Undesired Consent Terms: Misunderstanding between Client and Counsel

By: Shreya Mohapatra (ILS Law College, Pune)


The scope of misunderstanding instructions received from a client is heightened in present-day as such communication primarily happens over the phone. The threshold for proving the occurrence of a genuine misunderstanding which is not an attempt to dishonour the concerned arrangement is extremely high.

This post seeks to analyse the concerns consequent of such a misunderstanding in a settlement, where the resultant consent terms signed by a party’s counsel are not as desired by the former.

Section 30 of the Arbitration and Conciliation Act, 1996 (“the Act”) expressly encourages parties to settle their dispute and provides for these settlement terms to be recorded in the form of an award. It reads as follows:

30. Settlement.

(1) It is not incompatible with an arbitration agreement for an arbitral tribunal to encourage settlement of the dispute and, with the agreement of the parties, the arbitral tribunal may use mediation, conciliation or other procedures at any time during the arbitral proceedings to encourage settlement.

(2) If, during arbitral proceedings, the parties settle the dispute, the arbitral tribunal shall terminate the proceedings and, if requested by the parties and not objected to by the arbitral tribunal, record the settlement in the form of an arbitral award on agreed terms.

(3) An arbitral award on agreed terms shall be made in accordance with section 31 and shall state that it is an arbitral award.

(4) An arbitral award on agreed terms shall have the same status and effect as any other arbitral award on the substance of the dispute.” (emphasis supplied)

CHALLENGING SETTLEMENT TERMS IN AN ARBITRATION

The parties may or may not request the settlement terms to be taken on record in the form of an award. Nevertheless, if their disputes are settled in fact, the arbitral tribunal will be left with nothing further to adjudicate. The tribunal will then terminate the proceedings citing that it is no longer necessary to proceed with the same, in accordance with Section 32(c) of the Act.

Where the settlement terms are disputed by the parties on the grounds of there being a miscommunication between them and their counsel, the responsibility of determining the existence of an “undisputed” settlement appears to rest with the tribunal. However, in the event that the tribunal has terminated their mandate, a controversy is created between them and the concerned party. The termination of the tribunal’s mandate therefore poses a problem additional to the misunderstanding.

The link is, therefore, of cause and effect. Where the settlement terms are disputed by the parties on the grounds of there being a miscommunication between them and their counsel, the arbitrator must determine the existence of an “undisputed” settlement before he can terminate his mandate is what is stated under Mohammedhussain. This creates a controversy between the concerned party and the tribunal. The termination of the tribunal’s mandate therefore poses a problem additional to the misunderstanding.

In such a predicament, the answer to who will decide whether there has been a genuine misunderstanding becomes increasingly difficult to obtain. The Act does not prescribe any requirements for entering into or recording a settlement, in contrast to the Civil Procedure Code, 1908 (“CPC”). A compromise under Order XXIII, Rule 3 of CPC is valid only when it is ‘in writing and signed by the parties’, whereas Section 30 of the Act mandates no such rule. Consequently, parties may contend that the settlement terms, albeit recorded in an award, suffer from a lack of consent or a misinterpretation of the parties’ original intention.

In the absence of any statutory mechanism to ensure the authenticity of the settlement terms, it becomes all the more incumbent on the tribunal to decide that the same are uncontested.

In Mohammedhussain Abdullabhai v. Shabbirbhai Abdullabhai (Mohammedhussain), the Bombay High Court was required to decide the validity of an award recording a settlement; the terms of which were disputed as all parties were not agreeable to the same.

The High Court clarified the interplay between Sections 30 and 32 of the Act, signifying the raised responsibility on arbitrators to decide the genuineness of settlements in arbitration, as the necessary prerequisites under the CPC are not necessarily applicable to arbitration due to Section 19. It observed that where parties question the existence of a valid settlement, the tribunal will retain jurisdiction to decide this issue even after arbitral proceedings have terminated.

It reiterated that additionally, in the presence of a specific request by the parties to record the settlement in the form of an award as under Section 30(2) of the Act; after the tribunal determines the validity of the same, his mandate shall only terminate upon making such an award. The tribunal, hence, does not become functus officio until it decides whether there is an unchallenged settlement. Any interpretation to the contrary would cause Section 30(2) to become redundant. This would also prevent frivolous disputes with regard to the fact of the settlement and ensure that the purpose of the arbitral proceedings has been fulfilled.

MISCOMMUNICATION BETWEEN CLIENT AND COUNSEL

A challenge may arise if one of the parties alleges that their attorney was either not authorised to make, or otherwise made a misleading statement in respect of the party’s consent to settle. It is therefore necessary to determine the extent to which a client is bound by the actions of his counsel.

In Byram Pestonji Gariwala v. Union Bank of India and Ors., the Supreme Court was required to decide an appeal against a judgment of the Bombay High Court holding that a decree made against the defendant in terms of a compromise in writing and signed by a counsel representing the party but not signed by the party in person, was valid and binding on the party. The Court observed that a party is bound by all actions of his attorney so long as the latter is duly authorised by a vakalatnama and so long as the action in question is within the scope of the suit. That being said, the Court carved out an exception for when there is a misunderstanding between the client and her attorney, holding:

Where counsel enters into a compromise in intended pursuance of terms agreed upon between the clients, and, owing to a misunderstanding, the compromise fails to carry out the intentions of one side, the compromise does not bind the client, and the court will allow the consent to be withdrawn.

In 2015, the Apex Court in Himalayan Cooperative Group Housing Society v. Balwan Singh was confronted with determining whether a concession made by a counsel in a writ petition would bind his client in the absence of the client’s ‘express consent’ under the Bar Council of India Rules, 1975. The Court clarified that an attorney’s implied authority to act on behalf of and bind their client was limited only to “decisions as to tactics… while the client has a right to make decisions that can affect his rights.”

INTERVENTION UNDER SECTION 14(2)

The Supreme Court, in Lalit Kumar Sanghavi & Anr. v. Dharamdas V. Sanghavi & Ors., dealt with an instance where arbitral proceedings had been terminated as a consequence of non-payment of fees of the arbitrator. After having regard to the scheme of the Act and a conjoint reading of Sections 14 and 32, the Court ruled that the question of whether the arbitrator’s mandate stood legally terminated could be examined by the court “as provided under Section 14(2)”, which reads as follows:

If a controversy remains concerning any of the grounds referred to in clause (a) of sub-section (1), a party may, unless otherwise agreed by the parties, apply to the Court to decide on the termination of the mandate.

As discussed in this post above, the Bombay High Court in Mohammedhussain clarified that the arbitral tribunal retains the jurisdiction to determine the validity and existence of a settlement. Therefore, a controversy may arise between the parties and the tribunal over whether the latter’s mandate is in fact terminated. Accordingly, the parties may approach the court under Section 14(2). The court may thereafter choose to restore the arbitral proceedings as in Neeta Lalit Sanghavi and Anr. v. Dharamdas Vanmalidas Sanghavi and Ors. The restored tribunal may delve into the issue of misunderstanding and upon satisfaction of the genuineness of the same, assist the parties in preparing a fresh set of consent terms.

CONCLUDING REMARKS

The lack of procedural requirements and guidelines in attempting an amicable settlement in arbitration causes problems. More so when one of the parties subsequently contends that the settlement is resultant of a miscommunication between the parties or their respective attorneys.  Parties would then be entitled to file an application before the arbitral tribunal seeking a recall of the order or award passed in light of the settlement. Therefore, the following are a few precautionary steps the tribunal should require on a case-by-case basis:

  • All destining parties should affix their signature on the settlement terms. If the terms are agreed over correspondence, there should be a clear agreement through the correspondence exchanged;
  • Wherever practicable, the parties’ attorneys should affix their signature on the settlement agreement as well;
  • Parties may be required to make a joint application seeking termination of the arbitral proceedings;
  • Parties may undertake additional steps to ensure that the agreed settlement terms are clear and ‘undisputed’. For instance, the Mumbai Centre for International Arbitration (MCIA) Rules further suggest that even in the event parties do not require the consent terms to be recorded in the form of an award, a confirmation of settlement must be made to the Registrar of the Council of the MCIA; and most significantly,
  • Before making any request on behalf of the client, the attorney should seek appropriate and express instructions in writing before making any concession which may, directly or remotely, affect the substantive rights of their client.

(Shreya Mohapatra is a final year student at ILS Law College, Pune. The author would like to thank Ritvik Kulkarni, a lawyer based in Mumbai, for his comments on an earlier draft of the post.)

 

 

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