"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.

Sunday, November 28, 2010

Wake up to the deficiency in the system

Court perhaps, could not have used more straightforward and strong language than this to vent its frustrations. The question is what will come of it. The following are the words of Justice Katju in a judgment, Raja Khan v. U.P. Sunni Central Waqf Board (SLP (Civil) No. 31797 of 2010, DoJ 26th Nov. 2010)

The faith of the common man in the country is shaken to the core by such shocking and outrageous orders such as the kind which have been passed by the Single Judge.

We are sorry to say but a lot of complaints are coming against certain Judges of the Allahabad High Court relating to their integrity. Some Judges have their kith and kin practising in the same Court, and within a few years of starting practice the sons or relations of the Judge become multi-millionaires, have huge bank balances, luxurious cars, huge houses and are enjoying a luxurious life. This is a far cry from the days when the sons and other relatives of Judges could derive no benefit from their relationship and had to struggle at the bar like any other lawyer.

We do not mean to say that all lawyers who have close relations as Judges of the High Court are misusing that relationship. Some are scrupulously taking care that no one should lift a finger on this account. However, others are shamelessly taking advantage of this relationship.

There are other serious complaints also against some Judges of the High Court.

The Allahabad High Court really needs some house cleaning (both Allahabad and Lucknow Bench), and we request Hon'ble the Chief Justice of the High Court to do the needful, even if he has to take some strong measures, including recommending transfers of the incorrigibles.

We entirely agree with the view taken by the Learned Division Bench in the impugned judgment. In view of the foregoing, we find no merit in this petition which is accordingly dismissed.

Let a copy of this order be sent to the Registrar Generals/Registrars of all High Courts for being placed before Hon'ble the Chief Justice of the respective High Courts.

The SC failed to find valid legal reasons for the two ex-parte orders of the (learned) single judge of the HC of Allahabad. On the other hand the court imputes extraneous considerations as the motivation for such orders.

Technically, the orders of the single judge are without jurisdiction, in a non-maintainable petition, giving final relief in the interim order.

The merit of the case be as it may, the question is what next. Especially since the malaise is pervasive. Justice Katju’s formula is to send the copy of this admonition to the CJ of the Allhabad HC to “do the needful” mentioning strong measures like ‘transfer of the incorrigible.’ Also to send it to all HC for the consideration of respective CJs

The very fact that a SC judge came out in open, recording in a judgment about the widespread corruption is by no means a simple thing. The existing system of self- regulation has proven to be inadequate in more occasion than one. It is time that the ongoing debate about judicial accountability is taken to its logical conclusion.

Monday, November 22, 2010

Dallah Real Estate and Tourism Holding Company v. Ministry of Religious Affairs, Government of Pakistan (Part III)

In the previous post on this topic, we had discussed a portion of the landmark case of Dallah Real Estate and Tourism Holding Company v. Ministry of Religious Affairs, Government of Pakistan. We had in an earlier post given an overview of the case and started off the discussion on the case by discussing a very portion of the Commercial Court’s decision. In this post, we intend to analyse the decision of the Commercial Court further. As with most of our posts, we would simultaneously analyse the Indian law on too.

Issue 2: What is the scope of enquiry by a court when a party challenges the recognition and enforcement of a NYC award under S 103(2)(b)?

One of the parties had argued that the court had to conduct a “full hearing of all the relevant evidence” while the recognition and enforcement of a New York Convention award is challenged while the other party had argued that the nature of enquiry was a review of the arbitral tribunal’s decision on jurisdiction simpliciter.  What comes out of this question is this: according to Dallah, the argument was that the court cannot go into a full rehearing of whether Pakistan had proved, in accordance with French law, that it was not a party to the arbitration agreement. Pakistan took a contrary position. It was in Dallah’s interests that the scope of enquiry was limited.  

However, court was in favour of the former, ruling that the grounds under S 103(2)(b) were those of fact requiring the challenging party “to adduce all evidence necessary to satisfy the burden of proof on it to establish the existence of one of the grounds”  The relevant provision states:

103 Refusal of recognition or enforcement
(2) Recognition or enforcement of the award may be refused if the person against whom it is invoked proves
(b) that the arbitration agreement was not valid under the law to which the parties subjected it or, failing any indication thereon, under the law of the country where the award was made;

Thus, it is inherent in the language of S 103(2) that the party against whom the award is invoked (Pakistan) proves that the arbitration agreement was not valid under French Law. Thus:

If a party has to "prove" a matter, that must mean, in the context of English civil proceedings, prove the existence of the relevant matters on a balance of probabilities.

Issue 3: The parties are in agreement that the arbitration agreement would be tested on the touchstone of the French Law. But what are the French law principles applicable in the case?

A question as to foreign law is a question of fact, usually established through the use of experts. In this case, the French Law experts of both sides submitted a Joint Memorandum on the law in France on the principles pertaining to whether Pakistan had validly agreed to arbitration as per the arbitration agreement in issue., though they disagreed on several aspects. Following were some of the principles explicated by them:
  • The test to decide whether Pakistan was a part of the arbitration agreement was to see if it was the common intention of all the parties to the said agreement to be bound by the arbitration agreement.
  • The common intention could be established on the basis of facts. For this, the courts would look into all surrounding facts to see if they pointed to an intent to be bound by the arbitration clause.
  • The ascertainment of subjective intention of the parties to be bound by the arbitration clause would be based on the objective conduct of the parties.
  • The French Jurisprudence Constante* is that the international arbitration agreement “must be extended to parties directly implicated in the performance of the contract and in any disputes arising out of the contract.
  • It must be established that, notwithstanding the absence of any signature to the international arbitration agreement, “respective contractual situations and existing usual commercial relations” of the purported parties such an agreement gave rise to a presumption that the purported parties had bound themselves to the arbitration agreement.
  • To establish common intention, “good faith” must be taken into account.
  • A State or a State entity, when it enters into an arbitration agreement, waives the State immunity from the jurisdiction of the arbitral tribunal and the immunity against execution of the arbitral award against it.
We will continue the discussion on the remainder of third issue in a future post. The discussion on the third issue is extremely interesting and we might devote an independent post on the remaining portion of it.

* Jurisprudence Constante, a term of French origin, translates roughly as “uniform jurisprudence”. It refers to “a long series of previous decisions applying a particular rule of law carries great weight and may be determinative in subsequent cases.” According to Wikipedia, “Jurisprudence constante is a legal doctrine according to which a long series of previous decisions applying a particular rule of law is very important and may be determinative in subsequent cases. This doctrine is recognized in most civil law jurisdictions, in the civil law of Louisiana, for example. The rule of law applied in the Jurisprudence constante directly compares with stare decisis. But the Louisiana Supreme Court notes the principal difference between the two legal doctrines: a single court decision can provide sufficient foundation for stare decisis, however, ‘a series of adjudicated cases, all in accord, form the basis for jurisprudence constante’.” [The Wikipedia reference has been verified and seems to be correct. See foot note 17 to the case cited in the article. The case can be accessed from this link.]

Thursday, November 18, 2010

AT&T v. Concepcion

The United States Court of Appeals for the Ninth Circuit had to decide the validity of an arbitration agreement found in a Wireless Service Agreement. The facts:

Feb 2002: Vincent and Liza Concepcion entered into an agreement called the Wireline Service Agreement  (WSA) with the predecessor of AT&T. The WSA governed the relationship between the Concepcions and AT&T pertaining to cell phone service and purchase of new phones.

AT&T had advertised that the cell phones were free but had charged sales tax at 7.75% of the phone's value in the retail market. The Concepcions sued AT&T alleging fraud. The WSA provided that any dispute in the agreement should be submitted to arbitration. The arbitration clause also contained a class action waiver clause. A class action suit is filed by one person or several persons on behalf many others. As per WSA, Concepcion was deemed to have his right to sue AT&T only under his individual capacity and not through any class action.

Jan 2006: The Concepcions sued AT&T for charging sales tax when the phone was advertised as free. A class action suit was filed by Laster.

Sep 2006: The District Court had consolidated the claims of Conceptions with that of the Laster class action.

Dec 2006: AT&T amended the arbitration clause by providing, in effect, that:

If Arbitration Award > AT&T’s last written settlement offer, then the customer would be paid USD 7,500.

Mar 2008: AT&T applied to the court to compel the Concepcions and Laster to arbitrate the dispute in their individual capacities under the new arbitration agreements.

The District Court denied the motion of AT&T holding, inter alia, that the class action waiver provision in the arbitration agreement was unconscionable as per California law and that the Federal Arbitration Agreement did not pre-empt the California unconscionability law.

Against this decision, AT&T appealed to the US Court of Appeals. The decision of the Court of Appeals is summarized:

  • Under the FAA (Federal Arbitration Act) arbitration agreements are valid and enforceable “save upon such grounds as exist at law or in equity for the revocation of any contract” (Section 2 of the FAA).
  • The Federal Arbitration Act did not, either expressly or impliedly, pre-empt the California Unconscionability Law. The objective of the FAA was to remove hostility towards arbitration and treat an arbitration clause like a contract. Assuming that there is a contract with a class action waiver, the class action waiver clause would nevertheless fall foul of the California Law.
  • Further, S 2 clearly recognizes that arbitration agreements should be denied if they are invalid due to grounds such as unconscionability.
  • Declaration of class action waiver clauses as invalid, if it satisfies the criteria laid down in past decisions, does not reduce the efficiency of arbitration.
  • In previously decided cases, courts have held that since class actions “serve the important policy function of deterring and redressing wrongdoing, particularly where a company defrauds large numbers of consumers out of individually small sums of money”, class action waivers are unconscionable if certain conditions are satisfied:
    • The class action waiver is found in a “consumer contract of adhesion”;
    • Disputes between parties involve small sums of money as damages;
    • The allegation is that complaint is that the party with superior bargaining power has cheated a large number of consumers for a small amount of money;
  • The purported waiver has resulted in exempting the wrongful party from its own fraud or wrongful injury to another.
  • Since the WSA was a contract of adhesion (because the Concepcions were given no opportunity to negotiate), since the damages involved here were a small amount of USD 30.22 and since the allegation against AT&T is that they have cheated a large number of customers by advertising the phones as free when they knew they would charge sales tax on the phone, the class action waiver provision in the arbitration agreement was unconscionable as per California Law
The US SC is hearing arguments in the case of AT&T v. Concepcion. Touted as one of the most important cases in the recent times, the AT&T case seemingly involves complex questions pertaining to class action, consumer rights, federalism and arbitration. More on the Supreme Court proceedings in a future post. But before closing off we make two points:

  1. In First Options of Chicago v. Kaplan 514 US 938 (1995), the US Supreme Court held:
"When deciding whether the parties agreed to arbitrate a certain matter (including arbitrability), courts generally (though with a qualification we discuss below) should apply ordinary state law principles that govern the formation of contracts... The relevant state law here, for example, would require the court to see whether the parties objectively revealed an intent to submit the arbitrability issue to arbitration."
  1. Thank god India does not have this state law – central law problem in arbitration that USA suffers from! 
For a brilliant set of links on the case (briefs, oral arguments in the SC, blog posts, short articles, Amicus Briefs- even professors of arbitration and contract law have made submissions as amici, commentary) check out this page. The compilation of links on the case is simply amazing. Hats off!

Tuesday, November 16, 2010

Fortnightly Roundup of SSRN Articles on Arbitration (November 1- November 15)

Interim relief is critical in any form of dispute resolution. Parties must have the option to seek interim measures, like preliminary injunctions and attachments, where their adversaries threaten to take action which cannot be undone by after-the-fact damages. Parties in international arbitrations are no exception. But while international arbitration has many advantages that make it a consensus favorite over litigation in national courts, interim relief has been rightfully called its “Achilles’ heel.” Acknowledging this crippling shortcoming, arbitration institutions have sought to address the problem by revising their international arbitration rules to provide a variety of options for parties to seek interim relief. Drawing on prior research, case studies, and statistics, we provide an updated comparative analysis of interim measures under twelve sets of commonly used international arbitration rules and guidelines. Unlike prior studies, however, we test these procedures in action by comparing them in four hypothetical scenarios, consider expedited proceedings as an alternative to interim relief, and compare a much broader group of rules. We conclude that, while no single set of rules provides the full range of possible options that a party might want, those institutions that have sought to address the problem have come up with several viable procedures (particularly pre-tribunal referee procedures) that other arbitral institutions should consider adopting.

While courts often think of religion in terms of faith, prayer, and conscience, many religious groups are increasingly looking to religion as a source of law, commerce, and contract. As a result, courts are being called upon to apply the church autonomy doctrine – which bars courts from reviewing matters of faith, doctrine, and church governance – where commercial conduct is religiously motivated. In this Article, I consider an example of the challenges faced by courts when trying to interpret and regulated religious commerical conduct: the constitutionality of imposing sanctions for violating the Bankruptcy Code’s automatic stay by submitting a dispute for religious arbitration. In considering this example, I suggest that courts, instead of trying to take religion out of the equation, need to develop an increasingly sophisticated understanding of the religious dynamics of a case to know when they can – and cannot – review and regulate the conduct in question.

Commercial parties worldwide rely on arbitration clauses to mitigate the high risks inherent in international business transactions. A split in federal circuit courts has emerged and left the validity of arbitration agreements in global insurance contracts under the United Nations Convention on the Recognition and the Enforcement of Arbitral Agreements (the "New York Convention" or "Convention") in a state of uncertainty in the United States. The Convention mandates that federal courts must recognize and enforce arbitration agreements among international parties. Article II specifically requires signatories to "recognize an agreement in writing under which the parties undertake to submit to arbitration all or any differences which have arisen or which may arise between them in respect of a defined legal relationship... concerning a subject matter capable of settlement by arbitration." In the context of insurance, however, many states have enacted anti-arbitration statutes and invalidated international insurers’ arbitration agreements under the McCarran-Ferguson Act, which allows state law regulating the "business of insurance" to reverse-preempt federal law. Under this statute, which Congress originally enacted in 1945 to preserve states’ rights to regulate the industry and prevent federal prosecutors from targeting insurers’ industry practices under the federal antitrust laws, states have refused to enforce arbitration clauses in insurance contracts, despite the New York Convention.

On November 9, 2009, Safety Nat’l Casualty Corp. v. Certain Underwriters at Lloyd’s, London created a split in federal circuit courts over whether the McCarran-Ferguson Act reverse preempts the New York Convention and allows states to circumvent the United States’ national policy favoring arbitration and invalidate global insurers’ arbitration agreements. The Fifth Circuit and several district courts have held that the McCarran-Ferguson Act does not reverse-preempt any treaty and the New York Convention therefore protects arbitration agreements in international insurance contracts. In contrast, the Second Circuit has held that the McCarran-Ferguson Act reverse-preempts the New York Convention because it is a non-self-executing treaty and the Act preempts the Convention’s implementing legislation. As the international insurance has globalized and expanded, this circuit split is timely and greatly impacts global business relations.

This Note examines the split in federal circuit courts created by Safety Nat’l Casualty Corp. Part I examines the legal framework governing arbitration in the United States, including New York Convention and Federal Arbitration Act. It also explores the current state of insurance arbitration and the McCarran-Ferguson Act. Furthermore, Part I briefly reviews the doctrine of preemption and foreign relations law concerning the status of treaties in United States law. Part II discusses the split in federal authority, particularly both sides’ interpretations of foreign relations law and the McCarran-Ferguson Act. Part III proposes two possible resolutions to the conflict in authority, both legislative and judicial. Part III.A suggests that Congress should amend the McCarran-Ferguson Act to exempt the New York Convention in light of the national policy favoring arbitration and the importance of arbitration in promoting international business in which parties rely on arbitration to diminish risks and efficiently resolve their conflicts. Part III.B offers a judicial solution. It contends that the Supreme Court should accept certification in Safety National and hold that the McCarran-Ferguson Act does not enable state law to reverse-preempt the New York Convention or enable states to thwart arbitration of disputes concerning insurance contracts. It argues that the Fifth Circuit appropriately found that the plain meaning of “Act of Congress” when Congress enacted the MFA did not include treaties but instead only contemplated legislation. It further maintains that the MFA’s legislative history reflects that "Act of Congress" does not contemplate treaties. The current status of the Convention as executing and non-self-executing remains unknown, but it is irrelevant for this analysis. Furthermore, it posits that the Supreme Court should recognize that the MFA does not cover the Convention as an "Act of Congress" because the MFA only applies to interstate commerce and does not apply to international arbitration agreements under the Convention. Finally, it contends that Congress did not intend the MFA preemption exemption to apply to arbitration or dispute resolution because in enacting the MFA. This Note concludes that Congress and the Supreme Court should ensure that states do not have unlimited power to preclude international business parties from enforcing mutually agreed-upon arbitration clauses in insurance contracts.

This paper analyses the human rights interventions of various civil society organisations in international investment arbitration through the submission of amicus curiae briefs. It asks what value these interventions have had in promoting social justice issues in the arbitration process.

The paper argues that the language and legal obligations of human rights appear to have an important impact in terms of ensuring that amicus submissions of civil society groups are accepted by tribunals. But there are fundamental problems inherent in this mechanism which make it unlikely that the human rights arguments raised will have any significant role in the decision-making process of the tribunal panels. The paper concludes with some thoughts about the wider implications of these findings for international investment law, international human rights law and international law more generally.

We can expect that many eminent commentators will pass judgment on the first 10 years of operation under the Arbitration Act 1996. Their scrutiny will be intense and erudite. Herein lies a danger. For the very sophistication of the analysis may obscure simple truths. First among these is the fact that the 1996 Act has turned out to be an unquestionable improvement on the prior law.

Indeed, London’s reputation today as a centre for international commercial arbitration is enviable. In the Queen Mary/PWC Survey conducted under the direction of Dr. Mistelis, England was ranked by respondents as the preferred international arbitration venue. The Second Annual Litigation Trends Survey by Fulbright & Jaworski, based on 354 registered interviews, records London as the favoured arbitration venue in the world, preferred by 31 per cent of respondents overall (including US and UK respondents), followed by New York (with 25 per cent) and Paris (with 5 per cent). Amongst UK respondents, London was preferred by 60 per cent. In contrast, New York was only preferred by 33 per cent of US respondents. This agreeable situation stands in satisfying contrast to what I observed when I started practice in the 1970s, when the ravages and abuses of the special case procedure had led to the result that an international lawyer proposing a London venue might be accused of professional negligence. The point was a serious one; how could one justify the selection of a place of arbitration for an ICC arbitration which considered a cornerstone of the ICC rules – namely the waiver of appeal – to be a nullity? And it is a matter of historical fact that in those Dark Ages the ICC Court of Arbitration, the world’s leading body in the field, clearly and demonstrably shunned London.

A national policy of encouraging the use of voluntary arbitration to settle disputes arising from the terms of collective bargaining agreements was established by the Labor Management Relations Act of 1947 (LMRA). Section 301(a) of the Act authorized federal courts to hear disputes arising from collective bargaining agreements. The ramifications of section 301, however, carry far beyond a mere procedural grant of jurisdiction to federal courts. For example, the Supreme Court, in Textile Workers Union v. Lincoln Mills, made section 301 the basis for the judicial review of labor arbitration awards. By authorizing federal courts to fashion standards for the enforcement of collective bargaining agreements, the Court required the judiciary to apply federal substantive law to those subject to the provisions of the LMRA. In amplifying Lincoln Mills, the Court held in Dowd Box v. Courtney that section 301(a) did not divest state courts of jurisdiction in a suit for violation of a provision of a collective bargaining agreement. Thus, impliedly at least, a state court could exercise concurrent jurisdiction in such cases. The Court later held, however, that federal jurisdiction and state jurisdiction over agreement violations were not mutually independent under section 301(a). Incompatible doctrines of local law were held subordinate to federal labor law principles. As a result, the scope of judicial review over an arbitration decision became primarily a question of federal law.

Part II of this Article discusses the Steelworkers Trilogy, a series of three cases, handed down on June 20, 1960, where the Supreme Court outlined the scope of judicial treatment of arbitration provisions in collective bargaining agreements that fall under the ambit of section 301 of the LMRA. These cases are popularly referred to as The Steelworkers Trilogy, include: United Steelworkers v. American Manufacturing Co., United Steelworkers v. Warrior & Gulf Navigation Co., and United Steelworkers v. Enterprise Wheel & Car Corp. In Part III, this Article examines a representative survey of the various approaches taken by the circuit courts in applying the Enterprise standard of judicial review to the validity of an arbitrator’s award. Part V focuses on specific problems such as the remedial powers of the reviewing court; ambiguous awards; procedural questions; and public policy issues, whether a court will enforce an arbitrator’s award that contravenes public policy, and finally it focuses on the significance of the applicability of the Federal Arbitration Act to collective bargaining agreements. This Article concludes that the arbitration award is not a mere step in a chain of appeals, but is, in most cases, the terminal point of the dispute. If a more liberal scope of review is vested in the judiciary, it will encourage the losing party to appeal to the courts, resulting in a prolongation of the dispute, additional expense to the parties, and loss of confidence in the arbitration process.

The chapter discusses a multi-sourced equivalent norm (MSEN) situation arising out of the parallel breach of an investment treaty and the WTO agreement. On the basis of a number of case studies, it considers how MSENs are affected by secondary rules of state responsibility that prima facie reflect precisely the systemic and harmonising perspective of the international legal order. It focuses, in particular, on the WTO-authorised suspension of TRIPS concessions that may breach investment obligations regarding IP rights, and on the converse scenario of countermeasures applied against investment protection obligations that might also breach WTO rules (using the US-Mexico soft drinks disputes in NAFTA and the WTO as a case study). It is suggested that the focus of trade and investment dispute settlement regimes on systemic strengthening may come at the cost of complicating the relationship and the resolution of conflicts with extra-systemic primary and secondary rules.

We study attorney fee clauses in a data set of 2,350 contracts contained as exhibits in Form 8-K filings by reporting corporations. Because 8-K filings are required only for material events, these contracts likely are negotiated by sophisticated parties and, therefore, provide evidence of efficient ex ante solutions to contracting problems. The American Rule for compensating attorneys requires each party to pay its own attorney, win or lose; the English Rule (applicable rule in most of the world) requires the losing party to pay the winner’s reasonable fees. Adoption of the English Rule or other loser-pays arrangements has frequently been proposed as a solution to perceived U.S. litigation problems. But the vast theoretical modeling literature on fees has reached no consensus. Empirical reality should help assess the models and provide new insights. Because contracting parties can opt out of the American Rule and into a loser-pays rule at low cost, we expect such opt-outs to occur frequently if the English Rule more efficiently compensates counsel. Our data show, however, that the American Rule is preferred about as often as the English Rule (or similar loser-pays rules). Choosing the American Rule is associated with the following contractual features: specific kinds of contracts, the presence of a non-U.S. party, the absence of arbitration clauses and jury trial waivers, selection of New York law in contracts other than underwriting contracts, and a likely long-term relation between the parties. It is inversely associated with an increasing degree of contract standardization. Sophisticated parties thus often perceive the American Rule to be value-enhancing compared to loser-pays systems but contracting parties that opt out of U.S. courts through arbitration clauses, or eliminate jury trials through jury waiver clauses tend to reject the American Rule. The findings suggest that theoretical models should resist the assumption that a single attorney fee rule is most efficient in all contexts and that models should strive to account for real-world factors associated with fee clauses.

To distinguish between these two concepts is a matter of considerable concrete importance. Decisions of tribunals which do not respect jurisdictional limits may be invalidated by a controlling authority. But if parties have consented to the jurisdiction of a given tribunal, its determinations as to the admissibility of claims should be final. Mistakenly classifying issues of admissibility as jurisdictional may therefore result in an unjustified extensiion of the scope for challenging awards, and frustrate the parties expectation that their dispute be decided by the chosen neutral tribunal. Of course, national laws may explicitly provide that arbitral disposition of issues of admissibility are not final. But then again, national laws may explicitly provide that all decisions by arbitrators are subject to full appeals, including findings of fact or conclusions of law. Indeed, national laws may forbid arbitration altogether. Yet that is emphatically not the modern trend. This essay proposes an approach consistent with an international consensus that decisions of arbitrators having jurisdication are final.

Friends of Karl-Heinz Böckstiegel remark that it is almost impossible to imagine him in an embarrassing situation. He seems always to find himself in the right place at the right time, and, perhaps more importantly, never in the wrong place at the wrong time. The key to this phenomenon is to be found in two words: anticipation and planning. These concepts are not difficult to understand. They are simply hard to implement.

Over the years, practitioners in the field of international arbitration have become conscious of a method of controlling time which is so closely identified with its creator that most of us will understand a suggestion – without further explanation – to follow ‘the Böckstiegel Method,’ or ‘a Böckstiegel style procedure.’ Given the confidentiality of most arbitral proceedings, the details of this method are not a matter of general knowledge; the procedural orders that reflect the Böckstiegel Method tend to become part of the intellectual property of fellow arbitrators, parties, counsel who have participated in cases over which he has presided.

It is therefore a source of satisfaction to have available the full text of an award which sets out a procedural framework characteristic of the Böckstiegel Method. This award, rendered in the Tradex Hellas v. Albania case under the aegis of the International Centre for the Settlement of Investment Disputes and under the chairmanship of Professor Böckstiegel, has been published by consent in extenso.

Time is a particularly precious commodity in international arbitral proceedings. No one seeks with greater insistence to avoid its waste than Professor Böckstiegel. The Tradex case provides an interesting illustration of his approach, and invites the reflections that follow.

Monday, November 15, 2010

Scope of Jurisdiction to Award Interim Measures Vis-à-vis Third Parties (Part VIII)

We had, in the last seven posts on this topic, discussed the law pertaining to the power of an adjudicatory authority under the Arbitration and Conciliation Act, 1996 to award interim measures (by adjudicatory authority, we mean the courts and the arbitral tribunals). At first, we had seen the not-so controversial issue of the power of the arbitral tribunal to award interim measures against third parties. Subsequently, we had taken up the tricky issue of the jurisdiction of a court under S 9 of the Arbitration and Conciliation Act, 1996 to grant interim measures against a non-signatory to the arbitration agreement (third party).

Though it might be unjust, at times, to pass order for interim measures against third parties, there might be compelling reasons for courts to have and exercise such a power. In this last post on this topic, we would discuss the reasons why a court under S 9 should have the power to issue interim orders against third parties.

  1. History of the UML:
The structure of the Indian Arbitration and Conciliation Act, 1996 has been borrowed from the UNCITRAL Model Law on International Commercial Arbitration, 1985 (Model Law) and the UNCITRAL Conciliation Rules, 1980. Part I of the Act is virtually based on the Model Law. Sections 9 and 17 of the Act address the same subject as that of the Model Law. In a report of one of the Working Groups of the UNCITRAL, it was stated:
The range of interim measures of protection covered by article 9 is considerably wider than that under article 18* due to the different purposes of these two articles. Article 18 deals with the limited power of the arbitral tribunal to order any party to take an interim measure of protection in respect of the subject-matter of the dispute and does not deal with enforcement of such orders. Article 9 deals with the compatibility of the great variety of possible measures by courts available in different legal systems, including not only steps by the parties to conserve the subject-matter or to secure evidence but also other measures, possibly required from a third party, and their enforcement. This would, in particular, include pre-award attachments and any similar seizure of assets.” (emphasis not in the original) [UNCITRAL, ANALYTICAL COMMENTARY ON DRAFT TEXT OF A MODEL LAW ON INTERNATIONAL COMMERCIAL ARBITRATION (A/CN.9/264) (25 March 1985)]
[* The present Article 17 was then Article 18 “Power of arbitral tribunal to order interim measures”]

Against this rationale, it might be argued that the wordings of Article 9 were completely different from that of Section 9. Article 9 of the Model Law reads:
 Arbitration agreement and interim measures by court: It is not incompatible with an arbitration agreement for a party to request, before or during arbitral proceedings, from a court an interim measure of protection and for a court to grant such measure.”
But this argument is not sustainable because Article 9, as the drafting history of the UML would show, was negatively worded so as to preserve the right of a court to grant interim orders or measures, including even those addressed to non-signatories to the arbitration agreement. In fact, the inability of the arbitral tribunal to pass interim orders against third parties was one of the important reasons for having a provision in the UML saving the jurisdiction of the court to grant interim measures, notwithstanding an agreement to arbitrate disputes. India has retained the same structure as that of the Model Law, including that of the power of the court to grant interim measures in relation to arbitration proceedings (Unlike most other provisions of Part I of the Act, there is no provision analogous to S 9 in the Model Law though the subject matter of both the provisions is the same. The drafters seem to have drawn inspiration for this section from S 41(b) and Schedule II of Arbitration Act, 1940).

  1. The Structure of S 9 of the Act:
There is nothing in S 9 of the Act, which restricts a court to pass orders under that section against non-signatories. In fact, under certain provisions of S 9, a court is authorised to pass orders in respect of parties who are not signatories to the arbitration agreement. For example, the court could, under S 9, appoint a guardian, or a receiver, who would be third parties to the arbitration agreement. In Value Advisory Services v. ZTE Corporation and Ors. MANU/DE/1032/2009, Rajiv Sahai Endlaw, J. noted:
Under Clause (i) [of S 9], the guardian to be appointed may not be [] a party [to the arbitration agreement]; similarly the goods under Clause (ii) (a) may be or may be required to be in custody of or delivered to or sold to such third parties - further orders against such third parties may also be required in connection with such sale; under Clause (ii)(b) the amount to be secured may be in the form of money payable or property in hands of such third party - the scope cannot / ought not to be restricted to securing possible with orders against parties to arbitration only. Similar examples can be given with respect to other clauses also.”
Further, a perusal of cases in which the courts have denied the existence of the power of a court to grant interim orders against third parties would reveal that not one justification is given for such denial. All that these courts do is to simply state that no express power for the same has been granted in S 9. The provision is, however, clear on one point (which we have noted in one of the earliest posts on this topic). Only a party can apply to the court for interim measures:
A party may, before, or during arbitral proceedings or at any time after the making of the arbitral award but before it is enforced in accordance with section 36, apply to a court…”
“Party” here is defined in the Act. Section 2(1)(h) defines “party” to mean “a party to an arbitration agreement.” Thus, only a party to the arbitration agreement can apply to the court for interim measures. But the provision does not say against whom the relief can be claimed.

  1. Power of a Civil Court:
S 9 provides:
“…the Court shall have the same power for making orders as it has for the purpose of, and in relation to, any proceedings before it.”
 Thus, the power under S 9 of a court is equivalent to that of a civil court. There are instances where civil courts have, in the past, made interim orders in respect of non-signatories. State Bank of India v. The Economic Trading Co. SAA & Ors. AIR 1975 Cal 145: MANU/WB/0028/1975 is a classic example where the court granted an interim injunction restraining non-signatory banks, which were either the guarantor or the beneficiary of a guarantee, from taking action with respect thereto. In this case, the State Bank of India, on behalf of a party to a contract, gave a guarantee to an Egyptian bank. When the Egyptian bank wanted to invoke the guarantee, the said party to the contract approached the court for interim injunction. The court granted an interim injunction against the SBI preventing it from honouring the Egyptian bank’s demand, against the Egyptian bank from insisting SBI from further demanding to encash the bank and the ultimate beneficiaries of the bank guarantees who instructed the Egyptian bank to demand encashment.

The Delhi High Court has, as noted in the previous post, in Value Advisory Services v. ZTE Corporation and Ors., cited several examples of orders recognized under the Code of Civil Procedure, 1908, such as Sections 47, 60 and Order 21 Rules 46 and 46A-F, Order 38 Rules 6-11A of CPC, that may be against third parties.

  1. The Role of a Court in the Arbitral Process:
In CREF Finance Limited v Puri Construction & Others (MANU/DE/0580/2000), the court held (we had already quoted this phrase in an earlier post on this topic):
“Wherever the powers of the Court are invoked with the objective of supporting the arbitration, the Court must act with alacrity.”
 As we had seen in this post, the petitioner would have been left remediless because the petitioner can neither approach the arbitrator for an interim measure against a third party (because the tribunal, being a “creature” of contract, cannot pass any order against a third party) nor the court if the court unnecessarily refuses to order interim measures of protection. We had discussed the case of Cadre Estate Pvt. Ltd. v. Salochna Goyal where the court refused to pass an interim order against third parties to the contract. The petitioner’s complaint was that one of the respondents had entered into an agreement to sell with her. However, the said respondent disposed off the property even before the sale was concluded. Therefore, the petitioner approached the court to restrain the said respondent and the subsequent transferee from alienating or disposing off the property. The court held that there was no agreement between the petitioner and the subsequent transferees and dismissed the application under S 9 for interim injunction.

  1. Multiplicity of Proceedings:
Take the case of Cadre Estate Pvt. Ltd. v. Salochna Goyal as an example. The petitioner’s prayer for interim injunction against third party transferees was dismissed. Obviously, the arbitrator cannot have any jurisdiction against the third party transferees (though in reality, the arbitrator restrained even the third party transferees). The only forum available to the petitioner for restraining the third party transferees is the civil court. So she has to file a separate suit for injunction against the third party transferees. It is this kind of situation which leads to multiplicity of proceedings that ought to be avoided.

The courts have, in the past, issued interim orders even against third parties. Examples are National Highways Authority of India v. Elsamex-TWS-SNC Joint Venture MANU/DE/0732/2008, Niko Resources Ltd. v. Union of India 2001(3) Arb. L.R. 196 (Delhi) (DB). As stated before, the courts denying existence of the power to issue interim orders against third parties have based their justifications on the absence of any express statement of the existence of such a power under S 9. For the reasons above, it is submitted, it would be erroneous to deny the existence of such power. Nevertheless, there might be cases in which justice would demand the court not to exercise that power. In such cases, courts ought to base their reasons on law and reason and not on illusory considerations.
[Readers may refer to this guest post by Mr. Shantanu Narvane in the Lex Arbitri Blog on this topic]

Friday, November 12, 2010

Scope of Jurisdiction to Award Interim Measures Vis-à-vis Third Parties (Part VII)

In a previous post on the same topic, we had discussed the earliest cases on the issue as to whether a court, under S 9 of the Arbitration and Conciliation Act, 1996, would have the power to issue an interim order against a non-signatory (“third party”) to the arbitration agreement. Moving forward, we would, as promised in the previous post, see a few recent cases on this point.

The first decision is that of Rajiv Sahai Endlaw, J. in the case of Value Advisory Services v. ZTE Corporation and Ors. In the said case, though the judge dismissed the petitioner’s prayer to issue an order under S 9 for other reasons, the judge discussed, in detail, the law on the issue relevant to our subject. His discussion on the issue is significant and therefore we summarize it:
  • There can be no general principle on the issue as to whether a court has the power under S 9 to grant interim order against a third party.
  • The past cases have decided on the facts unique to them
  • Each case has to be decided on the facts before the court.
  • Restricting a court’s power to grant an interim order only against the parties to the arbitration and not a third party would hamper the efficacy of S 9.
  • S 9 itself recognises issue of interim orders against a class of persons who are actually third parties to the arbitration agreement.
  • Though the proceedings in court, similar to those before the arbitrator, are between the parties to the arbitration agreement, the practice has been to issue interim orders against third parties under several provisions of the Code of Civil Procedure, 1908 such as Sections 47, 60 and Order 21 Rules 46 and 46A-F, Order 38 Rules 6-11A of CPC.
  • There is no indication in the Act that the power of the court to issue interim orders is restricted only to the parties to the arbitration agreement. In fact, S 9 states that the court shall have, in issuing interim orders, the same power which it has for or in relation to any proceeding before it.
(Also see, Sri Krishnan v. Anand and Ajay Makhija v. Dollarmine Exports, where Rajiv Sahai Endlaw, J. has confirmed the position he took in Value Advisory Services v. ZTE Corporation and Ors. on the issue. Sri Krishnan v. Anand is also an interesting case because Rajiv Sahai Endlaw, J. maintains that in case a party breaches the tribunal’s order under S 17, the other party could approach the court under S 27(5) of the Act against the breaching party for contempt of court. We’ll discuss this aspect of the case some other day)

The next case is interesting, one reason being that the decision is not precisely on the issue under discussion. The other reason is that the case is intrinsically connected to our issue. In the case of Mohammad Ishaq Bhat v. Tariq Ahmad Sofi 2010(3) Arb. LR 107 (J & K), the question before the Jammu & Kashmir High Court was whether a party had the right to be impleaded as a party to a petition under S 9.The court decided it in the affirmative. We’ll skip the facts but discuss only the law by summarizing it like we did for the previous case (on facts the court allowed the plea of the petitioner to be impleaded as a respondent even though he was not a party to the arbitration agreement):

  • S 9 is clear in that only a party to the arbitration agreement can apply to the court for interim measures. A third party to an arbitration agreement cannot apply to the court under S 9 for interim measures
  • However this does in no way restrict a person from impleading himself as a party to the proceedings when he is “materially and substantially interested” in the subject matter of the S 9 petition and would be materially affected by the court order.
  • Restraining such a person from having a say in the court in such a situation might lead to injustice.
  • Such a person would assist the court in arriving at a just conclusion
  • If the person is not allowed to implead himself as a party to the proceedings under S 9, it may lead to multiplicity of proceedings and would consequently be contrary to public policy.
  • Such person has to, however, convince the court that:
    • He is a proper and necessary party to the proceedings, and
    • His presence is bound to enable the court to arrive at a just and proper conclusion.
The court held:
A person having vital interest in the subject matter of arbitration agreement cannot be asked to watch the proceedings from the fence and leave the arena to for the parties to the arbitration agreement to cut swords , when the victim of the outcome of the dispute is none else but the person pushed to the fence.”
Thus, in both the cases, the courts have contemplated that third parties could have (in some situations) an important role to play in respect of the subject matter of a S 9 petition. More on this in the next post.

Thursday, November 11, 2010

Norm Creation (ADR) and Arbitration

ADR Prof Blog has a post on the interesting topic of ADR and Norm Creation. In that post, the blawgger provides two rare examples of ADR in creating norms. 

One of the complaints against ADR processes is that they undermine the rule or norm-creating role of adjudication. By taking disputes from the norm-creating sphere of public adjudication to private and confidential tribunals, the role of precedents and norm-creation are undermined. The problem is  further complicated because the review of ADR decisions (in a generic sense of term), if any, are on the basis of possibility-standards and not on the basis of substantive correctness of the decision. We had discussed this issue in the sidelines while discussing the case of Sumitomo Heavy Industries v ONGC. There, we had commented:
"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?"
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) Girardeau A. Spann, in Expository Justice, 131 U. Pa. L. Rev. 585 (1983), argued:
[t]he exposition of law that occurs during the process of adjudication serves an important governmental function, which should be viewed as the primary function of courts rather than as a mere incident to the resolution of disputes. By explaining how legal principles produce particular results in particular factual contexts, courts give operational meaning to principles that would otherwise remain abstract, rhetorical and elusive.
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 [See, William M. Landes & Richard A. Posner, Adjudication as Private Good, 8 J. Legal Stud. 236 (1979)]. There is no need for private judges to act in a precedent-creating manner as they are paid by the parties for rendering an impartial decision and not for amplifying law to guide future conduct. Also, creation of precedents by the private judge would mean that a future judge would free-ride on the previous judge who created the precedent in the first place without compensating his action of creating the precedent. 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 [Posner , in another place, makes an identical point when he deals with the justification for appeal courts. He says that if the appeal courts gave deference to the trial courts on legal questions, law would be unpredictable as the trial court judges would disagree a lot, notwithstanding their quality. See, RICHARD A. POSNER, ECONOMIC ANALYSIS OF LAW 643-644 (1998)]. Landes & Posner ask how requisite standardisation of law could be achieved in the absence of a single source for precedent production. This guidance function of the Courts in arbitration is clearly reflected in the case of CMA CGM SA v. Beteiligungs-Kommanditgesellschaft MS Northern Pioneer Schiffahrtgesellschaft MBH & Co (“Northern Pioneer”) [2002] EWCA Civ 1878 where the Court of Appeal had to interpret the War Cancellation Clause of a standard form charter party. The War Cancellation Clause provided: 
In the event of the outbreak of war (whether there be a declaration of war or not) between any two or more of the following countries: The United States of America, the United Kingdom, France, Russia, the People's Republic of China, Federal Republic of Germany and any country of the EEC or in the event of the nation under whose flag the vessel sails becoming involved in war (whether there be a declaration of war or not), either the Owners or the charterers may cancel this charter.”
The court had to decide whether participation by Germany in the military operation at Kosovo amounted to war, thereby entitling the charterers to terminate the charter party. The majority of the arbitral tribunal had held that the events in Kosovo did not amount to “war” and therefore termination of the charter parties was wrongful. The interpretation of this clause was of public importance because almost all standard form charter parties contained this clause and the Court of Appeal had to decide whether the facts came within the scope of “war”. The Court held that the facts of this case demonstrated that changing circumstances could raise issues of general public importance in relation to such clauses that were not covered by judicial decision. The Court held that the changing circumstance in this case was in the nature of international conflicts and concluded that the arbitrators were wrong in holding that the military operation in Kosovo was not war as from a businessman’s perspective the military operation amounted to “war” (the Court , however, dismissed the appeal on other grounds). The decision evoked responses from various quarters and a solicitor’s in-house newsletter [cited in Hew R. Dundas, Appeals on Question of Law: Section 69 Revitalised, 69 Arbitration 172 (2003)] observed on the Northern Pioneer that:
"[s]o few arbitrated disputes now reach the courts that one wonders how English commercial law will develop, all appealed awards being private matters. This is particularly worrying in the context of some of our key markets, such as ship chartering and, of course, reinsurance, where standard form contracts or clauses are widely used, the effect of which impacts on many of our clients. In light of that, the decision of the Court of Appeal in [Northern Pioneer] was welcome".
Contrary to the popular opinion, the post in ADR Prof Blog suggests two examples of norm-creation through ADR processes. These examples seem to run counter to the general notion that ADR processes undermine norm-creation. 

Example 1: There is a fresh perspective given in the academia to the Google Book Search Settlement. It seems the settlement has been a "quasi-public copyright reform". According to Paula Samuelson's paper (cited by the blawgger):
"An intriguing way to view the proposed settlement of the copyright litigation over the Google Book Search (GBS) Project is as a mechanism through which to achieve copyright reform that Congress has not yet and may never be willing to do... This Article... demonstrates that the proposed settlement would indeed achieve a measure of copyright reform that Congress would find difficult to accomplish. Some of this reform may be in the public interest. It also considers whether the quasi-legislative nature of the GBS settlement is merely an interesting side effect of the agreement or an additional reason in favor or against approval of this settlement."
Thus amplification seems to have occurred independent of legislation through the ADR process of negotiation and settlement. 

Example 2: The second example that the blawgger cites is the case of the Official Unsecured Creditors of the Bayou Group against Goldman Sachs Execution and Clearing. The Bayou Hedge Funds Group was a hedge fund group created in 1996. Its investors were defrauded when their investments were misappropriated. Goldman's Sachs Execution and Clearing was the prime broker and clearing house for the Bayou Funds. The Unfficial Unsecured Creditors of the Bayou Group initiated arbitration against Goldman Sachs Execution and Clearing alleging that the clearing house knew about the fraud committed by some in the  Bayou Group against its investors and had therefore facilitated fraud. In the arbitration conducted under the aegis of the Financial Industry Regulatory Authority (FINRA), the three member tribunal ruled against Goldman Sachs Execution and Clearing. Goldman tried to get the award vacated in the District Court but didn't succeed. The blawgger has cited a New York Times article which suggests that, "if upheld, the award could raise the standard among banks for clearing trades.the award could raise the standard among banks for clearing trades."

Notwithstanding the above two instances, there seems to be some merit in the criticism that confidential ADR processes undermine the court function of amplification of law. In the Google Settlement case, the dispute was initially filed as a class action lawsuit, the settlement was widely publicised. Thus, it was a "precedent"  in the sense that the settlement was probably the first of its kind. Similarly, the FINRA award against Goldman Sachs was publicised (probably as per the legal requirements in the US). Assume for a moment that S 69 of the UK Arbitration Act did not exist, what would have happened in the case of CMA CGM SA v. Beteiligungs-Kommanditgesellschaft MS Northern Pioneer Schiffahrtgesellschaft MBH & Co? The term "war" would have, then, been interpreted to mean a "declared war" as opposed to war from the businessman's perspective.

Wednesday, November 10, 2010

A tale of two judgments

Two judgments delivered by the Supreme Court in quick succession are indicative of court’s different approaches in the use of its potential to align law to justice. Pointer is towards Amicus Curiae v. Prashant Bhushan (decided on 10th of November, 2010) and J &K Panthers Party v. Union of India (decided on 9th of November, 2010)

In Prashanth Bhushan, the court could rope in a construction wide enough to reach the conclusion it apparently preferred. The contempt action initiated though technically do not fall within Section 3 (a) of the Contempt of Courts Act 1971, therefore liable to be dismissed on fault of procedural irregularity, was regularized as deemed to be within section 3, and is given a lease of life. In J&K Panthers Party, court used the technicality of the bar by Art. 329 of the Constitution of India and Section 142 of the Constitution of J&K to dismiss the petition. The petition challenged the amendment to Section 3 of the J&K Representation of People Act, 1957, freezing the delimitation of territorial constituencies of the Legislative Assembly until the publication of census result of 2026. It also challenged the amendment of the Constitution on the basis of violation of basic structure.

The court found quick answers that; one, judiciary is barred from entertaining such a petition, two, the constitution does not promise same value for votes nor does it speaks about arithmetical precision in the matters of delimitation. Therefore the amendment cannot be said to be violating the basic structure norm of ‘free and fair election’.

In Prashant Bhushan, though Section 3 clearly lays down requirements of registering a contempt action and the Registrar has failed to observe the mandate, the same was condoned. The petition was treated as one in which cognizance was taken suo motu regularising it under Section 3.

It is not my argument that judiciary should have bypassed an express bar in the Constitution which would have invited another set of criticisms. Instead of finding refuge under constitutional bar, it could have taken certain issues by the horns. The petitioner has raised issues of SC/ST representation and the differential value of each vote due to the freezing. The court says that there could be practical and historical reasons that could legitimise the legislative action. Having said this, one is left in lurch divining what could be these reasons. Neither the respondent detailed what these reasons are nor the court found it necessary to ask. It is important to know the rationale as what is under challenge here is a fundamental aspect of democracy, ‘fair elections’. Moreover, the constitution may not have mandated arithmetical precision but it also says that ‘as far as practicable, the ratio between population of each constituencies and the number of seats allotted shall be the same throughout the state.’ This is a positive mandate to the state and if the state is taking any actions to the contrary, it is their duty to establish with reasons the need of variance. When they failed to do so, court is the forum for people to seek answers and judiciary is expected to call for reasons to align the law with justice so that it maintain institutional relevance in the eye of the people.

Tuesday, November 9, 2010

Dallah Real Estate and Tourism Holding Company v. Ministry of Religious Affairs, Government of Pakistan (Part II)

In a previous post (with a different title) we had introduced the English case of Dallah Real Estate and Tourism Holding Company v. Ministry of Religious Affairs, Government of Pakistan and we had commented on the issues that the lower courts had to deal with. In this post, we'll start off from where we had stopped. We'll deal with the legal principles of international arbitration as discussed by the Commercial Court.

Issue 1: What is the correct construction of section 103(2)(b) of the Act?

a.      What is the meaning of arbitration agreement in S 103(2)(b)?

According to the judge, there are two kinds of arbitration agreements contemplated under the English Law. One is the agreement to refer the present or future disputes to arbitration. The other is the actual “reference” of a particular dispute to arbitration. The court recognized that in other jurisdictions the difference between the arbitration agreement and the reference does not have any substantial legal consequence. Under English Law, however, the arbitration agreement and the 0reference are treated as two different agreements. Even the New York Convention, it seems, maintains this distinction. For example, Article V.1(a), which cross refers to Article II, speaks of the Arbitration agreement while Article V.1(c) refers to the reference:

Article V
1. Recognition and enforcement of the award may be refused, at the request of the party against whom it is invoked, only if that party furnishes to the competent authority where the recognition and enforcement is sought, proof that:
 (a) The parties to the agreement referred to in article II were, under the law applicable to them, under some incapacity, or the said agreement is not valid under the law to which the parties have subjected it or, failing any indication thereon, under the law of the country where the award was made; or
 (c) The award deals with a difference not contemplated by or not falling within the terms of the submission to arbitration, or it contains decisions on matters beyond the scope of the submission to arbitration, provided that, if the decisions on matters submitted to arbitration can be separated from those not so submitted, that part of the award which contains decisions on matters submitted to arbitration may be recognized and enforced;

[Readers may please note that S 34 (setting aside arbitral award) of the UNCITRAL Model Law on International Commercial Arbitration, 1985 makes a similar kind of reference to “submission to arbitration”, probably because it replicates the grounds under Article V of the New York Convention on refusal of recognition and enforcement of awards. Section 7 of the Indian Arbitration Act, 1996 provides:

(4) An arbitration agreement is in writing if it is contained in-
(a) A document signed by the parties;
(b) An exchange of letters, telex, telegrams or other means of telecommunication which provide a record of the agreement; or
(c) An exchange of statements of claim and defence in which the existence of the agreement is alleged by one party and not denied by the other.

Off the cuff, it is doubtful if such a distinction needs to be made in the context of Indian Law or even the English Law. The Commercial Court has cited a few judgements and a standard book for this distinction. So we’ll examine the utility served by the distinction and its legal consequence in some future post. For those interested, the authorities cited by the court are: Albert Jan van den Berg “The New York Arbitration Convention 1958” at pages 295-6 and 314-6; Black Clawson International Ltd v Papierwerk Waldhof-Aschaffenburg AG [1981] 2 Lloyd’s Rep 446; Mustill & Boyd on Commercial Arbitration (2nd Ed. 1989 page 61)].

The object of taking note of this distinction by the Judge was to decide whether “arbitration agreement” in S 103(2)(b) also included the “reference”. The court held that since such a distinction made in the New York Convention was also followed under the Act, the term “arbitration agreement” referred to only the “arbitration agreement” and not the “reference”.

[Hypothetically, even if no such distinction is made, it does not make much difference. In such case, the notice invoking arbitration would be seen as a step taken in furtherance of an arbitration agreement. If the parties, in their reference, submit a dispute not covered by the arbitration agreement, such reference could be treated as an amendment to the arbitration agreement. If any party is of the view that the arbitral tribunal had no jurisdiction to decide a dispute, the party could nevertheless participate in the process under protest, unless the forum’s law gives the right of a party challenging the jurisdiction of the tribunal to approach the courts in the forum if the tribunal decides against such challenge or even otherwise.]

b.      Whether the phrase in this provision, “the arbitration agreement was not valid” also covered a situation where the person against whom the award was made was not a party to the arbitration agreement?

Initially the court was skeptical to buy Pakistan’s argument that the ground that the arbitration agreement was not valid also included a circumstance where there was no arbitration agreement at all. However, the commercial judge had the grace to admit that “once Mr Landau referred me to the analysis of Mance LJ in Dardana Ltd v Yukos Oil Co and Petroalliance Services Co Ltd, I accepted that I must be wrong and was, in any case, bound by Court of Appeal authority. I will not therefore set out here my own analysis”. [Formatting omitted] In Dardana Ltd v Yukos Oil Co and Petroalliance Services Co Ltd, Mance LJ held:

At the first stage, a party seeking recognition or enforcement must, under s 102(1), produce the duly authenticated award or a duly certified copy and the original arbitration agreement or a duly certified copy. The arbitration agreement means an arbitration agreement in writing, as defined in s 5. Once such documents have been produced, recognition or enforcement may be refused at the second stage only if the other party proves that the situation falls within one of the heads set out in s 103(2). The issue before us concerns the content of and relationship between the first and second stages.

In Annex 6 to the judgement of the Commercial Court, the judge has analysed in detail the reason for the above finding. Most of Annex 6 deals with an account of the judgement of Mance LJ (as he was then) in Dardana Ltd v Yukos Oil Co and Petroalliance Services Co Ltd. Relevant extracts of Annex 6 are below (pardon the long quotes):

He noted that [S 100 of the Arbitration Act, 1996] provided that the award to be recognised or enforced under the Convention must be "…an award made in pursuance of an arbitration agreement…”. He construed this as meaning an award "purporting to be made under an arbitration agreement". Therefore all that was required at the first stage of recognition and enforcement was production of apparently valid documents, including an apparently valid arbitration clause, by reference to which the arbitrators accepted that the parties had agreed to arbitrate. Accordingly, he decided, it is only at the second stage, when the prima facie right to recognition and enforcement is challenged, that the court will consider the issue of whether the apparently valid arbitration clause was, in fact, an agreement to arbitrate between the party seeking recognition and enforcement of the award and the party against whom the award was to be invoked. Also at that stage the court can consider, under section 103(2)(b), any issue of whether (under the relevant law applicable) the arbitration agreement was validly made.

 Therefore, in section 103(2)(b), the phrase "the arbitration agreement was not valid under…" the relevant law, must be construed as including the issue of whether, in fact, the party against whom the award is to be invoked is indeed bound by the arbitration clause which gave the arbitrators their jurisdiction to make the award.’

c.       Whether “within the law of the country where the award was made” would include the conflict of law rules of the seat which refer to a third country’s laws?

As a preliminary matter, we’ll look at the Indian Law on this point. Whenever India is the seat and the parties have chosen English Law, for example, it would mean that the relevant court should refer to substantive English Law without any reference to conflict of laws rules of England and Wales which refer to the laws of some other country. This principle has probably been adopted to make choice of substantive law in international arbitration simpler. The law on this point in India is found in S 28(1)(b)(ii) of the Indian Arbitration and Conciliation Act, 1996:

(1) Where the place of arbitration is situate in India, -
(b) In international commercial arbitration, -
(ii) Any designation by the parties of the law or legal system of a given country shall be construed, unless otherwise expressed, as directly referring to the substantive law of that country and not to its conflict of laws rules;”

For that matter, even the UNCITRAL Model Law on International Commercial Arbitration, 1985, in Article 28(1) statesc (probably the source of the Indian Act's corresponding provision):

The arbitral tribunal shall decide the dispute in accordance with such rules of law as are chosen by the parties as applicable to the substance of the dispute. Any designation of the law or legal system of a given State shall be construed, unless otherwise expressed, as directly referring to the substantive law of that State and not to its conflict of laws rules.”

Now, coming back to the case, the judge held that the New York Convention itself, incorporated in the Arbitration Act, 1996, makes uniform some of the Conflict of Laws rules pertaining to arbitration. One such Conflict of Laws rule is that the parties are free to agree on the substantive law governing issues pertaining to the validity of the arbitration agreement. Thus, the issues pertaining to validity of the arbitration agreement must be decided in accordance with the substantive law of France dealing with the validity of arbitration agreement. This was not disputed by the parties or their experts. According to the Joint Memorandum of the French Law experts:

"Where a French court is called upon to decide the challenge of an arbitral award rendered by a tribunal seated in France, it has not to apply French conflict of laws in order to determine whether the arbitral tribunal has jurisdiction”.

However, according to Pakistan, under the French substantive law on this aspect, the approach is to conduct a “broad factual enquiry” and consider all circumstances, including factual aspects pertaining to the foreign law on the issue. This would include statute, constitution of a foreign country. Now, if this is the case, then the question is whether Pakistani Law mandates that contracts should only be entered in a particular manner by the Government of Pakistan and, if so, whether the contract in question was entered into by the Government of Pakistan complying with the Pakistani Laws.

This issue was taken up separately by the Commercial Court as Issue 4 (According to Article 173 of the Constitution Of Pakistan, the State of Pakistan can only validly enter into and be bound by an agreement if the agreement mandatory procedure as stated therein was followed? In this case, it was not. So the question is whether the English court was bound to account for Pakistani Laws, including that of the Pakistani Constitution?).

We are done with the analysis of only one out of eight issues. The rest of it and the analyses of the Court of Appeal and the Supreme Court judgements will be taken up in future posts.