NLSIR Symposium: A Case for Judicial Intervention

The recent Symposium on Arbitration conducted by the National Law School of India Review saw the much-maligned interventionist role of the judiciary receiving support from leading practitioners, including Senior Advocates Arvind Datar and Gourab Banerji. Two of the most heavily criticized judicial interventions are (a) holding that the Chief Justice carries out a judicial function in determining appointing an arbitrator, as opposed to a purely administrative function; and (b) the expansive attitude towards “public policy” u/s 34 of the Arbitration and Conciliation Act, 1996; which effectively allows Courts to set aside awards which are based on errors of law. Nonetheless, there appears to be at least an arguable case for the “interventionist” judicial approach.

Judicial Function or Administrative Function?

If the role of the Chief Justice in appointing arbitrators is categorized as a judicial function, he must enter into questions of validity of the arbitration agreement at the time of appointment of arbitrators. This was the understanding accepted by the Supreme Court in the Patel Engineering case. The arguments against this typically revolve around (a) the kompetenz-kompetenz principle, which allows arbitral tribunals to decide on their own jurisdiction; and (b) the fact that the 1996 Act specifically uses the words “Chief Justice” and not “Court” as used in the earlier enactment. Presumably, this indicates that the function is intended to be an administrative one and not a judicial one.

It is noteworthy; however, that “Chief Justice” could well have been intended because of the eminence of the post – not because of an intention to make the function a purely administrative one. At a pragmatic level, does it make sense to hand to a constitutional functionary such as the Chief Justice a purely ministerial function involving practically no application of mind? Would the better course be to construe the function as a judicial one, allowing the Chief Justice to adjudicate on the validity of the arbitration agreement prior to appointing arbitrators? Again, the Indian Act allows appeals against an arbitrator’s decision on jurisdiction only when the arbitrator declines jurisdiction. If the arbitrator assumes jurisdiction, a challenge will be possible only after the arbitral proceedings are over – unlike under the UNCITRAL model law which allows appeals against both types of jurisdictional decisions immediately. Does it make any sense to expect a party to go through arbitration, spend time and money, and then come back to Court after the proceedings? Given the structure of domestic arbitrations in India, it is an extremely exceptional case where an arbitrator declines jurisdiction. Is it not practically better to allow the judiciary to adjudicate the issue at the outset itself, in terms of saving both time and money? Is it necessarily to strictly adhere to doctrinaire considerations in these matters?

“Public policy”

The arguments against setting aside awards based on an expansive reading of “public policy” turn on questions of the importance of party-autonomy and minimal judicial interference. It is on this basis that the decision in ONGC v. Saw Pipes has been heavily criticized.

However, Mr. Gourab Banerji put forth strong pragmatic arguments in favour of the decision in ONGC. At the outset, it is essential to consider that parties are not allowed to contract out of statute; or to enter into contracts for illegal objects. If that is the case, will not a refusal to set aside an illegal award under the guise of party autonomy effectively mean that parties are doing indirectly what they cannot do directly? Mr. Banerjee’s argument may be seen through the following extract from the paper which he presented:

The general assumption is that arbitral awards should be final and binding, and open to limited challenge before the Court. The key question is: why should this be so? The theoretical answer is that arbitration is a manifestation of party autonomy. The theory is that arbitration is a consensual process, being the subject matter of agreement. The theory is that two parties have got together and mutually decided to resolve the dispute outside the Court system. In such a case it is thought that the Courts should not interfere in such consensual arrangements. The theory is that once two parties have chosen to appoint a third person by consent, an award by such a person should be final and binding and should not be challenged except in very rare circumstances. This is the basis for a limited challenge, whether it be under the 1940 Act or under the 1996 Act.

Unfortunately, the reality does not always match the theory. The reality is that in the vast majority of purely domestic arbitrations, where there is no foreign element, the government or its agencies are parties. The reality is that due to various circumstances, such as economic duress, one-sided arbitration clauses are imposed upon the party with lesser bargaining power. The reality is that in many cases of named arbitrators, they are government employees who are likely to be biased for one reason or another. The reality is that most arbitrations are not institutional but ad-hoc, and there are no trained arbitrators who can facilitate fast and summary disposal while maintaining the confidence of both parties. The reality is that many arbitrations end up being conducted as if they are mini trials, with pleadings, issues, admission and denial, oral and documentary evidence, cross-examination etc.

Thus, where there is a disconnect between the theory and the reality of arbitration, not unnaturally the Courts would wish to intervene when they are faced with injustice. It is on this basis that the decision in Saw Pipes (and those following) must be understood.

Separate standards for domestic and international commercial arbitration?

On a broader level, the Symposium presented some key issues, which are only likely to be debated even more, particularly as there are indications that the apex Court could be willing to reconsider the position of law emerging from Bhatia and Satyam. In particular, an issue which must deserve consideration is this – should the Indian judiciary necessarily adopt – in all cases – an attitude which seeks to be in consonance with the Model Law? As Mr. Banerjee noted, the Model Law was meant to operate only in respect of international commercial arbitration. Unfortunately, the Indian Parliament seems to have copy-pasted the model law into the 1996 Act, without keeping in mind the practical distinction between domestic arbitration and international commercial arbitration. Is it time for the judiciary to step in and draw a line, applying different principles for the two? Should India prefer a model such as the Singapore model, where two different standards of judicial interference exist for domestic and international commercial arbitrations?

It appears in sum that given the ground realities noted by several of the leading practitioners who attended the Symposium, it might well be essential to create a dichotomy in the treatment of domestic and international commercial arbitrations. This dichotomy appears to be essential in the interests of substantive justice, at least until domestic arbitrations can be made procedurally as sound as international commercial arbitrations. The recent decision of the London Court of International Arbitration to open a centre in India must therefore be welcomed, as it might well be the first step toward ensuring an institutional approach even in domestic arbitrations. But unless that institutional approach gets cemented, it might be a better option to allow for greater judicial interference, at least in domestic arbitrations.

Unconnected Bits and Pieces

A consolidated digest of income tax cases for January 2009 to April 2009 is available on the ITAT Bar website, and can be downloaded here. A post analyzing the AAR ruling in Worley Parsons, which points to some problems in the Supreme Court decision in Ishikawajima, is available on the Indian Corporate Law Blog here. Also, an analysis of the decision in VIP Industries, where Dharmendra Textiles (which dealt with penalty proceedings, and which settled the law in favour of the Revenue) appears to have been read down, is available here. On the IP front, a very interesting discussion on the issue of software piracy raids is found here.

Regular posts on this blog will resume from next week.

Should Ishikawajima be reconsidered?

A recent decision of the Authority for Advanced Rulings in Re Worley Parsons Services (AAR 747 of 2007) appears to have doubted some of the observations in the leading decision of Ishikawajima-Harima. The decision was discussed briefly in this post. A reader of this blog in a comment had stated:

One more point in this connection is that, with respect, Ishikawajima itself is decided wrongly. In Ishikawajima, the payer of fees was an Indian co, therefore a resident. Now, sub-clause (c) applies if the payer is non-resident. So there was no need for the SC to elaborate on sub-clause (c), the relevant clause was sub-clause (b). The application of the sub-clauses of Section 9(1)(vi) depends not on the residential status of PAYEE/RECEIVER of fees, but of PAYER. .But anyway, Ishikawajima is the law of the land, as Clifford Chance seems to have reaffirmed. Again, these type of cases should be resolved on the simple wording of the DTAA in question I believe...

The Authority’s decision in Re WorleyParsons Services proceeds partly on the same rationale. The summary of the decision has been posted on ITAT Online, and some of the extracts from the summary are as follows:

It is not clear why in Ishikawajima reference has been made to s. 9(1) (vii) (c) instead of s. 9 (1) (vii) (b) even though the two deal with different situations and why it was stated that s. 9 (1)(vii) (c) requires that the services have to be rendered as well as utilized in India in order to be taxable in India even though the word “rendered” is not to be found even in the inapplicable clause (c). Though it is difficult to find an answer, the dicta has to be respected without invoking the doctrine of per incuriam as far as possible…

Further, though in Ishikawajima it was observed that “the legal fiction created by s.9 should be construed having regard to the object which it seeks to achieve”, it was not indicated as to what is the object of the said provision that deters the legal fiction being carried to the extent specifically provided by the language of the section. The object of s. 9(1) is to deem certain incomes as accruing or arising in India so as to widen the net of taxation and this object will not be defeated if the legal fiction enacted by s. 9 is taken to its logical extent… Though in Ishikawajima it was held that the location of the source of income within India would not render sufficient nexus to tax the income from that source, this cannot be construed to mean that the age-old test of source of income should be eschewed altogether while considering territorial nexus… Though the AAR has to give full effect to the law laid down in Ishikawajima vis-à-vis s. 9 (1) (vii) and territorial nexus, on facts, there was territorial nexus and a “live link” because a part of the services were rendered in India.

A detailed post on the AAR decision will follow shortly. Should Ishikawajima be reconsidered by the Supreme Court? What do the readers have to say on this aspect?

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