In commercial transactions, disputes are governed by agreements between the parties. Dispute resolution clause provides for resolution of disputes through courts or alternate mechanisms, preferably arbitration. Drafting of such a clause should be unambiguous, clear and to the extent possible, complete with procedural details. Parties need to be diligent so as to minimise risks of litigation. There are no specific laws which can provide such drafting tips and, hence, understanding through jurisprudence can provide insights into critical aspects to be considered.
The present bulletin examines an important recent judgment and makes certain recommendations to be borne in mind while drafting an arbitration clause to minimise disputes at the stage of invoking arbitration.
1. Facts of the case
In a recent case of Antrix Corporation Pvt. Ltd.("Petitioner") vs. Devas Multimedia Pvt. Ltd1 ("Respondent") the parties entered into an agreement in 2005 ("Agreement") regarding the allocation of S-band spectrum for construction of two satellites needed by the Respondent for providing wireless multimedia services. Article 19 of the Agreement provided the termination clause which empowered the Petitioner to terminate the Agreement in certain contingencies. Article 20 of the Agreement provided for a two-tier mechanism for resolution of disputes or differences. The first tier provided that the parties may resolve the dispute by the involvement of the senior management failing which, the second tier allow the parties to invoke arbitration. The arbitral tribunal was to consist of three arbitrators with its seat in New Delhi and the applicable rules could either be ICC or UNCITRAL.
A dispute arose when the Petitioner unilaterally terminated the Agreement and the Respondent refused to accept such termination. The Respondent invoked the arbitration clause under ICC Rules, appointed an arbitrator and requested the Petitioner to nominate their arbitrator. The Petitioner refused to nominate its nominee arbitrator on the ground that they were never consulted for choice of law for invoking the arbitration proceedings. Further, the Petitioner invoked independent arbitration proceedings under the UNCITRAL Rules, appointed their arbitrator and asked the Respondent to nominate their arbitrator. Thus, both the parties arrived at a deadlock situation by choosing two different rules for starting the arbitration. Although the action of both the parties was well within the parameters of the agreed arbitration clause but they had never thought about such an eventuality (i.e., both parties will invoke under different rules) while drafting the clause.
The arbitration clause gave liberty to both the parties with regard to rules for the arbitration proceedings. As a result, nominee arbitrators under respective proceedings could not be appointed. They had to finally seek intervention of the court to resolve the deadlock of non-appointment of the arbitrator by the other party. So, in effect, the proceedings were derailed, even before commencement, at a stage when the Respondent failed to nominate their arbitrator under the agreed procedure within the period of 30 days. Accordingly, the Petitioner moved an application under section 11(4) read with section 11(10) of the Arbitration and Conciliation Act, 1996 ("Act") for the intervention of the Chief Justice for the aforesaid appointment.
The question for deliberation before the Supreme Court ("SC") was whether the Petitioner was right in invoking the arbitration proceedings under one of the rules when the proceedings under another rule over the same subject-matter of dispute was already initiated and the counterparty was well aware of this.
The SC finally settled the dispute by striking a balance between contemporary requirements of the arbitration as a dispute resolution mechanism and in the spirit of the Act by refusing to interfere with the ongoing proceedings of a duly constituted arbitral tribunal. The SC held that the same arbitration agreement cannot be invoked twice for the same cause of action.
2. Parties contention
The Petitioner contended that they were not consulted while invoking the ICC Rules and, consequently, refused to be part of such proceedings. Therefore, the Petitioner invoked arbitration under the UNCITRAL Rules. The Petitioner relied upon the SC's judgement in case of National Thermal Power Corporation vs. Singer Co.2 In this case, the SC observed that the law governing the arbitration proceedings would be, firstly, the law chosen for the interpretation of contract by the parties and, secondly, in the absence of any agreement, the law of the country in which the arbitration is held. Based on this cardinal test, the Petitioner stated that since the law governing the contract was Indian law; therefore, the Act (based on UNCITRAL Rules) would apply.
The Respondent, on the other hand, raised the argument that the arbitration agreement provided for the formation of an ad hoc tribunal, which should follow one of the two prescribed procedures. Therefore, as they had already invoked arbitration agreement under the ICC Rules and so any objection pertaining to the constitution of the arbitral tribunal be raised before the tribunal itself.
3. Decision of the SC
Various questions of law came up before the SC, which were discussed at length and have been discussed herein below:
(a) Unilateral deviation from two prescribed rules permissible or not: The SC held that the language of Article 20 of the Agreement provided that the arbitration proceedings would be held in accordance with either ICC or UNCITRAL Rules. Therefore, the Respondent was entitled to invoke arbitration under the ICC Rules. Thus, the subsequent arbitral tribunal constituted under the UNCITRAL Rules would be without jurisdiction. Further, when the arbitrator was already appointed under the ICC Rules and such appointment was already communicated to the other party, a separate application to resolve the appointment of arbitrator is not maintainable under the UNCITRAL Rules. Once the power has been exercised under the Agreement, there is no power left to refer the same dispute again to arbitration unless the arbitral award is subsequently set aside.
(b) Scope of section 11(6) and court intervention: Section 11(6) of the Act empowers the Chief Justice or any institution designated by him to take necessary measures when there is failure of parties to act under the agreed procedure. The reason for failure of procedure can arise under different circumstances like where one party refuses to appoint the arbitrator or two appointed arbitrator fail to appoint a third arbitrator or designated institution or person under the agreement fails to discharge the function.
The SC said that once the ICC Rules was invoked then any challenge to the initiated proceedings does not lie on the ground that an alternative procedure is available. If a party is dissatisfied or aggrieved by the appointment of an arbitrator the remedy would not lie by invoking the power of the Chief Justice under section11(6). In other words, since the proceedings under ICC Rules were in progress, section 11(6) was not applicable. The condition precedent for invoking the proceedings under section 11(6) is the failure of parties to act under the agreed procedure, which is not the case in the present matter. The Chief Justice under section 11(6) does not have power to replace one arbitrator duly appointed under the Agreement. Any reason for departure from this position should be recorded with reasons.
In fact, invoking section 11(6) in such circumstances would lead to an anomalous state of affairs, if the arbitrator appointed under the Agreement could be questioned in a subsequent proceedings initiated by the other party for an appointment of the arbitrator. The SC held that the Petitioner was well within its right to challenge the appointment of the arbitrator, but not by way of an independent proceeding under section 11(6) of the Act as the Chief Justice is not empowered to replace the arbitrator duly appointed under the Agreement. The recourse available to the Petitioner was under section 13 of the Act which provides for the process for challenging the procedure.
To sum up, the judgment analysed a complex factual situation which involved deliberation upon two important issues regarding interpretation of the powers of the Chief Justice under section 11(6) and whether an arbitration agreement can be invoked twice for the same cause of action. The judgment settles the critical issue that no second arbitration proceedings can be invoked for the same cause of action. The judgment rules in favour of maintaining the sanctity of the arbitration.
The present judgment highlights that the parties should exercise a vigilant approach while drafting the arbitration clause. It is clear that providing two different rules and giving contracting parties a right to choose between them will not aid but, instead, confound the situation since two disputing parties will find it hard to agree on anything, as evidenced by this case. Simply put, the flexibility of procedure in alternative dispute resolution mechanism, while a good idea, should not leave room for further interpretation of the clause, as it will frustrate the purpose of opting for them by opening the gateways for litigation.
2. (1992) 3 SCC 551
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.