India: Appellate Arbitration Not Contrary To Indian Law Says Supreme Court

Last Updated: 28 February 2017
Article by Arunima Singh

Most Read Contributor in India, July 2017

In a recent case of M/s Centrotrade Minerals & Metal Inc. versus Hindustan Copper Ltd. arising out of Civil Appeal No. 2562 of 2006, a special bench of the Supreme Court (constituting of Hon'ble Justice Madan B. Lokur, Hon'ble Justice R. K. Agarwal and Hon'ble Justice D. Y. Chandrachud) has held that two tier arbitration will not be contrary to the Indian Laws even though such a process is not backed by any provision in the Arbitration and Conciliation Act, 1996 (hereinafter referred to as "the Act").

The following issues arose for the consideration of a three-judge bench of the apex court:

  1. Whether a settlement of disputes or differences through a two-tier arbitration procedure as provided for in Clause 14 of the contract between the parties is permissible under the laws of India? And
  2. Assuming a two-tier arbitration procedure is permissible under the laws of India, whether the award rendered in the appellate arbitration being a 'foreign award' is liable to be enforced under the provisions of Section 48 of the Arbitration and Conciliation Act, 1996 at the instance of Centrotrade? If so, what is the relief that Centrotrade is entitled to?

Clause 14 in issue no.1 is the arbitration agreement entered into between M/s Centrotrade Minerals Inc. (hereinafter referred to as "Centrotrade") and Hindustan Copper Ltd. (hereinafter referred to as "HCL"). The Arbitration clause 14 read as follows:

"14. Arbitration - All disputes or differences whatsoever arising between the parties out of, or relating to, the construction, meaning and operation or effect of the contract or the breach thereof shall be settled by arbitration in India through the arbitration panel of the Indian Council of Arbitration in accordance with the Rules of Arbitration of the Indian Council of Arbitration. If either party is in disagreement with the arbitration result in India, either party will have the right to appeal to a second arbitration in London, UK in accordance with the Rules of Conciliation and Arbitration of the International Chamber of Commerce in effect on the date hereof and the result of this second arbitration will be binding on both the parties. Judgment upon the award may be entered in any court in jurisdiction."

The matter was initially put up before a two judge bench of the Apex Court in 2006 wherein a difference of opinion arose between the two judges and therefore the matter went on to being referred to a special bench.

BRIEF FACTS OF THE CASE:

After disputes arose between the parties, Centrotrade invoked arbitration for resolution of those disputes. Thereafter, Indian Council of Abritration appointed an arbitrator who rendered a Nil award. Aggreived by this, Centrotrade invoked the second part of the arbitration clause and the arbitrator in London gave an award dated 29.09.2001 in accordance with the Rules of Conciliation and Arbitration of the International Chamber of Commerce. Centrotrade sought to invoke the said award under section 48 of the Act after which the controversy arose.

VIEW TAKEN BY THE HON'BLE SUPREME COURT:

The Apex Court, at the outset, noticed that it was necessary to appreciate the intention of the parties to opt for a two-step arbitration. Wherein the first step would be settlement of disputes by arbitration in India and the second attempt would be by arbitration in London; where this second arbitration was in the nature of an appeal against the first/previously passed arbitral award.

While considering the legal position, the Court also made an interesting observation with respect to the contentions of HCL. It said that HCL could not advance any such argument wherein it may contend that the contract is illegal because that would imply that HCL was aware that one of the provisions of the contract were contrary to Indian Law and with that knowledge, it entered into contract with Centrotrade thereby playing fraud on Centrotrade. The Apex Court noted that this would have serious ramifications for international commercial contracts with an Indian party.

An argument raised on behalf of HCL was rendered unacceptable by the Apex Court wherein it was contended that acts which are mentioned in the statute are permissible and those not mentioned in the statute are not permissible. The special bench held that appellate arbitration not being provided in the Act was not of concern in the present case. The issue in this matter was not of a statutory appeal but a nonstatutory process agreed upon by the parties that has nothing to do with court procedures.

ARBITRAL AWARDS BINDING IN LIMITED CONTEXTS

It was held that the "final and binding" clause in Section 35 of the Act does not mean final for all intents and purposes. Finality of an award shall always be subject to the intention of the parties to allow an aggrieved party, recourse to an arbitration of second instance.

PARTY AUTONOMY

The Apex Court has once again made it clear that party autonomy is the back bone of an arbitration proceeding. The case of Bharat Aluminium Company v Kaiser Aluminium Technical Services Inc. reported as (2016) 4 SCC 305 was relied upon by the Apex Court to hold that the intention of the parties which will have to be taken into account when understanding the terms of the contract. The special bench has clearly held that in an arbitration the choice of a) jurisdiction, b) procedural law and c) substantive law are all left to the contracting parties. In view of all these, parties are also autonomous enough to decide as to the route of an appeal which may be preferred before a court of law or be made in form of another arbitration before a separate arbitral tribunal.

PUBLIC POLICY AND TWO-TIER ARBITRATIONS

As per Associate Builders versus Delhi Development Authority reported as (2015) 3 SCC 49, it has been held that an award would be set aside if it is contrary to:

  1. Fundamental policy of India Law; or
  2. The interest of India; or
  3. Justice or morality; or
  4. If it is patently illegal.

The concern in the present case was only with the fundamental or public policy of India. The Court held that the parties to the contract have not by-passed any mandatory provision of the Act. Further, the parties entered into the contract with the agreement that the first arbitral award shall not have a binding effect and instead shall be subject to another arbitration. If binding effect of an arbitral award can be agreed upon by the parties then an appellate arbitration can also be agreed upon by the contracting parties.

The entire judgment was made concise by the Special Bench in the following paragraph:

"..The parties to the contract have not by-passed any mandatory provision of the A&C Act and were aware, or at least ought to have been aware that they could have agreed upon the finality of an award given by the arbitration panel of 35 (2015) 3 SCC 49 C.A. Nos.2562 of 2006 etc. Page 27 of 29 the Indian Council of Arbitration in accordance with the Rules of Arbitration of the Indian Council of Arbitration. Yet they voluntarily and deliberately chose to agree upon a second or appellate arbitration in London, UK in accordance with the Rules of Conciliation and Arbitration of the International Chamber of Commerce. There is nothing in the A&C Act that prohibits the contracting parties from agreeing upon a second instance or appellate arbitration – either explicitly or implicitly. No such prohibition or mandate can be read into the A&C Act except by an unreasonable and awkward misconstruction and by straining its language to a vanishing point. We are not concerned with the reason why the parties (including HCL) agreed to a second instance arbitration – the fact is that they did and are bound by the agreement entered into by them. HCL cannot wriggle out of a solemn commitment made by it voluntarily, deliberately and with eyes wide open."

With the coming of this judgment, doors open for appellate arbitration or arbitration of second instance in India. However, amendment in the existing act would be required to facilitate appellate arbitration as a number of questions remain hanging. For instance, the situation in which the parties can apply for intervention of court in the event the parties fail to appoint arbitrators or whether there would be provision of an appeal from an award rendered in Appellate Arbitration. If the latter question is in affirmative then another question would arise as to the apt forum of such appeal; choices being High Court or Supreme Court.

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.

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