Second Instance or Appellate Arbitrations

“Arbitration – All disputes or differences whatsoever arising between the parties out of, or relating to, the construction, meaning and operation or effect of the contract or the breach thereof shall be settled by Arbitration in India through the Arbitration Panel of the Indian Council of Arbitration in accordance with the Rules of Arbitration of the Indian Council of Arbitration.

If either party is in disagreement with the Arbitration Result in India, either party will have the right to appeal to a Second Arbitration in London, UK in accordance with the Rules of Conciliation and Arbitration of the International Chamber of Commerce in effect on the date hereof and the Result of this Second Arbitration will be binding on both the parties. Judgment upon the Award may be entered in any Court in jurisdiction.”

“Construction – The contract is to be constructed and to take effect as a contract made in accordance with the laws of India.”

My Lord, Is a Two-Tier Arbitration Procedure, as provided for in the contract between the parties, permissible under the laws of India?

The contracting parties intended to provide for two opportunities at resolving their disputes or differences. The first occasion would be a settlement by Arbitration in India (the ‘Arbitration Result’) and the second occasion would be by Arbitration in London, with the second occasion being in the nature of an appeal against the ‘Arbitration Result’ in India. We have no hesitation in concluding that the ‘Arbitration Result’ must mean an Arbitration Award given by the Arbitral Panel of the Indian Council of Arbitration.

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. We see nothing wrong in either of the two clauses mutually agreed upon by the parties. A long line of decisions rendered by various Courts in the country have accepted the validity of a Two-Tier Arbitration Procedure under institutional rules and have not taken the view that a Two-Tier Arbitration Procedure is per se invalid. The fact that recourse to a Court is available to a party for challenging an Award does not ipso facto prohibit the parties from mutually agreeing to a second look at an Award with the intention of an early settlement of disputes and differences.

Even assuming the broad delineation of the Fundamental Policy of India as stated in Associate Builders, (2015) 3 SCC 49 we do not find anything fundamentally objectionable in the parties preferring and accepting the Two-Tier Arbitration System. We hold that the Arbitration Clause in the agreement between the parties does not violate the Fundamental or Public Policy of India by the parties agreeing to a Second Instance Arbitration.

The parties to the contract have not by-passed any mandatory provision of the A&C Act and were aware, or at least ought to have been aware that they could have agreed upon the finality of an Award given by the Arbitration Panel of the Indian Council of Arbitration in accordance with the Rules of Arbitration of the Indian Council of Arbitration. Yet they voluntarily and deliberately chose to agree upon a Second or Appellate Arbitration in London, UK in accordance with the Rules of Conciliation and Arbitration of the International Chamber of Commerce. 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. No such prohibition or mandate can be read into the A&C Act except by an unreasonable and awkward misconstruction and by straining its language to a vanishing point.”

Hon’ble Justice Madan B. LokurM/s. Centrotrade Minerals & Metal Inc. v. Hindustan Copper Ltd., [Civil Appeal No. 2562 of 2006].

The question that arises concerns the nature of the cause of action in the Second Instance Arbitration. Section 43 of The A&C Act provides that the limitation rules in The Limitation Act, 1963 apply to Arbitrations in the same way that they apply to Court proceedings. In relation to the First Instance Arbitration, this would therefore involve asking when the cause of action arose and whether the Arbitration was commenced before the period of limitation relevant to that cause of action (eg breach of contract, tort) expired. But the making of an Arbitral Award is usually taken to extinguish the original cause of action and replace it with a right (founded on the implied term in the Arbitration Agreement that the parties will honour any Award made under that agreement: see, eg, Badat v. East India Trading, AIR 1964 SC 538 and Bremer Oeltransport GmbH v. Drewry, [1932] 1 KB 753) to have the Award enforced. If that rule applies to the Award produced by the First Instance Arbitration, then the subject-matter of the Second Instance Arbitration is no longer the original cause of action (eg damages for breach of contract or tort) but the correctness of the First Award. This means, for limitation purposes, that the relevant period is (or may not be) the period that relates to the original cause of action (eg breach of contract or tort); nor would the provisions relating to appeals (see, eg, article 116, Schedule I to The Limitation Act) apply because those are concerned with appeals from Court orders. The answer may be that the residuary provision applies.