Validity of an Arbitration Clause: No Strait-Jacket Formula

On September 7, 2022, the Hon’ble Supreme Court issued a significant ruling in the case of Babanrao Rajaram Pund v. Samarth Builders & Developers[1], holding that no strait jacket formula can be made under the Arbitration and Conciliation Act, 1996, to determine the particulars of an arbitration clause. It further held that an arbitration clause must be treated as final and binding even if specific words like “final” or “binding” are not used in such a clause.

Babanrao Rajaram Pund v. Samarth Builders & Developers

The case related to one Babanrao (the Appellant), who was the owner of a property situated in Aurangabad. The Appellant intended to build residential and commercial complexes on this property. Samarth Builders & Developers (Respondent No. 1), a company specialising in the building of homes and commercial buildings, learned of the Appellant’s intention to build such a residential and commercial complex and approached him. A “Development Agreement” (DA) was subsequently signed by the Appellant and Respondent No.1. The Appellant, thereafter, signed a General Power of Attorney (GPA) in favour of Respondent No. 1.  Respondent No. 2, in the civil appeal was the partner of Respondent No. 1.

According to the DA, Respondent No.1 had to build “Amay Apartments” on the property within 15 months. However, this deadline could have been extended with the payment of a penalty. Respondent No. 1 accepted the conditions of the DA and stated that he would build 45 percent of the constructed space before or on the deadline of the 15-month period, retaining the other 55 percent of the developed section for himself.

Respondent No.1 was, however, unable to finish the work within the allotted time. Aggrieved by this act, the Appellant gave notice to terminate the DA and to cancel the GPA. On 11.07.2016 the cancellation of the agreement and GPA were also publicised in a newspaper by the Appellant. Since, Respondent No.1 did not respond to the notice of the Appellant issued under Clause 18 of the DA, which carried an arbitration clause, the Appellant was constrained to approach the High Court.

Clause 18 of the DA reads as follows:

“18. All the disputes or differences arising between the parties hereto as to the interpretation of this Agreement or any covenants or conditions thereof or as to the rights, duties, or liabilities of any part hereunder or as to any act, matter, or thing arising out of or relating to or under this Agreement (even though the Agreement may have been terminated), the same shall be referred to arbitration by a sole arbitrator mutually appointed, failing which, two arbitrators, one to be appointed by each party to the dispute or difference, and these two Arbitrators will appoint a third Arbitrator and the Arbitration shall be governed by the Arbitration and Conciliation Act, 1996 or any re-enactment thereof.”

The Arbitration Clause

Before the Hon’ble High Court of Bombay, the Appellant had filed an application pursuant to Section 11 of the Arbitration Act, 1996, after receiving no response from the Respondents. The Respondents claimed that clause 18 of the DA could not be enforced because it lacked the precise phrase “to be bound by the decision of the Arbitral Tribunal.” The Hon’ble High Court ruled in favour of the Respondents and determined that the clause lacked necessary components of a legitimate arbitration agreement and did not expressly specify that the arbitrator’s ruling would be binding. Aggrieved by the order of the High Court, a Special Leave Petition was filed by the Appellant before the Hon’ble Supreme Court.

The Issue Before the Hon’ble Supreme Court

If an arbitration clause lacks specific language like “binding” or “final,” should it still be considered a valid agreement for the purpose of invoking powers under Sec. 11 of the Arbitration and Conciliation Act, 1996?

While analysing the issue, the Hon’ble Supreme Court made it clear that there is no precise form of an arbitration clause, and that Section 7 of the Arbitration Act of 1996 does not provide a specific form of arbitration agreement. The Hon’ble Supreme Court critically analysed Clause 18 of the DA and concluded that the terms of the agreement were clear. It made it clear that the term “disputes shall be” referred to arbitration, meant that the reference to arbitration was clear in the DA. Additionally, it was also observed that the contract contained clear instructions for choosing a third arbitrator and that the parties would be subject to the Arbitration and Conciliation Act, 1996. The Hon’ble Supreme Court further opined that the requirement and purpose of the parties to be bound by the arbitral tribunal are mandated by Clause 18 of the DA. The arbitral clause was held to be not invalidated by the omission of the phrases “final” and “binding.” The decision of the Hon’ble High Court of Judicature of Bombay was thus set aside by the Hon’ble Supreme Court and a sole arbitrator was appointed to resolve the dispute.

Key Takeaway

Though, the decision by the Hon’ble Supreme Court gives considerable breathing room for an arbitration clause, it is imperative to consider that an insufficiently written arbitration clause does hinder the process of arbitration. The only solution in such a scenario is to fix the deficiency in the arbitral clause. The parties must ensure that the arbitration agreement is well drafted so that there are no errors and the intention of the parties to refer the dispute to arbitration can be easily inferred. This will also ensure that the parties will not be forced to approach the courts to determine the validity of the clause.

References: 

[1] 2022 SCC OnLine SC 1165.

The only solution in such a scenario is to fix the deficiency in the arbitral clause. The parties must ensure that the arbitration agreement is well drafted so that there are no errors and the intention of the parties to refer the dispute to arbitration can be easily inferred. 

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Draft Mediation Bill, 2021- An Analysis

                          “It may be worthwhile to recall that the failure of mediation (in Mahabharata) led to disastrous consequences.”

                                                                                              -Chief Justice of India N V Ramana

While addressing the Curtain Raiser and Stakeholder Conclave of the International Arbitration and Mediation, CJI Ramana emphasized that courts should be engaged as the last resort for dispute resolution. The ADR mechanisms are not only instrumental from the standpoint of dispute resolution but essential to restore stressed relationships.

Recently, in an effort to strengthen the framework for mediation in the country as a viable ADR mechanism the Ministry of Law and Justice released the Draft Mediation Bill,2021 in the public domain. The dialogue emphasizing the need for a stand-alone law on mediation has always been strongly advocated for by the legal pundits owing to the lack of structure of mediation processes, unavailing inconsistencies between various existing legislations such as Code for Civil Procedure, 1908, Industrial Disputes Act, 1947 and the Commercial Courts Act 2015. Additionally, since India is a signatory to the Singapore Convention on Mediation a substantial legislation addressing it was necessary. Finally, the lack of a coherent enforcement mechanism for mediation settlements was a crucial factor that rendered mediation ineffectual.

This article aims to analyse the Draft Mediation Bill, 2021 by mapping its significant provisions, understanding the plausibility of the processes established and highlighting gaps in the framework that demand a more sincere deliberation.

Summary of the Draft Mediation Bill

 

Part I- Domestic Mediation

The first part discusses and highlights domestic mediation and its applicability, procedure, and reache in India. The segment also assigns online mediation with statutory recognition.

Chapter 1

Discusses the scope and definition of concepts and terms conferred in the Act.

The provisions of this chapter offer an overdue clarity with respect to definition and scope to many terms which assumed significance over the years in the field of mediation. Further, the extension of the Act to international mediations makes it possible to settle international disputes with finality.

Chapter 2

The chapter exclusively focuses on the mediation process. The act under this chapter empowers the court to refer the parties to mediation while segregating matters that shall not qualify for mediation. A party may, before the commencement of or during the continuation of mediation proceedings under this Part, can file an application before a Court or Tribunal of competent jurisdiction for seeking urgent interim measures.

Comments –Provisions of this chapter give the necessary importance, legality, and validity to the mediation agreements by way of mandatory prerequisites. No ambiguity is left qua almost all the aspects of a mediation process. However, providing for an interim relief procedure while the mediation is pending may thwart the spirit of mediation, and much caution is required while incorporating such a provision

Chapter 3

This chapter enlightens the procedures to be followed for the appointment of the mediator on party autonomy and the duties of the mediator. It is pertinent to note that it provides that the mediator can be appointed from any nationality. The preference under the act is given to the parties to the dispute.

Comments – Provisions of this chapter provide the much-awaited party autonomy to the stakeholders in the appointment of the mediator. This shall make the process swifter and less strenuous. Further, if the mediator is already known to both parties, there are better chances of settlement.

Chapters 4

The chapter discusses details of setting territorial jurisdiction, date of commencement, etc. for the benefit of the parties. Renders code of civil procedure and Indian Evidence Act inapplicable to mediation. The time limit for completion of mediation is 90 days, which can be further extended to 90 days with the consent of the parties. The mediation settlement agreement is also made applicable to online mediation settlements.

Comments – Setting a fixed timeline for concluding the process shall emerge as a major boon to its earnestness. Steps like online mediation shall render the mediation more viable for the stakeholders.

Chapter 5

This chapter addresses the status of the settlement agreement. The agreement can be challenged on grounds of fraud, corruption, gross impropriety, or impersonation within a period of 3 months. It also excludes the limitation period during the mediation.

Comments – Exclusion of period of mediation from the limitation period prescribed may emerge as a major boon for diverting the pendency from litigation to mediation.

Chapter 6

This chapter states that online mediation shall take place in accordance with the provisions of the information technology Act. However, both the mediators and the parties under the chapter are duty-bound to maintain autonomy as well as confidentiality.

Comments – Online mode of mediation is the need of the hour and this chapter successfully codifies the concept.  However, the infrastructural problems are yet to be addressed which can be done by way of appropriate rules.

Chapter 7

Provides for the establishment of the mediation council of India by the central government with head office in Delhi. Discusses the composition of the mediation council of India, the functions to be performed by them, and the process and grounds for impeachment.

Comments – The establishment of a council shall make the mediation process more disciplined and responsible. However, centralization of the council only to the Capital might be required to be reviewed to balance out regional coordination requirements.

Chapter 8

Discusses the recognition of the mediation service provider and mediation institutes and their function.

Comments – From a more or less and unorganized field, Mediation is now a complete organizational process with the involvement of the service providers and institutes. However, the functions of the institutes may need to be regulated at a micro-level with substantial infrastructural inputs.

 

Part II – Community mediation

It is interesting to note that the act provides for community mediation which is likely to affect the peace, harmony, and tranquillity amongst the residents or families of any area or locality. It also provides for the procedure to be adopted for community mediation.

 

Part III- International settlement agreements

This part is dedicated towards international commercial settlement and Enforcement of international commercial settlement agreements resulting from mediation.

By enabling the enforcement of international settlement agreements, a major boost is sought to establish the reliability and versatility of the Indian Justice dispensation system.

 

Gaps and Suggestions

 

Despite formulating cogent provisions that majorly tackle the immediate concerns surrounding the mediation process in the country, there are some factors that need in-depth deliberation.

Following suggestions can be incorporated in the bill to eliminate ambiguities and establish a well-rounded framework to guide mediation processes.

  1. Section 22 talks about confidentiality to be maintained by the parties to the dispute as well as the mediator.

However, the draft does not provide for any punishment/ liability or the consequences which shall be imposed on one who wilfully infringes the said section, thereby defeating the primary objective of the act of maintaining confidentiality.

  1. Under section 29, an application for challenging the mediated settlement agreement may not be made after three months have elapsed from the date on which the party making that application has received the copy of mediated settlement agreement under section 21(3) of this Act. Provided that if the Court is satisfied that the applicant was prevented by “sufficient cause” from making the application within the said period of three months it may entertain the application within a further period of thirty days, but not thereafter.

The term “sufficient cause” for the delay in filing the challenge to the settlement agreement is ambiguous; therefore, it is suggestible that the draft should include specific and clear grounds under which the settlement agreement can be challenged even after three months.

  1. Under section 10, the bill provides that qualification, experience, and accreditation of the foreign, as well as domestic mediator, would be determined by the council.

The same should be decided in consultation with the judiciary or a body of specialized individuals.  The same shall instill more faith in the parties towards the appointed expert. Additionally, mediation shall become a viable career option for young professionals in the sector.

  1. The concept of composite reference arbitration has gained a lot of significance in the field of ADR since it facilitates clubbing more than one dispute arising under many sub-agreements under a common contract, eg; a construction contract. This method aids in avoiding multiple conflicting awards, saving time, money, and resources. However, the same does not have any legal backup in the Indian statutes and is dependant on legal precedents and the discretion of the courts.

It would be sensible to include the concept of “Composite reference mediation” in the mediation Rules, 2021 which will help in avoiding multiple conflicting awards, boost efficiency, and render the process cost-effective.

 

Conclusion

In a nutshell, it can be concluded that the Bill indeed is a step in the right direction and is equipped with fair shares of constructive provisions which will certainly contribute towards strengthening and promotion of mediation as a viable alternate dispute resolution mechanism in the country. This stand-alone legislation would not only inspire greater confidence and faith in the mediation process but also significantly address the concerns of an over-burdened and over-worked adversarial system of justice. However, to truly instill merit and prudence in the processes it is imperative to carefully address the abovementioned gaps in the Bill and facilitate the ADR mechanism of mediation.

Image Credits:  Image by mohamed Hassan from Pixabay 

The Bill indeed is a step in the right direction and is equipped with fair shares of constructive provisions which will certainly contribute towards strengthening and promotion of mediation as a viable alternate dispute resolution mechanism in the country. This stand-alone legislation would not only inspire a greater confidence and faith in the mediation process, but also significantly address the concerns of an over-burdened and over-worked adversarial system of justice.

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Appointment of Sole Arbitrator: Two Sides of the Same Coin

Almost every commercial contract contains an arbitration clause in order to circumvent the traditional trajectory of dispute resolution through litigation. It is common to encounter myriad project financing documents between a lender and a borrower bearing arbitration as a means of settling any dispute or difference. The concerning question raised in such a scenario is whether the lender of facilities exercises an upper hand in designating an arbitrator devoid of any recourse to the borrower; thereby bringing us to the crucial question: Have the clauses similar to “All disputes and differences of whatsoever nature arising out of this agreement, whether during its term or after expiry thereof or prior termination shall be referred to arbitration in terms of the Arbitration and Conciliation Act, 1996. The arbitration shall take place before a sole arbitrator, to be appointed by the Lender.” been obliterated?

The law in case of appointment of the sole arbitrator by a party has been settled by the Hon’ble Supreme Court in the case of Perkins Eastman Architects DPC and Ors. v. HSCC (India) Ltd.[1] (Perkins case). HSCC (India) Ltd. (Respondent), the executing agency of the Ministry of Health and Family Welfare, issued a Letter of Award (LOA) to the consortium of Applicants for the appointment of Design Consultant for All India Institute of Medical Sciences (AIIMS) proposed at Guntur in Andhra Pradesh. The dispute resolution clause in the contract between the parties provided that if Applicants were dissatisfied with the decision of Director (Engg.), HSCC (India) Ltd. (HSCC) they were at the liberty to issue a notice to the Chief Managing Director (CMD), HSCC for the appointment of an arbitrator within 30 (thirty) days of receipt of the decision.

Furthermore, the contract also prohibited any other person except appointed by CMD, HSCC to act as a sole arbitrator thereby entirely vesting the power of appointment of an arbitrator on the Respondent. When disputes arose, the Applicants invoked the dispute resolution clause in the contract and the Chief General Manager, HSCC appointed the sole arbitrator. Thereafter, an application was filed by the Applicants under Section 11(6) read along with Section 11(12)(a) of Arbitration and Conciliation Act, 1996 (hereinafter referred to as the “Act”) which envisages appointment of an arbitrator by the court. The Hon’ble Supreme Court examined if it could exercise the power of appointment of an arbitrator in this case dehors the procedure set out in the arbitration agreement.

The Hon’ble Supreme Court referred to the judgement of TRF Limited v. Energo Engineering Projects Limited[2] (TRF case) in which the Apex Court examined the issue wherein the Managing Director of the Respondent was titled as the sole arbitrator and was also vested with the authority to nominate a replacement. The Apex Court by virtue of Section 12(5) of the Act that deals with the arbitrator’s relationship with the parties or counsel or subject matter of dispute, affirmed the ineligibility of a person falling under the purview of Seventh Schedule of the Act to perform the role of an arbitrator. Therefore, the Managing Director was ineligible to act as an arbitrator due to which his ability to nominate another person as an arbitrator was annihilated. The Apex Court in this case differentiated the dual power of the Managing Director, one to adjudicate as an arbitrator and second, the capacity of the Managing Director to appoint a nominee in his place.  

The principles emanating from the TRF case were reflected in the present case wherein the capacity of CMD, HSCC to appoint an arbitrator was analyzed. The Hon’ble Supreme Court held that in the TRF case the ineligibility of the Managing Director arose due to his interest in the outcome of the dispute. The same ground would be applicable in the scenario irrespective of the binary power of the arbitrator. In other words, if the appointed arbitrator has an interest in the dispute or in the outcome or decision thereof, he shall be incompetent to adjudicate the dispute as an arbitrator and/or disentitled to appoint any other person as an arbitrator.

The Hon’ble Court stated that the facet of exclusivity shall encompass the party that unilaterally appoints the sole arbitrator of its choice and discretion in spelling the course of the proceedings. Thus, the essence of the Act along with the TRF case was retained by upholding that it would be incongruous to confer the power of appointing an arbitrator in the hands of a person who has an interest in the outcome or decision of the dispute. The appointment made by the Respondent who was empowered in accordance to the dispute resolution clause was annulled and the Hon’ble Court exercised its power under Section 11(6) resulting in the appointment of a sole arbitrator to preside over the disputes between the parties.

The Hon’ble High Court of Delhi echoed this principle in the case of Bilva Knowledge Foundation and Ors. v. CL Educate Limited[3] where the court conceded with the view, followed by the case of Proddatur Cable TV DIGI Services v. SITI Cable Network Limited[4] wherein the distribution agreement vested a unilateral right to appoint the sole arbitrator on the Respondent Company which disagreed with the nomination of arbitrator proposed by the Petitioner. The High Court held that test of having an interest in the outcome of the dispute will be exhibited by the Respondent Company acting through its Board of Directors thereby vitiating the unilateral appointment. The High Court clarified that though party autonomy is a touchstone in arbitration, one cannot overlook the underlying principles of fairness, transparency and impartiality that are also fundamental in an arbitration. While the parties may agree to the procedure mentioned in the dispute resolution clause by free will, this agreement should not eclipse the facet of fairness and impartiality in an arbitration proceeding.

Concluding remarks

In cases where both parties can nominate their respective choice of arbitrators the power derived by one party is counter balanced by an equal power with the other party as seen in the Central Organisation for Railway Electrification v. ECI-SPIC-SMO-MCML (JV)[5].  Though it may seem that the law governing the right of the lender to appoint the sole arbitrator as upheld in the case of D.K. Gupta and Ors. v. Renu Munjal[6] is now settled through the Perkins case, one has to be prudent in drafting and interpreting the clauses for the appointment of sole arbitrator that may be reached by mutual consent or by court appointment or any other alternative thereby balancing party autonomy and the tenets of fairness, transparency and impartiality.

 

References:

[1] AIR2020SC59

[2] (2017)8SCC377

[3] Arb. P. 816/2019

[4] 267(2020)DLT51

[5] 2020(1)ALT70

[6] O.M.P. (T) (COMM.) 106/2017 & IA No. 14824/2017

 

 

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In cases where both parties can nominate their respective choice of arbitrators the power derived by one party is counter balanced by an equal power with the other party as seen in the Central Organisation for Railway Electrification v. ECI-SPIC-SMO-MCML (JV).

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Undue delay in passing Arbitral Award in violation of Public Policy?

A clause for Alternate dispute resolution (ADR) is incorporated in a contract to ensure avoidance of lengthy and costly legal procedures. Undue delay in arbitration procedure tends to vitiate this essential objective that ADR seeks to achieve.  Further, the ADR process is designed to minimize the interference of courts, however, it is more of fiction as parties unhappy with the outcome of the process take the legal recourse as a dilatory tactic. Therefore, it is essential that arbitral awards are set aside only when there is a grave injustice or is unreasonable on the face of it[I].

 

Some light was shed on the issue recently by the Hon’ble Madras High Court in the case of Mr. K. Dhanasekar v Union of India and Ors[ii]. The court set aside an arbitral award on an application made to it under section 34 of the Arbitration and Conciliation Act, 2015 holding that undue and/or inordinate delays in passing an award are in fact violative of public policy.

 

Factual Matrix:

 

The Petitioner, an engineering contractor, entered into an agreement with the Respondent, Southern Railways, for the collection and supply of 50 mm size machine crushed hard granite ballast for railway track doubling purposes. Certain disputes arose between the parties, and in accordance with the provisions of the contract which provided for settlement of disputes by arbitration, an arbitral tribunal consisting of three arbitrators was constituted. The learned arbitral tribunal dismissed the claim of the claimant in its entirety and allowed the counterclaim of the respondent. Challenging the same, the Petitioner approached the Hon’ble Madras High Court.

The Petitioner, inter alia, contended that there was a severe delay in passing the award. The arbitral tribunal passed the impugned award after a period of 3 years and 7 months which was not a reasonable time period. The Respondent countered that the learned arbitral tribunal, upon hearing the parties at length and upon consideration of all facts and circumstances, had passed the impugned award. Further, the delay in passing the award had not caused any prejudice to anyone and therefore, the award must not be set aside.

 

Issue:

 

Whether inordinate delays in passing an arbitral award was sufficient cause to set aside the impugned award.

 

Judgment:

 

The Hon’ble Court observed that the fact that there were delays in passing the impugned award was not disputed. What was disputed was whether such delay warranted the interference of the Hon’ble Court in setting aside the award.

To answer the question, reliance was placed on the decision of the Hon’ble Delhi Court in the case of Harji Engineering Works Pvt. Ltd. v Bharat Heavy Electricals Limited[iii], wherein the Hon’ble Delhi High Court had held that an arbitrator was required to make and publish an award within a reasonable period of time, and in the event that there is a delay, the same had to be adequately explained. The lack of any satisfactory explanation to such delays would be prejudicial to the interests of the parties. The Hon’ble Delhi High Court also held that the parties to an arbitration agreement had the right to be satisfied that the arbitrator was conscious of and had taken into consideration all contentions and claims before adjudicating on the claim. An inordinate delay from the last date of hearing would not provide such satisfaction to the parties.

The Hon’ble Madras High Court, adopting the same rationale found that arbitrators are likely to forget the contentions and pleas raised by parties during the course of arguments. Further, unexplained delay in passing an arbitral award was violative of the public policy of India and therefore liable to be set aside.  

       

Conclusion:

 

The Hon’ble High Court has proceeded on the assumption that the arbitrators must have forgotten the arguments placed by the parties, despite the fact that written submissions were placed on record by each party. Additionally, Section 29A introduced by the Arbitration Amendment Act, 2015 (further amended in 2019) has prescribed a time limit of 12 months from the date of completion of pleadings, within which period, the Arbitrator must necessarily make the award.  Although the amendment is not applicable to the case at hand (Consequent to the decision of the Supreme Court in Board of Control for Cricket in India v. Kochi Cricket Pvt. Ltd. and Ors[iv] on the retrospective application of the Arbitration Amendment Act, 2015), however, a similar case today would reach the same fate because of these set timelines. The said decision, as well as the amending provision, have the tendency of acting as a tool for the losing party to have the arbitral award set aside on procedural ground rather than on merits. These also increase the interference of the court which might result in unnecessary delays which the amending provision or the decision basically condemns. Further, with the 12 month or 18 months limit (if extended by the parties), the delay might not happen in ADR proceedings but may happen in the legal proceedings which the parties seek to avoid by opting for the ADR mechanism in the first place. In addition, court interference or dependence would hamper the confidentiality that parties seek to achieve through the ADR process. This is violative of the sanctity of arbitral awards and goes against the very fabric of the Arbitration and Conciliation Act itself.

Finally, the Arbitration Council being set up through the 2019 amendment, to undertake necessary measures to promote and encourage the ADR mechanism and to frame policy and guidelines for uniform professional standards, must take cognizance of this. Although provisions for penalizing arbitrators have not been provided in the amendment, the Arbitration Council should consider making regulations on the same to ensure compliance. This might provide an impetus to the overall arbitration process and ensure timely resolution in a fair and equitable manner while avoiding the interference of the court.

References:

 

[i] Oil and Natural Gas Corporation Ltd., v. Saw Pipes Ltd., [2003 (5) SCC 705]

[ii] O.P. No. 4 of 2015 and O.A. No. 31 of 2015 at http://164.100.79.153/judis/chennai/index.php/casestatus/viewpdf/489701

[iii] [2009 (107) DRJ 213]

[iv] (SLP (C.) No. 19545-19546 of 2016)

 

 

Image Credits: Photo by Aron Visuals on Unsplash

The Hon’ble High Court has proceeded on the assumption that the arbitrators must have forgotten the arguments placed by the parties, despite the fact that written submissions were placed on record by each party. Additionally, Section 29A introduced by the Arbitration Amendment Act, 2015 (further amended in 2019) has prescribed a time limit of 12 months from the date of completion of pleadings, within which period, the Arbitrator must necessarily make the award.

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