Irregular Arbitration Agreements; An invitation To Intervene?

Prakhar Chauhan & Utkarsh Trivedi

24 May 2020 4:36 AM GMT

  • Irregular Arbitration Agreements; An invitation To Intervene?

    The origins of international arbitration are sometimes traced, if uncertainly, to ancient mythology. Dispute resolution among Greek gods, in matters at least arguably international by then-prevailing standards, involved disputes between Poseidon and Helios over the ownership of Corinth (which was reportedly split between them after an arbitration before Briareus, a giant) as stated...

    The origins of international arbitration are sometimes traced, if uncertainly, to ancient mythology. Dispute resolution among Greek gods, in matters at least arguably international by then-prevailing standards, involved disputes between Poseidon and Helios over the ownership of Corinth (which was reportedly split between them after an arbitration before Briareus, a giant) as stated by Ralston in his book, International Arbitration from Athens to Locarno in 1929. Athena and Poseidon over possession of Aegina (which was awarded to them in common by Zeus). The Egyptian mythology offers similar accounts, including a dispute between Seth and Osiris, resolved by Thot ("he who decides without being partial"). They required a certain parameter which does not require the courts to interfere, absent dire need. Otherwise the essence of having the dispute arbitrated is meaningless.

    Badly drafted arbitration clauses have posed problems, both in India and other jurisdictions, where due to the drafter's fault the beneficiary loses. US courts in Webster v OneMain Financial Inc {(No. CV 18-2711 (D.N.J. Dec. 4, 2018)} addressed the same problem of a badly drafted Mandatory Arbitration Clause. Webster asserted that she could not be compelled to arbitrate because her claim fell under the "small claims exception." The clause provided that any claim for which "all parties collectively . . . seek monetary relief in the aggregate of $15,000 or less in total relief, including compensatory, statutory and punitive damages" were excluded from arbitration. The Court held in favour of Webster, stating that the exception holds.

    Such problems have arisen in India as well, where the result of such badly drafted agreements have led to a Place/Seat/Venue Conundrum, the most recent scapegoat being in the Mankastu Impex Private Ltd. v. Airvisual Limited (Arb Pet. No. 32 of 2018) judgement.

    The Petitioner sought arbitrator appointment under S.11 of the Arbitration and Conciliation Act, 1996 ("Act"). Mankastu Impex ("MI") was the sole distributor of air quality monitor products for five years under the MoU. AVL was later acquired by IQ Air AG, which informed MI that it would not honour any MI contracts, hence leading to the dispute.

    MI invoked the Arbitration clause under Clause 17 of the MoU, and proposed a sole arbitrator. Clause 17, inter alia provided for the MoU to be 'governed by the laws of India, without regard to its conflicts of laws provisions'. Jurisdiction vested in 'courts at New Delhi'. Disputes arising from the MoU were to be 'referred to and finally resolved by arbitration administered in Hong Kong.' The clause further provided that 'the place of arbitration shall be Hong Kong'.

    The Hon'ble Supreme Court analyzed the relevance of the seat of arbitration, observing that the seat sets the lex arbitri (the national law governing the arbitration proceedings and the scope of judicial review by such jurisdiction). The issue was whether India or Hong Kong would be the seat.

    The court held that Clause 17.2 "Place of Arbitration shall be Hong Kong" was insufficient to establish a seat. The Court further analysed that the same clause indicated that the seat of arbitration was Hong Kong. The Court went on to hold that Hong Kong would be lex arbitri, whereas Clause 17.1 only governed the law of the Contract, not extending to Arbitration proceedings. The apex court dismissed the petition for appointment of an Arbitrator, as part I of the Act did not apply.

    It wasn't the first time where the apex court had to distinguish between seat and venue. The Court in BGS SGS SOMA JV v. NHPC Ltd (CA No. 9307 of 2019) addressed a similar question, which also arose in Union of India v Hardy Exploration and Production (India) Inc (CA No. 4628 of 2018), and was extensively dealt with in the NHPC judgement. The Supreme Court in NHPC dealt with the question of where section 34 and subsequently section 37 proceedings could be initiated (Punjab & Harayana, or New Delhi). A seemingly poorly drafted arbitration clause lead to unnecessary delays and costs. 'Arbitration proceedings shall be held at New Delhi / Faridabad' - this is not for the first time that such a clause has been at the helm of yet another 'landmark judgement' rendered by the Supreme Court.

    This blog neither intends to get into the judgement reasoning nor the distinction between seat and venue. Every time the courts face this question, they will have to decide it on a case by case basis, but for how long?

    Arbitral Jurisprudence in India exists majorly because of these pathological clauses and the self-inflicted confusions which happen at the post-award stage. To add to this confusion, the arbitration agreement in question was technically a tiered clause which provided for amicable settlement failing which arbitration at Faridabad/New Delhi was to be conducted. The presumption is that parties would have adhered to the clause and attempted to amicably resolve their dispute. Since no time frame was mentioned for the amicable talk to fail, they could have possibly failed on the very first day thereby resulting in arbitration. It is perhaps time that viability of tiered clauses and performance by the parties should be sincerely looked at.

    In the arbitration context, the word 'seat' is a legal term whereas 'venue' is not. The express choice of 'venue' does not necessarily indicate a choice of the seat of arbitration; indeed, the word 'venue' is more likely to 'imply that the designated location will be where meetings or hearings must be conducted'. Going back to the discussion, any recalcitrant party would do the same as NHPC. The fault lies in the arbitration clause itself, enabling alternative performance. It was argued that the arbitration clause only referred to a 'convenient venue', which technically helps nobody's case. It was buttressed by the fact that everything from signing of the agreement to sending of notices happened in Faridabad, and hence courts there should exercise jurisdiction.

    There is no respite in the legislation as well. This inconsistency, if one were to call it so, emanates from the legislation itself, as section 20(3) of the Act stipulates that 'Notwithstanding sub section (1) or sub section (2), the arbitral tribunal may, unless otherwise agreed by the parties meet at any place as considers appropriate for consultation…..'. The use of the word 'place' is often mistaken to be the seat or the place where the arbitration agreement stipulated the arbitration to be conducted, where it should be recognised, and its validity challenged.

    In India's case, from McDonnel Douglas{(1993) 2 Lloyds Rep 48}, to Videocon (CA No. 4269 of 2011), Venture Global, BALCO (CA No. 309 of 2008 and CA No. 7019 of 2005) to Bhatia(CA No. 6527 of 2001), the practice of concluding an agreement with a poorly drafted clause is still growing, instead of entities revisiting those clauses, and these are the judgements which have shown India as 'arbitration unfriendly'.

    Before drafting or reviewing a dispute resolution provision in a contract, counsel need to fully understand the impact of various types of dispute resolution — for example, expert determination as distinct from binding baseball arbitration — and choose the one that best accomplishes the client's stated objectives. Second, counsel must ensure that the client's intent is clearly expressed in the dispute resolution provision. Counsel from experts in dispute resolution is desirable, and rather wise, before committing the client to a costly and time-consuming mistake. Moreover, it is still not late to revisit arbitration agreements and remedy the errors already committed, to save further costs and risk losing good claims.

    Public Sector Undertakings in India particularly need to overhaul their arbitration agreements and crease out portions which, in their own past experiences have had adverse effects on enforcement. Another aspect to consider after looking at the arbitral jurisprudence in India (which blossomed post-Balco, Mankastu being a fruit) that focus is majorly on enforcement. It is logical that a non-enforceable award is of no use, however the process within which the award was made also needs to be like Ceaser's wife, and that is possible only if the proceedings emanate out of a non-pathological and unambiguous arbitration clause, capturing the clear intent of the parties to arbitrate. The more ambiguous the clause, the more likely court intervention is. Why arbitrate then?

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