Issues Relating to Arbitration in Outsourcing Contracts - Essay Example

Issues Relating to Arbitration in Outsourcing Contracts Introduction This case is pertaining to how a foreign arbitral award can be implemented or get annulled by Indian courts. The Arbitration and Conciliation Act, 1966 of India is based on the Model Law on International Commercial Arbitration espoused by the United Nations Commission on International Trade Law (UNCITRAL) which requires prior approval from an Indian court for the enforcement of foreign award. The section 56(c) of the above act demands the party trying to get enforcement to offer evidence that the award obtained is from foreign jurisdiction. Section 44 of the Act defines what a foreign award is, and it denotes an award passed in such jurisdiction as the central government of India through a notification would declare to be the territory to which the New York Convention is applicable. It is to be noted that India is already a member of the New York Convention1. The Indian Arbitration and Conciliation Act, 1996- section 48 deals with the stipulations for the implementation of foreign awards in India. The reasons for refusal to implement a foreign award in India are that of analogues to the New York Convention. As per section 48 of the Arbitration and Conciliation Act, 1966 of India, the ground for setting aside for a foreign arbitral award would be any of the following: • If a party to the contract was under some incapability; or • Under the governing law, if the arbitration agreement was not valid; • No proper notice of either the arbitral proceedings or the appointment of the arbitrator was given to any of the parties; • If the award exceeds its scope of the submission; • If the award is pertaining to a dispute not agreed by or not falling within the purview of the subject matter of the arbitration. • If the arbitral procedure or the composition of the arbitral tribunal was not in tune with the consent of the parties; • Arbitration process may not be used for arriving at a conclusion as the subject matter of arbitration is so grave; • Where the arbitral award is against the public policy of India. Thus, the main objective of this essay is to find out how a foreign award can be set aside in India and if so, on what grounds. 2.” Issues and problem “ a) Global was not a party to the Outsourcing Agreement and, therefore, whether it is o r not liable there under; b) Sir Humphrey Mullis cannot hear the case as the firm he used to work for is paid a monthly retainer by Global c) Whether under English and international principles of construction GSI and Global are jointly and severally responsible and must compensate DF? d) Whether awarding of punitive damages of Euro 500 million in favour of DF by Sir Humphrey Mullis is legally valid or not? 3 Rules and regulation related In this case, Global Solutions India Ltd. (GSI) and Deutsche Financial AG (DF) are the parties to the contract and they have agreed that the outsourcing contract will be governed in every respect by the laws of India. Though the seat of the arbitration is London as agreed between the parties, the arbitration will be under the rules of the League of Nations. In Bremer Vulkan v South India2, it was held by the House of Lords that there is no supervisory power assigned to the English courts over arbitration process, and if it is provided in the Arbitration Act, then only, the English courts will intervene in cases wherever it is essential3. Thus, though the seat of the arbitration is London, the applicable arbitral laws will be Indian laws. The Arbitration and Conciliation Act, 1966 of India is based on the Model Law on International Commercial Arbitration espoused by the United Nations Commission on International Trade Law (UNCITRAL) which requires prior approval from an Indian court for the enforcement of foreign award whereas no such provision can be found in the New York Convention. The section 56(c) of the above act demands the party trying to get enforcement to offer evidence that the award obtained is from foreign jurisdiction. Section 44 of the Act defines what a foreign award is, and it denotes an award passed in such jurisdiction as the central government of India through a notification would declare to be the territory to which the New York Convention is applicable. It is to be noted that even if a nation is a signatory to the New York Convention, it does not automatically connote that an arbitral award passed in such a nation would be immediately enforceable in India. There is one another requirement that the Indian central government should declare such a nation as the signatory to the New York Convention through a notification. For example, India has notified more than forty nations, which are territory under the New York Convention which includes UK, Germany and USA. In addition to the party to the New York Convention of 1958 on the Recognition and Enforcement of Foreign Arbitral Awards, India is also a party to the Geneva Protocol on Arbitration Clauses and the Geneva Convention on the execution of foreign arbitral awards4. It is to be noted that both the India and the UK are parties to the New York Convention of 1958 particularly on the Recognition and Enforcement of Foreign Arbitral Awards and hence an arbitral award obtained in UK is implementable and enforceable in India. For implementing a foreign award in India, the Code of Civil Procedure 1908 (CPC) needs the execution of decrees whether domestic or foreign in India. In one another case, a foreign award rendered in an arbitration proceeding held in London against the Venture Global Engineering (VGE) had been challenged in Indian court by VGE on the ground that award infringed some Indian foreign investment and corporate statutes particularly the Foreign Exchange Management Act, 1999 and hence, it was argued that it amounted to a contradiction with the public policy of India as per the part I of the section 35 of the Arbitration Act of India. The arbitral relief was pertaining to VGE’s business interest in India and demanded for the transfer of some shares that VGE owned in an Indian Joint venture. The above decision has a significant impact both for the companies with vast assets in India, for the companies carrying out business in India and for the companies which are needed to implement foreign arbitral awards in India. Thus, Indian courts can set aside the foreign arbitral awards on the grounds of against the public policy5. Section 48 of the Indian Arbitration act provides the grounds for refusal of implementation of a foreign arbitral award in India, which is identical to the New York Convention. Now, the foreign arbitral awards can be challenged in Indian courts on the ground that it violates the public policy. In Venture Global engineering v Satyam Computer Services Ltd, Supreme Court of India held that a foreign arbitral award can be challenged if it infringed the provisions of Indian statutes, and if it is divergent to the Indian public policy as per Part I of the Indian Arbitration and Conciliation Act, 1996. The most important part is how to apply and analyse the case in jurisdiction, asset, due process, impartiality under English law UNCIRAL arbitration rules NYC. Though the English law did not follow the Law of UNCITRAL , various provisions of the English Arbitration Act has been adopted from the UNCITRAL model law .Under English act , there is a way to set free the arbitration process from the clutches of the above said 1979 Act. However, there is still available an option to appeal to the court when there is a question of law which is very restricted under the” s.82 (1) of the above act.” As per section 69(1) of the Act, there should be a question of law stemming from the arbitral award and unless otherwise accepted by the parties. Further, as per question 69(2) states that an appeal shall not be initiated except with the consent of the all the parties involved or with the leave of the court. It is to be noted that the court will sanction its leave only if it is convinced that the relevant question substantially impacts privileges of one or more parties. Further, the question of law is one which the arbitral tribunal has been requested to decide and the majority of verdicts of the tribunal on such a question are always apparently erroneous .The court can also interfere when the question is of general public significance, and the verdict of the tribunal is in any case open to grave doubts. Thus, the court control on a question of English law still exists6. In case , if the appeal is heard by the court ,as per s.69(7),it may authenticate the arbitral award , make appropriate changes in the award or send back the case to the tribunal for reconsideration citing various reasons or the court makes the award as null and void either in the whole or in the part7. On the other hand, as per section 69(1), the control of the court can be completely eliminated if the contract contains a provision “unless otherwise agreed by the parties.” Thus, under section 69(1), the parties, may at any juncture, for any variety of transactions may keep out through a written agreement, any privilege of appeal on a question of law to the court8. Further, s.69 (1) specifies that an agreement to relinquish with reasons for the strategic objectives on which the award by the tribunal is made shall be regarded an agreement to keep out the court’s jurisdiction under the above section. Nonetheless , the 1996 Act preserves the regulation that the Court may order the arbitral tribunal to offer valid objectives or further reasons for its award when there is an appeal under 67 to 69 . In the Lesotho Highlands9 case, House of Lords contradicted the verdict made by the Court of Appeals, which had ruled that the arbitral tribunal concerned had arrived at an improper verdict at law. Lord Steyn in this case reiterated the narrow authority of the courts to review under the Arbitrations Act 1996 and viewed that “ sections 68(2)(b) does not allow a dispute on the footing that the tribunal came to a wrong verdict due to the matter of fact or law10. Under the point of law, the right to appeal backs upon the appellant receiving an order from the leave of the court under the directives framed in sec.69 (3). These directives can be classified as under; That the determination of question will in a major way impact the privileges of one or more of the parties, That the question is one which the tribunal was requested to decide , That , on the footing of the findings of fact in the award , Whether the decision of the tribunal has been arrived on the wrong footing The fact is of general public significance, and the award of the tribunal is at least is open to severe distrust That, in spite of consent to resolve the issues through arbitration, is proper and just in all the background for the court to determine the question. From the above, we can come to a conclusion that the right to appeal against or to confront an arbitral award is fairly wide under English law as compared to other jurisdictions. Especially, the need under section 69(3) of the Act is that the award is “obviously wrong” or of general public significance or open to serious doubt or the “serious irregularity” could be cause of concern under sec. 68(2). It is to be noted that in other legal systems, correction of award is allowed only under two grounds viz. to establish that the correction of an award on just procedural errors or to set out the award if there is an infringement of public policy issues whereas under English legal system, more broader categories are allowed for review of an arbitral award11. In “T.Co Metals, LLC v. Dempsey Pipe & Supply, Inc12”, the finding of a district court was reversed by the U.S Court of Appeals for the Second Circuit thereby annulling an modified final verdict on the footings that the arbitrator surpassed his authority to correct his award by reinterpreting and reconsidering the records, instead of restricting himself to modify just clerical mistakes. The Second Circuit court was of the view that the arbitrator had the authority to construe the institutional regulations pertaining to the arbitral proceedings, but he could not surpass his authority to reassess the verdicts they made in their final verdicts, thereby successfully permitting the parties to appeal against the award to the arbitral tribunal. Thus, such authority is not available in any well-found arbitral regulations and also runs contrary to the functus officio doctrine and destabilises the finality of the arbitral verdicts. The Arbitration act grants autonomous authority upon arbitrators to settle on their own jurisdiction, which is famously known in German as Kompetenz- Kompetenz ,which is mainly designed to reduce the control of the arbitral awards and arbitral proceedings by the courts at the place where the arbitration is being handled and to either internationalise or delocalise the international arbitrations , to separate the arbitral lex fori from the control of national private international law set up, to hold back or attenuate controls on the acknowledgement or enforcement of foreign arbitral wards and to confer enlarged authority to arbitrators and parties of selecting the law applicable to the arbitral procedure and to substance of the dispute13. In Dallah v Pakistan , the UK ‘s Supreme Court on 3rd November 2010 turned down the request made by the plaintiff to implement a French ICC award against Pakistan’s government assets in UK on the footing that the Pakistan government was not a party to the specific arbitration agreement. Thus, the arbitration agreement cited by the plaintiff relates between a trust and Dallah. The same line of verdict was also given in 14 Dardana Limited v Yukos Oil Company15 . “Impartiality of the Arbitrators” It is general perception that an arbitrator should be impartial – which means that he has to act without prejudice and bias. As per UNCITRAL Arbitration regulations, if an arbitrator found to be acting in an impartial way, then, it would be sufficient ground for his removal. As per Ethics for International Arbitrators describes the impartiality as if an arbitrator is found to be prejudicial as regards to the subject-matter of the dispute, or if he favours one of the parties of the dispute. As per the UNCITRAL Arbitration rules, the prevalence of “justiable doubt” would be adequate. Under US law, it has to be demonstrated that there has been evident partiality. Under UK laws, justifiable doubt should be established if there is an imminent peril of bias. In Re the Owners of the Steamship “Catalina “and Others and the Owners of the Motor Vessel “Norma16” an arbitrator was removed as he passed a comment that “ Portuguese people were liars17. In Buraimi Oasis18 arbitration case, an arbitrator was found to have functioned as an official of the Saudi Arabia government, and he was in control of arbitration matters when he was under employment and hence, his appointment was regarded as bias. In an arbitration between a US food company and the Government of Nicaragua, it was alleged that one of the arbitrators had functioned as an advisor to the US government on the matters relating to the US government on arbitration matters and however, the challenge to appointment was failed19. In Commonwealth Coatings Corp v Continental Casualty Co20, if an arbitrator had functioned as a consultant to a party to the dispute previously, and if this fact had not been divulged in advance, then, it could be valid ground for the removal of the arbitrator. In Tracomin SA, v Gibbs Nathaniel (Canada) Ltd and another21, it was held that an arbitrator can be removed from the office on the accusation of earlier partial demeanour of the arbitrator which rests upon the gravity and nature of the demeanour. If the claimant’s lawyer and the chairman of a panel shared a hotel room as this may have a grave outcome for any award22. In Sunkist Softdrinks, Inc v Sunkist Growers, Inc23, it was held that if an arbitrator who is appointed by a party used to confer with a party, and this could not be sufficient ground for his removal. In Laker Airways, Inc v FLS Aerospace Ltd24, barristers from the same chambers would not be regarded as creating a bias. In case of a three-member panel where each party is having authority to appoint an arbitrator to represent his side, and this connotes that these arbitrators are arguing for the party appointing them. In Tracomin25, it was held that such an arbitrator may function as media of communication between the tribunal and the party. “Force Majure Clasue” In this issue , there is a force majure clause as per ICC 2OO3 in the contract. One of the exemption clause Force Majure Clause of ICC 2003 states that if some unforeseen development has occurred due to act of government, whether legal or illegal, observance with any law or order by government, statute, directive or regulation , the affected party can has the privilege to cease the contract by announcement within a reasonable period to Deutsche Financial AG (DF) by Global Solutions India Ltd. (GSI). He GSI can issue a notice within reasonable time to DF that it is intending to cease the contract due to above force majure clause. “Appointment of Arbitrator “ Article 9 of UNCITRAL Arbitration Rules has prescribed for the establishment of a three-member tribunal. Article 9(1) details out the distinctive procedure in such a scenario: each party to the contract issue a notice for appointment of an arbitral tribunal consisting of three arbitrators and each party has to nominate an arbitrator within 14 days of such notice and has to appoint one arbitrator for their side and the so appointed two arbitrators would appoint the third arbitrator. Hence , in the appointmnet Sir Humphrey as an arbitrator , the above procedure has not been followed, and hence Sir Humphrey appointment is not within the above rules, and his appointment is not in order. Hence ,Global Solutions India Ltd. (GSI) can refer this and request for removal of Sir Humphrey as the arbitrator to the issue. Conclusion and Recommendations In this case, Global was not a party to the Outsourcing Agreement and, therefore, not liable there under. In recent Vodafone case, Indian Supreme Court held in January 2012 that a parent, and a subsidiary are distinctly different tax payers and the very fact that the parent exerts control over the affairs of its subsidiary cannot bind the parent for the contracts entered by the subsidiary. India is also a party to the New York Convention on Arbitration26. There are five procedural defects prescribed by the New York Convention through its Article V on which a national court in India can decline to recognise and implement the foreign arbitral awards27. An arbitration award rendered against a non-signatory can be confronted as Global was not a party to the contract. For example, since Global had not been a signatory to the contract, it would not have signed the contract as a party and hence, it might be denied a chance to be heard. Local courts in India can cancel the arbitration award against the parent company (Global) as the arbitration contract was not signed by the Global. Sir Humphrey Mullis cannot hear the case as the firm he used to work for is paid a monthly retainer by Global. Further, GSI is aware that the firm Sir Humphrey used to work for advising Global on several issues arising from the international tax investigation. This is one of the valid grounds to make the arbitral award as invalid. In Commonwealth Coatings Corp v Continental Casualty Co , if an arbitrator had functioned as a consultant to a party to the dispute previously, and if this fact had not been divulged in advance, then, it could be valid ground for the making the arbitral award as invalid. In Buraimi Oasis arbitration case, an arbitrator was found to have functioned as an official of the Saudi Arabia government, and he was in control of arbitration matters when he was under employment and hence, his appointment was regarded as bias. It was brought notice of GSI and Global that Sir Humphrey met in private with counsel for Global on several occasions. However, this could not be a sufficient ground for making the award as illegal. In Sunkist Softdrinks, Inc v Sunkist Growers, Inc28, it was held that if an arbitrator who is appointed by a party used to confer with a party, and this could not be sufficient ground for his removal. It was alleged that Sir Humphrey told to GSI’s lawyer as saying “These Indians have a very distorted view of how international arbitration operates”. In Re the Owners of the Steamship “Catalina “and Others and the Owners of the Motor Vessel “Norma ” an arbitrator was removed as he passed a comment that “ Portuguese people were liars .” Hence, Sir Humphrey’s verdict can be vacated on the above ground. Further, in the outsourcing contract, there should be a clause in case if any one of the parties wants to quit the contract. By using such clause, GSI can put an end to the contract by giving proper notice to the other party. This has not been stated in the problem question. 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