Impartiality of arbitrators, confidentiality in arbitration proceedings and finality in arbitral awards are the three pillars of a well-structured arbitration proceedings. Though parties may submit that the award passed by the arbitrators shall be final and binding on them, in most cases the awards are subjected to judicial scrutiny in form of an appeal or to be set aside. Since arbitration proceedings involve significant time and costs attached to it, the arbitration jurisprudence have come up with an alternative to prevent unwarranted and unscrupulous appeals to the arbitration awards called ‘Appellate Arbitration’ or ‘Two tire Arbitration’. Appellate arbitration or two tire arbitration means a method of appeal wherein the aggrieved party to an arbitral award, instead of approaching the civil courts, is provided a recourse to initiate another arbitration to appeal against the decision of the arbitral award before another arbitral tribunal. Since recourse to civil courts entails significant time and cost in achieving finality of the dispute, the parties prefer appellate arbitrations to limit the interference of the courts and in cases where court’s interventions are necessary, to limit the grounds for reviewing the arbitral award thereby saving time and cost in the long run.

Historical background:

Recently the Supreme Court in Centrotrade Minerals & Metals v. Hindustan Copper Ltd (“Centrotrade”), discussed whether appellate arbitrations are permissible under The Arbitration and Conciliation Act, 1996 (‘1996 Act’) and whether it was contrary to the public policy of India. Before we analyse the decision made by the Supreme Court in supra, it is important to  analyse the historical background of appellate arbitrations in India.

Though the idea of appellate arbitration appears to be a new concept, the same can be traced way back to the Arbitration Act, 1899. In Heeralal Agarwalla and Co v. Joakin Nahapiet and Co. Ltd.1 the Calcutta High Court dealt with the clauses of the contract where the parties have agreed that in case of any dispute, the same would be referred to two arbitrators, then to an umpire and then to a committee of appeal. In dealing with the issue of multi-tier arbitration, the court held that “…There is, as indeed is recognized by the respondents, nothing to prevent the parties from agreeing to a submission such as is contained in the contract before us. In other words there is nothing to prevent the parties from agreeing to a submission containing in it a further submission to arbitration…”

1 AIR 1927 Cal 647, 103 Ind Cas 648

In Fazalally Jivaji Raja v. Khimji Poonji & Co2., the Bombay High while dealing with a two tier arbitration clause observed that “the intention of the parties is to be the sole guide for determining the mode of working out the submission and reaching a final decision. The law of arbitration is based upon the principle of withdrawing the dispute from the ordinary Courts and enabling the parties to substitute a domestic tribunal. Once that tribunal reaches a final decision as contemplated or agreed upon by the parties, then the Indian Arbitration Act steps in to help the parties to enforce the said decision”

The above views of the Calcutta High Court and the Bombay High Court was accepted by the Madras High Court in M.A. & Sons v. Madras Oil & Seeds Exchange Ltd.3, whereby the High Court held that “I Need not deal with the issue of validity of two-tier arbitration in respect of disputes arising before the coming into force of the Act any further. In my view this position of law has remained the same as I do not find any prohibition or ban being introduced by the Act from entering into an agreement providing for a two-tier arbitration and that at the time of introduction of the Act, it was well known to the legislature that it was consistently held and approved by courts of India that two-tier arbitration was permissible in India…”

Centrotrade Minerals & Metals v. Hindustan Copper Ltd.:

The issue of validity of appellate arbitrations under 1996 Act was finally brought before the Apex Court in Centrotrade Minerals & Metals v Hindustan Copper Ltd4 before the Division Bench comprising of S.B. Sinha ,J. and Tarun Chatterjee, J. Before we analyse the ratio of Division Bench it is important to examine the impugned arbitration clause which came before the court’s consideration:

14. Arbitration – All disputes or differences whatsoever arising between the parties out of, or relating to, the construction, meaning and operation or effect of the contract or the breach thereof shall be settled by arbitration in India through the arbitration panel of the Indian Council of Arbitration in accordance with the Rules of Arbitration of the Indian Council of Arbitration.

If either party is in disagreement with the arbitration result in India, either party will have the right to appeal to a second arbitration in London, UK in accordance with the Rules of Conciliation and Arbitration of the International Chamber of Commerce in effect on the date hereof and the result of this second arbitration will be binding on both the parties. Judgment upon the award may be entered in any court in jurisdiction

2 AIR (1934) Bombay 476

AIR (1965) Madras 392

4 (2006) 11 SCC 245


The main issues of contention before the apex court were:

  • Whether appellate arbitrations are permissible under the Arbitration and Conciliation Act, 1996, and
  • Whether appellate arbitrations are contrary to the public policy of India.

In dealing with the issues, both S.B. Sinha, J and Tarun Chatterjee, J had divergent opinions on the validity of appellate arbitration under the 1996 Act and whether they are contrary to the public policy of India.

Decision of S.B. Sinha, J:

S.B. Sinha, J. observed that the appellate arbitrations are ultra vires to the scheme of the 1996 Act and contrary to the public policy of India. The lordship held though arbitrations provide a flexible framework for resolution of disputes, such contracts should always be within the framework of the legislation. In terms of the 1996 Act, the parties cannot contract out of the statute and take recourse to a forum which would negate the very intent and purpose of Section 345 and Section 366 of the 1996 Act. It was pointed out that though the 1996 Act conferred various powers on the arbitral tribunal, it does not allow the parties to choose a procedure of appeal after the award is made. Such contracts which confer appellate jurisdiction on a forum which is prohibited by law are not only impermissible under the 1996 Act but are against the public policy as they are void under Section 237 of the Indian Contract Act.

…the 1996 Act does not provide such “contracting out” provision so that parties can fix / determine, by their terms of agreement, the procedure of appeal after the award is made. Such a contractual arrangement, having regard to the provisions contained in Section 23 of the Indian Contract Act shall be void being opposed to public policy”.

The court held that in the context of the 1996 Act, two tire arbitrations which operate to waive the statutory jurisdiction of the courts are invalid in law under Section 23 of the Indian Contract Act. Such clauses are non est in law and their validity and legality should always be judged on the touchstone of Section 23 of the Indian Contract Act. The court held that “It is, thus, amply clear that the very scheme of the 1996 Act does not contemplate a two tier arbitration agreement of this nature.”

Further, the court on a jurisdictional issue observed that since the first part of the arbitration clause deals with domestic award and the second part of the arbitration clause deals with a

  • Refer Section 34 of the Arbitration and Conciliation Act, 1996 – Application for setting aside arbitral award.
  • Refer Section 36 of the Arbitration and Conciliation Act, 1996 – Power of Court.

foreign award, it is inconceivable that one part of the arbitration agreement shall be enforceable as a domestic award but the other part would be enforceable as a foreign award. The court held that “…The fundamental legislative policy brought out by the 1996 Act, thus, being not in consonance with having two tier arbitration which had two different statutes governed by two different provisions and would be subject to different procedures, in our opinion, is not valid.

S.B. Sinha, J also while observing the decisions rendered by the High Courts of Calcutta, Bombay and Madras held that the decisions might have been held good in terms of the  provisions contained in 1940 Act or the 1961 Act, but the ratio cannot be extended for cases falling under both Part I and Part II of 1996 Act.

Decision of Tarun Chatterjee, J:

In contrast to the decision made by S.B. Sinha, J, Tarun Chatterjee, J referred to the same decisions rendered by the High Courts of Calcutta, Bombay and Madras and held that the position of law with respect to appellate arbitration have remained the same in both 1940 Act and 1996 Act and that there is no bar introduced by the 1996 Act which prohibited two tier  arbitration agreements. Though Tarun Chatterjee, J agreed to the view of S.B. Sinha, J that any contractual arrangement that negates the statutory provisions are contrary to public policy, he did not agree with S.B. Sinha, J’s view that two tier arbitration negated the purpose and intent of Section 34 and Section 36 of the 1996 Act. Tarun Chatterjee, J opined that “I disagree with this finding of my learned brother. After a careful consideration of the 1996 Act, I find nothing in it prohibiting the parties from entering into an agreement providing for a two tier arbitration.”

With respect to the view of S.B. Sinha, J that the validity of an award can be questioned only before a court under Section 34 of the 1996 Act and not before any other forum, Tarun Chatterjee, J opined that the award which has to be considered by the courts either for set aside or enforcement is the final award that has been passed following the procedure agreed by the parties. It was held that Section 358 of the 1996 Act is not a bar to appellate arbitrations and held that “this section only comes into operation once the arbitration proceedings as a whole which must include appellate arbitrations, if any, have ended. In my view allowing the appellate arbitrations is fully in consonance with the objects of the 1966 Act”

Tarun Chatterjee, J also considered the question of whether an arbitration clause that leads to both domestic and foreign awards on the same dispute is valid under the 1996 Act. S.B. Sinha, J. in his decision observed that even if a two tier arbitrations are valid under the 1996 Act, it cannot be such that one award is governed by Part I of the Act and the award in the second tier is governed by Part II of the 1996 Act, as the procedure applicable to the arbitration proceedings as well as for enforcement of the awards is different under different Parts of the 1996 Act.

8 Refer Section 35 of the Arbitration and Conciliation Act, 1996 – Finality of arbitral awards.

Dissenting the view of S.B. Sinha, J, Tarun Chatterjee, J held “that nothing in the 1996 Act prohibits the parties from providing a two tier arbitration wherein one tier is dealt with under Part I and the other under Part II of the 1996 Act. Such an agreement does not violate the provisions of Sections 34 and 36 of the 1996 Act and it cannot be said to be invalid as being opposed to public policy of India. Therefore, in my view, the second part of clause 14 of the agreement and the ICC arbitration in its furtherance, are not invalid as being opposed to public policy of India

Contrary to the views of S.B. Sinha. J that one part of the arbitration agreement would be enforceable as a domestic award but  the  other  part  would  be  enforceable  as  a  foreign  award, Tarun Chatterjee, J held that in cases of two tier arbitrations, doctrine of merger equally applies that upon issuance of the appellate award, the original award merges with the appellate award and only the appellate award is valid and capable of enforcement. The court held that “Therefore, I am unable to agree that such two tier arbitration proceedings culminate into an admixture of two different types of awards, as there is eventually only one award that subsists. For the reasons aforesaid, I, therefore, conclude that the second Part of Clause 14 of the agreement is valid and permissible in India under the Act.

Three Judge Bench – The Verdict:

The contrasting opinions of the division bench comprising of S.B. Sinha, J and Tarun Chatterjee, J resulted in the constitution of a three judge bench comprising of Madan B. Lokur, J. R.K. Agrawal, J. and D.Y. Chandrachud, J. for settling the issue of validity of the two tier arbitration agreements under the 1996 Act9

The Court observed that though recourse to the courts is available for challenging an arbitral award, the same does not ipso facto prohibits the parties from mutually agreeing to a second look at an award with the intention of an early settlement of disputes and differences. The intention of the 1996 was never to preclude the parties from adopting any acceptable redressal mechanisms such as appellate arbitrations.

The Court referred to the decisions rendered in Shri Lal Mahal Ltd. v. Progetto Grano Spa10 and Subhash Aggarwal Agencies v. Bhilwara Synthetics Ltd11, whereby appeals to arbitration awards were considered as valid. The Court further held that “There are several decisions of several High Courts to the same effect and we see no error in the implicit acceptance of the general principle of two-tier arbitrations”. The court also approached the validity of two tire arbitrations in light of party autonomy. The court observed that party autonomy is the backbone of arbitration

9 (2017) 2 SCC 228 – Appeal from the Division Bench with respect to the issue of validity of appellate arbitration under the 1996 Act. (Decided on 15.12.2016)

10 (2014)2SCC433

11 (1995)1SCC371 decided under the Indian Arbitration Act, 1940.

and the current legal position in India is that the parties to an arbitration agreement have the autonomy to decide on the procedural law, substantive law and also the jurisdiction. The court held that “the parties have agreed on a two tier arbitration system through Clause 14 of the agreement and Clause 16 of the agreement provides for the construction of the contract as a contract made in accordance with the laws of India. We see nothing wrong in either of the two clauses mutually agreed upon by the parties.”

Further, the courts refused to accept that the award passed in the first-tire arbitration would be final as per Section 35 of the 1996 Act. The court clarified that the ‘final and binding” clause in Section 35 of the A&C Act does not mean final for all intents and purposes. The finality is subject to any recourse that an aggrieved party might have under a statute or an agreement providing for arbitration in the second instance…. Unless this interpretation is accepted, a second instance arbitration would be per se invalid in India. This would be going against the grain of a long line of decisions rendered by various courts in the country which have accepted the validity of a two-tier arbitration procedure…”

The next issue dealt in by the Court is whether embracing the two tier arbitration system for the reason of party autonomy would be contrary to public policy. It referred to Associate Builders v. Delhi Development Authority12 wherein the parties preferring and adopting two tier arbitration mechanism was not found to be fundamentally objectionable. The Court reaffirmed that the parties to the contract have not by-passed any mandatory provision of the 1996 Act and there is nothing in the 1996 Act that prohibits the contracting parties from agreeing upon a second instance or appellate arbitration-either explicitly or implicitly. The Court held that “No such prohibition or mandate can be read into the A&C Act except by an unreasonable and awkward misconstruction and by straining its language to a vanishing point. We are not concerned with the reason why the parties (including HCL) agreed to a second instance arbitration-the fact is that they did and are bound by the agreement entered into by them. HCL cannot wriggle out of a solemn commitment made by it voluntarily, deliberately and with eyes wide open”. The Court concluded that “the arbitration Clause in the agreement between the parties does not violate the fundamental or public policy of India by the parties agreeing to a second instance arbitration.

Issue of Enforcement:

Since the above three bench division was silent on the issue of enforcement of the London  award, the matter was once again listed before another three bench division of Supreme Court comprising of Rohinton Fali Nariman, J. Navin Sinha, J. B.R. Gavai, J. in Centrotrade Minerals & Metals v Hindustan Copper Ltd13 for considering the second issue of enforcement of the London award. The court after considering the facts, merits and the earlier decisions rendered in

12 (2015) 3 SCC 49

13 MANU/SC/0464/2020 – Appeal from the Division Bench with respect to the issue of enforcement of appellate award under the 1996 Act (Decided on 02.06.2020)

this case held that the appellate award passed by Jeremy Cook QC in London, UK in accordance with the Rules of Conciliation and Arbitration of the International Chamber of Commerce is the award which can be enforced as a foreign award.

Outcome of Centrotrade – Potential Questions of Law:

The decision passed by the Supreme Court not only expanded the scope of arbitration but also seeded several questions for further consideration. One peculiar issue that can be raised is whether the ratio laid down by the Supreme Court with respect to ‘party autonomy’ can be expanded to include remand of arbitral awards before the same arbitrator. That is,  whether parties to an arbitration agreement choose to appoint the same arbitrator for a relook on the arbitral award. One aspect to this issue is that once an arbitrator has rendered his decision, the mandate of the arbitrator is terminated under Section 32(3)14 read with Section 32(1). In such cases, remanding the matter to the same arbitrator can be made only by a fresh appointment and not under the previous mandate.

In case of a remand, another issue that arises is whether the rules and restrictions applicable for Section 34(4) (remand by courts) will also be applicable for remands preferred by the parties by mutual agreement. The Supreme Court in Radha Chemicals v Union of India15, held that “the court while deciding a Section 34 petition has no jurisdiction to remand the matter to the Arbitrator for a fresh decision.” Further, the Supreme Court in M/s. Dyna Technologies Pvt. Ltd.

v. M/s. Crompton Greaves Ltd.16 held that “The power vested under Section 34 (4) of the Arbitration Act to cure defects can be utilized in cases where the arbitral award does not provide any reasoning or if the award has some gap in the reasoning. Provision under Section 34(4) cannot be brushed aside.” Perusal of the two aforesaid judgments shows that in case an arbitral award is defective and liable to be set aside, the courts cannot remand such arbitral awards back to the same arbitrator for a fresh decision. The remand provision under Section 34(4) can be utilized only to fill the gaps in the reasoning made by the arbitrator. If the above principle is strictly followed, a party preferring a remand before the same arbitrator would not have an opportunity to expect a re-look on the issues from a fresh perspective than what is already decided. In such cases, an appellate arbitration before a different set of arbitrators can provide more benefit than a remand process.

Another issue that needs clarification is procedure in which the appellate arbitrator would be appointed when there is no express procedure provided for the same in the arbitration agreement. In Centrotrade, though the procedure for appointment of an arbitrator was not provided, the parties were saved by incorporating the ICA and ICC Rules for appointment of arbitrators. In

  1. Refer Section 35 of the Arbitration and Conciliation Act, 1996 – Termination of proceedings.
  2. (Civil Appeal No. 10386 of 201 8)

16 2020(1)ArbLR1(SC)

case appellate arbitration agreements do not provide for a procedure either expressly or through reference to institutional rules, the matter will have to be settled only through mutual agreement between the parties or by approaching the courts for appointment.

The Future:

The idea of appellate arbitration, like every other mode of dispute resolution, has both pros and cons. Though an in-built appeal mechanism is beneficial in terms of saving time at courts, the main concern behind the system is whether the same mechanism can be used as a delaying tactic to prolong the finality in awards. It should be noted that even if parties prefer appellate arbitration, the appellate award is still subject to judicial scrutiny under Section 34 and Section 4817 of the Act which would be another process over and above the two tiered mechanism. Further, lack of legislative clarity on appellate arbitrations is another drawback for parties intending to incorporate the same in their agreements.

Though Centrotrade established the ground rules for appellate arbitration, relevant changes have to be made in the legislation to give full effect to the appellate mechanism. For instance, the legislation can include amendments with respect to the timeline for appealing before another tribunal, procedure for appointment of appellate arbitrators, extent of arbitral review in the appellate stage, grounds for automatic stay on set-aside or enforcement of earlier awards, period of limitation, grounds for setting aside appellate awards etc. Further, coping up with the judicial precedents, arbitration institutions can step up and make necessary amendments to the institutional rules to accommodate appellate arbitrations. Such provisions will not only provide a reliable appellate procedure but will also remove the grounds for challenging the arbitral awards. The institutional rules will also act as a driving force in making parties to subject themselves to institutional arbitrations.

Given the current legal position with respect to appellate arbitrations, the parties should now carefully consider the cost, time and jurisdiction factors involved in the appellate process and must cautiously weigh the benefits and drawbacks of the appellate mechanism before incorporating the same into their dispute resolution clause.

17 Refer Section 48 of the Arbitration and Conciliation Act, 1996 – Conditions for enforcement of foreign awards.

No Comments

Leave a Comment