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SU Shah &
MODULE - 5
RECENT TREND IN ARBITRATION
5.1. INDIA’S FIRST INTERNATIONAL Centre (IFSC) in Mumbai. It will act as a
ARBITRATION CENTER. catalyst for businesses and investments in
India’s first International Arbitration Centre was
inaugurated in Mumbai by Maharashtra Chief • It is an outcome of joint efforts done by the
Minister Devendra Fadnavis on 8th October 2016. national and international arbitration
The head of Mumbai Centre for International community, the business community and the
Arbitration is Madhukeshwar Desai. Government of Maharashtra.
5.1.1. Key features of Mumbai Centre for When there was no international arbitration centre
International Arbitration (MCIA)- in the country, the majority of global disputes were
landed at the Singapore International Arbitration
• The MCIA is an independent and non-profit Centre and London Court of International
organization, governed by total of 17 council Arbitration. A study conducted by the Singapore
members who are eminent national and international Arbitration Centre suggests that it
international luminaries such as Cyril, Nish handled about 30 percent of cases that involved
Shetty, Pallavi Shroff, Justice S.S. Nijjar, Indian businesses.
Vyapak Desai and many others.
According to Times of India newspaper, the second
• This International Arbitration Centre is in International Arbitration Centre has been
sync with the Prime Minister's ‘Make in India’ established at Gurgaon after the approval from
campaign which helps to provide time bound Punjab and Haryana High Court.
and cost-effective facility and also reinforces
investor’s confidence. The district and sessions judge of Gurgaon, Harnam
Singh Thakur said that "Gurgaon houses a large
• MCIA will be helpful in development of the number of multi-national companies (MNCs). Setting
proposed International Financial Services
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up IAC in the city will be more cost-effective and less award is if the award opposes public policy under
time consuming for these companies.” Section 34(2)(b)(ii).
The New Delhi International Arbitration Centre Bill, 5.2.1. ‘Patent Illegality’: For Domestic Arbitral
2018 (Bill) has also been introduced in the Lok Sabha. Awards
This Bill provides for the establishment of the New ‘Patently illegal’ (blatant illegality or error on the face
Delhi International Arbitration Centre (NDIAC) as an of the record) can be defined as an error of law that
autonomous and independent institution for goes to the root of the matter; or a violation of the
promoting institutional arbitration in India, while constitution or a statutory provision; or it may be an
recognizing the failure of the existing International inconsistency with common law.
Centre for Alternative Dispute Resolution (ICADR) in
effectively functioning as a centre for institutional 5.2.2. Origin of Patent Illegality
arbitration. • The ground of “Patent Illegality” was
originated by the Supreme Court judgment in
5.2. ENFORCEMENT OF FOREIGN AWARDS Oil and Natural Gas Corp v. Saw Pipesi and the
BECOMES EASIER: ‘PATENT ILLEGALITY’ rationale behind this judgment was that “the
award which is, on the face of it, patently in
The Arbitration Act, 1940 was enacted in India to violation of statutory provisions cannot be
consolidate and amend the law relating to arbitration said to be in public interest. Such
effectively thereafter, the same Act was again award/judgment/decision is likely to
modified in 1996 with the aim and the objective to adversely affect the administration of
give grant impact to the UNCITRAL Model Laws as justice.”
adopted by the UN Commission on International • This case law settled that the term ‘public
Trade Law on 21 June 1985. policy’ under Section 34(2)(b)(ii) was to be
interpreted broadly and thus ‘patent
Article 34 of UNCITRAL Model and Article V of the illegality’ could be a new head under public
New York Convention on the Recognition and policy.
Enforcement of Foreign Arbitral Awards provide the • It finally held that Courts could set aside the
restrictive grounds for relief of setting aside of award award on the ground of ‘patent illegality’
or refuse to recognize or replace the same by the
court. One of such grounds of setting aside an arbitral
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which would be said to exist in 3 decide the matter and take a view he
circumstances considers sound although it may be incorrect.
i. If the award is contrary to the substantive • It was thus held back in 1994 that Award
provisions of law cannot be set-aside merely on the ground of
ii. Or the provisions of the Act misreading, misconstruction or non-
iii. Or against the terms of the contract appreciation of evidence or material on
5.2.3. Prior to SAW Pipes case • Further, Court cannot substitute its own
opinion or appreciate evidence put before the
The primary proposition was that the Arbitrator’s arbitrator. Court cannot substitute its own
award is final in fact and in law. Court can interfere evaluation of the conclusion of law for that of
only in exceptional cases. In this regard, Article 5 of the arbitrator and even a possibly not correct
the UNCITRAL Model Law seeks minimum view cannot be interfered with by the Court.
interference and states, “In matters governed by this • Despite, the establishment of patent illegality
Law, no court shall intervene except where so as a ground for setting aside, these general
provided in this Law”. principles on setting aside was not displaced
Indian Judiciary have always been careful in ensuring and in fact reiterated and upheld by Courts in
that Section 34 is not used by parties as an appeal where patent illegality was alleged.
against the Arbitrator’s decision where the award • The foremost case in this regard is Steel
goes against a party. The Supreme Court also held Authority of India Ltd v. Gupta Brother Steel
that- The Court should be “circumspect in setting Tubes Ltdii. The Supreme Court clearly laid
aside award made by Arbitrator. Therefore, it can be down the principles of inquiry into matters of
said that general rule shall always favor the Arbitral patent illegality of Arbitral Award. It held:
Tribunal’s findings. “It is not necessary to multiply the references.
Suffice it to say that the legal position that
5.2.4. Post Saw Pipes Case Developments emerges from the decisions of this Court can
be summarized thus:
• It has been decided by Indian Courts that the (i) In a case where an arbitrator travels
Court under Sec 34 cannot sit in appeal of the
Arbitral Award. The Arbitrator is free to
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beyond the contract, the award would be (vi)If the conclusion of the arbitrator is based
without jurisdiction and would amount to on a possible view of the matter, the court
legal misconduct and because of which the should not interfere with the award.
award would become amenable for being set
aside by a Court. (vii) It is not permissible to a court to examine
the correctness of the findings of the
(ii) An error relatable to interpretation of the arbitrator, as if it were sitting in appeal over
contract by an arbitrator is an error within his his findings.”
jurisdiction and such error is not amenable to
correction by Courts as such error is not an 5.2.5. ‘Patent Illegality’: Setting Aside Foreign
error on the face of the award. Arbitral Awards
(iii) If a specific question of law is submitted to • The Indian Arbitration and Conciliation Act is
the arbitrator and he answers it, the fact that divided into two parts – Part I deals with
the answer involves an erroneous decision in domestic arbitration and Part II deals with
point of law does not make the award bad on international commercial arbitration.
• Section 34 of this act falls under Part I and
(iv)An award contrary to substantive therefore it is only applicable to domestic
provision of law or against the terms of arbitration.
contract would be patently illegal.
• However, in Bhatia International v. Bulk
(v) Where the parties have deliberately Trading S.A.,iii the Supreme Court set aside a
specified the amount of compensation in foreign arbitral award on the basis of patent
express terms, the party who has suffered by illegality.
such breach can only claim the sum specified
in the contract and not in excess thereof. In • It raised a lot of questions within the
other words, no award of compensation in arbitration community because the Court
case of breach of contract, if named or very easily treated this foreign arbitration as
specified in the contract, could be awarded in an Indian one. Courts and legal practitioners
excess thereof. across the country condemned this decision
because it defeated the basic division of parts
of the Indian Arbitration Act.
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• This decision of the Supreme Court was 5.3. PATHOLOGICAL ARBITRATION CLAUSE
looked down upon because when companies
of two different countries contract to Pathological Arbitration clauses are the clauses in an
arbitrate, it needs to be kept in mind that the arbitration agreement which may lead to disputes
two companies come from different political, due to difference in interpretation which may further
social, economic and most importantly result in the failure of arbitral clauses or in the
different moral backgrounds. Different parts unenforceability of an award.
of the world have different sensibilities. What
may be adverse to public policy in one country The term “Pathological Clauses” was introduced by
may be enhancing it in the other. One state Frederic Eisemann, the former Secretary General of
may then set aside an award which is ICC (International Chamber of Commerce).
considered good in the other state. According to him, there are four elements of an
• Because of the above mentioned reasons, a
decision in Bhatia International v. Bulk • to produce mandatory consequences for the
Trading S.A was overruled by Bharat parties,
Aluminium Co v. Kaiser Aluminium Technical
Services Inc, iv. The Supreme Court held that • to exclude the intervention of the state courts
“Part I provisions were to be applicable only in the settlement of the disputes, at least
to domestic awards thus discrediting its own before the issuance of the Award,
decision in the Bhatia International case.”
• to give powers to the Arbitrators to resolve
• This judgment by the Supreme Court gave the disputes likely to arise between the
relief to the international arbitration Parties,
community which reinstated the pro-
arbitration and commercial atmosphere in • to permit the putting in the place of a
the country. procedure leading under the best conditions
of efficiency and rapidity to the rendering of
an award that is susceptible to judicial
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If the arbitration clause does not fulfill any of the • Facts:
above elements of arbitration or deviates from the The parties entered into a Joint Venture
same then such clause would be termed as Agreement on December 26, 2011 (JVA). The
Pathological Clauses. agreement contained some arbitration
clauses which are as follows:
For Example: - In case of failure, the dispute the
arbitrator shall consider the dispute
• Clauses that do not make arbitration wherein the parties will mutually agree. If
mandatory. the parties are not able to arrive at such
arbitrator, then the rules of arbitration of
• Clauses where institutions were not referred the Singapore Chamber of Commerce
to or erroneously referred to or do not exist. shall be considered for his appointment.
- The arbitration proceedings would be
• Clauses those are inherently inconsistent or conducted in Singapore and would be
convoluted. regulated and followed as per the laws of
5.3.1. Pathological Clause and Indian Law-
On facing a dispute when both parties were
• In the case of Pricol Limited ("Pricol") v. not able to appoint the arbitrator, Johnson
Johnson Controls Enterprise Ltd. ("Johnson") approached SIAC for the appointment of an
& Orsvi, Supreme Court of India construed arbitrator. Mr. Steven Lim was appointed as a
pathological arbitration clause and ensured sole arbitrator by SIAC. The jurisdiction of
that arbitral procedures are not delayed. arbitrator would also be challenged by Pricol
Supreme Court also held that the as it indicated. A partial award was passed by
appointment of a sole arbitrator by the the arbitrator with regard to the jurisdiction
Singapore International Arbitration Centre that the appointment done SIAC under the
(SIAC) and a partial award passed by the International Arbitration Act (IAA) is valid
arbitral tribunal on the issue of jurisdiction,
cannot be questioned in a petition under
Section 11(6) of the Arbitration Act.
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since the parties had also consented for the award related to jurisdiction was a
seat of arbitration to be held at Singapore. consequence of proceedings before SIAC.
The court admitted the fact that his
• Contentions- appointment and the award related to
- Pricol contended that the Indian laws must jurisdiction could not be challenged in
proceedings under Section 11(6) of the Act. If
regulate the rights of the parties as no it is done, it would indicate the court sitting in
contrary intentions were expressed in the appeal for the decision of SIAC as well as the
agreement and India would continue to be the partial award and this would be
seat of arbitration as the parties had inappropriate.
consented for the Singapore to be
the venue for proceedings. Thus, Part 1 • Analysis
Arbitration & Conciliation Act, 1996, would In this case, the court has done a significant
remain applicable. construction of a pathological agreement.
- The contention of Johnson was that the The actual intent of the parties to go for
parties to the agreement had agreed for arbitration, despite the fact that it was under
Singapore to be the seat of arbitration while an imaginary institution, has been properly
substantive law would be Indian law, the acknowledged and approved. In this regard,
appointment of arbitrator should be Supreme Court has constructively certified
governed by the arbitration agreement. It was that the arbitration process was not
argued by the respondents also that the real obstructed and parties would not spend time,
intent of parties was to approach SIAC for money and effort in litigating further on this
appointment of arbitrator in case of failure of issue. Also any order that is passed by the
a mutual agreement. court would amount to sitting in appeal over
the decision of SIAC and/or the partial award
• Judgment passed by arbitrator would be improper.
It was decided by the court that the
appointment of sole arbitrator and the partial
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i Oil & Natural Gas Corporation Ltd. v. Saw Pipes Ltd. (2003) v Dealing with Pathological Clauses in Arbitration,
Appeal (civil) 7419 2001 of 518. PRESSREADE (October 2015),
ii (2002) CIVIL APPEAL NO. 5241 OF 2002. 7297167887.
iii (2001) Appeal (civil) 6527 of 2001. vi (2014) Arbitration Case (Civil) No. 30 of 2014.
iv (2005) CIVIL APPEAL NO.7019 OF 2005.
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