Arbitration involving consortium of an Indian and foreign entity

Arbitration involving consortium of an Indian and foreign entity: Treatment under the Arbitration and Conciliation Act.

By- Amiy Kumar,

Background of the Case: 

The Supreme Court of India in a recent judgment passed in Larsen and Toubro Limited Scomi Engineering BHD Vs Mumbai Metropolitan Region Development Authority1, analysed the following issues relating to ‘international commercial arbitration’ (ICA) as contemplated under section 2(i) (f) of the Arbitration and Conciliation Act, 1996 (ACA):

(i) Whether a consortium formed by a company incorporated in India and a company incorporated outside India will be considered to be a ‘body corporate’ as stipulated under section 2(1)(f)(ii) of the ACA or an ‘association’ as stipulated under section 2(1)(f)(iii) of the ACA?

(ii) Whether an arbitration proceeding in which such consortium is a party, would be considered to be an ICA?

This note discusses the analysis and the ratio held by the Supreme Court in relation to the above issues.

Analysis
(i) Treatment of the Consortium
In the instance case the consortium was formed by M/s Larsen and Toubro, an Indian Company (L&T) with Scomi Engineering Bhd, a Malaysian Company (Scomi). The consortium of L&T and Scomi (Consortium) was governed by terms and conditions of a consortium agreement dated 09.01.2009 (Consortium Agreement).
Whilst analysing whether the Consortium will be a body corporate or an association under section 2(1)(f) of the ACA, the Supreme Court relied upon a previous judgment of Bombay High Court inter se between the parties which prohibited L&T and Scomi to rely upon their status as independent entities under the Consortium. Therefore, the Consortium was not considered to be a body corporate for the purpose of section 2(1)(f)(ii) of the ICA.

1 Arbitration Petition (C) No. 28 of 2017, decided on 03.10.2018, (2018 SCC OnLine SC 1910)
Further, the apex Court relied upon the definition of ‘person’ as provided under the Income Tax Act, 1961 and observed that under Section 2(31) of the Income Tax Act, 1961, “person” is defined as including, under subclause (v), an association of persons, or body of individuals, whether incorporated or not.
It was therefore laid down that an association is referred to in Section 2(1)(f)(iii) of the ACA in the similar sense as established under the Income Tax Act, 1961 which would therefore include a consortium consisting of two or more bodies corporate, at least one of whom is a body corporate incorporated in a country other than India.
(ii) Applicability of ICA
The apex court further analysing the said Consortium Agreement, observed the following:
(a) L&T was the lead partner of the Consortium; (b) the supervisory board constituted under the Consortium Agreement makes it clear that the lead partner, i.e., L&T has the power to appoint the Chairman of the said Board; (c) the fact that the Consortium’s office is in Wadala, Mumbai; and (d) L&T shall lead the arbitration proceedings.
From the aforesaid provisions of the Consortium Agreement, the Supreme Court concluded that central management and control of the Consortium in the present case appears to be exercised in India and not in any foreign nation as the central management and control rests with the lead partner of the Consortium, i.e., L&T which is a company incorporated in India. Accordingly, the arbitration proceedings in which the Consortium is a party and the other party in MMRDA, shall not be considered to be an ICA.
Conclusion The above judgment of the Supreme Court appears to provide the following conclusion: (i) A consortium formed by an Indian entity and an entity incorporated outside India will be considered to be an association if parties have agreed not to rely upon their status as independent entities under their consortium agreement. In such cases, the consortium is considered to be an unincorporated body of associations. (ii) Further, in order to determine the applicability of Section 2(i)(f) of the ACA, the status and origin of incorporation of the lead member of such consortium having the central management and control over supervisory board shall be considered. In the event such lead member is an Indian entity, the Section 2(i)(f) of the ACA shall not be applicable and any arbitration proceeding involving such consortium and any other Indian entity shall not be held to be an ICA.
This judgment is a welcome analysis by the Apex court which provides certainty on the treatment of consortium involving Indian and foreign company for the purposes of the ACA.

 

By- Amiy Kumar, Associate, King Stubb & Kaisva, Advocates & Attorneys, Mumbai

Interim Measures under Arbitration & Conciliation Act

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Interim Measures under Arbitration & Conciliation Act

(Author: Dr Shailesh N Hadli )

 Arbitration and Conciliation Act is effective and inttergative part of Alternative dispute resolution system accepted universally. Arbitration and Conciliation Act 1996 repealed old Arbitration Act existing in India and incorporated law relating to domestic arbitration, international commercial arbitration and law relating to conciliation. The new Act was enacted on the lines of the United Nations commission on International Trade Law (UNCITRAL) for ensuring a fair and efficient settlement of disputes in an international commercial contract. Whenever there is an ambiguity in arbitration matters, our Courts have relied on UNCITRAL rules for interpretation and application of the provisions of new act.

 Need for Arbitration?

The new Act minimized the intervention of courts and it provided that final award passed is binding on parties and is enforceable as if it were a decree, if it is not set aside on challenge u/s 36. The arbitrators are vested with powers for deciding matters such as law to be applied, procedure to be followed for evidence, jurisdiction, venue, interest etc. As these factors contribute to speedy arbitral process, it is quite common to find arbitration clause in commercial agreements.

Arbitration Procedure:

Arbitration process starts when parties to agreement fail to amicably resolve their disputes or differences and aggrieved party issues a notice for referring the dispute/claim to the arbitrator (Section 21). After the arbitral Tribunal is constituted, claimant will state facts of his case submit his claim and seek relief. Respondent will file his counter claim or his defence to the claim. Arbitrator passes an award on completion of arbitration proceedings.

Award under Arbitration:

As per definition of arbitral award appearing in Section 2(e), an arbitral award includes an interim award within its ambit. Section 31(6) provides that the arbitral tribunal may, at any time during the proceedings make an interim award on any matters with respect to which it may make a final award. A question that arises in the minds of everyone is that whether interim measures can be treated as  an interim award especially when such measures of protection are ordered by the Tribunal. The author is of the view that such measures will amount to granting of interim award. This view is subscribed from the definition of arbitral award as defined u/s 2 (e) of the new Act.

With the above background, it is now appropriate to shift the focus of this article to the interim measures /relief provided under the New act and their effectiveness. The sections that deal with interim relief are Section 9 and Section 17. Both these are compared for ascertaining the ground reality of these measures.

Interim relief Under Arbitration:

Under the Arbitration Act, 1940,a party could commence proceedings in a Court by moving an application under Section 20 for appointment of an arbitrator and simultaneously it could move an application for interim relief under the Second Schedule read with Section 41(b) of the old Act.  Under the  New Act 1996,  Section 9 empowers the court to order a party to take interim measure or protection when an application is made. Besides this Section 17 gives power to the Arbitral Tribunal to order interim measures unless the agreement prohibits such power.

Interim relief u/s 9

A plain reading of the section 9 indicates that a party may before or during the arbitral proceedings or at any time after making of the arbitral award but before it is enforced in accordance with Section 36, may apply, to the court for interim measure of protection. Prayers for interim measures of protection may include:

– Appointment of a guardian for a minor or person of unsound mind

– Preservation or interim custody or sale of goods, if goods are of perishable nature

– Securing the amount of claims

– Allowing inspection or interim injunction or appointment of receiver

– Any other relief’s as the court may in its discretion may deem proper considering the circumstances of the case.

 

Interim relief u/s17

Let us now examine the powers of Arbitral Tribunal u/s 17. If the arbitration agreement does not prohibit, Arbitral Tribunal at the request of a party, may order the other party to take such interim measures of protection as it may deem necessary in respect of subject matter of dispute. In the process, it can order for providing appropriate security in exercise of its power. This power also has to be exercised within the terms of reference or arbitration agreement. It is very strange that Section 17 although permits Arbitral tribunal to pass interim order, it does not give any power to Tribunal to enforce its order. Also there is no  section in the  new Arbitration Act which ensures  enforcement of interim orders passed by the Tribunal or  to treat  interim order as an enforceable decree like that of final award. In other words, the power of the tribunal is limited and any interim award necessarily has to merge with the final award for attaining enforceability.

In UNCITRAL model law similar power is given to arbitral tribunal under Article 16 and 21 of Arbitration Rules.

 

Section 9 and Section 17:

Analysis of Section 9 and Section 17 would lead us to the following conclusions:-

– The new arbitration Act empowers the arbitral tribunal to pass orders for giving interim relief while such power is not vested under the Old Act.

– Powers under Section 17 can be exercised only after the arbitral tribunal is constituted and it stats functioning.

– Powers of court under section 9 are wide as the words “before,  during or after  indicate so. A party can approach the court to seek interim measures of protection even before the arbitration commences.

– Court’s powers are wide and have supremacy in granting interim relief. However interference of court when Tribunal is constituted is minimum.

Judicial precedents:

Let us now refer to some important judgments for understanding the effectiveness or limited effectiveness of Section 17.

No power to Arbitral tribunal to enforce its orders u/s17

Supreme court of India in the case of M D Army WHO Vs Sumangal services (p) Ltd reported in AIR 2004 SC 1344  observed thateven under S. 17 of the 1996 Act the power of the Arbitrator is a limited one. It cannot issue any direction which would go beyond the reference or the arbitration agreement. Even under S. 17 of 1996 Act, an interim order must relate to the prot, ection of subject-matter of dispute and the order may be addressed only to a party to the arbitration. It cannot be addressed to other parties. Even under S. 17 of the 1996 Act, no power is conferred upon the Arbitral Tribunal to enforce its order nor does it provide for judicial enforcement thereof.

Relief u/s 9 can be granted even before commencement of arbitration

In the case of M/s. Sundaram Finance Ltd. v. M/s. NEPC India Ltd., AIR 1999 SC 565, Supreme Court was to examine the issue whether u/s 9 of the Arbitration and Conciliation Act, 1996, the Court has jurisdiction to pass interim orders even before arbitral proceedings commence and before an arbitrator is appointed. SC held that it is not necessary that arbitral proceedings must be pending or at least a notice invoking arbitration clause must have been issued before an application under Section 9 is filed.

 

Interim measure u/s 9 and u/s 17 are distinguishable

In Firm Asok Traders  Vs Gurumukhdas Saluja AIR2004 SC 1433, the Apex court observed  that Section 17 would operate only during the existence of the Arbitral Tribunal. During that period power conferred on Arbitral tribunal u/s 17 and power of  court u/s 9 may over lap to some extent but so far as the pre and post the arbitral proceedings are concerned, party seeking interim measure of protection has to approach only court.

 

Conclusion: While drafting arbitration clause, one should keep in mind whether the arbitral tribunal should be given the power to grant interim relief or not. If arbitration clause provides for such power to arbitral Tribunal, then one need not approach the court for such relief. But there exists a doubt about its enforceability, if it is not complied with by the party. Courts can be approached only if interim relief as prayed is refused u/s 37(2)(b) but not for enforcing the interim relief granted by the arbitrator.

 

Arbitration: The potential Alternative Dispute Resolution

Abstract

 The Alternative dispute resolution is an option for traditional judiciary proceeding. The difference between ADR and judiciary are many. Comparatively ADR is best way of dispute resolution. The judiciary have burden of pending cases. The ratio per judge is very serious. The ADR includes mainly three methods like Arbitration, negotiation and Conciliation. In west ADR is very popular way of dispute resolution. The benefits of ADR are numerous like saving time, costs, result oriented, speedy; maintain confidentiality and cooperative approach that maintain company’s relation and employer- employee relation too.

 Introduction

India is second most populating country in the world. In limited sources and limited machineries there is lack of efficiency,transparency and swiftness. And Indian judiciary is no exception to this presumption.

The Indian government said approximately 3.2 crore cases were pending in high courts and subordinate courts across the nation while 56,383 cases were pending in the Supreme Court.

It also said 74% of the total 3.2 crore cases were less than five years old. Similarly, 20,334 out of the 56,383 pending cases in the apex court were less than one year old.[1]

The current judges numbers are 14,576 as against the sanctioned strength of 17,641.

 So the ratio will be like that[2]

 

Pending cases in India Judges number Ratio per judges
3,12,80,000 14,576 2,145

 So we need an alternative method which solves disputes with more economical and efficient and speedily. Alternative Dispute Resolution (ADR) means methods of resolving a dispute which are alternatives for litigation in the courts. It includes mainly arbitration, mediation, conciliation, negotiation.

 What is ADR?

 In General meaning

It is a familiar method of dispute resolution with flexibility in procedures, rules and regulations.

 Arbitration

Arbitration is a structure of alternative dispute resolution of a legal method for the resolution of disputes outside the courts, where the parties to a dispute appoints its one or more persons called as Arbiters,Arbitrators or Arbitral tribunaland such decision is known as The award

 Some important statistics: Use and effectiveness of Arbitration as a mechanism

Of ADR: American case study (source: National Arbitration Forum, Washington)

 78% of people find faster recovery in Arbitration

83% of people find Arbitration equally or more fair

59.3% of people find Arbitration less expensive

84.6% of people find ADR equally or more suitable for insurance/reinsurance sector[3]

 Mediation

ADR also include mediation a type of settlement negotiation prepared by an impartial and independent third party and non-binding resolution by experts. The examples of ADR are commercial disputes, consumer and employment matters. Arbitration can be either voluntary or compulsory and can be either binding or non-binding.

 Conciliation

The parties to a dispute have the same opinion to make use of the services of a conciliator, who then meets with the parties individually in an effort to resolve their outstanding issues by way of improving interactions, interpreting issues, providing technical assistance, exploring probable solutions result in a negotiated settlement. 

Ithas no legal status, no power to seek evidence or take witnesses testimony, no decision, and no award. 

 History:

 In Mahabharata, when both parties were strong-minded to decide the clash in battle fields,
Lord Krishna made efforts to resolve the conflict.

 The notion of private arbitration can be found back to the Roman and Canon law. Arbitration as a dispute resolution mechanism was used in Common Law since the 14th Century.

Importance after the 19th Century, with the advent of trans-national trade and commerce.

 panchayatsystem works in the villages. The Indian system places a lot of importance on resolution of disputes by negotiation which is only conciliatory.

Arbitrating on property disputes and torts.Panchayat is a representative body of the members of a particular village which consists the elder most people or the most respected and experienced elder. One of the most important functions of these panchayats is the dispensing of justice.[4]

 The best example where conciliation played an integral role is of the highly politically sensitive case of the Beagle channel dispute over the ownership of certain islands in the entrance to the channel between Chile and Argentina. The mediator was the Vatican. The process was remarkable because it was flexible enough to accommodate the changing political environments in both countries and the mediator used a range of tools to great advantage. This process served to protect a fragile peace between the countries and ultimately allowed them to create an agreement that has lasted until this day[5].

 Indian perspective:

Features of Arbitration & Conciliation Act 1996

The object of Arbitration Act is to run quick redress to commercial dispute by private Arbitration.

Arbitration Agreement [section 7]- The base of an arbitration is the arbitration agreement between the parties. the provision of arbitration can be made at the time of entering the agreement itself, so that if any dispute arises in future, the dispute can be referred to arbitrator as per the agreement. Even refer a dispute to arbitration after the dispute has arisen. The agreement must be in writing and signed by both parties. It can be in form of exchange of letters, document, telex, telegram etc.

 Appointment of Arbitrator

[Section 11(3)] The parties can mutually appointing the arbitrator/s as per arbitration agreement. If parties fail to agree then each party will appoint one arbitrator and appointed two arbitrators will appoint the third arbitrator who will act as a presiding arbitrator.

 [Section 12(1)] An arbitrator is to be independent and impartial. If there are some situations due to which his independence or impartiality can be challenged, he must disclose the circumstances before his appointment.

Otherwise Appointment of Arbitrator can be challenged on grounds

(a)Circumstances shows that a justifiable doubts as to his independence or impartiality

(b)[Section 12(3)] He does not hold the qualifications agreed to by the parties.The challenge to appointment has to be decided by the arbitrator himself.

 Arbitral Proceedings

[Section 18] All Parties should be treated equally by the Arbitral Tribunal. Full opportunity shall be given to each party.

[Section 19(1)] The Code of Civil Procedure, 1908 or Indian Evidence Act, 1872 is not bounded to Arbitrational tribunal. The parties are free to agree on and decide the procedure to be followed by the Arbitral Tribunal.

 Procedure, Place and Language

[Section 19(3)] Unless parties agree on the procedure to be followed,  Arbitral Tribunal has full powers to decide the procedure.

[Section 19(4)] The Tribunal also has authorities to decide the acceptability, importance, materiality and weight of any evidence.

[Section 20] Place of arbitration will be decided by mutual agreement. if the parties failto agree, then will be decided by tribunal.

[Section 22] language to be used in arbitral proceedings can be decided bymutually. Otherwise, Arbitral Tribunal can decide.

 Submission

The parties should Submit Statement of Claim, points of issue and relief or remedy sought and defense in respect of these particulars.

[Section 23] Such claim or defense can be amended any time. All relevant documents must be submitted.

 Hearings

Arbitral Tribunal can decide the mode of hearing. It will be oral hearing or on the basis of documents and other materials. but if one of the parties demands, the hearing shall be oral. [Section 24] Adequate advance notice of hearing should be given to both the parties.

 The award

The decision of tribunal is known as the award. And  it will be by majority.             

[Section 29] Such arbitral award shall be in writing and signed by the members of the tribunal.    

And also should be dated and place of tribunal. Copy of award should be given to each party. [section 31(6)] Tribunal can make interim award also. The award can be correct within appropriate time.

 Costs

[Section 31(8)] The arbitration tribunal can decide the cost of proceeding and also share of each party. If the parties refuse to pay the costs, the Arbitral Tribunal may refuse to deliver its award.

 Benefits

What are the Benefits to Alternative Dispute Resolution?

 Time

In India, an average time for a case to be disposed is varies case to case. In civil cases it took 10 to 15 years averagely, some time even more. There were cases which took hundreds of years also. In ADR the proceeding in very flexible and informal, so it took very little time to resolved matters. And save a lot of time compare to court proceedings. So speedy proceeding is one on best feature of ADR.

 Money/ COST

One of the main reasons that parties wish to resolve their disputes outside of the courts is cost. Alternative dispute resolution usually costs much less than litigation. thelitigation’s fee and cost in court are very high due to its long and unending procedure.  And there is no balance between cost and benefit to parties

Whilethe ADR proceedings are time framed and speedy, the cost of ADR is comparativelow and efficient.the parties can save their money by choosing ADR.

 Results

In various situation parties themselves doubted could ever be settled or not? Yet, as with most disputes, even extremely charged, exceptionally complex disputes can be resolved through negotiations when both of the parties appreciate the risks of losing power over the end result.

 In Minnesota, many high-stakes cases of great complexity have been resolved through ADR, including securities fraud class actions, large business disputes, merger and acquisition claims, RICO claims, environmental disasters, and international transactions.[6]

 The success of ADR was acknowledged by the American Bar Association’s Standing Committee on Dispute Resolution:

 “The use of ADR to resolve all pending litigation following the L’Ambience Plaza construction collapse in Bridgeport, Connecticut within 20 months of the disaster, a process that involved five judicial bodies, more than 44 plaintiffs, approximately 40 potential defendants, several government agencies, and nearly 200 attorneys, represents a dazzling display of the potential impact of the sophisticated use of ADR in complex cases.”

 

— J. Michael Keating, Jr., ABA Dispute Resolution Kit (1989)[7]

 Confidentiality

Disputes resolved by courts are in public hearing. Even judgments pronounced are also public document. So it is publically accessible. While in ADRallproceedingswere conducted in private and stay strictly confidentiality.

Outstanding issues and undisclosed facts of proceeding are assured to be kept Confidentiality through an ADR mechanism.

 Company Relations

Company relationshipseven employer-employee relationships that might or else be vanished through the ill will that often characterizes legal actioncan be conserved.

 Global Jurisdiction

Global disputes can be solvedas per rules agreed in agreement, thereby avoiding the ambiguity inherent in being subjected to the jurisdiction of foreign courts.[8]

 Speed
In judiciary the dates are scheduled by courts where in ADR dates can be scheduled by the parties and the panelist on agrees to meet. Compared to the court process, ADR is as fast as the parties want it to be.

 Control
the parties can control some of the process like selecting what method of ADR they want to opt, appointment the panelist for their proceeding, the span of the process.

In a mediations case, even the result. Different to the court proceeding, where the legal system and the judge control every aspect while ADR is much more flexible.

 Mutual Approach
ADR proceeds in a more informal, flexible way. This maintainsaoptimistic business relationship between the parties. With mediation, specifically, the result is cooperation between the parties.[9]

 Conclusion

No doubt, the ADR is future of dispute resolution. The judiciary proceeding is strict, particular and time consuming. The judiciary has limitation of human resource,inordinance delay,costs, lack of infrastructure and technology, and old proceeding laws.

While on other hand speedy, cost efficient, time framed and various features. ADR is coming up as a alternative option for traditional judiciary proceeding.


[2] http://articles.timesofindia.indiatimes.com/2010-03-06/india/28143242_1_high-court-judges-literacy-rate-backlog,PTI Mar 6, 2010, 06.05pm IST

 

[3]http://www.icadr.org/news-speechcjhc.html

[4]http://arbitrationandconciliation.org/

[5]http://indialawjournal.com/volume1/issue_3/article_by_isha.html

[6]http://library.findlaw.com/1995/Jun/1/126578.html

[7]http://library.findlaw.com/1995/Jun/1/126578.html

[8]Ibid.

[9]http://www.ibabc.org/idrsbc/benefits.html