The difference between ‘reasons’ and ‘finding’ – defining scope of Court’s interference under Section 34(4) of the Arbitration and Conciliation Act, 1996

An arbitration award, much like a decree of a Court, must adhere to the principles of natural justice, which form the plinth of the justice system in India. Maneka Gandhi v. UOI^[1] has settled the law viz. an unreasoned order is null and void, as it violates the principles of natural justice. The scheme of the arbitration law in India is to expeditiously put an end to the dispute and provides very limited grounds for challenge to an award. Section 34(4) of the Act, therefore, has found an important place in the Arbitration and Conciliation Act, 1996 (the Act) which enables an arbitral tribunal to remedy a curable defect in an award, upon an application made by a party. The said power is aimed at upholding the sanctity of an award which, although contains a ‘finding’, lacks sufficient ‘reasons’ in support thereof. Section 34(4) envisages that if a party opposing Section 34 proceedings files an application seeking resumption of proceedings by a tribunal to eliminate the grounds for setting aside the award, the Court may adjourn the proceedings for a period of time to give the Tribunal an opportunity to resume proceedings or taken any action as required to eliminate the grounds for setting aside the award.

This provision allows a tribunal to reconvene even after the arbitral proceedings are terminated upon passing of an award. This is done to cure defects, in order to preserve the integrity of an award. The judgment of the Hon’ble Supreme Court of India in I-Pay Clearing Services Pvt. Ltd. v ICICI Bank Ltd.^[2] while re-affirming the principle that a lack of reasons may be cured under Section 34(4), states that a lack of a finding on a particular issue is incapable of being cured under Section 34(4).

• I-Pay Clearing Services Pvt. Ltd. (“I-Pay”) and ICICI Bank Ltd. (“ICICI”) entered into a Service Provider Agreement pertaining to technology, management and operations of a Smart-Card based loyalty program for Hindustan Petroleum Corporation Ltd.
• ICICI terminated the agreement giving rise to a dispute that was referred to arbitration, presided over by a Sole Arbitrator.
• The Ld. Sole Arbitrator passed an award directing ICICI to pay INR 50 crores as damages with interest at 18% p.a. from the date of Award, till realization.
• ICICI Bank assailed the Award under Section 34 of the Act, before the Hon’ble Bombay High Court on the ground of patent illegality, inasmuch as no finding was recorded in the Award on the issue of whether ICICI illegally and abruptly terminated the agreement. Peculiarly, even though the issue had been framed, the award was bereft of a specific finding. ICICI argued that the Award did not even contain a finding on the exact nature of the breach, thus being patently illegal and erroneous.
• During the pendency of the Section 34 petition, I-Pay brought out a notice of motion under Section 34(4) of the Act, which was dismissed by the High Court, by way of its order dated 16.07.2019 on the ground that the there was no finding on the issue of the legality of the termination. It held that this defect was not curable as the Award lacked a finding on the exact nature of breach for which damages were awarded.
• This order was challenged by I-Pay before the Hon’ble Supreme Court of India.

• I-Pay argued that the Award was based on the finding of the Tribunal that ICICI had illegally and abruptly terminated the agreement due to which, damages were awarded, and only lacked certain reasons, which constitutes a curable defect under Section 34(4) of the Act.
  • I-Pay relied on the judgment of the Singapore Court of Appeals in AKN & Anr. v ALC & Ors.[3] and of the Singapore High Court in Permasteelisa Pacific Holdings Ltd. v Hyundai Engineering & Construction Co. Ltd.[4] to say that remission to the Tribunal is a ‘curative alternative’ to setting aside the award, and ought to be exercised to preserve the award.
  • Reliance was also placed by it on Dyna Technologies Pvt. Ltd. v Crompton Greaves Ltd.[5] to substantiate the argument that a lack of, or a gap in the reasoning in an award is capable of being remedied under Section 34(4) of the Act.
• ICICI argued that the Tribunal had not considered relevant documentary evidence in support of its contentions, and the Award suffered from perversity and patent illegality, which could not be cured by remission under Section 34(4) of the Act. It argued that to allow a finding on the issue of legality of the termination to be added to the award at this stage, through recourse under Section 34(4) would amount to changing the Award that was already passed.
  • To buttress this point, the decision in Income Tax Officer, A Ward, Sitapur v Murlidhar Bhagwan Das[6] was relied upon to explain the difference between ‘finding’ and ‘reason’.

• In its order dated January 03, 2022, the Hon’ble Supreme Court found in favor of ICICI and upheld the impugned order of the Hon’ble Bombay High Court.
• It recorded that Section 34(4) was couched in language that was similar to Article 34(4) of the UNCITRAL Model Law on International Commercial Arbitration. It stated that remission is a ‘curative alternative’ to setting aside of an award that must be exercised to give effect to the intention behind Section 34(4).
• It also recognized that the judgment in Kinnari Mullick v Ghanshyam Das Damani^[7] holds that the quintessence of Section 34(4) is to enable the tribunal to eliminate the grounds for setting aside the arbitral award by curing defects in it.
• However, it differentiated the decision in Dyna Technologies and Som Datt Builders v. State of Kerala^[8] by noting that these were not cases of patent illegality in the award but pertained to lack of reasoning for a finding that was already recorded in the award.
• To the contrary, in the case at hand, there was nothing in the Award to evince that there was a finding on the issue of validity of the termination. While drawing a distinction between ‘finding’ and ‘reasons’, it held that a finding is a decision on an issue and ‘reasons’ are the links between the materials on which certain conclusions are based and the actual conclusions.^[9]
• The Hon’ble Supreme Court while dismissing the appeal held that the Award lacked a finding on a key issue and had yet proceeded to award damages.
• It unequivocally clarified that lack of reasons is a curable defect subject to the discretion of a Court, however the lack of a finding is not a curable defect capable of rectification under Section 34(4).

The Hon’ble Supreme Court has stated the obvious. A right given to a party to seek permission for remission to permit a Tribunal to rectify curable defects would not permit such a Tribunal to change the Award by supplanting findings on the pretext of giving reasons. The intention of the legislature could not have been to permit a Tribunal to sit and rectify its own award by adding findings on material issues in the absence of which an award would be perverse. The idea of introducing Section 34(4) was to uphold the sanctity of an award by eliminating the grounds for challenge to the award. The intention was not to make 34(1) redundant by changing the Award. Thus, where a Tribunal gives a clear finding, the scheme of Section 34(4) permits the Tribunal to provide detailed reasons in support of that finding. On the other hand, where the Tribunal fails to record a finding on a material issue but grants an exorbitant compensation, Courts are obligated to reject the request U/s 34(4) for supplanting a finding under the garb of a reasoning.  An application under Section 34(4) must be filed keeping in mind the grounds raised in the application under Section 34(1) by the party challenging the award.

A valuable observation of the Supreme Court in this case has been that the power under Section 34(4) of the Act is discretionary and not obligatory. Such discretion should be exercised where the reasoning is inadequate or there exists a lacuna in the reasoning that requires to be supplemented. An application under Section 34(4) cannot be a disingenuous attempt to change the award or alter the findings therein.

We hope you have found this information useful. For any queries/clarifications please write to us at insights@elp-in.com  or write to our authors:

Mumtaz Bhalla, Partner – Email – mumtazbhalla@elp-in.com
Harshvardhan Nankani, Associate – Email – harshvardhannankani@elp-in.com

[1] AIR 1978 SC 597
[2] Civil Appeal No. 7 of 2022, arising out of S.L.P. (C) No. 24278 of 2019, delivered on January 03, 2022.
[3] [2015] SGCA 63
[4] [2005] SGHC 33
[5] (2019) SCC Online SC 1656
[6] AIR 1965 SC 342
[7] (2018) 11 SCC 328, paragraphs 12 and 13
[8] (2009) 10 SCC 259, paragraphs 25 and 26
[9]  J. Ashoka v University of Agricultural Sciences & Ors. (2017) 2 SCC 609