Consequences of failure to make arbitral award within time

Recently in Suryadev Alloys and Power Pvt. Ltd. v. Shri Govindaraja Textiles Pvt. Ltd, the Madras High Court interpreted the scope of the power of courts under Section 29A of the Arbitration & Conciliation Act, 1996 to hold that if an arbitral award is not made either within the statutory time period or the extended period, then the mandate of the tribunal stands terminated as it becomes functus officio.

Based on this interpretation, it was held that a court cannot ratify an award ex post facto by extending the time period for making the award in a petition filed before it subsequently.

This decision holds significance as it provides an avenue for many arbitral awards to be subject to challenge on account of delay. It also takes a view contrary to the Delhi High Court on the scope of powers of the court when the arbitral tribunal fails to make an award within the statutory framework.

Brief Facts

The arbitration clause contained in a Power Purchase Agreement entered into between the parties was invoked by the original claimant with regard to non-payment of invoices, a part of which was satisfied by invoking the bank guarantees issued in its favour. A counter-claim was filed by the respondent with regard to non-supply of power by the original claimant, on account of which the respondent suffered a loss. Furthermore, an alternative arrangement for supply needed to be made by the respondent, which resulted in incurring additional expense.

After the twelve-month statutory period for making the arbitral award lapsed, an application was filed before the Madras High Court seeking extension of time, pursuant to which the time period was extended by 6 months vide order dated September 4, 2018. The claim was reserved for judgment on February 9, 2019. However, the award came to passed by the arbitrator in favour of the original claimant only on September 13, 2019.

Both parties filed an application under Section 34 of the Act, with the respondent taking the ground that the award was passed after the mandate of the arbitrator had terminated.

The issue framed for consideration was whether an award passed after the period fixed by Court had lapsed was valid or not?

Decision

The Court considered the scope of powers under Section 29A of the Act and juxtaposed it with Section 28 of the repealed Arbitration Act, 1940 to conclude that:

“...unlike the Section 28(1) of the 1940 Act, which gave wide powers to the Court to enlarge the time for making an award even after the expiry of the time for making the award or even after the award has been made, the 1996 Act has curtailed these powers and restricted the extension only within the provisions of Section 29A(3) and 29A(4).”

The Court further analysed Section 29A of the Act to hold that that if an award is not made within 12 months, there are two remedies available to the parties:

i. The parties can, by consent, extend the period by a further six months. However, such discretion should be exercised before the lapse of 12 months under Section 29A(1); or

ii. Either party can, before or after the period of 12 months lapses, move the Court for extension. The Court can extend the period even beyond six months as the cap is only specified under Section 29A(3).

It was observed that although the court can extend the period for making the award even after the expiry of one year or the extended period under Section 29A(3), it can only do so on an application moved by either party under Section 29A(5) of the Act. The applicant must show sufficient cause and the Court may impose such terms and conditions as it deems necessary while granting extension.

However, in the absence of such an application for extension, it was held that the court cannot ratify an award ex post facto by extending the period in a petition filed under Section 34 by an aggrieved party. Based on this reasoning, it set aside the arbitral award.

Amendment Act, 2019

It is important to note that the decision of the Court has been rendered in context of the unamended Section 29A of the Act. The provision was amended through the Amendment Act, 2019 to state that the 12-month period for making the arbitral award would begin to run from the date when pleadings are completed under Section 23(4) of the Act.

Furthermore, now, where an application under 29A(5) is pending, the mandate of the arbitrator shall continue till the disposal of the said application.

Ruling contrary to Delhi High Court judgment

This judgment is in clear conflict with the judgment of the Delhi High Court in the case of Chandok Machineries v. N Sunderson & Co.

In that case, a three-member arbitral tribunal passed an award on June 12, 2017, i.e. just one day before the statutory time period under the Act was about to lapse. However, the award was only signed by two out of three members as on that date. Subsequently, on June 28, 2017, the third member signed the award and dispatched it to the parties on July 7, 2017. A challenge against the award was raised on the ground that it was passed after the mandate of the tribunal had terminated.

The Single Judge held that even assuming the date of the Award to be July 7, the Court could extend the time for making of the award under Section 29A(4) of the Act on an oral application of either party. It further sought to shift the burden on the petitioner to provide reasons for not granting an extension of time limit.

On appeal, the Division Bench, while affirming the decision of the Single Judge, observed that it wasn’t necessary to examine the power of the court under Section 29A(4) of the Act to extend the time limit for making the award, since the award had attained finality on being signed by the majority of the tribunal before the lapse of the time period.

Analysis

The scope of powers of the court has been considered by the Supreme Court in NBCC Ltd. v. J.G. Engineering Private Ltd. However, the same was done before Section 29A was inserted vide the Amendment Act, 2015.

The Supreme Court held that given the scheme of the principal Act, the court does not have any power to extend the time unlike Section 28 of the 1940 Act and that the court was now stripped of its power to enlarge time for making and publishing an award. It observed that since there was no outcome to the arbitration process, which had lingered on for a significant time, it defeated the purpose of arbitration, viz. speedy resolution of disputes.

It was further held that the court cannot exercise its inherent power in extending the time fixed by the parties in the absence of consent of either of them, when a mechanism for enlargement of time through mutual consent was provided under the agreement. The Court also acknowledged that the mandate of the arbitrator stood automatically terminated when the time period as extended by the parties lapsed.

Based on such reasoning, the Apex Court upheld the termination of the arbitrator’s mandate under Section 14 of the Act (since Section 29A(4) of the Act wasn’t available at the time) and directed for the appointment procedure as laid down under Section 15(2) of the Act to be followed.

Conclusion

In view of this judgment, and given that Section 29A(4) of the Act specifically provides for termination of mandate of the arbitral tribunal upon its failure to make an award within the statutory or extended time period, it is difficult to argue that the Supreme Court would not side with the Madras High Court if a similar issue fell before it for consideration.

While the Madras High Court has tried to honour the timelines established under the Act, such strict interpretation of the provision would certainly lead to speculation about India’s willingness to evolve and become an arbitration hub, since awards rendered after incurring huge expense would become liable to be set aside solely on account of delay.

The author is an Associate at J. Sagar Associates.