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

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