Op EdsOP. ED.

The doctrine of the ‘corporate veil’ is the legal assumption that the acts of a corporation are not the actions of its shareholders, so that the shareholders are exempt from liability for the corporation’s actions. However, Courts sometimes apply common law principles to ‘pierce the corporate veil’ and hold promoters/shareholders personally responsible for the corporation’s wrongful acts. This article examines whether these common law principles extend themselves to the arbitration of disputes.

INTRODUCTION

Company laws of all economically advanced countries make available corporate vehicles through which businesses can be carried on with the benefit of limited liability. For most shareholders this means that once they have paid for their shares the worst fate that can befall them in the event the company becomes insolvent is that they will lose the value of their investment. Their other assets remain unaffected. In the event of the success of the company, its shareholders are entitled to receive all residual benefits in the form of dividend and/or share price appreciation. The irony from the perspective of its trade and financial creditors is apparent, companies require credit to work, yet creditors do not partake in the potentially unlimited returns of the company in the event of its success. They are at all times limited to the fixed returns agreed between themselves and the company .

Otto Kahn-Freund in his seminal piece, Some Reflections on Company Law Reform analysed modern company law issues such as the abuse of the corporate entity and allocation of shares in return for overvalued assets from the perspective of a creditor. Kahn-Freund noted with amusement how the position of law recognised a ‘metaphysical’ distinction between one man in his individual capacity as a shareholder and his capacity as a company when it came to recovering the dues of trade creditors. Describing the judgment in Solomon v. Solomon as catastrophic, Kahn-Freund had suggested two remedies (a) requiring higher capital inputs by shareholders at the time of forming private companies to protect the interest of its creditors; and (b) fixing liability upon shareholders based on their controlling interest in the company. Neither of these suggestions were ever implemented in the United Kingdom as they were perceived as a barrier to the organic growth of small companies.

In India, we are seeing a push towards encouraging free enterprise through the STARTUP INDIA initiative and the MAKE IN INDIA initiative. Companies can now be set up in just one day. The environment is apt to revisit Kahn-Freund’s concerns and examine the doctrine of piercing the corporate veil. Given the vastness of the subject the authors are limiting their inquiry only to an analysis of the doctrine of piercing the corporate veil in relation to the arbitration of disputes.

THE STATUTORY FRAMEWORK IN INDIA

The authors Gower and Davies state that the doctrine of lifting the veil plays but a small role in British Company Law. They assert that instances in which ‘the veil has been lifted’ usually turn on the provisions of a particular statute or on the contracts executed between the parties .

Does the legislative environment in India lend itself to piercing of the corporate veil in aide of arbitration? Chapter I of Part I of the Arbitration and Conciliation Act, 1996 (“the 1996 Act”) contains the general provisions of the 1996 Act. Section 2(1) defines various terms appearing in the 1996 Act with the qualification “unless the context otherwise requires”. Section 2(1)(h) defines the term party to mean ‘a party to an arbitration agreement ’.

In the year 2014, the 246th Law Commission submitted its Report on ‘Amendments to the Arbitration and Conciliation Act, 1996’. While the Law Commission suggested changes to Section 7 of the 1996 Act, none of the Law Commission’s recommendations were directed to the language of sub-section (1) and sub-section (4)(a) of Section 7 and in particular to the referential terms: ‘parties’ and ‘document signed by the parties’ therein. Ultimately, the only amendment included in the statute book was an amendment to sub-section 4(b) of Section 7 whereby the words ‘including communication through electronic means’ was inserted.

The Commission recommended the need to amend Section 2(h) and Section 8(1) to bring them in line with the wording of Section 45 and Section 54 of the 1996 Act . The recommendations were suggested with the view to extend the ratio of the judgment of the Supreme Court of India in Chloro Controls India Pvt. Ltd. v. Severn Trent Water Purification Inc to arbitrations conducted under Part I of the 1996 Act.

Following the recommendations of the Law Commission, Section 8(1) of Chapter II of Part I of the 1996 Act dealing with the Power of a Judicial Authority to refer parties to arbitration where there is an arbitration agreement was amended to bring it in line with Section 45 of Chapter I of Part II of the 1996 Act. Post amendment Section 8(1) reads:

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

However, in spite of the recommendations of the Law Commission there was no amendment made to Section 2(1)(h) of the 1996 Act i.e. the provision which defines the term a party to an arbitration agreement. Without the amendment to Section 2(1)(h) the amendment to Section 8(1) is indeed an anomaly.

At first glance the use of the phrase ‘any person claiming through or under him’ with reference to a ‘party to the arbitration agreement’ is suggestive of a legislative policy allowing for ‘non-signatories’ to an arbitration agreement to seek the reference of a matter filed before a judicial authority to arbitration. But the manner in which the provision is drafted presents limited practical application. The term ‘any person claiming through or under him’ is suggestive of two circumstances: (a) the person (making the application for reference) has acquired the interest of a party to a matter, and/or (b) the person is an heir or a subsidiary/holding/associate company of a party to a matter. In both instances, one fails to understand how the provision has benefited by the addition. The acquisition of a company does not affect the right of the transferee company to seek reference of a matter to arbitration . An heir was by virtue of Section 40 of the 1996 Act entitled to commence and/or continue and/or enforce and/or was bound by an award passed in an arbitration. Where such acquisition of a company being a party to a matter before a judicial authority is sanctioned by the Tribunal, the provisions of Section 232 of the Companies Act, 2013 ensure that the rights, liabilities of the transferor company become those of the transferee company. The relevant provisions of the Companies Act, 2013 also contain the stipulation that proceedings initiated by the transferor company may be continued by the transferee company .

One could also argue that the amendment to Section 8(1) far from furthering the intentions of the judgment in Chloro Controls actually is a step in the wrong direction. The following illustration would demonstrate this point: Company A1 is the holding company of Company A2. Company B enters into an agreement with Company A2, which contains an agreement to arbitrate disputes. Disputes arise and Company B initiates a matter before a judicial authority against Company A1 realising as is commonly the case that A2 has no assets of its own and seeking the lifting of the corporate veil of Company A2 on the ground that Companies A1 & A2 are a single economic unit, or Company A2 is a façade or sham, or that Company A2 is an agency for the business of Company A1. The provision as drafted would allow Company A2 to interrupt such proceedings before a judicial authority and seek to enforce the agreement to arbitrate disputes between Company B and Company A2.

Another oddity observed is that the provision specifies a special period of limitation within which the application would have to be made by a person claiming under or through a party to a matter. Section 8(1) requires the application by a person seeking a reference of the matter to arbitration to be made before the submission of a party’s first statement on the substance of the dispute. In Jadavji Narsidas Sha & Co. v. Hirachand Chaturbhai a Division Bench of the Bombay High Court regarded the filing of an affidavit-in-reply setting out a party’s defence in a summary suit as being the submission of its first statement on the substance of the dispute. But there appears no logical reason for the imposition of this time limit for an application when made by a person claiming through or under a party in a matter before a judicial authority as such person is under no obligation under the Code of Civil Procedure, 1908 to ‘submit a first statement on the substance of the dispute’ not being a party to the proceeding.

That said, the amendments aforementioned have received wide spread acknowledgement for encouraging one to look beyond the identity of the ‘party’ or ‘signatory’ to the arbitration agreement and consider an application for reference to arbitration by ‘non-signatories’ or including ‘non-signatories’ to an arbitration agreement.

In the next part of this article the authors shall evaluate the approach adopted by Courts with the view of assessing whether a norm for lifting the veil can be identified with reference to the arbitration of disputes.

THE VEIL AND COMMON LAW

A leading case on the doctrine of piercing the corporate veil in the United Kingdom was the case of Adams v. Cape Industries Plc. . This case raised almost every known reason for piercing the corporate veil known to modern company law including that the corporate structure was a sham or façade that the companies were a group of companies forming a single economic unit and even the principle of the interest of justice in order to make the parent company liable for the obligations of a subsidiary towards involuntary tort victims. The question ultimately boiled down to whether the holding company was bound by judgments passed in the United States of America against its subsidiary and a company it was associated with. The Court rejected the argument that Cape the holding company was doing business or was present in the United States through its wholly owned subsidiaries or through a company (CPC) with which it was observed to have close business links.

A leading authority on the doctrine of piercing the corporate veil in India is the judgment of the Supreme Court of India in Life Insurance Corporation of India v. Escorts Ltd. . In this case the Supreme Court was called upon to consider whether a portfolio investment scheme framed under Section 73(3) of the Foreign Exchange Regulation Act, 1973 for the purpose of encouraging investment in Indian companies by non-resident Indians read with the other provisions of the Act permitted authorities to look beyond the corporate identity of the investor and identify the ‘real’ owners of the portfolio. The examination by the authorities was undertaken in order to ascertain whether there had been a transgression of the maximum of 1% investment by an individual non-resident Indian. The allegation of the Revenue was that a single individual Mr Swraj Paul had made investments in the scheme far in excess of the 1% limit through his family trust and through thirteen companies forming the Caparo group of companies which it was alleged were controlled by him. The Court ruled that the statutory framework read with the scheme of the portfolio concerned only permitted a limited lifting of the corporate veil for the purpose of inquiring into identifying the nationality of the shareholders but did not permit or allow any further scrutiny to determine the individual identity of each shareholder.

In the context of arbitration, the inquiry into this issue eventually leads one to the case of Indowind Energy Ltd. v. Wescare (India) Ltd. where the Supreme Court of India was called upon to consider an agreement for sale dated 24th February, 2006 between Wescare and Subuti. The agreement defined Wescare and its subsidiary RCI Power India as the sellers and defined Subuti and its nominee as the buyers and promoters of Indowind. The agreement contemplated the transfer of business assets by the seller to the buyer in return for part payment in cash and part payment via the issuance of shares. Disputes arose between the parties and Wescare filed 3 separate applications under Section 9 of the 1996 Act seeking various reliefs against Subuti and Indowind. All of these applications came to be rejected with a prima facie observation that Indowind had not signed the agreement for sale. Wescare thereafter filed an application under Section 11 of the 1996 Act seeking the appointment of an arbitrator to determine the disputes between the parties. Subuti resisted the application on the ground that ‘the agreement did not contemplate any transaction between itself and Wescare’ and hence the application did not indicate any cause of action against it. Indowind asserted that it was not a party to the agreement for sale. The learned Chief Justice of the Madras High Court allowed the application and observed that by lifting the corporate veil one would see that Subuti and Indowind were ne and the same person. Interestingly, only Indowind challenged the judgment of the Chief Justice. The Supreme Court of India upheld Indowind’s challenge and held that there was no arbitration agreement between Indowind and Wescare that met the requirements of Section 7 of the 1996 Act. The Court observed that the fact that Subuti and Indowind had common directors/shareholders made no difference for the purpose of seeking a reference to arbitration and actually observed negligence on the part of Wescare in not insisting that Indowind also sign the agreement.

The contractual terms between Subuti and Wescare are discussed in great detail in the judgment of the High Court of Judicature at Madras. The Madras High Court had observed that under the agreement for sale Indowind was described as the nominee of Subuti and agreed to ‘give’ consideration by issuing share capital to Wescare . Under Clauses 4.4 to 4.6 of the agreement for sale Indowind agreed to pay Wescare for the purchase of certain machinery. Thereafter, pursuant to the agreement for sale, Indowind passed two crucial resolutions to give effect to the terms of the agreement. An Extraordinary General Body Resolution was passed by the shareholders of Indowind on 15.04.2006 whereby the allotment of shares to Wescare was approved. The Board of Directors of Indowind passed a resolution approving the part purchase of machinery under the agreement for sale on 17.04.2006. The authors would submit that the analysis of the Madras High Court of the contractual terms are well informed and correctly exposit the true intention of the parties from the agreement between the parties, namely, that Indowind would be covered by the agreement for sale. The authors would submit that in addition to the analysis of the contractual terms between the parties if one were to apply the statutory scheme contained in the Specific Relief Act, 1963 and in particular the provisions of Section 15(h) and Section 19(e) of the Specific Relief Act, 1963 dealing with circumstances when a company can seek specific performance of an agreement entered into by its promoters one would necessarily conclude that Indowind was bound by the agreement for sale. The conduct of Indowind in passing the aforementioned resolutions clearly indicates that it had accepted the contract and had communicated such acceptance to the other party to the contract . It is submitted that if Indowind could seek the specific performance of the agreement for sale it would most certainly have to be willing to abide by it and hence it’s terms could also be enforced against it . The authors would therefore respectfully submit that both the terms of the contract between the parties as well as the statutory framework supported a conclusion that disputes between the parties were arbitrable.

In Chloro Controls India Pvt. Ltd. v. Severn Trent Water Purification Inc. the Supreme Court was called upon to consider whether the arbitration agreements contained in some of the agreements between the parties governed all the joint venture agreements. The Court analysed the corporate structure of the several parties to the dispute before it and came to the conclusion that the disputes essentially arose between two groups, namely: (a) the Chloro Control or Kocha Group, and (b) the Severn Trent Group.

These groups had entered into seven separate agreements with the intention of carrying on business by joint venture in the form of the appellant and Severn Trent De Nora LLC. In its analysis the Supreme Court determined that the shareholders agreement dated 16.11.1995 was the principle agreement between the parties. Under this agreement the Severn Trent Group appointed the appellant as its distributor in India for the products manufactured by it . In furtherance of this principle agreement the parties entered into an International Distributors Agreement, a Managing Director’s Agreement, an Export Sales Agreement, a trademark licence and technical know-how agreement and a Supplemental Agreement.

Disputes between the parties commenced following the allegation by the Severn Trent Group that the Chloro Control Group had failed to remedy certain issues and grievances raised by them whereupon they took the decision to terminate the joint venture. The appellant then filed a derivative suit before the High Court of Judicature at Bombay whereupon the Severn Trent Group made an application under Sections 8 and 5 of the 1996 Act seeking a reference of the dispute to arbitration. The Supreme Court concluded that in the present case the fact that one or some of the parties were not signatories to all the agreement would not be of much significance since all the agreements flow from one principle agreement. The Court opined that all the sub-agreements were executed in order to attain the object of the principle agreement. The intention of the parties being to attain one common goal it was necessary to construe that the disputes under one or more or all the agreements must be sent to a common arbitration . It would thus appear that the Court concluded from the terms of the agreements between the parties that there was an intention to refer all disputes between all the parties to arbitration. From the reported version of the judgment available with the authors it would appear that the decision in Indowind was not placed before the Supreme Court for its consideration.

In Rakesh Kathotia v. Milton Global , a Division Bench of the High Court of Judicature at Bombay was hearing an appeal from the dismissal of an application under Section 9 of the 1996 Act. The learned Single Judge had rejected the application on the ground that there was no identity between the parties to the arbitration agreement and the application. It was the contention of the appellant that a Joint Venture Agreement (JVA) dated 14.07.2001 entered into between two groups, namely, the Vaghani Group and the Subhkam Group required the transfer of the entire manufacturing and distribution business of the Vaghani Group to be transferred to a Joint Venture Company (JVC) incorporated between the groups. The appellant argued that the Vaghani Group had formed an entity Respondent 2 and were carrying on business in competition with the JVC. From the contractual documents before it the Court held that Respondent 2 would be covered by the terms of the JVA between the parties and hence the application under Section 9 could not have been dismissed on the ground that Respondent 2 was not a party to the arbitration agreement.

The judgment in Chloro Controls was followed by the Supreme Court of India in Purple Medical Solutions (P) Ltd. v. MIV Therapeutics Inc. The judgment is significant as the ratio in Chloro Controls was sought to be applied to an application filed under Section 11 of the 1996 Act. Differences between the parties had their genesis in a Share Purchase Agreement (SPA) entered into on 11.07.2011 and a License Royalty Agreement entered on the same date. Under the SPA, the first respondent was required to transfer 99.96% of its share capital to the petitioner. The transfer of shares was restrained by an order and Injunction passed by the District Court of Massachusetts in a claim filed by a third party. The petitioner came to learn of this order on 12.07.2011 just one day after the execution of the SPA. The petitioner was assured by the respondents that the dispute before the Court of Massachusetts would be settled and was thereby induced to make payment towards the purchase price of the shares. The respondents however did not discharge the claim before the District Court of Massachusetts and on 23.07.2013, coercive proceedings were commenced against the petitioner and Respondent 1 a company in which it had by now acquired a substantial stake. The Supreme Court applying the ratio of the judgment in Chloro Control held that the consent of Respondent 2 to arbitrate disputes under the agreements between the parties could be inferred from the nature of the transaction between the parties .

The judgment in Chloro Control was sought to be applied in a challenge to an arbitral award in a petition under Section 34 of the 1996 Act in ONGC v. Jindal Drilling and Industries Ltd. before the High Court of Judicature at Bombay. The arbitral tribunal had dismissed a claim filed before it on the grounds of lack of jurisdiction. It was the case of the petitioner that it had awarded a contract to a company by the name DEPL basis the representation that this entity was a sister concern of the respondent. The Court found no contractual or circumstantial evidence in support of these allegations and hence agreed with the Tribunal’s findings that there was no material produced in support of the aforesaid allegations. It was in such circumstances that the Court refused to apply the ratio of the judgment in Chloro Control .

GMR Energy Limited v. Doosan Power Systems India (P) Ltd. was an interesting case for it was a suit filed before the Delhi High Court seeking an injunction restraining the defendants from initiating or continuing an arbitration before the Singapore International Arbitration Centre (SIAC). The suit sought an injunction on the ground that the plaintiff was not a party to the arbitration agreements. The defendants filed an application seeking reference of the suit to arbitration under Section 45 of the 1996 Act. The defendants contended that the plaintiff had by virtue of two MOU’s guaranteed the liability of GCEL. These contentions were accepted by the Court and also noted that the GMR group of companies operated as a single group concern and the plaintiff had in fact made part-payment of the obligations of GCEL.

In Cheran Properties Ltd. v. Kasturi and Sons Ltd. , the Supreme Court of India was hearing appeals from a judgment of the National Company Law Appellate Tribunal. The third respondent, KSL, SPIL and Hindcorp entered into a share purchase agreement on 19.07.2004. Under this agreement SPIL would allot 240 lakh equity shares to KSL at a price fixed under the agreement in order to discharge the book debts of SPIL. KSL was to sell 243 lakh equity shares to KCP. The object being to take over the business, shares and liabilities of SPIL. Since the transaction was not completed by KCP disputes broke out between the parties, which were referred to arbitration. An award was passed against KCP. KCP challenged the award unsuccessfully losing at every stage right up to the Supreme Court. The award having attained finality, KSL initiated proceedings under Section 111 of the Companies Act, 1956 seeking a rectification of the register. The NCLT allowed the application and KCP’s appeal against this order was dismissed. In passing its order, the NCLT had concluded that the appellant was a nominee of KCP. These conclusions were based on an evaluation of the proceedings during the course of the arbitration and the provisions of the share purchase agreement, which allowed KCP to nominate any person for the purpose of acquiring the shares of SPIL provided they agreed to abide by the terms of the agreement between the parties. It was the appellant’s principal contention that the award could not be enforced against it, as it was not a party to the arbitration. The Court however, opined that in modern business transactions where parties enter into multiple layers of transactions through groups of companies. The Court held that the intention of the parties ought to be gathered from the transactional documents and the intention of the parties ought to be given effect including if necessary, by binding non-signatory parties by the outcome of the arbitration proceedings. Accordingly, the Court derived a contractual intent to bind the appellant and upheld the decision of the NCLT and the NCLAT and dismissed the appeal.

Before parting with this decision, it would be necessary to bring the attention of the reader to a distinction sought to be created by the Court between seeking to apply ‘the group of companies principle’ in a Section 11 situation as in Indowind and in a post arbitration case as in the case at hand. The Court concluded that the statutory framework, namely, Section 35 of the 1996 Act allowed it to execute an Award against persons claiming under or through a party to an arbitration but the scheme of the 1996 Act did not authorise such considerations in the context of an application under Section 11 of the 1996 Act . The authors respectfully differ with these observations of the Supreme Court . In proceedings under Section 8 as well as in proceedings under Section 11 of the 1996 Act, the judicial authority or court is required to give a finding on the existence of an arbitration agreement’ . There was additionally no distinction between the language of Section 8 and Section 35 at the time of the judgment since Section 8 of the 1996 Act had already been amended by Act 3 of 2016. The authors would state that once an intent can be seen or derived from the transaction between the parties or observed in their conduct there is nothing in the language of the 1996 Act that prevents a judicial authority or court from giving effect to that intention and appointing an arbitrator in a dispute covering signatory parties as well as non-signatory parties. It is also pertinent to note that the decision of the Supreme Court in this case did not benefit from having the opportunity to consider the judgment of the Supreme Court in Purple Medical Solutions which itself did not have the opportunity of considering Indowind .

In Ameet Lalchand Shah v. Rishabh Enterprises , the Supreme Court of India was called upon to consider the validity of an order dismissing an application under Section 8 of the 1996 Act. Rishabh had entered into two contracts with Juwi India, namely, an equipment and material supply contract and an engineering, installation and commissioning contract, both of which contained an arbitration agreement. Rishabh then entered into a sale and purchase agreement with Astonfield for purchasing CIS Photovoltaic products and an equipment lease agreement whereby Dante Energy agreed to lease the solar power plant of Rishabh at Jhansi. These two agreements did not contain arbitration agreements. Owing to disputes between the parties, Dante Energy invoked arbitration and nominated an arbitrator. In response Rishabh filed a suit before the High Court of Judicature at Delhi alleging fraud and seeking a declaration that the aforementioned agreements were void. The Supreme Court considered the terms of the various agreements as well as the pleadings in the plaint filed by Rishabh and concluded that clearly the four agreements were inter-connected. The Court opined that while there were several agreements covering several different parties these were all executed for the same commercial object of commissioning a solar power project in Jhansi. The Court therefore referred disputes under all four agreements to an arbitrator to be appointed by the parties.

The Courts have also had an opportunity of considering intervention by third parties in arbitration proceedings as was the case in Nirmala Jain v. Jasbir Singh as well as impleadment of third parties to arbitration agreements as was the case in Starlog Enterprises Ltd. v. Board of Trustees of Kandla Port . In Nirmala Jain a Division Bench of the Delhi High Court was deciding an appeal where the principle ground for challenge to an order under Section 9 of the 1996 Act was that it allowed a third party to the arbitration proceedings to intervene in the arbitral proceedings. Dismissing the appeal, the Court held that there was no absolute proposition of law that third parties/non-signatories could not be made parties to an arbitration. The Court observed that given the commonality of the subject-matter and the composite nature of the transaction between the parties there was nothing wrong with the order under challenge. In Starlog an arbitral tribunal passed an order in July 2019 impleading a third party in an arbitration that had commenced in the year 2014. The impleaded party sought to challenge the order of the Tribunal by filing a writ petition before the High Court of Judicature of Gujarat at Ahmedabad. This proceeding was dismissed as not maintainable and the Gujarat High Court left the parties to raise all the contentions on merits before an appropriate forum at the appropriate time.

In MTNL v. Canara Bank , MTNL sought to oppose the inclusion of CANFINA as Respondent 2 in arbitral proceedings contending that there was no arbitration agreement between MTNL and CANFINA. The Supreme Court referred to several documents to ascertain the intention of the parties including: the contractual documents between MTNL and Canara Bank, Minutes of Meetings between Cabinet Secretaries with respect to the arbitration of disputes and to earlier proceedings between the parties. The Court observed that arbitration agreements are to be construed according to the general principles of construction of statutes, statutory instruments, and other contractual documents. The intention of the parties must be inferred from the terms of the contract, conduct of the parties, and correspondence exchanged, to ascertain the existence of a binding contract between the parties. If the documents on record show that the parties were ad idem, and had actually reached an agreement upon all material terms, then it would be construed to be a binding contract . The meaning of a contract must be gathered by adopting a common sense approach and must not be allowed to be thwarted by a pedantic and legalistic approach. A commercial document has to be interpreted in such a manner so as to give effect to the agreement, rather than to invalidate it. An arbitration agreement is a commercial document inter parties, and must be interpreted so as to give effect to the intention of the parties, rather than to invalidate it on technicalities. The Supreme Court stated that a non-signatory can be bound by an arbitration agreement on the basis of the ‘group of companies’ doctrine, where the conduct of the parties evidences a clear intention of the parties to bind both the signatory as well as the non-signatory parties. The Courts and Tribunals have invoked this doctrine to join a non-signatory member of the group, if they are satisfied that the non-signatory company/ party was by reference to the common intention of the parties, a necessary party to the contract. The Court held that a non-signatory entity of a group of companies could be bound by an arbitration agreement if it was found that it had been engaged in the negotiation or performance of the transaction or made statements indicating its intention to be bound by the contract. Non-signatory parties could also be bound if they were found to be bound and/or benefitted from the relevant contract. The Court also observed the need to have a common arbitration where a ‘composite transaction’ required several different agreements to be performed in order to attain a common objective. Ultimately, the Court concluded that from the material before it no gainful arbitral proceedings could be conducted in the absence of CANFINA and thus referred the parties to the arbitration.

CONCLUSION

Like a consummated romance arbitration rests on consent. The analysis above clearly articulates consent as the cornerstone of arbitration. However, consent need not always be express and it may be implied from the transactional documents and the conduct of the parties as well as by the conduct of non-parties/non-signatories. The authors, therefore, propose that terminology such as ‘group of companies’, ‘vessel of fraud’, ‘sham or bogus’ etc commonly used in proceedings where parties seek to question or challenge the separate corporate identity of a company whilst applicable to civil proceedings where such questions arise, do not have a natural home in the sphere of arbitration. In the sphere of arbitration, the enquiry must exclusively concentrate on whether or not consent to arbitrate can be observed whether expressly or by necessary implication from the nature of the transaction, the contract, the correspondence and conduct of the parties.


*Advocate, Bombay High Court (mikhailbehl@gmail.com)

**Advocate, Bombay High Court and former Visiting Professor at Government Law College, Mumbai (anupamsurve@gmail.com).

[1] Definition of ‘corporate veil’: Black’s Law Dictionary (11th Edn.).

[2] Definition of ‘piercing the corporate veil’: Black’s Law Dictionary (11th Edn.).

[3] Gower and Davies: Principles of Modern Company Law (8th Edn.) (Ch. 8, pp. 193–209).

[4] (1944) 7 Modern Law Review 54.

[5] 1896 AC 22.

[6] UK Company Law Review: Strategic Framework, Ch. 5.2.

[7] Gower and Davies: Principles of Modern Company Law (8th Edn. ) (Ch. 8 at p. 195).

[8] https://www.startupindia.gov.in (viewed on 26.08.2020).

[9] https://www.makeinindia.com/policy/new-initiatives (viewed on 26.08.2020).

[10] Gower and Davies: Principles of Modern Company Law (8th Edn.) (Ch. 8 at pp 208-209).

[11] Arbitration and Conciliation Act, 1996

[12] What constitutes an arbitration agreement being defined in Section 7 of the 1996 Act.

[13] Report No. 246 of the Law Commission of India: Amendments to the Arbitration and Conciliation Act, 1996 [at p. 42].

[14] Act 3 of 2016.

[15] Pertaining to New York Convention Awards.

[16] Pertaining to Geneva Convention Awards.

[17] See paras 61 to 64 of the 246th Report of the Law Commission on Amendments to the Arbitration and Conciliation Act, 1996 (August,2014).

[18] (2013) 1 SCC 641.

[19] Order 22 Rule 10 of the Code of Civil Procedure, 1908.

[20] See also Order 22 Rule 1 of the Code of Civil Procedure, 1908.

[21] Section 232 (4) of the Companies Act, 2013.

[22] Section 232(3)(c) of the Companies Act, 2013.

[23] (2013) 1 SCC 641.

[24] 1953 SCC OnLine Bom 65.

[25] Malhotra: Commentary on the Law of Arbitration (Fourth EdN.) (pp. 152-154).

[26] [1990] Ch 433: [1990] 2 WLR 657 (HL).

[27] (1986) 1 SCC 264.

[28] (2010) 5 SCC 306.

[29] Wescare (I) Ltd. v. Subuthi Finance Ltd., 2008 SCC OnLine Mad 539 at para 12.

[30] Clause 4.2 of the Agreement for Sale dated 24.02.2006.

[31] Wescare was seeking enforcement of its agreement with Subuti.

[32]See proviso to Section 15(h) of the Specific Relief Act, 1963.

[33] See Section 16(b) and (c) of the Specific Relief Act, 1963.

[34] See Section 19(e) of the Specific Relief Act, 1963.

[35] (2013) 1 SCC 641.

[36] Clause 7 of the Shareholders Agreement.

[37] (2013) 1 SCC 641 at paras 73 to 76.

[38] (2010) 5 SCC 306.

[39] 2014 SCC Online Bom 1119.

[40] (2013) 1 SCC 641.

[41] (2015) 15 SCC 622.

[42] (2013) 1 SCC 641.

[43] The judgment however does not consider Indowind, (2010) 5 SCC 306.

[44] (2013) 1 SCC 641.

[45] 2015 SCC Online Bom 1707.

[46] (2013) 1 SCC 641.

[47] 2017 SCC Online Del 11625.

[48] (2018) 16 SCC 413.

[49] (2010) 5 SCC 306

[50] (2018) 16 SCC 413  para 29.

[51] It is necessary to note that these observations were made prior to the enactment of Act 33 of 2019 whereby Section 11(6-A) of the 1996 Act came to be deleted from the statute book.

[52] Malhotra: Commentary on the Law of Arbitration (Fourth Edn, at. page 317).

[53] Malhotra: Commentary on the Law of Arbitration (Fourth Edn., at page 449).

[54] See Sections 4 & 6 of Act 3 of 2016. The authors would state that irrespective of the deleting of Section 11(6-A) by virtue of Act 33 of 2019 since the High Court or the Supreme Court is required to evaluate the mechanism contained in the arbitration agreement the Courts would have to come to a prima facie finding that there was an arbitration agreement in existence.

[55] Garware Wall Ropes Ltd.  v. Coastal Marine Construction and Engineering Ltd., (2019) 9 SCC 209.

[56] (2015) 15 SCC 622.

[57] (2010) 5 SCC 306.

[58] 2018 SCC Online SC 487.

[59] (2019) SCC Online Del 11342.

[60] R/Special Civil Application No. 14146 of 2019 decided by the  High Court of Judicature of Gujarat at Ahmedabad on 18.05.2020.

[61] (2019) SCC Online Del 11342.

[62] R/Special Civil Application No. 14146 of 2019 decided by High Court of Judicature of Gujarat at Ahmedabad on 18.05.2020.

[63] 2019 SCC Online SC 995.

[64] Ibid at para 9.4.

[65] The Court subsequently on the constitution of the Administrative Mechanism for the Resolution of CPSE’s Disputes (AMRCD) referred the three government bodies to the AMRCD with the understanding that if disputes were not settled by 15.01.2020 there would be an arbitration of these disputes. See (2019) 10 SCC 32.

Case BriefsSupreme Court

Supreme Court: The Bench of Navin Sinha and Indira Banerjee*, JJ., has held that when the acceptor puts in a new condition while accepting the contract already signed by the proposer, the contract is not complete until the proposer accepts that condition.

Setting aside the concurrent findings of the Trial Court and the High Court of Judicature at Hyderabad in a case relating to conclusiveness of the contract for supply of Wooden Sleepers, the bench said,

“Both the Trial Court and the High Court over-looked the main point.”

Background

On 17-7-1990, the respondent floated a tender for supply of Wooden Sleepers. The main dispute was related to Clauses 15 and 16 of the tender, which are extracted herein below:

“15. The purchaser will not pay separately for transit insurance and the supplier will be responsible till the entire stores contracted for arrive in good condition at destination. The consignee will as soon as but not later than 30 days of the date of arrival of stores at destination notify the supplier of any loss, or damage to the stores that may have occurred during transit.

16. In the event of the supplies being found defective in any matter the right to reject such materials and return the same to the supplier and recover the freight by the Port is reserved.”

Pursuant to the aforesaid tender, the appellant submitted its offer with a specific condition of the offer that inspection of the Sleepers, contrary to the requirement of the respondent, had to be conducted only at the depot of the appellant, thereby making a counter proposal. The appellant deposited Rs.75,000/- towards earnest deposit, along with its quotation while reiterating that if the respondent required inspection at the site of the respondent, the appellant would charge 24% above the rate quoted by him for the supply of goods. Though the respondent agreed that the goods would be inspected at the site of the appellant, a further condition was imposed that the final inspection would be made at the General Stores of the respondent and the respondent also requested to extend the delivery period of the sleepers until 15-11-1990. The Appellant rejected the proposal of the Respondent and requested that the deposited earnest money be returned to it.

The respondent contended that, by reason of refusal of the appellant to discharge its obligation of supplying the requisite number of sleepers, it had been constrained to invoke the risk purchase clause as contained in Paragraph 16 of the Special Conditions of purchase and had to purchase the wooden sleepers at a higher rate from a third party, incurring losses, for which the respondent was entitled to claim damages.

The Trial Court and the High Court held that since the appellant had committed breach of its obligations under a concluded contract; the respondent was entitled to damages.

Observations and Decision

Noticing that both the Trial Court and the High Court over-looked the question as to whether the acceptance of a conditional offer with a further condition results in a concluded contract, irrespective of whether the offeror accepts the further condition proposed by the acceptor, the Court observed that Section 7 of the Contract Act, 1872 which emphasises that acceptance must be absolute.

“It is a cardinal principle of the law of contract that the offer and acceptance of an offer must be absolute. It can give no room for doubt. The offer and acceptance must be based or founded on three components, that is, certainty, commitment and communication.”

However, when the acceptor puts in a new condition while accepting the contract already signed by the proposer, the contract is not complete until the proposer accepts that condition.

The Court cited Haridwar Singh v. Bagun Sumbrui (1973) 3 SCC 889, wherein it was held that an acceptance with a variation is no acceptance. It is, in effect and substance, simply a counter proposal which must be accepted fully by the original proposer, before a contract is made.

The Court further relied on Union of India v. Bhim Sen Walaiti Ram, (1969) 3 SCC 146, where a three-Judge Bench of this Court had held that,acceptance of an offer may be either absolute or conditional. If the acceptance is conditional, offer can be withdrawn at any moment until absolute acceptance has taken place.”

It was, hence, held that the Trial Court and the High Court over-looked the main point that, in response to the tender floated by the respondent, the appellant had submitted its offer conditionally subject to inspection being held at the Depot of the Appellant and the said condition was not accepted by the respondent unconditionally. The respondent had agreed to inspection at the Depot of the appellant, but it imposed a further condition that the goods would be finally inspected at the showroom of the respondent. This Condition was not accepted by the Appellant.

It could not, therefore, be said that there was a concluded contract. Therefore, there could be no question of any breach on the part of the appellant or of damages or any risk purchase at the cost of the appellant.

The Court, while setting aside impugned judgments and orders held that the appellant was entitled to refund of earnest money deposited with the respondent within four weeks with interest at 6% per annum from the date of institution of suit No.450 of 1994 till the date of refund.

[Padia Timber Company (P) Ltd. v. Visakhapatnam Port Trust, 2021 SCC OnLine SC 1, decided on 05-01-2021]


*Justice Indira Banerjee has penned this judgment

Know Thy Judge| Justice Indira Banerjee

Op EdsOP. ED.

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

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

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

Brief Facts

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

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

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

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

Findings of Supreme Court

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

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

Analysis

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

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

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

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

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

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

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

Sole Reliance upon Vishwanath Sood 

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

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

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

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

(emphasis supplied)

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

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

Conclusion

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


 *Partner at L&L Partners, Litigation, Delhi

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

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

[1] (2020) 3 SCC 222

[2] Ibid.

[3] Ibid

[4](1989) 1 SCC 657

[5] (2009) 2 SCC 337

[6](1987) 2 SCC 160

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

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

[9] 2019 SCC OnLine SC 1158

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

[11]Ibid, para 17.

[12] (2020) 3 SCC 222

[13] 2016 SCC OnLine Del 2494

[14]Ibid, para  20.

[15] 2016 SCC OnLine MP 8013

[16] (1989) 1 SCC 657

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

Case BriefsHigh Courts

Allahabad High Court: Dr Kaushal Jayendra Thaker, J., addressed a matter with regard to stamp duty.

Respondents invited a tender to repair different roads in District Mathura. Petitioner’s tender was accepted.

Stamp Act

Further, the respondent issued a letter of acceptance with a clause that total security along with stamp duty should be deposited within 10 days. Petitioner wrote to the respondents that he is supposed to pay stamp duty as per Article 57(b) Schedule 1 B of the Stamp Act and for a period of 8 months, no work order was passed.

Bench on perusal of the facts and circumstances of the present matter stated that it is covered by the decision of this Court and further waste of time would cause loss to the public and Exchequer.

Despite the previous decisions in Strong Construction v. State of U.P., Civil Misc. WP No. 35096 of 2004 and Kishan Traders v. State of U.P., Writ C No. 52385 of 2015, authorities have demanded from petitioner what is known as stamp duty.

Further, the Court added that though the petition is belated, this Court has not been made aware whether the contract has already been executed or not.

With regard to the stamp duty, Court stated that it has been covered by the Division Bench of this Court in Kishan Traders v. State of U.P., Writ C No. 52385 of 2015, wherein Writ of Mandamus was issued which read as follows:

“We also issue a Writ of Mandamus commanding the respondents not to compel the Petitioners and similarly situate persons, whether they have filed writ petition or not, to pay Stamp Duty on security deposit in question treating as ‘mortgage deed’ and further to charge Stamp Duty on such ‘securities’ as provided under Article 57 (b) Schedule 1 B of the Stamp Act.”

Hence in view of the above, bench held that the petitioner would be liable to pay stamp duty as per Article 57(b) Schedule 1 B of the Stamp Act.

In view of the above, the petition was allowed. [Yogendra Kumar v. State of U.P., 2020 SCC OnLine All 1024, decided on 07-09-2020]

Case BriefsSupreme Court

“Flat purchasers suffer agony and harassment as a result of the default of the developer. Flat purchasers make legitimate assessments in regard to the future course of their lives based on the flat which has been purchased being available for use and occupation. These legitimate expectations are belied when the developer as in the present case is guilty of a delay of years in the fulfilment of a contractual obligation.”

Supreme Court: In the case where 339 flat buyers has complained against delayed handing over of possession, the Bench of Dr. DY Chndrachud and KM Joseph, JJ held that the flat buyers are entitled to compensation for delayed handing over of possession and for the failure of the developer to fulfil the representations made to flat buyers in regard to the provision of amenities.

“A failure of the developer to comply with the contractual obligation to provide the flat to a flat purchaser within a contractually stipulated period amounts to a deficiency. There is a fault, shortcoming or inadequacy in the nature and manner of performance which has been undertaken to be performed in pursuance of the contract in relation to the service.”

Brief Background

The complainants had booked residential flats in a project called Westend Heights at New Town, DLF, BTM Extension at Begu, Bengaluru. However, the obligation to handover possession within a period of thirty-six months was not fulfilled. National Consumer Disputes Redressal Commission (NCDRC) dismissed a consumer complaint filed by 339 flat buyers, accepting the defence of DLF Southern Homes Pvt. Ltd. and Annabel Builders and Developers Pvt. Ltd. that there was no deficiency of service on their part in complying with their contractual obligations and, that despite a delay in handing over the possession of the residential flats, the purchasers were not entitled to compensation in excess of what was stipulated in the Apartment Buyers Agreement (ABA).

On ABA being one-sided

Where a flat purchaser pays the installments that are due in terms of the agreement with a delay, clause 39(a) stipulates that the developer would “at its sole option and discretion” waive a breach by the allottee of failing to make payments in accordance with the schedule, subject to the condition that the allottee would be charged interest at the rate of 15 per cent per month for the first ninety days and thereafter at an additional penal interest of 3 per cent per annum.

On the other hand, where a developer delays in handing over possession the flat buyer is restricted to receiving interest at Rs 5 per square foot per month under clause 14. The agreement stipulates thirty-six months as the date for the handing over of possession.

“Evidently, the terms of the agreement have been drafted by the developer. They do not maintain a level platform as between the developer and purchaser. The stringency of the terms which bind the purchaser are not mirrored by the obligations for meeting times lines by the developer. The agreement does not reflect an even bargain.”

On argument that flat buyers are constrained by the stipulation contained in ABA providing compensation for delay at the rate of Rs 5 per square feet per month

The court must take a robust and common-sense based approach by taking judicial notice of the fact that flat purchasers obtain loans and are required to pay EMIs to financial institutions for servicing their debt. Delays on the part of the developer in handing over possession postpone the date on which purchasers will obtain a home. Besides servicing their loans, purchasers have to finance the expenses of living elsewhere. To postulate that a clause in the agreement confining the right of the purchaser to receive compensation at the rate of Rs 5 per square foot per month (Rs 7,500 per month for a flat of 1500 square feet) precludes any other claim would be a manifestly unreasonable construction of the rights and obligations of the parties.

“Where there is a delay of the nature that has taken place in the present case ranging between periods of two years and four years, the jurisdiction of the consumer forum to award reasonable compensation cannot be foreclosed by a term of the agreement.”

Further, the expression “service‟ in Section 2 (1) (o) means a service of any description which is made available to potential users including the provision of facilities in connection with (among other things) housing construction. Under Section 14(1)(e), the jurisdiction of the consumer forum extends to directing the opposite party inter alia to remove the deficiency in the service in question. Intrinsic to the jurisdiction which has been conferred to direct the removal of a deficiency in service is the provision of compensation as a measure of restitution to a flat buyer for the delay which has been occasioned by the developer beyond the period within which possession was to be handed over to the purchaser.

Hence, to uphold the contention of the developer that the flat buyer is constrained by the terms of the agreed rate irrespective of the nature or extent of delay would result in a miscarriage of justice.

Directions

  • Except for eleven appellants who entered into specific settlements with the developer and three appellants who have sold their right, title and interest under the ABA, the respondents shall, as a measure of compensation, pay an amount calculated at the rate of 6 per cent simple interest per annum to each of the appellants. The amount shall be computed on the total amounts paid towards the purchase of the respective flats with effect from the date of expiry of thirty-six months from the execution of the respective ABAs until the date of the offer of possession after the receipt of the occupation certificate;
  • The above amount shall be in addition to the amounts which have been paid over or credited by the developer at the rate of Rs 5 per square foot per month at the time of the drawing of final accounts; and
  • The amounts due and payable in terms of directions (i) and (ii) above shall be paid over within a period of one month from the date of this judgment failing which they shall carry interest at the rate of 9 per cent per annum until payment.

[Wg. Cdr. Arifur Rahman Kan and Aleya Sultana v. DLF Southern Homes Pvt Ltd, 2020 SCC OnLine SC 667, decided on 24.08.2020]

Case BriefsHigh Courts

Uttaranchal High Court: A Full-Bench of Ramesh Ranganathan CJ, Sudhanshu Dhulia and Alok Kumar Verma JJ, held that contractual state employees are also entitled to child care leave, and that its denial would mean the denial of the rights of a child.

The petitioner is a lady Ayurvedic doctor in Uttarakhand’s State Medical and Health Services, appointed on a contractual basis for one year which had been repeatedly renewed since her appointment in 2009. After her maternity leave, she did not rejoin service and instead claimed Child Care Leave (CCL), citing a 2015 Judgement by a division bench of the Uttaranchal High Court which allowed a contractual employee to get CCL for 730 days. Her application was rejected on the grounds of a 2011 Government Order which excluded contractual employees from availing CCL. A division bench referred the matter in the present case to a Full Bench, which had to decide whether CCL of 730 days could be granted to a contractual employee hired for only one year, and whether the High Court, exercising its jurisdiction under Article 226, could issue mandatory guidelines extending this benefit to contractual employees in the absence of any legislation in this regard.

Chief Standing Counsel for the State, Paresh Tripathi, contended that the petitioner was only entitled to a “fixed monthly honorarium,” and could claim CCL as a matter of right since she is not technically a government servant. He also argued that the petitioner is only relying upon Part IV of the Constitution i.e., the Directive Principles of State Policy, which are not enforceable. He rebutted claims of alleged violations of Articles 14 and 16, averring that regular and contractual employees form two different classes and their separation would fall under ‘reasonable classification’, and Article 21.

While acknowledging the recent worldwide emergence of the otherwise neglected concepts of maternity and child care leave, the Court stated that “the leave is not a recognition of the rights of a woman but it is more a recognition of the rights of a child.”

Bench took due cognizance of various Constitutional and statutory provisions, including Article 15(2) and several Articles under Part IV of the Constitution, which were enforced bearing the needs and rights of children in mind. It rejected the State’s argument that DPSPs are not enforceable, instead upholding their importance by citing Supreme Court judgments where the DPSPs were hailed as “fundamentals in the governance of the country.”

The Court opined that since no distinction is made between a regular and a contractual employee with respect to maternity leave, the same principle should be adopted while considering CCL as well. On the first issue, the Court held that a contractual employee employed for a year was also entitled to CCL, but not for 760 days. Rather, they can be granted paid CCL for 31 days on the same terms as “earned leave” given to other employees under the 2011 Government Order. With regard to the second issue, the Court stated that it has merely read the rights of a contractual employee into the 2011 Order, which have duly been subjected to the restrictions imposed on any regular employee under the said Order. [Tanuja Tolia v. State of Uttarakhand, 2020 SCC OnLine Utt 337, decided on 24-07-2020]

Case BriefsForeign Courts

Supreme Court of Canada: Full Bench comprising Wagner, C.J., Abella, Moldaver, Karakatsanis, Côté, Brown, Rowe, Martin and Kasirer, JJ. allowed an appeal against a class action lawsuit claiming disgorgement from the Atlantic Lottery Corporation (ALC), a corporation which approves licenses for Video lottery terminals (VLTs).

The class action was instituted on behalf of any natural person who paid to play VLTs in the area in the six years preceding the lawsuit, which claimed that VLTs are deceptive and dangerous and contravene the Criminal Code’s (1985) prohibition of games similar to “three-card monte”. The plaintiffs claim that ALC breached its duty by not warning players of “the inherent dangers associated with VLTs, including the risk of addiction and suicide ideation.” The claim relies on three causes of action i.e., waiver of tort, breach of contract and unjust enrichment, to seek a gain-based award quantified by the profit ALC earned by licencing VLTs. ALC’s application against the claim before a certification judge failed, as did its appeal in the Court of Appeal, which allowed the plaintiff’s lawsuit to proceed to trial.

The Court, however, held that the plaintiffs’ plea is bound to fail since it does not disclose a reasonable cause of action. The bench opined that while disgorgement is a remedy against actionable misconduct, the plaintiffs seek to use it as an independent cause of action under an entirely new category of wrongful conduct, which is akin to negligence but does not require proof of damage. Denying relief on this ground, the Court asserted that “granting disgorgement for negligence without proof of damage would result in a remedy arising out of legal nothingness.” As for the argument concerning the similarity of VLTs to three-card monte, the Court rejected it since the prohibition was directed at the game’s attribute and not its feature of deception.

The Court opined that gain-based recoveries in cases of breach of contract require the consideration of the legitimate interest which such an award seeks to vindicate. Since the award sought by the plaintiffs is measured by the defendant’s gain, it seeks to serve a compensatory purpose which distinguishes it from disgorgement and that makes a gain-based remedy inappropriate. Moreover, the contract between ALC and the plaintiffs under which the plaintiffs paid to play on the VLTs cannot be said to have been vitiated since a benefit derived by a defendant from a valid contract is not unjustified. The plaintiffs failed in establishing a causal connection between the alleged breach of contract and the gain to be disgorged. However, four judges on the Bench dissented by allowing the appeal in part, striking down disgorgement and unjust enrichment as causes of action, instead suggesting that the lawsuit be focused on a breach of duty of care, the adequacy of ordinary remedies resulting from it and whether exemplary damages ought to be awarded. [Atlantic Lottery Corporation Inc. v. Babstock, 2020 SCC 19, decided on 24-07-2020]

Op EdsOP. ED.

Swiftness of the Coronavirus induced disruptions surely would have prevented any viable pre-preparation on part of those most affected. Resultantly, almost all businesses/industries/manufacturing units are likely to, as many already do, face unprecedented upheavals and alterations in their supply chains/workforce/expansion. It is in this background that industrial and manufacturing units, regardless of functioning via a written agreement or not, must prime themselves vis-à-vis the laws of frustration, contingency and force majeure.

In India, the law pertaining to contingency[1] and frustration[2] must be treated  as rules of positive law that oblige and outline specific rights and obligations thereof. On the other hand, force majeure is a derivation of civil law, particularly French Law, whereby it pertains to any supervening event or happenstance as may obviate and affect the ability of a party to the agreement from performing it. In India, ‘force majeure’ usually finds place in a contract thereby allowing for a certain degree of flexibility and play in contractual relations thereof. Though a lot is dependent on the actual language and construction of the said clause, the courts in India have leaned in favour of placing ‘force majeure’ within the umbrella of contingency.

The courts have in their wisdom expounded upon force majeure as an exclusionary clause being part of a mutual agreement between parties thereof. In such a scenario, operation of such a clause is to be found under, and has been limited to (albeit incorrectly as per me), the chapter dealing with ‘contingency’ rather than ‘frustration’.[3] It is conceded that the presence of a ‘force majeure’ clause clearly postulates that the parties were in the know of an event or several events (being exclusively a function of that particular clause) and agreed upon the same so as to render the agreement non-performable thereof. Contingency in a contract rests on (1) agreement between parties, (2) postulated upon a future uncertain event(s)/condition(s), (3) being collateral to the contract thereof, and (4) happening (or not) of such event/condition.[4] Therefore, having regard to the same, one would be hard-pressed to disagree with the law as laid down in the seminal judgment of Satyabrata Ghose v. Mugneeram Bangur and Co. [5] when it adjudges that:

“In cases, therefore, where the Court gathers as a matter of construction that the contract itself contained impliedly or expressly a term, according to which it would stand discharged on the happening of certain circumstances the dissolution of the contract would take place under the terms of the contract itself and such cases would be outside the purview of Section 56 altogether….In such a scenario it would be a derivative of Section 32.”

Though the Supreme Court has labelled ‘force majeure’ as a function of contingency, it is my submission that in essence such a clause is ex abundati cautela and in that it traverses the thin grey area between contingency and frustration. Furthermore, it has authoritatively been held that the presence of such a clause as specifies conditionalities vide which parties would stand discharged of their contractual obligations dispenses with application of the positive law rule enshrined in Section 56.[6] However, this is where I stand in disagreement with the law as laid down in Satyabrata Ghose (1954) and followed thereafter in Energy Watchdog (2017).

In effect, both the judgments as cited herein above have given primacy to the rule of construction premised on ‘intention of parties’ whereby, regardless of Section 56, a party may agree (albeit devoid of any undue influence and coercion) to honour a contract despite occurrence of circumstances as may fundamentally alter its scape; effectively allowing the contracting parties to override a statutory enactment in going ahead with their commitment despite disappearance/obliteration/fundamental alteration of the very object thereof. Surely such a construction leads to an anomalous situation whereby the statutory scope of ‘subsequent impossibility’ is smothered.

Take for instance Illustration (e) to Section 56 as per the Act, 1872;

“(e) A contracts to act at a theatre for six months in consideration of a sum paid in advance by B. On several occasion A is to ill to act. The contract to act on those occasions becomes void.”

 Evidently, as per this illustration, A’s illness is considered to be serious enough such as to excuse performance on the basis that it fundamentally alters the object of the said contract. Collating the said illustration to the situation prevailing currently whereby say ‘A’ is suffering from COVID-19 induced illness and is mandated by policy to isolate and quarantine for a certain time period. In this background, suppose the contract between ‘A’ and ‘B’ consists of a ‘force majeure’ clause such as to exclude an illness from rendering the contract void. As per the law contained in the above cited judgments, said clause would override Section 56 impossibility and despite the COVID-19 induced SARI, ‘A’ would be held liable to for breach.

The above approach, albeit in accordance with the law as at present, is not in harmony with public policy in such aberrant times. On the other hand it may be worth considering that if ‘A’ can prove that COVID-19 fundamentally prevents him/her from carrying out the object of the contract, then the lower threshold of the ‘force majeure’ clause must fall through in the face of an express statutory obligation and frustration induced discharge ought to follow. In conclusion, having regard to the above noted averment, ‘force majeure’ cannot and must not be treated as solely a function of contingency simply because of the argument resting on intention of parties and ensuing foreseeability (or not) of the event thereof.


*Author is a practising Advocate in Delhi

[1] See Chapter III, Contract Act, 1872

[2] See Chapter IV, Contract Act, 1872

[3] Energy Watchdog  v. CERC , (2017) 14 SCC 80

[4] See Section 30, Act 1872

[5] 1954 SCR 310

[6] Satyabrata Ghose v. Mugneeram Bangur and Co., 1954 SCR 310; followed thereafter in Energy Watchdog v. Central Electricity Regulatory Commission , (2017) 14 SCC 80

Case BriefsHigh Courts

Bombay High Court: G.S.Patel, J., held that an arbitration agreement must be stamped in the state where the arbitration is to take place, even if the only “thing to be done” in the state is the arbitration of the dispute. In this particular case, the contract was executed outside the state and was concerned with work that was to be carried out in Visakhapatnam, however the arbitration clause specified that in case of any dispute, arbitration would take place in Mumbai. The main agreement had been stamped as per relevant laws in Visakhapatnam. When a dispute arose and the parties couldn’t decide upon an arbitrator by themselves, the matter was referred to the Bombay High Court under Section 11 of the Arbitration and Conciliation Act, 1996. Upon doing so, a further dispute arose as to whether the arbitration agreement would be recognised in Maharashtra as it was not stamped there.

The Court took into account the case of Garware Wall Ropes Ltd. v. Coastal Marine Constructions & Engineering Ltd., (2019) 9 SCC 209 where the Supreme Court had ruled that an arbitration agreement cannot be acted upon unless it is duly stamped. The Court relied upon the combined reading of Sections 3(b) and 19 of the Maharashtra Stamp Act, 1958 which specify that stamp duty has to be paid for instruments (1) executed out of State and (2) relating to any matter of “thing done or to be done” in the State and (3) is received in the State. In this backdrop, the Court proceeded to deal with whether arbitration would be a “thing to be done” under the abovementioned sections. In this regard, the judge observed that to insist that arbitration clauses alone are exempt from stamp duty under the Act would entail severing it from the rest of the agreement, which is not possible. It was clarified that arbitration is founded in the contract and Garware Wall Ropes Case also specifies that such a contract is one and indivisible at least to the extent of its arbitration agreement. 

The Court further stated that even on a literal appreciation of the provisions of the Maharashtra Stamp Act, 1958 they could not rule in favour of the applicant. The Court finally clarified that if any stamp duty has been paid in the other state then an adjustment will be done but the applicant will not be exempted from paying stamp duty in Maharashtra. [S. Satyanarayana Co. v. West Quay Multiport (P) Ltd., 2019 SCC OnLine Bom 4595, decided on 22-11-2019]

Case BriefsHigh Courts

Bombay High Court: K.R. Shriram, J., dismissed a criminal appeal filed against the order of the trial court whereby the accused was acquitted of the charge under Section 138 (dishonour of cheque) of the Negotiable Instruments Act, 1881.

The appellant had initiated a complaint under Section 138 against the accused alleging dishonour of cheque issued by him in favour of the appellant. It was alleged that the subject cheque was issued by the accused for payment of outstanding liability in relation to purchase of grapes from the appellant. The accused did not deny the purchase of grapes; he, however, contended that the subject cheque was given only as a security cheque and the outstanding payment was already made in three installments. The accused was tried for the offence as aforesaid. At the conclusion of the trial, the accused was found not guilty and was, therefore, acquitted. Aggrieved, the appellant preferred the instant appeal.

 The High Court reiterated the well-settled law that it is settled law that the important ingredient for the offence punishable under Section 138 is that cheque must have been issued for the discharge in whole or in part of any debt or other liability. If the cheque is not issued for the discharge of any debt or other liability, Section 138 can not be invoked.

Perused the facts of the instant case, the Court found that the appellant, in his cross-examination, had admitted that the cheque issued was only for guarantee. Relying on its earlier decisions, the Court noted that if the cheque is issued only as security for performance of a certain contract or an agreement and not towards the discharge of any debt or other liability, offence punishable under Section 138 is not made out.

Following the aforenoted position of law, and noting the admission of the appellant in his cross-examination, the Court concluded that there could be no other conclusion that the cheque was not issued for the discharge of any debt or other liability. The important ingredient for the offence punishable under Section 138, therefore, was missing.

Moreover, it was found that the appellant had been giving different dates on which the cheque was issued, which shows that he was economical with the truth. Reiterating that a person, who’s case is based on falsehood, has no right to approach the Court, the High Court dismissed the instant appeal. [Shantaram Namdeo Sathe v. State of Maharashtra, 2019 SCC OnLine Bom 4354, decided on 15-11-2019]

Case BriefsHigh Courts

Punjab and Haryana High Court: A Division Bench of Krishna Murari, C.J and Arun Palli, J. disposed of the writ petition after the consensus was drawn between the parties to present the case in front of the competent authorities.

A writ in the nature of mandamus was sought for commanding the respondent to restraint from awarding the tender/contract whose bid had been accepted.

Brief facts of the case were that FCI invited E-tenders for Handling and Transport Contractor for a period of 2 Years. The grievance was that the respondent submitted his bid as a small enterprise so as to avail the benefit admissible to Micro & Small Enterprises but it does not fulfill the requisite terms prescribed to be eligible in the said category. Thus, the FCI was restrained from awarding the work order to the respondent and resorted to an ad hoc arrangement of the movement of the food grains.

D.S. Patwalia and Kannan Malik, Counsels for the petitioner submitted that parties shall report to the competent authority and abide by the date and time indicated by the counsel.

J.S. Puri, Counsel for the respondent submitted that as time was the essence of the situation the parties should be directed to approach the Food Corporation of India.

The Court opined that as a consensus had emerged between the parties as only a period of 6 months remains out of initial period of 2 years for which contract to be awarded and it would rather be expedient if the FCI re-initiates the process, confining to the petitioner and respondent, with downward bidding from the lowest bid submitted by respondent. It was further submitted that it shall be open to the FCI to award the contract for a period of 6 months or for a longer period, as it may choose and decide.

The Court thus held that as the parties have drawn the consensus and nothing substantive remains, the petition was disposed of with the said terms to the parties. It was further added that the Court has not opined with the eligibility of the respondent to bid and thus the same was open to being adjudicated in appropriate proceedings if any.[Ambay Transport Co. v. FCI, 2019 SCC OnLine P&H 1267, decided on 17-07-2019]

Case BriefsSupreme Court

Supreme Court: In the case where a Notice Inviting Tender had a clause asking the parties invoking arbitration to furnish a “deposit-at-call” for 10% of the amount claimed, the bench of RF Nariman and Vineet Saran, JJ struck down the said clause on the premise that:

“Deterring a party to an arbitration from invoking this alternative dispute resolution process by a pre-deposit of 10% would discourage arbitration, contrary to the object of de-clogging the Court system, and would render the arbitral process ineffective and expensive.”

The Court was hearing the matter where the Punjab State Water Supply & Sewerage Board Bhatinda had issued notice inviting tender for extension and augmentation of water supply, sewerage scheme, pumping station and sewerage treatment plant for various towns mentioned therein on a turnkey basis. Clause 25(viii) of the Notice inviting Tender was challenged before the Court which read

“It shall be an essential term of this contract that in order to avoid frivolous claims the party invoking arbitration shall specify the dispute based on facts and calculations stating the amount claimed under each claim and shall furnish a “deposit-at-call” for ten percent of the amount claimed, on a schedule bank in the name of the Arbitrator by his official designation who shall keep the amount in deposit till the announcement of the award.”

Noticing that a 10% deposit has to be made before any determination that a claim made by the party invoking arbitration is frivolous, the Court said that such a clause would be unfair and unjust and which no reasonable man would agree to.

The Court said that since arbitration is an important alternative dispute resolution process which is to be encouraged because of high pendency of cases in courts and cost of litigation, any requirement as to deposit would certainly amount to a clog on this process. It also said:

“it is easy to visualize that often a deposit of 10% of a huge claim would be even greater than court fees that may be charged for filing a suit in a civil court.”

Striking down the said clause, the Court said that unless it is first found that the litigation that has been embarked upon is frivolous, exemplary costs or punitive damages do not follow.

“Clearly, therefore, a “deposit-at-call” of 10% of the amount claimed, which can amount to large sums of money, is obviously without any direct nexus to the filing of frivolous claims, as it applies to all claims (frivolous or otherwise) made at the very threshold.”

[ICOMM Tele Ltd. v. Punjab State Water Supply & Sewerage Board, 2019 SCC OnLine SC 361, decided on 11.03.2019]

Case BriefsHigh Courts

Uttaranchal High Court: The Bench of Sudhanshu Dhulia, J. stated that if the major part of the work was of civil nature then making the lead contractor from the civil department cannot be detrimental to the other non-civil contractors.

The petitioner who was a contractor and a proprietor of a firm was aggrieved by the tender notice inviting for civil and electrical work by the respondent. He has questioned the composite nature of the tender which according to him must have been separately called for taking into consideration the work which was both of civil and electrical engineering. He further contends that the nature of work has electrical component but experienced electrical contractors have been virtually ousted from the process by treating them as a ‘junior partner’ making it a violation under Articles 14 and 19 (1) (g) of the Constitution of India. The rebuttal placed by the respondents were that they acted in the above-stated manner to save time and money of the department as the major component of the work was civil work and only 20 to 30 per cent was reserved for the electrical plus they haven’t barred the petitioners from participating in the tender rather a joint venture was created so violation under no case could be claimed. 

The Court considering that amount of electrical work which formed a  small part of the entire venture and thus Civil Engineering being in the forefront does no harm and was not arbitrary. Accordingly there was no illegality if a composite contract was called for as that would best serve the interest of the State.  Hence the petition was dismissed.[Naveen Chandra Joshi v. State of Uttarakhand, 2018 SCC OnLine Utt 1062, order dated 11-07-2018]

Case BriefsForeign Courts

Supreme Court of the United States: The appeal lies before the Bench of Kavanaugh, J.

The facts of the case were such that the respondent Archer and White Sales Inc. sued Henry Schein for the violation of Federal and State anti-trust laws, seeking monetary and injunctive relief. The contract between the parties provided for arbitration to resolve any dispute arising between them except for actions seeking injunctive relief. Schein, therefore, requested the District Court to refer the matter to arbitration while Archer argued that this matter was not subject to arbitration owing to injunctive relief. The Fifth Circuit affirmed with Archer’s view. However, the Supreme Court vacated the judgment of the Fifth Circuit and held that parties to such a contract may refer to an arbitrator to decide the ‘gateway questions of arbitrability.’ The Court opined that a court cannot override the contract even if it thinks that the arbitrability claim is ‘wholly groundless.’

The case was remanded for further proceedings.[Henry Schein Inc. v. Archer and White Sales Inc., 2019 SCC OnLine US SC 1, decided on 08-01-2019]

Case BriefsHigh Courts

Bombay High Court: A Single Judge Bench comprising of S.B. Shukre, J. dismissed a petition filed challenging the orders of Collector, Gadchiroli and Additional Commissioner, Nagpur under Section 14(1)(g) of the Maharashtra Village Panchayats Act, 1958.

The petitioner, a candidate for Gram Panchayat elections, was disqualified under the said section by the orders impugned as the husband of the petitioner had entered into a contract with the Gram Panchayat for giving of a shop block belonging to the Gram Panchayat, and the petitioner, being his wife, was indirectly interested in the contract. The petitioner challenged the order on the reasoning that there was no contract executed between her husband and the Gram Panchayat, the execution being only of a rent agreement. According to her, the word contract used in Section 14(1)(g) has a restrictive meaning which has to be understood as referring only to those contracts which had been awarded by the Gram Panchayat for execution of some work of the Gram Panchayat. Secondly, the petitioner being only the wife, could not be said to having an indirect interest in the said contract.

The High Court found favour with the submission of counsel for the respondent that the word contract had nowhere been clarified in the Act by laying down that the word has to be understood only in the context of a particular type of contracts. In such circumstances, contract must be understood by the definition given in Section 2(h) of the Indian Contract Act, 1872, according to which even the rent agreement executed between the Gram Panchayat and the husband would be a contract. As to the second contention, it was held that mere relationship, by itself, would not determine the extent of interest in a contract and something more is required to be proved against of Gram Panchayat. In the instant case, the petitioner admitted that her family is maintained from the income earning from the business carried out from the rented premises. Thus, it was clear that she had an interest, and therefore the said rent agreement was to be treated as a contract in which the petitioner was having an interest. Resultantly, the Court found no fault with the order impugned. The petition was accordingly dismissed. [Gita Vijay Somankar v. Divisional Commr., Nagpur, 2018 SCC OnLine Bom 2943, decided on 03-10-2018]

Case BriefsHigh Courts

Delhi High Court: A Division Bench comprising of Ravindra Bhat and A.K. Chawla, JJ., dismissed a First Appeal against an order declining grant of interim relief under Section 9 of the Arbitration and Conciliation Act, 1996.

The contract between the parties was the result of bidding in a public tendering process. The consideration of the contract was over Rs. 69 crores, with the period of execution being of 15 months along with an option to apply for extension. The appellant was aggrieved by the termination of contract after several defects and deficiencies during performance were pointed out. The grievance of the appellant was threefold viz. against invocation of performance guarantee, mobilization of advance bank guarantee and alleged unlawful termination of contract.

The Court directed that the issue of wrongful termination was a matter to be decided on merits during the arbitral proceedings and proceeded to decide upon the issues of invocation.

On that issue, the Court held that the performance guarantee mandates the bank to honour without demur any demand by the principal, who is the real beneficiary of any sums, claimed by it as due under the contract. In other words, the bank cannot adjudicate as to whether the claim by the beneficiary was in fact determined by it in accordance with the underlying contract between it and a third party. It was further held, that guarantee is an independent contract and has only a referential connection to the contract between the two parties, who agree upon the execution of performance of a particular contract for which the bank guarantee is issued. In the circumstances, mere invocation of a guarantee does not provide valid grounds for interdicting the invocation of guarantee. [M/s Classic KSM Bashir JV v. Rites Ltd., 2018 SCC OnLine Del 9056, decided on 14-05-2018]

Case BriefsSupreme Court

Supreme Court: Stating that a property developer has to respect the contractual commitment, the 3-Judge Bench of Dipak Misra, Amitava Roy and A.M. Khanwilkar, JJ said that the developer has to live up to the terms of the contract and gain trust so that the people who dream of houses can repose faith in him.

In the case at hand, the 39 respondents had argued that their patience is on the burial pyre and they cannot wait any longer believing in the concept of optimism and expectation, for the appellant had not built the flats as assured, and in fact, compelled them to land up in such a financial crisis that they had never conceived of.

Taking note of the contention of the respondents, the Court said that the appellant by delaying or procrastinating the completion of the flats cannot base its stand on excuses or any subterfuge to advance the stand that the constructions take time. It is “flat” or “money” and nothing else.

The appellant had suggested that it would complete three towers by the end of April, 2017 and would hand over possession to some of the respondents by that time and further the respondents can be allowed to take some amount by direction of this Court that is to say that the respondents can be distributed Rs.5,00,00,000/- towards the principal and be handed over flats by the end of April, 2017 and some shall be given thereafter when the other towers are complete. The rest of the amount, that is, Rs.10,00,00,000/- that have been deposited before the Registry of this Court be allowed to be refunded to the appellant for facilitating the construction.

Considering the fact that the respondents were not interested in the flats and hadmade a demand for refund of money because they have fought the litigation with ceaseless vigour and enormous hope, the Court said that the principal amount deposited by the respondents amounts to Rs.16,55,02,525/-  as Rs.15,00,00,000/- have been invested and some interest has accrued, let the same be given to the respondents on pro rata basis on proper identification by the learned counsel. The Court directed that the appellant company is directed to deposit a further sum of Rs.2,00,00,000/-  within four weeks hence. [Unitech Residential Resorts Ltd. v. Atul Gupta, 2016 SCC OnLine SC 1155 , decided on 19.10.2016]

Case BriefsSupreme Court

Supreme Court: Considering the sad state of affairs of long drawn expensive and cumbersome trials to resolve disputes between two Government owned corporations and the fact that one of the parties in the case at hand had with considerable tenacity opposed the move aimed at a quick and effective resolution of the conflict and resultant quietus to the controversy by a reference of the disputes to arbitration in terms of the Arbitration and Conciliation Act, 1996, the bench of T.S. Thakur, CJ and R. Banumathi, J. referred the matter for adjudication to Justice K.G. Balakrishnan, Former Chief Justice of Supreme Court, who is hereby appointed as Sole Arbitrator to adjudicate upon all claims and counter claims which the parties may choose to file before him.

In the present case, the parties had entered into a contract for construction of a Coal Handling Plant and a Clause in the Contract provided for adjudication of disputes between the parties by way of arbitration. Disputes between the parties were referred for resolution in terms of the “permanent in-house administrative machinery” set up by the Government. Both the parties, upon being dissatisfied with the awards, challenged the award in appeals filed before the Law Secretary, Department of Legal Affairs, Ministry of Law and Justice in terms of the in-house mechanism provided by the Government. The appellant then filed a civil suit before the High Court of Delhi alleging that the Arbitral award passed by the appellate authority was according to the appellant illegal and vitiated by errors apparent on the face of the record, hence, liable to be set aside.

Discussing the question of remanding the case to the Civil Court, the Court noticed that an arbitral award under the Permanent Machinery of Arbitration may give quietus to the controversy if the same is accepted by the parties to the dispute. In cases, however, a party does not accept the award, as is the position in the case at hand, the arbitral award may not put an end to the controversy. Such an award being outside the framework of the law governing arbitration will not be legally enforceable in a court of law. Just because a Government owned company has resorted to the permanent procedure or taken part in the proceedings there can be no estoppel against its seeking redress in accordance with law. Making reference to a sole arbitrator for adjudication of all outstanding disputes between the two corporations, the Court held that the alternative to such arbitration is a long drawn expensive and cumbersome trial of the suit filed by the appellant before a civil court and the difficulties that beset the execution of an award made under a non-statutory administrative mechanism and that both these courses are unattractive with no prospects of an early fruition. [NORTHERN COALFIELD LTD v. HEAVY ENGINEERING CORP. LTD, 2016 SCC OnLine SC 697, decided on 13.07.2016]