Is judicial intervention in Arbitration Justified.

"justice delayed, justice denied"

INTRODUCTION:

The much-maligned interventionist role of the judiciary receiving support from leading practitioners, including Senior Advocates ARVIND DATAR and GOURAB BANERJI. Two of the most heavily criticized judicial interventions are (a) holding that the Chief Justice carries out a judicial function in determining appointing an arbitrator, as opposed to a purely administrative function; and (b) the expansive attitude towards "public policy" u/s 34 of the Arbitration and Conciliation Act, 1996; which effectively allows Courts to set aside awards which are based on errors of law. Nonetheless, there appears to be at least an arguable case for the "interventionist" judicial approach. The Chief Justice in appointing arbitrators is categorized as a judicial function, he must enter into questions of validity of the arbitration agreement at the time of appointment of arbitrators. This was the understanding accepted by the Supreme Court in the Patel Engineering case. The arguments against this typically revolve around (a) the kompetenz-kompetenz principle, which allows arbitral tribunals to decide on their own jurisdiction; and (b) the fact that the 1996 Act specifically uses the words "Chief Justice" and not "Court" as used in the earlier enactment. Presumably, this indicates that the function is intended to be an administrative one and not a judicial one.

  It is noteworthy; however, that "Chief Justice" could well have been intended because of the eminence of the post – not because of an intention to make the function a purely administrative one. At a pragmatic level, does it make sense to hand to a constitutional functionary such as the Chief Justice a purely ministerial function involving practically no application of mind? Would the better course be to construe the function as a judicial one, allowing the Chief Justice to adjudicate on the validity of the arbitration agreement prior to appointing arbitrators? Again, the Indian Act allows appeals against an arbitrator’s decision on jurisdiction only when the arbitrator declines jurisdiction. If the arbitrator assumes jurisdiction, a challenge will be possible only after the arbitral proceedings are over – unlike under the UNCITRAL model law which allows appeals against both types of jurisdictional decisions immediately. Does it make any sense to expect a party to go through arbitration, spend time and money, and then come back to Court after the proceedings? Given the structure of domestic arbitrations in India, it is an extremely exceptional case where an arbitrator declines jurisdiction. Is it not practically better to allow the judiciary to adjudicate the issue at the outset itself, in terms of saving both time and money? Is it necessarily to strictly adhere to doctrinaire considerations in these matters?

   The arguments against setting aside awards based on an expansive reading of "public policy" turn on questions of the importance of party-autonomy and minimal judicial interference. It is on this basis that the decision in ONGC v. SAW PIPES has been heavily criticized.

    However, Mr. GOURAB BANERJI put forth strong pragmatic arguments in favour of the decision in ONGC. At the outset, it is essential to consider that parties are not allowed to contract out of statute; or to enter into contracts for illegal objects. If that is the case, will not a refusal to set aside an illegal award under the guise of party autonomy effectively mean that parties are doing indirectly what they cannot do directly? Mr. BANERJI’S argument may be seen through the following extract from the paper which he presented:

   The general assumption is that arbitral awards should be final and binding, and open to limited challenge before the Court. The key question is: why should this be so? The theoretical answer is that arbitration is a manifestation of party autonomy. The theory is that arbitration is a consensual process, being the subject matter of agreement. The theory is that two parties have got together and mutually decided to resolve the dispute outside the Court system. In such a case it is thought that the Courts should not interfere in such consensual arrangements. The theory is that once two parties have chosen to appoint a third person by consent, an award by such a person should be final and binding and should not be challenged except in very rare circumstances. This is the basis for a limited challenge, whether it be under the 1940 Act or under the 1996 Act.

  Extent Defined

Section 5 Extent of judicial intervention. Notwithstanding anything contained in any other law for the time being in force, in matter governed by this Part, no judicial authority shall intervene except where so provided in this Part.

In the case of this section the courts have tried to protect the sanctity of the section and in a judgement in 2007 the Supreme Court held that "Superior Court’s power of judicial review has wide amplitude but the same should not be exercised when there exists an arbitration clause."[1]

The Supreme Court in another case held the High Court justified in holding that photo copies of lease agreements could be taken on record for ascertaining the existence of arbitration clause. The Court should exercise power under Article 142 to meet the situations which cannot be effectively and appropriately tackled by existing provisions of law[2].

The Apex Court however seems to have gone against the principle of sanctity of the arbitration agreement when it held that "no party can be allowed to take advantage of inartistic drafting of arbitration clause in any agreement as long as clear intention of parties to go for arbitration in case of any future disputes is evident from the agreement and material on record including surrounding circumstances."[3]

WHY THE NEED FOR ARBITRATION?

The act of 1996 has defined arbitration in the following, manner "Arbitration means any arbitration whether or not administered by permanent arbitral institution"[4].

 A fair, just and quick process of resolution of disputes is indispensable in any democratic society becoming increasingly aware of their human and legal rights. The human and material resources in Courts are inadequate to meet the ever growing demands, resulting in backlog of cases and delay in the administration of justice. Our justice delivery system is bursting at the seams and unless timely measures are adopted, for the quick disposal of cases, particularly at the grass-roots it will lead to very dire consequences.

In certain disputes like financial matters involving the individuals, firms and even multinational companies, they do not want to submit to the jurisdiction of the courts of obvious reasons of delay, rigid procedural rules and provisions of appeals and revisions. The simple logic is that both the parties are not interested in getting a proposition of law on any point laid down but they are interested to settle their money matters and for that purpose they can even give up certain claims which they are otherwise entitled to. One such method of dispute resolution is arbitration governed in India by the Arbitration and Conciliation Act 1996.

MAIN OBJECTIVES OF ARBITRATION AND CONCILIATION ACT, 1996

1.      To-cover within its fold International commercial arbitration and conciliation as also the domestic arbitration and conciliation.

2.      To make provision for an efficient and effective procedure to meet the requirements and needs of specific arbitration.

3.      To ensure that arbitral tribunals functions within the framework of the Act.

4.      To minimize supervisory role of courts in the arbitral process and thus ensure minimal judicial intervention.

5.      To encourage amicable settlement of disputes between parties using arbitration as an alternative disputes resolution mechanism.

6.      To ensure making of an award on settled terms of the parties.

7.      To provide that every final award is enforced in the same manner as if it were a decree of the Court and thus eliminate the necessity of approaching a law court to make a decree of the Court.

8.      Last but not least, to provide conditions and procedure for the purpose of enforcement of foreign awards under New York and Geneva Conventions.

      CHOICE OF JUDGES

Arbitration offers parties a unique opportunity to designate persons of their choice as arbitrators, which is not possible in case of courts. This enables the parties to have their disputes resolved by people who have specialized competence and expertise in the relevant field. Another important factor is the lack of specialized judges and Courts; this can be an impediment both in terms of time taken and also in terms of injustice being done due to lacunae in knowledge[5].

    FASTER & LESS EXPENSIVE

Arbitration is faster and less expensive than litigation in courts. Where the arbitral proceedings can often score over judicial methods is in the duration of time taken- the latter tends to be lengthy for a variety of reasons which includes the enormous pendency of existing caseloads as well as the various levels of original and appellate jurisdiction which need to be completed before a final solution is arrived at.

    CONFIDENTIAL

The element of confidentiality, which is wanting in judicial proceedings in an attribute of arbitration system. Arbitration hearings are not public and only the parties receive the copies of the arbitral award.

JUDICIAL INTERVENTION – THE BANE?

Major thrust and legislative intent of the new Arbitration and Conciliation Act, 1996 is to reduce excessive judicial intervention due to which the earlier Arbitration Act, 1940 suffered serious infirmities. Section 8(1) of the New Act, therefore, makes it mandatory duty for the judicial authority i.e. court to stay legal proceedings if started, where the subject matter has been referred to an arbitral tribunal. Similar provisions are made in connection with the New York and Geneva

The enactment of the 1996 Act was initially met with approbation by the Court in cases like KONKAN[6], (which stated clearly that the provisions of the 1996 Act unequivocally indicate that the Act limits intervention of the Court with an arbitral process to the minimum) but subsequent reality however, has been far from ideal. Even as a global study has indicated that an overwhelming 91% of the respondents were against the mechanism of appealing international arbitration, cases like ONGC[7] and SBP & Co[8]. Have sharply belied governmental attempts to promote arbitration in India. ONGC witnessed the challenge of an arbitral award on the ground that it was ‘in conflict with the public policy of India’; instead of taking a narrow interpretation of the phrase ‘public policy’ as being something in excess of a prima facie transgression of Indian law, the Court adopted a very broad understanding of the same. The Court went on to equate ‘patent illegality’ with ‘error of law’ and held that any contravention of an Indian legislation would ipso facto make the award violative of public policy.

The doors were thus flung open for the very rounds of painstaking judicial review that the Act was put in place to avoid[9]. SBP & Co further extended the scope of judicial intervention when the Supreme Court ruled that it was within the powers of the Chief Justice of India to adjudicate on issues like valid arbitration agreements and went on to state that the CJ could even call for evidence to resolve jurisdictional issues while performing the function of appointing an arbitrator when the parties failed to come to an agreement. The Supreme Court went on to say that such decisions would be final and binding upon the parties. This effectively flouted the principle of competence and thus amounted to a situation where the arbitral tribunal’s power to determine its jurisdiction was undermined.

Effectively therefore, Courts endowed themselves with powers which would substantively delay arbitral proceedings (be it by raising specious objections to preliminary issues or by sabotaging the appointment process) which goes against the fundamental reason for enacting Section 13 of the 1996 Act. This thus brings us to what has been called the dispute between high principles (stressing the need for justice, though the heavens fall) and low principles (an equally insistent clamour to end litigation) in adjudication today[10].  The expansion of the Court’s intervention into the judicial sphere has aroused serious misgivings; ONGC’s expansive interpretation of the term ‘public policy’ has been followed by a catena of cases which all reiterate the judiciary’s right to review the arbitral award. In cases like HINDUSTAN ZINC[11], the Supreme Court has stated that awards could be set aside on grounds like being contrary to the terms of contract since ONGC gave license for interference in such grounds. This indeed sets a dangerous precedent since, as stated earlier; the encouragement of ADR was based on a need to circumvent the lengthy court process.

The debate between finality and justice is perhaps best resolved by the reasoned judgment of EVANS J., in Indian Oil[12] where he held that "these two factors are not inconsistent with each other. If either of them is to prevail, then it should be the requirement of justice. But justice, even fairness, is not an abstract concept. It has to be applied in this context between two parties who were in dispute with each other and who agreed that the dispute should be resolved by an arbitral tribunal. They agreed that the tribunal's award should be final. But they agreed this on the basis that the arbitration procedure would be regulated by law. The Court has statutory power to set aside an award when the arbitrators misconduct themselves or the references. But it also has the unqualified discretion to remit the award to the chosen tribunal. If the power is exercised, but only in circumstances when it would be unjust not to do so, then there is not, in my judgment, an uncovenanted or an unacceptable restriction on the agreed finality of the tribunal's award."

We shall now study in detail all the sections of the act relating to arbitration which make provisions for judicial intervention and the effect that such intervention has had on the efficacy of the legislation. We will also see what interpretation the judiciary has placed on the various sections and how this has affected the functioning of the act.

Correlation between judicial intervention and arbitration

     Arbitration Agreement

Section 2 (b) defines an arbitration agreement as "Arbitration agreement" means an agreement referred to in section 7.

Section 7 Defines the Arbitration agreement.

           Referring Parties to Arbitration

Section 8   Defines the Power to refer parties to arbitration where there is an arbitration agreement.

     Intervention Before or During Arbitration

Section 9 Interim measures, etc. by court. -A party may, before or during arbitral proceedings or at any time after the making of the arbitral award but before it is enforced in accordance with section 36, apply to a court.

     Intervention in Appointing Arbitrators

Section 11  Defines the appointment of arbitrators.

         Challenge to Appointment of an Arbitrator

 Section 12 (3) An arbitrator may be challenged only if-

(a) Circumstances exist that give rise to justifiable doubts as to his independence or impartiality, or

(b) He does not possess the qualifications agreed to by the parties.

Section 13  Defines Challenge procedure.

     Setting Aside an Award

Section 34 Defines the application for setting aside arbitral award.

Section 37 Defines the appealable orders.

CONCLUSION

The Parliament has enacted the Arbitration and Conciliation Act with a view to provide speedy remedy by arbitration and to achieve this objective, section 5 of the Act puts a complete bar on the intervention of the courts matter where there exists an arbitration clause. It is relevant to mention that prior to coming into force of the Act, the Arbitration Act, 1940 was the law in the  force relating to arbitration and section 34 of the repealed Act being para material to section 5 of the Act also provided that in respect to matter covered by arbitration proceeding in a court were not maintainable. However, the language used in section 5 of the Act is more stringent and unequivocal insofar as the bar to the jurisdiction of any judicial authority is concerned. Whereas in section 34 of the 1940 Act only civil suits were practically barred as would be clear from the language used in section 5 of the Act, every judicial authority has been barred from intervening in respect of a matter which is governed by Part-I of the Act.[13]Arbitration is a sum of many parts. There are benefits and costs and the reminder that one is incomplete without the other. As things stand today, arbitration is poised to effect great changes to the ways in which dispute resolution is conducted. It brings with it the solemnity and finality of the judicial process and couples it with the procedural flexibilities of non-conventional dispute resolution methods. There is, however, an equally pressing need to recognize that much more can and should be done to improve the conduct of arbitral proceedings in India but most importantly, we, the researchers, feel that there is a need to effect a change in perceptions. As our nation moves towards increasing litigiousness, alternative methods of dispute resolution might just provide the key to resolving the problems of overburdened case loads, long pendency of cases and an all too frequent case of justice delayed. For long, the problem plaguing the effective implementation of ADR methods has been their perception as being subordinate to the court process- a perception shared and fostered by lawyers and people alike. It is imperative, that this be changed and this can only be achieved if there is active engagement from all the stakeholders in this process. Certainly, there are some disputes inherently unsuited for alternative channels but there are so many more which fit perfectly within the vision envisaged for if a system of rendering justice that runs concurrent to the Courts. It is necessary for the Courts themselves to mandate recourse to ADR methods in inter alia international commercial disputes, employment disputes, matrimonial cases, compoundable criminal offences, to name just a few. At the end of the day, what should take precedence is the provision of justice, in substance more than in form. As our country grows and flowers, taking wing on issues unimagined before, it is time also for our dispute resolution systems, the undisputed backbone of our nation, to follow suit.

[1]  The Empire Jute Co. Ltd. and Ors. Vs.  The Jute Corporation of India Ltd. and Anr.2007 (4) ARBLR 74 (SC).

[2]  Bharat Sewa Sansthan Vs. U.P. Electronics Corporation Limited. AIR 2007 SC 2961

[3]  VISA International Ltd. Vs. Continental Resources (USA) Ltd. AIR 2009 SC 1366

[4]  Section 2(a).

[5]  Imhoos Christophe, Verbist Herman, Kwatra G.K., International Trade Centre, Arbitration and Alternative Dispute Resolution, (New Delhi: LexisNexis Butterworths, 2004), 48.

[6]  Konkan Railway Corporation v. Mehul Construction Co., 2000 (7) SCC 201.

[7]  Oil and Natural Gas Corporation v. SAW Pipes, (2003) 5 SCC 705.

[8]  SBP & Co. v. Patel Engineering, (2005) 8 SCC 618.

[9]  Aloke Ray, Dipen Sabharwal, "What Next for Indian Arbitration?" The Economic Times, 29 August, 2006.

[10]  Zaiwalla, Sarosh, "Challenging Arbitral Awards: Finality is Good but Justice is Better" 20(2) Journal of International Arbitration (2003), http://www.zaiwalla.co.uk/html/publications.html, 16 July, 2008.

[11]  Hindustan Zinc Ltd. v. Friends Coal Carbonisation, (2006) 4 SCC 445.

[12]  Indian Oil Corporation Ltd., v. Coastal Bermuda Ltd., [1990] 2 Lloyd’s Rep., 407

[13]  Engineers India Ltd v. D. Warren International Ltd.

    Bibliography:

·        Arbitration And Conciliation Act- Hari. Dev Kohli

·        Law of Arbitration And Conciliation- P.K. Majumdar

·        Supreme Court On Arbitration- Surendra Malik

·        Law of Arbitration And Conciliation- Justice R.P. Sethi

·        Arbitration And Conciliation- O.P. Malhotra & Indu Malhotra

·        Law of Arbitration And Conciliation- Justice R.S. Bachawat

·        Arbitration And Conciliation- Shibsankar Sarkar

·        Challenging Arbitral Award: Finality is Good but Justice is Better 20(2) Journal of International Arbitration (2003)

·        http://www.zaiwalla.co.uk/html/publications.html, 16 July, 2008.

·        Imhoos Christophe, Verbist Herman, Kwatra G.K., International Trade Centre, Arbitration and Alternative Dispute Resolution, (New Delhi: LexisNexis Butterworths, 2004), 48.

·        The Arbitration And Conciliation Act, 1996

·        NLSIR Symposium on Arbitration Law

·        IN THE HIGH COURT OF DELHI AT NEW DELHI

SUBJECT: ARBITRATION AND CONCILIATION ACT, 1996

OMP No. 152/2002

Date of decision : 04.09.2008

JAI SINGH ….. Petitioner

Through: Mr Sudhanshu Batra with

Mr Bhuwan Gugnani, Advocates

Versus

DDA and OTHERS ....... Respondents

Through : Mr Bhupesh Narula, Advocate.