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ARBITRATION IN INDIA – LOST IN JUDICIAL TRANSLATION

By : Om Prakash Pandey on 29 July 2009 Report Abuse Print Print this
 



ARBITRATION IN INDIA – LOST IN JUDICIAL TRANSLATION

Om Prakash Pandey

III LLB, ILS Law College

 

“If there is a valid arbitration agreement between parties, the parties are required to adhere to and are bound by the same.”[1]

INTRODUCTION

Dispute resolution in India has long been confined to the courts and their inevitable delays instead of exploring alternative methods to achieve the same ends. Looking at the immense backlog of cases in Court today, few would argue that the ancient methods of solving dispute; arbitration, conciliation, negotiation and mediation, are very much the need of the hour. This paper takes a close look at arbitration in India and undertakes to describe the current scenario, analyze the laws in place and understand the effect that judicial intervention has on the smooth functioning of the act.

Since the dawn of humankind, the urge to resolve disputes has dominated human thought and experience. India has long known of systems of alternative dispute resolution- be it arbitration (in the form of panchayats), negotiations, mediation or conciliation, the Indian experience of it has been ancient. Today, as we witness our overburdened courts, and slow system justice dispensation, there is an undoubted need to diversify our conflict solving mechanisms.

Commercial disputes can be resolved in two ways: Jurisdictional and non- jurisdictional methods. The former encompasses State court litigation and arbitral proceedings while the latter refers to all methods of alternative dispute resolution except arbitration (conciliation and mediation being two examples). The most obvious difference between the two is the enforceability factor while jurisdictional methods are legally enforceable and binding upon the involved parties, the success of the latter methods’ settlements are wholly dependent upon their individual compliance.

WHY THE NEED FOR ARBITRATION?

The act of 1996 has defined arbitration in the following ,manner “Arbitration means any arbitration whether or not administered by permanent arbitral institution”.[2]

 A fair, just and quick process of resolution of disputes is indispensable in any democratic society becoming increasingly aware of their human and legal rights. The human and material resources in Courts are inadequate to meet the ever growing demands, resulting in backlog of cases and delay in the administration of justice. Our justice delivery system is bursting at the seams and unless timely measures are adopted, for the quick disposal of cases, particularly at the grass-roots it will lead to very dire consequences.

In certain disputes like financial matters involving the individuals, firms and even multinational companies, they do not want to submit to the jurisdiction of the courts of obvious reasons of delay, rigid procedural rules and provisions of appeals and revisions. The simple logic is that both the parties are not interested in getting a proposition of law on any point laid down but they are interested to settle their money matters and for that purpose they can even give up certain claims which they are otherwise entitled to. One such method of dispute resolution is arbitration governed in India by the Arbitration and Conciliation Act 1996.

ADVANTAGES OF ARBITRATION

I.            Finality Of Decisions

The decision (i.e. award) of arbitral tribunal is final and binding on the parties. A final and enforceable decision by amicable settlement can generally be obtained only by recourse to arbitration because arbitral tribunals are not subject to appeal. Arbitral awards may be challenged only on a very few limited grounds.

II.            International Recognition

Arbitral awards enjoy much greater international recognition than judgments of national Courts. The New York Convention facilitates enforcement of awards in all contracting states.

III.            Unbiased Jurisdiction

Neutrality and mutuality are perhaps the most redeeming features of arbitration process. At least in matters such as:

·        place of arbitration

·        language to be used procedure or rules to be applied

·        nationality of arbitration

·        legal representation and

·        that the parties can place themselves on equal footing

IV.            Choice of Judges

Arbitration offers parties a unique opportunity to designate persons of their choice as arbitrators, which is not possible in case of courts. This enables the parties to have their disputes resolved by people who have specialized competence and expertise in the relevant field. Another important factor is the lack of specialized judges and Courts; this can be an impediment both in terms of time taken and also in terms of injustice being done due to lacunae in knowledge.[3] Arbitration helps in overcoming this.

V.            Faster & Less Expensive

Arbitration is faster and less expensive than litigation in courts. Where the arbitral proceedings can often score over judicial methods is in the duration of time taken- the latter tends to be lengthy for a variety of reasons which includes the enormous pendency of existing caseloads as well as the various levels of original and appellate jurisdiction which need to be completed before a final solution is arrived at.

VI.            Confidential

The element of confidentiality, which is wanting in judicial proceedings in an attribute of arbitration system. Arbitration hearings are not public and only the parties receive the copies of the arbitral award.

VII.            Specialised Judges

The undisputed advantage of arbitration lies in the fact that the judges themselves can be unbiased experts in the field within which the issues being arbitrated fall.[4] While the efficacy of the existing judiciary is undoubted, certain fields demand specialized knowledge not easily acquired by a regular judge. Intellectual property disputes- to take just one example- demand a high degree of technical skill and knowledge and even lawyers handling such disputes are required to possess the same. Given that arbitrators can be (and often are) experts in their arenas, the need for expert witnesses can be eliminated- saving both much time and much money as well as potentially ensuring a fairer results for the disputants.[5]

VIII.            Amicable and Mutual

The method of arbitration creates understanding between disputants as it resolves the disputes through compromise and co-operation without leaving an intolerable trial of bitterness behind.

MAIN OBJECTIVES OF ARBITRATION AND CONCILIATION ACT, 1996

The main objectives of the Arbitration and Conciliation Act, 1996 may be summarized as follows:

1.      To cover within its fold International commercial arbitration and conciliation as also the domestic arbitration and conciliation.

2.      To make provision for an efficient and effective procedure to meet the requirements and needs of specific arbitration.

3.      To ensure that arbitral tribunals functions within the framework of the Act.

4.      To minimize supervisory role of courts in the arbitral process and thus ensure minimal judicial intervention.

5.      To encourage amicable settlement of disputes between parties using arbitration as an alternative disputes resolution mechanism.

6.      To ensure making of an award on settled terms of the parties.

7.      To provide that every final award is enforced in the same manner as if it were a decree of the Court and thus eliminate the necessity of approaching a law court to make a decree of the Court.

8.      Last but not least, to provide conditions and procedure for the purpose of enforcement of foreign awards under New York and Geneva Conventions.

JUDICIAL INTERVENTION – THE BANE?

Major thrust and legislative intent of the new Arbitration and Conciliation Act, 1996 Is to reduce excessive judicial intervention due to which the earlier Arbitration Act, 1940 suffered serious infirmities. Section 8(1) of the New Act, therefore, makes it mandatory duty for the judicial authority i.e. court to stay legal proceedings if started, where the subject matter has been referred to an arbitral tribunal. Similar provisions are made in connection with the New York and Geneva

The enactment of the 1996 Act was initially met with approbation by the Court in cases like Konkan,[6] (which stated clearly that the provisions of the 1996 Act unequivocally indicate that the Act limits intervention of the Court with an arbitral process to the minimum) but subsequent reality however, has been far from ideal. Even as a global study has indicated that an overwhelming 91% of the respondents were against the mechanism of appealing international arbitration, cases like ONGC[7] and SBP & Co.[8] have sharply belied governmental attempts to promote arbitration in India. ONGC witnessed the challenge of an arbitral award on the ground that it was ‘in conflict with the public policy of India’; instead of taking a narrow interpretation of the phrase ‘public policy’ as being something in excess of a prima facie transgression of Indian law, the Court adopted a very broad understanding of the same. The Court went on to equate ‘patent illegality’ with ‘error of law’ and held that any contravention of an Indian legislation would ipso facto make the award violative of public policy.

The doors were thus flung open for the very rounds of painstaking judicial review that the Act was put in place to avoid.[9] SBP & Co further extended the scope of judicial intervention when the Supreme Court ruled that it was within the powers of the Chief Justice of India to adjudicate on issues like valid arbitration agreements and went on to state that the CJ could even call for evidence to resolve jurisdictional issues while performing the function of appointing an arbitrator when the parties failed to come to an agreement. The Supreme Court went on to say that such decisions would be final and binding upon the parties.[10] This effectively flouted the principle of competence and thus amounted to a situation where the arbitral tribunal’s power to determine its jurisdiction was undermined.[11]

Effectively therefore, Courts endowed themselves with powers which would substantively delay arbitral proceedings (be it by raising specious objections to preliminary issues or by sabotaging the appointment process)[12] which goes against the fundamental reason for enacting Section 13 of the 1996 Act. This thus brings us to what has been called the dispute between high principles (stressing the need for justice, though the heavens fall) and low principles (an equally insistent clamour to end litigation) in adjudication today.[13] The expansion of the Court’s intervention into the judicial sphere has aroused serious misgivings; ONGC’s expansive interpretation of the term ‘public policy’ has been followed by a catena of cases which all reiterate the judiciary’s right to review the arbitral award. In cases like Hindustan Zinc,[14] the Supreme Court has stated that awards could be set aside on grounds like being contrary to the terms of contract since ONGC gave license for interference in such grounds. This indeed sets a dangerous precedent since, as stated earlier; the encouragement of ADR was based on a need to circumvent the lengthy court process.

The debate between finality and justice is perhaps best resolved by the reasoned judgment of Evans J., in Indian Oil[15] where he held that “these two factors […] are not inconsistent with each other. If either of them is to prevail, then it should be the requirement of justice. But justice, even fairness, is not an abstract concept. It has to be applied in this context between two parties who were in dispute with each other and who agreed that the dispute should be resolved by an arbitral tribunal. They agreed that the tribunal's award should be final. But they agreed this on the basis that the arbitration procedure would be regulated by law. The Court has statutory power to set aside an award when the arbitrators misconduct themselves or the references. […] but it also has the unqualified discretion to remit the award to the chosen tribunal [….]. If the power is exercised, but only in circumstances when it would be unjust not to do so, then there is not, in my judgment, an uncovenanted or an unacceptable restriction on the agreed finality of the tribunal's award.”

We shall now study in detail all the sections of the act relating to arbitration which make provisions for judicial intervention and the effect that such intervention has had on the efficacy of the legislation. We will also see what interpretation the judiciary has placed on the various sections and how this has effected the functioning of the act.

I.            Arbitration Agreement

Section 2 (b) defines an arbitration agreement as “Arbitration agreement” means an agreement referred to in section 7. Under Section 7 the act then goes on to give an elaborate definition of the term in the following manner:

Section 7. Arbitration agreement. –

(1) In this Part, “arbitration agreement” means an agreement by the parties to submit to arbitration all or certain disputes which have arisen or which may arise between them in respect of a defined legal relationship, whether contractual or not.

(2) An arbitration agreement may be in the form of an arbitration clause in a contract or in the form of a separate agreement.

(3) An arbitration agreement shall be in writing.

(4) An arbitration agreement is in writing if it is contained in-

(a) A document signed by the parties;

(b) An exchange of letters, telex, telegrams or other means of telecommunication which provide a record of the agreement; or

(c) An exchange of statements of claim and defence in which the existence of the agreement is alleged by one party and not denied by the other.

(5) There reference in a contract to a document containing an arbitration clause constitutes an arbitration agreement if the contract is in writing and the reference is such as to make that arbitration clause part of the contract.

Giving the widest possible interpretation to this section the Supreme Court has held that “The existence of an arbitration agreement can be inferred from a document signed by the parties, or an exchange of letters, telex, telegrams or other means of telecommunication, which provide a record of the agreement.”[16] Thus here the Courts have protected the sanctity of the Arbitration Act.

II.            Extent Defined

Section 5. Extent of judicial intervention. Notwithstanding anything contained in any other law for the time being in force, in matter governed by this Part, no judicial authority shall intervene except where so provided in this Part.

In the case of this section the courts have tried to protect the sanctity of the section and in a judgement in 2007 the Supreme Court held that “Superior Court’s power of judicial review has wide amplitude but the same should not be exercised when there exists an arbitration clause.”[17]

The Supreme Court in another case held the High Court justified in holding that photo copies of lease agreements could be taken on record for ascertaining the existence of arbitration clause. The Court should exercise power under Article 142 to meet the situations which cannot be effectively and appropriately tackled by existing provisions of law.[18]

The Apex Court however seems to have gone against the principle of sanctity of the arbitration agreement when it held that "no party can be allowed to take advantage of inartistic drafting of arbitration clause in any agreement as long as clear intention of parties to go for arbitration in case of any future disputes is evident from the agreement and material on record including surrounding circumstances."[19]

III.            Referring Parties to Arbitration

Section 8. Power to refer parties to arbitration where there is an arbitration agreement.-

(1) A judicial authority before which an action is brought in a matter, which is the subject of an arbitration agreement, shall, if a party so applies not later than when submitting his first statement on the substance of the dispute, refer the parties to arbitration.

(2) The application referred to in sub-section (1) shall not be entertained unless it is accompanied by the original arbitration agreement or a duly certified copy thereof.

(3) Notwithstanding that an application has been made under sub-section (1) and that the issue is pending before the judicial authority, an arbitration may be commenced or continued and an arbitral award made.

The court has read this section strictly and has in its interpretation made it clear that without an agreement to that effect no arbitration under this section lies, the court said that “For application of Section 8 of the Arbitration and Conciliation Act, 1996, it is absolutely essential that there should be an arbitration agreement between the parties.”[20] However this reading of the section seems to be in contradiction with provisions in the act which allow a person recourse to arbitration even without an agreement in the interest of speedy resolution of disputes.

IV.            Intervention Before or During Arbitration

Section 9. Interim measures, etc. by court. -A party may, before or during arbitral proceedings or at any time after the making of the arbitral award but before it is enforced in accordance with section 36, apply to a court: -

(i) For the appointment of a guardian for a minor or a person of unsound mind for the purposes of arbitral proceedings; or

(ii) For an interim measure of protection in respect of any of the following matters, namely: -

(a) The preservation, interim custody or sale of any goods, which are the subject matter of the arbitration agreement;

(b) Securing the amount in dispute in the arbitration;

(c) The detention, preservation or inspection of any property or thing which is the subject-matter of the dispute in arbitration, or as to which any question may arise therein and authorising for any of the aforesaid purposes any person to enter upon any land or building in the possession of any party, or authorising any samples to be taken or any observation to be made, or experiment to be tried, which may be necessary or expedient for the purpose of obtaining full information or evidence;

(d) Interim injunction or the appointment of a receiver;

(e) Such other interim measure of protection as may appear to the court to be just and convenient,

And the Court shall have the same power for making orders as it has for the purpose of, and in relation to, any proceedings before it.

In the interest of resolving disputes faster the courts have limited the scope of injunctions under this section. However this has not stopped parties from constantly litigating for interim relief’s before and during the arbitration procedure. Thereby defeating the very purpose of the act.

It was keeping this scenario in mind that the Supreme Court opined that “the intention behind Section 9 of the Act is the issuance of an order for preservation of the subject matter of an arbitration agreement. Power under Section 9 of the Act not totally independent of the well known principles governing the grant of an interim injunction that generally govern the Courts in this connection”[21]

In the same year the Supreme Court clearly set the limits of permissible jurisdiction under this section when it said that “the power under Section 9 is conferred on the District Court. No special procedure is prescribed by the Act in that behalf. It is also clarified that the Court entertaining an application under Section 9 of the Act shall have the same power for making orders as it has for the purpose and in relation to any proceedings before it. Prima facie, it appears that the general rules that governed the court while considering the grant of an interim injunction at the threshold are attracted even while dealing with an application under Section 9 of the Act. There is also the principle that when a power is conferred under a special statute and it is conferred on an ordinary court of the land, without laying down any special condition for exercise of that power, the general rules of procedure of that court would apply.”[22]

The Supreme Court again reiterated the view when it held that “Unless and until a case of irreparable loss or damage is made out by a party to a suit, the court should not permit the nature of the property being changed which also includes alienation or transfer of the property which may lead to loss or damage being caused to the party who may ultimately succeed and may further lead to multiplicity of proceedings.”[23]

V.            Intervention in Appointing Arbitrators

Section 11. Appointment of arbitrators. –

(1) A person of any nationality may be an arbitrator, unless otherwise agreed by the parties.

(2) Subject to sub-section (6), the parties are free to agree on a procedure for appointing the arbitrator or arbitrators.

(3) Failing any agreement referred to in sub-section (2), in an arbitration with three arbitrators, each party shall appoint one arbitrator, and the two appointed arbitrators shall appoint the third arbitrator who shall act as the presiding arbitrator.

(4) If the appointment procedure in sub-section (3) applies and-

(a) A party fails to appoint an arbitrator within thirty days from the receipt of a request to do so from the other party; or

(b) The two appointed arbitrators fail to agree on the third arbitrator within thirty days from the date of their appointment, The appointment shall be made, upon request of a party, by the Chief Justice or any person or institution designated by him.

(5) Failing any agreement referred to in sub-section (2), in an arbitration with a sole arbitrator, if the parties fail to agree on the arbitrator within thirty days from receipt of a request by one party from the other party to so agree the appointment shall be made, upon request of a party, by the Chief Justice or any person or institution designated by him.

(6) Where, under an appointment procedure agreed upon by the parties, -

(a) A party fails to act as required under that procedure; or

(b) The parties, or the two appointed arbitrators, fail to reach an agreement expected of them under that procedure; or

(c) A person, including an institution, fails to perform any function entrusted to him or it under that procedure, A party may request the Chief Justice or any person or institution designated by him to take the necessary measure, unless the agreement on the appointment procedure provides other means for securing the appointment.

(7) A decision on a matter entrusted by sub-section (4) or sub-section (5) or sub-section (6) to the Chief Justice or the person or institution designated by him is final.

(8) The Chief Justice or the person or institution designated by him, in appointing an arbitrator, shall have due regard to-

(a) Any qualifications required of the arbitrator by the agreement of the parties; and

(b) Other considerations as are likely to secure the appointment of an independent and impartial arbitrator.

(9) In the case of appointment of sole or third arbitrator in an international commercial arbitration, the Chief Justice of India or the person or institution designated by him may appoint an arbitrator of a nationality other than the nationalities of the parties where the parties belong to different nationalities.

(10) The Chief Justice may make such scheme, as he may deem appropriate for dealing with matters entrusted by sub-section (4) or sub-section (5) or subsection (6) to him.

(11) Where more than one request has been made under sub-section (4) or subsection (5) or sub-section (6) to the Chief Justices of different High Courts or their designates, the Chief Justice or his designate to whom the request has been first made under the relevant subsection shall alone be competent to decide on the request.

(12) (a) Where the matters referred to in sub-sections (4), (5), (6), (7),(8) and (10) arise in an international commercial arbitration, the reference to “Chief Justice” in those subsections shall be construed as a reference to the “Chief Justice of India”.

(b) Where the matters referred to in sub-sections (4), (5), (6), (7), (8) and (10) arise in any other arbitration, the reference to “Chief Justice” in those sub-sections shall be construed as a reference to the Chief Justice of the High Court within whose local limits the principal Civil Court referred to in clause (e) of sub-section (1) of section 2 is situate and, where the High Court itself is the Court referred to in that clause, to the Chief Justice of that High Court.

In a judgment dated 2007 the court held that “High Court ought not to have appointed an arbitrator in a manner, which was inconsistent with the arbitration agreement ”[24]. The court again in the same year held that “For settlement of dispute by arbitration, the agreement executed between the parties is to be given importance and an agreed procedure for appointment of Arbitrator is to be placed on high pedestal.”[25]

Supreme Court has read special powers in the statute and extinguished the rights of a party appointing an arbitrator, albeit belatedly, when it held that “Once a party files an application under section 11(6), the other party extinguishes its right to appoint an arbitrator in terms of clause of agreement.”[26]

 “Due regard has to be given to the qualifications required by the agreement and other considerations for appointment of an arbitrator by the Chief Justice or any person or institution designated by him”[27]

The court decided to extend the limits of its jurisdiction when it held that “Though the Order under Section 11(4) is a judicial order, having regard to Section 11(7) relating to finality of such orders, and the absence of any provision for appeal, the Order of the Civil Judge was open to challenge in a Writ Petition under Article 227 of the Constitution.”[28]

This trend has been tried to be arrested a little in a latest judgment wherein the court opined that in the case of “A petition under Section 11(5) of the Arbitration Act would not lie if there is any agreement between the parties providing for the procedure for appointment of an Arbitrator.”[29]

VI.            Challenge to Appointment of an Arbitrator

 

Section 12 (3) An arbitrator may be challenged only if-

(a) Circumstances exist that give rise to justifiable doubts as to his independence or impartiality, or

(b) He does not possess the qualifications agreed to by the parties.

(4) A party may challenge an arbitrator appointed by him, or in whose appointment he has participated, only for reasons of which he becomes aware after the appointment has been made.

 

Section 13. Challenge procedure. –

(1) Subject to sub-section (4), the parties are free to agree on a procedure for challenging an arbitrator.

(2) Failing any agreement referred to in sub-section (1), a party who intends to challenge an arbitrator shall, within fifteen days after becoming aware of the constitution of the arbitral tribunal or after becoming aware of any circumstances referred to in sub-section (3) of section 12, send a written statement of the reasons for the challenge to the arbitral tribunal.

(3) Unless the arbitrator challenged under sub-section (2) withdraws from his office or the other party agrees to the challenge, the arbitral tribunal shall decide on the challenge.

(4) If a challenge under any procedure agreed upon by the parties or under the procedure under sub-section (2) is not successful, the arbitral tribunal shall continue the arbitral proceedings and make an arbitral award.

(5) Where an arbitral award is made under sub-section (4), the party challenging the arbitrator may make an application for setting aside such an arbitral award in accordance with section 34.

(6) Where an arbitral award is set aside on an application made under subsection (5), the court may decide as to whether the arbitrator who is challenged is entitled to any fees.

(6) A party aggrieved by such an arbitral award may make an application forgetting aside such an arbitral award in accordance with section 34.

 

VII.            Setting Aside an Award

 

Section 34. Application for setting aside arbitral award. –

(1) Recourse to a court against an arbitral award may be made only by an application for setting aside such award in accordance with sub-section (2) and subsection (3).

(2) An arbitral award may be set aside by the court only if-

(a) The party making the application furnishes proof that-

(i) A party was under some incapacity, or

(ii) The arbitration agreement is not valid under the law to which the parties have subjected it or, failing any indication thereon, under the law for the time being in force; or

(iii) The party making the application was not given proper notice of the appointment of an arbitrator or of the arbitral proceedings or was otherwise unable to present his case; or

(iv) The arbitral award deals with a dispute not contemplated by or not falling within the terms of the submission to arbitration, or it contains decisions on matters beyond the scope of the submission to arbitration: Provided that, if the decisions on matters submitted to arbitration can be separated from those not so submitted, only that part of the arbitral award which contains decisions on matters not submitted to arbitration may be set aside; or

(v) The composition of the arbitral tribunal or the arbitral procedure was not in accordance with the agreement of the parties, unless such agreement was in conflict with a provision of this Part from which the parties cannot derogate, or, failing such agreement, was not in accordance with this Part; or

(b) The court finds that-

(i) The subject-matter of the dispute is not capable of settlement by arbitration under the law for the time being in force, or

(ii) The arbitral award is in conflict with the public policy of India.

Explanation. -Without prejudice to the generality of sub-clause (ii), it is hereby declared, for the avoidance of any doubt, that an award is in conflict with the public policy of India if the making of the award was induced or affected by fraud or corruption or was in violation of section 75 or section 81.

(3) An application for setting aside may not be made after three months have elapsed from the date on which the party making that application had received the arbitral award or, if a request had been made under section 33, from the date on which that request had been disposed of by the arbitral tribunal:

Provided that if the court is satisfied that the applicant was prevented by sufficient cause from making the application within the said period of three months it may entertain the application within a further period of thirty days, but not thereafter.

(4) On receipt of an application under sub-section (1), the court may, where it is appropriate and it is so requested by a party, adjourn the proceedings for a period of time determined by it in order to give the arbitral tribunal an opportunity to resume the arbitral proceedings or to take such other action as in the opinion of arbitral tribunal will eliminate the grounds for setting aside the arbitral award.

The Apex Court has clarified the jurisdiction of this section by holding that "Where a party is aggrieved by the arbitral award made on the basis of merits of claim and no jurisdictional issue is involved therein, recourse has to be taken to Section 34 and not Section 37(2)(a) of the Arbitration & Conciliation Act, 1996."[30]

This section has been one of the most contentious sections of the act with the court going beyond the language of the section to give it a wider meaning and to increase its jurisdiction. The statutory and the judiciary created grounds of intervention are now discussed below.

Statutory Grounds for Setting Aside the Arbitral Award

Section 13(5) of the 1996 Act provides that where the tribunal overrules a challenge and proceeds with the arbitration, the party challenging the arbitrator may make an application for setting aside the arbitral award under s 34 of the 1996 Act (corresponding to Art 34 of the Model Law). Hence, approach to a court is only at the post-award stage.

Section 16 incorporates the competence-competence principle and enables the arbitral tribunal to rule on its jurisdiction, including with respect to the existence or validity of the arbitration agreement. If the arbitral tribunal rejects any objection to its jurisdiction, or to the existence or validity of the arbitration agreement, it shall continue with the arbitral proceedings and make an award.16 Section 16(6) of the 1996 Act provides that a party aggrieved by such award may make an application for setting aside the same in accordance with s 34. The Indian Act permits approach to the court only at the award stage (and not during the pendency of the arbitration proceedings). Hence, ss 13(5) and 16(6) of the 1996 Act furnish two additional grounds for challenge of an arbitral award (over and above the ones stipulated in s 34 of the 1996 Act.).

Section 34 of the 1996 Act contains the main grounds for setting aside the award. It is based on Art 34 of the Model Law and, like Art 34, states that the grounds contained therein are the ‘only’ grounds on which an award may be set aside. However, in the Indian context the word ‘only’ prefixing the grounds is a bit of a misnomer as two additional grounds have been created by the Act itself as mentioned above. Besides, another ground is to be found in an ‘Explanation’ to the public policy ground in s 34.

Section 75 referred to in the explanation is part of the conciliation scheme under the Act and states that the conciliator and parties shall keep confidential all matters relating to the conciliation proceedings. Section 81 prohibits any reference in arbitral or judicial proceedings to views, suggestions, admissions or proposals, etc. made by parties during conciliation proceedings.

New Ground for Challenge to Award Through Judge-made Law

To the above-mentioned legislatively stipulated grounds, came to be added a new ‘judge-made’ ground. This came about in the Supreme Court decision of Oil and Natural Gas Corp v Saw Pipes Ltd.[31] The issue here was whether an award could be set aside on the ground that the arbitral tribunal had incorrectly applied the law of liquidated damages to the case. The question turned around the scope of s 34 of the 1996 Act, which on a plain reading does not permit a challenge on merits. The Supreme Court in Saw Pipes came to the conclusion that the impugned award was legally flawed in so far as it allowed liquidated damages on an incorrect view of the law.

In the process it held, that an award can also be challenged on the ground that it contravenes ‘the provisions of the Act (i.e. Arbitration Act) or any other substantive law governing the parties or is against the terms of the contract’. Further, the judgment expanded the concept of public policy to add that the award would be contrary to public policy if it is ‘patently illegal’. The Supreme Court in Saw Pipes confined the expansion of public policy to domestic awards alone as an earlier larger Bench decision of the court in the case of Renu Sagar Power Co v General Electrical Corp[32] had construed narrowly this ground as limited to ‘fundamental policy of Indian law’.[33]

A recent decision of the Supreme Court in the case of Venture Global Engineering v Satyam Computer Services has held that the wider interpretation of ‘public policy’ would apply to foreign awards as well.[34] The Venture Global case is far reaching for it creates a new procedure and a new ground for challenge to a foreign award (not envisaged under the Act). The new procedure is that a person seeking to enforce a foreign award has not only to file an application for enforcement under Section 48 of the Act, it has to meet an application under Section 34 of the Act seeking to set aside the award. The new ground is that not only must the award pass the New York Convention grounds incorporated in Section 48, it must pass the expanded "public policy" ground created under Section 34 of the Act.

The Saw Pipes judgment has come in for some sharp criticism from several quarters.[35] Read literally, the judgment sets the clock back to the old position where an award could be challenged on merits and indeed renders the court as a court of appeal. Some judicial decisions have tried to reign in the effect of Saw Pipes.

One instance of this is the Supreme Court decision in the case of McDermott International Inc v Burn Standard Co Ltd,[36] where the court somewhat read down Saw Pipes. It held: “The 1996 Act makes provision for the supervisory role of courts, for the review of the arbitral award only to ensure fairness. Intervention of the court is envisaged in few circumstances only, like, in case of fraud or bias by the arbitrators, violation of natural justice, etc. The court cannot correct the errors of arbitrators. It can only quash the award leaving the parties free to begin the arbitration again if it is desired. So, the scheme of the provision aims at keeping the supervisory role of the court at minimum level and this can be justified as parties to the agreement make a conscious decision to exclude the court’s jurisdiction by opting for arbitration as they prefer the expediency and finality offered by it.”

Commenting on Saw Pipes the court held:[37] “We are not unmindful that the decision of this court in ONGC had invited considerable adverse comments but the correctness or otherwise of the said decision is not in question before us. It is only for a larger Bench to consider the correctness or otherwise of the said decision. The said decision is binding on us. The said decision has been followed in a large number of cases.”

A few High Court decisions have also sought to narrowly read Saw Pipes on the ground that a literal construction of the judgment would expand judicial review beyond all limitations contained not only under the 1996 Act but even under the old regime. These High Court decisions have (rightly) held that one judgment of the Supreme Court cannot render naught the entire law on the subject.

The High Court of Bombay in the case of Indian Oil Corp Ltd v Langkawi Shipping Ltd[38] held that to accept a literal construction on Saw Pipes: “would be to radically alter the statutorily and judicially circumscribed limits to the court’s jurisdiction to interfere with arbitration awards. It would indeed confer a First Appellate Court’s power on a court exercising jurisdiction under s 34 of the 1996 Act. There is nothing in the 1996 Act which indicates such an intention on the part of the legislature. That the intention is to the contrary is clear, inter alia, from the Arbitration and Conciliation Bill 1995 which preceded the 1996 Act which stated as one of its main objectives the need ‘to minimize the supervisory role of Courts in the Arbitral process”.

 The Hon’ble Court went on to say “In the circumstances, the aforesaid principles laid down consistently by the Supreme Court and the various High Courts cannot be said to be no longer good law in view of the 1996 Act. Nor can it be said that the observations of the Supreme Court in Oil and Natural Gas Corp v Saw Pipes Ltd (supra), have expressly or impliedly rendered the aforesaid judgments and the principles contained therein no longer good law in view of the 1996 Act. The principles apply with equal force under the 1996 Act.”[39]

The High Court of Gauhati following the above Bombay High Court decision held: “The observations of the Apex Court in ONGC v Saw Pipes[40], did not expressly or impliedly render the Ratio Decidendi on the issue contained in a plethora of judgments and the laid down principles therein non est. On a due consideration of the entire gamut of the provisions of the Act and the precedential law, we, without hesitation subscribe, to the view expressed in IOC Ltd, supra. The decision in Saw Pipes, does not depart from the judicially evolved precepts bearing on the authority and jurisdiction of an arbitrator in determining a dispute referred to him, the norms and measures to be applied for assessment of damages and the scope of court’s interference with his findings … The above decision does not intend, according to our construction, to efface the time-tested legal propositions and judicial tenets on arbitration and thus ought not to be construed away from the well-established trend set by a string of decisions preceding the same.”[41]

The Saw Pipes judgment has quite rightly been criticised. To begin with it is contrary to the plain language of the 1996 Act and indeed also the spirit of the law. Its expanded judicial review is especially unsuitable in the Indian context where courts are overwhelmed with backlog. In such a scenario, to permit a challenge on merits would considerably delay the enforcement proceedings. A majority of parties opting for arbitration do so to avoid court delays and legal niceties. To engage them back into the same system at the enforcement stage would be ironic. An unfortunate side effect of this decision is that it has become a ground for parties to shift the venue of arbitration outside India (lest arbitration in India renders the award more vulnerable or judicial review delay enforcement).

“On this point, there is near unanimity of opinion as amongst the High Courts of the country as well. Illustratively, we may refer to a few cases. In Union of India v. Ajit Mehta and Associates, Pune and Ors.[42], the Division Bench held that the Court has suo motu power to set aside an award on ground other than those covered by Section 30 such as an award made by arbitrators who can never have been appointed under Section 8, as such an award would undoubtedly be ab initio void and no nest. In Union of India v. South Eastern Railway[43] and Rajendra Dayal v. Govind[44], both Division Bench decisions, the High Court of Madhya Pradesh has held that in certain situations the Court may set aside an Award even without there being an application under Section 30 or even if the petition under Section 30 has not been filed within the period of limitation if the Court finds that the award is void or directs a party to do an act which is prohibited by law or is without jurisdiction or patently illegal. We need not multiply the number of authorities on this point as an exhaustive and illuminating conspectus of judicial opinion is found to be contained in Law of Arbitration and Conciliation - Practice and Procedure by S.K. Chawla (Second Edition, 2004 at pp. 181-184) under the caption - "Whether the Court has suo motu power to set aside an Arbitral Award - " and the answer given in the discussion there under is in the affirmative.”[45]

Finality And Enforcement Of Arbitral Awards

Section 35. Finality of arbitral awards. -Subject to this Part an arbitral award shall be final and binding on the parties and persons, claiming under them respectively.

“An appeal as against an award in terms of an agreement may be or may not be filed within the time specified under Section 34 of the Act. Even the appellate arbitrator (if we may use the said term) would have no jurisdiction to pass an order of injunction staying the operation of the original award of the arbitrator. The 1996 does not contemplate that only because an appeal has been filed against the award, the time envisaged under Section 34 shall cease to run. If during pendency of the so-called appeal an award becomes a decree, the appellate arbitrator cannot set aside the said decree.”[46]

Section 37. Appealable orders. –

(1) An appeal shall lie from the following orders (and from no others) to the court authorised by law to hear appeals from original decrees of the court passing the order, namely: -

(a) Granting or refusing to grant any measure under section 9;

(b) Setting aside or refusing to set aside an arbitral award under section 34.

(2) An appeal shall also lie to a court from an order of the arbitral tribunal--

(a) Accepting the plea referred to in sub-section (2) or sub-section (3) of section 16; or

(b) Granting or refusing to grant an interim measure under section 17.

(3) No second appeal shall lie from an order passed in appeal under this section, but nothing in this section shall affect or take away any right to appeal to the Supreme Court.

FLAWS IN THE ACT OF 1996

In Bhatia International Vs. Bulk Trading SA.[47] The Supreme Court described the Act as an ‘ill-drafted enactment’.

If the arbitration law does not contain a statutory procedure for speeding up the arbitral process–at least after one year–or for control of the excessive charge of fee by the arbitrators, the State must step in and make some law for speeding up arbitration. The amendments which the 176th Report of the Law Commission had proposed addressed these questions. The arbitration has to be completed in one year, if not, the court will monitor it by fixing dates and during the interregnum, when the court is moved and it passes orders, there shall be no stay of the arbitral proceedings. The prospect of a civil court setting the time schedule for retired judges of the superior courts (whose award would any way go under the Act before the civil courts, if challenged) should be a deterrent and I am sure once this amendment comes into force, arbitration in India will be quite fast, if not faster than elsewhere. I may also say that the mechanism we have proposed for speeding up arbitration is unique and there are no parallel provisions elsewhere in any other country. If we do not address the questions of speed and costs, parties will soon opt for other alternatives–alternative not only to court adjudication but also to arbitration.

 Article 21 of the ICC Arbitration Rules and Article 25.4 of the UNCITRAL Arbitration Rules both emphasise the safeguarding of privacy and holding in camera hearings as a primary characteristic of the arbitral process. However, in keeping with recent trends of openness and an emphasis on the people’s right to know, Courts have begun drawing a balance between the need for knowledge to be disclosed in the ‘public interest’ and the equally pressing need to maintain confidentiality of the proceedings. Confidentiality, while permissible to a certain degree, can not be guaranteed absolutely, keeping in view ‘the public’s legitimate interest in obtaining information’.[48]

 

CONCLUSION

Arbitration is a sum of many parts. There are benefits and costs and the reminder that one is incomplete without the other. As things stand today, arbitration is poised to effect great changes to the ways in which dispute resolution is conducted. It brings with it the solemnity and finality of the judicial process and couples it with the procedural flexibilities of non-conventional dispute resolution methods. There is, however, an equally pressing need to recognize that much more can and should be done to improve the conduct of arbitral proceedings in India but most importantly, we, the researchers, feel that there is a need to effect a change in perceptions. As our nation moves towards increasing litigiousness, alternative methods of dispute resolution might just provide the key to resolving the problems of overburdened case loads, long pendency of cases and an all too frequent case of justice delayed. For long, the problem plaguing the effective implementation of ADR methods has been their perception as being subordinate to the court process- a perception shared and fostered by lawyers and people alike. It is imperative, that this be changed and this can only be achieved if there is active engagement from all the stakeholders in this process. Certainly, there are some disputes inherently unsuited for alternative channels but there are so many more which fit perfectly within the vision envisaged for if a system of rendering justice that runs concurrent to the Courts. It is necessary for the Courts themselves to mandate recourse to ADR methods in inter alia international commercial disputes, employment disputes, matrimonial cases, compoundable criminal offences, to name just a few. At the end of the day, what should take precedence is the provision of justice, in substance more than in form. As our country grows and flowers, taking wing on issues unimagined before, it is time also for our dispute resolution systems, the undisputed backbone of our nation, to follow suit.

 



[1] Everest Holding Ltd. Vs Shyam Kumar Shrivastava and Ors.  2008 (14) SCALE 294

[2] Section 2 (a)

[3] Imhoos Christophe, Verbist Herman, Kwatra G.K., International Trade Centre, Arbitration and Alternative Dispute Resolution, (New Delhi: LexisNexis Butterworths, 2004), 48.

[4] Phillips, Philip G., “A Lawyer's Approach to Commercial Arbitration”, The Yale Law Journal, 31, 51, (1934).

[5] Ibid.

[6] Konkan Railway Corporation v. Mehul Construction Co., 2000 (7) SCC 201.

[7] Oil and Natural Gas Corporation v. SAW Pipes, (2003) 5 SCC 705.

[8] SBP & Co. v. Patel Engineering, (2005) 8 SCC 618.

[9] Aloke Ray, Dipen Sabharwal, “What Next for Indian Arbitration?” The Economic Times, 29 August, 2006.

[10] ibid

[11] Ibid.

[12] Ibid.

[13] Zaiwalla, Sarosh, “Challenging Arbitral Awards: Finality is Good but Justice is Better” 20(2) Journal of International Arbitration (2003), http://www.zaiwalla.co.uk/html/publications.html, 16 July, 2008.

[14] Hindustan Zinc Ltd. v. Friends Coal Carbonisation, (2006) 4 SCC 445.

[15] Indian Oil Corporation Ltd., v. Coastal Bermuda Ltd., [1990] 2 Lloyd’s Rep., 407

[16] Shakti Bhog Foods Limited Vs.  Kola Shipping Limited, AIR 2009 SC 12, 

[17] The Empire Jute Co. Ltd. and Ors. Vs.  The Jute Corporation of India Ltd. and Anr.2007 (4) ARBLR 74 (SC)

[18] Bharat Sewa Sansthan Vs. U.P. Electronics Corporation Limited. AIR 2007 SC 2961

[19] VISA International Ltd. Vs. Continental Resources (USA) Ltd. AIR 2009 SC 1366

[20] Atul Singh and Ors. Vs. Sunil Kumar Singh and Ors. AIR 2008 SC 1016

[21] Adhunik Steels Ltd. Vs.  Orissa Manganese and Minerals Pvt. Ltd. AIR 2007 SC 2563.

[22] Arvind Constructions Co. Pvt. Ltd. Vs.  Kalinga Mining Corporation and Ors. AIR 2007 SC  2144

[23] N. Srinivasa Vs.  Kuttukaran Machine Tools Ltd. 2009 (3) SCALE 762

[24] Municipal Corporation, Jabalpur and Ors. Vs. Rajesh Construction Co. AIR 2007 SC 2069

[25] The Iron and Steel Company Limited Vs.  Tiwari Road Lines. AIR 2007 SC 2064

[26] Union of India (UOI) Vs. Bharat Battery Manufacturing Co. (P) Ltd. 2007(3)ARBLR282(SC)

[27] Northern Railway Admn., Ministry of Railway, N Delhi Vs. Patel Engineering Company Ltd. (2008) 10 SCC 240

[28] Punjab Agro Industries Corpn. Ltd. Vs.  Kewal Singh Dhillon (2008) 10 SCC 128

[29] Standard Corrosion Controls Pvt. Ltd. Vs. Sarku Engineering Services SDN BHD AIR 2009 SC 1138

 

[30] National Thermal Power Corporation Ltd. Vs. Siemens Atkeingesellschaft AIR 2007 SC 1491

[31] 2003 (5) SCC 705 (‘Saw Pipes’).

[32] 1994 Supp (1) SCC 644 (‘Renu Sagar’).

[33] However, see infra, pp 74–80 under the section headed ‘F — Enforcement of Foreign Awards’

[34] AIR 2008 SC 1061

[35] See, for instance, the chapter entitled ‘Judicial Supervision and Intervention’ by Mr Fali S Nariman in Asia’s Leading Arbitrators’ Guide to International Arbitration JurisNet, LLC 2007 at p 353.

[36] 2006 (11) SCC 181 at 208.

[37] Id at 211.

[38] 2004 (3) Arb LR 568.

[39] Ibid at 573 and 574.

[40] supra

[41] Daelim Industrial Co v Numaligarh Re_ nery Ltd Arbitration Appeal No 1 of 2002 (24 August 2006).

[42] MANU/MH/0007/1990

[43] AIR 1992 M.P. 47

[44] 1970 MPLJ 322

[45] Chief Engg. of B.P.D.P./R.E.O, Ranchi  Vs. Scoot Wilson Kirpatrick India Pvt. Ltd. 2006 (11) SCALE 644

[46] Centrotrade Minerals and Metal Inc. Vs. Hindustan Copper Limited (2006) 11 SCC 245

[47] 2002 (4) SCC 105

[48] Redfern Alan, Hunter Martin, Law and Practice of International Commercial Arbitration, 4th Edn. (London: Sweet & Maxwell, 2004), 22.


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jayaveladvocate

jayaveladvocate

Wrote on 01 August 2009

The Arbitration Act section 34 contained a contained code for the law of limitation but the Indian Court are oblivion to the spirit behind this letters they let the counsels file a defective papers in time and prolong the representation of the corrected papers or often so called representation were also defective so the parliament should address this issue first to keep the law of limitation as a law in force












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