EXTENT OF JUDICIAL INTERVENTION IN

ARBITRATION

Submitted To: Ms. Mahima Bhardwaj

Submitted By : Anmol Kataruka (A3221511036) Shreya (A3221511076) Kashish Khurana (A3221511010) Kuunal Bakshi (A3221511016) B.B.A. LL.B.(H.) (9th SEMESTER)

ACKNOWLEDGMENT

We are hereby submitting my ADR project titled ‘Extent of judicial intervention in Arbitration.’

Any attempt at any level can’t be satisfactorily completed without the support and guidance of learned people.

It gives us immense pleasure to acknowledge all those who have rendered encouragement and support for the successful completion of this work.

We are grateful to my teacher Ms.Mahima Bhardwaj. She gave us moral support and guided us in different matters regarding the topic and very kindly suggested the outlines of this project and gave different ideas in making it. We thank her for her overall supports.

THANKING YOU

1

CONTENT

INTRODUCTION

TOPICS Page no.

1. INTRODUCTION 3

2. GROWTH OF ARBITRATION IN INDIA 4

3. ROLE OF COURT 5-6

4. SCHEME OF THE ACT AND COURT INTERFERANCE

7

5. INTERVENTION OF INDIAN COURTS IN ARBITRATION PROCEEDINGS

SCOPE OF INDIAN COURTS JURISDICTION TO GRANT INTERIM RELIEF

APPOINTING THE ARBITRATORS ENFORCEMENT OF ARBITRAL AWARDS

JURISDICTION OF INDIAN COURTS

8-12

6. JUDICIAL INTERVENTION: CAUSE OF MISERY 13-14

7. JUDICIAL INTERVENTION: JUSTIFICATION 15

8. CONCLUSION 16

2

Arbitration is one of the oldest methods of settling civil disputes between two or more persons by reference of the dispute to an independent and impartial third person, called arbitrator, instead of litigating the matter in the usual way through the courts. It saves time and expense. It also avoids unnecessary technicalities and at the same time ensures “substantial justice within limits of the law”.

Arbitration is a process of settling disputes in the commercial sphere and is well known to the Indian system of justice. It is an old practice through which the panchayats in villages would settle disputes between the parties. The main objective of the Arbitration Act is to minimize the supervisory role of courts in the arbitral process and to provide that every final arbitral award is enforced in the same manner as if it were a decree of the Court.

The courts shall not interfere in arbitral proceeding is one of the fundamental theme underlying the Act. Indeed the Act contemplates three situations where judicial authority may intervene in arbitral proceedings. These are:

i) Appointment of arbitrators, where the parties envisaged method for the same fails

ii) Ruling on whether the mandate of the arbitrator stands terminated due to inability to perform his functions or failure to proceed without undue delay 

iii) Provide assistance in taking evidence

All the above three situations provide the backdoor entry to the judiciary (courts) to interfere into the arbitration matters.

3

GROWTH OF ARBITRATION IN INDIA

Litigation in India is generally time-consuming and expensive. Civil courts in India are typically bogged down with delay. An estimated backlog of 30 million cases and routine delays to dispose of a single case has severely undermined public confidence in the rule of law. In this situation, Arbitrations are becoming increasingly popular & affords parties the hope of avoiding the judicial system. There are other reasons to support recourse to arbitration too. For international transactions, arbitration offers the hope of reducing bias and the prospect of parallel lawsuits indifferent countries. There may also be the expectation (warranted or not) of confidentiality, speed and expertise.

The general assumption is that arbitral awards should be final and binding, and open to limited challenge before the Court.

But what is the basis of “Limited Challenge”? The Theory behind this is that Arbitration is amanifestation of party autonomy. It is a consensual process, being the subject matter of agreement. When two parties have got together and mutually decided to resolve the dispute outside the Court system then in such a cases the Courts should not interfere in such consensual arrangements. Once two parties have chosen to appoint a third person by consent, an award by such a person should be final and binding and should not be challenged except in very rare circumstances. This is the basis for a limited challenge under the Arbitration and Conciliation Act, 1996

ROLE OF COURT

4

One of the fundamental features of the Act is that the role of the court has been minimized. Accordingly, it is provided that any matter before a judicial authority containing an arbitration agreement shall be referred to arbitration (Sec. 8 provided the non - applicant objects no later than submitting its statement of defense on merits). Further, no judicial authority shall interfere, except as provided for under the Act.

In relation to arbitration proceedings, parties can approach the Court only for two purposes:

1. For any interim measure of protection or injunction or for any appointment of receiver etc.

2. For the appointment of an arbitrator in the event a party fails to appoint an arbitrator or if two appointed arbitrators fail to agree upon the third arbitrator.

In such an event, in the case of domestic arbitration, the Chief Justice of a High Court may appoint an arbitrator, and in the case of international commercial arbitration, the Chief Justice of the Supreme Court of India may carry out the appointment.

A court of law can also be approached if there is any controversy as to whether an arbitrator has been unable to perform his functions or has failed to act without undue delay or there is a dispute on the same. In such an event, the court may decide to terminate the mandate of the arbitrator and appoint a substitute arbitrator.

5

The Principle of Non-intervention by the Courts

 The principle that the courts shall not interfere in arbitral proceedings is a fundamental theme underlying the Act. Indeed the Act contemplates of only three situations where judicial authority may intervene in arbitral proceedings. These are:

By and large the Indian courts have well understood the spirit and intent behind the principle of non-intervention. Thus, the respondent obtained an anti-arbitration injunction from the High Court on the ground that the pledge of shares, which was sought to be enforced through arbitration, would enable the claimants to take control of a telecom company which (as it was a foreign company) would be contrary to Indian law. On appeal, the Supreme Court rejected this contention, stating that this was a plea on merits and thus within the sole jurisdiction of the arbitrators. Interestingly, the court not only vacated the injunction, it also restrained the respondent from moving any further applications ‘which would have the effect of interfering with the continuance and conclusion of the arbitration proceedings’1. 

however, Hon’ble Supreme Court refused to stay the court action on the ground that the subject matter of the arbitration agreement was not the same as the subject matter of the civil suit. Besides, the parties in the two actions were not identical. The court held that the entire subject matter of the suit should be the subject matter of the arbitration agreement in order for the mandatory provisions of Sec. 8 to be applied.2

1 CDC Financial Services (Mauritius) Ltd vs. BPL Communications, 2005(2) RAJ 43 (SC).

2 Sukanaya Holdings vs. Jayesh Pandya, (2003) 5 SCC 531.

6

SCHEME OF THE ACT AND COURT INTERFERANCE

It is important to note that the assistance of the courts is necessary for the smooth functioning of the arbitration system since the courts have statutory powers to execute and enforce an order.

But at the same time courts should avoid entertaining applications against the arbitration proceedings because the court proceedings delay the arbitral process and consequentially the objective of the arbitration gets defeated.

Hence the courts, which are exercising the supervisory powers, should exercise the powers with caution so that the arbitral process does not get affected. The Arbitration and Conciliation Act, 1996 gives scope to the Courts only with respect to the following issues:

(a) Reference to arbitration (S.8, 45 &54)

(b) Appointment of arbitration (S.11)

(c) Interim measures (S.9)

(d) Challenge to arbitrators (S.12, 13 & 14)

(e) Challenging the arbitration awards (S.34)

(f) Seeking Courts assistance with regard to Witnesses (S.27)

(g) Contempt Proceedings (S.27)

(h) Enforcement of awards (S.36, 49&58)

(i) Appealable orders (S.37 and S.59)

7

INTERVENTION OF INDIAN COURTS IN ARBITRATION PROCEEDINGS

Section 5 of the Act expressly lays down that no judicial authority will interfere with any arbitration proceeding except as provided in Part I of the Act. The section opens with a clause "Notwithstanding anything contained in any other law for the time being in force" which excludes other statutes from operation in so far as they relate to intervention by any judicial authority in such proceedings. Set out below is the scope of interim relief and enforcement of arbitral awards by Indian Courts under the Act.

1. SCOPE OF INDIAN COURTS JURISDICTION TO GRANT INTERIM RELIEF

Section 9 of the Act empowers judicial courts to grant interim relief. These reliefs can be claimed at any time before, or during arbitral proceedings or at any time after the making of the arbitral award but before such an award is enforced. Set out below are the circumstances under which such interim relief can be granted by judicial courts.

i. for the appointment of a guardian for a minor or person of unsound mind for the purposes of arbitral proceedings; or

ii. for an interim measure or protection in respect of any of the following matters, namely:-

a. the preservation, interim custody or sale of any goods which are the subject-matter of the arbitration agreement;

b. securing the amount in dispute in the arbitration;

c. the detention, preservation or inspection of any property or thing which is the subject-matter of the dispute in arbitration, or as to which any question may arise therein and authorising for any of the aforesaid purposes any person to enter upon any land or building in the possession of any party or authorising any samples to be taken or any observation to be made, or experiment to be tried, which may be necessary or expedient for the purpose of obtaining full information or evidence;

d. interim injunction or the appointment of a receiver;

e. such other interim measure of protection as may appear to the Court to be just and convenient.

8

It is critical to note that initially courts in India interpreted section 9 so as to apply to both International Commercial Arbitration and Domestic Arbitration. the Supreme Court decided that the courts had the power to grant interim relief in International Commercial Arbitration along with Domestic Arbitrations and that section 9 did not just apply to Indian arbitrations but could also apply to foreign arbitrations unless the arbitration agreement expressly excludes the application section 9 of the Act.3 However this was subsequently overturned,wherein the Apex Court held that Part I (Section 2-43) would only apply to Domestic Arbitrations and not International Commercial Arbitration.4 In Bharat Aluminium, the Supreme Court restricted the application of the judgment to disputes arising from arbitration agreements that are executed after the date of the judgment (6 September 2012).

2. APPOINTING THE ARBITRATORS

Intervention in appointing the arbitrators – Sec11 prescribes for the procedure of appointment of arbitrator by the parties. When the parties/arbitrators/any person including an institution fails to agree/act/perform any function entrusted to them or any procedure they are expected to agree upon under sub clauses (4), (5) or (6), then a party may request Chief Justice or any person or any institution designated by him to take the necessary measure. This is the first instance where the act envisages recourse to a court in relation to arbitration proceedings. The difference between model law and Indian law is that the model law envisages the court to appoint the arbitrator whereas the Indian law requires the Chief Justice of the High court in national and Chief Justice of India in case International Commercial Arbitration to appoint the arbitrator. As explained by the Supreme Court, the idea behind this is to ensure that nomination for the arbitrator is made by a high judicial designate who would appoint a competent, independent and qualified arbitrator in good faith. But judicial authority appointing the arbitrator can lead to conflicting decisions. On this, the court has held that the function of appointment of arbitrator is not judicial but administrative in nature.5 Even if any ‘doubt’ arises in the mind of the Chief Justice or any person so designated by him as to the existence or validity of the arbitration agreement, same has to be referred to the arbitral tribunal to resolve but the judiciary is not to intervene with the arbitration.

Challenging the appointment of the arbitrator – Under sec12, an arbitrator can be challenged under only two conditions:                       

(a) Circumstances exist to indicate that justifiable doubt exists as to the impartiality or independence of the arbitrator; or  

(b) The arbitrator so appointed is not aptly qualified.

Further, subject to the parties’ agreement that, it is the arbitral tribunal, which shall decide over the challenge. In case, the challenge fails, the arbitration proceedings shall continue and the arbitral tribunal will render award. 

3 Bhatia International v. Bulk Trading S.A. and Anr (2002) 4 SCC 105.4 Bharat Aluminium Co. v. Kaiser Aluminium Technical Services Inc.(Civil Appeal No. 7019 of 2005).5 Konkan Rly. Corp v. Rani Construction Pvt. Ltd. Appeal (civil) 5880-5889 of 1997.

9

3. ENFORCEMENT OF ARBITRAL AWARDS

The Act also distinguishes between Domestic Awards and Foreign Awards in respect to enforcement of such Awards.

i. Domestic Arbitration

Section 36 of the Act deals with enforcement of Domestic Arbitral Awards which states "Where the time for making an application to set aside the arbitral award under award under section 34 has expired, or such application having been made, it has been refused, the award shall be enforced under the Code of Civil Procedure, 1908 (5 of 1908) in the same manner as if it were a decree of the Court."

As per the 1996 Act, arbitral award includes final and interim awards passed by the arbitrator. Both interim as well as final awards can be challenged under S. 34. The Supreme Court of India confirmed the powers of the courts to entertain S.34 applications while dealing with the case McDermott International Inc. Vs. Burn Standards Co. Ltd.6, The Only recourse against any arbitral awards as per the act is by filing an application for setting aside arbitral awards under S. 34.

Section 34 which deals with recourse against Domestic Arbitral Awards provides an exhaustive list of the circumstances under which such Awards can be set aside by Judicial Courts . Section 34(2) lays down that an arbitral award may be set aside by the Court only if

a. The party making such an application for setting it aside furnishes proof that –

A party was under some incapacity.

The arbitration agreement was not valid under law

The applicant was not given proper notice of the appointment of the arbitrator or of the arbitral proceedings or was otherwise unable to present his case or

The award deals with a dispute not contemplated by or not falling within the terms of the submission , or it contains decision on matters beyond the scope of the submission to arbitration. However, if the decision on matters submitted can be separated from those not so submitted only that part dealing with matters not submitted may be set aside.

The composition of the arbitral tribunal or the arbitral procedure was not in accordance with the agreement of the parties, unless such agreement was in conflict with the mandatory provision of part I of the Act; or

b. The Court finds that –

6 (2006) 11 SCC 181

10

The subject-matter of the dispute is not capable of settlement by arbitration under the law for the time being in force; or

The arbitral award is in conflict with the public policy of India. The

explanation clarifies that without prejudice to the generality of expression, an award is said to be in conflict with the public policy of India if its making was induced or affected by fraud or corruption or it was in violation of the obligations of confidentiality of matters relating to conciliation proceedings(Section 75) or the bar on admissibility of evidence of conciliation proceedings(Section 81).

Based on the aforesaid it is well established, that judicial courts can only set aside a domestic arbitral award only if it fulfills the grounds stated in Section 34. The Act expressly denies the court the authority to decide the case on its merits if the Arbitrator(s) has already looked into it.

ii. International Commercial Arbitration

Section 49 of the Act deals with enforcement of Foreign Awards which states "Where the Court is satisfied that the foreign award is enforceable under this Chapter, the award shall be deemed to be a decree of that Court."

Section 48 of the Act deals with recourse against foreign awards provides a list similar to section 34 with one additional ground for setting aside a foreign award in circumstances where such an award has not yet become binding on the parties, or has been set aside or suspended by a competent authority of the country in which, or under the law of which, that award was made. The party making such an application would have to provide proof of the same.

4. JURISDICTION OF INDIAN COURTS

Section 2(1)(e) of the Act defines a Court as the principal Civil Court of original jurisdiction in a district, and includes the High Court in exercise of its ordinary original civil jurisdiction, having jurisdiction to decide the questions forming the subject matter of the arbitration if the same had been the subject matter of the suit, but does not include any Civil Court of a grade inferior to such principal Civil Court, or any court of small cause.

The Civil Procedure Code, 1908 ("CPC") establishes the territorial jurisdiction of the various courts in which Civil Suits can be initiated which are set out below.

In respect to disputes involving an immovable property, the suit shall be initiated in the Court within whose jurisdiction the subject property is situated. Provided that a suit to obtain relief respecting, or compensation for wrong to, immovable properly held by or on behalf of the defendant may, where the relief sought can be entirely obtained through hi s personal obedience, be instituted either in the Court within the local limits of whose jurisdiction the property is situate, or in the Court within the local limits of whose jurisdiction the defendant actually and voluntarily

11

resides, or carries on business, or personally works for gain. CPC further clarifies that if such an immoveable property is situated in the jurisdiction of more than one court, the suit can be initiated in either of the courts within whose jurisdiction a portion of the property is situated.

In respect of Suits for compensation for wrongs to person or movablesif the wrong was done within the local limits of the jurisdiction of one Court and the defendant resides, or carries on business, or personally works for gain, within the local limits of the jurisdiction of another Court, the suit may be instituted at the option of the plaintiff in either of the said Courts.

In other cases, the suit shall be initiated in the Court within whose jurisdiction the defendants actually and voluntarily resides, or carries on business, or personally works for gain or in the court within whose jurisdiction the cause of action arose.

Section 42 further states "Notwithstanding anything contained elsewhere in this Part or in any other law for the time being in force, where with respect to an arbitration agreement any application under this Part has been made in a Court, that Court alone shall have jurisdiction over the arbitral proceedings and all subsequent applications arising out of that agreement and the arbitral proceedings shall be made in that Court and in no other Court.”

Additionally, the Supreme Court has held that where there are two or more competent Courts which can entertain a suit, if the parties to the contract agree to vest jurisdiction in one such court to try the dispute, then any such disputes in respect to such agreement would be tried exclusively by that court.7 Further, the Supreme Court emphasized that whenever there is a specific provision in the agreement of the parties conferring jurisdiction on a particular court from among the courts having jurisdiction to decide a matter then it automatically ousts the jurisdiction of other courts. 8However, it was clarified that only the courts at the place which has jurisdiction under the CPC can be clothed with exclusive jurisdiction under the parties agreement.9 Based on the above we understand that the parties can vide an agreement confer exclusive jurisdiction onto a court provided that such a court already has jurisdiction under the CPC.

7 A.B.C. Laminart Pvt. Ltd. vs A.P. Agencies, Salem , AIR 1989 SC 1239.8 Rite Approach Groupe Ltd. Vs Poso Boron export, AIR 2000 SC 401.9 Tata Finance Ltd vs Pragati Paribahan, AIR 2000 Cal 241.

12

JUDICIAL INTERVENTION: CAUSE OF MISERY

Legislative intent of the new Arbitration and Conciliation Act, 1996 is to reduce excessive judicial intervention due to which the earlier Arbitration Act, 1940 suffered serious infirmities. The enactment of the 1996 Act was initially met with approbation by the Court in case of Konkan Railway Corporation vs. Mehul Construction Co.,10 which stated clearly that the provisions of the Act indicates that the Act limits intervention of the Court with an arbitral process to the minimum. But subsequent reality however, has been far from ideal.

Cases like ONGC vs. SAW Pipes11 and SBP & Co. vs. Patel Engineering12 have sharply shown governmental attempts to promote arbitration in India. ONGC case witnessed the challenge of an arbitral award on the ground that it was ‘in conflict with the public policy of India’; instead of taking a narrow interpretation of the phrase ‘public policy’ as being something in excess of a prima facie of Indian law, the Court adopted a very broad understanding of the same. The Court went on to equate ‘patent illegality’ with ‘error of law’ and held that any contravention of an Indian legislation would ipso facto make the award in violation of public policy.

The doors were thus open for the judicial review that the Act was put in place to avoid. Case of SBP & Co. further extended the scope of judicial intervention when the Hon’ble Supreme Court ruled that it was within the powers of the Chief Justice of India to adjudicate on the issues like valid arbitration agreements and went on to state that the Chief Justice could even call for evidence to resolve jurisdictional issues while performing the function of appointing an arbitrator when the parties failed to come to an agreement.

The Supreme Court went on to say that such decisions would be final and binding upon the parties. This effectively flouted the principle of competence and thus amounted to a situation where the arbitration tribunal’s power to determine its jurisdiction was undermined.

Effectively therefore, Courts endowed themselves with powers which would substantively delay arbitral proceedings (be it by raising specious objections to preliminary issues or by sabotaging the appointment process) which goes against the fundamental reason for enacting Sec. 13 of the Act.

10 (2000) 7 SCC 20111 (2003) 5 SCC 705 12 (2005) 8 SCC 618

13

This brings us to what has been called the dispute between high principles (stressing the need for justice) and low principles (an equally insistent to end litigation). The expansion of the Court’s intervention into the judicial sphere has aroused serious issues; ONGC case expansive interpretation of the term ‘public policy’ has been followed in many cases which all reiterate the judiciary’s right to review the arbitral award.

Further, in case of Hindustan Zinc Ltd. vs. Friends Coal Carbonisation,13 Hon’ble Supreme Court has stated that awards could be set-aside on grounds like being contrary to the terms of contract. This indeed sets a dangerous precedent since, as stated earlier; the encouragement of ADR was based on a need to avoid the lengthy court process.

The Court has statutory power to set aside an award when the arbitrators misconduct themselves or the references. But it also has the unqualified discretion to remit the award to the chosen tribunal.

13 (2006) 4 SCC 445

14

JUDICIAL INTERVENTION: JUSTIFICATION

In the vast majority of purely domestic arbitrations, where there is no foreign element, the government or its agencies are parties. In many cases the arbitrators appointed by the center are the government employees who are likely to be biased for one or the other reason.14

Most arbitration Tribunals are not institutional but ad-hoc, and there are no trained arbitrators who can facilitate fast and summary disposal while maintaining the confidence of both parties. Most Arbitration is ad hoc arbitrations. There are few institutions, which can provide arbitration facilities under their Rules.

Often, retired judges are appointed as arbitrators who, by virtue of long tenures behind the Bench, have got accustomed to tedious rules pertaining to procedure and evidence. As a result, arbitrations become a battle of pleadings and procedures, with each party trying to stall if it works to their favour15.

And, there may be a temptation for arbitrators to prolong the arbitration to earn higher "sitting fees". Whispers also abound of arbitrators being vulnerable to `being procured' and those with deep pockets being able to purchase justice. Many arbitrators are not familiar with the practice of arbitration or how to effectively conduct the arbitral process.16 They all have forgotten the object, the aim, and the mission behind incorporating the Act. Lawyers too, are often not trained in the law and practice of arbitration and there is a tendency among them to prolong arbitrations, seek unnecessary adjournments, sandwich arbitrations between their regular court appearances, etc., all of which add up to a lack of standards in conducting arbitration in India.17

Therefore, many arbitrations end up being conducted as if they are mini trials, with pleadings, issues, admission and denial, oral and documentary evidence, cross examination etc. Thus, where there is no connection between the theory and the practice of arbitration, not unnaturally the Courts would wish to intervene when they are faced with injustice and the people would definitely knock the door of the court for Justice.

CONCLUSION14 “Is Judicial Intervention in arbitration justified?” http://indiacorplaw.blogspot.com/2009/04/nlsir-symposium-isJudicial.html

15 Promod Nair, “Quo vadis Arbitration in India?” http://www.thehindubusinessline.com/2006/10/19/stories/2006101900101100.htm16 “Is Judicial Intervention in arbitration justified?” http://indiacorplaw.blogspot.com/2009/04/nlsir-symposium-isJudicial.html17 Promod Nair, “Quo vadis Arbitration in India?” http://www.thehindubusinessline.com/2006/10/19/stories/2006101900101100.htm

15

In reality, judicial intervention is justified if current Indian situation is taken into consideration. Where the arbitrators appointed by the center are the government employees who are likely to be biased for one or the other reason & where often, retired judges are appointed as arbitrators who, by virtue of long tenures behind the Bench, have got accustomed to tedious rules pertaining to procedure and evidence.

On the other hand, if we look at the aim and purpose of the Act than we find that the intervention of judiciary diminishes it. Therefore it becomes apparent to adopt a middle approach to sort this dilemma.

The aims and objectives of the Act could be met with adequate availability of skilled, trained and honest arbitrators as well as well-equipped arbitration institution. The need of such arbitrators is also very imp. Because if there is an emergent opinion that by choosing arbitration over litigation, parties have substantially diminished their chances of getting good quality of justice, it will obviously darken the future of arbitration. And what is needed is inculcation of a culture of arbitration among the key stakeholders — the bar, the Bench, the arbitrators and the consumers of arbitration.

Sir LJ Earl Warren once correctly said, “It is the spirit and not the form of law that keeps the justice alive”.

16