The Indian Idea of Arbitration: Recent Rulings that Set the Ball Rolling

The Indian idea of Arbitration is more than a century old and like a typical Indian idea, has had several reincarnations starting from the Arbitration Act of 1899, Arbitration Act, 1940, Arbitration & Conciliation Act, 1996 and the amendments made thereto first by the Arbitration & Conciliation (Amendment) Act, 2015 and more recently by the Arbitration & Conciliation (Amendment) Act, 2019.

Through a series of amendments and contemporaneous progressive judicial pronouncements, the concerted endeavour from all corners has been to restore faith in arbitration as an efficient, fair, binding, and effective means of dispute resolution and to streamline the Indian idea of arbitration in order to make India a commercial arbitration hub. In this endeavour, the last quarter of 2019 was significant as it witnessed a number of landmark rulings by the Supreme Court which clarified certain dubious positions of law.

This article covers 3 such judgments pronounced in the last quarter of the year which, in the opinion of the authors, are indicative of the ever evolving arbitration jurisprudence of India.

Perkins Eastman Architects DPC v. HSCC (India) Ltd. (26 November, 2019) -The end of the unilateral appointment of arbitrator by a party?

Sun Tzu in his seminal work ‘Art of War’ wrote “Every battle is won or lost before it’s ever fought”. Had he been talking in the context of arbitration, he would certainly have been alluding to the appointment of arbitrator by a party. It is appalling that unilateral appointment of arbitrator by a party has endured as a practice and concept despite several attempts through legislative amendments and judicial pronouncements to reign it in. But with the judgment of the Hon’ble Supreme Court in Perkins Eastman Architects DPC v. HSCC (India) Ltd. delivered on 26 November, 2019, the death knell of this enduring concept seems to have been sounded. Setting the record straight on the dubious nature of this practice, the apex court held that -

“A party or an official or an authority having interest in the dispute or in the outcome or decision thereof [...] must [...] not be eligible to appoint any else as an arbitrator and such person cannot and should not have any role in charting out any course to the dispute resolution by having the power to appoint an arbitrator.”

The judgment delivered by the bench of Justices UU Lalit and Indu Malhotra in Perkins (supra) begets the question as to what is the fate of the arbitration clauses which bestowed the power to appoint an arbitrator on an official of a party. A negative interpretation might seek to argue that the clause itself may not survive as the party had only agreed to arbitration subject to retaining the right to appoint arbitrator. However, such an interpretation would not only be shortsighted but also, in the authors’ opinion, may not pass judicial scrutiny as it does not account for the fact that the agreement by the parties to refer themselves to arbitration would be severable from the question as to who would appoint. In such a scenario, the clauses would have to be given a purposive interpretation to hold that arbitration agreement survives. The options available to the parties would be to either, by way of addendum, seek to agree on manner of appointment of arbitrator either by mutual consent or by giving a third party or institution the right to appoint or by seeking appointment of the arbitrator under Section 11(4) of the Arbitration & Conciliation Act.

Parties, who have long enjoyed the power to appoint, would find it difficult to resist the temptation to set up illusory, in-name only third-party departments for making appointments of arbitrators (for instance, the setting up of a Dispute Resolution Board in a Public Sector Undertaking). However, in the authors’ opinion, such a measure would not pass muster on the test of neutrality.

Interestingly, another approach that a contracting party, usually a government entity, adopts is to prepare a panel of arbitrators and then leave the choice on the other side/contracting party to appoint an arbitrator from amongst the panel. Recently, the Supreme Court in Central Organization for Railway Electrification v. M/s ECI-SPIC-SMO-MCML (JV) A Joint Venture Company deliberated upon the legality of such a situation in light of the Perkins (supra) & TRF Limited v. Energo Engineering Projects Limited judgments. Clarifying the legal position on the peculiarity of the situation, the court held - “Since the respondent has been given the power to select two names from out of the four names of the panel, the power of the appellant nominating its arbitrator gets counter-balanced by the power of choice given to the respondent.”

Hence, the legal proposition, as it stands, appears to be that unilateral appointment of arbitrators remains invalid as per the Perkins dictum, but a unilateral selection of a panel of arbitrators from which the other side/party can choose an arbitrator, is valid, as per the Central Organization for Railway Electrification dictum. It will be interesting to see how the law develops in tackling this practical menace of unilateral appointments and whether unilateral selection of a panel also persists as a practice.

Whatever may be the execution challenges in future, one thing is certain that the Perkins judgment goes a long way in making arbitration a more fair and transparent process with no one party having an unfair advantage and a bigger say and sway in the arbitral proceedings.

Hindustan Construction Company Ltd. & Anr. v. Union of India & Ors. (27 November, 2019) - The end of the era of automatic stay of arbitral award:

The principle of automatic stay of arbitral awards the moment a challenge is made under Section 34 of the Arbitration & Conciliation Act, 1996 was recognized by the Hon’ble Supreme Court in National Aluminum Company Ltd. (NALCO) v. Pressteel & Fabrications (P) Ltd. & Anr. and reiterated in Fiza Developers and Inter-Trade P Ltd. v, AMCI (India) P. Ltd & Anr. This effectively defeated the objective of arbitration as an alternative dispute resolution system since awards would be rendered un-executable for years as the objections filed under Section 34 would remain pending. The Law Commission in its 246th Report suggested certain amendments to Section 36 of the 1996 Act to provide that the award will not become unenforceable upon the making of an application under Section 34 of the Act. The said amendments found their place in the Arbitration & Conciliation (Amendment) Act, 2015 but a new controversy emerged as to whether the said amendments would apply to court proceedings initiated after the Amendment Act of 2015 but arising out of arbitration proceedings initiated before the said Amendment Act. The Hon’ble Supreme Court in its judgment Board of Control for Cricket in India v. Kochi Cricket (P.) Ltd. set the controversy at rest by holding that, “... Section 26 of the Amendment Act makes it clear that the Amendment Act, as a whole, is prospective in nature.”

The Court in effect, held that the Amendment Act will apply to both – (1) arbitral proceedings which have commenced on or after the date of amendments coming into force and (2) applications filed after the commencement of the act even though the arbitral proceedings commenced before the amendment came into force (certain exceptions make it applicable to applications pending on the date of commencement). However, the Arbitration & Conciliation (Amendment) Act, 2019 introduced Section 87 to specifically stipulate that,

“amendments made by the Arbitration & Conciliation (Amendment) Act, 2015 shall –

(a) not apply to –

i. arbitral proceedings commenced before the commencement of the Arbitration and Conciliation (Amendment) Act, 2015;

ii. court proceedings arising out of or in relation to such arbitral proceedings irrespective of whether such court proceedings are commenced prior to or after the commencement of the Arbitration and Conciliation (Amendment) Act, 2015;

(b) apply only to arbitral proceedings commenced on or after the commencement of the Arbitration and Conciliation (Amendment) Act, 2015 and to court proceedings arising out of or in relation to such arbitral proceedings.”

The constitutional validity of this Section 87 was recently in challenge before the Hon’ble Supreme Court in the case of Hindustan Construction Company Ltd. & Anr. v. Union of India & Ors., where the three-judge bench held as follows -

“Thus, the reasoning of the judgments in NALCO (supra) and Fiza Developers and Intra Trade Pvt. Ltd. (supra) being per incuriam in not noticing Section 9, 35 and second part of Section 36 of Arbitration Act, 1996 do not commend themselves to us and do not state the law correctly [......] Thus, it is clear that the automatic-stay of an award, as laid down by these decisions, is incorrect. The resultant position is that Section 36- even as originally enacted – is not meant to do away with Article 36(2) of the UNCITRAL Model Law, but is really meant to do away with two bites at the cherry doctrine in context of awards made in India, and the fact that enforcement of a final award, when read with Section 35, is to be under the CPC, treating the award as if were the decree of the court.

The result is that the BCCI judgment (supra) will therefore continue to apply so as to make applicable the salutary amendments made by the 2015 Amendment Act based on Article 19(1)(g), 21 and 300-A of the Constitution of India.”

This decision of the apex court has ushered out the era of automatic-stay of arbitral awards by solidifying the legal position as held in BCCI v. Kochi Cricket (supra) and by holding S. 87 as unconstitutional. It is a welcome judgment with positive practical implications for the arbitral-award holders. However, what remains to be seen is whether the Government again attempts to bring in a similar provision to neuter the effect of the decision or the government accepts the judgment as a course-correction in its bid to promote India as an arbitration hub.

M/s Uttarakhand Purv Sainik Kalyan Nigam Ltd. v. Northern Coal Field Ltd.(27 November, 2019) - Recognition & Reiteration of the legislative intent behind the insertion of S11(6)A by the Arbitration & Conciliation (Amendment) Act 2015:

In the next judgment for consideration, the Hon’ble Supreme Court repelled the preliminary objection of limitation being raised to oppose the appointment of an arbitrator under Section 11, by giving primacy to the legislative intent behind the introduction of S. 11(6)A by the Arbitration & Conciliation (Amendment) Act, 2015 and giving effect to a conjoint reading of S. 11(6)A and the principle of kompetenz-kompetenz enshrined under S. 16, the Court opined that -

“Based on the recommendations of the Law Commission, Section 11 was substantially amended by the 2015 Amendment Act, to overcome the effect of all previous judgments rendered on the scope of power by a non-obstante clause, and to reinforce the kompetenz-kompetenz principle enshrined in Section 16 of the 1996 Act.”

In view of the provisions of Section 16, and the legislative policy to restrict judicial intervention at the preference stage, the issue of limitation would require to be decided by the arbitrator.”

While the said judgment is a step in the right direction to enforce the principle of kompetenz- kompetenz, however, the reliance on S. 11(6)A might prove shortsighted in as much as the Arbitration & Conciliation (Amendment) Act, 2019 while introducing sweeping changes in S. 11, has omitted S.11(6)A. While these provisions are yet to be notified, it will be interesting to note whether the arbitral institutions sought to be endowed, under the said provisions, with power to appoint an arbitrator would be able to repel such preliminary objections opposing the request for appointment of arbitrator especially in view of omission of S. 11(6)A.

These judgments have come at a most crucial juncture for the Indian arbitration space. At a time when India’s image as a preferred hub of arbitration has been shrouded by the mist of 2019 Amendment Act, the judiciary has shown incredible impetus in interpreting the provisions to bring much-needed clarity by penning down these landmark rulings.

These series of judgments are most unique in many senses apart from having been delivered within weeks of each other. They have put to rest, many controversies and phased out many practices which were holding back the growth of arbitration. Be it the Perkins judgment effectively bringing an end to the practice of unilateral appointment of arbitrators or the HCCL judgment holding S. 87 to be unconstitutional waving a red flag to the era of automatic stay of arbitral awards or be it the sound judgment in Uttarakhand Purv Sainik Kalyan Nigam solidifying the application of the core principle of kompetenz-kompetenz – all these decisions are bound to create a positive perception in the global space for India to be called a truly friendly arbitration jurisdiction.

Shashank Garg is a Partner at Advani & Co. and Kanika Singh is a lawyer practicing at the Delhi High Court.