Case BriefsHigh Courts

Delhi High Court: The Division Bench of Rajiv Shakdher and Talwant Singh, JJ., while addressing a matter with regard to the arbitral award, held that,

“Mere erroneous application of the law, or appreciation of evidence, does not call for interference of the award on the ground of patent illegality. The Court cannot set aside the award by reappreciating the evidence, which is taken into consideration, by an Arbitral Tribunal”

Instant appeal was preferred under Section 37 of the Arbitration and Conciliation Act read with Section 13 of the Commercial Courts Act, 2015 against the decision of Single Judge.

Factual Matrix

Respondent was in the business of manufacturing and selling footwear and its components, on 20th March 2008 respondent obtained the Standard Fire and Special Perils Policy from the appellant.

Policy period spanned between 20-03-2008 and 19-03-2009. The total sum assured under the policy initially, was 24,25,00,000/-, which was enhanced to Rs 27,25,00,000/- w.e.f. 30-06-2008.

On 14-12-2008, fire broke out in one of the two units of the respondents which caused damage to the building, plant and machinery, stocks, furniture, fixtures and fittings etc.

Surveyor recommended the release of interim payment in favour of the respondent and accordingly, in March 2009 Rs 2,50,00,000 were paid to the respondent.

Later, in August the respondent scaled down its claim. Surveyor submitted its report to which the respondent consented.

Appellant was somehow not satisfied with the consent letter sent by the respondent and hence asked the respondent to send it again and draft for a fresh consent letter was sent by the appellant via email.

Respondent agreed that, if the balance amount was paid, it would constitute the full and final settlement in respect of its claim lodged with the appellant.

Since the appellant was still not satisfied with the consent letter, he asked the respondent to furnish a new consent letter with the exception that, it contained the averment, to the effect, that, the respondent undertook not to agitate its claim before any court, consumer forum, commission, or any other authority in future. A pre-receipt document was also attached which sought to affirm that respondent’s claim had been settled.

Respondent was unhappy and felt coerced into accepting a lesser amount in respect of the claim lodged by it. After which a notice was issued by the respondent, and this all led to arbitration proceedings.

On being dissatisfied with the award of the arbitral tribunal, the appellant approached the Court and Single Judge repelled the challenge.

Question for Consideration:

Whether the Arbitral Tribunal had committed patent illegality in assessing the loss which the respondent had suffered, qua the stock, which was available, at its factory on the day of the fire?

Analysis, Law and Decision

High Court noted that, because a fire had occurred, and given the fact that stock register and production register was not available (as is perhaps traditionally found with some concerns, if not all), the Arbitral Tribunal took recourse to the manufacturing and trading account, to ascertain the value of the stock that would have been available at the respondent’s factory had the incident of fire not occurred.

Arbitral Tribunal rejected the assessment, made of the loss concerning the closing stock, by the surveyor, for various reasons, including the arbitrary deductions made qua quantities of raw material and finished goods. The Arbitral Tribunal was particularly concerned with the gross profit rate adopted by the surveyor, which, was pegged that 50.81%. The gross profit rate, arrived at by the surveyor, was, undoubtedly, incorrectly calculated, as while calculating the same, depreciation on building, plant and machinery [i.e., Rs. 1,32,80,291/-] was not factored

Arbitral Tribunal picked up correctly from the audited balance sheet of the respondent, which had been submitted to its banker as well.

In Court’s opinion, Arbitral Tribunal was right in concluding that, although the manufacturing and trading account showed that the closing stock as on 14.12.2008, was Rs. 6,25,08,799/-, however, since the respondent while lodging its claim had pegged the value of the closing stock at Rs. 5,98,12,000/-, the value of the closing stock had to be scaled down to that figure i.e. Rs. 5,98,12,000/-. The respondent could not have been compensated, for more than, the claimed amount.

The total loss quantified by the Arbitral Tribunal was pegged at Rs. 4,42,36,337/-

As observed, at the very outset, since the adjusted loss of stock, arrived at by the surveyor, was pegged at Rs. 2,33,59,637/-, the Arbitral Tribunal directed the appellant to pay the balance amount, i.e., Rs. 2,08,76,700/-

High Court did not find anything wrong with the approach adopted by the Arbitral Tribunal.

While there can be no doubt that, weight ought to be given to the surveyor’s report, we are, however, unable to agree that the conclusion reached surveyor, cannot be put to test. As noted by the Arbitral Tribunal, the surveyor had committed, inter alia, serious errors in making arbitrary deductions qua quantities of raw material and finished goods and in ascertaining the rate of gross profit. The rate of gross profit arrived at, was an astronomical figure, of 50.81% only because the surveyor had, somehow, forgotten to factor in depreciation, while calculating the production cost.

Bench also added that the Arbitral Tribunal, in the instant case, has given enough and more reasons, as to why it chose to ignore the methodology adopted by the surveyor in calculating the loss claimed by the respondent on account of damage to its stock.

Therefore, while concluding, the Court expressed that,

“…domestic awards can be challenged on the ground of patent illegality only if it is one, which appears, on the face of the award, and is such, which goes to the root of the matter.”

Lastly, the Court stated that the objections raised by the appellant, to the award, do not meet the bar set, both by the 1996 Act and the law enunciated by the Supreme Court in Ssangyong Engg. & Construction Co. Ltd. v. NHAI, (2019) 15 SCC 131 for bringing it within the ambit of the expression ‘patent illegality’.

In view of the above, the appeal was allowed. [Oriental Insurance Co. Ltd. v. Diamond Product Ltd., 2021 SCC OnLine Del 4319, decided on 9-9-2021]


Advocates before the Court:

Mr. Sanjeev Sindhwani, Senior Advocate with Mr. Abhishek K. Gola, Advocate.

Mr. Vineet Kumar, Advocate.

Case BriefsHigh Courts

Delhi High Court: On finding no ground for interference in the arbitral award, Anup Jairam Bhambhani, J., upheld the decision of Single Judge Bench.

Instant appeal was filed under Section 13 of the Commercial Courts Act 2015 read with Section 10 of the Delhi High Court Act 1966 and Section 37 of the Arbitration and Conciliation Act 1996 impugning the decision of Single Judge of this Court. In the said decision arbitral award made by the sole arbitrator was upheld.

Background

Railways had filed a petition under Section 32 of the Arbitration and Conciliation Act challenging the arbitral award in which Railways was directed to refund to Annavaram the sum of Rs 1,22,38,125 which had been deducted/withheld by the Railways as ‘liquidated damages’ imposed upon Annavaram for alleged breach of the terms and conditions of a tender, pursuant to which a Letter of Acceptance was issued by the Railways to Annavaram for supply of 10000 Pre-Stressed Concrete Sleepers.

Non-Performance & Non-Compliance

The reason for the dispute was the non-performance and non-compliance with the terms of Letter of Acceptance. As Annavaram did not supply even a single sleeper within the stipulated time, nor did they obtain any extension of time for making such supply.

In view of the above background, penalty was imposed and then the contract was terminated.

Mr R.K. Sanghi, Senior counsel appearing for Annavaram contended that by inserting clause 1.2, a new condition came into effect whereby the parties agreed that the quantity of sleepers ordered under the original tender stood “… reduced to the number of sleepers manufactured till the date of issue of LoA for the new contract …”; and it was contended, that as a result there was no obligation on Annavaram to supply 10000 sleepers by 14-07-2009.

Consequently, it was argued that, the Railways were not justified in imposing any liquidated damages upon Annavaram.

Analysis, Law and Decision

Firstly, the High Court stated that there is limited scope and ambit of a challenge under Sections 34 and 37 of the A&C Act, which are pithily set out inter alia in the Supreme Court decision of PSA SICAL Terminals (P) Ltd. v. Board of Trustees of V.O. Chidambranar Port Trust Tuticorin, 2021 SCC OnLine SC 508, in which the Supreme Court reiterated its view on MMTC Limited v. Vendanta Limited, (2019) 4 SCC 163 wherein it was observed that:

“As far as Section 34 is concerned, the position is well-settled by now that the Court does not sit in appeal over the arbitral award and may interfere on merits on the limited ground provided under Section 34(2)(b)(ii) …”

“It is only if one of these conditions is met that the Court may interfere with an arbitral award in terms of Section 34(2)(b)(ii), but such interference does not entail a review of the merits of the dispute, and is limited to situations where the findings of the arbitrator are arbitrary, capricious or perverse, or when the conscience of the Court is shocked, or when the illegality is not trivial but goes to the root of the matter. An arbitral award may not be interfered with if the view taken by the arbitrator is a possible view based on facts.”

“…the court cannot undertake an independent assessment of the merits of the award, and must only ascertain that the exercise of power by the court under Section 34 has not exceeded the scope of the provision.”

Therefore, Bench held that so long as the view taken by an arbitrator, is a possible view based on facts, it is irrelevant whether this Court would or would not have taken the same view on the merits of the matter, hence arbitral award was required to be upheld.

Hence, impugned judgment was upheld.

Conclusion

Annavaram entitled to receive from the Railways the amount directed to be refunded in the arbitral award along with simple interest at 6% per annum till the date of payment as per the impugned judgment. [Union of India v. Annavaram Concrete Pvt. Ltd., 2021 SCC OnLine Del 4211, decided on 31-8-2021]


Advocates before the Court:

Ms Geetanjali Mohan, Advocate.

Mr R.K. Sanghi, Senior Advocate with Mr Satjendar Kumar, Advocate and Mr Ishan Sanghi, Advocate.


Additional Reading:

“There is a disturbing tendency of courts setting aside arbitral awards …”: SC upholds arbitration award of Rs 2728 crore plus interest in favour of Delhi Airport Metro Express (P) Ltd.

Foreign arbitral award enforceable against non-signatories to agreement; ‘perversity’ no longer a ground to challenge foreign award; tort claims arising in connection with agreement are arbitrable: SC expounds law on foreign awards

Arbitrator cannot rewrite contract for parties; Arbitral award based on no evidence or in ignorance of vital evidence comes in realm of patent illegality: SC   

Can Courts modify Arbitral Awards under S. 34 of Arbitration Act or is power limited? SC decides

Del HC | Ambiguity in contractually stipulated obligations favours whom? Court discusses while refusing interference in arbitral award

Del HC adverts to scope of judicial review of an arbitral award; Wades through bunch of pleas including violation of Part 1, CPC and insurance against breakage during transit, etc.

 

Case BriefsSupreme Court

Supreme Court: The bench of SA Nazeer* and Krishna Murari, JJ has held that if the contract contains a specific clause which expressly bars payment of interest, then it is not open for the arbitrator to grant pendente lite interest.

Facts

Parties entered into a contract for construction of boundary wall at 2×750 MW Pragati III Combined Cycle Power at Bawana, Delhi, which, inter alia, contained the interest barring the following clause:

“Clause 17: No interest shall be payable by BHEL on Earnest Money Deposit, Security Deposit or on any moneys due to the contractor.”

When the dispute arose between the parties, the appellant, apart from claiming various amounts under different heads, inter alia claimed pre-reference, pendente lite and future interest at the rate of 24% on the value of the award.

The Arbitrator concluded that there is no prohibition in the contract about payment of interest for the pre-suit, pendente lite and future period.  Therefore, he awarded pendente lite and future interest at the rate of 10% p.a. to the appellant on the award amount from the date of filing of the claim petition i.e. 02.12.2011 till the date of realization of the award amount.

Analysis

Interest payments are governed in general by the Interest Act, 1978 in addition to the specific statutes that govern an impugned matter.

  • Section 2 (a) of the Interest Act defines a “Court” which includes both a Tribunal and an Arbitrator.
  • Section 3 allows a “Court” to grant interest at prevailing interest rates in various cases. The provisions of Section 3 (3) of the Interest Act, 1978 explicitly allows the parties to waive their claim to an interest by virtue of an agreement. Section 3(3)(a)(ii) states that the Interest Act will not apply to situations where the payment of interest is “barred by virtue of an express agreement”.

Further, the provisions of the Arbitration and Conciliation Act, 1996 give paramount importance to the contract entered into between the parties and categorically restricts the power of an arbitrator to award pre-reference and pendente  lite  interest when the parties themselves have agreed to the contrary.

Section 31(7)(a) of the 1996 Act which deals with the payment of interest is as under :

“31(7)(a) Unless otherwise agreed by the parties, where and insofar as an arbitral award is for the payment of money, the arbitral tribunal may include in the sum for which the award is made interest, at such rate as it deems reasonable, on the whole or any part of the money, for the whole or any part of the period between the date on which the cause of action arose and the date on which the award is made.”

The provision makes it clear that if the contract prohibits pre-reference and pendente lite interest, the arbitrator cannot award interest for the said period.

In the present case, clause barring interest is very clear and categorical. It uses the expression “any moneys due to the contractor” by the employer which includes the amount awarded by the arbitrator.

Hence, it was held that when there is an express statutory permission for the parties to contract out of receiving interest and they have done so without any vitiation of free consent, it is not open for the Arbitrator to grant pendent lite interest.

Important rulings

Sayeed Ahmed and Company v. State of Uttar Pradesh, (2009) 12 SCC 26

A provision has been made under Section 31(7)(a) of the 1996 Act in relation to the power of the arbitrator to award interest.  As per this section, if the contract bars payment of interest, the arbitrator cannot award interest from the date of cause of action till the date of award.

Sree Kamatchi Amman Constructions v. Divisional Railway Manager (Works), (2010) 8 SCC 767

here the parties had agreed that the interest shall not be payable, the Arbitral Tribunal cannot award interest between the date on which the cause of action arose to the date of the award.

Sri Chittaranjan Maity v. Union of India, (2017) 9 SCC 611

If a contract prohibits award of interest for pre-award period, the arbitrator cannot award interest for the said period.

[Garg Builders v. Bharat Heavy Electricals Ltd., 2021 SCC OnLine SC 855, decided on 04.10.2021]

_______________________________________________

Counsels:

For appellant: Advocate Sanjay Bansal

For respondent: Advocate Pallav Kumar


*Judgment by: Justice SA Nazeer

Know Thy Judge | Justice S. Abdul Nazeer

Op EdsOP. ED.

Introduction

In the realm of the enforcement of foreign arbitral awards in India, the more prevalent international commercial arbitrations (ICA) often outnumber their comrades — investment treaty arbitrations (ITA). In India, the enforcement of foreign arbitral awards in legislated by the Arbitration and Conciliation Act of 1996[1]. Both domestic and international commercial arbitral awards are covered within the ambit of this statute. The legal conundrum with regard to the Act’s scope lies in the area of investment treaty arbitral awards; these foreign awards result from a sovereign country’s international investment agreements. These agreements are signed by countries at various levels to safeguard the investment of their investors in other countries. These safeguards are accompanied by dispute resolution mechanisms that allow investors to opt for proceedings against a State in the event of an alleged transgression of the agreement.[2] Thus, ITAs form an essential component of foreign awards, in addition to the more common ICA awards.

In India, the enforcement of investment awards is a complicated affair due to the lack of any specific domestic legislation and its abstention from being a party to the relevant international convention. The Convention on the International Centre for Settlement of Investment Disputes between States and Nationals of other States (ICSID Convention) allows for the enforcement of investment awards in the jurisdictions of the signatory member States. It also provides safeguards against the challenge of such awards in domestic jurisdictions. In many of India’s bilateral investment treaties (BITs), there are provisions to make use of the ICSID Additional Facility Rules or for ad hoc arbitrations through United Nations Commission on International Trade Law[3] (UNCITRAL Rules). Since the Convention does not apply to such proceedings and the resultant awards, these are not free from enforcement encumbrances as compared to ICSID awards.[4]

The Arbitration and Conciliation Act, 1996 and investment awards

In order to further delve into the current position of the enforceability of investment awards in India, a closer examination of Part II of the Arbitration and Conciliation Act is needed. Part II has been drafted keeping in mind the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, 1958[5], (the New York Convention).[6] This allows for the recognition and the subsequent enforcement of foreign arbitral awards in India, through the Arbitration Act. In the present context, both the reservations offered by the Convention are relevant; India adopted both the reciprocity reservation and the one where the Convention would only apply to disputes that were considered commercial under Indian domestic law.[7] At this juncture, it is essential to discern ICA awards from that of ITAs. In the former, disputes could arise due to private agreements and contractual agreements, but in the latter the root of the dispute arises from disharmony between a foreign investor and a sovereign State. In the event of an award against the sovereign host State, pecuniary damages will have to be paid to the foreign investor due to a breach of treaty obligations, thus not due to any commercial reason. This distinction has ensured that ITA awards are not considered as foreign awards by certain courts in India; the commercial nature of a dispute would not accord it the status of being commercial as per Indian domestic law. There is scarce clarity in the discourse surrounding the word commercial. In the Commercial Courts Act, Section 2(1)(c)[8] defines the term commercial disputes and lists various kinds of disputes that could be covered under the ambit of the definition. In sub-section (1)(c)(xxii), the Central Government is given the prerogative of notifying any such additional commercial dispute. The section also clarifies that parties to the dispute being States or their agencies/instrumentalities would not preclude the dispute from being a commercial dispute.[9] In Union of India v. MV Hoegh Orchid[10], the High Court of Gujarat assigned a broad ambit to the word commerce. It said that commerce would cover “business and trade transactions in any of their forms … between the citizens of different countries”.[11] In R.M. Investment and Trading Co. (P) Ltd. v. Boeing Co., the Supreme Court of India opined that the word commercial should be construed in an expansive manner where dispute settlement in matters of international trade, through the New York Convention, is completed swiftly.[12]

India’s tryst with BITs

India has had a mixed experience in dealing with the enforcement of investment arbitration awards. In the 1990s, India first dabbled with the BIT regime, when it signed its first BIT with the United Kingdom in 1994. This model was suited to countries with higher levels of economic development, where higher protection was offered to investors, as compared to the State. Similar BITs were signed by India with other countries, where focus was placed on investor protection, rather than the State; this model was not suitable for a third world country that had only recently liberalised its economy. The ramifications of such investor-friendly BITs started to shows themselves with the dispute of the Dabhol Power Project, in 2011.[13] The Dabhol Power Corporation was a joint venture comprising Enron Corporation, General Electric Corporation and Bechtel Enterprises. The DPC entered into an agreement with the Maharashtra State Electricity Board, a government entity, to supply power in Maharashtra. Certain internal and external factors led the Board to terminate its contract with DPC. After failed attempts by DPC to initiate arbitration proceedings, it proceeded to initiate investment treaty arbitration proceedings through the Indo-Mauritius BIT. The matter was later settled confidentially, but there have been certain estimates that the settlement figure touched a billion dollars. It should be noted here that the reasons for cancellation of the contract were politically strategic since public perception viewed this project as unnecessarily expensive. Such decisions, in an investor-friendly treaty could have ironical consequences for Governments, where such finance conserving decisions could backfire.[14] In this case, a settlement was reached before an award could be passed, but in the ITA of White Industries, the conclusion was a wake-up call for the Indian political establishment. An Australian mining giant, White Industries, entered into a mining contract with the Indian governmental entity Coal India. After some disputes arose between the parties, they proceeded to initiate arbitration proceedings that ultimately ruled in favour of White Industries. Coal India filed an application before the Calcutta High Court to set aside the award, whereas White Industries moved the Delhi High Court to enforce the award. After numerous delays before the High Courts and then the Supreme Court, White Industries initiated arbitration proceedings under the India-Australia BIT. The Tribunal formed as per the treaty ruled in favour of White Industries as well. The Tribunal entered troubled waters when it opined that India, as the host State, had failed to provide effective means to White Industries to enforce its claims. It borrowed this provision from the India-Korea BIT after using the most favoured nation doctrine of international law.[15] The Indian Government surprisingly accepted the decision of the Tribunal and paid approximately AUD 4 million to the investors. The White Industries debacle ensured that Indian authorities had finally seen the potential harm that such investor-friendly BITs could do to both the economy of the country and their political image.

In the subsequent few years, there were more ITA proceedings that were initiated against India against sovereign Indian regulatory policies.[16] Since then, India has attempted to control the potential damage by revisiting the terms of BITs and adopting a pro-State, as is visible in the 2016 Model BIT.[17] In recent times, certain High Court rulings have further added to the existing uncertainty around the enforceability of investment awards. The disagreement amongst Indian High Courts largely centres on the applicability of the Arbitration Act on ITAs. In Port of Kolkata v. Louis Dreyfus Armatures SAS[18], the Calcutta High Court ruled that such arbitrations would attract the provisions of the Arbitration Act. In Louis Dreyfus[19], Kolkata Port Trust had filed an anti-arbitration injunction against Louis Dreyfus from proceedings with investment arbitration proceedings through the India-France BIT. The Court held that in this scenario, the Republic of India should be a party to the proceedings, and not the Port, since the State signed the BIT. The Court simply assumed that the Arbitration Act could be applied to ITAs and ruled on the application.[20] In contrast to this holding, in more recent times, the Delhi High Court has taken a complete contrary view. In Union of India v. Vodafone Group Plc United Kingdom[21], the Union of India approached the Court for an anti-arbitration injunction. It argued that the Vodafone Group be restricted from instituting an investment arbitration under the India-UK BIT, since its subsidiary had already initiated investment arbitration proceedings under the India-Netherlands BIT. The Delhi HC declined to intervene and ruled that domestic courts did not have the jurisdiction to intervene in ITAs in the ordinary course of their functioning and would intervene only in exceptional circumstances. The Court stated that ITAs were distinct from ICAs, and that they did not come under the commercial scope of the Indian arbitration Act. The Court further reiterated its earlier Vodafone[22] stand in Union of India v. Khaitan Holdings (Mauritius) Ltd., where it is stated that the Code of Civil Procedure would govern BITs.[23]

In another publicised dispute, Cairn Energy initiated arbitration proceedings against the Indian Union against its retrospective amendment to Indian Income Tax laws; these amendments had ensured that a liability of 1.6 billion was imposed on Cairn Energy on capital gains during a restructuring attempt in the early 2000s. In December 2020, the constituted tribunal through the 1994 India United Kingdom BIT ruled in favour of Cairn and directed the Indian State to pay $1.2 billion as a result of violation of the BIT’s provisions. Such uncertainty has ensured that investors make an attempt to locate the assets of the award debtor in other jurisdictions, and instituting proceedings there.

The future of the Indian State and BITs

The present uncertainty in this area of lawmakers, and its possible resolution in the future is a complex process. In order to comment on the future Indian position on the enforceability of investment treaty arbitrations in India, it is essential that the nature of stakeholders in ITAs and ICAs be distinguished. The former arises due to breach of international treaty obligations whereas the latter is a more private affair. In the latter, disputes between private parties will be arbitrated upon, where a quicker alternative to the traditional legal system is sought. In the former case, the breach of treaty provisions ordinarily occurs through an official function or regulation of a State in exercising its sovereign functions. These functions and/or regulations could range from monetary and fiscal policies, environmental regulations, amongst others that could fall under the ambit of the ITA dispute. Any decision against a country would involve ramifications of a political nature, and would affect the country taxpayers, and not just private entities. This was seen in Blue Ridge Investments, LLC v. Republic of Argentina[24], where the Tribunal ruled Argentina’s financial emergency provisions to be infringing the Argentina United States of America Bilateral Investment Treaty. With India becoming the hotbed for foreign investment in the last few years, the enforceability of ITA awards could be problematic from the perspective of the Indian Government. In Maharashtra Power Development Corporation Ltd. v. Dabhol Power Co.[25], although the parties entered into a confidential settlement, it has been estimated that the Indian Government paid a settlement amount of approximately 1 billion US dollars to the investors. An increase in foreign investment in India shows a strong correlation with the number of investment treaties signed by India. In the event that the approach of the Calcutta High Court in Dreyfus[26] does end up being the law of the land, Conditions for Enforcement foreign awards as mentioned in Section 48[27] of the Act will gain importance, as the host State could make use of such provisions to challenge the enforcement of the award. The public policy aspect of the provision will come into further emphasis. In Shri Lal Mahal Ltd. v. Progetto Grano Spa, the Supreme Court held that a foreign award, under Section 48, could be refused on grounds of it violating the fundamental policy of India, interests of India, and justice and morality.[28] Although the interests of India requirement was removed vide the 2015 Amendment to the Act, but for a policy discourse (and pre-amendment disputes), the interests of India in the policymaking perspective could influence the Government’s approach while devising ITA enforcement mechanisms in the future.

In the Dabhol[29] and Vodafone[30] cases one can see the quantum of sums involved in such ITAs; the imposition of such a financial burden on the taxpayers of an economically developed country such as India would not be seen as politically and economically favourable. In the model Indian bilateral investment treaty prior to 2016, the guiding dispute resolution article allows foreign investors to hold the Indian State accountable to treaty violations. In the abovementioned model treaty, there is no mandatory requirement to exhaust all domestic remedies before the institution of such proceedings before submitting the dispute to international treaty arbitration. The 2016 model BIT rectifies such lacunae by mandating the exhaustion of local remedies with a time frame before submitting the dispute to arbitration. The extensive dispute resolution chapter of the new model BIT has been drafted to halt the spew of BIT arbitrations that have followed White Industries Australia Ltd. v. Coal India Ltd.[31] In this model BIT, the amount of power that has been placed in the hands of the State is significantly higher than the earlier treaties; albeit this place higher power in the hands of the Indian State, but it leaves Indian foreign investors struggling to receive compensation from foreign governments.[32]

In England and Wales, unlike India, courts have the jurisdiction to entertain matters related to investment awards. The United Kingdom is a signatory to the ICSID Convention and through its Arbitration (International Investment Disputes) Act of 1966, bestows the same authority on ICSID awards as if they were decrees of English Courts. In Republic of Ecuador v. Occidental Exploration and Production Co., the England and Wales Court of Appeal held that English Courts could rule on matters relating to investment arbitration awards.[33] Singapore is also a signatory of the ICSID Convention; Singaporean courts, though it is amended International Investment Disputes Act, entertain matters relating to ITAs. Singapore has not received an application to enforce foreign investment arbitral awards but have heard challenges to such Singapore-seated awards. In Swissbourgh Diamond Mines (Pty) Ltd. v. Kingdom of Lesotho, the High Court successfully set aside the award due to the Tribunal exceeding its jurisdiction.[34] It is important to recognise that unlike India, the UK and Singapore have not opted for the commercial reservation of the New York Convention, and their domestic courts can entertain ITA matters; both these countries are signatories to the ICSID Convention as well.

Conclusion

The landscape of the enforcement of ITAs in India is ambiguous at best, and not only does it fail to support objectives of the investor, but also does little to support the State. In several areas of the law, the limited judicial intervention has worked wonders for unorthodox dispute resolution mechanisms, but in this sphere, certain certainty and proportionate judicial intervention is needed. The differing rulings of the Delhi and Calcutta High Courts have left the stakeholders in a lurch, with great uncertainty to the extent of a judicial intervention. Uncertain areas of the law such as public policy have further complicated the enforcement of foreign awards in the investment arbitrations context. If one were to recall the disputes of Dabhol[35], White Industries[36], and Vodafone[37], it would appear that an uncertain enforcement regime might temporarily play into the hands of the Government, providing them interim respite from the flood of BIT proceedings that could be initiated against them. It is essential that in the long run, either the Supreme Court lays down the law of the land in this aspect, or a partially new structure be enacted by the Government for governing ITA awards; this structure should strive to achieve a holistic balance between the rights of the State and parties to the treaty, while considering the differences between ITAs and ICAs. It is also incumbent on the State to understand that despite its sovereign powers on domestic law, it needs to adopt a balanced approach to maintain its goal of increasing ease of business in India. The new model BIT complemented by strong legislation and policies could ensure that India’s problematic history with BITs does not repeat itself.


Advocate practicing in Mumbai, e-mail: rishit@vimadalal.in.

[1] <http://www.scconline.com/DocumentLink/QWdt5a4f>.

[2] United Nations Conference on Trade and Development. 2004. International Investment Agreements: Key Issues. [Online] <https://unctad.org/system/files/official-document/iteiit200410_en.pdf> accessed on 28-10-2020.

[3] <http://www.scconline.com/DocumentLink/q0V16q1A>.

[4] S.R. Subramanian, BITs and Pieces in International Investment Law: Enforcement of Investment Treaty Arbitration Awards in the Non-ICSID States: The Case of India, 14 J. World Investment & Trade 198 (2013).

[5] <http://www.scconline.com/DocumentLink/uqd961oJ>.

[6] Fali S. Nariman, “India and International Arbitration”, 41 Geo. Wash. Int’l L. Rev. 367 (2009).

[7] India – New York Convention, New York Convention Guide (2011), <https://bit.ly/369ddP4> (last visited 4-11-2020).

[8] <http://www.scconline.com/DocumentLink/5b7H7AX1>.

[9] The Commercial Courts Act, 2015, No. 4, Acts of Parliament, 2016.

[10] 1982 SCC OnLine Guj 57.

[11] Ibid.

[12] (1994) 4 SCC 541.

[13] Gus Van Harten, “TWAIL and the Dabhol Arbitration”, 3 Trade L. & Dev. 131 (2011).

[14] Ronald J. Bettauer, “India and International Arbitration: The Dabhol Experience”, 41 Geo. Wash. Int’l L. Rev. 381 (2009).

[15] S.K. Dholakia, “Investment Treaty Arbitration and Developing Countries: What Now and What Next?  Impact of White Industries v. Coal India Award”, 2 Indian J. Arb. L. 4 (2013).

[16] Manu Sanan, “The White Industries Award – Shades of Grey”, 13 J. World Investment & Trade 661 (2012).

[17] “Bilateral Investment Treaty Arbitration and India, With Special Focus on India Model BIT, 2016”, Nishith Desai (2018) <https://www.nishithdesai.com/fileadmin/user_upload/pdfs/Research_Papers/Bilateral_Investment_Treaty_Arbitration_and_India-PRINT-2.pdf> (last visited 2-11-2020).

[18] 2014 SCC OnLine Cal 17695.

[19] 2014 SCC OnLine Cal 17695.

[20] Delphine Constantin, “Indian Case Law Review (2014-2015): Anti-Arbitration Injunctions”, 2015 Int’l Bus. L.J. 409 (2015).

[21] 2018 SCC OnLine Del 8842.

[22] 2018 SCC OnLine Del 8842

[23] 2019 SCC OnLine Del 6755.

[24] No. 12-4139 (2nd Cir 2013).

[25] 2003 SCC OnLine Bom 1128.

[26] 2014 SCC OnLine Cal 17695.

[27] <http://www.scconline.com/DocumentLink/1f9D98bq>.

[28] (2014) 2 SCC 433.

[29] 2003 SCC OnLine Bom 1128.

[30] 2018 SCC OnLine Del 8842.

[31] 2004 SCC OnLine Cal 281.

[32] “Bilateral Investment Treaty Arbitration and India, With Special Focus on India Model BIT, 2016”, Nishith Desai (2018) <https://www.nishithdesai.com/fileadmin/user_upload/pdfs/Research_Papers/Bilateral_Investment_Treaty_Arbitration_and_India-PRINT-2.pdf> (last visited 2-11-2020).

[33] 2006 QB 432 : (2006) 2 WLR 70; Devashish Krishan, Introductory Note to United Kingdom Supreme Court of Judicature Court of Appeal (Civil Division): Occidental Exploration and Production Company v. Republic of Ecuador, 45 ILM 246 (2006).

[34] 2018 SGCA 81.

[35] 2003 SCC OnLine Bom 1128.

[36] 2004 SCC OnLine Cal 281.

[37] 2018 SCC OnLine Del 8842.

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

Experts CornerTariq Khan

An unwritten rule during war was to not shoot the messenger. The rationale behind this rule was logical i.e. do not shoot the messenger as the messenger is just sharing the news. Despite this rule, in some cases, the carrier of the bad news was, in fact, killed. Similarly, in an arbitration, the losing party often makes the arbitrator a party to the proceedings while challenging the award under Section 34 of the Arbitration and Conciliation Act, 1996. Just like a recipient of bad news frowns at the messenger, a losing party also blames the arbitrator and is tempted to sue the arbitrator. In such cases, arbitral immunity comes to the rescue of the arbitrator and provides essential safeguard to the arbitrator. It is a protection guaranteed by the statute to the arbitrators against any civil liability arising from their adjudicatory function provided that the arbitrator has acted in good faith.

 

Arbitral immunity is akin to the concept of judicial immunity. Judicial immunity means that a person, against whom a decision has been given by a court, cannot attack the decision of the court by suing the Judge. Therefore, those who perform judge-like functions should be protected from legal proceedings because a losing party is often tempted to involve the arbitrator in a legal proceeding either by making him a party or by compelling him to give testimony in a case. The rationale behind the concept of arbitral immunity is to protect arbitrator’s neutrality and independence.

 

International Context

 

The UNCITRAL Model Law is silent on arbitral immunity owing to the steep differences in the approach of different nations towards the immunity of arbitrators which has made it difficult to devise one uniform provision for the same. But different countries have inculcated this doctrine in their own suitable ways either by including it in the statute or through judicial interpretations.

 

The English Arbitration Act, 1996, Section 29(1), Singapore International Arbitration Act, 2012, Section 25, the Australian Commercial Arbitration Act, 2011, Section 39 and the Hong Kong Ordinance, 2011, Section 104 have explicitly included the provision of arbitral immunity in their arbitration statutes whereas countries like Canada have taken the route of judicial interpretations, predominantly from English cases and held that in absence of proof of bad faith or fraud, an arbitrator enjoys immunity from civil liability similar to that of a Judge. The Austrian Supreme Court in the same context determined that an arbitrator can be held liable for damages only if the arbitrator’s decision is overturned by a court and the party is able to prove that the arbitrator was grossly negligent.

 

Indian Context

 

As India moves towards making arbitration more robust, the doctrine of arbitral immunity was incorporated to the Arbitration and Conciliation Act, 1996 by the 2019 amendment leading to the addition of Section 42-B which reads as under:

 42-B. Protection of action taken in good faith.— No suit or other legal proceedings shall lie against the arbitrator for anything which is in good faith done or intended to be done under this Act or the rules or regulations made thereunder.

 One very important factor for ensuring judicial independence and impartiality is the immunity provided to Judges which protects them from liability of monetary damages in civil court for their acts pursuant to their adjudication. Similarly, it is pertinent to provide arbitrators the said immunity to ensure that the very object of arbitration is not lost.

 

This need of incorporating arbitral immunity was to shed light on in India much later, when in Rajesh Batra v. Ranbir Singh Ahlawat[1], the Court took suo motu cognizance of the arbitrator’s jurisdiction and imposed a penalty on the arbitrator for acting beyond his jurisdiction stating that, the arbitrator brazenly proceeded to conduct the proceedings and passed the impugned award.

 

Before the amendment of 2019, the Act of 1996 did not contain the provision of arbitral immunity in the absence of which, arbitrators had to rely on the rules of the institution which were opted by the parties. Though some institutions like Mumbai Centre for International Arbitration (MCIA), Rule 34.1 have adopted rules providing for exemption of the arbitrator from any liability in case of negligence, many institutions have not done so. The situation becomes worse in ad hoc arbitrations where such immunity lies only at the anvil of the parties.

 

The importance of adopting the provision of arbitral immunity in India was further advocated in the Report of Srikrishna Committee which recommended the insertion of a clause in the Arbitration and Conciliation Act based on Section 29 of the Arbitration Act, UK which opines that “An arbitrator is not liable for anything done or omitted in the discharge or purported discharge of his functions as arbitrator unless the act or omission is shown to have been in bad faith.”

 

Most cases brought against arbitrators are collateral attacks on the award. It is improper for the losing party to make arbitrator a party to the case along with the defendants as once the award is rendered by the arbitrator; he becomes functus officio. The rationale behind this recommendation of Srikrishna Committee was twofold. One was that the immunity of arbitrators is well accepted principally internationally. Secondly, the reason for it being well accepted internationally is that through this immunity the independence of the arbitrators is ensured and the integrity of the arbitral process is maintained.

 

Arbitral Immunity versus Amendment Act of 2021

 

The recent amendment of 2021 to the Arbitration and Conciliation Act, 1996 renders the provision of arbitral immunity otiose. The Bill specifies in proviso to Section 36(3) that an unconditional stay on the operation of the arbitral award can be granted if the court is satisfied that the making of the award was affected by fraud or corruption. This paves the way for the judgment-debtor to use this as a ground to resist the enforcement of the award and to seek an unconditional stay on its operation. For seeking an unconditional stay, a judgment-debtor may raise grounds of fraud or corruption in the making of the award. As a result, averments of corruption against the arbitrators may also be raised in the petition which will eventually hamper the reputation of the arbitrator. The Amendment Act of 2021 fails to consider this aspect and Section 42-B does not provide protection to the reputation of the arbitrators from such frivolous challenges as Section 42-B merely protects the arbitrator from any legal proceedings and not from any allegations that a losing party may make against the arbitrator in its pleadings while challenging the arbitral award.

 

The Way Ahead

The inculcation of arbitral immunity in India is a positive step. It has aimed to not only provide arbitrators the essential protection to conduct the proceedings impartially but is also a testament to the fact that Indian lawmakers are making space for arbitration to evolve in the country and making it more robust.

 

The interpretation of the term “good faith” will be very crucial in achieving the desired objective of the aforementioned provision. Incidentally, a lot of room is left for ambiguity when it comes to understanding what entails “good faith” in a given context which will have serious repercussions on both the parties and the arbitrator.

 

There are no safeguards under the Act to prevent the abuse of arbitral immunity. It can be argued that in some cases, the arbitrators will now take refuge of the above-mentioned provision and act arbitrarily according to their own whims and fancies. Further, they will be able to wriggle out of any liability arising in such situations because of the protection granted through this clause. On the other hand, arbitral immunity should also include protection of an arbitrator’s reputation so that no allegations can be made against the arbitrator if he has acted in good faith.

 

Therefore, if the arbitrator has in fact acted in bad faith, proper redress in the form of damages should be provided to the parties or penalty should be imposed on arbitrator. Similarly, if an arbitrator has acted in good faith, he/she should be granted immunity not only from legal proceedings but such immunity should also protect his/her reputation.

 

All in all, a lot will depend on the implementation of Section 42-B and how the courts will interpret “good faith”. Arbitrators also have to always keep in mind that they have a moral duty to act responsibly and ethically to avoid any such allegations by the losing party which can harm their integrity and credibility. At the same time, parties to an arbitration must also draft their pleadings responsibly and refrain from dragging the arbitrator unnecessarily while challenging the award.

 


Advocate, Supreme Court of India.The author can be reached at advocate.tariqkhan@gmail.com

The author would like to thank Ruhi Thakkar, Final Year Student at Balasaheb Apte College of Law, Mumbai for her able assistance.

[1] 2011 SCC OnLine Del 3308.

Advani & Co.Experts Corner

Introduction

The Arbitration and Conciliation Act, 1996 (A&C Act) is based on the 1985 UNCITRAL Model Law and came into force on 25-1-1996. The Indian Legislature recognised the need to honour India’s obligations under 1958 New York Convention and implement the modern arbitration regime to promote comity of nations in the field of international commercial arbitration and to foster international trade. The A&C Act has in Section 5 embodied the policy of minimal judicial interference. Although, the principle of minimised judicial interference is recognised by the most leading arbitration jurisdictions, the national courts of the seat have a supervisory jurisdiction to oversee the arbitration proceedings. Some extent of judicial oversight is considered necessary to ensure that the justice rendered through this private method of adjudication is in conformity with the fundamental principles of law of those nations with which it has a territorial connection. Therefore, the parties to arbitration proceedings must approach the national court of the jurisdiction where it wishes to have the arbitral award enforced and that court has the exclusive power to ensure that the arbitral award is not in contravention with the fundamental principles of law recognised by it and is also in conformity with its idiosyncratic public policies. The term “public policy” is dynamic in nature and is subject to varying interpretations, each depending on the field of law to which it is applied. It is diverse depending on the peculiarities of each jurisdiction. An early comment connoting the complexities of the term “public policy” can be traced back to the opinion of Burrough, J. when he went to warn the courts of law by saying it is a  “very unruly horse and once you get astride it you never know where it will carry you”.[1]

 

The connotation “public policy” in the context of setting aside of an arbitral award should not be confused with a review of the award on merits. It is a recognised principle of arbitration law that an arbitral award is final and binding on the parties and cannot be reviewed by the courts on merits at the setting aside or enforcement proceeding. Section 34(2) of the A&C Act contains seven grounds on which an arbitral award may be set aside and is divided into two parts. The grounds in Section 34(2)(a) are procedural in nature and precise. The grounds in Section 34(2)(b) are substantive and have been subject to judicial controversy over the years. Section 34(2)(b)(ii) of the A&C Act has laid down that a court may set aside an award if the award is in conflict with the public policy of India. The term “public policy” in Section 34(2)(b)(ii) is ambiguous and has been subject to varied interpretations. The present article will be divided into 6 parts each based on a particular phase and will carefully examine the evolution in jurisprudence with regard to the fluctuating boundaries of the term “public policy of India” in the context of an application made under Section 34(2) of the A&C Act.

 

I : From Renusagar to the Saw Pipes Eclipse

 

The decision of the Supreme Court in Renusagar Power Electric Co. Ltd. v. General Electric Co.[2] (Renusagar) was an early decision under the pre-1996 regime where the Supreme Court had the opportunity to expound the concept of public policy of India in the context of the enforcement of a foreign arbitral award. In Renusagar[3], the Court was confronted with elucidating the expression “public policy” embodied in Section 7 of the Foreign Awards (Recognition and Enforcement) Act, 1961 with respect to enforcement of an arbitral award passed by the International Chamber of Commerce. The appellant had raised a number of objections against the award that included a contention that the award is in blatant violation of the Foreign Exchange Regulation Act, 1973. At the time of opining on the invocation of the public policy ground, the Court observed that the said term could be subject to a narrow and a broad meaning. It went on to establish a dichotomy between the application of public policy to the domestic arena and the international arena. It is undoubted that this was the prevailing international standard at the time. The Court observed that the public policy of India should be narrowly construed in the context of private international law while keeping in mind the pro-enforcement bias that was envisaged by the 1958 New York Convention that abolished double exequatur. The Court adopted a narrow interpretation of the term “public policy” and held that a foreign arbitral award would not be refused enforcement only because it is in violation of an aspect of Indian public policy. Applying this criterion, it was held that a foreign award would be refused enforcement by the courts in India only on the ground of public policy if such enforcement would be contrary to (i) fundamental policy of Indian law; (ii) the interest of India; and (iii) justice or morality. The dictum of the Supreme Court in Renusagar[4] was appraised internationally and it became a seminal authority on the rule that an arbitral award must not be reviewed on merits at the enforcement stage. It is in our opinion that this decision was exemplary, well balanced and judiciously nuanced rightly paying heed to the pro-arbitration bias that prevailed in international arena at the time.

 

After the enactment of the A&C Act in 1996, the Foreign Awards (Recognition and Enforcement) Act, 1961 stood repealed. The A&C Act served as a complete code for the practice of arbitration in India. Section 34 in Part I of the A&C Act made provisions of the enforcement of domestic arbitral awards whereas Section 48 in Part II of the A&C Act made provisions for the enforcement of foreign awards in India. The public policy ground to resist enforcement was retained in both Sections 34 and 48. The precedential value of Renusagar[5] was shadowed by uncertainty unless it were to obtain judicial endorsement under the new arbitration regime.

 

The Supreme Court was confronted with this challenge in the year 2003 in the infamous case of ONGC v. Saw Pipes Ltd.[6] (Saw Pipes), where it had to define the contours of public policy in Section 34(2)(b)(ii) of the A&C Act in the context of setting aside a domestic arbitral award. The decision in Saw Pipes[7] appeared to be in polar contrast with the decision in Renusagar[8]. The Court had to decide whether it had the jurisdiction under Section 34 of the A&C Act to set aside an award which was inter alia “patently illegal” or in contravention of the A&C Act or in other words whether the court could review the merits of the award. The Court propounding a meticulous ratio, undoubtedly flawed in many aspects answered this question in the affirmative. The Court held that an Arbitral Tribunal was a creation of the A&C Act and therefore if the Arbitral Tribunal violated the provisions of the A&C Act, it would warrant intervention by the Court. The Court employing the rule that every right should have remedy appears to have ignored the principle that parties to arbitration have the right to contract out of an appeal like recourse against the arbitral award. The Court appears to have forgone the sacrosanct principles of party autonomy and minimal judicial intervention while thwarting the mechanism employed in Section 34(2) that separates procedural from substantive irregularities. The Court conflated jurisdictional with procedural violations and wrongly held that every violation of the A&C Act by the Arbitral Tribunal would amount to a jurisdictional violation. The Court categorically opined that it could act as an appellate and revisional court in a proceeding under Section 34. Further to strengthen the precedential value of Saw Pipes[9], the Court added the ground “patent illegality” to those enumerated by the Court in the Renusagar[10]. It is our opinion that the decision of the Court in Saw Pipes[11] is extremely flawed and is against the true spirit of the 1958 New York Convention and 1985 UNCITRAL Model Law which can be discerned from its travaux préparatoires. Apart from opening the floodgates for proceedings under Section 34(2), another major issue that was brought about by the decision in Saw Pipes[12] was that the criterion adopted therein was to apply to Section 48 of the A&C Act with respect to foreign arbitral awards. It is needless to say that the exemplary approach adopted by the Supreme Court in Renusagar[13] was eclipsed by Saw Pipes[14]. The decision in Saw Pipes[15] received a considerable amount of criticism and therefore warranted attention by the legislature. It is pertinent to note that decision of the Supreme Court in Venture Global Engg. v. Satyam Computer Services Ltd.[16] (Venture Global) worsened the effect of Saw Pipes[17] as it went on to lay down that a foreign award may be challenged under Section 34 of the A&C Act. It is our opinion that that this decision suffered from many infirmities.

 

It is interesting to mention at this juncture, that in spite of the eclipse cast by Saw Pipes[18], there was a school of thought that was cognizant of its deficiencies and insinuated much-needed dissent. In a 2006 often cited judgment of the Supreme Court in McDermott International Inc. v. Burn Standard Co. Ltd.[19] (McDermott International) the Court although following Saw Pipes[20] made succinct observations regarding the restrictive role of courts at the time of hearing applications for setting aside of arbitral awards under Section 34 of the A&C Act. Later in 2012, a similar observation was made in Rashtriya Ispat Nigam Ltd. v. Dewan Chand Ram Saran[21] (Rashtriya Ispat) in polar contrast to the dictum in Saw Pipes[22]. The Court in Rashtriya Ispat[23] laid down with regard to the interpretation of the substantive contract by an arbitrator, that if the view taken by the arbitrator is a possible one it cannot be capriciously subjected to judicial interference even if the contract is capable of two interpretations. It was hoped that these rulings would act as a hint and help the Supreme Court pre-empt more problematic jurisprudence.

 

II : Foreign Awards : The Transition from Phulchand Exports to Shri Lal Mahal

 

In Phulchand Exports Ltd. v. O.O.O. Patriot[24] (Phulchand Exports) the Supreme Court had to deliver an opinion on the scope of public policy in Section 48 of the A&C Act. The Court in a rather capricious manner departed from the commonly accepted norm that the public policy filter should be assessed narrowly with respect to foreign awards. Further in blatant ignorance to the comity of nations and the global pro-enforcement bias, it held that the criterion laid down in Saw Pipes[25] would be applicable to foreign awards. This decision was undoubtedly detrimental to the prospect of India becoming an arbitral-friendly jurisdiction as now Indian courts could set aside foreign awards on the unreasonably broad “patent illegality” test laid down in Saw Pipes[26] which was in fact propounded in the context of a domestic award. It is our opinion that this approach was gravely erroneous.

 

However, it was in 2012 where the Constitutional Bench of the Supreme Court made a corrective approach to the attitude of the judiciary when they were confronted with exercise of their supervisory jurisdiction with respect to foreign arbitrations. The Constitutional Bench in Bharat Aluminium Co. v. Kaiser Aluminium Technical Services Inc.[27] (BALCO) after a rather extensive analysis on the prevailing jurisprudence at the time prospectively overruled the position laid down in Bhatia International v. Bulk Trading SA[28] (Bhatia International) and that held Part I of the A&C Act would not apply to international arbitrations unless otherwise agreed by the parties.

 

In the aftermath of the landmark decision of the Supreme Court in BALCO[29], the Court delivered another much-awaited judgment. In Shri Lal Mahal Ltd. v. Progetto Grano Spa[30] (Shri Lal Mahal) when Lodha, J. was confronted with the enforcement of an arbitral award passed in London, it appeared he was inclined to reconsider his own decision in Phulchand Exports[31] by holding that the public policy criterion in Section 48 would have to be construed in conformity with decision in Renusagar[32] and held that foreign arbitral awards cannot be denied enforcement on the “patent illegality” ground laid down in Saw Pipes[33]. The decision in Shri Lal Mahal[34] undoubtedly remedied the negative effect that Saw Pipes[35] had cast on the international arena, although the menace played by Saw Pipes[36] did not end here.

 

It is pertinent to note the decision of the Constitutional Bench in BALCO[37] had only prospectively overruled the decision in Bhatia International[38] which meant BALCO[39] would apply from the date of the decision and therefore the arbitration agreements entered into before 6-9-2012 would continue to be governed by Bhatia International[40]. This meant that Saw Pipes[41] and Venture Global[42] would continue to be the standard that would be applicable to the arbitral awards rendered in these arbitrations and that foreign awards could be challenged on the ground “patent illegality”. It is also evident that the decisions in Phulchand Exports[43] and Venture Global[44] are the negative repercussions of the perspective adopted by the Supreme Court in Saw Pipes[45] and Bhatia International[46]. Thus, there was considerable anguish in the arbitration fraternity at the time and a much-awaited intervention was desired from the legislature, that came only after the labyrinth was made more complex by two more controversial decisions of the Supreme Court.

 

III: Western Geco and Associate Builders

 

The three-Judge Bench in ONGC v. Western Geco International Ltd.[47] (Western Geco) offset the improvements that were made on the subhead “patent illegality” by laying down a comprehensive exposition of the subhead “fundamental policy of Indian law”. The Court was confronted with an application to set aside an arbitral award passed in an international commercial arbitration that had its seat in India. In Western Geco[48] the parties had entered into an agreement for upgradation of the appellant’s seismic survey vessel by installing hydrophones. The performance could not be completed as the respondent was not able to obtain a licence from the regulatory bodies of the US Government for the sale of hydrophones. Due to this the respondent invoked the force majeure clause, the Tribunal held that the respondent was not entitled to invoke the force majeure clause as the delay that occurred was not solely attributable to the failure of the authorities to furnish the licence. However, the Tribunal also held that the entire period of delay was not attributable to the respondent. The appellant aggrieved by this sought to challenge the award under Section 34 of the A&C Act. Naturally, the respondent contended that these findings of the Tribunal cannot be re-examined by the Court as it would entail a reassessment of the case on merits. At this juncture, it was hoped that the 3-Judge Bench would in the light of all the criticism be inclined to remove the eclipse cast by the decision in Saw Pipes[49] and bring back Renusagar[50]. However, the Court followed Saw Pipes[51] decided to go a step further. The Court noted that the decision in Saw Pipes[52] although laying down the branches of public policy including “fundamental policy of Indian law” did not define their scope. Therefore, it held that it was an appropriate time to exposit the boundaries of “fundamental policy of Indian law”. The Supreme Court laid down that there are three important principles that are fundamentally embedded in Indian law to comprise the “fundamental policy of Indian law”. These are the duty of the judicial forum to follow a judicial approach, to strictly follow the principles of natural justice and be reasonable enough when passing a judgment. It is pertinent to note that the Court’s judgment in Western Geco[53] has permitted an inquiry into the merits of an arbitral award as is evident from a bare reading of the relevant portion of the judgment:

 

(a) A Judicial Approach: “Judicial approach ensures that the authority acts bona fide and deals with the subject in a fair, reasonable and objective manner and that its decision is not actuated by any extraneous consideration. Judicial approach in that sense acts as a check against flaws and faults that can render the decision of a court, tribunal or authority vulnerable to challenge.”[54]

(b) Principles of Natural Justice: “Besides the celebrated audi alteram partem rule one of the facets of the principles of natural justice is that the court/authority deciding the matter must apply its mind to the attendant facts and circumstances while taking a view one way or the other. Non-application of mind is a defect that is fatal to any adjudication.”[55]

(c) The Wednesbury Principle of Reasonableness: “a decision which is perverse or so irrational that no reasonable person would have arrived at the same will not be sustained in a court of law. Perversity or irrationality of decisions is tested on the touchstone of Wednesbury principle of reasonableness”.[56]

 

Thereafter, the Court found it appropriate to divide the delay into four components as against the method adopted by the Tribunal and thereby found that they are unable to agree with the decision of the Tribunal. The Court characterised this as an error resulting in the miscarriage of justice apart from the fact that it failed to appreciate and draw inferences that logically flow such proved facts. It is our opinion that this decision is flawed. Firstly, the Court has allowed an inquiry into the merits under the “fundamental policy of Indian law” violating the true essence of Renusagar[57]. Secondly, the Court has erred by failing to take cognizance of the fact that the test of public policy is to be applied to check whether the enforcement of the award would lead to a violation of public policy and not that arbitral award and the merits of the award. By employing this ratio and without realising its side effects, the Court has inextricably linked the public policy of India with the merits of an arbitral award. It is our opinion that the Court in Western Geco[58] has done exactly what its predecessors had pre-empted 20 years ago in Renusagar[59], where the Court refrained from reviewing the award for the grant of interest in arrears as a violation of the Foreign Exchange Regulation Act, 1973. In addition to this, in Renusagar[60] it was made clear that a court cannot set aside an award just because it disagrees with the reasoning of the arbitrator on law or facts. It is needless to say that court in Western Geco[61] has done the exact opposite and has disregarded the dictum of the judgment in Renusagar[62] in totality while contributing to the menace played by its decision in Saw Pipes[63]. Finally, it is pertinent to note that Court’s exposition of “fundamental policy of Indian law” has led to a duplication of the grounds already enumerated in Section 34(2)(a). The principles of natural justice is already a ground available in Section 34(2)(a)(iii), while following a judicial approach as explained in para 35 of Western Geco[64] would nonetheless entail following the principles of natural justice. Therefore, the procedural irregularities contemplated by Section 34(2)(a) are now also a part of Section 34(2)(b)(ii). This has left room for recalcitrant parties to play mischief by using a backdoor to challenge arbitral awards. It is in our opinion that this decision should have been the wake call for the legislature. However, it was not until another problematic decision, that the Law Commission of India pulled up the legislature.

 

The Division Bench of the Supreme Court comprising Nariman and Gogoi, JJ. in Associate Builders v. DDA[65] (Associate Builders) delivered soon after Western Geco[66] made some laudable observations in its dictum in spite of the precedential burden cast upon it by the decision of the three-Judge Bench in Western Geco[67] that followed and approved Saw Pipes[68]. The decision of the Court in Associate Builders[69] although compelled to follow the earlier judgments undoubtedly had a mitigating effect on the damaging ramifications of the earlier rulings. The Court appeared to be well intentioned and cognizant of the problems in the prevailing jurisprudence and decided to tackle them head on in spite of the doctrine of stare decisis. At first, the Court on a conjoint reading of Section 34 with Section 5 of the A&C Act categorically laid down that the merits of an arbitral award are assailable under Section 34 only when the award is in conflict with the public policy of India. The Court then went on to enumerate and lay down the contours of all the subheads of public policy while imposing some fetters in an attempt to remedy the nuisance created by Western Geco[70] and Saw Pipes[71].

 

At the time of defining the heads of “public policy of India”, the Court followed and elucidated Western Geco[72] and held that “fundamental policy of Indian law” would comprise (i) compliance with the statutes and judicial precedents; (ii) need for judicial approach; (iii) natural justice compliance; and (iv) Wednesbury reasonableness.[73] It is interesting to note here, that the Court found it appropriate to lay an emphasis on Wednesbury reasonableness as it observed with regard to it that where (i) a finding is based on no evidence; (ii) an Arbitral Tribunal takes into account something irrelevant to the decision which it arrives at; and (iii) ignores vital evidence in arriving at its decision, such a decision would necessarily be perverse.[74]

 

Moreover, it is also interesting to note that the Court in Associate Builders[75] endeavoured for the first time to lay down an exposition on the other two heads of “public policy of India” coined in Renusagar[76]. The Court with regard to the subhead “interest of India”, held that an award may be set aside if contrary to the interests of India and that this would entail it if concerns itself with India as a member of the world community in its relation with foreign powers.[77] The Court with respect to the subhead “justice or morality” held that an award can be said to be against justice when it shocks the conscience of the court.[78] Lastly, with regard to “patent illegality” the Court followed and elucidated Saw Pipes[79] in connoting that this would entail (i) contravention of substantive law of India; (ii) contravention of A&C Act, 1996; and (iii) contravention of the terms of the contract.[80]

 

It is evident that the Court has not been able to correct the erroneous duplication of procedural irregularities embodied in Section 34(2)(a) in the sub heads of public policy in India. Although, it has been held that the grounds mentioned in Section 34(2)(a) would strictly not entail a review on merits of the award, it is needless to say that this observation has been made redundant. The duplication of the procedural irregularities contemplated by Section 34(2)(a) are evident in the subheads of “fundamental policy of Indian law” and “patent illegality” as thus there is always a backdoor for parties to misuse the recourse in Section 34 by disguising procedural irregularities as violations of public policy of India and thus vandalising the ethos of the 1985 UNCITRAL Model Law.

 

At this juncture, it is important to observe the positive aspect of the judgment in Associate Builders[81] where in spite of being compelled to follow Western Geco[82] and Saw Pipes[83], the Court was successful in remedying some mischief. The method adopted by the Court to achieve this is worthy of appraisal, as it relied on the dictum of earlier judgments where the courts appeared conscious of their duty to exercise judicial restraint at the time of hearing an application under Section 34. The Court in Associate Builders[84] has tactfully relied on the dictum of McDermott International[85] and Rashtriya Ispat[86] to give primacy to the findings of the arbitrator with regard to interpretation of the contract in spite of having to concede to Saw Pipes[87] that the contravention of the terms of the contract would amount to “patent illegality”. The Court held that if an arbitrator construes a term of the contract in a reasonable manner, it will not mean that the award can be set aside on this ground. It laid emphasis by stating that the construction of the terms of a contract is primarily for an arbitrator to decide and only if the arbitrator construes the contract in such a way that it could be said to be something that no fair-minded or reasonable person could do, that it would warrant judicial interference.

 

The Court relying on three earlier judgments also laid down that when a court is applying the public policy test to an arbitral award it does not act as a court of appeal and consequently errors of fact cannot be corrected, clearly departing from the position adopted in Saw Pipes[88] and Western Geco[89]. It was also noted that a possible view by the arbitrator on facts has necessarily to pass muster as the arbitrator is the ultimate master of the quantity and quality of evidence to be relied upon when he delivers his arbitral award. Moreover, it supplemented this ratio by stating that an award based on little evidence or on evidence which does not measure up in quality to a trained legal mind would not be held to be invalid on this score, provided that it is found that the arbitrator’s approach is not arbitrary or capricious.[90] The judgment in Associate Builders[91] can most definitely be considered as a remarkable one which marked an inception of a more pro-arbitration approach with regard to upholding arbitral awards, in spite of the precedential burden that was cast upon Nariman and Gogoi, JJ.

 

IV : The Law Commission of India admonishes the Legislature : The 2015 Amendment

 

The Law Commission of India published a comprehensive report known as the 246th Law Commission Report in August 2014 suggesting amendments to Section 34 of the A&C Act, heavily criticising judgment in Saw Pipes[92]. The Law Commission also made observations on all the landmark decisions of the Supreme Court in the arbitration domain such as Shri Lal Mahal[93], BALCO[94], Bhatia International[95], etc. while suggesting a reinstatement of Renusagar[96].

 

It is interesting to note that even after the scathing observations that were made in the Law Commission Report with regard to the broad scope of public policy, the 3-Judge Bench of the Supreme Court delivered the judgment in Western Geco[97] in September 2014 only a month after the publication of the Report. It is needless to say that the judgment in Western Geco[98] did exactly what the Law Commission warned the judiciary to refrain from doing. Subsequently, 2 months after this in November 2014 came the decision in Associate Builders[99] reinforcing the broad scope of public policy. In the aftermath of these two controversial decisions that were in blatant disobedience of the 246th Law Commission Report, the Law Commission was too quick to re-join by publishing a strongly worded supplement to the 246th Law Commission Report on 6-2-2015 titled as “Public Policy” – Developments Post Report No. 246. This supplement heavily criticised the judgments in Western Geco[100] and Associate Builders[101] and strongly urged to legislature to implement the amendments recommended by the Law Commission. It is interesting to see the exasperation and anguish expressed by the Law Commission by reproducing a small extract from the supplement where it stated at para 6 “the Supreme Court’s judgment in Western Geco[102] undermines the Commission’s attempts to bring the Act in line with international practices and will discourage the possibility of international arbitration coming to, and domestic arbitration staying in India”[103].

 

Thereafter, the legislature passed the 2015 amendment of the A&C Act incorporating the recommendations made by the Law Commission. The amendments that were made to Section 34(2)(b)(ii) of the A&C Act include two Explanations and an additional ground by insertion of Section 34(2-A). The amendments are reproduced below for better analysis:

 

Explanation 1.– For 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 Section 75 or Section 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 arbitration 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.

 

On a bare perusal of the amendments made to Section 34(2)(b)(ii) it is evident that the legislature has enumerated in Explanation 1 what constitutes a violation of public policy of India while endorsing statutory recognition to the subheads enumerated in Renusagar[104]. The legislature has then in Explanation 2 categorically laid down that a contravention of “fundamental policy of Indian law” shall not entail a review on merits, thereby statutorily superseding the Western Geco[105] and Associate Builders[106]. Moving on to the newly inserted Section 34(2-A) it is clear that the legislature has also statutorily endorsed the mischievous ground of “patent illegality” laid down in Saw Pipes[107]. However, in an attempt to prevent its misuse it has added a proviso disallowing any reappreciation of evidence thereby statutorily superseding Saw Pipes[108] while appearing to converge with the positive aspect of ratio laid down in Associate Builders[109]. The proviso has also protected the fate of awards passed in international commercial arbitrations from being challenged on the ground of “patent illegality” clearly adopting the Court’s opinion in Shri Lal Mahal[110]. It is our opinion, that the 2015 amendment of the A&C Act was long overdue and has correctly imposed fetters on the power of the courts when they are confronted with an application for setting aside of an arbitral award.

 

V : The Post-Amendment Renaissance

 

The 2015 amendment of the A&C Act had a drastic impact on the jurisprudence and the arbitration fraternity witnessed the conscious effort that was being made by the judiciary to correct their approach when they were confronted with Section 34 applications. A few exemplary judgments are briefly discussed in this part.

 

In November 2017, the Supreme Court in Venture Global Engg. LLC v. Tech Mahindra Ltd.[111] observed that an award can be set aside only on the grounds specified in Section 34 and no other grounds. It was further held that the Court is barred from acting as an appellate forum to examine the legality of the arbitral award and is strictly barred from reassessing facts.

 

Soon after this, in Sutlej Construction Ltd. v. State (UT of Chandigarh)[112] it was held that when the arbitrator has taken a plausible and reasonable view, the Court cannot capriciously substitute the view of the arbitrator with its own just because it has a different view or opinion. It was further laid down that setting aside of an arbitral award on the ground of public policy would be limited to a rare situation where the award shocks the conscience of the court and this would not include what the court thinks would be unjust on the facts of the case. It is evident that the Court has followed the legislative mandate and has employed the positive aspect of the ratio in Associate Builders[113].

 

More recently, in Parsa Kente Collieries Ltd. v. Rajasthan Rajya Vidyut Utpadan Nigam Ltd.[114] the Court relying on Associate Builders[115], McDermott International[116] and Rashtriya Ispat[117] has held that if an arbitrator construes a term of the contract in a reasonable manner it will not mean that the award can be set aside on that ground as the construction of the terms of a contract is primarily for the arbitrator. Moreover, it went on to reiterate that when a court is applying the public policy test to an arbitration award it does not act as a court of appeal and therefore the errors on facts cannot be corrected. It is evident that the Saw Pipes[118] and Western Geco[119] regime was abandoned.

 

Lastly, with regard to applicability of the 2015 amendment, it has been held in the landmark decision of the Supreme Court in BCCI v. Kochi Cricket (P) Ltd.[120] (Kochi Cricket) that the 2015 amendment will apply prospectively both to arbitral and court proceedings which have commenced on or after the 2015 Amendment Act came into force unless otherwise agreed by the parties.

 

VI : Ssangyong Engg. and Construction Co. Ltd. v. National Highways Authority of India : The End of Western Geco and Restoration of Renusagar

 

In a recent landmark judgment of the Supreme Court in Ssangyong Engg. and Construction Co. Ltd. v. National Highways Authority of India[121] (Ssangyong Engg.), the Division Bench comprising Nariman and Saran, JJ. made extensive observations on the position after the 2015 amendment of the A&C Act and clarified its interplay with the judgments in Western Geco[122], Associate Builders[123] and Renusagar[124]. The Court held that the broad interpretation of “fundamental policy of Indian law” as propounded in Western Geco[125] and followed in Associate Builders[126] would be improper in the light of the 2015 amendment of the A&C Act. The Court relied on the 246th Law Commission Report and its supplementary and further laid down that the interpretation of the subhead “fundamental policy of Indian law” would now be in line with Renusagar[127]. Further it laid emphasis that this subhead would now entail (i) the contravention of a law protecting national interest; (ii) disregarding the orders of superior courts; and  (iii) the principles of natural justice. Thus, it is evident that the Court has done away with the ground of non-adoption of a judicial approach correctly pre-empting that this would force an entry into the merits of the award which is clearly prohibited by the legislative intervention.

 

The Court then went to make observations with regard to the other species of public policy of India, wherein it held that the head “interest of India” would no longer warrant place in our jurisprudence. However, Nariman, J. found it appropriate to preserve the head “justice or morality” by stating that this head would now have to be construed as a conflict with the “most basic notions of morality or justice” in line with his earlier opinion in Associate Builders[128]. Thus only those arbitral awards that shock the conscience of the Court could attract this ground.

 

The Court then recalibrated the subhead “patent illegality” in the light of its statutory recognition by the insertion of Section 34(2-A) by laying down that there must be “patent illegality” appearing on the face of the award which must mean that such an illegality goes to the root of the matter but excluding an erroneous application of law by the Tribunal or reappreciation of evidence as an appellate court. The Court enumerated the circumstances that would attract a “patent illegality” appearing on the face of the award by conclusively laying down that this ground may be invoked if (i) the arbitrator fails to give reasons in the award in violation of Section 31(3) of the A&C Act; (ii) the arbitrator has taken an impossible view in construing the contract; (iii) the arbitrator transgresses his jurisdiction, and lastly in complete consensus with Associate Builders[129]; and (iv) if the arbitrator has made a perverse finding based on no evidence, overlooking vital evidence or based on documents taken up as evidence without giving proper notice to the parties. The Court also affirmed the findings in Kochi Cricket[130] with regard to the prospective applicability of the 2015 amendment of the A&C Act.

 

It is in our opinion that the judgment in Ssangyong Engg.[131] has definitely been long awaited and the Court has correctly given effect to the intention of the legislature and the Law Commission of India by rectifying the shortcomings in its earlier decisions thus removing the eclipse that was cast by Saw Pipes[132] by reinstating Renusagar[133].

 

In a recent judgment of May 2020 in Patel Engg. Ltd. v. North Eastern Electric Power Corpn. Ltd.[134] (Patel Engg.) the 3-Judge Bench of the Supreme Court has held with regard to the newly inserted Section 34(2-A) affirmed the position laid down in Associate Builders[135] followed in Ssangyong Engg.[136] The Court in Patel Engg.[137] has also affirmed the judgment in Kochi Cricket[138].

 

Conclusion

 

After a concentrated examination of the expansion and contraction of the term “public policy of India” embodied in Section 34(2)(b)(ii) of the A&C Act beginning from the 1994 judgment in Renusagar[139] to the 2019 judgment in Ssangyong Engg.[140], it is apparent that there has been a long-drawn battle between the Supreme Court of India and the “unruly horse” that has lasted more than two decades and which still continues to persist. The Supreme Court has time again had sand thrown into its eyes when it had to construe the term “public policy of India” and has often deviated from giving effect to the essence of the 1958 New York Convention. The Court has diluted the rationales of the pro-enforcement bias and minimum judicial intervention both which are incorporated in the A&C Act.

 

In spite of the far-reaching effects of the judgments in McDermott International[141], Shri Lal Mahal[142], Associate Builders[143] and Ssangyong Engg.[144] there still appears to be room for mischief that could be detrimental to the arbitration landscape in India. It is in our opinion that there is need for a complete overruling of Saw Pipes[145] as its interplay with the other existing and future judgments could be problematic. In addition to this, it is evident that in spite of the efforts made to correct the semantics there still appears to be a duplication of procedural irregularities in the subheads of public policy of India.

 

It is also interesting to note that the term “public policy of India” has shadowed the subject-matter arbitrability of disputes in India for decades until the Supreme Court articulated the rights test in Booz Allen and Hamilton Inc. v. SBI Home Finance Ltd.[146] and more recently by articulating the fourfold test in Vidya Drolia v. Durga Trading Corpn.[147] The Indian courts have also erred by applying the domestic notions of public policy to foreign awards, although the courts have taken cognizance of this error it is in our opinion that this transgression is likely to occur again. In this context, I would like to give credit by citing the remarkable writings of Professor Pierre Lalive where he attempts to demonstrate that there exists a concept of a “truly” international or transnational public policy in the field of international commercial arbitration.[148] Professor Lalive in his writings stresses on the need to recognise the dichotomy between the two types of public policy when he attempts to explain the underlying objective of Article V of the 1958 New York Convention[149]. Professor Lalive says that this automatic assimilation or the confusion between those two kinds of “public policy” is particularly dangerous.[150] He lays emphasis by stressing on the importance of distinguishing domestic arbitration from the specificity of international arbitration by correctly improvising and applying to international arbitration those mandatory rules enacted and conceived for domestic arbitration.[151] It is our opinion that Supreme Court had correctly followed this approach in Renusagar[152] and then later was swayed by the “unruly horse”. Although, Nariman, J. in Ssangyong Engg.[153] has restored Renusagar[154], it is our opinion that there is a need for a more authoritative ruling by the Supreme Court that strictly imposes fetters on the powers of the judiciary thereby preventing it from reading deeper into the term “public policy of India” and thus emerging triumphant in its battle with the “unruly horse”.

 


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

†† Manav Nagpal, Associate at Advani & Co.

 

[1] Richardson v. Mellish, (1824) 2 Bing 229, 242 : 130 ER 294.

[2] 1994 Supp (1) SCC 644.

[3] Ibid.

[4] Ibid.

[5] Ibid.

[6] (2003) 5 SCC 705.

[7] Ibid.

[8] 1994 Supp (1) SCC 644.

[9] (2003) 5 SCC 705.

[10] 1994 Supp (1) SCC 644.

[11] (2003) 5 SCC 705.

[12] Ibid.

[13] 1994 Supp (1) SCC 644.

[14] (2003) 5 SCC 705.

[15] Ibid.

[16] (2008) 4 SCC 190.

[17] (2003) 5 SCC 705.

[18] Ibid.

[19] (2006) 11 SCC 181.

[20] (2003) 5 SCC 705.

[21] (2012) 5 SCC 306.

[22] (2003) 5 SCC 705.

[23] (2012) 5 SCC 306.

[24] (2011) 10 SCC 300.

[25] (2003) 5 SCC 705.

[26] Ibid.

[27] (2012) 9 SCC 552.

[28] (2002) 4 SCC 105.

[29] (2012) 9 SCC 552.

[30] (2014) 2 SCC 433.

[31] (2011) 10 SCC 300.

[32] 1994 Supp (1) SCC 644.

[33] (2003) 5 SCC 705.

[34] (2014) 2 SCC 433.

[35] (2003) 5 SCC 705.

[36] Ibid.

[37] (2012) 9 SCC 552.

[38] (2002) 4 SCC 105.

[39] (2012) 9 SCC 552.

[40] (2002) 4 SCC 105.

[41] (2003) 5 SCC 705.

[42] (2008) 4 SCC 190.

[43] (2011) 10 SCC 300.

[44] (2008) 4 SCC 190.

[45] (2003) 5 SCC 705.

[46] (2002) 4 SCC 105.

[47] (2014) 9 SCC 263.

[48] Ibid.

[49] (2003) 5 SCC 705.

[50] 1994 Supp (1) SCC 644.

[51] (2003) 5 SCC 705.

[52] Ibid.

[53] (2014) 9 SCC 263.

[54] Id.,para 35.

[55] Id., para 38.

[56] Id., para 39.

[57] 1994 Supp (1) SCC 644.

[58] (2014) 9 SCC 263.

[59] 1994 Supp (1) SCC 644.

[60] Ibid.

[61] (2014) 9 SCC 263.

[62] 1994 Supp (1) SCC 644.

[63] (2003) 5 SCC 705.

[64] (2014) 9 SCC 263.

[65] (2015) 3 SCC 49.

[66] (2014) 9 SCC 263.

[67] Ibid.

[68] (2003) 5 SCC 705.

[69] (2015) 3 SCC 49.

[70] (2014) 9 SCC 263.

[71] (2003) 5 SCC 705.

[72] (2014) 9 SCC 263.

[73] Associate Builders, (2015) 3 SCC 49, paras 27-30.

[74] Id., para 31.

[75] (2015) 3 SCC 49.

[76] 1994 Supp (1) SCC 644.

[77] Associate Builders, (2015) 3 SCC 49, para 35.

[78] Id., paras 36 to 39.

[79] (2003) 5 SCC 705.

[80] Associate Builders, (2015) 3 SCC 49, para 42.

[81] (2015) 3 SCC 49.

[82] (2014) 9 SCC 263.

[83] (2003) 5 SCC 705.

[84] (2015) 3 SCC 49.

[85] (2006) 11 SCC 181.

[86] (2012) 5 SCC 306.

[87] (2003) 5 SCC 705.

[88] Ibid.

[89] (2014) 9 SCC 263.

[90] Associate Builders, (2015) 3 SCC 49, paras 32 to 34.

[91] (2015) 3 SCC 49.

[92] (2003) 5 SCC 705.

[93] (2014) 2 SCC 433.

[94] (2012) 9 SCC 552.

[95] (2002) 4 SCC 105.

[96] 1994 Supp (1) SCC 644.

[97] (2014) 9 SCC 263.

[98] Ibid.

[99] (2015) 3 SCC 49.

[100] (2014) 9 SCC 263.

[101] (2015) 3 SCC 49.

[102] (2014) 9 SCC 263.

[103] Supplementary to Report No. 246 on Amendments to the Arbitration and Conciliation Act, 1996 at para 6.

[104] 1994 Supp (1) SCC 644.

[105] (2014) 9 SCC 263.

[106] (2015) 3 SCC 49.

[107] (2003) 5 SCC 705.

[108] Ibid.

[109] (2015) 3 SCC 49.

[110] (2014) 2 SCC 433.

[111] (2018) 1 SCC 656.

[112] (2018) 1 SCC 718.

[113] (2015) 3 SCC 49.

[114] (2019) 7 SCC 236.

[115] (2015) 3 SCC 49.

[116] (2006) 11 SCC 181.

[117] (2012) 5 SCC 306.

[118] (2003) 5 SCC 705.

[119] (2014) 9 SCC 263.

[120] (2018) 6 SCC 287.

[121] (2019) 15 SCC 131.

[122] (2014) 9 SCC 263.

[123] (2015) 3 SCC 49.

[124] 1994 Supp (1) SCC 644.

[125] (2014) 9 SCC 263.

[126] (2015) 3 SCC 49.

[127] 1994 Supp (1) SCC 644.

[128] (2015) 3 SCC 49.

[129] Ibid.

[130] (2018) 6 SCC 287.

[131] (2019) 15 SCC 131.

[132] (2003) 5 SCC 705.

[133] 1994 Supp (1) SCC 644.

[134] (2020) 7 SCC 167.

[135] (2015) 3 SCC 49.

[136] (2019) 15 SCC 131.

[137] (2020) 7 SCC 167.

[138] (2018) 6 SCC 287.

[139] 1994 Supp (1) SCC 644.

[140] (2019) 15 SCC 131.

[141] (2006) 11 SCC 181.

[142] (2014) 2 SCC 433.

[143] (2015) 3 SCC 49.

[144] (2019) 15 SCC 131.

[145] (2003) 5 SCC 705.

[146] (2011) 5 SCC 532.

[147] (2021) 2 SCC 1.

[148] Pierre Lalive, “Transnational (or Truly International) Public Policy and International Arbitration” in Pieter Sanders (ed.), Comparative Arbitration Practice and Public Policy in Arbitration (ICCA Congress Series, vol. 3, Kluwer Law International 1987).

[149] Id., para 9.

[150] Id., para 9.

[151] Id., para 9.

[152] 1994 Supp (1) SCC 644.

[153] (2019) 15 SCC 131.

[154] 1994 Supp (1) SCC 644.

Op EdsOP. ED.

Introduction

Interlocutory Orders

Interlocutory orders or as we know them orders of injunction passed by courts pending disposal of the suit, application or proceedings are a regular feature in every lawyer’s practice. You are either applying for the same if you are a plaintiff or attempting to prevent the same being passed against you if you are a defendant. We encounter this day in and day out. These orders inure till the disposal of the suit or till they are otherwise set aside in appeal or vacated due to changed circumstances or lapsing of the orders in cases where the orders are limited only up to a particular date or only for a particular purpose. This article will address the issue of the consequences that ensue after passing of an order of injunction.

Orders of injunction are passed in view of the inherent jurisdiction of the court under Order 39 of the Code of Civil Procedure 1908[1] (CPC) which sets out the various circumstances in which an order of injunction can be passed. There also orders of attachment before judgment under Order 38[2] which are also passed. A third type of injunctive orders which we regularly come across are orders passed by the court under Section 9 of the Arbitration and Conciliation Act 1996[3]. There are also orders of injunction passed in terms of exercise of writ jurisdiction in constitutional matters where the challenges normally are to orders of inferior courts, authorities, tribunals, etc.

The proposition

What is to happen to these orders of injunction and what is the consequence of these orders of injunction when parties choose to ignore them. Can a party choose to simply say I will not follow the order whatever it maybe and render the order passed as infructuous or non-effective.

A question also arises as to what are the remedies available to a person who has an order of injunction his favour and finds the defendant or respondent is not complying with the order.

As is well known, these orders take many forms and usually are prohibitory in nature and meant to preserve the subject of the dispute or prevent damage or loss to the party applying. Orders of injunction are normally sought (to prevent parties from entering into third-party contracts, breaching contracts, creating third-party rights, trespassing, etc.) so that the entire suit or action in which final relief or orders are to be passed is not rendered infructuous. There are innumerable instances where orders of injunction are sought such as in suits/actions for specific performance, for trespass, for breach of contractual rights, for land, pertaining to development rights, partnership disputes and partition actions amongst a host of others. It is in such suits/actions that the plaintiff applies for interim relief and depending upon the merits of the case the court passes a temporary injunction pending disposal of the suit against the defendant.

As is the case many a times the defendant would not want to be bound by the order and would try to get out of it or frustrate it by creating third-party rights or dealing with the property even after orders of injunction.

In order that this does not happen, time and again in the decisions which I will now elaborate it has been held that orders of injunction are required to be obeyed and cannot be flouted with impunity. The consequence of flouting the same is that the entire transaction or actions sought to be taken contrary to the orders of injunction are declared to be void and non-effective. Courts have time and again held that in fact the wrong or action or transfer contrary to an order of injunction must be rolled back or treated as non-effective. The remedy in such cases available is to apply to the court to declare the transactions which have transpired as of no effect and not binding on the party in whose favour the relief of injunction is continuing. In most cases this will require an amendment to bring on record the facts as are relevant and necessary prayers seeking to declare the impugned transactions as illegal, not binding or ineffective.

The law on the subject

The following cases set out the view consistently taken by courts:

(1) Surjit Singh v. Harbans Singh[4] (M.M. Punchhi and Sujata V. Manohar, JJ.):

“4. … In defiance of the restraint order (of the Court), the alienation/assignment was made. If we were to let it go as such, it would defeat the ends of justice and the prevalent public policy. When the Court intends a particular state of affairs to exist while it is in seisin of a lis, that state of affairs is not only required to be maintained, but it is presumed to exist till the court orders otherwise. The Court, in these circumstances has the duty, as also the right, to treat the alienation/assignment as having not taken place at all for its purposes.”

(2) Tayabbhai M. Bagasarwalla v. Hind Rubber Industries (P) Ltd.[5] (B.P. Jeevan Reddy and Suhas C. Sen, JJ.):

“28. … these orders (of the court) have to be obeyed and their violation can be punished even after the question of jurisdiction is decided against the plaintiff provided the violation is committed before the decision of the court on the question of jurisdiction.”

(3) Jehal Tanti Nageshwar Singh[6] (G.S. Singhvi and S.A. Bobde, JJ.):

“Since the sale deed was executed in favour of Respondent 1 in the teeth of the order of injunction passed by the trial court, the same appears to be unlawful.

(4) Satyabrata Biswas v. Kalyan Kumar Kisku[7] (S. Mohan and A.S. Anand, JJ.):

23. … Any act done in the teeth of the (court) order of status quo is clearly illegal. All actions including the grant of sublease are clearly illegal.”

(5) In Jehal Tanti v. Nageshwar Singh[8], it was held:

“11. The same issue was considered in Vidur Impex and Traders (P) Ltd. v. Tosh Apartments (P) Ltd. [9] and it was held:

  1. … At the cost of repetition, we consider it necessary to mention that Respondent 1 had filed suit for specific performance of agreement dated 13-9-1988 executed by Respondent 2. The appellants and Bhagwati Developers are total strangers to that agreement. They came into the picture only when Respondent 2 entered into a clandestine transaction with the appellants for sale of the suit property and executed the agreements for sale, which were followed by registered sale deeds and the appellants executed agreement for sale in favour of Bhagwati Developers. These transactions were in clear violation of the order of injunction passed by the Delhi High Court which had restrained Respondent 2 from alienating the suit property or creating third-party interest. To put it differently, the agreements for sale and the sale deeds executed by Respondent 2 in favour of the appellants did not have any legal sanctity.

 (6) DDA v. Skipper Construction Co. (P) Ltd.[10]:

“17. The principle that a contemnor ought not to be permitted to enjoy and/or keep the fruits of his contempt is well settled. In Mohd. Idris v. Rustam Jehangir Babuji[11], this Court held clearly that undergoing the punishment for contempt does not mean that the court is not entitled to give appropriate directions for remedying and rectifying the things done in violation of its orders.  The petitioners therein had given an undertaking to the Bombay High Court.  They acted in breach of it.  A learned Single Judge held them guilty of contempt and imposed a sentence of one month’s imprisonment.  In addition thereto, the learned Single Judge made appropriate directions to remedy the breach of undertaking.  It was contended before this Court that the learned Judge was not justified in giving the aforesaid directions in addition to punishing the petitioners for contempt of court.  The argument was rejected holding that the Single Judge was quite right in giving appropriate directions to close the breach (of undertaking).

  1. The above principle has been applied even in the case of violation of orders of injunction issued by civil courts. In Clarke v. Chadburn[12], Sir Robert Megarry V.C. observed:

I need not cite authority for the proposition that it is of high importance that orders of the court should be obeyed. Wilful disobedience to an order of the court is punishable as a contempt of court, and I feel no doubt that such disobedience may properly be described as being illegal. If by such disobedience the persons enjoined claim that they have validly affected some charge in the rights and liabilities of others, I cannot see why it should be said that although they are liable to penalties for contempt of court for doing what they did, nevertheless those acts were validly done.  Of course, if an act is done, it is not undone merely by pointing out that it was done in breach of the law. If a meeting is held in breach of an injunction, it cannot be said that the meeting has not been held.  But the legal consequences of what has been done in breach of the law may plainly be very much affected by the illegality.  It seems to me on principle that those who defy a prohibition ought not to be able to claim that the fruits of their defiance are good, and not tainted by the illegality that produced them.”

(7) In Century Flour Mills Ltd. v. S.  Suppiah[13], it was held by a Full Bench of the Madras High Court that where an act is done in violation of an order of stay or injunction, it is the duty of the court, as a policy, to set the wrong right and not allow the perpetuation of the wrongdoing. The inherent power of the court, it was held, is not only available in such a case, but it is bound to exercise it to undo the wrong in the interest of justice. That was a case where a meeting was held contrary to an order of injunction. The Court refused to recognise that the holding of the meeting is a legal one. It put back the parties in the same position as they stood immediately prior to the service of the interim order.

(8)  In Sujit Pal v. Prabir Kumar Sun[14] a Division Bench of the Calcutta High Court has taken the same view. There, the defendant forcibly dispossessed the plaintiff in violation of the order of injunction and took possession of the property. The Court directed the restoration of possession to the plaintiff with the aid of police. The Court observed that no technicality can prevent the court from doing justice in exercise of its inherent powers. It held that the object of Rule 2-A of Order 39[15] will be fulfilled only where such mandatory direction is given for restoration of possession to the aggrieved party.  This was necessary, it observed, to prevent the abuse of process of law.

(9) In Keshrevial Jivji Shah v. Bank of   Maharashtra[16], it was held:

“27. We cannot accept Shri Naphade’s contention that observations of the Supreme Court in Surjit Singh[17] should be read as restricted to proceedings under Order 22 Rule 10 of the Civil Procedure Code and the same cannot be extended to defiance of injunction order issued under Order 39 Rule 1 of the Civil Procedure Code. Once the issue is placed on the pedestal of public policy and the very faith of litigants in rule of law and administration of justice, then it is not possible to make the distinction or bifurcation suggested by Shri Naphade. It would mean that consequences of nullifying such transaction not being provided by the statute, it would not lose its legal efficacy even if it is in utter disregard to or in violation of or breach of prohibitory order or order of injunction issued by a court of law. It would mean that parties can breach and violate court orders openly and with impunity neither they nor the beneficiaries suffer any consequences. It is time that we recognise the principle that transfer of immovable property in violation of an order of injunction or prohibition issued by court of law, confers no right, title or interest in the transferee, as it is no transfer at all. The transferee cannot be allowed to reap advantage or benefit from such transfer merely because he is not party to the proceedings in which order of injunction or other prohibitory direction or restraint came to be issued. It is enough that the transferor is a party and the order was in force. These two conditions being satisfied, the transfer must not be upheld. If this course is not adopted then the tendency to flout orders of courts which is increasing day by day can never be curbed. The court exercises its powers on the foundation of respect and regard for its authority by litigating public. People would lose faith and respect completely if the court does not curb and prevent this tendency. The note of caution of the Supreme Court must be consistently at the back of everybody’s mind. Therefore, Shri Naphade is not right in the distinction which he is trying to make.

  1. Equally untenable is the contention of Shri Naphade that an order of injunction will bind only the transferor in this case. It is his submission that the said order does not bind the world at large. He submits that ownership rights are neither taken away nor restricted in any manner by order of injunction or other preventive directions. He submits that the transfer in favour of his client was thus neither invalid nor illegal, leave alone null and void. For the reasons already recorded above, we find it difficult to accept this contention of Shri Naphade. Decision of the Supreme Court in Krishan Kumar NarulaState of Jammu & Kashmir[18] has no application. There, the Supreme Court was distinguishing an order of stay from an order of injunction. The distinction was made in the context of consequences upon breach and violation of such orders. It is in that context that the Supreme Court observed that the order of stay is qua a Court, whereas an order of injunction reaches and touches a party to the lis. These observations cannot be applied when it is noticed that during the pendency of an order of injunction, immovable property, which is subject-matter of restraint or injunction, is transferred. When this course is admittedly adopted, then there is no choice but to declare the transaction as illegal. There is no question of then deciding the nature and effect of the order of injunction.”

Other remedies

There is also a remedy available to apply for holding the violator guilty of civil contempt under Section 2(b) of the Contempt of Courts Act, 1971[19]. This remedy enables the court to (if contempt is proved) pass orders for detention of the contemnor which is a strong deterrent and usually results in the contemnor reversing the transaction or step taken in order to avoid the stringent punishment of imprisonment. In cases of companies the directors can be hauled up for contempt and punished.

It must however be noted that since the orders of injunction operate only till the disposal of the suit finally in the event that there is a transaction which is contrary to the injunction the same would not take effect if the suit is decreed in favour of the plaintiff but in the event the suit of the plaintiff fails the necessary consequences is that the order itself of temporary injunction comes to an end an d in that event the transaction pending the suit would continue and take effect.

Conclusion                       

Operative orders of injunction cannot be ignored and if so ignored will not only invite the wrath of the court but will invariably have the effect of the court nullifying the transactions and preventing the defaulting party acting contrary to injunctions issued till the injunctive relief is in force.


*Advocate, High Court, Bombay. Assisted by Mayur Agarwal, Arjun Prabhu and Sheetal Parkash. Author can be reached at karlkshroff1@gmail.com.

[1] Order 39, Code of Civil Procedure 1908.

[2] Order 38 CPC.

[3] Section 9, Arbitration and Conciliation Act 1996.

[4] (1995) 6 SCC 50, 52.

[5] (1997) 3 SCC 443, 460. Also see paras 15-18, 22 & 28, pp.   453-460.

[6] (2013) 14 SCC 689, 695, para 13.

[7] (1994) 2 SCC 266, 276.

[8] (2013) 14 SCC 689, 694-695.

[9] (2012) 8 SCC 384, 414.

[10] (1996) 4 SCC 622, 635-636.

[11] (1984) 4 SCC 216.

[12] (1985) 1 WLR 78.

[13] 1975 SCC OnLine Mad 73.

[14] 1985 SCC OnLine Cal 146.

[15] Rule 2-A, Order 39 CPC.

[16] 2004 SCC OnLine Bom 368.

[17] (1995) 6 SCC 50.

[18] (1967) 3 SCR 50.

[19] Section 2(b) of Contempt of Courts Act, 1971.

Case BriefsHigh Courts

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

Factual Matrix 

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

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

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

Charter Party

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

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

Contract of Affreightment

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

What was the dispute?

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

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

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

Finding of the Arbitral Tribunal

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

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

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

Reasons and Conclusion

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


Advocates before the Court:

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

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

Advocate.

Case BriefsSupreme Court

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

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

What’s the controversy?

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

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

The reason for entering into the SHA was as follows:

“WHEREAS

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

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

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

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

Delhi High Court’s Verdict

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

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

Supreme Court’s Verdict

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

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

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

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

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

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

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

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

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

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

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


*Judgment by Justice RF Nariman 

Know Thy Judge| Justice Rohinton F. Nariman

Appearances before the Court by:

For Appellant: Senior Advocate K.V. Viswanathan

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

Also read the detailed report on the Vidya Drolia judgment 

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

Case BriefsSupreme Court

Supreme Court: The 3-judge bench of RF Nariman, BR Gavai and Hrishikesh Roy, JJ has held that given the object of speedy disposal sought to be achieved both under the Arbitration and Conciliation Act, 1996 and Commercial Courts Act, 2015, for appeals filed under section 37 of the Arbitration Act that are governed by Articles 116 and 117 of the Limitation Act or section 13(1A) of the Commercial Courts Act, a delay beyond 90 days, 30 days or 60 days, respectively, is to be condoned by way of exception and not by way of rule.

However,

“in a fit case in which a party has otherwise acted bona fide and not in a negligent manner, a short delay beyond such period can, in the discretion of the court, be condoned, always bearing in mind that the other side of the picture is that the opposite party may have acquired both in equity and justice, what may now be lost by the first party’s inaction, negligence or laches.”

Resultantly, the Court has overruled last year’s judgment in N.V. International v. State of Assam, (2020) 2 SCC 109 , wherein it was held that any delay beyond 120 days in the filing of an appeal under Section  37 from an application being either dismissed or allowed under Section 34 cannot be allowed. It was further, clarified that the said period of 120 days, comprises of a grace period of 30 days under Section 5 of the Limitation Act added to the prescribed period of 90 days.

The Court said that merely because sufficient cause has been made out in the facts of a given case, there is no right in the appellant to have delay condoned.

“Given the object sought to be achieved under both the Arbitration Act and the Commercial Courts Act, that is, the speedy resolution of disputes, the expression “sufficient cause” is not elastic enough to cover long delays beyond the period provided by the appeal provision itself. Besides, the expression “sufficient cause” is not itself a loose panacea for the ill of pressing negligent and stale claims.”

Section 37 of the Arbitration Act, when read with section 43 thereof, makes it clear that the provisions of the Limitation Act will apply to appeals that are filed under section 37. Articles 116 and 117 of the Limitation Act provide for a limitation period of 90 days and 30 days, depending upon whether the appeal is from any other court to a High Court or an intra-High Court appeal. Further, when the Commercial Courts Act is applied to the aforesaid appeals, given the definition of “specified value” and the provisions contained in sections 10 and 13 thereof, it is clear that it is only when the specified value is for a sum less than three lakh rupees that the appellate provision contained in section 37 of the Arbitration Act will be governed, for the purposes of limitation, by Articles 116 and 117 of the Limitation Act.

On this, the Court explained that,

“… the main object of the Arbitration Act requiring speedy resolution of disputes would be the most important principle to be applied when applications under section 5 of the Limitation Act are filed to condone delay beyond 90 days and/or 30 days depending upon whether Article 116(a) or 116(b) or 117 applies. As a matter of fact, given the timelines contained in sections 8, 9(2), 11(4), 11(13), 13(2)-(5), 29A, 29B, 33(3)-(5) and 34(3) of the Arbitration Act, and the observations made in some of this Court’s judgments, the object of speedy resolution of disputes would govern appeals covered by Articles 116 and 117 of the Limitation Act.”

Hence, from the scheme of the Arbitration Act, condonation of delay under section 5 of the Limitation Act has to be seen in the context of the object of speedy resolution of disputes.

Why was NV International overruled?

Firstly, N.V. International does not notice the provisions of the Commercial Courts Act at all and can be said to be per incuriam on this count.

Secondly, the period of 90 days plus 30 days and not thereafter mentioned in section 34(3) of the Arbitration Act cannot now apply, the limitation period for filing of appeals under the Commercial Courts Act being 60 days and not 90 days.

Thirdly, the argument that absent a provision curtailing the condonation of delay beyond the period provided in section 13 of the Commercial Courts Act would also make it clear that any such bodily lifting of the last part of section 34(3) into section 37 of the Arbitration Act would also be unwarranted.

Stating that the difference between interpretation and legislation is sometimes a fine one, as it has repeatedly been held that judges do not merely interpret the law but also create law, the Court referred to the judgment in Eera v. State (NCT of Delhi), (2017) 15 SCC 133, wherein it was held,

“The golden rule in determining whether the judiciary has crossed the Lakshman Rekha in the guise of interpreting a statute is really whether a Judge has only ironed out the creases that he found in a statute in the light of its object, or whether he has altered the material of which the Act is woven. In short, the difference is the well-known philosophical difference between “is” and “ought”. Does the Judge put himself in the place of the legislator and ask himself whether the legislator intended a certain result, or does he state that this must have been the intent of the legislator and infuse what he thinks should have been done had he been the legislator. If the latter, it is clear that the Judge then would add something more than what there is in the statute by way of a supposed intention of the legislator and would go beyond creative interpretation of legislation to legislating itself. It is at this point that the Judge crosses the Lakshman Rekha and becomes a legislator, stating what the law ought to be instead of what the law is.”

Hence, given the ‘lakshman rekha’ laid down in the aforementioned judgment, the Court found it little difficult to appreciate how a cap can be judicially engrafted onto a statutory provision which then bars condonation of delay by even one day beyond the cap so engrafted.

[Government of Maharashtra v. Borse Brothers Engineers and Contractors Pvt. Ltd., 2021 SCC OnLine SC 233, decided on 19.03.2021]


*Judgment by: Justice RF Nariman

Know Thy Judge| Justice Rohinton F. Nariman

Op EdsOP. ED.

The principle of least judicial interference was legislatively codified as Section 5 of the Arbitration and Conciliation Act, 1996[1] (Act) in order to ensure continuation of the arbitration without periodic interdicts by any court.  Section 16[2] of the said Act carves out an exception to the general rule by providing a right to the parties before arbitration to raise the plea of objection to the competency of an Arbitral Tribunal. This is based on the principle of kompetenz-kompetenz i.e., the power of the Tribunal to rule on its own jurisdiction[3].  The reason is that if an arbitrator is himself of the view that he is not competent, no purpose would be served by continuation of the arbitration proceedings. If the arbitrator finds lack of competency, the arbitral proceedings would come to an end. It is in view thereof that an appeal has been provided under Section 37[4] of the said Act. The position would be however different where the Arbitral Tribunal finds that it is competent to proceed with the arbitration. No appeal has been provided in such a case. The consequences of such a decision are provided in Section 16(5) of the said Act is that the arbitral proceedings would continue resulting in an arbitral award. The remedy is provided in Section 16(6) of the said Act which is to challenge the ultimate award under Section 34[5] of the said Act. There is no segregated challenge permissible only on the question of the competency of the Arbitral Tribunal.

            The question then would be, at what stage should the jurisdictional objections raised by a party to the arbitration be considered and decided by the Arbitral Tribunal?  This question also arises in view of the prevalent trend of Arbitral Tribunals deferring the consideration of jurisdictional objections to the stage of final award which often results in the party which has raised the objection at the threshold, having to contest the entire proceedings, thereby wasting considerable amount of time and that too at great expense.

            In the respectful view of the author, the bare reading of Section 16(2) along with Section 16(5) of the Act leaves no manner of doubt that the Tribunal has no discretion in deferring a decision on an application under Section 16 of the Act. Section 16(2) stipulates that a party raising jurisdictional objections shall have to do so not later than the submission of the statement of defence.  The very purpose of having a party raise objections at the threshold would get defeated in the event the decision on these objections is also not taken with equal promptitude. As per Section 16(5) of the Act, the Arbitral Tribunal “shall” decide on the jurisdictional objections, and where the Arbitral Tribunal takes a decision rejecting the plea, the Tribunal shall continue with the arbitral proceedings and make an arbitral award. The reading of Section 16(5) indicates that a decision rejecting the jurisdictional objections is a statutory precondition for continuance of arbitral proceedings. The statute envisages only one of two situations i.e. first, where Section 16 objections are accepted and Tribunal holds that it does not have jurisdiction and second, where the objections are rejected by the Tribunal. In the first case, the remedy of Section 37 appeal is available and in the latter, the award passed by the Tribunal can be assailed under Section 34 of the Act. Therefore, once a statutory remedy has been provided against an order passed on a challenge to the jurisdiction of the Tribunal under Section 16, then, such a challenge must, in the opinion of the author be determined at the threshold itself and there is no apparent reason for deferring a decision on the Section 16 application.

            Any refusal to go into the merits of the dispute is a jurisdictional issue.[6] Therefore, it would be manifest, that a decision on any objection regarding the competence of the Tribunal to go into the merits of the dispute must not, and indeed cannot be deferred and must be taken at the preliminary stage itself. This position is consistent with the decisions of the Supreme Court in McDermott[7], Kvaerner Cementation[8] and also in Ayyasamy[9], where it was held that “the jurisdictional challenge is required to be determined as a preliminary ground”.

            In several cases, while deferring the consideration of a challenge under Section 16, parties and Tribunals have placed reliance on the decision in Maharshi Dayanand University v. Anand Coop. L/C Society Ltd.[10] where it was held by a two-Judge Bench of the Supreme Court that there is no mandatory requirement to decide jurisdictional challenge as a preliminary matter, and that the same can be decided along with the final award. It is to be noted that the decision in Maharshi[11] did not consider the previous decision in McDermott[12], therefore, it could be argued that the decision in Maharshi[13] is “per-incuriam” and would not be good law. Similarly, in SAIL v. Indian Council of Arbitration[14] the Delhi High Court held that the wordings of Sections 16(2) and 16(5) do not place any mandatory condition of deciding preliminary objections to jurisdiction of the Tribunal at the threshold. Again, the High Court in arriving at its conclusion did not take into account the decision in McDermott[15] and Kvaerner Cementation[16], as such, the decision of the High Court cannot be said to be good law.

            Another aspect of the matter is the impact of the introduction of the Arbitration and Conciliation (Amendment) Act, 2015[17] (“2015 Amendment”) on the timeline and stage of consideration of the jurisdictional objections under Section 16 of the Act.  The 2015 Amendment was introduced with the objective of making arbitration user-friendly, cost effective and expeditious disposal.[18] In particular, Section 29-A was introduced mandating strict timelines of approximately one year for conclusion of arbitration proceedings.  With the introduction of the stricter timelines, there is a stronger case to be made for threshold examination of any jurisdictional objections at the preliminary stage itself. This would be consistent with the objective of expeditious disposal of arbitration proceedings and would also ensure that in cases of abuse of process, apparent jurisdictional bar, the party raising such objections is not made to wait till the conclusion of the proceedings for determination of these fundamental objections.  Such a course, if adopted, in the opinion of the author would pave way for furthering the cause of expeditious, and inexpensive arbitration proceedings.


Advocate, Delhi High Court and Supreme Court of India.

[1] <http://www.scconline.com/DocumentLink/87bn601l>.

[2] <http://www.scconline.com/DocumentLink/C8X6A4y5>.

[3] Chloro Controls India (P) Ltd. v. Severn Trent Water Purification Inc., (2013) 1 SCC 641; Duro Felguera SA v. Gangavaram Port Ltd., (2017) 9 SCC 729; Uttarakhand Purv Sainik Kalyan Nigam Ltd. v. Northern Coal Field Ltd., (2020) 2 SCC 455.

[4] <http://www.scconline.com/DocumentLink/0Vi7sQsH>.

[5] <http://www.scconline.com/DocumentLink/teuo89l3>.

[6] National Thermal Power Corpn. Ltd. v. Siemens Atkeingesellschaft(2007) 4 SCC 451.

[7] McDermott International Inc. v. Burn Standard Co. Ltd., (2006) 11 SCC 181.

[8] Kvaerner Cementation India Ltd. v. Bajranglal Agarwal, (2012) 5 SCC 214.

[9] A. Ayyasamy v. A. Paramasivam, (2016) 10 SCC 386.

[10] (2007) 5 SCC 295.

[11] (2007) 5 SCC 295.

[12] (2006) 11 SCC 181.

[13] (2007) 5 SCC 295.

[14] 2013 SCC OnLine Del 4490.

[15] (2012) 5 SCC 214.

[16] (2012) 5 SCC 214.

[17] <http://www.scconline.com/DocumentLink/9ajA4z9b>.

[18] Statement of Objects & Reasons – Arbitration and Conciliation Amendment Bill, 2015.

Case BriefsSupreme Court

Supreme Court: In an important ruling, the bench of Indu Malhotra* and Ajay Rastogi, JJ has held that the period of limitation for filing an application under Section 11 of the Arbitration and Conciliation Act, 1996 would be governed by Article 137 of the First Schedule of the Limitation Act, 1963. Hence, the period of limitation will begin to run from the date when there is failure to appoint the arbitrator. Further,iIn rare and exceptional cases, where the claims are ex facie timebarred, and it is manifest that there is no subsisting dispute, the Court may refuse to make the reference.

The Court also suggested that,

“It would be necessary for Parliament to effect an amendment to Section 11, prescribing a specific period of limitation within which a party may move the court for making an application for appointment of the arbitration under Section 11 of the 1996 Act.”

This would be in consonance with the object of expeditious disposal of arbitration proceedings.

What would be the period of limitation for filing an application under Section 11 of the Arbitration and Conciliation Act, 1996?

Section 11 does not prescribe any time period for filing an application under sub-section (6) for appointment of an arbitrator. Since there is no provision in the 1996 Act specifying the period of limitation for filing an application under Section 11, one would have to take recourse to the Limitation Act, 1963, as per Section 43 of the Arbitration Act, which provides that the Limitation Act shall apply to arbitrations, as it applies to proceedings in Court.

It is a settled law that the limitation for filing an application under Section 11 would arise upon the failure to make the appointment of the arbitrator within a period of 30 days’ from issuance of the notice invoking arbitration.

“… an application under Section 11 can be filed only after a notice of arbitration in respect of the particular claim(s) / dispute(s) to be referred to arbitration [as contemplated by Section 21 of the Act] is made, and there is failure to make the appointment.”

However,  the period of limitation for filing a petition seeking appointment of an arbitrator/s cannot be confused or conflated with the period of limitation applicable to the substantive claims made in the underlying commercial contract. The period of limitation for such claims is prescribed under various Articles of the Limitation Act, 1963.

“The limitation for deciding the underlying substantive disputes is necessarily distinct from that of filing an application for appointment of an arbitrator. This position was recognized even under Section 20 of the Arbitration Act 1940.”

Given the vacuum in the law to provide a period of limitation under Section 11 of the Arbitration and Conciliation 1996, the Courts have taken recourse to the position that since none of the Articles in the Schedule to the Limitation Act, 1963 provide a time period for filing an application for appointment of an arbitrator under Section 11, it would be covered by the residual provision Article 137 of the Limitation Act, 1963 which provides a period of 3 years from the date when the right to apply accrues.

However, this is an unduly long period for filing an application u/S. 11, since it would defeat the very object of the Act, which provides for expeditious resolution of commercial disputes within a time bound period.

“The 1996 Act has been amended twice over in 2015 and 2019, to provide for further time limits to ensure that the arbitration proceedings are conducted and concluded expeditiously. Section 29A mandates that the arbitral tribunal will conclude the proceedings within a period of 18 months. In view of the legislative intent, the period of 3 years for filing an application under Section 11 would run contrary to the scheme of the Act.”

Hence, the period of limitation for filing an application under Section 11 would be governed by Article 137 of the First Schedule of the Limitation Act, 1963. The period of limitation will begin to run from the date when there is failure to appoint the arbitrator. This position will hold field till the Legislature comes up with an amendment to Section 11 of the 1996 Act to provide a period of limitation for filing an application under this provision, which is in consonance with the object of expeditious disposal of arbitration proceedings.

Whether the Court while exercising jurisdiction under Section 11 is obligated to appoint an arbitrator even in a case where the claims are ex facie time-barred?

In view of the legislative mandate contained in the amended Section 11(6A), the Court is now required only to examine the existence of the arbitration agreement. All other preliminary or threshold issues are left to be decided by the arbitrator under Section 16, which enshrines the kompetenz-komptenz principle.

“The doctrine of kompetenz-komptenz implies that the arbitral tribunal is empowered and has the competence to rule on its own jurisdiction, including determination of all jurisdictional issues. This was intended to minimise judicial intervention at the pre-reference stage, so that the arbitral process is not thwarted at the threshold when a preliminary objection is raised by the parties.”

In a recent judgment delivered by a three-judge bench in Vidya Drolia v. Durga Trading Corporation(2021) 2 SCC 1, on the scope of power under Sections 8 and 11, it has been held that the Court must undertake a primary first review to weed out “manifestly ex facie non-existent and invalid arbitration agreements, or non-arbitrable disputes.”

“The prima facie review at the reference stage is to cut the deadwood, where dismissal is bare faced and pellucid, and when on the facts and law, the litigation must stop at the first stage. Only when the Court is certain that no valid arbitration agreement exists, or that the subject matter is not arbitrable, that reference may be refused.”

While exercising jurisdiction under Section 11 as the judicial forum, the court may exercise the prima facie test to screen and knockdown ex facie meritless, frivolous, and dishonest litigation. Limited jurisdiction of the Courts would ensure expeditious and efficient disposal at the referral stage. At the referral stage, the Court can interfere “only” when it is “manifest” that the claims are ex facie time barred and dead, or there is no subsisting dispute.

“It is only in the 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, that the court may decline to make the reference. However, 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.”

[BSNL v. Nortel Network India Pvt. Ltd., 2021 SCC OnLine SC 207, decided on 10.03.2021]


*Judgment by: Justice Indu Malhotra 

Appearances before the Court by:

For appellants: Senior Advocate R.D. Agrawala

For respondent: Senior AdvocateNeeraj Kumar Jain, Senior Advocate

Amicus Curiae: Senior Advocate Arvind Datar

Case BriefsSupreme Court

Supreme Court: In the light of the “prima facie” test laid down last year in Vidya Drolia v. Durga Trading Corporation(2021) 2 SCC 1, the 3-judge bench of RF Nariman*, BR Gavai and Hrishikesh Roy, JJ has held that the Parliament may need to have a re-look at Section 11(7) and Section 37 of the he Arbitration and Conciliation Act, 1996 so that orders made under Sections 8 and 11 are brought on par qua appealability as well.

What do the relevant provisions in question read?

  1. Power to refer parties to arbitration where there is an arbitration agreement. —

(1) A judicial authority, before which an action is brought in a matter which is the subject of an arbitration agreement shall, if a party to the arbitration agreement or any person claiming through or under him, so applies not later than the date of submitting his first statement on the substance of the dispute, then, notwithstanding any judgment, decree or order of the Supreme Court or any Court, refer the parties to arbitration unless it finds that prima facie no valid arbitration agreement exists.

(…)

  1. Appointment of arbitrators. —

(…)

(6) Where, under an appointment procedure agreed upon by the parties, — (a) a party fails to act as required under that procedure; or (b) the parties, or the two appointed arbitrators, fail to reach an agreement expected of them under that procedure; or (c) a person, including an institution, fails to perform any function entrusted to him or it under that procedure, a party may request the Supreme Court or, as the case may be, the High Court or any person or institution designated by such Court to take the necessary measure, unless the agreement on the appointment procedure provides other means for securing the appointment. (6A) The Supreme Court or, as the case may be, the High Court, while considering any application under sub-section (4) or sub-section (5) or subsection (6), shall, notwithstanding any judgment, decree or order of any Court, confine to the examination of the existence of an arbitration agreement.

(7) A decision on a matter entrusted by sub-section (4) or sub-section (5) or sub-section (6) to 3 the Supreme Court or, as the case may be, the High Court or the person or institution designated by such Court is final and no appeal including Letters Patent Appeal shall lie against such decision.

Legislative History

Sections 8 and 11 were amended pursuant to a detailed Law Commission Report being the 246th Law Commission Report on Arbitration. Shedding light on the legislative history of the provisions in question, the Court said that  when Parliament enacted the 2015 amendment pursuant to the Law Commission Report, it followed the Scheme of the Law Commission’s Report qua Section 8 and Section 37 by enacting the words “….. unless it finds that prima facie no valid arbitration agreement exists……” in Section 8(1) and the insertion of sub-clause (a) in Section 37(1) providing an appeal in an order made under Section 8, which refuses to refer 44 parties to arbitration. However, so far as Section 11(6) and Section 11(6A) are concerned, what was recommended by the Law Commission was not incorporated.

“Section 11(6A) merely confined examination of the Court to the existence of an arbitration agreement. Section 11(7) was retained, by which no appeal could be filed under an order made under Section 11(6) read with Section 11(6A), whether the Court’s determination led to a finding that the arbitration agreement existed or did not exist on the facts of a given case. Concomitantly, no amendment was made to Section 37(1), as recommended by the Law Commission.”

What was held in Vidya Drolia Judgment?

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

Explaining the scope of the phrase “existence of an arbitration agreement” in Vidya Drolia judgment, the 3-judge bench of NV Ramana*Sanjiv Khanna** and Krishna Murari, JJ  had held that the phrase ‘existence of an arbitration agreement’ in Section 11 of the of the Arbitration and Conciliation Act, 1996, would include aspect of validity of an arbitration agreement, albeit the court at the referral stage would apply the prima facie test. In cases of debatable and disputable facts, and good reasonable arguable case, etc., the court would force the parties to abide by the arbitration agreement as the arbitral tribunal has primary jurisdiction and authority to decide the disputes including the question of jurisdiction and non-arbitrability.

“An agreement evidenced in writing has no meaning unless the parties can be compelled to adhere and abide by the terms. A party cannot sue and claim rights based on an unenforceable document. Thus, there are good reasons to hold that an arbitration agreement exists only when it is valid and legal. A void and unenforceable understanding is no agreement to do anything. Existence of an arbitration agreement means an arbitration agreement that meets and satisfies the statutory requirements of both the Arbitration Act and the Contract Act and when it is enforceable in law.”

On the question as to who decides arbitrability, the Court held that the scope of judicial review and jurisdiction of the court under Sections 8 and 11 of the Arbitration Act is identical but extremely limited and restricted. Further, the general rule and principle, in view of the legislative mandate clear from the amendments to the of the Arbitration and Conciliation Act, 1996 by Act 3 of 2016 and Act 33 of 2019, and the principle of severability and competence-competence, is that the arbitral tribunal is the preferred first authority to determine and decide all questions of non-arbitrability. The court has been conferred power of “second look” on aspects of nonarbitrability post the award in terms of sub-clauses (i), (ii) or (iv) of Section 34(2)(a) or sub-clause (i) of Section 34(2)(b) of the Arbitration Act.

Conclusion

Since, by a process of judicial interpretation, Vidya Drolia has now read the “prima facie test” into Section 11(6A) so as to bring the provisions of Sections 8(1) and 11(6) r/w 11(6A) on par and considering that Section 11(7) and Section 37 have not been amended, an anomaly thus arises.

“Whereas in cases decided under Section 8, a refusal to refer parties to arbitration is appealable under Section 37(1)(a), a similar refusal to refer parties to arbitration under Section 11(6) read with Sections 6(A) and 7 is not appealable.”

Hence, it was held that the Parliament may need to have a re-look at Section 11(7) and Section 37 so that orders made under Sections 8 and 11 are brought on par qua appealability as well.

[Pravin Electricals Pvt. Ltd. v. Galaxy Infra and Engineering Pvt. Ltd, 2021 SCC OnLine SC 190, decided on 08.03.2021]


*Judgment by: Justice RF Nariman

Know Thy Judge| Justice Rohinton F. Nariman

Appearances before the Court by:

For appellant: Senior Advocate Shyam Divan

For Respondent: Senior Advocate Dhruv Mehta

Op EdsOP. ED.

The Arbitration and Conciliation Act, 1996 (hereinafter referred to as “the Act” or “the Arbitration Act”) has undergone several changes in the recent past which lead to a “pro-arbitration” approach – such as reducing judicial interference, resolving ambiguities, avoiding delays and ensuring a time-bound process, etc. Notably, with the enactment of the Arbitration and Conciliation (Amendment) Act, 2015[1] (hereinafter referred to as “the 2015 Amendment Act”), the Arbitration Act was revamped to adopt several prominent recommendations made by the 246th Law Commission’s Report on amendments to the Arbitration and Conciliation Act, 1996[2].

Consequent to the judgment of BALCO  v. Kaiser Aluminium Technical Services Inc.,[3] (“BALCO”), no application for interim relief under Section 9 or any other provision of the Act was maintainable in case of a foreign-seated international commercial arbitration owing to Section 2(2) of the Act, as it stood at the time. Similarly, no suit for interim injunction simpliciter would be maintainable in India, in case of foreign seated international commercial arbitration.

Although BALCO[4] judgment played a pivotal role in setting India’s trajectory towards “pro-arbitration” approach, the basis of BALCO[5] judgment had been altered by the 2015 Amendment, which interalia amended Section 2(2) of the Arbitration Act, which was the bone of contention in BALCO[6] as well as Bhatia International[7] and Venture Global Engg.[8] The amended provision of Section 2(2) of the Act, not only applies to cases where place of arbitration is in India, but further introduced a proviso which states that subject to an agreement to the contrary, Sections 9, 27 and 37(1)(b) and 37(3) (i.e. provisions pertaining to interim measures, taking assistance of the Court and appeals) shall also apply to international commercial arbitration, even if the place of arbitration is outside India, and an arbitral award made or to be made in such place is enforceable and recognised under the provisions of Part II.

The provision for interim reliefs in foreign seated arbitration has come into limelight recently, in view of the dispute between Amazon and Future Group pertaining to acquisition of Future Group by Reliance Retail. Amazon invoked arbitration against one of the Future Group entities and obtained an order of injunction from the Emergency Arbitrator appointed as per the SIAC Rules. Future Group has announced that the order is not enforceable in India. The case has raked up the issue of enforceability of interim orders passed by foreign seated arbitrators and especially an emergency arbitrator who is appointed prior to the constitution of the arbitral tribunal, which is one of the predominant reliefs available in most of the leading institutional arbitral centres. Future Retail has preferred a suit before the Delhi High Court against Amazon for interfering in the transaction with Reliance by misusing the interim order passed the Emergency Arbitrator. The suit is presently sub judice.

Further, the proviso to Section 2(2) of the Act has also raised certain issues in the field of arbitration law, which came up for consideration before various Courts. Some of the key questions which arose are:

(a) whether Part  I also applies in case of two Indian parties choosing a foreign seat of arbitration;

(b) whether the term “agreement to the contrary” under the new proviso includes within its ambit both implied and express stipulations in a contract; and (c) whether it is an essential condition for applicability of Part  I that an award made or to be made in a place outside India is enforceable and recognised under the provisions of Part  II.

Additionally, the authors shall also discuss the issue of enforceability of interim orders passed by foreign seated arbitral tribunals/emergency arbitrators.

  1. Whether Part I applies to Part II even in case of two Indian parties choosing a foreign seat of arbitration?

This question assumes importance because, while the amended provision is intended to extend certain sections of PartI of the Act to foreign seated arbitrations, the provision restricts such extension only to “International Commercial Arbitration” situated outside India. The definition of “International Commercial Arbitration” adopted in the Act, unlike the UNCITRAL Model Law[9], is limited to only commercial disputes where at least one of the parties is necessarily a foreign party[10], as against any arbitration seated outside India. Consequently, an arbitration between two or more Indian parties, seated outside India, is barred from application of Part-I due to Section 2(2) of the Act. In other words, two Indian parties choosing a foreign seat, cannot apply for interim measures in India, thereby rendering the amended proviso half-baked.

This, however, does not seem to be the intention behind the legislation. Firstly, the counter-part provision of Section 2(2) of the Act under the UNCITRAL Model Law provides that: “The provisions of this Law, except Articles 8, 9, 35 and 36, apply only if the place of arbitration is in the territory of this State.” Secondly, the intention which can be deciphered from the perusal of the Commission Report also suggests that the proviso was necessitated to protect the assets of a party located in India, against whom there is a likelihood or apprehension that the assets will be dissipated. Therefore, it is unlikely that the Legislature intended to exclude applicability of certain provisions of Part I in a scenario where two Indian parties choose a foreign seat.

In contrast to the aforesaid view, it could also be said that the Legislature, by limiting the scope of the proviso to Section 2(2) of the Act only to “International Commercial Arbitration” situated outside India and not any foreign seated arbitration, perhaps intended to forbid two Indian parties from choosing a foreign seat. The question of whether two Indian parties can choose a foreign seat of arbitration has itself been subject-matter of dispute with conflicting views and decisions.

The conundrum surfaced when the Bombay High Court in Addhar Mercantile Pvt. Ltd. v. Shree Jagadamba Agrico Exports Pvt. Ltd.[11]decided on 12th June, 2015 (“Addhar Mercantile”) held that two Indian parties cannot derogate from Indian law by choosing a foreign seat for arbitration. The Bombay High Court, while coming to this conclusion, placed reliance on TDM Infrastructure Pvt. Ltd. v. UE Development India Pvt. Ltd.[12] (“TDM Infrastructure) wherein the Supreme Court, while discussing the scope of Section 28 of the Arbitration Act observed that “the intention of the legislature appears to be clear that Indian nationals should not be permitted to derogate from Indian law. This is part of the public policy of the country.” It is pertinent to mention that similar view was also taken by the Bombay High Court in Seven Islands Shipping Ltd. v. Sah Petroleums Ltd.[13]  (“Seven Islands”).

The Madhya Pradesh High Court in Sasan Power Limited v. North American Coal Corporation India Pvt. Ltd.[14] (“Sasan Power”) decided on 11th September, 2015 was faced with the same issue, in which it gave a contrasting view to that of the Bombay High Court. The Court, placing reliance on the judgment of Atlas Export Industries v. Kotak & Co.[15] (“Atlas Export”) held that “it is clear that based on the seat of arbitration, the question of permitting two Indian companies/parties to arbitrate out of India is permissible”. In Atlas Export[16] itself, the principle has been settled that two Indian parties can agree to have their seat of arbitration in a foreign country […]” The Madhya Pradesh High Court also observed that the law laid down in TDM Infrastructure[17] cannot be a binding precedent as the Court itself made a express note that the findings/observations made in the judgment were only for the purpose of determining jurisdiction under Section 11 of the Act and not for any other purpose. While affirming the judgment passed by the Madhya Pradesh High Court, the Supreme Court[18] however, refrained from deciding the issue of whether two Indian parties can choose a foreign seat of arbitration, by observing that, in the tripartite agreement, one of the parties was in fact a foreign party and therefore, there was a ‘foreign’ element in the dispute, and was therefore, an “International Commercial Arbitration”. In Atlas Export[19] relied in the aforesaid judgment, the Supreme Court had rejected the contention that the award should have been held unenforceable inasmuch as the contract between the parties relating to arbitration was opposed to public policy under Section 23 read with Section 28 of the Contract Act, 1872 as they chose a foreign law/seat to govern the dispute. It was held by the Supreme Court in Atlas Export[20] that,

[…]Merely because the arbitrators are situated in a foreign country cannot by itself be enough to nullify the arbitration agreement when the parties have with their eyes open willingly entered into the agreement. Moreover, in the case at hand the parties have willingly initiated the arbitration proceedings on the disputes having arisen between them […]”

Thereafter, the Delhi High Court in GMR Energy Ltd.v. Doosan Power Systems India Pvt. Ltd.[21]  (“GMR Energy”) decided on 14th November, 2017 took a holistic consideration of the issue. In GMR Energy case[22], the Delhi High Court observed that the judgment in TDM Infrastructure[23] cannot be treated as a binding precedent. Further it was observed that, the Bombay High Court while deciding Aadhar Mercantile[24] and Seven Islands Shipping[25], did not consider the law laid down by the Supreme Court in Atlas Export[26], and therefore, the said judgments were per incurium. The Delhi High Court relied upon Atlas Export[27] and held that two Indian parties can choose a foreign seat to arbitrate.

Recently, the Gujarat High Court in GE Power Conversion India (P) Ltd. v. PASL Wind Solutions (P) Ltd.[28] (“GE Power”) had the opportunity to address this issue. The Court reaffirmed that two Indian parties can choose a foreign seat of arbitration and the award decreed therefrom could be enforced as a foreign arbitral award in India. The Court held that nationality of the parties has no relevance for considering the applicability of Part II, of the Act of 1996. Applicability of Part II is determined solely based on what is the seat of arbitration, whether it is in a country which is signatory to the New York Convention. If this requirement is fulfilled, Part II will apply. Therefore, the question remains so far as the applicability of the proviso to Section 2(2) in such a scenario is concerned. In our view, whilst two Indian parties can choose a foreign seat to govern their arbitration, the language used by the Legislature in Section 2(2) of the Act may require more clarity and reconsideration to address this conundrum.

  1. Whether the term “agreement to the contrary” under the new proviso includes within its ambit both implied and express stipulations in a contract?

As stated above, the ‘territorial principle’ propounded in BALCO case[29] was substituted with a proviso to Section 2(2) expressly extending the applicability of Part I to international commercial arbitrations even if the place of arbitration is outside India, subject to two-fold conditions i.e. (1) there is no agreement to the contrary; and (2) an arbitral award made or to be made in such place (outside India) is enforceable and recognised under the provisions of Part II of this Act. As the proviso does not stipulate whether the “agreement to the contrary” must be an express or implied clause/agreement, the issue came up for consideration before various courts. The Bombay High Court, in Aircon Beibars Fze v. Heligo Charters Pvt.  Ltd.[30] noted the intention behind extending the applicability of certain provisions of PartI to foreign seated arbitrations, and rejected the contention that, by choosing a foreign seat of arbitration, the parties had impliedly excluded the applicability of Part  I of the Act. This decision was also upheld by the Division Bench in Heligo Charters Pvt. Ltd. v. Aircon Beibars Fze.[31] (“Heligo Charters”). The Court clearly held that “In view of the amended provisions and facts, we are of the view that operation of provisions of Section 9 cannot be excluded in absence of a specific agreement to the contrary.” By holding that specific agreement will be required, the Court attempted to bridge the gap by necessitating an express agreement so as to exclude applicability of Part I of the Act, in a foreign seated international commercial arbitration. Similarly, in Raffles Design International India Pvt. Ltd. v. Educomp Professional Education Ltd.[32], (“Raffles Design”), the Delhi High Court, while deciding an application under Section 9 of the Act, rejected the contention that merely by choosing foreign seat, institutional rules or governing law, it cannot be said that the parties have impliedly excluded the applicability of Section 9 of the Act, which defeats the entire purpose of introducing the proviso to Section 2(2) of the Act. It was observed that,

“the inescapable conclusion is that since the parties had agreed that the arbitration be conducted as per SIAC Rules, they had impliedly agreed that it would not be incompatible for them to approach the Courts for interim relief.”                                                                                                                                                                           

(emphasis supplied)

The Delhi High Court, in a recent judgment in Goodwill Non–Woven (P) Ltd. v. Xcoal Energy & Resources LLC[33], held that the grant of interim measures in a foreign seated arbitration under Section 9 of the Arbitration Act does not contemplate the existence of assets in India. The Court, while placing reliance on the Raffles Design case[34] and the recommendations of the Report held that the application was maintainable however, refused to grant any reliefs in the absence of sufficient case made out. Therefore, the Courts have, till date, taken a unanimous view that, merely by choosing a foreign seat to govern arbitrations, parties cannot be said to have impliedly excluded the applicability of Part  I altogether and the parties can approach the Courts in India seeking interim measures, as per the proviso to Section 2(2) of the Act which is applicable to foreign seated international commercial arbitrations.

  1. Whether it is an essential condition for applicability of Part I that an award made or to be made in a place outside India is enforceable and recognised under the provisions of Part II?

 Part II of the Act pertains to “foreign awards” which, as per Section 44 of the Act, means arbitral awards that are made or to be made in pursuance of an agreement in writing for arbitration to which the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, New York, 1985 (“the New York Convention”) or the Convention on the Execution of Foreign Arbitral Awards Convention, Geneva, 1927 (“the Geneva Convention”) applies, and having place of arbitration in a territory which is notified by the Central Government of India to be a reciprocating territory under such Convention.[35] Therefore, to extend applicability of Section 9 of the Act to international commercial arbitrations having place outside India, the award made in such place, should be recognised and enforceable under PartII of the Act. Therefore, if the seat of arbitration is in a country which is not a signatory to the New York Convention and is not a reciprocating territory notified by the Central Government of India, a party cannot approach Indian courts for interim measures.[36] This is further reinforced with the intention of the Legislature behind amending the said provision of Section 2(2) of the Act, which is to overcome a situation “where the assets of a party are located in India, and there is a likelihood that that party will dissipate its assets in the near future, the other party will lack an efficacious remedy if the seat of the arbitration is abroad. The Report further states:

That being the case, it is a distinct possibility that a foreign party would obtain an arbitral award in its favour only to realize that the entity against which it has to enforce the award has been stripped of its assets and has been converted into a shell company.”[37]                                                   

(emphasis supplied)

It is in this context that the amended provision stipulates that the award shall be enforceable in India as per PartII. Therefore, the amendment would aid a party in enforcement of the award by inter alia granting interim measures. The pre-condition for applying Section 2(2) of the Act is that the award made or to be made in the foreign seat or place, should be enforceable and recognisable under Part  II of the Act. This is important because the intent is to protect a party from disposing off assets and rendering the foreign award as a mere paper decree. Therefore, in other words, if the award is not enforceable and recognisable under Part  II of the Act, there would be no occasion to grant interim measures. In this regard, it was contended before the Bombay High Court in  Heligo Charters case[38] that no interim measures can be granted unless the foreign award is enforced in accordance with Section 48 of the Act. However, this contention was rightly rejected, as there is no embargo in granting interim reliefs under Section 9 of the Act, pending enforcement of foreign award under Section 48 of the Act. This view was further reinforced recently by the Supreme Court in Avitel Post Studioz Ltd.  v. HSBC PI Holdings (Mauritius) Ltd.[39] (“Avitel”).

On the other hand, Section 27 of the Act, is also a transitory provision to aid the arbitration proceedings, where the Court’s interference may be required in taking of evidence, when a party or witness is situated in India. In our view, this should be available irrespective of the conditions for enforcement, as the Court’s assistance would be required in taking of evidence in an international arbitration. This right should be universally available to all parties as the powers to compel document production, witness to testify, etc. are effectively available only with the domestic courts and not arbitral tribunals. As a “pro-arbitration” nation, irrespective of whether the award made in the international commercial arbitration seated outside India would be enforceable in India or not, the doors must always be kept open for potential litigants of international arbitration in need of assistance of Indian courts in taking of evidence if a party or witness is situated in India.

Enforceability of interim orders passed in foreign seated arbitrations or by emergency arbitrators

 The Arbitration Act, despite several recommendations made by the Law Commission, does not specifically recognise interim orders passed by emergency arbitrators. Unlike an interim order passed in domestic arbitration under Section 17 of the Act, which has the same effect as that of a Court decree, there is no existing mechanism in place for enforcement of interim orders passed by foreign seated arbitral tribunals let alone emergency arbitrators. In international commercial arbitrations, enforcement mechanism is governed by the New York Convention. In India, the provisions pursuant to the New York Convention for enforcement are provided under Part II of the Act. “Foreign award” under Section 44 of the Act is defined as “an arbitral award on differences between persons arising out of legal relationships, whether contractual or not, considered as commercial under the law in force in India […]” However, just as the New York Convention is silent on the issue of whether interim orders elevate to the status of an “award”, the Act is also silent on the issue. From the perusal of the definition, it appears that the definition only includes partial/final awards passed by arbitral tribunals. It is also a contentious issue of whether an emergency arbitrator is covered within the definition of an “arbitral tribunal” which is defined under Section 2(1)(d) of the Act which only includes a sole arbitrator or a panel of arbitrators and does not envisage an arbitrator who is vested with powers to grant only interim reliefs. This is not in sync with the leading arbitral institutions such as ICC, SIAC, LCIA, etc. which specifically provide for appointment of emergency arbitrator to grant urgent interim reliefs before the constitution of the arbitral tribunals.

In India, particularly in the judgment of Raffles Design[40] referred hereinabove, the parties approached the Delhi High Court for grant of interim reliefs under Section 9 of the Act, in a foreign seated arbitration, although having secured interim orders from the emergency arbitrator. The Delhi High Court held that although the order passed by the emergency arbitrator is not enforceable, the Court was pleased to grant interim reliefs under Section 9 of the Act. Similarly, in HSBC PI Holdings (Mauritius) Ltd. v. Avitel Post Studioz Ltd.[41], the Bombay High Court was pleased to grant interim reliefs under Section 9 of the Act, despite an emergency arbitrator already having passed interim reliefs.

In Ashwani Minda v. U-Shin Ltd.[42] decided by the Delhi High Court, the applicant had approached emergency arbitrator under the JCAA Rules in a foreign seated arbitration. The emergency arbitrator had declined to grant interim reliefs by passing a detailed order. The applicant then approached the Delhi High Court under Section 9 of the Act. However, the Delhi High Court declined to grant interim relief on the ground that the applicant cannot take a second bite at the cherry having already approached the emergency arbitrator for interim reliefs, especially when there was no change in circumstances. Therefore, the judicial trend with respect to interim reliefs passed by foreign arbitral tribunals and emergency arbitrators seems to be that the same hold persuasive value, although the same cannot be enforced in India.

Conclusion

The applicability of certain provisions of Part I to foreign seated arbitrations is a crucial requirement to protect the assets of a party from being stripped off, rendering a foreign arbitral award redundant. It is with this intention that the change was proposed and made in Section 2(2) of the Act by way of the 2015 Amendment Act. However, due to the ambiguity in the language used in the provision, various issues have afflicted the arbitration proceedings causing delays and increased judicial intervention. Most importantly, Section 2(2) of the Act is a clear case of casus omissus, as it does not appear to include a scenario where two Indian parties choose a foreign seat for arbitration, in which case, it is not regarded as “international commercial arbitration” and as a sequitur, cannot approach Indian courts for interim measures. This does not seem to in line with the intention behind extending Sections 9 and 27 of the Act to arbitrations falling under Part II of the Act.

To give effect to a “pro-arbitration” approach, it is necessary that the issue of two Indian parties choosing a foreign seat for arbitration should be settled once and for all by the Supreme Court, and likewise, the Legislature must cure the casus omisus in the proviso to Section 2(2) of the Arbitration Act. Similarly, the issue of enforcement of interim orders passed by emergency arbitrators and foreign seated arbitral tribunals needs to be addressed under the Indian Arbitration Act. Some of the advance legal systems such as Singapore and Hong Kong expressly recognise the enforcement of interim orders passed by emergency arbitrators and foreign seated arbitral tribunals. However, this issue exists not just in India but in most other countries, where the enforcement regime is left for the domestic laws to decide.


* Partner, Induslaw

** Senior Associate, Induslaw

***Associate, Induslaw

[1] Arbitration and Conciliation (Amendment) Act, 2015.

[2] Law Commission of India, Report No.  246 on Amendments to the Arbitration and Conciliation Act, 1996 (August, 2014).

[3] (2012) 9 SCC 552.

[4] Ibid.

[5] Id.

[6] Id.

[7] Bhatia International v. Bulk Trading S.A., (2002) 4 SCC 105.

[8] Venture Global Engg. v. Satyam Computer Services Ltd., (2008) 4 SCC 190.

[9]Article 1(3) of UNCITRAL Model Law: 1.(3) An arbitration is international if:

(a) the parties to an arbitration agreement have, at the time of the conclusion of that agreement, their places of business in different States; or

(b) one of the following places is situated outside the State in which the parties have their places of business:

(i) the place of arbitration if determined in, or pursuant to, the arbitration agreement;

(ii) any place where a substantial part of the obligations of the commercial relationship is to be performed or the place with which the subject-matter of the dispute is most closely connected; or

(c) the parties have expressly agreed that the subject-matter of the arbitration agreement relates to more than one country.

[10]TDM Infrastructure Pvt. Ltd. v. UE Development India Pvt. Ltd., (2008) 14 SCC 271

[11] 2015 SCC OnLine Bom 7752.

[12] (2008) 14 SCC 271.

[13] 2012 SCC OnLine Bom 910 : 2012 MhLJ 822.

[14] 2015 SCC OnLine MP 7417.

[15] (1999) 7 SCC 61.

[16] Ibid.

[17] (2008) 14 SCC 271.

[18]Sasan Power Limited v. North America Coal Corp.(India) Pvt.  Ltd., (2016) 10 SCC 813.

[19] (1999) 7 SCC 61.

[20] Ibid.

[21] 2017 SCC OnLine Del 11625.

[22] Ibid.

[23] (2008) 14 SCC 271.

[24] (1999) 7 SCC 61.

[25] Ibid.

[26] (1999) 7 SCC 61

[27] Ibid.

[28] R/Petn. under Arbitration Act No. 131 of 2019, decided on 3-11-2020 (Guj.)

[29] (2012) 9 SCC 552.

[30] 2017 SCC OnLine Bom 631.

[31] 2018 SCC OnLine Bom 1388 : (2018) 5 AIR Bom R 317.

[32] 2016 SCC OnLine Del 5521 : (2016) 6 Arb LR 426 .

[33] 2020 SCC OnLine Del 631.

[34] 2016 SCC OnLine Del 5521 : (2016) 6 Arb LR 426.

[35] Section 44 of the Act – In this Chapter, unless the context otherwise requires, “foreign award” means an arbitral award on differences between persons arising out of legal relationships, whether contractual or not, considered as commercial under the law in force in India, made on or after the 11th day of October, 1960—

(a) in pursuance of an agreement in writing for arbitration to which the Convention set forth in the First Schedule applies, and

(b) in one of such territories as the Central Government, being satisfied that reciprocal provisions have been made may, by notification in the Official Gazette, declare to be territories to which the said Convention applies.

[36]https://library.iccwbo.org/content/dr/COUNTRY_ANSWERS/CA_SUPP_0029_31.htm?l1=Country+Answers&l2=India

[37] Law Commission’s 246th Report, on Amendments to the Arbitration and Conciliation Act, 1996 (August, 2014);

Consultation Paper placed by the Government of India in public domain referred in Raffles Design International India Pvt. Ltd. v. Educomp Professional Education Ltd., 2016 SCC OnLine Del 5521 :  (2016) (6 Arb LR 426.

[38] 2018 SCC OnLine Bom 1388 : (2018) 5 AIR Bom R 317.

[39] 2020 SCC OnLine SC 656.

[40] 2016 SCC OnLine Del 5521 : (2016) 6 Arb LR 426.

[41] 2014 SCC OnLine Bom 102.

[42] OMP (I) (COMM.) 90 of 2020, decided on 12-5-2020 (Del).

Op EdsOP. ED.

Introduction

While party autonomy is the underlying motif of the Arbitration and Conciliation Act, 1996[1] (“the Act”), Parliament has ensured that the Act contains adequate provisions to deal with situations and circumstances which require intervention of courts whenever necessary. One such provision is Section 11 of the Act which apart from granting parties the liberty to devise their own procedure to appoint arbitrator(s) (subject to provisions of the Act) describes the extent and role of courts in appointment of arbitrators. In case of non-appointment in an international commercial arbitration i.e. an arbitration where at least one of the parties is foreign, the party concerned can approach the Supreme Court (with the remedy being before the relevant High Courts in all other cases).[2]

Section 11 of the Act, as originally enacted, envisaged that if one of the parties failed to appoint an arbitrator in terms of the agreement between the parties (or within 30 days of the receipt of a request to do so from the other party, in case there is no agreed procedure), the requesting party could approach the Chief Justice of India and request the Chief Justice to appoint the arbitrator. The appointment would then be made either by the Chief Justice himself, or by any person or institution designated by him for this purpose.

Parts of Section 11 of the Act were amended by Section 6 of the Arbitration and Conciliation (Amendment) Act, 2015[3] (“the 2015 Amendment Act”), which came into force w.e.f. October 23, 2015. The 2015 Amendment Act effectively entrusted the responsibility of appointing the arbitrator to the Supreme Court or any person or institution designated by it. The 2015 Amendment Act also introduced a timeline for the disposal of a Section 11 application by introducing sub-section (13). Notably, this timeline of sixty days from the date of service of notice on the opposite party is only directory and the Supreme Court or the person or institution designated by it are required to make an endeavour to adhere to this time-period.

The Supreme Court has not designated an institution for exercising the powers under the Act and therefore continues to hear Section 11 applications itself. However, pursuant to Section 11(10) of the Act (before its amendment in 2015), the Chief Justice of India formulated ‘The Appointment of Arbitrators by the Chief Justice of India Scheme’ on May 16, 1996 (“the Scheme”) which is still in force. Therefore, the provisions of the Act, the Supreme Court Rules, 2013[4] (“the SC Rules”), and the Scheme govern Section 11 applications.

Section 11 of the Act now stands substantially amended by the Arbitration and Conciliation (Amendment) Act, 2019[5] (“the 2019 Amendment Act”). The amended Section 11 entrusts the appointment of the arbitrator in the arbitral institutions designated by the Supreme Court. These arbitral institutions, in turn, are to be graded by the Arbitration Council of India (“ACI”) (a body to be established by the Central Government pursuant to Section 43-B of the 2019 Amendment Act) – this gradation, according to Section 43-I, will be “on the basis of criteria relating to infrastructure, quality and calibre of arbitrators, performance and compliance of time limits for disposal of domestic or international commercial arbitrations, in such manner as may be specified by the regulations”. The most significant change to Section 11 in the 2019 Amendment Act is therefore that the task of appointing an arbitrator where the parties fail to do so, is entrusted to an arbitral institution (as opposed to the Supreme Court or the High Court, as the case may be), thereby substantially streamlining the process of the appointment of an arbitral tribunal. This article does not delve into details of the amendments brought about by the 2019 Amendment Act, including with respect to the process of gradation by the ACI, or the pool of arbitral institutions that may be selected by it, or the choice of potential arbitrators that each of these institutions may in turn have. The focus of this article is on the changes introduced, to the extent that they would have an impact on the timelines for the disposal of Section 11 applications. However, until the relevant sections of the 2019 Amendment Act are notified, the Supreme Court will continue appointing arbitrators.

One of the principal advantages of arbitration over the more traditional form of dispute resolution is that arbitrations are quick and time-efficient. However, oftentimes the appointment of an arbitrator itself takes substantial time (thereby effectively nullifying this benefit). Despite the amendments to the Act, this initial step has not been made mandatorily timebound, as opposed to, for instance, the entire arbitration process itself (reference Section 29-A of the Act). What is relevant, however, is that the scope of examination under Section 11 by the courts has been confined to an examination of the existence of the arbitration agreement. With this, the Act does envisage a quick and expeditious disposal of Section 11 applications. It may therefore be necessary for the Supreme Court to make structural changes to ensure quick disposal of Section 11 applications.

This article is divided into following parts:

(i) analysis of average time taken for listing of a Section 11 application before the Supreme Court for the first time and average time for final disposal (2016-2019);

(ii) reasons for delay in the first listing and final disposal of Section 11 applications; and possible solutions for streamlining and expediting hearing of Section 11 applications by the Supreme Court; and

(iii) the changes sought to be brought about by the 2019 Amendment Act.

The focus of this article is not the changes proposed to be brought in place by the 2019 Amendment Act (though these are briefly spoken about), but rather steps that can be taken to expedite Section 11 applications that will be filed before the Supreme Court till the time that the ACI is established and the amended Section 11 is acted upon.

I. Time taken for first listing of Section 11 applications and their disposal by the Supreme Court

This article has reviewed the data available on the Supreme Court’s website[6] for the years 2016 to 2019 in relation to Section 11 applications to analyse the average time taken in the appointment of an arbitrator by the Supreme Court. The methodology employed is as follows:

(i) for calculating the number of days for first listing of a Section 11 application, the date of registration of the application by the Supreme Court Registry is taken as the starting point; and

(ii) for calculating the number of days for final disposal of a Section 11 application, the day on which the Supreme Court issued notice is taken as the first day (while the date of service of notice is the starting point under Section 11(13) of the Act (as amended by the 2015 Amendment Act), this information is not available on the Supreme Court website).

The graphs below indicate the average time taken for the first listing of a Section 11 application before the Supreme Court and the average time taken for final disposal:

 

The first listing of any application/petition/appeal before the Supreme Court is determined generally by a computer software with minimum human intervention. It will be seen that in 2016, 66 Section 11 applications were preferred before the Supreme Court and the average time for their first listing from the date of their registration by the Supreme Court Registry was 25.86 days. In the following year, 54[7] Section 11 applications were preferred before the Supreme Court. However, the average time for the first listing was almost half the time in comparison to that in 2016 i.e. 12.95 days. In 2018, only 39 Section 11 applications came to be filed which were at an average listed before the Supreme Court within 16.87 days of their registration. In 2019, the average time for first listing of a Section 11 application increased almost two-fold from 2018, i.e. it took 32.98 days for first listing before the Supreme Court.

Insofar as the average days for final disposal of Section 11 applications is concerned, the data paints a woeful picture. In 2016, a Section 11 application at an average would be disposed of in 385.95 days. In fact, till date four Section 11 applications filed in 2016 are still pending. In 2017[8], the Supreme Court took 204.42 days on an average to finally dispose of a Section 11 application and as on date eight applications are still pending. In 2018, the average time reduced to 159 days but fourteen applications are yet to be disposed of by the Supreme Court. Of the 55 Section 11 applications filed in 2019, only 15 have been disposed of yet and the average time for these has been 180.93 days. This analysis reveals that it can take almost six months (if not more) to only get an arbitrator appointed, effectively negating the advantages of choosing arbitration as a mode of dispute resolution.

The data in relation to disposal of Section 11 applications by appointment of arbitrator(s) is as follows:

  1. Of the 62 Section 11 applications of 2016 disposed of by the Supreme Court, arbitrators were appointed in 43 applications;
  2. Of the 40 Section 11 applications of 2017 disposed of by the Supreme Court, arbitrators were appointed in 29 applications;
  3. Of the 25 Section 11 applications of 2018 disposed of by the Supreme Court, arbitrators were appointed in 21 applications; and
  4. Of the 15 Section 11 applications of 2018 disposed of by the Supreme Court, arbitrators were appointed in 8 applications.

It is therefore critical that the Supreme Court takes steps to expedite the process of appointing arbitrators under Section 11. The next part analyses the reasons for the delay and suggests simple solutions which may help in quicker disposal of Section 11 applications.

II. Reasons for delay in the first listing and final disposal of Section 11 applications and possible solutions

A. First Listing of Section 11 applications

As already mentioned above, the first listing of any case before the Supreme Court is governed by a computer-based software once the Supreme Court Registry has verified it for listing. The steps preceding this include:

(i) filing the requisite number of paper books with the Registry, which notifies defects in the application;

(ii) curing of the defects notified by the Registry and refiling of the application; and

(iii) further scrutiny and final verification for listing.

The Registry treats a Section 11 application on a par with any other petition/appeal/ application filed before the Supreme Court and its scrutiny is not accorded any special status. Therefore, Section 11 applications are scrutinised in their turn along with special leave petitions which form the bulk of the filings before the Supreme Court. The delay begins here and therefore it would be prudent to have rules in place which require Section 11 applications to be scrutinised on a priority basis.

The second reason for delay is the requirement of filing five copies of the Section 11 application in the very first instance, as opposed to three copies in other cases, presumably to speed up the service process once notice is issued by the Supreme Court. Once the Section 11 application is scrutinised and the defects are notified, the lawyer is required to collect the original as well as the copies submitted to cure the defects which can be a time-consuming process if it requires re-numbering of pages and/or making changes in the body of the application. However, if the lawyer is only required to submit the original in the first instance, considerable time could be saved.

The third reason for delay in the first listing of a Section 11 applications could be attributed to the computer based software which presumably has no special function for listing of Section 11 applications. It is submitted that the computer based software could be suitably modified to ensure that Section 11 applications are listed before the Roster Bench within seven to ten days of being verified by the Supreme Court Registry.

At present, the average time for first listing between 2016-2019 is over three weeks. The suggested measures would ensure that right from the filing stage, Section 11 applications move through the machinery of the Supreme Court Registry swiftly and are listed in the shortest possible duration.

B. Final disposal of Section 11 applications

Apart from the adjournments sought by the parties and time constraints faced by the Supreme Court, briefly speaking, the following two reasons are the main cause for the delay in finally disposing of Section 11 applications:

(i) Service of application on opposite party after notice; and

(ii) Listing after pleadings have been completed.

Service of Section 11 applications

The Act does not prescribe any rules for service of Section 11 applications and the same is left to the courts to prescribe. The service of Section 11 applications in the Supreme Court is governed by the SC Rules and the Scheme.

Order LIII of the SC Rules governs service of documents including service of notices. Rule 3 of Order LIII states that service to a party residing in India is to be done by posting a copy of the document required to be served in a pre-paid envelope registered for acknowledgment. The party desirous of service is required to deposit the requisite process fee with the Supreme Court Registry and thereafter, the Supreme Court Registry undertakes steps to ensure service on the opposite party. In case the party upon which the document is required to be served is resident out of India, the provisions in the Code of Civil Procedure, 1908 (“CPC”) are required to be followed. Order V Rule 26 CPC prescribes the way of service on parties residing out of India. Accordingly, service of Section 11 applications by the Supreme Court Registry would be in consonance with the provisions of CPC which is a long drawn and time-consuming process. Further, in case of Section 11 applications before the Supreme Court, the applicant in accordance with Rule 10 of the Scheme is required to deposit INR 15,000 with the Supreme Court for processing the application which includes costs of service.

Since service of Section 11 applications is only made upon notice and there is no stipulation for advance service on the opposite party, a considerable time elapses between the date on which the Court issues notice and service is affected on the opposite party. It is submitted that if the following amendments to the relevant SC Rules and Scheme are made, it may go a long way in ensuring quicker disposal of Section 11 applications:

  1. The applicant must serve a copy of the Section 11 application in advance to the opposite party. In non-contentious Section 11 applications, if the respondent(s) appears on the first date itself, the application may be finally decided on the same day. In fact, a few High Courts already have rules in place for advance service of Section 11 applications without which the application is not listed.
  2. In all applications on which notice is issued, the Supreme Court should allow dasti service including service by email on the opposite party in addition to the mode already prescribed under the SC Rules. Since Rule 2, Order LIII of the SC Rules allows service on the advocate-on-record of any party at his registered office or registered email address including that of his clerk, permitting dasti service by email in the first instance would not be a novel concept. Similarly, the applicant should be allowed to post/courier/email the complete copy of the application directly to the address of the respondent(s) stated in the memo of parties. This is likely to ensure that service is affected in a shorter time. Under appropriate circumstances, service by email alone may also be considered sufficient service.
  3. To ensure appearance of the opposite party, the notice should specifically state that notice by the applicant shall be deemed to be sufficient service. The applicant may also be required to file proof of delivery and upon such filing, the application should be listed before the Court. An even quicker way to ensure disposal of Section 11 applications would be if the order issuing notice states a returnable date i.e. the date on which the Section 11 application would next be listed. This would help bypass the deficiency in computer based software system which otherwise lists Section 11 applications in due course.

The above-suggested amendments to the SC Rules and the Scheme will go a long way in furthering the object of the Act.

Listing of Section 11 applications after completion of pleadings

At present, Section 11 applications get listed before the Roster Bench after completion of pleadings before the Registrar in due course, on a date determined by the computer based software. As such, the software does not list Section 11 applications expeditiously and in preference to other categories of cases pending before the Supreme Court.

Therefore, there is an urgent need to modify/update the software to ensure that Section 11 applications are listed before the Roster Bench immediately upon completion of pleadings and preferably within two weeks to ensure the Court has sufficient time to hear the application. It is essential to treat Section 11 applications as a separate category at all stages – at the time of filing, for the purposes of services and for the purpose of listing for final disposal.

One other way to ensure quicker disposal of Section 11 applications would be by amending the SC Rules to allow the Registrar to pass an order after completion of pleadings to list Section 11 applications within two weeks before the Court.

These measures, if employed will further the object of the Act, and give effect to the objective which the Legislature intended to achieve through the relevant amendments contained in the 2015 and 2019 Amendment Acts.

C. Reverting to the earlier practice of listing Section 11 applications before a Single Judge

Section 11 of the Act read with Rule 3 of the Scheme allows the Chief Justice to designate any person or institution for the purpose of appointing an arbitrator. Until recently, Section 11 applications were decided by a Single Judge designated by the Chief Justice in accordance with the provisions of the Scheme and in exercise of powers under the Act. This ensured quicker disposal of Section 11 applications since the Single Judge would hear these applications periodically. Moreover, a designated Judge hearing Section 11 applications on designated days ensures that all such applications are heard since no other matters would be on this list. Therefore, it may be better to revert to the practice of designating a Single Judge to deal with Section 11 applications.

III. Changes sought to be brought by the 2019 Amendment Act

As stated above, the 2019 Amendment Act seeks to substantially alter the regime when the parties fail to appoint arbitrators themselves and seek intervention in this regard. Section 11, as amended by the 2019 Amendment Act, now places this responsibility on an arbitral institution to be designated by the Supreme Court on the basis of a gradation to be carried out by the ACI.

Since the ACI has not been established as yet, the manner of appointment of arbitrator under Section 11 continues to remain unchanged. However, even with the establishment of the ACI, the 2019 Amendment Act does not specify the rules or procedures to be followed by the arbitral institutions in making appointments pursuant to Section 11.

For instance, there are no rules or express provisions on the scope of the arbitral institution’s role in the appointment of the arbitrator and whether any inquiry is required to be carried out by an arbitral institution tasked with the responsibility of implementing Section 11. In this regard, the courts have, through various judgments, interpreted the scope of determination that is required to be carried out by them in Section 11 applications. It is unlikely that an arbitral institution would carry out the level of analysis that the courts have undertaken in Section 11 applications. The amendments to Section 11, however, support the conclusion that the arbitral institution will likely only be expected to appoint the arbitrator, without any determination on whether an arbitrator ought to be appointed or not, such determination being left to the arbitrator in terms of Section 16 of the Act. This is buttressed by Section 3(5) of the 2019 Amendment Act, which deletes sub-sections (6-A) and 7 of Section 11.

The amendments also do not specify any procedural requirements that are to be followed while filing Section 11 applications. When the contracting parties agree to have their arbitrations administered by any arbitral institution, they agree to all the procedural rules prescribed by the institution, including with respect to the form of pleadings and mode of service. However, in the case of a Section 11 application, the parties are only approaching the institution for the purpose of the appointment of the arbitrator (and only because this is the institution designated by the Supreme Court). The arbitration itself will continue to remain ad hoc. Given this, it is likely that separate rules will be framed for the purpose of filing Section 11 applications under the Act. Section 43-L of the Act also prescribes that the ACI may, in consultation with the Central Government, make regulations for the discharge of its functions under the Act.

It is hoped that any rules framed in relation to Section 11 applications, whether by the ACI or otherwise, will ensure that the procedural lapses/delays analysed in this article are done away with. Arbitral institutional rules typically provide greater flexibility, whether in the mode of filing, the form of filing or the mode of service, than court rules permit. For instance, most arbitral institution rules permit service of documents by several modes such as courier, speed post, or email (ref., as an example, Rule 2.1 of the MCIA Rules, 2016). Any rules to be framed with respect to Section 11 should retain the flexibility that arbitrations typically offer.

Pertinently, the 2019 Amendment Act also obligates the arbitral institution to dispose of the Section 11 application within a period of 30 days from the date of service of notice on the opposite party. The amended sub-section (13), as it is currently worded, makes this timeline mandatory and not merely directory. It is hoped that this timeline is followed in the future to further the object of the Act and the amendments brought about by the legislature.

Conclusion

In conclusion, it is submitted that until the relevant sections of the 2019 Amendment Act are notified, the mantle of ensuring quicker disposal of Section 11 applications continues to be held by the Supreme Court. While it may seem that it is too late in the day to undertake any structural changes, the Supreme Court could set an example for the courts below by adapting and adopting mechanisms which promote a more efficient justice delivery system. To make India a more arbitration-friendly jurisdiction, the changes such as the ones suggested above could be adopted, especially since commercial disputes resolution by arbitration has over the last few decades become a more preferred means of dispute resolution, a preference escalated due to the pandemic. Section 11 applications are filed to kickstart arbitral proceedings and therefore any and all measures should be taken by the Supreme Court to ensure that appointment of the arbitral tribunal is completed in the least possible time once the parties appear before it.


*Advocate

**Advocate

[1] The Arbitration and Conciliation Act, 1996

[2] This article only focusses on the role of the Supreme Court in the appointment of arbitrators under Section 11 of the Act and therefore references are restricted to that extent.

[3] The Arbitration and Conciliation (Amendment) Act, 2015

[4] The Supreme Court Rules, 2013    

[5] The Arbitration and Conciliation (Amendment) Act, 2019

[6] The data was gathered from https://main.sci.gov.in/case-status on July 8, 2020.

[7] The data for six Section 11 applications filed in 2017 was not available on the Supreme Court’s website as on July 8, 2020.

[8] Ibid.

Op EdsOP. ED.

Issue

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

Analysis

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

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

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

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

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

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

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

(emphasis supplied)

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

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

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

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

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

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

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

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

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

(emphasis supplied)

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

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

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

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

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

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

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

 

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

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

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

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

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

[…]

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

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

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

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

 

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

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

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

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

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

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

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

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

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

4. Addressing the Issue

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

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

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

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

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


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

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

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

[1] Arbitration and Conciliation Act, 1996

[2] UNCITRAL Model Law on International Commercial Arbitration

[3] The Stamp Act, 1899

[4] The Contract Act, 1872

[5] (1999) 2 SCC 479 

[6]ibid

[7](2004) 3 SCC 155

[8]Supra Note 5

[9]Supra Note 7

[10]Supra Note 5

[11] (2005) 8 SCC 618

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

[13]Supra Note 11

[14] (2011) 14 SCC 66

[15]Ibid

[16] 2019 SCC OnLine Bom 563

[17]Supra Note 15

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

[19]Infra Note 28

[20]Supra Note 17

[21]Ibid

[22]Supra Note 15

[23]Ibid

[24]Supra Note 15

 [25]Supra Note 7

[26] (2016) 10 SCC 386

[27] (2019) 9 SCC 209 

[28]Supra Note 15

[29]Supra Note 28

[30]Supra Note 15

[31]Ibid

[32]Supra Note 15

[33]Ibid

[34] (2018) 17 SCC 607 

[35]Supra Note 28

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

[37]2019 SCC OnLine Bom 5719

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

[39]Supra Note 17

[40]Supra Note 17

[41]Ibid

[42]Supra Note 37

[43]Supra Note 17

[44]Supra Note 28

[45]Supra Note 38

[46]Supra Note 37

[47]Supra Note 28

[48]Supra Note 17

[49]Supra Note 28

[50]Supra Note 17

[51]Supra Note 28

[52]Supra Note 17

[53]Supra Note 37

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

[55]Supra Note 15

[56]Supra Note 55

[57]Supra Note 15

[58]Supra Note 5

[59]Supra Note 7

[60]Supra Note 11

[61]Supra Note 17

[62]Supra Note 7

[63]Supra Note 28

[64]Ibid

[65]Supra Note 17

[66]Supra Note 28

[67]Supra Note 17

[68]Supra Note 28

[69]Supra Note 15

[70]Supra Note 28

[71]Supra Note 11

[72]Supra Note 28

[73]Supra Note 17

[74]Supra Note 39

[75]Supra Note 17

[76]Supra Note 7

[77]Supra Note 17

[78]Supra Note 28

[79]Supra Note 17

[80]Supra Note 37

[81]Supra Note 38

Op EdsOP. ED.

A. INTRODUCTION

1. Part II of the Arbitration and Conciliation Act, 1996[1] (“the Act”) defines a foreign award and provides the manner/mode for the execution of a foreign award. Depending on the Convention and the framework agreed upon, foreign awards are separately defined under  Section 44 and Section 53, both of which are dealt with under Chapter I and Chapter II of Part II of the Act.

2. As per Section 44, (which is governed under the New York Convention[2]) foreign award is defined as follows:

“44. Definition.– In this Chapter, unless the context otherwise requires, “foreign award” means an award on differences between persons arising out of legal relationships, whether contractual or not, considered as commercial under the law force in India, made on or after the 11th day of October, 1960 –

(a) in pursuance of an agreement in writing for arbitration to which the Convention set forth in the First Schedule applies, and

(b) in one of such territories as the Central Government, being satisfied that reciprocal provisions have been made may, by notification in the Official Gazette, declare to be territories to which the said Convention applies.”

3. As per Section 53, (which is governed under the Geneva Convention) foreign award is defined as follows:

53. Interpretation.— In this Chapter “foreign award” means an arbitral award on differences relating to matters considered as commercial under the law in force in India made after the 28th day of July, 1924,—

(a) in pursuance of an agreement for arbitration to which the Protocol set forth in the Second Schedule applies, and

(b) between persons of whom one is subject to the jurisdiction of some one of such powers as the Central Government, being satisfied that reciprocal provisions have been made, may, by notification in the Official Gazette, declare to be parties to the Convention set forth in the Third Schedule, and of whom the other is subject to the jurisdiction of some other of the Powers aforesaid, and

(c) in one of such territories as the Central Government, being satisfied that reciprocal provisions have been made, may, by like notification, declare to be territories to which the said Convention applies, and for the purposes of this Chapter an award shall not be deemed to be final if any proceedings for the purpose of contesting the validity of the award are pending in the country in which it was made….”

4. According to Section 44 of Chapter I of the Act, a foreign award means an arbitral award on differences between persons arising out of legal relationships, whether contractual or not, considered as commercial under the law in force in India, made on or after 11th October, 1960 in pursuance of an agreement in writing for arbitration. The award has to be passed in one such territory with which India has a reciprocal treaty. Similar conditions are specified under Section 53 for the Geneva Convention Awards. The said Awards can be executed as if it was a decree passed by the civil court of original jurisdiction in India as envisaged under Section 36 of the Act. For execution of the award the format laid down in Order 21 Rule 11 (2) of the Code of Civil Procedure, 1908 for execution of decree is required to be followed.

5. Section 48 of the Act lays down conditions for the enforcement of foreign award. Section 48 of the Act reads as follows:

48. Conditions for enforcement of foreign awards.—(1) 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—

(a) 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; or

(b) 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; or

(c) 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:

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

(d) the composition of the arbitral authority or the arbitral procedure was not in accordance with the agreement of the parties, or, failing such agreement, was not in accordance with the law of the country where the arbitration took place; or

(e) the award has not yet become binding on the parties or has been set aside or suspended by a competent authority of the country in which, or under the law of which, that award was made.

(2) Enforcement of an arbitral award may also be refused if the court finds that—

(a) the subject-matter of the difference is not capable of settlement by arbitration under the law of India; or

(b) the enforcement of the award would be contrary to 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 Section 75 or Section 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.

(3) If an application for the setting aside or suspension of the award has been made to a competent authority referred to in clause (e) of sub-section (1) the Court may, if it considers it proper, adjourn the decision on the enforcement of the award and may also , on the application of the party claiming enforcement of the award, order the other party to give suitable security.”

6. The grounds mentioned in Section 48 are watertight i.e. no grounds outside Section 48 can be looked at. The enforcement of a foreign award under Section 48 of the Act may be refused only if the party resisting enforcement furnishes to the Court proof that any of the stated grounds has been made out to resist enforcement. The grounds for resisting enforcement of foreign award under Section 48 may be classified into three grounds – (i) grounds which affect the jurisdiction of the arbitration proceedings; (ii) grounds which affect party interest alone; and (iii) grounds which go to the public policy of India, as explained by Explanation to Section 48(2).

7. Through the present article, the author has analysed/discussed the ruling of the Supreme Court in  Vijay Karia  v. Prysmain Cavi E Sistemi SRL[3] , wherein the Court has discussed/dealt with the enforcement of foreign award under Section 48 of the Act.

B. BRIEF FACTS

8. The brief facts of this case are as follows:

8.1 Appellant 1 i.e. Vijay Karia and Appellants 2 to 39 (who are represented by Appellant 1) (collectively referred to as “the appellants”) were non-cooperative shareholders of Ravin Cables Ltd. (“Ravin”). On January 19, 2010, the appellants and Ravin entered into a Joint Venture Agreement with Respondent 1 i.e. Prysmian Cavi E Sistermi SRL (“Respondent 1) (a company registered under the laws of Italy). By virtue of the JVA, Respondent 1 acquired a majority shareholding of Ravin’s share capital. Clause 27 of the JVA provided for dispute resolution, under which any dispute arising under the agreement, would be settled exclusively under the Rules of Arbitration of the London Court of International Arbitration (“LCIA”) and the seat of the Arbitration shall be London, United Kingdom.

8.2 On the same day, under a separate ‘Control Premium Agreement’ Respondent 1 (claimant in the arbitration) paid substantial consideration to the appellant (respondent in the arbitration) as ‘control premium’ towards the acquisition of the share capital of Ravin. As per the terms of the JVA, until the expiry of the integration period, Ravin was to be jointly managed by the CEO & Managing Director and after the efflux of the integration period, Managing Director was solely responsible for managing Ravin. However, during the integration period the existing CEO (earlier appointed by Respondent 1) was removed and replaced by the Board of Directors (at the instance of the appellants). Thereafter, the appellants’ directors opposed the appointment of a CFO whose appointment was assented to by Respondent 1. The interference in the management and control of Ravin led to disputes between the parties.

8.3 As a result, in February 2012, Respondent 1  invoked arbitration proceedings against the appellants, alleging that there have been material breaches committed under the JVA. As a result, the LCIA appointed a sole arbitrator to adjudicate the disputes between the parties. The parties filed their respective claims/counter-claims before the  sole arbitrator.

8.4 Considering the various issues were raised by the respective parties at different stages, the  sole arbitrator passed three (3) Interim arbitral awards and one (1) final arbitral award. After considering the facts and the pleadings, the  sole arbitrator passed the final arbitral award in favour of  Respondent 1 (claimant in the arbitration) and rejected the counter-claims of the appellants. The Arbitral Tribunal allowed all the reliefs sought by Respondent 1 and directed the appellants to transfer 10,252,275 shares held by them to  Respondent 1. The appellants were further directed to reimburse the legal costs of the arbitration as determined by the LCIA Court.

8.5 The final award was never assailed by the appellants before the English Courts and only when the award-holder brought the arbitral award to India for the purpose of its enforcement, the appellants raised certain objections under Section 48 of the Act. The  Single Judge of the  Bombay High Court after dealing with the objections raised by the appellants, stated that the final arbitral award must be recognised and enforced, and the objections raised by the appellants do not fall under the pigeonholes contained in Section 48 of the Act. Since Section 50 of the Act, does not provide an appeal when a foreign award is recognised and enforced by a judgment of a  Single Judge of a High Court, the appellants filed an appeal before the Supreme Court under Section 136 of the Constitution of India.

C. ISSUES RAISED

9. The appellants’ contentions can be categorised broadly into the three ‘pigeonhole’ grounds (para 25) viz. 

(i) that the party was unable to present its case before the Tribunal,

(ii) that the Tribunal failed to deal with the contentions raised by the appellants [under Section 48(1)(b)],

(iii) that the foreign award is against the public policy of India [under Section 48(2)(b)] in two respects viz. (a) that it would be in contravention to the fundamental policy of Indian law; and (b) that it would violate the most basic notions of justice.

10. The issues raised by the appellants were dealt/answered by the Supreme Court as follows –

I. Exercise of power under Article 136 while dealing with an order enforcing the foreign award (para 24):

i Section 37 of the Arbitration Act, which is contained in Part I of the said Act, provides an appeal against either setting aside or refusing to set aside a ‘domestic’ arbitration award. The legislative policy so far as recognition and enforcement of ‘foreign’ arbitration awards is that an appeal is provided against a judgment refusing to recognise and enforce a foreign award. The Act does not provide for an appeal against an order recognising and enforcing an award.

ii This is because the policy of the legislature is that there ought to be only one bite at the cherry in a case where objections are made to the foreign award on the extremely narrow grounds contained in Section 48 of the Act and which have been rejected. This is in consonance with the fact that India is a signatory to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, 1958 (“the New York Convention”) and intends – through this legislation – to ensure that a person who belongs to a Convention country, and who, in most cases, has gone through a challenge procedure to the said award in the country of its origin, must then be able to get such award recognised and enforced in India as soon as possible.

iii Bearing this in mind, it is important to remember that the Supreme Court’s jurisdiction under Article 136 should not be used to circumvent the legislative policy so contained. The Court should be very slow in interfering with such judgments, and should entertain an appeal only with a view to settle the law if some new or unique point is raised which has not been answered by the Supreme Court before, so that the Supreme Court judgment may then be used to guide the course of future litigation in this regard. Also, it would only be in a very exceptional case of a blatant disregard of Section 48 of the Arbitration Act that the Supreme Court would interfere with a judgment which recognises and enforces a foreign award however, inelegantly drafted the judgment may be.

II. Public policy post 2015 Amendment (paras 37- 40):

i. By the 2015 Amendment Act[4], Section 48 was amended to delete the ground of “contrary to the interest of India”. Also, what was important was to reiterate Renusagar Power Co. Ltd. v. General Electric Co.[5] position, that 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 [vide Explanation 2 to Section 48(2)].

ii. It will be noticed that in the context of challenge to domestic awards, Section 34 of the Arbitration Act differentiates between international commercial arbitrations held in India and other arbitrations held in India. So far as “the public policy of India” ground is concerned, both Sections 34 and 48 are now identical, so that in an international commercial arbitration conducted in India, the ground of challenge relating to “public policy of India” would be the same as the ground of resisting enforcement of a foreign award in India.

iii. Why it is important to advert to this feature of the 2015 Amendment Act is that all grounds relating to patent illegality appearing on the face of the award are outside the scope of interference with international commercial arbitration awards made in India and foreign awards whose enforcement is resisted in India[6]. This statement of the law applies equally to Section 48 of the Arbitration Act.

iv. Indeed, this approach has commended itself in other jurisdictions as well. Thus, in Sui Southern Gas Co. Ltd. v. Habibullah Coastal Power Co.[7], the Singapore High Court, after setting out the legislative policy of the Model Law that the ‘public policy’ exception is to be narrowly viewed and that an arbitral award that shocks the conscience alone would be set aside.

III. Pro-enforcement Bias (para 47):

i.  US cases show that given the “pro-enforcement bias” of the New York Convention, which has been adopted in Section 48 of the Arbitration Act, 1996 – the burden of proof on parties seeking enforcement has now been placed on parties objecting to enforcement. In the guise of public policy of the country involved, foreign awards cannot be set aside by second guessing the arbitrator’s interpretation of the agreement of the parties; the challenge procedure in the primary jurisdiction gives more leeway to the Courts to interfere with an award than the narrow restrictive grounds contained in the New York Convention when a foreign award’s enforcement is resisted.

IV. Discretion of the Court to enforce foreign awards (paras 48, 49, 50, 52, 55, 56):

i. Enforcement of a foreign award under Section 48 of the Arbitration Act may be refused only if the party resisting enforcement furnishes to the Court proof that any of the stated grounds has been made out to resist enforcement. The said grounds are watertight – no ground outside Section 48 can be looked at. Also, the expression used in Section 48 is “may”.

ii. When the grounds for resisting enforcement of a foreign award under Section 48 are seen, they may be classified into three groups – (i) grounds which affect the jurisdiction of the arbitration proceedings; (ii) grounds which affect party interest alone; and (iii) grounds which go to the public policy of India, as explained by Explanation 1 to Section 48(2).

iii. Where a ground to resist enforcement is made out, by which the very jurisdiction of the tribunal is questioned – such as the arbitration agreement itself not being valid under the law to which the parties have subjected it, or where the subject-matter of difference is not capable of settlement by arbitration under the law of India, it is obvious that there can be no discretion in these matters. Enforcement of a foreign award made without jurisdiction cannot possibly be weighed in the scales for a discretion to be exercised to enforce such award if the scales are tilted in its favour. In simpler words, if an objection made to the jurisdiction of the Arbitral Tribunal, and the parties are able to satisfy that the award was made without the Arbitral Tribunal having jurisdiction, then the Courts have said that they will not exercise its discretion to enforce an award.

iv. On the other hand, where the grounds taken to resist enforcement can be said to be linked to party interest alone, for example, that a party has been unable to present its case before the arbitrator, and which ground is capable of waiver or abandonment, or, the ground being made out, no prejudice has been caused to the party on such ground being made out, a Court may well enforce a foreign award, even if such ground is made out.

v. When it comes to the “public policy of India” ground, again, there would be no discretion in enforcing an award which is induced by fraud or corruption, or which violates the fundamental policy of Indian Law, or is in conflict with the most basic notions of morality or justice.

vi. The expression “may” in Section 48 can, depending upon the context, mean “shall” or as connoting that a residual discretion remains in the Court to enforce a foreign award, despite grounds for its resistance having been made out. What is clear is that the width of this discretion is limited to the circumstances pointed out herein above, in which case a balancing act may be performed by the Court while enforcing a foreign award “or was otherwise unable to present his case”, natural justice under Section 48 and failure to determine a material issue would fall under public policy (para 84).

vii. The expression “was otherwise unable to present his case” occurring in Section 48(1)(b) cannot be given an expansive meaning and would have to be read in the context and colour of the words preceding the said phrase. In short, this expression would be a facet of natural justice, which would be breached only if a fair hearing was not given by the arbitrator to the parties. Read along with the first part of Section 48(1)(b), it is clear that this expression would apply at the hearing stage and not after the award has been delivered, as has been held in Ssangyong[8] (supra).

viii. A good working test for determining whether a party has been unable to present his case is to see whether the factors outside the party’s control have combined to deny the party a fair hearing. Thus, where no opportunity was given to deal with an argument which goes to the root of the case or findings based on evidence which go behind the back of the party and which results in a denial of justice to the prejudice of the party; or additional or new evidence is taken which forms the basis of the award on which a party has been given no opportunity of rebuttal, would, on the facts of a given case, render a foreign award liable to be set aside on the ground that a party has been unable to present his case. This must, of course, be with the caveat that such breach be clearly made out on the facts of a given case, and that awards must always be read supportively with an inclination to uphold rather than destroy, given the minimal interference possible with foreign awards under Section 48.

ix. If a foreign award fails to determine a material issue which goes to the root of the matter or fails to decide a claim or counter-claim in its entirety, the award may shock the conscience of the Court and may be set aside, as was done by the Delhi High Court in Campos Brothers Farm v. Matru Bhumi Supply Chain Pvt. Ltd.[9] on the ground of violation of the public policy of India, in that it would then offend a most basic notion of justice in this country.

x. It must always be remembered that poor reasoning, by which a material issue or claim is rejected, can never fall in this class of cases. Also, issues that the tribunal considered essential and has addressed must be given their due weight – it often happens that the tribunal considers a particular issue as essential and answers it, which by implication would mean that the other issue or issues raised have been implicitly rejected.

xi. For example, two parties may both allege that the other is in breach. A finding that one party is in breach, without expressly stating that the other party is not in breach, would amount to a decision on both a claim and a counterclaim, as to which party is in breach. Similarly, after hearing the parties, a certain sum may be awarded as damages and an issue as to interest may not be answered at all. This again may, on the facts of a given case, amount to an implied rejection of the claim for interest.

xii. The most important point to be considered is that the foreign award must be read as a whole, fairly, and without nit-picking. If read as a whole, the said award has addressed the basic issues raised by the parties and has, in substance, decided the claims and counterclaims of the parties, enforcement must follow.

V. Violation of FEMA Rules and fundamental policy of Indian Law (paras 91, 93):

i. Based on the Non-Debt Instrument Rules[10], it was argued that that the transfer of shares from the Karias (appellants), who are persons resident in India, to  Respondent 1, who is a person resident outside India, cannot be less than the valuation of such shares as done by a duly certified Chartered Accountant, Merchant Banker or Cost Accountant, and, as the sale of such shares at a discount of 10% would violate Rule 21(2)(b)(iii), the fundamental policy of Indian Law contained in the aforesaid Rules would be breached; as a result of which the award cannot be enforced.

ii. The Supreme Court upheld the Delhi High Court judgment in Cruz City Mauritius Holdings v. Unitech Limited[11], wherein the Delhi High Court held that a contravention of a provision of law is insufficient to invoke the defence of public policy when it comes to enforcement of a foreign award. Contravention of any provision of an enactment is not synonymous to contravention of fundamental policy of Indian Law. The expression fundamental policy of Indian Law refers to the principles and the legislative policy on which Indian statutes and laws are founded. The expression “fundamental policy” connotes the basic and substratal rationale, values and principles which form the bedrock of laws in our country. The objections to enforcement on the ground of public policy must be such that offend the core values of a member State’s national policy and which it cannot be expected to compromise. The expression “fundamental policy of law” must be interpreted in that perspective and must mean only the fundamental and substratal legislative policy, not a provision of any enactment. The contention that enforcement of the award against Unitech must be refused on the ground that it violates any one or the other provision of FEMA, cannot be accepted; but, any remittance of the money recovered from Unitech in enforcement of the award would necessarily require compliance of regulatory provisions and/or permissions.

iii. The Supreme Court held (paras 91 and 93) that first and foremost, FEMA – unlike FERA – refers to the nation’s policy of managing foreign exchange instead of policing foreign exchange, the policeman being  Reserve Bank of India under FERA. It is important to remember that Section 47 of FERA no longer exists in FEMA, so that transactions that violate FEMA cannot be held to be void. Also, if a particular act violates any provision of FEMA or the Rules framed thereunder, permission of Reserve Bank of India may be obtained post-facto if such violation can be condoned.

iv. Neither the award, nor the agreement being enforced by the award, can, therefore, be held to be of no effect in law. This being the case, a rectifiable breach under FEMA can never be held to be a violation of the fundamental policy of Indian Law. Even assuming that Rule 21 of the Non-Debt Instrument Rules requires that the shares be sold by a resident of India to a non-resident at a sum which shall not be less than the market value of the shares, and a foreign award directs that such shares be sold at a sum less than the market value,  Reserve Bank of India may choose to step in and direct that the aforesaid shares be sold only at the market value and not at the discounted value, or may choose to condone such breach.

v. Further, even if Reserve Bank of India were to take action under FEMA, the non-enforcement of a foreign award on the ground of violation of   FEMA Regulations or Rules would not arise as the award does not become void on that count.

vi. The fundamental policy of Indian Law, as has been held in Renusagar [12](supra), must amount to a breach of some legal principle or legislation which is so basic to Indian Law that it is not susceptible of being compromised. “Fundamental Policy” refers to the core values of India’s public policy as a nation, which may find expression not only in statutes but also time-honoured, hallowed principles which are followed by the Courts. Judged from this point of view, it is clear that resistance to the enforcement of a foreign award cannot be made on this ground.

D. CONCLUSION

11. After considering the facts and pleading, the Supreme Court confirmed the ruling of the sole arbitrator and dismissed the appeals with heavy costs. The Court stated that their jurisdiction under Article 136 of the Constitution is very limited.

12. On a conjoint reading of the objective of Article V of the New York Convention along with the objectives of the Act, the Supreme Court through the present judgment, has ironed the wrinkles under Section 48 of the Act. The Supreme Court took a holistic view by not just limiting its scope of enquiry to the Indian judgments but has also relied on judgments of various other jurisdictions to arrive at a global consensus on various issues involved in challenging the enforcement of a foreign award. The Supreme Court has adopted a balanced approach while dealing with the scope of judicial interference at the time of enforcement of foreign award and exercising its jurisdiction under Article 136 of the Constitution.


*Alumni (2012-2017) of Government Law College, Mumbai, practicing Advocate at High Court at Mumbai and maybe reached out vatsalapant94@gmail.com. The views expressed herein are personal and do not represent views of any organisation. 

[1] Arbitration and Conciliation Act, 1996 

[2] Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York, 1958)

[3] 2020 SCC OnLine SC 177  

[4] Arbitration and Conciliation (Amendment) Act, 2015 

[5] 1994 Supp (1) SCC 644

[6] Ssangyong Engineering & Construction Co. Ltd. v. National Highways Authority of India, (2019) 15 SCC 131 (paras 30 & 43)

[7] [2010] 3 SLR 1 : (2010) SGHC 62

[8] (2019) 15 SCC 131

[9] 2019 SCC OnLine Del 8350

[10] Foreign Exchange Management (Non-debt Instruments) Rules, 2019 

[11] 2017 SCC OnLine Del 7810  

[12] 1994 Supp (1) SCC 644

Op EdsOP. ED.

Introduction:

One of the most sought after remedies under the Arbitration and Conciliation Act, 1996[1] (the Act) is the grant of interim relief under Section 9 of the Act which allows the parties to apply to the court for interim relief before or during the arbitral proceedings, or after an award is passed but before it is enforced. The law of interim reliefs took a great stride under the Act as neither the Arbitration Act of 1940 nor the UNICTRAL Model Law had envisaged granting interim reliefs to a party in a post award scenario. The Act accordingly allows the parties, before executing the award, to apply to the court for securing the proceeds of the arbitral award to protect the decretal amount, so that the award debtor cannot evade the obligations under the award and make the realisation of the award illusory.

The importance of a post award Section 9:

The grant of interim reliefs under Section 9 of the Act, especially in a scenario where the award has been delivered, assumes significance primarily because the Act provides for a statutory period of three months for the award debtor to file a challenge to the award. This created a unique hurdle in the enforcement of the award by the successful award-holder since the mere filing of a Section 34 application would automatically stay the execution of the award, pending the adjudication of the setting aside application.

To remedy such an incongruity in law, the Act, as amended in 2015 removed the concept of an automatic stay on the execution of awards, pending the adjudication of a setting aside application, and allowed award- holders to forthwith move for the execution of the award, even if a Section 34 application was pending before the court. This was deemed essential to ensure that the decree obtained in favour of the award- holder did not remain unsatisfied and be rendered a mere paper decree amidst the rigmarole of the award debtor’s attempts to stall execution of the award. Under the amended Act, an award debtor has to now necessarily apply for a stay of the execution of the arbitral award by the successful award-holder, through a separate application. Therefore, the amendment to the Act created two distinct scenarios where firstly, what was available on a platter under the Act has to be now asked for and secondly, a grant of it can be conditional upon an adjudication of the grounds made out in the stay application [See Rendezvous Sports World v. Board of Cricket Control in India[2], BCCI v. Kochi Cricket Ltd.[3] and Hindustan Construction Company Ltd. v. Union of India[4]]

Accordingly, a post award Section 9 application attains renewed significance because while the amended Act allows for the execution of the award as a money decree pending a Section 34 challenge, it does not cover situations where the 90 day period provided to award debtors to challenge an arbitral award is utilised to alienate its assets with the sole intent of resisting execution of the award. In such a circumstance, even if the successful award-holder moves for the execution of the award upon expiry of the statutory period, he would be prevented from enjoying the fruits of his decree on account of the award debtor’s mala fide conduct. The only remedy available to a successful award-holder to seek interim protection of the award amount in such circumstances therefore remains a post award Section 9 application.

The scope of a post award Section 9: Applying principles of Order 39 strictu sensu?

When it comes to the principles guiding grant of interim relief, there prima facie appears to be a consensus among the courts on applicability of procedural law principles enunciated under the Civil Procedure Code, 1908 (CPC) and the Specific Relief Act, 1963 (SRA) supervising the operation of Section 9, which includes inter alia, prima facie test, balance of convenience and irreparable harm. [See Adhunik Steels Ltd. v. Orissa Manganese and Minerals (P) Ltd.[5]] However, there appears to be a divergence on the issue of the degree to which such principles from the CPC and SRA can be imported in the adjudication of a post award Section 9 application. In any event, it is essential to note that the nature of reliefs in a post award Section 9 application can only be to a limited extent of preservation of the subject-matter of the arbitration agreement or securing the amount in dispute and not for the execution of the award pending the objections against the award. [See Afcons Infrastructure Ltd. v. Board of Trustees of Port of Mumbai.[6]]

In reference to the guidelines that the courts are supposed to follow while granting a post award interim relief, there have been various judgments which have held that a Section 9 court is not duty bound to observe the provisions of CPC strict sensu but have to merely refer to the CPC for guidance on principles governing injunctions on the alienation of assets and deposit of the award amount. The Bombay High Court in Delta Construction Systems Ltd., Hyderabad v. Narmada Cement Company Ltd., Mumbai,[7] held that in case of securing the amount in dispute, all that is required to be established is a case that if interim relief is not granted, the award in favour of a party will become nugatory. Similarly, the Kerala High Court in M. Ashraf v. Kasim V.K.[8], held that a Section 9 court has to necessarily take a liberal approach while granting interim reliefs post award and not be stymied by the application of the CPC in its most rigid sense.

However, the recent judicial trends seem to suggest that depending on the facts and circumstances of each case, the courts are inclined to apply the three–fold test of prima facie case, balance of convenience and irreparable harm and injury enshrined under Order 39 the CPC for grant of temporary injunctions while adjudicating a post award Section 9 application. Reference in this regard may be drawn to two Bombay High Court decisions in Felguera Gruas India Pvt. Ltd v. Tuticorin Coal Terminal Pvt Ltd.[9] (Felguera) and Mahyco Monsanto Biotech (India) Pvt. Ltd. v. Nuziveedu Seeds Ltd.[10], (Monsanto) wherein the Bombay High Court applied the principles of Order 39 CPC in securing the award amount by way of a post award interim relief. In the cases as above, the court merely established the existence of a prima facie case for grant of interim relief (based on the financial position of the award debtor and its conduct with regard to alienation of its assets) and proceeded to grant deposit of the entire arbitral award pending the execution of the award.

Accordingly, evidence of the declining financial position of the award debtor coupled with mala fide conduct in dealing with its assets is essential to make out a case for a post award Section 9. It is important to remember that owing to the limited period for challenge under the Act upon expiry of which an award becomes enforceable, the courts are generally hesitant to grant a post award relief and that too in a circumstance where the challenge to the arbitral award has not been filed yet. However, if a prima facie case can be made out to the court’s satisfaction, and in compliance with the principles governing Order 39 CPC – establishing that the declining financial position of the award debtor and its surreptitious conduct in disposing of its assets would amount to the award being rendered a mere paper decree, the chances of obtaining a deposit or injunction order from the courts would increase manifold.

Recent judicial trends:

Recent pronouncements on the issue can be looked at from two different perspectives:

(a) The grant of post award interim reliefs in situations where a Section 34 challenge has been filed; and

(b) The grant of post award interim reliefs in situations apprehending the filing of a Section 34 challenge by the award debtor.

Analysing the jurisprudential development on the subject, it is crucial to note that the courts generally grant deposit of the entire award amount as and by way of a post award relief under Section 9, and the grant of such relief is usually predicated upon the contumacious conduct of the award debtor and/or its brazen attempts to renege from its payment obligations under the award. The Delhi High Court in Power Mech Projects v. Sepco Electric Power Construction Corporation (Sepco)[11], granted a 100% deposit of the principal amount in the award before hearing the objections to the award filed by the award debtor. This was because in the facts and circumstances of the case, the award debtor had no immoveable assets in India and sought to furnish security for the award amount on the strength of its ongoing projects in India. The Court in Sepco, while negating the award debtor’s arguments held that revenue generated from the ongoing projects cannot be accepted as security against the enforcement of the award and further observed that valuations of machinery and other assets at the project site also cannot be taken as solvent security since the award is to be enforced as a money decree and cannot be secured by moveable assets such as machinery.

In Sampson Maritime Limited v. Hardy Exploration & Production (India) Inc.,[12] (Samson Maritime) even though a Section 34 application was pending in the case, the Madras High Court proceeded to hear the Section 9 application and granted full deposit of the awarded amount. In doing so, the Court observed that an action under Section 9 of the Act, post award, in no manner qualified as enforcing the award in itself and sought to distinguish a post award Section 9 application from an application made under Order 38 Rule 5  CPC. The remedy under Order 38 Rule 5 squarely applies in situations where the attachment of the judgment debtor’s assets is sought before judgment and the rights of the award-holder have not crystallised. Hence, an application under Order 38 Rule 5 needs to necessarily be supported by material averments to establish how the award-holder expects his rights to be defeated by the conduct of the judgment debtor. However, in a post award Section 9 application, the rights of the award-holder have crystallised since he has a decree in his favour. In such a scenario, the Court need not go into the question of the intention of the judgment debtor to delay the execution of the award and the making of a positive case by the award- holder establishing the mala fide intent of the judgment debtor. The Madras High Court held that pending the adjudication of a Section 34 application, the successful award-holder can seek protection under Section 9 post the delivery of the award – not on any apprehended action of the respondent but as a matter of right.

In Candor Gurgaon Two Developers & Projects Pvt. Ltd. v. Srei Infrastructure Finance Ltd.,[13] (Candor) the Calcutta High Court was dealing with a question of a post award Section 9 application by the award- holder, apprehending the filing of a Section 34 application by the judgment debtor. In Candor, the award directed the judgment debtor to make payment of Rs 25 crores within 30 days of the making of the award. However, since no such payments were furnished by the judgment debtor, the Section 9 application was filed seeking protection of the award amount. The Court held that since the judgment debtor had not made any effort to repay the amounts due to the successful award- holder, notwithstanding the fact that the judgment debtor still had time to file its challenge to the award, the award-holder was entitled to the protection of the award amount. Highlighting the scope of a post award Section 9, the Court observed that the protection under Section 9 can be exercised to the extent of protecting the arbitral amount if there exists a real likelihood that the award amount will be disposed of or is at general risk of being rendered nugatory.

Conclusion: Post award Section 9 reliefs – jumping the gun?

At the outset, it is crucial to note that the threshold of maintaining a case for post award relief is extremely high, even when proof of the financial weakness of the award debtor is furnished. The Gujarat High Court in Essar Oil Limited v. United India Insurance Company Limited,[14] has categorically observed that mere proof of financial instability would not in itself be sufficient to maintain a case for post award reliefs. It held that if there are extenuating circumstances showing that the conduct of the award debtor is such that it leads to the inescapable conclusion that they are likely to dispose of the property with a view to defeat the decree/awards, the Court may in the exercise of powers under Section 9(ii)(b) of the Act, pass an order of protecting the award amount. Similarly, since the statute provides a 90-day period for the award debtor to lodge his challenge to the award, the enforcement mechanism kicks in immediately after the expiry of the 90 days. Therefore, the burden on the award-holder is very high to satisfy to the court that pending the filing of the challenge to the award (and even in cases where such challenge is filed) and before the execution of the award, the circumstances are such that warrant grant of interim protection to prevent the award from becoming a paper decree.

However, should a situation arise which makes it evident that the award debtor is encumbering its assets to defeat the award, Monsanto and Felguera may be used as a guide to understanding the factors that contribute towards demonstrating the commercial insolvency of the award debtor[15]. Since the Act, as amended in 2015 does away with the concept of the automatic stay, it would be prudent to initiate execution proceedings upon the expiry of the 90 day period lest there exist prima facie exigencies which make it evident that there exists a likelihood of the award being defeated.

***


*Final year student of Government Law College, Mumbai

** Associate (Dispute Resolution) Vashi and Vashi, Advocates and Solicitors, Mumbai

[1] Arbitration and Conciliation Act, 1996 

[2] 2016 SCC OnLine Bom 6064  

[3] (2018) 6 SCC 287  

[4] 2019 SCC OnLine SC 1520 

[5] (2007) 7 SCC 125

[6] 2013 SCC OnLine Bom 1946 

[7] 2001 SCC OnLine Bom 630 

[8] 2018 SCC OnLine Ker 4913 

[9] Felguera Gruas India Pvt. Ltd. v. Tuticorin Coal Terminal Pvt. Ltd., Commercial Arbitration Petition No. 1403 of 2019,  order dated  20-11- 2019.

[10]. Mahyco Monsanto Biotech v. Nuziveedu Seeds Ltd.,Commercial Arbitration Petition No. 312 of 2019, judgment dated  6-3- 2019.

[11] Power Mech Projects v. Sepco Electric Power Construction Corporation, Judgment dated F 17-2- 2020, in O.M.P. (I.) (COMM.) 523/2017

[12] 2016 SCC OnLine Mad 9122 

[13] 2018 SCC OnLine Cal 2430

[14] 2014 SCC OnLine Guj 6737 

[15] Supra Note 10, at para 19

Op EdsOP. ED.

Background

The statute which is applicable for the enforcement of foreign arbitral award in India is the Arbitration and Conciliation Act, 1996 [“the Act”]. India being a signatory to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, 1958[1] and the Geneva Convention on the Execution of Foreign Arbitral Awards, 1927. The Supreme Court of India has dealt with two opposing positions on public policy, namely – the narrow view where the Courts do not create new heads of public policy and the broad view where a certain degree of judicial review is allowed. Indian position on the enforcement of foreign arbitral awards is in line with the international standards. In  Shri Lal Mahal Ltd. v. Progetto Grano Spa[2], a three-Judge Bench of the Supreme Court held that review of a foreign arbitral award on its merits is untenable as it is not permitted under the New York Convention. The judgment clearly exposes the difference in the scope of inquiry during the annulment of a domestic award and the enforcement of a foreign award. It stated that the expression ‘public policy of India’ under Section 48 of the Act should be construed narrowly; whereas the same could be given a wider meaning under Section 34 of the Act.

In its landmark decision in Renusagar Power Co. Ltd. v. General Electric Co.[3] the Supreme Court addressed this question under Section 7(1)(b)(ii) of the Foreign Awards (Recognition & Enforcement) Act, 1961[4] and concluded that the public policy in an enforcement setting shall include: (i) fundamental policy of Indian law, (ii) the interests of India; or (iii) justice and morality. This clearly was a narrow interpretation of international public policy reflecting on the pro-enforcement bias of the New York Convention.

However, the Supreme Court in two significant judgments, namely, Oil and Natural Gas Corporation v. Saw Pipes Ltd. [5] and Venture Global Engineering v. Satyam Computer Services Ltd.[6], deviated from this precedent by giving an undesired and expansive interpretation to the public policy exception. In Saw Pipes, while dealing with a domestic award, the Court held that the award could be set aside on the ground that the tribunal violated the Indian Law and eventually, added “patent illegality” as an additional ground to  Renusagar[7] formula. In Venture Global case[8], the Court relying on the this ratio and of Bhatia case[9] annulled a foreign arbitral award based on pure domestic notions of public policy, and thereby afforded India the image of an arbitration-hostile jurisdiction. Therefore, the underlying fact is that, although both the notions domestic and international comes under the purview of national public policy, the application of the domestic public policy must be limited to domestic award.

The limited scope of public policy defence available under Article V of the New York Convention does not permit the judicial review of the merits of a foreign arbitral award. The Supreme Court in Shri Lal Mahal Ltd. v. Progetto Grano Spa[10] overruled the wider view as held in Phulchand Exports Ltd.[11], vide para 30 of its judgment:

“It is true that in Phulchand Exports[12], a two-Judge Bench of this Court speaking through one of us (R.M. Lodha, J.) accepted the submission made on behalf of the appellant therein that the meaning given to the expression “public policy of India” in Section 34 in Saw Pipes must be applied to the same expression occurring in Section 48(2)(b) of the 1996 Act. However, in what we have discussed above it must be held that the statement in para 16 of the Report that the expression “public policy of India used in Section 48(2)(b) has to be given a wider meaning and the award could be set aside, if it is patently illegal” does not lay down correct law and is overruled.”

Recently, in Vijay Karia v. Prysmian Cavi E SistemiSrl [14] the Supreme Court held that while considering grounds for setting aside a foreign award, the Court must warrant minimal interference. While dismissing the petition under Article 136 of the Constitution elucidated the following:

1. Enforcement of a foreign award may only be refused under Section 48 of the Act if the party resisting enforcement furnished to the court proof that any of the stated grounds have been made to resist enforcement and the discretion to do so lies with the Court. In light of the above, the Court enforcing a foreign award may perform a “balancing act“.

2. Section 48(1)(b) was to be interpreted in the context and colour of the words preceding the phrase “was otherwise unable to present his case”.

3. A foreign award must only be set aside if it were to overtake the most basic notion of justice.

“The important point to be considered is that the foreign award must be read as a whole, fairly, and without nit-picking. If read as a whole, the said award has addressed the basic issues raised by the parties and has, in substance, decided the claims and counter-claims of the parties, enforcement must follow.”

4. The following will not fall under the parameters of any grounds mentioned in Section 48 of the Arbitration Act.

    1. Any ground which appears to be an after-thought and has not been taken before the learned arbitrator in light of the given circumstances.
    2. If it is apparent on the face of record that no adverse inference has been drawn by the arbitrator and there is no breach of natural justice.
    3. If critical evidence has not been taken into account or admissions have not been ignored, the perversity of the award cannot be challenged on the said ground.
    4. Valuation on the basis of merits is for the arbitrator to determine and falls outside the purview of any grounds laid down in Section 48.
    5. Interpretation of an agreement by an arbitrator being perverse is not a ground that can be made out under any of the grounds contained in Section 48(1)(b).
    6. Pleas going to the unfairness of the conclusions reached by the award are foray into the merits of the matter, and which is plainly proscribed by Section 48 of the Arbitration Act read with the New York Convention.

The Court also observed that its jurisdiction under Article 136 is limited in scope and if merits have already been dealt with exhaustively in the awards and the High Court, the Supreme Court’s interference is unwarranted.

GROUNDS FOR REFUSAL TO RECOGNITION

The grounds in the Indian Law for refusing recognition are similar to the grounds provided under Article V of the New York Convention[15]. Thus, the grounds for refusing recognition and enforcement of a foreign award under Section 48(1)[16] of the Act are:

  • The parties referred to in Section 44[17] of the Act are under some incapacity according to the law applicable to them, or the agreement is void according the law to which the parties have subjected to, or the award is deferred or set aside by the competent authority the country in which the award was made; or
  • The party against whom the award is invoked was not given proper notice of the appointment of the arbitral tribunal or wasn’t able to present his/her case during the proceedings; or
  • The award is rendered on issues that were not contemplated at the time of signing of the agreement; or
  • The arbitral tribunal was not composed in accordance with the agreement with the agreement of the parties, or not in accordance with the law of the country where the arbitration took place; or
  • The award has not yet become binding on parties, or has been set aside or suspended by the competent authority of the country in which the award was made. It may be reasonable to adjourn enforcement proceedings if a challenge has been made by an award debtor in the country where the award has been made.[18] However, courts may order for the deposition of security while the execution proceedings are deferred.

A reading of Section?48(1)(e) of the Act read with Section?48(3) of the Act implies that the ‘competent authority’ in Section?48(3) is the authority of the country where the award has been made, and not the executing court in India. Further, under Section 48(2) of the Act, enforcement of a foreign award may also be refused if the court finds that:

  • The subject-matter is not arbitrable under the law of India.
  • The enforcement would be contrary to the public policy of India.

The amendments to the Act[19] have clarified that an award would be considered to be in conflict with the public policy of India, only if:

  • The award was tainted by fraud or corruption or was in violation of Section 75 or Section 81 of the  Evidence Act, 1872;
  • It is in violation with the fundamental policy of Indian law; or
  • It is in conflict with the most rudimentary notions of morality or justice.

FOREIGN AWARD NOT ENFORCEABLE IF CONTRACT VIOLATES GOVERNMENT POLICY, RULES

In a recent case, the Supreme Court in National Agricultural Cooperative Marketing Federation of India v. Alimenta S.A[20] held that a foreign award is not enforceable, on the basis that the transaction contemplated would have violated the Indian laws and was contrary to the public policy of India.

FACTUAL MATRIX

National Agricultural Cooperative Marketing Federation of India (NAFED), the appellant entered into a contract on 12.01.1980 with Alimenta S.A. (respondent) for supply of 5000 metric tonnes (“mt”) of India HPS groundnut (“commodity”). NAFED was able to supply only 1900 mt of the commodity due to some unforeseen circumstances. The parties entered into a first and second addendum on 18.08.1980 and 8.10.1980 respectively due to occurrence of certain anomaly in the US. The remaining 3100 mt was supposed to be delivered at an inflated price. NAFED was a canalizing agency for the Government of India (“GOI”). Prior approval was needed by NAFED from the Government of India for exporting the commodity which is to be C/F to the next year from the previous year.

NAFED unaware of the fact that Government of India’s approval was needed, entered into a new contract for the year of 1980-81. Subsequently NAFED was denied the permission to export under the new quota of the GOI. Alimenta approached Federation of Oil, Seeds, and Fats Association Ltd. (“FOFSA”) and invoked the arbitration clause in the agreement.  FOFSA asked NAFED to appoint their arbitrator in 21 days as Alimenta had appointed their arbitrator. NAFED filed for a stay on the proceeding in the Delhi High Court, who granted the stay on arbitration proceeding. FOFSA with a telex informed the High Court that they had no jurisdiction to grant a stay. FOFSA then moved on with the proceeding and appointed an arbitrator for NAFED. Following the appointment NAFED moved to remove the arbitrator as they had been stripped of the opportunity to appoint an arbitrator in light of stay of the proceeding on 10.01.1989 in which they contended the appointment was manifestly arbitrary; meanwhile Alimenta filed their written submissions on 19.06.1989. On the basis of these submissions FOFSA passed an award of USD 4,681,000 with an interest of 10.5% per annum from 13.02.1981 to the date of the award. NAFED moved to the Board of Appeal which denied them the opportunity of their choice of counsel and passed an award increasing the interest rate to 11.25% instead of 10.5%. Alimenta filed a petition for enforcement of the said award at the High Court. The High Court after hearing both the sides held the award to be enforceable.

On 24.11.2010 NAFED filed an appeal before the Supreme Court for the case to be adjudicated on merits. 

ISSUES BEFORE THE SUPREME COURT

In the light of above contentions raised by respective parties, the Supreme Court was called upon to answer three questions:

  • Whether NAFED was unable to comply with the contractual obligation to export groundnut due to the Government’s refusal?
  • Whether NAFED could have been held liable for breach of contract to pay damages particularly in view of Clause 14 of the agreement?
  • Whether enforcement of award is against the public policy of India?

FINDINGS

1. First issue:

The Bench considered the judgments decided by this Court in Satyabrata Ghose v. Mugneeram Bangur & Co. [21] and Delhi Development Authority v. Kenneth Builders & Developers Pvt. Ltd.[22]  which discussed upon the doctrine of frustration being a positive doctrine which doesn’t fall under Section 56 of the Contract Act rather falls under Section 32 of the Contract Act which deals with enforcement of contract contingent on an event happening.

Relying on these judgments, the Court observed that Clause 14 (supra) of the agreement which clearly stipulates the criteria on the basis of which the enforcement of the contract will come to an end and will release both the parties from their obligations. In this instance it was the failure of NAFED to supply the commodity due to Government of India’s new quota, the validity of which was looked at length and on the basis of the evidence provided the Court held that NAFED was unable to fulfil its contractual ability due to unforeseen circumstances which as per Clause 14 released them of the obligation.

2. Second issue: 

Clause 14 of the contract which was termed as prohibition listed out the possibilities under which a party would have been considered discharged from their contractual obligations. The Supreme Court held in a judgment of Ram Kumar v. P.C Roy & Co (India) Ltd.[23] in which by the virtue of limitation placed by the Government of India there was a failure to supply of wagons as per the contract. The Court in the said case held that the contract became void and parties were relieved of their liabilities. In the current case, using Ram Kumar case as reference the Supreme Court held that NAFED was not liable to pay any damages under Clause 14 of the contract.

3. Third issue:

Relying on the judgment of Renusagar[24] in which the meaning of expression of ‘public policy’ under Section 7(1)(b)(ii)[25] of the Foreign Awards Act, 1961 came into question. A test was laid down for determining the enforcement of foreign award in relation to public policy of India as to under what circumstances will it be held in violation of public policy and will not be enforceable in the county. The award would be held contrary on the following grounds:

  1. Fundamental policy of Indian Law,
  2. The interest of India,
  3. Justice and morality.

Even referring to the judgment of Ssangyong Engineering & Construction Co. Ltd v. National Highways Authority of India[26] which also talked upon public policy which reiterated the test laid down in Renusagar[27]. This Court in the judgment held that the award could not be said to be enforceable on the basis of the test laid down in the aforementioned case as its enforcement would be against the fundamental policy of Indian law and the basic concept of justice. Hence, the award was held unenforceable. The High Court was said to have erred in law in holding the award to be enforceable. Hence, NAFED was held to be not liable to pay any damages under the foreign award.

CONCLUSION

The award was ex facie illegal as per the Supreme Court, and that no export could have been undertaken without the permission of the Government of India. The export would have violated the law and hence the enforcement of the award was against the public policy of India. On the happening of Clause 14 of the agreement, both the parties stood discharged of their obligations and keeping these findings in mind, the Court held that NAFED could not be held liable to pay damages under foreign award.


* Final year BA LLB student, Lloyd Law College, Greater Noida.

** Second year LLB student, Lloyd Law College, Greater Noida.

[1] Convention on the Recognition and Enforcement of Foreign Arbitral Awards, 1958 (hereinafter called the New York Convention). 

[2] (2014) 2 SCC 433 

[3] 1994 Supp (1) SCC 644

[4] Foreign Awards (Recognition & Enforcement) Act, 1961 

[5] (2003) 5 SCC 705

[6] (2010) 8 SCC 660 

[7] 1994 Supp (1) SCC 644

[8] Venture Global Engineering v. Satyam Computer Services Ltd., (2010) 8 SCC 660

[9] Bhatia International v. Bulk Trading S.A,  (2002) 4 SCC 105 

[10] (2014) 2 SCC 433

[11] Phulchand Exports Ltd. v. O.O.O Patriot,  (2011) 10 SCC 300 

[12] Ibid.

[13] Oil and Natural Gas Corporation v. Saw Pipes Ltd., (2003) 5 SCC 705

[14] 2020 SCC OnLine SC 177 

[15] Supra Note 1.

[16] 48 Conditions for enforcement of foreign awards. — (1) 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—

(a) 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; or

(b) 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; or

(c) 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:

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

(d) the composition of the arbitral authority or the arbitral procedure was not in accordance with the agreement of the parties, or, failing such agreement, was not in accordance with the law of the country where the arbitration took place; or

(e) the award has not yet become binding on the parties, or has been set aside or suspended by a competent authority of the country in which, or under the law of which, that award was made.

[17] 44. Definition.—In this Chapter, unless the context otherwise requires, “foreign award” means an arbitral award on differences between persons arising out of legal relationships, whether contractual or not, considered as commercial under the law in force in India, made on or after the 11th day of October, 1960—

(a) in pursuance of an agreement in writing for arbitration to which the Convention set forth in the First Schedule applies, and

(b) in one of such territories as the Central Government, being satisfied that reciprocal provisions have been made may, by notification in the Official Gazette, declare to be territories to which the said Convention applies.

[18]Naval Gent Maritime Ltd. v. Shivnath Rai Harnarain (I) Ltd.  (2009) SCC OnLine Del 2961 

[19] The Arbitration and Conciliation (Amendment) Act, 2015.

    22. Amendment of Section 48.— In Section 48 of the principal Act, for the Explanation to sub-section (2), the following Explanations shall be substituted, namely—

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 Section 75 or Section 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.”.

[20] 2020 SCC OnLine SC 381

[21] 1954 SCR 310

[22] (2016) 13 SCC 561

[23] 1949 SCC OnLine Cal 48

[24] 1994 Supp (1) SCC 644

[25] 7. Conditions for enforcement of foreign awards.—(1) A foreign award may not be enforced under this Act—

*              *            *

(b) if the Court dealing with the case is satisfied that—

(i) the subject-matter of the difference is not capable of settlement by arbitration under the law of India; or

(ii) the enforcement of the award will be contrary to the public policy.

[27] 1994 Supp (1) SCC 644