Appellate Arbitration Mechanism in India: An (Un)baked Reform

Ajay Raj[i]

The strength of arbitration is the finality of the arbitral award.[ii]As a result, an arbitral award can be challenged only under exceptional circumstances. By design, Section 34 of the Arbitration and Conciliation Act, 1996 (“Act”), affords the possibility for setting aside an award on limited grounds such as conflict with public policy, inability to present case, among others. However, this limited review of awards before the courts may raise apprehensions in cases where the errors committed by the tribunals are obvious since the courts cannot delve into the merits of the case. Here, obvious errors signify misapplication of the law or the evidence.[iii] Unsurprisingly, a judicial review of the award under Section 34 of the Act contravenes the parties’ intent behind resorting to arbitration for its quintessential advantages such as confidentiality, speedy adjudication, and neutrality. In complex disputes, parties may be dubious of a potential error by the arbitrator,[iv]and an arbitration appeal remains the only ground for a review on the merits of the award.

Due to these reasons, either party may exercise its autonomy and opt for an appellate arbitration mechanism. Such a procedure provides for an appeal through another arbitration to correct the error in the arbitral award. Recognizing that “party autonomy is virtually the backbone of arbitration”, the Indian Supreme Court (“SC”) recently delivered its decision in M/s Centrotrade Minerals & Metal Inc. v. Hindustan Copper Ltd., 2020(“Centrotrade”). The decision has led to three notable developments: (1) it clarifies the validity of the appellate arbitration clauses in India, (2) it affirms the enforcement of a ‘foreign award’ rendered by a second instance tribunal, and (3) it confers a coherent interpretation to Section 48(1)(b) of the Act by interpreting the term ‘was otherwise unable to present its case’ and holding that the legislative intent behind Section 48 inclines towards a ‘pro-enforcement’ bias.

The decision reinforces the pro-enforcement regime in India, expands the limited review of awards, and affirms the substantive right to appeal of the parties. This has been discussed previously on the blog here. However, it is imperative to note that the Act does not provide for such clauses. Analogously, India lacks a smooth ground for the execution of a two-tier mechanism.

With that prelude, the purpose of this post is to juxtapose the lack of procedural clarity on such clauses in India vis-à-vis the appellate arbitration rules in international arbitration jurisprudence. The post examines this issue in order to propose an optional appellate procedure by taking the cue from 2013 Option Appellate Rules (“AAA Rules”); 2003 JAMS Optional Arbitration Appeal Procedure (“JAMS Procedure”); 2007 CPR Arbitration Appeal Procedure (“CPR Procedure”); and2015 European Court of Arbitration Rules(“ECA Rules”).

The Time Limit to Appeal and Cross-Appeal Before the Second Instance Tribunal

The Act stipulates that an award under Section 34 can be challenged only within the limitation period of three months from the date of the receipt of the award with the exception of additional 30 days in case a sufficient cause is shown. This limitation period, as held in the case of Union of India v. Tecco Trichy Engineers and Contractors, commences only after the delivery of a signed arbitral award. However, it is to be noted that the Act does not provide for a time limit to appeal before the second instance tribunal. Since, a two-tier arbitration procedure without any doubts is a time-consuming affair, the optional appellate rules, to standardize and streamline this process, prescribe a time limit to appeal.[v] For instance, the AAA Rules provides for a limitation period of 30 days to initiate the process. The JAMS Procedure provides for a 14 days’ period. Similarly, the CPR Procedure caps the period at 30 days. To expedite the process, India should also prescribe a time limit to appeal. Moreover, in line with Section 34 of the Act, the time limit to appeal must begin on the date on which the signed underlying award is submitted to the parties.

From the foregoing discussion, another issue that further emerges is how to maintain a balance between the parties’ interests in case of appellate arbitration? For example, in Centrotrade, either party could have invoked the appellate clause. However, what if the other party finds that the appeal process in that particular case would not lead to any advantage. The said proposition finds approval in this illustration – the parties acknowledge that there is an obvious error in the arbitral award; however, the error concerns a minuscule amount. Hence, the appeal process would prove to be more expensive.[vi] In such cases, it is essential to provide a mechanism for cross-appeal. A cross-appeal refers to the means through which the appellee may avoid the appeal in cases where the appeal process would not be fruitful. The said aspect requires consideration as the AAA Rules, the JAMS Procedure, and the CPR Rules lay down a period of seven days to cross-appeal after the initiation of the appellate process.[vii] Thus, India should provide for cross-appeal.

Expeditious Adjudication and Jurisdiction

As per Section 29A of the Act, the tribunal has to pass an award within twelve months, which is extendable by another six months if both the parties agree. It is imperative to know that further extension can be granted by the ‘Court’. However, since the Act does not recognize the appellate arbitration procedure, the time limit to appeal and the ‘Court’ which may grant an extension is unclear. Therefore, the author answers two questions: first, the time limit for completion of the appellate process; and second, in case an extension is required, which ‘Court’ will exercise the jurisdiction and when should an extension be given.

To maintain the sanctity of arbitration by ensuring speedy adjudication, the optional appellate rules provide for a set duration during which an appellate award has to be given. For instance, the AAA Rules contemplate the completion of the appellate process within three months. The JAMS Procedure indicates the completion of the appellate process in twenty-one days. Further, rule 28.7 of the ECA Rules sets forth the process to be winded up within six months, and in case there is an evidentiary stage, then the adjudication should be completed within nine months.

While it is important to determine the time limit during which an arbitral award should be rendered, India may also need to address the jurisdiction of the ‘Court’ in case an extension is sought. For this, the author considers the judicial interpretation to determine the jurisdiction in case of an extension of time for challenges under Section 34. By design, Section 11 of the Act provides that in cases of international commercial arbitration, the SC is the competent authority to appoint arbitrators, and in other arbitrations, the jurisdictional High Courts(“HC”) have the competency. At this juncture, it is also imperative to note that only the HCs have the mandate to extend the tenure. In Nilesh Ramanbhai Patel v. Bhanubhai Ramanbhai Patel, the court held that for the purpose of Section 29A, the term ‘Court’ means the court which appointed the arbitrator. Moreover, in State of Jharkhand v. Hindustan Corporation Company, the court held that the SC could not be considered ‘Court’ under Section 2(e) of the Act. Then, in Cabra Instalaciones Y Servicios, S.A. v. Maharashtra State Electricity Distribution Company Limited, where the arbitrator was appointed by the SC, the HC held that in cases of international commercial arbitration, the SC has the exclusive jurisdiction. However, as stated, the power to extend the mandate has only been conferred to the HC. This debate has yet not been settled. Hence, it is essential to consider which court will have the jurisdiction in appellate arbitration for a time extension. The author contends that India should consider the optional appellate rules and the jurisdiction in such cases must be provided therein.

Constitution of the Second Instance Tribunal

Section 11 of the Act provides the procedure for appointment of arbitrators. It allows the parties to appoint their own arbitrators and generally, the two party-appointed arbitrators select the third arbitrator. The courts from time and again while upholding the principle of party autonomy have reiterated that the appointment of arbitrators by the parties shall not be interfered with. However, the author argues that when an appellate mechanism is elected, which is solely for the review purposes, these powers should be waived off.

The ECA Rules set a peculiar example for substantiating the veracity of the contention. Unlike the AAA Rules, the JAMS Procedure, and the CPR Procedure; the ECA Rules provide that the institution will appoint the three appellate arbitrators without the participation of the parties.[viii]This approach is similar to that of the ICSID on the constitution of the ad hoc committees.[ix]

The author contends that India should take the cue from ECA Rules in this regard as it will serve a two-fold purpose: First, it will not allow the arbitrators in the original tribunal to adjudicate over the appeal. Consequently, there will be absolute independence and impartiality in the appellate process. Second, considering that appellate arbitration is a review process, there should be a more skilled and experienced tribunal. As has been argued by Hans Smit and Paulsson[x], renowned scholars in the field of arbitration, party-appointed arbitrators diminish the ability of parties to appoint arbitrators who possess special skills. Although the term ‘skilled’ has not been deliberated upon, logically, it means expertise in relation to the subject matter. In sum, an effective adjudication of the arbitration appeal would exist.

The Threshold for Reviewing the Underlying Award

Section 34 and 48 of the Act which entails the grounds for setting aside the awards and enforcement of foreign awards respectively have a high standard of review. Categorically, the review is on the limited grounds of competency, due process, arbitrability, public policy, and jurisdiction. In other words, there is no review of merits such as erroneous application of the law or the evidence except in case of the contravention of public policy or non-arbitrability. Reliance can also be placed on decisions such as ONGC Ltd. v. Saw Pipes Ltd., which laid down the high standards for challenging the award on the ground of ‘patent illegality’; Cruz City 1 Mauritius Holdings v. Unitech Limited, where the court held that challenge on the ground of ‘public policy’ must “offend the core values of India’s National Policy”, among other decisions. Thus, it can be construed that India provides for high deference in cases of setting aside of the awards which ordinarily leads to their annulment. The judicial appeal process only concerns the “legitimacy of the process”.[xi]

In contrast, an appellate arbitration procedure concerns the “substantive correctness” and the “legitimacy of the process”.[xii] Thus, it is imperative to assess the threshold for review in a two-tier arbitration. For instance, the AAA Rules and the CPR Rules provide that an appellate arbitral tribunal can review only if there is “an error of law that is material and prejudicial” or “there have been errors in the determinations of the fact”.[xiii] The JAMS Procedure provides for the “same standard of review that the first-level appellate court in the jurisdiction would apply to an appeal from the trial court decision”.[xiv] Furthermore, rule 28.4 of the ECA Rules provides that there will be a full review of the award, including its rehearing, admissibility, and merits.

From the aforementioned statements, it is clear that the optional appellate rules provide for a high standard of review. Prima facie, such a high threshold does not seem in consonance with the reasoning behind opting for appellate arbitration, i.e. the limited scope of review before the courts. However, as Carreterio has argued, limited grounds for setting aside or refusing enforcement should not be interchangeably used with a relatively high threshold for review in appellate arbitration.[xv] This high threshold caters to the misapplication of law or evidence as seen in the threshold set by the optional appellate rules.

The author contends that India should adopt the approach of the AAA Rules and the CPR Rules and not that of the JAMS Procedure and the ECA Rules. This is for the following reasons: (1) the JAMS approach does not differentiate between judicial appeal and arbitration appeal by applying the same standards; (2) parties resort to arbitration appeal to avoid risks in complex disputes and hence, a full review in the ECA Rules deviate from the essence of arbitration which is speedy adjudication. Moreover, such a review may increase the costs associated with the process; and (3) an appellate arbitration mechanism provides for deference from the original award in cases of obvious errors, but the application of the ECA Rules might result in a completely different award instead of deference. While, on the other hand, the application of AAA Rules and CPR Rules in India will uphold the essence by adjudicating expeditiously with fewer costs, and review the obvious errors in the underlying award.

Application of Two Potentially Contradictory Rules

One of the significant issues associated with the appellate arbitration mechanism is the application of two potentially contradictory rules. Appellate tribunal reviews the misapplication of law; however, the law applied by two institutions may be substantially different. Such an interaction between two laws would, undoubtedly, give a contradictory decision.

An example of this situation can be the application of the ICA Rules in the first instance with Indian law as

the governing law and the application of the LCIA Rules with English law as the governing law. Additionally, the enforcement of the foreign award will be sought in India. In such cases, the arbitral award may be distinct due to the different application of the domestic public policy standards in the two instances. As a result, an award which contained an error would have been enforceable after rectification is now subject to a challenge under Section 48 of the Act on the ground of violation of public policy. This affects the parties not only in terms of a punctured arbitration, but also in terms of cost, time, and justice. Thus, there may be instances of interaction between two contradictory rules.

This issue can be resolved by following the approach of jurisdictions such as Austria, South Africa, and Paris provide for an internal review of the award. India should also adopt an internal appellate arbitration mechanism because, in an internal review mechanism, a different panel of the same arbitral institution reviews the underlying award at the request of the parties.

Concluding Remarks

The author submits that considering the brooding spirit of arbitration in India, it is essential to devise the optional appellate arbitration procedure with a fusion of internal appellate procedure. With this, not only the parties electing for arbitration appeals would have procedural clarity, but the Indian arbitration jurisprudence would also be at par with the international arbitration regime.

[i] Ajay Raj is an ante-penultimate year law student at Symbiosis Law School, Pune. His interests lie in arbitration and insolvency laws. For any discussion related to the article, he can be contacted via mail [ii] Gary Born, International Arbitration: Law and Practice, 8 Kluwer Law Int’l (2012). [iii] James M. Gaitis, International and Domestic Arbitration Procedure: The Need for a Rule Providing a Limited Opportunity for Arbitral Reconsideration of Reasoned Awards, 15(9) Am. Rev. Int’l Arb. 25 (2004). [iv] Irene Ten Cate, International Arbitration and the Ends of Appellate Review, 41 NYU J. Int’l L. & Politics 1109(2011). [v] AAA Rules, rule A-3(a)(i) (2013); JAMS Procedure, rule (b)(i) (2003); and CPR Procedure, rule 2 (2007). [vi] Mateus Aimoré Carreterio, Appellate Arbitral Rules in International Commercial Arbitration, 33(2) Journal of International Arbitration 185 (2017). [vii]AAA Rules, rule A-3(c) (2013); JAMS Procedure, rule B(ii) (2003); and CPR Procedure, rule 2.2 (2007). [viii] AAA Rules, rule A-4, 5 (2013); JAMS Procedure, rule (A) (2003); CPR Procedure, rule 4.2 (2007); and the ECA Rules, rule 28.5 (2015). [ix]See ICSID Rules, rule 52 (2006). [x] Jan Paulsson, The Idea of Arbitration 291 (Oxford 2013). [xi] Schreuer-Malintppi-Reinisch-Sinclair, The ICSID Convention: a Commentary, Cambridge (2009) 890. [xii] Ibid. [xiii]AAA Rules, rule A-10 (2013). [xiv]JAMS Procedure, rule (d) (2003). [xv] Carreterio, supra note 5, 206. Preferred Citation: Ajay Raj, Appellate Arbitration Mechanism in India: An (Un)baked Reform, Arbitration & Corporate Law Review, Published on 22nd August, 2020.

Appellate Arbitration Mechanism in India
• 184KB

This article was reviewed by Deeksha Sahni and Shruti Dhonde.

121 views0 comments