Clear and Unclear Injustice: Tantia Constructions

Sanjeev K Kapoor, a partner in Khaitan and Co. has written an article in moneycontrol.com critiquing the recent Supreme Court judgement in Union of India and Ors vs Tantia Construction Pvt Ltd. The article titled 'Arbitration: Existential Crisis?' traces the debate regarding interference by a writ court in contractual matters and argues that "[t]he test under the latest judgment to invoke writ jurisdiction is when injustice is clear from the facts of the case and exercise of such jurisdiction is mandated to curb injustice and uphold the rule of law. This is an onerous test which is required to be satisfied by a party invoking writ jurisdiction of the court as opposed to existing remedy of the arbitration." The reasoning cited by the Supreme court for interference in a contractual matter was injustice:

"[I]t is now well-established that an alternative remedy is not an absolute bar to the invocation of the writ jurisdiction of the High Court or the Supreme Court and that without exhausting such alternative remedy, a writ petition would not be maintainable. The various decisions cited by Mr. Chakraborty would clearly indicate that the constitutional powers vested in the High Court or the Supreme Court cannot be fettered by any alternative remedy available to the authorities. Injustice, whenever and wherever it takes place, has to be struck down as an anathema to the rule of law and the provisions of the Constitution. We endorse the view of the High 28 Court that notwithstanding the provisions relating to the Arbitration Clause contained in the agreement, the High Court was fully within its competence to entertain and dispose of the Writ Petition filed on behalf of the Respondent Company."

Contrary to what Sanjeev K Kapoor suggests, this blawgger feels that the test that the writ court would intervene where "injustice is clear from the facts of the case and exercise of such jurisdiction is mandated to curb injustice and uphold the rule of law" is neither an onerous test nor the correct one for the court's interference. Any breach of contract would result in injustice to the other party. This blawgger is not sure if the court has supplied us with parameters on how to distinguish between "clear" injustice and "unclear" injustice. Does the court mean that if the case of breach of contract is arguable, the dispute would be within the contractual domain and if the breach of contract is clear, it would be within the constitutional domain? If so, what is the basis or the utility for such a distinction? 

The problem with interference of writ courts in commercial matters is that there are no clear parameters laid down for interference. Amorphous tests like "clear injustice" bring no certainty. In case the Supreme Court lays down parameters for interference, it would be the duty of subsequent courts deciding on interference to state why interference is warranted under a particular parameter listed out by the prior Supreme Court decision.

In a future post, we will look into past decisions to see if there are such parameters.

Are We Groping in the Dark? The Need for Empirical Research on Arbitration in India

In 2003, the Supreme Court went contrary to the then prevailing understanding of the ground of public policy in Section 34 of the Arbitration and Conciliation Act, 1996 (“Act” or “1996 Act”) and held that patent illegality of the arbitral award would also come within the purview of the ground of public policy in Section 34(2)(b)(ii) for setting aside arbitral awards. Commentators lamented that the judgement had brought back the position in the Arbitration Act, 1940. For instance, Sarah Hilmer argued: “[u]nfortunately, in Saw Pipes [ONGC v. SAW Pipes AIR 2003 SC 2629] the Supreme Court has opened the floodgates to arbitral litigation.” [Sarah E. Hilmer, Did Arbitration Fail India or did India Fail Arbitration, 10 Int. A.L.R. 2007 33, 34 (2007)] From a doctrinal point of view, the argument that the Saw Pipes is not contrary to the spirit of the Act or that Saw Pipes is not in consonance with the prevailing international scenario may be convincing at first sight. However, in the face of a powerful argument that till 2007 (Saw Pipes was decided in 2003) only 26.72% (151) of the applications were filed challenging an award based on public policy and in those 151 applications, 112 were outrightly rejected (representing about 74.17% of the total applications based on public policy ground), Sarah Hilmer’s argument does not sound overwhelmingly forceful anymore. [for the figures just cited, see Sumeet Kachwaha, Enforcement of Arbitration Awards in India, (2008) 4 AIAJ 64 (2008); and Amelia C. Rendeiro, Indian Arbitration and “Public Policy”, 89 Tex. L. Rev 699 (2011) wherein Rendeiro argues on the basis of data in Kachwaha’s article that the challenges on the basis of public policy are “relatively rare and, when made, are frequently rejected by the high courts”. The point made here is about the forcefulness of empirical research and not the correctness of the data in Kachwaha's article] This is a typical illustration of the potency of quantitative data or empirical evidence in dispelling myths.

Empirical: Quid Est? The term “empirical” means “based on what is experienced or seen rather than on theory”. As opposed to doctrinal research, empirical research involves the “systematic investigation of real world facts or actual societal functioning, whether by quantitative or qualitative methods, for the purpose of making law more effective and just or the administration of justice more fair.” [See, Craig Allen Nard, Empirical Legal Scholarship: Reestablishing a Dialogue between the Academy and Profession, 30 Wake Forest L. Rev. 347 (1995).] The title of the law review article just cited says it all: empirical research is an attempt at establishing a dialogue between legal academia and legal profession. While quantitative empirical research, as the name suggests deals with numbers and statistics, qualitative empirical research primarily consists of historical materials, interviews, case studies, etc[See, Lee Epstein & Gary King, The Rules of Inference, 69 U. Chi. L Rev 1, 2 (2002)]. Uses and applications of empirical techniques in law have been charted out quite systematically in the past three decades in legal scholarship worldwide. Some of the uses of empirical legal research, as stated in the Nuffield Report [Professor Dame Hazel Genn et al, Law in the Real World: Improving Our Understanding of How Law Works, November 2006] are enumerated below:

1. Results of empirical legal research would provide near-certain data about the existence or the non-existence of certain state of affairs, depending on which policy could be made or modified.
2. Several institutions such as Non-governmental organisations, civil society, etc act as links between the policy-makers and law-in-motion. At their level, empirical legal research helps in convincing the policy makers about the need for making a policy or amending it.
3. Use of empirical data in pleadings to support an argument in the court. (see, for example, AT & T Mobility v Concepcion)

Empirical Research in Indian Arbitration:
While qualitative empirical research in law is much more prevalent in India, quantitative research in law is not probably taken as much as is required, at least in the mainstream legal academia. [Some examples are Wolfgang K. C. Köhling, The Economic Consequences of a Weak Judiciary; Matthieu Chemin, Does the Quality of the Judiciary Shape Economic Activity? Evidence from India; Lakshmi Iyer et al, Political Representation and Crime: Evidence from India; India Development Foundation, Judicial Impact Assessment: An Approach Paper. 

Empirical Research, whether quantitative or qualitative,  in Indian arbitration is even more uncommon. Apart from a few empirical analyses such as those pertaining to the number of awards set aside and number of arbitration cases filed, there has been no systematic data collection and interpretation. 

Data is difficult to come by in arbitration primarily because of its inherent nature: arbitration is a private and confidential process. This problem has been mitigated to an extent by several arbitral institutions which publish statistical information pertaining to arbitrations handled by them. For example, the Singapore International Arbitration Centre publishes relevant statistics in its annual report [SIAC, 2010: CEO’S ANNUAL REPORT]. Arbitral institutions in India, it would seem, do not officially publish statistics of arbitrations conducted under their aegis. The problem of lack of data is further amplified in India where ad hoc arbitration is the prevalent mode of arbitration. With these constraints it is not easy to find data on arbitration. So we have to rely “on anecdotal sources of information, such as reported court cases, published arbitral awards, and attorney war stories.” [Christopher R. Drahozal, Of Rabbits and Rhinoceri: A Survey of Empirical Research on International Commercial Arbitration, 20 J. Int’l Arb. 23 (2003)] However, this does not prevent researchers from doing research on the role of judiciary in arbitration. As illustrated above, establishing arguments through empirical data adds more force and certainty to the argument. Due to lack of empirical research on Indian arbitration, the connect between theory and the law-in-motion is not firmly entrenched, leading to hypothetical arguments. It would do well for arbitration researchers in India to venture into the empirical domain.

Generally, teachers of arbitration at National Law Schools suggest (or at times allot, I understand) non-empirical topics to students. Suggesting arbitration topics related to data collection/ data analysis might probably go a long way in bridging the gap between theory and practice.

Arbitrability in India: Booz Allen & Hamilton v SBI Home Finance: Part II

In the last post, we did a descriptive comment on the Booz Allen case. We are yet to deal with the crucial issue where the Supreme Court explicated the Indian law on Arbitrability. In this post, we’ll comment on what the Supreme Court had to say on Arbitrability. In subsequent posts on this topic, we'll do a critique of the decision.

Issue 4: Whether the subject matter of the suit is 'arbitrable'?

• There are three different conceptions of Arbitrability: (i) disputes capable of being adjudicated through arbitration, (ii) disputes covered by the arbitration agreement, and (iii) disputes that parties have referred to arbitration.
• In principle, any dispute that can be decided by a civil court can be resolved through arbitration.
• The legislature has reserved certain disputes to be decided exclusively by private fora.
• Apart from those reserved by the legislature, there are certain disputes the resolution of which can, by necessary implication, be only by public fora.
• Some examples are “(i) disputes relating to rights and liabilities which give rise to or arise out of criminal offences; (ii) matrimonial disputes relating to divorce, judicial separation, restitution of conjugal rights, child custody; (iii) guardianship matters; (iv) insolvency and winding up matters; (v) testamentary matters (grant of probate, letters of administration and succession certificate); and (vi) eviction or tenancy matters governed by special statutes where the tenant enjoys statutory protection against eviction and only the specified courts are conferred jurisdiction to grant eviction or decide the disputes.”
• These cases above are actions in rem as opposed to actions in personam. Actions pertaining to rights which are exercisable against the world at large (rights in rem) are actions in rem. Actions in personam are actions pertaining to rights and interests of the parties between themselves. In the former, there is a determination of right not only as between the parties to the action but against the world itself (that is, any other person claiming an interest in the subject matter at any point of time). Consequently, a judgement in an action in personam is a judgement against a person while in an action in rem it is a judgement that determines the status or the condition of the property.
• The general rule is that all actions in rem are to be pursued in a court of law while other actions may be brought before a private forum. The exception is the case where the action pertains to rights (in the nature of rights in personam) subordinate to a right in rem.
• The Act does not specifically provide for non-arbitrable classes of disputes but Sections 34(2)(b) and 48(2) of the Act state that an arbitral award dealing with a non-arbitrable subject matter could be set aside.

[The court devoted a separate para no. (26) for referring to the previous Supreme Court decisions on Arbitrability. Each of the previous cases were analysed in sub-paragraphs (26.1-26.3). Although a minor thing, this practice is commendable and makes the judgement more structured and systematic.]

• The Supreme Court has, in previous instances, decided on the Arbitrability question- Haryana Telecom Ltd. v Sterlite Industries India Ltd. (1999) 5 SCC 688, Olympus Superstructures Pvt. Ltd. v. Meena Vijay Khetan & Ors. (1999) 5 SCC 651; Chiranjit Shrilal Goenka v Jasjit Singh (1993) 2 SCC 507.
• An agreement to sell or an agreement to mortgage does not involve a transfer of a right in rem but is in the nature of a right in personam. Therefore disputes pertaining to such agreements are arbitrable.
• On the other hand, a suit for mortgage is an action in rem for the enforcement of a right in rem. Therefore, such suits would have to be necessarily decided by courts and cannot be adjudicated in private fora. The scheme for adjudication of mortgage suits is contained in Order XXXIV of the Code of Civil Procedure It prescribes the procedure for adjudication of mortgage suits, rights of mortgagees and mortgagors, thereby implying that such disputes are to be adjudicated by civil courts alone. For instance, Rule 1 of the said Order provides that all persons having an interest in the mortgage security shall be joined as a party to the suit relating to the mortgage. The rationale for this provision is to eliminate chances of multiplicity of proceedings. Similarly, in the said proceedings, the court safeguards not only the interests of the mortgagor and the mortgage but also of other persons having an interest such as puisne/ mesne mortgagees, persons entitled to the equity of redemption, auction purchasers etc. [the court lists out certain other actions that a court can order and an arbitral tribunal cannot]
• A decree for sale of mortgaged property is akin to an order of winding up-it requires the court to protect the interests of persons other than the suit parties. Therefore, a suit for enforcement of mortgage is not arbitrable.
• There might be some questions pertaining to a mortgage suit such as the amount due to the morgtagee etc that a tribunal could decide. However, the issues in a mortgage suit cannot be divided and decided by two fora [Sukanya Holdings (P) Ltd. v. Jayesh H. Pandya (2003) 5 SCC 531].

Therefore, the court upheld that decision to dismiss the application under Section 8 not for reasons provided by the lower courts but for the reason of non-arbitrability if the subject matter.

Arbitrability in India: Booz Allen & Hamilton v SBI Home Finance

We had, in a previous post, commented on the observations of the Supreme Court in Booz Allen & Hamilton v SBI Home Finance as regards the power of the Chief Justice to determine questions pertaining to Arbitrability in an application under Section 11 of the Arbitration and Conciliation Act, 1996 (Act). In this post, we will do a descriptive comment on the case. In subsequent posts, we would deal with the arbitrability issue in detail.

Court: Supreme Court of India

Civil Appeal: No. 5440/ 2002

Date of Judgement: 15 April 2011

Bench: RV Raveendran & JM Panchal, JJ.

Facts:

03.12.94       Capstone Investments Pvt Ltd (Capstone) and Real Value Appliances Pvt Ltd (Real) were owners of two flats (9A & 9B). Capstone and Real borrowed loans from SBI Home Finance Ltd (SBI) under two loan agreements with 9A and 9B as security.

05.04.96        Capstone and Real entered into separate Leave and Licence Agreements (LLA) with Booz Allen & Hamilton (Booz), the term being from 01.09.96 to 31.08.99. SBI also signed on each of the two such agreements as aa confirming party. Also, each of the Capstone and Real Value signed the other’s Leave and Licence Agreement.

                   Also, a Tripartite Deposit Agreement (TDA) was entered into between Real and Capstone jointly as the first party with Booz and SBI being the other two parties. According to the TDA, Booz paid Rs. 6.5 crores as deposit to Real and Capstone (jointly) in furtherance of conditions in the TDA and the LLA. Further, the TDA provided that the the two LLA and the TDA formed a single transaction.

Further, according to Para 5A of the TDA, notwithstanding repayment of dues by Sapstone, 9A (owned by Capstone) would be available as security for the remaining dues of Real and for that purpose, Capstone would be the guarantor for the dues of Real. The clause also stated that SBI had no objection to Booz occupying the flat as long as Capstone and Real (if they fail, Booz) paid its dues.

[I am still yet to find out the reason why people still use the expression “party of the First Part” or “party of the First Part” in agreements. This practice seems to be more prevalent in the immovable property sector than anywhere else. The usage is definitely confusing and it is better to call the parties by their names. The only possible use of these expressions is to denote two entities that form a single party, as was the case in this case. However, in such a case, it would be better practice to use terms like “Seller”, “Lessor” etc than to use such confusing expressions.]

July 97           Real made a reference to Board of Industrial and Financial Reconstruction (BIFR) under the Sick Industrial Companies (Special Provisions) Act, 1985. Pursuant to the reference, the Liquidator took over flat 9B (owned by Real.

04.08.99         Booz informed Capstone and Real that it was not interested in exercising the option to renew the licences on the expiry of the original term. [There  was such an option in the LLAs] and asked the Licensors to return the rs. 6.5 crore deposit.

26.08.99        A further letter was written to Capstone and Real stating that unless the Deposit was made, Booz would continue to occupy the flats.

28.10.99          SBI filed a suit in the Bombay High Court against Capstone, Real and Booz in regard to 9A since the loan amount due by Real was not repaid. Against Booz, SBI asked for an order to vacate 9A and hand over the possession to SBI.

25.11.99          The High Court (Bom HC), through an interim order pursuant to a notice of motion taken out by SBI, let Booz continue to occupy the flat.

15.12.99       In a reply filed by Booz to the notice of motion, it contended that SBI had a contractual obligation towards Booz as SBI had agreed for the continuance of Booz’s occupation till refund of the deposit.

10.10.01      Pursuant to a notice of motion, Booz prayed for the matter to be referred to arbitration agreement as per Clause 16 of the DA and for the suit to be dismissed. SBi resisted the application.

Order of the Single Judge of the Bom HC:

The High Court dismissed the application on the following grounds:

a) Reference of the dispute between the parties was not contemplated by the said arbitration clause.

b) The detailed reply filed by Booz (dated 15.12.99) in regard to the notice of motion for interim relief amounted to the first statement on the substance of the dispute. As per Section 8 of the Act, a party is deemed to have waived its right to ask for reference of the matter to arbitration under Section 8 if an application for reference is made after the submission of first statement on the substance of the dispute

c) Application for reference under Section 8 was filed only after 20 months from filing of the reply dated 15.12.99.

An appeal by special leave was filed to the Supreme Court. The Supreme Court granted leave on 28.08.02 (why did it take almost a decade for the court to decide the dispute!).

Four issues arose according to the Supreme Court:

“(i) Whether the subject matter of the suit fell within the scope of the arbitration agreement contained in Clause 16 of the deposit agreement?

(ii) Whether the Appellant had submitted his first statement on the substance of the dispute before filing the application under Section 8 of the Act?

(iii) Whether the application under Section 8 was liable to be rejected as it was filed nearly 20 months after entering appearance in the suit?

(iv) Whether the subject matter of the suit is 'arbitrable', that is capable of being adjudicated by a private forum (arbitral tribunal); and whether the High Court ought to have referred the parties to the suit to arbitration under Section 8 of the Act?”

Decision of the Supreme Court:

Issue 1: Whether the subject matter was within the scope of the arbitration ageement?

Clause 16 of the Deposit Agreement read:

“In case of any dispute with respect to creation and enforcement of charge over the said shares and the said Flats and realization of sales proceeds there from, application of sales proceeds towards discharge of liability of the Parties of the First Part to the parties of the Second Part and exercise of the right of the Party of the Second Part to continue to occupy the said Flats until entire dues as recorded in Clause 9 and 10 hereinabove are realized by the party of the Second Part, shall be referred to an Arbitrator who shall be retired Judge of Mumbai High Court and if no such Judge is ready and willing to enter upon the reference, any Senior Counsel practicing in Mumbai High Court shall be appointed as the Sole Arbitrator. The Arbitrator will be required to cite reasons for giving the award. The arbitration proceedings shall be governed by the Arbitration and Conciliation Ordinance 1996 or the enactment, re-enactment or amendment thereof. The arbitration proceedings shall be held at Mumbai.”

The Supreme Court held that the nature of the suit filed by SBI against the others was for the enforcement of mortgage/ charge and for ordering Booz to vacate the mortgaged property (9A). These issues were, for the court, covered by the arbitration clause (dispute pertaining to “creation and enforcement of charge over the said shares and the said Flats”, “exercise of the right of the Party of the Second Part [Booz] to continue to occupy the said Flats until entire dues as recorded”) These were therefore within the purview of the arbitration clause.

Issue 2: Whether Booz had submitted its first statement on the substance of the dispute before filing the application under Section 8 of the Act?

This issue arose in the first place because Section 8 grants a party to the arbitration agreement the right to have the dispute referred to arbitration by the court. However, such right is available only before filing the applicant’s first statement on the substance of the dispute. In this case, it was contended by SBI that by filing the detailed counter to the application for temporary injunction, Booz lost the right to apply to have the dispute arbitrated.

The test is even a statement, application or affidavit, filed by a defendant prior the written statement could be construed as a statement on the substance of the dispute “if by filing such statement/application/affidavit, the Defendant shows his intention to submit himself to the jurisdiction of the court and waive his right to seek reference to arbitration”. The court, relying on Rashtriya Ispat Nigam Ltd. v Verma Transport Company (pdf) (2006) 7 SCC 275  held that merely filing an application for temporary injunction or a reply to the same would not amount to submission on the substance of the issue. Further, the reply affidavit stated that it was being filed for the limited purpose of opposing the interim relief.

[The court cited the Rashtriya Ispat case as 2006 (7) SCC 275 instead of (2006) 6 SCC 275. I am not sure if the court's method of citing SCC reporter is correct.]

Issue 3: Whether the application for referring the dispute to arbitration could be rejected as it was filed nearly 20 months?

The court held that a lapse of 20 months for filing the application to refer the dispute to arbitration under Section 8 after entering into appearance did not amount to a waiver of the right to arbitrate. The court offered the following reasons:

• Section 8 does not prescribe a time limit for filing the application
• When applications for temporary relief are filed, it takes time to be decided by the court, and can involve appeal against the court’s order as well.
• In this case, there were attempts to settle the disputes and when these attempts ended in failure, Booz had filed an application under Section 8.

Therefore, the court held that a delay of 20 months did not amount to waiver of the right to have the matter arbitrated.

The court’s decision on the fourth issue is important and will be taken up in detail in another post.

Gas Dispute, Cairn's Revenge, the Production Sharing Contract: Updates

Lots of things happening in the petroleum arena. I call the petroleum sector an arena because its the most happening sector as far as disputes are concerned!

Gas Allocation Issue:

The Bombay High Court has reserved its judgement on the issue of non-allocation of gas from the Reliance D- 6 Field to the steel industry. We have been following this issue for some time (previous posts from this label). Moneycontrol.com has reported that the Ministry of Petroleum and Natural Gas has filed a reply to the petition of Maxsteel Welspun and others. Key aspects of the response, as per the report are the following:

•  Gas allocation to the fertilizer sector should be prioritized due to the Kharif Season.
• The power sector needs priority because of the extreme summer conditions.
• This action by the Government would lead to savings in subsidy to the tune of Rs. 1251 crores to the government

Against this, it was contended that the Government has completely overhauled the extant policy on natural gas. Further, it was argued that if there was a reduction in gas production, there should be pro-rata cuts by the Government in respect of all sectors.

The steel companies counsel forwarding the point that if there is a reduction in the production of gas from the KG-D6 basin then the oil ministry should form this particular policy of pro-rata cuts for all sectors across the board in the range of 10-15%.

Cairn's Revenge?:

Cairn is now acting like a woman scorned. Readers must be aware of the Cairn-Vedanta deal and how the Government-ONGC combine is still holding both Cairn and Vedanta by their respective kudumis! Now, Cairn India has alleged that ONGC has overstated its gas reserves in the KG-DWN Block 98/2 Block. Cairn India is in fact a part of the ONGC-Cairn consortium that has been given the licence to explore the Block. This allegation makes the Cairn-Vedanta-MoPNG saga more interesting, especially when ONGC is coming up with an FPO. Meanwhile check out a few news reports on the issue- Times of India, Business Standard

PSC:

More trouble in the petroleum exploration business. The Comptroller and Auditor General's office has come up with a 193 page Draft Report on Hydrocarbon Production Sharing Contracts alleging that it has structural flaws, the major one being that the PSC encourages more capital expenditure by the Contractor thereby reducing the government's share of the profits from the petroleum produced. Check out this news report. This blawgger couldn't get hold of the report but if anyone has a copy of it, please mail it to lawbadri@gmail.com so that we could do a series of posts on the report.

Transfer of Seat: Videocon Industries v Union of India

We had analysed the recent case of Videocon Industries v. Union of India in two posts. The said posts can be accessed from here and here. An issue pertaining to the transfer of seat was to be commented on.This post deals with the said issue.

To recap, the arbitration clause in the Production Sharing Contract (PSC) between Union of India and a consortium (of which Videocon was the lead) provided for Kuala Lumpur, Malaysia as the seat of arbitration. Due to the outbreak of SARS disease, the arbitration proceedings were held in Amsterdam and London. In October 2003, the Tribunal passed a consent order which read: “By consent of parties, seat of the arbitration is shifted to London.” The issue was whether this meant a transfer of the seat of arbitration itself or merely a consensus between the parties to the arbitration to hold the proceedings in London but to retain Kuala Lumpur as the seat. Videocon argued that there was a transfer of seat and Union of India argued that there was no transfer of seat. We had summarized the decision of the Supreme Court on this issue in one of those two posts mentioned above. We reproduce the same here:

The Supreme Court's reasoning and decision on this question is summarized below:

• The PSC was entered into between five parties with Kuala Lumpur being the seat of arbitration. If the parties were to amend the PSC, they could do so only by amending the PSC as per Article 35.2 through a written instrument. Therefore, there was no transfer of seat but of shifting of venues to different places for convenience.

[The provision of the contract pertaining to amendment read: “This Contract shall not be amended, modified, varied or supplemented in any respect except by an instrument in writing signed by all the Parties, which shall state the date upon which the amendment or modification shall become effective.”]

• There is no provision in the Arbitration and Conciliation Act by which seat could be changed by the arbitral tribunal. 
• The distinction between the seat and holding hearings in venues other than the seat has, however, been recognized in international arbitration. Even in Dozco India Ltd. V. Doosan Infracore, the Supreme Court recognized the difference between juridical seat of arbitration and hearings taking place in a jurisdiction outside the seat. [Section 53 English Arbitration Act, 1996]
• Therefore, there was no agreement to transfer the seat of arbitration to London. The agreement was merely an agreement to hold proceedings outside the seat.

In this post, we analyse whether the decision of the Supreme Court was correct.

It must be admitted that the argument of Mr. Gopal Subramaniam, the Solicitor General, appears forceful. Even so, this blawgger is of the opinion that the order of the arbitral tribunal was for a transfer of the seat of arbitration and not merely an agreement to hold the arbitral proceedings outside Kula Lumpur. The reasons are as follows:

1) There was no necessity for such an agreement because the tribunal had been holding the arbitral proceedings in Amsterdam and London even before the agreement was reached.

(2) The agreement uses the term “seat of arbitration”. The seat of arbitration specifically connotes the jurisdiction which would grant the “legal touch” to the arbitration proceedings. These were parties that had sophisticated legal counsel (for obvious reasons- the consensus was reached during the arbitration proceedings and was recorded by the tribunal). Therefore, the usage of the term “seat of arbitration” could not have been for any purpose other than to transfer the jurisdiction which grants the legal touch to the arbitration.”

(3) Article 35.2 of the PSC provides for three mandatory steps as regards amendment of the PSC:

a. An amendment must be through a written instrument

b. The amendment must be signed by all the parties, and

c. The amendment must provide for the date from which amendment would become effective.

This was admittedly not done. But the question is, notwithstanding Article 35.2, whether a consensus was reached between the parties to have the seat changed to London and whether the same is binding. According to this blawgger, the agreed manner of performance in the contract can be altered even extra-contractually by an undertaking given in a court of law. The Supreme Court was not right stating that any consensus to transfer the juridical seat to London required an amendment of the contract as per Article 35.2. Even though the effect of the consensus was alteration in the manner of dispute resolution, it was in effect a concession made before a tribunal which is virtually a court of law. If the interpretation afforded by the court is accepted, the problem would be that any concession made by counsel of a government party in a contractual issue would have to comply with the requirements of Article 299 of the Indian Constitution, which is actually not the case.

Nature of Concessions made in a Court of Law:

In Jamilabai Abdul Kadar v Shankarlal Gulabchand andOrs. (30.04.1975), a three judge Bench consisting of A.C. Gupta, R.S. Sarkaria and V.R. Krishna Iyer, JJ. had to consider whether a compromise signed by the pleader of one of the parties was binding on that party. Holding in the affirmative, the court stated that the pleader had an implied authority to enter into a compromise on behalf of his client even when the client has not expressly authorized the pleader to do so. Despite such authority, the court advised as a matter of prudence that the advocate should take the client’s concurrence.

Subsequent to this decision Rule 3 of Order XXIII was amended. The Rule reads as below (the underlined portions are some of the insertions made in 1976, that is, one year after Jamilbai)

“Where it is proved to the satisfaction of the Court that a suit has been adjusted wholly or in part by any lawful agreement or compromise in writing and signed by the parties, or where the defendant satisfies the plaintiff in respect of the whole or any part of the subject-matter of the suit, the Court shall order such agreement, compromise or satisfaction to be recorded, and shall pass a decree in accordance therewith so far as it relates to the parties to the suit, whether or not the subject-matter of the agreement, compromise or satisfaction is the same as the subject-matter of the suit:

Provided that where it is alleged by one party and denied by the other that an adjustment or satisfaction has been arrived at, the Court shall decide the question; but no adjournment shall be granted for the purpose of deciding the question, unless the Court, for reasons to be recorded, thinks fit to grant such adjournment.

Explanation.--An agreement or compromise which is void or voidable under the Indian Contract Act, 1872 (9 of 1872), shall not be deemed to be lawful within the meaning of this rule.”

 The above provision as amended seems to suggest that a court compromise (a compromise between the parties which submitted to the court for passing a decree on the basis of the same) cannot be reached without the signature of the party. However, in Byram Pestonji Gariwala v. Union Bank of India andothers (20.09.1991), a two judge Bench of the Supreme Court (T.K. Thommen and R.M. Sahai, JJ.) held that notwithstanding the amendments made in 1976, a compromise in writing and signed by counsel of the parties was binding on the parties. The court relied on the Statement of Objects and Reasons for the amendment (which provided that the amendment was, among other things, intended to clarify that a compromise has to be in writing signed by the parties to avoid delay which might arise from the uncertainties of oral agreements). On whether the 1976 amendment altered the law on the implied authority of the advocates to enter into compromise on behalf of the client, the court held:

“After the amendment of 1976, a consent decree, as seen above, is executable in terms thereof even if it comprehends matters falling outside the subject-matter of the suit, but concerning the parties. The argument of the appellant's counsel is that the legislature has intended that the agreement or compromise should be signed by the parties in person, because the responsibility for compromising the suit, including matters falling outside its subject-matter, should be borne by none but the parties themselves. If this contention is valid, the question arises why the legislature has, presumably being well aware of the consistently followed practice of the British and Indian Courts, suddenly interfered with the time-honoured role of lawyers in the conduct of cases without specifically so stating, but by implication? Can the legislature be presumed to have fundamentally altered the position of counsel or a recognised agent, as traditionally understood in the system of law and practice followed in India and other 'common law countries' without expressly and directly so stating?

Therefore the court held that the advocate had the implied authority to enter into a written compromise on behalf of his client. Subsequent decisions also recognized this [See, for instance, Pushpa Devi v. Rajinder Singh]. In Commissioner of Endowments v Vittal Rao MANU/SC/1003/2004, a compromise was made during the course of writ proceedings. The court recognized the same despite non-compliance with Order XXIII Rule 3 on the ground that writ proceedings stand on a different footing when compared to proceedings pertaining to suits or appeals.

The point about all this discussion in the current context is to establish that even a concession or compromise by the advocate of a party binds the client. Indian jurisprudence recognizes circumstances when compromises and concessions could be made without amending the contract. If that is so, it is difficult to conceive that in contracts involving governments, counsels would have no implied authority to make concessions and compromises or that compromises and concessions should be strictly in accordance with Article 299 of the Indian Constitution. The rationale for the existence of implied authority of advocates as held in Byram Pestonji applies with equal force to this situation:

“To insist upon the party himself personally signing the agreement or compromise would often cause undue delay, loss and inconvenience, especially in the case of non-resident persons. It has always been universally understood that a party can always act by his duly authorised representative. If a power-of-attorney holder can enter into an agreement or compromise on behalf of his principal, so can counsel, possessed of the requisite authorisation by vakalatnama, act on behalf of his client. Not to recognise such capacity is not only to cause much inconvenience and loss to the parties personally, but also to delay the progress of proceedings in court.” (emphasis supplied)

Our stand in this post is that the concession made before the tribunal to transfer the seat was not an amendment to the agreement. The court erred in not considering the concession as a species different from a contractual amendment. A judgement based on concession by parties would obviously override any previous agreement made by the parties as if that is not so, it would obviate the purpose of making the concession or the compromise in a court of law. 

[Thanks to Mr. Sumit Rai for commenting on a draft of this post.] 

Update on the Gas Allocation Issue

Business Standard has reported that the Bombay High Court has asked the Ministry of Petroleum and Natural Gas (MoPNG) to state whether they would be able to supply natural gas to Welspun Maxsteel and Ispat Industries. For those new to this blog and to the gas allocation issue, the Ministry of Petroleum and Natural Gas had directed Reliance Industries Limited, the operator of the Reliance D 6 Field, to supply gas only to select core sectors considering the shortage in supply of gas. Steel industries, which used natural gas, were denied supply of the same from the D 6 Field. Therefore, some steel companies had challenged the said decision before the Bombay and the Delhi High Courts. Recently, the Delhi High Court had asked the Empowered Group of Ministers (EGoM) to explain its position on the issue through an affidavit.

Yesterday, the Bombay High Court has asked the Government if it would be able to allow supply of gas to the petitioners, Welspun Maxsteel and Ispat Industries. This was consequent to the petitioners’ argument that the decision would result in closure of the plant and would also lead to a Rs. 1,000 crore loss of exchequer. Implying that the Government’s decision was harsh, Justice Shah is reported to have stated: “Sometimes government does not realize. If an industry shuts down, it is very difficult to revive”.

The dispute is definitely interesting to followers of the petroleum industry. So far in the history of Indian lex petrolea, the Government has been exercising virtually untrammelled powers as regards the petroleum sector. Even the courts have not questioned this. Examples are Association of Natural Gas Industries [(2004) 4 SCC 489] and Reliance decisions of the Supreme Court. However, it appears that the Bombay High Court seems to be of the view that the impugned decision is harsh, as the abovwe quote of Justice Shah would show.

The Government is fighting against these petitions before the Delhi as well as the Bombay High Courts. To prevent inconsistent decisions, it would be prudent for the matter to be transferred to either of these courts.

Updates on the Gas Allocation Issue and the Indus Water Treaty Dispute

The Gas Re-Allocation Issue
Over the past few months, Directorate General of Hydrocarbons (DGH) has been asking Reliance Industries Limited (RIL) to increase its gas production in the KG D6 Field. The direction from the DGH to RIL is in the wake of a slump in the production from the said Field and the increasing demand from the industry. Due to this, the MoPNG had no other alternative but to allocate the gas from the Field to the “core” sectors and deny supply to non-core sectors such as the steel industry etc. Several steel companies such as Essar Steel Limited, Welspun Maxsteel and others had challenged MoPNG's Direction before the Delhi and the Bombay High Courts. We had covered this in three posts (here, here and here). We had noted in our latest post that the MOPNG was firm in its position on gas allocation exclusively to the core sectors.

In one of our previous posts, we had noted that the Delhi High Court refused to grant an interim stay on the MoPNG direction to allot the gas exclusively to core sectors (Direction). It may also be noted that Welspun Maxsteel and others have filed a petition before the Bombay High Court challenging the same direction. It would be prudent for the matter to be transferred to either of the two High Courts.

In the proceedings before the Delhi High Court, one of the grounds for challenging the Direction was that the MoPNG was not competent to alter the allocation of gas done by the Empowered Group of Ministers (EGoM). Consequently, the counsel of Essar Steel reportedly prayed the court to order the matter to be decided by the EGoM. The Business Standard reports that even the court was of the opinion that it was better if the EGoM made a decision. An EGoM meeting was scheduled to be held on 9 June 2011. However, the meeting was cancelled. Ultimately, the Additional Solicitor General agreed to have the matter decided by the EGoM. The order of the Delhi High Court dated 3 June 2011 notes: “Mr. A.S. Chandhiok, learned ASG states that the stand of the EGOM in the matter will be made explicit by an affidavit to be filed on its behalf on or before 4th July 2011.”

Kishanganga Dispute between India and Pakistan
A 10 member court of arbitration, alongwith observers from India and Pakistan would inspect the Kishanganga project on 18 June. We have been providing updates on the issue. All the posts on this issue can be accessed from this label.

Monthly Roundup of Indian Cases on Contract Law and Arbitration (May 2011)

DLF Ltd. v. Punjab National Bank (Del HC)

Aspects: Validity of Pre-payment charges under Loan Agreement

HCL Technologies Limited vs Unique Identification Authority of India (DelHC)

Aspects: Tender, Withdrawal of Bid by Bidder, Forfeiture of Earnest Money Deposit, Injunction against Bank Guarantee Invocation.

Explaining the rationale behind EMD in government contracts, the High Court held:

“The purpose of stipulating forfeiture of the EMD in the event of the tenderer backing out of his contractual obligation to participate in the whole of the tendering process is to ensure that it is only serious and financially sound tenderers who participate in the tendering process and the fly by not operators, or those who are not serious about participating in the tendering process do not frustrate the whole process of tendering by withdrawing at the initial or an intermediate stage. If the tenderers know that the EMD furnished by them cannot be forfeited, in the event of there being a price/cost escalation, they may get to withdraw from it at a subsequent stage and in a given case, if the number of tenderers withdrawing from the tendering process happens to be substantial, the remaining tenderers left in the fray for submitting the bids may not be sufficient in number and consequently the Government may not get a competitive rate for the product it seeks to purchase or the service it seeks to avail. If the Government, on account of the number of tenderers left in the fray being inadequate has to cancel the tendering process and issue fresh tenders that may, besides causing financial loss to the Government, may also delay the important and time bound projects of the Government. It is, therefore, necessary that the parties to the tendering process strictly abide by the terms of the tender and this can be ensured only by enforcing the provision made in the tender document for forfeiture of EMD/bid security/performance security, as the case may be.”

Indraprastha Power Generation Co. vs M/S Harvinder Singh & Co. (Del HC)

Aspects: Work Orders issued as a part of same enquiry, Escalation, Error Apparent on the Face of Record, Setting Aside Arbitral Awards

Smt. Janki Devi & Ors. vs Shri Harish Chander Chawla (Del HC)

Aspects: Specific performance of agreement to sell immovable property, forged document, Pleadings in cases of fraud, undue influence and coercion

M/S. Herbicides (India) Ltd. vs M/S. Shashank Pesticides P.Ltd. (Del HC)

Aspects: Presumption as regards Registered Post Acknowledgement Due, Quantum of Damages if Stipulated in the Contract (S. 74)

The court drew principles from the landmark cases on S 73 & 74 of the Indian Contract Act and held:

“a) If a party to the contract commits breach of the contract, the party who suffers loss/damage on account of such breach is entitled to receive such compensation from the party in breach of the contract which naturally arose in usual course of business, on account of such breach or which the parties to the contract knew, at the time of making the contract, to be likely to result on account of its breach. However, the party suffering on account of the breach is entitled to recover only such loss or damage which arose directly and is not entitled to damages which can be said to be remote.

b) In case the agreement between the parties provides for payment of liquidated damages, the party suffering on account of breach of the contract even if it does not prove the actual loss/damage suffered by it, is entitled to reasonable damages unless it is proved that no loss or damage was caused on account of breach of the contract. In such a case, the amount of reasonable damages cannot exceed the amount of liquidated damages stipulated in the contract. Any other interpretation would render the words "whether or not actual damage or loss is proved to have been caused thereby" appearing in Section 74 of the Indian Contract Act absolutely redundant and therefore the Court needs to eschew such an interpretation.

c) If the amount stipulated in the contract, for payment by party in breach of the contract, to the party suffering on account of breach of the contract is shown to be by way of penalty, the party suffering on account of the breach is entitled only to a reasonable compensation and not the amount stipulated in the contract. If it is shown by the party in breach of the contract that no loss or damage was suffered by the other party on account of breach of the contract, the party in breach of the contract is not liable to pay any amount as compensation to the other party.

d) If the nature of the contract between the parties is such that it is not reasonably possibly to assess the damages suffered on account of breach of the contract, the amount stipulated in the contract, for payment by the party in breach should normally be accepted as a fair and reasonable pre-estimate of damages likely to be suffered on account of breach of the contract and should be awarded.”

Radha Krshna Films Ltd v. 2 Motion Pictures Association (Bombay HC)

Aspects: Setting aside arbitral awards, Applicability of Evidence and Civil Procedure Laws to arbitration, Necessity of reasoned arbitration awards, Remand of invalid award

Jet Airways (India) Limited v. Sahara Airlines Limited & Ors (Bombay HC)

Aspects: Award based on Consent Terms, Interest if award is silent

Md. Sabir Ansari v. Bishnu Mandal (Jharkhand HC)

Aspects: Injunction, Agreement to sell

In this case, the Jharkhand HC, instead of referring to the Specific Relief Act,  referred to a legislation unheard of previously in India – “the Specific Performance of Contract Act”.

Ramratanbhai Badriprasad Agrawal v. Kankuben (Gujarat HC)

Aspects: Compromise to be recognized by the court must not be void or voidable under the Indian Contract Act, 1872.

Inklab Chaturvedi vs Ansar Mohammad (Madhya Pradesh HC)

Aspects: Recovery of money paid under a void agreement.

In this case, the object of the agreement was not legal and therefore the agreement was void. The Madhya Pradesh HC rejected the argument holding that “while the agreement being void may not have been enforceable, but the money which had been paid to the accused under the agreement was legally recoverable” under Section 65 of the Contract Act. There is a contrary opinion that it is only as regards an agreement that becomes void subsequent to the agreement that is covered under Section 65 or that is discovered to be void post-agreement. In other words, the opinion is that an agreement that is void from the very beginning is not within the scope of Section 65. [See, 13^th Report of the Law Commission of India; Ramakrishna Ganapatrao v. Kondiram Jayasingrao AIR 2002 Bom 148; Kuju Collieres v Jharkhand Mines AIR 1974 SC 1892].

Vasant Dyeing And Printing Works vs Asset Reconstruction Company (India) Ltd. (Gujarat HC)

Aspects: The SARFAESI Act does not supersede the Indian Contract Act, 1872 (as regards discharge of sureties and co-sureties).

Progressive Career Academy v. FIIT JEE Ltd. (Delhi HC)

Aspects: Power of a court to order removal of an arbitrator during the currency of arbitration on the ground of bias.

This is a must read decision. Some extracts: 

"On a reading of Section 13(5), the legislative intent becomes amply clear that Parliament did not want to clothe the Courts with the power to annul an Arbitral Tribunal on the ground of bias at an intermediate stage. The Act enjoins the immediate articulation of a challenge to the authority of an arbitrator on the ground of bias before the Tribunal itself, and thereafter ordains that the adjudication of this challenge must be raised as an objection under Section 34 of the Act. Courts have to give full expression and efficacy to the words of the Parliament especially where they are unambiguous and unequivocal."

The decision is also notable because it overrules one of the earlier decisions by Vikramjit Sen who is also a part of the Bench in this case.

Arti Jethani vs Daehsan Trading (India) Pvt Ltd (Del HC)

Aspects: Application for reference of a pending dispute to arbitration, Application to be made before the filing of statement of defence on the substance of the dispute.

In this case, the court had to decide whether an application before the civil court under Section 8 for reference of the dispute to arbitration was maintainable when it was made after the filing of a written statement but when the applicant had challenged the jurisdiction of the court for the existence of the arbitration clause in the written statement. The court was of the opinion that the application was not maintainable.

Destel Marine Ltd . v. MV Star (Gujarat HC)

Aspects: Security for arbitration, invocation of admiralty jurisdiction, maritime lien, law applicable for determining the lien, International Conventions of Maritime Liens and Mortgages, 1993

Videocon Industries Ltd v. Union of India (Supreme Court of India)

We’ve had two blog posts on this case which may be accessed from here and here.

Devinder Kumar Gupta vs Realogy Corporation & Anr (Delhi HC)

Aspects: Challenging the validity of arbitration agreement through a civil suit, anti-arbitration injunction

Sanjiv Bhoradia v Sunil Kumar Bhoradia (Gujarat HC)

Aspects: Arbitrability of Disputes regarding Tenancy Rights, Arbitrator ignoring vital evidence

Arbitrability, Section 11 and Booz Allen

Last month, the Supreme Court comprehensively dealt with the Arbitrability question in Booz Allen & Hamilton v SBI Home Finance and laid down general principles on Arbitrability. In one of our recent posts, we had mentioned that Booz Allen makes a mention of the issue of the scope of the power of the Chief Justice under Section 11 to decide the question of Arbitrability. In this post, we would that aspect.

Booz Allen deals with the scope of the decision to be taken by the judicial authority pursuant to an application under Section 8 of the Arbitration and Conciliation Act, 1996. The court, while distinguishing between the scope of the power of a court under Section 8 and under Section 11 (the term used in Section 11 is the “Chief Justice” but after Patel Engineering, the distinction between court and the Chief Justice is virtually none), stated that that scope of issues for consideration under Section 8 was wider than that of Section 11 as under the latter, the court did not decide questions pertaining to Arbitrability. The court held:

"While considering an application under section 11 of the Act, the Chief Justice or his designate would not embark upon an examination of the issue of `arbitrability' or appropriateness of adjudication by a private forum, once he finds that there was an arbitration agreement between or among the parties, and would leave the issue of arbitrability for the decision of the arbitral Tribunal."

The court went further and stated that if the tribunal is constituted pursuant to an application under Section 11 and if the tribunal decides that the dispute was arbitrable, the only remedy available to challenge the tribunal’s decision on arbitrabilility is to approach the court under Section 34(2)(b)(i) of the Act.

In one of our earlier posts, we had touched upon this issue in the context of the power of a court under Section 11 to decide on question pertaining to Arbitrability of a claim arising under a contract by an unregistered partnership firm against another party to the contract. Our take on the issue was that the court should. In this post, we explain why.

Rationale of Patel Engineering

Two dominant themes dominate the reasoning in Patel Engineering (1) the jurisdictional facts rationale, (2) credibility.

The court held that when a tribunal (generic usage) intends to exercise jurisdiction, it has to be satisfied of the existence of jurisdictional facts, that is, those facts which are conditions precedent for the exercise of jurisdiction. Since, the existence of an arbitration agreement or its validity was a condition precedent to the exercise of a court’s jurisdiction, the court held that it was a jurisdictional fact and therefore, the court under Section 11 had to decide it.  

Another reason for the decision was that the court’s view that a party would be put to serious monetary pressure if he was dragged to arbitration when there was arbitration no arbitration agreement at all. Therefore, the court held that instead of letting such party to be dragged to arbitration, it would be better if the court itself decided on these questions.

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.

Patel Engineering has even expressly stated that the Arbitrability questions should go the court and not the arbitrator. Following are the relevant portions of the judgement:

"[I]t appears to us that while functioning under Section 11(6) of the Act, a Chief Justice or the person or institution designated by him, is bound to decide whether he has jurisdiction, whether there is an arbitration agreement, whether the applicant before him, is a party, whether the conditions for exercise of the power have been fulfilled and if an arbitrator is to be appointed, who is the fit person, in terms of the provision.”

"The appointment of an arbitrator against the opposition of one of the parties on the ground that the Chief Justice had no jurisdiction or on the ground that there was no arbitration agreement, or on the ground that there was no dispute subsisting which was capable of being arbitrated upon or that the conditions for exercise of power under Section 11(6) of the Act do not exist or that the qualification contemplated for the arbitrator by the parties cannot be ignored and has to be borne in mind, are all adjudications which affect the rights of parties.”

[the above reference may be to any outstanding issue between the contracting parties post-discharge of a contract]

"Dragging a party to an arbitration when there existed no arbitration agreement or when there existed no arbitrable dispute, can certainly affect the right of that party and even on monetary terms, impose on him a serious liability for meeting the expenses of the arbitration, even if it be preliminary expenses and his objection is upheld by the arbitral tribunal.”

Even if it is argued that the above quotes refer to contractual arbitrability and not arbitrability limitations imposed by law, there is no rationale why contractual arbitrability issues need to be treated differently from arbitrability limitations imposed by law. The recent edition of Justice RS Bachawat’s Law of Arbitration and Conciliation notes at p. 747:

“The immediate implication of [of the decision in Patel Engineering that the nature of the decision under Section 11 was judicial] is that the court, when asked to appoint an arbitrator, must go into the questions of arbitrability of the claim, validity of the arbitration agreement, and other jurisdictional matters.”

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.