Sunday, January 22, 2017

‘Second Instance’ Arbitration: Centrotrade Minerals

In an important decision, the Supreme Court has recently held that the Indian Arbitration and Conciliation Act 1996 (‘the 1996 Act’) does not prohibit the parties from entering into an arbitration agreement that provides for an appeal from the first award to a second arbitral tribunal constituted under that agreement. The decision, however, also gives rise to further questions—not all of which are answered in the judgment—about the nature of arbitral awards under Indian law and the basis on which they are enforced.

The facts of Centrotrade Minerals were simple, if perhaps also relatively rare in practice. In summary, the effect of clause 14 of the contract was that: (a) any disputes arising out of the contract would be ‘settled by arbitration in India’ in accordance with the Rules of Arbitration of the Indian Council of Arbitration but that (b) any party ‘in disagreement with the arbitration result in India’ would be entitled to ‘appeal to a second arbitration in London …’ in accordance with the ICC Rules. Significantly, clause 14 provided that the ‘result of this second arbitration will be binding on both the parties’ but did not contain similar language in relation to the first arbitration.

A dispute which arose between Centrotrade and Hindustan Copper was, in accordance with clause 14, initially submitted to arbitration in India under the ICA Rules. Centrotrade then sought to ‘appeal’ against that award by initiating arbitration in London under the second part of clause 14. It obtained an award in London and sought to enforce this in India under section 48 of the 1996 Act. The question in the Supreme Court was whether the 1996 Act expressly or impliedly prohibits the parties from entering into arbitration agreements of this kind.

Centrotrade’s first argument was that clause 14 did not, in fact, provide for two arbitrations because any decision made by the first arbitrator could not be described as an ‘award’ for the purposes of the 1996 Act. The basis of this argument was that clause 14(b) provided that either party in disagreement with ‘the result’ (and not award) of the first arbitration could appeal by commencing arbitration in London. Lokur J, who gave the Court’s judgment, rejected this argument because (among other things) it led to the conclusion that the first result/award could not be enforced under the 1996 Act even if neither party wished to ‘appeal’ by commencing a London arbitration. That is correct and Lokur J might have added that the use of the word ‘result’ is rather less significant than first appears because the second arbitration (i.e., the London arbitration), which it was common ground led to an ‘award’, is also described in these terms: ‘the result of this second arbitration will be binding on both parties.’

On the basis that the first ‘result’ was in fact an arbitral award, a more fundamental question of law arose: is anything in the 1996 Act, or in Indian public policy, which prohibits a second-instance arbitration by way of an appeal? Lokur J noted that there were suggestions in the legislative history of the 1996 Act that a second-instance arbitration should not be excluded by the UNCITRAL Model Law (see para 17) and that Parliament should be taken to have known of this (and Indian High Court cases recognising the practice) when it enacted the 1996 Act. Against that background, the fact that Parliament did not prohibit the practice rather suggested, said Lokur J, that it was not inconsistent with the Act. But he did not decide the case on this basis and went on to consider whether the existence of a remedy against an arbitral award (section 34) in the 1996 Act impliedly prohibits a second-instance arbitration.

Lokur J gave two reasons for rejecting that argument. First, he pointed out that section 34 of the 1996 Act uses the words ‘recourse to a Court against an arbitral award may be made only by an application for setting aside such award…’, that is, that the word ‘only’ qualifies the form of recourse specified in section 34 (to a court) and not the right to recourse itself. Put differently, section 34 is not exhaustive.

Secondly, it was suggested that the fact that an arbitral award is ‘final and binding on the parties’ (s 35 of the Act) shows that the Act did not intend to permit any recourse against an award save under s 34. Lokur J said at para 35 that this was incorrect on the basis that:

…the ‘final and binding’ clause in section 35 of the A&C Act does not mean final for all intents and purposes. The finality is subject to any recourse that an aggrieved party might have under a statute or agreement providing for arbitration in the second instance. The award is binding in a limited context.

This may well be correct but it leaves at least two questions unanswered. The first concerns the reason why an arbitral award is binding. The following points may be made in this respect:
  1. It is a well-established principle of both English and Indian law that an arbitral award, unlike a judgment, is only enforceable because there is an implied term in the arbitration agreement that the parties will honour any award made under that agreement: see, eg, Badat & Co v East India Trading AIR 1964 SC 538 and Bremer Oeltransport GmbH v Drewry [1932] 1 KB 753.
  2. The existence and scope of this implied term is a matter of construction, just as it would be in relation to any implied term in a contract.
  3. If the parties envisage a ‘second-instance’ arbitration, this implied term must, as a matter of construction, be read as a duty to honour the first award subject to the right of either party to commence another arbitration: this appears to be what Lokur J is suggesting at para 35.
  4. But if neither party actually exercises that right—for example because the respondent to the first arbitration considers that any appeal is bound to fail—when does the first award become enforceable in the usual way and why? The answer may be that the implied term is in fact that there is a duty to honour the first award if the right to appeal by commencing a second arbitration is not exercised within a reasonable time (or perhaps until the limitation period expires) but this requires the Court to imply a considerably more detailed term than is ordinarily the case.

The second question that arises from para 35 concerns the nature of the cause of action in the second-instance arbitration. Section 43 of the Arbitration Act provides that the limitation rules in the Limitation Act 1963 apply to arbitrations in the same way that they apply to court proceedings. In relation to the first-instance arbitration, this would therefore involve asking when the cause of action arose and whether the arbitration was commenced before the period of limitation relevant to that cause of action (eg breach of contract, tort) expired. But the making of an arbitral award is usually taken to extinguish the original cause of action and replace it with a right (founded on the implied term above) to have the award enforced. If that rule applies to the award produced by the first-instance arbitration, then the subject-matter of the second-instance arbitration is no longer the original cause of action (eg damages for breach of contract or tort) but the correctness of the first award. This means, for limitation purposes, that the relevant period is (or may not be) the period that relates to the original cause of action (eg breach of contract or tort); nor would the provisions relating to appeals (see, eg, article 116, Schedule I to the Limitation Act) apply because those are concerned with appeals from court orders. The answer may be that the residuary provision applies.

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