Analysis of Section 28 of the Arbitration and Conciliation Act, 1996

The Arbitrator's Compass: An In-Depth Analysis of Section 28 of the Arbitration and Conciliation Act, 1996

Introduction

Section 28 of the Arbitration and Conciliation Act, 1996 (hereinafter "the Act") stands as a cornerstone in the Indian arbitral regime, delineating the fundamental rules applicable to the substance of disputes. It mandates that arbitral tribunals decide disputes based on substantive law and the terms of the contract, thereby ensuring a principled and legally sound adjudicatory process. This provision plays a crucial role in maintaining the integrity and predictability of arbitration, balancing party autonomy with the imperatives of legal propriety. This article seeks to provide a comprehensive analysis of Section 28, examining its various sub-sections, its interplay with other provisions of the Act, particularly Section 34 concerning the setting aside of arbitral awards, and its interpretation through landmark judicial pronouncements in India. The discussion will also carefully distinguish Section 28 of the 1996 Act from similarly numbered sections in the Indian Contract Act, 1872, and the erstwhile Arbitration Act, 1940, which, though sometimes invoked in related contexts, address different legal issues.[17, 18, 20, 21, 22, 23, 24, 25]

The Mandate of Section 28: Rules Applicable to the Substance of the Dispute

Section 28 is pivotal in guiding the arbitral tribunal on the substantive legal framework and contractual obligations that must underpin its decision-making process. Its provisions are structured to address different scenarios, including domestic and international commercial arbitrations, and the specific authority required for decisions ex aequo et bono.

Section 28(1): Choice of Substantive Law

Section 28(1) distinguishes between domestic arbitrations and international commercial arbitrations concerning the applicable substantive law.

Domestic Arbitrations (Section 28(1)(a)): For arbitrations other than international commercial arbitrations, Section 28(1)(a) unequivocally states that "the arbitral tribunal shall decide the dispute submitted to arbitration in accordance with the substantive law for the time being in force in India." This provision is mandatory. The Supreme Court in Bharat Aluminium Company v. Kaiser Aluminium Technical Services Inc. (BALCO)[4] clarified that Part I of the Act, which includes Section 28, applies to arbitrations seated in India. Consequently, for domestic arbitrations seated in India, the arbitral tribunal is bound to apply Indian substantive law. This ensures that domestic disputes are resolved consistently within the national legal framework.

International Commercial Arbitrations (Section 28(1)(b)): In the realm of international commercial arbitration, Section 28(1)(b) accords significant respect to party autonomy. It stipulates that the arbitral tribunal shall decide the dispute "in accordance with the rules of law designated by the parties as applicable to the substance of the dispute."[15] If parties designate the law of a particular country, it is construed as referring to its substantive law, not its conflict of laws rules, unless otherwise expressed.[15] Failing such designation by the parties, Section 28(1)(b)(iii) empowers the arbitral tribunal to "apply the rules of law it considers to be appropriate given all the circumstances surrounding the dispute."[15] This grants the tribunal considerable discretion in selecting the applicable substantive rules in the absence of party agreement, a power that must be exercised judiciously, considering all relevant factors of the dispute.

Section 28(2): Decision Ex Aequo Et Bono or as Amiable Compositeur

Section 28(2) provides that "the Arbitral Tribunal shall decide ex aequo et bono or as amiable compositeur only if the parties have expressly authorised it to do so."[15] This means a tribunal can decide based on general principles of fairness and equity, rather than strict legal rules, only when explicitly permitted by the parties. This provision underscores the principle that deviation from substantive law requires clear and express consent from the disputants, reinforcing the general obligation to apply law unless otherwise agreed.

Section 28(3): Primacy of Contract and Trade Usages

Perhaps one of the most frequently invoked provisions, Section 28(3) mandates: "While deciding and making an award, the Arbitral Tribunal shall, in all cases, take into account the terms of the contract and trade usages applicable to the transaction."[15] This sub-section is critical as it binds the tribunal to the contractual bargain struck by the parties and the relevant trade customs.

The Supreme Court's decision in Ssangyong Engineering & Construction Co. Ltd. v. National Highways Authority Of India (NHAI)[3] illustrates the importance of this provision. The Court upheld a dissenting arbitration award that rejected NHAI's unilateral alteration of a price adjustment formula through a policy circular, emphasizing that such modifications without mutual consent contravene the original contract terms. An award that ignores the explicit terms of the contract or countenances unilateral modifications would fall foul of Section 28(3). Similarly, in Oil And Natural Gas Corporation Limited v. Western Geco International Limited,[2] the Supreme Court's detailed examination of delay attribution and the applicability of a force majeure clause inherently involved scrutinizing whether the arbitral tribunal had decided in accordance with the contract. The Punjab & Haryana High Court in M/S U.B Engineering Limited v. Indian Oil Corporation Limited And Another[19] explicitly noted that under Section 28 of the 1996 Act, "the arbitrator was to act in accordance with the terms and contract and to adjudicate the dispute accordingly. He had no authority to avoid the terms of contract..."

Interplay with Section 34: Judicial Review of Awards for Non-Compliance with Section 28

Non-compliance with the mandates of Section 28 by an arbitral tribunal can lead to challenges against the award under Section 34 of the Act. The primary ground under which such challenges are typically mounted is "patent illegality."

"Patent Illegality" as a Ground for Challenge

The Supreme Court in Oil & Natural Gas Corporation Ltd. v. Saw Pipes Ltd.[6] significantly expanded the scope of judicial review under Section 34 by interpreting "public policy of India" to include "patent illegality." An award is considered patently illegal if it is contrary to the substantive provisions of law, the Act itself, or the terms of the contract. Therefore, a decision by an arbitral tribunal that disregards Indian substantive law in a domestic arbitration (violating Section 28(1)(a)) or fails to decide in accordance with the terms of the contract (violating Section 28(3)) can be set aside on the ground of patent illegality.

The Supreme Court in Associate Builders v. Delhi Development Authority[5] further elaborated on "patent illegality," clarifying that it must be an illegality that goes to the root of the matter and is apparent on the face of the award. It does not encompass mere erroneous application of law or misappreciation of evidence. The introduction of Section 34(2A) by the 2015 amendment to the Act codified "patent illegality" as a distinct ground for setting aside domestic arbitral awards, stating that an award may be set aside if "the court finds that the award is vitiated by patent illegality appearing on the face of the award."[15] The proviso to Section 34(2A) reiterates that "an award shall not be set aside merely on the ground of an erroneous application of the law or by reappreciation of evidence."[15]

The Scope of Judicial Scrutiny

While a breach of Section 28 can lead to an award being set aside for patent illegality, courts are generally cautious not to delve into the merits of the dispute. The judicial approach, as emphasized in cases like Associate Builders,[5] is one of minimal intervention. The error of law must be obvious and substantial. For instance, if a tribunal applies a foreign law to a purely domestic arbitration without it being an international commercial arbitration or without party agreement where permissible, it would be a patent illegality violating Section 28(1)(a). If a tribunal rewrites the contract for the parties or ignores crucial contractual clauses, it would violate Section 28(3) and could be deemed patently illegal.

The Bombay High Court in Hindustan Petroleum Corporation Ltd. v. Batliboi Environmental Engineers Ltd. & Another[8] raised a pertinent question: "Under which provisions of section 34(2) could the award be challenged if the Tribunal does not follow the substantive law of India or wrongly applies the substantive law, or goes beyond the term of the contract...?" The court opined that such violations might not directly fall under Section 34(2)(a)(i), (ii), (iii), or (iv) as they were then framed (pre-2015 amendment). However, the evolution of the "patent illegality" doctrine under the "public policy" ground by the Supreme Court, and its subsequent codification in Section 34(2A), has provided a clearer avenue for challenging awards that contravene Section 28.

Section 28 and Party Autonomy

The Act endeavors to balance party autonomy with certain mandatory legal principles. While Section 19 of the Act grants parties the freedom to agree on the procedure to be followed by the arbitral tribunal, and failing such agreement, empowers the tribunal to conduct proceedings in a manner it considers appropriate (without being bound by the Code of Civil Procedure, 1908 or the Indian Evidence Act, 1872),[12, 16] this procedural flexibility is exercised "subject to this Part" (Part I of the Act). Section 28, being part of Part I, thus imposes substantive limitations that generally cannot be derogated from by party agreement, particularly Section 28(1)(a) for domestic arbitrations and Section 28(3) regarding adherence to the contract.

It is also relevant to briefly note Section 28 of the Indian Contract Act, 1872. Several reference materials discuss this provision,[7, 9, 10, 11] which voids agreements in restraint of legal proceedings. Exception 1 to this section saves contracts to refer future disputes to arbitration, and Exception 2 saves agreements to refer existing disputes to arbitration. This provision of the Contract Act fundamentally validates arbitration agreements under Indian law. The principle articulated in A.V.M Sales Corporation v. Anuradha Chemicals Private Limited,[7] that "parties cannot contract against a statute," while made in the context of the Contract Act, resonates with the mandatory nature of certain provisions within Section 28 of the Arbitration and Conciliation Act, 1996. For example, parties in a purely domestic arbitration cannot agree to apply foreign substantive law to the exclusion of Indian law, as this would contravene the mandate of Section 28(1)(a).

Distinguishing from Section 28 of the Arbitration Act, 1940

It is crucial for clarity to distinguish Section 28 of the Arbitration and Conciliation Act, 1996, from Section 28 of the (now repealed) Arbitration Act, 1940. A number of the provided reference materials[17, 18, 20, 21, 22, 23, 24, 25] pertain to Section 28 of the 1940 Act. That section dealt with the "Power of courts to enlarge time for making award." For instance, in Haryana State Electricity Board v. Universal Fasteners Private Limited And Another,[17] the Supreme Court discussed the court's power under Section 28 of the 1940 Act to extend the time for making an award. Similarly, Hindustan Steelworks Construction Ltd. v. C. Rajasekhar Rao[18] also concerned the court's power to extend time under the old Act. These references, while historically relevant to arbitration practice under the 1940 Act, address a procedural aspect (time limits for awards) that is now governed by Section 29A of the 1996 Act, and are distinct from the substantive rules of decision-making prescribed by Section 28 of the 1996 Act.

Conclusion

Section 28 of the Arbitration and Conciliation Act, 1996, serves as a critical directive to arbitral tribunals in India, ensuring that their decisions are anchored in substantive law and the contractual understanding between the parties. By mandating adherence to Indian substantive law in domestic arbitrations, respecting party autonomy in choosing the governing law in international commercial arbitrations, and requiring decisions to be in accordance with the contract and trade usages in all cases, Section 28 upholds the principles of legal certainty and fairness. Its interplay with Section 34, particularly through the "patent illegality" ground, provides a mechanism for judicial oversight, ensuring that arbitral awards that deviate fundamentally from these mandates can be challenged. While promoting arbitration as an efficient dispute resolution mechanism, Section 28 reinforces the notion that such efficiency cannot come at the cost of substantive justice. The careful delineation of these rules contributes significantly to the robustness and credibility of the arbitral process in India, fostering an environment where arbitration is both autonomous and accountable.

References