Supreme Court validates two-tier arbitration process

By Vivek Vashi and Utkarsh Srivastava, Bharucha & Partners
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A three-judge bench of the Supreme Court has upheld the validity of a two-tier arbitration procedure in India. This issue was referred to a larger bench owing to a split decision of a two-judge bench.

In the case of Centrotrade Minerals & Metal Inc v Hindustan Copper Ltd, the parties to the dispute had agree to the following clause:

Vivek Vashi, Mainstay of the litigation team, Bharucha_&_Partners
Vivek Vashi
Mainstay of the litigation team
Bharucha_&_Partners

Arbitration – All disputes or differences whatsoever arising between the parties … 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 …”

The primary issue before the court was whether a two-tier arbitration procedure is permissible under Indian law. The court analysed this on three counts: (a) whether the appeal provision in the arbitration clause is contrary to the provisions of the Arbitration and Conciliation Act, 1996; (b) whether this act contains an implied prohibition against appellate arbitration; and (c) whether appellate arbitration is contrary to Indian public policy.

Relying on a UNCITRAL working group report and on several high court decisions the court held that a two-tier arbitration procedure is “acceptable” and has historically been considered to be valid. The court also held that the parliament can be assumed to have known the view of the UNCITRAL working group and “chose not to specifically prohibit appellate arbitration” under the 1996 act.

The court further observed that the defence that appellate arbitration is contrary to Indian law was an attack on the validity of the agreement and could have long-term implications for international commercial contracts.

The respondent contended that a right to appeal can be provided only under a statute. However, the court held that it was dealing with a “non-statutory process agreed upon by parties” which had nothing to do with court procedures and constituted a substantive right.

The court also held that the availability of a recourse to court under section 34 did not in itself preclude the parties “from mutually agreeing to a second look” at an award. Further, the court held that the words “final and binding” in section 35 cannot be interpreted to mean final for “all intents and purpose” and such finality was subject to recourse under a statue or an agreement providing for appellate arbitration.

Utkarsh Srivastava Associate Bharucha & Partners
Utkarsh Srivastava
Associate
Bharucha & Partners

Lastly, the court rejected the submission that appellate arbitration is against public policy on the ground that there was nothing “fundamentally objectionable” in the parties preferring and accepting a two-tier appellate arbitration mechanism so as to bypass a “mandatory provision” of the 1996 act.

While analysing the issues in the case, the court focused on party autonomy, which it called the “backbone of arbitrations”. Relying on its past decisions and various treatises, the court held that the intention behind the act “is not to throttle the autonomy of parties or preclude them from adopting any other acceptable method of redressal such as appellate arbitration.”

Pertinently, the court has recognized the importance of party autonomy in arbitrations so that disputes may be resolved with minimal judicial intervention. However, it should be noted that parties agreeing to appellate arbitration will now have to consider the type of such arbitration (ad hoc or institutional), place of arbitration and, importantly, the costs linked with it. Moreover, the parties in the appellate arbitration would have to adhere to the timelines prescribed by the 1996 act, post the 2015 amendment.

This judgment is yet another instance of promoting dispute resolution by arbitration in India. However, it may also be argued that there is a possibility of misuse of appellate arbitration by a recalcitrant party simply to delay the final execution of the award, particularly if the first award is not in its favour.

Moreover, while the court held that the result of the first arbitration would be considered as an “award”, it did not address the issue of whether such an award would be enforceable pending the second (appellate) arbitral reference. There is also no clarity as to the kinds of issues that may be referred for appeal.

Thus, while the implications of this judgment may be far-reaching and unknown, its effect on evolution of arbitration jurisprudence in India is certain.

Vivek Vashi is the mainstay of the litigation team at Bharucha & Partners, where Utkarsh Srivastava is an associate.

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