[The Viewpoint] Understanding the scope of Section 34(4) of the Arbitration & Conciliation Act

The Arbitration & Conciliation Act was brought on to the statute books in the beginning of the year 1996. Undeniably, the Act and its provisions are widely used for resolution of disputes, primarily commercial.

Section 34(2) provides grounds for challenging the award. It has been consistently held by several courts in India including the apex court that the scope of challenge to an arbitral award under Section 34(2) is very limited. An award can be set aside only if it contrary to public policy, suffers from patent illegality or perversity or is such that it would shock the conscience of a court of law. An arbitrator being the sole judge of law and fact is entitled to take a view on the facts involved in the matter and his interpretation of a contractual term is to be respected, whenever the same is plausible one.

Till recently, Section 34(4) of the Act had not received much attention of the parties. However, it is noticed that this provision is frequently relied upon by the party in whose favour the award has been passed, in its attempt to save the award from being set aside.

What exactly is the scope and ambit of Section 34(4) is not really known with clarity. The Section itself is couched in such a language that the party in whose favour an award has been passed would like to propound the widest meaning to be given to the said provision with an intent of supporting the award. On the contrary, a party who has lost before the arbitrator would try to contend that the scope is very limited and a ground for challenge of an award cannot be ignored by the court by remitting the matter to the arbitrator for removing such grounds.

In a recent judgment, the Supreme Court of India had occasion to consider the scope of Section 34(4) in the matter of I-Pay Clearing Services Pvt Ltd v. ICICI Bank Ltd. In this case, the arbitral tribunal had passed the award in favour of I-Pay and against ICICI Bank, thereby directing bank to pay a sum of ₹50 crore to I-Pay with interest@18% per annum. The disputes between the parties arose out of a contract having an arbitration clause.

I-Pay contended that ICICI Bank illegally terminated the contract which resulted in severe losses to it. On the other hand, ICICI Bank pleaded that the contract came to an end by accord and satisfaction and was not terminated, and thus no damages could be awarded. ICICI Bank filed a petition under Section 34 (2) before the Bombay High Court, challenging the award. In the said proceedings, I-Pay moved an application under Section 34(4) requesting the Court for remission of the award to the arbitrator in order to enable him to remove the gaps in the reasoning.

The main issue that arose in the case was that the arbitrator had framed a specific issue as to whether “the termination of contract was illegal”. However, the arbitrator did not give any finding on the said issue, but simply refused to accept the contention of ICICI Bank that the contract came to end by accord and satisfaction. Based on the said finding, the arbitrator awarded a sum of ₹50 crore together with interest @18% pa in favour of I-Pay. The High Court rejected the application of I-Pay on the ground that since it was not a case of lack of reasoning, but a case of complete lack of finding on a contentious issue between the parties, powers under Section 34 (4) were not available.

The Supreme Court upheld the decision of the High Court, and noted the difference between ‘finding’ and ‘reason'. It held that Section 34(4) only gives discretion to the court to remit the matter to the arbitral tribunal to give an opportunity to resume the proceeding or not, which is indicated by the expression “where it is appropriate” used therein. It was further held that such discretion is to be exercised by the court on a request made by the parties. It was further held that when an application under Section 34(4) is made, the court has to consider the same keeping in mind the grounds raised in the application under Section 34(1) of the Act by the party who has questioned the award and the grounds raised in the application filed under Section 34(4) of the Act and response thereto.

The apex court further held that mere making of an application under Section 34(4) by a party does not oblige the court to remit the matter to the tribunal. It was held that the discretionary power under Section 34(4) is to be exercised where there is inadequate reasoning or to fill up the gaps in the reasoning, in support of the finding which is already recorded in the award. The Court held that under the guise of additional reasons or filling up the gaps in the reasoning, no award can be remitted to the arbitrator, where there is no finding on contentious issue in the award.

On a conjoint reading of Sections 31, 34(1), 34 (2)(a) and 34(4) of the Act, the Court held that in an appropriate case, the arbitrator can be given an opportunity to resume the proceeding and to give reasons or fill up the gaps in reasoning in support of its findings. It was further held that if there is patent illegality in the award by not recording a finding on a contentious issue, the court should not accede to the request of the party of remitting the matter to the arbitral tribunal.

This judgment of the apex court has thrown some light on the scope of Section 34 (4) of the Act and has brought in some more clarity. However, there is much to be desired. Unfortunately, the Act does not clearly spell out what exactly is the scope of Section 34(4). The intention of the legislature behind enacting such a provision has to be gathered by reading other provisions of the Act. The other provisions, some of which have also been read by the apex court while passing the judgment, are Sections 31, 33 and 34.

In my view, the power under Section 34(4) is to be exercised for supporting the award, where the award suffers from deficiencies or discrepancies, without touching upon the merit of the award. Resort can be had to Section 34(4) in the following situations:

(i) Where the award does not disclose the date of making the award and/or the place where the award was made.

(ii) The award does not provide the reasons for absence of signature of the minority arbitrator, if any, or the reasons why the award has been signed by different arbitrators on different dates.

(iii) Where there is dispute regarding the date and/or mode of service of a signed copy of the award by tribunal to the parties.

(iv) It could be exercised for correcting computational/clerical/typographical or inadvertent errors which could have been corrected under Section 33 (1)(a), but no such steps were taken for the same.

(v) To enable the tribunal to give an interpretation of a specific point or part of the award, as permitted under Section 33(1)(b), but no application was made by the parties for said purpose or such steps having been initiated by one the parties, the other party refused to give its consent.

(vi) To enable the arbitral tribunal to pass an additional award on claim(s) which though referred to the tribunal, were not considered while passing the award.

(vii) In a situation where the award records findings supported by reasons on a specific issue, but the reasons are inadequate or there are some gaps in the reasoning recorded in the award.

However, it is quite certain that the power under Section 34(4) cannot be used in such a manner that it nullifies the provisions of Section 34. Furthermore, in my opinion, by exercising the power under Section 34(4), a court cannot permit arbitrators to change their findings or reverse the same, because the Act does not permit the arbitrator to review/change its own award. The expression “will eliminate the grounds for setting aside the arbitral award” also indicates that the tribunal will maintain its award but will only be able to do such corrections that affirm the award already published.

There are several other aspects relating to the true scope of power under Section 34(4). What kind of order is a court required to make while remitting the matter back to the award? Is the court’s order of remitting the matter to the arbitrator under Section 34(4) appealable, which it appears to be not, going by the plain language of Section 37(1)(c)? What is the remedy available once the tribunal’s order is passed on remand? Can the party making the application under Section 34(4), challenge the order passed by the arbitrator on remand?

Hopefully, in due course of time, many more issues touching upon the scope and ambit of Section 34(4) will arise and be decided by the courts.

Vikas Goel is a Partner at Singhania & Partners LLP.