"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.

Thursday, April 7, 2016

Part II: Applicability of the 2015 Arbitration Amendment Act to Arbitration Related Court Proceedings

This post is in continuation of the previous post on the applicability of the  Arbitration and Conciliation (Amendment) Act, 2015 to arbitration related court proceedings that were pending as on 22.10.2015 and those proceedings initiated on or after 23.10.2015 but in relation to arbitral proceedings commenced before the said date.

In the last post, we had analysed some conflicting decisions on the point, looked at the text of Section 26 of the 2015 Act and discussed the general principles regarding retrospectivity. In this post, we look at an important decision of the Supreme Court on a similar issue that arose on enactment of the Arbitration and Conciliation Act, 1996 and conclude based on the analysis of all these aspects. Readers who did not go through the previous post as this post refers to several aspects of the previous post.

Thyssen Stahlunion Gmbh v. SAIL (1999:SC:Two Judges Bench)

In this case, disputes arose between contracting parties and was referred to arbitration which commenced prior to the 1996 Act but the award was passed when the 1996 Act was in force. The Award Holder sought enforcement of the award under the 1996 Act. Question was whether it could do so. The relevant provision was Section 85 of the 1996 Act, which is quoted below for convenience:
"55. Repeal and saving (1) The Arbitration (Protocol and Convention) Act, 1937 (6 of 1937), the Arbitration Act, 1940 (10 of 1940) and the Foreign Awards (Recognition and Enforcement) Act 1961 (45 of 1961) are hereby repealed.
(2) Notwithstanding such repeal, -
(a) the provisions of the said enactments shall apply in relation to arbitral proceedings which commenced before this Act came into force unless otherwise agreed by the parties but this Act shall apply in relation to arbitral proceedings which commenced on or after this Act comes into force;
(b) all rules made and notifications published, under the said enactments shall, to the extent to which they are not repugnant to this Act, be deemed respectively to have been made or issued under this Act
."
The decision of the Supreme Court  is important for the present topic on two counts: 

(1) The  Supreme Court interpreted Section 85(2)(a) and held that notwithstanding repeal of the old arbitration enactments, including the Arbitration Act, 1940, those  provisions continued to apply in respect of arbitration related court proceedings of  arbitrations commenced prior to the coming into force of the 1996 Act.  The court stated:
This expression "in relation to" [used in the first limb of Section 85(2)(a)] has to be given full effect to, particularly when read in conjunction with the word "the provisions" of the old Act. That would mean that the old Act will apply to whole gambit of arbitration culminating in the enforcement of the award. If it was not so, only the word "to" could have sufficed and when the legislature has used the expression "in relation to", a proper meaning has to be given. This expression does not admit of restrictive meaning. First limb of Section 85(2)(a) is not a limited saving clause. It saves not only the proceedings pending at the time of commencement of the new Act but also the provisions of the old Act for enforcement of the award under that Act.”
(2) The second aspect of the decision in Thyssen is that applying the 1996 Act for enforcement of arbitral award issued under the 1940 Act would lead  to multiple problems. The Court held so while rejecting the contention that a purposive construction of the statute should be given and the 1996 Act should be  applied to enforce an award issued under the 1940 Act. The Court noted the difficulties in applying the 1996 Act to an award issued under the 1940 Act (for those interested, please see Para 39 of the decision) and held that where one construction would produce “an unjust or an inconvenient result and another would not have those effects, there is then also a presumption in favour of the latter”.

The Court also noted that since Section 85 employed the expression “unless otherwise agreed by the parties”, parties could always agree to apply  the 1996 Act for  enforcement of award under the 1940 Act.

Comparison of Section 26 of the 2015 Act and Section 85(2)(a) of the 1996 Act

As noted in the previous post,  the Division Bench of the Calcutta High Court in Tufan Chatterjee vs Rangan Dhar and the Madras High Court in New Tirupur Area Development Corporation Ltd. v. M/s Hindustan Construction Co. Ltd (see previous post) have relied on Thyssen and have held that since Section 26 uses  the expression “to the arbitral proceedings” instead of “in relation to arbitral proceedings”, the legislative intent was not to apply Section 26 even to arbitration related court proceedings. This entails a comparison of both provisions (click on the image if it is too small to read):


The argument that the bar in the first limb of Section 26 is not applicable to arbitration related court proceedings in view of the usage of the phrase “to the arbitral proceedings” as opposed to “in relation to arbitral proceedings” appears attractive. But a few points are noteworthy here:

(1) The first limbs of both these provisions are of distinct character. The first limb of Section 26 is negatively worded (“Nothing contained in this Act”) and speaks exclusively of the applicability of the 2015 Act while that of Section 85(2)(a) is positively worded and speaks of applicability not of the 1996 Act but of the Acts it repealed. (The first  limbs of these  provisions could be rephrased as “this Act shall not apply” and “The repealed enactments shall apply” respectively). Hence, to compare both these  provisions and hold that the 2015 amendments applied to arbitration related court proceedings due to the absence of the phrase “in relation to” may  not  be altogether correct, especially considering  the next three points discussed below. Therefore, it may not be  correct to determine the legislative intent merely on the basis of the first  limb of Section 26. 

(2) In fact, the last limbs of both the Sections speak of applicability of the relevant Acts. On this, both the provisions are identical. Having clearly stated that the 2015 Act was applicable in relation to arbitral proceedings commenced on or after 23.10.2015,  nothing prevented the Parliament from clearly stating that the  2015 Act applied to pending  arbitration related court proceedings of arbitrations which terminated prior to 23.10.2015. This is especially since a similar confusion arose even under the  unamended 1996 Act soon after its enactment.

(3) Going by this reasoning, 2015 Act would apply to arbitration related court proceedings of arbitrations which commenced before 23.10.2015 but terminated as per Section 32 on or after 23.10.2015 since the first limb of Section 26 talks only of arbitral proceedings and not arbitration related court proceedings, going by the rationale of Division Bench of Calcutta High Court and the Madras High Court. If the intent of the Parliament was not to apply the 2015 Amendments to  arbitral proceedings, surely  the Parliament would not have intended to apply arbitration related court proceedings unless there was a  clear intent.

(4) The Division Bench of the Calcutta High Court and the Madras High Court have wholly ignored the second part of the decision of the Supreme Court in Thyssen. To recollect, the Supreme Court held that if one construction of a statute would produce “an unjust or an inconvenient result and another would not have those effects, there is then also a presumption in favour of the latter”. Such a presumption can be rebutted only if the statute clearly provides otherwise. As noted previously, Section 26 does not expressly state that it applies to arbitration related court proceedings whether pending as on or which are filed on or after 23.10.2015. What are the possible adverse consequences of applying the 2015 amendments to pending arbitration related court proceedings and in respect of arbitrations commenced prior to 23.10.2015? 

Some  of such consequences are discussed below:

  • Partner X of a partnership firm files a suit in 2011 making serious allegations of fraud against Partner Y. On filing of the suit, Y immediately objects to the suit on the ground  that there is  an arbitration clause in their partnership deed  out of which  the dispute has arisen. The civil court rejected the said objection  by relying on N. Radhakrishnan v Maestro Engineers (dispute involving  allegations of fraud cannot be arbitrated) and proceeds on merits. The parties have spent several years pursuing the litigation and the arguments have been complete and the judgement has been reserved as on 22.10.2015. The 2015 Amendments  come into force on 23.10.2015. Going by the Division  Bench  of the Calcutta High Court and the Madras High  Court, the trial court should refer the matter to arbitration. It is also possible that a  similar stance could  be taken by an appellate court if an appeal is pending against a judgement of the trial court rendered before 23.10.2015 on the  same facts. This will not only lead to huge costs for the parties, it will affected the vested right of appeal against a  possible adverse decision against  Party X. Note that there is no right of  appeal against the arbitral award but only a right to challenge it on limited  grounds. [The correctness of N Radhakrishanan is irrelevant].
  • Parties to an agreement in 2013, clearly aware of BALCO, agree on a foreign seat notwithstanding that no interim relief could be sought in India. Thus, such a party is now disabled from objecting  to a petition for interim relief in Indian courts owing to Section 2(II) of the 2015  Amendment which permits a party to  a foreign seated arbitration to approach Indian courts for interim relief.  
  • Party X invokes arbitration in May  2014 and  proposes appointment of an arbitrator. Party Y objects in June 2014 to the same on the ground that the claim  is a long barred claim since the limitation period expired in 2008 and no communications  were made between the parties since 2005. Party A files a petition under Section 11 in December  2014 and the same is pending on 23.10.2015. Pursuant to Patel Engineering and National Insurance  Co., Y had the right to get the issue adjudicated by the High Court/Supreme Court, as the  case may  be, without expending fee and expenses for  appointing the arbitrator and proceeding with the arbitration. But pursuant to the amended  Section 11, a court cannot examine  such questions under Section 11 but can only refer the parties to arbitration.
  • Assume an arbitration commences in 2010 and an award is rendered in  2014. Note that the award was rendered in the SAW Pipes regime. The award is challenged in 2014 within limitation on the ground of patent illegality. During the pendency of these proceedings, the 2015 Amendment comes into force and disallows review on merits. These affect the vested rights of a party to question the award for patent illegality.
All the above examples go to show that vested rights would be affected if the 2015 Amendments are applied to arbitration related court proceedings of arbitrations which commenced prior to 23.10.2015. The Supreme Court in Thyssen sought to avoid such situations. Hence, reliance by the Division Bench of the Calcutta High Court and the Madras High Court of Thyssen would be to apply one part of the decision and wholly ignore the other, which is unwarranted. 

Conclusion

Following are the conclusions from the aforesaid analysis:

(1) Section 26 does not expressly provide for retrospective application, that is application of the 2015 Amendments to arbitration related court proceedings pending on 23.10.2015 or which are filed on or after 23.10.2015 relating to arbitrations which commenced prior to 23.10.2015.

(2) Reliance on Thyssen to argue that Section 26 does not use the expression “in relation to” and therefore that the first limb of Section 26 did not apply to arbitration related court proceedings would be to ignore the second aspect of Thyssen by which the Supreme Court held that where one construction would produce “an unjust or an inconvenient result and another would not have those effects, there is then also a presumption in favour of the latter”.

(3) Applying amendments restrospectively to proceedings noted in point no. 1 above seem to affect vested rights. 

(4) Thyssen clearly rejected the argument that the salutary purposes/ objects  of the 1996 Act required that retrospective operation must be given to the said Act. Hence, the salutary objects of the 2015 Act may not be an answer to apply it retrospectively, given the lack of clear parliamentary mandate and the injustice caused.

Finally, look at the costs that litigating parties have to expend obtaining an authoritative decision on the applicability. There is much confusion on this question and this blawgger is sure that this issue has been raised by several hundred courts in India. The overall social cost due to the ambiguity in the statute must be enormous. All these costs, precious court hours and time could have been saved had the Parliament drafted Section 26 clearly. It appears from the Parliamentary debates (see, here) that Section 26 was a last minute addition. If the Parliament had really intended Section 26 to apply retrospectively, it should have made the provision clearer. An immediate clarificatory amendment either as an enactment or as an ordinance would be helpful in resolving the issue.

11 comments:

Anonymous said...

Both your posts are quite confusing. Where, in the first post you've said that both Tufan Chatterjee and the New Tirupur judgments have held that since Section 26 uses the expression “to the arbitral proceedings” instead of “in relation to arbitral proceedings”, the legislative intent was to not apply Section 26 to arbitration related court proceedings. However, in the second post you've said that according to both the judgments, since Section 26 uses the expression “to the arbitral proceedings” instead of “in relation to arbitral proceedings”, the Courts have said that the legislative intent was to apply Section 26 even to arbitration related court proceedings.

Could you please clarify. Thank you.

Badrinath Srinivasan said...

Thanks for pointing out :) . The relevant sentence in the second part should read: "...the legislative intent was not to apply Section 26 even to arbitration related court proceedings". I've missed the word "not" and the same has been corrected. I hope now there is no confusion.

Anonymous said...

Thanks a lot.

Another point- in the second post in the very beginning you've said "In the last post, we had analysed some conflicting decisions on the point". But, aren't all the judgments in the first post, quite unequivocal on the point that the expression “to the arbitral proceedings” instead of “in relation to arbitral proceedings”, would mean that Section 26 will not apply to arbitration related court proceedings. So what exactly is the conflict you're referring to?

Badrinath Srinivasan said...

Not all the judgments. Electrosteels (Singe Judge Cal HC) was of the view that by virtue of Section 26, the 2015 Act would not apply to Section 34 proceedings challenging arbitral awards.

Anonymous said...

Could you please clarify how Electrosteels is different from Tufan Chatterjee/New Tirupur. I was under the assumption that both say the same thing.

Badrinath Srinivasan said...

Electrosteels states that the 2015 Act is not applicable to pending court-related arbitration proceedings and such proceedings initiated after 23.10.2015 relating to arbitral proceedings commenced prior to 23.10.2015. The other two judgements noted there state that 2015 Act would apply to such court-related arbitration proceedings. The confusion arises because Section 26 is negatively worded. "Nothing contained in this Act..."

To put it differently, Electrosteels held that the bar under Section 26 was applicable to pending court-related arbitration proceedings and such proceedings initiated after 23.10.2015 relating to arbitral proceedings commenced prior to 23.10.2015. The other two judgements held that the bar under Section 26 was not applicable to those proceedings.

Anonymous said...

According to you, (consequence No. 4) a party cannot challenge question the award for patent illegality. However, if you read Section 34(2A), it says "An arbitral award arising out of arbitrations other than international commercial arbitrations, may also be set aside by the Court, if the Court finds that the award is vitiated by patent illegality appearing on the face of the award:
Provided that an award shall not be set aside merely on the ground of an erroneous application of the law or by reappreciation of evidence."
Is Section 2A a 'narrower provision' when compared with the law laid down in Saw Pipes and Western Geco?

Anonymous said...

Also,the test for public policy and patent illegality was narrowed down/clarified anyway in Associate Builders v. DDA which is a pre-amendment judgment. So will this retrospective application have a lot of effect on such a contention?

Badrinath Srinivasan said...

Post-Saw Pipes, there were two lines of decisions: one set of decisions held (expressly or by implication) that if there is an error of law, or error in the interpretation of a contractual provision (or at times error of fact), the award would be deemed to be patently illegal; the other line of precedents (which have become more common among most High Courts in the past few years) is that the award should, on the face of it, be illegal. Mere error of law or error of application of law to facts, etc. would not constitute a ground for setting aside. The proviso in the 2015 Amendment Act addresses the former line of decisions while the main clause addresses the latter type of precedents.

Anonymous said...

Well written. However, there's one thing I'd like to point out. As far as the 1st consequence which you've written about is concerned, the conclusion I can arrive at, upon reading the Law Commission's Report on Pages 50 and 59 is that even if Section 85A of the Report was incorporated, the 2nd exception to Section 85A would have ensured that the matter be referred to arbitral tribunals even in cases of pending court proceedings/ where the judgment has been reserved.

Anonymous said...

You said that the judgment in electrosteel talks about pending court related arbitral proceedings and such proceedings initiated after 23.10.2015 relating to arbitral proceedings commenced prior to 23.10.2015. But I am unable to find out any such decision of the court while going through the case. It only talks about arbitral proceedings and not arbitral related court proceedings. Please clarify the same!