Op EdsOP. ED.

With an increase in arbitration agreements, the issues with respect to jurisdiction have also increased. We have witnessed the issue of jurisdiction of courts in foreign seated arbitration getting more settled from Bhatia International[1] to Balco[2] and then to the 2015 Amendment. However, with the increase in domestic arbitration, the issue of jurisdiction of courts in India still has scope of being more precise and clear.

Section 20 CPC confers jurisdiction to such court, in case of a dispute pertaining to an agreement, within the local limits of whose jurisdiction either cause of action or part of cause of action has arisen or place of the defendant.[3] Therefore, the jurisdiction may lie upon more than one court. It is a settled position of law that an agreement may exclude the jurisdiction of other courts in case it lies upon more than one court but the jurisdiction can only be conferred upon the court which originally had it in the first place. The situation is a little different when it comes to arbitration agreement. Section 20 of the Arbitration Act, 1996[4] gives the parties autonomy to mutually choose jurisdiction of the court even if it did not have jurisdiction in the first place. For example, business of X is in Ahmedabad while Y is from Jaipur, a dispute arose between the parties wherein cause of action arose in Vadodara and part of cause of action also arose in Ahmedabad, X may choose either to file the suit in the courts of Vadodara, Ahmedabad or Jaipur, they may also exclude the jurisdiction of courts of Jaipur and Vadodara submitting themselves exclusively to the jurisdiction of the courts of Ahmedabad but cannot choose the jurisdiction of the court other than Vadodara, Ahmedabad or Jaipur, while in an arbitration agreement they may exclusively choose to submit to the jurisdiction of the court of Mumbai even if no part of cause of action arose in Mumbai.

This article discusses issues related to implied exclusion of courts in arbitration agreements. The above-stated issue arose in  Swastika Gases (P) Ltd. v. Indian Oil Corporation Ltd.[5] wherein Clause 18 of the agreement between the parties conferred jurisdiction on the courts at Kolkata. It was the case of the appellant that part of cause of action arose in Jaipur and that the agreement does not expressly oust the jurisdiction of other courts as Clause 18 cannot be construed as an ouster clause due to lack of words like “alone”, “only”, “exclusive” and “exclusive jurisdiction” in the clause and therefore the courts of Jaipur also have the jurisdiction. The Supreme Court held that for jurisdiction clause in the agreement the words like “alone”, “only”, “exclusive” or “exclusive jurisdiction” are not decisive and do not make any material difference, that the intention of the parties by having Clause 18 in the agreement is clear and unambiguous and that the courts at Kolkata shall have jurisdiction which means that the courts at Kolkata alone shall have jurisdiction.[6]

The said judgment was followed in B.E. Simoese Von Staraburg Niedenthal v. Chhattisgarh Investment Ltd. [7] and in Indus Mobile Distribution (P) Ltd.  v. Datawind Innovations (P)  Ltd.[8]  In B.E. Simoese[9] jurisdiction clause of the agreement stated that “the courts at Goa shall have exclusive jurisdiction”. Whereas in Indus Mobile[10], the seat of arbitration was Mumbai and the jurisdiction clause stated that “all disputes and differences of any kind whatever arising out of or in connection with this agreement shall be subject to the exclusive jurisdiction of courts of Mumbai only”. It is pertinent to note here that there was express exclusion of jurisdiction of other courts by using words like exclusive and only in respective cases. However, in Indus Mobile[11] the  Supreme Court went on to hold that in arbitration law, the moment “seat” is determined, the court of that place would vest with exclusive jurisdiction for purposes of regulating arbitral proceedings arising out of the agreement between the parties.

The issue was thereafter discussed in Brahmani River Pellets Ltd. v. Kamachi Industries Ltd.[12] wherein the jurisdiction clause of the agreement stated that “Arbitration shall be under the Arbitration and Conciliation Act, 1996 and the venue of arbitration shall be Bhubaneswar”. The respondent in the present case filed a petition under Section 11 of the Arbitration Act before the Madras High Court for appointment of sole arbitrator. The case of the appellant was that the parties have agreed that the seat of arbitration be Bhubaneswar, that when the parties have agreed for a place/venue for arbitration, it gets the status of seat which is the juridical seat and therefore, only the Orissa High Court has exclusive jurisdiction to appoint the arbitrator. The Supreme Court held that the contract specifies the jurisdiction of the court at a particular place, only such court will have the jurisdiction to deal with the matter and the parties intended to exclude all other courts. In the present case, the parties have agreed that the “venue” of arbitration shall be at Bhubaneswar. Considering the agreement of the parties having chosen Bhubaneswar as the venue of arbitration, the intention of the parties is to exclude all other courts. As held in Swastika[13], non-use of words like “exclusive jurisdiction”, “only”, “exclusive”, “alone” is not decisive and does not make any material difference. The  Supreme Court relied upon the judgments in Swastika[14] and Indus Mobile[15]  to establish that choosing of seat of arbitration not only vests jurisdiction to the courts of the chosen seat but also implies exclusion of other courts as well. By virtue of the said series of judgments, it is safe to conclude that Section 11 application would be maintainable only before a High Court under whose jurisdiction the place chosen as seat of the arbitration is situated and not before any other High Court.

Though the situation might slightly be different when it comes to application filed under Section 9 before a court. Swastika[16], Mobile[17] and Brahmani River[18] were dealing with Section 11 application whereas B.E. Simoese[19] dealt with Section 9 application. The Supreme Court in Indus Mobile[20] held that the moment “seat” is determined, the court of that place would vest with exclusive jurisdiction for purposes of regulating arbitral proceedings arising out of the agreement between the parties, it is pertinent to note that Section 9 application is not for regulating arbitral proceeding but to provide interim relief to the parties before or during arbitral proceedings or at any time after the making of the arbitral award but before it is enforced in accordance with Section 36 and hence mere choosing of seat would not oust the jurisdiction of other competent courts[21] to entertain Section 9 application. Nevertheless, any specific clause in the arbitration agreement vesting jurisdiction to the court of chosen seat, even if without the usage of words such as “only”, “alone”, “exclusive” and “exclusive jurisdiction”, would imply the ouster of jurisdiction of other courts from entertaining Section 9 application.


* Advocate, Gujarat High Court

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

[2] Bharat Aluminium Company Ltd.  v. Kaiser Aluminium Technical Services, (2012) 9 SCC 552

[3] Section 20 of Civil Procedure Code: Subject to the limitations aforesaid, every suit shall be instituted in Court within the local limits of whose jurisdiction-(a) the defendant, or each of the defendants where there are more than one, at the time of the commencement of the suit, actually and voluntarily resides, or carries on business, or personally works for gain; or (b) any of the defendants, where there are more than one, at the time of the commencement of the suit actually and voluntarily resides, or carries on business, or personally works for gain, provided that in such case either the leave of the Court is given, or the defendants who do not reside, or carry on business, or personally work for gain, as aforesaid, acquiesce in such institution; or (c) the cause of action, wholly or in part, arises.

[4] Arbitration and Conciliation Act, 1996, S. 20

[5] (2013) 9 SCC 32

[6] Swastika Gases (P)  Ltd. v. Indian Oil Corpn. Ltd., (2013) 9 SCC 32, para 32.

“It is so because for construction of jurisdiction clause, like Clause 18 in the agreement, the maxim expressio unius est exclusio alterius comes into play as there is nothing to indicate to the contrary. This legal maxim means that expression of one is the exclusion of another. By making a provision that the agreement is subject to the jurisdiction of the courts at Kolkata, the parties have impliedly excluded the jurisdiction of other courts. Where the contract specifies the jurisdiction of the courts at a particular place and such courts have jurisdiction to deal with the matter, we think that an inference may be drawn that parties intended to exclude all other courts. A clause like this is not hit by Section 23 of the Contract Act at all. Such clause is neither a forbidden by law nor it is against the public policy. It does not offend Section 28 of the Contract Act in any manner. It is not necessary to include words like alone, only, exclusively to confer jurisdiction to a court and that the intension of parties matter. Therefore exclusion of courts can also be implied.”

[7] (2015) 12 SCC 225

[8] (2017) 7 SCC 678

[9] (2015) 12 SCC 225

[10] (2017) 7 SCC 678

[11] Ibid

[12] (2020) 5 SCC 462

[13] (2013) 9 SCC 32

[14] Ibid

[15] (2017) 7 SCC 678

[16](2013) 9 SCC 32

[17]  (2017) 7 SCC 678

[18] (2020) 5 SCC 462

[19]  (2015) 12 SCC 225

[20]  (2017) 7 SCC 678

[21] Clause (e) of sub-section (1) of Section 2 of the Arbitration Act, 1996 defines “court” which means the Principal Civil Court of Original Jurisdiction in a district, and includes the High Court in exercise of its ordinary civil jurisdiction, having jurisdiction to decide the questions forming the subject matter of the arbitration if the same had been the subject matter of a suit, but does not include any civil court of a grade inferior to such Principal Civil Court, or any Court of Small Causes.

Op EdsOP. ED.

Issue

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

Analysis

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

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

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

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

                      *                                          *                                                      *

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

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

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

(emphasis supplied)

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

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

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

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

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

           *                                           *                                                   *

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

*                                              *                                               *

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

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

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

(emphasis supplied)

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

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

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

*                                                              *                                                *

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

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

                                   *                                                 *                                              *

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

                                     *                                                *                                 *

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

 

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

                           *                                    *                                          *

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

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

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

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

[…]

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

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

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

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

 

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

              *                                          *                                                *

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

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

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

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

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

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

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

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

4. Addressing the Issue

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

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

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

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

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


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

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

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

[1] Arbitration and Conciliation Act, 1996

[2] UNCITRAL Model Law on International Commercial Arbitration

[3] The Stamp Act, 1899

[4] The Contract Act, 1872

[5] (1999) 2 SCC 479 

[6]ibid

[7](2004) 3 SCC 155

[8]Supra Note 5

[9]Supra Note 7

[10]Supra Note 5

[11] (2005) 8 SCC 618

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

[13]Supra Note 11

[14] (2011) 14 SCC 66

[15]Ibid

[16] 2019 SCC OnLine Bom 563

[17]Supra Note 15

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

[19]Infra Note 28

[20]Supra Note 17

[21]Ibid

[22]Supra Note 15

[23]Ibid

[24]Supra Note 15

 [25]Supra Note 7

[26] (2016) 10 SCC 386

[27] (2019) 9 SCC 209 

[28]Supra Note 15

[29]Supra Note 28

[30]Supra Note 15

[31]Ibid

[32]Supra Note 15

[33]Ibid

[34] (2018) 17 SCC 607 

[35]Supra Note 28

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

[37]2019 SCC OnLine Bom 5719

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

[39]Supra Note 17

[40]Supra Note 17

[41]Ibid

[42]Supra Note 37

[43]Supra Note 17

[44]Supra Note 28

[45]Supra Note 38

[46]Supra Note 37

[47]Supra Note 28

[48]Supra Note 17

[49]Supra Note 28

[50]Supra Note 17

[51]Supra Note 28

[52]Supra Note 17

[53]Supra Note 37

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

[55]Supra Note 15

[56]Supra Note 55

[57]Supra Note 15

[58]Supra Note 5

[59]Supra Note 7

[60]Supra Note 11

[61]Supra Note 17

[62]Supra Note 7

[63]Supra Note 28

[64]Ibid

[65]Supra Note 17

[66]Supra Note 28

[67]Supra Note 17

[68]Supra Note 28

[69]Supra Note 15

[70]Supra Note 28

[71]Supra Note 11

[72]Supra Note 28

[73]Supra Note 17

[74]Supra Note 39

[75]Supra Note 17

[76]Supra Note 7

[77]Supra Note 17

[78]Supra Note 28

[79]Supra Note 17

[80]Supra Note 37

[81]Supra Note 38

Legislation UpdatesStatutes/Bills/Ordinances

President promulgates Arbitration and Conciliation (Amendment) Ordinance, 2020

Amendment of Section 36

In Section 36 of the Arbitration and Conciliation Act, 1996 (hereinafter referred to as the principal Act), in sub-section (3), after the proviso, the following shall be inserted and shall be deemed to have been inserted with effect from 23rd day of October, 2015, namely:—

“Provided further that where the Court is satisfied that a prima facie case is made out,-—

(a) that the arbitration agreement or contract which is the basis of the award; or

(b) the making of the award,

was induced or effected by fraud or corruption, it shall stay the award unconditionally pending disposal of the challenge under section 34 to the award.”.

Explanation.— For the removal of doubts, it is hereby clarified that the above proviso shall apply to all court cases arising out of or in relation to arbitral proceedings, irrespective of whether the arbitral or court proceedings were commenced prior to or after the commencement of the Arbitration and Conciliation (Amendment) Act, 2015.

Substitution of new Section for Section 43J

For section 43J of the principal Act, the following section shall be substituted, namely:-—

Norms for accreditation of arbitrators

“43J. The qualifications, experience and norms for accreditation of arbitrators shall be such as may be specified by the regulations.”

Omission of Eighth Schedule

The Eighth Schedule to the principal Act shall be omitted.

Read the Ordinance here: ORDINANCE


Ministry of Law and Justice

[Dt. 04-11-2020]

Case BriefsHigh Courts

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

Brief Facts

Facts of the case are briefly mentioned hereunder;

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

 Contentions

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

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

 Observations

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

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

 Decision

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


Sakshi Shukla, Editorial Assistant has put this story together

Case BriefsHigh Courts

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

Brief Facts

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

Contentions

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

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

Issue

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

Decision

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


Sakshi Shukla, Editorial Assistant has put this story together

Op EdsOP. ED.

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

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

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

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

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

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

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

International authorities and UNCITRAL Model Law

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

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

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

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

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

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

Extent of doctrine of separability

Bermuda/Swiss/German Law:

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

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

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

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

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

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

English Law:

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

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

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

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

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

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

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

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

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

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

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

US Law:

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

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

Australian Law:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

(emphasis supplied)

 

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

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

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

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

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

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

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

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

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

Conclusion

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

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

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


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

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

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

[3]Id.

[4]Id.

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

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

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

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

[8]Supra Note 6.

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

[10]Supra Note 6, para 42.

[11]Supra Note 6, para 81.

[12]Supra Note 6, para 84.

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

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

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

[16]Id., para 5.

[17]Id., para 6.

[18]Id.

[19]Id., para 7.

[20]Id., para 10.

[21]Id.

[22]Id., para 13.

[23] Id., para 17.

[24]Id.

[25]Id.

[26]Id.

[27]Id., para 18.

[28]Id.

[29]Id.

[30]Id., para 32.

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

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

[33]Id., para 35.

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

[35]Id., para 41.

[36]Id.

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

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

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

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

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

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

[43]Id.

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

[45]Id.

[46]Id.

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

[48]Supra Note 6, para 114.

[49]Supra Note 6, para 113.

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

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

[52]Supra Note 6, para 142.

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

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

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

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

[57]Id.

[58]Id.

[59] Id., para 54.

[60]Id., para 12.2.

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

[62]Id.

[63]Supra Note 57, para 34.

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

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

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

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

[68]Supra Note 15, para 27.

Op EdsOP. ED.

Public sector undertakings, statutory/government bodies and even private parties (“the employer”) may execute contracts with other private parties (“the contractor”) for construction of various projects. While the models for such contracts would vary, the contractor’s obligation to timely complete the project remains a key term of such contracts. However, the contractor’s ability to complete the project within stipulated timelines is also contingent on the employer fulfilling its’ obligations on time, such as, inter alia, providing land for construction on time. A delay by either of the parties in fulfilling their obligations may entitle the other to be compensated for the loss suffered arising from such delay. Such contracts may also provide for dispute resolution through arbitration.

However, in accordance with Section 7 of the Arbitration and Conciliation Act, 1996, the parties have the freedom to refer all or only certain disputes for arbitration. If the parties have agreed to not refer certain disputes for arbitration, the same may be classified as ‘excepted’ matter and any dispute regarding the same would not be arbitrable. Many such construction contracts provide that the contractor will compensate the employer for the delay in completion of the project by payment of liquidated damages. Such liquidated damages may be decided by an employee of the employer such as a designated superintending engineer under the contract (“SE”), whose decision shall be final and binding in this regard. Question arises when there is a dispute between the parties regarding levy of liquidated damages by the employer in such cases. If the decision of the SE of the employer regarding levy of liquidated damages is final and binding, is this an excepted matter and not arbitrable? Further, what is the scope of such alleged excepted matter – whether only quantum of liquidated damages calculated is not arbitrable or even the issue of whether the delay is attributable to the contractor, which gives the employer the right to levy liquidated damages, is not arbitrable?

While these issues have been previously considered by the Supreme Court of India, the said issue was recently re-agitated in Mitra Guha Builders (India) Company v. Oil and Natural Gas Corporation Limited[1]  (“Mitra Guha v. ONGC”). This article seeks to analyse the judgment in Mitra Guha v. ONGC on the abovementioned issues.

Brief Facts

In this case, the respondent, Oil and Natural Gas Corporation Limited (“ONGC”) was the employer and it entered into contract for construction of flats and other works with the appellant, who was the contractor. There was delay in completion of the works and the contractor raised claims against the employer, which were refuted by the employer and consequently, the contractor invoked the arbitration clause as provided in the contract. The employer also levied liquidated damages and withheld amount for the same from the payment to the contractor, which was also sought to be challenged in the arbitration proceedings by the contractor.

In this regard, it is pertinent to note that Clause 2 of the contract provided that in event of delay by the  contractor, the “…contractor shall pay compensation on amount equal to ½% per week as the Superintending Engineer (whose decision in writing shall be final) may decide”. Further for special jobs, if a time schedule had been submitted and the contractor fails to comply with the schedule, “…he shall be liable to pay as compensation an amount equal to ½% per week as the Superintending Engineer (whose decision in writing shall be final) may decide on the contract value”. The entire value of compensation under this clause could not exceed 10% of the tendered cost of the work.

Further, Clause 25 of the contract provided for settlement of disputes by arbitration. It stated that all disputes, difference, question or disagreement shall be referred for arbitration. However, “the decision of the Superintending Engineer regarding the quantum of reduction as well as his justification in respect of reduced rates for sub-standard work, which may be decided to be accepted, will be final and binding and would not be open to arbitration…”

The learned arbitrator noted that both the parties were responsible for delay in completion of the project. However, it disallowed the claim for liquidated damages by the  employer on the grounds that under the garb of liquidated damages, what was sought to be imposed was penalty. Further, the arbitrator noted that the  employer was also liable for substantial delay in the project, and thus, could not collect such penalty belatedly. While hearing the challenge to the award, the Single Judge of the  High Court at Delhi (“the Delhi High Court”) re-affirmed the findings of the arbitrator and noted that since the  employer is also responsible for substantive part of delay (60% of the delay), hence the  employer is not entitled to recovery of such penalty. The said findings regarding levy of liquidated damages were overturned by the Division Bench of the Delhi  High Court , on the grounds that liquidated damages had been levied under Clause 2 of the contract, which provided that the decision of the SE is final and binding. Thus, the same was an excepted matter and not arbitrable. Further, the Division Bench noted that even the arbitrator had held the  contractor to be liable for some delay in the completion of the project and that the arbitrator had not given any reason as to why Clause 2 was in the nature of penalty and not a genuine pre-estimate of the loss suffered by the  employer.

Findings of Supreme Court

The Supreme Court affirmed the findings of the Division Bench and held that by virtue of Clause 2 of the contract, the SE was not only conferred with a right to levy compensation but also for determining the liability/quantum of compensation. Since Clause 2 attaches finality to such decision of the SE, the same cannot be the subject-matter of arbitration and Clause 2 provides for the complete mechanism for levy of liquidated damages. In para  18[2], it states that, ‘any’ decision of SE cannot be referred for arbitration and any other meaning to the finality clause would make the agreed Clause 2 and Clause 25 redundant. Thus, in paras 20 and 26[3], it states that delay in completion of work and the levy of liquidated damages could not have been determined by the arbitrator and the only recourse available is in ordinary course of law. The Supreme Court relied on the judgment of interalia Vishwanath Sood v. Union of India[4] (“Vishwanath Sood”) to support its interpretation to Clauses 2 and 25.

The appellant contractor contended that the finality attached in Clause 2 is on quantification of liquidated damages. However, for levy of liquidated damages, there has to be delay and to determine who is responsible for delay, the said issue will have to be determined by an arbitrator. Reliance was placed on BSNL v. Motorola India (P) Limited[5](“BSNL v. Motorola”). However, the Supreme Court rejected the same and held that the case of BSNL v. Motorola is distinguishable on account of different wording of the relevant clauses. The Supreme Court  noted that in BSNL v. Motorola, the entitlement of the party was to recover liquidated damages. Linkage of compensation, in BSNL v. Motorola, to “value of delayed quantity” and “for each week of delay” showed that it was necessary to find out whether there has been delay on part of the supplier. Thus, Clause 16.2 in BSNL v. Motorola did not envisage a complete process for adjudication of the issue. However, in the present case, the Supreme Court held that Clause 2 of the present agreement is a complete mechanism. Thus, the ‘right to levy damages’ is exclusively conferred upon the SE and is final and binding and not arbitrable.

Analysis

It is submitted that while finality can be attached to quantification of damages by SE, however this right to levy liquidated damages by SE is a secondary power, for which the primary issue required to be determined is whether the  contractor had caused any delay to invite levy of liquidated damages. Determination of such a primary issue ought to be arbitrable and in this regard, the reasoning of the Supreme Court in Mitra Guha v. ONGC, should be read in context of the issues highlighted in the following paragraphs.

Party to the agreement cannot be an arbiter in its own cause

The right to levy liquidated damages does not exist in a vacuum and arises only upon breach by the  contractor i.e. when the delay is attributable to the  contractor. Thus, the right to levy liquidated damages is a subsidiary and consequential power and not a primary power to even determine question of breach by the  contractor. The same was also held by the Supreme Court  in State of Karnataka v. Shree Rameshwara Rice Mills[6] (“Rice Mills”) in para 7. While the Supreme Court in Rice Mills case noted that the wording of the relevant clause did not confer finality to the power of officer of the employer to determine question of breach, it held that, in any event, such a power could not be conferred. The same was on the basis that a party to the agreement cannot be an arbiter in his own cause. It held that, “interests of justice and equity require that where a party to a contract disputes the committing of any breach of conditions, the adjudication should be by an independent person or body and not by officer party to the contract.”  However, the Supreme Court in Rice Mills case did note that if the contractor has admitted delay or there is no dispute regarding the same, then such officer of the employer would be well within his rights to assess the damage. The same was also followed by the Supreme Court in BSNL v. Motorola[7], however, Mitra Guha v. ONGC did not deal with this issue and only sought to distinguish the case of BSNL v. Motorola on the grounds of wordings of the relevant clause. This dicta in Rice Mills case and BSNL v. Motorola has been followed in J.G. Engineers Private Limited v. Union of India[8] (“J.G. Engineers”), which dealt with a contractual clause similar to the one in Mitra Guha v. ONGC. However, while Mitra Guha v. ONGC, in interpreting Clauses 2 and 25 of the contract, placed reliance on Vishwanath Sood, however, it did not consider the case of J.G.Engineers. Further, even Vishwanath Sood did not have the occasion to consider  Rice Mills case. The dicta that a party to the agreement cannot be an arbiter in its own cause has been further re-affirmed by a three-Judge Bench of the Supreme Court  in  Tulsi Narayan Garg v. M.P. Road Development Authority[9], which was dealing with the question of whether the State could have levied liquidated damages and initiated recovery proceedings for the same, when the dispute was pending before the Arbitral Tribunal.

Reading of Clauses 2 and 25 in light of J.G. Engineers and Rice Mills

The above interpretation is also in consonance with the interpretation of Clauses 2 and  25 of the contract. The Supreme Court  in J.G. Engineers while interpreting Clause 2 (worded similarly to the one in Mitra Guha v. ONGC) noted that “…his decision is not made final in regard to the question as to why the work was not commenced on the due date or remain unfinished by the due date of completion and who was responsible for such delay”.[10] Further, it stated that the said clause does not attach finality to the “question as to whether the contractor had failed to complete the work or portion of work within the agreed time schedule, whether the contractor was prevented by any reasons beyond its control or by the acts or omissions of the respondents, and who is responsible for the delay.”[11]

The Supreme Court in J.G. Engineers noted that the consequential decision of the SE in regard to quantification/levy of liquidated damages, is made final “if there is no dispute as to who committed the breach. That is if the contractor admits that he is in breach or if the arbitrator finds that the contractor is in breach”. Further, Clause 25 in Mitra Guha v. ONGC, excludes the decision of SE regarding ‘quantum’ of reduction of rates ‘in case of sub-standard work’ as excepted matter. The same cannot be read to expand the scope of ‘excepted matter’ to include the dispute on whether the contractor is responsible for the delay, thereby inviting levy of liquidated damages.

The Supreme Court  in Mitra Guha v. ONGC has stated in paras 19 and 20[12] that if further adjudication under Clauses 2 and 25 is allowed, it will render the agreement meaningless and redundant. It further notes in para 26 that remedy against the decision of SE in Clause 2 shall lie in ordinary course of law and not arbitration. In this regard, first it is reiterated that the scope of finality attached to decision of SE in Clause 2 read with Clause 25 is on the levy/quantification of liquidated damages. The same is consequential to and distinct from the primary power of adjudicating the issue of the party responsible for such breach and for this, the employer cannot be an arbiter in his own cause. Second, the Supreme Court has not considered that even if the claim against levy of liquidated damages is not referred to the arbitrator, the  contractor may refer other claims such as escalation on account of delay caused by the employer to the arbitrator. In such case, the arbitrator will be required to determine the party responsible for delay in completion of the contract. In the event finality is attached to the SE’s decision on the  contractor being responsible for delay for levy of liquidated damages, there may be contrary findings on the said issue by the SE and the arbitrator. Further, even if recourse is taken to the ordinary course of law, the same may lead to multiplicity of proceedings and contrary findings on the same issue of determining the party responsible for delay. Thus, even in Rice Mills and J.G. Engineers, the Supreme Court stated that the SE’s decision to levy liquidated damages can attain finality only if there is no dispute on breach by the contractor. It is to be noted that in Mitra Guha v. ONGC, the arbitrator had recorded a finding that both the parties were responsible for the delay, which was not upset by any of the courts. However, the arbitrator had faulted with SE for imposition of liquidated damages on other grounds. 

Sole Reliance upon Vishwanath Sood 

The Supreme Court in Mitra Guha v. ONGC relied upon Vishwanath Sood to come to its findings as Clause 2 being considered was similar in both cases. However, the Supreme Court did not discuss the case of J.G.Engineers which also had a similarly worded clause for levy of liquidated damages. Vishwanath Sood stated that Clause 2 provides a complete mechanism and the SE has the discretion to determine the liquidated damages within a permissible range after considering the pleas of the contractor, which may include any mitigating circumstances being pleaded by the contractor. Thus, the decision of the SE is a considered decision. However, in this regard, the same has to be read in light with decision of the Supreme Court in Rice Mills and J.G. Engineers and considered to be applicable to a situation only where there is no dispute by the contractor on the question of breach by the contractor. It is not clear whether the judgment of J.G. Engineers was brought on record before the Supreme Court  in Mitra Guha v. ONGC. On previous occasions, the Delhi High Court and the  High Court of Madhya Pradesh (“the MP High Court”) had the occasion to consider J.G. Engineers and Vishwanath Sood together.

The Delhi High Court in Winner Constructions Private Limited v. Union of India[13], read down the scope of Vishwanath Sood by reading it with J.G. Engineers and BSNL v. Motorola to hold that “the issue of non-arbitrability is only upon the question of any compensation, which the Government might claim in terms of Clause 2 of the Contract. In other words, the issue whether the contractor had delayed the project would still be arbitrable.[14]

It further relied upon para 10 of Vishwanath Sood  to come to the said conclusion, which itself stated that,

“10. We may confess that we had some hesitation in coming to this conclusion. As pointed out by the Division Bench, the question of any negligence or default on the part of the contractor has many facets and to say that such an important aspect of the contract cannot be settled by arbitration but should be left to one of the contracting parties might appear to have far reaching effects. In fact, although the contractor in this case might object to the process of arbitration because it has gone against him, contractors generally might very well prefer to have the question of such compensation decided by the arbitrator rather than by the Superintending Engineer. But we should like to make it clear that our decision regarding non arbitrability is only on the question of any compensation which the Government might claim in terms of clause 2 of the contract …We have already pointed out that this is a penalty clause introduced under the contract to ensure that the time schedule is strictly adhered to…This is not an undefined power. The amount of compensation is strictly limited to a maximum of 10% and with a wide margin of discretion to the Superintending Engineer, who might not only reduce the percentage but who, we think, can even reduce it to nil, if the circumstances so warrant. It is this power that is kept outside the scope of arbitration. We would like to clarify that this decision of ours will not have any application to the claims, if any, for loss or damage which it may be open to the Government to lay against the contractor, not in terms of Clause 2 but under the general law or under the Contract Act.

(emphasis supplied)

Similarly, even the MP  High Court in  Shridhar Dubey v. Union of India[15] read down the scope of a similarly word Clause 2 and the impact of Vishwanath Sood by reading it together with the case of J.G. Engineers, Rice Mills and BSNL v. Motorola. The MP High Court held that, “prima facie, the liability for compensation arises when the contractor has failed to maintain the deadline for completion…Thus, in case where there is dispute as regards to the quantum of compensation, the respondent may be within their right to say that the same is “excepted” from being arbitered…it is in this context the decision rendered by Supreme Court in Vishwanath Sood v. Union of India[16], and the Coordinate Bench in Pawan Kumar Jain[17]  is relevant” to hold that,  had the J.G. Engineers and Rice Mills been also discussed by the Supreme Court  in Mitra Guha v. ONGC, it is arguable that findings could have been different.

It is also to be noted that the dispute resolution envisaged through arbitration in Clause 25 in Vishwanath Sood and J.G. Engineers started with the words, “except as otherwise provided in the contract, all questions and disputes…shall be referred to the sole arbitration”. The phrase ‘except as otherwise provided’ was relied upon by the Supreme Court in Vishwanath Sood to hold that Clause 2 is excepted under Clause 25. However, Clause 25 in Mitra Guha v. ONGC does not contain such an exception and the exception provided in Clause 25 is to the decision of SE for “quantum” of reduction as well as his justification for reduced rates “for sub-standard work” and not for delay in completion of work.

Conclusion

The Supreme Court in Mitra Guha v. ONGC while holding that Clause 2 is a complete mechanism to decide on whether there was a delay in completion of work and on levy of liquidated damages by SE, did not have occasion to consider the principles enunciated in Rice Mills and J.G. Engineers as such the judgment does not seem to have been relied upon by the parties. Thus, it expands the scope of ‘excepted matter’ by a broad reading of Clause 2 to include even the determination of party responsible for delay as ‘excepted matter’ and hence not arbitrable. It is to be noted that the arbitrator in this case had attributed delay to both parties but had sought to deny the levy of liquidated damages on other grounds and not because the arbitrator held that the contractor was not responsible for any delay. ONGC had pleaded that out of delay of 640 days, a delay of 273 days was attributable to the  contractor, which was also taken into consideration by the Single Bench of the Delhi High Court in upholding the findings of the arbitrator. Thus, the expansion of the scope of the finality attached to the decision of SE in levy of liquidated damage, to include decision on the party responsible for delay in completion of work was not warranted as the same was not the primary issue before the Supreme Court in Mitra Guha v. ONGC. Thus, as a precedent Mitra Guha v. ONGC, may still be distinguishable and it can be argued that finality attached to SE’s decision is restricted to quantification of damages. However, this right to levy liquidated damages by SE is a secondary power, which is consequential to the primary issue of whether the contractor had caused any delay to invite levy of liquidated damages. The latter primary issue ought to be arbitrable in light of the principles discussed in Rice Mills, J.G. Engineers and BSNL v. Motorola, which the Supreme Court has not considered in Mitra Guha v. ONGC.


 *Partner at L&L Partners, Litigation, Delhi

**Associate at L&L Partners, Litigation, Delhi

[Authors’ Note: The views expressed are personal and do not represent views of the firm.  The views expressed do not constitute legal advice.]

[1] (2020) 3 SCC 222

[2] Ibid.

[3] Ibid

[4](1989) 1 SCC 657

[5] (2009) 2 SCC 337

[6](1987) 2 SCC 160

[7] (2009) 2 SCC 37, para 24.

[8](2011) 5 SCC 758, paras 19-21

[9] 2019 SCC OnLine SC 1158

[10]J.G. Engineers Pvt. Ltd. v. Union of India, (2011) 5 SCC 758, para 17.

[11]Ibid, para 17.

[12] (2020) 3 SCC 222

[13] 2016 SCC OnLine Del 2494

[14]Ibid, para  20.

[15] 2016 SCC OnLine MP 8013

[16] (1989) 1 SCC 657

[17] Pawan Kumar Jain v. Union of India, 2009 SCC OnLine MP 398

Case BriefsSupreme Court

Supreme Court:  The 3-judge bench of SA Nazeer, Indu Malhotra and Aniruddha Bose, JJ has dismissed Central Government’s plea against enforcement of a 2011 foreign award passed in favour of Vedanta Limited in a dispute arising out of a contract for exploring and developing the petroleum resources in the Ravva Gas and Oil Fields. The Court held,

“the enforcement of the foreign award does not contravene the public policy of India, or that it is contrary to the basic notions of justice.”

On 19 February 2020 the Delhi High Court had directed the enforcement of the foreign award by the Vedanta Limited.

On applicability of amended Section 48 of the Arbitration & Conciliation Act, 1996

In Renusagar Power Co. v General Electric Co., 1994 Supp (1) SCC 644, this Court held that “public policy” comprised of (1) the fundamental policy of Indian law; (2) interests of India; and (3) justice or morality.

Section 48 of the Arbitration and Conciliation Act, 1996 was amended by Act 3 of 2016. By this amendment, the public policy ground was given a narrow and specific construction by statute, by the insertion of two Explanations. The 2016 Amendment has dropped the clause “interests of India,” which was expounded by the Renusagar judgment

“The two Explanations in Section 48 begin with the words “For the avoidance of any doubt.” It cannot, however, be presumed to be clarificatory and retrospective, since the substituted Explanation 1 has introduced new sub-clauses, which have brought about a material and substantive change in the section. A new Explanation 2 has been inserted which states that the test as to whether there is a contravention with the fundamental policy of Indian law, shall not entail a review on the merits of the dispute.”

The Court, hence, held that since the amendments have introduced specific criteria for the first time, it must be considered to be prospective, irrespective of the usage of the phrase “for the removal of doubts.”

It was, hence, held that the amended Section 48 would not be applicable to the present case, since the court proceedings for enforcement were filed by the Respondents-Claimants on 14.10.2014 i.e. prior to the 2016 Amendment having come into force on 23.10.2015.

Whether the Malaysian Courts were justified in applying the Malaysian law of public policy while deciding the challenge to the foreign award?

The Court held that the Malaysian Courts being the seat courts were justified in applying the Malaysian Act to the public policy challenge raised by the Government of India. The enforcement court would, however, examine the challenge to the award in accordance with the grounds available under Section 48 of the Act, without being constrained by the findings of the Malaysian Courts.

“Merely because the Malaysian Courts have upheld the award, it would not be an impediment for the Indian courts to examine whether the award was opposed to the public policy of India under Section 48 of the Indian Arbitration Act, 1996.”

If the award is found to be violative of the public policy of India, it would not be enforced by the Indian courts. The enforcement court would however not second-guess or review the correctness of the judgment of the Seat Courts, while deciding the challenge to the award.

Whether the foreign award is in conflict with the Public Policy of India?

Rejecting the contention that the award may not be enforced, since it is contrary to the basic notions of justice, the Court noticed that the Government has neither been able to prove that the violation of procedural due process in the conduct of the arbitral proceedings nor have they been able to prove that the award is in conflict with the basic notions of justice, or in violation of the substantive public policy of India.

The Court noticed that the  enforcement may be refused only if it violates the enforcement State’s most basic notions of morality and justice, which has been  interpreted to mean that there should be great hesitation in refusing enforcement, unless it is obtained through “corruption or fraud, or undue means.”

On limitation for filing an enforcement/execution petition of a foreign award under Section 47 of the 1996 Act

The Court held that the period of limitation for filing a petition for enforcement of a foreign award under Sections 47 and 49, would be governed by Article 137 of the Limitation Act, 1963 which prescribes a period of three years from when the right to apply accrues.

The Court noticed:

  • The limitation period for filing the enforcement / execution petition for enforcement of a foreign award in India, would be governed by Indian law. The Indian Arbitration Act, 1996 does not specify any period of limitation for filing an application for enforcement/execution of a foreign award. Section 43 however provides that the Limitation Act, 1963 shall apply to arbitrations, as it applies to proceedings in court.
  • The Limitation Act, 1963 does not contain any specific provision for enforcement of a foreign award. Articles 136 and 137 fall in the Third Division of the Schedule to the Limitation Act. Article 136 provides that the period of limitation for the execution of any decree or order of a “civil court” is twelve years from the date when the decree or order becomes enforceable.
  • Article 137 is the residuary provision in the Limitation Act which provides that the period of limitation for any application where no period of limitation is provided in the Act, would be three years from “when the right to apply accrues”.
  • The legislature has omitted reference to “foreign decrees” under Article 136 of the Limitation Act. The intention of the legislature was to confine Article 136 to the decrees of a civil court in India. The application for execution of a foreign decree would be an application not covered under any other Article of the Limitation Act, and would be covered by Article 137 of the Limitation Act.
  • Foreign awards are not decrees of an Indian civil court. By a legal fiction, Section 49 provides that a foreign award, after it is granted recognition and enforcement under Section 48, would be deemed to be a decree of “that Court” for the limited purpose of enforcement. The phrase “that Court” refers to the Court which has adjudicated upon the petition filed under Sections 47 and 49 for enforcement of the foreign award. Hence,

“Article 136 of the Limitation Act would not be applicable for the enforcement/execution of a foreign award, since it is not a decree of a civil court in India.”

  • The enforcement of a foreign award as a deemed decree of the concerned High Court [as per the amended Explanation to Section 47 by Act 3 of 2016 confers exclusive jurisdiction on the High Court for execution of foreign awards] would be covered by the residuary provision i.e. Article 137 of the Limitation Act.

On the Scheme of the 1996 Act for enforcement of New York Convention awards

The enforcement Court cannot set aside a foreign award, even if the conditions under Section 48 are made out. The power to set aside a foreign award vests only with the court at the seat of arbitration, since the supervisory or primary jurisdiction is exercised by the curial courts at the seat of arbitration.

“The enforcement court may “refuse” enforcement of a foreign award, if the conditions contained in Section 48 are made out. This would be evident from the language of the Section itself, which provides that enforcement of a foreign award may be “refused” only if the applicant furnishes proof of any of the conditions contained in Section 48 of the Act.”

Further, the enforcement court is not to correct the errors in the award under Section 48, or undertake a review on the merits of the award, but is conferred with the limited power to “refuse” enforcement, if the grounds are made out.

If the Court is satisfied that the application under Section 48 is without merit, and the foreign award is found to be enforceable, then under Section 49, the award shall be deemed to be a decree of “that Court”.

“The limited purpose of the legal fiction is for the purpose of the enforcement of the foreign award. The concerned High Court would then enforce the award by taking recourse to the provisions of Order XXI of the CPC.”

[Government of India v. Vedanta Limited, 2020 SCC OnLine SC 749, decided on 16.09.2020]

Case BriefsHigh Courts

Karnataka High Court: John Michael Cunha, J. disposed of the petition by appointing a sole arbitrator to adjudicate the said matter in accordance with law.

In the present case, the respondent firm failed to complete the construction work within the stipulated time as per the Joint Development and Supplemental Agreement. Due to the undue delay of over four years and to avoid the development project from going to waste the petitioner sent the firm a legal notice in 2017 demanding the fulfillment of the legal obligations. Since the petitioner was in an urgency to proceed with the construction work, he wrote emails to the respondent regarding the same and went on to proceed with the work on his own. Since the agreement had fallen flat, the petitioner claimed that the respondent was liable to refund him a huge amount out of which a very meagre percentage was actually given back.

According to the said Agreement, a clause categorically made out that in event of a dispute, the matter would be referred for arbitration. The respondent despite repeated notices did not exercise his right to appoint an arbitrator.

S.R Kamalachapan, counsel on behalf of the petitioner submitted that since the respondent had not responded to the notices or even shown a sliver of interest in appointing an arbitrator, a sole arbitrator of the petitioner’s choice should be appointed to resolve the said matter.

Taking note of the submissions, the Court stood by the arbitration clause in the said Agreement and directed the sole arbitrator suggested by the petitioner to take charge of the said issue as the respondent by his conduct had shown clear disinclination towards appointing one.[Mohammed Gafoorur Rahman v. JM Associates, CMP No. 12 of 2019, decided on 27-08-2020]

Case BriefsSupreme Court

Supreme Court: The bench of RF Nariman and Navin Sinha, JJ has held that “serious allegations of fraud” as a ground for exemption from arbitral proceedings arise only if either of the two tests laid down are satisfied, and not otherwise.

  • The first test is satisfied only when it can be said that the arbitration clause or agreement itself cannot be said to exist in a clear case in which the court finds that the party against whom breach is alleged cannot be said to have entered into the agreement relating to arbitration at all.
  • The second test can be said to have been met in cases in which allegations are made against the State or its instrumentalities of arbitrary, fraudulent, or malafide conduct, thus necessitating the hearing of the case by a writ court in which questions are raised which are not predominantly questions arising from the contract itself or breach thereof, but questions arising in the public law domain.

BACKGROUND OF THE CASE

The Court was hearing an appeal from the interlocutory judgment and order passed in the appeal under section 9 of the Arbitration and Conciliation Act, 1996 by the Bombay High Court in a dispute between HSBC and Avitel India.

HSBC made an investment in the equity capital of Avitel India for a consideration of USD 60 million in order to acquire 7.8% of its paid-up capital. This was done after Avitel India told HSBC that it was at a very advanced stage of finalising a contract with the British Broadcasting Corporation [BBC] to convert the BBC’s film library from 2D to 3D. This contract was expected to generate a revenue of USD 300 million in the first phase, and ultimately over USD 1 billion and hence, an investment of USD 60 million was required. HSBC, however, discovered that he purported BBC contract was non-existent and was set up by the Appellants to induce HSBC into investing the aforesaid money. Though Avitel Dubai received the entire investment proceeds of USD 60 million, it appeared that around USD 51 million were not used to purchase any equipment to service the BBC contract, but appeared to have been siphoned off to companies in which its promoters, the Jain family, had a stake.

RELEVANT PROVISIONS UNDER CONTRACT ACT

Section 10 of the Contract Act states that all agreements are contracts if they are made with the free consent of parties competent to contract, for a lawful consideration and with a lawful object, and are not hereby expressly declared to be void. Section 14 states that consent is said to be free when it is not caused inter alia by fraud as defined in section 17. Importantly, the section goes on to say that consent is said to be so caused when it would not have been given but for the existence, inter alia, of such fraud. Where such fraud is proved, and consent to an agreement is caused by fraud, the contract is voidable at the option of the party whose consent was so caused.

EFFECT OF INSTITUTION OF CRIMINAL PROCEEDINGS

If it is clear that a civil dispute involves questions of fraud, misrepresentation, etc. which can be the subject matter of such proceeding under section 17 of the Contract Act, and/or the tort of deceit, the mere fact that criminal proceedings can or have been instituted in respect of the same subject matter would not lead to the conclusion that a dispute which is otherwise arbitrable, ceases to be so.

DISTINCTION BETWEEN CONTRACT BEING OBTAINED BY FRAUD AND PERFORMANCE OF A BEING VITIATED BY FRAUD

Explaining the difference between a contract being obtained by fraud and performance of a contract (which is perfectly valid) being vitiated by fraud or cheating, the Court said that the latter would fall outside section 17 of the Contract Act, in which the remedy for damages would be available, but not the remedy for treating the contract itself as being void. This is for the reason that the words “with intent to deceive another party thereto or his agent” must be read with the words “or to induce him to enter into the contract”, both sets of expressions speaking in relation to the formation of the contract itself. This is further made clear by sections 10, 14 and 19, all of which deal with “fraud” at the stage of entering into the contract. Even section 17(5) which speaks of “any such act or omission as the law specially deals to be fraudulent” must mean such act or omission under such law at the stage of entering into the contract.

Thus, fraud that is practiced outside of section 17 of the Contract Act, i.e., in the performance of the contract, may be governed by the tort of deceit, which would lead to damages, but not rescission of the contract itself. Both kinds of fraud are subsumed within the expression “fraud” when it comes to arbitrability of an agreement which contains an arbitration clause.

RULING ON THE FACTS

After reading the issues and some of the material findings in the Foreign Final Award, the Court came to the conclusion that the issues raised and answered are the subject matter of civil as opposed to criminal proceedings. The Court said that the fact that a separate criminal proceeding was sought to be started and may have failed was of no consequence whatsoever.

The Court further held that a reading of the Foreign Final Award in this case would show that a strong prima facie case has indeed been made out as the Award holds the BBC transaction as a basis on which the contract was entered into and the USD 60 million paid by HSBC, which would clearly fall within fraudulent inducement to enter into a contract under section 17 of the Contract Act. Such a contract would be voidable at the instance of HSBC. Also, the findings on the siphoning off of monies that were meant to be allocated for the performance of the BBC contract would attract the tort of deceit.

It, hence, concluded:

  • That there is no such fraud as would vitiate the arbitration clause in the SSA entered into between the parties as it is clear that this clause has to be read as an independent clause. Further, any finding that the contract itself is either null and void or voidable as a result of fraud or misrepresentation does not entail the invalidity of the arbitration clause which is extremely wide
  • That the impersonation, false representations made, and diversion of funds are all inter parties, having no “public flavour” as explained in paragraph 14 so as to attract the “fraud exception”.

[Avitel Post Studioz Ltd. v. HSBC PI Holdings (Mauritius) Ltd., 2020 SCC OnLine SC 656, decided on 19.08.2020]

Op EdsOP. ED.

In its judgment in Union of India v. Singh Builders Syndicate,[1] the Indian Supreme Court flagged the indiscriminately high arbitrator fees as a major challenge to the growth of arbitration in the country. It was stated that contrary to legislative intent, arbitration proceedings had become disproportionately expensive, and needed to be “saved from arbitration costs.” Consequently, the Law Commission recommended a rationalised fee structure based on a model schedule of fees,[2] which was duly incorporated through the 2015 Amendment as the Fourth Schedule to the Arbitration and Conciliation Act, 1996[3] (“the Act”). Subsequent amendments brought about in 2019[4], although not yet notified, sought to further streamline the issue of arbitral fees under the Act. This post is an attempt to examine the law as aforesaid, in practice, and analyse the underlying issues that parties, as well as arbitrators, continue to face, in the above context.

Determination of Fees

Section 31(8) of the Act empowers arbitral tribunals to fix the costs of arbitration, subject to the regime stipulated under Section 31-A. Sub-section (1) of Section 31-A vests discretion in the tribunal to determine –

  1. whether costs are payable by a party;
  2. the amount(s) of such costs; and
  3. the time of payment.

Interestingly, while the term “costs” is defined to include, inter alia, the fees and expenses of arbitrators, the same has specifically been confined only to the said sub-section. As a result, subsequent provisions under Section 31-A, which contain internationally recognised principles to ascertain such costs (including the loser pays principle), are seemingly inapplicable in determining arbitral fees and expenses. Instead, Section 11(14) of the Act empowers the High Courts to frame rules for the same, taking the Fourth Schedule into account. However, the same being merely an enabling provision, many High Courts have not issued any such rules, effectively rendering the provision redundant. Although the courts in some cases[5] have nonetheless applied the Fourth Schedule, there are decisions[6] that have explicitly held that the same is merely indicative and is not binding on the parties.

Therefore, in the absence of a conclusive judicial finding and sans any other provision in the Act on the applicability of the Fourth Schedule, it would appear that the arbitral tribunals continue to have unfettered discretion to fix their fee, at least in non-institutional/ad hoc arbitration proceedings. While the parties may, by prior agreement, fix a fee schedule, the practice is relatively uncommon in arbitrations to which the Act applies. In fact, even the question of party autonomy with respect to determining the fee had remained contentious for a long time until the Supreme Court finally settled the matter in Gammon Engineers v. NHAI.[7] The Court affirmed that a prior fee structure agreed to by the parties would be binding upon the tribunal, notwithstanding the provisions of the Act.

Resultantly, unless the parties contractually agree to a prior fee structure, or the proceedings are governed by institutional rules prescribing the same, there is little to guide or regulate arbitrators in the determination of their fee. In such situations, one or all parties may be constrained to agree to whatever fee is decided, lest the tribunal gets prejudiced against them. Alternatively, the parties may refuse to pay such fee and mount a challenge in court, or lead the arbitrators to simply resign – both of which can significantly derail arbitral proceedings. In empowering a graded arbitral institution to determine the fees subject to the Fourth Schedule,  the 2019 Amendment Act has seemingly rectified this concern. However, almost a year since its enactment, the said change is yet to be notified, and it is unclear whether even the new sub-sections (3-A) and (14) to Section 11 would apply to party-appointed arbitrators in ad hoc proceedings.

Payment of Fees

Once determined, the form and payment of a tribunal’s fee present problems of its own. While most institutional rules provide for simplified and streamlined processes for the deposit and payment of the arbitrators’ fees, the same is not the case with ad hoc arbitration proceedings, where there is considerable scope for ambiguity and resulting arbitrariness in the process.

As per Section 38 of the Act, a tribunal can fix the amount of deposit (or supplementary deposit) as an advance for costs, including its fees. Sub-section (2) states that such a deposit is to be paid by the parties in equal shares, or that one party may pay the entire amount if the other fails to pay. In the eventuality where even the other party refuses or is unable to pay the entire share of the deposit, the Act empowers the tribunal to suspend or terminate such proceedings.

Interestingly, while the Model Law (on which the Act is based) does not contain any such provision, similar clauses do exist in various institutional rules (including the SIAC and LCIA). Consequently, arbitrations to which the Act applies but which are not backed by any institutional framework, face challenges in the effective application of the provision. Unlike institutions, who hold such deposits in trust for the parties, arbitrators in ad hoc arbitration proceedings often demand complete and often an unconditional payment of fees upfront. Further, there is neither any remedy available to a party justifiably not willing to pay the fee, nor does the Act give power to the tribunal to enforce compliance should a party do so.

While broad powers of contempt have been judicially read into the Act by the Supreme Court in Alka Chandewar v. Shamshul Ishrar Khan,[8] the same may not hold in such situations in light of the statutory alternative under Section 38(2). Even justification for non-payment of fee may be for a number of reasons, but the Act does not spell out any such condition under which a party may refuse to pay the deposit. For instance, the parties challenging the composition or jurisdiction of an arbitral tribunal, or raising questions about arbitrators’ independence, might refuse to pay any sum that may have the potential to become frustrated costs later.

What is thus needed is a uniform system and procedure that protects the legitimate interests of the parties and the requirements of the arbitrators without compromising on the efficiency of the arbitral process itself. The fee rules of the Delhi International Arbitration Centre,[9] for instance, are a good example, which explicitly provide for specific percentages of fee to be released depending on the stage of the arbitration proceedings. It is expected that the Arbitration Council of India, proposed to be set up under the new Part I-A of the Act will be able to address and better regulate these issues, once the amendment is notified.

Refund/Reimbursement of Fees

Questions have also been raised as to how under the scheme of the Act, substantial losses are suffered even by successful parties towards costs incurred for arbitral proceedings, of which the arbitral fee forms a substantial part. In practice, where a party is successful in its challenge to the arbitral tribunal, or even to the award, the fee paid by it to the tribunal often becomes an irrecoverable, frustrated cost. The unresolved dispute will still need to be settled, not to mention the time already spent in the exercise.

Section 38(3) of the Act provides that upon termination of proceedings, an arbitral tribunal shall render an accounting of the deposits received from the parties and “shall return any such unexpended balance”. A statutory onus has thus been cast on the arbitrators to be accountable for the deposits (including fees) received from the parties. However, the Act provides for no recourse whatsoever to the parties in case the tribunal fails in this obligation, as is usually the case. There is also no mention of whether the same would amount to misconduct. Instead, in stark contrast, the newly added Section 42-B grants protection to the arbitrators for all acts done in good faith. Thus, even where proceedings are terminated for want of jurisdiction, or a patently illegal award is set aside, or when an arbitrator resigns, it may not necessarily mean the tribunal acted without due care and caution. Effectively, the parties appear to have been deprived of their recovery rights in such situations under general civil law as well.

However, reimbursement of arbitral fee still remains an issue yet to be decided by Indian courts, despite a number of awards being set aside and the mandate of tribunals being terminated for various reasons. Interestingly, along similar lines, the Austrian Supreme Court, in 2014, had rejected the request of a claimant for reimbursement of a portion of fees advanced to the arbitrator whom it had successfully challenged during ongoing proceedings. The Court held that the services provided by the arbitrator up to that point were not entirely worthless, and since those proceedings were not required to be repeated, the arbitrator was found entitled to half his fee.

In Hungary, Act LX of 2017 on Arbitration contains an explicit provision disentitling arbitrators to any fee should their award be annulled. While this may be unduly harsh and even deter competent arbitrators to agree to being appointed, parties must have some enforceable remedy to recover at least the justifiable costs expended by them. Reports of arbitrators charging unduly high fees and/or resigning are not uncommon, with parties left with no choice but to replace them, but with the entire fee being paid again.

 Conclusion

Given that India is perhaps one of the few jurisdictions where ad hoc proceedings are largely preferred over institutional arbitrations, efficiency and cost effectiveness of the arbitral process are important factors to consider if the country aims to become a global arbitration hub. It is imperative to mandatorily cap arbitrators’ fee by law and allow a rationalised, transparent system of payment to be introduced that will effectively hold the parties as well as the arbitrators to account.

The new amendment enacted in 2019 with the stated objective “to promote institutional arbitration” does seem to provide some of these solutions, but these will only be assessed once the changes are notified and actually adopted in practice.


*Authors are practising commercial lawyers and represent both public and private parties in commercial arbitration proceedings.

[1](2009) 4 SCC 523

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

[3] Fourth Schedule, Arbitration and Conciliation Act, 1996

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

[5] Kumar & Kumar Associates v. Union of India, 2016 SCC OnLine Pat 9476.

[6] Paschimanchal Vidyut Vitran Nigam Limited v. IL&FS Engineering & Construction Company Limited, 2018 SCC OnLine Del 10831

[7] 2019 SCC OnLine SC 906

[8](2017) 16 SCC 119

[9]The Delhi International Arbitration Centre (Administrative Cost and Arbitrators’ Fees) Rules, 2018.

Case BriefsInternational Courts

Permanent Court of Arbitration: In an unanimous decision by the Arbitral Tribunal concerning the “Enrica Lexie Incident”, it was held that Italy has breached Article 87, Paragraph 1, sub-paragraph (a) and Article 90 of the United Nations Convention for the Law of the Sea (UNCLOS) thereby constituting adequate satisfaction for the injury to India’s non-material interests. It was further held that as a result of the breach, India is entitled to payment of compensation in connection with loss of life, physical harm, material damage to property (including to the ‘St. Antony’) and moral harm suffered by the captain and other crew members of the ‘St. Antony’, which by its nature cannot be made good through restitution.

As per the facts, on 15-02-2012, two Indian fishermen were killed off the coast of Kerala, aboard the St. Antony. India alleged that the two Italian marines aboard the Italian-flagged commercial oil tanker MV Enrica Lexie killed the fishermen. The Indian Navy then intercepted MV Enrica Lexie and detained the two Italian marines, therefore giving rise to the instant dispute between India and Italy.

Italy contended before the Tribunal that by directing and inducing the Enrica Lexie to change course and proceed into India’s territorial sea through a ruse, as well as by interdicting the Enrica Lexie and escorting her to Kochi, India violated Italy’s freedom of navigation, in breach of UNCLOS Article 87(1)(a), and Italy’s exclusive jurisdiction over the Enrica Lexie, in breach of Article 92 of UNCLOS and abused its right to seek Italy’s cooperation in the repression of piracy, in breach of Article 300 read in conjunction with Article 100 of UNCLOS. It was further contended that by initiating criminal proceedings against the Italian marines, India violated Italy’s exclusive right to institute penal or disciplinary proceedings against the Marines, in breach of Article 97(1) of UNCLOS. The Indian side however contended that by firing at St. Anthony and killing the fishermen aboard that vessel, Italy violated India’s sovereign rights under Article 56 of UNCLOS and India’s freedom and right of navigation under Articles 87 and 90 of UNCLOS.     

The Tribunal comprising of Vladimir Golitsyn, J. (President), Jin-Hyun Paik, Patrick Robinson, JJ., Prof. Francesco Francioni and Dr  Pemmaraju Sreenivasa Rao (Arbitrators) perused the facts and the contentions put forth by the Countries. It was observed that the instant dispute involved the interpretation/ application of the UNCLOS. Determining that the Arbitral Tribunal has jurisdiction over the dispute, it was unanimously held that India’s counter-claims are admissible and that Italy has violated aforementioned provisions of the UNCLOS. However with a ratio of 3:2, the Tribunal also held that the Marines- Chief Master Sergeant Massimiliano Latorre and Sergeant Salvatore Girone, are entitled to immunity in relation to the acts that they committed during the incident, and that India is precluded from exercising its criminal jurisdiction over the Marines. Taking note of Italy’s commitment to resume criminal investigations into the St. Anthony firing incident, the Tribunal directed India to take the necessary steps in order to cease the exercise its criminal jurisdiction over the Marines. [Italian Republic v.  Republic of India, PCA Case No. 2015-28, decided on 02-07-2020] 

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Introduction

Bilateral Investment Treaties (‘BIT’) establish the terms and conditions for private investments made by individuals and business entities from one sovereign State into other sovereign State[1]. The first ever BIT was entered between Germany and Pakistan on November 25, 1959[2] and since then, the BITs have evolved in an unprecedented manner.  However, the genesis of across the border investments is very old and can be traced back to the colonial periods and multifold investments across the territory of India were made but one could not have argued against the vile intricacies of the investment back then before an investment arbitral tribunal[3]. However, with the passage of time, the modalities of investments have changed and now the investments are made under binding agreements and disputes arising therein are resolved qua dedicated investment tribunals working under different conventions and rules.

The disputes arising out of a BIT are not a contractual dispute as such because there is no privity between the parties. Perhaps, that is the reason why, investment arbitration is also known as arbitration without privity[4]. The disputes that arise between the parties of the BIT are between two States so, the entire dynamics of such an arbitration is different as what one would usually observe in a domestic arbitration. A commercial arbitration is based on an arbitration agreement, whereas investment arbitration may be based on either an investment treaty or a bilateral/multilateral treaty.

India as one would recall was rather a closed economy prior to the 1991 economic liberalisation but after the 1991, the Indian economy underwent some major structural changes. For the very first time, countries all around the world were encouraged to invest in India and the Indian economy saw liberalisation to reach new heights.

Bilateral Investment Treaty: Indian Context

The BIT primarily came into picture to safeguard the investments which were made by different countries. An investment across the borders is generally a long term relationship and the investor look for certain level of safety before making the investment. The BITs do not afford protection such as insurance coverage for the investments rather it devolves a mechanism to resolve the disputes arising during the tenure of investment. India signed its first BIT in 1994 with the United Kingdom. Since, 1994, India has signed around 84 BITs out of which according to the latest data, currently, there are 14 BITs which are in force, 58 out of 84 BITs have been terminated. In addition to the BITs, India has also entered into Comprehensive Economic Cooperation Agreements (‘CECA’) which covers issues like investment, trade, intellectual property rights, etc. India has also contemplated the idea of entering Foreign Treaty Agreements (‘FTA’) with European Nations[5].

As per the recent data, India is ranked among the top 10 nations in the world for the inbound Foreign Direct Investment (‘FDI’)[6] and among the top 20 for the outbound FDI. In last five years, FDI inflow in India has increased by 11.5% totalling to around 62 billion dollars in the FY 2018-2019. In the same financial year, the outbound FDI also rose up to 11 billion dollars. The uprising in the quantum of FDI is a result of unprecedented change in the Indian FDI policy. India has now allowed FDI in Defence[7], Telecom[8], Information and Broadcasting, etc. India had also increased its FDI capping in E-commerce[9] and Insurance[10] sector from 49% to 100% which has seen massive investments being made by foreign entities in the Indian companies. India has also worked towards promoting ‘ease of doing businesses’ with dedicated ministry and departments.

Institutions adjudicating investment Arbitrations across the world 

There are institutions across the world which governs different investment arbitration more specifically depending upon to which institution the parties agree to submit their disputes. The mechanism in such arbitration is just like an international commercial arbitration. The tribunal under the various institutions primarily adjudges behavior of the host States towards a foreign investor. The International Centre for Settlement of Investment Disputes (ICSID), International Chamber of Commerce International Court of Arbitration (ICC) and Stockholm Chamber of Commerce (SCC) are preferred arbitration institutions by the parties. Generally, where a bilateral investment treaty exists, investors are free to bring arbitration actions in any of the arbitration institutions as identified in the said treaty.  Most of the BITs provide for a mechanism of dispute settlement through any of the arbitral institutions as mentioned above[11].

Underlying facets of BIT

BIT has many facets to it, however, there are a few underlying facets of BIT which holds great significance. They have been enlisted and discussed below[12]:

a) Fair and Equitable Treatment (FET): FET is considered to be one of most frequently invoked facets in a BIT. When an investor invests into a country, an expectation of fair and equitable treatment comes on a pretext of a healthy competition with the local/domestic players of a host country. However, it is pertinent to consider that the contours of its deciphering may differ with the specific wording/nomenclature of the specific clause as mentioned in a BIT.

b) Protection from Expropriation: Expropriation can be understood as nationalisation of assets of a foreign investor or taking any such measures which have similar effects as that to a right of property of an individual. Prevention against expropriation is the fundamental principle of International Law and hence, it holds out as a very significant facet of a BIT. A foreign investor would apprehend the prospects of expropriation as generally the quantum of investments made is very high.

There is also a concept called ‘creeping expropriation’ which means that the economic value of the investment has been eaten out to such a level that it virtually becomes worthless[13].

c) Most Favoured Nation Treatment (MFN): It is one of the most alluring facets of a BIT. The MFN clause ensures that a foreign investor will get all the advantages within the four walls of the highlighted clause in a BIT with respect to the investment made in the host State. It boasts the confidence of the investor State as MFN status invariably promises to treat the foreign investor at par with all the domestic investors of the host State.

d) Full protection and security: The host State is under an obligation to ensure that the investments made by a foreign investor is protected and secured. The protection herein is multifold as the host State should protection of the employees, assets, facilities associated with the investment. The said clause of protection and security may also include guarantee and security provided by the host State.

e) National Treatment: It is one of the responsibilities of the host State that it treats the foreign investor equally as its domestic investors and market players. It is also to ensure for the host State that the foreign investors are made available all the competitive opportunities as may be available with any of the domestic players.

f) Freedom to transfer funds: It is one of the primary responsibilities of the host State under a BIT to ensure that a foreign State is able to transfer the returns from the investment to their own country and in their own currency. It also comes in as one of the most sought out clauses in a BIT as smooth realisation of funds/returns from an investments attract more investors in a host State.

g) Sunset Clause: Sunset clauses are regarded as survival clauses. A general sunset clause will include a period of 5 years and longest could go up to 25 years. For instance, China and India entered BIT into 2007 but the BIT got terminated in 2017[14]. The termination would ideally mean an exit for the parties to the BIT but such survival clauses in the BITs complicate the exit route. The process of denunciation becomes cumbersome if the BITs are not negotiated between the parties prudently which could result in having such a clause in the BIT.

h) Fork in the road clause: In the Model BIT, 2016, an investor ideally has to explore all the domestic redressal avenues before approaching the investment arbitral tribunals. However, in few of the agreements, the investors have an option of either moving before domestic courts and tribunals or to move before the investment tribunals. Such a clause is known as fork in the road clause[15].

BIT Arbitrations in India 

After signing its first BIT in 1994, India devolved its first Model BIT in 2003 and it resembled with the United Kingdom BIT. However, India faced its first round of BIT arbitration in the year 2004 in the infamous Dabhol Power Plant case[16]. The plant was to be set up in the State of Maharashtra and various investor states like United Kingdom, Netherlands, Mauritius, France, Switzerland and Austria invoked the BIT arbitration against India. More specifically, Bechtel and General Electric brought claims against India under the India-Mauritius BIT, alleging expropriation of their interest in the power plant by the Indian Government. The claims were however settled and India had to compensate for losses.

Thereafter, one of the first substantive cases related to BIT arbitration came up in the White Industries case[17]. In 1989, the Australian company entered into a contract with the Coal India Limited, a public sector undertaking for developing of coal mines in Piparwar (Erstwhile Bihar, now Jharkhand), India.  White Industries alleged that due to inconceivable delay at the hands of the Indian judiciary spanning around 9 years, the company had incurred huge losses and there has been a breach of treaty guarantee. One of the interesting facets of the said case was while passing the award, the tribunal held that there had been a breach of guarantee to provide ‘effective means to assert claims’, a guarantee which was not present in the India-Australia BIT and was drawn from India-Kuwait BIT. The award[18] made India pay approximately USD 4 million as damages and legal cost[19].

Investor-State Disputes in India 

Whenever disputes relating to investments come to our mind specifically in the Indian context, the case of Louis Dreyfus Armateurs SAS v. India [20] cannot be ignored. It is considered to be one of the first cases where India succeeded in having an award in its favour. In first of its cases resulted out of a dispute that arose after termination of the agreement by Haldia Bulk Terminals Private Limited (‘HBT’). Louis Dreyfus initiated investment arbitration against India under the India-France BIT alleging that the termination of HBT virtually decimated the investment. An UNCITRAL arbitral tribunal has reportedly dismissed a US$ 36 million claim by a French investor, Louis Dreyfus Armateurs SAS (“LDA“), against India under the 1997 France-India bilateral investment treaty (“BIT“). The award is not public at this time, but press reports state that LDA has also been ordered to pay approximately US$ 7 million in respect of India’s substantial legal expenses[21]. The Permanent Court of Arbitration held[22] that in order to invoke jurisdiction of the tribunal by an investor in an indirect investment, the investor shall hold at least 51% ownership in order to fall within the protection granted by the BIT as defined under Article 2(1) of the BIT.

Among the other investment arbitrations like Deutsche Telekom AG v. Republic of India[23], Khadamat Integrated Solutions Private Limited v. Kingdom of Saudi Arabia[24], one such case which is also very significant is Union of India v. Vodafone GroupPlc [25]. In 2014, Vodafone International Holdings BV (‘VIHBV’) initiated investment arbitration against the Republic of India under the India-Netherlands BIT. It was interesting to note that while the abovementioned arbitration was pending the VIHBV filed another set of investment arbitration under the India-UK BIT against the retrospective effect of an amendment made by the Indian Government under Section 9(1) and Section 195 of the Income Tax Act, 1961 read with Section 119 of the Finance Act, 2012. The Indian Government approached the Delhi High Court seeking an anti-arbitration injunction against VIHBV for initiating two parallel arbitral proceedings. However, in the year 2018, the Delhi High Court rejected[26] the contentions of  Republic of India upholding the principle of ‘kompentz kompetz’ and held that the purview of intervention with a BIT arbitration is very limited and the provisions of the Arbitration and Conciliation Act, 1996 will not apply to the BIT arbitrations.

The year 2019 also saw some more relevant inter-State disputes.  Khaitan Holdings (Mauritius) issued a notice of dispute to Republic of India under the India-Mauritius BIT.  Republic of India moved before the Delhi High Court seeking anti-arbitration injunction against Khaitan Holdings. However, the Delhi High Court while relying upon Vodafone Plc[27] (supra) held that it is with the arbitral tribunal to determine whether Khaitan Holdings were investors as defined under the India-Mauritius BIT. The Delhi High Court in its judgment in Union of India v. Khaitan Holdings (Mauritius)[28] held that the provisions of the Arbitration and Conciliation Act, 1996 will not be applicable to such arbitrations[29].

Another interesting set of investment arbitration took place in Nissan Motor Co. Ltd. v. Union of India[30], where one of the facets of BIT i.e. fair and equitable treatment was evaluated by the Permanent Court of Arbitration. Nissan Motors initiated investment arbitration against India under India-Japan Economic Partnership Agreement against the non-payment of unpaid incentives under the Indian tax regime. Nissan also alleged that Republic of India has also violated Comprehensive Economic Partnership Agreement (CEPA) wherein the agreement affords some protection to the Japanese entities in India and vice versa.  Republic of India however, raised an objection before the Permanent Court of Settlement, Singapore with respect to its jurisdiction to adjudicate the dispute. The Permanent Court of Settlement, Singapore rejected the contentions made by  Republic of India. The case is still pending for final adjudication[31].

Model BIT, 2016-India’s Reconnisance attempt 

With the passage of time and after witnessing multiple investment arbitration downfalls, India tried to devolve a new Model BIT in 2016[32]. The Model BIT consists of 38 articles and 7 chapters and showcased a departure from the locus India used to have with its erstwhile BITs. It could be said that the 2016 Model is more State centric than its earlier predecessors i.e. the 2003 India Model BIT. The Model BIT has adopted  Salini Criteria’ as was held in the landmark case of ‘Salini Costruttori S.p.A and Italstrade S.P.A v. Kingdom of  Morocco[33] in order to determine the investment criteria for a foreign investor. The investment as mentioned in Article 1.4 has to be operated by the investor in ‘good faith’ which remains a point of deliberation while negotiating treaties with other countries[34].  Salini Criteria also postulated a mechanism which evaluates the substantial business activities for the test of investor[35].

The Model BIT has also made an exclusion of pre-investment activities from the purview of investments. It could be seen under Article 1.4(iii) which stated that “any pre-operational expenditure relating to admission, establishment, acquisition or expansion of the enterprise incurred before the commencement of substantial business operations of the enterprise in the territory of the Party where the investment is made.”

The Model BIT, 2016 has removed the Most Favoured Nation (‘MFN’) clause. A MFN clause ensures protection for a foreign investor and its investment and its primary purpose to afford equal treatment of both foreign and domestic market players. India has done away from the MFN clause taking its cue from Salini case[36] wherein the investor tried to import arbitration as a dispute settlement mechanism from Jordan-UK BIT through the MFN clause in the Jordan-USA BIT. The contention was, however, rejected by the International Centre for Settlement of Investment Disputes. India has tried to curb the chances of an investor seeking benefits from a separate treaty with a third party however, by not having MFN clause exposes a foreign investor to differential treatment risks.

India has also incorporated Article 15.2 which states that an investor has to necessarily seek legal remedy from the domestic courts of a host states for an initial period of 5 years before seeking a claim under Model BIT. If a foreign investor had to take a cue from the episodes of Indian judicial system in White Industries[37] then having this clause in the BIT might just prove preposterous for any investment.

One of the welcoming articles of Model BIT is Article 10 which deals with ‘Transparency’. The article ensures that the investing state or the investor get well versed with the prevailing laws, regulations and procedures. Also, Article 10.2 which postulates a mechanism of consultation with the investor State or the investor regarding a particular law, regulation, procedures will instill confidence in the investors.

The Model BIT, 2016 has also devolved a differentiation between direct and indirect expropriation. There is no precise definition of expropriation. However, the Model BIT, 2016 under Article 5 specifically deals with expropriation. The Model BIT, through indirect expropriation has covered the concept of ‘creeping expropriation’. The Model BIT has further broadened the contours of expropriation by stating that the character, intent and objective of the measure taken by the government of the host country has to be prudently evaluated before considering the prospect of expropriation. A perusal of Article 5 of Model BIT, 2016 reveals that it has been made more host-State-centric and requirements to adopt indirect regulatory measures create cynicism in the minds of the investor and further acts as a road block for an investor seeking refuge under the purview of expropriation before the investment arbitration tribunals.

Handling BITS and Investments during and after COVID-19 [38]

The entire world is undergoing an epidemic which has not only engulfed many lives but has considerably decimated multiple economies. For instance, the International Air Transport Association has estimated a loss of global revenue at USD 63 billion to USD 113 billion[39]. In these challenging times, it becomes pertinent to evaluate the global investment psychology as resistance in investments would become a common phenomenon. It would be interesting to see how India would re-plan and formulate its strategies so as to reinvigorate the investments in India[40].

It would be also interesting to see how investors are treated under such dire circumstances. As the lockdown, which has been enforced in a majority of nations across the world, the commitments underlying within a treaty may get disgruntled[41]. The prospect of indemnification with respect to the investors also needs to be evaluated.  One has to evaluate as to how will a non-performance of an obligation under a treaty will be treated? As most of the BITs provide for expropriation (direct & indirect) and general exceptions, it would also be interesting to see that how will be interpreted under the light of extra-ordinary circumstances such as COVID-19.  For instance, Article 32 covers the General Exceptions and Article 32.1(ii) specifically states that ‘(ii) protect human, animal or plant life or health’.

Times like these seek greater conscience and greater responsibilities. The very need to avoid the investor-Sate dispute could never have been any greater. When the entire world economy has been crippled by COVID-19, resorting to high stake Investor State Dispute Settlement (‘ISDS’) mechanism does not seem to be a good option. More specifically, for developing countries like India which has already been economically rattled by the pandemic, any investor-state dispute will further worsen the situation. According to the fact that the litigant might be reeling under a financial stress, an option of third party funding by someone who has a majority stake in the investment could be ruled out. A recent judgment of the High Court of Bombay in Norscot Rig Management Private Limited v. Essar Oilfields Services Limited[42], wherein it was held that, an arbitration award, which has been obtained due to third party funding, cannot be termed as against of public policy of India. The validity of such agreements would be tested by the fact of the validity of the arbitration award.

However, it is pertinent to mention that a study of the OECD estimates the average cost to defend a claim is USD 8 million[43]. Specifically for developing countries like India, claims by different foreign investors are bound to surface but a situation like this would require a holistic approach in order to have a feasible investment environment.

Parting Thoughts 

In the last decade, international investments have increased in an unprecedented manner but at the same time India has also terminated many of its BITs. The disputes related to BIT and investment arbitration is a fast evolving law. There have been a flurry of investment arbitrations and legal proceedings post arbitral proceedings which have challenged the fundamentals of BIT arbitration in India. India as a contesting party has had lot of debacles in the BIT arbitrations, sometimes due to weak clauses in the treaty and sometimes due to constrained usage of legal acumen. Most investment arbitrations nowadays are brought on the basis of bilateral and multilateral treaties and are conducted under different conventions like ICSID Convention, UNCITRAL Arbitration Rules, etc. India is not a signatory to the ICSID Convention, which is among the most sought out institution for BIT arbitrations. However, some recent decisions in the year 2019, for instance Tenoch Holdings Limited (Cyprus), Maxim Naumchenko (Russian Federation)[44], South-East Asia Entertainment Holdings Limited[45] cases bring some positivity to the BIT arbitrations in India.

One cannot ignore the fact that COVID-19 as an epidemic has savaged the world economy. With expectations of multiple claims to be made in future by foreign investors, it would be interesting to see how India handles the situation. 


*Authors are advocates practicing in Delhi.

[1] https://guides.ll.georgetown.edu/c.php?g=371540&p=4187393

[2] Treaty Between Federal Republic of Germany and Pakistan for Promotion and Protection of Investments dated 25-11-1959 (Bonn)

[3] Discrimination or Social Networks? Industrial Investment in Colonial India’ by Bishnupriya Gupta, University of Warwick; Department Economics.

[4] Friday Group Speaker: Justice Indu Malhotra : Bilateral Investment Treaty Arbitration: Last visited on 01.05.2020 (https://www.youtube.com/watch?v=EIr2t3SToNk)

[5] Department of Economic Affairs, Bilateral Investment Treaties (BITs)/Agreements https://dea.gov.in/bipa

[6] https://www.usnews.com/news/best-countries/slideshows/10-countries-that-receive-the-most-foreign-direct-investment?slide=2

[7] https://www.makeinindiadefence.gov.in/pages/fdi-policy-in-defence-sector

[8] https://dot.gov.in/fdi-policy-telecom

[9] https://www.fdi.finance/sectors/retail-and-e-commerce

[10] https://www.business-standard.com.article/pti-stories/dpiit-notifies-100-pc-fdi-in-insurance-intermediaries-120022501602_1.html

[11] https://internationalarbitrationlaw.com/about-arbitration/international-disputes/investment-arbitration/

[12] V. Inbavijayan & Kirthi Jayakumar, “ARBITRATION AND INVESTMENTS– INITIAL FOCUS”, Indian Journal of Arbitration Law, Vol. 2, Issue 1

http://www.ijal.in/sites/default/files/IJAL%20Volume%202_Issue%201_V.%20Inbavijayan%20%26%20Kirthi%20Jayakumar.pdf

[13] https://uk.practicallaw.thomsonreuters.com/3-501-7334?transitionType=Default&contextData=(sc.Default)&firstPage=true&bhcp=1

[14] https://economictimes.indiatimes.com/news/economy/foreign-trade/china-keen-on-bilateral-investment-pact-with-india/articleshow/63523147.com?from=mdr

[15] https://www.nortonrosefulbright.com/en/knowledge/publications/0bd10ad8/fork-in-the-road-clauses

[16] Capital India Power Mauritius I and Energy Enterprises (Mauritius) Company v. India,    ICC Case No. 12913/MS, Award dated 27-4-2005 (ICA).

[17] White Industries Australia Limited v. Republic of India, Final Award dated 30-11-2011 (UNCITRAL)

[18] Ibid

[19] http://lawtimesjournal.in/investment-arbitration-in-india/

[20] Louis Dreyfus Armateurs Sas (France) v. The Republic of India, PCA Case No. 2014-26, Award dated 11-9-2018 (PCA)

[21] https://hsfnotes.com/arbitration/2018/09/17/tribunal-awards-india-first-bit-case-win-dismissing-claims-of-french-investor/

[22] Louis Dreyfus Armateurs Sas (France) v. The Republic of India, PCA Case No. 2014-26, Award dated 11-9-2018 (PCA)

[23] Deutsche Telekom AG v. the Republic of India, PCA Case No. 2014-10,  Interim Award dated 13-12-2017 (PCA)

[24] PCA Case No. 2019-24, dated 7-2-2020 (PCA)

[25] Union Of India v. Vodafone Group Plc United Kingdom, 2018 SCC OnLine Del 8842

[26] Ibid

[27] Ibid

[28] Union of India v. Khaitan Holdings (Mauritius), 2019 SCC OnLine Del 6755

[29] https://www.nishithdesai.com/information/news-storage/news-details/article/investment-arbitration-india-2019-year-in-review.html

[30] Nissan Motor Co. Ltd. (Japan) v. The Republic of India; PCA Case No. 2017-37

[31] https://www.reuters.com/article/us-nissan-india-arbitration-exclusive/exclusive-arbitration-court-rejects-indias-plea-in-acse-against-nissan-sources-document-idUSKCN1SZ0X8

[32] https://dea.gov.in/sites/default/files/ModelBIT_Annex_0.pdf

[33] ICSID Case No. ARB/00/4; Decision on Jurisdiction dated 23-7-2001

[34] https://www.allenovery.com/en-gb/global/news-and-insights/publications/indian-model-bilateral-investment-treatyBilateral_Investment_Treaty_Arbitration_and_India-PRINT-2.pdf

[35] https://www.nishithdesai.com/fileadmin/user_upload/pdfs/Research_Papers/Bilateral_Investment_Treaty_Arbitration_and_India-PRINT-2.pdf

[36] Salini Costruttori SpA and Italstrade SpA v. Kingdom of Morocco, ICSID Case No. ARB/00/4, Decision on Jurisdiction dated 23-7-2001 

[37] White Industries Australia Ltd. v. Republic of India, Final Award dated 30-11-2011 (UNCITRAL)

[38] http://arbitrationblog.kluwerarbitration.com/2020/03/30covid-19-and-investment-treaty-claims/?doing_wp_cron=1588865131.8151700496673583984375

[39] https://www.iata.org/en/pressroom/pr/2020-03-05-01/

[40] https://globalarbitrationreview.com/article/1222354/could-covid-19-emegency-measures-give-rise-to-investment-claims-first-reflections-from-italy

[41] https://www.lexology.com/library/detail.aspx?g=e21b3a08-9ec8-4b74-af25-98d6a288ee26

[42] Norscot Rig Management Pvt Ltd v. Essar Oilfields Services Limited; 2019 SCC OnLine Bom 9153 

[43] https://www.theguardian.com/business/2018/jul/02/revealed-39m-cost-of-defending-australias-tobacco-plain-packaging-laws

[44] Tenoch Holdings Limited (Cyprus) v. Republic of India, Case No. 2013-23 (PCA)

[45] Astro All Asia Networks and South Asia Entertainment Holdings Ltd.  v. Republic of India; Award dated 8-10-2018 (UNCITRAL)

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The principle of Gram Swaraj is based on the idea of “self-governance” or “self-rule” which teaches human beings to be self sufficient by living in peace and harmony and by understanding and respecting the needs and demands of their fellow brethrens.

In dispute resolution, this principle inspires the conflicting parties to resolve their disputes amicably by understanding and respecting the needs and demands of each other. The true aim of the dispute resolution system based on the principle of Gram Swaraj is to unite the parties towards the path of humanity and love for mankind.

Mohandas Gandhi, in his autobiography, had shared an instance wherein he successfully convinced the parties to arbitrate their dispute and, thereafter, successfully convinced the award holder to allow the award debtor to pay the awarded sum in “moderate instalments”, even though the instalments were to run “over a very long period”. Had his client (the award holder) not gotten convinced for such a settlement, the award debtor would be declared bankrupt “and there was an unwritten law among the Porbandar Memans living in South Africa that death should be preferred to bankruptcy.”[1] Gandhi wrote thereafter that “It was more difficult for me to secure this concession of payment by installments than to get the parties to agree to arbitration. But both were happy over the result, and both rose in the public estimation. My joy was boundless. I had learnt the true practice of law. I had learnt to find out the better side of human nature and to enter men’s hearts. I realized that the true function of a lawyer was to unite parties riven asunder. The lesson was so indelibly burnt into me that a large part of my time during the twenty years of my practice as a lawyer was occupied in bringing about private compromises of hundreds of cases. I lost nothing thereby – not even money, certainly not my soul.[2]

This enshrines the spirit of Alternative Dispute Resolution mechanism in India.

Alternative Dispute Resolution (hereinafter ‘ADR’),which stands as an acronym for a variety of dispute resolution methods such as arbitration, mediation, conciliation, Permanent Lok Adalats, etc., complements the formal justice system. The ADR mechanism gives the autonomy to the parties to select the procedure and the dispute resolution method which are best suited to their needs and preferences. This enables them to resolve their disputes more efficiently by avoiding the complexities involved in court adjudication. This means that they will have more freedom, relaxed rules, tailored remedies, speedy resolution, cost-efficient mechanisms, and an improved access to justice.

However, the parties while deciding to resolve their dispute through any mode of ADR face certain difficulties such as uncertainty in the selection of procedures, uncertainty in the selection of an efficient panel of neutrals (arbitrator, conciliator, mediator, etc.), uncertainty in fixing the fee of the panel of neutral(s), difficulty in searching for a proper place of proceeding etc. To overcome these shortcomings, the institutional ADR offers many advantages. The institutional ADR facilitates the process of ADR by equipping the parties with the prerequisites for effective conduction of the proceedings. For example, it provides to the parties a well built-in infrastructure, a panel of specialised and efficient neutral(s), uniform fees, updated rules, and predetermined procedures, among others.

While these institutional advantages can be avail for the ADR methods such as arbitration, mediation, negotiation, etc, in India, the institutional system of Permanent Lok Adalat (hereinafter ‘PLA’) provides for some additional benefits. Moreover, whenever we think about institutional ADR, we mostly think of Arbitration and Mediation. However, we fail to acknowledge that these mechanisms are predominantly of the rich and the corporate. The common man hardly avails justice through these modes of ADR. Thus, the PLA is an ADR institution for justice to the common man. It is cost-efficient, speedy, government-supported, and promises justice to all, irrespective of their economic, social, or other disability.

PERMANENT LOK ADALATS

Permanent Lok Adalats (hereinafter ‘PLAs’) are one of the most effective tools of ADR in India. PLAs are special tribunals established by the National Legal Service Authority (hereinafter ‘NALSA’) or the State Legal Service Authority (hereinafter ‘SLSA’) with a pre-litigation attempt to resolve the disputes related to public utility in a speedy manner by means of compromise. The latest statistics on PLAs available on the NALSA website reveal that currently there are 298 PLAs in the country which had collectively settled 102,625 out of 143,061 cases from April 2018-March 2019, the total settlement value of those touches Rs. 3,870,578,815[3]. Moreover, the pecuniary jurisdiction of the PLA has been increased from Rupees Ten lakhs to Rupees One crore.[4]

Unlike Lok Adalats which can only be called occasionally, PLAs are established institutions. With the aim of fulfilling the constitutional promise of justice to all, in an affordable, efficient and speedy manner, Parliament in 2002 made certain amendments in the Legal Services Authorities Act, 1987 (hereinafter ‘the Act’), and added Chapter VI-A for pre-litigation conciliation and settlement of the disputes.

This amendment, which gave birth to the system of PLA, was an attempt to further strengthen the system of Lok Adalat in India by institutionalising a forum for compulsory pre-litigation re-conciliation and settlement of disputes related to public utility services such as those related to transport, postal, sanitation, education, dispensary, banking, insurance, housing and real estate, power, light, water, etc.[5]

Further, the unique feature of PLA is that, unlike Lok Adalat, it is a hybrid mechanism of reconciliation and adjudication. In Interglobe Aviation Ltd v. N. Satchidanand,[6] the Supreme Court of India said that the procedural trait of PLA is CON-ARB (that is “conciliation-cum- arbitration”). Further, in Bar Council of India v. Union of India[7], it was said that PLAs are empowered to decide the dispute on merits upon failure between the parties to arrive at a settlement by the way of conciliation.[8]

This means that PLA has twofold power. First: it has the power to conduct the conciliation proceedings between the parties, taking into consideration the circumstances surrounding the dispute, to help them reach an amicable solution in an impartial, speedy, and independent manner.Second: if during the conciliatory proceedings in action, the panel of neutrals realises that one of the parties is unnecessarily becoming adamant to not settle the dispute, even when there exist possible “elements of settlement” for the parties to sign an ‘agreement of settlement on dispute’, then the PLA also has the power to give a decision in the dispute, provided that the dispute does not relate to any non-compoundable offence.[10]

Therefore, the major advantage of PLA is that even though it is a forum for ADR which primarily aims at resolving disputes consensually, yet it is empowered to give a final and binding decision when one of the parties purposefully gets unwilling to settle a fit case.

Are the awards of PLA appealable?

Every award of PLA is final and binding[11] and “shall not be called into question in any original suit, application or execution proceeding”[12]. Here, one may argue that the appeal of the award of PLA should be possible primarily because (i) the Act expressly doesn’t bar the appeal for the award of PLA whereas it does expressly bar the appeal for the award of Lok Adalat under Section 21(2) of the Act which says that “no appeal shall lie to any court against the award [of Lok Adalat]”[13] and (ii) because PLA can adjudicate a dispute on the merits of the case which opens room for the aggrieved party to move the award in appeal, in contrast to Lok Adalat which only conciliates a dispute and passes award on the consent of the parties, thus, leaving no room for an appeal.[14]

However, the Supreme Court of India refuted these arguments in Bar Council of India[15](supra), and held that the award of PLA is non-appealable. It further clarified that (i) the right to appeal is not an inherent right but a creation of statute; if a statute doesn’t expressly prohibits the appeal of an award, that by ipso facto doesn’t make an award appealable especially when the text of the statute strongly suggests otherwise; (ii) that PLAs are special tribunals aiming at resolving public utility disputes at the earliest, and hence, to avoid unnecessary prolongation, the right to appeal is absent; (iii) that if at all, a party is aggrieved by the adjudication of PLA, he always has an option to invoke the special and extraordinary jurisdiction of the High Court under Articles 226 and 227 of the Constitution of India.[16]

Procedure followed by PLA

The procedure followed by the PLA is in complete resonance with what is required to be followed in any ADR mechanism. The legislation requires that the proceedings in the PLA, both at the time of conciliation between the parties and at the time of deciding a dispute on merit if needed, should be guided by “the principles of natural justice, objectivity, fair play, equity, and other principles of justice.”[17] Moreover, it is required that the PLA should remain impartial and independent while conciliating the parties to reach an amicable solution.[18] Further, as far as procedural applicability is concerned, the PLA is not bound by the Code of Civil Procedure, 1908 and the Evidence Act, 1872[19]. However, “for the purpose of holding any determination”, the PLA shall have the same powers as are vested in a civil court under the Code of Civil Procedure, 1908 while trying a suit.[20]

Suggestions

While PLA is one of the fastest growing ADR institutions in the country, its jurisdiction to entertain only the matters related to the public utility services needs to be expanded. I suggest that the civil dispute claims such as breach of contract claims, tort claims, equitable claims, traffic rules claims, negotiable instrument claims, etc., must also be put under the purview of PLA. Here, it is noteworthy that according to the 245th Report of the Law Commission of India, the disputes related to negotiable instruments, police and traffic challan, electricity bills, and sanitation are the source of excessive litigation in the country.[21]

The huge backlog of cases only makes justice less accessible. Therefore, to reduce the backlog of cases, and in the interest of speedy justice, it is suggested that such disputes should compulsorily be resolved through PLA.

Further, after regarding the composition of PLA, it is my suggestion that there should be some definite definition of the term persons “having adequate experience in public utility service”.[22] In SN Pandey v. Union of India[23], the Supreme Court of India said that “We do emphasis that the persons who are appointed on the Permanent Lok Adalats should be person of integrity and adequate experience. Appropriate rules, inter alia in this regard, no doubt will have to be framed, if not already in place”.[24] Hence, it is proposed that the Government should notify certain specifications for the appointment of the neutrals in the panel of a PLA.

Lastly, a time-frame needs to be introduced for resolution of disputes in PLAs. Currently, there is no time limit for the resolution of disputes that are filed before PLAs.Therefore, if disputes are left unresolved for a longer period, there will be ambiguity and instances of unchecked discretionary actions by the PLA panels. Hence, to keep alive the spirit of PLA, a time-frame must be defined by the Government.

PLA vis-à-vis International Arbitration Institutions

Whether it can be said that PLA is an Indian model bearing close similarity to international arbitration tribunals?

While there are a few procedural similarities between the PLA and international arbitration institutions, the system of PLA is a unique one. The unique model devised to grant justice to the common man makes PLA stand out in the world from the rest of the ADR institutions.

The PLA charges zero fee for the resolution of disputes[25]. Also, the parties have the option of arguing their case by themselves, thus allowing them to save on the lawyer’s cost. In contrast, resolving a dispute before an international tribunal through any mode of ADR viz. arbitration, mediation, or conciliation is very costly. It involves hefty administration fee, counsel fee, neutrals’ fee (i.e. the fee charged by the panel of arbitrators, mediators, or conciliators as the case may be) among others.

Further, the PLA model is inherently a ‘multi-tier dispute resolution’ model i.e. it first provides conciliation of the dispute, and, if the conciliation fails because of the adamant nature charged with mala fide of one of the parties, then the PLA can even adjudicate the dispute. Whereas, to avail a multi-tier dispute resolution process before an international tribunal, it requires (i) consent of the parties at dispute, (ii) a multi-tier dispute resolution clause, (iii) time, resources, and efforts to defend any challenge related to the existence, validity, invocation, or qualification of the multi-tier dispute resolution clause, and (iv) multiple costs at every tier of the multi-tier dispute resolution.

Furthermore, under the PLA model, the parties do not have to decide anything ‘mutually’ concerning the dispute resolution before entering into any contractual relationship relating to the use of public utility services. PLAs are government institutions which provide CON-ARB form of ADR with pre-defined procedure, rules, composition and qualifications of the panelists, and which are currently located at 298 different ‘places’ in India. A party can unilaterally invoke the jurisdiction of the PLA without the need for any pre-existing dispute resolution agreement. In contrast, the resolution of a dispute before an international tribunal is purely based on ‘party autonomy’ and existence of a valid ‘dispute resolution agreement’. Thus, the parties have to mutually agree upon the form of ADR, its procedure, forum, place, venue, number of arbitrators (or mediators or conciliators as the case may be), subject-matter, etc., before entering into any contractual relationship. This involves a lot of time, effort, and resources both during the drafting of the dispute resolution agreement and thereafter, during defending its ingredients before the tribunal. The system of PLA, therefore, provides an escape route from these complexities and challenges, thus, saving a lot of time, resources and energy of the parties, and ensuring a time-bound resolution of the dispute.

Finally, the subject-matter of disputes before PLAs and international tribunals is largely different. PLAs aim at resolving public utility disputes at the domestic level while the international tribunals function to resolve international/domestic commercial disputes, investor-State treaty disputes, and State-to-State disputes. Both the tribunals, however, share similarity so far as both are (i) institutionalised forum of ADR and (ii) not bound by the domestic rules of evidence and civil procedure.

The advantages of the PLA cannot be compared readily with those of international tribunals. PLA is a forum that provides justice to the common man whereas international tribunals are predominantly of the rich and the corporate.

CONCLUSION

PLA – the unique hybrid of reconciliation and adjudication in India- is the Indian contribution to the world ADR jurisprudence. The PLA performs the function of promoting and strengthening the principle of “equal access to justice” in the country.  It is very popular among the litigants and legal functionaries not only because of its innovative nature and inexpensiveness but also because it serves the common man. The country which is infected with illiteracy, poverty, downtrodden and pendency of cases, PLA is the institutional ADR mechanism progressing towards the attainment of the principle of “Gram Swaraj” and the constitutional promise of justice to everyone at the doorstep.


*IV Year BA LLB (Hons.) student at Maharashtra National Law University, Nagpur. Email id: prakhar.spc@gmail.com

[1] Mahatma Gandhi, The Story of My Experiments with Truth 158 (1959).

[2] Ibid, 158-59 (1959).

[3] National Legal Service Authority, Permanent Lok Adalat, April 2018 to March 2019, National Legal Service Authority of India (May 02, 2020, 02:05 Am)

[4] Section 22-C(1) of the Legal Services Authorities Act, 1987

[5] See Section 22-A(b) of the Legal Services Authorities Act, 1987

See also, National Legal Service Authority, Lok Adalat: Permanent Lok Adalat, National Legal Service Authority of India (May 02, 2020, 02:25 Am), https://nalsa.gov.in/lok-adalat.

[6] (2011) 7 SCC 463

[7] (2012) 8 SCC 243

[8] See also, Section 22-C(8) of the Legal Services Authorities Act, 1987

[9] S.N. Pandey v. Union of India, (2012) 8 SCC 261

[10] Section 22-C(7) read with Section 22-C(8) of the Legal Services Authorities Act, 1987

[11] Section 22-E(1) of the Legal Services Authorities Act, 1987

[12] Section 22-E(4) of the Legal Services Authorities Act, 1987

[13] Section 21(2) of the Legal Services Authorities Act, 1987

[14] P.T. Thomas v. Thomas Job, (2005) 6 SCC 478

[15] (2012) 8 SCC 243

[16] Bar Council of India v. Union of India, (2012) 8 SCC 243

[17] Section 22-D of the Legal Services Authorities Act, 1987

[18] Section 22-C(5) of the Legal Services Authorities Act, 1987

[19] Section 22-D of the Legal Services Authorities Act, 1987

[20] Section 22(1) of the Legal Services Authorities Act, 1987

See also, Bar Council of India v. Union of India (2012) 8 SCC 243.

[21] Law Commission of India, Report No. 245 on Arrears and Backlog: Creating Additional Judicial (wo)manpower, Government of India, (July 2014) 

[22] Section 22-B(2)(b) of the Legal Services Authorities Act, 1987

[23] (2012) 8 SCC 261

[24] SN Pandey v. Union of India, (2012) 8 SCC 261

[25] National Legal Service Authority, Lok Adalat, National Legal Service Authority of India (May 04, 2020), https://nalsa.gov.in/lok-adalat.

Op EdsOP. ED.

An evaluation of the process of appointment of arbitrators from a ‘broad based panel’

Introduction

Arbitration is an ever-evolving arena. The Arbitration and Conciliation (Amendment) Act, 2015 (Act 3 of 2016)(“the Arbitration Amendment Act,  2015”) had introduced substantial changes to the provisions of the Arbitration and Conciliation Act, 1996 (“the Arbitration Act, 1996”). Many vexed questions regarding interpretation of several provisions of the Arbitration Amendment Act, 2015 have arisen, some of which have subsequently been settled and/or clarified by various judgments of the High Courts and the Supreme Court of India. Some issues, however, continue to harbour controversies, like that of the appointment of arbitrators.

This paper endeavors to analyse firstly, the degree of fairness which the parties are required to adopt with regard to the procedure for appointment of arbitrators in government contracts in light of the current legal scenario established by Indian courts. Secondly, whether the current norms established by the courts for appointment of arbitrators in government contracts can be regarded as cogent? And, lastly, understanding the duty incumbent upon the courts to create a conducive environment for arbitration of disputes arising out of government contracts.

The journey thus far

As far as the present legal scenario regarding appointment of arbitrators in government contracts are concerned, it will be interesting to note the development of precedents. The Supreme Court’s decision in TRF Ltd. v. Energo Engineering Projects Ltd. (“TRF Ltd.”)[1] opened up more chambers of controversy than the issues it had put to rest. The Court held that once the identity of a managing director of a company, being a party to an arbitration proceeding, as the sole arbitrator is lost, the power to nominate someone else as an arbitrator is obliterated, thereby extending the scope of Entries, 1, 5 and 12 of the Seventh Schedule to attract the disqualification, which provides that the proposed Arbitrator should not be an employee of one of the parties to the arbitration.

The Supreme Court vide the judgment of Perkins Eastman Architects DPC  v. HSCC (India) Ltd. (“Perkins Eastman”)[2] while clarifying the TRF Ltd.[3] (supra) legacy eloquently established that arbitration clauses which provide exclusive power to one party to appoint a sole arbitrator cannot be the norm of the day anymore and principles of impartiality and absence of bias in arbitration proceedings should be of paramount consideration.

The aforesaid principle established by Perkins Eastman (supra) also resonates in the recent judgment delivered by the Delhi High Court in  Proddatur Cable TV Digi Services v. SITI Cable Network Ltd. (“Proddatur”)[4] wherein the Court while placing reliance on the ratio of Perkins Eastman[5] (supra) held that even a ‘company’ acting through its Board of Directors will have an interest in the outcome of the dispute and thus, the arbitration clause which envisaged the appointment of a sole arbitrator by the ‘company’, would be rendered unworkable. The Court further opined that the underlying principle of party autonomy in an arbitration clause, cannot be permitted to override the principles of impartiality and fairness in arbitration proceedings. 

However, a situation where both parties to an arbitration agreement are provided with the option to nominate their respective arbitrators, the same would be treated differently. The rationale behind the same is that, an advantage which one party may derive by nominating an arbitrator of its choice would get counter-balanced with the equal power provided to the other party. The Court drew the distinction with respect to cases where only one party has a right to appoint a sole arbitrator and stated that such choices will always have an element of exclusivity in determining or charting the course for dispute resolution and thus, a person who has an interest in the outcome or decision of the dispute, must not have the power to appoint a sole arbitrator.

It is to be noted that Perkins Eastman[6] (supra) despite initiating discussions, did not deal with a situation where an arbitrator is chosen from a panel appointed unilaterally by one of the parties to arbitration.

A snapshot of other jurisdictions

The jurisprudence in foreign jurisdictions is also not significantly different when it comes to ensuring equality of opportunity of parties in constituting the arbitral tribunal. The principle of equality of parties or the principle of equal treatment in the designation of parties was first enunciated by the French Cour de Cassation in  Sociétés BKMI et Siemens v. Société Dutco (“Dutco”)[7]. In this case, the Court set aside an arbitral award rendered in a three-party dispute where each of the two respondents asserted the right to appoint their own arbitrator, rather than make a joint appointment. Though the respondents eventually made a joint nomination under protest, the court set aside the award on the basis that, the appointment procedure violated the respondents’ right to equal treatment because it granted the claimant greater influence in the constitution of the arbitral tribunal than each of the respondent. The Cour de Cassation further went onto hold that the “equality of the parties in the appointment of arbitrators is a matter of public policy which can be waived only after the disputes has arisen”.[8] The position of law thus underwent a noticeable change post Dutco which consequently led to major alterations in the rules formulated by prominent arbitral institutions, including the International Chambers of Commerce (“ICC”) and London Court of International Arbitration (“LCIA”) pertaining to constitution of arbitral tribunals by the parties.

The aforesaid prevailing rule of law is also manifest from the decisions rendered by US Courts which have time and again refused to enforce appointment procedures in employment disputes which permits one party (in most cases, the employer itself) to dictate the list from which the arbitral tribunal could be constituted[9].

Establishing a new norm pertaining to appointment of arbitrators

The Supreme Court in Voestapline Schinen GmbH v. Delhi Metro Rail Corporation Ltd.[10] (“DMRC case”) dealt with the question of choosing an arbitrator from a panel selected by a party, for the first time. For the purposes of understanding the rationale of the decision, it may be useful to delve into the facts of the case in brief.

In this matter, the procedure for constitution of the arbitral tribunal came up for consideration by the court. The procedure envisaged that upon invocation of the arbitration clause, the respondent shall forward names of five persons from the panel of arbitrators maintained by the respondent. Thereafter, both the petitioner and the respondent, will have to choose its nominee arbitrator from the said panel. Two such chosen arbitrators will, thereafter, choose the third arbitrator from the said panel, to act as the presiding arbitrator. This procedure of constitution of the arbitral tribunal was not acceptable to the petitioner owing to the fact that the panel prepared by the respondent comprised of serving or retired engineers of the respondent company and government departments or public sector undertakings and they purportedly did not qualify as independent arbitrators in the light of the ineligibility norms provided under Section 12(5) read with Seventh Schedule to the Arbitration Act, 1996.

The Supreme Court struck down the aforesaid procedure holding that it is imperative that a panel should be ‘broad based’ in nature. The Court also prescribed the category of persons who can form a part of the panel in addition to serving or retired engineers of government departments and public sector undertakings. As per the Court, such persons included engineers of prominence and high repute from the private sector and also, persons with legal background like judges and lawyers of repute. Further, while concluding, the Supreme Court directed formation of a panel comprising 31 arbitrators. It would, however, be pertinent to mention that the Supreme Court vide the said judgment, did not prescribe a specific number of arbitrators who are mandatorily required to be included in a panel so it may be called ‘broad based’.

It is however, pertinent to mention, that although the DMRC case[11] (supra) discussed the issue of constructive bias with regard to a situation where a party is given the exclusive power to create a panel of arbitrators, the Supreme Court failed to lay down any specific guideline to address it and anticipated that the rule of creating a ‘broad based panel’ established by it, would sufficiently address any controversy that may arise in connection to it. Whether or not such rule clarifies the position or confuses it has been analysed in the following portion on this paper.

Clarifying pre-established principles?

The opportunity to test the principle of a ‘broad based panel’ enunciated by the DMRC case (supra) on the whetstone of the principles of equality, presented itself before a Full Bench of the Supreme Court in  Central Organisation for Railway Electrification v. ECI-SPIC-SMO-MCML(JV) (“Central Organisation case”)[12].

Here, the dispute amongst the parties arose in respect of an arbitration clause which stipulated that the arbitral tribunal shall comprise of a panel of three retired railway officers not below the rank of ‘senior administrative officer’ as arbitrators. For this purpose, the petitioner (Railway) would send a panel of at least four names of retired railway officers. On receipt of the panel of four names, the respondent (contractor), would suggest to the general manager of the petitioner, at least two names out of the panel for appointment as the respondent`s nominee and the general manager shall appoint at least one out of them as the respondent`s nominee. Further, the General Manager would also be simultaneously required to appoint the balance number of arbitrators from the arbitrators remaining in the panel or from ‘outside the panel’.

In respect of the general manager’s authority to appoint arbitrators, the issue before the Supreme Court was similar to one dealt in TRF Ltd.[13] (supra) i.e. when a named arbitrator had become ineligible by the operation of law to be appointed as an arbitrator, could he be eligible to nominate an arbitrator?

The Court after analysing the law laid down in TRF Limited (supra) and Perkins Eastmans[14] (supra), held that in this matter the right of the general manager to appoint arbitrators is counter-balanced by the respondent’s power to choose any two from out of the four names, one of whom would be appointed as the respondent’s nominee. The Court, therefore, held that the general manager does not become ineligible to appoint arbitrators and the ratio laid down in  TRF Ltd. is not applicable in the instant case.

Despite heavily relying upon the DMRC case[15] (supra) for the purposes of upholding appointment of ex-employees of an organisation as members of the arbitration panel, the Supreme Court in Central Organisation case[16] (supra)did not make any reference to creation of a ‘broad based panel’ of arbitrators while dealing with the issue of ineligibility of the general manager to appoint a nominee. Moreover, it is pertinent to note that the panel in the Central Organisation case (supra) comprised only ‘four’ arbitrators which is in stark contrast to the principle of a ‘broad based panel’ of at least 31 names, as enunciated by the Supreme Court in the DMRC case (supra).

Further, notably the Supreme Court in the DMRC case[17] (supra) had expressly carved out the ‘adverse consequences’ that might manifest if a unilateral discretion is vested with a single party to create a panel of arbitrators including the limited choice where the managing director has to select the presiding arbitrator out of the two nominated arbitrators. In Central Organisation case (supra), the General Manager was required to appoint the remaining arbitrators from the arbitrators left on the panel, or from ‘outside the panel’. There is no discussion in Central Organisation case (supra) pertaining to what constituted ‘outside the panel’. It is unclear if the court meant ‘outside the panel’ to indicate any arbitrator (which would be a unilateral decision, and hence fall foul of Perkins Eastman), or a panel of arbitrators qualifying to be a ‘broad based panel’? If the answer is a broad based panel that would automatically raise the question that whether an arbitration agreement could be interpreted so liberally? The Court has certainly failed to address these potent questions in the Central Organisation case (supra).

Additionally, it is ex facie evident from the facts of the Central Organisation case[18] (supra) that the General Manager of the petitioner was vested with the power to complete the process of constituting the arbitral tribunal by also indicating the ‘presiding officer’ from amongst the two such appointed arbitrators. This is distinct from the DMRC case (supra), where the arbitrators would indicate a presiding arbitrator amongst themselves.

In light of the aforesaid, it may be argued that the decision of the Court holding that the authority exercised by the general manager would not fall foul of the principles in TRF Ltd. (supra) judgment, cannot be regarded as fully acceptable. TRF Ltd. (supra) prohibited a nominee of a ‘managing director’ or any person who is a ‘part of the management’ to be appointed as an arbitrator. The general manager therefore, being vested with the authority to appoint the presiding arbitrator in the Central Organisation case (supra) from the remaining list of arbitrators or those who are from ‘outside the panel’ cannot be protected by the principle clarified by the court in Perkins Eastman (supra) since, for the purposes of appointing the presiding arbitrator to constitute the arbitral tribunal, the sole discretion vested exclusively with the general manager of the petitioner and there was no counter-balancing opportunity vested with the respondent. Thus, insofar as the appointment of the ‘presiding arbitrator’ for the arbitral tribunal is concerned, the same should have ideally fallen short of the standard laid down in TRF Ltd. (supra), and subsequently clarified by Perkins Eastman (supra).

Defining the contours of the DMRC case[19]

Though the Central Organisation case (supra) partially ignored the principles established by the DMRC case (supra), applying the concept of ‘adverse consequences’ enunciated by the DMRC case (supra), the Delhi High Court in  Afcons Insfrastructure Ltd. v. Rail Vikas Nigam Ltd. (“Afcons Infrastructure”)[20] disregarded the procedure for appointment of arbitrators enumerated under clause 17.3 (ii) of the General Conditions of Contract (GCC) between the parties. The said procedure prescribed that the employer (respondent) would forward a panel of 5 (five) names to the contractor (petitioner) for confirming any one name from the panel to be appointed as one of the arbitrators. The employer had the power to decide upon the second arbitrator, out of the remaining 4 names in the panel and thereafter, the presiding arbitrator would be appointed by two such appointed arbitrators. The said clause also provided that in case the two arbitrators are not being able to agree upon the presiding arbitrator; on request of either of the parties, the managing director of the respondent, can appoint the presiding arbitrator. The rationale for the decision of the Court was based on, inter alia, on the following:

  1. The said clause would limit the choice of the party to select one out of the five persons suggested by the other party as mentioned in DMRC case (supra).
  2. Since the respondent (RVNL) had suggested names of its former employees for appointment of an arbitrator, all such persons had a past relationship (however remote) with the respondent (RVNL/Railways). Such relationship may not strictly fall within the rigour of Section 12(5) read with the Seventh Schedule to the Arbitration Act, 1996, but undeniably, the same does give rise to apprehensions of bias, (whether justifiable or not), in the minds of the other party. Thus, it undermines the confidence of the parties in the arbitral process.

Although the Afcons Infrastructure (supra) judgment purported to expand the applicability of DMRC case (supra), it also placed an innuendo by holding that appointment of ex-employees of a particular party might create an apprehension of bias in the minds of the other party which may have an overall impact on the element of fairness in the arbitration proceedings. Whether or not this may be regarded as a reasonable limitation to the principle established by the Court in DMRC case (supra) is a question that begs consideration. The Fifth and the Seventh Schedules to the Arbitration Act, 1996 disqualifies arbitrators having past or present business relationships with one of the parties from being appointed to an arbitral tribunal constituted to resolve disputes between such parties. However, former employees are not disqualified to act as arbitrators.

The Supreme Court of India had the occasion to consider the issue in State of Haryana v. G.F. Toll Road Pvt. Ltd.[21] where it was held that only present employees are disqualified under  Entry 1 of the Fifth Schedule which is pari materia with Entry 1 of the Seventh Schedule to the Act. It was held that “any other past or present business relationship” refers to a relationship other than that of an employee, consultant, or advisor. Given that there is a gradual movement in the judicial precedents from “circumstances that give rise to justifiable doubts as to independence or impartiality exist” to an “apprehension of bias” in the arbitrator, it may be interesting to see if there is a purposive interpretation of the provision by a court of law, or an amendment of the statute to disqualify former employees as arbitrators in the near future.

A similar question arose for consideration before the Delhi High Court in  Simplex Infrastructure Ltd. v. Rail Vikas Nigam Ltd.  [“Simplex Infrastructure”][22] with regard to Clause 17.3.(ii) of the General Conditions of Contract (GCC) between the parties, as in Afcons Infrastructure (supra). The petitioner thus, contended that the said procedure cannot be adopted in the light of the judgment rendered by the courts in  DMRC case (supra) and Afcons Infrastructure (supra).

The Delhi High Court taking a note of the position of law already enumerated by the Supreme Court in DMRC case (supra) held that, the aforesaid manner of appointment of arbitrators as per the said clause is no longer valid and the respondent must broad base its panel of arbitrators by including names of engineers of prominence and high repute from the private sector, persons with legal background like judges and lawyers of repute; people having knowledge and expertise in accountancy. The Court also observed that the list of 26 (twenty-six) panel arbitrators prepared by the respondent comprised mostly of retired officials from the railways or other companies which falls under the umbrella of Indian Railways like IRCON/CRIS and only 9 (nine) of them were persons who were not connected with railways or any other railway organisations/companies. The Court thus, held the same to be contrary to the spirit of ratio laid down in Afcons Infrastructure (supra).

The Delhi High Court, whilst relying upon DMRC case (supra), also made it imperative for the party vested with the responsibility of creating the panel of arbitrators to include persons from diverse professions to pass the test of a ‘broad based panel’ of arbitrators. However, the Delhi High Court, like its predecessors on the issue, did not give any direction pertaining to the appropriate number of arbitrators for the purposes of comprising such a ‘broad based panel’.    

The occasion to answer the aforesaid question pertaining to as to what can be regarded as an appropriate number of arbitrators to be categorised as ‘broad based’ arose before the Delhi High Court in  SMS Ltd. v. Rail Vikas Nigam Ltd. (“SMS Ltd.”)[23] wherein it had to adjudicate upon the disputes between the parties regarding choosing a list of arbitrators from a ‘broad based panel of proposed arbitrators’. The said broad based panel comprised 37 (thirty-seven) arbitrators. The petitioners objected to the same since the names which were suggested by the respondent were mostly retired officers of either railway services or SPVs/PSUs/organisations of the railways. Moreover, only 8 (eight) names which were suggested by the respondent in the said panel, seemed to have no association with the Railway Ministry but were former government employees of organisations like NHPC, CPWD etc.

The Delhi High Court while placing reliance on Simplex Infrastructure (supra) and DMRC case (supra) held that the said ‘broad based panel of proposed arbitrators’ did not satisfy the concept of neutrality of arbitrators and hence, such a panel of 37 arbitrators cannot be regarded as ‘broad based’ in nature. 

Thus, the case of SMS Ltd. (supra), established that even a panel of 37 members cannot be regarded to be as enough for the purposes of passing the test of a ‘broad based panel’. Such an interpretation therefore, possibly warrants that the test of a ‘broad based panel’ is not dependent upon the number of arbitrators but, upon the diversity in the expertise of the professionals comprising a panel which renders such a panel to be ‘broad based’ in nature. However, unless the law in this regard is clearly laid down, what future possibly holds is a series of experiments with panels permuting and combining numbers, expertise and vocations of arbitrators to pass some unwritten test. Such prospect does not look too exciting.

Conclusion

The Supreme Court in  DMRC case (supra) had observed that time has come to send positive signals to the international business community, in order to create a healthy arbitration environment and conducive arbitration culture in India. The said observation by the Court was in consonance with that of the Law Commission, which in its Report[24], had stated that the duty becomes more onerous in government contracts, where one of the parties to the dispute is the government or public sector undertakings itself and the authority to appoint the arbitrator rests with it.

The Supreme Court’s resolve to create a conducive environment for impartial, fair and unbiased arbitrations to thrive in India is necessary to be followed in its true letter and spirit, especially, with regard to not providing exclusive powers to one party to prepare a panel of arbitrators. After all, it is warranted that both parties should have an equal opportunity to prepare the list of arbitrators for the panel to eliminate any notion of bias in the appointment of arbitrators.

As the current scenario reflects that the arbitration agreements between the parties continue to provide power to only one party to prepare the list of arbitrators, which in government contracts is the government itself, it may be advisable for government authorities to renegotiate the arbitration clauses/agreements providing for unilateral appointment of arbitrators and provide the other party with equal rights and opportunity in appointment of arbitrators. 


* Partner at Argus Partners, Kolkata

**Associate at Argus Partners, Kolkata

[1] (2017) 8 SCC 377

[2]2019 SCC OnLine SC 1517 

[3] (2017) 8 SCC 377

[4] 2020 SCC OnLine Del 350 

[5] 2019 SCC OnLine SC 1517 

[6] Ibid

[7] ASA Bulletin 10(2) (1992), 295. Decided on 17.01.1992.

[8] Id. at 297

[9] Murray v. United Food & Commercial Workers Int’l Union, 289 F.3d 297, 303 (4th Cir. 2002); Hooters of Am., Inc. v. Phillips, 173 F.3d 933 (4th Cir. 1999).

[10] (2017) 4 SCC 665 

[11] Ibid.

[12] 2019 SCC OnLine SC 1635

[13](2017) 8 SCC 377

[14] 2019 SCC OnLine SC 1517 

[15] (2017) 4 SCC 665 

[16] 2019 SCC OnLine SC 1635

[17](2017) 4 SCC 665 

[18] 2019 SCC OnLine SC 1635

[19](2017) 4 SCC 665 

[20] 2017 SCC OnLine Del 8675  

[21] (2019) 3 SCC 505

[22] 2018 SCC OnLine Del 13122

[23] 2020 SCC OnLine Del 77 

[24] Law Commission of India Report No. 246 on Amendments to the Arbitration and Conciliation Act, 1996 dated August, 2004. 

Case BriefsHigh Courts

Kerala High Court: Devan Ramachandran, J., directed the District Court to reconsider the petition challenging an award.

The present appeal has been filed by the petitioner challenging the order passed by the District Court wherein her challenge to an award passed by the District Collector under the provisions of the National Highways Act, 1956 (“Act”) had been rejected for the reason that the petition did not disclose the ingredients under Section 34 (2) of the Arbitration and Conciliation Act, 1996.

The counsel representing the petitioner, KS Bharathan submitted that the impugned order of the District Court is untenable because the Arbitration Award has been assailed only to the extent to which solatium and interest on solatium had been denied by the District Collector, while issuing it. The counsel placed reliance on the Division Bench judgment passed by the present Court Special Deputy Collector v. Vinod  Kumar, 2020 SCC OnLine Ker 1029 which had decided that since the Supreme Court has struck down Section 3-J of the Act, the provisions of the Land Acquisition Act, 1894 relating to payment of solatium and interest on solatium becomes applicable to the acquisitions made under the Act also. Counsel, therefore, prays that the impugned order of the District Court be set aside and his client’s claim for solatium and interest on solatium be acceded to.

Senior Government pleader representing the respondent, M.V. Anandan, conceded that the law has been now settled by the learned Division Bench as afore and the solatium and interest on solatium cannot be denied to the appellant.

The Court upon perusal of the arguments of the counsels stated that since the admitted position of the law is as afore, the present appeal deserves to be allowed. The Court also expressed that it will not be proper for the Court to grant the reliefs sought for hence it will direct the District Court to reconsider the original petition and take an appropriate decision thereon. [Prabha E.K. v. Deputy Collector, Arb. A. No. 54 of 2019, decided on 09-03-2020]

Case BriefsHigh Courts

Bombay High Court: A Division Bench of Pradeep Nandrajog, CJ and Bharati Dangre, J. while allowing the present appeals with regard to failure in showing sufficient cause to seeking review with a delay of 2680 days, stated that,

“It needs no rocket science for anyone to infer that probably the respondent got a premonition that it might lose.”

Facts pertinent to the issue

An agreement was entered between the appellants and respondent, wherein the respondent was to supply bunker fuel to the appellant’s vessel M.T. Antikeros at Mudra Port.  After the respondent supplied the same, 12 days later a dispute arose between the parties regarding the quantity and quality of the fuel. After about a month, the appellant claimed for damages. Respondent denied the liability and raised a counter-claim.

Appellant on 19-03-2009, invoked the arbitration clause, with a view to save arbitration costs, proposed a sole arbitrator. Appellant appointed R.S. Cooper as its arbitrator and called upon the respondent to do likewise. Respondent failed to respond to appoint an Arbitrator. Later Single Judge of the Bombay High Court pursuant to an application filed by the appellant for appointment of an arbitrator on behalf of respondent disposed of the same by appointing J.K. Bhatt as an Arbitrator on 21-04-2011.

The above-stated arbitrator’s appointed T.V. Shanbhag as the Presiding Arbitrator.

On 19-09-2013, Arbitral Tribunal settled the issues which arose for determination.

Respondents challenged the Jurisdiction of the tribunal. Later on 03-08-2018, respondents while filing an application seeking to recall the order passed by the tribunal on 03-07-2013, as also the order dated 19-09-2013, by which order issues were settled.

Though, the tribunal rejected the above application. Further, the respondents challenged the order passed by Single Judge of the Bombay High Court regarding the appointment of J.K. Bhatt as an Arbitrator.

On 30-8-2018 the respondent filed a petition seeking review of the order dated 21-04-2011 passed by this Court. It also sought 7 years delay in filing the Review Application to be condoned.

On 22-03-2018, the impugned order was passed condoning delay of 7 years in seeking review of the order dated 21-04-2011 and simultaneously recalling the said order of appointment of J.K. Bhatt as an Arbitrator on behalf of the respondent.

“Torpedo shot by the respondent on 30-08-2018 hit its target. The Arbitral Tribunal came to be hit, in that, its constitution was blasted by the torpedo fired by the respondent.”

On noting the stated facts, Single Judge noted that the subject matter of the application being an international commercial arbitration the appropriate fora was the Supreme Court of India and thus, the order dated 21-04-2011 was a nullity and is non-est.

Where a Court acts under an appealable provision of law and passes an order, a party is not deprived of the right of appeal, though on the facts the order should not have been passed under that provision

High Court noted that the impugned order being passed in exercise of the review jurisdiction by the Single Judge both the appeals are maintainable.

Court observed that

prior to the amendment of the Act by the Arbitration & Conciliation (Amendment) Act 2015 brought into force with effect from 01-01-2016 when in sub-section 4, 5 & 6 of Section 11 of the Act the words ‘the Chief Justice or any person or institution designated by him’ wherever they occur were replaced by the words ‘the Supreme Court or, as the case may be, the High Court or any person or institution designated by such Court’, the position was that under the Act the procedure for appointment in case of sub-section 3 being applicable was to file an application before the Chief Justice of a High Court or any person or institution designated by him, in a case of domestic arbitration and before the Chief Justice of India or any person or institution designated by him in International Commercial Arbitration.

Section 11 of the Arbitration Act was a Judicial Power was held in 7-Judge Bench decision of the Supreme Court S.B.P. & Co. v. Patel Engineering Ltd., (2005) 8 SCC 618.

Thus, on perusal of the above-stated analysis and facts, Bench held that Single Judge had no jurisdiction to entertain the petition seeking review of the order dated 21-04-2011.

Further, Court stated that, the impugned order is vitiated when it proceeds to condone the delay by not considering whether the sufficient cause was shown to condone the delay of 2680 days in seeking review of the above-stated order.

“Whilst it may be true that an order passed in a lis or an issue which cannot be taken cognizance of by a Court or an authority is void and non-est, but that does not mean that a party can sleep over its rights and participate in further proceedings and one fine day approach the Court or the authority to rectify the error.”

Hence, respondents failed to show sufficient cause entitling it to 2680 days delay in seeking review of the order dated 21-04-2011 to be condoned.

The torpedo fired by the respondent is declared to be a dude and it sinks without hitting its target.

Appellant would be entitled to costs incurred before the Single Judge as also in the instant appeals which bench quantified at Rs 5 lakhs. [Antikeros Shipping Corpn. v.  Adani Enterprises Ltd., 2020 SCC OnLine Bom 277, decided on 18-02-2020]

Case BriefsSupreme Court

Supreme Court: A 3-judge bench of RF Nariman, Aniruddha Bose and V. Ramasubramanian, JJ has held that enforcement of a foreign award may under Section 48 of the Arbitration and Conciliation Act, 1996 be refused only if the party resisting enforcement furnishes to the Court proof that any of the stated grounds has been made out to resist enforcement. The said grounds are watertight – no ground outside Section 48 can be looked at.

Stating that Court’s power under Article 142 ought not to be used to circumvent the legislative policy contained in Section 48 of the Arbitration Act, the bench said,

“nothing in Section 48 of the Arbitration Act would permit an enforcing court to add to or subtract from a foreign award that must either be enforced or rejected by reason of any of the grounds under Section 48 being made out to resist enforcement of such foreign award.”

Some of the important considerations highlighted by the Court for enforcement of a foreign award

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

“This is because the policy of the legislature is that there ought to be only one bite at the cherry in a case where objections are made to the foreign award on the extremely narrow grounds contained in Section 48 of the Act and which have been rejected.”

  • The foreign award must be read as a whole, fairly, and without nit-picking. If read as a whole, the said award has addressed the basic issues raised by the parties and has, in substance, decided the claims and counter-claims of the parties, enforcement must follow.
  • Grounds for resisting enforcement of a foreign award under Section 48
    • Enforcement of a foreign award made without jurisdiction cannot possibly be weighed in the scales for a discretion to be exercised to enforce such award if the scales are tilted in its favour.
    • Where the grounds taken to resist enforcement can be said to be linked to party interest alone, for example, that a party has been unable to present its case before the arbitrator, and which ground is capable of waiver or abandonment, or, the ground being made out, no prejudice has been caused to the party on such ground being made out, a Court may well enforce a foreign award, even if such ground is made out.
    • When it comes to the “public policy of India” ground there would be no discretion in enforcing an award which is induced by fraud or corruption, or which violates the fundamental policy of Indian law, or is in conflict with the most basic notions of morality or justice.
  • The expression “may” in Section 48 can, depending upon the context, mean “shall” or as connoting that a residual discretion remains in the Court to enforce a foreign award, despite grounds for its resistance having been made out. In that case a balancing act may be performed by the Court enforcing a foreign award.
  • Given the fact that the object of Section 48 is to enforce foreign awards subject to certain well-defined narrow exceptions, the 108 expression “was otherwise unable to present his case” occurring in Section 48(1)(b) cannot be given an expansive meaning and would have to be read in the context and colour of the words preceding the said phrase. In short, this expression would be a facet of natural justice, which would be breached only if a fair hearing was not given by the arbitrator to the parties.
  • If a foreign award fails to determine a material issue which goes to the root of the matter or fails to decide a claim or counter-claim in its entirety, the award may shock the conscience of the Court and may be set aside.

[Vijay Karia v. Prysmian Cavi E Sistemi Srl, 2020 SCC OnLine SC 177, decided on 13.02.2020]

Legislation UpdatesRules & Regulations

The New Delhi International Arbitration Centre (NDIAC), Act 2019 was enacted with a view to provide for the establishment and incorporation of the New Delhi International Arbitration Centre for the purpose of creating an independent and autonomous regime for institutionalised arbitration and to make it a hub for institutional arbitration and to declare the New Delhi International Arbitration Centre to be an institution of national importance.

The Act replaced the ordinance on the subject which had come into force on 02-03-2019.

As per Section 5 of the Act, NDIAC will be headed by a Chairperson, who has been a Judge of the Supreme Court or a Judge of a High Court or an eminent person, having special knowledge and experience in the conduct or administration of arbitration, law or management, to be appointed by the Central Government in consultation with the Chief Justice of India. Besides, it will also have two Full-time or Part-time Members from amongst eminent persons having substantial knowledge and experience in institutional arbitration, both domestic and international.

In addition, one representative of a recognized body of commerce and industry shall be nominated on rotational basis as a Part-time Member. The Secretary, Department of Legal Affairs, Ministry of Law & Justice; Financial Adviser nominated by Department of Expenditure, Ministry of Finance and Chief Executive Officer, NDIAC will be ex-officio Members.

Section 23 of the Act provides for the Secretariat to the Centre inter-alia comprising Registrar, Counsel and other officers & employees etc.

In this regard, the Department of Legal Affairs has prepared the following draft Rules:

  1. The New Delhi International Arbitration Centre (the terms and conditions and the salary and allowances payable to the Chairperson and Full-time Members) Rules 2020.
  2. The New Delhi International Arbitration Centre (the travelling and other allowances payable to Part-time Members) Rules 2020.
  3. The New Delhi International Arbitration Centre (the number of officers and employees of the Secretariat of the Centre) Rules 2020.
  4. The New Delhi International Arbitration Centre (the qualifications, experience, method of selection and the functions of the Registrar, Counsel and other officers and employees of the Centre) Rules 2020.

The Government intends to consult all stakeholders in the process. A copy of the aforesaid draft Rules have been uploaded on the website of the department of Legal Affairs (http://legalaffairs.gov.in/). Accordingly, DoLA has commenced public consultation on the draft rules with the timeline of submission of comments by 14-03-2020.


Ministry Of Law & Justice

[Source: PIB]

[Press Release dt. 12-02-2020]

Law School NewsLive Blogging

Welcome to the Delhi Summit of the Indian Mediation Week 2019! The event is taking place at the Constitutional Club of India in Delhi. The theme of the summit is Promoting ADR and Technology in Government Disputes.

10:00 AM – The registration for the event has begun! The summit will be attended by various law school students, lawyers and ADR experts.

11:00 AM – The Summit is underway! Pranjal Sinha, the Chief-Coordinator of Indian Mediation Week and one of the Co-founders of SAMA, addresses the crowd and welcomes everyone to the event.

11:02 AM – The Summit kickstarts with a video which describes the origin of Indian Mediation Week.

11:07 AM – Pranjal describes the state of Indian judiciary and the huge number of pending cases.

11:13 AM – Akshetha Ashok, one of the co-founders of the SAMA, invites Bhaskar Bhartendu to the stage.

11:14 AM : Bhaskar describes the importance of conversation in our day to day lives. Bhaskar proceeds to describe the impact IMW has had through its history. Team IMW has conducted 5000+ drives in the last 3 years with the help of 4000+ volunteers across 65 cities.

11:17 AM : The ambassadors from the North Zone are lauded for their marvelous efforts through the course of the campaign.

11:18 AM : Pranjal invites on stage the 1st Keynote speaker of the Summit, Mr. Sunil Chauhan , the director of NALSA.

11:22 AM : Mr. Chauhan focuses on the lack of awareness regarding Alternative Dispute Resolution (ADR) mechanisms across the country. The director of NALSA also describes the various barriers which have created the huge backlog of cases in the country. He elucidates the benefits of ADR mechanisms. He explains the financial burden and policy which restrict the Government from settling its cases through ADR mechanisms. He suggests that there should be development of a culture which promotes ADR and identification of cases which can be settled through ADR mechanisms. He explains that the officials who visit the courts do not the authorization to settle cases which has proved to be the biggest obstacle in the past. The keynote address ends with him encouraging the young upcoming lawyers to promote ADR in the days to come.

11:35 AM : Pranjal thanks Mr. Sunil Chauhan for his insightful address.

11:43AM : Mr. Sunil Chauhan is facilitated by Kritika Bhatt and Nipun Katahar, two of the student ambassadors of Indian Mediation Week.

11:46 AM : Pranjal invites the second keynote speaker of the day Mr. Sanjeev Ahuja on stage. Mr. Sanjeev Ahuja is an ADR expert and the founding director of Ensemble Resolution Professionals.

11:48 AM : Mr. Ahuja explains the motto of the campaign ” Suljhao, Magar Pyaar se“. He explains that in a litigation case the resolution of the dispute takes place at the loss of one of the parties. He focuses on the loss of Pyaar or love and respect between the parties in a case being pursued through litigation. He explains the benefits of mediation and states that mediation is the future of dispute resolution. He also explains the need to identify cases which are fit for mediation. This would help in effective dispute resolution. He ends his address by congratulating SAMA for organizing yet another successful edition of Indian Mediation Week.

11:57 AM : Akshetha thanks Mr. Ahuja for his wonderful address. The floor has now been opened for questions.

12:13 PM : Mr. Ahuja is felicitated by Prashant Mishra, one of the top performing ambassadors of Indian Mediation Week.

12:15 PM: Anushka Thakur, one of the most hardworking ambassadors of Indian Mediation Week, is felicitated by the two keynote speakers. She has proved to be a true asset to the team.

12:16 PM : We move on and Pranjal invites Ayush Rastogi ,founder of AfPR, to the stage. He focused on students who are interested in international law can join AfPR and create literature in contemporary fields such as criminal law and arbitration.

12:23 PM : Ayush ended his speech by inviting the students to pitch in more ideas and make efforts in a collaborative manner.

12:24 PM : We move on to the next segment, the Case management workshop being conducted by SAMA. We look at the feasibility of Mediation as a profession. Pranjal and Akshetha tell us about the qualities of a good case manager which include communication skills, neutrality and confidentiality. A case manager works along with the mediator and helps in prompt scheduling. One also needs to give feedback about the performance of the mediators. One has a more administrative role and is not allowed to enter the merits of the case. The focus of a case manager has to be the resolution of the case.

12:50 PM : The case management workshop ends with an informative Q&A session. The various steps required in order to become a mediator were the focus of the questions.

1:00 PM : The Summit ends with the distribution of certificates to the people in attendance.

We thank you for joining us for the Delhi Summit of Indian Mediation Week! We will see you next time!