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Is Section 34(5) Of The Arbitration Act Mandatory Or Directory: Supreme Court Interpretation

BACKGROUND
This instant appeal arose out of an arbitral award passed on 06.01.2016. The award debtor in the instant case, (“Appellant”) challenged the said award by filing an application under Section 34 of the Arbitration and Conciliation Act, 2015 (“Act”) before Patna High Court. The Court issued a notice to the opposite party on 18.07.2016.

The said Application became vexed between the parties on account of coming into force of Section 34(5) of the Act. Section 34(5) and related 34(6 )of the Act states as follows:

Section 34 – Application for setting aside the arbitral award. –

 (5) An application under this Section shall be filed by a party only after issuing a prior notice to the other party and such application shall be accompanied by an affidavit by the applicant endorsing compliance with the said requirement.

(6) An application under this Section shall be disposed of expeditiously, and in any event, within a period of one year from the date on which the notice referred to in Sub-section (5) is served upon the other party.

In the instant case, neither prior notice was issued by the Appellant to the other party in terms of the aforementioned Section, nor was the application accompanied by an affidavit that was a requirement under subsection 34(6).

While taking the non-compliance with the relevant clauses of section 34 into account, the Single Judge Bench of Patna High Court, vide judgment dated 06.09.2016, held that the provision contained under Section 34(5) was the only directory and not mandatory. The judgment by Patna High Court was based on the decision of Supreme Court in Kailash v. Nanhku and Ors.

Aggrieved by the Judgement of the High Court, the Respondent preferred a Letters Patent Appeal (LPA) to the Division Bench of Patna High Court, which vides an order dated 28.10.2016, held:

‘……Upon adverting to the Law Commission Report which led to the 2015 amendment, that the mandatory language of Section 34(5), together with its object, made it clear that the sub-section was a condition precedent to the filing of a proper application under Section 34, and, on the analogy of a notice issued Under Section 80 of the Code of Civil Procedure, 1908, being a condition precedent to the filing of a suit against the Government…….’

‘……since this mandatory requirement had not been complied with, and as the period of 120 days had run out, the Section 34 application itself would have to be dismissed.’

Aggrieved by the decision of the Hon’ble Division Bench, the Appellant preferred the present appeal in Supreme Court.

ISSUE FOR CONSIDERATION BEFORE SUPREME COURT

Whether Section 34(5) of the Arbitration and Conciliation Act, 1996, inserted by Amending Act 3 of 2016 (w.e.f 23rd October 2015), is mandatory or directory?

OBSERVATION

The Supreme Court bench comprising of J. Rohinton Fali Nariman and J. Indu Malhotra made reference to the definitive objective of the provisions as per “The 246th Law Commission Report” and the same is as under:

“……the object of Section 34(5) and (6) is the requirement that an application under Section 34 is disposed of expeditiously within a period of one year from the date of service of the notice.”

The Court also referred to numerous case laws to arrive at a Just and irrefutable conclusion with respect to the issue in question.

The Honorable Bench referred to Topline Shoes v. Corporation Bank. In the instant case,  Section 13(2) (a) of the Consumer Protection Act, 1986, was dealt with. Section 13(2) permits the opposite party to file its reply “within a period of 30 days or such extended period not extending 15 days, as may be granted by the District Forum”.

“The Court read the same in conjunction with the Statement of Objects and Reasons of the Act which provides that the principles of natural justice have to be kept in mind and thus, held the provision to be the directory in nature.”

Further, a decision of the Apex Court in Kailash v. Nanhku and Ors has also referred wherein the Hon’ble Court dealt with the amendment of Order VIII Rule 1 of the CPC under the Amendment Act of 2002. Order VIII Rule 1 is circumscribed by the words “shall not be later than ninety days”.

The question of law in the instant case was “Whether, after the amendment of Order VIII Rule 1 of the Code of Civil Procedure by the Amendment Act of 2002, the said provision must be construed as being mandatory?

“The provision is procedural in nature and that its object is to curb the mischief of unscrupulous defendants adopting dilatory tactics by delaying the disposal of cases. The language of the proviso to Order VIII Rule 1 is couched in negative form; it does not specify any penal consequences flowing from the non-compliance. The provision being in the domain of the procedural law was to be held directory and not mandatory.”

The identical ratio was adopted by Supreme Court in Surendra Trading Company while interpreting the time-bound proceedings, under IBC, at the end of Adjudicating authority i.e NCLT. The Apex Court held that the time period of 14 days to be directive and not mandatory.

The Hon’ble Apex Court further considered the matter of Salem Advocate Bar Association v. Union of India, wherein it was held that:

“The use of the word “shall” in Order 8 Rule 1 by itself is not conclusive to determine whether the provision is mandatory or directory. We have to ascertain the object which is required to be served by this provision and its design and context in which it is enacted. The use of the word “shall” is ordinarily indicative of mandatory nature of the provision but having regard to the context in which it is used or having regard to the intention of the legislation, the same can be construed as directory. The Rule in question has to advance the cause of justice and not to defeat it. The Rules of procedure are made to advance the cause of justice and not to defeat it. Construction of the Rule or procedure which promotes justice and prevents miscarriage has to be preferred. The Rules of procedure are the handmaid of justice and not its mistress. In the present context, the strict interpretation would defeat justice.”

The Apex Court also referred to the judgment in Bihari Chowdhary and Anr. v. State of Bihar and Ors. dealt with Section 80 of the Civil Procedure Code. The provision affords the government or public officers, an opportunity to analyze the claim being proposed to be filed against them, with the intent to avoid unnecessary litigation and saving public time and money by settling the claim without driving the individual who has issued the notice to file a suit. The patent object of the section is the advancement of justice and the securing public interest by avoidance unnecessary litigation. The Court hence observed that Section 80 of the CPC, even though a procedural provision, is mandatory in nature as it is conceived in public interest.

The Court held:

Section 80 CPC is to be contrasted with Section 34(5), also a procedural provision, the infraction of which leads to no consequence. To construe such a provision as being mandatory would defeat the advancement of justice, as it would provide the consequence of dismissing an application filed without adhering to the requirements of Section 34(5), thereby scuttling the process of justice.”

Further, In Global Aviation Services Private Limited v. Airport Authorities of India, the Bombay High Court held :

 “Section 34(5) of the Arbitration and Conciliation Act is directory because no consequence has been provided for breach of the limit specified.”

REFERRED  DECISIONS

The Hon’ble Court put reliance upon the following decisions in forming the view:

  1. Topline Shoes v. Corporation Bank – (2002) 6 SCC 33
  2. Kailash v. Nanhku and Ors – (2005) 4 SCC 480
  3. Salem Advocate Bar Association v. Union of India – (2005) 6 SCC 344
  4. New India Assurance Co. Ltd. v. Hill Multipurpose Cold Storage Pvt. Ltd. – (2015) 16 SCC 20.
  5. Bihari Chowdhary and Anr. v. State of Bihar and Ors – (1984) 2 SCC 627
  6. Global Aviation Services Private Limited v. Airport Authorities of India – Commercial Arbitration Petition No. 434 of 2017 [decided on 21.02.2018]

The Supreme Court further emphasized upon the instructive passage in Maxwell on Interpretation of Statutes, 10th Edition, to the effect that

“……considerations of convenience and justice are uppermost, and if general inconvenience or injustice results, without promoting the real aim and object of the enactment, the provision must be declared to be directory.”

In the light of the cases and jurisprudence discussed above, the Hon’ble Apex Court held as under:

“It will thus be seen that Section 34(5) does not deal with the power of the Court to condone the non-compliance thereof. It is imperative to note that the provision is procedural, the object behind which is to dispose of applications Under Section 34 expeditiously. One must remember the wise observation contained in Kailash, where the object of such a provision is only to expedite the hearing and not to scuttle the same. All Rules of procedure are the handmaids of justice and if, in advancing the cause of justice, it is made clear that such provision should be construed as directory, then so be it.” 

KEY TAKEAWAYS

  • The Supreme Court set aside a number of High Court judgments that have all taken the view that Section 34(5) is mandatory in nature.
  • The Court allowed the appeal by holding Section 34(5) to be directory and set aside the judgment of the Patna High Court.
  • The Court further directed that the Section 34 application will now be decided on the merits alone.

CONCLUDING  REMARKS

The Supreme Court in the captioned matter has been more inclined to see that on account of strict interpretation of the amended provisions, justice is not unduly defeated in a matter.

This reasoning by the Apex Court overtly signals that the judiciary wants a more flexible interpretation of the words written in the statute: an interpretation that is not bound within the airtight compartment of the lingo used in drafting the law but one which furthers the fundamental goal of rightful administration of justice.

Finally, it is further a common law that a provision in a statute which is procedural in nature, even if it has the word “shall” in it, may not be held to be mandatory, if consequently no prejudice is caused.

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