TWO TIER ARBITRATION

[Mr. M. GOVINDARAJAN]

Introduction

The Arbitration and Conciliation Act, 1996 provides for the settlement of dispute between the parties by means of agreement entered into by them to refer the dispute to arbitration and to appoint arbitrators to settle the dispute. This is an alternative way of settling the dispute by commercial entities. The Act provides for the procedure for conducting arbitration by the Arbitral Tribunal, passing the awards and enforcement of the award. The award also can be challenged before the Court. In an agreement for arbitration, usually there will be only one arbitration proceedings but not multiple level of arbitration. This is unknown concept. However there is a wide support for the practice of appealing arbitral awards before another arbitral award.

Two tier arbitration

The two tier arbitration is also known as ‘second instance arbitration’. It is, definitely, a new concept in India. The legal validity of two tier arbitration has been upheld by the Supreme Court, the case law of which is going to be discussed in this article. The National Stock Exchange has the two tier arbitral system to settle the grievances of the investors, traders. At the first instance they have to refer to arbitration which will decide the case and pass award.  If any person is aggrieved by the award of the first arbitration proceedings, he may file appeal within 30 days from the date of receipt of the award to the Appellate Tribunal of Arbitrators. On appeal the Appellate Tribunal of Arbitrators may uphold the award or set aside the award. The award passed by the first arbitrator is final unless the parties to the party do not go in for appeal against the said award.

Case law

In ‘Centrotrade Minerals and Metals Inc. v. Hindustan Copper Limited’ – 2020 (6) TMI 117 – Supreme Court, the appellant in this appeal is an US company, dealing with sale and purchase of non-precious metals including copper. The respondent Hindustan Copper Limited (HCL) is a Government of India undertaking and its business includes purchase of copper concentrate. They entered into an agreement on 16th of January, 1996 where Centrotrade was the seller and the HCL was the purchaser of copper concentrate,  to be delivered at Kanda Port. The respondent used the said goods at the Khetri plant. The payments had been made by the respondent in accordance with the agreement entered into between them. However a dispute arised as to the quantity of dry weight of copper concentrate delivered during December 1998 and January 1999.

Clause 14 of the agreement reads as under-

All disputes and difference 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 arbitrator in London, U.K. in accordance with the rules of conciliation and arbitration of the International Chamber of Commerce in effect on the date hereof and the result of this second arbitration will be binding on both the parties. Judgment upon the award may be entered in any Court of Jurisdiction.

The disputes were referred to Indian Council of Arbitration. Arbitrator was appointed by the Indian Council of Arbitration. Centrotrade made a claim for an award for US $ 383,442.90 in respect of the goods shipped on board the vessels ‘M.V. MARITIME MASTER’ and ‘M.V. LOK PRITI’, and for interest pendent lite at such rate as Centrotrade was entitled to under the law and also for interest on the sum awarded until decree was pronounced in terms of the award. . By the award dated 15.06.1999 the first tier arbitrator passed a NIL award. Therefore the appellant invoked the second tier arbitration. The Indian Council of Arbitration appointed Jeremy Cook QC as arbitrator. 

During the pendency of the second tier arbitration the respondent, Hindustan Copper Limited challenged the award given by the first tier arbitrator before the Civil Court in Khetri. Since the case was decided against the HCL, it filed a revision petition before the High Court at Gujarat. The High Court restrained the appellant from taking further steps in the London arbitration, pending hearing and disposal of the revision petition.  The said stay order has been vacated by the Supreme Court on 08.02.2001. The second arbitrator referred the stay matter to the ICC Court which ordered to continue the arbitration proceedings.

The second tier arbitrator, vide their order dated 29.09.2001, awarded as detailed below-

• Hindustan Copper Limited (HCL) is to pay Centrotrade the sum of $152,112.33, inclusive of interest to the date of the Award in respect of the purchase price for the first shipment.
• HCL do pay Centrotrade the sum of $15,815.59, inclusive of interest to the date of this Award in respect of demurrage due on the first shipment.
• HCL, do pay Centrotrade the sum of $284,653.53, inclusive of interest to the date of this Award in respect of the purchase price on the second shipment.
• HCL do pay Centrotrade their legal costs in this arbitration in the sum of $82,733 and in addition the costs of the International Court of Arbitration, the Arbitrator's fees and expenses totaling $29,000.
• HCL do pay Centrotrade compound interest on the above sums from the date of this Award at 6% p.a. with quarterly rests until the date of actual payment.

After the award was passed by the ICC arbitrator, an application was filed by HCL seeking declaration of the award passed by the ICC as void and not enforceable. At the same time, Centrotrade filed an application for enforcement of the ICC Award. These applications were transferred to the original side of the Calcutta High Court which were heard and disposed of by the Judgment and order of the learned Single Judge of that Court on 10.03.2005. The Single Judge held that the ICC Award was enforceable in law and therefore direction was made to HCL to make payment to Centrotrade.  The Single Judge observed that HCL had full knowledge of the proceedings and proper opportunity to present their case was duly given to HCL and therefore the plea of HCL that proper opportunity was not given, was rejected. It was also held that some papers had in fact reached the arbitrator after the stipulated time and the arbitrator also considered the submissions of HCL before making the award.

On appeal the Division Bench of Calcutta High Court held that an appeal would be maintainable inasmuch as the London award could not be said to be a foreign award, but that a two-tier arbitration clause would be valid. The Division Bench of Calcutta High Court allowed the appeal filed by HCL holding that since the Indian award and the London Award, being arbitration awards by arbitrators who had concurrent jurisdiction, were mutually destructive of each other, neither could be enforced.

Then the matter came to the Division Bench of the Supreme Court. One Judge Sinha S.B. held that a two tier clause of the kind contained in clause 14 of this agreement is non est in the eye of law and would be invalid under Section 23 of the Indian Contract Act. Therefore the foreign award could not enforced in India. The said Judge dismissed the appeal filed by the appellant.

The second Judge Chatterjee Tarun JJin the said appeal framed the following issues to be considered-

• Whether the second part of clause 14 of the agreement providing for two-tier arbitration was valid and permissible in India under the Act?
•  If it is valid, on the interpretation of clause 14 of the agreement, can it be said that the ICC arbitrator sat in appeal against the award of the Indian arbitrator?
• Whether the ICC award is a foreign award or not?
• Whether HCL was given proper opportunity to present its case before the ICC arbitrator?

The said Judge held as below-

• the two-tier arbitration process was valid and permissible in Indian law;
• the ICC arbitrator sat in appeal against the award of the Indian arbitrator;
• the ICC award was a foreign award;

Since HCL was not given proper opportunity to present its case before the ICC arbitrator the appeal filed by the appellant was dismissed and allowed the appeal filed by HCL.

Then this case has been referred to the three Judge Bench of the Supreme Court because of the difference of opinion of the two Judges of the Division Bench. The following are the questions referred to the three Judge Bench-

• Whether a settlement of disputes or differences through a two-tier arbitration procedure as provided for in Clause 14 of the contract between the parties is permissible under the laws of India?
• Assuming that a two-tier arbitration procedure is permissible under the laws of India, whether the award rendered in the appellate arbitration being a ‘foreign award’ is liable to be enforced under the provisions of Section 48 of the Arbitration and Conciliation Act, 1996 at the instance of Centrotrade? If so, what is the relief that Centrotrade is entitled to?

The first question was decided in favor i.e., the settlement of disputes or difference through a two tier arbitration procedure as provided or in clause 14 of the contract between the parties is permissible under Indian Law.

   In respect of the second question the appellant submitted the following questions before the Court-

• Ample opportunity had been given by the arbitrator to HCL to present its case, but that HCL, having an Indian award in its pocket, wanted somehow to abort the London arbitration proceedings.
• HCL first filed the suit that has been referred to, and obtained ex parte ad interim stay against parties from proceeding in the arbitration on 27.04.2000, which was vacated by the Supreme Court only on 08.02.2001. 
• The second arbitrator afforded as many as six opportunities to HCL to present its case and bent over backwards by extending time for filing of submissions and documents several times, and even considered documents that were filed by HCL after the last deadline had been extended and then only passed the award.

HCL, has taken a preliminary submission that the only point of difference between S.B. Sinha,J. and Tarun Chatterjee,J. was on whether the two-tier arbitration clause was valid in law.  Once that point had been answered, the question of being unable to present one’s case, not having been decided by S.B. Sinha, J., was not referred to the larger bench as there was no difference of opinion between the learned Judges on this aspect and therefore this aspect cannot now be adjudicated upon.

HCL further submitted the following before the Supreme Court-

• Once the arbitrator had extended time, the last extension being till 12.09.2001, he ought to have allowed further time in which, apart from legal submissions furnished, documents could have been furnished in support of HCL’s case.
• On 11.09.2001, a terrorist attack had taken place in New York as a result of which globally, there was disruption of transport and communication, and therefore it was very difficult for HCL to send documents within the requisite time.
•  Had such documents been seen, there can be no doubt that this one-sided award might well have been in its favor, as a result of which serious prejudice had been caused to HCL.
• The arbitrator in proceeding with the arbitration despite the ex parte ad interim stay being granted by an Indian court resulted in his client being unable to present his case before the arbitrator.

The Supreme Court heard the submissions put forth by both the parties. The Supreme Court analyzed the award given by the ICC arbitrator. HCL refused to participate in the arbitration proceedings even though they were invited by the arbitrator to do so without prejudice to their jurisdictional objections.

• HCL has been given every opportunity to take any point which they wished to take in their defence.
• By Orders made on 20.12.2000, 19.01.20010, the arbitrator directed that Centrotrade serve submissions and supporting evidence, followed by HCL's response and evidence in support, with a right in Centrotrade to put in a reply in accordance with a clear timetable.
• Since HCL did not give any submission the arbitrator sent them a fax on 30.07.2001, giving them one last opportunity to inform the arbitrator by return of any intention on their part to put in a Defence and to seek an extension of time for doing so.
• On 11.08.2001 the arbitrator received a fax requesting an extension of time of one month to put in a defence.
• On 16.08.2001 the arbitrator ordered that any submissions in support of an application for an extension of time for a defence and any submissions on the substantive merits of the dispute, together with any evidence relied on in relation to the application and any submissions should be received by the arbitrator by 31.08.2001, in the absence of which the arbitrator would not give them any consideration.
• On 27.08.2001 HCL sought a further 3 weeks’ extension of time for making their submissions and serving supporting evidence.
•  The arbitrator allowed a final extension for these submissions and evidence until 12th September 2001. 
• On 13.09.2001 HCL submitted 75 pages of submissions without any supporting evidence or any justification for not complying with the arbitrator’s earlier orders. 
• Despite the objections raised by the appellants the arbitrator considered those submissions made by HCL and taken them fully into account in making this Award.
• HCL raised only jurisdictional issue.

Then the Supreme Court considered the judgment of Single Judge of Calcutta High Court. The Single Judge found that-

• The appellant approached the ICC International Court of Arbitration on 22.02.2000.
• The respondent filed a suit in the Court of Civil Judge, Junior Division, Khetry on 28.03.2000.
• It wanted to stop the second arbitration in terms of the arbitration agreement.
• The arbitrator was appointed on 07.06.2000.
• Till August 2001 the respondent maintained that the second part of the arbitration agreement being against the public policy of India, the arbitration through the ICC International Court of Arbitration was not permissible. On this ground the respondent refused to participate in the arbitral proceeding. It took the matter up to the Apex Court.
• When it failed to obtain any order to stop the arbitration, it filed its submissions running into 75 pages beyond the stipulated period.
• The arbitrator has recorded that at every stage he consulted the procedural aspects with the solicitors representing the respondent.
• There is no proof that the respondent ever objected to the rules and procedure followed by the arbitrator or that the arbitrator followed a procedure not contemplated in the agreement.
•  It is apparent from the award that all opportunities were given to the respondent to present its case.

Then the Supreme Court considered the decisions of Division Bench of Calcutta High Court for which there is diversion of decisions by the Judges. In the first round in this court, S.B. Sinha,J. did not go into the natural justice point, in view of his finding that the arbitration clause itself was null and void. Chatterjee,J., considered as to whether HCL was given proper opportunity to present its case before the ICC arbitrator. According to section 48(1) (b) enforcement of a foreign award can be refused if the party against whom the award is invoked was not given proper notice of the appointment of the arbitrator or of the arbitral proceedings or was otherwise unable to present his case.

The Supreme Court also observed that the matter went to third Judge being difference of opinion of two Judges of Division Bench. The respondent contended that the London arbitrator ought to have determined the question of jurisdiction as a preliminary question, as he himself had initially indicated, before going into the substantive issues relating to the contract. Given the aforesaid timeline, it is clear that the arbitrator was extremely fair to the respondent. Having noticed that the respondent wanted to stall the arbitral proceedings by approaching the Courts in Rajasthan and having succeeded partially, at least till February 2001, the conduct of the respondent leaves much to be called for. Despite being informed time and again to appear before the Tribunal and submit their response and evidence in support thereof, it is only after the arbitrator indicated that he was going to pass an award that the respondent’s attorneys woke up and started asking for time to present their response.

The Supreme Court rejected the plea of HCL that the Supreme Court cannot go into the question posed before it as there was no difference of opinion on HCL being unable to present its case, Justice Chatterjee J’s being the only judgment on this score. HCL also contended that the London arbitrator ought to have determined the question of jurisdiction as a preliminary question, as he himself had initially indicated, before going into the substantive issues relating to the contract. The Supreme Court observed that this argument has never been raised earlier, and has been raised by HCL in the Supreme Court for the first time. None of the documents submitted by HCL clearly and unequivocally shows that the arbitrator sought to take up the plea as to jurisdiction as a preliminary objection which should be decided before other matters. The arbitrator had given a large number of opportunities to HCL to file documents and legal submissions. The arbitrator cannot be faulted on this ground.

The Supreme Court further observed that remanding the matter to the ICC arbitrator to pass a fresh award is clearly outside the jurisdiction of an enforcing court under Section 48 of the 1996 Act. The Supreme Court, therefore, held that Chatterjee, J.’s judgment cannot be sustained.  The Supreme Court set aside the order passed by Chatterjee, J and held that the foreign award shall be enforced.

Conclusion

The Supreme Court in the above case law validated the two party arbitrations. As it becomes the law of the Country the said procedure may be vogue in future. In the view of the author this process is a time consuming one. Definitely one party to arbitration agreement, being aggrieved, will resort to second arbitrator. The second arbitrator award can be challenged before the Court which will take time to conclude the case and implementation of the award.