18 Dec 2016

Two - tier arbitration mechanism valid in Indian laws: Supreme Court

Resolving a long-pending controversy, a judge-bench of the Supreme Court in its recent decision has affirmed what is popularly known as two-tier arbitration mechanism where the arbitration award can be challenged before an appellate arbitration panel. On the issue of the validity of such two-tier procedure, two-judges of the Court had difference of opinion and consequently the issued was referred for a bench of larger composition. 

In Centrotrade Minerals & Metals Inc. v. Hindustan Copper Ltd. [Civil Appeal No. 2562/2006, decision dated 15.12.2016], the three-judges of the Supreme Court have unanimously upheld the mechanism declaring it to be an essential facet of 'party autonomy', a feature which lies at the foundation of arbitration mechanism. The Court has also ruled out the challenge that such mechanism cries foul of 'public policy of India'. In the view of the Court, there is no fundamental inconsistency in such mechanism vis-a-vis the Indian Arbitration law of 1996.

Some of the relevant excerpts of the decision are as under;
27. In our opinion, on a combined reading of sub-section (1) of Section 34 of the A&C Act and Section 35 thereof, 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 A&C Act. This is precisely what the parties have in fact agreed upon and we see no difficulty in honouring their mutual decision and accepting the validity of their agreement.
28. The fact that recourse to a court is available to a party for challenging an award does not ipso facto prohibit the parties from mutually agreeing to a second look at an award with the intention of an early settlement of disputes and differences. The intention of Section 34 of the A&C Act and of the international arbitration community is to avoid subjecting a party to an arbitration agreement to challenges to an award in multiple forums, say by way of proceedings in a civil court as well under the arbitration statute. The intention is not to throttle the autonomy of the parties or preclude them from adopting any other acceptable method of redressal such as an appellate arbitration.
34. It is therefore quite clear that the “final and binding” clause in Section 35 of the A&C Act does not mean final for all intents and purposes. The finality is subject to any recourse that an aggrieved party might have under a statute or an agreement providing for arbitration in the second instance. The award is binding in a limited context.
35. Unless this interpretation is accepted, a second instance arbitration would be per se invalid in India. This would be going against the grain of a long line of decisions rendered by various courts in the country which have accepted the validity of a two-tier arbitration procedure under institutional rules and have not taken the view that a two-tier arbitration procedure is per se invalid. ...
40. Be that as it may, the legal position as we understand it is that the 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 have agreed on a two tier arbitration system through Clause 14 of the agreement and Clause 16 of the agreement provides for the construction of the contract as a contract made in accordance with the laws of India. We see nothing wrong in either of the two clauses mutually agreed upon by the parties.
44. For the present we are concerned only with the fundamental or public policy of India. Even assuming the broad delineation of the fundamental policy of India as stated in Associate Builders we do not find anything fundamentally objectionable in the parties preferring and accepting the two-tier arbitration system. 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 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.
45. We decline to read the A&C Act in the manner suggested by learned counsel for HCL and hold that the arbitration clause in the agreement between the parties does not violate the fundamental or public policy of India by the parties agreeing to a second instance arbitration. It follows from our discussion that the award which is required to be challenged by HCL is the award rendered on 29th September, 2001 by the arbitrator in London."

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