Multi Tier Arbitrations and its Validity

Settlement of disputes through arbitration has been there since times immemorial. Historical legal literature tells us about the ancient system of arbitration for resolving disputes regarding a family or a social group. [1] The Constitution of India also stipulates settlement of International disputes through arbitration. [2] The law, which governs arbitration in India, is the Arbitration and Conciliation Act, 1996. Prior to the 1996 Act it was governed by three different Acts, namely, Arbitration Act, 1940, The Arbitration (Protocol and Convention) Act, and the Foreign Awards (Recognition and Enforcement) Act. The 1996 Act is based on the Model Law on International Commercial Arbitration, as proposed by the United Nations Commission on International Trade Law (UNICTRAL) in 1985. This was done because the UNICTRAL felt the need for a uniform set of rules and regulation regarding international trade and commerce, which would bring down all the different countries under a uniform set of laws. This 1996 Act comprehensively deals with both foreign arbitration and domestic Arbitration. Part I of the Act deals with domestic arbitration and Part II of the Act deals with foreign Arbitration. In this research paper the researcher would discuss a topic, which is relatively new as far as arbitration in India is concerned.

The researcher intends to discuss Multi- Tier Arbitrations and its validity under the Indian law. For this purpose the researcher would also discuss in detail the Centrotrade Minerals Case [3] . For the first time ever did a division bench of the Honorable Supreme Court of India got the chance to determine whether Multi- Tier Arbitration clauses come under the Preview of the Arbitration and Conciliation Act, 1996. The issue of private appellate authority in the Centrotrade case was slightly different from the normal two- tier arbitration. The two- tier clause in the present case provided for two separate tiers of Arbitration. The Arbitration clause provided for first an arbitration to be held under the Indian Council of Arbitration and then on appeal under the rules of International Chamber of Commerce in London. The two Judge Bench had a divided view and hence it has been referred to a higher Judge Bench. The Centrotrade case has come up at such a time when India has opened its gate for foreign Companies. Such foreign companies at many times have such arbitration clauses, which require a multi- tier arbitration system. It needs to be seen whether the current Act of 1996 can be applied to take care of such multi- tier clauses or not.

The main issues which will be discussed in some detail in this paper is the concept of ‘party autonomy’ ‘contracting out’. The Centrotrade case discusses a lot of other aspects of the 1996 Act and checks its effectiveness. In this research paper the researcher intends to review the concept of Multi- Tier arbitration and its validity Under the Arbitration and Conciliation Act, 1996. In part I of this paper the researcher will explain multi- tier Arbitration clauses. In Part II the researcher shall discuss the position in India with respect to Multi- Tier Arbitration. In part III the researcher shall do a critical analysis of the Centrotrade Case.

Part I

Multi- Tier Arbitration Clause

Multi- Tier or two- tier arbitration clauses are clauses which provides for distinct stages involving separate procedures for dealing with and seeking to resolve disputes. [4] In a multi- tier arbitration system the parties have to go through certain other procedures and methods prior to resorting to arbitration, such as negotiation, mediation, neutral evaluation, mini trial, expert determination, etc…. such a measure can help solve any kind of dispute within the parties without even resorting to arbitration or any other legal process. In todays world where commercial contracts are so technically drafted that there is always a possibility of a conflict between the parties, a multi- tiered dispute resolution system can come handy. It encourages parties to give early consideration to the dispute and try and solve it on their own, such an effort would also save them on a lot on money also. [5] Hence multi- tiered arbitration clauses are being used heavy these days in international commercial contracts as it save them a lot of time and money.

Increasing Role of Party Autonomy

One of the most important aspects of multi- tiered arbitration clauses is ‘party autonomy’. The principle of ‘party autonomy’ is greatly recognized in a driving force in the international arbitration. [6] Party autonomy in arbitrational proceedings acts as one of the key distinguishing features of the arbitration agreements. It gives the parties the freedom to choose the forum and the procedure to be followed according to their own convenience. This principle guides international commercial arbitrators in determining the correct choice of the law applicable to an international commercial contract. [7]

The only limitation, which is there with regards to multi- tiered arbitration clause is that, it should not be against public policy or be illegal. [8]

In the case of Channel Tunnel Group v. Balfour Beatty Construction Ltd. [9] , the Court made an important observation. In this case an arbitration clause was entered into a construction contract. This arbitration clause provided for a two- tier dispute settlement mechanism. The first tier provided for the dispute to be referred in writing to a panel of three experts, who would give their decision within a period of ninty days, thereafter is the either of the parties were dissatisfied with the award, they could refer the matter to arbitration under the rules of Conciliation and Arbitration of the ICC by three arbitrators in Brussels.

A dispute arose between the parties, the dispute reach the courts and a plea for stay of proceedings before the courts was sought. Lord Mustill was of the opinion that once parties have agreed to a particular mode of resolving their disputes, the party disputing that clause must show good reasons for departing from it. Furthermore, it is also in the best interests of orderly regulation of international commerce, the parties resort to the forum they have chosen. Such an argument of lord Mustill revolves around the principle of ‘party autonomy’, hence a stay was awarded.

Part II- Position in India

The concept of two- tier arbitration is relatively new to the Indian laws. Although, there did exist a provision for an appeal before a private authority under the 1940 Act. In the case of M.A Sons v. Madras Oil and Seeds Exchange Limited and another [10] , the High Court of Madras observed that,

“an award made pursuant to a proper arbitration agreement is final, subject, of course, to the consequences of any such term of the contract”

In the above-mentioned case the parties entered into and agreement and one of the clause specified that the contract would be subject to the by-laws of the Madras oil and seeds exchange Ltd. later a contract by- law 202 came into existence which gave the parties a right to appeal. It was contended that this was opposed to the Condition No. 7 of the First Schedule of the Arbitration Act, 1940 which provided that the award shall be binding on the parties. The Court however rejected this argument observing that there is nothing preventing parties to pursue an appeal. The Court heavily relied on a decision of the Calcutta High Court in the case of Hiralal Agarwalla and Co. v. Joakim Nahapier and Co. Ltd [11] , in this case the Calcutta High Court dealt with a situation where the dispute was first refered to Arbitrators, then to an umpire, and there on to a committee of appeal. The Court held that there was nothing to prevent the parties from agreeing to a submission containing in it a further submission to arbitration and held that the appeal was valid. The Court also referred to a passage from Russel on Arbitration which mentions that an arbitration agreement may provide for an appeal. Hence, the High Court was of the opinion that, an award made pursuant to a proper arbitration agreement is final, subject, of course, to the consequences of any such term of the contract.

The Centrotrade Case

Till the time Centrotrade Minerals and Metals Limited v. Hindustan Copper Limited [12] , had not come into existence, the law regarding two- tier or multi-tier arbitration clauses were pretty much silent. It is not that the upcoming of this case has made law very clear about such arbitration clauses, but one can say that atleast people have started realizing the importance of such clauses irrespective of whether it is within the purview of the laws of arbitration in India or not. In the present case, Centrotrade Minerals and Metals Limited entered into a contract for the sale of Copper Concentrate to Hindustan Copper Limited to be used at by the latters at its plant in Khetri, Rajasthan. One of the clauses in the contract provided that, in case of any dispute between the two parties, the matter would be referred to arbitration in India before the Indian Council of Arbitration (ICA) in accordance with the rules of arbitration of ICA. In the event of any disagreement with the decsiosn given by the arbitrators under the ICA, the matter would be further referred to a second arbitration in London, in acoordance with the rules of International Chamber of Commerce (ICC). A dispute arose Centrotrade Minerals approached ICA for arbitration, arbitrator made an award in favour of Hindustan Copper Lt. (HCL). Centrotrade made an appeal to the second arbitral tribunal in london under the ICC. Arbitrator made an award in favour of Centrotrade. As a result HCL filed an application with the District Judge of Alipore, Calcutta, seeking declaration of the award passed by the ICC as void and unenforceable. On the other hand Centrotrade filed an application with the Senior division Civil Judge for the execution of the ICC award. both the cases were sent to the Calcutta High Court, where a single Judge Bench gave the decision in favour of the Cantrotrade but the Division Bench of the High Court reversed the decision. Hnece an appeal by both the parties to the Supreme Court. The matter was placed before a bench comprising Justice S B Sinha and Justice Tarun Chatterjee. Both of whom differed in their opinions. Justice S B Sinha outrightly rejected the presence of two tiers of arbitration under the scheme of the Arbitration Act, 1996. Justice Tarun Chatterjee on the other hand was of the opinion that the two tier arbitration is possible under the Arbitration Act.

Justice S B Sinha stated that, no where in the 1996 Act is there any specific provision for an appeal. He was of the view that,

“throughout, the provisions nowhere it is mentioned that an appeal can be made or an application can be filed against the award to a separate arbitration board or forum. So, the finality and legality has to be determined by the Court if it is so challenged.” [13]

Further Justice Sinha added that a domestic award not set aside as provided under the act within the time frame provided under S. 34 would become a decree by legal fiction as provided under S. 36 of the Arbitration Act. [14] The decree can only be set aside as provided under the Act. It would be opposed to public policy if the same is set aside by a private adjudicator. [15]

On the issue of whether the ICC award would be enforceable as a foreign award or not, Justice S P Sinha was of the opinion that, the 1996 Act itself makes a difference between the two. Part I of the Act applies to domestic awards and part II applies to foreign awards. He further was of the opinion that an outcome of an arbitration agreement can either be a foreign award or a domestic award, wherein different provisions have been laid down in the Act. Justice Sinha stated that,

“it is inconceivable that one part of the arbitration agreement shall be enforceable as a domestic award but the other part would be enforceable as a foreign award” [16]

Justice Sinha further said that the move from Indian Council of Arbitration to the ICC arbitral tribunal would not amount to an appeal, as an appeal is generally a continuation of the same proceeding. In the present case two different tribunals would use two different set of proceedings and rules. Hence it would not amount to the same proceedings. [17]

Justice Sinha also specified that the 1996 Act does not provide for the contracting out of the Act. [18] He observed that having regard to Section 23 of the Contract Act a statutory jurisdiction cannot be waived by contract. [19]

With repect to the question of whether the ICC arbitrator gave it award in an appeal against the award of the Inidan Arbitrators, Justice Sinha was of the opinion that, a domestic award cannot be challenged anywehre else except before a national court on the grounds specified under Sec. 34 of the 1996 Act. On the same issue Justice Tarun Chaterjee was of the opinion that,

“…The intention of the parties was that the second arbitration was in the nature of an appeal and that the second award would take precedence over the first award. It is therefore amply clear that the intention of the parties to the agreement was that if the parties are dissatisfied with the first award and if approach was made to the ICC arbitrator… then the first arbitration award would not be binding on the parties nor there would be any existence of the same after the ICC award was made. Thus, it cannot be said that the proceeding before the ICC arbitrator was an independent proceeding nor it could be said that it was merely a second arbitration in London, U.K.” [20]

Hence one can see that while Justice S P Sinha was strictly against the applicability and validity of such two- tier arbitrations, Justice Tarun Chaterjee was completely for it. He contrastingly observed that there was nothing which prohibited the existence of an arbitral appellate forum under the Arbitration Act. [21] His Lordship further observed that in light of the precedents [22] and there being no express prohibition under the Arbitration Act. Two tier dispute resolution vide arbitration is permissible under the Arbitration Act.

As a result of a major difference in opinion of the two Judges of the Supreme Court the matter has been referred to a higher bench. It would be really interesting to wait and see what the larger bench has to say about such an important topic in the field of commercial arbitration.

Conclusion

The Arbitration laws have seen a huge change ever since the first statute relating to Arbitration had come out. Right from the time of the 1940 Act to the 1996 one. There has been a huge shift in the approach with regard to the Arbitration proceedings. This concept of muli- tier arbitration clause might be something really new for the indian judiciary (specially the ones which provide for a second reference to another arbitral tribunal in some other country), but it is something which is heavily used and preferred in the modern day international business contracts. Most major construct contracts and other multi national contracts contain such two- tier or multi- tier arbitration clauses. The Supreme Court of India by not being able to give a decisive opinion on the issue has sent a very wrong message to such multi national companies who plan to invest in India.

Even then researcher is of the opinion that, although that there is no clear stand taken by the Courts in this respect still two- tier arbitration can survive under the scheme of the 1996 Act as it favours party autonomy. One should not forget that at the end of the day the main object of such kind of clauses is speedy resolution of disputes and in the guise of two tier arbitration parties should not seek to prolong to adjudication of their disputes. Justice Sinha’s emphasis on speedy resolution of disputes should be a watch word for two tier arbitration to operate in India.