Prior notice: A precondition to challenge arbitral awards?

By Karthik Somasundram and Shreya Gupta, Bharucha & Partners
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The 246th report of the Law Commission of India, dealing with delay in arbitration, recommended numerous changes to the Arbitration and Conciliation Act, 1996. One cause of delay was that “challenges to arbitration awards … are kept pending for many years.” Following the recommendations, section 34 of the act was amended, introducing two preconditions. Firstly, notice to the other party must precede a challenge to an award; secondly, the applicant must file an affidavit deposing that such notice was served on the opposition. The court is required to dispose of the challenge “expeditiously and in any event within … one year from the date on which the notice” was served.

Karthik SomasundramPartnerBharucha & Partners
Karthik Somasundram
Partner
Bharucha & Partners

Inevitably, a measure designed to make arbitration more efficient has led to litigation! Patna High Court, considering the object of the amendment, namely speedy disposal, and the mandatory language of the amendment held that, absent notice, the challenge to the award must fail. The high courts of Himachal Pradesh, Delhi and Gauhati concurred. The Bombay High Court, on the contrary, held that the prescription was only directory. The Kolkata High Court agreed.

The opposing decisions were considered by the Supreme Court in the case of State of Bihar v Bihar Rajya Bhumi Vikas Bank Samiti (2018). The Supreme Court upheld the view of the Mumbai and of the Kolkata high courts.

Noting the report of the Law Commission, the court was satisfied that the object of the amendment was to ensure that applications challenging awards “be disposed of expeditiously …”. However, this was not the issue: the issue was whether the amended section was mandatory.

In its deliberations, the court relied on its earlier rulings, none of which involved the act. These rulings dealt with amendments to the Consumer Protection Act, the Code of Civil Procedure, and the Code of Criminal Procedure. All prescribed timelines. For example, Kailash v Nankhu (2005) and Salem Advocate Bar Association v Union of India (2005) considered Order VIII Rule 1 of the Code of Civil Procedure that prescribed an outer limit of 90 days to file the defence statement. Topline Shoes v Corporation Bank (2002) examined section 13(2)(a) of the Consumer Protection Act, which prescribed a defence filing of 30 days, with an outer limit of 15 additional days. The objective of each provision was the speedy disposal of proceedings and were couched in mandatory language. They were nonetheless ruled to be directory only.

Shreya GuptaAssociateBharucha & Partners
Shreya Gupta
Associate
Bharucha & Partners

In construing the amended section 34, the Supreme Court affirmed the settled principle of interpretation that the statutory consequences of disobedience were relevant. Although dismissal may be the “natural and usual consequence of disobedience”, it had to be tempered by considerations of convenience and justice. A result of “general inconvenience or injustice to innocent persons or advantage to those guilty of neglect”, would be incompatible with a statutory intention to nullify.

The court therefore considered whether the act, as amended, prescribed the consequence of non-compliance; whether the power of the courts to condone delay was expressly removed or curtailed; whether the prescription was procedural or substantive; and, whether the objective was to expedite disposal or to “scuttle” the hearing entirely.

The court held that sub-sections (2) and (3) of section 34 were substantive as they provided for grounds of challenge. In contrast, sub-section (5), prescribing prior notice, was procedural. Section 34 did not prescribe consequences of failure to give notice. The court compared that section with the amended section 29A of the act which expressly provided that the mandate of the arbitral tribunal would lapse if the award was not issued within the prescribed time. The court was guided by the principle that the statute conferred the right to challenge an award which should not fail for procedural non-compliance. To do so would result in injustice, “the baby being thrown out with the bath water”.

The court’s attention was specifically drawn to section 80 of the Code of Civil Procedure which mandated two months’ notice being given before a party could sue the government or its officials. This was ruled as mandatory even though the statute provided no consequences for failure to give such notice. The court distinguished this provision, section 80 being based on public interest, enabling the government to settle legitimate claims and to avoid litigation. Despite being a procedural provision, it was nonetheless held to be mandatory.

Having concluded that the requirement was directory, the court issued directions for the timely disposal of pending challenges after service of notice.

Karthik Somasundram is a partner and Shreya Gupta is a senior associate at Bharucha & Partners.

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