Law of Arbitration in India- In a Nutshell

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May 11, 2018

INTRODUCTION

The Arbitration proceedings in India are governed by the Arbitration and Conciliation Act, 1996. The Indian Arbitration Act is based on the UNCITRAL Model Law on International Commercial Arbitration 1985 and the UNCITRAL Arbitration Rules 1976. The UNCITRAL Model Law was adopted in 1985 with the objective to assist States in reforming and modernizing their laws on arbitral procedure so as to take into account the particular features and needs of international commercial arbitration. In the year 2006, the UNCITRAL Model Law was amended with the object to modernise the form requirement of an arbitration agreement to conform with international contract practices and establish a more comprehensive legal regime dealing with interim measures in support of arbitration. Accordingly, the General Assembly of the United Nations recommended that all countries give due consideration to the said Model Law, in view of the desirability of uniformity of the law of arbitral procedures and the specific needs of international Commercial arbitration practice. In view of the recommendation, the Indian Legislature enacted the Arbitration and Conciliation Act in 1996 with the object to consolidate and amend the law relating to domestic arbitration, international commercial arbitration and enforcement of foreign arbitral awards so as to define the law relating to conciliation and for matters connected therewith or incidental thereto.

ARBITRATION AGREEMENT

Statute

The Act renders definition of Arbitration Agreement (Section 7). The essential ingredients of an arbitration agreement are as under:

  1. Agreement by the parties to submit to arbitration all or certain disputes
  2. Dispute must have arisen in respect of a defined legal relationship (may or may not be contractual)
  3. Agreement can be (i) in form of arbitration clause or (ii) a separate agreement
  4. Agreement must be in writing
  5. Signed by both the parties

Judicial Dicta

ARBITRTATION AGREEMENT INDEPENDENT OF UNDERLYING CONTRACT

In the case of Enercon (India) Ltd. v. Enercon Gmbh & Anr.[1] the question confronted by the Supreme Court was whether an arbitration clause being a part of an Agreement/contract which is not concluded is a valid arbitration agreement.

The Appellants in the case had alleged that the matter could not be referred to arbitration as the IPLA (Intellectual Property License Agreement), containing the arbitration clause/agreement, is not a concluded contract. However, the Supreme Court rejected the Appellant’s submissions and observed that their existed a legal relationship between the parties and the arbitration clause in the IPLA abundantly indicated the intention of the parties to arbitrate.

The Court opined that the arbitration clause is independent of the underlying contract, i.e.  IPLA containing the arbitration clause. In this context Court made reference to Section 16 which provides that the Arbitration clause forming part of a contract shall be treated as an agreement independent of such a contract. The Court further observed that the concept of severability of the arbitration clause/agreement from the underlying contract is a necessity to ensure that the intention of the parties to resolve the disputes by arbitration does not evaporate into thin air with every challenge to the legality, validity, finality or breach of the underlying contract.

Similarly, in the case of Ashapura Mine-Chem Ltd. V. Gujarat Mineral Development Corporation[2], the Supreme Court held that the arbitration clause contained in the MoU was an independent arbitration agreement and therefore even if the Respondent chose to terminate the MoU, the arbitration agreement would continue to remain.

Consensus ad idem- From the interpretation of law and Judiciary’s opinion it can be deciphered that one of the most essential elements for existence of a valid arbitration agreement is consensus ad idem i.e. agreeing to the same thing in the same sense by the parties. In the case of Rickners Verwaltung Gmbh v. Indian Oil Corporation[3]it was held that the intention of the parties to arbitration is to be gathered only from the expressions used in correspondence and the meaning it conveys.

Similarly, in the case of Visa International Ltd. v. Continental Resources (USA) Ltd.[4], the Supreme Court while determining whether the parties to dispute agreed to resolving of dispute through arbitration or conciliation observed that in such circumstances what is required to be gathered is the intention of the parties from the surrounding circumstances including the conduct of the parties and the evidence such as exchange of correspondence between the parties.

IS ARBITRATION AGREEMENT REQUIRED TO BE IN A PARTICULAR FORM?

The Courts have settled the legal proposition that an arbitration agreement is not required to be in any particular form. For instance, in the case of Rukmani Bai Gupta v. Collector of Jabalpur[5], the Court ruled that arbitration agreement is not required to be in any particular form. It was held what is required to be ascertained is whether the parties have agreed that if disputes arise between them in respect of the subject matter of contract such dispute shall be referred to arbitration, then such an arrangement would spell out an arbitration agreement.

A similar stance was taken by the Court in the case of M. Dayanand Reddy v. A.P. Industrial Infrastructure Corp. Ltd. & Ors.[6]– An arbitration clause is not required to be stated in any particular form. If the intention of the parties to refer the dispute to arbitration can be clearly ascertained from the terms of the agreement, it is immaterial whether or not the expression ‘arbitration’ or ‘arbitrator’ or arbitrators’ has been used in the agreement.

LIMITED SCOPE OF JUDICIAL INTERVENTION

One of the intrinsic objectives behind the enactment of Arbitration and Conciliation Act, 1996 was reducing the scope of judicial intervention. The Indian Legislature in conformity with Article 5 of the UNCITRAL Model Law on International Commercial Arbitration 1985[7]  enacted Section 5 of the Act which eliminates the scope of judicial intervention and enumerates that no judicial authority shall intervene except where so provided by the Act.

In plethora of judgments, the Indian Judiciary has reaffirmed this settled principle of Law and stated that the Act under Section 5 intends to limit judicial intervention[8]. Furthermore, Section 34 of the Act also restricts the scope of judicial intervention by Courts and provides an inclusive list of circumstances in which an Arbitral Award can be set aside by the Court. For instance, an Arbitral Award can be set aside by the Court when:

  1. A party is under some incapacity;
  2. Arbitration agreement in not valid under the Law;
  3. Party making the application was not given proper notice of appointment of arbitrator;
  4. The arbitral award deals with a dispute not contemplated by or not falling within the terms of the submission to arbitration;
  5. The composition of the arbitral tribunal or the arbitral procedure was not in accordance with the agreement of the parties;
  6. When Court finds that the subject-matter of the dispute is not capable of settlement by arbitration under the law for the time being in force or Award is in conflict with the Public Policy of India

The aforesaid grounds as enlisted for judicial intervention under Section 34 have also been upheld by the Supreme Court in the case of McDermott International Inc. v. Burn Standards Co. Ltd.[9] In this case, the Court stated that the 1996 Act makes provision for the supervisory role of Courts, for the review of the arbitral award only to ensure fairness. The Court further observed that intervention of the Court is envisaged in few circumstances only, like, in case of fraud or bias by the Arbitrators, violation of natural justice, etc. The Court cannot correct errors of the Arbitrators. It can only quash the award leaving the parties free to begin the arbitration again if it is desired. So, scheme of the provision aims at keeping the supervisory role of the Court at minimum level and this can be justified as parties to the agreement make a conscious decision to exclude the Court’s jurisdiction by opting for arbitration as they prefer the expediency and finality offered by it.

Section 8 of the Act also eliminates the scope of judicial intervention and states that a judicial authority before which an action is brought in a matter, which is the subject of an arbitration agreement shall refer the parties to arbitration. Hence, the scheme of the Act is such that Court intervention is minimal and commercial disputes are attempted to be resolved through the arbitration mechanism. This apart from saving precious judicial time also aids in amicable resolution of dispute.

Court cannot substitute its views over that of the arbitrators- In a recent case Ssangyong Engineering & Construction v. National Highways Authority of India, the Division Bench of Delhi High Court while dismissing Petition under Section 34 of the Act, opined that if a Contract can be interpreted in two ways, then it is not open for the Court to interfere with an arbitral award, just because the Court prefers the other view. In this case, the Appellant had challenged the order of Single Judge, wherein the Single Judge had dismissed the Appellant’s petition under Section 34 of the Arbitration and Conciliation Act, 1996 for setting aside the arbitral award. The Court in the case also observed that Court could not substitute its view over that of the Arbitrators.

ARBITRAL PROCEEDINGS

Scheme of the Act

Chapter V of the Act deals with the conduct of arbitral proceedings. The Act provides for giving of equal opportunity to all parties to arbitration to present their case. It further enumerates that the parties are free to decide the manner in which the arbitral proceedings are to be conducted. If the parties to fail in arriving at a decision, the Arbitral Tribunal may determine the manner of proceedings and also the admissibility, relevance, materiality and weight of any evidence.

Place of Arbitration- Section 20(1) of the Act gives the parties the freedom to decide on a place of arbitration, however, failing such agreement the place is to be decided by the Arbitral Tribunal having regard to the circumstances of the case including the convenience of parties.

Language of Arbitration- Section 22 of the Act gives freedom to the parties to agree upon the language or languages to be used in arbitral proceedings. It provides that the Tribunal subject to agreement between the parties has the power to determine the language/es to be used in arbitral proceedings.

Sections 23 to 27 of the Act stipulate the procedure to be followed in arbitration proceedings. The Act entails a comprehensive guidance regarding the procedure to be followed like submission of claim and defence, amendment of claims etc.

Statement of Claim and defence- Section 23 of the Act provides that within the period of time agreed, the claimant shall state the facts supporting his claims and also the relief sought. The act also provides for the amendment of statement of claims during the arbitral proceedings under Section 23(3). However, the Law empowers the Arbitral Tribunal to disallow amendment of claims on the grounds of delay.

Section 24 of the Act also enumerates the manner in which proceedings are to be conducted. It envisages the law regarding hearings and submission of written proceedings before the Tribunal. Under this provision, the Act empowers the Tribunal to decide whether the proceedings shall be conducted orally or on the basis of documents and other materials on record.

Power to terminate the proceedings– The Act under Section 25 empowers the arbitrator to terminate the proceedings where the without any sufficient cause, the claimant fails to communicate his statement of claim within the stipulated period. However, if the respondent fails to submit his statement of defence within the predetermined period, the arbitrator shall continue with the proceedings without treating such a failure in itself as an admission of claimant’s allegations.

Appointment of experts by the Arbitral Tribunal (Section 26) – The Act also empowers the Tribunal to appoint one or more experts to report to it in specific issues to be determined by the Arbitral Tribunal. The provision also requires the party to give expert any relevant information or to produce, or provide access to any relevant documents, goods or other property for his inspection.

Court Assistance- The Act under Section 27 provides that an Arbitral Tribunal can take Court’s assistance in securing the attendance of witness or for the production of documents. The Act also extends the Court the authority to issue summons for examination of witnesses and for the production of documents.

TYPES OF ARBITRATION PROCEEDINGS

The arbitral proceedings in India have been broadly classified into Ad-hoc arbitration and Institutional arbitration. The Law Commission’s 222nd Report on Need for Dispensation of Justice through ADR (Alternative Dispute Resolution) elaborated on the concept of Ad-hoc and Institutional arbitration.

The Commission stated that under Ad-hoc arbitration parties determine the conduct of arbitration proceedings i.e. arbitration proceedings are agreed to and arranged by the parties themselves without recourse to an arbitral institution. In ad hoc arbitration, if the parties are not able to agree as to who will be the arbitrator or one of the parties is reluctant to cooperate in appointing the arbitrator, the other party will have to invoke Section 11 of the Act, whereunder the Chief Justice of a High Court or the Supreme Court or their designate will appoint the arbitrator. In case of domestic arbitration, it will be the Chief Justice of a High Court or his designate. In case of international commercial arbitration, it will be the Chief Justice of India or his designate. In ad hoc arbitration, the fee of the arbitrator will have to be agreed to by the parties and the arbitrator. The Report also states that under the prevailing circumstances, the fee of the arbitrator is quite high in ad hoc arbitration.

Under Institutional arbitration, arbitration is administered by an arbitral institution. The parties may stipulate in the arbitration agreement to refer an arbitral dispute between them for resolution to a particular institution. The Indian institutions include the Indian Council of Arbitration and the International Centre for Alternative Dispute Resolution. International institutions include the International Court of Arbitration, the London Court of International Arbitration and the American Arbitration Association. All these institutions have rules expressly formulated for conducting arbitration. These rules are formulated on the basis of experience and hence, they address all possible situations that may arise in the course of arbitration.

ARBITRAL AWARD

STATUTE

Essential elements of an Arbitral award– According to the Act, an Arbitral Award:

  1. Shall be in writing;
  2. Shall be signed by members of Arbitral Tribunal;
  3. Shall state the reasons on which the Award is based;
  4. Date and place of arbitration;

The Act provides that after passing the Award, a signed copy of the Award shall be delivered to each party. The Tribunal if required can also pass an interim arbitral award.

Correction and Interpretation of Arbitral Award- Section 33 of the Act deals with the correction and interpretation of Arbitral award. It provides that the Tribunal may correct the award within 30 days from the receipt of award. If the Tribunal finds the request for correction to be reasonable, then it shall make a correction or interpretation of a specific point or part of the award within 30 days of the receipt of request. However, if the Tribunal deems it necessary it can also extend the period of time within which it will make correction in the Award or interpretation of the Award.

The Act also makes provision for Additional Award- It states that unless otherwise agreed by the Parties, a party with notice to the other party may request the Tribunal for passing an Additional Award as to the claims presented in the Arbitral proceedings but erroneously omitted from the Arbitral Award.

Enforcement of Arbitral Award- Section 36 of the Act provides that if the time for making application to set aside an award under Section 34 has expired or the application has been refused then the Award shall be enforced under the Code of Civil Procedure in the same manner as a decree of a Court.

JUDICIAL DICTA

Unreasoned Arbitral Award [Section 31(1)]- In this case, the Petitioners filed for setting aside the award under Section 34 on the ground that the award passed by the Arbitral Tribunal is an unreasoned award and liable to be set aside in view of the provision under Section 31(1) of the Act. In the case of Hemadari Cements Pvt. Ltd. v. Walchandnagar Industries Ltd.[10], the Division Bench of Andhra Pradesh High Court held that an award even if it is valid is liable to be set aside, if the award in question does not contain any reasons.

What is a reasoned or speaking award?

The Supreme Court in the case of Jajodea (Overseas) Pvt. Ltd. v. IDC of Orissa Ltd.[11]settled the legal position that a speaking or reasoned award is one which discusses or sets out the reasons which led the Arbitrator to make the award. Setting out the conclusions upon the questions of issues that arise in the arbitration proceedings without discussing the reasons for coming to these conclusions does not make an award a reasoned or speaking award. A similar observation was made by the Court in the case of Union of India v. Hindustan Motors Ltd.[12], wherein the Supreme Court stated that there is no elaborate discussion does not mean that the reasons have not been articulated. The rational basis of the award is revealed in the narration. In our opinion it is a speaking award, and not a silent award, though it speaks in few words. We must therefore proceed on this footing.

Stamping of Arbitral Award- On several occasions, the Courts have been confronted with the issue whether an arbitral award which is not stamped is enforceable or not. In the case of Naval Gent Maritime Ltd. v. Shivnath Rai Harnarain (I) Ltd.[13]In any case the issue of Stamp Duty cannot stand in the way of deciding whether the award is enforceable or not. The Supreme Court decided a similar issue in the case of M. Anasuya Devi & Anr. v. M. Manik Reddy and Ors.[14], wherein the Apex Court had observed that the question as to whether the award is required to be stamped and registered, would be relevant only when the parties would file the award for its enforcement under Section 36 of the Act. It is at this stage the parties can raise objections regarding its admissibility on account of non-registration and non-stamping under Section 17 of the Registration Act. In that view of the matter the exercise undertaken to decide the said issue by the Civil Court as also by the High Court was entirely an exercise in futility. The question whether an award requires stamping and registration is within the ambit of Section 47 of the Code of Civil Procedure and not covered by Section 34 of the Act.

SETTING ASIDE OF ARBITRAL AWARD

Section 34 of the Act provides for setting aside of an Arbitral Award by the Court. The Act provides a comprehensive list of circumstances under which an Arbitral Award can be set aside by the Court and they are:

  1. The party is under some incapacity;
  2. Arbitration agreement between the parties is not valid;
  3. Lack of notice of appointment of arbitrator or of holding of arbitral proceeding;
  4. Arbitral award deals with a dispute not contemplated by or not falling within the terms of the submission to arbitration or it contains decisions on matters beyond the scope of submission of arbitration;
  5. Composition of arbitral tribunal or arbitral procedure was not in accordance with the agreement of the parties;
  6. The Court finds that the subject matter of the dispute is not capable of settlement by arbitration under the Law;
  7. The Award is in conflict with the Public Policy

SETTING ASIDE AWARD ON THE GROUNDS OF PUBLIC POLICY

The ground of “public policy” under Section 34 has remained a boiling pot under the Indian Arbitration regime. Justice Borroughs rightly described the term “public policy” as an unruly horse[15]. Public Policy in its nature is so uncertain and fluctuating; varying with the habits and fashions of the day, with the growth of commerce and the usages of trade, that it is difficult to determine its limits with any degree of exactness[16]. Public policy does not remain static in any given community. It may vary from generation to generation and even in the same generation. Public policy would be almost useless if it were to remain in fixed moulds for all time[17]. The provision to set aside an Award by the Court if it is in conflict with the public policy gives wide powers to the Courts and thereby encroaches upon the very essence of ADR i.e. limiting the scope of judicial intervention.

In plethora of judgments, the Indian Judiciary has time and again widened the purview of public policy. In a recent verdict, the Delhi High Court while determining a petition filed under Section 34 for setting aside an arbitral award held that, the only ground besides the technical grounds enumerated in Section 34 on which the Court has been empowered to set aside an arbitral award, is the ground of the arbitral award being in conflict with the public policy of India. The expression “public policy of India” has been held to mean fundamental policy of Indian law, justice and morality[18]

Some other remarkable judgments which aid in determining the concept of public policy in India are enumerated below:

Renusagar Power Co. Ltd. v. General Electric Co.[19]the Supreme Court elaborately dealt with the concept of public policy and stated that enforcement of a foreign award would be refused on the ground that it is contrary to public policy if such enforcement would be contrary to (i) fundamental policy of Indian law; or (ii) the interests of India; or (iii) justice or morality.

ONGC v. Saw Pipes[20] can be safely classified as one of the most celebrated cases determining the concept of ‘public policy’ under the Arbitration Act. The Court in the case held that the term ‘public policy’ could not be given a narrower meaning. The Court’s observation in the case was that the phrase ‘Public Policy of India’ used in Section 34 in context is required to be given a wider meaning. It can be stated that the concept of public policy connotes some matter which concerns public good and the public interest. What is for public good or in public interest or what would be injurious or harmful to the public good or public interest has varied from time to time. However, the award which is, on the face of it, patently in violation of statutory provisions cannot be said to be in public interest. Such award/judgment/decision is likely to adversely affect the administration of justice. Hence, in our view in addition to narrower meaning given to the term ‘public policy’ in Renusagar’s case, it is required to be held that the award could be set aside if it is patently illegal. Result would be – award could be set aside if it is contrary to: –

(a) fundamental policy of Indian law; or

(b) the interest of India; or

(c) justice or morality, or

(d) in addition, if it is patently illegal.

Illegality must go to the root of the matter and if the illegality is of trivial nature it cannot be held that award is against the public policy. Award could also be set aside if it is so unfair and unreasonable that it shocks the conscience of the Court. Such award is opposed to public policy and is required to be adjudged void. A similar observation was made by the Apex Court in the case of Phulchand Exports Ltd. v. OOO Patriot[21], wherein the Court stated that the expression ‘public policy of India’ used in Section 48(2)(b) has to be given wider meaning and the award could be set aside, ‘if it is patently illegal’.

However, the aforesaid verdict of the Supreme Court was overruled by a Three-Judge Bench of the Supreme Court in the case of Shri Lal Mahal Ltd. v. Progetto Grano SPA[22]wherein the Court held that the expression “public policy of India” must be given narrow meaning and the enforcement of foreign award would be refused on the ground that it is contrary to public policy of India if it is covered by one of the three categories enumerated in Renusagar case, i.e. (i) fundamental policy of Indian law; or (ii) the interests of India; or (iii) justice or morality.

ONGC v. Western Geco International Ltd.[23]– The much deliberated topic of ‘public policy’ was once again taken up by the Supreme Court in this case in 2014, wherein a Three-Judge Bench of the Supreme Court widened the scope of ‘public policy’ and stated that the expression must include all such fundamental principles as providing a basis for administration of justice and enforcement of law in this country.

 

[1]  (2014) SLT 470

[2] 2015(5) SCALE 379

[3] (1999)1SCC1

[4] 2009(2) SCC 55

[5] (1980) 4 SCC 556

[6] (1993) 3 SCC 137

[7] In matters governed by this Law, no court shall intervene except where so provided in this Law.

[8] Ssangyong Engineering & Construction Co. Ltd. V. National Highways Authority of India

[9] [(2006) 11 SCC 181]

[10] 1996 (1) ARBLR 681 AP

[11] 1993(1)Arb LR 334

[12] (1987) 3 SCC 458

[13] 2009(10) AD(Delhi) 230

[14] (2003) 8 SCC 565

[15] Richardson v. Mellish, 2 Bing.229

[16] Mich L.J. 308(1894) Public Policy

[17] Murlidhar Agarwal & Anr. v. State of U.P. & Ors., [1974 (2) SCC 472]

[18] Bharti Airtel Limited v. Union of India, 231 (2016) DLT 71

[19] 1994 Supp. (1) SCC 644

[20]  (2003) SLT 324

[21] (2011) SLT 732

[22]  (2013) SLT 229

[23] (2014) SLT 564