Case BriefsSupreme Court

Supreme Court: A Division Bench of Sanjay Kishan Kaul and Hemant Gupta, JJ. reiterated that a Letter of Intent merely indicates a party’s intention to enter into a contract with the other party in future. No binding relationship between the parties at this stage emerges and the totality of the circumstances have to be considered in each case.  

The Court was deciding whether, in the facts of the case, the respondent−successful bidder who was awarded a tender by the appellant−South Eastern Coalfields Ltd., was liable for the execution of work by another contractor at the risk and cost of the successful bidder.

Factual Matrix

South Eastern Coalfields Ltd. (“Company”) floated a tender for certain works in June 2009. Bids were received and the respondent was the successful bidder. A Letter of Intent (“LoI”) was issued by the Company in October 2009 awarding the contract for a total work of over Rs 3.87 crore. In pursuance of the LoI, the successful bidder mobilised resources at site. On 28-10-2009, the Company issued a letter of site handover/acceptance certificate, which was to be taken as the date of commencement of the work.

Sometime in December 2009, the machinery deployed by the successful bidder suffered major breakdown and the work had to be suspended. After this, contractual relationship deteriorated and the Company alleged breach of contractual terms and rules and regulations applicable. The Company brought to successful bidder’s notice that they failed to submit the performance security deposit which was required to be submitted within 28 days from the date of receipt of LoI as per the terms of the tender.

The Company issued a show cause notice that they were left with no option except to terminate the work awarded to the successful bidder and get it executed by another contractor at the risk and cost of the successful bidder in terms of Clause 9 of the General Terms and Conditions of the Notice Inviting Tenders (“NIT”). Ultimately, final termination of work was carried out in April, 2010. Thereafter, the work was awarded to another contractor at a higher price and on account thereof a letter was issued by the Company to the successful bidder seeking an amount of over Rs 78 lakh being the difference in the contract value between the successful bidder and the new contractor.

Appeal

The successful bidder filed a writ petition before the Chhattisgarh High Court seeking quashing of the termination letter as well as the recovery order. The High Court held that the Company was within their rights to cancel the award of work and forfeit the bid security. However, endeavour of the Company to recover the additional amount in award of contract to another contractor as compared to the successful bidder was held not recoverable. Aggrieved, the Company approached the Supreme Court.

Analysis and Observations

The task before the Court was to decide whether there was a concluded contract between the parties, the breach of which will make the successful bidder liable for execution of work by another contractor at the risk and cost of the successful bidder. Considering the conspectus of pleas put forward by the parties, the Court was of the view that it could not be said that a concluded contract had been arrived at inter se the parties.

Perusing the terms of the LoI and what it mandated the successful bidder to do, the Court concluded that none of the mandates were fulfilled except that the successful bidder mobilised the equipment at site, handing over of the site and the date of commencement of work was fixed vide letter dated 28-10-2009. The successful bidder neither submitted the Performance Security Deposit nor signed the Integrity Pact as required. Consequently, the work order was also not issued nor was the contract executed.

The Court stated that the issue of whether a concluded contract had been arrived at inter se the parties is in turn dependent on the terms and conditions of the NIT, the LoI and conduct of the parties. It reiterated the proposition that an LoI merely indicates a party’s intention to enter into a contract with the other party in future. No binding relationship between the parties at this stage emerges and the totality of the circumstances have to be considered in each case. The Court further observed:

It is no doubt possible to construe a letter of intent as a binding contract if such an intention is evident from its terms. But then the intention to do so must be clear and unambiguous as it takes a deviation from how normally a letter of intent has to be understood.

Turning then to the NIT, the Court noted that Clause 29.2 clearly stipulated that the notification of award will constitute the formation of the contract “subject only” to furnishing of the Performance Security/Security Deposit. Thus, it was clearly put as a pre-condition and that too to be done within 28 days following notification of the award. The failure of the successful bidder to comply with the requirement “shall constitute sufficient ground for cancellation of the award work and forfeiture of the bid security” as per Clause 30.2. Further, in terms of Clause 34 dealing with the Integrity Pact, the failure to submit the same would make the tender bid “as not substantially responsive and may be rejected.”

Decision

Holding that there was no concluded contract inter se the parties, the Supreme Court affirmed the High Court’s decision that all that the Company can do in the instant case is to forfeit the bid security amount and it was so directed. [South Eastern Coalfields Ltd. v. S. Kumar’s Associates AKM (JV), Civil Appeal No. 4358 of 2016, decided on 23-7-2021]


Tejaswi Pandit, Senior Editorial Assistant has reported this brief.

Alternate Dispute ResolutionCase BriefsHigh Courts

Delhi High Court: Jayant Nath, J., observed that the assignment of the trademark is by a contract and not by a statutory act. It does not involve any exercise of sovereign functions of the State.

Defendant filed an application under Section 8 of the Arbitration and Conciliation Act, 1996.

Master Long Term Supply Agreement 

Plaintiff submitted that the parties had entered into Master Long Term Supply Agreement by which the defendant on an exclusive basis had supplied to the plaintiff exclusive brands of the defendant “Golden’s Gold Flake, Golden Classic, Taj Chhap, Panama and Chancellor”.

The above-stated brands were being sold, supplied and distributed exclusively in the domestic and international market.

Trademark Agreement and Amendment Agreement

Later, plaintiff entered into a trademark agreement and amendment agreement and was granted exclusive non-assignable, non-transferable license to manufacture the defendant’s product to be manufactured exclusively at the plaintiff’s factory at Noida and were to be marketed and distributed.

Plaintiff submitted that despite huge capital and operational expenditure made by the plaintiff to increase the availability of defendant’s product, the defendant arbitrarily cancelled the trademark license agreement.

A termination notice by the defendant was issued. Since the commercial production had not started the agreement was terminated with immediate effect.

By another termination notice, the defendant company stated that timely payment was not made in terms of the agreement and hence plaintiff was to have no right to manufacture and sell the exclusive brands of the defendant in the market from that point onwards.

In view of the above-stated circumstances, the present suit was filed.

It was prayed that the disputes between the plaintiff and the defendant raised be referred to a sole Arbitrator.

Analysis, Law and Decision

Bench firstly noted the legal position by referring to Section 8 of Arbitration and Conciliation Act, further Supreme Court’s decision in Vidya Drolia v. Durga Trading Corporation, (2021) 2 SCC 1, was referred.

As per the above decision, actions in rem including grant and issue of patents and registration of trademarks are exclusive matters falling within the sovereign and government functions and have erga omnes effect. Such grants confer monopolistic rights, and they are non-arbitrable.

Further, reference to the decision of the co-ordinate Bench of this Court was made in Hero Electric Vehicles (P) Ltd. v. Lectro E-Mobility (P) Ltd., 2021 SCC OnLine Del 1058 as it applies on all fours to the facts of the present matter.

Court held that the dispute did not pertain to infringement of a trademark on the ground that the defendants are using a deceptively similar trademark. The ground was that the right to use the trademark was conferred by a particular agreement on a particular group of the family. Even if the plaintiff in that case were to rely on any provisions of the Trademark Act the essential infraction as allegedly committed by the defendant was not the provisions of the Trademark Act but the provisions of the agreements in question. The dispute which emanates out of the agreement between the parties was held to be arbitrable. The court also clarified that the controversy in the said case did not relate to grant or registration of trademarks. The said trademarks stood granted and registered. It was also held that assignment of a trademark is by a contract and is not a statutory fiat. It does not involve any exercise of sovereign functions.

Primarily the crux of the issue was that the dispute was relating to interpretation of the terms of the Trademark Agreement and amendment agreement executed between parties and whether the termination of the said agreements by the defendant and cancellation of the assignment of the trademark in favour of the plaintiffs was legal and valid.

“right that is asserted by the plaintiff is not a right that emanates from the Trademark Act but a right that emanates from the Trademark Agreement and the amendment agreement.”

In the present matter, Bench held that it cannot be said that the disputes are not arbitrable.

In view of the above discussion, the application was allowed. [Golden Tobie (P) Ltd. v. Golden Tobacco Ltd., 2021 SCC OnLine Del 3029, decided on 4-06-2021]


Advocates before the Court:

For the plaintiff: Mr. Kailash Vasdev, Sr. Adv. with Ms. Priyadarshi Manish and Ms. Anjali J. Manish, Advs.

For the Defendant: Mr. Sumeet Verma, Mr. Vijay Kumar Wadhwa and Mr. Maninder Pratap Singh, Advocates.

Case BriefsHigh Courts

Bombay High Court: Dama Seshadri Naidu, J., in a suit for specific performance, observed that:

“..in a suit for specific performance, a third party’s assertion that he has a stake in the subject matter of the suit counts to noting (sic). What matters is the contract, not the property covered by the contract. “

Background

‘A’ engaged in a contract with B for purchasing some property and B defaulted. Later, C the brother of A, represented A as his power of attorney agent (POA) and after a few years, A discharged C from being his POA and pursued the case independently and got a decree – not for specific performance but for the return of money.

Now an objection arose when A wanted to withdraw the deposited decretal amount and the objection was raised by C.

The ground for objection was that C wanted a part of the decretal amount since he too had contributed to the sale consideration.

Question for Consideration

Can C’s claim be countenanced? Is such an ‘intervention application’ maintainable?

Discussion

Code of Civil Procedure must be interpreted in a manner to subserve and advance the cause of justice. 

— C.K. Thakker’ s Code of Civil Procedure, Vol. 1, EBC, p. 200 (EBC Reader) 

Bench noted that in the present matter, firstly, there was no lis before the Court for it to entertain an interlocutory application. Thus, Court was proverbially functus officio. 

Adding to the above, Court stated that C wanted the Court to revive and resurrect a disposed of suit and to do that the Court must set aside the decree that was already passed.

But the question was, can the Court do so?

To the above, the answer was Court cannot. Further, it was elaborated that “A decree can be set aside under Order 9 Rule 13 CPC. In the Supreme Court decision of Ram Prakash Agarwal v. Gopi Krishna, (2013) 11 SCC 296, it was held that the applicant must have been a party to the suit, in the first place, whereas Supreme Court in Raj Kumar v. Sardari Lal, (2004) 2 SCC 601, took a different view and stated that the same was in the context of a lis pendens purchaser.

Bench coming back to the present matter, expressed that:

Subhash has a highway or a thoroughfare to travel on if ever he wants to reach his judicial destination: a separate suit, seeking a declaration.

Looking at the issue from another perspective, Court stated that in a suit for specific performance, whatever be its outcome, no third party can have the role to play.

Precedential Position

Ajay Kumar v. Tulsabai, 1973 SCC OnLine Bom 4, Court held that by very nature, a suit for specific performance confines itself to the agreement and several please that can either defeat or lead to its enforcement. The cause of action in such a suit is the agreement and its enforceability.

In the above-cited case, Court posed a question unto itself: Can it really be said that the stranger to an agreement is concerned with the relief sought by the plaintiff or the defences raised against such specific performance? The answer was that, firstly the stranger not being a party to the suit, any decision in that suit does not affect him. Secondly, the Court is being called upon to enforce the agreement but not to settle any disputes between the plaintiff and the stranger, therefore such a person’s presence is not necessary for the Court to decide the controversy of the suit.

In Panne Khushali v. Jeewanlal Mathoo Khatik,  AIR 1976 MP 148,  a Full Bench of the High Court of Madhya Pradesh has held that strangers to the contract making a claim adverse to the title of the defendant—for example, that they are the co-owners of the contracted property—are neither necessary nor proper parties. So they are not entitled to be joined as parties to the suit.

Delhi High Court in its decision of Raj K. Mehra v. Anjali Bhaduri, 1981 SCC OnLine Del 105, echoed the same view as above.

Analysis, Law and Decision

In view of the above, Court proceeded to examine the issue:

(1) The agreement was between Rajesh and Sudarshan.

(2) From the very inception, Subhash represented Rajesh as his POA in the suit; thus, he knew his brother’s pleadings and assertions to the exclusion of everyone else.

(3) Despite that, Subhash never objected to his principal’s (Rajesh’s) contentions.

(4) Though Rajesh, as the principal, cancelled GPA in 2017, Subhash never attempted, if ever permissible, to come on record as a defendant to protect his independent interest, if any.

(5) The suit was eventually decreed in 2001.

(6) Sudarshan willingly suffered the decree and deposited the amount to be appropriated by Rajesh alone.

Collateral Issue:

Subhash insisted that this Court in its Order dated 16-04-2012 noted that Subhas, too, contributed to the sale consideration.

To the above contention Bench stated that to facilitate adjudication of the matter, the Court undertakes various steps and during that process, Court prima facie observe or record certain aspects based on the counsel’s representation but the same does not acknowledge the parties existing rights if any, but they do not create rights on their own.

A Court’s observation cannot give rise to a right unless it has already existed, nor does it provide a cause of action. Here, in this case, it had never been in the Court’s contemplation as to who contributed the sale consideration. It is a non sequitur.

Concluding the matter, Court held that however strong a person’s right to recovery may be, he cannot file an intervention application in an already disposed of matter and stay the execution of the decree or nullify the decree without proper judicial recourse.

In view of the above discussion, Court dismissed the application. [Rajesh Saichand Sharma v. Sudershan Gangaram Rajula,  2021 SCC OnLine Bom 835, decided on 11-06-2021]


Advocates before the Court:

Mr. Sanjiv Sawant a/w Mr. Abhishek P. Deshmukh – Advocate for the Applicant.

Sukeshi Bhandari a/w Akshay Chauhan – Advocate for the Defendants.

Mr. Chandrakant N. Chavan a/w Mr. Rajesh Sharma – Advocate for Plaintiff.

Op EdsOP. ED.

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

The concept of confirming party

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The concept of group of company’s doctrine

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Conclusion

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


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

†† 4th Year law student, UPES.

1 (2009) 1 SCC 372

2 Ibid.

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

4 (2011) 1 SCC 320

5 Ibid.

6 (2003) 5 SCC 531

7 Ibid.

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

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

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

11 2016 SCC OnLine Del 1093

12 (1998) 3 SCC 573

13 (2011) 11 SCC 375

14 2016 SCC OnLine Del 1093

15 (2011) 11 SCC 375

16 (2011) 11 SCC 375

17 2016 SCC OnLine Del 1093

18 (2003) 5 SCC 531

19 Ibid.

20 (2020) 12 SCC 767, 779

21 (2003) 5 SCC 531

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

23 Ibid.

Op EdsOP. ED.

I. Introduction

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

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

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

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

II. Factual matrix

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

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

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

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

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

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

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

III. Law prior to N. Global

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

33. Examination and impounding of instruments.— 

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

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

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

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

Provided that—

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

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

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

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

  1. When a contract contains an arbitration agreement, it is a collateral term relating to the resolution of disputes, unrelated to the performance of the contract. It is as if two contracts—one in regard to the substantive terms of the main contract and the other relating to resolution of disputes—had been rolled into one, for purposes of convenience….

***

  1. Having regard to Section 35 of the Stamp Act, unless the stamp duty and penalty due in respect of the instrument paid, the court cannot act upon the instrument, which means that it cannot act upon the arbitration agreement which is part of the instrument.[6]

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

  1. … It is important to remember that the Stamp Act applies to the agreement or conveyance as a whole. Therefore, it is not possible to bifurcate the arbitration clause contained in such agreement or conveyance so as to give it an independent existence, as has been contended by the respondent.

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

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

  1. … if the court comes to a conclusion that the instrument is not properly stamped, it should be impounded and dealt with, in the manner specified in Section 38 of the Stamp Act, 1899. Further, the Court stated that the court cannot act upon such a document or the arbitration clause therein.[13]

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

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

IV. The paradigm shift in the judicial pronouncements

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

A. Arbitration agreement as an independent agreement

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

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

(i) The doctrine of separability

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

…an arbitration clause which forms part of a contract shall be treated as an agreement independent of the other terms of the contract. A decision by the arbitral tribunal that the contract is null and void shall not entail ipso jure the invalidity of the arbitration clause.

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

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

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

(ii) The doctrine of kompetenz-kompetenz

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

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

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

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

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

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

V. Analysis

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


* Principal Associate, Hammurabi and Solomon Partners.

** Associate, Hammurabi and Solomon Partners. 

[1] 2021 SCC OnLine SC 13.

[2] Arbitration and Conciliation Act, 1996.

[3] Stamp Act, 1899.

[4] (2011)14 SCC 66.

[5] Registration Act, 1908 

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

[7] (2019) 9 SCC 209.

[8] Section 11 of the Act, 1996.

[9] Supra Note 4.

[10]Supra Note 7, p. 232.

[11] (2020) 4 SCC 612

[12] Supra Note 4.

[13] Supra Note 4, p. 74.

[14] Supra Note 4.

[15] Supra Note 7.

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

[17] 2013 SCC OnLine Bom 1048. 

[18] (2007) 5 SCC 692 

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

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

[21] (1999) 5 SCC 651 

[22] (2020) 2 SCC 455.

[23] Maharashtra Stamp Act, 1958.

Case BriefsHigh Courts

Orissa High Court: A Division Bench of S. Muralidhar CJ. and B. P Routray J. dismissed the petition on grounds discussed below.

The facts of the case are such that the Food Corporation of India i.e. `FCI (Opposite 1 and 2) being the nodal organization of the Government of India, delivers food grains to different parts of the State of Odisha and for such purpose it uses the space available in different warehouses under OSWC for storing and facilitating movement of the food grains on contract basis. The Petitioner executed a contract with Odisha State Warehousing Corporation i.e. OSWC (Opposite Party 1 and 2) effective for a period of two years for Handling and Transportation (H & T) of foodgrains and other allied materials at OSWC as per the quoted rate of contract. The said contract was extendable for a further period of three months. The contract was extended twice before the expiration of their respective previous contracts as the tender issued for the purpose could not be materialized. Those two extensions were granted with the same rate of contract but on further extension, FCI expressed dissatisfaction and put a condition that, the rate applicable for the extended period would be the existing rate or the new rate, whichever is lower. The new agreement was executed and the rate of contract was much lesser than the earlier rate of contract fixed as per the original contract. Thus, for the bills raised by OSWC after 31st March 2017, FCI deducted the amount calculated on the differential rate between the rate of contract existed as per the 2013 agreement and 2017 agreement. As a result, OSWC realized the differential amount from the bill of the Petitioner and this is the subject matter of the dispute in the present petition.

Counsel for the petitioners Mr. P.K.Roy submitted that realization of differential amount from its bill with retrospective effect is grossly illegal and the same is violation of statutory rules as no opportunity of showing any cause or hearing has been granted. It is further contended that in the absence of any agreement after 31st October, 2015 till 31st March 2017, the rate applicable would be the existing rate as per the 2013 agreement.

Counsel for the respondents Mr. P.K. Rath, Mr. Bijay Kumar Dash and Mr. Debasish Nayak submitted that the Petitioner has not come with clean hands as the entire dispute has emanated from contractual obligations and, therefore, the writ petition under Article 226 would not be maintainable. It is further contended that the petitioner continued H & T work with OSWC having been aware of the stipulation of change in rate of contract, is estopped from raising the dispute at realization stage.

The Court observed that realization of the differential amount at a lower rate in absence of any existing contract is not contentious as it is clear that being fully aware of the lower rate, which may be stipulated in the new contract, the Petitioner continued with the work for the extended period.

The Court observed “Once the Petitioner has accepted the condition with a lower rate than the existing rate which may be effected for the period it continued with the work on extension, it hardly makes any difference whether a written contract on specific term is executed or not. Thus, the Petitioner now cannot claim that such a stipulation at the lower rate to realize the differential amount was without his knowledge.”

The Court relied on judgment Kerala State Electricity Board v. Kurien E. Kalathil (2000) 6 SCC 293 wherein it was held that

“11. A statute may expressly or impliedly confer power on a statutory body to enter into contracts in order to enable it to discharge its functions. Dispute arising out of the terms of such contracts or alleged breaches have to be settled by the ordinary principles of law of contract. The fact that one of the parties to the agreement is a statutory or public body will not by itself affect the principles to be applied. The disputes about the meaning of a covenant in a contract or its enforceability have to be determined according to the usual principles of the Contract Act.

The Court observed that the petitioner is unable to point out the violation of any statutory rule in its favour. The rate on which work is to be performed, flows from the contract executed between the Petitioner and OSWC.

The Court thus held “….Therefore, adjudication of the dispute in the writ jurisdiction in the present form is neither appropriate nor feasible.”[Jayasingh Bhoi v. OSWC, 2021 SCC OnLine Ori 630, decided on 31-05-2021]


Arunima Bose, Editorial Assistant has reported this brief.

Case BriefsSupreme Court

Supreme Court: The bench of UU Lalit and Indira Banerjee, JJ has held that the existence of an arbitration clause does not debar the court from entertaining a writ petition.

Stating that the availability of an alternative remedy does not prohibit the High Court from entertaining a writ petition in an appropriate case, the Court highlighted that the High Court may entertain a writ petition, notwithstanding the availability of an alternative remedy, particularly

(i) where the writ petition seeks enforcement of a fundamental right;

(ii) where there is failure of principles of natural justice or

(iii) where the impugned orders or proceedings are wholly without jurisdiction or

(iv) the vires of an Act is under challenge.

The Court was hearing a dispute between Uttar Pradesh Power Transmission Corporation Ltd. (UPPTCL) and CG Power and Industrial Solutions Limited arising out of a Framework Agreement with UPPTCL for construction of 765/400 KV Substations, at Unnao, Uttar Pradesh. UPPTCL had directed CG Power to remit Labour Cess amounting to Rs.2,60,68,814/-, computed at 1% of the contract value, under Sections 3 sub-section (1) and (2) of the Building and Other 1 Construction Workers’ Welfare Cess Act, 1996, hereinafter referred to as the “Cess Act”, read with Rules 3 and Rule 4 (1), (2) (3) and (4) of the Building and Other Construction Workers Welfare Cess Rules, 1998, hereinafter referred to as the “Cess Rules” and also Section 2 (1)(d), (g) and (i) of the Building and Other Construction Workers (Regulation of Employment and Condition of Service) Act, 1996.

This direction had come after, in the Audit Report, the Accountant General pointed out the lapse on the part of UPPTCL, in not deducting labour cess from the bills of the contractor, that is Respondent No.1, in respect inter alia of the First Conract, observing that every employer was required to levy and collect cess at a rate not exceeding 2% and not less than 1% of the cost of construction incurred by an employer and to deposit the same with the Building and Other Construction Workers Welfare Board.

When CG Power filed a writ petition before the Allahabad High Court challenging the same, UPPTCL did not oppose the writ petition on the ground of existence of an arbitration clause. Nor was there any whisper of any arbitration agreement in the Counter Affidavit filed by UPPTCL to the writ petition in the High Court.

In such circumstances, the Supreme Court held that the existence of an arbitration clause does not debar the court from entertaining a writ petition and that relief under Article 226 of the Constitution of India may be granted in a case arising out of contract. However, the writ jurisdiction under Article 226, being discretionary, the High Courts usually refrain from entertaining a writ petition which involves adjudication of disputed questions of fact which may require analysis of evidence of witnesses.

[Uttar Pradesh Power Transmission Corporation Ltd v. CG Power and Industrial Solutions Limited, 2021 SCC OnLine SC 383, decided on 12.05.2021]


Judgment by: Justice Indira Banerjee

Know Thy Judge| Justice Indira Banerjee

Case BriefsSupreme Court

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

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

What’s the controversy?

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

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

The reason for entering into the SHA was as follows:

“WHEREAS

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

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

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

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

Delhi High Court’s Verdict

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

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

Supreme Court’s Verdict

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

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

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

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

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

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

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

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

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

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

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


*Judgment by Justice RF Nariman 

Know Thy Judge| Justice Rohinton F. Nariman

Appearances before the Court by:

For Appellant: Senior Advocate K.V. Viswanathan

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

Also read the detailed report on the Vidya Drolia judgment 

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

Case BriefsHigh Courts

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

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

Factual Matrix

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

Issue in the Writ Petitions 

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

Arbitration Proceedings

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

Petitioner’s Case

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

Discussion and Conclusion

Question that falls for determination in the present matter are:

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

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

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

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

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

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

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

On what grounds is the Judicial Review classified:

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

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

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

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

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

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

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

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

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

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

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

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

Second Question

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

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

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

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

Hence, present case is not of blacklisting.

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

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


Advocates before the Court:

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

Mr. Sandeep Marne, for the Respondents.

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

Case BriefsHigh Courts

Chhattisgarh High Court: Sanjay S. Agrawal, J. allowed the appeal and directed the plaintiff to be entitled to a decree for specific performance of a contract.

The facts of the case are such that Defendant 1 in the suit instituted before Trial court Sobhna Chourasiya agreed to sell the suit property to Plaintiff – Munnalal Agrawal at the rate of Rs 350/- per square meter, i.e., for a total consideration of Rs 1, 59,110/- to upon receiving the earnest amount of Rs 20,000 with a condition that the tenant will be vacated within 6 months and a sale deed to be registered thereafter within the period of 7 days from the date of receiving the information. Despite making repeated requests, no action was initiated for obtaining the vacant possession, which led to the institution of the suit. During the pendency of the suit, Defendant 1 sold the property to Defendant 2 – Smt. Saraswati Yadav, wife of the tenant Narayan Yadav vide registered sale deed.  One of the condition was that the property in question was to be sold at the rate of Rs 700/- per square foot, i.e., for a total consideration of Rs 3, 17,926/- upon receiving the earnest amount of Rs 20,000/- and half of the sale consideration was to be paid by the Plaintiff within the period of 6 months, else the earnest amount of Rs 20,000/- paid by him shall be forfeited. The Trial Court has dismissed the suit, which has been assailed by the Plaintiff by way of this appeal.

Counsel for the appellants submitted that the finding of the trial Court holding that the property in question was agreed to be sold at the rate of Rs 700/- per square foot and half of the sale consideration was to be paid within the period of 6 months even in absence of any terms and conditions stipulated in the alleged agreement to sale, is apparently contrary to law. It was further submitted that once the parties reduce the terms of their contract into writing, the Court can only look at the writing alone in order to construe what the terms of the contract.

The Court observed that according to the provisions prescribed under Sections 91 & 92 of the Indian Evidence Act, 1872, when the terms of a contract, or of any other disposition of property, have been reduced to the form of a document, no evidence shall be given or permitted to be adduced in proof of the terms of such contract or other disposition of the property, except the document itself and the oral evidence in proof of terms of the contract is thus excluded. Here, in the instant matter, the validity regarding the execution of the alleged agreement to sale has not been disputed, and therefore, the vendor of the property in question, namely, Smt. Sobhna Chourasiya cannot be permitted to lead any evidence contrary to the express recitals of it as the aforesaid provisions specifically bar the proof of variations in terms of a transaction contained therein.

The Court thus held “in the light of the aforesaid principles, the contention of the vendor that the property in question was to be sold at the rate of Rs.700/- per square foot, which even otherwise not supported by her witness, is precluded to establish the alleged terms and conditions contrary to and/or in variance of the alleged agreement to sale (Ex.P.1) and it is accordingly held that the property in question was agreed to be sold at the rate of Rs.350/- per square foot, as mentioned therein. The first question is thus answered in positive by holding that finding of the trial Court in this regard is not sustainable in the eye of law.”

In view of the above, appeal was allowed.[Munnalal Agrawal v. Sobhna Chourasiya, 2021 SCC OnLine Chh 609, decided on 17-03-2021]


Arunima Bose, Editorial Assistant has reported this brief.

Op EdsOP. ED.

Background

Section 27 of the Contract Act, 18721 (ICA) dealing with agreement in restraint of trade states as under:

(1) Every agreement by which any one is restrained from exercising a lawful profession, trade or business of any kind, is to that extent void.

Exception 1.― Saving of agreement not to carry on business of which goodwill is sold–

One who sells the goodwill of a business may agree with the buyer to refrain from carrying on a similar business, within specified local limits; so long as the buyer, or any person deriving title to the goodwill from him, carries on a like business therein:

Provided that such limits appear to the Court reasonable, regard being had to the nature of the business.

It thus provides that an agreement restraining a person from carrying on a lawful profession, trade or business is void to that extent. However, an agreement not to carry on within specified local limits, a business similar to the business of which goodwill is sold, can be enforced, provided the limits of restraint are reasonable.

The provision regarding restraint of trade has been lifted from David D. Field’s Draft Code for New York which was based upon the old English doctrine of restraint of trade, as prevailing in ancient times. While construing the provisions of Section 27, the High Courts in India have held that neither the test of reasonableness nor the principle that the restraint being partial or reasonable are applicable to a case governed by Section 27 of the Contract Act, unless it falls within the exception.

The original draft of the Law Commission did not contain any provision regarding restraint of trade. But the provision of Section 27 was introduced afterwards at the time of enactment, the main object being to protect trade in India. The Law Commission in its Thirteenth Report2 had recommended that the provision should be suitably amended to allow such restrictions and all contracts in restraint of trade, general or partial, as were reasonable, in the interest of the parties as well as of the public. However, no action had been taken on the said recommendation.

Scope

The section is general in nature, and declares all agreements in restraint of trade void, pro tanto, except in the case specified in the exception. The section lays down a very rigid rule invalidating restraints, not only general restraints but also partial ones, and also restricts the exception of narrow local limits.

Broadly, agreements in restraint of trade are those in which one or both parties limit their freedom to work or carry on their profession or business in some way. Such agreements are often criticised because they conflict with public interest, and because they are unfair in unduly restricting personal freedom.

In a sense, every promise relating to business dealings operates as a restraint of trade, because it restricts the promisor’s future liability. It is the restraint which is “unreasonably detrimental to a freely competitive private economy”. (Farnsworth, Contracts, 3rd edn., p. 331). Further Lord Birkenhead laid down two tests to decide whether an agreement is in restraint of trade. They are:

(a) Whether it is reasonable as between parties.

(b) Whether it is consistent with the intent of public.

The Delhi High Court in Modicare Ltd. v. Gautam Bali2, has explained the validity of Section 27 of ICA as:

  1. Section 27 of the Contract Act makes void i.e. unenforceable, every agreement by which anyone is restrained from exercising a lawful profession, trade or business of any kind. Thus, even if the defendants or any of them, under their agreement with the plaintiff, had undertaken not to carry on or be involved in any capacity in any business competing with the business of the plaintiff, even after leaving employment with/association of the plaintiff, the said agreement, owing to Section 27 supra, would be void and unenforceable and the plaintiff on the basis thereof could not have restrained any of the defendants from carrying on any business or vocation, even if the one which the defendant had agreed not to carry on. I find it incongruous that the law, on the one hand would disable a plaintiff from enforcing a contract where the defendant had voluntarily agreed not to do something, by going to the extent of declaring such contract void, but on the other hand, enable the same plaintiff to the same relief under the law of tort. To hold so, would make the law look like an ass.
  2. Section 27, contained in a legislation of the year 1872, on promulgation of the Constitution of India in the year 1950, conferring the right to practice any profession or to carry on any occupation, trade or business, the status of a fundamental right, under Article 19(1)(g) thereof, today has a different connotation. Article 19(6) only clarifies that nothing contained in clause (g) shall affect the operation of any existing law or prevent the State from making any law, imposing in the interest of general public, reasonable restrictions on the exercise of right conferred by the said clause. Thus, restrictions, in the interest of general public and if reasonable, to the fundamental right to practice any profession or to carry on any occupation, trade or business, can be imposed only by law. The law of tort of unreasonable interference in carrying on business, in view of Section 27 of the Contract Act in force since 1872, was not the existing law within the meaning of Article 19(6) of the Constitution.

 Restrictive nature of covenants in the agreement

A contract may have several covenants, which may be positive, negative, general or partial. In contacts containing negative obligations, the restraint is direct. When a positive obligation limits freedom, it imposes an indirect restraint and can be equally restrictive or unreasonable as a negative obligation.

The principle of restraint of trade and restrictive nature of covenants in agreements have been elucidated by several courts in a plethora of judgments. In Navigators Logistics Ltd. v. Kashif Qureshi3, the Delhi High Court has explained the validity of Section 27, ICA as:

  1. Section 27 of the Contract Act is as under:

* * *

  1. The interpretation of Section 27 of the Contract Act is not res integra.

56. Applying the aforesaid law to the facts of the present case, it is found that as per the plaintiff also, there was no fixed term for which either of Defendants 1 to 8 had agreed to serve the plaintiff. The clause in the employment contract claimed by the plaintiff also is to the effect that Defendants 1 to 8, for a period of one year after ceasing to be the employee of the plaintiff, to not compete with the plaintiff. Such a clause in the employment contract, as per the judgments aforesaid of the Supreme Court, is void under Section 27 of the Contract Act. Once the clause is void, there can be no injunction or damages in lieu of injunction on the basis thereof.

The High Court of Delhi in Arvinder Singh v. Lal Pathlabs (P) Ltd.4, has explained the principle of Section 27, ICA as under:

  1. As per Section 27 of the Contract Act every agreement by which any one is restrained from exercising a lawful profession, trade or business of any kind is to that extend void. It is the exception which protects from being void such an agreement provided the conditions envisaged by the exceptions are satisfied. The condition for the exception is that if the goodwill of a business has been sold, an agreement to refrain from carrying on similar business, if it appears to the Court to be reasonable, would be protected and would be enforced.
  1. The words “profession” “trade” and “business” used in Section 27 are specific words and we see no scope to give meaning to the word profession applying the rule of noscitur a sociis.
  1.  The reasoning of the learned Single Judge is obviously on the basis that the activity of a profession is akin to that of a business, for if this was not the reasoning, the exception to Section 27 of the Contract Act would not even apply. Such agreements not to carry on business if goodwill of a business is sold, subject to the restriction being reasonable, are alone carved out from the general embargo embossed by Section 27 of the Contract Act.
  1. The sweep of the span of the injunction to prohibit the appellants to carry on their profession as pathologist or radiologist in any manner whatsoever would render the appellants incapable of working as a pathologist or radiologist in any capacity whatsoever, and this would be contrary to Section 27 of the Contract Act.

In Percept D’Mark (India) (P) Ltd. v. Zaheer Khan5, the Supreme Court explained the provisions of Section 27, ICA as under:

  1. If the negative covenant or obligation under Clause 31(b) is sought to be enforced beyond the term i.e. if it is enforced as against a contract entered into on 20-11-2003 which came into effect on 1-12-2003, then it constitutes an unlawful restriction on Respondent 1’s freedom to enter into fiduciary relationships with persons of his choice, and a compulsion on him to forcibly enter into a fresh contract with the appellant even though he has fully performed the previous contract, and is, therefore, a restraint of trade which is void under Section 27 of the Contract Act.
  2. Under Section 27 of the Contract Act: (a) a restrictive covenant extending beyond the term of the contract is void and not enforceable; (b) the doctrine of restraint of trade does not apply during the continuance of the contract for employment and it applies only when the contract comes to an end; and (c) As held by this Court in Gujarat Bottling Co. Ltd. v. Coca Cola Co.6, this doctrine is not confined only to contracts of employment, but is also applicable to all other contracts.

Construing the section in its literal terms, the section only deals with agreements which operate as a total bar to the exercise of a lawful business, and does not cover agreements which merely restrain freedom of action in actual exercise of a lawful business. The above principle was emphasised by the Supreme Court in Gujarat Bottling Co. Ltd. v. Coca Cola Co.7, as:

  1. There is a growing trend to regulate distribution of goods and services through franchise agreements providing for grant of franchise by the franchiser on certain terms and conditions to the franchisee. Such agreements often incorporate a condition that the franchisee shall not deal with competing goods. Such a condition restricting the right of the franchisee to deal with competing goods is for facilitating the distribution of the goods of the franchiser and it cannot be regarded as in restraint of trade.
  1. If the negative stipulation contained in paragraph 14 of the 1993 Agreement is considered in the light of the observations in Esso Petroleum Co. Ltd. v. Harper’s Garage (Stourport) Ltd.8, it will be found that the 1993 Agreement is an agreement for grant of franchise by Coca Cola to GBC to manufacture, bottle, sell and distribute the various beverages for which the trade marks were acquired by Coca Cola. The 1993 Agreement is thus a commercial agreement whereunder both the parties have undertaken obligations for promoting the trade in beverages for their mutual benefit. The purpose underlying paragraph 14 of the said agreement is to promote the trade and the negative stipulation under challenge seeks to achieve the said purpose by requiring GBC to wholeheartedly apply to promoting the sale of the products of Coca Cola. In that context, it is also relevant to mention that the said negative stipulation operates only during the period the agreement is in operation because of the express use of the words “during the subsistence of this agreement including the period of one year as contemplated in paragraph 21” in paragraph 14. Except in cases where the contract is wholly one sided, normally the doctrine of restraint of trade is not attracted in cases where the restriction is to operate during the period the contract is subsisting and it applies in respect of a restriction which operates after the termination of the contract.
  1. Shri Shanti Bhushan has submitted that these observations must be confined only to contracts of employment and that this principle does not apply to other contracts. We are unable to agree. We find no rational basis for confining this principle to a contract for employment and excluding its application to other contracts. The underlying principle governing contracts in restraint of trade is the same and as a matter of fact that courts take a more restricted and less favourable view in respect of a covenant entered into between an employer and an employee as compared to a covenant between a vendor and a purchaser or partnership agreements. 
  1. Since the negative stipulation in paragraph 14 of the 1993 Agreement is confined in its application to the period of subsistence of the agreement and the restriction imposed therein is operative only during the period the 1993 Agreement is subsisting, the said stipulation cannot be held to be in restraint of trade so as to attract the bar of Section 27 of the Contract Act. We are, therefore, unable to uphold the contention of Shri Shanti Bhushan that the negative stipulation contained in paragraph 14 of the 1993 Agreement, being in restraint of trade, is void under Section 27 of the Contract Act.

In Niranjan Shankar Golikari v. Century Spg. and Mfg. Co. Ltd.9, the Supreme Court held that restraint of trade may be good if shown to be reasonably necessary for freedom of trade. The Court has held thus:

  1. As to what constitutes restraint of trade is summarised in Halsbury’s Laws of England (3rd edn.), Vol. 38, at p. 15 and onwards. It is a general principle of the common law that a person is entitled to exercise his lawful trade or calling as and when he wills and the law has always regarded jealously any interference with trade, even at the risk of interference with freedom of contract as it is public policy to oppose all restraints upon liberty of individual action which are injurious to the interests of the State. This principle is not confined to restraint of trade in the ordinary meaning of the word “trade” and includes restraints on the right of being employed …The rule now is that restraints whether general or partial may be good if they are reasonable. A restraint upon freedom of contract must be shown to be reasonably necessary for the purpose of freedom of trade. A restraint reasonably necessary for the protection of the covenantee must prevail unless some specific ground of public policy can be clearly established against it … A person may be restrained from carrying on his trade by reason of an agreement voluntarily entered into by him with that object. In such a case the general principle of freedom of trade must be applied with due regard to the principle that public policy requires for men of full age and understanding the utmost freedom of contract and that it is public policy to allow a trader to dispose of his business to successor by whom it may be efficiently carried on and to afford to an employer an unrestricted choice of able assistants and the opportunity to instruct them in his trade and its secrets without fear of their becoming his competitors (Fitch Dewes10). Where an agreement is challenged on the ground of its being a restraint of trade the onus is upon the party supporting the contract to show that the restraint is reasonably necessary to protect his interests. Once, this onus is discharged, the onus of showing that the restraint is nevertheless injurious to the public is upon the party attacking the contract.

 Recently, the Delhi High Court in Aakash Educational Services Ltd. v. Sahib Sital Singh Bajwa11, reiterated the position of law on the scope of enforceability of negative covenants in a commercial contract, holding that once a contract is terminated, a negative covenant thereunder to restrict the trade, business or profession of any party is hit by Section 27 of ICA. The court also held that while such negative covenants may be legal during the subsistence or currency of the contract, however, post termination of the contract, barring exceptional cases, they will be unenforceable.

Partnership contracts 

A number of exceptions to Section 27, ICA have been incorporated in the Partnership Act 1932 (IPA), keeping in view the overall importance of the common partnership business. Such exceptions pertain to agreements between partners in four situations:

(a) during continuance of business;

(b) at the time of any partner ceasing to be a partner;

(c) at time of dissolution of the firm; and

(d) on sale of goodwill of the firm.

Section 11 of IPA authorises the partners to determine their mutual rights and duties themselves trough a mutual agreement, which may be express or implied. The section further explains that an agreement, whereby it is agreed that a partner shall not carry-on business other than that of the firm while he is a partner, is valid.

As per Section 36, IPA, when a partner ceases to be a partner in the firm and his accounts are settled, he may be required to make an agreement that after he ceases to be a partner, he shall not carry on any business similar to that of the firm within a specified period or within specified local limits. Such an agreement tends to protect the interest of partners still continuing the business, and therefore held to be valid.

Section 54 of IPA states that on dissolution of the firm, some of the partners may procure an agreement from other partner(s), the latter agreeing not to carry on business similar to that of a firm. Such an agreement shall also be valid provided the local limits or the limit of time in respect of which the restrictions are imposed, are reasonable.

As per Section 55, on the sale of goodwill there may be an agreement between the partners and the buyer of goodwill, that the partners shall not carry on any business similar to that of the firm within a specified period or within specified local limits. Such an agreement has been held to be valid.

In Hukmi Chand v. Jaipur Ice & Oil Mills Co.12, the Jaipur Bench of Rajasthan High Court has upheld the validity of the agreement entered into between a retiring partner and the other partners, wherein the former sold his share of goodwill and agreed not to carry on similar business on the adjoining plot of land, which came to his share. The Court further held that the burden of proof that the restrictions imposed in any agreement of restraint of trade are reasonable, is on the party which pleads them as reasonable. 

Contracts of service

There are also several cases where restraints are placed on personal service during the subsistence of personal service contract, and it has held that such restraint would be reasonable only during the period of such contacts and not beyond that.

 The Delhi High Court in K.D. Campus (P) Ltd. v. Metis Eduventures (P) Ltd. India13, has held that once the employer has treated the employment contract of the employee as terminated, then he cannot proceed to enforce any negative covenant as against the employee. The Court held as under:

  1. In the present case the contract of employment has admittedly been prematurely terminated. According to the plaintiff, unilaterally and illegally by the defendants No. 2 to 8. It is not the case of the plaintiff that the plaintiff, notwithstanding such unilateral and illegal termination of the contract of employment by the defendants No. 2 to 8, is continuing to treat the defendants No. 2 to 8 as in the employment of the plaintiff or is continuing to pay the emoluments which the plaintiff under the contract had agreed to pay to the defendants No. 2 to 8. Rather, it is the plea of the defendants No. 2 to 8 that their past emoluments, for the period for which they served the plaintiff, were also not paid and which compelled them to look for employment elsewhere. Once the plaintiff itself is treating the contract of employment with each of the defendants No. 2 to 8 as terminated and has stopped performing his obligations under the said contract to the defendants No 2 to 8, in my view the present case would fall in the genre of employer seeking to enforce the negative covenant after the termination of service and which is not permissible in law. 
  1. In my opinion, it is only during the period for which the employee continues to serve the employer and receives emoluments from the employer can the employer enforce the negative covenant unless it is shown that the enforcement of negative covenant beyond the period of wrongful repudiation of the contract is necessary to protect the interest of the employer. However, such restraint can be to protect any proprietary right of the employer and not to prevent competition. 
  1. The plaintiff in the present case has indeed not shown any proprietary right which may be infringed by Defendants 2 to 8 joining employment elsewhere or by indulging in the activity of teaching. Moreover, Defendants 2 to 6 who are teachers cannot be expected to teach any subject other than that in which they are qualified to teach and it is also not the plea that they are capable of getting employment elsewhere in any other capacity. We are today living in an age where employment avenues are scarce and if Defendants 2 to 8 are restrained as sought, they would necessarily be driven to idleness and a state of penury.

In Superintendence Co. of India (P) Ltd. v. Krishan Murgai14, the Supreme Court has also affirmed that any negative covenant beyond the termination of the service is void. The Court has held as under:

  1. Under Section 27 of the Contract Act, a service covenant extended beyond the termination of the service is void. Not a single Indian decision has been brought to our notice where an injunction has been granted against an employee after the termination of his employment.
  2. On a true construction of Clause 10 of the agreement, the negative covenant not to serve elsewhere or enter into a competitive business does not, in my view, arise when the employee does not leave the services but is dismissed from service. Wrongful dismissal is a repudiation of contract of service which relieves the employee of the restrictive covenant.

 Protection of trade secrets and confidential information

 In an employment contract, the employer has trade secrets and business connections, worthy of protection. In case of restraints in contracts of employment, it is necessary to show that employee has entered into a contract with a customer, or has trade secrets of the employer. An employer can lawfully prohibit his employee from accepting any position, after determination of his employment, where the employee is likely to utilise the information of trade secrets acquired by him. 

Trade combinations

 Agreements between traders to combine and regulate their business for the purpose of promoting their common interest are not considered to be against public policy and consequently not in restraint of trade. The main objective of making such agreement is to avoid competition between themselves by mechanism such as fixing minimum process, pooling their resources, regulating supply of goods and services, pooling profits and distributing the same as per some agreed formula. Similarly, if two or more persons agree to jointly carry on their business and avoid competition among themselves or even to monopolise the trade, is nothing but doing lawful act of promoting their commercial interest, and the same is valid.

Though an agreement between persons to regulate their own trade is valid, a bare agreement in restraint of competition is void. Such an agreement would be valid if it is ancillary to their commercial interest and is also consistent to public interest.

 Solus agreements

 There may be agreements where one party is to deal exclusively with the product of a particular producer or manufacturer and not to deal with any other person. Such agreements are called solus or exclusive dealing agreements. For example, a buyer of a certain commodity may agree that he will purchase all his requirements from a particular manufacturer only, or vice-versa. The validity of such agreements depends on the object of the parties. Such a type of agreement would be valid if it is reasonable for benefiting the parties to the agreement, and if such agreement aims at putting undue restrictions by one party on the other with an objective to monopolise trade, then such an agreement is void.

Exception – Sale of goodwill

Regarding the exception to the section relating to sale of goodwill, when a person sells the goodwill of his business, he may give an undertaking to the buyer of the goodwill that he will not carry on that kind of business of which the goodwill is being sold. Such an agreement puts a restraint on the seller of the goodwill, but the same is valid for the purpose of protection of interest of the buyer of goodwill, for which he has paid the consideration. When there is no sale of goodwill of a business, an agreement not to carry on such business would be against public policy and therefore void. Therefore, the scope of exception to Section 27 is limited. Further it would operate only so long as the buyer or a person deriving title from him carries on a business for lifetime. Further, the restrictive covenant would strand extinguished when the goodwill comes to an end.


  Advocate and a qualified Chartered Accountant, presently practising at Supreme Court and Delhi High Court.

1 <http://www.scconline.com/DocumentLink/47U3hio9>.

2 <http://www.scconline.com/DocumentLink/PAfjro2g>.

2 2019 SCC OnLine Del 10511

3 2018 SCC OnLine Del 11321.

4 2015 SCC OnLine Del 8337

5 (2006) 4 SCC 227.

6 (1995) 5 SCC 545

7 (1995) 5 SCC 545

8 1968 AC 269 : (1967) 2 WLR 871.

9 (1967) 2 SCR 378

10 (1921) 2 AC 158.

11 2020 SCC OnLine Del 1719

12 1980 SCC OnLine Raj 58

13 2018 SCC OnLine Del 13366

14 (1981) 2 SCC 246.

Case BriefsHigh Courts

Delhi High Court: Vibhu Bakhru, J., while addressing the matter in respect to the invocation of an arbitration clause expressed that:

“…the legislative policy is to encourage arbitration, thus, any interpretation that would nullify an arbitration clause must be avoided.”

What led to the filing of the present petition?

Petitioner (TKE) is a company that has filed the present petition under Section 11 of the Arbitration and Conciliation Act, 1996, inter alia, praying for an arbitral tribunal to be constituted for the purpose of adjudicating the disputes that arose between the parties in relation to the Contract Agreement.

RITES Ltd. had issued a Notice Inviting Tender for “Development of Integrated Check Post at Dawki (Meghalaya) along Indo-Bangladesh Border” for which TKE was awarded the contract.

Further, TKE submitted that the execution of the work was hampered by RITES due to which TKE suffered losses to the extent of ₹2,37,23,39,473. The work was stopped by the Border Guards of Bangladesh as it objected to any activity within 40 metres of the International Border. Along with the Border Guards, even the forest department objected to setting up campsites.

RITES issued a notice calling upon TKE to expedite the work failing which it would terminate the agreement and in response to that TKE stated the reasons for delay.

Later, RITES terminated the agreement and the same was challenged by TKE before the Meghalaya High Court, which was dismissed and on being aggrieved with the same, TKE filed a Special Leave Petition. Supreme Court had observed that: 

“it would be appropriate for the petitioner to avail of the alternative remedy by filing arbitration petition or civil suit, as it may be advised”.

TKE requested the Engineer-In-Charge (EIC) to review the decision of terminating the Agreement and permit it to finish the work or in the alternative, compensate TKE for the damages incurred by it. The EIC rejected the said application, after which TKE invoked the arbitration clause in the agreement.

Analysis, Law and Decision

Bench stated that TKE’s contention that it did not invoke the arbitration clause was unmerited since the notice dated 06-03-2020 clearly indicated that the same was a “Notice of Intention to commence Arbitration under Clause 25(1) of the General Conditions of Contract”.

TKE sent another notice seeking to correct an error that had crept in the said notice inasmuch as, TKE had wrongly calculated the total amount of its claims as ₹237,23,39,473.14/- instead of ₹57,11,47,927.91.

RITES did not respond to TKE’s notice, hence TKE cannot be faulted for preferring the present application under Section 11 of the A&C Act.

Whether the parties can be referred to arbitration in view of TKE’s stand that the Appointing Authority, cannot appoint an arbitrator? 

Controversy in the instant matter revolves around the appointment of the arbitrator under Clause 25 of the GCC, which provides that the matters would be referred to a Sole Arbitrator appointed by the Appointing Authority. And, the same would be from a list of three serving officers of RITES of appropriate status, as may be provided by the Appointing Authority and as selected by TKE.

As per Section 12(5) of the A&C Act, the above-said is no longer permissible.

A serving employee of RITES would be disqualified as RITES is an interested party in the disputes that have arisen and thus, its employee cannot be appointed as an arbitrator. 

Whether the disability of the appointing authority to appoint an arbitrator would frustrate the arbitration agreement? 

After the amendment of A&C Act, 2015 certain persons were declared ineligible to act as arbitrators as per the 7th Schedule of the A&C Act. Although parties can waive the said objection after disputes arise.

Bench stated that it is not impossible for such persons to act as arbitrators. They can do so if objections to their independence and impartiality are waived in writing, in terms of the proviso to Section 12(5) of the A&C Act.

In view of the Supreme Court decisions of TRF Ltd. v. Energo Engineering Projects Ltd.: (2017) 8 SCC 377 and Perkins Eastman Architects DPC  v. HSCC (India) Ltd.  2019 SCC OnLine SC 1517, the appointing authority i.e. the Executive Director of RITES cannot appoint an arbitrator, without the written consent of TKE after disputes arise. However, this would not mean that the arbitration clause stands nullified.

Section 12(1) of the A&C Act was substituted and Section 12(5) of the A&C Act was introduced.

In Voestalpine Schienen GMBH v. Delhi Metro Rail Corporation Ltd.: (2017) 4 SCC 665, the Supreme Court had noted the recommendations made by the Law Commission of India in its 246th Report and had explained the legislative intent of introducing the statutory amendments in Section 12 of the A&C Act. The said decision encapsulates the Court’s view regarding the importance of independence and impartiality of the arbitrators.

In TRF Ltd. v. Energo Engineering Projects Ltd.: (2017) 8 SCC 377 Supreme Court had decided that a person who is ineligible by the operation of law to act as an arbitrator would also be ineligible to nominate another person to act as an arbitrator. The said decision was founded on the express language and legislative intent of Section 12(5) of the A&C Act.

In Perkins Eastman Architects DPC v. HSCC (India) Ltd. 2019 SCC OnLine SC 1517 Supreme Court interpreted the provisions of Section 12(5) of the A&C Act, in an expansive manner and held that even in cases where the power to appoint an arbitrator was vested with the person who was otherwise ineligible to be appointed as an arbitrator, it would be impermissible for him to exercise the same in view of the ineligibility referred to in TRF Ltd. Thus, a person who is ineligible to act as an arbitrator, would also not be eligible to appoint anyone else as an arbitrator.

Now, proceeding further in light of the above discussion, Bench while considering that RITES had agreed that the subject disputed are required to be referred to arbitration, could not be heard to contend that the said arbitration would either be conducted in a manner which may compromise the fundamental requirement of an independent and an impartial process or not at all.

Hence, in the instant matter, by virtue of Section 12(5) of the A&C Act, though appointing authority is ineligible to act as an arbitrator but this would not mean that the entire arbitration agreement would be frustrated.

In North Eastern Railway v. Tripple Engineering Works: (2014) 9 SCC 288, the Supreme Court observed that the principle that the court must appoint an arbitrator as per the contract between the parties had seen a significant erosion.

Power of the Court to appoint Arbitrator

Supreme Court in Indian Oil Corporation Ltd. v. Raja Transport (P) Ltd.: (2009) 8 SCC 520 was also referred wherein the decision was rendered in an appeal against an order passed by the Chief Justice of the Uttaranchal High Court in an application filed under Section 11(6) of the A&C Act appointing a former Judge of that Court as the Sole Arbitrator to adjudicate the disputes between the parties.

In the above-mentioned decision, Supreme Court held that a Court could appoint an independent arbitrator in cases where it found that the arbitrator named in the agreement or to be appointed as per the procedure as agreed under the agreement, would not be impartial or independent.

The above principle of the Supreme Court would hold good in the present context as well.

As held in Indian Oil Corporation Ltd. v. Raja Transport (P) Ltd.: (2009) 8 SCC 520 even in cases where the arbitration agreement provides for a procedure for appointment of an arbitrator, a court could appoint an independent arbitrator if there were reasonable grounds to doubt the independence and impartiality of the named arbitrator to be appointed in accordance with the procedure as stipulated under the arbitration agreement.

Hence no dispute was found as to the existence of the arbitration agreement. As TKE had invoked the arbitration clause but the parties were unable to concur on the appointment of an arbitrator, High Court proposed that Justice (Retd.) Pradeep Nandrajog, former Chief Justice of the High Courts of Rajasthan and Maharashtra be appointed as a Sole Arbitrator.

Matter to be listed on 19-03-2021.[T.K. Engineering Consortium (P) Ltd. v. Director (Projects) RITES Ltd., 2021 SCC OnLine Del 1188, decided on 08-03-2021]


Advocates who appeared in this case:

For the Petitioner:

: Mr Rituraj Biswas, Ms Sujaya

: Bardhan, Mr Rituraj Choudhary and: Mr Mayan Prasad, Advocates.

: Mr G. S. Chaturvedi and

For the Respondents:

: Mr Shrinkar Chaturvedi, Advocates: for RITES Ltd.

: Mr Ripu Daman Bhardwaj, CGSC

: for R-3

Case BriefsHigh Courts

Jharkhand High Court: The Division Bench comprising of Aparesh Kumar Singh and  Anubha Rawat Choudhary, JJ., heard the instant Commercial Appeal challenging the judgments passed by the Commercial Court whereby the appellant’s plea for setting aside the arbitral award was rejected.

Background

 The Government of Bihar, Orissa and West Bengal had conceived a plan to make Galudih right bank main canal to be the main link for supply of irrigation water to then State of Bihar (now State of Jharkhand), State of Orissa and State of West Bengal parallel to Swarnrekha Multi-purpose project. State of Bihar had invited tenders for excavation of Galudih right bank main canal in which the appellant participated and was allocated the work; vide letter no. 272 dated 06-03-1986. The work order was followed by two separate agreements between the parties for KM 43.05 to KM 50.25 and KM 50.25 to KM 56.04 respectively with identical terms and conditions numbered as LCB – 03 of 1985-86 and LCB – 04 of 1985-86 both dated 12-03-1986.

Findings of the Arbitrator  

It was in the abovementioned background that a sole arbitrator was appointed by the Supreme Court to resolve the controversy regarding the said project. Pursuant to which the Arbitrator had ruled out in controversies arising in Commercial Appeal No.6 of 2020 and Commercial Appeal No.7 of 2020 that the appellant had completed 67% of the work allotted under the agreement within a period of twenty-four months. Also some extra work over and above the terms of the agreement was done by the appellant on being directed by the executive engineer. The Arbitrator held that the reason for non – completion of the project were entirely and wholly attributable to the respondent. Identical findings had been recorded in Commercial Appeal No.7 of 2020 except that the claimant completed 82% of the work allotted under the agreement within a period of twenty-four months.

Award regarding Payment

In the matter of Commercial Appeal No.6 of 2020, the Arbitrator held that the appellant would be entitled of payment for execution of 67% of the contracted work plus the extra work executed by the appellant, and towards the unfinished work the appellant was held to be entitled of total Rs.3,77,86,645/-. Further, observing that sum of Rs.3,18,17,831/- had already been paid, the Arbitrator adjusted the sum and held that the appellant instead of Rs.3,77,86,645/- would be entitled to Rs.59,68,814 with 9% interest and Rs.50,00,000/- with interest at 9% was also awarded in favour of appellant from 02-10-2018, i.e., date of award till the date of payment.

Whereas, in the other matter, i.e., Commercial Appeal No.7 of 2020, the Arbitrator said that the appellant would have get Rs.1,88,41,196 for 82% of the contracted work as completed by him and Rs.38,72,458 towards damages for the unfinished work, i.e., Rs.2,27,13,654. However, the award was adjusted against the payment of Rs.2,67,59,598 which was already paid by the respondent to the appellant. Thereby, the appellant was directed to refund Rs.40,45,994 to the respondent with 6% interest.

Contentions of the Appellant

The appellant contended that since the claim was filed before the Arbitrator post-2015 amendment, therefore the same was to be governed by the amended provisions of the 2015 amendment in the Arbitration and Conciliation Act, 1996 in view of the pronouncement by the Supreme Court in Ssangyong Engg. & Construction Co. Ltd. v. NHAI, (2019) 15 SCC 131. It was argued that the Arbitrator had miscalculated the amount payable to the appellant by adjusting certain sums allegedly payable to the respondents even when there was no counter-claim or claim of set-off filed before the Arbitrator. It was further submitted regarding the work already executed, but not measured, that the claim could not be rejected merely because the appellant did not participate at the time of measurement. He submitted that upon a comparison of the two records, it was apparent that the Arbitrator had committed an error of record.

Findings of the Court

In ONGC Ltd. v. Western Geco International Ltd., (2014) 9 SCC 263, it was held that Section 34, as amended, would apply only to applications that had been made to the Court on or after 23-10-2015, irrespective of the fact that the arbitration proceedings may had commenced prior to that date. Thus, the Bench said since the awards, as well as the petitions challenging the awards, were filed after 23-10-2015, section 34, as amended in 2015 would apply to the instant case

Distinction amongst, Counter-claim, Set-off, Payment and Adjustments

 In order to draw distinction amongst, counter-claim, set-off, payment and adjustments, the Bench relied on the judgment of Patna High Court in Jayanti Lal v. Abdul Aziz, 1955 SCC OnLine Pat 83, wherein, it had been held that a payment refers to a satisfaction, or extinguishment of a debt effected prior to the raising of the defence of payment, while a plea of set-off prays for satisfaction or extinguishment thereof commencing in the future after the date of the plea. A question of set off, therefore, can arise only in respect of dues which are outstanding, and which have not already been adjusted.

In Cofex Exports Ltd. v. Canara Bank, 1997 SCC OnLine Del 515, it was held that, “a payment is the satisfaction or extinguishment of a debt prior to filing of the written statement and adjustment contemplates existence of mutual demands between the same parties in the same capacity.” Further, A plea of adjustment was distinguished from a plea of a set off or counter claim, “Adjustment like payment is relatable to a period anterior to the date of such plea being set out before the court. A plea was in the nature of payment, adjustment and the like can be raised in defence as of right. The plea if upheld has an effect of mitigating or wiping out the plaintiff’s claim on the date of the suit itself. A counter claim or a plea of a set off is a claim made by the defendant. It does not extinguish the plaintiff’s claim; it exonerates the defendant from honouring plaintiff’s claim though upheld.”

Verdict

The Bench opined that essentially the plea raised by the respondent before the Arbitrator was a plea of payment/adjustment. While citing Mcdermott International Inc. v. Burn Standard Co. Ltd., (2006) 11 SCC 181, wherein, it had been held that Ss. 55 and 73 of the Indian Contract Act did not lay down mode and manner as to how and in what manner the computation of damages or compensation had to be made, the Bench said that the mode and manner of calculation of damages having not been specifically prescribed under Indian law, the formula as suggested by the appellant before Arbitrator i.e., Hudson formula was not binding on the Arbitrator nor non-consideration of the formula could have been a ground for challenge under section 34 of the aforesaid Act of 1996 as amended in the year 2015.

Further, noticing that the respondents had invited the appellant for final measurement, but the appellant’s representative was not present at the time of measurement, the Court opined that in absence of final measurement, the Arbitrator had rightly passed a reasoned order rejecting Part II of the claim A of Statement A and accordingly, the same also did not call for any interference. So far as the adjustment was concerned, the Bench said the same was a matter of interpretation of contract. Hence, the adjustments neither being ex facie illegal nor shocking the conscience of the court did not fall within the grounds enumerated under Section 34 of Arbitration and Conciliation Act, 1996 as amended in 2015.

Lastly, the Court observed that, the Court below had failed to examine the case in the light of 2015 amendment read with the law interpreted by the Supreme Court in Ssangyong Engg. case while passing the award against the appellant when it di directed the appellant to pay an amount of Rs.40,45,994 with an interest @ 6% to the respondents till the date of adjustment, even though the respondent had neither made any counter claim nor any set off. Holding that such direction certainly shocks the conscience of the Court and suffer from patent illegality calling for interference under Section 34 (2-A), the Court set aside the award passed by the Arbitrator in Commercial Appeal No.7 of 2020 to that extent.[R.K. Construction (P) Ltd. v. State of Jharkhand, 2021 SCC OnLine Jhar 286, decided on 13-01-2021]


Appearance before the Court by:

For the Appellant: Adv. Salona Mittal

For the Respondents: A.A.G. II Sachin Kumar, and Adv. Deepak Kumar Dubey


Kamini Sharma, Editorial Assistant has reported this brief.

Case BriefsHigh Courts

Karnataka High Court: M. Nagaprasanna J. set aside the impugned order and allowed the petition. 

Facts

The facts of the case are such that the second respondent issued a notification inviting applications for the post of Project Information Officer on contract basis. Petitioner finding herself eligible applied, selected and was appointed as Project Information Officer on contract basis with effect from 27.11.2009. The contract was being renewed from time to time on an annual basis and the latest renewal of such contract was on 01.04.2019 to be in operation upto 31.03.2020. The petitioner is thus in service for 10 years now albeit on contract basis. During the subsistence of the aforesaid period of contract, the petitioner by an application dated 11.06.2019, sought maternity leave. On the application given by the petitioner, a notice was issued on 25.06.2019, by the second respondent directing her to report to duties forthwith, despite her application seeking maternity leave. When the petitioner did not report back to duties, despite the notice on 25.06.2019, referring to the same, an order dated 29.08.2019 was passed terminating the service of the petitioner / canceling the contract entered into with the petitioner appointing her as a Project Information Officer on the ground that the petitioner remained absent. Assailing this order instant petition was filed.

Arguments

Counsel for the petitioners submitted that that denial of maternity leave and terminating or cancellation of the employment of any employee on that ground is contrary to law.

Counsel for the respondents submitted that the petitioner was a contract employee and contract itself gave a right to the second respondent to terminate her services at any point in time and seek to justify the notice impugned.

Issue

Whether a contract employee is entitled to maternity leave under the Maternity Benefit Act, 1961?

Observations

Rights of women and children recognized by United Nations

  1. Article 1 of Universal declaration of Human Rights is ‘all human beings are born free and have equal dignity and rights’ these are inalienable.
  2. Article 42 of the Constitution of India depicts that the State shall make provision for securing just human conditions for work and maternity relief. Therefore, the right of seeking maternity relief by way of leaves springs from Article 42 of the Constitution of India.
  3. Article 45 of the Constitution of India directs that the State shall endeavor to provide early child care and education for all children until they complete six years.

All these form part of Part IV of the Constitution i.e., Directive Principles of State Policy. The Court relied on Mohini Jain v. State of Karnataka, (1992) 3 SCC 666 wherein it was held

“The directive principles which are fundamentals in the governance of the country cannot be isolated from the fundamental rights guaranteed under Part III. These principles have to be read into the fundamental rights. Both are supplementary to each other. The State is under a constitutional mandate to create conditions in which the fundamental rights guaranteed to the individuals under Part III could be enjoyed by all.”

The Court thus observed that therefore, the State and its instrumentalities cannot deny its obligation to perform its duty as enshrined in the aforesaid Articles.

The Court further relied on Municipal Corpn. of Delhi v. Female Workers, (2000) 3 SCC 224 wherein it was held :

  1. It is in the background of the provisions contained in Article 39, specially in Articles 42 and 43, that the claim of the respondents for maternity benefit and the action of the petitioner in denying that benefit to its women employees has to be scrutinised so as to determine whether the denial of maternity benefit by the petitioner is justified in law or not.
  2. Since Article 42 specifically speaks of “just and humane conditions of work” and “maternity relief”, the validity of an executive or administrative action in denying maternity benefit has to be examined on the anvil of Article 42 which, though not enforceable at law, is nevertheless available for determining the legal efficacy of the action complained of.
  3. Section 12 Maternity Benefit Act, 1961, which contains a very significant prohibition in regard to the service of a woman employee, provides as under:

“12. Dismissal during absence or pregnancy.—(1) When a woman absents herself from work in accordance with the provisions of this Act, it shall be unlawful for her employer to discharge or dismiss her during or on account of such absence or to give notice of discharge or dismissal on such a day that the notice will expire during such absence, or to vary to her disadvantage any of the conditions of her service.

  1. This section prohibits dismissal of a woman employee during or on account of her absence on maternity leave. It ensures that the conditions of her service would not be varied to her disadvantage during her absence.
  2. Contravention of the provisions of this Act has been made an offence under Section 21 of the Act which provides as under:

“21. Penalty for contravention of Act by employer.—(1) If any employer fails to pay any amount of maternity benefit to a woman entitled under this Act or discharges or dismisses such woman during or on account of her absence from work in accordance with the provisions of this Act, he shall be punishable with imprisonment which shall not be less than three months but which may extend to one year and with fine which shall not be less than two thousand rupees but which may extend to five thousand rupees:

  1. The provisions of the Act which have been set out above would indicate that they are wholly in consonance with the Directive Principles of State Policy, as set out in Article 39 and in other articles, specially Article 42. A woman employee, at the time of advanced pregnancy cannot be compelled to undertake hard labour as it would be detrimental to her health and also to the health of the foetus. It is for this reason that it is provided in the Act that she would be entitled to maternity leave for certain periods prior to and after delivery. We have scanned the different provisions of the Act, but we do not find anything contained in the Act which entitles only regular women employees to the benefit of maternity leave and not to those who are engaged on casual basis or on muster roll on daily-wage basis.

The Maternity Benefit Act, 1961, has now undergone certain amendments,      relevant paras of which are extracted hereunder for the purpose for ready reference.

“THE MATERNITY BENEFIT (AMENDMENT) ACT, 2017

 (A) In sub-section (3) – (i) For the words “twelve weeks of which not more than six weeks”, the words “twenty-six weeks of which not more than eight weeks” shall be substituted.

(ii) after sub-section (3) and before the first proviso, the following proviso shall be inserted, namely:- “Provided that the maximum period entitled to maternity benefit by a woman having two or more than two surviving children shall be twelve weeks of which not more than six weeks shall precede the date of her expected delivery,”;

 (5) In case where the nature of work assigned to a woman is of such nature that she may work from home, the employer may allow her to do so after availing of the maternity benefit for such period and on such conditions as the employer and the woman may mutually agree.”

The Court thus observed that the Amendment Act of 2017, a pregnant woman is entitled to maternity leave for a period of 26 weeks which would come to 6 months and 15 days. It was further observed the petitioner was entitled to maternity leave of six months in all in terms of the amended Act of 2017. The action of the second respondent cannot be countenanced, as maternity or the Act does not classify or qualify a mother to be, a government servant, temporary employee, employee on contract basis or an employee on daily wages. The order impugned infers such a harrowing classification.

The Court held that “the writ petition deserves to succeed and it is a fit case where, apart from granting back wages to the petitioner, in the peculiar facts, the second respondent will have to be mulcted with exemplary costs.”

In view of the above, petition was allowed.[B. S. Rajeshwari v. State of Karnataka, Writ Petition No.10677 of 2020, decided on 04-02-2021]


Arunima Bose, Editorial Assistant has reported this brief.

Case BriefsForeign Courts

Supreme Court of the Democratic Socialist Republic of Sri Lanka: A Full Judge Bench of Sisira. J. de Abrew, Murdu Fernando and Gamini Amarasekara, JJ., allowed a petition which was filed by the petitioner alleging that her Fundamental Rights guaranteed by Articles 12(1), 12(2), and 14(1)(g) of the Constitution had been violated by the Respondents.

The Petitioner who passed had the GCE (Ordinary Level) with five distinctions in the year 2000 and the GCE (Advanced Level) with two credit passes and one simple pass in the year 2003, was appointed as Management Assistant in the Department of Irrigation on contract basis with effect from 21-5-2008, thereafter her services were extended till 31-12-2014. Thereafter, the Petitioner was appointed to the post of clerk with effect from 24-10-2014 and stated that she had fulfilled the requirements stated in the said Circular. After the Petitioner assumed duties as a clerk, she was paid salaries from January 2015 to August 2015 on the salary scale stated in the said letter of appointment. However, the Petitioner’s appointment to the post of clerk was cancelled with effect from 17-11-2014 which was the date of the letter of appointment.

The Senior State Counsel (SSC), Mr. Rajiv Goonatilake contended that the Petitioner was not entitled to be appointed to the post of clerk since the said Circular had authorized to appoint Management Assistants to the permanent cadre only if they (Management Assistants) were drawing the salary scale of MN1 and in the current case Petitioner was not on the salary scale of MN1 but on the salary scale of MN2. According to the contention of the SSC, if the Petitioner was drawing a salary of Rs.13,120/-, she was entitled to be appointed to the permanent cadre. It was alleged that it is an accepted principle in law that no man is permitted to take advantage of his own mistake. This view was supported by the observation made by His Lordship Justice Sansoni in the case of Kanapathipillai v. Meerasaibo, 58 NLR page41 at page 43 wherein His Lordship had observed thus “no man is allowed to take advantage of his wrong.” The Court observed that in the present case, the Petitioner’s appointment to the post of clerk (permanent cadre) was cancelled on the basis of an alleged mistake committed by the Director-General of Irrigation who had acted on behalf of the Government.

The letter of appointment stated that this post was permanent and pensionable. Her salary was Rs.13,120/-. The Government paid her salary (Rs.13,120/-) on the basis that she had been appointed to the post of clerk for eight months and remitted Rs.870/- monthly to the W&OP. This was established by her salary slips marked as P10(i) to P10(viii). The Petitioner gave up her post of Management Assistant on contract basis when she was appointed to the new post. Presently, the Petitioner had lost her earlier post of Management Assistant and her new post of clerk.

The Court relied on certain judicial decisions considering the question of whether the Petitioner had a legitimate expectation of continuing in the permanent cadre of the Government Service. In the case of Dayaratne v. Minister of Health, (1999) 1 SLR 393 this court held that,

            “On the facts of the case, the petitioners had a legitimate expectation that they would, upon satisfying prescribed conditions, be provided with a course of training for the examination leading to the award of the certificate of competency as Assistant Medical Practitioners. The decision effecting a change of policy which destroyed the expectation of the petitioners did not depend upon considerations of public interest. In deciding upon the conflicting interests of Graduate Medical Officers and Assistant Medical Practitioners, the 1st, 2nd and 3rd respondents (the Minister, his Secretary and the Deputy Director General Administration, respectively) considered the views of the GMOA and yielded to their pressure. Neither the views of the Assistant Medical Practitioners nor those of the petitioners were sought. Hence, rights of the petitioners guaranteed by Article 12 (1) of the Constitution were violated.”

Other cases relied on by the Court were Sirimal v. Board of Directors of the Co-operative Wholesale Establishment, (2003) 2 SLR 23; Surangani Marapana v. Bank of Ceylon, (1997) 3 SLR 156 and Pinnawala v. Sri Lanka Insurance Corporation, (1997) 3 SLR 85.

The Court finally considering all the matters above held that Petitioner had a legitimate expectation to continue in the permanent cadre of Government Service until the date of her retirement.

The Court while allowing the petition held that Petitioner’s fundamental rights guaranteed by Article 12(1) and 14(1)(g) of the Constitution had been violated by the Director General of Irrigation who acted on behalf of the Government and further held that Petitioner was entitled to be in the permanent cadre of Government Service on conditions stipulated in her letter of appointment directing the respondent to pay her back wages and other remunerations from the date that she was stopped from reporting for duty along with compensation decided by the Court.[D.B.D Rajapakshe “Prashakthi” Ratmalwala v. Y. Abdul Majeed, SC. FR Application No. 418 of 2015, decided on 12-02-2021]


Suchita Shukla, Editorial Assistant has put this story together

Case BriefsForeign Courts

Supreme Court of Canada: In an interesting case regarding interpretation of implied contractual obligations the 9-Judge Bench comprising of Wagner C.J. and Abella, Moldaver, Karakatsanis, Côté, Brown, Rowe, Martin and Kasirer JJ., held that,

 “The purpose of good faith is to secure the performance and enforcement of the contract made by the parties. It cannot be used as a device to create new, unbargained rights and obligations or to alter the express terms of the contract.”

Background

Wastech, a waste transportation and disposal company, had a long‑standing contractual relationship with (Greater Vancouver Sewerage and Drainage District) Metro, a statutory corporation responsible for the administration of waste disposal for the Metro Vancouver Regional. The said contract contemplated removal and transportation of waste by Wastech to three disposal facilities for which Wastech was to be paid at a differing rate depending on which disposal facility the waste was directed to and how far away the facility was located.

Also, the contract stipulated Wastech’s compensation to be structured around a “Target Operating Ratio” (Target OR) as a ratio of 0.890, where Wastech’s operating costs were 89 percent of its total revenues, resulting in an operating profit of 11 percent.

The contract did not guarantee that Wastech would achieve a certain profit in any given year and it gave Metro absolute discretion to allocate waste as it so chose.

In 2011, Metro, while exercising discretion re-allocated waste to a closer disposal facility, resulting in Wastech failing to reach the target operating ratio. Wastech alleged that Metro breached the contract by allocating waste among the facilities in a manner that deprived Wastech of the possibility of achieving the target profit.

Wastech referred the dispute to arbitration and sought compensatory damages. The arbitrator found that a duty of good faith applied, that Metro had breached that duty, and that Wastech was therefore entitled to compensation. The Court allowed Metro’s appeal and set aside the arbitrator’s award.

Analysis by the Court

The majority opined that where a party to a contract exercise its discretion unreasonably, in a manner not connected to the underlying purposes of the discretion granted by the contract, its conduct would amount to a breach of the duty to exercise contractual discretionary powers in good faith. The Bench observed Wastech asked the Court to had Metro subvert its own interest in name of accommodating Wastech’s interest. However,

“Metro was Wastech’s contracting partner, not it’s fiduciary. The loyalty required of it in the exercise of this discretion was loyalty to the bargain, not loyalty to Wastech.”

The Bench stated duty to exercise contractual discretion in good faith requires the parties to exercise their discretion in a manner consistent with the purposes for which it was granted in the contract. But where the exercise stand outside the compass set by contractual purpose, the exercise becomes unreasonable in light of the agreement for which the parties bargained.

While analysing the case of Bhasin v. Hrynew, 2014 SCC OnLine Can SC 55,  as relied by the appellant the Bench expressed, the good faith doctrine did not represent an abandonment of commercial certainty by requiring contracting parties to place their counterparty’s interests ahead of their own.

“Wastech is asking for an advantage for which it did not bargain: it asks that Metro confer a benefit upon it that was not contemplated, expressly or impliedly, under the contract.”

After reading the contract as a whole, which stated, to allow Metro the flexibility necessary to maximize efficiency and minimize costs of the operation, the majority expressed that Metro’s exercise of discretion was not unreasonable with regard to the purposes for which the discretion was granted. The contract gives Metro the absolute discretion to determine how the waste was to be allocated. There was no guaranteed minimum volume of waste allocated in a given year.

Verdict

 Hence, it had been held that the parties foresaw this risk — and chose to leave the discretion in place. The Bench expressed wonder on, how the exercise of an apparently unfettered contractual discretion could ever constitute a breach of contract since one could argue that a party, in exercising such a discretionary power, even opportunistically, is merely doing what the other party agreed it could do in the contract?

Consequently, the instant appeal was dismissed. [Wastech v. G.V. Sewerage and Drainage,  2021 SCC OnLine Can SC 1, decided on 05-02-2021]


Kamini Sharma, Editorial Assistant has put this story together.

Case BriefsHigh Courts

Delhi High Court: Kameswar Rao, J., decided a petition wherein on the invocation of the arbitration clause, one of the parties appointed the sole arbitrator on its own.

The instant petition was filed under Section 11(6) of the Arbitration and Conciliation Act, 1996. Petitioner and the respondents entered into a lease deed in respect of the premises.

It has been stated that pursuant to the execution of the lease deed, petitioner started fulfilling the obligations on the assumption that the respondents will also do the same and disbursed an amount of Rs 3,32,000 to the respondents in order to expedite the refurbishment and up-gradation of the premises to make it at par with the petitioner’s benchmark.

Due to the pandemic, petitioner sought to invoke the force majeure clause in the Lease Deed.

Even after repeated communications and grant of time as sought by the respondents, the respondents failed to furnish the complete set of documents as mandated under Clause 11.2.1 of the Lease Deed.

While the above-stated breach was being cured, respondents suddenly and to complete shock and dismay of the petitioner issued a letter demanding a sum of money by misrepresenting the clauses of the Lease Deed.

Respondents invoked arbitration clause citing the existence of disputes under the lease deed and nominated a Retired Judge of this Court as the Sole Arbitrator.

 Issue for consideration:

Whether the appointment of the arbitrator was at variance with the stipulation in the contract and as such non-est for this Court to grant the relief to the petitioner by appointing a new arbitrator?

Decision

  1. DISPUTE RESOLUTION- Any dispute or controversy arising out of or in connection with the Deed or its performance, including the validity, interpretation or application hereof, shall to the extent possible be settled amicably by negotiation and discussion among the Parties within 30 (thirty) days as of the date requested by either Party. Failing which, either Party shall be at liberty to refer the matter to arbitration in accordance with the Indian Arbitration and Conciliation Act, 1996. The arbitral panel shall consist of a sole arbitrator appointed mutually by the Parties. Any arbitral award issued by such sole arbitrator shall be final and binding on the Parties. The language of the arbitration shall be English and seat of arbitration shall be Delhi.”

(Emphasis supplied )

As per the arbitration clause contained in the deed, the arbitrator has to be appointed mutually by both the parties. In the present case, sole arbitrator was appointed by the respondent but was not confirmed by the petitioner.

Respondents should have approached the Court under Section 11 of the Act seeking an appointment of an Arbitrator when the same has not been confirmed.

Hence, the appointment is declared to be non-est.

Bench relied upon the Supreme Court decision in Walter Bau Ag. v. MCGM (2015) 3 SCC 800 and Naveen Kandhai v. Jai Mahal Hotels (P) Ltd., Arb. P. 53 of 2017.

With regard to the significance of adherence to the procedure agreed upon by the parties to an arbitration agreement with regard mutual/common consent in appointing an arbitrator, Court relied upon the decision of Manish Chibber

 While allowing the petition, Justice S.P. Garg, a retired Judge of this Court was appointed as the sole arbitrator to adjudicate the disputes and differences between the parties arising out of the lease deed. [Oyo Hotels and Homes (P) Ltd. v. Rajan Tewari,  2021 SCC OnLine Del 446, decided on 09-02-2021]


Advocates for the parties:

Petitioner: Jeevan Ballav Panda, Adv. with Satakshi Sood & Satish Padhi, Advs.

Respondents: Bobby Anand, Advocate

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