Author: Kanishka Bhukya*
Several national courts have considered whether competition law issues can be settled through arbitration. Although the case law in the European Union (E.U.), the United States (U.S.), and the United Kingdom (U.K.) typically favors a favorable response, this topic continues to be litigated in India as a means of avoiding arbitration clauses. In India, there is a general consensus that arbitration clauses should be avoided to enforce mandatory laws, such as competition laws, which aim to protect critical societal interests. The argument is based on the notion that such laws should not be entrusted solely to unregulated national or international arbitral organizations for enforcement.
Against this background, the present article explores the consistency between arbitration proceedings and competition law disputes in India and suggests potential solutions to harmonize the two domains while protecting the public interest. To that end, Section II discusses India’s unique approach to competition law disputes, highlighting the precedence of the Competition Act and the limitations of civil courts in hearing such cases. Section III examines the “four-fold test” for arbitrability introduced in the Vidya Drolia case, analyzing its criteria and implications for competition disputes in India. Section IV explores the possibility of leveraging the “second-look doctrine” and collaborative expertise to safeguard public policy in the arbitrability of competition disputes in India. Section V discusses the different approaches to the standard of review and the level of deference given to arbitrator decisions in competition law disputes, comparing the minimalist and maximalist perspectives. Finally, Section VI argues that courts must balance enforcing mandatory rules and preserving the advantages of international arbitration, suggesting a random de novo review of arbitration decisions as an optimal strategy.
Navigating Competition Law Disputes: The Arbitrability Paradigm in India
India’s jurisprudence has differed dramatically from approaches taken by nations with robust antitrust frameworks. The prevailing law in India, Section 61 of the Competition Act, assumes precedence over other laws, thereby leaving civil courts incapable of hearing cases that come under the purview of the Competition Commission of India (CCI). As a result, the legislation does not provide an alternate vehicle for addressing competition law issues.
To that end, the arbitrability of antitrust disputes in India was brought up for the first time in the 2012 case of Union of India v. Competition Commission of India. The Ministry of Railways asserted that the presence of a binding arbitration contract between the parties barred the CCI from intervening, thereby rendering the case unsustainable. The Delhi High Court, however, dismissed this claim, emphasizing that CCI disputes are separate from contractual duties addressed by arbitral tribunals and that the Competition Act trumps other legislations. The court also emphasized that arbitration tribunals may lack the competence, mandate, and ability to conduct the required investigations to resolve issues involving abuse of dominance.
Expanding on this principle further, the Bombay High Court, in the case of Central Warehousing Corporation v. Frontpint Automotive Pvt. Ltd., underscored the significance of considering Section 5 of the Arbitration and Conciliation Act in conjunction with Section 2(3) of the Arbitration Act 1996. This clarification emphasized that the provisions of the Arbitration Act should not take precedence over other laws, potentially allowing certain disputes to be excluded from arbitration. Moreover, the Court noted that competition disputes primarily seek penalties for anti-competitive behavior rather than the damages or compensation typically addressed in contractual disputes handled through arbitration mechanisms.
In addition, the Indian Supreme Court in Samir Aggarwal v. Competition Commission of India also affirmed the notion that the inquiries conducted by the CCI are in rem in nature, focusing on the general matter at hand rather than individual rights, unlike the in personam nature of arbitration proceedings. More notably, a recent order by the CCI against Tata Motors on 4 May 2021 reiterated the inquisitorial function of the CCI, emphasizing its dedication to the public interest. Similarly, proceedings before the National Company Law Appellate Tribunal (NCLAT) follow an inquisitorial and in rem approach.
While the various courts’ interpretations in the aforementioned cases provide clarity by establishing an explicit exception, it imposes a complete prohibition on arbitrating competition law disputes. This approach eliminates the flexibility offered by the Booz Allen and Vidya Drolia tests of arbitrability. The court failed to acknowledge the possibility of competition law violation claims primarily contractual breaches. While activities like cartels and other anti-competitive agreements covered under Section 3 of the Act have significant implications for the public, abusive conduct by dominant enterprises concerning distribution agreements may involve rights in personam, allowing arbitral tribunals to resolve such disputes privately. As a result, if such cases become the standard, courts may refuse to refer petitions to arbitration simply because they involve competition law claims.
Unlocking the Puzzle: Deciphering Vidya Drolia’s Four-Fold Arbitrability Test for Competition Disputes in India
To that end, building upon the analysis of India’s competition law framework and the challenges it presents, a closer examination of the “four-fold test” established by the Supreme Court in Vidya Drolia is crucial in understanding the potential arbitrability of competition disputes in India.
The Four-Fold Test:
In December 2020, the Supreme Court of India introduced the “four-fold test” in Vidya Drolia to address the arbitrability of disputes. This test aims to provide a streamlined approach and determine when a dispute falls outside the scope of arbitration. To that end, the “four-fold test” outlined in Vidya Drolia encompasses the following criteria:
- When the cause of action and subject matter of the dispute relates to actions in rem, that do not pertain to subordinate rights in personam that arise from rights in rem;
- when the cause of action and subject matter of the dispute affects third party rights; have erga omnes effect; require centralized adjudication;
- when the cause of action and subject matter of the dispute relates to inalienable sovereign and public interest functions of the State; and
- when the subject-matter of the dispute is expressly or by necessary implication non-arbitrable as per mandatory statute(s).
Analyzing the Criteria:
Antitrust disputes typically have a public nature and involve adjudicating actions and rights “in rem.” Certain provisions, such as Section 19(1) of the Indian Competition Act, 2002, allow both individuals who have suffered damages and any person, regardless of whether they have suffered damages or not, to approach the Competition Commission of India (CCI) to report violations of the Act. This reflects the public character of antitrust disputes. However, the Act also allows aggrieved parties to claim compensation based on the findings of the CCI under Section 53N, which requires the adjudication of the individual rights of the affected parties. Similarly, antitrust claims arising from existing contractual relationships such as franchise agreements, joint-venture agreements, or distribution agreements also involve adjudicating individual rights. In such cases, the traditional criteria of the “four-fold test” for arbitrability may not be fulfilled since the resolution of the dispute would involve rights between the parties themselves.
An illustration supporting the potential for arbitration in antitrust claims can be found in the Canadian case of Murphy v. Amway, where it was held that a private damages claim under Section 36 of the Canadian Competition Act could be subject to arbitration. The court relied on the Supreme Court of Canada’s distinction between different sections of the Business Practices and Consumer Protection Act in Seidel v. Telus Communications Inc., and concluded that claims under certain sections could go to arbitration. Similarly, in the context of India, it is pertinent to note that private antitrust claims governed by Section 53N of the Indian Competition Act and claims arising from pre-existing contractual relationships should also be considered eligible for arbitration.
Furthermore, private antitrust claims generally do not involve the inalienable and sovereign functions of the State. In fact, inalienable and sovereign functions of the State are exempt from the application of the Indian Competition Act itself. Section 54 of the Act provides that enterprises engaged in such functions may be exempted from the Act’s provisions if necessary for the public interest. Therefore, the criteria of protecting inalienable and sovereign functions of the State, which is one of the factors in the “four-fold test,” is not satisfied in private antitrust claims.
However, the exclusive jurisdiction of the CCI over antitrust disputes, as mandated by Section 61 of the Act, impedes the arbitrability of these disputes. This means that even the subordinate individual rights arising from the Act are not arbitrable. The Supreme Court of India, in the case of Vidya Drolia, has emphasized the importance of a specialized forum like the CCI for determining antitrust rights and liabilities, and this rationale supports the non-arbitrability of antitrust disputes.
However, the usefulness of this criterion for establishing arbitrability is debatable. Some argue that arbitrators can effectively apply these rules to disputes, thereby safeguarding the specific rights and duties established by the relevant legislation. In the case of Vidya Drolia, the Supreme Court of India acknowledged that conditions such as the requirement to adhere to mandatory laws, the public policy objectives of the legislation, and the complexity of the cases should not hinder arbitration. Parties involved in competition-related disputes could have the option to select arbitrators with a deep understanding of antitrust law, ensuring efficient resolution of their rights. This approach finds support in the U.S. Supreme Court decision in Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth Inc., 473 U.S. 614 (1985), which affirms that arbitrators can be relied upon to enforce substantive antitrust laws and provide appropriate remedies to aggrieved parties. Therefore, the mere existence of a specialized forum like the CCI should not be the sole justification for excluding arbitration from competition-related issues.
Shaping a New Paradigm: Leveraging the Second Look Doctrine and Collaborative Expertise to Safeguard Public Policy in Arbitrability of Competition Disputes in India
Now that we have examined how competition disputes can satisfy the requirements of the Vidya Drolia test, it is crucial to address how we can concomitantly and effectively uphold public policy objectives in the arbitrability of these disputes.
The non-arbitrability of competition law disputes is not the sole means of protecting public policy. An alternative approach involves allowing parties to opt for arbitration while granting the CCI a dual role as parens patriae and amicus curiae in the arbitral proceedings. Drawing inspiration from the Mitsubishi case, where antitrust disputes were deemed arbitrable in the U.S., the courts balanced their support for arbitrability by obliging arbitrators to apply antitrust law. This created a mechanism known as the “second look doctrine,” where the courts review the arbitral award during the enforcement stage to ensure proper consideration of competition law aspects. This doctrine prevents private parties from circumventing mandatory competition law through arbitration.
Furthermore, Sec. 27 of the A&C Act offers another safeguard by permitting arbitral tribunals to obtain evidentiary assistance from the court, thereby allowing tribunals to contact the CCI on competition-related issues. This practice is consistent with the E.U.’s approach, in which the European Commission routinely serves as an amicus curiae in arbitration proceedings involving competition regulations to guarantee precise and consistent execution.
Balancing Acts: Decoding the Standard of Review Dilemma in Arbitration of Competition Law Disputes
By embracing the “second look doctrine” and promoting collaborative expertise, India has the potential to revolutionize the arbitrability of competition disputes. This approach would allow for the protection of public policy objectives while still benefiting from the advantages of arbitration. However, the lack of consensus regarding the standard of review and level of deference that national courts should apply to arbitrator decisions remains a challenge. Consequently, different courts have adopted slightly different approaches to this issue.
The Minimalist Approach
The minimalist approach suggests that arbitral awards should only be annulled or refused recognition/enforcement in extreme cases. For example, if arbitrators enforce hardcore horizontal restrictions or completely disregard competition law despite it being raised by the parties. In all other cases, there should be no violation of public policy, even if the arbitrators made an erroneous decision regarding competition law. According to this approach, reviewing arbitral awards for errors would involve thoroughly examining the merits of the case (révision au fond), which is generally not allowed under modern arbitration laws. To that end, the Parisian Court of Appeal in Thalès v. Euromissile and the French Cour de Cassation in Cytec Industrie have also followed this approach, stating that a violation of public policy in international arbitration must be “flagrant, effective, and concrete” to set aside an arbitral award. A similar reluctance to review the merits of the case has been observed in appellate courts in Germany, Italy, and Sweden.
The Maximalist Approach
On the other hand, the maximalist approach emphasizes the principle of effectiveness and argues that most competition law violations should be considered violations of public policy. This approach views the protection of the public interest as the primary goal of competition law. Only minor errors should be excusable, and arbitrators should exercise caution when competition law is involved. Courts adopting this approach engage in substantive control when reviewing awards that relate to Indian competition law. The Swiss Tribunal Fédéral has emphasized that judges should examine not only the operative part but also the grounds on which the decision is based.
In the United States, the “Second Look” doctrine emerged following the Mitsubishi case. It stated that national courts, during the award-enforcement stage, have the opportunity to ensure that the enforcement of antitrust laws has been addressed. The concern is that private international arbitrators should properly adjudicate or fairly decide cases. However, a systematic substantive review of awards has not been widely implemented. Although some scholars argue that the Second Look doctrine has not been operative, courts have generally been willing to defer antitrust decision-making to arbitrators.
If domestic courts automatically enforce arbitration awards without subjecting them to review, arbitrators may disregard local mandatory rules. However, if courts routinely review arbitration awards de novo to ensure compliance with mandatory rules, it undermines the benefits of arbitration, such as predictability, neutrality, and cost minimization. Therefore, courts cannot simultaneously enforce mandatory rules and preserve the advantages of the international arbitration system.
Instead, the optimal strategy for courts is randomly engaging in a de novo review of arbitration decisions. This approach encourages arbitrators to frequently respect mandatory rules while relieving courts from the burden of reviewing every arbitration award. Despite its criticized vagueness, the Mitsubishi decision unintentionally implemented this strategy by creating uncertainty about how U.S. courts would respond to arbitration awards that violate mandatory rules.
It would be unfortunate if courts in more developed countries were to introduce exceptional review rules for specific fields of arbitration because of the potential spill-over effects. Reviewing the substance of arbitration awards is arguably only necessary in cases where there may be significant anti-competitive effects in a particular jurisdiction. In other words, it should only occur when arbitrators completely neglect competition law to evade the rules or when there is prima facie illegality or conflict with such rules. If arbitrators genuinely apply the competition rules, considering the parties’ arguments and providing substantial reasoning in their award, the award should generally not be subject to review, even if there are errors in the application. The focus should be on the effects of recognizing the award in the jurisdiction where enforcement is sought, rather than simply the existence of the problematic award. Only if those effects are intolerable and fundamentally contrary to the principles of law and morality in that jurisdiction should there be a violation of public policy.
* Kanishka Bhukya is a fourth-year law student at the National Law School of India University in Bangalore. His research interests include arbitration, banking and finance, sovereign debt restructuring, and international tax.