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.

International Arbitration: In the Age of the Technological Revolution - Volume 1 (2020)

The book titled "International Arbitration: In the Age of the Technological Revolution - Volume 1 (2020)" is interesting for two reasons. 

One, the book deals with a unique subject-matter. It deals with the interface between international dispute resolution and technology, and covers topics such as cryptocurrencies, blockchain, and artificial intelligence.  According to the Book Description:

"The first volume of the International Arbitration Collection in the Age of the Technological Revolution addresses the future (and the present) of arbitration, relating it to topics such as compliance, cryptocurrencies, startups, blockchain, and artificial intelligence. Most interestingly, this vision of technological revolution and arbitration is presented by authors from almost every continent, as there are opinions from professionals from Australia, Brazil, Spain, France, India, Portugal, Singapore and Switzerland. Several questions are formulated and answered by the authors in order to allow the reader a better understanding of how technology and arbitration already connected and they will increase their connection.

This is an extremely interesting book for anyone who wants to know more about arbitration, technology, or their interaction."

Two, the book contains a paper titled "Start-Ups & International Dispute Resolution: Challenges & Possible Solutions" penned by this blawgger, which deals with the challenges faced by Start-Ups in engaging with international arbitration. The paper also provides explores various solutions  to the common problems that start-ups face while fighting an international arbitration. Summary of the paper is as below:

"Globalisation as a phenomenon has encaptivated the world in the last part of the 20th century leading to the rise of a global service sector, where services could be offered across national borders. These factors have acted as catalysts in bringing forth a start-up revolution world over. Several start-ups have become great success stories.

The legal services industry world over has changed its approach to cater to start-ups and has adapted itself to the demands of a start-up. Even so, dispute resolution especially in the international sphere, has not been so forthcoming to provide legal services appropriate for start-ups. Start-ups face unique challenges in the context of international commercial dispute resolution. Already strained of funds, a cross-border dispute is a nightmare and might even result in shutting shop for the start-up.

This short paper identifies challenges faced by start-ups in resolving their international commercial disputes and offers possible solutions to these issues. To this end, the paper is structured in the following manner: Part II discusses the concept of a start-up. Different jurisdictions define start-ups differently. Since the scope of the paper is not constricted to a definite jurisdiction or region, start-up is defined in a general manner. Part II addresses the issues faced by start-ups in international dispute resolution, which is the primary focus of this paper. Part III offers possible solutions to these problems. Part IV concludes."

The paper concludes by putting forth the following points:

"Arbitral institutions are the centrepiece of international arbitration and significant reforms in the area have emanated from them. Hence, they should take the lead and formulate rules tailor-made for start-ups. Such rules could define start-ups and provide that in case disputes involved start-ups, certain special provisions such as appointment of sole arbitrator instead of a three member tribunal, documents-only arbitration, etc. would apply, with opt-out mechanisms. 

Internally, start-ups should put in place robust governance mechanisms and internal policies. This will aid them in not only putting forth their case well in a dispute but also ensure better governance. Start-ups should also negotiate with their clients for favourable dispute resolution and confidentiality clauses. Disputes between warring founder partners of a start-up also derail its case in legal proceedings, especially international arbitrations. Suitable systems / agreements should be put in place in consultation with lawyers to address possible future disputes between co-founders. 

All said and done, it is critical for start-ups to realize the importance of getting legal advice. There are umpteen legal issues that could crop up unexpectedly and have disastrous consequences. Therefore, it is crucial to have legal advice, preferably in-house legal counsel, who could also play multiple roles in the organization."