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13 December 2018
Two-tier arbitration clauses or appellate arbitration mechanisms were upheld by a three-judge bench of the Supreme Court in Centrotrade Minerals and Metal Inc v Hindustan Copper Limited.(1) The Supreme Court held that a two-tier arbitration procedure provided for between parties is permissible under Indian law, opining as follows:
There is nothing in the Arbitration and Conciliation Act, 1996 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 Arbitration and Conciliation Act except by an unreasonable and awkward misconstruction and by straining its language to a vanishing point.
This article discusses the evolution of the jurisprudence surrounding two-tier arbitration in India and analyses both the utility of such a mechanism to the contracting parties and its usefulness in certain situations.
The Calcutta High Court dealt with the issue of the validity of appellate arbitration under the Arbitration Act 1899 in Heeralal Agarwalla and Co v Joakim Nahapiet and Co Ltd.(2) In this case, the Division Bench of the High Court was dealing with a provision in the contract under which the parties had specified a mechanism whereby any dispute would be first referred to arbitrators, then to an umpire and then to a committee of appeal from the umpire. The court upheld the validity of such an appeal and held that the award passed by the committee of appeal was within the ambit of the Arbitration Act 1899.
A similar clause was upheld by the Bombay High Court in Fazalally Jivaji Raja v Khimji Poonja and Co,(3) in which the court held that the intention of the parties must be the sole guide for determining the mode of working out the submission for arbitration(4) and reaching a final decision.
The two-tier arbitration clause in Centrotrade stated as follows:
Arbitration - All disputes or differences whatsoever arising between the parties out of, or relating to, the construction, meaning and operation or effect of the contract or the breach thereof 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. Judgment upon the award may be entered in any court in jurisdiction.
A division bench of the Supreme Court (comprising Justice SB Sinha and Justice Tarun Chatterjee) gave different opinions, leading to the constitution of a three-judge bench to hear and decide on the validity of the two-tier appellate arbitration mechanism.
Sinha observed that providing for two different awards or appellate arbitration mechanisms does not seem to correspond with the framework under the Arbitration and Conciliation Act 1996, Sinha observed that:
We may notice the dichotomy arising herein. If the first award was to be enforced (although no occasion arose therefore), it could have been done only in terms of Part I of the Act.(5) Despite invocation of the second part of the arbitration agreement, it would not cease to be a decree in terms of Section 36 of the Act unless the operation thereof was directed to be stayed. In other words, the first award of the arbitral tribunal, on the expiry of the period specified for challenging the award, became a decree despite invocation of the second part thereof. It is difficult to comprehend that despite a part of the award becoming a decree of the court, the same would not be binding upon the arbitral tribunal.(6)
However, Chatterjee dissented, observing as follows:
The Supreme Court upheld the validity of a two-tier appellate arbitration mechanism, holding that this does not contravene Indian law, including the Arbitration Act 1996. Justice Lokur observed as follows:
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 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.
In a contract between an Indian resident and a non-resident, Indian parties may need to deliberate on the suitability of two-tier arbitration clauses. The non-resident party is unlikely to agree to an Indian-seated arbitration. In such a situation, in case of foreign-seated arbitration, Part II of the Arbitration Act 1996 would govern its enforcement. In addition, following the 2015 amendments to the act, patent illegality is no longer a ground for refusing to enforce a foreign award and the threshold for challenging enforcement has been increased to that of the fundamental policy of Indian law.(7)
Hence, the likelihood of refusal to enforce a foreign award is lower than it used to be. This has been reaffirmed by the recent decisions of the Delhi High Court in:
The fundamental policy of Indian law was interpreted by the Delhi High Court in Cruz City not to be a mere contravention of any statutory provision, but rather to be larger principles and the legislative policy on which the laws of India are founded. The court further held that this refers to the "values, principles and substratal rationale" which form the bedrock of Indian legislation.
Given the above and the removal of patent illegality as a ground for challenging the enforcement of a foreign award, such an award is more likely to be enforced than refused compared to in the past. In such cases, the resident Indian party may consider a two-tier appellate arbitration mechanism to at least ensure that it has an appellate mechanism to dispose of a patently illegal award, with the second award and appellate arbitration being done through a different institutional or ad hoc arbitral mechanism, thereby putting to rest any doubts regarding the sanctity of the process.
This call should be taken on a case-by-case basis, particularly where a commercial transaction with a non-resident is likely to go to dispute and the stakes are high for the resident Indian party or promoter.
For further information on this topic please contact Jeevan Ballav Panda or Satish Padhi at Khaitan & Co by telephone (+91 22 6636 5000) or email (email@example.com or firstname.lastname@example.org). The Khaitan & Co website can be accessed at www.khaitanco.com.
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