6 May 2021
There is scarcely any aspect of the Arbitration and Conciliation Act, 1996 (“Act”), which has not seen the spectre of ad nauseum arguments and judicial pronouncements. Concepts have been devised, lauded, followed, and then set aside. Lawyers have forcefully argued for awards to be set aside, and Courts have assiduously upheld the essence and spirit of the concept of arbitration. The law has been set, and then upturned, and in this entire process, not much judicial/ legislative light seems to have fallen on the protagonist of this piece. The Act only hints at what happens after an award is set aside, and the ‘hint’ paints a somewhat grim picture.
The Act is based on the UNCITRAL Model Law on International Commercial Arbitration (“Model Law”). As such, under the Act, a domestic award (i.e. an award passed in an arbitration of which the seat is in India) can be set aside (in part or in full) by making an application under Section 34 of the Act. Once an application under Section 34 of the Act is allowed and the award is set aside, the parties to the arbitration are left with several nuanced questions, such as (i) whether they are still bound by the arbitration agreement; (ii) do they have to re-initiate the arbitration proceeding, and if so, whether before the same tribunal; (iii) from what stage do such proceedings have to commence; (iv) whether the doctrine(s) of res judicata or estoppel would apply to the fresh arbitration proceeding, etc. These questions are not addressed by the Court in proceedings under Section 34, and rightly so, given the limited scope of the power of the Court thereunder. This article hopes to throw some light and offer some food for thought (and analysis) on these aspects.
Peculiarly, the Act largely remains silent inter alia on the precise procedure to be followed in situations wherein parties are required to re-initiate arbitration after an award has been set aside. However, the Courts in India have time and again sought to remedy this lacuna by making astute observations.
Like the Model Law, the Act recognises the power of the Court to send the award back to the arbitrator to eliminate existing grounds (i.e. grounds rendering the award amenable to challenge) or rectifying defects, as a curative alternative available in circumstances where the setting aside of an award can be prevented. This intent is encompassed in Section 34 (4)[1] of the Act. In this regard, the Supreme Court in Kinnari Mullick v. Ghanshyam Das Damani[2] has observed that Section 34 (4) of the Act provides limited discretion to Courts to relegate parties to the arbitral tribunal and the same can be exercised only upon a written application made in that behalf by a party to the arbitration proceedings (i.e. the same cannot be exercised by the Court suo motu). Further, the Supreme Court has also observed that the limited remedy available under Section 34(4) of the Act could be invoked by the party to the arbitral proceedings before the award is set aside by the Court. Therefore, it can be said that on receiving an application under Section 34 of the Act, the Courts are empowered, in appropriate cases, to adjourn the proceedings and remit the award back to the arbitral tribunal so as to eliminate the grounds for setting aside the award. In cases where no application has been made by the parties or if made, where Courts do not find it appropriate to remit the award, the petition under Section 34 of the Act will be heard and the award may or may not be set aside.
Moreover, in McDermott International Inc. v. Burn Standard Co. Ltd.[3] it was held that as under Section 34 of the Act, the Court cannot correct errors of the arbitrators in the arbitral award, it can only quash the arbitral award, thereby leaving the parties free to begin the arbitration proceeding again if so desired.
Similarly, it has been recently observed by the division bench of the Supreme Court in Dakshin Haryana Bijli Vitran Nigam Limited v. M/s. Navigant Technologies Pvt. Ltd.[4], that “in law, where the Court sets aside the award passed by the majority members of the tribunal, the underlying disputes would require to be decided afresh in an appropriate proceeding.” It was further stated that under Section 34 of the Act, the Court may either dismiss the objections filed and uphold the award, or set aside the award if the grounds contained in sub-sections (2) and (2A) are made out and that the Court does not have power to modify an arbitral award.
The view therefore appears to be that once an award has been set aside and parties are relegated to their original positions, the parties can recommence the arbitration proceedings afresh. This would make sense, as where an award is inter alia set aside for reasons other than invalidity of the arbitration agreement, the arbitration agreement would survive the award and the parties would be free to (attempt to) have their disputes settled by arbitration. This position has been settled by the Supreme Court[5] and subsequently followed by the Bombay High Court in Associated Constructions v. Mormugoa Port Trust[6], and the Delhi High Court in Steel Authority of India v. Indian Council of Arbitration[7].
As regards whether the arbitration proceedings continue before the (same) arbitrator for a fresh award, or whether the parties are compelled to commence proceedings from scratch (before the same or another arbitrator), apart from clarifying that the time spent between the commencement of arbitration proceedings till the setting aside of the award will be excluded at the time of calculating limitation for such new proceedings, the Act remains conspicuously silent. If the award is set aside on any of the substantive grounds mentioned in Sections 34(2)(b) or Section 34 (2-A), then it may perhaps be prudent for the parties to re-initiate arbitration before a new arbitrator. Having said that, another question of relevance in such a case, is the stage from which such arbitration proceedings are to be commenced.
Furthermore, an award can be set aside in part or in its entirety. Section 34(2)(iv) of the Act empowers the Court to set aside such portion of the award that deals with matters not contemplated by or not falling within the terms of the submission to arbitration or on matters beyond the scope of the submission to arbitration. Such severability is permissible only in cases where the invalid part of the award is not intermingled and interdependent upon the valid part of the award. In cases where the invalid portion of the award is intermingled with and interdependent on the valid part of the award, it is not possible to sever the award as the illegality may affect the award as a whole. In such cases, it may not be possible to set aside the award partially[8]. In cases where the award has been partially set aside, the new tribunal would only decide on the annulled parts of the award (to the extent that such issues are arbitrable in nature). This has been allowed with a view to reduce hardship, inconvenience, and injustice to the parties[9].
In Sssangyong Engineering & Construction Co. Ltd. v. NHAI[10], the Supreme Court observed that under the scheme of Section 34 of the Act, the disputes that were decided by the majority award would have to be referred afresh to another arbitration. The Court therefore noted that the same would cause considerable delay and would be contrary to one of the important objectives of the Act, namely, speedy resolution of disputes by the arbitral process under the Act. In view of the same, the Court upheld the views of the minority opinion and held that, “…Therefore, in order to do complete justice between the parties, invoking our power under Article 142 of the Constitution of India, and given the fact that there is a minority award which awards the appellant its claim based upon the formula mentioned in the agreement between the parties, we uphold the minority award, and state that it is this award, together with interest, that will now be executed between the parties.”
Further, the Delhi High Court has had the occasion to consider and explain the effect of setting aside an award under Section 34 of the Act in State Trading Corporation of India Ltd. v. Toepfer International Asia PTE Ltd.[11]. Whilst drawing a distinction between an appeal, and a petition under Section 34 of the Act, the Delhi High Court observed that ‘…In appeal, the decision under review not only may be confirmed, but may also be modified. In annulment, on the other hand, the decision under review may either be invalidated in whole or in part or be left to stand if the plea for annulment is rejected. Annulment operates to negate a decision, in whole or in part, thereby depriving the portion negated of legal force and returning the parties, as to that portion, to their original litigating positions. Annulment can void, while appeal can modify. Section 34 is found to provide for annulment only on the grounds affecting legitimacy of the process of decision as distinct from substantive correctness of the contents of the decision. The Court has therefore held that once an award (either wholly or partially) is set aside in a petition under Section 34 of the Act, the same operates as an ‘annulment’ and the parties are relegated to their ‘original litigating position’ with respect of such portions of the award, as have been set aside. Furthermore, the Court also observed that the legal principle of res judicata would not act as a bar for fresh arbitration proceedings, as the findings of the arbitral tribunal were found to be unsustainable in law and the claims of the parties still continued to survive and could not be stated to have been decided finally. Relying on the overarching principle of party autonomy, the Calcutta High Court in Jagdish Kishinchand Valecha v. Srei Equipment Finance Limited and Anr.[12], whilst setting aside an award on account of lack of impartiality and independence on part of the arbitrator, appointed a different arbitrator to consider the claims of the parties afresh. In the instant case, both parties had specifically consented to a different arbitrator being appointed to consider the claim anew. Accordingly, the Court held that ‘a different and independent Arbitrator should be appointed to decide the claim of the award holder afresh’. In this regard, the Court (relying on Section 43(4) of the Act and Section 89 of the Civil Procedure Code, 1908) observed that ‘the Act ensures party autonomy at all levels right through the dispute resolution process and even to the procedure for challenge to the award. The freedom of the parties to decide on the next course of action must therefore be preserved in the facts of the present case. The statutory recognition to keeping all redressal doors open for the parties post setting aside of an award is secured in Section 43(4) of the 1996 Act… The free rein given to parties also finds resonance in Section 89 of The Code of Civil Procedure… The basic premise is that the parties who have come to the Court cannot be without a remedy when they have agreed that the matter should go before a different Arbitrator. The 1996 Act does not curtail the power of a Court to mould the relief in fit cases, provided the relief is not repugnant to the law as existing on that date’.
In Suvidha Infracon Pvt. Ltd. v. Intec Capital Limited[13], the Delhi High Court held that parties initiating arbitration proceedings afresh would be entitled to take benefit of Section 43(4) of the Act for purposes of limitation in such proceedings, if initiated. Apart from this exclusion of limitation, which is specifically provided for in the Act, the Act remains silent inter alia on the procedure regarding re-initiation of arbitration after an award has been set aside.
As stated earlier, the Model Law is silent on the consequences of setting aside of an award[14]. Article 34(4) thereof merely suggests that the state court may, in appropriate cases, remit the award to the arbitration tribunal instead of setting it aside altogether. Singapore Law[15], English Law[16], as well as the Canadian Law[17] are silent in this regard. The Singapore Court of Appeal in KN v. ALC[18] has considered the consequences of setting aside an award. Whilst doing so, it has observed that ‘while an award ceases to have legal effect, it does not affect the continued validity and force of the arbitration agreement between the parties’. Further, under the English Arbitration Act, the annulment of the award is seen as a drastic remedy and is only justified when remission cannot produce the required results[19]. Unlike most jurisdictions, the English Courts are empowered to vary[20] the award while deciding a challenge application. The German Arbitration Act unequivocally provides that ‘Setting aside the arbitral award shall, in the absence of any indication to the contrary, result in the arbitration agreement becoming operative again in respect of the subject-matter of the dispute’[21].
Pertinently, the central virtue of arbitration, which has made the mechanism popular in India, is the significant time discount that such proceedings promise to offer over the civil litigation alternative. This virtue appears undeniable, so long as an arbitral award is upheld and the challenge(s) thereto under Section 34 of the Act (followed by its retinue of an Appeal under Section 37 and the ubiquitous SLP) is dismissed.
Additionally, in the larger scheme of things, one may argue that the scheme of the Act provides an award debtor the option to challenge the award and seek to have the same remitted to the arbitrator, to address what may be considered to be curable defects. For defects in the award which cannot be cured, the Court would either set aside the award in part, or in full. Now, if the non-curability of the award relates to the existence or validity of the arbitration agreement[22]; or a party to the dispute is held not to be a party to (or bound by) the arbitral agreement; or the subject matter of the dispute between the parties is not capable of settlement by arbitration[23], the parties would be free to adopt any other legal remedy that may be available to them (including commencement of fresh proceedings before a civil court). However, if the award is set aside on any other ground, the Act entitles the parties to recommence the entire arbitral process. Apart from other ancillary issues, like the probability of the opposite party attempting to make their pleadings, case and evidence better, the party seeking adjudication of disputes would now need to start afresh. Given that the proceedings are to start afresh or to recommence, unless both parties agree (which is seldom the case), the proceedings would commence (with the issuance of a notice under Section 21 of the Act) before a different arbitral tribunal, and from scratch. Such a situation would clearly defeat any time advantage that the arbitral process may have over civil courts and would also make it a costly affair. The recommencement of arbitration, much to the disadvantage of the parties, may also place them at a relative disadvantage as parties would have previously been privy to each other’s strategy, submissions and arguments and would be well versed with the legal and factual loopholes in each other’s cases. Such prior disclosure would weaken the position of parties in a subsequent arbitration. Furthermore, when a court under Section 34, while setting aside an award, renders findings on merits of the case, such findings on merits will likely restrict (or at the very least affect) the scope of adjudication of the fresh proceeding. Against this background, it may well be regarded that Court proceedings maybe a more favourable option for parties vis-a-vis arbitration, as parties electing litigation as a method of dispute resolution would be provided with adequate remedy against assailable findings of a lower Court.
In light of the several open-ended questions discussed above, the need of the hour is for the legislature to codify the process of re-initiating arbitration proceedings, pursuant to an award being set aside, and the extent to which this process can be resorted to and under what circumstances. This will be a step forward in the direction of the government’s pro-arbitration intention/ regime and will bring about a much-needed respite in a legal system like ours, plagued with a severe and inundating backlog of cases.
[1] Section 34 (4) On receipt of an application under sub-section (1), 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.
For further information, please contact:
Aditya Mehta, Partner, Cyril Amarchand Mangaldas
aditya.mehta@cyrilshroff.com
[2] Civil Appeal No. 5172 of 2017 in SLP (Civil) No. 2370 of 2015
[3] (2006) 11 SCC 181
[4] Order dated March 2, 2021 in Civil Appeal No. 791 of 2021 (Arising out of SLP (C) No. 10372/2020)
[5] Juggilal Kamlapat v. General Fibre Dealers Ltd. (And Connected Appeal), AIR1962SC 1123
[6] 2010 (5) Mh.L.J. 739
[7] (2015) SCC Online Del 13394
[8] R.S. Jiwani and Ors. v. Ircon International Ltd., A Government of India and Ors., 2010(112)BOMLR491
[9] R.S. Jiwani and Ors. v. Ircon International Ltd., A Government of India and Ors., 2010(112)BOMLR491
[10] (2019) 15 SCC 131
[11] 2014 (3) ArbLR 105 (Delhi)
[12] Order dated 12th April 2021 & 13th April 2021 passed in AP/103/2021
[13] Order dated September 11, 2018 passed in O.M.P. (COMM.) 12/2018 & IA No. 534/2018
[14] Para 25 – 56, Comparative International Commercial Arbitration, Julian D.M. Lew, Loukas A. Mistelis and Stefan M. Kröll
[15] The International Arbitration Act
[16] The Arbitration Act, 1996
[17] Commercial Arbitration Act ( Loi sur l’arbitrage commercial)
[18] [2015] SGCA 63
[19] Para 25 – 62, Comparative International Commercial Arbitration, Julian D.M. Lew, Loukas A. Mistelis and Stefan M. Kröll
[20] Section 67 and 71 of The Arbitration Act, 1996
[21] Section 1059 (5), Chapter VII Recourse against award, The tenth book of the Civil Procedure (Zivilprozessordnung) (CCP), section 1026 – 1066 of the CCP l
[22] Section 34(20(a)(ii) of the Act
[23] Section 34(2)(b)(i) of the Act
