The Supreme Court has held that an arbitral award may be set aside if an undue and unexplained delay in its delivery has a demonstrable adverse impact on the tribunal’s decision-making and results in material lapses. Even though delay alone is not an independent ground to strike down an award under the law, the ruling clarified that such delay can nonetheless vitiate the award if it undermines its quality, reasoning or fairness.
A bench of justices Sanjay Kumar and Satish Chandra Sharma noted that while Section 34 of the Arbitration and Conciliation Act, 1996 (which allows courts to set aside arbitral awards) does not list delay as a standalone basis to challenge an award, inordinate delay can weaken memory, distort the arbitrator’s understanding of the record, and foster suspicion in the minds of litigating parties, thereby eroding the trust that is essential to the arbitral process.
Absolute faith, the bench noted in a recent judgment, is central to alternative dispute resolution, and “once that belief is shaken, it would lead to a breakdown of the system itself.” However, the bench acknowledged that delays are not common and that each instance must be examined on its own facts to determine whether the delay affected the outcome.
It stressed that only when the adverse impact of the delay is “explicit” and the award appears “tainted” by the consequences of such delay, can the award be treated as being in conflict with the “public policy of India” under Section 34(2)(b)(ii) (meaning it offends basic legal principles), or as suffering from “patent illegality” under Section 34(2A) (meaning it contains a clear and obvious legal error).
Significantly, the court further clarified that a party challenging such an award need not first seek termination of the arbitrator’s mandate under Section 14(2) of the Act (which relates to an arbitrator’s inability to act). The remedies under Sections 14 and 34 are independent, and a challenge under Section 34 does not depend on first invoking Section 14.
The judgment also addressed a broader question concerning the nature of arbitral awards. The bench held that an award that fails to finally resolve the disputes between the parties and instead leaves them with no option but to initiate further litigation or fresh arbitration defeats the basic purpose of arbitration, which is meant to be a faster and conclusive mode of dispute settlement.
If an award alters the parties’ positions irreversibly while still failing to resolve the core dispute, it amounts to an “unworkable” award. Such an award, the bench held, would not only be contrary to public policy but would also be patently illegal, and therefore liable to be set aside under Section 34.
The judgment underscored the Supreme Court’s concern that arbitration must remain a credible and efficient alternative to court litigation. Any delay or failure that undermines the finality and fairness of the process, the bench emphasised, has the potential to shake the trust that parties repose in arbitration, and courts must step in to restore that trust when necessary.
These principles were applied in a case where the arbitrator reserved the award in July 2012 but pronounced it only in March 2016, after nearly three years and eight months. The delay was unexplained and, more critically, the award did not settle the dispute at all. Instead, the arbitrator had passed interim directions that changed the parties’ commercial positions, including granting possession of part of a building to one side, which they subsequently leased out to third parties. The result was that the situation created by the arbitrator could not be reversed, yet the substantive issues remained unresolved, forcing the parties back into litigation over a contract dating back to 2004.
The bench described the arbitrator’s approach as “utterly shocking” and observed that he had “totally lost sight of the very purpose of the exercise.” Setting aside the award was necessary, the bench said, but sending the parties back to a fresh arbitral process would only prolong a dispute already stretched across 16 years and would be neither practical nor just. Given these exceptional circumstances, the top court invoked its powers under Article 142 of the Constitution, which allows it to pass orders necessary to do “complete justice”, to bring the matter to a close.
Exercising that power, the bench fashioned a final settlement between the parties by allowing the validity of sale deeds that had originally been executed in violation of the agreement terms but directing that the party responsible for the violation must be financially penalised. It also granted compensation to the opposite party for completing construction work on the building, and held that possession and title of each party shall now stand regularised in accordance with this arrangement. The court said this course was essential to protect the stability of third-party interests, prevent yet another round of proceedings, and finally close a dispute that should have been resolved many years ago.
