Section 34: Setting Aside an Award, and What 'Public Policy' Now Means

Ground (iv) is the excess of jurisdiction ground, and its proviso is the Act's severability rule for awards: the good part survives if it can be separated.

Ground (v) protects the parties' agreed process, but only so far as that agreement was itself lawful. An agreement conflicting with a mandatory provision is not protected, which is where section 12(5) and section 18 come back in.

"On the basis of the record of the arbitral tribunal" was inserted by the 2019 amendment, replacing "furnishes proof that". The change is significant: a section 34 application is not an occasion for fresh evidence. The court looks at the record the tribunal had.

Section 34(2)(b): the two grounds the Court may find

• (i) the subject matter of the dispute is not capable of settlement by arbitration under the law for the time being in force. This is arbitrability, chapter 250.
• (ii) the award is in conflict with the public policy of India.

What public policy means, since 2015

Public policy was the ground that swallowed the section, and Parliament closed it in 2015 by adding two Explanations.

Explanation 1: an award is in conflict with the public policy of India only if:

• (i) the making of the award was induced or affected by fraud or corruption, or was in violation of section 75 or section 81;
• (ii) it is in contravention with the fundamental policy of Indian law; or
• (iii) it is in conflict with the most basic notions of morality or justice.

Explanation 2: the test of contravention with the fundamental policy of Indian law shall not entail a review on the merits of the dispute.

Read Explanation 1's opening word: only. Three categories, closed. And note the reference to sections 75 and 81, which are the confidentiality and admissibility provisions of the conciliation Part, chapter 580; they appear here because an award induced by breaching the confidence of a conciliation is treated as offending public policy.

Section 34(2A): patent illegality, and it is domestic only

An arbitral award arising out of arbitrations other than international commercial arbitrations may also be set aside by the Court if the Court finds that the award is vitiated by patent illegality appearing on the face of the award.

Proviso: an award shall not be set aside merely on the ground of an erroneous application of the law or by reappreciation of evidence.

Two things must be said together, and most notes say only the first.

Patent illegality is a ground, and it was created by the courts before Parliament wrote it into the Act. The three cases below trace it.

And it is available only in a domestic arbitration. Sub-section (2A) says "arising out of arbitrations other than international commercial arbitrations". So an award in an international commercial arbitration seated in India, which is still a domestic award under section 2(7), cannot be attacked as patently illegal.

And the proviso is half the ground. An error of law is not enough. Reappreciating evidence is not permitted. What is caught is illegality appearing on the face of the award, of which the clearest example is an award that ignores the terms of the contract, contrary to section 28(3), chapter 350.

The three cases, in order

Saw Pipes: where patent illegality came from

Oil and Natural Gas Corporation Ltd v. Saw Pipes Ltd, (2003) 5 SCC 705, decided 17 April 2003.

Facts. A challenge to an arbitral award in which the Court had to decide whether an award contrary to the terms of the contract, or to the provisions of the Act, could be set aside as being in conflict with the public policy of India, that being the only ground on which such a complaint could then be brought.

Held. The Court read "public policy" in section 34 widely enough to include an award that is patently illegal, covering an award contrary to the substantive provisions of law, to the provisions of the Act, or to the terms of the contract, so that such an award could be set aside.

Why it matters. It is the origin of the ground now in section 34(2A). It also shows why the ground had to be moved: reading patent illegality into "public policy" meant that the wider concept travelled into Part II as well, where a much narrower test is right for a foreign award. Chapter 520 works that through.

Associate Builders: the picture just before the amendment

Associate Builders v. Delhi Development Authority, (2015) 3 SCC 49, decided 25 November 2014, R.F. Nariman J with Ranjan Gogoi J.

Facts. A challenge to an arbitral award decided shortly before the 2015 amendment, which gave the Court occasion to set out systematically what the public policy ground had come to contain.

Held. The Court analysed the heads of public policy then recognised, listing the fundamental policy of Indian law, the interest of India, and justice or morality, together with patent illegality, and explained the content of each.

Why it matters. Compare that list with Explanation 1 as enacted in 2015 and the change is visible: "the interest of India" is gone, and "justice or morality" has become "the most basic notions of morality or justice", which is deliberately narrower. Associate Builders remains valuable for its analysis of what the surviving heads mean; it is not a statement of the current list.

Ssangyong: the position after 2015

Ssangyong Engineering and Construction Co Ltd v. National Highways Authority of India, AIR 2019 SC 5041, decided 8 May 2019, R.F. Nariman J with Vineet Saran J.

Facts. A challenge to an arbitral award which required the Court to consider what the 2015 amendment had done to the grounds for setting aside, and in particular to the public policy ground, and to decide to which applications the amended section 34 applies.

Held. The Court described the effect of the amendment in terms worth learning:

There is no doubt that in the present case, fundamental changes have been made in the law. The expansion of "public policy of India" in ONGC Ltd. v. Saw Pipes Ltd. and ONGC Ltd. v. Western Geco International Ltd. has been done away with, and a new ground of "patent illegality", with inbuilt exceptions, has been introduced.

And on the temporal question it declared that section 34 as amended applies only to section 34 applications made to the Court on or after 23 October 2015, irrespective of when the arbitration proceedings commenced.

Why it matters. It is the authoritative statement of the position after 2015, and its declaration is the practical rule for dating a problem: look at when the section 34 application was made, not when the arbitration began.

Section 34(3): the time limit, and how strict it is

An application may not be made after three months have elapsed from the date on which the party making it received the arbitral award, or, if a request had been made under section 33, from the date on which that request had been disposed of by the tribunal.

Proviso: if the Court is satisfied that the applicant was prevented by sufficient cause from applying within three months, it may entertain the application within a further period of thirty days, but not thereafter.

"But not thereafter" is the whole point. This is not the ordinary law of limitation, where delay can be condoned on sufficient cause without an outer limit. Here there is an absolute ceiling of three months plus thirty days, and a court has no power to go beyond it.

Two dates matter and students confuse them: the party's receipt of the award, under section 31(5), and the disposal of a section 33 request, chapter 390.

The Jammu and Kashmir and Ladakh State amendment doubles both periods, substituting six months for three months and sixty days for thirty days, and inserts its own sub-section (2A) on patent illegality without the international commercial arbitration carve-out.

Section 34(4) to (6): the remaining machinery

Section 34(4): on receipt of an application, the Court may, where it is appropriate and it is so requested by a party, adjourn the proceedings for a period it determines, in order to give the tribunal an opportunity to resume the arbitral proceedings or take such other action as in the opinion of the tribunal will eliminate the grounds for setting aside.

This is the Act's repair mechanism, and it is why section 32(3) makes the termination of the mandate subject to section 34(4). Rather than destroying an award for a curable defect, the court can send it back. Note the two conditions: it must be appropriate, and a party must request it.

Section 34(5), inserted in 2015: an application shall be filed only after issuing a prior notice to the other party, and shall be accompanied by an affidavit endorsing compliance with that requirement.

Section 34(6), inserted in 2015: an application shall be disposed of expeditiously, and in any event within one year from the date on which the notice under sub-section (5) is served.

A worked example

A domestic award for Rs. 3 crore is received by the losing party on 1 March. It reads the contract's price escalation clause in a way the party says is impossible, ignores a clause capping liability, and decides a counterclaim for defamation that was never referred.

What is the only remedy? An application to set aside under section 34(1). There is no appeal on the merits.

The defamation counterclaim. Ground (2)(a)(iv): the award contains decisions on matters beyond the scope of the submission. And by the proviso, if that part can be separated, only that part is set aside and the rest survives.

The ignored liability cap. This is the classic patent illegality argument under section 34(2A), because section 28(3) requires the tribunal to take the terms of the contract into account. It is available here because this is a domestic arbitration. It would not be available if one party were foreign.

The escalation clause. Here the party must be careful. If its complaint is really that the tribunal read the clause wrongly, the proviso to section 34(2A) defeats it: an award is not to be set aside merely for an erroneous application of the law or by reappreciation of evidence.

By when must it apply? Within three months of 1 March. If it was prevented by sufficient cause, the Court may allow a further thirty days, but not thereafter. If it had made a section 33 request, the three months would run from the disposal of that request.

What must it do before filing? Issue prior notice to the other party and file an affidavit endorsing compliance, under section 34(5).

Could the court save the award instead of setting it aside? Yes. If a party requests it and the court thinks it appropriate, section 34(4) lets the court adjourn and give the tribunal a chance to resume and eliminate the ground.

Change the parties. Make the claimant a company incorporated in Singapore. It remains a domestic award under section 2(7), so section 34 still applies, but patent illegality is no longer available, because section 34(2A) excludes international commercial arbitration.

What beginners get wrong

There is no appeal against an award. Section 34 is the only recourse, and it sets aside rather than varies.

Patent illegality is not available in an international commercial arbitration, even one seated in India.

"Public policy" is now a closed list of three, under Explanation 1, and "the interest of India" is no longer one of them.

The thirty day extension is an absolute ceiling. "But not thereafter" excludes any further condonation.

An error of law is not a ground. The proviso to section 34(2A) says so.

Section 34 is not a rehearing. Since 2019 the applicant must establish clause (a) grounds on the record of the arbitral tribunal, and Explanation 2 forbids a review on the merits.

Quick revision

• 34(1): recourse only by an application to set aside.
• 34(2)(a), the applicant establishes on the record: (i) incapacity; (ii) invalid arbitration agreement; (iii) no proper notice or otherwise unable to present his case; (iv) beyond the scope of the submission, with a severability proviso; (v) composition or procedure contrary to the parties' agreement, unless that agreement conflicted with a non-derogable provision.
• 34(2)(b), the Court finds: (i) not arbitrable; (ii) conflict with public policy of India. Explanation 1: only fraud or corruption or violation of sections 75 or 81; contravention of the fundamental policy of Indian law; or conflict with the most basic notions of morality or justice. Explanation 2: no review on the merits.
• 34(2A): patent illegality on the face of the award, domestic arbitrations only; not for an erroneous application of law or reappreciation of evidence.
• 34(3): three months from receipt of the award, or from disposal of a section 33 request; plus thirty days for sufficient cause, but not thereafter. Jammu and Kashmir and Ladakh: six months and sixty days.
• 34(4): the Court may adjourn to let the tribunal eliminate the grounds. 34(5): prior notice and an affidavit. 34(6): dispose of within one year of that notice.
• Ssangyong (8 May 2019): the Saw Pipes and Western Geco expansion of public policy is done away with; patent illegality is a new ground with inbuilt exceptions; amended section 34 applies to applications made on or after 23 October 2015.

Test yourself

1. Can a court correct an arithmetical mistake in an award under section 34? No. Section 34 permits only setting aside, wholly or in part. A computation error is corrected by the tribunal under section 33(1)(a), within thirty days of receipt of the award.

2. Is patent illegality available against an award made in an international commercial arbitration seated in Mumbai? No. Section 34(2A) applies only to awards arising out of arbitrations other than international commercial arbitrations, even though such an award is a domestic award under section 2(7).

3. State the three limbs of public policy after 2015. Under Explanation 1 to section 34(2)(b)(ii), an award conflicts with the public policy of India only if the making of the award was induced or affected by fraud or corruption or was in violation of section 75 or section 81; or it contravenes the fundamental policy of Indian law; or it conflicts with the most basic notions of morality or justice.

4. An award is received on 1 June. The party applies on 20 October. Can the court hear it? No. Three months expired on 1 September, and the proviso to section 34(3) allows a further thirty days on sufficient cause "but not thereafter". 20 October is beyond that absolute outer limit, and no further condonation is possible.

5. The tribunal decided one claim that was outside the reference. Must the whole award go? No, if it can be separated. The proviso to section 34(2)(a)(iv) provides that where the decisions on matters submitted to arbitration can be separated from those not so submitted, only that part containing decisions on matters not submitted may be set aside.