Two Tier Arbitration Procedure Permissible Under The Laws Of India: SC [Read Judgment]

In a landmark judgment accepting the concept of ‘two tier arbitration’ or ‘second instance arbitration’, a three judge bench of the Supreme Court comprising of Justices Madan B. Lokur, R.K Agrawal and D.Y Chandrachud answering a reference made in 2006 due to divergence of opinions between Justice S.B.Sinha and Tarun Chatterjee, held that arbitration clauses which provide for a two- step arbitration process are valid under Indian arbitral jurisprudence.

In a nutshell, brief facts of the dispute are that M/s. Centrotrade Minerals and Metal Inc., and the Hindustan Copper Limited, entered into a contract for sale of 15,500 DMT of Copper Concentrate to be delivered at Kandla Port in the State of Gujarat in two separate consignments.After the consignments were delivered, the payments therefor had been made. However, a dispute arose between the parties as regard the dry weight of concentrate copper.

Clause 14 of the contract contained an arbitration agreement which read:

"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."

Centrotrade invoked the arbitration clause. The Arbitrator appointed by the Indian Council of Arbitration made a NIL award. Centrotrade thereupon invoked the second part of the said arbitration agreement on or about 22nd February, 2000. An award was made pursuant thereto on 29th September, 2001 upholding the claim of Centrotrade. Centrotrade, filed an application for enforcement of the said award in the Court of the District Judge, Alipore. The said execution case was transferred to the Calcutta High Court.A learned Single Judge of the said court by a judgment and order dated 10th March, 2004 allowed the said execution petition. Aggrieved by and dissatisfied therewith, HCL preferred an appeal which was allowed by reason of the impugned order dated 20th May, 2004. Both the parties came beforethe Supreme Court questioning the correctness of the said judgment.In its judgment, the High Court had held that although successive arbitration is not impermissible in India, but two successive awards are mutually destructive and the second award is not a foreign award within the meaning of Section 44 of the 1996 Act and, thus, Section 34 thereof would apply thereto in the facts and circumstances of the case.

Justice S.B.Sinha in his opinion held that the High Court had decided it incorrectly while Justice Tarun Chatterjee upheld it. Due to divergence in opinion, the matter was referred to a three judge bench. The 3 judge bench sough to answer the query that –

“Whether a settlement of disputes or differences through a two-tier arbitration procedure as provided for in Clause 14 of the contract between the parties is permissible under the laws of India?”

While holding that words ‘arbitration result’ in Clause 14 shall be interpreted as an ‘arbitration award’ the bench recorded submission by HCL’s counsel that he second part of Clause 14 of the contract was contrary to the laws of India. Justice Lokur further held that the plain language of Clause 14 specifically provided for a second arbitration, and rejected the contention that the right to file an appeal can only be created by a statute and not by an agreement between the parties as it may be so in respect of litigation initiated in courts under a statute or for the enforcement of common law rights, but that did not prevent parties from entering into an agreement providing for non-statutory appeals so that their disputes and differences could preferably be settled without resort to court processes

Three further submission made by HCL were that the provisions of the A&C Act do not sanction an appellate arbitration; there is an implied prohibition to an appellate arbitration in the A&C Act; and an appellate arbitration is even otherwise contrary to public policy.While focussing on the doctrine of party autonomy and Section 34, 35 36 of the A&C Act, the bench held that there is nothing in the A&C 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 A&C Act except by an unreasonable and awkward misconstruction and by straining its language to a vanishing point.

However, the bench did not lay clearly as to whether such a set up effects the public policy of the Country and held that even assuming the broad delineation of the fundamental policy of India as stated in Associate Builders they did not find anything fundamentally objectionable in the parties preferring and accepting the two-tier arbitration system.The judgment is a landmark judgment bringing in the two tier arbitration set up in the country which is a huge success for foreign players indulging in business in India and will act as a catalyst for out of courts settlement.

Read the Judgment here.

This article has been made possible because of financial support from Independent and Public-Spirited Media Foundation.