‘Second Instance’ Arbitration: Centrotrade Minerals

In an important decision, the
Supreme Court has recently held that the Indian Arbitration and Conciliation
Act 1996 (‘the 1996 Act’) does not prohibit the parties from entering into an
arbitration agreement that provides for an appeal from the first award to a
second arbitral tribunal constituted under that agreement. The decision,
however, also gives rise to further questions—not all of which are answered in
the judgment—about the nature of arbitral awards under Indian law and the basis
on which they are enforced.

The facts of Centrotrade Minerals
were simple, if
perhaps also relatively rare in practice. In summary, the effect of clause 14
of the contract was that: (a) any disputes arising out of the contract would be
settled by arbitration in India’ in
accordance with the Rules of Arbitration of the Indian Council of Arbitration
but that (b) any party ‘in disagreement
with the arbitration result in India
’ would be entitled to ‘appeal to a second arbitration in London …
in accordance with the ICC Rules. Significantly, clause 14 provided that the ‘result of this second arbitration will be
binding on both the parties
’ but did not contain similar language in
relation to the first arbitration.

A dispute which arose between
Centrotrade and Hindustan Copper was, in accordance with clause 14, initially
submitted to arbitration in India under the ICA Rules. Centrotrade then sought
to ‘appeal’ against that award by initiating arbitration in London under the
second part of clause 14. It obtained an award in London and sought to enforce
this in India under section 48 of the 1996 Act. The question in the Supreme
Court was whether the 1996 Act expressly or impliedly prohibits the parties
from entering into arbitration agreements of this kind.

Centrotrade’s first argument was
that clause 14 did not, in fact, provide for two arbitrations because any
decision made by the first arbitrator could not be described as an ‘award’ for
the purposes of the 1996 Act. The basis of this argument was that clause 14(b)
provided that either party in disagreement with ‘the result’ (and not award) of the first arbitration could appeal by commencing arbitration in
London. Lokur J, who gave the Court’s judgment, rejected this argument because
(among other things) it led to the conclusion that the first result/award could
not be enforced under the 1996 Act even if neither party wished to ‘appeal’ by
commencing a London arbitration. That is correct and Lokur J might have added
that the use of the word ‘result’ is rather less significant than first appears
because the second arbitration (i.e.,
the London arbitration), which it was common ground led to an ‘award’, is also
described in these terms: ‘the result
of this second arbitration will be binding on both parties
.’

On the basis that the first
‘result’ was in fact an arbitral award, a more fundamental question of law
arose: is anything in the 1996 Act, or in Indian public policy, which prohibits
a second-instance arbitration by way of an appeal? Lokur J noted that there
were suggestions in the legislative history of the 1996 Act that a
second-instance arbitration should not be excluded by the UNCITRAL Model Law
(see para 17) and that Parliament should be taken to have known of this (and
Indian High Court cases recognising the practice) when it enacted the 1996 Act.
Against that background, the fact that Parliament did not prohibit the practice
rather suggested, said Lokur J, that it was not inconsistent with the Act. But he
did not decide the case on this basis and went on to consider whether the
existence of a remedy against an arbitral award (section 34) in the 1996 Act
impliedly prohibits a second-instance arbitration.

Lokur J gave two reasons for
rejecting that argument. First, he pointed out that section 34 of the 1996 Act
uses the words ‘recourse to a Court
against an arbitral award may be made only by an application for setting aside
such award…
’, that is, that the word ‘only’ qualifies the form of recourse
specified in section 34 (to a court) and not the right to recourse itself. Put
differently, section 34 is not exhaustive.

Secondly, it was suggested that
the fact that an arbitral award is ‘final
and binding on the parties
’ (s 35 of the Act) shows that the Act did not
intend to permit any recourse against an award save under s 34. Lokur J said at
para 35 that this was incorrect on the basis that:

…the ‘final and
binding’ clause in section 35 of the A&C Act does not mean final for all
intents and purposes. The finality is subject to any recourse that an aggrieved
party might have under a statute or agreement providing for arbitration in the
second instance. The award is binding in a limited context.

This may well be correct but it
leaves at least two questions unanswered. The first concerns the reason why
an arbitral award is binding. The following points may be made in this respect:
  1. It is a well-established
    principle of both English and Indian law that an arbitral award, unlike a
    judgment, is only enforceable because there is an implied term in the
    arbitration agreement that the parties will honour any award made under that
    agreement: see, eg, Badat & Co v East India
    Trading
    AIR
    1964 SC 538 and Bremer Oeltransport GmbH v Drewry
    [1932] 1 KB 753.
  2. The existence and scope of this implied term is a matter of construction, just as it would be in relation to any implied term in a contract.
  3. If the parties envisage a ‘second-instance’ arbitration, this implied term must, as a matter of construction, be read as a duty to honour the first award subject to the right of either party to commence another arbitration: this appears to be what Lokur J is suggesting at para 35.
  4. But if neither party actually exercises that right—for example because the respondent to the first arbitration considers that any appeal is bound to fail—when does the first award become enforceable in the usual way and why? The answer may be that the implied term is in fact that there is a duty to honour the first award if the right to appeal by commencing a second arbitration is not exercised within a reasonable time (or perhaps until the limitation period expires) but this requires the Court to imply a considerably more detailed term than is ordinarily the case.

The second question that arises
from para 35 concerns the nature of the cause of action in the second-instance
arbitration. Section 43 of the Arbitration Act provides that the limitation
rules in the Limitation Act 1963 apply to arbitrations in the same way that
they apply to court proceedings. In relation to the first-instance arbitration, this would therefore involve asking
when the cause of action arose and whether the arbitration was commenced before
the period of limitation relevant to that cause of action (eg breach of
contract, tort) expired. But the making of an arbitral award is usually taken
to extinguish the original cause of action and replace it with a right (founded
on the implied term above) to have the award enforced. If that rule applies to
the award produced by the first-instance arbitration, then the subject-matter
of the second-instance arbitration is no longer the original cause of action
(eg damages for breach of contract or tort) but the correctness of the first
award. This means, for limitation purposes, that the relevant period is (or may
not be) the period that relates to the original cause of action (eg breach of
contract or tort); nor would the provisions relating to appeals (see, eg,
article 116, Schedule I to the Limitation Act) apply because those are
concerned with appeals from court orders. The answer may be that the residuary provision
applies.

About the author

V. Niranjan

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