"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 15, 2010

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

We had, in the last seven posts on this topic, discussed the law pertaining to the power of an adjudicatory authority under the Arbitration and Conciliation Act, 1996 to award interim measures (by adjudicatory authority, we mean the courts and the arbitral tribunals). At first, we had seen the not-so controversial issue of the power of the arbitral tribunal to award interim measures against third parties. Subsequently, we had taken up the tricky issue of the jurisdiction of a court under S 9 of the Arbitration and Conciliation Act, 1996 to grant interim measures against a non-signatory to the arbitration agreement (third party).

Though it might be unjust, at times, to pass order for interim measures against third parties, there might be compelling reasons for courts to have and exercise such a power. In this last post on this topic, we would discuss the reasons why a court under S 9 should have the power to issue interim orders against third parties.

  1. History of the UML:
The structure of the Indian Arbitration and Conciliation Act, 1996 has been borrowed from the UNCITRAL Model Law on International Commercial Arbitration, 1985 (Model Law) and the UNCITRAL Conciliation Rules, 1980. Part I of the Act is virtually based on the Model Law. Sections 9 and 17 of the Act address the same subject as that of the Model Law. In a report of one of the Working Groups of the UNCITRAL, it was stated:
The range of interim measures of protection covered by article 9 is considerably wider than that under article 18* due to the different purposes of these two articles. Article 18 deals with the limited power of the arbitral tribunal to order any party to take an interim measure of protection in respect of the subject-matter of the dispute and does not deal with enforcement of such orders. Article 9 deals with the compatibility of the great variety of possible measures by courts available in different legal systems, including not only steps by the parties to conserve the subject-matter or to secure evidence but also other measures, possibly required from a third party, and their enforcement. This would, in particular, include pre-award attachments and any similar seizure of assets.” (emphasis not in the original) [UNCITRAL, ANALYTICAL COMMENTARY ON DRAFT TEXT OF A MODEL LAW ON INTERNATIONAL COMMERCIAL ARBITRATION (A/CN.9/264) (25 March 1985)]
[* The present Article 17 was then Article 18 “Power of arbitral tribunal to order interim measures”]

Against this rationale, it might be argued that the wordings of Article 9 were completely different from that of Section 9. Article 9 of the Model Law reads:
 Arbitration agreement and interim measures by court: It is not incompatible with an arbitration agreement for a party to request, before or during arbitral proceedings, from a court an interim measure of protection and for a court to grant such measure.”
But this argument is not sustainable because Article 9, as the drafting history of the UML would show, was negatively worded so as to preserve the right of a court to grant interim orders or measures, including even those addressed to non-signatories to the arbitration agreement. In fact, the inability of the arbitral tribunal to pass interim orders against third parties was one of the important reasons for having a provision in the UML saving the jurisdiction of the court to grant interim measures, notwithstanding an agreement to arbitrate disputes. India has retained the same structure as that of the Model Law, including that of the power of the court to grant interim measures in relation to arbitration proceedings (Unlike most other provisions of Part I of the Act, there is no provision analogous to S 9 in the Model Law though the subject matter of both the provisions is the same. The drafters seem to have drawn inspiration for this section from S 41(b) and Schedule II of Arbitration Act, 1940).

  1. The Structure of S 9 of the Act:
There is nothing in S 9 of the Act, which restricts a court to pass orders under that section against non-signatories. In fact, under certain provisions of S 9, a court is authorised to pass orders in respect of parties who are not signatories to the arbitration agreement. For example, the court could, under S 9, appoint a guardian, or a receiver, who would be third parties to the arbitration agreement. In Value Advisory Services v. ZTE Corporation and Ors. MANU/DE/1032/2009, Rajiv Sahai Endlaw, J. noted:
Under Clause (i) [of S 9], the guardian to be appointed may not be [] a party [to the arbitration agreement]; similarly the goods under Clause (ii) (a) may be or may be required to be in custody of or delivered to or sold to such third parties - further orders against such third parties may also be required in connection with such sale; under Clause (ii)(b) the amount to be secured may be in the form of money payable or property in hands of such third party - the scope cannot / ought not to be restricted to securing possible with orders against parties to arbitration only. Similar examples can be given with respect to other clauses also.”
Further, a perusal of cases in which the courts have denied the existence of the power of a court to grant interim orders against third parties would reveal that not one justification is given for such denial. All that these courts do is to simply state that no express power for the same has been granted in S 9. The provision is, however, clear on one point (which we have noted in one of the earliest posts on this topic). Only a party can apply to the court for interim measures:
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…”
“Party” here is defined in the Act. Section 2(1)(h) defines “party” to mean “a party to an arbitration agreement.” Thus, only a party to the arbitration agreement can apply to the court for interim measures. But the provision does not say against whom the relief can be claimed.

  1. Power of a Civil Court:
S 9 provides:
“…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.”
 Thus, the power under S 9 of a court is equivalent to that of a civil court. There are instances where civil courts have, in the past, made interim orders in respect of non-signatories. State Bank of India v. The Economic Trading Co. SAA & Ors. AIR 1975 Cal 145: MANU/WB/0028/1975 is a classic example where the court granted an interim injunction restraining non-signatory banks, which were either the guarantor or the beneficiary of a guarantee, from taking action with respect thereto. In this case, the State Bank of India, on behalf of a party to a contract, gave a guarantee to an Egyptian bank. When the Egyptian bank wanted to invoke the guarantee, the said party to the contract approached the court for interim injunction. The court granted an interim injunction against the SBI preventing it from honouring the Egyptian bank’s demand, against the Egyptian bank from insisting SBI from further demanding to encash the bank and the ultimate beneficiaries of the bank guarantees who instructed the Egyptian bank to demand encashment.

The Delhi High Court has, as noted in the previous post, in Value Advisory Services v. ZTE Corporation and Ors., cited several examples of orders recognized under the Code of Civil Procedure, 1908, such as Sections 47, 60 and Order 21 Rules 46 and 46A-F, Order 38 Rules 6-11A of CPC, that may be against third parties.

  1. The Role of a Court in the Arbitral Process:
In CREF Finance Limited v Puri Construction & Others (MANU/DE/0580/2000), the court held (we had already quoted this phrase in an earlier post on this topic):
“Wherever the powers of the Court are invoked with the objective of supporting the arbitration, the Court must act with alacrity.”
 As we had seen in this post, the petitioner would have been left remediless because the petitioner can neither approach the arbitrator for an interim measure against a third party (because the tribunal, being a “creature” of contract, cannot pass any order against a third party) nor the court if the court unnecessarily refuses to order interim measures of protection. We had discussed the case of Cadre Estate Pvt. Ltd. v. Salochna Goyal where the court refused to pass an interim order against third parties to the contract. The petitioner’s complaint was that one of the respondents had entered into an agreement to sell with her. However, the said respondent disposed off the property even before the sale was concluded. Therefore, the petitioner approached the court to restrain the said respondent and the subsequent transferee from alienating or disposing off the property. The court held that there was no agreement between the petitioner and the subsequent transferees and dismissed the application under S 9 for interim injunction.

  1. Multiplicity of Proceedings:
Take the case of Cadre Estate Pvt. Ltd. v. Salochna Goyal as an example. The petitioner’s prayer for interim injunction against third party transferees was dismissed. Obviously, the arbitrator cannot have any jurisdiction against the third party transferees (though in reality, the arbitrator restrained even the third party transferees). The only forum available to the petitioner for restraining the third party transferees is the civil court. So she has to file a separate suit for injunction against the third party transferees. It is this kind of situation which leads to multiplicity of proceedings that ought to be avoided.

The courts have, in the past, issued interim orders even against third parties. Examples are National Highways Authority of India v. Elsamex-TWS-SNC Joint Venture MANU/DE/0732/2008, Niko Resources Ltd. v. Union of India 2001(3) Arb. L.R. 196 (Delhi) (DB). As stated before, the courts denying existence of the power to issue interim orders against third parties have based their justifications on the absence of any express statement of the existence of such a power under S 9. For the reasons above, it is submitted, it would be erroneous to deny the existence of such power. Nevertheless, there might be cases in which justice would demand the court not to exercise that power. In such cases, courts ought to base their reasons on law and reason and not on illusory considerations.
[Readers may refer to this guest post by Mr. Shantanu Narvane in the Lex Arbitri Blog on this topic]

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