PROJECT TITLE – GROUNDS FOR SETTING ASIDE THE

ARBITRAL AWARD

INTRODUCTION
Arbitration has turned out to be more preferred than many other means of solving a
dispute in that it is faster, less revealing of parties’ business, and is handled by
professionals. Nevertheless, there are circumstances in which arbitration does not
produce efficient or fair results and the parties turn to courts for a remedy. Part V of the
Arbitration and Conciliation Act, 1996, specifically section 34 1 of the Act outlines the
conditions for seeking an application to set aside an award. This article therefore goes
deeper into section 34 explaining the circumstances on which an award given by an
arbitrator may be challenged and set aside by a court.

WHAT IS AN ARBITRAL AWARD ?

Under section 2(1)(c) of the 1996 Act2 an arbitral award means an interim award as well.
Cautiously and only upon the request of the party an arbitrator may make an interim
order or award concerning the dispute. Interim orders are orders given and apply only
within the arbitration process only, restraining the party from doing some acts that the
party would otherwise consider prejudicial to the interest of the other party. Of this type
of an order is made in the form of interim injunction. An interim award as defined under
the 1996 Act is distinguishable from a conventional interim order in that it is enforced as
a component of the final award, and therefore is legally enforceable against the
contracting parties settled in the dispute. An interim award is issued following a rather
extensive hearing which considers the admissible interim procedures.

Nevertheless, after arbitration has been conducted, the arbitral tribunal renders an
arbitral/arbitration award as the final award. An arbitral award could be pecuniary as well
as non-pecuniary. It can be monetary which is created for purposes of payment of a sum
of money from one party to the other and it can be non–monetary where no money is
required to be paid but it contains matters such as decisions that can be stopping a certain
business practice or an enhancement of unemployment benefits and premiums.
In order for an award to be valid, it has to satisfy two prerequisites. Firstly, it should be
certain, this means clear, specific as well as unambiguous in the terms of the decision

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Section 34 – Arbitration & conciliation act 1996
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Section 2(1)(c ) - Arbitration & conciliation act 1996
made as to rights of the parties concerned. Secondly, it must contain a decision.” An
award which does not contain a valid decision, or where the decision of the arbitral
tribunal is not sufficiently clear on every point that has been made to the tribunal shall be
void. As a result of this an award has to meet these conditions and one of them being that
an award has to be signed by an arbitrator. It also must set out specific grounds for a
decision made as to a particular case in an award. The award should not allow the parties
to argue or have any doubt regarding their responsibilities and the consequences which
result from the agreement. An award has to determine every aspect of the issue in dispute
between the parties, and make a clear and final determination in respect of each of those
aspects of the issue.

Similarly in the case of Union of India v. Punjab Communications (2002) 3 there in the
award, the amount which was payable by one party to the other was not spelt out and also
the decision was vague and unenforceable. That is why the arbitral award to the applicant
was annulled.

These requirements have been expanded in Section 31 of the 1996 Act. First of all, an
award has to be in written, which prefers the legal aspect against recognizing oral awards.
Secondly, if more than one arbitrator is included in the tribunal any award made should
bear signature of the members of the arbitration tribunal. However, from the social point
of view it is necessary to underline, that in case the majority of members of the tribunal
signed the award the signatures which are united indicate the award as the valid one.
Third, the issuer requirement that the award indicates the date and the place of its
issuance is relevant as the specific details. In addition, and for the same prudential
reasons, a signed copy of the document must also be signed by every party upon the
execution of the document.
Pursuant to Section 31(1) of the 1996 Act these arbitral awards like any award granted by
an arbitrator is final in nature and is also conclusive on the parties of the arbitral
proceedings. It means that for the award to passed conclusively will in effect put an end
to all question/issues arising on the arbitral process. The use of the term ‘final’ under
Section 31 presupposes that of the involved parties the award has the totality in deciding
the issues, the award remains binding until a court step in to set it aside. The arbitrators
are under statutory mandate to make an award within the time as agreed or extended.
Preferably, the award must be construed liberally in this case, drawing our attention to the
objectives of the arbitral tribunal as a more accurate reflection of award. The award given
by an arbitrator could be set aside by an unsatisfied party by making an application to an
appropriate court for setting aside an award.

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GROUNDS FOR SETTING ASIDE THE ARBITRAL AWARD
The 1996 Act has it under Section 7 that any two parties that have agreed to an
arbitration agreement are equally bound to the agreement. This means that the law of
contracts implies liability to settle any difference that might be anticipated later on
through arbitration. -This is in effect the first step that creates the legal relation for
arbitration and creates a legal relation that binds the parties to do as outlined in the
agreement.
When the couple enters a conflict and such conflict is solved through arbitration, an
award is given which is legally enforceable on the two parties. Consequently, the very
award signed by the adjudicating authority imposes the parties’ legal duty to perform as
per the decision and terms of the arbitration award. The last instance of the award gives
the arbitrator full jurisdiction to resolve the dispute.
However, there are some situations which may cause one or both parties to feel they
were not fairly treated by the arbitral award; where such circumstances arise the 1996 Act
has made provision for recourse. Section 34 of the 1996 Act deals with specific grounds
which have been made available to the parties which enables them to apply for setting
aside an award and Section 37 of the 1996 Act provides the provisions of appeal in regard
to certain order.
It is Section 34 of the 1996 Act which contains provisions of one or the other of the
specific grounds which entitle a party to seek setting aside an arbitral award made in
India. They are-
1. Irravity of one party while making an application to enter into the agreement.
2. Failure to recognize the arbitration agreement under the law of a certain country.
3. There were other complaints that pointed to a failure to give proper notice of the
appointed Arbitrators in the existing Arbitral Tribunal.
4. No matter what the nature of the dispute is, this is more often than not not capable of
being settled by arbitration.
5. The nature of the formation of the arbitral award and all circumstances of the case do
not conform to the provisions of the agreement of the Parties.
6. The arbitral award has been made contrary to the public policy of a state.
7. The matter relates to an issue which does not form subject-matter of the award as a
result of arbitration.

LEGAL FRAMEWORK: SECTION 34(1) OF THE ACT

Section 34(1) of the Act provides that any court challenge against an arbitral award may
only be made by an application for the setting aside of such award in terms of subsections
(2) and (3). It also makes sure that there is no unfettered right to reopen arbitral awards
through a claim in substantive unconscionability and that callers must play the specific
notes even if they have been rendered on unappreciated piano keys.
DETAILED GROUNDS FOR SETTING ASIDE AN ARBITRAL AWARD
Section 34(2) and Section 34(3) enshrine certain conditions under which an award may
be annulled. These grounds are divided into two main categories: One, on party-based
reasons, and the other, on court-based reasons.

SECTION 34(2)(A): PARTY-BASED GROUNDS:

1. INCAPACITY (section 34(2)(a)(i))

An award made with an arbitrator may be vacated if the party with which the award is to be
enforced was under some incapacity. According to Section 11 of the Indian Contract Act,
1872, a person must meet the following qualifications to enter into a contract:

- Age of Majority: The person has also to be of required legal age as prescribed by the laws
of the country they come from.
-Sound Mind: This is the mental capacity as per the contract at the time of their formation;
-the person is supposed to be sane.
-Not Disqualified by Law: No law to which the person is subjected can bar him from
performing the task.
This implies that should any of those conditions not be met, the arbitration agreement is
unlawful thus any arbitral award made under such agreement is unlawful. Incapacity also
encompasses a case where a person is a minor, mentally ill or otherwise legally restricted.

2. Invalid Arbitration Agreement (Section 34(2)(a)(ii))

The arbitration agreement must be raised also in legal requirements of the law in
accordance to which the parties of the arbitration agreement are directed or otherwise, if
the law is not indicated – in the law effective at the time. The Indian Arbitration and
Conciliation Act, required under section 7 an arbitration agreement to be in writing.
Section 10 provides for further requirements for such agreements to be effective. An
arbitration agreement may be invalid if:

- They do not fulfill the requirements set in the law applying to them.
- It may be completely devoid of necessary characteristics such as mutual consent
or it was founded on deceit or misstatement

If an arbitration agreement was found to be invalid, any award made under that invalid
arbitration cannot be enforced, and the parties have to resort to other methods of ADR.
 3. Lack of Proper Notice (Section 34(2)(a)(iii))
Warning and the right to be heard are primitives of fairness and justice. It is prohibited by
the Section 18(1) of the Indian Arbitration and Conciliation Act, 1996 to appoint an
arbitrator without providing a written notice to the other parties regarding that appointment
also the notice of the arbitral proceedings. A party may not be afforded the opportunity to
present their position and may then claimed that their right to natural justice has been
prejudiced in this way. This violation can result in:
- An unfair or biased outcome.
- The disadvantaged position taken by a party to contribute towards the arbitration
process.
A party aggrieved by a decision which he believes has been arrived at in violation of its
right to natural justice may, under Section 34 seek a declaration to set aside the award on the
ground that there was a failure to observe the provisions of natural justice during the arbitral
proceedings.
4. Excess of Jurisdiction (Section 34(2)(a)(iv))
Arbitration award can be set aside where it relates to a matter which the arbitration
agreement has not provided for or where it is not within the purview of the arbitration
agreement which led to the arbitration.
• The arbitral award addresses issues not covered by the arbitration agreement.
• The arbitrator makes decisions on matters beyond the scope of what the parties
submitted to arbitration.
In legal language it is called as ultra vires the arbitration agreement, which literally means
going beyond the power. It would be important to underscore that every time an arbitrator
goes beyond the said authority, the award is a nullity.

5. Improper Composition of Arbitral Tribunal (Section 34(2)(a)(v))

Section 34(2)(b): Court-Based Grounds:

1. Non-Arbitrable Subject-Matter (Section 34(2)(b)(i))

The court may set aside an award if the subject matter of the dispute is not capable of
settlement by arbitration under the law in force. Certain disputes are inherently non-
arbitrable and require judicial intervention. These include:
 Criminal offenses.
 Matrimonial matters.
 Insolvency and bankruptcy issues.
These types of disputes require judicial scrutiny to ensure public interest and legal propriety.
2. Conflict with Public Policy (Section 34(2)(b)(ii))
An award that conflicts with the public policy of India can be set aside. Courts in India have
interpreted “public policy” broadly to include:
 Awards based on fraud or corruption.
 Awards violating fundamental rights.
 Awards contrary to basic notions of morality or decency.
 Awards that enforce illegal contracts or actions against India’s sovereignty or
security.
Public policy considerations ensure that arbitration remains a fair and just method of dispute
resolution, aligned with societal values and legal principles.

SPECIFIC PROVISIONS AND LEGAL INTERPRETATIONS:

- Incapacity Under Section 34(2)(a)(i)

The incapacity of a party at the time of entering into the arbitration agreement renders the
agreement and any resulting award void. This includes:

 Minors: Persons who have not attained the age of majority.

 Mentally Unsound Persons: Those who cannot understand the nature and
consequences of the agreement.
 Legally Disqualified Persons: Those disqualified by specific laws, such as
bankrupt individuals or those declared incompetent by a court.

- Invalid Arbitration Agreement Under Section 34(2)(a)(ii)

An arbitration agreement must comply with the legal requirements to be valid. This
includes:

 Writing Requirement: Section 7 mandates that the agreement must be in writing.

 Essential Elements: The agreement must have mutual consent, lawful
consideration, and a lawful object.
If these elements are missing, the agreement is invalid, and any arbitral award based on it
can be set aside.

In Adarsh Kumar Khera v. Kewal Kishan Khera, 2007, the arbitral award was set aside
since it was made without giving the parties a chance to be heard, it was deemed void, and
both parties wanted it overturned.

- Proper Notice and Opportunity Under Section 34(2)(a)(iii)

Proper notice and the opportunity to present one’s case are crucial for a fair arbitration
process. If a party is not given proper notice or is otherwise unable to present their case, they
may argue that their right to natural justice has been violated. This can include:

 Failure to notify a party of the appointment of an arbitrator.

 Failure to notify a party of the arbitral proceedings.
 Denying a party the opportunity to present evidence or arguments.
These violations can lead to the setting aside of the arbitral award.

In AKM Enterprises Pvt. Ltd. v. Ahluwalia Contract (India) Ltd. (2016), arbitral award
was set aside on the grounds that the arbitrator would not hear a counter case of the
applicant on merits because no notice had been given prior to the subject assertion. This is
contrary to established legal precedent, which states that the purpose of the counter-case is
to restrict the number of procedures and that in such cases, the court would have the
authority to arbitrate upon them even in the absence of prior notification.

- Excess of Jurisdiction Under Section 34(2)(a)(iv)

An arbitral award must not exceed the scope of the arbitration agreement. If it does, it is
considered ‘ultra vires’ the agreement. This includes:
 Addressing issues not covered by the arbitration agreement.
Making decisions on matters not submitted to arbitration by the parties.
Such awards can be challenged and set aside for exceeding the arbitrator’s authority.

Improper Composition of Arbitral Tribunal Under Section 34(2)(a)(v)

The composition of the arbitral tribunal and the arbitration procedure must conform to the
agreement between the parties. Any deviation can render the award invalid. This includes:
 The appointment of arbitrators not in accordance with the agreement.
 Following arbitration procedures that differ from those agreed upon by the
parties.
If the composition or procedure deviates significantly and affects the fairness of the
proceedings, the award can be set aside.

The arbitral decision in Yamaha Motor Pvt. Ltd. v. Divya Ashish Jamwal, 2019, was
overturned because it was made in accordance with the terms of the contract, without
considering pertinent evidence that was on file, and on the basis of assumption. Further, in
Rulia Mal Amarchand v. Hindustan Petroleum Corporation Ltd., 2019, it was held
that the arbitrator ought to have restricted his consideration to the issues and agreement that
were brought up for arbitration.
 - Non-Arbitrable Subject-Matter Under Section 34(2)(b)(i)

Certain disputes are inherently non-arbitrable and require judicial intervention. These
include:

 Criminal Offenses: Matters involving criminal law cannot be arbitrated.

 Matrimonial Matters: Issues related to marriage, divorce, and child custody
require judicial scrutiny.
 Insolvency and Bankruptcy: These matters are governed by specific laws that
require court intervention.
These disputes are excluded from arbitration to ensure appropriate judicial scrutiny and
protection of public interest.

- Conflict with Public Policy Under Section 34(2)(b)(ii)

An arbitral award must not conflict with the public policy of India. This includes:
 Fraud and Corruption: Awards based on fraudulent or corrupt practices are
against public policy.
 Fundamental Rights Violations: Awards that violate fundamental rights are not
enforceable.
 Morality and Decency: Awards contrary to basic notions of morality or decency
can be set aside.
 Illegal Contracts: Awards enforcing illegal contracts or actions against India’s
sovereignty or security are invalid.
Public policy considerations ensure that arbitration remains aligned with societal values and
legal principles.

In Steel Authority of India Ltd. v. Primetals Technologies, 2020, the award was partially
set aside as being against public policy because an extraordinarily high-interest rate of 14
percent per annum was given without any justification in comparison to current interest
rates. Furthermore, the high interest rate looked to be punitive in character given the
circumstances. As a result, the interest rate was cut to 10% per year.

Conclusion

Section 34 of the Indian Arbitration and Conciliation Act, 1996, provides essential
safeguards to ensure that arbitral awards are just, fair, and in accordance with legal
principles. It balances the need for finality in arbitration with the necessity of judicial
oversight to prevent unjust outcomes. By outlining specific grounds for setting aside an
arbitral award, Section 34 ensures that arbitration remains a credible and reliable method of
dispute resolution. It upholds the integrity of the arbitration process while protecting the
rights and interests of the parties involved. This legal framework is crucial for maintaining
the trust and confidence of parties in the arbitration system, fostering a fair and just dispute
resolution environment.

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