M J Antony: Validity of the two-tier arbitration clause

OUT OF COURT

Once again, judges of the Supreme Court fail to agree on interpreting provisions of the new Act.

Though the Arbitration and Conciliation Act is less than a decade old, there are few central legislations that have been subjected to the scrutiny of the Supreme Court so often. The court itself has reviewed its views on important questions, like whether the Chief Justice of India, while choosing the international arbitrator, exercises his judicial or administrative power (SBP & Co case of 2005). In the latest of the Supreme Court judgements on arbitration law, two judges could not agree on the validity of two-tier arbitration agreements, particularly when the first clause is for domestic mediation and the second one prefers an international forum.

The issue arose in two appeals from a judgement of the Calcutta High Court in Centrotrade Minerals & Metals Inc vs Hindustan Copper Ltd. Centrotrade is a US firm dealing in non-precious metals like copper. The Indian company, owned by the government, bought copper concentrates from the US firm under an agreement that provided for a two-tier arbitration mechanism. It, in effect, said that if disputes arose, the parties shall move the Indian Council of Arbitration. If either party disagrees with the result of the arbitration in India, it will have the right to appeal to an arbitrator in London, in accordance with the rules of the International Chamber of Commerce (ICC). The result of the second arbitration will be binding on both the parties.

In this case, the US firm moved the Indian forum but it received a "Nil" award. Therefore, it invoked the second part of the arbitration clause and approached the ICC. The arbitrator in London passed an award in favour of the US firm. The Indian undertaking then moved an application in a court here seeking a declaration that the award was void. The US firm moved another, seeking the enforcement of the award. These applications were transferred to the Calcutta High Court.

The complexity of the issue could be gauged from the fact that the single judge passed an order in favour of Centrograde, while a division bench of the high court reversed it. Both parties appealed to the Supreme Court, only to find that the two judges who heard the case wrote differing judgements running to a hundred pages. Now the issue will be placed before a larger bench to heard all over again.

The five judges who dealt with the crucial issues in the high court and the Supreme Court differed on all of them. For instance, can there be a two-tier agreement, first domestic and the second in the nature of an appeal, conducted abroad? Can the ICC award over-rule an award passed by the Indian arbitrator? Is it permissible under the Indian law to have an appellate forum? Are the precedents of the repealed arbitration laws valid under the new 1996 Act? Is the ICC award a "foreign award" under the Indian law?

The extent of divergence of judicial opinion can be seen from a few passages in the judgement. Justice S B Sinha categorically states that the 1996 Act put domestic and foreign awards in different compartments. Therefore, an arbitration award cannot be an "admixture" of domestic and foreign awards. "It is inconceivable that one part of the agreement shall be enforceable as a domestic award but the other part would be enforceable as a foreign award," according to him. Moreover, a multi-tier arbitration was valid under the old arbitration laws of 1940 and 1961, but the new statute scraps the old procedures.

On the other hand, Justice Tarun Chatterjee finds nothing in the new law prohibiting two-tier arbitration. Such agreements were valid under the old statutes and the new law does not scrap it. Further, the award of the ICC arbitrator was not a domestic one, but a foreign award. Similarly, the judges of the high court also took divergent views on the questions raised in the case.

With such vital questions still unanswered, and the court reviewing its own decisions so often, doubts are bound to be raised about the functioning of the new law. Last year, the Supreme Court delivered a judgement in Shin-Etsu Chemicals Ltd vs Aksh Optifibre Ltd, in which three judges had given opinions at variance with each other. There have been several other decisions that highlighted the grey areas in the law.

The law-makers have taken note of some of the deficiencies in the law and an amendment bill has been before Parliament for some time. Unless an overhaul is carried out, the law would not get recognition from the business community. Ultimately, the country may be the loser. Many international parties are willing to choose Asian countries as venues for arbitration because they are cheaper and the new investments are going there. What stops them from going ahead is the state of law in these countries. The law is not clear, even to the apex judiciary. Moreover, the infrastructure available in these countries is not adequate. The delays crippling arbitration proceedings still remain scandalous. The functioning of the arbitration law is a bad indicator as far as India is concerned.