Advani LawExperts Corner


Introduction


Over the years, smart contracts have played a significant role in transforming blockchain technology, enabling a decentralised system. The World Economic Forum, in its 2015 survey recognised that by 2025-2027, about 10% of the global GDP would be stored in blockchains, owing to its efficient attributes of data security management. By the means of smart contracts, fully automated legal obligations can be enforced without the involvement of third parties. Much like conventional contracts, smart contracts on the blockchain are susceptible to a variety of problems, including non-transactional disputes, off-chain governance issues, and on-chain disputes. An on-chain dispute resolution system is still in its infancy. It is said that an on-chain smart contract is contained in a self-executing code that automatically executes the terms of the parties’ agreements without the intervention of a third party, leaving little space for human mistakes or disagreement. Smart contracts, on the other hand, do not eliminate the possibility of a disagreement. Thus, it becomes imperative to implement a dispute resolution mechanism governing digital relationships set out in such smart contracts.

 


Understanding Blockchain and Smart Contracts


According to the chamber of digital commerce, a smart contract is an instrument that executes underlying contractual terms. Smart contracts themselves are not the legal agreement — the agreement between the two parties is the contract, and the smart contract program simply executes the agreed-upon actions.[1] Smart contracts are like real contracts, but they are digital and are stored and executed on a blockchain. Blockchain is a particular type of distributed ledger technology (DLT), a way of recording and sharing data across multiple data stores where each has the same data records and is collectively maintained and controlled by a distributed network of computer servers called nodes.[2] A smart contract is a computer protocol intended to digitally facilitate, verify, or enforce the negotiation or performance of a contract allowing the performance of credible, trackable, and irreversible transactions without third parties. The contractual clauses are embedded as computer code in the blockchain. Smart contracts are simply programs stored on a blockchain that run when predetermined conditions are met. They typically are used to automate the execution of an agreement so that all participants can be immediately certain of the outcome, without an intermediary’s involvement or time loss.[3] Thus, the algorithms work something similar to an “artificial agent” in the context of the formation of a contract.


Legal Recognition of Smart Contracts


The prevalence of the following provisions conventions suggests widespread acceptance of contracts that are concluded and enforced digitally.

  • Article 2.1.1 of the UNIDROIT Principles of International Commercial Contracts, 2016 covers contracts involving automated performance arrangements, where parties agree on self-executing electronic platforms without the involvement of a natural person to ensure performance. [4]
  • Article 11 of the UNCITRAL Model Law on E-Commerce, 1996 states that an offer and the acceptance of an offer may be expressed by means of data messages, which shall not be denied legal validity and enforceability. Further, Article 2 clarifies that these “data messages” include not only communication exchanged electronically but also include computer-generated records that are not intended for communication.[5]
  • The UNCITRAL Model Law on Electronic Transferable Records, 2017 explicitly accommodated distributed ledger technology in its explanatory notes.[6]
  • The UNCITRAL Convention on Electronic Communications in International Contracts (2007 Convention) provides legal recognition to on-chain arbitrations. Articles 6 and 18 allow electronic data and transactions in arbitral proceedings.[7]
  • In the United States, many States have amended their versions of the Uniform Electronic Transactions Act (UETA) to address blockchain and smart contracts.[8]
  • On 18-11-2019, UK Jurisdictional Taskforce published a legal statement expressing the view that smart contracts were contracts under English law.[9]
  • On 28-5-2021, for the first time in blockchain arbitration history, Mexican courts enforced an arbitral award relying on a blockchain arbitration protocol (blockchain arbitral award). [10]
  • Recently, the High Court of England and Wales in Tulip Trading Ltd. Bitcoin Assn. for BSV[11] while considering whether security for costs could be satisfied by a party providing cryptocurrency refused the Bitcoin offered since it did not meet the required standards for security, however, allowed for other more sophisticated cryptocurrencies can be accepted at a later date.

Out of the available alternative dispute resolution mechanisms available, arbitration is the most accurate and optimal dispute resolution mechanism. The blockchain arbitration can be bifurcated into “on-chain” and “off-chain”.

  • On-chain arbitration involves the use of a smart contract in a classic dispute resolution mechanism.
  • Off-chain arbitration involves automatic recognition of awards but with automation of certain elements of the procedure before the Arbitral Tribunal.

Dispute Resolution Mechanism in Smart Contracts: Blockchain Arbitration


The on-chain arbitration process can be a desirable option from an efficiency perspective. A typical on-chain arbitration process is well envisioned in the Digital Dispute Resolution Rules (the “Digital DR Rules”)[12] published on 22-4-2021 after extensive public and private consultation with lawyers, technical experts and financial services and commercial parties by the UK Jurisdictional Taskforce (UKJT), that are to be used for and incorporated into on-chain digital relationships and smart contracts.

 

The Digital DR Rules define a smart contract as a digital asset. To incorporate these rules into a smart contract on a blockchain, the text “any dispute shall be resolved in accordance with UKJT Digital Dispute Resolution Rules” has to be included in an on-chain contract. The Digital DR Rules allow these words to be incorporated into codes. Since a blockchain is programmed into codes, these words can be incorporated intothe encoded form. Under the remit of the Digital DR Rules, disputes relating to smart contracts can be resolved without the interference of the courts. Disputes under the Digital DR Rules can be solved via an automatic dispute resolution process. Alternatively, such disputes can also be submitted to an arbitrator or expert determination.

 

  • Automatic dispute resolution process: The rules provide an idiosyncratic automated dispute resolution mechanism that allows the parties to choose a person, panel, or artificial intelligence agent to decide disputes automatically. The decision is then immediately applied to the digital asset system i.e. the platform where the digital asset exists. Rule 8 makes the outcome of the automatic dispute resolution process legally binding on the parties.
  • Submission to an arbitrator: Alternatively, any dispute between parties arising out of the relevant contract/digital asset that was not subject to an automatic dispute resolution process can be presented to an arbitrator. The procedure for commencement, appointment, and submission is quite similar to the regular arbitration procedure. The rules allow arbitrators to use a private key to implement their decision directly on the blockchain.

Recently in the fourth edition of the International Conference on Arbitration in the Era of Globalisation[13] held in Dubai, Justice D.Y. Chandrachud, Judge of the Supreme Court of India made reference to smart contracts in his speech to demonstrate the technological advancements in the sphere of commercial transactions and identified arbitration as the means to resolve disputes relating to smart contracts.

One of the most significant advantages of blockchain arbitration is that it removes human intervention, allowing for quicker and more cost-effective dispute settlement. On the blockchain, the proper examination of evidence may be done online, leaving less room for facts to be tampered with or evidence to be manipulated. However, smart contracts and blockchain arbitration, while gaining traction among governments and experts throughout the world, are still in their early stages of development and would require additional legislation to become a viable option for dispute settlement. Privacy concerns and the enforceability of smart awards continue to be a source of concern. Because blockchain arbitration is a component of technical evolution that allows artificial intelligence to generate self-enforcing decisions, it is still solar systems apart from being used in countries going through development.


† Managing Partner Advani Law LLP.
†† Senior Partner Advani Law LLP.
††† Associate Advani Law LLP.

[1] “Why Smart Contracts are Valid under Existing Law and do not Require Additional Authorization to be Enforceable”, Chamber of Digital Commerce, January 2018, <HERE>, accessed on 18-4-2022.

[2] Niki Wiles, The Radical Potential of Blockchain Technology, 6-6-2015, <HERE >.

[3] What are Smart Contracts on Blockchain?, (IBM), <HERE> accessed 10-4-2022.

[4] UNIDROIT Principles of International Commercial Contracts 2016, Art. 2.1.1, <HERE>.

[5] UNICITRAL Model Law Model Law on E-Commerce (adopted 21-6-1985), Art. 11, <HERE >.

[6] UNICITRAL Model Law on Electronic Transferable Records (adopted on 13-7-2017 by UNCITRAL), Art. 1, (Para 18, P. 23), <HERE>.

[7] United Nations Convention on the Use of Electronic Communications in International Contracts, P. 5, <HERE >.

[8] Uniform Electronic Transactions Act (UETA) adopted in 1999.

[9] UK Jurisdiction Taskforce, “Legal Statement on Cryptoassets and Smart Contracts”, November 2019, <HERE >.

[10] Maxime Chevalier, “Arbitration Tech Toolbox: Is a Mexican Court Decision the First Stone to Bridging the Blockchain Arbitral Order with National Legal Orders?”, Kluwer Arbitration Blog, 4-3-2022, <HERE > accessed on 18-4-2022.

[11] 2022 EWHC 141 (Ch).

[12] Digital Dispute Resolution Rules, 2021<HERE >.

[13] Dr D.Y. Chandrachud, International Conference: Arbitration in the Era of Globalization (4th Edn., Dubai, 19-3-2022).

Advani LawExperts Corner

  1. Introduction

The internationalisation of sports has resulted in making it a huge industry and has also, owing to globalisation and commercialisation of sports in general, led to the integration of sports and law. The sports industry has witnessed huge growth in a short span of time, which has completely transformed the nature of the industry as a whole and has led it to become a more commercialised set-up rather than being considered only a leisure activity, especially owing to the exorbitant amounts of monies involved in a few of the major sports. As a result, it is no surprise that the industry produces a large number of legal disputes which require speedy adjudication and well-settled bodies to deal with the specificity of the subject-matter. Like any other sector depending largely on arbitrations as a means of resolving disputes, sports arbitrations entail a method of resolving sports-related disputes by submitting them before a person/tribunal for final and binding decisions. The only difference between sports arbitrations and any other arbitrations is merely the subject-matter of the former. Although procedurally all arbitrations are the same, sports arbitrations do have their unique set of challenges that make them different from other forms of arbitrations. While sports arbitrations offer the same advantages as arbitrations in commercial disputes like a neutral setting, flexible procedures and specialised arbitrators; however, sports arbitrations do not conform to the New York Convention since the governing bodies have their internal rules and regulations in place to deal with the disputes that arise in the industry. Hence, the enforcement of awards through sports arbitrations is different from those arising through commercial or investment arbitrations.

The following paragraphs would trace the history of the development of jurisprudence for sports arbitration and the creation of the Court of Arbitration for Sports (CAS) in Switzerland for adjudication of sports-related disputes. Additionally, the focus would also be given to the development of mechanisms of sports arbitrations in India and its ratification of foreign principles in its municipal jurisdiction.

Development of Court of Arbitration for Sports and significance of Switzerland in sports arbitration

Switzerland is home to a number of international sports organisations. International Olympic Committee (IOC), the International Council of Arbitration for Sport (ICAS) and the CAS are all headquartered in Lausanne, Switzerland. The presence of such important sports organisations/authorities has led to Switzerland becoming the hub for adjudication of sports arbitration globally. Once read in detail, Swiss law is extremely flexible, which ultimately allows potential litigants a significant level of control and flexibility in the entire process of dispute resolution.[1]

The CAS was a result of the efforts of the President of IOC in 1981, Juan Antonio Samaranch, who recognised the requirement of such an independent adjudicating body, which would be understood to take up the role of “the Supreme Court of world sport”. In 1982, at an IOC meeting, late Judge Kéba Mbaye, who was acting as a Judge in the International Court of Justice was asked to chair a working party with the aim to create statutes of a sports dispute resolution body which would be known as the “Court of Arbitration for Sports”. It was in 1983 that IOC officially ratified the statutes of the CAS which came into force on 30-6-1984 and CAS began its operation.[2]

The CAS witnessed several reforms and revisions in its functioning in 1994. Since the institution of the body, the IOC has held a great degree of control in the working of CAS. In order to allow the CAS to work distinctively from the IOC, the International Council of Arbitration for Sports (ICAS) was established solely to deal with the management and operation of CAS. One of the primary functions of the ICAS was to ensure that CAS functions as an independent body and overlooks its administration, financing and overall running of the organisation.[3]

Working of Court of Arbitration for Sports

Arbitration, as a dispute resolution process, has been developed to tackle the unnecessarily long and stretched court proceedings and provide for a quicker and more efficient mode of dispute resolution. Even though all forms of arbitrations are inherently supposed to be a quicker means of dispute resolution, in sports arbitrations, this requirement is proliferated. Given the nature of the industry involved, it becomes essential that the decision to the disputed point of question is provided at the earliest opportunity to ensure that the even runs as per schedule. In order to ensure that decisions are pronounced in a timely manner, ICAS established an ad hoc division in 1996 which was given the responsibility to resolve disputes arising from the Olympic Games in Atlanta within twenty-four hours. Since the ad hoc division proved to be a huge success, similar divisions were set up for all succeeding Olympic events thereafter.[4] Furthermore, to help aid and quicken the entire resolution process in sports arbitrations, arbitrators hold a more active function in the entire procedure as compared to commercial and investment arbitrations. However, there are certain rules and regulations that the parties cannot circumvent. This includes the strict liability rule under the anti-doping regulations wherein the sports persons are instantly disqualified and abstained from getting any medals or prizes through the event concerned. In Alain Baxter v. International Olympic Committee,[5] a British skier was disqualified from the Alpine Skiing Slalom even at the Salt Lake City Olympics for having tested positive for a prohibited substance under the Olympic Movement Anti-Doping Code. Appellant suffered from chronic nasal congestion for which he used a non-prescription Vicks vapour inhaler to manage his symptoms. However, the version of the drug present in the US contained certain prohibited substances which the appellant was unaware about. The panel found, in line with the previous CAS rulings, that the appellant is strictly responsible for the substances they place in their body, and for the purposes of disqualification neither intent nor negligence needs to be proven. Another rule that the parties cannot derogate from includes that all the arbitrations before CAS are seated in Lausanne, Switzerland, including the cases coming through ad hoc divisions. In a way, this adds to the swift nature of the entire process since it eliminates any scope of debate between the parties over the question of competent jurisdiction presiding in an arbitration.[6]

To guarantee expertise on the panels adjudicating upon the disputes, CAS maintains a closed list of a group of arbitrators from which the parties are required to appoint arbitrators for their disputes. CAS arbitrators are required to undergo appropriate legal training which involves proficiency with respect to sports law and/or international arbitrations and a good knowledge of sports in general. In 2003, this rule was challenged before the Swiss Federal Tribunal where it was contented that the parties’ freedom to choose their arbitrator is curtailed and they should not be bound by CAS’s closed list of arbitrators. However, the Tribunal rejected this challenge establishing that the rule was justified by the need for sports-specific legal expertise for timely resolution of disputes and to ensure consistency arising through the decisions given by CAS.[7]

 

Another important feature of arbitrations before the CAS includes the transparent nature of the proceedings. In comparison to other forms of arbitrations, CAS is comparatively more transparent when it comes to releasing their awards. Despite a certain level of transparency in their proceedings, CAS arbitrators are bound by a duty of confidentiality which refrains them from disclosing any facts to a third party. If the arbitrator fails to abide by this duty, it may lead to cancellation of their empanelment.[8] Other than the responsibility of the arbitrator, rules for publication of awards are different depending upon whether the proceedings are initiated in the ordinary or appeals division. While ordinary proceedings are confidential and none of the stakeholders are allowed to disclose any information to the non-concerned party without prior permission from CAS and an agreement between the parties to disclose the award publicly, the appeals division works very differently and has the opposite principles attached to it. As a rule, the awards passed from the appeals division are published for the general public, unless otherwise agreed by the parties.[9]

Authority of awards passed by the Court of Arbitration for Sports

CAS awards do not carry a binding authority with them, and the arbitrators are free to deviate from the rulings previously given while they adjudicate upon a dispute. However, CAS panels often refer to previous decisions for persuasive guidance or to make a different ruling by distinguishing cases upon facts. This has led to the harmonisation of the rulings given by CAS even though there is no binding authority that the awards carry. Nevertheless, given that the closed list of arbitrators that CAS consists of arbitrators that belong to different legal backgrounds, coupled with a lack of institutional scrutiny of the awards being passed, there is always a certain degree of uncertainty present before the award is rendered by the Tribunal.

Thus, while CAS has created an organised structure for sports industry, there are certain aspects that still need to be developed better in order to ensure that the rulings remain consistent, and the participants are provided with a fair platform for the resolution of disputes.

Sports Arbitration in India

The sporting industry and the horizon of sports entertainment have had a significant boom in the past decade with a surge in viewership and investment thanks to multiple sporting leagues. With this surge has come a rising demand for a conducive infrastructure for dispute resolution for resolving sports disputes. Sports competitions and tournaments have acted as a platform for national recognition on the horizon of global politics alongside acting as a source of income for the economy. The need for utilising the same was realised by India years after independence. This led to a mirage of developments towards developing an organised structure for the sports community. Parallel to the developments happening globally, India also witnessed their initial developments in the field of sports.

Matters relating to sports, development or otherwise, come under the purview of the State Government as per Entry 33 of the State List under the Constitution of India. However, with respect to issues of international sports, it is the Union Government that has the responsibility of enacting laws as per Entry 10 of List 1 of the Constitution. Despite the State and Central Government having the responsibility to control the developments happening in the country with respect the sports industry, there are many private bodies that take up this responsibility in practice. The concern arises when there exists ambiguity in accountability of functioning of bodies that work independently of the Governments i.e. when the bodies that hold the primary power to regulate and sway the events that may take place in the sports community are privately functioning bodies,  for e.g. the Board of Control for Cricket in India (BCCI), which is the self-governing body in nature and would not fall under the definition of the State, thus escaping the statutory accountability that comes with the same, for example, the enforcement of Article 12 of the Constitution. Thus, having an entity created by the State, specifically catering to the intricacies of the needs of an effective dispute resolution in the field of sports, is integral. This drawback is overcome by the establishment of the Sports Arbitration Centre of India (SACI), which has been further elaborated on in the following paragraphs.

Following the events of the Asian Games in 1982, a need for development in the field of sports and education was realised. The year 1984 has been marked as the year of the creation of the Sports Authority of India (SAI), which is an autonomous registered society. This was followed by the creation of a National Sports Policy in 1984, the first milestone in the development being aimed for in the country. It was an amalgamation of all aspirations and ideals in furthering the Indian Sports Community. It could be observed in the trends that there did not exist an active inclination and interest within the nation towards developing and pursuing sports activities as a skill. Thus, the policy largely focused on promoting sports infrastructure and situating physical education as a part of school curriculums.[10] However, the policy did not focus enough to create a more organised and equipped environment with a formal set of rules, along with institutional bodies to enforce the same.

Upon the lack of success of the National Sports Policy of 1984, a new National Sports Policy was envisaged and created in 2001. It was a joint effort initiated by the State and Central Government in consonance with the Olympic Association and National Sports Federation and their primary objective of the policy was to further excellence in sports events internationally along with the “broad-basing of sports”.[11] It still retained a focus on amalgamating physical education within the existing academic curriculum. The policy placed the responsibility of enforcement on the Central and State Governments to provide them with appropriate powers to institute legislation,  which constituted a hurdle for effective implementation of the rules.

In furtherance to these efforts, the Indian Court of Arbitration for Sports (ICAS) was set up in 2011 with Dr A.R. Lakshmanan at the helm as Chairman.[12] ICAS was one of India’s first concrete steps toward laying the groundwork for having a robust dispute resolution mechanism specifically catering to the nuances of issues involved in sport. The court was centred around the principle of effective and speedy resolution of sports disputes keeping in mind the limited time span that a sportsperson enjoys during their career in sport.

Another major step in the evolution of sports regulations guidelines concerning safeguarding the interests of sportspersons and provision of effective grievance redressal system in the Constitution of National Sports Federations were brought forth. In the aftermath of Sushil Kumar v. Union of India,[13] before the High Court of Delhi in 2016, the Youth Affairs and Sports Ministry issued a notification through which they laid down guidelines with respect to dispute resolution in the area of sports. The guidelines titled, “Safeguarding the Interests of Sportspersons and Provision of Effective Grievance Redressal System in the Constitution of National Sports Federations”, emphasised two major points that are:

  1. The establishment of a transparent, free and fair grievance redressal system aimed to protect the interests of the persons involved in sports.
  2. Directed all sports federations to include a clause for appealing to the Court of Arbitration of Sports in their contracts and their Constitutions to address those cases where the sportsperson is unhappy with the ruling made by the sports association/federation. Directing the Sports Federations to include within their Constitution and their contracts a clause to appeal to the Court of Arbitration of Sports in case they are aggrieved by any decision or ruling of the federation/association.[14]

 

At present most sporting disputes in India are attempted to be resolved through the constitution of an internal commission typically appointed by the Sports Authority/Federation incharge of the sport in India or the State in question.  Failing the commission route, disputes usually go through litigation in either the  Supreme Court or the respective High Court.[15] There is a salient need for a specialised dispute resolution mechanism for disputes in sports and the sporting industry. To tackle these issues head-on there have been a plethora of suggestions made by the Law Commission of India primarily centred around the prospective setting up of a practice-friendly and modern law to govern the settlement of disputes in the field and the set up of a specialised body for Sports Arbitration in India.

To address this lacuna, the Sports Arbitration Centre of India was founded in 2021. Sports Arbitration Centre of India (SACI) was inaugurated by Minister of Law and Justice, Kiren Rijiju in September 2021 in Ahmedabad, Gujarat to serve as an independent body to fast track disputes in the sports sector and serve as a mechanism to redress issues related to sports.[16] The SACI will be promoted by Ahmedabad based SE TransStadia Pvt. Ltd. and all legal backing will be provided by the Ministry of Law and Justice. The SACI will have a far-reaching impact on the sports sector of the country by creating a reputation and establishing credibility for itself through the provision to settle disputes and other issues and concerns of the sports sector in a fast, transparent and very accountable manner.

It answers to the need for an independent body specifically catering to the intricate needs of the up and coming era of sports within a country by providing a neutral platform that’s more efficient and caters only to dispute matters within the sports community. Since the centre has been set up by the Ministry of Law and Justice, and in a way it is an extension of the same, providing a level of accountability that remained ambiguous before this venture. While there have been multiple ventures in the past in India, aiming to aid and facilitate the development of the sports communities, they failed to accomplish these aspirations owing to a lack of vision. For the development of the sports community of India, focusing on expanding the infrastructure alone is not enough. There existed a need to provide appropriate amenities, regulations, rights and rules to sportsmen partaking in the world of sports activities. It is important to give access to all sportsmen these rights and follow through on this ideal vision by implementation by giving them a platform that can efficiently act as a redressal mechanism. Turning to the hierarchy of courts in India for dispute redressal, as they themselves remain afflicted by administrative hurdles that make the entire process extremely time-consuming and technical, not to mention the lack of expertise required to address matters of such nature, does not suffice. Having a Sports Arbitration Centre in India acts as an effective safeguard available to the sportsmen in India that’s time efficient and possesses the requisite knowledge to appropriately address the disputes that may arise.

The most important venture after the inauguration of SACI is to raise awareness about the regulations rights and that commands and are available to the community. Despite being significantly behind in the field of dispute resolution and arbitration, India has made efforts to develop the infrastructure for the sports community, essentially moving to the commercialisation of the field. What the need of the hour calls for are steps towards formalisation, to have more organised structures that provide aid and amenities to the sportsmen to develop and flourish.


Kanika Arora Partner, Advani Law LLP

†† Vidyotma Malik, Associate, Advani Law LLP

[1] Daniel Girsberger and Nathalie Voser, “Sports Arbitrations”, International Arbitration: Comparative and Swiss Perspectives (4th Edn.) .

[2] Ian Blackshaw, “Access to Justice in Sports Arbitration”, Access to Justice in Arbitration: Concept, Context and Practice.

[3] Ian Blackshaw, “Access to Justice in Sports Arbitration”, Access to Justice in Arbitration: Concept, Context and Practice.

[4] Philippe Cavalieros and Janet Kim, “Can the Arbitral Community Learn from Sports Arbitration?” 32 Journal of International Arbitration 237.

[5] CAS 2002/A/376.

[6]  Philippe Cavalieros and Janet Kim, “Can the Arbitral Community Learn from Sports Arbitration?” 32 Journal of International Arbitration 237.

[7] A, B v. Comité International Olympique et Fédérations Internationale de Ski (Swiss Federal Tribunal, 1st Civil Law Chamber, 4P267/2002).

[8] Court of Arbitration for Sports, ICAS statutes, S19.

[9] CAS Procedural Rules, General Provisions, R. 43.

[10] Dr Awadhesh Kumar Shirotriya, “Conceptual Framework for Redesigning the Sports Policy of India” (2019) 8(1) International Journal of Physical Education Health & Sports Sciences.

[11] Dr Awadhesh Kumar Shirotriya, “Conceptual Framework for Redesigning the Sports Policy of India” (2019) 8(1) International Journal of Physical Education Health & Sports Sciences.

[12] Mukesh Rawat, “Choice of Law in Court of Arbitration for Sport: An Overview” SSRN (23-1-2021).

[13] 2016 SCC OnLine Del 3660.

[14] Safeguarding the Interests of Sportspersons and Provision of Effective Grievance Redressal System in the Constitution of National Sports Federations.pdf

[15] Arka Majumdar and Kunal Dey, “Significant Judgments on Arbitration and Conciliation Act, 1996 – May 2020 to July 2020 – Litigation, Mediation & Arbitration – India” (25-8-2020).

[16] “Kiren Rijiju Inaugurates Country’s First Sports Arbitration Centre, Says it Will Have Far-Reaching Impact” (The Times of India, 26-9-2021).

Advani LawExperts Corner

Introduction

A conspectus of the Arbitration and Conciliation Act, 1996 read with a plethora of case laws goes to show that courts in India have taken a view that arbitral award can be challenged only if it is perverse or erroneous in law. An award based on an alternative and reasonable interpretation of the law does not make it perverse. In  NTPC Ltd. v. Deconar Services (P) Ltd.,[1] Chief Justice of India N.V. Ramana held:

 

 “In order to succeed in a challenge against an arbitral award, it must be shown that the award of the arbitrator suffered from perversity or an error of law or that the arbitrator has otherwise misconducted himself. Merely showing that there is another reasonable interpretation or possible view on the basis of the material on the record is insufficient to allow for the interference by the court.” 

 

Section 34 of the Arbitration and Conciliation Act, 1996 sets out a comprehensive list of grounds under which an award passed in a domestic arbitration or an international commercial arbitration seated in India can be challenged before the appropriate court in India. A three-Judge Bench of the Supreme Court in Bhaven Construction v. Sardar Sarovar Narmada Nigam Ltd.,[2] has highlighted that the opening phase of Section 34 read as “recourse to a court against an arbitral award may be made only by an application for setting aside such award in accordance with sub-sections (2) and  (3)”. The court emphasised that the use of term “only” as occurring under the provision served two purposes of (i) making the enactment a complete code; and (ii) laying down the procedure.

 

The present article aims to decode the growth of public policy of India and patent illegality on the face of an award as interpreted by various courts in India.

 

Development of Public Policy Jurisprudence in India

The Convention on the Recognition and Enforcement of Foreign Arbitral Awards or the New York Convention itself lays down relevant conditions for refusal of execution of awards in situations where the awards go against the public policy of the signatory country.

 

Under Article 5(2)(b) of the Convention, recognition has been given to the country where enforcement of the award has to be made. The convention does not lay down a universally accepted definition but allows the States to create their standards for the same.[3] It is not the convention that is implemented in such cases but the domestic legislations dealing with this question.[4] In case of India, the standard applicable for public policy for an award made in foreign arbitration has been laid down under Section 48(2)(b) of the Arbitration and Conciliation Act, 1996.

 

Since each country has the authority to decide the standard of public policy for itself, several issues arise in the question of international public policy rather than in domestic public policy.[5] This might be so because an award arising out of international commercial arbitration may be declared in one country and seek execution in another. In most of the cases, the Tribunal may not have competent knowledge regarding the public policy standards used in the country where the award has to be executed. Public policy has been aptly described in an English case as “a very unruly horse, and when once you get astride it you never know where it will carry you”.[6] It has been so described because of the unexpected turn it might take while the domestic courts are dealing with the question of their State’s public policy. Complete State autonomy over this issue allows them to move this law in any direction and prescribe any standards to be followed.

India has witnessed several landmark judgments in the arena of public policy for enforcement of foreign awards.

 

The first such case in the Indian jurisprudence was Renusagar Power Co. Ltd v. General Electric Co.[7] Even though the question arising out of the case dealt with legislation which stands repealed now, the precedent set in the case is still good in law. The Supreme Court in the case laid down standards of public policy to be followed in the country while dealing with foreign awards. It held that while deciding upon the validity of an award concerning public policy in the State, the court could not delve into the merits of the award. It is solely allowed to comment on its validity in light of the public policy standards in place. It further laid down the standards of public policy which needs to be followed while judging upon the validity of an award. Enforcement of an award could only be refused if the award was against the

(i) fundamental policy of Indian law;

(ii) interests of India or;

(iii) justice or morality.

 

To test any award against the standard of the public policy, the effect of enforcement of the award would be looked into rather than different aspects of the award.[8] In certain situations where the enforcement of the award would not lead to a violation of public policy of India but a component of the ruling on merits may lead to such violation, the latter would be ignored and enforcement may be carried without any case.

 

It was after the Renusagar case[9] that the Arbitration and Conciliation Act, 1996 came into being. The Act was supposed to deal with all situations arising out of arbitration proceedings in the country and through foreign proceedings as well. The issues arising out of domestic awards fell under Part 1 of the legislation while questions of foreign awards were dealt with in Part 2 of the legislation. This Act was largely based on the UNCITRAL Model Law and was a means to bring Indian law under the ambit of international regulatory framework.[10] Public policy as a ground of refusal of enforcement of award was retained for both the domestic and the foreign awards. For the foreign awards, the standard applicable was laid down in Section 48(2)(b).

 

The next decision with respect to foreign public policy came in the ONGC Ltd. v. Saw Pipes Ltd.[11] The issue in the case dealt with the question of public policy under Section 34 of the Act which is in Part 1. The decision of the Supreme Court broadened the standard of public policy laid down in the Renusagar case[12]. The distinction made in the former case for a violation of public policy from enforcement of the award and violation arising out of other components of the award was removed. As per the decision in the ONGC case[13], a patently illegal award cannot be allowed to be enforced and must be set aside. The concept of patent illegality was read into the principles of public policy laid down in Section 34 of the Act.[14] Thereby, the court added another standard of violation of public policy in addition to the heads mentioned in Renusagar case[15] which was “patent illegality” of the award. Such illegality must go to the core of the matter to be against public policy. An award will not be set aside if the illegality is trivial.

 

One difference between the two cases discussed above is the issues they are dealing with. While Renusagar case[16] deals with the question of foreign awards which will fall under Section 48 of the latest Act, ONGC case[17] deals with domestic awards under Section 34 of Part 1 of the Act. Although the two provisions in question are almost identical, there is one very fundamental difference. While Section 34 in Part 1 of the Act uses the words “setting aside” of an award, Section 48 uses the term “refusing enforcement of” instead. The major difference lies in the stage of arbitration proceedings that are being dealt with. In Section 34, the award has not been given finality by the Tribunal and maybe set aside on grounds of violation of public policy before that. On the other hand, Section 48 solely deals with the enforcement of award which only comes into question once the final award has been passed by the Tribunal. The court opines that wider jurisdiction should be granted in a case of setting aside of an award where the validity of the award can be questioned. Hence, the Court did not overrule the decision given in the Renusagar case[18] but only widened the concept of public policy laid down in that case.[19]

 

However, the question arises on the applicability of the decision in ONGC case[20] to Part 2 of the Act and whether the concept of patent illegality would also apply to foreign awards falling under Section 48 of the Act. This issue was dealt with by the Supreme Court in Phulchand Exports Ltd. v. O.O.O. Patriot.[21] The issue in the case was the applicability of the definition of “public policy” laid down in the ONGC case[22] to Section 48(2)(b) of the Act.

 

The Supreme Court decided that there is no logical distinction between foreign and domestic awards to hold different standards of public policy for them. They held that the wider interpretation laid down in the ONGC case would apply to the foreign awards as well. Such awards maybe set aside if there is patent illegality on the face of it.[23] This case brought significant hardships and apprehensions within individuals involved in such commercial agreements in India. Furthermore, it allowed reopening of the entire case at the time of enforcement of the award which would eventually lead to much longer proceedings, thereby, nullifying the entire idea behind having arbitration in the first place.[24]

 

This issue was again brought to the Supreme Court in Shri Lal Mahal Ltd. v. Progetto Grano Spa.[25] The dispute arose between an Indian supplier and an Italian buyer in a contract for the supply of Indian origin durum wheat. The buyer claimed that the suppliers were in a breach of the contract for shipping non-contractual goods and asked for damages. The dispute was heard by an Arbitral Tribunal under the Grain and Feed Trade Association (GAFTA) contract, seated in London. The awards were made in the favour of the buyer, who instituted a suit for the enforcement of the awards in the Delhi High Court. The High Court decided in favour of the buyer and rejected the claims of the seller. The case was eventually heard by a Full Bench of the Supreme Court. The Bench rejected the argument that the wider meaning given to the expression “public policy” in the ONGC case[26] would apply to the award made under Section 48 of the Act. The court reinstated the precedent made in the Renusagar case[27]. It was established that the expression “public policy” should be given a narrower meaning when it comes to foreign awards. The Court overruled the decision of Phulchand[28] in this case and stated that the additional ground of patent illegality will not apply to foreign awards.[29]

The decision brought a better and a pro-environment for arbitration in the country. Such precedents have ensured that the courts in India do not intervene unnecessarily within arbitration proceedings.[30]

 

Supreme Court elaborated on this issue again in Associate Builders v. DDA,[31] in which the court laid down three juristic principles for the concept of fundamental policy of Indian law to include judicial approach, natural justice and absence of perversity or irrationality. It was stated that an award would be set aside only when it is fundamentally problematic and shocks the conscience of the court.

 

Further changes were made to the concept of public policy under arbitration law through the amendment of 2015. Considering the plethora of judgments that were laid down by the Supreme Court on this issue, the amendment clarified the concept and laid down the standards for an award to be against the public policy of India which includes:

 

(i) the award is vitiated by fraud or corruption;

(ii) it is in contravention to the fundamental policy of Indian law; and

(iii) it is in conflict with basic notions of morality and justice.

 

Furthermore, the amendment clarified that the ground of “patent illegality” cannot be taken in international arbitrations and the same is solely applicable in domestic arbitrations.

 

Post the amendment of 2015, this issue was again brought before the Supreme Court in Ssangyong Engg. & Construction Co. Ltd. v. NHAI,[32] wherein the court clarified that the appeals submitted post the amendment would fall under its ambit. Court also reaffirmed that the any challenge to an award under Section 34 would only be allowed if a fundamental principle has been breached which shocks the conscience of the court.

 

Supreme Court on Public Policy

The Supreme Court has had several instances of dealing with the question of public policy under this legislation. The following sections would be discussing the law laid down by the Supreme Court about this question. Supreme Court gave out its judgment in Govt. of India v. Vedanta Ltd.,[33] and laid down the law concerning amended Section 48 of the Act.

 

The facts of the case include a dispute arising out of Article 15 of the production sharing contract executed by the parties in 1994. This provision imposed a cap on the payment of the development costs to be made for the construction of the production capacity of 35,000 barrels of oil per day to a particular sum. An award was made in favour of Vedanta Ltd. by a Tribunal seated in Malaysia, which was challenged in the Malaysian High Court on the grounds of public policy by the Indian Government. They were unsuccessful in their approach to the Malaysian Courts and lost up to the last resort possible. In the same time, Vedanta Ltd. applied for the enforcement of the award where the contentions of Government of India were rejected once again. Hence the appeal to the Supreme Court.

 

The court upheld the law laid down in Renusagar case[34]. It has been stated that the defence of public policy should be construed narrowly and should only be permitted if they violate the standard laid down in Renusagar case[35]. The court commented upon the scope of amended Section 48 of the Act as well. The Explanation laid down to the section uses the words, “for removal of doubts” which have introduced a specific criterion for the application of public policy doctrine and should be considered prospectively. The same would be applied to the current case as the proceedings had begun before the amendment coming into force. Furthermore, if the enforcement of the award is supposed to be carried out in India, the courts in the country have the authority to apply the standards of Indian public policy and would not be restrained from the proceedings with public policy carried in Malaysia.

 

For the said reasons, the court dismissed the contentions made by the Government of India and gave a decision in favour of Vedanta Ltd. The approach carried out by the court, in this case, is consistent with the pro-arbitration view the State wishes to stick with.

 

In another case of Vijay Karia v. Prysmian Cavi E Sistemi SRL,[36] the Supreme Court reiterated their pro-arbitration stance. Facts of the case are as follows. Four arbitral awards were passed by a sole arbitrator in arbitrations administered by the (London Court of International Arbitration) LCIA. Material breaches were alleged by the respondents. Counterclaims were filed by the appellants regarding non-compete obligations and interference with the management of the joint venture company. The sole arbitrator decided in the favour of the respondents and directed the appellants to sell their share of the company to the respondents at a discounted price. It was only when the respondents sought enforcement of awards before the Bombay High Court that the appellants raised contentions under Section 48 of the Act. It was contented that the award is contrary to the Foreign Exchange Management Act, 1999, as the same prohibits sale of shares at a discounted price to a non-resident entity, making the award against the fundamental policy of Indian law. These contentions were not accepted by the High Court and it allowed enforcement of the awards, hence an appeal was made before the Supreme Court.

 

Supreme Court considered several precedents laid down in respect of this issue and reiterated the principle of minimum interference with foreign arbitral awards. As per the principles laid down in the Renusagar[37] and Lal Mahal cases[38], the Court laid down that the violation of the fundamental policy of Indian law must entail a breach of some legal principle or legislation which is so basic to Indian law that it is not susceptible of being compromised. “Fundamental policy” was held to be the core values of India’s public policy as a nation, which may find expression not only in statutes but also a time honoured, hallowed principles which are followed by courts. As per the amended Section 48 of the Act, it was laid down that the same does not permit review of foreign awards on merits. The Court also laid down that refusal to enforce a foreign award is completely discretionary and the courts may choose to execute it even if some ground exists under Section 48.

 

Thus, the courts did not accept the contentions raised by the appellants since there was no violation of the FEMA guidelines and declared their suit to be speculative. The court also directed the appellants to pay costs to the respondents along with enforcement of the award.

 

Ironically, in another judgment of the Supreme Court, it took a step back on its journey towards the development of public policy jurisprudence right up to the case of Vijay Karia[39].

 

In its judgment of National Agricultural Cooperative Marketing Federation of India v. Alimenta SA,[40] the court dealt with a 31 year old award in a dispute between the parties. Just like the Renusagar case[41], the foreign award in question was made under the Foreign Awards (Recognition and Enforcement) Act, 1961.

 

The dispute arose in 1979-1981 where NAFED was required to supply certain commodities under the Federation of Oils, Seeds and Fats Associations Ltd. contract. NAFED was unable to supply the entire amount owing to natural calamities. Parties agreed to supply the balance amount in the subsequent year. Since NAFED was an agency of the Government of India, they applied for permission from the Ministry of Agriculture. They were prohibited from making any shipments for the leftover quantities from previous years and NAFED was unable to fulfil the contract.

 

The parties took to arbitration where a FOSFA-appointed arbitrator passed an award in favour of Alimenta directing NAFED to pay for the losses. While Alimenta filed for execution of the award, NAFED filed an SLP to the Supreme Court.

 

Supreme Court held that since the contract was contingent under Section 32 of the Contract Act, 1872, it was held unenforceable on account of lack of permission from the Government. The contract was declared to be invalid and void by the court. Enforcement of the award was also denied on the ground that it would be against the fundamental public policy of India to enforce such an award and any supply made would contravene India’s policy relating to export for which permission of the Government was necessary.

Supreme Court went against the precedents set by them and delved into the merits of the case despite a settled position that does not allow them to do so. The court discussed the landmark cases relevant to this question and still declared the award to be unenforceable by declaring the contract to be void.

 

Conclusion

Cases like that of NAFED would fall under the exception and not the rule. Supreme Court has kept a positive position for the development of principles of public policy and enforcing foreign awards. There has been no undue denial of enforcements of rights of foreign entities carrying out business with Indian individuals. This creates a safe environment and attracts foreign investment in the country. A pro-arbitration stance ensures individuals of their rights being protected. Given that arbitration as a means of dispute resolution is gaining popularity at a tremendous level, the judiciary needs to develop principles that would promote such ideas in the country. India actively seeks foreign entities to work in the country in different sectors as a means to escalate development in the country. For the said reason, there must be a better environment for these entities to take up their legal issues and expect a prompt resolution to their dispute.

 

As observed in this article, India has witnessed a tumultuous trajectory in the development of its jurisprudence dealing with the validity of an arbitral award, which has led to a confused and chaotic state for its stakeholders for a very long time. However, the latest developments made by the legislature and the judiciary has allowed for better conditions and a reduction in the reliance on adjudicatory mechanisms that are taken up post the arbitration proceedings by the parties. Having made stringent policies for admitting petitions in relation to final awards made ensures that sanctity of the procedure is maintained and there is no repetition of proceedings between the parties and finality is granted to resolution arrived at between the parties.


†  Senior Partner, Advani Law LLP.

†† Partner, Advani Law LLB..

††† Associates, Advani Law LLP.

[1] 2021 SCC OnLine SC 498.

[2] (2022) 1 SCC 75.

[3] Nivedita Shenoy, “Public Policy Under Article V(2)(B) of the New York Convention: Is there a Transnational Standard?”, SSRN Electron. J. (2018), <https://www.ssrn.com/abstract=3226757> (last visited 7-11-2020).

[4] Nivedita Shenoy, “Public Policy Under Article V(2)(B) of the New York Convention: Is there a Transnational Standard?”, SSRN Electron. J. (2018), <https://www.ssrn.com/abstract=3226757> (last visited 7-11-2020).

[5] M.S. Rawat, “International Commercial Arbitration and Transnational Public Policy”, 49 J. Indian Law Inst. 17 (2007).

[6] Richardson v. Mellish, 1824 All ER 258.

[7] 1994 Supp (1) SCC 644.

[8] Jahnavi Sindhu, “Public Policy and Indian Arbitration: Can the Judiciary and the Legislature rein in the ‘Unruly Horse’?”, 58 J. Indian Law Inst. 27 (2016).

[9] 1994 Supp (1) SCC 644.

[10] 1994 Supp (1) SCC 644.

[11] (2003) 5 SCC 705.

[12] 1994 Supp (1) SCC 644.

[13] (2003) 5 SCC 705.

[14] (2003) 5 SCC 705.

[15] 1994 Supp (1) SCC 644.

[16] 1994 Supp (1) SCC 644.

[17] (2003) 5 SCC 705.

[18] 1994 Supp (1) SCC 644.

[19] Sidharth Sharma, “Public Policy Under the Indian Arbitration Act: In Defence of the Indian Supreme Court’s Judgment in ONGC v. Saw Pipes, (2003) 5 SCC 705.

[20] (2003) 5 SCC 705.

[21] (2011) 10 SCC 300.

[22] (2003) 5 SCC 705.

[23] (2003) 5 SCC 705.

[24] Arpan Kumar Gupta, “A New Dawn for India: Reducing Court Intervention in Enforcement of Foreign Awards” 7 (2020).

[25] (2014) 2 SCC 433.

[26] (2003) 5 SCC 705.

[27] 1994 Supp (1) SCC 644.

[28] (2011) 10 SCC 300.

[29] (2011) 10 SCC 300.

[30] (2003) 5 SCC 705.

[31] (2015) 3 SCC 49.

[32] (2019) 15 SCC 131 : 2019 SCC OnLine SC 677.

[33] (2020) 10 SCC 1 : 2020 SCC OnLine SC 749.

[34] 1994 Supp (1) SCC 644.

[35] 1994 Supp (1) SCC 644.

[36] (2020) 11 SCC 1 : 2020 SCC OnLine SC 177.

[37] 1994 Supp (1) SCC 644.

[38] (2014) 2 SCC 433.

[39] (2020) 11 SCC 1 : 2020 SCC OnLine SC 177.

[40] 2020 SCC OnLine SC 381.

[41] 1994 Supp (1) SCC 644.

Advani LawExperts Corner


INTRODUCTION


The Bench of the  Supreme Court comprising the  Chief Justice of India N.V. Ramana, J. and Surya Kant, J. has in its judgment passed in Welspun Specialty Solutions Ltd. v. ONGC Ltd.[1] (Welspun Specialty Solutions) clarified the interplay between Sections 55 with 73 and 74 of the Contract Act, 1872 (Contract Act) with respect to the performance of time-conditioned obligations and the assessment of the quantum of damages for delay. The judgment has been a subject of judicial discourse and may have cast a shadow on the reliability of a provision for liquidated damages in contracts where it is stipulated that time will be of the essence. The present article will study the judgment of the Supreme Court with respect to its interpretation of the aforesaid sections of the Contract Act.

 


Facts


Oil and Natural Gas Corporation (ONGC) floated a global tender for the purchase of certain seamless steel casing pipes (pipes). A company known as Remi Metals Gujarat Ltd. which is now known as Welspun Specialty Solutions Ltd. (Remi Metals) was considered the successful bidder and pursuantly was awarded the contract (contract) by ONGC. Subsequently, ONGC issued four purchase orders. These purchase orders laid down that the supply of pipes are subject to the strict adherence of time-conditioned obligations and that delivery must not be later than the dates mentioned therein. It was clearly enunciated that time will be of the essence in view of the principles enshrined under Section 55 of the Contract Act. Moreover, the general terms and conditions of the purchase orders allowed ONGC to levy liquidated damages, if there is a delay in supply of pipes on the part of Remi Metals.

 

Amidst performance of the obligations under the contract, there were certain delays on the part of Remi Metals in meeting the timely supply of pipes as per the dates mentioned in the purchase orders and owing to that, ONGC granted extension of time on numerous occasions. These extended periods were accepted by Remi Metals and ultimately its obligations stood discharged under the contract. However, owing to the various periods of delay on the part of Remi Metals, ONGC deducted an aggregate amount of USD 8,07,804.03 and INR 1,05,367 as liquidated damages from various invoices that were submitted by Remi Metals. Aggrieved by the high-handed deduction of liquidated damages, Remi Metals invoked arbitral proceedings against ONGC and sought refund of the amounts deducted along with certain other claims.


Award of Arbitral Tribunal


The Arbitral Tribunal framed numerous issues in order to determine whether Remi Metals were rightfully entitled to the refund of liquidated damages that were withheld by ONGC. One of the most critical issues framed by the Arbitral Tribunal was to ascertain whether time was of the essence of contract. The Arbitral Tribunal held that a mere clause in a contract which stipulates that “time is of the essence” would not at all be determinative to safely conclude that the performance of the obligations are strictly time conditioned in view of Section 55 of the Contract Act. It held that in order to conclusively determine whether time is of the essence, an inquiry must be made into the overall nature of the contract by examining the contract as a whole.

 

Moreover, in the light of the pertinent clauses of the contract, the Arbitral Tribunal held that since the contract contained provisions for extension of time, payment of penalty for delay, levy of liquidated damages that such clauses diluted time being of the essence and rendered the time-conditioned stipulation as nugatory. Resultantly, the Arbitral Tribunal held that with regard to the issue lawful imposition of liquidated damages, that in view of the well-settled legal position that liquidated damages being in the nature of pre-quantified damages could not be granted. The reasoning employed by the Arbitral Tribunal to arrive at this is rather interesting, it held that since it was concluded that time is not of the essence of the contract that there could be no breach of the contract on account of the delay on the part of Remi Metals. Hence, as there is no breach there could be no question of allowing ONGC to withhold the monies deducted as liquidated damages.

 

Accordingly, the Arbitral Tribunal held that damages, if any, which are payable to ONGC would be those damages which are in the nature of unliquidated damages being actual/tangible damages that require a discharge of a high evidentiary burden. Thereafter, ONGC was constrained to provide an estimation of its tangible losses which were under four categories amounting to an aggregate of USD 3,80,64,830. This estimation was accepted by the Arbitral Tribunal. Although, the Arbitral Tribunal held the opinion that ONGC could not be entitled to claim any damages for those losses that it incurred during the period when time was extended for completion of delivery as they expressly waived the imposition of liquidated damages for that period.

 

Ultimately, the Arbitral Tribunal passed an award in favour of ONGC entitling them to retain a sum of USD 4,40,610.42 out of the monies already deducted as liquidated damages from the various invoices submitted by Remi Metals.

 


Setting-aside Proceedings Before High Court of Uttarakhand


Being aggrieved by the arbitral award, ONGC was quick to prefer a petition under Section 34 before the District Court under the Arbitration and Conciliation Act, 1996 (A&C Act) for setting aside of the award contending that the award was not in accordance with the contract. The District Court found no infirmity in the award and refused to interfere with the Arbitral Tribunal’s findings.

 

Aggrieved by the judgment of District Court, both parties preferred an appeal under Section 37 of the A&C Act before High Court of Uttarakhand. The High Court found that the Arbitral Tribunal and the District Judge erred in the construction of contract and observed that the Arbitral Tribunal committed a gross error by holding that ONGC had to prove loss suffered before recovering damages.


Judgment of Supreme Court


At the time of hearing before the Supreme Court, the learned counsels appearing on behalf of the parties put forth their legal submissions in order to buttress their contentions. The learned Senior Counsel appearing for Welspun reiterated that the view taken by the Arbitral Tribunal was plausible and thus did not warrant any interference. It was contended that as the contract made provisions for extension of time and levy of liquidated damages, that it could not be said that time was of the essence of the contract. Further, emphasis was laid on ONGC’s conduct whereby they waived the imposition of liquidated damages on earlier occasions while granting extension of time. It was submitted that in the light of this waiver, it was not proper that liquidated damages could be imposed for another extension period. Summing up its submissions on interpretation of the contract and corresponding provisions of the Contract Act, Welspun relied on the judgment of the Supreme Court in Associate Builders v. DDA[2] (Associate Builders) where it was laid down that the courts should ordinarily refrain from interfering with arbitral awards under their jurisdiction envisaged by Section 34 of the A&C Act. The celebrated Judge R.F. Nariman, J. laid down in Associate Builders[3], that interference was warranted only in exceptional circumstances i.e. where awards are vitiated by “patent illegalities”.

 

The learned counsel appearing on behalf of ONGC, vehemently contended that the arbitral award stood vitiated as the Arbitral Tribunal had transgressed the four corners of the contract by making certain extraneous findings. It was contended that the contract stipulated the imposition of liquidated damages and in the light of these pre-estimated damages, the Arbitral Tribunal grossly erred by awarding unliquidated damages in terms of Section 55 r/w Section 73 of the Contract Act. The learned counsel on behalf of ONGC relied on the controversial ruling of the Supreme Court in ONGC Ltd. v. Saw Pipes Ltd.[4] (Saw Pipes) to strengthen its contention.

 

After the conclusion of the oral submissions made by the parties, the Supreme Court at the outset outlined the ambit of its jurisdiction under Section 34 of the A&C Act as it stood before the 2015 amendment of the A&C Act. The Court observed that the term “public policy” in Section 34(2)(b)(ii) has been an exploited ground for the challenge of arbitral awards and has been a subject of judicial controversy for a considerable period of time. The Court observed that “public policy” does not indicate “a catch-all provision” to challenge arbitral awards before an appellate court on infinite grounds. The Court discussed the scope of the term “public policy” from the time of its initial exposition in the seminal dictum of the Supreme Court in Renusagar Power Co. Ltd. v. General Electric Co.[5] (Renusagar) where the Court propounded a narrow interpretation of the term. Subsequently, the Court discussed the infamous judgments in Saw Pipes[6] and ONGC Ltd. v. Western Geco International Ltd.[7] (Western Geco) which broadened the scope of ambit of the term “public policy” in the context of setting aside arbitral awards under Section 34(2)(b)(ii).

 

It is in our opinion and evident from the leading judgments and the opinion of experts in the arbitral fraternity, that the judgments of the Supreme Court in Saw Pipes[8] and Western Geco[9] had cast a shadow on the fate of domestic arbitral awards in India. It is true that the legislature had enacted the 2015 amendment of the A&C Act to mitigate the negative repercussions of these controversial rulings and in spite of which, they still continue to cause havoc at the time of setting aside of arbitral awards. After the discussion on the ambit of the interference with arbitral awards on the ground of “public policy”, the Court was posed with the question of whether an arbitral award could be sustained under Section 37 of the A&C Act.

 

The Court in Welspun Specialty Solutions[10] observed that the substratum of the challenge to the award was whether the imposition of unliquidated damages is sustainable in spite of the fact that the contract expressly contemplated imposition of liquidated damages. After discussing the legal framework of liquidated damages in India with regard to Section 74 of the Contract Act, the Court observed that the finding of the Arbitral Tribunal that time was not of the essence of contract was beyond reproach. The Court concurred with the reasoning employed by the Arbitral Tribunal that the very existence of extension of time provisions together with the stipulation of liquidated damages and the subsequent conduct of ONGC (granting extension of time on earlier occasions) rendered the stipulation of time-conditioned performance as diluted. The Court concurred with the finding of the Arbitral Tribunal that since it was found that time was not of essence, that resultantly the amount stipulated as pre-estimated damages in form of liquidated damages would not be appropriate in order to fairly quantify the actual/tangible loss sustained by ONGC due to the delay. The Court held the opinion that these findings of the Arbitral Tribunal were in accordance with the well-known principles of contractual interpretation and did not suffer from any perversity.

 

The Court in Welspun Specialty Solutions[11] took the opportunity to exposit and reiterate certain well-known principles at common law with respect to the adherence of time-conditioned obligations that it deemed worthy of import to the principle in Section 55 of the Contract Act. The Court affirmed the general principle at common law, as envisaged by the English Court in Percy Bilton Ltd. v. Greater London Council[12] (Percy Bilton) that the general rule is that the promisor is bound to complete the obligation by the date of competition stated in the contract. In addition, it highlighted an exception to the rule of levy of liquidated damages as carved out in the century-old precedent of the English Court in Holme v. Guppy[13] where it was laid down that the promisee is not entitled to liquidated damages, if by his act or omission he has prevented the promisor from completing the work by the completion date.

 

After a substantial discussion on the applicable jurisprudence, the Court found that in order to ascertain whether time was of the essence of the contract, one must read the entire contract as a whole and on a holistic basis and not by examining singular clauses in isolation.

 

This doctrine was laid down in 1979 by the Full Bench of the Supreme Court in Hind Construction Contractors v. State of Maharashtra[14] (Hind Construction Contractors). However, it is surprising to note that the judgment in Welspun Specialty Solutions[15] has no mention of the judgment of the Full Bench in Hind Construction Contractors[16].

 

An in-depth factual analysis was undertaken by the Supreme Court, as it further interpreted Clause 9(i) of the contract wherein it was clearly enunciated that “subject to extension granted without prejudicing the right of ONGC to recover damages”. It was held that the ‘‘damages’’ contemplated by this provision meant unliquidated damages within the meaning of the 2nd paragraph of Section 55 and not pre-estimated/liquidated damages as envisaged under Section 74 of the Contract Act. The Court upheld the findings of the Arbitral Tribunal that said term “damages” in Clause 9(i) of the contract meant actual/tangible loss and not pre-estimated loss.

 

It is our opinion that the finding of Arbitral Tribunal that damages would be granted under Section 55 read with the principles enshrined in Section 73 in place of the pre-estimated sum stipulated under Section 74 of the Contract Act is not entirely correct. It is our opinion that once it is found that time is not of the essence, the delay in completion would still attract the provisions for liquidated damages. It is pertinent to note that the Court has concurred with these findings without sufficient examination of the interplay of the various sections of the Contract Act and the underlying rationale of liquidated damages under Section 74.

 

The Court rejected ONGC’s reliance on the judgment in Saw Pipes[17] by observing that in Saw Pipes[18] no waiver was granted for levying liquidated damages on earlier occasions amidst performance as in the present case. On this basis it held that ONGC was not entitled to benefit from the exceptions carved out in Saw Pipes[19]. The Court observed that in the present case it was undisputed that ONGC had waived liquidated damages on numerous earlier occasions while granting time extensions for completion of the obligations. The Court concurred with the finding of the Arbitral Tribunal that as liquidated damages were waived on earlier occasions, subsequent impositions could not be imposed unless agreed upon by the parties. This finding was upheld and recognised as the autonomy of a party to engage in contract terms and one which requires a clear intention.

 

Ultimately, the Court in Welspun Specialty Solutions[20] in view of its limited jurisdiction refused to interfere with any of the findings of the Arbitral Tribunal and upheld the award, while setting aside the judgments passed by the High Court of Uttarakhand.


Conclusion


It is our opinion that the judgment of the Supreme Court in Welspun Specialty Solutions[21] has drastically changed the perspective of the employers with respect to the reliability of a provision for liquidated damages, more particularly one which caters to recompense for delay in performance of time-conditioned obligations. It  also remains uncertain that even when the contract stipulates that time will be of the essence, that whether such a stipulation will prevail after the arbitral tribunals/courts examine the contract as a whole.

 

It is true that the decision in Welspun Specialty Solutions[22] is welcome step with respect to judicial non-interference with arbitral awards, but at the same time has cast a shadow of doubt on the efficacy of a clause for liquidated damages in contract where the performance of obligations is strictly time conditioned. It is our opinion that such an undesirable situation, nonetheless warrants cognizance by the Supreme Court at the earliest possible opportunity to clarify the essence of the underlying rationale of liquidated damages in Section 74 of the Contract Act.

 


† Founder and Chairman, Advani Law LLP.

†† Partner, Advani Law LLP.

†††Associate, Advani Law LLP.

[1]  (2022) 2 SCC 382.

[2](2015) 3 SCC 49.

[3] (2015) 3 SCC 49.

[4](2003) 5 SCC 705.

[5]1994 Supp (1) SCC 644.

[6] (2003) 5 SCC 705.

[7](2014) 9 SCC 263.

[8] (2003) 5 SCC 705.

[9] (2014) 9 SCC 263.

[10] (2022) 2 SCC 382.

[11] (2022) 2 SCC 382.

[12](1982) 1 WLR 794.

[13](1838) 3 M & W 387 : 150 ER 1195

[14](1979) 2 SCC 70.

[15] (2022) 2 SCC 382.

[16] (1979) 2 SCC 70.

[17] (2003) 5 SCC 705.

[18] (2003) 5 SCC 705.

[19] (2003) 5 SCC 705.

[20] (2022) 2 SCC 382.

[21] (2022) 2 SCC 382.

[22] (2022) 2 SCC 382.

Advani LawExperts Corner


  1. What are Asymmetrical Arbitration Clauses?


Arbitration clauses by its very nature envisage reference of all disputes governed under the auspices of an arbitration agreement to be resolved vide arbitration by reference of the parties to the contract. However, in certain instances, the parties enter into arbitration agreements that vest disparate powers pertaining to the reference of disputes. These clauses are also commonly known as “unilateral option clauses”, “hybrid clauses” and “asymmetrical arbitration clauses” in international legal parlance.

 

An “asymmetric arbitration clause” or “unilateral option arbitration clause” under which the parties bound by it limit themselves to bringing an action in a particular jurisdiction, while at the same time allowing one or more parties to choose whether to refer a dispute to arbitration.[1]

 

The asymmetric arbitration clause only gives one party the advantage of choosing whether the dispute should be resolved by means of arbitration, it follows that the party entitled to decide has a certain advantage over the other. For the beneficiary party, the clause can represent as an effective risk management mechanism as they will have the security and flexibility to initiate, however this shall only apply when the clause is deemed valid.

 

Any arbitration clause which gives unequal powers to refer disputes for adjudication to all parties but one, is usually referred to as “asymmetrical arbitration clause”. This ranges from:

(i) Instances where only a single party has the power to refer the disputes to arbitration (unilateral clauses).

(ii) Instances where both parties have an option to refer the disputes to arbitration, however only one party has the power to refer the dispute to litigation or alternative redressal forums.

 

These clauses may be further tweaked by the parties such that reference of disputes to either litigation/arbitration may be made at the option of only one party, which in legal parlance is referred to as “option clauses”.

 

The present article, in turn, seeks to examine the validity of asymmetrical arbitration clauses including option clauses in the Indian scenario and analyse the judicial pronouncements that examine the validity and enforceability of arbitration clauses and the extent to which such clauses affect the validity and existence of the arbitration agreement.


  1. Pronouncements by Indian Courts on Asymmetrical Clauses


The beneficiary of a unilateral arbitration clause is vested with the power to refer disputes to arbitration, usually at his option, however the same is distinguished from unilateral appointment of an arbitrator. In the former, only one party may refer disputes to arbitration however, the appointment becomes a different matter altogether; whereas in the latter, only a single party has the power to appoint an arbitrator. Such unilateral clauses often contain provisions for unilateral appointments as well, however the operation and purport of the two are vastly different. The Supreme Court of India took the view that in an arbitration agreement providing for adjudication by a sole arbitrator, the appointment of the sole arbitrator cannot be made unilaterally by one of the parties, even if the clause so vested such a power in the said party, and that to maintain absolute fairness and impartiality, the competent court alone could affect the said appointment in exercise of powers under Section 11 of the Arbitration and Conciliation Act, 1996[2]

 

In Emmsons International Ltd. v. Metal Distributors (UK)[3] the Delhi High Court decreed that where an arbitration clause arising under a bill of lading is conceptualised with a view to deprive the other party of approaching the local courts/tribunals or initiate arbitration, such clauses run afoul of Section 28 of the Contract Act, 1872 (Contract Act) that declares agreements restraining legal proceedings as illegal and cannot be enforced as it is an agreement in restrain of legal. It is pertinent to note however, that the arbitration clause in the instant case vested the seller with the option to initiate arbitration as well as decide the forum of adjudication and gave no rights to the buyer to initiate proceedings.

 

The present case also reaffirms the decree of the Delhi High Court[4] that holds invalid, any unilateral dispute resolution clauses that completely deprive the other party to seek recourse to legal proceedings as well as deciding the appropriate forum of adjudication without the consent and approval of the other party.

 

However, in a case before the Supreme Court[5], the validity of an arbitration clause which provided only one party to either initiate appropriate legal proceedings in UK or initiate arbitration was deemed to be valid and further stated that these unilateral options clauses are valid and that there is no dispute with the same. The judgment however is received with skepticism since the court has interpreted the clause in accordance with the applicable English law which cannot be used to interpret clauses governed by Indian law, however being a decision of the Supreme Court the powers under stare decisis operates, hence the applicability of the same is uncertain.

 

The Delhi High Court in Lucent Technologies Inc. v. ICICI Bank Ltd.[6], yet again held that unilateral option clauses are invalid. The Court relied on both Bhartia Cutler[7] and Emmsons International[8] cases and stated that the party’s right to recourse through legal proceedings had been infringed under Section 28 of the Contract Act, 1872.

 

Curiously, the Madras High Court took a contrarian view in Castrol India Ltd. v. Apex Tooling Solutions[9] by upholding unilateral clauses in line with the view adopted in international jurisprudence that an arbitration clause need not necessarily have mutuality.


  1. Issues concerning Optional Clauses


What differentiates an optional clause from a mandatory one is the positioning of any prefix to the option to arbitrate/litigate. The usage of prefixes such as “shall”, “will” or “must” presupposes that such clauses stipulate that all disputes arising must be resolved in the manner provided under the dispute resolution clause and the parties are bound by the same.

 

Whereas the usage of the prefix “may” or “at the option of party (x)” gives discretion to the party/parties with the option to initiate appropriate disputes at its time of choosing at such appropriate forums as may be enumerated in the dispute resolution clause. Where the option to refer disputes is to be exercised by the parties jointly, the disputes clause shall only come to life once the parties by consent agree to refer the disputes as per the mechanism enshrined. An example of such a clause is “all disputes arising thereof shall be referred for arbitration if the parties so determine”. This draws a distinction from optional clauses where either party has an option to arbitrate or refer the disputes which takes the form such as “all disputes arising thereof shall be referred for arbitration at the option of either party”.

 

The Bombay High Court[10] has clarified that where the prefix “may” is attached in optional arbitration clauses, the party opting to initiate either arbitration/litigation has to seek consent anew of the other party before commencing arbitration, whereas situations envisaging mandatory arbitration are those where consent is deemed to have been given with the usage of the word “shall” or “will”  and thus either party to the agreement may initiate appropriate arbitration/litigation proceedings.

 

The Bombay High Court also distinguishes the Supreme Court case of Zhejiang Bonly Elevator Guide Rail Manufacture Co. Ltd. v. Jade Elevator Components[11], where both parties were given a choice to select a forum of under arbitration or litigation. Here, since the petitioners initiated arbitration, the respondent was bound to comply with the arbitration process as well since the clause was not optional in nature but mandatory.

 


  1. Analysis and Concluding Remarks


One of the more visible concerns in asymmetrical clauses is the power of the party having recourse to more than one forum of adjudication to seek and enforce a stay on proceedings initiated by a party having only recourse to a single method of adjudication. For example, where the party having a sole option to refer the disputes to arbitration invokes the same, the opposite party having more than one option for adjudication of the disputes stemming from the contract, may invoke an alternative forum under the asymmetrical clause, thereby inconveniencing his counterpart through greater control of the dispute resolution process. This would also run counter to Section 28 of the Contract Act by creating hindrances and restraints in the commencement of legal proceedings by the aggrieved party.

 

Yet, courts in India (with the exception of the Delhi High Court) and abroad do not dispute the existence of arbitration agreements which are entered into willingly by the parties, since contractual covenants must be given effect to without deviation to the terms stipulated by the contractual intent of the parties. Therefore, as a logical consequence even if arbitration agreements are asymmetrical in nature the same would be valid keeping in line with the principles of party autonomy enumerated by the Supreme Court,[12] which are the cardinal pillars of the Arbitration and Conciliation Act, 1996.

 

On closer examination on contractual agreements containing such clauses it would be discovered that these are found in several employer-contractor agreements, usually with one side being a corporate entity with deep pockets and the tenacity to weather several disputes whereas the other side being small to medium sized companies who have little room to bargain.

 

When taking into account the nature of the parties entering into such agreements, the clauses arising thereof would seem to be founded on unequal terms that violate Article 18 of the UNCITRAL Model Law where the “parties must be treated with equality and each party shall be given an opportunity to present his case”. The sequitur being that even the ability of the parties to refer disputes must be treated at parity.

 

Contracts containing terms that do not keep parties at parity are deemed by the Supreme Court[13] to be those against public policy and therefore invalid, since the parties do not enjoy equal bargaining power and therefore are construed as unconscionable contracts under Section 23 of the Contract Act.

 

However, the prevailing judicial view is that there is no requirement for mutuality in arbitration agreements which stem from equal considerations given by the parties to a contract and hence there is no requirement for an arbitration agreement to confer a mutual right to initiate a reference to arbitration and any agreements providing for an option for one party alone to refer disputes to arbitration is deemed valid. The extent of consideration in the main contract that flows into the arbitration agreement must be examined in further detail considering that arbitration agreements by its very nature are a separate agreement and are severable from the main contract.

 

At the present juncture in time, asymmetrical and optional clauses are prima facie deemed to be valid by the Indian courts in line with the international cases conclusively opining on the same. However, there are disparate views prevailing across the Indian courts as to its validity unless there is a clear indication that the manner or terms of the contract itself are contrary to the public policy of India.[14]

 

Though the courts in the United Kingdom and Singapore – two of the most arbitration-friendly hubs – deem asymmetrical, optional clauses as valid,[15] it is imperative that the Indian courts analyse the validity of such clauses in the socio-economic backdrop of India rather than the prevailing global sentiment in order to give effect to a uniform standard as to the treatment of asymmetrical and optional clauses in order to ensure expeditious adjudication and disposal of arbitration proceedings.


† Founder & Chairman, Advani Law LLP.

†† Senior Partner, Advani Law LLP.

††† Associate, Advani Law LLP.

* Associate, Advani Law LLP.

[1] Maastricht Journal of European and Comparative Law 2018, Vol 25 (I) 77–86, Bas van Zelst, page 77.

[2]Perkins Eastman Architects DPC v. HSCC (India) Ltd., 2019 SCC OnLine SC 1517.

[3] 2005 SCC OnLine Del 17

[4]Bhartia Cutler Hammer Ltd. v.  AVN Tubes Ltd., 1991 SCC OnLine Del 322 : (1993) 1 BC 472.

[5] Fuerst Day Lawson Ltd. v. Jindal Exports Ltd., (2001) 6 SCC 356.

[6]2009 SCC OnLine Del 3213.

[7] 1991 SCC OnLine Del 322 : (1993) 1 BC 472.

[8] 2005 SCC OnLine Del 17

[9] 2015 SCC OnLine Mad 2095.

[10]Quick Heal Technologies Ltd. v. NCS Computech (P) Ltd., 2020 SCC OnLine Bom 693.

[11](2018) 9 SCC 774.

[12]PASL Wind Solutions (P) Ltd. v. GE Power Conversion (India) (P) Ltd., (2021) 7 SCC 1.

[13]Central Inland Water Transport Corpn. Ltd. v. Brojo Nath Ganguly, (1986) 3 SCC 156.

[14]ONGC Ltd. v. Saw Pipes Ltd., (2003) 5 SCC 705; Bharat Aluminium Co. v. Kaiser Aluminium Technical Services Inc., (2012) 9 SCC 552; Shri Lal Mahal Ltd. v. Progetto Grano Spa, (2014) 2 SCC 433.

[15]NB Three Shipping Ltd. v. Harebell Shipping Ltd., 2004 EWHC 2001; Dyna-Jet Pte. Ltd v. Wilson Taylor Asia Pacific Pte. Ltd., 2017 SGCA 32.