M J Antony: Arbitration muddle

OUT OF COURT

The formidable difficulties in interpreting international arbitration law were once again demonstrated in the Supreme Court judgement passed a few weeks ago in Shin-Etsu Chemicals Ltd vs Aksh Optifibre Ltd.

The three judges who heard the case differed not only on the main issue but also on subsidiary ones and agreed perhaps only on the point that arbitration must always proceed expeditiously, without legal hurdles.

The core issue in this case related to the interpretation of Section 45 of the Arbitration and Conciliation Act of 1996, which had repealed three previous legislations on arbitration. The new law was patterned on the UNCITRAL model law for international commercial arbitration.

The 1996 Act was supposed to speed up arbitration and clear the bottlenecks that slowed down the previous regime. However, the new law also seems to be sinking in the mire of legalities and ingenuities of lawyers and arbitrators.

In this case, the parties entered into an agreement in 2000. It was agreed that in case of disputes, they shall be settled in Tokyo and the decision there shall be final. Two years after the contract, the Japanese company terminated its agreement with its Indian partner.

The latter moved the civil court in this country for an injunction against the foreign company alleging that the long-term purchase agreement of 2000 was unconscionable, unreasonable, against public policy and it was entered into under undue influence. It was incapable of performance and should be declared void from the start.

The Japanese company invoked the international arbitration clause. The trial court in India referred the parties to arbitration. On appeal, the high court referred the dispute again to the trial court, according to Section 45. The Japanese firm then moved the Supreme Court.

According to Section 45, a judicial authority can refer a dispute for arbitration unless the agreement is "null and void, inoperative or incapable of being performed". The question arose whether this was a prima facie, preliminary finding or a final finding. This is the question on which the three judges who heard the case could not agree.

The majority agreed that the trial court could go by the prima facie finding and there was no need for elaborate hearing and a final finding on this issue. Ultimately, the case went back to the trial court. It is already more than two years since the dispute started and there is still a long way to reach finality, despite the new law.

One judge had suggested that a time limit of three months should be fixed for deciding the preliminary objection, which could be done on affidavits while skipping oral arguments.

However, the main judgement did not find this idea practical. If the applicable law is a foreign law, which is a common feature in international contracts, the time limit is unlikely to be complied with as it is not feasible.

Moreover, the object of the Act, to expedite arbitration, would be defeated if the court proceedings remain pending even after the commencement of the arbitration. Therefore, the majority judge said that at the pre-reference stage the trial court's view should be based on its prima facie view only. A full trial could await the post-award stage.

The third judge examined the possibilities in case the trial court finds that the reference to arbitration should be rejected. This is a "legal question of sufficient complexity" and he did not go into it in this particular case. Thus, all the questions on this issue have not been finally answered by the Supreme Court.

Earlier Supreme Court judgements on the new arbitration law have also not settled several aspects of the alternative dispute resolution mechanism.

Meanwhile, a seven-judge constitution bench headed by the Chief Justice is expected to deliver a judgement soon on two other irksome issues which earlier decisions could not fix. They involve the interpretation of Sections 11 and 16 of the Act, which have been found to be hurdles in speedy resolution of disputes.

Meanwhile, the ninth report of the Rajya Sabha standing committee which went into the grey areas of the law and examined a Bill to amend the present Act has recommended that a new comprehensive one should be drafted.

It noted that many international parties were willing to choose Asian countries as the venue for arbitration because they are cheaper and the new investments are going there.

But they are dissuaded by the current situation of law there. If a conducive atmosphere is built up in India "" clear laws and procedures and availability of infrastructure "" it could become a major player in the field of international arbitration.