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The Centrotrade Saga- A Paradigm Shift In Indian Arbitration

Majority of the legal jurisdictions, including India restricts judicial intervention when it comes to reviewing arbitral awards. The United Nations Commission on International Trade Law (UNCITRAL) Model Law on International Commercial Arbitration (adopted in 1985) provides that an application for setting aside an award in the seat of arbitration is the only recourse available against the impugned award with the grounds for setting aside being restricted to procedural anomalies.


It is, however, pertinent to note that appellate review of arbitration awards have been upheld since time immemorial. There is enough precedence available reiterating the concept of appellate review of the awards which implies reviewing arbitral award by another appellate tribunal. UNCITRAL model of law, on whose line Indian Arbitration Act was brought into existence, while in its infancy, deliberated upon the issue of recognition of appellate tribunal awards. The Report of the Working Group on International Contract Practices on the Work of its Third Session (of which India was a member) observed that it is widely supported that the parties should be given free hands to agree that the award may be appealed before another tribunal (second instance).


On these lines, Indian Arbitration Act does not specifically prohibit ‘two-tier’ arbitration clauses. In a step ahead, the Supreme Court recently, in June 2020, cleared the air of ambiguity around ‘two-tier’ arbitration clause and upheld the validity of the same in Centrotrade Minerals & Metals, Inc. v. Hindustan Copper Limited Ltd.


THE CENTROTRADE SAGA

The case dates back to the year 2000 when in a contract for sale of 15,500 DMT of copper concentrate, the parties mutually agreed to resolve any dispute by arbitration in India initially before the Indian Council of Arbitration (“ICA”) following the Rules of Arbitration of ICA and in the event of subsequent disagreement, either of the party may approach, under the rules of the International Chamber of Commerce (“ICC”), for a second arbitration in London.


Centrotrade Minerals invoked the arbitration clause when the dispute arose, wherein the arbitrator passed a Nil award (an award of no damages). Aggrieved by the order, Centrotrade invoked the ‘second tier’ of arbitration in London. The award so passed by the arbitrator in London was in favour of Centrotrade. When the award was sought to be enforced by Centrotrade in India, Hindustan Copper Limited (“HCL”) filed an application under section 48 of the Indian Arbitration Act in the court of District Judge, Calcutta, challenging the validity of the award passed by ICC on the grounds that:

i) Indian Law does not permit ‘two-tier’ arbitration,

ii) the first award being an Indian Award, the second instance award cannot be treated as foreign award for the purpose of enforcement and

iii) HCL had failed to present its case in the proceedings in London.


After dismissal by the District Judge, aggrieved, HCL approached the Calcutta High Court. Both the benches put forth different awards, favouring and disfavouring the enforcement. Perturbed, both the parties, hence, knocked the doors of Supreme Court appealing the issue. Supreme Court, finally, after years of litigation, upheld the validity of the ‘two-tier’ agreement. The Court stated that following the UNCITRAL Working Report, the Parliament should not exclude the two tier arbitration practice and after noting the fact that the ‘two-tier’ arbitration system existed prior to the Arbitration Act, more so, should choose not to specifically prohibit the same. It is not unknown that the Arbitration Act does not contain any provision that might be a bar to the ‘two-tier’ arbitration system. On the issue of violation of natural justice, the Court reiterated the grounds of violation of principles of natural justice for challenge to the foreign award as held in Vijay Karia & Others v. Prysmian Cavi E Sistemi SRL & Others. Taking a view that Section 48 incorporated a ‘pro-enforcement’ bias, the court revisited the stand of narrow interpretation of the word ‘otherwise’ under section 48(1)(b).


Further, the clause was feared to shadow section 35 of the Indian Arbitration Act, 1996 which states that the arbitration award shall be final and binding on both the parties and person claiming under them. Clearing the position, the Court held that the “final and binding” clause in section 35 of the 1996 Act does not mean final for all intents and purposes thereby over ruling its own earlier taken position that once an arbitral tribunal passes an award, no action can be started on the original claim that had been the subject-matter of the reference.


PARTY AUTONOMY AND PUBLIC POLICY

The validity of ‘two-tier’ arbitration was feared to be a threat to the existing public policy in India. However, one of the fundamental principals governing arbitration is that of party autonomy. Considered to be the “backbone or a cornerstone of arbitration proceeding”, it stipulates that the parties to an agreement are free to arrange their terms in the arbitration agreement on three different laws viz., the proper law of the contract, proper law of arbitration agreement and the proper law of the conduct of arbitration.


The Court in Bharat Aluminium Company v. Kaiser Aluminium Technical Services Inc. observed that the party autonomy is the “brooding and guiding spirit” in international commercial arbitration, where the parties to the contract are free to agree on application of three different laws governing the entire contract.


Thus, the elementary position is that the parties have the freedom to stipulate not only the procedural law to be followed but also the substantive law. In the light of the above autonomy, the parties are free to agree on a ‘two-tier’ system of arbitration framing the contract in the lines of established laws in the country.


IMPLICATIONS OF THE NEW SHIFT

Now, per say, the Indian Arbitration Act does not provide for ‘two-tier’ arbitration. It has, however, been zealously recognised in International Arbitration. It is now evident that the second instance arbitration specifies that whenever any dispute arises between parties to the contract belonging to different countries, the same shall be referred to arbitration in a particular country. The award so passed by the first-named arbitrator shall be referred to as an ‘arbitration result’. In the event of there being an appeal from the either party for the award passed, the same shall be referred to the second-named arbitrator residing in another country. In a nutshell, second-instance arbitration or in a ‘two-tier’ arbitration, appeal is preferred against one arbitral award to another arbitration proceeding. It is not mandatory that the venue for the arbitration should be either of one of the countries from which the parties belong.


Needless to say, this breakthrough shall give more confidence to the foreign players who are intending to do business in India. However, with this pro enforcement arbitration, there do arise few issues in the ‘two-tier’ arbitration regime.


For instance, determination of venue of arbitration and seat of arbitration are two dubious aspects in ‘two-tier’ arbitration. Curial law is the Lex Arbitri, that is, the procedural law overseeing the arbitration. It is a settled position of law that a lawful seat of arbitration is different from the venue, as the venue is the geologically helpful spot for holding hearings. In international commercial arbitration, venue of arbitration never gives simultaneous concurrent supervisory jurisdiction to the courts where the arbitration hearings are held. Centrotrade case couched down the issue because arbitrators in both-first instance arbitration and second-instance arbitration were institutional arbitrators viz, Indian Council of Arbitration and International Chamber of Commerce. But such Frankenstein clauses shall not be present everytime. The Courts have failed to highlight the issue.


Further, there is no clarity on the recourse to be undertaken when one party seeks injunction from the court that requires the proceedings to be initiated within a given time which hence implies that party cannot undertake multiple proceedings.


CONCLUSION

In many of the pro-enforcement arbitration judgment, Centrotrade has its definitive judgment from the Indian Supreme Court setting a precedent for the enforcement of ‘two-tier’ arbitration in Indian regime. Though the new wave is welcomed, it has not gone unnoticed that it took around 20 years and three ISC excursions to enforce the agreement. It is an example of how tedious and time consuming can the proceedings turn making the award creditor wait before him reaping the benefits of the awards.


Therefore, deciding on whether to include such a clause may need some coherent understanding because without such a clause, there are chances of better speed and finality in the proceedings, though the parties may have to accept the award in finality if there is no recourse of further appeal. Hence, for it to be at par with global standards and have a more definite construct, the Indian Arbitration should have better defined rules keeping up with the recent changes in the dispute resolution landscape.


ABOUT THE AUTHOR

This blog has been authored by Shambhavi Srivastava, who is a 5th Year B.A., LL.B. (Hons.) student at National University of Study and Research in Law, Ranchi.


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