Introduction:
In the legal landscape, arbitration is one of the most preferred methods of Alternative Dispute Resolution (ADR). Arbitration offers faster resolution, cost-effectiveness, and confidentiality. The final decision given by the arbitrator(s) is known as an Arbitral Award, and it is binding on the parties.
However, to uphold the principles of natural justice and fairness, Indian law allows for limited judicial intervention. The Arbitration and Conciliation Act, 1996, particularly under Section 34, provides the grounds on which an arbitral award may be set aside by a competent court.
Legal Provision: Section 34 of Arbitration and Conciliation Act, 1996
Section 34 – Application for setting aside arbitral award:
“Recourse to a court against an arbitral award may be made only by an application for setting aside such award in accordance with sub-sections (2) and (3)…”
Thus, an award can only be challenged on specific legal grounds within a limited time frame (generally 3 months).
Grounds for Setting Aside Arbitral Award
A. Grounds under Section 34(2)(a): Party-Centric Grounds
These grounds are to be proved by the party making the application:
- Incapacity of a Party
If either party was legally incompetent (e.g., minor, unsound mind), the award is liable to be set aside. - Invalid Arbitration Agreement
If the arbitration clause or agreement is not valid under the law (e.g., due to coercion, fraud, or not in writing), the award becomes void. - Improper Notice or Inability to Present Case
If a party was not given proper notice of the appointment of the arbitrator or arbitration proceedings, or was unable to present their case, it violates natural justice. - Award Beyond the Scope of Arbitration
If the arbitrator decides on matters not referred for arbitration, the award can be partly or fully set aside.
Example: If parties referred a price dispute but arbitrator decides ownership, it exceeds the scope. - Improper Composition of Arbitral Tribunal
If the arbitral tribunal was not constituted according to the agreement or the Act (e.g., bias, disqualified arbitrator), the award becomes invalid.
B. Grounds under Section 34(2)(b): Court-Centric Grounds
These grounds are examined by the court suo moto (on its own):
- Award in Conflict with Public Policy of India
This is the most litigated ground. The court can set aside an award if it is against:- Fundamental policy of Indian law
- Interests of India
- Justice or morality
- Patent illegality (introduced via 2015 amendment; applies only to domestic awards)
Important Case: ONGC v. Saw Pipes Ltd. (2003)
The Supreme Court held that an award can be set aside if it is “patently illegal” or “opposed to the public policy of India”.
- Disputes Not Capable of Settlement by Arbitration
Certain disputes are not arbitrable, such as:
- Criminal offenses
- Matrimonial disputes
- Insolvency proceedings
- Guardianship or testamentary matters
If an arbitrator decides such a matter, the award is null.
Judicial Interpretation: Key Case Laws
- Renusagar Power Co. Ltd. v. General Electric Co. (1994)
Laid down a narrow interpretation of “public policy” for foreign awards—only covering fundamental policy, justice, and morality. - ONGC Ltd. v. Saw Pipes Ltd. (2003)
Broadened the meaning of “public policy” for domestic awards—includes patent illegality. - Associate Builders v. DDA (2015)
The court added that violation of natural justice, jurisdictional errors, or irrational decisions may amount to grounds for setting aside. - Ssangyong Engineering v. NHAI (2019)
Clarified that post-2015 Amendment, only patent illegality can be a ground for setting aside domestic awards, not for international commercial awards.
Limitation Period for Setting Aside an Award
- An application must be made within 3 months from the date of receiving the arbitral award.
- A further 30-day extension can be granted if the applicant proves sufficient cause for delay.
- No application is entertained after 120 days.
What Is Not a Valid Ground?
- Errors in facts or law cannot be challenged unless they lead to patent illegality.
- The court does not sit as an appellate court over the arbitrator’s findings.
- Merely unfavorable decisions to one party do not justify setting aside.
Practical Example
Case: X Ltd. vs Y Ltd.
X Ltd. and Y Ltd. enter into a contract with an arbitration clause.
Y Ltd. appoints an arbitrator unilaterally, without notifying X Ltd.
The arbitrator passes an award favoring Y Ltd.
X Ltd. can apply to set aside the award under Section 34(2)(a)(iii) – not given proper notice or unable to present the case.
Summary Table – Grounds for Setting Aside Arbitral Award
| S. No. | Ground | Description | Section |
|---|---|---|---|
| 1 | Incapacity of party | Legal disability or incompetence | 34(2)(a)(i) |
| 2 | Invalid agreement | Not valid under law | 34(2)(a)(ii) |
| 3 | No proper notice | Party unable to present case | 34(2)(a)(iii) |
| 4 | Beyond scope | Arbitrator decided un-referred issues | 34(2)(a)(iv) |
| 5 | Improper tribunal | Against agreement/law | 34(2)(a)(v) |
| 6 | Conflict with public policy | Violates Indian policy, morality, justice | 34(2)(b)(ii) |
| 7 | Non-arbitrable subject | Dispute not capable of arbitration | 34(2)(b)(i) |
Code to Remember the Grounds:
“IIN-BPNC”
- I – Incapacity of party
- I – Invalid agreement
- N – No proper notice
- B – Beyond scope
- P – Procedural irregularity (Improper tribunal)
- N – Non-arbitrable dispute
- C – Conflict with public policy