- by Siddhant Samaiya and Bhumi Vashisht, 2nd year students at National Law Institute University, Bhopal.
Background
The Arbitration and Conciliation Act, 1996 (“A&C Act”) defines the law relating to domestic arbitration, international commercial arbitration and enforcement of foreign arbitral awards. Arbitration is an alternative to litigation in courts and is advantageous as it provides flexibility and confidentiality. Section 34 of the A&C Act, provides the framework for setting aside an arbitral award under specific circumstances. It balances the need for finality in arbitration with the necessity of judicial oversight to prevent unjust outcomes. There is no existing provision in the act regarding the Appellate Arbitral Tribunal.
On 18th October 2024, the Department of Legal Affairs invited comments on the draft amendment to the A&C Act, which has recommended a plethora of changes. One such significant change has been introduced to Section 34, wherein an appellate arbitral tribunal has been proposed to be established, to which parties can challenge an arbitral award. As per the proposed amendment, parties choosing institutional arbitration would be allowed to choose between the Court or Appellate Arbitral Tribunal for appeal.
This provision would be available for the arbitrations conducted under the aegis of institutional arbitration centres. It appears that appellate arbitral tribunals in ad hoc arbitrations are not permitted by the draft bill. Under Section 34A of the proposed amendment, institutions may provide for an appellate arbitral tribunal to entertain applications under Section 34 of the Act.
This blog will first examine the status of appellate arbitral tribunals in India prior to the proposed amendment. Following this, the role of appellate arbitral tribunals and two-tier arbitration systems across various arbitration institutions such as the Paris Arbitration Chambers, London Court of International Arbitration and International Chambers of Commerce will be explored by analysing the challenges, advantages, and disadvantages associated with the proposed amendment. This blog primarily focuses on how the proposed amendment limits the grounds available for the appellate arbitral tribunal to review an award.
Jurisprudence Related to The Appellate Arbitral Tribunal
There was no existing provision on the Appellate Arbitral Tribunal in the A&C Act until this amendment that allowed the parties to challenge the arbitral awards before an Appellate Arbitral Tribunal. There have been several cases in the past where parties have inserted such clauses to enable them to get their arbitral awards reviewed by an appellate arbitral tribunal and respectively, Indian courts have dealt with the validity of such clauses with respect to the A&C Act.
The Calcutta High Court in the case of Heeralal Agarawalla and Co. v. Joakin Nahapiet held that there is nothing that prevents the parties from agreeing to a clause of two-tier arbitration. Further, this position was upheld by the Supreme Court in the cases of Shri Lal Mahal Ltd. v. Progetto Grano Spa and Subhash Aggarwal Agencies v. Bhilwara Synthetics Ltd. on the basis of party autonomy. The court further clarified that these clauses do not violate Section 35 of the A&C Act as Section 35 allows for a review, provided that the agreement between parties or statutory provisions allow for such appeal.
The validity of such clauses was finally established by the Supreme Court in the landmark case of Centrotrade Minerals & Metals v Hindustan Copper Ltd., wherein the Hon’ble Court upheld the previous decisions of various High Courts where these clauses were considered valid observing that though recourse to courts is available for challenging an arbitral award but that does not ipso facto prohibits the parties from mutually agreeing to review of arbitral award by appellate arbitral tribunal. It also upheld party autonomy as the basis for allowing such an appeal. Further, it held that these clauses are not against public policy as there is nothing in the A&C Act that prohibits the contracting parties from agreeing upon such an appellate arbitration.
In light of the above cases, Indian courts have consistently validated the clauses for the challenge of an arbitral award in the appellate arbitral tribunal. It is seen as a valid extension of arbitration, reinforcing the principle of party autonomy in arbitration agreements.
International Perspective
Two-tier arbitration is widely recognized in many jurisdictions like Japan, Netherlands, South Africa, Italy, Austria and leading arbitral institutes. The UNCITRAL model law on International Commercial Arbitration has also considered two-tier arbitration as a viable option. According to rule A-10 of the Optional Appellate Tribunal Rules of the American Arbitration Association, a party is allowed to appeal to the appellate arbitral tribunal on two grounds namely, an error of law that is material and prejudicial or a determination of facts that are clearly erroneous. Here, the second ground allows a limited review on the merits of the case.
According to rule XVII of the Paris Arbitration Chambers, any party to the arbitration involved in a claim exceeding 30,000 € may resort to a second-degree examination to hear the matter afresh after the final award is rendered by the first panel. The award of the second panel is final and binding on the parties. Thus, providing satisfaction to the parties in case of error by the first panel. Similarly, the rules of the European Court of Arbitration also provide for a fresh hearing at the stage of the second arbitration.
Leading arbitration practices often adopt an appellate mechanism for an arbitral award, reducing the probability of risks significantly, and providing “peace of mind” to the parties concerned. Likewise, the Grain and Feed Trade Association also provides for a new hearing in appeal and the board of appeal may vary, amend or set aside the arbitral award.
The majority of arbitration institutions worldwide permit two-tier arbitration and impose no bar on its application. For instance, the Singapore International Arbitration Centre (“SIAC”), the London Court of International Arbitration (“LCIA”) and the International Chambers of Commerce (“ICC”) do not have two-tier arbitration but do not bar them as well.
Critical Analysis of The Proposed Amendment to Section 34
The proposed amendment offers multiple benefits such as strengthening institutional arbitrations. Only parties to institutional arbitrations have the choice under Section 34 of the act to challenge the arbitral award in the appellate arbitral tribunal apart from courts. Therefore, institutional arbitration is poised to become a lucrative option for parties in comparison to ad hoc arbitration. Further, as the proposed amendment provides options to parties to go to the appellate arbitral tribunal under S. 34, this can potentially reduce the workload of the courts. Additionally, the appellate arbitral tribunal, operating under Council-prescribed rule is something which will be agreed upon by the parties, its actions of setting aside or modifying awards would not undermine the principle of party autonomy rather it would seek to uphold it.
With several advantages, it also has some challenges which need to be addressed by the legislature. The jurisprudence of the appellate arbitral tribunal shows that parties prefer these clauses in their agreement to have ‘peace of mind’ i.e. these clauses are generally preferred by parties who prioritize the correctness of the award over time and money.
However, since the proposed amendment inserts the appellate arbitral tribunal under S. 34, it eventually limits the scope of the appellate arbitral tribunal to set aside/ review the awards on procedural grounds or on the basis of violation of fundamental/public policy of India. This limits the basic purpose for which parties in many jurisdictions add these clauses i.e., review of the awards on merits. This can be appreciated by looking at arbitration rules of some institutions such as, the American Arbitration Association and Paris Arbitration Chambers, related to appellate arbitral tribunals where such review on merits is allowed wholly or on limited grounds.
Though one most prominent argument against the review of awards on the basis of merits may be that it destroys the basic principle of arbitral awards, that is, of finality it may be argued that each dispute differs and each party has different expectations related to a dispute. Some parties may prefer quick and binding awards but some parties value correctness over time or costs saved. Thus, this amendment by restricting the option of the parties of challenging the award under section 34 on merits creates a disadvantage for both the parties and arbitral institutions. Since some parties may not conduct arbitration through such institutions because they do not allow the review on merits.
Conclusion
The proposed amendment is an encouraging step to strengthen institutional arbitration in India and to make India an arbitration hub for the world. It may also reduce the burden on the courts. On the other side, it has some disadvantages as well, such as limiting the scope of the appellate arbitral tribunal on procedural grounds. It limits the power of the parties to make their award subject to the review on the basis of merits. This not only limits the options of the parties but also makes the institutional arbitrations less lucrative and hinders the goal for which the proposed amendment is made. Further, the formation of an appellate arbitral tribunal leads to adding one more layer to the appeal mechanism, which may increase the cost and complexity of the arbitration and delay the adjudication process.
It is suggested that the legislature should bring such a proviso in S. 34, which provides an option to the parties that either they can get their awards reviewed on limited grounds of S. 34 by courts or appellate arbitral tribunal or can also get their awards reviewed on the basis of merit by the appellate arbitral tribunal, as they deem fit.
Such proviso will help cure this dilemma which may ensue upon the enforcement of the present proposed amendment and thus effectively deal with complex situations which may arise afterwards.
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