Appellate arbitration clauses: a path less travelled

Introduction

In the past decade, the Indian jurisprudence on commercial dispute resolution has undergone a revolution. Indian courts are inclined to adopt a procedure that ensures efficient, timely resolution involving lesser costs and are willing to adopt novel procedures to such end. While arbitration is a favorable mode of dispute resolution in this regard, the increasing time, costs and uncertainty on correctness of arbitral awards has been a cause of concern for parties and courts. In an attempt to meet these shortcomings, parties resort to multi-tiered dispute resolution clauses, i.e., an arbitration clause combined with provisions for other means of alternative dispute resolution. Such provisions are referred to as multi-tiered dispute resolution clauses. While mediation-arbitration, negotiation-arbitration clauses are commonly utilized for cost saving, appellate arbitration clauses i.e., review of arbitral tribunal’s decision to another arbitration panel is considered to avoid incorrectness in arbitral awards and provide reassurance to parties. In this article, we discuss the position of appellate arbitration clauses in India and share our views on it.

Appellate arbitration clauses

The Arbitration and Conciliation Act, 1996 (Arbitration Act) is a self-contained code and governs the procedure for arbitrations in India. While the Arbitration Act provides for a mechanism to appeal / challenge an arbitral award, the grounds for challenge are limited. Under the current regime, an arbitral award cannot be challenged on merits i.e., the decision of an arbitrator is final unless the arbitral award suffers from a procedural infirmity or is against the fundamental / public policy of India. In such a situation, parties are bound by the decision of the arbitrator as full and final. While the limited scope of judicial interference at appellate stage reduces both litigation costs and delays, it also means that an eccentric, or simply wrong arbitral decision cannot be corrected[1] unless one goes through the rigors of challenging the award on the limited grounds prescribed under the Arbitration Act.[2]

The above position posed a challenge to arbitrations where correctness of the arbitral award is of essence compared to saving time and money required in appellate judicial review. Considering these shortcomings, parties prefer to include appellate arbitration clauses in agreements wherein the award can be challenged before a second arbitral tribunal. Such stipulations in contracts ensure another chance for considering the matter on merits.

Position in India vis-à-vis other jurisdictions

Appellate arbitration clauses, though not statutorily prescribed under the Indian arbitration regime, are contractual clauses drawn by parties to submit to appellate review at the instance of either of the parties. A question that necessarily falls from such an arrangement is whether such contractual clauses hold good in the absence of an affirmative statutory provision.

The Supreme Court had the opportunity to consider the validity of such clauses under the Indian arbitration regime in Centrotrade Minerals and Metal Inc. v. Hindustan Copper Ltd.[3] (Centrotrade Minerals Case). The Supreme Court ruled that: (i) appellate arbitration clauses are not contrary to the provisions of Arbitration Act, (ii) party autonomy allows parties to agree on procedural as well as substantive law for arbitrations, (iii) agreeing on appellate arbitration clauses is not opposed to the public policy of India. It was reiterated that party autonomy is virtually the backbone of arbitrations, and all attempts should be made to enforce mutual decisions of parties to a contract. Therefore, the Supreme Court held that appellate arbitration clauses, being creatures of mutual agreement between parties must be recognized as valid in India.

While this position allows parties another chance at hearing the same matter on merits, it also poses enforcement issues that deter parties from including such clauses in contracts. A few challenges identified by us are listed below:

a. Enforcement of first arbitral award: While the Supreme Court dealt with the validity of appellate arbitration clauses in Centrotrade Minerals Case, it remained silent on the position of the first arbitral award in case the appellate provision is invoked. Whether the first arbitral award could be enforced while the appeal is heard and decided by the second arbitral tribunal is a matter of concern. Enforcement being an issue falling from the statute will have to be decided either by the courts or the legislature by way of a clarification / amendment to the Arbitration Act.

While Indian regime remains unclear on the issue, certain international arbitration institutions including JAMS Optional Arbitration Appeal Procedure, 2003 (JAMS Appeal Procedure), the Arbitration Appeal Procedure of International Institute of Conflict Prevention and Resolution, 2015 (CPR Appeal Procedure) and the Optional Appellate Rules of American Arbitral Association, 2013 (AAA Appeal Procedure) provide for the same. These institutional rules prescribe that the enforcement of first arbitral award will not be allowed till the appeal is pending. However, in our opinion this may be used by parties as a tactic to delay proceedings and avoid enforcement of arbitral awards thereby defeating the purpose of speedy redressal. In order to resolve the gap, inspiration can be drawn from the current enforcement procedure prescribed under the Arbitration Act; in case either of the parties prefers an appeal before a second arbitral tribunal, it may also be required to seek a stay on enforcement of the first arbitral award by approaching the court. This arrangement will ensure a just opportunity to both the parties on whether stay on the enforcement is warranted in the case or can be allowed simultaneously.

b. Limitation: In a judicial appeal process, the statute prescribes a timeline within which parties can initiate enforcement of the arbitral award. On the other hand, in an appellate mechanism, there are two arbitration awards, i.e., one by the arbitral tribunal instituted in the first instance and second by the appellate arbitral tribunal. In such a situation, in case the arbitral award of first instance is upheld by the appellate arbitral tribunal, the award required to be enforced would be the award rendered by the first arbitral tribunal. However, the time spent in the appellate procedure may exceed the time period generally prescribed for seeking enforcement. Therefore, whether the limitation period to enforce would commence from the date of first arbitral award or second arbitral award poses a question before the parties.

In this regard, Rule (c) of JAMS Appeal Procedure and Rule 2.3 of the CPR Appeal Procedure provide that the limitation period for initiating enforcement proceedings will commence from the date of appellate award. The position under JAMS Appeal Procedure and CPR Appeal Procedure follows from the fact that both the institutions allow enforcement only once the appeal procedure is concluded. Therefore, the limitation period will commence from the date of the appellate arbitral tribunal’s award. In the absence of any clarity in India to this extent, we believe that if the current procedure for enforcement i.e., seeking a stay and simultaneously appealing the decision is adopted for appellate arbitration procedure, the limitation period for enforcement will depend on the outcome of the decision of stay. Moreover, the Limitation Act, 1963 prescribes exclusion of time spent in bona fide litigation for the purposes of calculating the maximum period of limitation. Accordingly, in a situation where appellate review of the award is rejected and the arbitral award of first instance is desired to be enforced, the courts will exclude the time spent in appellate review as bona fide for calculating limitation period.

 c. Ad-hoc arbitrations: Institutional arbitrations like the above-named provide for a procedure to be adopted in case of appellate arbitrations. These procedures are optional depending on whether parties mutually agree to be bound by the same. However, a question arises in cases where parties resort to ad-hoc arbitrations and do not agree on a procedure of appointment and conduct of appellate arbitrations in the agreement. Pursuant to the decision of Centrotrade Minerals Case, there is a possibility that Indian courts, respecting party autonomy would require parties to resort to the same process that was agreed for the first arbitral tribunal. Moreover, in case of disagreement, as prescribed under the current regime, parties may be allowed to approach the courts seeking appointment of arbitral tribunal for appellate arbitration.

Concluding Remarks

While the above-mentioned limitations deter parties from choosing appellate arbitration clauses, it must be borne in mind that party autonomy is the guiding principle in arbitration and parties are free to agree on a modified, altered procedure. Keeping this in mind, experts opine that in order to benefit from the process, parties must consider the possibility of drafting an arbitration clause providing for appropriate measures on appellate arbitration procedure.[4] This will ensure a tailor-made process suitable for the nature of disputes referred to arbitration and meet the shortcomings under the current regime. Given that appellate arbitration procedure allows a review on merits, the chances of judicial intervention become minuscule. Therefore, it is strongly recommended that in matters where a sound decision holds more value than time and money spent on dispute resolution, parties must opt for tailor-made appellate arbitration clauses in contracts.

Authors: Renjith Nair and Richa Phulwani

The information contained in this document is not legal advice or legal opinion. The contents recorded in the said document are for informational purposes only and should not be used for commercial purposes. Acuity Law LLP disclaims all liability to any person for any loss or damage caused by errors or omissions, whether arising from negligence, accident, or any other cause.

[1] Gary Born in International Arbitration and Forum Selection Agreement: Drafting and Enforcing (6th Edn)

[2] Section 34 of the Arbitration and Conciliation Act, 1996

[3] https://main.sci.gov.in/supremecourt/2004/19375/19375_2004_34_1501_22350_Judgement_02-Jun-2020.pdf

[4] Gary Born in International Arbitration and Forum Selection Agreement: Drafting and Enforcing (6th Edn)