Effective arbitration: the devil lies in the details

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Pointers on pitfalls to avoid while drafting an arbitration clause by Sumeet Kachwaha and Dharmendra Rautray at Kachwaha & Partners

It needs to be recognized that arbitrations are tricky business. A lot hangs on the arbitration agreement. Here are three suggestions (which are especially useful in the Indian context) to navigate the challenges that parties confront:

Sumeet Kachwaha
Sumeet Kachwaha
  1. Avoid ad hoc arbitrations: This method of conducting arbitrations is considered bad anywhere in the world for a variety of reason. The process lacks transparency and accountability as parties are left to the whims and fancies of the arbitrator in terms of conduct of proceedings, fixing of costs, securing support mechanisms for a fair conduct of the proceedings, etc.

    In India, ad hoc arbitrations are especially difficult as they invite additional court intervention. This is a result of a ruling by a seven-judge bench in SBP & Co v Patel Engineering Ltd & Anr (overruling a five-judge decision in Konkan Railway Corporation Ltd v Rani Construction Pvt Ltd) holding that the court’s power to appoint an arbitrator is judicial, and not administrative, in nature.

    As a corollary, the court went on to hold that if its jurisdiction to appoint an arbitrator is invoked (in an ad hoc arbitration, where there is no mechanism to constitute a tribunal when parties disagree) the court, and not the arbitral tribunal, shall decide preliminary issues including whether there is a “live” claim; whether there has been accord and satisfaction; whether the arbitration agreement is “null and void, inoperative or incapable of being performed”; whether the claim is time barred, etc.

    This effectively results in an additional round of litigation, as a reluctant defendant can and will happily make frivolous preliminary objections (with no deterrent costs to follow). As a result we have seen anything between two and four years being consumed in what should be a simple process of an arbitral tribunal being constituted. In an institutionally administered arbitration, none of this wastage of time and costs is suffered.

  2. No vagueness in the arbitration clause: An advantage of arbitration is that the parties can tailor their dispute resolution mechanism to suit their needs. This advantage is often frittered away if parties omit essentials like selection of venue, number of arbitrators, language of arbitration, governing law etc., while drafting an arbitration clause. Recently we came across a high value government tender that provided for arbitration under “ICC / UNCITRAL Rules”. As both are different this is guaranteed to create difficulties.

    Another typical problem occurs if parties do not unequivocally state that the dispute is to be referred to arbitration. Indian courts have held that the following statements do not amount to an arbitration agreement: “parties can if they so desire refer the disputes to arbitration” or “in the event of any dispute the parties may also refer the same to arbitration” or “if any dispute arises, the parties should consider settlement by arbitration” or “if the parties so decide, the disputes shall be referred to arbitration” or “any dispute between the parties if they so agree, shall be referred to arbitration”.

    The courts have held that the above statements merely indicate a desire or hope that the dispute would be settled by arbitration, or constitute an arrangement to explore arbitration as a possible method of settlement should disputes arise. These have been held to merely constitute an agreement to enter into an agreement, which is not contractually binding.

  3. The fallout of the Balco judgment: Recently a constitution bench of the Supreme Court ruling in Bharat Aluminium Co v Kaiser Aluminium Technical Service Inc has overruled its two previous decisions: Bhatia International and Venture Global. While none may lament the demise of Venture Global (which enabled Indian courts to set aside foreign awards applying the domestic law provisions), Bhatia International (which enabled Indian courts to grant interim relief in offshore arbitrations) will be missed. Although Bhatia International was seen as an attempt by Indian courts to interfere with an offshore process, it did serve an important purpose.

    The problem that now faces parties is how to obtain interim relief from Indian courts in an offshore arbitration. With the overturning of Bhatia International there is no legal solution for such an eventuality. The Balco ruling had noted the problem, but felt it was for parliament to address. Parliament may or may not step in and till it does, parties that need the help of Indian courts for interim measures of protection can be in trouble.

    This makes it necessary to stipulate in the arbitration clause that parties may take recourse to Indian courts “in support of the arbitration proceedings” for the limited purpose of interim measures of protection under section 9. Similarly, an arbitration clause should enable parties to seek the assistance of Indian courts to take evidence under section 27 of the Arbitration Act if need be.

    The Balco ruling overruled Bhatia International and Venture Global prospectively and all arbitration agreements entered into after 6 September will need to address these issues (of sections 9 and 27) in their arbitration agreement.

    To conclude, it is vital that great care is taken in drafting an arbitration clause in order to factor in several anomalies that are peculiar to India.

Sumeet Kachwaha is a managing partner at Kachwaha & Partners in New Delhi where Dharmendra Rautray is a member. They can be contacted at [email protected] and [email protected] respectively.