[Gaurav Jairaj is a 3rd year student at National Law University Odisha and Gaurav Kumar a 3rd year student at Dr. Ram Manohar Lohiya National Law University Lucknow]
Arbitration generally confers supremacy to the party autonomy. It gives flexibility to parties to adopt the rules and procedures for resolution of disputes between them. Two-tier arbitration or appellate arbitration is the reflection of such party autonomy, wherein parties to the arbitration agreement choose to retain an option to appeal against the original arbitral award. In India, the statute does not explicitly provide for a two-tier arbitration process. However, the Supreme Court judgment in Centrotrade Minerals and Metals Inc. v. Hindustan Copper Ltd. (2 June 2020) rightly recognises two-tier arbitration. Stating that “party autonomy is virtually the backbone of arbitrations”, a three-judge bench of the Supreme Court unanimously upheld the validity of two-tier arbitration in India. However, despite years of such recognition, the statutory arbitral regime in India has failed to incorporate any mechanism for its implementation.
In this post, the authors briefly discuss the position of appellate arbitration across different arbitral regimes and illustrate the Indian position concerning the same. The authors highlight how the Indian arbitration institutions lack the procedural roadmap to govern two-tier arbitrations, and act as a hindrance to India’s goal of emerging as a hub for arbitration.
Two Tier Arbitration from an Indian Perspective
One can trace back statutory recognition to arbitration to the Indian Arbitration Act, 1899, which was enacted for the presidencies of Madras, Bombay and Calcutta. It was followed by the Arbitration Act 1940 and the Arbitration and Conciliation Act, 1996. While all these legislation failed to incorporate explicit provisions related to appellate arbitration clauses, none of them are said to deny the possibility for parties to opt for the same. The fact that both the latter legislation envisage supremacy to the parties’ mutual decision in weaving their arbitration clauses paved the way for them to opt for a two-tier arbitration mechanism as well.
Howsoever, the judiciary had to face a divided opinion on the interpretation of section 35 of the 1996 Act on finality of the arbitral awards. Section 35 is in fact a replica of para 7 of the first schedule of the 1940 Act. It says:
“35. Subject to this Part an arbitral award shall be final and binding on the parties and persons claiming under them respectively.”
While interpreting the abovementioned section, the Court in Centrotrade held that the “final and binding” clause in section 35 of the 1996 Act does not mean final for all intents and purposes. Hence, it overruled the earlier position that once an arbitral tribunal passes an award, no action can be started on the original claim that had been the subject-matter of the reference. Therefore, the Court has conclusively held that section 35 is no bar to parties opting for a two-tier arbitration, and that the context to which the award is binding is limited to the intention of the parties. Even though two-tier arbitration clauses are not statutorily recognised, the core principle underlying Indian arbitration shall favour an arbitration clause executed in the exercise of party autonomy.
Indian courts have also upheld the validity of an appellate arbitration clause even prior to the Centrotrade decisions, while dealing with the 1899 Act and 1940 Act. The courts have opined that the right of appeal is not a mere matter of procedure but is a substantive right that can only be taken away by an express enactment; therefore, awards can be subjected to appeal depending upon the terms of the agreement. In Steel Authority of India v. Engineers Project India Ltd., the Bombay High Court observed that appellate arbitration was neither proscribed under the 1899 Act or the 1940 Act, nor could it be proscribed under the 1996 Act.
Evidently, the judiciary has been consistent in upholding the validity of appellate arbitration clauses. The underlying principle here is not only party autonomy but also due regard for fair trial. It provides an option for revisiting the award with parties’ consent when the courts’ role in reviewing arbitral awards is very limited. Certainly, the Centrotrade decisions have further strengthened these principles; however, their implications in practice is yet awaited.
To ensure lesser disputes pertaining to two-tier arbitrations, it becomes pertinent to draft the arbitration clauses in unequivocal terms. Quite often, parties fail to draft sound arbitration clauses, which then lead to wasteful expenditures of time and money to resolve the dispute. With higher complexity involved in two-tier arbitration clauses, it becomes more important to carefully lay down the mechanism , including the clarity on finality of previous awards, the limitation period, and the seat of the different arbitrations, to name a few.
Internal Appellate Review in Institutional Arbitrations
Two-tier arbitration is prominently found in international commercial arbitration either in an institutional set-up or in ad hoc form [A. Redfern & M. Hunter, International Arbitration 586 (5th ed., 2009)]. This appellate mechanism is validated by different jurisdictions across the globe including Japan, Italy, the Netherlands [M. Rubino-Sammartano, International Arbitration Law and Practice 893 (2d ed., 2007)], Austria, and South Africa. The UNCITRAL Model Law on International Commercial Arbitration also provides for an appeal mechanism where the parties have previously agreed on such possibility. The leading arbitral institutes including American Association of Arbitration (AAA), Conflict Prevention & Resolution (CPR), JAMS and GAFTA provide for two-tier arbitration mechanisms.
The Paris Arbitration Chambers (PAC) also provides for the same, and parties can request the second panel to hear the matter afresh before the final award is rendered by the first panel. The award passed by the second panel would be final and binding on the parties. The European Court of Arbitration, on the same footing as PAC, provides for a fresh hearing to the parties at the stage of the second arbitration. The reason why the best arbitration practices tend to adopt an appellate mechanism for arbitral awards is that providing an appellate mechanism can reduce the chances of risks substantially while providing “peace of mind” to the parties concerned.
While leading arbitral institutes across the globe envisage an internal appellate review system on the desire of the parties, India still lags behind. Even after 14 years of Centrotrade Minerals and Metals Inc. v. Hindustan Copper Ltd. (2006), prominent Indian arbitration institutions have not shown the will to bring two-tier arbitration into practice. Institutes like Indian Council of Arbitration (ICA), the Delhi International Arbitration Centre (DIAC), the Mumbai Centre for International Arbitration (MCIA), and the International Centre For Alternative Dispute Resolution (ICADR) have altogether failed to materialize two-tier arbitration into Indian arbitration.
Undoubtedly, a review process can be carried out through institutional arbitration with more ease in comparison to ad hoc arbitration. In order to bring India on the global stage as an arbitration hub, it becomes very important to have arbitration centres with more optimal rules, addressing every development that occurs in the dispute resolution landscape. While two-tier arbitrations have a positive signal from the Supreme Court, it will still struggle if it does not find a smooth ground for its execution. The country’s recent endeavor in the form of the Arbitration Council of India is a reflection of its focus on strengthening institutional arbitration. Now that the appellate arbitration clauses have been found to be valid, a sound framework should be incorporated for its implementation without procedural hardships. The institutional set-up in appellate arbitration should be adopted by jurisdictions such India, which are at its nascent stage of appeal inclusivity in arbitration.
– Gaurav Jairaj & Gaurav Kumar