Prejuding a Dispute in a Section 11 Related Proceeding? A Case Comment

It was expected that the Supreme Court would pass several judgements on the first day of the Court after the vacations (29.06.2016). The Supreme Court did pass several decisions and twenty three of them have been uploaded onto the Court’s website. One such decision is M/s. Emm Enn Associates v. Commander, Works Engineer (Civil Appeal 7184/2008)(AM Sapre & A. Bhushan, JJ.), which is the subject of this post. 

The Supreme Court granted Special Leave to Appeal against a decision by the High Court under Section 11 of the Arbitration and Conciliation Act, 1996 refusing to refer a dispute to arbitration. The reason for refusal by the High Court was that there was no live claim. Payment on the final bill was made in April 2001 and the Appellant chose to invoke arbitration in February 2005.

An interesting argument was put forth by the Appellant that the Audit Clause contained in the Contract meant that limitation period would begin to run only from the expiry of the two year period specified in the Contract. If this was so, the two year period would have expired in April 2003 and the arbitration would have been invoked within three years from April 2003. 

Readers may note that Audit Clause is a standard term in Government Contracts, which allows the Government to (a) audit and examine the relevant documents and papers of the Contractor for any over-payment or other erroneous payment by the Government entity to the Contractor, and (b) if such over-payment or erroneous payment is discovered, demand/ adjust the said amount from the Contractor. The power to do so exists for a limited period, usually three to four years. The interpretation of audit clauses has rarely come up before the courts. Unfortunately, the Supreme Court did not give a ruling on the impact of the audit clause on limitation, although it was raised by the Appellant (see, Para 24-25). 

[The Court got its reference to case law wrong. Having extracted Para 13(!) of the SBP & Co., the Court stated that it had cited para 14 of the judgement in “Indian Oil Corporation Ltd.” The extracted para was para 13 and it was not from Indian Oil Corpn. but was from v. SBP v. Patel Engineering.] 

The Court decided the issue on based on different reasons. The Court found that the Appellant had signed the No-Claims Certificate (as is a practice in Government Contracts) only as regards the undisputed portion of the final Bill and the payment was made for the undisputed portion alone. As regards the disputed portion of the final bill, the Court held that whether there was a live claim or not cannot be decided, on facts, in the proceedings under Section 11 but only by the arbitrator. 

Having gone ahead with this view, the court unfortunately chose to comment on the merits of the case: “The claim raised by petitioner in the facts of the case could not have been said to be a dead claim.”. Surprisingly, the Court did not give any substantive reason for it but merely stated that such a conclusion was drawn “[e]specially in view of the additional documents which have been placed” before it. The reason why it is so was not fully substantiated by the Court. 

Ultimately, the Court remitted the case to the High Court to pass consequential orders for appointment of the arbitrator for deciding the disputes between the parties. 

Three questions:

1. If the Court stated that it was not right on the part of the High Court to decide the question as to whether there was a dead claim or not, why did it choose to give a finding on the same issue? The arbitrator ought to consider the view of the Supreme Court on this point as only a prima-facie view and has to decide the issue de novo and in full, especially given that the Supreme Court did not offer a full justification as to why it reached the conclusion that the claim was not dead one. The only justification offered, that the No-Claims Certificate was only as regards undisputed amounts is not relevant in determining whether the debt was long time-barred in the facts. No other specific and compelling reason was given by the Court.
2. Why did the Court not decide on the contention regarding the impact of the Audit Clause on limitation when it could have either taken up the issue head on or could have stated that it was for the arbitrator to decide? 
3. The dispute related to an Agreement that was entered into in 1998. The dispute arose by 2001. The Special Leave to Appeal was probably granted in 2008. The adjudication of the dispute is yet to begin. Despite this, was the Court correct in remitting the matter back to the High Court for appointment of arbitrators? [There was two ways of seeing this. On the one hand, it could be argued that the Court simply wasted another month in the long march of the parties towards justice by remitting the matter. See, this article (pardon the self-promotion) at p.28 & 34) On the other hand, it could be argued that the Supreme Court could not have appointed the arbitrator since it probably did not have a list of arbitrators from whom it could appoint a suitable arbitrator depending on the location of the parties and the High Court was better suited to appoint a suitable arbitrator.] 

Part III: Applicability of the 2015 Arbitration Amendment Act to Arbitration Related Court Proceedings: The Lok Sabha Debates

We had done three posts on the retrospective operation of the Arbitration and Conciliation (Amendment) Act, 2015:

a) The blog post titled “Applicability of the 2015 Arbitration Amendment Act to Arbitration Related Court Proceedings: Part I” posted on 04.04.2016 in the Practical Academic Blog. The post dealt with Section 26 of the Amendment Act on the point and the conflicting decisions of various High Courts on the retrospective applicability of the 2015 Amendments. (link)

b) The blog post titled “Part II: Applicability of the 2015 Arbitration Amendment Act to Arbitration Related Court Proceedings posted on 07.04.2016 dealt with Thyssen (SC:1999) and compared of Section 26 of the 2015 Act and Section 85(2)(a) of the 1996 Act (link)

c) The blog post titled “Is the New Arbitration and Conciliation (Amendment) Ordinance, 2015 Prospective or Retrospective?” published in the blog on 28.10.2015 noted the possible divergence of views of different courts on the question (link)

It was suggested to this blawgger that these posts do not deal with the Lok Sabha Debates on the point. Hence, this post addresses the debates of the Lok Sabha on the applicability of the 2015 Amendment Act to pending arbitral proceedings. 

Before embarking on the Lok Sabha debates, it would do well to contextualise the discussion. The predecessor to the relevant Lok Sabha Debates seems to be the judgement of the Hon’ble Madras High Court in Delphi TVS v. Union of India (24.11.2015: MANU/TN/3726/2015) where the Court directed the Union of India (rep. by the Learned Addl. Solicitor General Shri Su. Srinivasan) to examine, among other things, if the Ordinance would apply to pending proceedings. The Court referred to the absence in the Ordinance of Section 85A recommended by the Law Commission and also predicted the possibility of unnecessary litigations on the question. The relevant portions of the judgement are extracted below:

"4. The first respondent, while filing the counter-affidavit, especially since the matter is at the Ordinance stage, must examine the issue of pending arbitration proceedings, as the provision in question apparently is not one which was recommended by the Law Commission in this form. There would be huge litigations unnecessarily generated in respect of the pending arbitrations and the provision being procedural in nature fixing the time limit, it can be clarified that it would be either not applicable to the pending arbitrations or if it is applicable to the pending arbitrations, the time period specified therein would commence from the date of the Ordinance, to obviate such unnecessary litigations.

5. In the aforesaid context, the learned counsel for the petitioners further points out that another issue which has given rise to considerable litigation already is the non-introduction of the proposed Section 85A by the Law Commission, which dealt with the aspect as to which provision would apply prospectively and which would apply retrospectively."

As regards the Lok Sabha Debates on the question, it appears that on 17.12.2015, an MP, Shri Jithender Reddy (Mahabubnagar) raised the issue of non-incorporation of the Law Commission’s Section 85A in the Bill. It was strongly recommended by the said MP to incorporate Section 85A into the Arbitration and Conciliation (Amendment) Bill considering that the Bill was introduce to install a sense of confidence in our judicial process.  (p. 151, Lok Sabha Debates dt. 17.12.2015):

"The Law Commission of India, in its 246th Report, which recommended amendments to the Arbitration & Conciliation Act, 1996, had proposed to insert a new Section 85-A to the Act, which would clarify the scope of operation to each amendment with respect to pending arbitration proceedings. However, this specific recommendation has not been incorporated into the Ordinance. One of the reasons for bringing about this ordinance is to instil a sense of confidence in foreign investors in our judicial process, with regard to certainty of implementation in practice and ease of doing business. Therefore, it is strongly urged to incorporate Section 85A as proposed by the 46th Report of the law Commission of India, where it clearly states the scope of operation of the amended provisions."

Another MP, Shri  Mekpati Raja Ram Mohan Reddy (Nellore) wanted the Bill to apply even to pending “cases where the arbitrator is already appointed” (p. 158).

Importantly, the Minister of Law and Justice stated (at p. 190): “One of the suggestions was that it should have retrospective effect. If the parties agree, then there will be no problem. Otherwise, it will only have prospective effect.” (emphasised)

It is not known if there was an agreement between the parties for applicability of the Act retrospectively. At least the Debates do not disclose such an agreement. Thereafter the Law Minister wanted to introduce Section 25A to the Bill which is Section 26 of the 2015 Amendment Act. The Bill was passed in this form. From the TVS Delphi decision and the statement made by the Law Minister, it would seem that he was in favour of applicability of the 2015 amendments to the pending proceedings only if all the parties agreed to it. From the legal theory angle, a statement made by a member of the Parliament cannot be taken as the view of the Legislature but it would seem that the intent behind Section 25A of the Bill (Section 26) was to make the 2015 Amendment inapplicable to pending arbitral proceedings given the absence of indication of consensus in the Lok Sabha on applying the 2015 Amendments to pending arbitral proceedings. 

Certain developments have taken place on the issue since the last post on the topic. These are discussed below: 

In M/S. Reliance Capital Limited vs Chandana Creations (17.05.2016), the question before the Calcutta High Court was whether execution proceedings can continue notwithstanding the pendency of a Section 34 application against the arbitral award sought to be executed. The Single Judge held that the 2015 Amendment Act did not apply to arbitral proceedings commenced prior to 23.10.2015. The Court held: 

"The bare look of the said provision gives an impression that the arbitral proceedings which commenced before coming in the said amended Act shall still be regularized and guided by the unamended provisions unless the parties agree that the amended provisions would apply."

The Court also noted that there was another decision of the Calcutta High Court [Shri Nitya Ranjan Jena vs. Tata Capital Financial Services Limited (AP No. 15 of 2016, GA No. 145 of 2016, decided on 2nd March 2016) which concurred with the aforesaid view. Curiously, the Single Judge did not cite Tufan Chatterjee v Rangan Dhar, which was a Division Bench judgement of the same High Court and which held the contrary view. 

The Gujarat High Court seems to have made the 2015 Amendment Act apply in arbitral proceedings pending before 23.10.2015 for termination of mandate of arbitrator. 

At the end of the day, the post dt. 28.102.2015 and the decision of the Madras High Court dt. 24.11.2015 were correct in predicting the difference of views on the issue.