The much awaited decision of the three judge bench in relation to two-tier arbitrations in the matter of M/s Centrotrade Minerals & Metal Inc. v. Hindustan Copper Ltd. was delivered on 15.12.2016. The Supreme Court framed two issues, but answered only one. On the first issue i.e. validity of two-tier arbitration, the court held the same to be valid and not against public policy of Indian law.
On the second issue i.e. whether the award rendered in the appellate arbitration being a ‘foreign award’ is liable to be enforced under the provisions of Section 48…”, the court observed that “appeals should be listed again for consideration of the second question which relates to the enforcement of the appellate award”.
While the ruling is a welcome one and speaks directly to party autonomy, it is important for the Supreme Court to clarify some important questions on the second issue.
While framing the second issue, the court pre-supposes that the second ICC award is a foreign award, perhaps because this was not a contentious issue between the underlying differing judgments [(2006) 11 SCC 245]. In my humble submission, however, it would be imperative for the court to revisit (or reframe) the issue, as to whether the ICC award is a foreign award at all, in the peculiar facts and circumstances of the case, particularly when read in the light of the decision of Enercon (India) Limited v. Enercon GMBH [(2014) 5 SCC 1].
In the present case, the substantive law of contract was Indian law. In fact, the ICC Arbitrator too applied Indian law. Parties to the dispute were Indian and American and neither party was British. The first arbitration was held in India in accordance with the rules of the Indian Council of Arbitration and award was also delivered in India.
The only connection to London was that the second-tier of the arbitration was to be held there in accordance with the rules of ICC. Exclusive jurisdiction of neither country was provided for. It is submitted that India is, therefore, the place with the closest and most intimate connection with the arbitration. In the circumstances, London can only be the venue of arbitration and not the seat of arbitration.
It is settled law that Part-I of the Arbitration Act, 1996 will apply except if the same has been excluded either expressly or by necessary implication [Bhatia International v. Bulk Trading S. A. & Anr., (2002) 4 SCC 105; para 32]. It would also be important to mention, like Enercon, it is the ratio of Bhatia International that will govern the arbitration contract between Centrotrade and HCL, since the same was executed prior to 06.09.2012 [cut-off date for the applicability of BALCO v. Kaiser Aluminium Technical Services Inc., 2012 9 SCC 552].
As explained and affirmed in Enercon, in an International Commercial Arbitration, venue can often be different from the seat of arbitration. From a perusal of the relevant law, it appears, that the lex-arbitri or the law governing the arbitration is the determinative law for deciding the seat of arbitration, if such seat has not been designated.
Unlike in the present facts and circumstances, in Enercon, except for the designation of venue, all three laws were all Indian i.e. (i) the law governing the substantive contract; (ii) the law governing the agreement to arbitrate and the performance of that agreement (iii) the law governing the conduct of the arbitration. I also recognise that the court in Enercon recognised, with approval, the ratio of Roger Shashoua Rodeman Holdings Ltd. Stancroft Trust Ltd. v. Mukesh Sharma [(2009) EWHC 957 (Comm); para 27] whereby the court held that the venue of arbitration was accompanied by “arbitration to be conducted in accordance with the Rules of ICC in Paris (a supranational body of rules)”.
While the court in Enercon recognised that normally if the place is designated, the law governing the arbitration shall be of that place [Naviera Amazonica Peruana S.A. Vs. Compania Internacional De Seguros Del Peru; 1988 (1) Lloyd’s Rep 116], it is submitted this not the only determinative factor. In the present facts and circumstances, there is no ‘seat’ designated. The only connection to London is that it is the arbitration venue and required the application of ICC Rules.
On an examination of the facts in the present matter, the court may well come to the conclusion that the ICC London award is to be treated as a foreign award in view of the ratio in Shashoua or that facts thereof differ from those in Enercon, but it must, at least, test the factual position against the proposition laid down in Enercon.
Brief Facts of Centrotrade
Before proceeding further, it might be appropriate to dwell briefly on the facts. A contract between an American corporation namely M/s Centrotrade Minerals & Metal Inc. and Hindustan Copper Limited, a Government of India undertaking (“HCL”), for the purchase of copper concentrate was entered into which provided for an unusual two-tier arbitration clause, which read as follows:
“14. Arbitration :
All disputes or differences whatsoever arising between the parties out of, or relating to, the construction, meaning and operation or effect of the contract or the breach thereof shall be settled by arbitration in India through the arbitration panel of the Indian Council of Arbitration in accordance with the Rules of Arbitration of the Indian Council of Arbitration.
If either party is in disagreement with the arbitration result in India, either party will have the right to appeal to a second arbitration in London, UK in accordance with the rules of conciliation and arbitration of the international chamber of commerce in effect on the date hereof. The results of this second arbitration will be binding on both the parties. Judgment upon the award may be entered in any Court in jurisdiction.”
Disputes arose between the parties, leading to the first-tier of arbitration. The Indian Council of Arbitration gave a NIL award on June 15, 1999. Centrotrade then invoked the second-tier arbitration in February, 2000, before the International Chamber of Commerce (“ICC”) in London.
During the pendency of the proceedings before the ICC arbitrator, an injunction was granted in revision proceedings filed by HCL, by the Rajasthan High Court, which was later vacated by the Supreme Court in February 2001. The Award was passed on September 29, 2001, in favour of Centrotrade, who subsequently sought enforcement under s.48 of the Arbitration and Conciliation Act, 1996 (“ACA”) proceeding on the assumption that the ICC Award was a foreign award.
The Single Judge of Hon’ble Calcutta High Court held that the ICC Award was a foreign award in terms of s.44 of the ACA and enforceable accordingly. Relying on the judicial precedence, the court held in favour of two-tier arbitrations.
On appeal by HCL, the Division Bench, inter alia, held that the second award was not enforceable since both the awards were binding and the second Award did not expressly overrule or substitute the first award. The Court also held that since the law governing the agreement was Indian law, the award would not be a foreign award within the meaning of s.44 of the ACA.
The matter was appealed to the Supreme Court by both parties. On May 9, 2006, SB Sinha and Tarun Chatterjee JJ. rendered differing judgments. Sinha J. held that two-tier arbitrations were impermissible and invalid under the ACA. On the other hand, Chatterjee J. was of the view that successive arbitrations were to be regarded as one proceeding and the last arbitration will get merged with the other and therefore the second award was valid and enforceable. In view of the differing judgments, the matter was referred to a larger bench.
The Doctrine of Merger
This brings me to the second issue i.e. the doctrine of merger. Having held that appellate arbitrations are valid in India, it would be important for the court to clarify the position with regard to the applicability of this doctrine to two-tier arbitrations for three reasons.
First, this was one of the contentious issues between the differing judgements. Secondly, as held in the landmark judgement of Kunhayammed v. State of Kerela [(2000) 6 SCC 359; para 12] this doctrine does not have either universal or unlimited application. Thirdly, unlike courts, there is no recognised hierarchy within arbitral awards. Chatterjee, J in his judgement states ,
“… the doctrine of merger equally applies in cases of appellate arbitrations, such that on the issuance of appellate award, the original award merges with it and only the appellate award is valid and capable of enforcement.”
According to Chatterjee J, two-tier arbitrations do not culminate into ‘an admixture of two different types of awards’ but rather only one award subsists. Undoubtedly, the three-judge bench decision uses the term ‘appellate arbitration’ and, perhaps therefore by implication approved the view of Chatterjee J.
But the doctrine of merger is a common law doctrine defining the propriety of the hierarchy of the judicial system. The logic underlying the doctrine is that there cannot be more than one decree or operative order governing the same subject-matter at a given point of time [(2000) 6 SCC 359; para 9]. Therefore, for the second award to survive, the first award must necessarily subsume into the second award and the second arbitral tribunal must necessarily be recognised as the superior forum.
It is therefore, in my view, imperative for the Supreme Court to clearly state its position on the application of the doctrine of merger to appellate awards. Parties desirous of providing for two-tier arbitrations have to carefully word their arbitration clause and specify that the subsequent (appellate) arbitration has the specific power to reverse, modify or affirm the previous arbitral award.
Lastly, a word of caution is necessary for those opting for two-tier arbitrations, because unlike s.34 where the grounds for challenge are limited, an appellate arbitration, would be akin to a first appeal. Further, the scrutiny under s.34 and s.48 is not ousted. So, unless, there is a considered and compelling purpose served which merits a review of both law and fact de-novo, it would not be advisable to opt for a two-tier arbitration, as this would merely add another layer to the entire process and result in delaying the final resolution.
It is hoped that the second unresolved issue is decided at an early date. The doctrine of merger and manner of enforceability are important for the court to decisively rule upon, particularly in relation to international commercial arbitrations, where the ‘seat’ may or may not be in India.
Payal Chawla is the founder of JusContractus, a Delhi based full service law firm, with primary focus on arbitrations. The author recognises the able assistance of Ms. Hina Shaheen, an Associate at JusContractus. For feedback, contact email@example.com.