Case BriefsHigh Courts

Delhi High Court: C. Hari Shankar, J. observed that,

The question of whether, once a bench of the Supreme Court has doubted the correctness of an earlier bench of co-equal strength, and referred the issue to a larger bench, Courts lower in hierarchy should continue to follow the earlier decision, appears to be debatable.

Instant petition was filed under Section 11 (5) of the Arbitration and Conciliation Act, 1996 for appointment of an arbitrator to arbitrate on the dispute between the parties.

Parties having failed to arrive at any agreement regarding the arbitrator to arbitrate on the disputes, the petitioner has approached this Court under Section 11(5) of the 1996 Act.

Respondent’s Counsel raised objection regarding the reference of the disputes to arbitration is that the agreement between the parties is inadequately stamped.

He relied on the decision of Supreme Court in N.N. Global Mercantile (P) Ltd. v. Indo Unique Flame Ltd., (2021) 4 SCC 379, to contend that, till this defect is rectified, the Court cannot refer the dispute to arbitration.

Petitioner’s counsel submitted that the arbitration agreement was sufficiently stamped and that, even if it were not, this aspect could be decided by the Arbitrator.

After copiously reproducing from the decision of N.N. Global Mercantile (P) Ltd. v. Indo Unique Flame Ltd., (2021) 4 SCC 379, the Court pointed that in fact, the decision in NN Global defeats submission of the respondent. After this, the respondent sought to rely on the earlier decision of coequal strength in Vidya Drolia. Notably, the decision of Vidya Drolia v. Durga Trading Corpn., (2021) 2 SCC 1 on this aspect was doubted by the later judgment of coequal strength in NN Global.

Analysis, Law and Decision

High Court remarked that,

 “…question of whether, once a bench of the Supreme Court has doubted the correctness of an earlier bench of co-equal strength, and referred the issue to a larger bench, Courts lower in hierarchy should continue to follow the earlier decision, appears to be debatable.”

Bench referred the parties to Delhi International Arbitration Centre which would appoint a suitable arbitrator to arbitrate thereon. Arbitration would take place under the aegis of the DIAC and would abide by its rules and regulations.

Lastly, the Court held that all issues of fact and law, including the aspect of non-stamping of the agreement between the parties and, if so, the consequences thereof on arbitrability of the dispute, are left open for agitation before the learned Arbitrator. [Bhagwati Devi Gupta v. Star Infratech (P) Ltd., 2021 SCC OnLine Del 3995, decided on 11-08-2021]


Advocates before the Court:

For the Petitioners: Shalabh Singhal, Advocate 

For the Respondent: Rakesh Saini, Advocate

Case BriefsSupreme Court

Supreme Court: A Division Bench comprising of R.F. Nariman and B.R. Gavai, JJ. held that a foreign arbitral award is enforceable against non-signatories to arbitration agreement. The Supreme Court reiterated that grounds for resisting a foreign arbitral award contained in Section 48(1)(a) to (e) of the Arbitration and Conciliation Act, 1996 are to be narrowly construed, and that a non-signatory’s objection cannot possibly fit into Section 48(1)(a). Furthermore, a foreign arbitral award cannot be challenged on the ground of “perversity”.

Incidental to the main issue, it was also held that Section 44 recognises the fact that tort claims may be decided by an arbitrator provided they are disputes that arise in connection with the subject agreement.

The instant appeals before the Supreme Court raised interesting questions relatable to Part II of the Arbitration and Conciliation Act which provisions deal, inter alia, with recognition and enforcement of foreign awards.

Factual Matrix and Appeal

In September 2000, a Representation Agreement was entered into between Integrated Sales Services Ltd. (a company based in Hong Kong) and DMC Management Consultants Ltd. (a company registered in India, with principal business address at Nagpur). By this agreement, Integrated Sales was to assist DMC to sell its goods and services to prospective customers, and in consideration thereof was to receive commission. The agreement also had an arbitration clause as per which any dispute between the parties was to be referred to a single arbitrator in Kansas City, Missouri, USA.

Disputes arose between the parties, as a result of which a notice for arbitration was sent by Integrated Sales to Arun Dev Upadhyaya (Chairman of DMC). DMC and one Gemini Bay Transcription Private Limited were also made a party respondent to the statement of claim. This Gemini Bay was a company formed in India, owned and/or controlled and dominated by Arun Dev Upadhyaya. It was alleged that Arun Dev Upadhyaya used Gemini Bay to transfer funds away from Integrated Sales. It was alleged that DMC terminated contracts with clients brought in by Integrated Sales, and later caused execution of new contracts by same clients with Gemini Bay. This was done to evade payment of commission to Integrated Sales. It was alleged that Arun Dev Upadhyaya used Gemini Bay as alter ego of himself, and ignored the corporate forms of DMC to achieve his improper purpose of breaching the Representation Agreement. Gemini Bay objected that the arbitration agreement entered into between Integrated Sales and DMC was not enforceable against it.

In March 2010, the international arbitrator gave award to the tune of USD 6,948,100 in favour of Integrated Sales, which then approached a Single Judge of the Bombay High Court to enforce the foreign arbitral award. The Single Judge held that the arbitral award was enforceable only against DMC and not against Arun Dev Upadhyaya and Gemini Bay as they were non-signatories to the arbitration agreement. However, on appeal, the Division Bench of the High Court reversed the judgment of the Single Judge. Aggrieved, Gemini Bay and Arun Dev Upadhyaya approached the Supreme Court.

Analysis and Observations

Foreign award

Foremost, the Court noted that a reading of Section 44 of the Arbitration and Conciliation Act, 1996 would show that there are six ingredients to an award being a foreign award. First, it must be an arbitral award on differences between persons arising out of legal relationships. Second, these differences may be in contract or outside of contract, for e.g., in tort. Third, the legal relationship so spoken of ought to be considered “commercial” under the law in India. Fourth, the award must be made on or after 11-10-1960. Fifth, the award must be a New York Convention award. And sixth, it must be made in one of such territories which the Central Government by notification declares to be territories to which the New York Convention applies.

Pre-requisites for enforcement of foreign award

Then the Court referred to Section 47 (Evidence), sub-section (1) of which provides pre-requisites for the enforcement of a foreign award: (a) the original award or a copy thereof duly authenticated in the manner required by the law of the country in which it is made; (b) the original agreement for arbitration or a duly certified copy thereof; and (c) such evidence as may be necessary to prove that the award is a foreign award.

Roping in a non-signatory

It was noted that all the requirements of sub-section (1) are procedural in nature, the object being that the enforcing court must first be satisfied that it is indeed a foreign award, as defined, and that it is enforceable against persons who are bound by the award.  The Court was of the opinion that:

“Section 47(1)(c) being procedural in nature does not go to the extent of requiring substantive evidence to ‘prove’ that a non-signatory to an arbitration agreement can be bound by a foreign award. As a matter of fact, Section 47(1)(c) speaks of only evidence as may be necessary to prove that the award is a foreign award.”

The Court dismissed the argument of the appellant that the burden of proof is on the person enforcing the award and that this burden can only be discharged by such person leading evidence to affirmatively show that a non-signatory to an arbitration agreement can be bound by a foreign award. It was held that such argument is outside Section 47(1)(c).

Refusal to enforcement of foreign award

Next, the Court referred to Section 48 (Conditions for enforcement of foreign awards).  It was noted that when enforcement of a foreign award is resisted, the party who resists it must prove to the court that its case falls within any of the sub-clauses of sub-section (1) or sub-section (2) of Section 48. The Court said:

“Given that foreign awards in convention countries need to be enforced as speedily as possible, … the expression ‘proof’ in Section 48 would only mean ‘established on the basis of the record of the arbitral tribunal’ and such other matters as are relevant to the grounds contained in Section 48.”

It was also observed that the New York Convention which has been adopted by the Arbitration Act has a pro-enforcement bias, and unless a party is able to show that its case comes clearly within Section 48(1) or Section 48(2), the foreign award must be enforced. Also, the grounds contained in Sections 48(1)(a) to (e) are to be construed narrowly. Reliance was placed on Ssangyong Engg. & Construction Co. Ltd. v. NHAI, (2019) 15 SCC 131; and Vijay Karia v. Prysmian Cavi E Sistemi SRL, (2020) 11 SCC 1.

Non-signatory’s objection cannot fit into S. 48(1)(a)

The appellant had argued that a non-signatory to an arbitration agreement would be directly covered by Section 48(1)(a) as well as Section 48(1)(c), and if the Award were to be read, it would be clear that the reasons given are extremely sketchy and based on ipse dixit and not on facts, rendering the Award liable to be set aside on these two grounds.

Section 48(1)(a) provides that enforcement of a foreign award may be refused, at the request of the party against whom it is invoked, only if that party furnishes to the court proof that “the parties to the agreement referred to in Section 44 were, under the law applicable to them, under some incapacity, or the said agreement is not valid under the law to which the parties have subjected it or, failing any indication thereon, under the law of the country where the award was made”.

The Court said that if read literally, Section 48(1)(a) speaks only of parties to the agreement being under some incapacity, or the agreement being invalid under the law to which parties have subjected it. It was observed:

“There can be no doubt that a non-party to the agreement, alleging that it cannot be bound by an award made under such agreement, is outside the literal construction of Section 48(1)(a).”

The Court further said that the ground is in itself specific, and only speaks of incapacity of parties and the agreement being invalid under the law to which the parties have subjected it. To attempt to bring non-parties within this ground is to try and fit a square peg in a round hole. It was categorically stated:

“A non-signatory’s objection cannot possibly fit into Section 48(1)(a)”

The Court said that what it was being asked to do in the guise of applying Section 48(1)(a) was really to undertake a review on merits. However, given the fact that the foreign award gave reasons on facts to apply the alter ego doctrine, it was not possible for the Court to reappreciate the facts especially when the burden lay on the appellants to establish the grounds made out in Section 48(1), none of which go to the merits of the case.

Perversity not a ground to set aside international commercial arbitration

The appellant also argued that the Award was perverse since vital evidence was not led in support of the claimant’s case before the arbitrator. Rejecting the argument, the Court answered:

“Perversity as a ground to set aside an award in an international commercial arbitration held in India no longer obtains after the 2015 amendment to the Arbitration Act, 1996.”

Relying on the law laid down in Ssangyong, (2019) 15 SCC 131, the Court explained that Section 48 has also been amended in the same manner as Section 34 of the Arbitration Act. The ground of “patent illegality appearing on the face of the award” is an independent ground of challenge which applies only to awards made under Part I which do not involve international commercial arbitrations. It was observed:

“Thus, the ‘public policy of India’ ground after the 2015 amendment does not take within its scope ‘perversity of an award’ as a ground to set aside an award in an international commercial arbitration under Section 34, and concomitantly as a ground to refuse enforcement of a foreign award under Section 48, being a pari materia provision which appears in Part II of the Act.”

Limited scope of challenge under S. 48(1)(c)

Section 48(1)(c) provides that enforcement of a foreign award may be refused, at the request of the party against whom it is invoked, only if that party furnishes to the court proof that “the award deals with a difference not contemplated by or not falling within the terms of the submission to arbitration, or it contains decisions on matters beyond the scope of the submission to arbitration”.

The Court was of the view that given the fact that the expression “submission to arbitration” would refer primarily to the arbitration agreement, sub-clause (c) only deals with disputes that could be said to be outside the scope of the arbitration agreement between the parties – and NOT to whether a person who is not a party to the agreement can be bound by the same.

Natural justice grounds under S. 48(1)(b)

The appellant next argued that though Section 48(1)(b) refers to a natural justice ground, the giving of reasons being part of natural justice ought to be included in this ground, and as no proper reasons have been given by the Arbitrator, the Award should be set aside on this ground.

Section 48(1)(b) provides that enforcement of a foreign award may be refused, at the request of the party against whom it is invoked, only if that party furnishes to the court proof that “the party against whom the award is invoked was not given proper notice of the appointment of the arbitrator or of the arbitral proceedings or was otherwise unable to present his case”.

The Court stated that Section 48(1)(b) does not speak of absence of reasons in an arbitral award at all. It was explained:

“The only grounds on which a foreign award cannot be enforced under Section 48(1)(b) are natural justice grounds relatable to notice of appointment of the arbitrator or of the arbitral proceedings, or that a party was otherwise unable to present its case before the arbitral tribunal, all of which are events anterior to the making of the award.”

While rejecting the appellant’s argument, the Court relied on Vijay Karia, (2020) 11 SCC 1 to note that in any case Section 48(1)(b) is to be narrowly construed.

Tort claims and scope of arbitration

The appellant contended that since damages were given in tort by the Arbitrator in the instant case, they would be outside the scope of the arbitration agreement.

For answering this contention, the Court referred to the arbitration clause between the parties which expressly said “in the event a dispute arises in connection with this Agreement, such dispute shall be referred to a single arbitrator …”. Rejecting the appellant’s contention, the Court observed that:

“Section 44 recognises the fact that tort claims may be decided by an arbitrator provided they are disputes that arise in connection with the agreement.”

Power of enforcing court

The appellant argued that a comparison between Section 35 (Finality of arbitral awards) and Section 46 (When foreign award binding) of the Arbitration Act, 1996 would show that the legislature circumscribed the power of the enforcing court under Section 46 to persons who are bound by a foreign award as opposed to persons which would include “persons claiming under them” and that, therefore, a foreign award would be binding on parties alone and not on others.

Rejecting this argument as well, the Court stated that Section 46 does not speak of “parties” at all, but of “persons” who may, therefore, be non-signatories to the arbitration agreement. Also, Section 35 speaks of “persons” in the context of an arbitral award being final and binding on the “parties” and “persons claiming under them”, respectively. Section 35 would, therefore, refer to only persons claiming under parties and is, therefore, more restrictive in its application than Section 46 which speaks of “persons” without any restriction.

Damages awarded do not shock conscience of the court

The final argument of the appellant was that the damages which were awarded by the arbitrator had no basis whatsoever.

Finding no merit in this final contention, the Court said that such challenge to enforceability of the Award would again not fall within any of the exceptions contained in Section 48(1). Furthermore, in order to attract Section 48(2) read with Explanation 1(iii), it is only in exceptional cases which involve some basic infraction of justice which shocks the conscience of the court that such a plea can be entertained.

The Court found that the Arbitrator correctly held that as nothing was forthcoming from the appellant, he would have to make a best judgment assessment for damages. It was also noted that it has been established that such “guesstimates” are not a stranger to the law of damages in the USA and other common law nations. The Court was of the opinion that:

“In any case, the damages so awarded in the facts of this case cannot even remotely be said to shock the conscience of this Court so as to clutch at ‘the basic notion of justice’ ground contained in Section 48(2) Explanation (1)(iii).”

Decision

In view of the above, the appeal was dismissed by the Supreme Court. [Gemini Bay Transcription (P) Ltd. v. Integrated Sales Service Ltd., 2021 SCC OnLine SC 572, decided on 10-8-2021]


Tejaswi Pandit, Senior Editorial Assistant has reported this brief.

Case BriefsHigh Courts

Delhi High Court: Suresh Kumar Kait, J., reiterated that no party could be permitted to unilaterally appoint an Arbitrator, as the same would defeat the purpose of unbiased adjudication of the dispute between the parties.

Crux of the petitions is to seek the appointment of Arbitrators for adjudication of disputes between the parties.

According to the petitioner firm, a license agreement along with a supplementary agreement was entered between the petitioner and respondent of shops in question, which was renewable every five years at the option of the petitioner.

Petitioner submitted that after the change of name of petitioner/firm from M/S Virender Kumar & Co. to M/S Sital Dass Sons, an additional space adjacent to shop in the same shopping arcade was granted by the respondent to M/S Sital Dass Sons vide supplementary agreement and the terms of the original license agreement were to be read with the other agreement. M/S Sital Dass Sons through its partners informed the respondent that they shall be operating under two different names.

According to the petitioners in the petitions, on the ground that the internal fittings of shopping arcade were nearly 40 years old and were in urgent need of repair and it was no longer financially profitable to continue with shopping arcade, respondent vide a notice revoked the license in respect of the shops.

Petitioners contended that they were in exclusive possession of shops in question and the said notice did not mention any violation of the terms and conditions of the license/lease agreement by petitioners. Further submitted that petitioners had the right to carry on business at the hours suited to them and the license/lease could not have been terminated at the will of respondent.

It had been also brought to the notice of this Court that against illegal eviction of petitioners, they had preferred a civil suit CS(Comm)) 237/2020 before this Court for declaration and permanent injunction against the respondents, which was disposed of vide order dated 21.07.2020 as not maintainable in view of Arbitration clause between the parties.

Bench stated that the arbitration agreement between the parties and invocation of arbitration was not disputed by the respondents. Hence the said petitions deserved to be allowed.

However, contention of petitioners to appoint Arbitrator of their choice was rejected, as no party could be permitted to unilaterally appoint an Arbitrator, as the same would defeat the purpose of unbiased adjudication of dispute between the parties.

Court relied on the decision of the Supreme Court in Perkins Eastman Architects DPS v. HSCC (India) Ltd., 2019 SCC OnLine SC 1517 wherein it had been categorically stated that “in cases where one party has a right to appoint a sole arbitrator, its choice will always have an element of exclusivity in determining or charting the course for dispute resolution. Naturally, the person who has an interest in the outcome or decision of the dispute must not have the power to appoint a sole arbitrator.”

The above-stated decision was followed by the Coordinate Benches of this Court in Proddatur Cable Tv Digi Services v. Siti Cable Network Limited 2020 SCC OnLine Del 350 and VSK Technologies Private Ltd. v. Delhi Jal Board, 2021 SCC OnLine Del 3525 in unequivocal terms.

Concurring the above decisions, present petition was allowed.

Hence, the High Court appointed the sole arbitrator to adjudicate the dispute between the parties.

Adding to the above, Court stated that the fee of the arbitrator shall be governed by the fourth schedule of the Arbitration and Conciliation Act, 1996 and the Arbitrator shall ensure compliance with Section 12 of Arbitration and Conciliation Act, 1996 before commencing the arbitration. [Sital Dass Jewellers v. Asian Hotels (North) Ltd., 2021 SCC OnLine Del 3914, decided on 6-08-2021]


Advocates before the Court:

For the Petitioners: Mr P.K. Agrawal, Mr Rishabh Tomar & Ms Sukriti Sinha, Advocates

For the Respondent: Mr Sidhant Kumar & Ms Manyaa Chandok, Advocates

Op EdsOP. ED.

“Arbitrators and Arbitral Tribunals are creatures not of statute but of contract[1].”

Universally arbitration is recognised as one of the most noteworthy alternative dispute resolution processes. Arbitration provides a much-needed respite to ailing litigants to seek redressal of their grievances by an autonomous process, with limited or no judicial intervention. In fact, the perquisites of arbitral proceedings are too profuse to be chronicled in a few words. The Supreme Court in Govt. of Orissa v. G.C. Roy[2], while distinguishing the process of determination of disputes through judicial means, in contrast with, arbitration proceedings, observed, “…resolution of dispute by court, through judicial process is costly and time consuming … alternative method of settlement of dispute through arbitration is a speedy and convenient process….” Similarly, in Shailesh Dhairyawan v. Mohan Balkrishna Lulla[3], the Supreme Court acknowledged that the parties choose arbitration as a dispute resolution mechanism, “keeping in view that it offers a timely, private, less formal and cost-effective approach for the binding determination of disputes. It provides the parties with greater control of the process than a court hearing.” Consequently, endorsing the numerous benefits which may ensue from an arbitration proceeding, it is quite understandable that the Indian Courts[4] have repeated avowed that the said process needs to be encouraged, considering the, “high pendency of cases in the courts and cost of litigation.”

 Customarily, the genesis of arbitration proceedings lies under a contract or an “arbitration agreement[5]” wherein the parties agree to submit to arbitration, “all or certain disputes which have arisen or which may arise between them in respect of a defined legal relationship, whether contractual or not.” As per Section 7(4) of the Arbitration and Conciliation Act, 1996 (Arbitration Act) such an agreement, in turn, may be in a form of a document signed by the parties or an exchange of letters, telex, telegrams or other means of telecommunication, including communication through electronic means, which provide a record of the agreement or an exchange of statements of claim and defence in which the existence of the agreement is alleged by one party and not denied by the other. In fact, it is trite law[6] that there is no prescribed format/form of an arbitration agreement and the only prerequisite is the ascertainment of the fact, “whether the parties have agreed that if disputes arise between them in respect of the subject-matter of contract such dispute shall be referred to arbitration, then such an arrangement would spell out an arbitration agreement.” Regardless of the manner and form in which an arbitration agreement may be constructed, it is, however, an established fact that where the parties willingly submit to arbitration as a mode of their dispute resolution, the scope of such proceedings and the confines of arbitrator’s jurisdiction get contractually defined. As a corollary, an arbitrator is expected to exercise his power and authority within the terms and confines of contract, as executed between the parties to a dispute, and cannot, under a guise of doing justice[7], “award contrary to the terms [thereof]”. It is, in fact, a settled law[8] that an arbitrator cannot act arbitrarily, irrationally, capriciously or independent of the contract and in a case where an arbitrator transgresses beyond contractual limitations, “he would be acting without jurisdiction, whereas if he has remained inside the parameters of the contract, his award cannot be questioned on the ground that it contains an error apparent on the face of the record.” As per the Supreme Court[9], jurisdiction of the arbitrator is confined within the four corners of an arbitration agreement for, “he can only pass such an order which may be the subject-matter of reference”.

 Irrespective of the contractual limitation on arbitral proceeding, it is not quite uncommon that during such proceeding, parties may elevate certain claims which may fall outside the purview of their contract(s). One of such commonly invoked claims pertains to the escalation cost or escalation charge, being the monetary claim arising pursuant to inflation, as a result of time gap in the performance of any contract. Generally, the parties to an agreement make specific provisions pertaining to the grant or refusal of escalation cost(s)/charge(s) under their agreement. However, difficulty arises in a case where no such stipulation is envisaged or foreseen by contracting parties. Nonetheless, even in these states of imbroglio, courts have not abrogated their responsibility of extricating the layers of incertitude and providing a needed lucidity on the subject.

Undoubtedly, there can be no occasion for ambiguity in cases where there is an explicit prohibition under a contract regarding the claims pertaining to escalation cost. In fact, in this regard, the Supreme Court in New India Civil Erectors (P) Ltd. v. Oil & Natural Gas Corpn.[10] has firmly voiced its disapproval regarding the grant of any amount against price escalation, despite an explicit contractual embargo towards the agitation of such claims. Similarly, the Supreme Court in Continental Construction Co. Ltd. v. State of M.P.[11], struck down the award of an arbitrator for extra claim resulting due to price escalation by, inter alia, observing, “there are specific clauses referred to hereinbefore which barred consideration of extra claims in the event of price escalation”. At the same time, the Supreme Court in State of Orissa v. Sudhakar Das[12], considering a scenario of absence of escalation cost clause under a contract, inter alia, observed:

  1. It is not disputed that the arbitration agreement contained no escalation clause. In the absence of any escalation clause, an arbitrator cannot assume any jurisdiction to award any amount towards escalation. That part of the award which grants escalation charges is clearly not sustainable and suffers from a patent error. The decree, insofar as the award of escalation charges is concerned, cannot, therefore, be sustained.

Clearly, these precedents and the observations made therein are harmonious with the general principle of arbitration that the powers of an arbitrator are bounded within the contractual realms. Accordingly, in the event of an explicit prohibition under a contract pertaining to the grant of escalation charges, as a rule, or in the absence of any clause/term pertaining to such claims under an agreement, ordinarily, it would not be within the domain of an arbitrator to award any amount towards escalation.

However, it is to be noted that there have been several instances, wherein the courts, despite the absence of an explicit cause pertaining to the grant of escalation charge under an agreement, have favoured grant thereof, weighing the factors such as the; implicit and inherent meaning and interplay of various terms of/stipulations under the contract, lack of any prohibitive clause under contract to such conferment, facts and circumstances involved, equity, etc. In one such instance[13], the Supreme Court, while acknowledging that escalation is, “a normal incident arising out of gap of time in this inflationary age in performing any contract”, upheld an arbitral award which, inter alia, permitted/granted escalation cost despite the absence of an unequivocal provision/price escalation clause under arbitration agreement/ reference. Significantly, the reasons which governed the said conclusion of the Court, inter alia, were that since in the instant case, “[o]nce it was found that the arbitrator had jurisdiction to find that there was delay in execution of the contract due to the conduct of the respondent, the respondent was liable for the consequences of the delay, namely, increase in prices. Therefore, the arbitrator had jurisdiction to go into this question.” The said reasoning of the Court can be discerned in light of its earlier observation in Tarapore & Co. v. State of M.P.[14], inter alia, to the effect that even in the absence of any explicit contractual term, an arbitrator is within his power to exercise jurisdiction in cases where something follows as a necessary concomitant to what was agreed upon by parties under a contract. In fact, as per the Court,

“it cannot be held that the arbitrators had no jurisdiction to make the award because of lack of specific provision permitting the claim at hand. This does not conclude the matter. It has to be seen whether the term of the agreement permitted entertainment of the claim by necessary implication.”

Significantly, though, the Court dismissed the argument to the effect that whatever is not excluded specifically by the contract can be subject-matter of claim by a contractor on the ground that the same, “will mock at the terms agreed upon”, however, held, “Of course, if something flows as a necessary concomitant to what was agreed upon, courts can assume that too as a part of the contract between the parties.”

In another illustration, the Supreme Court in K.N. Sathyapalan v. State of Kerala[15], being specifically posed with the issue, “whether in the absence of any price escalation clause in the original agreement and a specific prohibition to the contrary in the supplemental agreement, the appellant could have made any claim on account of escalation of costs”, inter alia, observed:

  1. Ordinarily, the parties would be bound by the terms agreed upon in the contract, but in the event one of the parties to the contract is unable to fulfil its obligations under the contract which has a direct bearing on the work to be executed by the other party, the arbitrator is vested with the authority to compensate the second party for the extra costs incurred by him as a result of the failure of the first party to live up to its obligations. Significantly, these observations were, subsequently, reiterated and affirmed by the Court in Assam SEB Buildworth (P) Ltd.[16] Noticeably, a perusal of these dictates would demonstrate that the reasons for upholding the grant of escalation cost under the said circumstances appears to be premised on the principle of equity and the absence of any explicit embargo to the grant of escalation charges under a contract. Reasonably, under the circumstances where delay in performance of its obligations by one of the parties to a contract have a direct nexus on the deferment of contractual compliance by another, in the absence of an explicit prohibition, grant of escalation charges by an arbitrator may not only sensible, rather, equitable and fair.

In a related context the Supreme Court in Associated Construction v. Pawanhans Helicopters Ltd.[17], inter alia, dealt with the issue, “whether the contractual prohibitions regarding the grant of escalation cost can be extended beyond the duration of such an agreement”. Significantly, in the instant case, though, on one hand, there were specific clauses under the contract which explicitly prohibited claims pertaining to fluctuation in price and compensation for the subsequent increase in cost of material, etc., however, it was noted by the Court that the contracting parties had stipulated under their agreement that there, “could be a situation where the contractor had suffered loss for whatever reasons which was required to be reimbursed as per procedure prescribed in Clause 43. Clause 43(2) also specifically provided that Clause 43 was without prejudice to any other rights and remedies that the contractor might possess.” At the same time, while acknowledging that timely performance of contractual obligations was agreed to be the essence of the contract in this specific instance, the Court, opined, “even assuming for a moment that there could be no price escalation during the period of 4 months i.e., during the pendency of the contract, such embargo would not be carried beyond that period as time was of the essence of the contract.” Accordingly, the Court approved the grant of additional claims towards escalation cost/ charges, in favour of one of the participants to the said contract, against the work performed by it beyond the agreed term/duration, for the reasons of delay solely attributable to the conduct of the other party. Significantly, the said remarks are in stark contrast with the  Court’s observations in New India Civil Erectors (P) Ltd. case[18], inter alia, to the effect:

  1. …stipulation provides clearly that there shall be no escalation on any ground whatsoever and the said prohibition is effective till the completion of the work. The learned arbitrators, could not therefore have awarded any amount on the ground that the appellant must have incurred extra expense in carrying out the construction after the expiry of the original contract period … Merely because time was made the essence of the contract and the work was contemplated to be completed within 15 months, it does not follow that the aforesaid stipulation was confined to the original contract period.

Notably, though, the Supreme Court in Associated Construction case did not have an occasion to deal with its earlier decision in New India Civil Erectors (P) Ltd. case, however, there are certain explicit distinguishing features of these precedents. Firstly, in the former case, the delay in performance of contract by the claimant was attributable due to the defaults committed by the other contracting party, which was not the situation in latter. At the same time, though, in Associated Construction case, the claims for escalation cost beyond the period of contract were held to be justified on a general clause/term regarding reimbursement of losses under the contract involved, however, no such similar clause was cited/noted by the Court in New India Civil Erectors (P) Ltd. case. Nevertheless, it would be an appreciated stride, in case, the extraneous/illusive conflict between these dictates is resolved by a larger Bench of the Supreme Court.

Determinately, resolutions pertaining to the grant or refusal of escalation cost/charges, akin to other claims, inter alia, revolve on[19], “the construction of the contract in that case, the evidence placed before the arbitrator and other facts and circumstances of the case.” Undoubtedly, the grant of escalation cost in utter negation of an explicit contractual prohibition to the said effect, contradicts the fundamental and core principles of arbitration and the jurisdiction of an arbitrator. However, in contrast, failure of an arbitrator to exercise its authority to grant such costs/in appropriate cases/instances, where no contractual prohibitions exist, would certainly negate the principles of justice, equity and fairness. It is trite law[20] that that, though, an arbitrator is required to decide on issues within contractual terms, however, “if an arbitrator construes a term of the contract in a reasonable manner” that, cannot, by in itself become a reason for setting aside of an arbitral award. Consequently, while roving through the rugged terrains of arbitral proceedings, an arbitrator is required to not only adopt an approach of caution and circumspection, rather, must be equipped with a thorough knowledge of law and skills to appreciate the contractual terms in their exact spirit and intent, in order to establish an equilibrium between divergent assertions. Further, it is quite understandable that it is not enough that an arbitrator does not transgresses his contractually defined restraints, rather, must have astuteness to appreciate an agreement in its true form so as to not out rightly negate claims, which are necessarily concomitant to such agreements and at the same time imminent, valid, just and equitable.


Advocate, Supreme Court and High Court(s), e-mail: abhigoyal85@gmail.com.

[1] HMJ V. Ramasubramanian in 4G Identity Solutions (P) Ltd. v. Bloom Solutions (P) Ltd., 2018 SCC OnLine Hyd 22.

[2] (1992) 1 SCC 508.

[3] (2016) 3 SCC 619.

[4] Refer to State of J&K v. Dev Dutt Pandit, (1999) 7 SCC 339.

[5] Refer to S. 7(1) of the Arbitration and Conciliation Act, 1996.

[6] Refer to Rukmanibai Gupta v. Collector, (1980) 4 SCC 556.

[7] State of Rajasthan v. Nav Bharat Construction Co., (2006) 1 SCC 86.

[8] Refer to Bharat Coking Coal Ltd. v. Annapurna Construction, (2003) 8 SCC 154.

[9] Army Welfare Housing Organisation v. Sumangal Services (P) Ltd., (2004) 9 SCC 619.

[10] (1997) 11 SCC 75.

[11] (1988) 3 SCC 82.

[12] (2000) 3 SCC 27.

[13] P.M. Paul v. Union of India, 1989 Supp (1) SCC 368 [Refer also to Food Corporation of India v. A.M. Ahmed & Co., (2006) 13 SCC 779].

[14] (1994) 3 SCC 521.

[15] (2007) 13 SCC 43.

[16] (2017) 8 SCC 146.

[17] (2008) 16 SCC 128.

[18] (1997) 11 SCC 75.

[19] Refer to NTPC v. Deconar Services (P) Ltd., 2021 SCC OnLine SC 498

[20] Refer to Associate Builders v. DDA, (2015) 3 SCC 49.

Case BriefsSupreme Court

Supreme Court: The bench of Ashok Bhushan and R. Subhash Reddy*, JJ has held that the Micro, Small and Medium Enterprises Development Act, 2006, being a special Statute, will have an overriding effect vis-à-vis Arbitration and Conciliation Act, 1996, which is a general Act. Hence, even if there is an agreement between the parties for resolution of disputes by arbitration, if a seller is covered by Micro, Small and Medium Enterprises Development Act, 2006, the seller can certainly approach the competent authority to make its claim. Further, if the counter-claim made by the buyer in the proceedings arising out of claims made by the seller is not allowed, it may lead to parallel proceedings before the various fora.

The Court, held,

“When there is a provision for filing counter-claim and set-off which is expressly inserted in Section 23 of the 1996 Act, there is no reason for curtailing the right of the respondent for making counter-claim or set-off in proceedings before the Facilitation Council.”

Scheme of the Acts

  • As per Section 18(3) of the 2006 Act, when the conciliation initiated under sub-section (2) of Section 18 of the said Act is not successful, the Council shall either itself take up the dispute for arbitration or refer to any institution for arbitration.
  • Further, Section 18(3) of the said Act also makes it clear that the provisions of 1996 Act are made applicable as if there is an agreement between the parties under sub-section (1) of Section 7 of the 1996 Act.
  • The obligations of the buyer to make payment, and award of interest at three times of the bank rate notified by Reserve Bank in the event of delay by the buyer and the mechanism for recovery and reference to Micro and Small Enterprises Facilitation Council and further remedies under the 2006 Act for the party aggrieved by the awards, are covered by Chapter V of the 2006 Act.
  • The provisions of Section 15 to 23 of the Act are given overriding effect notwithstanding anything inconsistent therewith contained in any other law for the time being in force.
  • From the Statement of Objects and Reasons also it is clear that it is a beneficial legislation to the small, medium and micro sector.
  • The Arbitration and Conciliation Act, 1996 is a general law whereas the Micro, Small and Medium Enterprises Development Act, 2006 is a special beneficial legislation which is intended to benefit micro, small and medium enterprises covered by the said Act.
  • The Act of 2006 contemplates a statutory arbitration when conciliation fails. A party which is covered by the provisions of 2006 Act allows a party to apply to the Council constituted under the Act to first conciliate and then arbitrate on the dispute between it and other parties.

Fundamental differences in the settlement mechanism under the 2006 Act and the 1996 Act

  • The Council constituted under the 2006 Act to undertake mandatory conciliation before the arbitration which is not so under the 1996 Act.
  • In the event of failure of conciliation under the 2006 Act, the Council or the centre or institution is identified by it for arbitration. The 1996 Act allows resolution of disputes by agreed forum.
  • In the event of award in favour of seller and if the same is to be challenged, there is a condition for pre-deposit of 75% of the amount awarded. Such is not the case in the 1996 Act.

Why the counter-claim should be allowed?

“When Section 18(3) makes it clear that in the event of failure by the Council under Section 18(2) if proceedings are initiated under Section 18(3) of the 1996 Act, the provisions of 1996 Act are not only made applicable but specific mention is made to the effect as if the arbitration was in pursuance to an arbitration agreement referred to in sub-section (1) of Section 7 of the 1996 Act. When there is a provision for filing counter-claim and set-off which is expressly inserted in Section 23 of the 1996 Act, there is no reason for curtailing the right of the respondent for making counter-claim or set-off in proceedings before the Facilitation Council.”

The Court hence, noticed that if the counter-claim made by the buyer in the proceedings arising out of claims made by the seller is not allowed, it may lead to parallel proceedings before the various fora.

“When such beneficial provisions are there in the special enactment, such benefits cannot be denied on the ground that counter-claim is not maintainable before the Council.”

On one hand, in view of beneficial legislation, seller may approach the Facilitation Council for claims, in the event of failure of payment by the buyer under provisions of 2006 Act, at the same time, if there is no separate agreement between the parties for any arbitration in a given case, buyer may approach the civil court for making claims against the seller, or else if there is an agreement between the parties for arbitration in the event of dispute between the parties, parties may seek appointment of arbitrator. At the same time if the seller is covered by definition under micro, small and medium enterprises, seller may approach the Facilitation Council for making claims under the provisions of Micro, Small and Medium Enterprises Development Act, 2006. In such event, it may result in conflicting findings, by various forums.

“If any agreement between the parties is there, same is to be ignored in view of the statutory obligations and mechanism provided under the 2006 Act. Further, apart from the provision under Section 23(2A) of the 1996 Act, it is to be noticed that if counter-claim is not permitted, buyer can get over the legal obligation of compound interest at 3 times of the bank rate and the ―75% pre-deposit contemplated under Sections 16 and 19 of the MSMED Act.”

Further, when the provisions of Sections 15 to 23 are given overriding effect under Section 24 of the Act and further the 2006 Act is a beneficial legislation, even the buyer, if any claim is there, can very well subject to the jurisdiction before the Council and make its claim/ counter claim as otherwise it will defeat the very objects of the Act which is a beneficial legislation to micro, small and medium enterprises.

Even in cases where there is no agreement for resolution of disputes by way of arbitration, if the seller is a party covered by Micro, Small and Medium Development Act, 2006, if such party approaches the Council for resolution of dispute, other party may approach the civil court or any other forum making claims on the same issue.

“If two parallel proceedings are allowed, it may result in conflicting findings.”

[Silpi Industries v. Kerala State Road Transport Corporation, 2021 SCC OnLine SC 439, decided on 29.06.2021]


*Judgment by: Justice R. Subhash Reddy

Know Thy Judge| Justice R. Subhash Reddy

For appellants: Senior Advocates V. Giri, P.B. Suresh

For Kerala State Road Transport Corporation: Aishwarya Bhati, ASG

For Respondent: Basava Prabhu Patil

Alternate Dispute ResolutionCase BriefsHigh Courts

Delhi High Court: Jayant Nath, J., observed that the assignment of the trademark is by a contract and not by a statutory act. It does not involve any exercise of sovereign functions of the State.

Defendant filed an application under Section 8 of the Arbitration and Conciliation Act, 1996.

Master Long Term Supply Agreement 

Plaintiff submitted that the parties had entered into Master Long Term Supply Agreement by which the defendant on an exclusive basis had supplied to the plaintiff exclusive brands of the defendant “Golden’s Gold Flake, Golden Classic, Taj Chhap, Panama and Chancellor”.

The above-stated brands were being sold, supplied and distributed exclusively in the domestic and international market.

Trademark Agreement and Amendment Agreement

Later, plaintiff entered into a trademark agreement and amendment agreement and was granted exclusive non-assignable, non-transferable license to manufacture the defendant’s product to be manufactured exclusively at the plaintiff’s factory at Noida and were to be marketed and distributed.

Plaintiff submitted that despite huge capital and operational expenditure made by the plaintiff to increase the availability of defendant’s product, the defendant arbitrarily cancelled the trademark license agreement.

A termination notice by the defendant was issued. Since the commercial production had not started the agreement was terminated with immediate effect.

By another termination notice, the defendant company stated that timely payment was not made in terms of the agreement and hence plaintiff was to have no right to manufacture and sell the exclusive brands of the defendant in the market from that point onwards.

In view of the above-stated circumstances, the present suit was filed.

It was prayed that the disputes between the plaintiff and the defendant raised be referred to a sole Arbitrator.

Analysis, Law and Decision

Bench firstly noted the legal position by referring to Section 8 of Arbitration and Conciliation Act, further Supreme Court’s decision in Vidya Drolia v. Durga Trading Corporation, (2021) 2 SCC 1, was referred.

As per the above decision, actions in rem including grant and issue of patents and registration of trademarks are exclusive matters falling within the sovereign and government functions and have erga omnes effect. Such grants confer monopolistic rights, and they are non-arbitrable.

Further, reference to the decision of the co-ordinate Bench of this Court was made in Hero Electric Vehicles (P) Ltd. v. Lectro E-Mobility (P) Ltd., 2021 SCC OnLine Del 1058 as it applies on all fours to the facts of the present matter.

Court held that the dispute did not pertain to infringement of a trademark on the ground that the defendants are using a deceptively similar trademark. The ground was that the right to use the trademark was conferred by a particular agreement on a particular group of the family. Even if the plaintiff in that case were to rely on any provisions of the Trademark Act the essential infraction as allegedly committed by the defendant was not the provisions of the Trademark Act but the provisions of the agreements in question. The dispute which emanates out of the agreement between the parties was held to be arbitrable. The court also clarified that the controversy in the said case did not relate to grant or registration of trademarks. The said trademarks stood granted and registered. It was also held that assignment of a trademark is by a contract and is not a statutory fiat. It does not involve any exercise of sovereign functions.

Primarily the crux of the issue was that the dispute was relating to interpretation of the terms of the Trademark Agreement and amendment agreement executed between parties and whether the termination of the said agreements by the defendant and cancellation of the assignment of the trademark in favour of the plaintiffs was legal and valid.

“right that is asserted by the plaintiff is not a right that emanates from the Trademark Act but a right that emanates from the Trademark Agreement and the amendment agreement.”

In the present matter, Bench held that it cannot be said that the disputes are not arbitrable.

In view of the above discussion, the application was allowed. [Golden Tobie (P) Ltd. v. Golden Tobacco Ltd., 2021 SCC OnLine Del 3029, decided on 4-06-2021]


Advocates before the Court:

For the plaintiff: Mr. Kailash Vasdev, Sr. Adv. with Ms. Priyadarshi Manish and Ms. Anjali J. Manish, Advs.

For the Defendant: Mr. Sumeet Verma, Mr. Vijay Kumar Wadhwa and Mr. Maninder Pratap Singh, Advocates.

Alternate Dispute ResolutionCase BriefsHigh Courts

Delhi High Court: J.R. Midha, J., in view of serious doubts on the independence of sole arbitrator as named in the arbitration agreement, appointed another independent arbitrator.

Petitioner sought appointment of an arbitrator under Section 11 of the Arbitration and Conciliation Act.

Parties had agreed for reference of disputes to the sole arbitrator, Sachin Dev Sharma, Chartered Accountant as per the arbitration agreement between them.

Petitioners Counsel submitted that the sole arbitrator was not competent to act as an arbitrator in terms of Section 12(5) read with 7th Schedule of the Arbitration and Conciliation Act as the named arbitrator was a consultant/advisor to the respondent and a director and shareholder in PEB Steel Lloyd (India) Ltd.

This Court vide an Order in March had directed the arbitrator to file an affidavit with respect to his relationship between the parties in terms of the Seventh Schedule under Section 12(5) of the Arbitration and Conciliation Act, wherein he admitted that he was an independent director in PEB Steel Lloyd (India) Ltd. in which respondent 1 was also a director.

Further, respondent 1 submitted that the petitioner had agreed to the named arbitrator cannot wriggle out of the arbitration agreement.

High Court in view of the above submissions, held that it had serious doubt to the independence of named arbitrator and hence in the interest of justice it would be appropriate to appoint an independent arbitrator to adjudicate disputes between the parties.

Saurabh Kirpal, Senior Advocate was appointed as the sole arbitrator and was directed to ensure compliance with Section 12 of the Arbitration and Conciliation Act before commencing the arbitration. [Monica Khanna v. Mohit Khanna, 2021 SCC OnLine Del 3421, decided on 18-06-2021]


Advocates before the Court:

For the Petitioners: Abhay Mahajan, Advocate

For the Respondents: Amit Mishra, Advocate

Op EdsOP. ED.

A dynamic position of law has arrived at crossroads: whether confirming party/parties can be made a signatory to contract or not? This question is astonishing at first due to the complexities it holds. The legal precedence at this matter is highly conflicting. In this article we aim to clarify the position of non-signatories and also determine the criteria in which non-signatories can be made a party to the arbitration agreement.

The concept of confirming party

A confirming party is a concept present under the tripartite contract. The sole intention of the tripartite pact is for the third party to act as a confirming party. For instance: when a registered society is added as a third party to an agreement for the purchase and sale of a flat, it confirms the transaction and means that the society has no objection to transferring the flat in the buyer’s name.

Herein, there is a necessary question that need to be addressed here:

(1) Whether a confirming party would be bound by the terms of the contract and arbitration can be initiated against them in the capacity of non-signatory to the agreement?

In order to answer this question, we must refer some crucial case laws.

In Yogi Agarwal v. Inspiration Clothes & U,1 this court observed:

“When Sections 7 and 8 of the Act refer to the existence of an arbitration agreement between the parties, they necessarily refer to an arbitration agreement in regard to the current dispute between the parties or the subject-matter of the suit. It is fundamental that an arbitration provision, to constitute an arbitration agreement for the purposes of Sections 7 and 8 of the Act, should satisfy two conditions. Firstly, it should be between the parties to the dispute. Secondly, it should relate to or apply to the dispute.”2

Now, constructing the above, it is quintessential that the dispute must be between the parties and only applies to them. Although, confirming parties may sign the contract, in the capacity, as to verify the terms of the contract. However, the crux of an arbitration is a dispute and a dispute occurs between the interested parties who have rights and obligations under the arbitration agreement. A mere observer that verifies the terms of the arbitration agreement is not covered under Section 7(1) of the Arbitration and Conciliation Act, 1996, “all or certain disputes which have arisen or which may arise between them in respect of a defined legal relationship, whether contractual or not”.3

Here, reference must be made to S.N. Prasad v. Monnet Finance Ltd.,4 this Court held:

“There can be a reference to arbitration only if there is an arbitration agreement between the parties. If there is a dispute between a party to an arbitration agreement, with other parties to the arbitration agreement as also non-parties to the arbitration agreement, reference to arbitration appointment of arbitration can be only with respect to the parties to the arbitration agreement and not the non-parties… As there  was   no arbitration agreement between the parties, the impleading of the appellant as a respondent in the proceedings and the award against the appellant in such arbitration cannot be sustained.”5

The Supreme Court has held in Sukanya Holdings (P) Ltd. v. Jayesh H. Pandya,6

 “that a person who is not a party to the arbitration agreement, cannot be roped into the arbitration proceedings, roped into an application under Section 9″.7

After the above references, it may seem conflicting that the distinction made is between parties and non-parties to the contract. However, one may argue that confirming party may be said to a party. This is where the crucial concept of “proper party” comes into play.

Under Order 1 Rule 10(2) CPC:8 By the virtue of this provision, the court can at any point add or remove a plaintiff or defendant. Now, this can be done only on two grounds:

(i) if the said party is a necessary party; or

(ii) if the said party is a proper party.

An individual or a group of people ought to be a necessary party in the case that if they do not join the case, no effective degree can be passed, additionally the case would be dismissed.9  While, a “proper party” is not a necessary party, however, a person whose intervention will allow the court to completely, properly, and appropriately adjudicate all issues in question in the suit, even though he is not a party in favour of or against whom the judgment is to be rendered.10 In the circumstance where it is neither a necessary party nor a proper party, the court does not have the authority to compel him to testify against the plaintiff’s wishes.

Hence, now the argument stands at the point that, confirming party is in no way a necessary party as the dispute is not in relation to the confirming party. Moreover, a non-proper party cannot be made liable or hold rights, hence it cannot join the suit as a plaintiff or a defendant. Hence, the confirming party cannot under the law be called as a “proper party” or there cannot be an invocation of the Order 1 Rule 10(2) CPC.

The same argument was taken in Svogl Oil Gas & Energy Ltd. v. Comet Overseas (P) Ltd.,11 wherein the court accepted the respondent’s argument and disposed of the case. Additionally, in support of this heavy reliance must be placed on the decisions of K.K. Modi v. K.N. Modi12 and the judgment passed on 29-3-2011 by the Supreme Court of India in the matter of Deutsche Post Bank Home Finance Ltd. v. Taduri Sridhar,13 in support of his submissions to further substantiate the above argument.

Now, in Svogl Oil Gas case14 (supra) the court referred to Deutsche Post Bank15 (supra) said that the confirming parties to the agreement are neither proper nor necessary parties to the arbitration. Now, let us look at this case. In Deutsche Post Bank Home Finance Ltd. v. Taduri Sridhar16.

The Supreme Court ruled that only parties to the deal should participate in the Arbitral proceedings. During the arbitration hearings, the bank was not present, and the only two parties were the purchaser who received the loan and the developer. A home financing corporation (HFC) cannot be considered a party to arbitration in conflicts between the developer and the buyer of a house until the HFC signed the arbitration agreement. In this case, the buyer of the house and the developer had an arbitration agreement. In this case, an arbitration deal existed between the house buyer and the developer. The HFC was not involved in it. When a conflict emerged between the buyer and the developer, the buyer requested the appointment under the Arbitration and Conciliation Act from the Andhra Pradesh High Court. The buyer claimed that there exists a conspiracy between the HFC and the developer, so the High Court assigned an arbitrator and made the HFC a party to the agreement. The HFC filed an appeal with the Supreme Court, claiming that he was not a party to the buyer-developer deal. The Supreme Court agreed with this argument and decided to dismiss the HFC from the arbitration.17

The concept of group of company’s doctrine

While discussing this, the question that needs to be addressed here is can an arbitration agreement bound a non-signatory, and if so, then in what situation? In Sukanya Holdings (P) Ltd. v. Jayesh H. Pandya,18 the Supreme Court of India stated that:

“Causes of action against various parties cannot be separated in a single arbitration and that an arbitration arrangement can only bind the parties who have entered into it.”19

A non-signatory to the arbitration agreement can become a party to the arbitration agreement by applying the “group of companies” principle. This principle in Indian jurisprudence was explained in Mahanagar Telephone Nigam Ltd. v. Canara Bank20 the Supreme Court observed that:

10.5 The “group of companies” doctrine has been invoked by courts and tribunals in arbitrations, where an arbitration agreement is entered into by one of the companies in the group; and the non-signatory affiliate, or sister, or parent concern, is held to be bound by the arbitration agreement, if the facts and circumstances of the case demonstrate that it was the mutual intention of all parties to bind both the signatories and the non-signatory affiliates in the group.

The doctrine provides that a non-signatory may be bound by an arbitration agreement where the parent or holding company, or a member of the group of companies is a signatory to the arbitration agreement and the non-signatory entity on the group has been engaged in the negotiation or performance of the commercial contract, or made statements indicating its intention to be bound by the contract, the non-signatory will also be bound and benefitted by the relevant contracts.

10.6 The circumstances in which the “group of companies” doctrine could be invoked to bind the non-signatory affiliate of a parent company, or inclusion of a third party to an arbitration, if there is a direct relationship between the party which is a signatory to the arbitration agreement; direct commonality of the subject-matter; the composite nature of the transaction between the parties.

A “composite transaction” refers to a transaction which is interlinked in nature; or, where the performance of the agreement may not be feasible without the aid, execution, and performance of the supplementary or the ancillary agreement, for achieving the common object, and collectively having a bearing on the dispute.

10.7 The group of companies Doctrine has also been invoked in cases where there is a tight group structure with strong organisational and financial links, so as to constitute a single economic unit, or a single economic reality. In such a situation, signatory and non-signatories have been bound together under the arbitration agreement. This will apply in particular when the funds of one company are used to financially support or restructure other members of the group.21

From the abovementioned case, a non-signatory can be made a party to the agreement if the following conditions are satisfied:

(1) It has been identified that the parties agreed for the arbitration arrangement to include both the signatory and non-signatory group companies.

(2) The non-signatory signatory has a direct association with the signatory party, or the parties are engaged in the conduct of a composite contract, and the subject-matter is similar.

(3) Where it can be demonstrated that the signatory and non-signatory parties are part of a tight association, the courts can use the “group of companies” doctrine.

An additional reference must be made to a case which lays down some conditions for non-signatory:22

“A non-signatory or third-party could be subjected to arbitration without their prior consent, but this would only be in exceptional cases. The court will examine these exceptions from the touchstone of direct relationship to the party signatory to the arbitration agreement, direct commonality of the subject-matter and the agreement between the parties being a composite transaction. The transaction should be of a composite nature where performance of the mother agreement may not be feasible without aid, execution and performance of the supplementary or ancillary agreements, for achieving the common object and collectively having bearing on the dispute. Besides all this, the court would have to examine whether a composite reference of such parties would serve the ends of justice. Once this exercise is completed and the court answers the same in the affirmative, the reference of even non-signatory parties would fall within the exception afore discussed.”23

By referring to the abovementioned cases, it is crystal clear that a non-signatory can be bound by it even if they did not consent to the same, if there is a composite transaction between the party to the agreement and the non-party to the arbitration agreement, the non-signatory can be made bound by it by following the group of companies’ doctrine.

Conclusion

The concept of confirming party in regard to non-signatories is clarified from the viewpoint of existence of dispute between the parties. The relevant observation here to be made is that there is no existence of dispute between a confirming party and other parties. Moreover, in regard to group of companies’ doctrine, where there is a composite transaction, non-signatories may be bound by the arbitration agreement subject to the facts and circumstances of each case.


4th Year law student, UPES, Managing Editor, UPES Student Law Review, International Review of Dispute Resolution Founder, Legisnations.com

†† 4th Year law student, UPES.

1 (2009) 1 SCC 372

2 Ibid.

3 S. 7(1) of Arbitration and Conciliation Act, 1996.

4 (2011) 1 SCC 320

5 Ibid.

6 (2003) 5 SCC 531

7 Ibid.

8 Or. 1 R. 10(2) of Civil Procedure Code, 1908

9 United Provinces v. Atiqa Begum, 1940 SCC OnLine FC 11

10 Baluram v. P.Chellathangam, (2015) 13 SCC 579

11 2016 SCC OnLine Del 1093

12 (1998) 3 SCC 573

13 (2011) 11 SCC 375

14 2016 SCC OnLine Del 1093

15 (2011) 11 SCC 375

16 (2011) 11 SCC 375

17 2016 SCC OnLine Del 1093

18 (2003) 5 SCC 531

19 Ibid.

20 (2020) 12 SCC 767, 779

21 (2003) 5 SCC 531

22 Chloro Controls India (P) Ltd. v. Severn Trent Water Purification Inc., (2013) 1 SCC 641

23 Ibid.

Case BriefsHigh Courts

Delhi High Court: Jayant Nath, J., while addressing the matter stressed upon the essentiality of Novation and Arbitration Agreement.

Factual Matrix

The present application was filed under Section 8 of the Arbitration and Conciliation Act, 1996 read with Order 7 Rule 11 CPC for rejection of the plaint and referring the parties to the arbitration.

Plaintiff sought for the recovery of Rs 2,58,24,648 being refund of the available interest-free refundable security deposit. A decree of mandatory injunction was also sought to handover the movable of the plaintiff which has been stated to be illegally detained by the defendant.

Facts leading to the present matter

Vide a Lease Deed, the defendant leased to the plaintiff the office premises in Dehradun with 22 parking slots for 9 years. Simultaneously a maintenance agreement was also executed between the parties which was co-terminus with the lease deed for payment of fit out and maintenance charges for the said premises.

As per the deed, there was a lock-in period from 01-01-2017 to 31-12-2022.

Fresh Agreement

Further, as per the plaintiff, a fresh agreement was arrived at between the parties in respect of use and occupation of the said premises and maintenance.

Hence plaintiff’s case was that the Lease Deed and Maintenance Agreement stood substituted/novated on account of the said Fresh Agreement.

Later, plaintiff initiated negotiations with the defendant for a reduction of rentals and maintenance, however, the defendant did not budge. In fact, the defendant illegally disconnected the electricity connection of the rented premises as a means to coerce the plaintiff to make payments.

Termination of Fresh Agreement

In March 2020 the plaintiff sent out a legal notice to the defendant terminating the Fresh Agreement. The said legal notice also sought a grant of access to the authorised representative of the plaintiff to remove the movable and the server. Hence, the present suit was filed.

Analysis, Law and Decision

Bench noted that in the original lease deed and the maintenance agreement, the parties agreed to settle their disputes through arbitration.

Counsel for the plaintiff pointed out that the plaintiff and the defendant at the time of execution of the Lease Deed and the Maintenance Agreement were family-held companies. The family exited from the plaintiff company sometimes in September 2018 and new management took over charge of the plaintiff company. It was strongly urged that there was a novation of Agreement and the original Lease Deed and the Maintenance Agreement dated 21-02-2017 stood superseded and novated in view of the terms and conditions settled upon in the emails dated 26.09.2018 and 15.10.2018. In the novated contract, there was no arbitration agreement and hence, the present application is misplaced

Novation of Contract

Court observed that the correspondence exchanged between the parties on the basis of which it was pleaded by the plaintiff that there was a novation of a contract.

Now the question was, whether it could be said that on account of the exchange of the above-stated communication, the parties rescinded the old agreement being the registered Lease Deed and the Maintenance Agreement of the same and completely novated the contract.

In the above context, reference was made to Section 62 of the Contract Act:

“62. Effect of novation, rescission, and alteration of contract — If the parties to a contract agree to substitute a new contract for it, or to rescind or alter it, the original contract need not be performed.”

 Supreme Court’s decision in Lata Construction v. Dr Rameshchandra Ramnikalal Shah, (2000) 1 SCC 586 was also cited.

A Novation takes place only when there is a complete substitution of a new contract in place of the old.

 Bench further examined the scope of Section 8 of the Arbitration Act and referred to the Supreme Court decision in Vidya Drolia v. Durga Trading Corpn.,(2019) 20 SCC 406

 Bench noted that for rejection of a Section 8 application, a party has to make out a prima facie case of non-existence of valid arbitration agreement, by summarily portraying a strong case.  Court should refer the matter if the validity of the arbitration agreement cannot be determined on a prima facie basis.

Conclusion

High Court opined that in light of the facts and circumstances of the present case prima facie it could not be said that there was a completely new contract and the old registered lease deed read with Maintenance Agreement were novated and substituted by a completely new contract.

Defendant’s email did not specifically state that all the terms and conditions stood superseded or novated.

Hence, Court found that the present issue required deeper consideration and would be best left to the arbitral tribunal to adjudicate upon.

Court appointed Justice G.S. Sistani as the Sole Arbitrator to adjudicate the dispute between the parties. [Knowledge Podium Systems (P) Ltd. v. S.M. Professional Services (P) Ltd., 2021 SCC OnLine Del 136, decided on 25-01-2021]

Case BriefsSupreme Court

Supreme Court: Three days after the Court overruled the ratio in Himangni Enterprises v. Kamaljeet Singh Ahluwalia, (2017) 10 SCC 706 wherein it was held that landlord-tenant disputes governed by the provisions of the Transfer of Property Act, 1882, are not arbitrable as this would be contrary to public policy, the 3-judge bench of SA Bobde, CJ and AS Bopanna* and V. Ramasubramanian, JJ referred to the law laid down in Vidya Drolia v. Durga Trading Corporation2020 SCC OnLine SC 1018 and explained what makes the lease disputes arising under the Transfer of Property Act, 1882 arbitrable and those under Rent Acts, non-arbitrable.

Here’s the explainer by the Court:

Disputes arising under Transfer of Property Act

Section 111, 114 and 114A of the TP Act indicate the manner in which the determination of lease would occur, which also includes determination by forfeiture due to the acts of the lessee/tenant in breaking the express condition   agreed between the parties or provided in law. The breach and the consequent forfeiture could also be with respect to nonpayment of rent.

In such circumstance where the lease is determined by forfeiture and the lessor sues to eject the lessee and, if, at the hearing of the suit, the lessee pays or tenders to the lessor the rent in arrear, Section 114 of TP Act provides that the Court instead of passing a decree for ejectment may pass an order relieving the lessee against the forfeiture due to which the lessee will be entitled to hold the property leased as if the forfeiture had not occurred.

Under Section 114A of the TP Act a condition for issue of notice prior to filing suit of ejectment is provided so as to enable the lessee to remedy the breach.

“No doubt the said provisions provide certain protection to the lessee/tenant before being ejected from the leased property. In our considered view, the same cannot be construed as a statutory protection nor as a hard and fast rule in all cases to waive the forfeiture. It is a provision enabling exercise of equitable jurisdiction in appropriate cases as a matter of discretion.”

Such equitable protection does not mean that the disputes relating to those aspects between the landlord and the tenant is not arbitrable and that only a Court is empowered to waive the forfeiture or not in the circumstance stated in the provision.

When the disputes arise between the landlord and tenant with regard to determination of lease under the TP Act, the landlord to secure possession of the leased property in a normal circumstance is required to institute a suit in the Court which has jurisdiction. However, if the parties in the contract of lease or in such other manner have agreed upon the alternate mode of dispute resolution through arbitration the landlord would be entitled to invoke the arbitration clause and make a claim before the Arbitrator.

Even in such proceedings, if the circumstances as contained in Section 114 and 114A of TP Act arise, it could be brought up before the Arbitrator who would take note of the same and act in accordance with the law qua passing the award.

“If in the arbitration proceedings the landlord has sought for an award of ejectment on the ground that the lease has been forfeited since the tenant has failed to pay the rent and breached the express condition for payment of rent or such other breach and in such proceedings the tenant pays or tenders the rent to the lessor or remedies such other breach, it would be open for the Arbitrator to take note of Section 114, 114A of TP Act and pass appropriate award in the nature as a Court would have considered that aspect while exercising the discretion.”

Disputes arising under Rent Acts

The disputes arising under the Rent Acts are not arbitrable as notwithstanding the terms and conditions entered into between the landlord and tenant to regulate the tenancy, if the eviction or tenancy is governed by a special statute, namely, the Rent Act the premises being amenable to the provisions of the Act would also provide statutory protection against eviction and the courts specified in the Act alone will be conferred jurisdiction to order eviction or to resolve such other disputes.

“In such proceedings under special statutes the issue to be considered by the jurisdictional court is not merely the terms and conditions entered into between the landlord and tenant but also other aspects such as the bonafide requirement, comparative hardship etc. even if the case for eviction is made out.”

In such circumstance, the Court having jurisdiction alone can advert into all these aspects as a statutory requirement and, therefore, such cases are not arbitrable. The same is not the position in matters relating to the lease/tenancy which are not governed under the special statutes but under the TP Act.

Conclusion

Insofar as eviction or tenancy relating to matters governed by special statutes where the tenant enjoys statutory protection against eviction whereunder the Court/Forum is specified and conferred jurisdiction under the statute alone can adjudicate such matters. Hence in such cases the dispute is non-arbitrable.

If the special statutes do not apply to the premises/property and the lease/tenancy created thereunder as on the date when the cause of action arises to seek for eviction or such other relief and in such transaction if the parties are governed by an Arbitration Clause; the dispute between the   parties is arbitrable and there shall be no impediment whatsoever to invoke the Arbitration Clause.

[Suresh Shah v. Hipad Technology Pvt. Ltd., 2020 SCC OnLine SC 1038, decided on 18.12.2020]


*Justice AS Bopanna has penned this judgment

For petitioner: Advocate Vikas Dhawan

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

Case BriefsSupreme Court

Supreme Court: The 3-judge bench of NV Ramana*, Sanjiv Khanna** and Krishna Murari, JJ has overruled the ratio in Himangni Enterprises v. Kamaljeet Singh Ahluwalia, (2017) 10 SCC 706 wherein it was held that landlord-tenant disputes governed by the provisions of the Transfer of Property Act, 1882, are not arbitrable as this would be contrary to public policy.

Are Landlord-tenant disputes arbitrable?

“Landlord-tenant disputes are arbitrable as the Transfer of Property Act does not forbid or foreclose arbitration. However, landlord-tenant disputes covered and governed by rent control legislation would not be arbitrable when specific court or forum has been given exclusive jurisdiction to apply and decide special rights and obligations. Such rights and obligations can only be adjudicated and enforced by the specified court/forum, and not through arbitration.”

  • Landlord-tenant disputes are not actions in rem but pertain to subordinate rights in personam that arise from rights in rem. Such actions normally would not affect third-party rights or have erga omnes affect or require centralized adjudication.
  • An award passed deciding landlord-tenant disputes can be executed and enforced like a decree of the civil court.
  • Landlord-tenant disputes do not relate to inalienable and sovereign functions of the State. The provisions of the Transfer of Property Act do not expressly or by necessary implication bar arbitration.
  • Transfer of Property Act, like all other Acts, has a public purpose, that is, to regulate landlord-tenant relationships and the arbitrator would be bound by the provisions, including provisions which enure and protect the tenants.

A fourfold test for determining non-arbitrability of a dispute

(1) when cause of action and subject matter of the dispute relates to actions in rem, that do not pertain to subordinate rights in personam that arise from rights in rem.

(2) when cause of action and subject matter of the dispute affects third party rights; have erga omnes effect; require centralized adjudication, and mutual adjudication would not be appropriate and enforceable;

(3) when cause of action and subject matter of the dispute relates to inalienable sovereign and public interest functions of the State and hence mutual adjudication would be unenforceable; and

(4) when the subject-matter of the dispute is expressly or by necessary implication non-arbitrable as per mandatory statute(s).

However, these tests are not watertight compartments; they dovetail and overlap, albeit when applied holistically and pragmatically will help and assist in determining and ascertaining with great degree of certainty when as per law in India, a dispute or subject matter is non-arbitrable. Only when the answer is affirmative that the subject matter of the dispute would be non-arbitrable.

Instances of Non-arbitrable disputes

  • Insolvency or intracompany disputes
  • Grant and issue of patents and registration of trademarks
  • Criminal cases
  • Matrimonial disputes relating to the dissolution of marriage, restitution of conjugal rights etc.
  • Probate, testamentary matter etc.
  • Allegations of fraud can be made a subject matter of arbitration when they relate to a civil dispute. This is subject to the caveat that fraud, which would vitiate and invalidate the arbitration clause, is an aspect relating to non-arbitrability.
  • Disputes which are to be adjudicated by the DRT under the DRT Act.

When can the issue of non-arbitrability be raised?

  1. Before the court on an application for reference under Section 11 or for stay of pending judicial proceedings and reference under Section 8 of the Arbitration Act;
  2. Before the arbitral tribunal during the course of the arbitration proceedings; or
  3. Before the court at the stage of the challenge to the award or its enforcement.

‘Existence of an arbitration agreement’ – Meaning

“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.”

Hence, the phrase ‘existence of an arbitration agreement’ in Section 11 of the of the Arbitration and Conciliation Act, 1996, would include aspect of validity of an arbitration agreement, albeit the court at the referral stage would apply the prima facie test. In cases of debatable and disputable facts, and good reasonable arguable case, etc., the court would force the parties to abide by the arbitration agreement as the arbitral tribunal has primary jurisdiction and authority to decide the disputes including the question of jurisdiction and non-arbitrability.

Who decides arbitrability?

The general rule and principle, in view of the legislative mandate clear from the amendments to the of the Arbitration and Conciliation Act, 1996 by Act 3 of 2016 and Act 33 of 2019, and the principle of severability and competence-competence, is that the arbitral tribunal is the preferred first authority to determine and decide all questions of non-arbitrability. The court has been conferred power of “second look” on aspects of nonarbitrability post the award in terms of sub-clauses (i), (ii) or (iv) of Section 34(2)(a) or sub-clause (i) of Section 34(2)(b) of the Arbitration Act.

Judicial Review- Scope

Scope of judicial review and jurisdiction of the court under Section 8 and 11 of the Arbitration Act is identical but extremely limited and restricted in order to check and protect parties from being forced to arbitrate when the matter is demonstrably ‘non-arbitrable’ and to cut off the deadwood.

Rarely as a demurrer the court may interfere at the Section 8 or 11 stage when it is manifestly and ex facie certain that the arbitration agreement is non-existent, invalid or the disputes are non-arbitrable, though the nature and facet of non-arbitrability would, to some extent, determine the level and nature of judicial scrutiny.

The court by default would refer the matter when

  • contentions relating to non-arbitrability are plainly arguable;
  • consideration in summary proceedings would be insufficient and inconclusive;
  • facts are contested;
  • 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.”

Justice NV Ramana, writing a separate but concurring opinion said

“Courts, while analyzing a case under Section 8, may choose to identify the issues which require adjudication pertaining to the validity of the arbitration agreement. If the Court cannot rule on the invalidity of the arbitration agreement on a prima facie basis, then the Court should stop any further analysis and simply refer all the issues to arbitration to be settled.”

He further states that the scope of the Court to examine the prima facie validity of an arbitration agreement includes only:

  1. Whether the arbitration agreement was in writing?
  2. Whether the arbitration agreement was contained in exchange of letters, telecommunication etc?
  3. Whether the core contractual ingredients qua the arbitration agreement were fulfilled?
  4. On rare occasions, whether the subject-matter of dispute is arbitrable?

[Vidya Drolia v. Durga Trading Corporation, 2020 SCC OnLine SC 1018, decided on 14.12.2020]


*Justice NV Ramana penned a concurring opinion.

**Justice Sanjiv Khanna penned the judgment. 

For petitioners: Senior Counsels K. V. Vishwanathan, Manoj Swarup, Gopal Shankarnarayan

For Respondents: Senior Counsel Nakul Dewan and counsel Sourav Agarwal

Op EdsOP. ED.

Issue

Can a court grant interim reliefs/protections in accordance with Section 9 of the Arbitration and Conciliation Act, 1996 in a dispute arising out of an agreement that has not been duly stamped in accordance with the provisions of the  Stamp Act, 1899?

Analysis

1. Section 9 of the Arbitration and Conciliation Act 1996[1] (“the A&C Act”) is in many ways, similar to Article 9 of the United Nations Commission on International Trade Law’s Model Law on International Commercial Arbitration[2] (“the UNCITRAL Model Law”). However, in order to invoke the jurisdiction of our Courts in accordance with Section 9 of the A&C Act mandates that an applicant ought to be ‘party’ to an ‘arbitration agreement’. While this does sound fairly simple to comprehend at first blush, the issue at hand requires context via views taken by our courts in this regard and even vis-à-vis existing legislation i.e. the Stamp Act, 1899[3] (“the Stamp Act”) and even the  Contract Act, 1872[4] (“the Contract Act”). Before addressing the issue, it is of relevance to understand the scope of Section 9, as has been held by the Supreme Court before looking into the jurisprudence of stamping vis-à-vis the A&C Act.

2. Jurisprudence of the Scope of Section 9 of the A&C Act

2.1 In Sundaram Finance Ltd. v. NEPC India Ltd.[5] (Sundaram Finance), the Supreme Court inter alia dealt with the scope and ambit of Section 9 of the A&C Act by observing that interim protections granted by a Court in proceedings under Section 9 do not imply a waiver of arbitral proceedings, especially considering the language used in Section 9, which has been inspired by Article 9 of the UNCITRAL Model Law. The Court held that the phrase “before or during arbitral proceedings” as used in Section 9 of the A&C Act and Article 9 of the UNCITRAL Model Law would imply that arbitral proceedings are, in a sense, separate from proceedings under Section 9 and can be initiated or continued regardless of the stage of proceedings under Section 9. The relevant portions of Sundaram Finance[6] have been culled out and reproduced herein below:

14. Section 9 of the [A&C] Act corresponds to Article 9 of the UNCITRAL Model Law which is as follows:

                      *                                          *                                                      *

This article recognises, just like Section 9 of the [A&C] Act, a request being made before a court for an interim measure of protection before arbitral proceedings. It is possible that in some countries, if a party went to the court seeking interim measure of protection, that might be construed under the local law as meaning that the said party had waived its right to take recourse to arbitration. Article 9 of the UNCITRAL Model Law seeks to clarify that merely because a party to an arbitration agreement requests the court for an interim measure ‘before or during arbitral proceedings’, such recourse would not be regarded as being incompatible with an arbitration agreement. To put it differently, the arbitration proceedings can commence and continue notwithstanding a party to the arbitration agreement having approached the court for an order for interim protection. The language of Section 9 of the [A&C] Act is not identical to Article 9 of the UNCITRAL Model Law but the expression ‘before or during arbitral proceedings’ used in Section 9 of the [A&C] Act seems to have been inserted with a view to give it the same meaning as those words have in Article 9 of the UNCITRAL Model Law. It is clear, therefore, that a party to an arbitration agreement can approach the court for interim relief not only during the arbitral proceedings but even before the arbitral proceedings. To that extent, Section 9 of the [A&C] Act is similar to Article 9 of the UNCITRAL Model Law.

2.2 In Firm Ashok Traders v. Gurumukh Das Saluja [7] (Ashok Traders), the Supreme Court whilst relying on Sundaram Finance[8], reiterated that the provisions of Section 9 of the A&C Act were similar to Article 9 of the UNCITRAL Model Law. However, and more interestingly, the Court held that the initiation of proceedings under Section 9 of the A&C Act does not arise out of a contract and that the litigant invoking such jurisdiction must only be able to ascertain his locus standi by way of an arbitration agreement. The relevant portions of Ashok Traders[9] have been culled out and reproduced hereinbelow:

13. The A&C Act […] is a long leap in the direction of alternate dispute resolution systems. It is based on UNCITRAL Model. The decided cases under the preceding Act of 1940 have to be applied with caution for determining the issues arising for decision under the [A&C] Act. An application under Section 9 under the scheme of the A&C Act is not a suit. Undoubtedly, such application results in initiation of civil proceedings but can it be said that a party filing an application under Section 9 of the Act is enforcing a right arising from a contract? ‘Party’ is defined in clause (h) of sub-section (1) of Section 2 of the A&C Act to mean ‘a party to an arbitration agreement’. So, the right conferred by Section 9 is on a party to an arbitration agreement. The time or the stage for invoking the jurisdiction of court under Section 9 can be: (i) before, or (ii) during arbitral proceedings, or (iii) at any time after the making of the arbitral award but before it is enforced… With the pronouncement of this Court in [Sundaram Finance][10] the doubts stand cleared and set at rest and it is not necessary that arbitral proceedings must be pending or at least a notice invoking arbitration clause must have been issued before an application under Section 9 is filed … suffice it to say that the right conferred by Section 9 cannot be said to be one arising out of a contract. The qualification which the person invoking jurisdiction of the court under Section 9 must possess is of being a ‘party’ to an arbitration agreement. A person not party to an arbitration agreement cannot enter the court for protection under Section 9. This has relevance only to his locus standi as an applicant. This has nothing to do with the relief which is sought from the court or the right which is sought to be canvassed in support of the relief. The reliefs which the court may allow to a party under clauses (i) and (ii) of Section 9 flow from the power vesting in the court exercisable by reference to ‘contemplated’, pending or ‘completed’ arbitral proceedings. The court is conferred with the same power for making the specified orders as it has for the purpose of an in relation to any proceedings before it though the venue of the proceedings in relation to which the power under Section 9 is sought to be exercised is the Arbitral Tribunal. Under the scheme of the A&C Act, the arbitration clause … constitutes an agreement by itself. In short, filing an application by a party by virtue of its being a party to an arbitration agreement is for securing a relief which the court has power to grant before, during or after arbitral proceedings by virtue of Section 9 of the A&C Act. The relief sought for in an application under Section 9 of the A&C Act is neither in a suit not a right arising from a contract … the court under Section 9 is only formulating interim measures so as to protect the right under adjudication before the Arbitral Tribunal from being frustrated

(emphasis supplied)

2.3 In SBP and Co. v. Patel Engineering Ltd. [11] (SBP), the 7-Judge Constitution Bench of the Supreme Court inter alia observed (per majority)[12] that litigants do invoke the jurisdiction of courts under Section 9 of the A&C Act prior to the commencement of arbitral proceedings in order obtain interim reliefs/protections. The judgment per majority further observed that in proceedings under Section 9 of the A&C Act, a Court would have to inter alia decide whether the arbitration agreement, pursuant to which the Section 9 proceedings have been initiated, is a valid agreement in law or not. The relevant portion of the judgment (per majority) in SBP[13] has been culled out and reproduced hereinbelow:

“19.… Similarly, Section 9 [of the A&C Act] enables a court, obviously, as defined in the Act, when approached by a party before the commencement of an arbitral proceeding, to grant interim relief asserting that there was a dispute liable to be arbitrated upon in terms of the [A&C] Act, and the opposite party disputes the existence of an arbitration agreement as defined in the Act or raises a plea that the dispute involved was not covered by the arbitration clause, or that the court which was approached had no jurisdiction to pass any order in terms of Section 9 of the [A&C] Act, that the court has necessarily to decide whether it has jurisdiction, whether there is an arbitration agreement which is valid in law and whether the dispute sought to be raised is covered by that agreement. There is no indication in the [A&C] Act that the powers of the court are curtailed on these aspects. On the other hand, Section 9 [of the A&C Act] insists that once approached in that behalf, ‘the court shall have the same power for making orders as it has for the purpose of an in relation to any proceeding before it’. Surely, when a matter is entrusted to a civil court in the ordinary hierarchy of courts without anything more, the procedure of that court would govern the adjudication…

3. Jurisprudence on the Applicability, Scope and Extent of the Stamp Act in the Context of the A&C Act

3.1 In SMS Tea Estates (P) Ltd. v. Chandmari Tea Co. (P) Ltd.[14] (SMS Tea Estates), the Supreme Court inter alia addressed the applicability of the provisions of the Stamp Act to the A&C Act. While considering the provisions of the Stamp Act, the Court concluded that any document containing an arbitration clause, which is required to be stamped and is not stamped, cannot be acted upon by the Court. The Court, however, did also hold that should such a document be subsequently impounded by the Collector and stamp duty (along with penalty fee, if any) be fully paid, the Court may then act upon such a document. The relevant portions of SMS Tea Estates[15] have been culled out and reproduced hereinbelow:

“19. Having regard to Section 35 of the Stamp Act, unless the stamp duty and penalty due in respect of the instrument paid, the court cannot act upon the instrument, which means that it cannot act upon the arbitration agreement which is part of the instrument

           *                                           *                                                   *

21. Therefore, when a lease deed or any other instrument is relied upon as contending the arbitration agreement, the court should consider at the outset, whether an objection in that behalf is raised or not, whether the document is properly stamped. If it comes to the conclusion that it is not properly stamped, it should be impounded and dealt with in the manner specified in Section 38 of the Stamp Act. The court cannot act upon such a document or the arbitration clause therein. But if the deficit duty and penalty is paid in the manner set out in Section 35 of Section 40 of the Stamp Act, the document can be acted upon or admitted in evidence.

*                                              *                                               *

22.1. The court should, before admitting any document into evidence or acting upon such document, examine whether the instrument/document is duly stamped …

22.2. If the document is found to be not duly stamped, Section 35 of the Stamp Act bars the said document being acted upon. The court should then proceed to impound the document under Section 33 of the Stamp Act and follow the procedure under Sections 35 and 38 of the Stamp Act.

22.3. If the document is found to be duly stamped, or if the deficit stamp duty and penalty is paid, either before the court or before the Collector (as contemplated in Section 35 or Section 40 of the Stamp Act), and the defect with reference to deficit stamp is cured, the court may treat the document as duly stamped.

(emphasis supplied)

3.2 In Gautam Landscapes (P) Ltd. v. Shailesh S. Shah [16] (Gautam Landscapes), a Full Bench of the Bombay High Court inter alia specifically considered the applicability of the provisions of the Stamp Act vis-à-vis Section 9 of the A&C Act. Upon examining these provisions of law, the Court held that the Stamp Act is a fiscal law enacted to secure revenue for the State on certain classes of instruments. As the invocation of Section 9 of the A&C Act is for seeking ad interim or interim reliefs and protections, application of SMS Tea Estates[17] would defeat the purpose of Section 9 of the A&C Act seeing as non-payment of stamp duty is not an incurable defect. The Court further held that the procedure of impounding and payment under the scheme of the Stamp Act could even be subject to appeal, thereby defeating the speedy nature of adjudication provided for in Section 9 of A&C Act – this could not have been the intent of the legislature. Simply put, the Bombay High Court held that the defence of non-payment of stamp duty in a document (which requires to be stamped per the Stamp Act) containing an arbitration clause would not be valid in law. It would be prudent here to mention that the Bombay High Court also looked into the applicability of the provisions of the Stamp Act vis-à-vis Sections 11(6) and 11(6-A) of the A&C Act[18] and held that a Court need not await adjudication by the stamp authorities in order to pass an order appointing an arbitrator(s) in terms of Section 11(6) of the A&C Act. However, the authors are not presently addressing the second question, seeing as the Supreme Court, in Garware Wall Ropes[19] has overruled Gautam Landscapes[20] in this aspect and laid down the law in that regard. The relevant portions of Gautam Landscapes[21], with regard to its observations on the applicability of the Stamp Act to proceedings under Section 9 of the A&C Act, have been culled out and reproduced hereinbelow:

“63. Under the Stamp Act defect of non-payment of stamp duty is not an incurable defect. It can be cured at any stage before it is admitted in evidence … the Stamp Act is a fiscal measure enacted to secure revenue for the State on certain classes of instruments. We are, therefore, of the view that the respondents cannot insist applying decision of the Supreme Court […] [SMS Tea Estates[22]] […] in proceedings under Section 9 and contend that the document needs to be adequately stamped before the Court considering the application under Section 9 to grant interim or ad interim reliefs.

  1. The learned counsel for the respondents placed heavy reliance on the judgment of the Supreme Court in SMS Tea Estates[23]. In our view, considering the facts of the case, the view adopted by the Supreme Court, emerging from [Gauhati] High Court in the observation of the Supreme Court the provisions of the [A&C Act] and [the] Stamp Act, we are of the considered opinion that the judgment of the Supreme Court in SMS Tea Estates[24] was not delivered arising out of an application under Section 9 of the [A&C Act] but was delivered arising out of an order passed under Section 11 of the [A&C Act].
  2. In [Ashok Traders][25], the Supreme Court has held that the right conferred by Section 9 [of the A&C Act] cannot be said to be one arising out of a contract. The qualification which the person invoking jurisdiction of the Court under Section 9 must possess, is of being a party to an arbitration agreement. This is nothing to do with the relief which is sought for from the Court or the right which is sought to be canvassed in support of the relief. The arbitration clause constitutes an agreement by itself.

*                                                              *                                                *

67.… We are … of the view that even if the main agreement containing arbitration agreement is not stamped or insufficiently stamped, there could not be any bar against the Court hearing the application under Section 9 of the [A&C] Act for interim measures to grant ad interim or interim relief to a party.

  1. We are not inclined to accept the submission of Mr Dani, learned Senior Counsel appearing for respondent in Arbitration Application No. 246 of 2016 that for the purpose of interim measures, the Court has to act upon the main agreement containing arbitration agreement and, thus till such time, such an agreement is stamped … irrespective of the urgency and though case is made out for grant of ad interim or interim relief, the Court does not have power to grant any such relief. This clearly for the reason that the Court in considering a relief under Section 9 [of the A&C Act] is acting upon the arbitration agreement only, and not the main contract. An arbitration agreement would not require any stamping.
  1. In our view, the argument of Mr Dani, if accepted, would be in conflict with the scheme of the legislation and intent of the provisions of Section 9 of the [A&C Act]. Under the scheme of the [A&C Act] … we are of the considered view that the legislative intent and purpose would be served by providing the efficacious and expeditious relief to a party to an arbitration agreement and that is prescribed under Section 9 of the [A&C Act]. In case the submission of Mr Dani is accepted, the exercise of jurisdiction under Section 9 of the [A&C Act] would be completely eclipsed and party would be deprived to approach a forum for any urgent relief of ad interim or interim nature. This obviously cannot be implication and intent of the statutory interpretation.

                                   *                                                 *                                              *

  1. Thus, in our view, the question of law i.e. whether a Court under the [A&C] Act […] can entertain and grant any interim or ad interim relief in an application under Section 9 of the [A&C] Act when a document containing arbitration clause is unstamped or insufficiently stamped, is required to be answered in the affirmative.

                                     *                                                *                                 *

  1. Thus postponing application for consideration, filed under … Section 9 [of the A&C Act], to indefinite period till the final decision of the issue raised under the Stamp Act, would also not be in conformity of the legislative policy and intent to provide speedy remedy under … Section 9 of the [A&C Act].

 

  1. The basic principles guiding judicial decision-making, in the context of arbitration matters, the Court would surely be concerned with the efficacy of the arbitral process. The recognition of the legislative intent can also be clearly seen from the decision of the Supreme Court in A. Ayyasamy v. A Paramasivam [26], wherein D.Y. Chandrachud, J. concurring with the judgment of A.K. Sikri, J. (as His Lordship then was), observed that [t]he basic principle which must guide judicial decision-making is that arbitration is essentially a voluntary assumption of an obligation by contracting parties to resolve their disputes through a private tribunal. The intent of the parties is expressed in the terms of their agreement. Where commercial entities and persons of business enter into such dealings, they do so with a knowledge of the efficacy of the arbitral process. The commercial understanding is reflected in the terms of the agreement between the parties. The duty of the Court is to impart to that commercial understanding a sense of business efficacy.
  1. We may thus observe that the Stamp Act is a fiscal statute and its purpose is collection of revenue. The said purpose will be achieved by impounding the document and sending it to the stamp authorities if it is found to be insufficiently stamped. At the same time, the Court need not wait for outcome of the said adjudication. It would not be appropriate to put restrictions on the Court’s powers to exercise its such jurisdiction under the provisions of the [A&C Act], if the party deserves such intervention by the Court.

                           *                                    *                                          *

118.… we are of the view that the party need not be put to a disadvantage merely because an objection has been raised in respect of insufficiency of the stamp on the agreement presented before the Court. Neither a contesting party could deprive legitimate rights of a litigant in praying for timely intervention of the Court by praying for appointment of an arbitral tribunal nor for interim reliefs in the fact situation of a case. That would be rendering a party without any forum and in a given situation the outcome would be, at times, catastrophic and disastrous and the damage could be irreparable one. A balanced approach … so that the purpose of enacting the provisions of Section[…] 9 of the [A&C Act] is not defeated.

  1. If an application under … Section 9 [of the A&C Act] is required to be postponed till the order of adjudication is passed by the learned Collector of Stamps with such uncertainty of the time it would take to decide and the hierarchy of remedies after such order, as it would be subject to an appeal or a revision, as the case may be and till such time no order … under Section 9 should be passed, then the Legislature would not have provided for speedy disposal of the applications under … Section 9 of the [A&C] Act.

3.3. In Garware Wall Ropes Ltd. v. Coastal Marine Constructions and Engineering Ltd.[27] (Garware Wall Ropes), the Supreme Court, while reiterating the ruling in SMS Tea Estates[28], rejected the argument that an arbitration clause in an agreement ought to be considered an agreement independent of the agreement of which such arbitration clause is a part. The Supreme Court further held that a harmonious reading of the provisions of the Stamp Act, the A&C Act and the Contract Act would suggest that in the event an agreement (including its arbitration clause) is not duly stamped, then it cannot be said to be a valid agreement or a contract. It is important here to reiterate that these observations of the Supreme Court are in the context of Sections 11(6) and 11(6-A) of the A&C Act. The relevant portions of Garware Wall Ropes[29] have been culled out and reproduced hereinbelow:

“17.… when it came to an unstamped lease deed which contained an arbitration clause, this Court, [in SMS Tea Estates[30]], after setting out Sections 33 and 35 of the Stamp Act held: […]

[…]

18…It will be noticed from [SMS Tea Estates][31] that where an arbitration clause is contained in an agreement or conveyance, different consequences ensue depending on whether the agreement or conveyance is unregistered or unstamped… it is difficult to accede to the argument made by the learned counsel on behalf of the respondent that … an arbitration agreement has an independent existence of its own …

19.… It is important to remember that the Stamp Act applies to the agreement or conveyance as a whole. Therefore, it is not possible to bifurcate the arbitration clause contained in such agreement or conveyance so as to give it an independent existence, as has been contended by the respondent. The independent existence that could be given for certain limited purposes, on a harmonious reading of the Registration Act, 1908 and the [A&C] Act has been referred to by Raveendran, J. in SMS Tea Estates[32] when it comes to an unregistered agreement or conveyance. However, the Stamp Act, containing no such provision as is contained in Section 49 of the Registration Act, 1908 has been held [in SMS Tea Estates[33]] to apply to the agreement or conveyance as a whole, which would include the arbitration clause contained therein…

  1. Looked at from a slightly different angle, an arbitration agreement which is contained in an agreement or conveyance is dealt with in Section 7(2) of the [A&C] Act. We are concerned with the first part of Section 7(2) on the facts of the present case, and therefore, the arbitration clause that is contained in the sub-contract in question is the subject-matter of the present appeal. It is significant that an arbitration agreement may be in the form of an arbitration clause ‘in a contract.’

  1. Sections 2(a), 2(b), 2(g) and 2(h) of the Contract Act […] … read as under:[…]

 

  1. When an arbitration clause is contained ‘in a contract’, it is significant that the agreement only becomes a contract if it is enforceable by law. We have seen how, under the Stamp Act, an agreement does not become a contract, namely, that it is not enforceable in law, unless it is duly stamped. Therefore … Section 7(2) of the [A&C] Act and Section 2(h) of the Contract Act, would make it clear that an arbitration clause in an agreement would not exist when it is not enforceable by law…

              *                                          *                                                *

  1. [The] judgment in [United India Insurance Co. Ltd. v. Hyundai Engg. and Construction Co. Ltd.][34] is important in that what was specifically under consideration was an arbitration clause which would get activated only if an insurer admits or accepts liability. Since on facts it was found that the insurer repudiated the claim, though an arbitration clause did ‘exist’, so to speak, in the policy, it would not exist in law, as was held in that judgment, when one important fact is introduced, namely, that the insurer has not admitted or accepted liability. Likewise, in the facts of the present case, it is clear that the arbitration clause that is contained in the sub-contract would not ‘exist’ as a matter of law until the sub-contract is duly stamped, as has been held by us above…

3.4 Seeing as the observations and holding in Garware Wall Ropes[35] were in the context of Sections 11(6) and 11(6-A) of the A&C Act, Single Judge Benches of the Bombay High Court, in Saifee Developers (P) Ltd. v. Shanklesha Constructions [36] (Saifee Developers) and IREP Credit Capital (P) Ltd. v. Tapaswi Mercantile (P)Ltd.[37] (IREP Credit Capital) respectively, did not accept the arguments favouring the application of the Stamp Act to proceedings under Section 9 of the A&C Act because, primarily, this specific question (viz. the issue at hand) is currently being considered by the Supreme Court in an appeal[38] assailing Gautam Landscapes[39]. Additionally, the Bombay High Court did not favourably view the arguments in favour of the application of the Stamp Act to proceedings under Section 9 of the A&C Act because the Supreme Court has not stayed Gautam Landscapes[40] and therefore concluded that a Single Judge Bench of the Bombay High Court would be bound be Gautam Landscapes[41] seeing as it is a Full Bench verdict. The relevant portions of Saifee Developers[42] have been culled out and reproduced hereinbelow:

“10. I am not persuaded to accept the respondents’ contention that the Court at this stage of the proceedings cannot consider grant of any ad interim relief in the proceeding filed under Section 9 of the [A&C] Act, on the ground that the document is not sufficiently stamped. This for the reason that Full Bench of this Court in [Gautam Landscapes][43] has held that it is permissible for the Court in proceedings under Section 9 of the [A&C] Act, to grant ad interim/interim reliefs even when the document in question on the basis of which a relief is sought, is not sufficiently stamped. The Full Bench in this context has observed thus: […]

The decision of the Supreme Court in Garware Wall Ropes[44] is rendered in the context of Section 11 of the Act and not in a proceeding under Section 9 of the Act. The decision of the Full Bench in the context of Section 9 of the Act is subject-matter of challenge before the Supreme Court in [Shailesh Shah v. Gautam Landscapes (P) Ltd. ]. By an order dated [29-4-2019], passed by the Supreme Court, on the said petition, while issuing notice to the respondents, the Supreme Court has not stayed the decision of the Full Bench. The Supreme Court, however, observed that Section 9 petition may continue, in the meanwhile judgment delivered thereon shall not be implemented without leave of the Court. Thus, as the judgment of the Full Bench is binding on this Court, and the same being not stayed by the Supreme Court, it is not possible to accept the contention as urged on behalf of respondent that this Court cannot grant any ad interim relief.

The relevant portions of IREP Credit Capital[45] have been culled out and reproduced hereinbelow:

“30. The argument, however, is on the footing that if insufficiency of stamps will not permit a Section 11 petition or will not permit the appointment of an Arbitral Tribunal, then no order can be made in a Section 9 proceeding either. As far as I am concerned, the question is no longer res integra. It was squarely before G.S. Kulkarni, J. in [Saifee Developers][46]. The submissions today are precisely those that were before Kulkarni, J. (see para 8). He held, after considering the Supreme Court decision in [Garware Wall Ropes Ltd.][47] and the ratio in [Gautam Landscapes][48]that this submission can have no bearing on the petition under Section 9. Garware Wall Ropes[49], as Kulkarni, J. said, was a matter under Section 11. Gautam Landscapes[50] was under both Section 9 and Section 11. In Garware Wall Ropes[51], the Supreme Court held that the Full Bench decision in Gautam Landscapes[52] did not correctly state the law on Section 11. The Supreme Court did not address the question of stamping being required even for a Section 9 petition. Kulkarni, J. noted that in fact there is a special leave petition pending in the Gautam Landscapes matter and that, on [29] April 2019, the Supreme Court issued notice but did not stay the Full Bench decision. It said that the Section 9 petition may continue, but any judgment on it would not be implemented without leave of the Supreme Court. Kulkarni, .J held in para 11 of Saifee Developers[53] that he was bound by the decision of the Full Bench on the Section 9 aspect in Gautam Landscapes and that the contention (that without stamp being paid no order could be made even on a Section 9 petition) was without merit.

3.5 In Dharmaratnakara Rai Bahadur Arcot Narainswamy Mudaliar Chattram and other charities v. Bhaskar Raju and Bros. [54] (Bhaskar Raju),  the Supreme Court reiterated the law laid down in SMS Tea Estates[55], and held that it is the duty of a Court to preliminarily consider whether the instrument it is dealing with has been stamped or not, even if an objection to that effect has not been raised by the litigants before it. The relevant portions of Bhaskar Raju[56] have been culled out and reproduced hereinbelow:

“20. It can thus clearly be seen, that this Court [in SMS Tea Estates[57]] has in unequivocal terms held, that when a lease deed or any other instrument is relied upon as containing the arbitration agreement, the Court is required to consider at the outset, whether the document is properly stamped or not. It has been held, that even when an objection in that behalf is not raised, it is the duty of the Court to consider the issue. It has further been held, that if the Court comes to the conclusion, that the instrument is not properly stamped, it should be impounded and dealt with in the manner specified in Section 38 of the Stamp Act […]. It has also been held, that the Court cannot act upon such a document or arbitration clause therein. However, if the deficit duty and penalty is paid in the manner set out in Section 35 or Section 40 of the Stamp Act […], the document can be acted upon or admitted in evidence …

4. Addressing the Issue

4.1 What we understand from Sundaram Finance[58], Ashok Traders[59] and SBP[60] is that Section 9 of the A&C Act is invoked to secure interim protections from a Court, that such protections may be of interest to a party to an arbitration agreement, that these proceedings can be initiated or continued before or during arbitral proceedings and that these proceedings are independent of arbitration. This view has also found acceptance in the legal community in India at large.

4.2 Where there seems to be difference in our courts’ views, and the view of the legal community in India as well, lies in the applicability of the Stamp Act vis-à-vis proceedings under Section 9 of the A&C Act:

4.2.1 In Gautam Landscapes[61], the Bombay High Court’s conclusions appear to be on the basis of equity and legislative intent i.e. that applicants in proceedings under Section 9 of the A&C Act must not be denied ad interim or interim reliefs/protections merely because an agreement containing an arbitration clause is not stamped in accordance with the Stamp Act. This equity-based view adopted by the Bombay High Court stems from the fact that the Stamp Act is fiscal statute meant to secure revenue for the Government and therefore ought not to be used as a line of defence by a respondent to the proceedings under Section 9 of the A&C Act. This view taken by the Bombay High Court is seemingly consistent with the Supreme Court’s decision in Ashok Traders[62] – where it was held that the rights adjudicated upon in proceedings under Section 9 of the A&C Act do not stem from a contract;

4.2.2 In Garware Wall Ropes[63], however, the Supreme Court looks at this predicament from a different angle. As mentioned earlier, Garware Wall Ropes[64] does not specifically address the issue at hand, but some of its observations are in conflict with Gautam Landscapes[65]. In fact, Garware Wall Ropes[66] has overruled Gautam Landscapes[67]vis-à-vis the application of the Stamp Act in proceedings under Section 11(6) of the A&C Act. The Supreme Court in Garware Wall Ropes[68] has, in a way, harmoniously read SMS Tea Estates[69], the provisions of the Stamp Act, the A&C Act and the Contract Act to hold that an arbitration clause in an agreement cannot be legally valid if the agreement itself is not legally valid. To elaborate, the Supreme Court found that an agreement (which also contains an arbitration clause) that is not duly stamped cannot be an agreement that is valid in law i.e. it is not a contract that legally binds parties, unless the agreement is subsequently stamped. This view adopted in Garware Wall Ropes[70] can also be read in conjunction with the Constitutional Bench’s views in SBP[71] and, if this view adopted by the Supreme Court in Garware Wall Ropes[72] does stand the test of time and judicial interpretation, Gautam Landscapes[73] could well be overruled vis-à-vis the issue at hand.

4.3 While the Supreme Court has not yet clearly provided an answer on the applicability of the provisions of the Stamp Act vis-à-vis Section 9 of the A&C Act, what will be interesting to see is what route the Supreme Court shall take in the appeal[74] assailing Gautam Landscapes[75] while adjudicating this question of law – one based on equity (as has been held in Ashok Traders[76] and Gautam Landscapes[77]) or one based on statutory interpretation and stare decisis (as has been in Garware Wall Ropes[78]). Till such time, Gautam Landscapes[79], Saifee Developers[80] and IREP Credit Capital[81] shall perhaps continue to serve as precedent in all the proceedings under Section 9 of the A&C Act.


* Advocate, Bombay High Court, BA LLB, National Law University (Jodhpur), LLM, Columbia Law School (New York)

** Advocate, Bombay High Court, BA LLB, Symbiosis Law School (Pune)

[Authors’ Note: The views expressed herein are personal and independent. No third party has funded inter alia the issuance of this paper or the research conducted by the authors. The authors have based their views in this research paper on prevalent legislation, judicial opinions/interpretations pertaining to the same and their experience as practicing advocates in India.]

[1] Arbitration and Conciliation Act, 1996

[2] UNCITRAL Model Law on International Commercial Arbitration

[3] The Stamp Act, 1899

[4] The Contract Act, 1872

[5] (1999) 2 SCC 479 

[6]ibid

[7](2004) 3 SCC 155

[8]Supra Note 5

[9]Supra Note 7

[10]Supra Note 5

[11] (2005) 8 SCC 618

[12] C.K. Thakker, J. delivered the dissenting opinion.

[13]Supra Note 11

[14] (2011) 14 SCC 66

[15]Ibid

[16] 2019 SCC OnLine Bom 563

[17]Supra Note 15

[18]These provisions pertain to proceedings before Court vis-à-vis appointing an arbitrator(s). The specific question that the Bombay High Court considered in this context was “Whether, inter alia, in view of Section 11(6A) of the Arbitration and Conciliation Act 1996, inserted by the Arbitration and Conciliation (Amendment Act) 2016, it would be necessary for the Court before considering and passing final orders on an application under Section 11(6) of the Act to await the adjudication by the stamp authorities, in a case where the document objected to, is not adequately stamped?

[19]Infra Note 28

[20]Supra Note 17

[21]Ibid

[22]Supra Note 15

[23]Ibid

[24]Supra Note 15

 [25]Supra Note 7

[26] (2016) 10 SCC 386

[27] (2019) 9 SCC 209 

[28]Supra Note 15

[29]Supra Note 28

[30]Supra Note 15

[31]Ibid

[32]Supra Note 15

[33]Ibid

[34] (2018) 17 SCC 607 

[35]Supra Note 28

[36]Commercial Arbitration Petition No. 627  of 2019, order dated 15-7-2019

[37]2019 SCC OnLine Bom 5719

[38]Shailesh S. Shah v. Gautam Landscapes (P) Ltd., SLPs  (C) Nos. 10232-233/2019

[39]Supra Note 17

[40]Supra Note 17

[41]Ibid

[42]Supra Note 37

[43]Supra Note 17

[44]Supra Note 28

[45]Supra Note 38

[46]Supra Note 37

[47]Supra Note 28

[48]Supra Note 17

[49]Supra Note 28

[50]Supra Note 17

[51]Supra Note 28

[52]Supra Note 17

[53]Supra Note 37

[54] 2020 SCC OnLine SC 183: (2020) 4 SCC 612

[55]Supra Note 15

[56]Supra Note 55

[57]Supra Note 15

[58]Supra Note 5

[59]Supra Note 7

[60]Supra Note 11

[61]Supra Note 17

[62]Supra Note 7

[63]Supra Note 28

[64]Ibid

[65]Supra Note 17

[66]Supra Note 28

[67]Supra Note 17

[68]Supra Note 28

[69]Supra Note 15

[70]Supra Note 28

[71]Supra Note 11

[72]Supra Note 28

[73]Supra Note 17

[74]Supra Note 39

[75]Supra Note 17

[76]Supra Note 7

[77]Supra Note 17

[78]Supra Note 28

[79]Supra Note 17

[80]Supra Note 37

[81]Supra Note 38

Case BriefsHigh Courts

Kerala High Court: A.K. Jayasankaran J., allowed the present petition, clarifying the scope and ambit of powers to be exercised by Courts under Section 11 of the Arbitration and Conciliation Act, 1996 and the effect of pre-condition imposed against invoking of an Arbitration Agreement.

Brief Facts

Facts of the case are briefly mentioned hereunder;

  1. That the petitioner is a company incorporated under the Companies Act, 1956, with its registered office at New Delhi and the respondent is the Airports Authority of India, a statutory body under the aegis of the Ministry of Civil Aviation, Government of India that is responsible for creating, maintaining, upgrading and managing civil aviation infrastructure in India.
  2. That the respondent had floated a ‘request for qualification’ (RFQ) and ‘request for proposal’ (RFP) for concession to develop, market, setup, operate, maintain and manage the food and beverage outlets (F&B outlets) at Calicut International Airport, and invited bids from intending bidders in terms of the RFP and RFQ.
  3. That the petitioner submitted its technical and financial bids and in the evaluation procedure that followed, the petitioner was found eligible and was accordingly awarded the concession referred above.
  4. That the parties consequently executed the Letter of Intent to Award (LOIA) dated 07-12-2017 and the Concession Agreement dated 22-3-2018, containing the terms and conditions of the contract between them.
  5. That the respondents allegedly raised wrong invoices against the petitioner which was anyhow paid by them.
  6. That due to continued losses the petitioner was forced to issue a termination notice dated 16-4-2019 and finally vacated the premises on 13-8-2019.
  7. That the respondent unilaterally invoked the bank guarantee that had been furnished by the petitioner as security deposit and also proceeded to blacklist the petitioner from participating in future tenders floated by the respondent for a period of three years.
  8. That the invocation of the bank guarantee was injuncted by an order dated 05-09-2019 of the Principal District Judge, Manjeri passed in an Arbitration preferred by the petitioner under Section 9 of the Arbitration and Conciliation Act, 1996.
  9. That consequently, the petitioner invoked the arbitration agreement vide notice dated 23-09-2019 and nominated its Arbitrator to act as the sole Arbitrator, to adjudicate upon the disputes between the petitioner and the respondent arising out of and in relation to the concession agreement and requesting the respondent to agree to the suggestion.
  10. That on the respondent refuting the claim of the petitioner for recourse to arbitration, the petitioner was constrained to approach this Court through the present Arbitration Request.

 Contentions

Counsel for the petitioner, Sri S. Sreekumar assisted by Sri P.Martin Jose, submitted that obliging the petitioner to choose an Arbitrator from among a panel suggested by the respondent, fall foul of the law declared by the Supreme Court in Perkins Eastman v. HSCC (India) Ltd., 2019 SCC Online SC 1517, as also by the Bombay High Court in the judgment dated 04-12-2019 in Commercial Arbitration Application No.495/2019 between the very same parties and in respect of an identical agreement. Moreover, the condition in clause 5.15 of the RFP that requires the petitioner to pre-deposit amounts as a condition for invoking the arbitration can no longer be seen as a valid clause in the light of the judgment of the Supreme Court in ICOMM Tele Ltd. v. Punjab State Water Supply and Sewerage Board, (2019) 4 SCC 401, wherein it was opined that ‘deterring a party to an arbitration from invoking the alternate dispute resolution process, by insisting on a pre-deposit of 10 per cent would discourage arbitration, contrary to the object of de-clogging the court system, and would render the arbitral process ineffective and expensive’. Lastly, it is pointed out that the amendment made in 2015 limits the scope of examination of this Court, in proceedings under Section 11 of the 1996 Act to the existence of an arbitration agreement and nothing more. Reliance is placed on the decision of the Supreme Court in Uttarakhand Purv Sainik Kalyan Nigam Ltd. v. Northern Coal Field Ltd., (2020) 2 SCC 455  for the said proposition.

Counsel for the respondent, Sri NN Sugunapalan assisted by Sri V. Santharam, contended that the Arbitration Request is not maintainable for it being a premature step. A reference was made to clause 5.15(i) and (ii) of the RFP, which mandates that the petitioner has to deposit the disputed amount with the respondent as a condition precedent for invoking the arbitration clause. The Counsel further relied on the decision in S.K. Jain v. State of Haryana, (2009) 4 SCC 357, to contend that the Supreme Court had, in that case, found a clause, that required the party invoking arbitration to make a security deposit of an amount as a precondition for invoking the arbitration agreement, on condition that the said amount would be refunded to him if he succeeded in the action, as not illegal.

 Observations

Post Amendment Act of 2015, the role of court while entertaining a petition under Section 11 of the Arbitration and Conciliation Act, 1996 is limited to look at one aspect alone, namely, the existence of an arbitration agreement between the parties. In the instant case, the submissions advanced on behalf of the petitioner and the respondent indicates that there is no dispute among them as regards the existence of an arbitration agreement between them, the question urged being only as to whether the petitioner was required to fulfill certain preconditions before invoking the arbitration under the said agreement.

The condition that requires the petitioner to make a pre-deposit of amounts as a condition for invoking the arbitration, would fall foul of the law declared by the Supreme court in the decisions reported as Perkins Eastman v. HSCC (India) Ltd., 2019 SCC Online SC 1517 and ICOMM Tele Ltd. v. Punjab State Water Supply Board, (2019) 4 SCC 401.

 Decision

While allowing the petition at hand, the Court clarified the effect of a pre-condition for invoking the Arbitration Agreement, in the light of settled precedents. The Court further appointed an Arbitrator and issued relevant directions for the conduct of arbitration proceedings.[Lite Bite Foods v. Airport Authority of India,  2020 SCC OnLine Ker 4736, decided on 28-10-2020]


Sakshi Shukla, Editorial Assistant has put this story together

Op EdsOP. ED.

The validity of an arbitration agreement in cases of an invalid parent agreement (void, voidable or void ab initio) is riddled with uncertainties in India. To date, the Supreme Court of India (“the Supreme Court”) has not had the opportunity to authoritatively pronounce the law, which furthers the legislative policy under the Indian Law.

It has been widely acknowledged by the courts in India that the parties tend to challenge the arbitration agreement intending to delay the arbitral proceedings or to avoid the mandate of arbitration agreed by them. Before 2015, judgments pronounced by Indian courts have presented only a murky picture relating to the validity of an arbitration agreement in case the main agreement is invalid (void, voidable or void ab initio).

The 2015 amendment has tectonically shifted the legislative policy, leaning in favour of arbitration, which has resulted in a change in the fundamental policy of Indian Law. The said change has been recognised by the Indian courts.[1] Considering the aforesaid change in fundamental policy of Indian Law, judgments rendered before 2015 which tended to hinder and obstruct arbitration in India, would need to be brushed aside, to achieve the legislative intent of the amendments to the Indian Laws.

It has been argued that the doctrine of separability does not save the arbitration clause in the above scenario where the arbitration agreement is invalid because the contract in which it is embedded or to which it relates to, is invalid under Indian law. Parties challenging the validity of the arbitration agreement tend to forget that the doctrine of separability is no more at a nascent stage and it is time to recognise the same considering the tectonic shift in the legislative policy which is pro-arbitration.

The Supreme Court had categorically held that the Arbitration and Conciliation Act, 1996 (“the Act”) should be interpreted to bring in line the principles underlying its interpretation in a manner that is consistent with the prevailing approaches in the common law world. Jurisprudence in India must evolve towards strengthening the institutional efficacy of arbitration.[2] Deference to a forum chosen by parties as a complete remedy for resolving all their claims is but a part of that evolution.[3] Minimising the intervention of courts is again a recognition of the same principle.[4] Therefore, a reference to the international authorities and the judgments pronounced by Courts in other jurisdictions such as Bermuda, USA, UK, and Australia, would be beneficial to understand the prevailing law representing an evolution in the common law world. It would be relevant to mention that the doctrine of separability was recognised with its full rigor in those jurisdiction as early as 1967 in US, 1990 in Bermudan Law, 1993 in English and Australian Law. The principles laid down therein would be attracted while interpreting the Act.

The answer to the issue at hand lies in deeper aspects:

  • Effect of the doctrine of separability on the agreement and pro-arbitration policy in India (Sections 5, 7 read with Section 16 of the Act);
  • Meaning of “in respect of a defined legal relationship, whether contractual or not”;
  • The test applied under Section 45 of the Act. 

International authorities and UNCITRAL Model Law

Redfern and Hunter on International Arbitration (Sixth Edn.), ‘Chapter 2 – Agreement to Arbitrate’ (at pp. 103 and 104, paras 2.103 and 2.104) state that there are, in fact, two separate contracts: the primary or main, contract concerns the commercial obligations of the parties; the secondary, or collateral, the contract contains the obligation to resolve any disputes arising from the commercial relationship by arbitration. The doctrine of separability means that an arbitration clause that forms part of a contract shall be treated as an agreement independent of the other terms of the contract.

Following the provisions of the UNCITRAL Rules, Article 16(1) of the Model Law provides that an arbitration clause which forms part of a contract shall be treated as an agreement independent of the other terms of the contract. A decision by the arbitral tribunal that the contract is null and void shall not entail ipso jure the invalidity of the arbitration clause.

Section 7 of the Act defines an arbitration agreement as provided under the Model Law. Under the Model Law, the term “arbitration agreement” is defined along the lines of Article II(1) of the 1958 New York Convention; as more clearly expressed in that Convention, there is an implied guarantee of recognition that goes beyond a mere definition.

An arbitration agreement needs to be in writing though it need not be signed. The fact that the arbitration agreement shall be in writing is continued in Section 7(3) of the Act. Section 7(4) only further adds that an arbitration agreement would be found in the circumstances mentioned in the three sub-clauses that make up Section 7(4). This does not mean that in all cases an arbitration agreement needs to be signed. The only prerequisite is that it be in writing, as has been pointed out in Section 7(3).[5]

Collaborative reading of principles stated by Redfern and Hunter, Article 16 of the Model Law and Section 7 of the Act prima facie establish that the arbitration agreement, whether incorporated as a clause in the main agreement or executed between the parties as a separate agreement, survives and remains valid irrespective of the fact whether the main agreement is void, void ab initio or voidable. The doctrine of separability acts as a veil between the arbitration agreement and the main agreement. All legal systems admit some degree of separability of the arbitration clause from the main contract and the real question to be canvassed is to what extent is the doctrine of separability permitted.

Judgments pronounced in other jurisdictions – Bermuda, USA, UK and Australia on the meaning of ‘defined legal relationship whether contractual or not’, ‘extent of the doctrine of separability’ and ‘true meaning of transaction or contract’

Extent of doctrine of separability

Bermuda/Swiss/German Law:

In Sojuznefteexport (SNE) v. Joc Oil Ltd.,[6] the Court of Appeal of Bermuda dealt with the issue of whether the invalidity of the main agreement taints the arbitration clause. The contention raised by JOC was that the purchase agreement had not been executed by two authorised representatives of SNE and accordingly was void/void ab initio under the Soviet Law. It was submitted that when the contract did not exist ab initio, there could be no dispute between the parties which could come within the terms of the arbitration clause. JOC alleged that, as a consequence, the arbitral tribunal lacked the competence to adjudicate the dispute because the arbitration clause was void. Though the arbitral tribunal held that the main agreement was void ab initio, it upheld the validity of the arbitration agreement and delivered award in favour of SNE based on the doctrine of restitution and unjust enrichment.

The Court of Appeal was of the view that there is pro-arbitration/pro-enforcement bias, both under US Law and English Law, which shall be followed[7] and accordingly, upheld the award. Most systems recognise that an arbitration clause is a separate contract, procedural and ancillary to the main contract and it does not create substantive rights between the parties but provides how the disputes which may arise should be resolved.[8] An arbitration agreement gives rise to collateral primary and secondary obligations of its own.[9]

The Court of Appeal referred to the development of the doctrine of separability in the USA, Swiss Law, German Law, and UK Law. The doctrine of separability of the arbitral clause is referred to as ‘severability‘ in the United States and ‘autonomy‘ in France and the Federal Republic of Germany, each connoting that the invalidity of the main contract does not, in principle, entail the invalidity of the arbitral clause.[10]

Swiss Law makes no material distinction between different kinds of invalidity of the main contract, or between an arbitration clause embodied in the main contract and an arbitration agreement that is contained in a physically separate document.[11]

The German doctrine of autonomy allows arbitrators to decide upon disputes consequent upon the invalidity of the main contract without any material distinction between different kinds of invalidity or between an arbitration clause in the main contract and an arbitration agreement in a physically separate document.[12]

The invalidity of the main agreement for any reason be it non-fulfillment of legal requirements or being contrary to public policy, does not raise any issue as to whether or not the parties agreed to the terms of the contract.[13] It concedes that the parties did, but asserts that their agreement gave rise to no enforceable contractual rights or duties. It raises no issue about the consensus ad idem of the parties.[14]

English Law:

In  Fiona Trust and Holding Corpn v Privalov,[15] the House of Lords authoritatively rejected the orthodox view regarding the doctrine of separability. Concerning the construction of the arbitration agreement and doctrine of separability, it was held that arbitration is consensual. It depends upon the intention of the parties as expressed in their agreement. The meaning which the parties intended to express by the words which the parties used will be affected by the commercial background and the reader’s understanding of the purpose for which the agreement was made.[16] It was further held that in approaching the question of construction, it is necessary to inquire into the purpose of the arbitration clause. The parties have entered into a relationship, an agreement or what is alleged to be an agreement or what appears on its face to be an agreement, which may give rise to disputes.[17] The parties want those disputes decided by a tribunal which they have chosen, commonly on the grounds of such matters as its neutrality, expertise, and privacy, the availability of legal services at the seat of the arbitration and the unobtrusive efficiency of its supervisory law.[18]

There is no rational basis upon which businessmen would be likely to wish to have questions of the validity or enforceability of the contract decided by one tribunal and questions about its performance decided by another, one would need to find very clear language before deciding that they must have had such an intention.[19] Businessmen frequently do want the question of whether their contract was valid, or came into existence, or has become ineffective, submitted to arbitration and that the law should not place conceptual obstacles in their way.[20]

Section 7 was intended to enable the courts to give effect to the reasonable commercial expectations of the parties about the questions which they intended to be decided by arbitration. But Section 7 will not achieve its purpose if the courts adopt an approach to construction which is likely in many cases to defeat those expectations.[21] Therefore, construction of an arbitration clause should start from the assumption that the parties, as rational businessmen, are likely to have intended any dispute arising out of the relationship into which they have entered or purported to enter to be decided by the same tribunal.[22]

The principle of separability enacted in Section 7 means that the invalidity or rescission of the main contract does not necessarily entail the invalidity or rescission of the arbitration agreement. The arbitration agreement must be treated as a distinct agreement and can be void or voidable only on the grounds which relate directly to the arbitration agreement.[23] There may be cases in which the ground upon which the main agreement is invalid is identical with the ground upon which the arbitration agreement is invalid.[24] For example, if the main agreement and the arbitration agreement are contained in the same document and one of the parties claims that he never agreed to anything in the document and that his signature was forged, that will be an attack on the validity of the arbitration agreement.[25] But the ground of attack is not that the main agreement was invalid. It is that the signature to the arbitration agreement, as a distinct agreement, was forged. Similarly, if a party alleges that someone who purported to sign as an agent on his behalf had no authority whatever to agree on his behalf, that is an attack on both the main agreement and the arbitration agreement.[26]

On the other hand, if the allegation is that the agent exceeded his authority by entering into the main agreement in terms which were not authorised or for improper reasons that are not necessarily an attack on the arbitration agreement.[27]

Even if the allegation is that there was no concluded agreement (for example, that the terms of the main agreement remained to be agreed) that is not necessarily an attack on the arbitration agreement. If the arbitration clause has been agreed, the parties will be presumed to have intended the question of whether there was a concluded main agreement to be decided by arbitration.[28]

Section 7 is intended to overcome the arguments that because the main agreement and the arbitration agreement were bound up with each other, the invalidity of the main agreement should result in the invalidity of the arbitration agreement. They must be treated as having been separately concluded and the arbitration agreement can be invalidated only on a ground which relates to the arbitration agreement and is not merely a consequence of the invalidity of the main agreement.[29]

Section 7 reproduces in English Law the principle that was laid down by Section 4 of the United States Arbitration Act, 1925. The validity, existence or effectiveness of the arbitration agreement is not dependent upon the effectiveness, existence or validity of the underlying substantive contract unless the parties have agreed to this.[30] The purpose of these provisions, as the  United States Supreme Court (“USSC”) observed in Prima Paint Corpn v. Flood & Conklin Manufacturing Co.,[31] is that the arbitration procedure, when selected by the parties to a contract, should be speedy and not subject to delay and obstruction in the courts.[32]

The doctrine of separability requires direct impeachment of the arbitration agreement before it can be set aside. This is an exacting test. The argument must be based on facts that are specific to the arbitration agreement. Allegations that are parasitical to a challenge to the validity to the main agreement will not do.[33]

Recently, Fiona Trust was followed by High Court of Justice Queen’s Bench Division Commercial Court[34] (“the High Court”), wherein it was held that an arbitration agreement is to be treated as a distinct and separable agreement from the contract of which it forms part. The mere unenforceability of the contract will not of itself result in the unenforceability of the arbitration agreement. However, an arbitration agreement may be rendered void or unenforceable if it is directly impeached on grounds that relate to the arbitration agreement itself and are not merely a consequence of the invalidity of the underlying contract. If the assumed facts are proved in the arbitration the illegality will be established and the guarantees will not be enforced. This would not be contrary to our obligation of international comity and would, therefore, not offend against the notions of public policy.[35] The policy and purpose of the rule which invalidates the guarantees i.e. main agreement, does not strike down the arbitration provisions.[36]

The requirement that the enforceability of the arbitration agreement is separable from that of the principal contract was explained and illustrated in Harbour Assurance v. Kansa General International Insurance,[37] wherein the Court of Appeal held that the doctrine of separability could apply to preserve the arbitration agreement, even where the principal contract was alleged to be not merely voidable but void ab initio.[38]

US Law:

In Buckeye Check Cashing v. John Cardegna et al.,[39]  USSC relying upon Prima Paint Corp.v. Flood & Conklin Mfg. Co.,[40] and Southland Corp. v. Keating,[41] reiterated three propositions of law. First, as a matter of substantive federal arbitration law, an arbitration provision is severable from the remainder of the contract. Second, unless the challenge is to the arbitration clause itself, the issue of the contract’s validity is considered by the arbitrator in the first instance. Third, this arbitration law applies in State as well as Federal Courts. It was further held that the rule of severability establishes how this equal footing guarantee for ‘‘a written arbitration provision’’ is to be implemented.

Buckeye and Prima Paint was recently followed by USSC,[42] wherein it was reiterated that a party’s challenge to another provision of the contract, or the contract as a whole, does not prevent a court from enforcing a specific agreement to arbitrate. As a matter of substantive federal arbitration law, an arbitration provision is severable from the remainder of the contract.[43]

Australian Law:

The Federal Court of Australia held that there is no rule of law which prohibits the empowering of an arbitrator to decide the initial validity of the contract containing the arbitration clause.[44] For those who hold a different view, there is no “received doctrine” to this effect.[45] The arbitration clause is regarded as severable from the main contract with the result that, logically, an arbitrator, if otherwise empowered to do so, can declare the main contract void ab initio without at the same time destroying the basis of his power to do so.[46]

True meaning of “contract/transaction – ‘whether contractual or not’, ‘defined legal relationship’[47]

There is no doubt that at the time of entering into an agreement, the parties believe that they are entering into a valid and binding agreement. It is not that the parties never met or never agreed -upon the terms or no consequences flowed from their invalid contract.[48] In the classic terminology of contract, there is undoubtedly consensus ad idem as to the terms of the contract.

It is a well-settled law (India, Soviet, US, and English Law) that the words must be construed as far as possible in their popular meanings. As a matter of everyday usage amongst commercial men, the word ‘contract‘ is used to mean an agreement, document, or bargain, whether legally enforceable or not. As a matter of usage in commercial transactions, the meaning of the word ‘contract‘ is not confined to a legally enforceable contract. Its meaning includes an agreement entered into between the parties, even if the agreement turns out to be invalid.

In reality, a transaction is a legal fact, is not always confined only to the expression of the will of the parties, directed to the achievement of a legal result, but gives rise, in the event of the breach of the requirements of the law, concerning the content and form of the transaction, to other consequences envisaged by the law.

It is necessary that there is a strict delineation of the factual elements lying at the basis of the legal relationships, to the establishment of which the will of the parties is directed, and the legal consequences, which the parties were not able to or did not wish to contemplate but which independently of their will are established by law. Such a delineation very distinctly manifests itself in an invalid transaction, the consequences of which are established by law. Therefore, the assertion is incorrect that an invalid (null and void) transaction does not result in any consequences.[49]

The USSC rejected the contention that the only arbitration agreements to which the provision applies are those involving a ‘‘contract,’’ and since an agreement void ab initio under State law is not a ‘‘contract,’’ there is no ‘‘written provision’’ in or ‘‘controversy arising out of’’ a ‘‘contract,’’ to the provision can apply. The USSC held that it does not read ‘‘contract’’ so narrowly.[50]

The fact that the main agreement is invalid (void, voidable or void ab initio) does not mean that there were no specific legal relationships to which the arbitration agreement could relate to. Both Section 7 of the Act and Article II of the New York Convention expressly refers to defined legal relationships ‘whether contractual or not‘. A relationship which gives rise to a claim for restitution and unjust enrichment is a defined legal relationship.[51] In any event, the reference to ‘defined legal relationship‘ is not limited to a contractual relationship since Section 7 of the Act as well as Article II(1) adds the words ‘whether contractual or not‘. Therefore, the claims framed in tort can be submitted to arbitration since they come within the purview of the arbitration agreement.[52] A claim in restitution is a claim which does arise out of a specific legal relationship.[53]

Effect of the doctrine of separability on the agreement and pro-arbitration policy in India (Section 7 read with Sections 5 and 16 of the Act)

A fresh line must be drawn to ensure the fulfillment of the intent of Parliament in enacting the Act and the 2015 Amendment Act and towards supporting commercial understandings grounded in the faith in arbitration.[54] It appears that a golden triangle i.e. Section 7 read with Sections 5 and 16 of the Act, has been enacted by Parliament which not only recognises the doctrine of separability but also restricts the court from interfering with the arbitrator’s power/ arbitral process.

English and Indian Law acknowledge that the basic principle which must guide judicial decision-making is that arbitration is essentially a voluntary assumption of an obligation by the contracting parties to resolve their disputes through a private tribunal.[55] Where commercial entities and persons of business enter into a transaction, they do so with a knowledge of the efficacy of the arbitral process.[56] The commercial understanding is reflected in the terms of the agreement between the parties.[57] The court has to impart to that commercial understanding a sense of business efficacy.[58]

In Ayyasamy v. A. Paramasivam,[59] the Supreme Court, quoting Russell on Arbitration concerning the doctrine of separability, held that doctrine of separability and Section 7 of the Arbitration Act, 1996 provides a statutory codification of the previous case law on this subject. The relevant extract of the judgment is as under:

54. …In Russell on Arbitration [24th Edn., 2015, para 2-007], the doctrine of separability has been summarised in the following extract:

The doctrine of separability.—An arbitration agreement specifies the means whereby some or all disputes under the contract in which it is contained are to be resolved. It is however separate from the underlying contract:

“An arbitration clause in a commercial contract … is an agreement inside an agreement. The parties make their commercial bargain … but in addition, agree on a private tribunal to resolve any issues that may arise between them.”

This is known as the doctrine of separability and Section 7 of the Arbitration Act, 1996 provides a statutory codification of the previous case law on this subject. …”

(emphasis supplied)

 

Given the statutory codification of the doctrine of separability in the Act (and even otherwise) and the interpretative approach adopted by the Indian Court as narrated above, the aforesaid foreign judgments which deal with ‘doctrine of separability and its effect’, ‘defined relationship whether contractual or not’, ‘meaning of transaction/contract’, ‘construction of arbitration agreement’ and ‘vice/public policy attached to the main agreement not affects the arbitration agreement’ would be squarely applicable for strengthening the institutional efficacy of arbitration in India.

To eliminate the vices of unnecessary litigation, Section 5 by a non-obstante clause, provides a clear message that there should not be any judicial intervention for scuttling the arbitration proceedings.[60]

Section 16 empowers the arbitral tribunal to rule upon its jurisdiction, including ruling on any objection for the existence or validity of an arbitration agreement. Section 16(1)(b) stipulates that a decision by the Arbitral Tribunal that a contract is null and void shall not entail ipso jure the invalidity of the arbitration clause. Hence, the invalidity of the contract between the parties does not render the arbitration agreement invalid as a consequence of the law.[61] This recognises as inhering in the arbitrator the jurisdiction to consider whether the main contract (other than the arbitration clause) is null and void.[62] The arbitration agreement survives for determining whether the contract in which the arbitration clause is embodied is null and void.[63]

It would be relevant to mention that even under Part II of the Act (Section 45), the legislature has embedded the doctrine of separability and its implication. In Part II as well, the Court is not to be influenced by the validity of the main agreement, even if the parties contend that the main agreement is not valid for any reason including ab initio invalidity. As long as the arbitration agreement is neither null and void nor inoperative and nor incapable of being performed, the Court would refer the matter to arbitration even though the main agreement is not valid.[64]

Non-applicability of Article 299 of the Constitution of India with the arbitration agreement

One may argue that the aforesaid position of law may be considered to be valid as it relates to the contract between private parties. However, when it comes to the agreement entered into by the State in the exercise of its executive power, non-fulfilment of the requirement of Article 299 of the Constitution of India would render the main agreement as null and void being contrary to public policy and with it, the arbitration agreement must collapse. It may also be argued that such public policy also attaches to the arbitration agreement rendering it null and void.

At first, the aforesaid argument appears to be attractive, but does not stand in law and deserves to be rejected for various reasons. As already explained, the public policy or reason for invalidity attached to the main agreement does not relate to the arbitration agreement. Further, Article 299 corresponds substantially to Article 175(3) of the Government of India Act, 1935. It is not in dispute that the underlying objective behind Article 299 is to ensure that no rights and obligations are created against the State without the blessing of the Governor or the President, as the case may be. There is a substantial and crucial difference between the main agreement and an arbitration agreement:

  • The main agreement provides for rights and obligations of the parties, whereas the arbitration agreement does not provide for any rights and obligations pertaining to the dispute in question. The main agreement deals with the substantive rights of the parties and the consequence thereof. In contrast, the arbitration agreement does not deal with substantive rights and is rather a procedural agreement between the parties;
  • In case of breach of the main agreement, the court may grant various remedies including specific performance thereof. However, in the case of an arbitration agreement, the only remedy available is the specific enforcement of the arbitration agreement.
  • When a contract contains an arbitration agreement, it is a collateral term relating to the resolution of disputes, unrelated to the performance of the contract. It is as if two contracts – one regarding the substantive terms of the main contract and the other relating to resolution of disputes – had been rolled into one, for purposes of convenience. An arbitration clause is, therefore, an agreement independent of the other terms of the contract or the instrument.

The contract not conforming to Article 299(1) is not void in the technical sense that it cannot be ratified. The Supreme Court of India held that there should be nothing to prevent the ratification of the contract by the Government especially if that was for the benefit of the Government.[65] Since the arbitration agreement incorporated in the main agreement neither prescribes any right/obligation nor relates to the performance of the substantive right under the main agreement, it would remain valid even if the rigor of Article 299 may not have been complied with.

Conclusion

 It is evident from above that both in common law as well as in the civil law jurisdictions, the courts have recognised the ambit and extent of principle of separability, which makes it imperative for the Indian Courts to make a fresh start given the adoption of the principle of separability by  Parliament in Section 7 of the Act. This gets further strengthened from the very fact that the aforesaid change in legislative policy requires that any doubts concerning the scope of arbitral issues should be resolved in favor of arbitration and that arbitration clauses should be construed as broadly as possible.[66] The evolution of these foreign jurisdictions as arbitration hubs lies within the pro-arbitration approach adopted therein as early as 1990s. In order to develop India as an arbitration hub, it is imperative for the Indian Courts to adopt such an approach and instil the confidence between the parties.

There is every reason to presume that the parties being consensus ad idem intend to have the defined legal relationships decided by the same tribunal[67] whether contractual or not, and the claims arising therefrom, irrespective of whether their contract is effective or not, since arbitration is intended to be a one-stop method of adjudication for the determination of all disputes.[68]

Therefore, the practice of unnecessary challenges to the arbitration agreement by the parties should be nipped at the bud and the parties must be directed to abide by the arbitration agreement for the same having been consensus ad idem, irrespective of the nature of invalidity attached to the main agreement between them.


*Alumni, National Law University Odisha (Batch of 2009-14), presently working as In-house Counsel at an Indian Conglomerate. Anurag may be reached at anuragnluo@gmail.com. The views expressed herein are personal and do not represent views of any organisation. 

[1]Vijay Karia v. Prysmian Cavi E Sistemi SRL, 2020 SCC OnLine SC 177 (3 Judges-Bench).

[2]Ayyasamy v. A. Paramasivam, (2016) 10 SCC 386, para 53.

[3]Id.

[4]Id.

[5]Caravel Shipping Services Pvt. Ltd. v.  Premier Sea Foods Exim Pvt. Ltd., (2019) 11 SCC 461;

Jugal Kishore Rameshwardas v.  Goolbai Hormusji, AIR 1955 SC 812.

[6]Sojuznefteexport (SNE) v. Joc Oil Ltd., Court of Appeal of Bermuda, Yearbook Commercial Arbitration 1990, Vol. XV [recently cited by Bermuda Supreme Court in Huawei Tech Investment Co. Ltd. v. Sampoerna Strategic Holdings Limited, (2014) SC (Bda) 8 Civ (14 February, 2014)].

[7] R.F. Nairman, J.  reiterated pro-arbitration bias in Vijay Karia v. Prysmian Cavi E Sistemi SRL, 2020 SCC OnLine 177 (3 Judges-Bench).

[8]Supra Note 6.

[9]Lord Diplock, Paal Wilson & Co. v. Partenreederei (sup.), (1983) AC 8541.

[10]Supra Note 6, para 42.

[11]Supra Note 6, para 81.

[12]Supra Note 6, para 84.

[13]Mackender v. Feldia, (1967) 2 QB 590.

[14]Id., supra Note 6, para 105.

[15]Fiona Trust and Holding Corpn v. Privalov, [2007] Bus LR 686 : [2007] UKHL 40.

[16]Id., para 5.

[17]Id., para 6.

[18]Id.

[19]Id., para 7.

[20]Id., para 10.

[21]Id.

[22]Id., para 13.

[23] Id., para 17.

[24]Id.

[25]Id.

[26]Id.

[27]Id., para 18.

[28]Id.

[29]Id.

[30]Id., para 32.

[31]Prima Paint Corpn. v. Flood & Conklin Manufacturing Co., (1967) 388 US 395, 404: 87 SCt 1801.

[32]Supra Note 15, para 32. Fiona Trust and Holding Corpn v Privalov, [2007] UKHL 40.

[33]Id., para 35.

[34]Beijing Jianlong Heavy Industry Group v. Golden Ocean Group Ltd., [2013] Bus LR D 58 : [2013] EWHC 1063 (COMM).

[35]Id., para 41.

[36]Id.

[37]Harbour Assurance Co. (UK) Ltd. v. Kansa General International Insurance Ltd., [1993] 3 WLR 42 : [1993] 1 Lloyd’s Rep 455.

[38]Id.; supra Note 34, para 26.

[39]Buckeye Check Cashing v. John Cardegna et al., 2006 SCC OnLine US SC 14: 546 US 440.

[40]Prima Paint Corp.v. Flood & Conklin Mfg. Co., 1967 SCC OnLine US SC 160 : 388 US 395 : 87 SCt 1801 : 18 LEd 2d 1270.

[41]Southland Corp. v. Keating, 1984 SCC OnLine US SC 19 :  465 US 1 (1984): 104 SCt 852: 79 LEd 2d 1.

[42]Rent–A–Center, West v. Antonio Jackson, 2010 SCC OnLine US SC 78 : 561 US 63 (2010) : 177 LEd 2d 403 (2010).

[43]Id.

[44]QH Tours Ltd v. Ship Design & Management (Aust) Pty Ltd., (1991) 33 FCR 227.

[45]Id.

[46]Id.

[47]Supra Note 6, paras 122 to 124.

[48]Supra Note 6, para 114.

[49]Supra Note 6, para 113.

[50]Buckeye Check Cashing v. John Cardegna et al., 546 U.S. 440 relaying upon Prima Paint Corp.v. Flood & Conklin Mfg. Co., 388 US 395: 87 SCt 1801: 18 LEd 2d 1270 and Southland Corp. v. Keating, 1984 SCC OnLine US SC 19 : 465 US 1 (1984) : 104 SCt 852: 79 LEd 2d 1.

[51]Supra Note 6, paras 94 & 95.

[52]Supra Note 6, para 142.

[53]Supra Note 6, para 143; Sections 70 and 65 of the Contract Act, 1872.

[54]Ayyasamy v. A. Paramasivam, (2016) 10 SCC 386, para 57.

[55] Supra Note 15; Id., paras 48 and 53.

[56]Supra Note 57, paras 48 and 53.

[57]Id.

[58]Id.

[59] Id., para 54.

[60]Id., para 12.2.

[61]Id., para 34, Swatantra Properties (P) Ltd. v.  Airplaza Retail Holdings Pvt. Ltd., Arbitration and Conciliation Appl. u/S. 11(4) No. 134 of 2017, Allahabad HC (Judgment dt. 28.05.2018).

[62]Id.

[63]Supra Note 57, para 34.

[64]Sasan Power Ltd. v. North American Coal Corpn. (India) (P) Ltd., (2016) 10 SCC 813, paras 49 and 81.

[65]Chaturbhuj Vithaldas v. Moreshwar Parasharan, AIR 1954 SC 236, para 42.

[66]Vijay Karia .v. Prysmian Cavi E Sistemi SRL , 2020 SCC OnLine 177 (3 Judges-Bench); David L. Threlkeld & Co. Inc. v. Metallgesellschaft Ltd. (London), (1991) 923 F 2d 245 (2d Cir).

[67]Supra Note 15, para 14; Federal Supreme Court of the Federal Republic of Germany (Bundesgerichtshof) (1970) 6 Arbitration International 79, 85.

[68]Supra Note 15, para 27.

Case BriefsHigh Courts

Bombay High Court: N.J. Jamadar, J., while disposing of an interim application filed by the defendants in a commercial division summary suit, held that the salutary object of the Arbitration and Conciliation Act, 1996, cannot be defeated by adding a claim over and above the claim in respect of the matter which is squarely covered by arbitration agreement. 

The suit was filed by the plaintiffs for recovery of a sum of over Rs 1. 24 crores on the basis of a memorandum of understating (“MoU”) entered into with the defendants and multiple negotiable instruments issued by the defendants in favour of the plaintiffs. The defendants filed the instant interim application seeking the reference of the dispute to arbitration in view of an arbitration clause in the MoU. The plaintiffs resisted the application averring that there was a series of transactions between them and the defendants. Their claim consisted of two parts, the first part based on cheques issued by the defendants and the second part based on bills of exchange. It was submitted that the arbitration clause in the MoU covered only the first part, whereas the second part was out of its purview. 

Narayan Sahu, counsel for the plaintiffs, submitted that the subject-matter of the suit cannot be bifurcated and, therefore, the application under Section 8 of the Arbitration and Conciliation Act became untenable. While on the other hand, Saurab Oka, counsel for the defendants insisted on allowing their application under Section 8 and refer the dispute for arbitration. 

According to the High Court, the crucial question which wrenches to the fore was: whether the effect and force of the arbitration clause gets diluted on account of inclusion in the suit, of a claim in respect of a dispute which is not governed the arbitration clause?

The Court thought it fit to consider the question from the perspective of the legislative object contained in Section 8. Referring to Order 2 Rules 3 and 6 CPC and relying on the Supreme Court decisions in Sundaram Finance Ltd. v. T. Thankam, (2015) 14 SCC 444, it was held by the High Court that if the submission of plaintiff as aforementioned is readily accepted, it has the propensity to give a long leash to the plaintiff to circumvent the arbitration agreement by uniting a cause of action which is beyond the purview of the arbitration agreement. It would have the effect of denuding Section 8 of its force and vigour. Such an interpretation would also derogate from the object which the Arbitration and Conciliation Act, 1996 is intended to achieve: of minimum judicial intervention where parties have agreed to arbitrate the dispute.

In the peculiar facts of the case, the Court referred the dispute to arbitration in respect of the first transaction which was squarely covered by the arbitration clause and exercised its power under Order 2 Rule 6 CPC to direct the plaintiffs to institute a separate suit in respect of the second transaction not covered by the arbitration clause. [Taru Meghani v. Shree Tirupati Greenfield, 2020 SCC OnLine Bom 110, decided on 10-01-2020] 

Case BriefsHigh Courts

Bombay High Court: G.S.Patel, J., held that an arbitration agreement must be stamped in the state where the arbitration is to take place, even if the only “thing to be done” in the state is the arbitration of the dispute. In this particular case, the contract was executed outside the state and was concerned with work that was to be carried out in Visakhapatnam, however the arbitration clause specified that in case of any dispute, arbitration would take place in Mumbai. The main agreement had been stamped as per relevant laws in Visakhapatnam. When a dispute arose and the parties couldn’t decide upon an arbitrator by themselves, the matter was referred to the Bombay High Court under Section 11 of the Arbitration and Conciliation Act, 1996. Upon doing so, a further dispute arose as to whether the arbitration agreement would be recognised in Maharashtra as it was not stamped there.

The Court took into account the case of Garware Wall Ropes Ltd. v. Coastal Marine Constructions & Engineering Ltd., (2019) 9 SCC 209 where the Supreme Court had ruled that an arbitration agreement cannot be acted upon unless it is duly stamped. The Court relied upon the combined reading of Sections 3(b) and 19 of the Maharashtra Stamp Act, 1958 which specify that stamp duty has to be paid for instruments (1) executed out of State and (2) relating to any matter of “thing done or to be done” in the State and (3) is received in the State. In this backdrop, the Court proceeded to deal with whether arbitration would be a “thing to be done” under the abovementioned sections. In this regard, the judge observed that to insist that arbitration clauses alone are exempt from stamp duty under the Act would entail severing it from the rest of the agreement, which is not possible. It was clarified that arbitration is founded in the contract and Garware Wall Ropes Case also specifies that such a contract is one and indivisible at least to the extent of its arbitration agreement. 

The Court further stated that even on a literal appreciation of the provisions of the Maharashtra Stamp Act, 1958 they could not rule in favour of the applicant. The Court finally clarified that if any stamp duty has been paid in the other state then an adjustment will be done but the applicant will not be exempted from paying stamp duty in Maharashtra. [S. Satyanarayana Co. v. West Quay Multiport (P) Ltd., 2019 SCC OnLine Bom 4595, decided on 22-11-2019]

Case BriefsSupreme Court

Supreme Court: The bench of AM Khanwilkar and Ajay Rastogi, JJ has held that the Chief Justice or   his Designate, in exercise of power under Section 11(6) of the  Arbitration and Conciliation Act, 1996, cannot directly make an appointment of an independent arbitrator without, in the first instance, resorting to ensure that the remedies provided under the arbitration agreement are exhausted.

Clause (c) of sub­section (6) of Section 11 relates to failure to perform any function entrusted to a person including an institution and also failure to act under the procedure agreed upon by the parties. Noticing the intent behind the said clause, the Court explained the scheme of Section 11(6) and said,

“clause(a) refers to the party failing to act as required under that procedure; clause(b) refers to the agreement where the parties fails to reach to an agreement expected of them under that procedure and clause (c ) relates to a person which may not be a party to the agreement but has given his consent to the agreement and what further transpires is that before any other alternative is resorted to, agreed procedure has to be given its precedence and the terms of the agreement has to be given its due effect as agreed by the parties to the extent possible.“

The Court hence held that corrective measures have to be taken first and the Court is the last resort.

The Court also noticed that by appointing an arbitrator in terms of sub­section (8) of Section 11 of Act, 1996, due regard has to be given to the qualification required for the arbitrator by the agreement of the parties and also the other considerations such as to secure an independent and impartial arbitrator.

The Court, hence, held,

“To fulfil the object with terms and conditions which are cumulative in nature, it is advisable for the Court to ensure that the remedy provided as agreed between the parties in terms of the contract is first exhausted.”

[Union of India v. Parmar Construction Company, 2019 SCC OnLine SC 442, decided on 29.03.2019]

Case BriefsHigh Courts

Delhi High Court: A Single Judge Bench comprising of Pratibha M. Singh, J. allowed an appeal filed by the Government of NCT of Delhi which challenged the award passed by a sole arbitrator.

The brief facts were that the Government called a tender for providing sanitation and scavenger services inside and outside the building including reception services from designated places for the Delhi Sachivalaya/Secretariat, IP Estate, New Delhi. The tender proforma contained various terms and conditions. One Yasikan Enterprises – a sole proprietary concern of Jagdish Kumar submitted his offer.  The contract for sanitation services was entered into with Yasikan Enterprises. The contractor started raising bills. It was the Government’s case that the contractor was entitled to only a sum of Rs 73,652 per month as per the calculation submitted, based on measurements provided by Public Works Department. The contractor claimed that he was entitled to Rs 2,63,982 per month. The disputes between the parties were referred to arbitration in terms of the arbitration clause. However, it is pertinent to note that the arbitration clause was invoked by Yasikan Enterprises (P) Ltd. which was a company registered under the Companies Act, 1956. A representation was made to the Lieutenant Governor invoking arbitration and vide letter dated 24th September 2004, the Arbitrator was appointed. The appellant submitted that there was no arbitration clause with the company Yasikan Enterprises (P) Ltd. The contract was awarded to the firm Yasikan Enterprises, which was a sole proprietary concern.

The High Court perused the record and observed that as per Section 7 of the Arbitration and Conciliation Act, every arbitration agreement has to be in writing between the parties. It also has to be signed by the parties. In the present case, there was no arbitration agreement signed between the appellant and Yasikan Enterprises (P) Ltd. The company was not awarded the contract. The offer was submitted by Yasikan Enterprises as a sole proprietary firm. It was signed by Jagdish Kumar as the sole proprietor. The company being a distinct legal entity from the sole proprietorship, the arbitration clause, in the Court’s opinion, did not devolve upon the company. Moreover, the arbitration clause is an independent clause which is not assignable. The Court held the reference to arbitration was contrary to law. Furthermore, on merits as well, the order impugned was found liable to be set aside. Orders were made accordingly. The appeal was, thus, allowed. [Govt. (NCT of Delhi) v. Yasikan Enterprises (P) Ltd.,2018 SCC OnLine Del 11918, dated 16-10-2018]

Case BriefsHigh Courts

Delhi High Court: A Single Judge Bench comprising of Navin Chawla, J., dismissed a petition filed under Section 11(6) of Arbitration and Conciliation Act, 1996 seeking appointment of a sole arbitrator for adjudication of the dispute between the parties.

The dispute arose in relation to a contract executed between the petitioner and the respondents for construction of EWS houses. Arbitration Agreement between the parties was contained in Clause 25 of the said contract, which not only provided for hierarchical manner of adjudication of claims raised by the contractor but also gave a specific timeline for the decision of each authority. The primary contention raised on behalf of the respondents was that the petition was not maintainable in as much as the petitioner did not follow the procedure prescribed in the Agreement before filing of the present petition.

In order to appreciate the submissions of the respondents, the High Court perused the Arbitration Agreement. On reading the sequence of events, the Court noted that the procedure as prescribed in Clause 25 was not followed by the petitioner. It was observed that Section 11(6) comes into play only where the other party fails to act as required under the procedure. The High Court was of the view that the petitioner, itself, having not followed the procedure as prescribed in the Arbitration Agreement, cannot make a complaint against respondents’ alleged failure to act in accordance with the same. In the facts and circumstances of the present case, it was held that the petition was liable to be dismissed as the petitioner itself failed to follow the procedure defined in the Arbitration Agreement. The order was made accordingly. [Ved Prakash Mithal and Sons v. DDA,  2018 SCC OnLine Del 9884, dated 10-07-2018]

Case BriefsHigh Courts

Calcutta High Court: A Single Judge Bench comprising of Ashis Kumar Chakraborty. J. decided an arbitration petition, wherein the arbitrator was appointed by the Court in light of disagreement between the parties on appointment of the arbitrator.

The parties entered into a Contract for certain works. Clause 10.1 of the General Conditions of Agreement provided that any dispute arising under and out of the said contract was to be decided by arbitration process conducted by the arbitrator appointed by mutual consent of both the parties. Eventually a dispute arose between the parties under the Contract. The petitioner suggested that the matter be decided by SCOPE, Delhi. However, the respondent refused the suggestion. Therefore, the application under Section 11(6) of the Arbitration and Conciliation Act, 1996 was filed before the Court for appointing the arbitrator.

The Court perused the agreement and found that there was no dispute as to the fact that there was an arbitration clause in the contract in terms of Clause 10.1 of the General Conditions of Contract. The Court held that in view of the insertion of sub-section (6A) of Section 11, an application under Section 11(6) has to succeed if there is no dispute among the parties as to the existence of an arbitration clause. Accordingly, the petition was allowed and retired Justice Tapan Kumar Dutt was appointed as the sole arbitrator to decide upon the matter. [F. Harley and Co. (P) Ltd. v. SAIL, 2018 SCC OnLine Cal 2054, dated 07.05.2018]