NLA Arbitration Newsletter
Covering Supreme Court and High Court rulings on appellate interference with arbitral awards, the twelve-month mandate period for arbitrators, post-limitation applications under Section 29A, public policy as a bar to setting aside awards, and the MSME Act versus independent arbitration.
Supreme Court — Court holds that an appellate court cannot set aside a tribunal’s arbitral award merely on the ground that its own view is a “better view,” reaffirming the extremely limited scope of interference under Sections 34 and 37.
The bench noted that an Award cannot be invalidated solely on the basis that the Appellate Court’s perspective is superior to that of the Arbitral Tribunal. The Award itself cannot be altered unless it is in violation of the substantive provision of the law, including any provision of the Arbitration and Conciliation Act, 1996, or the terms of the agreement.
The major ratio of the decision is quoted as follows: “In the case at hand, the Arbitral Award dated 08.11.2012 is based upon evidence and is reasonable. It has not been found to be against public policy of India or the fundamental policy of Indian law or in conflict with the most basic notions of morality and justice. It is not held to be against any substantive provision of law or the Act. Therefore, the Award was rightly upheld by the Court exercising the powers under Section 34 of the Act. The Appellate Court, as such, could not have set aside the Award without recording any finding that the Award suffers from any illegality as contained in Section 34 of the Act or that the Court had committed error in upholding the same. Merely for the reason that the view of the Appellate Court is a better view than the one taken by the Arbitral Tribunal, is no ground to set aside the Award.”
The Court justified the Appellate Court’s limited power by stating that “the Appellate Courts power under Section 37 of the Act is not akin to the normal Appellate jurisdiction vested in the civil Courts for the reason that the scope of interference of the Courts with Arbitral proceedings or Award is very limited, confined to the ambit of Section 34 of the Act only and even that power cannot be exercised in a casual and a cavalier manner.”
The case of Dyna Technologies (P) Ltd. v. Crompton Greaves Ltd., (2019) 20 SCC 1, was noted, in which it was determined that Appellate Courts should not interfere with an Award merely because an alternative view on facts and interpretation of contract exists. The Court stated that “even if two views are possible there is no scope for the Court to reappraise the evidence and to take the different view other than that has been taken by the arbitrator. The view taken by the arbitrator is normally acceptable and ought to be allowed to prevail.” The Court ultimately held that Courts should exercise caution and defer to the Arbitral Tribunal’s perspective unless the Award demonstrates perversity that is unpardonable under Section 34.
Key Takeaway
Section 34 of the Indian Arbitration & Conciliation Act, 1996, outlines the grounds on which an arbitral award can be challenged: invalidity of the arbitration agreement, lack of proper notice, awards beyond the scope of the agreement, or conflict with Indian public policy (including fraud, corruption, or violations of fundamental legal principles). Applications must be filed within three months of receiving the award, with a possible 30-day extension. The section underscores minimal judicial interference; an appellate court’s preference for a “better view” is never a ground to set aside an award.
Delhi High Court — Court clarifies that the twelve-month period for passing an arbitral award under Section 29A(1) begins from the completion of pleadings, not from the submission of the Statement of Defence.
The Delhi High Court determined that the Arbitral Tribunal’s mandate is terminated if the Tribunal fails to issue the Award within twelve months of concluding the pleadings under Section 23(4), when reading Section 29A(1) of the Arbitration and Conciliation Act, 1996, in conjunction with Section 29A(4). The bench determined that the twelve-month period should be computed from the conclusion of pleadings, rather than the date of submitting the Statement of Defense (SOD).
The Court ruled that the phrase “under Sub-Section (4) of Section 23” is included because Section 23(4) pertains to the submission of the SOD. However, this does not imply that the twelve-month period should commence from the SOD filing date. Section 23(4) mandates that the statement of claim and the statement of defense must be finalized within six months of the arbitrator receiving notification of his appointment, unless the parties reach an agreement to the contrary. Section 29A(1) then provides that the Arbitral Tribunal is obligated to render its Award within twelve months of the completion of the pleadings.
The High Court also reviewed whether a rejoinder should be included in the definition of “pleadings” for the purposes of Section 29A(1). The inclusion of rejoinders and replications in pleadings has been confirmed by previous judgments, including Nicholas Piramal India Ltd. v. Cultor Food Science Inc., 2002 SCC OnLine AP 964, and Anant Construction (P) Ltd. v. Ram Niwas, 1994 SCC OnLine Del 615. Consequently, the High Court ruled that the Arbitral process should not be interrupted without justification and extended the mandate by one year to guarantee that the arbitration could be resolved.
Key Takeaway
Section 29A of the Arbitration and Conciliation Act, 1996, imposes a 12-month time limit for completing arbitral proceedings after the conclusion of pleadings (not from the SOD filing date), with a possible 6-month consensual extension. Pleadings include rejoinders and replications, not just the claim and defence. Strict but purposive interpretation of this provision ensures arbitration timelines are maintained without creating unworkable outcomes for complex disputes.
Supreme Court — Court holds that an application for extension of the arbitral mandate under Section 29A(4) is maintainable even after the prescribed twelve-month or extended period has expired.
The Supreme Court clarified the highly contested issue that litigants frequently encounter: whether an application for an extension of the time period for passing an Arbitral Award under Section 29A(4) is maintainable after the expiration of the mandated period. Since the addition of Section 29A with the 2019 amendment, this issue had remained ambiguous. The position before the judgment was that Arbitral Awards must be rendered within twelve months of the conclusion of pleadings, with a possible six-month extension by mutual agreement. Section 29A(4) stipulates that the Arbitral mandate will be terminated unless it is extended by a Court order if the Award is not granted within this timeframe.
The Court rejected the narrow interpretation that applications could not be entertained post-expiry, and instead applied a purposive interpretation to the term “terminate” as defined in Section 29A(4): “The Arbitral Tribunal is rendered functus officio by the term ‘terminate’ in Section 29A(4), but this is not absolute. The true meaning of the term ‘terminate’ must be interpreted in the context of the provision’s syntax. The term ‘terminate’ is followed by the word ‘unless,’ which qualifies the initial portion of the Section with the subsequent limb, namely ‘unless the Court has, either prior to or after the expiry of the period so specified, extended the period.’”
The Court determined that termination of the Arbitral mandate is contingent upon the non-filing of an extension application and cannot be considered a stricto sensu termination. “A rigid interpretation would equate to legislating and prescribing a limitation period for filing an application under Section 29A, when the Section does not conspicuously state.” Accordingly, the Court ruled that it has the authority to extend the period for making an Award at any point, whether before or after the mandated period.
Key Takeaway
Section 29A of the Arbitration and Conciliation Act, 1996, introduced in 2015, imposes a 12-month limit for completing arbitral proceedings, with a possible 6-month extension. While the strict timeline proved impractical in complex disputes, the Supreme Court has now clarified that a Section 29A(4) extension application is maintainable even after the prescribed period has expired. Courts may extend the mandate at any point; “termination” under Section 29A(4) is not absolute where an extension application is pending.
Supreme Court — Court clarifies that a mere violation of law alone will not render an arbitral award invalid; to set aside an award, the violation must be against the public policy of India as narrowly defined post the 2015 Amendment.
The primary issue was whether the Respondent breached the contract by delaying the delivery of cooling systems and whether the Petitioner provided sufficient evidence to substantiate its claims of financial loss. The Petitioner argued that the delays were severe enough to impact the operation of its power plant, leading to considerable losses. The Respondent contended that the delays were either justified or minimal and that the Petitioner had not adequately demonstrated a direct causal link between the delays and the financial harm claimed.
The Supreme Court, while examining the evidence and contractual obligations, concluded that although there were delays in the Respondent’s performance, they were not substantial enough to constitute a breach of the contract. The Court emphasized the need for a detailed and accurate presentation of evidence, particularly in complex commercial disputes. It found that the Petitioner failed to present concrete evidence directly linking the Respondent’s delays to the claimed financial losses, and reiterated that damages claims in breach of contract cases require a clear causal relationship between the breach and the alleged losses.
In addressing the arbitration aspects, the Court applied the principles of Section 34 of the Arbitration and Conciliation Act, 1996. The Court held that the Arbitral Tribunal’s decision did not violate public policy. The judgment underscored that public policy, as defined under Indian law, includes considerations such as fundamental principles of law, justice, and morality. The Court clarified that disagreements over factual findings by the Arbitral Tribunal do not automatically qualify as violations of public policy unless there is clear perversity, illegality, or a breach of the fundamental principles of Indian Law. It reinforced the notion that Courts should adopt a hands-off approach to Arbitral Awards unless there are exceptional circumstances like procedural impropriety or fundamental errors in the application of law.
Key Takeaway
The term “public policy of India” under Section 34 of the Arbitration and Conciliation Act, 1996, serves as a basis for challenging arbitral awards that conflict with fundamental legal principles. The 2015 amendments limited the use of public policy to minimize unnecessary judicial interference. Only awards fundamentally at odds with Indian legal principles can be set aside — a plain violation of law without more is insufficient; the violation must strike at the most basic notions of fairness, morality, or the fundamental policy of Indian law.
Calcutta High Court — Court holds that the MSME Act does not bar independent arbitration under the Arbitration and Conciliation Act, 1996; parties with an arbitration clause may choose to pursue arbitration independently.
The petitioner sought arbitration under Section 11 of the Arbitration Act, despite being an MSME, arguing that the provisions of Section 18 of the MSMED Act — which mandates mediation and arbitration through the MSME Facilitation Council — were not mandatory for the dispute in question. The central issue was whether Section 18(1) of the MSMED Act prevents an MSME from opting for arbitration outside the MSME framework when an arbitration agreement exists between the parties.
The Petitioner contended that the use of the term “may” in Section 18(1) allows parties the option to choose arbitration independently under the Arbitration Act. Moreover, their claim extended beyond the recovery of payment for goods supplied, which is covered under Section 17 of the MSMED Act, to include demands for the procurement of goods and compensation for the respondent’s failure to honor the contract.
The Court ruled in favor of the petitioner, emphasizing that the MSMED Act does not bar a party from pursuing arbitration under the Arbitration Act if an arbitration clause exists between the parties. The Court noted that the non-obstante clause in Section 18(1) of the MSMED Act only applies if parties opt for the Facilitation Council’s jurisdiction. Since the dispute extended beyond simple payment recovery, the petitioner’s broader claims necessitated arbitration under the Arbitration Act.
Key Takeaway
Arbitration for MSMEs in India is governed by both the MSMED Act, 2006, and the Arbitration and Conciliation Act, 1996. Section 18 of the MSME Act establishes the Facilitation Council as an alternative dispute resolution forum, but it does not impose a mandatory bar on independent arbitration where the parties have a separate arbitration agreement and the dispute extends beyond simple payment recovery. The use of “may” in Section 18(1) confirms the optional nature of the Facilitation Council route.
© Nirka Law Advisory. All rights reserved. For queries, connect with us.
