ISSUE XII : Heed and read the arbitration clause

Heed and Read the Arbitration Clause

Introduction

India has seen several landmark decisions on Arbitration, especially relating to disputes between Indian and foreign entities. Despite several guidelines by Supreme Court from time to time on arbitration clauses in an agreement, several disputes still arise over the arbitration clause leading to frivolous and multiple petitions before courts for challenging the validity of arbitration clauses and arbitration awards. The current bulletin discusses a recent decision of the Delhi High Court (“DHC”) as an example of why it is necessary to pay due attention to arbitration clauses at the time of entering into agreements between Indian and foreign parties.

1. Facts of the Case

In this case,1 there were several contracts between a Foreign firm (“Respondent”) and an Indian firm (“Appellant”), which stipulated arbitration in case of a dispute through the London Rice Broker’s Association (“LRBA”),2 governed by English laws. Disputes arose, and the Respondent initiated arbitration and the Appellant objected to the jurisdiction of the said tribunal. Once the decision re the jurisdiction was passed in favor of the Respondent, the Appellant withdrew from the proceedings and the Arbitral Award (“Award”) was passed thereafter in favor of the foreign firm. The Award passed by the LBRA required the Appellant to deposit 50% of the amounts claimed by the Respondent.

Aggrieved, the Appellant filed a civil suit in India, wherein it alleged that the subject contract containing the arbitration clause was void and not binding. The respondent had in parallel filed an application for the enforcement of the Award, which was allowed, and the Award passed by LRBA was deemed to be a decree of the court. The Appellant also filed an appeal before the DHC, and therein again challenged the validity of the underlying contracts and the arbitration clause contained therein and objected to the Award passed by the LRBA. This objection was dismissed, and the Appellant again approached the division bench of the Delhi High Court, which, by a detailed order, was dismissed and the Award had attained finality.

Thereafter the Appellant again approached the DHC and challenged the Award under the Section 34 of the Arbitration and Conciliation Act, 1996 (“Act”) before the division bench of the DHC.

2. Main Issues

Main question of law involved in this matter was whether a section 34 application can be filed under the Act after expiry of the limitation period prescribed under the Act, and whether the parties can re-agitate an issue already heard, under a section 34 application. Further, the Indian firm raised the issue of which law would be applicable to an arbitration, despite there being specific indication under the contract for the same.

3. Contention of the Parties

3.1 Appellant’s contentions

The Appellant’s primary contention is that the Award passed by LRDA consisted of two Arbitrators, violated Section 10 of the Act which mandates an odd number of arbitrators. The Appellant also argued that the correspondence exchanged by the parties, from which the subject contract had emerged, does not contain any arbitration clause. They further contended that the Award was not circulated to all the partners of the firm and by that virtue the award passed by LRDA is non est in law and alleged breach of natural justice. The primary contention of the Appellant was that the Award had been passed by following procedure that was in direct conflict and violation of the Act and could not be enforced in India.

3.2 Respondent’s contentions

The Respondent’s main contention was that the appeal is not maintainable. According to them, since the contract was made in England, the procedural law to be followed was English law. Countering the argument relating to the number of arbitrators, the Respondent contended that since English law was the applicable law, under the English Arbitration Act appointment of two arbitrators is permitted. They had also claimed that the Appellants had been barred from the current petition by the principles of res judicata in the light of their previous petition under Section 48 of the Act. The Respondents vehemently objected to the appeal by the Appellants stating that the Appellant is a chronic litigant and the appeal filed is only to delay the enforcement of the Award.

The DHC dismissed the appeal, and provided the following general guidelines to be kept in mind before entering into an arbitration agreement:

  1. Law of arbitration, as it has developed globally, recognizes that there is a difference between the law of contract and the law governing the conduct of the Arbitral Tribunal.
  2. Parties are empowered to nominate which national laws will govern either or both these divisions.
  3. For pragmatic reasons, the seat of arbitration or the juridical seat of arbitration or the place of arbitration or the venue of arbitration, if specified in a contract, will also indicate the parties’ choice of the curial law pertaining to the conduct of the Arbitral Tribunal’s proceedings. In the case of any inconsistency, courts must read out the stipulations as to the venue or seat of arbitration as being one among several places where the Arbitral Tribunal conducts its workings.
  4. At least, so far as India is concerned, the selection of the law that will be applied to the resolution of disputes must be one amongst many other forums which would possess jurisdiction.
  5. We reiterate that the Act has not been properly worded or conceived of. Part I thereof contains provisions which relate to the law of the contract as well as to the curial law moderating workings of the Arbitral Tribunal. Sections 9 and 34 do not pertain to curial law. So far as Section 9 is concerned, it predates the form of the Arbitral Tribunal; Section 34 is attracted to events post the publication of the award where the Arbitral Tribunal has already been rendered functus officio. If a contract stipulates that the functioning of the Arbitral Tribunal shall be governed by laws in a foreign country, whereas the substantive or contract law will be governed by Indian laws, Section 9 as well as Section 34 will be maintainable.
  6. Broadly speaking, the curial law is contained in Chapters III to VI, whereas proper law of the contract is covered in large measure in the other Chapters of Part I.
  7. Section 10 may be open to a party to object the first instance since the contract for an even number of arbitrators would be contrary to the statute

Conclusion

This decision of DHC is bound to have repercussions on how Indian parties view arbitration clauses under foreign contracts which stipulate foreign arbitration. The DHC has made it amply clear that where part I is excluded, the grounds of challenge under section 34 automatically become unavailable. Despite the expiry of the limitation period in the present case, as well as the fact that the Award has attained finality, the impact of this judgment lies in the fact that will have an impact on the parties when the final award is passed outside India. However, considering the general guidelines laid down by the DHC, it will be interesting to see how the same is applied in cases where there are multiple jurisdictions that are involved, which makes the question of choice of law even more complicated. At present, all parties must be alert in assessing the pros and cons of including an arbitration clause in a contract at all, since invariably, despite having an award in its favor, parties have to approach the courts to enforce the same.

Authored by:
S. Aravindan

1 Anita Garg vs. Glencore Grain Rotterdam B.V., 2011 VII AD (Delhi)165
2 An arbitration council in England

 

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