Category: Arbitration

BY PRIYANSHI BHAGERIA, FOURTH-YEAR STUDENT AT RMLNLU, LUCKNOW

Introduction

Section 17 of the Arbitration & Conciliation Act 1996 (‘Act’) empowers the Arbitral Tribunal to grant interim measures during the arbitral proceedings. The phraseology of Section 17 is similar to Section 9 of the Act, which grants similar powers to the courts. Both the sections are similar in the sense that they not only deal with the grant of interim measures, although at different stages, but also the orders passed under the respective sections are deemed to be court orders and shall be enforceable in the same manner. 

One major question that is a subject of repeated discourse is whether the tribunal has the power to grant measures affecting the rights of the third parties since a similar power is often exercised by the courts under Section 9. In this context, it is important to examine if there is a difference in the scope of the powers under both these sections. 

This article analyses the bare provision and tries to establish that the Tribunal has powers that are at parity with a civil court and are to be governed by the Civil Procedure Code, 1908 (‘CPC’). Further, the effect of the conversion of Section 9 applications to Section 17 applications is dealt with by the author to make a case for the power of the Tribunal to grant interim measures affecting the third parties. Lastly, the article highlights the applicability of the group of companies doctrine and the necessity to grant such a power to the Tribunal. 

Nature & Scope of Section 17

A reading of Section 17 suggests that the Tribunal has powers to grant interim measures like interim injunctions, appointment of receivers, appointment of guardians, etc. The powers of the Tribunal are wide and the same can be gauged from Section 17(1)(ii)(e) which empowers the Tribunal to grant any other measures, apart from the ones enumerated in the provision, that it deems just and convenient. Despite the wide ambit of powers, the primary argument against the applicability of Section 17 with respect to third parties is that it is a creation of an express contract between two parties and the tribunal hence cannot pass orders affecting the rights of the third parties. However, this argument cannot be seen in isolation. 

It is important to note that there is a reference under this section about the powers of the tribunal being akin to that of a court while granting interim measures. It is significant to highlight that such a mention was specifically made by the Arbitration and Conciliation (Amendment) Act, 2015, highlighting the unambiguous intention of the legislature. Moreover, Section 17(2) states that an order under this section is deemed to be a court order and would be enforceable under CPC. In Pearl Hospitality & Events Pvt. Ltd. v. OYO Hotels and Homes Pvt. Ltd., the Delhi High Court held that the principles governing Order XXXVIII Rule 5 would be applicable, while considering a prayer for furnishing security, under Section 9 or Section 17.  In another case, Navtrip Implementation Society v. IVRCL Ltd., the Delhi High Court observed that the object of Section 17 of the Act is similar to that of Order XXXVIII, Rule 5 of the CPC, and therefore its conditions have to be kept in mind while passing orders under Section 17. This shows that the principles of CPC govern the powers of the Tribunal despite there being resistance regarding the same. Hence, it is absurd to assume that some principles of CPC which grants inherent powers to the courts to grant interim measures affecting the rights of third parties will not be applicable while some mentioned above would still continue to guide the proceedings under Section 17. It is important to clarify that a blind application of all the existing principles of CPC is not desirable. However, unsubstantiated exclusion of these specific principles raises concerns and leads to adverse repercussions for the parties as explained further in the article. 

Furthermore, Section 28(1)(a) of the Act states that the tribunal shall be bound by the substantive law of India in case of domestic arbitrations. In a number of cases, the Indian courts have enumerated general principles of granting interim measures and the same would apply to the Tribunal by virtue of it being a part of the substantive law of India.

Therefore, the nature of the power under Section 17 is guided by the principles of CPC and is placed at a similar stature to that of a court. 

Practice of Converting Section 9 Applications into Section 17 Applications

Secondly, it is important to highlight a practice of the courts while dealing with an application under Section 9. In a catena of cases, the courts have converted an application under Section 9 to an application under Section 17 once the tribunal has been constituted. If we have a look at the data of the years 2022 and 2023, a significant number of applications filed under Section 9 before were converted into an application under Section 17 by various High Courts. 

A bare look at the data might suggest that the number of Section 9 applications converted to Section 17 applications is only a small proportion. However, one must consider that even if the number is not compelling enough, the data indicates a practice which is prevalent. And the repercussions of such a practice are borne by one of the parties who is ultimately rendered remedy less. This also points to the fact that this practice which is supposedly ‘pro-arbitration’ can infact disincentivise arbitration if the Tribunals are not given powers at parity with the courts.

The prayer under that Section 9 application which is now being converted to a Section 17 application before the Tribunal remains the same. It is impractical to assume that the Tribunal would not have the authority to grant measures at parity with the Court in the same prayer which is now to be dealt with by the Tribunal on the direction of the Court itself. For example, a prayer may pertain to custody or sale of the goods which are subject matter of the arbitration agreement and could include situations where the goods are in the possession of a third party. In such a scenario, the conversion of the Section 9 application to a Section 17 application would cause prejudice to the parties. 

Moreover, if we were to assume that the powers of the court and the Tribunal are uneven, this conversion would disincentivize the constitution of the Tribunal. The parties would prefer applications under Section 9 or under the allied provision of CPC to an application under Section 17, where the Tribunal’s power is limited. This would create a lacuna and would defeat the purpose of the Act, i.e., to facilitate arbitration.

Group of Companies Doctrine: Its Effect on Section 17

Although the final verdict on the applicability of the group of companies doctrine by the Apex Court in Cox and Kings Ltd. v SAP India Pvt. Ltd. is awaited which would give more clarity, it is nonetheless important to analyze the position with regard to the Tribunal’s power under Section 17 affecting the rights of non-signatories. 

The Supreme Court in cases, such as Chloro Controls (I) Private Limited v. Severn Trent Water Purification Incorporated, Ameet Lalchand Shah v. Rishabh Enterprises, and Mahanagar Telephone Nigam Limited v. Canara Bank, has acknowledged the multi-layered and complex nature of transactions in today’s times and has allowed that in certain exceptional situations, even non-signatories to an arbitration agreement could be referred to a composite arbitration proceeding and could be bound by the award. 

There is still an absence of consensus with regard Tribunal’s powers under Section 17. This absence of consensus has resulted in courts giving conflicting judgments on the same issue. For example, in Prabhat Steel Traders Pvt. Ltd. v. Excel Metal Processors Pvt. Ltd., the Bombay High Court recognized that the interim orders passed by the Tribunal under Section 17 may affect non-signatory third parties in a direct or indirect manner. However, the same court in Bombay Slum Redevelopment Corporation Limited v. Samir Narain Bhojwani held that a Tribunal passing interim orders against a third party would be overstepping its jurisdiction under Section 17. 

While ascertaining the Tribunal’s power in this context, the legislative intent must also be considered. Before the 2015 Amendment, Section 8 used the word ‘party’ which was replaced by ‘a party to the arbitration agreement or any person claiming through or under him’. This broadens the definition of party to make space for non-signatories. Hence, the complex nature of today’s transactions must be seen a reason enough for the Tribunal to exercise powers under Section 17 to grant measures that might affect the rights of the third parties.

Conclusion

Therefore, it is evident that there is a need to expand the powers of the Tribunal under Section 17 so as to grant interim measures that may affect the rights of the third parties. In order to incentivize arbitration, the Tribunal must be given such power to ensure that the measures granted can be practically executed which is only possible when the Tribunal has the liberty to include third parties. Even if there is no concrete provision establishing this power of the tribunal, the same should be seen in the context of the above arguments and the need of the hour. The courts must formulate guiding principles in this regard and the same must be allowed, even if it is only limited to exceptional circumstances. 

by Mohammad Atik Saiyed and Shukla Pooja Sunilkumar, Third year students at GNLU, Gujarat

Introduction

We are living in a global village with transforming commercial realities and with such radical evolutions – the corporate entities are driving forces of economic value additions. In correspondence to the novel societal structure, interdependent and entangled utility alternatives, new perspectives, disagreements, questions, and jurisprudential mechanisms have also evolved. Arbitration has developed as the core effective means for alternative dispute resolution and the exponential increase in its practice unveils a question of how much fees are to be paid for the arbitration, which was recently revisited by the Apex Court in the case of Oil and Natural Gas Corporation Ltd. v. Afcons Gunanusa JV.

Constructing the substructure of arbitration fees

Constructing the sub-structural root of the legal question, Section 31(8) of the Arbitration and Conciliation Act, 1996 (the “Act”) empowers the arbitral tribunal with the authority to ascertain the costs in accordance with Section 31A. Section 31A accredits the ‘discretion’ of the tribunal to determine three aspects revolving around the regime of costs – Firstly, whether costs are payable by one party to another; secondly, the amount of costs and thirdly, the time of payment of costs. Within the horizon of the present analogy, the explanation to Section 31(8)(a) and Section 31A(1) provides that the term ‘costs’ symbolizes “reasonable costs relating to the fees and expenses of the arbitrators and witnesses”, among other things. Moving further in the prism, Section 38(1) of the Act encompasses the authority of the tribunal to fix the amount of deposits, separately for claims and counter-claims, as an advance for the arbitration fees which is an integral part of ‘costs’ in Section 31(8). 

The tribunal holds the power to determine costs and deposits as enshrined in the sections highlighted but the tribunal cannot be granted unbridled authority to unilaterally determine its own fees. This unveils the central question of how much fees are to be paid for the arbitration. Comprehensively dealing with ad hoc arbitrations, the Fourth Schedule (the “Schedule”) of the Act advances a model framework for the determination of arbitration fees. Rooting out the parliamentary purpose, the Schedule was introduced by the 2015 amendment on the recommendation of the 246^th LCI report, which addressed the issue of arbitrators charging exorbitant fees in ad hoc arbitrations. The Fourth Schedule sets out ‘Sum in dispute’ as a standard for ascertaining the fees of arbitrators based on the model prescribed. Ergo, for the determination of fees, the undefined terminology gives rise to a substantial legal dilemma regarding the interpretation of ‘Sum in dispute’ in the fourth schedule as to whether the sum for the determination of fees has to be accounted for claims and counter-claims, cumulatively or separately? Settling the two competing interpretations holds core importance, as the applicability of the ceiling enshrined in the Schedule will be resolved on that premise. 

Cumulatively or separately? – Weighing ‘Sum in dispute’ on both ends

Navigating the two arguments based on the interpretation conundrum, firstly, if ‘Sum in dispute’ is regarded as the cumulative total of claim and counter-claim, on acceptance, there will be a common fee for adjudicating both the proceedings and the fee ceiling within the Schedule will apply to the cumulative total, whereas, secondly, if ‘Sum in dispute’ is considered separately for claim and counter-claim, with adoption, there will be different fees for claim and counter-claim proceedings and the fee ceiling within the Schedule will be administered separately to each proceeding. For instance, the sixth entry in the Schedule provides that if the ‘Sum in dispute’ is above Rs.20 Crore then the model fees would be “Rs. 19,87,500 plus ‘0.5 percent’ of the claim amount over and above Rs.20 Crores with a ceiling of Rs.30 Crores.” Consider a situation wherein, the claim is INR 20 Crores and the counter-claim is INR 20 Crores, ergo, with an interpretation of ‘Sum in dispute’ as cumulative of claim and counter-claim, then the fee ceiling will be INR 30 Lakhs, whereas, understanding ‘Sum in dispute’ separately for claim as well as counter-claim, then the fee ceiling stands at INR 39,75,000/-. 

Comprehensive analysis and interpretation of ‘Claim’ and ‘Counter-claim’

Importantly, the terms, ‘Claim’ and ‘Counter-claim’ are not defined within the Act, and since the issue revolves around the two terminologies, to settle the question, it is foremost to comprehensively understand ‘Claim’ and ‘Counter-claim’ along with their nature in the proceedings. Understanding the nature of ‘Claim’ and ‘Counter-claim’ proceedings is important since the amount of deposits can be ascertained on that basis by the tribunal, wherein, if both proceedings are distinct and independent of each other, then separate deposits for claims and counter-claims would be required. As highlighted earlier, arbitration fee is an integral part of deposits and consequently, separate deposits imply that separate fees would be charged for ‘Claim’ and ‘Counter-claim’, and subsequently, the model in ‘Fourth Schedule’ will apply independently. Whereas, if a contrary interpretation is considered then ‘Claim’ and ‘Counter-claim’ will constitute the same proceeding, ergo, a combined deposit for both proceedings would be required. 

To serve the interpretation question of whether the ‘Claim’ and ‘Counter-claim’ are independent proceedings or not, reference is made to diversified sources of legal jurisprudence on two dimensions – arbitration proceedings and civil proceedings.

‘Claim’ and ‘Counter-claim’ in Arbitration Proceedings

• Within the statutory frame of the Arbitration Act, Section 2(9) highlights that if under the Arbitration part of the Act, there is any reference to claim & defense to claim, it must also apply to counter-claim and defense to counter-claim respectively. Thereby, the act treats both proceedings separately. Furthermore, Section 23(2A)  obligates the tribunal to adjudicate upon a counter-claim or set-off, if the subject is covered within the ambit of the arbitration agreement directing ‘independence’. On the same lines, attributing Section 38(2) relating to deposits, the tribunal has the discretion to terminate the proceedings ‘separately’ for the claim, counter-claim, or both with failure to provide appropriate deposits. Ergo, the act principally provides that both are different proceedings drawing inference for separate deposits. 

• Unfolding extensive analysis of ‘Claim’ and ‘Counter-claim’ by investigating academic opinions and references, it can be derived from Justice Bachawat’s seminal treatise on Law of Arbitration and Conciliation^[i] that the tribunal has the jurisdiction and the obligation to adjudge both claims and counter-claims ‘autonomously’, and CR Dutta’s treatise^[ii] reinforces the inference that the Arbitration Act perceives and handles claim and counter-claim as two separate and independent proceedings. Citing Gary Born on arbitration, it can be extracted that counter-claims are not restricted to claims wherein the subject of the counter-claim can be absolutely unlinked, provided that it falls within the ambit of the agreement. To dissolve, the Procedure and Evidence in International Arbitration, by noting that the counter-claim is not a defense to the claim and stands completely independent, corroborates the autonomy of claims and counter-claims.

• Progressing to the dimension of judicial behavior even before the introduction of Section 23(2A) in 2015, there existed various pronouncements including IOCL v. Amritsar Gas Service, whose position was supplemented in State of Goa v. Praveen Enterprises, that unanimously substantiate the obligation of the tribunal to ‘independently’ adjudicate counter-claims and provide that the rationale for recourse to the same arbitration is to eliminate the multiplicity of proceedings, Additionally, from Voltas Ltd. v. Rolta India Ltd., the independent nature of the claim, and counter-claim proceedings can be noted.

(B) Civil Proceedings

Parallelly, understanding whether civil proceedings treat ‘Claim’ and ‘Counter-claim’ as independent and separate proceedings or not is also important for an extensive analysis. Advancing the statutory structure of the Code of Civil Procedure, 1908 (“CPC”) and explicitly concentrating on Order VIII of the CPC associated with written statements, set-offs, and counter-claims, the distinction between set-offs and counter-claims can be constructed, as set-offs are covered within Rule 6, and Rule 6-A deals ‘explicitly’ with the counter-claims by the defendant. Emphasis has to be placed on Rule 6-D of Order VIII, which provides that “even if the suit which has been instituted by the plaintiff is stayed, discontinued, or dismissed, it will not affect the defendant‘s counter-claim”, concludes that counter-claims are not simply set-offs but stand distinct and independent as a separate proceeding. Moreover, investigation of academic convictions such as Mulla’s, Sarkar’s, and Zuckerman’s treatise on the Code of Civil Procedure consonantly points that counter-claim is an ‘independent action’ and they also crystalize Rule 6-D acknowledging that counter-claims remain unaffected by the dismissal of claims. Correspondingly, Halsbury’s Laws of India (Civil Procedure) describes a counter-claim as “a claim, independent of and separable from the plaintiff’s claim, which can be enforced by a cross-action.” Moreover, examining judicial precedents, Jag Mohan Chawla v. Dera Radha Swami Satsang and Rajni Rani v. Khairati Lal, among others, unanimously establish the aspect that counter-claims can arise out of the unconnected cause of actions and are ‘absolutely independent.’ 

Forecasting perspectives of ‘Sum in dispute’ as a cumulative

Advancing a different viewpoint, if we consider ‘Sum in dispute’ as a cumulative of claim and counter-claim, extensive repercussions on procedural fairness can be forecasted, such as, firstly, equitable division of fees between parties while accounting for individual deposits within Section 38(1), secondly, intermediate revision of arbitration fees in case of dismissal under Section 38(2) and thirdly, combined fees unproportionate to separate efforts for unique subject matters raised in same proceedings as empowered by Section 23(2-A). Taking note of the purposive interpretation of the insertion of the Fourth Schedule emphasized by the 246^th LCI Report, which highlighted the problem of exorbitant fees being charged by arbitrators in ad hoc arbitration; however, the lucid legislative meaning in the statute would have an overriding effect and if the contrary is required, there exists parliamentary wisdom for the amendment. 

Concluding Perspective

In line with the stark contrasts and reasonable conflicts in the comprehensive legal and logical analogy of the multidimensional prism of “Sum in dispute,” the distinction and independence of proceedings of claim and counter-claim can be lucidly outlined and accordingly, both are capable of being raised in individual proceedings, but the primary rationale for consideration to same arbitration is to eliminate the multiplicity of proceedings. Conclusively, a counter-claim is not a rebuttal to the claim, besides, the dismissal or result of the claim will have no bearing on the counter-claim proceedings. Wherefore, it is reflected that in an arbitration case, deposits in respect of arbitration costs, including arbitrator fees, have to be filed separately for both. Dissolving the color of the same horizon to the interrelated prism of Section 31(8), Section 31A, Section 38(1), as well as the Fourth Schedule of the Arbitration Act, it can be outlined that the standard of “Sum in dispute” in the Fourth Schedule for ascertaining arbitrator fees has to be considered distinctively and independently for ‘Claims’ and ‘Counter-claims,’ thereby, the fee ceiling will be applicable autonomously and differently for claims and counter-claims, that will further enhance income for arbitrators. 

^[i] Justice R S Bachawat, Law of Arbitration and Conciliation (Volume I & II, 6th Edition, LexisNexis, 2017)

^[ii] C R Datta, Law of Arbitration and Conciliation (Including Commercial Arbitration) (LexisNexis, 2008)

By Prerna Mayea, fifth-year student at Institute of Law, Nirma University

I. Introduction

Emergency arbitration has been a buzzword in the last few years in India since the ruling in Amazon.com NV Investment Holdings LLC v. Future Retail Ltd. The Supreme Court of India held that Emergency Award (‘EA’) in India-seated arbitration can be enforced under Section 17(2) of the Arbitration and Conciliation Act (‘the Act’). This is certainly a big step for creating a pro-arbitration environment in the country. However, this case did not provide authority for the issue that EA in foreign seated arbitration is enforceable in India. This is because Section 17 cannot be relied upon to enforce the EA since Part I of the Act does not apply to foreign seated arbitration.

II. Judicial Stance On Enforcement Of Foreign Seated EA In India

The matter regarding enforcement of EA in foreign seated arbitration firstly came before the Delhi High Court in Mr. Ashwani Minda & Anr. V. U-Shin Ltd. & Anr. In this case, the applicant tried to avail the remedy of EA in foreign seated arbitration which was denied to him. Subsequently, the applicant tried to seek interim relief under Section 9 of the Act, which was denied by the court on two premises:

1. The dispute resolution clause in the agreement excluded the applicability of Section 9.
2. The applicant had already failed before the emergency arbitrator, and there were no changes in the circumstances.

The court cited the continuing mandate of the emergency arbitrator to deny the relief under section 9. This suggests that the court considered EA in a foreign seated arbitration as an effective remedy to disallow relief under Section 9.

In HSBC PI Holdings Ltd. v. Avitel Post Studioz Ltd and Ors., even though the court did not enforce the EA directly, it granted relief under Section 9 of the Act to the party by reproducing the EA verbatim. This suggests an alternate mode of enforcement of the EA by obtaining similar interim reliefs under Section 9. However, this might not be an efficacious remedy since it would require re-adjudication by the court leading to duplication of proceedings and wastage of time.

In Raffles Design International India Pvt. Ltd. v. Educomp Professional Education Ltd., the court denied enforcement of EA in foreign seated arbitration citing a lack of authority, and insisted on filing a fresh application under Section 9 of the Act. The court however also added that a party cannot be denied interim relief simply because a similar relief has been obtained through EA. Further, the decision to grant the relief will be independent of the interim order in foreign seated arbitration.

III. Enforcement Of Foreign Seated EA Under The Act

• Section 44 and 48 – Enforcing as foreign award

Arbitral award has been defined under Section 2(1)(c) to include an interim award. However, this definition under Part I of the Act cannot be applied in the case of foreign seated arbitration. Section 44 of the Act does not define ‘arbitral award’. However, Section 44(a) applies to arbitral awards arising out of arbitration to which the New York Convention (‘NY Convention’) applies.

Under the NY Convention, Article 1(2) defines ‘arbitral award’ to “include not only awards made by arbitrators appointed for each case but also those made by permanent arbitral bodies to which the parties have submitted.” This definition is inclusive and wide enough to encompass emergency award made by the arbitrator. It must be noted that emergency arbitrators are appointed by arbitral tribunals and thus such award must be considered to be made by arbitral institutions only and subsequently be included under the definition of an arbitral award. For example, Schedule 1(3) of the SIAC Rules, 2016 states that emergency arbitrator shall be appointed by the president of the institution upon the filing of an application by parties.

Further, Article 3 and Article 5(1)(e) of the NY Convention have been interpreted to consider ‘binding effect’ and ‘finality’ as prerequisites for enforcing an award under the NY Convention. This has raised concerns regarding the non-finality of EA as it can be overridden by arbitral tribunal after its constitution. In Yahoo! Inc v. Microsoft Corporation, the US court observed that the emergency arbitrator’s order was final in nature. It reasoned that while deciding to grant a specific interim measure, the emergency arbitrator duly considered all necessary information to resolve the merits of that request. Further, urgent interim reliefs provided in EA have been considered as ‘final’ across several jurisdictions such as Germany and Egypt. Since EA provides a definitive ruling regarding the interim measure, the ‘finality’ requirement under NY Convention must be expansively articulated to include interim measures granted in EA.

This leads to the conclusion that EA falls within the scope of Section 44 and can be subsequently enforced under Section 48 of the Act.

• Section 27 (5)- Contempt of Court

Section 27(5) gives the power to the arbitral tribunal to punish for its contempt. The punishment is alike the offences in suits tried before the court. It is a reprimanding and novel provision that does not trace itself from UNCITRAL Model Law.

In Alka Chandewar v. Shamshul Ishar Khan, the Supreme Court has ruled that in case any party fails to comply with orders of the arbitral tribunal, this act will be considered to be contempt of court. The aggrieved party can seek relief under Section 27(5) by making representation to the court. The court will be competent to deal with the matter under the provisions of Contempt of Courts Act, 1971, or under Order 39 Rule 2A of the Code of Civil Procedure, 1908.

After the amendment in 2015, Section 27 is also applicable to Part II of the Act. Thus, Section 27 (5) can be used to ensure the enforcement of EA in foreign seated arbitrations as well. This line of reasoning was raised and rejected in Raffles case. The court reasoned that a person in contempt of interim order passed by tribunal in foreign seated arbitration cannot be punished by Indian courts. This reasoning by the court seems to be flawed to the extent that the party or its assets would be located in India and therefore would be within the jurisdiction of Indian courts, which would have power, even at the instance of a foreign seated arbitral tribunal.

IV. International Perspective

Various commercial jurisdictions such as Singapore and Hong Kong have a legislative framework that provide more certainty in enforcement of foreign seated Emergency arbitration award. For instance, in Hong Kong, Section 61 of the Arbitration Ordinance, 2011 requires to obtain the leave of the High Court to enforce interim measures granted by foreign tribunals. The party seeking enforcement needs to substantiate that the order falls within the description of an order or direction that may be made by an arbitral tribunal seated in Hong Kong. This mechanism has also been extended to emergency arbitration under Part 3A of the Arbitration (Amendment) Ordinance, 2013.

In Singapore, the International Arbitration Act, 1994 (IAA) includes emergency arbitrator within the definition of ‘arbitral tribunal’. Recently, the Singapore High Court in CVG v. CVH has also ruled that ‘foreign awards’ under the IAA would also include foreign interim awards made by an emergency arbitrator, thus allowing for enforcement of foreign seated EA. Further IAA also provides for grounds refusing recognition of EA including breach of rules of natural justice and exceeding the jurisdiction of emergency arbitrator. 

V. Framework For India

It is evident that countries are moving towards an arbitration-friendly approach in terms of enforcement of foreign seated EA and interim measures while also providing for safeguards to honor their national public policy. The most effective legislative solution for India is to incorporate in the Act a provision similar to Section 17H of the Model Law, which provides for recognition and enforcement of interim measures by arbitral tribunals irrespective of the country of issuance. Such enforcement must also be paired with appropriate safeguards such as:

1. Vesting of power to in the court where enforcement is sought, to order for provision of adequate security from requesting party.
2. Specify grounds for recognition and enforcement of interim measures keeping in mind the public policy of India.

Such safeguards will help to maintain a balance between party autonomy and public policy of India. It will also make the enforcement of EA faster and easier. Parties must also be cautious while drafting the arbitration clause to ensure that it does not exclude the applicability of Section 9 of the Act. Courts adhere to predetermined procedures when deciding on interim measures. EA, on the other hand, can provide such relief in a more expedient and confidential manner, saving both money and time. Justice Srikrishna Committee Report (2017) and the 246^th Law Commission Report have also suggested including emergency arbitrators within the definition of ‘arbitral tribunal’. However, given the existing position of Indian courts refusing to enforce EAs, parties should exercise extreme caution when relying on emergency arbitral awards obtained in a foreign jurisdiction to defend their rights in an emergency

BY PRATEEK, GRADUATE FROM ARMY INSTITUTE OF LAW, MOHALI

Introduction

Arbitration has seen a meteoric rise in adoption in the United States of America (“The USA”). This can primarily be attributed to the arbitration friendly approach taken by the courts while interpreting statutes like the Federal Arbitration Act, 1925. A manifestation of this became the arbitration friendly approach taken towards arbitrability of disputes. Consumer dispute arbitrability is a glaring example of this. While Indian courts have taken a cautious approach towards consumer dispute arbitrability, ruling against the mandatory enforcement of pre-dispute arbitration agreements, courts in the USA have allowed mandatory enforcement of pre-dispute arbitration agreements. This case study of arbitral proceedings against Robinhood provides an analysis into the problematic aspects of mandatory consumer dispute arbitration.

Background

Robinhood Market is a trading platform founded in the USA in the year 2013. The platform is primarily populated by day traders and retail investors consisting of primarily small portfolios of shares and options trading.

Retail investors identified that stocks like AMC and GameStop were being betted against by some Wall Street Hedge Funds. Against such backdrop, the community aimed at pumping the stock to sky-rocket its price till they achieve a short-squeeze through buying and holding shares. This caused a frenzy of online memes, sounding calls for retail investors to cause a short-squeeze, and earned these stocks the designation of “meme stocks”. Robinhood saw massive trading volumes since the retail investors were primarily driving this surge. This allegedly caused a major liquidity crisis for the platform creating an inability for Robinhood to meet collateral requirements for trades with National Securities Clearing Corporation (‘NSCC’), their clearing house. Due to this, Robinhood restricted trading on these “meme stocks”, causing substantial losses to customers.

The FINRA Way of Arbitration

Alleging damages due to missed-opportunity for making profits through trading said “meme stocks”, caused by Robinhood’s trading restrictions, a few users decided to raise their claims against the platform. Claims were raised through disputes governed by Section 38 of the Robinhood Consumer Agreement , which contains a pre-dispute arbitration clause whereby all disputes between parties to the agreement are to be mandatorily submitted for arbitration before Financial Industry Regulatory Authority (‘FINRA‘) Dispute Resolution in the State of California.

In January 2022, Jose Batista, a retail investor aggrieved by Robinhood’s actions, was awarded approximately $30,000 through the FINRA Dispute Resolution Mechanism. While this award is seen as a victory for the average retail investors, the mechanism through with the award was won creates a barrier that systematically isolates the approach to remedy for every consumer. Robinhood’s actions caused losses to multiple customers but due to arbitration being the mandate, the dispute cannot be resolved through any form of class action. This barrier is further solidified through the FINRA Code of Arbitration Procedure for Consumer Disputes, under which Rule 12204 posits that class action claims cannot be arbitrated under the code.

American Position on Consumer Dispute Arbitration

In the USA, arbitration is primarily governed at the federal level by the Federal Arbitration Act, 1925 (“The FAA”). Under this statute, once the mandatory arbitration clause is established, the court is required to refer the dispute to arbitration. This mechanism has been radically interpreted by the Supreme Court in Moses H. Cone Memorial Hospital v Mercury Construction Corp., where the court mandated a presumption in favour of arbitration when faced by an arbitration agreement. The doctrine of unconscionability does provide respite to parties in cases where the contract is clearly tarnished by unfair terms, and deficient or imbalanced bargaining powers between parties. But this test has been held in Zapatha v Dairy Mart Inc., to be applicable only on a case-to-case basis since the court posited that no all-purpose definition of unconscionability was possible. Further, the already limited grounds for escaping mandatory arbitration, restricted to prima facie unconscionability, fraud, misrepresentation, coercion, incompetence, and illegality of consideration being established through a bare reading of the agreement, were held to be subject to the doctrine of separability in the case of Prima Paint Corp. v. Flood & Conklin Mfg. Co.. Application of the doctrine of separability meant that tainted sections of an arbitration agreement could be excluded, to allow a consistent and legally binding reading of the mandatory arbitration agreement, as long as the agreement was not entirely vitiated or defeated by such exclusions. Consequently, all claims of fraud and unconscionability are also to be adjudicated upon by the arbitral tribunal. 

Exceptionalism of arbitration forms the centrepiece of judicial jurisprudence on the subject in America. This overriding prioritization is manifested through the sections under the FAA, and with the case of Southland Corp. v. Keating, the Supreme Court ruled that the FAA pre-empts all state laws on the subject. Consequently, statutes like the Mont. Code Ann. § 27-5-114 (1993) providing safeguards to protect consumer interests, were struck down by the court while holding the law restrictive of arbitration. This exceptionalism is especially mind-boggling as the prohibitively expensive nature of arbitration and its deterrent effect on a consumer’s ability to bring disputes to court has been noted by courts. While exorbitant and incapacitating cost of arbitration was acknowledged as grounds for escaping arbitration, in Green Tree Financial Corp.-Ala. .v Randolph, the Supreme Court held that the burden to prove the prohibitive nature of costs was on the consumer who is seeking to escape mandatory arbitration. 

With respect to class action arbitration, in cases where the agreement is silent on the issue, the Supreme Court in Green Tree Financial Corp. v. Bazzle delegated the task of determining the issue to arbitral tribunals. Through subsequent decisions, this power was significantly curtailed. In the case of AT&T Mobility L.L.C. v. Concepcion, the Supreme Court held that the FAA pre-empts the use of unconscionability as means to allow class action consumer arbitration. The court further expressed displeasure against the concept of class action arbitration itself. 

Shortcomings of Consumer Dispute Arbitration Praxis from an Indian Perspective

The Robinhood case study can provide interesting insights from an Indian standpoint into the following possible ramifications of a liberal approach towards consumer dispute arbitrability:

A. Lack of Precedent Value:

Some arbitration agreements, like in the Robinhood case, may not require a reasoned order. In any case, even if a reasoned order made, this cannot be used as precedent in arbitral proceedings by other aggrieved consumers under the same issue. This is primarily due to mandatory confidentiality requirements and further lack of precedential value of awards. This may create deterrence for smaller claims being raised. Since facts are usually similar in consumer disputes arising out of unfair business practices, creation of precedence defeats the impediment created by class action waivers. This is due to the creation of certainty in outcome.

B. Prohibitive Cost:

The public policy argument against arbitration is premised on the comparative inferiority of arbitration in comparison to court adjudication. On this subject, in Vidya Drolia v Durga Trading Corp. The Supreme Court of India reiterated the observation made in Union of India v. Singh Builders Syndicate, stating that arbitration is expensive for parties in comparison to judicial adjudication.

This prohibitive cost creates a virtual barrier against consumer arbitration. Consumer disputes largely involve smaller claims, and recognition of this fact is evident from the regime of costs under the Consumer Protection Act, 2019. This issue is magnified under consumer disputes where the claimant is usually an individual consumer who may not anticipate the grant of compensation to extents that would justify the risk of undertaking expensive arbitration proceedings. 

C. Unequal Bargaining Powers in Standard Form B2C Agreements:

Indian courts have observed limited acceptance of the doctrine of unconscionability as grounds for nullifying agreements under public policy. In these cases, the doctrine of unconscionability was based on unequal bargaining power. Similar inequality is observed in standard form B2C contracts, especially in a country like India. This inequality is exasperated by widespread digital illiteracy and a lack of legal awareness. Thus, there is scope for applying the principles of unconscionability in India under public policy for denying enforcement of mandatory arbitration agreements. 

D. Express and Implied Class Action Waivers:

Since arbitration attains legitimacy through party autonomy, any breach in privity of contract would compromise such autonomy and consequently, the whole process of arbitration. This structural barrier can be avoided if Business to consumer agreement (‘B2C‘) agreements allow for class action lawsuits, but businesses lack the incentive to allow such provisions. Due to the inequality in bargaining power regarding standard form B2C agreements, class action waivers become a part and parcel to protect business interests.

Class action becomes an essential tool for vulnerable parties to attain equality in bargaining power while seeking redressal of disputes. While in cases of victories, the overall compensation may not be as high as individual claims due to their division amongst a large class, the risk value being low rationalises the trade-off. This is because raising disputes is itself expensive, and class-actions allow division of costs. Such metrics are particularly relevant for arbitration, while is an uncertain and expensive process. 

The Way Forward

While class-actions may provide some respite to consumers from above-mentioned issues, business incentive to include class-action waivers in standard form contracts is very high. Further, lack of precedent on legality of these waivers in India makes this argument moot for now.

Interestingly, the pro tem solution to this issue is possible through elimination of the incentives that businesses have for undertaking consumer arbitration. In Manchester City Football Club Ltd v Football Association Premier League Ltd., an English court published a confidential arbitral award in the name of public policy. Such publication of awards impacting a larger class of people under the direction of courts may be useful for arbitral tribunals engaged in similar disputes against the same unfair business practice. While arbitral awards are not binding precedents, persuasive value can surely be derived. This is especially true since the award in such cases is granted higher legitimacy due to recognition of public interest by the court. Eliminating reduced publicity of claims is a disincentive for businesses to promote expensive arbitration with consumers since the biggest ace up their sleeves is rendered useless.