Case BriefsSupreme Court

Supreme Court: The bench of MR Shah and Sanjiv Khanna*, JJ has held that mere exercise of the right by the pawnee to record himself as the ‘beneficial owner’, which is a necessary precondition before the pawnee can exercise his right to sell, is not ‘actual sale’ and would not affect the rights of the pawnor of redemption under Section 177 of the Contract Act.

The Court observed,

“Every transfer or sale is not ‘actual sale’ for the purpose of Section 177 of the Contract Act. To equate ‘sale’ with ‘actual sale’ would negate the legislative intent.”

The Court was deciding the question as to whether the Depositories Act, 1996 read with the Regulation 58 of the Securities and Exchange Board of India (Depositories and Participants) Regulations, 1996 has the legal effect of overwriting the provisions relating to the contracts of pledge under the Contract Act, 1872 and the common law as applicable in India.

The Court, in a 86-pages-long verdict, explained that the Depositories Act distinguishes between the ‘registered owner’ and the ‘beneficial owner’, i.e., the de facto owner, but this does not in any manner contradict or lay down a rule which is contrary to the provisions of Sections 176 and 177 of the Contract Act. These sections, given the objective and purpose behind them, would still apply to any pledge deed and do not get diluted or overridden by the provisions or requirements of the Depositories Act. Section 10, a non obstante provision, which prevails over existing enactments by law, treats the ‘depository’ as the ‘registered owner’ and the shareholder/holder as a ‘beneficial owner’. It does not undermine or rewrite the provisions of the law of pledge and mutual obligations and rights of the pawnee and pawnor.

Further, the non-obstante part of sub-regulation (8) to Regulation 58 serves a limited objective and purpose: the pawnee must record itself as a ‘beneficial owner’ before he proceeds to sell the pledged securities. Without the pawnee being accorded the status of a ‘beneficial owner’, a pawnee cannot proceed to sell the pledged dematerialized securities. A contractual term cannot overwrite the requirement of Sections 7 and 10 of the Depositories Act, which is reflected in sub-regulation (8) to Regulation 58 as pe which the pawnee must be recorded as the ‘beneficial owner’ before the pledged dematerialized securities are sold.

“This requirement of sub-regulation (8) to Regulation 58 does not circumscribe or limit the contractual rights and obligations agreed upon between the parties on the agreed terms, including the pawnee’s right to sell the pawned goods. While the contractual terms are fundamental and determine the rights and obligations inter se the parties including when the pawnee would be entitled to get his name substituted as a ‘beneficial owner’ under the 1996 Regulations, however, the contractual terms are not permitted to override the Contract Act as explained above in so far as it regulates the rights and obligations of the pawnee and pawnor, and the requirement of compliance with Regulation 58(8).”

The Court noted that it is absolutely necessary that the pawnee must be accorded status of ‘beneficial owner’ to enable him to exercise his right to sell the pledged dematerialized securities. The object is to ensure compliance with the procedure prescribed for the sale of dematerialised securities and not to interfere with the freedom to contract as long as they comply with the Contract Act and other laws. Further, if the terms of the pledge document violate Regulation 58(8), the pledge is not rendered void or illegal, albeit enforcement of the pledge viz. the dematerialised securities will be rendered unattainable unless steps are taken to act in accordance with the procedure prescribed by the 1996 Regulations. The pawnee would be entitled to sue the pawnor for recovery of money, breach of contract and may even apply for injunction/restrain on sale of dematerialised securities. However, third-party rights on transfer of the dematerialized securities, unless injuncted by a prior court order, would not be affected as long as the transfers are in terms of the Depositories Act and the 1996 Regulations.

Stating that while interpretating the law relating to commercial matters and commerce the court must consider the real-world impact and consequences, the Court held that the expression ‘actual sale’ in Section 176 read in the context of the Depositories Act and the 1996 Regulations have to be given a meaning. The expression ‘actual sale’ used in Section 177 should be read as ‘the sale by the pawnee to a third person made in accordance with the Depositories Act and applicable by-laws and rules’. It also means and requires compliance with Section 176 of the Contract Act.

The reasoning that prior notice under Section 176 of the Contract Act would interfere with transparency and certainty in the securities market and render fatal blow to the Depositories Act and the 1996 Regulations is farfetched as it fails to notice that the right of the pawnee is to realise money on sale of the security. The objective of the pledge is not to purchase the security. Purchase by self is conversion and does not extinguish the pledge or right of the pawnor to redeem the pledge.

Hence, the Court did not find any derogation or conflict between Section 176 of the Contract Act and sub-regulations (8) and (9) of Regulation 58. Regulation 58(8) entitles the pawnee to record himself as a ‘beneficial owner’ in place of the pawnor. This does not result in an ‘actual sale’. The pawnee does not receive any money from such registration which he can adjust against the debt due. The pledge creates special rights including the right to sell the pawn to a third party and adjust the sale proceeds towards the debt in terms of Section 176 of the Contract Act.

[PTC INDIA FINANCIAL SERVICES LIMITED v. VENKATESWARLU KARI, 2022 SCC OnLine SC 608, decided on 12.05.2022]


*Judgment by: Justice Sanjiv Khanna

Case BriefsHigh Courts

Delhi High Court: While reiterating the law on award of liquidated damages, Vibhu Bakhru, J., expressed that, where a contract comprises, several components awarded to different contractors, it is inapposite to blame the contractor that is last in completing the work for loss suffered on account of delay in completing the Project.

In the present matter, the parties have filed cross petitions under Section 34 of the Arbitration and Conciliation Act, 1996 impugning an Arbitral Award rendered by the Arbitral Tribunal comprising of a former Judge of this Court as the Sole Arbitrator. 

Factual Background

Haryana Vidyut Prasaran Nigam Limited (HPVNL) was engaged in the business of maintenance and supply of electricity within the State of Haryana.

A Joint Venture (Cobra) was formed to supply materials and execute the works relating to the erection of infrastructure and transmission of electricity.

Further, it was stated that the Government of India received a loan from the International Bank for Reconstruction and Development (IBRD) for the Haryana Power System Improvement Project.

In 2011, HPVNL issued an Invitation for Bids (IFB) for the works regarding “procurement of plant, design, supply and installation of Package G-09” on the terms and conditions stipulated.

Pursuant to the said IFB, Cobra submitted its bid for executing the project. Cobra’s bid was accepted and thereafter, HPVNL issued two Letters of Acceptance (LoAs) in relation to the two contracts, in favour of Cobra. In terms of LoAs, Cobra was required furnish Performance Security equivalent to 10% of the value of contracts within a period of 28 days, in accordance with Clause 13.3.1 of the General Conditions of Contract.

Thereafter, two Contract Agreements were signed between the parties.

Cobra failed to complete the project within the stipulated time resulting in the imposition of liquidated damages.

Cobra approached this Court by way of a petition under Section 11 of the A&C act for the appointment of an arbitrator and this Court appointed a Sole Arbitrator to adjudicate the disputes between the parties.

The Arbitral Tribunal, considering the evidence on record, found that fifty percent of the Liquidated Damages as stipulated in the Agreements was reasonable.

Aggrieved by the impugned award, the parties filed the present petitions.

Analysis, Law and Decision


Liquidated Damages

High Court noted the Arbitral Tribunal’s observation, which was as follows:

“36. The question for consideration is where several parts of a project have been awarded to two or more contractors, can it be said that the Contractor who had completed his part of the work after delay although before completion of the work by the other Contractor(s), would not be liable to pay any damages to the Employer although there is loss to the Employer on account of the delayed completion of the work. In other words, whether it would be only the Contractor who has completed his work in the end liable to compensate the Employer for the loss even though there is delay in completion of the work assigned to the other Contractor(s) as well. The simple answer to the question would be plain “No”. In my opinion, each of the Contractors would be liable to compensate the Employer pro-rata in terms of the Contract provided the Employer has really suffered some loss…..”

Bench did not find any infirmity with the above view.

Further, the Court stated that even though a contract may comprise of separate components, which may be awarded to different contractors, it may be inapposite to blame the contractor that is last in completing the works for the loss suffered on account of delay in completing the project.

“Since it is not disputed that Cobra had delayed the performance of its obligations, which were a vital part of the works to be executed for commissioning the Project, it cannot be absolved of its liability for the delay on the ground that some other contractor had also delayed execution of the works.”

High Court stated that, the Arbitral Tribunal’s view that Cobra cannot be absolved of its liability for compensating the loss suffered by HVPNL resulting on account of delay in execution of the works, is certainly a plausible view, if not the correct one.

Bench found that there was inconsistency in the finding of the Arbitral Tribunal. After having found that the losses were incapable of being determined with any precision and that HVPNL was entitled to the same, there was no reason for the Arbitral Tribunal to have reduced the levy of Liquidate Damages to 50%. HVPNL had contended that the Liquidated Damages were a genuine pre-estimate of damages.

This Court found it difficult to sustain the award of damages based on “guess work”, particularly as there was no material on record to make any educated guesses as to the quantum of damages payable.

Hence, making an ad hoc assessment of damages at 50% of the Liquidated damages, is arbitrary and plainly erroneous.

In view of the above, Court considered it apposite that the Arbitral Tribunal’s decision was in respect of levy o Liquidated Damages, be set aside and the parties may be relegated to agitate the said dispute afresh.

Bank Guarantee charges

Whether the decision of the Arbitral Tribunal to award Bank Guarantee charges, in favour of Cobra, is patently illegal?

Bench did not find any infirmity with Arbitral Tribunal’s decision, Cobra was obliged to keep the bank guarantee alive for a period of 540 days from the date of completion of the Facilities.

Watch and Ward Expenses

Court did not find any ground to interfere with the decision of the Arbitral Tribunal to award watch and ward expenses calculated on the basis of the bare minimum number of guards deployed per sub-station for a period of 5 months on the minimum wages as notified by the Labour Commissioner, Government of India.

Given the limited scope of interference under Section 34 of the A&C Act, no interference was warranted.

Award of Interest

High Court expressed that it is well settled that the question of construction of a contract is within the jurisdiction of the Arbitral Tribunal and the same would warrant no interference in proceedings under Section 34 of the A&C Act unless it is, ex facie, perverse or a view that no reasonable person would accept.

Reimbursement of Sales Tax

The impugned award to the extent that it was related to the award of Liquidated Damages and the interest payable thereon, was set aside.

In view of the above terms., the petitions were disposed of. [Haryana Vidyut Prasaran Nigam Ltd. v. Cobra Instalaciones Y. Services, 2022 SCC OnLine Del 1157, decided on 25-4-2022]


Advocates who appeared in this case:

OMP (Com) 8 of 2021

For the Petitioner : Mr Samir Malik, Ms Iti Agrawal, Mr Praful Shukla, Advocates

For the Respondent : Mr Pankaj Kumar Singh, Advocate

OMP (Comm) 597 of 2020

For the Petitioner: Mr Pankaj Kumar Singh, Advocate

For the Respondent : Mr Samir Malik, Ms Iti Agrawal, Mr Praful Shukla, Advocates.

Advani LawExperts Corner


Introduction


Over the years, smart contracts have played a significant role in transforming blockchain technology, enabling a decentralised system. The World Economic Forum, in its 2015 survey recognised that by 2025-2027, about 10% of the global GDP would be stored in blockchains, owing to its efficient attributes of data security management. By the means of smart contracts, fully automated legal obligations can be enforced without the involvement of third parties. Much like conventional contracts, smart contracts on the blockchain are susceptible to a variety of problems, including non-transactional disputes, off-chain governance issues, and on-chain disputes. An on-chain dispute resolution system is still in its infancy. It is said that an on-chain smart contract is contained in a self-executing code that automatically executes the terms of the parties’ agreements without the intervention of a third party, leaving little space for human mistakes or disagreement. Smart contracts, on the other hand, do not eliminate the possibility of a disagreement. Thus, it becomes imperative to implement a dispute resolution mechanism governing digital relationships set out in such smart contracts.

 


Understanding Blockchain and Smart Contracts


According to the chamber of digital commerce, a smart contract is an instrument that executes underlying contractual terms. Smart contracts themselves are not the legal agreement — the agreement between the two parties is the contract, and the smart contract program simply executes the agreed-upon actions.[1] Smart contracts are like real contracts, but they are digital and are stored and executed on a blockchain. Blockchain is a particular type of distributed ledger technology (DLT), a way of recording and sharing data across multiple data stores where each has the same data records and is collectively maintained and controlled by a distributed network of computer servers called nodes.[2] A smart contract is a computer protocol intended to digitally facilitate, verify, or enforce the negotiation or performance of a contract allowing the performance of credible, trackable, and irreversible transactions without third parties. The contractual clauses are embedded as computer code in the blockchain. Smart contracts are simply programs stored on a blockchain that run when predetermined conditions are met. They typically are used to automate the execution of an agreement so that all participants can be immediately certain of the outcome, without an intermediary’s involvement or time loss.[3] Thus, the algorithms work something similar to an “artificial agent” in the context of the formation of a contract.


Legal Recognition of Smart Contracts


The prevalence of the following provisions conventions suggests widespread acceptance of contracts that are concluded and enforced digitally.

  • Article 2.1.1 of the UNIDROIT Principles of International Commercial Contracts, 2016 covers contracts involving automated performance arrangements, where parties agree on self-executing electronic platforms without the involvement of a natural person to ensure performance. [4]
  • Article 11 of the UNCITRAL Model Law on E-Commerce, 1996 states that an offer and the acceptance of an offer may be expressed by means of data messages, which shall not be denied legal validity and enforceability. Further, Article 2 clarifies that these “data messages” include not only communication exchanged electronically but also include computer-generated records that are not intended for communication.[5]
  • The UNCITRAL Model Law on Electronic Transferable Records, 2017 explicitly accommodated distributed ledger technology in its explanatory notes.[6]
  • The UNCITRAL Convention on Electronic Communications in International Contracts (2007 Convention) provides legal recognition to on-chain arbitrations. Articles 6 and 18 allow electronic data and transactions in arbitral proceedings.[7]
  • In the United States, many States have amended their versions of the Uniform Electronic Transactions Act (UETA) to address blockchain and smart contracts.[8]
  • On 18-11-2019, UK Jurisdictional Taskforce published a legal statement expressing the view that smart contracts were contracts under English law.[9]
  • On 28-5-2021, for the first time in blockchain arbitration history, Mexican courts enforced an arbitral award relying on a blockchain arbitration protocol (blockchain arbitral award). [10]
  • Recently, the High Court of England and Wales in Tulip Trading Ltd. Bitcoin Assn. for BSV[11] while considering whether security for costs could be satisfied by a party providing cryptocurrency refused the Bitcoin offered since it did not meet the required standards for security, however, allowed for other more sophisticated cryptocurrencies can be accepted at a later date.

Out of the available alternative dispute resolution mechanisms available, arbitration is the most accurate and optimal dispute resolution mechanism. The blockchain arbitration can be bifurcated into “on-chain” and “off-chain”.

  • On-chain arbitration involves the use of a smart contract in a classic dispute resolution mechanism.
  • Off-chain arbitration involves automatic recognition of awards but with automation of certain elements of the procedure before the Arbitral Tribunal.

Dispute Resolution Mechanism in Smart Contracts: Blockchain Arbitration


The on-chain arbitration process can be a desirable option from an efficiency perspective. A typical on-chain arbitration process is well envisioned in the Digital Dispute Resolution Rules (the “Digital DR Rules”)[12] published on 22-4-2021 after extensive public and private consultation with lawyers, technical experts and financial services and commercial parties by the UK Jurisdictional Taskforce (UKJT), that are to be used for and incorporated into on-chain digital relationships and smart contracts.

 

The Digital DR Rules define a smart contract as a digital asset. To incorporate these rules into a smart contract on a blockchain, the text “any dispute shall be resolved in accordance with UKJT Digital Dispute Resolution Rules” has to be included in an on-chain contract. The Digital DR Rules allow these words to be incorporated into codes. Since a blockchain is programmed into codes, these words can be incorporated intothe encoded form. Under the remit of the Digital DR Rules, disputes relating to smart contracts can be resolved without the interference of the courts. Disputes under the Digital DR Rules can be solved via an automatic dispute resolution process. Alternatively, such disputes can also be submitted to an arbitrator or expert determination.

 

  • Automatic dispute resolution process: The rules provide an idiosyncratic automated dispute resolution mechanism that allows the parties to choose a person, panel, or artificial intelligence agent to decide disputes automatically. The decision is then immediately applied to the digital asset system i.e. the platform where the digital asset exists. Rule 8 makes the outcome of the automatic dispute resolution process legally binding on the parties.
  • Submission to an arbitrator: Alternatively, any dispute between parties arising out of the relevant contract/digital asset that was not subject to an automatic dispute resolution process can be presented to an arbitrator. The procedure for commencement, appointment, and submission is quite similar to the regular arbitration procedure. The rules allow arbitrators to use a private key to implement their decision directly on the blockchain.

Recently in the fourth edition of the International Conference on Arbitration in the Era of Globalisation[13] held in Dubai, Justice D.Y. Chandrachud, Judge of the Supreme Court of India made reference to smart contracts in his speech to demonstrate the technological advancements in the sphere of commercial transactions and identified arbitration as the means to resolve disputes relating to smart contracts.

One of the most significant advantages of blockchain arbitration is that it removes human intervention, allowing for quicker and more cost-effective dispute settlement. On the blockchain, the proper examination of evidence may be done online, leaving less room for facts to be tampered with or evidence to be manipulated. However, smart contracts and blockchain arbitration, while gaining traction among governments and experts throughout the world, are still in their early stages of development and would require additional legislation to become a viable option for dispute settlement. Privacy concerns and the enforceability of smart awards continue to be a source of concern. Because blockchain arbitration is a component of technical evolution that allows artificial intelligence to generate self-enforcing decisions, it is still solar systems apart from being used in countries going through development.


† Managing Partner Advani Law LLP.
†† Senior Partner Advani Law LLP.
††† Associate Advani Law LLP.

[1] “Why Smart Contracts are Valid under Existing Law and do not Require Additional Authorization to be Enforceable”, Chamber of Digital Commerce, January 2018, <HERE>, accessed on 18-4-2022.

[2] Niki Wiles, The Radical Potential of Blockchain Technology, 6-6-2015, <HERE >.

[3] What are Smart Contracts on Blockchain?, (IBM), <HERE> accessed 10-4-2022.

[4] UNIDROIT Principles of International Commercial Contracts 2016, Art. 2.1.1, <HERE>.

[5] UNICITRAL Model Law Model Law on E-Commerce (adopted 21-6-1985), Art. 11, <HERE >.

[6] UNICITRAL Model Law on Electronic Transferable Records (adopted on 13-7-2017 by UNCITRAL), Art. 1, (Para 18, P. 23), <HERE>.

[7] United Nations Convention on the Use of Electronic Communications in International Contracts, P. 5, <HERE >.

[8] Uniform Electronic Transactions Act (UETA) adopted in 1999.

[9] UK Jurisdiction Taskforce, “Legal Statement on Cryptoassets and Smart Contracts”, November 2019, <HERE >.

[10] Maxime Chevalier, “Arbitration Tech Toolbox: Is a Mexican Court Decision the First Stone to Bridging the Blockchain Arbitral Order with National Legal Orders?”, Kluwer Arbitration Blog, 4-3-2022, <HERE > accessed on 18-4-2022.

[11] 2022 EWHC 141 (Ch).

[12] Digital Dispute Resolution Rules, 2021<HERE >.

[13] Dr D.Y. Chandrachud, International Conference: Arbitration in the Era of Globalization (4th Edn., Dubai, 19-3-2022).

Case BriefsHigh Courts

Delhi High Court: Vibhu Bakhru, J., held that whether claims are barred by limitation is a mixed question of fact and law and is required to be examined by the Arbitral Tribunal.

The petitioner (PDL) had filed the instant petition under Section 11(6) of the Arbitration and Conciliation Act, 1996 praying that an arbitrator can be appointed on behalf of the respondent (FRL).

Factual Background

PDL had entered into an agreement with the Delhi Metro Rail Corporation Limited, whereby a specified area on the ground and first floor within the Station Box was allocated for constructing a shopping complex under the name and style of ‘Parsvnath Mall’.

PDL was given the right to sub-license the use of the facility for the period of the agreement and for the uses specified.

Thereafter, PDL and FRL entered into a sub-license agreement (Contract) wherein two units on the ground and first floors were agreed to be sub-licensed to FRL for running a departmental store under the name of ‘Big Bazaar’.

During the subsistence of the Contract, in the year 2007, the Government of India enacted the Finance Act, 2007 by virtue of which the service of renting/licensing immovable properties for commercial use was included as a taxable service and brought under the nest of service tax. Consequently, the licensing of the premises to FRL under the Contract was a taxable service.

PDL claimed that FRL was liable to bear the additional burden of service tax; however, FRL had failed to reimburse the service tax.

FRL submitted that no stipulation was contained in the Contract for payment of service tax.

Analysis, Law and Decision

Whether the petition for the appointment of an arbitrator required to be rejected on the ground that the main agreement is insufficiently stamped?

High Court observed that, an arbitration agreement, even though embodied in a main agreement, is a separate agreement and invalidation of the main agreement does not necessarily invalidate the arbitration agreement.

An arbitration agreement is not required to be compulsorily registered.

Hence, the doctrine of severability, denying the benefit of an arbitration agreement to a party on the ground of any deficiency in the main agreement, may not be apposite.

Well Settled Law

By virtue of Section 11(6A) of the A&C Act, the scope of examination under Section 11 of the A&C Act is confined to the existence of an arbitration agreement.

The Bench observed that, in cases where there is no vestige of doubt that the claims are not arbitrable or the agreement is invalid, the Courts may decline to refer the parties to arbitration but not in any other case.

Supreme Court’s decision in NCC Ltd. v. Indian Oil Corpn. Ltd., 2019 SCC OnLine Del 6964, was also referred.

High Court opined that it would be apposite for this Court to adjudicate the issue of whether PDL’s claims were barred by limitation, the same shall be decided by an Arbitral Tribunal.

PDL had nominated Mr S.C. Jain, Additional District Judge (Retired) as its nominated Arbitrator. Accordingly, Mr Laxmi Kant Gaur, District Judge (Retired), is appointed as FRL’s nominated Arbitrator. Further, it was stated that both the arbitrators shall appoint the third arbitrator for the constitution of the Arbitral Tribunal.

The petition was allowed under the above terms. [Parsvnath Developers Ltd. v. Future Retail Ltd., 2022 SCC OnLine Del 1017, decided on 12-4-2022]


Advocates before the Court:

For the Petitioner: Mr Rahul Malhotra and Mr Rishu Kant Sharma, Advocates.

For the Respondent: Mr Sudhir K. Makkar, Senior Advocate with Ms Saumya Gupta, Ms Veera Mathai, Ms Yogita Rathore, Advocates.

Case BriefsSupreme Court

Supreme Court: Explaining the law on abandonment on contractual obligation, the bench of Hemant Gupta and V. Ramasubramanian*, JJ has held that the refusal of a contractor to continue to execute the work, unless the reciprocal promises are performed by the other party, cannot be termed as abandonment of contract. A refusal by one party to a contract, may entitle the other party either to sue for breach or to rescind the contract and sue on a quantum meruit for the work already done.

Relevant Facts

  • The appellant is a registered contractor with the Government of Maharashtra. In a tender for the execution of the work of Regional Rural Piped Water Supply Scheme for Dabhol-Bhopan and other villages in Ratnagiri District, the appellant became the successful tenderer and was issued with a work order on 03.07.1986, for the execution of the work.
  • The time for the completion of the work was stipulated as 30 months but the Respondents issued a letter   dated 28.07.1986 informing the appellant that the work order was kept in abeyance.
  • The respondents issued another letter dated 02.03.1987 instructing the appellant to stop the pipeline work and start the work at Panchanadi.
  • There were issues related to non-payment of bills and the work under the main contract did not start till the second bill was cleared in May, 1987.
  • The High Court of Bombay held this as the basis for abandonment of contract.
  • This finding was completely contrary to yet another finding that the period of the contract was up to June, 1989 and that the respondents themselves granted extension of time to complete the contract up to 31.12.1989, despite there being no request from the appellant.
  • Interestingly, the contract, that was originally to continue till June. 1989, was extended up to December, 1989.

Analysis

The Supreme Court found High Court’s finding erroneous and observed,

“We fail to understand as to how a person who abandoned the contract in May, 1987 could be granted extension of time up to December, 1989 on the very understanding of the respondents that the contract was up to June, 1989.”

The Court held that such a finding of abandonment of contract cannot co¬exist with the specific stand of the respondents that the period of contract was extended up to December, 1989.

The Court explained that the fundamental to the Law of Contract is that whenever a material alteration takes place in the terms of the original contract, on account of any act of omission or commission on the part of one of the parties to the contract, it is open to the other party not to perform the original contract. This will not amount to abandonment.

“Moreover, abandonment is normally understood, in the context of a right and not in the context of a liability or obligation. A party to a contract may abandon his rights under the contract leading to a plea of waiver by the other party, but there is no question of abandoning an obligation. In this case, the appellant refused to perform his obligations under the work-order, for reasons stated by him. This refusal to perform the obligations, can perhaps be termed as breach of contract and not abandonment.”

[Shripati Lakhu Mane v. Maharashtra Water Supply And Sewerage Board, 2022 SCC OnLine SC 383, decided on 30.03.2022]


*Judgment by: Justice V Ramasubramanian


Counsels

For appellant: Senior Advocate Vinay Navare

For Respondent: Advocate Sunil Muraka

Case BriefsHigh Courts

Punjab and Haryana High Court:  Sudhir Mittal, J. dismissed the revision petition filed by the petitioners (in this case the judgment-debtors) against the action of the Executing Court for refusing to recall the impugned order. According to the petitioners, the execution order was passed, ex parte hence, the fundamental principle of natural justice was violated.

Factual matrix of the case:

Initial suit for possession was filed by the petitioners, during the pendency of the suit the parties reached an amicable settlement and in lieu of such settlement, a compromise decree was passed. The terms of the decree offered the sale deed to be executed on or before 15.05.2016 along with the remaining consideration amount by the petitioners. Another term of the decree was, if the amount is not deposited on time, the earnest money will be forfeited and the agreement will also stand cancelled. According to the petitioners the amount was deposited on 08.07.2016. It was the case of the petitioners that the execution petition was preferred by the opposite party and the proceedings were dealt ex parte. However, the petitioner filed an application for setting aside the ex parte order but the same was dismissed .

Various issues and arguments governing the present case : 

(i) Issue: Whether the Executing Court has taken into consideration the likelihood of the petitioners not being found within a reasonable time.

Submissions : Petitioners contended that the execution proceedings were illegal and O. 5 R. 15 CPC was misconstrued by the Executing Court. It was alleged that the proper mode of service of summons was not followed by the Executing Court. Service of summons was made through an adult male member of the family and no efforts were made to find the petitioners. It was further contended that summons can only be served through an adult male member when there is no likelihood of the defendant being found at the residence within a reasonable time.

Held : Proper service report is not attached by the petitioners. It was held, “ Had they done so, it could have been seen whether there was likelihood of the J.D’s being found within a reasonable time.” Hence, it was difficult for the Court of examine whether the Executing Court failed to construe O. 5 R. 15 CPC.

(ii) Issue: Whether the petitioners showed ‘good cause’ for setting aside the ex parte order by the Executing Court.

Submissions : The contention of the petitioner was based on O. 9 R. 7 CPC. It was contended by the petitioners that they had ‘good cause’ as the application for setting aside the ex parte order was filed 7 months later on acquiring knowledge of the proceedings and the service was not affected in person and was improper mode altogether. The expression ‘good cause’ should be interpreted widely and not confined to the restricted interpretation placed on the expression ‘sufficient cause’ as mentioned in O. 9 R. 13 CPC.

Held: Application for setting aside the order after 7 months cannot qualify as a good cause. Hence, the Court while rejecting the contention held, “The interpretation placed upon Order 9 Rule 7 CPC is on the basis of a judgment of the Supreme Court in Sangram Singh vs. Election Tribunal, AIR 1955 SC 425 which holds that if good cause is not shown the party can be permitted to join proceedings prospectively. The clock cannot be turned back.”

(iii) Issue: No proper notice was given to the petitioner for the execution of sale deed by the Local Commissioner.

Submissions: It was argued by the petitioner that the execution and directions were issued even when the application for setting aside was pending.

Held: Court found that no legal principle has been cited by the petitioner in support of their argument. Hence, it was held, “A person who is not yet a party to the execution proceedings is not entitled to be given notice. Moreover, the order by which the Local Commissioner was directed to execute the sale deed is not under challenge and thus, the argument is rejected.”

(iv) Issue: The balance amount was paid by the petitioner after the time fixed in the decree, however, the agreement was rescinded and therefor the petitioners were entitled to certain relief.

Submissions: It was further argued by the petitioners that, a right stood accrued in favour of the petitioners on the date of filing of the application for setting aside the ex parte order and the same could not have been taken away.

Held: For the above mentioned argument the Court observed that S. 28 of Specific Relief Act, 1963, can only be brought into action when an application in this regard is filed made to the proper court. The Court while rejecting the argument of the petitioner held that, “It is in the nature of an enabling provision and does not confer an indefeasible right. To succeed, the JDs could have filed an application for the rescission of the contract before the Court which decreed the suit.”

[Dalbir Kaur v. Kashmir Singh, Civil Revision No. 388 of 2022, decided on 02-02-2022]


Appearances

For Petitioners:  Mr. Divanshu Jain


Aastha Sharma, Editorial Assistant has put this report together

OP. ED.Practical Lawyer Archives

Contracts are intrinsic to virtually all practical aspects of our lives. Extending it further, the entire commercial ecosystem works on the basis of contracts. Contracts are the mode and medium to channelise different parties’ resources into their agreed commercial relationship and translate the understanding into tangible/intangible goods, services, technology and what not.

The need for capitulating the parties’ understanding in writing cannot be written enough about, so let us not go into that here. However, law students and professionals are invariably inquisitive about what all should be captured in a contract and how.

Contract drafting is not a mechanical act in isolation—to begin the process, we, the draftsman (gender neutral, please) must be aware of various aspects—one from isolated perspectives of different stakeholders—their needs, expectations, resources, mindset, compulsions, flexibility, aggression, negotiation power, clout, etc. and secondly, from a common perspective i.e. what is the parties’ common intent, what kind of relationship or the transaction have the parties made up their mind for? So, essentially, we need to see the common points as well as the areas of divergence between the parties.

A good contract would be one which can be understood, implemented, and enforced effectively without any hassles and ambiguity. How do we get to such a contract?

Let us discuss a few points that could hold good in drafting any kind of commercial contract.

Homework: Prepare a preliminary checklist of information you require to draft a contract. Collate as much information as you can by yourself, from the client or other available public information about the parties (including your client), the proposed business/transaction/relationship. Tally it with the likely legislations having a bearing on the contractual relationship. Here, you need to assess what information can be provided by which source —are you allowed to approach that source (say, the other party or its advisers).

Template: Whatever be the malaise attached to cut, copy, paste, using a template is inevitable. However, a lot goes into working on a template in drafting a good contract. First things first, get hold of a good template. See if it is applicable in the present transaction. See if the template would work in the parties’ jurisdiction, circumstances and other aspects. Then only you should go ahead.

Customisation of the template: Just accessing a good template is no good, it should work in the transaction at hand in consonance with the parties’ requirements and expectations as well. Therefore, customisation is the key here. You must review the entire template thoroughly and, among others:

(i) retain what works;

(ii) discard what is not applicable;

(iii) amend what needs a change, given the mandate;

(iv) update considering the latest legal provisions/case law; and

(v) add what is missing as per your assessment.

Remember, a client comes to you for your specific attention to its mandate—only cut, copy, paste would not work. Had that been the case, the client would access innumerable templates available on so many platforms and need not approach you.

Equal attention to every provision: An ambiguity or a dispute between the parties can arise out of any word, sentence, paragraph (even a punctuation mark) of a contract. Therefore, you do not have the luxury of treating any provisions as unimportant or less important. You need to pay equal attention to all the sections of the contract, be it the background information, operative clauses, boilerplate clauses or even annexures. This applies whether you are drafting a contract, reviewing, or negotiating one.

An effective contract should, inter alia, incorporate the following:

(1)  Index: Why do we prefer to go to supermarkets instead of roadside vendors or conventional shops nowadays? One benefit is that you have much more variety and more space for everything—another and may be more important is that there are designated sections for different products, and you need not waste time in locating what products would be lying where. A well-organised index guides the reader to locate the provision at a particular place and no time needs to be spent in trying to scan the entire contract to find anything.

(2) Subject-matter: The subject-matter of the contract i.e. invariably the transaction or the relationship between the parties must be clearly mentioned. We should examine and apprise the client whether it is so called, and perceived “partnership” is a partnership, joint venture, consortium, distributorship, franchise, licensing, etc. from a legal perspective and what are the respective roles as well as the rights and obligations attached to such roles.

(3) Preconditions: If a contract requires some preconditions to be complied with before a contract can be put into effect, specifying these preconditions is necessary. Further, the consequence for not meeting these preconditions should also be stipulated—like, whether the contract will be terminated or truncated or could the deadline for meeting these preconditions be extended to enable the parties to comply, etc.

(4) Rights and obligations: Rights and obligations of different parties invariably run simultaneously and are two sides of a coin, proverbially. One party’s right is the other party’s obligation and vice versa. These should be clearly mentioned. Every party’s advisor would like to enhance their client’s rights, entitlements, benefits, powers, etc. and reduce its exposure, liabilities, duties, obligations and the like. Therefore, your stand on each of such clauses would depend on which party you are representing.

(5)  Working framework: This ensures as to how the parties’ respective rights and obligations are to be exercised and enforced respectively. This is the system, the method, the functionality as to how the parties’ relationship will work —the flow of goods, services, promises, money and so on.

(6) Time frame: Commercial contracts are mostly entered into for exchange of goods, services and money. The frequency of transactions, delivery, payments as well as the timeline of the contract need to be specified clearly. Otherwise, it is no good. As a prospective employ would you be fine with a contract of employment without working hours, leaves, wages and bonus payment frequency, a timeline for probation/confirmation/appraisal?

(7) Representations and warranties: Most to the times, parties need to convince each other about their experience, expertise, resources, conduct, past and present status and many other aspects to enable them to take a considered call whether to go ahead with the contemplated transaction or not. The objective of making representations is to make the other party comfortable and entice it into entering a commercial deal. A warranty, on the other hand is a promise to compensate the other party if any of the representations were to go wrong. The extent, timing, exceptions, etc. pertaining to these representations and warranties should be meticulously captured in a contract.

(8) Remedies: Nothing is perfect in this life with anyone. How can contracts be any different? Therefore, a good contract should contemplate what can go wrong between the parties and what would be the remedies available to the suffering party? Monetary compensation, replacement, repair, refund, injunction, indemnity, damages (liquidated or otherwise), limitation of liability, termination of the contract—the spectrum is very wide. You must see what a just and fair solution for your client would be if the other party does not fulfil its part of the bargain in the contract.

(9) Dispute resolution: An effective contract tries to minimise ambiguities and disputes between the parties. However, as said earlier, we do not live in a perfect world, so no one can ensure that no disputes will ever arise between the parties. Howsoever good a contract you may strive to draft, you cannot avoid disputes between the parties. Here again, what you can do is to create an economical, effective and expeditious ecosystem for overcoming such disputes—be it discussion, conciliation, mediation, arbitration….

(10) Termination: All good things come to an end—contracts too, if they must. If the parties think they cannot live in harmony with each other anymore due to any reason whatsoever, it is better to part (amicably, if possible). Include a comprehensive system of termination listing eventualities, consequences, time frame and mechanism, surviving provisions, etc.

Read and reread your draft contract several times, proofreading leads to a lot of discoveries (!) or silly mistakes, as you may call it.

What do you do if you observe that any one of the above ingredients is missing from your draft contract? Simple, go back to the contract, fine-tune it and it is done.


Bhumesh Verma is Managing Partner at Corp Comm Legal and can be contacted at bhumesh.verma@corpcommlegal.in.

Case BriefsHigh Courts

Bombay High Court: B.P. Colabawalla, J., addressed an arbitration application filed under Section 11 of the Arbitration and Conciliation Act, 1996.

Instant application was filed under Section 11 of the Arbitration and Conciliation Act, 1996 seeking the appointment of a Sole Arbitrator to adjudicate upon the disputes and differences between the applicant and respondent arising out of the Service Level Agreement.

High Court noted that the existence of the Arbitration Clause has not been disputed by the respondent.

Grounds on which the application was opposed:

  • Dispute between the parties is not arbitrable as the claims made by the applicant is outside the term of SLA as well as the pleaded case of the applicant as reflected

For the above-stated, respondent’s counsel brought to the Court’s attention Clause 2.1 of the SLA which defined the term of SLA and stipulated that the same shall continue to be in force and in effect for a period of three years and can be extended for a term of one year and shall supersede all prior or contemporaneous communications, proposals and agreements between the respondent and the petitioner.

Further, the counsel submitted that the period of SLA came to an end on 2-05-2017. However, the claim of the applicant was in relation to the services rendered and invoices raised for the period after 2-5-2017. Hence, he submitted that the disputes were clearly not arbitrable and there was no question of referring the disputes to arbitration.

High Court stated that it cannot come to the conclusion as to whether the disputes between the applicant and the respondent are arbitrable or otherwise.

Another argument was that the disputes cannot be referred to arbitration because there is a fraud that has been played by the applicant on the respondent. On being unimpressed with the said argument, Court expressed that on the issue of fraud, the law is well settled. Supreme Court in N.N. Global Mercantile (P) Ltd. v. Indo Unique Flame Ltd., (2021) 4 SCC 379, clearly held that all civil or commercial disputes, either contractual or non-contractual, which can be adjudicated upon by a Civil Court, in principle, can be adjudicated and resolved through arbitration, unless it is excluded expressly either by statute, or by necessary implication.

Supreme Court has categorically held that the Arbitration and Conciliation Act, 1996 does not exclude any category of disputes as being non-arbitrable. Section 2 (3) of the Arbitration Act, however, recognizes that certain categories of disputes by law may not be submitted to arbitration. Finally, the Supreme Court has held that the civil aspect of fraud is considered to be arbitrable in contemporary arbitration jurisprudence with the only exception being where the allegation is that the Arbitration Agreement itself is vitiated by fraud or fraudulent inducement, or the fraud goes to the validity of the underlying contract, and impeaches the arbitration clause itself.

Respondent’s case was that the alleged fraud was that the former employees of the Respondent (in connivance with the Applicant) continued to avail of the services of the Applicant beyond the expiry of the SLA merely to siphon off the funds of the Respondent unlawfully.

Further, the fraud alleged was that the former employees, along with the applicant siphoned off monies of the Respondent even after the expiry of the said SLA.

The Court opined that the respondent counsel’s submission that dispute between parties cannot be referred to arbitration on account of fraud was incorrect.

High Court held that it has no hesitation in constituting the arbitral tribunal to decide the disputes and differences between the applicant and the respondent arising out of the said SLA.

Parties agreed before the Court that for the purposes of deciding their disputes and differences Mikhail Behl an Advocate of this Court, be appointed as a Sole Arbitrator.

Order of the Court:

(a) By consent of parties, Mr Mikhail Behl, an advocate of this Court is hereby appointed to act as a Sole Arbitrator to decide the disputes and differences between the Applicant and the Respondent arising out of and/or in connection with and/or in relation to the Service Level Agreement dated 3rd May, 2014.

(b) A copy of this order will be communicated to the learned Sole Arbitrator by the advocates for the Applicant within a period of two weeks from today.

(c) The learned Sole Arbitrator is requested to forward his Statement of Disclosure under Section 11 (8) read with Section 12 (1) of the Arbitration Act to the advocates for the Applicant so as to enable them to file the same in the Registry of this Court. The Registry of this Court shall retain the said Statement on the file of this Application and a copy of the same shall be furnished by the advocates for the Applicant to the advocates for the Respondent.

(d) The parties shall appear before the Sole Arbitrator on such date and at such place as he nominates to obtain appropriate directions with regard to fixing a schedule for completing pleadings etc. The Arbitral Tribunal shall give all further directions with reference to the arbitration and also as to how it is to proceed.

(e) Contact and communication particulars shall be provided by both sides to the Sole Arbitrator within a period of two weeks. This information shall include a valid and functional email address as well as mobile numbers of the respective advocates.

(f) The Respondent is at liberty to raise all questions of jurisdiction within the meaning of Section 16 of the Arbitration Act. All contentions in that regard are expressly kept open on both sides. It is made clear that any observations made by me herein are only prima facie and tentative and shall not bind the Arbitral Tribunal while deciding any issue of jurisdiction. It is however made clear that the Respondent shall not be allowed to contend before the Arbitral Tribunal that there does not exist an Arbitration Agreement as the same has been expressly admitted.

(g) The parties have agreed that the Arbitral Tribunal shall be free to fix its own fees and shall not be bound by the 4th Schedule of the Arbitration and Conciliation Act, 1996 or the Bombay High Court (Fee payable to Arbitrators) Rules, 2018. The parties further agree that all arbitral costs and fees of the Arbitrator will be borne by the parties equally and will be subject to the final Award that may be passed by the Tribunal.

(h) The parties immediately consent to a further extension of up to six months to complete the Arbitration should the learned Sole Arbitrator find it necessary.

(i) The parties have agreed that the venue and seat of the arbitration will be in Mumbai.

In view of the above terms, the arbitration application was disposed of.[One Point One Solutions Ltd. v. Reliance Nippon Life Insurance Company Ltd., 2021 SCC OnLine Bom 7861, decided on 28-9-2021]


Advocates before the Court:

Mr Jamshed Master a/w Delan Fernandez, Radhika Motwani i/b Purazar P. Fouzdar, for the Applicant.

Mr Shyam Kapadia a/w Dhruva Gandhi, Mehafrin Mehta i/b HSA Advocates, for the Respondent.

Op EdsOP. ED.

Arbitration being a private procedure established by agreement, it is possible for the parties to agree (whether by subscription to the printed code of procedure of an institution or otherwise) to lay down for themselves the procedure to be followed.[1] Arbitrators are the Arbitral Tribunal whose jurisdiction is wholly derived from contract.[2] When parties agree to enter into an institutional arbitration, they agree to be bound by the rules and procedures of that arbitral institution.[3] Not only the parties, but the arbitrator/s (whether nominated by the parties or by the institution itself) are also bound to follow the rules and procedure of the chosen arbitral institution unless otherwise agreed. An arbitration is said to be institutional when the parties agree to an institution’s arbitration rules and have delegated to this arbitral institution the power to make binding decisions on certain procedural matter.[4]

According to the Black’s Law Dictionary, the breaking or violating of a law, right, or duty, either by commission or omission is called as “breach”. When parties intend to enter into an institutional arbitration, in case of any future disputes the standard language of the arbitration clause is (ICC Rules[5], for example)—

All disputes arising out of or in connection with the present contract shall be finally settled under the Rules of Arbitration of the International Chamber of Commerce by one or more arbitrators appointed in accordance with the said Rules.

The Black’s Law Dictionary defines “breach of contract” as failure, without legal excuse, to perform any promise which forms the whole or part of a contract.

As stated hereinabove, the arbitration clause in the contract itself states that any future dispute shall be settled by way of rules of the chosen arbitral institution. As the language suggests, the contract between the two disputing parties indirectly binds the parties and the arbitral institution to the arbitral institutional rules, being in connection or a part of the contract or the arbitration agreement, and can be understood to be a breach of contract by either of the party if obligations/ duties by which such party is bound to follow fails to comply with the same. In many common law countries, the legal relationship between the arbitral institution and the parties are considered to be contractual in nature.[6] Moreover, the main features of a contract are (a) offer, (b) acceptance, and (c) consideration. A contract is equally binding even if it is oral in nature. The parties offer the
arbitral institution to become the administrative body of their dispute resolution with the monetary consideration in terms of the administrative fees. When the arbitral institution accepts the offer, it becomes a contract, legally enforceable by law.

Therefore, it will not be wrong to interpret that even a failure of performing an obligation or violating a duty of commission of the arbitral institutional rules, by either of the party may constitute a breach of contract. For example, if in an institutional arbitration the claimant fails to deposit requisite administrative fee to the arbitral institution or any requisite document, papers, etc., (which the parties are mandatorily bound to comply as in terms of the arbitral institutional rules) the arbitration procedure may come to a halt.

As far as repudiatory nature of such breach is concerned, let us first understand the exact legal meaning of the term “repudiation”. A repudiation means a contracting party’s words or actions that indicate an intention not to perform the contract in the future; a threatened breach of contract.[7] In Heyman v. Darwins Ltd.[8], the term “repudiation” has been interpreted in wide aspect which may form relevancy to the proposition in concern —

“Repudiation in relation to a contract may mean (a) a denial that there was a contract in the sense of an actual consensus ad idem; (b) a claim that apparent consent was vitiated by fraud, duress, mistake, or illegality; (c) a claim that the contract is not binding owing to a failure of condition or breach of duty which invalidates the contract; (d) an unequivocal refusal to proceed with an admittedly binding contract, or mostly commonly; and (e) an anticipatory breach whereby one party to a contract indicates an intention not to be bound thereby, whereupon the other party accepts repudiation and rescinds the contract.”

If we look into the Indian context as well, according to Section 39 of the Contract Act, 1872[9], if a party to a contract has refused to perform, or disabled himself from performing, his promise in its entirety, the promise may put an end to the contract, unless he has signified, by words or conduct, his acquiescence in its continuance.

In Samsung Electronics v. Qimonda AG[10], the parties had entered into a licence contract wherein they agreed to refer any future disputes, if any, to ICC arbitration. However, when a dispute arose and they referred the same to International Chamber of Commerce (ICC), it was observed that the contract had derogated from two integral factors, attempting to exclude the most invasive powers of ICC. Due to this derogation, the ICC Secretariat refused to administer the arbitration and when the parties refused to remove the adversaries, the ICC institution terminated the arbitration proceedings. The parties then opted for ad hoc arbitration.

Continuing with the previous example, if the claimant, during an institutional arbitration, fails to pay the requisite administrative fee to the institution, the institution may, at its discretion, repudiate the complete proceedings on account of such non-payment and breach of rules thereof, unless otherwise provided. On an alternative, there is also a view that even if a party has committed serious procedural defaults or has completely ignored the arbitration process, institutional arbitration rules and national arbitration laws generally require that an Arbitral Tribunal still examine the merits of the claim based on whatever evidence has been put before it.[11] If insufficient evidence has been provided to prove a claim to the necessary standard, the claim will still fail, regardless of the opposing party’s procedural defaults.[12] However, the fact that must be kept in mind that such situation is subjective in nature and differs from institution to institution as to the manner in which different arbitral institutional rules are made. Usually, the arbitration institutions have the right to identify and decide which of their rules are derogatable and non-derogatable. Breach of such institutional rules occurs when either of the parties derogate from performing its mandatory duties provided under the arbitral institutional rules. If the construction of the arbitration clause in the contract is such that it derogates from a mandatory rule of the chosen arbitral institution, the arbitral institution shall have a right to halt the proceedings and terminate the contract.


Advocate. Author can be reached at <garimasharma97@gmail.com>.

[1]P.C. Markanda, Building & Engineering Contracts, Law & Practice, p. 1432 (LexisNexis, 4th Edn., Vol. 2, 2013).

[2]P.C. Markanda, Building & Engineering Contracts, Law & Practice, p. 1432 (LexisNexis, 4th Edn., Vol. 2, 2013).

[3]Eric Robine, The Liability of Arbitrators and Arbitral Institutions in International Arbitrations under French Law, Arbitration International, Vol. 5, Issue 4, 1989, pp. 323- 332.

[4]Ulrich G. Schroeter, Ad Hoc or Institutional Arbitration — A Clear-Cut Distinction? A Closer Look at Borderline
Cases, p. 185.

[5] ICC Arbitration Rules, 2017.

[6]Timar, Kinga, The Legal Relationship between the Parties and the Arbitral Institution, ELTE Law Journal, 2013 (last visited on 23-8-2021 at 9.18 a.m.), <https://eltelawjournal.hu/the-legal-relationship-between-the-parties-and-the-arbitral-institution/>.

[7]P. Ramanatha Aiyar’s Advanced Law Lexicon, p. 4079 (LexisNexis, 3rd Edn.).

[8] 1942 AC 356 : (1942) 1 All ER 337.

[9]  Contract Act, 1872, S. 39.

[10]Samsung Electronics v. Qimonda AG, Tribunal de Grande Instance (TGI) (ordinary court of original jurisdiction)
Paris, 22-1-2010, 10/50604, 571 (Fr.).

[11]Latham & Watkins, Guide to International Arbitration, p. 8, (last visited on 23-8-2021 at 8.20 a.m.),
<https://www.lw.com/thoughtleadership/guide-to-international-arbitration-2017>.

[12]Latham & Watkins, Guide to International Arbitration, p. 8, (last visited on 23-8-2021 at 8.20 a.m.),
<https://www.lw.com/thoughtleadership/guide-to-international-arbitration-2017>.

Case BriefsHigh Courts

Chhattisgarh High Court: Sam Koshy J. partly allowed the petition and partly disposed of the petition expressing no opinion on the termination notice issued against the petitioner.

The present writ petition was filed against the action on the part of the respondents in issuing document dated 13.01.2022 whereby the respondent-NTPC had issued correspondence to the HDFC Bank for invocation of the bank guarantee.

Counsel for the petitioner took the court to the agreement entered into between the parties. It was further submitted that the petitioner in the initial phase of the contract has been able to discharge his duties to the satisfaction of the management of NTPC. However, on account of the impact of Covid-19 Pandemic the petitioner could not discharge the duties effectively and as a result there was some shortfalls on the part of the petitioner in completion of the work as per schedule and which the petitioner had been apprising the management of NTPC time and again. It is the further contention of the petitioner that ignoring the aforesaid factual aspect of the matter and without taking a pragmatic approach the respondents unilaterally decided to terminate the contract of the petitioner and initially issued a show cause notice which was responded too by the petitioner

It was stated by the petitioners that since in the agreement itself there is a mechanism carved out for resolving the disputes, if any, by a mutual negotiation and discussion in good faith. The respondent should first have resorted to the said mechanism before initiating any co-ercive action against the petitioner. The petitioner referring to clause 24.4.(c) submitted that under no circumstances could the respondents have initiated any recovery proceedings within 30 days time from the date of issuance of the notice which in the instant case is 10-01-2022.

Counsel for the respondent submitted that the writ petition first of all would not be maintainable in the light of there being an alternative remedy carved out in the agreement of resolving the dispute by resorting to the arbitration clause.

It was observed that if the party is able to make out an exceptional case at the same time if the court finds that an irretrievable injustice would occur in the event if the writ jurisdiction is not invoked by the court, at a given moment of time, the High Courts do have the power to entertain the writ petition.

The Court observed that it was mutually agreed between the parties to first try to resolve the dispute in good faith by negotiation and discussion across the table in respect of any dispute arising out of the said contract/agreement.

It cannot be lost sight of the fact that for the last almost two years period the whole country was grappling with the impact of Covid-19 Pandemic. Every establishment has been adversely affected by its impact. The respondent NTPC is no exception and the contractors engaged by the NTPC also were faced with similar situation. If that was the reason, it was expected of the management of NTPC to consider the grievances in a pragmatic, practical and in a feasible manner without there being any detriment to the interest of either of the parties.

The Court further observed that instead of admitting the petition along with an interim protection and keeping it pending for a long, this court is of the opinion that ends of justice would meet if the writ petition at this juncture is disposed of directing the petitioner and the respondent NTPC to resort to the conditions as stipulated in Clause 24.4(c) and 24.4(d) of the agreement entered into between the parties by way of a mutual discussion and negotiation and try to resort the disputes. That, only on failure of the said discussion/conciliation should the management of NTPC avail other remedies available to them in terms of the agreement entered into between the parties which includes the action of invocation of the bank guarantee.

The Court thus held “The respondents accordingly are restrained from encashing the bank guarantee referred to in the preceding paragraph, if not encashed by now.”[SS Chhatwal v. NTPC, 2022 SCC OnLine Chh 72, decided on 18-01-2022]


Appearances:

For Petitioner: Shri S.C. Verma, Shri Vikram Sharma and Ms. Juhi Jaiswal,

For Respondent 1: Shri Anand Shukla


Arunima Bose, Editorial Assistant has reported this brief.

High Court Round UpLegal RoundUpTribunals/Regulatory Bodies/Commissions Monthly Roundup

“For a contract to be enforceable, the restraint of trade clause must be reasonable.”

[Rajesh Kumar Gandhi v. Mukesh Dutt]


Read the interesting picks from the stories eported in first week of February.


Delhi High Court


Baazi v. WinZo| Trademark is used by a manufacturer or service provider to distinguish products from those of competitors: Here’s how Winzo appeared dishonest and unfair in adopting Baazi

Explaining the significance of a trademark, Asha Menon, J., observed that,

When people are satisfied with the products supplied by a manufacturer or service provider, they buy them on the basis of the trade mark and over time it becomes popular and well known. Thus, the use of a similar or identical trademark by a competitor in the same product would lead unwary customers to believe that it originates from the same source.

Read full report here…

Whether a ‘blade’ would be covered under S. 397 IPC as a deadly weapon? Del HC explains in view of settled position of law

Mukta Gupta, J., explained under what circumstances would Section 397 of penal Code, 1860 would be attracted.

Rae full report here…

Court under maintenance proceedings under S. 125 of CrPC, can usurp jurisdiction of Civil Courts? Del HC decides

Chandra Dhari Singh, J., decided a maintenance case wherein the marital status of the parties was the crux of the matter and expressed that,

“…there is no straight jacket formula for judging the validity of the marriage between the parties.”

Read full report here…


Kerala High Court


Is not taking treatment for mental illness to bring out a peaceful family atmosphere a form of cruelty and thus, a ground for divorce? Kerala HC answers

In an interesting case the Division Bench of A.Muhamed Mustaque and C.R. Sophy Thomas, JJ., held that not taking treatment for mental illness in order to bring out a peaceful and harmonious family atmosphere can also be counted as cruelty to the persons at the receiving end. Upholding the Family Court’s order granting divorce on the ground of cruelty, the Bench remarked,

“There is no merit in preserving intact a marriage, when the marital tie becomes injurious to the parties. When there is no rose, and only thorns left, and there is no scope for the plant to sprout again, there is no meaning in watering the same, knowing that it is dead forever.”

Read full report here…


Andhra Pradesh High Court


LGBTQ+ community’s right to reservation; Can a transgender claim to be appointed by reservation in spite of failure to secure minimum cut off marks in screening test? AP HC answers 

In a significant case wherein, a transgender had approached the Court seeking benefit of reservation for appointment in police department, M. Satyanarayana Murthy, J., denied to issue direction to the State in favour of the petitioner. The Bench, however, remarked,

“The State is unconscious of the directions issued by NALSA and failed to provide a specific column meant for gender identity for transgender in the proforma of application in the Notification dated 01.11.2018 and did not provide any reservation to transgenders, as they are socially and educationally backward and not in a position to compete with ordinary men and women.”

Read full report here…


National Company Law Tribunal


Operational Creditor is under obligation to recover money from its client and not agent: NCLT decides while dismissing a petition filed under S. 9 IBC

The Coram of H.V. Subba Rao (Judicial Member) and Chandra Bhan Singh (Technical Member) dismissed a petition filed under Section 9 of the IBC while noting that no operational debt existed under Section 5(8) and expressed that,

“Operational Creditor being the principal was always under obligation to recover the money from the client and not from his agent unless the agent failed to perform his duties.”

Read full report here…


Tis Hazari Court


For a contract to be enforceable, restraint of trade clause must be reasonable: Post-termination non-compete clauses are permissible in employment contracts under S. 27 of Contract Act? District Court explains

Holding that, post-termination non-compete clauses in employment contracts are “restraint of trade” and it is impermissible under Section 27 of the Act, Richika Tyagi, C.J-02, expressed that such agreements of restraint are vid because of being unfair and depriving an individual of his or her fundamental right to earn a living.

Read full report here…


Information Commissioner’ Office


Unsolicited marketing calls causing distress to people and disregard to their privacy rights: Would it lead to imposition of monetary penalty? Detailed decision of Information Commissioner’s Office

Andy Curry, Head of Investigations, on noting serious contravention of regulations 21 and 24 of the Privacy and Electronic Communication Regulations 2003 (PECR) has issued Home2sense Limited with a monetary penalty under Section 55A of the Data Protection Act, 1998.

“Home2sense’s dismissive and troubling response, coupled with its failure to disclose any details of its CDRs or any other information which might assist the Commissioner’s investigation shows, in the Commissioner’s view, a complete disregard for the privacy rights of the individuals whom it sought to contact.”

Read full report here…

Case BriefsTribunals/Commissions/Regulatory Bodies

National Consumer Disputes Redressal Commission (NCDRC): Ram Surat Maurya (Presiding Member) addressed a matter wherein the date of issue of the Risk Confirmation Letter was in a serious dispute leading to Insurance Broker’s fraudulent act.

The complainant had a factory, and the OP was engaged in the business of providing insurance services. Further, the complainant obtained standard Fire and Special Peril Policy from the OP, for a period of 10-2-2005 to 9-2-2006 for its buildings, furniture, fixtures, fittings and electrical installation, Plant and Machinery, machinery parts, Dies & moulds and stock for a sum of Rs 23 crores. The said policy was renewed.

In February 2008, the complainant invited offers from Insurances brokers for renewal of the above-said policy. It was stated that the Western Regional Office of the OP accepted the proposal form and issued risk confirmation for fire and allied perils insurance policy and Satyan Insurance Broker sent a Risk Confirmation letter to the complainant on 18-2-2008.

On 17-2-2008, a major fire occurred at the factory premises of the complainant causing extensive loss to the buildings, plant & machineries, furniture and stock etc. The complainant informed the insurer about the said incident and the insured appointed a surveyor and loss adjuster, and further the surveyor declined to proceed in the absence of the insurance policy.

The complainant received a letter (bearing the date 18-02-2008) on 28-02-2008 from the Insurer, stating therein that the consideration received for covering the risk was less than the offer given by them. Hence, they were not in a position to cover the risk as requested.

The Insurer, vide dated 13-03-2008, denied issuance of Risk Confirmation on 14-02-2008.

The complainant then gave a legal notice, to the Insurer for either making payment of Rs 2.70 crores within seven days or to refer the dispute to an Arbitrator. The Insurer, vide reply declined to refer the dispute to an Arbitrator or to pay.

Further, the complainant filed an arbitration application in the Bombay High Court which was ultimately rejected on the ground that in the absence of an arbitration agreement between the parties, the application was not maintainable. Then the present complaint was filed.

What is the serious dispute about?

The dispute between the parties was with regard to the date of issue of Risk Confirmation letter and the letter of the Insurer, declining to issue policy on the ground that the premium was deficient.

Analysis and Discussion

The Commission stated that two circumstances clearly proved the fraudulent act of Satyan Insurance Broker, firstly cheque of Rs 6,825 was bearing a date of 13-02-2008. The complainant issued his cheque of Rs 23,891 on 13-02-2008. Had Satyan Insurance Broker informed the complainant that an insurance premium of Rs 30,176 was payable then the complainant instead of issuing a cheque of Rs 23,891 would have issued the cheque of the full amount. Secondly, it was not a normal conduct that any insurance agent would give a premium of a client from his account.

Section 19 of Contract Act, 1872, provides that when the consent of an agreement is caused by coercion, fraud, or misrepresentation, the agreement is voidable at the option of the party whose consent is so caused.

In Supreme Court’s decision of Reliance Life Insurance Company v. Rekhaben Nareshbhai Rathod, (2019) 6 SCC 175 and New India Assurance Company Ltd. v. Satpal Singh Muchal, (2009) 12 SCC 673, it was held that a contract insurance is a contract of uberrima fide and non-disclosure of material fact, vitiates the insurance policy.

Therefore, no illegality in not issuing the insurance policy by the Insurer as the Risk Confirmation letter was obtained on concealment of material facts relating to the fire incident.

Coram concluded by stating that,

“If Risk Confirmation letter had been issued on 14.02.2008, the complainant would not have committed two days delay in informing the Insurer in respect of fire incident. Appointment of the surveyor on 20.02.2008 was an innocent mistake, the complainant cannot get any benefit of it.”

In view of the above, no merit was found in the complaint and it was dismissed. [Tainwala Personal Care Products (P) Ltd. v. Royal Sundaram Alliance Insurance Co. Ltd., 2022 SCC OnLine NCDRC 11, decided on 25-1-2022]


Advocates before the Commission:

For the Complainant: Ms. Fareshte Sethna, Mr. Munindra Dvivedi, Ms. Divya Bhalla, Ms. Aathira Pilllai, Advocates

For the OP: Mr. S.M. Tripathi, Advocate and Ms. Deepa Chacko, Advocate

Advani LawExperts Corner


Introduction


Many construction contracts require the contractor to enter into an agreement with a subcontractor for a specialised task of the contractor’s scope of work. The subcontractor can be either selected by the contractor or the employer of the contractor. When the subcontractor is selected and employed solely by the contractor the subcontractor is termed as a domestic subcontractor, however when the subcontractor is selected and employed by the employer, the subcontractor is then termed as a nominated subcontractor. Although the employer has selected the subcontractor, the contractor signs the agreement with the subcontractor and remains responsible for the works done. In simple words, a nominated subcontractor is selected by the employer and imposed on the contractor. However, whether the nominated subcontractors’ defaults and delays place a liability on the employer or the contractor has always been a point of contention.

 

Domestic subcontractors.– The contractor and the employer will shortlist certain number of potential subcontractors for the purpose of issuing the tender but will be finally selected and employed by the contractor. Therefore, the main contractor is solely responsible and liable for that subcontractor. Even though the employer is involved in the selection process of the subcontractor, the contractor is the one that chose the subcontractor for the specialised work and is responsible for the completion of the work without delay.

 

Nominated subcontractors.– The contractor and the employer will shortlist a certain number of potential subcontractors, but it is the employer that negotiates the terms of the contract, selects and employs the subcontractor. However, the contractor is responsible for the completion of the work, the liability of the subcontractor falls in the hands of the employer and the contractor has no cause of action against the employer in respect of any delay or default on the part of the nominated subcontractor.[1]


Development in law


  • Foreign jurisprudence

 

The concept of nominated subcontractors has been more nuanced in English law. As per various authorities, the contractor cannot bear liability of a subcontractor over which it has no control over.

  1. In Young & Marten Ltd. v. McManus Childs Ltd.[2], the Court of Appeal held that the contractor is not liable to the employer for any defects in design, quality of workmanship and materials provided by the subcontractor.
  2. In Gloucestershire County Council v. Richardson[3], the House of Lords held that the main contractor’s liability to the employer was limited to the extent of the nominated supplier’s liability to the main contractor by operation of the terms of the nominated subcontract.
  3. In North West Metropolitan Regional Hospital Board T.A. Bickerton & Son Ltd.[4], the Court held that in the absence of clear language, to make the contractor liable for a nominated subcontractor over whose appointment or activities he has little control is simply unjust.
  4. In Sinclair Woods of Winchester Ltd.,[5] the Court held that the main contractor has no liability for the design under the terms of the main contract, and that he cannot mysteriously acquire that liability merely because he is instructed to enter a subcontract with a nominated subcontractor who is going to do some design work on behalf of the employer.

 

Under JCT Standard Form of Building Contract, 1998, the contractor is entitled to claim an extension of time (EOT) but is not entitled to claim loss and expenses as confirmed in Norwest Holst Construction Ltd. v. Coop. Wholesale Society Ltd.[6] If the subcontractor is nominated, the contractor will be entitled to an extension of time since he had very less control over the subcontractor’s selection and therefore on the performance too (for example under Cl. 25.4.7 of the JCT, 1998). However, things have changed under the JCT 2005 Standard Form nomination which has done away with nomination. Instead the JCT has adopted the “the three persons” scheme which gives the employer the advantage of specifying a competent specialist subcontractor whilst leaving the risk of defective work and delay on the part of the subcontract with the contractor.[7]

Non-performance by the nominated subcontractor, does not entitle the contractor to additional time or expense, according to FIDIC’s Red Book Form of Contract, 1999. Under FIDIC 1999, the employer may appoint the subcontractor, once the subcontractor has accepted the nomination, the employer becomes responsible for the actions of the nominated subcontractor. Therefore, the contractor may not claim for any failures of the nominated subcontractor. The idea that the contractor is liable for the actions of nominated subcontractors is predicated on the fact that the main contractor has the option to object to the employer’s nomination at the outset. The contractor can make a legitimate objection by stating the reasons why the subcontractor chosen by the employer is unsuitable.

 

  • Indian jurisprudence

Indian law does not make a distinction between domestic subcontractors and nominated subcontractors. The Indian courts have adhered to the rules of privity of contract and have held that the relationship between the employer and the contractor is on one hand and the relationship between the contractor and the subcontractor is on the other hand keeping it distinct and separate as was held in Ircon International Ltd. v. Vinay Heavy Equipments[8]. In order to avoid legal battles on the issue of liability of the subcontractor, careful consideration must be given to drafting the terms and conditions of the subcontract.

 


Conclusion


The English law on nominated subcontractor seems to be more nuanced. The relationship between a subcontractor and the contractor depends upon the construction of the subcontract.[9] Much will be influenced by what the main contractor agreed to with the employer in the contract, and the contract’s provisions are always the launching point for determining the contractor’s liabilities. In the absence of any clause which expressly permits the contractor to claim time or cost, the risk of a nominated subcontractor lies with the contractor.[10]

 

Furthermore, because Indian courts have not dealt with the issue of nominated subcontractor defaults and delays, there is very little jurisprudence on the subject. However, based on the approach taken by English Courts, it is best to conclude that the most important factor in determining the contractor’s liability for defects and delays caused by the nominated subcontractor would be influenced by the selection process, negotiation of the terms of the subcontract, the employment and the subcontract.


† Hiroo Advani, Founder and Chairman, Advani Law.

†† Kanika Arora, Partner, Advani Law.

††† Surbhi Ahuja, Associate, Advani Law.

* Ria Garg, Associate, Advani Law.

[1]North West Metropolitan Regional Hospital Board v. T.A. Bickerton & Son Ltd., (1970) 1 WLR 607 at 615 : (1970) 1 ALL ER 1039.

[2](1969) 1 AC 454 : (1968) 3 WLR 630.

[3](1969) 1 AC 480.

[4](1970) 1 WLR 607 : (1970) 1 ALL ER 1039.

[5] 2006 EWHC 3003.

[6]1998 EWHC Technology 339

[7]JCT Standard Form of Building Contract, 2005, Cl. 3.8.

[8](2015) 13 SCC 680

[9]Calder v. H. Kitson Vickers & Sons (Engineers) Ltd., [1987] EWCA Civ J0730-9

[10]Percy Bilton Ltd. v. Greater London Council, (1982) 1 WLR 794.

Case BriefsHigh Courts

Delhi High Court: “It is the consideration which puts enforceability in the agreements to make promises legally binding”, Asha Menon, J., stated that the importance of ‘consideration’ cannot be belittled.

Background

Instant suit was filed to seek specific performance of a Collaboration Agreement for granting of a permanent and mandatory injunction against the defendant. Damages to the tune of Rs 2,10,00,000 were claimed against the defendant for attempting to cancel the said Collaboration Agreement.

Defendant was stated to be having 75% share in the said property and in actual, physical possession of his share, while his brother had 25% share in the said property, which the wife of the plaintiff claimed to have purchased through an Agreement to Sell from him for a sum of Rs 3,23,00,000, Rs 30,00,000 having been paid towards earnest money.

Contentions

Kishore M. Gajaria, Plaintiff’s counsel submitted that a Collaboration Agreement was entered into between the plaintiff and the defendant for re-development of the property and the same had been duly signed by the defendant. However, subsequently, a notice was issued to the plaintiff stating that the said agreement was an invalid document as it lacked in ‘consideration’ and had been forced upon the defendant, taking advantage of his age.

There were WhatsApp communications and talks on the phone between the parties, but the defendant claimed he was being prevented from acting on the Collaboration Agreement by his son and daughter-in-law.

Due to the defendant’s conduct, plaintiff suffered a loss as he had raised huge loans from the market and had purchased building materials worth Rs 10,00,000 too.

Further, the counsel submitted that the Collaboration Agreement contained reciprocal promises, plaintiff had undertaken to construct the property and the defendant did not have to spend any money, in return the defendant had to transfer two floors and 25% of the stilt parking to the plaintiff.

Hence consideration was the amount to be spent on construction and each party’s promise was the consideration for the reciprocal promise. Since the said promise of constructing two floors and handing over the same to the defendant was “valuable”, it satisfied the definition of ‘consideration’ under Section 2(d) of the Indian Contract Act, 1872.

Further, the counsel relied on the Supreme Court decisions in Union of India v. Chaman Lal Loona, 1957 SCR 1039 and Chidambara Iyer v. P.S. Renga Iyer, (1966) 1 SCR 168, and urged that what was “valuable” was determinable also by the Court and therefore, this Court may accept that consideration had passed, even if not in money.

Analysis, Law and Decision

High Court expressed that the reliance on Chidambara Iyer v. P.S. Renga Iyer, (1966) 1 SCR 168 was misplaced.

Question:

Whether the Collaboration Agreement contains promises that are valid and are binding?

Bench noted that there was no reference in the Collaboration Agreement to the consideration being paid for the transfer of the property by the defendant to the plaintiff, there was also no undertaking mentioned in the agreement as to the liability of the plaintiff to meet the construction cost and finally, not even an estimate of the construction cost was mentioned, though there was some reference to the quality of construction being ‘good’.

What all reciprocal promises made, and constituted consideration were not revealed or explained.

Bench also expressed that another significant fact was that the reply to the Legal Notice recorded that the conversion from leasehold to freehold did not take place. In fact, the said reply also revealed that the Agreement to Sell with the brother of the defendant was also dependent on the said conversion and as per the WhatsApp communication placed on record, the plaintiff’s wife seemed to have called off that deal too.

Court stated that in any event, payment of Rs 30,00,000 to the brother of the defendant can, by no means, be read as ‘consideration’ being paid to the defendant.

Elaborating further, WhatsApp communication addressed to the brother of the defendant which was sent by the plaintiff and his wife affirmed the position and because of the inability to convert the property, had requested that the Agreement to Sell between them be treated as cancelled. Hence, the refund of entire amount paid to him was also called for.

“Importance of ‘consideration’ cannot be belittled.” 

“Even where the ‘promisor’ intends to bind himself by the promise, ‘consideration’ is essential to make the promise binding and enforceable.”

Bench held that the agreement was completely silent on the value of the property, now belonging to the defendant, and the estimated cost of construction.

The Court opined that the ‘Agreement’ seemed to be more in the nature of a note of assurances and not a ‘concluded’ contract.

Further, the averments in the plaint and the documents filed by the plaintiff did not disclose any cause of action. Supreme Court in T. Arivandandam v. T.V. Satyapal, (1977) 4 SCC 467 has held that

while considering an application under Order VII Rule 11 CPC, what is required to be decided is whether the plaint discloses a “real cause of action” or something “purely illusory”. If, on a meaningful and not a mere formal reading of the plaint, it appears to be manifestly vexatious and meritless and fails to disclose a clear right to sue, but through clever drafting creates an illusion of a cause of action, the court being guided by the mandatory provisions of Order VII Rule 11 CPC should not hesitate to exercise powers vested in it to “nip it in the bud”.

In view of the above discussion, the plaint was rejected under Order VII Rule 11 (a) CPC. [Sameer Madan v. Ashok Kumar Kapoor, 2021 SCC OnLine Del 5290, decided on 15-12-2021]


Advocates before the Court:

For the plaintiff: Kishore M. Gajaria and Aayush Paranjpe, Advocates

Case BriefsHigh Courts

Allahabad High Court: Noting the significance of Sections 14 and 15 of the Arbitration and Conciliation Act, 1996, Jayant Banerji, J., expressed that,

If the arbitrator had been rendered functus officio, there existed no occasion to invoke the provisions of Sections 14 and 15 of the Act for appointing a substitute arbitrator.

Instant application was filed to seek the appointment of an independent arbitrator under Section 11 of the Arbitration and Conciliation Act, 1996.

Factual Background

Applicants and OPs entered into a contract. Since a dispute arose between the parties under clause 70 of the general conditions of the stated agreement which provides for arbitration, the competent authority appointed Baljit Singh as the sole arbitrator who made the final award.

The stated award was challenged before the District Judge by means of an application under Section 34 of the Act for setting aside the award. Later the Court remitted the matter back to the Arbitrator to reconsider all the issues raised before the Court in light of the terms of the Contract as well as the issue regarding the extension of period for completion of work of 3rd phase and to pass the award fresh.

It was noted that the Arbitrator Mr Baljit Singh resigned and withdrew from the aforesaid arbitration proceedings citing his ineligibility to continue as Arbitrator as he had retired, and only a serving officer could be an Arbitrator as per the agreement.

Applicant’s counsel submitted that despite serving several reminders to OPs, no substitute Arbitrator was being appointed by them, hence the application was filed.

Court had made a query to the applicant’s counsel that:

Whether the Court exercising jurisdiction under Section 34 of the Act, had power to remand the matter to the Arbitrator after setting aside the arbitral award, and if not, whether the present application would be maintainable?

Counsel while referring to Section 14 and 15 of the Act, contended that since the matter was remanded and Arbitrator withdrew from his office, his mandate stood terminated, and therefore, under Section 15(2) of the Act, a substitute Arbitrator was required to be appointed.

Lower Court

Court below, while affirming that an award by the arbitrator cannot be modified, set aside the award, and proceeded to hold that the matter required reconsideration in light of the terms of the contract, and remitted the case to the arbitrator.

In Supreme Court’s decision of Kinnari Mullick v. Ghanshyam Das Damani, (2018) 11 SCC 328, it was held that no power had been invested by the Parliament in the Court to remand the matter to the Arbitral Tribunal except to adjourn the proceedings for the limited purpose mentioned in Section 34 (4) of the Act.

In the above decision it was also observed that,

Limited discretion available to the Court under Section 34(4) of the Act can be exercised only upon a written application made in that behalf by a party to the arbitration proceedings.

Present Position:

Hence, the order passed by the Court under Section 34 of the Act remitting the matter back to the Arbitrator to reconsider all the issues would be beyond the statutory mandate conferred on the Court and was thus without jurisdiction.

In view of the facts of the present matter, after making the final arbitral award, given the provisions of Section 32(1) and subject to Section 32(3), the mandate of the arbitral tribunal stood terminated with the termination of the arbitral proceedings.

Thereafter, the Arbitrator became functus officio and therefore, remitting the matter back to him by the Court to reconsider all the issues was not permissible.

Pertinent observation of the Court:

Since the arbitrator had been rendered functus officio, there existed no occasion to invoke the provisions of Sections 14 and 15 of the Act for appointing a substitute arbitrator. 

Sections 14 and 15 of the Act provide for appointment of a substitute arbitrator where the specified conditions cause the mandate of an arbitrator to terminate.

Further, the Court elaborated its observations that, mandate of an arbitrator stems forth from an arbitration agreement under Section 7 of the Act and his appointment under Section 11 of the Act.

Sections 14 and 15 of the Act would only be applicable where the arbitral proceedings are pending.

In the present case, under Section 32(1) of the Act, the arbitral proceedings stood terminated by the final arbitral award, and, in view of Section 32 (3) of the Act, the mandate of the arbitral tribunal stood terminated with the termination of the arbitral proceedings.

High Court stated that, there was no averment in the present application that, after setting aside of the award passed by the arbitral tribunal, under the aforesaid provision of clause 70 of the agreement, any written notice had been given to the OPs regarding any dispute, to initiate arbitration proceedings de novo.

Therefore, there was no failure on part of the OPs to act or discharge a function which would entitle the applicants to invoke the powers conferred by Section 11 (4) (5) and (6) of the Act.

In view of the above discussion, present application was dismissed. [P.N. Garg, Engineers & Contractors v. Sultania Infantry Lines Bhopal, Appln. U/S 11(4) No. 92 of 2021, decided on 16-11-2021]


Advocates before the Court:

Counsel for Applicant: Aarushi Khare

Case BriefsTribunals/Commissions/Regulatory Bodies

National Consumer Disputes Redressal Commission (NCDRC): Expressing that the builder cannot take shelter of “Force Majeure” while delay in handing over possession Coram of C. Viswanath (Presiding Member) and Ram Surat Ram Maurya (Member) directed for a refund of buyers’ amount along with interest.

Facts in a Nutshell

Complainants had booked a unit in OP’s project and paid a booking amount as well. Later they were allotted a unit vide an allotment letter.

Subsequently, an Apartment Buyer’s Agreement was executed, wherein possession of the unit was promised within 39 months from the date of excavation, excluding an additional grace period of 6 months to complete the project.

Grievance

The grievance of the Complainants was that the OP, despite receiving more than 90% of the total consideration, failed to hand over possession of the Unit, within the promised time period and even possession in the near future seemed unlikely.

Contentions of the OP

OP while contending that the possession could not be delivered in time because some of the customers did not make timely payments also added that there was a shortage of labour due to construction of Commonwealth Games Village, shortage of water, dispute with construction agencies, delays in obtaining licenses, approvals, etc. Further, it was added that as per the Agreement, in case of delay caused due to “Force Majeure” events, the OP would be entitled to an extension of time, without incurring any liability.

Though, the Opposite Party failed to prove that there was an unforeseen and unexpected event that prevented the completion of the Project within the stipulated time period.

Analysis, Law and Decision

Commission expressed that the OP cannot take shelter of the “Force Majeure” Clause and the reasons cited by the OP for the delay of the project, appeared to be delaying tactics veiled as “Force Majeure” conditions and seemed to be an attempt to wriggle out of its contractual obligations.

It was noted that even after receiving the substantial amount OP failed to fulfil its contractual obligation of delivering possession of the Unit to the complainant within the time stipulated.

Conclusion

A person cannot be made to wait indefinitely for the possession of the flats allotted to him/her. The Complainants are, therefore, entitled to seek the refund of the amount paid along with compensation. [Manoj Kawatra v. Pioneer Urban Land & Infrastructure, 2021 SCC OnLine NCDRC 325, decided on 1-11-2021]


Advocates before the Commission:

For the Complainant: Aditya Parolia, Advocate

For the OP: T.V.S. Raghavendra Sreyas, Advocate

Case BriefsSupreme Court

Supreme Court: Stating that readiness and willingness are necessary for the purpose of passing a decree of specific performance, Division Bench of M.R. Shah and A.S. Bopanna, JJ., expressed that,

Straightaway to rely upon the affidavit without amending the plaint and the pleadings is wholly impermissible under the law.

Factual Background

Plaintiff and the defendant entered into a sale agreement wherein the defendant agreed to sell the same for a sale consideration of Rs 16.20 lakhs to the plaintiff. A part sale consideration of Rs 3,60,001 was paid at the time of execution of the agreement to sell.

Amongst the number of conditions stipulated in the agreement to sell, one of the conditions was that the defendant as original owner was required to evict the tenants from the property in question thereafter to execute the sale deed on receipt of the full sale consideration.

In view of the above condition, plaintiff sent a legal notice to defendant asking to evict the tenants from the property in question and to execute the sale deed on receipt of balance sale consideration vide a notice.

Plaintiff approached the Trial Court for specific performance of the contract.

Plaintiff’s case was that he was ready and willing to perform his part of the contract, but the defendant did not evict the tenants and come forward to execute the sale deed.

Trial Court held that the plaintiff was not willing to get the sale deed executed as it is, and, therefore, held the issue of willingness against the plaintiff. Court also added that the defendant failed to prove that tenants had vacated the suit property as claimed, however, the Trial Court held on willingness against the plaintiff by observing that the plaintiff had not shown the willingness to purchase the property with the tenants.

In an appeal filed before the High Court under Section 96 read with Order XLI by the impugned judgment and order, High Court allowed the said appeal and quashed and set aside the decree passed by the Trial Court dismissing the suit and consequently had decreed the suit for specific performance.

On being aggrieved and dissatisfied with the decisions of the lower courts, defendant approached this Court.

Analysis, Law and Decision

Supreme Court noted the non-compliance of the Order XLI Rule 31 CPC passed by the High Court Order.

High Court disposed of the appeal preferred under Order XLI CPC read with Section 96 in a most casual and perfunctory manner. Court neither re-appreciated the entire evidence on record nor had given any specific findings on the issues which were even raised before the Trial Court.

In Court’s opinion, High Court failed to exercise the jurisdiction vested in it as a First Appellate Court. Hence, High Court’s decision was unsustainable.

As per the case of the original plaintiff, the defendant was required to evict the tenants and hand over the physical and vacant possession at the time of execution of the sale deed on payment of full sale consideration.

Procedure adopted by the High Court relying upon the affidavit in a First Appeal by which virtually without submitting any application for amendment of plaint under Order VI Rule 17 CPC, High Court as a First Appellate Court had taken on record the affidavit and as such relied upon the same, but the said procedure is untenable and unknown to law.

It was also observed that, there were no pleadings in the plaint that he was ready and willing to purchase the property and get the sale deed executed of the property with tenants and the specific pleadings were to hand over the peaceful and vacant possession after getting the tenants evicted and to execute the sale deed.

Bench also opined that the plaintiff was never ready and willing to purchase the property and/or get the sale deed executed of the property with tenants.

It was for the first time before the High Court in the affidavit filed before the High Court and subsequently when the learned Trial Court held the issue of willingness against the plaintiff, the plaintiff came out with a case that he is ready and willing to purchase the property with tenants. 

Further, the Court held that once it is found on appreciation of evidence that there was no willingness on the part of the plaintiff, the plaintiff was not entitled to the decree of specific performance.

Therefore, Trial Court’s decision was upheld.

Submission on behalf of the plaintiff that, in the agreement, a duty was cast upon the defendant to evict the tenants and to handover the vacant and peaceful possession, which the defendant failed and, therefore, in such a situation, not to pass a decree for specific performance in favour of the plaintiff would be giving a premium to the defendant despite he having failed to perform his part of the contract.

Defendant not refunding the amount of part sale consideration with 18% interest as ordered by the Trial Court cannot be a ground to confirm impugned judgment and order passed by the High Court.

The Court directed the appellant to refund the amount of Rs 3,60,001 with 18% interest from the date of agreement till the date of realization. [K. Karuppuraj v. M. Ganesan, 2021 SCC OnLine SC 857, decided on 4-10-2021]

Op EdsOP. ED.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


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

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

[2] (1992) 1 SCC 508.

[3] (2016) 3 SCC 619.

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

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

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

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

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

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

[10] (1997) 11 SCC 75.

[11] (1988) 3 SCC 82.

[12] (2000) 3 SCC 27.

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

[14] (1994) 3 SCC 521.

[15] (2007) 13 SCC 43.

[16] (2017) 8 SCC 146.

[17] (2008) 16 SCC 128.

[18] (1997) 11 SCC 75.

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

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

Case BriefsTribunals/Commissions/Regulatory Bodies

Customs, Excise and Services Tax Appellate Tribunal (CESTAT): The Coram of Dilip Gupta (President) and P.V. Subba Rao (Technical Member) allowed the appeals which were related to demand of service tax on liquidated damages recovered by the appellant for acts of default, like delayed or deficient supplies by various suppliers.

The appellant was a Public Sector Undertaking engaged in excavation of lignite from the captive mines at Neyveli in Tamil Nadu and at Barsingsar in Rajasthan. Lignite is principally consumed in the generation of electricity at the thermal power stations of the appellant.

The appellant had executed a contract dated 10-08-2006 with Bharat Heavy Electricals Limited for design, engineering, manufacture, supply, erection, testing, commissioning, and supply of two Circulating Fluidised Bed Combustion steam generators, complete with all accessories and auxiliaries and two Steam Turbines. BHEL was required to complete successful performance guarantee tests for UNIT 1 within 35 months of date of Letter of Award and for UNIT 2 within 39 months of date of Letter of Award. As BHEL failed to adhere to the above time limits, the appellant recovered liquidated damages in terms of the contract. Likewise, the appellant recovered liquidated damages for non-adherence to the time schedule for supplies from other contractors/Vendors. The appellant was served with show cause notice and he filed a detailed reply in which he mentioned that proceedings may be dropped for the reason that no service tax was payable on liquidated damages and penalties recovered under the contract.

The Commissioner not accepting his contentions had passed an impugned order against the appellant, thus the instant appeal was filed.

Ms Krithika Jaganathan, counsel appearing for the appellant submitted a number of case laws which supported their contention that the amount of liquidated damages/penalty collected for non-compliance of the terms of the contracts cannot be subjected to levy of service tax.

The Tribunal was convinced with the arguments of the counsel of the appellant that no service tax was payable on the amount collected towards liquidated damages considering the decision relied on by the counsel in South Eastern Coalfields Ltd. v. Commr. of Central Excise and Service Tax, 2020 (12) TMI 912.

The Tribunal observed that the Commissioner, however, did not accept the contention advanced on behalf of the appellant and confirmed the demand of service tax holding that the amount received by the said appellant towards penalty, earnest money deposit forfeiture and liquidated damages would tantamount to a consideration “for tolerating an act” on the part of the buyers of coal/contractors, for which service tax would be levied under section 66 E(e) of the Finance Act.

The Tribunal rejected the contentions advanced on behalf of the Department that penalty amount, forfeiture of earnest money deposit and liquidated damages had been received by the said appellant towards “consideration” for “tolerating an act” leviable to service tax under section 66E(e) of the Finance Act.

The Tribunal while allowing the appeal held that the view taken by the Commissioner that since BHEL did not complete the task within the time schedule, the appellant agreed to tolerate the same for a consideration in the form of liquidated damages, which would be subjected to service tax under section 66E(e) of the Finance Act cannot be sustained.[Neyveli Lignite Corprn. Ltd. v. Commr. Of CCE & ST, 2021 SCC OnLine CESTAT 2511, decided on 26-07-2021]


Suchita Shukla, Editorial Assistant has reported this brief.

Case BriefsSupreme Court

Supreme Court: A Division Bench comprising of R.F. Nariman and B.R. Gavai, JJ. held that an arbitral award which is based on no evidence and/or in ignorance of evidence would come under the realm of patent illegality. The Court also held that an arbitrator cannot rewrite the contract for the parties.

Facts and Appeal

In 1998, the respondent−Tuticorin Port Trust (“Trust”) awarded a tender to the appellant−Company for certain development and operation works at the Tuticorin Port for 30 years on a Build, Operate and Transfer basis. Shorn of details, commercial differences arose between the parties relating primarily to royalty/revenue sharing model. The Company requested the Trust to amend the License Agreement to incorporate revenue sharing model in place of royalty model. This was however rejected by the Trust.

In 2012, the Company invoked arbitration clause under the License Agreement. The Arbitral Tribunal passed an award in favour of the Company directing conversion of royalty model to revenue sharing model. Thereafter, the Trust presented a petition under Section 34 of the Arbitration and Conciliation Act, 1996 for setting aside an arbitral award. This petition was rejected by the District Judge, Tuticorin. Against this, the Trust filed an appeal before the Madras High Court. The appeal was allowed and the award made by the Arbitral Tribunal was set aside. Aggrieved, the Company approached the Supreme Court.

Analysis and Observations

Scope of interference with an arbitral award in India      

Relying on a catena of judgments including MMTC Ltd. v. Vedanta Ltd., (2019) 4 SCC 163 and SsangYong Engg. & Construction Co. Ltd. v. NHAI, (2019) 15 SCC 131,  the Supreme Court noted it to be settled legal position that in an application for setting aside an arbitral award filed under Section 34 of the Arbitration Act, the court does not act as an appellate court and reappreciate the evidence. The scope of interference is limited to grounds provided under Section 34. Interference would be warranted when the award is in violation of public policy of India. A judicial intervention on account of interfering on the merits of the award would not be permissible.

Principles of natural justice as contained in Sections 18 and 34(2)(a)(iii) of the Arbitration Act continue to be grounds of the challenge of an award. Awards that shock the conscience of the court can be set aside for being in conflict with justice or morality. An award can be set aside on the ground of patent illegality appearing on the face of the award as such, which goes to the roots of the matter.

Merits of the case

Article 14 of the License Agreement

The bone of contention between the parties was Article 14 of the License Agreement which dealt with ‘Change in Law’. Article 14.3 provided that the Licensee (appellant−Company) may request for amendments in terms of the License Agreement if after the date of the License Agreement there is any change in law which substantially affects rights of the Licensee. The questions before the Court were:

(i) Whether the Arbitral Tribunal was justified in finding a change in law which entitled the Company to invoke Article 14.3 of the License Agreement; and

(ii) Whether the Arbitral Tribunal was justified in converting the contract from royalty model to revenue sharing model.

The Court said that for answering the questions, it will have to consider documents on record as well as the conduct of the parties and their intention as could be gathered from the material. For such propsition, reliance was placed on MMTC Ltd. v. Vedanta Ltd., (2019) 4 SCC 163.

Findings of the Arbitral Tribunal

It was noted by the Court that entire finding of the Arbitral Tribunal was based on a premise that when the parties entered into the contract in 1998, there was an existing policy which provided royalty to be factored into the cost while fixation of tariff. That, subsequently in 2003, Government of India changed the policy thereby providing that royalty will not be so factored while fixing tariff. In 2005, there was yet another change in policy vide which royalty was allowed to be factored in while fixing tariff, but subject to a maximum of the bid of second lowest bidder. According to the Arbitral Tribunal, this amounted to change in law which adversely affected the Company.

Examining the correctness of such finding, the Court found that when Letter of Intent was issued to the Company in January 1998, there was no policy/guidelines at all. The relevant guidelines were adopted by the authority concerned (Tariff Authority for Major Ports “TAMP”) only in February 1998. Even these 1998 Guidelines did not provide for factoring royalty in cost while determining tariff.

Notably, it was in the year 1999, that the Company presented a proposal before TAMP to revise tariff. The proposal was approved by TAMP, and royalty was allowed to be factored in cost while fixing tariff, however, this was only on account of the Trust’s conditional approval to the proposal submitted by the Company. The TAMP also made clear that its order should not be interpreted to amount to any implicit approval of royalty related issues which were left to be decided by the Trust and the Government of India.

Then came the first notification in 2003, where the Government of India decided to clarify, as a matter of policy, that royalty payment shall not be factored into account as cost for fixation of tariff.

Next came the second notification in 2005, superseding the 1998 Guidelines. The new guidelines provided that royalty payment will not be admissible cost for tariff computation. Further, in Build, Operate and Transfer cases such as that of the Company, it was allowed that tariff computation can factor in royalty payment as cost subject however only to a maximum of the amount quoted by next lowest bidder.

On a conjoint reading of all documents, the Court concluded that:

In this scenario, the finding of the Arbitral Tribunal, that there was a law when the Agreement was entered into between the parties, which provided royalty as a pass-through and that the said law has been changed for the first time in 2003 and subsequently again changed in 2005, in our view, is a finding based on ‘no evidence‘.

The Court was of the opinion that the Arbitral Tribunal totally failed to take into consideration relevant aspects of the matter as discussed above. Noting that the Arbitral Tribunal arrived at its decision based on ‘no evidence’ and in ‘ignorance of vital evidence’, the Court held that the findings of the Arbitral Tribunal would come in the realm of perversity as explained in Associated Builders v. DDA, (2015) 3 SCC 49.

Conversion of royalty payment model to revenue sharing model

The next issue was whether the Arbitral Tribunal was justified in substituting royalty payment model to revenue sharing model. While considering this, the Court opined that:

A contract duly entered into between the parties cannot be substituted unilaterally without the  consent of the parties.

Gathering the  intention of the parties from documents on record, the Court found that the Company wanted the License Agreement to be amended to change royalty payment method to revenue sharing method. Whereas, the Trust always opposed it and was not agreeable to any such amendment. Noting that the Arbitral Tribunal ignored the stand of the Trust to thrust upon a new term in the License Agreement, the Court observed:

It is thus clear that the Award has created a new contract for the parties by unilateral intention of [the Company] as against the intention of [the Trust].

Reiterating that a party to the Agreement cannot be made liable to perform something for which it has not entered into a contract, the Court concluded that:

In our view, rewriting a contract for the parties would be breach of fundamental principles of justice entitling a Court to interfere since such case would be one which shocks the conscience of the Court and as such, would fall in the exceptional category.

Decision

In such view of the matter, the Supreme Court was of the considered opinion that the impugned award passed by the Arbitral Tribunal would come under the realm of “patent illegality” and therefore it was rightly set aside by the High Court. [PSA SICAL Terminals (P) Ltd. v. V.O. Chidambranar Port Trust, 2021 SCC OnLine SC 508, decided on 28-7-2021]


Tejaswi Pandit, Senior Editorial Assistant has reported this brief.