The bench of Justices N V Ramana, Mohan Shantanagoudar, and Ajay Rastogi held that an arbitral award that lacks reasoning can be set aside on an application made under Section 34 (4). The award passed was first challenged before a single judge bench of the Madras, who while upholding the award, held that the view taken by the arbitrator regarding compensation to be paid by the petitioner to the respondent therein, was a view taken by the arbitrator on the contract, which could not be substituted by the reasoning of a judge in an appeal against the award.
While this reasoning of the Honourable Single Judge Bench of the Madras High Court could have been sufficient on its own, the appeal before the Division Bench of the Hon’ble High Court succeeded in challenging the award because the Division Bench was of the view that the award lacked sufficient reasons, discussions or conclusion.
The Supreme Court was hearing an appeal against the order of the Division Bench of the Hon’ble Madras High Court where it first delved into the basic jurisprudence behind Section 34 which requires the Court while considering the challenge to be cognizant of the fact that arbitral awards “should not be interfered with in a casual and cavalier manner, unless the Court comes to a conclusion that the perversity of the award goes to the root of the matter without there being a possibility of alternative interpretation which may sustain the arbitral award.”
Thereafter, the Supreme Court analysed the case in terms of Section 31 of the Arbitration and Conciliation Act, 1996 which state that an arbitral award should have the reasons upon which it is based, unless otherwise agreed by the parties, or it is on agreed terms under Section 30. The Supreme Court analysed the conflict between the ruling in the case of Raipur Development Authority v. Chokhamal Contractors, AIR 1990 SC 1426 and the legislative enactment in Section 31. In the aforementioned case, the Supreme Court held that there is no requirement for reasons in the award of an arbitrator. However, the Supreme Court observed that the legislature enacted Section 31 (3) which is now supported by the reasoning of the Court in Som Datt Builders Ltd. v. State of Kerala, (2009) 4 ARB LR 13 SC, where it was held to not be an empty formulation in the act.
The requirements of a reasoned order, the Court held was threefold, in the sense that the award was required to be proper, intelligible, and adequate. The court thus held that the reasoning must be proper, or else it reveals a flaw in the decision-making process. Impropriety or perversity could be challenged under Section 34 of the Act, whereas the situation where there are no reasons at all would render the award unintelligible. The Supreme Court stated that Courts are required to be careful while distinguishing between inadequacy of reasons in an award and unintelligible awards.
The court further held that,
“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.”
On the award in the instant case, the court held, inter alia, that “the award is confusing and has jumbled the contentions, facts and reasoning, without appropriate distinction.” The fact that the claimant’s and respondent’s contentions and claims were narrated in the award did not support the stance that it was with reasons, and thus the Supreme Court upheld the challenge stating that “the award is unintelligible and cannot be sustained.”
Thus, the Supreme Court rendered a judgment in which, while it exercised caution and recommended the same for other courts, it laid to rest a dispute that spanned over two decades, and thus, held that the Court shall not consider awards without reasons to be intelligible. The legislative intent behind enacting Section 31 was thus upheld by the Court.
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Link to judgment: Dyna Technologies v. Crompton Greaves