"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 9, 2011

Reference, Counter-Claims and Limitation in Arbitration: SCI Clarifies

In a recent decision, the Supreme Court filled several gaps in the statute (the Arbitration and Conciliation Act, 1996 or Act or 1996 Act) pertaining to Reference, claims and counter-claims in arbitration, especially as regards circumstances when a party cannot raise counter-claims in the pleadings for the first time, the need for mentioning the list of specific disputes for which arbitrator is appointed under Section 11, admissibility of counter-claims in arbitration under an arbitration agreement which “requires specific disputes to be referred to arbitration” and restricts the jurisdiction of the arbitrator to only those disputes so referred to arbitration. We provide a descriptive comment of the case in this post.

Case: State of Goa v. Praveen Enterprises 2011(3) Arb. LR 209 (SC)
Date of judgement: 04.07.2011
Civil Appeal No. 4987/ 2011 ariising out of SLP (C) No. 15337 of 2009
Bench: RV Raveendran & AK Patnaik, JJ.


Relevant portions of the arbitration clause in the Agreement dated 04.11.1992 between the State of Goa (Goa) and Praveen Enterprises (Praveen) read:
Except where otherwise provided in the contract, all questions and disputes relating to the meaning of the specifications, designs, drawings and instructions herein before mentioned and as to the quality of workmanship or materials used on the work or as to any other question, claim right matter or thing whatsoever, in any way arising out of or relating to the contract… shall be referred to the sole arbitration of the person appointed by the Chief Engineer, Central Public Works Department in charge of the work at the time of dispute… It is a term of contract that the party invoking arbitrations shall specify the dispute or disputes to be referred to arbitration under this clause together with the amount or amounts claimed in respect of each such disputes.” (emphasis supplied)
Disputes arose between the parties. Praveen sent a notice invoking arbitration of certain claims and asked Goa to appoint the Chief Engineer as per the arbitration clause. Since Goa did not appoint an arbitrator, Praveen applied to the Chief Justice under Section 11 of the Act. The Chief Justice appointed a Retired Advisor, Konkan Railway Corporation (Sole Arbitrator) as arbitrator. In the arbitration proceedings, Praveen filed its claim statement and Goa filed its reply and counter-claim. Some of the claims in the claim statement and the counter-claim were allowed. Praveen applied to the Additional District Court(District Court) to set aside the award on two counts:
  • the arbitrator wrongly rejected of some of its claims
  • the arbitrator wrongly allowed one of the counter-claims of Goa
The District Court accepted Praveen’s plea on the second ground for the reason that the arbitrator did not have the power to enlarge the scope of reference and entertain fresh claims by the claimant or counter-claims by the respondent. The Bombay High Court rejected the appeal by Goa against the decision of the District Court. The rationale for the High Court’s decision was that Goa did not place these counterclaims in the proceedings before the Chief Justice under Section 11. The High Court relied on its decision in Charuvil Koshy Verghese v. State of Goa [1998(2) ARb. LR 157 (Bom)] (Charuvil Koshy)


On appeal to the Supreme Court, Goa contended as follows:
  • There was no bar in the arbitration agreement to raise counter-claims before the arbitrator even if none was raised in the proceedings under Section 11.
  • Since the Chief Justice does not “refer” disputes to arbitration under Section 11, the High Court was wrong in stating that there was no reference by the High Court of the counter-claims raised.
  • Charuvil Koshy was a decision under the Arbitration Act, 1940, which is materially different from the 1996 Act.
The Respondent contended:
  • In SBP & Co. v. Patel Engineering (2005) 8 SCC 6128 and National Insurance Co. v. Boghara Polyfab (2009) 1 SCC 267 where the Supreme Court held that in an application under Section 11, the Chief Justice could decide whether an disputes raised were time-barred. Therefore, the application under Section 11 should show that the claims are within limitation. Unless it is required that the counter-claimant mention counter-claims in the proceedings under Section 11, the counter-claimant would merely circumvent this requirement and refer to arbitration even time-barred claims.
  • Limitation period under Section 21 is reckoned only from the date of filing of the notice invoking arbitration. Therefore, sending a notice invoking arbitration is mandatory even in case of counter-claims.
  • Every claim not mentioned in the application under Section 11 and every counter-claim not mentioned in objections to such application cannot be raised before the arbitrator. 
  • In “Law and Practice of Commercial Arbitration in Englan” authored by Mustill & Boyd (1989), at p. 131, it is stated: “The arbitrator should carefully consider whether the subject matter of the counter-claim was one of the matters submitted to him at the time of appointment.”
  • The court is bound under Section 11 to ascertain the precise nature of the dispute and then appoint an arbitrator. This is possible only if the claims and the counter-claims are stated in the proceedings in Section 11. In Heyman v Darwins [(1942) AC 356], the House of Lords stated:
"Where proceedings at law are instituted by one of the parties to a contract containing an arbitration clause and the other party, founding on the clause, applies for a stay, the first thing to be ascertained is the precise nature of the dispute which has arisen The next question is whether the dispute is one which falls within the terms of the arbitration clause.”
  • In accordance with Article 21, arbitration proceedings commence when the notice invoking arbitration is received by the respondent. Therefore, arbitration proceedings in respect of the counter claims commence only after issuing a notice invoking arbitration
Questions before the Court:
According to the Supreme Court, the following questions arose in the case:
Whether the respondent in an arbitration proceedings is precluded from making a counter-claim, unless
a) it had served a notice upon the claimant requesting that the disputes relating to that counter-claim be referred to arbitration and the claimant had concurred in referring the counter claim to the same arbitrator;
b) it had set out the said counter claim in its reply statement to the application under section 11 of the Act and the Chief Justice or his designate refers such counter claim also to arbitration.”
Summary of the decision is below. The below summary has been prepared keeping in mind the comprehensive manner in which the court has dealt with the issue. Each of the points may be taken as propositions laid down by the court.

On Reference in Arbitration:

1. The phrase ‘reference to arbitration’ may mean any of the following:
  • where an agreement provides for reference of future disputes to arbitration, reference is the reference by the parties to arbitration of disputes after such disputes have arisen;
  • nomination of arbitrator by the appointing authority appointed in the arbitration agreement and reference by the appointing authority of disputes raised to arbitration; and
  • where either of the parties approach the court for whatsoever reason for appointment of the arbitrator under Section 11 and if the court appoints the arbitrator, such appointment automatically results in reference to arbitration.
2. Reference contemplated under Section 8 is not a reference of disputes but of parties to arbitration. Subsequently, parties appoint the tribunal and refer the disputes to arbitration.

On Reference and Jurisdiction:

3. If the agreement provides for reference of all disputes under the agreement to the arbitrator, the arbitrator has jurisdiction to decide all disputes that were made in the pleadings of the parties, including counter-claims. “But where the reference to the arbitrator is to decide specific disputes enumerated by the parties/ court/ appointing authority, the arbitrator’s jurisdiction is circumscribed by the specific reference and the arbitrator can decide only those specific disputes.”

4. In case of arbitration agreements entered into after specific disputes have arisen, the arbitrator cannot go beyond the disputes specifically referred to in the arbitration agreement, unless the parties agree to refer additional disputes to arbitration.

Claims, Additional Claims, Counter-Claims and Limitation

5 The Limitation Act, 1963 (Section 3) provides for institution of a “suit” within the limitation period. In accordance with Section 43(1) of the Act, the Limitation Act applies to arbitration as it applies to court proceedings. Question then arises as to what is the equivalent of institution of the suit in arbitration proceedings. This question is answered by Sections 43(2) and 21 of the Act. Thus, arbitral proceeding commences on the date of receipt by the respondent of the notice invoking arbitration.

6. Where a party files additional claims through amendment to the claim statement under Section 23(3), the limitation period is reckoned not with respect to the date of notice invoking arbitration or the original claims but with respect to the date on which the “additional claims were introduced”.

7. Claims of set-off and counter-claims are treated as independent suits. A claim of set-off is deemed to have been made on the date when it is pleaded in the court and a counter-claim is deemed to have been made on the date on which that counter-claim is made in the court. Section 21 does not deal with counter-claims but Section 43(1) read with Section 3(2)(b) of the Limitation Act, 1963 does, except when in reply to a notice invoking arbitration, the respondent raises certain claims and subsequently files those claims as counter-claims in the arbitration proceedings. In case of the latter, the arbitration commences when the counter-claims were raised for the first time in the reply to notice invoking arbitration. In the former situation, counter-claims, like in suits, are deemed to have been made on the date on which the counter-claims are made in the arbitration proceedings.

8. Section 23 does not restrict the claimant (which term includes a counter-claimant) from raising disputes not contemplated in the notice invoking arbitration (or the reply, in case of counter-claimant), unless the parties have agreed otherwise. The claimant is free to amend his claim. Section 2(9) read with Section 23 allows a party to file counter-claims and amend or file additional counter-claims, unless the arbitration agreement refers only particular disputes to arbitration.

Therefore, Praveen’s contention that it is mandatory to give notice of arbitration for raising counter claims is not correct. A party could even add extra claims to its claim statement without giving a notice of arbitration.

Counter-claims and Section 11 Proceedings:

9. One of the differences between the 1940 Act and the 1996 Act is that under Section 20 of the former, the court had to refer the disputes to the arbitrator while in the latter, consistent with the principle of minimum judicial interference, the Chief Justice merely appoints the arbitrator.

10. Under Section 11, the Chief Justice merely appoints the arbitrator after ensuring that certain jurisdictional facts exist for the exercise of his jurisdiction and does not “refer” the parties to arbitration. Therefore, the claimant need not restrict his claim statements to disputes that were mentioned in the application under Section 11 nor is there a need for the respondent in proceedings under Section 11 to mention counter-claims.

11. Even in arbitration proceedings initiated pursuant to Section 20 of the 1940 Act, the Respondent could directly raise counter-claims before the arbitrator even without mentioning the same in the Section 20 proceedings [Indian Oil Corporation v. Amritsar Gas Service (1991) 1 SCC 533].

12. The Respondent’s contentions are based on an erroneous premise that the Chief Justice is liable to decide on the issue of limitation. As per Patel Engineering & Boghara Polyfab, the Chief Justice is has the discretion to decide whether a claim is a stale/dead claim [a claim which is “patently long time barred”- Indian Oil Corporation v. SPS Engineering 2011(1) Arb LR 373 (SC)]. The exercise of discretion in such case depends on whether it is clear at the outset that the claim was a dead claim. A question as to whether a claim was barred by limitation or not (and not whether it was “patently long time barred”) is a question for the arbitrator to decide. If the Chief Justice is not the right forum to decide questions on limitation, there is obviously no need to refer in details to the claims and counter-claims in Section 11 proceedings.

13. The reliance placed on Mustill & Boyd’s commentary is misconceived as the discussion there was pertaining to English Law prior to the Arbitration Act, 1996. Further, the observations therein were made in the context of agreements referring specific disputes to arbitration.

14. Respondent contends that in Section 11 proceedings, the court needs to ascertain the precise nature of the dispute and decide whether the dispute arises out of the arbitration agreement. Such a decision is possible, according to the Respondent, only of the claims and counter-claims are set in detail in the Section 11 proceedings. The Respondent relied on English case Hayman v Darwins Ltd. This decision is not applicable as it was rendered in respect of proceedings similar to those under Section 8 of the Act. The questions to be decided under Section 8 and 11 are different and therefore the decision is of no assistance to the Respondent.

15. In the present case, although the arbitration clause requires a party invoking arbitration to specify the disputes to be referred to arbitration, such clause cannot be taken as requiring the appointing authority to mention specific disputes to arbitration. Nor does it bar the arbitrator from deciding counter-claims.

See this post at myLAW analyses the case.

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