India: Two-Tier Arbitration | Permissible Under Arbitration Act

In an interesting development, three bench of Supreme Court in a recent judgment has approved of the two tier arbitration process under the Arbitration and Conciliation Act, 1996 ("Arbitration Act").

The two-tier arbitration process provides the parties dissatisfied with the first award have an opportunity to appeal against the first award by way of appeal, wherein the parties are to be heard afresh on the merits of the case. The second award, then, which is passed at such second arbitration is binding on the parties, subject to the recourse that the parties may have under the provisions of the Arbitration Act.

The permissibility of agreements containing a two-tier arbitration clause had been under doubt for quite some time. There were differences of opinion on this issue between the two judges of the Division Bench of Supreme Court in their judgment which has been pending since May 2006. However, the position now stands cleared in light of the judgment delivered by the three judge bench of Supreme Court.

The two-tier arbitration clause over which the parties to the dispute approached the Supreme Court i.e. Clause 14 of the contract, runs as follows:

"All disputes or differences whatsoever arising between the parties out of, or relating to, the construction, meaning and operation or effect of the contract or the breach thereof shall be settled by arbitration in India through the arbitration panel of the Indian Council of Arbitration in accordance with the Rules of Arbitration of the Indian Council of Arbitration. If either party is in disagreement with the arbitration result in India, either party will have the right to appeal to a second arbitration in London, UK in accordance with the rules of conciliation and arbitration of the International Chamber of Commerce in effect on the date hereof and the results of this second arbitration will be binding on both the parties. Judgment upon the award may be entered in any court in jurisdiction."

Validity of Clause: HCL had challenged the validity of the aforesaid clause on ground that provisions of the Arbitration Act do not sanction for an appellate arbitration and the appeal of the arbitration award i.e. second arbitration is contrary to the laws of India.

Supreme Court in its decision to this contention noted that the Parliament, after having known the view of the UNCITRAL Working Report that the model law should not exclude the two tier arbitration practice and after noting the fact that the two-tier arbitration system existed prior to the Arbitration Act, chose not to specifically prohibit the same. In view of the same, the Supreme Court held that the Arbitration Act does not contain any objections to the two-tier arbitration system. Furthermore, the Supreme Court also rejected the contention of HCL that the right to appeal can only be created by a statute and not by an agreement between the parties on the basis that an appeal before an arbitral tribunal concerns a non-statutory process and not a statutory appeal.

Implied Prohibition: HCL to support this contention relied on Section 34 of the Arbitration Act and suggested that an award under the Arbitration Act could only be set aside by the Courts having jurisdiction under the Arbitration Act, thereby excluding the two-tier arbitration procedure.

Supreme Court also rejected this contention of HCL focusing on party autonomy. It held that Section 34 does not exclude the autonomy of the parties to mutually agree to a procedure whereby the arbitral award may be reconsidered by another arbitrator or a panel of arbitrators by way of an appeal and the result of that appeal is acceptable by both the parties to be final and binding subject to a challenge provided for by the Arbitration Act. In furtherance of this view, the Supreme Court held that the fact that recourse to a court is available to a party does not ipso facto prohibit the parties from mutually agreeing to a second look at an award as the intention is not to throttle the autonomy of the parties or preclude them from adopting any other acceptable method of redressal such as appellate arbitration.

Appellate arbitration | Contrary to public policy: HCL had contended that appellate arbitration is contrary to public policy.

Rejecting this contention, the Supreme Court held that "even assuming the broad delineation of the fundamental policy of India as stated in Associate Builders, we do not find anything fundamentally objectionable in the parties preferring and accepting the two tier arbitration system. There is nothing in the Arbitration Act that prohibits the contracting parties from agreeing upon a second instance or appellate arbitration – either explicitly or implicitly. No such prohibition or mandate can be read into the Arbitration Act except by an unreasonable and awkward misconstruction and by straining its language to a vanishing point. We are not concerned with the reason why the parties (including HCL) agreed to a second instance arbitration – the fact is that they did and are bound by the agreement entered into by them. HCL cannot wriggle out of a solemn commitment made by it voluntarily, deliberately and with eyes wide open. We decline to read the Arbitration Act in the manner suggested by learned counsel for HCL and hold that the arbitration clause in the agreement between the parties does not violate the fundamental or public policy of India by the parties agreeing to a second instance arbitration."

MHCO COMMENT

This is a welcome judgment wherein the Supreme Court has held that party autonomy is the backbone of arbitration and enforced the terms of the contract as were agreed. While this judgment would reassure the faith of international parties in the arbitration proceedings in India, what we think should be considered by the parties before deciding to opt for such two-tier arbitration process is the time and money that would be expended in resolving their disputes via such two-tier procedure.

This update was released on 10 May 2017.

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