JUDICIAL SCRUTINY UNDER SECTION 34 OF THE ARBITRATION AND CONCILIATION ACT, 1996 IS LIMITED

[Mr. M. GOVINDARAJAN]

Introduction

One of the objectives of the Arbitration and Conciliation Act, 1996 (‘Act’ for short) is the speedy resolution of the disputes. For achieving this objective of expeditious resolution of arbitral disputes, Parliament has twice amended the Arbitration Act, 1996 in the years 2016 and 2019 and brought in provisions which prescribe an outer time-limit for the conclusion of the arbitral proceedings, commencement of arbitral proceedings within 3 months from the date of the interim order passed by the court, limited judicial inquiry and role at the stage of appointment of arbitrator among others.

Application under section 34

Section 34 of the Act provides that an application for setting aside may not be made after 3 months have elapsed from the date on which the party making that application had received the arbitral award.  If the Court is satisfied that the applicant was prevented by sufficient cause from making the application within the said period of 3 months it may entertain the application within a further period of 30 days, but not thereafter.

Section 34(2) provides that an arbitral award may be set aside by the Court only if-

• the party making the application establishes on the basis of the record of the arbitral tribunal that-

• a party was under some incapacity, or
• 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
• 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
• 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 the submission to arbitration;
• the composition of the arbitral tribunal or the arbitral procedure was not in accordance with the agreement of the parties, unless such agreement was in conflict with a provision of this Part from which the parties cannot derogate, or, failing such agreement, was not in accordance with this Part;

• the Court finds that-

• 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.

An application under this section shall be filed by a party only after issuing a prior notice to the other party and such application shall be accompanied by an affidavit by the applicant endorsing compliance with the said requirement.  On receipt of an application the Court may, where it is appropriate and it is so requested by a party, 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.

An application under this section shall be disposed of expeditiously, and in any event, within a period of 1 year from the date on which the notice is served upon the other party.

Finality of the award

An arbitral award shall be final and binding on the parties and persons claiming under them respectively.  In M/S. DYNA TECHNOLOGIES PVT. LTD. VERSUS M/S. CROMPTON GREAVES LTD. - 2019 (12) TMI 842 - SUPREME COURT, the Supreme Court held that Section 34 is different in its approach and cannot be equated with a normal appellate jurisdiction.  The mandate under Section 34 is to respect the finality of the arbitral award and the party autonomy to get their dispute adjudicated by an alternative forum as provided under the law.  If the Courts were to interfere with the arbitral award in the usual course on factual aspects, then the commercial wisdom behind opting for alternate dispute resolution would stand frustrated.

Appeal

Section 37 of the Act provides that an appeal shall lie from the following orders (and from no others) to the Court authorized by law to hear appeals from original decrees of the Court passing the order-

• refusing to refer the parties to arbitration;
• granting or refusing to grant any measure
• setting aside or refusing to set aside an arbitral award.

An appeal shall also lie to a court from an order of the arbitral tribunal-

• accepting the plea referred to in sub-section (2) or sub-section (3) of section 16 (questioning the jurisdiction and scope of the authority); or
•  granting or refusing to grant an interim measure under section 17.

No second appeal shall lie from an order passed in appeal under this section, but nothing in this section shall affect or take away any right to appeal to the Supreme Court.

Judicial scrutiny

The issue to be discussed in this article on the extent of the judicial scrutiny of the award by the Court to deal the application under Section 34 with reference to decided case laws.  Section 34 of the Act provides for setting aside the award by the Court and Section 37 provides for appeal against the original decrees passed by the Court and the orders passed by the Arbitral Tribunal. 

Setting aside the award

An arbitral award can be set aside only if the award is against the public policy of India as held by the Supreme Court in HARYANA TOURISM LIMITED VERSUS M/S KANDHARI BEVERAGES LIMITED - 2022 (1) TMI 558 - SUPREME COURT.   The award can be set aside under Section 34/37 of the Act, if the award is found to be contrary to fundamental policy of Indian law or the interest of India or justice morality or if it is patently illegal.

Limited jurisdiction

The following case laws will discuss about the limited jurisdiction for Court in the matter of judicial scrutiny of award under Section 34 of the Act:

The Supreme Court in UHL POWER COMPANY LTD. VERSUS STATE OF HIMACHAL PRADESH AND STATE OF HIMACHAL PRADESH VERSUS UHL POWER COMPANY LTD. - 2022 (1) TMI 307 - SUPREME COURT held that the Court does not sit in appeal over the arbitral award and may interfere on the merits of the case on the limited ground provided under Section 34(2)(b)(ii) i.e., if the award is against the public policy of India.

In MEDERMOTT INTERNATIONAL INC. VERSUS BURN STANDARD CO. LTD. & ORS. - 2006 (5) TMI 442 - SUPREME COURT the Supreme Court held that the supervisory role of the Court in arbitration proceedings has been kept at a minimum level and this is because the parties to the agreement make a conscious decision to exclude the Court’s jurisdiction by opting for arbitration as the parties prefer the expediency and finality offered by it.

In M/S. VICNIVAAS AGENCY, REPRESENTED BY ITS PARTNER, T.P.S. PONKUMARAN VERSUS M/S. MMTC LIMITED AND MR. JUSTICE P.N. NAG (RTD.) - 2023 (5) TMI 322 - MADRAS HIGH COURT the appellant was appointed as Handling Agent for the 1^st respondent company for export of wheat from Tuticorin port through the agreement.  The appellant was expected to receive wheat on behalf of the 1^st respondent from Food Corporation of India godown at Tuticorin and transport it by trucks to Tuticorin Port which involves loading the goods into vessels at the specified loading rates.  The 1^st respondent is to supply goods as well to arrange for vessels. 

The appellant had to hire godowns for storage of goods.  According to the appellant this work is an additional work.  Initially the appellant raised bills for the rent of godowns and the respondent No. 1 paid the same.  Subsequently the 1^st respondent declined to pay such storage rental charges.  Since the other branches of the respondent company were paying rental charges the appellant required the respondent No.1 to pay the rental charges as claimed by the appellant.   Thus the dispute arose between the appellant and the first respondent in regard to the payment of rental charges to the appellant by the 1^st respondent.

The appellant invoked the arbitration clause in the agreement.  The arbitration was conducted by the second respondent as Arbitrator.  The Arbitrator, in his award dated 16.03.2006, dismissed the claim of the appellant.  The Arbitrator held that the consolidated rate fixed under the Agreement will not be subject to any escalation and considering the clauses in the agreement there is no scope for the claimant to make any new claim under any head for whatsoever the reason.  The storage in godown before the goods are loaded in the port, is the responsibility of the appellant and it cannot be called as an additional work as claimed by the appellant.

Against this order the appellant filed an application under section 34 of the Act before the District Court.   The appellant filed an IA under section 34(4) of the Act with the prayer for remitting the award back to the Arbitrator so as to eliminate the ground for setting aside the award.   The District Court allowed the application and remitted the matter back to Arbitrator for fresh consideration and fixed a time limit for completion of the proceedings.  Till such the Court directed to keep in abeyance of the award.

A Civil Revision Petition was filed before the High Court against the order of District Court.  The High Court allowed the said petition to a limited extent.  The High Court held that the Arbitration proceedings shall stand adjourned for a period of 3 months from the date of receipt of the order of High Court.  The High Court gave liberty to the Arbitrator either to resume proceedings or to take such other action as in his considered opinion would eliminate the grounds raise for setting aside the award.  The High Court also directed to communicate its decision within 3 months to the District Court and the parties to the arbitration within 3 months.

The Arbitrator heard the parties against the passed an additional award on 24.04.2009, reaffirming its earlier order and dismissed the claim made by the applicant.  The matter was taken up before District Court which also confirmed the award passed by the arbitrator on 04.08.2010.  Against this order the present appeal has been filed before the High Court.

The appellant submitted the following before the High Court-

• Even though there is no provision in the agreement for providing the storage godowns the appellant performed the same as additional work for which the respondent has to pay the dues for the additional work performed by the appellant.
• When the other branches of the 1^st respondent have paid the entire storage charges/godown rent, there was no reason for the 1^st respondent to deny their liability.
• The Arbitrator, after having held that the claim for rental charges is outside the scope of the agreement, ought to have invoked section 70 of the Contract Act and ordered for compensation of the appellant for the rental/storage charges.   However the Arbitrator wrongly interpreted Section 70 of the Contract Act and confined it to the principle of Qnatum Meruit.
• The District Judge failed to appreciate the facts that there was perverse finding by the Arbitrator and hence it fell within the parameters under Section 34 of the Act for interfering with the award.

Therefore, the appellant warranted the inference of the High Court and to hold that the appellant is eligible for relief sought for.

The 1^st respondent submitted the following before the High Court-

• Clause 2 and Clause 6 of the agreement makes it clear that the entire responsibility of handling, protection, loss/damages, transit shed and temporary storage of goods before loading the goods into the vessel at the port is the sole responsibility of the appellant and rates have been fixed for this purpose.
• Therefore the appellant is not having right to claim the storage chares of the godown rent.
• The Arbitrator has considered the claims of the appellant and held that the claim of the appellant is out of the scope of the arbitral agreement.
• Such factual findings of the Arbitrator cannot be interfered in a petition filed under section 34 of the Act and the District Court rightly dismissed the petition.
• To claim compensation under Section 70 of the Contract Act the appellant is to prove that he had done something lawfully for the 1^st respondent or delivered something to the 1^st respondent and while doing the same, he must not have intended to have acted gratuitously and the 1^st respondent must have enjoyed a benefit out of the same.
• The appellant has not discharged the burden that all the ingredients of Section 70 of the Contract were fulfilled for the claim of compensation under that section.
• Therefore the Arbitration rightly dismissed the claim of the appellant.

The 1^st respondent prayed the High Court to dismiss the appeal filed by the appellant since there was no ground to interfere with the award of the Arbitrator.

The appellant, as well as the 1^st respondent, relied on some case laws to support their sides.  The High Court carefully considered the submissions made on either side or the materials available on record.

The High Court analyzed the clauses in the Cargo Handling Agreement in detail and also the fixed rate structure for each and every activity which is attached with the agreement.  The High Court observed that as per the agreement the petitioner was saddled with the responsibility right from unloading from Food Corporation of India godown till the loading of the goods at the Tuticorin port.  The issue of storage of the goods, for whatever period, falls well within the process.  The High Court held that it is the responsibility of the appellant and consequently, the appellant is not entitled to be compensated towards storage charge/godown rent.  The High Court observed that the Arbitrator has come to a conclusion that there were deliberations between the parties before the rates were fixed and that is the reason why clauses 2.15, 6.1 and 6.8 were incorporated in the agreement and hence, there is no scope for the appellant to claim compensation beyond what has been fixed by the agreement.  This finding cannot be read in isolation and it must be read along with the other reasonings given by the Arbitrator. 

The High Court held that the terms of the contract have been construed in a reasonable matter.  Just because an alternative view on facts and interpretation of contract exists, that can never be a ground for interfering with an award.  The High Court cannot deal with this appeal like a regular appeal.  The extent of judicial scrutiny under Section 34 of the Act is limited and the scope of interference is narrow.  An appeal under section 37 is more or less akin to a second appeal, the first appeal being to the Court by way of objections under Section 34 of the Act.  Where there are concurrent findings of facts and law, the Appellate Court would be very cautious and reluctant to interfere into the findings returned in the award by the Arbitral Tribunal and confirmed by the Court under Section 34 of the Act.

The High Court also observed that there is no need for the Court to go into the other issue pertaining to the applicability of section 70 of the Contract Act.  This issue will also arise for consideration only if the Court holds that the appellant has done extra work/additional work which is not founded in the agreement.  Hence the interpretation given to Section 70 of the Contract Act qua the principle of Quantum Meruit by the Arbitrator does not require a finding in this appeal.  Therefore the Court did not deal with the arguments made on either side on this issue.

The High Court did not find any ground to interfere with the award passed by the Arbitrator and as confirmed by the District Court under Section 34 of the Act.  The High Court dismissed the appeal. 

Conclusion

From the above discussions it can be inferred that the extent of judicial scrutiny under section 34 of the Act is very limited and the scope of interference is very narrow.  To put it lightly Section 34 of the Act acts as a pigeon hole where only a sparrow can enter and when it comes to Section 37 of the Act, probably only an ant can enter.  For even ants would not rush in where sparrows fear to tread.