Supreme Court: In an issue revolving around the importance of the words “final and binding” in an arbitration agreement, the bench of Surya Kant* and Abhay S Oka, JJ has held that when the arbitration agreement luminously discloses the intention and obligation of the parties to be bound by the decision of the tribunal, the lack of express mention of the words “final and binding” does not mean that a valid arbitration clause does not exist.
The Court was deciding the case relating to a Development Agreement. When a dispute arose between the parties, the Appellant invoked the arbitration clause. Though the notice was duly served, the Respondents failed to respond to it, leading to the Appellant filing an application under Section 11 of the Arbitration and Conciliation Act, 1996 before the Bombay High Court.
However, the Respondents contended that the contract lacked the express wording, like “the parties agreeing in writing to be bound by the decision of an arbitral tribunal, necessary for it to be considered a valid and binding agreement to refer the disputes to arbitration.
The High Court agreed with the Respondent and held that the Appellant’s application under section 11 was not maintainable for want of a valid arbitration clause.
Disagreeing with the observation of the High Court, the Supreme Court held that the deficiency of words in agreement which otherwise fortifies the intention of the parties to arbitrate their disputes, cannot legitimise the annulment of arbitration clause.
The Court noticed that the subject-clause, in the case at hand, luminously discloses the intention and obligation of the parties to be bound by the decision of the tribunal, even though the words “final and binding” are not expressly incorporated therein. Going through the other parts of the arbitration agreement, the Court noticed that the intention of the parties was surely to refer the disputes to arbitration. Hence, in the absence of specific exclusion of any of the attributes of an arbitration agreement, the Respondents’ plea of non- existence of a valid arbitration clause, is seemingly an afterthought.
The Court observed,
“Even if we were to assume that the subject-clause lacks certain essential characteristics of arbitration like “final and binding” nature of the award, the parties have evinced clear intention to refer the dispute to arbitration and abide by the decision of the tribunal. The party autonomy to this effect, therefore, deserves to be protected.”
The Court stressed on the fact that UNCITRAL Model Law on International Commercial Arbitration, 1985 from which the Arbitration and Conciliation Act, 1996 originated, envisages minimal supervisory role by courts. When Section 7 or any other provisions of the Act do not stipulate any particular form or requirements, it would not be appropriate for a court to gratuitously add impediments and desist from upholding the validity of an arbitration agreement.
It was, hence, observed that it is imperative upon the courts to give greater emphasis to the substance of the clause, predicated upon the evident intent and objectives of the parties to choose a specific form of dispute resolution to manage conflicts between them. The intention of the parties that flows from the substance of the Agreement to resolve their dispute by arbitration are to be given due weightage.
[Babanrao Rajaram Pund v. Samarth Builders & Developers, 2022 SCC OnLine SC 1165, decided on 07.09.2022]
*Judgment by: Justice Surya Kant
Supreme Court: The 3-judge bench of Dr DY Chandrachud*, Surya Kant and Sanjiv Khanna*, JJ has held that arbitrators do not have the power to unilaterally issue binding and enforceable orders determining their own fees. While Chandrachud, J wrote the majority opinion for Surya Kant, J and himself, Khanna, J wrote a separate opinion where he agreed with the majority opinion of certain parts but disagreed on some.
Unilateral determination of fees by Arbitrators
The bench has held that a unilateral determination of fees violates the principles of party autonomy and the doctrine of the prohibition of in rem suam decisions, i.e., the arbitrators cannot be a judge of their own private claim against the parties regarding their remuneration. However, the arbitral tribunal has the discretion to apportion the costs (including arbitrators’ fee and expenses) between the parties in terms of Section 31(8) and Section 31A of the Arbitration and Conciliation Act, 1996 and also demand a deposit (advance on costs) in accordance with Section 38 of the Arbitration Act.
“If while fixing costs or deposits, the arbitral tribunal makes any finding relating to arbitrators‘ fees (in the absence of an agreement between the parties and arbitrators), it cannot be enforced in favour of the arbitrators. The arbitral tribunal can only exercise a lien over the delivery of arbitral award if the payment to it remains outstanding under Section 39(1). The party can approach the court to review the fees demanded by the arbitrators if it believes the fees are unreasonable under Section 39(2).”
Directives to govern proceedings in ad hoc arbitrations
While holding that the fees of the arbitrators must be fixed at the inception to avoid unnecessary litigation and conflicts between the parties and the arbitrators at a later stage, the Court issued the following directives to govern proceedings in ad hoc arbitrations:
- Upon the constitution of the arbitral tribunal, the parties and the arbitral tribunal shall hold preliminary hearings with a maximum cap of four hearings amongst themselves to finalise the terms of reference of the arbitral tribunal. The arbitral tribunal must set out the components of its fee in the Terms of Reference which would serve as a tripartite agreement between the parties and the arbitral tribunal.
- In cases where the arbitrator(s) are appointed by parties in the manner set out in the arbitration agreement, the fees payable to the arbitrators would be in accordance with the arbitration agreement. However, if the arbitral tribunal considers that the fee stipulated in the arbitration agreement is unacceptable, the fee proposed by the arbitral tribunal must be indicated with clarity in the course of the preliminary hearings in accordance with these directives. In the preliminary hearings, if all the parties and the arbitral tribunal agree to a revised fee, then that fee would be payable to the arbitrator(s). However, if any of the parties raises an objection to the fee proposed by the arbitrator(s) and no consensus can be arrived at between such a party and the tribunal or a member of the tribunal, then the tribunal or the member of the tribunal should decline the assignment.
- Once the Terms of Reference have been finalised and issued, it would not be open for the arbitral tribunal to vary either the fee fixed or the heads under which the fee may be charged.
- The parties and the arbitral tribunal may make a carve out in the Terms of Reference during the preliminary hearings that the fee fixed therein may be revised upon completion of a specific number of sittings. The quantum of revision and the stage at which such revision would take place must be clearly specified. The parties and the arbitral tribunal may hold another meeting at the stage specified for revision to ascertain the additional number of sittings that may be required for the final adjudication of the dispute which number may then be incorporated in the Terms of Reference as an additional term.
- In cases where the arbitrator(s) are appointed by the Court, the order of the Court should expressly stipulate the fee that arbitral tribunal would be entitled to charge. However, where the Court leaves this determination to the arbitral tribunal in its appointment order, the arbitral tribunal and the parties should agree upon the Terms of Reference as specified in the manner set out in draft practice direction (1) above.
- There can be no unilateral deviation from the Terms of Reference. The Terms of Reference being a tripartite agreement between the parties and the arbitral tribunal, any amendments, revisions, additions or modifications may only be made to them with the consent of the parties.
- All High Courts shall frame the rules governing arbitrators’ fees for the purposes of Section 11(14) of the Arbitration and Conciliation Act, 1996.
- The fee structure contained in the Fourth Schedule, revised in the year 2016, cannot be static and deserves to be revised periodically. The Union of India shall, hence, suitably modify the fee structure contained in the Fourth Schedule and continue to do so at least once in a period of three years.
The Court also made clear that when one or both parties, or the parties and the arbitral tribunal are unable to reach a consensus, it is open to the arbitral tribunal to charge the fee as stipulated in the Fourth Schedule, which we would observe is the model fee schedule and can be treated as binding on all. Consequently, when an arbitral tribunal fixes the fee in terms of the Fourth Schedule, the parties should not be permitted to object the fee fixation. It is the default fee, which can be changed by mutual consensus and not otherwise.
Some Clarifications on the Fourth Schedule of the Arbitration Act
- The term “sum in dispute” in the Fourth Schedule of the Arbitration Act refers to the sum in dispute in a claim and counter-claim separately, and not cumulatively. Consequently, arbitrators shall be entitled to charge a separate fee for the claim and the counter-claim in an ad hoc arbitration proceeding, and the fee ceiling contained in the Fourth Schedule will separately apply to both, when the fee structure of the Fourth schedule has been made applicable to the ad hoc arbitration;
- The ceiling of Rs 30,00,000 in the entry at Serial No 6 of the Fourth Schedule is applicable to the sum of the base amount (of Rs 19,87,500) and the variable amount over and above it. Consequently, the highest fee payable shall be Rs 30,00,000; and
- This ceiling is applicable to each individual arbitrator, and not the arbitral tribunal as a whole, where it consists of three or more arbitrators. Of course, a sole arbitrator shall be paid 25 per cent over and above this amount in accordance with the Note to the Fourth Schedule.
Khanna, J’s opinion
Khanna, J agreed with the majority opinion on the following points”
(a) party autonomy and arbitration agreement are the foundation of the arbitral process, and therefore, when the parties fix the fee payable to the arbitral tribunal, the law does not permit the arbitral tribunal to derogate and ask for additional or higher fee;
(b) where the court while appointing an arbitrator fixes the fee, the arbitral tribunal cannot ask for supplementary or higher fee; and
(c) in both cases, the fee payable to the arbitral tribunal may be enhanced either by a written agreement between the parties or by a court order.
He, however, disagreed on the point that in the absence of any agreement between the parties, or the parties and the arbitral tribunal, or a court order fixing the fee, the arbitral tribunal is not entitled to fix the fee. He opined that by the implied terms of the contract and as per the provisions of the Arbitration Act , an arbitral tribunal can fix a reasonable fee, which an aggrieved party, who is not a signatory to the written agreement, can question under sub-section (3) of Section 39 of the Arbitration Act during the pendency of the arbitration proceedings, or in case the arbitral tribunal claims lien on the award in terms of sub-section (2) to Section 39 of the Arbitration Act.
“In my opinion, arbitrator’s fee, being a component of cost, can be fixed by the arbitral tribunal when it is not already predetermined by way of an agreement between the parties, or by a court order. This is because the arbitral tribunal has the power to fix and direct the parties to make payment of deposits in advance and during the course of the arbitration proceedings, subject to the arbitral tribunal rendering an account on termination of the arbitration proceedings.”
On the argument that the word ‘cost’, it is argued, is different from the arbitrator’s fee and therefore, the arbitral tribunal is not competent or authorised to fix its own fee on the principle of nemo judex in causa sua, that is, ‘no one should be judge in their own cause’, Khanna, J explained that,
“The principle would apply where the parties have fixed the fee payable to the arbitral tribunal, either as a term in the arbitration agreement or otherwise by an agreement, either before or after the appointment of the arbitral tribunal. This principle will apply equally where the court fixes the fee as a term of appointment. However, this principle will have no application where the parties or the court has left it to the arbitral tribunal to fix its own fee.”
Hence, when the arbitration agreement is silent and the parties have not agreed on the quantum of fee payable to the arbitral tribunal, or the court order does not fix the fee, the arbitral tribunal has the right and power to fix its own fee.
It was further explained that the pre-amended sub-section (8) to Section 31 and post-amendment Section 31A and Section 38 of the Arbitration Act, use the expression ‘costs’, albeit they also refer to fee and expenses of the arbitrator/tribunal. The sections are, therefore, comprehensive and all-embracing provisions that equally empower and authorise the arbitral tribunal to fix the fee in the absence of any agreement between the parties or a court order fixing the fee payable to the arbitral tribunal. Any other interpretation would make the Arbitration Act unworkable and Sections 31A, 38 and 39 superfluous.
He also observed that arbitral tribunals, since time immemorial, have been fixing arbitration fee, and the legislature has not intervened or barred them from doing so even by the 2016 Amendment. Additionally, there is no provision in the Arbitration Act which states that the parties can move the court for fixation of fee of the arbitral tribunal when the arbitration agreement is silent or the parties are unable to agree on the quantum of fee or where the court, while making reference, has not fixed the fee and has left it to the arbitral tribunal to decide upon its own fee. Hence, to hold to the contrary would create chaos and invalidate a number of orders passed by the High Courts and even this Court, which leave it open for the arbitral tribunal to fix its own fee.
He, however, agreed with the majority opinion of the point that when an arbitral tribunal, even in the absence of consent of the parties, fixes the fee in terms of the Fourth Schedule, the parties should not be permitted to object the fee fixation. The Fourth Schedule is the default fee, declared by the legislature as fair and reasonable, which can be changed by mutual consensus, and not otherwise. Further, post the enforcement of the Arbitration Amendment Act, 2019 vide Act 33 of 2019 on 30th August 2019, and insertion of subsection (3A) to Section 11, the proviso to the sub-section states that the fee prescribed in the Fourth Schedule is mandatory and applies to all arbitrations including ad hoc arbitrations, albeit in case of institutional arbitrations, as per sub-section (14) to Section 11 of the A&C Act, the fee fixed by the institution “subject to the rates specified in the Fourth Schedule” would be payable.
[ONGC v. Afcons Gunanusa JV, 2022 SCC OnLine SC 1122, decided on 30.08.2022]
*Judgment by: Justice Dr DY Chandrachud (Majority) and Justice Sanjiv Khanna (Partial dissent)
For petitioners: AG KK Venugopal and SG Mr Tushar Mehta
For respondents: Senior Advocate Dr Abhishek Manu Singhvi
For Intervenors: Advocates Manu Sheshadri and K. Parmeshwar
Amicus Curiae: Senior Advocate Huzefa Ahmadi
Calcutta High Court: While deciding a review petition, Debangsu Basak, J. held that the court while exercising powers under Section 11 of the Arbitration and Conciliation Act, 1996 cannot substitute arbitration agreement with conduct of parties.
Facts of the Case
The respondent filed an application under Section 11 of the Arbitration and Conciliation Act, 1996 for the appointment of an arbitrator after a dispute arose between the parties regarding the execution of the work as per Clause 13 of the work order issued by the applicant in favor of respondent.
On the direction of the Supreme Court, the applicant filed a review petition as he could not place relevant judgement before the High Court when the impugned order was passed for which he filed Special Leave Petition before the Supreme Court.
Contention of the Parties
The Applicant contended that there was no arbitration agreement between the parties and merely because the applicant did not dispute the same at the relevant stage, the Court couldn't have appointed the arbitrator.
The respondent contended that since the applicant did not dispute the arbitration agreement in its pleadings, therefore, it was a consent order, and it cannot be allowed to take a different stand now. Moreover, the applicant has submitted to the jurisdiction of the Arbitration Tribunal as he filed the counter claim and also, filed an application under Section 16 of the Arbitration and Conciliation Act, 1996.
The respondent also contended that if there is a dispute regarding the existence of arbitration agreement, the same shall be determined by the Arbitration Tribunal.
Observation and Analysis:
The Court observed that as per Clause 13, the option of arbitration was only available to government enterprises and since the respondent is not a government enterprise, it cannot avail the same remedy.
Relying on Pravin Electricals (P) Ltd. v. Galaxy Infra and Engineering (P) Ltd., (2021) 5 SCC 671, the Court held that “…the fundamental basis for referring the parties to arbitration being an arbitration agreement in writing between them, never existed between the parties for the applicant herein to waive or acquiesce any of its rights.”
The Court also observed that the Court while exercising powers under Section 11 of the Arbitration and Conciliation Act, 1996 is bound to examine the existence of the arbitration agreement and if it is not possible for the court “to weed out manifestly and ex-facie non-existent and invalid arbitration agreements and non-arbitrable disputes” then only it can refer the issue related to existence of arbitration agreement to the arbitrator for determination as a preliminary issue.
The Court held that in absence of the agreement, the Court cannot refer the parties to arbitration merely because the respondent did not raise objections.
[Eastern Coalfields Ltd. v. RREPL-KIPL (JV), 2022 SCC OnLine Cal 2350]
*Ritu Singh, Editorial Assistant has put this report together.
Rajasthan High Court: Ashok Kumar Gaur, J. found that the writ petition by the petitioner lacks merit and dismissed it stating that no award can be remitted back to the arbitrator where there are no findings on the contentious issues of the award.
The petitioner filed a writ petition challenging the order passed by the commercial court wherein the application filed under Section 34(4) of the Arbitration and Conciliation Act, 1996 (‘Act of 1996') was dismissed. The arbitral award of an earlier case was challenged by the respondent under Section 34 of the Act of 1996 in the commercial court. The petitioner moved an application under Section 34(4) of the Act of 1996 to adjourn the proceedings in the application filed by the respondent and asked to give an opportunity to the Arbitral Tribunal to resume the arbitral proceedings or to take such other action as in the opinion of the Arbitral Tribunal was required to eliminate the grounds for setting aside the arbitral award.
The main grounds raised by the petitioner in the application filed are as under:
The award of the Arbitral Tribunal omitted the adjudication on every issue to give findings on the issue separately.
Omitted to explain the words where “bare minimum principles of natural justice” and in “hyper technical ground” while setting aside the impugned termination.
Omitted the reasons for providing INR Rs.4,80,00,000/- against loss of business, reputation & goodwill and omitted to assign explanation for setting aside the counter claim of the respondent-applicant in the appeal.
The Arbitral Tribunal was required to be given an opportunity to eliminate the grounds for setting aside the award.
The bare perusal of the award showed that findings do not discuss and give the reasoning as to why the principles of natural justice were not followed and why the termination of the order was termed as hyper technical ground.
All the conditions as per the law laid down by Supreme Court in , were fulfilled by the petitioner by moving an application and as such the court below could not have dismissed the application on the reasons assigned in the impugned order.
As per law laid down in ‘I-pay case', (2022) 3 SCC 121, the discretion vested with the Court for remitting the matter to the Arbitral Tribunal ought to have been exercised and on bare reading of the award if there is any inadequate reasoning or certain gaps in the reasoning are required to be filled, if such application is filed, then it needs to be allowed.
The points raised by the Respondent were as follows-
The Court does not need to interfere by allowing a writ petition under Article 227 of the Constitution. If there is an inherent lack of jurisdiction, then only the Court under Article 227 of the Constitution of India can exercise the jurisdiction.
The present writ petition filed by the petitioner is not maintainable and proper remedy for the petitioner was to either file an appeal under Section 37 of the Act of 1996 or to take recourse under Section 13 of the Commercial Courts Act, 2015.
In view of the judgment passed by the Supreme Court in ‘I-pay case' (supra), the writ petition filed by the petitioner is liable to be dismissed.
The reliance placed by counsel for the petitioner on the judgments have all been considered by the Supreme Court which has found that all these judgments were not of any assistance to explain the scope of Section 34 (4) of the Act of 1996.
The scope of Section 34 (4), Act of 1996 has come to the conclusion that on application being filed under Section 34 (4), Act of 1996, it is always not obligatory for the Court to remit the matter to the Arbitral Tribunal and discretionary power under Section 34 (4), Act of 1996 is to be exercised where there is inadequate reasoning or to fill up the gaps in the reasoning in support of findings, which are already recorded in the award.
Under the guise of additional reasons and filling up the gaps in the reasoning, no award can be remitted to the Arbitrator where there are no findings on the contentious issues in the award.
The Supreme Court considered the scope of Section 34 (4) of the Act of 1996 in the case of I-Pay Clearing Services Private Limited v. ICICI Bank Limited (2022) 3 SCC 121 wherein it was observed
“19. The quintessence for exercising power under Section 34(4) of the Act is to enable the Tribunal to take such measures which can eliminate the grounds for setting aside the arbitral award, by curing the defects in the award.”
“21. Further, Section 34(4) of the Act itself makes it clear that it is the discretion vested with the Court for remitting the matter to Arbitral Tribunal to give an opportunity to resume the proceedings or not. The words “where it is appropriate” itself indicate that it is the discretion to be exercised by the Court, to remit the matter when requested by a party.”
The Court therefore held that the application under Section 34(4) of the Act of 1996 is required to be decided by the court by exercising its discretionary powers and same powers cannot be exercised under the guise of additional reasons and filling up the gaps in the reasoning and as such award cannot be remitted to the arbitrator or arbitral tribunal and particularly if there are no findings on the contentious issues in the award.
Thus, the Court held that the writ petition lacks merit and the same was dismissed accordingly.
[Eptisa Servicios De Ingenieria SL v. Ajmer Smart City Limited, S.B. Civil Writ Petition No.13488 of 2019, decided on 23-05-2022]
Advocates who appeared in this case :
Mr Ajatshatru Mina, Advocate, for the Petitioner(s);
Mr Rajendra Prasad, Senior Advocate, for the Respondent(s).
*Arunima Bose, Editorial Assistant has reported this brief.
Karnataka High Court: A Division bench of Ritu Raj Awasthi, CJ., and Suraj Govindaraj, J. issued notice to the respondent and listed for 22-02-2022.
The noteworthy facts in the instant case is that the petitioner and respondent are body corporate which are incorporated outside India, the petitioner having its registered office at Korea and the respondent having its registered office at Vietnam. An application filed under Sections 44 to 52 Arbitration and Conciliation Act, 1996 i.e Act of 1996 seeking enforcement of an international commercial arbitral award dated 18-08-2021 delivered by the Sole Arbitrator in international arbitration proceedings held in Singapore, the final award being registered with the Singapore International Arbitration Centre (SIAC) Registry of Awards.
Counsel for petitioner Mr. Shreyas Jayasimha submitted that this Court has jurisdiction since the respondent property against which interim orders are sought are in New Mangalore Port. This is in view of a government notification stating that an arbitral award rendered in the Republic of Singapore can be enforced in India in a Court which would have territorial jurisdiction.
The Court observed that for an award to be recognized as a foreign award, it has to be as regards a commercial relationship as per the laws in India and rendered in a territory where the Convention has been made applicable by a suitable notification by the Central Government.
It was also observed that the explanation to Section 47 provides for the definition of ‘Court’ under which means the High Court having original jurisdiction to decide the questions forming the subject-matter of the arbitral award if the same had been the subject-matter of a suit in its ordinary original civil jurisdiction and in other cases, in the High Court having jurisdiction to hear appeals from decrees of courts subordinate to such High Court.
It was further remarked “Section 2(f) of the Act of 1996, when applied to the present case it is clear that the present arbitration is international commercial arbitration” and that “The Central Government by its notification dated 06.07.1999 has declared an arbitral award rendered in Republic of Singapore could be enforced in India.”
The question that arises for consideration is that whether the Court shall exercise its jurisdiction when both the parties are not connected to India and they are not corporate bodies established within the territorial limits of India, more particularly within the territorial limits of this Court.
The Court observed that a foreign award under a New York Convention has been given a special status. India being a signatory to the said New York Convention it is required that all countries which are signatories to the New York Convention enable execution of a foreign arbitral award rendered in a reciprocating country in the event of a property against which the arbitral award is sought to be enforced is situated within the jurisdiction of that particular country.
The Court while considering that the above application filed under Sections 44 to 52 of the Act of 1996 which deals with New York Convention awards under Chapter I of Part II of the Act of 1996 and the obligations of the Republic of India in terms of Article 51 (c) of the Constitution of India, held that “this Court could exercise jurisdiction to enforce a foreign award in the event the properties of the respondent against which the enforcement is sought for is situated within the territorial limits of this Court in view of later part of Section 2 (e) (ii) of the Act of 1996 as also later part of the explanation to Section 47(2) of the Act of 1996.”[CTI Future Corporation v. Ducgiang Chemical and Detergent Powder Joint Stock Company, AP-EFA NO. 1/2022, decided on 18-02-2022]
Arunima Bose, Editorial Assistant has reported this brief.
Delhi High Court: Vibhu Bakhru, J., allowed an amendment application seeking amendment of a petition filed under Section 34 of the Arbitration and Conciliation Act.
The Court observed that there is no remedy available against the order passed by the Arbitral Tribunal under Section 34 of the A&C Act as the same is not a fresh award, which can be impeached by filing a separate petition under Section 34 of the A&C Act.
An instant application was filed seeking to add additional grounds for challenging the arbitral award (the impugned award). The said impugned award was rendered by an Arbitral Tribunal, wherein two members concurred and passed the impugned award, and third member entered a dissenting opinion.
Later, the petitioner filed an application under Section 33 of the A&C Act seeking rectification and clarification, which was dismissed on the ground that it was barred by limitation.
The Respondent i.e. ONGC opposed the Amendment Application on the ground that:
(a) the Petitioner seeks to urge fresh grounds to challenge the Impugned Award which is impermissible under Section 34 read with Section 36 of the Arbitration Act as, the time for filing the application to set aside the award has since elapsed, and
(b) Allowing of the Amendment Application to add further grounds would in effect, tantamount to allowing the Petitioner to assail the Impugned Award at a belated stage on the ground, which it had forfeited, by not impeaching the impugned award on such grounds itself.
Analysis and Decision
On examining the new grounds sought to be urged by the petitioner, it was apparent that the petitioner sought to urge further grounds that arose because the impugned award was now required to be read in light with the order passed by the Arbitral Tribunal under Section 34(4) of the A&C Act.
Bench expressed that there is no remedy available to the petitioner against the order of the Arbitral Tribunal under Section 34(4) of the A&C Act as the same is not a fresh award, which can be impeached by filing a separate petition under Section 34 of the A&C Act.
High Court stated that the impugned award remains unaltered. The only difference being that it is now to be read with the order passed by the Arbitral Tribunal under Section 34(4) of the A&C Act. In this view, the petitioner cannot be precluded from raising such additional grounds.
In view of the above, an application was allowed. [UEM India (P) Ltd. v. ONGC Ltd., OMP (COMM) 393 of 2018, decided on 15-3-2022]
Advocates before the Court:
For the Petitioner: Mr. Gaurav Pachnanda, Senior Advocate with Ms. Iti Agarwal, Mr. Praful Shukla and Ms. Avni Sharma, Advs.
For the Respondent: Mr. Abhisek Puri and Ms. Surbhi Gupta, Advs.
Supreme Court: In a case where the bench of Ajay Rastogi and Abhay S. Oka, JJ was deciding an issue relating to Bihar Public Works Contracts Disputes, the bench has held that if any of the provisions of the Bihar Public Works Contracts Disputes Arbitration Tribunal Act, 2008 are in conflict with the Arbitration and Conciliation Act, 1996, the 2008 Act shall prevail to the extent of the conflict.
Relevant Provisions under the 2008 Act
Under Section 9 (1) of the 2008 Act, when any dispute arises between the parties to the contract, irrespective of the fact whether such contract does or does not contain an arbitration clause, either party can refer the dispute in writing in the prescribed form to the Arbitration Tribunal. The dispute can be referred within one year from the date on which the dispute has arisen.
Section 22 of the 2008 Act starts with a non-obstante clause which provides that notwithstanding anything contained in any other law, rule, order, scheme, or contract, any dispute as defined under section (e) of Section 2 shall be regulated by the provisions of the 2008 Act in the absence of an arbitration clause in the agreement.
In view of Section 8 of the 2008 Act, if any of the provisions of the 2008 Act are in conflict with the 1996 Act, the latter shall prevail to the extent of the conflict.
In the case at hand, there was no arbitration clause in the agreement between the parties. The respondent, in the present case it was argued, did not refer the dispute to the Arbitration Tribunal within one year from the date on which the dispute had arisen as provided under Section 9(1) of the 2008 Act. The Arbitration Tribunal had condoned the delay.
Considering the provisions of both the Acts and also the facts of the case at hand, the Court observed that as there is no arbitration clause in the agreement between the parties, the provisions of the 1996 Act will have no application and the reference to the Arbitration Tribunal will be governed by the 2008 Act.
As the 2008 Act provides for a specific period of limitation, Article 137 of the schedule in the 1963 Act will not apply.
Further, under Section 18 of the 2008 Act, the Arbitration Tribunal has the power to condone the delay. Therefore, under Article 136 of the Constitution of India, the Court refused to interfere with the award on the ground that the reference was barred by limitation.
[Bihar Industrial Area Development Authority v. Rama Kant Singh, 2022 SCC OnLine SC 320, decided on 15.03.2022]
*Judgment by: Justice Abhay S. Oka
For appellants: Senior Advocate Rajiv Dutta
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.
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.
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.
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.
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.
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
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.
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.
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.
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]
For appellant: Advocate Sanjay Bansal
For respondent: Advocate Pallav Kumar
*Judgment by: Justice SA Nazeer
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. 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. 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 (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.
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, (the New York Convention). 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. 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) 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. In Union of India v. MV Hoegh Orchid, 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”. 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.
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. 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. 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. 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. 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. 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, the Calcutta High Court ruled that such arbitrations would attract the provisions of the Arbitration Act. In Louis Dreyfus, 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. 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, 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 stand in Union of India v. Khaitan Holdings (Mauritius) Ltd., where it is stated that the Code of Civil Procedure would govern BITs.
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, 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., 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 does end up being the law of the land, Conditions for Enforcement foreign awards as mentioned in Section 48 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. 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 and Vodafone 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. 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.
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. 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. 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.
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, White Industries, and Vodafone, 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: email@example.com.
 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.
 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).
 Fali S. Nariman, “India and International Arbitration”, 41 Geo. Wash. Int’l L. Rev. 367 (2009).
 India – New York Convention, New York Convention Guide (2011), <https://bit.ly/369ddP4> (last visited 4-11-2020).
 Gus Van Harten, “TWAIL and the Dabhol Arbitration”, 3 Trade L. & Dev. 131 (2011).
 Ronald J. Bettauer, “India and International Arbitration: The Dabhol Experience”, 41 Geo. Wash. Int’l L. Rev. 381 (2009).
 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).
 Manu Sanan, “The White Industries Award – Shades of Grey”, 13 J. World Investment & Trade 661 (2012).
 “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).
 Delphine Constantin, “Indian Case Law Review (2014-2015): Anti-Arbitration Injunctions”, 2015 Int’l Bus. L.J. 409 (2015).
 No. 12-4139 (2nd Cir 2013).
 “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).
 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).
 2018 SGCA 81.
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.
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.
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.
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.
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.
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.
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.
- The arbitrator currently represents or advises one of the parties or an affiliate of one of the parties
- 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.
- 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.
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
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.
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
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.
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.
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, 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 firstname.lastname@example.org
The author would like to thank Ruhi Thakkar, Final Year Student at Balasaheb Apte College of Law, Mumbai for her able assistance.
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”.
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. (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, 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 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 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. (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 appeared to be in polar contrast with the decision in Renusagar. 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, the Court added the ground “patent illegality” to those enumerated by the Court in the Renusagar. It is our opinion that the decision of the Court in Saw Pipes 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 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 was eclipsed by Saw Pipes. The decision in Saw Pipes 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. (Venture Global) worsened the effect of Saw Pipes 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, 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. (McDermott International) the Court although following Saw Pipes 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 (Rashtriya Ispat) in polar contrast to the dictum in Saw Pipes. The Court in Rashtriya Ispat 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 (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 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 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. (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 (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, the Court delivered another much-awaited judgment. In Shri Lal Mahal Ltd. v. Progetto Grano Spa (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 by holding that the public policy criterion in Section 48 would have to be construed in conformity with decision in Renusagar and held that foreign arbitral awards cannot be denied enforcement on the “patent illegality” ground laid down in Saw Pipes. The decision in Shri Lal Mahal undoubtedly remedied the negative effect that Saw Pipes had cast on the international arena, although the menace played by Saw Pipes did not end here.
It is pertinent to note the decision of the Constitutional Bench in BALCO had only prospectively overruled the decision in Bhatia International which meant BALCO 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. This meant that Saw Pipes and Venture Global 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 and Venture Global are the negative repercussions of the perspective adopted by the Supreme Court in Saw Pipes and Bhatia International. 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. (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 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 and bring back Renusagar. However, the Court followed Saw Pipes decided to go a step further. The Court noted that the decision in Saw Pipes 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 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.”
(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.”
(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”.
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. 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 has done exactly what its predecessors had pre-empted 20 years ago in Renusagar, 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 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 has done the exact opposite and has disregarded the dictum of the judgment in Renusagar in totality while contributing to the menace played by its decision in Saw Pipes. 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 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 (Associate Builders) delivered soon after Western Geco 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 that followed and approved Saw Pipes. The decision of the Court in Associate Builders 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 and Saw Pipes.
At the time of defining the heads of “public policy of India”, the Court followed and elucidated Western Geco 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. 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.
Moreover, it is also interesting to note that the Court in Associate Builders endeavoured for the first time to lay down an exposition on the other two heads of “public policy of India” coined in Renusagar. 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. 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. Lastly, with regard to “patent illegality” the Court followed and elucidated Saw Pipes 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.
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 where in spite of being compelled to follow Western Geco and Saw Pipes, 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 has tactfully relied on the dictum of McDermott International and Rashtriya Ispat 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 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 and Western Geco. 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. The judgment in Associate Builders 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. The Law Commission also made observations on all the landmark decisions of the Supreme Court in the arbitration domain such as Shri Lal Mahal, BALCO, Bhatia International, etc. while suggesting a reinstatement of Renusagar.
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 in September 2014 only a month after the publication of the Report. It is needless to say that the judgment in Western Geco 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 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 and Associate Builders 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 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”.
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. 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 and Associate Builders. 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. However, in an attempt to prevent its misuse it has added a proviso disallowing any reappreciation of evidence thereby statutorily superseding Saw Pipes while appearing to converge with the positive aspect of ratio laid down in Associate Builders. 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. 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. 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) 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.
More recently, in Parsa Kente Collieries Ltd. v. Rajasthan Rajya Vidyut Utpadan Nigam Ltd. the Court relying on Associate Builders, McDermott International and Rashtriya Ispat 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 and Western Geco 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. (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 (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, Associate Builders and Renusagar. The Court held that the broad interpretation of “fundamental policy of Indian law” as propounded in Western Geco and followed in Associate Builders 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. 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. 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; 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 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. 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 by reinstating Renusagar.
In a recent judgment of May 2020 in Patel Engg. Ltd. v. North Eastern Electric Power Corpn. Ltd. (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 followed in Ssangyong Engg. The Court in Patel Engg. has also affirmed the judgment in Kochi Cricket.
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 to the 2019 judgment in Ssangyong Engg., 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, Shri Lal Mahal, Associate Builders and Ssangyong Engg. 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 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. and more recently by articulating the fourfold test in Vidya Drolia v. Durga Trading Corpn. 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. 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. Professor Lalive says that this automatic assimilation or the confusion between those two kinds of “public policy” is particularly dangerous. 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. It is our opinion that Supreme Court had correctly followed this approach in Renusagar and then later was swayed by the “unruly horse”. Although, Nariman, J. in Ssangyong Engg. has restored Renusagar, 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.
 Richardson v. Mellish, (1824) 2 Bing 229, 242 : 130 ER 294.
 Id.,para 35.
 Id., para 38.
 Id., para 39.
 Id., para 31.
 Id., paras 36 to 39.
 Supplementary to Report No. 246 on Amendments to the Arbitration and Conciliation Act, 1996 at para 6.
 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).
 Id., para 9.
 Id., para 9.
 Id., para 9.
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 (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 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. 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.
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 (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. (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 (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 (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, it was held:
“11. The same issue was considered in Vidur Impex and Traders (P) Ltd. v. Tosh Apartments (P) Ltd.  and it was held:
- … 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.:
“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, 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).
- The above principle has been applied even in the case of violation of orders of injunction issued by civil courts. In Clarke v. Chadburn, 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, 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 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 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, it was held:
“27. We cannot accept Shri Naphade’s contention that observations of the Supreme Court in Surjit Singh 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.
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 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.”
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. 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.
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 email@example.com.
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.
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.
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,
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:
(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
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
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.
“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