Enforcement of Foreign Awards and Regulatory Intervention: The Case of Tata-Docomo

It created flutters would be an understatement. The high-profile international arbitration between Tata Sons and Docomo was a head turner from the day that the disputes arose between the parties to the failed venture. After the severely contested proceedings before the international arbitral tribunal, where Tata Sons lost the case, the matter came for enforcement before the Delhi High Court. An unlikely intervention against the enforcement was made by the Reserve Bank of India (RBI) before the High Court. Initially, the enforcement of the award was opposed by Tata Sons on the grounds of inability to perform without special permission from RBI under the Foreign Exchange Management Act, RBI opposed the enforcement on the grounds of illegality that would result if the award is enforced since they would contravene the several prohibitions prescribed under the FEMA. This is the first known instance where a regulator intervened in the enforcement of an arbitration award on the grounds of illegality, raising fundamental questions about the propriety of an intervention by a third party in enforcement proceedings. In the meanwhile, a joint application under Order XXIII Rule 3 was filed by Tata and Docomo seeking to place on record the settlement agreement arrived at amongst them. The settlement agreement too subsequently came to be opposed by the RBI on the grounds of illegality under Section 23 of Contract Act and the express bar against any settlement agreement in a execution proceedings under Order XXIII Rule 4 of CPC.The RBI's opposition hinged upon the following grounds:

1. The transaction is in contravention to the FEMA: Clause 5.7.2, the put option clause that created the right in favour of Docomo to have an assured amount of returns on its investment if it wishes to exercise the right vested with it under the clause was seen by RBI in violation of Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2000.
2. The award does not consider the special permission of RBI to carry out such transactions: It was the case of RBI that for carrying out certain category of transactions are defined under the Foreign Exchange and Management Act, 1999 and the same is plenary in all respects unless anything to the contrary stands stated in the Act. The transaction that was sought to be carried out was seen as a Capital Account transaction that is disguised as a current account transaction. As per Section 2 (e) of FEMA, mere alteration in the assets/liabilities of either a resident or a non-resident entity constitutes a capital account transaction.
3. The transaction, in the form in which it is sought to be enforced, is a colourable transaction: According to RBI, the manner in which the SHA is structured would necessarily result in contravention of FEMA provisions. The portrayal of the transaction as a current account transaction cannot be accepted simply because the essential result would remain the same. The ultimate result of the transaction is the transfer of shares by Docomo to Tata for an agreed consideration under the share holders agreement. This is sufficient for the transaction to fall under the definition of a capital account transaction.

The arguments on the merits aside, RBI all through has never been make out sufficient case or itself on the question of maintainability of such an intervention at all by an entity who is neither a party to the shareholders agreement under dispute nor a party to the process of arbitration. This attains more significance since the important cause of intervention by RBI, as it stated, is that the present case involves interpretation of the provisions of FEMA and other regulations governing foreign exchange. As a regulator it sought to justify its intervention to protect its interests by aiding the court in arriving at the right interpretation of the statutory provisions. This is a dangerous precedence to be set, if such an intervention is allowed. If regulatory bodies across the board intervened on the grounds of the case involving interpretation of statutory provisions, over which they have vested interests, or that the arbitral tribunal has arrived at a wrong conclusion over its interpretation, it would be nigh well impossible for any arbitral award to attain the sanctity of the decree without the express authorisation of such bodies. It would deal a death blow to the whole ecosystem of arbitration. The very concept of arbitration is to resolve dispute amongst two private parties without any intervention from an alien third party entity would stand compromised. The High Court has rightly rejected the intervention made by RBI. 

The objections of RBI, under Order XXIII Rule 4, were also ruled against it holding that nothing can prevent the parties from entering into a compromise regardless of nature of proceedings. Even otherwise, the court found that the objections of RBI, over the illegality of the consent terms arrived at between Tata and Docomo, were not justified.

Another interesting question that this decision has answered is whether RBI would be bound by an arbitral award that interprets the scope of its powers or not. Answering in positive, the judgement states that the conclusion arrived at in the award would be binding on RBI just as it would any other entity, since, under Section 36 of the Arbitration Act an award automatically becomes the decree of the court and is enforced as such under the Civil Procedure Code. However, it must be noted that it would be binding on RBI only for those two parties. It can neither be a precedent nor can it be binding on RBI for any other transaction of similar nature. The judgement is also careful enough to note that this would yet not permit any intervention by RBI, since there is no statutory provision which expressly provides for it.

The judgment is a watershed moment in the field of international arbitration in India, since it has effectively put to rest the ambiguity that prevailed over the control of regulatory bodies in enforcement of foreign arbitral awards. Any contrary decision would have resulted in a situation where the enforcement proceedings of foreign awards would be subject to the whimsical objections of regulatory bodies such as RBI.

Disclosure: I assisted the court on behalf of Reserve Bank of India in this matter.

Permanent Machinery for Arbitration: A Saga of Unending Maladies

Sometimes a remedy to cure a disease may develop a new unforeseen complication worse than the disease that it intended to cure. Here the nobility of intention to provide a cure will not be of much help. Indian judicial system is fraught with such instances. The attempt to provide an alternative dispute resolution mechanism for the public sector enterprises (PSE) is a veritable example of something that backfired horribly.

The Permanent Machinery for Arbitration

The initial attempts to explore a mechanism, which is efficient and cost-effective at the same time, to resolve the disputes amongst public sector entities (excluding disputes on income-tax, customs and excise) was explored by the government as early as 1987. In pursuance to this, a decision was taken by the Committee of Secretaries to set up a permanent machinery of arbitrators to settle the disputes. It was further decided that all the agreements entered into between the public sector utilities shall contain a binding arbitration clause that would refer any disputes arising between the parties to the body arbitrators so formed, called as Permanent Machinery for Arbitration (PMA). The most important aspect of this setup is that the whole mechanism is outside the scope of laws of arbitration making the award made under this mechanism is not challengeable in any court of law and is binding on both the parties.
In order to implement the mechanism, it was made compulsory for all the PSEs to contain a clause to this effect in all the commercial contracts that is entered inter se between them. A seemingly fool proof mechanism that it was, ran into problems when the PSEs did not abide by the clause and challenged the award in court of law through various means.
The genesis of the present situation can be traced back to the case of Oil and Natural Gas Commission and Anr. Vs. Collector of Central Excise[1] (ONGC-I)[2]. The Supreme Court, after noticing the high frequency of such litigation between government entities, where the award made under PMA was challenged in court in spite express bar, resulting in loss to the exchequer, asked the government to set up a Committee consisting representatives from the Ministry of Industry, the Bureau of Public Enterprises and the Ministry of Law, to monitor disputes between Ministry and Ministry of Government of India, Ministry and Public Sector Undertaking of the Government of India and Public Sector Undertakings in between themselves. Relevant part of the judgement is extracted here:

We direct that the Government of India shall set up a Committee consisting representatives from the Ministry of Industry, the Bureau of Public Enterprises and the Ministry of Law, to monitor disputes between Ministry and Ministry of Government of India, Ministry and Public Sector Undertaking of the Government of India and Public Sector Undertakings in between themselves, to ensure that no litigation comes to Court or to a Tribunal without the matter having been first examined by the Committee and its clearance for litigation. Government may include a representative of the Ministry concerned in a specific case and one from the Ministry of Finance in the Committee. Senior Officers only should be nominated so that the Committee would function with status, control and discipline.

This was to ensure that no such litigation comes to Court or to a Tribunal without the matter having been first examined by the Committee (later called as Committee on Disputes or CoD) and its clearance for litigation.[3] In order to give more force to this alternative mechanism the Supreme Court directed that all courts and tribunals, before which disputes between two government entities are raised, must demand a clearance from the Committee in case it has not been so pleaded and in the absence of the clearance, the proceedings would not be proceeded with.[4]
With the passage of time, several issues cropped up with the implementation of the process. In many cases, the permission from the High-powered Committee required to initiate the proceedings came with considerable delay adversely affecting the limitation period to file them. Also the direction of the Supreme Court in ONGC-I that the ‘recourse to litigation should be eliminated’ created some confusion as to its true scope and import. These issues came to be considered by a three-judge bench of the court in Oil and Natural Gas Commission and Anr. Vs. Collector of Central Excise[5] (ONGC-III). The bench clarified that the directions provided in ONGC-I & II cannot be interpreted to mean that the statutory remedies of Union of India and its statutory corporations are effaced. The constitution of such a committee was not to take away those remedies. The machinery was contemplated only to ensure that no litigation came to court without the parties having had an opportunity of conciliation before the committee. Also, the bench made clear that there should be no bar to the lodgement of an appeal or petition either by the Union of India or the public sector undertakings before any court or tribunal to save limitation period, with a caveat that before such filing every endeavour should be made to have the clearance of the high-powered committee.[6] In those cases, which are filed without the clearance of the high-powered committee, reference is to be made to the committee within a period of one month from the date of filing of the case.[7] Such additions providing leeway to litigation in effect defeated the whole purpose of the formation of such a body. The dilution of such intentional restrictions in the form of limitations, some times for good and cogent reasons, ended up counterproductive.
In a subsequent case, the scope of such a dispute resolution mechanism was increased to include State Government entities as well. To make good the directions, the court directed that a committee be formed to sort out the differences between Central Government and State Government entities.[8]
In spite of such strenuous efforts to ensure that the resources of the state are not frittered away in unnecessary litigation, further complications arose. The reasons ranged from inability of the high-powered committee to deal with such complex questions of law to unreasonable delay caused in giving the approval. Conscious of these complications, the Supreme Court while considering it in the case of Electronics Corp. of India Vs. Union of India[9] made observations recalling the orders which resulted in the formation of the Committee on Disputes that:

“The mechanism was set up with a laudatory object. However, the mechanism has led to delay in filing of civil appeals causing loss of revenue. For example, in many cases of exemptions, the Industry Department gives exemption, while the same is denied by the Revenue Department. Similarly, with the enactment of regulatory laws in several cases there could be overlapping of jurisdictions between, let us say, SEBI and insurance regulators. Civil appeals lie to this Court. Stakes in such cases are huge. One cannot possibly expect timely clearance by CoD[10]. In such cases, grant of clearance to one and not to the other may result in generation of more and more litigation. The mechanism has outlived its utility. In the changed scenario indicated above, we are of the view that time has come under the above circumstances to recall the directions of this Court in its various Orders reported as

1. 1995 Supp. (4) SCC 541 dated 11.10.1991,
2. (2004) 6 SCC 437 dated 7.1.1994 and
3. (2007) 7 SCC 39 dated 20.7.2007.”[11]

Though the Electronics Corporation case put to rest the unending confusion that was created, it only resolved a part of the problem that prevailed. The decision was limited only to recall order passed in those cases over the formation and functioning of Committee of Disputes (CoD). This only resolved a part of the issue that faced. The dominant problems that stymied the smooth functioning of PMA were not addressed and were left for consideration in the future. The contraption of PMA, with its unresolved legal complications, still prevailed with its entailing confusion.
Amid all these confusions the very constitutionality/validity of such clauses were challenged before the court in various writ and suit proceedings before the High Courts. In most of these cases the challenges were dismissed in view of the fact that none of the decisions of the Supreme Court doubted the validity PMA itself. However, there arose inherent conflict regarding the maintainability of such legal remedies before the court either be it suit or a writ petition. The flurry of such decisions did not help the confusion that was resulted.

Northern Coalfields: An Unrealised Chance

The issue came up for consideration by the Supreme Court in the case of M/s. Northern Coalfields Ltd. Versus Heavy Engineering Corporation Ltd. & Anr. The judgement delivered in this case effectively lays down the law and seemingly resolves all the conflicts that arise in the judgements delivered by the High Courts. The judgement takes into consideration genesis of the PMA and COD mechanism under challenge in the present case tracing its history from its inception until the Electronics Corporation case wherein the COD mechanism was abolished. Here too the requirement of clearance from COD, including pre-Electronics Corporation cases, stands answered in negative.
Though the judgement of the Supreme Court attempted to resolve it the overall outcome falls far short of providing an optimal solution due to the myopic view of its reasoning. The bone of contention over the validity of PMA and the remedies available to an aggrieved party under PMA is not made clear in the judgement. The judgement, while upholding the validity of the PMA itself yet leaves it open for a challenge before a court of law, that too without specifying under what remedy that is made available by law to the aggrieved party. In its own words:

“Remedies which are available to the Government on the administrative side cannot substitute remedies that are available to a losing party according to the law of the land. The appellant has lost before the arbitrators in terms of the Permanent Machinery of Arbitration and is stoutly disputing its liability on several grounds. The dispute regarding liability of the appellant under the contract, therefore, continues to loom large so long as it is not resolved finally and effectually in accordance with law. No such effective adjudication recognized by law has so far taken place. That being so, the right of the appellant to demand such an adjudication cannot be denied simply because it happens to be a Government owned company for even when the appellant is a government company, it has its legal character as an entity separate from the Government. Just because it had resorted to the permanent procedure or taken part in the proceedings there can be no estoppel against its seeking redress in accordance with law. That is precisely what it did when it filed a suit for declaration that the award was bad for a variety of reasons and also that the contract stood annulled on account of the breach committed by the respondents.”

Here the whole mechanism of PMA is merely dismissed as an administrative action, which cannot become a substitute for courtroom adjudication, completely defeating the very purpose of the constitution of PMA as an alternative for time-consuming legal proceedings, rendering the previous judgements of the court redundant. The Supreme Court has missed a golden opportunity to set right the cart that went astray.


[1] 1992 Supp (2) SCC 432
[2] A similar judgement was passed by the Supreme Court in another case (Oil and Natural Gas Commission and Anr. Vs. Collector of Central Excise 1995 Supp. (4) SCC 541) delivered immediately after ONGC-I, with same directions. This case is referred to as ONGC-II in subsequent judgements in the subject matter.
[3] Supra at Para 2
[4] Supra at Para 3
[5] (2004) 6 SCC 437
[6] Supra at Para 6
[7] Supra at Para 8
[8] Oil and Natural Gas Corporation Ltd. Vs. City and Indust. Dev. Corpn., Maharashtra and Ors. (2007) 7 SCC 39 (ONGC-IV)
[9] (2011) 3 SCC 404.
[10] Committee on Disputes (The High-Powered Committee subsequently came to be termed under this name)
[11] Supra at Para 17

Arbitrability of Disputes and Alternative Standard of Tests

While the importance of Arbitration as an important avenue for resolution of a dispute has consistently been emphasised by the Indian judiciary through various judicial pronouncements there still exists considerable lacunae in the interpretation offered towards the advancement of this thought process. In more than a few instances, the intervention of judiciary has proved to be an unwanted thorn in ensuring the much-needed consistency within the discourse. The necessity for coherent and logical pronouncements, commensurate to the changing needs of the time, cannot be emphasised anymore. Yet, there exist several glaring voids within this discourse that require some attention. One such important issue is the ‘arbitrability’ of disputes, which goes to the very root of the arbitral process. While it is axiomatic to state that not all disputes can be arbitrated, the question over species of subjects that falls under the genus of non-arbitrability has given rise to unforeseen quandaries restricting the scope of arbitration at times.
Typically, the question over arbitration can arise at three stages in arbitration[1]

1. On an application to stay arbitration.
2. When the opposing party questions the authority of the tribunal to entertain the subject matter of arbitration.
3. On an application challenging the award.

In the Indian context, the above-mentioned situation arises under Section 9, Section 16 and Section 34 respectively.
The piquant question though came up for consideration several times before the judiciary, it was in the landmark decision of Booz Allen and Hamilton Vs. SBI Home Finance Limited and others (2011) 5 SCC 532 that an attempt was made to rationalise the issue while analysing the true scope of the problem involved. The primary question that was considered by the bench in the case was to adjudicate the true scope and import of the term arbitrability of a subject matter. In other words, what are the subject matters that cannot be adjudicated through a private arbitration due to its inherent nature and what is the framework upon which the arbitrability of a subject matter can be tested?
Commenting on the ability of an arbitral tribunal to adjudicate certain disputes it states that ‘every civil or commercial dispute, either contractual or non-contractual and which can be decided by a court, is in principle capable of being adjudicated and resolved by arbitration unless it is excluded either expressly or by necessary implication.’ The express or implied exclusion stated in the decision is based on the limitation imposed due to overarching public policy considerations. Furthermore, the decision enunciates several examples of non-arbitrable disputes, which are

1. disputes relating to rights and liabilities which give rise to or arise out of criminal offences;
2. matrimonial disputes relating to divorce, judicial separation, restitution of conjugal rights, child custody;
3. guardianship matters;
4. insolvency and winding up matters;
5. testamentary matters (grant of probate, letters of administration and succession certificate); and
6. eviction or tenancy matters governed by special statutes where the tenant enjoys statutory protection against eviction and only the specified courts are conferred jurisdiction to grant eviction or decide the disputes.

The framework upon which the list is enunciated is the nature of rights that is sought to be enforced. The primary test prescribed is whether the subject matter of reference relates to action in rem, in the case of which it would fall outside the scope of powers provided to an arbitral tribunal under the Arbitration Act. The test restricts those rights, adjudication of which shall affect the rights of third parties who are not privy to the arbitration agreement. The underlying principle for such a restriction is that such rights in rem come within the protection offered by a state as its duty towards its citizenry. The sovereign duty to enforce such rights cannot be delegated to a private adjudicatory forum, the delegation of which would go against the public policy. Hence, applying this test, only in personam rights can be referred to arbitration.
While this may sound straightforward enough as a solution to determine the arbitrability of a subject matter, the subjective nature of the test makes it a tool which can be applied rather too liberally leaving much scope for restricting the subject matters which can be arbitrated. This can prove counter-productive for the whole arbitration eco-system. An example can be had when one looks at the widely fluctuating decisions rendered by the Supreme Court over the arbitrability of issues involving fraud in an arbitration agreement, especially in international commercial arbitration. In the case of World Sport Group (Mauritius) Ltd. Vs. MSM Satellite (Singapore) Pte. Ltd. AIR 2014 SC 968 for the first time it was ruled that disputes involving fraud are not inconsistent with jurisdiction conferred on an arbitral tribunal in an international commercial arbitration. For the domestic arbitration involving claims of fraud similar inconsistency still prevails, however, with the passage of time a high standard has been developed that must be satisfied to refuse a matter to arbitration. For an arbitration agreement to be held as inapplicable the court must find that there are very serious allegations of fraud which make a virtual case of a criminal offence or where allegations of fraud are so complicated that it becomes absolutely essential that such complex issues can be decided only by a civil court.[2] This absolute standard has come to be recognised consistently in various judicial pronouncements.
As mentioned earlier, the ambiguity of this test is primarily due to its subjective nature, which provides much leeway to take away many subjects from the scope of arbitration. Going merely by this test, if, for an example, when a dispute involves enforcement of intellectual property rights at the first blush it can easily be rejected as a right in rem and hence incapable of being arbitrated. However, when one takes into consideration the nature of reliefs sought for, in most cases, it can easily be distinguished from the enforcement in rem IP rights. The observation made by Raveendran J. in the Booz Allen (Supra) case acquires significance here.
“Generally and traditionally all disputes relating to rights in personam are considered to be amenable to arbitration; and all disputes relating to rights in rem are required to be adjudicated by courts and public tribunals, being unsuited for private arbitration. This is not however a rigid or inflexible rule. Disputes relating to subordinate rights in personam arising from rights in rem have always been considered to be arbitrable.”
The problem arises when the distinguishing features of such subordinate rights which are sought to be enforced is not taken note of and a blanket assessment of test prescribed in Booz Allen is preferred, restricting the scope of arbitration clauses. It would be too broad a proposition to state that any dispute involving rights in rem due to its inherent nature are incapable of arbitration. Whenever such disputes arise it will be prudent to give a widest possible interpretation to the arbitration clause to see whether the dispute falls within its scope or not, to further the cause. A recent decision of Eros International Media Limited Vs. Telemax Links India Pvt. Ltd. and Ors. (Suit No. 331 of 2013) by Bombay High Court articulates this in the best possible manner. Drawing analogy striking between the IP rights like Trademark et al and other property rights the judgement concludes that albeit all those rights are in a sense a protection conferred to an individuals’ right over a property against the whole world, the enforcement of such rights are still done against individuals, making it an in personam right subordinate to the in rem rights conferred upon them.
The contrary parochial interpretation with a blanket assessment has been offered by a recent pronouncement of Supreme Court in the case of Shri Vimal Kishor Shah & Ors. Vs. Mr. Jayesh Dinesh Shah & Ors. (Civil Appeal No.8164 of 2016). In this case, the issue that arose for consideration was the arbitrability of an issue arising out of trust deed. While the decision follows the right path in its reasoning to exclude disputes that are exclusively to be dealt with under the mechanism provided under the Trusts Act, an opportunity to distinguish between those set of rights that can be arbitrated for being subordinate to the rights and responsibilities conferred under the Act.
In order to resolve such inconsistencies, as noted above, it is imperative that the standard of test prescribed in Booz Allen (Supra) should be modified to test the dispute involved upon the nature of reliefs sought rather than mechanically testing the subject as a whole in its widest ambit. Such moves end up restricting the scope of arbitration act as a whole. The decision of Bombay High Court discussed above is a welcome move towards ensuring the achievement of real intent behind the Arbitration and Conciliation Act.


[1] Russel on Arbitration, 23rd Edition at Page 15.
[2] A. Ayyasamy Vs. A. Paramasivam and Ors. Civil Appeal Nos. 8245-8246 of 2016

Dispute Review Boards: The Gun Without Bullets

In a post that I wrote early this year, I discussed the new, for India, concept of Dispute Review Boards. There I merely gave an overview of what the concept is all about, without resorting to any sort deep analysis, and the role of lawyers in such kind of proceedings. Though I wrote that post without actually attending in person any DRB proceedings, my opinions were based on the way in which everyone who is involved in it treated it, as an adjudicating process. My fears, in fact proved to be true beyond reproach as I got to attend one of the most hostile conciliation in my very limited experience. 

The problems in this particular DRB proceeding that I happened to involve myself are numerous. I can with a degree of certainty state that the same is the case with most other DRB proceedings in India. The fundamental problem is the mind-set that every person involved in the proceedings has towards the proceedings itself. As stated in my earlier post, lawyers contribute the most to this problem. Everyone involved in the proceedings thinks this merely as another box ticking exercise that has to be done before reaching the process of litigation, how much ever long drawn and adversarial it could be. This is no less because of the fact that none of the people who were involved in the process were either trained in the process or at least gone through the pain of reading the literature on this process. They essentially treated this like arbitration with a change in the nomenclature of certain things here, like an award in arbitration into recommendation. One of the important contributing reasons for this waywardness is the poor drafting of contractual clauses concerning the DRB. The contract that I was involved in, merely had two lines to the effect that the disputes should be first referred to a DRB and the process shall be governed by the ICC (International Chamber of Commerce) Dispute Board Rules. 

When to form?

The primary aim that is sought to be achieved through this conciliatory process is to solve any dispute in a commercial transaction as and when it arises and as amicably as possible. This has to be seen in the light of the fact that the whole concept Dispute Boards evolved as a solution for the problem of delay that happens frequently in the construction industry. To the contrary, in my case, the DRB process was initiated only after the whole project is over defeating the whole purport. In case the process is initiated post the completion of project, apart from the failure to resolve the disputes on time, it also results in a futile reconstruction of whole process again, wherein inevitably some muddling happens resulting in time and cost to the parties. A real time settlement more than settling the disputes helps preserving the relationship between the parties. An important reason for this mistake is because it has not been expressly mentioned in the contract, that the DRB has to be constituted at the beginning of the project, in order to continuously monitor the project and settle the disputes in real time.

Is It a Necessary Condition Precedent?

An interesting implication can be drawn if we suppose that a party bypasses the process completely and goes to litigate its claims. Though I was not able to find any Indian case law on this subject (Albeit it is a limited and indolent search of a lazy bone) I was able to find several American case laws, for the process has matured to a greater extent there. Two possibilities arise in such situations. One is where the claimant simply bypasses it and initiates litigation and another is where the other party simply insists upon the DRB proceedings to buy more time from litigation. The court (in BAE Automated Systems V. Morse Diesel International), as expected, ruled that, in the absence any legally justifiable reasons the process cannot be bypasses. The reasons can be waiver by one of the parties, fraud, estoppel etc. 

Appointment and Removal of Members

As in all conciliatory proceedings the integrity and impartiality of the person who is appointed as a member of the board is of utmost importance. It will be rhetoric to write about the code of conduct that a member of DRB must follow. In the proceedings that I happened to witness one of the members of DRB was visibly advocating the cause of the party who appointed him when the other party’s counsel made his oral presentation of his case. The reason could either be because he did not realise that it is a conciliatory proceedings and that he has to be impartial or because he is just a plain old jackass. The implications of such instances are very important, for any loss of confidence that a party has over the member will undermine the sanctity of overall process.

Applicability of Part III

I was curious after the incident, over whether the provisions of Arbitration and Conciliation Act, 1996, pertaining conciliation will be applicable in this case or not. It is given that it is a conciliation process; however it is still a creature of a contract. One possible reason can be that we cannot thrust in something which is not there already in the contract, with this essentially being a creation of the contract we cannot set it aside. However, Section 61 of the Act clears the air by defining its application and scope.

61. Application and scope - (1) Save as otherwise provided by any law for the time being in force and unless the parties have otherwise agreed, this Part shall apply to conciliation of disputes arising out of legal relationship, whether contractual or not and to all proceedings relating thereto. (2) This Part shall not apply where by virtue of any law for the time being in force certain disputes may not be submitted to conciliation.

I found an Indian case law that indirectly deals with the applicability of Part III of the act to the proceedings before DRB (Alcove Industries Ltd. Vs. Oriental Structural Engineers Ltd. [1]). The main issue in this case is the responsibility of an arbitrator to disclose in writing at the outset, such facts, which may give rise to justifiable doubts to his independence and impartiality. The arbitrator in this case, before being appointed as an arbitrator by the defendant company, worked as a member of Dispute Board, in respect of some works executed by respondent company. This fact was not disclosed when the appointment to the present arbitration proceedings were made. The court in order to explicate the bar of a conciliator (member of DRB in this case) referred to the provisions contained in Part III of the act. The judgement goes on to hold that section 80 of the act prohibits a conciliator from acting as an arbitrator or as a representative or counsel of a party in any arbitral or judicial proceeding in respect of a dispute that is the subject matter of the conciliation proceedings. Though these aspects are irrelevant for the present post, the important aspect that I can infer from this decision is the applicability of Part III of the act to the DRB proceedings. The decision, albeit indirectly, makes it clear that DRB proceedings are indeed governed by the provisions of the act.

Conclusion
Whatever is the form that the efforts for an amicable dispute resolution might take, it all ends up depending upon the intention and ability of the lawyers to best utilize the opportunity, more than the parties themselves, to settle the disputes in the most prudent way possible. The very intent of the process is defeated in most cases with things as basic as the tenor language that is used in the written communications. Without a fundamental understanding of such intricacies it is impossible for such efforts to succeed at any level. Moreover, in most cases with the resolution process being administered ad hoc without any institutional assistance, just like the case of arbitration, in India, the process loses its focus and the required streamlined approach without required expert assistance. The solution cannot be a something that can be done at the stroke of a pen. It requires some ideological acceptance of the process as a genuine alternative to settle the disputes. 

---

[1] 2008 (1) ARBLR 393 (Delhi)

Dispute Boards: An Overview

In the legal universe dispute settlement is a never ending process that seeks constant attempts to innovate and try new mechanisms. This attains enormous significance in the case of India, given its infamous reputation for its long drawn judicial decision making process. Now that the economy of the country is making giant strides, the consequent increase in commerce needs for such innovations to be made in the alternative dispute resolution mechanisms to provide the entrepreneurs with a safe and effective decision making process to fall back upon. However, India has always been late in adopting such innovations. One example for that can be the Arbitration as an effective alternative dispute settlement process. It was not until the Arbitration and Conciliation Act, 1996 was passed that it was really seen as an effective solution to resolve the disputes. These days it has become an invariable standard for everyone to resort to arbitration to solve their disputes. Ignoring the harsh reality that in most of the cases the arbitral awards are challenged again the court giving raise to numerous litigations, rendering the whole intention of resorting to the arbitration in the first place ineffective, we still have to recognize the fact that it still provides a person a safe and effective dispute settlement process over which is both flexible and on time.

Arbitration as a dispute settlement process, however, comes into play only after a dispute arose and both the parties recognize that it has to be decided by way of a formal adjudication. Thus it still is a process that possesses the possibility to delay the projects, if it is an ongoing one. Moreover, the whole process is adversarial that it will not result in an amicable ‘settlement’. Though other dispute resolution mechanisms like mediation, conciliation do exist they still lack the actual engagement between the parties in real time to be effective to curb a problem as and when it arises. This role of providing a platform for the parties to realistically engage can be provided by the still budding concept of ‘Dispute Board’. Though the concept itself is not new, it is yet to attain the required traction in India. Major commercial contracts have just begun to include Dispute Board Clauses with reference to the International Chamber of Commerce (ICC) Rules.

Dispute Boards- An Overview

The International Chamber of Commerce defines a Dispute Board as standing bodies, comprising one or three members, normally set up at the outset of a contract to help parties resolve any disagreements and disputes that may subsequently arise during its performance. Under the ICC Dispute Board Rules three different types of Dispute Boards has been prescribed, giving the parties a choice to choose amongst them according to their own preference and convenience. They are

i)                    Dispute Review Boards (DRB), which issues recommendations

ii)                  Dispute Adjudication Boards, which issue decisions and

iii)        Combined Dispute Boards (CDB), which normally issue recommendations but may  issue decisions if a party so requests and no other party objects.

The classification is completely based on the binding nature of the decisions or recommendations that the parties wishes the Dispute Board to issue, where a decision must be complied with by the parties without any delay and a recommendation must be complied with only if no party expresses dissatisfaction within a prescribed time limit. Also it is free for the parties to make even the non-binding observations made by the board admissible as evidence in the court. Thus it is completely dependent upon the choice made by the parties over the nature and mandate of the Dispute Board.

An Ideological Hijack

The major advantage of this model of dispute resolution technique is that this is a ‘hands on’ approach that involves both the parties in a fair and transparent manner without any third party intervention, read lawyers. In India at least, I feel that, the reason for failure of arbitration and other dispute resolution methods is because they have been hijacked by lawyers. Yes, the involvement lawyers to a great extent as defeated the purpose of such alternative dispute resolution mechanisms. The very moment a lawyer gets involved in the process he brings with him all those unnecessary legalese that the process is designed to avoid. Of course, one can never refuse the necessity of involving a lawyer in certain unavoidable situations within these mechanisms, but the level of involvement has become too much for any meaningful outcome from these mechanisms.

The Dispute Boards on the contrary stands out with the difference that it seeks to involve the parties directly and its formation is, as mentioned earlier, is right at the outset of the project itself. The parties gets to appoint a member of their own in the board and the board will meet periodically to review the project as a whole, looking for any emerging issues between the parties to nip them in the bud. Thus this is proactive in its way of functioning. As far as involvement of the lawyers are concerned, the International Chamber of Commerce (ICC) Dispute Board Rules, which provides with a standard and uniform set of rules for the procedures before the dispute board, Article 19 (7) is the provision that is used as the entry ticket. It reads as follows

“The parties shall appear in person or through duly authorized representatives who are charge of the performance of the Contract. In addition, they may be assisted by advisors.”

The problem arises when the lawyers who involve themselves brings with them the uncalled for courtly atmosphere. Even with my very limited experience in dealing with this I was able to see this plainly. The fact that the parties feel a psychological discomfort when they do not have a lawyer around, even for a process as friendly as this only adds to the woes. Unless this still budding mechanism is rescued from the hands of lawyers like me by limiting their role only to the extent as an adviser the novel concept will definitely go wayward like others of our history.

Pre-Referral Interest in an Arbitral Award- An Analysis

The passage of latest arbitration act has brought in a sea of changes in the field of alternative dispute resolution in India, bringing it to the international arena. However, with the passage of time, undeniably, it has also metamorphosed into different being, either for good or bad, through the judicial reasoning and practice, one such example is of the apex court’s verdict in the ONGC Vs Sawpipes case. Likewise, there are still a lot of issues that are yet to be settled in this domain. One such example is the omission on the part of the arbitrator to award interest over the award.

The power of an arbitrator to award interest over to the successful claimant is contained in the Section 31 (7) of the Arbitration and Conciliation Act. Of course, this power, as always, will be subject to those that are stated in the arbitration agreement itself. This provision, apart from suggesting that interest be provided where ever possible, also prescribes that in case the arbitration agreement is silent on the rate of interest that is to be awarded it will be given at a rate of 18% per annum for the whole period or any part of the period between the date on which the cause of action arose and the date on which the award is made. Here we have to notice the two periods over which interest is being prescribed to be given. One is for the period from when the cause of action arose till the award is given (pre award period) and the other is for the period from when the award is made till its realization (post award). Furthermore, two more types of interest can be awarded one is for the period during which the suit is pending (pendente lite) and from the date on which the decree has been made till its realization. Since these two period are of no relevance for the subject matter I refrain from going any further with this. At any rate the award of interest is determined by the provisions of the arbitration agreement itself. The parties are at an option either to have a pre-determined rate of interest over a period or not to have any interest at all. However, this will not be applicable to the period post the award. The Supreme Court has categorically stated that, “any provision in the contract barring interest will operate only till the date of award and not thereafter”[1], thus curtailing the liberty of the parties to contract out the interest for the post award period. A unique issue crops up in the case of the interest that is leviable for the pre-award period. Though the power of the arbitrary tribunal to award interest over the pre-award period is undisputed, albeit within the constraints dictated by the arbitration agreement, issues arises when the arbitral tribunal refuses to grant interest over the pre-award period based on the sole fact that it has been prohibited in the contract, in spite of the fact that the defaulting party has unreasonably withheld the payment of principal amount for a genuinely long period of time. It is to be noted that the underlying principle behind the awarding of interest, in general, is that the person who keeps the money deprives the other of its profit potentiality and therefore deserves compensation.[2] Thus, a party aggrieved, because of a mistake committed by the other party, will be positively entitled to the interest money for the pre-referral period, if not for the prohibitive clause in the arbitration agreement. If such being the case the aggrieved party’s only option is to move to the court to set aside the award by way of section 34 of the arbitration act. This provision is marred by controversies right from the day on which the act came into force. The grounds upon which an aggrieved party can approach the court, by statue, is very limited. In the present case the situation worsens, since the arbitration agreement itself provides that the interest shall not be awarded for the pre-award period, leaving him in lurch. Under section 34 of the act, the grounds upon which a person can ask the court to set aside the award are very limited, putatively to limit the scope of judicial intervention over the arbitration proceedings itself. The grounds that are stated under section 34 are as follows

•  Incapacity of the party
•  Arbitration agreement not being valid
•  Proper notice not being served to the party
•  Award crosses the scope offered by the terms of reference made to the arbitrators
•  Composition of the tribunal not according to the agreement
•  Subject matter is inarbitrable
•  Award is in conflict with the public policy of India

The above stated grounds have been subject to extensive analysis. However, the only resort amongst the above stated grounds for an aggrieved party in the present case is to challenge the award by stating that it is in conflict with the public policy of India. This too is a precarious ground, for it is subjective term that will be decided by the court. The icing on the cake is that there are umpteen numbers of judgments of the Supreme Court, which categorically states that court shall refrain from interfering with the rate of interest that is awarded by the arbitral tribunal.[3]  The ground of public policy as stated earlier has been subject to much controversy, especially after the ONGC V. Sawpipes cases, where the ambit of judicial interference under section 34 over the arbitral award was widened. In spite of such widening of the ambit a petition to set aside an award in most cases are liable to be rejected, particularly when there is a provision in the arbitration agreement preventing the same. Thus the effective space for a party to maneuver is very limited. The claims can only be based upon the equity, which is not strong enough a contention to set aside an award under section 34 of the act. One option that can be effective in such situation is to seek the court to exercise its powers under Art.142 of the Constitution of India, which invariably can only be exercised as a last resort and that too in the Supreme Court. Thus an aggrieved party is left in a lurch as far as his claims are concerned. 

In the present day highly competitive business world such instances occurs frequently. The root cause for such issues is the clause in the contract that prevents the award of interest over a particular period. Many employers, being in an advantageous position, force this clause into the contract that they enter with the contractors. The only effective remedy can to add an exception in such clauses stating that interest can be awarded wherever the principal amount has been withheld by one party for an unreasonably long period of time, with the time period stated expressly in the contract, considering the unique facts and circumstances upon which they enter into the said contract.

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[1] Sayeed Ahmed & Co. v. State of Uttar Pradesh, (2009) 3 Arb LR 29

[2] Municipal Committee, Patiala v. Krishan Kumar Bansal, (2002) 3 RAJ 15

[3] See Sayeed Ahmed & Co. v. State of Uttar Pradesh, (2009) 3 Arb LR 29, 37