Reasoning’ the award

Posted On - 24 May, 2023 • By - Renjith Nair

“Reason is the soul of justice. Any order passed, whether in the exercise of judicial or administrative powers vested in the authority, must be speaking.” – said the Delhi High Court[i] while holding that giving of reasons for decision is an essential attribute of judicial and judicious disposal of a matter. Indian courts have repeatedly emphasized on the importance of providing reasons in an order. Courts have stated that judicial reasoning introduces clarity in an order and without reasoning, the order becomes lifeless and is rendered indefensible[ii]. On the same principles, arbitrating parties typically expect reasons in the award passed by the arbitral tribunal. Giving of reasons by arbitral tribunals is aimed at preventing unfairness or arbitrariness in reaching conclusions. Reasoned awards also provide parties with a more comprehensive and satisfactory explanation of why the arbitral tribunal decided as it did.

Most arbitration agreements in the international realm also require arbitral tribunals to produce a reasoned award. It is also expressly mandated in the UNCITRAL Model Law on International Commercial Arbitration (Model Law) and in the vast majority of national laws, whether or not such laws are based on the Model Law. The principle of reasoned awards is also mandated in almost all international arbitration rules[iii]. In the present article, we discuss the scope of a reasoned award under the Arbitration and Conciliation Act, 1996 (Arbitration Act).

Reasoning is mandatory

Under the Arbitration Act, the arbitral tribunal is required to give a reasoned award[iv] setting out what, in their view of the evidence, did or did not happen. The award should explain the decision and how the arbitral tribunal reached its decision. This is essential because it is the disclosure of reasons that effectively demonstrate that the arbitral tribunal had applied its mind. In State Bank of India v. Ram Das and others, the Andhra Pradesh High Court had held that vague and general observations cannot be concluded to be reasons in the award. The court ruled that the minimum requirement of law is that (a) the award itself should disclose as to what are the documents taken into consideration, and (b) which is the document upon which reliance is placed in reaching the conclusion. In Union of India v. Royal Construction, the Calcutta High Court laid down that the reasons in an award may be short, but they must have such connection with the conclusions reached by the arbitrator as to show that the arbitrator has not acted unreasonably.

In P.C. Sharma and Another v. Delhi Development Authority, the Delhi High Court held that an arbitrator is not expected to write a judgment like a judge but has only to state as to how he has come to the finding arrived at by him. A similar view was also taken in Delhi Development Authority v. Uppal Engineering Construction Co. where the Court held that so long as the arbitral tribunal was mindful of the contention raised by the parties and had considered the same while passing the award, it cannot be said that there is absence of reasons in the award. In The Chief Engineer / Metropolitan Transport Project (Railways), Southern Railway and Another v. Progressive-Aliens, the Madras High Court held that an arbitral award need not be elaborate like a judgment, and that it must be proper, intelligible, and adequate.

When reasons are dispensed with by parties

Under the provisions of the Arbitration Act[v], it is stipulated that an arbitral award should state the reasons on which it is based, unless the parties have explicitly agreed otherwise, or the award is an agreed term between the parties. The requirement to provide reasons can only be waived by the parties themselves, as held by the Calcutta High Court in the case of Inspiration Cloths and U v. Yash Traders. Consequently, the rules of an arbitral body cannot exempt an arbitrator from the obligation to provide reasons, unless the parties have explicitly accepted such rules.

When the parties have mutually agreed that the award does not need to contain any reasons, it becomes impermissible to challenge the award on the grounds of it being unreasoned. The Bombay High Court, in the case of Mutta International v. Nandnandan Silk Mills Pvt. Ltd., dismissed a challenge to an unreasoned arbitral award since the parties had agreed that no reasons need to be provided for the award. The court emphasized that such an unreasoned award falls within the framework of the Arbitration Act and is therefore valid. Similarly, in the case of Gujarat Industrial Devp. Corpn. v. S.R. Parmar & Co., the court rejected a challenge to an unreasoned arbitral award based on the fact that the arbitration agreement itself granted the tribunal the liberty not to state reasons in the award.

It is pertinent to mention the Supreme Court judgment in Rajasthan State Mines and Minerals Ltd. v. Eastern Engineering Enterprises where the court’s jurisdiction to set aside an unreasoned award was addressed. The Supreme Court held that in the case of a non-speaking award, the court’s jurisdiction is limited. The award can only be set aside if the arbitrator has exceeded his jurisdiction. In situations where no reasons are given by the arbitrator, the court cannot speculate on the factors that influenced the arbitrator’s conclusion. Even if the arbitrator has made an error of fact or law in reaching the decision on the disputed question submitted for adjudication, the court cannot interfere.

Our thoughts

Upon examining the decisions of Indian courts, it is clear that there is no rigid framework for assessing the adequacy of reasons in an arbitral award. Instead, the sufficiency of reasons is evaluated on a case-by-case basis, considering the specific requirements of each case. Indian courts generally avoid subjecting an arbitrator’s reasoning to stringent scrutiny and are hesitant to set aside awards unless there is evidence of arbitrariness or a failure to provide satisfactory reasons, except when the parties have expressly waived the requirement. This approach reflects the recognition of party autonomy, which asserts that the arbitral tribunal’s decision should be final and not subject to judicial review.

Though parties can waive the requirement for a reasoned award, there are compelling reasons why they may choose not to do so. Firstly, a reasoned award promotes transparency and justifiability by providing a clear explanation of the arbitrator’s decision-making process. Secondly, a reasoned award is crucial for appellate or judicial review in jurisdictions where such review is available. It allows the reviewing body to assess the correctness of the arbitrator’s legal analysis and reasoning. Without reasons, the scope and effectiveness of any potential review may be limited.

While parties may have valid reasons to waive the requirement for a reasoned award in certain circumstances, it is important for them to carefully consider the potential benefits of retaining this right. Factors such as fairness, transparency, and the overall efficacy of the arbitration process should be considered before deciding to waive the right to a reasoned award.

Authors: Renjith Nair and Altamash Qureshi

The information contained in this document is not legal advice or legal opinion. The contents recorded in the said document are for informational purposes only and should not be used for commercial purposes. Acuity Law LLP disclaims all liability to any person for any loss or damage caused by errors or omissions, whether arising from negligence, accident, or any other cause.

[i] Smt. Usha Rani and Another. v. Union of India and Others.

[ii] Victoria Memorial Hall v. Howrah Ganatantrik Nagrik Samity

[iii] LCIA Arbitration Rules Art. 26.2 (“The Arbitral Tribunal shall make any award in writing and, unless all parties agree in writing otherwise, shall state the reasons upon which such award is based.”); ICC Arbitration Rules Art. 32(2) (“The award shall state the reasons upon which it is based.”); SIAC Arbitration Rule 32.4 (“The Award shall be in writing and shall state the reasons upon which it is based unless the parties have agreed that no reasons are to be given.”)

[iv] Section 31 of the Arbitration and Conciliation Act, 1996; Tamil Nadu Electricity Board v. Bridge Tunnel Constructions.