arbitration in india
DESCRIPTION
Detailed description of arbitration proceedings in context of infrastructure projects in IndiaTRANSCRIPT
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SYMBIOSIS CENTRE FOR MANAGEMENT & HUMAN RESOURCE DEVELOPMENT [Constituent of SYMBIOSIS INTERNATIONAL UNIVERSITY (SIU)]
(Established under Section 3 of the UGC Act 1956, by notification No.F.9-12/2001 – U.3 of the Government of India) (Accredited by NAAC with ‘A’ Grade)
Study of arbitration, dispute resolution and mitigation practices in Indian Infrastructure
Sector
MBA – Infrastructure Management
Batch 2013-15
Semester III
Thesis Guide: Dr. Ajit Patwardhan
Prepared by:
Name Roll No. Jasjeet Singh Gill 2013D02 Subhashini N. 2013D17
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Acknowledgement We consider it our privilege to express a few words of gratitude and respect to all those who contributed and wished for the successful completion of our project.
We express our deep felt gratitude to Prof. (Dr.) Pratima Sheorey - Director, SCMHRD and college management for providing us with all facilities for making this endeavour possible.
We acknowledge with a deep sense of gratitude, the constant help and guidance provided by our thesis guide and faculty Prof. (Dr.) Ajit Patwardhan at all stages of our project work. He has been an eternal source of inspiration and knowledge, without him, this thesis, was impossible.
We would like to express our thanks in no less measure to Prof. Vasundhara Sen for her constant help.
Our sincere thanks to our friends and all the people who directly or indirectly helped us, without which completing the course of this study would have been difficult.
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Certificate
This is to certify that the project entitled “Study of arbitration, dispute resolution and mitigation practices in Indian Infrastructure Sector” is the bonafide work of Mr. Jasjeet Singh Gill (2013D17) & Ms. Subhashini N. (2013D17) in partial fulfillment of the academic requirements for the award of MBA in Infrastructure Management. This work is carried out by them, under my guidance and supervision.
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Contents
Importance of Topic .......................................................................................................................... 6
Chapter 1 - Introduction .................................................................................................................... 7
Chapter 2 – Literature Review ......................................................................................................... 12
2.1 Alternative Dispute Resolution ............................................................................................. 12
2.1.1 Introduction ................................................................................................................. 12
2.1.2 Techniques of ADR ....................................................................................................... 13
2.2 The Arbitration and Conciliation Act 1996 ............................................................................ 15
2.2.1 Objectives of The Act.................................................................................................... 15
2.2.2 Scheme of the Act ........................................................................................................ 15
2.2.3 Subject matter of arbitration ........................................................................................ 16
2.2.4 Role of the court ................................................................................................................. 16
2.2.5 Jurisdiction of the arbitrator ............................................................................................... 16
2.2.6 Challenge to arbitrator ........................................................................................................ 18
2.2.7 Conduct of arbitration proceedings ..................................................................................... 18
2.2.8 Taking of evidence in arbitral proceedings .......................................................................... 19
2.2.9 Governing Law .................................................................................................................... 19
2.2.10 Form and content of awards ............................................................................................. 19
2.2.11 Setting aside of awards ..................................................................................................... 20
2.3 Trends in Arbitration in India................................................................................................ 22
2.3.1 Independence of arbitrators ......................................................................................... 23
2.3.2 Growing need for expert witness .................................................................................. 23
2.3.3 Hot tubbing – gaining popularity .................................................................................. 23
2.3.4 Growing importance of technology in arbitration ......................................................... 23
Chapter 3 - Arbitration in India ........................................................................................................ 24
3.1 Introduction ..................................................................................................................... 24
3.2 Arbitration Agreement ..................................................................................................... 24
3.3 Rule of 'incorporation by reference' ................................................................................. 24
3.4 Ad hoc arbitration ............................................................................................................ 25
3.5 Institutional arbitration .................................................................................................... 25
3.6 Number of arbitrators ...................................................................................................... 26
3.7 Qualification of arbitrators ............................................................................................... 27
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3.8 Nationality of the arbitrator ............................................................................................. 27
3.9 Named person or authority as arbitrator .......................................................................... 27
3.10 "Notice of Arbitration" and "Commencement of Arbitration" ........................................... 28
3.11 Requirements of a letter of invocation ............................................................................. 30
3.12 Requirements for filing an application .............................................................................. 30
3.13 Existence of arbitration clause.......................................................................................... 30
3.14 Discharge of contract and arbitration clause as a result of full and final settlement ........ 31
3.15 Existence of 'dispute' a pre-condition of the right to seek appointment ........................... 32
3.16 Court intervention............................................................................................................ 33
3.17 Anti-suit proceedings ....................................................................................................... 33
3.18 Meaning of Court ............................................................................................................. 33
3.19 Appointment of arbitrator through Court assistance ........................................................ 34
3.20 Appointment of the third / presiding arbitrator ................................................................ 39
3.21 Appointment of presiding arbitrator by the arbitral institution ......................................... 40
3.22 Refusal by or failure of one party to appoint .................................................................... 40
3.23 Challenge to the order of appointment ............................................................................ 41
3.24 Limitation for filing an application seeking appointment .................................................. 41
3.25 Seat and Choice of Law of Arbitration .............................................................................. 41
3.26 Recognition and enforcement of award ........................................................................... 42
Chapter 4 - Disputes in Infrastructure Projects in India .................................................................... 44
4.1 Introduction ......................................................................................................................... 44
4.2 Common sources of construction claims and disputes ......................................................... 45
Chapter 5 – Arbitration Practices around the World ........................................................................ 51
5.1 United States of America (USA) ............................................................................................ 51
5.2 United Kingdom (UK) ........................................................................................................... 54
5.3 Australia .............................................................................................................................. 56
5.4 China ................................................................................................................................... 59
Chapter 6 – Cases: Description and Analysis .................................................................................... 62
6.1 ONGC vs. SAW Pipes - Delay ................................................................................................. 62
6.2 Rajasthan States Mines and Minerals vs. Eastern Engineering Enterprises ............................ 68
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Importance of Topic Arbitration is a leading method for resolving disputes arising from commercial agreements and
other domestic and international relationships. The practice of arbitration has developed so as
to allow parties from different legal and cultural backgrounds to resolve their domestic and / or
cross border disputes, generally away from litigation. Majority of the companies in India have a dispute resolution policy 91% of the companies surveyed in India, who have a dispute resolution
policy, include arbitration (not litigation) for resolution of future disputes. 61% of the companies
surveyed in India have a dispute resolution policy and confirmed inclusion of a dispute resolution
clause in contracts entered by their company. Companies generally indicated a flexible approach towards negotiating arbitration clauses. However, factors such as law governing the arbitration,
seat of arbitration and language primarily drive the negotiation. Arbitration remains a preferred
dispute resolution mechanism, despite certain loopholes and shortcomings in the arbitration
environment in India. An overwhelming majority of the companies surveyed used arbitration, in isolation or in combination with another dispute resolution mechanism Top three factors that
make arbitration the most preferred dispute resolution mechanism are: speed, flexibility and
confidentiality.
One of the reasons cited by the companies for choosing arbitration over any other dispute
resolution mechanism is flexibility of the procedure. This factor of flexibility rests in adopting
either ad-hoc or institutional arbitration. Majority of the companies in India that experienced
arbitration preferred ad-hoc over institutional arbitration. Further, companies with no experience of arbitration also indicated a preference for ad-hoc arbitration. It is important to note that
companies having experience in arbitration indicated constitution of the tribunal as one of the
top most reasons contributing to the length of the arbitration proceedings. One of the
advantages of adopting institutional arbitration is that it provides a mechanism and time frame for selection of the tribunal. On the other hand the flexibility offered by ad-hoc arbitration may
lead to a longer time frame for constitution of tribunal and other administrative procedures.
Greater flexibility in procedures may not necessarily produce greater efficiency. In developed
countries, institutional arbitration is a preferred type of arbitration owing to presence of a variety of institutions, bespoke administration of the proceedings offered by such institutions, uniform
rules and procedures of the institute, absence of interference from the country’s legal system
and arbitration friendly infrastructure available in such countries.(source PWC arbitration survey
report)
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Chapter 1 - Introduction Disputes are an unavoidable part of any relationship or organisation. However, where there is
dispute there must also be a mechanism for resolution of these disputes. Disputes arising in infrastructure projects can be resolved either through litigation i.e. in court of law or through
Alternative Dispute Resolution (ADR) Mechanism.
Arbitration is a method for settling disputes privately, but its decisions are enforceable by law. An arbitrator is a private extraordinary judge between the parties, chosen by mutual consent to
sort out controversies between them. Arbitrators are so called because they have an arbitrary
power; for if they observe submissions and keep within due bounds their sentences are definite
from which there is no appeal. Arbitration offers greater flexibility, prompt settlement of national and international private disputes and restricted channels of appeal than litigation.
Arbitration is a simplified version of a trial involving no discovery and simplified rules of evidence.
Either both sides agree on one arbitrator, or each side selects one arbitrator and the two arbitrators elect the third to comprise a panel. Arbitration hearings usually last only a few hours
and the opinions are not public record. Arbitration has long been used in labour, construction,
and securities regulation, but is now gaining popularity in other business disputes.
Litigation is expensive, time consuming and full of complexities. ADR is a system whereby
disputants resolve their disputes with minimum outside help. The ADR procedure consists of four
basic methods of dealing with disputes which are:
1. Negotiation 2. Mediation
3. Conciliation
4. Arbitration
Alternative dispute resolution is not new to India. The concept is analogous to the panchayat or similar bodies consisting of influential and elderly men from the community who were bestowed
with power to manage of religious and social functions and who were called upon to decide the
dispute between parties in the particular village, be it civil or criminal or revenue.
Also, arbitration was enshrined in three different enactments, namely, The Arbitration Act, 1940,
the Arbitration (Protocol and Convention) Act, 1937 and the Foreign Awards (Recognition and
Enforcement) Act, 1961. The Arbitration Act laid down the framework within which domestic
arbitration was conducted in India, and the other two Acts dealt with foreign awards. The Arbitration and Conciliation Act, 1996 has repealed the three past acts, consolidated and
amended the law relating to domestic arbitration, international commercial arbitration and
Arbitration is more rational, just, and humane than the resort to the sword. - Richard Cobden
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enforcement of foreign arbitral awards and also defines the law relating to conciliation, providing
for matters connected therewith and incidental thereto on the basis of the Model Law on
International Commercial Arbitration adopted by the United Nations Commission on International Trade Law (UNCITRAL) in 1985.
India is also a party to the following international conventions on arbitration: The Geneva Protocol on Arbitration Clauses of 1923 The Geneva Convention on the Execution of Foreign Arbitral Awards, 1927; and
The New York Convention of 1958 on the Recognition and Enforcement of Foreign
Arbitral Awards. It became a party to the 1958 Convention on 10th June, 1958 and
ratified it on 13th July, 1961.
Kinds of arbitration
Adhoc arbitration: In the course of a commercial transaction if a dispute arises and could not
be settled amicably either by way of mediation or conciliation, the parties have the right to seek
adhoc arbitration. It is a process entrusted to a non-institution with all the procedural laws set out in specific agreement of the parties for that particular arbitration only.
Institutional arbitration: In this kind of arbitration there will be a prior agreement between
the parties regarding the institution that they will refer to in order to resolve their disputes in the course of a commercial transaction.
Contractual arbitration: Here the parties incorporate an arbitration clause in their agreement.
The arbitration clause provides that if in future any dispute arises between the parties they will be referred to a named arbitrator (s).
Statutory arbitration: If by operation of law the court provides that the parties have to refer
the matter to arbitration it is termed as statutory arbitration. In this kind of arbitration the consent of the parties is not required. It is more of a compulsory arbitration and it is binding on
the parties as the law of the land.
The Arbitration and Conciliation Act, 1996 provides two alternate method of ADR: Arbitration
and Conciliation. Arbitration may be conducted ad hoc or under institutional procedures and
rules. Institutional arbitration is conducted under the guidance and well-tested rules of an
established arbitral organization whereas under Ad hoc arbitration, the parties have to draft their
own rules and procedures to fit the needs of their dispute. There are number of national and international organisations set up with the main object of settling commercial disputes by way of
arbitration and other alternative dispute resolution mechanism.
These organisations lay down rules for the conduct of arbitration. These rules, however, cannot override the Act. These organisations handle the arbitration cases of the parties and provide
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valuable services like administrative assistance, consultancy and recommending names of
arbitrators from the panel maintained by them.
Advantages of arbitration over litigation
1. Arbitration carries a number of advantages over usual method of dispute resolution of
redressal through a court of Law. 2. Arbitration promises privacy. In a civil court, the proceedings are held in public.
3. Arbitration provides liberty to choose an arbitrator, who can be a specialist in the subject
matter of the dispute. Thus, arbitrators who are sector specialists can be selcted who
resolve the dispute fairly and expeditiously. 4. The venue of arbitration can be a place convenient to both the parties. Likewise the
parties can choose a language of their choice.
5. Even the rules governing arbitration proceedings can be defined mutually by both the
parties. 6. A court case is a costly affair. The claimant has to pay advocates, court fees, process
fees and other incidental expenses. In arbitration, the expenses are less and many times
the parties themselves argue their cases. Arbitration involves few procedural steps and
no court fees. 7. Arbitration is faster and can be expedited. A court has to follow a systematic procedure,
which takes an abnormally long time to dispose off a case.
8. A judicial settlement is a complicated procedure. A court has to follow the procedure laid
down in the Code of Civil Procedure, 1908 and the Rules of the Indian Evidence Act. An arbitrator has to follow the principles of natural justice. The Arbitration and Conciliation
Act, 1996 specifically states that the Arbitral Tribunal shall not be bound by The Code of
Civil Procedure, 1908 and The Indian Evidence Act, 1872.
9. Section 34 of the Act provides very limited grounds upon which a court may set aside an award. The Act has also given the status of a decree for the award by arbitrators. The
award of the arbitrators is final and generally no appeal lies against the award.
10. In a large number of cases, Arbitration facilitates the maintenance of continued
relationship between the parties even after the settlement.
Dispute resolution under FIDIC contracts Disputes over contract performance often arise between the investor and the contractor during the course of project implementation. If a dispute arises between the investor and the contractor
while carrying out a project using the terms from FIDIC (the International Federation of
Consulting Engineers)—whether the Conditions of Contract for Construction (known as the “Red
Book”) or for Plant and Design-Build (the “Yellow Book”)—standard dispute resolution procedures will be available.
Provisions concerning “Claims, disputes and arbitration” are set forth in section 20 of the Red
Book and the Yellow Book. Under this section, the parties to a dispute may seek a resolution
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from the Contract Engineer, the Dispute Adjudication Board, or, as a last resort, arbitration
under international rules. Ultimately, the dispute resolution procedure is always under the control
of the parties, who may adapt the procedure to suit their needs under the Particular Conditions of the contract.
Under clause 20.1 of the General Conditions, claims are submitted first to the Contract Engineer,
as a sort of “first instance,” and he has 42 days to uphold or reject the claim, providing a detailed justification for the decision. In practice, when the Contract Engineer is experienced and
trusted by the parties, a dispute may be often be resolved immediately, on-site.
If the dispute cannot be resolved by the Contract Engineer, it will then pass to the Dispute Adjudication Board, which is appointed jointly by the investor and the contractor and contains
one or three members. If the parties decide on a three-member panel, each party appoints one
member, who must be accepted by the other party. Then, in consultation with the first two
members, the parties jointly appoint a third member, who chairs the Dispute Adjudication Board. It is possible to limit the panel to persons included in a list of potential members drawn up as an
appendix to the contract at the time it is signed. The investor and the contractor also decide
whether Dispute Adjudication Board should act as a standing panel for the duration of the
contract, or ad hoc.
The Dispute Adjudication Board, which provides a sort of appellate review of decisions by the
Contract Engineer, may also serve as a panel to which the parties may submit disputes directly,
bypassing the Contract Engineer. Under clause 20.4, the board generally has 84 days to rule on a dispute, but it may propose a different deadline for the parties’ approval.
The decision of the Dispute Adjudication Board is binding, and the parties are required to comply
with it promptly, unless it is modified through a conciliation procedure or by an arbitration award. A party has 28 days to reject the decision by notifying the other party. If the decision is
accepted, it becomes final.
If a party is unsatisfied with the decision, the parties should attempt to resolve the issue amicably. If that fails, the dispute should then be resolved by arbitration, which, under clause
20.6, is conducted under the Rules of Arbitration of the International Chamber of Commerce by
a panel of three arbitrators, in the language determined by the parties. Nonetheless, the parties
are free to provide, in the Particular Conditions, that disputes should be decided by the state court instead of arbitration.
Why is India not a good seat for international arbitration? Both International and domestic Arbitrations having India as the seat of arbitration are governed by the Indian Arbitration and Conciliation Act, 1996. It is a very arbitration friendly legislation,
legislated in the lines of UNCITRAL Model law. The Part 1 of the above said Act governs the
domestic arbitrations in India and the International arbitrations having the seat of arbitration in
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India. Part 2 of the said Act governs the enforcement of International awards in India. Since
India also realised the importance of speedy disposal of cases through arbitration and also the
difficulties in executing the Court judgments in different countries, to get foreign direct investments, chose to legislate the above said law replacing the earlier Arbitration Act. The said
law really reduces the scope for interference by the Courts in India in the Arbitration proceedings
and also effectively restricts the grounds of appeal challenging an award.
However, the following factors make India unfavourable as seat of arbitration –
a) Huge pendency of cases in Indian Courts
Even though the author is an Indian lawyer he does not recommend India as the seat of the International arbitration because even though the Act prescribes minimum interference by
courts, due to huge pendency of litigations in-case if one of the parties go to court the
arbitration may get delayed for years. Since The Courts in India does not have any power to give
preference to arbitration matters in the hearing process they are heard like other criminal and civil cases, which further delays the arbitration. India has very less number of Judges in the
world to deal with cases of millions of people. India also has given two appeal provisions in
almost all proceedings, which also add to the delays. Hence if a party seeks assistance of the
Court for an interim order or for summoning witnesses or even for appointment of arbitrator it may consume a minimum of one year to get concluded. Even though there are directions by the
Supreme Court of India and recommendations of law Commission to increase the number of
Judges from 10 to 50 per million people, none of the governments are showing any interest in
resolving the issue.
b) Handling of Arbitration appeals by the Courts in India
Once parties decide to make India as the seat of arbitration, Indian Courts are empowered to
handle the Appeals under S.34 of the Arbitration and Conciliation Act, 1996. The appeals can be filed in the High Court having original jurisdiction or in the District Courts on the basis of the seat
of arbitration. Even though the Act has very much restricted the grounds on which arbitral
awards can be challenged, the courts are liberal in admitting the appeals. Once appeal is
pending for years the execution of the award cannot be done. Hence India is not a recommended by the author as a seat for International arbitrations.
c) Execution of International Arbitration Awards in India
India being a signatory to New York Convention it recognises almost all the international awards passed in the countries who are signatories to the New York convention. Even though India
reserves the right to recognise the awards passed from countries which are notified by the
government of India. But India has recognised almost all countries which have signed the New
York Convention. Recently India recognised China and Hong Kong International arbitration awards also.
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Chapter 2 – Literature Review
2.1 Alternative Dispute Resolution
2.1.1 Introduction The alternative dispute resolution methods are not new to India and have been in existence in
some form or the other in the olden days. It is interesting to discover that the practice of settling the dispute through community elders existed in India even before British Raj. It is only now that
there is universal acceptance and statutory recognition for such procedures to facilitate early
settlement of disputes on agreed terms. It was only after the Court system that was
predominantly adopted for resolution of disputes, the methods such as Arbitration, Mediation, and Conciliation came to be treated as alternative means of resolving the disputes. Alternative
dispute redressal methods are being increasingly acknowledged in the field of law and
commercial sectors both at National and International levels. Its diverse methods can help the
parties to resolve their disputes at their own terms cheaply and expeditiously.
Alternative dispute redressal techniques are in addition to the Courts in character. Alternative
dispute redressal techniques can be used in almost all contentious matters, which are capable of
being resolved, under law, by agreement between the parties. Alternative dispute redressal techniques can be employed in several categories of disputes, especially civil, commercial,
industrial and family disputes. It is found that alternative dispute redressal methods offer the
best solution in respect of commercial disputes where the economic growth of the Country rests.
The goal of ADR is enshrined in the Indian Constitution’s preamble itself, which enjoins the
State: “to secure to all the citizens of India, justice-social, economic, and political—liberty,
equality, and fraternity.” The Law Commission of Indian has maintained that, the reason for
judicial delay is not a lack of clear procedural laws, but rather the imperfect execution, or even utter non-observance, thereof. The Law Commission of Indian in its 14th Report categorically
stated that, the delay results not from the procedure laid down by the legislations but by reason
of the non-observance of many of its important provisions particularly those intended to expedite
the disposal of proceedings. Given the huge number of pending cases, the governance and administrative control over judicial institutions through manual processes has become extremely
difficult. The Supreme Court made it clear that this state of affairs must be addressed: “An
independent and efficient judicial system is one of the basic structures of our Constitution…It is
our Constitutional obligation to ensure that the backlog of cases is decreased and efforts are made to increase the disposal of cases.” Alternative dispute resolution process is qualitatively distinct from the judicial process. It is a
process where the disputes are settled with the assistance of a neutral third party generally of parties own choice, where the neutral is generally familiar with the disputes of that nature,
where proceedings are informal, without procedural technicalities and are conducted by and
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large, in the manner agreed by the parties, where the dispute is resolved expeditiously and with
less expenses, here decision making process aims at substantial justice ,where the confidentiality
of subject matter of the dispute is maintained to a great extent. In substance, ADR process aims at rendering justice in the form and content that not only resolves the dispute but also brings
back harmony in the relationship of the parties. ADR techniques are extra-judicial in character; they can be used to resolve any matter, under
law, by agreement between the parties. They have been employed to settle myriad subject
categories of disputes, especially civil, commercial, industrial, and family disputes. In particular,
these techniques have achieved success in the case of business/commercial disputes such as banking, contract performance, and interpretation, construction contracts, intellectual property
rights, insurance coverage, joint ventures, partnerships differences, personal injury product
liability, professional liability, real estate and securities.
Needless to say, that ADR offers the most efficacious solution in respect of commercial disputes
of an international nature. However, Alternative dispute resolution is not intended to supplant
altogether the traditional means of resolving disputes by means of litigation wherein there is an
adjudication or final determination of a dispute which is binding on the parties thereto. ADR techniques offer only alternative options to litigation and their desirability increases as they are
instrumental in avoiding vexation, expense, and delay. However, there are disputes pertaining to
a number of important areas, including constitutional law and criminal law which cannot be
resolved without resorting to litigation. ADR may not be appropriate for every dispute even in other areas or even if appropriate, it cannot be invoked unless both the parties to a dispute are
willing and agree to adopt ADR.
2.1.2 Techniques of ADR The ADR procedures consists of Negotiation, Conciliation, Mediation, Arbitration and array of hybrid procedures including last offer arbitration, medola , minitrial, med-arb, and neutral
evaluation. In countries like U.S.A several federal and State judges have incorporated ADR
techniques in their court room practice and encourage litigants to adopt them. Legislations were
also enacted to promote the use of ADR by state instrumentalities. A number of ADR procedures are hybrids that combine two or more well established ADR procedures. ADR procedures can be
broadly divided into two categories namely, adjudicatory and non adjudicatory. The adjudicatory
procedures such as arbitration and binding expert determination lead to a binding ruling that
decides the case. The non-adjudicatory procedures contribute to resolution of disputes by agreement of the parties without adjudication. Mediation is different from conciliation only in
that in the former the neutral third party plays a more active role in putting forward his own
suggestions for the settlement of the dispute. A brief description of ADR procedures widely used
is as follows:
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a. Negotiation: A non-binding procedure in which discussions between the parties are
initiated without the intervention of any third party with the object of arriving at a
negotiated settlement of the dispute. b. Conciliation Mediation: A non-binding procedure in which an impartial third party, the
conciliator/mediator, assists the parties to a dispute in reaching a mutually satisfactory
and agreed settlement of the dispute.
c. Med-Arb: A procedure which combines sequentially conciliation/Mediation and where the dispute is not settled through conciliation/mediation within a period of time agreed in
advance by the parties, arbitration.
d. MEDOLA: A procedure in which if the parties fail to reach an agreement through
mediation, a neutral person, who may be the original mediator or an arbitrator, will select between the final negotiated offers of parties such selection being binding on the
parties.
e. Mini-Trial: A non binding procedure in which the disputing parties are presented with
summaries of their cases to enable them to assess the strengths, weaknesses, and prospects of their case and then an opportunity to negotiate a settlement with the
assistance of a neutral adviser.
f. Arbitration: A procedure in which the dispute is submitted to an arbitral tribunal which
makes a decision (an `award') on the dispute that is binding on the parties. g. Fast track Arbitration: A form of arbitration in which the arbitration procedure is rendered
in a particularly short time and at reduced cost.
h. Neutral listener Agreement: Parties to a dispute discuss their respective best settlement
offer in confidence with a neutral third party who, after his own evaluation, suggests settlements to assist the parties to attempt a negotiated settlement.
i. Rent a judge: Disputing parties mutually approach a referee, usually a retired judge,
before whom they present their case in an informal proceeding. The referee judge gives
his decision which is enforceable in a court of law. The fee of the referee is paid by the parties.
j. Final offer arbitration: Each party submits its monetary claim before a panel who renders
its decision by awarding one and rejecting the other claim.
ADR
Non Adjudicatory
Adjudicatory Neutral – Eg. Med-Arb
Mediation
Conciliation
Lok Adalats
Arbitration
Binding Expert
Determination
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2.2 The Arbitration and Conciliation Act 1996 The Indian law of arbitration is contained in the Arbitration and Conciliation Act 1996 (Act). The Act is based on the 1985 UNCITRAL Model Law on International Commercial Arbitration and the UNCITRAL Arbitration Rules 1976. The Statement of Objects and Reasons of the Act recognises that India’s economic reforms will become effective only if the nation’s dispute resolution provisions are in tune with international regime.
2.2.1 Objectives of The Act The Statement of Objects and Reasons set forth the main objectives of the Act as follows:
i. To comprehensively cover international and commercial arbitration and conciliation as also domestic arbitration and conciliation;
ii. To make provision for an arbitral procedure which is fair, efficient and capable of meeting the needs of the specific arbitration;
iii. To provide that the arbitral tribunal gives reasons for its arbitral award; iv. To ensure that the arbitral tribunal remains within the limits of its jurisdiction; v. To minimise the supervisory role of courts in the arbitral process; vi. To permit an arbitral tribunal to use mediation, conciliation or other procedures during
the arbitral proceedings to encourage settlement of disputes; vii. to provide that every final arbitral award is enforced in the same manner as if it were a
decree of the court; viii. to provide that a settlement agreement reached by the parties as a result of conciliation
proceedings will have the same status and effect as an arbitral award on agreed terms on the substance of the dispute rendered by an arbitral tribunal; and
ix. to provide that, for purposes of enforcement of foreign awards, every arbitral award made in a country to which one of the two International Conventions relating to foreign arbitral awards to which India is a party applies, will be treated as a foreign award.
2.2.2 Scheme of the Act 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 Part I and Part II thereof. Part I contains the provisions for domestic and international commercial arbitration in India. All arbitration 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; non-intervention by courts; composition of the arbitral tribunal; jurisdiction of 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 New York Convention or the Geneva Convention. Part II is thus, (by its very nature) not a complete code. This led to judicial innovation by the Supreme Court in the case of Bhatia International v. Bulk Trading. Here the Indian courts jurisdiction was invoked by a party seeking interim measures of protection in relation to an arbitration under the ICC Rules to be conducted in Paris. The provision for interim measure (section 9) was to be found in Part I alone (which applies only to domestic arbitration).
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Hence the Court was faced with a situation that there was no proprio vigore legal provision under which it could grant interim measure 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 applicability of the general provisions of Part I to off-shore arbitrations as well.
It may be stated that this was premised on the assumption that the Indian Court would otherwise have jurisdiction in relation to the matter (in the international sense). This became clear in a subsequent decision of the Supreme Court in Shreejee Traco (I) Pvt. Ltd. v. Paperline International Inc. Here the Court’s assistance was sought for appointing an arbitrator in an offshore arbitration. The power of appointment by court exists under Section 11 of Part I of the Act. The Court declined to exercise jurisdiction. It found that the arbitration was to be conducted in New York and that the law governing the arbitration proceedings would be the law of seat of the arbitration. Hence, the extension of Part I provisions to foreign arbitrations sanctified by Bhatia could not be resorted to in every case. The Indian Courts would have to first determine if it has jurisdiction, in the international sense.
2.2.3 Subject matter of arbitration Any commercial matter including an action in tort if it arises out of or relates to a contract can be referred to arbitration. However, public policy would not permit matrimonial matters, criminal proceedings, insolvency matters anti-competition matters or commercial court matters to be referred to arbitration. Employment contracts also cannot be referred to arbitration but director -company disputes are arbitrable (as there is no master servant relationship here). Generally, matters covered by statutory reliefs through statutory tribunals would be non-arbitrable.
2.2.4 Role of the court One of the fundamental features of the Act is that the role of the court has been minimised. Accordingly, it is provided that any matter before a judicial authority containing an arbitration agreement shall be referred to arbitration (Section 8 provided the non - applicant objects no later than submitting its statement of defense on merits). Further, no judicial authority shall interfere, except as provided for under the Act (Section 5).
In relation to arbitration proceedings, parties can approach the Court only for two purposes: (a) for any interim measure of protection or injunction or for any appointment of receiver etc.; or (b) for the appointment of an arbitrator in the event a party fails to appoint an arbitrator or if two appointed arbitrators fail to agree upon the third arbitrator. In such an event, in the case of domestic arbitration, the Chief Justice of a High Court may appoint an arbitrator, and in the case of international commercial arbitration, the Chief Justice of the Supreme Court of India may carry out the appointment7. A court of law can also be approached if there is any controversy as to whether an arbitrator has been unable to perform his functions or has failed to act without undue delay or there is a dispute on the same. In such an event, the court may decide to terminate the mandate of the arbitrator and appoint a substitute arbitrator.
2.2.5 Jurisdiction of the arbitrator The Act provides that the arbitral tribunal may rule on its own jurisdiction, including any objections with respect to the existence or validity of the arbitration agreement. The arbitration agreement shall be deemed to be independent of the contract containing the arbitration clause,
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and invalidity of the contract shall not render the arbitration agreement void. Hence, the arbitrators shall have jurisdiction even if the contract in which the arbitration agreement is contained is vitiated by fraud and/or any other legal infirmity. Further, any objection as to jurisdiction of the arbitrators should be raised by as party at the first instance, i.e., either prior to or along with the filing of the statement of defence. If the plea of jurisdiction is rejected, the arbitrators can proceed with the arbitration and make the arbitral award. Any party aggrieved by such an award may apply for having it set aside under Section 34 of the Act. Hence, the scheme is that, in the first instance, the objections are to be taken up by the arbitral tribunal and in the event of an adverse order it is open to the aggrieved party to challenge the award.
In SBP & Co. v. Patel Engg Ltd. the Supreme Court of India (in a decision rendered by a Bench of Seven Judges) held that the nature of power conferred on the Court under Section 11 of the Act is judicial (and not administrative) in nature. Accordingly, if parties approach the Court for appointment of arbitral tribunal (under Section 11) and the Chief Justice pronounces that he has jurisdiction to appoint an arbitrator or that there is an arbitration agreement between the parties or that there is a live and subsisting dispute to be referred to arbitration and the Court constitutes the Tribunal as envisaged, this would be binding and cannot be re-agitated by the parties before the arbitral tribunal.
In S.B.P & Co. case the Supreme Court has defined what exactly the Chief Justice, approached with an application under Section 11 of the Act, is to decide at that stage. The Chief Justice has the power to decide his own jurisdiction in the sense whether the party making the motion has approached the right court. He has to decide whether there is an arbitration agreement, as defined in the Act and whether the person who has made the request before him, is a party to such an agreement. He can also decide the question whether the claim was a dead one; or a long-barred claim that was sought to be resurrected and whether the parties have concluded the transaction by recording satisfaction of their mutual rights and obligations or by receiving the final payment without objection.
The Court in SBP & Co case, inter alia, concluded as follows:
i. The power exercised by the Chief Justice of the High Court or the Chief Justice of India under Section 11(6) of the Act is not an administrative power. It is a judicial power.
ii. The power under Section 11(6) of the Act, in its entirety, could be delegated, by the Chief Justice of the High Court only to another Judge of that Court and by the Chief Justice of India to another Judge of the Supreme Court.
iii. In case of designation of a Judge of the High Court or of the Supreme Court, the power that is exercised by the designated Judge would be that of the Chief Justice as conferred by the statute.
iv. The Chief Justice or the designated Judge will have the right to decide the preliminary aspects as indicated in the judgment. These will be, his own jurisdiction to entertain the request, the existence of a valid arbitration agreement, the existence or otherwise of a live claim, the existence of the condition for the exercise of his power and on the qualifications of the arbitrator or arbitrators. The Chief Justice or the designated Judge would be entitled to seek the opinion of an institution in the matter of nominating an arbitrator qualified in terms of Section 11(8) of the Act if the need arises but the order appointing the arbitrator could only be that of the Chief Justice or the designated Judge.
v. The District Judge does not have the authority under Section 11(6) of the Act to make appointment of an arbitrator.
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vi. The High Court cannot interfere with the orders passed by the arbitrator or the Arbitral Tribunal during the course of the arbitration proceedings and the parties could approach the Court only in terms of Section 37 of the Act (appealable orders) or in terms of Section 34 of the Act (setting aside or arbitral award).
vii. Since it is a judicial order, an appeal will lie against the order passed by the Chief Justice of the High Court or by the designated Judge of that Court only under Article 136 of the Constitution to the Supreme Court.
viii. No appeal shall lie against an order of the Chief Justice of India or a Judge of the Supreme Court designated by him while entertaining an application under Section 11(6) of the Act.
ix. Where an Arbitral Tribunal has been constituted by the parties without having recourse to Section 11(6) of the Act, the Arbitral Tribunal will have the jurisdiction to decide all matters as contemplated by Section 16 of the Act.
2.2.6 Challenge to arbitrator An arbitrator may be challenged only in two situations. First, if circumstances exists that give rise to justifiable grounds as to his independence or impartiality; second, if he does not possess the qualifications agreed to by the parties. A challenge is required to be made within 15 days of the petitioner becoming aware of the constitution of the arbitral tribunal or of the circumstances furnishing grounds for challenge. Further, subject to the parties agreement, it is the arbitral tribunal (and not the court - unlike under the old Act of 1940) which shall decide on the challenge. If the challenge is not successful the tribunal shall continue with the arbitral proceedings and render the award, which can be challenged by an aggrieved party at that stage.
This is another significant departure from the Model Law, which envisages recourse to a court of law in the event the arbitral tribunal rejects the challenge. The Indian courts have held that “the apprehension of bias must be judged from a healthy, reasonable and average point of view and not on mere apprehension of any whimsical person. Vague suspicions of whimsical, capricious and unreasonable people are not our standard to regulate our vision.”
2.2.7 Conduct of arbitration proceedings The arbitrators are masters of their own procedure and subject to parties agreement, may conduct the proceedings “in the manner they consider appropriate.” This power includes- “the power to determine the admissibility, relevance, materiality and weight of any evidence”. The only restrain on them is that they shall treat the parties with equality and each party shall be given a full opportunity to present his case, which includes sufficient advance notice of any hearing or meeting. Neither the Code of Civil Procedure nor the Indian Evidence Act applies to arbitrations. Unless the parties agree otherwise, the tribunal shall decide whether to hold oral hearings for the presentation of evidence or for arguments or whether the proceedings shall be conducted on the basis of documents or other material alone. However the arbitral tribunal shall hold oral hearings if a party so requests (unless the parties have agreed that no oral hearing shall be held).
Arbitrators have power to proceed exparte where the respondent, without sufficient cause, fails to communicate his statement of defence or appear for an oral hearing or produce evidence. However, in such situation the tribunal shall not treat the failure as an admission of the allegations by the respondent and shall decide the matter on the evidence, if any, before it. If
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the claimant fails to communicate his statement of the claim, the arbitral tribunal shall be entitled to terminate the proceedings.
2.2.8 Taking of evidence in arbitral proceedings The Indian Oath’s Act 1969 extends to persons who may be authorized by consent of parties to receive evidence. This Act thus, encompasses arbitral proceedings as well. Section 8 of the said Act states that every person giving evidence before any person authorized to administer oath “shall be bound to state the truth on such subject.” Thus, witnesses appearing before an arbitral tribunal can be duly sworn by the tribunal and be required to state the truth on oath and upon failure to do so, commit offences punishable under the Indian Penal Code. However, the arbitrators cannot force unwilling witnesses to appear before them and for this court’s assistance is provided for vide Section 27 of the Act. Under this provision the arbitral tribunal or a party with the approval of the tribunal may apply to the court seeking its assistance in taking evidence (this is also provided for in the Model Law). However, Section 27 of the Indian Act goes beyond the Model Law as it states that any person failing to attend in accordance with any order of the court or making any other default or refusing to give evidence or guilty of any contempt of the arbitral tribunal, shall be subject to like penalties and punishment as he may incur for like offences in suits tried before the court. Further, the court may either appoint a commissioner for taking evidence or order that the evidence be provided directly to the arbitral tribunal. These provisions extend to any documents to be produced or property to be inspected. Section 26 provides for appointment of experts by the arbitral tribunal for any specific issue. In such situation a party may be required to give the expert any relevant information or produce any relevant document, goods or property for inspection as may be required. It will be open to a party (or to the arbitral tribunal) to require the expert after delivery of his report, to participate in an oral hearing where the parties would have an opportunity to put questions to him.
2.2.9 Governing Law In an international commercial arbitration, parties are free to designate the governing law for the substance of the dispute. If the governing law is not specified, the arbitral tribunal shall apply the rules of law it considers appropriate in view of the surrounding circumstances. For domestic arbitration, however, (i.e., between Indian parties), the tribunal is required to decide the dispute in accordance with the substantive laws of India.
The Supreme Court in TDM Infrastructure (P) Ltd. v. UE Development India (P) Ltd.19 held that irrespective of where the ‘central management and control is exercised’ by a company, companies incorporated in India, cannot choose foreign law as the governing law of their arbitration. The nationality of companies incorporated in India being Indian, the intention of the legislature is that Indian nationals should not be permitted to derogate from Indian law as it would be against public policy. The Court was of the view that "international commercial arbitration" meant an arbitration between parties where at least one of it is a body corporate incorporated in a country other than India. Where both companies are incorporated in India (and thereby had Indian nationalities), then the arbitration between them cannot be said to be an international commercial arbitration (even though the central management and control of the company may be exercised from a country other than India).
2.2.10 Form and content of awards The arbitrators are required to set out the reasons on which their award is based, unless the parties agree that no reasons are to be given or if it arises out of agreed terms of settlement.
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The tribunal may make an interim award on matters on which it can also make a final award. Indian law provides for a very healthy 18% interest rate on sums due under an award. Thus, unless the arbitral tribunal directs otherwise, the award will carry interest at 18% per annum from the date of the award till the date of payment. The tribunal is free to award costs, including the cost of any institution supervising the arbitration or any other expense incurred in connection with the arbitration proceedings.
2.2.11 Setting aside of awards The grounds for setting aside an award rendered in India (in a domestic or international arbitration) are provided for under Section 34 of the Act. These are materially the same as in Article 34 of the Model Law for challenging an enforcement application. An award can be set aside if:
a. a party was under some incapacity; or b. the arbitration agreement was not valid under the governing law; or c. a party was not given proper notice of the appointment of the arbitrator or on the
arbitral proceedings; or d. the award deals with a dispute not contemplated by or not falling within the terms of
submissions to arbitration or it contains decisions beyond the scope of the submissions; or
e. the composition of the arbitral tribunal or the arbitral procedure was not in accordance with the agreement of the parties; or
f. the subject matter of the dispute is not capable of settlement by arbitration; or g. the arbitral award is in conflict with the public policy of India.
A challenge to an award is to be made within three months from the date of receipt of the same. The courts may, however, condone a delay of maximum 30 days on evidence of sufficient cause. Subject to any challenge to an award, the same is final and binding on the parties and enforceable as a decree of the Court.
Considerable controversy has been generated as to whether an award is liable to be challenged under Section 34 on merits. The earlier view, as expounded by the Supreme Court in Renu Sagar Power Co. Ltd. v. General Electric Co. was that an award could be set aside if it is contrary to the public policy of India or the interests of India or to justice or morality – but not on the grounds that it is based on an error of law or fact. The Supreme Court in that case was faced with the issue to determine the scope of public policy in relation to proceedings for enforcement of a foreign award under the Foreign Awards (Recognition and Enforcement) Act, 1961. The Court also held that in proceedings for enforcement of a foreign award the scope of enquiry before the court in which the award is sought to be enforced would not entitle a party to the said proceedings to impeach the award on merits.
However, in a later Supreme Court of India decision in Oil and Natural Gas Corporation vs. Saw Pipes the Court added an additional ground of “patent illegality”, thereby considerably widening the scope of judicial review on the merits of the decision. In Saw Pipes case the court accepted that the scheme of Section 34 which dealt with setting aside the domestic arbitral award and Section 48 which dealt with enforcement of foreign award were not identical. The court also accepted that in foreign arbitration, the award would be subject to being set aside or suspended by the competent authority under the relevant law of that country whereas in domestic arbitration the only recourse is to Section 34. The Supreme Court observed:
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“But in a case where the judgment and decree is challenged before the Appellate Court or the Court exercising revisional jurisdiction, the jurisdiction of such Court would be wider. Therefore, in a case where the validity of award is challenged there is no necessity of giving a narrower meaning to the term 'public policy of India'. On the contrary, wider meaning is required to be given so that the 'patently illegal award' passed by the arbitral tribunal could be set aside.
……….. Similarly, if the award is patently against the statutory provisions of substantive law which is in force in India or is passed without giving an opportunity of hearing to the parties as provided under Section 24 or without giving any reason in a case where parties have not agreed that no reasons are to be recorded, it would be against the statutory provisions. In all such cases, the award is required to be set aside on the ground of 'patent illegality'.”
The court in Saw Pipes case although adopted the wider meaning to the term ‘public policy’ but limited its application to domestic awards alone. The Saw Pipes case has generated some controversy, and it remains to be seen if it will stand the test of time.
The position of a foreign award has also undergone some recent controversy. A foreign award is enforceable under Part II of the Act if it is rendered in a country that is a signatory to the New York Convention or Geneva Convention and that territory is notified by the Central Government of India. Once an award is held to be enforceable it is deemed to be a decree of the court and can be executed as such. Under the Act there is no procedure for setting aside a foreign award. A foreign award can only be enforced or refused to be enforced but it cannot be set aside.
This fundamental distinction between a foreign and a domestic award has been altered by the Supreme Court in the recent case of Venture Global Engineering v. Satyam Computer Services Ltd. (Venture Global). Here the Supreme Court was concerned with a situation where a foreign award rendered in London under the Rules of the LCIA was sought to be enforced by the successful party (an Indian company) in the District Court, Michigan, USA. The dispute arose out of a joint venture agreement between the parties. The respondent alleged that the appellant had committed an “event of default” under the shareholders agreement and as per the said agreement exercised its option to purchase the appellant’s shares in the joint venture company at book value. The sole arbitrator appointed by the LCIA passed an award directing the appellant to transfer its shares to the respondent. The respondent sought to enforce this award in the USA.
The appellant filed a civil suit in an Indian District Court seeking to set aside the award. The District Court, followed by the High Court, in appeal, dismissed the suit holding that there was no such procedure envisaged under Indian law. However, the Supreme Court in appeal, following its earlier decision in the case of Bhatia International v. Bulk Trading held that even though there was no provision in Part II of the Act providing for challenge to a foreign award, a petition to set aside the same would lie under Section 34 Part I of the Act (i.e. it applied the domestic award provisions to foreign awards). The Court held that the property in question (shares in an Indian company) is situated in India and necessarily Indian law would need to be followed to execute the award. In such a situation the award must be validated on the touchstone of public policy of India and the Indian public policy cannot be given a go by through the device of the award being enforced on foreign shores. Going further the Court held that a challenge to a foreign award in India would have to meet the expanded scope of public policy as laid down in Saw Pipes (supra) (i.e. meet a challenge on merits contending that the award is “patently illegal”).
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Thus, in conclusion, India has in place a modern and efficient Arbitration Act. There have been some decisions which are not in tune with the letter or spirit of the Act. Hopefully, these would be addressed by the judiciary in the near future and continuing popularity of arbitrations would be served by a truly efficient ADR mechanism.
The Act contains general provisions on arbitration, enforcement of certain foreign awards, conciliation and. supplementary provisions. The three schedules reproduce the texts of Geneva
Convention on the execution of Foreign Arbitral Awards, 1927, the Geneva Protocol on
Arbitration Clause, 1923 and the New York Convention on the Recognition and Enforcement of
Foreign Arbitral Awards, 1958. The Act differs from previous acts in many ways.
Firstly, where there is an arbitration agreement, the judicial authority is required to direct the
parties to resort to arbitration as per the agreement, provided the application for that purpose is
made before or when a written statement on the merits is submitted to the judicial authority by the party seeking arbitration. Secondly, the grounds on which award of an arbitrator may be
challenged before the court has been severely trimmed. For e.g. a challenge will now be
permitted only on the basis of invalidity of the agreement, want of jurisdiction on the part of the
arbitrator or want of proper notice to a party of the appointment of the arbitrator or of arbitral proceedings or a party being unable to present its case.
At the same time, an award can now be set aside if it is in conflict with the public policy of India
a ground which covers, inter alia, fraud and corruption. Thirdly, the powers of the arbitrator himself have been amplified by inserting specific provisions on several matters, such as the law
to be applied by him, power to determine the venue of arbitration failing agreement, power to
appoint experts, power to act on the report of a party, power to apply to the court for assistance
in taking evidence, power to award interest, and so on.
Fourthly, obstructive tactics sometimes adopted by parties in arbitration proceedings are sought
to be thwarted by an express provision whereunder a party who knowingly keeps silent and then
suddenly raises a procedural objection will not be allowed to do so. Fifthly, the role of institutions in promoting and organising arbitration has been recognised. Sixthly, the power to nominate
arbitrators has been given (failing agreement between the parties) to the Chief Justice or to an
institution or person designated by him. Seventhly, the time limit for making awards has been
deleted. Eighthly, present provisions relating to arbitration through intervention of court when there is no suit.
2.3 Trends in Arbitration in India The following observations are according to a report on released by EY, called 'Emerging trends in arbitration in India’. The report aims to study the current scenario of arbitration
and understand the developing trends in the domain. The research findings are based on the
responses of leading legal practitioners and prominent users of arbitration in India and abroad.
Here are some more insights from the report -
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2.3.1 Independence of arbitrators Appointment of an independent arbitrator, unbiased to either party, is crucial to successful arbitration. The report indicates that there is a need to lay down explicit provisions for checking
the independence and impartiality of arbitrators. An arbitrator appointed by the same party more
than three times is required to provide a detailed disclosure in this regard.
2.3.2 Growing need for expert witness The need for experts’ reports before passing an arbitral award is gradually growing due to the
increasing sophistication and complexity of matters referred to arbitration. The report states that
expert witness report provides concrete supporting evidence with regard to issues in arbitral
proceedings and helps an arbitral tribunal deliver an arbitral award in all fairness. EY research reveals that leading Indian practitioners are of the view that the need for financial experts is
going to increase in arbitral proceedings.
There have been significant developments in the field of arbitration in India. The arbitration scenario in India will take a positive stride through implementation of cost- and time-effective
solutions with streamlining of certain provisions of the law. Given the current scenario, it is
anticipated that the positive trend of resolving international disputes through arbitration will gain
further momentum in India at a rapid pace.
2.3.3 Hot tubbing – gaining popularity
Hot tubbing is widely gaining recognition and importance over the old-school method of cross
examination. The process enables lawyers and arbitrators to question experts in the presence of
other specialists and challenge each other's evidence, and thereby simplifies complex trials and
saves valuable time.
According to leading practitioners, the controversial practice of hot tubbing, although present in
India, is practically negligible at the moment. This practice is viewed as desirable for increasing
the efficacy of domestic arbitration
2.3.4 Growing importance of technology in arbitration The scope of technology in arbitration is significant in view of cost and time it can save. Various
effective IT tools like e-Discovery, financial modeling tools and data management systems can
make arbitration more accessible eliminating geographical, economical and time constraints.
However, EY research shows that the use of technology in arbitration is minimal and is not being exploited to its fullest potential. e-Discovery is a growing trend in commercial arbitration
proceedings, especially when parties seek significant discovery. Likewise, financial models help in
quantifying damages and analyses.
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Chapter 3 - Arbitration in India 3.1 Introduction
Arbitration may be defined as "the process by which a dispute or difference between two or more parties as to their mutual legal rights and liabilities is referred to and determined judicially and with binding effect by the application of law by one or more persons (the arbitral tribunal) instead of by a court of law".
There can be reference to arbitration only if there is an arbitration agreement between the parties. The Act makes it clear that an arbitrator can be appointed under the Act at the instance of a party to an arbitration agreement only in respect of disputes with another party to the arbitration agreement. If there is a dispute between a party to an arbitration agreement, with other parties to the arbitration agreement as also nonparties to the arbitration agreement, reference to arbitration or appointment of arbitrator can be only with respect to the parties to the arbitration agreement and not the non-parties.
The source of the jurisdiction of the arbitrator is the arbitration clause. The arbitration clause is normally a part of the main contract governing the parties. An arbitration agreement on the other hand constitutes a separate agreement, distinct from the main contract, and is binding on the parties. Parties can, even after the disputes have arisen, agree to have their disputes referred to arbitration. The agreement, however, must be in writing. Although contracts are required to be signed by the parties, arbitration clause need not be signed by the parties. An arbitration clause is binding if the parties have given their express or implied or tacit consent to refer the disputes to arbitration. Subject to the law of limitation, parties can refer their disputes to arbitration any time.
There are two forms of arbitration namely, ad hoc and institutional arbitration. Both forms have separate mechanism for appointment of arbitrators. In ad hoc arbitrations, parties make their own arrangements for selection of arbitrators and for designation of rules, applicable law, procedures and administrative support. However, an institution administers the arbitral process as per the institutional rules on payment of administrative fees by the parties. The institution also allows the parties to select arbitrator(s) from the institution's panel of arbitrators comprising experts drawn from various parts of the world.
3.2 Arbitration Agreement An arbitration agreement is collateral to the substantial stipulation of the contract. It is merely procedural and ancillary to the contract and it is a mode of settling the disputes, though the agreement to do so is itself subject to the discretion of the court. It is distinguishable from other clauses in the contract. It embodies an agreement of both parties with consensus ad idem that if any dispute arises with regard to the obligations undertaken therein which one party has undertaken towards the other, such a dispute shall be settled by a tribunal of their own constitution. It is the procedural machinery which is activated when disputes arise between parties regarding their rights and liabilities.
3.3 Rule of 'incorporation by reference' The rule of 'incorporation by reference' asserts that, even though the contract between the parties does not have a provision for arbitration but is contained in an independent document it will be imported and engrafted in the contract between the parties, by reference to such an
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independent document in the contract, if the reference is such as to make the arbitration clause in such document, a part of the contract. The wording of provisions of the Act makes it clear that a mere reference to a document would not have the effect of making an arbitration clause from that document, a part of the contract. The reference to the document in the contract should be such that shows the intention to incorporate the arbitration clause contained in the document, into the contract. The reference in a contract to a document containing an arbitration clause constitutes an arbitration agreement if the contract is in writing.
The intention of the Indian Legislature is not to incorporate an arbitration clause contained in a separate document, merely on reference to such document in the contract. The intention was to ensure that the reference is such as to make that arbitration clause part of the contract and there is a conscious acceptance of the arbitration clause in another document, by the parties, as the part of their contract, before such arbitration clause could be read as a part of the contract between the parties.
The Act does not contain any indication or guidelines as to the conditions to be fulfilled before a reference to a document in a contract can be construed as a reference incorporating an arbitration clause contained in such document, into the contract. In the absence of such statutory guidelines the normal rules of construction of contracts would have to be applied. The court in ascertaining the intention of the parties would determine as to whether the intention of the parties was to borrow specific terms and conditions contained in the separate document or the reference to that document was made with the intention to incorporate the contents of that document in its entirety into the contract.
The test is that there should be a special reference indicating a mutual intention to incorporate the arbitration clause from another document in the contract. The exception to the requirement of special reference is where the referred document is not another contract, but a standard form of terms and conditions of a trade associations or regulatory institutions which publish or circulate such standard terms and conditions for the benefit of the members or others who want to adopt the same. The standard forms of terms and conditions of trade associations or regulatory institutions are drafted by experience gained from trade practices and conventions, frequent areas of conflicts and differences, and dispute resolutions in the particular trade. They are also well known in trade circle and parties using such formats are usually well versed with the content thereof including the arbitration clause therein. Therefore, even a general reference to such standard terms, without special reference to the arbitration clause therein, is sufficient to incorporate the arbitration clause into the contract.
3.4 Ad hoc arbitration Ad hoc arbitration is an arbitration which is not administered by an institution providing arbitration facilities and it is left to the parties to determine all aspects of the arbitration like appointment of arbitrators, manner in which appointment is made, procedure for conducting the proceedings and for designation of rules, applicable law, procedures and administrative support. Ad hoc arbitration is mainly governed by the provisions of Arbitration and conciliation Act 1996 ('Act') and parties are free to determine the procedure.
3.5 Institutional arbitration In institutional arbitration, a specialized institution with a permanent character intervenes and assumes the functions of aiding and administering the arbitral process, as provided by the rules of that institution. The institution only facilitates and administers the process and the tribunal is
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appointed either by the parties or the institution. Often, the contract between the parties will contain an arbitration clause which will designate an institution as administrator by stating that the arbitration would be conducted as per the party designated institutional rules. For administering and facilitating the arbitration and providing secretarial services and facilities for conducting the arbitration proceedings, the institution normally levies administrative charges on the parties. The primary disadvantages of the institutional arbitration are:
(i) Administrative fees are imposed ad valorem and depend on the claim amount. Fees for services and use of facilities are high in disputes over large amounts;
(ii) Pre-established rules and procedures without any flexibility for conducting the proceedings may contribute to parties dis-satisfaction;
(iii) Parties to the arbitration may be required to comply with procedural requirements in unrealistic time frames.
In institutional arbitration, the first issue arising for agreement of the parties is choice of the institution appropriate for the resolution of disputes arising under the contract. Whilst making such choice, there are various factors to be considered i.e. nature & commercial value of the dispute, rules of the institution (as these rules differ), past record and reputation of the institution and also that the institutional rules are in tune with the latest developments in international commercial arbitration practice.
The advantages of institutional arbitration outweigh those of ad hoc arbitrations. Some of the advantages are:
(i) Administrative fees for services and use of facilities are often borne by the losing parties.
(ii) Institutions provide administrative assistance in the form of a secretariat or court of arbitration;
(iii) Maintains a panel of qualified arbitrators having expertise in different commercial sectors;
(iv) Institution can act as appointing authority of arbitrators on parties consent;
(v) Provides hearing room facilities and support services for arbitrations;
(vi) Extends assistance in encouraging reluctant parties to proceed with arbitration; and
(vii) Offers an established rules and procedure for conducting arbitration proceedings.
3.6 Number of arbitrators The Act provides that parties are free to determine the number of arbitrators which however, should not be an even number. Failing any determination by the parties, the arbitral tribunal shall consist of a sole arbitrator. The statutory requirement of odd numbers of arbitrators is a derogable provision. The words in the provision "the parties are free to determine the number of arbitrators" indicate that if they desire to exercise their option in favour of even number of arbitrators and agree to not to challenge the consequent award, the award rendered would be a valid and binding. The provision only gives a ground to either of the party in the event of appointment of even number of parties to object to such composition of the arbitral tribunal. A party has a right to object to the composition of the arbitral tribunal, if such composition is not in
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accordance with the Act. There is, however, no provision for the eventuality in case where the parties agree to even number. If neither of the parties challenge the composition then any challenge to the composition must be raised by a party before the time period prescribed under the Act, failing which it will not be open to that party to challenge the award after it has been passed by the arbitral tribunal. The Act enables the arbitral tribunal to rule on its own jurisdiction. A challenge to the jurisdiction of the arbitral tribunal must be raised, not later than the submission of the statement of defence even though the party may have participated in the appointment of the arbitrator and/or may have himself appointed the arbitrator. The Act recognises the right of both parties to choose the number of arbitrators. If the party wishing to exercise the right fails to exercise such right within the time frame provided then he will be deemed to have waived his right to so object.
3.7 Qualification of arbitrators The agreement executed by the parties has to be given great importance. An agreed procedure for appointing the arbitrators has to be given preference to any other mode for securing appointment of an arbitrator. If the procedure for appointment as agreed between the parties fails and an application is filed in court for appointment, the court cannot ignore provisions contained in Clause (a) of Sub-section (8) of section 11 of the Act wherein it is specifically provided that the Chief Justice or the person or institution designated by him, in appointing an arbitrator, shall have due regard to any qualifications required of the arbitrator by the agreement of the parties.
A clause in the agreement providing for settling the dispute by arbitration through arbitrators having certain qualifications or in certain agreed manner is normally adhered to by the courts and not departed with unless there are strong grounds for doing so. The appointment of an arbitrator can be challenged by a party on the ground that he does not possess the qualification agreed to by the parties. Such challenge has to be brought within 15 days after becoming aware of the constitution of the arbitral tribunal or after becoming aware of the circumstance that he does not possess the necessary qualification.
3.8 Nationality of the arbitrator Parties are free to agree to the nationality of the arbitrator. The word "may" in the Act confers a discretion on the Chief Justice or his nominee. It is not mandatory that the arbitrator should be of a nationality other than the nationalities of the parties to the agreement.
3.9 Named person or authority as arbitrator The parties to an arbitration agreement may agree to refer their disputes to a specific person and may either name him or give his designation in the agreement. For example, parties may state that the "Chief Engineer" of the department shall act as the arbitrator. If the person named therein or person holding the designation refuses to act as arbitrator and the parties have not intended that the vacancy should not be supplied, in that event the court will have jurisdiction to appoint another arbitrator. The basis for assuming such jurisdiction is that the clause would otherwise be rendered inoperative.
Where the agreement itself specifies and names the arbitrator, it is obligatory upon the court, in case it is satisfied that the dispute ought to be referred to the arbitrator, to refer the dispute to the arbitrator specified in the agreement. It is not open to the court to ignore the arbitration clause and to appoint another person as an arbitrator. Only in cases where the arbitrator
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specified and named in the agreement refuses or fails to act or where the agreement does not specify the arbitrator and the parties cannot also agree upon an arbitrator, does the court get the jurisdiction to appoint an arbitrator. The court is bound to refer the dispute only to the arbitrator named and specified in the agreement.
If the arbitration agreement mentions a "named arbitrator", he should be identifiable by name, designation or office. Reference of such a person by class, description or in the generic sense would not amount to naming the arbitrator in the arbitration agreement24. The court would always try to give effect to the terms of the arbitration agreement even though the contracting party had failed to act according to the contract. Failure on the part of the party to appoint an arbitrator in terms of the agreement would amount to abdication of the right of that party to make such appointment and the court would then be competent to appoint the arbitrator of its choice.
It will not be open to a party, at least in government contracts, to contend that appointment of a sole arbitrator only by one party to the dispute violates the equitable principle that no man can be a judge in his own cause if that party had entered into the contract with eyes wide open and had accepted the terms and conditions of the contract. Any challenge to the maintainability of the proceedings before the arbitral tribunal and to the tribunal's jurisdiction on the ground that the arbitration clause in the contract between the parties is void and unenforceable law will be rejected. In Nandan Biomatrix Ltd. v. D1 Oils Ltd., it was contended that appointment of a sole arbitrator only by one party to the dispute violates the equitable principle that no man can be a judge in his own cause. Rejecting the contention the Court held that the petitioner having accepted the terms and conditions of the contract cannot now resile from the same.
Whether appointment has to be made de hors the contract on failure by the named authority or institution? The Chief Justice or his designate cannot ignore the contractual terms between the parties and appoint an arbitrator even when the person or authority named is available. The court summed up the position stating:
"1. The Chief Justice or his designate even if the authority or institution named does not nominate the Arbitrator which is required to be done or to constitute the Arbitral Tribunal, will ordinarily direct the authority or institution to nominate the Arbitrator and effectively constitute the Arbitral Tribunal. This is more so in the case of public bodies and Corporation, where failure on the part of an official holding howsoever a high post, shall not result in that body being saddled with an arbitral Tribunal not in terms of the contract it entered into or was entered on its behalf.
2. It is only in the event, for some good reason that the Arbitrator cannot be named or, the Tribunal constituted in terms of the contract, shall the Chief Justice or designate nominate the Arbitrator or constitute the Arbitral Tribunal beyond the terms of the Contract".
A party would forfeit its right to appoint an arbitrator in terms of arbitration clause after the end of the statutory period of 30 days and if no steps have been taken to appoint before the other party makes an application to the court seeking appointment; the court may appoint an arbitrator.
3.10 "Notice of Arbitration" and "Commencement of Arbitration" According to the Act, arbitral proceedings would commence on the date of service of a notice for appointment of an arbitrator. The notice must be issued to and received by the respondent
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indicating that the claimant seeks arbitration of the disputes. If the request / notice is not received or there is a denial by the respondent of such receipt, the burden is on the party making the request to show that the respondent can be deemed to have received the request. This may be so in a situation where the request is sent by registered post and the acknowledgement to which bears the signature of the respondent.
Request to appoint an arbitrator need not be in express and precise language, it may be implied. The test is to determine whether the 'communications were in their context sufficiently clear and unambiguous to leave a reasonable recipient in no reasonable doubt that they were intended to operate as a call for the appointment of an arbitrator'.
The issue of "notice of arbitration" and "commencement of arbitration", has been dealt by Mustill and Boyd. They have stated:
"It is common to use expressions such as 'a notice of arbitration' or 'the commencement of an arbitration' as if they had the same meaning for all purposes, in the context of all the various possible types of agreement to arbitrate. This is misleading, for when enquiring whether sufficient steps have been taken to set an arbitration in train, the answer may depend on the reason why the question is being asked. There are several different reasons why it may matter when the arbitration has begun. Of these, the following are probably the most important.
First, the question may be whether, at a given moment, there is any person or group of persons with jurisdiction to make an award, and power to give directions and make rulings in the course of the reference. For this purpose, what is being considered is whether the arbitration has reached the stage where there is a completely constituted arbitral tribunal.
Second, the problem may relate to the jurisdiction of the arbitrator. Thus if there is a general reference of disputes the scope of the reference will be determined by the state of the disputes at the moment when the arbitration was begun. Disputes arising thereafter must be the subject of a separate arbitration, unless brought within the existing reference by consent.
Third, the purpose of the enquiry may be to ascertain whether the claimant has taken such steps as may be prescribed by statute or contract for the purpose of preventing his claim from being time barred.
Finally, it may be necessary to consider whether one party has taken sufficient steps towards setting the arbitration in motion to give him certain procedural advantages in the appointment of the tribunal: either as a preliminary to appointing his own nominee as sole arbitrator, or at least by way of preventing the other party from exercising his statutory right to make, or procure, a nomination in default.
It is plain that expressions such as 'the commencement of the arbitration' must have different meanings in these various contexts. For example, the giving of a notice to concur in the appointment of a sole arbitrator is sufficient to prevent
time from running under the Limitation Act 1980; and it is also an essential first step towards the making of a default appointment under Section 10(a) of the Arbitration Act. But the arbitration has not at this stage 'commenced' in any practical sense, since there is no person or group of persons charged with any authority to determine the matters in dispute."
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3.11 Requirements of a letter of invocation (i) It must clearly and unambiguously evince the intention of the sender for appointment of an arbitrator.
(ii) Should specify the contract under which the arbitration clause is being invoked.
(iii) Should record compliance with pre-condition for invocation of the arbitration clause.
(iv) If parties under the contract are required to resolve the disputes amicably after notice of invocation is given, party issuing the notice should call upon the other party for a meeting.
(v) If arbitration is to be referred to three arbitrators one to be appointed by each party and the third arbitrator by the nominated arbitrators, party invoking the arbitration clause should also nominate his arbitrator.
3.12 Requirements for filing an application The essential pre-conditions to be satisfied before an application for appointment of arbitrator by Court is filed are:
(i) there exists an arbitration clause in the contract in terms of section 7;
(ii) the party filing the application is privy to the arbitration agreement;
(iii) there exists a dispute between the parties in relation to the contract containing the arbitration agreement.
(iv) notice invoking the arbitration clause has been issued and received by the other party.
(v) in a multi-tier arbitration agreement, the steps preceding invocation of the arbitration agreement has been complied with.
In dealing with an application for filing an arbitration agreement, the Court must satisfy itself about the existence of a written agreement which is valid and subsisting and which has been executed before the institution of any suit, and that a dispute has arisen with regard to the subject-matter of the agreement which is within the jurisdiction of the Court. The existence of an arbitration agreement is a condition precedent for exercise of power to appoint the arbitral tribunal.
3.13 Existence of arbitration clause Before seeking appointment of an arbitrator it is necessary to ascertain as to whether the contract governing the parties contains an arbitration clause. If the contract does not contain an arbitration clause, unless otherwise agreed by the other party, the disputes cannot be referred to arbitration. The aggrieved party would have to file a civil suit before the appropriate forum to have its claim adjudicated. In some contracts, mostly standard form contracts, the arbitration clause is not contained in the contract governing the parties but is contained in a separate document the terms of which are incorporated by reference into the contract signed by the parties.
The Act has conferred the power on the arbitral tribunal to decide whether there is in 'existence' an arbitration clause. The statute uses the word "may" when conferring such power which is a clear indication that even courts could go into such issues when hearing an application for
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appointment of arbitrator. An option given by the arbitration clause to the parties with the use of the expression "parties may refer the disputes to arbitration" would be a case where no arbitration clause exists between the parties and hence no appointment of an arbitrator can be made. The use of the word 'may' would imply that parties need not necessarily go to an arbitrator but can also go before the civil court by way of a suit. In order to make such an arbitration clause effective, a fresh consent for arbitration would be necessary. The arbitration clause therefore, must be firm or mandatory.
In dealing with the issue of existence of an arbitration agreement between the parties, the learned Chief Justice or his designate is required to decide the issue finally and it is not permissible in a proceeding under Section 11 to merely hold that a party is prima facie a party to the arbitration agreement and that a party is prima facie bound by it. It is not as if the Chief Justice or his designate will subsequently be passing any other final decision as to who are the parties to the arbitration agreement. Once a decision is rendered by the Chief Justice or his designate under Section 11 of the Act, holding that there is an arbitration agreement between the parties, it will not be permissible for the arbitrator to consider or examine the same issue and record a finding contrary to the finding recorded by the court. This is categorically laid down by the Constitution Bench in SBP & Co. v. Patel Engg. Ltd.
If there is an assertion of existence of an arbitration agreement in any suit, petition or application filed before any court, and if there is no denial thereof in the defence/counter/written statement thereto filed by the other party to such suit, petition or application, then it can be said that there is an "exchange of statements of claim and defence" for the purposes of Section 7(4)(c) of the Act. It follows that if in the application filed under Section 11 of the Act, the applicant asserts the existence of an arbitration agreement with each of the respondents and if the respondents do not deny the said assertion, in their statement of defence, the court can proceed on the basis that there is an arbitration agreement in writing between the parties.
Notwithstanding the arbitration clause, a party may challenge its effectiveness or validity. A reference to arbitration may be disputed where some of the claims are arbitrable and not all. In other words, parties have expressly stated in the contract that a particular nature of claims cannot be a subject matter of adjudication by the arbitral tribunal. Such non-arbitrable claims would fall within the meaning of "excepted matters", adjudication of which is either completely barred or can be done only before the court.
3.14 Discharge of contract and arbitration clause as a result of full and final settlement
When a respondent contends that the dispute is not arbitrable on account of discharge of the contract under a settlement agreement or discharge voucher or no-claim certificate, and the claimant contends that it was obtained by fraud, coercion or undue influence, the issue will have to be decided either by the Chief Justice/his designate in the proceedings under Section 11 of the Act or by the Arbitral Tribunal as directed by the order under Section 11 of the Act. A claim for arbitration cannot be rejected merely or solely on the ground that a settlement agreement or discharge voucher had been executed by the claimant, if its validity is disputed by the claimant. The court in Boghara Polyfab case further observed:
"52. Some illustrations (not exhaustive) as to when claims are arbitrable and when they are not, when discharge of contract by accord and satisfaction is disputed, to round up the discussion on this subject are:
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(i) A claim is referred to conciliation or a pre-litigation Lok Adalat. The parties negotiate and arrive at a settlement. The terms of settlement are drawn up and signed by both the parties and attested by the conciliator or the members of the Lok Adalat. After settlement by way of accord and satisfaction, there can be no reference to arbitration.
(ii) A claimant makes several claims. The admitted or undisputed claims are paid. Thereafter negotiations are held for settlement of the disputed claims resulting in an agreement in writing settling all the pending claims and disputes. On such settlement, the amount agreed is paid and the contractor also issues a discharge voucher/no-claim certificate/full and final receipt. After the contract is discharged by such accord and satisfaction, neither the contract nor any dispute survives for consideration. There cannot be any reference of any dispute to arbitration thereafter.
(iii) A contractor executes the work and claims payment of say rupees ten lakhs as due in terms of the contract. The employer admits the claim only for rupees six lakhs and informs the contractor either in writing or orally that unless the contractor gives a discharge voucher in the prescribed format acknowledging receipt of rupees six lakhs in full and final satisfaction of the contract, payment of the admitted amount will not be released. The contractor who is hard-pressed for funds and keen to get the admitted amount released, signs on the dotted line either in a printed form or otherwise, stating that the amount is received in full and final settlement. In such a case, the discharge is under economic duress on account of coercion employed by the employer. Obviously, the discharge voucher cannot be considered to be voluntary or as having resulted in discharge of the contract by accord and satisfaction. It will not be a bar to arbitration.
(iv) An insured makes a claim for loss suffered. The claim is neither admitted nor rejected. But the insured is informed during discussions that unless the claimant gives a full and final voucher for a specified amount (far lesser than the amount claimed by the insured), the entire claim will be rejected. Being in financial difficulties, the claimant agrees to the demand and issues an undated discharge voucher in full and final settlement. Only a few days thereafter, the admitted amount mentioned in the voucher is paid. The accord and satisfaction in such a case is not voluntary but under duress, compulsion and coercion. The coercion is subtle, but very much real. The "accord" is not by free consent. The arbitration agreement can thus be invoked to refer the disputes to arbitration.
(v) A claimant makes a claim for a huge sum, by way of damages. The respondent disputes the claim. The claimant who is keen to have a settlement and avoid litigation, voluntarily reduces the claim and requests for settlement. The respondent agrees and settles the claim and obtains a full and final discharge voucher. Here even if the claimant might have agreed for settlement due to financial compulsions and commercial pressure or economic duress, the decision was his free choice. There was no threat, coercion or compulsion by the respondent. Therefore, the accord and satisfaction is binding and valid and there cannot be any subsequent claim or reference to arbitration."
3.15 Existence of 'dispute' a pre-condition of the right to seek appointment
Existence of a dispute or difference is a pre-condition of the right to arbitrate and seek an appointment. It is not necessary for a claim to be formulated to give rise to a dispute. Mere existence of a disagreement on a central issue is sufficient. However, merely raising a claim does not satisfy the pre-condition of the dispute. For a dispute to come into existence there should be
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an assertion on behalf of one party and a positive denial by the other. There would be no dispute or difference if one party's claim has been expressly or impliedly admitted or if the other party has demonstrably no defence. A 'dispute' and 'difference' is most of the time used interchangeably and are the same although 'difference' has been held to have a wider meaning.
The word "dispute" means a genuine and real dispute and a claim which is indisputable because there is no arguable defence, does not create a dispute at all. The jurisdiction of an arbitrator depends not upon the existence of a claim or the accrual of a cause of action but upon the existence of a dispute. The question whether the dispute in the suit falls within the arbitration clause involves consideration of two matters. Firstly, what is the dispute in the suit and secondly, what disputes the arbitration clause covers. Thus, where the arbitration clause referred to a dispute regarding the goods of the contract and not to a dispute regarding the contract itself, and the suit was for damages for breach of the contract occasioned by non-delivery of goods. It was held that the suit was not in respect of a matter agreed to be referred to arbitration under the terms of the contract and could not be stayed.
3.16 Court intervention The Act limits court intervention in the arbitral process to the minimum in order to preserve the sanctity of the agreement of the parties to have their disputes settled by a forum of their choice. In view of this objective the legislative intent was not to make each and every order passed by an authority under the Act, a subject-matter of judicial scrutiny of a court of law.
3.17 Anti-suit proceedings A party seeking to stay the suit and have the disputes referred to arbitration would have to establish that the arbitrator is competent or empowered to decide the dispute. An application would lie only where there is already a judicial proceeding pending even though parties had agreed to refer the disputes to arbitration. The pendency of the proceeding itself is evidence of dispute. All that the court needs to ensure is whether the subject matter of the dispute is covered by the arbitration agreement.
The matter will not be referred to the arbitral tribunal, by the Court if (a) no application for referring the dispute to the arbitrator has been filed by the parties to the arbitration agreement; (b) such application is not filed before submitting first statement on the substance of the dispute in a pending suit; or (c) such application is filed without the original arbitration agreement or duly certified copy thereof. Application to the court will not lie if the subject matter of the suit is relating to matters lying outside the arbitration agreement, or between parties not involved in an arbitration agreement.
3.18 Meaning of Court "Court" means the principal civil court of original jurisdiction in a district, and includes the High Court in exercise of its ordinary original civil jurisdiction, having jurisdiction to decide the questions forming the subject-matter of the arbitration if the same had been the subject-matter of a suit. It, however, does not include any civil court of a grade inferior to such principal civil court, or any court of small causes.
The expression "if the same had been the subject-matter of a suit" means that had there been no arbitration agreement between the parties in the contract governing their obligations then on disputes arising between the parties the appropriate court would be one where the suit would have been filed in accordance with the provisions contained in sections 15 to 20 of the Code of
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Civil Procedure, 1908 (CPC). Therefore, even for matters which are subject of arbitration agreement the principles underlying the provisions of the CPC will continue to apply for determination of the appropriate "court". The only qualification to the application of the said provisions of CPC to disputes forming subject matter of arbitration agreement is that it will not include a court inferior to principal civil court in a district. As a consequence even High Courts in exercise of its ordinary original civil jurisdiction would fall under the definition of Court. However, unlike the provisions of section 15 to 20 which refer to the place, where the parties reside, dwell or carry on business to determine the court having jurisdiction, provisions of the Act only refers to the subject-matter of the arbitration. The Act excludes residence of parties for purposes of determination of jurisdiction of court. A "subject-matter" of arbitration can be determined from the nature of dispute which is raised by a party to arbitration agreement. Although, a contract between parties can give rise to several kinds of dispute, it will only be disputes which can be referred to arbitration which would fall within the term "subject-matter". Those disputes which under the contract cannot be referred to arbitration cannot be taken into consideration for determination of "subject-matter" of the arbitration although it may be an issue before the arbitrator as to whether it falls within the arbitration agreement or is an excepted matter. If the dispute relates to contract for construction of a building then in that case it will be the place where the contract is to be performed and not merely where the contract had been signed as it may have been signed at the place where the parties reside which may be different from place where the contract is to be performed.
Principal civil court of original jurisdiction in a district will be the Court where an application for enforcement of the award as decree shall have to be filed. The expression "the Principal Civil Court of original jurisdiction in a District" has not been defined under the Act. CPC defines a "district" to mean the local limits of the jurisdiction of a principal civil court of original jurisdiction ("district court"), and includes the local limits of the ordinary original civil jurisdiction of a High Court.
The General Clauses Act defines "district judge" to mean the judge of a principal civil court of original jurisdiction, but shall not include a High Court in the exercise of its ordinary or extraordinary original civil jurisdiction. The definition of "court" if read with the definition of "district" and "district Judge" would evince that the Court of district judge is the principal civil court of original jurisdiction in a district.
3.19 Appointment of arbitrator through Court assistance The existence of an arbitration agreement as defined under Section 7 of the Act is a condition precedent for exercise of power to appoint an arbitrator/Arbitral Tribunal, under Section 11 of the Act by the Chief Justice or his designate. It is not permissible to appoint an arbitrator to adjudicate the disputes between the parties, in the absence of an arbitration agreement or mutual consent.
Where the intervention of the court is sought for appointment of an Arbitral Tribunal under Section 11, the duty of the Chief Justice or his designate is defined in SBP & Co. case. The Supreme Court in that case identified and segregated the preliminary issues that may arise for consideration in an application under Section 11 of the Act into three categories, that is:
(i) issues which the Chief Justice or his designate is bound to decide;
(ii) issues which he can also decide, that is, issues which he may choose to decide; and
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(iii) issues which should be left to the Arbitral Tribunal to decide.
The issues (first category) which the Chief Justice/his designate will have to decide are:
(a) Whether the party making the application has approached the appropriate High Court.
(b) Whether there is an arbitration agreement and whether the party who has applied under Section 11 of the Act, is a party to such an agreement.
The issues (second category) which the Chief Justice/his designate may choose to decide (or leave them to the decision of the Arbitral Tribunal) are:
(a) Whether the claim is a dead (long-barred) claim or a live claim.
(b) Whether the parties have concluded the contract/transaction by recording satisfaction of their mutual rights and obligation or by receiving the final payment without objection.
The issues (third category) which the Chief Justice/his designate should leave exclusively to the Arbitral Tribunal are:
(i) Whether a claim made falls within the arbitration clause (as for example, a matter which is reserved for final decision of a departmental authority and excepted or excluded from arbitration).
(ii) Merits or any claim involved in the arbitration.
As per the scheme of the Act, in regard to issues falling under the second category, if raised in any application under Section 11 of the Act, the Chief Justice/his designate may decide them, if necessary, by taking evidence. Alternatively, he may leave those issues open with a direction to the Arbitral Tribunal to decide the same. If the Chief Justice or his designate chooses to examine the issue and decides it, the Arbitral Tribunal cannot re-examine the same issue. The Chief Justice/his designate will, in choosing whether he will decide such issue or leave it to the Arbitral Tribunal, be guided by the object of the Act (that is expediting the arbitration process with minimum judicial intervention). Where allegations of forgery/fabrication are made in regard to the document recording discharge of contract by full and final settlement, it would be appropriate if the Chief Justice/his designate decides the issue.
Section 11 of the Act lays down the procedure for appointment of arbitrator or arbitrators with court intervention. The sole object of seeking court assistance under the Act is to secure constitution of the arbitral tribunal expeditiously. Parties to an arbitration agreement can agree upon a procedure for appointment of a sole arbitrator or arbitrators as contemplated under sub-section (2) of section 11. A party can approach the Chief Justice or his designate if the parties have not agreed on a procedure for appointing the arbitrator as contemplated by sub-section (2) of section 11 of the Act or the circumstances provided for in sub-section (6) have arisen. Section 11(2) provides that the parties are free to agree to any procedure for appointing the arbitrator. In case of failure of the procedure in securing the appointment agreed between the parties, the aggrieved party can invoke sub-sections (4), (5) or (6) of Section 11, as the case may be.
Sub-section (4) of section 11 of the Act deals with the existence of an appointment procedure and the failure of a party to appoint the arbitrator within 30 days from the receipt of a request to do so from the other party or when the two appointed arbitrators fail to agree on the presiding
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arbitrator within 30 days of their appointment. Sub-section (5) deals with the parties failing to agree in nominating a sole arbitrator within 30 days of the request in that behalf made by one of the parties to the arbitration agreement and sub-section (6) deals with the Chief Justice appointing an arbitrator or an Arbitral Tribunal when the party or the two arbitrators or a person including an institution entrusted with the function, fails to perform the same.
Section 11(6) of the Act applies only when a party has failed to act in terms of the arbitration agreement. Section 11(6) contemplates that a request be made to the Chief Justice of India or his nominee to take the necessary measure if:
(a) a party fails to act as required under the appointment procedure agreed between the parties; or
(b) the parties, or the two appointed arbitrators, fail to reach an agreement expected of them under that procedure; or
(c) a person, including an institution, fails to perform any function entrusted to him or it under that procedure.
For filing an application for appointment of an arbitrator under section 11(6) of the Act, no time limit has been prescribed, whereas a period of 30 days has been prescribed under section 11(4) and section 11(5) of the Act.
Sub-sections (3) and (5) will come into play only when there is no agreement between the parties as is referred to in sub-section (2) of section 11 of the Act viz. that the parties have not agreed on a procedure for appointing the arbitrator or arbitrators. If the parties have agreed on a procedure for appointing arbitrator or arbitrators, sub-sections (3) and (5) of section 11 of the Act will have no application. Similarly, under sub-section (6) of section 11 request to the Chief Justice or to an institution designated by him to take the necessary measures, can be made if the conditions enumerated in clause (a) or (b) or (c) of this sub-section are satisfied.
Therefore, a combined reading of the various sub-sections of section 11 of the Act would show that the request to the Chief Justice for appointment of an arbitrator can be made under sub-sections (4) and (5) of section 11 where parties have not agreed on a procedure for appointing the arbitrator as contemplated by sub-section (2) of Section 11. A request to the Chief Justice for appointment of an arbitrator can also be made under sub-section (6) where parties have agreed on a procedure for appointment of an arbitrator as contemplated in sub-section (2) but certain consequential measures which are required to be taken as enumerated in clause (a) or (b) or (c) of sub-section (6) are not taken or performed.
Sub-section (7) of section 11, makes the decision of the Chief Justice on the matters decided by him final while constituting the arbitral tribunal. The finality under section 11 (7) of the Act, however, is attached only to a decision of the Chief Justice on a matter entrusted by sub-section (4) or sub-section (5) or sub-section (6) of that section.
Sub-section (8) of section 11, requires the Chief Justice or the person or institution designated by him to give due regard to the qualifications required for an arbitrator by the agreement of the parties, and other considerations as are likely to secure the appointment of an independent and impartial arbitrator when making an appointment. Even while exercising the jurisdiction under section 11(6), the court is required to have due regard to the provisions contained in section
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11(8) of the Act. The aforesaid section provides that apart from ensuring that the arbitrator possesses the necessary qualifications required of the arbitrator by the agreement of the parties, the court shall have due regard to other considerations as are likely to ensure the appointment of an independent and impartial arbitrator. In Indian Oil Corpn. Ltd. case, it was emphasised that normally the court shall make the appointment in terms of the agreed procedure, however, the Chief Justice or his designate may deviate from the same after recording reasons for the same.
Sub-section (9) of section 11, deals with the power of the Chief Justice of India or a person or institution designated by him to appoint the sole or the third arbitrator in an international commercial arbitration.
Sub-section (10) of section 11, deals with the Chief Justice's power to make a scheme for dealing with matters entrusted to him by sub-section (4) or sub-section (5) or subsection (6) of Section 11.
Sub-section (11) of section 11, deals with the respective jurisdiction of the Chief Justices of different High Courts who are approached with requests regarding the same dispute and specifies as to who should entertain such a request.
Sub-section (12) of section 11, clause (a) clarifies that in relation to international arbitration, the reference in the relevant sub-sections to the "Chief Justice" would mean the "Chief Justice of India". Clause (b) indicates that otherwise the expression "Chief Justice" shall be construed as a reference to the Chief Justice of the High Court within whose local limits the Principal Court is situated.
The jurisdiction of the court and the nature of power exercised by it when acting pursuant to the provisions contained in section 11 has been summarized in S.B.P & Co. v. Patel Engineering as under:
(i) The power exercised by the Chief Justice of the High Court or the Chief Justice of India under Section 11(6) of the Act is not an administrative power. It is a judicial power.
(ii) The power under Section 11(6) of the Act, in its entirety, could be delegated, by the Chief Justice of the High Court only to another Judge of that Court and by the Chief Justice of India to another Judge of the Supreme Court.
(iii) In case of designation of a Judge of the High Court or of the Supreme Court, the power that is exercised by the designated Judge would be that of the Chief Justice as conferred by the statute.
(iv) The Chief Justice or the designated Judge will have the right to decide the preliminary aspects as indicated in the earlier part of this judgment. These will be his own jurisdiction to entertain the request, the existence of a valid arbitration agreement, the existence or otherwise of a live claim, the existence of the condition for the exercise of his power and on the qualifications of the arbitrator or arbitrators. The Chief Justice or the designated Judge would be entitled to seek the opinion of an institution in the matter of nominating an arbitrator qualified in terms of Section 11(8) of the Act if the need arises but the order appointing the arbitrator could only be that of the Chief Justice or the designated Judge.
(v) Designation of a District Judge as the authority under Section 11(6) of the Act by the Chief Justice of the High Court is not warranted on the scheme of the Act.
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(vi) Once the matter reaches the Arbitral Tribunal or the sole arbitrator, the High Court would not interfere with orders passed by the arbitrator or the Arbitral Tribunal during the course of the arbitration proceedings and the parties could approach the Court only in terms of Section 37 of the Act or in terms of Section 34 of the Act.
(vii) Since an order passed by the Chief Justice of the High Court or by the designated Judge of that Court is a judicial order, an appeal will lie against that order only under Article 136 of the Constitution to the Supreme Court.
(viii) There can be no appeal against an order of the Chief Justice of India or a Judge of the Supreme Court designated by him while entertaining an application under Section 11(6) of the Act.
(ix) In a case where an Arbitral Tribunal has been constituted by the parties without having recourse to Section 11(6) of the Act, the Arbitral Tribunal will have the jurisdiction to decide all matters as contemplated by Section 16 of the Act.
(x) Since all were guided by the decision of this Court in Konkan Rly. Corpn. Ltd. v. Rani Construction (P) Ltd. and orders under Section 11(6) of the Act have been made based on the position adopted in that decision, we clarify that appointments of arbitrators or Arbitral Tribunals thus far made, are to be treated as valid, all objections being left to be decided under Section 16 of the Act. As and from this date, the position as adopted in this judgment will govern even pending applications under Section 11(6) of the Act.
(xi) Where District Judges had been designated by the Chief Justice of the High Court under Section 11(6) of the Act, the appointment orders thus far made by them will be treated as valid; but applications if any pending before them as on this date will stand transferred, to be dealt with by the Chief Justice of the High Court concerned or a Judge of that Court designated by the Chief Justice.
If an arbitrator is appointed by the designate of the Chief Justice under Section 11 of the Act, nothing prevents the arbitrator from proceeding with the arbitration. It also therefore follows that the mere fact that an appeal from an order dismissing the suit under Order 7 Rule 11 CPC (on the ground that the disputes were required to be settled by arbitration) is pending before the High Court, will not come in the way of the appointment of an arbitrator under Section 11 read with Section 15(2) of the Act, if the authority under Section 11 finds it necessary to appoint an arbitrator.
While appointing an arbitrator under Section 11 of the Arbitration and Conciliation Act, 1996, two things must be kept in mind:
(i) That there exists a dispute between the parties to the agreement and that the dispute is alive.
(ii) Secondly, an arbitrator must be appointed as per the terms and conditions of the agreement and as per the need of the dispute.
The scope of Section 11 of the Act containing the scheme of appointment of arbitrators may be summarised thus:
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(i) Where the agreement provides for arbitration with three arbitrators (each party to appoint one arbitrator and the two appointed arbitrators to appoint a third arbitrator), in the event of a party failing to appoint an arbitrator within 30 days from the receipt of a request from the other party (or the two nominated arbitrators failing to agree on the third arbitrator within 30 days from the date of the appointment), the Chief Justice or his designate will exercise power under sub-section (4) of Section 11 of the Act.
(ii) Where the agreement provides for arbitration by a sole arbitrator and the parties have not agreed upon any appointment procedure, the Chief Justice or his designate will exercise power under sub-section (5) of Section 11, if the parties fail to agree on the arbitration within thirty days from the receipt of a request by a party from the other party.
(iii) Where the arbitration agreement specifies the appointment procedure, then irrespective of whether the arbitration is by a sole arbitrator or by a three member Tribunal, the Chief Justice or his designate will exercise power under sub-section (6) of Section 11, if a party fails to act as required under the agreed procedure (or the parties or the two appointed arbitrators fail to reach an agreement expected of them under the agreed procedure or any person/institution fails to perform any function entrusted to him/it under that procedure).
(iv) While failure of the other party to act within 30 days will furnish a cause of action to the party seeking arbitration to approach the Chief Justice or his designate in cases falling under sub-sections (4) and (5), such a time-bound requirement is not found in sub-section (6) of Section 11. The failure to act as per the agreed procedure within the time-limit prescribed by the arbitration agreement, or in the absence of any prescribed time-limit, within a reasonable time, will enable the aggrieved party to file a petition under Section 11(6) of the Act.
(v) Where the appointment procedure has been agreed between the parties, but the cause of action for invoking the jurisdiction of the Chief Justice or his designate under clauses (a), (b) or (c) of sub-section (6) has not arisen, then the question of the Chief Justice or his designate exercising power under subsection (6) does not arise. The condition precedent for approaching the Chief Justice or his designate for taking necessary measures under sub-section (6) is that:
(a) a party failing to act as required under the agreed appointment procedure; or
(b) the parties (or the two appointed arbitrators) failing to reach an agreement expected of them under the agreed appointment procedure; or (c) a person/institution who has been entrusted with any function under the agreed appointment procedure, failing to perform such function.
(vi) The Chief Justice or his designate while exercising power under sub-section (6) of Section 11 shall endeavour to give effect to the appointment procedure prescribed in the arbitration clause.
(vii) If circumstances exist, giving rise to justifiable doubts as to the independence and impartiality of the person nominated, or if other circumstances warrant appointment of an independent arbitrator by ignoring the procedure prescribed, the Chief Justice or his designate may, for reasons to be recorded ignore the designated arbitrator and appoint someone else.
3.20 Appointment of the third / presiding arbitrator The Act provides that in arbitration with three arbitrators, each party shall appoint one arbitrator, and the two appointed arbitrators shall appoint the third arbitrator who shall act as the presiding arbitrator. It is not necessary that the appointment of the third arbitrator be done by the two
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appointed arbitrators by sitting together and in writing. The requirement of the law is that there should be an appointment and the appointment should be by the two appointed arbitrators. The statute does not contemplate that such appointment should be made in writing. In Keshavsinh Dwarkadas Kapadia v. Indian Engineering Company, it was observed that:
"The appointment of an umpire by two arbitrators means that the arbitrators are to concur in appointing an umpire. There is no particular method of appointment of an umpire prescribed by the Act. The usual method of appointment of an umpire by the arbitrators is in writing. Arbitrators who are required to appoint an umpire are under no obligation to obtain the approval of the choice of the personnel by the parties who appointed the arbitrators. If any party is dissatisfied with the choice it will not affect the validity of the appointment.”
The appointment by arbitrators of an umpire should be the act of the will and judgment of the two. Such an appointment is to be one of choice and not of chance. "
All that the two arbitrators need to do to satisfy the provision of statute, while making the appointment is to:
(i) actually make the appointment,
(ii) appointment should be made after consultation with each other, and
(iii) such appointment is communicated to the parties.
The Act nowhere provides that the parties need to be consulted, involved or informed prior to the appointment of the presiding arbitrator.
3.21 Appointment of presiding arbitrator by the arbitral institution An arbitration clause may require each of the parties to the dispute to nominate its arbitrator and the third arbitrator is to be chosen by the two arbitrators appointed by the parties who shall act as the presiding arbitrator.
If under the appointment procedure contemplated by the contract, any person or organization or body is required to appoint the presiding arbitrator then the court will not exercise its jurisdiction under the Act to fill the vacancy. The cause of action for moving an application under the Act would exist only if the person or organization or body fails or refuses to appoint the presiding arbitrator.
3.22 Refusal by or failure of one party to appoint If the party having the responsibility under the arbitration agreement refuses or fails to appoint an arbitrator or arbitrators as the case may be as per the agreed procedure for appointment, within 30 days of the demand being made by the other party, the party having the right to make such appointment can be said to have forfeited his right and it will be open to the other party to approach the court and seek the appointment of the arbitrator in accordance with the agreed procedure. However, the right to appoint the arbitrator or arbitrators of the defaulting party would subsist till the time the other party has not filed an application before the court seeking appointment of the arbitrator or arbitrators. Once the other party moves the Court the right to make the appointment ceases to exist and the procedure envisaged under the arbitration clause for appointment of arbitrator ceases to be in existence.
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If, however, after making an appointment of arbitrator, there is a vacancy in the office of the arbitrator by virtue of death, retirement or resignation the appointing authority would not lose his right to supply the vacancy.
3.23 Challenge to the order of appointment The power exercised by the Chief Justice or the Judge designated at the time of appointment of arbitrator on request filed by a party is in the nature of a judicial order. The Chief Justice or the designated Judge would not pass the order of appointment going into the contentious issues between the parties. The function of the Chief Justice or his designate under Section 11 is simply to fill the gap left by parties in the arbitration agreement or in the nomination of an arbitrator by two arbitrators appointed by the parties. Section 11 does not contemplate a decision by the Chief Justice or his designate on any controversy that the other party may raise even where the other party has failed to appoint an arbitrator within thirty days of the request being made.
3.24 Limitation for filing an application seeking appointment The period of limitation for the commencement of an arbitration runs from the date on which, had there been no arbitration clause, the cause of action would have accrued, just as in the case of actions the claim is not to be brought after the expiration of a specified number of years from the date on which the cause of action accrued. In arbitrations, the claim is not to be put forward after the expiration of the specified number of years from the date when the claim accrued.
An application under section 11 of the Act for appointment of arbitrator is governed by Article 137 of the schedule to the Limitation Act, 1963 and must be made within 3 years from the date when the right to apply first accrues. However, there is no right to apply until there is a clear and unequivocal denial of that right by the respondent. It must, therefore, be clear that the claim for arbitration must be raised as soon as the cause for arbitration arises as in the case of cause of action arises in a civil action. There must thus, not only be an entitlement to money but there must be a difference or a dispute must arise. An application filed after the expiry of three years from the date of acceptance of final bill and measurement will be barred by limitation. Any negotiations or agreement between the parties after accrual of cause of action to refer the matter to arbitration does not have the effect of suspending the cause of action so as to stop the running of limitation.
A party cannot postpone the accrual of cause of action by writing reminders or sending reminders but where the bill had not been finally prepared, the claim made by a claimant is the accrual of the cause of action. A dispute arises where there is a claim and a denial and repudiation of the claim. The existence of dispute is essential for appointment of an arbitrator. Cause for arbitration arises on date of service of the notice calling upon respondent to refer matter for arbitration.
3.25 Seat and Choice of Law of Arbitration The seat of arbitration can be fixed by the parties themselves. If there is no such agreement, the arbitral tribunal has the freedom to determine the seat of arbitration. However, this discretion is not absolute. The arbitral tribunal must keep in mind the circumstances of the particular dispute and the convenience of the parties. The venue of arbitration, however, is different and can be as per convenience of the two parties.
Normally, the appropriate courts of the seat of arbitration will have jurisdiction in respect of procedural matters concerning the conduct of the arbitration. However, the overriding principle
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is that the courts of the country whose substantive laws govern the arbitration agreement are the competent courts in respect of all matters arising under the arbitration agreement. Thus if the law governing the arbitration agreement is Indian, it follows that Indian courts would have jurisdiction in respect of any and all disputes arising out the arbitration agreement.
For domestic arbitrations in India, the applicable law is the law of India. This is a mandatory requirement under the Indian Arbitration Act and cannot be contracted out of by the parties. For international arbitrations with a seat in India, the arbitral tribunal shall follow the laws the parties have agreed to apply to the substance of their dispute. The designated law or legal system applying to the substance of the dispute is to be construed, unless expressly agreed otherwise, as referring to the substantive law of that country and not its conflict of laws rules. In the absence of any agreement between the parties as to the applicable law, the arbitral tribunal shall apply the laws that it considers to be appropriate and relevant to the dispute.
Parties may choose, either expressly or by implication, the substantive law governing the arbitration agreement as well as the procedural law governing the conduct of the arbitration. Where there is no express choice of the law governing the contract as a whole, or the arbitration agreement in particular, and in the absence of any contrary indication, there is a presumption that the parties have intended that the proper law of the contract, as well as the law governing the arbitration agreement, to be the same as the law of the seat in which the arbitration is agreed to be held. On the other hand, where the proper law of the contract is expressly chosen by the parties, in the absence of an unmistakable intention to the contrary, such law must govern the arbitration agreement which, though collateral or ancillary inclusion into the main contract, is nevertheless a part of such contract.
The substantive law governing the arbitration determines the validity, effect and interpretation of the arbitration agreement. In the absence of any agreement to the contrary, the arbitral proceedings are conducted in accordance with the law of the seat of the arbitration. On the other hand, if the parties have specifically chosen the law governing the conduct and procedure of arbitration, the arbitral proceedings will be conducted in accordance with that law, provided that it is not contrary to the public policy or the mandatory requirements of the law of the country in which the arbitration is held. If no such choice has been made by the parties, expressly or by necessary implication, the procedural aspect of the conduct of the arbitration (as distinguished from the substantive agreement to arbitrate) will be determined by the law of the seat of arbitration.
The overriding principle is that the courts of the country whose substantive laws govern the arbitration agreement are the competent courts in respect of all matters arising under the arbitration agreement. The jurisdiction exercised by the courts of the seat of arbitration is merely concurrent, not exclusive, and strictly limited to matters of procedure. All other matters in respect of the arbitration agreement fall within the exclusive competence of the courts of the country whose laws govern the arbitration agreement.
3.26 Recognition and enforcement of award a) Domestic Awards-
Under Section 36 of the Indian Arbitration Act, a domestic award (i.e. an award made under Part I) is enforceable under the Civil Procedure Code 1908 (CCP) in the same manner as if it were a decree of an Indian court.
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The procedure for the execution of a domestic award is laid down in Order XXI of the CCP and must be followed. Order XXI of the CCP also lays down the detailed procedure for enforcement of decrees. All proceedings in execution are commenced by way of an “application for execution” in accordance with Rule 10 of the CCP. The execution of a decree against the property of the judgment debtor can be under two heads, namely:
— attachment of property; and
— sale of the property of the judgment debtor
At the execution stage, there can be no challenge as to validity of the domestic award. Thus, once a party has failed to challenge an award under Section 34 of the Indian Arbitration Act, this possibility is no longer available in execution proceedings.
b) Foreign Awards-
A foreign award can be enforced in India under the multilateral international conventions to which India is a party, namely the 1927 Geneva Convention and the New York Convention. The award must have been made in a country that has ratified the 1927 Geneva Convention or the New York Convention. The 1927 Geneva Convention has ceased to apply to those awards to which the New York Convention now applies.
India made two reservations when it ratified the 1927 Geneva Convention and the New York Convention. The first was that India would apply both the 1927 Geneva Convention and the New York Convention to the recognition and enforcement of an award only if it was made in the territory of another state that is bound by either convention. The second was that India would apply the 1927 Geneva Convention and the New York Convention only to differences arising out of legal relationships which are considered as “commercial” under the Indian laws. The concept of “commercial relationship” takes place within the ambit of all relationships which arise out of, or are ancillary or incidental to business dealings.
A foreign award can be enforced under Part II of the Indian Arbitration Act. The procedure for enforcement of awards is largely the same in the Indian Arbitration Act as under the 1937 Act and the 1961 Act. The New York Convention and the 1927 Geneva Convention provide a procedure for enforcement which has been given statutory recognition by way of enabling legislation, namely the 1937 Act and the 1967 Act. This continues under the Indian Arbitration Act (which has replaced the 1937 Act and the 1967 Act).
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Chapter 4 - Disputes in Infrastructure Projects in India
4.1 Introduction A rough estimate of the amount of money currently blocked in construction sector disputes in India is around INR 54,000 crore. Moreover, the dispute resolution mechanism in India takes anywhere between 5 to 15 years to resolve the issue compared to a global average of 12.8 months and a European average of 6 months. As a result, the dispute resolution process becomes costly for most companies to pursue in India. This is highlighted by respondents to a survey conducted by Deloitte in 2014 where 65 percent of respondents stated that expenses on dispute resolution totalled up to 5 percent of annual revenues and 20 percent said they spent 5-10 percent of their annual revenues on dispute resolution.
The key factors listed by respondents leading to costly and delayed dispute resolution were ‘poorly defined arbitration clauses’ and ‘inability to pinpoint responsibility for default on project obligations’. In our experience, two of the key factors leading to disputes are delays in environmental clearances and problems in land acquisition. In such scenarios, it becomes difficult to apportion blame for default on project obligations leading to complex disputes. In addition, the slow nature of the judicial and arbitration process (that often lacks urgency) makes the resolution of any commercial dispute in India even more time consuming and costly.
An example is the dispute regarding termination of a leading infrastructure group’s Concession Agreement by an African Government in November 2012. The Arbitration process, seated in Singapore, went on for about 15 months and an award was made in favour of the group in June 2014, as reported by the news media. In contrast, the dispute regarding termination of a large slum rehabilitation project by a domestic airport operator, being run in India, is still in early stages of the arbitration process and it may take much longer for the arbitration process to reach an award stage.
Another example that indicates the long drawn out nature of arbitration in India is the dispute between a large oil and gas conglomerate and the Government of India over allocation of gas blocks. The appointment of arbitrators itself has been controversial, as reported by the news media. Almost three years after commencement of the dispute, the two sides have not been able to agree on the panel of arbitrators. Both the parties have appointed their nominees to the panel but are fighting a case in the Supreme Court over appointment of the third arbitrator.
Arbitration clauses in contracts are often one sided and not defined comprehensively. These clauses mostly do not specify the qualifications of the arbitrator nor do they talk of a time frame in which the process is to be concluded. Another key challenge in the dispute resolution mechanism in India is the non-binding nature of arbitration awards. The enforcement of the award in India tends to have its own challenges. The party on the losing side of the arbitration process tends to opt for further litigation by challenging the award on technical grounds thus leading to costly and delayed dispute resolution.
Take for instance, the dispute between a leading road infrastructure provider and the regulatory body regarding bonus payment for early commencement of operations. It took almost 5 years
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for an award to be granted in the infrastructure provider’s favour. However, this was challenged by the regulator not only in the High Court but also in the Supreme Court, further delaying the resolution of the dispute.
In India, arbitration has often been cited as the most preferred option for dispute resolution with bilateral negotiations and mediation taking a back seat, whereas, globally, bilateral negotiation ranks as the most preferred method of dispute negotiation followed by mediation and then arbitration. This may also partly explain faster dispute resolution in Europe and other countries as compared to India.
4.2 Common sources of construction claims and disputes The common sources of disputes are listed below, as per various studies that have been conducted. If we observe closely, most of the causes are anticipated. Kumaraswamy (1997) attempted to differentiate causes of claims and disputes into root causes and proximate causes. He defined proximate causes as those that were immediately apparent and differentiated these from the underlying root causes; an example of a proximate cause is changes by client and a root cause as clients lack of information or decisiveness. However he did not actually trace and isolate the critical causes that give rise to significant categories of claims. He only stated that it appeared that almost all the proximate and root causes are controllable to a certain extent.” However, he did concede that it is “…unlikely that all potential causes can be adequately controlled simultaneously, given the multiple interacting subsystems and variables in any project”.
5% of annual reserves
5-10% of annual reserves
Amount spent on dispute resolution
65%
20%
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ROOT CAUSES Unfair Risk Allocation
Unclear Risk Allocation Unrealistic quality/time/cost targets by clients
Uncontrollable external events Adversarial industrial culture
Unrealistic tender pricing Inappropriate contract type
Lack of competence of project participants Lack of professionalism of project participants
Clients lack of information or indecisiveness Unrealistic information expectations by contractors
Perceived underlying root causes that give rise to construction claim
..Generate by themselves or through interactions..
Inadequate briefPoor communications Personality clashesVested interests
Charges by clientSlow client responsesExaggerated claims
Estimating errorsOther work errors
Internal disputes in JVsInadequate contract administration
Inaccurate design information
Incomplete tender documentationsInadequate design documentation
Inappropriate contract selectionInadequate contract documentation
Inappropriate payment modalities Inappropriate contract form
..Generate by themselves or through interactions..
PROXIMATE CAUSES
Immediately apparent causes
CLAIMS & DISPUTES
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Authors Year Source of Dispute
Blake Dawson Waldron 2006 Key Issues- 1. Variations to scope 2. Contract Interpretation 3. EOT Claims 4. Site conditions 5. Late, incomplete or substandard information 6. Obtaining information 7. Site access 8. Quality of design 9. Availability of resources
Cheung and Yui 2006 Faulty Tree [fuzzy logic] model of root causes of disputes [assumption that conflict is inevitable] 3 areas: 1. Conflict : Task interdependency, differentiations, communication obstacles, tensions, personality traits 2. Triggering events: Non performance, payment, time 3. Contract provision
Yiu and Cheung 2004 33 dispute sources identified [literature] & were ranked. 2 categories:
1. Construction related: 24 items 2. Human behaviour related: 9 items
Ranked from survey data and results: Significant sources: Human behaviour parties: expectations and inter parties’ problems construction related: variation and delay in work progress
Kumaraswamy 61 projects in Hong Kong
1997 11 Time claim categories and 19 cost claim categories giving rise to two main groupings of causes of disputes and claims: root causes and proximate causes
Conlin et al 438 dispute events on 21 projects in the UK
1996 Six areas: 1. payment and budget; 2. performance; 3. delay and time; 4. negligence; 5. quality; 6. administration
Sykes 1996 Two major groupings of claims and disputes: 1. misunderstandings [8 specific reasons/examples];
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2. unpredictability [with 17 specific reasons/examples]
Bristow and Vasilopoulos Ontario, Canada
1995 Five primary causes of claims: 1. unrealistic expectations by parties; 2. ambiguous contract documents; 3. poor communications between project participants; 4. lack of team spirit; 5. failure of participants to deal promptly with changes and unexpected outcomes
Diekman et al 1994 Three areas: 1. people; 2. process; 3. product
Heath et al Survey of 28 quantity surveyors and five case studies in the UK
1994 Five main categories of claims: 1. Extension of time 2. Variations in quantities 3. Variations in specifications 4. Drawing changes 5. others
Seven main types of disputes: 1. contract terms 2. payments; 3. variations; 4. extensions of time; 5. nomination 6. renomination; 7. availability of information
Rhys Jones General survey of construction industry and lawyers
1994 Ten factors in the development of disputes: 1. Poor management 2. Adversarial culture 3. Poor communications 4. Inadequate design 5. Economic environment 6. Unrealistic tendering 7. Influence of lawyers 8. Unrealistic client expectations
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9. Inadequate contract drafting 10. Poor workmanship
Semple et al 24 projects in Western Canada
1994 Six commons categories of dispute claims: 1. Premium time 2. Equipment costs 3. Financing costs 4. Loss of revenue 5. Loss of productivity 6. Site overhead
Four common causes of claims: 1. acceleration; 2. restricted access; 3. weather/cold; 4. increase in scope
Watts and Scrivener 72 judgements from 56 construction litigation cases in Australia
1992 59 categories of disputes and 117 ‘sources’ of disputes. Most frequent sources include claims arising from: 1. variations 2. negligence in tort 3. delays
Hewitt 1991 Six areas: 1. change of scope; 2. change conditions; 3. delay; 4. disruption 5. acceleration; 6. termination
Diekmann and Nelson 427 claims on 22 [federally administered] projects in USA
Most commons cause of contract claims: 1. design errors [46%] 2. discretionary or mandatory changes [26%] 3. Other specific claims types [entitlement issues] included; 4. Differing site conditions 5. Weather 6. Strikes 7. Value engineering
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F: First Level Cause, S: Second Level Cause
Claim-Cause Description F1 Change in Law S1 Imposition of new taxes S2 Revision in entry tax S3 Revision in excise duty S4 Revision on royalty charges on materials F2 Delay in Site Handing Over S5 Delay in Land Acquisition S6 Delay in removal of encroachments S7 Delay in environmental / forest clearances S8 Delay in compensation payments S9 Employer default
S10 Losses due to EOT S11 Increased guarantee charges S12 Idling of tools, plants, manpower F3 Improper Contract Management
S13 Derived BOQ Item Rate and payment S14 Non-BOQ item rate and payment S15 Delayed / reduced payment S16 Escalation / price adjustment S17 Poor quality construction S18 Poor planning of activities by contractor S19 Non granting of completion S20 Loss of interest S21 Stoppage of work by employer F4 Improper study prior to Tendering
S22 Improper study by the client S23 Improper study by the contractor S24 Change in scope by client S25 Ambiguous contract clause F5 Legal Costs
S26 Lawyer fees S27 Cost of arbitration F6 Beyond control of both parties
S28 Natural calamity S29 Increase in material / fuel cost S30 Strike, agitation etc. S31 Court intervention S32 Terrorism risk S33 Statutory charges
Source: Primary research on disputes in Highway sector by Parikh, D.M & Joshi G.J. (2013) with data collected from 77 project contracts
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Chapter 5 – Arbitration Practices around the World
5.1 United States of America (USA) The development and use of alternative dispute redressal mechanisms in USA pre-dates both the
declaration of Independence and the Constitution. Arbitral tribunals were established as early as 1768 in New York and shortly thereafter in other cities primarily to settle disputes in the clothing,
printing and merchant seaman industries. The United States law has strongly recognised and
favoured recognition of agreement to arbitrate and enforcement of arbitral awards, both in
domestic and international commerce. In 1854, the United States Supreme Court held that arbitration as a mode of settling dispute should get every encouragement from the Courts and
the Court upheld the right of an arbitrator to issue binding judgments. Writing for the Court,
Justice Grier said that the arbitrators are the judges chosen by the parties to decide the matter
submitted to them, finally and without appeal. Arbitration law in United States arises from both National laws i.e. the Federal Law and the law of various States. The National Congress enacts
federal statutory laws and they govern matters within federal jurisdiction.
The federal statutory law of arbitration contained in the Federal Arbitration Act, which was first enacted in 1925, has been amended several times since then. It is confined to disputes in
Federal Courts. The 1970 amendment was made to implement the accession by the United
States to the United Nation Convention on the Recognition and Enforcement of Foreign Arbitral
Awards. In addition, almost all the States comprising the United States have their own arbitration statutes, enacted by their State legislatures. The State statutes are patterned on the model law
of Uniform Arbitration Act that was first adopted in1955 and amended in1956. Most State
statute, while differing in some detail, follow the general principles as those embodied in Federal
Arbitration Act.
The arbitration law began in United States in early rule of the English Government. There are
numerous references in the Statute Books of Arbitration of particular cases such as disputes
against Stockholders of Corporations, but the New York Chamber of Commerce had arbitration facilities from 1761 to 1920 and New York Stock Exchange provided for arbitration of member’s
disputes in its Constitution of 1817. The question of constitutionality of arbitration was raised in
Courts of law. Compulsory arbitration unless accompanied by sufficient provisions for an appeal
to the ordinary Courts has been deemed unconstitutional. Despite observation of the Courts and interference by the Legislature, use of arbitration has been in trend in United States for
commercial matters largely due to the influence of Chamber of Commerce and other Trade
Associations. The New York State Chamber of Commerce has printed its earliest arbitration
records consisting of Minutes of its Committee from 1779 to 1792. Some States in the USA have passed Acts for compulsory arbitration so as to avoid delay in the Court proceedings in respect of
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certain claims, such as motor accidents and small claims. These statutes exclude the traditional
jurisdiction of Courts based on equity. The Year book on commercial arbitration in the United
States for 1927 contained provisions for arbitration including forms, rules and regulation and panel of arbitrators in Trade Association for thirty principal branches of commerce, and a
comprehensive list of Chamber of Commerce Exchanges, Municipal Courts, Legal Aid Society and
Bar Associations Furnishing arbitration facilities in every part of the country.
The Federal Arbitration Act applies generally to arbitration that relates to maritime transactions
and to contracts evidencing transactions involving commerce among the several States of United
States or with Foreign Nations. The arbitration law of the State where the arbitration takes place
is generally applicable to other cases. However, in any specific case, the parties should consider whether the arbitration law of a particular State is applicable and should consult that law. This is
important even when the case is before a Federal Court because of a doctrine, which requires
that the Federal Court in many cases must determine certain questions relating to arbitration in
accordance with the laws of the State in which the Federal Court is located.
In USA, mediation as a method of dispute resolution was used in an ad hoc way since long time,
though litigation was the primary method of dispute resolution. In 1976, Pound Conference was
held to commemorate the 70th Anniversary of Dean Rosco Pound’s dissertation on the “Public dissatisfaction with American legal system”. The conference took a close view as to the reasons
as to why American Courts were criticized. One of the reasons why justice administration in
America was criticized was because of overcrowded and costly Court system. The ADR
movement of America started with Pounds Conference 1976. Arbitration is used extensively in United States of America in commercial disputes, including disputes over the performance of
contracts, quality of goods and wide variety of other controversies that are amenable to
agreement between the disputed parties. Since the enactment of the Civil Justice Reforms Act
(CJRA) 1990, which calls for every federal district Court to implement a civil justice expense and delay reduction plan, there has been tremendous growth in the creation of ADR programs and
the use of ADR by federal and State Courts. A growing number of Courts have promulgated rules
that mandate or authorize judges to recommend, or require litigants to participate in, ADR
procedures such as summary jury trials, early mediator evaluation, mini-trials, mediation and arbitration. As of September 1995, 80 of 94 Federal District Courts had authorized or established
some form of ADR program. Alternative dispute redressal methods have been so successful in
America that the District Court of Colombia introduced a voluntary mediation program in 1989
and in the year 1997, it is said that more than 1,000 cases have completed mediation. Moreover, the program boasts a 50 % settlement rate.
In the Native American culture, peace-making is the primary method of problem solving.
Disputes are handled in a way, which deals with the underlying cause of conflict, and mends relationships. The institutionalization of ADR in America can be said to be with the establishment
of American Arbitration Association. The principal arbitration institution is the American
Arbitration Association (AAA), which was found in 1926 in response to the need for an arbitration
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institution able to administer all kinds of cases in all parts of United States of America. It is an
independent, non-governmental, non-profit organisation. It is governed by a Board of Directors
chosen from a wide range of industries, professions and social groups throughout the nation. Full time professional staffs of experts in arbitration procedure and law administer it.
The Court of Appeals for the District Court of Columbia also has implemented a mediation
program in an effort to supplement the Court’s 1986 Case Management plan, which was undertaken to accommodate a 60% increase in filing and pending cases over the prior two years
period. The key difference between these two programs is that the Court’s Chief Staff Counsel
selects cases in the Appeals Court program for mediation, whereas the District Court program is
strictly voluntary. In 1994, the CPR Institute for Dispute Resolution conducted a survey of 244 of the largest law firms in United States,all of which had demonstrated interest in alternative
dispute redressal methods through membership in the CPR Institute and found that 65% of the
124 responding firms had formalized their delivery of ADR services with 68% having adopted
two or more of the following organizational strategies. The strategies like designation of an ADR specialist or partner (58%), the organization of an ADR committee or department(47%),
strategic profiling of one or more prominent partners a neutrals(27%) and creation of a distinct
provider group within the form, or affiliated with but distinct from the firm(14%). It has revealed
that there are significant differences in perceived gains from ADR between firms that had formalized their ADR organization and those that had not done so. 59% of the organized firms
verses 35% of unorganized firms reported positive client comments from their alternative
dispute redressal methods initiatives and 49% of the organized firms verses 21% of the
unorganized firms reported that ADR has had an appreciable, positive impact on the firms lawyers, clients and practice. New business or new clients resulting from the firm’s ADR expertise
were reported by 37% of the organized firm and only 2% of the unorganized firms.
In different States of United States of America such as Columbia, New Jersey, Houston, Philadelphia, and a number of American cities and States now offer multi-door programs. The
program enables a member of the public to contact the Court in person or by telephone, with a
complaint or dispute. Where, a preliminary analysis of the case is done of the case in order to be
able to recommend which dispute resolution process is most suitable to resolve it. Various criteria will be applied for this process, for example, the kind of issues involved, what kind of
compensation is likely to be awarded if successful, whether witnesses or other evidence will be
needed, whether rights need to be protected and what services are available. The inquiring party
is then advised about the processes that might be most appropriate to the case and is given relevant referral details, which may be to departments within the Court, or may perhaps be to
outside agencies.
Moreover, the judges of the Supreme Court increasingly encourage litigants to use both public and private alternative dispute redressal methods to resolve their disputes. In addition to the
State programs discussed above, Special Courts offering relatively expeditious processing of
commercial disputes have been set up in three major cities namely New York, Chicago and
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Wilmington. The Commercial Division of the New York State Supreme Court is exclusively
devoted to commercial disputes, committed to expedited process and encouragement of
settlement. Four judges hear cases in this Court from start to finish. This offers several advantages, the most obvious of which is speed. Specialization also allows these judges to
develop subject-matter expertise. Prior to its implementation, each judge was assigned
approximately 1,000 pending cases. Because of the Court’s commitment in expediting
proceedings and encouraging settlement at every opportunity, within one year, the average caseload reduced to 400 cases per judge.
In U.S.A., judicial settlement conferences and settlement weeks have resulted in a high success
rates. In some of the Federal States of U.S.A., legislation has been passed to provide for private judging (also known as 'rent a Judge') such as Texas, California, New York, Ohio and Oregon.
Multi-Door Courthouse system which has been developed in U.S.A., if followed, could offer the
prospect of greater access to justice and more economical and faster resolution of disputes.
In USA, where ADR has been practiced in every Court at the State level since the 1970s, more
than 90% of all pending cases are settled through advocate and judicial mediation and hardly a
few percent of all cases actually proceed to trial. However, it took the American justice delivery
system over 20 years to achieve this success rate. Mediation was introduced in USA first through judicial mediation and, once accepted, then advocate mediation. The broad pool of qualified
advocate-neutrals is essential to this success rate in USA. In the USA high volume Court systems,
advocate neutrals are relied upon to resolve the majority of cases and judicial mediators are
reserved for the most complex cases and cases that advocate neutrals have been unable to resolve. The alternative dispute redressal methods in United States of America are multifaceted
and diverse. The growth in the use and the development of different alternative dispute
redressal methods has resulted from initiatives at all levels and from all branches of the
government- executive, legislatures, and judiciary and from many corners of the private sectors, community organization, corporations and the bar. With these increased inclusion of alternative
dispute redressal methods in domestic as well as international commercial agreements and the
wide publication of ADR success, the alternative dispute redressal methods is continuously
expanding.
5.2 United Kingdom (UK) Arbitration in England is as old as its legal history. At Common Law the parties could at any time
before award revoke the authority of the arbitrator even where the agreement expressly made the submission irrevocable. The subject matter of disputes was mainly confined to Chattel and
Tort. With the expansion of the British Empire and the growth of trade, disputes with merchants
and traders increased and commercial matters were frequently referred to arbitration. This
resulted in substantial reduction of trial of commercial business in Courts. English Courts felt greatly prejudice against arbitration. It was thought that arbitration was an attempt to oust the
jurisdiction of Court. The Statute of
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1698 was the first legislation towards encouragement of arbitration. The Statute of 1833
followed it. The Common Law Procedure Act of 1854 and the England Arbitration Act of 1889
codified the general law relating to arbitration. It sub-divided the subject-matter of arbitration into the one where references are by consent of parties out of Court, and the other reference
under the order of the Court. With regard to the former, the Act required a submission to
arbitration to be in writing. The submission unless a contrary intention was expressed in it, was
irrevocable except by leave of the Court or a judge. An arbitrator was not liable for want of skill or for neglect in conducting the arbitration. An arbitrator had power to administer oath. In the
absence of any express provision in the submission, an award was required to be made within
three months from the date of entering upon the reference. All the disputes referred to
arbitration had to be disposed of by the award. With regard to reference under order of Court, a Court or a Judge could refer any question arising in any cause or matter to an official of Special
Referee whose report could be enforced like a judgment or order. The Act of 1889 was the
foundation of subsequent legislations relating to arbitration in England.
The England Arbitration Act of 1889 and the subsequent legislations relating to arbitration,
however, cannot be said to contain the whole law of arbitration in England. Many of the
statutory provisions could be excluded. The parties were free to agree to the procedure to be
followed by the arbitrator and the powers to be vested in him. The parties by agreement could determine the constitution of the arbitral tribunal that was to decide the dispute. All the legal
defenses available to the party before the Court were also available in arbitration.
The Arbitration Clauses (Protocol) Act, 1924 was passed to ratify and give effect to the Protocol signed at the assembly of the League of Nations and in regulating the procedure to be adopted
in commercial arbitration between parties to the jurisdiction of the signatory States. In 1925 the
Supreme Court of Judicature (Consolidation) Act repealed and replaced certain section of
Arbitration Act ,1889.The Arbitration(Foreign Awards) Act, 1930 gave effect to a convention on the execution of the arbitral award and made amendments of the Protocol Act, 1924. The
Arbitration Act of 1934 made substantial changes by supplementing the Act of 1889. These two
statutes were consolidated in the Arbitration Act of 1950. The Arbitration Act, 1950 came into
force with effect from 1st September 1950. It provided for the procedure regulating arbitration made as a result of a written agreement between the parties as well as certain arbitrations
conducted under statutory provisions. If the parties to a dispute agree, many provision of the
1950 Act need not be observed. The Departmental Advisory Committee (DAC) reported that
there were fundamental problems in the presentation of Arbitration Law of England due to some uncertainty and confusion in English arbitration law. DAC advices that there should be new
improved legislation relating to arbitration. Thus, the idea of the Arbitration Act 1996 was
conceived. The Arbitration Act of 1950 has been repealed by the Arbitration Act 1996 with the
exception Pt II, which relates only to enforcement of a limited number of Foreign Awards. The rest of the provisions with suitable modifications have been re-enacted in the Act of 1996. This
Act 1996 does not adopt the UNICTRAL Model Law in its entirety, its structure and content is
mainly based on it. The Arbitration Act of 1996 received the Queen’s assent on 17 June 1996
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and came into force from 31 January 1997. This Act compounds the doctrine of arbitration law
with realities of institutional practices, and integrates the largest developments into regulatory
provisions. The amalgamation of doctrine and practice with comprehensiveness of the 1996 Act, qualifies it to be a prototype statutory framework for governing an international arbitration
proceeding. The Act 1996 functions with the principle of speedy, inexpensive and fair trial by an
impartial tribunal, party autonomy and minimal Court intervention. In case of ambiguity as to the
meaning of any provision of the Arbitration Act 1996, regard is to be given to these principles. The English Common Law of Arbitration and the English Arbitration Act form the main source of
the law of the Arbitration in most of the Commonwealth Countries and the United States of
America.
With the Woolf Reforms, it seems likely that mediation will become a more prominent fixture on
the dispute resolution landscape in England and Wales. Civil Procedure Rule 1.4(2) (e) now
requires the Court, as part of its responsibility to actively manage cases, to encourage the
parties to use an ADR procedure if the Court considers it appropriate and to facilitate the use of such procedure.
Although City of London lawyers and others have embalmed mediation as a technique to resolve
large commercial cases, the cost savings that can be achieved through effective and early use of ADR are such that very few types of dispute cannot be assisted by ADR.
With the opportunity for creative solutions, for a fast and inexpensive resolution that the parties
develop and buy into, and for a process that enhances rather than destroys on-going business relationships, alternative dispute resolution method is likely to grow rapidly in popularity over the
next few years in the UK. As lawyers become more sophisticated consumers of alternative
dispute resolution services they and their clients will select mediators best suited for a given
dispute and the number and range of competent, qualified mediators will expand.
5.3 Australia Australia is a Federal State. Under the Constitution of Commonwealth of Australia, powers are
divided between the Central Government and the State Government. Arbitration is a matter that is traditionally been covered by State and Territory, rather than Commonwealth, legislation. The
Commonwealth Parliament legislates with respect to external affairs, and to trade and commerce
with other countries, and in international commercial arbitration. It has done so in the Arbitration
(Foreign Awards and agreements) Act 1974, which gives effect to the 1958 New York Convention. All other law affecting commercial arbitration is to be found in the statutes and
common law of the States and territories. Arbitration is commonly used to settle building
disputes arising out of insurance policies. In agreements between Australia and other parties,
which contain an international element, arbitration is increasingly accepted, as it may lead to the avoidance of problems arising from the conflict of law, especially since the adoption of the 1958
New York Convention, the recognition and enforcement of foreign arbitral awards604. Thus,
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Australian law on arbitration is based on international conventions, legislations both federal and
State and common law which is the judge made law. Australia being party to three international
conventions on international arbitration has given effect to it within Australia by federal International Arbitration Act 1974 (IAA). The Part II of the IAA contains the provisions for
implementation of the Convention on the Recognition and Enforcement of Foreign Arbitral Award
of 1958(New York Convention). Part III of IAA gives the UNCITRAL Model Law on International
Commercial Arbitration of 1885 a force of law in Australia. Part IV gives effect to the Convention on the Settlement of Investment Disputes between States and Nationals of other States of 1975
(Washington Convention). The State and Territories of Australia all have their own uniform
legislation on arbitration, which is called the Commercial Arbitration Act (CAA).
Australia had no national accreditation system for alternative dispute resolution mechanisms.
However, following the National Mediation Conference in May 2006, the National Mediation
Accreditation Standards system has apparently started to move to its implementation phase.
Mediation is now accepted procedure for resolution of domestic disputes in Australia. Its popularity has grown remarkably over the past few years. In the area of neighborhood disputes
and family law disputes, it has assumed particular importance. It is also used in commercial
disputes for a contractual and non-contractual nature. Specialist bodies have been set up for
promoting or foster mediation and numbers of instructional courses are offered on mediation skills and techniques606. ADR practitioners recognize that mediators (as distinct from arbitrators
or conciliators) need to be recognized as having professional accreditations the most. There are
a range of organizations within Australia that do have extensive and comprehensive
accreditations for mediators but people that use mediation are unsure as to what level of accreditation is required for the quality of service that they receive. Standards will tend to vary
according to the specific mediation and the level of specificity that is desired. Due to the wide
range of ADR processes that are conducted, it would be very difficult to have a set of standards
that could apply to all ADR processes, but standards should be developed for particular ADR processes.
The clients need the assurance that mediators have some form of ongoing assessment and
training throughout their careers. Mediators must satisfy different criteria to be eligible for a variety of mediator panels. In addition, different mediator organizations have different ideals of
what makes a good mediator that in turn reflects the training and accreditation of that particular
organization. Selection processes for ADR practitioners are based on the needs of the service,
but a problem is posed when organizations, such as the Court want to refer a client to mediation and they usually have to rely on their in-house mediators or rely on word of mouth. There are
inconsistent standards. A National Accreditation System could very well enhance the quality and
ethics of mediation and lead mediation to become more accountable. There is a need for a
unified accreditation system for mediators across Australia to establish clarity and consistency. Suitable education and training for mediators becomes a complex issue, largely due to the
breadth of areas, which may call on mediation as a means of dispute-resolution. The educational
requirements for accreditation as a mediator differ between accrediting groups and from Country
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to Country. In some cases, legislation mandates these requirements; whilst in others,
professional bodies impose standards and applicants must comply prior to becoming accredited
by them.
In Australia, professionals wanting to practice in the area of family law must have tertiary
qualifications in law or in social science, undertake 5 days training in mediation and engage in at
least 10 hours of supervised mediation. Furthermore, they must also undertake 12 hours of mediation education or training every 12 months. Tertiary institutions globally offer units in
mediation across a number of disciplines such as law, social science, business and the
humanities. In Australia, not all fields of mediation-work require academic qualifications, as some
deal more with the practical skills rather than with theoretical knowledge: to this end membership-organization such as LEADR provide training-courses to further the adoption and
practice of mediation. Internationally the organisation CEDR takes a similar approach to mediator
training. No legislated national or international standards on the level of education, which should
apply to all mediation practitioners’ organizations, exist. However, organisations such as the National Alternative Dispute Resolution Advisory Council (NADRAC) in Australia continue to
advocate for a wide scope on such issues. Other systems apply in other jurisdictions such as
Germany, which advocates a higher level of educational qualification for practitioners of
mediation.
A tendency exists for professional to develop their own codes of conduct, which apply to their
own members. Examples of this in Australia include the mediation codes of conduct developed
by the Law Societies of South Australia and Western Australia and those developed by organisations such as Institute of Arbitrators & Mediators Australia (IAMA) and LEADR for use by
their members. Other organizations such as the American Center for Conflict Resolution Institute
have developed both classroom and distance learning courses, which subscribe to its mission of
promoting peace through education611. The CPR Georgetown Ethics Commission, the Mediation Forum of the Union International des Avocats, and the European Commission have also
promulgated Codes of Conduct for mediators.
The most common aspects of a mediator Code of Conduct include a commitment to inform participants as to the process of mediation, the need to adopt a neutral stance towards all
parties to the mediation, revealing any potential conflicts of interest. The requirement for a
mediator to conduct the mediation in an impartial manner within the bounds of the legal
framework under which the mediation is undertaken any information gained by the mediators should be treated as confidential. The mediators should be mindful of the psychological and
physical wellbeing of all the mediations participants. The mediators should not offer legal advice,
rather they should direct participants to appropriate sources for the provision of any advice they
might need. The mediators should seek to maintain their skills by engaging in ongoing training in the mediation process. The mediators should practice only in those fields in which they have
expertise gained by their own experience or training.
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Australia has incorporated mediation extensively into the dispute settlement process of family
law and into the latest round of reforms concerning industrial relations under the Work Choices
amendments to the Workplace Relations Act 1996. Where prospects exist of an ongoing disputation between parties brought on by irreconcilable differences stemming from such things
as a clash of religious or cultural beliefs, mediation can serve as a mechanism to foster
communication and interaction. Mediation can function not only as a tool for dispute resolution
but also as a means of dispute prevention. Mediation can be used to facilitate the process of contract negotiation by the identification of mutual interests and the promotion of effective
communication between the two parties. Examples of this use of mediation can be seen in
recent enterprise bargaining negotiations within Australia.
The Governments can also use mediation to inform and to seek input from stakeholders in
formulation or fact-seeking aspects of policymaking. Mediation in wider aspect can also be used
in to prevent conflict or develop mechanisms to address conflicts as they arise. The Australian
Government sought to alleviate the concerns of a wide section of the population and industry on the decisions implications on land tenure and use by enacting the Native Title Act 1993. A
cornerstone of the Act is the use of mediation as a mechanism to determine future native title
rights within Australia. Although not barring litigation, the Act seeks to promote mediation
through a process incorporating the Federal Court and the National Native Title Tribunal (NNTT). This has a better long tern success by providing flexible and practical solutions to the needs of
the various stakeholders. The extensive use of mediation in the resolution of native title matters
does not stop the referral of matters to the Courts for resolution, nor is mediation precluded
from occurring whilst legal challenges are being pursued. In the cases where native title rights is found to exist over a large portion of the City there is simultaneous use of mediation and formal
legal appeals processes. A key feature of Native Title mediation lies in the use of Indigenous
Land Use Agreements (ILUAs). These binding agreements are negotiated between native title
claimant groups and others such as pastoralists, miners and local governments and cover aspects of the use of the land and any future act such as the granting of mining leases.
5.4 China The basic framework of civil litigation in China is set forth in the Civil Procedure Law of the People’s Republic of China, adopted by the National Peoples Congress on 9 April 1991. The
general rule is that civil actions against citizens, legal person and organizations come under the
jurisdiction of the Chinese Court in the place where the defendant is domiciled. Certain actions,
however, fall within the jurisdiction of the Chinese Court of the place where the plaintiff is domiciled, including cases concerning personal relationships where the defendants are not
resident within PRC.
The Chinese jurisprudence has two major philosophical traditions: Confucianism and Legalist thought. Unlike Confucian thought (li) which seeks to make the enforcement of law flexible and
adaptable, the legalist tradition (fa) stresses that society can achieve harmony only where
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transgressions are met with firm and swift punishment. Folsom and Minan, held that in China
mediation and conciliation remain the predominant forms of civil and commercial dispute
settlement in both domestic and international affairs. This preference derives from the Confucian philosophy’s exaltation of harmonious relationships. The 1949 Revolution and establishment of
the PRC, while annulling many old systems and tradition, institutionalized informal mediation
systems. However, the Communist blessed and co-opted mediation not only as a form of
dispute, but also as a tool for the Communist Party to exert political, economic and social pressure. Mediation is so pervasive in China that it may be useful to distinguish its context,
namely whether it is prescribed by law, extra –judicial or judicially required.
Mediation is the first choice for dispute settlement in China. China’s principle use of mediation is a direct result of the Confucian view of natural harmony and dispute resolution by morals rather
than coercion. Chinese mediation boards or committees made up of several individuals from
each local community resolve more than 80 per cent of all civil disputes. Mediation is the corner
stone of the Chinese system of dispute resolution. It has played a prominent role in both traditional and contemporary China. It has also been employed to deal with dispute arising from
Chinese- Foreign business contracts. Mediation is used as an Independent method for dispute
settlement and in some places it is employed in combination with litigations of arbitration
proceedings.
China has extended the use of mediation to its arbitration and litigation proceedings. The China
International Economic and Trade Arbitration Commission (CIETAC) and the China Maritime
Arbitration Commission (CMAC) permit an arbitral tribunal to mediate a case during arbitration if both parties desire or one party so desires and the other does not object when consulted by the
tribunal. Although arbitration is frequently designated as a means of international dispute
settlement contracts with Chinese agencies or corporations may simply refer to consultation and
mediation between the parties as the means to resolve disputes. Under Chinese law, the settlement agreement is deemed to constitute a private contract. One of the unique
characteristics of arbitration in China is that proceedings before the international arbitration
bodies frequently involve conciliation. In general, at any time during the course of the
proceedings, with the consent of the parties, the arbitrators may resort to conciliation in an effort to resolve the disputes. If their efforts are unsuccessful, the arbitrators are then permitted
to resume the arbitral proceedings and render an award.
The emphasis on mediation carries over not only to arbitration, but to litigation proceedings as well. Under the Civil Procedural Law, Courts can attempt mediation during the proceedings and
may invite relevant parties and individuals to assist. Any mediation agreement must be reached
voluntarily between the parties. The general rule regarding the legal effect of a mediated
settlement is that Court mediated agreements are legally binding in the same way as a Court judgment. In any case, Chinese prefer negotiation, conciliation and joint conciliation with non-
binding recommendations for settlement. The use of arbitration in China has increased and come
more in line with international standards. Not surprisingly, arbitration tribunals frequently convert
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the arbitration into mediation. Two different types of mediation services have developed to deal
specifically with Chinese- Foreign business disputes. The first is mediation under the auspices of
the Beijing Conciliation Center (Established in 1987) and provincial – level conciliation centers guided by the Beijing Conciliation Center. The second type is ‘Joint Conciliation’ carried out in
accordance with arrangements between Chinese and foreign dispute settlement bodies. The
Beijing Conciliation Center conducts institutional conciliation services pursuant to its own rules;
called the Conciliation Rules of the Beijing Conciliation Center (BCC) of China Council for the Promotion of International Trade. The center maintains its own panel of conciliators who carry
out their functions in accordance with the rules concerning handling of cases. Fees for the
services performed by the Center levied in accordance with the fees schedule set forth in the
BCC conciliation rules. In contrast to conciliation under the Beijing Conciliation Center, which is handled exclusively by Chinese conciliators, joint conciliation involves both foreign and Chinese
conciliators. The procedure for joint conciliation in China was first developed in the 1970s
pursuant to an agreement between China’s international arbitration body and American
Arbitration Association. China has also entered into a conciliation agreement to handle disputes between Chinese and Taiwanese parties. Like ad hoc conciliation, joint conciliation is non-
binding. In cases where the conciliation is successful, a settlement agreement or conciliation
agreement will be drawn up, signed by the parties and may be witnessed by the conciliators.
Such agreements are not enforceable except as private contracts between the parties. The legislation governing arbitration in China is the Arbitration Law of the People’s Republic of China
(the Arbitration Law).The Arbitration Law is a unified law applicable to both foreign and domestic
arbitration. It calls for the creation of the China Arbitration Association to serve as a non-
governmental, self-regulating organization of arbitration Commission. The establishment of foreign related arbitration commissions and the formulation of arbitration commission rules fall
under the responsibility of the China Council for the Promotion of International Trade (CCPIT) .
After introduction of the Arbitration Law there are almost 93 arbitral bodies established in China
as per the report of the Chinese International Economic and Trade Arbitration Commission (CIETAC). Under the amended Rules of Chinese International Economic and Trade Arbitration
Commission, CIETAC may accept cases between foreign investment enterprises and other
Chinese legal persons as well as other cases that are not foreign- related. International
arbitration in China is conducted predominantly before two institutions: CIETAC and the China Maritime Arbitration Commission (CMAC). Both CIETAC and CMAC operate under the umbrella of
the China trade promotion body, the CCPIT, also known as the China International Chamber of
commerce. The general, CIETAC’s jurisdiction extends to all types of commercial disputes
whereas CMAC’s jurisdiction is limited to maritime disputes. The cases heard by the Arbitration tribunal of three arbitrators are decided by majority vote. If a majority opinion cannot be
reached, the award will be based on the opinion of the presiding arbitrator. The Arbitration Law
of the People’s Republic of China Art 55 and 56 insists that arbitral award must be in written
form, dated, identifying the place of issuance and be signed by a majority of the arbitrators. The award must contain reasons unless the parties agree otherwise or unless the ruling is made in
accordance with a conciliation agreement. Under the CIETAC Rules, awards are final and binding
on the parties.
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Chapter 6 – Cases: Description and Analysis
6.1 ONGC vs. SAW Pipes - Delay PETITIONER Oil & Natural Gas Corporation Ltd. RESPONDENT SAW Pipes Ltd. The key issue in the case is the award by the tribunal, the appellant wants to set aside the award on the basis of clause 34 of the Indian Arbitration and Conciliation Act. Both the parties present their cases by referring to the Indian Arbitration and Conciliation Act, the referred sections and their interpretations submitted by the parties are presented in detail within the case as well as previous interpretations of said clauses to support their case respectively.
Appellant - ONGC which is a Public Sector Undertaking, has challenged the arbitral award dated 2nd May, 1999 by filing Arbitration Petition No. 917/1999 before the High Court of Bombay. Learned Single Judge dismissed the same. Appeal No.256/2000 preferred before the Division Bench of the High Court was also dismissed. Hence, the present appeal.
It is stated that in response to a tender, respondent-Company which is engaged in the business of supplying equipment for Offshore Oil exploration and maintenance by its letter dated 27th December, 1995 on agreed terms and conditions, offered to supply to the appellants 26" diameter and 30" diameter casing pipes. The appellant by letter of intent dated 3rd June, 1996 followed by a detailed order accepted the offer of the respondent-Company. As per terms and conditions, the goods were required to be supplied on or before 14th November, 1996.
It was the contention of the respondent that as per clause (18) of the agreement, the raw materials were required to be procured from the reputed and proven manufacturers/suppliers approved by the respondent as listed therein. By letter dated 8th August, 1996, respondent placed an order for supply of steel plates, that is, the raw material required for manufacturing the pipes with Liva Laminati, Piani S.P.A., Italian suppliers stipulating that material must be shipped latest by the end of September 1996 as timely delivery was of the essence of the order. It is also their case that all over Europe including Italy there was a general strike of the steel mill workers during September/October 1996. Therefore, respondent by its letter dated 28th October, 1996 conveyed to the appellant that Italian suppliers had faced labour problems and was unable to deliver the material as per agreed schedule. Respondent, therefore, requested for an extension of 45 days time for execution of the order in view of the reasons beyond its control. By letter dated 4th December, 1996, the time for delivery of the pipes was extended with a specific statement inter alia that the amount equivalent to liquidated damages for delay in supply of pipes would be recovered from the respondent. It is the contention of the respondent that the appellant made payment of the goods supplied after wrongfully deducting an amount of US $ 3,04,970.20 and Rs.15,75,559/- as liquidated damages. That deduction was disputed by the respondent and, therefore, dispute was referred to the arbitral tribunal. The arbitral tribunal arrived at the conclusion that strikes affecting the supply of raw material to the claimant are not within the definition of 'Force Majeure' in the contract between the parties, and hence, on that ground, it cannot be said that the amount of liquidated damages was wrongfully withheld by the appellant. With regard to other contention on the basis of customs duty also, the arbitral tribunal arrived at the conclusion that it would not justify the delay in the supply of goods. Thereafter,
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the arbitral tribunal considered various decisions of this Court regarding recovery of liquidated damages and arrived at the conclusion that it was for the appellant to establish that they had suffered any loss because of the breach committed by the respondent in not supplying the goods within the prescribed time limit. The arbitral tribunal thereafter appreciated the evidence and arrived at the conclusion that in view of the statement volunteered by Mr. Arumoy Das, it was clear that shortage of casing pipes was only one of the other reasons which led to the change in the deployment plan and that it has failed to establish its case that it has suffered any loss in terms of money because of delay in supply of goods under the contract. Hence, the arbitral tribunal held that appellant has wrongfully withheld the agreed amount of US $ 3,04,970.20 and Rs.15,75,559/- on account of customs duty, sales tax, freight charges deducted by way of liquidated damages. The arbitral tribunal further held that the respondent was entitled to recover the said amount with interest at the rate of 12 per cent p.a. from 1st April 1997 till the date of the filing of statement of claim and thereafter having regard to the commercial nature of the transaction at the rate of 18 per cent per annum pendente lite till payment is made.
For challenging the said award, learned senior counsel Mr. Desai submitted that:-
(1) the award is vitiated on the ground that there was delay on the part of respondent in supplying agreed goods/ pipes and for the delay, appellant was entitled to recover agreed liquidated damages i.e. a sum equivalent to 1% of the contract price for whole unit per week of such delay or part thereof. Thereby, the award was contrary to Section 28(3) which provides that the arbitral tribunal shall decide the dispute in accordance with the terms of the contract;
(2) the award passed by the arbitrator is on the face of it illegal and erroneous as it arrived at the conclusion that the appellant was required to prove the loss suffered by it before recovering the liquidated damages. He submitted that the arbitral tribunal misinterpreted the law on the subject;
(3) in any set of circumstances, the award passed by the arbitrator granting interest on the liquidated damages deducted by the appellant is, on the face of it, unjustified, unreasonable and against the specific terms of the contract, namely clause 34.4 of the agreement, which provides that on 'disputed claim', no interest would be payable.
As against this, learned senior counsel Mr. Dave submitted that it is settled law that for the breach of contract provisions of Section 74 of the Contract Act would be applicable and compensation / damages could be awarded only if the loss is suffered because of the breach of contract. He submitted that this principle is laid down by the Privy Council as early as in 1929 in Bhai Panna Singh and others v. Bhai Arjun Singh and others [AIR 1929 PC 179], wherein the Privy Council observed thus: -
"The effect of S. 74, Contract Act of 1872, is to disentitle the plaintiffs to recover simplicitor the sum of Rs.10,000/- whether penalty or liquidated damages. The plaintiffs must prove the damages they have suffered."
He submitted that this Court has also held that the plaintiff claiming liquidated damages has to prove the loss suffered by him. In support of this contention, he referred to and relied upon various decisions. In any case, it is his contention that even if there is any error in arriving at the said conclusion, the award cannot be interfered with under Section 34 of the Act.
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At this stage, we would refer to the relevant terms of the contract upon which learned counsel for the appellant has based his submissions, which are as under: -
"11. Failure and Termination Clause/Liquidated Damages:-
Time and date of delivery shall be essence of the contract. If the contractor fails to deliver the stores, or any installment thereof within the period fixed for such delivery in the schedule or at any time repudiates the contract before the expiry of such period, the purchaser may, without prejudice to any other right or remedy, available to him to recover damages for breach of the contract:-
(a) Recovery from the contractor as agreed liquidated damages are not by way of penalty, a sum equivalent to 1% (one percent) of the contract price of the whole unit per week for such delay or part thereof (this is an agreed, genuine pre- estimate of damages duly agreed by the parties) which the contractor has failed to deliver within the period fixed for delivery in the schedule, where delivery thereof is accepted after expiry of the aforesaid period. It may be noted that such recovery of liquidated damages may be upto 10% of the contract price of whole unit of stores which the contractor has failed to deliver within the period fixed for delivery, or
(e) It may further be noted that clause (a) provides for recovery of liquidated damages on the cost of contract price of delayed supplies (whole unit) at the rate of 1% of the contract price of the whole unit per week for such delay or part thereof upto a ceiling of 10% of the contract price of delayed supplies (whole unit). Liquidated damages for delay in supplies thus accrued will be recovered by the paying authorities of the purchaser specified in the supply order, from the bill for payment of the cost of material submitted by the contractor or his foreign principals in accordance with the terms of supply order or otherwise.
(f) Notwithstanding anything stated above, equipment and materials will be deemed to have been delivered only when all its components, parts are also delivered. If certain components are not delivered in time the equipment and material will be considered as delayed until such time all the missing parts are also delivered.
12. Levy of liquidated damages (LD) due to delay in supplies.
LD will be imposed on the total value of the order unless 75% of the value ordered is supplied within the stipulate delivery period. Where 75% of the value ordered has been supplied within stipulated delivery period. LD will be imposed on the order value of delayed supply(ies). However, where in judgment of ONGC, the supply of partial quantity does not fulfill the operating need, LD will be imposed on full value of the supply order.
34.4 Delay in Release of Payment: -
In case where payment is to be made on satisfactory receipt of materials at destination or where payment is to be made after satisfactory commissioning of the equipment as per terms of the supply order. ONGC shall make payment within 60 days of receipt of invoice / claim complete in all respects. Any delay in payment on undisputed claim / amount beyond 60 days of the receipt of invoice / claim will attract interest @ 1% per month. No interest will be paid on disputed claims. For interest on delayed payments to small scale and Ancillary Industrial Undertakings, the provisions of the "Interest of delayed payments to small scale and Ancillary Industrial Undertakings Act, 1993 will govern."
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Mr. Desai referred to the decision rendered by this Court in Delta International Ltd. v. Shyam Sundar Ganeriwalla and another [(1999) 4 SCC 545] and submitted that for the purpose of construction of contracts, the intention of the parties is to be gathered from the words they have used and there is no intention independent of that meaning.
It cannot be disputed that for construction of the contract, it is settled law that the intention of the parties is to be gathered from the words used in the agreement. If words are unambiguous and are used after full understanding of their meaning by experts, it would be difficult to gather their intention different from the language used in the agreement. If upon a reading of the document as a whole, it can fairly be deduced from the words actually used therein that the parties had agreed on a particular term, there is nothing in law which prevents them from setting up that term. {Re: Modi & Co. v. Union of India [(1968) 2 SCR 565]}. Further, in construing a contract, the Court must look at the words used in the contract unless they are such that one may suspect that they do not convey the intention correctly. If the words are clear, there is very little the court can do about it. {Re: Provash Chandra Dalui and another v. Biswanath Banerjee and another [1989 Supp (1) SCC 487]}.
Therefore, when parties have expressly agreed that recovery from the contractor for breach of the contract is pre-estimated genuine liquidated damages and is not by way of penalty duly agreed by the parties, there was no justifiable reason for the arbitral tribunal to arrive at a conclusion that still the purchaser should prove loss suffered by it because of delay in supply of goods.
Further, in arbitration proceedings, the arbitral tribunal is required to decide the dispute in accordance with the terms of the contract. The agreement between the parties specifically provides that without prejudice to any other right or remedy if the contractor fails to deliver the stores within the stipulated time, appellant will be entitled to recover from the contractor, as agreed, liquidated damages equivalent to 1% of the contract price of the whole unit per week for such delay. Such recovery of liquidated damage could be at the most up to 10% of the contract price of whole unit of stores. Not only this, it was also agreed that:-
(a) liquidated damages for delay in supplies will be recovered by paying authority from the bill for payment of cost of material submitted by the contractor;
(b) liquidated damages were not by way of penalty and it was agreed to be genuine, pre-estimate of damages duly agreed by the parties;
(c) This pre-estimate of liquidated damages is not assailed by the respondent as unreasonable assessment of damages by the parties.
Further, at the time when respondent sought extension of time for supply of goods, time was extended by letter dated 4.12.1996 with a specific demand that the clause for liquidated damages would be invoked and appellant would recover the same for such delay. Despite this specific letter written by the appellant, respondent had supplied the goods which would indicate that even at that stage, respondent was agreeable to pay liquidated damages.
On this issue, learned counsel for the parties referred to the interpretation given to Sections 73 and 74 of the Indian Contract Act in Sir Chunilal V. Mehta & Sons Ltd. v. The Century Spinning and Manufacturing Co. Ltd. [1962 Supp. (3) SCR 549], Fateh Chand v. Balkishan Das [(1964) 1 SCR 515 at 526], Maula Bux v. Union of India [(1969) 2 SCC 554] Union of India v. Rampur
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Distillery and Chemical Co. Ltd. [(1973) 1 SCC 649] and Union of India v. Raman Iron Foundry[(1974) 2 SCC 231].
Relevant part of Sections 73 and 74 of Contract Act are as under:-
"73. Compensation for loss or damage caused by breach of contract:- When a contract has been broken, the party who suffers by such breach is entitled to receive, from the party who has broken the contract, compensation for any loss or damage caused to him thereby, which naturally arose in the usual course of things from such breach, or which the parties knew, when they made the contract, to be likely to result from the breach of it.
Such compensation is not to be given for any remote and indirect loss or damage sustained by reason of the breach.
74. Compensation for 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.
Explanation.- A stipulation for increased interest from the date of default may be a stipulation by way of penalty."
From the aforesaid Sections, it can be held that when a contract has been broken, the party who suffers by such breach is entitled to receive compensation for any loss which naturally arise in the usual course of things from such breach. These sections further contemplate that if parties knew when they made the contract that a particular loss is likely to result from such breach, they can agree for payment of such compensation. In such a case, there may not be any necessity of leading evidence for proving damages, unless the Court arrives at the conclusion that no loss is likely to occur because of such breach. Further, in case where Court arrives at the conclusion that the term contemplating damages is by way of penalty, the Court may grant reasonable compensation not exceeding the amount so named in the contract on proof of damages. However, when the terms of the contract are clear and unambiguous then its meaning is to be gathered only from the words used therein. In a case where agreement is executed by experts in the field, it would be difficult to hold that the intention of the parties was different from the language used therein. In such a case, it is for the party who contends that stipulated amount is not reasonable compensation, to prove the same.
Judgment
In the result, it is held that:-
A. (1) The Court can set aside the arbitral award under Section 34(2) of the Act if the party making the application furnishes proof that:-
(i) a party was under some incapacity, or
(ii) the arbitration agreement is not valid under the law to which the parties have subjected it or, failing any indication thereon, under the law for the time being in force; or
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(iii) the party making the application was not given proper notice of the appointment of an arbitrator or of the arbitral proceedings or was otherwise unable to present his case; or
(iv) the arbitral award deals with a dispute not contemplated by or not falling within the terms of the submission to arbitration, or it contains decisions on matters beyond the scope of the submission to arbitration;
2) The Court may set aside the award:-
(i) (a) if the composition of the arbitral tribunal was not in accordance with the agreement of the parties,
(b) failing such agreement, the composition of the arbitral tribunal was not in accordance with Part-I of the Act.
(ii) if the arbitral procedure was not in accordance with:-
(a) the agreement of the parties, or
(b) failing such agreement, the arbitral procedure was not in accordance with Part-I of the Act.
However, exception for setting aside the award on the ground of composition of arbitral tribunal or illegality of arbitral procedure is that the agreement should not be in conflict with the provisions of Part-I of the Act from which parties cannot derogate.
(c) If the award passed by the arbitral tribunal is in contravention of provisions of the Act or any other substantive law governing the parties or is against the terms of the contract.
(3) The award could be set aside if it is against the public policy of India, that is to say, if it is contrary to:-
(a) fundamental policy of Indian law;
(b) the interest of India; or
(c) justice or morality, or
(d) if it is patently illegal.
(4) It could be challenged:-
(a) as provided under Section 13(5); and
(b) Section 16(6) of the Act.
B. (1) The impugned award requires to be set aside mainly on the grounds:-
(i) there is specific stipulation in the agreement that the time and date of delivery of the goods was the essence of the contract;
(ii) in case of failure to deliver the goods within the period fixed for such delivery in the schedule, ONGC was entitled to recover from the contractor liquidated damages as agreed;
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(iii) it was also explicitly understood that the agreed liquidated damages were genuine pre-estimate of damages;
(iv) on the request of the respondent to extend the time limit for supply of goods, ONGC informed specifically that time was extended but stipulated liquidated damages as agreed would be recovered;
(v) liquidated damages for delay in supply of goods were to be recovered by paying authorities from the bills for payment of cost of material supplied by the contractor;
(vi) there is nothing on record to suggest that stipulation for recovering liquidated damages was by way of penalty or that the said sum was in any way unreasonable.
(vii) In certain contracts, it is impossible to assess the damages or prove the same. Such situation is taken care by Sections 73 and 74 of the Contract Act and in the present case by specific terms of the contract.
For the reasons stated above, the impugned award directing the appellant to refund US $ 3,04,970.20 and Rs.15,75,559/- with interest which were deducted for the breach of contract as per the agreement requires to be set aside and is hereby set aside. The appeal is allowed accordingly. There shall be no order as to costs
6.2 Rajasthan States Mines and Minerals vs. Eastern Engineering Enterprises - Compensation
PETITIONER Rajasthan States Mines and Minerals RESPONDENT Eastern Engineering Enterprises
The brief facts of the case are that on 14th May, 1981, appellant and respondent no. 1 entered into an agreement on a turn-key basis for excavation, removal, transportation including loading and unloading, disposal dumping dozing, levelling etc. of over burden at the specified dump yards including final dressing of the mine benches, faces and sides etc. and incidental mining of rock phosphate ore encountered during the excavation of over-burden and its transportation to ore-stacks etc. from the footwall, western portion and eastern portions of D Block of the Jhamarkotra mines including drilling, blasting, loading, transportation, unloading etc. with the leads and lifts involved in connection therewith, more particularly described in the said contract for the period of three years and three months, that is, from 13.3.81 to 12.6.84 for the quantity of 21.15 lacs cubic meter subject to plus minus 10% at the fixed rate of Rs. 35.80 (Rupees Thirty Five and eighty paise) all inclusive per cubic meter in respect of over burden and/or ore actually excavated mined, removed etc.
Respondent No. 1 vide its letter dated 7th September, 1983, raised certain disputes and claimed reimbursement and/or additional payments and/or compensation on account of escalation of cost of work and breach of contract by the Appellant. The Appellant vide its letter dated 11th September, 1984 refuted the claims of Respondent No. 1 by stating that in no case the rates over and above Rs. 35.80 per cubic meter could be given. On 10th November, 1984, respondent No. 1 invoking the arbitration clause, requested the Managing Director of Appellant to appoint a
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sole arbitrator to adjudicate the claims made by the Contractor. Thereafter, on 5th February, 1985, Shri C.S. Jha, Chairman-cum-Managing Director, Bihar State Mineral Development Corporation Ltd. was appointed as a sole arbitrator to decide all claims raised by the contractor, M/s. Eastern Engineering Enterprises vide its letter dated 7th September, 1983.
On 20th September, 1985, the sole arbitrator made an interim award in respect of three claims, namely, claim nos. 2, 3 & 5 and awarded Rs. 65 lacs to the claimants. Paragraph 1 of the said award mentions that Mr. C.S. Jha was appointed as the sole arbitrator to decide the disputes between the parties arising out of the agreement dated 14th May, 1981. It also recites that by the consent of the parties, arguments were heard claim-wise and out of 7 claims submitted by the claimants, hearing in respect of claim no. 2, 3 & 5 was completed. It is also stated that when final award would be made in respect of the entire proceedings, interim award would be integrated into and form part of the final award. The Appellant challenged the interim award on 15th January, 1986 in the Court of District Judge, Udaipur.
Thereafter, on 18th February, 1986 the sole arbitrator made final award. It, inter-alia, provides that after considering the long drawn arguments and examination of documentary evidence and having made detailed examination of the calculations I have given due thought and weightage to all that was placed/argued before me, as regards admissibility as well as quantum of each claim by going through details of work done under each item of claim as filed before me. Thereafter, he awarded Rs. 1.07 crore for the claims made by the respondent no. 1. The said amount included the amount awarded against the claims 2, 3 & 5 for which he had passed interim award. He further awarded interest @ 12.5 % p.a. on the sum awarded from 5th February, 1985 till the date of payment or decree whichever is earlier.
That final award was also challenged before the District Judge. The Court framed as many as 12 issues out of which issues (5) to (8) are as under: - 5. Did the Arbitrator fail correctly to consider Clauses 17 and 18 of the Agreement and the Contract labour (Abolition and Regulation) Act, 1970? 6. Did the Arbitrator fail to apply his mind to consider pleadings, documents and evidence? 7. Whether the award is bad as the learned sole Arbitrator failed to apply his mind to documents and decide the dispute on per unit basis? 8. Is the award perverse? Has it been improperly procured and is it otherwise invalid as mentioned in the Objection Petition?
Thereafter, the District Judge, rejected the contentions raised by the appellant and declared the award as the rule of court and passed the decree. That was challenged by filing the appeal before the High Court.
Before the High Court, it was contended that the District Judge erred in accepting the interim as well as the final award and it was required to be set aside as the arbitrator had ignored the fixed rate mentioned in clauses 17 & 18 of the agreement and thereby he has travelled beyond his jurisdiction. It was also pointed out that by doing so the arbitrator has legally misconducted himself. It was also submitted that the arbitrator was influenced by Mr. K. Sehgal, hence, the award was required to be set aside. The High Court arrived at the conclusion that the point of jurisdiction was not raised before the arbitrator. Therefore, appellant cannot raise the same before the court. The learned Judge held that the perusal of the letter dated 5th February, 1985 goes to show that there was nothing by which the arbitrator was restricted with regard to rates, on the contrary, he was asked to decide all the claims raised by the contractor without any clarification. The High Court further observed that the appellant raised objection in view of clauses 17 and 18 of the Contract in his reply to the claim petition but he has not raised this
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point before the arbitrator and thus the arbitrator has not disclosed it. The learned Judge further observed that the appellant never asked the arbitrator to decide his objection at initial stage or final stage and this conduct of the appellant goes to show that he has waived the objection, otherwise he ought to have asked the arbitrator to decide at proper stage. The Court held that even before District Judge, the point of jurisdiction was never raised and the issues framed were with regard to clauses 17 & 18 which were decided against the appellant.
Dr. A.M. Singhvi, the learned senior Counsel appearing on behalf of the appellant contended that the judgment and order passed by the High Court is, on the face of it, illegal because all throughout the appellant has contended that claims made by respondent no. 1 were not entertainable in view of clauses 17 & 18 of the agreement. He submitted that, on the face of it, claims made by the respondent no. 1 were for prohibited or excepted items under clauses 17 & 18 of the agreement between the parties. Therefore, he submitted that the arbitrator travelled beyond his jurisdiction in awarding the compensation for the said claims. He referred to all claims and pointed out that except the claim for release of additional security deposit of Rs. 5 lacs furnished by way of bank guarantee, no claim could be entertained and granted in view of stipulations in clauses 17 & 18 of the agreement and also because the contract is on a turn-key basis.
As against this, learned senior Counsel, Mr. Ashok H. Desai, appearing on behalf of the Respondent No. 1 strenuously submitted that, in the present case, arbitration clause is of widest amplitude and it provides that all disputes and differences arising out of or in any way touching or concerning the contract whatsoever shall be referred to the sole arbitration. Hence, the award passed by the arbitrator cannot be held to be without jurisdiction or it cannot be held that arbitrator has travelled beyond his jurisdiction. He also submitted that award is a non-speaking one and, therefore, also the Court cannot go behind the said award for finding out the mental process of the arbitrator for awarding the said sum. He submitted that the award only depends upon interpretation of the clauses of the agreement between the parties. It is his further contention that, in any case, jurisdictional question was not raised properly before the arbitrator or before the District Court and the appellant allowed the arbitrator to proceed with the proceedings without raising its objection of jurisdiction or competence. By the reference letter dated 5th February, 1985, arbitrator was empowered to decide all claims raised by the contractor vide its letter dated 7th September, 1983. He also submitted that even the committee appointed by the appellant-company to examine the claims of the respondent, has recommended same payment to the contractor by granting an escalation in contracted rate and to pay compensation towards loss suffered on account of non supply of explosives. Hence, the appellant should not be permitted to raise the contention of jurisdiction and the appeal be dismissed. For deciding the controversy, clauses 17 & 18 as well as clause 74 which provides for arbitration is required to be referred. Clauses 17 & 18 reads thus: -
17. Blasting Operation It is express term of this contract that while carrying out the excavation/Mining operations from the aforesaid areas, blasting wherever required, shall be undertaken by the contractor at his cost. The remuneration payable under this contract for the work aforesaid is inclusive of this element which includes cost of explosives, its accessories transportation, salary and wages of its crew/blasters etc., or otherwise. In view of aforesaid, the contractor shall obtain necessary permission/s from the Director General of Mines Safety and/or other competent authorities for undertaking the blasting operation independently at the aforesaid areas covered by this contract as also obtain necessary licence for the explosive
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magazine etc. The contractor shall do all that are required to be done to obtain the necessary permission etc., from the competent authorities immediately without any further loss of time and shall make regular and continuous efforts for the same if for the present such permission is not granted to him/her.
In the event of the contractor failing to obtain such permission required from the competent authority for doing blasting operation in the areas covered by this contract after all genuine and effective efforts, the company may at the request of the contractor and subject to its convenience take up the blasting operation in the areas entrusted to the contractor under this contract, at the cost and risk of the contractor. Provided, however that the contractor shall be bound to observe all terms and conditions of blasting operation in the contract and other operations involved therein shall be duly observed/undertaken by the contractor, as if the blasting is being done by them. Drilling shall be done by the contractor at places and as per the pattern approved in writing by the Engineer-in-charge. The Engineer-in-charge, may require drilling of additional holes by the contractor before blasting is taken up. The holes not drilled as per the approved drilling pattern shall not be taken up for blasting. On receipt of written requisition from the contractor in the prescribed proforma duly signed by the authorised representative of the contractor to the company not less than 2 days prior to intended date of blasting, blasting will be done by the Company as and when felt necessary and convenient by the Engineer-in-charge. The company shall make available the blasting material, its transportation, blasting accessories and blasting crews including blaster/s. In case the company is not in a position to arrange for the same, the contractor shall make his own arrangements for the same without any liability and obligation on the company. The company shall deduct the actual landed cost of all explosives ex-Jhamarkotra as may be used in the course of blasting plus five per cent value of the landed cost of explosives as blasting charges from the contractors running Bill/s or any amount that may be found due and payable to the contractor or the security amount. It is agreed and understood by the contractor that in the event of company doing blasting as aforesaid, for and on behalf of the contractor, the contractor shall not be allowed and/or permitted to raise any dispute as to make, type quantity of the explosives that will be used in blasting by the company, fragmentation of rock, toes at the mining face, landed cost of explosive, time and frequency of blasting etc., and the contractor shall be bound to make good the landed cost of explosives, cost of blasting accessories etc., plus overheads @ 5% as may be certified by the Engineer-in-charge from time to time. Provided also that the contractor shall not be entitled and/or justified to raise any claim or dispute on account of blasting or non blasting or idling of his equipment or his labour or any rise in the landed cost of explosives at any time or during the currency of this agreement or on any ground or any reason of any account, whatsoever.
At the time of blasting in the areas being worked by the Company or by the contractor if the company is required to carry out blasting operation, the contractor shall be required to vacate the areas if the areas fall within blasting zone, worked by him for which the contractor shall not be entitled for any claim, additional payment whatsoever.
18. Contractors remuneration for works under the Contract:-
In consideration of the performance of the work, fulfillment of all the obligations, terms and conditions of this agreement by the contractor in execution of the work covered by this contract in and from the aforesaid areas, the contractor shall be paid remuneration calculated @ Rs. 35.80 (thirty five and eighty paise) all inclusive per cubic meter in respect of over burden and/or
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Ore actually excavated, mined, removed, transported, disposed off, dumped, dozed, levelled and spreaded including drilling, blasting, mucking, loading, and unloading, etc., with all leads and lifts involved in connection with the transportation and dumping of over-burden to the dump yards or ore stacks, including all preparatory dressing, finishing and other operational works etc., executed and approved by the Engineer- in-charge. The rates aforesaid shall be composite and inclusive of all services, activities and operations involved in the execution of the work as per terms and conditions of this agreement which constitute the whole and inclusive remuneration that is payable by the Company to the contractor under this contract. The contractor shall be only entitled to the payment of composite rate as aforesaid and no other or further payment of any kind or item, whatsoever, shall be due and payable by the Company to the contractor under this agreement except as aforesaid.
The rates aforesaid shall remain firm, fixed and binding during the currency of this agreement till the issue of final certificate irrespective of any fall or rise in the cost of Mining operations of the work covered by this contract or for any other reason or any account or any ground whatsoever.
Provided, however, that the company has agreed to freeze the issue rate of Diesel as on 13th March, 1981, at the rate of Rs. 2.78 (Rupees Two and seventy eight paise only) per litre and the company shall issue the Diesel subject to availability and its convenience to the contractor against the surrender of permit/s of the equipment by him at the frozen rate of Rs. 2.78 per litre during the currency of this contract even if there by any rise in the cost of diesel after execution of this agreement subject to a ceiling of 1.3 litres(one point three litre) for one cubit meter of rock (in situ) actually handled and work executed by the contractor and approved by the Engineer-in-charge, as per provisions of this agreement. No diesel at the frozen rate of Rs. 2.78 per litre shall be supplied and/or issued to the contractor after the 12th day of June, 1984, if the work is not finally completed by the contractor as aforesaid. The company shall deduct the cost of diesel @ Rs. 2.78 per litre actually issued to the contractor from the contractors running bills or any amount that may be due to him or the security amount. Save and except as aforesaid the contractor shall not be entitled to raise any claim and/or dispute on account of any rise in the price of oil, lubricants, tyres, tubes, explosives, spares etc. statutory or otherwise or increase in the wages or Minimum wages or on any other ground or reason or account, whatsoever.
Relevant part of arbitration clause 74 is as under:-
All disputes and differences arising out of or in any way touching or concerning this contract whatsoever, except as to any matter, the decision of which is expressly vested in any authority in this contract, shall be referred to the sole arbitration of the person appointed by the Managing Director of Company who shall have status of a Mines Manager having 1st Class Mines Managers Certificate and having experience not less than five years in open cast mining as Mines Manager.
At this stage, we would refer to the relevant portion of letter dated 7- 9-1983 written by the Contractor to the appellant as the dispute for the said claims made in the letter are referred to for arbitration. 1. After stating the reasons in delay in starting the work, it is mentioned:
- In view of above, we now request RSMML to consider our case and condone the theoretical delay, which, in fact, was not there and also give us necessary, relief as to consequential damages thereof. Hence, we request you to consider 1st August, 1981 as the date of start of work and accordingly, extend the validity of the contract.
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2. The demand is Release of additional security deposit of Rs. 5 lakhs furnished by us in RSMMLs favour by way of bank guarantee for the reasons stated therein. 3. Request for Rescheduling of the existing excavation schedule for the reasons mentioned therein. 4. Claim for Escalation in the existing rate of excavation: We signed the contract with a clear understanding that the rate under this contract is firm and final and we shall get no escalation in our rates, except in case of diesel, which will be supplied to us by the Company at a frozen rate. With the passage of time our cost calculations went hayway for reasons which were beyond our control.
5 (i) From the beginning of the contract we had paid wages equivalent to RSMML wages instead of Minimum wages. The difference between the two on an average in the last 25 months works out to Rs.75,000/- per month, against an average production of 40,000 cu.m. per month. Thus the additional cost works out to Rs.1.80 per cu.m.
(ii) Unforeseen and difficult operating condition in the footwall and its effect on the cost of operation: The work in footwall area of D block is a major constituent of the contract both quality and quantity wise. While the contract is termed as a Turnkey contract, at least in the footwall the work cannot, by any stretch of imagination, be considered as Turnkey, as the operation in that area is totally controlled by the Principal employer.
In fact, it was beyond our imagination that our working in the footwall will be so much restricted, resulting the cost of operation, which is virtually very high than normal cost of operation. In view of above, we feel that our request in this regard will be sympathetically considered by the Management, who are also engaged in similar work. Thus, for such poor utilisation of the Shovel, the rate should be 35.80 = 61.20. 58.50x100 Thus, an additional rate of Rs.25.40 per cu.m. for the entire footwall operation has to be provided for. (iii) Non-availability of explosive and use of costly explosive for blasting :
Reimbursement of Rs.22.55 lakhs towards cash loss due to non- supply of explosives in time plus Rs.1.82 per cu.m. of rock handled so far. 6. Claim for Transportation of ore : After stating reasons in detail, it is claimed thus:
Till 31st August, 1983 mined and transported 45,456 tonnes of ore and mixed ore from Eastern Saddle and Footwall, the additional expenses involved in this operation are: -
(i) Care being taken during mining to avoid as much as possible admixture of ore and overburden, and
(ii) Additional transportation involved for taking it to the crusher instead of the dumpyard. Towards this we have to make claim of Rs.6/- towards this mining cost per tonne and Rs.4/- towards transportation cost per tonne making the total to Rs.4,05,660/- for 40,566 tonnes of ore after allowing ½% of the total excavation volume of footwall i.e. 3.36 lakhs cu/.m.
To sum up, claims under various heads are as under:
(i) Not to levy any damages for not starting work in time and to treat 1st August, 1981 as the date of start of work and thereafter calculate 3 years for completing this work under this contract; (ii) To release performance bank guarantee of 5 lakhs furnished in your favour by way of additional security deposit; (iii) To re-schedule the excavation schedule keeping in view the industrial climate at Jhamarkotra @ 40,000/- cu.m. per month; (iv) To allow us escalation of
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Rs.3.62 in our rates towards additional cost that has been incurred by us with retrospective effect.
(v) To admit our claim of Rs.22.55 lakhs towards loss suffered on account of non supply of explosives, Rs.4,05,660/- towards additional cost of mining and transportation of ore and Rs.52,53,650/- on account of loss suffered by us for unforeseen and difficult operating condition at footwall or in other words the present rate of Rs.35.80 per cu.m. with retrospective effect. On the basis of the claims made in the letter dated 7th September, 1983, respondent filed claim statement for 8 items which is tabulated by the High Court in its judgment. Claim Description of Relief claimed No. claim
1. Claim for increase in rate Claimed reimbursement @ for excavation work at Rs.25.40 per cu.m. up to the Footwall area demand Aug.83 thereafter @ 63.56 for escalation in the per cu.m. Over and above existing rates of the contract rate of Rs.35.80 excavation. Cu.m. In all claim under this item quantified for Rs. 1,36,43,218/-.
2. Claim for increase in costs Claimed reimbursement @ Rs. Of work due to use of high 1.80 per cu.m. for all Explosives instead of use excavation done/to be done Of ANFO mixture. Under the contract using high Explosives instead of ANFO mixture.
3. Claim for reimbursement for Claim reimbursement of Losses suffered due to non- Rs. 22.55 lacs by way of loss Availability of explosive. During the period February, 1963 to May 1983.
4. Claim for reimbursement Claimed reimbursement of of additional costs for mining additional costs at the rate of and transport of ore. Rs. 6/- per ton Towards mining and Rs.4/- per ton towards additional transportation to the crusher. Total Rs.10/- per ton for 47856 tonnes of ore and mixed ore upto 31st December, 1984 quantifying claim of Rs.4,31,890/-.
5. Claim for reimbursement Claim reimbursement @ Rs. of additional expenditure 1.82 per cu.m. for excavation incurred on account of done/to be done on account Agreement with RPMS.- Of respondent entering into For wages to labourers. An agreement with RPMS Dated 26.5.81 Ex.C/I of the Arbitration proceedings.
6. Claim for release of Claimed release of duly discharged additional securities Bank guarantee of Rs.5 lacks on deposit. Account of Addl. Security deposit.
7. Claim for reimbursement Claim reimbursement of Rs.0.90 of additional expenses on per cu.m. of excavation done account of revised wage since 1.4.83 or to be done structure w.e.f.1.4.83. thereafter as per Ex.C/58 and C/68.
8. Interest Claimed interest on the amount of Award @ Rs.18% per annum Or decree whichever is earlier.
As stated earlier by interim award, arbitrator has awarded Rs. 65 lakhs for claims No. 2, 3 & 5. Thereafter, by final award, he has awarded total sum Rs. 1.07 crores with 12.5% interest w.e.f. 5.2.85.
Before discussing further, what emerges from the facts stated above is: -
(1) in the award, no reasons are assigned for granting various claims to that extent, it is non-speaking. For claim Nos. 2,3 and 5, Rs. 65 lakhs were awarded by interim award dated 20th
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September, 1985. (2) In the interim award, the arbitrator has made it clear that he was appointed as the sole arbitrator vide memo dated 5th February 1985 to decide the dispute between the parties arising out of the agreement dated 14th May, 1981. So, his authority or jurisdiction to decide the claims raised by the contractor was on the basis of the agreement between the parties. (3) In the final award also, in the first paragraph itself, arbitrator has stated that:-
The claimants have put in claims arising out of and in relation to the work Excavation and removal of overburden at the Jhamarkotra mines of RSMML executed under agreement dated 14.5.1981, and have put in their claims under 7 heads of claim and have further claimed interest, pendentelite and future at 18% per annum.. It further mentions that he has given due weightage to all the documents placed and arguments submitted before him as regards admissibility as well as quantum of each claim by going through details of work done under each item of claims as filed before me.
(4) In the letter dated 7th September, 1983, the Contractor himself has clarified, admitted and stated thus:
We signed the contract with a clear understanding that the rate under this contract is firm and final and we shall get no escalation in our rates, except in case of diesel, which will be supplied to us by the company at a frozen rate. With the passage of time our cost calculations went hay way for reasons which were beyond our control.
(5) The appellant in his detailed reply before the arbitrator to the claims made by the contractor has pointed out and relied upon clauses 17 & 18 for contending that contractor was not entitled to any such claim under the contract. (6) Before the District Judge also, the issues pertaining to clauses 17 & 18 as stated above were raised. (7) Before the High Court also, it was contended that arbitrator made award against the stipulations of the agreement between the parties and thereby travelled beyond his jurisdiction.
From the facts stated above, learned Counsel for the appellant has rightly pointed out that Claim No. 1 for increase in rate of excavation work at footwall area and claim no. 4 for reimbursement of additional costs for mining and transport of ore is against the stipulation of clause 18 as narrated above, which inter-alia, specifically provides as under:-
(a) The contractor shall be paid remuneration calculated @ Rs. 35.80(Rupees Thirty Five and Eighty Paise only) all inclusive per cubic meter in respect of over burden and/or Ore actually excavated transported (b) The contractor shall be only entitled to payment of composite rate as aforesaid and no other or further payment of any kind of item, whatsoever, shall be due and payable by the Company to the contractor under this agreement except as aforesaid. (c) The rates shall remain in firm, fixed and binding irrespective of any fall or rise in the cost of Mining operations of the work covered by the contract or for any other reason or any account or any ground whatsoever. Similarly, claim no. 2 for increase in costs of work due to use of high explosives instead of use of ANFO mixture and claim no. 3 for reimbursement for losses suffered due to non-availability of explosive is also against Clause 17, which inter-alia, provides:- (a) It is express term of this contract that while carrying out the excavation/Mining operations from the aforesaid areas, blasting wherever required, shall be undertaken by the contractor at his cost. The remuneration payable under this contract for the work aforesaid is inclusive of this element which includes cost of explosives, its accessories transportation, salary and wages of its
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crew/blasters etc., or otherwise. (b) Provided also that the contractor shall not be entitled and/or justified to raise any claim or dispute on account of blasting or non blasting or idling of his equipment or his labour or any rise in the landed cost of explosives at any time or during the currency of this agreement or on any ground or any reason of any account, whatsoever.
Similarly, claim no. 5 for reimbursement of additional expenditure incurred on account of RPMS and claim no. 7 for reimbursement of additional expenses on account of revised wage structure w.e.f. 1.4.83 also cannot be granted in view of aforesaid stipulations and also part of Clause 18 which, inter-alia, provides as under: Save and except as aforesaid the contractor shall not be entitled to raise any claim and/or dispute on account of any rise in the price of oil, lubricants, tyres, tubes, explosives, spares, etc. statutory or otherwise or increase in the wages or Minimum wages or on any other ground or reason or account, whatsoever.
Apart from the aforesaid specific stipulations, even the contractor has admitted in his letter dated 7th September, 1983 that the contract was signed with clear understanding that the rate under the contract was firm and final and that no escalation in rates except in case of diesel would be granted. Despite the admission by the contractor, it is apparent that arbitrator has ignored the aforesaid stipulations in the contract. In the award, the arbitrator has specifically mentioned that he has given due weightage to all the documents placed before him and has also considered the admissibility of each claim. However, while passing the award basic and fundamental terms of the agreement between the parties are ignored. By doing so, it is apparent that he has exceeded his jurisdiction. Further, in the present case, there is no question of interpretation of clauses 17 & 18 as the said clauses are so clear and unambiguous that they do not require any interpretation. It is both, in positive and negative terms by providing that contractor shall be paid rates as fixed and that he shall not be entitled to extra payment or further payment for any ground whatsoever except as mentioned therein. The rates agreed were firm, fixed and binding irrespective of any fall or rise in the cost of the work covered by the contract or for any other reason or any ground whatsoever. It is specifically agreed that contractor will not be entitled or justified in raising any claim or dispute because of increase in cost of expenses on any ground whatsoever. By ignoring the said terms, arbitrator has travelled beyond his jurisdiction as his existence depends upon the agreement and his function is to act within the limits of the said agreement. This deliberate departure from the contract amounts not only to manifests disregard of the authority or misconduct on his part but it may tantamount to mala fide action.
It is settled law that the arbitrator is the creature of the contract between the parties and hence if he ignores the specific terms of the contract, it would be a question of jurisdictional error which could be corrected by the Court for that limited purpose agreement is required to be considered. For deciding whether the arbitrator has exceeded his jurisdiction reference to the terms of the contract is a must It is true that arbitration clause 74 is very widely worded, therefore, the dispute was required to be referred to the arbitrator. Hence, the award passed by the arbitrator cannot be said to be without jurisdiction but, at the same time, it is apparent that he has exceeded his jurisdiction by ignoring the specific stipulations in the agreement which prohibits entertaining of the claims made by the contractor. In the letter dated 5th February, 1985 appointing the sole arbitrator, it has been specifically mentioned that agreement dated 14th May, 1981 was executed by and between the parties and that contractor has raised the claims as mentioned in the letter dated 7th September, 1983 which was denied by the company and at the request of the contractor, sole arbitrator was appointed to adjudicate the claims made
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by the contractor vide his letter dated 7th September, 1983. This reference to the arbitrator also clearly provides that reference was with regard to the dispute arising between the parties on the basis of the agreement dated 14th May, 1981. It nowhere indicates that the arbitrator was empowered to adjudicate any other claims beyond the agreement between the parties. No such issue was referred for adjudication. Even the arbitrator in his interim award has specifically stated that he was appointed to adjudicate the disputes between the parties arising out of the agreement dated 14th May, 1981.
However, learned senior Counsel, Mr. Ashok H. Desai, submitted that award is a non-speaking one and the arbitration clause, in this case empowers the arbitrator not only to decide all disputes arising out of the contract but also to decide all disputes in any way touching the contract whatsoever, hence the arbitrator is not required to confine himself only to the terms of the contract but can pass appropriate award so as to do justice between the parties including awarding damages suffered by the contracting parties. Therefore, award cannot be said to be without or beyond jurisdiction. He further submitted that the award passed by the arbitrator is on the basis of the interpretation of clauses 17 & 18 and, therefore, the award would be within his jurisdiction. Learned counsel for both the parties submitted that law on this subject is well settled. However, they referred to various decisions to buttress their respective contentions. To do justice to their contentions, we would refer to the various decisions of this Court relied upon by them. In Jivarajbhai Ujamshi Sheth and Others Vs. Chintamanrao Balaji and Others [(1964) 5 S.C.R. 481], the dispute arose between the partners of a firm on retirement of partners which was referred to the arbitrator. The arbitrator had passed non-speaking award. While revoking the award, the High Court in concurrence with the Court below upheld two objections: - (a) that the arbitrator exceeded his jurisdiction; and (b) that he was guilty of misconduct in receiving some evidence behind the back of one partner, Chintaman Rao. Before this Court, it was contended that the deed of partnership as well as the order of reference left the arbitrator a free hand and even if the arbitrator wrongly interpreted the deed of partnership and had included the depreciation and appreciation while valuing partnership property, no question of jurisdiction could arise. The partnership deed referred to by the Court provided that in ascertaining the valuation of the firm, the property was to be valued at the book value of the firm and such stock and movables thus valued shall be given to the remaining partners. After considering the decision in Chempsey Bhara and Company Vs. Jivraj Balloo Spinning and Weaving Company Ltd. [LR 50 I.A. 324], Shah.J, observed that : (a) It is not open to the Court to speculate, where no reasons are given by the arbitrator, as to what impelled arbitrator to arrive at his conclusion (b) It is not open to the Court to admit to probe the mental process by which the arbitrator has reached his conclusion where it is not disclosed by the terms of the award. (c) The primary duty of the arbitrator under the deed of a reference in which was incorporated the partnership agreement, was to value the net assets of the firm and to award to the retiring partners a share therein. In making the valuation of the firm, his jurisdiction was restricted in a manner provided by paragraph 13 of the partnership agreement. As the arbitrator has expressly stated in his award that in arriving at his valuation, he has included the depreciation and appreciation of the property, the arbitrator has travelled outside his jurisdiction and the award was on that account liable to be set aside. This was not a case in which the arbitrator has committed a mere error of fact or law in reaching his conclusion on the disputed question submitted for his adjudication. It is a case of assumption of jurisdiction not possessed by him, and that renders the award, to the extent to which it is beyond the arbitrators jurisdiction, invalid. The award must fail in its entirety as it was not possible to sever from the valuation made by the arbitrator, the value of the depreciation and appreciation included. In a concurring judgment, Hidayatullah J, after
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considering the decision in Chempsey Bhara and Companys case (supra) observed that the first point is therefore to decide what were the limits of the arbitrators action as disclosed by the reference and the deed of partnership and then to see what the arbitrator has actually done and not what he may have stated loosely in his award. This is the only way in which the excess of jurisdiction can be found. If the interpretation of the deed of partnership lies with the arbitrator, then there is no question of sitting in appeal over his interpretation, in view of the passage quoted above from Champseys case but if the parties set limits to action by the arbitrator, then the arbitrator had to follow the limits set for him, and the court can find that he has exceeded his jurisdiction on proof of such action.
The next decision on which reliance is placed is Continental Construction Co. Ltd. Vs. State of M.P. [1988 (3) SCR 103]. In the said case, it was contended by the contractor that contract could not be completed within stipulated time because of alleged gross delay on the part of the State in allotment of work and discharge of its obligation under the contract. He had, therefore, incurred unforeseen expenditure and claimed damages to the tune of Rs. 5,29,812/-. The matter was referred to the retired Engineer-in- Chief, PWD, Bhopal, who partly allowed the contractors claim. The award was set aside by the District Judge. Appeal was also dismissed by the High Court and in appeal before this Court, it was contended that the contractor was not entitled to extra cost for material and labour in terms of the contract. This Court held that arbitrator misconducted himself in allowing the claim without deciding the objection of the State that in view of the specific clauses of the contract, the Contractor was not legally entitled to claim extra cost. The Court observed: If no specific question of law is referred, the decision of the arbitrator on that question is not final however much it may be within his jurisdiction and indeed essential for him to decide the question incidentally. The arbitrator is not a conciliator and cannot ignore the law or misapply it in order to do what he thinks is just and reasonable. The arbitrator is a tribunal selected by the parties to decide their disputes according to law and so is bound to follow and apply the law, and if he does not he can be set right by the Court provided his error appears on the face of the award. In this case, the contractor having contracted, he cannot go back to the agreement simply because he does not suit him to abide by it. The decision of this Court in M/s. Alopi Parshad Vs. Union of India, [1960] 2 SCR 793 may be examined. There it was observed that a contract is not frustrated merely because the circumstances in which the contract was made, altered. The Contract Act does not enable a party to a contract to ignore the express covenants thereof, and to claim payment of consideration for performance of the contract at rates different from the stipulated rates, on some vague plea of equity. The parties to an executory contract are often faced, in the course of carrying it out, with a turn of event which they did not at all anticipate, a wholly abnormal rise or fall in prices, a sudden depreciation of currency, an unexpected obstacle to execution, or the like. There is no general liberty reserved to the courts to absolve a party from liability to perform his part of the contract merely because on account of an uncontemplated turn of events, the performance of the contract may become onerous.
Thereafter, the Court distinguished the decision in Tarapore Company Vs. Cochin Shipyard Ltd. And another [1984(2) SCC 680]. In the said case, there were no specific clauses which barred consideration of extra claims in events of price escalation. At this stage, we would mention that in Tarapore Companys case, this Court after considering the various decisions has held that a specific question as to whether the claim of compensation made by the Contractor demurred and disputed by the respondent would be covered within the scope, ambit and width of the arbitration clause was specifically referred by the parties for the decision of the Arbitrator. In
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such cases, the award cannot be set aside on the ground that there is an error of law on the face of the award. Learned Sr. Counsel, Mr. Ashok H. Desai has heavily relied upon this decision in support of his contention that in the present case also, arbitration clause 74 is very widely worded. Dealing with arbitration clause, Court observed arbitration clause so widely worded, as disputes arising out of the contract or in relation to the contract or execution of the works, would comprehend within its compass a claim for compensation related to estimates and arising out of the contract. The test is whether it is necessary to have recourse to the contract to settle the dispute that has arisen. Further, while interpreting such clause, the Court has held as under:- We may now turn to some decisions to which our attention was drawn. The first case we would like to refer to is A.M. Mair & Co. Vs. Gordhandass Sagarmull [1950] SCR 792. The Court was concerned with the arbitration clause drawn up as : all matters, questions, disputes, differences and/or claims, arising out of and/or concerning, and/or in connection and/or in consequence of, or relating to, the contract etc.. The question arose whether the due date under the contract was extended within the time, earlier reserved. The arbitrator held that the due date of the contract has been extended by a mutual agreement and the respondents were held liable to pay a sum of Rs. 4116 together with interest at the rates specified in the award. It was contended that the dispute is not covered by the arbitration clause. This clause while holding that the dispute is covered by the arbitration clause observed that looking to the rival contentions, such a dispute, the determination of which turns on the true construction of the contract, would also seem to be a dispute under or arising out of or concerning the contract. The test formulated was that if in settling a dispute, a reference to the contract is necessary, such a dispute would be covered by the arbitration clause.
It is true that arbitration clause in the present case, is also very widely worded and that all disputes in any way touching or concerning the contract whatsoever are required to be referred to the arbitration. Therefore, reference of the dispute to the arbitrator cannot be termed as without jurisdiction. Still the question would be whether arbitrator will have authority or jurisdiction to grant damages or compensation in teeth of stipulation providing that no escalation would be granted and that contractor would only be entitled to payment of composite rate as mentioned and no other or further payment of any kind or item whatsoever, shall be due and payable by the company to the contractor; the rates wherever fixed are binding during the currency of the agreement irrespective of any fall or rise in the cost of the work covered by the contract or for any other reason or on any account or any other ground whatsoever. In the said case, there was no such specific agreement or stipulation. Further, the Court has also given a finding that it was a case where a specific question of law touching upon the jurisdiction of the arbitrator was referred for the decision of the arbitrator by the parties. Hence the Court held that in such a situation, even if the view taken by the arbitrator may not accord with the view of the Court, the award cannot be set aside on the ground that there is an error of law apparent on the face of the record. Facts and issues in the present case are quite different as stated above.
In M/s. Sudarshan Trading Co. Vs. Government of Kerala and Another [1989] 2 SCC 38, this Court posed the following questions for its decision: - How should the court examine an award to find out whether it was a speaking award or not; and if it be a non-speaking award, how and to what extent the court could go to determine whether there was any error apparent on the face of the award to be liable for the interference by the court. The other question that arises in this case is, to what extent can the court examine the contract in question though not incorporated or referred to in the award.
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In that case also, the arbitrator has passed the non-speaking awards but with regard to each and every claim it has separated and passed the order either accepting or rejecting the claim or partly accepting the claim of the contractor. After referring to the various decisions including Jivarbhai Ujamshi Sheth case, the Court observed as under: This was reiterated by Justice Hidayatullah that if the parties set limits to action by the arbitrator, then the arbitrator had to follow the limits set for him and the court can find that he exceeded his jurisdiction on proof of such excess. In that case the arbitrator in working out net profits for four years took into account depreciation of immovable property. For this reason he must be held to have exceeded his jurisdiction and it is not a question of his having merely interpreted the partnership agreement for himself as to which the civil court could have had no say, unless there was an error of law on the face of the award. Therefore, it appears to us that there are two different and distinct grounds involved in many of the cases. One is the error apparent on the face of the award, and the other is that the arbitrator exceeded his jurisdiction. In the latter case, the courts can look into the arbitration agreement but in the former, it cannot, unless the agreement was incorporated or recited in the award.
In the result, the appeal is allowed with costs. The award passed by the arbitrator is quashed and set aside. Consequently, the judgment and order dated 17th December, 1991 passed by the High Court in S.B. Civil Miscellaneous Appeal No.254 of 1991confirming the judgment and order dated 1st August, 1989 passed by the District Judge, Udaipur in Civil Miscellaneous Case No. 131 of 1985 and 45 of 1986 is also quashed and set aside.