On what grounds can a court set aside an arbitral award? Ssangyong and Section 34

The Statutory Question

Section 34 of the Arbitration and Conciliation Act 1996 is the only door through which an Indian court may unmake an arbitral award, and since 23 October 2015 that door has been deliberately narrowed. Sub-section (1) is written as a restriction, not a grant: recourse to a court against an arbitral award "may be made only by an application for setting aside such award in accordance with sub-section (2) and sub-section (3)". On 8 May 2019, in Ssangyong Engineering and Construction Co Ltd v National Highways Authority of India, (2019) 15 SCC 131, the Supreme Court of India read that sentence against the amendments recommended by the Law Commission of India in its 246th Report of August 2014 and enacted by the Arbitration and Conciliation (Amendment) Act 2015.

The question before the Court was not whether the majority arbitrators had decided the dispute correctly. It was narrower: after the 2015 amendment replaced the Explanation to Section 34(2)(b)(ii) and inserted a new Section 34(2A), how much review power does a court retain? Justice R.F. Nariman, writing for a Bench that also included Justice Vineet Saran, held that what survives is small, and that none of it permits a court to ask whether the tribunal got the merits right.

The commercial stakes are immediate. Since the 2015 amendment rewrote Section 36, merely filing a Section 34 application no longer operates as an automatic stay on enforcement, a position the Supreme Court confirmed on 15 March 2018 in Board of Control for Cricket in India v Kochi Cricket Private Limited, (2018) 6 SCC 287. A losing party must now apply separately for a stay under Section 36(3), and the court may impose conditions when granting one.

The grounds, as the section actually lists them

Two features of that table do most of the work. Section 34(2)(b) grounds are for the court to find, while Section 34(2)(a) grounds must be established by the applicant; and Section 34(2A) is confined to "arbitrations other than international commercial arbitrations", so patent illegality is unavailable even when an international commercial arbitration is seated in India.

What the Court Held

Ssangyong arose from a highway construction contract with the National Highways Authority of India containing a price adjustment formula tied to the Wholesale Price Index. After the Government shifted the WPI series to a new base year, NHAI relied on a circular issued in 2013 prescribing how the revised index was to be applied. A majority of the three-member tribunal accepted NHAI's method; the third arbitrator dissented and would have applied the formula in the contract as written.

The Supreme Court set aside the majority award on 8 May 2019 and, exercising its power under Article 142 of the Constitution, upheld the minority award as the award between the parties. The reasoning was not that the majority had misread the escalation clause. It was that by applying a circular that was never part of the bargain, the majority had in substance written a new contract for parties who had never agreed to it, and had relied on material that the objecting party was not given a fair chance to meet.

Four propositions of law emerge from the judgement and now govern every Section 34 application filed in India.

1. "Fundamental policy of Indian law" in Explanation 1(ii) to Section 34(2)(b)(ii) carries the narrow meaning given to it in Renusagar Power Co Ltd v General Electric Co, 1994 Supp (1) SCC 644, and no wider.
2. The expanded reading of that phrase in Oil and Natural Gas Corporation Ltd v Western Geco International Ltd, (2014) 9 SCC 263, including the importation of Wednesbury reasonableness, does not survive the 2015 amendment.
3. Patent illegality, introduced as a facet of public policy in Oil and Natural Gas Corporation Ltd v Saw Pipes Ltd, (2003) 5 SCC 705, now lives only in Section 34(2A) and only for domestic awards.
4. An award founded on no evidence at all, or on material taken behind a party's back, is vulnerable, but not because the court disagrees with the tribunal's appreciation of that material.

Reasoning

Public policy was cut back to three closed categories

The 2015 amendment did not leave "public policy of India" to judicial elaboration. Explanation 1 to Section 34(2)(b)(ii) now states that an award is in conflict with the public policy of India "only if" one of three things is true: the making of the award was induced or affected by fraud or corruption or was in violation of Section 75 or Section 81; the award is in contravention with the fundamental policy of Indian law; or it is in conflict with the most basic notions of morality or justice. The word "only" converts an open standard into a closed list of three.

Explanation 2 then blocks the obvious workaround. It reads: "For the avoidance of doubt, the test as to whether there is a contravention with the fundamental policy of Indian law shall not entail a review on the merits of the dispute." Ssangyong treats that sentence as decisive. A court asked to set aside an award for contravening fundamental policy may not reach the question by first deciding what the correct answer on the merits was. This is why the 2014 approach in Western Geco, which had allowed courts to test whether a tribunal adopted a "judicial approach" and reached a conclusion a reasonable person could reach, could not be carried forward past 23 October 2015.

On the third category, the Court kept the threshold from Associate Builders v Delhi Development Authority, (2015) 3 SCC 49: an award offends the most basic notions of morality or justice only where it shocks the conscience of the court. That is a standard about outrage, not about error.

Patent illegality is a domestic ground and excludes mere error

Section 34(2A), inserted in 2015, provides that an award "arising out of arbitrations other than international commercial arbitrations, may also be set aside by the Court, if the Court finds that the award is vitiated by patent illegality appearing on the face of the award". The proviso is the operative limit: "Provided that an award shall not be set aside merely on the ground of an erroneous application of the law or by re-appreciation of evidence."

Ssangyong reads the sub-section and its proviso together. Patent illegality is available, but two of the most common grounds urged in practice are taken off the table by statute. An award is not set aside because the tribunal applied the wrong provision of the Contract Act 1872, and it is not set aside because a judge, re-reading the record, would have weighed the evidence differently. What remains within patent illegality is the class of defect visible on the face of the award itself: a finding resting on no evidence whatever, a decision that ignores vital evidence, a construction of the contract no fair-minded person could put on the words, or an award that contravenes the substantive law of India or the terms of the contract under Section 28(3).

Natural justice is about process, not outcome

The strongest strand in Ssangyong is procedural. Section 34(2)(a)(iii) allows an award to be set aside where the applicant "was not given proper notice of the appointment of an arbitrator or of the arbitral proceedings or was otherwise unable to present his case". Reliance by a tribunal on documents or a methodology that a party was never confronted with falls squarely inside those words, because a party cannot present a case against material it has not seen.

That is a different complaint from "the tribunal was wrong", and it is testable without reopening the merits: either the material was put to the party or it was not. This explains the shape of the relief. The Court did not remit the dispute for fresh adjudication and did not substitute its own view of the correct escalation figure; it set aside the majority award and, under Article 142, let the dissenting arbitrator's award stand.

Practical Takeaways

For a party planning a challenge. Time is the first constraint and it is unforgiving. Section 34(3) requires the application within three months from the date of receipt of the award, extendable by a further thirty days on sufficient cause "but not thereafter". Section 34(5) requires prior notice to the other party, and Section 34(6) directs disposal expeditiously and in any event within one year from the date the Section 34(5) notice is served.

• Frame the petition around a listed ground, naming the sub-clause. A petition that reads as an appeal on facts invites dismissal under the proviso to Section 34(2A).
• Identify the specific document or methodology the tribunal used that was never put to you. That is a Section 34(2)(a)(iii) point and does not require the court to reopen the merits.
• Remember that the Arbitration and Conciliation (Amendment) Act 2019, brought into force on 30 August 2019 and therefore after Ssangyong was decided, changed Section 34(2)(a) from "furnishes proof that" to "establishes on the basis of the record of the arbitral tribunal that". The record now defines the evidentiary universe for those grounds.
• An appeal against an order setting aside or refusing to set aside an award lies under Section 37(1)(c). There is no second chance to add grounds that were never pleaded.

For an award creditor. The 2015 rewrite of Section 36 and the position confirmed in BCCI v Kochi Cricket on 15 March 2018 mean that enforcement is not frozen by the mere filing of a Section 34 petition. Press for execution, and resist any stay under Section 36(3) unless it is conditional on a deposit.

For businesses drafting contracts. Ssangyong is ultimately a drafting warning. The dispute existed only because a price adjustment clause referenced a published Wholesale Price Index series that the Government later rebased, and the 2013 circular filling that gap formed no part of the contract. Where a contract borrows an external series, say what happens if it is rebased or discontinued, because a tribunal cannot supply that term afterwards without risking the award under Section 34(2A).

For foreign and non-resident parties. If your arbitration is an international commercial arbitration seated in India, Section 34(2A) is closed to you and your challenge must fit the Section 34(2)(a) grounds or one of the three public policy categories. Where an award results in money moving out of India, the repatriation and tax mechanics matter as much as the award itself, and our repatriation calculator and NRI tax calculator set out the limits and rates that apply.

How this sits beside bank recovery. Arbitration is a contractual remedy, while a secured lender enforcing security under the SARFAESI Act 2002 needs no arbitration clause at all: it can act under the SARFAESI route or move the Debts Recovery Tribunal, where the value of the collateral rather than an award drives the outcome. Borrowers weighing an arbitration clause in a facility agreement against those statutory routes should price the difference before signing, alongside the cost of the loan on our home loan EMI calculator.

Three earlier explainers in this series fill in the surrounding law: why a general power of attorney does not convey title, the constitutional challenge to SARFAESI in Mardia Chemicals, and when a director can be prosecuted for a company's bounced cheque.

The full text of the ruling is on Indian Kanoon, and the Arbitration and Conciliation Act 1996 as amended is published by the Government of India on India Code.

FAQ

Can a court set aside an arbitral award simply because the arbitrator applied the law wrongly?

No. The proviso to Section 34(2A), inserted by the Arbitration and Conciliation (Amendment) Act 2015, states that an award shall not be set aside merely on the ground of an erroneous application of the law or by re-appreciation of evidence. Ssangyong, decided on 8 May 2019, applies that proviso directly. An error of law inside the award is for the tribunal to make; it is not a ground under Section 34 unless it amounts to patent illegality appearing on the face of the award.

What does "patent illegality" mean after the 2015 amendment?

It is the ground in Section 34(2A), available only for awards in arbitrations other than international commercial arbitrations. It covers illegality that appears on the face of the award, such as a finding resting on no evidence at all, a decision ignoring vital evidence, or an award that contravenes the substantive law of India or the terms of the contract. Before 2015 it was a judge-made facet of public policy under Saw Pipes, (2003) 5 SCC 705.

Does patent illegality apply to international commercial arbitrations seated in India?

No. Section 34(2A) applies by its own wording to "arbitrations other than international commercial arbitrations". An award in an international commercial arbitration, even with an Indian seat, can be challenged only under the grounds in Section 34(2)(a) or under the three public policy categories in Explanation 1 to Section 34(2)(b)(ii). Ssangyong confirmed this division on 8 May 2019.

How long do I have to file a Section 34 application?

Section 34(3) gives three months from the date on which the party making the application received the arbitral award. A court may extend that period by a further thirty days if satisfied that the applicant was prevented by sufficient cause, but the sub-section closes with the words "but not thereafter". Section 34(6) then directs that the application be disposed of within one year from the date the notice under Section 34(5) is served on the other party.

Does filing a Section 34 petition stop the winning party from enforcing the award?

Not automatically. The 2015 amendment rewrote Section 36 so that an award is enforceable despite a pending challenge unless the court separately grants a stay under Section 36(3), and it may attach conditions to that stay. The Supreme Court settled the transitional position on 15 March 2018 in BCCI v Kochi Cricket Private Limited, (2018) 6 SCC 287. The old practice of an automatic stay on filing is gone.

What is left of "public policy of India" as a ground?

Three categories, and nothing more, under Explanation 1 to Section 34(2)(b)(ii): fraud or corruption in the making of the award or a violation of Section 75 or Section 81; contravention of the fundamental policy of Indian law, in the Renusagar sense from 1994; and conflict with the most basic notions of morality or justice, which Associate Builders, (2015) 3 SCC 49, measured by whether the award shocks the conscience of the court. Explanation 2 bars any merits review under this head.

What happened to the award in Ssangyong itself?

The Supreme Court set aside the majority award on 8 May 2019 because it applied a circular that formed no part of the contract and relied on material the objecting party had not been given a fair opportunity to meet. Rather than sending the dispute back for a fresh arbitration, the Court invoked Article 142 of the Constitution and upheld the dissenting arbitrator's award as the award between the parties.