Two-tier arbitration permissible: SC

In an important ruling, the Supreme Court of India clarified that the parties have the autonomy to agree to a two-tier arbitration in India (appellate arbitration) and such a choice would not be contrary to the public policy of India.

A Large Bench of the Court distinguished appellate arbitration vis-a-vis statutory appeals before courts and tribunals and said that an appeal procedure contained in an arbitration agreement was a substantive right created by the parties by mutual consensus. The Court said that “we are not concerned with a statutory appeal but a non-statutory process agreed upon by parties that has nothing to do with court procedures.”

“……on a combined reading of sub-section (1) of Section 34 of the A&C Act [Arbitration and Conciliation Act, 1996] and Section 35 thereof, an arbitral award would be final and binding on the parties unless it is set aside by a competent court on an application made by a party to the arbitral award. This does not exclude the autonomy of the parties to an arbitral award to mutually 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 result of that appeal is accepted by the parties to be final and binding subject to a challenge provided for by the A&C Act. This is precisely what the parties have in fact agreed upon and we see no difficulty in honouring their mutual decision and accepting the validity of their agreement”, the Court ruled.

The fact that recourse to a court is available to a party for challenging an award does not ipso facto prohibit the parties from mutually agreeing to a second look at an award with the intention of an early settlement of disputes and differences, the Bench clarified.

On parties’ autonomy in an arbitration agreement, the Court said that the legal position is that the parties to an arbitration agreement have the autonomy to decide not only on the procedural law to be followed but also the substantive law. The choice of jurisdiction is left to the contracting parties.

The Court further said it doesn’t find anything fundamentally objectionable in the parties preferring and accepting the two-tier arbitration system.

“The parties to the contract have not by-passed any mandatory provision of the A&C Act and were aware, or at least ought to have been aware that they could have agreed upon the finality of an award given by the arbitration panel of the Indian Council of Arbitration in accordance with the Rules of Arbitration of the Indian Council of Arbitration. Yet they voluntarily and deliberately chose to agree upon a second or appellate arbitration in London, UK in accordance with the Rules of Conciliation and Arbitration of the International Chamber of Commerce. There is nothing in the A&C Act that prohibits the contracting parties from agreeing upon a second instance or appellate arbitration – either explicitly or implicitly. No such prohibition or mandate can be read into the A&C Act except by an unreasonable and awkward misconstruction and by straining its language to a vanishing point”, the Court added.

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