Arbitration

Alternate Dispute ResolutionOp EdsOP. ED.

Introduction

Climate change and global warming are the two crucial issues that need the instant attention of people. It is being noticed that global warming is increasing with each passing day. It is necessary to keep up with the protection of the environment along with fulfilling our needs. There have been many neglected ways that can prove to be a significant factor in curbing global warming. When arbitration is discussed, it is well known to many of the people that are being chosen for various reasons. Commercial cases, investment treaties, and many other kinds of matters are being decided through arbitration and other alternate dispute resolution mechanism. Till now, commercial and other sectors of arbitration were being chosen for simplified process, speedy decisions, convenience, etc. so cases get resolved as soon as possible.

While we connect climate changes with international arbitration, it is not shocking to know that, like commercial issues, climate change issues are also in priority. There have been various steps taken by the arbitration institutions which are evident to prove that international arbitration is extending its approach to deal with the issue of global warming. Not only the awards passed by the tribunals but, the implementation of various treaties and campaigns are equally important to curb the major environmental issues. The matters of climate change are of public importance and thus attract the interest of arbitrators too. While we notice that arbitration has been gaining importance from last years, will the steps being taken concerning climate change also come out as fruitful decisions? The steps that have been taken till now are not questionable but, for how long will they be effective?

The questions will be raised for ensuring the effectiveness. However, analysis of the strides made by the arbitration sector will give a proper understanding of the same. The Paris Agreement of 2016[1] is not in direct connection to arbitration but, the arbitration proceedings being held along with it will manage the climatic changes. It is necessary to relate the aspects to get better results out of them.

Correlation of Paris Agreement and International Commercial Arbitration

In 2015 United Nations Framework Convention on Climate Change (UNFCCC), the Paris Agreement was adopted for the first time that all nations were committed to ambitious efforts to combat climate change and adapt to its effects. The Paris Agreement aim is to lower the global temperature by 2 degrees celsius above pre-industrial levels i.e., mitigation and to enhance the ability of the nations to deal with the impacts of climate change that is to adapt to climate changes. Paris Agreement also aims to support the developing nations and the nations who are in danger to adopt such changes. The task force of ICC had a broader view foreseeing the climate change-related disputes and tried to include any dispute arising out of or concerning the effect of climate change and its policies. [2]

As per the IPCC Special Report on Global Warming of 1.5 degrees Celsius published in 2018, it stated that climate change is one of the biggest challenges of all time. Therefore, to combat this challenge all they require is rapid and far-reaching transitions in energy, urban infrastructure, land, industrial systems to avoid the worst effects of climate change.[3] So as the new rapid changes to land, infrastructure, and industrial systems that are arising out from the global response to climate change will give a new scope of investment and contracts, accordingly, this will give a rise to contractual legal dispute. Such disputes can be categorised as:[4]

  1. Contracts concerning specific transition, adaptation, or mitigation contracts

Here the contract can be executed between the investor, industry body, funder, State, etc. in conformity with the Paris Agreement commitments. These contractual terms are can be reinforced through appropriate and effective dispute mechanisms. The contacts shall be expressly made with a clause relating to UNFCCC such as Green Climate Fund (GFC), agreements reacted to low emission projects.[5]

  1. Contracts not concerning specific transition, adaptation, or mitigation contracts

As every business activity and contractual relationship is capable of being impacted by energy and other systems transition, mitigation, or adaptation measures and/or the environmental impacts of global warming, those contracts that have no direct impact on climate change or have no specific climate-related purpose may predate the Paris Agreement.

The correlation that has been created with the Paris Convention would help the arbitration institutions to reach their goals too. The goal to reach “greener arbitration” is concerning the goal of the Paris Convention. Therefore, working on both of them would bring out better results from both ends. It would not only facilitate but, also encourage other associations to do the same.

The potential steps by ICC in climate change-related disputes

The Task Force’s mandate is first to explore how ICC Arbitration and alternative dispute resolution (ADR) services are currently used to resolve disputes that potentially engage climate change and related environmental issues. As the Paris Agreement and the Intergovernmental Panel on Climate Change (IPCC) Special Report are relatively recent, disputes arising out of “rapid and far-reaching transitions in energy, land, urban and infrastructure, and industrial systems” are not yet reflected in past and existing ICC cases. Nevertheless, three important aspects of existing ICC cases are instructive:[6]

(i) ICC Arbitration and ADR are frequently adopted in commercial contracts concerning energy, land use, urban and infrastructure, and industry with these sectors representing a large portion of ICC cases;

(ii) climate change-related investment is rapidly increasing and system transition of the scale proposed by IPCC will recalibrate regulatory risk and investment strategy in sectors where ICC Arbitration and ADR are already prevalent; and

(iii) climate change mitigation and adaptation, and systems transition as a whole, may cause environmental impact, and ICC Arbitration and ADR are increasingly being used to resolve environmental claims.

These steps taken by ICC promote the goal of the institution widely. The implementation of the task force is evident that apart from resolving the disputes, arbitration has paved a way to safeguard the environment. The process of curbing global warming is not simplified, yet not complicated. It could be time taking but, with collective efforts in different ways by the arbitration sector will come out to be successful.

CGA: A pathway to greener arbitration

Lucy Greenwood in 2019 founded the Campaign for Greener Arbitrations (CGA) 2019 intending to reduce the carbon footprint on international arbitrations. This campaign is led by a Steering Committee from the arbitration community. This campaign runs on the set of protocols so that the goal of developing practical steps which could be implemented to accomplish the Campaigns Guiding Principles. There are several green protocols suggested and some are as under:[7]

  1. The green protocol for arbitral proceedings

This protocol suggests the measures to conduct arbitral proceedings in a more environmental-friendly manner. This protocol can be initiated by the parties or by the tribunal a well.  Here the parties can do remote proceedings, less use of travel, avoiding printings on paper, etc.

  1. The green protocol for law firms and legal service provides.

This protocol has focused on the firm’s day-to-day operations. Here the firms are required to motivate their employees to work eco-friendlier. The firm shall make  “Green Ambassadors” who shall make new policies on working of firms do that the environment depletion can be reduced. Firms shall also use incentive programmes for the employees so that they can be encouraged to use this protocol.

  1. The green protocol for arbitrators

Here the independent arbitrators are required to seek guidance from this protocol. They are expected to reduce travel, energy, etc. so that the wastage of resources can be reduced. The arbitrators expected to integrate the conduct rules with green protocols.

  1. The green protocol for arbitration institutions.

In the protocol, the institutional representatives are required to guide both internal and external operations of the firm. The institutions shall try to motivate the parties and arbitrators to conduct the proceedings remotely and try to provide such infrastructures as well.

  1. The arbitration hearing venues

The facilitators of conducting arbitral proceedings are required to adopt this protocol. They are encouraged to use technological platforms to promote digital representations of cases and file sharing so that the paper works can be reduced. They shall also use clean energy while conducting such proceedings.

So, this campaign can successfully be achieved by only implementing rules i.e. reduce the hard copy bundles and travel least as possible. The Campaign also plans to expand its research to consider the usage of e-mails and energy consumption, as well as other aspects of an international arbitration practice beyond those analysed in the initial impact assessment.

 Conclusion

The issue of climate change is crucial, and the steps taken by the arbitral institutions are paramount. It has been known so far, the arbitration resolves the issues related to climate change issues but, the self-contribution in making arbitration greener is a new concept. It would take time for the adaption of this mechanism completely in the field but, would have essential contributions towards nature. This will also increase the importance of arbitration globally. As arbitration will be labelled as a mechanism to resolve one more problem. These steps will gain more importance shortly. Also, this will lead to the opening of doors for news initiatives in the field of international arbitration.

*Advocate, High Court of Chhattisgarh.

**Student, Semester VIII, BA LLB(Hons.), Amity Law School, Amity University, Chhattisgarh.

[1]http://www.scconline.com/DocumentLink/Oz50zWNo.

[2]Melissa Denchak, Paris Climate Agreement: Everything you need to know, NRDC, 10-2-2021

[3]The IPCC Special Report, Global Warming of 1.5˚C (October 2018), p. 15.

[4]In-depth Q&A: The IPCC’s Special Report on Climate Change at 1.5°C, Carbon Brief, 8-10-2018

https://www.carbonbrief.org/in-depth-qa-ipccs-special-report-on-climate-change-at-one-point-five-c.

[5] Green Climate Fund Proposal Toolkit (2017), p. 3.

[6]Kirsten Odynski, The Role of ICC Arbitration in Resolving Climate Change Disputes, White and Case, 29-1-2020

   https://www.whitecase.com/publications/alert/role-icc-arbitration-resolving-climate-change-disputes.

[7]Chetna Alagh and Sejal Makkad, Arbitration and climate: Steps taken by arbitration associations to curb global warming, The Daily Guardian, 30-4-2021

https://thedailyguardian.com/arbitration-and-climate-steps-taken-by-arbitration-associations-to-curb-global-warming/.

Op EdsOP. ED.

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

The concept of confirming party

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The concept of group of company’s doctrine

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Conclusion

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

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

†† 4th Year law student, UPES.

1 (2009) 1 SCC 372

2 Ibid.

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

4 (2011) 1 SCC 320

5 Ibid.

6 (2003) 5 SCC 531

7 Ibid.

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

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

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

11 2016 SCC OnLine Del 1093

12 (1998) 3 SCC 573

13 (2011) 11 SCC 375

14 2016 SCC OnLine Del 1093

15 (2011) 11 SCC 375

16 (2011) 11 SCC 375

17 2016 SCC OnLine Del 1093

18 (2003) 5 SCC 531

19 Ibid.

20 (2020) 12 SCC 767, 779

21 (2003) 5 SCC 531

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

23 Ibid.

Op EdsOP. ED.

I. Introduction

Recently a three-Judge Bench of the Supreme Court in N.N. Global Mercantile (P) Ltd. v. Indo Unique Flame Ltd.[1] decided on the effect of an arbitration clause contained in a contract which requires to be stamped and clarified the law grounding on doctrine of separability of arbitration agreements from the underlying contract and also decided upon arbitrability of disputes involving fraud. The Supreme Court held:

 “the allegations of fraudulent invocation of bank guarantee furnished under a substantive contract would be an arbitrable dispute, irrespective of whether the underlying contract regarding the arbitration was stamped or not.”

In addition to this, the Court further observed that any allegations of fraud being on non-arbitrable grounds is an entirely archaic view and has grown obsolete, and must be discarded.

Therefore, in this article the authors endeavour to examine the implication on arbitration agreement embedded in an unstamped contract as propounded in the present case and will also analyse the paradigm shift in the judicial pronouncements over the years making its way towards pro-arbitration proceedings.

II. Factual matrix

Indo Unique Flame Ltd. (hereinafter referred as “the respondent”) was awarded a work order dated 18-9-2015 by Karnataka Power Corporation Ltd. (hereinafter referred as “KPCL”) and in pursuance to the same a bank guarantee was furnished for Rs 29.29 crores in favour of KPCL through State Bank of India. Subsequently, the respondent entered into a sub-contract with N.N. Global Mercantile Pvt. Ltd. (hereinafter referred as “the appellant”) which contained an arbitration clause in respect of transportation of coal from its washery to the stockyard, siding, coal handling and loading into the wagons. As per Clause 9 of the sub-contract, the appellant furnished a bank guarantee in favour of the respondent.

Under the principal contract, certain dispute arose between the respondent and KPCL which led to the invocation of bank guarantee by KPCL and as a result, the bank guarantee furnished by the appellant was also invoked. Being aggrieved by such invocation, the appellant filed a suit against the respondent and State Bank of India before the Commercial Court at Nagpur praying for a pronouncement that the respondent was not entitled to encash the bank guarantee furnished under the sub-contract as it was a conditional guarantee. The Commercial Court hereinafter directed status quo to be maintained with respect to the enforcement of the bank guarantee.

The respondent filed an application under Section 8 of the Arbitration and Conciliation Act, 1996[2] (hereinafter referred as the “the Act, 1996”) seeking reference of disputes to arbitration.  The Commercial Court rejected the application holding that the bank guarantee was an independent contract. The order of the Commercial Court was challenged by the respondent by filing a writ petition in the Bombay High Court. The High Court held that it was the admitted position that there was an arbitration agreement between the parties and therefore the application under Section 8 of the Act, 1996 was maintainable.

The decision of the High Court allowing the application for seeking arbitration was appealed against before the Supreme Court. The issue dealt by the Supreme Court was:

a) Whether an arbitration agreement would be enforceable and acted upon, even if the work order is unstamped and unenforceable under the Stamp Act?

b) Whether allegation of the fraudulent invocation of the bank guarantee is an arbitrable dispute?

c) Whether a writ petition under Articles 226 and 227 of the Constitution would be maintainable to challenge an order rejecting an application for reference to arbitration under Section 8 of the Act, 1996.

III. Law prior to N. Global

The Stamp Act, 1899[3] (hereinafter referred as “the Stamp Act”) requires stamp duty to be collected on the execution of specific documents. Section 33 of the Stamp Act imposes a duty on the courts to examine an instrument on whether it is duly stamped or not.

33. Examination and impounding of instruments.— 

(1) Every person having by law or consent of parties, authority to receive evidence, and every person in charge of a public office, except an officer of police, before whom any instrument, chargeable, in his opinion, with duty, is produced or comes in the performance of his functions, shall, if it appears to him that such instrument is not duly stamped, impound the same.

(2) For that purpose every such person shall examine every instrument so chargeable and so produced or coming before him, in order to ascertain whether it is stamped with a stamp of value and description required by the law in force in India when such instrument was executed or first executed.

Further Section 35 of the Stamp Act envisages that any contract not duly stamped is not admissible as evidence in the court of law. The relevant portion of Section 35 is mentioned herein below:

  1. Instruments not duly stamped inadmissible in evidence, etc.—No instrument chargeable with duty shall be admitted in evidence for any purpose by any person having by law or consent of parties authority to receive evidence, or shall be acted upon, registered or authenticated by any such person or by any public officer, unless such instrument is duly stamped:

Provided that—

(a) any such instrument shall, be admitted in evidence on payment of the duty with which the same is chargeable, or, in the case of an instrument insufficiently stamped, of the amount required to make up such duty, together with a penalty of five rupees, or, when ten times the amount of the proper duty or deficient portion thereof exceeds five rupees, of a sum equal to ten times such duty or portion;

Therefore, in view of the provisions of Section 35 of the Stamp Act, unless the stamp duty and penalty due in respect of the instrument is paid, the court cannot act upon the said instrument.

The issue whether a contract containing an arbitration clause which is not duly stamped as per the provisions of Sections 33 and 35 of the Stamp Act be enforceable and can be acted upon by the parties has been widely debated in recent years. The Supreme Court in its various judicial pronouncements over the years have discussed the concept of non-stamping of an agreement containing an arbitration clause and thereby its effect on the validity of the said arbitration clause.

The  Supreme Court in SMS Tea Estates (P) Ltd. v. Chandmari Tea Co. (P) Ltd.[4] inter alia addressed the applicability of the provisions of the Stamp Act and considered the issue whether an arbitration agreement in  an unregistered and unstamped lease deed, which required compulsory registration under Sections 17 and 19 of the Registration Act, 1908[5], was valid and enforceable. While considering the issue the Court held that:

  1. 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 in regard to the substantive terms of the main contract and the other relating to resolution of disputes—had been rolled into one, for purposes of convenience….

***

  1. 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.[6]

Thereafter, in Garware Wall Ropes Ltd v. Coastal Marine Constructions and Engg. Ltd.[7] the Supreme Court dealt with the question whether the courts can appoint an arbitrator under Section 11 of the Act, 1996[8] when the underlying agreement containing the arbitration clause is insufficiently stamped. While reiterating the ruling of SMS Tea Estates[9], the Court in Garware Wall Ropes Ltd.[10], 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 and held that:

  1. … 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  Court further held that a harmonious reading of the provisions of the Stamp Act and the Contract Act, 1872 would suggest that in the event an agreement is not duly stamped, then it cannot be said to be a valid agreement.

Recently, the Supreme Court in Dharmaratnakara Rai Bahadur Arcot Narainswamy Mudaliar Chattram and other Charities v. Bhaskar Raju and Bros.[11] again reiterated the settled law of SMS Tea Estates[12] and held:

  1. … if the court comes to a 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, 1899. Further, the Court stated that the court cannot act upon such a document or the arbitration clause therein.[13]

Therefore, the Supreme Court in the aforesaid precedents laid down the principle that if a contract containing an arbitration clause is not duly stamped as per the provisions of Sections 33 and 35 of the Stamp Act, then such contract shall be unenforceable till the payment of the requisite stamp duty and the arbitration clause contained in the said contract cannot be invoked by the parties.

However, the Supreme Court in the present case revisited the law on the issue of validity, existence and enforceability of an arbitration agreement in an unstamped document and overruled two major judgments i.e. SMS Tea Estates (P) Ltd.[14] and Garware Wall Ropes Ltd.[15]

IV. The paradigm shift in the judicial pronouncements

The Supreme Court in the earlier two judgments erred while deciding the implication of arbitration agreements in unstamped documents by positioning the law that an arbitration clause contained in a contract would exist as a matter of law only if the underlying contract is duly stamped. However, in the present case, the Court had gone a step further and delved into the shift of the approach of the Court from increased judicial intervention to pro-arbitration. The Court primarily focused in the following issues:

A. Arbitration agreement as an independent agreement

The Supreme Court in the present case held that it is well settled in arbitration jurisprudence that an arbitration agreement is a separate and distinct agreement, which is independent from the substantive commercial contract in which it is imbedded. This is based on the premise that when parties enter into a commercial contract containing arbitration clause, they are entering into two separate agreements viz. the substantive contract which contains the rights and obligations of the parties arising from the commercial transaction and secondly, the arbitration agreement which contains the binding obligation of the parties to resolve their disputes through mode of arbitration.

The Supreme Court further held that the autonomy of arbitration agreement is based on the twin concept of separability and kompetenz-kompetenz.

(i) The doctrine of separability

The doctrine of separability of the arbitration agreement connotes that the invalidity, ineffectiveness or termination of the substantive commercial contract would not affect the validity of the arbitration agreement, except if the arbitration agreement itself is directly impeached on the ground that the arbitration agreement is void ab initio. It embraces that the arbitration clause is separable from the rest of the contract and an assertion that the latter is invalid does not prevent the arbitrators from ruling on the validity of the former. Article 16(1)[16] of the UNCITRAL Model Law on International Commercial Arbitration incorporates the doctrine of separability which positions 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.

Similarly, the Act, 1996 is based on the Model Law and also recognises the principle of separability of arbitration clause and consequently, allows parties to elect the substantive law of the entire contract as different from the law governing the arbitration agreement. The Bombay High Court in Mulheim Pipecoatings GmbH v. Welspun Fintrade Ltd.[17] formulated the principles of the doctrine of separability and held that “for an arbitration agreement to be null and void, requires a direct impeachment of the arbitration agreement and not simply a parasitical impeachment based on a challenge to the validity or enforceability of the main agreement”.

The Supreme Court in National Agriculture Coop. Mktg. Federation (India) Ltd. v. Gains Trading Ltd.[18], while observing the doctrine of separability held:

“the validity of contract and the arbitration clause should be treated independently from the main contract. Moreover, if a contract becomes null and void, the arbitration clause shall not be understood in the same context as void.”

(ii) The doctrine of kompetenz-kompetenz

This principle states that the Arbitral Tribunal has the competence to determine and rule on its own jurisdiction, including issues of existence, validity and scope of arbitration agreement in the first instance which is subject to judicial scrutiny by the courts at a larger stage of the proceedings. The principle of kompetenz-kompetenz has two aspects i.e. firstly an authentication to the arbitrators to decide the jurisdiction without the help of the court and secondly, the Arbitral Tribunal gets an upper hand to decide the issue first before the Court interferes.[19] It has been noted over the years that the doctrine of kompetenz-kompetenz has evolved to minimise judicial intervention at the pre-reference stage and reduce challenges raised on the issue of jurisdiction of the Arbitral Tribunal. The said doctrine has also been recognised under Section 16(1)(a) of the Act, 1996[20] which categorically states that an arbitration clause which forms part of a contract shall be treated as an agreement independent of the other terms of the contract.

In Olympus Superstructures (P) Ltd. v. Meena Vijay Khetan[21], it was observed that under the Act, 1996 the Arbitral Tribunal is vested with powers under Section 16(1) to rule on its own jurisdiction including ruling on any objection with respect to its existence or validity of arbitration agreement and for that purpose the arbitration clause which forms part of the contract shall be treated as an agreement independent of any terms of the contract and any decision of the Arbitral Tribunal that the contract is null and void shall not entail ipso jure the invalidity of the arbitration clause.

The  Supreme Court while continuing to accept the principle of kompetenz-kompetenz, in Uttarakhand Purv Sainik Kalyan Nigam Ltd. v. Northern Coal Field Ltd.[22], held that the scope of jurisdiction under Section 11(6-A) was confined to the examination of the existence of the arbitration agreement at the preference stage. In view of the legislative mandate contained in Section 11(6-A), the Court is now required only to examine the existence of the arbitration agreement. All other preliminary or threshold issues are left to be decided by the arbitrator under Section 16 which enshrines the kompetenz-kompetenz principle.

B. Non-payment of stamp duty does not invalidate the main contract

Analysing the statutory scheme of the Stamp Act, the court emphasised that the Stamp Act is a fiscal measure enacted to secure the revenue of the State on certain classes of instruments. It observed that under the Stamp Act, the substantive contract would not be admissible in evidence, and could not be acted upon, for any purpose, in the event of non-payment of stamp duty. However, the Supreme Court in the present case held that the non-payment or deficiency of stamp duty on the work order does not invalidate the main contract. It further held that Section 34 provides that an unstamped instrument would not be admissible in evidence, or be acted upon till the requisite stamp duty is paid. This would amount only to a deficiency curable on the payment of the requisite stamp duty and would not invalidate the main contract. Accordingly, the Court held that there would be no legal impediment to the enforceability of the arbitration agreement, pending payment of stamp duty on the substantive contract.

The Court clarified that where an application is filed under Section 8 of the Act, 1996 before judicial authority for reference of disputes to arbitration, the judicial authority would make the reference to arbitration. However, in the meanwhile, the parties would be directed to have the substantive contract stamped in accordance with the provisions of the relevant Stamp Act, so that the rights and obligations emanating from the substantive contract can be adjudicated upon.

V. Analysis

The Court in the present judgment has thus clarified the prerequisites for referring a case to arbitration on disputes involving unstamped contracts. The Court while expanding the scope of doctrine of separability emphasises that the arbitration agreement is an independent contract and non-compliance of the provisions of Sections 33 and 35 of the Stamp Act does not invalidate arbitration agreement and the non-stamping of the same will amount only to a deficiency curable on the payment of the requisite stamp duty at a later stage. The Court also pointed out that an arbitration agreement is not included in the Schedule as an instrument chargeable to stamp duty under the Maharashtra Stamp Act, 1958[23]. It can be inferred from the judgment that the intention of the Court to expand the scope of the utilisation of the principle of separability was to minimise judicial intervention at the pre-reference stage and reduce challenges raised on the issue of invocation of arbitration agreement. Hence, it can be concluded that the Court have taken a pro-arbitration stance to not impede the arbitral process and benefit parties who intent to settle the matter through arbitration.

* Principal Associate, Hammurabi and Solomon Partners.

** Associate, Hammurabi and Solomon Partners. 

[1] 2021 SCC OnLine SC 13.

[2] Arbitration and Conciliation Act, 1996.

[3] Stamp Act, 1899.

[4] (2011)14 SCC 66.

[5] Registration Act, 1908 

[6] Supra Note 4, pp. 72-73.

[7] (2019) 9 SCC 209.

[8] Section 11 of the Act, 1996.

[9] Supra Note 4.

[10]Supra Note 7, p. 232.

[11] (2020) 4 SCC 612

[12] Supra Note 4.

[13] Supra Note 4, p. 74.

[14] Supra Note 4.

[15] Supra Note 7.

[16] United Nations Commission on International Trade Law, UNCITRAL Model Law on International Commercial Arbitration. http://www.scconline.com/DocumentLink/q0V16q1A, <https://www.uncitral.org/pdf/english/texts/arbitration/ml-arb/07-86998_Ebook.pdf>, 1985.

[17] 2013 SCC OnLine Bom 1048. 

[18] (2007) 5 SCC 692 

[19]Dr Mukesh Kumar Malviya, Jurisdictional Issues in International Arbitration with Special Reference to India, Bharati Law Review, Jan-March 2017, <http://docs.manupatra.in/newsline/articles/Upload/03D471A1-CEC8-46DC-8E27-A42DC5D09E7C.pdf>.

[20] Section 16(1)(a) of the Act, 1996.

[21] (1999) 5 SCC 651 

[22] (2020) 2 SCC 455.

[23] Maharashtra Stamp Act, 1958.

Experts CornerIram Majid

In Part 2, firstly this article shall analyse the existence of an alternative dispute resolution mechanism in India. Secondly, this article shall study various arbitration cases in space-related disputes and conduct a brief comparative analysis to litigation cases in space-related disputes. Thirdly, this article shall suggest the requisite means and measures to improve the dispute resolution mechanism for space-related disputes.

 

  1. Space Law from the Lens of Indian Standpoint: Does any Alternative Dispute Resolution Mechanism Exist at the Domestic Level?

 

In 2017, the Government of India released the Draft Space Activities Bill, 2017. The Government sought for comments on this draft from the public. This Bill addressed the aspect of private participation in the Indian space sector. It essentially acknowledged the importance and the crucial role that the private sector would play in the near future for the development and enhancement of space-related technology for humanity. However, at the same time, substantial discretion was rested in the hands of the Indian State to essentially control the access to outer space. Regardless of this, the Bill emphasised on the creation of a public-private partnership model to meet the future goals of the space sector, alongside Indian Space Research Organisation (ISRO) inviting the private sector to develop the future satellites.

 

However, the point of conundrum arises is that, when we carefully scrutinise the 2017 Bill, we comprehend that powers have been given to the domestic Indian courts whereas there is no mention of resolution of disputes through arbitration, mediation, and/or negotiation. This lack of mention, accompanied by the Arbitration and Conciliation Act, 1996 and the Indian jurisprudence on arbitration, both being in their nascent stages, proves highly detrimental to the resolution of space-related disputes. This is because, even though the parties in space sector have commercial contracts and agreements that may consist of an arbitration clause, it is pertinent to note that not all disputes may be arbitrable. For example, landlord-tenant disputes were not arbitrable in India until 2020 as they dealt with matters related to public policy and interest. This meant that matters which relate to public policy and interest cannot be arbitrated as such arbitration happens in privacy and confidentiality whereas, these matters are to take place in public forums as that of the civil courts. Due to this, there were multiple conflicting decisions of the High Court and the Supreme Court. However, in December 2020, the Supreme Court finally held that the landlord-tenant disputes are arbitrable as they dealt with subordinate rights in personam that arose from rights in rem.[1] All these conflicts and confusion could have been avoided had there have been an explicit mention about resolution of landlord-tenant disputes through arbitration in the Transfer of Property Act, 1882 with the necessary exemptions of State-specific legislations that provide for specific forums for landlord-tenant disputes redressal.

 

Similarly, in the case of space-related disputes, if there is no mention of arbitration about space-related disputes in the 2017 Bill, it may highly lead to heavy turmoil and confusion despite having arbitration clauses in space-related commercial contracts and agreements, thereby hindering the objective of just, effective, and efficient justice. Although the Supreme Court developed a four-pronged guiding test in Vidya Drolia (2) case[2] –– to ascertain which disputes are non-arbitrable –– that can be applied to decide the arbitrability of space-related disputes, it is pertinent to note that there will be a massive time and resource drainage.

 

This drainage will take place because there will be a substantial time and resources drainage and wastage in deciding whether a space–related dispute is arbitrable. If the Court decides that such outer-space disputes are arbitrable, then there is an unnecessary time and resources lag to commence and conclude arbitration proceedings. This lag can cost both the Parties heavily considering outer-space disputes are enormously expensive. Further, if any Party is unsatisfied with the arbitral award, then they would approach the Court to set it aside. This process of setting aside the arbitral award only adds on to the stress of the previous time and resource lag.

 

Or, if the Court decides that such outer-space disputes are non-arbitrable, then resorting to the traditional, tedious litigation process for adjudication of that space–related dispute and/or getting the previous judgment, that outer–space disputes are non-arbitrable, reviewed by a higher Court/Bench, causes similar time and resources detriment to both the Parties.

 

  1. Study of Arbitration in Space-Related Disputes with a Comparative Analysis of Outer Space Litigation

 

As previously mentioned, the types of space-related disputes may be, but not limited to, late delivery of satellites, problem regarding the launch of a satellite, defective satellites in the orbit, sale and purchase of satellites in the orbit, lease of satellite capacity, right to operate at certain orbital positions, revocation of leased spectrum, and reservation of capacity for governmental use. Thus, taking the aforementioned into consideration, certain arbitration case laws shall be scrutinised for better comprehension.

 

Firstly, the case of Spacecom v. Israel Aerospace Industries was a dispute regarding late delivery of satellites.[3] In this case, Israel Aerospace Industries was supposed to build a satellite for Spacecom and deliver the same by August 2015. However, there were certain delays due to which the satellite was delivered to Spacecom by September 2016. Further, during a prelaunch test, this newly delivered satellite disintegrated. Spacecom initiated arbitration proceedings against Israel Aerospace Industries wherein Spacecom secured an award of USD 10 million in its favour.

 

Secondly, the case of Avanti Communications Group v. Space Exploration Technologies was a dispute regarding launch of satellites.[4] In this case, Avanti contracted with Space Exploration Technologies (hereinafter “SpaceX”) wherein Avanti’s satellite was to be launched aboard a SpaceX Falcon 9 launch vehicle. In pursuance to this contract, SpaceX was mandated to show a certain number of successfully completed launches for their launch vehicle, which they failed to show. Due to this failure, Avanti terminated the contract with SpaceX and requested for a refund as Avanti had already paid the launch cost deposit of USD 7.6 million to SpaceX. SpaceX denied refunding the same amount and Avanti initiated arbitration proceedings against Space X wherein Avanti secured an arbitral award of USD 7.6 million in its favour.

 

Thirdly, the case of Thuraya Satellite Telecommunications v. Boeing Satellite Systems International was a dispute regarding defective satellites in the orbit.[5] Generally, satellite manufacturer’s liability stops from the launch of the satellite. However, in this particular case, a group of insurers brought a claim against Boeing as Boeing’s manufactured satellite lost power in the orbit due to the alleged defective solar panels. Boeing acknowledged that its earlier satellite models contained defects; however, it said that it was not aware about these problems before such satellites were launched and denied concealing such defects from the purchasers of its satellites. The Arbitral Tribunal rejected the insurers’ claim and ordered them to pay Boeing’s full “costs”.

 

Fourthly, the case of ABS v. KT Corpn.[6] was a dispute regarding sale and purchase of satellites in orbit. In this case, ABS contracted with KT Corporation and KTSAT (hereinafter “KT”) for the purchase of a satellite from KT. This satellite was purchased with the requisite US regulatory approvals, but not any Korean regulatory approvals. In 2011, KT delivered the satellite to ABS wherein ABS paid the requisite purchase price of USD 500 million. However, in 2013, Korea’s Ministry of Science, ICT and Future Planning (hereinafter “MSIP”) declared the contract –– between KT and ABS –– as null and void as KT did not comply with Korean regulatory approval. Further, KT was ordered for returning the satellite to its original operating condition. Due to this, KT sent a letter to ABS wherein KT asserted its ownership of the satellite. However, ABS denied the same on two counts: (i) MSIP did not have the authority to nullify the contract between KT and ABS; and (ii) Korean export approval was not necessary because the satellite was not a Korean export but a US export. ABS initiated arbitration proceedings against KT and secured an arbitral award in its favour wherein the title was declared to have been transferred to ABS even before the MSIP nullified the contract. This was because:

 

… ABS and KT fulfilled every prerequisite defined in Article 10.1 of the purchase contract as a condition precedent to the passage of title to the satellite: obtaining export approval by KT and Lockheed Martin for a US export under the regime of the US International Traffic in Arms Regulations (ITAR), delivery of the satellite, payment of the purchase price and issuing of bills of sale.[7]

 

Further, the Arbitral Tribunal also held that the Korean Government did not have any authority to nullify the contract as it held that MSIP was not the competent agency to issue an order of nullification, but the Korean Ministry of Trade, Industry and Energy was competent that remained silent throughout the matter.

 

Fifthly, the case of Avanti Communications v. Govt. of Indonesia was a dispute regarding leasing of satellite capacity.[8] In this case, Indonesia’s satellite malfunctioned in 2015 due to which Indonesia could have lost its orbital slot. The filling of this orbital slot with a new satellite would have taken more than three years but this was problematic to Indonesia because, according to the “use it or lose it” policy, a State may lose its orbital slot if the State leaves the orbital slot vacant for more than three years.[9] To avoid the same conundrum, Indonesia leased capacity on another satellite that could be brought and maintained in Indonesia’s orbital slot until a new Indonesian satellite could be placed. This replacement satellite was owned by Avanti. The lease capacity agreement was worth USD 30 million. Indonesia paid only USD 12 million, leaving a remaining balance of USD 16.8 million as it claimed that the satellite was not fulfilling the requisite purpose. Failure to pay even after a year, due to this, Avanti initiated arbitration proceedings against Indonesia in 2017 and secured an arbitral award in its favour in 2018 wherein Indonesia was ordered to pay Avanti a total sum of USD 20.075 million.

 

Sixthly, the case of Eutelsat SA v. United Mexican States[10] is a dispute regarding reservation of capacity for governmental use. In this case, Eutelsat, a satellite operator, acquired a satellite in 2014. However, according to the regulatory rules of United Mexican States i.e. Mexico, satellite operators are mandated to reserve ninety per cent of their satellite’s overall capacity for governmental use, which the operators could otherwise commercialise. The problem arose at the point wherein Eutelsat claims that it was required to reserve a larger capacity for Mexican Government than its competitors which, in turn, violated the principle of fair and equitable standard under the Mexico-France Bilateral Investment Treaty (BIT). The case is still pending.

 

Seventhly and in finality, there are two noteworthy arbitral disputes that are the Devas arbitrations[11] and the Eutelsat arbitrations[12] that relate to revocation of lease spectrum and the right to operate at orbital positions respectively.

 

Thus, considering the aforementioned cases, it is lucidly evident that a plethora of international arbitration cases have taken place that are related to a conventional manufacturing, purchase, title, or contract-related dispute.

 

However, the query is that whether litigation takes places for space-related disputes. The answer is affirmative as already evident from the 1991 case of Martin Marietta Corpn. v. Intelsat.[13] In this case, Martin Corporation (hereinafter “Martin”) and Intelsat entered into an agreement to launch two satellites. Martin agreed to launch the satellites in return for a consideration worth USD 112 million from Intelsat. Soon after the lift off of the first launch, the payload’s separation system failed to eject the satellite and the satellite’s booster. Although Intelsat’s engineers eventually separated the payload from the rocket, this delay caused in the separation of the payload from the rocket left the satellite in a useless orbit. It was estimated that the cost to rescue and place the satellite in a proper orbit was USD 90 million due to which Martin filed a case in Maryland District Court. In response to this, Intelsat filed a counter case claiming a breach of contract. Further, Intelsat also brought the claims of negligent misrepresentation, negligence and gross negligence to recover the damages for loss of profits, loss of use of satellite, and rescue costs. The District Court’s case lasted for a significant period of time, but it did not end there as the case went to appeal to the Fourth Circuit that disagreed on the District Court’s decision on multiple counts.

 

Thus, the point of consideration, rather than a conundrum, arises is that this significant time and resource lapse, alongside changing decisions of the courts, in Martin case[14], could have been avoided had the matter been referred to arbitration proceedings as arbitration would have not only offered a higher chance at time and resource savings, but also mutual development and agreement for the claim amounts, thereby enabling the development of sustainable and long-lasting relationship between the parties. Similar problems have arisen in the space-related litigation disputes of Appalachian Insurance Co. v. McDonnell Douglas Corpn.[15] and Lexington Insurance v. McDonnell Douglas.[16]

 

Thus, it is lucidly evident that litigation proceedings in already complex and highly technical space-related disputes add on to the existing layers of complexity. Further, it also leads to massive cost and resource drainage and wastage which, in turn, further detriments the space sector from gaining traction in terms of growth, development, and innovation. Therefore, arbitration, mediation and/or negotiation offer the best chance at saving time and resources alongside building long-lasting and sustainable commercial relationships which, in turn, enable the space sector to bloom while protecting its manufacturers, sellers, and service providers.

 

In the following, the author shall conclude with certain recommendations to improve the scenario of dispute resolution in space-–related disputes.

 

  1. Conclusion: What is Actually Written in the Stars for the Future of Dispute Resolution Mechanism in Space-Related Disputes

 

We comprehend that the disputes in the space sector are highly technical and complex in nature due to which the need for arbitration substantially rises and for litigation reduces. However, it is pertinent to note that, in the space sector, the disputes are usually resolved through the process of mediation.[17] The parties resort to arbitration only if the matter escalates.[18] Taking this into account, it can be inferred that mediation is quintessential to resolve space-related disputes. However, considering the fact that the conventions and accords regarding space law are obsolete and ineffective, an imperative need to update and upgrade the same becomes the need of the hour because failure to do so will obstruct in the delivery of justice to the parties. The reason behind the same is that there is a burning need to develop a dispute resolution mechanism that is akin to space-related disputes only, rather than resorting to a general and standard dispute resolution mechanism as previously argued.

 

Thus, firstly, a new, effective, and efficient dispute resolution mechanism of arbitration, mediation, and negotiation (hereinafter “AMN”) can be developed through a top-to-down approach (hereinafter “TDA”). This means that that the law and its related provisions shall flow from the lawmakers to the parties wherein the updation and upgradation of the related conventions, treaties, and accords, alongside the development of specific rules and procedures shall be the responsibility of the lawmakers. It shall involve inclusion of specific and comprehensive provisions related to the dispute resolution mechanism of AMN in the newly updated and upgraded conventions, treaties, accords, and so on. Further, the relevant and requisite suggestions/amendments may be sought from various actors of the space sector for a comprehensive and inclusive development of the dispute resolution mechanism. This approach takes precedence over a down-to-top approach (hereinafter “DTA”) wherein the law and its related provisions flow between the parties while ensuring adherence to the general norms of international law. In other words, in DTA, the parties shall set their own rights, duties, and obligations, while ensuring that such setting does not violate any basic provisions of international law such as justice, fairness, equality, and good faith. DTA is not a preferrable mode because in this approach, there is a lack of uniformity and standardisation in the rights, duties, and obligations of the parties. This lack of uniformity and standardisation may inherently lead to the creation of stark differential treatment for each AMN proceedings which, in turn, may be perceived as discriminatory. Thus, to avoid the same, TDA is preferrable for the creation of an AMN dispute resolution mechanism.

 

Adding on to the aforementioned updation and upgradation of the treaties and so on, it is of quintessence importance for us to comprehend that the PCA Outer Space Arbitration Rules already exist for the purpose of arbitration in space-related disputes. Considering the dynamic and rapid changes in the space sector, wherein the probability of space-related disputes exponentially rise in times of Covid-19 — owing to halt and delay in various businesses and their ancillary industries — the need for utilising and applying these Rules becomes inevitable. This is to ensure faster, effective, and efficient redressal of space-related disputes owing to these Rules expertise and specific draft for space-related disputes. However, to achieve the same, there is a need for creating an awareness regarding these Rules within the space sector. Further, these Rules scope can also be expanded by including provisions and measures for mediation and/or negotiation. The benefit of the same would essentially be of standardisation and uniformity in the Rules for dispute resolution mechanisms as earlier argued.

 

Secondly, it is also imperative for us to comprehend that if the parties choose to go for litigation, then they may choose to go for the International Court of Justice (hereinafter “ICJ”) ad hoc litigation rather than a traditional ICJ litigation. The reason behind the same is that, in the ICJ Statute, there is a provision that enables the creation of ad hoc litigation chambers of the ICJ.[19] According to Article 26 of the ICJ Statute, we comprehend that it enables the creation of two types of chambers: a chamber that deals with a particular case;[20] or one or more chambers that deal with a particular “category” of cases.[21] Thus, we need to comprehend that this type of ad hoc ICJ litigation is far more beneficial than a traditional ICJ litigation because: (i) the ad hoc chambers will be specially equipped with experience and expertise to deal with space-sector related disputes as Article 26(1) enables the creation of chambers for a particular category of cases. This benefit of experience and expertise shall enable ICJ to deliver judgments of higher effectiveness and efficiency which, in turn, will enable the parties to receive appropriate and speedy justice. (ii) Ad hoc chambers act in a manner similar to that of Arbitral Tribunals because these chambers are created especially for specific disputes which is the same case in Arbitral Tribunals. This essentially offers similar benefits of Arbitral Tribunal but in the form of a decision rendered by an ICJ chamber. Further, it is also quintessential to note that these ad hoc chambers decisions are considered as a judgment rendered by the ICJ[22] which, in turn, makes it binding on the parties as per Article 59[23] and thereby increases the authenticity of these decisions.

 

However, the advantages of an ad hoc ICJ chamber over an Arbitral Tribunal must be discussed. These advantages are as follows: (i) From a political standpoint, it has already been observed that ICJ judgments have a higher visibility than an Arbitral Tribunal which, in turn, creates an increased probability of compliance with these judgments.[24] Further, these ICJ judgments are termed as “more prestigious” when compared to arbitral awards.[25] This, in turn, enables a party to bring the other party under the accountability and responsibility factor which may be due to the other party’s inability to fully or partially comply with the judgment. (ii) An ad hoc ICJ litigation chamber is comparatively lesser expensive than an Arbitral Tribunal because, according to Article 33, the “expenses” of the ICJ proceedings shall be borne by ICJ. The parties would be required to only bear their “own costs” for the ICJ proceedings. This encourages small actors of space-related disputes to undertake the same proceedings. Thus, it is lucidly evident that the parties can also resort to ad hoc ICJ litigation, provided the mutual settlement talks and/or mediation and/or arbitration has failed between them.

 

Therefore, considering the fact that there are ample amounts of opportunity for the dispute resolution mechanism for space-related disputes to grow, develop, and evolve, an inevitable need for constant updation and upgradation of the laws and rules arises alongside the creation of an awareness regarding the same.

† Iram Majid, Director of Indian Institute of Arbitration and Mediation (ILAM) and Executive Director of Asia Pacific Centre for Arbitration and Mediation.

[1] Vidya Drolia v. Durga Trading Corpn., (2021) 2 SCC 1 : 2020 SCC OnLine SC 1018.

[2] Ibid.

[3] Jan Frohloff, Arbitration in Space Disputes, 35 Arbitration Int’l 309, 311 (2019).

[4] Id. at 311-312.

[5] Id. at 313.

[6] ICC Case 19958/ AGF/RD/MK (ABS).

[7] Frohloff, supra note 2, at 315.

[8] Id. at 316.

[9] Id. at 317.

[10] ICSID Case No. ARB(AF)/17/2.

[11] See also CC/Devas (Mauritius) Ltd. v. Republic of India, PCA Case No 2013-09 and Devas Multimedia (P) Ltd. v. Antrix Corpn. Ltd., ICC Case 18051/CYK.

[12] See also Eutelsat v. Media Broadcast, Deutsche Telekom; Eutelsat v. SES (Eutelsat) <https://www.international-arbitration-attorney.com/icc-space-arbitration-eutelsat-communications-v-ses/>.

[13] 763 F Supp 1327 (D Md 1991).

[14] Ibid.

[15] 262 Cal Rptr 716, 718 (Cal Ct App 1989).

[16] 49 USC app § 2615 (1988).

[17] Frohloff, supra note 2, at 328.

[18] Ibid.

[19] 1945 3 Bevans 1179, Art. 26 (hereinafter “ICJ Statute”).

[20] Id. at Art. 26(2).

[21] Id. at Art. 26(1).

[22] Id. at Art. 27.

[23] Id. at Art. 59.

[24] Andreas Zimmermann, Ad Hoc Chambers of the International Court of Justice, 8(1) Dickinson Journal of International Law 9, 1-32 (1989).

[25] Ibid.

Case BriefsHigh Courts

Delhi High Court: Sanjeev Narula, J., decides a matter covering various aspects of the arbitration agreement.

Instant petition under Section 11 of the Arbitration and Conciliation Act sought appointment of a Sole Arbitrator.

Respondent was called upon to file a reply to the petition vide Order 08-02-2021, but no reply was filed.

Factual Matrix

Parties entered into a Memorandum of understanding on 1-01-2020 with the objective of promoting their respective business interests and profitability.

In the MoU it was provided that both the parties agree that they shall not attempt to solicit, contact or attempt to contact employees of each other for the purpose of offering employment.

Disputes arose as MSD breached its obligations under Clause 2.4 as explained above. MSD also indulged in various criminal activities which violate the terms of MoU, such as tampering with the servers of IMZ, forcibly gaining access to the computer database and electronic records of IMZ, sending emails to clients of IMZ and further making a false allegation against the directors and employees of IMZ.

On being aggrieved with the above, IMZ invoked the arbitration. Since MSD did not respond to the notice of Delhi International Arbitration Centre, IMZ approached this Court by way of the present petition.

Analysis

High Court while analyzing the matter stated that in exercising jurisdiction under Section 11, Court needs to only examine if there is an existence of the arbitration agreement and whether there is the existence of arbitral disputes.

Supreme Court in the decision of Vidya Drolia v. Durga Trading Corporation, (2021) 2 SCC 1, observed that “the rule for the Court is ‘when in doubt, do refer”.

Therefore, it was noted that only in cases when ex-facie, the document appeared to be fabricated, that the Court would make a judicial enquiry. Mere allegation of fraud is not enough.

Bench stated that the purported veracity of the document in the present case, though disputed by MSD, was not sufficient to hold that the document is fraudulent, or that the Court should not proceed to appoint an Arbitrator.

Non-Compliance of Pre-Arbitration Procedure 

Arbitration clause stipulated that the parties shall attempt to resolve the disputes mutually through negotiations, falling which the same shall be referred to and decided by a sole arbitrator.

Bench found it to be surprising and irreconcilable that, on hand, MSD initiated criminal proceedings by filing an FIR against IMZ and on the other hand, it looked forward to mutually resolve the disputes through negotiation.

Moreover, in Court’s opinion, having regard to the ongoing litigation between directors of the parties before the NCLT, criminal proceedings, and conduct of the parties, relegating them to mutual negotiation to resolve the disputes would be an empty formality

 In such a situation which arose in the present matter, insistence on negotiation as a pre-condition to arbitration should not get in the way of the dispute resolution process agreed upon between the parties.

Non-payment of stamp duty on a commercial contract would invalidate the arbitration agreement?

High Court stated that the issue of stamping also stands covered by N.N. Global Mercantile (P) Ltd. v. Indo Unique Flame Ltd., 2021 SCC OnLine SC 13, wherein the Supreme Court in clear and unequivocal terms overruled the decisions in SMS Tea Estates (P) Ltd. v. Chandmari Tea Company (P) Ltd.,(2011) 14 SCC 66, and Garware Wall Ropes Ltd. v. Coastal Marine Constructions and Engg. Ltd., (2019) 9 SCC 209, however, the same was affirmed in Vidya Drolia v. Durga Trading Corporation, (2021) 2 SCC 1.

Thus, Court opined that the plea of agreement being unstamped wouldn’t prevent the Court in appointing an arbitrator while exercising jurisdiction under Section 11 of the Act.

IMZ established that the contingencies provided under Section 11(6) of the Act were satisfactorily made out. Hence the present petition was allowed.

Shashank Garg, Advocate was appointed as the Sole Arbitrator to adjudicate the disputes that arose between the parties under the MoU.

Appeal was allowed in view of the above terms. [IMZ Corporate (P) Ltd. v. MSD Telematics (P) Ltd., 2021 SCC OnLine Del 3016, decided on 4-06-2021]

Advocates before the Court:

For Petitioner: Mr Nikhil Malhotra, Advocate

Mr Devadatt Kamat, Senior Advocate with Mr Sumeet Lall,

Mr Sidhant Kapoor and Mr. Javedur Rehman, Advocates.

Advani & Co.Experts Corner

 

Introduction

 

The seminal judgment of the 3-Judge Bench of the Supreme Court of India in Vidya Drolia v. Durga Trading Corpn.[1] (Vidya Drolia) has been instrumental in settling many controversies that have existed in Indian arbitral jurisprudence since the commencement of the Arbitration and Conciliation Act, 1996 (the Act). The judgment of the Supreme Court has addressed multiple issues concerning the interpretation of the various facets of the arbitration agreement that have time and time again been obscured by obsolete and conflicting jurisprudence. The Court found it appropriate to recalibrate the Indian position of arbitrability and therefore has holistically articulated the fourfold test to determine subject-matter arbitrability supplementing the rights test laid down in Booz Allen and Hamilton Inc. v. SBI Home Finance Ltd.[2](Booz Allen). The Court has also held the ratio in Booz Allen as per incuriam with regard to the arbitrability of the tenancy disputes governed by the Transfer of Property Act, 1882. The judgment has also laid emphasis on the scope of judicial interference when the courts are seized of an application made under Sections 8 and 11 of the Act. The Court while delivering its opinion in this regard has conclusively outlined the scope of judicial inquiry that is to be conducted to determine the existence and validity of the arbitration agreement. The Court in its reasoning has extensively relied on the 246th Report of the Law Commission of India and has noted the importance of giving effect to the intention of the legislature that is evident from the series of amendments made to the Act in recent years. The opinion of the Supreme Court pertaining to the scope of judicial inquiry at the time of deciding an application under Sections 8 and 11 and the appealability of the orders under the provisions of the Act is within the purview of the present article.

 

The Prima Facie Test

 

The Supreme Court laid extensive reliance on its earlier decisions while simultaneously noting the lack of their precedential value in the light of the legislative amendments made to the Act in recent years. The Court has propounded a prima facie test in order to determine the existence of an arbitration agreement by holding that the courts must refer parties to arbitration unless they find that prima facie no valid arbitration agreement exists. The Court has reiterated that this prima facie examination is only to weed out ex facie non-existent arbitration agreements, invalid arbitration agreements and that on rare occasions the courts could consider non-arbitrability contentions. It must also be kept in the mind that the Court’s findings must be based on and limited to a summary presentation of documents rather an extensive appreciation of evidence.

 

The Court has also reiterated the importance of strictly adhering to the words in the erstwhile Section 11(6-A) of the Act and has also stated that its omission in 2019 has not changed the restrictive examination of the courts at the referral stage. Augmenting its ratio, the Court also placed reliance by elucidating the rationales of the sacrosanct doctrines of separability and kompetenz-kompetenz that give primacy to the Arbitral Tribunal to determine all questions pertaining to the validity and existence of the arbitration agreement. The Court also departed from its earlier position and has held that arbitrability is for the arbitrator to decide in accordance with the power enshrined in Section 16 of the Act. The Court has held while the principle of kompetenz-kompetenz gives the Arbitral Tribunal primacy to decide issues of non-arbitrability, they still have the final word as the courts can take a second look when deciding an application for setting aside under Section 34 of the Act. Finally, the Court in Vidya Drolia[3] has held that the scope of judicial inquiry at the time of deciding applications under Sections 8 and 11 is identical and the said sections are complementary in nature.

 

It is interesting to note, that although the Supreme Court has confined its inquiry to ascertain prima facie whether a valid arbitration agreement exists to compel parties to arbitrate, it has distinguished validity and existence as two separate corollaries to assess the enforceability of an agreement in law. It is true that many jurisdictions recognise the dichotomy between the formal and substantive validity of the arbitration agreements, it is in my opinion that the assessment of the substantive validity in terms of the requirements under the Contract Act, 1872 would not be feasible on a summary perusal of documents and would in fact require an extensive appreciation of evidentiary proceedings. The Court has pre-empted such a situation and has therefore held that when the Court cannot come to a conclusion on the validity of the arbitration agreement applying the prima facie test, it must stop any further inquiry and must refer the parties to arbitration. The judgment of the Court in Vidya Drolia[4] has summed up this approach as “when in doubt, do refer”.

 

It is also pertinent to note that this opinion of the Court in Vidya Drolia[5] is based on the findings of the another decision of the Supreme Court in Garware Wall Ropes Ltd. v. Coastal Marine Constructions and Engg. Ltd.[6] (Garware). However, a coordinate Bench of the Supreme Court in N.N. Global Mercantile (P) Ltd. v. Indo Unique Flame Ltd.[7] has expressed dissent with the opinion of the Court in Garware[8] that was affirmed in Vidya Drolia[9] and has accordingly referred the question to a Constitution Bench. Therefore, until this question is settled by the Constitution Bench the opinion of the Court regarding the dichotomy of existence and validity of the arbitration agreement in Vidya Drolia[10] is of uncertain precedential value.

 

Appealability and Conclusion

 

After analysing the above proposition, it is clear that the Supreme Court in Vidya Drolia[11] has vehemently laid down that the scope of judicial inquiry under Sections 8 and 11 of the Act is identical and extremely restrictive. Although the Court has brought the ambit of inquiry under Sections 8 and 11 at par by reading the prima facie test into both provisions, it has erred by failing to take cognizance of an inconsistency between the said sections with regard to the appealability of orders passed under these sections. From a conjoint reading of Section 8(1) with Section 37(1)(a) and Sections 11(6) and (6-A) with Section 11(7) of the Act it appears that an anomaly has arisen. It will be seen that an order passed under Section 8 that refuses to refer parties to arbitration is appealable under Section 37(1)(a), whereas a similar order passed under Section 11(6) read with Section 11(6-A) whether referring the parties or refusing to refer parties to arbitration is barred from an appeal by virtue of the strict rule in Section 11(7).

 

It is needless to say that this outcome is undesirable and is contrary to the true spirit of the ratio laid down by the Court in Vidya Drolia[12]. The legislature has followed the recommendations of the Law Commission of India and has carried out amendments to the Act but has not brought about the desired consistency between Sections 11(7) and37 of the Act. It is my opinion that such a lacuna could be used by recalcitrant parties, as they are likely to resort to dilatory tactics by filing mala fide Section 11 applications. Through this medium, these parties would attack the existence and validity of the arbitration agreement and would therefore pray for an order refusing to refer the parties to arbitration. By virtue of Section 11(7) of the Act that order would not be appealable. Such an outcome defeats the legislature’s policy to promote arbitration as the preferred method for dispute resolution arising from commercial contracts and is evidently not in conformity with the due process of law.

 

However, the Supreme Court in a recent judgment in Pravin Electricals (P) Ltd. v. Galaxy Infra and Engg. (P) Ltd.[13] (Pravin Electricals) has noted this inconsistency and has expressed its concern in relation to what has been laid down in Vidya Drolia[14]. The Court in Pravin Electricals[15] has invited the attention of the legislature to this conundrum by making an observation stating that Parliament might need to have relook at Sections 11(7) and 37 in order to bring the orders passed under Sections 8 and 11 at par on appealability. Therefore, until the legislature steps in and fixes this loophole the uncertainty will prevail.

 

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

†† Manav Nagpal, Associate at Advani & Co.

 

[1] (2021) 2 SCC 1.

[2] (2011) 5 SCC 532.

[3] (2021) 2 SCC 1.

[4] Ibid.

[5] Ibid.

[6] (2019) 9 SCC 209.

[7] 2021 SCC OnLine SC 13.

[8] (2019) 9 SCC 209.

[9] (2021) 2 SCC 1.

[10] Ibid.

[11] Ibid.

[12] Ibid.

[13] 2021 SCC OnLine SC 190.

[14] (2021) 2 SCC 1.

[15] 2021 SCC OnLine SC 190.

Advani & Co.Experts Corner

 Introduction

Nearly after a decade the Indian arbitration regime has come in consonance with the western world and settled the long due controversy on stamping of arbitration agreement. A Bench comprising of Dr Justice D.Y. Chandrachud, Justice Indu Malhotra and Justice Indira Banerjee in N.N. Global Mercantile (P) Ltd. v. Indo Unique Flame Ltd.[1] has held that since the arbitration agreement is an independent agreement between the parties, and is not chargeable to payment of stamp duty, the non-payment of stamp duty on the commercial contract, would not invalidate the arbitration clause, or render it unenforceable, since it has an independent existence of its own.

Existence and Validity: Finding of Garware Ropes Referred to A Larger Bench

 

At the outset, the Court first addressed the issue regarding validity of an arbitration agreement in an unstamped agreement extensively in the two landmark judgments, namely, SMS Tea Estates (P) Ltd. v. Chandmari Tea Co. (P) Ltd. (SMS Tea Estates)[2] and Garware Wall Ropes Ltd. v. Coastal Marine Constructions and Engg. Ltd.[3] (Garware Ropes). The Supreme Court in SMS Tea Estates[4] observed that an arbitration clause is independent of the other terms of the contract and held that

 

(i) an unstamped arbitration agreement cannot be acted upon; and

(ii) an arbitration agreement would be invalid where the contract is voidable at the option of a party.

Further, in 2019 the Supreme Court while deciding the case of Garware Ropes[5] again reverted to the position taken in 2011 in SMS Tea Estates[6] which held that an arbitration clause contained in a contract would exist as a matter of law only if the underlying contract is duly stamped. Garware Ropes[7] also held that it is not possible to bifurcate the arbitration clause contained in the arbitration agreement so as to give it an independent existence.

In the instant case, the Court held that Garware Ropes[8] does not lay down the correct position of law by opining that “existence” and “validity” are intertwined, and arbitration agreement does not exist if it is illegal or does not satisfy mandatory legal requirements. Invalid agreement is no agreement.

 

The Court overruled the decision of Garware Ropes[9] and gave a clear and reasonable finding that that an arbitration agreement is distinct and independent from the underlying substantive contract and once the arbitration agreement is held to have an independent existence, it can be acted upon, irrespective of any technical defects.

 

Despite the coherent ruling given by the Supreme Court, the decision in Garware Ropes[10] was affirmed by a three-Judge Bench of the Supreme Court in Vidya Drolia v. Durga Trading Corpn.[11] at para 92 of the judgment. The Court in instant case specifically held that the finding in Garware Ropes[12] is erroneous and has rightly referred the issue “whether non-payment of stamp duty on commercial contract will invalidate an arbitration agreement” to the Constitution Bench for an authoritative determination.

 

Scheme of the Stamp Act, 1899

Before analysing the findings of the Court, it is important to note that the aim of the Stamp Act is to secure the revenue of the State.  To briefly highlight, Section 33 casts a statutory obligation on every person empowered by law to examine the instrument presented before them, and ascertain whether the instrument is duly stamped, failing which the relevant authority can impound the instrument and direct the parties to pay the requisite stamp duty along with a penalty of five rupees or ten times the amount of the proper duty or of the deficient portion thereof and obtain an endorsement from the Collector concerned.

 

Section 35 of the Stamp Act operates as a bar to an unstamped instrument being admitted in evidence or being acted upon. Furthermore, Section 40 of the Stamp Act provides the procedure for instruments which have been impounded, and sub-section (1) of Section 42 requires the instrument to be endorsed after it is duly stamped by the Collector concerned before expiration of one month from the date of impounding. Section 42(2) provides that after the document is duly stamped, it shall be admissible in evidence, and may be acted upon.

 

In the present case, the Supreme Court held that on a harmonious reading of the provisions of the Stamp Act with the Arbitration and Conciliation Act, 1996, it is suggested that even if the underlying contract was not sufficiently stamped, the arbitration agreement, which survives independently shall not be rendered invalid in law. Upon curing the defects as prescribed above the document would be admissible in evidence and could be acted upon.

Interplay between Stamp Act and Arbitration and Conciliation Act

 

Given that an arbitration agreement is distinct and independent from the underlying substantive contract and the same can be acted upon once the technical defects are cured, it is important to determine which authority would exercise the power of impounding the instrument in a case where the substantive contract contains an arbitration agreement.

 

  1. Cases where arbitrator is appointed by parties’ consent: In such a case, the arbitrator is obligated by Section 33 of the Stamp Act. This section casts a statutory obligation on every person empowered by law to examine the instrument presented before him, and ascertain whether the instrument is duly stamped, failing which the arbitrator can impound the instrument, and direct the parties to pay the requisite stamp duty (and penalty, if any), and obtain an endorsement from the Collector concerned.
  1. Applications under Section 11:In such a case, the relevant court, while exercising jurisdiction under Section 11, would impound the substantive contract which is either unstamped or inadequately stamped, and direct the parties to cure the defect before the arbitrator/tribunal can adjudicate upon the contract.
  1. Applications under Section 8: In such a case, the judicial authority will make the reference to arbitration. However, in the meanwhile, the parties would be directed to have the substantive contract stamped in accordance with the provisions of the relevant Stamp Act, so that the rights and obligations emanating from the substantive contract can be adjudicated upon.
  1. Applications under Section 9: When it is brought to the attention of the court that the substantive contract is not duly stamped under a Section 9 petition, the court would grant ad interim relief to safeguard the subject-matter of the arbitration. However, the substantive contract would then be impounded, and the party concerned be directed to take the necessary steps for payment of the requisite stamp duty, within a time-bound period. The Full Bench of the Bombay High Court in Gautam Landscapes (P) Ltd. v. Shailesh S. Shah[13] also held that the Court may grant any interim or ad interim reliefs in an application under Section 9 of the Arbitration and Conciliation Act when a document containing arbitration clause is unstamped or insufficiently stamped.

After analysing the above provisions of the Stamp Act along with the provisions of the Arbitration and Conciliation Act, the Court clearly held that non-payment of stamp duty on the substantive contract would not invalidate the main contract as this is a deficiency which is curable on the payment of the requisite stamp duty at any prescribed stage.

 

Conclusion

This judgment reaffirms the position given in Section 7 of the Arbitration and Conciliation Act, 1996 that requires an arbitration agreement to be in black and white in order for it to be enforceable. It is opined that Garware Ropes[14] might have hampered the arbitration mechanism from the start by expanding the extent of judicial interference in the appointment of arbitrators, as well as delaying the issuance of interim relief, effectively declaring the arbitration process null and void. However, this lacuna has been now rectified by the judiciary and a pro- arbitration stance has been taken by the Court.

 

More importantly, a requirement of stamping of an arbitration agreement would have aided in delay in the dispute resolution mechanism in India and hence we look forward to the Constitution Bench reaffirming this decision as such decisions are being lauded in the arbitration fraternity.

 

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

†† Tariq Khan, Principal Associate at Advani & Co.

††† Mahi Mehta, Associate at Advani & Co.

 

[1] 2021 SCC OnLine SC 13.

[2] (2011) 14 SCC 66.

[3] (2019) 9 SCC 209.

[4] (2011) 14 SCC 66.

[5] (2019) 9 SCC 209.

[6] (2011) 14 SCC 66.

[7] (2019) 9 SCC 209.

[8] Ibid.

[9] Ibid.

[10] Ibid.

[11] (2021) 2 SCC 1 : 2020 SCC OnLine SC 1018.

[12] (2019) 9 SCC 209.

[13] 2019 SCC OnLine Bom 563 : (2019) 3 Mah LJ 231.

[14] (2019) 9 SCC 209.

Op EdsOP. ED.

The controversy surrounding the issue of legality of two Indian parties opting out of Indian arbitration law for a foreign-seated arbitration has been put to rest by the Supreme Court of India. The Court had the occasion to deal with the divisive issue in the matter of PASL Wind Solutions (P) Ltd. v. GE Power Conversion India (P) Ltd.[1].

The issue involved is twofold: (a) whether two Indian parties are allowed to contractually opt out of the Arbitration and Conciliation Act, 1996[2] and have their disputes settled in a foreign-seated arbitration under the curial law (procedural law of arbitration) of another State; and (b) if yes, would then an award rendered in such an arbitration be considered a “foreign award” within the meaning of Section 44[3] of the Arbitration and Conciliation Act, 1996 for enforcement under Part II of the 1996 Act as a New York Convention Award. And to answer the issue, the real question is whether the phrase “foreign award” in Section 44 gains colour from the nationality of the parties or from the nationality of the juridical seat of the arbitration (or the nationality of the curial law of arbitration). To state simply, whether Section 44 is party-neutral and seat-centric or not?

In PASL Wind Solutions (P) Ltd.4 matter, the arbitration agreement stipulated that Zurich would be the seat and hence the curial law/procedural law of arbitration would be Swiss. The arbitration agreement further adopted the Rules of Conciliation and Arbitration of the International Chamber of Commerce, as the institutional rules for the conduct of arbitration.

It was the appellant’s contention that “foreign award” contemplated under Section 44 in Part II arise only from “international commercial arbitration” as defined in Section 2(1)(f)5 in Part I of the Arbitration Act and which section expressly requires a foreign element i.e. at least one of the parties has to be a national of a country other than India and therefore, the award passed in an arbitration b/w two Indian parties cannot be designated as a “foreign award” under Part II of the Arbitration Act. It is submitted that this argument has the effect of making the walls between Part I and Part II permeable, when in fact it has been held by Supreme Court in Bharat Aluminium Co. v. Kaiser Aluminium Technical Services Inc.6, that Part I and Part II of the 1996 Arbitration Act are mutually exclusive with no overlapping, in conformity with the territoriality principle. Placing reliance on this decision, the Supreme Court rightly held that “International commercial arbitration” defined in Section 2(1)(f) of Part I does not relate to the words “foreign award” in Section 44 under Part II. “International commercial arbitration” defined in Section 2(1)(f) means an arbitration with India as the juridical seat and with foreign element. Therefore, “international” in Section 2(1)(f) draws colour from the nationality of the parties and not from the seat which is India only.

Furthermore, a perusal of Section 537 of the Arbitration Act, modeled on the Geneva Convention on the Execution of Foreign Arbitral Awards, 1927 (the Geneva Convention), reveals that for an award to qualify as a “foreign award”, it is necessary that parties to the arbitration should be of different nationalities. However, this requirement is absent in Section 44 and in Articles I and II of the New York Convention8 which indicate that for an award to be a “foreign award” under Section 44, the parties need not be of different nationalities and they can be of same nationality. The Court found that nationality of parties is not a requirement for labelling an award as a “foreign award” under Section 44 inasmuch as “persons” mentioned in Section 44 has no reference to nationality, residence or domicile.

The appellant made one very ingenious argument that the expression “unless the context otherwise requires” used in Section 44 would necessarily import the definition of “international commercial arbitration” contained in Part I when the context requires this to be done, namely, when two Indian parties are resolving their disputes against each other in a territory outside India. To counter this, it was rightly reasoned that Section 44 is party neutral and therefore expression “unless the context otherwise requires” cannot be interpreted to undo the very basis of Section 44 by converting it from a seat-oriented provision to a person-oriented provision.

Furthermore, the Court rejected the appellant’s contention that treating the present award as a “foreign award” under Section 44 would be violative of the public policy as Section 28(1)(a)9 of the 1996 Act provides that two Indian parties cannot opt out of the substantive law of India. With this argument, the appellant sought to create a confusion between the proper law of the contract and the curial law of arbitration. This argument was an eyewash inasmuch as Section 28(1)(a) pertains only to India seated domestic arbitration and it stipulates that in such an arbitration, the substantive law (proper law of the contract) would be Indian to ensure that two or more Indian parties do not circumvent the substantive Indian law by resorting to arbitration. Accordingly, Section 28(1)(a) does not forbid two Indian parties to opt for a foreign-seated arbitration.

Furthermore, the appellant’s apprehension that if this is allowed, the parties can circumvent Indian laws was completely unfounded. It is unfounded as rightly held by the Court because such an eventuality will be taken care of as, (a) two Indian nationals resorting to a foreign-seated arbitration will apply the substantive law of India to disputes between them which arise from a breach of contract which takes place in India; (b) but if rules that will apply to the substance of the dispute have not been identified by the parties, the arbitrator, in accordance with the conflict of law rules of the country in which the arbitration takes place, will apply the substantive law of India as the transactions are concluded in India and contract’s breach has happened in India; (c) lastly, if on facts of a case, if it is found that two Indian nationals have circumvented a law pertaining to the fundamental policy of India, then such foreign award will not be enforced under Section 48(2)(b)10 of the Arbitration Act on grounds of violation of “public policy” of India.

Opinion and conclusion

In the author’s opinion, the judgment is very welcome as it has resolved a very pertinent issue in Indian arbitration law jurisprudence in conformity with the tenets and ethos of the New York Convention, 1958. The issue it answers had been dealt with differently by different High Courts in the country, making the jurisprudence on the issue nebulous. On one hand, we have the Madhya Pradesh High Court’s judgment in Sasan Power Ltd. v. North American Coal Corpn. (India) (P) Ltd.11 (Sasan I) and two decisions12 of the Delhi High Court which have followed the decision in Sasan I13. These judgments correctly hold Section 44 is a party-neutral provision and seat-centric and therefore give liberty to Indian parties to have their disputes settled in a foreign-seated arbitration.

On the other hand, we have the Supreme Court’s decision in TDM Infrastructure (P) Ltd. v. UE Development India (P) Ltd.14 which has given a contrary opinion and the two judgments15 of the Bombay High Court which have followed the Supreme Court’s decision in TDM Infrastructure16. The present judgment has overruled these decisions.

The reason why two parties of different nationalities chose a third State as the seat is because both want a neutral forum. One could, therefore, argue there is no reason why two Indian parties should choose another State as seat and if so, the same should not be permitted. While the reasons for such an election by two Indian parties may be unfathomable, the real question is that if party autonomy is the brooding and guiding spirit of arbitration and there is no clear and undeniable harm caused to the public, then what stops two Indian nationals to avail of a challenge procedure of a foreign country, especially when the 1996 Act and the New York Convention, 1996 do not put any embargo. The act of balancing “party autonomy” and “clear and undeniable harm to the public” has undoubtedly been performed well by this judgment.

*Advocate, Delhi. GNLU, Gandhinagar, Batch of 2015. The author can be reached at  dksrivastava0511@gmail.com

[1] 2021 SCC OnLine SC 331. 

[2]  Arbitration and Conciliation Act, 1996. 

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

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

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

4 2021 SCC OnLine SC 331. 

5 S. 2.  Definitions.— (1) In this Part, unless the context otherwise requires,—

(f) “international commercial arbitration” means an arbitration relating to disputes arising out of legal relationships, whether contractual or not, considered as commercial under the law in force in India and where at least one of the parties is—

(i) an individual who is a national of, or habitually resident in, any country other than India; or

(ii) a body corporate which is incorporated in any country other than India; or

(iii) an association or a body of individuals whose central management and control is exercised in any country other than India; or

(iv) the Government of a foreign country;

6 (2012) 9 SCC 552. 

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

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

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

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

and for the purposes of this Chapter an award shall not be deemed to be final if any proceedings for the purpose of contesting the validity of the award are pending in the country in which it was made.

8 New York Convention. 

9 S. 28. Rules applicable to substance of dispute.— (1) Where the place of arbitration is situate in India,— (a) in an arbitration other than an international commercial arbitration, the Arbitral Tribunal shall decide the dispute submitted to arbitration in accordance with the substantive law for the time being in force in India;

10  Section 48(2)(b)

11 2015 SCC OnLine MP 7417 

12 GMR Energy Ltd. v. Doosan Power Systems India (P) Ltd., 2017 SCC OnLine Del 11625. ; Dholi Spintex (P) Ltd. v. Louis Dreyfus Co. India (P) Ltd., 2020 SCC OnLine Del 1476 

13 2015 SCC OnLine MP 7417

14 (2008) 14 SCC 271 

15Seven Islands Shipping Ltd. v. Sah Petroleums Ltd., 2012 SCC OnLine Bom 910; Addhar Mercantile (P) Ltd. v. Shree Jagdamba Agrico Exports (P) Ltd., 2015 SCC OnLine Bom 7752.

16 (2008) 14 SCC 271.

Op EdsOP. ED.

The success of any dispute resolution system depends greatly on the effectiveness of the enforcement mechanism which it prescribes. Arbitration could emerge as a successful alternative dispute redressal mechanism in India purely because of the ease with which an arbitral award can be enforced. An arbitral award could be enforced by the courts in the same manner as if it were a decree of the court. Since the enforcement of an award is similar to enforcement of a decree of a court, the same is broadly governed by the principles laid down by the Code of Civil Procedure, 1908[1] (CPC), but with some minor differences.

Although an award passed by an arbitral tribunal is treated as a decree of the court, yet there exists no legal presumption by which an arbitral tribunal is treated as a court for the purpose of enforcement. This scenario poses various practical difficulties in enforcement of an arbitral award, which the article endeavours to highlight.

In order to fully appreciate the whole gamut of controversy, the authors have briefly dealt with the provisions of CPC that deal with jurisdiction of court at the stage of institution of suit and at execution of decree, how these provisions were made applicable to the regime under the Arbitration Act, 1940[2] (the 1940 Act), the sudden shift brought by India’s adoption to the UNCITRAL Model Law on International Commercial Arbitration[3] (the UNCITRAL Model Law) by enacting the Arbitration and Conciliation Act, 1996[4] (the 1996 Act) and subsequent amendments made to the 1996 Act. The article focuses on provisions of the 1996 Act that deal with jurisdiction of court and the enforcement of an arbitral award and their interplay especially in view of the amendments made to these provisions by the Arbitration and Conciliation (Amendment) Act, 2015[5] (the Amending Act, 2015). In the course of discussion, the authors have analysed the judgments of the Supreme Court which have settled the various controversies surrounding the laws of arbitration in India and how there still exists ambiguity with respect to certain aspects of the legislation.

JURISDICTION OF COURTS AS PER THE CODE OF CIVIL PROCEDURE, 1908

Jurisdiction of court under CPC is subject-matter centric. Civil proceedings are instituted in courts within whose local limits the defendant resides or the subject property is situated or cause of action has arisen. Sections 15 to 21[6] CPC deal with jurisdiction of the court in which a suit can be instituted.

Once a decree is passed, it is either enforced by a court which has passed the decree or is transferred to a court which exercises jurisdiction over the person against whom the decree is passed or within whose jurisdiction the property is situated which would be sufficient to satisfy such decree. Sections 36 to 74[7] contained in Part II of the CPC deal with execution of decree and orders.

Provisions relating to transfer of decree are provided in Sections 39 to 45[8]. A court which has passed the decree may on an application of the decree-holder, send the decree for execution to another court if the person against whom the decree is passed, resides or carries on business within the local limits of jurisdiction of that court, or if such person has no property within the local limits of the jurisdiction of the court which passed the decree sufficient to satisfy such decree and has property within the local limits of the jurisdiction of such other court, or if the decree directs the sale or delivery of immovable property situated outside the local limits of the jurisdiction or for any other reason which the court may think fit. In addition to the aforesaid, under Section 46[9], the court which has passed the decree, upon an application filed by the decree-holder, may issue a percept to any other court which would be competent to execute such decree to attach any property belonging to the judgment debtor and specified in the percept.

Order 21 Rules 26[10] and 29[11] are also relevant in the present context as they lay down the circumstances in which execution of decree may be stayed. A decree may be stayed for reasonable time inter alia to enable the judgment debtor to file an appeal. It can also be stayed on such terms as to security, if a suit is pending in any court against the decree- holder of such court or of a decree which is being executed by such court. The appellate court can also grant the stay to the execution proceeding.

The aforesaid provisions, with some modifications were adopted by the legislature while enacting the Arbitration Act, 1940.

JURISDICTION OF COURTS UNDER THE ARBITRATION ACT, 1940

The 1940 Act provided for application of the Code of Civil Procedure to all proceedings before the court and to all appeals under the 1940 Act, subject to the provisions of the 1940 Act (Section 41[12]). The definition of “court” under the 1940 Act was more or less the same as the court under CPC. As per Section 2(c)[13] court meant a civil court having jurisdiction to decide the question forming the subject-matter of reference if the same had been the subject-matter of suit but did not include a small cause court except for the purposes of arbitration proceedings under Section 21[14].

One of the key features of the 1940 Act which was done away in the 1996 Act was that an award under the 1940 Act did not become final and binding on the parties. Under the 1940 Act, an arbitral award once passed had to be filed in court and the court had to give notice to the parties. The parties were entitled to file their objection to the award. The court had power to modify or correct the award and also to remit the award to the arbitrators for reconsideration, if any issues were left undetermined, or where the award was so indefinite to be incapable of execution, or where objection to legality of award is apparent upon the face of it. In case, the court found no cause to remit the award and the time period for making application to set aside the award had expired or such application had been refused, the court would proceed to pronounce the judgment according to the award and upon the judgment so pronounced a decree shall follow and the award will become effective.

Section 31 of the 1940 Act[15] dealt with jurisdiction. As per this Section, an award had to be filed in court having jurisdiction in the matter to which the reference relates. The concept of jurisdictional seat in the 1940 Act was conspicuous by its absence. A holistic reading of the 1940 Act would indicate that it was the subject-matter of dispute that formed the basis of jurisdiction of court just like jurisdiction under CPC.

The enforcement of arbitral award also had to be done as per the provisions of CPC. This practice prevailed in India till the enactment of the 1996 Act, which was based on UNCITRAL Model law.

UNCITRAL MODEL LAW ON INTERNATIONAL COMMERCIAL ARBITRATION

The need for improvement and harmonisation of domestic laws dealing with arbitration, especially international commercial arbitration, led to the United Nations Commission on International Trade law adopting the UNCITRAL Model Law in the year 1985. This was ratified by India in the form of the 1996 Act. The 1996 Act overhauled its predecessor and ushered in a new era of dispute resolution through arbitration.

Article 20 of the UNCITRAL Model Law provides that the parties are free to agree on the place of arbitration. In case parties fail to do so, the arbitral tribunal, having regard to the circumstances of the case and the convenience of parties, can determine the place of arbitration. Article 20(2) is a non obstante clause which provides that notwithstanding anything contained in Article 20(1), the arbitral tribunal can hold meeting at any place, unless otherwise agreed by the parties. Thus, Article 20 contemplates two places  – one is the seat, which the parties have agreed as per the agreement or the Tribunal has determined, the other is the venue, where the Tribunal can hold any of its meeting irrespective of that place not being seat as chosen by the parties or determined by the Arbitral Tribunal. The Model Law mandates the award to contain the date and the place of arbitration (Article 31). Thus, the “place” where the award was made gained significance under the UNCITRAL Model Law.

An arbitral award can be set aside by the court only if the grounds mentioned in Article 34 are satisfied. Article 35 deals with recognition and enforcement of arbitral award as per which, an arbitral award, irrespective of the country in which it was made, shall be recognised as binding and upon application in writing to the competent court, shall be enforced subject to the provisions of Articles 35 and 36. Article 35 is a significant departure from the practice that was followed by Courts in India due to the 1940 Act. Unlike the 1940 Act, under the UNCITRAL Model Law, an arbitral award is binding on parties and capable of enforcement i.e. an award was treated as a decree capable of enforcement. It does not require approval of the jurisdictional civil court for its enforcement.

Article 36 deals with the grounds for refusing recognition and enforcement of arbitral award, irrespective of the country in which it was made. Just like Article 34, the grounds for refusal to recognise and enforce the arbitral award are limited. Article 36(2) is of vital importance. As per this provision, in case, an application for setting aside or suspension of award is made in a court of the country in which, or under the law of which the award was made, then the court where the recognition or enforcement of award is sought, may, if it considers proper, adjourn its decision. It may also, on an application of the party claiming recognition or enforcement of the award, order the other party to provide appropriate security. Thus, a discretionary power has been granted to the court where recognition or enforcement is sought to defer its decision.

Although the UNCITRAL Model Law underwent amendment in 2006, the aforesaid articles remained intact.

THE ARBITRATION AND CONCILIATION ACT, 1996 AND THE SUBSEQUENT AMENDMENTS

As mentioned in the foregoing paragraph, the 1996 Act is modelled on the UNCITRAL Model Law. Part I of the 1996 Act applies where the place of arbitration is in India, Part II applies where the place of arbitration is outside India.[16] In this article we are concerned with Part I of the Act.

The 1996 Act defines court in Section 2(1)(e) to mean the principal civil court of original jurisdiction in a district and includes the High Court in exercise of its ordinary original 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.

The definition of court has been subject-matter of various deliberations and judgments as this definition along with Sections 20, 31(4) and 42 are critical in determining which court shall have jurisdiction to hear applications arising out of arbitration agreement and arbitral proceedings.

The language of Sections 20, 21, 31, 32 and 34 of the 1996 Act have been borrowed from the UNCITRAL Model Law without any material change.

Concept of Juridical Seat

Section 20 of the 1996 Act, just like Article 20 of the UNCITRAL Model law deals with place of arbitration and contemplates a situation where arbitration proceedings can be held at a place different from the place decided by the parties to the arbitration agreement or as determined by the Arbitral Tribunal. It differentiates between juridical seat and venue.

In the early years of coming into force of the 1996 Act, the concept of “seat” and “venue” were not very clear. The Indian courts in various judgment held that the 1996 Act is “subject-matter centric”. The concept of parties choosing a neutral place for arbitration, which was well established in other parts of the world, especially in International Commercial Arbitrations, was alien to India. It was not before 2012, in the decision in Bharat Aluminium Co. v. Kaiser Aluminium Technical Services Inc. (BALCO)[17], that a Constitutional Bench of the Supreme Court drew a distinction between venue and seat and held that arbitrations are anchored to the seat and that seat is the centre of gravity. In holding so, the Constitutional Bench clarified that the term “subject-matter of arbitration” used in the definition of court in Section 2(1)(e) cannot be confused with the term “subject-matter of the suit”. The subject-matter of arbitration is arbitration itself and hence, the term court would mean the court of the seat of arbitration. The court also took note of Section 20 of the Act, a statutory provision in support of party autonomy and observed that any other interpretation would leave the provision nugatory. Thus, came the concept of supervisory court.

It must be pointed out that although in para 96 of the judgment, the Supreme Court recognises supervisory court, it holds that the legislature has intentionally given jurisdiction to two courts – (i) the court which would have jurisdiction where the cause of action is located and (ii) the supervisory court.  An isolated reading of para 96 of the judgment reveals that courts have concurrent jurisdiction and parties can either choose the court where the cause of action has arisen or the court exercising supervisory jurisdiction over the arbitral proceedings. Many courts in India followed this approach. However, a holistic reading of the judgment makes it clear that the courts at seat alone will have jurisdiction to challenge arbitral award. This observation of the authors is supported by a recent judgment of the Supreme Court in BGS SGS Soma JV v. NHPC Ltd.[18] (BGS SGS Soma JV).

The Supreme Court in Indus Mobile Distribution (P) Ltd v. Datawind Innovations (P) Ltd.,[19] while analysing in detail the effect of Section 20 of the 1996 Act on the jurisdiction of court held that the place chosen by the parties in the arbitration agreement to hold arbitral proceedings, may not in the classical sense have jurisdiction, i.e. no part of the cause of action may have arisen at such a place, however, in arbitration law, the moment such a place is chosen, it becomes the juridical seat, which is akin to exclusive jurisdiction clause. Thus, jurisdiction of court under the arbitration law is seat-centric.

Section 21 deals with commencement of arbitral proceedings from the date on which request for dispute to be referred to arbitration is received by the respondent and as per Section 32, it terminates when the Tribunal has made the final award. Just like the UNCITRAL Model Law, Section 31(4) of the 1996 Act also mandates the award to mention the date and the place of arbitration. These provisions were not subjected to any amendments.

Challenge to Arbitral Award

An arbitral award can only be challenged before the court within whose jurisdiction an award is made. Section 34 deals with application for setting aside the arbitral award. The grounds for setting aside an award are confined to those provided in the Section. As per Section 34(3), the time period to challenge the arbitral award is three months. Section 34 underwent some change in 2015 and the grounds for challenge were further limited. In order to make the dispute resolution process effective, sub-clause (6) was introduced which mandated the courts to dispose of Section 34 application within a period of one year from the date of service of  notice.

Finality of Award and its Enforcement

Section 35 deals with finality of arbitral awards. An award is final and binding on the parties and persons claiming under them. Section 36 deals with enforcement of arbitral award. As per this section, where the time for making an application to set aside the arbitral award has expired, or such application having been made, it has been refused, the award shall be enforced under the CPC in the same as it were a decree of the court. This is significantly different from the position contemplated in the 1940 Act where the arbitral award by itself was not final, binding and enforceable and required approval from the court by way of judgment and decree to make it enforceable.

Position under the 1996 Act distinct from that under the UNCITRAL Model Law

A bare reading of Articles 36 of the UNCITRAL Model Law and Section 36 of the 1996 Act would suggest that contrary to Article 36 of the UNCITRAL Model Law, where a discretion has been granted to the executing court to stay or not to stay the execution of arbitral award till the pendency of proceedings challenging the arbitral award, no such discretion vests with the Courts under Section 36 of the 1996 Act.

Judgments of the Court and the position of law prior to the Amending Act of 2015

The aforesaid position has been subject-matter of various judgments in the past. The Supreme Court in National Buildings Construction Corpn. Ltd. v. Lloyds Insulation (India) Ltd.[20] and Fiza Developers and Inter-trade (P) Ltd. v. AMCI (India) (P) Ltd. .[21] held that the very filing and pendency of application under 34 operates as a stay of enforcement of the award. Similar stand was taken in National Aluminium Co. Ltd. v. Pressteel & Fabrications (P) Ltd.[22] , however, the Court was quick to add that automatic suspension of the execution of arbitral award defeats the very purpose of arbitration. This suggestion of the Supreme Court was accepted by the 246th Law Commission[23], which in its report recommended insertion of the following:

Section 36(1) will be subject to Section 36(2);

36(2) where an application to set aside the arbitral award has been filed in the Court under Section 34, the filing of such an application shall not by itself render the award unenforceable, unless upon a separate application made for that purpose, the court grants stay of the operation of the award in accordance with the provisions of sub-section (3) hereof;

36(3) upon filing of the separate application under sub-section (2) for stay of the operation of the award, the court may, subject to such conditions as it may deem fit, grant stay of the operation of the award for reasons to be recorded in writing:

Provided that the Court shall while considering the grant of stay, in the case of an award for money shall have due regard to the provisions for grant of stay of money decrees under the Code of Civil Procedure, 1908.

The aforesaid recommendation was duly incorporated in the 1996 Act by the Amending Act of 2015. Thus, post the Amending Act of 2015, mere filing of Section 34 application will not in itself render the arbitral award non-executable.

Position post the Amending Act of 2015: Judgment in Board of Control for Cricket in India v. Kochhi Cricket (P) Ltd.

After the amendment,  there were conflicting decisions passed by the various High Courts regarding whether the amendment made to the 1996 Act by the Amending Act of 2015 shall apply to pending court proceedings or not. The position was finally settled by the Supreme Court in Board of Control for Cricket in India v. Kochhi Cricket (P) Ltd. [24]. The issue before the Court was whether the amended Section 36, would apply in relation to proceedings initiated prior to coming into force of the amendment. The question required interpretation of Section 26 of the Amending Act of 2015 as per which the amendment was to apply in relation to arbitral proceedings commenced on or after the date of commencement of this Act and would apply to the arbitral proceedings which commenced before the commencement of this Act only if the parties agreed to its application.

The Court held that the era of automatic stay was over. Section 36 being procedural in nature, the amendment would be applicable to pending court proceedings as well. Consequently, in order to stay enforcement of arbitral award, application to that effect under Section 36(2) will have to be filed before the competent court and that mere challenge to arbitral award will not make the arbitral award non-executable. However, the issue that whether Section 36 proceedings are independent of Section 34 proceedings was not decided despite being raised by the parties.

It will not be out of place to mention that a press note dated 7 March 2018 was brought to the notice of court as per which a new Section 87 was proposed to be inserted to clarify that unless parties agree otherwise the 2015 Amendment shall not apply to –

  • Arbitral proceedings which have commenced before the commencement of the 2015 Amendment Act; and
  • Court proceedings arising out of or in relation to such arbitral proceedings irrespective of whether such court proceedings are commenced prior to or after the commencement of the 2015 Amendment Act.

Shall apply only to

  • Arbitral proceedings commenced on or after the commencement of the 2015 Amendment Act; and
  • To court proceedings arising out of or in relation to such arbitral proceedings.

The Supreme Court took note of the press note and advised the Central Government to keep in the mind the very object of the enactment of the 2015 Amendment Act as the proposed Section 87 would defeat the very purpose for which the amendment was made to the 1996 Act.

Parliament ignored the advice of the Supreme Court and went ahead and introduced Section 87 to the 1996 Act by way of Section 13 of the Arbitration and Conciliation (Amendment) Act, 2019[25].

Section 87 of the 1996 Act was challenged in a batch of petition before the Supreme Court in Hindustan Construction Co. Ltd. v. Union of India.[26] The Supreme Court struck down the insertion of Section 87 by the Amending Act, 2019 as well as deletion of Section 26 of the Amending Act, 2015. This judgment, although a landmark, suffers from some errors; only time will tell whether the errors are glaring enough to take away the precedential value of this judgment.

Jurisdiction of Court: Section 42 of the 1996 Act

Another crucial provision of the 1996 Act which has been a subject-matter of various controversies is Section 42 which deals with jurisdiction. A bare perusal of Section 42 would suggest that Section 42 has an overriding effect over all other provisions of the Act.

As per Section 42, the court where the first application emanating from the arbitration agreement or arbitral proceedings is made, shall have jurisdiction over the arbitral proceedings and will have exclusive jurisdiction over all other future court proceedings. Reading Section 42 in isolation would suggest that in a case where the cause of action arose in city  A, and the arbitration was seated in city B, if a party files an application before courts in city A, the courts in city A alone will exercise jurisdiction over future court proceedings emanating from the arbitration agreement. These readings of the section run counter to the concept of seat and supervisory jurisdiction which is etched deeply in the UNCITRAL Model Law based on which the 1996 Arbitration Act is modelled. Therefore, in order to understand the true import of Section 42, the same has to be read together with Section 2(1)(e) and Section 20. The aforesaid position, with a similar example was discussed in BGS SGS Soma JV[27], where the Court observed that the moment a seat is chosen by the parties, the Court of the seat is conferred with exclusive jurisdiction to decide the proceedings emanating from the arbitration agreement.

In para 62 of the judgment, the Court held that the decision of High Court of Delhi in Antrix Corpn. Ltd. v. Devas Multimedia (P) Ltd.[28] (Antrix Corpn.) is incorrect. The High Court of Delhi in Antrix Corpn.[29] by relying on para 96 of BALCO[30] had concluded that the two courts can have concurrent jurisdiction and that merely choosing a seat cannot amount to exercising such a right of exclusive forum selection. The High Court of Delhi in Antrix Corpn.[31] was of the opinion that holding otherwise would in effect render Section 42 of the 1996 Act ineffective. The Supreme Court concluded that Section 42 of the 1996 Act is meant to avoid conflicts in jurisdiction of courts by placing the supervisory jurisdiction over all arbitral proceedings in connection with the arbitration in one court exclusively. The Court further observed that in cases where it is found on facts that no seat is designated by the agreement or the so-called seat is only a convenient venue and that several courts may have jurisdiction as part of the cause of action have arisen within their jurisdiction, then the court where the earliest application is filed, will be the court that shall exercise exclusive jurisdiction under Section 42.

Interplay between Sections 36 and 42 of the 1996 Act

We have in the initial paragraphs of this article discussed in detail how a decree is executed under CPC. As per Section 38 CPC, a decree may be executed either by the court which has passed the decree or the court to which the decree may be sent for execution. An arbitral award, unlike a judgment and order, is passed by an Arbitral Tribunal which does not have power of execution of decree and thus, the first part of Section 38 that deals with execution of decree by the court which has passed it does not apply in the case of arbitral award. The second part of Section 38 that deals with execution by court to which decree is sent also does not get attracted in the case of execution as there exists no deeming fiction to hold that the court within whose jurisdiction the arbitral award was passed should be taken to be the court which passed the decree. It is for the same reason, why Section 39 CPC can also not be fully applied to execution of an arbitral award as there exists no court from where a decree has been transferred for execution. However, Section 39 comes to the rescue in determining which court will have jurisdiction to execute an award as it marks out certain indicators needed to determine the appropriate court where an execution petition may be filed.

Thus, an arbitral award may be executed at any place having a close nexus with a judgment debtor or his assets or properties or both. As such, a person in whose favour the award is passed is not required to file an execution petition before the District Court within whose jurisdiction the award was passed and then seeks its transfer to the court where inter alia the assets or properties of a judgment debtor lie.[32]

Position of law clarified by the judgment in Sundaram Finance Ltd. v. Abdul Samad

The Supreme Court in Sundaram Finance Ltd. v. Abdul Samad (Sundaram Finance)[33] clarified the position of law on this point by holding that the enforcement of an award through its execution can be filed anywhere in the country where such a decree can be executed and there is no requirement for obtaining a transfer of decree from the court, which would have jurisdiction over the arbitral award.

The Supreme Court in Sundaram Finance[34]  while holding so also took note of the relevance of Section 42 of the 1996 Act in determining jurisdiction of executing court and concluded that Section 42 will not get attracted in case of execution proceedings. The Court observed that when final award is made, of which execution is sought, the arbitral proceedings already stand terminated (Section 32) and thus, Section 42 of the Act, which deals with jurisdiction issue in respect of arbitral proceedings, will have no relevance.

The judgment in Sundaram Finance[35]  although seems to have settled the position of law relating to execution of arbitral awards, however, certain parts of the judgment could have been more elaborative to avoid any ambiguity in future. The Court by holding that Section 42 will not get attracted in case of execution of award under Section 36 has taken into account only those cases where a final award has been passed by the Tribunal and not an interim award. Similarly, while referring to Section 46 CPC, which deals with issuance of percept, the Court has failed to hold which court will be competent to issue precepts – does it mean that an execution petition may be filed, as a matter of principle, in a court where Section 34 application is pending and necessary direction may be issued by that court to the court which otherwise under CPC would be the competent court to execute the decree? One problem that may emerge from the ambiguity is that litigants may rely on para 10 of Sundaram Finance judgment[36] to maintain their petition before a court which otherwise lacks territorial jurisdiction to enforce the arbitral award.

The lack of clarity in the aforesaid issue is problematic as even the obiter of the Supreme Court is binding on lower courts. An ambiguous obiter may pose a different level of problems as we have seen in the past.[37]

CONCLUSION

From the foregoing discussion, one thing is clear that although the legislature and the judiciary have come a long way in streamlining the dispute settlement process through arbitration, yet there continues to exist an ambiguity with respect to certain aspects of the Arbitration and Conciliation Act, 1996. The amendments brought by the Amending Act of 2015 have definitely aided in changing the outlook of the international community towards India as an arbitration friendly nation, however, the lack of clarity that has crept in because of the divergent judicial pronouncements subsequent to these amendment poses a greater challenge which needs to be overcome soon.

One of the areas which need clarity is the interplay between Sections 34 and 36 of the 1996 Act.  The Amending Act, 2015 has intertwined these Sections. As per the amended Act, in order to obtain a stay on the execution of an arbitral award, an application challenging the arbitral award under Section 34 of the Act has to be accompanied by a separate application seeking stay of the arbitral award under Section 36(2).  Only when the competent court passes an order of stay of the award, on the application made under Section 36(2), the arbitral award becomes unenforceable. The court while hearing the application for stay of the arbitral award may impose certain conditions on the judgment debtor. One of these conditions may include payment of money as well in case of a money decree.  In such a situation, a question arises as to whether such an action of the supervisory court, i.e. imposition of condition involving payment of money amounts to deemed execution of award or not. The courts are yet to examine this issue. One of the standpoint from which the court will have to examine this issue is that unlike jurisdiction under CPC, the jurisdiction of courts under the 1996 Act is not subject-matter centric. A court, under the 1996 Act, exercises supervisory jurisdiction over arbitration purely because of the fact that the arbitration was conducted within its local limits. There can be a situation where the supervisory court has absolutely no nexus with the subject-matter of dispute. In such a situation, whether by conferring the power to stay the execution of an award by imposing conditions involving payment of money, has the legislature not transgressed the settled principles of law relating to jurisdiction of court at the time of execution of a decree.

The aforesaid issue gives rise to another practical problem. Assuming the court stays the award and directs the judgment debtor to deposit a certain portion of arbitral amount and at the same time, allows the decree-holder to withdraw that amount upon an application being made by him, then whether such an order would amount to deemed enforcement of award. Also, which court would be responsible to see whether the proper stamp duty has been paid or not on an arbitral award as per the judgment laid down in M. Anasuya Devi. v M. Manik Reddy[38], since the issue of stamp duty has to be seen at the stage of enforcement.

Another issue that will require examination is whether the court under Section 34 while staying the arbitral award are deemed to be the court “which has passed the decree” as per Section 37 of the CPC, 1908 so as to make certain sections of the CPC while enforcing the decree workable like precepts. This issue, although was discussed in Sundaram Finance[39], has not been tested.

In order to make the dispute resolution through arbitration reach its full potential, the courts will have to address the aforementioned issues and ensure that the judgments in future provide a solution keeping in mind the practical realities of dispute resolution in India.

† Advocate on Record, Supreme Court of India.

† † LLM, National University of Singapore, Advocate practicing at Supreme Court of India.

[1] Code of Civil Procedure, 1908. 

[2] Arbitration Act, 1940.

[3] UNCITRAL Model Law on International Commercial Arbitration. 

[4] Arbitration and Conciliation Act, 1996. 

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

[6] Sections 15 to 21 CPC 

[7] Sections 36 to 74 CPC 

[8] Sections 39 to 45 CPC 

[9] Section 46 CPC 

[10] Order 21 Rules 26 CPC 

[11] Order 21 Rules 29 CPC 

[12] Section 41 of the Arbitration Act, 1940 

[13] Section 2(c) of the Arbitration Act, 1940 

[14] Section 21 of the Arbitration Act, 1940 

[15] Section 31 of the Arbitration Act, 1940 

[16] Bharat Aluminium Co. v. Kaiser Aluminium Technical Services Inc., (2012) 9 SCC 552 

[17] Ibid.

[18] (2020) 4 SCC 234  — Whether a three-Judge Bench in SGS Soma could have clarified the judgment passed by a Constitution Bench in BALCO, supra Note 16 is something which requires further deliberation.

[19] (2017) 7 SCC 678 

[20] (2005) 2 SCC 367, para 6

[21] (2009) 17 SCC 796, para 20

[22] (2004) 1 SCC 540 

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

[24] (2018) 6 SCC 287. 

[25] Section 13 of the Arbitration and Conciliation (Amendment) Act, 2019

[26] 2019 SCC OnLine SC 1520 

[27] Supra Note 18.

[28] 2018 SCC OnLine Del 9338 

[29] Ibid.

[30] Supra Note 16.

[31] Supra Note 28.

[32] Daelim Industrial Co. Ltd. v. Numaligarh Refinery Ltd., 2009 SCC OnLine Del 511 — “A money award, can be enforced through courts of the place wheresoever the money or any property of the party liable to pay is situated”; Indusind Bank Ltd. v. Bhullar Transport Co., 2012 SCC OnLine P&H 21674 .

[33] (2018) 3 SCC 622.

[34] Ibid.

[35] Ibid.

[36] Ibid.

[37] Para 96 of  BALCO, supra Note 16 (elaborated in the foregoing paragraphs of this paper).

[38] (2003) 8 SCC 565 .

[39] Supra Note 33.

Advani & Co.Experts Corner

INTRODUCTION

In about a span of decade, dispute funding or litigation funding or now more commonly known as Third Party Funding (‘TPF’) is no longer just restricted to common law jurisdictions but it has gained much spotlight in international litigation and commercial arbitration, albeit high risk.

The International Bar Association (IBA) in fact has been one of the first organisations to address TPF. The 2014 IBA Guidelines in their General Standard 6(b) in assessing conflicts of interest, includes reference to third-party funders:

“If one of the parties is a legal entity, any legal or physical person having a controlling influence on the legal entity, or a direct economic interest in, or a duty to indemnify a party for, the award to be rendered in the arbitration, may be considered to bear the identity of such party.”

The explanation to General Standard 6(b) provides a definition, which includes additional details:

“For these purposes, the terms ‘third-party funder’ and ‘insurer’ refer to any person or entity that is contributing funds, or other material support, to the prosecution or defence of the case and that has a direct economic interest in, or a duty to indemnify a party for, the award to be rendered in the arbitration.”

INCREASING DEMAND FOR FUNDING

In recent years, with the increasing costs in arbitration and with curbs being placed on legal budgets in corporate companies, it therefore comes as no surprise that the demand for TPF has risen considerably. Also, the fact that with increasing access to justice, companies are now less hesitant in pursuing meritorious claims, while wanting to preserve their cash flow for running their business and manage risks. To simply state, TPF is not restricted to those that are impecunious. Thus, with the rising demand for TPF, a wide array of new funders has entered the global litigation financing market, showing the rapid growth of this industry.

WHY IS FUNDING SOUGHT AND BY WHOM?

The key participators in litigation funding are the claimants, funders, lawyers and possibly, funding brokers. Funding is usually sought to cover legal fees, expert fees, arbitrator’s fees, arbitral institutions fees or costs associated for enforcement proceedings or appeals.

While most recipients of TPF are claimants, but in some jurisdictions, law firms may also be the users of dispute finance. While still relatively rare, but TPF for respondents is evolving and becoming more available in the event there is a counter claim. However, the funding of respondents leads to challenges with respect to how to reimburse the funders in the event of a successful defence. In some cases, the defence of a claim could also be included in portfolios arrangement.

THE DISPUTE FUNDING PROCESS

The nature, constitution, and characteristics of third-party funding arrangements can vary from case to case. Most cases presented to any given TPF are rejected for one reason or another. There are few published statistics available, as well as statements made by some funders, which indicates rejection rate of 80 percent or higher[1].

The decision about whether to fund a claim will be arrived at following detailed due diligence by the funder (often using external counsel, and if required damages or technical experts), and the funder’s board or investment committee’s approval. Funders are concerned with the case merits, the fiscal matters of the proposed investment and the enforceability of any award. For a TPF to consider a potential opportunity there must be suitable indication of a solid claim with a well recoverable margin between the anticipated damages recovery and the anticipated budget for legal fees and costs.

RETURN STRUCTURES

A TPF providing “non-recourse” funding will usually expect to make a multiple return on the capital invested. This shows both the high-risk nature of the investment as well as the Internal Rate of Return (“IRR”) expectations of the funders. The funder’s return (or success fee) may be based on the multiple of the capital invested or as a percentage of the “claim proceeds” (the amount recovered by way of damages or settlement). Some arrangements may also include a combination of these. In the landmark decision of Essar v.Norscot[2] the arbitrator accepted that cost of the third-party funding was reasonable and the same was upheld by the English High Court.

CONTROL AND COST CONTAINMENT

Quite often the concern expressed by the claimants and lawyers is the extent to which the funders while in its efforts to control costs, maintain tight control over the case strategy, arbitration proceedings, including settlements, if any, which may in turn affect analysis of certain issues, for instance disclosures and conflicts etc. While it would be natural for the funders to exercise high degree of control to protect their investment, however, some funders report that, after their initial assessment of the case, the funders only function and monitor from a distance and only receive regular updates.

CONFLICTS OF INTEREST AND DISCLOSURE

The growing concerns with respect to potential arbitrator conflicts of interest have increased due to many leading arbitrators having taken up ad hoc consultant roles with some funders. Further, the interdependent relationship between funders and law firms and some arbitrators also gives rise to such potential conflicts of interest, which has thus raised several issues on disclosures. Opposition was met due to the consequences of disclosures of TPF such as frivolous challenges to arbitrators and baseless applications for security for costs.  However, with the growing demand for transparency in arbitrations, arbitral institutions are introducing mandatory disclosures. The Singapore International Arbitration Centre (SIAC) was first to give the Tribunal power to order disclosure of TPF[3]. The Hong Kong International Arbitration Centre (HKIAC) has adopted a similar approach and more recently the ICC RULES 2021[4] has also introduced the requirement for disclosure of TPF.

LEGISLATIONS AND CODE OF CONDUCT

Debate still exists with regards the regulation of TPF. While common law doctrines against ‘champerty and maintenance’ are well versed with, however, only two countries have taken action to regulate TPF in international arbitration. The Singapore Parliament passed the Civil Law (Amendment) Bill (No. 38/2016)[5]on 10 January 2017, permitting TPF for international arbitration and related proceedings in Singapore.

Similarly, on 14 June 2017, the Hong Kong Legislative Council passed the Arbitration and Mediation Legislation (Third Party Funding) (Amendment) Ordinance, 2017[6]for permittingTPF of arbitration and mediation in Hong Kong.

Meanwhile to regulate TPF in Australia, the Treasurer of the Commonwealth of Australia announced on May 22, 2020, that litigation funders will be subject to financial regulation that requires holding an Australian Financial Services License (AFSL)[7].

While not formally regulated, but In England and Wales, the Court of Appeal decision in the costs appeal in Excalibur Ventures LLC v. Texas Keystone Inc[8], Lord Justice Tomlinson said:

‘Litigation Funding is an accepted and judicially sanctioned activity perceived to be in the public interest.‘

Likewise, only recently the Supreme Court of India in Bar Council of India v. AK Balaji[9], clarified the legal permissibility of third-party funding in litigation and opined that

“There appears to be no restriction on non-lawyer third parties funding the litigation and getting repaid after the outcome of the litigation.”

 

Additionally, few states in India including Gujarat, Maharashtra, Madhya Pradesh, Uttar Pradesh, Andhra Pradesh, Orissa, and Tamil Nadu have distinctly recognized TPF by bringing in an amendment in Order XXV Rule 1 of the Code of Civil Procedure, 1908, which empowers the Courts to secure costs for litigation by asking the financing party to become a party and depositing the costs in court.

A legal start-up in India Advok8 aims to create a third-party funding market by aiding litigants for their lawsuits through crowd funding. According to information available, they have completed funding for eight cases[10].

Third party funding has also been adopted into Canadian litigation. In 2020, the Supreme Court of Canada in a unanimous decision in the insolvency case of Quebec Inc. v. Callidus Capital Corp.[11] confirmed that funding for litigation may provide a viable path by which to maximize recovery for an insolvent company’s creditors.

However, in some jurisdictions, for instance the Supreme Court of Ireland in the case of Persona Digital Telephony Ltd v. Minister for Public Enterprise[12]held that third party litigation funding violated its laws on maintenance and champerty.

CONCLUSION

TPF has gained much acceptance in the world of international arbitration and it is a given that TPF is here to stay. As with any legal practice or institution, to reap the benefits of TPF and in providing justice with greater transparency and to further avoid uncertainties and limit its dangers, a strong mechanism is needed to support the TPF infrastructure in various jurisdictions and develop global and uniform guidelines for practitioners to rely upon. Whether in favour or against TPF, there is a need for policy makes to create an environment of assurance and where accountability is recognised for both funders and applicants in terms of operation. Further, with the recent global fiscal slowdown due to the Covid-19 pandemic, it has become difficult for most parties to pursue their claims due to liquidity crunch. If we want to encourage and promote parties to opt for arbitration, then TPF can be a practical solution. Thus it is the need of the hour for various legislatures to provide a legal framework as regards TPF. Thus, one can only hope for developments for TPF on all  fronts – legislative, regulatory and case-law.

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

†† Chaiti Desai,  Senior Associate at Advani & Co.

[1]https://www.thejudgeglobal.com/mistakes-to-avoid-when-approaching-third-party-funders/

[2]Essar Oilfields Services Ltd v Norscot Rig Management PVT Ltd, [2017] Bus LR 227

[3] SIAC IA Rules, Art 24.1

[4]https://iccwbo.org/dispute-resolution-services/arbitration/rules-of-arbitration/

[5] https://sso.agc.gov.sg/Bills-Supp/38-2016/Published/20161107?DocDate=20161107

[6]https://www.doj.gov.hk/en/legal_dispute/pdf/brief_note_tpf_e.pdf

[7]https://ministers.treasury.gov.au/ministers/josh-frydenberg-2018/media-releases/litigation-funders-be-regulated-under-corporations

[8]Excalibur Ventures llc v Texas Keystone Inc and others (No 2) (Association of Litigation Funders of England and Wales intervening), [2017] 1 WLR 2221

[9](2018) 5 SCC 379

[10]https://epaper.timesgroup.com/Olive/ODN/TimesOfIndia/shared/ShowArticle.aspx?doc=TOIM%2F2019%2F02%2F24&entity=Ar01307&sk=57F8ABA8&mode=text

[11]9354-9186 Québec inc. v. Callidus Capital Corp., 2020 SCC 10, see https://www.canlii.org/en/ca/scc/doc/2020/2020scc10/2020scc10.html

[12][2017] IESC 272

Case BriefsSupreme Court

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

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

What’s the controversy?

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

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

The reason for entering into the SHA was as follows:

“WHEREAS

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

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

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

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

Delhi High Court’s Verdict

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

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

Supreme Court’s Verdict

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

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

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

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

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

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

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

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

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

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

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

*Judgment by Justice RF Nariman 

Know Thy Judge| Justice Rohinton F. Nariman

Appearances before the Court by:

For Appellant: Senior Advocate K.V. Viswanathan

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

Also read the detailed report on the Vidya Drolia judgment 

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

Op EdsOP. ED.

I. Introduction

The imposition of retrospective taxation by the Government of India in 2012[1] triggered at least three major Bilateral Investment Treaty (BIT) arbitration proceedings – Vodafone International Holdings BV v. The Republic of India[2] (Vodafone); Cairn Energy Plc and Cairn UK Holdings Ltd v. The Republic of India[3] (Cairn) and Vedanta Resources Plc v. The Republic of India[4] (Vedanta). Two of these proceedings, Vodafone[5] and Cairn[6] have concluded, with the Permanent Court of Arbitration, ruling in favour of the investor companies stating that the Indian Government’s retrospective tax demand was in breach of the guarantee of fair and equitable treatment under the BITs. The award in Vodafone[7] has been challenged by India at the Singapore High Court[8] and that in Cairn[9] is also set to be challenged, if latest reports are to be believed to be true.[10]

Prior to the communiqué from the Government, Cairn Energy wrote to the Indian Government seeking enforcement of the award, stating that since India is a signatory to the New York Convention, the award can be enforced in other countries as well. The letter warned that the company shall endeavour to get Indian assets situated abroad attached in the event of non-enforcement,[11] a practice being heavily resorted to these days for recovery.[12] Most recently, the company has moved courts in the United States, United Kingdom, the Netherlands, Canada, UAE, Singapore, Japan and Cayman Islands seeking enforcement of the award.[13]

Even as India has decided to challenge the award in Cairn[14], Cairn Energy’s letter and subsequent legal action provoke some obvious, yet very compelling inquiries – is attachment of Indian assets in foreign countries the only way to enforce the arbitral award passed by the Arbitral Tribunal? What, if any, is the usual legal recourse that would be available with Cairn Energy to enforce the arbitral award in India? It is in the backdrop of these imperative inquiries that this present study attempts to analyse how and if BIT arbitral awards are enforceable in India. It also studies whether the current position vis-à-vis enforcement is also the correct position, and what other alternatives exist.

II. Enforcing investment arbitral awards in India: A Herculean task

In India, the enforcement of arbitral awards determined by international commercial arbitration proceedings is fairly simple although, elaborate. Governed by the Arbitration and Conciliation Act, 1996[15] (the Act of 1996), the jurisprudence surrounding enforcement of international commercial arbitration awards has greatly evolved and is well developed. Per contra, enforcement of arbitral awards passed in BIT arbitrations is neither simple, nor is the jurisprudence around it properly formulated.

India is not a signatory nation to the Convention on the Settlement of Investment Disputes between States and Nationals of Other States, 1965[16] (the ICSID Convention). As a result, inter alia, there is no obligation upon India to enforce BIT awards under ICSID. Not just this, India has also opted for reservation provided in Article I(3) of the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, 1958 (the New York Convention) by virtue of which, only such New York Convention awards will be enforceable in India that arise out of differences that are considered “commercial” under the Indian law.[17] The biggest impediment to enforcement of BIT arbitral awards, however, is posed by the conflicting decisions passed by the High Courts at Calcutta and Delhi,[18] on the applicability of the Act of 1996, thereto. While the former Court held the Act of 1996 to be applicable, the latter held to the contrary. Such inconsistency in judicial positions resulted in grave uncertainty on the enforceability of BIT arbitral awards in India, which necessarily warrants assessment.

a)  India is not a party to the ICSID Convention

Crucially, the ICSID Convention grants finality to the award passed under the Convention and prohibits any appeal before national courts.[19] It also provides that the enforcing States must treat arbitral awards passed thereunder as decisions passed by national courts and ensure enforcement of pecuniary obligations imposed by the award.[20] Since India is not a signatory to the Convention these obligations do not concern, let alone bind India.

The ICSID Additional Facility Rules (the Additional Facility Rules), however, are relevant to the present discussion. The ICSID Additional Facility Rules were created on 27-9-1978 to offer arbitration, conciliation and fact-finding services in situations wherein, inter alia, one of the parties to the BIT is not a signatory to the ICSID Convention or is a national of a contracting State.[21] Several BITs signed by India provide for arbitration under these Rules. Notably, the primary subject that these Rules deal with is the administration of arbitration proceedings, and very little is offered in terms of enforcement of BIT arbitral awards, making it susceptible to the whims of the enforcing State.

In order to address the likely consequences of the aforesaid regime, the Additional Facility Rules provide that arbitrations thereunder shall be conducted only in New York Convention States.[22] It can be inferred that such a provision was inserted to guarantee enforcement of awards as per the New York Convention. While this provision might mitigate an impediment to enforcement in several States that are parties to the New York Convention, the same may not be true for India, since India has availed the reservation provided for under Article I(3) of the New York Convention.

b) Effect of reservation under Article I(3) of the New York Convention

As per Article I(3), inter alia, any State signing, ratifying or acceding to the New York Convention may restrict its applicability to awards passed in disputes arising out of only such relationships that are considered to be “commercial” under the domestic law of the enforcing State. India has availed the reservation provided for under Article I(3) of the New York Convention.[23] Accordingly, even if the inference that an award passed under Additional Facility Rules must be enforced in accordance with the New York Convention is relied upon, enforcement cannot be guaranteed unless arbitral awards passed under a BIT can be said to have arisen out of differences that are considered as “commercial” under the Indian law.

At this point, accordingly, it is befitting to explore the contours of the term “commercial” under the Indian law.

III. Whether a BIT award can be said to arise out of a “commercial relationship” or not? An analysis

In order to ascertain the above, the authors rely upon UNCITRAL Model Law on International Commercial Arbitration, 1985[24] (the UNCITRAL Model Law), the Model Text for the Indian BIT (the Model BIT) and judgments of the Supreme Court of India.

a) “Commercial” under the UNCITRAL Model Law

The second footnote to Article I of the UNCITRAL Model Law provides that the term “commercial” must be given a wide interpretation in order to ensure that all matters of a commercial nature are covered in its ambit, whether contractual or otherwise. It further lays down a non-exhaustive list of transactions that fall under the meaning of the term “commercial”. It is imperative to note that the subjects enlisted in the footnote include “investment” as well.[25]

The Act of 1996 is based upon the UNCITRAL Model Law, as stated in the Preamble to the Act[26]. The Supreme Court of India has also held on several occasions that the Act of 1996 must be interpreted in accordance with the UNCITRAL Model Law.[27] Pursuant to the Supreme Court decisions and the statutory recognition of the UNCITRAL Model Law as the source of the Act of 1996, the term “commercial” must be interpreted as inclusive of “investment”.

b) “Commercial” under Model BIT issued by the Department of Economic Affairs (DEA), Ministry of Finance, Government of India

Before studying the relevant provision of the Model BIT, it is essential to understand what BITs are and the purpose they serve. BITs are instruments signed by two countries that establish the terms and conditions pursuant to which nationals and companies from the countries invest in one another, such investments are popularly known as Foreign Direct Investments (FDIs). FDIs are intended to spur growth and development in the states involved. BITs lay down the rights and obligations of the parties and thereby guarantee smooth flow of such investments. At the same time, they also guarantee the rights of and offer protection to the investing nationals and companies. In essence, therefore, BITs balance the interests of the host States with those of the investors.

Given that the ultimate goal served by a BIT is using trade and commerce to advance economic growth in countries and ensuring unhindered returns to the investors, it is argued that investments under BITs are inherently arising out of commercial relationships. The view was also echoed in a speech delivered by the Chief Justice of Singapore on International Arbitration, Mr Sundaresh Menon who said,

“Investment treaties were designed to encourage foreign direct investment by providing an additional safeguard of a foreign investor’s commercial interests and protecting this from being adversely affected by Government action in the host State.”[28]

(emphasis supplied)

Legally speaking, however, the Government of India had no clear policy as to whether “investments” under BITs were to be deemed as “commercial transactions” under the Indian Law or not until 2016. It was only when the DEA, while issuing Model BIT in 2016 put the conundrum to rest once and for all. Article 27.5 was introduced in the Model BIT, which provides[29],

“27.5. Finality and enforcement of awards.—A claim that is submitted to arbitration under this article shall be considered to arise out of a commercial relationship or transaction for purposes of Article I of the New York Convention.                                                                                                                              (emphasis supplied)

Article 27.5 left no room for doubt as to the interpretation of the term “commercial” vis-à-vis enforcement of BIT arbitral awards. As per the article, claims submitted to arbitration under the Model BIT would be treated as commercial “for the purposes of Article I of the New York Convention”. This implies that awards (including awards passed in arbitrations under the Additional Facility Rules) that must be enforced as per the New York Convention are to be treated as arising out of commercial relationship under the Indian law.

As a note of caution, it is found germane to state that the Model BIT must be employed to ascertain the contours of the term “commercial” not merely for the purposes of BITs entered into after 2016, but also to those entered into before 2016. In our view, any interpretation to the contrary would be erroneous and legally untenable, as the nature and purpose of BITs as well the general understanding of the term “commercial” have remained the same over the years, notwithstanding the deeming clause.

c) “Commercial” as per the decisions of the Supreme Court

As mentioned hereinabove, Indian courts have always argued in favour of attributing a “wide import” to the term “commercial” under the Act of 1996[30]. It has also been held in a gamut of decisions that the Act of 1996 must be interpreted as per the UNCITRAL Model Law[31].

Yet another of the Supreme Court’s observations in R.M. Investments and Trading Co. (P) Ltd. v. Boeing Co. (R.M. Investments) merit attention at this point. In the said decision, while examining the ambit of the term “commercial” in relation to the Act of 1996, the Supreme Court held that:

  1. … The expression “commercial” should, therefore, be construed broadly having regard to the manifold activities which are integral part of international trade today.[32]

In arriving at the aforesaid conclusion, the Court relied upon its decisions in Renusagar Power Co. Ltd. v. General Electric Co.[33] (Renusagar) and Koch Navigation Inc. v. Hindustan Petroleum Corpn. Ltd.[34] (Koch Navigation). In Koch Navigation, the Court held:

  1. … Act is calculated and designed to subserve the cause of facilitating international trade and promotion thereof by providing for speedy settlement of disputes arising in such trade through arbitration and any expression or phrase occurring therein should receive, consistent with its literal and grammatical sense, a liberal construction.

The abovementioned judgments of the Supreme Court of India make it clear that all such activities that are intended to facilitate international trade and promotion thereof fall within the ambit of the term “commercial” within the meaning of the Act of 1996. It is further clarified that the term must be given a vast, liberal interpretation so as to include the many activities that make part of international trade today. The purpose of any BIT, as elucidated above, is indeed the promotion of international trade and development in the countries that are parties thereto. BITs are entered into so that investments can be made internationally by natural or juridical persons from one country into another, and as such, investment made pursuant to a BIT is squarely covered within the ambit of a commercial relationship and any disputes or differences arising therefrom are liable to be considered as arising out of a “commercial relationship”.

IV. Conflicting decisions of two Indian High Courts on the applicability of the Act of 1996 to investment arbitral awards

Notwithstanding the UNCITRAL Model Law, Article 27.5 of the Model BIT and the decisions of the Supreme Court in R.M. Investments[35], Renusagar[36] and Koch Navigation[37], two decisions of the Delhi High Court, Union of India v. Khaitan Holdings (Mauritius) Ltd.[38] and Union of India v. Vodafone Group Plc[39] have held that arbitral awards under a BIT fall outside the ambit of differences whch are considered as commercial under the Indian law, consequently holding the Act of 1996 as inapplicable to enforcement of BIT arbitral awards. The decisions are also contrary to the 2014 Calcutta High Court judgment in Board of Trustees of the Port of Kolkata v. Louis Dreyfus Armatures SAS[40], wherein the Court assumed that the Act of 1996 is applicable to BIT arbitral awards and proceeded with such assumption.

Following is a discussion on these judgments.

a) Board of Trustees of the Port of Kolkata Louis Dreyfus Armatures[41] (Louis Dreyfus)

In Louis Dreyfus, a request for an anti-arbitration injunction was made by Kolkata Port Trust under Section 45 of the Act of 1996[42]. The Court allowed the said application. However, it is to be noted that Section 45 deals with the power of a judicial authority to refer parties to arbitration in matters of international commercial arbitration. The Court assumed that the section, as also the Act of 1996 would apply to BIT arbitral awards as they would to awards passed in commercial arbitrations.

b) Union of India v. Vodafone Group Plc[43] (Vodafone suit)

In this case, even as arbitration was pending before the Permanent Court of Arbitration under the India-Netherlands BIT between India and Vodafone, its parent company Vodafone Plc initiated arbitration under the India-UK BIT. Consequently, India filed a civil suit before the Delhi High Court inter alia seeking a stay on arbitration under the India-UK BIT, arguing that the proceedings amounted to an abuse of due process, and were null and void. The Court, by way of an order dated 22-8-2017 granted a temporary injunction in favour of India on the basis of preliminary findings.

The final judgment and order in the Vodafone suit was passed on 7-5-2018. In essence, the Court held that it was not devoid of jurisdiction in matters concerning investment treaty arbitrations under compelling circumstances wherein no alternative efficacious remedy was available. It further held that an arbitration agreement between an investor and a State did not by itself constitute a treaty, but only a contract upon which the Court had the power to adjudicate. In so doing, however, the Court also acknowledged the role of international law and held that interests of investors are better served if the arbitration agreement is governed thereunder, as opposed to State law. The Court vacated the interim injunction it had granted on 22-8-2017 and permitted arbitration under the India-UK BIT.

Peculiar and worrying questions of law flow from the Court’s collective adjudication of the issues related to the jurisdiction of domestic courts in dealing with BIT arbitrations, and the applicability of private international law or other domestic law to BIT arbitrations and suits related thereto. The Court rejected Vodafone’s contention that national courts did not possess the requisite jurisdiction or should refrain from exercising its jurisdiction with respect to Bilateral Investment Protection Agreements (BIPA) on the premise that if the contention were true, such courts would also be powerless in enforcing BIT awards. In a nutshell, then, the Court upheld its jurisdiction to interfere with BIT arbitrations.

However, in a few paragraphs thereafter, the Court also went on to hold that albeit BITs give rise to arbitration agreements between investors and host States, they did not qualify as domestic or international commercial arbitration, thereby declaring that the Act of 1996 is not applicable to BIT arbitrations. It held that BIT arbitration disputes are fundamentally different from commercial disputes as the cause of action (whether contractual or not) is grounded on State guarantees and assurances and so, are not commercial in nature.

In addition to the above, the very premise of rejecting the applicability of the Act of 1996 to BIT arbitral awards, that such awards are not a result of a commercial relationship between the investor and the host State, does not seem to be founded on a sound legal basis. It is noteworthy that none of the parties to the suit addressed any arguments with respect to the proposition that BIT arbitrations are not commercial arbitrations. The New York Convention and India’s reservation thereto make it abundantly clear that an award which arises out of a commercial relationship is liable to be enforced under the said Convention read with Section 45 of the Act of 1996[44]. What is commercial is to be determined in accordance with the domestic law of India.

The High Court, without taking into consideration the existing precedent which defines “commercial” has arrived at the erroneous conclusion that BIT awards are fundamentally different from commercial disputes. Furthermore, even apart from the precedent, the High Court could have considered the definition of the term “commercial” under the UNCITRAL Model Law[45] as the guiding principle to determine whether BIT awards fall within the definition of the term “commercial” or not. The Court also erred in not appreciating the fact that the recent series of BITs concluded by India, under Article 27.5 provide that “a claim that is submitted to arbitration under this Article shall be considered to arise out of a commercial relationship or transaction for purposes of Article I of the New York Convention”. Therefore, the Delhi High Court has grossly erred in arriving at the conclusion that BIT awards and their enforcement would not be covered under the Act of 1996.

c) Union of India v. Khaitan Holdings[46] (Khaitan Holdings)

In Khaitan Holdings, the Delhi High Court refused to grant an anti-arbitration injunction in favour of the Union of India, reiterating its position in Vodafone suit[47] that intervention of courts in arbitrations under BITs was warranted only in compelling and rare circumstances. Whereas the non-interventionist approach of the court is welcomed, the Court also held that BITs make for a separate “species” of arbitration which is not covered under the ambit of the Act of 1996. This decision in Khaitan Holdings[48], like in Vodafone suit[49], sets a problematic precedent. The ouster of BIT arbitration from the umbrella of the Act of 1996 leaves it with virtually no regime to enforce awards passed thereunder.

V. Conclusion

It is conclusively established from the discussion above that the two decisions of the Delhi High Court in Khaitan Holdings[50] and Vodafone suit[51] have rendered the enforcement of BIT arbitral awards in India virtually impossible, especially if the awards are adverse to India. A Pandora’s box is opened by the said decisions, passed without considering the judgments of the  Supreme Court in R.M. Investments[52], Renusagar[53] and Koch Navigation[54], a bare reading whereof would make it clear that investments under a BIT and disputes arising therefrom fall within the contours of the term “commercial relationship” under the Act of 1996.

Furthermore, in both the decisions[55], the High Court has also failed to consider the Model BIT prepared by India, Article 27.5 of which makes it abundantly clear that claims arising out of the BIT shall be considered as arising out of a commercial relationship. The term “commercial” as understood under the UNCITRAL Model Law has not been given any weightage either. Devoid of these considerations, the decisions are founded on a purely academic difference identified by the High Court between commercial and BIT arbitrations, ignorant of the practical and statutorily-identified likeness between the two.

In any case, the option to close the Pandora’s box continues to rest with the Delhi High Court itself, considering that the decision in Khaitan Holdings[56] is an interim one. In arriving at any final conclusion pursuant to the enforcement of BIT arbitral awards, the Court must take into account established precedent, the Model BIT as well as the UNCITRAL Model Law, thereby setting the position straight. Such course correction is the dire need of the hour in light of the increasing number of BIT arbitrations, since there is no set regime for enforcement of such awards until then. Notably, a BIT award cannot be treated as a “decree” under the Code of Civil Procedure too, since awards are neither “decree” nor “judgment”.

Immediate course correction is also important, for in the absence thereof, there will only be two possible alternatives that investor companies such as Cairn could exercise – one, to either file a new suit where the arbitral award would have mere evidentiary value, rendering the entire purpose of speedy resolution of investment treaty disputes defeated; and two, the seizure of Indian assets abroad. Not just this, absence of a robust regime for enforcement of an arbitral award militates against India’s efforts of becoming the global hub for international arbitration. Other than anything, it is only wise to remember that India continues to be one of the most attractive destinations for FDI. With an increase in FDI, which is governed by BITs, a surge in the number of disputes has also been recorded. As a developing economy, India must not want to push the investors away by setting an image of not honouring decisions passed by arbitral tribunals, nor should the Delhi High Court.

* Managing Partner, Miglani Varma and Co. –Advocates, Solicitors and Consultants, New Delhi, India.

**Managing Partner, Miglani Varma and Co. –Advocates, Solicitors and Consultants, New Delhi, India.

*** Legal Trainee, Miglani Varma and Co. –Advocates, Solicitors and Consultants, New Delhi, India.

[1] Finance Act, 2012.

[2] PCA Case No. 2016-35.

[3] PCA Case No. 2016-07.

[4] PCA Case No. 2016-05.

[5]  Supra Note 2

[6] Supra Note 3.

[7] Supra  Note 2.

[8]Dilasha Seth, India Challenges Vodafone Arbitration Award, Plans the Same in Cairn Case (Business Standard, 25-12-2020) <https://www.business-standard.com/article/companies/india-challenges-vodafone-arbitration-award-plans-the-same-in-cairn-case-120122401064_1.html> (accessed 13-2-2021).

         [9] Supra Note 3.

[10]Aanchal Magazine and Sandeep Singh, Govt. to Contest Cairn Award, Suits in International Courts, (The Indian Express, 20-2-2021) <https://indianexpress.com/article/business/govt-to-contest-cairn-award-suits-in-international-courts-7196419/> (accessed 26-2-2021).

[11]Cairn threatens to seize Indian assets overseas to collect $1.4 bn award (The Hindu, 26-1-2021) https://www.thehindu.com/business/cairn-energy-threatens-to-enforce-arbitration-award-against-indian-assets-overseas/article33665842.ece> (accessed 13-2-2021).

[12]US firm ConocoPhillips recouped multi-billion dollar of compensation awarded in arbitration from Venezuela; Malaysian Government impounded plane owned by Pakistan State carrier, Pakistan International Airlines. For discussion, see India May Offer Cairn Oilfield against $1.4 Billion Arbitration Award (Business Standard, 31-1-2021) <https://www.businesstoday.in/current/economy-politics/india-may-offer-cairn-oilfield-against-14-billion-arbitration-award/story/429690.html> (accessed 13-2-2021).

[13] Cairn Energy Arbitration: India Should Honour its Word and Pay $1.4 Billion, says Company (The Hindu BusinessLine, 7-3-2021) <https://www.thehindubusinessline.com/companies/cairn-energy-arbitration-india-should-honour-its-word-and-pay-14-billion-says-company/article34010972.ece> (accessed 9-3-2021).

        [14] Supra Note 3.

        [15] http://www.scconline.com/DocumentLink/QWdt5a4f.

[16] For the full list of parties to the ICSID Convention, see List of Contracting States and Other Signatories of the Convention at https://icsid.worldbank.org/sites/default/files/ICSID-3.pdf (as of 9-6-2020, accessed 13-2-2021).

[17]India recorded its reservation under Art. I(3) of the New York Convention in the following words: “In accordance with Art. I of the Convention, the Government of India declare that they will apply the Convention to the recognition and enforcement of awards made only in the territory of a State, party to this Convention. They further declare that they will apply the Convention only to differences arising out of legal relationships, whether contractual or not, which are considered as commercial under the law of India.” For the list of all Contracting States to the New York Convention, and countries that have availed reservation therein, see https://www.newyorkconvention.org/countries .

[18]Infra, Part IV: Conflicting decisions of two Indian High Courts on the applicability of the Act of 1996 to investment arbitral awards.

[19]Convention on the Settlement of Investment Disputes between States and Nationals of Other States – International Centre for Settlement of Investment Disputes, Washington 1965, Article 53.

[20] ICSID Convention, Article  54.

[21] Rules Governing the Additional Facility for the Administration of Proceedings by the Secretariat of the International Centre for Settlement of Investment Disputes (Additional Facility Rules), Article 2.

[22] Additional Facility Rules, Article 19.

[23] Supra Note 11.

[24] UNCITRAL Model Law on International Commercial Arbitration, 1985.

[25] The footnote provides, “The term ‘commercial’ should be given a wide interpretation so as to cover matters arising from all relationships of a commercial nature, whether contractual or not. Relationships of a commercial nature include, but are not limited to, the following transactions: any trade transaction for the supply or exchange of goods or services; distribution agreement; commercial representation or agency; factoring; leasing; construction of works; consulting; engineering; licensing; investment; financing; banking; insurance; exploitation agreement or concession; joint venture and other forms of industrial or business cooperation; carriage of goods or passengers by air, sea, rail or road.”

[26] Preamble to the 1996 Act.

[27]R.M. Investment and Trading Co. (P) Ltd. v. Boeing Co., (1994) 4 SCC 541,  Sundaram Finance Ltd. v. NPEC India Ltd. (1999) 2 SCC 479

[28] “The Coming of New age for Asia (and Elsewhere)” delivered at ICCA Congress, 2012; cited by Mr. Sumeet Kachwaha in his submissions as the Amicus Curiae in Union of India v. Vodafone Group Plc, 2018 SCC OnLine Del 8842.

[29] Department of Economic Affairs, Model Text for the Indian Bilateral Investment Treaty, Article 27.5; for full text of the Model BIT, see <https://dea.gov.in/sites/default/files/ModelBIT_Annex_0.pdf>.

[30] Supra, Note 19.

[31] Ibid.

[32] (1994) 4 SCC 541, 547

[33] (1984) 4 SCC 679 

[34] (1989) 4 SCC 259, 262

[35] (1994) 4 SCC 541 

[36]  (1984) 4 SCC 679 

[37] (1989) 4 SCC 259

[38] 2019 SCC OnLine Del 6755

[39] 2018 SCC OnLine Del 8842 

[40] 2014 SCC OnLine Cal 17695 

[41]  Ibid.

[42] Section 45 of the Act of 1996.

[43] Supra Note 39.

[44]Section 45 of the 1996 Act.

[45] Supra Note 18.

[46] Supra Note 38.

[47]  Supra Note 39.

[48] Supra Note 38.

[49] Supra Note 39.

[50] Supra Note 38.

[51] Supra Note 39.

[52] Supra Note 35.

[53] Supra Note 33.

[54] Supra Note 34.

[55] Khaitan Holdings, supra Note 38 and Vodafone suit, supra Note 39.

[56] Supra Note 38.

Case BriefsHigh Courts

Bombay High Court: The Division Bench of Dipankar Datta, CJ and G.S. Kulkarni, J., addressed an issue in light of the principles of judicial review explained that the Government must have freedom of contract.

 “…fair play in the joints is a necessary concomitant for an administrative body, functioning in an administrative sphere or quasi-administrative sphere.”

Factual Matrix

Petitioner was awarded a contract by the respondent – Navi Mumbai Municipal Corporation for a period of 5 years of the work of mechanized housekeeping and multi-purpose services in its health centres, which came to be terminated in 2017 due to non-satisfactory performance.

Issue in the Writ Petitions 

  • Fresh Tender issued for the same work but with a pre-qualification criterion that an eligibility condition providing that “the contractors whose work contract is terminated due to unsatisfactory services or are blacklisted would not be eligible to participate in the tender”

Arbitration Proceedings

On being aggrieved with the termination of contract, arbitration proceedings by the petitioner were initiated against the Corporation.

Petitioner’s Case

Petitioner’s case that if the petitioner is held to be ineligible by application of the said note in Clause 4(g) of the pre-qualification criteria, it would lead to a consequence that the petitioner cannot participate in such contracts of the Corporation although the petitioner is not blacklisted or debarred and yet is being prohibited to participate in such re-tender.

Discussion and Conclusion

Question that falls for determination in the present matter are:

(I) Whether the Municipal Corporation is entitled in law to impose a pre-qualification criterion as contained in Condition 4(g) (supra) to the effect that ‘the contractors whose work contract is terminated due to unsatisfactory services are not eligible to participate in the tender’?

(II) Whether imposing such impugned condition would amount to blacklisting of the petitioner?

In the present matter, while considering the facts and circumstances of the case, Bench discusses some vital points with respect to:

  • legal principles on the authority of the State and its instrumentalities to enter into contracts and
  • Principles of Judicial Review.

Power of Judicial Review is exercised to rein in unbridled executive functioning.

It is not the function of the Court to act as a super board, or with the zeal of a pedantic school master substituting its judgment for that of the administration. The duty of the court is to confine itself to the question of legality of the tender process on the touchstone of Article 14 of the Constitution.

It is not for the Court to determine whether a particular policy or particular decision taken in the fulfillment of that policy is fair. The only concern should be with the manner in which such decision have been taken.

On what grounds is the Judicial Review classified:

Firstly, Illegality: This means the decision-maker must understand correctly the law that regulates his decision-making power and must give effect to it;

Secondly Irrationality, namely, Wednusbury unreasonableness, that is when a decision which is so outrageous in its defiance of logic or of accepted moral standards that no sensible person who had applied his mind to the question to be decided could have arrived at. The decision is such that no authority properly directing itself on the relevant law and acting reasonably could have reached it.;

Thirdly Procedural impropriety. The Court does not sit as an appellate authority over the tendering authority, but merely reviews the manner in which the decision was made.

Bench in view of the above-stated expressed that the terms of the invitation to tender cannot be open to judicial scrutiny as an invitation to tender is in the realm of contract.

Further, it was added that the Government must have freedom of contract. Principles laid above are enunciated in the Supreme Court decision of Tata Cellular v. Union of India, (1994) 6 SCC 651.

With respect to taking a review of the authorities and more particularly on the prescription and adherence of essential conditions has laid down principles of judicial review in the Supreme Court decision of BSN Joshi &. Sons Ltd. v. Nair Coal Services Ltd., (2006) 11 SCC 548.

High Court elaborating more, added that the freedom to arrive at legitimate terms and conditions in inviting public offers cannot in any manner be taken away.

Cherished principles of free play in the joints and the liberty to choose a contractor, on terms and conditions fixed by the tendering authority in public interest, cannot be taken away.

Court would not have any expertise to sit in appeal over the tender conditions, the role of the Court is triggered only qua the decision-making process.

Moving forward, Bench examined whether Corporation acted either malafide or arbitrarily with material illegality in having a condition to restrict participation of a bidder whose contract is terminated due to unsatisfactory services?

 It was noted that the said condition was applicable to all the bidders and not just to the petitioner. The corporation made it clear with its condition that it did not desire a party whose work was unsatisfactory in the past to get onboard again, hence in Court’s opinion, the said condition became imperative, considering the nature of the contract.

Hence, Corporation’s condition was in no manner arbitrary and illegal. Therefore, Corporation was entitled in law to impose pre-qualification criteria as it did.

Second Question

 Imposing of impugned condition resulted in blacklisting the petitioner from participating in the tender in question?

Bench in light of the above question noted that a contractor cannot be blacklisted for having breached the terms and conditions of the contract unless a fair hearing was accorded to the party being blacklisted in due adherence to the principles of natural justice.

In Court’s Opinion, the present case is not the one wherein the petitioner can be said to be blacklisted by the Corporation.

In fact, the petitioner’s case is of an implied blacklisting by the Corporation by prescribing of a pre-bid criteria that a contractor whose work contract is terminated due to unsatisfactory performance is not eligible to participate in the tender.

Hence, present case is not of blacklisting.

It is also fallacious for the petitioner to label such condition as a condition of an implied blacklisting of the petitioner in future tenders to be issued by the Corporation. This is only a presumption of the petitioner. 

Concluding with the decision, High Court held that the petitions failed and were accordingly rejected. [BVG India Ltd. v. State of Maharashtra, 2021 SCC OnLine Bom 412, decided on 19-03-2021]

Advocates before the Court:

Mr. V. A. Thorat, Senior Advocate with Mr. Ashutosh M. Kulkarni and Mr. Sarthak S. Diwan for the Petitioner.

Mr. Sandeep Marne, for the Respondents.

Mr. P. P. Kakade, Government Pleader with Ms .R.A. Salukhe, AGP for State.

Op EdsOP. ED.

“27. … While deciding an issue, the court is bound to give reasons for its conclusion. It is the duty and obligation on the part of the court to record reasons while disposing of the case. … The reason is the heartbeat of every conclusion. It introduces clarity in an order and without the same, the order becomes lifeless. Reasons substitute subjectivity with objectivity. The absence of reasons renders an order indefensible/unsustainable particularly when the order is subject to further challenge before a higher forum. Recording of reasons is the principle of natural justice and every judicial order must be supported by reasons recorded in writing. It ensures transparency and fairness in decision making. The person who is adversely affected must know why his application has been rejected.”

The above mentioned are the observations of the Supreme Court in Sant Lal Gupta v. Modern Coop. Group Housing Society Ltd.[1], wherein the Supreme Court, after relying on plethora of its previous cases, has made its observations on point of a reasoned/speaking order.

Sections 8[2] and 45[3] of the Arbitration and Conciliation Act, 1996 (hereafter, “A&C Act, 1996”) respectively envisage that if a “judicial authority”, which is dealing with a matter between the parties, is apprised by one of the party that the matter in dispute before it contains an arbitration agreement, then such “judicial authority” shall immediately refer the parties to arbitration, unless it prima facie finds that no valid arbitration agreement exists between the parties.[4] The only difference between Sections 8 and 45 of the A&C Act, 1996 is that the former applies in cases of “domestic arbitration”, while the latter applies in cases of “foreign commercial arbitration”.

The words “domestic arbitration” and “foreign commercial arbitration” are not defined under the A&C Act, 1996. A “domestic arbitration” can be said to be an arbitration, where the “seat of arbitration” is chosen as India; and a “foreign commercial arbitration” is the one whose “seat of arbitration” is outside India and also it shall deal only with commercial legal relationship between the parties. Hence, it is the “seat” or “place” of arbitration, which differentiates between the two, and not the “nature” of arbitration. Part 1 of the A&C Act, 1996 applies exclusively to the “domestic arbitration”,[5] while Part 2 applies exclusively to “foreign arbitration”, and Part 1 applies to both international arbitrations which take place in India as well as domestic arbitrations which would normally take place in India.[6]

What is a “judicial authority” is also not defined under the A&C Act, 1996. But, a 7-Judge Constitutional Bench of the Supreme Court in SBP & Co. v. Patel Engg. Ltd.,[7] has held that a “judicial authority” would include a court as defined under Section 2(e)[8] of the A&C Act, 1996, and would also include other courts and special tribunals. On the basis of above-mentioned ratio decidendi of the Supreme Court, we can say that all the courts, quasi-judicial bodies, tribunals, etc., that are functioning for the purposes of administration of justice in India are the “judicial authorities” under the A&C Act, 1996.

All the courts, quasi-judicial bodies, tribunals, etc., in India must necessarily follow the principles of natural justice. One of such principle is giving of reasons for an order passed by them (i.e., reasoned order). Now, in A&C Act, 1996, when a “judicial authority” passes an order, either referring the matter to arbitration or refusing to refer the matter to arbitration, does it need to pass a reasoned/speaking order? Let us understand the legal position by way of following scenarios:

Scenario 1: A judicial authority is approached under Section 8 (domestic arbitration) of the A&C Act, 1996 in a matter which is subject to an arbitration agreement. The judicial authority, on prima facie examination of an “arbitration agreement”, finds that the matter is subject to arbitration and refers the parties to arbitration. The option left before the aggrieved party is to contest the arbitration proceedings and subsequently challenge it, either before the “Arbitral Tribunal” under Section 16(1)[9] of the A&C Act, 1996 or challenge the “arbitral award” itself under Section 34(2)[10] of the A&C Act, 1996.

Scenario 2: A judicial authority is approached under Section 8 (domestic arbitration) of the A&C Act, 1996 in a matter which is subject to an arbitration agreement. The judicial authority, on prima facie examination of an “arbitration agreement”, finds that the matter is not subject to arbitration and refuses to refer the parties to arbitration. The option left before the aggrieved party is, before contesting in the arbitration proceedings, it can file an appeal under Section 37(1)(a)[11] of the A&C Act, 1996[12] before the court which is authorised by law to hear appeals from original decree of the court passing such order of refusal.

Scenario 3: A judicial authority is approached under Section 45 (foreign commercial arbitration) of the A&C Act, 1996 in a matter which is subject to an arbitration agreement. The judicial authority, on prima facie examination of an “arbitration agreement”, finds that the matter is subject to arbitration and refers the parties to arbitration. The option left before the aggrieved party is to contest the arbitration from the “place” mentioned in arbitration agreement and try the remedies available under the law of place of such arbitration.[13]

Scenario 4: A judicial authority is approached under Section 45 (foreign commercial arbitration) of the A&C Act, 1996, in a matter which is subject to an arbitration agreement. The judicial authority, on prima facie examination of an “arbitration agreement”, finds that the matter is not subject to arbitration and refuses to refer the parties to arbitration. The option left before the aggrieved party is, before contesting in the arbitration proceedings, it can file an appeal under Section 50(1)(a)[14] of the A&C Act, 1996 before the court which is authorised by law to hear appeals from original decree of the court passing such order of refusal.

Now, in Scenarios 1and 3, the “judicial authority”, which on prima facie examination of an “arbitration agreement”, refers the matter to arbitration, need not pass any “reasoned/speaking order” for such reference. In a very recent case relating to arbitration, the Supreme Court in Vidya Drolia v. Durga Trading Corpn., has observed that a prima facie examination is not a full review of the case on facts, it is just a preliminary and summary discussion of proceedings.[15] As the matter under Scenarios 1 and 3 is not decided on “merits”, and as it requires detailed examination by the “Arbitral Tribunal” selected by or given to the parties, the judicial authority will not be in a position to pass a “detailed reasoned order”. And also, as the party has to necessarily participate in arbitral proceedings without getting an opportunity to appeal, the need for a “reasoned order” is not felt. And also, as the parties have an option, at least in case of “domestic arbitrations” (Section 8), to challenge the existence or validity of the arbitration agreement before the “Arbitral Tribunal” under Section 16(1) of the A&C Act, 1996 or challenge the “arbitral award” itself under Section 34(2) of the A&C Act, 1996, hence, a “reasoned order” by a “judicial authority” is not necessary at the preliminary stage. This kind of exception to the mandatory passing of a “reasoned order” (which is an important principle of natural justice) by a “judicial authority” is to promote “pro-arbitration regime” in India.

But, in Scenarios 2 and 4, the judicial authority, which on prima facie examination, refuses to refer the matter to arbitration, then such judicial authority must give a “reasoned order”. In one of the judgments relating to arbitration, a 3-Judge Bench of the Supreme Court in Shin-Etsu Chemical Co. Ltd. v. Aksh Optifibre Ltd.[16], was dealing with an issue of whether a “judicial authority”, while dealing with an objection under Section 45 of the A&C Act, 1996, about the arbitration agreement being “null and void, inoperative or incapable of being performed”, needs to decide the objection on a prima facie view of the matter or decide the objection on merits? With 2:1 majority, the Supreme Court held that the correct approach to be adopted under Section 45 at the pre-reference stage, is one of prima facie finding by the trial court as to the validity or otherwise of the arbitration agreement.[17] Justice D.M. Dharmadhikari, in his supplementing judgment with the majority, has discussed the scope of when the “judicial authority” must give a “reasoned order” and when it shall not give a “reasoned order”. His Lordships observed that

“111. … if on a prima facie examination of the documents and material on record including the arbitration agreement on which request for reference is made by one of the parties, the judicial authority or the court decides to make a reference, it may merely mention the submissions and contentions of the parties and summarily decide the objection if any raised on the alleged nullity, voidness, inoperativeness or incapability of the arbitration agreement. In case, however, on a prima facie view of the matter, which is required to be objectively taken on the basis of material and evidence produced by the parties on the record of the case, the judicial authority including a regular civil court, is inclined to reject the request for reference on the ground that the agreement is “null and void” or “inoperative” or “incapable of being performed” within the meaning of Section 45 of the Act, the judicial authority or the court must afford full opportunities to the parties to lead whatever documentary or oral evidence they want to lead and then decide the question like trial of a preliminary issue on jurisdiction or limitation in a regular civil suit and pass an elaborate reasoned order. Where a judicial authority or the court refuses to make a reference on the grounds available under Section 45 of the Act, it is necessary for the judicial authority or the court which is seized of the matter to pass a reasoned order as the same is subject to appeal to the appellate court under Section 50(1)(a) of the Act and further appeal to this Court (Supreme Court) under sub-section (2) of the said section.[18]

It is to be noted that the words “prima facie” have been inserted under Sections 8 and 45 through Arbitration and Conciliation (Amendment) Act, 201519, on the recommendations of Law Commission of India’s 246th Report20. And the basis of Law Commission’s recommendation is the majority decision of Supreme Court in Shin-Etsu Chemical Co. Ltd. case.21

The supplementing opinion of Justice D.M. Dharmadhikari, in regard with giving of “reasoned orders” while refusing the referral of the matter to arbitration, shall be followed, because, the aggrieved party does not get an opportunity to contest in the arbitration proceedings before the “Arbitral Tribunal”, by virtue of the “refusal order” by the “judicial authority”. The only remedy for the aggrieved party is filing an appeal, under Sections 37(1)(a) and 50(1)(a) respectively, to the appellate court from the order of refusal by such “judicial authority” under Sections 8 and 45 respectively. And when an appellate court decides the matter, it shall be in a position to know the reasons of “judicial authority” for what reason it has refused to refer the matter to arbitration. It is one of the facets of principles of natural justice.

†  LLB student, University College of Law, Osmania University, Hyderabad, e-mail: akashbaglekar@gmail.com.

[1] (2010) 13 SCC 336, pp. 345-346,.

[2] <http://www.scconline.com/DocumentLink/0P4pSy8x>.

[3] <http://www.scconline.com/DocumentLink/7vabSnZy>.

[4] In S. 45, the wording is unless it prima facie finds that the said agreement is null and void, inoperative or incapable of being performed. On close scrutiny, the meaning of both the wordings are almost same.

[5] Bharat Aluminium Co. v. Kaiser Aluminium Technical Services Inc., (2012) 9 SCC 552. It is to be noted that by inserting a proviso to S. 2(2) through A&C (Amendment) Act, 2016, the legislature has relaxed the Supreme Court’s ratio decidendi, thereby applying S. 9 (interim relief by Indian courts), S. 27 (Indian courts assistance in taking evidence), and S. 37 (appeal from granting or refusal of interim relief and appeal to the Supreme Court) of the Part 1 to the Part 2 of the A&C Act, 1996.

[6] Id., at para 88.

[7] (2005) 8 SCC 618 at para 19.

[8] <http://www.scconline.com/DocumentLink/TA0St4w3>.

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

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

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

[12] This appeal provision from refusal to refer parties to arbitration was added through the A&C (Amendment) Act, 2016.

[13] It is to be noted that the “place of arbitration” can even be India, if the arbitration agreement between the parties is silent about it. It will be decided by the “Arbitral Tribunal” based on facts and circumstances of each case, and not by the “judicial authority” which is approached under S. 45. But, generally, in practical parlance the parties (at least if it is foreign party/parties) decide the place of arbitration beforehand.

[14] <http://www.scconline.com/DocumentLink/cd4DUf7O>.

[15] (2021) 2 SCC 1: 2020 SCC Online SC 1018 at para 123.

[16] (2005) 7 SCC 234.

[17] Id., at para 106.

[18] Id., at pp. 277-278.

19 <http://www.scconline.com/DocumentLink/9ajA4z9b>.

20 <http://www.scconline.com/DocumentLink/N7O69Zxv>.

21 Supra note 16.

Case BriefsSupreme Court

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

However,

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

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

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

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

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

On this, the Court explained that,

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

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

Why was NV International overruled?

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

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

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

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

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

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

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

*Judgment by: Justice RF Nariman

Know Thy Judge| Justice Rohinton F. Nariman

Case BriefsHigh Courts

Delhi High Court: In the notable ruling of Amazon v. Future Retail, J.R. Midha, J. of Delhi High Court considered three crucial questions:

♦ What is the legal status of an Emergency Arbitrator?

♦ Whether the Emergency Arbitrator misapplied the Group of Companies doctrine which applies only to proceedings under Section 8 of the Arbitration and Conciliation Act?

♦ Whether the interim order of Emergency Arbitrator is Nullity?

Amazon.com invested Rs 1431 Crore in Future Coupons Private Limited (FCPL) based on certain special, material protective/negative rights available to FCPL in Future Retail Limited (FRL), namely, that the Retail Assets of FRL would not be alienated without the prior written consent of Amazon.com (Petitioner), and never to a Restricted Person. Further, an agreement was attained wherein it was stated FRL would be the sole vehicle for the conduct of FCPL and FRL’s conduct of business, resulting in benefit of the entire investment to FRL.

Within months of investment it was noted that the Biyanis which controls FRL breached the agreements by violating the contractual obligations, approved transaction relating to the transfer of its retail assets to Mukesh Dhirubhai Ambani Group (MDA) which is a Restricted Person as per Shareholders’ Agreement between petitioner and respondents (FCPL-SHA) [Disputed Transaction].

Timeline of Events:

05-10-2020
  • Arbitration Proceedings initiated.
  • Application filed to seek an ‘Emergency Interim Relief to restrain respondents from pursuing Disputed Transaction.
06-10-2020
  • Respondent 2 raised an objection with respect to Emergency Arbitrator’s jurisdiction.
09-10-2020
  • Petitioner requested for status quo to be maintained, however, respondents declined to give any assurance during the pendency of proceedings before the Emergency Arbitrator.
13-10-2020

Emergency Arbitrator called upon both the parties to submit their response pertaining to the following 4 Supreme Court Judgments:

Respondents raised objection to Emergency Arbitrator’s Jurisdiction.
16-10-2020 Arbitrator heard all the parties.
25-10-2020

Emergency Arbitrator passed an interim order and held that:

“the Emergency Arbitrator is an Arbitral Tribunal for all intents and purposes. The Emergency Arbitrator further noted that the Emergency Arbitrators are recognized under the Indian Arbitration framework.

Arbitrator observed that the petitioner made out a strong prima facie case that respondents were in breach of the contractual obligations. Further, the arbitrator added that the petitioner would suffer irreparable injury if the interim injunction was not granted.

Conclusion of Emergency Arbitrator

Petitioner has a strong prima facie case on the merits of the dispute, the petitioner’s rights under the FCPL-SHA, the SSA, and the FRL-SHA (insofar as it has been incorporated into the FCPL SHA) have been apparently compromised by the Respondents and the Respondents have given no good legal reasons for effecting the sale of FRL’s Retail Assets to the Restricted Person behind the petitioner’s back.

Point-Wise Analysis of the crucial questions raised in the present matter:

Legal Status

 Status of an Emergency Arbitrator is solely based on the party autonomy and the powers of such an arbitrator are similar to Arbitral Tribunal to decide an interim measure. Though Arbitral Tribunal is empowered to reconsider, modify, terminate or annul the order/award of the Emergency Arbitrator.

Emergency Arbitration is a very effective and expeditious mechanism to deal with the Emergency Interim Relief Application and has added a new dimension to the protection of the rights of the parties.

With this mechanism, a litigant gets justice within 15 days, though if the order of Emergency Arbitrator is not enforced, it would make the entire mechanism redundant.

In the present matter, by agreeing to incorporate the Rules of SIAC into the arbitration agreement, parties agreed to the provisions relating to Emergency Arbitration.

Current legal framework is sufficient to recognize the Emergency Arbitration and no amendment in this regard was required.

Section 2(1)(d) defines “arbitral tribunal” to mean a sole arbitrator or a panel of arbitrators, it is wide enough to include Emergency Arbitrator.

Under Section 17(1) of the Arbitration and Conciliation Act, the Arbitral Tribunal has the same powers to make interim order, as the Court has, and Section 17(2) makes such interim order enforceable in the same manner as if it was an order of the Court. The Interim Order is appealable under Section 37 of the Arbitration and Conciliation Act.

Whether Doctrine of Group of Companies applies only to proceedings under Section 8 of the Arbitration and Conciliation Act? 

Law relating to the Group of Companies doctrine is well settled by the Supreme Court in Chloro Controls India Private Limited v. Sever N Trent Water Purification Inc., (2013) 1 SCC 641, Cheran Properties Limited v. Kasturi and Sons Limited, (2018) 16 SCC 413 and MTNL v. Canara Bank, (2020) 12 SCC 767.

Group of Companies doctrine binds the non-signatory entity where the multiple agreements reflect a clear intention of the parties to bind both the signatory and non-signatory entities within the same Group.

 Supreme Court has laid down various tests for invoking the said doctrine.

Following are the Tests:

  • direct relationship to the party signatory to the arbitration agreement,
  • direct commonality of the subject-matter and
  • the agreement between the parties being a composite transaction.
  • The transaction should be of a composite nature where performance of the mother agreement may not be feasible without aid, execution and performance of the supplementary or ancillary agreements, for achieving the common object and collectively having bearing on the dispute.
  • Besides all this, the Court has to examine whether a composite reference of such parties would serve the ends of justice.

Bench also observed that the said doctrine has been very succinctly explained in the 4th Edition of Malhotra’s Commentary on the Law of Arbitration by Justice Indu Malhotra.

Here’s a Summary for a quick glance at the principles laid down by the Supreme Court on Group of Companies doctrine:

  • As the law has evolved, it has recognised that modern business transactions are often effectuated through multiple layers and agreements. There may be transactions within a Group of Companies. The circumstances in which they have entered into them may reflect an intention to bind both signatory and non-signatory entities within the same group.
  • The Group of Companies doctrine is essentially intended to facilitate the fulfilment of a mutually held intent between the parties, where the circumstances indicate that the intent was to bind both signatories and non-signatories. The effort is to find the true essence of the business arrangement and to unravel from a layered structure of commercial arrangements, an intent to bind someone who is not formally a signatory but has assumed the obligation to be bound by the actions of a signatory.
  • Doctrine can be invoked to bind a non-signatory entity where a Group of Companies exist and the parties have engaged in conduct, such as negotiation or performance of the relevant contract or made statements indicating the intention assessed objectively and in good faith, that the non-signatory be bound and benefited by the relevant contracts.
  • Doctrine will bind a non-signatory entity where an arbitration agreement is entered into by a company, being one within a group of companies, if the circumstances demonstrate that the mutual intention of all the parties was to bind the signatories and non-signatory affiliates.
  • A non-signatory party can be subjected to arbitration where there was a clear intention of the parties to bind both, the signatory as well as the non-signatory parties who are part of Group of Companies. In other words, ―the intention of the parties‖ is a very significant feature that must be established before the scope of arbitration can be said to include the signatory as well as the non-signatory parties.
  • Direct relationship to the party signatory to the arbitration agreement, direct commonality of the subject-matter and the agreement between the parties being a composite transaction. The transaction should be of a composite nature where performance of the mother agreement may not be feasible without aid, execution and performance of the supplementary or ancillary agreements, for achieving the common object and collectively having bearing on the dispute. Besides all this, the Court has to examine whether a composite reference of such parties would serve the ends of justice.
  • Where the agreements are consequential and in the nature of a follow-up to the principal or mother agreement, the latter containing the arbitration agreement and such agreements being so intrinsically intermingled or interdependent that it is their composite performance which shall discharge the parties of their respective mutual obligations and performances, this would be a sufficient indicator of intent of the parties to refer signatory as well as non-signatory parties to arbitration. The principle of ‚composite performance would have to be gathered from the conjoint reading of the principal and supplementary agreements on the one hand and the explicit intention of the parties and the attendant circumstances on the other.
  • While ascertaining the intention of the parties, attempt should be made to give meaning and effect to the incorporation clause and not to invalidate or frustrate it by giving it a literal, pedantic and technical reading.
  • Tests laid down are:

◊ The conduct of the parties reflect a clear intention of the parties to bind both the signatory as well as the non-signatory parties.

◊ The non-signatory company is a necessary party with reference to the common intention of the parties.

◊ The non-signatory entity of the group has been engaged in the negotiation or performance of the contract.

◊ The non-signatory entity of the group has made statements indicating its intention to be bound by the contract.

◊ A direct relationship between the signatory to the arbitration agreement and the non-signatory entity of the group; direct commonality of the subject-matter and composite nature of transaction between the parties.

◊ The performance of the agreement may not be feasible without the aid, execution and performance of the supplementary or ancillary agreement for achieving the common object.

◊ There is a tight group structure with strong organizational and financial links so as to constitute a single economic unit or a single economic reality.

◊ The funds of one company are used to financially support or restructure other members of the group.

◊ The composite reference of disputes of fresh parties would serve the ends of justice.

Bench in view of the above, decided that the Group of Companies Doctrine is applicable to the present case and respondent 2 is a proper party to the proceedings – Why? Lets’ read the reasons:

  • Signatory and non-signatory company (FRL) belong to the same Biyanis
  • Parties Conduct reflected clear intention to bind the signatory as well as non-signatory company (FRL) of Biyanis
  • Common negotiating and legal team represented the signatory and non-signatory company (FRL).
  • Statutory disclosure made by the non-signatory company to the public.
  • Direct relationship of the non-signatory company to the signatory company of the Group, direct commonality of the subject matter and composite nature of transactions.
  • Funds of Signatory Company used to financially support the non-signatory company of the Group.
  • Agreements are so intrinsically intermingled that their composite performance only shall discharge the parties of their respective mutual obligations.
  • Common intention of all the parties, to arbitrate.
  • Supreme Court’s observation in the decision of Cheran Properties Limited v. Kasturi and Sons Limited, (2018) 16 SCC 413 would squarely apply to the present matter.

Whether the Interim Order is Nullity?

In Court’s opinion, respondent plea of Nullity is to mislead this Court.

Bench agreed with the Emergency Arbitrator that the protective rights do not amount to control of the petitioner over FRL and do not violate the law.

In the present matter, since the respondents were continuing to violate the agreement even after the Emergency Arbitrator’s decision, the petitioner approached this Court for enforcement of the interim order of the Emergency Arbitrator.

Respondents did not dispute the breach of the agreements either before the Emergency Arbitrator or before this Court.

High Court noted that the whole thrust of the respondents before this Court is that the petitioner is a trillion-dollar company and Rs 1430 crore invested by them in the present case is peanuts for them and they should forget about this money as it is worth zero today.

Bench also quoted the senior counsel for respondent 2 for the above-said observation:

“…What happens to his 1430 crores………that is worth zero today. FRL is zero. FCPL coupon business is gone. For this American behemoth, 1400 crore would be rounded off………..”

Before parting with this decision, High Court stated that Emergency Arbitrator, V.K. Rajah SC is a well-known jurist.

Conclusion

All the objections raised by the respondents were rejected with a cost of Rs 20,00,000 to be deposited by the respondents with the Prime Minister Relief Fund for being used for providing COVID vaccination to the Below Poverty Line (BPL) category – senior citizens of Delhi.

Since the respondents deliberately and willfully violated the interim order, hence they are liable for the consequences enumerated in Order XXXIX Rule 2A of the Code of Civil Procedure.[Amazon.Com NV Investment Holdings LLC v. Future Coupons (P) Ltd., 2021 SCC OnLine Del 1279, decided on 18-03-2021]

Op EdsOP. ED.

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

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

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

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

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

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

† Advocate, Delhi High Court and Supreme Court of India.

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

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

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

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

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

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

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

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

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

[10] (2007) 5 SCC 295.

[11] (2007) 5 SCC 295.

[12] (2006) 11 SCC 181.

[13] (2007) 5 SCC 295.

[14] 2013 SCC OnLine Del 4490.

[15] (2012) 5 SCC 214.

[16] (2012) 5 SCC 214.

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

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

Case BriefsSupreme Court

Supreme Court: The Division Bench of R.F. Nariman* and B.R. Gavai, JJ., addressed an important case regarding nature of arbitration under Arbitration and Conciliation Act, 1996. The Bench ruled,

“If at least one of the parties was either a foreign national, or habitually resident in any country other than India; or by a body corporate which was incorporated in any country other than India; or by the Government of a foreign country, the arbitration would become an international commercial arbitration notwithstanding the fact that the individual, body corporate, or government of a foreign country carry on business in India through a business office in India.”

In the instant case the respondents were appointed as Distributor for the appellant, Amway India Enterprises (P) Ltd. for undertaking sale, distribution and marketing of its products in India with the name, “Sindhia Enterprises”. As a dispute arose between the parties, the respondents, after making repeated attempts to resolve the dispute amicably, invoked arbitration clause on 28-07-2020. Since the parties could not reach to finality regarding appointment of the Arbitrator, the respondents approached Delhi High for appointment of a sole arbitrator under Section 11(6) of the Act, 1996.

The main plea taken by the appellant was that a petition before the High Court was not maintainable as the dispute relates to international commercial arbitration, being covered by Section 2(1)(f)(i) of the Arbitration Act inasmuch as the respondents were husband and wife who were both nationals of and habitually resident in the United States of America. This plea was turned down by the High Court. The High Court, while relying on Larsen & Toubro Ltd. – SCOMI Engineering Bhd v. MMRDA, (2019) 2 SCC 271, wherein the Supreme Court was concerned with a consortium consisting of an Indian company and a foreign company and the Court took note of the fact that the office of an unincorporated entity, i.e. the consortium, being in Mumbai, as one of the factors for arriving at the conclusion that the arbitration proceedings would not be international commercial arbitration, the High Court held that the matter would fall within the purview of domestic arbitration and appointed Justice Brijesh Sethi, a retired Judge of the Delhi High Court as the sole arbitrator.

Whether the distributorship of husband and wife was a separate entity?  

The High Court opined that since the central management and control of the proprietorship was exercised only in India, the dispute was not an international commercial arbitration as the Code of Ethics and Rules of Conduct issued by the appellant under Clause 3.17.1 had contemplated and recognised that a husband and wife shall operate their Distributorship as single entity.

Contrary to that, the Supreme Court observed that under “authorised signature”, the entity’s name was filled in as Sindhia Enterprises and the proprietor was filled in as Ravindranath Rao Sindhia.  Noticing the application form, together with the Code of Ethics, the Bench said that a husband and wife were entitled not to two, but a single distributorship, as it had been made clear under clause 3.17 of the Code of Ethics that they were to operate only as a single entity. The form that was filled in made it clear further that the respondents applied to become a distributor as a sole proprietorship, where the husband, Ravindranath Rao Sindhia, was the sole proprietor / “primary applicant” and the wife, Indumathi Sindhia, was a “co-applicant”. The Bench Said,

“A sole proprietary concern is equated with the proprietor of the business, while a proprietary concern is only the business name in which the proprietor of the business carries on the business. In the event of the death of the proprietor of a proprietary concern, it is the legal representatives of the proprietor who alone can sue or be sued in respect of the dealings of the proprietary business.”

The provisions of Order XXX, enabled the proprietor of a proprietary business to be sued in the business names of his proprietary concern. The real party who was being sued was the proprietor of the said business. The said provision did not have the effect of converting the proprietary business into a partnership firm. Consequently, the Bench reached to the conclusion that a suit by or against a proprietary concern was by or against the proprietor of the business.

Conclusion

The Bench opined that the argument that there was no international flavour to the transaction between the parties had no legs to stand on. As, an analysis of Section 2(1)(f) would show that whatever be the transaction between the parties, if it happen to be entered into between persons, at least one of whom was either a foreign national, or habitually resident in, any country other than India; or by a body corporate which was incorporated in any country other than India; or by the Government of a foreign country, the arbitration become an international commercial arbitration notwithstanding the fact that the individual, body corporate, or government of a foreign country referred to in Section 2(1)(f) carry on business in India through a business office in India.

In the light of above, the Bench opined that the High Court had no jurisdiction to appoint an arbitrator; therefore, the impugned judgment was set aside.

[Amway India Enterprises (P) Ltd. v. Ravindranath Rao Sindhia, 2021 SCC OnLine SC 171, decided on 04-03-2021]

Kamini Sharma, Editorial Assistant has put this report together 

*Judgment by: Justice R.F. Nariman

Know Thy Judge| Justice Rohinton F. Nariman

Appearance before the Court by:

For Appellant: Sr. Adv. Parag Tripathi,

For Respondent/s: Adv. Manmeet Arora

Case BriefsSupreme Court

Supreme Court: Answering the “hotly debated” question as to in what circumstances and categories of cases, a criminal proceeding may be quashed either in exercise of the extraordinary powers of the High Court under Article 226 of the Constitution, or in the exercise of the inherent powers of the High Court under Section 482 CrPC, the bench of Indu Malhotra* and Ajay Rastogi, JJ has held that in the matter of exercise of inherent power by the High Court, the only requirement is to see whether continuance of the proceedings would be a total abuse of the process of the Court

“… the exercise of inherent power of the High Court is an extraordinary power which has to be exercised with great care and circumspection before embarking to scrutinise the complaint/FIR/charge-sheet in deciding whether the case is the rarest of rare case, to scuttle the prosecution at its inception.”

The Court observed that in order to exercise powers under Section 482 CrPC, the complaint in its entirety shall have to be examined on the basis of the allegation made in the complaint/FIR/charge-sheet and the High Court at that stage was not under an obligation to go into the matter or examine its correctness. Whatever appears on the face of the complaint/FIR/charge-sheet shall be taken into consideration without any critical examination of the same. The offence ought to appear ex facie on the complaint/FIR/charge-sheet and other documentary evidence, if any, on record.

“The Criminal Procedure Code contains a detailed procedure for investigation, framing of charge and trial, and in the event when the High Court is desirous of putting a halt to the known procedure of law, it must use proper circumspection with great care and caution to interfere in the complaint/FIR/charge-sheet in exercise of its inherent jurisdiction.”

The Court was dealing with a case where a property, belonging to 2nd Respondent was mortgaged with State Bank of Patiala and the total legal liability payable to the Bank was Rs. 18 crores. In order to clear the said dues, 2nd respondent hatched a conspiracy with a broker so as to cheat and defraud the appellants/complainants and to further misappropriate the amounts paid by the complainants as part of the deal, the 2nd respondent breached the trust of the appellants/complainants deliberately and falsely stating to the appellants/complainants that the 2nd respondent would be liable to pay a sum of Rs. 25.50 crores to the complainant if the deal is not carried forward by the 2nd respondent.

While an FIR was lodged in the case at hand for offence of cheating, arbitral proceedings were also initiated at the instance of the appellants/complainants.

On a careful reading of the complaint/FIR/charge-sheet, the Court noticed that the ingredients of the offences under Sections 406 and 420 IPC cannot be said to be absent on the basis of the allegations in the complaint/FIR/charge-sheet.

“… whether the allegations in the complaint are otherwise correct or not, has to be decided on the basis of the evidence to be led during the course of trial. Simply because there is a remedy provided for breach of contract or arbitral proceedings initiated at the instance of the appellants, that does not by itself clothe the court to come to a conclusion that civil remedy is the only remedy, and the initiation of criminal proceedings, in any manner, will be an abuse of the process of the court for exercising inherent powers of the High Court under Section 482 CrPC for quashing such proceedings.”

The Court noticed that the facts narrated in the present complaint/FIR/charge-sheet indeed reveal the commercial transaction but that is hardly a reason for holding that the offence of cheating would elude from such transaction. In fact, many a times, offence of cheating is committed in the course of commercial transactions and the illustrations have been set out under Sections 415, 418 and 420 IPC. So far as initiation of arbitral proceedings is concerned, there is no correlation with the criminal proceedings.

The Court, hence, held that the issue involved in the matter under consideration is not a case in which the criminal trial should have been short-circuited. The High Court was not justified in quashing the criminal proceedings in exercise of its inherent jurisdiction. The High Court has primarily adverted on two circumstances,

(i) that it was a case of termination of agreement to sell on account of an alleged breach of the contract and

(ii) the fact that the arbitral proceedings have been initiated at the instance of the appellants.

The Court held that both the alleged circumstances noticed by the High Court are unsustainable in law.

[Priti Saraf v. State of NCT of Delhi, 2021 SCC OnLine SC 206, decided on 10.03.2021]

*Judgment by: Justice Indu Malhotra

Appearances before the Court by:

For appellants: Senior Advocate Mukul Rohatgi,

For Second Respondent: Senior Advocate P. Chidambaram,

For State: Additional Solicitor General  Aishwarya Bhati

Case BriefsSupreme Court

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

The Court also suggested that,

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

“It is only in the very limited category of cases, where there is not even a vestige of doubt that the claim is ex facie time-barred, or that the dispute is non-arbitrable, that the court may decline to make the reference. However, if there is even the slightest doubt, the rule is to refer the disputes to arbitration, otherwise it would encroach upon what is essentially a matter to be determined by the tribunal.”

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

*Judgment by: Justice Indu Malhotra 

Appearances before the Court by:

For appellants: Senior Advocate R.D. Agrawala

For respondent: Senior AdvocateNeeraj Kumar Jain, Senior Advocate

Amicus Curiae: Senior Advocate Arvind Datar