Legislative Flaws in India’s Arbitration Law: A Critical Appraisal of Section 34 and Structural Inconsistencies

Arbitration, as an Alternative Dispute Resolution (ADR) mechanism, is designed to offer a swift, cost-effective, and neutral process for resolving commercial disputes. India, through the Arbitration and Conciliation Act, 1996 (hereinafter “the Act”), seeks to align with international standards such as the UNCITRAL Model Law[1]. The Act was intended to serve as an alternative adjudicatory system alongside various tribunals and similar bodies. However, there is an ongoing debate about whether these alternative mechanisms are truly meeting the expectations of both lawmakers and litigants. In a significant development, the Ministry of Finance, Department of Expenditure, Government of India, through an Office Memorandum dated 3rd June 2024, has issued guidelines advising government departments, public sector undertakings (PSUs), and related agencies to avoid routinely including arbitration clauses in tenders and contract agreements. This move marks a sharp departure from the foundational goals of ADR and highlights the deep-rooted issues plaguing the arbitration framework issues that the government can no longer overlook.

However, despite multiple amendments, the Indian arbitration regime still suffers from various legislative flaws that undermine its efficiency and reliability. These flaws have led to procedural delays, increased judicial intervention, and inconsistencies in arbitral enforcement ultimately deterring foreign investors and litigants.

Need for Legislative Clarity on the Scope of ‘Public Policy’ in Arbitration

One of the persistent issues under the Act is the ambiguity surrounding the term “public policy” as used in Sections 34[2] and 48[3] of the Act. Although this term serves as a ground for setting aside a domestic arbitral award or refusing the enforcement of a foreign award, its scope remains vague and subjective. Despite several judicial attempts to interpret and narrow its meaning, “public policy” continues to invite broad and often inconsistent judicial discretion. This lack of clarity has led to frequent court interference in arbitral matters, thereby undermining the very objective of arbitration as a final and binding alternative dispute resolution mechanism. To address this concern, it is imperative for the legislature to step in and codify an exhaustive and narrowly defined list of what constitutes “public policy”. Such legislative clarity would help curb arbitrary interpretations and promote the autonomy and finality of arbitral awards.

Ambiguity Surrounding Section 21: The Redundant Role of Commencement Notice in Arbitration Timelines

While the rationale behind prescribing a 12-month time limit for delivering an arbitral award from the date of completion of pleadings under Section 23(4)[4] is understandable, the provisions concerning the commencement of arbitral proceedings and the completion of pleadings, as mentioned in Sections 21[5] and 23(4)[6], are somewhat ambiguous. The relevance of the date on which the award is passed, as per Section 23(4)[7], is clear when it comes to determining the timeline for filing a challenge under Section 34[8]. However, the importance of the commencement date outlined in Section 21[9] is unclear and confusing. Section 21[10] refers to a notice given by one party to the other, but it fails to define the basis or objective of this notice. Ideally, it should have explicitly stated that the notice pertains to the intention to refer the dispute to arbitration. Oddly enough, Section 11[11], which deals with the appointment of arbitrators, makes no mention of Section 21[12]. Considering that Sections 29A[13] and 23(4)[14] already govern the timelines for concluding proceedings, Section 21[15] becomes redundant unless its underlying purpose is clearly defined.

Revisiting Schedule 4: The Need for a Practical and Updated Arbitrators’ Fee Framework

The inclusion of Schedule 4[16] in the Act, reflects the commendable foresight of the legislature in attempting to standardize arbitrators’ fees. This schedule has effectively reduced discrepancies in fee structures, particularly benefitting government departments and public agencies, which often faced delays and complications in negotiating arbitrators’ fees unlike private parties who typically faced fewer hurdles. Prior to Schedule 4[17], the process of finalizing the arbitrator’s fee would often consume significant time, thus hampering the efficiency of the arbitral proceedings.

In appreciating Schedule 4[18], one is reminded of a similar initiative under the Motor Vehicles Act, 1988[19], where the Second Schedule[20] provided a compensation table for third-party fatal and injury claims. Although well-intentioned, the courts eventually identified serious flaws in the compensation formula, which were later addressed through judicial interventions. A similar situation has unfolded with Schedule 4[21] of the Act. In ONGC Ltd. v. Afcons Gunanusa JV[22], the Hon’ble Supreme Court tried to clarify and rectify several ambiguities within the schedule. The Court primarily focused on defining the term ‘sum in dispute’ interpreting fee structures in multi-member tribunals, and affirming that counterclaims should be treated as separate “sums in dispute”. However, numerous other uncertainties remained unresolved.

In practice, Schedule 4[23] continues to raise questions. For instance, while the “sum in dispute”  generally refers to the total value of claims and counterclaims, many arbitral cases involve purely declaratory relief without any monetary component. In such scenarios, the basis for calculating fees remains unclear. Despite multiple amendments to the Act in 2015, 2019, and 2021, the fee schedule under Schedule 4[24] has not been revised. Although the legislature has been proactive in setting time limits for completing pleadings and issuing awards, it has failed to revisit and update the fee structure even in light of inflation or proceedings extending beyond the statutory 18-month period.

This gives rise to a critical gap: Schedule 4[25] appears to prescribe fees only for the 18-month duration of the arbitral reference, with no statutory guidance on whether arbitrators are entitled to additional remuneration if the proceedings extend beyond this period. Although the Hon’ble Supreme Court in the Afcons case[26] held that Schedule 4[27] is not mandatory and party autonomy should prevail, practical challenges persist especially in cases involving government departments. Officials representing such departments often cannot instantly agree on fee proposals and must seek prior approval from higher authorities. This bureaucratic process can delay proceedings and encroach upon the 18-month limit.

Moreover, Schedule 4[28] currently assumes an average “sum in dispute” of Rs. 20 crores. In reality, most arbitration cases involve much higher claim values. In the Afcons case[29] itself, the dispute exceeded Rs. 1000 crores and involved complex legal and factual issues, along with massive volumes of documentation. These challenges even led some arbitrators to withdraw from the tribunal.

It is evident that Schedule 4[30] needs a realistic and well-researched revision. A more practical, scalable, and scientifically framed fee structure would not only streamline the process of fee determination but also save valuable tribunal time, ultimately enhancing the efficiency of the arbitral process.

Reassessing Section 34: A Necessary Safeguard or a Redundant Judicial Hurdle?

Section 34[31], one of the most debated provisions of the Act, which allows parties to challenge arbitral awards. Chapter VII[32] of the Act, which comprises only Section 34[33], lays out the procedure for challenging arbitral awards. The section mentions that such a challenge must be made in a “court” but fails to clearly identify which court. To interpret this, one must refer to Section 2(1)(e)[34] of the Act.

For domestic awards, the competent forum is the civil court of original jurisdiction, typically the District Court, while for international commercial arbitration, the High Court is the proper forum. A basic reading of the section indicates that district courts are the primary venues for domestic award challenges.

However, Section 34(2)(a)[35] lays out highly technical grounds for challenge, without inviting a re-evaluation of the merits of the case. Only limited scrutiny is permitted under Sections 34(2)(b)(ii)[36] and (iii)[37], which allow setting aside awards if they violate the fundamental policy of Indian law or basic notions of justice or morality. An exception also allows courts to intervene in cases involving fraud or corruption.

The judiciary has consistently reiterated that arbitral tribunals are the final authority on facts, and courts are not to re-examine the merits of the dispute. In NHAI v. M. Hakeem[38], the Hon’ble Supreme Court emphasized that the Act aims to minimize judicial interference. Similarly, in Dyna Technologies v. Crompton Greaves[39], it was made clear that Section 34[40] differs from appellate review and any interference by courts would undermine the purpose of ADR.

In S.V. Samudram v. State of Karnataka[41], the Apex Court cautioned that modifying awards under Sections 34[42] or 37[43] would cross a clear legal boundary. Yet, contradictory approaches have been taken in cases like Vedanta Ltd. v. Shenzhen Shandong Nuclear power Construction Co. Ltd.[44], Oriental Structural Engineers (p) Ltd. v. State of Kerala[45], and M.P. Power Generation Co. Ltd. v. Ansaldo Energia Spa[46], leading to confusion.

Is Section 34 Even Necessary?

The broader aim behind creating tribunals and promoting ADR was to ensure accessible, swift, and cost-effective dispute resolution. However, despite Section 34[47] providing limited grounds for interference, courts both at the district and high court levels often overreach their jurisdiction, defeating this very purpose.

Only four High Courts in India possess original civil jurisdiction. Thus, applications under Section 34[48], irrespective of the monetary value of the dispute, must be filed in district courts even when the arbitral award involves thousands of crores and was passed by a panel of former Supreme Court or High Court judges. This creates a paradox where relatively junior judicial officers are expected to scrutinize highly complex awards, often involving retired justices.

This contradicts the very purpose of arbitration to avoid overburdened courts and provide a quicker route to justice. The statutory requirement under Section 34[49] to challenge awards before courts violate the foundational principle of “party autonomy”. Even in cases where no appeal is contractually allowed, parties still invoke Section 34[50] because the law permits it.

Furthermore, High Courts entertain appeals under Section 37[51] on the same grounds as Section 34[52], creating unnecessary duplication. Since courts already lack resources and are backlogged, this only prolongs litigation and frustrates award-holders, who must wait years even a decade for resolution. This alone is reason enough to reconsider Section 34[53] and Section 37.

No pecuniary limits have been fixed for courts under Section 34[54], meaning district judges must entertain challenges involving any amount, regardless of complexity or scale. As it stands, a significant volume of these cases burden courts unnecessarily.

The same scrutiny performed under Section 34[55] is again applied under Section 37[56], and further appeals go to the Hon’ble Supreme Court under Article 136[57]. Unlike ordinary civil appeals, which challenge final decrees, challenges to arbitral awards are treated as miscellaneous applications creating confusion in procedural handling.

Conclusion

In conclusion, while the Act was enacted with the laudable objective of promoting efficient and autonomous dispute resolution, its current legislative framework contains several ambiguities and redundancies that hinder its effectiveness. Key provisions, including the undefined scope of “public policy”, the impractical timelines for proceedings, and the rigid, outdated fee structure under Schedule 4[58], reveal deep-rooted flaws. Most notably, Section 34[59], which was intended to provide a narrow window for judicial review, has evolved into a procedural bottleneck that undermines the very essence of arbitration speed, finality, and party autonomy. Unless these legislative shortcomings are addressed through thoughtful reform and precise statutory definitions, the promise of arbitration as a reliable and expedient alternative to litigation will remain unfulfilled in India’s legal landscape.

Authored By:
Varun S. Ahuja
Ahuja Law Offices
M: 9971673660

[1] UNCITRAL Model Law on International arbitration,1985.
[2] The Arbitration and Conciliation Act, 1996 (26 of 1996), s.34.
[3] The Arbitration and Conciliation Act, 1996 (26 of 1996), s.48.
[4] The Arbitration and Conciliation Act, 1996 (26 of 1996), s.23(4).
[5] The Arbitration and Conciliation Act, 1996 (26 of 1996), S.21.
[6] Supra Note 4.
[7] Ibid
[8] Supra Note 2.
[9] Supra Note 5.
[10] Ibid.
[11] The Arbitration and Conciliation Act, 1996 (26 of 1996), s. 11.
[12] Supra Note 5.
[13] The Arbitration and Conciliation Act, 1996 (26 of 1996), S.29A.
[14] Supra Note 4.
[15] Supra Note 5.
[16] The Arbitration and Conciliation Act, 1996, Sch.4.
[17] Ibid.
[18]Ibid.
[19] Motor Vehicles Act, 1988, (59 of 1988).
[20] The Arbitration and Conciliation Act, 1996, Sch. 2.
[21] Supra Note 23.
[22] (2024) 4 SCC 481.
[23] Supra Note 16.
[24] Ibid.
[25] Ibid.
[26] ONGC Ltd. V. Afcons Gunanusa JV (2024) 4 SCC 481.
[27] Supra Note 16.
[28] Supra Note 16.
[29] ONGC Ltd. V. Afcons Gunanusa JV (2024) 4 SCC 481
[30] Supra Note 16.
[31] Supra Note 2.
[32] The Arbitration and Conciliation Act, 1996 926 of 1996), Ch. VII.
[33] Supra Note 2.
[34] Supra Note 4.
[35] The Arbitration and Conciliation Act, 1996 (26 of 1996), s. 34(2) (a).
[36] The Arbitration and Conciliation Act, 1996 (26 of 1996), s. 34(2)(b)(ii).
[37] The Arbitration and Conciliation Act, 1996 (26 of 1996), s. 34(2)(b)(iii)
[38] (2021) 9 SCC 1.
[39] (2019) 20 SCC1.
[40] Supra Note 2.
[41] (2024) 3 SCC 623.
[42] Supra Note 2.
[43] The Arbitration and Conciliation Act, 1996 (26 of 1996), s. 37.
[44] (2019) 11 SCC 465.
[45] (2021) 6 SCC 150.
[46] (2018) 16 SCC 661.
[47] Supra Note 2.
[48] Ibid.
[49] Ibid.
[50] Ibid.
[51] Supra Note 50.
[52] Supra Note 2.
[53] Ibid.
[54] Supra Note 2.
[55] Ibid.
[56] Supra Note 43.
[57] Constitution of India, Art. 136.
[58] Supra Note 23.
[59] Supra Note 2.