A FEW ISSUES RELATING TO ARBITRATION ACT, 1996
1.0 I had recently attended a `Conference on Trends in
International Commercial Arbitration and its Relevance in
2.0 In this note, I would like to focus on the following issues:
2.1 `Public Policy’ as the ground for setting aside an Arbitral Award;
2.2 Dispute Resolution Boards as method of alternative Dispute Resolution; (not in preference to but as an addition to Arbitration
Tribunals)
2.3 The need for giving a `Reasoned Award’;
2.4 Whether Arbitral Tribunals can give
provisional/interim awards – how should the Arbitration Law in
2.1 Recent
developments in Indian Law on the issue of setting aside an Arbitral Award for
contravention of `Public Policy of
Participating Lawyers and the Panelists contended that `Public Policy’ is a vague concept and should be accepted as a ground for setting aside an Arbitral Award only in very rare cases and that Courts must not interfere with the Arbitral Awards in general. The current President of Supreme Court Bar Association Shri P.H. Parekh who led this argument squarely termed Supreme Court’s recent decision in the case of `ONGC Vs Saw Pipes Ltd.,’ to be “erroneous and wrong”
2.1.1 A brief history of this interesting case is given below:
ONGC had floated a tender and received a response from the Respondent company which was engaged in the business of supplying equipment for Offshore Oil exploration and maintenance. The Respondent company offered to supply certain pipes of a specified size to ONGC and entered into a contract for the same with timely delivery being the essence of the contract. The respondent company entered into a sub-contract with an Italian company for the supply of pipes. However, for reasons beyond its control, the Italian company could not meet its obligations and hence could not supply the pipes on time. Consequently, the Respondent company was granted an extension by ONGC for meeting its contractual obligations with the stipulation inter alia that the amount equivalent to liquidated damages for delay in supply of pipes would be recovered from the respondent. ONGC deduced an amount of US $3,04,970.20 and Rs.15,75,559/- as liquidated damages from the dues of the respondent company. The deduction being disputed by the respondent company, the matter was referred to the arbitral tribunal. The Tribunal arrived at the conclusion that it was for the appellant (i.e., ONGC) to establish that they had suffered any loss because of the breach committed by the respondent in not supplying the goods within the prescribed time limit. The arbitral tribunal thereafter concluded that the shortage of casing pipes was only one of the other reasons which led to the change in the deployment plan by ONGC, and no case of having suffered any monetary loss because of delay in the supply of goods under the contract had been established. Hence, the arbitral tribunal held that the appellant i.e., ONGC had wrongfully withheld the agreed amount of US $ 3,04,970.20 and Rs.15,75,559/- on account of customs duty, sales tax, freight charges deducted by way of liquidated damages. The Appellant – ONGC, a Public Sector Undertaking, had challenged the arbitral award before the High Court of Bombay, which was however not entertained by the High Court. Aggrieved, ONGC approached the Supreme Court in appeal.
2.1.2 Supreme Court Interalia
discussed the concept of “Public Policy” of
2.1.3 During the course of the discussions regarding the merits of Supreme Court’s above said judgment in which I also participated, I brought it to the notice of the Panel, that in the context of the contracts concluded by Public Sector and Govt. Undertakings such as Railways, ONGC etc., the term “Public Policy” should necessarily be given a wide interpretation; and that the arbitral awards which seek to bring in extraneous issues with the intention to modify the mutually accepted contractual provisions need to be necessarily set aside on ground of Public Policy. While the participants in this Conference representing ONGC, JNPT, State Electricity Boards welcomed my argument, most of the Lawyers present disagreed and stated that the 1996 Arbitration Act will in effect become “old wine in new bottle” since under 1940 Arbitration Act, it was easy to set aside awards only on the ground of Public Policy.
2.2 Appointment of Dispute Resolution Boards (DRBs) in cases of long term, high value projects:
2.2.1 Starting from the early 1980s, a system of contemporary
and concurrent dispute resolution method has been evolved in
2.2.2 In this connection, a brief report from DRB Foundation Forum Papers is given below:
“The successful resolution of contractual issues was facilitated by the use of relatively new approach known as “Dispute Review Board. The DRB is a panel of three experts selected by the contractual parties with mutual consent at the commencement of the project. The Board makes regular site visits and keeps itself informed about the progress of work. If controversies arise, the parties submit the position papers to the Board and hearing is conducted and the Board issues recommendations to assist the parties to resolve the disputes within a period of maximum 30 days.
“The statistics up to the year 2001 indicate that there are 818 projects with DRBs valuing US $ 41 billion; and that during that year, 1221 disputes were settled by this DRB and out of 1038 recommendations made, only 31 have been taken by the parties to the Arbitration Tribunal.
2.2.3 On the face of it, it appears that the cost of having a DRB in long term projects like Konkan Railway Project or Gauge Conversion projects may be less than what the Railway is incurring on account of lost man days and payment of huge awards in respect of cases going to Arbitration. For instance, on Konkan Railway, more than 200 cases(approx) had to be referred to Arbitration Tribunal after the completion of the project and each of them on an average must have cost the Corporation not less than Rs.10 to 15 lakhs. Similarly, on SCRly on completion of 4 of the major Gauge Conversion projects, more than 60 cases had to be referred to Arbitration and most of them are still under finalisation. NHAI is said to have fixed a monthly remuneration of Rs.9,000 to DRB members, in addition to daily fee of Rs.4,000 in case of site visits. Most of the contracts where DRB clause has been included, the cost of this Board is said to have not exceeded more than 0.5% of the cost of the project. In case of Mumbai Sewerage Project which has this clause and which is of the duration of four years, no dispute is said to have been referred to Arbitration. Perhaps, it is high time that Indian Railways also opts for this clause in addition to the standard arbitration clause in its GCC in respect of major projects of having a value of say Rs.10 crs and the project duration is of more than 24 months.
2.3 The need for giving a `Reasoned Award’.
2.3.1 The panelists defined the meaning of `Reasoned Award’ as follows:
“A reasoned award is one in which the tribunal sets out the reason for its decision and these reasons form part of the award itself. A reasoned award is also sometimes referred to as a “speaking award” or a “motivated award”.
2.3.2 Section 31(3) of the new Act of 1996 states that an arbitral award shall state the reasons upon which it is based, unless the parties have agreed otherwise, or the award is on agreed terms as described under S.30. This was reiterated by the Supreme Court in Tamil Nadu Electricity Board v. Bridge Tunnel Construction Co. The rationale behind this direction is to ensure that the arbitrator has not acted capriciously, and that the ground, belief, or motive for the course of action chosen by him are clear at the outset.
2.3.3 However, the reasonableness of the reasons given by an arbitrator cannot be challenged on merits. There can be various arbitrations in which parties may not like the disclosure of reasons and hence it cannot be held as a rule that every case of absence of reasons should result, in remitting or setting aside the award. The requirement of reasoned award may also be dispensed with in cases of voluntary selection of a particular arbitrator by parties on the basis of faith and confidence.
2.3.4 Whether the appellate arbitral tribunal is required to record reasons in support of appellate award was a question that came up for consideration before the Supreme Court and it was held that parties are entitled to know the reasons as to why the award was either confirmed or reversed and hence reasons ought to be given. Reasons need not be very comprehensive since every arbitrator is not a lawyer or trained person. However, merely answering the issues without stating reasons does not amount to giving reasons. Even short reasons can be good reasons, provided that by reading award, the basis on which the mind of tribunal worked can be discerned.
2.3.5 Thus, in conclusion, it may be said that it is a mandatory for the arbitrators to cite reasons for their award, except under the two conditions mentioned above.
2.4 Provisional/Interim Measures - How should the Arbitration Law in India Develop ?
2.4.1 This is yet another interesting issue regarding which I was given a lot of information.
2.4.2 Interim and conservatory measures are primarily aimed at protecting the rights of parties pending final resolution of their disputes. Traditionally, national courts enjoy competence to impart such reliefs. Advent of arbitration as a dispute realization mechanism and its increasing acceptability has made it imperative that arbitral tribunals also possess the authority to impart interim and conservatory measures.
There
can be no dispute that the parties that have chosen to secure resolution of
their disputes through the arbitration mechanism rather than litigation through
national courts would certainly not like to forfeit beyond what is absolutely
necessary the rights that may have been available to them if they had litigated
before the national courts. While it is inevitable that litigation and
arbitration each has certain advantages and dis-advantages
viz-a-viz the other, the mechanism of arbitration
would suffer a staggering blow if such a mechanism is found to be substantially
deficient in effectively dealing with their matter by being handicapped to
impart interim and conservatory measures.
International Tribunals have consistently acted on the premise that they have the inherent authority to order interim measures of protection so as to preserve the subject matter of dispute and thereby resolve the dispute.
Permanent court of international justice reflecting on its authority as regards provisional measures imparted by its own statute in the following words:
“The authority to order interim measures of protection so as to preserve the subject matter of the dispute, and hence the tribunal’s capacity to resolve the dispute, is but a necessary component of the tribunal’s authority to resolve the dispute in the first place.”
The general principle authorizing international tribunals to order interim measures is applicable equally to arbitral as well. This is because the function of a tribunal, once it is seized of the dispute, is to take all steps towards reaching a decision. This necessarily involves securing a final and binding resolution of the dispute. Such a commitment requires preservation of the subject matter of dispute in a manner that will not interfere with the capacity of the tribunal to render a fair and effective award. Neither the 1988 ICC Rules nor the Indian Arbitration Act, 1940 gave any express authority to the arbitrator to issue interim measures. However, situation has undergone sea change in the 1998 ICC Rules and the Arbitration and Conciliation Act, 1996. Article 23 of the ICC Rules provides for passing of an interim measure that could take the form of an order or an award. UNCITRAL MODEL LAW under Article 17 authorises an arbitral tribunal to issue interim measures at the request of a party. International trends thus favour arbitral tribunals being possessed still needs focused attention.
The Arbitration and Concilication Act, 1996 confers under Section 9 power on court to issue interim measures and under section 17 such a power has been made at the disposal of the arbitral tribunal. However, there is variance in the degree and efficacy of these interim measures.
a) The arbitral tribunal is possessed of limited power to direct interim
measures, pertaining to
(i) protection of the subject matter in dispute;
(ii) providing appropriate security in connection thereof.
b) Failure to have any mechanism of enforceability of the direction
of the arbitral tribunal.
In
the aforesaid premise, it can be seen that arbitral tribunal, not possessed any
coercive authority to secure implementation of its interim measures is in a
sense a toothless tiger. This is indeed a flaw that weakens the entire
arbitration mechanism and at times makes it appear spineless. Section 38 of the English
Arbitration Act, 1966 give competence to the arbitral tribunal to order interim
measures of protection, including the express power to order a party to furnish
security for the course of arbitration. It is indeed significant that
Section 44(3) of the English Act vests the court with power in support of arbitral
proceedings and
prescribes
the procedure for exercise of such power. While modern trend is towards the marginalisation and containment of judicial intervention in
arbitration proceedings, the kind of intervention envisaged by Section 44(3) of
the English Arbitration Act, 1996 cannot be reckoned as disruptive of
arbitration. Absence of such a provision in our legislation is being felt.
The urgent need is to have provisions that entitle arbitral tribunals to impart effective interim and conservatory measures at par with the authority of national court and to have an effective mechanism of carrying them out. The present situation wherein the arbitral tribunal has limited power to issue interim measures and thereafter being dependant only on its persuasive authority to carry them out deserves to be replaced by an effective dispensation.
Ms Geetha Thoopal, FA&CAO/SCR