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Online Dispute Resolution: A Game Changer

May 26, 2023
Saurabh Bindal
Randeep Sabharwal

As a result of COVID-19’s influence, there had to be adjustments made to how arbitrations for conflict resolution are conducted and this is how Online Dispute Resolution (ODR) came into being. ODR is an extension of Alternative Dispute Resolution (ADR) that takes place through digital platforms. In essence, it denotes e-ADR and is an integration of technology with ADR. It typically consists of one or more of the following: negotiation, mediation, arbitration, or some combination of these.

As online commerce has grown, so has the necessity for a dispute resolution system to handle any disagreements that may arise. In 1996, researchers at the University of Massachusetts and the University of Maryland took the first steps towards developing ODR programmes. eBay’s online mediation model for buyer-seller disagreements was launched in the year 1999. To help its users work out their differences, eBay implemented a system of online mediation. In just two weeks, this project was able to settle 200 disagreements. In 2010, eBay’s online mediation process resolved more than 60 million conflicts, allowing the company to reach more equitable outcomes for all parties involved. The global success of these relatively small platforms has attracted the interest of governments throughout the world. In 2004, New York County was the first in the nation to use ODR. After seeing the success of ODR systems like Brazil’s Consumidor.gov and Europe’s European Online Disputes Resolution Platform, governments around the world began adopting similar systems.

In June 2020, Niti Aayog, in India, brought together key stakeholders, including senior judges of the Supreme Court, secretaries from key government ministries, and leaders of the industry, for advancing ODR in India. Thereafter, on June 10, 2021, a handbook was released containing rules, policies, and expectations from the system. India is in grave need of a system like ODR because the Indian judicial system is under tremendous pressure with over 4.7 million cases pending across different levels of the judiciary. Due to this, there is a huge backlog of cases that are pending for the past 30 years.

ODR is time and cost-effective, and this is a very important factor in delayed justice. The economic burden associated with dispute resolution can hinder a person’s access to justice. Anyone with the help of ODR can do the arbitration from anywhere, and ODR also has the potential to reduce legal costs. The system of ODR is quicker at giving awards and resolving issues than ADR. Since it’s conducted online, the synchronisation of schedules is also done with much ease. It also eliminates the bias made by human judgement as it is much more secure and strict and the proceedings are easily available, and any higher authority can review the whole process.

For any system to grow, the governance framework must encourage the growth of innovation both within the government and the private sector. Even though ODR is still in its development stages, it has already started to show great potential by reducing the load on overburdened courts and resolving matters more effectively. ODR is the future of dispute resolution. We should accept it rather than oppose it, as it delivers efficiency and is cost-effective. Overall, ODR has the potential to transform the Indian judicial system by being a more efficient and accessible system of dispute resolution. With the right support, ODR can become an integral part of India’s legal ecosystem and contribute to the country’s growth and development.

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Validity of Unstamped Arbitration Agreements: A Scrutiny of Dissenting Opinions

May 12, 2023
Saurabh Bindal
Akanksha Batra

A five-judge Bench of the Supreme Court comprising Justice K.M. Joseph, Justice Aniruddha Bose, Justice C.T. Ravikumar, Justice Hrishikesh Roy, and Justice Ajay Rastogi while deciding an appeal on 25^th April 2023, held that an arbitration agreement in an unstamped contract which is liable to be stamped will not be considered valid in law. Until now, arbitration clauses were considered as separate agreements and this pronouncement will have a deep-rooted effect on the law of the land.

Introduction

Settling the long-standing debate around the validity and enforceability of an unstamped arbitration agreement and putting an end to contradictory judicial pronouncements surrounding the issue, the Apex Court delivered the judgment in N.N. Global Mercantile v. Indo Unique Ltd.[1] by a 3:2 majority, while Justice Ajay Rastogi and Justice Hrishikesh Roy dissented and were of the view that arbitration agreements are valid till the pre-referral stage. In this article, we analyse the majority and minority views while referring to the concepts of separability and Kompetenz-Kompetenz.

Background

The Petitioner and Respondent had entered into a subcontract which contained an arbitration clause. The case began when the Respondent approached the Commercial Court invoking arbitration proceedings against the Petitioner under Section 8 of the Arbitration and Conciliation Act, 1996 (the Act) when certain disputes arose between the two pertaining to the invocation of a bank guarantee furnished by the Petitioner. On rejection of the application by the Commercial Court, the Respondent filed a revision application before the Bombay High Court. Consequently, the Bombay High Court allowed the Respondent to withdraw the revision application and approach the Court by way of a writ petition[2], wherein the Court held that the Section 8 application was maintainable before it and the issue of unenforceability of the arbitration clause owing to the unstamped and unregistered subcontract can be raised before the Arbitral Tribunal under Section 11 of the Act. Aggrieved by the decision of the Bombay High Court, the Petitioner filed a Special Leave Petition before the Supreme Court which was heard by a three-judge Bench. When faced with this issue, the court, overturning the decision laid down in SMS Tea Estates (P) Ltd. v. Chandmari Tea Co.[3] and Garware Wall Ropes Ltd. v. Coastal Marine Constructions and Engg. Ltd. held that the independence of the arbitration clause will be deemed supreme and will not be vitiated owing to the insufficient stamping and thus cannot be a ground for refusing the arbitrator’s appointment[4].

The bone of contention, however, persisted regarding the enforceability of the arbitration clause in the unstamped subcontract and the Supreme Court referred the matter to a five-judge bench for the very reason that in the case of Vidya Drolia v. Durga Trading Corpn[5], a co-ordinate bench held differently.

The Majority View

Fast forward to 2023, the five-judge Bench held arbitration agreements in unstamped contracts as invalid by a majority. The Supreme Court held that an instrument containing an arbitration clause which is bound to be stamped and registered but is not, does not fit within the definition of a contract under Section 2(h) of the Indian Contract Act, 1872 and hence cannot be enforceable in law. The majority view reasoned that the doctrine of arbitration will be followed and that in case of an original agreement being produced which is unstamped, the Court under a Section 11 application is bound by law to proceed as per Sections 33 and 35 of the Indian Stamp Act, 1899 and impound such an agreement and the Courts must follow the law as per due procedure to ultimately remove the defect.

Prior to NN Global, the Supreme Court while examining the same issue in SMS Tea Estates, held that an arbitration clause in an unstamped arbitration agreement cannot be acted upon for the appointment of an arbitrator owing to the rationale that an instrument which mandatorily needs to be registered and is chargeable under the Stamp Act cannot be admitted into evidence and loses credibility.

A two-judge bench in Garware Wall Ropes also upheld the rationale in SMS Tea Estates while adding that the introduction of Section 11 (6-A) does not alter the position of law and the existence of the arbitration clause will survive only if the contract is stamped and registered, being duly valid in law as the arbitration clause cannot be culled out of the main contract and be considered a separate entity[6]. Recently in 2021, a three-judge bench in Vidya Drolia also affirmed the findings in SMS tea estates and Garware wall ropes.

Merit in Dissent

The objective of the Indian Stamp Act, 1899 is primarily to generate revenue for the State. In this regard, Section 33 of the Act empowers the Authority to examine and ascertain whether the stamp duty on an instrument presented before them has been duly paid. In case of a situation to the contrary, the Authority is to impound the document and direct the parties to pay the stamp duty with or without levying a penalty.

A perusal of Section 35 further reveals that no instrument can be admitted in evidence which does not carry the requisite stamp duty the instrument is liable for. However, the proviso to said Section further provides a cure in case of this defect by allowing its admission into evidence after payment of the requisite stamp duty and the penalty. Thereby revealing that such a defect can be cured even at a later stage and that an unstamped or insufficiently stamped instrument can be turned valid in law by fulfilling the criteria laid out in the proviso to Section 35. Justice Rastogi, on similar lines, noted his dissent by opining that the Stamp Act is not rigid in making the instrument invalid in law and provides for a mechanism to rectify and fulfil the criteria prescribed under Section 35 even at a later stage. Following this scheme, Section 42 of the Stamp Act further envisages that in case of an impoundment under Section 33, such an instrument can be endorsed by the Collector so authorized and then be admitted in evidence. Hence, the law clearly provides for the admissibility of such instruments which may lack or suffer from insufficient stamp duty and nowhere envisions their complete invalidity in law.

Moving on to the Arbitration and Conciliation Act, 1996, he further held that the legislative intent behind the enactment of the Act was to avoid arduous litigation procedures and hasten the dispute resolution processes. A harmonious interpretation of the Indian Stamp Act, 1899 and the Arbitration and Conciliation Act, 1996 needs to be adopted to provide an interplay between the two to meet the ends of justice. The applicability of Section 33 and 35 of the Indian Stamp Act, 1899 to a Section 11 application under the Arbitration and Conciliation Act, 1996 which deals with the appointment of an arbitrator essentially defeats the purpose of speedy disposal of cases by focusing on procedural irregularities which can be cured. Section 11, following the doctrine of Kompetenz-Kompetenz, provides that the Court may restrict its interference only to the “existence” of an arbitration agreement and leave subsequent issues such as validity and scope for the tribunal to adjudicate. It can be inferred that impounding and invalidity of the arbitration agreement at the pre-referral stage will only create more roadblocks and increase interference by courts thereby defeating even the purpose of the Arbitration and Conciliation Act, 1996 and will have no effect on the existence of the arbitration agreement.

Justice Roy in his dissenting opinion was also of the view that a non-stamped or an insufficiently stamped instrument would still be enforceable for the appointment of arbitrators under Section 11 and courts should restrict their scrutiny only to the existence of the agreement to keep judicial interference in check in order to meet the objective of the 2015 amendment.

The Gordian Knot

While arriving at the decision in N.N. Global, the well-established principle of separability[7] in arbitration jurisprudence has not been considered which puts India in a precarious position in its quest to become a hub for Commercial Arbitration. The principle of separability acknowledges that an arbitration agreement is autonomous from the commercial contract it forms a part of[8]. This autonomy is based on the concepts of separability and kompetenz-kompetenz. This doctrine further implies that the invalidity or ineffectiveness of the underlying commercial contract will not vitiate the arbitration agreement. This has also been embodied in Section 16 of the UNICITRAL Model Law which allows the Arbitral Tribunal to rule upon its own jurisdiction including matters regarding existence and validity[9].

Conclusion

The authors believe that this landmark ruling will have far-fetched consequences. The principle of separability of the arbitration agreement will have to see a complete metamorphosis to align itself with the ruling. The question of stamping is not related to the jurisdiction of the Arbitral Tribunal, but it relates to the issue of admissibility. At the pre-arbitral stage, the dissent of N.N Global intrigues the way in which the discourse of arbitration “should be”. It would be axiomatic to state that the majority has set the law of the land by laying down a parameter to be checked in a Section 11 petition.

References:

[1] N.N. Global Mercantile v. Indo Unique ltd, 2023 SCC OnLine SC 495.

[2] Article 226, The Indian Constitution, 1950.

[3] SMS Tea Estates (P) Ltd. v. Chandmari Tea Co. (2011) 14 SCC 66.

[4] N.N. Global Mercantile v. Indo Unique ltd, 2021 SCC OnLine SC 13

[5] Vidya Drolia v. Durga Trading Corpn, (2021) 2 SCC 1.

[6] Garware Wall Ropes Ltd. v. Coastal Marine Constructions and Engg. Ltd, (2019) 9 SCC 209.

[7] Heyman v. Darwins Ltd. 1942 AC 356 (HL).

[8] Ibid.

[9] §16(1), United Nations Commission on International Trade Law, UNCITRAL Model Law on International Commercial Arbitration 1985: with amendments as adopted in 2006 (Vienna: United Nations, 2008), available at www.uncitral.org/pdf/english/texts/arbitration/ml-arb/07-86998_Ebook.pdf.

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Scope of Enquiry Under Section 11 of the Arbitration and Conciliation Act, 1996

October 13, 2022
Saurabh Bindal
Siddharth Baskar

In the recent case of M/S. Emaar India Ltd v. Tarun Aggarwal Projects LLP & Anr[1]., the Hon’ble Supreme Court has held and reaffirmed its earlier view that under a Section 11 petition in the Arbitration and Conciliation Act, 1996, the Court can determine whether or not a dispute is arbitrable by conducting a preliminary inquiry.

Brief Facts

The case concerns Tarun Aggarwal Projects LLP & ANR (Respondents) who entered into a collaboration agreement with Emaar India Ltd. (Appellant) for the development of residential colonies located in Gurugram, Sector 62 and 65. Both parties entered into an agreement on May 7, 2009. After this, both parties signed an Addendum Agreement on April 19, 2011. Soon a dispute arose between the parties and the Respondents stated that the Appellant had not followed the obligation specified under the Addendum Agreement. Thereafter, a legal notice was issued on behalf of the Respondents on December 11, 2019, demanding the physical possession of 5 plots measuring 2160 sq. yds. and claiming a sum of Rs. 10 crores for the losses/damages suffered by them. The Respondents contended that the dispute is arbitrable in nature as mentioned under clause 37 of the Addendum Agreement. Hence, they appointed an arbitrator who was a former judge of the Hon’ble High Court. The Appellant refused the appointment of the arbitrator following which a petition under Section 11 was filed by the Respondents before the Hon’ble High Court of Delhi.

At this stage, it would be important to refer to Clauses 36 and 37 of the Addendum Agreement, which read as follows:

Dispute Resolution & Jurisdiction

“In case of any conflict or difference arising between the parties or in case the either party refused or neglects to perform its part of the obligations under this Addendum Collaboration Agreement, interalia as mentioned in Clauses 3, 6 & 9 hereinabove, then the other party shall have every right to get this agreement specifically enforced through the appropriate court of law”.
Save & except clause 36 hereinabove mentioned, all or any dispute arising out of or touching upon or in relation to the terms of this Agreement including the interpretation and validity thereof, and the respective rights and obligations of the parties, shall be settled through under the provisions of Arbitration & Conciliation Act, 1996 wherein both the parties shall be entitled to appoint one Arbitrator each and the Arbitrators so appoint shall appoint a third Arbitrator or rank of Retired Judge of any High Court. The arbitration proceedings shall be governed by the provisions of Arbitration and Conciliation Act, 1996 or any statutory amendments/modification thereto for the time being in force. The arbitration proceedings shall be held at Delhi.”

Before the Hon’ble High Court, it was contended by the Appellant that the dispute relates to the breach of clauses 3, 6 and 9. Therefore, it is only the Court which has the jurisdiction to entertain the dispute as per the terms of Clause 36 of the Addendum Agreement. The invocation of arbitration by the Respondents which was contended by the Appellant was thus not in alignment with the agreed terms. Alternatively, in the prayer, the Appellant suggested the nomination of their arbitrator. The Hon’ble High Court examined clauses 36 and 37 of the Addendum Agreement and held that conjoint reading of both the Clauses makes it clear that a party does have a right to seek enforcement of agreement before the Court of law, but it does not bar settlement of disputes through Arbitration and Conciliation Act, 1996. Moreover, Clause 37 also suggests how arbitration proceedings shall be conducted. On this ground, the Hon’ble High Court proceeded with the appointment of the third arbitrator. Aggrieved by the order of the Hon’ble High Court, the Appellant approached the Hon’ble Supreme Court.

Observations of the Supreme Court

The seminal issue before the Hon’ble Supreme Court was whether the Hon’ble High Court has made a justified decision to appoint an arbitrator under Sec. 11(5) and 11(6) of the Arbitration Act without having a preliminary inquiry under Sec. 11 to decide the arbitrability of the dispute.

The Hon’ble Supreme Court looked at both clauses and determined that on a bare reading of Clause 36 of the Agreement, it is apparent that in the event of any dispute as mentioned in Clauses 3, 6 and 9, the other party shall have a right to get the Agreement specifically enforced through the appropriate court of law. As per Clause 37, save and except Clause 36, all or any dispute arising out of or touching upon or in relation to the terms of the addendum agreement shall be settled under the provisions of the Arbitration and Conciliation Act, 1996. Thus, with respect to any dispute as mentioned in Clauses 3, 6 & 9, such disputes are not arbitrable at all.

The Hon’ble Supreme court also cited Vidya Drolia and Ors. v. Durga Trading Corporation[2] and held that it is incumbent upon Courts to hold a preliminary enquiry under a Section 11 petition filed under the Arbitration and Conciliation Act, 1996. The Hon’ble Supreme Court noted that the Hon’ble High Court had erred in its decision and the matter was remitted back to the Hon’ble High Court to decide the petition and pass an appropriate order after having the preliminary inquiry on arbitrability of the dispute. The Hon’ble Supreme Court held that the objective of prima facie review at the reference stage is to cut the deadwood and trim off the side branches in straightforward cases where dismissal is barefaced and pellucid and when on the facts and law the litigation must stop at the first stage.

Conclusion

It is important to note that under Section 11 of the Arbitration and Conciliation Act, 1996, the Courts will do a preliminary enquiry as to the arbitrability of the disputes. The law in this regard has been settled by the Hon’ble Supreme Court. The purpose of such an enquiry is limited to pruning of matters which would not fall in the category of arbitrable matters. The Supreme Court had in the case of Vidya Drolia and Others v Durga Trading Corporation laid down a four-pronged test to determine when the subject matter of a dispute in an arbitration agreement is not arbitrable:

When the cause of action and subject matter of the dispute relates to actions in rem, that do not pertain to subordinate rights in personam arising from rights in rem.
When the cause of action and subject matter of the dispute affects third party rights; has erga omnes effect; require centralized adjudication, and mutual adjudication would not be appropriate and enforceable;
When the cause of action and subject matter of the dispute relates to an inalienable sovereign and public interest functions of the State, hence mutual adjudication would be unenforceable;
When the subject matter of the dispute is expressly or by necessary implication non-arbitrable as per mandatory statute(s)

References:

[1] 2022 SCC OnLine SC 1328.

[2] (2021) 2 SCC 1.

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The Hon’ble Supreme Court held that the objective of prima facie review at the reference stage is to cut the deadwood and trim off the side branches in straightforward cases where dismissal is barefaced and pellucid and when on the facts and law the litigation must stop at the first stage.

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Validity of an Arbitration Clause: No Strait-Jacket Formula

14 September, 2022
Saurabh Bindal
Siddharth Baskar

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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Blockchain Arbitration: The Future of Dispute Resolution

The current buzzword- Blockchain has advanced from being a theoretical concept to reaching the sphere of technology where it is shaping today’s society and the legal profession. The field of legal technology has not only streamlined knowledge management requirements and operational aspects of a legal office, but also transformed the way lawyers practice law!

Smart contracts and blockchains have the potential to alter the way documentation and dispute resolution are approached. Hence the concepts need integration, implementation and recognition with arbitration for a more efficient, cost-effective and automated structure.

Smart Contracts, Blockchain and Arbitration

These self-executing, new generation contracts are geared towards the realization of predetermined conditions. With the help of smart contracts, Blockchain Arbitration can facilitate storing and verification of rules and automated execution (upon a particular event constituting a breach of the agreement) by invoking the arbitration clause incorporated in the smart contract.

In case of a dispute, the smart contract will notify the Arbitrator via a blockchain-based dispute resolution interface. A party can digitize the terms of an agreement, lock the funds into a smart contract, and condition the intelligent contract so that the task at hand is fulfilled and the funds will pass through. Upon completion of the process, the self-executable nature of the smart contract will automatically enforce the award and transfer the prescribed fee to the Arbitrator.

However, it is yet to be seen how smart contracts shall interact with data protection and privacy laws, intricacies of dispute resolution, and obligations and rights of the parties involved.

Blockchain Technology: An aid to Arbitration?

Arbitration aims to be a time-bound and specialized decision-making process. In this backdrop, Blockchain Arbitration theoretically promises to be an ideal structure for the trial process in the following ways:

Briefs, Transcriptions & Document Management: The tool in the blockchain system can quickly and efficiently provide synopsis and briefs of the record which would be beneficial not only to the Tribunal but to the parties.
Elimination of intermediaries and cost-effectiveness: There shall be no mechanism requiring approval and control at every stage, and the intermediary institutions are not included in the process. For instance, Banks, involved as intermediary institutions in legal and financial transactions, incur costs at every stage of the transaction and are time-intensive in nature.
Automation: A blockchain-based dispute resolution platform would exclude oral hearings and the Arbitrator’s decision and automate other aspects of filing of pleadings, filing of documentary evidence, correspondence with the Arbitral Tribunal.
Ease in making the Arbitral Award: Blockchain tools can assist the Tribunals in preparing awards. The tools ensure that all necessary ingredients to make the arbitral award reasoned and enforceable have been taken care of. The blockchain will continue to prepare the award from the beginning as the arbitration progresses.
Confidentiality / Security of Data: Blockchain is the safest way of storing information. Each block will be authenticated by the Arbitral Tribunal and the party to the proceedings. There is no provision for changing, altering or deleting the data unilaterally. It can only be done when it is authenticated by the Arbitral Tribunal and the party to the proceedings. Since third parties are entirely absent from the proceedings, the possibility of breach of data and information is negligible. Disputes arising out of smart contracts can be made confidential which will limit the exposure of the nature of dispute between the parties. Blockchain has a decentralized structure and the security of the system is protected by cryptography.
Removal of human error: The reliability and validity of a transaction depend upon the accuracy of the algorithm underlying the transaction. Since, each transaction is based on algorithms, which are mathematical models, it is free from human influence and intervention and, consequently, human error.

Security and privacy of data are primary concerns in the conventional Arbitral process. In fact, as a specific case representing the flaws of the present model of international arbitration, in July 2015, the website of the Permanent Court of Arbitration was hacked during an essential hearing of maritime border arbitration between China and the Philippines, in the international arbitration of the “Republic of Philippines v. People’s Republic of China.”[1]

As far as the credibility of blockchain technology in resolving such issues is concerned, the World Economic Forum, in its 2015 survey recognized that by 2025-27, about 10% of the global GDP would be stored in blockchains, owing to its efficient attributes of data security management. By 2025, even taxes are strongly probable to be collected by employing blockchain technology. Moreover, in its research published in 2018, World Trade Organisation described at length the opportunities that lie ahead in the future, owing to the efficacy associated with the safeguard mechanisms of blockchains.

Legal Recognition of Blockchain Arbitration and procedure to be adopted

The UNCITRAL Electronic Model Law on Electronic Commerce (1996 Convention) and the ‘UNCITRAL Convention on Electronic Communications in International Contracts (2007 Convention)’ are the primary legal instruments facilitating blockchain contracts.[3]

Articles 6 and 18 of the 2007 Convention assert the validity of on-chain arbitration by allowing for electronic data records and electronic transactions in the arbitration process, thereby providing legal recognition to on-chain arbitrations.

Appointment of an Arbitrator

Once the notice of arbitration has been sent, the appointment of an arbitrator can be done through blockchain. Thus, the exchange of documents, e-mails, and messages, etc. are all recorded automatically and replicated at all stakeholder’s computers without the involvement of any third party. The case management conference can be done online using a video conferencing facility of blockchain which is recorded and filed in the computers of all stakeholders in original and thereby removing manipulation.

Pleadings

The pleadings including a statement of claim, statement of defense, counterclaims, and reply to counterclaims and further submissions can be submitted online and are automatically served to the parties & the Tribunal along with automated acknowledgment. This ensures timely submissions and helps in maintaining uniformity in the pleadings thus circulated. Any delay will also be penalized in terms of the penalty prescribed by the Tribunal or as agreed by the parties. The fear of ex-parte communication will also be mitigated when the procedural orders and communication by the Tribunal will be auto-delivered to both parties.

Interim Measures

Interim measures that are sought from courts can be executed on the blockchain if the judicial system of a particular jurisdiction allows for a seamless digital interface with the parties’ computers. In the case of an automated interface with the judicial system, the execution of court orders can also happen immediately provided the jurisdiction’s administrative machinery is using blockchain.

Recording of Evidence & Preparation of Award

The efficiency of blockchain can be seen in evidence-taking and award preparation. Witness conferencing, cross-examination, and taking of oral evidence can be easily done using video conferencing suites, or even if hearings are done physically, they can still be transferred on blockchain and stacked for procedural integrity. Statements of expert witnesses, oral submission by experts, and expert communications can be recorded on the blockchain.

Security of Data

Blockchain is a secure way of storing information because each block is replicated and authenticated by all stakeholders. The provision to alter or delete any data does not exist until authenticated by all stakeholders. In the absence of intervention of a third party, there is no network administrator or supervisor making the possibility of data breach negligible.

Globally, blockchain technology is being readily resorted to as an effective means of data storage, management, distribution, and transfer. Blockchain technology has immense potential to enhance the efficacy of Arbitral proceedings, especially owing to its mechanism of encryption, which helps secure data.

Contemporary issues in Blockchain Arbitration

The functioning of blockchain arbitration highlights various concerns. Firstly, in an on-chain arbitration, there would be no requirement for oral hearings which are integral to the current justice system and stand at a juxtaposition with the principles of natural justice.

Secondly, an essential principle of arbitration is the underlying idea of confidentiality. Despite the strong protection afforded by blockchain, data privacy can pose a significant concern when an independent third party gets involved as an oracle in dispute resolution. The General Data Protection Regulation (GDPR) provisions are not currently empowered enough to regulate the intricacies in the decentralized functioning of blockchain, which makes it difficult to impose liability on data controllers. Furthermore, the traceable feature of blockchain is again in conflict with the GDPR’s requirement of the “right to be forgotten“.

Thirdly, The New York Convention on the Enforcement of Foreign Arbitral Awards of 1958 (hereinafter referred to as “the New York Convention”) is the most prominent code on enforcing international arbitral awards with 166 contracting states to the Convention. According to Article II of the New York Convention, an arbitration agreement must be in “writing” and requires the parties’ signature. However, in a virtually operative blockchain arbitration, there is no scope for written agreements or signatures.[4]

Challenges in the enforceability of the Blockchain arbitration award in India

Lack of enforceability of the agreement itself under the New York Convention

One problem identified with the enforceability of blockchain arbitration awards is the lack of enforceability of the agreement itself under the New York Convention which requires such agreements to be in writing or through an exchange of telegrams/telefaxes.

Section 7 of the Arbitration and Conciliation Act, 1996 requires that a valid arbitration agreement should be in “writing”. However, unlike Article II of the New York Convention, Section 7 of the Arbitration and Conciliation Act, 1996 clarifies that an agreement would be considered as having been made in writing if it has been communicated through “electronic means”. The allowance for “electronic means” was introduced through the Arbitration and Conciliation (Amendment) Act, 2015, yet remains undefined.

Theoretically, it can be asserted that an award generated in a blockchain arbitration may fall within the ambit of the definition of an ‘electronic record’ under the Information Technology Act, 2000.

Difficulty in determining Awarding Country in a Blockchain Arbitration

India although is a signatory to the New York Convention, only foreign awards made in only certain Contracting States of the Convention (gazetted by the Central Government) can be enforced in view of India’s reciprocity reservation. India has gazetted less than 1/3^rdof all of the Contracting States to the New York Convention.[5]

In the working of a blockchain arbitration, Arbitrators are appointed by a blockchain-based dispute resolution platform. The award is generated on a blockchain and circulated to the parties before the Arbitrator. The parties may be in different countries and the origin/awarding country may be difficult to trace out. In the absence of details of an awarding country, the enforceability of such an award in India becomes a daunting task.

Enforcement of Arbitral Award

As per the Arbitration and Conciliation Act, 1996, an application for enforcement of an arbitral award shall be accompanied by an original arbitral award. In a blockchain arbitration, the award is circulated as an electronic record in the blockchain to the parties directly. The concept of a hard copy/original award is alien in blockchain arbitration.

Conclusion and Suggestion

A conspectus of the aforesaid facets of the blockchain system shows that the same needs multi-fold reforms before being set to use by the legal fraternity. Even though the blockchain assures, to a great extent, protection of data, but it cannot be forgotten that the hackers also keep updating their own skills and no technology is flawless. The blockchain system has to be made dynamic enough so as to keep abreast with the challenges of new advents in unethical hacking.

Secondly, it is also required that a proper training module is formulated for lawyers of the participating countries which shall ensure unimpeded use of the technology.

Lastly, the author strongly recommends that the use of blockchain should be limited only to procedural aspects in such cases where the dispute involves issues of interpretation of the clauses and or statutes including common law. This may be achieved by adopting a hybrid model of dispute resolution with embedded human intervention modules.

References:

[1]Gargi Sahasrabudhe, Blockchain technology and arbitration, VIA Mediation & Arbitration Centre, (Nov. 3, 2021, 5:00pm), https://viamediationcentre.org/readnews/ODE1/Blockchain-technology-and-Arbitration

[2]Athul aravind, Blockchain arbitration: the future?, Law and Dispute resolution blog, (Nov. 3, 2021, 5:00pm), https://www.mappingadr.in/post/blockchain-arbitration-the-future

[3] Dena Givari, How does arbitration intersect with the blockchain technology that underlies cryptocurrencies, Kluwer Arbitration Blog, Wolters Kluwer, (Nov. 6, 2021, 8:00pm), http://arbitrationblog.kluwerarbitration.com/2018/05/05/scheduled-blockchain-arbitration-april-17-2018/

[4] Idil Gncosmanoglu, Blockchain-smart contract and arbitration, Mondaq, (Nov. 5, 2021, 5:00pm), https://www.mondaq.com/turkey/fin-tech/967452/blockchain-smart-contracts-and-arbitration.

[5] Ritika Bansal, Enforceability of awards from blockchain arbitrations in India, Kluwer arbitration Blog, http://arbitrationblog.kluwerarbitration.com/2019/08/21/enforceability-of-awards-from-blockchain-arbitrations-in-india/, (2019)

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The use of blockchain should be limited only to procedural aspects in such cases where the dispute involves issues of interpretation of the clauses and or statutes including common law. This may be achieved by adopting a hybrid model of dispute resolution with embedded human intervention modules.

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Appointment of Sole Arbitrator: Two Sides of the Same Coin

06 November, 2020
Shweta P Iyer

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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Evolution of the Doctrine of Public Policy in Arbitration

13 October, 2020
Lubna Fairoze

The pendency of litigation and piling up of cases in courts was the necessity which led to the discovery of alternative dispute resolution mechanisms. These tools of dispute resolution are highly efficient, time-bound and cost-effective. Further, as the dispute resolution is amicable, the delicate and long-standing relationship of parties is preserved. It is for this reason separate tribunals are set up for arbitration, independent mediators can be appointed for mediation and a number of unaided negotiations take place between the parties for settlement of any disputes.

Arbitration is also familiar as a form of private litigation as to some extent the formalized means of dispute resolution; witness examination, expert opinions, and binding nature of the arbitral award will substantiate the fact. However, with enhanced remedial and appellate participation from the judiciary, the idea of ‘alternative’ dispute resolution seems to replicate a façade. The primeval legislation, Arbitration Act of 1940 provided for a triangular remedial setup, namely rectification, remission, and setting aside of the arbitral award. This was narrowed down to remission and setting aside of the award in the subsequent Act, 1996.

A noteworthy argument here is, that the arbitration disputes are often referred to as, ‘matters’ and not ‘suits’, this is a practice to limit the authority of courts over these disputes. The term ‘judicial authority’ is not construed in a narrow sense, rather derives a wider import to itself by the virtue of numerous common law precedents. Inclusion of District Forums, State Commissions and National Commission[1] under COPRA Act[2], commissions under Monopolies and Restrictive Trade Practices Act, 1969[3] and Company Law Tribunals have been brought under the ambit of ‘judicial authority’.

The interplay of litigation courts in the proceeding of arbitration can be analyzed in three stages vis-à-vis before proceedings, during proceedings, and after proceedings. When on one hand this intermingling helps establish effective checks and balances when it comes to matters of public policy, on the counter, it defeats one of the primary advantages of arbitration, i.e. the expediency of dispute resolution.

Section 5 of the Arbitration & Conciliation Act, 1996 provides for the limited or minimal intervention of judicial authority in arbitration proceedings.[4] The said section is analogous to Article 5 of UNCITRAL Model Law on International Commercial Arbitration, 1985[5]. The scope of judicial intervention is however non-arbitrary and is limited to the purposes prescribed in the Act, extending only to the administrative and non-judicial roles, within the non-obstante provisions.[6] The stance of the Indian judiciary was firmly established while inclining with the legislative intent behind the section, that the courts’ intervention should be minimal to encourage the resolution of disputes expeditiously and less expensively.[7] Even if the matter requires judicial intervention, the judicial authority is required to decide the issue expeditiously within a prescribed period and not to treat the matter in parimateria regular civil suits.[8]

Section 9 and 17 of the Arbitration & Conciliation Act, 1996 provide for interim measures by the courts and tribunals. An application under Section 9 is that of a mandatory nature and is not a substantive remedy available at the discretion of the parties. The section provides for the judicial recourse for enforcement of rights of a third party in case its rights are being affected as a result of the arbitral award. As the third party is not a party[9] to the arbitration and does not have a locus standi, the said enforcement can happen only on a separate cause of action engaged by the third party and is not covered under the ambit of an arbitration agreement.[10] The right conferred by Section 9 is therefore not a contractual right, as only a party to the arbitration agreement possess the same.[11] Only in the rarest of rare cases, the third party would be competent to claim relief under Section 9 and not otherwise.[12] As locus standi is a significant rationale before granting interim relief under Section 9, the courts must be extra vigilant to not benefit frivolous litigations.

As the remedy of ‘rectification’ has been taken away in the 1996 Act, the Arbitral Tribunal under the 1996 Act cannot review an Award on its own, the aggrieved party who has suffered on account of the Arbitral Award is required to challenge it according to the Law prescribed, and if the aggrieved party fails to apply under Section 34 for setting aside the Award, then a de novo inquiry cannot arise on its own. Section 34 of the Act provides for setting aside the arbitral award, in two cases when either a party is willing to challenge the award on grounds of prejudice or the Court finds that the award was in conflict with the public policy of India. The aggrieved party can make an application under this section within 3 months and additional 30 days from the date of receipt of the award. Section 34(2)(a) of the Arbitration and Conciliation Act, 1996 provides for numerous grounds on account of which the Court can set aside the arbitral award, including incapacity of parties, invalid or illegal arbitration, no proper notice for appointment of an arbitrator, non-agreement of parties on composition of the tribunal. The court is vested with powers to set aside the award in case of a non-arbitrable dispute or if the award conflicts with the public policy of India.

AMBIGUITY IN ‘PUBLIC POLICY’

The ground of public policy for setting aside the arbitral award under Section 34 of the Act is a ‘judge-made’ ground evolving from common law. A series of precedents shaped the doctrine of public policy as it stands today with regard to setting aside the arbitral award.

The foremost case of Renusagar Power Co. Ltd v. General Electric Company[13] (Renusagar), which questioned the validity of Section 7 (1)(b)(ii) of the Foreign Award (Recognition and Enforcement) Act, 1961 which provided for the non-enforceability of a foreign award in case it contravened the public policy. It was held by the Apex court that “public policy” was to be interpreted as to be the public policy of India, whilst the application of foreign law in a purely municipal legal issue. The court relied on Article I(e) of the Geneva Convention Act, 1927, which recognizes objections by the host country regarding the enforceability of the award if the same contravenes the public policy of the host country. Further, Section7(1) of the Protocol & Convention Act, 1937 which requires that the enforcement of the foreign award must not be contrary to the public policy or the law of India. Therefore, it was concluded that to invoke the bar of public policy the award must invoke something more than mere violation of any domestic law. A test was laid down for the satisfaction of the ‘public policy’ doctrine vis-à-vis, the award should not be contrary to i) fundamental policy of Indian law, ii) interests of India, iii) justice or morality.

The second landmark judgment in the evolution of public policy doctrine in the present context was, Oil & Natural Gas Corporation v. Saw Pipes Ltd[14] (Saw Pipes) the issue of the scope of judicial intervention under Section 34 was decided, as to whether a legally flawed arbitral award could be challenged on the pretext of contravention of provisions of the governing Act. The award was held to be ‘patently illegal’, therefore indirectly staining the public policy. The test to qualify repudiation of public policy in Renusagar was hence expanded to include acts contradicting i) fundamental policy of Indian law, (ii) the interests of India, (iii) justice or morality, (iv) if it is patently illegal. Hence, the thought of public policy was granted enormously wide abstract notions as if it was to ‘shock the conscience of the court’.

The final stone was laid by the Supreme Court in the case of Shri Lal Mahal Ltd. v. Progetto Grano Spa[15](Lal Mahal), where the vague and abstract nature of the expression, ‘public policy’ was challenged in relation to Section 48(2)(b)[16] of the Act with identical terminology. The SC analyzed that Section 34 was of a wider import than Section 48(2)(b) despite having identical terminology. Therefore, the decision limited the inference of ‘public policy’ in the impugned section to not include patent illegality of the award.

The ambiguity and blanket protection of the term ‘public policy’ was criticized in numerous judgments that followed. The defense of public policy cannot be used as a shield protecting judicial intervention in matters of arbitration. Various counter-claims included court must assume only a supervisory role by reviewing arbitral awards to ensure fairness.[17] The object of the 1996 Act itself is to radically curtail the judicial intervention in arbitration awards except in the circumstances as contemplated in the provisions of the Act, by vesting such enormous powers of judicial intervention in Section 34; the judiciary is violating the legislative intent.[18] It must be noted that the arbitrator is no less than a judicial authority and the view taken by the arbitrator in judicial capacity is no less than that taken by the judge, therefore his plausible view must not be interfered with in a judicial proceeding under Section 34 of the Act,[19] which was reiterated in the case of State of Jharkhand v. HSS Integrated SDN & Anr.[20]

SIGNIFICANT AMENDMENTS

2015 Amendment

The 2015 Amendment in the Act brought about significant changes in the concept of ‘public policy’ under the Arbitration Act, drawing suggestions from the 246^th Law Commission Report. An amendment was made to the Sections 2A[21] and 34(2),[22] by adding Explanation 2. The amendment restricts the scope of judicial intervention in arbitral proceedings by limiting the definition of public policy. The Amendment Act restricted the grounds of setting aside international arbitral awards solely on:

Induced or affected by fraud or corruption
Contravention in the fundamental policy of Indian Law
In conflict with notions of morality and public justice

Therefore, the court cannot act as an Appellate Court to examine the legality of the arbitral award, nor can it examine the factual merits of the claim.[23] As factual merits could not be questioned, the record of an arbitrator was to be held to be sufficient to furnish compliance with Section 34.[24] This was reiterated as cross-examination of persons swearing such affidavits/ records is not allowed unless absolutely necessary.[25] Further, the Amendment Act provided that proceedings for setting aside could be initiated only after due notice to the parties. Furthermore, Arbitration and Conciliation (Amendment) Act, 2015 was held to be prospective in nature and operation.[26] Post amendment, the mere initiation of proceedings under Section 34 would not automatically operate as a stay of the arbitral award. The aggrieved party is required to file a separate application seeking stay of the award and the Court may grant a stay of the award by imposing conditions.

The position of the term ‘public policy’ has been further clarified in the recent judgment of Ssangyong v. NHAI[27] (Ssangyong) to not include the ‘fundamental policy’ under Section 34, relying on the 246^th Law Commission Report. However, with such a firm stance, the overall efficacy of remedy under Section 34 may be objected. The judgment is noteworthy while analysing the applicability of Section 34 as it unmistakably stated that ‘under no circumstances can the Courts interfere with an arbitral award on the ground that justice was not served in the opinion of the Court as the same would clearly contradict the ethos of Section 34.’[28]

On one hand where the Ssangyong endeavours to restrict the scope of ‘public policy’, the 2020 judgment of NAFED v. Alimenta[29] (NAFED) seems to elaborate it. The judgment included export policy within the ambit public policy, stating the contravention of the former will inevitably contravene the latter. On the face of it, the judgment seems to be against the precedents, however, one argument of the judgment is found on the premise that it is highly fact-based. Even though the judgment has accredited a lot of criticism in the short span after delivery to not have considered the judgment of Vijay Karia[30]. However, it must not be overlooked that the NAFED judgment seeks to define the ‘public policy’ in Section 48 of the Act which has a very distinct pose than the use of term under Section 34.

2019 Amendment

The threshold under the erstwhile Section 34(2)(a) for the setting aside of arbitral awards by the court was that the applicant has to furnish proof of the circumstances enumerated therein for the Court to set aside the award. The ‘furnishing of proof’ led to the prolongation of setting aside proceedings serving as an obstacle for the enforcement of domestic awards. The amendment in Section 34(2) removes the requirement of furnishing proofs to substantiate the ground(s) for setting aside the award. Instead, by virtue of this amendment, the applicant needs to establish the ground(s) for setting aside of the award based on the record of the arbitral tribunal which may ensure that proceedings under Section 34 are conducted expeditiously. It was held that proceedings under Section 34 of the Act are summary in nature.[31] Furthermore, the court held that under Section 34 (2A) of the Arbitration Act, a decision which is perverse while no longer being a ground for challenge under “public policy of India”, would certainly amount to patent illegality appearing on the face of the award.[32] The court while deciding the application for setting aside an arbitral award decided that the court will not ordinarily require anything beyond the records before the arbitrator. If otherwise pertinent to the issue, the records can be brought before the Court by the way of affidavits by both parties.[33]

CONCLUSION

Conclusively it can be said that the legislative intention behind alternative dispute resolution was never to encourage interference from the judiciary perhaps that was the reason arbitration awards were classified to be binding on the parties. However, it must not be forgotten that the judiciary is expected to be the safe-keeper of the fundamental rights of the citizens; therefore, if genuine and gross violations in the arbitral award render the parties without a remedy, the courts must not be restricted to intervene in the arbitration proceedings. Standing the evolution in time and necessary amendments, the Arbitration and Conciliation Act, 1996 has proven to be a living document.

References

[1] Fair Air Engineers Pvt. Ltd. V. N.K. Modi AIR1997SC533

[2] Consumer Protection Act, 1986

[3] Shri Balaji Traders v. MMTC Ltd. [1999] 34 CLA 251

[4] Sundaram Brake Linings Ltd vs Kotak Mahindra Bank Ltd (2010) 4 Comp LJ 345 (Mad)

[5] Article 5: This Law shall not affect any other law of this State by virtue of which certain disputes may not be submitted to arbitration or may be submitted to arbitration only according to provisions other than those of this Law.

[6] Secur Industries Ltd vs M/S Godrej & Boyce Mfg. Co. Ltd. (2004) 3 SCC 447

[7] P. Anand Gajapathi Raju v. P.V.G. Raju, (2000) 4 SCC 539

[8] Shin Etsu Chemical Co. Ltd. v. Aksh Optifibre Ltd., (2005) 7 SCC 234

[9] Sec. 2(h) of the Arbitration and Conciliation Act, 1996 defines ‘Party’

[10] Harita Finance Ltd. vs ATV projects India ltd., 2003(2)ArbLR376

[11] Firm Ashok Traders and Ors. vs. Gurumukh Das Saluja and Ors., AIR 2004 SC 1433

[12] L & T Finance Limited vs. C.T. Ramanathan Infrastructure Pvt. Ltd. A. No. 5314 of 2012

[13] Renusagar Power Co. Limited v. General Electric Company; 1994 Supp (1) SCC 644

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

[15] Shri Lal Mahal Ltd. v. Progetto Grano Spa, 2013 (4) CTC 636

[16] Section 48 in The Arbitration and Conciliation Act 1996 Conditions for enforcement of foreign awards,

(2) Enforcement of an arbitral award may also be refused if the Court finds that— (b) the enforcement of the award would be contrary to the public policy of India.

[17] McDermott International Inc. v. Burn Standard Co. Ltd 2006(5)ALT1(SC)

[18] Indian Oil Corporation Ltd. V. Langkawi Shipping Ltd, 2005 (2) Bom CR 458

[19] National Highway Authority of India v. Progressive MVR, (2018) 14 SCC 688

[20] (2019) 9 SCC 798

[21] Explanation to sec. 2A -An arbitral award arising out of arbitrations other than international commercial arbitrations, may also be set aside by the Court, if the Court finds that the award is vitiate by patent illegality appearing on the face of the award:

Provided that an award shall not be set aside merely on the ground of an erroneous application of law or by reappreciation of evidence.

[22] Explanation to sec. 34(2)- For the avoidance of 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.

[23] Venture Global Engineering LLC and Ors v Tech Mahindra Ltd. and Ors [2017] 13 SCALE 91 (SC)

[24] Sandeep Kumar v. Dr. Ashok Hans, (2004) 3 Arb LR 306

[25] Emkay Global Financial Service Limited v. Giridhar Sondhi, Civil Appeal No. 8367 of 2018

[26] BCCI v. Kochi Cricket Pvt. Ltd., (2018) 6 SCC 287

[27] Ssangyong Engineering & Construction Co. Ltd. v. National Highways Authority of India (NHAI), Civil Appeal No. 4779 of 2019, Supreme Court

[28] Ibid

[29] National Agricultural Co-operative Marketing Federation of India (NAFED) v. Alimenta S.A Civil Appeal No. 667 of 2012, delivered on April 22, 2020

[30] Vijay Karia & Ors. Vs. Prysmian Cavi E Sistemi SRL & Ors. Civil Appeal No. 1544 of 2020

[31] M/s.Canara Nidhi Limited v/s. M. Shashikala & Ors. 2019 SCC OnLine SC 1244

[32] Sangyong Engineering & Construction Co. Ltd. v/s. National Highways Authority of India, 2019 SCC OnLine SC 677

[33] M/s Emkay Global Financial Services Ltd. V. Girdhar Sondhi (2018) 9 SCC 49

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The legislative intention behind alternative dispute resolution was never to encourage interference from the judiciary perhaps that was the reason arbitration awards were classified to be binding on the parties.

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

26 November, 2019
Prakriti Agarwal

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)

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