"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.

Sunday, October 17, 2010

Scope of Jurisdiction to Award Interim Measures Vis-à-vis Third Parties (Part II)


In the previous post, we had promised to look into the case of Cadre Estate Pvt. Ltd. v. Salochna Goyal W.P.(C) 2782/2010 and C.M. No. 5556/2010 (Stay) in detail because the arbitrator had passed an interim order under Section 17 of the Act against a third party who was not even a signatory to the arbitration agreement.

The judgement is also relevant for the purposes of power of a court of order interim measures against non-signatories to the arbitration agreement. Hence, facts/ analysis pertaining to S 9 and S 17 shall be dealt with separately. This post, continuing with the previous one, shall be on the analysis of this case vis-à-vis the arbitrator’s interim order under S 17 in respect of a non-signatory to the arbitration agreement.

Court: Delhi High Court
Bench: Muralidhar, J.
Date of Judgement: 05 October 2010
Petition Filed under: Article 226 of the Constitution of India

Cadre Estate Pvt. Ltd (CEPL) had filed as writ petition against an interim injunction order passed by the sole arbitrator against CEPL. The relevant facts are as below:

 30.09.2008:     An agreement to sell was executed between Saroj Kumar Bagaria (Bagaria) and Salochna Goyal (Goyal) by which Bagaria agreed to sell a property (Disputed Property) for consideration. Goyal alleged that she had paid Earnest Money Deposit in respect of the Disputed Property.

31.12.2008:     A Tripartite Agreement was entered into between CEPL, Saroj Kumar Bagaria (Bagaria) and the Punjab National Bank (PNB) by which CEPL purchased the Disputed Property.

Goyal alleged that Bagaria, CEPL and PNB had colluded and had wrongfully denied Goyal of the right to the said property. Dispute arose under the Agreement to Sell.

01.04.2009:     Bagaria consented to appoint Retired Justice K. Ramamoorthy as the sole arbitrator in respect of the dispute under the Agreement to Sell with Goyal.

28.10.2009:     Goyal filed an application under S 17 of the  Act for interim directions. It was contended by Goyal that although CEPL was not a party to the arbitration agreement, since CEPL was a subsequent purchaser of the Disputed Party, it would be deemed to be a party to the arbitration.

18.12.2009:     The arbitrator ordered the First Respondent, Bagaria (who was a party to the Agreement to Sell), and the Second Respondent, CEPL (which was not a party to the Agreement to Sell and was nevertheless made a party to the arbitration proceedings),  not to deal with the Disputed Property till further orders.

It is this order dated 18.12.2009 that was the subject matter of the writ petition under Article 226. In is inconceivable as to how the arbitrator could clothe himself with jurisdiction that was not his to possess- he could not have acquired jurisdiction against a party which was not a party to the arbitration agreement by any means. As stated in the previous post, the arbitral tribunal does not acquire jurisdiction otherwise than by consent through the arbitration agreement. A person may have acquired a property pending a dispute but he would merely be bound by the decision of the arbitral tribunal but can in no way become a party to the arbitration proceedings, unless that person has consented to be subjected to the jurisdiction of the tribunal. This is one of the reasons why the UNCITRAL Model Law for International Commercial Arbitration (UML) provided for power of a court to order interim measures, independent of the power of the arbitral tribunal to order interim measures between the parties to the arbitration agreement. The Act also provides for such a power to the court.

A look at the Travaux Préparatoires of the UML would show that the relevant court has been accorded the power because of the inherent lack of power of the arbitral tribunal to pass orders against third parties. [Specifically, see Para 66, UNCITRAL, REPORT OF THE WORKING GROUP ON INTERNATIONAL CONTRACT PRACTICES ON THE WORK OF ITS THIRD SESSION (A/CN.9/245) (23 March 1982); Para 71, UNCITRAL, REPORT OF THE WORKING GROUP ON INTERNATIONAL CONTRACT PRACTICES ON THE WORK OF ITS SEVENTH SESSION (A/CN.9/245) (22 September 1983); Para 59, UNCITRAL, REPORT OF THE WORKING GROUP ON INTERNATIONAL CONTRACT PRACTICES ON THE WORK OF ITS SEVENTH SESSION  (A/CN.9/246) (6 March 1984); UNCITRAL, ANALYTICAL COMMENTARY ON DRAFT TEXT OF A MODEL LAW ON INTERNATIONAL COMMERCIAL ARBITRATION (A/CN.9/264) (25 March 1985).

In this regard, the following observations by the Supreme Court in M.D., Army Welfare Housing Organisation v. Sumangal  Services Pvt. Ltd. [a decision rendered with respect to the Arbitration Act, 1940. Same principles are applicable under the 1996 Act too] may be noted:

An arbitrator in a situation of this nature had no jurisdiction to pass the interim order under the Arbitration Act, 1940 in absence of any specific agreement in relation thereto… 
An arbitral tribunal is not a court of law. Its orders are not judicial orders. Its functions are not judicial functions. It cannot exercise its power ex debito justitiae. The jurisdiction of the arbitrator being confined to the fourcorners of the agreement, he can only pass such an order which may be subject matter of reference… 
[E]ven under Section 17 of the 1996 Act the power of the arbitrator is a limited one. It cannot issue any direction which would go beyond the reference or the arbitration agreement. Furthermore, an award of the arbitrator under the 1996 Act is not required to be made a rule of court; the same is enforceable on its own force. Even under Section 17 of 1996 Act, an interim order must relate to the protection of subject matter of dispute and the order may be addressed only to a party to the arbitration. It cannot be addressed to other parties. Even under Section 17 of the 1996 Act, no power is conferred upon the Arbitral Tribunal to enforce its order nor does it provide for judicial enforcement thereof. The said interim order of the learned Arbitrator, therefore, being coram non judice was wholly without jurisdiction and, thus, a nullity.” (Emphasis not in the original)

Hence, it is clear that the arbitrator in the instant case could not have directed the injunction at a person who was not a party to the arbitration agreement. Further, just because a person would be affected by an award of the arbitrator, that alone does not make him a party, unless there was an arbitration agreement as contemplated in Section 7 of the Act.

The Delhi High Court did not strike down the interim order of the arbitrator. The court asked CEPL to avail of the statutory remedy under S 37(2)(b) of the Act. [The said provision reads:

(2) Appeal shall also lie to a court from an order of the arbitral tribunal----
(a) accepting the plea referred to in sub-section (2) or sub-section (3) of section 16; or
(b) granting or refusing to grant an interim measure under section 17.”]

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