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CHAPTER 10

ARBITRATION
SYNOPSIS
DISPUTE SETTLEMENT: ALTERNATE DISPUTE RESOLUTION
DRAFTING AN ARBITRATION AGREEMENT/Clause
Arbitration Agreement
Judicial Analysis
Halsburys Laws
INTERNATIONAL COMMERCIAL ARBITRATION
Advantages of alternative dispute resolution
Disadvantages of alternative dispute resolution:
ENFORCEMENT OF ARBITRAL AWARDS
Detrimental Reliance
ARBITRATION CLAUSE
DAMAGES IN ARBITRATION

Dispute Settlement: Alternate Dispute Resolution

The Arbitration and Conciliation Act, 1996, consolidated and amended the law
relating to domestic arbitration, international commercial arbitration and
enforcement of foreign arbitral awards. It also defines the law relating to
conciliation of disputes. The Act was enacted in pursuance of the
recommendations of the general assembly of the United Nations stressing the
desirability of uniforming the law relating to arbitral and conciliation procedures and
is largely based on the model law on International Commercial Arbitration and
Model Conciliation Rules adopted by the United Nations Commission on
International Trade Law (UNCITRAL).
It is an essential pre-requisite of the arbitration law in India that parties to a
contract can demand resort to arbitration, if and only if, there is an arbitration
agreement between them and it is further necessary that the arbitration agreement
must satisfy the legal requisites. In the Arbitration Act, 1940, the legal requisites
are set out in section 2(a). In the Arbitration and Conciliation Act, 1996, these
requisites have been elaborated in greater detail, but the substratum has been
retained with further additions and refinements.
Drafting an Arbitration Agreement/Clause
The Arbitration and Conciliation Act, 1996, came into force on and from 16
August 1996. Section 2(1)(b) of the Act defines arbitration agreement to mean an
agreement referred to in section 7 of the Act. Chapter II of the Act deals with
arbitration agreements.
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Arbitration Agreement
Section 7 of the Act defines arbitration agreement to mean an agreement by
the parties to submit to arbitration all or certain disputes which have arisen or
which may arise between them in respect of a defined legal relationship, whether
contractual or not. Section 7(2) provides that an arbitration agreement may be in
the form of an arbitration clause in a contract or in the form of a separate
agreement. In particular, section 7(3) mandatorily provides that an arbitration
agreement shall be in writing.
According to section 7(4), an arbitration agreement is in writing, if it is
contained in
(a) a document signed by the parties;
(b) an exchange of letters, telex, telegrams or other means of
telecommunication which provide a record of the agreement; or
(c) an exchange of statements of claim and defence in which the existence
of the agreement is alleged by one party and not denied by the other.
It is further stipulated in section 7(5) that the reference in a contract to
document containing an arbitration clause, constitutes an arbitration agreement, if
the contract is in writing and the reference is such as to make that arbitration
clause as part of the contract. Therefore, the emphasis under the Arbitration and
Conciliation Act, 1996, is clearly and unambiguously on an arbitration agreement
in writing as the basis for invoking the proceedings for arbitration and/or
conciliation.
The expression arbitration agreement as defined in section 2(a) of the
Arbitration Act, 1940 (which has since been repealed by the Arbitration and
Conciliation Act, 1996) had been defined earlier to mean a written agreement to
submit present or future differences to arbitration, whether an arbitrator is named
therein or not. Therefore, in the absence of a written agreement between the
parties, the nature of the dispute as well as the terms of reference to the
arbitrator(s) cannot be determined and, hence the agreement in writing is insisted
upon as a pre-requisite for ascertaining the dispute(s) and for making reference
thereof to the arbitrator(s). The statute does not recognise any oral or implied
agreement for arbitration.
The very purpose of requiring in section 7(3) of the Act that the arbitration
agreement shall be in writing is to secure that an oral agreement is not
recognised in Law and, hence, does not constitute an arbitration agreement. The
cases and circumstances in which an arbitration agreement is to be regarded as
being in writing, have been narrated in section 7(4) and the instances given therein
are illustrative and cannot be regarded as exhaustive.
The English Arbitration Act, 1996, also contains special provisions in
section 5(2) to secure that there is an agreement in writing, if the agreement is
made in writing whether or not it is signed by the parties, or if the agreement is
made by exchange of communications in writing or if the agreement is evidenced
in writing.

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Judicial Analysis
The requirement of arbitration agreement in writing is also taken note of by the
Supreme Court in M.M.T.C. Ltd v. Sterlite Industries (India) Ltd, AIR 1997 SC 605
in which it has been made clear that
Sub-section (3) of section 7 requires an arbitration agreement to be in
writing and sub-section (4) describes the kind of that writing. There is
nothing in section 7 to indicate the requirement of the number of arbitrators
as a part of the arbitration agreement. Thus the validity of an arbitration
agreement does not depend on the number of arbitrators specified therein.
The number of arbitrators is dealt with separately in section 10, which is a
part of machinery provision for the working of the arbitration agreement. It
is, therefore, clear that an arbitration agreement specifying an even number
of arbitrators cannot be a ground to render the arbitration agreement invalid
under the new Act as contended by the learned Attorney General.
It may be noted that prior to the enactment of the Arbitration Act, 1940, oral
agreements for arbitration were considered as valid in law and any award made in
pursuance of such oral agreements could validly form the basis for the suit as also
for reference to arbitration and/or as a defence in the suit. After the requirement
of arbitration agreement in writing became statutorily mandatory, the determination
of how to find an arbitration agreement in writing, became necessary in various
cases, as may be seen from the various cases decided by the courts. The
signatures of the parties to the agreement was not considered essential earlier, but
in view of section 7(4) of the 1996 Act, the signature of the parties is essential.
The insistence on identity of parties to the agreement for arbitration and the
signature of the parties is essential. The insistence on identity of parties to the
agreement for arbitration and their signature is only to secure that the parties are
ad idem so that the arbitration agreement could be read to ascertain and establish
that the Parties agreed to the same thing in the same sense. The absence of ad
idem would invalidate the arbitration agreement and make the proceedings for
arbitration unsustainable in law.
The judgement of the Supreme Court in U.P. Rajkiya Nirman Nigam Ltd. v.
Indure (P) Ltd, AIR 1996 SC 1373 illustrates a case in which there was no
arbitration agreement between the parties and, hence, the plea for reference to
arbitration was rejected because an agreement for arbitration cannot be inferred,
nor could be implied. After referring to the earlier decision in Ramji Dayawala &
Sons (P) Ltd v. Invest Import, AIR 1981 SC 2085, the court held that, in the facts
of a given case, acceptance of a suggestion may be sub silentio reinforced by
subsequent conduct. It was further held that
Where there is mistake as to terms of a document, amendment to the draft
was suggested and a counter offer was made, signatory to the original
contract is not estopped by his signature from denying that he intended to
make an offer in the terms set out in the document. Where the contract is
in a number of parties, it is essential to the validity of the contract that the
contracting party should either have assented to or taken to have assented
to the same thing in the same sense or as it is sometimes put, there should

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be consensus ad idem. In that case, a sub-contract was signed and

executed by the managing director of the appellant company, but part of the
contract was altered subsequently since counter proposal was given by the
respondent. This court had held that one such case is whether a part of the
offer was disputed at the negotiation stage and the original offeree
communicated that fact to the offeror saying that he understood the offer
in a particular sense; this communication probably amounts to a counter
offer in which case it may be that mere silence of the original offeror will
constitute his acceptance. Where there is a mistake as to the terms of the
documents as in that case, amendment to the draft was suggested and a
counter offer was made, the signatory to the original contract is not
estopped by his signature from denying that he intended to make an offer
in the terms set out in the document; to wit, the letter and the cable. It can,
therefore, be stated that where the contract is in a number of parties, it is
essential to the validity of the contract that the contracting party should
either have assented to or taken to have assented to the same thing in the
same sense; or as it is sometimes put, there should be consensus ad idem.
It was held that there was no consensus ad idem to the original contract.
It was open to the party contending novation to prove that he had not
accepted a part of the original agreement though it had signed the
agreement containing that part.
It was accordingly held that
There is no signed agreement by a duly competent officer on behalf of the
appellant. The doctrine of indoor management cannot be extended to
formation of the contract or essential terms of the contract unless the
contract with other parties is duly approved and signed on behalf of the
public undertaking or the Government with its seal by an authorised or
competent officer. Otherwise, it would be hazardous for public undertakings
or Government or its instrumentalities to deal on contractual relations with
third parties. In view of the fact that section 2(a) of the Act envisages a
written agreement for arbitration and that written agreement of submit the
existing or future differences to arbitration is a pre-condition and further, in
view of the fact that the original contract itself was not a concluded
contract, there existed no arbitration agreement for reference to the
arbitrators. The High Court, therefore, committed a gross error of law in
concluding that an agreement had emerged between the parties, from the
correspondence and from submission of the tenders of the Board.
Accordingly, it is declared that there existed no arbitration agreement and
that the reference to the arbitration, therefore, is clearly illegal.
Consequently, arbitrators cannot proceed further to arbiter the dispute, if
any.
Where the Parties to the arbitration agreement are not ad idem, the arbitration
by reference to the arbitrators of any dispute cannot be justified and the reference
would be bad and unsustainable in law as held in Sheodutt v. Pandit Vishnudutta,
AIR 1955 Nag 116.

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Halsburys Laws
It is stated by Lord Halsbury in Laws of England, 4th Edn., vol. 2, page 267,
para 522:
If the agreement is written, it may be included in a particular contract by
reference or implication. The agreement between the parties may
incorporate arbitration provisions, which are set out in some other
documents, but in order to be binding, the arbitration provisions must be
brought to the notice of both parties
It is inherent in cases of incorporation by reference that the parties are
concerned not with one document alone, but with at least two one of which
contains an arbitration clause and the other of which does not. In some
case, the one document may constitute a contract between other parties.
A common case is where the two documents concerned are a charter party
and a bill of lading. If the relevant contract between the relevant parties is
contained in the document, which does contain the arbitration clause, no
question of incorporation arises. Where this is not the case, the question
whether the document containing the arbitration clause is incorporated in
the relevant contract between the relevant Parties is, always, a question of
construction.
A brief epilogue
The need for an arbitration agreement in writing between the parties is to
secure that the terms and conditions of the agreement are clear and certain and
they are capable of being enforced to give effect to binding legal relationships
between the Parties in regard to their rights and obligations. In the absence of an
agreement in writing between the same parties, there can be no arbitration of a
dispute which needs to be resolved and in every such case where no arbitration
is permissible, the only remedy is to pursue civil suit in accordance with the law
of contract and the Indian Civil Procedure Code. The significance of a written
arbitration agreement cannot, therefore, be under-estimated, nor could it be
disregarded for settlement of any dispute between the parties to decide whether
the arbitration is permissible or not and whether civil suit is the only remedy left
to be pursued by and between the parties to the dispute.
International Commercial Arbitration
Commercial arbitration has been going through incredible growth over the last
decades and has become a hot-topic. An entire industry has developed around
alternative dispute resolution. (ADR) Certain countries have even adopted
arbitration laws that limit judicial reviews of arbitration awards (Belgium,
Switzerland, and England) in order to facilitate this growth market and get their
share of this multimillion-dollar industry.
If the parties to a contract decide to use commercial arbitration to resolve any
dispute they might have, they will have to do so either by inserting a clause to
that effect into the written agreement, or agree to submit a conflict to arbitration
when it arises. Since it can be safely stated that parties in dispute will be having
a hard time agreeing on, anything, it is better to include an arbitration clause in
the original agreement.

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Advantages of alternative dispute resolution

Familiarity with the procedure: when international contract disputes are brought
before a national judge there is normally one party unfamiliar with the procedure.
In case of arbitration with one of the international institutes this is not the case.
Furthermore the procedures in arbitration are simple compared to the civil
procedure of many countries.
No home-court advantage: Even when it is not justified, there will always be
distrust towards a foreign court, especially when the court is from the homeland
of the opposing party. This is not the case with arbitration before an impartial
tribunal, and sometimes even on neutral ground.
Choice of Law: National judges will often lean towards the laws of their own
country and resist the use of transnational laws and trade usage. ( lex mercatoria).
Clear Jurisdiction: There is no doubt in case of an arbitration clause regarding
the tribunal, which would have jurisdiction over the dispute. The question of
jurisdiction however is an issue, which can be the grounds for expensive and
tedious jurisdictional law-suits.
International Enforcement: This is probably the most important reason to elect
arbitration for dispute settlement. About 100 countries are signatories to the 1958
New York Convention, which makes the enforcement of an arbitration award a
shoe-in compared to enforcing monetary judgments from a national court in
another country.
Confidentiality: The proceedings before the tribunal and the final award are
normally kept confidential. This protects business secrets and can facilitate
settlement by reducing the opportunities and incentives for media-play by the
parties.
Disadvantages of alternative dispute resolution:
High Costs: The costs of conducting an international arbitration are
considerable. Actually, with the legal fees, administration costs and arbitration
fees, the average arbitration can be more expensive than a lawsuit.
Delay Tactics: Speed used to be one of the advantages of arbitration. This is
no longer so. In case of a technical or legal complex matter the arbitration can last
just as long, or even longer, than a lawsuit. Furthermore, there are ways in which
an arbitration procedure can be delayed, not unlike the delays experienced in a
lawsuit.
Limited Judicial Review: With legal systems all over the world more positive
towards arbitration, the judicial reviews of the arbitration procedure and subsequent
rewards are being limited to procedural or public policy checks only (not a review
of the merits of the case). This means that there now exists the risk that one has
to take defense against an obvious erroneous arbitration award in each country
where one has assets and that is a signatory to the New York Convention, since
the arbitration award can no longer be annulled in the country of the arbitration
situs.

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Different Arbitration Laws: Contrary to its name, international arbitration is not

regulated by international treaties but governed by the arbitration laws of the
location of the arbitration situs.
With arbitration becoming less of a quick fix, mediation is gaining in
popularity as it still holds many of the informalities and speed that were once the
reasons for arbitrations original popularity.
Enforcement of Arbitral Awards
Under the Indian Arbitration Act, an award is enforceable on its own force
without the need for any ratification or approval by the court.
However, an opportunity to challenge the award is afforded to the aggrieved
party. Under section 34 (a) of the Arbitration Act, an award can be challenged only
on certain limited grounds, as follows:
(i) incapacity of the party;
(ii) invalidity of the arbitration agreement;
(iii) lack of proper notice to the aggrieved party of the appointment of the
arbitrator or of the arbitration proceedings;
(iv) inability of a party to present his case;
(v) the arbitral award dealing with disputes not contemplated by or falling
within the terms of submission to arbitration;
(vi) the procedure not being in accordance with the agreement of the parties.
An award can also be set aside under sub-section (b) of section 34, if the
court finds that the subject-matter of the dispute is not capable of settlement by
arbitration or that the arbitration award is in conflict with the public policy of India.
Public policy is not defined. The Explanation to section 34 states that the Award
is bad on the grounds of public policy, if it is induced or affected by fraud or
corruption or is contrary to section 75 (duty of conciliator to maintain
confidentiality) or section 81 (non-admissibility of evidence relating to conciliation
proceedings). Mere error of law would not render an award bad on the ground of
public policy.
The time limit for filing objection to an award is three months, extendable by
30 days at the discretion of the court. An appeal would lie from the order of the
court, setting aside or refusing to set aside the award. Thereafter a second appeal
may lie to the Supreme Court, purely at the discretion of the court. This would only
be if an important question of law or of public interest is involved. Subject to the
aforesaid, an award is executable, as soon as the period for filing objections is
over.

Detrimental Reliance
In India, the cause of action would not be based on detrimental reliance but
on estoppel. Estoppel is defined in section 115 of the Indian Evidence Act as
follows:
115. When one person has, by his declaration, act or omission,

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intentionally caused or permitted another person to believe a thing to be true

and to act upon such belief, neither he nor his representative shall be
allowed, in any suit or proceeding between himself and such person or his
representative, to deny the truth of that thing.
Estoppel is based on the principle that it would be inequitable and unjust if one
person by a representation made, or by conduct amounting to a representation,
had induced another to act as he would not otherwise have done. The person who
made the representation should not be allowed to deny or repudiate the effect of
his former statement, to the loss and injury of the person who acted on it.
One species of estoppel is Promissory Estoppel which creates an estoppel as
to future promises. The law of promissory estoppel is well settled by the Supreme
Court of India in M.P. Sugar Mills v. State of U.P., AIR 1969 SC 621 and in Union
of India v. Godfrey Philips, (1985) 4 SCC 369 (both decided by Justice Bhagwati).
For this equitable doctrine to operate there must be:
(i) a legal relationship giving rise to certain rights and duties between the
Parties;
(ii) next there must be, a promise which is intended to affect the legal
relationship between the parties and which indicates that the promisor
will not insist on his strict legal rights, arising out of that relationship,
against the promisee;
(iii) an intention on the part of the former Party that the latter will rely on the
representation and such reliance by the other Party.
Even if these requirements are satisfied, the operation of the doctrine may be
excluded if it is, nevertheless, not inequitable for the first party to go back on his
promise, i.e., the promisee must have acted in reliance on the promise, in a way,
so that he cannot be restored to the position in which he was before he took such
action.
In the present factual situation, prima facie the above requirements are not
fulfilled. Further, estoppel cannot be invoked also for the following reasons:
1. Written contract.It has been held by the Supreme Court that the
doctrine of promissory estoppel cannot be on a higher pedestal than a
written contract between the parties. [The State of Himachal Pradesh v.
Ganesh Wood Products, 1995 (6) SCC 363.]
2. No damages.The only relief in an action for promissory estoppel is by
way of Injunction. No award of damages can be made.
Arbitration Clause
(a) Any dispute, controversy, or claim by or among the parties hereto arising
out of or relating to or in connection with the transactions contemplated hereby or
the Project, including, without limitation, under this Agreement or the
Organizational Documents, or the breach, termination or validity hereof or thereof
(a Dispute) shall be finally settled by arbitration in accordance with the Arbitration
Rules of the United Nations Commission on Trade Law (UNCITRAL) then in effect
(the Rules), except as modified therein.

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723

(b) There shall be three arbitrators. In the case of a Dispute between any
two (2) persons Party hereto, each shall select one arbitrator. The two arbitrators
thus appointed shall select the presiding arbitrator of the arbitral tribunal who shall
act as chairman of the arbitral tribunal within twenty days of the appointment of
the second arbitrator. If any arbitrator has not been appointed within the time limits
specified herein and in the Rules, the appointment of such arbitrator shall be made
by the International Court of Arbitration of the International Chamber of Commerce
upon the written request of any party to any such dispute within twenty (20) days
of such request.
(c) Any arbitration proceedings or award rendered hereunder and the validity,
effect and interpretation of this Agreement to arbitrate shall be governed by the
laws of .................... The arbitration proceedings shall be conducted in
...................., ...................., and the award shall be rendered, in the english
language.
(d) The award shall be final and binding upon the parties thereto, and shall be
the sole and exclusive remedy between them regarding any claims, counter
claims, issues, or accountings presented to the arbitral tribunal. The arbitrators
award shall, as between the disputing Parties and those in privity with them, be
final and entitled to all of the protections and benefits of a final judgment, e.g., res
judicata (claim preclusion) and collateral estoppel (issue preclusion), as to all
claims, including compulsory counterclaims, that were or could have been
presented to the arbitrators. The arbitrators award shall not be appealable to any
court.
(e) The parties hereto expressly agree that leave to appeal under section 45
or section 69 of the English Arbitration Act of 1996 shall not be sought with
respect to any question of law existing in the course of the arbitration or with
respect to any award made. Furthermore, each party hereto hereby waives
irrevocably any rights of application or appeal to the courts of India and the courts
of the United States to the fullest extent permitted by law in connection with any
questions of law arising in the course of the arbitration or with respect to any award
made except for actions to obtain a judgement recognising, enforcing or setting
aside an arbitral award and except for actions seeking interim or other provisional
relief in any court of competent jurisdiction in aid of arbitration.
(f) It is the intent of the parties hereto that the arbitration proceeding shall be
conducted expeditiously, without initial recourse to the courts and without
interlocutory appeals of the arbitrators decisions to the courts. However, if a
disputing party refuses to honour its obligations under this agreement to arbitrate,
any other disputing party may obtain appropriate relief staying litigation and/or
compelling arbitration in any court having jurisdiction over the disputing parties; the
order compelling arbitration shall require that the arbitration proceedings take place
in ...................., ...................., as specified above. The disputing Parties may
apply to any court having jurisdiction for orders requiring witnesses to obey
subpoenas issued by the arbitrators. Moreover, any and all of the arbitrators orders
and decisions may be enforced if necessary by any court having jurisdiction. The
arbitrators award may be confirmed in, and judgement upon the award entered by,

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Corporate and Commercial Agreements

any court having jurisdiction.

(g) The validity, construction, and interpretation of this agreement to arbitrate,
and all procedural aspects of the arbitration conducted pursuant to this agreement
to arbitrate, including, but not limited to, the determination of the issues that are
subject to arbitration (i.e., arbitrability), the scope of the arbitrable issues,
allegations of fraud in the inducement to enter into this Agreement to arbitrate,
allegations of waiver, laches, delay or other defences to arbitrability, and the rules
governing the conduct of the arbitration (including the time for filing an answer, the
time for the filing of counter-claims, the times for amending the pleadings, the
specificity of the pleadings, the extent and scope of discovery, the issuance of
subpoenas, the times for the designation of experts, whether the arbitration is to
be stayed pending resolution of related litigation involving third parties not bound
by this agreement to arbitrate, the receipt of evidence, and the like) shall be
decided by the arbitrators.
(h) Any monetary award shall be made and promptly payable in dollars and the
arbitral tribunal shall be authorised in its discretion to grant pre-award and postaward interest at commercial rates. However, the arbitrators shall have absolutely
no authority to award treble, exemplary or punitive damages of any type under any
circumstances, regardless of whether such damages may be available under
applicable law. The arbitrators shall have the authority to assess the costs and
expenses of the arbitration proceeding (including the arbitrators fee and expenses)
against one or more of the disputing parties in whatever manner or allocation the
arbitrators deem appropriate, provided that each disputing party shall bear its own
attorneys fees, and the arbitrators shall have no authority to award attorneys fees.
(i) Each party hereto acknowledges and agrees that in the event of any breach
of this Agreement by it, the other parties hereto would be irreparably harmed and
accordingly agrees (i) to waive the defence in any arbitration proceeding conducted
hereunder that a remedy at law would be adequate, and (ii) that the other parties
hereto, in addition to any other remedy to which they may be entitled at law or in
equity, shall be entitled to compel specific performance of this Agreement.
(j) To the extent that any party hereto (including assignees of any partys rights
or obligations under this Agreement) may be entitled in any jurisdiction, to claim
for itself or its revenues, assets or properties, sovereign immunity from service of
process, from suit, from the jurisdiction of any court, from an interlocutory order
or injunction, from any order of specific performance or order for the recovery of
any property, or from the enforcement of the same or any arbitral award against
its revenues, assets or property in such court or otherwise, from attachment prior
to judgment, from attachment in aid of execution of an arbitral award or judgment
(interlocutory or final), or from any other legal process, and to the extent that, in
any such jurisdiction there may be attributed such a sovereign immunity (whether
claimed or not), each party hereto hereby irrevocably agrees not to claim, and
hereby irrevocably waives, such sovereign immunity and consents to such matter,
to the extent that, without prejudice to the generality of such Agreement and
waiver, in any proceeding taken in .................... the foregoing agreement and
waiver of sovereign immunity shall have effect under, and be construed in
accordance with, the State Immunity Act of 1978.

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725

(k) A disputing Partys breach or alleged breach of this Agreement shall not
affect this agreement to arbitrate. Moreover, the obligations of the parties hereto
under this arbitration provision are enforceable even after this Agreement has
terminated. The invalidity or unenforceability of any provision of this agreement to
arbitrate shall not affect the validity or enforceability of the obligation of the parties
hereto to submit their claims to binding arbitration or the other provisions of this
Agreement to arbitrate. This Agreement to arbitrate shall be binding upon the
successors, assigns and any trustee or receiver of each party hereto.
Damages in Arbitration
Arbitration a Judicial Process: It is a settled principle of law that Arbitration
is a process by which a dispute or difference.................... is referred to and
determined judicially. Halsbury Law of England 4th Edition, Reissue, Volume 2
page 332 333; See also Dobson v. Groves, 1844 (6) QB 637, 647. Hence, an
arbitration tribunal is bound to determine the dispute in a judicial manner.
Indian law regarding award of damages.Indian law stipulates that in case of
breach of contract, damages may be awarded by way of compensation for any
loss or damage which naturally arose in the usual course of things, or which the
parties knew when they made the contract likely to result from the breach thereof.
Further, compensation is not to be given for any remote and indirect loss or
damage sustained by the breach (the Contract Act, section 73). As regards,
liquidated damage, the Act provides that where such damages are stipulated, the
party complaining of breach is entitled to receive reasonable compensation not
exceeding the amount stipulated (section 74). A bare perusal of sections 73 and
74 makes it clear that in law damages can only be compensatory in nature and
not penal and must be such which naturally arose in the usual course of things.
Further remote or indirect damages cannot be awarded. Even where the parties
have stipulated liquidated damages, the court can only award reasonable
compensation. Any award of damages, which is contrary to sections 73 and 74,
would be an award contrary to Indian law.
Scheme of Arbitration Act.Section 28(1)(b) mandates that the arbitral
tribunal shall decide the dispute in accordance with the rules of law designated
by the parties. In the present case, the parties have agreed (vide Article 12.1 of
the JDA) that the governing law shall be the law of India. Hence, the arbitrators
have to decide the dispute in accordance with (inter alia) sections 73 and 74 of
the Contract Act. Further, under UNCITRAL Rules if a party so requests, the
arbitral tribunal shall hold hearings for the presentation of evidence including
experts witnesses.
Consequence of literal interpretation of Article 13.4.It cannot be that after
taking evidence, hearing arguments, establishing correct facts and legal position,
the arbitrators cast aside all this, and merely select the position of one of the
parties.
The arbitrators cannot abdicate their role of deciding in accordance with law.
Such an award would be a mockery of the law and the arbitration proceedings, and
hence invalid and unenforceable under Indian law.

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The above proposition can be supported by the following illustrative Indian and
International arbitration cases:
The Delhi High Court has held that if the arbitrators have not decided the
dispute in accordance with the law, the award can be set aside [1998 (2)
Arb. LR 345].
ICC Case No. 4462 Year Book Commercial Arbitration Volume XVI page 54.
In this case, the arbitration tribunal disregarded the liquidated damages
contractually agreed between the parties holding the same to be grossly
exaggerated and awarded a lesser sum based on the applicable law and
evidence presented to it.
ICC Case No. 5759; Year Book of Commercial Arbitration, Volume XVIII
page 39. It was held that failure to provide sufficient evidence to prove
damages and failure to mitigate the loss was a ground for the arbitrators to
reduce damages from the contractually stipulated amount.
Interpretation of the Article 13.4.A perusal of Article 13.4 shows that the
Clause is perhaps intended to apply only to a certain class of disputes. These are
disputes where the project has to be proceeded with, but the parties have
differences between two commercial viewpoints. Here, the arbitrators are directed
to adopt one of the parties position, giving due considerations to the commercial
reasonableness of each partys position. It is for this reason, that it is stipulated,
that the parties should not only state their position to the tribunal, but also state
the proposed resolution (line 2 of Article 13.4). The types of disputes, which
would fall under Article 13.4, would be perhaps choice of EPC/O&M Contractor,
selection of Suppliers, Manufacturers or other commercial decisions. These are
disputes which are not suitable for a judicial determination, and hence the
arbitrators, have to give due consideration to the commercial reasonableness of
each Parties case, and then select one Partys position. Article 13.4 cannot apply
to a claim for damage which has to be judicially determined in accordance with
law, nor can it compel the arbitrators to decide contrary to established facts and
settled law. Such a decision would be invalid in law, contrary to public policy and
liable to be set aside.