NPAC Arbitration Review: Consequences of setting aside an arbitral award

Bar & Bench July 8 2019
Consequences of setting aside an arbitral award

Renu Gupta

When an arbitral award is set aside by court under Section 34 of Arbitration and Conciliation Act, 1996 (A&C Act), and there is a fresh arbitration, does it really start afresh? Would doctrine of res judicata or estoppel apply to the fresh arbitration? If yes, would the new tribunal be bound by any observations or findings given by the court on merits in its decision rendered under Section 34 of A&C Act?

This article attempts to answer some of these questions.

The Delhi High Court in State Trading Corporation of India Ltd. v. Toepfer International Asia PTE Ltd. 2014 (144) DRJ 220 (DB) @ paragraphs 7 to 9, while explaining the effect of setting aside of an arbitral award, observed that annulment under Section 34 of the A&C Act operates to negate a decision, in whole or in part, depriving the portion negated of legal force and returning the parties, as to that portion, to their original litigating positions. 

The court further observed that Section 34 provides for annulment only on the grounds affecting legitimacy of the process of decision as distinct from substantive correctness of the contents of the decision and considers whether, regardless of errors in the application of law or determination of facts, the decision resulted from a legitimate process. 

Therefore, if a court sets aside an award, such setting aside should ordinarily result in the annulment of the entire award, including the arbitral tribunal’s findings relating to the claims which were challenged, and which challenge was successful.

In cases where a court, while setting aside an award, renders findings on the merits of the case, such as, the substantive correctness of the grounds upon which the award is based; whether it is rendered in contravention of law or contract by an arbitral tribunal; the decision of court on such issues could affect the scope of adjudication before the new arbitral tribunal. 

The Bombay High Court has taken a view that in such a case, the decision of the court setting aside the award, to the extent that it relates to the merits of the case, will bind the new arbitral tribunal. In Pushpa P. Mulchandani and others v. Admiral, Radhakrishin Tahiliani, MANU/MH/1432/2007, the court held that when the award is set aside for reasons other than merits, then it is open to the parties to the arbitration agreement, to invoke the arbitration agreement and to have the matter referred to arbitration. This view has also been taken in Associated Constructions v. Mormugoa Port Trust, 2010 (5) Mh.L.J. 739 @ paragraphs 15 and 20.

[Note: The Pushpa P Mulchandani case was decided by a Division Bench of Bombay High Court. The Full Bench of Bombay High Court in R. S. Jiwani v. IRCON International Ltd., (2010) 1 Mh. L. J. 547 set aside the view taken in this case in respect of severability of award. However, it appears that the view taken in this case regarding this issue has not been overruled in R.S Jiwani’s case.]

Both these decisions are prior to the 2015 amendment of the A&C Act. After the amendment, Explanation 2 to Section 34(2) specifies that the test for finding out whether an award is in contravention of the “fundamental policy of Indian law”, will not involve a review on merits of the dispute.

Even prior to the amendment, the courts have tried to stay away from reviewing the award on merits (except during the phase of ONGC v. Western Geco International judgment where the court expressly permitted review on merits and has thus been overruled). However, often decisions include observations on the merits of the dispute. It will be interesting to now see the approach of courts in cases where while deciding a challenge under Section 34, the court renders findings on the merits of the dispute.

Let us say while setting aside an award by a court under Section 34, it gives findings on the merits of the dispute. The parties start fresh arbitration proceedings. Would the findings be res judicata before the new tribunal? Could the arbitral tribunal decide that the findings on merits could not have been given and, therefore, there is no res judicata? These questions are yet to be tested before courts.

In AKN and another v. ALC and others, [2015] SGCA 63 @ paragraphs 52, 54 to 63, the Singapore Court of Appeal has held that an arbitration agreement survives the setting aside of the award. Therefore, for a party which has successfully obtained an award in the arbitration, which is then set aside by a court, it will result in a fresh arbitration as the dispute has not yet been resolved after the award has been set aside. It applied the doctrine of res judicata/estoppel to fresh arbitration. In the facts of that case, it applied the principle of extended estoppel to ensure that a party, which ought to have argued a point before the arbitral tribunal and failed to do so, cannot raise that point in the fresh arbitration.

One could argue that the analysis of the Singapore Court of Appeal is in the context of an award that was partially set aside and that only in such cases, part of the award which is not challenged or which is challenged but not set aside, will be res judicata. This decision has not been followed or referred to by any court in India and it would be interesting to see how Indian courts would interpret the decision of the Singapore Court of Appeal.

Conclusion

When a court under Section 34 of A&C Act, while setting aside an award, renders findings on the merits of the case; such findings on merits will likely circumscribe the scope of adjudication before the new arbitral tribunal. Therefore, it cannot be assumed that all issues or claims which were raised before the earlier arbitral tribunal will be available for re-appreciation before the new arbitral tribunal.

About the Author: Renu Gupta practices before the Delhi High Court and other courts and tribunals in Delhi.

Members of the Nani Palkivala Arbitration Arbitration Centre (NPAC) will be writing a weekly column for Bar & Bench analyzing the latest developments on the law of arbitration.

 

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