In the evolving landscape of cross-border transactions and the increasing complexity of commercial contracts, efficient dispute resolution mechanisms have become critical. One such mechanism is the two-tier arbitration clause, which aims to balance expediency with fairness by introducing a second tier of review within the arbitration process itself. This article explores the concept of two-tier arbitration clauses, their enforceability under Indian law, and the evolving judicial perspective on these clauses.
What Are Two-Tier Arbitration Clauses?
Under this format of arbitration, the parties voluntarily agree to resolve their disputes through a two-tier arbitration process. In the first tier, a sole arbitrator or an arbitral tribunal is constituted by mutual consent of the parties, to hear the dispute and issue an award. In the second tier, if either party is dissatisfied with the award, an appellate arbitral tribunal is constituted, which reviews and confirms, modifies, or sets aside the award made by the first-tier tribunal.
Globally, two-tier arbitration clauses are common in commercial agreements, particularly in contracts involving cross-border transactions. A two-tier arbitration model embodies the principle of party autonomy—allowing parties to design their dispute resolution process, including an appeal mechanism if they deem it necessary. This autonomy is central to arbitration and is fully consistent with international arbitration practices under frameworks like the UNCITRAL Model Law on International Commercial Arbitration.
With the advent of globalization and the liberalization of the Indian economy, numerous multinational corporations are entering the Indian market. By creating an appellate mechanism within arbitration, parties are able to seek a review without resorting to court proceedings, thus maintaining the efficiency and confidentiality of the arbitration process.
Enforceability and Validity of Two-Tier Clauses in Indian Legal Landscape
The enforceability of two-tier arbitration clauses in India is governed by the Arbitration and Conciliation Act, 1996, which provides parties with significant autonomy to structure their arbitration agreements. Indian courts have generally upheld the validity of these clauses, provided that the terms are clearly drafted and do not violate the principles of fairness and due process. Moreover, with India being a signatory to the New York Convention, two-tier arbitration clauses in cross-border contracts are enforceable, enhancing the certainty and stability of international arbitration agreements.
Under Section 7, parties are vested with the autonomy to design their arbitration agreements and include multi-tiered arbitration processes. Section 8 mandates courts to refer parties to arbitration where a valid arbitration agreement exists. Section 11 governs the appointment of arbitrators, which can include constitution of an appellate tribunal where the agreement provides for a second tier of arbitration. Section 16 empowers the arbitral tribunal to determine its own jurisdiction, and can enable the tribunal to assess whether the two-tier structure has been properly implemented before proceeding with the arbitration. Section 29A which imposes a time limit for the completion of arbitral proceedings, could be extended to appellate arbitral tribunals to ensure that cases are not unnecessarily dragged out. Though the two-tier arbitration model intends to reduce the need for judicial scrutiny as the parties have already been provided with an opportunity for review, it however does not preclude judicial intervention under Section 34.
Judicial Interpretation of Two-Tier Arbitration Clauses
In a landmark judgment of Centrotrade Minerals and Metals Inc. v. Hindustan Copper Ltd., reported as (2017) 2 SCC 228, the Supreme Court of India affirmed the validity of two-tier arbitration clauses under the Arbitration and Conciliation Act, 1996. The Court held that such a mechanism, where parties can appeal an arbitral award before a second arbitration body, is legally permissible, and upheld the agreement executed between the parties to allow for an appeal before the International Chamber of Commerce (ICC) following a domestic arbitration. The decision set a significant precedent for the validity of multi-tiered arbitration agreements in India.
Subsequently, the enforceability of the foreign arbitral award passed by the ICC was considered by the Supreme Court in Centrotrade Minerals and Metals Inc. v. Hindustan Copper Ltd., reported as (2020) 19 SCC 197. Hindustan Copper Ltd. challenged the award on the ground that it was not able to present its case before the ICC Arbitrator. However, the Court rejected this objection and allowed the execution of the ICC award in favour of Centrotrade, reasoning that the procedural objections must meet stringent criteria under Section 48 of the Arbitration and Conciliation Act, 1996, to bar the enforcement of foreign arbitral awards. Thus, while parties may agree to a second tier of arbitration, it does not oust the court’s jurisdiction to review an arbitral award.
Section 34 vis-à-vis Two-Tier Arbitration
Section 34 of the Arbitration and Conciliation Act, 1996, provides limited grounds for challenging an arbitral award, such as violations of public policy or procedural misconduct. However, Section 34 is not an appeal mechanism—it only allows parties to seek the setting aside of an arbitral award based on narrowly defined criteria. It does not permit a re-evaluation of the merits of the case or the evidence presented. This creates a critical gap for parties who may wish to correct errors in the arbitral award without resorting to court intervention.
Two-tier arbitration, involving a second-tier appellate arbitral tribunal, offers a mechanism for reviewing arbitral awards internally before approaching the courts. Unlike Section 34 which limits judicial review to procedural and public policy violations, an appellate arbitral tribunal allows for a more thorough review of factual and legal issues. This provides parties with an opportunity to correct errors and enhance the fairness of the award without seeking court intervention.
However, introducing a second tier can raise significant concerns about delays. Arbitration is meant to be faster than traditional litigation, and adding an appeal mechanism could extend the time taken to resolve disputes. While the intention is to ensure a more accurate and fairer outcome, there is a risk that the second-tier review might defeat the purpose of arbitration’s efficiency. In such a scenario, introducing strict timelines and clear guidelines for those parties who opt for having two-tier/ multi-tier arbitration clauses in their contracts could help mitigate such delays.
Conclusion
In conclusion, Indian courts have largely upheld the validity of two-tier arbitration clauses, reinforcing the principles of party autonomy and procedural fairness. A two-tier model presents both opportunities and challenges from a legal and commercial standpoint. While it enhances procedural fairness and allows for greater scrutiny, it inherently risks diluting the core benefits of arbitration i.e., speed and cost-efficiency. However, from a commercial perspective, the same may be viable in highstakes, complex disputes where an additional review is necessary to safeguard interests.
As business entities continues to opt for arbitration as a preferred mode of dispute resolution, the adoption of two-tier arbitration clauses is likely to increase, offering parties an efficient and effective framework for resolving their disputes. Therefore, a careful drafting of two-tier arbitration clauses is crucial to maximizing their effectiveness and ensuring a streamlined dispute resolution process.