Testing the permissibility of two-tier arbitrations in India

Testing the permissibility of two-tier arbitrations in India

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INTRODUCTION:

The central theme of this prolegomenon is to answer the following questions of relevance:

  1. What is ‘second instance’ arbitration?
  2. Is ‘two-tier’ arbitration in consonance with the brooding spirit of arbitration mechanism that is to facilitate party autonomy or is it in conflict with the public policy of India?
  3. Can parties to an arbitration agreement confer upon themselves ‘right to appeal’ from the ‘arbitral result’ delivered by one arbitrator to another arbitrator acting as an appellate authority?
  4. Is there any difference between ‘arbitration decision’ and ‘arbitral award’?

The centrepiece of discourse will be the dicta rendered in the following two cases: M/s. Centrotrade Minerals & Metals Inc. v. Hindustan Copper Ltd., (2006) 11 SCC 245, and M/s. Centrotrade Minerals & Metals Inc. v. Hindustan Copper Ltd., (2017) 2 SCC 228.

About decade back, that is, on 09th May, 2006, the following point of discussion, debate and controversy was referred by the Bench of S.B. Sinha & Tarun Chatterjee, JJ. to the Hon’ble Chief Justice of India: ‘If parties, as in this case, Centrotrade Minerals & Metals Inc. (hereinafter referred to as “Centrotrade”) and Hindustan Copper Ltd. (hereinafter referred to as “HCL”), enter into a contract containing an arbitration clause providing for two-tier arbitration and some disagreements and differences erupt between the parties to the contract, pursuant to which one of the parties to the contract, that is, “Centrotrade”, invokes the arbitration clause and the matter is referred to the first-named arbitrator, namely, Indian Council of Arbitration, which gives a ‘nil’ award, and then later an appeal is preferred by the erstwhile party, that is, “Centrotrade”, to the second-named arbitrator, namely, Mr. Jeremy Cooke (sitting in London and complying with the Rules of Conciliation and Arbitration of International Chamber of Commerce), who passes an award in favour of the erstwhile party, that is, “Centrotrade”, then, can it be said that the result of the appellate arbitration would be binding on both the parties to the arbitration agreement subject to a legal challenge in accordance with law, or, will the system of second-instance arbitration be held bad in law for it is incongruous with the provisions of the Arbitration and Conciliation Act, 1996?’

It is necessary to note that, “Centrotrade” was incorporated in the United States of America and dealt with the sale and purchase of non-precious metals including copper, while, “HCL” was Government of India undertaking and its business included purchase of copper concentrate. After the arbitral award was passed by the appellate arbitrator, namely, Mr. Jeremy Cooke, in favour of “Centrotrade”, an application under Section 48 of the Arbitration and Conciliation Act, 1996 was preferred by “Centrotrade” before the Court of District Judge, Alipore. Subsequently, the execution case was transferred to the High Court of Calcutta, and the Learned Single Judge of the High Court of Calcutta allowed the execution petition. Aggrieved by the order of the Learned Single Judge of the High Court of Calcutta, an appeal was preferred by “HCL” to the Division Bench of the High Court of Calcutta. The Division Bench set aside the order of the Learned Single Judge of the High Court of Calcutta and observed that the matter should be sent back to the International Chamber of Commerce for fresh disposal. Aggrieved by the order of the Division Bench of the High Court of Calcutta, both the parties, that is, “Centrotrade” and “HCL” came before the Hon’ble Supreme Court of India in cross-appeals.

In a split decision, Hon’ble Mr. Justice S.B. Sinha observed that, the Arbitration and Conciliation Act, 1996 (hereinafter referred to as the “1996 Act”) contains a coherent and model framework, that is, the 1996 Act envisages only one award under one set of rules and it does not contemplate multilayer awards governed by different set of rules. Further, it was observed that, an arbitration agreement envisioning different procedures at different stages cannot be countenanced under the 1996 Act; however, if at all there was a provision for preferring an appeal within the set-up of the Indian Council of Arbitration, subject to compliance with time-frame, probably the agreement would have been valid. Per contra, Hon’ble Mr. Justice Tarun Chatterjee observed that, a two-tier arbitration entered into before or after the coming into force of the 1996 Act is valid and permissible in India. It was categorically observed that, there is nothing under the 1996 Act which prohibited the parties from entering into an agreement where under the first arbitration proceeding is conducted under Part I of the 1996 Act and the appeal there from is entertained under Part II of the 1996 Act. Now, because of the variation in the opinions rendered by the learned judges, a full-bench was formed comprising of the following judges, namely, Hon’ble Mr. Justice Madan B. Lokur, Hon’ble Mr. Justice R.K. Agrawal and Hon’ble Mr. Justice D.Y. Chandrachud to adjudicate upon the admissibility of two-tier arbitrations in form as explained above. The full-bench was headed by Hon’ble Mr. Justice Madan B. Lokur, who wrote the unanimous opinion. Before we travel any further, it will be pertinent to answer the questions set out in the prologue, that is, what is second-instance arbitration and whether it is in tune with the provisions of the 1996 Act?

WHAT IS ‘SECOND INSTANCE’ ARBITRATION?

Having regard to international commercial arbitration, “second-instance” arbitration can be explained as a method and/or mechanism whereby parties to a contract hailing from two different countries agree that in case of any difference and/or dispute arising between the parties to the contract, the matter/controversy will be referred to an arbitrator residing in a particular country for adjudication of dispute by complying with certain rules as agreed between the parties to the contract. This decision rendered by the first-named arbitrator is termed as an ‘arbitration result’. An appeal can be preferred against this ‘arbitration result’ to the second-named arbitrator residing is some other country, not necessarily the country from which the parties to the contract are hailing. Thus, in two-tier arbitration there is an inbuilt mechanism for preferring an appeal from the decision rendered by the first-named arbitrator to the second-named arbitrator.

It is necessary to note that in international commercial arbitration, “venue” can often be different from the “seat” of arbitration. The seat of arbitration normally carries with it the choice of that country’s arbitration (curial law). But, this would rather arise only if the curial law is not specifically chosen by the parties to the contract containing an arbitration agreement. Curial law is the lex arbitri, that is, the procedural law governing the arbitration. Legal seat of arbitration is different from the venue, as the venue is the geographically convenient place for holding hearings. If the seat of arbitration has been fixed in India, it follows that the courts in India will have the exclusive jurisdiction to exercise the supervisory powers over the arbitration. In an international commercial arbitration, venue of arbitration never confers concurrent supervisory jurisdiction to the courts where the arbitration hearings are held.[1]

The curious aspect in two-tier arbitration will be that of determining the “seat” and “venue” of arbitration apropos the first-named arbitrator and thereafter, if an appeal is preferred as regards the second-named arbitrator. But, in the present case at hand, that is, M/s. Centrotrade Minerals & Metals Inc. v. Hindustan Copper Ltd., (2017) 2 SCC 228, no such anomaly was surfaced as both the first-named arbitrator and the second-named arbitrator were the Institutional Arbitrators, namely, Indian Council of Arbitration and International Chamber of Commerce, which were to adjudicate the dispute complying with their respective rules and judgment upon the award was to be entered in any of the courts having the requisite jurisdiction. Thus, in the present case no jarring situation was witnessed whereby there was an apparent conflict or confusion as regards the applicability of the governing law of the contract, governing law of the arbitration agreement and/or the law of arbitration (curial law) as regards the first-named arbitrator and/or the second-named arbitrator.[2]

TWO-TIER ARBITRATION- PARTY AUTONOMY AND PUBLIC POLICY OF INDIA:  

In the case of, Bharat Aluminium Company v. Kaiser Aluminium Technical Services Inc.[3], it was categorically observed that, party autonomy is the brooding and guiding spirit in international commercial arbitration, where the parties to the contract are free to agree on application of three different laws governing the entire contract, namely, the proper law of the contract, proper law of arbitration agreement and the proper law of the conduct of arbitration. The terms of the contract must always be understood in the way the parties want and intend them to be, that is to say that, in agreements of arbitration party autonomy is the grundnorm. Further, in the case of, Union of India v. Uttar Pradesh State Bridge Corporation Ltd.[4], the Hon’ble Supreme Court of India opined that, there are two fundamental principles that govern the 1996 Act, first is the principle of fair, speedy and inexpensive trial by an Arbitral Tribunal, and second is the principle of party autonomy in the choice of procedure. Thus, the elementary position is that the parties to an arbitration agreement have autonomy to decide not only the procedural law to be followed but also the substantive law. The choice of jurisdiction is left to the contracting parties. Thus, in case the parties to contract agree on a two-tier arbitration system with the construction of the contract to be made in accordance with the laws of India, nothing erroneous can be found with it.

The Hon’ble Supreme Court of India in the case of, M/s. Centrotrade Minerals & Metals Inc. v. Hindustan Copper Ltd., (2017) 2 SCC 228 held that, two-tier arbitration is not against the public policy of India. Citing Mustill & Boyd[5], the Hon’ble Court held that, an arbitral award will fall foul of the public policy argument if the terms of the arbitration agreement are such which either exclude or restrict the supervisory jurisdiction of the court, or, require the arbitrator to conduct the arbitral reference in an unacceptable manner (devoid of fair hearing), or, empower the arbitrator to carry out procedures or exercise powers which lie exclusively within the domain of the courts. An arbitration agreement providing for second-instance arbitration comes clean of the above stated points. Further, the court opined that, an arbitral award which is passed following the two-tier arbitration mechanism stands good so far as considerations in the nature of: fundamental policy of Indian law; interest of India; and, justice and morality is concerned. Thus, the Hon’ble Court was of the opinion that, there is nothing in the 1996 Act that prohibits the contracting parties from agreeing upon two-tier appellate arbitration either expressly or impliedly on the grounds of public policy, justice and/or morality.

PARTIES TO ARBITRATION AGREEMENT CONFERRING UPON THEMSELVES ‘THE RIGHT TO APPEAL’:

The Hon’ble Court in the case of, M/s. Centrotrade Minerals & Metals Inc. v. Hindustan Copper Ltd., (2017) 2 SCC 228 held that, to state that the right to file an appeal can only be created by a statute and not by an agreement between the parties to arbitration is a meritless argument, for, such an argument may hold good so far as litigation initiated in courts under a statute is concerned, but under an arbitration mechanism where party autonomy is the brooding spirit, such an argument has no space to exist. Drawing inspiration from the commodity trade arbitrations, the Hon’ble Court held that, elemental feature of commodity trade arbitrations is second-instance arbitration system whereby first score of arbitration is held speedily and relatively informally resulting into an award which sometimes is also called as an ‘arbitration result’, this first instance award can be appealed against by the dissatisfied party to the ‘board of appeal’ of the relevant association. This system of appellate arbitration gives a party two bites at the cherry, for, the arbitral process is not deemed to be concluded until the board of appeal issues its final award. The final award which is in the nature of an affirmation or negation of the arbitration result can be challenged by the aggrieved party before the court of law. Placing reliance on, Garikapati Veeraya v. N. Subbiah Choudhry[6], the court held that, the right of appeal is not a mere matter of procedure but is a substantive right, thus, the court negated the argument that, the right to appeal is a creature of statute and parties to arbitration cannot confer upon themselves the right of appeal vide an agreement. Focusing on the argument that, there is a difference between the right of appeal not provided for by the 1996 Act and the parties to arbitration conferring upon themselves the right to appeal by mutual agreement, the Hon’ble Court held that, doctrine of party autonomy which is the heart and soul of the alternate dispute resolution mechanism forms the spirit of the 1996 Act and there is no provision in the 1996 Act which restricts the parties to an arbitration agreement from agreeing to a mechanism of ‘second-instance’ arbitration.

ARBITRATION DECISION VERSUS ARBITRATION AWARD:

In two-tier arbitration mechanism an appeal can be preferred from the arbitration result (often termed as ‘arbitration decision’) to the board of appeal and the decision of the board of appeal forms the arbitration award. The argument that there is, as such, no difference between an arbitration result/decision and the arbitral award and to create any such terminological difference is not only fallacious but is rather confusing is a sham argument. A mere perusal of Article 31(1) of the UNCITRAL (United Nations Commission on International Trade Law) Rules will clear the air on this aspect, for, it is stated here that, all awards are decisions of the arbitral tribunal while all decisions of the arbitral tribunal are not awards. This is to say that, while a decision is generic, an award is more specific decision that affects the rights of the parties and has important consequences and can be enforced. Further deliberating on the said aspect, the Hon’ble Court in M/s. Centrotrade Minerals & Metals Inc. v. Hindustan Copper Ltd., (2017) 2 SCC 228 opined that, in two-tier arbitration the decision of the first-named arbitrator cannot be challenged in the court directly but rather an appeal is to be preferred from the said ‘arbitration result’ to the second-named arbitrator (which in commodity trade arbitrations is often termed as the ‘board of appeal’) whose decision consumes finality and is termed as an ‘arbitral award’. The key features of an arbitral award can be summed up as follows: (a) It concludes the dispute as to the precise issue determined in the arbitral award so that it has the effect of res judicata between the parties; (b) With the passing of the arbitral award the jurisdiction of the arbitral tribunal terminates as the respective claims of the parties to arbitration are disposed of; (c) An arbitral award can be confirmed by recognition and enforcement; and (d) An arbitral award can be challenged in the court of the place of arbitration.

Usually, procedural orders and directions which help the arbitration mechanism to move forward, such as orders concerning exchange of written evidence, production of documents and arrangements for the conduct of arbitration hearings are called as arbitration decisions; although these do not have the status of awards, yet, these may perhaps be called into question after the final award has been delivered on the grounds of ‘bias’ and/or ‘lack of due process’. Thus, an arbitral award is nothing but a final decision by the second-named arbitrator in a two-tier arbitration mechanism on all or any part of the dispute submitted to it, whether concerning the merits of the dispute, jurisdiction and/or any other procedural issue leading to the termination of the arbitration proceedings. An arbitral award is a binding decision made by the arbitrators which finally resolves the dispute.

Therefore, the distinction coined by an arbitration agreement providing for ‘second-instance’ arbitration as between an arbitration result/decision and arbitration award is not artificial or invented but is rather real and existing.

CONCLUSION:

Second-instance arbitration is a valid form of arbitration regards being had to international commercial arbitration practices and procedures. Two-tier arbitration mechanism has long been witnessed in India in the domestic arbitrations, further, to stretch it to international commercial arbitrations is not a practice to be found fault with as it is not in the teeth of the 1996 Act. Appellate arbitration garners support from the specific rules stipulated in the UNCITRAL Model Rules and further it is in tune with the public policy of India, giving muscle to the doctrine of party autonomy which is the brooding spirit of the alternate dispute resolution mechanism.           

[1] See: Enercon (India) Ltd. v. Enercon GMBH & Anr, (2014) 5 SCC 1

[2] As regards the first-named arbitrator the seat of arbitration and the venue of arbitration was India, thus, the applicable curial law was that of India; similarly, for the second-named arbitrator the seat of arbitration and the venue of arbitration was U.K., thus, the applicable curial law was that of the U.K.

[3] (2016) 4 SCC 126

[4] (2015) 2 SCC 52

[5] Mustill & Boyd, The Law & Practice of Commercial Arbitration in England, Butterworths (1982), p.245-246

[6] 1957 SCR 488

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