Supreme Court clarifies the nature of Section 34(5) of the Arbitration and Conciliation Act, 1996: State of Bihar & Ors. vs. Bihar Rajya Bhumi Vikas Bank Samiti (30 July 2018)

Supreme Court Clarifies Mandatory Nature of Section 34(5) of the Arbitration Act in Bihar Rajya Bhumi Vikas Bank Samiti vs State of Bihar (2018)

Date of the Judgment: 30 July 2018
Citation: (2018) INSC 694
Judges: R.F. Nariman, J., Indu Malhotra, J.
Can a procedural lapse in filing an application under Section 34 of the Arbitration and Conciliation Act, 1996, lead to its dismissal? The Supreme Court of India addressed this critical question, focusing on whether the requirement of prior notice and affidavit under Section 34(5) is mandatory or directory. This judgment clarifies the procedural aspects of challenging arbitral awards, impacting how arbitration proceedings are conducted in India. The bench consisted of Justice R.F. Nariman and Justice Indu Malhotra, with Justice Nariman authoring the opinion.

Table of Contents

Case Background

The case arises from an arbitration proceeding that commenced on 24 May 2015. An arbitral award was made on 6 January 2016. Subsequently, a petition under Section 34 of the Arbitration and Conciliation Act, 1996, challenging the award, was filed before the Patna High Court on 5 April 2016. The High Court issued a notice to the opposite party on 18 July 2016. Crucially, the application under Section 34 was not accompanied by an affidavit, and no prior notice was issued to the other party as required by Section 34(5) of the Arbitration and Conciliation Act, 1996, which came into effect on 23 October 2015.

Timeline

Date	Event
24 May 2015	Arbitration proceeding commenced.
23 October 2015	Section 34(5) of the Arbitration and Conciliation Act, 1996 came into force.
6 January 2016	Arbitral award was made.
5 April 2016	Section 34 petition filed before Patna High Court.
18 July 2016	Patna High Court issued notice to the opposite party.
6 September 2016	Single Judge of Patna High Court held Section 34(5) as directory.
28 October 2016	Division Bench of Patna High Court held Section 34(5) as mandatory.
30 July 2018	Supreme Court delivered the judgment.

Course of Proceedings

A Single Judge of the Patna High Court, on 6 September 2016, ruled that Section 34(5) of the Arbitration and Conciliation Act, 1996, was directory, relying on the Supreme Court’s judgment in Kailash v. Nanhku and Ors., (2005) 4 SCC 480. However, a Division Bench of the same High Court, in an order dated 28 October 2016, overturned this decision. The Division Bench, referencing the Law Commission Report that led to the 2015 amendment, held that the mandatory language of Section 34(5), along with its objective, made it a condition precedent for a valid Section 34 application. The Division Bench analogized it to a notice under Section 80 of the Code of Civil Procedure, 1908, which is a condition precedent for filing a suit against the Government. Consequently, the Division Bench dismissed the Section 34 application due to non-compliance, as the 120-day period had expired.

Legal Framework

The core of this case revolves around Section 34(5) and (6) of the Arbitration and Conciliation Act, 1996. These sections state:

“34. Application for setting aside arbitral award.—
xxx xxx xxx
(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.”

The Supreme Court examined whether the requirements of prior notice and affidavit under Section 34(5) are mandatory conditions for a valid application under Section 34. The Court also considered the purpose of Section 34(6), which mandates the disposal of such applications within one year.

Arguments

Appellants’ Arguments (State of Bihar & Ors.):

The Letters Patent Appeal itself was not maintainable.
Section 34(5) and (6) are part of a composite scheme to ensure expeditious disposal of Section 34 applications within one year.
Since no consequence is provided for failing to dispose of the application within one year, the provisions are directory despite the mandatory language.
Procedural provisions should not be interpreted in a way that obstructs justice.

Respondent’s Arguments (Bihar Rajya Bhumi Vikas Bank Samiti):

The High Court judgment was correct on both maintainability and the mandatory nature of Section 34(5).
An application filed without complying with Section 34(5) is non est (not valid) in law.
The consequence of non-compliance stems from Section 34(3), which stipulates that applications beyond the stipulated or extended period cannot be considered.
The Law Commission Report and the mandatory language of Section 34(5) indicate that it is a condition precedent.
Most High Courts have held the provision to be mandatory.

Main Submission	Appellants (State of Bihar & Ors.)	Respondent (Bihar Rajya Bhumi Vikas Bank Samiti)
Maintainability of Appeal	Letters Patent Appeal was not maintainable.	High Court judgment was correct on maintainability.
Nature of Section 34(5)	Section 34(5) is directory as it is part of a scheme for expeditious disposal, and no consequence is provided for non-compliance of time limit under Section 34(6).	Section 34(5) is mandatory and a condition precedent for a valid application under Section 34.
Consequences of Non-Compliance	No consequences for non-compliance of Section 34(5) are provided, hence it is directory.	Non-compliance of Section 34(5) makes the application non est in law, and it cannot be considered under Section 34(3).
Interpretation of Legal Provisions	Procedural provisions should be interpreted to advance justice, not obstruct it.	The Law Commission Report and mandatory language of Section 34(5) indicate that it is a condition precedent.
Precedent	Relied on judgments indicating that procedural requirements without consequences for non-compliance are directory.	Relied on the majority of High Court decisions which have held the provision to be mandatory.

Innovativeness of the Argument: The respondent’s argument that non-compliance with Section 34(5) renders the application non est in law and that the consequence stems from Section 34(3) was a novel interpretation of the interplay between these provisions.

Issues Framed by the Supreme Court

The primary issue before the Supreme Court was:

Whether Section 34(5) of the Arbitration and Conciliation Act, 1996, is mandatory or directory.

The Court also considered the interplay between Section 34(5) and Section 34(6) of the Arbitration and Conciliation Act, 1996.

Treatment of the Issue by the Court

Issue	Court’s Decision	Reason
Whether Section 34(5) is mandatory or directory?	Directory	The provision is procedural, and no consequence is provided for non-compliance. The object is to expedite the hearing, not to scuttle it.

Authorities

Cases Considered by the Court:

Topline Shoes v. Corporation Bank, (2002) 6 SCC 33: Considered the directory nature of time limits under Section 13(2)(a) of the Consumer Protection Act, 1986, where no penal consequences were prescribed for exceeding the time limit.
Kailash v. Nanhku and Ors., (2005) 4 SCC 480: Held that Order VIII Rule 1 of the Code of Civil Procedure, 1908, is directory, as it is procedural and does not specify penal consequences for non-compliance.
Salem Advocate Bar Association v. Union of India, (2005) 6 SCC 344: Reiterated that procedural rules should advance justice and not defeat it.
New India Assurance Co. Ltd. v. Hilli Multipurpose Cold Storage Pvt. Ltd., (2015) 16 SCC 20: Held that the time limit for filing a response under the Consumer Protection Act is mandatory, following J.J. Merchant (Dr.) v. Shrinath Chaturvedi, (2002) 6 SCC 635.
J.J. Merchant (Dr.) v. Shrinath Chaturvedi, (2002) 6 SCC 635: Held that the mandate of the law is required to be strictly adhered to, in context of the Consumer Protection Act.
State v. N.S. Gnaneswaran, (2013) 3 SCC 594: Held that Section 154(2) of the Code of Criminal Procedure, 1973, is directory because no consequence is provided for its breach.
Bikhraj Jaipuria v. Union of India, (1962) 2 SCR 880: Held that Section 175(3) of the Government of India Act, 1935, is mandatory for contracts on behalf of the Government.
Bihari Chowdhary and Anr. v. State of Bihar and Ors., (1984) 2 SCC 627: Explained the mandatory nature of Section 80 of the Code of Civil Procedure, 1908, for suits against the Government.
Global Aviation Services Private Limited v. Airport Authorities of India: The Bombay High Court held that Section 34(5) is directory because no consequence has been provided for breach of the time limit specified.

Legal Provisions Considered by the Court:

Section 34(1), 34(3), 34(5) and 34(6) of the Arbitration and Conciliation Act, 1996
Section 13(2)(a) of the Consumer Protection Act, 1986
Order VIII Rule 1 of the Code of Civil Procedure, 1908
Section 80 of the Code of Civil Procedure, 1908
Section 154(2) of the Code of Criminal Procedure, 1973
Section 175(3) of the Government of India Act, 1935
Section 29A of the Arbitration and Conciliation Act, 1996
Section 10 and 14 of the Commercial Courts, Commercial Division and Commercial Appellate Division of High Courts Act, 2015

Authority	Court	How the Authority was Treated
Topline Shoes v. Corporation Bank, (2002) 6 SCC 33	Supreme Court of India	Followed (Ratio that procedural time limits without consequences are directory)
Kailash v. Nanhku and Ors., (2005) 4 SCC 480	Supreme Court of India	Followed (Ratio that procedural provisions without consequences are directory)
Salem Advocate Bar Association v. Union of India, (2005) 6 SCC 344	Supreme Court of India	Followed (Ratio that procedural rules should advance justice)
New India Assurance Co. Ltd. v. Hilli Multipurpose Cold Storage Pvt. Ltd., (2015) 16 SCC 20	Supreme Court of India	Overruled (Incorrectly followed J.J. Merchant and did not consider Topline Shoes)
J.J. Merchant (Dr.) v. Shrinath Chaturvedi, (2002) 6 SCC 635	Supreme Court of India	Distinguished (Obiter dictum on Order VIII Rule 1 CPC, not applicable)
State v. N.S. Gnaneswaran, (2013) 3 SCC 594	Supreme Court of India	Followed (Ratio that procedural provisions without consequences are directory)
Bikhraj Jaipuria v. Union of India, (1962) 2 SCR 880	Supreme Court of India	Distinguished (Mandatory nature of contracts in public interest, not a general rule)
Bihari Chowdhary and Anr. v. State of Bihar and Ors., (1984) 2 SCC 627	Supreme Court of India	Distinguished (Mandatory nature of Section 80 CPC for suits against the government)
Global Aviation Services Private Limited v. Airport Authorities of India	Bombay High Court	Followed (Ratio that Section 34(5) is directory)

Judgment

How each submission made by the Parties was treated by the Court?

Submission	Court’s Treatment
Appellants’ submission that the Letters Patent Appeal was not maintainable.	Not decided as the appeal succeeded on other grounds.
Appellants’ submission that Section 34(5) and (6) are part of a composite scheme and are directory.	Accepted. The court held that the provisions are directory.
Respondent’s submission that Section 34(5) is mandatory and a condition precedent.	Rejected. The court held that it is a procedural provision and directory.
Respondent’s submission that non-compliance of Section 34(5) makes the application non est in law.	Rejected. The court held that the absence of consequences for non-compliance makes it directory.
Respondent’s submission that the consequence of non-compliance stems from Section 34(3).	Rejected. The court clarified that Section 34(1) does not refer to Section 34(5).

How each authority was viewed by the Court?

The Supreme Court followed Topline Shoes v. Corporation Bank, (2002) 6 SCC 33*, holding that procedural time limits without consequences are directory.
The Supreme Court followed Kailash v. Nanhku and Ors., (2005) 4 SCC 480*, reinforcing that procedural provisions without consequences are directory.
The Supreme Court followed Salem Advocate Bar Association v. Union of India, (2005) 6 SCC 344*, emphasizing that procedural rules should advance justice.
The Supreme Court overruled New India Assurance Co. Ltd. v. Hilli Multipurpose Cold Storage Pvt. Ltd., (2015) 16 SCC 20*, stating that it incorrectly followed J.J. Merchant and did not consider Topline Shoes.
The Supreme Court distinguished J.J. Merchant (Dr.) v. Shrinath Chaturvedi, (2002) 6 SCC 635*, stating that its observations on Order VIII Rule 1 CPC were obiter and not applicable.
The Supreme Court followed State v. N.S. Gnaneswaran, (2013) 3 SCC 594*, reiterating that procedural provisions without consequences are directory.
The Supreme Court distinguished Bikhraj Jaipuria v. Union of India, (1962) 2 SCR 880*, noting that its holding on mandatory contracts was in public interest and not a general rule.
The Supreme Court distinguished Bihari Chowdhary and Anr. v. State of Bihar and Ors., (1984) 2 SCC 627*, clarifying that Section 80 CPC is mandatory due to public interest considerations.
The Supreme Court followed the Bombay High Court’s decision in Global Aviation Services Private Limited v. Airport Authorities of India*, which held that Section 34(5) is directory.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the following:

Procedural Nature of Section 34(5): The Court emphasized that Section 34(5) is a procedural provision aimed at expediting the disposal of applications under Section 34.
Absence of Consequences: The lack of any specific consequence for non-compliance with Section 34(5) was a crucial factor in determining its directory nature.
Advancement of Justice: The Court reiterated that procedural rules should serve the cause of justice and not defeat it. Strict adherence to procedural rules should not lead to the dismissal of a case without considering its merits.
Consistency with Precedents: The Court relied on previous judgments, particularly Topline Shoes and Kailash, which held that procedural provisions without penal consequences are directory.
Object of the Act: The Court noted that the object of the Arbitration and Conciliation Act, 1996, is to provide speedy resolution of disputes. A strict interpretation of Section 34(5) would hinder this objective.

Reason	Percentage
Procedural Nature of Section 34(5)	30%
Absence of Consequences	30%
Advancement of Justice	25%
Consistency with Precedents	10%
Object of the Act	5%

Category	Percentage
Fact	20%
Law	80%

The Court’s reasoning was heavily influenced by legal principles and precedents, with a relatively lower emphasis on the specific facts of the case. The focus was on interpreting the law to ensure justice and not on the factual matrix of the case.

Logical Reasoning:

Issue: Is Section 34(5) of the Arbitration Act mandatory or directory?

↓

Is the provision procedural?

↓

Does the provision specify any consequences for non-compliance?

↓

Is the object of the provision to expedite or scuttle the hearing?

↓

Does the provision advance the cause of justice?

↓

Conclusion: Section 34(5) is directory.

The Court considered alternative interpretations, such as the argument that Section 34(5) is a condition precedent for a valid Section 34 application. However, it rejected this interpretation because it would lead to the dismissal of applications based on procedural technicalities, which is contrary to the object of the Act and the principles of justice. The Court also considered the mandatory language of Section 34(5) but held that the absence of consequences for non-compliance made it directory.

The Supreme Court held that Section 34(5) of the Arbitration and Conciliation Act, 1996, is directory and not mandatory. The Court reasoned that the provision is procedural, and no consequence is provided for non-compliance. The object of the provision is to expedite the hearing, not to scuttle it. The Court also stated that procedural rules are the handmaids of justice and should not be interpreted in a way that defeats the cause of justice.

The Court provided the following reasons for its decision:

Section 34(5) is a procedural provision.
No consequence is provided for non-compliance with Section 34(5).
The object of the provision is to expedite the hearing.
Procedural rules should advance justice, not defeat it.
The Court relied on previous judgments, particularly Topline Shoes and Kailash.

The Court quoted from the judgment:

“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.”

“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 by burying the element of fairness.”

“The only requirement in Section 34(1) is that an application for setting aside an award be in accordance with sub-sections (2) and (3). This, again, is an important pointer to the fact that even legislatively, sub-section (5) is not a condition precedent, but a procedural provision which seeks to reduce the delay in deciding applications under Section 34.”

There were no minority opinions in this judgment.

The Supreme Court’s analysis focused on the interpretation of Section 34(5) in light of its procedural nature and the absence of consequences for non-compliance. The Court applied established principles of statutory interpretation to arrive at its conclusion. The Court has also clarified that the object of Section 34(5) is to expedite the hearing and not to scuttle it.

The implications of this judgment are that applications under Section 34 of the Arbitration and Conciliation Act, 1996, will not be dismissed solely for non-compliance with the procedural requirements of Section 34(5). This ensures that the merits of the challenge to an arbitral award can be considered.

This judgment does not introduce any new doctrines or legal principles but reinforces the existing principles of statutory interpretation and the importance of ensuring that procedural rules do not defeat the ends of justice.

Key Takeaways

Section 34(5) of the Arbitration and Conciliation Act, 1996, is directory, not mandatory.
Failure to issue prior notice or file an affidavit will not automatically lead to the dismissal of a Section 34 application.
Courts should focus on the merits of the case rather than strict procedural compliance.
The judgment promotes the objective of speedy resolution of disputes in arbitration.
Courts should endeavor to dispose of Section 34 applications within one year of filing.

Directions

The Supreme Court directed that every Court in which a Section 34 application is filed should stick to the time limit of one year from the date of service of notice to the opposite party. If the Court issues notice after the period mentioned in Section 34(3) has elapsed, every Court should endeavor to dispose of the Section 34 application within a period of one year from the date of filing of the said application.

The Supreme Court also directed that in cases covered by Section 10 read with Section 14 of the Commercial Courts, Commercial Division and Commercial Appellate Division of High Courts Act, 2015, the Commercial Appellate Division should endeavor to dispose of appeals filed before it within six months, as stipulated. Appeals which are not so covered will also be disposed of as expeditiously as possible, preferably within one year from the date on which the appeal is filed.

Development of Law

The ratio decidendi of this case is that Section 34(5) of the Arbitration and Conciliation Act, 1996, is directory and not mandatory. This decision clarifies the position of law, which was previously ambiguous due to conflicting interpretations by various High Courts. The Supreme Court has now settled the law by holding that the procedural requirements of Section 34(5) are not conditions precedent for a valid application under Section 34. This judgment overrules the view taken by some High Courts that Section 34(5) is mandatory and brings the law in line with the principles of justice and the object of the Arbitration Act.

Conclusion

The Supreme Court’s judgment in State of Bihar & Ors. vs. Bihar Rajya Bhumi Vikas Bank Samiti clarifies that Section 34(5) of the Arbitration and Conciliation Act, 1996, is directory and not mandatory. This decision ensures that applications challenging arbitral awards are not dismissed on procedural technicalities, promoting justice and the speedy resolution of disputes. The Court’s emphasis on the procedural nature of Section 34(5) and the absence of consequences for non-compliance provides much-needed clarity for arbitration proceedings in India.