- Purbasha Panda
Staff Writer, The Arbitration Workshop
Party autonomy is the plinth on which the entire edifice of arbitration proceeding rests. The concept of party autonomy allows a party to determine the nature of arbitral clauses as well as choice of procedure of arbitration subject to such safeguards which are necessary in public interest. With increasing complexity of contractual disputes, parties are incorporating varied kinds of arbitral clauses in their contracts. For example, some commercial contracts provide for arbitral clauses mandating a condition precedent of compulsory mediation or negotiation to resolve contractual disputes before invocation of arbitration or in case of construction contracts a hierarchical form of arbitral clause can be found which provides for tiers of arbitral proceedings for disputes arising out of a single contract. These kinds of arbitral clauses are often referred to as ‘multi-tier arbitral clauses’ or ‘escalation clause’. On 2nd June, 2020, a three judge Bench of the Apex Court comprising of Rohinton Fali Nariman J., S. Ravindra Bhat J. and V. Ramasubramanian J. finally decided on validity of such clauses and enforceability of awards arising out of such hierarchical arbitral proceedings.
B. FACTUAL BACKGROUND OF THE CASE
The instant case essentially dealt with a contract for sale entered between an U.S based corporation M/s Centrotrade Minerals and Metals Inc. [‘Centrotrade’] and Hindustan Copper Ltd. [‘HCL’] for delivery of 15,500 DMT of copper concentrate to be delivered at the Kandla Port in the State of Gujarat to be used by HCL for one of its plants situated at Khetri, Rajasthan. The consignments were delivered, post which disputes arose with respect to the quality of the goods delivered and subsequent to which the arbitration clause was invoked which provided for a two-tier dispute resolution clause. The dispute resolution clause provided that the disputes arising out of the contract has to be first referred to an arbitration seated in India to be presided by the arbitration panel of the Indian Council of Arbitration and to be conducted in accordance with the ‘Rules of Arbitration of the Indian Council of Arbitration’, in case the parties disagree with the arbitral award rendered through this arbitration then either would have a right to appeal to a second arbitration seated in London to be conducted in accordance with ‘Rules of Conciliation and Arbitration of the International Chamber of Commerce [‘ICC Arbitration Rules’]. Centrotrade invokes the arbitral clause and the arbitration proceedings seated in India rendered a Nil award, after which ‘Centrotrade’ invoked the second part of the arbitral clause as a result of which ‘ Mr. Jeremy QC’, was appointed as the arbitrator in accordance with ICC Arbitration Rules, while this arbitration proceeding was going on HCL filed a suit at a lower court at Khetri, Rajasthan challenging the arbitration clause, further a revision petition was filed on this order before a Division Bench of the High Court of Rajasthan restraining the appellant from proceeding further with the arbitration proceedings, and an ad-interim ex-parte order was passed by the High Court of Rajasthan to this effect. HCL refused to participate in the arbitration proceedings taking aid of this order. This order was finally vacated by the Apex Court. The arbitrator ‘Jeremy QC’ referred the matter of stay of arbitration to the ICC court which then allowed the arbitrator to continue with arbitral proceedings. An arbitral award was delivered as a result of these arbitration proceedings in favour of Centrotrade. The arbitral award adjudged that HCL would have to a pay a particular sum inclusive of interest for purchase price of the first and second shipment, in addition to this HCL would also have to pay a certain sum inclusive of interest in respect of demurrage due on first shipment.
When Centrotrade was trying to enforce this award in India, HCL filed objections to the enforcement application filed by Centrotrade before a Single Judge Bench of High Court of Calcutta, which rejected the objections and as a result of which the award became executable in India. However, this order was brought to challenge before a Division Bench of Calcutta High Court and the court firstly held that the award passed by the arbitration proceedings seated in London is a ‘foreign award’. Further, it held that both the arbitrators seated in India and London had concurrent jurisdiction and both the awards rendered through these arbitrations are mutually destructive of each other, as a result of which neither can be enforced. The Division Bench of Calcutta High Court set aside the judgements of the Single Judge Bench. Further, Centrode went on to file a ‘Special Leave Petition’ before the Apex Court and the matter finally came before a Division Bench of the Apex comprising of S.B Sinha J. and Tarun Chatterjee J. Two separate judgements were delivered by S.B Sinha J. and Tarun Chatterjee J. which was reported in ‘Centrotrade Minerals & Metals Inc. v. Hindustan Cooper Ltd. S.B Sinha J. in his judgement held that multi-tier arbitration clauses are not enforceable under the legislative framework in India and would be violative of Section 23 of the Indian Contract Act, 1872 and therefore, he went on to dismiss the appeal filed by Centrotrade. However, Tarun Chatterjee J. had a drastically different take on this issue. Tarun Chatterjee J. essentially decided the entire matter in light of four issues which are (a) Enforcement of a multi-tier arbitration clause under the legislative framework of India. (b) Whether the award rendered by the arbitrator seated in London would be considered to have arisen out of an appeal from the award rendered by the arbitrator in India? (c) If the ICC award was a ‘foreign award’? (d) Whether HCL was given proper opportunity to present its case during the course of arbitral proceedings?
Tarun Chatterjee J. held that a multi-tier arbitral clause is permissible under the legal framework of India. The award rendered through the second tier of the arbitral clause is in nature of an appeal. The ICC award is indeed a foreign award. However, he held that HCL was not given proper opportunity to present its case and therefore, he went on to dismiss the appeal filed by Centrotrade. In light of the fact there was disagreement in opinions of both the judges, the matter was then referred to a three judge Bench of the Apex Court comprising of Madan B. Lokur J., R.K Agarwal J. and Dr. D.Y Chandrachud J. This case was reported as Centrotrade Minerals and Metals Inc v. Hindustan Copper Ltd.. The three-judge bench confined themselves only to the question of enforceability and validity of a multi-tier arbitration clause under legal framework in India. The other questions relating to enforceability of such an award and if proper opportunity was given to HCL to present its case before the arbitrator in the arbitration proceedings seated at London was decided by another bench of the Apex Court comprising of R.F Nariman J., S. Ravindra Bhat J. and V. Rama Subramanian J. in a judgement delivered on 2.06.2020 reported as M/S Centrotrade Minerals & Metals v. Hindustan Copper Ltd.
C. PRIMARY ISSUES BEFORE THE COURT
· Validity of a multi-tier arbitration clause under the legal frame work in India
The validity of the two-tier arbitration clause was brought before the three-judge Bench of the Apex Court in 2017. The Bench comprising of Lokur J., R.K Agarwal J. and Dr. D.Y Chandrachud J. upheld that multi-tier arbitration clauses are valid under the legal framework in India. Various underlying questions also cropped up while the Bench delved into deciding enforceability of the two-tier arbitration clause like (a) Form and conclusiveness of an ‘arbitral award’, (b) Difference or similarity between the term ‘arbitration result’ and ‘arbitral award’(c) Scope of party autonomy in formulating the nature of an arbitration clause.
The court firstly aimed to verify the scope of appellate arbitration procedure within the confines of the A&C Act. The counsel for HCL relied on Section 34(1), Section 35 and Section 36 of the A&C Act and formulated an argument that a combined reading of all the three Sections points towards an interpretation that an arbitral award can be set aside only through an application made to the court, thereby excluding a two-tier arbitration clause. The court rejected such an interpretation and held that the use of word ‘only’ in Section 34(1) of the A&C Act has been misinterpreted by the counsel for HCL. The court marked that the import of Section 34(1) of the A&C Act nowhere suggests that only recourse of a court has to be taken to set aside an arbitral award. The court held that the fact that recourse to a court is available to a party for challenging an award does not ipso facto prohibit the parties from mutually agreeing to have a second look at an award with the intention of an early settlement of disputes and differences. The court further marked that the intention behind Section 34(1) of the Act is to avoid subjecting to stop a party from challenging an award at multiple forums. Further, the court held that the term ‘final and binding’ in Section 35 of the A &C Act does not mean final for all intent and purposes. The finality is subject to any recourse that an aggrieved party might have under a statute or an agreement providing for arbitration in second instance. The court also delved into Article 34(1) of the UNCITRAL Model Law and marked that the sole recourse against an arbitral award is definitely through an application for setting aside to be a made to a court, however this does not preclude a party to have a procedure of appeal of second instance to an arbitral tribunal.
This analysis led the court to decide on another question of law which is, in the instant case ‘Whether the arbitral award rendered by the first tier of arbitration is final and binding?” The counsel for HCL contended that the award rendered through first tier is final and binding and an appeal cannot arise from it to another arbitral tribunal, it can only be set aside under Section 34 of the A&C Act, shedding light on ‘finality of an award’ the court relied on ‘Uttam Singh Duggal & Co v. UOI and held that once an award is made on a subject matter, no action can be started on original claim which has been subject matter of reference , also the fact that arbitration proceedings occur in two steps, the first step involves arbitration proceedings giving rise to an award, the second step involves enforcement of an award. However, though relying on this case the Apex Court marked that an arbitral award does not have to be enforced to attain finality, it can be final when it conclusively determines substantive rights and claims of the parties. In the instant case, the arbitration clause provided that in case the award rendered by the first-tier process is not agreeable by any of the parties, then the parties can appeal against such an award. In the instant case a NIL award was delivered by the first-tier arbitration. The court held that the arbitral award rendered by the first tier of arbitration is not final and binding and such conclusiveness of an arbitral award was made a function of the party autonomy with respect to the nature and form of the arbitration clause. This brought the court to another question which is, ‘How far can party autonomy be stretched to define nature of an arbitration clause, can it possibly be extended to include an appellate procedure in an arbitration clause?’
The court while examining the scope of party autonomy in defining an appellate procedure in an arbitration clause held that party autonomy is the backbone of arbitration procedure. The concept of party autonomy does not only extend to determining the (a) proper law of contract (b) proper law of arbitration agreement or (c) law of arbitration proceeding, otherwise known as curial law but it also extends to determining nature of an arbitral clause. It further relied on Reliance Industries Ltd v. UOI which marked that [..] The terms of a contract have to be understood in a way that parties want or intend for the terms to be understood or interpreted. In agreements of arbitration, party autonomy is the grund norm. Another question that stemmed from this analysis is ‘Whether incorporation of such a clause in the principal contract and an arbitral award arising out of such an arbitral clause violates public policy’. While deciding on this question, the two-tier arbitration clause was also put to test by the Apex Court on touchstone of violation of public policy.
The court made the following observation in this regard-: If terms of contract would be violative of public policy. If the terms affect (a) substantive content of the award (b) terms in a contract which purport to exclude or restrict the supervisory jurisdiction of the court (c) terms which require the arbitrator to conduct reference in an unacceptable manner (d) terms which purport to empower arbitrator to carry forward procedures or exercise power which lie exclusively with the courts (e) terms which require an arbitrator to make reference in an unacceptable manner (f) terms which purports to empower the arbitrator to carry forward procedures. The Apex Court held that the implication of a two-tier arbitration and an award arising out of such a clause does not fall into any of the categories defined for the purposes of testing violation of public policy. The court marked that it does not find anything fundamentally objectionable in preferring and accepting a two-tier arbitration system. Thus, the court fundamentally upheld an appellate arbitration procedure.
The court also marked it was not the first time in this case that a multi-tier arbitration clause had come before the court. It marked that in case of commodity trade arbitration multi-tier arbitration had become the norm. It also relied on ‘Report on Working Group on International Contract Practices: On work of its third session’ [ 1982]. India happened to be one of state members of the UNCITRAL Working Group. It was mentioned in the report that ‘Parties are free to agree that the award may be appealed before an arbitral tribunal of second instance and that model law should not exclude such practice although it was not used in all countries. However, they did not include a specific provision in this regard.’ In the instant case, it was observed by the Apex Court that India was a state party of the ‘Working Group’ in 1982. The framers of the A&C Act who legislated and drafted the Act during the nineties must have been aware of this very fact and therefore there is no such provision in the Act that exclusively prohibits a two-tier arbitration from the scope of the act. The court also recognized the fact that the award delivered by the arbitrator seated in London was a ‘foreign award’.
· Enforcement of an arbitral award arising out of a multi-tier arbitral clause
Before, we delve into this issue it is imperative to have a preliminary idea on how a foreign award is enforced in India. In case, a party receives a foreign award from a country which is signatory to the ‘Convention on the Recognition and Enforcement of Foreign Awards, 1958’ [‘New York Convention’] and the award is made in a territory which has been notified as a convention country by the Government of India, the award would then be enforceable in India. A foreign award is defined under the A&C Act under Section 44(1). The enforcement of such foreign award is initiated by filing an execution petition, such an execution petition is filed under Section 47, 48 and 49 of the A&C Act. In the instant case, it is at this stage that HCL had filed objections with respect to enforcement of the foreign award, post which the Single Judge Bench of Calcutta High Court rejected the objection raised by HCL, after which an appeal was preferred before a Division Bench of Calcutta High Court which had held that the award was liable to be set aside on the ground mentioned under Section 48(1)(b) of the Act. This particular question came before the Supreme Court by way of an SLP before a Division Bench comprising of S.B Sinha J. and Tarun Chatterjee J., post which the matter was referred to a three judge Bench comprising of Lokur J., DY Chandrachud J. and R, K Agarwal J. This Bench primarily dealt with the question of validity of a tier-arbitration clause and further ordered the question of enforcement of the foreign award must be put before another Bench. Hence the question ‘Whether the award passed by the ICC arbitrator was liable to be set aside under Section 48(1)(b) of the A&C Act?’ Three primary arguments were made by HCL in this matter (a) Setting aside of the arbitral award on ground of Section 48(1)(b) of the Act. (b) The applicability of the stay order by the Rajasthan High Court on the arbitration proceedings at London (c) The duty of the arbitrator at London to determine the question of jurisdiction as a preliminary position.
Before deciding on the veracity of HCL’s first argument, the court ventured to draw distinction between provision under A&C Act for setting aside a domestic arbitral award and a foreign award under the confines of the Act and the legislative policy behind this distinction. This was primarily important as later the court went to define the scope of interference with enforcement of an arbitral award in light of this distinction. With respect to interference with a foreign arbitral award, relying on the case of Vijay Karia vs Prysmian Cavi E Sistemi Srl (Vijay Karia Case) which was also decided by the same bench, the court marked that in case of domestic arbitrations, once an award is passed, the award would be in operation, there is no requirement to get the award enforced. However, in case of ‘foreign arbitrations’, once an award is passed an enforcement application has to be filed. The legislative intent behind drawing this distinction is to ensure that a person who belongs to a convention country and who has gone through a challenge procedure of the said award in its country of origin must then be able to recognize or enforce this award. In light of this legislative policy, the court ventured out to define the scope of challenge to a foreign arbitral award under Section 48 of the Act. In the instant matter, Article 136 of the Constitution of India was invoked by the parties, hence the question that arose before the court was ‘Whether Article 136 should be used to circumvent this legislative policy?’. The court observed that keeping the abovementioned legislative policy in mind, the Supreme Court’s jurisdiction under Article 136 to interfere with a foreign award should be narrowly and specifically defined. To determine if a party has been given proper opportunity to present its case. The Apex Court relied on two foreign judgements and the recent ‘Ssangyong Case’. In the case of Minmetals Germany Gmbh v. Ferco Steel Ltd. , it was held that the test to determine if a party has been given proper opportunity to present its case is to check if the procedure adopted by the arbitrator is contrary to rules of natural justice, also the fact that the enforcee has been prevented to present its case owing to matters outside its control. Further the court has also referred to the case of Jorf Lafar Energy Co. v. AMCT Export Corp. herein the test laid down was that the conduction of arbitral proceedings should not violate due process. The court further relied on the ‘Sangyong Case’ to define the object of Section 48(1)(b) of the Act. The court held that the expression ‘was otherwise unable to present its case’ occurring in Section 48(1)(b) cannot be given an expansive meaning and would have to be read in context and colour of words preceding the said phrase. The court marked that this expression is a facet of natural justice principles which would be breached only if a fair hearing was not given by the arbitrator to the parties. The court further ruled that if no opportunity is given to deal with an argument that goes to the root of a matter or evidence then this might result in denial of justice. The court held that a narrow meaning has been given to Section 48(1)(b) in light of pro-enforcement approach led down in ‘Vijay Karia Case’.
The court took an assessment of the sequence of events in the arbitration proceedings to decide if HCL was provided proper opportunity to present its case. The court found that on 03. 05. 2001, the arbitrator had directed HCL to serve submission along with documents, a time table was set out for this but by 30.07.2001 no defense submission or supporting evidence were filed. Until August 2001, respondents did not participate in arbitral proceedings. On 09.08.2001, the arbitrator informed the parties via fax that it is going to pass the award. It is after this point that HCL requested for extension of a month to put forward their defense. HCL was granted time till 31.8.2001, during this time HCL had also sought extension till 12.9.2001, however on 13.9.2001 the arbitrator received the arguments of HCL via fax. These submissions were taken into consideration in the award even after the deadline as the 9/11 attacks had happened during that time, hence considering this precarious situation and the implication of this incident on communication services the arbitrator took into account all these submissions made by HCL. The court marked that the arbitrator had been extremely fair in conduction of arbitral proceedings and the rejected the ground raised by HCL under Section 48(1)(b) of the Act for setting aside the arbitral award.
The second argument put forward by the counsel for HCL was that the effect of stay order of the Rajasthan High Court on conduction of arbitration proceedings needs to be taken into consideration in light of its refusal to become part of the arbitral proceedings even after repeated invite to participate. The court rejected this argument and held that the order of Rajasthan High Court was directed against the parties and not against the arbitrator. This stay order was also vacated by the Apex Court subsequently. The court marked that the arbitrator had proceeded in light of green signal received by the ICC Court.
The third argument which was put forward by the counsel of HCL was that the London arbitrator ought to have determined the question of jurisdiction as a preliminary question. Firstly, this plea was rejected by the court on the ground that it was taken before the Apex Court in the instant matter for the first time. Secondly, the court marked that there was no mandate to support the fact that arbitrator had sought to take up the plea as to jurisdiction as a preliminary objection which should be decided over other matters. Thus, this plea of HCl was also rejected by the Apex Court
In light of all these arguments, the Apex Court held that the judgement of Tarun Chatterjee J. which had held that HCL was not given a proper opportunity to present its case cannot be sustained in law and the appeal filed by Centrotrade should be allowed and that the foreign award should be enforced.
D. ANALYSIS AND CONCLUDING REMARKS
Before, we understand the implication of upholding the validity of a multi-tier arbitration clause. Let us try to understand the object of a multi-tier arbitration clause. Multi-tier arbitration clauses are incorporated in contracts to provide for a dispute resolution framework wherein escalation in tiers of the arbitral clauses are provided for increasing complexity in a contractual dispute. There are different kinds of escalation clauses incorporated in contracts. For example, some escalation clauses provide that the parties must undergo a pre-mediation or negotiation process before they start the arbitration proceedings so as to exhaust all opportunities of amicable settlement of dispute before arbitration. These kind of escalation clauses can provide for an opportunity for resolution of disputes in a more informal setting, thus it can prove to be cost effective to the parties to the extent that it can possibly avoid an arbitral proceeding. In case of governmental construction contracts, we often find that there are tiers of dispute resolution. In these, kind of contracts it is usually seen that a party has to approach a departmental authority for redressal for his grievance before approaching an arbitral tribunal. These clauses are aimed at avoiding a possible arbitration proceeding and providing preliminary means to settle the dispute.
In light of all this, the crux of the ratio upholding these clauses is that party autonomy as an essential feature of arbitration does not only extend to determining the nature of arbitral proceedings but also extends to formulating the nature of the arbitral clause.
If we take a look at the arbitral clause in this instant case, then we can find that the arbitral clause is two tiered. The first tier provides for an arbitration in India and in case the parties disagree with the award arising out of this arbitration proceeding then they can go for an arbitration seated in London which would deliver the final award. It is imperative to note that both these arbitral proceedings are of the same nature and intensity. There is no escalation in terms of the intensity of the arbitration proceeding in the clause, there is no informal or non-adversarial methods provided for amicable settlement or resolution of disputes before arbitration proceedings are commenced, hence it is dubious as to how this clause allows for dispute prevention, moreover such an appellate procedure also allows for the arbitration proceedings to continue for a greater interval of time as opposed to a single tier arbitration clause, which again is clearly in conflict with one of the primary objectives of the A&C Act which is speedy resolution of disputes. This analysis again brings us to the question that “Can party autonomy be exercised to formulate a kind of arbitral clause which might not be in spirit of one of the basic objectives of the Act?”. These questions are again before the courts to answer.
 Purbasha is a Staff Writer at the Arbitration Workshop. She can be reached at email@example.com.  (2006) 11 SCC 245  (2017) 2 SCC 228  Civil Appeal No. 2562 of 2006 decided by the Supreme Court of India on available at https://main.sci.gov.in/supremecourt/2004/19375/19375_2004_34_1501_22350_Judgement_02-Jun-2020.pdf  72 (1998) DLT 798  (2014) 7 SCC 603  2020 SCC OnLine SC 177  (1999) 1 All ER (Comm) 315 : (1999) C.L.C. 647