"I realise that some of my criticisms may be mistaken; but to refuse to criticize judgements for fear of being mistaken is to abandon criticism altogether... If any of my criticisms are found to be correct, the cause is served; and if any are found to be incorrect the very process of finding out my mistakes must lead to the discovery of the right reasons, or better reasons than I have been able to give, and the cause is served just as well."

-Mr. HM Seervai, Preface to the 1st ed., Constitutional Law of India.

Saturday, January 16, 2021

Padia Timbers & Contracting Through Tendering Process

A recent decision of the Supreme Court in Padia Timber v Vishakapatnam Port Trust is interesting on many counts. One, it is a rare decision by the Supreme Court construing general contract law (Sections 4 and 7 of the Indian Contract Act, 1872. Two, the Supreme Court overturned the decision of the trial court and the High Court notwithstanding that the case does not involve any new question of law that courts previously had not dealt with but that the lower courts (trial court and the High Court) did not deal with in this case. Three, the decision throws considerable light on government contracting practices and can act as a context in discussing such practices.  Four, this case relates to a notice inviting tender that was floated more than thirty years back (1990)! The matter was heard in the SC several times between 2007 and 2011 but it appears that the matter was not heard between 2011 and 2018.

The judgment reiterates the position that acceptance should be unconditional as per Section 7 and various decided cases. 

On facts, when  the appellant, Padia Timbers, submitted its bid, it made a revised quotation stating that inspection would have to be conducted at Padia Timber's depot an not otherwise. This is where government tendering practices are to be noted. Given the requirement of a rigorous and complaint free tendering process, government contracts usually state that the bidder must "accept" all the conditions stated in its offer.  If that is not the case, the Government entity generally rejects the bid if the non-acceptance pertains to a material provision. In this case, the error committed was that the Government entity went ahead with the tendering process and awarded the contract to the bidder despite deviation from the condition regarding inspection. What really happened making the port trust to proceed with the tendering process and awarding the contract is not clear and will be known if the tender file is perused.

The Court ultimately ordered the Port Trust to refund the earnest money to Padia Timber at an interest rate of 6% per annum from the date of institution of the suit (1994) till the date of refund. 

Tuesday, December 29, 2020

Vidya Drolia v DTC: Part II: Interesting Aspects- Contradiction between Patel Engineering & Booz Allen

Para 17-19 of Vidya Drolia v Durga Trading Corporation is the next interesting aspect we take up in this post. We had discussed the nature of an arbitration agreement and its relation to the law of contracts in the previous post on this subject. In this post, we will discuss the contradiction between Booz Allen and Patel Engineering on whether subject-matter arbitrability is to be decided by a court under Section 8 and11.

In Vidya Drolia, the Supreme Court observed:

" When public policy mandates and states that a case or a dispute is non-arbitrable, the court would not allow an application under Section 8 (or even Section 11 as observed supra) even if the parties have agreed upon arbitration as the mechanism for settlement of such disputes." (Para 19, P. 24).

Justice Ramana's opinion also touches on this topic in many places but does not explicitly note the contradiction between the approaches in these judgments (Patel Engineering &  Booz Allen) noted above. So what exactly is the issue?

The issue relates to whether power exercised under Sections 8 and 11 are similar. What turns on this question is the point whether a court hearing a petition under these sections has to decide subject-matter arbitrability.

In Patel Engineering, the SC held that Sections 8 and 11 were complementary in that the judicial authority under Section 8 or 11 has to decide the jurisdictional issues raised before it. This would logically include questions as to arbitrability of the subject-matter as well. In Booz Allen, however, a two-judge Bench of the Supreme Court held that the nature and scope of issues that arise for consideration in a Section 11 application were narrower than those under Section 8. The court held that arbitrability was not to be determined by the court under Section 11. It is this contradiction that the court in Vidya Drolia highlighted and held: 

"We are clearly bound by the dictum of the Constitutional Bench judgment in Patel Engineering Ltd. that the scope and ambit of court’s jurisdiction under Section 8 or 11 of the Arbitration Act is similar." (Para 17, p. 20).

We invite readers to access this post in this blog written almost a decade back where we argued that given the decision of the larger Bench in Patel Engineering, Booz Allen's approach as regards arbitrability question under Section 11 (that the same has to be decided by the arbitrator) was not consistent with Patel Engineering:

"The pertinent question for the purposes of this post would be whether Patel Engineering gives an indication of whether a decision under Section 11 included a decision on issues of Arbitrability. This blawgger’s view is that it would. Two reasons: (1) In line with the Patel Engg approach, Arbitrability of the dispute would be a jurisdictional fact/ condition precedent for the Chief Justice to exercise jurisdiction; (2) Supreme Court’s concern was for the party who had not agreed to an arbitration agreement but had to go through the entire process of arbitration (because the Act did not permit a court to interfere unless provided so in the Act) and could only challenge the award under Section 34. The same situation applies to Arbitrability as well. In a petition under Section 11, if the contention is that the dispute was not arbitrable, and if the court mechanically refers the parties to arbitration, the party which raised such a contention will be unnecessarily put to the trouble of going through the entire arbitration process...
Therefore, this blawgger is of the view that the obiter dicta of the Supreme Court in Booz Allen ought to be placed below the decision of the Seven Bench Supreme Court in Patel Engineering in terms of binding force."

However, this "contradiction" is a virtually an academic issue, given that Sections 8 and 11 have been amended. We will address Vidya Drolia on the implication of these amendments in another post. But we will conclude this post summarising the concluding observations in Vidya Drolia on this question:
  • Judicial review and court's jurisdiction u/ss 8 and 11 are identical but extremely limited [Para 96(b)]
  • Patel Engineering is no more good law in view of the 2015 and 2019 amendments to the 1996 Act. [96(a)]
  • By virtue of separability and competence principles, arbitral tribunal is the "preferred first authority" to decide all aspects of non-arbitrability and courts can have a second look in terms of Sections 34(2)(a)(i), (ii), or (iv) or 34(2)(b)(i) of the 1996 Act. [96(c)]
  • But courts can exercise its jurisdiction where the subject-matter of the dispute is "manifestly and ex facie" non-arbitrable. [96(d)].
[Note that Para 96(d) of the court's view confers very limited jurisdiction on the courts in respect of non-existence or invalidity of agreements as well but we did not deal with these aspects in this post.] 

Tuesday, December 22, 2020

The Law of the Arbitration Agreement: Enka Insat v OOO Insurance: UK Supreme Court

Enka Insaat Ve Sanayi AS v OOO Insurance Company Chubb [2020] UKSC 38 (09 October 2020) is an important decision which addresses the critical issue of the choice of law of the arbitration agreement. We had, in this blog, criticised, the pre-Enka English approach of giving priority to the law of the seat than the law of the contract where there is no express choice of the law of the arbitration agreement. 

Generally, we analyse such judgments in two parts, the first part deals with a detailed descriptive summary of the decision and the second part, usually in one or more posts, provides a critique of the decision. We will do so in this post but with a small change. We will not provide a detailed descriptive comment like we always do but refer readers to the (informal) press summary (pdf) provided by the UK Supreme Court, which is helpful in identifying the central aspects of the decision. In case readers wish to watch the summary rather than read it, please access this link. However, a brief idea about the judgment is provided in this post. 

The decision covers a situation where the law of the contract is different from that of the seat of arbitration. In this case, the English Court of Appeal had held that where there was no express choice of law of the arbitration agreement, the law of the arbitration agreement should be governed by the law of the seat as a matter of implied choice, subject only to any particular features of the case demonstrating power reasons to the contrary.

Readers who have read our post noted above will be familiar with the critique that preference to the law of the seat over the law of the contract is not the correct approach in the choice of the law of the arbitration agreement. Further, a look at the decision of the court of appeal noted in the above paragraph would reveal a test that is subjective and amorphous. 

In the Supreme Court, Lord Kerr, Lord Sales, Lord Hamblen, Lord Leggatt and Lord Burrows heard the matter.  There are three opinions: 
  • the first opinion was of Lord Hamblen and Lord Leggatt with which Lord Kerr agreed, 
  • the second one by Lord Sales (with whom Lord Sales agreed), and 
  • also a separate opinion by Lord Sales. 
Between the opinions, the  judges agreed in principle that if the parties had agreed on the law of the contract, such law would also govern the law of the arbitration agreement. The judges also agreed that what is material in granting an anti-suit injunction under English law whether the pursuit of foreign proceedings was in violation of the arbitration agreement, and not on the law of the arbitration agreement [See, the Summary]. There is considerable significance in these propositions. 

However, the following issues were contentious between them:
  • Where there is no express or implied choice of the law of the contract, whether the law with which the main contract is most closely connected should govern the arbitration agreement?
  • Whether, on facts, parties chose Russian law to govern their construction contract?
In terms of relief, the majority dismissed the appeal while the dissenting judges remitted the question as to whether there was breach of the law of the arbitration agreement to the Commercial Court for determination.

More on the decision in another post.

Monday, December 21, 2020

Ad hoc Arbitration and Its Enemies: Paper Review

 Ad hoc arbitration and its Enemies is an interesting speech given in the International Congress of Maritime Arbitrators (ICMA XXI), Rio de Janeiro, 9 March 2020, published in the recent issue of Arbitration. The paper provides an overview of ad hoc arbitration in the international arbitration landscape but in terms of normative arguments in support of it, we do not see much. Notwithstanding that, in a country like India where ad hoc arbitration is the norm, the paper is a timely reminder that while institutional arbitration needs to be encouraged, ad hoc arbitrations should not be left out of the lens of reform.