Indian Domestic Arbitration: A practical approach

Arbitration is a method of adjudication of dispute(s) / difference(s) between the parties by non-judicial process wherein arbitrator(s)/umpire(s) is appointed by the parties themselves under a contract whereby the parties agree for adjudication of such dispute(s)/difference(s) by way of arbitration proceedings

In India, laws/rules that govern the arbitration process are laid down in Arbitration and Conciliation Act, 1996. But the act itself does not give any right to any party unless parties have entered into an arbitration agreement/contract for adjudication of dispute(s)/difference(s) by way of arbitration. Section 2(1) (b) of the act says that an arbitration agreement means an agreement referred to in section 7. Section 7(1) further states that an arbitration agreement means an agreement by the parties to submit to arbitration all or certain disputes which have arisen or which may arise between them in respect of a defined legal relationship, whether contractual or not. The act does not prescribe any formal form for arbitration agreement. It says that “an arbitration agreement may be in the form of an arbitration clause in a contract or in the form of a separate agreement” like any other agreement- Section 7(2). But an arbitration agreement shall be in writing - Section 7(3). Here the term “writing” has special meaning that has been clarified in sub-section 4 of section 7 i.e.-
(4) An arbitration agreement is in writing if it is contained in
a) a document signed by the parties;
b) an exchange of letters, telex, telegrams or other means of telecommunication which provide a record of the agreement; or
c) an exchange of statements of claim and defence in which the existence of the agreement is alleged by one party and not denied by the other.

“Other means of telecommunication” indicates that a record of the agreement by exchanging e-mails may also be taken into account since as per the Law Encyclopedia (applicable to United States law) telecommunication means the transmission of words, sounds, images, or data in the form of electronic or electromagnetic signals or impulses. Section 7 (5) further clarifies that the reference in a contract to a document containing an arbitration clause constitutes an arbitration agreement if the contract is in writing and the reference is such as to make that arbitration clause part of the contract.

Section 2(1) (a) of the act says that arbitration means any arbitration whether or not administered by permanent arbitral institution. Thus it is clear from the definition that the act recognizes every type of arbitration whether it is institutional or non-institutional. Institutional arbitration means an arbitration process conducted by an institute; whether it is permanent or not; for adjudication of dispute(s) / difference(s) between the parties following rules of proceeding already framed by the parties themselves, failing which its own rules after obtaining the consent of the parties to such rules at a preliminary meeting in arbitration proceeding. Non-institutional arbitration means an arbitration process conducted by a arbitral tribunal other than institute for adjudication of dispute(s) / difference(s) between the parties following rules of proceeding already framed by the parties themselves, failing which its own rules after obtaining the consent of the parties in this regard at a preliminary meeting in arbitration proceeding.

Section 2(1) (h) party means a party to an arbitration agreement. This definition is not an expressed one. It is an implied definition as it has not been clarified who can be a party to an arbitration agreement. Here the term “party” covers a living person competent to enter into an agreement/contract and juristic person as well since juristic person may also be a party to an agreement/contract after fulfilling the certain legal formalities. Thus here party means a person competent to enter into a contract as per Indian Contract Act.

Section 2 (1) (e) of the act defines arbitral tribunal. It says “Arbitral tribunal means a sole arbitrator or a panel of arbitrators.” Where arbitral tribunal is a panel of arbitrators; “the parties are free to determine the number of arbitrators, provided that such number shall not be an even number”-Section 10(1) of the act. Failing the determination of number of arbitrators, the arbitral tribunal shall consist of a sole arbitrator- Section 10 (2) of the act.

To be an arbitrator, no formal qualification has been prescribed in the act. Even nationality is also no bar. Parties have been given full authority to determine the qualification of the arbitrator. Section 11 (1) of the act says that a person of any nationality may be an arbitrator, unless otherwise agreed by the parties. It is the parties who have to determine the qualification of the arbitrator keeping in mind the nature of the dispute(s)/difference(s) that has arisen or may arise between them. Parties may agree upon the qualification at very initial stage when they enter into an arbitration contract/clause or after dispute(s)/difference(s) arose if earlier has not been agreed. It will be beneficial for the parties themselves to determine the qualification otherwise decision of the arbitrator i.e. arbitral award may be set aside where the adjudication of such dispute(s) / difference(s) requires a person having a technical knowledge.

Appointment of arbitrator: Priority has been given to the procedure framed by the parties for appointing the arbitrator(s). Section 11(2) of the act says that the parties are free to agree on a procedure for appointing the arbitrator(s). Where a party (ies) fails to act as required under that procedure, appointment of arbitrator(s) can be secured by taking recourse to “other means” if arbitration agreement/clause provides such “other means” for securing the appointment of arbitrator(s) Section 11(6)(a). The term “other means” has not been define anywhere in the act. In case arbitration agreement does not provide such “other means” for securing the appointment, aggrieved party (ies) may request the Chief Justice or any person or institution designated by him to take the necessary measure for securing the appointment Section 11(6)(a). Where, under an appointment procedure agreed upon by the parties, the parties, or the two appointed arbitrators, fail to reach an agreement expected of them under that procedure; or a person, including an institution, fails to perform any function entrusted him or it under that procedure, a party may request the Chief Justice or any person or institution designated by him to take the necessary measure, unless the agreement on the appointment procedure provides other means for securing the appointment Section 11(6)(b) & (c).

Section 11(5) provides both the procedure and limitation period if the parties have not agreed on a procedure for appointing the arbitrator(s) in arbitration with a sole arbitrator. It says that if the parties fail to agree on the arbitrator within thirty days from receipt of a request by one party from the other party to so agree the appointment shall be made, upon request of a party, by the Chief Justice of any person or institution designated by him.

Section 11(3) provides only procedure with three arbitrators if the parties have not agreed on a procedure for appointing the arbitrator(s). It says that each party shall appoint one arbitrator, and the two appointed arbitrators, shall appoint the third arbitrator who shall act as the presiding arbitrator. Further Section 11(4) provides a limitation period for such appointment. It clarifies that if a party fails to appoint an arbitrator within thirty days from the receipt of a request to do so from the other party; or the two appointed arbitrators fail to agree on the third arbitrator within thirty days from the date of their appointment, the appointment shall be made upon request of a party, by the chief justice or any person or institution designated by him.

Section 11(7) provides that a decision of the Chief Justice or the person or institution designated by him is final on the matter entrusted by sub section (4) or sub section (5) or sub section (6) of Section 11 whereas sub section (10) of it clarifies that the Chief Justice may make such scheme as he may deem appropriate for dealing with such matters.

The Chief Justice or the person or institution designated by him, in appointing arbitrator, shall have due regaled to (a) qualifications required of the arbitrator by the agreement of the parties and (b) other considerations as are likely to secure the appointment of an independent and impartial arbitrator Section 11(8).

What will happen if more than one request has been made under sub section (4) or subsection (5) or sub section (6)to the Chief Justices of different High Courts or their designates ? Section 11(11) answer it. It says that the Chief Justice or his designate to whom the request has been first made under the relevant sub section shall alone be competent to decide on the request.

Section 11(12) (b) clarify the term “Chief Justice”. It says Where the matters referred to in sub sections (4 ), (5 ), (7 ), (8 ), and (10 ) arise in any other arbitration, the reference to Chief Justice in those sub sections shall he construed as a reference to the Chief Justice of the High Court within whose local limits the principal Civil Court referred to in clause (e) of sub section (1 ) of section 2 is situate and, where the High Court itself is the Court referred to in that clause, to the Chief justice of that High Court.

Primary Duties of arbitrator: Sec.2 (d)” "arbitral tribunal" means a sole arbitrator or a panel of arbitrators.” When a person is approached in connection with his possible appointment as an arbitrator, he shall disclose in writing [to the concern authority only] any circumstances likely to give rise to justifiable doubts as to his independence or impartiality: Section 12(1).

MODE OF COMMUNICATION: Arbitrator should inform the parties to arbitration agreement about his appointment as an arbitrator. Procedure for written communication is given in section 3 of the act. It gives freedom to parties to agree upon any procedure for written communication during the arbitration proceedings what they feel proper and speedy for adjudication of their dispute(s)/difference even through e-mails but mode of communication must provide a record of such communication. Failing any agreed communication procedure any written communication is deemed to have been received if it is delivered to the addressee personally or at his place of business, habitual residence or mailing address: Section 3(1)(a)

If none of the places of business, habitual residence or mailing address can be found after making a reasonable inquiry, a written communication is deemed to have been received if it is sent to the addressee’s last known place of business, habitual residence or mailing address by registered letter or by any other means which provides a record of the attempt to deliver it Section 3(1)(b). No substitute mode of service such as publication etc required.

The communication is deemed to have been received on the day it is so delivered Section 3(2).

Section 3(3) indicates that arbitrator is not a judicial authority so arbitration proceeding is not a judicial proceeding. It says “This section does not apply to written communications in respect of proceedings of any judicial authority” but it applies in arbitration proceedings. It confirms that arbitrator is not a judicial authority.

Duties of arbitrator: A & C Act 1996 imposes tremendous responsibilities upon Arbitral Tribunal to act in such a way that don’t give any rise to his independence or impartiality. When parties appear before the arbitrator in response of the notice, the arbitrator, from the time of his appointment and throughout the arbitral proceedings, shall, without delay, disclose to the parties in writing any circumstances referred to in sub section (1) of section 12 unless they have already been informed of them by him: Section 12(2).

Grounds for challenge for appointment of arbitrator: If a party becomes aware about circumstances that give rise to justifiable doubts as to arbitrator’s independence or impartiality, or missing of the qualifications agreed to by the parties as mentioned in section 12(3), the party has only recourse to it is, to challenge the appointment of arbitrator(s) before arbitrator itself.

A party may challenge an arbitrator appointed by him, or in whose appointment he has participated, only for reason, of which he becomes aware after the appointment has been made: Section 12(4)

Procedure for challenging an arbitrator: The parties are free to agree on a procedure for challenging an arbitrator: Section 13(1)

Failing any agreement on a procedure for challenging the arbitrator, a party who intends to challenge an arbitrator shall, within fifteen days after becoming aware of the constitution of the arbitral tribunal or after becoming aware of any circumstances referred to in sub-section (3) of section 12, send a written statement of the reasons for the challenge to the arbitral tribunal: Section 13(2)

Unless the arbitrator challenged under sub section (2) withdraws from his office or the other party agrees to the challenge, the arbitral tribunal shall decide on the challenge: Section 13(3)

If a challenge under any procedure agreed upon by the parties or under the procedure under sub section (2) is not successful, the arbitral tribunal shall continue the arbitral proceedings and make an arbitral award: Section 13(4)

Power and duties of arbitrator: A & C Act 1996 imposes mandatory obligations on Arbitral Tribunal to follow and give due respect to the contents of the arbitration agreement. Whatever has been written in the arbitration agreement regarding procedure to be followed, documents to be used as evidence, mode of communications to be used, place of arbitration, language etc in arbitration proceedings, arbitral tribunal is bound to follow the contents of the arbitration agreement. The parties (in arbitration proceedings) shall be treated with equality and each party shall be given a full opportunity to present his case Sec 18.

The whole purpose of enacting the A & C Act 1996 is to remove technical difficulties; faced by the parties in the court proceedings, from arbitration proceedings. That is why sec 19(1) says that the arbitral tribunal shall not be bound by the Code of Civil Procedure, 1908 or the Indian Evidence Act, 1872. The parties are free to agree on the procedure to be followed by the arbitral tribunal in conducting its proceedings Sec19 (2) but failing any agreement in this effect, the arbitral tribunal may conduct the proceedings in the manner it considers appropriate Sec19 (3).This power of the arbitral tribunal includes the power to determine the admissibility, relevance, materiality and weight of any evidence Sec 19(4). The tribunal should give reasons regarding the determination of admissibility, relevancy, materiality and weight of any evidence.

Section 16 of the act gives full competency to arbitral tribunal to rule on its own jurisdiction. ). But this competency is subject to courts’ supervision.

“Section 16-Competence of arbitral tribunal to rule on its jurisdiction.-
(1) The arbitral tribunal may rule on its own jurisdiction, including ruling on any objections with respect to the existence or validity of the arbitration agreement, and for that purpose,----
(a) an arbitration clause which forms part of a contract shall be treated as an agreement independent of the other terms of the contract; and
(b) a decision by the arbitral tribunal that the contract is null and void shall not entail ipso jure the invalidity of the arbitration clause.

(2) A plea that the arbitral tribunal does not have jurisdiction shall be raised not later than the submission of the statement of defence; however, a party shall not be precluded from raising such a plea merely because that he has appointed, or participated in the appointment of, an arbitrator.

(3) A plea that the arbitral tribunal is exceeding the scope of its authority shall he raised as soon as the matter alleged to be beyond the scope of its authority is raised during the arbitral proceedings.

(4) The arbitral tribunal may, in either of the cases referred to in sub-section (2) or sub-section (3), admit a later plea if it considers the delay justified.

(5) The arbitral tribunal shall decide on a plea referred to in sub-section (2) or sub-section (3) and, where the arbitral tribunal takes a decision rejecting the plea, continue with the arbitral proceedings and make an arbitral award.

(6) A party aggrieved by such an arbitral award may make an application for setting aside such an arbitral award in accordance with section 34.”

Though the arbitral tribunal has been empowered to order interim measures but this power is subject to arbitration agreement. Section 17 says:
“17.Interim measures ordered by arbitral tribunal.-
(1) Unless otherwise agreed by the parties, the arbitral tribunal may, at the request of a party, order a party to take any interim measure of protection as the arbitral tribunal may consider necessary in respect of the subject matter of the dispute.

(2) the arbitral tribunal may require a party to provide appropriate security in connection with a measure ordered under sub-section (1)”

Thus from above discussion, one can easily understood that there is no codified rules that govern arbitration proceedings except mentioned in arbitration agreement/clause if any. It is, therefore, one should be very careful before entering into any arbitration agreement/ clause in any walk of life.

Summoning the arbitrator

Union Of India VS. Orient Engg. & Commercial Co. Ltd. & Anr.

Respondent No. 1 filed, under Order XVI Rules 1 and 2 read with s. 151, C.P.C., a list of witnesses to be summoned including the Arbitrator who made an award in a matter between the appellant and the respondent No. 1. The Registrar of the High Court in the routine course granted summons without satisfying himself as to the sufficiency of cause to summon the arbitrator as required under Order XVI Rule 3, C.P.C. An objection petition u/s. 151, C.P.C. filed before the learned Judge of the High Court against the orders of the Registrar was dismissed.

Allowing the appeal, the Court,

HELD : (1) It is not right that every one who is included in the witness list is automatically summoned, but the true rule is that if grounds are made out for summoning a witness, he will be called. The court must realise that its process should be used sparingly and after careful deliberation if the arbitrator should be brought into the witness box. If a party has a case of mala fides and makes out prima facie that it is not a frivolous charge or has other reasonably relevant matters to be brought out, the court may, in given circumstances, exercise its power to summon even an arbitrator because nobody is beyond the reach of truth or trial by court.

(2)Courts should bear in mind the reason behind s. 121 of the Evidence Act when invited to issue summons to an arbitrator. It will be very embarrassing and in many cases objectionable if every quasi-judicial authority or tribunal were put to the necessity of getting into the witness box and testify as to what weighed in his mind in reaching his verdict. The slightest attempt to get to the materials of his decision, to get back to, his mind and to examine him as to why and how he arrived at a particular decision should be immediately and ruthlessly excluded as unreasonable. When an arbitrator has given an award, if grounds justifying his being called as a witness are affirmatively made out, the court may exercise its powers-otherwise not.

In the instant case the court has not approached the question from the proper perspective and on the materials on record, there is no justification for the examination of the arbitrator.
Khub Lal v. Bishambhar Sahai A.I.R. 1925 Allahabad 103, approved.

[The Court left open to the High Court to issue-necessary Process on a fresh application stating why he wants to examine the arbitrator, if and when made by the respondent.]

Minority share holders can be throne out

In a far-reaching decision, a division bench of the Bombay High Court has endorsed a special resolution of a company to reduce the share capital of a company on the basis of the identity of the person holding the shares. Majority shareholders can now throw out minority shareholders by effect a reduction of the capital held by minority shareholders alone.

Normally a reduction of capital is effected uniformly across all shareholders – not in a manner that picks and chooses specific shareholders who would cease to be shareholders. Since the proposed resolution sought to throw out minority shareholders alone as a consequence of the proposed reduction, a single judge had ruled that the proposal was inequitable. The division bench dealt with an appeal against the judgement of the single judge.

The provisions of Sections 100 to 105 of the Companies Act, 1956 (“the Act”) deal with reduction of capital. If a company’s Articles of Association permit reduction, the company could pass a special resolution (75 per cent vote by shareholders present and voting at a general meeting) approving reduction of capital, and then seek a court’s approval to effect the reduction.

The law entitles creditors to object to the proposal under certain conditions – logical, because shareholders normally stand last in queue when a company is wound up, and a reduction puts them ahead of the creditors.

There are other provisions in the Act based on which a shareholder could be taken out of a company. The provisions Sections 391-394 of the Act entail propounding of a scheme of arrangement or compromise whereby rights and obligations of shareholders and creditors could be altered, adjusted and modified in an extraordinary or unusual manner. Such sche-mes of arrangement too are subject to sanction of the high court, and once approved would bind the world at large including those dissenting to the scheme. Section 395 expressly deals with having to buy out dissenting minority shareholders who do not agree to a scheme approved by the majority.

However, in the instant case, the company’s proposal to reduce capital was in effect a proposal to squeeze-out the shareholders other than the promoters and divest them of shareholding.

The promoters were able to comfortably pass the special resolution. In lieu of the reduction, such shareholders would of course be paid money in terms of a fair value to be computed, but these shareholders would lose their right to hold shares although they were not willing sellers.

The division bench has ruled that the “special resolution which proposes to wipe out a class of shareholders after paying them just compensation” is not unfair or inequitable.

“In our opinion, once it is established that non-promoter shareholders are being paid fair value of their shares, at no point of time it is even suggested by them that the amount that is being paid is any way less,” the court observed. That an overwhelming majority of the non-promoter shareholders voted in favour of the resolution too weighed with the court, which held that “the court will not be justified in withholding its sanction to the resolution.”

The judgement opens up several interesting possibilities and propositions in relation to shareholder rights in India. The company in question was not a listed company – it had already been delisted.

Listed companies would require stock exchange approval for reduction of capital under the listing agreement, and it is unlikely that stock exchanges would approve such a transaction. However, for an unlisted company, regardless of whether a company is a public company or a private company, shareholders rights can be impacted severely.

Private equity investors holding small stakes without serious rights could easily be thrown out by management using such resolutions. In family-run companies, a segment of the family that holds a minority stake could get thrown by the rest of the family. All that one would need is a special resolution.

The core business issue involved here is not about whe-ther the price paid for the shares would be fair, but whether an owner of shares in India has a vested right to keep his property, or whether other shareholders can force him to divest his property.

For details judgment mail me at minturaj@gmail.com