KINDLING A LEGISLATIVE AMENDMENT: AMBIGUOUS NATURE OF DEFAULT BY A PARTY DURING ARBITRAL PROCEEDINGS

This article has been written by Nooransh Grover.

Abstract

It is of utmost importance that a legislation, by virtue of its own provisions, does not become counterproductive. Arbitration, in today’s modern era, has been rising by leaps and bounds as a vibrant dispute resolution mechanism. India also has been effective in developing a legal culture which facilitates adopted on arbitral mechanism for dispute resolution. The Arbitration and Conciliation Act, 1996 was enacted with the effort to provide a fresh perspective to the arbitral process and also its compliance with the international arbitral regime. But a careful reading of the Act poses certain question marks as to the provisions being counterproductive. The article is an attempt to highlight one such counter productiveness of the provisions itself namely with respect to Section 19 (2) and Section 25 (a) of the Act.

Introduction

Arbitration, in today’s dispute resolution regime, is not a forbidden fruit. Today, arbitration has been a sought-after dispute resolution mechanism as it provides parties with a less tedious and cumbersome process for settlement of their disputes as compared to traditional litigations. Today, big corporate giants and multinationals have started to increasingly prefer international commercial arbitrations or investment arbitration mechanisms as the case may be. Various countries have enacted domestic legislations for providing a legal status and framework to arbitrations. These laws are majorly based on the UNCITRAL Model Law on International Commercial Arbitrations. In India, the Arbitration and Conciliation Act, 1996 (“Act”) is the governing law on domestic arbitrations as well as for enforcement of foreign arbitral awards. The Arbitration and Conciliation Act provides a detailed framework for the conduct of arbitral proceedings as well as other ancillary rules on other aspects.

During arbitration procedures, it is customary for the concerned parties to provide their arguments, evidence, and legal rationale in written form, often referred to as the “Statement of Claim” and the “Statement of Defence.” The documents mentioned above serve a pivotal role in delineating the matters under contention and establishing a structure for the process of arbitration. The Statement of Claim and the Statement of Defence are both essential papers that provide the foundation for the arbitration process. Assistants play a crucial role in facilitating the comprehension of the matters under consideration by arbitrators, providing guidance to the involved parties during the hearing, and serving as a foundation for the decision-making process. It is crucial for all parties involved to meticulously compose these papers with the guidance of legal representation in order to effectively convey their strongest arguments throughout the arbitration process.

Establishing the Ambiguity and Counter Productivity

As per the Act, conduct of arbitration proceedings is provided under Chapter V which ranges from Section 18 to Section 27. Section 25 provides for default committed by one party and states as provided hereunder;

“Unless otherwise agreed by the parties, where, without showing sufficient cause, —

(a) the claimant fails to communicate his statement of claim in accordance with sub-section (1) of section 23, the arbitral tribunal shall terminate the proceedings;

(b) the respondent fails to communicate his statement of defence in accordance with sub-section (1) of section 23, the arbitral tribunal shall continue the proceedings without treating that failure in itself as an admission of the allegations by the claimant 3 [and shall have the discretion to treat the right of the respondent to file such statement of defence as having been forfeited].

(c) a party fails to appear at an oral hearing or to produce documentary evidence, the arbitral tribunal may continue the proceedings and make the arbitral award on the evidence before it.”

As provided, if the party fails to provide sufficient cause and does not submit the statement of claim as per Section 23 of the Act, the arbitrator shall terminate the proceedings. This issue was bought up in the case of Srei Infrastructure Finance Ltd v. Tuff Drilling Pvt. Ltd wherein the issue revolved around termination of arbitral proceedings as per Section 25 (a) of the Act. The Supreme Court in the said case held that on showing sufficient cause, the arbitral tribunal can condone the delay in filing of the statement of claim as per Section 23 of the Act. The Court also ruled that the arbitral tribunal may revoke its order of termination of proceedings passed pursuant to Section 25(a) upon filing of reasons of delay after a show cause notice is served on the party by the tribunal or the party himself or herself files such reasons.

Section 19 (2) of the Act provides for the autonomy of the parties to decide on the procedure to be adopted by the arbitral tribunal and states as hereunder

“(2) Subject to this Part, the parties are free to agree on the procedure to be followed by the arbitral tribunal in conducting its proceedings.”

On a collective reading of Section 19 (2) and Section 25 (a) of the Act, it leads to establishment of a conundrum. Section 25 starts with the phrase ‘without showing sufficient cause’, which suggests that the arbitral tribunal has to decide as to the sufficiency of the cause of delay provided by the party causing the delay. However, Section 19 (2) provides for parties’ autonomy to decide upon the procedure to be adopted by the parties in the dispute.

This leads to a direct conflict between parties’ autonomy and the tribunal’s power to decide upon the sufficiency of the cause. The party submitting the cause of delay can exercise its autonomy in making the arbitrator accept the causes of delay so submitted. This further leads to rendering Section 25 (a) to be toothless as the tribunal shall not have the power to look into the sufficiency of the causes of delay by virtue of the autonomy of the parties.

If it were to be established, that the tribunal has to determine the sufficiency or the reasonability of the causes of delay, then it shall grossly encroach upon the autonomy of the parties. It should be the prerogative of the parties to decide as to whether they are desirous of continuing the arbitral proceedings or they wish to discontinue it. It should also be kept in mind that the autonomy of parties is a joint concept and cannot operate singularly meaning thereby that it should be jointly agreed by both the parties and not just one.

It is a settled principle of arbitral jurisprudence that the tribunal derives its authority from the parties, unlike courts which derives its by law, and thereby it is the duty of the arbitral mechanism to give respectability to the autonomy of the parties as enshrined under Section 19. If a dispute arises on the sufficiency of the causes of delay between the parties, the tribunal can decide the matter on merits but not in a case when both the parties agree to the causes of delay and wish to resume the proceedings.

Conclusion

As suggested above, a collective leading of both the sections creates serious ambiguities and can also lead to multiple disputes with regard to the same. The provisions of the Arbitration and Conciliation Act, 1996 are framed in such a manner so as to keep the autonomy of the parties intact and this has been upheld in various judicial precedents as well.

But Section 25 (a) poses a serious question with regard to the same. In order to give true effect to the principle of party’s autonomy in an arbitral process, it is necessary that the phrase ‘without showing sufficient cause’ is omitted. This omission shall lead to a situation wherein when the parties agree to accept the causes of delay and resume the arbitral proceedings, the tribunal has to accept such causes and proceed with the arbitral proceedings.

It is imperative that such a misleading clause is omitted which shall thereafter not created deadlocks in the arbitration process altogether.