Two-Tier Arbitration in India

8th October, 2024 - 7:11 am Categories: Arbitration 0 Comments

Two-tier arbitration introduces a double-layered approach to dispute resolution. The first tier requires parties engage in a primary level arbitration process where a panel of arbitrators endeavour to reach an amicable settlement. If this stage proves unsuccessful, the dispute escalates to a secondary arbitration level or as they call it- the second tier.[i] A series of landmark cases involving the application of two-tier arbitration clauses in India are the Centrotrade Minerals and Metals Inc. v. Hindustan Copper Limited[ii] cases. These cases set a precedent for assessing the effectiveness of two-tier arbitration clauses in resolving complex commercial disputes.

GLOBAL APPLICATION

Two-tier arbitration is not only a well-established practice in international commercial arbitration, but also considered legitimate in various jurisdictions worldwide like Japan, Italy, the Netherlands, Austria, and South Africa. The UNCITRAL Model Law, which serves as a cornerstone of modern international arbitration, has offered assurance that the two-tier arbitration is viable. It states that “A party is not precluded from appealing to an arbitral tribunal of second instance if the parties have agreed on such a possibility (as is common in certain commodity trades).”

Leading arbitral institutions such as the American Association of Arbitration (AAA), Conflict Prevention & Resolution (CPR), JAMS, and GAFTA incorporate two-tier arbitration mechanisms. In addition, entities like the Paris Arbitration Chambers (PAC) and the European Court of Arbitration provide parties with the option to request a fresh hearing by a second panel before the final award is issued by the first panel. The second panel’s decision becomes final and binding. The widespread adoption of an appellate mechanism in arbitration best practices is driven by its ability to reduce risks significantly and offer peace of mind to the parties involved.

INDIAN PERSPECTIVE

In India, the legitimacy of two-tier arbitration clauses is a major concern. Such clauses have been subjected to judicial scrutiny to determine their enforceability and conformity with Arbitration and Conciliation Act 1996. The interpretation of Section 35 of the 1996 Act, dealing with the finality of arbitral awards, creates some confusion regarding enforceability of two-tier arbitration in India. Section 35 makes an arbitral award final and binding on the parties. However, in the Centrotrade case (supra) the court clarified that “final and binding” does not mean absolute finality. It overturned the notion that “once an arbitral tribunal issues an award, no action can be initiated on the original claim that had been the subject matter of the reference.”[iii]

The court emphasized that section 35 does not prohibit parties from opting for a two-tier arbitration, and that the award’s binding nature is subject to the parties’ intention. The Court held: “There is nothing in the A&C Act that prohibits the contracting parties from agreeing upon a second instance or appellate arbitration-either explicitly or implicitly…..the legal position as we understand it is 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. The choice of jurisdiction is left to the contracting parties.”

Indian courts had already acknowledged the validity of appellate arbitration clauses, even before the Centrotrade decision, while dealing with the 1899 Act and the 1940 Act. They recognized that the right to appeal is a substantive right that cannot be taken away without express legal provisions, allowing awards to be subject to appeal based on the agreement’s terms. In cases like Steel Authority of India v. Engineers Project India Ltd.[iv],  the courts affirmed that neither the 1899 Act, the 1940 Act, nor the 1996 Act prohibited appellate arbitration. Indian courts have consistently upheld the validity of appellate arbitration clauses, by holding that they are rooted in the principles of party autonomy and ensuring a fair trial.

Two-tier arbitration provides an opportunity to revisit awards with parties’ consent. This alleviates the burden of courts in reviewing arbitral awards. Although, parties have the recourse to Court under Section 34, that does not mean that the parties are precluded from applying other methods of redressal like an appellate arbitral tribunal. The Centrotrade decisions has made it very clear that the intention of the A and C Act 1996 is not to throttle party autonomy by providing recourse to Courts under Section 34.

PRACTICAL IMPLICATIONS

Two-tier arbitration is a prevalent practice. However, it brings about various practical questions. For instance, the role of the appellate arbitral tribunal needs clarification. Questions like; ‘will it function solely as an appellate body which primarily reviews the correctness of the initial arbitral award? Or will it carry out a comprehensive reassessment of the entire case, possibly without any reference of the first award?’ remain at the forefront. It is also important to address concerns as to interim orders according to Section 17 and the execution of awards according to Section 36 during the appeal process. Moreover, there could be concerns about the admissibility of extra documents or evidence.

At the same time, two-tier arbitration offers various advantages too. Some of which include transparency, the attraction of foreign investment, and flexibility in dispute resolution. One of the most attractive advantages of adopting a two-tier arbitration approach is that there can be an active involvement of prestigious international bodies like the ICC. This engagement enhances the transparency and credibility of the arbitration process, which is particularly valuable in our interconnected globalized world. In this manner, foreign investors can benefit from the opportunity of settling disputes in a neutral environment while still adhering to local laws. This, in fact, can create an assurance in their mind that there is a balanced and levelled playing field for all the parties involved.

It is also important to address potential disadvantages, such as the extended timeframes required for two-tier arbitration. There’s the conundrum of the merger between the first award and the appellate award, which requires attention. Clarity while drafting arbitration clauses is also essential to avoid disputes related to two-tier arbitration. This is to ensure that the mechanism, including the finality of previous awards, limitation periods, and the location of different arbitration proceedings, is explicitly defined.

CONCLUSION

The Indian judicial system has a disadvantage because of inefficiency. Establishing an effective system for upholding verdicts and quickly settling of disputes that have frequently dragged on for decades is important. Two-tier arbitration is efficient as it avoids the complications and time involved in traditional litigation. It gives parties multiple opportunities to settle their dispute by upholding one of the most significant principles of Arbitration- party autonomy. The rulings of Indian Judiciary, upholding the legality of two-tier arbitration clauses, reflect a significant step toward harmonizing the Indian arbitration system with international arbitration frameworks. Yet, in order to fully reap the rewards of this practice, a number of practical issues must be resolved.

Author: Yukta Chordia, in case of any queries please contact/write back to us via email to chhavi@khuranaandkhurana.com or at Khurana & Khurana, Advocates and IP Attorney.

[i] Gaurav Jairaj and Gaurav Kumar, “Two-Tier Arbitration in India: An Unclear Path.” IndiaCorpLaw, 10 July 2020, https://indiacorplaw.in/2020/07/two-tier-arbitration-in-india-an-unclear-path.html)

[ii] MANU/SC/1609/2016

[iii] Satish Kumar v. Surinder Kumar 1969 SCR (2) 240

[iv] W.P. (C) 3570/2012 & CM 7535/2012