This article is written by Kanika Upadhyaya who is pursuing Certificate in Arbitration: Strategy, Procedure and Drafting from Lawsikho.
Table of Contents
Justice has been an age-old concept since time man started living in a civilized manner. The concept of Justice was gradually institutionalized and channelled within a proper framework called “LAW” which was meant to protect all its subjects equally and punish the wrongdoer. What does a layman understand by Law and Legal System? Images of Courts, Voluminous Books, Lawyers and Judges come forth at the outset if thought about. Several Principles, Doctrines and Concepts emerged as codification and standardization of law took place. One of the supreme principles is “Justice Delayed is Justice Denied”. Yet, it is a grim reality of the Indian Judicial System of ever increasing backlog of cases, rising costs, heightened redressal challenges, lower decision pronouncements, invariably leading to delayed justice and people losing confidence in Judicial System. In such a difficult situation, a robust, efficient alternate mechanism for speedy resolution at an affordable rate, with an equivalent reaches as that of Courts was required. It was need of the hour since India’s utmost need was to expand and diversify its cross border trade and commercial relations.
Arbitration is the upcoming alternate redressal mechanism, which has shown a positive growth rate in resolving certain commercial and civil disputes. With an unprecedented COVID-19 looms large over the entire world, legal fraternity predicts a tremendous boost in use of alternate mechanisms instead of lengthy, expensive litigation. This article analyses 2 underlying principles of Reference and Competence in Indian Arbitration Law to examine its significance in current scenario.
Alternate Dispute Resolution usage can be traced back to Biblical times. King Solomon brought the mechanism into play for peaceful settlement of financial and other social conflicts. References can also be found in Arabic and Persian Testaments. In Hindu Law, the earliest mention can be found in “Brhadaranayaka Upanishad”, “Yajnavalka and Narada”. Panchayats in an elementary sense can be said to perform Arbitration. However, the 1st formal law on Arbitration was enacted in England in the year 1697.
In India, Arbitration Law was formally introduced in 1772 followed in 1787, 1899 and Code of Civil Procedure. To fill in the drawback of non-uniformity and make it more specific, another Act was passed in the year 1940. This version too had fallen short of fruitful implementation, especially Foreign Award enforcement out of its purview, paving way for enactment of Arbitration and Conciliation Act. This Act was way better than all previous legislation, as based on UNCITRAL Model Law, attempted to cover both domestic and International Arbitration and Conciliation along with minimal Court interference. With efflux of time, new issues cropped up and in order to counter the same and keep pace with novel developments, 1996 Act was amended further in 2015 and 2019 respectively.
Reference to Arbitration Clause
Section 7 defines an Arbitration Agreement wherein parties agree to submit all/any of disputes whether contractual or not in a written format for purposes of evidence, in same or separate Agreement intended to apply to main contract. Section 8 states reference to Arbitration by a Judicial Authority before which matter is brought that is originally covered under Arbitration. Either Party to the Arbitration Agreement or claiming under him, upto submission of 1st statement on substance of dispute proves existence of a valid Arbitration Agreement. Judicial Authority on being satisfied of such presence of Agreement on same subject is bound to send the other party for Arbitration. Arbitration may be initiated, continue and Award passed even while such application is pending before Judicial Authority.
It is to be noted that the language of Section 8 is mandatory after fulfilling conditions prescribed. It diverges from Model Law, Geneva Convention and New York Convention as Judicial Authority instead of Courts is used and that merit-based analysis of legality is not provided to any Judicial Body. Words “Prima Facie” indicate that not to delve into a detailed examination of Arbitration Agreement or Clause, rather observe its sufficiency to refer to Arbitration. As clearly mentioned, reference of disputes whether contractual or not can be made, i.e. not limited solely to commercial ones but be extended to certain civil disputes as well. Arbitration Agreement, in essence, being a contract has to impliedly comply with capacity and validity preconditions of the Indian Contract Act. Locus Standi requirement has been a bit relaxed and that a non-signatory can also be a party in Arbitration Proceedings, provided proves himself to be a necessary and proper party.
Case Laws on Section 7
- In M.R. Engineers and Contractors Pvt. Ltd. v. Som Datt Builders Ltd, a general reference in a sub-contract between contractor and a sub-contractor to an Arbitration Clause incorporated by reference in a main contract between contractor and PWD was not allowed since reference to Arbitration shall always be in precisely unequivocal terms, unless it is some sort of Standard Form of Contract whose terms are generally understood by members of Trade or any Regulatory Institution and hence a general reference shall also suffice.
- Inox Wind Limited v. Thermocables Limited further added a wide scope to earlier mentioned standard clause exception, when it held that even if 1 party which need not be a Trade or Regulatory Institution, using Standard Form of Contract, forming part of a single contract shall suffice for a general reference to Arbitration. It diluted prudent classification that members of Trade or Regulatory Body are aware of standard terms which might not be the case for any other ordinary individual. Hence binding any person who might not be aware of standard terms by general reference to any Organization’s Standard Reference altogether has a different impact.
- Subsequent Cases upholding the MR Engineers Case but reflecting subtle differences wherein an unsigned Bill of Lading mandating Arbitration under its Standard Printed Terms was made binding on parties. Contrasting viewpoints highlighted when a Draft Agreement mentioning Arbitration are attached at time of inviting bids and thereafter focus is on Acceptance /Approval Letter issuance to make it a binding contract , in order to make Arbitration compulsory.
- In GIRIRAJ v COAL INDIA, Reference to Arbitration as per previous terms and conditions regarding any dispute for coal allocation via single e window was considered binding as and when Petitioner entered into contract to lift coal after depositing earnest money. Relying on MR Engineers, Inox Cables and Habas Sanai Case, it fairly distinguished 1 from 2 contract case.
Reference reflects sort of Judicial/Quasi-Judicial Authorityconferred on The Arbitrator, in distinction to administrative or expert determination. 2015 Amendment included E- mode in addition to letters, Documents, Statement of Claim or Defence for proof of existence of Agreement intended for the same thing in the same sense. Oral Agreements have no bearing and that even if a precise clause is mentioned in the main Agreement itself, its validity and enforcement is independent of the contract per se. Stamping as per state where seat of Arbitration is located prescribed for Arbitrator Appointment. No particular format or exact categories of dispute can be enumerated at the time of entering into a contract, yet parties underlying motive should be to actually go for Arbitration and not mere possibility of opting Arbitration as recourse to settlement. Vague words not indicating any specific dispute or Authority to be addressed cannot be called as Arbitration Clause. Finality of the decision taken by any Authority mentioned tantamount to reference. Any Ill Reasoned or unjustifiable denial of Reference is Appealable in Court as per statute conferring jurisdiction to hear Appeals.
Upon careful examination of provisions above, it is germane on part of The Legislators to draw fine limitations on all vital aspects so as to limit undue judicial intervention and enhance use of Arbitration wherever possible. However, Courts till recently pronounced several conflicting judgments visibly not in tune with Legal Provisions and Precedents. An illustration of same is:
- A. AYYASAMY v A. PARAMASIVAM creating exceptions for forgery and fabrication adversely impacting the very soul of main contract so as to render Arbitration inoperable along with main contract. A Test of cutting through internal contract and being unconnected to public morality was laid down to objectively determine whether fraud be resolved by Arbitration.
- In a recent Ameet Lalchand judgment, Delhi High Court, relying on Ayyasmay and Sukanya Holding case proclaimed that mere fraudulent allegations without advancing substantial evidence, not be a sole criterion to reject Arbitration initiation Application since Business Efficiency is of paramount significance and not to be compromised.
- Another exception is not to divide subject if different parties are involved and dispute partly not covered under Arbitration, in order to avoid invocation against 3rd party, altogether not refer to Arbitration.
- Apart from this, principles of Estoppel, Waiver and Acquiescence are applicable to a party seeking reference of a matter to arbitration, in order to avoid probable abuse of process.
But the question is that Courts are to interpret and not create or supplement lacunas present in legal provisions? It cannot be ignored that each judge uses a different interpretation/construction rule, as per his perception of situation but in any case it is not meant to produce conflicting, contradictory verdicts from status quo, which itself is based on objective understanding. Had the Legislature desired to provide certain exceptions or increase domain of Judicial intervention, could have explicitly done so in 2 rounds of Amendments made in year 2015 and 2019. Arbitrability has been separately provided for in the Act itself, so there don’t seem any plausible reasons to entwine 2 clearly distinct provisions to produce an erroneous decision. Such disarrayed decisions create nothing but ambiguity in actual position, thereby discouraging use of Arbitration as an effective alternate mechanism.
Scope of reference to arbitration (Competence-Competence Principle) Section 16
In order to make Arbitration efficacious, next most significant principle in line with severability of Arbitration Clause is “KOMPETENZ-KOMPETENZ” Principle. For the purposes of restricting unhindered Court intervention, Arbitral Tribunal is given ample Authority to decide whether it has jurisdiction to preside over a particular matter or not. It has been propounded to prevent abuse by the other party who would like to surpass or delay valid Arbitration Agreement by approaching Courts.
ARTICLE 16 of UNCITRAL Model Law and several other International Arbitration Rules purport this Principle but its applicability hasn’t been uniform and has considerably varied across Nations particularly on the dimension of Court reviewing the validity of Jurisdiction after Arbitral Tribunal has heard the objections.
In India, there was no competence provision in 1940 Act but the 1996 Act did provide for same, exclusively barring Court determination or supervision at the outset. Specific time limit till submission of defence statement for questioning the jurisdiction has been provided, unless otherwise justified.
There are possibly 3 Dimensions attached to Arbitration: a) covered under Arbitration Agreement, b) capable of being adjudicated via Arbitration, c) parties actually submitting dispute to Arbitration. A fine dichotomy among myriad private rights been construed by Legislators for not engaging morality, public policy concepts in Arbitration. Therefore apart from Criminal Matters, Divorce, Guardianship, Restitution, Insolvency, Winding Up, Trusts, Testaments are kept outside the domain of Arbitration.
The Arbitral Tribunal concluding that it has the jurisdiction and continues with the proceedings and passes the Award, the party aggrieved may challenge such Award under SECTION 34. However in any case, no Appeal or challenge in any manner lies against such rejection of non jurisdiction application. On the contrary, if Arbitral Tribunal does accept its lack of jurisdiction pertaining to the subject of dispute, such order can be directly appealed under SECTION 37(2). Different rulings have persisted on the issue of deciding such jurisdiction challenge as preliminary issue or a part of final award, preference being given to decide as preliminary. Yet there is no binding statutory rule so as to decide jurisdiction issue at the preliminary stage itself since it being sole discretion of Arbitral Tribunal. Another debate is of defining jurisdiction under the Act and construing Limitation as part of Interim or Final Award.
Case laws on Section 16
- In BHADRA PRODUCTS CASE, a narrow interpretation to jurisdiction by bringing limited aspects such as validity within ambit of SECTION 16. It also held that limitation decision being an Interim Award by misconstruing pointers of an Interim Award. It has been severely criticized for its erroneous reliance on the English Arbitration Act and outrightly deviating from Indian precedents on the issue.
- In another case, the limitation determination stance was reiterated to be the decision of the Arbitrator. Chief Justice or his Designate appointing an Arbitrator or deciding the Composition of the Tribunal under SECTION 11Application, if in contravention of The Act or inappropriate in any other sense, be objected and heard before Tribunal itself. This Case overruled previous SBP AND CO. v PATEL ENGINEERING LTDstance that SECTION 16 cannot bypass a Judicial Order which was made prior its constitution under SECTION 11. Also owing to severability of Arbitration Clause from main contract; mandate not terminates if main contract declared void, as it earlier used to be.
It is to be observed that 2015 and 2019 Amendments did incorporate necessary dimensions to concepts of severability and competence so as to keep pace with Model Law and other nation’s developments, but at times some strikingly contravening, inaccurate pronouncements which waste time, resources and create hassle for subsequent similar cases as it is not possible for every case to reach Apex Court for clarification. Statutory provisions unequivocally provide for a transparent, unhindered Arbitral Proceedings but unnecessarily engaging into settling the Limitation and Jurisdiction questions, which not significantly relate to main subject of Arbitration, shall be avoided. Else indirectly judicial interference shall increase destroying the utility aspect of Arbitration.
Position in England
In India, SECTION 2(3), SECTION 7 and SECTION 16 clearly outline as to what constitutes an Arbitration Agreement, what kind of private disputes can be referred to Arbitration and the Competence of The Tribunal to have adequate Authority without any overpowering Judicial intervention. In England, the concept of “Arbitrability” not expressly defined and parameters are to be inferred from Judicial Precedents like no Implied Agreement to Arbitration,only towards determination of legal rights,not opposing public policy, not be of criminal nature or planning laws. UK Actin a similar vein, restricts judicial scope in Arbitration Proceedings to 3 stages:
- Prior Commencement of Arbitral Proceedings, for extension of time limits to initiate proceedings or dispose of other alternate methods, on application of either party Arbitral Tribunal solely decides this point.
- Similar to SECTION 11 of the Indian Act, SECTION 18 of the UK Act provides for Appointment of Arbitrators if no express selection can be perceived in the Agreement.
- Court essential assistance for Evidence collection, Receiver appointment, Sale of property and Interim Injunction if party seeking same proves that Arbitral Tribunal is not authorized to grant any of the above while it is necessary in interest of justice.
- In UK, Common Law and English Arbitration Act, both prescribe certain duties and code of conduct to be observed by the Arbitrator while Indian Act is silent on any such express guidelines and has to be inferred from standard behavioural principles.
- Confidentiality Clauses regarding disclosures made during proceedings are not expressly provided in both Indian and UK Act but UK Law does impose an obligation on parties as well as Arbitral Tribunal unless Court waives it in public or rightful party’s interest.
- India and UK considerably differ in reference to Arbitration, while the former refers to Arbitration as soon as valid Arbitration Agreement is presented before it, latter differentiates domestic and international cases, granting immediate stay in international cases but in domestic cases, Court has to be satisfied that no such ground exists which may justify non adherence to Arbitration Agreement. Also UK Court goes into merits prior reference to check that parties agreed on unambiguous, specific content.
- Undue Delay made by either of parties is stringently taken up by UK Courts and Arbitrators are given no power to deal with the same.
- Award execution in UK only has to be done via Courts or summary process and increasing judicial intervention may render whole Arbitration Proceedings futile.
- Privileges provided to Judges and Magistrates are not provided to Arbitrators in India but in UK, any other legal privilege shall be granted to Arbitrators as well.
- No specific Secretarial or Administrative assistance rules provided both in UK and India, but in UK sparingly used while in India with consent of parties such aid used.
Arbitration Regime indeed is an efficacious mechanism saving time, costs and speedy resolution can be made which unlike in Courts. Arbitration Act did make a laudable attempt to develop itself as an attractive hub of International Arbitrations, but still scope of improvement remains. Reference was introduced for unambiguous intent of parties to opt Arbitration. Yet it faces the daunting task of overcoming several other hurdles.
UK Arbitration Law can be looked at for countering some drawbacks. First and foremost, chain of precedents should be understood in a clear logical context in order to avoid any insensible deviations which create further complexities for the subsequent disputes, along with wastage of time and resources. Confidentiality in certain matters to be provided as not everything can be put on display for sake of transparency but prejudicial to interest of either party. Administrative Assistance shall be within clear contours so as to avoid possibility of unauthorized delegation despite with the consent of parties; the Arbitral Secretary may lack the requisite skill or expertise to preside over the matter. Certain Privileges can be granted to Arbitrator while in his official capacity.
Judicial Intervention was carefully restricted so as to promote Arbitration and Competence and Severability principle supplemented this objective to provide Tribunal required Authority to serve underlying purpose. Such small lacunas, if covered up shall strengthen the procedural and substantive aspects, so as to make Arbitration successful in true sense, to deal with novel complicated facts and ensure active participation of the parties who themselves decide the outcome or settlement rather than leaving it to any 3rd party as would have been in litigation.
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