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The Supreme Court has clarified that it is not mandatory to serve prior notice to the opposite party before filing an application to set aside an arbitral award under Section 34 of the Arbitration and Conciliation Act, 1996 (Act).
The judgment was delivered by a Bench of Justices Rohinton Nariman and Indu Malhotra in an appeal filed against a Division Bench judgment of the Patna High Court in Bihar Rajya Bhumi Vikas Bank Samiti v. State of Bihar and Ors.
The Court rendered the judgment after hearing arguments made by Senior Advocate Nagendra Rai for the state of Bihar (Appellant) and Senior Advocate Parag P Tripathi, who appeared for the Bihar Rajya Bhumi Vikas Bank Samiti (Respondent).
Section 34 of the Act deals with applications for setting aside an arbitral award. Section 35 (5) and (6) were inserted by an amendment in 2015, and they read as follows:
“34. Application for setting aside arbitral award.—
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(5) An application under this section shall be filed by a party only after issuing a prior notice to the other party and such application shall be accompanied by an affidavit by the applicant endorsing compliance with the said requirement.
(6) An application under this section shall be disposed of expeditiously, and in any event, within a period of one year from the date on which the notice referred to in sub-section (5) is served upon the other party.”
In the case at hand, a contention was raised that no prior notice was served upon the opposite party before filing the application to set aside the arbitral award in the Patna High Court.
A single judge of the High Court took the view that such notice in terms of Section 34 (5) was only directory.
However, on appeal, a Division Bench disagreed and took the view that Section 34 (5) was mandatory. Similar views have been taken by the High Courts of Kerala, Himachal Pradesh, Delhi and Gauhati as well.
Thus, the question before the Supreme Court was whether prior notice under Section 34 (5) of the Act is mandatory before filing an application to set aside an arbitral award under Section 34.
The Supreme Court has now laid down that such prior notice is only directory, given the following observations.
No Penal Consequences for non-compliance of Section 34 (5)
Even though Section 34 (5) and (6) are couched in mandatory language, the Court noted that the Act does not prescribe any penal consequences if they are not complied with.
In contrast, Section 29A, introduced by the same 2015 amendment, expressly provides for termination of the arbitrator if the award is made or extended beyond the period prescribed in the provision.
Interpretation of a procedural provision must be for the advancement of justice
Section 34 (5) is not a substantive provision. When a provision is only procedural in nature, it should be interpreted to advance the cause of justice rather than scuttle it, the Court noted.
“Section 34(5) does not deal with the power of the Court to condone the non-compliance thereof. It is imperative to note that the provision is procedural, the object behind which is to dispose of applications under Section 34 expeditiously.
One must remember the wise observation contained in Kailash (supra), where the object of such a provision is only to expedite the hearing and not to scuttle the same. All rules of procedure are the handmaids of justice and if, in advancing the cause of justice, it is made clear that such provision should be construed as directory, then so be it.”
As far as Section 34 (5) is concerned, the Court found that conferring a mandatory status upon it would be against the advancement of justice. The object behind the insertion of Section 34 (5) and (6) is the expeditious disposal of applications within a year. However, the infraction of this provision does not lead to any consequence.
On the other hand, to debar parties from approaching the Court on the ground that Section 34 (5) was not complied with, would deprive them of their vested rights under Section 34 of the Act. As noted in the judgment:
“To construe such a provision as being mandatory would defeat the advancement of justice as it would provide the consequence of dismissing an application filed without adhering to the requirements of Section 34(5), thereby scuttling the process of justice by burying the element of fairness.”
Section 34 (1) indicates that Section 34 (5) and (6) are not mandatory
Additionally, the Court also noted that Section 34 (1) of the Act itself only mandates the compliance of subsections (2) and (3) of the Act for filing an application to set aside arbitral awards.
“What is conspicuous by its absence is any reference to sub-section (5). The only requirement in Section 34(1) is that an application for setting aside an award be in accordance with sub-sections (2) and (3). This, again, is an important pointer to the fact that even legislatively, subsection (5) is not a condition precedent, but a procedural provision which seeks to reduce the delay in deciding applications under Section 34.”
Section 34 (5) would not be rendered otiose if not made mandatory
The judgment has also approved the Bombay High Court judgment in Global Aviation Services Private Limited v. Airport Authorities of India. In this case, the High Court rejected the argument that Section 34 (5) would be rendered otiose if it is not viewed as mandatory, with the following observation,
“The Court can always direct the petitioner to issue notice along with papers and proceedings upon other party before the matter is heard by the Court for admission as well as for final hearing. The vested rights of a party to challenge an award under section 34 cannot be taken away for non-compliance of issuance of prior notice before filing of the arbitration petition.”
In view of these observations, the Court allowed the appeal and directed that the Section 34 application be disposed of on merits.
Read the Judgment: