"I realise that some of my criticisms may be mistaken; but to refuse to criticize judgements for fear of being mistaken is to abandon criticism altogether... If any of my criticisms are found to be correct, the cause is served; and if any are found to be incorrect the very process of finding out my mistakes must lead to the discovery of the right reasons, or better reasons than I have been able to give, and the cause is served just as well."

-Mr. HM Seervai, Preface to the 1st ed., Constitutional Law of India.

Tuesday, November 18, 2008

Arbitration Agreement and Rules of Arbitral Institutions- Part I

Recently, I came across a post in a blawg titled, LAW AND LEGAL DEVELOPMENTS, a wonderful blog which I would recommend to anyone with interest in commercial law in general and arbitration, in particular. The post, titled, Interpretation of arbitration clause: Delhi High Court decision, was on interpretation of an arbitration clause by the Delhi High Court in the case of SIEL Ltd. v. Prime Industries (OMP 419 and 468 / 2006) (hereinafter "SIEL Case").

The facts, as noted by the Hon'ble Judge are:
SIEL entered into an agreement (referred to as the MoU) on 10.6.1994... The MoU was expressed as being valid for two years with a stipulation for renewal, for a further period through consent of parties; it could be terminated by either party giving notice, in writing. SIEL placed orders on the claimant to the extent of 1,562.975 MTs till March 1995. After that date it did not place any further order. The claimant alleged that it was aggrieved and issued a legal notice. It was alleged that the total quantity agreed to be lifted or purchased by SIEL was 5,000 MTs. Vanaspati for the first year and 6,000 MTs. Vanaspati for the second year... The MoU contained an arbitration clause in the following terms:
All disputes between the parties hereto arising out of this agreement shall be referred to an arbitrator appointed by Indian Council of Arbitration, New Delhi, and the provisions of the Indian Arbitration Act for the time being in force shall be applicable to such reference. Such reference will be decided as per the rules of Indian Council of Arbitration. The award decision so given shall be final and binding upon the parties.

Dispute arose between the parties and Prime wrote to Indian Council for Arbitration (ICA) with SIEL under the aegis of ICA. This was, in turn, informed to SIEL by ICA wherein it was stated:

As the amount involved in the dispute is stated to be Rs. 6,81,12,565/-, under the Rules of Arbitration of the Council, it has to be heard and determined by the arbitral tribunal of three arbitrators, unless the parties to the dispute agree to refer the dispute to sole arbitrator (rule 21(b). One each to be nominated by the parties and the third will be appointed by the Council, under its Rules. You are hereby required to forward the name of you nominee arbitrator from the panel of Arbitrators (copy enclosed) of the Council on or before 6th February 2000.
Under Rule 27 of the Rules of Arbitration of the Council, you are hereby required to deposit a tentative amount of Rs. 95,500/- towards the costs and expenses of the above arbitration on or before 6th February 2000. The cheque/draft for the amount may be sent in the name of The Indian Council of Arbitration. The deposit will be taken into account by the arbitral tribunal in apportioning the costs while making the Award. The Arbitrator or the Registrar will have power to call for further deposit, if necessary.

Prime wrote to ICA stating that the arbitration clause of the MOU contemplated a sole arbitrator. ICA changed its stand and wrote to SIEL stating:

Since both parties have agreed to refer the matter to an arbitrator i.e. sole arbitrator. We shall appoint the sole arbitrator on confirmation from the respondent also and in case both parties fail to forward the name of sole arbitrator by common consent... The respondent is directed to appoint the sole arbitrator with common agreement of the claimant for which the deposit will be Rs. 47,875/- by each party.

ICA appointed Mr. Justice K.N. Singh, Retired Chief Justice of India as the Arbitrator. SIEL moved an application before the latter stating that appointment of sole arbitrator by ICA was contrary to Rule 21-B of the ICA Rules and to Clause 18 of the MOU. It, therefore, sought for appropriate orders under Section 13(2) of the Act, on 21.8.2000. After considering the merits of the application, the Arbitrator rejected it, holding that the Tribunal was appropriately constituted in accordance with the arbitration agreement as well as in terms of the ICA rules.

Rule 20(b) of the ICA Rules states that where the claim is above Rs. 50 lacs, the dispute would be heard by a three- arbitrator tribunal, unless the parties agreed otherwise. It was contended by SIEL that the dispute had to be heard by an arbitral tribunal consisting of three judges. The Single Bench Court rejected Prime’s contention and held:

In plain words, the opening part of Clause 18 provides for appointment of a sole arbitrator and it confers authority on the ICA to appoint the arbitrator. The second part of Clause 18 relates to procedure and other matters in deciding the reference. The Rules framed by the ICA refer to many other matter also e.g. filing of claim petition, counter claim and administrative fee, place of arbitration etc. The expression 'reference will be decided as per the Rules of India Council of Arbitration' does not attract application of Rule 20 and 22(b) in view of the opening part of the Clause 18 of the agreement. If the agreement had stated that the dispute between the parties shall be settled by arbitration in accordance with the Rules of arbitration of the ICA, then Rule 20 and 22(b) would be applicable. But in the present case the language used in Clause 18 is quite different, under that clause, parties agreed for reference of the dispute to sole arbitrator who may be appointed by the ICA and they further agreed that the provisions of the Act and Rules of the ICA will be apply in deciding the reference.

Further, SIEL challenged the award rendered by the arbitrator on the ground that the procedure was violative of Section 34(2)(a)(v) of the Arbitration and Conciliation Act, 1996. SIEL brought the court’s attention to the fact that ICA had changed its initial stand of appointing three arbitrators and had instead appointed a sole arbitrator. The Delhi High Court reasoned in favour of the change of stand by ICA:

On a perusal of the various letters exchanged between the parties and the ICA, it is clear that the claimant as well as the respondent both had been given more than 30 days notice to nominate the sole arbitrator within mutual consent, but they failed to do so. The ICA extended the time for making the nomination of arbitrator, but even after five months of extended time, the parties failed to appoint sole arbitrator with mutual consent. Thereafter the ICA appointed sole arbitrator out of the panel maintained by it. The ICA in my opinion committed no illegality in appointing the sole arbitrator.

Counsel for SIEL argued:
1. The ICA itself had determined that since the Prime Industries Ltd.'s claim was in excess of Rs. 50 lakhs the dispute had to be referred to three arbitrators. However, without explanation it did a volte face and, contrary to Rule 21(b) without recording the consent of parties, constituted a Tribunal comprising of a Sole Arbitrator. Learned Counsel contended that the reference to an Arbitrator has to be understood as the dispute resolving mechanism rather than as a conscious agreement of parties to refer their disputes to a sole arbitrator.
2. Under Section 13(2) of the General Clauses Act, 1897, while interpreting an Act or Regulation a term in singular would include the plural and vice versa.

It was argued that the award had to set aside on the ground, inter alia, that the tribunal was illegally constituted.

Counsel for Prime stated:
1. The order of reference dated 2.7.1999 of the Delhi High Court clearly pointed to an express agreement by the parties for the resolution of their disputes by a Sole arbitrator.
2. Under the ICA Rules, particularly, Rule 8, the decision of the Arbitration Committee [constituted under Rule 3(a)] relating to interpretation of Rules or in procedural matter, was final and binding on the parties. Consequently, the ICA's position that the dispute was to be decided by a sole arbitrator could not be termed as illegal or contrary to agreement.

The Court acknowledged that “the procedure contemplated under Rule 21(a) is that all disputes where claims exceed Rs. 50 lakhs, are to be decided by a panel of three arbitrators, unless after notification of request for arbitration, the parties agree to refer the dispute to a sole arbitrator. In the facts of this case, that is undeniably, not the position. When Prime Industries sought for arbitration, ICA, through its letter, intimated that the arbitral tribunal would be of three members. However, it resiled from this stand, when the Prime Industries pointed out about the stipulation in Clause 18 being to an arbitrator.”

Thus, the court had to decide the meaning of “the expression an arbitrator even while there is an express advertence to ICA rules, which would govern the parties in this case.”

The Court held:
1. In interpreting such a document, the court has to follow certain basic canons of construction. First, the term or terms in question should not be read in isolation, but have to be considered in their contextual setting. After all, the parties, in such cases, set their own ground rules, which would be considered as norms binding them. The other consideration is that the interpretive process itself should not inject ambiguity to a term in a document, if it is otherwise plain in its meaning.
2. The Indian Iron and Steel Co. Ltd. v. Tiwari Road Lines.
MANU/SC/7707/2007, the Supreme Court underlined the importance of the courts respecting the mandate of the parties, in the following terms:
In the matter of settlement of dispute by arbitration, the agreement executed by the parties has to be given great importance and an agreed procedure for appointing the arbitrators has been placed on high pedestal and has to be given preference to any other mode for securing appointment of an arbitrator.
3. The court here cannot divorce the contextual setting of the term an arbitrator. It is set in an arbitration clause. Significantly, the parties did not use the widely used term Sole arbitrator or such like expression to manifest an intention that arbitration was to be by a single arbitrator.
4. Also, barring the letter written on behalf of the Prime Industries, in answer to the ICA's letter of 6-1-2000, there is nothing to support the ICA's assertion that the parties had agreed to a sole arbitrator, as mentioned in its letter of 30-1-2000. No doubt, CMC Ltd. is a judgment upholding the proposition that if parties express a clear intention to depart from the rules of ICA, or some other such body, they would be bound by it. Again, while reading such a judgment, the court cannot ignore the contextual facts. The arbitration clause was an elaborate one, where the parties' intention was more clearly expressed; the procedure prescribed by ICA was at variance from what was spelt out by the parties.The Orissa High Court, in Gayatri Projects Ltd. v. State Of Orissa Through The Executive Engineer, Heads Works Division, At/p. O. Samal, Dist. Angul. 2004-(2)-ARBLR 394 (Ori) had to deal with a somewhat similar situation where one party asserted that the expression an arbitrator meant the singular, and not a plurality of arbitrators, which was stipulated in the rules, of which the parties had made express mention, in the arbitration clause. The court dispelled the contention, in the following terms:
Para 25.2 of Section 5 of the agreement stipulates that either party may refer a decision of the adjudicator to 'an Arbitrator' within 28 days of the adjudicator's written decision. From the expression 'an Arbitrator', learned Counsel for the petitioner submitted that Arbitrator contemplated thereunder cannot be more than one Arbitrator and, therefore, as the Arbitration Tribunal which consists of three members is incompetent to adjudicate the dispute between the parties or to examine the correctness of the decision of the adjudicator. But aforesaid words 'an Arbitrator' occurring in Clause 25.2 of the said agreement has to be read along with other provisions stipulated in the said agreement. This expression 'an Arbitrator' cannot be detached from the context in which it occurs and hence the same cannot be interpreted in the vacuum. An interpretation of the expression 'an Arbitrator' has to be made in the light of other provisions of the agreement. The very next clause, namely, Para 25.3 occurring in Section 5 of the said agreement clearly stipulates that the Arbitration shall be conducted in accordance with the Arbitration procedure published by the institution named and in the place shown in the Contract Data, of the same agreement. Contract Data of the agreement clearly stipulates in an unambiguous language that the procedure followed by the Arbitration Tribunal shall be followed. I cannot lightly presume that the petitioner was ignorant about the existence of such Arbitration Tribunal or that it consisted of three members. This being the position, the expression 'an Arbitrator' must be held to include the Arbitration Tribunal also constituted by the Government under the provisions of the said Rules. If I accept this position, then I cannot allow the prayer of the petitioner to give a declaratory relief that such Arbitration Tribunal constituted under the said Rules consisting of three members is incompetent to adjudicate the dispute between the parties merely because it consists of more than one member.
5. The term “an arbitrator” is to be understood in the context of the parties' desire for arbitration; the parties further wanted the arbitration to be in accordance with the ICA rules, which envisaged that in such claims, the tribunal was to be of three arbitrators. This was also the initial understanding of ICA, which for inexplicable reasons, later stated that the parties had agreed to a sole arbitrator.
6. The court cannot overlook the fact that at the contract formation stage, the parties had access to ICA rules, which stipulated that such claims were to be adjudicated by three arbitrators. The parties, or one of them, proceeded to agree to arbitration, on the premise of decision by three arbitrators, as embodied in Rule 21(b) cannot be ruled out. As against this, the contentions of Prime Industries Ltd. that the term in Clause 18 is to be understood as an intention to have a sole arbitrator, are weaker. Not only is the evidence contrary to that understanding, but also the fact that the expression an arbitrator cannot be torn out of context; it would mean adjudication through arbitration, or simply, a generic reference to alternative dispute resolution through arbitration, in accordance with rules of ICA.

In view of the above reasons, the court is of opinion that SIEL has established that composition of the arbitral tribunal was not in accordance with the agreement between the parties, which incorporated Rule 21(b); the parties did not agree to decision by a sole arbitrator. As a result, SIEL's petition has to succeed.

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