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Two steps back for arbitration in India?


Shourav Lahiri considers the implications of a Supreme Court’s decision on the construction industry and on arbitration practice in general

It is a short point: if an arbitration clause is valid, and it covers the dispute in question, should a court proceedings brought by one of the parties be stayed to arbitration? The answer, one would expect, should be ‘yes’. But ‘no’ was the answer of the Supreme Court of India in last October’s decision in the case of N Radhakrishnan and M/s Maestro Engineers. Let us consider the implications of this Supreme Court decision on the construction industry and on arbitration practice in general.

No one seems to have told the Supreme Court of India that the growth of India’s economy, with a construction market worth US$50 billion per annum alone, is a major draw for foreign investment and domestic up-skilling alike. I say that because, much like a cranky traffic policeman on an off-day, the Supreme Court seems to be busy directing traffic in the wrong direction.

It all stems from recent ruling of the Supreme Court in India in N Radhakrishnan (‘NR’) and M/S Maestro Engineers and others (‘Maestro’).

The facts

NR, an Indian engineer, entered into a partnership agreement with others to form Maestro. The partnership agreement contained an arbitration agreement.

A dispute arose between the parties when NR alleged that Maestro had misappropriated funds from the partnership accounts and had forged the books. NR offered to resign from the partnership, subject to payment of outstanding salary and profit share from Maestro. Maestro’s response was to begin a civil suit against NR requesting a declaration that NR had effectively resigned from the partnership and for an injunction to stop NR from interfering with the partnership.

NR’s response was to seek an application under Section 8 of the Arbitration Act for the civil proceedings to be stayed because there was an arbitration clause in the partnership agreement. Two sets of lower courts rejected NR’s application, and NR moved the Supreme Court on appeal. The Supreme Court was of the same view as the lower courts, and it is to the ‘why’ that I now turn.

The issues

The starting position is that any action brought in the courts, in breach of an arbitration agreement that covers the dispute in question, should be stayed. Despite argument between the parties as to whether there was a valid arbitration agreement in this case, and whether that agreement covered the present dispute, the Supreme Court held that the arbitration agreement was valid and the dispute between the parties fell within its scope.

However, the Supreme Court held that, given the allegations of forgery and misappropriation of funds, the level of enquiry into material evidence that would be needed made it inappropriate for an arbitrator to carry out that enquiry; only the court was in a position to do so. Accordingly, there would be no stay of the civil proceedings and Maestro could continue in the courts.

The Supreme Court said this: “The facts of the present case do not warrant the matter to be tried and decided by the Arbitrator, rather for the furtherance of justice, it should be tried in a court of law which would be more competent and have the means to decide such a complicated matter.”

The consequences

Several troubling consequences arise from this decision. First, it undermines the certainty that parties can have in their choice of forum for resolution of their disputes arising from a particular transaction or contract. Leaving aside the relative speed and possibly increased technical expertise that an arbitral tribunal can bring to the resolution of specialist disputes when compared to the courts, (For instance, it took some three years for the procedural challenge to be resolved through three layers of court, and this is before any of the substantive matters in dispute have been heard) the desire to keep disputes out of the public eye can now be thwarted by a party seeking to raise a certain type of dispute.

Secondly, the Supreme Court did not decide that the matters in dispute in Maestro were outside the jurisdiction of an arbitrator, merely that it would not be appropriate for an arbitrator to deal with the issues pleaded. This, in my respectful submission, risks muddying the jurisprudence on the circumstances in which an arbitration tribunal can proceed. For instance, if NR had commenced an arbitration first and Maestro had decided to proceed in that arbitration ‘on protest’ because it felt that the courts were the correct forum, could it subsequently resist enforcement of the arbitration award under domestic law or the New York Convention?

Thirdly, if a party were to wish to stymie the arbitration process (and prevent the other side from obtaining the benefits of this process), it would seem that all it had to do is to plead issues that were modelled on the issues in Maestro. For a party in a construction project, that would not be too difficult given the range of records and documents that are created on a project, often without the most rigorous oversight. Given the approach of the Supreme Court in Maestro, lower courts before which such arguments are presented in the future would be loath to do anything other than accept jurisdiction and deny an application for a stay. That means another series of court applications and delay. Ultimately, the party alleging these matters could fail to prove them, or worse still, amend its case late in the day (expressly or implicitly) and choose to no longer rely on these allegations. What sanctions would face such parties? An award of costs (even punitive) may not be enough.

Fourthly, the standard approach in international arbitration is that an arbitrator is competent to rule on his own jurisdiction. It is therefore respectfully submitted that this choice should be left to the arbitrator with a detailed knowledge of the matters in dispute rather than to the court which is asked to accept jurisdiction at an early stage when little is known about the detail.

Finally, while the Supreme Court’s decision was made in the context of a domestic arbitration, there is other authority to say that the parts of the Arbitration Act that relate to domestic arbitrations also apply to international arbitrations where there is an Indian element.

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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