Judiciary and Arbitration Act An Attempt to Hijack the Arbitration Practice

Earlier the Indian courts were very much aware about the purpose and spirit of the nonintervention principle. For instance, the court in the case of CDC Financial Services (Mauritius) Ltd vs. BPL Communications, The High Court granted the respondent an anti-arbitration injunction on the grounds that the pledge of shares that was being sought to be enforced through arbitration would allow the claimants to seize control of a telecom company, which would be illegal under Indian law because it was a foreign company. The Supreme Court rejected this argument on appeal, claiming that it was a merits-based argument that was outside the exclusive purview of the arbitrators. It’s interesting to note that in addition to nullifying the injunction, the court also prohibited the respondent from submitting any more petitions “which might have the effect of interfering with the continuation and conclusion of the arbitration procedures.” In the words of the court, it was observed that

      “14. Whatever may be the merits of the writ application, we are of the view and it has been fairly conceded by the learned Senior Counsel appearing on behalf of Respondent 1 that the High Court should have had regard to Section 5 of the 1996 Act before granting the reliefs it did. Under Section 5 of the 1996 Act, courts are restrained from interfering with arbitration except in the manner provided in the 1996 Act. That the orders passed by the High Court would amount to a violation of this mandate is not seriously disputed by the respondents. We, accordingly, set aside the orders of the High Court without expressing our views on the merits of the contentions of the parties in any manner whatsoever. The orders dated 4-7-2002 and 23-7-2002 are accordingly, set aside. The respondents are restrained from moving any applications in the pending writ petition which would have the effect of interfering with the continuance and conclusion of the arbitration proceedings. The appeal of Respondent 1 before the Division Bench being preferred from the refusal to grant an interim order, does not survive and is accordingly dismissed. The matter shall now be heard by the learned Single Judge and disposed of in accordance with law.”

However, in Sukanaya Holdings v. Jayesh Pandya[1], the Hon’ble Supreme Court declined to stop the legal proceedings on the grounds that the arbitration agreement’s subject matter was distinct from that of the civil lawsuit. In addition, the parties to the two actions were different. According to the court, in order for the mandatory provisions of Section 8 to be implemented, the full subject matter of the lawsuit should be the topic of the arbitration agreement. But, Subsequently the trend of the court changed. In the infamous case of ONGC v. Saw Pipes[2] and In SBP & Co. vs. Patel Engineering[3], the government’s efforts to encourage arbitration in India were starkly displayed.  

In the ONGC case[4], an arbitral award was challenged on the grounds that it was “in conflict with the public policy of India.” The court adopted a very broad interpretation of the term “public policy” rather than adopting a narrow one that defined it as something that went beyond the scope of Indian law. The Court continued by equating “patent illegality” with “error of law” and holding that any violation of Indian law would automatically render the judgement against public policy. As a result, the Act’s intent to prevent judicial review was compromised. The court in his judgment observed that,

      “22. The aforesaid submission of the learned Senior Counsel requires to be accepted. From the judgments discussed above, it can be held that the term “public policy of India” is required to be interpreted in the context of the jurisdiction of the court where the validity of award is challenged before it becomes final and executable. The concept of enforcement of the award after it becomes final is different and the jurisdiction of the court at that stage could be limited. Similar is the position with regard to the execution of a decree. It is settled law as well as it is provided under the Code of Civil Procedure that once the decree has attained finality, in an execution proceeding, it may be challenged only on limited grounds such as the decree being without jurisdiction or a nullity. But in a case where the judgment and decree is challenged before the appellate court or the court exercising revisional jurisdiction, the jurisdiction of such court would be wider. Therefore, in a case where the validity of award is challenged, there is no necessity of giving a narrower meaning to the term “public policy of India”. On the contrary, wider meaning is required to be given so that the “patently illegal award” passed by the Arbitral Tribunal could be set aside. If narrow meaning as contended by the learned Senior Counsel Mr Dave is given, some of the provisions of the Arbitration Act would become nugatory. Take for illustration a case wherein there is a specific provision in the contract that for delayed payment of the amount due and payable, no interest would be payable, still however, if the arbitrator has passed an award granting interest, it would be against the terms of the contract and thereby against the provision of Section 28(3) of the Act which specifically provides that “Arbitral Tribunal shall decide in accordance with the terms of the contract”. Further, where there is a specific usage of the trade that if the payment is made beyond a period of one month, then the party would be required to pay the said amount with interest at the rate of 15 per cent. Despite the evidence being produced on record for such usage, if the arbitrator refuses to grant such interest on the ground of equity, such award would also be in violation of sub-sections (2) and (3) of Section 28. Section 28(2) specifically provides that the arbitrator shall decide ex aequo et bono (according to what is just and good) only if the parties have expressly authorised him to do so. Similarly, if the award is patently against the statutory provisions of substantive law which is in force in India or is passed without giving an opportunity of hearing to the parties as provided under Section 24 or without giving any reason in a case where parties have not agreed that no reasons are to be recorded, it would be against the statutory provisions. In all such cases, the award is required to be set aside on the ground of “patent illegality”.[5]

Case of SBP & Co.[6] further broadened the range of judicial intervention when the Hon’ble Supreme Court decided that the Chief Justice of India had the authority to decide on matters such as the validity of arbitration agreements and went on to say that the Chief Justice might even call for evidence to settle jurisdictional concerns while performing the duty of choosing an arbitrator when the parties were unable to reach an agreement. The Supreme Court continued by stating that such judgements would be conclusive and bind the parties. This amounted to a situation where the arbitration tribunal’s ability to assess its jurisdiction was compromised since it effectively violated the norm of competence. Therefore, courts effectively granted themselves the ability to significantly extend arbitral proceedings (either by raising fictitious objections to preliminary issues or by obstructing the appointment process), which is contrary to the primary intent of Section 13 of the Act’s enactment. In the words of the court, it was observed that,

      “12. Section 16 of the Act only makes explicit what is even otherwise implicit, namely, that the Arbitral Tribunal constituted under the Act has the jurisdiction to rule on its own jurisdiction, including ruling on objections with respect to the existence or validity of the arbitration agreement. Sub-section (1) also directs that an arbitration clause which forms part of a contract shall be treated as an agreement independent of the other terms of the contract. It also clarifies that a decision by the Arbitral Tribunal that the contract is null and void shall not entail ipso jure the invalidity of the arbitration clause. Sub-section (2) of Section 16 enjoins that a party wanting to raise a plea that the Arbitral Tribunal does not have jurisdiction, has to raise that objection not later than the submission of the statement of defence, and that the party shall not be precluded from raising the plea of jurisdiction merely because he has appointed or participated in the appointment of an arbitrator. Sub-section (3) lays down that a plea that the Arbitral Tribunal is exceeding the scope of its authority, shall be raised as soon as the matter alleged to be beyond the scope of its authority is raised during the arbitral proceedings. When the Tribunal decides these two questions, namely, the question of jurisdiction and the question of exceeding the scope of authority or either of them, the same is open to immediate challenge in an appeal, when the objection is upheld and only in an appeal against the final award, when the objection is overruled. Sub-section (5) enjoins that if the Arbitral Tribunal overrules the objections under sub-section (2) or (3), it should continue with the arbitral proceedings and make an arbitral award. Sub-section (6) provides that a party aggrieved by such an arbitral award overruling the plea on lack of jurisdiction and the exceeding of the scope of authority, may make an application on these grounds for setting aside the award in accordance with Section 34 of the Act. The question, in the context of sub-section (7) of Section 11 is, what is the scope of the right conferred on the Arbitral Tribunal to rule upon its own jurisdiction and the existence of the arbitration clause, envisaged by Section 16(1), once the Chief Justice or the person designated by him had appointed an arbitrator after satisfying himself that the conditions for the exercise of power to appoint an arbitrator are present in the case. Prima facie, it would be difficult to say that in spite of the finality conferred by sub-section (7) of Section 11 of the Act, to such a decision of the Chief Justice, the Arbitral Tribunal can still go behind that decision and rule on its own jurisdiction or on the existence of an arbitration clause. It also appears to us to be incongruous to say that after the Chief Justice had appointed an Arbitral Tribunal, the Arbitral Tribunal can turn round and say that the Chief Justice had no jurisdiction or authority to appoint the Tribunal, the very creature brought into existence by the exercise of power by its creator, the Chief Justice. The argument of the learned Senior Counsel, Mr K.K. Venugopal that Section 16 has full play only when an Arbitral Tribunal is constituted without intervention under Section 11(6) of the Act, is one way of reconciling that provision with Section 11 of the Act, especially in the context of sub-section (7) thereof. We are inclined to the view that the decision of the Chief Justice on the issue of jurisdiction and the existence of a valid arbitration agreement would be binding on the parties when the matter goes to the Arbitral Tribunal and at subsequent stages of the proceeding except in an appeal in the Supreme Court in the case of the decision being by the Chief Justice of the High Court or by a Judge of the High Court designated by him.”[7]

This brings us to the debate between high principles and low principles, which emphasises the necessity for fairness (an equally insistent to end litigation). Serious problems have been raised by the Court’s enlargement of its judicial intervention; the ONGC case’s[8] expansive interpretation of the term “public policy” has been applied in several judgements, all of which affirm the judiciary’s ability to examine the arbitral award. Additionally, the Supreme Court has said in the matter of Hindustan Zinc Ltd. vs. Friends Coal Carbonisation[9] that awards may be revoked if they are in violation of contractual obligations. As previously mentioned, the support of ADR was premised on the necessity to avoid the drawn-out court process, therefore this does certainly set a perilous precedent. When the arbitrators or the references engage in wrongdoing, the Court is authorised by statute to void the award. It does, however, also have the absolute option to remit the award to the selected tribunal.