Lombardi Engineering Ltd. v Uttrakhand Jal Vidyut Nigal Ltd.
Arbitration Petition no. 43 of 2022
The concept of ‘party autonomy’ stands recognized as the very backbone of the entire scheme of Arbitration. Judicial pronouncements across the globe have repeatedly confirmed the engraining of party autonomy as neatly woven in the very fabric of arbitration. It is in the perspective of party autonomy that Courts have repeatedly passed protective directions securing the proceedings of arbitration from being interfered with by Courts. In fact, Courts have encouragingly passed directions supporting the arbitration proceedings, keeping in view the perspective of party autonomy. In this backdrop, this article endeavors to highlight the recent judicial perspective drawing the confines, beyond which the concept of party autonomy may not be stretched.
Before deliberating upon the limiting of arena of party autonomy, it would be useful to highlight the prescriptions of Supreme Court of India laid down in the case of Bharat Aluminium Co. v. Kaiser Aluminium Technical Services Inc. [(2016) 4 SCC 126] (Balco Judgment), wherein the party autonomy was cited as the brooding and guiding spirit in arbitration. The Hon’ble Supreme Court went forth to hold the party autonomy as the grund norm particularly in agreements of arbitration between parties. In that context, it was observed that the terms of the contract will have to be understood in the way the parties wanted and intended them to be. It is needless to highlight that the Balco Judgment ushered in a new era in Arbitration, including, by bringing forth an overhaul in the statutory scheme of the Arbitration and Conciliation Act, 1996.
Further, in the case of Centrotrade Minerals & Metal Inc. v. Hindustan Copper Ltd. [(2017) 2 SCC 228], the Hon’ble Supreme Court while deliberating on the aspect of party autonomy noted its perspective prevailing in international commercial arbitration. In that context, the Supreme Court referred to the Law and Practice of International Commercial Arbitration [Chapter 6. Conduct of the Proceedings in Nigel Blackaby, Constantine Partasides, et al., Redfern and Hunter on International Arbitration [Sixth Edn., © Kluwer Law International, Oxford University Press 2015]. The Supreme Court noted the following extract:
“Party autonomy is the guiding principle in determining the procedure to be followed in an international arbitration. It is a principle that is endorsed not only in national laws, but also by international arbitral institutions worldwide, as well as by international instruments such as the New York Convention and the Model Law.”
Aso in the case of PASL Wind Solutions Pvt. Ltd. v GE Power Conversion India Pvt. Ltd. [(2021) 7 SCC 1], the Supreme Court made a detailed deliberation with respect to party autonomy being the backbone of the arbitration and went forth to hold that two Indian parties with no foreign element in their arbitration agreement can choose a seat outside India. It was further held that the principles of party autonomy also entitled the parties to choose the applicable law as they deem fit, provided the choice of law is not contrary to the public policy of India. While holding thus, the Court negated the argument that choosing the seat of arbitration outside India would be violative of Section 23 and 28 of the Indian Contract Act.
In the backdrop of various Judicial Prescriptions upholding the validity of acts and omissions of contracting parties on the anvil of party autonomy, came the recent pronouncement of Supreme Court in the case of Lombardi Engineering Ltd. v Uttrakhand Jal Vidyut Nigal Ltd. [(2023) SCC Online SC 1422], wherein the Supreme Court was called upon to decide inter-alia whether (a) the terms of arbitration agreement permitting one party to appoint sole arbitrator as well as (b) the terms of arbitration agreement requiring the party initiating arbitration to make pre-deposit of 7% of claim amount, hold good in law. While considering the questions the Supreme Court was pressed upon to consider the validity of said terms of the arbitration agreement under the principles of party autonomy. It was argued that a party having agreed to those terms stands estopped from denying them. Opposing the suggestion, it was countered that even if a party signs an agreement, such constraining terms cannot be held valid if they are effectively violative of the principles of Article 14 of the Constitution of India. It was argued that the impugned terms in the arbitration agreement are violative of the ‘operation of law’ and cannot be accorded validity at the behest of party autonomy.
While deliberating on the issues, the Supreme Court found relevance to look into and discuss the Kelson’s Pure Theory of Law on basic norm that he referred as “Grundnorm”. Deliberating thus, the Supreme Court referred to various Judgments and noted that every country across the globe has a hierarchy of laws, and the highest law of that country shall stand as its grundnorm. Pertinently, in the context of India, Constitution is the grundnorm. In this backdrop, Supreme Court proceeded to refer to its earlier Judgment in Olga Tellis and Ors. V Bombay Municipal Corporation & Ors. [(1985) 3 SCC 545] to note that there can be no estoppel against Constitution. The Constitution is not only the paramount source of law of the land, but it is the source and sustenance of all laws, including Arbitration and Conciliation Act. The provisions of Constitution are conceived in public interest and are intended to serve a public purpose.
Further, on the perspective of estoppel, it was noted that an individual cannot barter away the freedom conferred upon him by the Constitution; and even if a concession is made by him in a proceeding, whether under a mistake of law or otherwise, that he does not possess or will not enforce any particular fundamental right, such a concession cannot create an estoppel against him in that or any subsequent proceeding. It was further noted that such a concession, if enforced, would defeat the purpose of the Constitution. In this context, it was also noted that there can be no waiver of fundamental right founded on Article 14, or any other fundamental right guarantee under Part III of the Constitution.
In the above backdrop, the Supreme Court held that the concept of party autonomy cannot be stretched to the extent where it violates the fundamental rights guaranteed under the Constitution of India. It was further held that for an arbitration agreement to be legally binding it has to be in consonance with the ‘operation of law’, which includes the Grundnorm, i.e. Constitution. It was also observed that there can be no consent against law. Accordingly, the Supreme Court rejected the argument that a party having consented to pre-deposit cannot turn around and tell the court that such condition is arbitrary and falling foul of Article 14 of the Constitution.
Pertinently, deliberating at length on the law requiring neutrality of arbitrator, the Court held that the condition in the arbitration agreement permitting one party to appoint sole arbitrator stands violative of the operation of law. Further, with respect to the condition of pre-deposit also, the Court while referring to various foreign Judgments, came to the conclusion that such a condition in the agreement was opposed to public policy as well as unconscionable.
It falls from the above, that in the era when enthusiastic endeavors are being made to prosper the arbitration across Indian sub-continent, including by pressing into service the principles of party autonomy, the judgment of Supreme Court certainly acts as a guiding light, as to the stretchability of the principles of party autonomy, in construing the validity and enforceability of the terms of arbitration agreement. The clarity brought by this Judgment will guide and boost the future of arbitration in India in right direction, and will enable the parties to identify and understand their rights and entitlements under an agreement.
The above article is authored by Mr. Jyoti Kumar Chaudhary, Partner. The article was originally published by AXFAIT (https://www.axfait.com/post/party-autonomy-in-arbitration-how-far-is-it-stretchable)
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