This article is written by Ananya Garg and further updated by Mohd Atif Zakir. This article exclusively talks about Section 28 and its clauses, of the Arbitration and Conciliation Act, 1996. The rules structured in this article depict the varied circumstances such as “when the place of arbitration is India” and the “International commercial arbitration.” It further emphasises the amendments that have been made to Section 28. Further, it also signifies the applicability of the substantive law and the neutrality of an arbitrator which is called an amiable compositeur. 

Table of Contents

Introduction

In the present era, owing to the expensive litigation procedures, overburdened judiciary, and huge delays in resolution, people look towards alternative mechanisms of dispute resolution. Arbitration is one of such mechanisms. The history of arbitration is captivating, as it connects ancient customs with contemporary legal systems. Its development continues to influence how disputes are resolved globally.

It has a wide focus on the party autonomy, for example, this method of dispute resolution is followed at the agreement of the parties to do so in a case of a dispute, and the parties agree upon the appointment of arbitrators, the place of arbitration, arbitration rules, etc. This aspect of party autonomy is also extended to the rules which are applicable to the substance of disputes in arbitration.

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There are some rules which determine the applicability where it needs to be applied to the substances of disputes in arbitration act. The law governing the substance of a dispute is the law or rules of law governing the contract out of which the dispute takes place. The applicable law determines the rights and liabilities of the parties but it may also affect the types of damages recoverable, the substantive remedies available, the limitation defences, and even the burden of proof. Thus, a very important aspect of the law governing the arbitration are the rules which are applicable in deciding the law governing the substance of disputes.This article discusses and analyses every aspect of these rules and their implications.

Clause wise explanation for Section 28 of Arbitration and Conciliation Act, 1996

Section 28 of the Arbitration and Conciliation Act,1996 (hereinafter referred to as “the Act”) provides rules which are applicable to the substance of disputes. It specifies the law or the rules of law according to which the arbitral tribunal shall decide the dispute submitted for arbitration.

In the usual course of the process, the rules, which the parties to the dispute designate, are applicable to the substance of the dispute, the parties may also empower the arbitral tribunal to decide the cases in their good conscience without adhering to any strict laws or rules of law. The ambit of the specification of rules which may be applicable to the substance of disputes is very wide owing to the fact that the legislation uses the words law or rules of law which include transnational laws or rules of international conventions, etc.

Section 28 of the arbitration act which determine the rules applicable to the substance of disputes are discussed accordingly

Section 28(1) of Arbitration and Conciliation Act, 1996

Specifies that If the place of arbitration is situated in India; The place where the arbitration process takes place within the territory of India. This implies that the region, where the disputes between the parties happened, belongs to India.

Section28(1)(a) of Arbitration and Conciliation Act, 1996

States that the arbitral tribunal (excluding the international commercial arbitration) while in an arbitration shall resolve the matter in accordance with the substantive law that is in force in India at the time of the arbitration process. No other law except the substantive law (that is codified in the act) would be applicable.

Section28(1)(b) of Arbitration and Conciliation Act, 1996 defines the matters pertaining to international commercial arbitration; 

The international commercial arbitration implies that the disputes related to commercial transactions like trades and businesses take place outside the territory of India.

Section 28(1)(b)(i) of Arbitration and Conciliation Act, 1996

Unlike the arbitration that takes place in India. While dealing with international commercial arbitration, The arbitral tribunal shall decide the matter which has a conflict, with the law that is decided by the consent of both the parties. This statement is opposite to section 28(1)(a) in nature. Therefore, no substantive law shall be applicable in the proceeding of International Commercial arbitration.

Section 28(1)(b)(ii) of Arbitration and Conciliation Act, 1996

The parties have the freedom to choose the law or the legal system of any country they want to be designated to their dispute, by ensuring that any chosen law has to be interpreted but conditionally it should be referring to the substantive law of that country and not to its contradictory laws and rules.

Section 28(1)(b)(iii) of Arbitration and Conciliation Act, 1996

In a case where such a situation arises where no designation of the law applies, the arbitral tribunal shall apply the laws that would be suitable for that particular situation to resolve the disputes between the parties.

Section 28(2) of Arbitration and Conciliation Act, 1996 

If the parties have already given their consent expressly to deal with a matter, the arbitral tribunal has the authority to apply the law which is appropriate according to the situation and circumstances. This mechanism helps in reducing the unnecessary time period which takes place in arbitration to make an award.

Section 28(3) of Arbitration and Conciliation Act, 1996

Clarifies that the terms and conditions of a contract must be determined by the arbitral tribunal while it is assumed to decide and make an award. All the trade usages must be considered that is applicable to the transactions before taking into the consideration. In 2015, an amendment was made to clause 3 of section 28 of the arbitration act which replaced the word “in accordance with” by “taking into account”. Subsequently, this amendment has given more leverage to the arbitrator to decide the matter even beyond the terms of the contract.

Amendment to Section 28(3) of Arbitration and Conciliation Act, 1996

It is presumed that when the parties engage into a contract, they have carefully considered all of its provisions and are ready to abide by them, whether they are convenient to them or not. To put it differently, the adjudicating body cannot award damages to the parties if a contract they signed explicitly prohibits them from receiving such relief. Contracts with such exclusionary/prohibition clauses limit the authority of an adjudicatory body, such as an arbitral tribunal, to give remedy that is expressly prohibited by the terms of the contract.

The arbitral tribunal additionally obligated by Section 28(3) of the Arbitration and Conciliation Act, 1996 (the “Act”) to render a decision “in accordance with the terms of the Contract.”

Although in 2015, a recent amendment, the Arbitration and Conciliation Amendment Act 2015, has fundamentally altered how exclusionary and prohibitive Sections are interpreted.

The amendment in Section 28(3) through the Arbitration and Conciliation Amendment Act 2015, would allow an arbitral tribunal to award damages under Section 73 of the Indian Contract Act 1872, also known as the “Contract Act,” in the instance where the terms of the contract are proven to have been breached.

246th report of the Law Commission of India

The Law Commission Report (LCR) proposed that the amendment to Section 28(3) be made only with the intention of neutralising the rationale for the Supreme Court’s ruling in ONGC v. Saw Pipes Ltd, (2003) and to ensure that any infringement of contract by the tribunal does not set aside the award. Section 28(1) does not require a similar revision in the Commission’s opinion, because the public policy ground is expressly restricted. The LCR recommended that Section 28(3) be amended so that arbitral tribunal awards will not be automatically altered by an appeal court just because the arbitral tribunal issued an award that was inconsistent with the clauses of the agreement.

The Hon’ble Supreme Court reviewed the law soon after the LCR was published in the Associate Builders v. DDA, 2014 case. It was held that Section 28(3) should be read carefully and that the courts cannot modify or set aside the arbitrator’s interpretation which is reasonable and just.

Statutory acknowledgement of the recommendation of the LCR

The Arbitration and Conciliation Amendment Act, 2015 provided statutory recognition to the recommendations made by the LCR and acknowledged in Associate Builders v. DDA. A comparison has been made below stating the position of Section 28(3) before and after the amendment:

The arbitral tribunal shall make its decisions in accordance with the terms of the contract and shall take into account the usages of the trade that are relevant to the particular transaction.

After Amendment

The provisions of the contract and any applicable trade usage shall always be taken into account by the arbitral tribunal when rendering an award.

After the “Arbitration and Conciliation Amendment Act 2015, the law pertaining to contract exclusionary clauses underwent an extensive change. Even while it may not seem like much, the provision’s language is distinct, and this has significant consequences. With regards to decision-making before an arbitral tribunal, the substantive law of India now essentially has supremacy due to the amendment made to Section 28(3) and the continuation of Section 28(1) in the original structure.

The Arbitration and Conciliation Amendment act 2015, has not merely given the arbitral tribunal enough judicial power to decide a dispute in light of the overall facts and circumstances. it has been given the authority to pass an award with significant freedom while keeping the overall intent and effect of the contract in mind. Rather than being bound by the provisions of the contract.

arbitration

The Act lays down for the Arbitral Tribunal to decide according to the terms of the contract and usages of the trade which are applicable to the transaction. Prior to the 2015 amendment, the powers of the tribunal to apply its own discretion were very limited and it had to strictly abide by the ambit that the contract and usage of trade set for the parties. This made it difficult to render justice as one of the parties was usually able to exploit the situation and make the other party sign such terms which went against the basic nature of opportunity or equal bargaining power of both the parties.

The infrastructure contracts with the clause ‘as is where is’ are the example of one such situation where a party is forced to abide by the terms which may put a hindrance on the fair business opportunity in case the contractor encountered obstacles beneath the land. The deliverance of justice was not possible in such situations under the unamended Act. In the case, Oil & Natural Gas Corporation Ltd vs Saw Pipes Ltd the Hon’ble Supreme Court held that the awards passed by the tribunal which went against the terms of the contract were violative of Section 28(3) of the Act and this was a ground to set aside the award under Section 34.

In 2015 Section 28(3) was amended and the tribunal was given the power to apply its discretion in passing the awards. This amendment was solely passed to overrule the judgement in the case, Oil & Natural Gas Corporation Ltd vs Saw Pipes Ltd. Now, the fact that the award passed by the tribunal goes against the terms of the contract, cannot be the sole basis of setting aside the award. Thus, while deciding on the substance of the dispute, the arbitral tribunal does not have to limit the award within the terms of the contract binding the party, it is free to apply its own discretionary power provided that such liberty is taken within reason with the sole objective to serve justice. Now, the tribunal is empowered to interpret the terms by considering the intention of the parties involved. The trade usage can also be looked into and can be construed in a prudent and reasonable manner. The shift in the law from ‘in accordance with’ to ‘take into account’ has provided a certain level of flexibility to the tribunal. However, the interpretation of such intentions and trade usages must be a reasonable one which may be easily arrived at by a prudent person. This amendment has empowered the tribunals to be the master of the cause and has, at the same time, reduced the scope of court interference.

Rules when the place of arbitration is India

Applicability of the substantive law

In case the place of arbitration is India, Section 28(1) clause (a) of the Arbitration and Conciliation Act,1996 provides that the arbitral tribunal is to decide the dispute submitted in arbitration according to the substantive law for the time being in force in India. Substantive law implies the set of laws that define the rights and responsibilities in civil law, crimes and punishment in criminal law. This provision is only for the arbitration other than the international commercial arbitration.

Thus, if the place of arbitration is in India, the provisions of the substantive law of India govern the substance of the dispute and the arbitral tribunal shall decide the award accordingly.

Arbitrators acting as amiable compositeur

The term ‘amiable compositeur’ means an unbiased third party, In cases where the parties expressly authorise, the arbitrator is not bound by the strict rules of law and may give effect to general considerations of equity and fair play on an award decided upon equitable and bona fide, and thus act as an unbiased third party.

It is the circumstance in which an arbitral tribunal or arbitrator is empowered to act without being restricted by rigid statutes and is free to decide any issue that arises during the arbitration process by considering general justice and fairness into account.

Section 28(2) gives for ‘ex aequo et bono’ decision, it is an out of law dispute settlement based on fair and just morally and commercially acceptable principles. Based upon this principle, an arbitrator is allowed to disregard mandatory and non-mandatory provisions and rules of law as long as the decision is within the general framework of national and international policies. All (nearly all) arbitration rules allow the tribunal to decide a dispute in ex aequo et bono, if duly authorised by the parties prior to or during the arbitration process (UNCITRAL Model Law Article 28(3), 33(2)).

Rules in International Commercial Arbitration

International commercial arbitration is defined under Section 2(1)(f) of the Arbitration and Conciliation Act, 1996. It is an alternative dispute resolution method between private parties arising during the course of commercial transactions conducted across national borders that allows the parties to avoid litigation in national courts.

This implies that at least one of the parties is –

  • A person whose citizenship is of, or who consistently resides in, any nation other than India; 
  • A corporate entity incorporated in any nation other than India; 
  • An organisation or group of individuals whose central governance and control is exercised in any nation other than India;
  • A foreign nation’s government.

Where parties have designated the rules of law

Section 28 states that the arbitral tribunal shall decide the dispute according to the rules of law that the parties have designated as applicable to the substance of the dispute. Due to the use of the term ‘rules of law’, the ambit of the law has been widened considerably. The parties are not restricted to the national substantive laws; they may also choose transnational laws, international law principles, or the rules of international law conventions. Most commonly used rules are “lex mercatoria”, which incorporates international commercial rules and general principles of law and is not based upon a specific legal system; or the principles of the international commercial contract drawn up by UNCITRAL. The parties may also split the law applicable to the substance to several issues, or empower the tribunal to render a decision based on reasonableness and fairness.

In such cases where the parties have designated a law or the legal system of a given country, such designation is provided to be interpreted as the substantive law of the respective nation and not the conflict of laws rules. This implies that the tribunal shall directly apply the substantive law or the rule of law specified by the parties without having to determine any applicable conflict of rules first.

This provision reflects the imperative aspect of party autonomy in the process of arbitration as the parties are empowered with choosing the law or rules of law, which they deem appropriate, to apply to the substance of the dispute. They are also empowered with expressly authorising the arbitral tribunal to act as amiable compositeur.   

Where parties have not designated the rules of law

Party autonomy is a fundamental principle in international arbitration. An aspect of this principle is that the parties are free to choose the laws or rules of law which are applicable to the substance of the dispute. However, in case the parties do not expressly state which law governs to the substance of the dispute, the tribunal has the authority to apply the rules of law it considers appropriate given the circumstances.

The tribunal has the power to deviate from any strict laws or rules of law and decide on the basis of its own good faith only in cases where the parties expressly authorise it to do so. If the tribunal has not been expressly authorised to act as amiable compositeur then it must designate certain rules of law to the substance of dispute which it finds most appropriate after considering the circumstances surrounding the dispute.

Case laws 

Oil & Natural Gas Corporation Ltd v. Saw Pipes Ltd, (2003)

Facts of the case

A contract was signed by the Company Saw Pipes (respondent) and ONGC (appellant) for the appellant’s casting pipe supply. The response was unable to provide the requested materials in a timely manner because of strikes that were unprecedented throughout all of Europe. After being made aware of this, the appellant requested an extension of the deadline and said that, as a result of the delivery delay, they would be entitled to liquidated damages as per the terms of the contract. The condition specified that the maximum amount of damages could not exceed 10% of the total cost of the unit. They were to be billed 1% of the total unit cost or the portion of the delivery that the respondent failed to complete on a weekly basis.

Now, with all of the delays, the appellant deducted a set amount as liquidated damages. The respondent objected to this deduction, and the case was sent to the appropriate arbitral tribunal. The respondent received the award in their Favour. The decision was challenged before the Bombay High Court since the recipient was not happy with it. Once more, the decision favoured the respondent in this case. As a result, the Supreme Court heard an appeal regarding the case.

Issue raised

The issue before the Court was-

  • Whether the awards passed by the tribunal went against the terms of the contract according to Section 28(3). 
  • whether the disputed arbitral assessment might be set aside under Section 34 of the Arbitration and Conciliation Act, 1996, on the grounds that it violates public policy.

Judgement

In this specific case, the Court significantly broadened the scope within which the public policy needs to be interpreted. The Court created a new basis of “patent illegality,” which states that a judgement that clearly violates the statute cannot be justified as being in the public interest. The court stated that such an award would have a negative impact on the administration of justice.

The court said that while the sum stipulated in the contract is not essential, it is an admirable attempt to prevent litigation in this instance. The Court believed that the amount that the parties had agreed upon would provide a good foundation for overcoming the difficulty of proof. Thus, in light of the above cited grounds, the Court set aside the ruling of the tribunal.

Indian Oil Corporation Ltd. v. M/s. SPS Engineering Ltd.(2011)

Facts of the case

On October 17, 2000, the Indian Oil Corporation Limited (IOCL) awarded M/s. SPS Engineering Ltd, A drinking water system infrastructure project related to the refinery project of Paradip. Further, IOCL and SPSEL signed a formal agreement on January 18, 2001. The agreement, which had a contract value of Rs. 16,61,17,473/-, called for a completion time of 13 months from the order date. On 29th of October 2002, IOCL terminated the contract, alleging that SPSEL’s (the contractor) achieved 15.94% progress of the total work by April 30, 2002, which is far less than anticipated and that was the reason for the termination of the contract.

IOCL informed SPSEL that, in accordance with Clause 7.0.9.0 of the General Conditions of Contract, the work will be finished by an alternative agency at the expense and risk of SPS Engineering Ltd.

A writ appeal has been filed in objection to the challenged decision from the learned Single Judge, dated 30.7.2004. The company that filed the writ petition (respondent in this case) is registered under the Indian Companies Act of 1956.

In spite of this, the petitioner completed work estimated to be worth Rs. 7.9 crores. The bank guarantee was cashed by the respondent. The petitioner claims that the respondent’s stated act was illegal, malafide, and arbitrary.

Issues raised

The highlighted issues in this case are:

  • whether the respondent’s act of encashing the bank guarantees illegal, malafide, or arbitrary?
  • whether the respondent’s termination of the contract justified
  • Whether the order that is being challenged in the writ petition disclose a valid reason in law?

Judgement

The Court determined that the respondent’s action in cashing the bank guarantee was neither unlawful, malafide, or arbitrary. The respondent’s termination of the contract was justified. However, the order in question gave no explanation, it was ruled to be unlawful in the writ petition. In order to maintain fairness and reduce the potential of arbitrariness, the Court pointed out the significance of recording the grounds behind administrative judgements. Therefore, the appeal was dismissed.

Conclusion

The rules provided in the Act which govern the applicability of the laws or the rules of laws to the substance of dispute are found to be very direct and reasonable in approach. The important aspect of party autonomy which is integral to the whole process of arbitration is maintained throughout as the parties have been provided with the freedom to designate the law or even the rules of law to the substance of the dispute. The ambit of governance of the substance of the dispute is not just limited to the substantive laws of a nation but also extends to the transnational laws and principles of international conventions such as lex mercatoria or Principles of International Commercial Contract.

The Indian legislative authorities have tried to keep the process of arbitration as flexible as possible and have also maintained the discretionary powers of the arbitral tribunal by amending Section 28(3). They have also minimised the scope of court interference, thereby, maintaining the objective of speedy delivery of justice by the process of arbitration.

Thus, summarising the above article it may be concluded that in case the place of arbitration is India, the substantive laws of India will be applicable to the substance of the dispute and in case of international commercial arbitration the parties are empowered to decide the laws or rules of law governing the substance of the dispute. The tribunal is empowered with designating the rules of law it deems appropriate according to the circumstances in case the parties have not designated any law. The parties may also authorise the tribunal to judge the dispute in their good faith and conscience adhering to the principles of fairness and equity, and the tribunal shall, at all times, decide according to but not limiting themselves to the terms of the contract and usage of trade.

The process of arbitration thus remains one of the most preferred dispute resolution methods as it has managed to maintain the flexibility in procedure and efficiency in delivering justice.

Frequently Asked Questions (FAQs)

What does Section 28 signify in a fundamental form?

There is a framework that has been provided in Section 28 to determine the substance of disputes, considering applicable laws, fairness principles, and contractual terms. The purpose for this section is solely to guide arbitrators in awarding unbiased and enlightened decisions. The provision ensures that arbitrators consider the parties’ agreements and usual practices, supporting arbitration rulings that are fair and consistent. Section 28 plays a pivotal role in shaping the arbitration process, balancing party autonomy with necessary safeguards.

How is the Arbitral Tribunal’s authority affected by Section 28(3)?

The treatment of contractual terms and trade usages under Section 28(3) has been subject to judicial interpretation. Some courts opt for a careful approach, considering restriction clauses as absolute limitations on the tribunal’s ability to award claims. Others take a more liberal view, believing that contractual terms cannot undermine the tribunal’s inherent power if the claim is substantially suitable under applicable law.

What other amendments are relevant to arbitration proceedings in relation to Section 28?

Although the Arbitration and Conciliation (Amendment) Act, 2015 brings together more amendments that have frequently overtaken the relevance of Section 28 (3). These include changes to the independence of the arbitrator, time limitations for processes, and the automatic stay of awards in the face of a challenge.

Can an arbitral award be set aside for violating Section 28(3)?

While an arbitral award can be thrown aside for violating Section 28(3), it is dependent on particular facts, contractual provisions, and arbitrators’ reasoning. Reasonable and well thought decisions made within the contractual framework are less likely to be reversed simply because they violate the contract.

References

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