This article has been written by Shubham Jadia, a student of Indore Institute of Law
ABSTRACT
It is an incontrovertible that the process of arbitration is governed by the law of seat of the arbitration. Therefore, in case of international commercial arbitration having the seat of arbitration in India, and in case of domestic arbitration (both parties are Indian), section 34 under Part I of the Arbitration and Conciliation Act of 1996 (hereinafter referred as 1996 Act) lays down the provisions under which applications could be filed to set aside arbitral awards. This article is an attempt to critically analyse section 34 of the Arbitration and Conciliation Act, 1996 in the light of recent amendment of 2015 to the Act and judicial pronouncements.
Keywords: Arbitration, Award, Judicial pronouncement, amendment
INTRODUCTION
Application for setting aside the arbitral award: section 34
It is an incontrovertible that the process of arbitration is governed by the law of seat of the arbitration. Therefore, in case of international commercial arbitration having the seat of arbitration in India, and in case of domestic arbitration (both parties are Indian), section 34 under Part I of the Arbitration and Conciliation Act of 1996 (hereinafter referred as 1996 Act) lays down the provisions under which applications could be filed to set aside arbitral awards. It is to be noted that the underlying philosophy of section 34 of the 1996 Act strives to bring a balance between the party autonomy and judicial interference into an arbitral process. Thus the section envisages a position whereby an arbitral award can be challenged for the purpose of setting aside the same at the first instance without much delay. Commenting on the nature of Sec. 34, Supreme Court (SC) in “Indu Engg & Textiles Ltd v. D.D.A.” has observed that, an arbitrator is a judge appointed by the parties and as such an award passed by him is not to be lightly interfered with. The conclusion of an arbitrator on facts, even if erroneous in the opinion of the court cannot be interfered with. Where the view of the arbitrator is a plausible view and cannot be ruled as one which it is impossible to accept, the court should not substitute its own view in place of that of the arbitrator. But this does not mean there is no check on the arbitrators conduct. In order, therefore, to assure proper conduct of proceedings, the law allows certain remedies against an award. These remedies can be obtained through a court of law having jurisdiction over the matter.
Party Autonomy and the “Wrong” Law
Applicable law in arbitration
Applicable law is one of the classic issues in international arbitration. 50 The parties could originate from different countries, might have concluded the contract in a third country, have the place of performance in a fourth country and chosen the place of arbitration in a neutral fifth country. The international character of arbitration and its regulatory system imply that at least five different systems of law could be relevant to different parts of the same arbitration. It is beyond the scope of the thesis to examine all applicable laws in arbitration, but, in this chapter, some remarks will be made on the substantive law that governs the merits of the case and what constitutes the “wrong” substantive law.
In arbitration, the arbitrators are initially tasked with establishing the relevant facts in the dispute. Once this is done, the arbitrators may be able to resolve the dispute by applying the facts to the terms of the contract. Contracts are often detailed, and disputes could thereby be resolved without having to consult the applicable substantive law. However, there are disputes in which the substantive law governing the merits of the case must be consulted. For instance, the substantive law may have to be consulted when the main contract needs interpretation, when there is a question of the main contract’s validity or when the consequences of a breach of contract must be examined. In these instances, the important substantive law is the one governing the disputed contract.
When the substantive law governing the merits of the case needs to be consulted, the choice of applicable law is often decisive for the outcome of the case. Therefore, it is important that the parties can influence the choice of substantive law.
The principle of party autonomy
To thoroughly examine the applicable substantive law requires extensive research. Therefore, the applicable substantive law will henceforth be discussed in connection to party autonomy and the restrictions thereof. The interest of party autonomy serves as a basis for the definition of when the substantive law is wrong. The principle of party autonomy is recognized under all modern arbitration laws regarding the substantive law governing the merits of the case. Party autonomy has many advantages. By letting the parties determine the substantive law, the process of arbitration becomes more certain, predictable and uniform. Thereby the parties can prepare their argumentations and predict the outcome of the dispute. The parties could also not challenge the award on the grounds that the arbitrators chose the wrong substantive law. Consequently, party autonomy guarantees finality of awards. Party autonomy has been described in an arbitral award:
“There are few principles more universally admitted in private international law than that referred to by the standard terms of the ‘proper law of the contract’ – according to which the law governing the contract, is that which has been chosen by the parties, whether expressly or […] tacitly.”
In contrast to many arbitration laws that explicitly recognize the principle of party autonomy, the SAA has remained silent on how the substantive law is chosen.
The parties have several choices in the selection of substantive law. Also, many arbitration laws stipulate that “rules of law” can be applied, which indicates that the substantive law does not have to be a national law. The choices at the parties’ disposal generally include national law, public international law (and general principles), concurrent laws (e.g. common principles) and transnational law (e.g. lex mercatomercatoria). The transnational law lex mercatoria consists of universally recognized principles common in commercial contracts (e.g. pacta sunt servanda and force majeure), but the exact content is usually difficult to determine. The application of lex mercatoria could thereby cause questions of what law the arbitrators actually applied. Moreover, the parties could also agree to let the arbitrators decide as amiables compositeurs or ex aequo et bono. Although a jurisprudential difference seems to exist between amiables compositeurs and ex aequo et bono, they are often used interchangeably and will, in the thesis, fall under the term “equity”. A decision on equity generally requires the parties’ explicit consent.
Restrictions on party autonomy
The principle of party autonomy regarding the choice of substantive law has its restrictions. These restrictions exist because obligatory rules should not be derogated from by way of contract. Therefore, the restrictions on party autonomy could influence whether the arbitrators’ application of law is “wrong”. In the context of restrictions of the parties’ choice of substantive law, mandatory rules and public policy rules are of interest. At this point, it is first necessary to differ between national public policy and international public policy. National public policy is composed of the fundamental legal, economic and moral standards in a jurisdiction. International public policy differs from national public policy since it has no connection to a particular national jurisdiction. The exact content of international public policy is difficult to determine, but according to doctrine there seems to be unanimity that bribery, corruption, human trafficking, slavery and discrimination are included in the notion of international public policy.
Mandatory rules and national public policy rules as restrictions on party autonomy are debatable. Two important considerations arise. The first is what jurisdictions’ rules would constitute restrictions and the second is determining if they constitute any restrictions on party autonomy.
The “wrong” substantive law
The term “wrong” is relative regarding the substantive law. A party pleased with the outcome of the case would rarely agree that the substantive law applied was wrong. Therefore, the wrong law must be defined in its context. The substantive law could be wrong in many contexts. As discussed above, the principle of party autonomy prevails, and the arbitrators must therefore apply the parties’ choice of law. The simplest way to define when the law is “wrong” is to state that the substantive law is wrong when the arbitrators deviate from the parties’ choice of substantive law, except if the reason for the arbitrators’ deviation stems from restrictions on party autonomy. Nonetheless, it must be acknowledged that the substantive law could be wrong in other situations, apart from when the arbitrators deviate from the parties’ choice of law. For instance, if the parties have chosen an insufficient law that needs to be complemented by another law, the complementing law could supposedly be wrong. Depending on the situation, the arbitrators have an obligation to resolve the dispute, and the choice of law would thus be reassigned to the arbitrators if parties have not chosen the applicable substantive law.
The Challenge of Awards
- The principle of finality
The principle of finality implies that no higher instance will review the award on the merits of the case. By choosing arbitration, the parties have waived their right to appeal, and consequently, arbitration is an efficient dispute resolution. The finality of awards is emphasized in law, legislative history and case law, and it is on the international level reflected in the Model Law as well as in the New York Convention. The European Court of Justice has also emphasized the importance of finality of awards in the famous case Eco Swiss v Benetton:
“it is in the interest of efficient arbitration proceedings that review of arbitration awards should be limited in scope and that annulment of or refusal to recognise an award should be possible only in exceptional circumstances.”
Although the principle of finality implies that awards cannot be challenged on substantive grounds, there are procedural grounds upon which awards could be challenged within the framework of the lex arbitri. 86 The rationale behind permitting challenge on procedural grounds is to ensure minimum standards of objectivity, fairness and justice in arbitration, and thusly to create a fair balance between finality and review of awards.
- The challenge grounds
The challenge ground excess of mandate, in p 2 of section 34 of the SAA, requires that the award should be set aside where the arbitrators have otherwise exceeded their mandate. This challenge ground exists to ensure the adversarial principle in addition to due process and to guarantee the consensual nature of arbitration. An excess of mandate is considered to occur if the arbitrators go beyond the party instructions about limiting the judicial review to certain aspects of the dispute. It is virtually impossible to determine the precise point at which the arbitrators exceed the scope of their mandate, but it can be concluded that the normal scope of application is the substantive object of the dispute. It is a matter of debate whether the provision excess of mandate actually addresses both quantitative and qualitative excess of mandate.96 A quantitative excess of mandate would occur if the arbitrators go beyond the parties’ claims, or if the arbitrators consider circumstances that should not be considered. For instance, quantitative excess of mandate is illustrated by the Svea Court of Appeal’s judgment in If Skadeförsäkring AB v Securitas AB, in which the Court held that the arbitrators had exceeded their mandate by ignoring the respondent’s claim about not paying attention to certain circumstances that were not yet established. The arbitrators had considered circumstances that should not have been considered. Also, if the arbitrators fail to consider some claims it could constitute quantitative excess of mandate.
CONCLUSION
Both party autonomy and the principle of finality of awards are emphasized in law, doctrine and case law. In challenge of awards, the principle of finality is always weighed against other interests such as party autonomy or the importance of due process. Regarding the arbitrators’ application of the wrong substantive law, the balance between party autonomy and finality of awards seems to be weighed differently in theory than in practice. Although the situation could be referred to both excess of mandate and procedural irregularity in theory, it is very difficult to be successful in a challenge proceeding. Consequently and simply put, theory emphasizes party autonomy whereas practice emphasizes finality of awards. The fact that theory emphasizes party autonomy and the possibility to have awards set aside if the arbitrators apply the wrong substantive is not surprising. The arbitrators’ application of the wrong substantive law is a procedural error. However, this demands the question, why does practice emphasize the finality of awards when the arbitrators’ application of the wrong substantive law is a procedural error?
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