Sudip Mullick Niharika Dhall May 4 2017 Two-tier arbitration clauses Khaitan & Co | Arbitration & ADR - India Sudip Mullick, Niharika Dhall Arbitration & ADR OverviewFactsDecisionCommentOverviewMost legal jurisdictions, including India, limit the courts' authority to review arbitral awards by prohibiting a substantive review of the award. Under the United Nations Commission on International Trade Law (UNCITRAL) Model Law on International Commercial Arbitration (adopted in 1985), only one type of recourse is available against an arbitral award: an application for setting aside the award in the seat of arbitration. The grounds for setting aside the award are principally limited to procedural grounds, such as lack of capacity or a valid arbitration agreement. The approach parallels the grounds for refusing the recognition and enforcement of a foreign award under the New York Convention. Thus, appellate review of arbitral awards by the courts on substantive questions of law is prohibited under the New York Convention and the UNCITRAL Model Law.However, appellate review of arbitral awards is not an unknown concept. There is wide support for the practice of appealing arbitral awards before another arbitral tribunal. This issue was also deliberated during the drafting of the UNCITRAL Model Law, and while considering the recognition of appellate arbitration clauses, the Report of the Working Group on International Contract Practices on the Work of its Third Session (of which India was a member) observed that:"there was wide support for the view that parties were free to agree that the award may be appealed before another arbitral tribunal (of second instance), and that the model law should not exclude such practice although it was not used in all countries."(1)The arbitration law in India is based primarily on the UNCITRAL Model Law and does not specifically prohibit two-tier arbitration clauses which provide for appellate review of an arbitral award by a subsequent arbitration. The Supreme Court recently reaffirmed this position in Centrotrade Minerals & Metal Inc v Hindustan Copper Ltd.(2)FactsThe case has a chequered history which began when M/s Centrotrade Minerals & Metals Inc and Hindustan Copper Limited (HCL)(3) entered into a contract for the sale of copper concentrate, which was to be used in the HCL's Khetri plant. Differences arose between the parties regarding the dry weight of the goods and Centrotrade invoked the arbitration clause which read as follows:"All disputes or differences whatsoever arising between the parties out of, or relating to, the construction, meaning and operation or effect of the contract or the breach thereof shall be settled by arbitration in India through the arbitration panel of the Indian Council of Arbitration in accordance with the Rules of Arbitration of the Indian Council of Arbitration.If either party is in disagreement with the arbitration result in India, either party will have the right to appeal to a second arbitration in London, UK in accordance with the Rules of Conciliation and Arbitration of the International Chamber of Commerce in effect on the date hereof and the results of this second arbitration will be binding on both the parties. Judgment upon the award may be entered in any court in jurisdiction."On June 15 1999 an award was rendered under the rules of the Indian Council of Arbitration (ICA). Centrotrade appealed the ICA award by initiating proceedings before the International Chamber of Commerce (ICC) on February 22 2000. The arbitral tribunal, which comprised Jeremy Cooke as the sole arbitrator, rendered its award in 2001, upholding the validity of the arbitration clause and Centrotrade's claims.Thereafter, Centrotrade applied for enforcement of the ICC award, which was allowed by a single bench of the Calcutta High Court via a March 10 2004 judgment. HCL appealed this decision and, on July 28 2004, the division bench declared the ICC award to be non-executable as long as the ICA award stood.(4) This judgment was challenged before a two-judge bench of the Supreme Court, which referred the matter to a three-judge bench in 2006 because of a difference in opinion.(5)DecisionThis set of facts resulted in the recent judgment, which considered the following issues:Are two-tier arbitration clauses prohibited under the Arbitration and Conciliation Act 1996?Do two-tier arbitration clauses violate India's public policy?The court considered both issues in detail and held that the Arbitration Act does not prevent, either explicitly or implicitly, the parties' autonomy mutually to agree to a procedure whereby the arbitral award might be reconsidered by another arbitrator or panel of arbitrators by way of an appeal, and the same cannot be held to be against India's public policy. The judgment also clarifies that irrespective of the fact that the parties used the term 'arbitration result' to describe the first arbitral award, the same would nevertheless be considered an arbitral award under the Arbitration Act. A differing interpretation would not allow the enforcement of the ICA award in the event that neither party challenged the arbitration result.CommentThis judgment is an important win for party autonomy in India and sends a pro-arbitration message. While two-tier arbitration clauses necessarily have a huge cost and time implication for dispute resolution, parties may in certain cases give greater weight to the substantive correctness of an award. The court must still decide whether the ICC award is a foreign award and thus must be enforced under Section 48 of the Arbitration Act.Having accepted that two-tier arbitration clauses are permissible, further issues remain unresolved in India and will potentially lead to conflict – for example:the timeframe within which a party should appeal against the first arbitral award and, failing such appeal, whether the first arbitral award would become final and binding. The Supreme Court did not consider this issue in the present case, but it is pertinent to note that the appellate arbitration before the ICC was initiated nearly eight months after the ICA award was rendered;the procedure for appointment of the appellate tribunal where the parties have agreed on ad hoc arbitration;whether the appellate arbitral tribunal can remand the matter back to the first arbitral tribunal; andthe way forward in the event that the appellate arbitral award is set aside in the seat of arbitration.The Supreme Court may address some of these issues in the second part of its judgment, which is expected later in 2017.For further information on this topic please contact Sudip Mullick or Niharika Dhall at Khaitan & Co by telephone (+91 22 6636 5000) or email ([email protected] or [email protected]). The Khaitan & Co website can be accessed at www.khaitanco.com.Endnotes(1) A/CN.9/216 - Report of the Working Group on international contract practices on the work of its third session, 16-26 February 1982, New York.(2) 2016 SCC Online SC 1482.(3) HCL is a public sector enterprise of the Indian government which was incorporated in 1967 and is the only vertically integrated copper producing company in India.(4) Hindustan Copper Ltd v Centrotrade Minerals & Metals Inc (2004), SCC Online Cal 446. Notably, the division bench decided that while two-tier arbitration clauses are permissible in India, the arbitration agreement in question did not provide for appellate arbitration at the ICC and therefore the ICC award could not overrule the ICA award.(5) (2006) 11 SCC 245.