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16 April 2020
On 20 March 2020 the division bench of the Bombay High Court, comprising the Honourable Mr Justice R K Deshpande and the Honourable Mr Justice Prithviraj K Chavan, confirmed the legal position on when an interim or partial final award falls under the expression 'arbitral award' under Section 2(1)(c) of the Arbitration and Conciliation Act 1996 and is thus subject to the bar of limitation set out in Section 34(3) of the act (Aero Club v Solar Creations Pvt Ltd).
Disputes arose under franchise agreements between the parties and were referred to arbitration. The parties, under Section 19 of the Arbitration and Conciliation Act, agreed on the procedure to be followed by the arbitral tribunal, which was to comprise of two parts:
The original claimant (the respondent in the present case) filed its statement of claim for certain sums plus interest, while the original respondent (the appellant in the present case) filed a counterclaim for certain sums plus interest.
On 5 June 2015 the arbitral tribunal, in line with the aforesaid agreement between the parties under Section 19, passed the partial final award, which decided 13 issues framed for determination. On 14 December 2015 the final award was passed, awarding certain sums plus interest to the respondent. Thereafter, the appellant challenged both awards under Section 34 of the act before the learned single judge of the Bombay High Court.
The Bombay High Court held, among other things, that the partial final award fell under the expression 'arbitral award' under Section 2(1)(c) of the Arbitration and Conciliation Act and that, as such, the appellant's challenge of the award was barred by the limitation period prescribed under Section 34(3) of the act. This decision was the subject of the challenge before the division bench under Section 37 of the act.
The appellant argued that after passing the partial final award, the arbitral tribunal had not become functus officio but had been required to pass the final award, which became executable and enforceable only under Section 34 of the Arbitration and Conciliation Act. The mere declaration of certain rights and liabilities in the partial final award was insufficient to hold that the award fell within the expression 'arbitral award' under Section 2(1)(c) of the act and was thus subject to the bar of limitation specified in Section 34(3).
The respondent argued that the learned single judge's decision was correct, as the judge had taken into consideration the facts and circumstances of the case.
To determine the above issue, the division bench analysed:
The question of whether an interim award is final depends on its form and contents. If an interim award is intended to have effect only until the final award is delivered, it will have the force of an interim award and cease to have effect after the final award is made. However, if an interim award is intended to determine all of the parties' rights, it will have the force of a complete award and will have effect even after the final award is delivered.
Accordingly, the division bench confirmed the legal position and set out the tests for deciding when an interim or partial final award becomes an arbitral award under Section 2(1)(c) of the act:
(A) It is not every order, decision or adjudication at an interim stage of the arbitral proceedings; whether called as 'partial final award' or an 'interim award', that would assume the character of an 'arbitral award' under section 2(1)(c) of the said Act so as to attract the bar of limitation prescribed under sub-section (3) of section 34 of the said Act;
The question as to whether the interim award or partial final award; by whatever name it is called, subsumes within the expression an 'arbitral award' under section 2(1)(c) of the said Act, is essentially a question of fact to be decided in the facts and circumstances of each case;
The predominant tests to treat an 'interim award' or 'partial final award' as an 'arbitral award' under section 2(1)(c) of the said Act would be three fold:
(i) that it satisfies the tests of the form and contents of an award under sub-sections (1), (2) and (3) of section 31 of the said Act;
(ii) it is in relation to "any matter" with respect to which a final arbitral award can be made; as specified under sub-section (6) of section 31 of the said Act; and
(iii) the nature, extent and intendment of such order, decision or adjudication.
An interim or partial final award will become an arbitral award only if all of the above tests are satisfied. Consequently, the bar of limitation under Section 34(3) of the act will apply in respect of such an award. Given the facts and circumstances of the present case, it was held that the partial final award determined all rights and liabilities of the parties and thus had the force of a complete award and was subject to Section 34(3). Accordingly, the division bench held that all three tests were satisfied in the present case and thus did not interfere with the learned single judge's decision in the Section 34 petitions.
With respect to the functus officio argument, it was upheld that an arbitrator, after signing an interim or partial final award, become functus officio in respect of the subject matter of such award and to that extent only. However, this does not mean that there can be no further arbitration proceedings where the same arbitrator has nothing to do with the award with respect to the same dispute. In other words, even after passing an interim or partial final award, arbitrators have no authority to determine other issues and pass further awards or a final award. Thus, the functus officio test was irrelevant in this case.
It was also held that this pertained to the setting aside of a partial final award under Section 34 and did not depend on the executability or enforceability of such arbitral award. This should not be confused with execution proceedings or the enforcement of a final arbitral award under Section 36 of the act. Just because a partial final award is found to be declaratory in nature, without making it executable, does not mean that it does not fall under the expression 'arbitral award' and incur the bar of limitation set out in Section 34(3) of the act.
The Bombay High Court has systematically set out the legal position and the tests for determining whether a partial final award may be interpreted as an arbitral award under the Arbitration and Conciliation Act. In so doing, it also clarified the position on the limitation period for challenging such an award.
Thus, the limitation period set out in Section 34(3) of the act becomes applicable on delivery of a partial final award. As such, an aggrieved party must bring a challenge to such an award under Section 34 of the act within the prescribed timeframe, notwithstanding the delivery of the final arbitral ward.
Following this decision, it remains to be seen how effectively arbitration proceedings and a Section 34 challenge to a partial final award before a court in relation to the same proceedings can co-exist. In a situation where the final arbitral award is contingent on certain issues which have already been determined in the partial final award being challenged under Section 34, a stay or setting aside of the partial final award may lead to a possible delay in the adjudication of the arbitration proceedings.
For further information on this topic please contact Chakrapani Misra, Kathleen Lobo or Saasha Malpani at Khaitan & Co by telephone (+91 11 4151 5454) or email (firstname.lastname@example.org, email@example.com or firstname.lastname@example.org). The Khaitan & Co website can be accessed at www.khaitanco.com.
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