https://timesofindia.indiatimes.com/blogs/lawtics/understanding-section-34-of-the-indian-arbitration-act-grounds-for-setting-aside-an-arbitral-award/, (last visited on 06 November 2024)
• Anshu Singh Rathore, “Public Policy Conundrum in the Enforcement of Arbitral Award”, Manupatra Articles, October 7, 2022, available at https://articles.manupatra.com/article-details/Public-Policy-Conundrum-in-the-Enforcement-of-Arbitral-Award (last visited on 07 November 2024)
• Aishwarya Padmanabhan, “Analysis of Section 34 of the Arbitration and Conciliation Act- Setting Aside of Arbitral Awards and Courts’ Interference: An Evaluation with Case laws”, available at https://manupatra.com/roundup/326/articles/arbitration.pdf (last visited on 08 November 2024)
• Niharika Chauhan, “Judicial Intervention in Arbitration- A Comparative Analysis”, Manupatra Articles, March 3, 2022, available at https://articles.manupatra.com/article-details/Judicial-Intervention-In-Arbitration-A-Comparative-Analysis (last visited on 10 November 2024)
• Mohd Malik Chauhan, “Applicability of Section 5 of Limitation Act to Petition U/S 34 of the Arbitration Act Is Excluded: Himachal Pradesh HC”, Live Law, October 29, 2024, available at https://www.livelaw.in/high-court/himachal-pradesh-high-court/himachal-pradesh-high-court-clarifies-section-34-arbitration-act-and-applicability-of-section-5-limitation-act-273890 (last visited on 11 November 2024)
• Amisha Shrivastava, “S. 34 Arbitration Act| Mere Violation of Law Won’t Make Arbitral Award Invalid, Fundamental Policy of Law Must be Violated: Supreme Court”, Live Law, September 24, 2024, available at https://www.livelaw.in/top-stories/s-34-arbitration-act-mere-violation-of-law-wont-make-arbitral-award-invalid-fundamental-policy-of-law-must-be-violated-supreme-court-270512 (last visited on 11 November 2024)

REPORTS

• Justice B.N. Srikrishna, “Report of the High Committee Review the Institutionalisation of Arbitration Mechanism in India” 2017, available at https://legalaffairs.gov. in/sectiondivision/report-high-level-committee-review-institutionalisation-arbitration-mechanism-india (last visited on 13 November 2024)
• IBA Subcommittee, “Report on the Public Policy Exception in the New York Convention”, October 2015, available at https://www.ibanet.org/document?id= Subcommittee-on-Recognition-and-Enforcement-of-Arbitral-Awards-Public-Policy-Oct-2015 (last visited on 04 November 2024)

*****