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Legal Opinion – Shall we do this again?

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Can a party stop the other party from bringing two or more arbitrations on the same project? Shourav Lahiri finds out

With arbitrations in India fast becoming similar in size, cost and duration to court cases, the prospects of being involved in a second arbitration on the same project is not an attractive one.

But can a party stop the other party from bringing two or more arbitrations on the same project? Let us consider this issue which arose for determination by the Supreme Court in the recent case of Dolphin Drilling v ONGC.

It is not often that parties find themselves in more than one arbitration on a project being executed under one contract. Even if disputes have arisen during the course of a contract, most parties prefer to wait until the works are complete before seeking to commence dispute resolution processes. However, there could be occasions, particularly where the contract period is a long one, which certain disputes need to be referred to arbitration during the course of a project. For instance, disputes relating to design could necessitate early determination as the construction works may be impacted by the outcome of such a dispute. There may also be tactical reasons for a party to take a dispute to arbitration early. In such cases, if further disputes arise down the line, can a party refer that dispute to a second arbitration?

The answer depends on the terms of the arbitration clause. Usually, arbitration clauses will not restrict parties to commencing only one arbitration, though a party who is able to, but chooses not to, bring all its disputes within one arbitration risks time-bar setting in on the disputes that are not referred, or a risk that the other party will successfully argue in the second arbitration that the issues underlying the second dispute have already been determined in the first arbitration and some sort of issue estoppel or res judicata operates to prevent the second tribunal from considering the issues afresh. But there could be situations where a party is forced to bring a second arbitration because the issues in dispute were not in existence at the time when the first arbitration was commenced.

That is what happened to Dolphin Drilling in its contract with ONGC for the charter of a drilling rig. It had referred a dispute to arbitration in 2004, early in the contract period which started in 2003, and the arbitration in that dispute had been running for some four years when a further dispute arose in relation to payments due to Dolphin Drilling for works done after the expiry of the original contract period. Clearly the second dispute arose later in time and could not have been the subject of the first reference to arbitration. ONGC argued however that the arbitration clause limited Dolphin Drilling to only one shot at arbitration and therefore it could not bring a second arbitration.

The issue came up for determination by the Supreme Court because ONGC had refused to nominate its arbitrator to the three member arbitral tribunal and Dolphin Drilling was forced to move the court under Article 11(6) of the Arbitration and Conciliation Act, 1996 for the court to appoint an arbitrator on ONGC’s behalf (Dolphin Drilling v Oil and Natural Gas Corporation, Arbitration Petition No. 21 of 2009, decision of Alam J dated 17 February 2010). ONGC’s argument was not a strong one, and the Court had no hesitation in dismissing it and appointing an arbitrator on behalf of ONGC, but it did raise some important practical issues which the construction industry should bear in mind.

The principal motivation behind ONGC’s argument appears to have been one of cost. And one can sympathise with ONGC’s position as, presumably, the first arbitration had already been conducted at great expense of money and management time. Even the second arbitration, which Dolphin Drilling sought to commence in 2007, only got off the ground three years later with the Court’s judgment in 2010. However, in Dolphin Drilling’s defence, the dispute as to its entitlements to payment post expiry of the original contract period had arisen much later and it would not have been proper to deny it relief by preventing it from going to arbitration. It is not clear from the Court’s judgment whether parties had attempted to agree to refer the second dispute to the tribunal adjudicating the first dispute; if not, it would have seemed sensible for ONGC to have sought to do that instead of contesting the second reference in the courts. Also, it is not clear whether ONGC would have preferred to have the second dispute litigated in the courts as, if it had been successful in its arguments, that would have been the likely outcome (as no party can be deprived of some form of redress).

So what can one do to avoid the sort of situation that ONGC found itself in? The starting point must be with the drafting of the arbitration clause. If it is intended that parties should have only one shot at arbitration, the clause should say so. This is usually done by preventing either party from commencing arbitration until the works are complete; though that, in itself, is not enough to ensure that only one arbitration is brought after the works are complete. In Dolphin Drilling, the Court suggested this route and also that it would be sensible to add a provision in the arbitration clause that preserved any limitation period for claims that would have arisen during the course of a contract but could not be referred to arbitration. Indeed, for contracts with long periods, say more than 6 or 7 years, this would appear to be sensible. There is a work-around for such situations if the clause says that arbitration can be commenced during the course of a project but the arbitrators cannot ‘enter onto the reference’ until the works are complete.

A further solution, which I read in a blog discussing this case, is for the arbitration clause to require future disputes to be referred to the same tribunal (if one is already in existence). This is similar to a DAB arrangement where a DAB is appointed for the duration of the project and all disputes are referred to it in the first instance. While this solution is attractive, it can pose practical problems if the availability of members of the tribunal is limited, and if one party uses this provision to hinder the tribunal from properly and timeously determining prior disputes referred to it. Issues could also arise in relation to enforcement of awards issued by the tribunal.

If the arbitration clause is silent, and if the parties are really concerned about cost and time associated with a second arbitration, it is open for them to agree to submit a future dispute to the same tribunal. The tribunal would be in a good position as it would have the knowledge of the project and would therefore be able to determine the second dispute with greater efficiency than would a new tribunal. But, as dispute lawyers well know, any measure that depends on the agreement of both parties once a dispute has arisen has little chance of success as once parties are in dispute, they are unlikely to agree the day of week, let alone measures to resolve their disputes.

That is why arbitration clauses are so important as when parties are in a positive mood at the start of a project, they are much more likely to agree to the dispute resolution process than when matters go sour.

Dolphin Drilling illustrates a problem that is not particularly unique to the Indian context.

Arbitrations internationally are expensive and, except in civil law countries where there is a presumption that an arbitration will be completed and a decision issued within 6 months, relatively long affairs. The lesson from Dolphin Drilling is that if one wants to limit its exposure (and ability) to having to be subject to a second arbitration, it is worth paying attention to the arbitration clause at the outset.

Shourav Lahiri is a Partner in the international law firm Pinsent Masons LLP. He wishes to thank Ms Helen Turner of Pinsent Masons LLP for her assistance with this article. The author can be reached at shourav.lahiri@pinsentmasons.com. Pinsent Masons LLP has been selected as the Global Construction Law Firm of the Year 2009 by Who’s Who Legal and as one of the Top 10 international firms doing India work by the India Business Law Journal in June 2009.

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