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

Institutional Arbitration: A Better Alternative

Arbitration is a form of alternative dispute resolution (ADR) which allows disagreements between two parties to be resolved outside the traditional court system (avoid resolving their dispute in the public litigation). Arbitration is only an alternative to litigation and it does not replace the judicial machinery in all aspects, rather it co-exists with it. It is used mainly in solving disputes arising out of commercial matters.

Arbitral tribunals usually consist of either one or three arbitrators. The primary role of an arbitral tribunal is to apply the law and make a dispute decision by administering a so-called “arbitral award”. In principle, arbitral awards are final and binding. They can only be challenged before a state court under exceptional circumstances. Arbitral awards can be enforced in most countries worldwide. The procedure to be followed (if not included in the contract under dispute) is governed usually by a country’s arbitration laws, or by the arbitration rules stipulated by the International Chamber of Commerce (ICC).

Ad hoc Arbitration and Institutional Arbitration

There are two types of arbitration: ad hoc arbitration and arbitration organized in permanent institutions.

Ad hoc arbitration is conducted independently from any influence of institutions and requires that parties make their own arrangements for the selection of arbitrators and for designation of rules, applicable law, procedures, and administrative support. In this type of process, the arbitrators are appointed by a case-by-case basis, usually by the parties. At times the parties select an appointing authority that has the right to appoint arbitrators for the proceeding. The composition of the tribunal can vary from one to several arbitrators depending on procedural rules.

In the arbitration process organized by permanent institutions, the process is more bound to the rules of the said institution. Institutional arbitration is one in which a specialized institution intercedes and takes on the role to regulate the arbitration process. Each institution has its own set of rules which provide a framework for the arbitration, and its own form of administration to assist in the process. The institution provides arbitral services and normally appoints the arbitrators. One example of this kind of institution is the International Chamber of Commerce. It is a process whereby arbitration is conducted and overseen by a well-established arbitral institution and the proceedings are conducted by experts appointed by it as per its rules and governed by fee structure fixed by it. The contesting parties take recourse to an arbitral institution which helps to ensure independence and impartiality, besides ensuring efficiency and secrecy.

Ad hoc Arbitration vs. Institutional Arbitration

Determination of procedure

Arbitral proceedings have to be conducted in an acceptable and well-established manner. There is much of hue and cry to devise the procedure in ad hoc arbitration, but in case of arbitration conducted through the aegis of an arbitral institution, it poses no problem whatsoever. There are a fixed set of rules which are applicable to all the arbitrations conducted by the arbitral institution. The United Nations Commission on International Trade Law (UNICITRAL) Arbitration Rules, revised in 2013, are among the most suitable rules for this purpose. Such consistency and well- established norms are nowhere to be seen in ad hoc arbitrations.

Fixation of fees

The lacuna with respect to the scale of fee payable in case of ad hoc arbitrations still exists. It is most unfortunate that these days arbitration has become a profitable business.  In ad hoc arbitrations, the tribunals fix their own fee without having any regard whatsoever to its genuineness or justification. Fee is generally fixed according to the status of the arbitral tribunal.

In the case of institutional arbitrations, there is no such discretion permissible. A fixed fee structure is laid by the arbitral institution, according to which the members of the arbitral tribunal are paid.

 Charging exorbitant fee by arbitrators erodes confidence in arbitration

 It was noted by the Supreme Court in Union of India vs Singh Builders Syndicate[1] that fee charged by the arbitrators is highly excessive. It showed deep concern. In the aforesaid case, the Supreme Court had been constrained to observe:

“20. Another aspect referred to by the appellant, however, requires serious consideration. When the arbitration is by a tribunal consisting of 4 of serving officers, the cost of arbitration is very low. On the other hand, the cost of arbitration can be high if the Arbitral Tribunal consists of retired Judge(s).

“21. When a retired Judge is appointed as arbitrator in place of serving officers, the Government is forced to bear the high cost of arbitration by way of private arbitrator’s fee even though it had not consented for the appointment of such non-technical non-serving persons as arbitrator(s). There is no doubt a prevalent opinion that the cost of arbitration becomes very high in many cases where retired Judge(s) are arbitrators. A large number of sittings and charging of very high fees per sitting, with several add-ons, without any ceiling, have many a time resulted in the cost of arbitration approaching or even exceeding the amount involved in the dispute or the amount of the award.

“22. When an arbitrator is appointed by a court without indicating fees, either both parties or at least one party is at a disadvantage. Firstly, the parties feel constrained to agree to whatever fees is suggested by the arbitrator, even if it is high or beyond their capacity. Secondly, if a high fee is claimed by the arbitrator and one party agrees to pay such fee, the other party, which is unable to afford such fee or reluctant to pay such high fee, is put to an embarrassing position. He will not be in a position to express his reservation or objection to the high fee, owing to an apprehension that refusal by him to agree for the fee suggested by the arbitrator, may prejudice his case or create a bias in favor of the other party which readily agreed to pay the high fee.

“23. It is necessary to find an urgent solution for this problem to save arbitration from the arbitration cost. Institutional arbitration has provided a solution as the arbitrators’ fees are not fixed by the arbitrators themselves on a case-to-case basis but are governed by a uniform rate prescribed by the institution under whose aegis the arbitration is held. Another solution is for the court to fix the fees at the time of appointing the arbitrator, with the consent of parties, if necessary in consultation with the arbitrator concerned. The third is for the retired Judges offering to serve as arbitrators, to indicate their fee structure to the Registry of the respective High Court so that the parties will have the choice of selecting an arbitrator whose fees are in their “range” having regard to the stakes involved.”

       It was expected that the arbitrators will heed to the advice of the Supreme Court in scaling down their fees but, of late, it is noticed that the fees have rather gone up. It seems that the only answer to the problem is by taking recourse to arbitration through arbitral institutions where the schedule of fees is quite reasonable and in any case, it is no match to what is being charged in ad hoc arbitrations.

Procedural Matters

In the case of institutional arbitrations, everything is totally systemized, whereas it is not so in the case of ad hoc arbitrations. In the case of institutional arbitrations, if any vacancy arises, the same is filled up in a short time but in case of ad hoc arbitrations, there is no way out except to knock at the door of the court to supply vacancy, which is more so in case of arbitrations being conducted by sole arbitrators.

Screening of award

In ad hoc arbitrations, the award as published is sent to the court without caring as to the format and the formalities connected therewith. This results in raising of objections by the Registry of the court. The arbitral tribunal, after meeting with the objections, returns the same to the Registry of the court. This entails an unavoidable delay of a few months. However, there is a system laid down by arbitral institutions to scrutinize the award after it is received from the arbitral tribunal. By scrutiny of the award, it does not mean that the institution can comment upon the merits of the award. All that the arbitral institution has to see is to check the requirements from the angle of the court. In this way, lot of time is saved since Registry of the court has no occasion to raise any objection.

Confidentiality

 In the case of arbitrations conducted by arbitral institutions, the secretarial and administrative staff is governed by the rules of the institution. Thus, it is easy to maintain the confidentiality of not only the arbitral proceedings but also of the discussions which precede the making of the award, e.g. the interaction between the members of the arbitral tribunal. There is complete secrecy and no undue information is leaked. But in ad hoc arbitrations, the position is just the reverse. Every information, which a party wishes to have, is leaked to it by the concerned staff for consideration.

Conclusion

In the context of international commercial disputes, institutional arbitrations may be more suitable, despite being more expensive, time-consuming and rigid. The institutional process provides established and up to date arbitration rules, support, supervision and monitoring of the arbitration, review of the awards and strengthens the awards’ credibility. It is equally important to ensure that institutional arbitration in India is speedier and more cost-effective. To achieve this, the continuous effort would be required by the arbitral institutions and gain the confidence of parties to move towards mitigation instead of litigation. This can be achieved by providing state of the art facilities, experienced arbitrators, and effective administrative body and well-designed framework. India is a country with the great potential it has got the best possible opportunity to achieve this goal and emerge as the most effective arbitral seat in the globe.

[1] (2009)4 SCC 523

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

 

 

 

 

NO SPECIAL TREATMENT TO GOVERNMENT

INTRODUCTION

Arbitration as a dispute resolution mechanism has evolved through time ever since its inception in 1940. The current legislation, the Arbitration, and Conciliation Act, 1996, too purports to make arbitration an effective and meaningful dispute resolution mechanism. The nature of arbitration proceedings is such as to provide for alternative dispute redressal system wherein parties to the dispute consent to resolution through a tailored procedure that suits the parties. The ultimate fruit of the tree is an award enforceable in favour of one of the parties. The arbitral tribunal, just like any other quasi-judicial body, has powers and functions like that of a court. This includes the powers of the arbitrators to consider procedural laws like Code of Civil Procedure (CPC, for short) or even sometimes go beyond. Such is the authority and discretion of an arbitrator.
Recently the Hon’ble Supreme Court dealt with a proposition weighing the gravity of application of CPC, its enforcement hitches and Section 36 of the Act, in the case of Pam Developments Private Ltd. vs. State of West Bengal ,wherein it held that no special or exceptional treatment should be given to the Government as a party in granting stay of the arbitration award during the course of the proceedings.In fact, allowing the same would defeat the very purpose of quick resolution through arbitration, as the decree-holder would be deprived of the fruits of the award on the mere filing of objection under Section 34 of the 1996 Act.

FACTS OF THE CASE

Pam Developments Private Ltd. (appellant) and the State of West Bengal (respondent)entered into an agreement for a special repair programme for different stretches of National Highways in the district of Hoogly. Disputes arose between the parties. On the failure of the employer to appoint arbitrator, the High Court appointed an arbitrator. The arbitrator, after adjudication, made an award in favour of the appellant. Placing reliance on the judgement in the case of Board of Council for Cricket in India vs. Kochi Cricket Private Limited , wherein it was held that the amended provisions of Section 36 of the Arbitration and Conciliation Act, 1996 would also apply to the pending proceedings under Section 34 of the Act, the appellant filed an execution application before the Calcutta High Court. The respondent sought time to file an application for staying the award. The stay application was, however, dismissed and the Executing Court attached the amount lying to the credit of the respondent, with the Reserve Bank of India. The respondent filed a fresh application for stay of award, which was allowed by way of an unconditional stay under Order XXVII, Rule 8A of CPC. The said stay was a subject matter of the appeal before the Apex Court.

ISSUES BEFORE THE COURT

The SupremeCourt was called upon to adjudicate on the applicability of Order XXVII, Rule 8A of CPC while ordering an unconditional stay of an arbitral award against the Government. The Supreme Court also considered whether the Executing Court could pass an order of unconditional stay of an arbitral award against the Government solely relying upon the provisions of CPC.

SUBMISSIONS ON BEHALF OF COUNSE

The main contention of the appellant was that mere application of stay filed under Section 34, does not by itself render an arbitral award unenforceable, unless the court passes an order of stay of operation thereof under Section 36(3) of the 1996 Act. The appellant laid emphasis on the phrase “have due regard to” used in the proviso to Section 36(3) and stated that the said phrase would mean that the Court has to take into consideration the provisions of CPC as guiding principles and that the same would not be mandatory in nature.
Further placing reliance on the 246th Report of the Law Commission and Section 18 of the 1996 Act, which calls for equal treatment of the parties to the arbitration proceedings, the appellant contended that it also included the Government. The appellant further submitted that even if the provisions of Order XXVII, Rule 8A of CPC were to be considered, an order of unconditional stay of arbitral awards against the Government, solely relying upon the provisions of CPC, was untenable and the court should have directed the Government to deposit the awarded amount, as the said rule only exempted the Government from furnishing security amount and not deposit of the awarded amount. Based on the same, it was contended that Order XXVII, Rule 8A of CPC should not be read into the 1996 Act as it would limit the effect of Section 36 thereof.
Per contra, the respondent gave a different interpretation to the provisions of Section 36(3) of the 1996 Act. According to the respondent, the use of the word“shall” in the proviso to Section 36(3) of the Act made the provisions of CPC mandatorily applicable. It also stated that as per Order XLI, Rule 5(5) of CPC, the Government was required to make a deposit or furnish a security, failing which, stay would not be granted. But in view of Order XXVII, Rule 8A of CPC, the Government would be exempted from making such payment. Thus, the Government tried to evade its liability to furnish any security or make any deposit in view of exemption under the aforesaid provision.

JUDGEMENT

Setting aside the judgement of the Calcutta High Court, which granted an unconditional stay of an arbitral award against the Government, the Supreme Court held (para 27, page 9):
“……Once the Act mandates so, there cannot be any special treatment given to the government as a party. As such, under the scheme of the Arbitration Act, no distinction is made nor any differential treatment is to be given to the government, while considering an application for grant of stay of a money decree in proceedings under Section 34 of the Arbitration Act……”
The Court observed that the term “have due regard to” in Section 36 is purely recommendatory in nature. It means that the court can take the provisions of CPC into consideration, but its application is not mandatory. It has to be taken as a general guideline only and that, in itself, does not make the main provisions of the 1996 Act inapplicable.
In the backdrop to Section 36(3) of the Act, the Supreme Court while considering the phrase “having regard to” in the case of Shri Sitaram Sugar Company Limited vs. Union of India held that “the words ‘having regard to’ in this sub-section are legislative instructions for the general guidance of the Government in determining the price of sugar. They are not strictly mandatory, but in essence directory.”
The Court laid emphasis on the basis for amendment of Section 36 of the 1996 Act. It noted that Section 36 was amended in 2015 on the basis of the 246th Law Commission Report which had categorically recommended that there should be no automatic stay of an arbitral award and while so recommending, it did not make any exception for the Government. It further noted that Order XXVII, Rule 8A of CPC only provides an exemption from furnishing security. It does not restrict the Court from directing the Government to deposit the decretal amount in the appeal against a money decree.
Thus, the Supreme Court overruled the judgement of the Calcutta High Court affording special treatment to the Government and held that ordering an unconditional stay solely relying upon the provisions of CPC would be against the spirit of Section 36 of the Arbitration and Conciliation Act, 1996.

CONCLUSION

At this juncture, it would be apt to quote the observation of Hon’bleDr. Justice D.Y. Chandrachudin RomilaThapar vs. Union of India, (para 38, page 66):
“….The law is not a respecter of social, economic or political status and every litigant who seeks access to justice has to be treated evenly.”
The Supreme Court in Pam Developments’case strengthened the position of law on the application of Section 36 of the Act, with regard to the extent of the application of CPC and while upholding the supremacy and spirit of the provisions of the Arbitration and Conciliation Act, stated (para 19, page 7):
“……Mere reference to CPC in the said Section 36 cannot be construed in such a manner that it takes away the power conferred in the main statute (i.e. Arbitration Act) itself. It is to be taken as a general guideline, which will not make the main provision of the Arbitration Act inapplicable. The provisions of CPC are to be followed as a guidance, whereas the provisions of the Arbitration Act are essentially to be first applied. Since, the Arbitration Act is a self-contained Act, the provisions of the CPC will apply only insofar as the same are not inconsistent with the spirit and provisions of the Arbitration Act.”
Another inference of importance that can be drawn from this case is the interpretation of Order XXVII, Rule 8A of CPC. The Apex Court opined in this regard that the only exemption that is provided under Rule 8A of CPC is in respect of furnishing security. However, the aforesaid Rule is silent on the question of the Government’s liability to deposit the decretal amount and the Court is empowered to direct the Government to deposit the aforesaid amount.
Commenting on the legislative intent behind incorporation of archaic laws like Order XXVII, Rule 8A of CPC, the Apex Court has very interestingly observed that the said provision was brought in during the British Raj favouring and protecting the interests of the then Government, the Crown and also acknowledged the inconsistency and incongruency of the said rule to the contemporary setup of a democratic republic.

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