India: Supreme Court Holds Two-Tier Arbitration Valid Under The Arbitration And Conciliation Act, 1996

Last Updated: 24 March 2017
Article by Seema Jhingan and Rupal Bhatia

Parties to an agreement have the autonomy to provide for a second instance appeal for settlement of disputes or differences arising between them. This concept of providing second level of arbitration if either party is dissatisfied with the first arbitration (also known as 'two-tier arbitration' process) has been the bone of contention for long and strongly debated for and against. The issue has been finally settled by the Supreme Court of India ("SC") by holding that two-tier arbitration is neither prohibited under the Arbitration and Conciliation Act, 1996 ("Act") nor lies against the fundamental public policy of India. The issue regarding legality of two-tier arbitration process under the laws of India was considered by the SC recently in the case of M/s. Centrotrade Minerals & Metal Inc. vs. Hindustan Copper Ltd.1

In the present case, the arbitration clause provided for resolution of disputes between the parties through the arbitration panel of the Indian Council of Arbitration in accordance with the Rules of Arbitration of the Indian Council of Arbitration. It further stated that if either party is dissatisfied by the arbitration result in India, it 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. The parties agreed to be bound by the result of the second arbitration subject to a legal challenge in accordance with law.

The SC gave prime importance to the intent of the parties and discussed in detail the concept of "party autonomy". The SC opined that "party autonomy is virtually the backbone of arbitrations" and held that parties to an arbitration agreement have the autonomy to decide not only on the procedural law to be followed but also the substantive law. The choice of jurisdiction is left to the contracting parties. In the present case, the parties had agreed on a two-tier arbitration system and the agreement also provided for the construction of the contract as a contract made in accordance with the laws of India. The SC while upholding validity of both the clauses, concluded that plain reading of the arbitration clause shows the intent of both the parties to provide for two opportunities to resolve their disputes/differences. The first occasion would be a settlement by arbitration in India and the second occasion would be by arbitration in London, with the second occasion being in the nature of an appeal against the arbitration result in India.

The SC also opined that on a combined reading of sub-section (1) of Section 34 and Section 35 of the Act an arbitral award would be final and binding on the parties unless it is set aside by a competent court on an application made by a party to the arbitral award. This does not exclude the autonomy of the parties to an arbitral award to mutually agree to a procedure whereby the arbitral award might be reconsidered by another arbitrator or panel of arbitrators by way of an appeal and the result of that appeal is accepted by the parties to be final and binding subject to a challenge provided for by the Act. With the above view, the SC accepted the validity of the agreement between the parties in the present case and held that the provisions of the Act nowhere prohibit the parties from mutually agreeing to a second look at an award with the intention of an early settlement and do not preclude the parties from adopting any other mutually acceptable method of redressal such as an appellate arbitration.

The SC also observed that it is not concerned with the reason why the parties agreed to a second instance arbitration – the fact is that they did and are bound by the agreement entered into by them. Having agreed so, the parties cannot wriggle out of a solemn commitment made by it voluntarily, deliberately and with eyes wide open.

The SC has thus re-affirmed the established principle of "party autonomy" in arbitrations and that the parties can agree for a two-tier arbitration procedure for resolution of their disputes and differences.

Footnotes

1 MANU/SC/1609/2016

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Seema Jhingan
Rupal Bhatia
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