Author: Risha Sharma, Research Associate
I fervently trust that before long the principle of arbitration may win such confidence as to justify its extension to a wider field of international differences.
– Henry Campbell-Bannerman
The word ‘Arbitration’ has not been clearly defined in the Act of 1996. Section 2 (1) (a) of the Act very vaguely defines arbitration as “any arbitration whether or not administered by permanent arbitral institution”. In the case of Collins v. Collins ((28 LJ Ch 184: 53 ER 916)), arbitration was defined as a reference to the decisions of one or more persons, either with or without an umpire, a particular matter in difference between parties. Black’s Law Dictionary defines arbitration as a ‘process of dispute resolution in which a neutral third party renders a decision after hearing at which both parties have an opportunity to be heard’. It is often said that honest men dread arbitration more than they dread law suits, yet arbitration has a number of advantages over law suits, the principle advantages being that a dispute concerning technical matters such as engineering and building contract, or specific scientific issues, the person’s expert in those fields can resolve the dispute more efficiently and effectively. The process of arbitration is speedier and less costly than law suits and a strict adherence to the procedural aspect of law can be avoided. An unwanted publicity with regard to disputes settlement can be discarded and the completion of the proceedings can be pre-determined. An arbitrator can view the subject of dispute at any time. Further, the convenience of parties as to the venue and time for arbitration is of utmost importance. The essentials of an arbitration agreement are: there must be a present or future difference in connection with some contemplated affairs. Also, there must be an intention of the parties to settle such differences by private tribunals for which the parties must agree in writing to be bound by the decision of the tribunal. The parties must be adi idem. The arbitration agreement may be in the form of an arbitration clause in a contract or in the form of a separate agreement and furthermore arbitration is considered to be in writing if it is contained in a document signed by the parties. The agreement must contemplate that the decision of the tribunal will be binding on the parties and the jurisdiction of the tribunal for this must be derived from the consent of the parties. The agreement must also contemplate their substantive rights and lastly the agreement must be intended to be enforceable. The ‘party’ referred to in Section 8 (1) is a party who is entitled to maintain the application there under. The Party to the arbitration agreement who has himself instituted a suit is clearly not the ‘party’ envisaged, as held in Magma Leasing Limited v. NEPC Micon Ltd. ((AIR 1998 Cal 94: (1997) 30 Arb LR 290)). The term ‘party’ refers to a party in an arbitration agreement. The Apex Court in Andhra Pradesh Tourism Development Corporation v. Pampa Hotels Ltd ((AIR 2010 SC 1806 : (2010) 5 SCC 425)). held that an agreement enforceable by law is a contract and this agreement has to exist between two or more persons. There are generally two kinds of arbitration, Domestic arbitration, wherein arbitration takes place in India and is governed by the laws in India and International Commercial arbitration, wherein at least one of the parties to the dispute is domiciled outside India or the subject matter of the dispute lies outside India.
An agreement by the parties to submit to arbitration any dispute or differences between them is the foundation stone of modem international commercial arbitration. If there is to be a valid arbitration, there must first be a valid agreement to arbitrate. This is recognized both by national laws and by international treaties ((Alan Redfern & Martin Hunter, Law and Practice of International Commercial Arbitration 1-06 (3rd Ed. 1999).)). It is irrefutable that the arbitration agreement is the “cornerstone of the arbitration process” and thus the existence of both parties’ consent to submit the dispute to arbitration is clearly a necessity. If it is necessary in some cases to extend an arbitration agreement to a non-signatory, then one view of private international law and international arbitration holds that choice of law rules should answer any questions regarding when this is appropriate ((James M. Hosking, The Third Party Non-Signatory’s Ability to Compel International Commercial Arbitration: Doing Justice without Destroying Consent Pepperdine Dispute Resolution Law Journal Article 6, Vol. 4 Issue 3 at www.digitalcommons.pepperdine.edu p. 475)). Arbitration is the creature of a contract between the parties. However, it is not at all clear that general principles of contract law alone will suffice. The solution to the third party problem must be based on, or at least take into account, the contractual nature of the agreement that binds the signatories ((Ibid)). The crucial difference between arbitration and courts lies in the fact that the basis of the jurisdiction of an arbitral tribunal is the will of the parties, while courts owe their competence to procedural norms of state or of an international convention. A third party has the power to bring an action against an entity to which it has no contractual relationship; may intervene in proceedings merely on the basis that it is an interested party; or may itself be compelled to join a proceeding by way of a third party joinder application. None of these situations involve “consenting” to the jurisdiction of the court. The threshold question in arbitration is whether the parties consented to resolving their substantive dispute by arbitration ((Ibid)). The issue of a third party non-signatory has been referred to as a source of much controversy by commentators. The practical significance of the third party problem manifests itself in different ways and at different times. Most frequently, it arises in the context of a dispute in which it must be decided whether the third party is bound to arbitrate; is entitled to arbitrate at that party’s discretion; or is excluded from the arbitration agreement and should proceed with litigation. However, it also can be an issue in a range of commercial transactions in which, for example, parties require certainty that when they transfer contractual rights they are also transferring the arbitration agreement ((Ibid p. 478)).
Recently, the English Court of Appeal held in Fortress Value Recovery Fund I LLC v Blue Skye Special Opportunities Fund LP and others (([2013] EWCA Civ 367)), that whether the right of a third party to benefit from an exclusion clause in a contract is subject to an obligation to submit to arbitration pursuant to an arbitration agreement in the contract is a matter of construction. There was no express provision which made the clauses on which the third party sought to rely subject to the arbitration clause, so it was necessary for the Court to look at the parties’ intentions. This case provides an important analysis of one of the circumstances in which a third party may or may not become bound by an arbitration agreement and further highlights the need to undertake caution while drafting agreements which may confer a right over the third parties so as to make the parties’ intention clear with regard to the third parties’ involvement.
In India, in the case of Deutsche Post Bank Home Finance Ltd v Taduri Sridhar, Raveendran J of the Supreme Court took a strictly contractual view of arbitration agreements, and held that only parties to an agreement could be made party to arbitral proceedings under it. As a result, in an arbitration between the prospective purchaser of property and the developer, the bank providing a loan for the purchase (with whom the purchaser had an independent arbitration agreement) was not impleaded. However, in a recent decision, Raveendran J undertook a more permissive view. In P.R. Shah Shares & Stock Brokers v BHH Securities, the issue before the Court was whether the disputes concerning members of the stock exchange and a non-member could be heard in a single set of proceedings, or required different proceedings. Raveendran J pointed out that the arbitral proceedings here were based not on a contractual agreement, but the Bye-laws of the Stock Exchange, by which the members were bound on becoming members. He distinguished this case from Sukunya Holdings on grounds that there was an arbitration agreement between the first respondent and the appellant. With the addition of PR Shah’s case and with Sukanya Holdings case and Taduri Sridhar, a three-fold of decisions is formed dealing with the treatment of third parties in proceedings under section 8, section 11 and section 34. Factually, the analysis of Sukanya Holdings cannot be extended, to a situation where there are two separate arbitration agreements and the question is whether the proceedings under these two agreements could be combined. The underlying contractual relationship between the contesting parties, as per the respectively governing commercial law giving rise thereto, in each of the cases was not quite the same but materially different.