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03 Jan 2017

Two-tier Arbitration procedure is permissible under Indian law

In M/S Centrotrade Minerals and Metal Inc v Hindustan Copper Ltd (Civil Appeals No. 2562 and 2564 of 2006), the Supreme Court of India considered whether two-tier arbitration procedure is permissible in India.

On 15 December 2016, the Supreme Court of India (SC) held that the settlement of disputes or differences through a two-tier arbitration procedure (whereby a party can appeal the result of an arbitration to a second arbitration panel) is lawful under Indian law.

The court held that there was nothing in the Arbitration and Conciliation Act 1996 (1996 Act) that precluded the parties from agreeing that an award could be referred to a second panel of arbitrators by way of an appeal, with the result of that appeal being subject to the challenge procedure provided by the 1996 Act. Furthermore, two-tier arbitration procedure did not violate Indian public policy. (M/S Centrotrade Minerals and Metal Inc v Hindustan Copper Ltd (Civil Appeals No. 2562 and 2564 of 2006).)

The appeal in this case was referred to a bench of three judges owing to a difference of opinion between two judges of the SC. The court concluded that a plain reading of the arbitration clause in question, which was a part of a contract governed by Indian law, suggested that the contracting parties intended that:
  • Their disputes would be settled by arbitration in India.
  • The aggrieved party would have a right to appeal to a second arbitration panel in London, in accordance with the rules of the International Chamber of Commerce (ICC).
As such, the arbitration clause provided for a two-tier arbitration procedure.
The issues before the SC were the following:
  • Whether the 1996 Actallows an appellate arbitration.
  • Whether there is an implied prohibition to an appellate arbitration in the 1996 Act.
  • Whether an appellate arbitration is contrary to public policy.
While examining these issues, the SC observed that, historically, two-tier arbitration was permissible in India before the 1996 Act was enacted. The court also relied on the report of the UNCITRAL Working Group, which was in favour of appellate arbitration. Therefore, the court was of the view that Parliament must be assumed to have known the view of the UNCITRAL Working Group (of which India was a state member) and must be assumed to have known the decisions of various domestic courts and yet chose not to specifically prohibit the two-tier arbitration system.

The court considered that, on a combined reading of sections 34(1) and 35 of the 1996 Act, an arbitral award would be final and binding on the parties unless it was set aside by a competent court on an application made by a party to the award. This does not preclude the parties to an arbitral award from mutually agreeing to a procedure whereby the award might be reconsidered by another arbitrator, or panel of arbitrators, by way of an appeal, with the result of that appeal being accepted by the parties as final and binding, subject to a challenge procedure provided for by the 1996 Act. The fact that recourse to the court is available under the 1996 Act does not, of itself, prohibit the parties from mutually agreeing to a second look at an award with the intention of an early settlement of disputes and differences.

The SC also confirmed that a two-tier arbitration clause does not violate the fundamental or public policy of India.

Taking into account the above reasoning, the SC held that the parties to an arbitration agreement have the autonomy to decide not only on the procedural law to be followed, but also the substantive law. Therefore, it is permissible for parties to an arbitration to include a two-tier arbitration clause in their contracts.

By Sameer Bindra, Associate Juris Corp
This article was first published in PLC UK. Click here to access this article.