Delhi High Court
Case BriefsHigh Courts

Delhi High Court: Vibhu Bakhru, J. while hearing an application against award of an arbitral tribunal has held that it would not be permissible for the arbitral tribunal to rewrite the agreement between the parties or examine the commercial wisdom of entering in, when the parties have agreed to and accepted the terms of the agreement.

Factual Background

The petitioners had moved an application under Section 34 of the Arbitration and Conciliation Act, 1934 challenging an award rendered by the arbitral tribunal. The contract pertained to manufacture and supply of wagons by the respondents and there were subsequent amendments made to the agreement. Disputes had arisen in reference to certain claims based on the dual pricing of wagons.

The arbitral tribunal had found against the petitioners and had taken objection to III amendment made to the agreement. The action undertaken/order placed by the petitioner pursuant to this amendment was held to be in breach of the terms of the agreement. The arbitral tribunal ordered for the compensation under Sections 73 and 74 of the India Contract Act to be paid by the petitioners to the respondent in this regard.

Observations and Decision

Vibhu Bakhru J. observed that the limited point that required attention was whether the arbitral tribunal could hold an amendment made to agreement to be impressible only on the ground that it was commercially inviable to one of the parties and was in breach of the terms of agreements.

The Bench observed that the respondents had accepted and agreed to the terms of the agreement and the amendments that followed. The same was backed by the fact that the respondents did not challenge the contractual provisions and the III amendment per se and the claim rests on the same.

Further it was held that the “commercial contract between the parties cannot be avoided on the ground that one of the parties subsequently finds it commercially unviable to perform the same”. It was clarified that commercial wisdom of the parties is not up for examination in such cases.

It is not permissible that the arbitral tribunal reworks the bargain between the parties and in the process rewrite the contract. The Bench quoted with approval the decision of the Supreme Court in PSA SICAL Terminals Pvt. Ltd v. Board of Trustees of V.O. Chidambranar Port Trust Tuticorin, 2021 SCC OnLine SC 508.

The Bench added that in matters “where the terms of the contract do not clearly express the intentions of the parties, it is open to seek recourse to various tools of interpretation. This would include interpreting a contract in a manner that would make commercial sense’’, however yielding losses is not a ground for parties to not perform their contractual obligations.

Vibhu Bakhru J. held the arbitral award to be suffering from patented illegality and hence was erroneous.

[Union Of India, Ministry of Railways, Railway Board v. Jindal Rail Infrastructure Limited, 2022 SCC OnLine Del 1540, decided on 23-05-2022]


Parties appearing before the High Court:

For Petitioner: Mr Deepak Jain, with Mr K.B. Pradeep, Ms Jaspreet Aulakh and Mr Tanpreet Gul

For Respondent: Mr Ranjit Kumar, Mr Manoj Singh, Mr Nilava Bandyopadhyay, Mr Pratik Dhir and Mr Nimish Chandra

Case BriefsHigh Courts

Bombay High Court: A very interesting question was considered by G.S. Kulkarni, J., the question being, whether mere filing of a proceeding under Section 7 of the Insolvency and Bankruptcy Code, 2016 would amount to an embargo on the Court considering an application under Section 11 of the Arbitration and Conciliation Act, 1996, to appoint an arbitral tribunal?

Factual Background


 In the present matter, the respondent provided financial assistance to the applicant of an amount of Rs 4,50,00,000 for which a loan agreement was entered between the applicant and the respondent, referred to as Agreement 1.

Due to a change in the business scenario, another Agreement was executed referred to as Agreement 2, under which the date of repayment of the borrowing was extended.

There were defaults on the part of the applicant in the payment of the loan instalments.

Applicant’s case was that in the discharge of its liability towards the respondent under the above-stated agreements, the applicant issued a cheque to the respondent, of an amount of Rs 31,08,33,457 being the repayment of the respondent’s dues, which was in accordance with the terms and conditions of the loan agreement.

Respondent had approached the NCLT by initiating proceedings against the applicant under Section 7 of the Insolvency and Bankruptcy Code, 2016.

Though, so far, no order had been passed by the NCLT admitting the petition as per the provisions of Section 7(5) of the IBC.

Analysis and Decision


High Court observed that there was no dispute in regard to the arbitration agreements between the parties and there was a dispute in regard to the invocation of the arbitration agreement.

Thus, the primary considerations for this Court to exercise jurisdiction under Section 11(6) were certainly present.

The Bench stated that, even if an application under Section 8 of the ACA is filed, the adjudicating authority has a duty to advert to the contentions put forth under an application filed under Section 7 of the IBC by examining the material placed before it by the financial creditor and record a satisfaction as to whether there is default or not.

“…if the irresistible conclusion of the adjudicating authority (NCLT) is that there is default and the debt is payable, the bogey of arbitration to delay the process would not arise despite the position that the agreement between the parties contains an arbitration clause.”

The Bench observed that,

“…mere filing of the proceedings under Section 7 of the IBC cannot be treated as an embargo on the Court exercising jurisdiction under Section 11 of the ACA, for the reason that only after an order under sub-section (5) of Section 7 of the IBC is passed by the NCLT, the Section 7 proceedings would gain a character of the proceedings in rem, which would trigger the embargo precluding the Court to exercise jurisdiction under the ACA, and more particularly in view of the provisions of Section 238 of IBC which would override all other laws.”

Hence, as noted in the present case, the Corporate Insolvency Resolution Process initiated by the respondent is yet to reach a stage of the NCLT passing an order admitting the said proceedings, the Court would not be precluded from exercising its jurisdiction under Section 11 of the ACA, when admittedly, there was an arbitration agreement between the parties and invocation of the arbitration agreement had been made, which was met with a refusal on the part of the respondent to appoint an arbitral tribunal.

While concluding the matter, Bench held that, the Court would be required to allow the present application by appointing an arbitral tribunal for adjudication of the disputes and differences which arose between the parties under the agreements in question.

Though the Court added that a formal order appointing an arbitral tribunal was not required to be made as after the judgment was reserved, the parties just two days back, settled the disputes stating that arbitration was not warranted. [Jasani Realty (P) Ltd. v. Vijay Corpn., 2022 SCC OnLine Bom 879, decided on 25-4-2022]


Advocates before the Court:

Dr. Birendra Saraf, Senior Advocate a/w. Anshul Anjarlekar i/b. Raval- Shah & Co., Advocate for the Applicant.

Mr.Yusuf Iqbal Yusuf i/b. Y. and A Legal, Advocate for the Respondent.

Case BriefsHigh Courts

Delhi High Court: Vibhu Bakhru, J., held that whether claims are barred by limitation is a mixed question of fact and law and is required to be examined by the Arbitral Tribunal.

The petitioner (PDL) had filed the instant petition under Section 11(6) of the Arbitration and Conciliation Act, 1996 praying that an arbitrator can be appointed on behalf of the respondent (FRL).

Factual Background

PDL had entered into an agreement with the Delhi Metro Rail Corporation Limited, whereby a specified area on the ground and first floor within the Station Box was allocated for constructing a shopping complex under the name and style of ‘Parsvnath Mall’.

PDL was given the right to sub-license the use of the facility for the period of the agreement and for the uses specified.

Thereafter, PDL and FRL entered into a sub-license agreement (Contract) wherein two units on the ground and first floors were agreed to be sub-licensed to FRL for running a departmental store under the name of ‘Big Bazaar’.

During the subsistence of the Contract, in the year 2007, the Government of India enacted the Finance Act, 2007 by virtue of which the service of renting/licensing immovable properties for commercial use was included as a taxable service and brought under the nest of service tax. Consequently, the licensing of the premises to FRL under the Contract was a taxable service.

PDL claimed that FRL was liable to bear the additional burden of service tax; however, FRL had failed to reimburse the service tax.

FRL submitted that no stipulation was contained in the Contract for payment of service tax.

Analysis, Law and Decision

Whether the petition for the appointment of an arbitrator required to be rejected on the ground that the main agreement is insufficiently stamped?

High Court observed that, an arbitration agreement, even though embodied in a main agreement, is a separate agreement and invalidation of the main agreement does not necessarily invalidate the arbitration agreement.

An arbitration agreement is not required to be compulsorily registered.

Hence, the doctrine of severability, denying the benefit of an arbitration agreement to a party on the ground of any deficiency in the main agreement, may not be apposite.

Well Settled Law

By virtue of Section 11(6A) of the A&C Act, the scope of examination under Section 11 of the A&C Act is confined to the existence of an arbitration agreement.

The Bench observed that, in cases where there is no vestige of doubt that the claims are not arbitrable or the agreement is invalid, the Courts may decline to refer the parties to arbitration but not in any other case.

Supreme Court’s decision in NCC Ltd. v. Indian Oil Corpn. Ltd., 2019 SCC OnLine Del 6964, was also referred.

High Court opined that it would be apposite for this Court to adjudicate the issue of whether PDL’s claims were barred by limitation, the same shall be decided by an Arbitral Tribunal.

PDL had nominated Mr S.C. Jain, Additional District Judge (Retired) as its nominated Arbitrator. Accordingly, Mr Laxmi Kant Gaur, District Judge (Retired), is appointed as FRL’s nominated Arbitrator. Further, it was stated that both the arbitrators shall appoint the third arbitrator for the constitution of the Arbitral Tribunal.

The petition was allowed under the above terms. [Parsvnath Developers Ltd. v. Future Retail Ltd., 2022 SCC OnLine Del 1017, decided on 12-4-2022]


Advocates before the Court:

For the Petitioner: Mr Rahul Malhotra and Mr Rishu Kant Sharma, Advocates.

For the Respondent: Mr Sudhir K. Makkar, Senior Advocate with Ms Saumya Gupta, Ms Veera Mathai, Ms Yogita Rathore, Advocates.

Case BriefsHigh Courts

Delhi High Court: Vibhu Bakhru, J., allowed an amendment application seeking amendment of a petition filed under Section 34 of the Arbitration and Conciliation Act.

The Court observed that there is no remedy available against the order passed by the Arbitral Tribunal under Section 34 of the A&C Act as the same is not a fresh award, which can be impeached by filing a separate petition under Section 34 of the A&C Act.

An instant application was filed seeking to add additional grounds for challenging the arbitral award (the impugned award). The said impugned award was rendered by an Arbitral Tribunal, wherein two members concurred and passed the impugned award, and third member entered a dissenting opinion.

Later, the petitioner filed an application under Section 33 of the A&C Act seeking rectification and clarification, which was dismissed on the ground that it was barred by limitation.

The Respondent i.e. ONGC opposed the Amendment Application on the ground that:

(a) the Petitioner seeks to urge fresh grounds to challenge the Impugned Award which is impermissible under Section 34 read with Section 36 of the Arbitration Act as, the time for filing the application to set aside the award has since elapsed, and

(b) Allowing of the Amendment Application to add further grounds would in effect, tantamount to allowing the Petitioner to assail the Impugned Award at a belated stage on the ground, which it had forfeited, by not impeaching the impugned award on such grounds itself.

Analysis and Decision

On examining the new grounds sought to be urged by the petitioner, it was apparent that the petitioner sought to urge further grounds that arose because the impugned award was now required to be read in light with the order passed by the Arbitral Tribunal under Section 34(4) of the A&C Act.

Bench expressed that there is no remedy available to the petitioner against the order of the Arbitral Tribunal under Section 34(4) of the A&C Act as the same is not a fresh award, which can be impeached by filing a separate petition under Section 34 of the A&C Act.

High Court stated that the impugned award remains unaltered. The only difference being that it is now to be read with the order passed by the Arbitral Tribunal under Section 34(4) of the A&C Act. In this view, the petitioner cannot be precluded from raising such additional grounds.

In view of the above, an application was allowed. [UEM India (P) Ltd. v. ONGC Ltd., OMP (COMM) 393 of 2018, decided on 15-3-2022]


Advocates before the Court:

For the Petitioner: Mr. Gaurav Pachnanda, Senior Advocate with Ms. Iti Agarwal, Mr. Praful Shukla and Ms. Avni Sharma, Advs.

For the Respondent: Mr. Abhisek Puri and Ms. Surbhi Gupta, Advs.

Op EdsOP. ED.

Introduction

The term emergency arbitration has gained much prominence after various developments which took place in the legal battle that ensued between two corporate giants viz. Amazon and Future Group. Previous to this, one was acutely aware of this particular kind of interim relief wherein an “emergency arbitrator” is appointed to issue emergency relief before the constitution of the Arbitral Tribunal, and same can be very detrimental in ensuring that any of the parties does not suffer on account of procedural delay or even to protect the very subject-matter of the arbitration. Even the parties who consciously opt for arbitration are under impression that it is a quicker dispute resolution mechanism and at the threshold, emphasis needs to be made for approaching the problem of generating an interim relief even before the formation of the Arbitration Tribunal. The present article discusses about emergency arbitration, its advantages, challenges, and its legal status in India.

What is an emergency arbitration

There may be an instance, where parties may need an urgent interim relief even before the constitution of an Arbitral Tribunal so that the very purpose of parties opting for the arbitration does not get defeated. In such cases, emergency arbitration comes into the picture. The concept of emergency arbitration is akin to the concept of ad-interim injunction as provided by Section 37 of the Specific Relief Act, 1963[1] and regulated by the Code of Civil Procedure, 1908[2], wherein both the cases the primary measure is the preservation of the matter in status quo till the dispute is heard on merits. The provision of ad interim injunction is wildly used by the Indian courts while restraining one party in civil disputes and intellectual property cases. It is pertinent to mention herein that an emergency arbitrator is agreed to and arranged by the parties themselves without recourse to a tribunal at the first instance, therefore it is advisable to opt for any institutional arbitration, which recognises the concept of the emergency arbitrator and can arrange for it at the earliest, over adhoc arbitration, as in the latter case, if parties fail to reach consensus over the appointment of an arbitrator, or if any of the parties fails to appoint an arbitrator, the parties, even not intending, would be forced to take the recourse of the courts, for the appointment of an arbitrator, which in cases, may lead to delay in adjudication of the dispute. However, the provision of emergency arbitration is, enforceable and applicable only to parties who are signatories to the arbitration agreement and is applicable unless the contracting parties have opted out of it.

The provision of emergency arbitration was adopted, at first, by the International Centre for Dispute Resolution (“ICDR” for short) in 2006, wherein the concept of the emergency arbitrator and its procedures were laid down. Thereafter, the 2012 version of the International Chamber of Commerce (“ICC” for short) Rules also adopted the same provisions as that of the ICDR. The 2012 version of ICC Rules provided for the emergency arbitrator to be appointed when a party needs urgent interim or conservatory measures that cannot await the constitution of an Arbitral Tribunal and the same were then followed, by other institutions as well, such as Netherlands Arbitration Institute (“NAI” for short), the Singapore International Arbitration Centre (“SIAC” for short), Swiss Arbitration, Institute of the Stockholm Chamber of Commerce (“SCC” for short), the Australian Centre for International Commercial Arbitration (“ACIA” for short).3

SIAC, for example, have introduced the concept of emergency arbitration which allows an emergency arbitrator to be appointed before an arbitration even begins, within the space of one calendar day, who is required within the space of 2 weeks to issue emergency interim measures, freezing the status quo, assuming that the claimant, the party, requesting such measures, has demonstrated the appropriate need for that. This provides a mechanism for ensuring that the party’s rights are safeguarded, while the dispute resolution process proceeds.4

As pointed out by Gary Born:5

At the same time, these Rules all require very prompt and professional action by the arbitral institution and emergency arbitrator, which imposes burdens and risks on the institution, and thus, the parties. Despite this, unless practical application in coming years is to the contrary, these approaches appear to be sensible steps towards improving the arbitral process.

Advantages of emergency Arbitration

It goes without saying that the sole objective of the emergency arbitration is to provide urgent pro tem or conservatory measures to a party who cannot await the formation of an Arbitral Tribunal.6 In addition to this, this provision can eliminate the difficulty of a party who is under obligation to approach before courts in different jurisdictions for obtaining any instant relief, per contra same can be conveniently granted by the emergency arbitrator and can be enforced thenceforth by applying before the courts of a different jurisdiction. It also obliterates the chances of different courts in different jurisdictions passing varied orders further enhancing the complication for the parties, therefore, bringing uniformity in the order, and courts in different jurisdictions are only left with the responsibility of enforcing it within their jurisdiction. Hence, in nutshell, we can say that the present process is more time efficient for the courts inasmuch the parties, and perhaps most importantly, it provides for an immediate temporary solution which parties are bound to comply since the award passed on this head also becomes precedence once the Arbitral Tribunal is constituted.7

Challenges to emergency arbitration

The foremost challenge of an emergency arbitration is its recognition and enforceability. Many countries are still in process of recognising the sanctity and binding nature of the order passed by an emergency arbitrator which gives a preclusive effect whereas a lot of it including its enforcement depends on which jurisdiction the application for enforcement is filed. There may be a probability that a country might recognise the provision of emergency arbitration and will enforce the order passed by it but in the same case, any court of different jurisdiction might be incapable to recognise and enforce the same, due to reason of absence of specific legislation which recognises the order passed by an emergency arbitration. The situation gets much grimmer when an interim order passed by an emergency arbitrator is unlikely to qualify as an award and the situation becomes much dicey on how different courts would react to such requests and much likely the parties who has interim order in his favour would be left at the mercy of the respective courts to get it enforced.

Another challenge is that it is interim binding and once the Arbitral Tribunal is constituted the same is not binding and in case if any other person is appointed as an arbitrator to the substantive Tribunal, the latter can vary or suspend it, in case the time stipulated for such award has not expired. The form of interim relief can also play a part particularly when interim relief granted by the emergency arbitrator is in the form of order rather than an award.8

One major particular drawback is that there is no certainty for the consequences of non-compliance of the order made by the emergency arbitrator. Although, Article 29(2) of the ICC Rules requires the parties to undertake to comply with any order made by the emergency arbitrator, however, the same is silent about any consequences of non-compliance thereof. Parties who even manage to get interim orders in their favour would further struggle to get it enforced and will still need to rely on the support of the courts of that jurisdiction, meaning thereby that they are being virtually dragged into the litigation which they never intended to do so.

For instance, in India, the statutory provision relating to emergency arbitration is not clear, as the Arbitration and Conciliation Act, 19969 (“the Act” for short), is silent about the concept of emergency arbitration. Even if we read Section 2(1)(d) of the Act10 which defines an Arbitral Tribunal, goes on to describe it as a sole arbitrator or a panel of arbitrators. It is silent about whether an emergency arbitrator comes within the definition of the Arbitral Tribunal or not. The said has created a very dicey situation in the minds of the corporate giants who choose the seat of arbitration on basis of the flexibility of the local laws in adopting international conventions whereas predominantly the New York Convention11. More so, when the Act is silent on the recognition of emergency arbitrator it is very less likely that same can be enforced by the Indian courts.

Mechanism for emergency arbitration

The emergency arbitration procedure, which is broadly similar in all the above-named arbitration institutions, provides for a sole arbitrator to be appointed by the institution on request of any of the parties, on an expedited basis, to determine the immediate interim relief claimed by the party. The appointed emergency arbitrator is free to set his procedures, which should be clear from the outset. The procedures set by the emergency arbitrator could include the timelines for exchange of submissions inasmuch any reply thereto, a hearing if any, the mode of communication to be adopted by the parties, and how evidence is to be adduced.12 One thing worth mentioning is that interim measures or conservatory relief granted by an emergency arbitrator would be having an effect only for a stipulated period, as the same has been constituted for a limited purpose that is for grant of interim or conservatory relief and would immediately dissolve thereafter, once the purpose is served or the stipulated period has expired. To get a good understanding of how whole process of emergency arbitration is conducted, refer to this concise, yet comprehensive YouTube video.13

Legal status of emergency arbitration in India

Despite there being no statutory recognition for the order passed by an emergency arbitrator, the  Supreme Court has come up with a very artful interpretation of the Act, suitably meeting the needs of the New York Convention, in the famous case Amazon.com NV Investment Holdings LLC v. Future Retail Ltd.14, holding that the interim award passed by an emergency arbitrator appointed under the Arbitration Rules of the Singapore International Arbitration Centre is recognised under Section 17(1) of the Act15, and thus, enforceable under Section 17(2) of the Act. The Court was wise to further observe that there was nothing contained in the Act which prohibits contracting parties from agreeing to a provision providing for an award made by an emergency arbitrator. On the contrary, it was observed that a conjoint reading of Sections 2(6) and (8) of the Act16, if given a harmonious interpretation, would allow the contracting parties to incorporate institutional rules into their arbitration agreement, and such incorporation should be given paramount importance whereby in case the institutional rule provides for emergency arbitrator’s orders, the same would be covered under the Act. In particular, the Supreme Court was of the view that if the orders of an emergency arbitrator are not given effect to then the same would render the whole concept of emergency arbitration otiose.

Conclusion

That the Supreme Court has shown much-needed enthusiasm towards upholding the instrumental rules which include orders passed by an emergency arbitrator and such orders are referable to inasmuch can be made under Section 17(1) of the Act. The holistic approach adopted by the Supreme Court would further robust the arbitration mechanism in India and needless to say that the same would enlighten India’s prospect towards becoming an international arbitration hub. It would certainly help India in making a big leap in following international comity in the field of international arbitration and would also stand the test of minimum judicial intervention in respect of the arbitration proceedings, which was envisaged in Article 5 of the UNCITRAL Model Law on International Commercial Arbitration and also incorporated in the form of Section 5 of the Act17. Moreover, in the present conditions, what works as icing on the cake is that the recognition and thus enforcing of such orders will certainly decongest the Indian courts which are already neck-deep in work. However, whatever herein is said, does come with a caveat, that is, arbitration mechanism only offers an alternative option to litigation wherein it is intended only to supplement and not supplant the legal system enshrined in the Constitution. A perfect example would be that of Belgium which in 1985, in an attempt to make the country arbitration friendly inasmuch the preferred seat for international arbitrations, provided that a non-Belgian citizen who had no business in Belgium would not be permitted to apply to a Belgium court to set aside an arbitral award. It was believed and was done under the impression that with no judicial review of the award in Belgium, parties especially international parties, would be attracted to choose Belgium as a seat for arbitration. However, the reality was to the contrary, wherein nobody opted for Belgium for the seat of arbitration, which can be mainly attributed to the reason of lack of possible court review.18Thus, this analysis, clearly suggests that even parties in international arbitration prefer court supervision at the place of arbitration.


* Advocate. Author can be reached at <advshivamkunwar@gmail.com>.

[1] Specific Relief Act, 1963, S. 37.

[2]Code of Civil Procedure, 1908.

3 Swiss Rules, 2012, Art. 43; Australian Centre for International Commercial Arbitration Rules, 2011, Art. 28(1); NAI Arbitration Rules, 2010, Art. 42; Arbitration Rules of the Arbitration Institute of the Stockholm Chamber of Commerce, 2010, Appendix II, Art. 8; SIAC Rules, 2013, Art. 26(2), 28ASA Bull. 462 (2010).

4 Modern Arbitration: Live – An Interview with Gary Born, <https://www.wilmerhale.com/-/media/files/shared_content/editorial/news/documents/20190319-modern-arbitration-live-an-interview-with-gary-born.pdf>.

5Gary B. Born,  International Commercial Arbitration, Ch. 17 on Provisional Relief in International Arbitration, 2453 (2nd Edn., Kluwer Law International 2014).

6Martin J. Valasek and Jenna Anne De Jong, Enforceability of Interim Measures and Emergency Arbitrator Decisions, <https://www.nortonrosefulbright.com/en-in/knowledge/publications/6651d077/enforceability-of-interim-measures-and-emergency-arbitrator-decisions>.

7ICC Rules of Arbitration, 2012, Arts. 29(1) & (4) and Appendix V.

8Martin J. Valasek and Jenna Anne De Jong, Enforceability of Interim Measures and Emergency Arbitrator Decisions, <https://www.nortonrosefulbright.com/en-in/knowledge/publications/6651d077/enforceability-of-interim-measures-and-emergency-arbitrator-decisions>.

9Arbitration and Conciliation Act, 1996.

10Arbitration and Conciliation Act, 1996, S. 2(1)(d).

11United Nations Conference on International Commercial Arbitration Convention on the Recognition and Enforcement of Foreign Arbitral Awards, 1958.

12Stephanie Khan and Benson Lim, Emergency Arbitrator Procedures: What Should a Practice Note of Best Practices Consider?,  <http://arbitrationblog.kluwerarbitration.com/2019/01/11/emergency-arbitrator-procedures-what-should-a-practice-note-of-best-practices-consider/>.

13https://www.youtube.com/watch?v=EWziM90stb8.

14(2022) 1 SCC 209.

15Arbitration and Conciliation Act, 1996, S. 17(1).

16Arbitration and Conciliation Act, 1996, Ss. 2(6) and (8).

17Arbitration and Conciliation Act, 1996, S. 5.

18Ajar Rab, Chapter X Delocalization/Autonomous Theory in International Commercial Arbitration 58 (NALSAR University of Law, Hyderabad, First Edn., 2019 Reprint 2021).

Op EdsOP. ED.


INTRODUCTION


The Bench of the  Supreme Court comprising the  Chief Justice of India N.V. Ramana, J. and Surya Kant, J. has in its judgment passed in Welspun Specialty Solutions Ltd. v. ONGC Ltd.[1] (Welspun Specialty Solutions) clarified the interplay between Sections 55 with 73 and 74 of the Contract Act, 1872 (Contract Act) with respect to the performance of time-conditioned obligations and the assessment of the quantum of damages for delay. The judgment has been a subject of judicial discourse and may have cast a shadow on the reliability of a provision for liquidated damages in contracts where it is stipulated that time will be of the essence. The present article will study the judgment of the Supreme Court with respect to its interpretation of the aforesaid sections of the Contract Act.

 


Facts


Oil and Natural Gas Corporation (ONGC) floated a global tender for the purchase of certain seamless steel casing pipes (pipes). A company known as Remi Metals Gujarat Ltd. which is now known as Welspun Specialty Solutions Ltd. (Remi Metals) was considered the successful bidder and pursuantly was awarded the contract (contract) by ONGC. Subsequently, ONGC issued four purchase orders. These purchase orders laid down that the supply of pipes are subject to the strict adherence of time-conditioned obligations and that delivery must not be later than the dates mentioned therein. It was clearly enunciated that time will be of the essence in view of the principles enshrined under Section 55 of the Contract Act. Moreover, the general terms and conditions of the purchase orders allowed ONGC to levy liquidated damages, if there is a delay in supply of pipes on the part of Remi Metals.

 

Amidst performance of the obligations under the contract, there were certain delays on the part of Remi Metals in meeting the timely supply of pipes as per the dates mentioned in the purchase orders and owing to that, ONGC granted extension of time on numerous occasions. These extended periods were accepted by Remi Metals and ultimately its obligations stood discharged under the contract. However, owing to the various periods of delay on the part of Remi Metals, ONGC deducted an aggregate amount of USD 8,07,804.03 and INR 1,05,367 as liquidated damages from various invoices that were submitted by Remi Metals. Aggrieved by the high-handed deduction of liquidated damages, Remi Metals invoked arbitral proceedings against ONGC and sought refund of the amounts deducted along with certain other claims.


Award of Arbitral Tribunal


The Arbitral Tribunal framed numerous issues in order to determine whether Remi Metals were rightfully entitled to the refund of liquidated damages that were withheld by ONGC. One of the most critical issues framed by the Arbitral Tribunal was to ascertain whether time was of the essence of contract. The Arbitral Tribunal held that a mere clause in a contract which stipulates that “time is of the essence” would not at all be determinative to safely conclude that the performance of the obligations are strictly time conditioned in view of Section 55 of the Contract Act. It held that in order to conclusively determine whether time is of the essence, an inquiry must be made into the overall nature of the contract by examining the contract as a whole.

 

Moreover, in the light of the pertinent clauses of the contract, the Arbitral Tribunal held that since the contract contained provisions for extension of time, payment of penalty for delay, levy of liquidated damages that such clauses diluted time being of the essence and rendered the time-conditioned stipulation as nugatory. Resultantly, the Arbitral Tribunal held that with regard to the issue lawful imposition of liquidated damages, that in view of the well-settled legal position that liquidated damages being in the nature of pre-quantified damages could not be granted. The reasoning employed by the Arbitral Tribunal to arrive at this is rather interesting, it held that since it was concluded that time is not of the essence of the contract that there could be no breach of the contract on account of the delay on the part of Remi Metals. Hence, as there is no breach there could be no question of allowing ONGC to withhold the monies deducted as liquidated damages.

 

Accordingly, the Arbitral Tribunal held that damages, if any, which are payable to ONGC would be those damages which are in the nature of unliquidated damages being actual/tangible damages that require a discharge of a high evidentiary burden. Thereafter, ONGC was constrained to provide an estimation of its tangible losses which were under four categories amounting to an aggregate of USD 3,80,64,830. This estimation was accepted by the Arbitral Tribunal. Although, the Arbitral Tribunal held the opinion that ONGC could not be entitled to claim any damages for those losses that it incurred during the period when time was extended for completion of delivery as they expressly waived the imposition of liquidated damages for that period.

 

Ultimately, the Arbitral Tribunal passed an award in favour of ONGC entitling them to retain a sum of USD 4,40,610.42 out of the monies already deducted as liquidated damages from the various invoices submitted by Remi Metals.

 


Setting-aside Proceedings Before High Court of Uttarakhand


Being aggrieved by the arbitral award, ONGC was quick to prefer a petition under Section 34 before the District Court under the Arbitration and Conciliation Act, 1996 (A&C Act) for setting aside of the award contending that the award was not in accordance with the contract. The District Court found no infirmity in the award and refused to interfere with the Arbitral Tribunal’s findings.

 

Aggrieved by the judgment of District Court, both parties preferred an appeal under Section 37 of the A&C Act before High Court of Uttarakhand. The High Court found that the Arbitral Tribunal and the District Judge erred in the construction of contract and observed that the Arbitral Tribunal committed a gross error by holding that ONGC had to prove loss suffered before recovering damages.


Judgment of Supreme Court


At the time of hearing before the Supreme Court, the learned counsels appearing on behalf of the parties put forth their legal submissions in order to buttress their contentions. The learned Senior Counsel appearing for Welspun reiterated that the view taken by the Arbitral Tribunal was plausible and thus did not warrant any interference. It was contended that as the contract made provisions for extension of time and levy of liquidated damages, that it could not be said that time was of the essence of the contract. Further, emphasis was laid on ONGC’s conduct whereby they waived the imposition of liquidated damages on earlier occasions while granting extension of time. It was submitted that in the light of this waiver, it was not proper that liquidated damages could be imposed for another extension period. Summing up its submissions on interpretation of the contract and corresponding provisions of the Contract Act, Welspun relied on the judgment of the Supreme Court in Associate Builders v. DDA[2] (Associate Builders) where it was laid down that the courts should ordinarily refrain from interfering with arbitral awards under their jurisdiction envisaged by Section 34 of the A&C Act. The celebrated Judge R.F. Nariman, J. laid down in Associate Builders[3], that interference was warranted only in exceptional circumstances i.e. where awards are vitiated by “patent illegalities”.

 

The learned counsel appearing on behalf of ONGC, vehemently contended that the arbitral award stood vitiated as the Arbitral Tribunal had transgressed the four corners of the contract by making certain extraneous findings. It was contended that the contract stipulated the imposition of liquidated damages and in the light of these pre-estimated damages, the Arbitral Tribunal grossly erred by awarding unliquidated damages in terms of Section 55 r/w Section 73 of the Contract Act. The learned counsel on behalf of ONGC relied on the controversial ruling of the Supreme Court in ONGC Ltd. v. Saw Pipes Ltd.[4] (Saw Pipes) to strengthen its contention.

 

After the conclusion of the oral submissions made by the parties, the Supreme Court at the outset outlined the ambit of its jurisdiction under Section 34 of the A&C Act as it stood before the 2015 amendment of the A&C Act. The Court observed that the term “public policy” in Section 34(2)(b)(ii) has been an exploited ground for the challenge of arbitral awards and has been a subject of judicial controversy for a considerable period of time. The Court observed that “public policy” does not indicate “a catch-all provision” to challenge arbitral awards before an appellate court on infinite grounds. The Court discussed the scope of the term “public policy” from the time of its initial exposition in the seminal dictum of the Supreme Court in Renusagar Power Co. Ltd. v. General Electric Co.[5] (Renusagar) where the Court propounded a narrow interpretation of the term. Subsequently, the Court discussed the infamous judgments in Saw Pipes[6] and ONGC Ltd. v. Western Geco International Ltd.[7] (Western Geco) which broadened the scope of ambit of the term “public policy” in the context of setting aside arbitral awards under Section 34(2)(b)(ii).

 

It is in our opinion and evident from the leading judgments and the opinion of experts in the arbitral fraternity, that the judgments of the Supreme Court in Saw Pipes[8] and Western Geco[9] had cast a shadow on the fate of domestic arbitral awards in India. It is true that the legislature had enacted the 2015 amendment of the A&C Act to mitigate the negative repercussions of these controversial rulings and in spite of which, they still continue to cause havoc at the time of setting aside of arbitral awards. After the discussion on the ambit of the interference with arbitral awards on the ground of “public policy”, the Court was posed with the question of whether an arbitral award could be sustained under Section 37 of the A&C Act.

 

The Court in Welspun Specialty Solutions[10] observed that the substratum of the challenge to the award was whether the imposition of unliquidated damages is sustainable in spite of the fact that the contract expressly contemplated imposition of liquidated damages. After discussing the legal framework of liquidated damages in India with regard to Section 74 of the Contract Act, the Court observed that the finding of the Arbitral Tribunal that time was not of the essence of contract was beyond reproach. The Court concurred with the reasoning employed by the Arbitral Tribunal that the very existence of extension of time provisions together with the stipulation of liquidated damages and the subsequent conduct of ONGC (granting extension of time on earlier occasions) rendered the stipulation of time-conditioned performance as diluted. The Court concurred with the finding of the Arbitral Tribunal that since it was found that time was not of essence, that resultantly the amount stipulated as pre-estimated damages in form of liquidated damages would not be appropriate in order to fairly quantify the actual/tangible loss sustained by ONGC due to the delay. The Court held the opinion that these findings of the Arbitral Tribunal were in accordance with the well-known principles of contractual interpretation and did not suffer from any perversity.

 

The Court in Welspun Specialty Solutions[11] took the opportunity to exposit and reiterate certain well-known principles at common law with respect to the adherence of time-conditioned obligations that it deemed worthy of import to the principle in Section 55 of the Contract Act. The Court affirmed the general principle at common law, as envisaged by the English Court in Percy Bilton Ltd. v. Greater London Council[12] (Percy Bilton) that the general rule is that the promisor is bound to complete the obligation by the date of competition stated in the contract. In addition, it highlighted an exception to the rule of levy of liquidated damages as carved out in the century-old precedent of the English Court in Holme v. Guppy[13] where it was laid down that the promisee is not entitled to liquidated damages, if by his act or omission he has prevented the promisor from completing the work by the completion date.

 

After a substantial discussion on the applicable jurisprudence, the Court found that in order to ascertain whether time was of the essence of the contract, one must read the entire contract as a whole and on a holistic basis and not by examining singular clauses in isolation.

 

This doctrine was laid down in 1979 by the Full Bench of the Supreme Court in Hind Construction Contractors v. State of Maharashtra[14] (Hind Construction Contractors). However, it is surprising to note that the judgment in Welspun Specialty Solutions[15] has no mention of the judgment of the Full Bench in Hind Construction Contractors[16].

 

An in-depth factual analysis was undertaken by the Supreme Court, as it further interpreted Clause 9(i) of the contract wherein it was clearly enunciated that “subject to extension granted without prejudicing the right of ONGC to recover damages”. It was held that the ‘‘damages’’ contemplated by this provision meant unliquidated damages within the meaning of the 2nd paragraph of Section 55 and not pre-estimated/liquidated damages as envisaged under Section 74 of the Contract Act. The Court upheld the findings of the Arbitral Tribunal that said term “damages” in Clause 9(i) of the contract meant actual/tangible loss and not pre-estimated loss.

 

It is our opinion that the finding of Arbitral Tribunal that damages would be granted under Section 55 read with the principles enshrined in Section 73 in place of the pre-estimated sum stipulated under Section 74 of the Contract Act is not entirely correct. It is our opinion that once it is found that time is not of the essence, the delay in completion would still attract the provisions for liquidated damages. It is pertinent to note that the Court has concurred with these findings without sufficient examination of the interplay of the various sections of the Contract Act and the underlying rationale of liquidated damages under Section 74.

 

The Court rejected ONGC’s reliance on the judgment in Saw Pipes[17] by observing that in Saw Pipes[18] no waiver was granted for levying liquidated damages on earlier occasions amidst performance as in the present case. On this basis it held that ONGC was not entitled to benefit from the exceptions carved out in Saw Pipes[19]. The Court observed that in the present case it was undisputed that ONGC had waived liquidated damages on numerous earlier occasions while granting time extensions for completion of the obligations. The Court concurred with the finding of the Arbitral Tribunal that as liquidated damages were waived on earlier occasions, subsequent impositions could not be imposed unless agreed upon by the parties. This finding was upheld and recognised as the autonomy of a party to engage in contract terms and one which requires a clear intention.

 

Ultimately, the Court in Welspun Specialty Solutions[20] in view of its limited jurisdiction refused to interfere with any of the findings of the Arbitral Tribunal and upheld the award, while setting aside the judgments passed by the High Court of Uttarakhand.


Conclusion


It is our opinion that the judgment of the Supreme Court in Welspun Specialty Solutions[21] has drastically changed the perspective of the employers with respect to the reliability of a provision for liquidated damages, more particularly one which caters to recompense for delay in performance of time-conditioned obligations. It  also remains uncertain that even when the contract stipulates that time will be of the essence, that whether such a stipulation will prevail after the arbitral tribunals/courts examine the contract as a whole.

 

It is true that the decision in Welspun Specialty Solutions[22] is welcome step with respect to judicial non-interference with arbitral awards, but at the same time has cast a shadow of doubt on the efficacy of a clause for liquidated damages in contract where the performance of obligations is strictly time conditioned. It is our opinion that such an undesirable situation, nonetheless warrants cognizance by the Supreme Court at the earliest possible opportunity to clarify the essence of the underlying rationale of liquidated damages in Section 74 of the Contract Act.

 


† Founder and Chairman, Advani Law LLP.

†† Partner, Advani Law LLP.

†††Associate, Advani Law LLP.

[1]  (2022) 2 SCC 382.

[2](2015) 3 SCC 49.

[3] (2015) 3 SCC 49.

[4](2003) 5 SCC 705.

[5]1994 Supp (1) SCC 644.

[6] (2003) 5 SCC 705.

[7](2014) 9 SCC 263.

[8] (2003) 5 SCC 705.

[9] (2014) 9 SCC 263.

[10] (2022) 2 SCC 382.

[11] (2022) 2 SCC 382.

[12](1982) 1 WLR 794.

[13](1838) 3 M & W 387 : 150 ER 1195

[14](1979) 2 SCC 70.

[15] (2022) 2 SCC 382.

[16] (1979) 2 SCC 70.

[17] (2003) 5 SCC 705.

[18] (2003) 5 SCC 705.

[19] (2003) 5 SCC 705.

[20] (2022) 2 SCC 382.

[21] (2022) 2 SCC 382.

[22] (2022) 2 SCC 382.

Case BriefsHigh Courts

Bombay High Court: B.P. Colabawalla, J., addressed an arbitration application filed under Section 11 of the Arbitration and Conciliation Act, 1996.

Instant application was filed under Section 11 of the Arbitration and Conciliation Act, 1996 seeking the appointment of a Sole Arbitrator to adjudicate upon the disputes and differences between the applicant and respondent arising out of the Service Level Agreement.

High Court noted that the existence of the Arbitration Clause has not been disputed by the respondent.

Grounds on which the application was opposed:

  • Dispute between the parties is not arbitrable as the claims made by the applicant is outside the term of SLA as well as the pleaded case of the applicant as reflected

For the above-stated, respondent’s counsel brought to the Court’s attention Clause 2.1 of the SLA which defined the term of SLA and stipulated that the same shall continue to be in force and in effect for a period of three years and can be extended for a term of one year and shall supersede all prior or contemporaneous communications, proposals and agreements between the respondent and the petitioner.

Further, the counsel submitted that the period of SLA came to an end on 2-05-2017. However, the claim of the applicant was in relation to the services rendered and invoices raised for the period after 2-5-2017. Hence, he submitted that the disputes were clearly not arbitrable and there was no question of referring the disputes to arbitration.

High Court stated that it cannot come to the conclusion as to whether the disputes between the applicant and the respondent are arbitrable or otherwise.

Another argument was that the disputes cannot be referred to arbitration because there is a fraud that has been played by the applicant on the respondent. On being unimpressed with the said argument, Court expressed that on the issue of fraud, the law is well settled. Supreme Court in N.N. Global Mercantile (P) Ltd. v. Indo Unique Flame Ltd., (2021) 4 SCC 379, clearly held that all civil or commercial disputes, either contractual or non-contractual, which can be adjudicated upon by a Civil Court, in principle, can be adjudicated and resolved through arbitration, unless it is excluded expressly either by statute, or by necessary implication.

Supreme Court has categorically held that the Arbitration and Conciliation Act, 1996 does not exclude any category of disputes as being non-arbitrable. Section 2 (3) of the Arbitration Act, however, recognizes that certain categories of disputes by law may not be submitted to arbitration. Finally, the Supreme Court has held that the civil aspect of fraud is considered to be arbitrable in contemporary arbitration jurisprudence with the only exception being where the allegation is that the Arbitration Agreement itself is vitiated by fraud or fraudulent inducement, or the fraud goes to the validity of the underlying contract, and impeaches the arbitration clause itself.

Respondent’s case was that the alleged fraud was that the former employees of the Respondent (in connivance with the Applicant) continued to avail of the services of the Applicant beyond the expiry of the SLA merely to siphon off the funds of the Respondent unlawfully.

Further, the fraud alleged was that the former employees, along with the applicant siphoned off monies of the Respondent even after the expiry of the said SLA.

The Court opined that the respondent counsel’s submission that dispute between parties cannot be referred to arbitration on account of fraud was incorrect.

High Court held that it has no hesitation in constituting the arbitral tribunal to decide the disputes and differences between the applicant and the respondent arising out of the said SLA.

Parties agreed before the Court that for the purposes of deciding their disputes and differences Mikhail Behl an Advocate of this Court, be appointed as a Sole Arbitrator.

Order of the Court:

(a) By consent of parties, Mr Mikhail Behl, an advocate of this Court is hereby appointed to act as a Sole Arbitrator to decide the disputes and differences between the Applicant and the Respondent arising out of and/or in connection with and/or in relation to the Service Level Agreement dated 3rd May, 2014.

(b) A copy of this order will be communicated to the learned Sole Arbitrator by the advocates for the Applicant within a period of two weeks from today.

(c) The learned Sole Arbitrator is requested to forward his Statement of Disclosure under Section 11 (8) read with Section 12 (1) of the Arbitration Act to the advocates for the Applicant so as to enable them to file the same in the Registry of this Court. The Registry of this Court shall retain the said Statement on the file of this Application and a copy of the same shall be furnished by the advocates for the Applicant to the advocates for the Respondent.

(d) The parties shall appear before the Sole Arbitrator on such date and at such place as he nominates to obtain appropriate directions with regard to fixing a schedule for completing pleadings etc. The Arbitral Tribunal shall give all further directions with reference to the arbitration and also as to how it is to proceed.

(e) Contact and communication particulars shall be provided by both sides to the Sole Arbitrator within a period of two weeks. This information shall include a valid and functional email address as well as mobile numbers of the respective advocates.

(f) The Respondent is at liberty to raise all questions of jurisdiction within the meaning of Section 16 of the Arbitration Act. All contentions in that regard are expressly kept open on both sides. It is made clear that any observations made by me herein are only prima facie and tentative and shall not bind the Arbitral Tribunal while deciding any issue of jurisdiction. It is however made clear that the Respondent shall not be allowed to contend before the Arbitral Tribunal that there does not exist an Arbitration Agreement as the same has been expressly admitted.

(g) The parties have agreed that the Arbitral Tribunal shall be free to fix its own fees and shall not be bound by the 4th Schedule of the Arbitration and Conciliation Act, 1996 or the Bombay High Court (Fee payable to Arbitrators) Rules, 2018. The parties further agree that all arbitral costs and fees of the Arbitrator will be borne by the parties equally and will be subject to the final Award that may be passed by the Tribunal.

(h) The parties immediately consent to a further extension of up to six months to complete the Arbitration should the learned Sole Arbitrator find it necessary.

(i) The parties have agreed that the venue and seat of the arbitration will be in Mumbai.

In view of the above terms, the arbitration application was disposed of.[One Point One Solutions Ltd. v. Reliance Nippon Life Insurance Company Ltd., 2021 SCC OnLine Bom 7861, decided on 28-9-2021]


Advocates before the Court:

Mr Jamshed Master a/w Delan Fernandez, Radhika Motwani i/b Purazar P. Fouzdar, for the Applicant.

Mr Shyam Kapadia a/w Dhruva Gandhi, Mehafrin Mehta i/b HSA Advocates, for the Respondent.

Op EdsOP. ED.

In an age of increased cross-border investment, transaction and trade, modern day commercial contracts incorporate arbitration clauses as an efficient means of resolving disputes in a time-bound manner. Despite its benefits, arbitration proceedings can be expensive and is not an economical means of resolving petty disputes. Thus, a growing number of contracts have seen parties incorporate certain preconditions that must be satisfied before invoking arbitration. These preconditions take the form of “multitiered” and “escalation” clauses which generally envisage conciliatory cost-efficient methods of mutually resolving disputes before resorting to the zero-sum game of arbitration.

 

This proposed silver bullet has instead given rise to new conundrums that affect the efficacy of arbitration proceedings. The non-compliance of these preconditions have instead been used by parties to challenge the legality of an Arbitral Tribunal so constituted and in rare cases, some of the domestic courts around the world have gone so far as to annul the awards arising from improperly constituted tribunals.

 

The present article attempts to characterise the pre-arbitration procedural requirements and whether the same is a matter of jurisdiction (the theory that until the precondition procedures have been satisfied, the arbitration agreement is not triggered and that the constitution of a tribunal is invalid and the issue concerning the same cannot be heard by the tribunal as it goes to the root of its jurisdiction) or a matter of admissibility (the theory that the arbitration agreement exists and provides the arbitrators with jurisdiction to hear the issue of non-compliance of the preconditions, but does not permit adjudication of material claims until the issue of adherence to the preconditions has been satisfied).

 

Position in India

As of date, the aforementioned issue has not presented itself before the courts of India in order to determine the position of Indian laws with respect to it. However, before delving into the basket of foreign jurisprudence that have definitively opined on the aforesaid issue, it is necessary to examine the judicial pronouncements made by the courts of India that differentiate the issues of “jurisdiction” from those of “admissibility”.

 

In this regard, it is pertinent to highlight the case of BSNL v. Nortel Networks (India) (P) Ltd.[1], wherein the  Supreme Court has applied the “tribunal versus claim test” to determine whether the issue of a statutory time bar is a matter concerning jurisdiction or admissibility. To put it succinctly, the “tribunal versus claim test” asks whether the objection/issue is targeted at the tribunal (in the sense that the claim should not be arbitrated due to a defect in or omission to consent to arbitration), or at the claim (in that the claim itself is defective and should not be raised at all). In the present case, the Court decreed in favour of holding the issue of limitation as one towards admissibility as it challenges the nature of claims raised as opposed to challenging the jurisdiction of the Tribunal.

 

Another case of import, is United India Insurance Co. Ltd. v. Hyundai Engg. and Construction Co. Ltd.[2], wherein the Supreme Court held that in a case where the amount under the car policy has to be admitted as a precondition to bring forth the claim in arbitration, it is necessary that the said precondition has to be satisfied before arbitration can be invoked as only the admitted amount can be made part of the dispute to be adjudicated by the Tribunal. Thus, to reiterate, the arbitration clause would come to life only if the liability in respect of the car policy is admitted by the purportedly defaulting party, as a precondition.

 

The Supreme Court in Demerara Distilleries (P) Ltd. v. Demerara Distillers Ltd.[3], took a different stance altogether with respect to the examination of the preconditions and stated that one must also consider whether such preconditions have been complied with by the correspondence of the parties, and the likelihood of success especially in cases where the preconditions are open-ended and do not provide conclusive definitive terms to measure the attempt of satisfying the preconditions. In the instant case, the Court decreed after inferring the correspondence exchanged that the attempts to resolve disputes by mutual discussion and mediation as a precondition is merely an empty formality and not mandatory. It is pertinent to note that the Court itself determined the nature of preconditions without considering whether the Arbitral Tribunal was sufficiently empowered to decide the same.

 

Whereas the Supreme Court in S.K. Jain v. State of Haryana[4], had held that the language of the arbitration clause necessitated the adherence of pre-requirements, however the decision by the Supreme Court was reached after the Arbitral Tribunal was constituted and the said Tribunal held that it cannot assume jurisdiction as the mandatory requirements were not satisfied.

 

The courts in India have not conclusively dealt with the issue of whether non-compliance of arbitral preconditions are to be treated as a matter affecting the jurisdiction of the Tribunal, or whether the same is a matter of admissibility.

 

In light of the divergent and inconclusive Indian jurisprudence on the characterisation of preconditions, it is imperative to examine foreign jurisprudence in recent years which have definitively opined on the characterisation of preconditions.

 

Prevailing Trend in International Jurisprudence

Perhaps the earliest known case to attempt the delineation of the issues of admissibility and jurisdiction is in the US Supreme Court case of BG Group Plc v. Republic of Argentina[5]  where a challenge to an arbitral award was rejected, as the challenge was made on the premise that mandatory preconditions to arbitration have not been complied with. The precondition arose out of a bilateral investment treaty (BIT) agreement between UK-Argentina, which required the claimant to litigate their claims for 18 months in the domestic courts of Argentina prior to commencing a claim in arbitration.

 

The US Supreme Court went on to hold that in absence of a contrary provision in the arbitration agreement, questions as to whether the parties are bound by an arbitration clause are for the courts to decide and it is for the constituted Arbitral Tribunal to decide the meaning and import of procedural preconditions, including their non-compliance.

 

Recently, the Hong Kong Court of First Instance (HKCFI), in T v. B[6], held that any matter concerning the compliance or non-compliance of arbitral preconditions is a question of admissibility and not jurisdiction even though the parties and the arbitrator in the instant case referred to it as a “jurisdictional challenge”. This Court affirmed and upheld the rationale in C v. D[7] and stated that it is prudent to deem preconditions as a matter of admissibility rather than jurisdiction as the same would be in line with the general trend of judicial restraint in interfering with the arbitration proceedings and would facilitate expeditious disposal of matters rather than annulling awards after a long and expensive process on non-fulfilment of preconditions, which would render the arbitration process as circuitous and would defeat the very object of time-bound and expeditious disposal of arbitration proceedings. Since there is no doubt as to the mutual consent to arbitration and the challenge to the award was with reference to certain procedural prerequisites that have not been followed, it would not be appropriate for the domestic courts to hear such a challenge where the Arbitral Tribunal is empowered to hear such disputes.

 

The aforesaid case of C v. D[8] has also been upheld in Kinli Civil Engg. v. Geotech Engg.[9]  in the context of a dispute brought under a contract containing an arbitration agreement providing that a party may submit a dispute to arbitration. The Court granted a stay of litigation proceedings in favour of arbitration noting that the Court has no role in determining whether conditions with respect to the right to arbitrate have been satisfied.

 

The English High Court has taken the same view in Republic of Sierra Leone v. SL Mining Ltd.[10] expressly stating that any alleged non-compliance of preconditions is to be treated as a matter of admissibility, despite the fact that the defendant in the instant case failed to comply with the preconditions to arbitration. It also stated that the leading commentaries and authorities were all in favour of preconditions to arbitration being an issue of admissibility and not one of jurisdiction.

 

This rationale and reasoning shows a clear understanding of the distinction between issues of admissibility and those of jurisdiction, as can be evinced by a consensus of the domestic courts around the world using a similar line of thought, and thus framing a common standard governing international commercial arbitration.

 

Concluding Remarks

When characterising contractual preconditions to arbitration agreements, it is prudent to ascertain the intention of the parties when drafting such prerequisites, therefore as a general rule of thumb, the better approach is to treat preconditions which envisage mutual settlement or domestic litigation as aspirational or exhortive, unless the parties state otherwise in clear, unequivocal language that the said preconditions are a matter of jurisdiction. Whether the said preconditions are mandatory or optional must be left to be determined by the Arbitral Tribunal and not by the domestic courts, thereby observing the kompetenz-kompetenz principle.

 

To quote Gary Born’s International Commercial Arbitration (3rd edn. 2021):

“The best approach is to presume, absent contrary evidence, that pre-arbitration procedural requirements are not jurisdictional, but matters better determined by the arbitrators.”

However, the aforesaid approach seeds doubt as to the malleable nature of preconditions, and would seem contrary to the contractual intent of the parties to commence arbitration when the preconditions have not been satisfied. In the same vein, if these contractual preconditions are not satisfied a dispute arises between the parties, and if an arbitration agreement exists, the disputes must be referred to arbitration. If the parties had intended for all issues and disputes between the parties to be resolved by arbitration, it would be imprudent to label the non-compliance of preconditions as an issue to be determined by the courts which would ultimately treat preconditions as a matter of jurisdiction than that of admissibility.

 

It is pertinent to clarify, that characterising preconditions to arbitration as an issue of admissibility does not give a go-by to the preconditions to be satisfied. Whether the preconditions are mandatory or exhortive in nature is to be determined by the arbitrator who is vested with the authority to arbitrate and resolve all issues arising out of the contract. For example, where the preconditions use certain words such as “shall” rather than “may”, it is to be treated as a mandatory preconditions. The arbitrator if, he deems the preconditions as mandatory to the tee, may direct the parties to instead comply with the preconditions or apply a sanction of costs to the non-complying party.

 

The underlying basis for this assumption is that any pre-conditional procedures often require interpretation of the contractual intent and application of the preconditions by itself acts as a moratorium period for parties to settle some or all of the disputes. Thus, from its very nature, these preconditions to arbitration act as a stopgap from bringing claims to arbitration and should any claims which are not subject to preconditions be brought before the Arbitral Tribunal, the said claims would be treated as premature.

 

At this juncture I refer to the Oxford Handbook of International Arbitration (OUP 2020) at Paras 6-7:

“… the question of jurisdiction concerns the power of the Tribunal. The question of admissibility is related to the claim, rather than the Tribunal, and asks whether this is a claim which can be properly brought. In particular, it considers the question of whether there are any conditions attached to the exercise of the right to arbitrate which have not been fulfilled. Those conditions might be, for example, a limitation period applicable to the right to commence arbitration, or a requirement to mediate and/or negotiate before arbitral proceedings may be commenced.”

 

Hence, if a claim is deemed to be premature by the Tribunal and consequently, not admissible, in such circumstances, the parties would be constrained to appoint a new tribunal after complying with the preconditions. It is clearly established that preconditions by its very nature are a matter of admissibility and its adjudication is best left to the Tribunal rather than the domestic courts, which would be counter-intuitive to the purpose of arbitration.

 

It is perhaps fortunate and unfortunate that the courts in India have not conclusively determined on the characterisation of preconditions as a matter of admissibility or jurisdiction as this allows the courts to prepare a comprehensive set of rules and judicial tests in line with the global arbitration practices of treating preconditions to arbitration as a matter of admissibility. Once, the characterisation of arbitral preconditions is deemed as one of admissibility, there is no scope for interference by the domestic courts. However, if the said precondition were to be treated as a matter of jurisdiction it would give way to a slew of frivolous litigation and congest the already saturated Indian courts with inane applications to set aside the award on petty grounds such as that of non-compliance of arbitral preconditions.

 


† Hiroo Advani, Founder and Chairman, Advani Law.

†† Asif Lampwala, Senior Partner, Advani Law.

††† Kenneth Martin, Associate, Advani Law.

[1] (2021) 5 SCC 738.

[2] (2018) 17 SCC 607.

[3] (2015) 13 SCC 610.

[4] (2009) 4 SCC 357.

[5] 188 L Ed 2d 220 : 134 S Ct 1198 : 572 US 25 (2014).

[6]  2021 HKCFI 3645.

[7] 2021 HKCFI 1474.

[8] 2021 HKCFI 1474.

[9] 2021 HKCFI 2503.

[10] 2021 Bus LR 704 : 2021 EWHC 286 (Comm).

Case BriefsHigh Courts

Madhya Pradesh High Court: The Division Bench of Sheel Nagu and Purushaindra Kumar Kaurav, JJ., while holding that M.P Madhyastham Adhikaran Adhiniyam, 1983 mandates exclusive jurisdiction to Tribunal for settling “works contract” added that Section 34(2)(b)(i) of the Arbitration and Conciliation Act 1996, provides that an arbitral award would be liable to be set aside if the subject matter of the dispute is not capable of settlement by arbitration under the law for the time being in force.

An arbitration appeal under Section 37 of the Arbitration and Conciliation Act, 1996 took exception to the impugned order passed by the Commercial Court and Additional Sessions Judge allowing an application under Section 34 of the Act, 1996 whereby the original award was set aside.

Brief Facts

An agreement was executed between the appellant and the respondent for the work of rehabilitation and strengthening of Khargone-Barwani road and Khargone-Biston Road for a sum of Rs 58,25,28,228 and on 31-3-2009 the work was completed.

On 3-11-2009 a request was made by the appellant for reimbursement of the extra cost incurred due to enhancement of entry tax, but the said request was rejected which gave rise to him to invoke the arbitration clause.

Later the presiding arbitrator was appointed and finally, the award was pronounced wherein a sum of Rs 1,03,55,187 was awarded to the appellant.

The Court below had set aside the above award passed by the Arbitral Tribunal on the ground that under the provisions of the Act of 1996 the tribunal was without jurisdiction and the matter of the dispute fell within the definition of “Works Contract”, therefore, it was only the statutory tribunal created under the provisions of the Act of 1983 which had the exclusive jurisdiction to deal with the subject matter.

Analysis, Law and Discussion

High Court noted that in the State of Madhya Pradesh, the legislature enacted the Act of 1983, and the said Act provides all disputes relating to “works contract” shall be exclusively decided by the Tribunal created under the Act of 1983.

Elaborating further, Bench expressed,

“…the Act of 1983 provides that whether the parties to a “works contract” incorporate an arbitration agreement or not, any dispute relating to “works contract” shall fall within the exclusive jurisdiction of the Tribunal.”

Hence, the Act of 1983 mandates exclusive jurisdiction to the Tribunal.

As per the decision of Madhya Pradesh Rural Road Development Authority v. L.G. Chaudhary Engineers and Contractors, (2018) 10 SCC 826, the jurisdiction of the arbitral tribunal under the Act of 1996 is barred by operation of law.

Bench added that Section 34(2)(b)(i) of the Act of 1996, provides that an arbitral award would be liable to be set aside if the subject matter of the dispute is not capable of settlement by arbitration under the law for the time being in force. If this Court applies the requirements of Section 34(2)(b)(i) of the Act of 1996 in the present case, it is apparent that the same are squarely met. Under Section 7 of the Act of 1983 a dispute of “works contract” is not capable of being adjudicated by arbitral tribunal under the Act of 1996.

Hence, the High Court held that the Court below rightly found the arbitral award to be without jurisdiction.

Bench opined that the Trial Court acted in accordance with law while entertaining the objection under Section 34 of the 1996 Act and setting aside the arbitral award on the ground of lack of jurisdiction.

Court also gave a different reasoning for the above-stated, which was as follows:

If we examine Section 34 of the Act of 1996, it has two parts. Part (a) deals with grounds where a “party making an application furnishes proof”. Whereas part (b) deals with where “the Court finds”. Thus, even if no ground is taken in a petition under Section 34 of the 1996 Act, if the Court finds that the award is in respect of subject matter incapable of arbitration by operation of law; the court is duty-bound to set it aside under Section 34(2)(b)(i) of the 1996 Act.

In the Supreme Court decision of Fiza Developers & Inter-Trade (P) Ltd. v. Amci(I) (P) Ltd., (2009) 17 SCC 796, it was categorically laid down that an award is liable to be set aside by the Court’s own initiative if the subject-matter of the dispute is not arbitrate or the award is in conflict with the public policy of India.

Hence, even if a party assailing an arbitral award has not taken a ground in its Section 34 petition, the Court under Section 34 (2)(b)(i) of the Act of 1996 is obligated to set aside an award, which under the law in force, is not capable of arbitration.

Further, it was added that if the Court finds that when there is a challenge to lack of inherent jurisdiction the same can be raised at any stage and decree y a forum lacking inherent jurisdiction on the subject matter is a nullity.

Lastly, the High Court observed that the Court below did not commit any error in setting aside the arbitral award on the ground of lack of jurisdiction. Appellants can raise the dispute before the Tribunal under the Act of 1983.

Thus, if a dispute under Section 7 of the Act of 1983 is raised by the appellant along with an application seeking condonation of delay on the principles of Section 14 of the Limitation Act, Court directs the Tribunal to consider the same. [Gayatri Project Ltd. v. Madhya Pradesh Road Development Corpn. Ltd., 2022 SCC OnLine MP 133, decided on 7-1-2022]


Advocates before the Court:

For Appellant: Kunal Thakre, Advocate

For Respondent: Siddharth Sharma, Advocate.

Op EdsOP. ED.

India is fast emerging out of the shadow of its checkered history of being an interventionist jurisdiction in the international arbitration space. Numerous steps, judgments and amendments in law have aided in this remarkable journey which can be safely termed as renaissance of arbitration in India. If the legislature has been the Vinciof this revolution, Indian courts have been the Michelangelo. India is thus moving very fast towards achieving its almost “impossible” goal of becoming the hub of international arbitration, but the same has its own challenges and as Miguel de Cervantes said “in order to attain the impossible, one must attempt the absurd”.In the opinion of the authors, absurdity often lead to better clarity and court orders are no different. More on this is for later, for now back to the headlines.

The storied Amazon-Future dispute has reached yet another interesting point. A Division Bench of the Delhi High Court on 5-1-2022in Amazon.com NV Investment Holdings LLC v. Future Coupons (P) Ltd.[1],directed stay of further proceedings before the Arbitral Tribunal[2].

A brief recap of the Saga

Amazon.com NV Investment Holdings LLC (Amazon), a direct subsidiary of the global e-commerce giant, Amazon.com Inc., agreed to acquire 49% shareholding in Future Coupons Private Limited (FCPL). In this regard, three agreements were entered into between the parties:

(i) a shareholder agreement between Future Retail Limited (FRL), FCPL, Executive Chairman and Managing Director of FRL, the promoters and shareholders of FRL and group companies of FRL, namely, Future Corporate Resources Pvt. Ltd. and Akar Estate and Finance Pvt. Ltd.(collectively referred to as “the Biyani Group”) granting FCPL certain negative, protective, special and material rights with regard to FRL;

(ii) a shareholder agreement between Amazon, FCPL and the Biyani Group which inter alia listed “restricted persons” with whom FRL, FCPL and the Biyanis could not deal; and

(iii) a share subscription agreement, between Amazon, FCPL and the Biyani Group, which recorded Amazon’s agreement to invest INR 1431 crores in FCPL.

Amazon invested the aforesaid sum in FCPL which flowed down to FRL on the same day. Amazon applied to the Competition Commission of India (CCI) to obtain approval for acquisition of shares in FCPL. The CCI approved the combination on 28-11-2019[3].

A few months after the said investment, the Biyani Group entered into a transaction with the Mukesh Dhirubhai Ambani Group (MDAG)which envisages the amalgamation of FRL with the MDAG, the consequential cessation of FRL as an entity, and the complete disposal of its retail assets in favour of the said group.

Thus, Amazon initiated arbitration proceedings before the Singapore International Arbitration Centre (SIAC).

Amazon filed an application seeking emergency interim relief under the SIAC Rules against the aforesaid transaction between the Biyani Group and MDAG. The emergency arbitrator granted injunctions and passed directions vide order dated 25-10-2020. The award of the emergency arbitrator was held to be enforceable under Section 17(2) of the Arbitration and Conciliation Act, 1996[4] (the Act) by the Supreme Court vide judgment dated 6-8-2021[5].

FRL did not challenge the order of the emergency arbitrator but instead filed a civil suit before the Delhi High Court in which it sought an injunction restraining Amazon from unlawfully interfering with the performance of the transaction between FRL and Reliance/ MDAG, writing to statutory authorities by relying on the emergency arbitrator’s order. Vide judgment dated 21-12-2020[6], a Single Judge of the Delhi High Court declined to grant an interim injunction in favour of FRL and against Amazon.

In the interim FCPL filed an application dated 25-3-2021 before the CCIinter alia stating that Amazon has taken contradictory stands in relation to its investment in FCPL in representations and submissions before CCI, on the one hand and in arbitration proceedings and before courts, on the other.Vide order dated 17-12-2021[7], the CCI noted certain omissions, false statements and misrepresentations and considered it necessary to examine the combination afresh.

In view of the aforesaid, FCPL and FRL filed applications before the Arbitral Tribunal claiming that in view of the CCI order[8], the agreement between Amazon and FCPL which contains the arbitration clause would not survive and hence, the arbitration proceedings ought to be terminated (termination applications).

The current episode

FCPL and FRL urged that the hearing of expert witnesses scheduled for 5-1-2022 to 8-1-2022 be adjourned and instead the said dates be utilised for hearing the termination applications.

The Arbitral Tribunal, vide orders dated 29-12-2021, 30-12-2021 and 31-12-2021, declined to adjourn the hearings or to abandon the hearing scheduled for hearing the termination applications. The Tribunal offered to hear the termination applications by adding an extra day on 4-1-2022, but FRL refused on grounds of the non-availability of their counsel. Nonetheless, the Tribunal assured that it has not taken any decision on the implication of the CCI order9 on the arbitration proceedings and that reasonable opportunity would be given to all the parties to present their submissions on the said matter. Pertinently, the Tribunal also observed as under:

(a)The issue as to when to hear the termination applications is an issue of case management and therefore, the Arbitral Tribunal has the full discretion to decide when to hear the said applications.

(b) No prejudice would be caused to FRL and FCPL if the hearing on the termination applications would be conducted after the hearing on the parties’ expert witnesses on damages.

(c) If FRL and FCPL succeeded in their request for termination of arbitration, the option to claim costs would also be available for them.

Subsequently, the Arbitral Tribunal ordered that on the fourth day of the scheduled hearing, i.e. 8-1-2022, arguments on the termination applications shall be heard.

FCPL and FRL filed writ petitions under Article 227 of the Constitution of India10 before the Delhi High Court impugning the said orders dated 29-12-2021, 30-12-2021 and 31-12-2021, seeking a declaration that the continuation of the arbitration proceedings is contrary to law and a direction to the Arbitral Tribunal to decide the termination applications before continuing with the arbitration proceedings.

Arguments of the parties

Before the Single Judge, the Future group companies argued that (a) in view of CCI’s order11, the agreement between Amazon and FCPL no longer survives, which would invalidate the arbitral proceedings and thus must be terminated; (b) the termination applications must be given primacy and be decided before any further steps in the arbitration; (c) the Arbitral Tribunal has consistently violated the principles of fair and equal treatment enshrined in Section 18 of the Act12; (d) several lawyers representing FRL have tested positive for Covid-19 and therefore the Tribunal was requested to defer the expert witness hearings and instead take up the termination applications; and (e) one day fixed by the Tribunal for hearing the termination applications is not sufficient.

Per contra, Amazon submitted that (a) the writ petition, under Article 227 of the Constitution, was not maintainable; (b) the dates for expert witness hearings were fixed as far back as October 2021 and the experts and tribunal will join the proceedings from different parts of the world, rescheduling the hearings would cause unnecessary inconvenience; (c) the date fixed for hearing the termination applications gives sufficient time to the parties to prepare and file written arguments; and (d) the Tribunal has always provided equal opportunity to both parties to put their case.

The Single Judge’s decision

The Single Judge dismissed the writ petitions, vide judgment dated 4-1-202213, having found no grounds for interference.

A. The Judge, relying on Deep Industries Ltd. v. ONGC14 and on Surender Kumar Singhal Arum Kumar Bhalotia15 held that there cannot be a complete bar to the petitions being filed under Article 227, which is a constitutional remedy. However, interference under Articles 226/227 can only be in “exceptional circumstances”. There is “only a very small window” for interference with orders passed by the Arbitral Tribunal, that window becomes even narrower where the orders passed by the Arbitral Tribunal are procedural in nature and that window cannot be used for impugning case management orders passed by the Arbitral Tribunal which are in the nature of procedural orders.

B. The Judge held that case management orders are completely in the domain and discretion of the Arbitral Tribunal. It is in the sole discretion of the Arbitral Tribunal to decide whether the termination applications should be heard before or after the hearings of the expert witnesses. Although, on perusal of records, the Judge found that the Tribunal had given cogent reasons for its decision, the Judge clarified that it is not for the Court to interfere with the scheduling of the arbitration proceedings or the manner and the procedure of carrying out the arbitration proceedings. (Reliance on Telecommunication Consultants India Ltd. B.R. Sukale Construction16.)

The Judge emphasised the need for minimum interference by courts with arbitration proceedings in order to ensure that disputes are expeditiously disposed and the whole purpose of arbitration is not frustrated.

Prima facie, the Judge found that there is nothing to suggest that the Arbitral Tribunal has denied equal opportunity to the parties or that the Arbitral Tribunal has not been accommodating towards requests of FRL and FCPL. The Judge did not find any exceptional circumstances or perversity to have been demonstrated.

Stay order in LPAs

FRL and FCPL challenged the said judgment by filing letters patent appeals (LPAs) before the Delhi High Court. Vide order dated 5-1-202217, the Division Bench not only issued notice to the respondents in the LPAs but also directed stay of further proceedings before the Arbitral Tribunal until the next date of hearing. The reasons stated for grant of such stay is as under:

Having perused the order of CCI, the impugned orders passed by the Arbitral Tribunal and the judgment of the Single Judge dated 4-1-202218, in our view, appellants have made out a prima facie case for grant of interim relief and the balance of convenience also lies in favour of the appellants. If the interim relief prayed for is not granted, it would cause irreparable loss to the appellants.

The Division Bench noted the objections regarding the maintainability of the appeals but did not decide or express any view regarding the said objections prior to granting stay.

More questions than answers

The relationship between national courts and Arbitral Tribunals is dynamic and ever-evolving arbitration thrives on positive support from national courts as they alone can rescue the system when one party seeks to sabotage it19. Lord Mustill puts it succinctly in S.A. Coppée Lavalin NV v. Ken-Ren Chemicals and Fertilisers Ltd.20 stating that: … there is plainly a tension here. On the one hand the concept of arbitration as a consensual process reinforced by the idea of transnationalism leans against the involvement of the mechanisms of State through the medium of a municipal court. On the other side there is the plain fact, palatable or not,that it is only a court possessing coercive powers which could rescue the arbitration if it is in danger of foundering….

The order of the Division Bench raises several questions.

Firstly, Indian courts and legislature have, over the last few decades, made a conscious move towards a pro-arbitration approach minimising interference by civil courts in arbitration proceedings. The legislative changes as well as the development of the Indian jurisprudence is reflective of the appreciation of the principles of kompetenz-kompetenz and autonomy of arbitrators. In this regard, it is also relevant to note that the Arbitration and Conciliation (Amendment) Act, 201921 was aimed at not only further restricting interference of civil courts in arbitration proceedings but also encouraging institutional arbitrations.

The need to discourage judicial interference in the arbitral process is the central theme of order of the Single Judge. Given the objectives and intent of the Act, the pro-arbitration approach adopted by Indian courts and the basic principles of kompetenz-kompetenz and autonomy of arbitrators, should the Division Bench have interfered with the arbitration proceeding, particularly at the stage of issuing notice and without considering the question of maintainability.

Secondly, the Division Bench simply applied the three basic principles for grant of interim injunction i.e. prima facie case, balance of convenience and irreparable injury. Aside from the fact that the order does not elaborate on the reasons for the said three principles having been satisfied, did the Division Bench fall into error by applying the said principles while considering the question of grant of stay of arbitral proceedings.

In contrast to the aforesaid approach of the Division Bench, the Single Judge held that interference with arbitral proceedings under Articles 226/227 can only be in “exceptional circumstances” or where the impugned order is perverse and is patently lacking in inherent jurisdiction. The said standards are consistent with the standard of interference in anti-arbitration injunction suits.

(i) In Bharti Televentures Ltd. v. DSS Enterprises (P) Ltd.22, the Court held that “Unless it is indubitably clear that the substratum of the arbitration agreement has disintegrated, and if the only conclusion that can be drawn is that the foreign arbitration is motivated to harass and thereby coerce the other parties into a settlement, courts should not interference in the commencement, conduct and continuance of proceedings, before the arbitrators.”

(ii) In McDonald’s India (P) Ltd.v. Vikram Bakshi23 the Delhi High Court held that the power to grant anti-arbitration injunctions must be exercised rarely and only on principles analogous to those found in Sections 824 and 4525 of the Act.

(iii) In Surender Kumar Singhal26, the Court clarified that it is not prudent to exercise jurisdiction under Articles 226/227 and that efficiency of the arbitral process ought not to be allowed to diminish and hence, interdicting the arbitral process should be completely avoided.

Thirdly, the proceedings in question emanate from procedural orders whereby the Tribunal merely determined the schedule of proceedings. The Arbitral Tribunal did not dismiss the termination applications or decline to adjudicate the same but merely scheduled them for hearing on a date after the hearing of the expert witnesses. Does such an order warrant interference under Article 227, particularly when Section 19 of the Act27 expressly grants the Arbitral Tribunal to determine its own procedure.

Fourthly, Section 37 of the Act28 makes certain orders of the Arbitral Tribunal appealable. An order of the Tribunal declining FRL’s request to adjourn/abandon the scheduled hearings for expert witness, for hearing its termination applications, is not an appealable order under Section 37. The Delhi High Court in SAIL v. Indian Council of Arbitration29 following the ratio of SBP & Co. v. Patel Engg. Ltd.30 has held that a writ petition under Articles 226/227 does not lie against non-appealable orders passed by the arbitrator during arbitral proceedings.

Pertinently, it was also observed that:

  1. In any case, even if it is held that a writ petition against a non-appealable order of the arbitrator is maintainable, considering the legislative intent, as expressed in Section 5 of the Act31, which provides that no judicial authority shall intervene in matters governed by PartI except to the extent provided in the said Part and acknowledging that interference with the arbitral proceedings, in exercise of writ jurisdiction of the court, is bound to delay the conclusion of such proceedings, thereby defeating one of the main objectives behind preferring arbitration over litigation, the Court would be well advised in not interfering with such an order in exercise of its writ jurisdiction.32

Therefore, Division Bench’s reluctance to have given a finding on maintainability before passing any other effective order raises more questions.

From a perusal of the order, it appears that the order of the CCI weighed considerably with the Division Bench. In our opinion, not only is it within the jurisdiction of the Arbitral Tribunal to determine when to decide to the termination applications, it is also within the Tribunal’s jurisdiction to determine the implication of the CCI order on the proceedings before it. In such a scenario, was the Division Bench justified in granting stay of the arbitral proceedings, without even expressing a prima facie view on the maintainability of the LPAs before it. A Single Judge of the Delhi High Court referred to the reluctance of Court to“denude itself of jurisdiction”33. The order of the Division Bench may be an example of such reluctance and use of coercive powers not vested in it. However, this may be just another episode of this new season of Amazon -FRL series where the season finale may come from the  Supreme Court deciding whether the view of the Division Bench is a possible view and whether the view of the Single Judge is a plausible view.


*Counsel, specialising in commercial dispute resolution.

**Advocate, Delhi High Court.

[1]2022 SCC OnLine Del 67

[2]SIAC Arbitration No. 960 of 2020

[3]Amazon.com NV Investment Holdings LLC v. Future Coupons (P) Ltd., 2019 SCC OnLine CCI 43

[4] Arbitration and Conciliation Act, 1996, S. 17(2).

[5] Amazon.com NV Investment Holdings LLC v. Future Retail Ltd., 2021 SCC OnLine SC 557.

[6] Future Retail Ltd. v. Amazon.com NV Investment Holdings LLC, 2020 SCC OnLine Del 1636.

[7] Amazon.com NV Investment Holdings LLC v. Future Coupons (P) Ltd., 2021 SCC OnLine CCI 63

[8] Amazon.com NV Investment Holdings LLC v. Future Coupons (P) Ltd., 2021 SCC OnLine CCI 63

9 Amazon.com NV Investment Holdings LLC v. Future Coupons (P) Ltd., 2021 SCC OnLine CCI 63

10 Constitution of India, Art. 227.

11 Amazon.com NV Investment Holdings LLC v. Future Coupons (P) Ltd., 2021 SCC OnLine CCI 63

12 Arbitration and Conciliation Act, 1996, S. 18.

13 Future Retail Ltd. v. Amazon. Com NV Investment Holdings LLC, 2022 SCC OnLine Del 13.

14 (2020) 15 SCC 706.

15 2021 SCC OnLine Del 3708.

16 2021 SCC OnLine Del 4863.

17 Amazon.com NV Investment Holdings LLC v. Future Coupons (P) Ltd.,SIAC Arbitration No. 960 of 2020.

18 Future Retail Ltd. v. Amazon. Com NV Investment Holdings LLC, 2022 SCC OnLine Del 13.

19 Redfern and Hunter, International Arbitration,(6thEdn., Oxford University Press).

20 (1995) 1 AC 38 :(1994) 2 WLR 631 :(1994) 2 Lloyd’s Rep 109 , HL(E).

21 Arbitration and Conciliation (Amendment) Act, 2019.

22 2005 SCC OnLine Del 862, para 24.

23 2016 SCC OnLine Del 3949.

24 Arbitration and Conciliation Act, 1996, S. 8.

25 Arbitration and Conciliation Act, 1996, S. 45

26 2021 SCC OnLine Del 3708.

27 Arbitration and Conciliation Act, 1996, S. 19.

28 Arbitration and Conciliation Act, 1996, S. 37.

29 2013 SCC OnLine Del 4490.

30 (2005) 8 SCC 618.

31 Arbitration and Conciliation Act, 1996, S. 5.

32 SAIL v. Indian Council of Arbitration, 2013 SCC OnLine Del 4490.

33 Bina Modi v. Lalit Modi, 2020 SCC OnLine Del 901.

Case BriefsHigh Courts

Delhi High Court: The Division Bench of D.N. Patel, CJ and Jyoti Singh, J., stayed the arbitration proceeding in Amazon v. Future Group before the Singapore Tribunal.

High Court prima facie found merit in the appellant’s contention that the agreement between Amazon and FCPL was unenforceable and consequently, the Arbitration Agreement and in view, thereof the Arbitral Tribunal should have taken up the application filed under Section 32(2)(c) of the Arbitration and Conciliation Act, 1996 seeking termination of the arbitration proceedings, on priority and before recording the evidence. For reaching such prima facie finding, the Bench inter alia considered and laid emphasis on the order of CCI [Proceedings against Amazon.com NV Investment Holdings LLC under Sections 43A, 44 and 45 of the Competition Act, 2002, In re.,]:

“48. In view of the above, the Commission notes that the Internal Correspondence discussed above clearly demonstrates that Amazon had failed to disclose true and complete details of the purpose of the Combination, which is required to be given under Item 5.3 of Form I. Further, Amazon had misrepresented that its decision to pursue the Combination was based on the unique business model of FCPL, and that FRL, a company with strong financials and futuristic outlook, is relevant to the Combination only from the perspective of financial strength to FCPL. As brought out earlier, Amazon also failed to disclose and clarify the real purpose of the Combination in the Notice and continued with its false/misleading assertions even in its response to the queries posed vide letters dated 9th October, 2019 and 24th October, 2019 of the Commission. Amazon has also suppressed relevant and material documents required to be furnished in terms of Item 8.8 of Form I. Considering these, the Commission has no hesitation to hold that such conducts of Amazon amount to suppression and misrepresentation of the purpose of the Combination, which is a material particular. This is in contravention of the provisions contained in clauses (a) and (b) of Section 44 and clause (a) of sub-section (1) of Section 45 of the Act. The conduct of Amazon in suppressing relevant and material documents against the disclosure requirement under Item 8.8 of Form I is a contravention of clause (c) of sub-section (1) of Section 45 of the Act. Similarly, the rights over FRL that were considered as strategic in the Internal Correspondence of Amazon, were represented as mere investor protection rights. Such repeated assertions, contrary to their actual purport, amount to statements that are false in material particular, in contravention of the provisions contained in clauses (a) and (b) of Section 44 and clause (a) of subsection (1) of Section 45 of the Act.”

(emphasis supplied)

In the Court’s opinion appellants made out a prima facie case for grant of interim relief and the balance of convenience also lies in favour of the appellants.

Hence, the Bench stayed the further proceedings before the Arbitral Tribunal in Amazon.com NV Investment Holdings LLC v. Future Coupons Private Limited, SIAC Arbitration no. 960 of 2020 as well as the impugned judgment passed by the Single Judge [Future Retail Ltd. v. Amazon.Com NV Investment Holdings LLC, 2022 SCC OnLine Del 13, decided on 4-1-2022], till the next date of hearing.[Future Retail Ltd. v. Amazon. Com NC Investments Holdings LLC, 2022 SCC OnLine Del 78, decided on 5-1-2022]


Advocates before the Court:

For the Appellant: Mr. Harish Salve & Mr. Sandeep Sethi, Senior Advocates with Mr. Raghav Shankar, Mr. Harshvardhan Jha, Ms. Ritika Sinha, Ms. Arshiya Sharda & Mr. Aman Pathak, Advocates

For the Respondents: Mr. Gopal Subramanium, Mr. Rajiv Nayar, Mr. Gourab Banerji, Mr. Amit Sibal & Mr.Nakul Dewan, Senior Advocates with Mr. Anand S. Pathak, Mr. Amit K. Mishra, Mr. Shashank Gautam, Ms. Sreemoyee Deb, Mr.Vijay Purohit, Mr. Mohit Singh, Mr. Promit Chatterjee, Ms. Anubhuti Mishra, Mr. Shivam Pandey, Ms. Samridhi Hota, Ms. Nikita Bangera, Mr. Pratik Jhaveri, Mr. Faizan Mithaiwala, Ms. Didon Misri, Mr. Chetan Chawla, Mr.Vijayendra Pratap Singh, Mr. Rachit Bahl, Ms.Roopali Singh, Mr. Abhijan Jha, Mr. Priyank Ladoia, Mr. Tanmay Sharma, Ms. Vanya Chhabra, Mr. Arnab Ray, Mr. Vedant, Kapur, Mr. Shaurya Mittal, Mr. Abhisar Vidyarthi, Mr. Kartik Nayar, Mr. Pawan Bhushan, Ms. Hima Lawrence, Ms. Ujwala Uppaluri, Mr. S.P. Mukherjee, Mr.T.S. Sundaram, Mr. Vinay Tripathi, Mr. Aishvary Vikram, Mr. Kaustubh Prakash, Ms. Anushka Shah, Ms. Neelu Mohan, Ms. Smriti Kalra & Ms. Manjira Dasgupta, Advocates for R-1

Mr. Mukul Rohatgi & Mr. Dayan Krishnan, Senior Advocates with Mr. Mahesh Agarwal, Mr. Rishi Agrawala, Mr. Karan Luthra, Mr. Pranjit Bhattacharya, Mr. Sanjeevi Seshadri & Mr. Ankit Banati, Advocates for R-2

Case BriefsSupreme Court

Supreme Court: The Division Bench of M. R. Shah* and B.V. Nagarathna, JJ., held that where the Arbitrator appointed by the High Court had already declared the award, it is not open for parties to file a reference before M.P. Arbitration Tribunal with respect to the very claim/claims which were subject matter of arbitration. Noticing that the award had attained finality, the Bench while rejecting the respondent’s claim of award being void, stated that,

“Even the award or a nullity order has to be challenged before the appropriate forum/higher forum.”

Factual Matrix

An agreement was executed between the appellants and the respondent for construction of houses, with regard to which some disputes arose between the parties. The appellants contended that the respondent was supposed to complete the work within 18 months but,  despite granting repeated extensions, the contractor failed to complete the work, on account of which, appellants rescinded the contract.

Aggrieved by the order rescinding the contract, the respondent-contractor filed a writ petition before the High Court seeking direction to permit him to complete the work; which was disposed of on a joint consensus of the parties that the dispute shall be decided by the arbitrator i.e., Housing Commissioner, M.P. Housing Board.

Forum Shopping

The Arbitrator rejected the claim of the respondent-contractor and granted relief in favour of the appellants. Instead of challenging the said award by way of an application under Section 34 of the Arbitration and Conciliation Act, 1996, the respondent filed a fresh Reference Petition before the M.P. Arbitration Tribunal under Section 7 of the M.P. Madhyastham Adhikaran, Vindhyachal, Bhopal, Act, 1983.

The Tribunal dismissed the reference as not maintainable since claim made by the respondent had already been decided by the Arbitrator and the award had achieved finality. Later on, as an afterthought, the respondent-contractor filed a review petition before the High Court seeking clarification of the earlier order to the extent that by directing the adjudication of the dispute by the Housing Commissioner, it did not take away the jurisdiction of Arbitral Tribunal, which was dismissed by the Court.

Once again, the contractor approached the High Court with revision petition under Section 19 of the 1983 Act challenging the order passed by the learned Tribunal, by the impugned judgment the High Court allowed the said revision and quashed the order passed by the Tribunal while directing it to decide the reference/claim on merits and in accordance with law.

Findings

The Bench rejected the argument of the respondent–contractor that the earlier order passed by the High Court referring the dispute between the parties for adjudication to the Arbitrator and thereafter the award declared by the Arbitrator were non-est and void as Section 7B of the 1983 Act provides that no dispute can be referred to the Arbitration Tribunal unless the dispute is first referred for decision of the final authority under the scope of the term ‘works contract, on the basis of following findings:

(i) It was the respondent–contractor who approached the High Court submitting that he has invoked the arbitration clause;

(ii) The order of the High Court referring the dispute to the Arbitrator was a consent order; hence the claim was binding on the parties on the ground of ‘issue estoppel’.

(iii) The award of the Arbitrator had attained finality;

(iv) The review petition filed by the respondent-contractor for clarification of the earlier High Court order was rejected and the same also attained finality;

(v) The claims submitted before the Arbitrator; before the High Court and the claim submitted in Reference Petition before the Arbitral Tribunal under the 1983 Act were the same without any change;

(vi) In the subsequent reference petition before the Arbitral Tribunal there was no reference to the earlier order passed by the High Court referring the dispute to Arbitrator and the award passed by the Arbitrator. Thus, there was suppression of facts on the part of the respondent–contractor;

Decision

Holding that the award of the Arbitrator had attained finality and was binding on the parties, the Bench stated that there could not be any subsequent fresh proceeding with respect to the same claims. As no objections were raised by the respondent–contractor at the appropriate stage, the award could not be annulled subsequently.

Hence, the appeal was allowed. The impugned judgment and order of the High Court quashing and setting aside the order passed by the Arbitral Tribunal was quashed and set aside and the order of the Tribunal was restored.

[M.P. Housing and Infrastructure Development Board v. K.P. Dwivedi, 2021 SCC OnLine SC 1171, decided on 03-12-2021]


Kamini Sharma, Editorial Assistant has put this report together 


Appearance by:

For the Appellants: Bharat Singh, AAG

For Respondent: Kavin Gulati, Senior Advocate


*Judgment by: Justice M. R. Shah

Op EdsOP. ED.


Introduction


 

The Arbitration and Conciliation Act, 1996 (the A&C Act) is based on the 1985 UNCITRAL Model Law on International Commercial Arbitration, the enactment of the A&C Act signified the inception of the effort being made by the Indian legislature to bring India closer to the modern and pro-arbitral renaissance that was being spearheaded by the western world. Section 16 of the A&C Act embodies the sacrosanct doctrine of kompetenz-kompetenz which gives primacy to the Arbitral Tribunal to rule on its own jurisdiction including objections pertaining to the existence or validity of the arbitration agreement.

Although, Section 16 gives the express power to the Arbitral Tribunal to decide all issues pertaining to its own jurisdiction comprising an array of preliminary issues, it is silent as to what these preliminary issues include. The pertinent question that has warranted tremendous scholarly discourse by prominent practitioners in the global arbitral fraternity is whether the issue of limitation is one of jurisdiction or an adjudication on merits of the claim and whether this decision could be made by the Arbitral Tribunal under Section 16 of the A&C Act.

 

The present article will analyse two recent decisions of the Supreme Court of India where the Court has delivered conflicting opinions as to whether limitation constitutes a jurisdictional issue. The authors will conclude by suggesting a way forward until the controversy is conclusively settled by the judgment of a larger Bench of the Supreme Court.

 


The Controversy


The pertinent question of whether the decision of an Arbitral Tribunal on whether the claim of the claimant is barred under the law of limitation is an interim order or an interim award came up before the Division Bench of the Supreme Court comprising Nariman and Sinha, JJ. in Indian Farmers Fertilizer Coop. Ltd. v. Bhadra Products[1] (Indian Farmers). The Court was confronted with a case where the respondent had invoked arbitration and the Tribunal considered it appropriate to decide whether the claimant’s claim was barred by the law of limitation at first as a preliminary issue before traversing into the merits of the dispute. The arbitrator held that the claimant’s claim was not barred by the law of limitation. Aggrieved by the aforesaid interim decision of the arbitrator, the petitioner preferred an application filed under Section 34 of the A&C Act before the trial court styling it as the “first partial award”. The trial Judge held that the arbitrator’s decision did not constitute an award and dismissed the petition. Aggrieved by this judgment, the petitioner preferred an appeal to the High Court of Orissa wherein the High Court concurred with the findings of the trial court thereby dismissing the appeal proceedings. When the matter reached the Supreme Court, the Court at the outset had to decide whether the petition filed under Section 34 was maintainable. The Court realised that this could be determined by ascertaining whether the decision of the arbitrator on the issue of limitation constituted an interim award under Section 2(1)(c) r/w Section 31(6) and therefore assailable before the Court under Section 34 or whether the issue of limitation was one of jurisdiction and fell within the ambit of Sections 16(2) and (3) and therefore assailable before the Court only under the recourse envisaged under Section 37(2)(a) of the A&C Act. In the light of the aforesaid conundrum, the Court in Indian Farmers[2] framed the following issues:

 

(i) Whether an award on the issue of limitation can first be said to be an interim award?

(ii) Whether a decision on a point of limitation would go to jurisdiction and therefore be covered by Section 16?

 

The Court in Indian Farmers[3] began its reasoning with a conjoint reading of Sections 2(1)(c) and 31(6) observing that an arbitral award includes an interim award while noting that the A&C Act does not define an interim award. The Court was then constrained to rely on the wordings of Section 31(6) wherein it observed that the legislature had given the express power to the Arbitral Tribunal to make an interim award with respect to any matter on which it may make a final arbitral award. The Court relied on Section 32(1) to hold that there can be more than one interim award prior to the final award which could conclusively determine some issues between the parties.

 

The Court in Indian Farmers[4] relied on the wordings embodied in Section 47 of the English Arbitration Act, 1996 (English Arbitration Act) as it throws some light on what constitutes an interim award under English law. Relying on Section 47 of the English Arbitration Act, it was observed that a preliminary issue that affected the whole claim would expressly be the subject-matter of an interim award under the English Arbitration Act. It is pertinent to note that the Court stressed on the fact that the English Arbitration Act advisedly does not use the expression interim or partial so as to make it clear that the award covered by Section 47 of the English Arbitration Act would be a final determination of the particular issue arising from the dispute between the parties.

 

The Court in Indian Farmers[5] in order to augment its ratio went on to rely on an earlier decision of the Supreme Court that laid emphasis on what characteristics were required to constitute an interim award under the Indian arbitral regime. The Court relied on the decision in Satwant Singh Sodhi v. State of Punjab[6] (Satwant Singh) wherein an interim award in respect of one particular item was made by the arbitrator and the Court was confronted with whether such an award could be made a rule of the court. In Satwant Singh[7] it was held that an interim award which finally determines the rights of the parties with respect a certain claim and one which could not be readjudicated again could validly be made a rule of the court. Applying the dictum in Satwant Singh[8], the Court in Indian Farmers[9] held that as the issue of limitation was a final determination with respect to a part of the claim and was one which could not be readjudicated again it therefore validly constituted an interim award under Section 31(6) of the A&C Act. The Court in Indian Farmers[10] also relied on the dictum of the Supreme Court in the famous case of McDermott International Inc. v. Burn Standard Co. Ltd.[11] (McDermott International) wherein the Court has held that a partial award or an interim award is a final award on matters covered therein made at an intermediate stage of the arbitral proceedings. Relying on the above authorities, the Court in Indian Farmers[12] has held that a final decision of the arbitrator on the issue of limitation is an interim award within meaning of Section 2(1)(c) r/w with Section 31(6) and by virtue of being an award, it was capable of being challenged under Section 34 of the A&C Act.

 

Moving on to the second issue, as to whether the issue of limitation would fall within the ambit of Section 16 warranted a lengthy consideration by the Court. While answering this question in the negative, the Court after discussing the rationale of the doctrine of kompetenz-kompetenz relied on the corresponding provisions in Sections 30 and 31 of the English Arbitration Act. After carefully examining the wordings of the said provisions, it held that the doctrine of kompetenz-kompetenz connoted that the term “jurisdiction” under Section 16 only encompassed reference to three particular determinations:

(i) As to whether there is the existence of a valid arbitration agreement.

(ii) Whether the Arbitral Tribunal is properly constituted.

(iii) Matters submitted to arbitration should be in accordance with the arbitration agreement.

To further inquire whether limitation converged with jurisdiction, the Court relied on the decision of the Constitution Bench in Ittyavira Mathai v. Varkey Varkey[13] (Varkey Varkey) where the Constitution Bench interpreted the connotation jurisdiction wherein it laid down that a court has jurisdiction over the subject-matter pertaining to the case and the parties. It further held that it is true that courts are bound to rule while correctly applying the law, it is true that courts have been susceptible to making errors. The Court in Varkey Varkey[14] concluded that in spite of the fact that a court might have erred in coming to its conclusion it does not tantamount that the court has acted outside its jurisdiction.

 

More importantly, the Court in Indian Farmers[15] vehemently concurred with the findings of the Supreme Court in NTPC Ltd. v. Siemens Atkeingesellchaft[16] (NTPC) wherein it was held that when no question of jurisdiction has been addressed by the arbitrator in its findings, a party cannot disguise it to be one of jurisdiction falling within the ambit of Sections 16(2) and (3) so as to enable it to file an appeal under the recourse contemplated by Section 37(2). The Court in NTPC[17] observed that the appropriate recourse is for the aggrieved to prefer an application under Section 34 against the partial award and thereafter it could prefer an appeal under Section 37. Supplementing the opinion of the Court delivered at first by Mathur, J. in NTPC[18], Balasubramanyan, J. when discussing the ambit of jurisdiction under Section 16 laid down that when an Arbitral Tribunal finds that the claim was not maintainable for other valid reasons or that the claim was barred by the law of limitation it tantamounted to an adjudication by the Arbitral Tribunal on the merits of the claim and therefore would be assailable under Section 34 of the A&C Act.

 

Ultimately, the Court in Indian Farmers[19] relying on the above authorities held that the award passed by the arbitrator was an interim award, which being an arbitral award could be challenged by preferring an application under Section 34 and not Section 37. The Court held that the issue of limitation does not fall within the ambit of the Arbitral Tribunal’s jurisdiction under Section 16 and therefore the drill of Sections 16(5) and (6) need not be followed.

 

At this juncture it is important to study the controversy that has arisen in contemporary arbitral jurisprudence with regard to whether the issue of limitation falls within the Arbitral Tribunal’s power to rule on its own jurisdiction. A Coordinate Bench of the Supreme Court comprising Malhotra and Rastogi, JJ. in Uttarakhand Purv Sainik Kalyan Nigam Ltd. v. Northern Coal Field Ltd.[20] (Uttarakhand Purv Sainik) had to consider the ambit and scope of the newly inserted Section 11(6-A) in the light of the 2015 Amendment of the A&C Act. The Court in Uttarakhand Purv Sainik[21] observed that insertion of Section 11(6-A) marked a significant departure from the opinion of the 7-Judge Constitution Bench in SBP & Co. v. Patel Engg. Ltd.[22] (SBP & Co.) where many threshold issues could be decided by the Court. The Court observed that in view of the non obstante clause in Section 11(6-A), the decision in SBP & Co.[23] stood legislatively overruled on that point. Moreover, the Court in Uttarakhand Purv Sainik[24] laid down its opinion on the scope and ambit of Section 16 as to what constitutes an issue of jurisdiction wherein it relied on the decision in ITW Signode (India) Ltd. v. CCE[25] (ITW Signode). In ITW Signode[26] a Bench of three Judges held that the issue of whether a claim was time barred under law of limitation is a jurisdictional issue.

 

It is interesting to note what the Court in Uttarakhand Purv Sainik[27] has discerned from the dictums in Indian Farmers[28] and NTPC[29], as the Court relied on the same in coming to the conclusion that the issue of limitation is one of jurisdiction and falls within the ambit of the doctrine of kompetenz-kompetenz under Section 16. It is needless to say that Court has wrongly imported and applied the dictums in Indian Farmers[30] and NTPC[31] to the question that had arisen before it under Section 11(6-A) and has arrived at such an anomalous outcome.

 

Adding to the controversy, in a recent judgment of the Bombay High Court in C. Shamsuddin v. Now Realty Ventures LLP[32] (C. Shamsuddin), G.S. Patel, J. was confronted with opining on the scope of jurisdiction of the Court at the pre-reference stage in an application filed under Section 11. The Bombay High Court in C. Shamsuddin[33] considered the interplay between Sections 11 and 16 and while relying on the decisions of the Supreme Court in Indian Farmers[34] and Uttarakhand Purv Sainik[35] held that the issue of limitation should be decided by the Arbitral Tribunal under Section 16. It is our opinion that the Court in C. Shamsuddin[36] appears to have been left astray by following the ruling in Uttarakhand Purv Sainik[37] which erred in applying the decision in Indian Farmers[38].


Conclusion


It is evident that the decisions in Uttarakhand Purv Sainik[39] and C. Shamsuddin[40] suffer from the infirmity of incorrectly construing and applying the decision in Indian Farmers[41]. It is our opinion that the decision in Indian Farmers[42] was cogent, succinct and in consonance with contemporary pro-arbitral jurisprudence. It is also without doubt that the clarity brought about by the decision in Indian Farmers[43] was long awaited by the arbitral fraternity. The decision also gave sufficient clarity to litigants that the appropriate remedy is to file an application under Section 34 before the appropriate court in the event that one of them is aggrieved by the decision of the arbitrator on the issue of limitation. It is our opinion that the laudable effort of Nariman, J. in Indian Farmers[44] to settle ambiguity has been obscured by the ruling in Uttarakhand Purv Sainik[45] and has left the scope and ambit of the doctrine of kompetenz-kompetenz in dubiety. It is in our opinion that the present conundrum warrants cognizance by a larger Bench of the Supreme Court at the earliest possible opportunity, in order to prevent another series of conflicting judgments and also to bring about consonance between decisions of the leading High Courts.

 

It is a settled canon of law in India that where there are conflicting decisions of concurrent Benches of the Supreme Court, it is for the subordinate courts to follow the judgments which appears to have laid down the law more emphatically and accurately in the correct scenario having regard to the issue being dealt with by the court together with proper consideration of the factual matrix. In light of the above, it is our opinion that the decision in Indian Farmers[46] appears to have accurately and with adequate reasoning answered the questions with respect to the issues framed and is in the context of Section 16 rather than the decision in Uttarakhand Purv Sainik[47] that appears to have wrongly imported the decision in Indian Farmers[48] to the context of Section 11.

 

The decision in Uttarakhand Purv Sainik[49] has evidently obscured the essence of the underlying rationale in Indian Farmers[50] whilst erring by disregarding the nuanced difference between limitation and jurisdiction. It is our opinion that decision in Indian Farmers[51] correctly distinguished limitation as being a defect pertaining to the claim or right of a party to approach the court for reliefs whereas jurisdiction is a defect pertaining the power of the adjudicating authority to take cognizance of a claim based on other statutory considerations. Therefore, we suggest that the decision in Indian Farmers[52] be considered as the correct position of law in this regard. It is also recommended that the High Courts follow the decision in Indian Farmers[53] rather than Uttarakhand Purv Sainik[54] in order to prevent another series of conflicting decisions and to provide certainty to the arbitral fraternity thereby fostering the landscape for arbitration in India.

 


† Hiroo Advani, Senior Managing Partner at Advani & Co.

†† Manav Nagpal, Associate at Advani & Co.

[1] (2018) 2 SCC 534.

[2] (2018) 2 SCC 534.

[3] (2018) 2 SCC 534.

[4] (2018) 2 SCC 534.

[5] (2018) 2 SCC 534.

[6] (1999) 3 SCC 487.

[7] (1999) 3 SCC 487.

[8] (1999) 3 SCC 487.

[9] (2018) 2 SCC 534.

[10] (2018) 2 SCC 534.

[11] (2006) 11 SCC 181.

[12] (2018) 2 SCC 534.

[13] (1964) 1 SCR 495 : AIR 1964 SC 907.

[14] (1964) 1 SCR 495 : AIR 1964 SC 907.

[15] (2018) 2 SCC 534.

[16] (2007) 4 SCC 451.

[17] (2007) 4 SCC 451.

[18] (2007) 4 SCC 451.

[19] (2018) 2 SCC 534.

[20] (2020) 2 SCC 455.

[21] (2020) 2 SCC 455.

[22] (2005) 8 SCC 618.

[23] (2005) 8 SCC 618.

[24] (2020) 2 SCC 455.

[25] (2004) 3 SCC 48.

[26] (2004) 3 SCC 48.

[27] (2020) 2 SCC 455.

[28] (2018) 2 SCC 534.

[29] (2007) 4 SCC 451.

[30] (2018) 2 SCC 534.

[31] (2007) 4 SCC 451.

[32] 2020 SCC OnLine Bom 100 : (2020) 6 Mah LJ 108.

[33] 2020 SCC OnLine Bom 100 : (2020) 6 Mah LJ 108.

[34] (2018) 2 SCC 534.

[35] (2020) 2 SCC 455.

[36] 2020 SCC OnLine Bom 100 : (2020) 6 Mah LJ 108.

[37] (2020) 2 SCC 455.

[38] (2018) 2 SCC 534.

[39] (2020) 2 SCC 455.

[40] 2020 SCC OnLine Bom 100 : (2020) 6 Mah LJ 108.

[41] (2018) 2 SCC 534.

[42] (2018) 2 SCC 534.

[43] (2018) 2 SCC 534.

[44] (2018) 2 SCC 534.

[45] (2020) 2 SCC 455.

[46] (2018) 2 SCC 534.

[47] (2020) 2 SCC 455.

[48] (2018) 2 SCC 534.

[49] (2020) 2 SCC 455.

[50] (2018) 2 SCC 534.

[51] (2018) 2 SCC 534.

[52] (2018) 2 SCC 534.

[53] (2018) 2 SCC 534.

[54] (2020) 2 SCC 455.

Case BriefsSupreme Court

Supreme Court: A Division Bench comprising of Indira Banerjee and J.K. Maheshwari, JJ. held that once an Arbitral Tribunal is constituted, the court would not take up for consideration and apply its mind to an application for an interim measure, unless the remedy of applying to the arbitral tribunal for interim relief is inefficacious. However, this bar does not operate where already the application has been taken up for consideration and the court has applied its mind.

Questions of Law

The Supreme Court was deciding two questions of law:

(i) Whether the court has the power to entertain an application under Section 9(1) of the Arbitration and Conciliation Act, 1996, once an Arbitral Tribunal has been constituted and if so, what is the true meaning and purport of the expression “entertain” in Section 9(3) of the Arbitration Act?

(ii) Whether the court is obliged to examine the efficacy of the remedy under Section 17, before passing an order under Section 9(1) of the Arbitration Act, once an Arbitral Tribunal is constituted?

Section 9(1) of the Arbitration Act enables a party to an arbitration agreement to apply to a court for interim measures of protection before or during the arbitral proceedings, or at any time after an award is made and published, but before the award is enforced in accordance with Section 36 of the Arbitration Act. Further, Section 9(3) provides that once an Arbitral Tribunal has been constituted, the court shall not entertain an application under sub-section (1), unless the court finds that circumstances exist which may not render the remedy provided under Section 17 efficacious. Under Section 17, an Arbitral Tribunal has the same power to grant interim relief as the court.

Factual Matrix and Appeal

A commercial dispute arose out of a Cargo Handling Agreement entered into between ArcelorMittal Nippon Steel (India) Ltd. and Essar Bulk Terminal Ltd. ArcelorMittal invoked the arbitration clause. Essar did not respond. Thereafter, ArcelorMittal approached Gujarat High Court under Section 11 of Arbitration Act for appointment of Arbitral Tribunal. Subsequently, both parties filed applications under Section 9(1) in Commercial Court seeking interim measures. The Commercial Court heard both the applications and reserved the orders. Meanwhile, the High Court appointed an Arbitral Tribunal. Pursuant to this, ArcelorMittal requested the Commercial Court to refer both the applications filed under Section 9 to the now-constituted Arbitral Tribunal. This prayer was however rejected by the Commercial Court.

ArcelorMittal challenged the order of the Commercial Court before the High Court, which was dismissed. Aggrieved, ArcelorMittal approached the Supreme Court.

Analysis and Observations

Determining the answer to the questions of law (mentioned above), the Supreme Court noted that Section 9(3) of Arbitration Act has two limbs. The first limb prohibits an application under Section 9(1) from being entertained once an Arbitral Tribunal has been constituted. The second limb carves out an exception to that prohibition, if the court finds that circumstances exist which may not render the remedy provided under Section 17 efficacious.

Further, to discourage the filing of applications for interim measures in courts under Section 9(1) of the Arbitration Act, Section 17 clothes the Arbitral Tribunal with the same powers to grant interim measures, as the court under Section 9(1). In fact, an order passed by the Arbitral Tribunal under Section 17 is deemed to be an order of court for all purposes and is enforceable as an order of court. The Court opined:

“With the law as it stands today, the Arbitral Tribunal has the same power to grant interim relief as the Court and the remedy under Section 17 is as efficacious as the remedy under Section 9(1). There is, therefore, no reason why the Court should continue to take up applications for interim relief, once the Arbitral Tribunal is constituted and is in seisin of the dispute between the parties, unless there is some impediment in approaching the Arbitral Tribunal, or the interim relief sought cannot expeditiously be obtained from the Arbitral Tribunal.”

Considering the true meaning and purport of “entertain” in Section 9(3), the Court summarised a catena of judicial precedents and noted that it is now well settled that the expression “entertain” means to consider the issues raised by application of mind. The court entertains a case when it takes up a matter for consideration. The process of consideration can continue till the pronouncement of judgment. That, however, makes no difference. The question is whether the process of consideration has commenced, and/or whether the court has applied its mind to some extent before the constitution of the Arbitral Tribunal. If so, the application can be said to have been entertained before the constitution of the Arbitral Tribunal.

Opining that the intent behind Section 9(3) was not to turn back the clock and require a matter already reserved for orders to be considered in entirety by the Arbitral Tribunal under Section 17 of the Arbitration Act, the Court observed:

“On a combined reading of Section 9 with Section 17 of the Arbitration Act, once an Arbitral Tribunal is constituted, the court would not entertain and/or in other words take up for consideration and apply its mind to an application for interim measure, unless the remedy under Section 17 is inefficacious, even though the application may have been filed before the constitution of the Arbitral Tribunal. The bar of Section 9(3) would not operate, once an application has been entertained and taken up for consideration, as in the instant case, where hearing has been concluded and judgment has been reserved.”

The Court noted that even after an Arbitral Tribunal is constituted, there may be myriads of reasons why the Arbitral Tribunal may not be an efficacious alternative to Section 9(1). This could even be by reason of temporary unavailability of any one of the arbitrators by reason of illness, travel etc. Further, unless applications for interim measures are decided expeditiously, irreparable injury or prejudice may be caused to the party seeking interim relief. Therefore, it could never have been the legislative intent that even after an application under Section 9 is finally heard, relief would have to be declined and the parties be remitted to the remedy under Section 17. Elaborating, the Court explained:

“When an application has already been taken up for consideration and is in the process of consideration or has already been considered, the question of examining whether remedy under Section 17 is efficacious or not would not arise. The requirement to conduct the exercise arises only when the application is being entertained and/or taken up for consideration.”

Lastly, but importantly, the Supreme Court clarified that even if an application under Section 9 had been entertained before the constitution of the Arbitral Tribunal, the court always has the discretion to direct the parties to approach the Arbitral Tribunal, if necessary, by passing a limited order of interim protection.

Decision

In such view of the matter, the Supreme Court held that the High Court rightly directed the Commercial Court to proceed to complete the adjudication. It was however clarified that it shall not be necessary for the Commercial Court to consider the efficacy of relief under Section 17, since the application under Section 9 has already been entertained and considered by the Commercial Court.  [ArcelorMittal Nippon Steel (India) Ltd. v. Essar Bulk Terminal Ltd., 2021 SCC OnLine SC 718, decided on 14-9-2021]


Tejaswi Pandit, Senior Editorial Assistant has reported this brief.

Case BriefsSupreme Court

Supreme Court: A Division Bench comprising of R.F. Nariman and B.R. Gavai, JJ. held that an arbitral award which is based on no evidence and/or in ignorance of evidence would come under the realm of patent illegality. The Court also held that an arbitrator cannot rewrite the contract for the parties.

Facts and Appeal

In 1998, the respondent−Tuticorin Port Trust (“Trust”) awarded a tender to the appellant−Company for certain development and operation works at the Tuticorin Port for 30 years on a Build, Operate and Transfer basis. Shorn of details, commercial differences arose between the parties relating primarily to royalty/revenue sharing model. The Company requested the Trust to amend the License Agreement to incorporate revenue sharing model in place of royalty model. This was however rejected by the Trust.

In 2012, the Company invoked arbitration clause under the License Agreement. The Arbitral Tribunal passed an award in favour of the Company directing conversion of royalty model to revenue sharing model. Thereafter, the Trust presented a petition under Section 34 of the Arbitration and Conciliation Act, 1996 for setting aside an arbitral award. This petition was rejected by the District Judge, Tuticorin. Against this, the Trust filed an appeal before the Madras High Court. The appeal was allowed and the award made by the Arbitral Tribunal was set aside. Aggrieved, the Company approached the Supreme Court.

Analysis and Observations

Scope of interference with an arbitral award in India      

Relying on a catena of judgments including MMTC Ltd. v. Vedanta Ltd., (2019) 4 SCC 163 and SsangYong Engg. & Construction Co. Ltd. v. NHAI, (2019) 15 SCC 131,  the Supreme Court noted it to be settled legal position that in an application for setting aside an arbitral award filed under Section 34 of the Arbitration Act, the court does not act as an appellate court and reappreciate the evidence. The scope of interference is limited to grounds provided under Section 34. Interference would be warranted when the award is in violation of public policy of India. A judicial intervention on account of interfering on the merits of the award would not be permissible.

Principles of natural justice as contained in Sections 18 and 34(2)(a)(iii) of the Arbitration Act continue to be grounds of the challenge of an award. Awards that shock the conscience of the court can be set aside for being in conflict with justice or morality. An award can be set aside on the ground of patent illegality appearing on the face of the award as such, which goes to the roots of the matter.

Merits of the case

Article 14 of the License Agreement

The bone of contention between the parties was Article 14 of the License Agreement which dealt with ‘Change in Law’. Article 14.3 provided that the Licensee (appellant−Company) may request for amendments in terms of the License Agreement if after the date of the License Agreement there is any change in law which substantially affects rights of the Licensee. The questions before the Court were:

(i) Whether the Arbitral Tribunal was justified in finding a change in law which entitled the Company to invoke Article 14.3 of the License Agreement; and

(ii) Whether the Arbitral Tribunal was justified in converting the contract from royalty model to revenue sharing model.

The Court said that for answering the questions, it will have to consider documents on record as well as the conduct of the parties and their intention as could be gathered from the material. For such propsition, reliance was placed on MMTC Ltd. v. Vedanta Ltd., (2019) 4 SCC 163.

Findings of the Arbitral Tribunal

It was noted by the Court that entire finding of the Arbitral Tribunal was based on a premise that when the parties entered into the contract in 1998, there was an existing policy which provided royalty to be factored into the cost while fixation of tariff. That, subsequently in 2003, Government of India changed the policy thereby providing that royalty will not be so factored while fixing tariff. In 2005, there was yet another change in policy vide which royalty was allowed to be factored in while fixing tariff, but subject to a maximum of the bid of second lowest bidder. According to the Arbitral Tribunal, this amounted to change in law which adversely affected the Company.

Examining the correctness of such finding, the Court found that when Letter of Intent was issued to the Company in January 1998, there was no policy/guidelines at all. The relevant guidelines were adopted by the authority concerned (Tariff Authority for Major Ports “TAMP”) only in February 1998. Even these 1998 Guidelines did not provide for factoring royalty in cost while determining tariff.

Notably, it was in the year 1999, that the Company presented a proposal before TAMP to revise tariff. The proposal was approved by TAMP, and royalty was allowed to be factored in cost while fixing tariff, however, this was only on account of the Trust’s conditional approval to the proposal submitted by the Company. The TAMP also made clear that its order should not be interpreted to amount to any implicit approval of royalty related issues which were left to be decided by the Trust and the Government of India.

Then came the first notification in 2003, where the Government of India decided to clarify, as a matter of policy, that royalty payment shall not be factored into account as cost for fixation of tariff.

Next came the second notification in 2005, superseding the 1998 Guidelines. The new guidelines provided that royalty payment will not be admissible cost for tariff computation. Further, in Build, Operate and Transfer cases such as that of the Company, it was allowed that tariff computation can factor in royalty payment as cost subject however only to a maximum of the amount quoted by next lowest bidder.

On a conjoint reading of all documents, the Court concluded that:

In this scenario, the finding of the Arbitral Tribunal, that there was a law when the Agreement was entered into between the parties, which provided royalty as a pass-through and that the said law has been changed for the first time in 2003 and subsequently again changed in 2005, in our view, is a finding based on ‘no evidence‘.

The Court was of the opinion that the Arbitral Tribunal totally failed to take into consideration relevant aspects of the matter as discussed above. Noting that the Arbitral Tribunal arrived at its decision based on ‘no evidence’ and in ‘ignorance of vital evidence’, the Court held that the findings of the Arbitral Tribunal would come in the realm of perversity as explained in Associated Builders v. DDA, (2015) 3 SCC 49.

Conversion of royalty payment model to revenue sharing model

The next issue was whether the Arbitral Tribunal was justified in substituting royalty payment model to revenue sharing model. While considering this, the Court opined that:

A contract duly entered into between the parties cannot be substituted unilaterally without the  consent of the parties.

Gathering the  intention of the parties from documents on record, the Court found that the Company wanted the License Agreement to be amended to change royalty payment method to revenue sharing method. Whereas, the Trust always opposed it and was not agreeable to any such amendment. Noting that the Arbitral Tribunal ignored the stand of the Trust to thrust upon a new term in the License Agreement, the Court observed:

It is thus clear that the Award has created a new contract for the parties by unilateral intention of [the Company] as against the intention of [the Trust].

Reiterating that a party to the Agreement cannot be made liable to perform something for which it has not entered into a contract, the Court concluded that:

In our view, rewriting a contract for the parties would be breach of fundamental principles of justice entitling a Court to interfere since such case would be one which shocks the conscience of the Court and as such, would fall in the exceptional category.

Decision

In such view of the matter, the Supreme Court was of the considered opinion that the impugned award passed by the Arbitral Tribunal would come under the realm of “patent illegality” and therefore it was rightly set aside by the High Court. [PSA SICAL Terminals (P) Ltd. v. V.O. Chidambranar Port Trust, 2021 SCC OnLine SC 508, decided on 28-7-2021]


Tejaswi Pandit, Senior Editorial Assistant has reported this brief.

Case BriefsHigh Courts

Delhi High Court: Vibhu Bakhru, J., held that the scope of interference with an arbitral award under Section 34 of the Arbitration & Conciliation Act is limited.

Factual Matrix 

Steel Authority of India (SAIL) filed the instant petition under Section 34 of the Arbitration and Conciliation Act, 1996 impugning an Arbitral Award delivered by the Arbitral Tribunal.

Arbitration between the parties was an international commercial arbitration within the meaning of Section 2(1)(f) of the A&C Act and the same was conducted under the aegis of the Delhi International Arbitration Centre.

Respondent JOPL was the claimant and engaged in the business of maritime logistics including vessel operations and chartering.

Charter Party

Parties had executed a Charter Party whereby JOPL agreed to load, carry and discharge cargo of Bulk Coking Coal to ports in India.

Though there was no dispute between the parties as to the amount payable by SAIL under the Charter Party, there was also no dispute that JOPL had duly performed its obligations under the Charter Party.

Contract of Affreightment

However, it was stated that SAIL had withheld the admitted balance amount payable to JOPL for the reason that it had raised a claim of damages against JOPL in respect of another contract – Contract of Affreightment for shipping cargos of limestones.

What was the dispute?

OPL had not provided a vessel under the Contract of Affreightment for the 20th shipment and SAIL was compelled to make alternate arrangements for the same. SAIL claimed that JOPL had breached its obligations under the Contract of Affreightment and raised the claim for damages quantified at the additional expenses incurred by it to arrange for shipment of balance quantity of limestone.

But JOPL disputed the claim and stated that it was not obliged to provide a vessel as the shipment period under the Contract of Affreightment had come to an end.

Hence, disputes between the parties arising as a result of SAIL withholding the admitted amounts due under the Charter Party, were referred to arbitration.

Finding of the Arbitral Tribunal

The Arbitral Tribunal held in favour of JOPL and against SAIL and found that the Charter Party was unconnected with the Contract of Affreightment.

The Arbitral Tribunal found that there was no nexus between the two contracts. Whereas the Charter Party was a standalone contract for one shipment of Coking Coal, the Contract of Affreightment was a contract for multiple shipments of limestones over a period of twelve months.

In view of the above, the Arbitral Tribunal held that SAIL was not entitled to withhold any amount from the amounts as admittedly owed by it to JOPL under the Charter Party. It, accordingly, awarded a sum of USD 515,739.88.

Reasons and Conclusion

SAIL’s entitlement to any equitable set-off was contrary to public policy since Arbitral Tribunal failed to appreciate the same.

Fundamental premise that JOPL had breached the Contract of Affreightment was disputed

Bench added that SAIL had claimed that JOPL had breached the Contract of Affreightment and therefore, it was entitled to seek the performance of the balance obligations at its risk and cost. For the said claim SAIL was required to prove both its entitlement to damages and its measure.

 Whether set off could be claimed is a matter of discretion of the Court adjudicating the claim. SAIL could not claim it as a matter of right and in the given set of facts and circumstances, SAIL was not entitled to claim any set off as there was no ascertained debt owing by JOPL to SAIL.

Court while holding the position that impugned award is an award arising out of an international commercial arbitration and therefore, it cannot be assailed on the ground of patent illegality as contained in Section 34(2A) of the A&C Act.

Supreme Court in the decision of Ssagyong Engineering & Construction Ltd. v. National Highways Authority of India, (2019) 15 SCC 131, wherein it was held that an award arising from an international commercial arbitration can be assailed only on the limited grounds as specified under Section 34(2) of the A&C Act.

Hence, no grounds, whatsoever, to assert that the decision of the Arbitral Tribunal to reject SAIL’s contention falls foul of the fundamental policy of Indian Law.

The onus to prove that SAIL was entitled to withhold the admitted sums against any other claim, rested on SAIL. And it failed to discharge the said burden.

Whether the impugned award was liable to be set aside to the extent that it awards 12% interest compounded with quarterly rests, on the amount due to JOPL?

Court noted that the Statement of Claims filed by JOPL set outs the grounds for claiming the amount of USD 515,739.88.

It was also observed that JOPL had unequivocally stated that the only dispute between the parties was with regard to the payment of balance freight. SAIL did not traverse the said assertion. It was apparent that JOPL had premised its claim for interest and costs on the ground that SAIL had unjustifiably withheld the amounts admittedly payable by it. Thus, compelling JOPL to refer the disputes to arbitration. SAIL had contested the said Statement of Claims only on the ground that it was entitled to recover a sum of USD 1,187,847.318/- which, according to SAIL, was payable as damages by JOPL in respect of the Contract of Affreightment.

High Court opined that the SAIL cannot be permitted to contest the impugned award as contrary to fundamental policy of Indian Law.

Bench found considerable merit in the contention advanced by Mr Shankar that the rate of 12% p.a. interest compounded with 3 monthly rests cannot be held contrary to fundamental policy of Indian Law.

Supreme Court in its decisions noted that the recovery of compound interest would not contravene any fundamental policy of Indian Law, Mr Shankar also pointed that there are a number of legislation that provide for payment of compound interest.

It is also a norm of the banking industry to charge compound interest with either monthly or quarterly rests. Therefore, an arbitral award cannot be held to be contrary to the fundamental policy of Indian law only because one of the parties is awarded compound interest.

In view of the offering that, if SAIL was willing to pay the awarded amount with a lesser interest and put quietus to disputes, JOPL would accept the same and waive its right for receiving the balance interest.

Therefore, Bench adjourned the hearing to enable SAIL’s counsel to take instructions in the above regard. But the said offer was accepted by the Court.

But, considering that public funds are involved, this Court considered it apposite to grant SAIL another opportunity to reflect on the offer made on behalf of JOPL.

High Court held that the present petition was speculative and has been filed by SAIL to only protract litigation. Rs 50,000 costs were imposed.[SAIL v. Jaldhi Overseas PTE Ltd., 2021 SCC OnLine Del 2642, decided on 28-05-2021]


Advocates before the Court:

For the Petitioner: Mr Joy Basu, Senior Advocate with Mr Ashish Rana, Mr Kanak Bose, Advocates.

For the Respondent: Mr Ashwin Shankar and Mr Rishi Murarka, Ms Shweta Sadanandan, Mr Aditya Raj, Mr George Rebello,

Advocate.

Case BriefsSupreme Court

Supreme Court: In an important ruling on Arbitration, the 3-judge bench of RF Nariman, BR Gavai and Hrishikesh Roy, JJ has held that a Section 11 court under the Arbitration and Conciliation Act, 1996 cannot decide the questions of fact and law relating to novation of a contract containing arbitration clause and must refer them to an arbitral tribunal.

The Court held that such “complex” questions cannot possibly be decided in exercise of a limited prima facie review as to whether an arbitration agreement exists between the parties.

What’s the controversy?

A private company was incorporated on 09.12.1971 under the name and style of Asian Films Laboratories Private Limited (now ANI Media Private Limited) by Prem Prakash, the entire amount of the paid-up capital being paid for by him from his personal funds. He then distributed shares to his family members without receiving any consideration for the same.

Reuters Television Mauritius Limited (now Thomson Reuters Corporation), approached Sanjiv Prakash, son of Prem Prakash, for a longterm equity investment and collaboration with the company on the condition that he would play an active role in the management of the company. Hence, a MoU was entered into sometime in 1996 between the four members of the Prakash Family. A Shareholders’ Agreement dated 12.04.1996 [SHA] was then executed between the Prakash Family and Reuters.

The reason for entering into the SHA was as follows:

“WHEREAS

(A) Pursuant to a share purchase agreement dated today between the Prakash Family Shareholders and Reuters (the Share Purchase Agreement), Reuters has agreed to purchase 4,900 Shares (as defined below) representing 49% of the issued share capital of Asian Films Laboratories (Pvt.) Ltd. (the Company). Following completion of the Share Purchase Agreement, each of the Prakash Family Shareholders will hold the numbers of Shares set opposite his or her name in schedule 3 hereto, with the aggregate number of Shares so held by the Prakash Family Shareholders representing 51% of the issued share capital of the Company.

(B) The Shareholders (as defined below) are entering into the Agreement to set out the terms governing their relationship as shareholders in the Company.”

Disputes between the parties arose when Prem Prakash decided to transfer his shareholding to be held jointly between Sanjiv Prakash and himself, and Daya Prakash did likewise to transfer her shareholding to be held jointly between Seema Kukreja and herself. A notice invoking the arbitration clause contained in the MoU was then served by Sanjiv Prakash on 23.11.2019 upon the three Respondents, alleging that his pre-emptive right to purchase Daya Prakash’s shares, as was set out in clause 8 of the MoU, had been breached, as a result of which disputes had arisen between the parties and Justice Deepak Verma (retired Judge of this Court), was nominated to be the sole arbitrator.

However, the reply filed by Seema Kukreja and Daya Prakash, dated 20.12.2019, pointed out that the MoU ceased to exist on and from the date of the SHA, i.e. 12.04.1996, which superseded the aforesaid MoU and novated the same in view of clause 28.2 thereof. Therefore, they denied that there was any arbitration clause between the parties as the MoU itself had been superseded and did not exist after 12.04.1996.

Delhi High Court’s Verdict

After Sanjiv Prakash moved the Delhi High Court under Section 11 of the 1996 Act, the High Court, had, in it’s judgment held that,

“… the law relating to the effect of novation of contract containing an arbitration agreement/clause is well-settled. An arbitration agreement being a creation of an agreement may be destroyed by agreement. That is to say, if the contract is superseded by another, the arbitration clause, being a component/part of the earlier contract, falls with it or if the original contract in entirety is put to an end, the arbitration clause, which is a part of it, also perishes along with it.”

Supreme Court’s Verdict

The Court extensively discussed the law laid down in the recent judgment in Vidya Drolia v. Durga Trading Corporation, (2021) 2 SCC 1 wherein it was held that Section 11 Court is not empowered to determine whether an arbitration agreement is in existence or not. In the said judgment it was held that for Section 11 court to decide any matter, the “existence of an arbitration agreement” is mandatory. Whether or not an arbitration agreement exists, is a question to be decided by the Arbitral Tribunal.

“Existence of an arbitration agreement presupposes a valid agreement which would be enforced by the court by relegating the parties to arbitration. Legalistic and plain meaning interpretation would be contrary to the contextual background including the definition clause and would result in unpalatable consequences. A reasonable and just interpretation of “existence” requires understanding the context, the purpose and the relevant legal norms applicable for a binding and enforceable arbitration agreement. An agreement evidenced in writing has no meaning unless the parties can be compelled to adhere and abide by the terms. A party cannot sue and claim rights based on an unenforceable document. Thus, there are good reasons to hold that an arbitration agreement exists only when it is valid and legal. A void and unenforceable understanding is no agreement to do anything. Existence of an arbitration agreement means an arbitration agreement that meets and satisfies the statutory requirements of both the Arbitration Act and the Contract Act and when it is enforceable in law.

Section 11 does not prescribe any standard of judicial review by the court for determining whether an arbitration agreement is in existence. Section 8 states that the judicial review at the stage of reference is prima facie and not final. Prima facie standard equally applies when the power of judicial review is exercised by the court under Section 11 of the Arbitration Act. Therefore, we can read the mandate of valid arbitration agreement in Section 8 into mandate of Section 11, that is, “existence of an arbitration agreement”.”

Hence, the court by default would refer the matter when contentions relating to nonarbitrability are plainly arguable; when consideration in summary proceedings would be insufficient and inconclusive; when facts are contested; when the party opposing arbitration adopts delaying tactics or impairs conduct of arbitration proceedings.

“This is not the stage for the court to enter into a mini trial or elaborate review so as to usurp the jurisdiction of the Arbitral Tribunal but to affirm and uphold integrity and efficacy of arbitration as an alternative dispute resolution mechanism.”

Applying the aforesaid test, the Court said that it was obvious that

“whether the MoU has been novated by the SHA dated 12.04.1996 requires a detailed consideration of the clauses of the two Agreements, together with the surrounding circumstances in which these Agreements were entered into, and a full consideration of the law on the subject. None of this can be done given the limited jurisdiction of a court under Section 11 of the 1996 Act.”

The Court said that the detailed arguments on whether an agreement which contains an arbitration clause has or has not been novated cannot possibly be decided in exercise of a limited prima facie review as to whether an arbitration agreement exists between the parties.

Also, this case does not fall within the category of cases which ousts arbitration altogether, such as matters which are in rem proceedings or cases which, without doubt, concern minors, lunatics or other persons incompetent to contract.

“A Section 11 court would refer the matter when contentions relating to non-arbitrability are plainly arguable, or when facts are contested. The court cannot, at this stage, enter into a mini trial or elaborate review of the facts and law which would usurp the jurisdiction of the arbitral tribunal.”

[Sanjiv Prakash v. Seema Kukreja, 2021 SCC OnLine SC 282, decided on 06.04.2021]


*Judgment by Justice RF Nariman 

Know Thy Judge| Justice Rohinton F. Nariman

Appearances before the Court by:

For Appellant: Senior Advocate K.V. Viswanathan

For Respondents: Senior Advocate Mukul Rohatgi and Advocates Avishkar Singhvi and Manik Dogra

Also read the detailed report on the Vidya Drolia judgment 

‘Landlord-tenant disputes under Transfer of Property Act are arbitrable’. SC lays down test for determining non-arbitrability of disputes

Himachal Pradesh High Court
Case BriefsHigh Courts

Himachal Pradesh High Court: L. Narayana Swamy CJ., while exercising its powers under Section 11(6) of the Arbitration and Conciliation Act, 1996, appointed an Arbitrator and further allowed to either determine its own procedure for settling the dispute or run itself as per Section 23 and Section 29A of the Act.

Background

The present petition is moved under Section 11(6) of the Arbitration and Conciliation Act, 1996, by a Company who was awarded the work for widening and strengthening the existing single/inter-mediate lane carriage way with geometric improvement of two-lane carriage way in KM 58/100 to 105/0 of National Highway 70 by the respondents, seeking a direction for appointment of arbitrator for resolving the dispute between the petitioner and the respondents.

Respondents have filed reply in which objection regarding claim being barred by limitation has been taken. Senior counsel for the petitioner relies on the judgment of Supreme Court in, Uttrakhand Porv Sanik Kalyan Nigam v. Northern Coal Field, SLP (C) No. 11476 of 2018, wherein it was categorically stated that, “delay itself is a question of law and facts and has to be decided by the Arbitral Tribunal or the Arbitrator appointed by the Court.”

 Observations

Recognizing the contention forwarded by the counsel for the petitioner and reiterating the Supreme Court finding in the aforementioned case, the Court, in exercise of its powers under Section 11(6) of the Arbitration and Conciliation Act, 1996, appointed A.K. Goel, retired judge of the Himachal Pradesh High Court as the sole Arbitrator and further said, “It shall be open for the learned Arbitrator to determine his own procedure with the consent of the parties. Otherwise, also, entire procedure with regard to fixing of time limit for filing pleadings or passing of Award stands prescribed under Sections 23 and 29A of the Act. Liberty is also reserved to the respondent to raise objections, if any, by way of filing counterclaim before the Arbitrator.”

 Decision

While allowing the present petition, the Court clarified the practice and procedure related to the exercise of Court’s power under Section 11(6) of the Arbitration and Conciliation Act, 1996 and instances which may fall under the direct determination of the Arbitral Tribunal.[Shivalaya Construction (P) Ltd. v. State of H.P., 2020 SCC OnLine HP 2801, decided on 27-11-2020]

Counsel for the Petitioner: Bimal Gupta, Senior Advocate with Kusum Chaudhary, Advocate.

Counsel for the Respondents: Ritta Goswami, Additional Advocate General.


Sakshi Shukla, Editorial Assistant has put this story together

Case BriefsHigh Courts

Karnataka High Court: S.R. Krishna Kumar, J., allowing the present petition for the appointment of a sole arbitrator under Section 11(6) of the Arbitration and Conciliation Act, 1996, held that, the decision made is restricted to the peculiar facts of the instant case and shall not be treated as a precedent whatsoever.

Brief Facts

The present petition is instituted under Section 11(6) of the Arbitration and Conciliation Act, 1996 (hereinafter referred to as ‘the Act’), praying to appoint a sole arbitrator in terms of the Arbitration clause contained in clause 6 of the Agreement dated 13-06-2014, and in compliance with Section 11(6) of the Act, to enter into adjudication of disputes between the parties at the Arbitration and Conciliation Centre, Bengaluru.

Contentions

The Counsel for the respondents argued that the sale agreement, dated 13-06-2014, which contains the Arbitration clause, is insufficiently stamped and as such, the same cannot be acted upon for any purpose whatsoever including seeking appointment of an Arbitrator. In support of the argument, reliance was placed on the decision of Supreme Court in SMS Tea Estates (P) Ltd. v. Chand Mari Tea Co. (P) Ltd., 2011 (14) SCC 66 which was further followed in the case of Garvare Wall Ropes Ltd. v. Coastal Marine Constructions, 2019 (9) SCC 209.

The Counsel for the petitioners submitted that the responsibility of paying the deficit stamp duty and penalty on the said sale agreement, on or before the first date of hearing before the Arbitral Tribunal is hereby undertaken by them and that they have no objection with respect to the same.

Issue

  1. Whether an insufficiently stamped sale agreement, containing arbitration clause for the appointment of sole arbitrator enforceable under Section 11(6) of the Act? 

Decision

While considering the peculiar facts and circumstances of the present case, in addition to the position clarified in SMS Tea Estate and Garvare Wall Ropes, the Court appointed a sole arbitrator imposing necessary conditions with regard to payment of stamp duty and penalty on the sale agreement. It was further said that the procedure adopted in the present case is restricted and limited to the instant case as it is rendered with the consent of both the parties and without prejudice to any of their rights.[Malchira C. Nanaiah v. Pathak Developers (P) Ltd.,  2020 SCC OnLine Kar 1630, decided on 5-10-2020]


Sakshi Shukla, Editorial Assistant has put this story together

Case BriefsHigh Courts

Delhi High Court: C. Hari Shankar, J., addressed three different petitions between the same parties arising out of the award passed by Arbitral Tribunal, out of which, first petition was rejected, the second was passed and third stayed.

GMR and NHAI were under a concession agreement to build a six-lane, 555 km Kishangarh-Udaipur-Ahmedabad Highway, which was terminated by GMR on the ground that there had been a “change in law”, during the period of the agreement.

GMR claimed that it was entitled to compensation, under Clauses 41.1 and 41.3 of the Concession Agreement. The learned Arbitral Tribunal held that there was a “change in law” and that, GMR was entitled to compensation under Clauses 41.1 and 41.3. The majority award, however, permitted NHAI to take a fresh decision, on the claims of GMR, and assess the compensation to which it would be entitled. While the majority Award directed GMR to establish, before NHAI, its entitlement to compensation, under Clause 41.1 and 41.3 of the Concession Agreement, the dissenting Award(minority) opined that, instead of allowing NHAI to adjudicate thereon, the exercise ought to be delegated to an independent authority, such as a reputed firm of Chartered Accountants, or the like. The petitions, O.M.P. (COMM.) 426/2020, and O.M.P. (COMM.) 425/2020, were filed by NHAI and  GMR respectively and were preferred under Section 34 of the Arbitration and Conciliation Act, 1996, to set aside the award by the Tribunal. O.M.P. (I) (COMM.) 92/2020, was filed by GMR under Section 9 of Arbitration and Conciliation Act, 1996 essentially for the interim stay of operation of a letter demanding premium and, further, restraining GMR from taking any coercive steps, under the Concession Agreement.

NHAI claimed to be aggrieved by the decision, of the Arbitral Tribunal, holding GMR to be entitled to compensation, and contended, in its petition [O.M.P. (COMM.) 426/2020] that GMR was not entitled to any compensation on the ground of “change in law”. GMR challenged [in O.M.P. (COMM.) 425/2020] the majority Award, to the extent, it delegated the decision-making power, qua the claim, of GMR, to compensation, to NHAI. In other words, GMR sought to contend that the minority Award of Nayar, J., ought to be accepted.

The Court first decided the petition,O.M.P. (COMM.) 426/2020, and found the Arbitral Tribunal’s Judgment to be in order. Court found that the tribunal’s decision that change of circumstance did result in “change of law” under Clause 48 of the Concession Agreement, the claim of GMR had to be assessed under Clauses 48.1 and 48.3 and GMR had to establish the “financial burden” to claim this compensation.

Therefore, Court disposed of this petition. In O.M.P. (COMM.) 426/2020, the court sided with the minority judgment of the Arbitral tribunal and assigned a new arbitrator who would be taking up the task from where the learned Arbitral Tribunal passed its Award. The Court decided that the Sole Arbitrator would have a time of six months from the date of presentation GMR’s claims for compensation. Therefore, the petition was accepted. The remaining petition, O.M.P. (I) (COMM) 92/2020, was on the issue of the premium to be paid to NHAI, which was stayed by the court in the “the interests of justice”.  Therefore, the third petition stayed.[GMR Hyderabad Vijayawada Expressways (P) Ltd. v. NHAI, 2020 SCC OnLine Del 923, decided on 4-08-2020].