An Analysis of Section 34 of Arbitration & Conciliation Act, 1996


[This article is authored by Rhea Tewary, a Penultimate Year Law Student from JGLS, Sonipat]


Keywords: Section 34, Retrospective Effect, Arbitral Award, Insolvency.

Introduction

This paper provides a comprehensive analysis of Section 34 of the Arbitration and Conciliation Act, 1996 (“Act”) beginning with the recent decision of the Supreme Court in Ssangyong Engineering & Construction Co. Ltd. v. National Highways Authority of India (NHAI) in which the Court deliberated upon the amendments to Section 34 of the Act and whether they are applicable prospectively or retrospectively. The second part of this paper will deal with the question of subsection (2)(a) of the aforementioned provision, in particular, the words “furnishes proof” and the catena of case laws pertaining to the same. The paper will then go on to address in brief cases in which the Act is given precedence over other statutes such as the Insolvency and Bankruptcy Code, 2016 and vice-versa. Lastly, this paper will discuss Section 34(5) and whether the same is mandatory or directory.


Are the amendments to Section 34 applicable prospectively or retrospectively?:

S.34 lays down the situations in which an aggrieved party may challenge an arbitral award by filing a petition in court. Prior to the amendment, filing a Section 34 petition would de facto lead to the stay of court proceedings for execution of the arbitral award under Section 36 of the said Act. With the amendment, there is no longer an automatic stay; a separate application must be filed for a stay of execution proceedings subject to the court’s discretion. This decision indicates that even in the event of the arbitration occurring before the amendment was enacted, there will not be an automatic stay.


The most recent decision of the Supreme Court with respect to Section 34 came up in the case of SsangYong Engineering. In this case, it was held that the amendments to Section 34 would apply to all applications filed thereunder after October 23, 2015, with effect from October 23, 2015. This is puzzling in as much as the Court has effectively given this section a retrospective effect because it also went on to state that the amendments would apply to court proceedings that began prior to the amendments. Furthermore, the preceding judgment on this issue, namely BCCI v. Kochi Cricket (P.) Ltd. and Ors had emphasized the prospective aspect of it, which this judgment has neglected to address satisfactorily.


S.34 (2a) “FURNISHES PROOF”


Section 34(2)(a) deals with the question of the requirement to lead evidence in an application for setting aside an award. In the case of M/S Emkay Global Financial Services Ltd. v. Girdhar Sondhi, the Supreme Court interpreted the words “furnished proof” contained in the abovementioned subsection while dealing with the question of challenging an arbitral award. The case was one in which the arbitration clause stipulated that the arbitration would be subject to bye-laws of the National Stock Exchange. As per these bye-laws, the exclusive jurisdiction in the event of disputes rested with the civil courts in Mumbai. Once the dispute arose, the arbitral award was passed in Mumbai as per the bye-law, subsequent to which the respondent challenged the award in the District Court at Delhi. Due to the exclusive jurisdiction clause, the application under S.34 was rejected by the District Court. This decision was appealed in Delhi High Court, which referred the parties back to the District Judge to frame issues and thereafter decide on the question of evidence and cross-examination of those witnesses who gave depositions. On the question of how to interpret the words “furnishes proof”, the court relied upon the case of Sandeep Kumar v. Dr. Ashok Hans, in which it was held that there was no requirement for parties to lead evidence under the provisions stipulated in Section 34.[i] The record of the Arbitrator was held to have constituted enough proof of whether the grounds under Section 34 had been made out. In another case, Sial Bioenergie v. SBEC Systems, it was held by the Delhi High Court that if Courts were to allow the process of taking oral evidence at the time of hearing objections against arbitral awards under Section 34, it would not only prolong the process but would also render the objects of the Act nugatory[ii]. Clarifying the point of jurisdiction, the court relied on the case of Indus Mobile Pvt. Ltd. v. Datawind Innovations Pvt. Ltd wherein it was held that in arbitration, a reference to “seat” is tantamount to the exclusive jurisdiction. Therefore, the Mumbai courts would have exclusive jurisdiction in keeping with the agreement and the NSE bye-laws.


The Arbitration and Conciliation Act, 1996 v. The Insolvency and Bankruptcy Code, 2016:


In the case of K.Kishan v. M/s Vijay Nirman Company, Pvt. Ltd, the Supreme Court considered whether the Insolvency and Bankruptcy Code, 2016 can be invoked in respect of an operational debt if the arbitral award passed against the operational debtor creating such debt was challenged under S.34 of the Act. In this case, the parties entered into an agreement for the widening of a highway. During this period, disputes arose between them, and they were referred to arbitration proceedings. Once the award was passed, a sum of approximately 2 crores was granted in favour of the respondent with respect to interim payment certificates. Post the passing of this award, the respondent issued a demand notice under Section 8 of the Insolvency Code on the other party, which disputed the said demand notice and then went on to challenge the award under S.34 of the Act. The respondent thereafter filed an application under Section 9 of the Insolvency and Bankruptcy Code stating that the amount granted in their favour was an operational debt. The non-payment of such a debt was a sufficient ground for the initiation of the corporate insolvency resolution process (CIRP). Both the NCLT and the NCLAT held that the pendency of a challenge to the arbitral award under S.34 was irrelevant since there had been no stay of the award, and more importantly, the claim amount was admitted during the arbitral proceedings. The matter then went before the Supreme Court. The Court, while relying on Section 9(5)(ii)(d) of the Code, held that the demand notice was disputed even though the award was granted in favour of the respondent. Furthermore, the counterclaim was rejected by the Arbitral Tribunal. Lastly, as there was a pending challenge under S.34, it could not be said that no dispute existed between the parties. Therefore, the challenge to the Award was considered a ‘pre-existing dispute’. The Court further rejected the respondent’s submission that the debt which was set out in the demand notice had been admitted by the appellant during arbitral proceedings. Cross examinations that had been rejected by the Arbitral Tribunal were the subject matter of challenge under S.34.


Whether Section 34(5) is mandatory or directory?

In the case of The State of Bihar and Ors. v. Bihar Rajya Bhumi Vikas Bank Samiti, the Supreme Court deliberated upon the issue of whether S.34(5), which was inserted by the Amendment of 23rd October 2015, is mandatory or directory. The contention, in this case, was that prior notice was not issued to one of the parties as per the aforementioned subsection, nor was the application under S.34 accompanied by an affidavit as per the same subsection. The Patna High Court, relying on Kailash v. Nanhku and Ors, opined that Section 34(5) was a directory provision. The Supreme Court clarified that the objective of this subsection was to promote expeditious trials of applications under S.34, therefore, construing subsection (5) as mandatory would have the effect of dismissing an application filed without adhering to the requirements of the said subsection and would therefore obstruct the advancement of justice.

[i] Sandeep Kumar v Dr. Ashok Hans, 2004 SCC OnLine Del 106. [ii] Sial Bioenergie v SBEC Systems, 2004 SCC OnLine Del 863.

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