The Impact of Exclusion Clauses in Arbitration: A Study on Judicial Opinions, Legislative Inputs, and Way out for Global Emergence

Anchit Jain*

Introduction

Exclusion Clause is a kind of provision in an arbitration agreement which excludes the liability or right of a party. It creates imbalances in the rights and liabilities of the contracting parties. Moreover, an element of bias exists in such a clause. The clause can be observed in an Asymmetrical Arbitration Clause or in any other issue that creates a chaotic position among the contracting parties while resolving a dispute through arbitration. The alleged clause has a different position in the international community,[1] whereas the Indian judicial bodies interpreted in compliance with the municipal laws. Indian interpretation observes it against the party’s autonomy and object of Arbitration laws.

Exclusion Clause

Exclusion Clause in an agreement excludes the rights and duties of the parties in an agreement. It not only influences the decisions in a contract but also creates a dominating position upon a party.[2] In terms of an Arbitration Agreement (the agreement), it has to be identified whether an agreement can comprise of an exclusion clause or not. An arbitrary condition imposed by a party, to dominate the other party, for taking advantage of its influencing position can result in an inclusion of the Exclusion Clause.[3] If such a situation contravenes the right of a party against his legal entitlements then an exclusion clause can be observed there.

Contractual Position

The recent judgments of various courts have dealt with the question of one party excluding the right of another party’s on the concern of arbitrator’s appointment. A party single-handedly appointing arbitrator(s) or not letting the other party exhausting the right on arbitrator’s selection seems to be a biased situation. Such clauses are the ‘Asymmetrical Arbitration Clause’.[4] Despite the global acceptance of the Asymmetrical Arbitration Clause,[5] the Supreme Court in the case of Perkins Eastman Architects DPC & Anr v. HSCC (India) Ltd[6] invalidated such agreement’s clause. In the above mentioned case, the Chairman and Managing Director of the company possessed the exclusive power in appointing an arbitrator for the purposed of dispute resolution. The Court found it natural for a party to have an interest in the outcome of its dispute. Thus, the person cannot have the power to appoint a sole arbitrator. The reasoning behind this invalidation was the imbalance of power between the parties. This was raising the questions on the independence and impartiality of an arbitrator towards both parties. The Court, for balancing the alleged unfair position, stated that the parties must nominate their respective arbitrators.

It is pertinent to note that the Court has not only restored the party’s right against the exclusion clause but also curtailed down the exclusive right reserved by the dominating side.

Party’s Autonomy v. Impartiality & Independence of Arbitrators

Arbitration is a system of customizations in which a party can customize the rules and regulations of their dispute resolution meetings. They can also customize their procedure for appointing the arbitrator(s). The autonomy of parties is the basic feature in arbitration. It gives them the authority for controlling the arrangements. The rules agreed by parties for moderating their meetings are binding, not to mention, the rules must comply with the laws.

Supreme Court in the case of TRF Limited v. Energo Engineering Projects Limited[7]observed that the disputed agreement provided the Managing Director (MD) with an exclusive authority to act as an arbitrator. Moreover, if he does not act then he had the exclusive power to nominate an arbitrator. The Court held that the MD taking charge as an arbitrator or exclusively deciding the nomination of the arbitrator would hamper the soul of arbitration i.e. ‘Impartiality & Independence’. The Court, relying on the judgment of Pratapchand Nopaji v. Kotrike Venkata Setty & Sons[8] upheld the principle of “qui facit per alium facit per se” (what one does through another is done by oneself) and declared both the clauses invalid.

The 246th Law Commission Report[9] states that the “concept of party autonomy cannot be stretched to a point where it negates the very basis of having Impartial & Independent adjudicators for resolution of disputes.” The report emphasizes on procedure between fairness and binding nature of the contract. The report further emphasized that when a state is a party to a contract then the situation is extra cautious as the duty to appoint an Impartial & Independent adjudicator is much more “onerous”. “The right to natural justice cannot be said to have been waived only based on “prior” agreement between the parties at the time of the contract and before arising of the disputes.

The report was cited in the case of Voestapline Schienen Gmbh v. Delhi Metro Rail Corpn Ltd[10] (DMRC) where DMRC provided a pool of arbitrators to the applicants and asked them to make their nomination from the alleged pool. The options in the alleged pool were selected by DMRC. The other party was not included in the formation of the pool. The Court observed that Impartiality & Independence are “hallmarks” of any arbitration proceedings. Quoting the aforementioned report, the Court emphasized the state’s responsibility of ensuring a fair and reasonable dispute resolution. Eliminating an alleged element of exclusivity of DMRC, the Court held that DMRC should uphold the principle of Impartiality & Independence by preparing a mutual broad-based panel.

A Party with exclusive authority to appoint an arbitrator has to ensure the applicability of Schedule V and VII, which will test the arbitrator’s independence and impartiality.[11] This ensures that, if there is an element of bias then a party nominating an arbitrator with an exclusive authority will fail the test. Moreover, this test would help the parties to get the work done without investing their time on further discussion on the appointment of their arbitrator(s). Precedents challenging the exclusivity of such clauses have not only intervened with the features of Arbitration but also challenged the provisions of the Arbitration and Conciliation Act, 1996 (the Act).

Court’s Interference

Arbitration being a process of Alternative Dispute Resolution promotes the objectives of outside Court settlement for a speedy resolution of the disputes. It nowhere shows the Court a way out through this mechanism. Section 5 clarifies that Judiciary will intervene in those matters on which the Act will allow.[12] However, the question of appointment of an arbitrator with exclusive power to one party challenges the procedure of the said appointment. The Supreme Court in the case of Walter Bau AG v. Municipal Corporation of Greater Mumbai and Anr[13] clarified that after making an appointment, a challenge cannot stand against it. Party can avail the remedy under Section 12 and 13 of the Act. This ruling[14] was applied in the case of Proddatur Cable TV Digi Services v. Citi Cable Network Limited.[15]The Delhi High Court noted that the arbitration clause provided the company with an exclusive right for the appointment of a sole arbitrator. The Court relied on the principle, established under the judgment of Perkins,[16] and invalidated the disputed clause. The Court concluded with itself appointing the arbitrator.

However, the Court can be involved through Section 11 where the parties can apply for the appointment of an arbitrator if they fail to appoint the same, but this does not conclude that the parties in other remaining circumstances can provide an exclusion clause for restraining the jurisdiction of Court from intervening in any other arbitration matter. The parties in Dr. Bina Modi v Lalit Modi &Ors[17] provided in the trust deed that the award of arbitration would not be challenged before any Court of law. The Delhi High Court decided that the alleged case does not stand before the Court until any substantive question of law is involved. The Court reasoned that the parties have decided for arbitration considering their convenience. The Court relied on the case of Kvaerner Cementation India Limited v Bajranglal Agarwal[18] where the Apex Court held that considering the Section 16 of the Act an Arbitral Tribunal has the authority to decide the issue that pertains to the validity of the agreement, the reason being the inapplicability of civil Court’s jurisdiction on such nature of the question. Thus, the Delhi High Court never decided the question of excluding the jurisdiction of Court.

However, the clause seems to be invalid. If the issue falls under Section 37 of The Act then an appeal can be filed against the arbitral award.

Conclusion

The nature of the exclusion clause disputes the jurisprudence of Arbitration as the features and objectives of the Act are looking in contravention to each other. One possible may be the way through the model law. The model law is pervasive and has uniformity across the globe.[19] The recognition of global precedents may help in resolving the disputes in compliance with the prevailing pervasive standards. This can help India in setting some pervasive precedents. Indeed, the public policy of India will always be a key factor in its application, but if the test of a public policy confirms, then more regards to the foreign precedents on the disputed subject matters can help in India’s development in becoming the global hub of arbitration. This will also strengthen the applicability of Foreign Awards in India.


* Anchit is a fourth year B.B.A.LL.B student (Hons) at ICFAI University, Dehradun. He can be reached via his LinkedIn.

[1] Asymmetrical Arbitration Agreements, Norton Rose Fulbright, Last Accessed on Apr 02, 2020, 12:58 AM, https://www.nortonrosefulbright.com/en/knowledge/publications/a9d324be/asymmetric-arbitration-agreements.

[2] Anchit Jain, A Study on Exclusion Clause: Statutes, Precedents and Ongoing Legal Affairs, Taxmann, Last Accessed on Aug 01, 2020, 10:54 AM, https://www.taxmann.com/globalsearch.aspx?cat=all&st=%5B2020%5D%20114%20taxmann.com%2067%20(Article)

[3] Ibid

[4] Ajar Rab, Appointment of Sole Arbitrator: Can a Modified Asymmetrical Arbitration Clause Avoid Court Appointment?, Kluwer Arbitration Blog, Last Accessed on Mar 29, 2020, 4:03 PM), http://arbitrationblog.kluwerarbitration.com/2020/01/08/appointment-of-sole-arbitrator-can-a-modified-asymmetrical-arbitration-clause-avoid-court-appointment/

[5] Asymmetrical Arbitration Agreements, Norton Rose Fulbright, Last Accessed on Apr 02, 2020, 12:58 AM), https://www.nortonrosefulbright.com/en/knowledge/publications/a9d324be/asymmetric-arbitration-agreements

[6] Arbitration Application No.32 of 2019.

[7] (2017) 8 SCC 377.

[8] (1975) 2 SCC 208.

[9] Law Commission of India, Report Number 246, Last Accessed on Apr 09, 2020, 06:19 PM, http://lawcommissionofindia.nic.in/reports/Report246.pdf.

[10] (2017) 4 SCC 665.

[11] Ajar Rab, TRF Ltd. & Perkins: Limiting ‘Freedom of Contract’ and the Choking of Party Autonomy, National Law School of India Review, Last Accessed on Apr  1, 2020, 4:16 PM, http://www.nlsir.com/?p=923

[12] Arbitration and Conciliation Act, 1996.

[13] (2015) 3 SCC 800.

[14] Ibid.

[15] O.M.P. (T) (COMM.) 109/2019 and I.A. 17896/2019.

[16] Arbitration Application No.32 of 2019.

[17] CS(OS) 84/2020 & IA No.2760/2020.

[18] (2012) 5 SCC 214.

[19] Alexis Mourre, Arbitral Jurisprudence in International Commercial Arbitration: The Case For A Systematic Publication Of Arbitral Awards In 10 Questions…, Kluwer Arbitration Blog, Last Accessed on Apr 1, 2020, http://arbitrationblog.kluwerarbitration.com/2009/05/28/arbitral-jurisprudence-in-international-commercial-arbitration-the-case-for-a-systematic-publication-of-arbitral-awards-in-10-questions/

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