UNIVERSITY OF PETROLEUM AND ENERGY STUDIES COLLEGE OF LEGAL STUDIES

Arbitration & Conciliation and Alternate Dispute Resolution Systems Project TOPIC : SUPREME COURT DECISIONS IN ARBITRATION TITLE: Supreme court on Loopholes in the Arbitration and Conciliation Act, 1996

SUBMITTED TO: Dr.V.L.Mony Assistant Dean CoLS, UPES

SUBMITTED BY: Kriti Parashar (R230208026) B.A.LLB. V Semester

CONTENTS

1. 2. 3. 4.

Loopholes in the Act: Study Of the Supreme Court Decisions Intervention of the Supreme Court .. Monetary matters. Suggestions

5.

Conclusion

6.

Bibliography

TABLE OF CASES

Bhatia International v Bulk Trading 2002 (4) SCC 105 Sulochana Uppal v Surinder Sheel Bhakri AIR 1991 Del 138. Olympus Superstructures Pvt Ltd v Meena Vay Khetan1999 (5) SCC 651. Hindustan Petroleum Corporation v Pink City2003 (6) SCC 503. KK Modi v KN Modi 1998 (3) SCC 573. Konkan case 2002 (2) SCC 388. ONGC v Saw Pipes Ltd. 2003 (5) SCC 705

Renu Sagar Power Co v General Electric Corporation1994 Supp (1) SCC 644 Shin-Etsu Chemical Co Ltd v Aksh Optifibre Ltd2005 (6) SCALE 561 Harbanslal Sahnia and Anr. v. Indian Oil Corporation Ltd. and others AIR2003SC2120

Dolphin Drilling Limited v Oil and Natural Gas Corporation Limited

1. Loopholes in the Act : CRITICAL STUDY WITH REGARD TO SUPREME COURT DECISIONS
INTRODUCTION The Act is a composite piece of legislation. It provides for domestic arbitration, international commercial arbitration, enforcement of foreign award and conciliation (the latter being based on the UNCITRAL Conciliation Rules of 1980). The more significant provisions of the Act are to be found in Parts I and II thereof. Part I contains the provisions for domestic and international commercial arbitration. Any arbitration to be conducted in India would be governed by Part I, irrespective of the nationalities of the parties. Part II provides for enforcement of foreign awards. Part I is more comprehensive and contains extensive provisions based on the Model Law. It provides, inter alia, for arbitrability of disputes, nonintervention by courts, composition of the arbitral tribunal, jurisdiction of the arbitral tribunal, conduct of the arbitration proceedings, recourse against arbitral awards and enforcement. Part II, on the other hand, is largely restricted to enforcement of foreign awards governed by the Convention on the Recognition and Enforcement of Foreign Arbitral Awards or the Convention on the Execution of Foreign Arbitral Awards. Part II is thus, (by its very nature) not a complete code. CASES:

This led to judicial innovation by the Supreme Court in the case of Bhatia International v Bulk Trading.1 Here the Indian courts jurisdiction was invoked by a party seeking interim measures of protection in relation to an arbitration under the Rules of Arbitration of the International Chamber of Commerce International Court of Arbitration to be conducted in Paris. The provision for interim measure (s 9) was to be found in Part I alone (which applies only to domestic arbitration). Hence, the court was faced with a situation where there was no proprio vigore legal provision under which it could grant interim measures of protection. Creatively interpreting the Act, the Supreme Court held that the general provisions of Part I would apply also to offshore arbitrations, unless the parties expressly or impliedly exclude applicability of the same. Hence, by judicial innovation, the Supreme Court extended the general provisions of Part I to foreign arbitrations as well. A controversy arose as to whether arbitrators would have jurisdiction to order specific performance of a contract. The High Court of Delhi held 2 that the power to grant specific performance is discretionary and statutorily conferred on civil courts under the Specific Relief Act 1963. Hence, an arbitral tribunal would have no such power. On the other hand, the High Courts of Punjab, Bombay and Calcutta3 took the view that arbitrators could grant specific performance. The Supreme Court put to rest the controversy in Olympus Superstructures Pvt Ltd v Meena Vay Khetan4 and held that arbitrators do have the power to order specific performance of a contract. The court relied on Halsburys Laws of England which states that the differences or disputes which may be referred must consist of a justifiable issue triable civilly. A fair test of this is whether the difference can be compromised lawfully by way of accord and satisfaction. In the case of Hindustan Petroleum Corporation v Pink City,5 the respondent resisted arbitration on the ground that the cause of action made out by the claimant (ie short delivery and tampering with weights and measures and seals) was essentially a criminal offence under special
1 2

2002 (4) SCC 105 Sulochana Uppal v Surinder Sheel Bhakri AIR 1991 Del 138. 3 Lakshmi Narain v Raghbir Singh AIR 1956 Punj 249; Fertiliser Corp of India v Chemical Construction Corp ILR 1974 Bom 856 (DB); Keventer Agro Ltd v Seegram Comp Ltd, Apo 498 of 1997 dated 27 January 1998 (Cal). 4 1999 (5) SCC 651. 5 2003 (6) SCC 503.

statutes. It was contended that the respondents conduct could be investigated only by officers so authorised under statute and that the offence, if any, can be tried only by a court of competent jurisdiction and not by an arbitrator. The Supreme Court negatived this contention, holding that the claimant had rights under the contract which are independent of the statutory provisions and hence the contractual rights could be enforced through the arbitration process: The existence of dual procedure; one under the criminal law and the other under the contractual law is a wellaccepted legal phenomenon in Indian jurisprudence.6 Expert determination and arbitration: The Supreme Court had occasion to consider this extensively in the case of KK Modi v KN Modi7 it concluded that, by and large, there were no conclusive tests one could follow to determine whether the agreement was to refer an issue to an expert or whether the parties had in fact agreed to resolve disputes through arbitration. It held: The Act allows full freedom to the parties in the matter of appointment of arbitrators. However, if there is a failure of the parties agreed mechanism for appointment, the Chief Justice of a High Court (in the case of a domestic arbitration) or the Chief Justice of the Supreme Court of India (in the case of an international commercial arbitration) may be approached for this purpose. This is the first instance in which the Act envisages recourse to a court in relation to arbitration proceedings. A question arose as to whether the Chief Justice is required to carry out his duty (of appointment) in an administrative or in a judicial capacity. If the Chief Justice is required to act in a judicial capacity, a certain procedure would have to be followed which necessarily entail delays and the decision may tend to embarrass the arbitrators jurisdiction to decide issues of merit or jurisdiction independently. There may also be a possibility of conflicting decisions. After some difference of opinion, the controversy was finally settled by a Constitution Bench of the Supreme Court (ie a bench comprising of five judges) in the Konkan case.8 Here the court unanimously held that the function of appointment is administrative in nature and not judicial. It held that one of the objects of the law is to have the arbitral tribunal constituted as expeditiously as possible. Even formal pleadings for this purpose would not be required and the opposing party
6 7

Ibid 1998 (3) SCC 573. 8 2002 (2) SCC 388.

would need to be only notified so that it may know of it and may if it so choose, assists the Chief Justice or his designate in the nomination of an arbitrator. A domestic award can be challenged and set aside only by way of an application under s 34 of the Act and only on the grounds contained there under. Section 34 is based on Art 34 of the Model Law. The limited grounds of challenge provided for under s 34 reflect the very jurisprudence on which the Model Law is formulated, viz of trust in the arbitral process. It is abundantly clear that the courts have no power to get into the merits of the matter. However, this basic proposition was put to the test and suffered a setback in the case of ONGC v Saw Pipes Ltd.9 There the court succumbed to the temptation to correct perceived errors of judgment. The court was concerned with an arbitral award which disallowed liquidated damages. The Indian law of liquidated damages is contained in s 74 of the Indian Contract Act 1872. 10 The position is different from common law in as much as reasonableness of the compensation becomes an issue even where liquidated damages are stipulated. The Supreme Court in Saw Pipes came to the conclusion that the impugned award, in so far as it disallowed liquidated damages on the premise that they have to be proved, was legally fl awed. In the process it held as a matter of law, that an award can also be challenged on the ground that it contravenes the provisions of the Act or any other substantive law governing the parties or is against the terms of the contract. Further, the judgment expanded the concept of public policy to add that the award would be contrary to public policy if it is patently illegal. An earlier Supreme Court decision, by a larger bench, in the case of Renu Sagar Power Co v General Electric Corporation11 had construed the ground of public policy narrowly as confined to the fundamental policy of Indian law or the interest of India or justice or morality. The Supreme Court in Saw Pipes distinguished Renu Sagar II on the ground that the said judgment was in the context of a foreign award. The reasoning of the court is that in foreign arbitration, the award would be subject to
9

2003 (5) SCC 705 Section 74 of the Contract Act, in so far as relevant, provides as follows: Compensation of breach of contract where penalty stipulated for When a contract has been broken, if a sum is named in the contract as the amount to be paid in case of such breach, or if the contract contains any other stipulation by way of penalty, the party complaining of the breach is entitled, whether or not actual damage or loss is proved to have been caused thereby to receive from the party who has broken the contract reasonable compensation not exceeding the amount so named or, as the case may be, the penalty stipulated for. 11 1994 Supp (1) SCC 644
10

being set aside or suspended by the competent authority under the relevant law of that country, whereas in domestic arbitration there is no such recourse and the award attains finality 74 (thus, the greater need for judicial scrutiny). Hence, the ratio of Saw Pipes in so far as the expansion of public policy is concerned, would be confined only to domestic awards. The expansion of s 34 to include patent illegality may also not apply to foreign awards since this expansion was premised by the court on the provisions of Part I of the Act (which would not apply to foreign awards). Thus, foreign awards would be saved from the application of the said judgment. The case of Saw Pipes makes a significant dent in the jurisprudence of arbitration in India. The judgment has come in for some sharp criticism. Eminent jurist and lawyer Mr FS Nariman minced no words when he said that the judgment has: Virtually set at naught the entire Arbitration and Conciliation Act of 1996.. The Saw Pipes judgment skews the delicate balance, carefully crafted by the Model Law (and enshrined in s 34), between finality of arbitral awards on one hand and permissible judicial review on the other. The judgment is quite contrary to both the letter and spirit of arbitration law in India. The judgment is especially unsuitable for India, where courts are bogged down with enormous workload. In such a situation, to open the door to challenge on merits, howsoever guardedly is to undermine the efficacy of this dispute resolution mechanism. An interesting issue arose in Shin-Etsu Chemical Co Ltd v Aksh Optifibre Ltd12 as to whether a ruling by the court on the validity or otherwise of an arbitration agreement is to be on a prima facie basis or a final decision. If it were to be a final decision, it would involve a full trial and consequently years and years of judicial proceedings which would frustrate the arbitration agreement. Keeping this and the object of the Act in mind, the Supreme Court, by a 2:1 decision, held that a challenge to the arbitration agreement under s 4513 on the ground that it is null and
12

2005 (6) SCALE 561 Power of judicial authority to refer parties to arbitration.- Notwithstanding anything contained in Part I or in the Code of Civil Procedure, 1908 (5 of 1908), a judicial authority, when seized of an action in a matter in respect of which the parties have made an agreement referred to in section 44, shall, at the request of one of the parties or any person claiming through or under him, refer the parties to arbitration, unless it finds that the said agreement is null and void, inoperative or incapable of being performed.
13

void, inoperative or incapable of being performed is to be determined on a prima facie basis. It said: If it were to be held that the finding of the court under Section 45 should be a final, determinative conclusion, then it is obvious that, until such a pronouncement is made, the arbitral proceedings would have to be in limbo. This evidently defeats the credo and ethos of the Act, which is to enable expeditious arbitration without avoidable intervention by judicial authorities. This would mean that a court decision under s 45 would not operate as res judicata and the aggrieved party would be able to challenge the same in subsequent proceedings. In the year 2001, the Law Commission of India undertook a comprehensive review of the working of the said Act and recommended many amendments to the Act in its 176th Report submitted to the Government. The Government after considering the recommendations of the Report and after consulting the State Governments and certain institutions, decided to accept almost all the recommendations. Accordingly the Arbitration and Conciliation (Amendment) Bill 2003 was introduced in Rajya Sabha. It may be stated that in July 2004, Government constituted a Committee under the Chairmanship of Justice Dr.B.P.Saraf to make in-depth study of the implications of the recommendations of the Law Commission made in its 176th report14. The Bill was then referred to the Departmental Related Standing Committee on Personnel, Public Grievances, Law and Justice for examination and report. The said Committee submitted its report to the Houses of Parliament was of the view that the provisions of the Bill gave room for excessive intervention by the Courts in the arbitration proceedings and emphasized upon the need for establishing an institution in India which would measure up to international standards and for popularizing institutionalized arbitration. The Committee further expressed the view that since many provisions of the Bill were contentious, the Bill may be withdrawn and a fresh legislation may be brought after considering the recommendations of the Committee. In view of the large number of amendments recommended by the Committee and because many provisions of the Bill were contentious, the said Bill was withdrawn from the Rajya Sabha. At that time it was
14

http://lawcafe.in/?p=585, last visited on 11.11.2010

decided that a new legislation will be brought in Parliament after undertaking an in depth examination of the various recommendations of the Committee. In a press release issued by the Law Ministry on April 7, 2010 15, the Ministry has acknowledged the need to address the lacunas in the existing Arbitration Act framework. The press release states that The Supreme Court and High Courts have interpreted many provisions of the Act and while doing so they have also realized some lacunas in the Act which leads to conflicting views. Further, in some cases, courts have interpreted the provisions of the Act in such a way which defeats the main object of such legislation. Therefore, it becomes necessary to remove the difficulties and lacunas in the Act so that ADR method may become more popular and object of enacting Arbitration law may be achieved.

15

http://www.barandbench.com/index.php?title=Proposed%20Amendments%20to%20the %20Arbitration%20Act%20%E2%80%93%20Consultation%20Paper%20released%20by %20the%20Law%20Ministry&page=brief&id=640&gn=0, last visited on 11.11.2010

2. Intervention by the Courts using discretionary powers

As we have already seen that the main object behind the enactment of the Arbitration and Conciliation Act,1996 was to restrict the intervention of the court. With this view few sections were added in the Arbitration Act and section 89 of CPC,1908. Section 5: Notwithstanding anything contained in any other law for the time being in force, in matters governed by this Part, no judicial authority shall intervene except where so provided in this Part. Section 8: Power to refer parties to arbitration where there is an arbitration agreement.- (1) A judicial authority before which an action is brought in a matter which is the subject of an arbitration agreement shall, if a party so applies not later than when submitting his first statement on the substance of the dispute, refer the parties to arbitration. (2) The application referred to in sub-section (1) shall not be entertained unless it is accompanied by the original arbitration agreement or a duly certified copy thereof. (3) Notwithstanding that an application has been made under sub-section (1) and that the issue is pending before the judicial authority, an arbitration may be commenced or continued and an arbitral award made.

Hence it is the duty of the courts not to intervene in the matters of arbitration unless the Arbitration Act specifically provides, but the Courts have not been consistent with the above view. In Harbanslal Sahnia and Anr. v. Indian Oil Corporation Ltd. and others16, Honble Supreme Court of India took a very liberal view in pronouncing the judgment. The court held that rule of exclusion of writ jurisdiction by availability of an alternative remedy is a rule of discretion and not of compulsion. In an appropriate case in spite of availability of the alternative remedy, the High Court may still exercise its writ jurisdiction in at least three contingencies:
16

AIR2003SC2120

(i) (ii) (iii)

where the writ petition seeks enforcement of any of the Fundamental Rights; where there is failure of principles of natural justice or, Where the orders or proceedings are wholly without jurisdiction or the vires of an Act and is challenged.

Hence, in my opinion the Court should have dismissed the petition on the ground that the relationship between them was contractual and the dealership agreement had an arbitration clause. Therefore the use of discretionary power of the Court exceeded its limit in my opinion. This kind of judicial activism should not be encouraged because its losses are more than its benefits and the whole purpose of arbitration fails.

3. Monetary aspects
When the Arbitration Act was enacted one of the major considerations was that arbitration should be time effective and money effective. In Courts the Litigation continues for long time and the litigants loose a considerable amount of money. Hence Arbitration sought to restrict the time period and also eventually cutting down the cost. But these days arbitration has become commercialized and it has become an expensive affair. At this stage, we may point out a peculiar practice in India (essentially in government and public sector building contracts) providing for arbitration by an owners employee or nominee (eg arbitration by the managing director or engineer of the corporation). This practice has been sanctified with usage and continues under the new regime as well. Though the matter has not been tested under the 1996 Act, it is quite possible that this practice of appointment would continue to be upheld. But recently Supreme Court has criticized the practice of extraction huge money by the Arbitrators for single hearing. This issue came up in Dolphin Drilling Limited v Oil and Natural Gas Corporation Limited17, in the present case an agreement for the charter hire of deepwater drilling rig DP-Drill Ship 'Belford Dolphin' and services on an integrated basis was executed between Dolphin Drilling Ltd and Oil and Natural Gas Corporation Limited (ONGC). Dolphin's grievance was that a number of its invoices remained either unpaid or only partly paid by ONGC and no satisfactory response had been received from ONGC for this non-payment or part payment. Thus, Dolphin invoked the arbitration clause and accordingly sent a notice dated January 29 2008 to ONGC nominating a former chief justice of India as its nominee arbitrator. When ONGC failed to respond, Dolphin preferred the present application for appointment of an arbitrator before the chief justice of the Supreme Court. Although ONGC did not dispute the existence of an arbitration clause in the agreement, the notice invoking the arbitration or the arbitrability of the disputes, it pleaded that Dolphin had already invoked the arbitration clause earlier in connection with a different dispute arising under the agreement. ONGC argued that an arbitration clause is a one-time measure that cannot be
17

Arbitration Petition 21/2009, decided on February 17 2010.

resorted to repeatedly, even if the disputes are different and unconnected to each other. ONGC also pointed out that the arbitral process is an expensive proposition that entails numerous expenses. While allowing the application and the nominated arbitrator, it was held that the phrase 'all disputes' in an arbitration clause can mean only all disputes that might be in existence when the arbitration clause is invoked and one party to the agreement gives arbitration notice to the other. The arbitration clause cannot be said to be a one-time measure and it cannot be said that once the arbitration clause is invoked, the remedy of arbitration is no longer available in regard to other disputes that might arise in the future. It was also observed that the financial burden caused by arbitration proceedings is a legitimate concern, but that the problem can be remedied only by suitably amending the arbitration clause. Arbitration is perceived as a costly measure for resolving commercial disputes between parties, particularly with increasing judicial intervention in the arbitral process. It could be made less expensive by making the process time restricted.

Suggestions
176th report given by the Law Commission of India gives comprehensively the lacunas and loopholes in the Act and their solutions. Although these recommendations were given back way back in 2003, due to certain problems the Arbitration and Conciliation Bill, 2003 could not be passed and was dropped, since then nothing has been done in reference to that. In my view my suggestion would be that the Bill should be again introduced in the Parliament further delay is going to hamper and would not be of any help. The bill should consider the recommendations of the 176th report and the above mentioned loopholes and other aspects. Hence steps should be taken as soon as possible to bring about the changes required.

Conclusion
"What is the kind of justice that carries peace with it? Undoubtedly, it is arbitration: So too, with David, it is said, "And David executed justice and charity unto all his people" (I1 Sam, 8: 15). What is the kind of justice which carries charity with it? Undoubtedly, it is arbitration, i.e., compromise (thus), even if the judge has already heard the arguments of the litigants and knows in whose favor the verdict will be, it is commendable to effect an arbitration ........ ... The (moral) power of arbitration is greater than that of adjudication."18 The above stated quote becomes redundant in the present scenario the arbitration has not remained the same as it should have been. It has changed with the time and society. In is no longer charity and peaceful. The high cost and continuous intervention by the Courts using the loopholes calls for urgent need for changes in the Act. Hence this study tries and shows the positive aspects of the arbitration and how they have changed due to certain reasons and what changes are required.

18

Pound. Jurisprudence (1959). Vol. 5, page 360.

Bibliography

Websites

www.manupatra.com www.legalserviceindia.com www.scribd.com www.supremecourtofindia.nic.in www.lawcommissionof india.nic.in