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Two-Tier Arbitration: Ensuring A Private Appellate Forum

Devashish Bharuka
2 March 2020 8:54 AM GMT
Two-Tier Arbitration: Ensuring A Private Appellate Forum
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Introduction

An arbitral tribunal is a private fora chosen voluntarily by the parties to a dispute for its adjudication in place of public fora, i.e., the courts and tribunals constituted under the laws of a country.[1] Party autonomy is one of the foundational pillars of arbitration.[2] The expanse of party autonomy is vast, covering a wide range of issues like choice of substantive law, law governing the arbitration agreement, law governing the arbitral procedure, place of arbitration, language of arbitration, procedure to appoint an arbitrator, number, nationality and qualifications of arbitrators, procedure for challenging an arbitrator, etc.

This article focuses on post-arbitral award situations, more particularly, the scope of appeal against an arbitral award, its known restrictions and the possible way out for the parties to have a more effective and 'real' appellate forum in exercise of their right of party autonomy.

Appellate Jurisdiction

There is no denial of the fact that right of at least one appeal is a recognised right under all systems of civilised legal jurisprudence.[3] Not providing even one right of appeal would negate the very due process of law.[4] Though a right to an appeal is indubitably a creature of a statute[5] and can be circumscribed in the mode and manner, which the legislature intends to, yet, the same cannot be reduced to mere a mirage, a moonshine. Such an appeal must be real.

What is an 'appeal'? In its wider sense, it refers to a proceeding where a higher forum reconsiders the decision of a lower forum, on questions of fact and questions of law, with the jurisdiction to confirm, reverse and modify the decision or remand the matter to a lower forum for fresh decision in terms of its directions.[6] It has been held to mean the removal of a cause from an inferior or subordinate to a superior tribunal or forum in order to test and scrutinise the correctness of the impugned decision.[7] An appeal has been treated as a continuation and rehearing of the suit.[8] However, at the same time, it is not necessary that exercise of appellate jurisdiction will always involve re-agitation of entire matrix of facts and law.[9]

Limited Appeal under Sec. 34, Arbitration and Conciliation Act, 1996

Under the Indian Arbitration and Conciliation Act, 1996, after an arbitral award has been rendered, the Parliament has provided for an application to be filed under sec. 34 on limited grounds. An appeal under section 37, thereafter, has been provided after which the aggrieved party can move the Supreme Court by way of a special leave petition under Article 136 of the Constitution of India. An application under sec. 34 of the 1996 Act was held by the Supreme Court in Snehadeep Structures (P) Ltd. v Maharashtra Small-Scale Industries Development Corpn. Ltd.[10] to be within the ambit of an appeal.

However, on a holistic conspectus of sec. 34, it is quite apparent that this forum of appeal has been inhibited with multiple restrictions. An application under sec. 34, when read with sec. 5 of the 1996 Act, can be entertained only on grounds mentioned therein.[11] Grounds for interference laid down in sec. 34 fall under two categories – one under sec. 34(2)(a) and other under sec. 34(2)(b). It will be seen that none of the grounds contained in sub-section (2)(a) of Section 34 deal with the merits of the decision rendered by an arbitral award. It is only when the award is in conflict with the public policy of India that the merits of an arbitral award are to be looked into under certain specified circumstances.[12]

Sec. 34(2)(b) provides that an award would be in conflict with the public policy of India only if-

  • the making of the award was induced or affected by fraud or corruption or was in violation of section 75 or section 81; or,
  • it is in contravention with the fundamental policy of Indian law; or,
  • it is in conflict with the most basic notions of morality or justice.

Sub-section (2-A) of sec. 34 provides for an additional ground for interference with an arbitral award (other than those arising out of an international commercial arbitration) if the Court finds that the award is vitiated by patent illegality appearing on the face of the award.

As can be seen, the above grounds provide for a constricted space within which the Courts can, in an application under sec. 34 (effectively, a first appeal), interfere with an arbitral award. Explanation 1[13] to sec. 34(2)(b) further, almost as a reminder of court's limited jurisdiction, provides that for avoidance of any doubt, the test as to whether there is a contravention with the fundamental policy of Indian law shall not entail a review on the merits of the dispute. As if the constrained jurisdiction of the court was not clear enough, the Parliament has further chosen to insert proviso to sub-section (2-A) to sec. 34 requiring that an award shall not be set aside merely on the ground of an erroneous application of the law or by re-appreciation of evidence.[14]

On contra, if a party opts for resolution of its disputes through the regular court system, he has a right of a first appeal under sec. 96[15] of the Code of Civil Procedure, 1908. This appellate procedure postulates a full-fledged re-appreciation of evidence and assessment of applicable law and correct the lower forum judgment and decree on all the issues. It also permits placing additional evidence on record under certain circumstances. The appellate court has a wide range of power in terms of an order it can pass under Order XLI, Rule 33[16] of the CPC, 1908. An appeal is treated to be a continuation of a suit.[17] In a first appeal, a court can re-appreciate evidence.[18] It can interfere with the findings of fact given by the trial court.[19] In effect, it has been treated as a re-hearing[20] of the matter by an appellate court, which even permits taking into account facts and events which have come into existence after the decree appealed against, in order to mould the relief.[21]

It is quite apparent that an application under sec. 34 challenging an arbitral award having been shaped in view of the corresponding Article 34 of the UNCITRAL Model Law on International Commercial Arbitration,[22] is nowhere near to the scope and width of a first appeal provided under sec. 96 of the Code of Civil Procedure, 1908.

The present position of law, therefore, largely postulates an attitude of non-interference in case of an arbitral award. The arbitral tribunal chosen by the parties have been provided with substantial latitude to decide a dispute and then, a challenge to such an arbitral award is rarely interfered with on account of legislative restraints coupled with judicial interpretation. In effect, it is highly conceivable that the parties preferring arbitration over regular court system have to, for all practical purposes, face the possible crisis of a 'single-forum adjudication' on merits of the dispute. Though the arbitral process itself might be speedy considering Section 29-A[23] and Section 29-B[24] and maybe even cost-effective in view of Sec. 11(14) read with the Fourth Schedule,[25] the process naturally restricts their choices in a post-arbitral award situation in terms of a re-assessment of the award on merits. It would be highly incongruous to suggest that a judgment of a Judge in a court of law might require correction by the higher forums as 'to err is human' but an arbitrator is unlikely to fault on appreciation of evidence and understanding of law. To tell a party that a limited challenge is justifiable on account of its own choice of opting for a private fora (arbitration) rather than a public fora (courts) is almost making him punish for his choice. This cannot be the aim of dispute resolution under the rule of law.

Be that as it may, so long as the legislative restrictions continue, the parties and the courts would be bound by them. The issue is how the parties can, while exercising their right of party autonomy and formulating the arbitration clause, safeguard their own interest against a possible 'single-forum adjudication' on merits of the dispute.

The Centrotrade dictum of the Supreme Court

It is trite that a right to appeal is a creature of statute. It is never an inherent right, like that of filing of a suit. While conferring such a right, a statute may impose restrictions, like limitation or pre-deposit of penalty or it may limit the area of appeal to questions of law or sometime to substantial questions of law. Such right, its nature, ambit and width has to be governed by the statute itself.[26] However, this rule seems to apply to public dispute resolution forums, that is, the courts. In a private adjudication system like arbitration, one can easily fathom a private appellate body as well. The parties can agree to introduce their own appellate arbitral forum with agreed appellate procedural rules and grounds of interference with the arbitral award. For instance, parties can agree that such appellate forum shall treat an arbitration appeal as a sec. 96 CPC appeal and accordingly, decide the appeal.

The Supreme Court, in Centrotrade Minerals & Metal Inc v Hindustan Copper Ltd.,[27] has upheld the legality of such an appellate forum created by the parties under an arbitration agreement. Initially, the matter was listed before a bench of two Hon'ble Judges, which led to divergence of opinion.[28] Sinha J. was of view that the 1996 Act contains a coherent and model framework and envisages only one award under one set of rules. It does not contemplate multilayer awards governed by different set of rules.[29] According to Sinha J., a two-tier arbitration is invalid under the 1996 Act.[30] Chatterjee J., however, struck a different note and held that appellate arbitrations are fully in consonance with the Act.[31]

The matter was thus referred to a bench of three-Judges. In this case, the arbitration clause provided for the following:

  • Settlement of disputes between the parties by arbitration in India through the arbitration panel of the Indian Council of Arbitration in accordance with the Rules of Arbitration of the ICA.
  • In case either party is in disagreement with the 'arbitration result' in India, either party will have a "right to appeal" to a second arbitration in London in accordance with the Rules of Conciliation and Arbitration of the International Chamber of Commerce and the result of this second arbitration will be binding on both the parties.

The Supreme Court, at the outset, dispelled the submission that there is a difference between 'arbitration result' and 'award'. It held that the 'arbitration result' in the instant case has all the elements and ingredients of an arbitral award and thus, must mean an arbitration award given by the arbitral panel of the ICA. Having held so, the Apex Court then proceeded to hold that such a two-tire arbitration system is very much valid under the Indian law in the background of the following reasoning:

  • The arbitration clause specifically provides for a second arbitration, the form of an 'appeal' against the award of the arbitration panel of the ICA.
  • The 'statute and not agreement creates an appeal' principle may be so in respect of litigation initiated in courts under a statute or for the enforcement of common law rights, but that does not prevent parties from entering into an agreement which provides for non-statutory appeals so that their disputes and differences can preferably be settled without resort to court processes.
  • Combined reading of sec. 34(1) and 35 of the Arbitration and Conciliation Act, 1996 does not exclude the autonomy of parties to an arbitral award to mutually agree to a procedure whereby the arbitral award might be reconsidered by another arbitrator or panel of arbitrators 'by way of an appeal'.
  • There has been a long line of decisions rendered by various courts in India, which have accepted the validity of a two-tier arbitration procedure under institutional rules.[32]
  • Party autonomy is virtually the backbone of arbitration. Parties have the autonomy to decide not only on the procedural law to be followed but also the substantive law. The choice of jurisdiction is also left to the contracting parties.
  • The two-tire arbitration does not fall foul of public policy of India. There is nothing in the Arbitration and Conciliation Act, 1996, which prohibits the contracting parties from agreeing upon a second instance or appellate jurisdiction.

Issues surrounding a two-tier arbitration

While considering a two-tier arbitration, Sinha J. had flagged a concern about unnecessary delay or expenses.[33] This concern, in my view, can be addressed by the parties themselves with appropriate guiding principles in the arbitration clause itself. One can consider a sole-member appellate tribunal (a person senior[34] to the members of the arbitral tribunal), who would be required to re-assess the entire case and give an appellate award based solely on the arbitral record and with no further pleadings or additional evidence, Parties may have an opportunity of another oral hearing at best. A time-limit (for instance, 30 days) may be prescribed for conclusion of appellate tribunal proceedings with day-to-day hearing. This would help cut down on costs and delay.

Other issues, which are likely to arise in such an appellate arbitral tribunal could be its powers, which can be defined under the arbitration clause. The power of such appellate tribunal in terms of interference with an arbitral award can be de hors the strict contours of sec. 34. The limitation of period within which such appeal is to be preferred is yet another issue to be decided by the parties.

As and when two-tier arbitrations are more readily adopted, one can foresee certain issues in their implementation. Would the appellate arbitral tribunal truly act as an appellate body, that is, whether it would sit in appeal over the arbitral award and decide its correctness or would it de novo undertake a fresh assessment of the entire material on record and give its independent finding without any reference to the first award. Moreover, questions like permitting additional documents or additional evidence may also arise. Would sec. 17 be available for interim orders or would execution under sec. 36 be permitted during the pendency of the appellate forum? Would doctrine of merger apply? Would the second arbitral award be called an 'award' or an 'appellate award'? If appellate arbitral Tribunal is to set aside an award like an appeal on merits, then would the courts under sec. 34 decide the correctness of such an appellate award on the limited extent as envisaged therein or in its entirety? How would the doctrine of merger operate between the first award and the appellate award? These are some of the issues, which might arise with respect to a regular appellate arbitral forum, which the courts would be called upon to resolve.

Conclusion

The Centrotrade law goes a long way in upholding the principle of party autonomy. However, what is particularly interesting to note is the manner in which party autonomy can be appropriately exercised to ensure that the parties not only have a private fora of first instance but also an appellate body of their own choice with procedural rules. The parties clearly have a choice to ensure a full-fledged appeal against an arbitral award within the private dispensation before they enter the statutory arena of sec. 34 and sec. 37 remedies (which, by letter and court interpretation,[35] are restrictive). The law as it stands today permits choice of an appellate tribunal as an inherent element of party autonomy under the 1996 Act.

It would be worthwhile for the contracting parties to consider the inclusion of a two-tier arbitration within their agreement while agreeing to opt for arbitration rather than the public dispute resolution system. This would provide the parties another layer of re-appreciation of evidence and re-assessment of issues of facts and law within their own private regime before moving the courts under sec. 34 and sec. 37 of the 1996 Act. A decision by the first arbitral tribunal and appellate arbitral tribunal would substantially help in thrashing out all the issues of fact and law threadbare between the parties. By the end of the appellate award, the parties are likely to be clearer about where they stand.

One can also possibly imagine the parties' disinclination to even approach the courts after a two-tier arbitration. Under the present single-tier arbitration, a party aggrieved by an arbitral award is more likely to move a sec. 34 application to 'take a chance' than not. After a two-tier arbitration, such a fervour to move the courts might diminish. It is, thus, imperative that those advising for or seeking arbitration in their agreements should consider the possibility of a two-tier arbitration.

(Author is a LL.M. (Harvard), Advocate-on-Record, Supreme Court of India, Doctoral Research Fellow, Jindal Global Law)

Views Are Personal Only


[1] Booz Allen & Hamilton Inc. v SBI Home Finance Ltd., (2011) 5 SCC 532, pr. 35.

[2] Party autonomy has been held to be brooding and guiding spirit in arbitration. [Bharat Aluminium Co. v Kaiser Aluminium Technical Services Inc., (2017) 2 SCC 228; Union of India v U.P. State Bridge Corpn. Ltd., (2015) 2 SCC 52]

[3] Jasbir Kaur v Kuljit Singh, (2008) 3 PLR 192

[4] Dadu v State of Maharashtra, (2000) 8 SCC 437, pr. 17.

[5] Shiv Shakti Coop. Housing Society v Swaraj Developers, (2003) 6 SCC 659 [At para. 17, held, right of appeal is statutory and is inhered in no one.]

[6] James Joseph v State of Kerala, (2010) 9 SCC 642, prs. 19(i) and 10.

[7] C.W. Co-op. Transport Society v Punjab State, AIR 1962 Punj 94, 100.

[8] Dilip v Mohd. Azizul Haq, (2000) 3 SCC 607.

[9] Snehadeep Structures (P) Ltd. v Maharashtra Small-Scale Industries Development Corpn. Ltd., (2010) 3 SCC 34, prs. 36 & 49.

[10] (2010) 3 SCC 34. At para. 53, held: "The Law Commission, in its 176th Report on "Amendments to the Arbitration Act, 1996" has repeatedly referred to the need of providing appeals from certain orders of the arbitrator under Section 34. Further, this Court in Sanshin Chemicals Industry v. Oriental Carbons and Chemicals Ltd. [(2001) 3 SCC 341] had also made several references to "an appeal" under Section 34. The English Arbitration Act, 1996 provides that when the parties had excluded the "right to appeal" (by way of what is known as an "exclusion agreement") the right to file certain applications to invoke the court's indulgence in the matter is also taken away. Hence, it is not difficult to see that ordinarily, an application under Section 34 is referred to as an appeal."

[11] Associate Builders v DDA, (2015) 3 SCC 49, pr. 15.

[12] Ibid pr. 17.

[13] Substituted by Act 3 of 2016, S. 18, for the Explanation (w.e.f. Oct 23, 2015).

[14] Inserted by Act 3 of 2016, S. 18, for the Explanation (w.e.f. Oct 23, 2015).

[15] Section 96. Appeal from original decree- (1) Save where otherwise expressly provided in the body of this Code or by any other law for the time being in force, an appeal shall lie from every decree passed by any Court exercising original jurisdiction the Court authorized to hear appeals from the decisions of such Court.

[16] Or. XLI, R.33. Power of court of Appeal.- The Appellate Court shall have power to pass any decree and make any order which ought to have been passed or made and to pass or make such further or other decree or order as the case may require, and this power may be exercised by the court notwithstanding that the appeal is as to part only of the decree and may be exercised In favour of all or any of the respondents or parties, although such respondents or parties may not have filed any appeal or objection, and may, where there have been decrees in cross suits or where two or more decrees are passed in one suit, be exercised in respect of all or any of the decrees, although an appeal may not have been filed against such decrees:

[17] D. Purushotama Reddy v K. Sateesh, (2008) 8 SCC 505, pr. 11; Chandi Prasad v Jagdish Prasad, (2004) 8 SCC 724, pr. 22 (held, all intent and purpose, the suit continues.)

[18] L. Ashwathama v P. Prakash, (2009) 13 SCC 229, 8; see also A. Ambikamba v B. Ranagaswamy, (2005) 9 SCC 374; Trans Mediterranean Airways v Universal Exports, (2011) 10 SCC 316, pr. 7 (in the context of first appeal to the Supreme Court under sec. 23 of the Consumer Protection Act, 1986.)

[19] Santosh Hazari v Purushottam Tiwari, (2001) 3 SCC 179 pr. 15.

[20] Lachweshwar Prasad Shukul v. Keshwar Lal Chaudhuri, 1940 FCR 84 (Held, that it has been a principle of legislation in British India at least from 1861 that a court of appeal shall have the same powers and shall perform as nearly as may be the same duties as are conferred and imposed by the Civil Procedure Code on courts of original jurisdiction); foll. in Amarjit Kaur v. Pritam Singh, (1974) 2 SCC 363

[21] Bhashyam Iyengar, J. in Kristnama Chariar v. Mangammal, ILR (1903) 26 Mad 91, at p. 95-96 [Held, the hearing of an appeal is under the processual law of this country in the nature of a re-hearing, and that it is on the theory of an appeal being in the nature of a re-hearing that the courts in this country have in numerous cases recognized that in moulding the relief to be granted in a case on appeal, the court of appeal is entitled to take into account even facts and events which have come into existence after the decree appealed against.]

[23] Time-limit for arbitral award [Inserted by Act 3 of 2016, S. 15, for the Explanation (w.e.f. Oct 23, 2015)].

[24] Fast track procedure [Inserted by Act 3 of 2016, S. 15, for the Explanation (w.e.f. Oct 23, 2015)].

[25] Limiting fee of the arbitral tribunal [Substituted by Act 33 of 2019, S. 15, for the Explanation (w.e.f. Oct 23, 2015)].

[26] Raj Kumar Shivhare v Directorate of Enforcement, (2010) 4 SCC 774, prs. 19 & 29.

[27] (2017) 2 SCC 228, pr. 14. The concept of two-tier arbitration was also noted by Tarun Chatterjee, J. in Snehadeep Structures (P) Ltd. v Maharashtra Small-Scale Industries Development Corpn. Ltd., (2010) 3 SCC 34, pr. 50.

[28] Centrotrade Minerals & Metals Inc. v Hindustan Copper Ltd., (2006) 11 SCC 245.

[29] Ibid pr. 40

[30] Ibid prs. 117, 118.

[31] Ibid pr. 144.

[32] Dedhia Investments (P) Ltd. v. JRD Securities (P) Ltd., (2002) 4 Bom LR 932 : 2002 SCC OnLine Bom 544, Amin Merchant v. Bipin M. Gandhi, 2005 Supp Arb LR 337 : 2004 SCC OnLine Bom 986, Dhansukh K. Sethia v. Rajendra Capital Services Ltd., (2008) 1 Arb LR 368 : 2007 SCC OnLine Bom 792, Dowell Leasing & Finance Ltd. v. Radheshyam B. Khandelwal, (2008) 1 Bom CR 768 : 2007 SCC OnLine Bom 655, ANS (P) Ltd. v. Jayesh R. Ajmera, 2014 SCC OnLine Bom 1825, Ankit Bimal Deorah v. Microsec Capital Ltd., 2015 SCC OnLine Bom 4538, SAIL v. Engineers Project India Ltd., 2014 SCC OnLine Del 2314, U.P. Rajya Vidyut Utpadan Nigam Ltd. v. Union of India, 2015 SCC OnLine Del 13274 and Rakesh Kumar Garg v. DSE Financial Service Ltd., 2015 SCC OnLine Del 14458.

[33] Centrotrade (2006) supra, pr. 40.

[34] For instance, in terms of expertise or in terms of the post held like a former Chief Justice of India or a former Judge of the Supreme Court or a former Chief Justice of a High Court, etc.

[35] See for instance, Associate Builders v DDA, (2015) 3 SCC 49.

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