THE AUTHOR:
Mohit Mishra, LL.M. Candidate, National Law University, Delhi
Introduction
The case of Hala Kamel v. Arya Trading Ltd (“Hala Kamel”) is one of the latest curious cases in which the arbitrator in an international commercial arbitration was appointed by the Chief Justice of the High Court rather than the Chief Justice of Supreme Court in contrast to the provisions of the Arbitration and Conciliation Act, 1996 (“Act”). In this case, an international commercial arbitration was initiated, and the dispute was referred to a sole arbitrator, who awarded US $ 1,04,190 to the petitioners. The award was later challenged in Court under Section 34 of the Act. The interesting aspect of the case lies in the arbitration clause, which mentioned that the sole arbitrator shall be appointed by the Chief Justice of the Delhi High Court upon a reference made to him as per the provision of the Arbitration and Conciliation Act, 1996. The contradiction lies in the fact that the Supreme Court is empowered under Section 11 (6)(c) of the Act to appoint the arbitrator in International commercial arbitrations. The Court carved out three issues from the above; firstly, whether the appointment of the learned arbitrator was in accordance with the 1996 Act.; secondly, whether the appointment of the learned arbitrator vitiates the impugned award and lastly, whether this plea is permitted under section 34 petition. The Court held that although the appointment was invalid as section 11(6) of the Act is to be followed, the impugned award of the Delhi High Court was valid because section 11(6) of the Act is derogable and therefore waived if no objection is raised before the tribunal. This means if the aggrieved party does not remain vigilant, they will lose their right to challenge the tribunal’s composition. The courts in various judgements have defined what is mandatory or non-derogable and what is derogable. However, limited jurisprudence was available for section 11(6) of the Act. This article analyses this latest development and its impact on arbitration in India.
What Are Derogable and Non-Derogable Provisions, and How Are They Determined?
In England, there has been clear demarcation between mandatory and non-mandatory provisions in the Arbitration Act. In India, there is no such mention in the Arbitration and Conciliation Act 1996. As a result, it is largely subject to judicial interpretation. Although the scope and object of a statute should be the determining factors, courts have taken different stands on this issue. One of the guiding principles was established in the case of PEC Ltd. v. Austbulk Shipping Sdn. Bhd, where the Court, while deciding on the nature of Section 47 of the Act, stated that the use of “shall” in provisions determines the nature of the provision as derogable or non-derogable. Furthermore, the Court laid down in Choday sanyasi rao v. Hindustan petroleum Corpn. Ltd., most of the derogable provisions are preceded by “Unless otherwise agreed by parties”. Finally, the Apex Court in State of Bihar v. Bihar Rajya Bhumi Vikas, while dealing with section 34 holds that the provisions whose non-compliance is supplemented by penal provisions are mandatory.
Based on the above factors Courts have made various pronouncements regarding the Arbitration and Conciliation Act, categorizing its sections as either non-derogable or derogable:
- Non-derogable sections: Section 7, 8, 8(2), 11(9), 12(1), 12(5), 16(2), 16(3), 18, 21, 34(3), 45 and 47.
- Derogable sections: Section 10(1), 11(5), 11(9), 34(5), 34(6), 36(3) (provision), 37(7)(a), 37(7)(b) and 48.
Whether Section 11(6) is a Derogable Provision?
The controversy related to Section 11(6) came before the Bombay High Court in Soham Shah v. The Indian Film company Ltd. (“Soham Shah Case”). The case related to the appointment of an arbitrator by the Chief Justice of Bombay in an International Commercial arbitration under section 11(6) of the Act:
- Initially, the Chief Justice of Bombay appointed an arbitrator who subsequently refused to arbitrate.
- In response, a petition was filed for the substitution of the arbitrator. The Chief Justice of the High Court then appointed a substitute arbitrator by mutual consent of the parties.
- However, the petitioner filed a review petition challenging this appointment of the substitute arbitrator.
- Notably, it was undisputed that the petitioner had already filed a written statement before the arbitrator. Also, the statement of claim, defence, and rejoinder were filed.
The Court held that even if the party did not raise any objection under the original Section 11 petition or some facts were not brought to light, the Chief Justice has no jurisdiction to entertain the petition. Furthermore, the Court determined that Section 11(6) of the Act cannot be derogated from or waived under Section 4 of the Act, even if the parties did not raise an objection in their written statements before the arbitrator.
The contrast opinion was formed in Hala Kamel Zabal case, where the arbitration clause provided for the appointment by the Chief Justice of the Delhi High Court. To answer this question, the Delhi High Court relied on the judgement of Narayan Prasad Lohia v. Nikunj Kumar Lohia (“Narayan Prasad Lohia Case”).In this case, the parties appointed a two-member tribunal which contradicts section 10(1) of the Act. The Apex Court raised the issue, of whether section 10(1) of the Act is a derogable provision. The Apex Court in Narayan Lohia Case stated that the answer will depend on whether the party has the right to object to the composition of the tribunal and if so, at what stage.
While answering, the Court raised the primacy of Section 16 of the Act, which allows an arbitral tribunal to rule on any objections regarding the existence or validity of the arbitration agreement.. The Court cited the case of Konkan Railway Corporation v. Rani Construction (P) Ltd., which reinforced that section 16 of the Act not only determines the scope of the tribunal’s jurisdiction but also goes to the core of the arbitration process.
According to the Court, any objections must be raised no later than the submission of statement of defence. Such objection can be raised even if the party has previously participated in the proceeding or has appointed the arbitrator himself. The parties are also free to not take up the challenge and proceed. Thus, the conjoint reading of section 16 with section 10 shows that the section is derogable. If the party fails to object within the specified period, it is considered to have waived its right to challenge, as per Section 4 of the Act.
The Court further clarified that, to determine whether the provision is derogable, it must asses whether a challenge can be raised under Sections 16(2) or 16(3) of the Act. In Hala Kamel Case, the Court went on to explain the concept of “jurisdiction” under Section 16 and extended the tribunal’s scope of jurisdiction. The Court defined jurisdiction as established in CIT v. Pearl Mech Engg & Foundry work (P) Ltd. as “the power of the Court or Tribunal over the subject matter, over the res or property in contest, and to the authority of the Court to render the judgement or decree it assumes to make”. With respect to the power of the arbitrator, the Court relied on the judgement of In re. interplay between arbitration agreements under Arbitration and Conciliation Act, 1996 and Stamp Act, 1899, which upheld the principle of “competence-competence” that recognizes the power of an Arbitral tribunal to hear and decide challenges to its jurisdiction under Section 16 of the Act. Based on this reasoning, the Court rejected the challenge to the arbitral award as none of the parties had raised objections before the tribunal.
Can a Challenge be Raised Later Under Section 34(2)(a)(v) of the Act?
The third issue revolves around challenge under Section 34(2)(a)(v) of the Act, which states “the arbitral award can be challenged on composition of the arbitral tribunal or the arbitral procedure was not in accordance with the agreement of parties”. The proviso states that “unless such agreement was in conflict with the provisions of Part-I of the Act from which parties cannot derogate, or, failing such agreement, was not in accordance with this part”. The Court held that the above section provides for two conditions:
- firstly, the composition is against the agreement between parties, and
- secondly, if the first condition is not satisfied, whether the composition of the tribunal violates Part-I of the Arbitration Act.
In the Narayan Lohia Case, the Apex Court laid down that as long as the composition of the Arbitral Tribunal is in accordance with the arbitration agreement, it will not be open to either party, after the award has been passed, to contend that the arbitration clause violated the Act. However, the petitioner in the present case contested and drew a differentiation with the Narayan Lohia Case as the current case explicitly mentioned that the appointment was made in accordance with the Act. Therefore, the Act is applicable as the agreement itself requires compliance with the provisions of the Act. The Court rejected the interpretation of Petitioner on the premise that it can only be accepted if the clause is made and read independently, in accordance with the arbitration clause which requires the appointment of the Chief Justice of the Delhi High Court and of Chief Justice of Supreme Court as per provisions of Act. The Court holds the primacy of Arbitration Clause over the provisions of the Arbitration Act and held that a challenge to an award under Section 34 of the Act cannot be taken if it is in consonance with the Arbitration agreement.
Conclusion
This case marks the significant development in Section 11(6) of the Act. The Bombay High Court in the Soham Shah case stated section 11(6) as non-derogable whereas the Delhi High Court in Hala Kamel Zabal Case held section 11(6) as derogable. The judgement of the High Court is a major boost to party autonomy and gave primacy to the arbitration agreement. The Delhi High Court has increased the scope of section 16 of the Act, enhanced the power of the arbitrator, and reduced the scope of judicial intervention. This marks the pro-arbitration step.
On the other hand, parties must be aware of the law, as any delay or inaction may result in a waiver of rights. This is particularly important in the case of International commercial arbitration, where foreign parties need to familiarise themselves with the applicable laws before in arbitration initiating arbitrations in India. Further, the distinction between derogable and non-derogable provisions marks another highlight of judgement.
This judgement discourages parties from raising the same type of challenges in different forums under different provisions, thereby reducing the multiplicity of litigation and speeding up the dispute resolution mechanism. It also reinforces the finality of the arbitrator’s decision, limiting the grounds for challenge under the conditions mentioned in section 34 of the Act.
Further, the appointment of a sitting judge as arbitrator raises a major concern. The appointment of arbitrator is an administrative work, following the principle of party autonomy parties should themselves, or through an arbitral institution, appoint the arbitrator. Section 11 of the Act is an exceptional provision and should only be invoked in case of deadlock between the parties. The practice of appointing a sitting judge as the arbitrator at first instance should be discouraged, as it undermines the principle of judicial hierarchy by interfering with the original jurisdiction, the Supreme Court. In brief, this judgement, in many ways, contributes to building upon the basic principles of arbitration and will help in creating a better environment for arbitration in India.
Abstract
The evolving nature of jurisprudence and structures of arbitration need no introduction. Recent developments, such as amendments to the Arbitration Act, the creation of the Arbitration Bar of India, and the new Arbitral Institutions have contributed to these changes. The judiciary has always played an active role in interpreting arbitration law, ensuring that the basic principles of Arbitration are upheld.
One such example is the Delhi High judgement in Hala Kamel v. Arya Trading Ltd, where the Court not only reinforced key principles like minimal judicial intervention and party autonomy, but also clarified the nature and scope of various provisions of the Arbitration Act. Notably, Section 16 of the Act was highlighted for its significance, as it empowers the arbitral tribunal to rule on its jurisdiction, while giving primacy to the terms of the parties’ agreement.
Further, the judgement provided clarity of factors to determine which provisions can be considered as derogable and non-derogable. This decision emphasises the importance of awareness and timely action in arbitration proceedings.
ABOUT THE AUTHOR
Mohit Mishra is currently an LL.M. Candidate at the prestigious National Law University, Delhi. With a keen interest in arbitration, particularly in the Indian context, Mohit is dedicated to exploring alternative dispute resolution mechanisms and contributing to the development of this specialized field.
*The views and opinions expressed by authors are theirs and do not necessarily reflect those of their organizations, employers, or Daily Jus, Jus Mundi, or Jus Connect.
