The concept of “Two-Tier Arbitration” or “Second Instance Arbitration” provides for an arbitration reference being made subsequent to the award of an arbitrator in the first instance. The reference can be made for a fresh hearing and resolution of the dispute and passing an award anew, irrespective of the first award, when either or all the parties are aggrieved by the arbitral award.
For a Second Instance Arbitration, the arbitration clause must in express terms provide for the second/ additional level of arbitration, in order to enable the parties to adopt it.
A second instance arbitration is also considered a ‘non-statutory appeal’ of an arbitral award as it is taken at that stage of proceedings where usually the judicial appeal is raised. They can also be in place of the appellate proceedings before a court.
Typically, a two-tier arbitration clause will be worded in the following manner:
“…If either party is in disagreement with the arbitration result, either party will have the right to appeal to a second arbitration…”
Such arbitrations are in furtherance of the primary object of Alternate Dispute Resolution (ADR) mechanisms like conciliation, negotiation, arbitration, etc., i.e. ‘speedy and inexpensive trial’. Additionally, they help attain the secondary object of ADR which is ‘Party Autonomy’.
This additional level grants parties greater power to choose the forum and manner of resolving the disputes arising amongst them. A major benefit of two-tier arbitrations is that it has the scope to reduce the burden on the judicial system by facilitating the option of another chance at final disposal of the conflict.
The permissibility of such clauses in the Indian landscape had been under doubt for long, however, the same now stands cleared with the judgment of the Supreme Court delivered on December 15 [pdf] this year in the cross civil appeals between Centrotrade Minerals & Metals Inc. and Hindustan Copper Limited (Civil Appeal Nos. 2562 and 2664 of 2006).
A bench of Justices MB Lokur, RK Agarwal and DY Chandrachud concurred that two-tier arbitrations are neither prohibited by the Arbitration and Conciliation Act, 1996 nor are they contrary to the public policy of India, as was contended on behalf of Hindustan Copper Limited. While holding so, the Supreme Court gave approval to decisions of the Bombay High Court which have accepted the two-tier system of arbitration.
The judgment of the Supreme Court, delivered by Justice Lokur, clarifies the position by resorting to the Report of the UNCITRAL Working Group on Model Laws and several commentaries on arbitration. The approval to two-tier arbitrations is in consonance with international trade and commerce laws. In fact, this is the biggest factor in support of two-tier arbitrations, in view of the fact that India intends to consolidate its position as a player in the global economy.
An alternate dispute resolution policy which is in line with international practices will encourage foreign businesses to invest and operate in India by assuring them of sympathetic business laws. As it is the compliance, legal and judicial regimes in India are often considered to be long drawn and harsh as compared to international standards.
Even domestically it is often seen that despite arbitration awards, parties tend to file judicial proceedings to challenge them rather than for their enforcement. This defeats the entire point of “alternate” dispute resolution. A non-statutory appeal may prove to be a solution to this widely prevalent problem of judicial appeal of arbitral awards, by making parties realise the futility of mechanical and unreasonable challenges to awards which are good in law.
Thus, two-tier arbitration clauses may possibly increase ‘in-principle’ adherence to the provisions of Section 35 of the Arbitration and Conciliation Act, 1996 which makes arbitration awards binding subject to other provisions of that Chapter.
Despite the above advantages, two-tier arbitrations may achieve the exact opposite result in our country, where litigants are averse to the concept of giving finality to proceedings and where litigants, instead of accepting legally sound judgments, try their level best to find fault in them.
Further, though arbitrations are considered to be comparatively inexpensive, a second arbitration or appellate arbitration will involve an entire round of expenses relating to the arbitral tribunal, venue and attorneys costs, not to mention the prolonged pendency of the dispute and thereby of the contingent liabilities of the corporates as well.
It must be noted that this judgment of the Supreme Court only goes so far as to approving two-tier arbitrations, leaving open the issue of enforcement. The court is yet to hear parties as regards the enforcement of the award in the above case which was passed in London in accordance with the Rules of International Chamber of Commerce. The latter part of this case shall enlighten litigants on the issue of implementation, after which only can parties have a concrete indication of the entire process.
Eventually, the consequences of this judgment may go either way but the decision indeed gives an impetus to our commercial laws being in tandem with international laws.
Thus, only time will tell whether the provisions of two-tier arbitrations are suitable in the Indian setup or not, but it is certain that a positive change can be expected.
(Read the judgment below)
Nishit Dhruva is Managing Partner at MDP & Partners, Mumbai.
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