Inadequate reasoning in arbitral award: What the Supreme Court held

The Supreme Court on Wednesday set aside an arbitral award on the grounds of insufficiency and inadequacy of reasoning.

The Bench of Justices NV Ramana, Mohan Shantanagoudar, and Ajay Rastogi noted that an arbitral award passed without adequate reasons is “unintelligible”, and therefore, unsustainable. While doing so, the Court delved into the jurisprudence of Section 31(3) of the Arbitration Act, which provides that arbitral awards shall state the reasons on which they are based.

On this aspect, the judgment written by Justice Ramana states,

“When we consider the requirement of a reasoned order three characteristics of a reasoned order can be fathomed. They are: proper, intelligible and adequate.”

The Court goes on to elucidate that if the reasons are “improper”, it reflects a flaw in the decision making process. In case of “impropriety or perversity of reasoning”, the award can be challenged under Section 34 of the Act, which deals with an application for setting aside of the order.

On the point of unintelligible orders, the Court said that the same would be akin to providing no reason at all. In cases where an order provides inadequate reasoning, the judgment states,

“Coming to the last aspect concerning the challenge on adequacy of reasons, the Court while exercising jurisdiction under Section 34 has to adjudicate the validity of such an award based on the degree of particularity of reasoning required having regard to the nature of issues falling for consideration.”

The Court has also distinguished between unintelligible awards and awards lacking proper reasoning and has delved into the legislative intent behind Section 34(4) of the Act. This Section empowers the High Court to remit the proceedings to the Tribunal in case an award lacks reasoning or consists some gaps which can be cured by the Tribunal. This Section, the Court has said, provides a gateway to avoid a challenge to an award which can be cured by the Tribunal and may not be required to set aside.

“The power vested under Section 34 (4) of the Arbitration Act to cure defects can be utilized in cases where the arbitral award does not provide any reasoning or if the award has some gap in the reasoning or otherwise and that can be cured so as to avoid a challenge based on the aforesaid curable defects under Section 34 of the Arbitration Act.”

Having made these observations, the judgment also says that courts must not interfere with arbitral awards in a “casual and cavalier” manner unless it is found that there is no alternate interpretation to sustain the award. Several precedents have stated that courts ought not interfere with the awards merely on the ground that an alternate interpretation exists. The Court says,

“The mandate under Section 34 is to respect the finality of the arbitral award and the party autonomy to get their dispute adjudicated by an alternative forum as provided under the law. If the Courts were to interfere with the arbitral award in the usual course on factual aspects, then the commercial wisdom behind opting for alternate dispute resolution would stand frustrated.”

In the instant case, an arbitral award was challenged before a Single Judge Bench of the Madras High Court, which upheld the same. An appeal was subsequently preferred before a Division Bench, which set aside the award on the ground that the same lacked reasoning. This order of the High Court was assailed before the Supreme Court, which disposed of the appeal and set aside the arbitral award.

[Read Judgment]