Bishwajit Dubey Tamal Mandal January 31 2012 Court rules on single arbitration sustained between multiple parties Shardul Amarchand Mangaldas & Co | Litigation - India Bishwajit Dubey, Tamal Mandal Litigation IntroductionFactsDecisionCommentIntroductionThe Supreme Court recently made an important pronouncement concerning single combined arbitration proceedings and the sustainability of an award rendered in such proceedings when the parties were governed by different arbitration clauses. In PR Shah, Shares and Stock Broker (P) Ltd v BHH Securities,(1) the court considered that it would be proper and just to rule that when one party has a claim jointly against a second and a third party, and when there are provisions for arbitration in respect of both other parties, there can be a single arbitration.FactsThe appellant (PR Shah) and the first respondent were members of the Mumbai Stock Exchange (the third respondent). The constitution, management and dealings of the exchange were governed by its rules, bylaws and regulations. Bylaws 248 to 281D governed arbitration between members and non-members, while Bylaws 282 to 315L governed arbitration between members of the exchange.The first respondent referred to arbitration a dispute against the second respondent and the appellant, under the rules, bylaws and regulations of the exchange (Arbitration Reference 242/1998), seeking an award for a sum of Rs3,698,384.73 with interest at 24% per annum on Rs3,542,197.50. The first respondent alleged that the appellant and second respondent were sister concerns, as Kanan C Sheth was a common director, among other issues.The second respondent and the appellant filed their objections. The appellant contended that the exchange's arbitral tribunal had no jurisdiction to enter into arbitration, as there was no contract and no arbitration agreement between the first respondent and the appellant. It also contended that the arbitration reference was unlawful, as the parties and the causes of action were not analagous. It argued that as the appellant was a member of the exchange and the second respondent was not a member of the exchange, the arbitration should be governed by the exchange's rules governing disputes between a member and a non-member, instead of those governing disputes between members.The disputes were heard by a three-member arbitral tribunal. On October 12 1999 an award was made in favour of the first respondent, holding that the tribunal had jurisdiction to decide on the dispute.The appellant then challenged the award before the Bombay High Court under Section 34 of the Arbitration and Conciliation Act 1996.(2) The single judge of the court dismissed the application and held that if, in a dispute between a member and non-member, an incidental or connected claim against another claim cannot be referred for arbitration under Bylaw 248 and the claimant would be compelled to resort to two proceedings, then the possibility of multiplicity of findings at variance with each other could not be ruled out. The single judge therefore opined that it would be undesirable to take a route that could allow two forums to reach differing conclusions despite the cause of action being based on the same set of facts.On appeal to the Division Bench of the High Court, the bench dismissed the appellant's appeal. The appellant appealled to the Supreme Court.DecisionThe appellant raised the following three contentions before the Supreme Court. The appellant first claimed that only a dispute between a member and a non-member could be resolved under Bylaw 248; a dispute between two members would have to be decided under Bylaw 282. The appellant therefore argued that there could not be a single arbitration in regard to a claim of a member against both a non-member and another member. Rejecting the appellant's contention, the court held that if the first party had a claim against a second and third party and the first party had arbitration agreements with both the second party and the third party, there was no reason as to why the first party could not hold joint arbitration against the second and third party.The court reasoned that holding two separate arbitrations between the third parties in regard to the same claim could lead to conflicting decisions. Therefore, to deny the benefit of a single arbitration against the second and third party on the grounds that the arbitration agreements against the second and third party were different could lead to a multiplicity of proceedings and conflicting decisions, and cause injustice.Second, the appellant claimed that the arbitral tribunal should have held that there was no contract between the first respondent and the appellant, and that the claim of the first respondent against the appellant was based on fabricated documents. The court opined that a court does not sit in appeal over the award of an arbitral tribunal by re-assessing or re-appreciating the evidence. It ruled that an award could be challenged only on the grounds mentioned in Section 34(2) of the act. Once the arbitral tribunal had examined the facts and held that both the second respondent and the appellant were liable, in the absence of any grounds under Section 34(2) of the act, it would be impermissible to re-examine the facts to find out whether a different decision could have been reached.Third, the appellant argued that the arbitral tribunal had issued the award by making use of its personal knowledge in regard to the transactions and not on the material on record before it - therefore, the award was vitiated. The court held that an arbitral tribunal cannot make use of personal knowledge of the facts under dispute, if such knowledge is not a part of the record, in order to decide the dispute. However, the court stated that an arbitral tribunal can use its expert or technical knowledge, or general knowledge of a particular trade, when deciding a matter, which will not be considered the use of personal knowledge. The court made it clear that one reason for referring disputes to arbitration was due to the fact that the proceedings could draw on the technical knowledge of the tribunal and thereby come to reasoned decision.The Supreme Court therefore dismissed the appeal, ruling that the appellant's case lacked substance.CommentIn its decision, the Supreme Court has clarified the eligibility of a single arbitration proceeding between multiple parties in disputes that arise from the same cause of action. The court's reasoning is noteworthy, as it seeks to reduce the multiplicity of proceedings and the likelihood of conflicting decisions on the same cause of action. The court also reiterated that a challenge to an award can be made only on the grounds available in the act - if no such grounds are relied on, the court is estopped from re-assessing the evidence to determine the correctness of the award. The court also affirmed the need for experts as members of tribunals when deciding disputes, provided that such experts do not draw on personal knowledge that is not on record.For further information on this topic please contact Bishwajit Dubey or Tamal Mandal at Amarchand & Mangaldas & Suresh A Shroff & Co by telephone (+91 11 41590700), fax (+91 11 26924900) or email ([email protected] or [email protected]).Endnotes(1) Civil Appeal 9238/2003, decided on October 14 2011.(2) Section 34 - Application for setting aside an arbitral award:"(1) Recourse to a Court against an arbitral award may be made only by an application for setting aside such award in accordance with sub-section (2) and sub-section (3).(2) An arbitral award may be set aside by the Court only if—(a) the party making the application furnishes proof that—(i) a party was under some incapacity, or(ii) the arbitration agreement is not valid under the law to which the parties have subjected it or, failing any indication thereon, under the law for the time being in force; or(iii) the party making the application was not given proper notice of the appointment of an arbitrator or of the arbitral proceedings or was otherwise unable to present his case; or(iv) the arbitral award deals with a dispute 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, only that part of the arbitral award which contains decisions on matters not submitted to arbitration may be set aside; or(v) the composition of the arbitral tribunal or the arbitral procedure was not in accordance with the agreement of the parties, unless such agreement was in conflict with a provision of this Part from which the parties cannot derogate, or, failing such agreement, was not in accordance with this Part; or(b) the Court finds that—(i) the subject-matter of the dispute is not capable of settlement by arbitration under the law for the time being in force, or(ii) the arbitral award is in conflict with the public policy of India.Explanation.—Without prejudice to the generality of sub-clause (ii) it is hereby declared, for the avoidance of any doubt, that an award is in conflict with the public policy of India if the making of the award was induced or affected by fraud or corruption or was in violation of section 75 or section 81.(3) An application for setting aside may not be made after three months have elapsed from the date on which the party making that application had received the arbitral award or, if a request had been made under section 33, from the date on which that request had been disposed of by the arbitral tribunal:Provided that if the Court is satisfied that the applicant was prevented by sufficient cause from making the application within the said period of three months it may entertain the application within a further period of thirty days, but not thereafter.(4) On receipt of an application under sub-section (1), the Court may, where it is appropriate and it is so requested by a party, adjourn the proceedings for a period of time determined by it in order to give the arbitral tribunal an opportunity to resume the arbitral proceedings or to take such other action as in the opinion of arbitral tribunal will eliminate the grounds for setting aside the arbitral award."