Retrospective Operation of the MSMED Act, 2006

The Micro Small and Medium Enterprises Development Act, 2006 (“2006 Act” or "Act") provides for facilitating the promotion and development and enhancing the competitiveness of micro, small and medium enterprises and for connected and incidental matters. It is a beneficial piece of legislation. The Act provides for resolution of disputes between the Supplier (a micro, or small enterprise) and a buyer through conciliation and arbitration under the aegis of the Micro and Small Enterprises Facilitation Council. For those interested in the features of the 2006 Act, see here.

From the perspective of arbitration, the 2006 Act raises interesting and signficant questions. Till date, only a few questions pertaining to dispute resolution under the Act have been put to rest by the courts. We will be discussing this Act in detail in the future. For the convenience of the reader, we have inserted a new label "MSE Disputes".

In the last post, we looked into the recent judgement of Purbanchal Cables on the retrospective applicability of the Interest on Delayed Payments to Small Scale and Ancillary Industries Act, 1993 (1993 Act) to transactions entered into prior to its coming into force. There we concluded:

"Thus, it appears that the 1993 Act would apply only in respect of transactions that were entered into from 23.09.1992."

We further concluded:

"Going by [Purbanchal Cables], it would also seem that the Industrial Facilitation Councils would have jurisdiction to entertain claims in respect of Agreements entered into from 10.08.1998, the date on which the 1998 amendment establishing the Industrial Facilitation Councils came into force, in the absence of any indication to retrospectivity in the 1998 amendment. Therefore, in respect of transactions prior to 10.08.1998, a supplier could not have approached the Industrial Facilitation Council." 

In this series of posts, we dwelve into the question as to whether the 2006 Act applies to transactions that were entered into prior to its commencement. This question is signifcant as there are several cases pending in various courts pertaining to the applicability of the 2006 Act to transactions executed prior to the coming into force of the said Act. There are no cases under the 2006 Act on this issue.

Commencement of the 2006 Act:

Section 1(2) of the Act provides:

“[The 2006 Act] shall come into force on such date as the Central Government may, by notification, appoint; and different dates may be appointed for different provisions of this Act and any reference in any such provision to the commencement of this Act shall be construed as a reference to the coming into force of that provision.”

The Ministry of Small Scale Industries appointed 02.10.2006 as the date on which the provisions of the Act would come into force, vide Notification dt. 18.07.2006 (pdf), published in the Official Gazette on 21.07.2006. Thus, the Act came into force on 02.10.2006. Since the Act came into force only on 02.10.2006, it is valid to contend that the Act does not apply retrospectively. It is settled law that every statute is prima facie prospective unless it is expressly or by necessary implication made to have a retrospective effect [See, for example, JS Yadav v. State of Uttar Pradesh (2011) 6 SCC 570, Para 24]. There is nothing in the Act, express or implied, to indicate that it operates retrospectively.

That said, the question arises whether the Act applies to transactions that were concluded prior to 02.10.2006.

Argument:

It could be argued that the Act applies even to transactions entered into prior to it. Sections 24 16, and 18(1) can be cited in support of such a proposition. Sections 18(1) and Section 24 read:

"16. Date from which and rate at which interest is payable: Where any buyer fails to make payment of the amount to the supplier, as required under section 15, the buyer shall, notwithstanding anything contained in any agreement between the buyer and the supplier or in any law for the time bing in force, be liable to pay compound interest with monthly rests to teh supplier on that amount from the appointed day or, as the case may be, from the date immediately following the date agreed upon, at three times the bank rate notified by the Reserve Bank."
18.(1). Notwithstanding anything contained in any other law for the time being in force, any party to a dispute may, with regard to any amount due under section 17, make a reference to the Micro and Small Enterprises Facilitation Council."
"24. Overriding effect: The provisions of section 15 to 23 shall have effect notwithstanding anything inconsistent therewith contained in any otehr law for the time being in force."

A prima facie of the above provisions seem to indicate that from 02.10.2006, a new right accrues to the supplier- the right to interest at the rate under Section 16. Accordingly, the argument would be that till 01.10.2006, the rate of interest shall be as per contract and in the absence of any provision in the contract, as per the Interest Act, 1978, the Code of Civil Procedure, 1908 and the Arbitration and Conciliation Act, 1996. However, from  02.10.2006, an irreducible right to interest as per Section 16 is applicable. A hyothetical example. Big Enterpise enters issues a purchase order in favour of Small Enterpise on 01.09.2006. Small Enterpise delivers the goods on 10.09.2006. As per the purchase order, payment is to be made on or before 15.09.2006. Big Enterprise does not make any payment. It could be argued that Big Enterprise would be liable for interest under the 1993 Act from 15.09.2006 till 01.10.2006 at the rate specified therein (1.5 times SBI PLR) and with effect from 02.10.2006 at the rate specified in the 2006 Act (three times the Bank Rate as notified by RBI).

A prima facie reading of the relevant portion of the recent decision of the Supreme Court in Purbanchal Cables delivered under the context of the 1993 Act seems to support this argument:

"27. With the commencement of the Act, a new vested right exists with the supplier, that being, if there is delay in payment after the acceptance of the goods by the buyer, the supplier can file a suit for claiming interest at a higher rate, as prescribed by the Act. This position has been approved by this Court in the case of Modern Industries... If a suit for interest simpliciter is maintainable as held by this court in Modern Industries..., then a new liability qua the buyer is created with the commencement of the Act giving a vested right to the supplier in case of delayed payment. In other words, if there is a delayed payment by the buyer, then a right to claim a higher rate of interest as prescribed by the Act accrues to the supplier."   (emphasis added)

Comment on the Argument:

Although this argument appears to be convincing, on a deeper analysis, it is bound to fail for the reasons discussed below.

There is no decision that specifically deals with the question as to whether the 2006 Act applies to prior transactions. Hence, we have to rely on the decisions rendered in the previous Act, that is, the 1993 Act. Reliance on the judgements under the 1993 Act could be objected to but the same would fail. Section 10 of the 1993 Act contained an overriding provision similar to that contained in the 2006 Act. Section 10 reads:

“The provisions of this Act shall have effect notwithstanding anything inconsistent therewith contained in any other law for the time being in force.” Section 24 of the 2006 Act reads: “The provisions of Sections 15 to 23 shall have effect notwithstanding anything inconsistent therewith contained in any other law for the time being in force".

However, the overriding effect of the 2006 Act does not mean that it retrospectively applies to transactions that were concluded prior thereto. This is settled law under the 1993 Act. There are several pronouncements of the Supreme Court and the High Courts to the effect that the 1993 Act does not apply to transactions entered into prior to its effective date. Although the 1993 Act was enacted on 2nd April 1993, it was, by a legal fiction deemed to have come into effect from the date of promulgation of the Interest on Delayed Payments to Small Scale and Ancillary Industrial Undertakings Ordinance, 1992, i.e. 23rd September 1992.

Evolution of Case Law under the 1993 Act:

One of the earliest decisions on this issue is the case of Assam State Electricity Board v. Shanti Conductors MANU/GH/0114/2002 where the Full Bench of the Guwahati High Court held that the 1993 Act applied even to transactions that were entered into prior to the coming into the force of the 1993 Act but interest is to be calculated from the coming into the force of the Act. The court relied on the overriding clause to support such a conclusion. The court held:

“After hearing the learned counsel for the parties on this point we are of the view that the 1993 Act would be applicable even to the contract which may have been entered into prior to the enforcement of the Act, i.e., 23.09.1992 where the payments as envisaged by the contract are delayed and made after enforcement of the Act, on such delayed payment the buyer would be liable to pay interest under the Act of 1993. The incidence or the sine qua non for payment of interest under the Act of 1993 is not the terms of the contract but the delayed payment Sections 4 and 5 of the Act of 1993 as observed above, contain non obstante clause, i.e., 'notwithstanding anything in the agreement'. In other words, even if a buyer and the supplier were to agree that on delayed payments interest would not be paid as per the provisions of the Act of 1993 such a term in the contract cannot be enforced or come to the rescue of the buyer in view of provisions of Sections 4 and 5 of the Act which clearly provide 'Notwithstanding anything in the agreement'. However, in such a case interest on the delayed payment which is made after the coming into force of the Act of 1993 would be calculated under the Act from the date of the enforcement of the Act and not from the date of payment prescribed under the agreement. To illustrate, supposing the payment under the contract was to be made by 1st of January, 1992, however, the payment is made on 1st of January, 1994. The interest under the Act of 1993 on the delayed payment will be calculated in accordance with the provisions of Section 5 of the Act from 23.09.1992 to 1st January, 1994 and not from 01.01.1992.”

In Assam Small Scale Ind. Dev. Corp. Ltd. v. J.D. Pharmaceuticals and Anr. AIR 2006 SC 131, a two Judge Bench of the Supreme Court had the opportunity to consider the question as to the applicability of the 1993 Act to transactions that were entered into prior to 23.09.1992. The Court, disagreeing with the above judgement of the Full Bench of the Guwahati High Court, held that the 1993 Act would not apply to transactions concluded prior to the coming into force of the 1993 Act. The court observed:

“Section 3 of the 1993 Act imposes a statutory liability upon the buyer to make payment for the supplies of any goods either on or before the agreed date or where there is no agreement before the appointed day. Only when payments are not made in terms of Section 3, Section 4 would apply. The 1993 Act came into effect with effect from 23.9.1992 and will not apply to transactions which took place prior to that date… Mr. Choudhary has placed reliance upon a Full Bench decision of Guwahati High Court in Assam State Electricity Board and Ors. v. Shanti Conductors (P) Ltd. and Anr. MANU/GH/0114/2002 which having regard to the non-abstain clause contained in Sections 4, 5 and 10 of the 1993 Act opined that interest payable thereunder shall embrace within its fold even the contracts which might have been entered into prior to the enforcement of the Act. With respect, we do not subscribe to the said view as payment of interest at an enhanced rate cannot be made in relation to the transactions where Section 3 will have no role to play. We, therefore, are of the opinion that in relation to the transactions made prior to coming into force of the said Act, simple interest at the rate of 9% per annum, which was the bank rate at the relevant time, shall be payable both prior to date of filing of the suit and pendente lite and as future interest in terms of Section 34 of the Code of Civil Procedure. Interest, however, will be payable in terms of the provisions of the 1993 Act (compound interest at the rate of 23.5.% per annum) in relation to the transactions made after coming into force of the Act, both in respect of interest payable upto the date of institution of the suit and pendente lite and till realisation. The judgment and decree to that extent requires to be modified. It is directed accordingly.”

This legal position has been reiterated in several pronouncements of the Supreme Court, including, Shakti Tubes Ltd. v. State of Bihar (2009) 7 SCC 673, Rampur Fertilizers Limited v. Vigyan Chemical Industries (2009) 12 SCC 324, Modern Industries v. Steel Authority of India Limited MANU/SC/0251/2010 : (2010) 5 SCC 44, and Purbanchal Cables and Conductors Pvt. Ltd. v. Assam State Electricity Board MANU/SC/0540/2012. Coming to Purbanchal Cables, although a prima facie reading of Para 27 of the judgement supports the conclusion of the Full Bench of the Guwahati High Court, an in-depth reading of the judgement provides otherwise.

Purbanchal Cables: The question relevant to our context was whether the 1993 Act applied to contracts that were concluded prior to its commencement. The supply order was issued in Purbanchal Cables on 31.03.1992. Goods were delivered on 16.09.1992 and between 25.09.1992 and 30.03.1993.  Due to the failure by the buyer, the supplier approached the court and claimed statutory interest with effect from the commencement of the 1993 Act. The trial court granted a decree in favour of the supplier. On appeal, the first appellate court affirmed the decree. The buyer appealed to the High Court, which allowed the appeal. On appeal, the Supreme Court considered various pronouncements on the issue and concluded as follows:

"40. In the absence of any express legislative intendment of the retrospective application of the Act, and by virtue of the fact that the Act creates a new liability of a high rate of interest against the buyer, the Act cannot be construed to have retrospective effect. Since the Act envisages that the supplier has an accrued right to claim a higher rate of interest in terms of the Act, the same can only said to accrue for sale agreements after the date of commencement of the Act, i.e., 23rd September 1992 and not any time prior."

Since, the 1993 Act does not apply to any transaction prior to its commencement, Purbanchal Cables cannot be read to mean that the buyer is liable for interest under the 1993 Act from the date of its commencement for delay in payment for goods supplied under contracts entered into prior to the commencement of the 1993 Act. More on this in the next post.

Retrospective Operation of Interest on Delayed Payments Act

Retrospective operation of statutes seems to be a fashionable topic. This post deals with a recent decision of the Supreme Court in Purbanchal Cables and Conductors v. Assam State Electricity Board which discusses the retrospective operation of the Interest on Delayed Payments to Small Scale and Ancillary Industrial Undertakings Act, 1993 (1993 Act). The judgement has a far reaching impact on several cases that are pending before the courts under the 1993 Act and the Micro, Small and Medium Enterprises Development Act, 2006 (2006 Act).

Facts:

Two matters were jointly heard by the Supreme Court. Facts are slightly different and are noted below:

Facts in Purbanchal Cables v. ASEB:

31.03.1992: ASEB issued a supply order to Purbanchal Cables for supply of cables. Pursuant to the Supply Order, several orders were placed in June 1992, September 1992 and December 1992. 

16.09.1992: Delivery made with respect to three orders but no payment was received. 

25.09.1992 & 30.03.1993: Deliveries were made after the expiry of time in the Supply Order but after extension of time from the Buyer, ASEB.

14.12.1992 & 03.12.1993: Demand for payment with interest was raised by Purbanchal Cables but no response was forthcoming.

1996: Money Suit was filed by Purbanchal Cables for payment of interest under the 1993 Act.

2000: The trial court ordered compound interest at 18.25% to be paid plus interest of 5% above the said rate at monthly rests till payment

2001: On appeal by ASEB, the High Court dismissed the suit on the ground that the suit was not maintainable as no amount was due on the date of institution of the suit. the High Court followed the judgements of a Division Bench of the Guwahati High Court in ASEB v. Trusses & Towers where it was held that a civil suit for interest simpliciter was not maintainable when the principal amount was paid. Consequently,  the High Court ordered Purbanchal Cables to refund Rs. 10 lakhs that was paid consequent to an interim order of the High Court. Purbanchal Cables preferred an appeal against this decision.

Facts in ASEB v. Smitha Conductors:

2003: Against the two Supply Orders placed by ASEB, Smitha Conductors completed supplies between 22.03.1993 and 04.10.1993. 

March 1997: After receiving the entire amount, Smitha Conductors filed a suit for recovery of interest. Rs. 51 lakhs was decreed in favour of Smitha Conductors. 

2000: On appeal, the High Court doubted the correctness of ASEB v. Tresses and Towers and referred the matter to a Full Bench. The Full Bench overruled ASEB v. Tresses and Towers and held that suit for interest simpliciter was maintainable and that the 1993 Act was applicable only to contracts entered into prior to the commencement of the 1993 Act. ASEB preferred an appeal against the decision of the Full Bench,

Issues:

Primarily, two issues arose before the Court:

1. Whether a Suit on Interest simpliciter was maintainable when the principal amount was already paid?

2. Whether the Act was applicable to contracts concluded prior to the commencement of the Act?

Summary of the Court's decision is given below:

On Whether Suit for Interest Simplicer was Maintainable

• On 23.09.1992, an Ordinance titled Interest on Delayed Payments to Small Scale and Ancillary Industrial Undertakings Ordinance, 1992 was promulgated. Subsequently, the 1993 Act was passed repealing the Ordinance but was made effective from 23.09.1992, that is, the date of the Ordinance. 
• The Full Bench of the Guwahati High Court had already decided in ASEB v. Smitha Conductors that a suit for interest simpliciter was maintainable under the 1993 Act. The rationale there was that in case it was held that such a suit was not maintainable, the objective of the Act, that is, to afford interest in case of delayed payments to small scale industries, would become frustrated. This decision was approved by a two judge Bench of the Supreme Court in Modern Industries v. SAIL AIR 2010 SC 1625 and hence the issue is not new.

On Whether the Act was Applicable to Contracts Concluded Prior to its Commencement (23.09.1992)

• Prior to the commencement of the 1993 Act, the supplier could file a civil suit to recover the principal plus interest as per Section 34, Code of Civil Procedure, 1908 (CPC). The court had the discretion to award interest.
• From the commencement of the 1993 Act, a new "vested right exists". If there was a delay in payment, the supplier could file a civil suit claiming interest at the rate prescribed under the Act.
• This provision on right to higher interest is substantive in nature. In view of several judgements of the Supreme Court, the Act being substantive law applies retrospectively and not prospectively. There is no express provision making the application of the Act retrospective. Hence, the supplier would have a right to claim a higher rate of interest only in respect of sale agreements concluded on or after the date of commencement of the Act, i.e. 23.09.1992.
• The reference event was the date of the agreement and not the date of completion of performance of the agreement.
• There are precedents of the Supreme Court in favour of this proposition. Examples are Assam Small Scale Industries Development Corporation v. JD Pharmaceuticals (2005) 13 SCC 19, Shakti Tubes v. State of Bihar (2009) 7 SCC 673, Rampur Fertilizers Limited v. Vigyan Chemical Industries (2009) 12 SCC 324, Modern Industries v. SAIL AIR 2010 SC 1625

Thus, it appears that the 1993 Act would apply only in respect of transactions that were entered into from 23.09.1992. Going by the above judgement, it would also seem that the Industrial Facilitation Councils would have jurisdiction to entertain claims in respect of Agreements entered into from 10.08.1998, the date on which the 1998 amendment establishing the Industrial Facilitation Councils came into force, in the absence of any indication to retrospectivity in the 1998 amendment. Therefore, in respect of transactions prior to 10.08.1998, a supplier could not have approached the Industrial Facilitation Council.

[Disclaimer: The above post is based on research that was conducted in respect of a pending dispute.]

Why was Bhatia International Prospectively Overruled?

The five judge Bench of the Supreme Court in BALCO v. Kaiser Aluminum (pdf) held that Part I was not applicable to international commercial arbitrations held outside India, thereby overruling Bhatia International and Venture Global. Having done so, the court held:

"200. The judgment in Bhatia International (supra) was rendered by this Court on 13th March, 2002. Since then, the aforesaid judgment has been followed by all the High Courts as well as by this Court on numerous occasions. In fact, the judgment in Venture Global Engineering (supra) has been rendered on 10th January, 2008 in terms of the ratio of the decision in Bhatia International (supra). Thus, in order to do complete justice, we hereby order, that the law now declared by this Court shall apply prospectively, to all the arbitration agreements executed hereafter."

Thus, Bhatia International and Venture Global  would no more be good law but only for arbitration agreements executed after 06.09.2012. This part of the judgement has been criticised because for the coming years, there would be two parallel regimes which the courts have to take stock of- the Bhatia International regime and the Kaiser Aluminum regime and that the former regime would stay for several years especially in respect of long term agreements.

The criticism may not be altogether justified. Imagine, for example, an Indian party and an American party agree to London arbitration  in their contract. They also agree that, except for Section 9 (interim measures from the court), Part I of the Arbitration and Conciliation Act, 1996 would not apply to such arbitration. This is in accordance with Bhatia International (see, Para 26: "...all or some of the provisions of Part I may also get excluded by an express or implied agreement of parties.”). There was an expectation that parties could approach the Indian courts for interim measures under Section 9 despite the non-applicability of other provisions of Part I. If Bhatia International was not overruled prospectively, the parties would have been put in serious jeopardy as, having drafted the arbitration clause in accordance with the prevailing law,  the right to approach the Indian court under Section 9 would have been lost due to a subsequent change in the law (See, this post in the Blog Arbitration blog which discusses the said issue). It is obvious that parties draft contracts on the basis of the law as it was prevailing then. Hence, it was just on the part of the  Supreme Court to prospectively overrule Bhatia International. 

The above mentioned post in the Blog Arbitration blog raises an interesting point- that if a thirty year agreement is signed on 05.09.2012 and if a dispute arises in 2027 AD and is referred to arbitration, the award under such arbitration could be subject to challenge in the Indian courts. This risk is definitely there. But three points are worth noting here. One, after a slew of judgements including Yograj Infrastructure, the Bhatia International regime was been rationalised to some extent. although unsatisfactorily. So, it is not in all cases that the award could be set aside in Indian courts. Two, long term agreements are generally drafted in India with the help of legal counsel. Therefore, in such cases, parties would have definitely agreed to a clause that would either exclude Part I fully or selectively. Three, even if Part I has not been excluded in full or in part in such agreements, nothing prevents parties to renegotiate the arbitration clauses and amend their arbitration clauses, in which case the Kaiser Aluminum regime would be applicable. I am not, however, sure that parties would want to renegotiate the arbitration clause. Assume that parties had agreed to a hypothetical clause mentioned in the above para. The right to approach the Indian court under Section 9 for interim measures would be available to the American party. However, if the parties amend their arbitration clause after 06.09.2012, the Kaiser Aluminium judgement would not permit the American party to approach the Indian courts. Therefore, renegotiation of arbitration clauses may not happen. 

More on Kaiser Aluminum in the next few weeks.

Bharat Aluminium v. Kaiser Aluminium: A Summary

As readers of this blog and the followers of Indian arbitration are aware, it has taken about a decade for the

Bhatia International judgement to be overruled by a Bench consisting of Five judges of the Supreme Court in Kaiser Aluminium (pdf). For those who are new to Bhatia International and its legacy, see this post (here) and this paper (pdf) on the decision and its effects on  arbitration in India. We do not wish to dwelve upon the aspects covered by these posts and the said paper. In Bhatia International, it was held by a three judge Bench of the Supreme Court that Part I would apply even to international commercial arbitrations held outside India. Thus, in effect, courts in India had jurisdiction even over international commercial arbitrations held outside India. This meant, among other things, that the Indian courts could set aside awards in arbitrations whose seat were outside India. The contentions of counsel would be subjected to a detailed analysis in a subsequent post, if at all. We go straight to summarize the relevant portsions of the judgement in Kaiser Aluminium delivered today (on 06.09.2012). The judgement deals with the history of arbitration law in India and at the international level. These will not be dealt with in this post:

1. In Para 14(b) of Bhatia International, it was held: "(b) Lead to an anomalous situation, inasmuch as Part I would apply to Jammu and Kashmir in all international commercial arbitrations but Part I would not apply to the rest of India if the arbitration takes place out of India." The conclusion in the above para of Bhatia International is incorrect. Section 1(2) is the same as was in the Arbitration Act, 1940 (1940 Act). The said section 1(2) read: "It extends to the whole of India (except the State of Jammu and Kashmir).” In addition, the 1996 Act contains the following proviso to Section 1(2): “Provided that Parts I, III and IV shall extend to the State of Jammu and Kashmir only in so far as they relate to international commercial arbitration or, as the case may be, international commercial conciliation.” The above proviso is only to incorporate the special provisions pertaining to International Commercial Arbitration. These aspects were not dealt with under the 1940 Act and therefore the proviso was necessary. No anomaly would be  created as Section 2(2) would apply equally to arbitrations is Jammu and Kashmir and the courts in J & K would not have jurisdictions as regards ICA held outside India. Sectio 2(2) is not therefore affectd by the said  proviso. Purely domestic awards would be governed by the relevant J & K Arbitration statute.

2. Section 2(2) bars jurisdiction of Indian courts as regards arbitration held outside India. The opposite conclusion reached in Bhatia International is overruled. The exclusion of "only" in Section 2(2) is not a case of casus omissus and the omission is not a mistake.A plain reading of Section 2(2) makes it clear that Part I does not apply to arbitrations held outside India.

3. The relevant Model Law Article 1(2) used the wordd "only" as it contained exceptions to the territorial applicability and certain provisions such as interim measures were applicable even for arbitrations held outside the relevant country.  Therefore "only" was to stress the fact that except for such provisions, the Model Law was applicable to the relevant  country alone. Since those exceptions have not been retained in the 1996 Act, use of "only" was not necessary in Section 2(2). In fact the Swiss Private International Law Act 1987 and the English Arbitration Act, 1996 have dropped off "only"  as well.

4. If Part I was applicable to international commercial arbitrations outside India, certain words would have to be added to Section 2(2) which is not permissible.

5. Bhatia International's conclusion that Section 2(2) conflicts Sections 2(4) or (5) is erroneous.Section 2(4) only deals with arbitrations under other enactments. This provision has to be read in conjunction with Section 2(2) and would operate only as regards arbitrations in India under any enactment in force. This is in consonance to Article 245 of the Constitution which provides that Parliament may make laws for thewhole or part of India. Similarly Section 2(5) must be read in conjunction with Section 2(2)."All arbitrations" in Section 2(5) is to be read with as all arbitrations in India in view of Section 2(2).

6. It was contended that Section 2(7) indicates that Part I would apply to arbitrations outside india. It reads:
"An arbitral award made under this Part shall be considered as a domestic award.” This does not in any way dilute the adherence to the territoriality principle adopted in the 1996 Act nor does it provide for delocalized arbitration. The need for defining "domestic awards" was to distinguish it with "foreign awarsds" which are covered by Part II of the Act. Further, the definition also clarifies that even if the award was rendered in an international commercial arbitration held in India, such award is a domestic award.

7. The definitions Sections in Part I and II clarify the respective applicability of Parts I and II. Section 2 begins with the expression “In this part, unless the context otherwise requires……” Similarly Sections 44 and 53 gives the  interpretation of foreign awards for the purposes of Chapters I and II of Part II.

8. It was contended that Section 9(b) of the Foreign Awards (recognition & Enforcement) Act, 1961, not retained in the 1996 Act provided that nothing there was applicable to award in an arbitration agreement governed by Indian law.  There is no link between the deletion of 9(b) and the applicability of Part I to foreign arbitrations. The purpose behind Section 2(7) was to foreclose the possibility that an arbitration in India between two foreign parties should  be construed to be a non-domestic arbitration and provisions pertaining to foreign awards would be invoked to enforce such an award in India. 

9. Section 2(1)(e) which defines "courts" deals with courts which would exercise supervisory control over the  arbitral process. Thus, if neither party belongs to Delhi but both arbitrate in Delhi, the Delhi courts would have supervisory jurisdiction over the arbitral process. This is apart from the courts which would have had the jurisdiction as cause of action arose within such court's jurisdiction. This has no relevance to the applicability of Part I of the Act to non-domestic arbitrations. Section 20 which provides that parties could agree to the place of arbitration and that in case of failure by parties the tribunal will determine the appropriate place, is only meant to operate in arbitrations where place is India but parties have not selected the particular location in India. Further, for practical considerations a tribunal may meet even outside India as provided in Section 20(3). Thus, there is a distinction between "seat" and "venue". An agreement has to be construed independently to see if The foreign “seat” would be read as in fact only providing  for a venue where the hearings would be held, in view of the choice of the 1996 Act as being the curial law or Whether the specific designation of a foreign seat, "necessarily carrying with it the choice of that country’s Arbitration / curial law, would prevail over and subsume the conflicting  selection choice by the parties of the
 1996 Act". If the agreement provides for an Indian seat, Part I would be applicable. If it provides for a foreign seat, Part I would be inapplicable to the extent inconsistent with the arbitration law of the seat, even if the agreement states that the 1996 Act shall govern the arbitration proceedings.

10. The choice of a foreign country as the seat necessarily implies that the law of the seat regarding conduct and supervision of arbitration will apply. Therefore, if the seat is a foreign country, Part I would not be applicable to enable Indian courts exercise supervisory jurisdiction. But "it would only mean that the parties have contractually imported from the Arbitration Act, 1996, those provisions which are concerned with the internal conduct of their arbitration and which are not inconsistent with the mandatory provisions of the English Procedural Law/Curial Law.

11. Section 28 provides an option in a domestic international commercial arbitration for the parties to choose a different substantive contract law and is not indicative of the intent to make Part I applicable to foreign arbitrations.

12. It was contended that Part II recognised jurisdiction of two courts to exercise jurisdiction to annul the award- courts of seat and the courts of the country under the laws of which the award was made.This provision imported from the New York Convention is only to recognise that two Courts may have jurisdiction to annul an award.Thus, there is a complete segregation between Part I and II in the Act. Regulation of arbitration consists of four steps (a) commencement, (b) conduct, (c) challenge and (d) recognition and enforcement. Part I deals with all the four but as regards domestic arbitration while Part II deals with only (a) commencement and (b) recognition and enforcement. Thus, the conduct and the challenge of arbitrations are to be done in the country having supervisory jurisdiction over the arbitration. This is in consonance with the schemes in international instruments such as the New York Convention and the UNCITRAL Model Law on International Commercial Arbitration.

13. The use of expression “notwithstanding anything contained in Part I, or in the Code of Civil Procedure, 1908”, in Section 45 of the Arbitration Act, 1996 do not indicate the extra territorial applicability of Part I. These were the expressions used in the 1961 Act and since the 1996 Act is also a consolidating statute, it is not rare for a consolidating act to retain the expressions used in the previous Acts

14. It was argued that the expression that enforcement of a foreign award may be refused when the award “has been set aside or suspended ” “under the law of which” that award was made in Section 48(1)(e) indicated Part I was applicable to foreign arbitrations. This is not so. The said provision has been imported from the New York Convention. The said provision merely recognises the two courts have jurisdiction to annul and does not confer jurisdiction on a court to annul an award made outside the jurisdiction of the seat. It may be noted that the second alternative, that is, "under the law of which" the Award was made was inserted to state that in case the national legislation in the seat did not permit challenge, challenge could be made in the law under which the award was made. Thus the "second alternative" is not really an alternative but only operates in case of the absence of provision of challenge in the "first alternative", that is, the law of the seat. A similar situation resulted in Venture Engineering where the award was set aside under the laws governing the applicable law, Indian law. Furthermore, it is to be noted that the expression "under the law" in Section 45 does not denote the substantive law of contract but the procedural law of arbitration.

15. As regards applicability of Section 9 to foreign arbitrations, the power cannot be imputed to a court by the process of interpretion and doing the same would violate the principle of territoriality in Section 2(2) of the Act.

16. In Bhatia International, a non-convention award was interpreted to be included in Part I of the 1996 Act as the court considered it to be a lacuna that the said Act did not cover such awards. There is no such lacuna. Further, no interim relief could be claimed in respect of a foreign arbitration through a civil suit as an interim relief could only be in furtherance of the main relief. There is no power to a civil court to grant interim relief in relation to a foreign arbitration even if parties agree that 1996 Act should govern the arbitration even if it is a foreign seat.

17. Therefore, Bhatia International and venture Engineering are clearly erroneous and are overruled. Since Bhatia International and Venture Engineering have been applied by numerous courts, the law declared in this
judgement would be applicable prospectively to all arbitration agreements executed hereafter.

The judgement will be analysed in detail in this blog in the coming weeks. Its impact on Bhatia International is clear- the choice of a foreign seat would operate as an exclusive jurisdiction clause and exclude the applicability of Part I and no interim measures would be available in arbitrations held in foreign seats. But there are certain observations, summarized in paras 10 and 11 above, which have the potential to generate controversies. These will be dealt with in greater detail, starting next week, hopefully.

Bhatia International Overruled!

This blogger has received info from informal sources that Bhatia International has been overruled in Kaiser Aluminium. More on this once the judgement comes out. In the meanwhile check out this Legally India post on the same matter.

Update: Download the Kaiser Aluminium judgement delivered today from here.(pdf)

Update 2: Please read the summary of BALCO v. Kaiser Aluminum from here.

Spend More to Litigate for Less: A Tale from the Files of a Government Entity

Image from here

Gurgaon Grameen Bank v. Khazani (Civil Appeal 6261/2012, Supreme Court of India, dt. 4.9.12) is a case about a buffalo. Loan was taken by the Respondent to buy a buffalo. The poor animal was insured for Rs. 15,000. The buffalo died and the Respondent lodged a claim before the Insurer through the Appellant Bank. The Respondent was forced to file a complaint before the Gurgaon District Consumer Disputes Redressal Forum (DCDRF) for the lack of action by the Bank and the Insurer. The DCDRF ruled in favour of the Respondent insured. Appeals to the State CDRF and the National CDRF met with the same fate.

Ultimately, a SLP was filed and special leave was granted. When the matter came before a Bench consisting of KS Radhakrishnan & Dipak Mishra, JJ. it was found that about Rs. 13,000 was spent for a case of value Rs. 15,000. The cost would definitely be substantially more if costs pertaining to travel etc to the respective CDRFs and the Supreme Court were taken into account. Dismissing the appeal and imposing costs of Rs. 10,000, the Supreme Court held:

"Assuming that the  bank  is  right,  but  once  an  authority  like District Forum takes a view,  the bank should graciously  accept  it  rather than going in for further litigation  and  even  to  the  level  of  Supreme Court.   Driving  poor  gramins  to  various  litigative  forums  should  be strongly deprecated because they  have  also  to  spend  large  amounts  for conducting litigation.   We condemn this type of practice, unless the  stake is very high or the matter affects large number  of  persons  or  affects  a general policy of the Bank which has far reaching consequences."

This is the typical state of government litigation in India- Penny wise and pound...

Conclusion- Undue Delay Cannot Constitute Reason for Setting Aside the Arbitral Award-

In the last two posts (here and here), we had discussed the recent developments in the law on setting aside arbitral awards for unreasonable delay in passing the award after conclusion of hearings (hereafter "Delayed Awards"). this post is aimed at critically analysing the law on the said issue. 

From Harji to Essar:

The journey from Harji Engineering in 2008 till Essar Oil in 2012 represents a sea but subtle change in the law on the issue. This would be apparent if we tabulate the results of each of the four cases:

Case	Delay (years)	Whether Set Aside	Ratio
Harji Engineering	3	Yes	An award which is passed after a period of three years from the date of last effective hearing, without satisfactory explanation for the delay, will be contrary to justice and would defeat justice and should therefore be set aside.
Peak Chemical	4.5	No	Whether delay in the pronouncement of the award after conclusion of final arguments would vitiate the award depends on facts and circumstances. If the award comprehensively the facts as pleaded by the parties, the evidence, the submissions of counsel, the analysis of the facts and evidence, and the detailed reasons issue-wise and if the dispute between the parties has been long pending, it is not in the interests of justice to set aside the impugned Award only on the ground of delay.
NIKO Resources	4	Yes	The delay in pronouncement of the Award per se does not vitiate it, the delay appears to have led to the Award being vitiated by patent illegality and should therefore be set aside.
Essar Oil	3	No	When an Award was challenged on the ground of delay in its pronouncement, the Court would examine the facts and circumstances and ascertain if such delay had led to the Award being rendered patently illegal or opposed to the public policy of India.

In the first post on this topic, we had dealt with Harji Engineering where it was held that extensive delay that is unexplained or unsatisfactorily explained in passing the award after final hearing is “unjust”. In addition, the court found that since the arbitrator pronounced the award “without finally concluding the hearings”, the award was “contrary to principles of fair play and justice”. It is not wholly clear from a prima facie reading of the judgement if undue delay alone constituted sufficient ground for setting aside the award. However, one would not be wrong in concluding that the court's  view was that an award which was passed three years after the last effective hearing without satisfactory explanation for the delay defeated “the very purpose and the fundamental basis for alternative dispute redressal”, that delay that was "patently bad and unexplained" was "unjust" and that the award was liable to be set aside for being contrary to public policy.

In the same post, we had discussed Peak Chemical where Muralidhar, J. was not as unequivocal as Sanjiv Khanna, J. was in Harji Engineering. The former was not convinced that a Delayed Award could be contrary to the "public policy" of India. One would note that Sanjiv Khanna, J. reached the opposite conclusion in Harji Engineering. After discussing ONGC v. SAW Pipes and stating that "award could be set aside if it is contrary to... (c) justice...", he held that a delayed award was unjust. In Peak Chemical, Muralidhar, J. was not too convinced about applying Harji Engineering especially considering the following reasons (a) the award was comprehensive,  (b) the arbitrator had expired thereby eliminating any chance of remanding it again and (c) a arbitrating again meant that parties had to again incur costs and time. The judge did not state he disagreed with Sanjiv Khanna but only "distinguished" the facts in Peak Chemical and held that facts and circumstances would dictate as to whether a Delayed Award was bad. In Peak Chemical the judge held it didn't. While Muralidhar, J. seems to have actually questioned setting aside a Delayed Award by noting that he didn't think "public policy" could be stretched to cover such irregularities, he seems to have not wanted to actually contradict Sanjiv Khanna. This led to an ambiguous situation. However, Muralidhar, J. who was the judge in Peak Chemical, had an opportunity to clarify the legal position in NIKO Resources. In NIKO Resources, Muralidhar, J. reiterated his stance that delay in passing arbitral award was not a ground for setting aside the award. Curiously, the judge held: "It would have to be shown that the Award suffered from patent illegality on account of such delay." In other words, according to the judge, the award can be set aside only if the delay caused the award to be patently illegal. 

Thus, both Peak Chemical and NIKO Resources contradict with Harji Engineering on whether a Delayed Award per se is liable to be set aside under Section 34. According to Harji, it is, and according to Peak Chemical (and NIKO Resources) it is not. Muralidhar, J. disagreed with the suggestion of counsel for Oil India in Oil India Limited v. Essar Oil Limited (Essar Oil) to refer the matter to a larger bench owing to the contradiction between Harji Engineering and Peak Chemical and held: "In any event, as explained in Peak Chemical Corporation Inc., the decision in Harji Engg. turned on its own facts. The decision in Harji Engg. should not be understood as laid down as an inviolable law that irrespective of the facts and circumstances of a case, if there is delay in pronouncing an Award then it should be set aside. OIL is therefore mistaken in concluding that there is a conflict between the decisions in Harji Engg. and Peak Chemical Corporation Inc." This is not true. It is doubted if Harji Engineering carves out any exception to the proposition that Delayed Awards should be set aside under the "public policy" ground in Section 34. In fact, the cases cited in Harji Engineering seem to state that unreasoned delay will vitiate the award. For example, in Kesholal Ramdayal Kahar v. Laxman Rao Ramkrishna Rao Deshpande AIR 1940 Nag. 386, the court held:

"What is necessary in such a case of arbitration is that once an arbitrator is appointed the parties to the arbitration are entitled to insist that the arbitration should be proceeded with reasonable speed and if there be an unreasonable delay which is unexplained and not justified by the circumstances of the case the parties to arbitration will be justified in revoking the reference and if an award is given after a long delay he will be entitled to ask the Court not to file the award."  

In any case, Muralidhar, J attempted to further clarify the law in Essar Oil when he referred to NIKO Resources and held: "It was explained that when an Award was challenged on the ground of delay in its pronouncement, the Court would examine the facts and circumstances and ascertain if such delay had led to the Award being rendered patently illegal or opposed to the public policy of India." Two points to be noted on this test:

• As per ONGC v. SAW Pipes, an award that is patently illegal is contrary to the public policy of India. Patent illegality, according to a commentary on the 1996 Act means: "The expressions ‘patent illegality’, ‘blatant illegality’, and ‘error of law apparent on the face of the record’ have synonymously been used to denote the illegalty or error of law which goes to the root of the matter, or is violative of constitutional or statutory provisions or is inconsistent with the law established by judicial decisions" [O.P. MALHOTRA & INDU MALHOTRA, THE LAW AND PRACTICE OF ARBITRATION AND CONCILIATION 1175 (2006)]. Thus, where it is apparent on the face of the award that the award is illegal, it is liable to be struck down. Therefore, how does it matter is the patent illegality was caused by, say, lack of legal expertise of the arbitrator or delay in passing the award or any other reason? 
• Although Muralidhar, J. held in NIKO Resources that the the delay in that case had indeed led to an invalid Award being passed, the court has not precisely stated how the delay has led to the award becoming patently illegal. The draft award by Justice Wadhwa was circulated soon after the conclusion of the hearings; the majority award was published in 2009; Justice Wadhwa published his award in December 2009; the majority award does not deal with the dissenting points of Justice Wadhwa. But how did the court presume that it was the delay that caused the majority arbitrators to not deal with the contentious points raised by the draft dissenting award? In fact the majority award clarified this aspect: "We received his draft Award in good time but on reading it we found that there were basic differences in our approach and reasoning and it could hardly be expected that we all would be able to agree upon a common Award." Whether the award was patently illegal is a different question. But the court was perhaps not right in concluding that the delay caused the patent illegality. In any case, as stated above, it  does not matter whether the patent illegality was caused due to the unreasonable delay in passing the award after conclusion of hearings or for any other reason.

Whether a Delayed Award is liable to be struck down?

Muralidhar J. was right to state in NIKO Resources that the parties should approach the tribunal first and request it to pass the award within reasonable time and in case the tribunal fails to do so, the court must be approached under Section 14 of the 1996 Act for termination of the mandate of the arbitrator.

In arbitration, it is not only the effort of the tribunal to decide the dispute but also of the parties to ensure that the dispute is resolved swiftly and efficiently. Having agreed to arbitration, a party cannot wait till the tribunal commits a mistake and then go to court after the award and challenge it. Would the party have questioned the Delayed Award if it had been in its favour? Therefore, delay per se should not be a ground for setting aside the arbitral award.