Section 34 – Grounds for setting aside the arbitral award (Research Note)

The express language of Section 34(1) of the Act provides for recourse to courts for setting
aside an arbitral award in accordance with sub-section (2) and sub-section (3) of the Act.
While sub-section (2) provides for grounds for setting aside an arbitral award, sub-section (3)
provides the timeline within which an application for setting aside of the award must be
made. Sub-section (4) of Section 34 of the Act provides a discretionary power to the courts to
adjourn the proceedings and remand the matter to the tribunal for either resuming
proceedings or eliminating the grounds for setting aside the arbitral award, provided an
application to that effect is made by either of the parties.

1. Dakshin Haryana Bijli Vitran Nigam Limited v. M/s. Navigant Technologies Pvt.
Ltd. Civil Appeal No. 791 of 2021.

On a reading of these provisions, it’s clear that an application made under Section 34
of the Act can have two possible outcomes -i) the court may set aside the arbitral
award; or ii) adjourn the proceeding and remand the matter back to the arbitral
tribunal. In case of the former, it is settled that parties are relegated to their original
position and the dispute between the parties, or the portions of it which has been set
aside, can be decided afresh before a new tribunal. However, in the latter scenario, for
the purposes of Section 34(4), the matter is remanded back to the same tribunal which
passed the arbitral award in the first place.

2. National Highway Authority of India v. M. Hakeem, (2021) 9 SCC 1.

Held that modification of the arbitral awards amounts to crossing the interpretative
line of the statute.

Four reasons primarily weighed in the mind of the Court to subscribe to the said view.
First, Section 34 of the Arbitration Act was modelled on Article 34 of the
UNCITRAL Model Law which did not permit modification of arbitral awards, but
only setting aside of the arbitral award. Second, the statutory scheme under Section 34
of the Arbitration Act was substantially different from the erstwhile Arbitration Act,
1940 wherein courts were specifically empowered to modify or correct an award.
Third, proceedings under Section 34 of the Arbitration and Conciliation Act, 1996 did
not permit challenge to an arbitral award on merits. Thus, necessarily, a Section 34
Court cannot conduct a roving enquiry on merits and make de novo findings
modifying the arbitral award. Fourth, other cases had already settled the law that a
Section 34 court cannot modify the arbitral award, but merely set aside the award
leaving parties to commence fresh arbitration proceedings to settle their disputes.

3. National Highways Authority of India v. P. Nagaraju alias Cheluvaiah and

Reiterated the same as in NHAI v. M. Hakeem.

5. Damodar Valley Corpn. v. Reliance Infrastructure Ltd., 2023 SCC OnLine Cal
3307.

Award set aside on ground of patent illegality. It is squarely within the exclusive
domain of the arbitral tribunal to interpret the terms of contract. Only in a situation
where arbitral tribunal interprets the contract in a completely perverse manner and
wanders beyond the four corners of the contract, Courts can exercise their powers
under Section 34 of the Act. Furthermore, a finding based on no evidence at all or
which has been arrived at after ignoring vital evidence, can be set aside on the ground
of patent illegality appearing on the face of the award. 208 j. Courts under Section 34
of the Act are empowered to partly set aside an arbitral award. If the issues in which
the decision of the arbitral tribunal cannot be sustained are distinct and severable from
the rest of the issues, then it would be prudent and encouraged to partly set aside the
award. Such partial setting aside of an arbitral award would not amount to
modification of the arbitral award, something which the Courts are not permitted to do
under Section 34 of the Act.

6. Hindustan Steelworks Construction Ltd. v. New Okhla Industrial Development

Legality of setting aside order in part. Court- We have thus, no hesitation in holding
that scheme of the Act does not put any limitation on power of the court to apply the
doctrine of severability to an arbitral award while considering the objections under
Section 34 of the Act. It is well within the power of court to segregate, severe and set
aside part of the award and uphold the remaining part. The only restriction is (i) that
while exercising the power, the court cannot proceed to modify the findings returned
on any of the issues decided by the arbitral tribunal and (ii) the remaining part is
capable of surviving on its own.

7. Haryana Tourism Limited vs. Kandhari Beverages Limited (11.01.2022 - SC):

8.As per settled position of law laid down by this Court in a catena of decisions, an
award can be set aside only if the award is against the public policy of India. The
award can be set aside Under Sections 34/37 of the Arbitration Act, if the award is
found to be contrary to, (a) fundamental policy of Indian Law; or (b) the interest of
India; or (c) justice or morality; or (d) if it is patently illegal. None of the aforesaid
exceptions shall be applicable to the facts of the case on hand. The High Court has
entered into the merits of the claim and has decided the appeal Under Section 37 of
the Arbitration Act as if the High Court was deciding the appeal against the judgment
and decree passed by the learned trial Court. Thus, the High Court has exercised the
jurisdiction not vested in it Under Section 37 of the Arbitration Act. The impugned
judgment and order passed by the High Court is hence not sustainable.
8. State of Jharkhand vs. Webel Technology Limited (02.03.2023 - JHRHC):
MANU/JH/0194/2023

25. The limit of exercise of power by courts under Section 34 of the Act has been
comprehensively dealt with by R.F. Nariman, J. in Associate Builders v. DDA. Lack
of judicial approach, violation of principles of natural justice, perversity and patent
illegality have been identified as grounds for interference with an award of the
arbitrator. The restrictions placed on the exercise of power of a court under Section 34
of the Act have been analysed and enumerated in Associate Builders which are as
follows:

(a) The court under Section 34(2) of the Act, does not act as a court of appeal while
applying the ground of "public policy" to an arbitral award and consequently errors of
fact cannot be corrected.

(b) A possible view by the arbitrator on facts has necessarily to pass muster as the
arbitrator is the sole judge of the quantity and quality of the evidence.

(c) Insufficiency of evidence cannot be a ground for interference by the court. Re-
examination of the facts to find out whether a different decision can be arrived at is
impermissible under Section 34(2) of the Act.

(d) An award can be set aside only if it shocks the conscience of the court.

(e) Illegality must go to the root of the matter and cannot be of a trivial nature for
interference by a court. A reasonable construction of the terms of the contract by the
arbitrator cannot be interfered with by the court. Error of construction is within the
jurisdiction of the arbitrator. Hence, no interference is warranted.

(f) If there are two possible interpretations of the terms of the contract, the arbitrator's
interpretation has to be accepted and the court under Section 34 cannot substitute its
opinion over the arbitrator's view."

9. Hindustan Petroleum Corporation Ltd. V. Kalarani and Another, 2023 SCC

11. The claim made against the petitioner by referring the head lease agreement
cannot be arbitrated and the same is beyond the scope of the agreement.
Therefore, the award is liable to be set aside in terms of the Clause 34(2)(iv) of the
Arbitration and Conciliation Act in the terms of patent illegality.

10. S. Venkataramanan v. S. Muthukrishnan, 2023 SCC OnLine Mad 169

6. After hearing learned counsel for both parties and perusing the materials placed on
record, this Court finds that the arbitration case was initially numbered as ARB No. 1
 of 2017 and in the impugned award, it has been mentioned as ARB No. 1 of 2021
without any application of mind. That apart, the main reference for arbitration made
to the learned Sole Arbitrator was only for recovery of a sum of Rs. 1,03,00,000/-
along with interest, but the learned Sole Arbitrator has not at all dealt with this aspect.
On the other hand, he has exceeded his jurisdiction by dissolving the firm and
bringing the land and machinery of the firm for sale through public auction without
any reference in that regard as contended by le arned counsel for both parties.
Therefore, this Court is of the view that the impugned award is liable to be set aside as
the learned Sole Arbitrator has acted beyond the scope of reference and exceeded
his jurisdiction and thereby, committed patent illegalities in passing the impugned
award. In that view of the matter, the impugned award is set aside.

11. Trrans Granites, v. Hinduja Leyland Finance Ltd, 2023 SCC OnLine Mad 2266.

12. Ofcourse, in the event of any default committed by the petitioners subsequent to
the restructuring of the loan and if there is no novation of the previous contract, as
laid down by the Hon'ble Supreme Court in the case of ‘Chrisomar Corporation’
(cited supra), the arbitral proceedings can be proceeded with based on the arbitral
clause contained in the original agreement. By virtue of the ratification of the defaults
by the respondent, it would not amount to arising the earlier original contract itself,
certainly, the respondent can proceed against the petitioners by invoking arbitral
clause contained in the original agreement in the event of committing default by the
petitioners subsequent to the restructuring of the loan. But in the present case,
unfortunately, the respondent proceeded with the arbitral proceedings based on the
previous defaults which were already settled among the parties In fact, it is incumbent
upon the respondent to act fairly and bring the subsequent events to the knowledge of
the Arbitrator and seek for withdrawal of the arbitral proceedings. However, it was
not brought to the knowledge of the Arbitrator and as stated above, since the
petitioners were under the honest belief that the proceedings would be dropped, the
petitioners have not participated in the arbitral proceedings, which ended in passing
the ex parte award by the learned Arbitrator, which, in the opinion of this Court is
clearly in violation of principles of justice and contrary to the basic notions of justice.
That apart, this Court is also of the view that the petitioner was unable to present his
case due to the mis-information on the part of the respondent/claimant.

13. For the reasons stated above the award passed by the learned Arbitrator is vitiated
on the ground of violation of principles of natural justice as the petitioners were
unable to present their case before the Arbitrator and also patent illegality appeared on
the face of the award.