"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.

Monday, November 8, 2010

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

We had, in the last two months, written several posts on the power of an adjudicatory authority to award interim measures against non-signatories to an arbitration agreement. You can access the previous posts from the following links:

Part I:           dealt with principles pertaining to awarding interim measures by arbitrator against a non-signatory
Part II:             dealt with the case of Cadre Estate Pvt. Ltd. v. Salochna Goyal where the arbitrator awarded interim measures against a non-signatory.
Part III:            further dealt with the case of Cadre Estate Pvt. Ltd. v. Salochna Goyal
Part IV:          dealt with the relevant aspects of the case of Cadre Estate Pvt. Ltd. v. Salochna Goyal pertaining to the power of a court to award interim measures against a third party
Part V:             discussed briefly the law in the case of SN Prasad v. Monnet Finance Ltd. which affirmed the view (that we took in the previous posts) that a dispute between two parties can be referred to arbitration if both are parties to an arbitration agreement. Thus, an arbitrator would have no jurisdiction in respect of a non-signatory.

 The question as to whether a court has under S. 9 of the Arbitration and Conciliation Act, 1996 the power to pass an order against non-signatories to the arbitration agreement if such orders are in relation to arbitral proceedings before it has been answered both ways by the High Courts of India, as this blog post would show. In the absence of any binding decision of the Supreme Court of India (SCI) on this point, seeking orders under S 9 against third parties for whatever reasons is like walking on a tight-rope blindfolded. The court may decide on way or the other. It is in this context that this post is written. The purpose of this endeavour is to point out reasons in support of the contention that courts have the power to pass orders under S 9 against third parties.

Section 9 reads:

Interim measures etc. by Court.-
A party may, before, or during arbitral proceedings or at any time after the making of the arbitral award but before it is enforced in accordance with section 36, apply to a court-
(i) for the appointment of a guardian for a minor or person of unsound mind for the purposes of arbitral proceedings; or
(ii) for an interim measure or protection in respect of any of the following matters, namely:-
(a) the preservation, interim custody or sale of any goods which are the subject-matter of the arbitration agreement;
(b) securing the amount in dispute in the arbitration;
(c) the detention, preservation or inspection of any property or thing which is the subject-matter of the dispute in arbitration, or as to which any question may arise therein and authorising for any of the aforesaid purposes any person to enter upon any land or building in the possession of any party or authorising any samples to be taken or any observation to be made, or experiment to be tried, which may be necessary or expedient for the purpose of obtaining full information or evidence;
(d) interim injunction or the appointment of a receiver;
(e) such other interim measure of protection as may appear to the Court to be just and convenient,
and the Court shall have the same power for making orders as it has for the purpose of, and in relation to, any proceedings before it.”
Two aspects are worth noting here. One, Section 9 does not clearly stipulate if a court could pass an order against third parties. Two, in regard to the grant of interim measures, the court would have, according to this section, “the same power for making orders as it has” for or in relation to any proceedings brought before it. Thus, the court would have all the powers to grant interim measures that an ordinary civil court would have if such proceedings were brought before it.

As stated before, the High Courts have seriously differed on this question. Examples are:

Decisions in favour of such power
Decision against such a power
National Highways Authority of India v. China Coal Construction Group Corpn. AIR 2006 Del 134 : 2006 (1) Arb LR 265 (Delhi): MANU/DE/0488/2006

Arch Hi-Rise (P) Ltd. v. Yatin Bhimani & Ors. 2006 (4) CHN 204: MANU/WB/0276/2006

Impex  Trading Gmbh v. Anunay  Fab . Ltd. and Ors. 2008 (1) Arb LR 50 (Delhi): MANU/DE/8800/2007

Kanta Vashist v. Ashwani Kumar MANU/DE/0380/2008

The earliest case on this aspect was probably CREF Finance Limited v Puri Construction & Others (MANU/DE/0580/2000) CREF Finance Limited (CREF), the petitioner and Puri Construction (Puri) entered into a joint venture for jointly conducting business in real estate. Additional acreage was purchased in the name of CREF as Puri already owned 22 acres. The said 22 acres was to act as security in equitable mortgage for investments by CREF in terms of the letter by Puri. For discharging their liability towards CREF, Puri agreed to transfer a property within a time period. In the meanwhile a Development Agreement was signed between L & T and Puri with CREF as a consenting party. In the said Development Agreement, Puri’s liability to transfer that particular property was duly recognised as a previous agreement for transfer of the property. Disputes arose between Puri and CREF and a sole arbitrator was appointed. On 13 May 2010, the arbitrator passed certain Orders. Relevant portion of the Order reads:

"To sum up, [Puri] is directed to allot to CREF the entirety of the blocks marked as AR and A4 as well as 12 apartments covering an area of about 15000 sq. ft. in Block B2. [Puri] will be at liberty to dispose of in favor of the third parties the rest of the area covered by the first phase of development. In consideration of such earmarked allotment, CREF is directed not to interfere directly or indirectly with, or cause any obstructions in the way of [Puri] and L&T disposing of other buildings in this phase of the project."

On 15 July 2000, PCL recognised its obligations to comply with the Orders of the Arbitrator and stated that they would not transfer the property referred to as AR, A4 and the twelve apartments (Suit Property) to L & T.  However, on 31 May 2000, L & T stated that in an agreement they would not be in a position to allot the land to CREF. The arbitrator’s Orders were also challenged under S 34 of the Act. Hence CREF approached the Delhi High Court for interim relief praying for allotment to them of the property stated in the arbitrator’s Orders. CREF made a specific allegation in their pleadings that the managing director (MD) of Puri did not comply with the arbitrator’s Order. However, Puri’s MD resisted the petition on the ground that there was no arbitration agreement between the MD personally and CREF.

The Single Bench held that though the arbitrator’s Orders could be enforced in view of the fact of non-enforceability under S 34(3) and S 36, a Party to arbitration cannot be left remediless if court is convinced that a negative or a positive interim measure is called for. The purpose of the court in the arbitral process, according to the Single Judge, was to assist the arbitral process. MD was agent of the Respondent. It was contended that an interim order under S 9 cannot lie against L & T, a third party to the arbitration agreement. The court rejected the argument and held that the fact that L & T was a third party to the arbitration agreement would not in any way curtail the power of the court to grant equitable relief. The judge stated:

15. All Statutes must be viewed and interpreted with a proactive vision. This is not to say that Courts would be justified in granting interim orders and reliefs on the asking. Wherever the powers of the Court are invoked with the objective of supporting the arbitration, the Court must act with alacrity. This principle is recognised both in the United Kingdom and United States of America. The Supreme Court had cited with approval the English decision in The Channel Tunnel Group Vs. Balfour Beatty Construction Limited and Ors., (1993) (1) All. E. R.”

The court tried to further justify its order by stating that L & T was not a third party without notice and Puri was only acting as the agent of L & T.

National Highways Authority of India v. China Coal Construction Group Corpn. [2006 (1) Arb LR 265 (Delhi): AIR 2006 Delhi 134: MANU/DE/0488/2006] is perhaps the earliest case where the courts decided against the existence of power of a court to grant interim order against a Non-Signatory. In March 2002, NHAI and CCC entered into a contract for the construction of roads. Disputes arose between the parties and they invoked the arbitration clause. A petition was filed by CCC praying for restraining NHAI from invoking the contract bank guarantee. Arbitrator was nominated by NHAI in regard to the disputes. Further, a interim order was granted by the court restraining any attempt by CCC to remove equipment from the site. In view of the constitution of the arbitral tribunal, CCC sought the courts leave to withdraw it suit. Pursuant thereto, the court passed an order on 25 January 2005 dismissing the suit. On the same day, the arbitral tribunal passed an order restraining CCC from removing equipment from the site. The tribunal’s order, however, stated that its order would not affect any decision of the Kolkata High Court.  A petition was filed by the National Highways Authority of India (NHAI) against China Coal Construction Group Corp (CCC) for an order restraining CCC from interfering with the equipments lying on site. An interim order was passed on 25 January 2005 in the said petition. SREI International Finance Limited (SREI) filed an application as intervenor in the above proceedings and sought clarification of the above stated interim order. It may be noted that the tribunal’s order referred to the proceedings in the Kolkata High Court between the intervenor and CCC. CCC had, through hire purchase, purchased certain equipment, but according to the intervenor, had defaulted in payment. Hence, the intervenor had called upon CCC to remove the default or surrender possession of equipments lying in the site. Since NHAI was not a party to these proceedings before the Kolkata High Court but had a contractual right over the equipments lying on the site, it approached the Delhi High Court for an interim relief. After granting an interim measure of protection under S 9 as pleaded by NHAI, the High Court went on to decide if the intervenor could be impleaded as a party to the petition. Holding in the negative, the court held:

Section 9 of the Act is with reference to arbitral proceedings just as the Intervenor cannot be a party in the arbitral proceedings pending between NHAI and China Coal, it has no locus standi in the present proceedings. The interim orders that may be passed under Section 9 or Section 17 are with respect to the parties to the arbitration and in connection with the subject matter thereof.”

The above decisions have been analysed to give instances of the kinds of justifications offered to either confirm or deny the existence of such a power against a non-signatory. In CREF Finance, the judge took the aid of principles like proactive role of court to support the arbitral process, power of the court to grant relief in equity when the situation demands it, etc. However, in NHAI v. CCC, Badar Durrez Ahmed, J simply ruled that an order under S 9 cannot be passed against a non-signatory. He stated that the purpost of S 9 was then to support the arbitral process by providing urgent relief before the constitution of the arbitral tribunal.

In the next post, we shall see certain other notable cases on this point. Once we are through with this, we would provide reasons why denial of existence of such a power is unnecessary and erroneous.

No comments: