Op EdsOP. ED.

Part I of the Arbitration and Conciliation Act, 1996[1] (the Arbitration Act) has been enacted to consolidate and amend the law relating to domestic arbitration as well as international commercial arbitration in India after taking into account UNCITRAL[2] Model Law on International Commercial Arbitration, 1985 (UNCITRAL Model Law).[3] Like the UNCITRAL Model Law, the Arbitration Act follows the territoriality principle, according to which the law of the seat of arbitration will govern the conduct of the arbitration and challenge to the arbitral award.[4] Thus, any party to an arbitration proceeding having seat/place of arbitration in India aggrieved by an arbitral award will have to seek recourse under the Arbitration Act.

Section 34 of the Arbitration Act stipulates that any person aggrieved by an arbitral award can file an application seeking setting aside of the arbitral award in terms of Sections 34(2), (2-A) and (3) of the Arbitration Act, 1996.[5] Sections 34(2) and 34(2-A) of the Arbitration Act enumerate the grounds for setting aside of the arbitral award whereas Section 34(3) of the Arbitration Act sets out the time-frame within which the party aggrieved by the arbitral award needs to file an application before the Court.

There was divergence of judicial opinion in India on the scope of the powers of a court exercising jurisdiction under Section 34 of the Arbitration Act (Section 34 court). The High Courts of Karnataka,[6] Delhi[7] and Bombay[8]had taken a view that a Section 34 court can only quash the arbitral award leaving the parties to resume fresh arbitration proceedings for resolution of their disputes. On the other hand, the High Courts of Madras[9], Telangana[10] and Andhra Pradesh[11]had taken a view that a Section 34 Court can either set aside the arbitral award or modify the arbitral award by varying the findings in the arbitral award. Owing to these divergent views expressed by various High Courts in India and the recent judgment of the Supreme Court of India in National Highways Authority of India v. M. Hakeem[12] this article seeks to examine the true scope and purport of the power of a court exercising jurisdiction under Section 34 of the Arbitration Act to modify, vary or reverse the findings in the arbitral award. In order to accomplish this objective, the author will first examine the legislative history of Section 34 of the Arbitration Act resulting in its enactment. Thereafter, the author will examine the views of the Supreme Court of India and the divergent views expressed by the High Courts on the powers of a Section 34 court to modify or vary the findings in the arbitral award. The author will conclude by summarising his views on the powers of a Section 34 court to modify, vary or reverse the findings in the arbitral award.

Legislative history of Section 34 of the Arbitration and Conciliation Act, 1996

Since the Arbitration Act was enacted to give effect to the UNCITRAL Model Law, Section 34 of the Arbitration Act almost mirrors Article 34 of the UNCITRAL Model Law. While the Arbitration and Conciliation (Amendment) Act, 2015[13] amended Section 34 of the Arbitration Act to clarify the scope of “public policy” as a ground for interfering with the arbitral award, none of the amendments had any bearing on the power of the court to modify or vary the findings in the arbitral award under Section 34 of the Act.[14] Thus, the reports setting out the historical background for formulation of Article 34 of the UNCITRAL Model Law will still be relevant to ascertain whether Section 34 of the Act confers power on the court to modify or vary the findings of the arbitral award. Besides, it is settled principle of law in India that special committee reports preceding the enactment of a legislation can be looked into for interpreting meaning of the statute that is unambiguous and for appreciating the background leading to enactment of the provision.[15]

The reports/deliberations at the time formulating the UNCITRAL Model Law assume significance for another reason. One of the primary reasons for formulating UNCITRAL Model Law was to evolve a harmonised legal framework for settlement of international commercial disputes.[16] Moreover, in India, the provisions of domestic statute must be read to enhance conformity with the global legal regime.[17] Therefore, for all these reasons, the historical origins of Article 34 of the UNCITRAL Model Law will be an important factor that need to be considered while ascertaining whether Section 34 of the Arbitration Act confers power on a court to modify or vary the arbitral award. Hence, this section briefly examines the legislative history of Article 34 of the UNCITRAL Model Law.

In 1976, the Asian-African Legal Consultative Committee (AALCC)[18] invited UNCITRAL to consider the possibility of drafting a protocol to the United Nations Convention on Recognition and Enforcement of Foreign Awards, 1958 (NYC) to redress several issues arising from divergent interpretations of the NYC[19]. In light of the said proposal, the UNCITRAL requested the Secretary General to prepare a report on further steps to be taken by the UNCITRAL in respect of international commercial arbitration.[20]Accordingly, the Secretary General of the UNCITRAL submitted his report on further steps in respect of international commercial arbitration.[21] The participants at the consultative meeting unanimously agreed that the preparation of the Model Law on arbitration (instead of a Protocol) would be the most appropriate way to achieve the desired uniformity.[22] Accordingly, UNCITRAL entrusted the work to prepare draft Model Law on international commercial arbitration to Working Group on International Contract Practices (Working Group).[23]

The Working Group commenced its work of preparing the Model Law by preliminary exchange of views on possible features of the draft model law based on the report of the Secretary General of the UNCITRAL and questions contained in the note circulated by the UNCITRAL Secretariat.[24] In his report, the Secretary General had noted that there was great variety in national laws for “attacking” an arbitral award.[25] Hence, it was suggested that the Model Law should ideally streamline the various types of recourse against an arbitral award and provide “only one type of action of ‘attacking’ an award”.[26]The Working Group concurred with the suggestion and requested the UNCITRAL Secretariat to prepare draft provisions for challenging the arbitral award along these lines.[27]

Based on the discussions of the Working Group at its fourth session, the UNCITRAL Secretariat prepared draft articles providing recourse against arbitral award.[28]In line with the discussions of the Working Group, Draft Article 40 proposed by the Secretariat stipulated that the only recourse available to a party aggrieved by the arbitral award was to seek setting aside of the arbitral award.[29] Interestingly, Draft Article 41(4) proposed by the Secretariat set out the consequences of setting aside the arbitral award. It provided that

“if the court set aside the award, it may order that the arbitration proceedings to continue for retrial of the case [or] a party may within three months request reinstitution of the arbitration proceedings unless such measure is incompatible with a ground on which the award is set aside”.[30]

Divergent views were expressed as to the appropriateness of Draft Article 41(4). Under one view, there was no place in Model Law for such a provision since it insufficiently dealt with several procedural questions arising in various legal systems[31]. But, majority of the members of the Working Group expressed support for retaining the provision, since “the provision made it clear that the arbitration agreement did not necessarily lapse (on setting aside of the award) and it opened the way for remission to an Arbitral Tribunal”.[32]Therefore, a reading of the draft article and travaux préparatoires seems to suggest that Working Group only sought to confer power on the court to set aside the arbitral award and remit the matter to the tribunal for reconsideration. The Working Group never contemplated court modifying or varying the findings in the arbitral award. This is also evident from the subsequent modifications suggested to Draft Article 41(4) by the Working Group. Amongst other things, the Working Group at the fifth session wanted the UNCITRAL Secretariat to prepare a revised draft to clarify that “reinstitution” of arbitral proceedings would not necessarily mean that the proceedings would be conducted by the previous Arbitral Tribunal and to stipulate the authority to whom the party should make a request for reinstitution.[33]

Based on the recommendations of the Working Group at its fifth session, the UNCITRAL Secretariat redrafted the article relating to recourse against an arbitral award to provide that the “court when asked to set aside the award, may also order, where appropriate and if so requested by a party that the arbitral proceedings be continued.”[34]While there was some resistance to the idea of the court remitting the matter back to the tribunal, the Working Group ultimately adopted the proposal since it reduced the likelihood of arbitral awards being set aside for curable procedural defects.[35] Therefore, apart from setting aside the arbitral award, the Model Law envisaged that the court exercising power under Article 34 of UNCITRAL Model Law could only remit the matter to the Arbitral Tribunal to remedy curable defects so as to prevent setting aside of the arbitral award.[36] No substantial changes were neither proposed nor made in subsequent drafts considered by the Working Group.[37] Thus, Article 34 of the UNCITRAL Model Law provides that any person aggrieved by an arbitral award can either seeking setting aside or remission to the tribunal to remedy curable defects. Therefore, by implication, Article 34 of the UNCITRAL Model Law never envisaged that the court exercising jurisdiction under Article 34 of the UNCTIRAL Model Law can vary or modify the findings.

Two other aspects in the travaux préparatoires of the UNCITRAL Model Law fortify the conclusion that a court under Article 34 of the UNCITRAL Model was never conferred with the power to vary or modify the arbitral award. First, a proposal was made to include a provision in draft Model Law in case of setting aside of arbitral awards to exclude the time from commencement of arbitral proceedings till the date of setting aside of the arbitral award to enable the claimant/aggrieved party to pursue fresh arbitration/remedies in accordance with law.[38] While recognising the importance of such a provision, UNCITRAL eventually decided against its inclusion because it “touched upon issues regarded by many legal systems as matters of substantive law and might therefore be considered to be outside the scope of the model law”.[39] Most importantly, owing to paucity of time, UNCITRAL was not able to undertake a close study of issues involved for formulation of an appropriate rule.[40] Hence, from the aforesaid discussion, one may infer that Article 34 of the UNCITRAL Model Law only envisaged setting aside of arbitral awards. It was for this reason that UNCITRAL considered formulating a rule for excluding the time period from the date of commencement of arbitral proceedings till the date of setting aside of arbitral awards.

Second, in one of the UNCITRAL Secretariat working papers placed before the Working Group, the UNCITRAL Secretariat had recommended that UNCITRAL Model Law contain a provision regarding the manner in which a party may pursue a claim after setting aside of award under Article 34.[41] It was suggested, such a provision could clarify that, on setting aside of arbitral award, the original arbitration agreement stood discharged and parties were relegated to ordinary courts for adjudication of their disputes. Or, in the alternative, such a provision could recognise that original arbitration agreement was reactivated and the parties had to purse their claims by commencing fresh arbitration proceedings. But, for reasons not forthcoming from the record, it appears that the Working Group did not give serious consideration to the proposal. That said, in either of these cases, there was an implicit recognition of the fact that a court exercising power under Article 34 of the UNCITRAL Model Law could not vary or modify the award but only to set aside the award.

Hence, a meaningful reading of the preparatory works of UNCITRAL Model Law leads to conclusion that, on an application by a party, a court exercising jurisdiction under Article 34 of the UNCITRAL Model Law could remit the arbitral award to the tribunal to remedy curable defects. However, if the defects are not curable and grounds under Article 34(2) are made out by a party aggrieved by the arbitral award, the court can only set aside the arbitral award and not vary or modify the findings in the arbitral award.

Indian courts and divergent views on power under Section 34 of the Arbitration and Conciliation Act, 1996 to modify or vary the arbitral awards

This section will briefly examine the law laid down by the Supreme Court of India and the divergent views expressed by High Courts regarding the power of a Section 34 Court to vary or modify the arbitral award.

(i) Supreme Court of India

Since the law laid down by the Supreme Court of India binds all courts and tribunals in the country,[42] the judgments of the Supreme Court relating to power of a Section 34 Court to modify or vary the arbitral award will be examined first.

In McDermott International Inc. v. Burn Standard Co. Ltd.,[43] (McDermott case) the Supreme Court was seized of an appeal arising out of judgment of the Calcutta High Court dealing with challenge to an arbitral award under Section 34 of the Arbitration and Conciliation Act, 1996. Prior to adverting to the contentions of the parties for setting aside the arbitral award, the Court opined that “the court (exercising jurisdiction under Section 34 of the Arbitration and Conciliation Act, 1996) cannot correct errors of arbitrators. It can only quash the award leaving the parties free to begin the arbitration again if so desired”. But, for reasons detailed below, these observations cannot be regarded as law declared by the Supreme Court of India on the power of a Section 34 Court to modify or vary the arbitral award.

It is settled law that not everything said by a Judge while giving a judgment constitutes a precedent.[44] The enunciation of the reason or principle (i.e. ratio decidendi) upon which a question before a court has been decided is alone binding as a precedent under Article 141 of the Constitution of India.[45] A proposition of law can be regarded as ratio decidendi of a case if a deliberate/conscious judicial decision has been arrived at after hearing an argument on a question which arose or was put in issue in the facts of the case before the court.[46]Hence, viewed in this backdrop, the question whether a Section 34 Court can modify or vary the arbitral award never arose for consideration in McDermott case[47]. There was neither any question raised nor any argument advanced on the power of a Section 34 Court to modify or vary the arbitral award. Hence, the abovementioned observations can hardly be termed as a conscious judicial decision on the power of a Section 34 Court to modify or vary the arbitral award.

The matter can be considered from another standpoint. Recently, in State of Gujarat v. Utility Users’ Welfare Assn.,[48]the Supreme Court adopted “the Inversion Test” propounded by Prof. Eugene Wambaugh, with some modifications[49]to identify the ratio decidendi of a judgment. According to the Court, in order to test whether a particular proposition of law is to be treated as the ratio decidendi of the case, the proposition is to be inversed i.e. remove the proposition of law from the text of the case as if did not exist. If the conclusion of the case would still have been the same even without examining the proposition, then it cannot be regarded as ratio decidendi of the case.[50] Applying the said test to McDermott case[51], it can safely be concluded that, even if the observation that the court cannot correct errors of the arbitrators, but only set aside the award is inversed (i.e. removed from the text of the case), the conclusion of the case would have still been the same. Hence, owing to these reasons, the observations of the Supreme Court in McDermott case[52]cannot be regarded as law declared under Article 141 of the Constitution of India.

At this juncture, it is pertinent to note another judgment of the Supreme Court in India wherein some observations appear to have been made on the power of the court to modify or vary the arbitral award under Section 34 of the Act. In Dakshin Haryana Bijli Vitran Nigam Ltd. v. Navigant Technologies (P) Ltd.,[53] (Dakshin Haryana case) an appeal was filed against the judgment of the High Court dismissing a petition under Section 34 of the Arbitration Act as time-barred under Section 34(3) of the Arbitration Act. Amongst other things, it was contended that the time period for filing the arbitral petition under Section 34 should be reckoned from the date of receiving the majority as well as the minority award from the Arbitral Tribunal since on several occasions courts had upheld minority awards while setting aside the majority award. The Court allowed the appeal on the ground that

“there is only date recognised by law i.e. date on which a signed copy of the final award is received by the parties, from which the period of limitation for filing objections (i.e. petition under Section 34 of the Arbitration and Conciliation Act, 1996) would start ticking.”[54]

Since 90 days had not lapsed from the date of receipt of signed copy of the arbitral award, the Court allowed the appeal and remanded the petition under Section 34 of the Arbitration Act for adjudication on merits. While dealing with the contention of the appellant on the relevance of minority arbitral award, the Court opined that

“under Section 34 of the Arbitration Act, the Court may either dismiss the objections filed, and uphold the award, or set aside the award if the grounds contained in sub-sections (2) and (2-A) of (Section 34)are made out. There is no power to modify the award”.

In support of this proposition, the Court relied on McDermott case[55]. As discussed earlier, McDermott case[56] is not an authority for the proposition that court cannot modify or vary the arbitral award.

That apart, for the reasons stated below, Dakshin Haryana case[57] also cannot be regarded as an authority for the proposition that court can only set aside the arbitral award. First, if the inversion test[58] (explained above) is applied to Dakshin Haryana case[59], it will become abundantly clear that, even if the observations that a Section 34 court can only set aside the arbitral award is “omitted” from the text of the judgment, the Supreme Court would still have come to the same conclusion that the time period for computing limitation under Section 34(2) is to be reckoned from the date of receipt of the signed copy of the arbitral award.

Second, not all observations of the Supreme Court while delivering a judgment are binding under Article 141 of the Constitution of India.[60] A judgment can be distinguished into two parts – ratio decidendi and obiter dictum.[61]As stated earlier, it is only the ratio decidendi i.e. principle upon which the case is decided by the Supreme Court of India that binds courts and tribunals under Article 141 of the Constitution of India.[62]An “obiter dictum”, unlike the ratio decidendi, is an observation by the court on a legal question suggested in a case before it but not arising in such a manner as to require decision.[63]Thus, in Dakshin Haryana case[64], once the Supreme Court of India had taken a view that the limitation had to be reckoned from the date of receipt of the signed copy of the arbitral award, it was wholly unnecessary to make any observations on the powers of a Section 34 court to modify or vary the arbitral award. Hence, the observations of the Supreme Court in Dakshin Haryana case[65] cannot be considered as law declared under Article 141 of the Constitution of India since the power of a Section 34 court to modify the arbitral award did not arise in such a manner to require decision.

Recently, in National Highways Authority of India v. M. Hakeem,[66] the Supreme Court was dealing with a batch of appeals from the Madras High Court wherein the said High Court had disposed of a large number of appeals filed under Section 37 of the Arbitration and Conciliation Act, 1996[67] holding that a Section 34 Court can modify the arbitral award and enhance compensation awarded by arbitrator under the National Highways Act, 1956[68]. The Supreme Court of India categorically held that a Section 34 Court cannot modify or alter the findings of the Arbitral Tribunal, but only set aside the arbitral award.

Four reasons primarily weighed in the mind of the Court to subscribe to the said view. First, Section 34 of the Arbitration Act was modelled on Article 34 of the UNCITRAL Model Law which did not permit modification of arbitral awards, but only setting aside of the arbitral award.[69]Second, the statutory scheme under Section 34 of the Arbitration Act was substantially different from the erstwhile Arbitration Act, 1940[70] wherein courts were specifically empowered to modify or correct an award.[71]Third, proceedings under Section 34 of the Arbitration and Conciliation Act, 1996 did not permit challenge to an arbitral award on merits.[72] Thus, necessarily, a Section 34 Court cannot conduct a roving enquiry on merits and make de novo findings modifying the arbitral award. Fourth, the McDermott case[73],Dakshin Haryanacase[74] and Kinnari Mullick v. Ghanshyam Das Damani(Kinnari Mullick case) [75]had already settled the law that a Section 34 court cannot modify the arbitral award, but merely set aside the award leaving parties to commence fresh arbitration proceedings to settle their disputes.[76]For reasons stated supra, the McDermott case[77]and the Dakshin Haryana case[78] cannot be considered as authorities for the proposition that courts can only set aside, but not modify the arbitral award. Even Kinnari Mullick case[79] cannot be regarded as an authority for the said proposition because the court was only considering the power of a Section 34 Court to remand the matter to the arbitral tribunal under Section 34(4) of the Arbitration and Conciliation Act, 1996. The question as to whether a Section 34 court can modify the arbitral award was neither put in argument nor consciously decided by the Supreme Court in Kinnari Mullick case[80]. Hence, the observations therein can hardly qualify as laying down that a court can only set aside the arbitral award.

Be that as it may, the other observations of the Supreme Court in National Highways Authority of India v. M. Hakeem80, now make it amply clear that a Section 34 Court can only set aside the arbitral award, but not vary or modify the findings of the Arbitral Tribunal. The next section will examine the decisions of the High Court on the power of the Court to modify or vary the arbitral award.

(ii) High Courts and power of a Section 34 Court to modify or vary the arbitral award

The Bombay High Court81 and the Delhi High Court82had taken a view that, unlike a court exercising appellate powers under Section 96 of the Code of Civil Procedure, 190883, a Section 34 Court does not have the power to vary or modify the arbitral award or decree the claims dismissed by the Arbitral Tribunal. Therefore, a Section 34 Court can either uphold the arbitral award or set aside the arbitral award.

In Padma Mahadev v. Sierra Constructions84, the High Court of Karnataka had also taken a view that a Section 34 Court cannot vary or modify the findings of the Arbitral Tribunal, but only set aside the arbitral award. To arrive at the said finding, first, the High Court adverted to the McDermott case85 and concluded that the Supreme Court has declared the law that a Section 34 Court can only set aside the arbitral award, leaving parties free to begin fresh arbitration if they so desired.[81] Second, the High Court referred to Section 34(4) of the Arbitration Act that permits a Section 34 Court to remit the arbitral award to the Arbitral Tribunal to remedy curable defects which would obviate setting aside of the arbitral award. Based on this provision, the High Court concluded that the said sub-section would be rendered otiose if a Section 34 Court was held to have the power to vary or modify the arbitral award.[82]Third, the High Court referred to Section 43(4) of the Arbitration Act[83] which provides that, in case of setting aside of arbitral award, the time period from the commencement of arbitration to setting aside of arbitral award should be excluded for the purpose of computing limitation. Based on this provision, the High Court concluded that such a provision would have been wholly unnecessary if a Section 34 Court had the power to modify or vary the arbitral award and finally settle the list between the parties. Except for the erroneous reading of the law laid down in Mc Dermott case[84], the judgment does make a compelling case based on the text of the Arbitration and Conciliation Act, 1996 that a Section 34 Court can only set aside the arbitral award and not vary or modify the findings of the Arbitral Tribunal.

Contrary to the views of the Karnataka, Bombay and the Delhi High Courts, the Madras High Court,[85] Andhra Pradesh High Court[86] and  Telangana High Court[87] had taken a view that a Section 34 court can either set aside the arbitral award or vary the findings of the Arbitral Tribunal. In Kurra Venkateshwara Rao v. Competent Authority,[88]the Andhra Pradesh High Court held that the expression “recourse to a Court against an arbitral award” used in Section 34(1)[89] of the Arbitration Act could not be interpreted to limit the power of a Section 34 Court to merely set aside the arbitral award. Such an interpretation of Section 34(1) would leave parties in a worse off position than contemplated or deserved prior to commencement of arbitral proceedings. Thus, the words “recourse against an arbitral award” in Section 34 of the Arbitration and Conciliation Act, 1996 were interpreted to include the power of a Section 34 court to modify or vary the arbitral award along with the power to set aside the arbitral award. Further, the High Court sought to fortify its conclusion that a Section 34 Court can modify, vary or revise the findings of the Arbitral Tribunal by adverting to the general practice of the High Courts and the Supreme Court of India to vary, modify or revise arbitral findings while adjudicating Section 34 petitions under the Arbitration Act.

In the author’s opinion, the Andhra Pradesh High Court’s view is wholly erroneous on both counts. It is settled law that an interpretation that renders the provisions of a statute otiose or nugatory should be eschewed.[90]Section 34(1) of the Arbitration Act stipulates that recourse against an arbitral award may be made “only” by an application for setting aside such award in accordance with sub-sections (2) and (3). If the interpretation given by the Andhra Pradesh High Court to the expression “recourse against an arbitral award” is accepted, the word “only” in Section 34(1) of the Arbitration Act will be rendered otiose. It is obvious that the word “only” was used in Section 34(1) of the Arbitration Act to make it abundantly clear that recourse against an arbitral award was “only” by an application for setting aside the arbitral award and nothing else.

That apart, the reference to the general practice of the High Court and the Supreme Courts in varying or modifying arbitral awards while adjudicating petitions under Section 34 of the Arbitration Act is also entirely misplaced.

Undoubtedly, usage or practice developed under a statute is indicative of the meaning ascribed to its words.[91] The doctrine is based on the precept that the words used in the statute must be understood in the same way in which they are usually understood in ordinary common parlance by the persons whose duty it is to construe and apply it.[92] But the rule is not of universal application and can be applied only on fulfilment of following preconditions:

(a) First, contemporary construction placed by authorities can be looked at for construing a statute only if the meaning of a provision is obscure, but not when the meaning of the statute is plain, simple and unambiguous.[93]Section 34(1) of the Arbitration Act provides that filing of a setting aside application is the “only” recourse available against an arbitral award. Hence, there is no obscurity or ambiguity in the provision that warrants looking at the practice and usage developed under the Arbitration Act to ascertain the meaning of the provision.

(b) Second, practice or usage developed under the statute is only relevant for interpretation of an ancient statute, but not a modern statute.[94]This is for the obvious reason that, in ancient statutes/very old statutes, the language may itself have a different meaning at the time of the enactment of statute and the Judges who lived during that time or soon thereafter would be best able to decipher the intention of the legislature.[95]The Arbitration Act is of recent origin and was enacted in 1996 to give effect the UNCITRAL Model Law in India. No drastic changes have taken place in English language that would warrant Section 34(1) of the Arbitration Act being interpreted dehors the text of the provision, but with reference to the practice and usage of courts. Hence, in the author’s opinion, the Andhra Pradesh High Court does not lay down the correct law.

Furthermore, as rightly noted by the Supreme Court of India in National Highways Authority of India v. M. Hakeem,[96] in interpreting a statutory provision, a Judge must put himself in the shoes of Parliament and then ask whether Parliament intended the result. Since Parliament very clearly intended that no power of modification of an award exists in Section 34 of the Arbitration Act, 1996, the Andhra Pradesh High Court could not have read such a power into Section 34 of Arbitration Act, 1996.

Like the Andhra Pradesh High Court, in Gayatri Balaswamy v. ISG Novasoft Technologies Ltd.,[97]the Madras High Court also held that a Section 34 Court can modify or vary the findings in the arbitral award. While examining the issue, the High Court noted the general practice of the Supreme Court of varying or modifying arbitral awards while considering appeals arising from petitions under Section 34 of the Arbitration Act.[98] Thereafter, the High Court held that Section 34(1) of the Arbitration Act merely prescribed the form (i.e. application for setting aside) in which a party can seek recourse against an arbitral award.[99] Hence, nothing in Section 34(1) of the Arbitration Act could be construed to limit the power of a Section 34 Court to modify or vary the arbitral award.[100]Further, the Court adverted to the observations of the Supreme Court in McDermott case[101] that a Section 34 court only exercises supervisory role, which was almost akin to revisional powers under Section 115 of the Code of Civil Procedure, 1908[102]. Since the revisional jurisdiction under Section 115 of the Code of Civil Procedure 1908 permitted correction of patent illegalities, the Court held that a Section 34 court can also modify or vary the findings in the arbitral award. This judgment was subsequently affirmed by the Division Bench of the Madras High Court.[103] Both these decisions of the Madras High Court have been declared per incuriam in National Highways Authority of India v. M Hakeem.[104]

Besides, both the reasons given by the Madras High Court are wholly fallacious. The Madras High Court’s interpretation renders the word “only” used in Section 34(1) of the Arbitration Act, 1996 otiose. The legislature has consciously used the word “only” in Section 34(1) of the Act to make it clear that an application for setting aside is the only recourse against an arbitral award. This is evident from examination of the scheme of the Arbitration Act. Section 43(4) of the Act provides that, the time period between commencement of arbitral proceedings and setting aside of award shall not be reckoned for computing limitation if the parties decide to pursue the claims that were subject-matter of the award set aside afresh. Such a provision would have been unnecessary if a Section 34 Court could modify or vary the arbitral award. That apart, if courts had the power to modify or vary the arbitral awards, there was no need to enact Section 34(4) of the Act that permits a Section 34 Court to remit the arbitral awards to the tribunal to correct curable defects to obviate setting aside of the award. If the courts could modify or vary the arbitral awards, the courts could have suo motu undertaken remedial measures instead of remitting the matter back to the tribunal. Hence, the interpretation of the Madras High Court is incompatible with the scheme of the Arbitration Act, 1996.

Further, the Madras High Court’s reference to Section 115 of the Code of Civil Procedure for interpreting Section 34 of the Arbitration and Conciliation Act, 1996 is also fallacious. Suffice it is to state that the language of both the provisions and scheme of their enactments are materially different. Therefore, no inspiration can be drawn from one provision to interpret the other. In any event, Section 115 of the Code of Civil Procedure, 1908[105] confers a specific power on the courts to vary or reverse the findings made by the subordinate court. There are no corresponding words in the text of Section 34(1) of the Arbitration Act permitting a court to vary or modify the arbitral award. Hence, the Madras High Court’s interpretation that a court can vary or modify the arbitral is without textual basis and deserves to be ignored.

Lastly, in Saptarishi Hotels (P) Ltd. v. National Institute of Tourism & Hospitality Management,[106] the Telangana High Court has subscribed to the view of the Madras High Court and held that a Section 34 Court can modify or vary the findings in the arbitral award. However, the judgment has used the words “modification” or “varying” the terms of the arbitral award in a broader sense to include partial setting aside of the awards, and not merely varying or modifying the arbitral award on merits.[107]

At this juncture, it may be noted that there is nothing in the text of the Arbitration and Conciliation Act, 1996 prohibiting “partial” setting aside of the arbitral awards.[108] Therefore, if the arbitral award is found bad in respect of some claims and perfectly tenable in case of other claims, a Section 34 Court will be well within its rights to set aside part of the arbitral award. Hence, there is no infirmity with the decision of the Telangana High Court to that extent. The term “modify” or “vary” has been used in this article to refer to only those instances wherein a Section 34 Court adverts to the merits of the dispute and modifies or varies the findings in the arbitral award. The word “modify” or “vary” in this article most certainly do not refer to partial setting aside of award by a Section 34 Court, which is obviously permissible under the Arbitration Act provided the grounds in Sections 34(2) and (2-A) of the said Act are made out.

Conclusion

The preparatory works of the UNCITRAL Model Law make it clear that the drafters envisaged remission to the Arbitral Tribunal for remedying curable defects or the setting aside of the arbitral award as the only recourses available to a party aggrieved by the arbitral award. The drafters did not intend to clothe the courts hearing challenges under Article 34 of the UNCITRAL Model Law with the power to vary or modify the arbitral awards. It is for this reason that the UNCITRAL Secretariat and the Working Group initially sought to engraft provisions setting out the consequences of setting aside the arbitral award which provided that, on setting aside of the arbitral award, the parties may start fresh arbitration proceedings for adjudication of the dispute. Further, there was also a proposal to exclude the time from commencement of arbitration till the date of setting aside the arbitral award for the purpose of reckoning claims if the arbitral award was ultimately set aside. These proposals were not adopted since such provisions did not sufficiently deal with procedural questions arising in various legal systems. But, it would have been wholly unnecessary to consider proposals to incorporate such provisions if the courts had the power to modify or vary the arbitral award and consequently, settle the dispute between the parties by varying or modifying the findings of the Arbitral Tribunal. Section 34 of the Arbitration Act is pari materia to Article 34 of the UNCITRAL Model Law. Moreover, since Section 34 of the Arbitration Act was enacted to give effect to UNCITRAL Model Law,[109]an interpretation in conformity with Article 34 of the UNCITRAL Model Law should be adopted. Hence, a Section 34 Court does have the power to modify or vary the findings in the arbitral award. It can only set aside the arbitral award if conditions set out in sub-sections (2) and (2-A) of Section 34 are satisfied.

Further, Section 5 of the Arbitration Act[110]stipulates that, notwithstanding anything contained in any other law for the time being in force, no judicial authority shall intervene in arbitration proceedings (including setting aside of arbitral award) except as provided in Part I of the Arbitration Act. Since Section 34(1) contained in Part I of the Arbitration Act provides that recourse against an arbitral award can be “only” by an application for setting aside the arbitral award, the judicial authority can only interfere by setting aside the arbitral award. Thus, by implication, any other manner of interference with the arbitral award including by way of varying or modifying the findings in the arbitral award is not permissible in light of Section 5 read with Section 34(1) of the Arbitration Act.

That apart, unlike UNCITRAL Model Law, Section 43(4) of the Arbitration and Conciliation Act, 1996 specifically stipulates that time period from the commencement of arbitration till the setting aside of the arbitral award should not be reckoned for computing limitation in case fresh proceedings initiated after the arbitral award has been set aside. If a Section 34 Court is held to have the power to modify or vary the arbitral award, there would be no need to exclude time period for fresh proceedings as courts could vary or modify the arbitral award and settle the lis (i.e. dispute) between the parties. Thus, Section 43(4) exists because Section 34 of the Arbitration Act only empowers courts to annul arbitral awards, not vary or modify them owing to the errors committed by the Arbitral Tribunal.

The judgment of the Supreme Court in National Highways Authority of India v. M. Hakeem[111] is welcome since it is line with the intent of the UNCITRAL Model Law and settles the law putting to rest the confusion that arose from divergent views of different High Courts.

Having said that, the concerns of the Madras High Court,[112] Telangana High Court[113] and the Andhra Pradesh High Court[114] are not entirely misplaced and without substance. The main reason that seems to have weighed with the High Courts in taking a view that a Section 34 Court has power to vary or modify the arbitral award was the fact that mere setting aside the arbitral award would “leave the parties in a position much worse than what they contemplated or deserved before the commencement of the arbitral proceeding.”[115] But, conferring power on the court to vary or modify the arbitral awards is not the panacea such a problem. In fact, the remedy lies in courts not interfering with the arbitral awards in a cavalier manner especially since the setting aside of the arbitral award entails such harsh consequences. Ultimately, the court will have to respect finality of the arbitral award and the party autonomy to get their dispute resolved through arbitration.[116] It is only in extraordinary circumstances wherein procedural fairness and safeguards are not complied with, powers under Section 34 of the Arbitration Act should be invoked to set aside the arbitral award.

Thus, for the aforesaid reasons, the power of the Section 34 Court is only confined to setting aside the arbitral award, but not varying or modifying the findings in the arbitral award. However, there is nothing in the Arbitration Act that prohibits partial setting aside of the arbitral awards. Therefore, modification or varying of the arbitral award by setting aside of the arbitral award in part is permissible. Obviously, the doctrine of severability and setting aside of the arbitral award in part only holds good if the bad parts of the arbitral award are severable from the sustainable parts of the award. If the bad parts of the arbitral award cannot be severed from the sustainable parts of the award, the court will have no option but to set aside the entirety of the arbitral award leaving parties to commence fresh arbitration proceedings.


*Author is an alumnus of National Law University, Jodhpur (’16) and practices dispute resolution in Bangalore, Karnataka, and can be reached at rohan231993@gmail.com.

[1]Arbitration and Conciliation Act, 1996.

[2]United Nations Commission on International Trade Law.

[3]Preamble, Arbitration and Conciliation Act, 1996; Bharat Aluminium Co. v. Kaiser Aluminium Technical Services Inc. (2012) 9 SCC 552, para 68.

[4]Bharat Aluminium Co.v. Kaiser Aluminium Technical Services Inc., (2012) 9 SCC 552, paras 73-75, 120-124; S. 2(2) of the Arbitration and Conciliation Act, 1996.

[5]S. 34(1) of the Arbitration and Conciliation Act, 1996.

[6]Padma Mahadev v. Sierra Constructions Pvt. Ltd., COMAP 2 of 2021, decided on 22-3-2021 (High Court of Karnataka), para 24.

[7]Nussli Switzerland Ltd. v. Organising Commonwealth Games, 2010, 2014 SCC OnLine Del 4834, para 34; State Trading Corpn. of India Ltd. v. Toepfer International Asia Pte Ltd., 2014 SCC OnLine Del 3426, para 7.

[8]Dirk India (P) Ltd. v. Maharashtra State Electricity Generation Co.Ltd.,2013 SCC OnLine Bom 481, para 14; Wind World (India) Ltd. v. Enercon GmbH, 2017 SCC OnLine Bom 1147, para 16.

[9]Gayatri Balaswamy v. ISG Novasoft Technologies Ltd.,2014 SCC OnLine Mad 6568, paras 23, 24, 29, 30, 39, 51-53; ISG Novasoft Technologies Ltd. v. Gayatri Balasamy,2019 SCC OnLine Mad 15819, para 42.

[10]Saptarishi Hotels (P)Ltd.v. National Institute of Tourism & Hospitality Management, 2019 SCC OnLine TS 1765, paras 27, 34 and 35.

[11]Kurra Venkateshwara Rao v. Competent Authority, CMAs No. 987-993 & 1014 of 2008, decided on 1-5-2020 (Andhra Pradesh High Court, DB), paras 23, 24, 28, 34.

[12]2021 SCC OnLine SC 473.

[13]Arbitration and Conciliation (Amendment) Act, 2015. http://www.scconline.com/DocumentLink/9ajA4z9b.

[14]Explanation, S. 34(2) and S. 34(2-A) of the Arbitration and Conciliation Act, 1996; Law Commission of India, Report No. 246 on  Amendments to the Arbitration and Conciliation Act, 1996, (2014), Chapter II, Paras 34-37; Law Commission of India, Supplementary to Report No. 246 on Amendments to the Arbitration and Conciliation Act, 1996 – “Public Policy” Developments Post Report No. 246, (2014).

[15]Kalpana Mehta v. Union of India, (2018) 7 SCC 1, paras123-135; see M. Dhyan Chinnappa and Rohan Tigadi, Section 7(4)(c) of the Arbitration and Conciliation Act, 1996: Acquiescence by Silence?, (2021) 3 SCC J-32,  33.

[16]A/RES/40/72, Model Law on International Commercial Arbitration of the United Nations Commission on International Trade Law (11-12-1985); Preamble, Arbitration and Conciliation Act, 1996.

[17]K.S. Puttaswamy v. Union of India, (2017) 10 SCC 1, para 154; Commr. of Customs v. G.M. Exports,(2016) 1 SCC 91, paras 13-23; see M. Dhyan Chinnappa and Rohan Tigadi, Section 7(4)(c) of the Arbitration and Conciliation Act, 1996: Acquiescence by Silence?, (2021) 3 SCC J-32,  33.

[18]It is an international government organisation formed in 1956 to serve as an Advisory Board to member States on matters of international law.

[19]International Commercial Arbitration, Note by the Secretary General (A/CN.9/127).

[20]UNCITRAL Note by the Secretariat: Further Work in Respect of International Commercial Arbitration (A/CN.9/169), Para 2.

[21]UNCITRAL Report of the Secretary General: Study on the Application and Interpretation of the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York, 1958) (A/CN.9/168).

[22] Note by the Secretariat: Further Work in Respect of International Commercial Arbitration (A/CN.9/169), Para 6.

[23]UNCITRAL, Report of Working Group on International Contract Practices on the Work of its Third Session, A/CN.9/216, Para 1; Dhyan Chinnappa and Rohan Tigadi, Section 7(4)(c) of the Arbitration and Conciliation Act, 1996: Acquiescence by Silence?, (2021) 3 SCC J-32,  33-34.

[24] UNCITRAL, Report of the Working Group on International Contract Practices on the Work of its Third Session, A/CN.9/216, Paras 6 and 13.

[25] Report of the Secretary General: Possible Features of a Model Law on International Commercial Arbitration (A/CN.9/207), Para 108.

[26]Working Paper Submitted to the Working Group on International Contract Practices at its Third Session (16-2-1982 to 26-2-1982): Note by the Secretariat: Possible Features of a Model Law on International Commercial Arbitration : Questions for Discussions by the Working Group (A/CN.9/WG.II/WP.35), Para 31; UNCITRAL, Report of the Working Group on International Contract Practices on the Work of its Fourth Session (Vienna, 4-10-1982 to 15-10-1982), A/CN.9/232 (10-11-1982), Paras 13 and 14.

[27] UNCITRAL, Report of the Working Group on International Contract Practices of its Fourth Session (Vienna, 4-10-1982 to 15-10-1982), A/CN.9/232 (10-11-1982), Paras 13 and 14.

[28]UNCITRAL, Report of the Working Group on International Contract Practices on the Work of its Fifth Session (New York, 22-2-1983 to 4-3-1983) (A/CN.9/233), Para 132.

[29]UNCITRAL, Report of the Working Group on International Contract Practices on the Work of its Fifth Session (New York, 22-2-1983 to 4-3-1983) (A/CN.9/233), Paras 178-180.

[30]UNCITRAL, Report of the Working Group on International Contract Practices on the Work of its Fifth Session (New York, 22-2-1983 to 4-3-1983) (A/CN.9/233), Para 181.

[31]UNCITRAL, Report of the Working Group on International Contract Practices on the Work of its Fifth Session (New York, 22-2-1983 to 4-3-1983) (A/CN.9/233), Para 190.

[32]UNCITRAL, Report of the Working Group on International Contract Practices on the Work of its Fifth Session (New York, 22-2-1983 to 4-3-1983) (A/CN.9/233), Para 191.

[33]UNCITRAL, Report of the Working Group on International Contract Practices on the Work of its Fifth Session (New York, 22-2-1983 to 4-3-1983) (A/CN.9/233), Para 192.

[34] UNICTRAL, Report of the Working Group on International Contract Practices on the Work of its Sixth Session (Vienna, 29-8-1983 to 9-9-1983) A/CN.9/245, Para 150.

[35] UNICTRAL, Report of the Working Group on International Contract Practices on the Work of its Sixth Session (Vienna, 29-8-1983 to 9-9-1983) A/CN.9/245, Para 154.

[36] UNICTRAL, Report of the Working Group on International Contract Practices on the Work of its Sixth Session (Vienna, 29-8-1983 to 9-9-1983) A/CN.9/245, Para 154.

[37] UNCITRAL, Report of the Working Group on International Contract Practices on the Work of its Seventh Session (New York, 6-2-1984 to 17-2-1984), A/CN.9/246, Para 139; Report of the United Nations Commission on International Trade Law on the Work of its Eighteenth Session, 3-6-1985 to 21-6-1985, A/40/17, Paras 272, 305-307.

[38]Report of the United Nations Commission on International Trade Law on the Work of its Eighteenth Session, 3-6-1985 to 21-6-1985, A/40/17, Paras 183-187.

[39] Report of the United Nations Commission on International Trade Law on the Work of its Eighteenth Session,3-6-1985 to 21-6-1985, A/40/17, Para185.

[40]Report of the United Nations Commission on International Trade Law on the work of its Eighteenth Session, 3-6-1985 to 21-6-1985, A/40/17, Para 185.

[41]UNCITRAL Secretariat, Composite Draft Text of a Model Law on International Commercial Arbitration: Some Comments and Suggestions for Consideration: Note by the Secretariat (A/CN.9/WG.II/WP.50), Paras 24-26.

[42]Art. 141 of the Constitution of India; Director of Settlements v. M.R. Apparao, (2002) 4 SCC 638, para 7.

[43](2006) 11 SCC 181, para 52.

[44]Union of India v. Dhanwanti Devi, (1996) 6 SCC 44, para 9.

[45]Krishena Kumar v. Union of India, (1990) 4 SCC 207, para 20; Union of India v. Dhanwanti Devi, (1996) 6 SCC 44, para 10.

[46]Union of India v. Dhanwanti Devi, (1996) 6 SCC 44, paras9 and10; Shah Faesal v. Union of India, (2020) 4 SCC 1, para 25; Krishena Kumar v. Union of India, (1990) 4 SCC 207, para 20; Union of India v. Dhanwanti Devi, (1996) 6 SCC 44, para 20.

[47](2006) 11 SCC 181.

[48](2018) 6 SCC 21, paras 113 and 114.

[49] There is a difference between the “Inversion Test” propounded by Professor Wambaugh and as understood by the Supreme Court of India. According to Professor Wambaugh, in order to apply the “inversion test”, the person has to formulate the supposed proposition of law that is ratio decidendi of the case. Then, he has to insert in that proposition a word reversing its meaning. Thereafter, he has to inquire whether, if the court had conceived of the new proposition (i.e. inversed proposition) as good, would the decision in the case have been the same. If the answer is the in the affirmative, then, however, excellent the original proposition may be, the case is not a precedent for that proposition (Wambaugh’s Inversion Test).

In contrast, the Supreme Court of India, in State of Gujarat v. Utility Users’ Welfare Assn.,(2018) 6 SCC 21 formulates a far simpler test. In order to apply this test, the person has to simply remove the supposed proposition of law from the text of judgment and examine if the decision in the case would have still been the same. If yes, then the proposition of law is not ratio decidendi (Supreme Court’s Inversion Test).  The slight nuance can be best be explained with the help of an illustration.

Wambaugh’s Inversion Test: In Mcdermott case, (2006) 11 SCC 181, let us assume that the Courts are only permitted to set aside the arbitral awards and not correct error of the arbitrators is the supposed proposition of law. If inverted, the new conceived proposition will read “Courts are permitted, not only permitted to set aside the arbitral awards but also correct errors of the arbitrator”. Then, under Wambaugh’s Inversion Test, Court has to make an enquiry whether the Supreme Court of India in McDermott case, (2006) 11 SCC 181 would have arrived at the same decision even if the Judge had conceived the new proposition. If yes, the original proposition “court can only set aside the arbitral award but not correct errors of arbitrators” is not the ratio decidendi.

Supreme Court’s Inversion Test: In McDermott case, (2006) 11 SCC 181, let us assume that the supposed proposition of law “court can only set aside the arbitral award, but not correct the errors of the arbitrators. According to the Supreme Court’s inversion test, if the final decision in the case would be the same even after the supposed proposition of law is removed from the text of the judgment, then the said proposition is not the ratio decidendi of the case. Hence, unlike Wambaugh’s Test, the Indian courts are not required to evaluate whether the final outcome will be the same even if the Judge conceived the new inverted proposition to deduce ratio decidendi.

[50]State of Gujaratv. Utility Users’ Welfare Assn.,(2018) 6 SCC 21, para 114.

[51](2006) 11 SCC 181.

[52](2006) 11 SCC 181.

[53]2021 SCC OnLine SC 157.

[54]Dakshin Haryana Bijli Vitran Nigam Ltd. v. Navigant Technologies (P) Ltd., 2021 SCC OnLine SC 157, paras 5(vii), (xvi) and(xvii).

[55](2006) 11 SCC 181.

[56](2006) 11 SCC 181.

[57]2021 SCC OnLine SC 157.

[58]State of Gujaratv. Utility Users’ Welfare Assn., (2018) 6 SCC 21, para 114; Also see Nevada Properties (P) Ltd. v. State of Maharashtra, (2019) 20 SCC 119, para 13.

[59]2021 SCC OnLine SC 157.

[60]Union of India  v. Dhanwanti Devi, (1996) 6 SCC 44, para 9; Krishena Kumar v. Union of India,. (1990) 4 SCC 207, para 19; Director of Settlementsv. M.R. Apparao,(2002) 4 SCC 638, para 7; Nevada Properties (P) Ltd. v. State of Maharashtra, (2019) 20 SCC 119, para 13.

[61]Shah Faesal v. Union of India, (2020) 4 SCC 1, para 25; Director of Settlements v. M.R. Apparao, (2002) 4 SCC 638.

[62]Union of India v. Dhanwanti Devi, (1996) 6 SCC 44, paras 9 and 10; Krishena Kumar v. Union of India, (1990) 4 SCC 207, paras 19 and 20; Director of Settlementsv. M.R. Apparao, (2002) 4 SCC 638, para 7; Nevada Properties (P)Ltd. v. State of Maharashtra (2019) 20 SCC 119, para 13

[63]Director of Settlements v. M.R. Apparao, (2002) 4 SCC 638, para 7; Also see Fibre Boards (P)Ltd. v. CIT, (2015) 10 SCC 333, para 31.

[64]2021 SCC OnLine SC 157.

[65]2021 SCC OnLine SC 157.

[66]2021 SCC OnLine SC 473, paras 29 and 40.

[67]http://www.scconline.com/DocumentLink/0Vi7sQsH.

[68]http://www.scconline.com/DocumentLink/Ehv7iE72.

[69]Project Director, National Highways Authority of India v. M. Hakeem, 2021 SCC OnLine SC 473, paras 15 and 16.

[70]http://www.scconline.com/DocumentLink/3610ik0w.

[71]Project Director, National Highways Authority of India v. M. Hakeem, 2021 SCC OnLine SC 473, paras 17-20.

[72] National Highways Authority of India v. M. Hakeem, 2021 SCC OnLine SC 473, paras 21-28.

[73](2006) 11 SCC 181.

[74]2021 SCC OnLine SC 157.

[75](2018) 11 SCC 328.

[76]National Highways Authority of India v. M. Hakeem, 2021 SCC OnLine SC 473, para 40.

[77](2006) 11 SCC 181.

[78]2021 SCC OnLine SC 157.

[79](2018) 11 SCC 328.

[80](2018) 11 SCC 328.

802021 SCC OnLine SC 473.

81Dirk India (P) Ltd. v. Maharashtra State Electricity Generation Co. Ltd.,2013 SCC Online Bom 481, para 14; Wind World (India) Ltd.v. Enercon GmbH, 2017 SCC Online Bom 1147, para 16.

82Nussli Switzerland Ltd. v. Organising Committee Commonwealth Games, 2010, 2014 SCC OnLine Del 4834, para 34; State Trading Corpn. of India Ltd. v. Toepfer International Asia Pte Ltd., 2014 SCC OnLine Del 3426, para 7; Cybernetics Network (P) Ltd.v. Bisquare Technologies (P) Ltd., 2012 SCC OnLine Del 1155; Puri Construction (P) Ltd. v. Larsen & Tourbo Ltd., 2015 SCC OnLine Del 9126, paras 115-118.

83http://www.scconline.com/DocumentLink/XRnQ45N9.

84COMAP 2 of 2021, decided on 22-3-2021 (High Court of Karnataka).

85(2006) 11 SCC 181.

[81]Padma Mahadev v. Sierra Constructions, COMAP 2 of 2021, decided on 22-3-2021 (High Court of Karnataka), para 16.

[82]Padma Mahadev v. Sierra Constructions COMAP 2 of 2021, decided on 22-3-2021 (High Court of Karnataka), para 22.

[83]Section 43(4) of the Arbitration Act.

[84](2006) 11 SCC 181.

[85]Gayatri Balaswamy v. ISG Novasoft Technologies Ltd., 2014 SCC OnLine Mad 6568, paras23, 24, 29, 30, 39, 51-53; ISG Novasoft Technologies Ltd.v. Gayatri Balasamy, 2019 SCC OnLine Mad 15819, para 42.

[86]Kurra Venkateshwara Rao v. Competent Authority, CMAs No. 987-993 & 1014 of 2008, decided on 1-5-2020 (Andhra Pradesh High Court, DB).

[87]Saptarishi Hotels (P) Ltd. v. National Institute of Tourism & Hospitality Management, 2019 SCC OnLine TS 1765.

[88]Kurra Venkateshwara Rao v. Competent Authority, CMAs No. 987-993 & 1014 of 2008, decided on 1-5-2020 (DB)  paras 28, 34.

[89] Section 34(1) of the Arbitration and Conciliation Act, 1996 reads as under:

34. Application for setting aside arbitral award.—(1) Recourse to a court against an arbitral award may be made by an application for setting aside such award in accordance with sub-ss. (2) and (3).”

[90]High Court of Gujaratv. Gujarat Kishan Mazdoor Panchayat, (2003) 4 SCC 712, paras 35 and36.

[91]Justice G.P. Singh, Principles of Statutory Interpretation (12th Edn., 2011) p. 341; National and Grindlays Bank Ltd.v. Municipal Corpn.of Greater Bombay,(1969)1 SCC 541, para 5; Principles of Statutory Interpretation (12th Edn., 2011), p. 341; Rohitash Kumarv. Om Prakash Sharma, (2013) 11 SCC 451; J.K. Lakshmi Cement Ltd.v. CTO, (2016) 16 SCC 213, para 34.

[92]J.K. Lakshmi Cement Ltd.v. CTO, (2016) 16 SCC 213, para 34; Ultratech Cement Ltd.v. State of Rajasthan, 2020 SCC OnLine SC 582, para 102.

[93]National and Grindlays Bank Ltd.v. Municipal Corpn.of Greater Bombay,(1969) 1 SCC 541, para 5; Doypack Systems (P)Ltd.v. Union of India (1988) 2 SCC 299, para 61; J.K. Lakshmi Cement Ltd.v. CTO, (2016) 16 SCC 213, para 35; Rohitash Kumarv. Om Prakash Sharma,(2013) 11 SCC 451, para 11.

[94]J.K. Lakshmi Cement Ltd.v. CTO, (2016) 16 SCC 213, para 34; Doypack Systems (P) Ltd.v. Union of India (1988) 2 SCC 299, para 61.

[95] Justice G.P. Singh, Principles of Statutory Interpretation (12th Edn., 2011) pp. 341-342.

[96]2021 SCC OnLine SC 473, para 46.

[97]2014 SCC OnLine Mad 6568.

[98]Gayatri Balaswamy v. ISG Novasoft Technologies Ltd.,2014 SCC OnLine Mad 6568, paras 30-39.

[99]Gayatri Balaswamy v. ISG Novasoft Technologies Ltd.,2014 SCC OnLine Mad 6568, paras 50-52.

[100]Gayatri Balaswamy v. ISG Novasoft Technologies Ltd.,2014 SCC OnLine Mad 6568, paras 50-52.

[101](2006) 11 SCC 181.

[102]Section 115, Code of Civil Procedure, 1908.

[103]ISG Novasoft Technologies Ltd. v. Gayatri Balasamy, 2019 SCC OnLine Mad 15189, paras 41 and 42.

[104]2021 SCC OnLine SC 473, paras 29-37.

[105]S. 115(1) of the Code of Civil Procedure, 1908 reads as follows:

115. Revision.—(1) The High Court may call for the record of any case which has been decided by any court to such High Court and in which no appeal lies thereto, and if such subordinate Court appears—

(a) to have exercised a jurisdiction not vested in it by law; or

(b) to have failed to exercise a jurisdiction so vested, or

(c) to have acted in exercise of its jurisdiction illegally or with material irregularity.

the High Court may make such order in the case as it thinks fit:

Provided that the High Court shall not, under this section, vary or reverse any order made, or any order deciding an issue, in the course of a suit or other proceeding, except where the order, if it had been made in favour the party applying for revision, would have finally disposed of the suit or other proceedings.”                                                                                                                                                                                                                                                     (emphasis supplied)

[106]2019 SCC OnLine TS 1765, paras 27, 34 and 35.

[107]Saptarishi Hotels (P) Ltd. v. National Institute of Tourism & Hospitality Management, 2019 SCC OnLine TS 1765, para 34.

[108]R.S. Jiwani v. Ircon International Ltd., 2009 SCC OnLine Bom 2021, paras 30-38; J.G. Engineers (P)Ltd. v. Union ofIndia, (2011) 5 SCC 758, para 25.

[109]Para 3, Statement of Objects and Reasons, Arbitration and Conciliation Act, 1996.

[110]Section 5 of the Arbitration Act.

[111]2021 SCC OnLine SC 473.

[112]Gayatri Balaswamy v. ISG Novasoft Technologies Ltd., 2014 SCC OnLine Mad 6568; ISG Novasoft Technologies Ltd.v. Gayatri Balasamy, 2019 SCC OnLine Mad 15819.

[113]Saptarishi Hotels (P) Ltd. v. National Institute of Tourism & Hospitality Management, 2019 SCC OnLine TS 1765.

[114]Kurra Venkateshwara Rao v. Competent Authority, CMAs No. 987, 988, 989, 990, 991, 992 993 & 1014 of 2008, decided on 1-5-2020 (Andhra Pradesh High Court, DB).

[115]Gayatri Balaswamy v. ISG Novasoft Technologies Ltd., 2014 SCC OnLine Mad 6568, para 51; Kurra Venkateshwara Rao v. Competent Authority, CMAs No. 987-993 & 1014 of 2008, decided on 1-5-2020 (DB), para 28; Saptarishi Hotels (P) Ltd. v. National Institute of Tourism & Hospitality Management, 2019 SCC OnLine TS 1765, paras 34 and35.

[116]Dyna Technologies (P) Ltd. v. Crompton Greaves Ltd., (2019) 20 SCC 1, para 24.

Case BriefsHigh Courts

Jammu & Kashmir and Ladakh High Court: Sanjay Dhar, J., clarified the difference between Interim Award and Interim Order. The Bench stated,

“While passing an order under Section 17 (1)(ii)(e) of the Act of 1996, an arbitral Tribunal would be justified in considering the prima facie case, the balance of convenience and similar other factors at the time of passing such an order, while making an interim award under Section 31 (6) of the Act, the arbitral Tribunal has to be satisfied that there is an admission or acknowledgment of liability on the part of the party against which the award is proposed to be made.”

Background

The respondent-firm, being a supplier of defence equipments to the Indian Army and Para Military Forces, was given a contract for supply of 6250 pairs of Boot Anti Mine Infantry (hereinafter referred to as ‘BAMI’). As per clause Part IV i.e Special conditions of supply order of the Tender Agreement, the appellant had to make the payment to the respondent-firm instantly. It was alleged by the respondent-firm that no such payment had been made to it.

The respondent-firm claimed to have taken credit limit from the Axis Bank for the aforesaid supply and because of the delay in the payment, it had suffered a grave financial hardship and  was in urgent need of Rs.5,50,00,000/- against the outstanding payment of Rs.,16,80,00,000/- as interim relief so that the Bank would not declare it as NPA.

Allegations against the Respondent-firm

It was submitted by the government that delay in processing the bills had occurred due to non submission of correct documents by the respondent-firm. It was further submitted that certain complaints were received by the petitioner with regard to the shoes supplied by the respondent firm to the effect that several mine blast incidents had taken place, due to which the wearers of the shoes had lost limbs/suffered amputation. Accordingly, the petitioner had issued a defect report to the respondent-firm highlighting failure of the BAMI. Therefore, the government argued that any financial hardship suffered by the respondent-firm was due to its own misconduct as it had supplied substandard quality of BAMI which never met the General Staff Qualitative Requirements leading to amputations/loss of limbs in mine blast incidents and, therefore, the respondent-firm was not entitled to any interim relief.

Decision of the Arbitrator

Noticing that respondent-firm had supplied 6250 pairs of BAMI to the government and the BAMI successfully qualified the blast test and field trials of the Technical Evaluation done by the TEC constituted by the government and that the BAMI supplied by the respondent-firm were also inspected physically by the Inspection and Acceptance Board constituted by the petitioner, the Arbitrator had held that the respondent-firm was entitled to interim award amounting to Rs.5,50,00,000/- under the provisions of Section 31(6) of the Arbitration and Conciliation Act, 1996.

Observation and Analysis

Pursuing the impugned interim award, the Bench stated that though the Arbitrator had taken into consideration the factors, like prima facie case, the balance of convenience and irreparable loss, but the Tribunal had not given any finding as to whether there was any admission of claim on the part of the government. The Bench held that without there being a finding on this aspect of the matter, it was not open to the Arbitrator to pass an interim award in favour of the respondent-firm simply because it was reeling under the burden of loan and interest accruing thereon. Hence, the Bench held that the Arbitrator was not deciding an application under Section 17 (1)(ii)(e) of the Act, 1996, but it was deciding an application under section 31 (6) of the said Act and, it had landed itself into an error by applying the parameters necessary for passing an order under Section 17 (1)(ii)(e).

Interim Order vs Interim Award

Opining that an interim award cannot be equated to an interim order that can be passed by an arbitral Tribunal under Section 17 (1)(ii)(e) of the Act of 1996, the Bench stated,

“There is a clear distinction between the powers of an arbitral Tribunal to pass orders by way of an interim measures in terms of Section 17 (1)(ii)(e) of the Act of 1996 and an interim award in terms of Section 31 (6) of the said Act.”

While passing an order under Section 17 (1)(ii)(e) of the Act of 1996, an arbitral Tribunal would be justified in considering the prima facie case, the balance of convenience and similar other factors at the time of passing such an order, while making an interim award under Section 31 (6) of the Act, the arbitral Tribunal has to be satisfied that there is an admission or acknowledgment of liability on the part of the party against which the award is proposed to be made and such an admission should be clear, unambiguous and definite and should not require any evidence to prove at the stage of the trial.

Verdict

In the backdrop of above, it was held that the Arbitrator had, while passing the impugned interim award, committed a patent illegality appearing on the face of it and, thus, the same deserved to be quashed and set aside.

Accordingly, the impugned interim award passed by the Arbitrator was quashed and the application of respondent-firm for grant of interim award was remanded back to the Arbitrator with a direction to consider the same afresh on merits. [Union of India v. Gee Kay Engineering Industries, 2021 SCC OnLine J&K 678, decided on 16-09-2021]


Kamini Sharma, Editorial Assistant has reported this brief.


Appearance by:

For the Union of India: Vishal Sharma ASGI

For the Respondent-firm: M/S Guneet Choudhary & Ashwani Khajuria Advocates

Law School NewsOthers

About Legal Expatiate

Legal Expatiate is an initiative in lockdown to bring together the best talent of this country and to infuse them with a nation-first attitude. An active forum of researchers, professionals, and students where they arrange webinars of Senior Advocates, High Court Judges and other luminaries, where they arrange various competitions like Research Article Writing Competition, Moot Court Competitions, Essay Competition, Quiz Competition, Certificate Courses etc in order to groom research and advocacy skills of law learners.

About the Course

Brings to you the well experienced, named and renowned personality in the field of Arbitration Laws from at your doorstep through online sessions from 23.9.2021 to 27.9.2021.

For the complete and proper understanding of Research, tried covering the major aspects of it in four days by the best experienced guest speaker


DAY – 1 [6PM to 7.30PM]


Topic – Overview of Arbitration Act with specific reference to

  1. arbitration clause (with variations)
  2. notice of commencement of arbitration
  3. Section 8 petition to refer disputes to arbitration
  4. Section 9 petition
  5. Section 17 petition
  6. Section 11 petition for appointment of an arbitrator

Speaker – Suryanarayana Raju

Asst. Professor, HNLU, Chattisgarh

 


DAY – 2 [6PM to 7.30PM]


Topic –  1. Draft a statement of claims

  1. Draft a statement of defence
  2. Draft a counterclaim
  3. Draft a rejoinder

Speaker – Amarjit Singh

Additional Director, Dept of Food Civil Supplies and Consumer Affairs, Punjab

17 years experience as an arbitrator

 


DAY – 3 [6PM TO 7.30PM]


Topic-

  1. Draft questions for examination in chief for your witness
  2. Draft an affidavit to submit evidence for an arbitration proceeding
  3. Draft questions for cross-examination

4.Identify gaps/ create a final argument based on the response of the witness in cross-examination

  1. Prepare final arguments for arbitration

Speaker – Dr V. K. Bansal

Professor Emeritus, PU Head, Centre for study of laws, MGSIPA

53 Years experience as an arbitrator

 


Day 4 [6PM to 7.30PM]


Topic – 1. Draft petition for enforcement of the arbitral award

  1. Draft a petition for setting aside the final award
  2. Draft an appeal for setting aside interim relief under Section
  3. Draft an appeal for setting aside interim measures awarded by the tribunal under Section 17
  4. Draft an appeal against refusal to aside an arbitral award under Section 34

Speaker – Adv Rajesh Rai

Managing Partner, RR Legal partners LLP

21 years as an arbitration counsel

 


Day 5 [6PM to 7.30PM]


Topic – 1. Draft an application seeking extension of time for making Arbitral Award (Section 29-A)

  1. Draft an application/ letter for correction or clarification of Award (Section 33)
  2. Draft an application seeking stay of Arbitral Award (Section 36)
  3. Enforcement of foreign arbitral awards in India
  4. 2019 amendments to the Arbitration & Conciliation Act, 1996

Speaker – Adv A. R. Gupta

Advocate, High Court of Gujarat and Supreme Court of India

30 years as an arbitration counsel

 

 

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Last Date of Registration:

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Case BriefsSupreme Court

Supreme Court: A Division Bench comprising of Indira Banerjee and J.K. Maheshwari, JJ. held that once an Arbitral Tribunal is constituted, the court would not take up for consideration and apply its mind to an application for an interim measure, unless the remedy of applying to the arbitral tribunal for interim relief is inefficacious. However, this bar does not operate where already the application has been taken up for consideration and the court has applied its mind.

Questions of Law

The Supreme Court was deciding two questions of law:

(i) Whether the court has the power to entertain an application under Section 9(1) of the Arbitration and Conciliation Act, 1996, once an Arbitral Tribunal has been constituted and if so, what is the true meaning and purport of the expression “entertain” in Section 9(3) of the Arbitration Act?

(ii) Whether the court is obliged to examine the efficacy of the remedy under Section 17, before passing an order under Section 9(1) of the Arbitration Act, once an Arbitral Tribunal is constituted?

Section 9(1) of the Arbitration Act enables a party to an arbitration agreement to apply to a court for interim measures of protection before or during the arbitral proceedings, or at any time after an award is made and published, but before the award is enforced in accordance with Section 36 of the Arbitration Act. Further, Section 9(3) provides that once an Arbitral Tribunal has been constituted, the court shall not entertain an application under sub-section (1), unless the court finds that circumstances exist which may not render the remedy provided under Section 17 efficacious. Under Section 17, an Arbitral Tribunal has the same power to grant interim relief as the court.

Factual Matrix and Appeal

A commercial dispute arose out of a Cargo Handling Agreement entered into between ArcelorMittal Nippon Steel (India) Ltd. and Essar Bulk Terminal Ltd. ArcelorMittal invoked the arbitration clause. Essar did not respond. Thereafter, ArcelorMittal approached Gujarat High Court under Section 11 of Arbitration Act for appointment of Arbitral Tribunal. Subsequently, both parties filed applications under Section 9(1) in Commercial Court seeking interim measures. The Commercial Court heard both the applications and reserved the orders. Meanwhile, the High Court appointed an Arbitral Tribunal. Pursuant to this, ArcelorMittal requested the Commercial Court to refer both the applications filed under Section 9 to the now-constituted Arbitral Tribunal. This prayer was however rejected by the Commercial Court.

ArcelorMittal challenged the order of the Commercial Court before the High Court, which was dismissed. Aggrieved, ArcelorMittal approached the Supreme Court.

Analysis and Observations

Determining the answer to the questions of law (mentioned above), the Supreme Court noted that Section 9(3) of Arbitration Act has two limbs. The first limb prohibits an application under Section 9(1) from being entertained once an Arbitral Tribunal has been constituted. The second limb carves out an exception to that prohibition, if the court finds that circumstances exist which may not render the remedy provided under Section 17 efficacious.

Further, to discourage the filing of applications for interim measures in courts under Section 9(1) of the Arbitration Act, Section 17 clothes the Arbitral Tribunal with the same powers to grant interim measures, as the court under Section 9(1). In fact, an order passed by the Arbitral Tribunal under Section 17 is deemed to be an order of court for all purposes and is enforceable as an order of court. The Court opined:

“With the law as it stands today, the Arbitral Tribunal has the same power to grant interim relief as the Court and the remedy under Section 17 is as efficacious as the remedy under Section 9(1). There is, therefore, no reason why the Court should continue to take up applications for interim relief, once the Arbitral Tribunal is constituted and is in seisin of the dispute between the parties, unless there is some impediment in approaching the Arbitral Tribunal, or the interim relief sought cannot expeditiously be obtained from the Arbitral Tribunal.”

Considering the true meaning and purport of “entertain” in Section 9(3), the Court summarised a catena of judicial precedents and noted that it is now well settled that the expression “entertain” means to consider the issues raised by application of mind. The court entertains a case when it takes up a matter for consideration. The process of consideration can continue till the pronouncement of judgment. That, however, makes no difference. The question is whether the process of consideration has commenced, and/or whether the court has applied its mind to some extent before the constitution of the Arbitral Tribunal. If so, the application can be said to have been entertained before the constitution of the Arbitral Tribunal.

Opining that the intent behind Section 9(3) was not to turn back the clock and require a matter already reserved for orders to be considered in entirety by the Arbitral Tribunal under Section 17 of the Arbitration Act, the Court observed:

“On a combined reading of Section 9 with Section 17 of the Arbitration Act, once an Arbitral Tribunal is constituted, the court would not entertain and/or in other words take up for consideration and apply its mind to an application for interim measure, unless the remedy under Section 17 is inefficacious, even though the application may have been filed before the constitution of the Arbitral Tribunal. The bar of Section 9(3) would not operate, once an application has been entertained and taken up for consideration, as in the instant case, where hearing has been concluded and judgment has been reserved.”

The Court noted that even after an Arbitral Tribunal is constituted, there may be myriads of reasons why the Arbitral Tribunal may not be an efficacious alternative to Section 9(1). This could even be by reason of temporary unavailability of any one of the arbitrators by reason of illness, travel etc. Further, unless applications for interim measures are decided expeditiously, irreparable injury or prejudice may be caused to the party seeking interim relief. Therefore, it could never have been the legislative intent that even after an application under Section 9 is finally heard, relief would have to be declined and the parties be remitted to the remedy under Section 17. Elaborating, the Court explained:

“When an application has already been taken up for consideration and is in the process of consideration or has already been considered, the question of examining whether remedy under Section 17 is efficacious or not would not arise. The requirement to conduct the exercise arises only when the application is being entertained and/or taken up for consideration.”

Lastly, but importantly, the Supreme Court clarified that even if an application under Section 9 had been entertained before the constitution of the Arbitral Tribunal, the court always has the discretion to direct the parties to approach the Arbitral Tribunal, if necessary, by passing a limited order of interim protection.

Decision

In such view of the matter, the Supreme Court held that the High Court rightly directed the Commercial Court to proceed to complete the adjudication. It was however clarified that it shall not be necessary for the Commercial Court to consider the efficacy of relief under Section 17, since the application under Section 9 has already been entertained and considered by the Commercial Court.  [ArcelorMittal Nippon Steel (India) Ltd. v. Essar Bulk Terminal Ltd., 2021 SCC OnLine SC 718, decided on 14-9-2021]


Tejaswi Pandit, Senior Editorial Assistant has reported this brief.

Case BriefsSupreme Court

Supreme Court: A Division Bench comprising of L. Nageswara Rao and S. Ravindra Bhat, JJ. upheld the arbitral award of Rs 2782.33 crore plus interest made by the Arbitral Tribunal in favour of  Delhi Airport Metro Express (P) Ltd. The Supreme Court reversed the judgment of the Division Bench of the Delhi High Court which had interfered with the Tribunal’s award. While so deciding, the Supreme Court also observed that:

“There is a disturbing tendency of courts setting aside arbitral awards, after dissecting and reassessing factual aspects of the cases to come to a conclusion that the award needs intervention …”

Following is a comprehensive report of Supreme Court’s analysis of law on the subject and merits of the appeal.

Facts and Appeal

Delhi Metro Rail Corporation Ltd. (“DMRC”) entered into a ‘Concession Agreement’ with Delhi Airport Metro Express (P) Ltd. (“DAMEPL”) for design, installation, commissioning, operation and maintenance of the Airport Metro Express Line. Whereas, DMRC itself undertook design and construction of basic civil structure for the project. After completion of work, safety clearance were obtained from the Commissioner of Metro Railway Safety (“CMRS”) and commercial operations ensued in February 2011.

Defects emerged in the civil structure constructed by DMRC. DAMEPL issued a notice on 9-7-2012, asking DMRC to cure the defects in its works within a period of 90 days from the date of the notice, failing which it shall be treated as a breach having Material Adverse Effect on the Concessionaire (DAMEPL) under the Concession Agreement. Thereafter, on 8-10-2012, DAMEPL issued a notice terminating the Concession Agreement as the defects were not cured within 90 days, resulting in an Event of Default under the Agreement.

DMRC invoked arbitration under the Concession Agreement. The Arbitral Tribunal made an award of Rs 2782.33 crore plus interest in favour of DAMEPL. DMRC filed a petition under Section 34 of the Arbitration and Conciliation Act, 1996 for setting aside the arbitral award, which was dismissed by a Single Judge. However, on DMRC’s appeal under Section 37, a Division Bench partly set aside the award passed by the Arbitral Tribunal. Aggrieved, DAMEPL approached the Supreme Court.

Law

Contours of Court’s power to review arbitral awards

Cumulatively reading the UNCITRAL Model Law and Rules, the legislative intent with which the Arbitration and Conciliation Act, 1996 is made, and Sections 5 and 34 of the 1996 Act, the Supreme Court noted that judicial interference with the arbitral awards is limited to the grounds in Section 34. While deciding applications filed under Section 34 of the Act, courts are mandated to strictly act in accordance with and within the confines of Section 34, refraining from appreciation or re-appreciation of matters of fact as well as law. The Court relied on SsangYong Engg. & Construction Co. Ltd. v. NHAI, (2019) 15 SCC 131.

The Court said that the limited grounds available to courts for annulment of arbitral awards are well known to legally trained minds. However, the difficulty arises in applying the well-established principles for interference to the facts of each case that come up before the courts. It was observed:

“There is a disturbing tendency of courts setting aside arbitral awards, after dissecting and reassessing factual aspects of the cases to come to a conclusion that the award needs intervention and thereafter, dubbing the award to be vitiated by either perversity or patent illegality, apart from the other grounds available for annulment of the award.”

The Court was of the opinion that such approach would lead to corrosion of the object of the 1996 Act and the endeavours made to preserve this object, which is minimal judicial interference with arbitral awards.

Patent illegality

Observing that ‘patent illegality’ should be illegality which goes to root of the matter, the Court explained that:

“[E]very error of law committed by the Arbitral Tribunal would not fall within the expression ‘patent illegality’. Likewise, erroneous application of law cannot be categorised as patent illegality. In addition, contravention of law not linked to public policy or public interest is beyond the scope of the expression ‘patent illegality’.”

The Court restated that permissible grounds for interference with a domestic award under Section 34(2-A) on the ground of ‘patent illegality’ is when the arbitrator takes a view which is not even a possible one, or interprets a clause in the contract in such a manner which no fair-minded or reasonable person would, or if the arbitrator commits an error of jurisdiction by wandering outside the contract and dealing with matters not allotted to them. An arbitral award stating no reasons for its findings would make itself susceptible to challenge on this account. The conclusions of the arbitrator which are based on no evidence or have been arrived at by ignoring vital evidence are perverse and can be set aside on the ground of patent illegality. Also, consideration of documents which are not supplied to the other party is a facet of perversity falling within the expression ‘patent illegality’.

Public policy

Next, Section 34(2)(b) refers to the other grounds on which a court can set aside an arbitral award. If a dispute which is not capable of settlement by arbitration is the subject-matter of the award or if the award is in conflict with public policy of India, the award is liable to be set aside. The Court summarised that the award would be in conflict with public policy of India only when it is induced or affected by fraud or corruption or is in violation of Section 75 or Section 81 of the 1996 Act, if it is in contravention with the fundamental policy of Indian law or if it is in conflict with the most basic notions of morality or justice. It was explained:

“[C]ontravention of a statute only if it is linked to public policy or public interest is cause for setting aside the award as being at odds with the fundamental policy of Indian law.”

Conscience of the court and Morality

Lastly, the Court said that if an arbitral award shocks the conscience of the court, it can be set aside as being in conflict with the most basic notions of justice. It was observed:

“The ground of morality in this context has been interpreted by this Court to encompass awards involving elements of sexual morality, such as prostitution, or awards seeking to validate agreements which are not illegal but would not be enforced given the prevailing mores of the day”

Merits

Validity of the termination notice and consequences of the CMRS sanction

Actual date of termination

By referring to certain paragraphs of the award, the High Court held that there was confusion in the mind of the Arbitral Tribunal relating to the actual date of termination, which would have a material bearing on the exegesis of the article in the Concession Agreement dealing with termination by DAMEPL for DMRC Event of Default. However, the Supreme Court disagreed. Reading the arbitral award as a whole, the Supreme Court found that there was no ambiguity in the findings of the Arbitral Tribunal regarding the time given for curing the defects and the effective date of termination of the Concession Agreement.

Period for curing the defects

An ancillary issue arose that whether the period for curing the defects was 180 days or 90 days under the Concession Agreement. On this, the Court was of the view that construction of a provision of the Concession Agreement was within the domain of the Arbitral Tribunal. The view taken by the Arbitral Tribunal that the defects had to be cured within 90 days from the date of the cure notice, failing which DAMEPL was entitled to terminate the Concession Agreement, was a possible interpretation of the relevant article.

Certificate of fitness

Next, the High Court had held that the Tribunal committed a grave error in ignoring the CMRS fitness certificate as the Tribunal lost sight of the binding nature of the certificate. On the basis of the certificate issued by the Commissioner, DMRC argued that all the defects pointed out by DAMEPL had been cured.

The Supreme Court said that the certificate by itself could not come to the rescue of DMRC to show that the defects pointed out by DAMEPL were cured within the expiry of 90 days from 9-7-2012. The Court held that the Arbitral Tribunal’s finding that the defects were not cured is one of fact which could not be interfered with by the court. The issue before the Tribunal was whether the defects were cured within 90 days from the notice dated 9-7-2012 and the fitness certificate dated 18-1-2013 was not relevant for deciding the said issue.

The Supreme Court concluded that the High Court’s judgment that award of the Arbitral Tribunal suffered from patent illegality and shocks the conscience of the court,  was erroneous. It was observed:

“The members of the Arbitral Tribunal, nominated in accordance with the agreed procedure between the parties, are engineers and their award is not meant to be scrutinised in the same manner as one prepared by legally trained minds. In any event, it cannot be said that the view of the Tribunal is perverse. …

As the arbitrator is the sole judge of the quality as well as the quantity of the evidence, the task of being a judge on the evidence before the Tribunal does not fall upon the court in exercise of its jurisdiction under Section 34.”

Adjusted Equity

Another issue arose as to the computation of Termination Payment. The Arbitral Tribunal focused inter alia on ‘Adjusted Equity’ as one of the components of Termination Payment. The Tribunal had held that the expression ‘Adjusted Equity’ should include the money brought in by DAMEPL’s promoter and concluded that an amount of Rs 611.95 crore was used as expenses, thereby qualifying as ‘Concessionaire’s Capital Costs’ under the Concession Agreement. Whereas, the High Court concluded that the expression ‘Adjusted Equity’ in the Concession Agreement should be calculated by taking into account only the share capital of DAMEPL.

Having carefully examined the Concession Agreement and the findings recorded by the Tribunal and the High Court, the Supreme Court found that opinion of the Tribunal on inclusion of Rs 611.95 crore under ‘Adjusted Equity’ was a reasonable and possible view. It was observed:

“Even assuming the view taken by the High Court is not incorrect, we are afraid that a possible view expressed by the Tribunal on construction of the terms of the Concession Agreement cannot be substituted by the High Court. This view is in line with the understanding of Section 28(3) of the 1996 Act as a ground for setting aside the arbitral award …”

The Court also did not find any fault with the Tribunal’s approach that the understanding of the term equity as per the Companies Act, 2013 was not relevant for the purposes of determining ‘Adjusted Equity’ in light of the express definition of the term in the Concession Agreement. It was observed:

“As has been held in SsangYong Engg. & Construction Co. Ltd. v. NHAI, (2019) 15 SCC 131, mere contravention of substantive law as elucidated in Associate Builders v. DDA, (2015) 3 SCC 49 is no longer a ground available to set aside an arbitral award.”

In view of the foregoing, the Supreme Court set aside the findings of the High Court and upheld the award by the Arbitral Tribunal in respect of computation of Termination Payment.

Decision

Having concluded as above, the Supreme Court allowed the appeal filed by DAMEPL and set aside the judgment of the Division Bench of the High Court.

It may also be noted that the Supreme Court simultaneously considered a separate appeal filed by DMRC against the same judgment of the High Court in relation to issues which went against DMRC such as refusal to grant relief of specific performance of the Concession Agreement, waiver of termination notice due to DAMEPL’s conduct, etc. However, the Court did not find merit in any of the submissions advanced by DMRC in its appeal, which was consequently dismissed. [Delhi Airport Metro Express (P) Ltd. v. DMRC, 2021 SCC OnLine SC 695, decided on 9-9-2021]


Tejaswi Pandit, Senior Editorial Assistant has reported this brief.

OP. ED.SCC Journal Section Archives

The jurisdiction of the Arbitral Tribunal emanates from the agreement between the parties.1 Therefore, the existence of the arbitration agreement between the parties is a sine qua non for reference of the disputes between parties to arbitration.2

 

The Arbitration and Conciliation Act, 1996 (“the Act”) is the law governing arbitration proceedings in India. Section 7 of the Act defines an “arbitration agreement” to mean an agreement by the parties to submit disputes that have arisen or which may arise between them in respect of a defined legal relationship to arbitration.3 Further, Section 7(3) of the Act mandates that an arbitration agreement shall “be in writing”. Under the Act, an arbitration agreement is deemed to be in writing if : (a) it is contained in a document signed by the parties;4 (b) an exchange of letters, telex, telegrams or other means of telecommunication which provide a record of the agreement;5 (c) an exchange of statement of claim and defence in which the existence of the agreement is alleged by one party and not denied by the other;6 or (d) a contract between the parties making a reference to another document containing an arbitration clause indicating an intention to incorporate the arbitration clause from such other document into the contract.7

 

This article seeks to examine the scope and purport of Section 7(4)(c) of the Arbitration and Conciliation Act, 1996 which stipulates that an arbitration agreement is deemed to be in writing if it is contained in an exchange of statement of claim and defence wherein the existence of arbitration agreement is alleged by one party and not denied by the other. In order to accomplish the aforesaid objective, the authors first examined the legislative history of Section 7 of the Act resulting in its enactment. Thereafter, the authors briefly examined the divergent views expressed by the High Courts and the Supreme Court of India on the scope and meaning of Section 7(4)(c) of the Act. The authors concluded by summarising their views on the true scope and purport of the said sub-section.

 

Legislative History of Section 7 of the Arbitration and Conciliation Act, 1996

Prior to enactment of Section 7 of the Act, there was no provision under Indian laws that was pari materia to the said section. The Arbitration Act has been enacted to consolidate and amend the law relating to arbitration in India taking into account the United Nations Commission on International Trade Law’s Model Law on International Commercial Arbitration (“Uncitral Model Law”).8 Thus, Section 7 of the Arbitration Act mirrors Article 7 of the Uncitral Model Law, 1985.9 Therefore, the reports setting out the historical background for formulation of the Uncitral Model Law is relevant in construing Section 7(4)(c) of the Arbitration Act. In fact, in the recent past, the Supreme Court of India has examined the provisions of the Uncitral Model Law while interpreting the provisions of the Arbitration Act.10 It is settled that special committee reports preceding the enactment can be looked into for interpreting the meaning of a statute that is ambiguous and unclear or for appreciating the background leading to the enactment of the provision.11

 

The reports/deliberations at the time of formulating the Uncitral Model Law assume significance for another purpose. One of the primary reasons for formulating Uncitral Model Law was to evolve a harmonised legal framework for settlement of international commercial disputes.12 Moreover, in India, it is settled law that the provisions of the domestic statute must be read to enhance their conformity with the global legal regime.13 Therefore, the historical background will be extremely critical in interpreting Section 7(4)(c) of the Arbitration Act. Hence, this section briefly examines the legislative history of Article 7 of the Uncitral Model Law.

 

In 1976, the Asian-African Legal Consultative Committee (“Aalcc”)14 invited the United Nations Commission on International Trade Law (“Uncitral”) to consider the possibility of drafting a Protocol to the United Nations Convention on the Recognition and Enforcement of Foreign Awards, 1958 (“NYC”) to redress several issues arising from divergent interpretations of the NYC.15 In the light of the said proposal, the Uncitral requested the Secretary General to prepare a report on the application and interpretation of the NYC.16 Accordingly, the Secretary General of the Uncitral submitted his report on further steps to be taken by the Uncitral in respect of international commercial arbitration.17 The participants at the consultative meeting unanimously agreed that the preparation of a Model Law on arbitration (instead of a Protocol) would be the most appropriate way to achieve desired uniformity.18 Accordingly, Uncitral entrusted the work to prepare draft Model Law on international commercial arbitration to Working Group on International Contract Practices.19

 

Since an arbitration agreement between the parties is the edifice on which the arbitral proceedings are structured, it was considered necessary to stipulate the requirements of a valid arbitration agreement in the Uncitral Model Law in line with the provisions of the NYC.20 Therefore, like the NYC, the Uncitral Model Law defines “arbitration agreement” to include an arbitral clause in a contract or an arbitration agreement signed by the parties and/or contained in an exchange of letters or telegrams.21 Additionally, the Working Group felt that arbitration agreement should be defined to include arbitration clauses incorporated by reference to other documents and also cover scenarios wherein parties appeared before the Arbitral Tribunal without contesting its jurisdiction.22 However, none of the initial drafts23 of the Uncitral Model Law contained provisions akin to Section 7(4)(c) of the Arbitration Act which stipulates that an arbitration agreement comes into existence by exchange of statement of claim and defence wherein the existence of arbitration agreement is alleged by one party and not denied by the other.

 

In fact, it appears that a provision akin to Section 7(4)(c) of the Arbitration Act was incorporated in Uncitral Model Law at the suggestion of Bulgarian representative at the 320th Committee meeting of the Uncitral held in June 1985. In the said meeting, the Bulgarian representative proposed to amend draft Article 7(2) of the Uncitral Model Law that defined “agreement in writing” to include “an exchange of statements in which neither party denied the existence of an [arbitration] agreement”. This suggestion was based on the fact that some countries recognised such arbitration agreements.24 In order to give effect to the recommendation of the Bulgarian observer, the Australian representative suggested that the concluding phrase of draft Article 7(2) of Uncitral Model Law be amended to read “or in an exchange of statement of claim and defence where one party alleges and the other party does not deny existence of an arbitration agreement”.25 This suggestion found favour with the Commission and was engrafted in Article 7(2) of the Uncitral Model Law.26 Amongst other things, such a provision seems to have been incorporated to cover scenarios wherein the reference of dispute to arbitration was based on the tacit conduct of the parties.26 Most importantly, the original intention appears to include all exchange of statements (and not merely exchange of statement of claim and defence) in which neither party denied the existence of arbitration agreement to qualify as an arbitration agreement in writing.

 

The Model Law was amended by Uncitral on 7-7-2006.27 Several suggestions were made to amend the language of Article 7(2) of the Uncitral Model Law, 1985 to clarify its true scope and purport. A careful study of the several amendments proposed to Article 7(2) of the Uncitral Model Law provides useful insights into the real scope and purport of Section 7(4)(c) of the Arbitration Act.

 

At the time of amending Uncitral Model Law in 2006, it was suggested that Article 7 of the Uncitral Model Law defining “agreement in writing” be amended to read “if is contained in statements of claim and defence [on the substance of the dispute] in which the existence of arbitration agreement is alleged by one party and not denied by the other.”28 The words “on the substance of the dispute” were sought to be added to exclude procedural submissions such as notice of arbitration on the ground that the addressee may not carefully review and reply to such procedural submissions.28 Eventually, the said amendment was not adopted. Therefore, the aforesaid amendment makes it clear that the term “statement of claim and defence” have not been used restrictively in Article 7 of the Uncitral Model Law to be confined to pleadings before the Arbitral Tribunal, but also include any exchange of statements such as notice of arbitration alleging the existence of an arbitration agreement.

 

In fact, while considering changes to the Uncitral Model Law in 2006, suggestions were also made that the phrase “exchange of statement of claim and defence in which the existence of agreement is alleged by one party and not denied by the other” should be placed elsewhere in the Model Law because the said phrase did not deal with the writing requirement, but “with the existence and validity of an arbitration agreement”.29 However, in order to avoid confusion the text was retained in its original form. Therefore,it is clear that Section 7(4)(c) of the Arbitration Act does not merely stipulate a writing requirement but deals with the existence and validity of an arbitration agreement. Thus, the mere fact of the party not denying the existence of arbitration agreement alleged by other party is proof of its intention to refer disputes to arbitration.

 

There were also suggestions that the phrase “exchange of statement of claim and defence in which existence of agreement is alleged by one party and not denied by the other” in Article 7 of the Uncitral Model Law should be deleted because (i) the words “statement of claim and defence” were misleading as reference to existence of arbitration agreement was made at the earlier stage of arbitration proceedings i.e. at the time of issuance of arbitration; and (ii) the subject-matter was already covered under Article 4 read with Article 16(2) of the Uncitral Model Law on arbitration and no further provision was needed.30 Article 4 of the Uncitral Model Law stipulates that a party is deemed to have waived its right to object to non-compliance with a derogable provision if it does not object to such non-compliance and proceeds with arbitration. Article 16(2) of the Uncitral Model Law stipulates that any plea regarding the jurisdiction of the Arbitral Tribunal has to be taken at the earliest instance and not later than submission of statement of defence. After deliberations, the prevailing view was that the scope of Article 7 of Uncitral Model Law was much wider than scenarios covered under Article 4 and Article 16(2) of the Uncitral Model Law. Unlike Article 7, Article 4 read with Article 16(2) of the Uncitral Model Law did not permit a positive presumption of the existence of an arbitration agreement by mere exchange of statement of claims and defence.31 Therefore, the Working Group retained the phrase “exchange of statements of claim and defence in which the existence of agreement is alleged by one party and not denied by the other.”

 

Finally, at the Forty-fourth Session, the Working Group also considered amendment to Article 7 of the Uncitral Model Law to read “Furthermore, an arbitration agreement is in writing if it is contained in an exchange of written submissions in an arbitral or legal proceedings in which the existence of an agreement is alleged by one party and not denied by the other party in such submissions.”32 Another suggestion was made to amend Article 7 of the Uncitral Model Law to include more generic words to include situations where parties communicated on the merits of the dispute or scenarios wherein no arbitration agreement existed but a party nevertheless submitted the claim to arbitration which was not opposed by the other parties.33 However, the Working Group decided to retain the original text (i.e. Article 7 of the Uncitral Model Law) and not incorporate any of suggested amendments because the word “statement of claim” and “statement of defence” had well established and broad meanings in arbitral practice.32 The terms “written submissions” in the proposed amendment were held to be vague and imprecise.32 Therefore, it is clear that the terms “statement of claim and defence” in Article 7 of the Uncitral Model Law were not confined to pleadings filed before the Arbitral Tribunal, but have a wider connotation.

 

Therefore, a perusal of the preparatory works of Article 7 of the Uncitral Model Law makes it clear that the terms “statements of claim and defence” were not restricted to pleadings filed before the Arbitral Tribunal, but were used in a broader sense to include procedural submissions such as notice of arbitration. Moreover, Article 7 of the Uncitral Model Law intended the mere act of “exchange of statement of claim and defence in which the existence is alleged by one party and not denied by the other” to constitute an arbitration agreement between the parties and it was not merely a mere “writing requirement”. Most importantly, while the Working Group acknowledged that there was some overlap between Article 7 and Articles 4/16(2) of the Uncitral Model Law, Article 7 of the Uncitral Model Law was of wider import and therefore all the proposals for its deletion were rejected.

 

Indian Courts & Varied Interpretations of Section 7(4)(C) of the Arbitration Act, 1996

This section briefly discusses some of the significant cases wherein Indian courts have interpreted Section 7(4)(c) of the Arbitration Act. Since the law laid down by the Supreme Court binds all courts and tribunals in India, the judgments of the Supreme Court on Section 7(4)(c) of the Arbitration Act will be examined first.34

 

In S.N. Prasad v. Monnet Finance Ltd.35, the Supreme Court of India held that the words “statement of claim and defence” occurring in Section 7(4)(c) of the Arbitration Act are not restricted to the statements of claim and defence filed before the arbitrator. It held that, if there is an assertion of existence of an arbitration agreement in any suit, petition or application filed before any court, and if there is no denial thereof in the defence/counter/written statement thereto filed by the other party to such suit, petition or application, then it can be said there is an “exchange of statements of claim and defence” for the purposes of Section 7(4)(c) of the Arbitration Act.36 There is no reason forthcoming in the judgment as to why an interpretation was accorded to the words “statement of claim and defence” in Section 7(4)(c) of the Arbitration Act. However, it appears that, such an interpretation is inspired by the law of pleadings codified in the Code of Civil Procedure, 1908 (“CPC”). Under CPC, every allegation of fact if not denied specifically or by necessary implication or stated to be not admitted in the pleading of the counter-party/defendant is deemed to be admitted.37 Be that as it may, the interpretation of the words “statement of claim and defence” in Section 7(4)(c) of the Arbitration Act in the said judgment are in consonance with intent of the drafters of Uncitral Model Law.

 

In MTNL v. Canara Bank38, despite there being no arbitration agreement between the parties, matter was referred to arbitration on a joint request made by the parties before the High Court in writ proceedings. Consequently, statement of claim and defence along with counter-claims was filed before the Tribunal and no objections were raised to the jurisdiction of the Tribunal. Thereafter, the appellant therein filed a special leave petition challenging the order39 passed by the Delhi High Court referring the parties to arbitration on the ground that there was no arbitration agreement in existence. The Supreme Court dismissed38 the application inter alia on the ground that an arbitration agreement had come into existence between the parties under Section 7(4)(c) of the Arbitration Act by exchange of statement of claim and defence along with the counter-claim.40 Similarly, in State of W.B. v. Sarkar & Sarkar41, the Supreme Court of India held that an arbitration agreement had come into existence under Section 7(4)(c) of the Arbitration Act by virtue of exchange of statement of claim and defence along with counter-claim before the Arbitral Tribunal.

 

Hence, on a conspicuous reading of the judgments of the Supreme Court of India, it is clear that the words “statement of claim and defence” in Section 7(4)(c) of the Arbitration Act is not confined to pleadings before the Arbitral Tribunal, but also includes any suit, application or petition filed by a party asserting the existence of the arbitration agreement and not denied by the other party in its statement of defence/counter or objections to such suit, petition or application. However, the judgments of the Supreme Court have not expressed any opinion on whether an exchange of notices wherein the existence is alleged by one party and not denied by other in its reply to the notice will constitute an “arbitration agreement” within the meaning of Section 7(4)(c) of the Arbitration Act. The High Courts have expressed divergent opinions on this aspect.

 

The Karnataka High Court42 and the Delhi High Court43 have interpreted the words “statement of claim and defence” in Section 7(4)(c) of the Arbitration Act to include exchange of notice and reply between the parties in which the existence of arbitration is asserted by one party and not denied by the other as constituting an “arbitration agreement” within the meaning of Section 7(4)(c) of the Arbitration Act. On the other hand, the Andhra Pradesh High Court has held44 that the exchange of notices and reply wherein existence of arbitration agreement is alleged by one party and not denied by the other will not constitute an “arbitration agreement” within the meaning of Section 7(4)(c) of the Arbitration Act. At this juncture, a closer examination of the judgments of the High Courts needs to be undertaken to understand the rationale for the divergent views expressed.

 

In Tata Elxsi Ltd. v. Anand Joshi45, a notice was dispatched by the petitioner alleging the existence of an arbitration agreement between the parties. Thereafter, the respondent replied to the letter stating that “averments in the notice are false”. Subsequently, the respondent vide another letter denied the existence of an arbitration agreement. The petitioner filed an application under Section 11 of the Arbitration Act seeking appointment of an arbitrator. While the petition was dismissed, the High Court of Karnataka held that notice and reply exchanged between the parties will constitute an “arbitration agreement” if in the reply notice “all other matters such as claim, objections, etc. are replied but if the reply is silent about the arbitration agreement then such an agreement could be inferred”.46 Similarly, in Shyamraju & Co. (India) (P) Ltd. v. City Municipal Council47, the exchange of notice and reply wherein the claimant asserted the existence of arbitration agreement and the respondent did not deny it in reply while objecting to other claims was held to constitute an “arbitration agreement” within the meaning of Section 7(4)(c) of the Arbitration Act.

 

In G. Kapoor v. Reacon Engineers (P) Ltd.43, the petitioner issued a legal notice alleging the existence of an arbitration agreement. The respondent in its reply did not deny the existence of the arbitration agreement but asserted that it intended to suggest its own list of arbitrators for adjudication of the dispute. The Delhi High Court held that an “arbitration agreement” had come into existence by exchange of notice and reply within the meaning of Section 7(4)(c) of the Arbitration Act and appointed an arbitrator.48

 

An analysis of the aforesaid judgments seems to suggest that the High Courts have construed “statement of claim and defence” liberally to include exchange of notice and reply between the parties in line with the liberal and correct interpretation of the Supreme Court of India in S.N. Prasad v. Monnet Finance Ltd.35 discussed supra. In fact, the Delhi High Court in G. Kapoor43 and the Karnataka High Court in Shyamraju47 specifically advert to the decision of the Supreme Court in Monnet Finance35. While Monnet Finance35 which does not lay down an exhaustive definition of the words “statement of claim and defence” in Section 7(4)(c) of the Arbitration Act, it advocates liberal and expansive interpretation of the words “statement of claim and defence” in Section 7(4)(c) of the Arbitration Act. That apart, no other aspect appears to have been considered by the Karnataka High Court and Delhi High Court while taking a view that an exchange of notice and reply will lead to constitution of an “arbitration agreement” under Section 7(4)(c) of the Arbitration Act.

 

On the other hand, the Andhra Pradesh High Court in Gajulapalli Chenchu Reddy v. Koyyana Jaya Lakshmi44, has held that the words “statement of claim and defence” in Section 7(4)(c) of the Arbitration Act are confined to pleadings before the Arbitral Tribunal. Therefore, an acrimonious exchange of notices will not result in an “arbitration agreement” coming into existence in terms of Section 7(4)(c) of the Arbitration Act.49 The view taken by the Andhra Pradesh High Court is contrary to the law laid down by the Supreme Court of India in Monnet35. Therefore, on that count alone, the views expressed therein are bad in law.

 

For reasons detailed in next section, the authors argue that the view expressed by the Karnataka High Court and Delhi High Court that exchange of notice and reply wherein the existence of arbitration agreement is asserted by one party and not denied by the other constitute an “arbitration agreement” within the meaning of Section 7(4)(c) of the Arbitration Act.

 

Exchange of Notice, Reply and Arbitration Agreement Under Section 7(4)(C) of the Arbitration Act, 1996

Section 7(4)(c) of the Arbitration Act stipulates that an arbitration agreement is deemed to come into existence by exchange of statement of claim and defence in which the existence of arbitration agreement is alleged by one party and not denied by the other.

 

In order to ascertain whether exchange of notice and reply wherein the existence of arbitration agreement is alleged by one party and not denied by the other will result in an arbitration agreement within the meaning of Section 7(4)(c) of the Arbitration Act, the scope of the words “statement of claim and defence” will have to be considered.

 

Apart from Section 7 of the Arbitration Act, the words “statement of claim and defence” only find mention in the heading of Section 23 of the Arbitration Act. The said section stipulates that the parties shall file their statement of claim and defence stating the facts supporting the claim/defence, the points at issue and the relief or remedy sought before the Arbitral Tribunal as per the timelines set out in the agreement or determined by the Arbitral Tribunal. Thus, it is clear that Section 23 of the Arbitration Act does not intend to define “statement of claim and defence” in the Arbitration Act, but only set out framework for conduct of arbitration proceedings. Moreover, it is settled principle of law that words derive colour from the context in which they are placed.50 Therefore, given the fact that Section 23 is contained in Chapter V of the Arbitration Act dealing with conduct of arbitration proceedings, it is abundantly clear that it did not intend to define “statement of claim and defence” for the entirety of the Arbitration Act.

 

Therefore, in the absence of any guidance available in the statute, the preparatory works provide an important tool for interpretation of the words “statement of claim and defence” in Section 7(4)(c) of the Arbitration Act. As noted earlier, Section 7(4)(c) of the Arbitration Act mirrors Article 7 of the Uncitral Model Law. In 2006, Article 7 of the Uncitral Model Law was proposed to be amended to read “exchange of statements of claim and defence [on the substance of the dispute] in which the existence of the arbitration agreement is alleged by one party and not denied by the other”. The words “on the substance of the dispute” were sought to be added to exclude procedural submissions such as notice of arbitration on the ground that the addressee may not carefully review and reply to procedural submissions. The said amendment was rejected since “statement of claim and defence” were used liberally to include exchange of notices between the parties regarding the substance of the dispute.

 

That apart, it is settled principle of law that the words in a statute should be interpreted to give effect to every provision in the statute. Therefore, an interpretation which renders a provision otiose or nugatory should be eschewed.51 For reasons detailed below, if Section 7(4)(c) of the Arbitration Act is interpreted to exclude existence of arbitration agreement that has come into existence by exchange of notice and reply, it will render Section 7(4)(c) of the Arbitration Act nugatory.

 

Section 16(2) of the Arbitration Act clearly stipulates that the plea that Arbitral Tribunal has no jurisdiction must be taken not later than the statement of defence. Therefore, if a party is aggrieved by the fact that there is no arbitration agreement in existence but fails to take that contention in its statement of defence, it is deemed to have waived its right under Section 16(2) read with Section 4 of the Arbitration Act. Section 4 of the Arbitration Act provides that a party has waived its right if it does not object to non-compliance of a derogable provision of the Arbitration Act. Therefore, Section 16(2) of the Arbitration Act already deals with scenarios wherein the arbitration agreement is alleged to exist in statement of claim and not denied by the other party in its statement of defence “before” the Arbitral Tribunal. Thus, in order to give effect to Section 7(4)(c) of the Arbitration Act, it has to be interpreted to cover scenarios wherein the exchange of statement of claim and defence was “not before” the Arbitral Tribunal. Otherwise, Section 7(4)(c) and Section 16(2) of the Arbitration Act will operate in the same field, rendering Section 7(4)(c) of the Arbitration Act nugatory.

 

Additionally, it is settled principle of law that a statute should be interpreted practically having regard to ground realities.52 Therefore, where alternative constructions are possible the courts must give effect to that interpretation which will result in smooth working of the system for which the statute has been enacted rather than one which will reduce the legislation to futility.53 From a practical standpoint, parties do not impromptu convene before the Arbitral Tribunal. The convening of the Arbitral Tribunal is necessarily preceded by issuance of a notice of arbitration wherein the existence of the arbitration agreement is alleged by one party and the other party usually objecting to the constitution of the Arbitral Tribunal or denying the arbitration clause. Therefore, if the words “statement of claim and defence” in Section 7(4)(c) of the Arbitration Act are interpreted restrictively, it would be divorced from the ground reality of how arbitration proceedings are ordinarily conducted. Hence, in order to make words “statement of claim and defence” in Section 7(4)(c) of the Arbitration Act workable and meaningful, the words have to be necessarily interpreted to include notice wherein the existence of the arbitration agreement is alleged by one party and not denied by the notice in the reply. Such an interpretation would be in consonance with Uncitral Model Law basis which the Arbitration Act has been enacted and the practical ground realities.

 

Viewed from another angle, the starting point of arbitration in terms of Section 21 of the Arbitration Act is the notice of arbitration. If the notice alleges the existence of an arbitration clause whilst making and stating its claims and the other party responds to all the claims but does not respond to the claim of existence of an arbitration clause, the law deems acceptance of the arbitration clause. Such arbitration clause is for reference of only present disputes to arbitration.

 

Thus, based on the aforesaid analysis, it is clear that the words “statement of claim and defence” in Section 7(4)(c) of the Arbitration Act are not confined to pleadings before the Arbitral Tribunal. It includes any suit, petition or application filed before any court or tribunal wherein the existence of arbitration agreement is alleged by one party and not denied by the other party in the defence, counter-claim, written statement filed by the other party to such suit, petition or application. Moreover, having regard to the legislative history and well-settled cannons of interpretations, the words “statement of claim and defence” in Section 7(4)(c) of the Arbitration Act should be read to include exchange of notice and reply wherein the existence of arbitration agreement is alleged by one party and not denied by the other. There is no reason to restrict the meaning of the words “statement of claim and defence” to only pleadings before the tribunal. Every document which contains a claim would be a statement of claim and every document containing a defence in response to the claim would be a statement of defence.

 

———

Senior Advocate and Additional Advocate General of Karnataka.

†† Advocate enrolled with the Bar Council of India in May 2016. He is a gold medallist from National Law University, Jodhpur and practises law at Bangalore, India.

*The article has been published with kind permission of SCC Online cited as (2021) 3 SCC J-32

1 Indu Malhotra, O.P. Malhotra’s the Law & Practice of Arbitration and Conciliation (3rd Edn., 2014), p. 354.

2MTNL v. Canara Bank, (2020) 12 SCC 767, para 9; Yogi Agarwal v. Inspiration Clothes & U, (2009) 1 SCC 372, para 10; Indowind Energy Ltd. v. Wescare (India) Ltd., (2010) 5 SCC 306

, para 13.

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

4 Section 7(4)(a), Arbitration and Conciliation Act, 1996.

5 Section 7(4)(b), Arbitration and Conciliation Act, 1996.

6 Section 7(4)(c), Arbitration and Conciliation Act, 1996.

7 Section 7(5), Arbitration and Conciliation Act, 1996; Indowind Energy Ltd. v. Wescare (India) Ltd., (2010) 5 SCC 306, para 12.

8 Generally see, Rohan Tigadi, “Indian Arbitration : Ghost of Implied Exclusion and other related issues”, 12 (2) Asian International Arbitration Journal 181 (2016).

9 See, Article 7 of the Model Law on International Commercial Arbitration 1985 (United Nations Commission on International Trade Law, UN Doc. A/40/17, Annex I).

10 Generally see, Hindustan Construction Co. Ltd. v. Union of India, 2019 SCC Online SC 1520, para 19; BALCO v. Kaiser Aluminium Technical Services Inc., (2012) 9 SCC 552, para 68.

11Kalpana Mehta v. Union of India, (2018) 7 SCC 1, paras 123-35.

12 A/RES/40/72, Model Law on International Commercial Arbitration of the United Nations Commission on International Trade Law (11 December 1985); Preamble, Arbitration and Conciliation Act, 1996.

13K.S. Puttaswamy (Privacy-9J.) v. Union of India, (2017) 10 SCC 1, para 154.

14 It is an international government organisation formed in 1956 to serve as an advisory board to member States on matters of international law.

15 International Commercial Arbitration, Note by the Secretary General (A/CN.9/127)

16 UNCITRAL, Note by the Secretariat further work in respect of International Commercial Arbitration (A/CN.9/169), Para 2.

17 UNCITRAL Report of the Secretary General : Study on the application and interpretation of the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York, 1958) (A/CN.9/168)

18 Note by the Secretariat : Further work in respect of International Commercial Arbitration (A/CN.9/169), Para 6.

19 Report of Working Group on International Contract Practices on the Work of its Third Session, A/CN.9/216, Para 1.

20 UNCITRAL, Report of the Secretary General : Possible Features of a Model Law on International Commercial Arbitration (A/CN.9/207), Paras 39-43.

21 Article 7(2) of the UNCITRAL Model Law, 1985; Report of the Working Group on International Commercial Arbitration of its Third Session (A/CN.9/216), Para 23.

22 Report of the Working Group on International Commercial Arbitration of its Third Session (A/CN.9/216), Para 24 (in this connection, the question was raised whether a party which had appeared before an Arbitral Tribunal without contesting jurisdiction may later invoke lack of a written arbitration agreement. The prevailing view was that such a party could not in those circumstances invoke lack of written agreement. However, it was agreed that the question should be dealt with in the Model Law, as it was a question which could be adequately dealt by domestic law”.); International Commercial Contract : Analytical Commentary on Draft Text of a Model Law on International Commercial Arbitration (A/CN.9/264), Paras 6-8.

23 Generally see, UNCITRAL, Report of the Working Group on International Commercial Practices on the work of its Fourth Session (A/CN.9/232); UNCITRAL, Report of the Working Group on International Commercial Practices on the work of its Seventh Session (A/CN.9/246)

24 Summary records of the 320th UNCITRAL Meetings, available at <https://uncitral.un.org/sites/uncitral.un.org/files/media-documents/uncitral/en/320meeting-e.pdf> (last accessed on 31-1-2021), Para 5.

25 Summary records of the 320th UNCITRAL Meetings, available at <https://uncitral.un.org/sites/uncitral.un.org/files/media-documents/uncitral/en/320meeting-e.pdf> (last accessed on 31-1-2021), Para 6.

26 Report of the United Nations Commission on International Trading Law on the work of its 18th Session, A/40/17, Para 87.

27Ibid. Introduction to the UNCITRAL 2012 Digest of Case Law on International Commercial Arbitration (1985 with amendments adopted in 2006), p. 1, Para 1 available at <https://www.uncitral.org/pdf/english/clout/MAL-digest-2012-e.pdf> (last accessed 31-1-2021)

28 Report of the Working Group on Arbitration of its Thirty-third Session (A/CN.9/485), Para 38.

29 Report of the Working Group on Arbitration on the work of its Thirty-fourth Session, A/CN.9/487, Para 34.

30 Report of the Working Group on Arbitration on the work of its Thirty-sixth Session, A/CN.9/508, Paras 32-35.

31Id, Paras 34-35; Settlement of commercial disputes : Preparation of a model legislative provision on written form for the arbitration agreement, A/CN.9/WGII/WP.136, Para 10; Report of the Working on Arbitration on the work of its Forty-fourth Session (A/CN.9/592), Para 68.

32 Report of the Working Group on Arbitration on the work of its Forty-fourth Session (A/CN.9/592), Para 65.

33Id, Paras 66-67.

34 Article 141, Constitution of India.

35(2011) 1 SCC 320.

36Id, para 12.

37 Order 8 Rule 5, Code of Civil Procedure, 1908.

38(2020) 12 SCC 767.

39Canara Bank v. MTNL, 2011 SCC OnLine Del 5705; Canara Bank v. MTNL, 2011 SCC OnLine Del 5704.

40MTNL v. Canara Bank, (2020) 12 SCC 767, paras 9, 10.

41(2018) 12 SCC 736.

42Tata Elxsi Ltd. v. Anand Joshi, 2000 SCC OnLine Kar 120; Shyamraju & Co. (India) (P) Ltd. v. City Municipal Council, 2019 SCC OnLine Kar 3177

43G. Kapoor v. Reacon Engineers (P) Ltd., 2019 SCC OnLine Del 10667.

44Gajulapalli Chenchu Reddy v. Koyyana Jaya Lakshmi, 2009 SCC OnLine AP 202.

452000 SCC OnLine Kar 120.

46Id, para 5.

472019 SCC OnLine Kar 3177

48G. Kapoor v. Reacon Engineers (P) Ltd., 2019 SCC OnLine Del 10667, paras 15-17.

49Gajulapalli Chenchu Reddy v. Koyyana Jaya Lakshmi, 2009 SCC OnLine AP 202, para 11.

50Southern Electricity Supply Co. of Orissa Ltd. v. Sri Seetaram Rice Mill, (2012) 2 SCC 108, paras 20-21.

51High Court of Gujarat v. Gujarat Kishan Mazdoor Panchayat, (2003) 4 SCC 712, paras 35 & 36; Rajdeep Ghosh v. State of Assam, (2018) 17 SCC 524, para 23.

52Southern Electricity Supply Co. of Orissa Ltd. v. Sri Seetaram Rice Mill, (2012) 2 SCC 108, para 48; Badshah v. Urmila Badshah Godse, (2014) 1 SCC 188, paras 16-18.

53Badshah v. Urmila Badshah Godse, (2014) 1 SCC 188, para 20.

Law Firms NewsNews

Mayuri Tiwari Agarwala graduated from GNLU in 2010 and completed her masters from Columbia Law School, New York in 2015. Her practice focuses on domestic and international arbitration, complex commercial litigation and public international law. Prior to joining Khaitan, she was with Shardul Amarchand Mangaldas, Mumbai and was an Associate Counsel at Singapore International Arbitration Centre (SIAC).

Mayuri is a member of Young International Council for Commercial Arbitration (YICCA), Young Singapore International Arbitration Centre (YSIAC), Young Mumbai Centre for International Arbitration (YMCIA) and Young International Arbitration Group (YIAG).

 

She regularly represents clients in international arbitrations, seated throughout the world (Singapore London, the Hague, New York Mumbai, Delhi etc.) conducted under different arbitration rules (SIAC, LCIA ICC UNCITRAL ICSID etc.) and different laws (Indian law, English law, Singapore law, New York law, etc.) across a wide range of industries (infrastructure, construction energy, oil & gas, healthcare etc.). She regularly acts for foreign investors against States under various bilateral investment treaties and represents clients in domestic arbitration and litigation related to arbitration before Indian Courts.

Cyril Amarchand MangaldasExperts Corner

It is no secret that the infrastructure market has grown exponentially in India[1] and as EOTs, delays and cost overruns occur, so do disputes. We examine in this piece some recent, interesting judgments in construction of arbitration law and comment on some emerging trends.

 

Pre-arbitral Section 9 – Mumbai International Airport Ltd. v. Airports Authority of India[2]

 

The Mumbai International Airport Limited (MIAL) and Airports Authority of India (AAI) executed an operation, management and development agreement (OMDA) on 4-4-2016. Under the OMDA, the AAI leased certain areas MIAL including the Chhatrapati Shivaji Maharaj International Airport (CSI) to operate, maintain, develop, upgrade the CSI, etc. and to keep it in good operating condition. Further, under the OMDA, MIAL was required to pay an annual fee payable in twelve equal monthly instalments to AAI. Pursuant to Covid-19 and consequent restrictions, MIAL invoked the force majeure clause under the OMDA and informed AAI that it was suspending its obligation towards the payment of monthly fee, and that it had instructed the State Bank of India as the Escrow Bank, not to transfer any amount towards monthly payment of annual fee or any other payment to AAI, commencing April 2020.

 

Accordingly, in light of closure and stoppage of several flights, MIAL requested AAI to write to the Escrow Bank, directing it not to transfer any amount towards monthly payment or any other payment to AAI, and to transfer the funds lying in the account in which the annual fee is deposited every month, so that the said funds could be utilised by MIAL to meet its immediate requirements. AAI agreed to make this concession but for a limited period only on account of force majeure as under the OMDA, the party affected by such event was entitled to suspend its performance. However, MIAL argued that AAI ought not to accept this arrangement just for a limited period but should continue it for the entire time period during which the force majeure event continued which AAI refused to do and argued instead that despite the force majeure event, MIAL was capable of performance under OMDA. Aggrieved by this position of AAI, MIAL approached the Court under Section 9 of the Arbitration and Conciliation Act, 1996 (Arbitration Act) seeking an order to inter alia restrain AAI and Escrow Bank from appropriating any receivables towards AAI’s annual fees. The Court decided in favour of MIAL rejecting the contentions of AAI stating that the OMDA provides for suspension of performance in case of a force majeure event. The Court also permitted MIAL to utilise the deposited receivables for expenses in connection with its obligations under the OMDA.

 

Importantly, the Court also provided specific timelines within which the parties had to appoint the arbitrators. The Court noted that the “Under(sic) Section 9, court is concerned more with the necessity to preserve the status quo, so as to facilitate the arbitral process, to be initiated by the parties.” For this reason, the Court added that it was also “open to Section 9 court to, while passing pre-arbitral interim measures of protection under Section 9, condition such grant by requiring the parties benefiting therefrom, to institute arbitral proceedings within a specified timeframe”.

 

This, of course, we note is a measure also inbuilt within the language of the provision after the 2015 amendments to the Act where if the arbitration is not commenced within 90 days of interim relief under Section 9, the same stands vacated. This decision preserved the subject-matter of the dispute whilst letting business go on as usual in the interim, permitting MIAL to utilise amounts in the account in the meanwhile. This case is a good example of an order in aid of the actual project while disputes sort themselves out.

 

Post award Section 9 and order therein appealable? – SEPCO Electric Power Construction Corpn. v. Power Mech Projects Ltd.[3]

 

SEPCO Electric Power Construction Corporation (SEPCO), a Chinese entity was awarded various coal-based power projects in India. In one of its projects, subsequent to the execution of works, a dispute arose between SEPCO and one of its sub-contractors, Power Mech Projects Limited (Power Mech). The dispute was referred to arbitration and an award was made in favour of Power Mech and Power Mech filed an application under Section 9 of the Arbitration Act seeking the Court’s direction to secure the award amount. The Court in its order dated 12-2-2019 directed SEPCO to furnish a bank guarantee within six weeks and “further, the bank guarantee in the sum of Rs 30 crores will be that of a scheduled bank located in India”. Thereafter, a bank guarantee of Industrial and Commercial Bank of China Limited (ICBC) for a sum of INR 30 crores was produced by SEPCO. Power Mech filed an interim application seeking a bank guarantee of a “Scheduled Indian Bank” rather than ICBC as per the order of the Court and thereafter, SEPCO filed another interim application seeking acceptance of the ICBC bank guarantee, which was refused. Against this refusal order, SEPCO filed an appeal under Section 37 of the Arbitration Act.

 

While deciding on the maintainability of the appeal, the Court held that the order of the Court which was appealed, was an order granting interim relief under Section 9 of the Arbitration Act, directing SEPCO to furnish a bank guarantee (BG)  issued by a Scheduled Indian Bank. It was clarified that though SEPCO is not aggrieved from the direction of furnishing a bank guarantee, but it is aggrieved from the direction, that the bank guarantee be of a Scheduled Indian Bank only. The Court concluding on the maintainability of the appeal held that the said direction “would be covered within the meaning of an order granting ‘any’ measure under Section 9, within the meaning of Section 37(1)(b) of the Arbitration Act and within the meaning of ‘judgment or order’ of a Commercial Division of a High Court within the meaning of Section 13(1-A) of the Commercial Courts Act”. The Court therefore held that although the order is not final, it is nevertheless an order under Section 9. This is yet another decision which expanded the scope of what is treated as a Section 9 order and thereby the nature of a Section 9 direction order that would be appealable.

 

Would this be a beneficial reading of the provision? Some would argue that this leads to added proceedings and appeals from orders passed within a Section 9 petition that do not completely dispose it off.

 

Section 9 as final relief? National Highways Authority of India v. Bhubaneswar Expressway (P) Ltd.[4]

 

Bhubaneswar Expressway Private Limited (BEPL) had filed a Section 9 application against National Highways Authority of India (NHAI) and the Court through order dated 25-112019 directed NHAI to, subject to BEPL furnishing an unconditional and irrevocable bank guarantee in favour of NHAI and further subject to final award of the Arbitral Tribunal, deposit in an escrow account, a sum of Rs 337,73,19,434.10, found due from NHAI to BEPL towards termination payment under the concession agreement between NHAI and BEPL. This order was appealed before the Delhi High Court in this case. The question before the Court was whether Section 9 of the Arbitration Act empowers the Court to grant to an applicant, a relief, in the nature of a final relief, even if a case for urgent need thereof is made out and merely by expressing the same to have been granted on a prima facie view subject to other conditions.

 

BEPL argued that the Court can grant such relief under Section 9(1)(ii)(e) which provides that a court can grant “such other interim measure of protection as may appear to the Court to be just and convenient”. The Court rejected this argument and set aside the order dated 25-11-2019 stating that the power under Section 9(1)(ii)(e) is “not only circumscribed by the language of clause (ii) of Section 9 using the expression ‘interim measure’ but reiterates the said expression in clause (e) and further uses the word ‘protection’, again indicating that it is de hors final adjudication and at best on a prima facie view of the matter”. The Court therefore held that a court could not assume the power of adjudication which the parties had vested in the Tribunal, in the garb of the said clause (e).

 

This decision leaves a number of questions. Typically, Section 9 jurisdiction is used to secure the amount in the dispute so as to prevent a paper award. This is quite the ordinary nature of security relief, subject of course to the standard conditions of prima facie case, balance of convenience, irreparable injury and dissipation of assets to defeat the award being made out. The Court had even safeguarded the deposited amount by way of the direction of the unconditional and irrevocable bank guarantee thereby safeguarding the interest of the depositor as well. In other words, what other order of security would not be in the nature of a final relief as per the Court’s formulation? This case therefore raises a number of questions and how the dispute ultimately pans out remains to be seen.

 

Section 34 on overheads and loss of profits issues – Delhi Metro Rail Corpn. Ltd. v. N.S. Publicity (I) (P) Ltd.[5]

 

Delhi Metro Rail Corporation Limited (DMRC) and N.S. Publicity (I) Private Limited (NSP) executed a licence agreement on 20-5-2013 for outdoor advertising rights on the civil structures of underground section between different metro stations. Some disputes arose between the parties that were referred to arbitration. The Tribunal allowed a few claims of NSP which was the claimant in the arbitration and also allowed a few counterclaims filed by DMRC. Both NSP and DMRC challenged the award.

 

One of the claims of NSP was for loss of profits that NSP would have earned, had it not been denied access to the sites. Accordingly, NSP had claimed gross profit margin of 21.5%. However, the Tribunal did not accept the same and held that profit margin would be computed on the basis of NSP’s balance sheet for the year 2008-2009 on the turnover of INR 11,18,05,375. The Tribunal also denied NSP’s claim for overheads and held that the loss on account of overheads as claimed by NSP, were absorbed in its claim of loss of profits.

 

While discussing these issues, the Delhi High Court observed that the gross profit of 21.5% suggested by NSP was not seriously contested but nonetheless the Tribunal had concluded that NSP had failed to establish the same. After observing the same, the Court set aside the award stating that the Tribunal could “proceed to reject the claim or allow it to the extent that it considered reasonable. But it could not direct that it be calculated on the basis of accounts for the year 2008-2009, which were neither produced nor relied upon by parties”.

 

Further, on the overlap between the loss of profits and overheads claim, the Court noted that NSP’s claim for net profit is based on what it would have earned, had DMRC performed its obligations. It was further noted that on the other hand, “NSP’s claim for loss of overheads was in the nature of reimbursement of costs that it had incurred on overheads, which were allocated towards the contract in question. NSP’s claim that the said costs would have been met by the revenue earned from the sale of advertisement sites, had DMRC provided the same.” Thus, the Court concluded that “the claim of overheads was over and above the claim for loss of profits and the decision of the Arbitral Tribunal that such overheads had been absorbed in profits is patently erroneous” and set aside the award in this regard.

 

Questions of loss of profit and overheads routinely arise in construction arbitrations. This being a common question, the decision is a helpful guide for arbitrators to closely examine the nature of claims and most importantly, their characterisation before determining issues regarding overlap.

 

Time limit to file a Section 34 application – DDA v. Varindera Construction Ltd.[6]

 

The Delhi Development Authority (DDA) filed a petition under Section 34 against Varindera Construction Limited (VCL) to set aside an award dated 2-11-2019. The setting aside petition was filed on 28-1-2020. It was refiled on 27-2-2020, and then again on 29-2-2020 and finally on 2-3-2020. On 2-3-2020, the petition was accompanied by an application seeking condonation of delay in refiling. Later, another application was filed seeking condonation of delay in filing of the petition.

 

Under Section 34(3) of the Arbitration Act, the time limit to file a set aside petition is three months from the date on which the party making that application had received the arbitral award and an additional period of thirty days if sufficient cause was shown. VCL argued that there was an abuse of process by DDA as the time period of filing the petition was ending, DDA filed the petition on 28-1-2020 with various defects and changed it altogether when it was refiled on 27-2-2020 (which is after the three months’ period). Further, it was argued that the two applications for condonation of delay are entirely different and are not genuine. This was based on the argument that while one cited voluminous record, time taken to remove the defects and the associate of the counsel concerned leaving his office, the other cited health reasons of the counsel.

 

The Delhi High Court rejected the arguments of VCL and held that even if it were to assume that the original filing was non est, the filing on 27-2-2020/29-2-2020 was complete in all respects and within the time period of three months and thirty days. Further, it was noted that the filing was accompanied with an application to condone the delay, as per the procedure. On the question of whether there was indeed a sufficient cause or not, the Court held that the health reason of the counsel was a “good reason” to condone the delay. Interestingly, in response to the argument of VCL that the counsel was appearing before other Benches during that time and was not sick, the Court noted that “the Court cannot see any dilatory tactics, want of bona fides, and deliberate negligence on the part of the petitioner”.

 

The Bar is rife with reasons for adjournment and sometimes these reasons make it to condonation applications leading to contentious arguments. This case is one such example. The Court adopted a common sense approach so that merits did not remain unconsidered on grounds of delay.

 

Section 34 pertaining to compensation awarded in absence of losses – Telecommunication Consultants India Ltd. v. MBL Infrastructure Ltd.[7]

 

Haryana State Roads and Bridges Development Corporation Ltd. (HSRDC) issued a letter of acceptance dated 21-8-2008 to Telecommunication Consultants India Limited (TCIL) in response to a bid submitted by TCIL for construction of certain houses. Further, TCIL approached MBL Infrastructure Limited (MBL) to execute the said project as a sub-contractor and on 18-8-2008, MBL agreed to the terms and conditions. MBL furnished a performance security in the form of a bank guarantee and an invoice payment bank guarantee in favour of TCIL. Subsequent to completion of works by MBL, TCIL instead of releasing the bank guarantees encashed the same. Against this, MBL filed a Section 9 petition and secured a stay order preventing TCIL from encashing the demand draft provided by the bank to TCIL for encashment of the bank guarantees.

 

The disputes between the parties were referred to the Tribunal and MBL had premised the said claim on the basis that it had been granted non-fund based limits[8] [bank guarantee/letter of credits (LCs), etc.] to the extent of INR 465 crores and as a result of invocation of the bank guarantees by TCIL, the bank had increased the commission charges resulting in an additional cost. MBL also claimed that there was an additional cash outflow of ₹23.5 crores on account of the banks demanding cash margin for the non-fund based limits of bank guarantees/LCs of INR 465 crores granted to MBL. After considering all the facts, the Tribunal found that there was no material on record to show that MBL had availed of the bank guarantee limits to the extent of INR 465 crores and in fact, MBL had utilised the limits only to the extent of INR 90 crores. Despite these findings on facts, the Tribunal still went ahead and awarded a fair compensation of INR 10,00,000.

 

In this regard, the Delhi High Court held the said award is unsustainable. This is because after the Tribunal had examined MBL’s contention and had found that MBL had not substantiated its claims for the losses allegedly incurred by it, it could not proceed to award any amount as fair compensation for the wrongful invocation of the bank guarantees. The Court therefore held that there is no evidence on record to establish the measure of damages and set aside the award to the extent of this claim of INR 10,00,000.

 

This is an interesting case where the Court has gone into the merits of the award rendered by the Tribunal and found that upon the Tribunal finding that losses were not incurred, it could not then go on to order any compensation. Ordinarily, in a Section 34 jurisdiction, the Court does not interfere with merits of the dispute but chose to make an exception in this case.

 

Unreasoned award scope of challenge – Hindustan Petroleum Corpn. Ltd. v. Banu Constructions.[9]

Hindustan Petroleum Corporation Limited (HPCL) filed a petition under Section 37 against Banu Constructions and the sole arbitrator (which was later removed as a respondent) to set aside an order dated 3-8-2020 which dismissed a Section 34 petition against an award. HPCL moved a Section 37 application on the basis that the award was unreasoned. After a perusal of the award, the Madras High Court observed that the award summarised the pleadings and directly allowed/disallowed the claim without assigning any reason. Further, that there was “nothing in the award to suggest how the quantum of the claim was arrived at except that the quantum awarded matched the amount claimed”. Therefore, the Court allowed Section 37 application and the award was set aside. The Court held that “while it is not necessary for an arbitral award to justify every penny awarded to the claimant, the broad premise on which the quantum is founded has to be discernible from award itself for the award to be meaningful or even intelligible in legal terms”.

 

The observation of the Court in relation to amounts awarded is extremely relevant for a construction dispute – as it may not be possible for the arbitrator to account for every penny in such disputes, but the arbitrator(s) must outline the reasons for the amount awarded. After having been through the rigours of evidence and several hearings, parties need to know why their claims were allowed or rejected. While it is true that the Court cannot go behind reasons of the award, such reasons ought to exist (unless the parties agree otherwise).

 

It is interesting how arbitration and attendant court proceedings have come to the aid of construction disputes at various stages. Courts have risen to every challenge in recent times, to adopt a common sense, often commercially-driven approach with an underlying “business as usual” approach. In a country like India where several projects are often stalled due to a myriad variety of reasons, it is often left to the judiciary to find novel solutions so that roads and dams get built, contractors get paid and the public at large, does not suffer. This last is at the heart of many of its decisions.


† Partner at Cyril Amarchand Mangaldas.

†† Associate at Cyril Amarchand Mangaldas.

[1]Shashank Agarwal, “Indian Infrastructure Endures to Move on a Growing Trail”, Financial Express, 23-6-2021, available at <HERE>.

[2] (2021) 278 DLT 75.

[3] FAO(OS) (COMM) No. 136 of 2019, judgment dated 27-11-2020 (Del).

[4] 2021 SCC OnLine Del 2421.

[5] 2021 SCC OnLine Del 2639.

[6] 2021 SCC OnLine Del 2845.

[7] 2021 SCC OnLine Del 3187.

[8] The non-fund based facilities provided by the bank mean that there is no physical outflow of funds but the bank provides an assurance in favour of a third party to pay upon the occurrence of a given event.

[9] 2021 SCC OnLine Mad 724.

Case BriefsHigh Courts

Kerala High Court: Devan Ramachandran, J., held that parties to arbitration cannot nominate the arbitrator even if the Arbitration Agreement provides so.

Syllogistic Scope of Sections 11(5) and 11(6) of Arbitration Act

The instant Arbitration Request dealt with certain novel, but interpretationally germane legal aspects appertaining Sections 11(2), 11(5) and 11(6) of the Arbitration and Conciliation Act, 1996. The focus was on the interplay of Sections 11(5) and 11(6) of the Act, since both of them deal with appointment of a sole Arbitrator, albeit, in two subtly distinct scenarios. It was this distinction which was ingenuously grabbed by the respondent to resist the petitioner’s Arbitration Request.

The petitioner, a private limited Company had approached the Court under Section 11(6) of the Act, praying that the Court appoint a sole Arbitrator, in terms of Clause 27 of the Agreement – which the petitioner asserted was a lease agreement entered between the parties. Clause 27 provided ways to adjudicate and decide certain disputes, which warranted resolution only through the mechanism of arbitration.

Issue Raised

The respondent argued that the Arbitration Request was not maintainable because the grounds raised by the petitioner ineluctably disclose that they had, in fact, approached the Court under Section 11(5) of the Act, though styling it as being under Section 11(6) thereof; hence, unless thirty days pass after they had made demand to the client for appointment of Arbitrator, the Arbitration Request would be premature and hence, not maintainable. Additionally, the respondent contended that the issue was not arbitrable as it fell within the jurisdictional realm of the Rent Control Act.

Stand taken by the Petitioner

The petitioners contested that they had invoked Section 11(6) of the Act and hence were not obligated to wait for thirty days after demand had been made on the respondent. It was contended that Section 11(5) of the Act is called in only when the agreement does not contain a procedure for appointing an Arbitrator, or when the parties have not agreed on such. However, Clause 27 of agreement expressly disclosed the procedure agreed upon by the parties to appoint an Arbitrator; and, therefore, they had rightly invoked Section 11(6) which concedes no pre-conditional Stipulations.

Clause 27 of agreement provided for Arbitration between the parties in case of disputes, since it reads as under:

27 If any dispute or difference arises between the lessor and lessee during the period of lease or upon the expiry of the said lease both parties shall seek to resolve by mutual discussions. If such discussions are unsuccessful the same shall be referred to arbitration in accordance with the provisions of the Arbitration and conciliation Act, 1996 for the time being in force. Arbitration shall be by a sole arbitrator if parties can agree upon one and failing that the disputes shall be referred to an arbitrator to be selected by the lessor.”

Statutory Mandate

Section 11(2) Subject to sub-section(6), the parties are free to agree on a procedure for appointing the arbitrator or arbitrators.

 Section 11(5) Failing any agreement referred to in sub-section (2), in an arbitration with a sole arbitrator, if the parties fail to agree on the arbitrator within thirty days from receipt of a request by one party from the other party to so agree [the appointment shall be made on an application of the party in accordance with the provisions contained in sub-section (4)].

 Section 11(6) Where, under an appointment procedure agreed upon by the parties,-

  • a party fails to act as required under that procedure;

     …[the appointment shall be made, on an application of the party, by the arbitral institution designated by the Supreme Court, in case of international commercial arbitration, or by the High Court, in case of arbitrations other than international commercial arbitration, as the case may be] to take the necessary measure, unless the agreement on the appointment procedure provides other means for securing the appointment. 21.

Yardsticks of Sections 11(5) and 11(6)

Noticeably, provisions would limpidly reveal that Section 11(5) of the Act would become attracted only in the cases where an agreement as to the procedure for appointment of an Arbitrator, as referred to in Section 11(2), between the parties has failed. As far as section 11(2) was concerned, the parties were given liberty to enter into an agreement for procedure to appoint an Arbitrator, in which event, Section 11(6) alone would apply and the mandate of the provisions therein will guide the appointment.

Observing that Clause 27 crystally provided for a specific procedure – which had been agreed between the parties – as regards appointment of an Arbitrator, the Bench held that the mandate of Section 11(2) of the Act had been satisfied by the stipulations in that Clause; and Section 11(5) could not come into play because, as was evident from its phraseology, the procedure therein is attracted only “failing any agreement referred to in subsection (2)”.

Hence, the Bench rejected the argument that the petition was vitiated for the reason of non-compliance of the rigour of Section 11(5). On the same parity of reasoning, the Bench stated,

“Even if the petitioner has projected grounds in this Arbitration Request, under a mistaken notion that the mandate of Section 11(5) is to followed or has been satisfied, it would be of no real consequence, since it is the duty of this Court to affirmatively and conclusively determine if there is an agreement between the parties regarding the procedure for appointment of an Arbitrator and then to apply the correct and applicable sub-section of Section 11 of the Act.”

Can a Party to dispute Nominate the Arbitrator?

On perusal of Clause 27 of the agreement as to how the parties must initiate and proceed to arbitration, the Bench stated that the said Clause made an adscititious provision that if parties do not reach consensus regarding arbitrator, an Arbitrator shall be appointed by the lessor.

Subsequent to the amendments to the Act in the year 2016 through which sub-section (5) was inserted into Section 12, notwithstanding any agreement to the contrary, any person whose relationship with the parties falls under any of the categories in the seventh Schedule of the Act, is rendered ineligible to be appointed as an Arbitrator. The Supreme Court considered the effect of Section 12(5) of the Act in TRF limited v. Engineering projects Ltd., (2017) 8 SCC 377, and had unreservedly declared that, neither a party to the disputes nor a person nominated by it can be appointed as an Arbitrator. Hence, the Bench disregarded the stipulations of Clause 27 extent to it allowed the lessor to nominate the Arbitrator when the parties fail to arrive at a consensus nominee.

Decision

In the light of the above, the Bench rejected the contention that the dispute fell within the jurisdictional realm of the Rent Control Act, stating that it is well established that under the sanction of Section 16 of the Act that the Arbitrator himself had to decide whether he has the competence to adjudicate; and to rule appropriately on his jurisdiction as regards all or any of the disputes, under the “kompetenz-kompetenz” doctrine, which is expressly incorporated into the Act.

Accordingly, the Bench nominated Mr. D.Pappachan as the sole Arbitrator to adjudicate and resolve the disputes and differences between the parties to the case arising from the agreement.[Tulsi Developers India Pvt. Ltd., v. Appu Benny Thomas, Ar. No. 105 of 2020, decided on 08-07-2021]


Kamini Sharma, Editorial Assistant has reported this brief.


Appearance by:

For the Petitioner: Advocate Praveen K. Joy

For the Respondent: Advocate G.Sreekumar

Case BriefsHigh Courts

Jammu & Kashmir and Ladakh High Court: Tashi Rabstan, J., while addressing the syllogistic issue of ‘venue and ‘seat’ of arbitration dismissed the appeal challenging the dismissal order of District Court refusing to entertain a petition under Section 9 of Arbitration and Conciliation Act, 1996. The Bench opined that,

Where the contract specifies the jurisdiction of the court at a particular place, only such court will have the jurisdiction to deal with the matter and parties intended to exclude all other courts.

The instant appeal had been preferred by the petitioner under Section 37 of the Act, 1996 against the order of the Additional District Judge, whereby the court below without touching the merits of the case dismissed the petition of appellant filed under Section 9 of the Act on the ground that it lacked jurisdiction to adjudicate upon the matter. The petitioner-appellant was seeking to grant temporary prohibitory injunction restraining the respondents from appointing a new Master Franchisee of DRS-Kids for the UT of J&K in place of petitioner-appellant as well as from interfering in petitioner’s functioning as Master Franchisee of DRS-Kids for whole of erstwhile State of J&K.

Background

The facts-in-brief were that an agreement of franchisee dated 06-12-2007 was entered into between the petitioner and the DRS Vidya Samiti, a society, whereby, the appellant agreed to be appointed as franchisee of the DRS Vidya Samiti to establish and operate pre-school under the brand name “DRS Kids” within 3 kms radius of Trikuta Nagar, Jammu. Thereafter, the petitioner-appellant was appointed as the Master Franchisee by DRS Education Pvt. Ltd. vide contract dated 13-12-2008 vesting in petitioner the rights to identify potential areas for establishing new DRS Kids pre-schools within the whole erstwhile State of J&K. As per the agreement, the life of the master franchisee was fixed for 10 years from the date of agreement which was extendable for a further period on mutually agreed terms and conditions.

The petitioner-appellant submitted that on realizing that the appellant was able to open up 14 franchisee schools in Jammu alone, respondent 2 turned greedy and started devising ways to oust the appellant from the aforesaid agreement by replacing her. In anticipation of that, the appellant secured an interim relief from the court of Additional Munsiff, Jammu in suit titled Supinder Kour v. MDN Edify Education Pvt. Ltd., whereby the respondents were restrained from advertising, admitting children/students, opening and operating a pre-school in six km area from the border of Trikuta Nagar, Jammu. The suit was subsequently withdrawn by the appellant pursuant to a compromise arrived at between the parties.

The petitioner-appellant argued that the dismissal of the application under Section 9 of the Act on the point of jurisdiction was not sustainable as the Master Franchisee Agreement was executed in Jammu; the appellant’s area to act as Master Franchisee was in Jammu; the franchisee schools were operating in Jammu; the dispute with respect to the Master Franchisee agreement arose in Jammu; the post-dispute reconciliation proceedings/meetings were conducted in Jammu; the earlier litigation between the parties was in Jammu Court; the cause of action accrued to the appellant at Jammu and the subject-matter situate within the jurisdiction of the principal Civil Court of original jurisdiction.

It was further argued by the petitioner-appellant that section 20 of the Act classifies two places viz., ‘seat of arbitration’ and ‘venue of arbitration’, whereas the arbitration clause only refers the venue of arbitration to be at Hyderabad. She, thus, argued that where only the venue had been specified and seat of arbitration not determined, it is indisputably the cause of action/subject matter which would determine the jurisdiction of the courts as referred to in section 9 of the Act. Therefore, it was argued that the respondents could not oust the jurisdiction of the courts at Jammu with respect to cause of action and the situation of the subject matter.

Analysis and Opinion

In terms of Clause-27 of the agreement dated 06-12-2007, any dispute or differences arising out of or in connection with this agreement shall be finally settled in arbitration proceedings to be conducted at Hyderabad in accordance with the Arbitration and Conciliation Act, 1996. Further, in the said clause it had been specifically provided that the Courts at Hyderabad in Andhra Pradesh shall have exclusive jurisdiction under this agreement.  Similarly, Clause 13 of Master Franchise Agreement dated 13-12-2008 stated the following:

“13. GOVERNING LAW AND DISPUTE RESOLUTION

13.1 This agreement is made under and shall be governed by and construed for all purposes in accordance with the laws of India and subject to arbitration. However, the courts at Hyderabad shall have exclusive jurisdiction.

13.2 Any dispute, controversy or claim arising out of or relating to this Agreement, or the breach, termination or invalidity hereof, shall be settled by arbitration in accordance with the Arbitration and Conciliation Act, 1996 (or any statutory amendment thereof) as in force as at that date before a sole arbitrator appointed by the Franchisor. The venue of arbitration shall be Hyderabad.”

Civil Appeal No.5850/2019 decided on 25.07.2019 (supra):

Reliance was placed by the Court on the similarly placed decision of the Supreme Court in Brahmani River Pellets Ltd. v. Kamachi Industries Ltd., wherein appellant challenged the jurisdiction of the Madras High Court on the ground that the parties had agreed that Seat of arbitration be Bhubaneswar and therefore, only the Orissa High Court has exclusive jurisdiction to appoint the arbitrator. The Madras High Court vide impugned order appointed a former judge of the Madras High Court as the sole arbitrator by holding that mere designation of “Seat” by parties does not oust the jurisdiction of other courts other than at the Seat of arbitration. The High Court held that in absence of any express clause excluding jurisdiction of other courts, both the Madras High Court and the Orissa High Court will have jurisdiction over the arbitration proceedings. Resolving the dispute, the Supreme Court held that,

“Where the contract specifies the jurisdiction of the court at a particular place, only such court will have the jurisdiction to deal with the matter and parties intended to exclude all other courts. In the present case, the parties have agreed that the “venue” of arbitration shall be at Bhubaneswar. Considering the agreement of the parties having Bhubaneswar as the venue of arbitration, the intention of the parties is to exclude all other courts…

When the parties have agreed to have the “venue” of arbitration at Bhubaneswar, the Madras High Court erred in assuming the jurisdiction under Section 11(6) of the Act. Since only Orissa High Court will have the jurisdiction to entertain the petition filed under Section 11(6) of the Act, the impugned order is liable to be set aside.”

In the view of the above, the Bench opined that perusal of Clause-27 of the agreement and clauses 13.1 and 13.2 of Master Franchise Agreement specifically provided that the courts at Hyderabad shall have exclusive jurisdiction for all purposes in accordance with the laws of India and subject to arbitration, which belied the claim of the petitioner-appellant that the court’s jurisdiction had not been determined in the agreement. Not only this, but the arbitration clause also referred the venue of arbitration proceedings to be at Hyderabad.

Verdict

Thus, opining that the decision of Supreme Court clearly clinches the issue, the Bench held that the impugned order did not require any interference. Accordingly, the appeal was dismissed.[Supinder Kour v. MDN Edify Education Pvt. Ltd., 2021 SCC OnLine J&K 594, decided on 20-08-2021]


Kamini Sharma, Editorial Assistant has reported this brief.


Appearance by:

For the Appellant: Sr. Advocate Vikram Sharma with Advocate Sachin Dev Singh

For the Respondents: Advocate Rajesh Ranjan

Case BriefsSupreme Court

Supreme Court: A Division Bench comprising of R.F. Nariman and B.R. Gavai, JJ. held that a foreign arbitral award is enforceable against non-signatories to arbitration agreement. The Supreme Court reiterated that grounds for resisting a foreign arbitral award contained in Section 48(1)(a) to (e) of the Arbitration and Conciliation Act, 1996 are to be narrowly construed, and that a non-signatory’s objection cannot possibly fit into Section 48(1)(a). Furthermore, a foreign arbitral award cannot be challenged on the ground of “perversity”.

Incidental to the main issue, it was also held that Section 44 recognises the fact that tort claims may be decided by an arbitrator provided they are disputes that arise in connection with the subject agreement.

The instant appeals before the Supreme Court raised interesting questions relatable to Part II of the Arbitration and Conciliation Act which provisions deal, inter alia, with recognition and enforcement of foreign awards.

Factual Matrix and Appeal

In September 2000, a Representation Agreement was entered into between Integrated Sales Services Ltd. (a company based in Hong Kong) and DMC Management Consultants Ltd. (a company registered in India, with principal business address at Nagpur). By this agreement, Integrated Sales was to assist DMC to sell its goods and services to prospective customers, and in consideration thereof was to receive commission. The agreement also had an arbitration clause as per which any dispute between the parties was to be referred to a single arbitrator in Kansas City, Missouri, USA.

Disputes arose between the parties, as a result of which a notice for arbitration was sent by Integrated Sales to Arun Dev Upadhyaya (Chairman of DMC). DMC and one Gemini Bay Transcription Private Limited were also made a party respondent to the statement of claim. This Gemini Bay was a company formed in India, owned and/or controlled and dominated by Arun Dev Upadhyaya. It was alleged that Arun Dev Upadhyaya used Gemini Bay to transfer funds away from Integrated Sales. It was alleged that DMC terminated contracts with clients brought in by Integrated Sales, and later caused execution of new contracts by same clients with Gemini Bay. This was done to evade payment of commission to Integrated Sales. It was alleged that Arun Dev Upadhyaya used Gemini Bay as alter ego of himself, and ignored the corporate forms of DMC to achieve his improper purpose of breaching the Representation Agreement. Gemini Bay objected that the arbitration agreement entered into between Integrated Sales and DMC was not enforceable against it.

In March 2010, the international arbitrator gave award to the tune of USD 6,948,100 in favour of Integrated Sales, which then approached a Single Judge of the Bombay High Court to enforce the foreign arbitral award. The Single Judge held that the arbitral award was enforceable only against DMC and not against Arun Dev Upadhyaya and Gemini Bay as they were non-signatories to the arbitration agreement. However, on appeal, the Division Bench of the High Court reversed the judgment of the Single Judge. Aggrieved, Gemini Bay and Arun Dev Upadhyaya approached the Supreme Court.

Analysis and Observations

Foreign award

Foremost, the Court noted that a reading of Section 44 of the Arbitration and Conciliation Act, 1996 would show that there are six ingredients to an award being a foreign award. First, it must be an arbitral award on differences between persons arising out of legal relationships. Second, these differences may be in contract or outside of contract, for e.g., in tort. Third, the legal relationship so spoken of ought to be considered “commercial” under the law in India. Fourth, the award must be made on or after 11-10-1960. Fifth, the award must be a New York Convention award. And sixth, it must be made in one of such territories which the Central Government by notification declares to be territories to which the New York Convention applies.

Pre-requisites for enforcement of foreign award

Then the Court referred to Section 47 (Evidence), sub-section (1) of which provides pre-requisites for the enforcement of a foreign award: (a) the original award or a copy thereof duly authenticated in the manner required by the law of the country in which it is made; (b) the original agreement for arbitration or a duly certified copy thereof; and (c) such evidence as may be necessary to prove that the award is a foreign award.

Roping in a non-signatory

It was noted that all the requirements of sub-section (1) are procedural in nature, the object being that the enforcing court must first be satisfied that it is indeed a foreign award, as defined, and that it is enforceable against persons who are bound by the award.  The Court was of the opinion that:

“Section 47(1)(c) being procedural in nature does not go to the extent of requiring substantive evidence to ‘prove’ that a non-signatory to an arbitration agreement can be bound by a foreign award. As a matter of fact, Section 47(1)(c) speaks of only evidence as may be necessary to prove that the award is a foreign award.”

The Court dismissed the argument of the appellant that the burden of proof is on the person enforcing the award and that this burden can only be discharged by such person leading evidence to affirmatively show that a non-signatory to an arbitration agreement can be bound by a foreign award. It was held that such argument is outside Section 47(1)(c).

Refusal to enforcement of foreign award

Next, the Court referred to Section 48 (Conditions for enforcement of foreign awards).  It was noted that when enforcement of a foreign award is resisted, the party who resists it must prove to the court that its case falls within any of the sub-clauses of sub-section (1) or sub-section (2) of Section 48. The Court said:

“Given that foreign awards in convention countries need to be enforced as speedily as possible, … the expression ‘proof’ in Section 48 would only mean ‘established on the basis of the record of the arbitral tribunal’ and such other matters as are relevant to the grounds contained in Section 48.”

It was also observed that the New York Convention which has been adopted by the Arbitration Act has a pro-enforcement bias, and unless a party is able to show that its case comes clearly within Section 48(1) or Section 48(2), the foreign award must be enforced. Also, the grounds contained in Sections 48(1)(a) to (e) are to be construed narrowly. Reliance was placed on Ssangyong Engg. & Construction Co. Ltd. v. NHAI, (2019) 15 SCC 131; and Vijay Karia v. Prysmian Cavi E Sistemi SRL, (2020) 11 SCC 1.

Non-signatory’s objection cannot fit into S. 48(1)(a)

The appellant had argued that a non-signatory to an arbitration agreement would be directly covered by Section 48(1)(a) as well as Section 48(1)(c), and if the Award were to be read, it would be clear that the reasons given are extremely sketchy and based on ipse dixit and not on facts, rendering the Award liable to be set aside on these two grounds.

Section 48(1)(a) provides that enforcement of a foreign award may be refused, at the request of the party against whom it is invoked, only if that party furnishes to the court proof that “the parties to the agreement referred to in Section 44 were, under the law applicable to them, under some incapacity, or the said agreement is not valid under the law to which the parties have subjected it or, failing any indication thereon, under the law of the country where the award was made”.

The Court said that if read literally, Section 48(1)(a) speaks only of parties to the agreement being under some incapacity, or the agreement being invalid under the law to which parties have subjected it. It was observed:

“There can be no doubt that a non-party to the agreement, alleging that it cannot be bound by an award made under such agreement, is outside the literal construction of Section 48(1)(a).”

The Court further said that the ground is in itself specific, and only speaks of incapacity of parties and the agreement being invalid under the law to which the parties have subjected it. To attempt to bring non-parties within this ground is to try and fit a square peg in a round hole. It was categorically stated:

“A non-signatory’s objection cannot possibly fit into Section 48(1)(a)”

The Court said that what it was being asked to do in the guise of applying Section 48(1)(a) was really to undertake a review on merits. However, given the fact that the foreign award gave reasons on facts to apply the alter ego doctrine, it was not possible for the Court to reappreciate the facts especially when the burden lay on the appellants to establish the grounds made out in Section 48(1), none of which go to the merits of the case.

Perversity not a ground to set aside international commercial arbitration

The appellant also argued that the Award was perverse since vital evidence was not led in support of the claimant’s case before the arbitrator. Rejecting the argument, the Court answered:

“Perversity as a ground to set aside an award in an international commercial arbitration held in India no longer obtains after the 2015 amendment to the Arbitration Act, 1996.”

Relying on the law laid down in Ssangyong, (2019) 15 SCC 131, the Court explained that Section 48 has also been amended in the same manner as Section 34 of the Arbitration Act. The ground of “patent illegality appearing on the face of the award” is an independent ground of challenge which applies only to awards made under Part I which do not involve international commercial arbitrations. It was observed:

“Thus, the ‘public policy of India’ ground after the 2015 amendment does not take within its scope ‘perversity of an award’ as a ground to set aside an award in an international commercial arbitration under Section 34, and concomitantly as a ground to refuse enforcement of a foreign award under Section 48, being a pari materia provision which appears in Part II of the Act.”

Limited scope of challenge under S. 48(1)(c)

Section 48(1)(c) provides that enforcement of a foreign award may be refused, at the request of the party against whom it is invoked, only if that party furnishes to the court proof that “the award deals with a difference not contemplated by or not falling within the terms of the submission to arbitration, or it contains decisions on matters beyond the scope of the submission to arbitration”.

The Court was of the view that given the fact that the expression “submission to arbitration” would refer primarily to the arbitration agreement, sub-clause (c) only deals with disputes that could be said to be outside the scope of the arbitration agreement between the parties – and NOT to whether a person who is not a party to the agreement can be bound by the same.

Natural justice grounds under S. 48(1)(b)

The appellant next argued that though Section 48(1)(b) refers to a natural justice ground, the giving of reasons being part of natural justice ought to be included in this ground, and as no proper reasons have been given by the Arbitrator, the Award should be set aside on this ground.

Section 48(1)(b) provides that enforcement of a foreign award may be refused, at the request of the party against whom it is invoked, only if that party furnishes to the court proof that “the party against whom the award is invoked was not given proper notice of the appointment of the arbitrator or of the arbitral proceedings or was otherwise unable to present his case”.

The Court stated that Section 48(1)(b) does not speak of absence of reasons in an arbitral award at all. It was explained:

“The only grounds on which a foreign award cannot be enforced under Section 48(1)(b) are natural justice grounds relatable to notice of appointment of the arbitrator or of the arbitral proceedings, or that a party was otherwise unable to present its case before the arbitral tribunal, all of which are events anterior to the making of the award.”

While rejecting the appellant’s argument, the Court relied on Vijay Karia, (2020) 11 SCC 1 to note that in any case Section 48(1)(b) is to be narrowly construed.

Tort claims and scope of arbitration

The appellant contended that since damages were given in tort by the Arbitrator in the instant case, they would be outside the scope of the arbitration agreement.

For answering this contention, the Court referred to the arbitration clause between the parties which expressly said “in the event a dispute arises in connection with this Agreement, such dispute shall be referred to a single arbitrator …”. Rejecting the appellant’s contention, the Court observed that:

“Section 44 recognises the fact that tort claims may be decided by an arbitrator provided they are disputes that arise in connection with the agreement.”

Power of enforcing court

The appellant argued that a comparison between Section 35 (Finality of arbitral awards) and Section 46 (When foreign award binding) of the Arbitration Act, 1996 would show that the legislature circumscribed the power of the enforcing court under Section 46 to persons who are bound by a foreign award as opposed to persons which would include “persons claiming under them” and that, therefore, a foreign award would be binding on parties alone and not on others.

Rejecting this argument as well, the Court stated that Section 46 does not speak of “parties” at all, but of “persons” who may, therefore, be non-signatories to the arbitration agreement. Also, Section 35 speaks of “persons” in the context of an arbitral award being final and binding on the “parties” and “persons claiming under them”, respectively. Section 35 would, therefore, refer to only persons claiming under parties and is, therefore, more restrictive in its application than Section 46 which speaks of “persons” without any restriction.

Damages awarded do not shock conscience of the court

The final argument of the appellant was that the damages which were awarded by the arbitrator had no basis whatsoever.

Finding no merit in this final contention, the Court said that such challenge to enforceability of the Award would again not fall within any of the exceptions contained in Section 48(1). Furthermore, in order to attract Section 48(2) read with Explanation 1(iii), it is only in exceptional cases which involve some basic infraction of justice which shocks the conscience of the court that such a plea can be entertained.

The Court found that the Arbitrator correctly held that as nothing was forthcoming from the appellant, he would have to make a best judgment assessment for damages. It was also noted that it has been established that such “guesstimates” are not a stranger to the law of damages in the USA and other common law nations. The Court was of the opinion that:

“In any case, the damages so awarded in the facts of this case cannot even remotely be said to shock the conscience of this Court so as to clutch at ‘the basic notion of justice’ ground contained in Section 48(2) Explanation (1)(iii).”

Decision

In view of the above, the appeal was dismissed by the Supreme Court. [Gemini Bay Transcription (P) Ltd. v. Integrated Sales Service Ltd., 2021 SCC OnLine SC 572, decided on 10-8-2021]


Tejaswi Pandit, Senior Editorial Assistant has reported this brief.

Case BriefsHigh Courts

Delhi High Court: Suresh Kumar Kait, J., reiterated that no party could be permitted to unilaterally appoint an Arbitrator, as the same would defeat the purpose of unbiased adjudication of the dispute between the parties.

Crux of the petitions is to seek the appointment of Arbitrators for adjudication of disputes between the parties.

According to the petitioner firm, a license agreement along with a supplementary agreement was entered between the petitioner and respondent of shops in question, which was renewable every five years at the option of the petitioner.

Petitioner submitted that after the change of name of petitioner/firm from M/S Virender Kumar & Co. to M/S Sital Dass Sons, an additional space adjacent to shop in the same shopping arcade was granted by the respondent to M/S Sital Dass Sons vide supplementary agreement and the terms of the original license agreement were to be read with the other agreement. M/S Sital Dass Sons through its partners informed the respondent that they shall be operating under two different names.

According to the petitioners in the petitions, on the ground that the internal fittings of shopping arcade were nearly 40 years old and were in urgent need of repair and it was no longer financially profitable to continue with shopping arcade, respondent vide a notice revoked the license in respect of the shops.

Petitioners contended that they were in exclusive possession of shops in question and the said notice did not mention any violation of the terms and conditions of the license/lease agreement by petitioners. Further submitted that petitioners had the right to carry on business at the hours suited to them and the license/lease could not have been terminated at the will of respondent.

It had been also brought to the notice of this Court that against illegal eviction of petitioners, they had preferred a civil suit CS(Comm)) 237/2020 before this Court for declaration and permanent injunction against the respondents, which was disposed of vide order dated 21.07.2020 as not maintainable in view of Arbitration clause between the parties.

Bench stated that the arbitration agreement between the parties and invocation of arbitration was not disputed by the respondents. Hence the said petitions deserved to be allowed.

However, contention of petitioners to appoint Arbitrator of their choice was rejected, as no party could be permitted to unilaterally appoint an Arbitrator, as the same would defeat the purpose of unbiased adjudication of dispute between the parties.

Court relied on the decision of the Supreme Court in Perkins Eastman Architects DPS v. HSCC (India) Ltd., 2019 SCC OnLine SC 1517 wherein it had been categorically stated that “in cases where one party has a right to appoint a sole arbitrator, its choice will always have an element of exclusivity in determining or charting the course for dispute resolution. Naturally, the person who has an interest in the outcome or decision of the dispute must not have the power to appoint a sole arbitrator.”

The above-stated decision was followed by the Coordinate Benches of this Court in Proddatur Cable Tv Digi Services v. Siti Cable Network Limited 2020 SCC OnLine Del 350 and VSK Technologies Private Ltd. v. Delhi Jal Board, 2021 SCC OnLine Del 3525 in unequivocal terms.

Concurring the above decisions, present petition was allowed.

Hence, the High Court appointed the sole arbitrator to adjudicate the dispute between the parties.

Adding to the above, Court stated that the fee of the arbitrator shall be governed by the fourth schedule of the Arbitration and Conciliation Act, 1996 and the Arbitrator shall ensure compliance with Section 12 of Arbitration and Conciliation Act, 1996 before commencing the arbitration. [Sital Dass Jewellers v. Asian Hotels (North) Ltd., 2021 SCC OnLine Del 3914, decided on 6-08-2021]


Advocates before the Court:

For the Petitioners: Mr P.K. Agrawal, Mr Rishabh Tomar & Ms Sukriti Sinha, Advocates

For the Respondent: Mr Sidhant Kumar & Ms Manyaa Chandok, Advocates

Op EdsOP. ED.

“Arbitrators and Arbitral Tribunals are creatures not of statute but of contract[1].”

Universally arbitration is recognised as one of the most noteworthy alternative dispute resolution processes. Arbitration provides a much-needed respite to ailing litigants to seek redressal of their grievances by an autonomous process, with limited or no judicial intervention. In fact, the perquisites of arbitral proceedings are too profuse to be chronicled in a few words. The Supreme Court in Govt. of Orissa v. G.C. Roy[2], while distinguishing the process of determination of disputes through judicial means, in contrast with, arbitration proceedings, observed, “…resolution of dispute by court, through judicial process is costly and time consuming … alternative method of settlement of dispute through arbitration is a speedy and convenient process….” Similarly, in Shailesh Dhairyawan v. Mohan Balkrishna Lulla[3], the Supreme Court acknowledged that the parties choose arbitration as a dispute resolution mechanism, “keeping in view that it offers a timely, private, less formal and cost-effective approach for the binding determination of disputes. It provides the parties with greater control of the process than a court hearing.” Consequently, endorsing the numerous benefits which may ensue from an arbitration proceeding, it is quite understandable that the Indian Courts[4] have repeated avowed that the said process needs to be encouraged, considering the, “high pendency of cases in the courts and cost of litigation.”

 Customarily, the genesis of arbitration proceedings lies under a contract or an “arbitration agreement[5]” wherein the parties agree to submit to arbitration, “all or certain disputes which have arisen or which may arise between them in respect of a defined legal relationship, whether contractual or not.” As per Section 7(4) of the Arbitration and Conciliation Act, 1996 (Arbitration Act) such an agreement, in turn, may be in a form of a document signed by the parties or an exchange of letters, telex, telegrams or other means of telecommunication, including communication through electronic means, which provide a record of the agreement or an exchange of statements of claim and defence in which the existence of the agreement is alleged by one party and not denied by the other. In fact, it is trite law[6] that there is no prescribed format/form of an arbitration agreement and the only prerequisite is the ascertainment of the fact, “whether the parties have agreed that if disputes arise between them in respect of the subject-matter of contract such dispute shall be referred to arbitration, then such an arrangement would spell out an arbitration agreement.” Regardless of the manner and form in which an arbitration agreement may be constructed, it is, however, an established fact that where the parties willingly submit to arbitration as a mode of their dispute resolution, the scope of such proceedings and the confines of arbitrator’s jurisdiction get contractually defined. As a corollary, an arbitrator is expected to exercise his power and authority within the terms and confines of contract, as executed between the parties to a dispute, and cannot, under a guise of doing justice[7], “award contrary to the terms [thereof]”. It is, in fact, a settled law[8] that an arbitrator cannot act arbitrarily, irrationally, capriciously or independent of the contract and in a case where an arbitrator transgresses beyond contractual limitations, “he would be acting without jurisdiction, whereas if he has remained inside the parameters of the contract, his award cannot be questioned on the ground that it contains an error apparent on the face of the record.” As per the Supreme Court[9], jurisdiction of the arbitrator is confined within the four corners of an arbitration agreement for, “he can only pass such an order which may be the subject-matter of reference”.

 Irrespective of the contractual limitation on arbitral proceeding, it is not quite uncommon that during such proceeding, parties may elevate certain claims which may fall outside the purview of their contract(s). One of such commonly invoked claims pertains to the escalation cost or escalation charge, being the monetary claim arising pursuant to inflation, as a result of time gap in the performance of any contract. Generally, the parties to an agreement make specific provisions pertaining to the grant or refusal of escalation cost(s)/charge(s) under their agreement. However, difficulty arises in a case where no such stipulation is envisaged or foreseen by contracting parties. Nonetheless, even in these states of imbroglio, courts have not abrogated their responsibility of extricating the layers of incertitude and providing a needed lucidity on the subject.

Undoubtedly, there can be no occasion for ambiguity in cases where there is an explicit prohibition under a contract regarding the claims pertaining to escalation cost. In fact, in this regard, the Supreme Court in New India Civil Erectors (P) Ltd. v. Oil & Natural Gas Corpn.[10] has firmly voiced its disapproval regarding the grant of any amount against price escalation, despite an explicit contractual embargo towards the agitation of such claims. Similarly, the Supreme Court in Continental Construction Co. Ltd. v. State of M.P.[11], struck down the award of an arbitrator for extra claim resulting due to price escalation by, inter alia, observing, “there are specific clauses referred to hereinbefore which barred consideration of extra claims in the event of price escalation”. At the same time, the Supreme Court in State of Orissa v. Sudhakar Das[12], considering a scenario of absence of escalation cost clause under a contract, inter alia, observed:

  1. It is not disputed that the arbitration agreement contained no escalation clause. In the absence of any escalation clause, an arbitrator cannot assume any jurisdiction to award any amount towards escalation. That part of the award which grants escalation charges is clearly not sustainable and suffers from a patent error. The decree, insofar as the award of escalation charges is concerned, cannot, therefore, be sustained.

Clearly, these precedents and the observations made therein are harmonious with the general principle of arbitration that the powers of an arbitrator are bounded within the contractual realms. Accordingly, in the event of an explicit prohibition under a contract pertaining to the grant of escalation charges, as a rule, or in the absence of any clause/term pertaining to such claims under an agreement, ordinarily, it would not be within the domain of an arbitrator to award any amount towards escalation.

However, it is to be noted that there have been several instances, wherein the courts, despite the absence of an explicit cause pertaining to the grant of escalation charge under an agreement, have favoured grant thereof, weighing the factors such as the; implicit and inherent meaning and interplay of various terms of/stipulations under the contract, lack of any prohibitive clause under contract to such conferment, facts and circumstances involved, equity, etc. In one such instance[13], the Supreme Court, while acknowledging that escalation is, “a normal incident arising out of gap of time in this inflationary age in performing any contract”, upheld an arbitral award which, inter alia, permitted/granted escalation cost despite the absence of an unequivocal provision/price escalation clause under arbitration agreement/ reference. Significantly, the reasons which governed the said conclusion of the Court, inter alia, were that since in the instant case, “[o]nce it was found that the arbitrator had jurisdiction to find that there was delay in execution of the contract due to the conduct of the respondent, the respondent was liable for the consequences of the delay, namely, increase in prices. Therefore, the arbitrator had jurisdiction to go into this question.” The said reasoning of the Court can be discerned in light of its earlier observation in Tarapore & Co. v. State of M.P.[14], inter alia, to the effect that even in the absence of any explicit contractual term, an arbitrator is within his power to exercise jurisdiction in cases where something follows as a necessary concomitant to what was agreed upon by parties under a contract. In fact, as per the Court,

“it cannot be held that the arbitrators had no jurisdiction to make the award because of lack of specific provision permitting the claim at hand. This does not conclude the matter. It has to be seen whether the term of the agreement permitted entertainment of the claim by necessary implication.”

Significantly, though, the Court dismissed the argument to the effect that whatever is not excluded specifically by the contract can be subject-matter of claim by a contractor on the ground that the same, “will mock at the terms agreed upon”, however, held, “Of course, if something flows as a necessary concomitant to what was agreed upon, courts can assume that too as a part of the contract between the parties.”

In another illustration, the Supreme Court in K.N. Sathyapalan v. State of Kerala[15], being specifically posed with the issue, “whether in the absence of any price escalation clause in the original agreement and a specific prohibition to the contrary in the supplemental agreement, the appellant could have made any claim on account of escalation of costs”, inter alia, observed:

  1. Ordinarily, the parties would be bound by the terms agreed upon in the contract, but in the event one of the parties to the contract is unable to fulfil its obligations under the contract which has a direct bearing on the work to be executed by the other party, the arbitrator is vested with the authority to compensate the second party for the extra costs incurred by him as a result of the failure of the first party to live up to its obligations. Significantly, these observations were, subsequently, reiterated and affirmed by the Court in Assam SEB Buildworth (P) Ltd.[16] Noticeably, a perusal of these dictates would demonstrate that the reasons for upholding the grant of escalation cost under the said circumstances appears to be premised on the principle of equity and the absence of any explicit embargo to the grant of escalation charges under a contract. Reasonably, under the circumstances where delay in performance of its obligations by one of the parties to a contract have a direct nexus on the deferment of contractual compliance by another, in the absence of an explicit prohibition, grant of escalation charges by an arbitrator may not only sensible, rather, equitable and fair.

In a related context the Supreme Court in Associated Construction v. Pawanhans Helicopters Ltd.[17], inter alia, dealt with the issue, “whether the contractual prohibitions regarding the grant of escalation cost can be extended beyond the duration of such an agreement”. Significantly, in the instant case, though, on one hand, there were specific clauses under the contract which explicitly prohibited claims pertaining to fluctuation in price and compensation for the subsequent increase in cost of material, etc., however, it was noted by the Court that the contracting parties had stipulated under their agreement that there, “could be a situation where the contractor had suffered loss for whatever reasons which was required to be reimbursed as per procedure prescribed in Clause 43. Clause 43(2) also specifically provided that Clause 43 was without prejudice to any other rights and remedies that the contractor might possess.” At the same time, while acknowledging that timely performance of contractual obligations was agreed to be the essence of the contract in this specific instance, the Court, opined, “even assuming for a moment that there could be no price escalation during the period of 4 months i.e., during the pendency of the contract, such embargo would not be carried beyond that period as time was of the essence of the contract.” Accordingly, the Court approved the grant of additional claims towards escalation cost/ charges, in favour of one of the participants to the said contract, against the work performed by it beyond the agreed term/duration, for the reasons of delay solely attributable to the conduct of the other party. Significantly, the said remarks are in stark contrast with the  Court’s observations in New India Civil Erectors (P) Ltd. case[18], inter alia, to the effect:

  1. …stipulation provides clearly that there shall be no escalation on any ground whatsoever and the said prohibition is effective till the completion of the work. The learned arbitrators, could not therefore have awarded any amount on the ground that the appellant must have incurred extra expense in carrying out the construction after the expiry of the original contract period … Merely because time was made the essence of the contract and the work was contemplated to be completed within 15 months, it does not follow that the aforesaid stipulation was confined to the original contract period.

Notably, though, the Supreme Court in Associated Construction case did not have an occasion to deal with its earlier decision in New India Civil Erectors (P) Ltd. case, however, there are certain explicit distinguishing features of these precedents. Firstly, in the former case, the delay in performance of contract by the claimant was attributable due to the defaults committed by the other contracting party, which was not the situation in latter. At the same time, though, in Associated Construction case, the claims for escalation cost beyond the period of contract were held to be justified on a general clause/term regarding reimbursement of losses under the contract involved, however, no such similar clause was cited/noted by the Court in New India Civil Erectors (P) Ltd. case. Nevertheless, it would be an appreciated stride, in case, the extraneous/illusive conflict between these dictates is resolved by a larger Bench of the Supreme Court.

Determinately, resolutions pertaining to the grant or refusal of escalation cost/charges, akin to other claims, inter alia, revolve on[19], “the construction of the contract in that case, the evidence placed before the arbitrator and other facts and circumstances of the case.” Undoubtedly, the grant of escalation cost in utter negation of an explicit contractual prohibition to the said effect, contradicts the fundamental and core principles of arbitration and the jurisdiction of an arbitrator. However, in contrast, failure of an arbitrator to exercise its authority to grant such costs/in appropriate cases/instances, where no contractual prohibitions exist, would certainly negate the principles of justice, equity and fairness. It is trite law[20] that that, though, an arbitrator is required to decide on issues within contractual terms, however, “if an arbitrator construes a term of the contract in a reasonable manner” that, cannot, by in itself become a reason for setting aside of an arbitral award. Consequently, while roving through the rugged terrains of arbitral proceedings, an arbitrator is required to not only adopt an approach of caution and circumspection, rather, must be equipped with a thorough knowledge of law and skills to appreciate the contractual terms in their exact spirit and intent, in order to establish an equilibrium between divergent assertions. Further, it is quite understandable that it is not enough that an arbitrator does not transgresses his contractually defined restraints, rather, must have astuteness to appreciate an agreement in its true form so as to not out rightly negate claims, which are necessarily concomitant to such agreements and at the same time imminent, valid, just and equitable.


Advocate, Supreme Court and High Court(s), e-mail: abhigoyal85@gmail.com.

[1] HMJ V. Ramasubramanian in 4G Identity Solutions (P) Ltd. v. Bloom Solutions (P) Ltd., 2018 SCC OnLine Hyd 22.

[2] (1992) 1 SCC 508.

[3] (2016) 3 SCC 619.

[4] Refer to State of J&K v. Dev Dutt Pandit, (1999) 7 SCC 339.

[5] Refer to S. 7(1) of the Arbitration and Conciliation Act, 1996.

[6] Refer to Rukmanibai Gupta v. Collector, (1980) 4 SCC 556.

[7] State of Rajasthan v. Nav Bharat Construction Co., (2006) 1 SCC 86.

[8] Refer to Bharat Coking Coal Ltd. v. Annapurna Construction, (2003) 8 SCC 154.

[9] Army Welfare Housing Organisation v. Sumangal Services (P) Ltd., (2004) 9 SCC 619.

[10] (1997) 11 SCC 75.

[11] (1988) 3 SCC 82.

[12] (2000) 3 SCC 27.

[13] P.M. Paul v. Union of India, 1989 Supp (1) SCC 368 [Refer also to Food Corporation of India v. A.M. Ahmed & Co., (2006) 13 SCC 779].

[14] (1994) 3 SCC 521.

[15] (2007) 13 SCC 43.

[16] (2017) 8 SCC 146.

[17] (2008) 16 SCC 128.

[18] (1997) 11 SCC 75.

[19] Refer to NTPC v. Deconar Services (P) Ltd., 2021 SCC OnLine SC 498

[20] Refer to Associate Builders v. DDA, (2015) 3 SCC 49.

Experts CornerShardul Amarchand Mangaldas

Introduction

A recent judgment of a two-Judge Bench of the Supreme Court of India in U.P. Power Transmission Corpn. Ltd. v. CG Power and Industrial Solutions Ltd.[1] (UPPTCL) has yet again thrown up the divergent approaches followed by writ courts in  India while dealing with disputes arising out of contracts having an arbitration clause.

 

As with all debates, this one has two sides. On the one hand,  High Courts undoubtedly possess extraordinary powers to issue prerogative writs under Article 226 of the Constitution of India,  subject to  judicially crafted and self-imposed limitations, one of them, especially  in the context of commercial matters, being the existence of an efficacious alternative remedy such as arbitration. On the other hand, it is universally acknowledged that existence of an alternative remedy cannot be an absolute bar to exercise of writ jurisdiction by High Courts.

 

Given this legal paradox, a practising lawyer must willy-nilly gaze into a crystal ball (figuratively, at least) and assess his/her chances of success in choosing to file a writ petition as against taking recourse to arbitration in such matters.

 

This article examines the principles laid down by constitutional courts which will help a practitioner make an informed assessment on the preferable course of action in such situations. Part A of this article discusses the judgment in UPPTCL and Part B examines judicial precedents on this subject.

The UPPTCL case

A certain framework agreement was entered into between UPPTCL (employer) and CG Power and Industrial Solutions Limited (contractor) for construction of 765/400 KV substations at Unnao, Uttar Pradesh. In the framework agreement, the scope of the construction work was divided into four contracts. The first contract was in the nature of a supply contract, while the other three contracts pertained to civil works. After the contractor completed the supply work as per the supply contract, it was found, on an audit objection, that UPPTCL had failed to deduct labour cess from the bills of the contractor, under the Building and Other Construction Workers’ (Regulation of Employment and Conditions of Service) Act, 1996 (BOCW Act). Consequently, a demand was raised by UPPTCL upon the contractor.

 

The contractor filed a writ petition in the Allahabad High Court and challenged the demand, stating that the first contract was a pure supply contract and would not attract levy of labour cess under the BOCW Act. The employer/UPPTCL did not raise the point of existence of an arbitration clause in the framework agreement before the High Court.

The High Court set aside the demand in exercise of its writ jurisdiction.

What the Supreme Court held

While affirming the judgment of the High Court on merits, the Supreme Court found that although there was an arbitration clause in the framework agreement, the employer did not raise an objection in that regard and the existence of an arbitration clause did not debar the High Court from entertaining the writ petition.

 

The Supreme Court further reiterated that availability of an alternative remedy, such as arbitration, would not prohibit the High Courts from entertaining a writ petition in an appropriate case. The Court referred, amongst others, to the judgments in Whirlpool Corpn. v. Registrar of Trade Marks[2] and Harbanslal Sahnia v. Indian Oil Corpn. Ltd.[3] and noted that, notwithstanding the availability of such an alternative remedy, a writ petition would nevertheless be maintainable under certain circumstances. The Supreme Court, however, struck a note of caution that since writ jurisdiction under Article 226 is discretionary in nature, courts should refrain from entertaining a writ petition which involves adjudication of disputed questions of fact and analysis of evidence of witnesses.

 

It appears that the Court’s attention was not drawn to the fact that over the years, the correctness of the decision in Harbanslal Sahnia[4] has been doubted in subsequent decisions, as discussed in Part B below.

 

The decisions in Whirlpool Corporation and Harbanslal Sahnia

In Whirlpool Corpn. v. Registrar of Trade Marks[5], the Bombay High Court dismissed a writ petition challenging a show cause notice for cancellation of the certificate of renewal for a trademark issued by the Registrar of Trade Marks. The issue for consideration was whether a writ could be maintained in view of existence of an alternative remedy before the Registrar under the Trade Marks Act, 1940.  In this case, the dispute neither arose out of a contract nor was otherwise agreed by the parties as being referable to arbitration.

 

A two-Judge Bench of the Supreme Court held that the power of the High Courts to issue prerogative writs under Article 226 of the Constitution is plenary in nature and is not limited by any other provision of the Constitution and therefore, the High Courts, having regard to the facts of the case, have the discretion to entertain or not to entertain a writ petition. The Supreme Court stated that the High Courts have imposed upon themselves certain restrictions, including existence of an effective and efficacious alternative remedy. The Supreme Court further went on to hold that presence of an alternative remedy would not operate as a bar in at least three contingencies, namely (i) where the writ petition is filed for enforcement of any of the fundamental rights; or (ii) where there is a violation of the principle of natural justice; or (iii) where the order or proceedings are wholly without jurisdiction or the vires of an Act is challenged.

 

This judgment was followed by a two-Judge Bench of the Supreme Court in Harbanslal Sahnia v. Indian Oil Corpn. Ltd.[6] where the Supreme Court reiterated that the rule of exclusion of writ jurisdiction, in view of availability of alternative remedy, is a rule of discretion and not one of compulsion and the court may interfere if it comes to the conclusion that the case falls within one of the contingencies enunciated in Whirlpool Corpn.[7].

 

The dispute in Harbanslal Sahnia[8] pertained to termination of a petroleum dealership agreement by the respondent Corporation. Here, a writ petition filed by the aggrieved dealer challenging the termination action was dismissed by the High Court, having regard to the contractual relationship between the parties and existence of an arbitration clause in the dealership agreement. The Supreme Court, however, overruled the judgment of the High Court, after concluding that the termination was vitiated by non-compliance with certain government orders.

 

At this stage, it would be useful to look at certain decisions of the Supreme Court prior to the judgment in Harbanslal Sahnia[9].

 

In Titagarh Paper Mills Ltd. v. Orissa SEB[10], a three-Judge Bench of the Supreme Court upheld a Orissa High Court order dismissing a writ petition on the basis that the issue(s) in question pertained to disputes which were arbitrable under a contract.  In this case, the levy of a coal surcharge on the consumers of the Electricity Board concerned was challenged before the High Court. The High Court dismissed the petition on a preliminary ground that a specific remedy of arbitration was available to the parties. The Supreme Court upheld the High Court’s order and relegated the parties to arbitration, after finding that the claims relating to levy of coal surcharge would be covered by the arbitration agreement.

 

The approach in Titagarh Paper Mills Ltd.[11] was followed in several later judgments of the Supreme Court, such as State of U.P. v. Bridge & Roof Co. (India) Ltd.[12], Kerala SEB v. Kurien E. Kalathil[13] and State of Gujarat v. Meghji Pethraj Shah Charitable Trust[14].  In these judgments, the Supreme Court opined that factual disputes or disputes arising out of contractual terms or disputes pertaining to termination of the contract, without adherence to principles of natural justice, cannot be entertained in a writ petition and the suitable forum for adjudication may be a civil court or arbitration.     

 

Correctness of Harbanslal Sahnia doubted

Since the aforesaid prior judgments were not considered by the Supreme Court in Harbanslal Sahnia[15], its correctness was doubted in subsequent decisions of the Supreme Court. In Sanjana M. Wig v. Hindustan Petroleum Corpn. Ltd.[16] a two-Judge Bench of the Supreme Court noted that the Benches which decided Harbanslal Sahnia[17] and Whirlpool Corpn.[18] did not notice the prior decision in Titagarh Paper Mills Ltd.[19].  Nevertheless, the Court went on to hold that since the discretionary writ jurisdiction of the High Court will be determined on the facts and circumstances of each case, no hard and fast rule could be laid down. The Court held that a writ petition may be maintainable in situations where the impugned action is de hors the terms of the contract and also beyond the ambit and scope of the domestic forum created therefor; the Court qualified its finding by stating that such a case has to be indubitably pleaded.

 

Another two-Judge Bench of the Supreme Court opined in Ankur Filling Station v. Hindustan Petroleum Corpn. Ltd.[20] that the decision in Harbanslal Sahnia[21] requires reconsideration by a larger Bench. However, this issue was not considered in detail by the larger Bench in its final order[22], which focused on whether an arbitrator would have the power to order restoration of a licence. The three-Judge Bench went on to hold in the final order that there may not be an absolute bar for the arbitrator to order such restoration based on the facts and circumstances of the case and ultimately permitted the aggrieved party to invoke the arbitration clause. The Court stated that the larger question of law pertaining to powers of the arbitrator to grant appropriate relief could only be answered by a larger Bench of five Judges.

Conclusion

 In view of the above situation, a writ could credibly be maintained in a contractual matter in the following alternative scenarios, despite existence of an arbitration clause:

 

(i) the lis involves a public law character[23] or requires a judicial determination in rem[24];

(ii) the alternate forum chosen by the parties would not be in a position to grant appropriate relief[25];

(iii) a statutory contract is in question[26] or the action of a State or its instrumentality is demonstrably arbitrary, unreasonable[27] or violative of the fundamental rights of a party;[28]

(iv) the matter does not relate only to the interpretation of a contract which is within the domain of an arbitrator[29].

 

An authoritative pronouncement by a larger Bench of the Supreme Court on this issue would provide much needed clarity to litigants and practising lawyers alike.


† Partner, Shardul Amarchand Mangaldas & Co.

†† Associate, Shardul Amarchand Mangaldas & Co.

††† Associate, Shardul Amarchand Mangaldas & Co.

[1] 2021 SCC Online SC 383.

[2] (1998) 8 SCC 1.

[3] (2003) 2 SCC 107.

[4] (2003) 2 SCC 107.

[5] (1998) 8 SCC 1.

[6] (2003) 2 SCC 107.

[7] (1998) 8 SCC 1.

[8] (2003) 2 SCC 107.

[9] (2003) 2 SCC 107.

[10] (1975) 2 SCC 436.

[11] (1975) 2 SCC 436.

[12] (1996) 6 SCC 22.

[13] (2000) 6 SCC 293.

[14] (1994) 3 SCC 552.

[15] (2003) 2 SCC 107.

[16] (2005) 8 SCC 242.

[17] (2003) 2 SCC 107.

[18] (1998) 8 SCC 1.

[19] (1975) 2 SCC 436.

[20] (2011) 12 SCC 749.

[21] (2003) 2 SCC 107.

[22] Ankur Filling Station v. Hindustan Petroleum Corpn., Civil Appeal Nos. 10855 of 2018 arising out of SLP (Civil) No. 11193 of 2009, order dated 31-10-2018 (SC).

[23] Civil Appeal Nos. 10855 of 2018 arising out of SLP (Civil) No. 11193 of 2009, order dated 31-10-2018 (SC).

[24] Booz Allen and Hamilton Inc. v. SBI Home Finance Ltd., (2011) 5 SCC 532.

[25] Sanjana M. Wig, (2005) 8 SCC 242.

[26] Meghji Pethraj Trust, (2000) 6 SCC 293.

[27]Sanjana M. Wig, (2005) 8 SCC 242.

[28] Whirlpool Corpn., (1998) 8 SCC 1; Harbanslal Sahnia, (2003) 2 SCC 107.

[29] Bisra Stone Lime Co. Ltd. v. Orissa SEB, (1976) 2 SCC 167.


DisclaimerThe content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances. Further, the views in this article are the personal views of the authors.

Case BriefsSupreme Court

Supreme Court: The Division Bench of Sanjay Kishan Kaul and Hemant Gupta, JJ., while addressing the present matter, remarked that:

Fate of a suit against encashment of bank guarantee still hangs in balance after almost two decades!

Respondent 1 preferred an appeal before the Additional District Judge and the appellate court passed an interim order restraining the release of payment of bank guarantee, and the said order was confirmed.

On 6-01-2020, this Court passed an order directing the disposal of the appeal within a period of 3 months from the next date, meanwhile, respondent 1 moved an application seeking admission of copy of the report expert opinion under Section 45 of the Evidence Act. They sought to place on record some documents of the appellant with an objective of the signature comparison. Such a request was rejected by the ADJ, and an appeal was filed against the said order and a notice was issued and further proceedings pending were stayed.

Further, the aforesaid fact was brought to the notice of this Court and on noticing the mockery made out of the proceedings, for a stay of encashment of bank guarantee, Court called for a report.

On 2-11-2020, the High Court vacated the stay observing that the order of this Court was not brought to the knowledge of the High Court. In terms of the impugned judgment, the order dated 18-2-2020 of ADJ was set aside and the matter was remitted back to ADJ to consider the application under Order 41 Rule 27 CPC afresh at the time of hearing of the appeal.

Analysis, Law and Decision

Court found the impugned order to be unsustainable.

Supreme Court noted that the suit had been filed for a decree of permanent injunction restraining the appellant from encashment of bank guarantee and to the bank from making payment., along with a decree of declaration of the agreement including the arbitration clause, null and void and unenforceable.

Bench opined that the argument of respondent 1 is fallacious and it is trite to say that as a bank guarantee is an independent contact, there is a limited scope for interference in case of encashment of bank guarantee as enunciated by various courts including this Court from time to time.

Adding to the above, Court stated that one of the reasons for interference could be egregious fraud. Respondent was unnecessarily prolonging the issue and somehow preventing the encashment of the bank guarantee.

Therefore, impugned order was set aside and the Court dismissed the appeal filed by respondent No. 1 before the High Court against the order of the first appellate court rejecting their application for production of additional documents. [Atlanta Infrastructure Ltd. v. Delta Marine Company, 2021 SCC OnLine SC 482, decided on 19-07-2021]

Op EdsOP. ED.

The international trade has increased manifold with infrastructural advancements i.e. transportation from ships, railroads, automobiles to airplanes. With influx of international trade, the bilateral and multilateral trade agreements have increased and so the disputes arising thereof. The disputes arising therein have always been preferred to be resolved through arbitration rather than the routine course of litigation. The parties to the international trade prefer arbitration for dispute resolution. However, there are several conventions and treaties which regulate and enable the enforcement of a foreign award in a signatory country.

A. Historical background and evolution of recognition and enforcement of foreign arbitral award in India

While tracing down the path of development in the field of “enforcement” and “recognition” of foreign arbitral award, India had two statutes i.e. the Arbitration (Protocol and Convention) Act, 1937[1] and the Foreign Awards (Recognition and Enforcement) Act, 1961[2] to deal with it. The Arbitration (Protocol and Convention) Act, 1937 was an offspring of the Geneva Protocol, 1923 and the Geneva Convention, 1927. Whereas, the Foreign Awards (Recognition and Enforcement) Act, 1961 came into picture as a result of the New York Convention, 1958. After the First World War, the need to have a robust mechanism to resolve the disputes arising out of the international trade across the countries was very strongly felt. The International Chamber of Commerce (ICC) formulated an International Convention for smooth implementation of arbitration clause which used to be mentioned in definitive agreements. Thereafter, the Protocol on Arbitration Clauses was ratified by 30 countries on 24-9-1923 which categorically dealt with the arbitral procedure and execution of arbitral awards. Article I of the Protocol provided for recognition with respect to the international agreements between the countries, which were part of the Protocol which shall ensue that any future differences were to be resolved by arbitration[3].

The Government of India adhered to the Geneva Protocol on Arbitration Clauses, 1923 and the International Convention on the Execution of Foreign Arbitral Awards, 1927. The idea was to be included among the countries, which adhered to the abovementioned Protocol and Convention, in order to enable the resolution of commercial disputes through arbitration arising out of various underlying international agreements. However, subsequent to the implementation of the Geneva Protocol on Arbitral Clauses, there were few predicaments which came into light for instance; the beneficiary of the award was required to show to the executing court that award has attained finality in the country in which it was made in the first place. The said procedure was not very effective and was not in lines with the spirit and objective with which the Convention came into picture i.e. speedy and smooth enforcement of an arbitral award.

After several rounds of deliberations, a new International Convention on recognition came into picture for the recognition and enforcement of foreign arbitral awards i.e. the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the New York Convention, 1958). The Indian Legislature adopted the New York Convention, 1958 and enacted the Foreign Awards (Recognition and Enforcement) Act, 1961, which was enacted with an objective to put in place a robust mechanism, wherein the commercial disputes of contracting countries can be referred to arbitration. It aimed at providing an effective and speedy disposal and consequent smooth enforcement of the foreign awards[4]. The Arbitration (Protocol and Convention) Act, 1937 incorporated the Geneva Protocol and Geneva Convention as First and Second Schedules. The Foreign Awards (Recognition and Enforcement) Act, 1961 similarly embodied the Schedules of the New York Convention, 1958[5].

The United Nation Convention on the Recognition and Enforcement of Foreign Arbitral Awards was ratified by India on 13-7-1960. After the enactment of the Arbitration and Conciliation Act, 1996[6] (“the Arbitration Act, 1996”), the two Acts i.e. the Arbitration (Protocol and Convention) Act, 1937 and the Foreign Awards (Recognition and Enforcement) Act, 1961 were repealed. The Arbitration Act, 1996 was enacted in consonance with the UNCITRAL Model Law and Rules. Note that Part II of the Arbitration Act, 1996, deals with enforcement of a foreign award in India.

B. Definition of “enforcement” and “recognition”

The term “recognition” is more of a defensive mode to secure an arbitral award. The “recognition” secures protection to an arbitral award if the same parties to a convention go for a subsequent arbitration. The contesting party may seek recognition of an arbitral award to set off any other claim qua arbitration between the parties within whom the issues arising therein have already been settled. However, at the same time if, there are new issues which have arisen and which were not a part of earlier round(s) of arbitration, then those issues may be looked into and the very idea to set off while getting the award recognised arrives to a standstill.

“Enforcement” on the other hand is more on an offensive front. A party seeking enforcement of an award not only intends to get the award recognised but also to enforce the same by using appropriate legal sanctions. One may argue that “recognition” and “enforcement” are contemporaries and they act in tandem.

In Brace Transport Corpn. of Monrovia v. Orient Middle East Lines Ltd.[7], the Supreme Court held that:

  1. … An award may be recognised, without being enforced; but if it is enforced then it is necessarily recognised. Recognition alone may be asked for as a shield against re-agitation of issues with which the award deals. Where a court is asked to enforce an award, it must recognise not only the legal effect of the award but must use legal sanctions to ensure that it is carried out.

Now, before going any further, let us try to understand the meaning of “foreign award”. The term “foreign award is defined under Section 44 of the Arbitration Act, 1996[8]. It states that “foreign award means an arbitral award on differences between persons arising out of legal relationships, whether contractual or not, considered as commercial under the law in force in India, made on or after 11th day of October, 1960—

  • in pursuance of an agreement in writing for arbitration to which the Convention set forth in the First Schedule applies, and
  • in one of such territories as the Central Government, being satisfied that reciprocal provisions have been made may, by notification in the Official Gazette.”

The New York Convention, 1958 defined an “arbitral award” as “The term ‘arbitral award’ shall include not only awards made by arbitrators appointed for each case but also those made by permanent arbitral bodies to which parties have submitted.”

The High Court of Calcutta in Serajuddin & Co. v. Michael Golodetz[9] observed that the term “foreign arbitration” would also include arbitrations where one of the parties belongs to a country which has not ratified the Geneva Convention. The Court went on to examine the decisions where the terms “foreign arbitration” and “foreign award” were used and concluded that they were used in connection with the following:

  1. arbitrations in foreign lands;
  2. foreign arbitrators;
  3. application of foreign law; and
  4. foreign nationals.

The Court observed that the countries that have ratified the Geneva Conventions have included certain class of such arbitrations and awards within the definitions under the Arbitration (Protocol and Convention) provisions, however, the definitions were not exhaustive. In this case where one party was Indian and the other US citizens, the Court was of the view that even though the arbitration did not fall within the ambit of the Indian Arbitration (Protocol and Convention) Act, 1937[10] and American laws were applicable, it satisfied all the characteristics of foreign arbitration as aforementioned.

The Delhi High Court in GAILv. Spie Capage SA[11] has very beautifully dealt with the evolution of “enforcement” and “recognition” of foreign award as per the provisions of two primitive Acts i.e. the Arbitration (Protocol and Convention) Act, 1937 and the Foreign Awards (Recognition and Enforcement) Act, 1961.

Procedure of “recognition” and “enforcement” of an arbitral award under the Arbitration and Conciliation Act, 1996

The procedure for enforcement and execution of decrees in India is governed by the Code of Civil Procedure, 1908[12] (CPC, 1908) while, arbitral awards in India is primarily governed by the Arbitration Act, 1996. There are specific provisions i.e. Sections 44 and 49[13] dealing with “recognition” and “enforcement” of arbitral awards under the Arbitration Act, 1996.

India is a signatory to the UN Convention on the Recognition and Enforcement of Foreign Arbitral Awards, 1958 (New York Convention, 1958) as well as the Geneva Convention on the Execution of Foreign Arbitral Awards, 1927 (Geneva Convention, 1927). If a country, which is a party to any of the Conventions, receives an award to be enforced, then the recognition and enforcement is governed by that particular Convention.

The process of enforcement of a foreign award is basically a three-stage process. Firstly, the party which is seeking to enforce the award shall make an application under Section 47 of the Arbitration Act, 1996 to the court having appropriate jurisdiction. The party or the judgment- debtor thereafter may challenge the enforcement before the court under the grounds such as the agreement not having a valid arbitration clause or failure to give proper notice of the appointment of an arbitrator or the Arbitral Tribunal committed a mistake of law or fact. As it has been held in plethora of judgments that Part I of the Arbitration Act, 1996 is not applicable to foreign-seated arbitrations and therefore, grounds of challenge available under Section 34 of the Arbitration Act, 1996[14] cannot be availed to challenge a foreign award.

The award before getting enforced has to fulfil the essential conditions as enshrined under the Arbitration Act, 1996. Once, the award fulfils the essential conditions of the Arbitration Act, 1996, it gets executed just like a court decree under CPC, 1908. The essentials for the enforcement of an award are enshrined under Section 47[15] of the Act, 1996. The award shall be in original or in the manner as required by the laws of the country in which it is intended to be enforced. Secondly, the agreement out of which the dispute had arisen shall accompany and the agreement shall be in original or a certified copy along with such evidence as may be necessary to prove that the award is a “foreign award”. However, in order to create a more pro-enforcement environment, the Supreme Court in PEC Ltd. v. Austbulk Shipping Sdn. Bhd.[16] held that the word “shall” under Section 47 read as “may” must be restricted only to the initial stage of filing of the application. It means that the applicant might not be necessarily required to file the required documents at the time of making the application. The Court observed that certain courts have taken a strict view with respect to the filing of documents while others have held that non-filling of documents does not necessarily call for ejection of the application.

The requirement of an award being appropriately stamped while executing an award has been a contentious issue. However, as far as stamping of the awards is concerned, the Supreme Court inShriram EPC Ltd.v. Rioglass Solar SA[17] very categorically held that, the stamping in not a mandatory condition. The Supreme Court also held that there is also no such requirement of registration and the award can be enforced as a court decree.

C. Forum for enforcement of foreign award

The Supreme Court in Fuerst Day Lawson Ltd. v. Jindal Exports Ltd.[18] held that while enforcing a foreign award there in no such requirement under the statute to initiate separate proceeding seeking an order to file execution of a foreign award. Relying upon the Supreme Court judgment, the Bombay High Court in Noy Velissina Engineering Spa v. Jindal Drugs Ltd.[19] held that a person seeking execution of a foreign award can execute it as a decree of the court.

 The term “court” is defined under the Arbitration Act, 1996 under Section 2(1)(e)[20] as:

  1. (1)(e).…(i) in the case of an arbitration other than international commercial arbitration, the Principal Civil Court of original jurisdiction in a district, and includes the High Court in exercise of its ordinary civil jurisdiction, having jurisdiction to decide the questions forming the subject-matter of the arbitration if the same had been the subject-matter of a suit, but does not include any civil court, or any Court of Small Causes;

(ii) in the case of international commercial arbitration, 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, and in other cases, a High Court having jurisdiction to hear appeals from decrees of courts subordinate to that High Court.

It was held by the Supreme Court in State of Maharashtra v. Atlanta Ltd.[21] that the award-holder shall file the application for enforcement of a foreign arbitral award before the competent court in whose jurisdiction the assets of the judgment-debtor are located. Also, if in a situation, where assets of the judgment-debtor are located within territorial jurisdiction of multiple courts, the application for execution of the award can be filed simultaneously in all such courts having jurisdiction.

Moreover, the Supreme Court in Sundaram Finance Ltd. v. Abdul Samad[22]  while providing some clarity as to the appropriate court to approach for enforcement of a foreign award held that a foreign award-holder can initiate execution of the award before any court in India having territorial jurisdiction where the assets are located. It is important to note that, after the establishment of commercial courts under the Commercial Courts Act, 2015[23] if the foreign award is of a specified value, the designated commercial court of the appropriate court having the territorial and pecuniary jurisdiction shall have the jurisdiction to enforce the award.

For the awards arising out of India seated arbitration although being an international commercial arbitration, after the introduction of the Commercial Courts Act, 2015 and Arbitration and Conciliation (Amendment) Act, 2015[24], the jurisdiction lies with the Commercial Division of the particular High Court, where assets of the judgment-debtor is situated.

D. Enforcement in case of award passed in reciprocating and non-reciprocating countries

Section 2(6) CPC, 1908[25] defines “foreign judgment” as “foreign judgment means the judgment of a foreign court”. Therefore, any court which is outside the territorial jurisdiction of India and a judgment passed by it shall be deemed to be a “foreign judgment”. The perplexity occurs for a party who is intending to enforce a foreign award in two situations, one when the award is passed by a reciprocating country and one when the award is passed by a non-reciprocating country.

A party seeking enforcement of an award passed by a reciprocating country may do so by filing an execution petition just like an execution of a decree under the court having appropriate jurisdiction under Section 44-A CPC, 1908[26]. As explained above, the execution is filed in a court under whose jurisdiction the assets of the judgment-debtor are located. Also, after the establishment of commercial divisions in various high courts of the country, the execution shall be filed accordingly in the appropriate high court if there is money/claim which is to be realised out of the award passed. Otherwise, place of execution will depend on the location of the assets of the judgment-debtor.

On the other hand, if a party seeking enforcement of an award passed by a non-reciprocating country has to file a fresh suit in the court having appropriate jurisdiction in terms of Orders 5, 6 and 7  CPC, 1908. Thereafter, the suit will run like a routine civil suit wherein written statement would be filed as per Order 8 CPC, 1908, after completion of pleadings the issues would be framed as per Order 9 CPC, 1908 followed by evidence stage i.e. recording of evidence. After hearing the parties, the court will pass a judgment and within 15 days of passing, the court draws a decree. Note that, the limitation period for filing for enforcement in the appropriate court is three years from the date on which the award was made. It is to be further noted that upon filing of a fresh suit, the foreign award annexed with the suit shall be treated as evidence by the court in terms with Section 86 of the Evidence Act, 1872[27].

It is of paramount importance to remember that in both the cases, the execution or suit has to fulfil the essential criteria under Section 13 CPC, 1908[28], which postulates certain conditions which are to be fulfilled in order to hold the foreign judgment to be conclusive. Those conditions are as below:

  1. Where it has not been pronounced by a court of competent jurisdiction?
  2. Where it has not been given on the merits of the case?
  3. Where it appears on the face of the proceedings to be founded on an incorrect view of incorrect view of international law or a refusal to recognise the law of India in cases in which such law is applicable?
  4. Where the proceedings in which the judgment was obtained are opposed to natural justice?
  5. Where it has been obtained by fraud?
  6. Where it sustains a claim founded on a breach of any law in force in India?

E. Public policy and its evolution through various precedents

The concept of “public policy” has been a contentious issue lately in the Indian judicial diaspora. It is used as one of the grounds for refusal for enforcing an arbitral award. However, in a landmark decision in Bharat Aluminum Co. v. Kaiser Aluminium Technical Services Inc. (Balco)[29] came as a silver lining in the regime of Indian jurisprudence bringing together the age of “pro-enforcement stance”. The Bench of five Judges in Balco case[30] while drawing a clear line between vires of a domestic and foreign-seated arbitration held that Part I of the Arbitration Act, 1996 would not be applicable to foreign-seated arbitration. The judgment also while limiting the quantum of judicial interference, held that a foreign award cannot be challenged under Section 34(2) of the Act, 1996. While, again applying a little restrained approach, the Supreme Court in Renusagar Power Co. Ltd.v. General Electric Co.[31], held that merely a violation of Indian laws would not attract refusal to enforce an award under the ground of “public policy”.

The Supreme Court later on while deviating from a “pro-enforcement stance”, in ONGC v. Saw Pipes Ltd.[32] expanded the test of “public policy” and held that such awards which violate the Indian laws would be held to be “patently illegal” and the same would be held to be against the “public policy” of India. Such an interpretation opened up a Pandora’s box for the contesting party to contest the issues involved in the arbitration again and thereby delaying the entire process of enforcement of the award.

Furthermore, in Phulchand Exports Ltd. v. O.O.O. Patriot[33] the Supreme Court again went ahead and expanded the purview of “public policy” under Section 48 of the Arbitration Act, 1996[34] and interpreted the purview in consonance with Section 34. The Supreme Court after Saw Pipes[35] went two steps backward with the judgment in Phulchand[36] and provided an opportunity to the contesting parties to challenge the finality of the award on merits.

The Supreme Court in ONGC v. Western Geco International Ltd.[37] held that:

  1. …What is important in the context of the case at hand is that if on facts proved before them the arbitrators fail to draw an inference which ought to have been drawn or if they have drawn an inference which is on the face of it, untenable resulting in miscarriage of justice, the adjudication even when made by an arbitral tribunal that enjoys considerable latitude and play at the joints in making awards will be open to challenge and may be cast away or modified depending upon whether the offending part is or is not severable from the rest.

The judgment in Associate Builders v. DDA[38] followed the preposition set forth in ONGC[39]and held that the term “public policy” shall be interpreted broadly. These judgments were passed with a regressive approach as the Supreme Court conjointly interpreted Sections 48 and 34 of the Act, 1996 thereby allowing the parties to go into the merits of the arbitral award.

Very recently, the Delhi High Court in Campos Brother Farms v. Matru Bhumi Supply Chain (P) Ltd.[40] refused to enforce a foreign arbitral award under the Arbitration Act, 1996. The Court held that, if the arbitrator while passing the award had missed to consider a material issue relating to the maintainability of the arbitral proceedings then such an issue can be a ground to refuse the enforcement of an arbitral award under the ground of “public policy”. It was considered by the court that such an approach would violate the basic principles of justice.

The Supreme Court in National Agricultural Coop. Mktg. Federation of India v.  Alimenta SA[41], observed that enforcement of a foreign arbitral award is subject to the “public policy of India” test. The case can be adjudged to be homage to the parochial attitude regarding quantum of interference in the enforcement of a foreign arbitral award. However, the aforementioned judgment was a major divergence from its earlier judgment in Vijay Karia v. Prysmian Cavi E Sistemi SRL[42] which canvassed a pro-arbitration stance from the Supreme Court.

F. The silver lining in the enforcement of a foreign award: The public policy conundrum

In Shri Lal Mahal Ltd. v. Progetto Grano Spa[43], the Supreme Court brought the purview of “public policy” in lines with the New York Convention, 1958 and overruled the preposition set forth in the judgment of Phulchand[44]. In Shri Lal Mahal[45], the award was challenged under Section 48 of the Act, 1996 on the ground of it being “patently illegal” and thereby violating the Indian laws. The Court held that the ground of the award being “patently illegal” cannot be entailed within the purview of Section 48 of the Act, 1996 and such a ground will only be limited within the purview of Section 34 of the Arbitration Act, 1996. The Court held that while deciding upon the enforcement of a foreign award, the role of the court is very limited and Section 48 of the Arbitration Act, 1996 does not afford an opportunity to review the award on merits.

In the year 2015 by way of an amendment, a Second Explanation was added to sub-clause (b) to sub-section (1) of Section 48, which states that, within the purview of evaluating the prospects of “public policy”, the opportunity given to the enforcing court shall be very minimal. It can very well have understood from the nomenclature used in the said Explanation which stated:

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

In Cruz City Mauritius Holdings v. Unitech Ltd.[46] a balancing test to determine the issue of refusal of enforcement of a foreign arbitral award was laid down by the Delhi High Court. It further held that the scope of discretion to refuse a foreign arbitral award is narrow and limited but the same can be done if sufficient grounds exist.

Similarly in Govt. of India v. Vedanta Ltd.[47] a three-Judge Bench of the Supreme Court discarded the regressive stance taken by the Supreme Court in Alimenta case[48] and held that minimal interference shall be exercised by the courts in enforcing foreign arbitral awards.

The Supreme Court in Vijay Karia[49] referred to the “pro-enforcement bias” of the New York Convention, 1958 on which Section 48 of the Act, 1996 was based in its entirety. It was held that under the guise of “public policy”, the enforcing courts cannot enjoy the leeway to interfere with the merits of the award and there should be a narrow scope of interference as contained in the New York Convention, 1958.

Moreover, the Supreme Court in Centrotrade Minerals and Metals Inc. v.  Hindustan Copper Ltd.[50], while allowing the enforcement of an award passed under the rules of the International Chamber of Commerce interpreted Section 48(1)(b) of the Act, 1996. The Supreme Court held that the word “otherwise” cannot be read and interpreted “ejusdem generis” and held that a narrower meaning and interpretation should be afforded keeping in mind the primary object of Section 48(1)(b) i.e. enforcement of a foreign award.

G. Parting thoughts

Indian jurisprudence, especially with respect to dispute resolution has been under perennial evolution. Indian courts have evolved with the change in circumstances owing to opening up of economy, considerable enhancement in international trade and foreign direct investments. For any country which intends to invest in India, the process and feasibility of commercial dispute resolution is of paramount significance. An effective dispute resolution mechanism of a country instils confidence in the foreign investors. A dilapidated and regressive system will only make the entire resolution mechanism crippled.

From the advent of Arbitration and Conciliation Act, 1899 till the present statute i.e. the Arbitration Act, 1996, Indian jurisprudence have had different interpretation of “recognition” and “enforcement” which converged into an attempt of the judiciary to make it work on the lines of the New York Convention, 1958. Despite many judgments passed by the Supreme Court and various High Courts of the country, in our view the battle is only half won. India is still not considered as among the favoured nations when it comes to “recognition” and “enforcement” of a foreign arbitral award.

There has always been a debate over the quantum of interference that the Indian judiciary ought to make while enforcing a foreign arbitral award. There have been judgments where the Indian judiciary has gone into the merits of the award thereby, rehearing the case all over again and compromising the entire process of smooth “recognition” and “enforcement”. Such an act brings back the regressive attitude which was in place when the Arbitration Act, 1940[51] used to govern the dispute resolution mechanism. Also, there is a common problem of various High Courts holding views and passing judgments on the same question of law and facts arising thereby from Arbitration Act, 1996 which further complicates the enforcement process.

The purpose of Section 48 of the Arbitration Act, 1996 is nothing but enabling a smooth enforcement process. It may be noted that Section 48 is in parity with Article V of the New York Convention, 1958. It is important to note that in Section 48 and Article V of the New York Convention, 1958, the words “may be” have been used for refusing the enforcement of an award thereby, making the intention and objective of the section very clear. The judgments passed by various High Courts of India show that the grounds for refusing the enforcement of an award shall be construed narrowly, yet sometimes, the courts have overstepped the guarded wall of interference.

We have tried to summarise the history of commercial dispute resolution in India and the process involved therein in the enforcement of a foreign arbitral award in India. It may not be out of place to state that with modest efforts being made by the Indian judiciary, the entire process of recognition and enforcement is eased down a bit. However, India as a country has to work towards building a pro-enforcement regime while working in consonance with the spirit of Article V of the New York Convention, 1958. The recent decisions in Vijay Karia[52] and Centrotrade[53] are a step forward towards having a more conducive enforcement mechanism in place. Yet, the decisions like National Agricultural Coop. Mktg. Federation of India[54] was an attempt to again dismantle the progress that the Indian judiciary has made to make India a pro-enforcement destination thereby, compelling the “recognition” and “enforcement” mechanism to trawl down in search of a formidable shore.


* Advocate, New Delhi. Author can be reached at ksumit25@outlook.com

**Vth year student, ICFAI Law School, Hyderabad.

[1]Arbitration (Protocol and Convention) Act, 1937. http://www.scconline.com/DocumentLink/b6djW2F4.

[2]Foreign Awards (Recognition and Enforcement) Act, 1961. http://www.scconline.com/DocumentLink/Ye3wnUO3.

[3]Chapter  6.– Enforcement of Arbitral Awards in India; available at <https://shodhganga.inflibnet.ac.in/bitstream/10603/110130/16/16_chapter%206.pdf> (accessed on 27-5-2020).

[4] Recent Developments in Enforcement of New York Convention Awards in India, by Sahil Tagotra and Ishita Mishra; available at<http://arbitrationblog.kluwerarbitration.com/2020/07/06/recent-developments-in-the-enforcement-of-new-york-convention-awards-in-india/?doing_wp_cron=1598853711.0668098926544189453125> (accessed on 27-5-2020)/

[5] Report and the India Resolutions for the 1958 Convention on the Recognition and Enforcement of Foreign Awards by Fali Nariman andMarike Paulsson; available at <https://www.arbitration-icca.org/media/7/92930493591493/indiaresolutions16formatted.pdf>  (accessed on 27-5-2020).

[6]Arbitration and Conciliation Act, 1996. http://www.scconline.com/DocumentLink/QWdt5a4f.

[7]1995 Supp (2) SCC 280, 287.

[8]Section 44, Arbitration  & Conciliation Act, 1996. http://www.scconline.com/DocumentLink/6WVZQ7Gd.

[9]1959 SCC OnLine Cal 196.

[10] Arbitration (Protocol and Convention) Act, 1937. http://www.scconline.com/DocumentLink/b6djW2F4

[11]1993 SCC OnLine Del 561.

[12]Code of Civil Procedure, 1908. http://www.scconline.com/DocumentLink/fW5E2p7z.

[13]Section 49 CPC. http://www.scconline.com/DocumentLink/Qdz3P4AP.

[14]Section 34 of the Arbitration & Conciliation Act, 1996. http://www.scconline.com/DocumentLink/teuo89l3.

[15]Section 47 of the Arbitration & Conciliation Act, 1996. http://www.scconline.com/DocumentLink/kc7Y1ogo.

[16](2019) 11 SCC 620.

[17](2018) 18 SCC 313.

[18](2001) 6 SCC 356.

[19]2006 SCC OnLine Bom 545.  http://www.scconline.com/DocumentLink/Z547En23

[20]Section 2, Arbitration & Conciliation Act, 1996.  http://www.scconline.com/DocumentLink/TA0St4w3.

[21](2014) 11 SCC 619.

[22](2018) 3 SCC 662.

[23]Commercial Courts Act, 2015. http://www.scconline.com/DocumentLink/7566Y3w5.

[24]Arbitration and Conciliation (Amendment) Act, 2015. http://www.scconline.com/DocumentLink/9ajA4z9b.

[25]Section 2 CPC, 1908. http://www.scconline.com/DocumentLink/jadpgT2n.

[26]Section 44-A CPC, 1908. http://www.scconline.com/DocumentLink/Of6WYoXr.

[27]Section 86, Evidence Act, 1872. http://www.scconline.com/DocumentLink/a577IffO.

[28]Section 13 CPC, 1908. http://www.scconline.com/DocumentLink/Mw0TY9U5.

[29](2012) 9 SCC 552.

[30](2012) 9 SCC 552.

[31](1994) Supp (1) SCC 644.

[32](2003) 5 SCC 705.

[33](2011) 10 SCC  300.

[34]Section 48, Arbitration & Conciliation Act, 1996. http://www.scconline.com/DocumentLink/1f9D98bq.

[35](2003) 5 SCC 705.

[36] (2011) 10 SCC  300.

[37](2014) 9 SCC  263, 280.

[38](2015) 3 SCC 49.

[39](2014) 9 SCC  263, 280.

[40] 2019 SCC OnLine Del 8350. http://www.scconline.com/DocumentLink/c63f5U6g

[41] 2020 SCC OnLine SC 381. http://www.scconline.com/DocumentLink/X5L0eClA

[42](2020) 11 SCC 1.

[43](2014) 2 SCC  433.

[44](2011) 10 SCC  300.

[45](2014) 2 SCC  433.

[46]2017 SCC OnLine Del 7810.

[47]2020 SCC OnLine SC 765.

[48] 2020 SCC OnLine SC 381

[49](2020) 11 SCC 1.

[50]2020 SCC OnLine SC 479.

[51]Arbitration Act, 1940. http://www.scconline.com/DocumentLink/3610ik0w.

[52] (2020) 11 SCC 1.

[53] 2020 SCC OnLine SC 479.

[54] 2019 SCC OnLine Del 8350. http://www.scconline.com/DocumentLink/c63f5U6g.

Op EdsOP. ED.

Introduction

The term “public policy” has not been defined in any Indian statute. In fact, in numerous cases, the Supreme Court itself held that the term “public policy” is like an “untrustworthy guide” or an “unruly horse”. Generally, public policy means the principle that injury to the public good is a basis for denying the legality of a contract or other transaction. We find a reference to “public policy” in the Arbitration and Conciliation Act, 1996[1] (“the Arbitration Act”) specifically under Section 34, whereby an arbitral award can be set aside on the ground of it being in conflict with the public policy of India. This article particularly deals with the interpretation of public policy by Indian courts and further discusses in detail the concept of fundamental policy of Indian law, basic notions of morality and justice, and patent illegality.  

Relevant part of Section 34 of the Arbitration and Conciliation Act, 1996 as amended in 2015[2] to incorporate additions suggested by 246th Law Commission Report[3] 

  1. Application for setting aside arbitral award.— (1) Recourse to a court against an arbitral award may be made only by an application for setting aside such award in accordance with sub-section (2) and sub-section (3).

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

                *                                                                 *                                                       *

(b) the Court finds that—

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

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

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

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

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

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

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

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

(emphasis supplied)

 What is public policy?

Public policy connotes some matter which concerns the public good and the public interest. The concept of what is for the public good or in public interest or what would be injurious or harmful to the public good or public interest has varied from time to time.[4] It has to be shown that there is some element of illegality or that the enforcement of the award would be clearly injurious to the public good or possibly, that enforcement would be wholly offensive to the ordinary reasonable and fully informed member of the public on whose behalf the powers of the State are exercised.[5]

Clause (ii) of sub-section (2)(b) of Section 34 which inter alia provides that the Court may set aside arbitral award if it is in conflict with the “public policy of India”. The phrase “public policy of India” is not defined under the Act. Hence, the said term is required to be given meaning in context and also considering the purpose of the section and scheme of the Act. It has been repeatedly stated by various authorities that the expression “public policy” does not admit of precise definition and may vary from generation to generation and from time to time. Hence, the concept “public policy” is considered to be vague, susceptible to narrow or wider meaning depending upon the context in which it is used. Lacking precedent the Court has to give its meaning in the light and principles underlying the Arbitration Act, Contract Act, 1872 and constitutional provisions.[6]

The public policy violation, indisputably, should be so unfair and unreasonable as to shock the conscience of the Court. Where the arbitrator, however, has gone contrary to or beyond the expressed law of the contract or granted relief in the matter not in dispute would come within the purview of Section 34 of the Act.[7]

In Renusagar Power Co. Ltd. v. General Electric Co.[8], the Supreme Court considered Section 7(1) of the Arbitration (Protocol and Convention) Act, 1937 which inter alia provided that a foreign award may not be enforced under the said Act, if the Court dealing with the case is satisfied that the enforcement of the award will be contrary to the public policy.

  1. Article 5(2)(b) of the New York Convention of 1958[9] and Section 7(1)(b)(ii) of the Foreign Awards (Recognition and Enforcement) Act, 1961[10] do not postulate refusal of recognition and enforcement of a foreign award on the ground that it is contrary to the law of the country of enforcement and the ground of challenge is confined to the recognition and enforcement being contrary to the public policy of the country in which the award is set to be enforced. There is nothing to indicate that the expression “public policy” in Article 5(2)(b) of the New York Convention and Section 7(1)(b)(ii) of the Foreign Awards Act is not used in the same sense in which it was used in Article 1(c) of the Geneva Convention of 1927 and Section 7(1) of the Protocol and Convention Act of 1937. This would mean that “public policy” in Section 7(1)(b)(ii) has been used in a narrower sense and in order to attract to bar of public policy the enforcement of the award must invoke something more than the violation of the law of India. Since the Foreign Awards Act is concerned with recognition and enforcement of foreign awards which are governed by the principles of private international law, the expression “public policy” in Section 7(1)(b)(ii) of the Foreign Awards Act must necessarily be construed in the sense the doctrine of public policy is applied in the field of private international law. Applying the said criteria it must be held that the enforcement of a foreign award would be refused on the ground that it is contrary to public policy if such enforcement would be contrary to (i) fundamental policy of Indian law; or (ii) the interests of India; or (iii) justice or morality.  (emphasis supplied) 

What is included in fundamental policy of Indian law?

While discussing the case of ONGC Ltd. v. Western Geco International Ltd.[11], the three-Judge Bench of the Supreme Court comprising of T.S. Thakur, C. Nagappan and  Adarsh Kumar Goel, JJ. elaborated on the expression “fundamental policy of Indian law”.

The Bench in the abovereferred judgment was of the opinion that fundamental policy of Indian law shall include all such fundamental principles as providing a basis for administration of justice and enforcement of law in this country. The Supreme Court relied on:

  1. 35. … three distinct and fundamental juristic principles that must necessarily be understood as a part and parcel of the fundamental policy of Indian law. The first and foremost is the principle that in every determination whether by a court or other authority that affects the rights of a citizen or leads to any civil consequences, the Court or authority concerned is bound to adopt what is in legal parlance called a “judicial approach” in the matter. The duty to adopt a judicial approach arises from the very nature of the power exercised by the Court or the authority does not have to be separately or additionally enjoined upon the fora concerned. What must be remembered is that the importance of judicial approach in judicial and quasi-judicial determination lies in the fact so long as the Court, Tribunal or the authority exercising powers that affect the rights or obligations of the parties before them shows fidelity to judicial approach, they cannot act in an arbitrary, capricious or whimsical manner. Judicial approach ensures that the authority acts bona fide and deals with the subject in a fair, reasonable and objective manner and that its decision is not actuated by any extraneous consideration. Judicial approach in that sense acts as a check against flaws and faults that can render the decision of a court, tribunal or authority vulnerable to challenge.

The Bench further stated that:

  1.  It is neither necessary nor proper for us to attempt an exhaustive enumeration of what would constitute the fundamental policy of Indian law nor is it possible to place the expression in the straitjacket of a definition. What is important in the context of the case at hand is that if on facts proved before them the arbitrators fail to draw an inference which ought to have been drawn or if they have drawn an inference which is on the face of it, untenable resulting in miscarriage of justice, the adjudication even when made by an Arbitral Tribunal that enjoys considerable latitude and play at the joints in making awards will be open to challenge and may be cast away or modified depending upon whether the offending part is or is not severable from the rest. (SCC at p. 280)

What does “basic notions of morality and justice” mean?

The third ground to set aside an arbitral award in conflict with public policy of India is, if an award is against justice or morality. These are two different concepts in law.

“Justice or morality” has been tightened and is now to be understood as meaning only basic notions of justice and morality i.e. such notions as would shock the conscience of the court as understood in Associate Builders v. DDA[12]:

  1.  … An illustration of this can be given. A claimant is content with restricting his claim, let us say to Rs 30 lakh in a statement of claim before the arbitrator and at no point does he seek to claim anything more. The arbitral award ultimately awards him 45 lakh without any acceptable reason or justification. Obviously, this would shock the conscience of the Court and the arbitral award would be liable to be set aside on the ground that it is contrary to “justice”.

The other ground is of “morality”. Just as the expression “public policy” also occurs in Section 23 of the Contract Act, 1872[13], so does the expression “morality”. Two illustrations to the said section are interesting for explaining the scope of the expression “morality”:

(j) A, who is B‘s mukhtar, promises to exercise his influence, as such, with B in favour of C, and C promises to pay 1000 rupees to A. The agreement is void, because it is immoral.

(k) A agrees to let her daughter to hire B for concubinage. The agreement is void, because it is immoral, though the letting may not be punishable under the Penal Code, 1860 (45 of 1860).

What is construed as patent illegality?

If the award is patently against the statutory provisions of substantive law which is in force in India or is passed without giving an opportunity of hearing to the parties as provided under Section 24 or without giving any reason in a case where parties have not agreed that no reasons are to be recorded, it would be against the statutory provisions. In all such cases, the award is required to be set aside on the ground of “patent illegality”.[14]

The expression of “patent illegality” has been discussed elaborately in ONGC Ltd. v. Saw Pipes Ltd.[15]:

 Wider meaning is required to be given so that the “patently illegal award” passed by the Arbitral Tribunal could be set aside. If narrow meaning is given, some of the provisions of the Arbitration Act would become nugatory.

Illustration

 A case wherein there is a specific provision in the contract that for delayed payment of the amount due and payable, no interest would be payable, still however, if the arbitrator has passed an award granting interest, it would be against the terms of the contract and thereby against the provision of Section 28(3) of the Act which specifically provides that “Arbitral Tribunal shall decide in accordance with the terms of the contract.” Further, where there is a specific usage of the trade that if the payment this made beyond a period of one month, then the party would be required to pay the said amount with interest at the rate of 15 per cent. Despite the evidence being produced on record for such usage, if the arbitrator refuses to grant such interest on the ground of equity, such award would also be in violation of sub-sections (2) and (3) of Section 28. Section 28(2) specifically provides that arbitrator shall decide ex aequo et bono (according to what is just and good) only if the parties have expressly authorised him to do so.[16]

Conclusion

As discussed hereinabove, the term “public policy” is not defined in any statute. First time the Supreme Court categorised the meaning of public policy in Renusagar case[17] into three heads viz. (i) fundamental policy of Indian law; or (ii) the interests of India; or (iii) justice or morality. ONGC Ltd. v. Saw Pipes Ltd.[18] further added the fourth category i.e. “patent illegality” to the interpretation of public policy. The 2015 amendment to the Arbitration and Conciliation Act, 1996, introduced these categories as explanation to public policy of India. Based on the abovementioned observation, it can be said that the pigeonhole principle cannot be applied while interpreting the concept of public policy. The Indian courts have interpreted meaning of public policy based on circumstance of various cases. The scope for this principle to evolve further remains intact even after 2015 amendment to the Arbitration Act.


From ILS Law College, currently working as an in-house counsel in an Indian infrastructure company. Author can be reached at rpanganti@gmail.com.

[1]Arbitration and Conciliation Act, 1996.  <http://www.scconline.com/DocumentLink/QWdt5a4f>.

[2] Arbitration and Conciliation (Amendment) Act, 2015. <http://www.scconline.com/DocumentLink/9ajA4z9b>.

[3] Law Commission of India, Report No. 246 on Amendments to the Arbitration and Conciliation Act, 1996 (August, 2014). <http://www.scconline.com/DocumentLink/N7O69Zxv>.

[4] Central Inland Water Transport Corpn. Ltd. v. Brojo Nath Ganguly, (1986) 3 SCC 156 : (1986) 2 LLJ 171.

[5] Deutsche Schachtbau-Und Tiefbohrgesellschaft mbH v. R’as Al-Khaimah National Oil Co., (1990) 1 AC 295 : (1987) 3 WLR 1023 : (1987) 2 All ER 769, 779.

[6] ONGC Ltd. v. Saw Pipes Ltd., (2003) 5 SCC 705, 719, para 16.

[7] McDermott International Inc. v. Burn Standard Co. Ltd., (2006) 11 SCC 181; Centrotrade Minerals & Metals Inc. v. Hindustan Copper Ltd., (2006) 11 SCC 245.

[8] 1994 Supp (1) SCC 644, 682.

[9]Convention on the Recognition and Enforcement of Foreign Arbitral Awards, 1958. <http://www.scconline.com/DocumentLink/uqd961oJ>.

[10] Foreign Awards (Recognition and Enforcement) Act, 1961. <http://www.scconline.com/DocumentLink/hXK3cb7l>.

[11] (2014) 9 SCC 263, 278.

[12] Associate Builders v. DDA, (2015) 3 SCC 49, 77 : (2015) 2 SCC (Civ) 204.

[13] Contract Act, 1872. <http://www.scconline.com/DocumentLink/dsJF0yn9>.

[14] ONGC Ltd. v. Saw Pipes Ltd., (2003) 5 SCC 705, 724, para 22.

[15] (2003) 5 SCC 705.

[16] ONGC Ltd. v. Saw Pipes Ltd., (2003) 5 SCC 705.

[17] 1994 Supp (1) SCC 644.  http://www.scconline.com/DocumentLink/Dd7RgLrr

[18] (2003) 5 SCC 705.

Case BriefsSupreme Court

Supreme Court: The bench of Ashok Bhushan and R. Subhash Reddy*, JJ has held that the Limitation Act, 1963 is applicable to the arbitration proceedings under Section 18(3) of the Micro, Small and Medium Enterprises Development Act, 2006.

Here are the key points highlighted by the Court while reaching the aforementioned conclusion:

  • As per Section 15 of the said Act, where supplier supplies any goods or renders any services to any buyer, the buyer shall make payment on or before the agreed date between the parties in writing or where there is no agreement, before the appointed day.
  • Section 16 deals with date from which and rate of interest payable in the event of not making the payment.
  • The recovery mechanism for the amount due is covered by Sections 17 and 18 of the said Act.
  • If any party has a dispute with regard to amount due under Section 17, a reference is required to be made to the Micro and Small Enterprises Facilitation Council.
  • On such reference, the Council is empowered to conduct conciliation in the matter or seek assistance of any institution or centre providing alternate dispute resolution services by making a reference to such institution for conducting conciliation.
  • If the conciliation is not successful, as contemplated under Section 18(2) of the said Act, same stands terminated under Section 18(3) of the said Act.
  • Thereafter, the Council shall either itself take up the dispute for arbitration or refer it to any institution or centre providing alternate dispute resolution services for such arbitration and the provisions of Arbitration and Conciliation Act, 1996 are made applicable as if the arbitration was in pursuance of arbitration agreement between the parties, under sub-section (1) of Section 7 of the 1996 Act. Applicability of Limitation Act, 1963 to the arbitrations is covered by Section 43 of the 1996 Act.
  • A reading of Section 43 itself makes it clear that the Limitation Act, 1963 shall apply to the arbitrations, as it applies to proceedings in court.
  • When the settlement with regard to a dispute between the parties is not arrived at under Section 18 of the 2006 Act, necessarily, the Micro and Small Enterprises Facilitation Council shall take up the dispute for arbitration under Section 18(3) of the 2006 Act or it may refer to institution or centre to provide alternate dispute resolution services and provisions of Arbitration and Conciliation Act 1996 are made applicable as if there was an agreement between the parties under sub-section (1) of Section 7 of the 1996 Act.

The Court, hence, concluded:

“In view of the express provision applying the provisions of the Limitation Act, 1963 to arbitrations as per Section 43 of the Arbitration and Conciliation Act, 1996, the Limitation Act, 1963 is applicable to the arbitration proceedings under Section 18(3) of the 2006 Act.”

[Silpi Industries v. Kerala State Road Transport Corporation, 2021 SCC OnLine SC 439, decided on 29.06.2021]

For appellants: Senior Advocates V. Giri, P.B. Suresh

For Kerala State Road Transport Corporation: Aishwarya Bhati, ASG

For Respondent: Basava Prabhu Patil

Case BriefsSupreme Court

Supreme Court: The bench of Ashok Bhushan and R. Subhash Reddy*, JJ has held that the Micro, Small and Medium Enterprises Development Act, 2006, being a special Statute, will have an overriding effect vis-à-vis Arbitration and Conciliation Act, 1996, which is a general Act. Hence, even if there is an agreement between the parties for resolution of disputes by arbitration, if a seller is covered by Micro, Small and Medium Enterprises Development Act, 2006, the seller can certainly approach the competent authority to make its claim. Further, if the counter-claim made by the buyer in the proceedings arising out of claims made by the seller is not allowed, it may lead to parallel proceedings before the various fora.

The Court, held,

“When there is a provision for filing counter-claim and set-off which is expressly inserted in Section 23 of the 1996 Act, there is no reason for curtailing the right of the respondent for making counter-claim or set-off in proceedings before the Facilitation Council.”

Scheme of the Acts

  • As per Section 18(3) of the 2006 Act, when the conciliation initiated under sub-section (2) of Section 18 of the said Act is not successful, the Council shall either itself take up the dispute for arbitration or refer to any institution for arbitration.
  • Further, Section 18(3) of the said Act also makes it clear that the provisions of 1996 Act are made applicable as if there is an agreement between the parties under sub-section (1) of Section 7 of the 1996 Act.
  • The obligations of the buyer to make payment, and award of interest at three times of the bank rate notified by Reserve Bank in the event of delay by the buyer and the mechanism for recovery and reference to Micro and Small Enterprises Facilitation Council and further remedies under the 2006 Act for the party aggrieved by the awards, are covered by Chapter V of the 2006 Act.
  • The provisions of Section 15 to 23 of the Act are given overriding effect notwithstanding anything inconsistent therewith contained in any other law for the time being in force.
  • From the Statement of Objects and Reasons also it is clear that it is a beneficial legislation to the small, medium and micro sector.
  • The Arbitration and Conciliation Act, 1996 is a general law whereas the Micro, Small and Medium Enterprises Development Act, 2006 is a special beneficial legislation which is intended to benefit micro, small and medium enterprises covered by the said Act.
  • The Act of 2006 contemplates a statutory arbitration when conciliation fails. A party which is covered by the provisions of 2006 Act allows a party to apply to the Council constituted under the Act to first conciliate and then arbitrate on the dispute between it and other parties.

Fundamental differences in the settlement mechanism under the 2006 Act and the 1996 Act

  • The Council constituted under the 2006 Act to undertake mandatory conciliation before the arbitration which is not so under the 1996 Act.
  • In the event of failure of conciliation under the 2006 Act, the Council or the centre or institution is identified by it for arbitration. The 1996 Act allows resolution of disputes by agreed forum.
  • In the event of award in favour of seller and if the same is to be challenged, there is a condition for pre-deposit of 75% of the amount awarded. Such is not the case in the 1996 Act.

Why the counter-claim should be allowed?

“When Section 18(3) makes it clear that in the event of failure by the Council under Section 18(2) if proceedings are initiated under Section 18(3) of the 1996 Act, the provisions of 1996 Act are not only made applicable but specific mention is made to the effect as if the arbitration was in pursuance to an arbitration agreement referred to in sub-section (1) of Section 7 of the 1996 Act. When there is a provision for filing counter-claim and set-off which is expressly inserted in Section 23 of the 1996 Act, there is no reason for curtailing the right of the respondent for making counter-claim or set-off in proceedings before the Facilitation Council.”

The Court hence, noticed that if the counter-claim made by the buyer in the proceedings arising out of claims made by the seller is not allowed, it may lead to parallel proceedings before the various fora.

“When such beneficial provisions are there in the special enactment, such benefits cannot be denied on the ground that counter-claim is not maintainable before the Council.”

On one hand, in view of beneficial legislation, seller may approach the Facilitation Council for claims, in the event of failure of payment by the buyer under provisions of 2006 Act, at the same time, if there is no separate agreement between the parties for any arbitration in a given case, buyer may approach the civil court for making claims against the seller, or else if there is an agreement between the parties for arbitration in the event of dispute between the parties, parties may seek appointment of arbitrator. At the same time if the seller is covered by definition under micro, small and medium enterprises, seller may approach the Facilitation Council for making claims under the provisions of Micro, Small and Medium Enterprises Development Act, 2006. In such event, it may result in conflicting findings, by various forums.

“If any agreement between the parties is there, same is to be ignored in view of the statutory obligations and mechanism provided under the 2006 Act. Further, apart from the provision under Section 23(2A) of the 1996 Act, it is to be noticed that if counter-claim is not permitted, buyer can get over the legal obligation of compound interest at 3 times of the bank rate and the ―75% pre-deposit contemplated under Sections 16 and 19 of the MSMED Act.”

Further, when the provisions of Sections 15 to 23 are given overriding effect under Section 24 of the Act and further the 2006 Act is a beneficial legislation, even the buyer, if any claim is there, can very well subject to the jurisdiction before the Council and make its claim/ counter claim as otherwise it will defeat the very objects of the Act which is a beneficial legislation to micro, small and medium enterprises.

Even in cases where there is no agreement for resolution of disputes by way of arbitration, if the seller is a party covered by Micro, Small and Medium Development Act, 2006, if such party approaches the Council for resolution of dispute, other party may approach the civil court or any other forum making claims on the same issue.

“If two parallel proceedings are allowed, it may result in conflicting findings.”

[Silpi Industries v. Kerala State Road Transport Corporation, 2021 SCC OnLine SC 439, decided on 29.06.2021]


*Judgment by: Justice R. Subhash Reddy

Know Thy Judge| Justice R. Subhash Reddy

For appellants: Senior Advocates V. Giri, P.B. Suresh

For Kerala State Road Transport Corporation: Aishwarya Bhati, ASG

For Respondent: Basava Prabhu Patil

Case BriefsHigh Courts

Delhi High Court: Sanjeev Narula, J., refused to interfere in the interim arbitral award whereby the sole arbitrator had allowed certain claims of the respondent in arbitration proceedings against the appellant-IRCTC.

IRCTC sought the setting aside of the interim arbitral award, whereby Sole Arbitrator had allowed certain claims of the Respondent in arbitration proceedings.

Summary of Facts

Respondent, a private railway catering service provider empanelled with IRCTC and entitled to be considered for allotment of temporary licenses on category ‘A’ trains. on 07th September, 2016, IRCTC published a limited tender inviting bids from empanelled parties for providing on-board catering services in respect of Train No. 12951- 52/12953-54 (Rajdhani/August Kranti Express) for six months.

On being the highest bidder, respondent was awarded a temporary license.

What was the dispute?

Welcome drink served to the passengers was provided by IRCTC. Later, IRCTC decided that:

  • service provider to provide welcome drink to passengers at no extra-charge receivable by it, and if unwilling to do so, it could opt to exit the temporary license;
  • where service provider was providing meals to passengers on account of short supply by IRCTC, it would be reimbursed production charges @ Rs. 84/- (inclusive of taxes) per passenger for lunch/dinner for 2nd and 3rd A.C. passengers.
  • where additional meals were being served due to late running of train for more than 2 hours, service provider would be reimbursed @ Rs. 26.40 + service tax, per passenger.

For the above-stated policy decision, DC raised the following concerns:

  • DC reasoned that welcome drink was not included in the tender document;
  • expressed reservation with regard to reimbursement of charges on account of late running of trains for more than 2 hours.
  • emphasised that having made a substantial investment in setting up a base kitchen and infrastructure, it was unwilling to exit from the contract.

Later, on 13-2-2017, respondent intimated that it would provide the welcome drink in case the same would not be provided by IRCTC, but it would be charging for services as well as production charges for the same. In the event of train being late, charge of Rs 30 would be applied along with service tax for additional meal.

From 5-03-2017, the above-said service commenced. Further, in the month of April, IRCTC sought an unconditional acceptance of the policy decision from respondent and unless unconditional acceptance would be tendered, it would be presumed that respondent are not interested in extension of the license.

Further, it was added that, for a certain period when respondent did not provide the welcome drink and IRCTC had to provide the same, the charges in that respect would be adjusted against the bills raised by respondent.

Respondent raised an issue with regard to the above-stated, asserting that it was not liable for the charges. It further raised the issue of non-payment of service tax on service charge for food and drink for the period from 19th December 2016 to 04th March 2017, as well as other charges allegedly payable to it.

Respondent unconditionally accepted the policy decision and a 6-month extension of license was granted.

Respondent invoked arbitration with regard to deductions made on account of welcome drink as well as other issues. Hence, a petition was filed under Section 11 of the Arbitration and Conciliation Act.

What all were the claims?

  • Claim towards non-payment for a welcome drink: DC contended that the welcome drink did not form part of the tender document. It should not be liable to serve the same or reimburse the expenses incurred by IRCTC for serving the same from 19th December, 2016 to 04th March, 2017.
  • Reimbursement of GST on production charges/supply of meals with effect from 1st July 2017.
  • Claim towards wastage of food due to cancellation/non-turning- up of passengers.

Two claims of respondent were allowed: (i) payment with respect to welcome drink; and (ii) reimbursement of GST on production charges.

IRCTC filed an objection against the impugned award before District Judge at Patiala House Court Complex, Delhi, however, the claim calculated by IRCTC exceeded its pecuniary jurisdiction as per the provision of Section 12(2) of the Commercial Courts Acts, 2015.

Analysis, Law and Decision

Whether welcome drink formed a part of initial period of contract?

As per the tender document which refers to CC No. 32 of 14 states the Clause 2.1 requires the service provider to deliver free of cost catering to passengers.

Arbitrator meticulously examined the tender conditions, circulars issued by Railway Board, IRCTC’s policy, contractual provisions and testimonies of the witnesses and went on to answer the question in negative.

CC No. 32 of 14 dated 6-08-2014 laid down rates of composite contract for the service provider and noting the admitted position that catering services under the tender were invited through the mode of partial unbundling of services, the learned Arbitrator noted that respondent was required to provide quotations for the sector-wise services mentioned in Annexures, which had no direct or specific reference to the condition of providing a welcome drink. In the said circumstances, it was concluded that the bid was not invited for the service of provision of welcome drink, and thus no charge was quoted towards the same.

Arbitrator gave a finding that there was no contractual stipulation in the tender document that specifically put the obligation on respondent to provide welcome drink and the said finding was held to be sound, credible and comprehensive by the High Court.

 Binding Effect of Respondent’s ‘unconditional acceptance’

the policy decision dated 07-02-2017 became a part of the contract between the parties has rightly been disallowed by the learned Arbitrator, by holding the same to be a fresh policy decision brought in by IRCTC post entering into the licensing agreement with DC. IRCTC could not give any justification for bearing the burden for the initial period between 19-12-2016 to 4-03-2017, despite it’s alleged understanding to the contrary. Its continued supply of welcome drink without expressly affirming that the contractual obligation for the job lay on DC, reaffirms the uncertainty of contractual obligations.

On the basis of the conduct and the testimony of witnesses, the Arbitrator rightly held that the actions of IRCTC exhibit ambiguity about DC’s contractually stipulated obligations, which were then redressed by way of the ex post facto policy decision.

GST

The GST laws has replaced the erstwhile indirect taxation regime.

Respondent had explained that since the trains were moving through several states and each state had a different rate of tax under State VAT laws, it was not feasible to account for the same, therefore production charges were paid inclusive of taxes.

Besides, no Input Tax Credit was available to IRCTC for VAT.

However, the position underwent a change with the introduction of GST laws.

GST is available as Input Tax Credit for paying the outgoing tax liability. With restructuring of indirect tax system, railways introduced CC No. 44/17 which specifically provides for GST on catering services in the subject trains. The bifurcation of production charges was done under the afore-noted circular and it was advised that GST is to be reimbursed to the service provider on submission of proof of deposit.

the said circular specifies the revised catering apportionment charges for the trains in question where catering charges are built-in to the ticket fare. The table thereunder shows ‘catering charges disbursed to the service provider’ both with and without 18% GST in separate columns.

 Hence, IRCTC’s contention that claim of service tax on production charges was identical and since the same had been given up, the claim of GST would not survive.

Further, it was added that,

Applicability of service tax on production charges is a different plea intertwined with determination of factual position of whether there is an incidence of service in the activity of production or if the nature of service could be held as a composite supply.

GST is clearly attracted on supply of food. 

The claim of service tax over and above the amounts agreed to, was premised on a different footing and cannot be read at par with the claim of GST.

Arbitrator has given a finding that GST has been deposited by DC and proof thereof had been furnished to IRCTC. Court found no fault in interpretation of terms of contract.

Hence no ground for interference was made out. [Indian Railway Catering & Tourism Corporation Ltd. v. Deepak & Co., 2021 SCC OnLine Del 3609, decided on 5-07-2021]


Advocates before the Court:

For the Petitioner: Mr Nikhil Majithia and Mr Piyush Gautam, Advocates

For the Respondent: Mr Naresh Thanai and Ms Khushboo Singh, Advocates


About Justice Sanjeev Narula

Born on 24th August, 1970. Studied at St. Mary’s Presentation Convent School, Jammu. Graduated in B.Sc.(Computer Science) from Kirorimal College, University of Delhi. He acquired Degree in Law in 1994 from Law Faculty, University of Jammu and got enrolled with Bar Council of Delhi in 1995.

Practiced primarily before the Delhi High Court and also before the Supreme Court of India, District Courts of Delhi and various judicial forums in Delhi. Advised and represented clients in litigation relating to Civil, Commercial, Corporate, Criminal, Customs, Indirect taxes, Service, Banking & Finance, Land &Property, Arbitration, Indirect Taxes, GST, Intellectual Property, Constitutional, Cyber, E-Commerce, Consumer and Family Laws.

He was appointed as Central Government Standing Counsel; Senior Standing Counsel (Customs and Indirect Taxes) and Standing Counsel for Central Information Commission (CIC) for the Delhi High Court, positions he retained until he was appointed as a Judge.

Appointed as Permanent Judge of Delhi High Court on 22nd October 2018.


Source: Delhi High Court Website