Case BriefsSupreme Court

Supreme Court: In an issue revolving around the importance of the words “final and binding” in an arbitration agreement, the bench of Surya Kant* and Abhay S Oka, JJ has held that when the arbitration agreement luminously discloses the intention and obligation of the parties to be bound by the decision of the tribunal, the lack of express mention of the words “final and binding” does not mean that a valid arbitration clause does not exist.

The Court was deciding the case relating to a Development Agreement. When a dispute arose between the parties, the Appellant invoked the arbitration clause. Though the notice was duly served, the Respondents failed to respond to it, leading to the Appellant filing an application under Section 11 of the Arbitration and Conciliation Act, 1996 before the Bombay High Court.

However, the Respondents contended that the contract lacked the express wording, like “the parties agreeing in writing to be bound by the decision of an arbitral tribunal, necessary for it to be considered a valid and binding agreement to refer the disputes to arbitration.

The High Court agreed with the Respondent and held that the Appellant’s application under section 11 was not maintainable for want of a valid arbitration clause.

Disagreeing with the observation of the High Court, the Supreme Court held that the deficiency of words in agreement which otherwise fortifies the intention of the parties to arbitrate their disputes, cannot legitimise the annulment of arbitration clause.

The Court noticed that the subject-clause, in the case at hand, luminously discloses the intention and obligation of the parties to be bound by the decision of the tribunal, even though the words “final and binding” are not expressly incorporated therein. Going through the other parts of the arbitration agreement, the Court noticed that the intention of the parties was surely to refer the disputes to arbitration. Hence, in the absence of specific exclusion of any of the attributes of an arbitration agreement, the Respondents’ plea of non- existence of a valid arbitration clause, is seemingly an afterthought.

The Court observed,

“Even if we were to assume that the subject-clause lacks certain essential characteristics of arbitration like “final and binding” nature of the award, the parties have evinced clear intention to refer the dispute to arbitration and abide by the decision of the tribunal. The party autonomy to this effect, therefore, deserves to be protected.”

The Court stressed on the fact that UNCITRAL Model Law on International Commercial Arbitration, 1985 from which the Arbitration and Conciliation Act, 1996 originated, envisages minimal supervisory role by courts. When Section 7 or any other provisions of the Act do not stipulate any particular form or requirements, it would not be appropriate for a court to gratuitously add impediments and desist from upholding the validity of an arbitration agreement.

It was, hence, observed that it is imperative upon the courts to give greater emphasis to the substance of the clause, predicated upon the evident intent and objectives of the parties to choose a specific form of dispute resolution to manage conflicts between them. The intention of the parties that flows from the substance of the Agreement to resolve their dispute by arbitration are to be given due weightage.

[Babanrao Rajaram Pund v. Samarth Builders & Developers, 2022 SCC OnLine SC 1165, decided on 07.09.2022]


*Judgment by: Justice Surya Kant

Op EdsOP. ED.

   

Background

Arbitration is a “creature of consent”; parties consensually bind themselves to an arbitration agreement for the resolution of their disputes. It follows that generally, only the signatories to such an arbitration agreement should be bound by, and attached to, the arbitration that follows a dispute. However, the group of companies doctrine provides that, where a corporation has signed an arbitration agreement, it can be used to bind such a corporation's non-signatory affiliates if the “mutual intention” of the parties was to bind both the signatories and such non-signatories.

In Cox and Kings v. SAP India (P) Ltd. (Cox and Kings),1 after analysing the position of the group of companies doctrine in India, the Supreme Court made a reference to a larger Bench for the examination of this doctrine. The authors, by examining both majority and minority opinions, seek to showcase the insufficient reasoning in the majority opinion and argue in favour of the applicability of the group of companies doctrine in India.

Turning points — The Chloro Controls case, the 246th Law Commission Report and the 2015 Amendment

A pioneering attempt to bring the group of companies doctrine into the sphere of mainstream commercial arbitration was brought about by the ICC award in Dow Chemical v. ISOVER Saint Gobain (Dow Chemical).2 While relying on the general principles of international arbitration law, the Court in Dow Chemical case provided that “if the non-signatory company has effectively and individually participated in the conclusion, performance and termination of the respective contract, appeared as the actual party both to the contract and to the arbitration clause”, then it may be allowed to take advantage of the arbitration clause.3

The commercial jurisprudence that flowed from the Arbitral Tribunal was that notwithstanding the parties' distinct juridical identity, they would constitute a “group of companies”.

In India, the group of companies doctrine was first adopted and applied in Chloro Controls India (P) Ltd. v. Severn Trent Water Purification Inc. (Chloro Controls).4 Chloro Control primarily did two things; first, it concretised the exceptional cases in which non-signatories may be subject to the arbitration agreement. The Supreme Court, in establishing these exceptional cases, provided that the parties must be held to 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.”5 This is the threefold test or the “mutual intentions” test. Second, it provided for the distinction in the language of Sections 456 and 87 of the Arbitration and Conciliation Act, 1996 (A&C Act). The Supreme Court, while distinguishing the language of Sections 45 and 8 of the Act, stated that “in Section 45, the expression ‘any person' clearly refers to the legislative intent of enlarging the scope of the words beyond ‘the parties' who are signatory to the arbitration agreement”.8 In doing so, the Court allowed non-signatory parties to be referred to arbitration provided they fulfil the “mutual intentions” test.

In 2014, shortly after the judgment laid down in Chloro Controls case9, the Law Commission of India, in its 246th Report sought to delve into the “definition of party” under the Act. The primary concern laid down by the Law Commission of India was that the existing definition was “restrictive” and implicates only signatory to an arbitration agreement.10 In accordance with the interpretation laid down in Chloro Controls case11 on the scope of Section 45 of the Act, the Law Commission recommended an amendment to Section 8 of the Act. The Law Commission noted that the language mentioned in Section 45 of the A&C Act i.e. “person claiming through or under [a party]”, is absent in Section 8 of the Act and the latter should accordingly be amended to cure this inconsistency between Parts I and II of the A&C Act.12 Moreover, the Law Commission of India recommended that an amendment be made “to the definition of ‘party' under Section 2(h)13 of the Act”.14 In 2015, the Indian legislature amended Section 8 of the Act in accordance with the Law Commission's recommendation.15 Post amendment, a reference to arbitration could be made “by a party to an arbitration agreement or any person claiming through or under him”.16

Subsequent refinements

The aforementioned developments were further revisited and refined by the Supreme Court in its subsequent decisions. In Ameet Lalchand Shah v. Rishabh Enterprises [Ameet Lalchand]17, the Supreme Court cited Chloro Controls case18 in conjunction with the 246th Law Commission Report and following the 2015 Amendment to Section 8 of the Act to hold that “various agreements could be resolved only by referring all the four agreements and the parties thereon to arbitration”.19

It is important to note that the application of the “mutual intentions” test did not remain confined to references to arbitration under Section 8 of the Act. Rather, in Cheran Properties Ltd. v. Kasturi and Sons Ltd. [Cheran Properties], the issue into consideration was whether a non-signatory could be bound by an arbitral award. Section 35 of the Act states that an arbitral award “shall be final and binding on the parties and persons claiming under them respectively”.20 By reaffirming the threefold test laid down in Chloro Controls case21, the Supreme Court stated that “[t]he group of companies doctrine is essentially intended to facilitate the fulfilment of a mutually held intent between the parties, where the circumstances indicate that the intent was to bind both signatories and non-signatories.”22 In this regard, the Supreme Court stated that the expression “persons claiming under them” indicates the legislative intention to bind non-signatories to the arbitral awards as well.

The group of companies doctrine was further refined and crystallised in MTNL v. Canara Bank [MTNL]. In this case, Indu Malhotra, J. made an attempt to harmonise the principle of separate legal personality with the group of companies doctrine.23 On one hand, she stated that “each company is a separate legal entity which has separate legal rights and liabilities” and that “the company entering into the agreement, would alone be bound by it”.24 On the other hand, with respect to the group of companies doctrine, she stated that,

10.3 [a] non-signatory can be bound by an arbitration agreement on the basis of the “group of companies” doctrine, where the conduct of the parties evidences a clear intention of the parties to bind both the signatory as well as the non-signatory parties. Courts and tribunals have invoked this doctrine to join a non-signatory member of the group, if they are satisfied that the non-signatory company was by reference to the common intention of the parties, a necessary party to the contract.

(emphasis supplied)

Indu Malhotra, J. seems to be explaining how the group of companies doctrine is not affecting the applicability of the separate legal identity principle i.e. the former does not entail assuming that separate entities are one and the same. Rather, the non-signatories are bound by the arbitration agreement because of the “mutual intentions” test, without having any impact on the separateness of the entities.

Recently, in ONGC Ltd. v. Discovery Enterprises (P) Ltd.25, D.Y. Chandrachud, J. examined the group of companies doctrine. Inter alia, he took into account Indowind Energy Ltd. v. Wescare (India) Ltd.26, Chloro Controls case27, Ameet Lalchand case28, Cheran Properties case29, and MTNL case30 and ruled that the following factors need to be considered in law for applying this doctrine:31

(i) the mutual intent of the parties;

(ii) the relationship of a non-signatory to a party which is a signatory to the agreement;

(iii) the commonality of the subject-matter;

(iv) the composite nature of the transaction; and

(v) the performance of the contract.

This view of the group of companies doctrine is erroneous because of the following reasons. The parties' “mutual intent” is not one of the factors, but the ultimate finding based on which the application of the group of companies doctrine is determined. Making it one of the factors unnecessarily and unreasonably convolutes the established “mutual intentions test”. Moreover, the underlying “mutual intentions” test is threefold. It comprises a direct relationship of the non-signatory with the signatory party, direct commonality of the subject-matter, and composite nature of the relevant transaction.

Furthermore, in Chloro Controls case32, the feasibility to perform the main agreement without the aid, execution, etc. of the ancillary agreements was considered as one of the sub-factors to the third element/factor i.e. the composite nature of the transactions involved. In this regard, making “performance of the contract” a separate factor leads to uncertainty in the application of the doctrine; this is especially because the application of this doctrine is heavily based on the intricate facts of each case.

Cox and Kings

Recently, the Supreme Court examined the application of the group of companies doctrine in India and made a reference to a larger Bench. In Cox and Kings case33, two views were put forth by the 3-Judge Bench of the Supreme Court.34

The majority view of N.V. Ramana, C.J. and A.S. Bopanna, J. which was authored by the former, was in disagreement of the applicability of the group of companies doctrine in India. On the other hand, Surya Kant, J. put forth a dissenting view. Surya Kant, J. albeit in support of the group of companies doctrine in India, also referred certain questions of law to a larger Bench for the purposes of clarity in the application of the same.

N.V. Ramana, C. J. criticised the group of companies doctrine by stating that a “joinder [of non-signatories] has the effect of obliterating the commercial reality, and the benefits of keeping subsidiary companies distinct” and that “[c]oncepts like single economic entity are economic concepts difficult to be enforced as principles of law.”35 However, the group of companies doctrine does not entail circumventing the principle of separate legal personalities. Nor does it entail applying the concept of a “single economic entity”. The Chief Justice, while arriving at this criticism, specifically focused on the obiter stated by Indu Malhotra, J. in MTNL case.36 Inter alia, she had cited previous International Chamber of Commerce (ICC) Arbitration cases to discuss the concept of “single economic entity;” however, as discussed in the preceding paragraphs, the ratio in this case was based on the concept of “mutual intent.” The Chief Justice's 's undue focus on the obiter, and not the ratio of MTNL case37 raises serious doubts about his conclusion opposing the application of the group of companies doctrine in India.

Moreover, the Chief Justice stated that:

50. [i]t is evident from the discussion above that the group of companies doctrine must be applied with caution and mere fact that a non­-signatory is a member of a group of affiliated companies will not be sufficient to claim extension of the arbitration agreement to the non­-signatory.38

(emphasis supplied)

Even this criticism is misguided as the relationship between the signatory with the non-signatory(ies) is just one of the factors that are taken into consideration while arriving at a finding of “mutual intent”.

The Chief Justice referred the following two questions of law to a larger Bench:

(a) Whether the phrase “claiming through or under” in Sections 8 and 1139 could be interpreted to include “group of companies” doctrine?

(b) Whether the “group of companies” doctrine as expounded by Chloro Controls case40 and subsequent judgments are valid in law?

In the opinions of the Chief Justice and A.S. Bopanna, J. the group of companies doctrine is not in lieu with international principles and takes away from the foundational principles of arbitration which were entrenched in consent.

The majority raised a rather critical concern that the doctrine's application was based more on economics and convenience rather than principles of law itself. This brings about an important question of whether convenience or consent and party autonomy is on a higher pedestal in the conception of legal doctrines such as the group of companies.

On the other hand, in his dissenting opinion, Surya Kant, J. took a more pro-doctrine stance. He correctly pointed out that:

92. … joining a third party to arbitration based on the convergence of a group of companies as a “single economic unit” is no longer the norm under the group of companies doctrine. Instead, the standard is premised primarily on implied consent drawn from the acts and conduct of an entity within the group of companies.41

He postulated that “a non-signatory may act duplicitously to represent itself as the driver of the contract while avoiding any liabilities arising from it by not signing the contract”. It may be understood that Surya Kant. J's understanding of the theory examines the intent of the non-signatory and whether or not that intent positions the non-signatory in the same position as a contracting entity.

In this light, he referred the following questions of law to a larger Bench:

(a) Whether the group of companies doctrine should be read into Section 8 of the Act or whether it can exist in Indian jurisprudence independent of any statutory provision?

(b) Whether the group of companies doctrine should continue to be invoked on the basis of the principle of “single economic reality”?

(c) Whether the group of companies doctrine should be construed as a means of interpreting the implied consent or intent to arbitrate between the parties?

(d) Whether the principles of alter ego and/or piercing the corporate veil can alone justify pressing the group of companies doctrine into operation even in the absence of implied consent?

Conclusion

The relevance of a doctrine such as the group of companies in Indian arbitration law is one that is undisputed. However, we are standing at international crossroads, where the requirement of consent and party autonomy seems to be directly conflicting and balancing the two within the landscape of arbitration has become more pertinent than ever.

One can only anticipate the direction that the larger Bench will take, however, greater clarity on the application of the doctrine will ensure that the judicial discretion in its application will be curbed.


† 3rd year law student at National Law University, Jodhpur. Author can be reached at <priyanshu.shrivastava@tradelawdevelopment.com>.

†† 3rd year law student at National Law University, Jodhpur. Author can be reached at <fatema.kinkhabwala@nlujodhpur.ac.in>.

1. 2022 SCC OnLine SC 570.

2. ICC Case No. 4131 of 1982 (interim award dated 23-9-1982).

3. Dow Chemical case, ICC Case No. 4131 of 1982 (interim award dated 23-9-1982).

4. (2013) 1 SCC 641.

5. (2013) 1 SCC 641.

6. Arbitration and Conciliation Act, 1996, S. 45.

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

8. Chloro Controls case, (2013) 1 SCC 641.

9. (2013) 1 SCC 641.

10. Law Commission of India, 246th Report on Amendments to the Arbitration and Conciliation Act, 1996 (August 2014).

11. (2013) 1 SCC 641.

12. 246th Law Commission of India Report (2014).

13. Arbitration and Conciliation Act, 1996, S. 2(h).

14. 246th Law Commission of India Report (2014).

15. Arbitration and Conciliation (Amendment) Act, 2015.

16. Arbitration and Conciliation (Amendment) Act, 2015, S. 8(1).

17. (2018) 15 SCC 678.

18. (2013) 1 SCC 641.

19. Ameet Lalchand case, (2018) 15 SCC 678, para 24.

20. (2018) 16 SCC 413.

21. (2013) 1 SCC 641.

22. Cheran Properties Ltd. v. Kasturi and Sons Ltd., (2018) 16 SCC 413, para 23.

23. (2020) 12 SCC 767.

24. (2020) 12 SCC 767, 778.

25. 2022 SCC OnLine SC 522.

26. (2010) 5 SCC 306.

27. (2013) 1 SCC 641.

28. (2018) 15 SCC 678.

29. (2018) 16 SCC 413.

30. (2020) 12 SCC 767.

31. ONGC Ltd. v. Discovery Enterprises (P) Ltd., 2022 SCC OnLine SC 522.

32. (2013) 1 SCC 641.

33. 2022 SCC OnLine SC 570.

34. 2022 SCC OnLine SC 570.

35. 2022 SCC OnLine SC 570, para 40.

36. (2020) 12 SCC 767.

37. (2020) 12 SCC 767.

38. Cox and Kings case, 2022 SCC OnLine SC 570.

39. Arbitration and Conciliation Act, 1996, S. 11.

40. (2013) 1 SCC 641.

41. Cox and Kings case, 2022 SCC OnLine SC 570.

Calcutta High Court
Case BriefsHigh Courts

   

Calcutta High Court: In a petition challenging the appointment of sole Arbitrator by the respondent, Shekhar B. Saraf, J., held that merely because an arbitration clause provides for an illegal method of appointment of arbitrator, it does not come to an end and after removing the illegal portion of the arbitration clause, Courts can retain the remaining clause to give effect to the intention of the parties.Facts of the Case

Petitioner and respondent entered into a loan agreement amount of Rs. 5,50,00,000/- dated 29.08.2016. Due to alleged failure to repay the loan amount by the petitioner, respondent issued the notice of arbitration and unilaterally appointed the sole arbitrator.

The petitioner challenged the unilateral appointment of the sole arbitrator under S. 14 of the Arbitration and Conciliation Act, 1996 (‘the Act'). The arbitrator adjourned the arbitration sine die after learning the fact of the challenge of his appointment by the petitioner.

Petitioner's Contention

The petitioner contented that since the sole Arbitrator was unilaterally appointment by the respondent, he become de jure enabling him to perform his function under S. 14(1)(a) of the Act. The arbitration agreement itself becomes invalid as a portion of arbitration agreement provides for unilateral appointment of arbitrator making it ex-facie illegal and invalid. Moreover, the loan agreement itself involves the alleged matter of fraud and forgery, therefore substitution of arbitrator should not be allowed.

Court's observation

Relying on TRF Ltd. v. Energo Engineering Projects Ltd., (2017) 8 SCC 377 and Perkins Eastman Architects DPC v. HSCC (India) Ltd, (2019) SCC Online SC 1517 where it was held that an individual who has an interest in the outcome of a dispute also cannot nominate a sole arbitrator, the Court observed that indeed the Arbitrator was unilaterally appointed therefore, he becomes de jure unable to perform his functions and his mandated stands automatically terminated under S. 14 of the Act. The Court stated that

“The guiding principle is transparency, fairness, neutrality and independence in the selection process and hence, appointment of a sole arbitrator can either be with mutual consent of parties or by an order of the competent court. There can be no third way.”

While deciding the issue of whether the mandate of such an arbitrator, whose appointment is impermissible and illegal is automatically terminated under S. 14(1)(a) of the Act on account of being de jure unable to perform his functions, the Court relied on HRD Corpn. v. GAIL (India) Ltd., (2018) 12 SCC 471 and Bharat Broadband Network Ltd. v. United Telecoms Ltd., (2019) 5 SCC 755 where it was held that “… a case which falls under Section 12(5), Section 14(1)(a) of the Act gets attracted inasmuch as the arbitrator becomes, as a matter of law (i.e., de jure), unable to perform his functions under Section 12(5), being ineligible to be appointed as an arbitrator. This being so, his mandate automatically terminates, and he shall then be substituted by another arbitrator under Section 14(1) itself”.Thus, the Court held that where due to lack of inherent jurisdiction, the arbitrator does not have the power to decide on the objection regarding his ineligibility under S. 14(2) of the Act and the same has to be dealt with only by this Court.

The Court relied on Vidya Droalia v. Durga Trading Corpn., (2021) 2 SCC 1 and A. Ayyasamy v. A Paramasivam, (2016) 10 SCC 386, where it was observed that mere allegation of fraud is not sufficient to detract parties from the obligation to submit their disputes to arbitration and negated the contention of petitioner i.e. since the agreement itself is forged and fabricated and in the absence of any loan agreement, there exists no arbitration agreement, therefore this Court cannot appoint a substitute arbitrator under the Act.

The Court also rejected the argument of the petitioner that the entire arbitration agreement becomes illegal or invalid when the procedure of appointment is illegal.

Conclusion

Appointing the sole arbitrator to resolve the disputes between the parties, the Court held that the Court while exercising powers under S. 14 of the Act for appointing a substitute arbitrator will be guided by the principles of S. 11 of the Act.

[Yashovardhan Sinha HUF v. Satyatej Vyapaar (P) Ltd., 2022 SCC OnLine Cal 2386, decided on 24-08-2022]


*Ritu Singh, Editorial Assistant has put this report together.

Calcutta High Court
Case BriefsHigh Courts

   

Calcutta High Court: While deciding a review petition, Debangsu Basak, J. held that the court while exercising powers under Section 11 of the Arbitration and Conciliation Act, 1996 cannot substitute arbitration agreement with conduct of parties.

Facts of the Case

The respondent filed an application under Section 11 of the Arbitration and Conciliation Act, 1996 for the appointment of an arbitrator after a dispute arose between the parties regarding the execution of the work as per Clause 13 of the work order issued by the applicant in favor of respondent.

On the direction of the Supreme Court, the applicant filed a review petition as he could not place relevant judgement before the High Court when the impugned order was passed for which he filed Special Leave Petition before the Supreme Court.

Contention of the Parties

The Applicant contended that there was no arbitration agreement between the parties and merely because the applicant did not dispute the same at the relevant stage, the Court couldn't have appointed the arbitrator.

The respondent contended that since the applicant did not dispute the arbitration agreement in its pleadings, therefore, it was a consent order, and it cannot be allowed to take a different stand now. Moreover, the applicant has submitted to the jurisdiction of the Arbitration Tribunal as he filed the counter claim and also, filed an application under Section 16 of the Arbitration and Conciliation Act, 1996.

The respondent also contended that if there is a dispute regarding the existence of arbitration agreement, the same shall be determined by the Arbitration Tribunal.

Observation and Analysis:

The Court observed that as per Clause 13, the option of arbitration was only available to government enterprises and since the respondent is not a government enterprise, it cannot avail the same remedy.

Relying on Pravin Electricals (P) Ltd. v. Galaxy Infra and Engineering (P) Ltd., (2021) 5 SCC 671, the Court held that “…the fundamental basis for referring the parties to arbitration being an arbitration agreement in writing between them, never existed between the parties for the applicant herein to waive or acquiesce any of its rights.”

The Court also observed that the Court while exercising powers under Section 11 of the Arbitration and Conciliation Act, 1996 is bound to examine the existence of the arbitration agreement and if it is not possible for the court “to weed out manifestly and ex-facie non-existent and invalid arbitration agreements and non-arbitrable disputes” then only it can refer the issue related to existence of arbitration agreement to the arbitrator for determination as a preliminary issue.

The Court held that in absence of the agreement, the Court cannot refer the parties to arbitration merely because the respondent did not raise objections.

[Eastern Coalfields Ltd. v. RREPL-KIPL (JV), 2022 SCC OnLine Cal 2350]


*Ritu Singh, Editorial Assistant has put this report together.

Experts CornerSwarnendu Chatterjee

   

Introduction

The fundamental rule laid out by the Arbitration and Conciliation Act, 1996 (hereinafter “Arbitration Act”) requires the existence of an arbitration agreement between the parties to put forward the dispute before an arbitrator than a court. However, this fundamental rule is being challenged by the Micro, Small and Medium Enterprises Development Act, 2006 (hereinafter “MSME Act”).

In order to inscribe guidelines impacting MSMEs besides the sector’s limits and fundings, the MSME Act was notified in 2006. The MSME Act aims to accelerate these businesses’ growth and raise their level of competitiveness. It offers the first-ever legal framework for recognising the idea of an “enterprise”, which includes businesses that provide both goods and services. The Act seeks to protect the interests of both sellers (MSME parties) and the buyers (the non-MSME parties) in a business transaction. Section 18 of the Act states that regardless of the existence or non-existence of an arbitration agreement, sellers recognised under the MSME Act can readdress the matter to conciliation before the Micro and Small Enterprises Facilitation Council. Further on non-resolution of the dispute, it can be referred to arbitration.

Interplay between Arbitration Act and MSME Act

In circumstances when a disagreement develops between an MSME/supplier and a non-MSME/buyer, precedents have evolved on the interplay between the MSMED Act, 2006 and the Arbitration Act. Further some rules so developed are:

  1. In accordance with provision of Section 18(3) of the MSME Act, Limitation Act applies to such cases pari materia to the Arbitration under the Arbitration Act.3

  2. Any award passed by the MSME Facilitation Council will be deemed as an award under the Arbitration Act.4

  3. MSME parties are relieved of the obligation to deposit 75% at the time of filing Section 34 of the Arbitration Act.5

Analysis of judicial pronouncements

The judgment in SAIL v. Micro, Small Enterprise Facilitation Council6 ruled that no provision of MSME Act negate the arbitration agreement between the parties. Additionally, it validated the existence of arbitration agreement after conciliation. The judgment in Silpi Industries v. Kerala SRTC7 in addition to deciding upon the issue of where a non-MSME party can pursue a claim, lays down non-MSME party's right to counterclaim before the Facilitation Council when the claim of the MSME is already pending before it. Though the Silpi Industries8 case does not contradict the Steel Authority case9, yet it does not delve into the aspect of whether, or not, the non-MSME has a right to choose jurisdiction with respect to its own claims against the MSME, which can leave the confusion among the applicants unresolved. It further added that owing to the special nature of MSME Act, the general provision of Arbitration Act shall not apply (applied the doctrine of generalia specialibus non derogant).

While some previous judgments10 tried to avert the uncertainty by stating that since the Arbitration Act’s provisions apply to both arbitrations conducted under individual clauses and arbitrations conducted by the Council under Section 18, there is no question that an independent arbitration agreement will no longer be enforceable because the overriding clause only supersedes laws that are in conflict with it yet it could not clear the air as it faced withdrawal from various High Courts.11 This position was settled by the High Court of Bombay’s ruling in Porwal Sales v. Flame Control Industries,12 which exposed an inconsistency in the MSME Act and held that, in the event of a dispute between parties, the provisions of the MSME Act would apply if the supplier first invokes the Council’s jurisdiction. However, the rules of the MSME Act might not apply to such arbitration proceedings if the buyer first initiates arbitration under the parties’ contract.

This effectively implies that, before the supplier uses the Council’s jurisdiction, the buyer only needs to pull the trigger and seek arbitration under the contract in order to avoid having to arbitrate disputes under the MSME Act.

Reigniting the ongoing debate surrounding the position of arbitration agreements with MSME parties, the Punjab and Haryana High Court held that even if the parties had an agreement for arbitration of issues, if the seller was covered by the MSME Act, the MSME Act’s dispute resolution provisions would take precedence over the parties' agreement. It has further laid down that even in absence of an arbitration agreement statutory arbitration can be proceeded with under the MSME Act, this clearly rules out the party autonomy object of the Arbitration Act making the laws inconsistent. This order is in consistency with the previous 2011 judgment of Punjab and Haryana High Court13 ruled that Section 24 of the MSMED Act contains an explicit referral that outlines an abrogating outcome of the Act. The same position has been upheld by the Madras High Court.14

Conclusion

According to information held by the Ministry of MSMEs, just 9381 of the 90,906 cases brought before the Council have been resolved. A total of 24,309 crores are at stake in the ongoing cases.15 It is obvious that the Councils are already overloaded with cases and lack adequate resources to handle them effectively. These stats lead us to believe that the uncertainty surrounding the interplay of Arbitration Act with MSME has led to defeating the purposes of both the Acts. This may have been the ideal time for the Supreme Court to lay down the guidelines for streamlining the Council’s operations under the Act, as well as to clarify the numerous concerns and lessen needless, ancillary litigation centred around the Council’s authority.


† Advocate-on-Record, Supreme Court of India.

†† 6th semester BBA LLB (Hons.), NMIMS School of Law, Bengaluru.

3. Maharashtra State Electricity Distribution Co. Ltd. v. Deltron Electronics, 2016 SCC OnLine Bom 9521.

4. State of Rajasthan v. Sigma Engg., 2017 SCC OnLine Raj 2939.

5. Ravindranath Ge Medicate Associate (P) Ltd. v. Clean Coats (P) Ltd., 2016 SCC OnLine Bom 5068.

6. 2010 SCC OnLine Bom 2208.

7. 2021 SCC OnLine SC 439.

8. 2021 SCC OnLine SC 439.

9. 2010 SCC OnLine Bom 2208.

10. BSNL v. Maharashtra Micro and Small Scale Enterprises Facilitation Council, 2015 SCC OnLine Bom 4145.

11. Bharat Heavy Electricals Ltd. v. Micro and Small Enterprises Facilitations Centre, 2017 SCC OnLine Del 10604; GE T&D India Ltd. v. Reliable Engg. Projects and Mktg., 2017 SCC OnLine Del 6978 : (2017) 238 DLT 79.

12. 2019 SCC OnLine Bom 1628.

13. Welspun Corp. Ltd. v. Micro and Small, Enterprises Facilitation Council, 2011 SCC OnLine P&H 16956.

14. Madurai Kamaraj University v. Chairman, W.A (MD) No.1002 of 2021 and C.M.P (MD) Nos.4539 and 6834 of 2021, (Mad).

15. <https://www.financialexpress.com/industry/sme/msme-eodb-applications-for-clearing-over-rs-24k-crore-worth-msme-payments-filed-since-launch-of-msme-samadhaan-portal/2342813/>.

Case BriefsHigh Courts

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

Factual Background


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

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

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

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

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

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

Analysis and Decision


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

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

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

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

The Bench observed that,

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

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

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

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


Advocates before the Court:

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

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

Case BriefsHigh Courts

Delhi High Court: Mukta Gupta, J., expressed that the issue of whether in the absence of a third party, the refundable security deposit can be claimed would be for the Arbitrator to determine.

The petitioner sought the appointment of an Arbitrator under Section 11(6) of the Arbitration and Conciliation Act, 1996.

It was stated that the petitioner had purchased the ground 7th, 8th, 9th, 10th, 11th and 12th floors of New Tower, Bhikaji Cama Place, R.K. Puram, Delhi along with respective car parking areas at Hyatt Complex from respondent vide four registered Sale Deeds along with perpetual right to use the car parking area.

Further, the petitioner transferred and assigned all rights and title in the premises to IndusInd Bank Limited along with the perpetual right to use the car parking area.

Thereafter, the petitioner sought a refund of the security deposit of Rs 15 crores deposited by the petitioner pursuant to the Refundable Security Deposit Agreement entered between the petitioner and the respondent.

Since, the claim of the petitioner now was in terms of the Refundable Security Deposit Agreements, Clause 7 whereof provides for arbitration, the petitioner invoked arbitration and thereafter filed the present petition.

Analysis and Decision

The petitioner sought reference to arbitration in terms of Clause 7 of the Agreements. However, Clauses 2 and 3 of the Agreements were also integral parts which provide that only on the third party providing the Refundable Security Deposit to the respondent, the petitioner can claim Refundable Security Deposit and the third party is neither a party to the agreement nor party to the present petition.

Supreme Court’s decision in Cholro Controls India (P) Ltd. v. Severn Trent Water Purification Inc., (2013) 1 SCC 641, though dealing with an international arbitration under Section 45 of the Act, held that even third parties who are not signatories to the arbitration agreement can be joined in arbitration. It laid down categories where the third parties can be impleaded to the arbitration and held that the expression “claiming through them” should be construed strictly.

High Court observed that,

“The key rationale for holding that the courts’ review of the arbitration agreement should be limited to a prima facie standard is the principle of competence-competence.”

“The rule of priority in favour of the arbitrators is counterbalanced by the courts’ power to review the existence and validity of the arbitration agreement at the end of the arbitral process.”

The Bench held that,

“Once a valid arbitration agreement exists between the parties, the issue whether the petitioner is entitled to any relief in the absence of a third party to the agreement or that third party is required to be impleaded in the proceedings, is covered by the Doctrine of Competence-Competence and it will be for the Arbitrator to decide the said issue.”

Court requested Justice Usha Mehra, a former Judge of this Court to arbitrate the disputes between the parties.

In view of the above, the petition was disposed of. [Vistrat Real Estates (P) Ltd. v. Asian Hotels North Ltd., 2022 SCC OnLine Del 1139, decided on 22-4-2022]


Advocates before the Court:

For the Petitioner: Ms Ranjana Roy Gawai, Advocate.

For the Respondent: Mr Sidhant Kumar and Ms Manyaa Chandhok, Advocates.

Case BriefsHigh Courts

Delhi High Court: Mukta Gupta, J., decided that mere use of word ‘Arbitration’ in the heading of an Agreement would not mean the existence of an arbitration agreement.

Petitioner sought appointment of an Arbitrator for solving the disputes in relation to the software development arising out of the agreement between the parties and costs.

As per the petitioner, petitioner and respondent had entered into a Master Service Agreement and after the start of the project, the petitioner raised concerns due to the delay on part of the respondent.

Respondent introduced a new person for communication with the petitioner and showed no intention of resolving the issues flagged by the petitioner. Hence, the petitioner sent a legal notice to the respondent invoking arbitration.

The response by the respondent to the legal notice was that, there was no arbitration agreement between the parties.

Clause 11 of the Master Service Agreement dated 29th July 2021 between the parties reads as under:-

“11. Jurisdiction, Arbitration & Dispute Resolution

This Agreement and any dispute or claim relating to it, its enforceability or its termination shall be governed and interpreted according to the laws of India Subject to this Clause 11, the Courts at Delhi, shall have exclusive jurisdiction over any disputes under this Agreement”.

 It was submitted that the above-said clause did not provide that the parties agreed to refer their disputes for resolution through arbitration, just on the basis of noting the word ‘Arbitration’ the petitioner claimed resolution of disputes arising between the parties through arbitration.

Issue for Consideration

Whether the use of the word ‘Arbitration’ in the heading of an Agreement would entail existence of an arbitration agreement?

The said issue was dealt with by this Court in Avant Garde Clean Room & Engg. Solutions (P) Ltd. v. Ind Swift Ltd., (2014) 210 DLT 714.

High Court, in view of the above decision, held that,

Mere use of the word ‘Arbitration’ in the heading in Clause 11 of the Agreement between the parties would not lead to inference that there exists an agreement between the parties seeking resolution of disputes through arbitration.”

Therefore, in view of the above, no ground to appoint an arbitrator was found. The petition was dismissed. [Foomill (P) Ltd. v. Affle (India) Ltd., 2022 SCC OnLine Del 843, decided on 25-3-2022]


Advocates before the Court:

For the Petitioner: Mr. Rajiv Kr.Choudhary, Advocate with Mr.Manash Barman, Advocate.

For the Respondent: Mr .Kapil Madan, Advocate with Ms. Ramya Verma, Advocate.

Case BriefsSupreme Court

Supreme Court: In a case where the bench of Ajay Rastogi and Abhay S. Oka, JJ was deciding an issue relating to Bihar Public Works Contracts Disputes, the bench has held that if any of the provisions of the Bihar Public Works Contracts Disputes Arbitration Tribunal Act, 2008 are in conflict with the Arbitration and Conciliation Act, 1996, the 2008 Act shall prevail to the extent of the conflict.

Relevant Provisions under the 2008 Act

Under Section 9 (1) of the 2008 Act, when any dispute arises between the parties to the contract, irrespective of the fact whether such contract does or does not contain an arbitration clause, either party can refer the dispute in writing in the prescribed form to the Arbitration Tribunal. The dispute can be referred within one year from the date on which the dispute has arisen.

Section 22 of the 2008 Act starts with a non-obstante clause which provides that notwithstanding anything contained in any other law, rule, order, scheme, or contract, any dispute as defined under section (e) of Section 2 shall be regulated by the provisions of the 2008 Act in the absence of an arbitration clause in the agreement.

In view of Section 8 of the 2008 Act, if any of the provisions of the 2008 Act are in conflict with the 1996 Act, the latter shall prevail to the extent of the conflict.

Analysis

In the case at hand, there was no arbitration clause in the agreement between the parties. The respondent, in the present case it was argued, did not refer the dispute to the Arbitration Tribunal within one year from the date on which the dispute had arisen as provided under Section 9(1) of the 2008 Act. The Arbitration Tribunal had condoned the delay.

Considering the provisions of both the Acts and also the facts of the case at hand, the Court observed that as there is no arbitration clause in the agreement between the parties, the provisions of the 1996 Act will have no application and the reference to the Arbitration Tribunal will be governed by the 2008 Act.

As the 2008 Act provides for a specific period of limitation, Article 137 of the schedule in the 1963 Act will not apply.

Further, under Section 18 of the 2008 Act, the Arbitration Tribunal has the power to condone the delay. Therefore, under Article 136 of the Constitution of India, the Court refused to interfere with the award on the ground that the reference was barred by limitation.

[Bihar Industrial Area Development Authority v. Rama Kant Singh, 2022 SCC OnLine SC 320, decided on 15.03.2022]


*Judgment by: Justice Abhay S. Oka


Counsels

For appellants: Senior Advocate Rajiv Dutta

Case BriefsHigh Courts

Karnataka High Court: SR Krishna Kumar, J., disposed of the petition and directed the petitioner-company to avail such remedies as available in law.

The instant petition was filed by the petitioner company under Section 11(6) of the Arbitration and Conciliation Act, 1996 wherein it seeks resolution of disputes with the respondents- Railways by referring the same to a sole arbitrator in terms of clause 56 of the Agreement.

Counsel for petitioner Mr Sampath Bapat submitted that the dispute between the parties is arbitrable in terms of clause-56 of the Agreement entered into between the petitioner and respondents.

Counsel for respondents Mr Abhinay Y. T. submitted that the statement of objections clearly mentions that the claim of the petitioner falls under the category ‘excepted matters’ as per clause-45 (b) of the Agreement and consequently, the same are not arbitrable and cannot be referred to resolution by way of appointing a sole arbitrator.

The Court relied on judgment Harsha Constructions v. Union of India (2014) 9 SCC 246 observed that excepted/excluded matters cannot be referred to resolution by way of arbitration, since the matter in the instant case is a non-arbitrable dispute which is not capable of being referred to arbitration.

The Court held “the petition deserves to be disposed off reserving liberty in favour of the petitioner-company to avail such remedies as available in law including filing a civil suit for enforcement of its claim in accordance with law.”

[Global Agency v. Union of India, Civil Miscellaneous Petition No. 7 of 2018, decided in 16-12-2020]


Arunima Bose, Editorial Assistant has reported this brief.

Case BriefsHigh Courts

Allahabad High Court: Noting the significance of Sections 14 and 15 of the Arbitration and Conciliation Act, 1996, Jayant Banerji, J., expressed that,

If the arbitrator had been rendered functus officio, there existed no occasion to invoke the provisions of Sections 14 and 15 of the Act for appointing a substitute arbitrator.

Instant application was filed to seek the appointment of an independent arbitrator under Section 11 of the Arbitration and Conciliation Act, 1996.

Factual Background

Applicants and OPs entered into a contract. Since a dispute arose between the parties under clause 70 of the general conditions of the stated agreement which provides for arbitration, the competent authority appointed Baljit Singh as the sole arbitrator who made the final award.

The stated award was challenged before the District Judge by means of an application under Section 34 of the Act for setting aside the award. Later the Court remitted the matter back to the Arbitrator to reconsider all the issues raised before the Court in light of the terms of the Contract as well as the issue regarding the extension of period for completion of work of 3rd phase and to pass the award fresh.

It was noted that the Arbitrator Mr Baljit Singh resigned and withdrew from the aforesaid arbitration proceedings citing his ineligibility to continue as Arbitrator as he had retired, and only a serving officer could be an Arbitrator as per the agreement.

Applicant’s counsel submitted that despite serving several reminders to OPs, no substitute Arbitrator was being appointed by them, hence the application was filed.

Court had made a query to the applicant’s counsel that:

Whether the Court exercising jurisdiction under Section 34 of the Act, had power to remand the matter to the Arbitrator after setting aside the arbitral award, and if not, whether the present application would be maintainable?

Counsel while referring to Section 14 and 15 of the Act, contended that since the matter was remanded and Arbitrator withdrew from his office, his mandate stood terminated, and therefore, under Section 15(2) of the Act, a substitute Arbitrator was required to be appointed.

Lower Court

Court below, while affirming that an award by the arbitrator cannot be modified, set aside the award, and proceeded to hold that the matter required reconsideration in light of the terms of the contract, and remitted the case to the arbitrator.

In Supreme Court’s decision of Kinnari Mullick v. Ghanshyam Das Damani, (2018) 11 SCC 328, it was held that no power had been invested by the Parliament in the Court to remand the matter to the Arbitral Tribunal except to adjourn the proceedings for the limited purpose mentioned in Section 34 (4) of the Act.

In the above decision it was also observed that,

Limited discretion available to the Court under Section 34(4) of the Act can be exercised only upon a written application made in that behalf by a party to the arbitration proceedings.

Present Position:

Hence, the order passed by the Court under Section 34 of the Act remitting the matter back to the Arbitrator to reconsider all the issues would be beyond the statutory mandate conferred on the Court and was thus without jurisdiction.

In view of the facts of the present matter, after making the final arbitral award, given the provisions of Section 32(1) and subject to Section 32(3), the mandate of the arbitral tribunal stood terminated with the termination of the arbitral proceedings.

Thereafter, the Arbitrator became functus officio and therefore, remitting the matter back to him by the Court to reconsider all the issues was not permissible.

Pertinent observation of the Court:

Since the arbitrator had been rendered functus officio, there existed no occasion to invoke the provisions of Sections 14 and 15 of the Act for appointing a substitute arbitrator. 

Sections 14 and 15 of the Act provide for appointment of a substitute arbitrator where the specified conditions cause the mandate of an arbitrator to terminate.

Further, the Court elaborated its observations that, mandate of an arbitrator stems forth from an arbitration agreement under Section 7 of the Act and his appointment under Section 11 of the Act.

Sections 14 and 15 of the Act would only be applicable where the arbitral proceedings are pending.

In the present case, under Section 32(1) of the Act, the arbitral proceedings stood terminated by the final arbitral award, and, in view of Section 32 (3) of the Act, the mandate of the arbitral tribunal stood terminated with the termination of the arbitral proceedings.

High Court stated that, there was no averment in the present application that, after setting aside of the award passed by the arbitral tribunal, under the aforesaid provision of clause 70 of the agreement, any written notice had been given to the OPs regarding any dispute, to initiate arbitration proceedings de novo.

Therefore, there was no failure on part of the OPs to act or discharge a function which would entitle the applicants to invoke the powers conferred by Section 11 (4) (5) and (6) of the Act.

In view of the above discussion, present application was dismissed. [P.N. Garg, Engineers & Contractors v. Sultania Infantry Lines Bhopal, Appln. U/S 11(4) No. 92 of 2021, decided on 16-11-2021]


Advocates before the Court:

Counsel for Applicant: Aarushi Khare

Case BriefsHigh Courts

Delhi High Court: Sanjeev Narula, J., allowed an arbitration petition by appointing a sole arbitrator to adjudicate the disputes between the contesting parties.

Instant petition sought appointment of a Sole Arbitrator to adjudicate the disputes that were stated to have arisen under a Settlement Agreement containing an arbitration agreement.

Facts in a Nutshell

Sellers hold the complete shareholding in petitioner 1 company.

Buyers and Sellers entered into a Memorandum of Understanding for transferring the seller’s shareholding in petitioner 1 company to the buyers for a consideration of Rs 84.43 crores.

Under the terms of the MoU, initial payments were made by the Buyers in favour of the Sellers. Thereafter, the Buyers defaulted, and cheques issued by them were dishonoured. Sellers issued legal notices to the Buyers for breaches of the terms of the MoU and sought specific performance thereof. In some cases, the Sellers even proceeded under Section 138 of the Negotiable Instrument Act, 1881.

Further, a Settlement Agreement was entered into between all the Petitioners and Respondents (except Respondent 3) wherein it was agreed that the MoU stood terminated and cancelled and the parties would be restored to pre-MoU status, thereafter the buyers claimed a refund of Rs 21 crores from the sellers and in return offered re-possession of the project land.

Petitioners vide notice invoking arbitration, called upon the contesting Respondents to pay compensation to the tune of Rs. 25 crores, or in alternative, settle disputes in terms of the Clause 11 of the Settlement i.e., through arbitration mechanism.

On receiving no response from the respondent’s present petition was filed.

Respondent’s contentions:

  • Claims urged by the Sellers are barred by limitation, and hence, should not be referred to arbitration.
  • The claims sought to be referred to arbitration, arise under the MoU and not under the Settlement.

Analysis, Law and Decision

Whether court should refuse to refer the disputes to arbitration on account of non-arbitrability of disputes?

In Court’s opinion, respondent’s objection with regard to arbitrability of claims is an aspect that has to be agitated before the Arbitral Tribunal.

Prima facie, the contesting Respondents were correct in contending that in light of execution of the Settlement, the MoU stood cancelled and ceased to exist, and therefore, no claim could arise from a cancelled agreement.

Court stated that it was an admitted position that payments were partially made under the Settlement, by way of cheques. It can also not be denied that the contesting Respondents did not receive entire payment under the MoU as they had admittedly initiated criminal proceedings under the Negotiable Instrument Act, 1881 on account of dishonour of cheques.

Sellers contended that the Settlement was executed under coercion.

Factual Dispute:

Whether the settlement was executed under duress or coercion; whether payments under the Settlement were due or not whether claims against the contesting respondents were barred under Section 62 of the Indian Contract Act, 1872 in view of the novation of contract?

Court found no merit in the arguments by the contesting respondents.

Whether court should refuse to refer the disputes to arbitration on account of being barred by limitation?

Limitation is a mixed question of fact and law.

In the Supreme Court decision of Indian Farmers Fertilizers Cooperative Ltd. v. Bhadra Products, (2018) 2 SCC 534,  Supreme Court held that the issue of limitation, being a jurisdictional issue, should be left to be decided by the Arbitral Tribunal under Section 16 of the Act, the said is based on the principle of “kompetenz-kompetenz” which favoured minimum judicial intervention at the pre-reference stage.

Recently, the Supreme Court in BSNL v. Nortel Networks, (2021) 5 SCC 738      observed that only in very limited category of cases, where there is not even a vestige of doubt that the claim is ex facie time barred, or that the dispute is non-arbitrable, should a Court decline to make reference to an Arbitrator. However, at the same time, the Supreme Court also added a cautionary note that if there is even the slightest doubt, the rule is to refer the disputes to arbitration, otherwise it would encroach upon what is essentially a matter to be determined by the Tribunal.

Bench noted that the parties are undoubtedly at loggerheads since they have ongoing criminal litigations against each other.

Petitioners gave an explanation that they did not have any occasion to invoke arbitration prior to such date, since they received a copy of the Settlement Agreement only in the cheque bouncing proceedings initiated by the contesting respondents. From the said date when they gained knowledge, the invocation was within time.

Thus, the question of limitation was indeed a question of both fact and law.

Hence, the genuineness of the parties’ stand was a matter of trial, and the Court found the question of limitation in the instant matter to be disputed. Court did not find the instant case to be falling in the exceptional category of cases set out in the BSNL v. Nortel Networks, (2021) 5 SCC 738      where, on a prima facie basis, the Court concluded that the petition was ex facie barred by limitation.

Accordingly, Justice J.R. Midha, (Retd.) Former Judge of this Court was appointed as the Sole Arbitrator to adjudicate the disputes between the parties.

High Court allowed the present petition in view of the above. [Pooja Infotech (P) Ltd. v. Prabhuprem Infotech (P) Ltd., 2021 SCC OnLine Del 4749, decided on 21-10-2021]


Advocates before the Court:

For the Petitioners:

Sanjay Goswami, Advocate

For the Respondents:

Mr. Sanat Kumar, Senior Advocate with Mr. Sanjay Sharma Darmora, Advocate for Respondent No. 1-4. Mr. Pawan Kumar Mittal, Advocate for Respondent No. 5.

Mr. Akhil Sachar, Advocate for R-6.

Case BriefsHigh Courts

Delhi High Court: Amit Bansal, J., dismissed a petition challenging the order passed by the lower court whereby respondent’s application under Section 8 of Arbitration and Conciliation Act, 1996 was admitted.

Instant petition was filed impugning the decision of the lower court whereby the application filed on behalf of the respondent under Section 8 of the Arbitration and Conciliation Act was allowed.

Background

It was contended by the petitioner that the respondent had wrongly withheld an amount of Rs 12,24,181 which led to the filing of a recovery suit for an amount of Rs 17,26,000 before the Court of ADJ. In the said suit, an application under Section 8 of the Act was filed on behalf of the respondent seeking that the parties may be referred to arbitration in terms of the arbitration clause contained in the Letter of Intent.

Further, the application under Section 8 was allowed by the impugned order.

Analysis, Law and Decision

High Court while analyzing the matter, expressed that,

Unlike an order refusing an application under Section 8 of the Act for which statutory remedy of appeal has been provided under Section 37 of the Act, no remedy has been provided in respect of an application allowing a Section 8 application.

The intent of the Act is that existence and validity of the arbitration agreement can be raised by a party before the Arbitral Tribunal and therefore, finality has been given to the orders passed by the court allowing application under Section 8 of the Act.

In Deep Industries Ltd. v. ONGC (2020) 15 SCC 706, the Supreme Court observed that though petitions can be filed under Article 227 against judgments allowing or dismissing first appeals under Arbitration Act, yet the High Court would be extremely circumspect in interfering with the same, taking into account the statutory policy so that interference is restricted to orders which are patently lacking in inherent jurisdiction. It was further observed that, if petitions under Articles 226 and 227 of the Constitution of India against orders passed in appeals under the Arbitration Act were entertained, the entire arbitral process would be derailed and would not come to fruition for many years.

The reasoning given by the Supreme Court in the above decision would be equally applicable in the context of orders passed by courts allowing the application under Section 8 of the Act.

Hence, the Court opined that all grounds in respect of the existence and validity of the arbitration clause can be raised by the petitioner before the Arbitral Tribunal.

Court noted that the entire case was based upon the admission made by the respondent in respect of its alleged liability towards the petitioner and nowhere did the petitioner dispute the existence of the arbitration clause.

As observed by the Supreme Court in Hindustan Petroleum Corporation Ltd. v. Pinkcity Midway Petroleums, (2003) 6 SCC 503, once there is an arbitration clause in the agreement, it is obligatory for the court to refer the parties to arbitration in terms of the said agreement.

No merit was found in the present petition as the petitioner had not denied the existence of the arbitration agreement. [Arun Srivastava v. Larsen & Toubro Ltd., 2021 SCC OnLine Del 4909, decided on 9-11-2021]


Advocates before the Court:

For the Petitioner:

Randhir Jain with Bhoop Singh, Advocates

For the Respondent:

Ankit Chaturvedi with Neeraj Sood, Advocates

Op EdsOP. ED.

I. Introduction

The dispute before the  Supreme Court of India between Amazon.Com NV Investment Holdings LLC (Amazon) and Future Retail Ltd. (FRL) stemmed from Amazon’s move to enforce the order which was given against FRL by the Emergency Arbitrator, who was appointed under the Singapore International Arbitration Centre (SIAC’) Rules.1 This dispute arose in consequence of agreements that were entered into between Amazon and FRL (Respondent 1 before the Supreme Court) and other connected parties including FCPL (Future Coupons Pvt. Ltd.) which was arrayed as Respondent 2 in the lis. In these agreements, the rights of FCPL were to be exercised for the benefit of Amazon, which mirrored subsequently in the FCPL Shareholders’ Agreement, and consequently, Amazon agreed to invest INR 1431 crores in FCPL, which was recorded in a Share Subscription Agreement (SSA). It was expressly stipulated in SSA that investment in FCPL would directly flow to FRL and it was an understanding that Amazon’s investment in retail assets of FRL would continue to vest in FRL and that FRL’s retail assets could not be transferred without the consent of FCPL which was in turn dependent on the consent of Amazon. Contrary to the restrictions that were imposed, on 29-8-2020, the respondents entered into a transaction with Mukesh Dhirubhai Ambani Group (MDA Group) which envisaged the cessation of FRL and disposition of its assets to the MDA Group. Amazon initiated arbitration proceedings and filed an application on 5-10-2020 seeking emergency interim relief under the SIAC Rules, asking for injunctions against the aforesaid transaction. Defying the directions issued by the emergency arbitrator by calling its award a nullity and the emergency arbitrator as coram non judice (not before a Judge), the respondents i.e. the Biyani Group went ahead with the transaction while FRL filed a separate civil suit before the  Delhi High Court in restrainment of Amazon’s move to enforce the award of the emergency arbitrator under Section 17(1)2 of the Arbitration and Conciliation Act, 19963 (the Arbitration Act).

The SIAC Rules contain provisions for arbitration hearings to be conducted by an emergency arbitrator. Pursuant to Rule 1.3, an award under the SIAC Rules will include an award of an Emergency Arbitrator, who may be appointed by a party in need of emergency interim relief under Rule 26.2. Concurrently, Schedule 1 to the SIAC Rules outline the roles and responsibilities of an emergency arbitrator, scope of the power vested with an emergency arbitrator in delivering an award or order and the life of such an award or order passed by it post the constitution of a tribunal, the right of the parties to seek for an emergency interim relief under these Rules, among other rights and powers provided thereunder. Situations where parties have agreed to the seat of the arbitration proceedings beforehand, such seat shall be deemed to be the seat of the emergency arbitrator as well. The emergency arbitrator, unlike the Tribunal, is bound by time limits in conducting arbitration hearings, but also enjoys the freedom to apply or omit the application of the SIAC Rules depending on the circumstances.

The parties agree that an order or award by an emergency arbitrator pursuant to this Schedule 1 shall be binding on the parties from the date it is made, and undertake to carry out the interim order or award immediately and without delay. The parties also irrevocably waive their rights to any form of appeal, review or recourse to any State court or other judicial authority with respect to such award insofar as such waiver may be validly made.

In India, the Arbitration and Conciliation Act, 1996 (the Arbitration Act) does not have an express provision for an emergency arbitrator/emergency award codified in the statute. Nevertheless, it is apparent from the wordings of certain provisions that, there exists a scope for judicial interpretation without resorting to or adopting the path of casus omissus/judicial legislation, which is inapplicable to the Indian legal system, which are: (a) Section 2(1)(d)[6]; (b) Section 2(1)(c);[7] (c) Section 17(1)[8] and (d) Section 21[9]. Apart from the aforesaid, the object and purpose of the Arbitration Act, mirror the fact that the Arbitration Act must be read along with the provisions of the United Nations Commission on International Trade Law, 1985 (the Model Law) and the UNCITRAL Arbitration Rules, 1976 (the UNCITRAL Rules) , as India has ratified and adopted the aforesaid Model Law to be a part of the municipal system under Article 253 of the Indian Constitution.[10] Although not expressly but in some cases, the courts in India interpreted and have adopted the concept of emergency arbitrators into the Arbitration Act, and prevailing of party autonomy in arbitration agreements. Having established this, it is of significance to acknowledge that the “context” in Section 2(1)(c) the Arbitration Act allows for the adoption of measures that parties deem fit including the appointment of an emergency arbitrator through the principle of party autonomy[11].

Mr V.K. Rajah, who was appointed as the emergency arbitrator in Singapore, while ruling in favour of Amazon held the following:

(a) the respondents were injuncted from taking any step in aid of the Board resolution;

(b) the respondents were injuncted from completing the disputed transaction; and

(c) the respondents were “injuncted from directly or indirectly transferring, encumbering, alienating or disposing of any FRL’s retail assets by promoters, injuncted from issuing securities of FRL or obtaining any securities from prohibited persons”.

What is apparent from the adjudication by the emergency arbitrator in delivering the interim award is, the interests and rights of Amazon which were created through a contractual arrangement and were on the verge of getting violated due to anti-competitive measures taken by the respondents were duly protected under the law.

II. Observations of Delhi High Court with respect to FRL

When Amazon moved before the Delhi High Court to enforce the interim award which was passed by the emergency arbitrator against FRL and other respondents, various issues concerning non-signatory parties to an arbitration agreement, party autonomy, recognition of an emergency arbitrator and enforceability of its award stemmed up. The context here was: Amazon claimed to have been wronged from the breach of contractual agreements by Respondents 1-13 i.e. the Biyani Group and therefore, appeared before the Delhi High Court to enforce the emergency arbitrator’s interim award, while FRL claimed that it had never entered into any agreement with Amazon and that it was a non-signatory to the FCPL Shareholders’ Agreement (FCPL SHA) – one of the three agreements that FCPL and Respondents 3-13[12] had entered into with Amazon for an investment in FCPL and subsequent acquisition of FRL’s retail assets by Amazon.

While passing an order[13] that enforced the directions of the emergency arbitrator, the learned Single Judge Midha, J. made certain observations. First, for a non-signatory to be subject to an arbitration without their prior consent, the touchstone of their 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 are to be considered. This criteria was referred to in Chloro Controls (India) (P) Ltd. v. Severn Trent Water Purification Inc.,[14] where a composite transaction was defined to mean the performance and execution of ancillary or supplementary agreements for achieving the common objective of the mother agreement. Second, language of the contract was given deference through the case of Owners and Parties interested in the Vessel M.V. Baltic Confidence v. State Trading Corpn of India Ltd.,[15] where the Court was considering the question “as to whether the arbitration clause in a charter party agreement was incorporated by reference”, to ascertain the intention of the parties, and in answering to it held that efforts must be made to give meaning to a clause incorporated by reference and should not be frustrated by literal or pedantic interpretation. This, coupled with commercial business transactions corroborate to determine the intention of parties, as Dr Chandrachud, J. had ruled in Cheran Properties Ltd. v. Kasturi and Sons Ltd.,[16] that the effort should be to unravel the true commercial arrangements between the parties to an agreement. It is on this relationship between the non-signatory and the signatory parties that gets established through a composite transaction that makes the applicability of the doctrine of the group of companies inevitable in determining their intention to enter into  agreement(s).

When analysing the merits of the dispute before the Court,  Midha, J. acknowledged the widespread network of retail assets that FRL had built across India, and how Amazon would have irretrievably lost its special and protective rights if FRL were allowed to continue with the disputed transaction with MDA Group, given that many of respondents had also responded in affirmative to having had breached the contractual agreements with Amazon. Through his rationale, Midha, J. made it clear with the information on record that neither the directors nor the respondents especially FRL could be absolved of its liability.

However, the Division Bench of the Delhi High Court was pleased to stay[17] the operation of the judgment of the learned Single Judge, and thereafter the dispute/lis reached the doors of the Supreme Court.

Upon an observation from these developments, it is of essence to foreground the objective of interim reliefs/awards, as has been recognised by the international and national arbitration practices, as well the eminent authorities in arbitration like Gary Born. Interim reliefs play a crucial role in arbitrations, not just in terms of efficiency and cost-effectiveness but concerning the subject-matter of the dispute.[18] The important question that tickles the mind of many is why emergency arbitrators are created when Arbitral Tribunals have already been given the authority to adjudicate upon disputes? Answer to this question lies in the nature of the portfolio of these two distinct yet similarly placed positions. While Arbitral Tribunals exist to dispose of matters quickly and lessen the burden of courts, emergency arbitrators have an additional role to play in terms of managing the disputes. The creation of emergency arbitrators was with the objective to preserve the subject-matter of a dispute. Without going through the relatively lengthier process of appointing and constituting an Arbitral Tribunal, a party can seek interim relief from an emergency arbitrator if a matter requires urgent hearing and without which there could be substantial impact to the rights or interests of a party to an agreement. The situation of Amazon and FRL is analogous to this very illustration. Upon probing into the observations made by the  Single Judge, it is apparent that a situation was created where one of the parties i.e. FRL tried to ooze out of its responsibilities in the agreements with Amazon when it was presented with an opportunity to benefit from a different market player (here MDA Group). Such kind of anti-competitive practices, if encouraged, would lead to promoters of a company openly flouting the terms of a private arrangement thereby significantly impacting the interests and rights of an investor in the commercial world.

III. A disquisition on How Supreme Court ruled through the lens of the  Single Judge of the Delhi High Court

In furtherance of the points that were observed by the learned Single Judge of the Delhi High Court, the Supreme Court emphasised on certain other key points that form the basis for the foundation of emergency arbitrators under the Arbitration Act in India.

When interpreting the facts of the situation, the Supreme Court made a rhetorical observation on the grundnorm of arbitration being “party autonomy”. Emphasis was laid on Sections 2(6)[19], 2(1)(d)[20] and 34[21] read along with Article 34[22] of the Model Law, to demonstrate how a party enjoys the freedom to choose the terms of an arbitration agreement and to determine the applicable law governing its procedure and merits. Contextualising this to the present case, it held that the intention of the parties i.e. Amazon and FRL along with other respondents to the lis, must be construed according to the context in which the terms of the contracts between them were concluded.  At this juncture, two bifurcated interpretations were made into parties’ choice of SIAC Rules and Section 34 of the Arbitration Act being analogous to Article 34 of the Model Law. When the parties agreed to the applicability of the SIAC Rules and the provision regarding emergency arbitrator covered thereunder, they did not bypass the mandatory provisions of the Arbitration Act” since nothing in this Act prohibits them from “agreeing to a provision that provides for an emergency arbitrator”. Concurrently, it was held that Parliament did not intend for a “creative or purposive interpretation” of Section 34 of the Arbitration Act, and thus, the Court has the power to modify the awards besides being authorised to set them aside.

Having established party autonomy through this, the Supreme Court then made the following inferential conclusions: Section 1719 which is concerned with “Arbitral Tribunal” includes emergency arbitrators as has been interpreted under Section 2(1)(d) i.e. the context of Section 17(1) “otherwise requiring” as per parties’ choice of SIAC Rules to include emergency arbitrator. The conjoint reading of Section 17(1)20 and Sections 9(1)21 and 9(3)22 provide that they form a part of the same scheme, including the grounds for institution of interim measures and the “Arbitral Tribunal” to include interim -awards/emergency awards passed by emergency arbitrators.

In consequence to this, the Court did opine that if an emergency arbitrator’s award in a foreign-seated arbitration could be enforced in India, it is possible to interpret Section 17(2) to allow enforcement of the interim award that was passed by the emergency arbitrator in Amazon v. FRL, thereby upholding the recommendation of the Srikrishna Committee’s Report on the need to amend the Arbitration Act to bring “in line with international practice in favour of recognising and enforcing an emergency award”. This major development has definitely reinstated the objective behind introducing arbitration practice as a mechanism of dispute resolution in the first place.

Another aspect that was acknowledged but was not discussed at length by the Supreme Court, concerns the principles governing contractual agreements in light of the Foreign Exchange Management Act (FEMA), 1999[23] and public policy[24]. It was claimed by the respondents’ representative that the exercise of control by Amazon on FRL is in violation of the provisions of FEMA, thereby questioning the enforceability of the emergency arbitrator’s award under the same. One of the important pillars of contract law is pacta sunt servanda, a Latin maxim that translates into “a party that freely enters a contract should honour its commitments”.[25] This principle has significance especially in matters where foreign companies or investors are involved in any kind of transactions with a domestic company, mostly to protect the interests of the investors and further the economic growth of a country. In a situation like that of Amazon and FRL, where the facts corroborate to respondents’ active knowledge of the former’s involvement with the functioning of the latter but are accompanied by a denial of responsibilities by FRL, it becomes important to gauge at the nature of the regulation(s) under whose umbrella FRL has sought protection.

Supporting the claim of Amazon’s representative, FEMA is wholly different from that of the Foreign Exchange Regulations Act (FERA), 1947[26] as the former concerns with management and overseeing of activities unlike the latter that exercised regulatory powers in terms of controlling and conservation. Along with the fact that there is no provision under it for nullifying an award in case there is a breach of contract, the Supreme Court in Vijay Karia v. Prysmian Cavi E Sistemi SRL[27] had ruled that any violation of the provisions of the rules made under FEMA in enforcement of an arbitral award would not constitute a violation of public policy in India.

In consequence to these developments, it can be asserted that the Court through its judgment affirmed the learned Single Judge’s observations from Delhi High Court wherein interim injunction must be granted only upon the fulfilment of the trinity test of prima facie case, irreparable loss, and balance of convenience; only prima facie case is not sufficient to impose injunction against a party to a contract. Through recognition of the fact that balance of convenience will be violated against Amazon if it is not allowed to appeal before the authorities, then an irreparable loss shall be caused in terms of pre-emptive rights that Amazon claims to have created in its favour by entering into an agreement with FRL. This observation around the balance of convenience has reinstated the faith in foreign investors that no party can gain undue advantage by misrepresenting the laws before the adjudicatory authorities. Moreover, public policy as defined under the Arbitration Act, 1996 clearly demonstrates that the arbitral award given by the emergency arbitrator is not in contravention on any of the specified grounds.[28]

 IV. Conclusion

So far, the status quo of emergency arbitrators in India was legally recognised and enforceable for foreign-seated arbitrations. However, post the Supreme Court’s ruling in Amazon.com NV Investment Holdings LLC v. Future Retail Ltd.[29] in August 2021, has resulted in a milestone achievement in the arbitration practice for Indian-seated arbitrations. With major observations that were made by the Court, it can be ascertained that the future of foreign and domestic investors is secured as well. Moreover, the Amazon judgment is a rhetorical recognition of various pillars of arbitration such as party autonomy, protection of rights and obligations through contractual interest, public policy in India, and so on. What thus remains is the codification of the proposed amendment by the Srikrishna Committee i.e. introduction of a provision of “emergency arbitrator” into the Arbitration Act. In any case, the various obiters and ratios that were observed by Nariman, J., were much needed in the context of Indian arbitration as they will serve as a torchbearer for many arbitration hearings to take place, both remotely and physically, in the future.


*Principal Associate, Saraf and Partners Law Offices.

** 3rd year student, BA LLB (Hons.), National Law University, Odisha.

1Amazon.Com NV Investment Holdings LLC v. Future Retail Ltd., 2021 SCC OnLine SC 145.

2http://www.scconline.com/DocumentLink/27KJ0N1c.

3http://www.scconline.com/DocumentLink/QWdt5a4f.

[6]S. 2(1)(d) states—“Unless the context otherwise requires, an ‘arbitral tribunal’ means a sole arbitrator or a panel of arbitrators.”

[7]S. 2(1)(c) states—“Unless the context otherwise requires, ‘arbitral award’ includes an interim award.”

[8]S.17(1) (prior to substitution by Act 3 of 2016) states —“Unless otherwise agreed by the parties, the Arbitral Tribunal may, at the request of a party, order a party to take any interim measure of protection as the Arbitral Tribunal may consider necessary in respect of the subject-matter of the dispute.”

[9]S. 21 states— “Unless otherwise agreed by the parties, the arbitral proceedings in respect of a particular dispute commence on the date on which a request for that dispute to be referred to arbitration is received by the respondent.”

[10]Constitution of India, Art. 253.

[11] Redfern and Hunter, International Arbitration (6th Edn., Oxford University Press, 2015) pp. 353-414, Para 6.07; Bharat Aluminium Co. v. Kaiser Aluminium Technical Services Inc., (2016) 4 SCC 126.

[12](i)Respondent 1 – Future Retail Limited, India’s second-largest offline retailer (FRL),

(ii) Respondent 2 – Future Coupons Pvt. Ltd., a company that holds 9.82% shareholding in FRL and is controlled and majority-owned by Respondents 3 to 11 (FCPL),

(iii) Respondent 3 – Mr Kishore Biyani, Executive Chairman and Group CEO of FRL,

(iv) Respondent 8 – Mr Rakesh Biyani, Managing Director of FRL,

(v) Respondents 4 to 7 and 9 to 11 – other members of the Biyani family, namely, Ms Ashni Kishore Biyani, Mr Anil Biyani, Mr Gopikishan Biyani, Mr Laxminarayan Biyani, Mr Sunil Biyani, Mr Vijay Biyani, and Mr. Vivek Biyani, who are promoters and shareholders of FRL, and

(vi) Respondents 12 and 13 – Future Corporate Resources Pvt. Ltd.  and Akar Estate and Finance Pvt. Ltd., group companies of FRL.

[13] 2021 SCC OnLine Del 1279

[14](2013) 1 SCC 641.

[15](2001) 7 SCC 473.

[16](2018) 16 SCC 413.

[17] 2021 SCC OnLine Del 412.

[18]Gary Born, International Commercial Arbitration (3rd Edn., 2001).

[19]S. 2(6) states—“Where this Part, except S. 28, leaves the parties free to determine a certain issue, that freedom shall include the right of the parties to authorise any person including an institution, to determine that issue.”

[20]S. 2(1)(d) states“Unless the context otherwise requires, an ‘Arbitral Tribunal’ means a sole arbitrator or a panel of arbitrators.”

[21]S. 34 states—“Arbitration for setting aside arbitral award.—(1) Recourse to a court against an arbitral award may be made only by an application for setting aside such award in accordance with sub-sections (2) and (3).

(2) An arbitral award may be set aside by the court only if—

 (a) the party making the application furnishes proof that—

(i) a party was under some incapacity, or

(ii) the arbitration agreement is not valid under the law to which the parties have subjected it or, failing any indication thereon, under the law for the time being in force; or

(iii) the party making the application was not given proper notice of the appointment of an arbitrator or of the arbitral proceedings or was otherwise unable to present his case; or

(iv) the arbitral award deals with a dispute 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:

Provided that, if the decisions on matters submitted to arbitration can be separated from those not so submitted, only that part of the arbitral award which contains decisions on matters not submitted to arbitration may be set aside; or

(v) the composition of the arbitral tribunal or the arbitral procedure was not in accordance with the agreement of the parties, unless such agreement was in conflict with a provision of this Part from which the parties cannot derogate, or, failing such agreement, was not in accordance with this Part; or

(b) the Court finds that—

(i) the subject-matter of the dispute is not capable of settlement by arbitration under the law for the time being in force, or

(ii) the arbitral award is in conflict with the public policy of India.

Explanation 1.—For the avoidance of any doubt, it is clarified that an award is in conflict with the public policy of India, only if,—

(i) the making of the award was induced or affected by fraud or corruption or was in violation of S. 75 or S. 81; or

(ii) it is in contravention with the fundamental policy of Indian law; or

(iii) it is in conflict with the most basic notions of morality or justice.

Explanation 2.—For the avoidance of doubt, the test as to whether there is a contravention with the fundamental policy of Indian law shall not entail a review on the merits of the dispute.

(2-A) An arbitral award arising out of arbitrations other than international commercial arbitrations, may also be set aside by the court, if the court finds that the award is vitiated by patent illegality appearing on the face of the award:

Provided that an award shall not be set aside merely on the ground of an erroneous application of the law or by reappreciation of evidence.

(3) An application for setting aside may not be made after three months have elapsed from the date on which the party making that application had received the arbitral award or, if a request had been made under S. 33, from the date on which that request had been disposed of by the Arbitral Tribunal:

Provided that if the court is satisfied that the applicant was prevented by sufficient cause from making the application within the said period of three months it may entertain the application within a further period of thirty days, but not thereafter.”

[22] Art. 34. Application for setting aside as exclusive recourse against arbitral award.

(1) Recourse to a court against an arbitral award may be made only by an application for setting aside in accordance with paragraphs (2) and (3) of this article.

(2) An arbitral award may be set aside by the court specified in Article 6 only if:

(a) the party making the application furnishes proof that:

 (i) a party to the arbitration agreement referred to in Article 7 was 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 this State; or

 (ii) the party making the application was not given proper notice of the appointment of an arbitrator or of the arbitral proceedings or was otherwise unable to present his case; or

 (iii) the award deals with a dispute not contemplated by or not falling within the terms of the submission to arbitration, or contains decisions on matters beyond the scope of the submission to arbitration,  provided that, if the decisions on matters submitted to arbitration can be separated from those not so submitted, only that part of the award which contains decisions on matters not submitted to arbitration may be set aside; or

 (iv) the composition of the arbitral tribunal or the arbitral procedure was not in accordance with the agreement of the parties, unless such agreement was in conflict with a provision of this Law from which the parties cannot derogate, or, failing such agreement, was not in accordance with this Law; or

(b) the court finds that:

 (i) the subject-matter of the dispute is not capable of settlement by arbitration under the law of this State; or

 (ii) the award is in conflict with the public policy of this State.

(3) An application for setting aside may not be made after three months have elapsed from the date on which the party making that application had received the award or, if a request had been made under article 33, from the date on which that request had been disposed of by the arbitral tribunal.

(4) The court, when asked to set aside an award, may, where appropriate and so requested by a party, suspend the setting aside proceedings for a period of time determined by it in order to give the arbitral tribunal an opportunity to resume the arbitral proceedings or to take such other action as in the arbitral tribunal’s opinion will eliminate the grounds for setting aside.

19http://www.scconline.com/DocumentLink/27KJ0N1c.

20S. 17(1) states—“A party may, during the arbitral proceedings or at any time after the making of the arbitral award but before it is enforced in accordance with S. 36, apply to the Arbitral Tribunal—

(i) for the appointment of a guardian for a minor or person of unsound mind for the purposes of arbitral proceedings; or

(ii) for an interim measure of protection in respect of any of the following matters, namely—

(a) the preservation, interim custody or sale of any goods which are the subject-matter of the arbitration agreement;

(b) securing the amount in dispute in the arbitration;

(c) the detention, preservation or inspection of any property or thing which is the subject-matter of the dispute in arbitration, or as to which any question may arise therein and authorising for any of the aforesaid purposes any person to enter upon any land or building in the possession of any party, or authorising any samples to be taken, or any observation to be made, or experiment to be tried, which may be necessary or expedient for the purpose of obtaining full information or evidence;

(d) interim injunction or the appointment of a receiver;

(e) such other interim measure of protection as may appear to the Arbitral Tribunal to be just and convenient,

and the Arbitral Tribunal shall have the same power for making orders, as the court has for the purpose of, and in relation to, any proceedings before it.”

21S. 9(1) states—“A party may, before or during arbitral proceedings or at any time after the making of the arbitral award but before it is enforced in accordance with S. 36, apply to a court—

(i) for the appointment of a guardian for a minor or person of unsound mind for the purposes of arbitral proceedings; or

(ii) for an interim measure of protection in respect of any of the following matters, namely—

(a) the preservation, interim custody or sale of any goods which are the subject-matter of the arbitration agreement;

(b) securing the amount in dispute in the arbitration;

(c) the detention, preservation or inspection of any property or thing which is the subject-matter of the dispute in arbitration, or as to which any question may arise therein and authorising for any of the aforesaid purposes any person to enter upon any land or building in the possession of any party, or authorising any samples to be taken or any observation to be made, or experiment to be tried, which may be necessary or expedient for the purpose of obtaining full information or evidence;

(d) interim injunction or the appointment of a receiver;

(e) such other interim measure of protection as may appear to the Court to be just and convenient,

and the court shall have the same power for making orders as it has for the purpose of, and in relation to, any proceedings before it.”

22S. 9(3) states—“Once the Arbitral Tribunal has been constituted, the Court shall not entertain an application under sub-s. (1), unless the Court finds that circumstances exist which may not render the remedy provided under S. 17 efficacious.”

[23]Foreign Exchange Management Act, 1999.

[24]Explns. I and II from S. 34(2)(b) of the Arbitration and Conciliation Act, 1996 define “public policy” as—“For the avoidance of any doubt, it is clarified that an award is in conflict with the public policy of India, only if—

(i) the making of the award was induced or affected by fraud or corruption or was in violation of S. 75 or S. 81; or

(ii) it is in contravention with the fundamental policy of Indian law; or

(iii) it is in conflict with the most basic notions of morality or justice.”

[25]Ashish Kabra et al., Arbitration and Exchange Control Laws of India, (2021) International Arbitration Law Review (1) <https://www.nishithdesai.com/fileadmin/user_upload/pdfs/Research%20Articles/Arbitration_and_Exchange_Control_Laws_of_India.pdf > accessed 25-8-2021.

[26]Foreign Exchange Regulation Act, 1947.

[27] (2020) 11 SCC 1.

[28] (2020) 11 SCC 1, 23.

[29] 2021 SCC OnLine SC 557.

Case BriefsHigh Courts

Delhi High Court: While observing that the role of ICADR Rules shall come into play with regard to the procedure to be followed, only after the arbitration commences before the appropriate jurisdiction of law, Suresh Kumar Kait, J., reiterated the observation of BGS SGS SOMA JV v. NHPC, (2020) 4 SCC 234, wherein it was stated that if the arbitration agreement provides that arbitration proceedings “shall be held” at a particular venue, then that indicates arbitration proceedings would be anchored at such venue, and therefore, the choice of venue is also a choice of the seat of arbitration.

Background

Petitioner claimed to be one of the most reputed construction company specialized in construction of bridges and other projects across the country.

Respondent – Construction and Design Services, was a 100% undertaking of Government of Uttar Pradesh, which claimed to be providing construction and design Services.

Respondent had invited proposals for Qualification cum Request for Proposal to undertake design, engineering, procurement and construction of a dedicated corridor for old and differently-abled persons during Kumbh and Magh Mela at Sangam, Allahabad, Uttar Pradesh.

In the bidding process, the petitioner was stated to be the successful bidder with lowest bid. Therefore, respondent had issued a Letter of Award in favour of the petitioner and a formal contract was executed between the parties.

Petitioner had immediately taken steps like mobilization of resources, the appointment of various third-party Consultants.

However, respondent utterly failed in fulfilling its part of obligations, as in terms of Clause- 4.1.3 of the said Contract, the “Right of Way” in respect to the said works was to be provided by the respondent to the petitioner within 15 days of the date of the agreement, but even after expiry of the entire period of 30 months, respondent did not do so

Respondent did not even compensate the petitioner for the cost incurred by it towards fulfilling its part of obligations. Further, due to non-performance of obligations, the petitioner claimed to have incurred huge loss of productivity, turnover, overhead costs, contractor’s profits and earning capacity besides cost of construction under the Contract in question.

Vide a letter, the respondent intimated that the project as well as the contract ought to be terminated.

Further, petitioner raised an invoice towards “Termination of Payment”, which shall constitute full and final payment and respondent shall make the payment within 30 days and shall discharge the bank guarantees.

Adding to the above, petitioner also demanded extension of bank guarantees for a further period in an attempt to disown the termination notice which was already acknowledged by the petitioner.

Though the respondent communicated to the petitioner that the decision of termination of Contract was taken by Prayagraj Mela Board and till the time the said decision is under consideration and finalized by the Government of Uttar Pradesh, the Contract in question is “valid” and subsists and there is no liability towards “Termination Payment” except for refund of performance security in case the project is withdrawn by the State of Uttar Pradesh.

When efforts to amicably resolve the dispute failed, petitioner invoked the arbitration, to which the respondent communicated the petitioner that once the Contract itself has been revoked without commencement of work and bank guarantees have been returned, no dispute between the parties survives and so, the invocation of arbitration clause 26.03 was untenable.

Analysis, Law and Decision

High Court on considering the above, stated that the disputes between the parties have to be referred to an Arbitrator.

As per Clause 26.3.1, upon invocation of arbitration by either party, the proceedings shall be conducted in accordance with the Rules of Arbitration of the International Centre for Alternative Dispute Resolution, New delhi and the venue of such Arbitration shall be Lucknow.

Question for Consideration:

Whether the seat of arbitration shall be New Delhi in the light that the arbitration has to be conducted in accordance with the Rules of Arbitration of the International Centre for Alternative Dispute Resolution, New Delhi

OR

Lucknow, in the light of agreement that the venue of such arbitration shall be Lucknow?

Primary Argument:

Counsel for both sides laid emphasis upon the distinction between the “venue” and “seat” of arbitration and several decisions in this regard were cited before this Court. According to learned counsel for the petitioner, “venue” of arbitration does not include the “seat” of the arbitration and since the arbitration has to be conducted in terms of Rules of Arbitration of the International Centre for Alternative Dispute Resolution, New Delhi, therefore, seat of the Arbitrator has to be New Delhi. On the contrary, learned counsel for respondent strenuously argued that in terms of clause 26.3.1, the venue of arbitration has to be Lucknow only.

In the Supreme Court decision of Bharat Aluminum Company Ltd. v. Kaiser Aluminum Technical Services Inc, (2012) 9 SCC 552, recognized that “Seat” and “Venue” are different and observed that the “Seat” of arbitration is the center of gravity of the arbitration and the “Venue” is the geographical location where such arbitration meetings are conducted. The Court held that under sub- Section (2), (2) and (3) of Section 20 of the Arbitration and Conciliation Act, 1996, “Place of Arbitration” is used interchangeably.

In Indus Mobile Distribution (P) Ltd. v. Datawind Innovations (P) Ltd., (2017) 7 SCC 678, the Supreme Court had dealt with the issue whether the seat of arbitration suggests the jurisdiction and held that once a seat is determined, the courts at seat shall have the exclusive jurisdiction for the purpose of regulating arbitral proceedings. However, in the said case, the parties had not only agreed to the seat of arbitration but also had an exclusive jurisdiction clause, which ousted other jurisdictions.

Further, in Mankastu Impex (P) Ltd. v. Airvisual Ltd., (2020) 5 SCC 399,  while dealing with the issue of whether the seat of arbitration shall be New Delhi or Hongkong, observed that mere expression of place of arbitration will not entail that the parties intended it to be the seat. The intention of the parties to the seat has to be determined from other clauses of the Agreement and the conduct of the parties.

In the decision of BGS SGS SOMA JV v. NHPC, (2020) 4 SCC 234, it was held that the Court observed that if the arbitration agreement provides that arbitration proceedings “shall be held” at a particular venue, then that indicates arbitration proceedings would be anchored at such venue, and therefore, the choice of venue is also a choice of the seat of arbitration. Court reiterated that once the parties designate the seat of arbitration, only the courts governing the seat have exclusive jurisdiction to govern such arbitration proceeding and jurisdiction of all other courts stand ousted.

Hence in view of the Supreme Court decision in BGS SGS SOMA JV v. NHPC, (2020) 4 SCC 234 the observation of the Court that “choice of venue is also a choice of the seat of arbitration”, High Court in the present matter found that in Clause-26.3.1 of Article-26 of the Agreement, the parties had agreed that the venue of arbitration shall be “Lucknow‟ and therefore, the courts at Lucknow shall have the exclusive jurisdiction to entertain the disputes arising out of Agreement in question.

Bench opined that the role of ICADR Rules shall come into play with regard to procedure to be followed, only after the arbitration commences before the appropriate jurisdiction of law, which was in the present matter “Lucknow”.

Therefore, it was held that Court had no jurisdiction to entertain the present petition seeing appointment of an arbitrator and hence was dismissed, with liberty to the petitioner to approach the Court at Lucknow.[S.P. Singla Constructions (P) Ltd. v. Construction and Design Services, Uttar Pradesh Jal Nigam; 2021 SCC OnLine Del 4454, decided on 23-09-2021]


Advocates before the Court:

For the Petitioner: Anirudh Wadhwa, Advocate

For the Respondent: Rishabh Kapoor, Naman Tandon, Mayank Punia, Advocates

Case BriefsSupreme Court

Supreme Court: Expressing on the aspect of independence and impartiality of the arbitrators, Division Bench of M.R. Shah and Aniruddha Bose, JJ., held that,

Though the word ‘Chairman’ is not mentioned explicitly in Seventh Schedule, at the same time, it would fall under clause 1, clause 2, clause 5, and clause 12 of the Seventh Schedule, hence will be ineligible for the purpose of the arbitration.

The above schedule is to be read with Section 12(5) of the Arbitration and Conciliation Act.

Aggrieved and dissatisfied with the impugned order of Rajasthan High Court allowing applications under Section 11 of the Arbitration and Conciliation Act, 1996 and appointing an Arbitrator, Jaipur Zila Dugdh Utpadak Sahkari Sangh Ltd., preferred the present Special Leave Petitions.

Facts leading to the present matter

Respondent and the Sahkari Sangh entered into a Distributorship Agreement for the distribution of milk and butter milk in certain zones in Jaipur for a period of two years.

Disputes arose between the two and as per Clause 13 of the said agreement, all disputes and differences arising out of or in any way touching or concerning the agreement, whatsoever shall be referred to the sole Arbitrator, the Chairman, Jaipur Zila Dugh Utpadak Sahkari Sangh Ltd. and his decision shall be final and binding for the parties.

Respondent approached the Sole Arbitrator for settlement of a commercial dispute between the parties.

But during the pendency of the arbitration proceedings, the respondent approached the High Court for appointment of an arbitrator in exercise of powers under Section 11 of the Act and invoking the arbitration contained in clause 13 of the Agreement.

Opposing the above, petitioner submitted that once the respondent has approached the Sole Arbitrator invoking clause 13 and participated in the arbitration proceedings, it is not open for it to approach the High Court to appoint an arbitrator under Section 11 of the Act.

High Court considering Section 12(5) read with 7th Schedule to the Act, allowed the said application and had appointed the former District and Sessions Judge to act as an arbitrator.

Analysis, Law and Decision

Supreme Court noted that the High Court while allowing the application under Section 11 of the Act had appointed the arbitrator other than the Chairman.

Petitioners Contention:

Agreement was prior to the insertion of Sub­section (5) of Section 12 read with Seventh Schedule to the Act and therefore the disqualification under Sub­section (5) of Section 12 read with Seventh Schedule to the Act shall not be applicable and that once an arbitrator – Chairman started the arbitration proceedings thereafter the High Court is not justified in appointing an arbitrator.

Court’s view:

Petitioner’s contention stated above had no substance.

Supreme Court’s decisions in Trf Ltd. v. Energo Engineering Projects Ltd., (2017) 8 SCC 377, Voestalpine Schienen GMBH v. Delhi Metro Rail Corporation Ltd., (2017) 4 SCC 665, considered in detail the object and purpose of insertion of Section 12(5) read with Seventh Schedule to the Act.

In the decision of Voestalpine Schienen GMBH v. Delhi Metro Rail Corporation Ltd., (2017) 4 SCC 665, it was observed and held by the Court that the main purpose of amending the provision was to provide for ‘neutrality of arbitrators.’

Further, it was observed in the case that,

Sub­section (5) of Section 12 lays down that notwithstanding any prior agreement to the contrary, any person whose relationship with the parties or counsel or the subject­matter of the dispute falls under any of the categories specified in the Seventh Schedule, he shall be ineligible to be appointed as an arbitrator. It is further observed that in such an eventuality i.e. when the arbitration clause finds foul with the amended provisions (Sub­section (5) of Section 12 read with Seventh Schedule) the appointment of an arbitrator would be beyond pale of the arbitration agreement, empowering the court to appoint such arbitrator as may be permissible. It is further observed that, that would be the effect of non obstante clause contained in sub­section (5) of Section 12 and the other party cannot insist on appointment of the arbitrator in terms of the arbitration agreement.

Adding to the above list of decisions, Court added another one, Bharat Broadband Network Ltd.v. Telecoms Limited, (2019) 5 SCC 755, wherein it was observed that Section 12(5) read with Seventh Schedule made it clear that if the arbitrator falls in any one of the categories specified in the Seventh Schedule, he becomes ‘ineligible’ to act as an arbitrator. Once he becomes ineligible he then becomes dejure unable to perform his functions.

Petitioners Contention:

In view of Section 58 of the Rajasthan Cooperative Societies Act, 2001, the dispute between the parties is to be resolved by the Registrar only and as per Bye Laws 30 of Rajasthan Cooperative Societies Act, 2001 shall be applicable and therefore no court shall have jurisdiction and therefore the dispute referred to the former District Judge is unsustainable has no substance.

Court’s view:

Bench opined that, despite Section 58 of the Rajasthan Cooperative Societies Act, 2001, there is an agreement between the parties to resolve the dispute through arbitrator – Chairman. Parties are bound by the agreement and the arbitration clause contained in the Agreement.

Hence, neither Section 58 of the Rajasthan Cooperative Societies Act, 2001 shall not be applicable at all nor the same shall come in the way of appointing the arbitrator under the Arbitration Act.

Significant Question:

Whether the Chairman who is an elected member of the petitioner Sahkari Sangh can be said to be ineligible under Section 12(5) read with Seventh Schedule to the Act or not?

As per the petitioner, Seventh Schedule to the Act ‘Chairman’ is not mentioned and only Manager, Director or part of the Management can be said to be ineligible.

Court’s view:

Bench expressed that Section 12 (5) read with Seventh Schedule was inserted bearing in mind the ‘impartiality and independence’ of the arbitrators. It had been inserted with the purpose of ‘neutrality of arbitrators.’

Independence and impartiality of the arbitrators are the hallmarks of any arbitration proceedings, as observed in Voestalpine Schienen GMBH v. Delhi Metro Rail Corporation Ltd., (2017) 4 SCC 665.

Rule against bias is one of the fundamental principles of natural justice which apply to all judicial proceedings and quasi­judicial proceedings and it is for this reason that despite the contractually agreed upon, the persons mentioned in Sub­section (5) of Section 12 read with Seventh Schedule to the Act would render himself ineligible to conduct the arbitration.

In view of the above-cited decision, Supreme Court held that Chairman of the petitioner Sangh can certainly be held to be ‘ineligible’ to continue as an arbitrator. Court added that though the word ‘Chairman’ is not specifically mentioned, but it would fall in the category of Clause 1; Clause 2; Clause 5; Clause 12 which read as under:

“1. The arbitrator is an employee, consultant, advisor or has any other past or present business relationship with a party.

  1. The arbitrator currently represents or advises one of the parties or an affiliate of one of the parties
  2. The arbitrator is a manager, director or part of the management, or has a similar controlling influence, in an affiliate of one of the parties if the affiliate is directly involved in the matters in dispute in the arbitration.
  1. The arbitrator is a manager, director or part of the management, or has a similar controlling influence in one of the parties.”

Therefore, Chairman who was elected member/Director of the Sangh could certainly be said to be ‘ineligible’ to become an arbitrator as per Section 12(5) read with Seventh Schedule to the Act.

Petitioner’s Contention:

Respondents participated in the arbitration proceedings before the sole arbitrator – Chairman and therefore he ought not to have approached the High Court for appointment of arbitrator under Section 11

Court’s view:

While citing the decision of this Court in Bharat Broadband Network Ltd. v. Telecoms Limited, (2019) 5 SCC 755, wherein it was stated that there must be an ‘express agreement’ in writing to satisfy the requirements of Section 12(5) proviso, Bench found the above substance also unsustainable.

Conclusion

On considering the above discussion, Supreme Court held that once the sole arbitrator – Chairman is ‘ineligible’ to act as an arbitrator to resolve the dispute between the parties in view of Section 12(5) read with Seventh Schedule to the Act he loses mandate to continue as a sole arbitrator.

Hence, High Court did not commit any error in appointing the arbitrator other than the sole arbitrator – Chairman.

Taking into consideration the above reasons, Supreme Court dismissed the applications. [Jaipur Zila Dugdh Utpadak Sahkari Sangh Ltd. v. Ajay Sales & Suppliers, 2021 SCC OnLine SC 730, decided on 9-09-2021]


Advocates before the Court

Gunjan Pathak, Counsel for the Petitioners

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.