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Arbitrations and Arbitrators

Sometime in the late1960s soon after I had joined the bar of the Calcutta High Court I remember walking into one of the court rooms and finding it packed with the witness in the witness stand being the centre of attraction. Everyone including the judge, the opposing counsel and others unrelated to the case being tried was listening in spellbound silence to the exposition of the law on the contract of employment by the witness. The witness was Nani Palkhiwala and the case related the dismissal of the then editor of the Statesman. Nani Palkhiwala was for the newspaper. I do not remember what happened to the case but the way in which he mesmerised the Court and virtually controlled the proceedings as it were from the witness box is still fresh in my mind. This incident highlights not so much the force of his personality which was considerable or the power of his oratory which was great, but the respect in which he was held as a jurist and more importantly as a man of unimpeachable integrity. His arguments persuaded judges of the Supreme Court to lay down path breaking principles from limitations all the power of Parliament to amend the Constitution to the interpretation of a section of the Income Tax Act. As someone has said of him "Whether it was constitutional law, whether it was civil law, whether it was taxation, whether it was international law, Mr Nani Palkhivala had a certain quest for excellence and he lived up to that ideal on every occasion".'

, His absence at a time when a crucial area of legal jurisprudence brought about by the impact of globalisation and a burgeoning economy is developing in India is unfortunate. l.iberalisation of trade and investment or "globalisation", has normally meant the enactment nf laws to remove barriers that impede international commerce and investment'. Furthermore economic interaction inevitably gives rise to disputes necessitating the setting up of acceptable machinery for resolution of those disputes. What is equally necessary is an updating of attitudes in those whose business it is to interpret and apply those laws and an informed approach in those who run that machinery.

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Ideally arbitrations should be the most practical machinery for dispute resolution because they are based on the consent of parties and are meant to be quick, decisive and cost effective. However over the years a wealth of jurisprudence propounding principles relating to domestic arbitrations under the Arbitration Act, 1940 reduced arbitrations to a parallel version of proceedings in a civil court with all the disadvantages of an open trial and none of its advantages. The Arbitration and Conciliation Act, 1996 was enacted not only to get rid of the existing statute on the subject which was seen as outdated, but to make the law "more responsive to contemporary requirements" of a growing economy and globalisation. However there is an increasing and persistent criticism of the arbitral process as an efficient tool to resolve disputes. Some have put this down to the increasing tendency in Courts to interfere in arbitration proceedings and the virtual replication of the disadvantages of the existing legal system in such proceedings. However if I were to apportion the blame for this I would lay the blame not merely on the judges but also on the arbitrators. My intention today is to critically appraise the role of each in the discrediting of the arbitral process.

I Mr R.A. Dada at the Condolence Meeting held by the Bombay Bar Association on 17 December 2002 2 See in this respect .Randy Hayes: The 2002 Johns Hopkins Symposium un Foreign Affutrs series, Paragon or Paradox? Capitalism in the Contemporary World

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One of the main objects of the 1996 Act was to free the arbitral process from the coils of the judicial system and to minimize the supervisory role of courts in the arbitral process". This objective has been defeated to a large extent by the Supreme Court by interfering in the arbitral process at all stages from the stage of appointing an arbitrator to the consideration ot the award-- often rewriting statutory provisions in the process. It would take more than this paper to list the instances of this and I will limit myself to illustrating the point primarily with reference to the appointment of arbitrators.

By statute", primacy has been given to the parties in deciding consensually, the arbitral procedure including appointment of the arbitrator/arbitrators. In case of disagreement, the power of appointment has been statutorily given to lithe Chief Justice or any person or institution designated by him". In other words a distinction has been made between the Chief Justice's power to appoint and the power to designate another person or institution to appoint an arbitrator/arbitrators. The language is clear enough and the phrase has been used at least five times in one section alone. The Chief Justice's power to designate any person or institution has been curtailed in one of the Supreme Court's most controversial decisions in SBP & Co. v. Patel Engg. Ltd s. The Court said that "it is obvious" that no person other than a Judge and no non-judicial body can be designated by the Chief Justice to appoint an arbitrator. Later in the same judgment the Court went on with a legislative insouciance to limit the power of designation even further by saying that the Chief Justice cannot designate a District Judge, that the Chief Justice of a High Court can designate only a Judge of that Court and that the Chief Justice of India can designate only another Judge of the Supreme Court". The power to designate any institution has been effectively deleted from the statute.

While this part of the decision may not directly impact on the conduct of arbitration it does have an indirect effect which I will come to later. What had a direct and devastating impact was that part of the decision which held that the power of appolntrnent.js judicial in nature. Overruling a series of earlier decisions including a Constitutional Bench decision' which had said that the power to appoint an arbitrator is an administrative act, the court held that before appointing an arbitrator, the court will have to decide whether it has jurisdiction, whether there is an arbitration agreement, whether the applicant before it is a party, whether the conditions for exercise of the power have been fulfilled, and if an arbitrator is to be appointed, who is a fit persons. Following the decision in SBP & Co. v. Patel Engg. Ltd., it has been held that it is incumbent on the part of the Chief Justice or a designated Judge to consider the claim of both parties and pass a reasoned order, by taking evidence if necessary 9, to decide whether the claim could not be referred to the arbitrator because of full and final settlement and the claim stood llquldated'", to decide allegations of forgerv/fabrlcatton": whether the entire agreement

3 Statement of Objects and Reasons para. 4 (v) and section 5 of the Act. 4 Section 11

5.,(2005) 8 SCC 618

6 Ibid at page 661

7 Konkan Rly. Corpn. Ltd. v. Mehul Construction Co., (2000) 7 SCC 201; Konkan Rly. Corpn. Ltd. v, Rani Construction (P) Ltd.,(2002) 2 SCC 388

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9 Rameshwar Das Agrawal v. Kiran Agrawal, (2008) 2 SCC 155, at page 159 10 Union of India v. Talson Builders, (2008) 14 SCC 502, at page 503

II National Insurance Co. Ltd. v. Boghara Polyfab (P) Ltd.,(2009) 1 SCC 267

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including the arbitration agreement is vitiated by fraud": whether the claim is barred by llrnitation'" and whether a clause of the special conditions of the tender document will prevail over a clause of the general conditions of the contract". According to S8P & Co. v. Patel fnqq Ltd if the Chief Justice or his designate decides any of these issues the Arbitral Tribunal cannot re-examine it. By a debatable process of interpretation, the simple word "appointment" was relied on to ignore the statutory provision which says that it is the arbitral tribunal which may rule on its own jurisdiction, including on any objections with respect to the existence or validity of the agreement" leaving it to courts to overrule the arbitrators finding under section 34.

By rewriting the statue, the decision in S8P & Co. v. Patel Engg. Ltd has succeeded in obstructing at the outset achievement of a quick outcome in arbitration Since the funr tion of appointment is held to be judicial, Judges have assumed the jurisdiction which the statute had placed with arbitrators. Orders appointing arbitrators are passed after the entire process of adversarial proceedings is concluded with a lengthy reasoned order. One such decision" of the Supreme Court is 30 pages long though in all fairness 21 pages were devoted to setting out the documents verbatim as the Court went into the question and decided there was a concluded contract between the parties. In one case the Supreme Court noted that an application for appointment of an arbitrator made before the Chief Justice of the Orissa High Court was pending for over two years without orders". The delay is understandable as an application for appointment of an arbitrator has now become just another matter added to the massive backlog of cases waiting to be heard and disposed of. Even after the order of appointment is ultimately passed, an application for review of an order passed even by the Chief Justice of India or his nominee is maintainable'" and a petition under Article 136 of the Constitution would lie. In one case the High Court passed an order on 23-7-2003 acting as a designated authority under Section 11(5) of the 1996 Act. When the matter came up before the Supreme Court under Art. 136 in August 2005, an order was passed remanding the matter to the Chief Justice of the High Court for being heard and decided afresh as the Designated Judge had not taken into consideration any of the pleas raised by the respondent before him19. Conceivably another two years will elapse before an arbitrator is appointed.

Although I have not chosen to speak on the Courts interference with arbitration awards nevertheless I will only briefly say that despite pronouncements to the contrary, the boundaries of permissible challenge delineated by section 34 have been virtually done away with by a

12 India Household and Healthcare Ltd. v. LO Household and Healthcare Ltd.,(2007) 5 SCC 510, at page 510 :

13 DHV BV v. Tahal Consulting Engineers Ltd., (2007) 8 SCC 321, at page 326 ; National Insurance Co. Ltd. v. Boghara Polyfab (P) Ltd.,(2009) 1 SCC 267, at page 283; Shree Ram Mills Ltd. v. Utility Premises (P) Ltd., (2007) 4 SCC 599, at page 607

14 BSNL v. Motorola India (P) Ltd.,(2009) 2 SCC 337, at page 340 15 Section 16( 1 )

16 Trimex International FZE Ltd. V. Vedanta Aluminium Ltd 20103 SCC 1

17 Adhunik Steels Ltd. v. Orissa Manganese and Minerals (P) Ltd.,(2007) 7 SCC 125, at page 139 18 Jain Studios Ltd. v. Shin Satellite Public Co. Ltd.,(2006) 5 SCC 501, at page 504

19 Kutub Properties (P) Ltd. v. CL. Construction Co., (2005) 13 SCC 427

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process of judicial Interpretation". Now a challenge to an award is a first appeal. The malaise has not spared international awards. To quote a lawyer and jurist": "In India, the decisions of the Supreme Court have driven a coach and four into international awards". To sum up: increased judicial interference at all stages not only prolongs arbitral proceedings and introduces the element of uncertainty that is endemic to the legal system but also results in increasing the costs of arbitration.

Arbitrators:

Because the power of appointment has been restricted to judges by SBP & Co. v. Patel Engg.

Ltd, in the majority of cases retired judges are appointed as arbitrators". By the order of appointment they are entitled to decide upon the procedure to be adopted in the arbitral proceedings, the sittings of the arbitral proceedings and also to settle their fees in respect of the sittings. Litigants are normally happy with the appointment of judges as arbitrators who, they trust by reputation, will be impartial, fair and not as expensive as perhaps lawyers. But judges have a life time of experience in proceedings in a court of law. Consequently there is a danger that, like litigation, arbitrations will be dragged on with none of the discipline which proceedings in Court necessitate. In a recent case", Counsel for one of the parties expressed his client's reluctance to go to arbitration despite the existence of a clear arbitration clause, on the ground that arbitration was an expensive proposition and that the financial burden cast by the arbitration proceedings in terms of fees for the arbitrators, counsel/solicitors and other incidental expenses was onerous. Apart from the amount of fees demanded often being inordinately high, these incidental expenses WOUld, I presume, include the putting up of arbitrators in luxurious hotels and paying at least business class air fares. Sometimes no effective session is held and sometimes a sitting for one day is treated as two sittings justifying the charging of two fees for both the arbitrators and counsel. However, the Court rejected the plea of the reluctant client but acknowledged "The plea raised by the litigant raises a real problem. It is unfortunate that arbitration in this country has proved to be a highly expensive and time-consuming means for resolution of disputes".

A 'diagnosis of the underlying pathology' of the dogged refusal of courts to give effect to the language of the statute, stems from firstly, a conviction that only judges are adept at deciding disputes; secondly a refusal to acknowledge that the 1996 Act has effected a sea change in the

20Security Printing and Minting Corpn. of India Ltd v Gandhi Industrial Corpn., (']()m) 13 s('(' :~f) at page 245; Oil & Natural Gas Corpn. Ltd v. Saw Pipes Ltd.(2003) 5 SCC 705; ONGC Ltd. v. Garware Shipping Corpn. Ltd., (2007) 13 SCC 434; DDA v. R.S. Sharma and Co., (2008) 13 SCC 80, at page 91

21 Arvind Datar: Introduction to the Fifth Edition of Bachawat's Law of Arbitration and Conciliation 22

Rodemadan India Ltd. v. International Trade Expo Centre Ltd., (2006) 11 SCC 651, Arvind

Constructions Co. (P) Ltd. v. Kalinga Mining Corpn.,(2007) 6 SCC 798; Groupe Chimique Tunisien SA v. Southern Petrochemicals Industries Corpn. Ltd,(2006) 5 SCC 275; Citibank; NA. v. TLC Marketing PLC,(2008) 1 SCC 481; Adhunik Steels Ltd. v. Orissa Manganese and Minerals (P) Ltd.,(2007) 7 SCC 125,Great Offshore Ltd. v, Iranian Offshore Engg. & Construction ('0 J2(JOR) 14 S(,(, ?4()' Vanna Clniro Kaura v. Gauri Ani! Indulkar,(2009) 7 SCC 541; Indtel Technical Services (P) Ltd. v. Ws. Atkins Rail Ltd..(2008) 10 SCC 308; Citation Infowares Ltd. v. Equinox Corpn . .(2009) 7 SCC 220

23 Dolphin Drilling Limitedv. ONGC Ltd (2010) 3 SCC 267

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24 Bhatia International v. Bulk Trading S.A., (2002) 4 SCC 105, at page 119 25 N. Radhakrishnan v. Maestro Engineers and Others (2010) I SCC 72

26 Glencore International AG v. Hindustan Zinc Ltd.,(2005) 7 SCC 99, at page 102

27 Konkan Rly. Corpn. Ltd. v. Mehul Construction Co., (2000) 7 SCC 201, at page 205

arbitral process and finally a resistance to what is perceived as a marginalization of courts and an ouster of jurisdiction". Therefore although the role of Courts has been expressly rninimi7prl, the courts have widened their role25• As I have shown, the Chief Justice in his role as an appointer of an arbitrator, has in effect been held to be a court because as one Learned Judge put it- it was inconceivable that the Chief Justice would be a mere rubber stamp", overlooking the fact that a rubber stamp has no choice, whereas the Chief Justice in selecting an arbitrator does. So a party wishing to invoke the arbitration clause through Court is given a Hobson's choice of the whole judicial package or nothing.

In conclusion-- is arbitration a viable alternative to litigation in India? The answer to that in my opinion, as the law at present stands, is no- but it can and indeed must be. For that my suggestion is a re-Iook at the law either judicially or legislatively if necessary so as to allow the statute to operate to achieve its main objective of resolving disputes as expeditiously as possible with the minimum intervention of a court of law so that the trade and commerce are not affected on account of litigations before a court". Courts should be guided by a hands-off policy so that if disputes are arbitrable courts should not interfere. The answer to the lack of expedition and exorbitant costs lies in institutional rather than ad hoc arbitrations---institutions with time bound schedules, fixed fees and noted judges and experts chosen because of their independence, impartiality and experience being empanelled. That is why Il1dllY countues ildvt: such institutions which have successfully given parties relief at least with expedition. Unfortunately institutional arbitration has been by passed by the Supreme Court despite the fact that it would better serve the interests of the litigating public.

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