Applications of Arbitration to Infrastructure Sector

Arbitration is in simple terms a method of alternate dispute resolution by an impartial third person(s) who adjudicates upon the dispute between parties. It is basically to resolve disputes outside the courts, which are usually long drawn battles, with sanction of law which is binding upon the parties. It is done by consent of the Parties.

What kind of disputes can be submitted to arbitration?

All disputes of Civil Nature can be submitted to Arbitration. A Criminal case cannot be submitted to Arbitration. This is so in view of the phrase “disputes which have arisen or which may arise between them in respect of a defined legal relationship, whether contractual or not” as embodied in Section 7 of the Arbitration and Conciliation Act, 1996 (‘the Act’). In criminal cases there is no legal relationship between parties and also a criminal act is considered as crime against the society. Infrastructure disputes are civil disputes and hence are can be adjudicated by Arbitration.

Since Arbitration involves neutral third person who adjudicates or decides upon the dispute between person(s) outside the Court, and the adjudication or decision given by arbitrator referred to as “Award” would be enforced as Decree of Civil Court, an important and complex question arises as the place, venue, procedural law and substantive law applicable to the dispute. The place of Arbitration would also have bearing on the nature of the Award i.e. Domestic Awards or Foreign Awards and therefore its enforceability.

Statutory Vs Optional Arbitration:

Section 2(4) of the Act provide recognition to statutory arbitration. Statutory arbitration means arbitration pursuant to statute, rule, regulation as opposed to arbitration pursuant to agreement between parties which is commonly referred to as Optional arbitration. Statutory arbitration has the effect of compulsorily refer the parties to arbitration irrespective of their decision and intention.

Application of arbitration to infrastructure project:

Infrastructure disputes whether it be pertaining to disputes relating to Infra Projects for construction (including of Government its agencies) of Highways, providing affordable housing, housing construction etc. are civil disputes and can be adjudicated by Arbitration. It is now a standard practice for all builders, businessman and contractor especially government while allotting infrastructure projects or entering into public private partnership to incorporate arbitration clause in the contract. Long drawn battles of courts have encouraged parties especially the large players to incorporate arbitration clause in their agreement.

In fact, the government has gone to the extent of incorporating arbitration provisions in the statutes, rules, regulations etc. by which parties are mandatorily required to settle their disputes through arbitration and conciliation. There are also procedural provisions of various courts which encourage parties to settle their disputes through Alternate Disputes Resolution like Code of Civil Procedure, 1908.

Statutory arbitration in infra projects:

As stated there are many central and state act especially in the Infrastructure and allied field which contain provisions for Statutory Arbitration. Some of which also contain provisions as to person by designation and composition of Arbitral Tribunal. Some of the key acts are:-
1. Land Acquisition Act, 1894;

2. Indian Electricity Act;

3. Multi State Co-operative Societies Act, 2002;

4. Maharashtra Regional and Town Planning Act, 1966.

There are about 24 Central Acts apart from State Acts which provide for Statutory Arbitration.

Benefits of reference of dispute to arbitration in infra projects:

• Time saving due to multiple round of litigation especially in development and redevelopment projects;
• Non Payment of Court Fees which benefits both the parties especially purchaser;
• Effective Interim reliefs since Arbitrator under 17 is provided with same powers as Court under Section 9 after Amendment Act. Also in appropriate cases despite pending litigation, construction work may be allowed to be continued by Arbitration who gives detailed hearing to parties and can take holistic view.
• Less formal since cumbersome procedures of Civil Procedure Code, Indian Evidence Act are not applicable. Rules of fair play, equity and principles of natural justice are applicable.
• There are less efforts involved since there is optimum utilisation of time;
• Cost effective as good counsels charge on appearances which in courts due to various reasons may not be effective appearances as still clients would have to shell out moneys from their projects.

Section 8 and ouster of jurisdiction of judicial authorities:

Section 8 mandates judicial authorities to refer parties to Arbitration when fact regarding agreement relating to the same in brought to the notice of Judicial Authorities. It embodies the words “shall” and not “may”, hence are mandatory in nature and not directory. Its parliaments legislative command to the Judicial Authorities.

Exception:

National Consumer Disputes Redressal Forum in its recent landmark judgment in the case of Aftab Singh and Others vs Emaar MGF Land Limited and Anr by three member bench held that Consumer Protection Act, 1986 is benevolent social legislation for protecting the interest of consumers and it was to supplant and not replace the existing system for adjudication of disputes, hence builders cannot keep “Consumers” at lurch by incorporating arbitration clauses in the agreement.

Civil (infrastructure) disputes not arbitrable:

There are certain disputes which even though being Civil Disputes are not arbitrable. They cannot be arbitrable even by the consent of parties. It is settled law that parties cannot confer jurisdiction neither by consent nor waiver. For eg. Supreme Court looking at scheme of tenancy laws in various states has expressly stated that tenancy disputes are not arbitrable. Hence any disputes wherein existence, modification, extinguishment of rights of tenancy are disputed, such disputes cannot be submitted to arbitration even by consent of parties. Also the Act makes it abundantly clear that where in any act or statute or rules and regulations made thereunder it is expressly clear that certain disputes cannot be submitted to arbitration then such embargo shall apply.

Domestic Vs Foreign awards:

An Award given under Part I of the Act is considered a Domestic Award. Part I contains provisions prescribed by Indian Legislature for regulating the procedure for Arbitration in India. Interestingly, Section 28 of the Act states that where the “Place” of Arbitration is situated in India, in Arbitration other than an international commercial Arbitration, the arbitral tribunal shall decide the dispute submitted to Arbitration in accordance with the substantive law for the time being in force in India.
Foreign Awards are those Awards which are not Domestic Awards and which fulfil the definition criteria specified in Section 44 (New York Convention Awards) and Section 53 (Geneva Convention Awards) of the Act.

Place, venue & law applicable: ruckus following it:

In Bhatia International v. Bulk Trading S.A. it was held by Hon’ble Supreme Court that Part I of Arbitration Act applies to Arbitrations held outside India. It had draconian effects as foreign awards were challenged under Part I of the Act and so in many cases refused to be recognized thus enforced.

In order to nullify the draconian effects of Bhatia International’s case, a five judge constitutional bench of the Hon’ble Supreme Court in Bharat Aluminium Co. v Kaiser Aluminium Technical Service (popularly referred to as “BALCO” case) held that Part I of the Act does not apply where the place of Arbitration is outside India. But this judgment came with a set back that Provisions of Section 9 which provided for interim measures by the Court were not made available to International Commercial Arbitrations, so that they can be resorted to safeguard the value of property and for appropriate interim measures to render complete and effective justice through the mode of arbitration in cases where interim measures were necessary.

This led to the Indian Legislature to insert via amendment to sub-section (2) of Section 2 of the Act, by adding proviso that Sections 9, 27, 37(1)(a) and 37(3) shall apply to international commercial Arbitration held at a “place” (Seat) outside India, if award made or to be made is enforceable and recognized under Part II which deals with Foreign Awards. This led to adding of much needed effectiveness and stability to Arbitration.

There has been pertinent confusion till date from coming into force of the Act regarding place of Arbitration vis a vis venue of Arbitration vis a vis substantive law applicable to the dispute. Place of Arbitration being procedural law governing the dispute as contemplated by Supreme Court in its Judgment of Enercon (India) Ltd and Ors v Enercon Gmbh and Anr while venue being physical place where the tribunal sits for adjudication of dispute. Substantive law means substantive law of country for the time being in force on the basis of which dispute is to be resolved.

My analysis of place, venue and law applicable:

In my respectful opinion there was never any ambiguity in the Act regarding this and all this questions and confusion with respect to it is uncalled for.

Firstly the language employed by Section 28 clearly states that where place i.e procedural law is Indian law (“Seat”), the substantive law shall also be Indian law. Also when procedural law is Indian law parties are free to determine rules consistent with it. Therefore procedural and substantive laws go hand in hand. The parties cannot derogate from it in view of Section 2(6). Only exception is when there is International Commercial Arbitration where jurisdiction of two or more courts of different countries over the subject matter of dispute, parties may chose procedural law of one country and substantive law of another country. However as per the Act if procedural laws of India are chosen, it will be considered as Domestic Award even if substantive law of India is not applied. However that shall be proceeded on careful analysis of both countries laws regulating Arbitration.

The Venue of Arbitration is immaterial. Whether tribunal sits in New York or Singapore where designation of procedural law is Indian Law, the award shall be domestic award as Indian Arbitration and Conciliation Act, 1996 is followed. Arbitration in its inherent fundamental nature involves “sitting” or “holding” of arbitral tribunal or of Arbitration, as the case may be, as per the convenience of parties.

The word “Place” as used in Section 20 of the Act refers to “Venue” as opposed to Section 28 where is means “Procedural Law applicable” (“Seat”). The confusion existing until now is due to the word “Place” used in common parlance in Section 20 synonymous with the word “Venue”.

It is settled principle of law that one cannot oust the Jurisdiction of the Court. Therefore, if subject matter of dispute is “Property” situated at particular place i.e Mumbai, then Courts in Mumbai will have jurisdiction over it. However in any case, such as cross border transaction, where courts of two or more countries have jurisdiction, parties are at liberty to choose substantive law of any one country and procedural law of other country which has jurisdiction over it. The Indian Arbitration Act proceeds on that premise. However in such cases, parties have to analyse and weigh pros and cons of the same. And thus country whose procedural law is applicable, the award will be considered at domestic award of that country enabling parties to obtain appropriate reliefs and enforcement by courts of such country. However if Arbitration Agreement is silent on the same then procedural law and substantive law go in nexus with each other. In case of Arbitration, where jurisdiction of Courts of one country only applies, it would be illogical that substantive law of one country is applied and because of procedural laws of another is followed it would be considered domestic award of country whose procedural law is followed.

Indian Arbitration and Conciliation Act, 1996 is in my opinion been always clear on the premise that procedural law and substantive law go in sync and collusion with each other. Parties are entitled to obtain interim reliefs from courts of all jurisdictions in different countries so that the object of Arbitration is not defeated. This is amply clear by Amendment in 2015 prescribing the same. Venue i.e physical place of conduct of Arbitration is immaterial.