TWO-TIER ARBITRATION | PERMISSIBLE UNDER ARBITRATION ACT

In an interesting development, three bench of Supreme Court in a recent judgment has approved of the two tier arbitration process under the Arbitration and Conciliation Act, 1996 (“Arbitration Act”).

The two-tier arbitration process provides the parties dissatisfied with the first award have an opportunity to appeal against the first award by way of appeal, wherein the parties are to be heard afresh on the merits of the case. The second award, then, which is passed at such second arbitration is binding on the parties, subject to the recourse that the parties may have under the provisions of the Arbitration Act.

The permissibility of agreements containing a two-tier arbitration clause had been under doubt for quite some time. There were differences of opinion on this issue between the two judges of the Division Bench of Supreme Court in their judgment which has been pending since May 2006. However, the position now stands cleared in light of the judgment delivered by the three judge bench of Supreme Court.

The two-tier arbitration clause over which the parties to the dispute approached the Supreme Court i.e. Clause 14 of the contract, runs as follows:

“All disputes or differences whatsoever arising between the parties out of, or relating to, the construction, meaning and operation or effect of the contract or the breach thereof shall be settled by arbitration in India through the arbitration panel of the Indian Council of Arbitration in accordance with the Rules of Arbitration of the Indian Council of Arbitration. If either party is in disagreement with the arbitration result in India, either party will have the right to appeal to a second arbitration in London, UK in accordance with the rules of conciliation and arbitration of the International Chamber of Commerce in effect on the date hereof and the results of this second arbitration will be binding on both the parties. Judgment upon the award may be entered in any court in jurisdiction.”

Validity of Clause: HCL had challenged the validity of the aforesaid clause on ground that provisions of the Arbitration Act do not sanction for an appellate arbitration and the appeal of the arbitration award i.e. second arbitration is contrary to the laws of India.

Supreme Court in its decision to this contention noted that the Parliament, after having known the view of the UNCITRAL Working Report that the model law should not exclude the two tier arbitration practice and after noting the fact that the two-tier arbitration system existed prior to the Arbitration Act, chose not to specifically prohibit the same. In view of the same, the Supreme Court held that the Arbitration Act does not contain any objections to the two-tier arbitration system. Furthermore, the Supreme Court also rejected the contention of HCL that the right to appeal can only be created by a statute and not by an agreement between the parties on the basis that an appeal before an arbitral tribunal concerns a non-statutory process and not a statutory appeal.

Implied Prohibition: HCL to support this contention relied on Section 34 of the Arbitration Act and suggested that an award under the Arbitration Act could only be set aside by the Courts having jurisdiction under the Arbitration Act, thereby excluding the two-tier arbitration procedure.

Supreme Court also rejected this contention of HCL focusing on party autonomy. It held that Section 34 does not exclude the autonomy of the parties to mutually agree to a procedure whereby the arbitral award may be reconsidered by another arbitrator or a panel of arbitrators by way of an appeal and the result of that appeal is acceptable by both the parties to be final and binding subject to a challenge provided for by the Arbitration Act. In furtherance of this view, the Supreme Court held that the fact that recourse to a court is available to a party does not ipso facto prohibit the parties from mutually agreeing to a second look at an award as the intention is not to throttle the autonomy of the parties or preclude them from adopting any other acceptable method of redressal such as appellate arbitration.

Appellate arbitration | Contrary to public policy: HCL had contended that appellate arbitration is contrary to public policy.

Rejecting this contention, the Supreme Court held that “even assuming the broad delineation of the fundamental policy of India as stated in Associate Builders, we do not find anything fundamentally objectionable in the parties preferring and accepting the two tier arbitration system. There is nothing in the Arbitration Act that prohibits the contracting parties from agreeing upon a second instance or appellate arbitration – either explicitly or implicitly. No such prohibition or mandate can be read into the Arbitration Act except by an unreasonable and awkward misconstruction and by straining its language to a vanishing point. We are not concerned with the reason why the parties (including HCL) agreed to a second instance arbitration – the fact is that they did and are bound by the agreement entered into by them. HCL cannot wriggle out of a solemn commitment made by it voluntarily, deliberately and with eyes wide open. We decline to read the Arbitration Act in the manner suggested by learned counsel for HCL and hold that the arbitration clause in the agreement between the parties does not violate the fundamental or public policy of India by the parties agreeing to a second instance arbitration.”

MHCO COMMENT

This is a welcome judgment wherein the Supreme Court has held that party autonomy is the backbone of arbitration and enforced the terms of the contract as were agreed. While this judgment would reassure the faith of international parties in the arbitration proceedings in India, what we think should be considered by the parties before deciding to opt for such two-tier arbitration process is the time and money that would be expended in resolving their disputes via such two-tier procedure.

This update was released on 10 May 2017.

The views expressed in this update are personal and should not be construed as any legal advice. Please contact us directly on +91 22 40565252 or legalupdates@mhcolaw.com for any assistance. 

RERA FULLY NOTIFIED | LANDMARK CHANGE IN 

REAL ESTATE LAWS - KEY TAKEAWAYS

The Central Government in April 2016 partially notified Real Estate (Regulation and Development) Act, 2016 (RERA or Act) and these sections were effective from 1 May 2016. The rest of the sections were very recently notified and are effective from 1 May 2017.  The Maharashtra Government also notified various Rules under RERA thus making the Act functional in Maharashtra with effect from 1 May 2017.

Following are some of the important provisions of the Act and the newly notified Rules:

1.                       Applicability: The Act applies to all bodies (public and private) which develop real estate projects for sale to the general public. The Act makes both, the land owners and developers, who have executed a development agreement liable to comply with the provisions of the Act and the rules framed thereunder.

2.             Registration: All Real Estate Projects, for which the occupation certificate or the completion certificate, as the case may be, has not been obtained, must be registered with the Real Estate Regulatory Authority(Authority) within 90 days.

*                     Standalone Project: Where the project is to be developed in phases, every such phase shall be considered as a standalone project;

*                         Prohibition without Registration: If projects are not registered, promoters are barred from (a) advertising; (b) marketing; (c) booking, selling or offering for sale units in the said project. Further, all ongoing projects shall have a ninety day window for completing registration of projects, after which the promoter shall not advertise, market, book, sell or offer for sale units in the said project. The Authority will be operational from 1 May 2017 in Maharashtra.

*         State Registration Site: Promoters can register on the website of the Authority  (https://maharera.mahaonline.gov.in).

*                         Registration not required: However, the projects where the land area proposed to be developed is less than 500 square meters and the number of apartments to be developed is  less than 8, then the same is exempted from the Act.

3.                    Registration Fee and Documents: The Registration fee for a project is Rs 10 per sq m of land area, subject to a minimum of Rs 50,000/- and a maximum of Rs 10 lacs. Promoters are required to submit documents such as the document of title, development agreement, PAN Card, sanctioned plan, proposed plan, etc.

4.                      Timeline and Extension

*                        In case of new projects, the promoter is required to declare the time period within which he intends to complete the project failing which the registration of the said project will automatically lapse.

*             In case of on-going projects, the promoter is required to mention the extent of the construction work, common area, etc which is completed along with expected period of completion and failing which the registration of the on-going project will also lapse.

*                     The period of registration may be extended by the Authority due to specified force majeure events or in certain cases on account of reasonable circumstances. But such extension will not exceed 1 year in aggregate.

5.                Regular Updates and Penalty for non-registration: Once the project is registered on the website of the Authority, it is mandatory for the promoter to provide quarterly updates with respect to the same. If the promoter fails to register the project as per the Act, he shall be liable to a penalty which may extend to 10% of the estimated cost of the real estate project. A continued violation shall be punishable with imprisonment which may extend to 3 years or a further fine of 10% or both.

6.               Revocation / Lapse of Registration: Registration of the project will lapse in the event of the following:

*                         The promoter does not complete the project within the timeline declared to the Authority;

*                  Authority may revoke the registration of project on the basis of (i) Receipt of the Complaint; (ii) Suo Moto; (iii) On recommendation of the Competent Authority in the event of promoter defaults in his duties, violates any terms of the approval granted or is involved in any unfair trade practice.

7.                       Consequences: In the event of the revocation / lapse of registration, the Authority shall:

*                         (i) Debar the promoter from accessing the website; (ii) Specify his name in the list of defaulters on the website; (iii) inform other Regulatory Authorities in other states and union territories about such cancellation.

*                         Facilitate the remaining development works to be carried out with the assistance of the competent authority / association of allotees or any manner as may be determined by the Authority. It has to be noted that association of allotees shall have the first right of refusal for carrying out the remaining development works.

*                         Direct the bank holding the project account to freeze the account and thereafter take such further necessary action including de-freezing the account towards facilitating the remaining development work.

8.                    Registration of Real Estate Agents: Real Estate Agents are also expected to register themselves on the website of the Authority. The fee and process of registration for real estate agents is the same as those of promoters. Failure to register as a Real Estate Agent shall attract penalty of Rs 10,000 for every day of continuing default which may cumulatively extend upto 5% of the cost of plot, apartment or building, as the case may be.

9.                      Filing of Complaints: For fast track adjudication of customer grievances, Regulatory Authority and Appellate Authority has been established. Any person aggrieved on account of a violation of the RERA or the rules thereunder with respect to a registered project, can file a complaint on the website of the Regulatory Authority. Buyers may also pursue a complaint with the Consumer Forum, as an alternative to the Authority established under the RERA.

10.               Financial Compliance by Promoters: Promoters are required to place 70% of the funds obtained from a project in a separate account in order to meet the cost of construction and acquiring the land and withdrawals therefrom must be in proportion to the construction and land costs. For the purpose of withdrawal from the separate bank account the promoter shall submit the following certificates to the bank where the account is opened:

*                         A certificate from the project architect certifying the completion of construction work of each building/wing of the project;

*                         A certificate from the engineer for the actual cost incurred on the construction work in each building/wing of the project;

*                     A certificate from a practising Chartered Accountant for the costs incurred on construction on land and the proportion of such costs to the total estimated cost of the project.

*          Project accounts shall be audited annually and a copy of the audit report shall be published

            on the website of the Authority.

11.                   Other important compliances by Promoters:

*                         Promoters are required to form a Legal Entity of allottees like Cooperative Society, Company, Association etc within 3 months from the date on which 51% of the total number of Purchasers in such building or wing have booked their apartment The Promoter shall also execute a registered conveyance deed in favour of the allottees within 3 months from the date of issue of occupancy certificates or 51 % of the total number of purchasers, in such a building or a wing, has paid full consideration to the promoter, whichever is earlier.

*                         Changes to the sanctioned plans of any apartment plot or building sold to any person shall not be made without the consent of such person (except minor changes necessary for architectural or structural reasons)

*                         Any structural alterations to common areas can only be made with the previous written consent of at least two thirds of the allottees, other than the promoter.

*                         A Promoter shall not accept a sum of more than 10% of the cost of the apartment, plot or building as an advance payment from a buyer, without entering into a written agreement for sale and register the said agreement.

12.                   Other Important Provisions : 

*                         Open Parking areas cannot be sold to allottees and must be conveyed to the Association of Allottees once the Occupation Certificate is received. However promoters are entitled to sell covered parking areas and garages.

*                         The Act defines an allottee as one who acquires the plot/apartment through transfer or sale but not a person who acquires the same on rent. Therefore, the Act is applicable to those who acquire flats/apartments/plots consequent to a sale by the original owner.

*                         The buyer of a plot or apartment is entitled to receive interest on delay in handing over the possession by the Promoter, till the handing over of possession. The rate of interest payable by the Promoter to allottee or vice versa, shall be SBI’s highest marginal cost of lending rate plus 2%.

MHCO COMMENT: RERA brings out significant change in the outlook of the real estate market. It brings out much needed transparency and shall tremendously benefit the purchasers as it has established a Regulatory Authority to overlook the functionality and ensure compliance of the Act. However, being a very new legislation, it will require some teething period to settle and for effectively implementation by the centre and states. It has to be noted that only 13 states and union territories being Uttar Pradesh, Gujarat, Odisha, Andhra Pradesh, Maharashtra, Madhya Pradesh, Bihar, Andaman and Nicobar Islands, Chandigarh, Dadra and Nagar Haveli, Daman and Diu, and Lakshadweep have notified the RERA rules so far.

The views expressed in this update are personal and should not be construed as any legal advice. Please contact us directly on +91 22 40565252 or legalupdates@mhcolaw.com for any assistance.