Vidya Drolia v DTC: Part I: Interesting Aspects- Arbitration Law as a Special Contract Law

 Vidya Drolia v Durga Trading Corporation is an interesting and important decision of a three judge Bench of the Supreme Court of India on arbitrability in Indian arbitration and the allocation of powers between the court and the arbitral tribunal to decide questions relating to arbitrability, especially in the context of Section 8 (where the court refers a dispute covered by an arbitration agreement to arbitration) and Section 11 (power of the supervisory court to arbitrators).

This post and the posts following this one are not run-of-the-mill case comments. Rather, the objective here is to discuss certain interesting points about this 242 page decision. 

The first interesting aspect covered in the judgement is the relationship between general contract law (covered in Sections 1-75 of the Indian Contract Act, 1872) and arbitration law, which deals with a type of special contract, that is, arbitration agreement. Paras  11 to 15 of the decision (p. 12-17) deal with this issue. 

According to the Court, the meaning of "agreement" is derived from Section 10 of the Indian Contract Act, 1872 ("Contract Act") and therefore, "an arbitration agreement should satisfy the mandate of Section 10 of the Contract Act..." (Para 11). Thus, the arbitration agreement should satisfy the general contract law requirements of free consent and other such requirements. A contract is an agreement enforceable by law. An arbitration agreement not enforceable by law is void and is not legally valid (Para 11). 

Thus, arbitration is "a matter of contract". The immediate implication of this is that "the parties are entitled to fix boundaries as to confer and limit the jurisdiction and legal authority of the arbitrator." (Para 15).

If an arbitration agreement is a contract, taking this proposition to its logical end, an arbitration agreement can be specifically enforced. The mechanism of specific enforcement is provided in Section 8 of the Arbitration and Conciliation Act, 1996. The question further arises, whether specific performance is the only remedy for breach of an arbitration agreement. 

Many jurisdictions and commentaries have explored the question of whether damages would lie where a party breaches an arbitration agreement. A popular commentary on the subject argues on the breach of an arbitration agreement: "If it is broken, an award of damages is unlikely to be a practical remedy, given the difficulty of quantifying the loss sustained." (Para 1.55, Redfern, Hunter et al, Redfern & Hunter on International Arbitration, 2015). See also, Julio César Betancourt, Damages for breach of an international arbitration agreement under English arbitration law, Arbitration International, Volume 34, Issue 4, December 2018, Pages 511–532, https://doi.org/10.1093/arbint/aiy030. Born argues:

"Nevertheless, while inadequate when considered alone, damages for breach of an arbitration agreement can be an appropriate supplementary means of enforcing arbitration agreements, by increasing the disincentives for such conduct. A few contemporary judicial decisions in the United States, England and Switzerland have either awarded damages for the breach of an arbitration agreement or indicated that the possibility for doing so existed. Nonetheless, some contemporary judicial decisions deny the existence of a right to damages for breaches of arbitration agreements (ironically, effectively resurrecting the historic hostility to arbitration agreements, but in reverse form)." (Gary B Born, International Commercial Arbitration 1305-1306 (2014).

An aspect to be considered is: whether the provision relating to costs as contained in Section 31A could be considered as damages for breach of an arbitration agreement? See, "Costs Allocation Under the Amended Indian Arbitration Law: A Critique" which criticizes the practice of Indian courts in not adhering to the spirit behind the enactment of Section 31A. Before Indian courts delves on these aspects, Indian courts should uniformly allocate costs as per the general rule provided in Section 31A(2)(a) that "unsuccessful party shall be ordered to pay the costs of the successful party". 

If not damages, whether courts could order costs on an indemnity basis for breach of arbitration agreement could be explored. Such a movement would, prima facie, be in the right direction.

More on the decision in another post.