"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, June 2, 2020

Stereotyping & Setting Aside Arbitral Awards: Why East Asia was Correctly Decided

Why are cliches a problem? They are an issue because they amount to stereotyping. What is a stereotype? It is regarded as an over-generalised belief about something. In India, there is an over-generalised beliefs that arbitral awards should not be set aside at all. That is not correct. 

"Nonsense" A decision with scant regard for contract or law cannot pass off as an arbitral award. [Note that the word "nonsense" is being used here to signify how rude and bad it looks. A pleading drafted by a foreign law firm used the term "nonsense" on a contention by the other side. What happened to courtesy? But then, for some, whatever foreign law firms, especially of the first world, do is gospel truth and good to emulate!- another stereotype. Litigation or arbitration is not a fish market with disputing parties hurling choicest of abuses against each other. One has to show grace and courtesy in submissions.]

Almost a decade back, while discussing the case of Sumitomo Heavy Industries v ONGC, we had argued in this blog as follows:

"Though the SC's decision seems to be reasonable, it is sad that the court did not consider the law on the liability of a contractual party to bear increase in costs due to change of law during the currency of the contract. This is the problem with arbitration. The courts are forced to rule on whether the award was perverse or not rather than consider what should actually be the law on the issue. The main issue is taken outside the realm of the court. Essentially what the court has stated here is that Article 17.3 could either be narrowly construed like the Division Bench wanted it to be or broadly constructed as was done by the arbitrator. But what is the true law?" (emphasised)

In the same year, we did another post titled "Norm Creation (ADR) and Arbitration" (2010). A summary of the post is important to understand the context of this post and is as under:
  • The judiciary performs the important function of amplificiation of law. Amplification of law refers to the judiciary’s functions of filling the gaps that the statute leaves, making law in the absence of a statute, resolving contradictions in statutes and updating the law after taking into consideration the latest developments (such as those of technology, etc).
  • This function of amplification of law does not take place in private arbitration for a few reasons. One reason is that there are no incentives for the arbitral tribunal to produce precedents as there exists difficulty in establishing property rights over them.
  • The second problem with private arbitration is that the absence of review on merits of the award may lead to the production of inconsistent decisions on the same question of law leading to uncertainty of law. This would mean that parties would never predict outcomes of disputes and this would discourage settlement of disputes. The law in such a situation will be indeterminate and inaccurate.
Interestingly, many reputed commentators on arbitration law have highlighted the above aspects. In a lecture titled "Developing commercial law through the courts: rebalancing the relationship between the courts and arbitration", Right Hon. The Lord Thomas of Cwmgiedd, Lord Chief Justice of England and Wales (2016)  highlighted how arbitration had the potential in bring about uncertainty in commercial law by taking away cases from national courts. The lecture merits reading.

In short, arbitration law's limited error correction function creates a potentially uncertain position in law. An award would not be set aside if two plausible views in the case as to contract interpretation are possible. But what is the correct interpretation? In a jurisdiction like India where law as applied to facts is nascent, especially in the context of contract law, courts perform an important function of amplification of law and making the law more certain. This is the reason why a sort of balance is maintained in purely domestic arbitrations by retaining the ground of patent illegality in Section 34(2A). This function is important. In the past, the Supreme Court has donned the role of error corrector and decided on the correctness of arbitral awards. See, for instance, National Highways Authority of India v. Progressive-MVT (JV) 2018(2) Arb LR 111 (SC). (see this post)

Image from here
The decision in SEAMEC v OIL (2020) has to be seen in the same light. A contention similar to the one made in the arbitral award and upheld: that increase in diesel prices is a change in law is most common in construction arbitrations. Those practising on that side of commercial law would vouch that a Contractor- Claimant is sure to bring a claim on this count if there is an escalation or a change of law or a force majeure clause. Although not a construction arbitration, in this case, the Claimant brought about a similar contention. There seems to be no Supreme Court decision directly on whether such increases in diesel prices amount to force majeure or change of law or entitle the Contractor for escalation. See, for instance, Lift and Shift India Pvt. Ltd. vs. Central Warehousing Corporation (06.03.2017 - DELHC) : MANU/DE/0543/2017. [See also, The State of Bihar vs. Hardeo Singh (11.02.2019 - PATNAHC) : MANU/BH/0174/2019, Atlanta Limited and Ors. vs. Executive Engineer, Road Development and Ors. (04.05.2018 - BOMHC) : MANU/MH/1148/2018.]

Given the importance of the issue, the Supreme Court took the correct approach in settling the law once and for all. [Note that the law applied by the Supreme Court was the one prior to the 2015 amendments]. Although the court did not expressly state so, the effect of the court's judgment settles this vexatious issue. That the SC decided on an area which was uncertain is clear from the outcomes of the proceedings before the tribunal (which held that increase in price of diesel amounted to change of law for which the Contractor could claim compensation) and the High Court (where it was held otherwise). The High Court had also committed the error of conflating the basis of change of law clause with the force majeure clause, which the Supreme Court corrected.

The SC held that fluctuations in price of certain items which a prudent contractor would have to take into consideration while bidding cannot be brought within the scope of the change of law clause unless specific language pointed out to such an inclusion (Para 30) and that the "liberal" construction afforded by the Tribunal to Clause 23 to hold that change in the price of diesel was a change in law was incorrect.

The law is now certain. No more can unscrupulous persons bring about a claim for increase in diesel prices under the change of law clause. Had this clarity not been there, what would have happened? In almost every dispute under works contracts with a change of law or a general escalation clause (which does not encompass increase in diesel prices), Contractors would have brought about a claim on account of increase in diesel prices. The marginal cost of defending an additional claim and of deciding an additional claim would be incurred by the parties. Imagine if such costs are incurred in several arbitrations arising out of works contracts all over India. It could potentially run to crores of rupees. Now, because to the clarity afforded by the Supreme Court, an unscrupulous Contractor or an advocate would think twice before making a claim on account of change in diesel prices. Even if made, the Tribunal would (and is obligated to) award costs on the other side for such bogus claims.

Thus, it is submitted that the SC had rightly set aside the arbitral award. We found many write-ups on the decision, especially from law firms, simply parroting that the SC was not correct in setting aside the arbitral award or similar cliches. There should be deference to the arbitral process but that deference is only for the purpose of facilitating commercial dispute resolution. Such deference cannot be at the cost of certainty in law. Legal certainty affords clear direction to future course of conduct. 

Parties should expend their money on value creation rather than bickering on such issues merely because one party wants to "take a chance" to see if the tribunal can award the claim and because the (uncertain) law allows her to do so. 

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