Section 34 of the Arbitration and Conciliation Act, 1996, allows a party to contest an arbitral award in court and prescribes the conditions for this.

Delhi High Court judge Justice Chandra Dhari Singh has spoken out against the overuse of Section 34 as this is “defeating the ends for which the (Arbitration) Act has been legislated”.

In his verdict in the Hindustan Construction Ltd vs National Hydroelectric Power Corporation (NHPC) case, at the heart of which was the invocation of a ₹26-crore bank guarantee by NHPC, Justice Singh said: “The legislative intent behind enacting the Arbitration Act is to make justice delivery simple, inexpensive, party-led and time-bound as well as to take the burden of a big chunk of commercial off the conventional courts. This being the motivation and expectation, the finality of the arbitral award gains enormous importance. However, appealing the award granted by the arbitrator/tribunal has become a routine practice for the aggrieved party whose claims are not allowed; and the challenge petition becomes pending, further adding to the burden of the courts as well as posing a looming threat to the finality of the award, thus defeating the ends for which the Act had been legislated.”

The plaintiff, Hindustan Construction, had prayed for restraining NHPC from encashing the bank guarantee, especially in view of the cases filed under Section 34 of the Arbitration Act against arbitral awards related to some disputes.

The case arises out of a 2006 contract between Hindustan Construction and NHPC, under which the former would build the 160MW Teesta Low Dam in West Bengal for NHPC. The dispute is over NHPC’s claim of insurance premiums and liquidated damages amounting to ₹145 crore from Hindustan Construction.

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Justice Singh, who said he would deal only with this case and not the broader issue of return of bank guarantees, observed: “The settled position in law that emerges from the precedents is that the bank guarantee is an independent contract between bank and the beneficiary, and the bank is always obliged to honour its guarantee as long as it is an unconditional and irrevocable one. There are, however, exceptions to this rule when there is a clear case of fraud, irretrievable injustice or special equities.”

Citing several reasons why he believed such ‘special equities’ exist in the present case in favour of Hindustan Construction, the judge restrained NHPC from invoking the bank guarantee.

The arbitral award had gone in favour of Hindustan Construction and NHPC went to court under Section 34 of the Arbitration Act. Justice Singh noted that even if the NHPC succeeded in getting the arbitral award set aside, it did not follow that the original dispute between the parties would be settled in NHPC’s favour, because of the likelihood of further appeals. Therefore, it could not invoke the bank guarantee.