CAN ‘APPREHENSION OF BIAS’ PROVE TO BE FATAL TO ‘ARBITRATION AWARD’ CHALLANGED UNDER SECTION 34 OF ARBITARTION ACT, 1996?

‘Justice cannot be for one side alone, but must be for both’ as rightly quoted by the famous First Lady Eleanor Roosevelt, still holds sanctity and validity in the current realm of arbitration as means of resolving disputes. ‘Fairness ‘and ‘Unbiased Approach’ are vital tenets that need to be traced in an ‘Arbitrator’. They are quintessential for an efficient and fair ‘arbitral proceedings’ to be carried out, ultimately culminating in an effective ‘arbitral award’, leaving very limited or no scope of challenging the same in the courts subject to the satisfaction of the parties. But what if an ‘Arbitral Award’ suffers from the vices of ‘unfairness’ and ‘biasness’? Can the same be challenged if there is just an ‘apprehension of bias’ rather than ‘actual bias’ being alleged by one of the parties to the dispute?  Such questions have been dealt by the Hon’ble Kerala High Court, in the case of P.V. Jojo and Others. v. Indian Cements Capital and Finance Ltd[i].The case involving contentious issue as to whether ‘real likelihood of bias’ rather than ‘actual bias’ reflected by the ‘arbitrator’ while passing an ‘arbitral award’ is a valid ground to vitiate the entire ‘arbitral proceedings’ and whether the above said ‘arbitral award’ challenged by the aggrieved party is likely to be set aside or not, has been aptly dealt with by the Hon’ble High Court.

The intricacies involved in the case have been dealt by the court keeping in mind the bare provisions of the Section 34, Section 13 and Section 12 of the Act[ii]and relying upon the judgements of the apex court. The award in the above said case was passed before the amendment of 2015; hence the provisions prior to the amendment of 2015 shall stand applicable in the present case.

 

PROVISONS OF THE ACT[iii] APPLICABLE IN THE PRESENT CASE

Before delving into the facts of the case it is important to read out the provisions of the Act[iv](prior to amendment of 2015) which are as follows:-

  1. Section 34- Application for setting aside arbitral award

(1) Recourse to a Court against an arbitral award may be made only by an application for setting aside such award in accordance with sub-section (2) and sub-section (3).

(2) An arbitral award may be set aside by the Court only if—

(a) the party making the application furnishes proof that—

(i) a party was under some incapacity, or

(ii) the arbitration agreement is not valid under the law to which the parties have subjected it or, failing any indication thereon, under the law for the time being in force; or

(iii) the party making the application was not given proper notice of the appointment of an arbitrator or of the arbitral proceedings or was otherwise unable to present his case; or

(iv) the arbitral award deals with a dispute not contemplated by or not falling within the terms of the submission to arbitration, or it contains decisions on matters beyond the scope of the submission to arbitration:

Provided that, if the decisions on matters submitted to arbitration can be separated from those not so submitted, only that part of the arbitral award which contains decisions on matters not submitted to arbitration may be set aside; or

(v) the composition of the arbitral tribunal or the arbitral procedure was not in accordance with the agreement of the parties, unless such agreement was in conflict with a provision of this Part from which the parties cannot derogate, or, failing such agreement, was not in accordance with this Part; or

(b) the Court finds that—

(i) the subject-matter of the dispute is not capable of settlement by arbitration under the law for the time being in force, or

(ii) the arbitral award is in conflict with the public policy of India.

Explanation. —Without prejudice to the generality of sub-clause (ii) it is hereby declared, for the avoidance of any doubt, that an award is in conflict with the public policy of India if the making of the award was induced or affected by fraud or corruption or was in violation of section 75 or section 81.

(3) An application for setting aside may not be made after three months have elapsed from the date on which the party making that application had received the arbitral award or, if a request had been made under section 33, from the date on which that request had been disposed of by the arbitral tribunal: 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.

(4) On receipt of an application under sub-section (1), the Court may, where it is appropriate and it is so requested by a party, adjourn the proceedings for a period of time determined by it in order to give the arbitral tribunal an opportunity to resume the arbitral proceedings or to take such other action as in the opinion of arbitral tribunal will eliminate the grounds for setting aside the arbitral award.

  1. Section 12. Grounds for challenge

(1) When a person is approached in connection with his possible appointment as an arbitrator, he shall disclose in writing any circumstances likely to give rise to justifiable doubts as to his independence or impartiality.

(2) An arbitrator, from the time of his appointment and throughout the arbitral proceedings, shall, without delay, disclose to the parties in writing any circumstances referred to in sub-section (1) unless they have already been informed of them by him.

(3) An arbitrator may be challenged only if—

(a) circumstances exist that give rise to justifiable doubts as to his independence or impartiality, or

(b) he does not possess the qualifications agreed to by the parties.

(4) A party may challenge an arbitrator appointed by him, or in whose appointment he has participated, only for reasons of which he becomes aware after the appointment has been made.

  1. Section 13- Challenge procedure

(1) Subject to subsection (4), the parties are free to agree on a procedure for challenging an arbitrator.

(2) Failing any agreement referred to in sub-section (1), a party who intends to challenge an arbitrator shall, within fifteen days after becoming aware of the constitution of the arbitral tribunal or after becoming aware of any circumstances referred to in sub-section (3) of section 12, send a written statement of the reasons for the challenge to the arbitral tribunal.

(3) Unless the arbitrator challenged under sub-section (2) withdraws from his office or the other party agrees to the challenge, the arbitral tribunal shall decide on the challenge.

(4) If a challenge under any procedure agreed upon by the parties or under the procedure under sub-section (2) is not successful, the arbitral tribunal shall continue the arbitral proceedings and make an arbitral award.

(5) Where an arbitral award is made under sub-section (4), the party challenging the arbitrator may make an application for setting aside such an arbitral award in accordance with section 34.

(6) Where an arbitral award is set aside on an application made under sub-section (5), the Court may decide as to whether the arbitrator who is challenged is entitled to any fees.

 

FACTS OF THE CASE

 

The appellants entered into a loan agreement with the respondent company, namely, M/s India Cement Capital and Finance Ltd. On failing to pay the loan amount, the respondent filed a civil suit in the Sub Courts of Thirussar, to which the appellant moved an application for appointment of an arbitrator as the loan agreement contained an arbitration clause thereby invoking the arbitration proceedings. An arbitral award was rendered by the Arbitrator which was challenged by the appellants under section 34(1)[v]and the said arbitral award was rightly dismissed by the District Court of Thirussar. An appeal was filed against the above-said order which has been allowed by the Hon’ble High Court in the present case.

 

LEGAL OPINION OF THE COURT

 

The High court after hearing the arguments advanced by the learned counsels of both the parties gravitated towards the observation that in order to reach a ‘fair’ and ‘just decision’ it is important to expound the term ‘Bias’ which can be enumerated in the following manner :-

  1. Implication of ‘Actual Bias’ and ‘Real Likelihood of Bias’

Bias means predisposition of an adjudicator to decide for or against one party, without proper regard to the true merits of the dispute. ‘Bias’ is in violation of the principles of natural justice which forms the bedrock of the concept of ‘Arbitration’.

The Court opined that the ‘real likelihood of bias’ should be based on ‘cogent material’ and not on ‘mere whimsical apprehension’. The real test to see whether the ‘arbitrator’ smacks of ‘bias’ can be made out if the same was brought to the notice of the ‘arbitrator’ from the initial stage of the arbitration and has not been addressed by the ‘arbitrator’before or during the said ‘arbitral proceedings’.The court dismissed the plea of the respondent contending that the appellants gave their consent in the statement in ‘arbitral award’ thereby vitiating their challenge to the ‘appointment of the arbitrator’.

 

  1. Challenge made under Section 13(3) does not vitiate if the arbitration proceedings are going on and the same has not been addressed by the arbitrator.

In the present case, the appellants challenged the ‘appointment of the arbitrator’ under Section 13 (3) of the Act[vi], on the grounds that the ‘arbitrator’ had assisted his senior counsel in the suit involving the same subject matter to the dispute but the ‘arbitrator’ did not decide the challenge to the same till the final passing of the ‘arbitral award’. The appellant challenged the above-said order by virtue of Section 13(3) and Section 12 of the Act[vii]in the High Court of Kerala and according to the court if the same has not been addressed by the arbitrator then it shall not stand vitiated.

The court while evaluating the scope of the Section 13(3) of the Act[viii] was of the view that the provisions of the section are merely ‘directory’ and not ‘mandatory’ in nature and there is no provision for any consequences thereof. The object of the provision in Section 13(3) does not render otiose on account of the absence of the decision by the arbitrator.

 

  1. Conjoint reading of provisions of Section 13(5)[ix]and Section 34is necessary while interpreting the scope of ‘arbitral award’ under challenge

The court while redefining the limitations of the ‘arbitral award’ challenged under Section 34[x]is of the view that the expression ‘such an arbitral award’ can be challenged on the ground of ‘biases’ and ‘partiality of the arbitrator.’

 

  1. No adverse inference can be drawn against the aggrieved party if the party complies to the statement in the arbitral award whilst the challenge to the ‘appointment of the arbitrator’ is still subsisting

The court is also of the view that simply because the statement in the arbitral award was made, the challenge to the said appointment shall not be rendered useless.  In the absence of any express consent for the continuance of the arbitration proceedings or in the absence any cogent material to show that the allegation has been withdrawn by the aggrieved party, no adverse inference can be made against the aggrieved party challenging the award. The cumulative effect is sufficient to create ‘substantial possibility of bias’. Moreover the arbitrator never specifically denied or accepted the allegation levelled against his appointment and an adverse inference has been taken by the court.

 

  1. ‘Neutrality’- A paramount prerequisite for rendering an effective ‘arbitral award’

The High Court relied on the findings of the Apex Court in the case of Ranjit Thakur vs. Union of India[xi], wherein it has been observed that purity in administration demands party to arbitration proceedings should not have any apprehension that the arbitrator is biased and is likely to decide against him.

In the instant appeal, the previous conduct of the arbitrator has  put serious doubt in the minds of the aggrieved party in relation to the ‘neutrality’ of the arbitrator while conducting the arbitration proceedings and rendering an effective ‘arbitral award’.Furthermore, the High court while relying onVoestalpine case[xii]has laid emphasis on the ‘independence’ and ‘impartiality’ of the arbitrator which is very critical to arbitration process. Similarly in the case of ManakLal vs. Dr.Prem Chand Singhvi[xiii], the Apex Court has laid the test to ascertain the ‘biasness’ of an arbitrator.

 

 

 

CRITICAL EVAULATION OF THE JUDGEMENT

The High Court of Kerala has rightly inferred that in the absence of any ‘cogent material’ available against the aggrieved party to show that the challenge to arbitral award has been withdrawn during arbitral proceedings, the ‘arbitral award’ is likely to be set aside on the grounds of the ‘mere apprehension of bias’ rather than ‘actual apprehension of bias’. Also, an adverse inference has to been drawn against the ‘arbitrator’ if the same has not been either ‘denied’ or ‘admitted’ by the ‘arbitrator’, while conducting the ‘arbitral proceedings’ thereby rendering the arbitrator award as ‘ineffective’.

Principles of Natural Justice demand that an arbitrator has to ensure that ‘fairness’ and ‘neutrality’  is maintained at all the times and even if an iota of doubt arises in the minds of the party, the same has to be addressed as soon as possible without any undue delay. It is incumbent upon the arbitrator to ensure that ‘justice should not only be done but must appear to have been done.’ The judgment passed by the Hon’ble High Court has certainly to a great extent instilled more faith and trust in the minds of the parties who wish to resolve disputes via arbitration as an alternative mode of redressal. The scope of the word ‘bias’ has been redefined keeping in mind the satisfaction of the parties and ensuring that the ‘arbitral award’ rendered does not reflect a prejudiced mindset of an ‘unfair arbitrator’.

[i]2019 (6) Arb. LR 365 (Kerala) (DB)

[ii]  The Arbitration and Conciliation Act of 1996

[iii]  Ibid

[iv]  ibid

[v]  Ibid

[vi]  ibid

[vii]  Ibid

[viii]  ibid

[ix]  ibid

[x]  ibid

[xi] AIR 1987 SC 2386

[xii] 2017 (2) Arb. LR 1(SC)

[xiii]  AIR 1957 SC 425

Applicability of Emergency Arbitration in Domestic and International arbitration

Introduction

Emergency arbitration is a feature of the rules of all leading domestic and international arbitration institutions, both across Asia and elsewhere. Concept of emergency arbitration is considerably new and is likely to remain a permanent part of the international arbitration landscape.

Prior to the modern day emergency arbitration provisions, precursor emergency arbitration rules existed, such as the International Chamber of Commerce (‘ICC’, for short) Pre-Arbitral Referee procedure[1], as well as optional emergency arbitrator provisions in the rules of the American Arbitration Association.

The emergency arbitration rules implemented in the Stockholm Chamber of Commerce[2] may, however, be said to be the first instance of the modern form of emergency arbitration rules. Since these rules were promulgated, other leading arbitration institutions have followed suit, issuing comparable rules with a variety of refinements.

The Singapore International Arbitration Centre[3] was the first Asian institution to introduce emergency arbitration provisions in July 2010, making it an international leader in the number of cases handled.

What is Emergency Arbitration?

Emergency arbitration in the guise of an emergency relief is an upcoming concept in arbitration suitable for parties that cannot wait for the formation of the arbitral tribunal and is aimed to protect their assets and evidence, which may, otherwise, be altered or lost. The person seeking such appointment has to satisfy two elements-

1.Fumusboniiuris – Reasonable possibility that the requesting party will succeed on merits.

2.Periculum in mora– If the measure is not granted immediately, the loss would not and could not be compensated through damages.

Why Emergency Arbitration?

The ability of a party to obtain urgent interim relief is central to the success of any method of dispute resolution. In case of disputes that are subject to an arbitration agreement, until recently parties had only two options: either approach national courts for interim relief in support of the arbitration, or wait for the formation of the arbitral tribunal and then make an application for interim relief. The former would essentially require parties to initiate local proceedings before national courts (the avoidance of which may in fact have been the principal reason for choosing arbitration in the first place).

Some parties, therefore, prefer to seek interim measures within the arbitral process. A tribunal once appointed will also generally have wide powers, akin to those of a court, to grant interim relief. The difficulty that can arise is that in some instances the appointment of the substantive tribunal can take months, particularly if one party is obstructive or raises challenges to the nominated arbitrators.

In response, many leading arbitral institutions have introduced emergency arbitrator procedures which seek to close that gap by allowing parties, in situations of emergency, to obtain urgent arbitral relief before the substantive tribunal is formed.

UNCITRAL Model Law[4], Clause 17H provides for enforcement of interim awards and hence many countries which have similar provisions in their laws also recognize emergency arbitration awards under the category of interim international arbitration awards.

The award is enforceable like an order of the courts in jurisdictions that recognise emergency awards.

Emergency Arbitrator Procedure

Under emergency arbitrator procedures, a sole arbitrator is appointed by the arbitral institute on an expedited basis to determine applications for interim relief that cannot wait for the formation of the substantive tribunal.

Ad Hoc Tribunal

Under ICC rules[5] “any party that needs urgent interim or conservatory measures that cannot await the constitution of Arbitral Tribunal can apply for appointment of emergency arbitrator”. The same can be invoked before the institutions which provide for similar provisions.

The institution can set up an Ad hoc tribunal which is capable of granting interim measures or conservatory relief for a stipulated period of time on receipt of an application from the party to the institutional arbitration under contract and is in an emergency and requires a protective or any other interim order. The applicant is required to include in its application the reasons and the justification for emergency relief. The Ad hoc tribunal which has been constituted for a limited purpose and would immediately be dissolved, once the purpose is served or the said time frame in which such issues have to be decided, lapses.

International Arbitral institutions that have adopted emergency arbitrator mechanisms-

  • the International Chamber of Commerce (ICC)[6]
  • the Netherlands Arbitration Institute (NAI)[7]
  • the Swiss Chambers’ Arbitration Institute (SCAI)[8]
  • the Stockholm Chamber of Commerce (SCC)[9]
  • the International Centre for Dispute Resolution (ICDR)[10]
  • American Arbitration Association (AAA)[11]
  • the Hong Kong International Arbitration Centre (HKIAC)[12]
  • the Singapore International Arbitration Centre (SIAC)[13]
  • the China International Economic and Trade Arbitration Commission (CIETAC)[14]
  • the Australian Centre for International Commercial Arbitration (ACICA)[15]
  • the Japan Commercial Arbitration Association (JCAA)[16]
  • the Asian International Arbitration Centre (AIAC)[17]
  • the Lagos Chamber of Commerce International Arbitration Centre (LACIAC)[18]
  • the London Court of International Arbitration (LCIA)[19]
  • the Mexico City National Chamber of Commerce (CANACO)[20]

The following procedures, among others, must be adopted when a party chooses the emergency arbitration option:

1.Application in writing to the Registrar.

2.Filing of proof of serving such an application on the opposite party.

3.Payment of the fee, based on the schedule for each centre, where such arbitration is to be carried out with an implicit understanding that the application of emergency arbitration would be limited to signatories to the arbitration agreement or their successors.

Characteristics of Emergency arbitrator

The important characteristics of an emergency arbitrator are as follows:

1.Emergency arbitrator has powers to deal with only emergency relief applications;

2.Emergency arbitrator enjoys the same powers as the regular arbitral tribunal;

3.Emergency arbitrator must complete his work within 14 days;

4.Emergency arbitrator cannot continue after the formation of the arbitral tribunal;

5.Emergency arbitrator’s orders can be reviewed or altered by the arbitral tribunal;

6.Emergency arbitrator’s award can be challenged only where the seat of arbitration is located; and

7.Normally emergency arbitrator will not be a part of the arbitral tribunal.

Indian Scenario

Law commissions report

The law commission’s 246th report[21] on amendments to the Arbitration and Conciliation Act, 1996, proposed an amendment to section 2(1)(d) to broaden the definition of ‘arbitral tribunal’ and to include an emergency arbitrator appointed under any institutional rules in order to recognise emergency arbitrations and give statutory recognition to Singapore International Arbitration Centre rules or ICC rules or any other rules which provides for an appointment of an emergency arbitrator.

However, the Amendment Act of 2015[22] and 2019[23] failed to incorporate the recommendations of the Law Commission and did not provide at all for emergency arbitration.

Steps taken by Indian Institutions towards Emergency Arbitration

Notwithstanding the fact that the concept of emergency arbitration and its award is absent in the Indian legislation, the arbitration institutions in India such as Mumbai Centre for International Arbitration (MCIA)[24],  NaniPalkhivala Arbitration Centre (NPAC)[25], Indian Council of Arbitration (ICA)[26], Delhi International Arbitration Centre (DIAC)[27], Indian Institute of Arbitration & Mediation (IIAM)[28], Madras High Court Arbitration Centre (MHCAC)[29] and like, recognize emergency arbitration and have provided for specific procedure in that regard within their rules.

Enforcement in India

Domestic Awards

An interim award passed by the Arbitral tribunal, seated in India is enforceable, in accordance with section 2(c) of the Arbitration Act[30], as an arbitral award includes an interim award as well. An interim order that is passed by the arbitral tribunal, shall be binding as an order of the court, in accordance with section 17 of the Arbitration Act since after the 2015 amendment, hence domestic interim awards are enforceable.

Foreign seat Awards

The enforcement of a foreign seat award in India is highly unlikely as enforcement of such awards would be governed by the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, 1958 and shall only be recognised under part II of the Act[31]. Article 17H of UNCITRAL Model Law[32] specifies that an interim measure issued by an arbitral tribunal would be recognised as binding and can be enforced upon an application to competent court, irrespective of the country in which the award was issued. The award is enforceable like an order of the courts in jurisdictions that recognise emergency awards. However, the Arbitration Act[33] doesn’t contain the provisions regarding the same so an emergency arbitration award passed by a foreign seat is not enforceable in India and an application under section 9 of the Act[34]is probably the only recourse left for the parties to seek interim measures of protection in India.

Conclusion

Emergency arbitration has become an essential component of international commercial arbitration. Number of application for emergency arbitration in various institutions remain on the rise and parties continue to opt for emergency arbitration proceedings as opposed to interim relief from national courts for reasons of confidentiality, time and cost-effectiveness. The major issue revolving around the awards passed by the emergency arbitrator pertains to the enforceability of such awards by domestic courts in states which have not yet provided for provisions relating to emergency arbitration in their domestic legislatures. It seems that the only definite way to secure the enforceability of the emergency arbitration is to provide an express provision in national legislation. Various states ought to follow the steps taken by the likes of Singapore, Hong Kong, New Zealand and enact in their respective domestic legislatures the provisions which recognize the legitimacy of emergency arbitration and their award.

 

Disclaimer:

The information contained in this document is intended for informational purposes only and does not constitute legal opinion, advice or any advertisement. This document is not intended to address the circumstances of any particular individual or corporate body. Readers should not act on the information provided herein without appropriate professional advice after a thorough examination of the facts and circumstances of a particular situation. There can be no assurance that the judicial/quasi-judicial authorities may not take a position contrary to the views mentioned herein.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances

[1] ICC pre arbitral referee rules

[2]SCC Rules (2010), Expedited Rules and Appendix II.

[3] SIAC Rules(2010), article 29

[4]  The UNCITRAL Model law on international commercial Arbitration 1985

[5] Article 29(1) of ICC rules

[6]ICC Rules (2012), Article 29(1) and Appendix II.

[7]NAI Rules (2010) Articles 42a and 42b.

[8]Swiss Rules (2012), Articles 42–43

[9]SCC Rules (2010), Expedited Rules and Appendix II.

[10] ICDR rules 6, 24, 34, 38, 39

[11] AAA rules, rule 38

[12]HKIAC Administered Arbitration Rules (2008) Article.38.

[13] Article 29, Appendix V or its rules

[14] CIETAC rules, article 23, 77, Appendix III

[15] ACICA rules, section 1 rule 5, 33, 44, Appendix A, schedule 1

[16] JCAA rules, Chapter V

[17] AIAC rules, Part I rule 4, rule 8, Schedule II, Schedule III

[18] LACIAC rules, section III rule 33, section V annexure VI

[19] LCIA rules(2014) article 9

[20]CANACO Rules (2008), Articles 36 and 50.

[21]The Law Commission’s 246th Report dated 05.08.2014.

[22]The Arbitration and Conciliation (Amendment) Act, 2015 (No. 3 of 2016), w.r.e.f. 23.10.2015.

[23]The Arbitration and Conciliation (Amendment) Act, 2019 (No. 33 of 2019), w.e.f. 09.08.2019.

[24]Mumbai Centre for International Arbitration (Rules) 2016, Section 3, rule 14

[25] Rule 20A

[26] Rule 57b

[27] part III of its arbitration rules, section 18A

[28] Rule 9, Part III schedule 1

[29] Part IV of its rules, section 20 r/w schedule A and schedule D

[30]Supra note 23

[31]ibid

[32]Supra note 4

[33]Supra note 23

[34]Ibid.

APPOINTMENT OF ARBITRATOR- WHOSE PREROGATIVE?

Introduction:

The speed with which India is developing, there are a lot of construction contracts being awarded and executed between the parties. There generally exists an arbitration clause when an agreement is executed between the parties to the contract, for resolution of disputes between the contracting parties.

 

In the event of disagreement between the parties on the appointment of the arbitrator, or, when nominee-arbitrators fail to appoint the presiding arbitrator, or, when one of the parties fail to appoint its nominee arbitrator, or, when on the occurrence of vacancy, appointment of substitute arbitrator is not made, or in other such like situations, party desirous of constitution of arbitral tribunal shall move an application before the High Court, under section 11 of the Act.

 

Facts of the Cases:

The High Court of Delhi appointed an independent arbitrator for adjudication of disputes between the parties by order dated May 15, 2015, and February 2, 2015, instead of directing appointment of an arbitrator as per Clause 64 of General Conditions of Contract (GCC) which stipulated that Railways Officers would be appointed as arbitrator.

 

Facts of PradeepVinod Construction Co.[1] case:

The Railways failed to appoint an arbitrator despite invocation of the arbitration clause by the respondent on May 5, 2014, therefore, the High Court was of the view that the Railways forfeited its right under the arbitration clause and the learned Judge appointed a sole arbitrator instead of directing the appointment of arbitrator as per Clause 64 of the General Conditions of Contract.

 

Facts of M/s B.M. Construction Co.[2]case:

The appellant claimed that the disputes raised by the respondent were in the nature of “excepted matters”. The High Court held that the issue could be examined by the arbitrator even though the disputes fell under the category of “excepted matters”. With those findings, the court-appointed a sole arbitrator and directed that arbitration shall take place under the aegis of the Delhi International Arbitration Centre.

Hence, the present appeal.

 

Issue before the Court:

Whether an independent arbitrator can be appointed by the High Court where an arbitration clause clearly stipulates that Railways Officers should be appointed as arbitrator for adjudication of disputes between the parties?

 

Stand of the Appellant:

The appellant contended that the request to appoint an arbitrator was made prior to the Amendment Act, 2015 and hence, the proceedings must be governed by the Act of 1996.

 

In Union of India and another v. M.P. Gupta[3]and Union of India and another v. V.S. Engineering (P) Ltd.[4]and in a number of judgments, the court held that whenever the agreement specifically provides for appointment of named arbitrators, the appointment of arbitrator should be in terms of the contract. Therefore, the High Court made an error by appointing an independent arbitrator instead of directing the General Manager of the Railways to point an arbitrator as per Clause 64 of GCC which clearly states that “excepted matters” cannot be referred to arbitration.

 

The Appellant denied the request made by the respondents to appoint an arbitrator on the ground that their claims have been settled and the respondents have issued a “No Claim” certificate as well as executed a supplementary agreement expressing “accord and satisfaction”. Therefore, the dispute in question is not referable to arbitration.

 

Stand of the Respondents:

Respondents submitted that since the appellant has failed to appoint an arbitrator under the terms of the arbitration agreement under Section 11(6) of the Arbitration and Conciliation Act, 1996, hence, its right to appoint an arbitrator is forfeited and it is for the Chief Justice/Designate Judge to appoint an independent arbitrator.

 

Insofar as the contention that the respondents have already received the final bill and issued “No Claim” letter to the Railway, respondents submitted that “No Claim” certificate was issued under compulsion and undue influence of the authorities. Hence, it is open to the arbitrator to adjudicate by examining the bills which were furnished for payment and in such circumstances, it cannot be said to be an “excepted matter”.

 

Judgment:

After considering a number of matters of railway contract, the court, in the light of M.P. Gupta[5], V.S. Engineering[6] and Parmar Construction Company[7]set aside the appointment of independent arbitrator and the General Manager of the Railways was directed to appoint the arbitrator as per the procedure specified in Clause 64 of the GCC.

 

The Court further held that the contention raised by the appellant relating to “No Claim” certificate to which the respondent disputed that the same was issued under compulsion and undue influence by the railway authorities, must be agitated. As a result, the Supreme Court while allowing the appeal directed the appellant to appoint the arbitrator in terms of Clause 64(3) of the agreement within a period of one month.

 

Conclusion:

The Apex Court by allowing the appeals has sent down a positive message that stipulations of the contract must be satisfied while appointing arbitrator and that the High Court fell in error by appointing an independent arbitrator without resorting to the inbuilt mechanism agreed by the parties, as prescribed under Clause 64(3) of the contract.

Disclaimer:

The information contained in this document is intended for informational purposes only and does not constitute legal opinion, advice or any advertisement. This document is not intended to address the circumstances of any particular individual or corporate body. Readers should not act on the information provided herein without appropriate professional advice after a thorough examination of the facts and circumstances of a particular situation. There can be no assurance that the judicial/quasi-judicial authorities may not take a position contrary to the views mentioned herein.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances

[1]Union of India v. PradeepVinod Construction Company, 2019(6) R.A.J. 685(SC).

[2]Union of India v. M/s B.M. Construction Company, 2019(6) R.A.J. 685(SC).

[3]Union of India and another v. M.P. Gupta, (2004) 10 S.C.C. 504 (India).

[4]Union of India and another v. V.S. Engineering (P) Ltd., (2006) 13 S.C.C. 240 (India).

[5]Supra 1.

[6]Supra 2.

[7]Union of India v. Parmar Construction Company, 2019(3) R.A.J. 445 (India).

 

 

ARBITRATION v. LITIGATION

India is one of the fastest-growing economies in the world and it is more than often true that in places where there is a high rate of economic growth, there is also an increase in income, and increased purchasing power, thereby leading to the growth of effective demand and supply, ultimately resulting into the improvement in standard of living, life expectancy, quality of human life and others. The opening up of Indian markets to foreign firms in various industries including the service sector has tremendously increased the volume of cases in the courts. The courts are already over-burdened with a huge backlog of cases that have been pending for a long time. This not only affects the individuals /institutions, but also the overall growth of the Indian economy. India has an estimated 31 million cases pending in various courts.

As on 31.12.2015, there were 59,272 cases pending in the Supreme Court of India, around 3.8 million cases were pending in the High Courts and around 27 million pending before the subordinate judiciary. 26% of cases, more than 8.5 million, are over 5 years old. It has been estimated that 12 million Indians await trial in criminal cases throughout the country. On average, it takes twenty years for a real estate or land dispute to be resolved. The dispute resolution process has a huge impact on the Indian economy and the global perception of “doing business” in India. This is clearly indicated by the World Bank rating of “Ease of Doing Business 2016” which has ranked India at 131 out of 189 countries on how easy it is for private companies to follow regulations and conduct business. The study notes that India takes as much as 1,420 days and 39.6% of the claim value for dispute resolution. [1] It is in this context that several initiatives have been taken to reduce the pendency of cases and to ensure that cases are disposed of in a speedy manner. In addition to this, the legislature has introduced the new alternative dispute mechanism in the form of Arbitration and Conciliation Act, 1996, by repealing the old Arbitration and Conciliation Act, 1940, which has outlived its utility. The Arbitration and Conciliation Act, 1996 has been passed by the Parliament of India for the purpose of specifically adopting the UNCITRAL Model Law in the International Commercial Arbitration and implementing the same. The Arbitration and Conciliation Act, 1996 has undergone two amendments in the years 2015 and 2019 since its enforcement and these amendments have only gone to make the law more expeditious. The Civil Procedure Code, 2000 Amendment and 2002 Amendment in the Legal Services Authority Act have also been implemented, which further empowers the courts to mandatorily refer the parties to Alternate Dispute Resolution including Arbitration, Settlement, and Mediation as an option.

Many business owners and construction industry entities prefer, as a matter of course, that construction disputes be submitted to binding arbitration. Others maintain that, because arbitration lacks facets of the procedural and legal structure of court litigation, only traditional litigation will ensure an outcome that is truly premised on the facts and law. These opinions often are influenced by favorable, or more likely, unfavorable, experiences in either forum. There are potential advantages and disadvantages to either forum, depending upon the nature of the dispute.

Litigation implies a method in which a dispute between two parties is resolved by going to the court, for a judgment. However, due to the rigidity and high cost involved in the litigation process, the parties go in for arbitration. Arbitration is a method of settling a dispute between parties wherein an independent person, selected by the parties, mutually, to decide the case. The basic difference between arbitration and litigation is that the court is involved in the case of litigation, as it is a lawsuit, whereas, in arbitration, a settlement between the parties is done out of court.

The primary difference between arbitration and litigation is that Arbitration is always civil in nature while conversely, litigation can be either civil or criminal in nature. The pace at which both the proceedings proceed also varies greatly. Disputes which are taken to arbitration can be resolved faster than a lawsuit in court. In general, lawsuits can take years to get decided while arbitrations can take place in as little as 60 days. Additionally, the limited right to appeal arbitration awards typically eliminates an appeal process that can delay the finality of the adjudication. [2]

The next big difference between the two is the cost involved. Since most arbitration proceedings take lesser time than a lawsuit in a court, they will end up being less expensive than a case that goes to trial. There is also a difference in the specialization of the decision-makers in the two methods. Judges will often know very little about certain types of cases. This will often make it difficult for the attorney to effectively present the case. Arbitrators are selected from a pool of professionals, typically with experience in the industry pertaining to the arbitration disputes and, therefore, may provide a greater level of expertise in comparison to a judge. Such persons have a greater capability of comprehending project issues and documents and of scrutinizing liability and claim for damages which is common to the construction industry than most trial court judges. [3]

Arbitration is a private method of resolving controversies between the parties, wherein complete confidentiality is maintained and on the contrary, litigation is a public proceeding. Parties may be compelled to participate in arbitration proceedings only by agreement. [4] Thus, if any additional parties are necessary for complete relief, those other parties either must have agreements requiring such participation or otherwise must consent to their joinder in the proceedings.  In contrast, in court proceedings, all persons and entities involved in a dispute typically can be joined as parties.

When in court, a judge’s decisions are constrained by statutes and precedents and the conduct of the trial is governed by established rules of evidence.  In contrast, an arbitrator has considerable flexibility to consider any evidence he/she deems relevant and may issue an award based upon perceptions of fairness or equity and not necessarily on the evidence or rules of law. The parties in arbitration can agree to hold the arbitration in a certain location regardless of where the action took place. This often results in the party who drafts the arbitration clause having all the arbitrations in a certain city or state in which they are located.

Lastly, in the arbitration process, the parties select the arbitrator(s).  Any pre-hearing disputes between the parties are decided by the same arbitrator(s) who ultimately decide the case. In contrast, in many courts, no individual judge is assigned to a case and, therefore, multiple judges may be involved in adjudicating disputes. The judge is assigned by the court without input from the parties. Thus, arbitration affords the parties with the ability to select the adjudicator, whereas court litigation does not. [5]

Thus, arbitration is preferred by the parties over litigation due to many reasons such as greater confidentiality, quick judgement, choice of solutions, higher chances of settlement, low cost, flexibility in process, etc. Although, litigation has a number of advantages, such as numerous appeals can be made and easy enforcement of the final outcome.

[1] Strengthening Arbitration and its Enforcement in India – Resolve in India by Bibek Debroy and Suparna Jain NITI Aayog.

 

[2] Litigation v. Arbitration: Pros and Cons by Brenton D. Soderstrum.

[3] Arbitration vs. Litigation: The Great Debate by David K. Taylor.

[4] Arbitration vs. Litigation: The Right to Appeal and Other Misperceptions Fuelling the Preference for a Judicial Forum by Rebecca Callahan.

 

[5] Advantages of Arbitration over Litigation: Reflections of a Judge, Harry T. Edwards.

 

Disclaimer:

The information contained in this document is intended for informational purposes only and does not constitute legal opinion, advice or any advertisement. This document is not intended to address the circumstances of any particular individual or corporate body. Readers should not act on the information provided herein without appropriate professional advice after a thorough examination of the facts and circumstances of a particular situation. There can be no assurance that the judicial/quasi-judicial authorities may not take a position contrary to the views mentioned herein.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances

Proceedings under Section 34 of the Arbitration and Conciliation Act, 1996 –

A summary procedure.

In a recent judgment, the Supreme Court has held that the proceeding under Section 34 of the Arbitration and Conciliation Act, 1996 (hereinafter referred to as ‘Act’) are summary proceedings and the parties can only exceptionally be allowed to adduce additional evidence to prove their grounds of challenge.

Facts of the case:

 The appellant, a financial institution, advanced a loan of Rs. 50,00,000/- to respondent no.1 and respondent nos. 2, 4 and 5 to 8 were the guarantors in respect of the said loan. On the failure of respondent no. 1 in repayment of the loan, the appellant, pursuant to the terms of their agreement, invoked the arbitration clause. The Arbitrator passed an award based on the oral and documentary evidence adduced by the parties, which was assailed by respondent no. 1 under Section 34 of the Act.

The respondent nos. 1 and 2 filed an application under Section 151 of the Civil Procedure Code, 1908 (hereinafter referred to as ‘CPC’) before the District Judge to permit them to adduce additional evidence. The said application was dismissed by the learned District Judge on the grounds that there is no necessity of adducing fresh evidence in the application filed under Section 34 of the Act.

Aggrieved by this, the respondent Nos. 1 and 2 filed writ petitions before the Karnataka High Court. The High Court while placing reliance on the judgment in Fiza Developers and Inter-Trade Private Limited v. AMCI (India) Private Limited and another [1], observed that in order to prove the existence of the grounds under Section 34(2) of the Act, respondent nos. 1 and 2 are permitted to file affidavits of their witnesses. In the impugned judgment, the High Court concluded that the reasoning of the District Judge not permitting respondent nos. 1 and 2 to file their own affidavits and affidavits of other witnesses to prove their case is erroneous and opposed to settled principles of law. The District Judge was thereby directed to “recast the issues” and allow the respondents to adduce additional evidence and further allow cross-examination of the witnesses.

Issues before the Court:

The appellants being aggrieved by the direction of the High Court, were cued to move the Supreme Court. The issue before the Supreme Court was the procedure under Section 34 of the Act as also the applicability of the law laid down in Fiza Developers in light of provision of Order 14, Rule 1 of CPC. The Court also considered the impact of the amendments made to Section 34 and their impact thereof.

Submissions made by the Parties:

The appellant submitted that proceedings under Section 34 of the Act are summary in nature and the scope of the said proceedings is very limited. It was also submitted that the validity of the award has to be decided on the basis of the materials produced before the arbitrator and that there was no scope for adducing fresh evidence before the court, especially in the absence of any exceptional grounds made out to seek permission to lead fresh evidence in the said application.

The respondent nos. 1 & 2 submitted that in view of Rule 4(b) of the High Court of Karnataka Arbitration (Proceedings before the Courts) Rules, 2001, (Karnataka High Court Arbitration Rules) all the proceedings of the CPC shall apply to such proceedings and therefore, the High Court rightly allowed the writ petitions and permitted respondent nos. 1 and 2 to file their own affidavits and also the affidavits of the witnesses. Rule 4(b) of the Karnataka High Court Arbitration Rules provides that all the proceedings of the CPC shall apply to such proceeding/application filed under Sections 14 or 34 of the Act insofar as they could be made applicable.

Findings of the Supreme Court:

With regard to the submission of the respondents, the Supreme Court observed that

“….Rule 4(b) of Karnataka High Court Arbitration Rules, in our view, is only procedural. In Fiza Developers, the Supreme Court noticed Rule 4(b) of Karnataka High Court Arbitration Rules and made it clear that there is no wholesale or automatic import of all the provisions of CPC into the proceedings under Section 34 of the Act as that will defeat the very purpose and object of the Act.”

As regards the applicability of the Fiza Developers case, the Court observed that

“…..framing of issues as contemplated under Order XIV Rule 1 CPC is not required in an application under Section 34 of the Act which proceeding is summary in nature.”

The Court further observed that an amendment to Section 34 was first made by the amending Act 3 of 2016 whereby sub-sections (4) and (5) were added to the Act vide which the intention of expeditious disposal of applications under this Section was highlighted in clear terms. A further amendment has been made to the said Section vide Arbitration and Conciliation (Amendment) Act, 2019 based on the report of Justice B.N. Srikrishna Committee, to the effect that in sub-section (2)(a) of Section 34 , for the words “furnishes proof that”, the words “establishes on the basis of the record of the Arbitral Tribunal that” have been substituted.

The Court while placing reliance on the judgment in Emkay Global Financial Services Limited v. Girdhar Sondhi, [2] held that,

“The legal position is thus clarified that Section 34 application will not ordinarily require anything beyond the record that was before the arbitrator and that cross-examination of persons swearing in to the affidavits should not be allowed unless absolutely necessary.”

It was further held that,

“….there are no specific averments in the affidavit as to the necessity and relevance of the additional evidence sought to be adduced.”

While considering the intent of the legislature behind the amendments to Section 34, the court held,

“The object of sub-sections (5) and (6) to Section 34 fixing time frame to dispose of the matter filed under Section 34 of the Arbitration Act, 1996 is to avoid delay and to dispose of the application expeditiously and in any event within a period of one year from the date of which the notice referred to in Section 34(5) of the Act is served upon the other party. In the arbitration proceedings, the parties had sufficient opportunity to adduce oral and documentary evidence. The High Court did not keep in view that respondent Nos.1 and 2 have not made out grounds that it is an exceptional case to permit them to adduce evidence in the application under Section 34 of the Act. The said directions of the High Court amount to retrial on the merits of the issues decided by the arbitrator.”

Analysis:

The Supreme Court vide this judgment reiterates the intention and relevance behind the amendments made to the Act from time to time. This being said, the true intention of resolution of disputes by the Alternative Dispute Resolution (ADR) mechanism of Arbitration is for a speedy, cost effective and an efficient outcome. If the parties are to be involved in a sort of a retrial at the stage, when the Award passed by the arbitrator or an Arbitral Tribunal is due to be enforced, then the whole purpose of opting for Arbitration would be in vain. The parties, in most cases, are given a fair trial and hearing during the arbitration proceedings itself and they have sufficient opportunity to adduce evidence during that time, thus allowing the parties to adduce additional evidence beyond the record before the arbitrators would be counter-productive and will require that the same opportunity be given to the other party as well. This would only lead to the enforcement or setting aside of the award being delayed by a significant time.

However, in the exceptional circumstance, where grave injustice is apparent on the face of the record and if the objections raised by the Objector become impossible to answer or conclude without additional documents, then such documents may be allowed to be placed on the record for deliverance of justice. The Objector must also point out the same in clear terms in his application under Section 34 so as to enable the Court to appreciate the gravity of the same. Needless to say, this should only be allowed in exceptional cases and a petition under section 34 should not take shape of a full-fledged civil trial.

[1] (2009) 17 SCC 796

[2] (2018) 9 SCC 49

Disclaimer:

The information contained in this document is intended for informational purposes only and does not constitute legal opinion, advice or any advertisement. This document is not intended to address the circumstances of any particular individual or corporate body. Readers should not act on the information provided herein without appropriate professional advice after a thorough examination of the facts and circumstances of a particular situation. There can be no assurance that the judicial/quasi-judicial authorities may not take a position contrary to the views mentioned herein.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances