Judicial Intervention in Arbitration: How far is it justified?

Arbitration is the means by which parties to a dispute get the same settled through the intervention of a third person, but without having recourse to a Court of Law. This is however, more of a fiction now, than actual court procedure now. A court may have to interfere, or parties, may approach the Court, from the very initial stages of arbitration, and yet it will be arbitration all the same.^{<!–[if !supportFootnotes]–>[2]<!–[endif]–>}

When two persons agree to have their differences settled through arbitration what they really mean is that the actual decision of the dispute will rest with a third person called an arbitrator, through Court may have to intervene to regulate arbitration proceedings, or, to give the award of the arbitrator a sanction of law. The law of arbitration is based upon the principle of withdrawing the dispute from the ordinary courts and enabling the parties to substitute a domestic tribunal.^{<!–[if !supportFootnotes]–>[3]<!–[endif]–>} Halsbury defines arbitration as “ the reference of dispute or difference between not less than two parties, for determination, after hearing both sides in a judicial manner, by a person or persons other than a Court if competent jurisdiction.”

The parties must intend to make a submission to arbitration, i.e., there must be animus arbitrandi.^{<!–[if !supportFootnotes]–>[4]<!–[endif]–>} The parties must agree that the decision of the arbitrator would be binding upon both of them. If it is binding only on one of them, it would not be a reference to arbitration.^{<!–[if !supportFootnotes]–>[5]<!–[endif]–>}

ONGC v. Saw Pipes

In Oil & Natural Gas Corporation Ltd v. Saw Pipes Ltd.<!–[if !supportFootnotes]–>[6]<!–[endif]–>, the primary question considered by the court was the scope and ambit of the courts powers vis-a-vis Section 34. The court considered whether the power to set aside as award that was patently illegal reposed with the court as per Section 34. It was argued that the Parliament has not made much change while adopting Article 34 of UNCITRAL Model law. By not providing error of law as a ground of challenge to the arbitral award under Section 34 of the Act is has not intended to give a wider jurisdiction to the courts.

The Supreme Court considered Section 28(1) (a) which states that the arbitral tribunal is required to make the award in keeping with the substantive law for the time being in force in India. This is inclusive of the provisions of the Arbitration and Conciliation Act as well. The Supreme Court stated that the legislative intent could not be that an award, despite being in contravention of the Act should be allowed to stand. If the arbitral tribunal has not followed the mandatory procedure prescribed under the Act, it would mean that it has acted beyond its jurisdiction and thereby the award would be patently illegal which could be set aside under Section 34. The court held:

” …the jurisdiction’ or the power of the arbitral tribunal is prescribed under the Act and if the award is de hors the said provisions, it would be, on the face of it, illegal. The decision of the Tribunal must be within the bounds to its jurisdiction conferred under the Act or the contract. In exercising jurisdiction, the arbitral tribunal cannot act in breach of some provision of substantive law or the provisions of the Act.”

This statement necessarily has. grave implications on the interpretation of Section 34(2)(a)(v). The Supreme Court in the ONGC case also acknowledged that Section 34(2)(a)(v) dealt with the setting aside of an award if the arbitral procedure or the Composition of the tribunal was not in accordance with the parties agreement or in the absence of an agreement, Part I of the Act comprising of Sections 2 to 43. Interestingly, the court observed that the parties’ agreement must· not be in contravention of the provision of Part I. This was in stark contrast to the Apex court’s observations in Narayan Prasad Lohia v. Nikunj Kumar Lohia<!–[if !supportFootnotes]–>[7]<!–[endif]–> wherein it was held that if a award was in accordance with the agreement of the parties, it may not be set aside by the court. But as per the ONGC case, t he award must be in accordance with the agreement of the parties and the agreement of the parties must lie within the parameters prescribed by the non-derogable provisions of Part I. If the award does not meet the said criteria, it may be set aside, via Section 34(2)(a)(v) read with Section 28( 1)(a). The second approach employed by the court was to attempt to capture the meaning of ‘public policy’ under Section 34(2)(b)(ii) and read a patently illegal award as antithetical to the interests of ‘public policy’. The court held, inter alia, that Public Policy is not defined under the Arbitration Act, The Contract Act or the Constitution but must be understood in the light of all three. The court reiterated that public policy is not the policy of a particular government but is a policy in keeping with public interest. public good and the public conscience. It is a concept that must not be accorded a static meaning. In. fact the term is capable of modification and expansion. Further, the explanation to section 34(2)(b)(ii) reads ‘without prejudice to the generality of sub-clause (ii)’ implying that policy is not a concept limited to the above examples but inclusive of them. Therefore the ground of public policy that has been provided for is .very wide in scope and ambit. The court. specitically considered Rel1usagar Power Co. Ltd v. General Electric C.<!–[if !supportFootnotes]–>[8]<!–[endif]–>, and added to the principles laid down therein stating that an award may be set aside if it is contrary to:

] . Fundamental policy of Indian law; or

2. The interest of India; or

3. Justice or morality: or

4. If it is patently illegal.

The need for ‘error of law’ as a ground for setting aside the arbitral award, as is present in Section 68 of t he English Arbitration Act, ]996 has oft been expressed. Thus it may be observed that the Supreme Court has exerted itself to provide wide grounds of challenge under the broad head of public policy.

Some Further Implications of the ONGC Decision

It may also be observed that Section 34 does not provide ‘misconduct of the arbitrator’ as one of the grounds for recourse. Indeed this ground is not made available under the UNCITRAL Model Arbitration Law. Under the English Arbitration Act, 1996, misconduct of the arbitrator is a ground for challenge and section 67 and 68 of the English Act do not correspond exactly with the UNCITAL Model Law. Under the Indian enactment of 1940, section 30 included misconduct of the arbitrator as a ground for recourse. However, since the ONGC case, under the head of ‘public policy’ the court has deemed itself to have the power to cure any injustice. Therefore wherever the principles of natural justice have not been followed, the court may redress this by setting aside the arbitral award.

More specifically, Section 12(4) read with Section 13(3) indicates that the appointment of an arbitrator may be challenged on the grounds of doubt as to independence of the arbitrator or impartiality of the arbitrator in the course of the arbitral proceeding itself Section 13(4) states that if the challenge is unsuccessful, the arbitral proceedings shall continue. Section 13(5) provides that any award made under these circumstances may be challenged by the party and an application for setting aside of the award may be made in consonance with the provisions of section 34 Section 34(2)(a)(v) can be read to include a challenge on the above grounds. In the ONGC case the Apex Court validated Section 13(5) and Section 16(6) as legitimate grounds of challenge under Section 34 of the Act. The old act which provided for recourse in a situation where the arbitrator misconducted himself or the award was broadly construed. Reading Section 34 in the light of the ONGC case it is evident that though this ground for setting aside an award under the 1996 Act is not expressly stated, the interpretation of the judiciary enhances the scope of the Section. So as to possibly include it as a ground for recourse. Therefore. the position in law would seem to be that misconduct of the arbitrator may be read into the section and would be a sufficient ground for setting aside an award

Object of the Section

Section 34 of the Act is based on Article 34 of the UNCITRAL Model Law and the scope of setting aside the award is far less the same as under section 30 or section 33 of the Arbitration Act, 1940.^{<!–[if !supportFootnotes]–>[9]<!–[endif]–>}An arbitral award can be set aside only if any of the five grounds as contained in section 34(2)(a) or any of the two grounds as contained in section 34(2)(b) of the Act exist.^{<!–[if !supportFootnotes]–>[10]<!–[endif]–>} If a party fails to establish his case within the four corners of this section, the award cannot be set aside.^{<!–[if !supportFootnotes]–>[11]<!–[endif]–>}

The object of the section is to avoid delay and to require the parties to bring the disputes for the decision of the court in the form of petition. Remedy by way of a regular suit is intended to be excluded.^{<!–[if !supportFootnotes]–>[12]<!–[endif]–>}

Section 34 has shrunken the grounds and limited the scope for challenging the award to such an extent that the recourse to a court against an award is pen only in the following eventualities:^{<!–[if !supportFootnotes]–>[13]<!–[endif]–>}

i) if the part challenging the award furnishes proof that he was under some incapacity;

ii) that the agreement was not valid under the law;

iii) that he was not given a proper notice of the appointment of an arbitrator or of the arbitral proceedings or was otherwise unable to present his case;

iv) that the award deals with a dispute not referred to or not falling within the terms of the agreement;

v) if the award contains decisions on matters beyond the scope of submission to arbitration only when of the deciosns on matters submitted to arbitration can be separated from those not to be submitted and in that case only the severable part is liable to be set aside;

vi) if the composition of the arbitral tribunal or the procedure was not in accordance with the agreement of the parties;

vii) of the subject matter of the dispute is found, in the opinion of the court, not capable of settlement under the law; and

viii) of the award is in conflict with the public policy of India.

The legal proceedings which might be stayed under this section must be a proceeding independently of arbitration. If the legal proceeding is itself under the Arbitration Act and relates to the appointment of an arbitrator, sole arbitrator or umpire or such other matter, there can be no stay under this section.<!–[if !supportFootnotes]–>[14]<!–[endif]–>

In order that the proceedings in the suit may be stayed, there must be an existing dispute by and between the parties. If there is no dispute, there is nothing to arbitrate upon.<!–[if !supportFootnotes]–>[15]<!–[endif]–>

Matters within the Jurisdiction of the Court

When a court is called upon to decide the objections raised by a arty against an arbitration award, the jurisdiction of the court is limited as expressly indicated in the Act, an it has no jurisdiction to sit in appeal and examine the correctness of the award on merits.^{<!–[if !supportFootnotes]–>[16]<!–[endif]–>}

An award can be set aside only in the following three contingencies:

i) Composition of arbitral tribunal was not in accordance with the agreement;

ii) the arbitral procedure was not in accordance with the agreement between te parties;

iii) in the absence of such an agreement, the composition of arbitral tribunal or arbitration procedure was not in accordance with Part I of the Act.^{<!–[if !supportFootnotes]–>[17]<!–[endif]–>}

 

Object of the Act

The Arbitration and Conciliation Act, 1996 was brought into existence mainly to achieve the following objectives:

i) to make provision for an arbitral procedure which is fair, efficient and capable if meeting the needs of specific arbitration;

ii) to provide that the arbitral tribunal gives reasons for its award;

iii) to ensure that the arbitral tribunal remains within the limits if its jurisdiction;

iv) to minimise the supervisory role of courts in arbitral process;

v) to provide that every final arbitral award is enforced in the same manner as if it were a decree of the court.^{<!–[if !supportFootnotes]–>[18]<!–[endif]–>}

The object of the Act is expedition. This object would be defeated of the disputes remain pending in courts for months and years before even commencement of arbitration. For expeditous disposal of case, it is imperative that arbitration cases should be decided on the basis of affidavits and other relevant documents and without oral evidence. There may, however be a few exceptional cases where it may become necessary to grant opportunity to the parties to lead oral evidence. In both circumstances, the judicial authority is required to decide the issue expeditiously within a time frame and not to treat such matters like regular civil suits.^{<!–[if !supportFootnotes]–>[19]<!–[endif]–>}

Section 5 of the Act, 1996 provides for the extent of judicial intervention which says that “notwithstanding anything contained in any other law for the time being in force, in matters governed by this Part, no judicial authority shall intervene except where so provided in this Part”. The word “Part” referred to in this Section is Part I of the Act, 1996 which shall apply were the place of arbitration is in India (Section 2(2)) and shall not affect any other law for the time being in force by virtue of which certain disputes may not be submitted to arbitration (Section 2(3). Therefore, the judicial intervention has been restricted and minimised. Under Section 5, the words used are “Judicial Authority” which is a wider term than the word “Court” and judicial authority includes all such authorities/agencies conferred with the judicial powers of the Government. The judicial authority’s intervention under the Act, 1996 is limited to the purposes as prescribed by the Act, itself. The Act, 1996 provides for intervention or assistance of the judicial authority in respect of several matters.

 

Conclusion

The judiciary has through the decision in the ONGC case demonstrated its unwillingness to take a back seat and play the limited role in arbitration matters envisaged for it by the Model UNCITRAL Law. From the above observations the logical conclusion follows that though the structure and language of Section 34 of the 1996 Act is far removed from that of Section 30 of the 1940 Act, judicial interpretation has, in essence, diluted the differences between the two: the extent of this dilution will only become apparent by observing and analyzing the next few judicial decisions in this area which will be crucial.

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Tagged as: Arbitration