Presentation on the SIAC Proposal on Cross-Institutional Consolidation of Arbitration

Readers may please refer to yesterday's post in this blog on the recent proposal of the Singapore International Arbitration Centre on cross-institutional consolidation of arbitrations. For the ease of the readers, we have prepared a short 20-slide presentation on mechanics of SIAC's proposal. The presentation can be accessed from this link. Happy reading!

SIAC's Proposal on Cross Institutional Consolidation

Consider a complex set of transactions where a party proposes to invest in a country by entering into a joint venture with another company registered and functioning in that country. The investor enters into a series of transactions with its joint venture partner. One of such transactions could probably be a Shareholders Agreement,  which could provide for arbitration under the Rules of Arbitration of the International Chamber of Commerce (ICC). Another possible agreement that the parties could agree upon could be a technology licensing agreement. Consider that the parties agree, unwittingly, for arbitration under a different arbitral institution, say, the Singapore International Centre's (SIAC) arbitration rules. Assume that at a later point of time, a dispute arises between the parties and that the dispute relates to obligations under the shareholders agrement as well as the technology licensing agreement. 

Will the arbitration take place under the SIAC or the ICC Rules? Who decides the issue? What if one party takes a stance that the arbitration should be under the ICC Rules and the other party thinks SIAC Rules should govern? What happends if the tribunal under the ICC Rules comes up with a finding inconsisent with the tribunal under the SIAC Rules? The parties will spend thousands, if not millions, of dollars in deciding these questions, that too in various jurisdictions.

In order to save the trouble for the parties, the Singapore International Arbitration Centre has come up with a radically innovative proposal for consolidation of related arbitral proceedings but under different institutional rules. The proposal seeks adoption by international arbitration institutions of a protocol for this purpose. Acceptance of the proposal would entail amendment of the institutions' arbitration rules. 

The SIAC proposal for Cross-Institutional Consolidation is in effect two proposals: the first proposal is for a stand-alone mechanism for addressing the timing, the decision-making authority and the standards for such consolidation. Specifically, the SIAC recommends that a joint committee consisting of the representatives of the arbitral institutions whose proceedings are to be consolidated to decide on the applications for consolidation. The second, alternative, proposal calls for arbitral institutions to adopt objective criteria on the basis of which consolidations applications would be decided. 

SIAC thinks that the first proposal would be objective. But given that arbitral institutions which are very protective about their turf (see, for instance Article 1(2) of the ICC Rules), acceptance of the SIAC proposal would not be an easy task. Even otherwise, the SIAC proposal is a significant signal to the international arbitration market that the institution means business in making international arbitration efficient. 

SIAC's proposal can be accessed from this link. A summary of the proposal is available here.

Further Changes to Indian Arbitration Law in Line with the Report of the High Level Committee

News reports suggest that the Justice Sri Krishna Committee recommendations are going to be implemented through a slew of amendments to the 1996 Act. It appears that the Cabinet already has an amendment bill with it and the bill is likely to be tabled during the winter session of the Parliament. The bill could deal with the following aspects:

• Removal of typographical and other such errors in the Arbitration and Conciliation (Amendment) Act, 2015.
• Extending the time period of 12 months from the date when the tribunal enters reference to one year after the completion/ closure of pleadings.
• Immunity of arbitrators, except in bad faith.
• Model rules of procedure in conducting arbitrations 
• confidentiality of arbitral proceedings 
• Prospective applicability of the 2015 amendments.

For those interested, the report of the Justice Sri Krishna Committee is available here. For those who do not have the time, you could go through the key recommendations of the report, which are  reproduced below:

"1) Arbitration Promotion Council of India – An autonomous body styled the Arbitration Promotion Council of India (“APCI”) and having representation from various stakeholders may be set up by amendment to the ACA for grading arbitral institutions in India. (See Chapter VI, Section A) 

2) Accreditation of arbitrators – The APCI may recognise professional institutes providing for accreditation of arbitrators. Accreditation may be made a condition for acting as an arbitrator in disputes arising out of commercial contracts entered into by the government and its agencies. (See Chapter VI, Section B) 

3) Creation of a specialist arbitration bar – Measures may be taken to facilitate the creation of an arbitration bar by providing for admission of advocates on the rolls of the APCI as arbitration lawyers, encouraging the establishment of fora of young arbitration practitioners, and providing courses in arbitration law and practice in law schools and universities in India. (See Chapter VI, Section C) 

4) Creation of a specialist arbitration bench – Judges hearing arbitration matters should be provided with periodic refresher courses in arbitration law and practice. These courses could be conducted by the National Judicial Academy and the respective state judicial academies. (See Chapter VI, Section D) 

5) Amendments to the ACA (See Chapter VI, Section E) 

• Applicability of the 2015 Amendment Act – Section 26 of the 2015 Amendment Act may be amended with retrospective effect to provide that unless parties agree otherwise, the 2015 Amendment Act shall apply only to arbitral proceedings commenced on or after the commencement of the 2015 Amendment Act and to court proceedings arising out of or in relation to such arbitral proceedings. 
• Amendment to section 2(2) of the ACA – Section 2(2) may be amended to provide that clause (b) of sub-section (1) of section 37 shall also apply to international commercial arbitrations, even if the place of arbitration is outside India, instead of clause (a) of sub-section (1) of section 37. 
• Amendment to section 17(1) of the ACA – Section 17(1) may be amended to delete the words “or at any time after the making of the arbitral award but before it is enforced in accordance with section 36”. 
• Timelines under section 29A of the ACA – Amendments may be made to section 29A: (a) to limit its application to domestic arbitrations only, and not international commercial arbitrations; (b) to provide for a 6-month period for the submission of pleadings; (c) to provide that the time limit for completion of arbitral proceedings 5 starts to run the aforementioned 6-month time period; (d) to provide for the continuation of the mandate of the arbitral tribunal during the pendency of an application to extend the time limit; (e) to provide that the application is deemed granted if it is not disposed of within the period mentioned in section 29A; and (f) to provide for sufficient opportunity for hearing the arbitrator(s) where the court seeks to reduce the fees of the arbitrator(s). 
• Amendments to Section 34 of the ACA – § An amendment may be made to section 34(2)(a) of the ACA substituting the words “furnishes proof that” with the words “establishes on the basis of the arbitral tribunal’s record that”. § An amendment may also be made to section 34(6) of the ACA substituting the words “in any event,” with the words “an endeavour shall be made to dispose of the application” so that the time limit specified therein is construed as being directory only. 
• Reference to arbitration under section 45 of the ACA – Section 45 may be amended to clarify that the court shall refer parties to arbitration on the basis of only a prima facie conclusion that the arbitration agreement is not null and void, inoperative, or incapable of being performed. o Enforcement of foreign arbitral awards – A new sub-section (4) may be inserted in section 48 of the ACA providing that an application for enforcement of a foreign award under section 47 shall be disposed of expeditiously and an endeavour shall be made to dispose of such application within a period of one year from the date on which the application is filed before the court. 
• Amendments to section 37 and 50 of the ACA – In sub-section (1) of section 37 of the ACA, the words “Notwithstanding anything contained in any other law” shall be added before the words “An appeal shall lie”. Similarly, in sub-section (1) of section 50 of the ACA, the words “Notwithstanding anything contained in any other law” shall be added before the words “An appeal shall lie”. 
• Costs in proceedings under Part II of the ACA – A provision akin to section 31A pertaining to imposition of costs in connection with court proceedings under Part II of the ACA should be incorporated. 
• Typographical error in the Fourth Schedule – The Fourth Schedule may be amended to provide that the model fee where the sum in dispute is above INR 10,00,00,000 and up to INR 20,00,00,000 is 12,37,500 plus 0.75 per cent of the claim amount over and above INR 10,00,00,000. 
• Immunity for arbitrators – A new provision may be inserted to provide for immunity for arbitrators for acts or omissions in the discharge or purported discharge of his functions as arbitrator except in case of bad faith. 
• Confidentiality of arbitral proceedings – A new provision may be inserted in Part I of the ACA providing for confidentiality of arbitral proceedings unless disclosure is required by legal duty, to protect or enforce a legal right, or to enforce or challenge an award before a court or judicial authority. 
• Default rules of procedure – Model arbitral rules of procedure as provided in Annexure 2 to this Report may be incorporated in the ACA to operate as the default rules of procedure for arbitrations, unless parties exclude its operation (wholly or in part) by mutual consent at any time. 
• Amendments to section 11 of the ACA – In order to ensure speedy appointment of arbitrators, section 11 may be amended to provide that the appointment of arbitrator(s) under the section shall only be done by arbitral institution(s) designated by the Supreme Court (in case of international commercial arbitrations) or the High Court (in case of all other arbitrations) for such purpose, without the Supreme Court or High Courts being required to determine the existence of an arbitration agreement. 
• Recognition of emergency awards – Amendments may be made to section 2 of the ACA to enable the recognition of awards given by emergency arbitrators. 
• Insertion of a separate chapter establishing the APCI – A new Part IA may be inserted after Part I of the ACA establishing the APCI and providing for its composition, and functions and powers. 
• Depository of awards – The APCI may maintain an electronic depository of all arbitral awards made in India and such other records as may be specified by the APCI. Courts may access the depository for getting a copy of an award. 
• Incorporation of arbitral institutions – An amendment may be made to the ACA providing that all arbitral institutions shall be incorporated as companies under section 8 of the Companies Act 2013, or registered as societies under the Societies Registration Act 1860 or the corresponding state legislation. 

6. Other measures that can promote arbitration practice in India – Measures that promote access to the jurisdiction by permitting foreign lawyers to represent clients in international arbitrations held in India and promote India as a venue by easing restrictions related to immigration, tax, etc. may be adopted. (See Chapter VI, Section F) 

7. Role of the government and the legislature in promoting institutional arbitration – Measures to promote institutional arbitration such as facilitating the construction of integrated infrastructure for arbitration in major commercial hubs, adopting arbitration policies providing for institutional arbitration in commercial disputes involving the government, amending the ACA swiftly to keep abreast of developments in arbitration law and practice internationally, etc. may be adopted. (See Chapter VI, Section G) 

8. Changes in ADR culture – Measures may be taken to promote the use of ADR mechanisms, including requiring the provision of mediation facilities by arbitral institutions. The Government may also consider the feasibility of a separate legislation governing mediation. (See Chapter VI, Section H) 

9. The International Centre for Alternative Dispute Resolution – The ICADR should be taken over and be re-branded as the India Arbitration Centre in keeping with its character as a flagship arbitral institution. There must be a complete revamp of its governance structure to include only experts of repute who can lend credibility and respectability to the institution. (See Part II) 

10. Bilateral investment arbitrations involving the Union of India – Recommendations for effective dispute management and resolution, and dispute prevention include: (a) appointing the Department of Economic Affairs as the Designated Representative of the Government in existing BITs; (b) creating the post of an International Law Adviser, who shall advise the Government and coordinate dispute resolution strategy for the Government in disputes arising out of its international law obligations, particularly disputes arising out of BITs; (c) establishing a 5-member permanent Inter-Ministerial Committee in order to ensure effective management of disputes arising out of BITs entered into by the Government; and (d) tasking the Department of Economic Affairs with the preparation and implementation of dispute prevention strategies in order to prevent disputes from arising or escalating to formal dispute resolution proceedings. (See Part III)."

High Courts do what the Supreme Court did not: Decide on Choice of Foreign Seat by Indian Parties

Recently, the Delhi High Court has been in the news internationally for holding that two Indian parties can choose a foreign seat thereby making the arbitration a non-Domestic Arbitration and thereby sounding a death-knell for TDM Infrastructure v. UE Development as a binding precedent. The Madhya Pradesh (Sasan's case) and the Delhi High Courts have gone ahead and addressed the issue as to whether two Indian parties could choose a foreign seat, which the Supreme Court failed to do in the (Sasan Appeal). A perusal of the judgements concerning this issue would show only a textual analysis of the legislation and probably a policy argument that allowing Indian parties (especially where one of the party is an Indian subsidiary/ affiliate of a foreign parent) would give fillip to investments in India. There is a general lack of discussion of competing policy perspectives in these judgements, given the lack of a clear legislative guideline on the subject. The Delhi High Court's decision is a typical example.

While the international arbitration community is appreciative of this development (see here), there are certain unanswered questions. Take, for instance, this scenario: a micro enterprise (as defined in the MSMED Act, 2006) enters into an agreement with an Indian subsidiary of a foreign company for supply of certain goods. The arbitration clause provides for Singapore arbitration. Disputes crop up and the micro enterprise sends a letter demanding payment of dues. In order to pre-empt the micro enterprise from availing favourable remedies under the MSMED Act, 2006, the buyer (Indian subsidiary of a foreign parent) invokes arbitration in Singapore. The micro enterprise files a claim before the MSE Facilitation Council. Would the Facilitiation Council compel the micro enterprise to go for arbitration? 

It is time the Supreme Court of India considers the issue in depth.

Conflict of Interest of Arbitrators under the Amended Indian Arbitration Regime- A Comment

Bias, like beauty, is in the eyes of the beholder. But whether such a subjective view is sufficient for a court to strike down the appointment of an arbitrator is moot. Courts have leaned in favour of upholding objections to appointments based on objective standards. The Supreme Court of India had the occasion to consider the issue in the case of HRD Corporation v. GAIL (India)Limited

The decision is significant on two counts. To begin with, India recently brought a sea change in its arbitration law through the Arbitration and Conciliation (Amendment) Act, 2015. These amendments were aimed at providing a pro-arbitration legal framework consistent with international standards. This decision interprets the amended provisions on the grounds of challenging arbitrator appointments for conflict of interests and provides significant guidance on how to deal with them. Secondly, the grounds of challenge have been adopted from the International Bar Association Guidelines on Conflicts of Interest in International Arbitration, 2014 (‘IBA Guidelines’) with a few changes. Therefore, the decision adds to the growing body of case law on how different jurisdictions have interpreted the IBA Guidelines or statutory instruments based on the IBA Guidelines. This post discusses the judgement and its implications. 

Facts

The appellant, HRD Corporation, and GAIL (India) Ltd., the respondent, entered into a long-term agreement for the supply of wax generated at the respondent’s petrochemical plant. Disputes arose between the parties, which led to invocation of four arbitrations by HRD Corporation. In the third arbitration, one of the members of the tribunal expired and Justice TS Doabia was appointed as the substitute arbitrator by an order of the court. The tribunal passed an arbitral award. Justice TS Doabia was once nominated by the respondent as a member of the tribunal in the fourth arbitration. The nominees of the appellant and the respondent appointed Justice RC Lahoti as the presiding arbitrator. At the time of his appointment, Justice RC Lahoti disclosed to the parties that he had given an opinion on a legal issue between the Respondent and another public sector undertaking and that he was an arbitrator in a dispute in which the Respondent was a party. 

HRD Corporation challenged the appointments of Justice TS Doabia and Justice RC Lahoti before the arbitral tribunal. Under the Indian Arbitration and Conciliation Act, 1996 (‘1996 Act’), challenges to arbitrator appointment on the ground of conflict of interest is to be brought made before the tribunal. Justice RC Lahoti and Justice TS Doabia passed an order rejecting the challenge. However, the arbitrator-nominee of the appellant passed a separate order holding that the appointment of Justice RC Lahoti was correct but the appointment of Justice TS Doabia was contrary to the provisions of the 1996 Act. Questioning the order passed by Justice RC Lahoti and Justice TS Doabia, HRD Corporation filed a petition in the Delhi High Court, which was dismissed. The appellant thereafter filed an appeal in the Supreme Court of India. 

Arguments before the Supreme Court

The appellant argued that the recent amendments introduced in the Arbitration and Conciliation Act, 1996 restricted the grounds on which an arbitral award could be set aside. As a consequence, appellant contended that the grounds of challenging an arbitrator have to be construed widely to ensure a heightened level of independence and impartiality. 

Further, HRD Corporation argued that Justice Lahoti had previously given a legal opinion to GAIL, which disentitled him from acting as the arbitrator. HRD Corporation challenged the appointment of Justice Doabia for the reason that Justice Doabia was a member of the arbitral tribunal in a previous arbitration between the parties on related issues. These appointments, according to HRD Corporation fell foul of various grounds of challenge contained in the Fifth and the Seventh Schedule to the 1996 Act. The appellant also alleged that since Justice TS Doabia did not disclose at the time of his appointment those circumstances which affected his ability to devote sufficient time for the arbitration, he was ineligible. 

GAIL, on the other hand, argued that none of the items relied on by the Appellant was applicable in the case and that the argument regarding Justice Doabia’s failure to disclose circumstances which affected his ability to devote sufficient time for the arbitration was an afterthought as it raised for the first time before the Supreme Court.

Decision

The Supreme Court acknowledged that the Fifth and the Seventh Schedules introduced into the statute book through the 2015 Amendments were based on the IBA Guidelines. The court went on to note the differences between the Fifth and the Seventh Schedules: the Fifth Schedule enumerated situations which led to justifiable doubts as to the independence and impartiality of the arbitrators while the Seventh Schedule listed out grounds which made persons ineligible to act as arbitrators. The court also recorded the distinction in the manner in which appointments could be challenged under these Schedules: challenges under the Fifth Schedule were to be brought before the tribunal at the first instance and in case of rejection of such challenge, the rejection could be brought before a court only after the award is passed. However, an arbitrator who falls within the Seventh Schedule becomes de jure unable to act as arbitrator and therefore the challenge could be brought directly to a court of law at the first instance. Given the aforesaid legal position, the Supreme Court rejected challenges based on the items mentioned in the Fifth Schedule and held that such challenges could be made only after the award was passed.

The court disagreed with the Appellant’s contentions that the grounds contained in the Schedules should be widely construed. The court held that as the Schedules were based on the IBA Guidelines, they had to be construed in the light of the general principles contained in the said Rules. The appropriate method of construing the relevant items in the Schedules was to afford them a ‘fair construction, neither tending to enlarge [nor] restrict them unduly’. The court was of the view that the relevant standard to ascertain if doubts as to independence or impartiality were justified was that of a ‘reasonable third person having knowledge of the relevant facts and circumstances’.

The court stated that merely because Justice RC Lahoti gave his legal opinion in one instance to the Respondent did not make him ineligible from appointment under the 1996 Act. According to the court, the term ‘advisor’ in item 1 of the Seventh Schedule (Item 1 of the Seventh Schedule to the 1996 Act reads: ‘The arbitrator is an employee, consultant, advisor or has any other past or present business relationship with a party.’) connoted the existence of a regularity of advisory relationship and that too in relation to the business of a party. The court took note of items 2, 8, 14 and 15 in the Seventh Schedule which contemplated relationships based on legal advice and ruled that since item 1 used the term ‘business relationship’ in contradistinction to a relationship stemming from legal advice, such advice should relate to the business of a party. On this reasoning, the court concluded: ‘Something more is required, which is the element of being connected in an advisory capacity with a party.’

The appellant had argued that item 16 of the Seventh Schedule (Item 16 of the Seventh Schedule reads: ‘The arbitrator has previous involvement in the case’.) debarred an arbitrator who had previously rendered an award between the same parties in an earlier arbitration concerning the same set of disputes. The court disagreed with this and held that item 16 was inapplicable as it concerned a situation where the prospective arbitrator had a prior involvement in the ‘very dispute contained in the present arbitration’. After noting the corresponding provision in the IBA Guidelines, which employed the phrase ‘in the dispute’ instead of ‘in the case’, and the title heading of the said provision (‘Relationship of the arbitrator to the dispute’), the court concluded that Justice Doabia was not involved in the very dispute that formed the subject of the arbitral proceedings although he might have been involved in a related dispute between the parties previously. In reaching the aforesaid conclusion, the court also resorted to items 22 and 24 of the Fifth Schedule. According to the court, if item 16 was to be interpreted in the manner suggested by the appellant, item 24 would be rendered nugatory as the latter item covered the exact situation which the which the appellant was canvassing. 

Item 24 of the Fifth Schedule provides: ‘The arbitrator currently serves or has served within the past three years, as arbitrator in another arbitration on a related issue involving one of the parties or an affiliate of one of the parties.’

It is of note that a provision similar to item 24 of the Fifth Schedule is not contained in the Seventh Schedule. The court also rejected the challenge to the appointment of Justice Doabia on the ground that there was nothing to indicate that Justice Doabia held a pronounced anti-claimant view.

On the argument that Justice Doabia did not make a complete disclosure indicating that he would devote sufficient time to complete the arbitration within 12 months as required by the recent amendments. The court dismissed this argument as an afterthought considering that the appellant raised it for the first time before the Supreme Court.

Comment

When India decided to take steps to establish a pro-arbitration regime, the Law Commission of India considered that it was appropriate to adopt the objective standards laid down in the form of the IBA Guidelines considering its acceptability in international arbitration. At the same time, the IBA Guidelines were not to be adopted as they were. Considering the criticism that the presence of non-waivable red list was against the party autonomy doctrine (see, Para 60 of the 246th Report of the Law Commission and W Ltd v M SDN BHD [2016] EWHC 422 (Comm), para. 35-41) the Law Commission recommended that grounds under the non-waivable red list should be treated as waivable but after the dispute has arisen. These recommendations were accepted and the 1996 Act was amended to incorporate these changes. The amendments present an appropriate model for those countries which are intending to adopt objective standards in addressing bias of the arbitrators. 

The judgement is significant because it provides clarity on the manner of construing various grounds or items in the Fifth and the Seventh Schedules to the 1996 Act. The Supreme Court rightly resisted the temptation to read the grounds broadly and don an activist mantle. The court held that the fundamental principle in interpreting these items would be to look at it from the perspective of a reasonable man having full knowledge of the circumstances surrounding the appointment. The Supreme Court affirmed the view that these grounds should to be construed in a “common-sensical” fashion.

Since the items in the Seventh Schedule were also reflected in items 1 to 19 of the Fifth Schedule, the court noted their interconnectedness and clarified that the manner in which the Fifth Schedule was structured had a bearing on the interpretation of various items under the Seventh Schedule. Further, the court also held, rightly, that the same treatment should be afforded to the corresponding items in the Seventh Schedule. Therefore, it appears that the first step in construing the grounds under the Seventh Schedule would be look at the wordings of the corresponding item in the Fifth Schedule. The second step would be to find out related items and the last step would be to construe the related items harmoniously to ensure that there is no conflict.

The court adopted a prudent stance in holding that only if a professional, such as a legal professional, offered advice with an element of ‘regularity’ would that professional be barred from arbitrating a dispute involving a party which received the legal advice. It is possible that a successful legal professional would have advised prominent companies and clients at some point of time in her career. It is unreasonable and unrealistic to impute possible bias on the basis of such distant professional advice. Also, barring such a person from acting as an arbitrator would make arbitration appointment a cumbersome task. 

The court also recognised that unless the challenging party was able to show that the arbitrator was holding a prejudiced view, appointment of such arbitrator between the parties in a related dispute and the award rendered thereunder did not affect the present appointment. Although the decision fails to explain the reason behind employing the phrase ‘in the case’ in item 16 instead of ‘in the dispute’ which was used in the IBA Guidelines, the court’s conclusion that the Appellant failed to show that Justice Doabia would not have brought an open mind to the arguments of the Appellant, which might or might not be different from those made in the previous arbitration is a practical one. 

It is common in arbitration, domestic and international, to have the same tribunal adjudicate different arbitrations arising out of the same or similar transactions. If the arguments of the Appellants in this case were to be accepted, it would be difficult to constitute a different tribunal for each such arbitration. Also, what would happen in a case where the arbitral tribunal is appointed simultaneously to deal with different disputes arising out of multiple agreements? It would not be a good argument to suggest that the moment the tribunal makes a determination in one of the disputes, the tribunal would be debarred from acting in the other arbitrations merely because the latter arbitrations involved similar issues.

The manner in which India resolved the absence of relatively predictable standards in addressing conflict of interest of arbitrators by adopting the IBA Guidelines with suitable modifications is commendable and is in line with international practice. The Supreme Court’s decision in this case preserves the delicate balance between fairness on the one hand and reasonableness and predictability on the other. Although the Supreme Court did not examine the reasons for differences in the usage between certain items of the Schedules (such as item 16 of the Fifth Schedule) and the IBA Guidelines, the overall approach of the Supreme Court in clarifying the legal position augurs well for the future of international arbitration in India.

Has Sumitomo Been Overruled by BALCO? A Resounding Yes!

Sumitomo v ONGC  (04.12.1997: Supreme Court of India) was a pre-1996 Act case which laid down the law on the law governing challenge to arbitral awards. The case really reflects the debate in international commercial arbitration as to the law which governs challenge to arbitral awards. Some theorists were of the view that it is the law governing the arbitration agreement which deals with the law of challenge while some are of the view that it is the law of the seat. 

In this post, we present the idea that Sumitomo has been overruled on the issue that the court was asked to adjudicate upon: Whether proceedings challenging an arbitral award are governed by the law of the seat or the law of the arbitration agreement? 

To recap the facts briefly, Sumitomo and ONGC agreed that Indian laws would govern their contractual relationships and London would be the seat of arbitration in case of disputes. The parties did not designate the law of the arbitration agreement. Disputes arose and led to an arbitral award which was in favour of Sumitomo. ONGC challenged the arbitral award in India. Sumitomo objected stating that English courts alone had the jurisdiction to set aside the arbitral award. ONGC argued otherwise and was successful before the Bombay High Court. 

On appeal, the Supreme Court decided in favour of ONGC and held that once the arbitral award was passed, the curial law ceased to operate and the law of the arbitration agreement governed the setting aside proceedings. The court based its conclusion on two grounds. The first was Mustill & Boyd's book on English arbitration and the second was the fact that the Foreign Awards (Recognition and Enforcement) Act, 1961 did not apply where the arbitral award was made under an arbitration agreement governed by Indian law. 

Section 9 of the 1961 Act provided:

"Saving. Nothing in this Act shall-(a) prejudice any rights which any person would have had of enforcing in India of any award or of availing himself in India of any award if this Act had not been passed; or(b) apply to any award made on an arbitration agreement governed by the law of India."
(emphasis supplied)

Taking the aforesaid provision into consideration, the three-judge Bench of the Supreme Court held:

"The proceedings before the arbitrator commence when he enters upon the reference and conclude with the making of the award. As the work by Mustill and Boyd aforementioned puts, it with the making of a valid award the arbitrator's authority, powers and duties in the reference come to an end and he is "functus officio" (page 404). The arbitrator is not obliged by law to file his award in court but he may be asked by the party seeking to enforce the award to do so. The need to file an award in court arises only if it is required to be enforced, and the need to challenge it arises if it being enforced. The enforcement process is subsequent to and independent of the proceedings before the arbitrator. It is not governed by the curial or procedural law that governed the procedure that the arbitrator followed in the conduct of the arbitrator.
...
By reason of Section 9(b), the 1961 Act does not apply to any award made on an arbitration agreement governed by the law of India. The 1961 Act, therefore, does not apply to the arbitration agreement between the appellant and the first respondent. The 1940 Act, applies to it and, by reason of Section 14(2) thereof, the courts in India are entitled to receive the award made by the second respondent."

Thus, the choice of law rule that the three-judge Bench relied upon was that the proceedings for challenging the arbitral award and the grounds therefor were governed by the law of the arbitration agreement and not by the law of the seat. 

It is important to note that the aforesaid judugement was passed in the pre-1996 Act regime. Under the 1996 Act, the provision analogous to Section 9 of the 1961 Act does not deal with the law of the arbitration agreement. Section 51 of the 1996 Act states:

"Saving.—Nothing in this Chapter shall prejudice any rights which any person would have had of enforcing in India of any award or of availing himself in India of any award if this Chapter had not been enacted."

There is no clause in the aforesaid provision similar to Section 9(b) of the 1961 Act. Further, Section 44 makes Chapter I (New York Convention Awards) of Part II (Enforcement of Certain Foreign Awards) applicable on the basis of territoriality, as provided in Section 44(b), which reads:

"Definition.—In this Chapter, unless the context otherwise requires, “foreign award” means an arbitral award on differences between persons arising out of legal relationships, whether contractual or not, considered as commercial under the law in force in India, made on or after the 11th day of October, 1960—

(a) in pursuance of an agreement in writing for arbitration to which the Convention set forth in the First Schedule applies, and

(b) in one of such territories as the Central Government, being satisfied that reciprocal provisions have been made may, by notification in the Official Gazette, declare to be territories to which the said Convention applies." (emphasis supplied)

Similar provisions are contained in Sections 53 and 60, which deal with Geneva Convention Awards. 

Further, the seat as the principal jurisdiction that would govern challenge proceedings has been authoritatively laid down by the five judge Bench of the Supreme Court in Bharat Aluminium v. Kaiser Aluminium (06.09.2012: Supreme Court of India). The Supreme Court held:

"120. Upon consideration of the entire matter, it was observed that - "In these circumstances it is clear to me that the law with which the agreement to arbitrate has its closest and most real connection is the law of the seat of arbitration, namely, the law of England". (Para 14). It was thereafter concluded by the High Court that English Law is the proper law of the agreement to arbitrate. (Para 15)
121. The legal position that emerges from a conspectus of all the decisions, seems to be, that the choice of another country as the seat of arbitration inevitably imports an acceptance that the law of that country relating to the conduct and supervision of arbitrations will apply to the proceedings.122. It would, therefore, follow that if the arbitration agreement is found or held to provide for a seat / place of arbitration outside India, then the provision that the Arbitration Act, 1996 would govern the arbitration proceedings, would not make Part I of the Arbitration Act, 1996 applicable or enable Indian Courts to exercise supervisory jurisdiction over the arbitration or the award. 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. This necessarily follows from the fact that Part I applies only to arbitrations having their seat / place in India.
...
The words "suspended or set aside", in Clause (e) of Section 48(1) can not be interpreted to mean that, by necessary implication, the foreign award sought to be enforced in India can also be challenged on merits in Indian Courts. The provision merely recognizes that courts of the two nations which are competent to annul or suspend an award. It does not ipso facto confer jurisdiction on such Courts for annulment of an award made outside the country. Such jurisdiction has to be specifically provided, in the relevant national legislation of the country in which the Court concerned is located. So far as India is concerned, the Arbitration Act, 1996 does not confer any such jurisdiction on the Indian Courts to annul an international commercial award made outside India. Such provision exists in Section 34, which is placed in Part I. Therefore, the applicability of that provision is limited to the awards made in India. If the arguments of the Learned Counsel for the Appellants are accepted, it would entail incorporating the provision contained in Section 34 of the Arbitration Act, 1996, which is placed in Part I of the Arbitration Act, 1996 into Part II of the said Act. This is not permissible as the intention of the Parliament was clearly to confine the powers of the Indian Courts to set aside an award relating to international commercial arbitrations, which take place in India.
...
Therefore, the word "suspended/set aside" in Section 48(1)(e) cannot be interpreted to mean that, by necessary implication, the foreign awards sought to be enforced in India can also be challenged on merits in Indian Courts. The provision only means that Indian Courts would recognize as a valid defence in the enforcement proceedings relating to a foreign award, if the Court is satisfied that the award has been set aside in one of the two countries, i.e., the "first alternative" or the "second alternative.
148. The consistent view of the international commentators seems to be that the "second alternative" refers to the procedural law of the arbitration rather than "law governing the arbitration agreement" or "underlying contract". This is even otherwise evident from the phrase "under the law, that award was made", which refers to the process of making the award (i.e., the arbitration proceeding), rather than to the formation or validity of the arbitration agreement."

The aforesaid quote clearly establishes the choice of law rule that it is the law of the seat of the arbitration which governs setting aside proceedings and not the law of the arbitration agreement. One could argue that Sumitomo still stood as a precedent for the pre-1996 Act position. Sumitomo was also relied on prior to BALCO [See, Dozco v. Doosan (2011) 6 SCC 179 & Videocon v. Union of India AIR 2011 SC 2040]. It is submitted that Sumitomo should be deemed implicitly overruled for the reason that Sumitomo's conclusion that it is the law of the arbitration agreement and not the curial law that governs challenge proceedings was made independent of Section 9(b) which has not been incorporated under the 1996 Act.

It may be noted that BALCO (2012) did not rely on or consider Sumitomo. Curiously, BALCO II (2016) (a three judge Bench) did rely on Sumitomo at Para 5:

"Party autonomy being the brooding and guiding spirit in arbitration, the parties are free to agree on application of three different laws governing their entire contract-(1) proper law of contract, (2) proper law of arbitration agreement and (3) proper law of the conduct of arbitration, which is popularly and in legal parlance known as curial law. The interplay and application of these different laws to an arbitration has been succinctly explained by this Court in Sumitomo Heavy Industries Limited v. ONGC Limited and Ors. (1998) 1 SCC 305, which is one of the earliest decisions in that direction and which has been consistently followed in all the subsequent decisions including the recent Reliance Industries Limited and Anr. v. Union of India (2014) 7 SCC 603." (emphasis supplied)

BALCO II (2016) also acknowledged that Sumitomo was an authority for the proposition that in the absence of a choice of the law of the arbitration agreement, the choice of law governing the contract will also mean that the law of the arbitration agreement is chosen. To this extent, reliance on Sumitomo was correct. But the reliance in BALCO II (2016) on Sumitomo for the interplay between the law of the contract, of the arbitration agreement, and the lex arbitri (as quoted and emphasised above) is wholly wrong because such reliance contradicts with BALCO (2012).

In view of the above, the law governing challenge proceedings is not the law of the arbitration agreement but is the law of the seat. It is possible that both these laws could be the same. For instance, parties might agree that the seat of the arbitration is London and the law governing the arbitration agreement is English law but might agree on Indian laws to govern the contract (excluding the arbitration agreement). In such a case, English law will govern the setting aside proceedings not because English law is the law governing the arbitration agreement but because English law is the lex arbitri owing to the choice of London as the arbitral seat. 

Raj TV v Thaicom, Madras High Court & Choice of Law

On 14.07.2017, a two-judge Bench of the High Court of Madras passed a judgement in the case of Raj TV v Thaicom (OSA No. 113/2017 & CMP 7665/2017)(MANU/TN/2117/2017). The judgement deals with choice of law in international arbitration and is an important reason why commercial Benches are to be set up in the Madras High Court and in the State of Tamil Nadu. In this post, we will not be doing a detailed case comment on the decision but will identify certain portions of the judgement which are erroneous and require correction.

To give a brief factual background, the dispute arose out of a Transponder Service Agreement entered into between the parties in 2003. Clause 19 of the Agreement provided that the agreement, rights and responsibilities of the contracting parties, including any dispute, controversy, or claims arising out of the said contract or breach shall be subject to and construed according to Singaporean laws. Clause 23 provided that all disputes shall be referred to arbitration to be held in Singapore under UNCITRAL Arbitration Rules.

From Clause 19, it could be inferred that the substantive law of contract was Singaporean law. Further, since the seat was agreed to be Singapore, the lex arbitri or the law governing arbitration was Singaporean law. But what about the law of the arbitration agreement? Note that Clause 19 comprehensively covered all aspects of the Agreement such as rights, responsibilities, disputes, controversies, and claims, etc. Given this, the law of arbitration agreement, which was nothing but a clause in the Agreement, was Singaporean law. It is a presumption that where the arbitration clause forming a part of the agreement the law of the arbitration agreement is same as that of the agreement. Note that the latest law on international commercial arbitration provides for a three fold test in determining the law of the arbitration agreement. The below quoted portion of this post apltly sums the current legal position:

"[I]n the absence of any indication to the contrary, parties are assumed to have intended the whole of their relationship to be governed by the same system of law, and the natural inference is that the proper law of the main contract should also govern the arbitration agreement. While seat choice could be a mitigating factor, it would be insufficient in and of itself to negate this presumption."

The aforesaid post also neatly summarises the legal position under the English and the Singaporean laws. Even the Indian postition is similar to this, as can be seen from this post. The Indian position can be summarised as below, as noted in the said blog post:

• In the absence of express choice of the law of arbitration agreement, the choice of the proper law of the contract will also govern the arbitration clause.
• However, in exceptional circumstances, even if the proper law of the contract is chosen, such may not be the law of the arbitration agreement where the agreement is silent.
• Where neither the proper law of contract nor the proper law of arbitration agreement is chosen, it would be presumed that the latter would be the seat of arbitration.

Contrary to the prevailing international and the Indian legal position, the Madras High Court held that it was the law of the seat which determined the law of the arbitration agreement in the aforesaid factual situation. Although the conclusion that the Singaporean law was the law of the arbitration agreement was correct, the reasoning was wholly errenous as the High Court relied on the choice of seat as being determinative but the correct position was that the choice of the substantive law of contract determined the law of the arbitration agreement in this case. Further, the court seems to have held that curial law (that is, the law governing the arbitration) was the same as the law of the arbitration agreement, which is not the case: See the quoted portions of the judgement containing the errors:

"4(q)... In other words, it is not in dispute that the seat of arbitration is Singapore. Therefore, there can be no two views or dispute about the fact that the 'proper law' for the 'arbitration agreement' is Singaporean law. In other words, the Curial Law is Singaporean Law."...
"4(v)(i) (i) While proper law for arbitration agreement (Curial Law) is indisputably Singaporean Law, what is the proper law for the contract qua the said contract dated 10.9.2003?" ... (issues framed by the court)(emphasis supplied)
"4(z) In our opinion, this makes the task very simple and easy. The reason is, Curial Law or proper law for the arbitration agreement is directly evident (not even inferred) from the agreed seat of arbitration. The moment contracting parties agree on the seat of arbitration, it goes without saying that proper law for the arbitration agreement shall be the law of land, which is the seat of arbitration." 

This reasoning is faulty and is also against settled Indian precedents and the international position.

On another related note, administration of justice in the State of Tamil Nadu has not been upto the mark. The High Court is a typical case. The website of the High Court is one of the most user unfriendly ones in India. The Cause-Lists are uploaded only at 2230/2300 hrs for the next day making it absolutely inconvenient for litigants and even lawyers. The icing in the cake is the failure by the High Court to set up Commercial Benches. For some time, the Court could give the excuse of the lack of Bench strength. But now there are enough judges. Even so, it is perplexing why the Court has not set up even a single Commercial Bench. 

NLSIR Announcement

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The National Law School of India Review (NLSIR) is now accepting submissions for its upcoming issue – Volume 30(1). The NLSIR is the flagship law review of the National Law School of India University, Bangalore, India. The NLSIR is a bi-annual, student edited, peer-reviewed law journal providing incisive legal scholarship on issues that are at the forefront of contemporary legal discourse. For more than 25 years, the NLSIR has regularly featured articles authored by judges of the Indian Supreme Court, senior counsels practicing at the Indian bar, and several renowned academics from national and foreign universities.

The most recent volume of the NLSIR, Vol. 29 will feature contributions by Professor M.G. Bridge, Cassel Professor of Commercial Law at London School of Economics and Professor of Law, National University of Singapore, and Professor Richard Pierce, the Lyle T. Alverson Professor of Law at George Washington University, among several others. Moreover, in August 2009, NLSIR attained the unique distinction of being the only Indian student-run law journal to be cited by the Supreme Court of India, in Action Committee, Un-Aided Private Schools v. Director of Education. NLSIR has also recently been cited in Justice R. S. Bachawat’s Law of Arbitration and Conciliation, a leading treatise on arbitration law in India.

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PF Act, Contract Labourers & Principal Employer

Doubts are often expressed by Principal Employers on their liability vis-a-vis the Contract Labourers engaged in the Principal Employer's Establishment through Contractors. Strictly speaking, for the purposes of the Employees' Provident Funds & Miscellaneous Provisions Act, 1952, the term "Establishment" is relevant. Seen in its truest spirit, the PF Act calls for determination of the number of employees not on the basis of the number of direct employees of the Principal Employer alone but also the Contract Labourers. Consequently, it does not matter if the Contractor does not employ on his rolls 20 persons (and therefore claims exemption from the PF Act). Therefore, it is in the interest of the Principal Employer to specifically provide or agree upon in the Contract with the Contractor at the time of contract negotiations that the Contractor has to pay the PF for his workers as well.

Some courts have held that if the Contractor has his own code, then he, not the Principal Employer" is the Establishment (and the Employer). Although this is convenient for Principal Employers (and seems to find courts' acceptance), the PF Act per se does not recognise this aspect. The PF Act places the burden on the Principal Employer provided the Contract workers work in the premises of the Principal Employer. The PF authorities have tried to distinguish these judgements.

So long as the total number of employees (including Contract Labour) working in the Establishment crosses the 20 persons threshold, the Principal Employer (and not the Contractor) is obligated to comply with the PF Act. 

In a recent circular (No. C-I/3(19)2016/Clarification/ECR/7357, Dated 21.07.2017) by the PF authorities pertaining to separate PF Code and payment mechanism for employees working in multiple locations, the PF Authorities have stated that a facility has now been provided "to such employers to furnish their location-wise employees’ particulars." This will only support the arguments of the Principal Employers that even such Contract Labourers work in their premises, the "Establishment" will refer to that of the Contractor and not the Principal Employer.

Contempt Mechanism under Section 27(5) of the A&C Act 1996

On the 6th of July, the Supreme Court passed a judgement in the case of Alka Chandewar v. Shamshul Ishrar Khan [Civil Appeal No. 8720/2017]. The Civil Appeal arose against a judgement of the Bombay High Court where the High Court construed Section 27(5) to state that teh said provision did not "empower the Tribunal to make representation to the Court for contempt if orders including interim orders passed by the Arbitrator except in respect of taking evidence are violated by the party."

The said position taken up by the High Court is correct for the following reasons:

(1) The text of Section 27(5) is based on of Regulation XVI of the Regulations for the Administration of Justice in the Courts of the Mofussil Dewannee Adaulut and in the Suddur Dewannee Adaulut, 1781 (“1781 Regulation). The said provision reads: 

“XXVI … [T]he Court shall grant the like Process as well to the Parties and Witnesses to appear before such Arbitrator and shall administer such Oath to the Parties and Witnesses as the Court is authorized to do in Causes tried before the Judge thereof And the several Persons not attending in consequence of such Process or making any Default or refusing to give their Testimony or sign their Depositions or being guilty of any Comtempt to the Munsiffs in the executing of his Office shall be subject to like Disadvantages Penalties and Punishments by Order made by the Arbitrator as they would incur for the same Causes in Suits tried before the Judge of the Court so that the Arbitrator do report such Order together with the Reason for making the same to the Judge of the Court and do obtain the Consent of the Judge thereto which shall be signified by such Judge signing such Order with his Name;” 

This provision was adopted in the Code of Civil Procedure 1859, which was then adopted in the Codes of 1877, 1882 and 1908. Section 43(2) of the Arbitration Act, 1940 borrowed this provision and the same was once again borrowed into the 1996 Act. These provisions were enacted at a time when the arbitral tribunal was not empowered to pass interim orders at all! [See for instance, Surendra Kumar Roy Chowdhury v. Sushil Kumar Roy Chowdhury AIR 1928 Cal 256]. It is not possible that the predecessors of Section 27(5) could have applied to disobedience to an interim order by the tribunal. It was only for the first time under the 1996 Act that an arbitral tribunal was empowered to order interim measures.Therefore, how can one construe the same provision to mean that the tribunal was empowered to refer matters to the High Court for contempt?

(2) The scope of Section 43(2) of the 1940 Act [the present Section 27(5)] and its predecessors was restricted to witnesses alone 

[Interestingly, the 1859 Code formed the basis on which the Jamaican Code of Civil Procedure, 1879 (“Jamaican Code”) was drafted. Section 343 of the Jamaican Code contained a provision virtually identical to Section 317 of the 1859 Code. Significantly, the Marginal Note to Section 343 read: “Non-attendance or contempt by witness”. See, GOVERNMENT OF JAMAICA, The Laws of Jamaica Passed in the Year 1879 (1879)].

In its 76th Report, the Law Commission of India has stated the following in respect of Section 43: 

"Section 43 confers powers on the court to issue processes for appearance before the arbitrator or umpire. The power is co-extensive with the corresponding power of the court in suits tried before it. There are consequential provisions in regard to persons who fail to attend, and there is a definition of the expression “processes”. No amendment is required in the section.” 

The aforesaid observations clearly imply that Section 43 dealt with the “consequential provisions” pertaining to failing to honour the summons for witnesses or for production of documents and other default by the recipient of such summons and did not encompass contempt to the arbitral tribunal for breach of its interim orders.

(3) Even precedents under Section 43 of the 1940 Act provided for a limited scope:

In Nihaluddin v. Tej Pratap Singh and Ors. [AIR 1968 All 157], the Consolidation Officer referred a dispute as to title to the Civil Judge, who in turn, referred the matter to the arbitrator as per Section 37 of the U.P. Consolidation of Holdings Act, 1939. One of the parties to the dispute allegedly disobeyed the injunction order passed by the statutory arbitrator. The other party filed a criminal miscellaneous petition under Section 3 of the Contempt of Courts Act, 1952 alleging contempt. The court had to decide whether the arbitrator was a “court”. Having held that the arbitrator was not a court, the Allahabad High Court went on to hold that the opposite party could not be guilty of contempt of court in having overlooked the arbitrator’s order. On the scope of the provision, the court held:

“Under Section 43 of the Arbitration Act, it is the Court (and not the Arbitrator) who has authority to issue process to the parties and their witnesses whom they or the Arbitrator want or wants to examine. It is again the Court which would enforce the production of documents before the Arbitrator. Thus the Arbitrator again lacks the power to enforce the production of parties, their witnesses and documents, which is a distinguishing feature of Courts.”

The aforementioned arbitrator could pass interim orders since the relevant statute empowered him to do so. Even in such a case, the court held that a party disobeying such arbitrator’s interim orders was not liable for contempt. It is also noteworthy that if the court had the power to initiate contempt proceedings against a party disobeying the tribunal’s orders, either the party would have invoked Section 43(2) of the 1940 Act or the court would have referred to it, especially when the court discussed Section 43 of the 1940 Act.

Similarly, in M.I. Shahdad v. Mohd. Abdullab Mir and Ors.[AIR 1967 J&K 120], the High Court of Jammu & Kashmir held that the sole purpose of Section 43 was to “ensure service or process”. In Union of India v. Bhatia Tanning Industries [AIR 1986 Delhi 195], the Division Bench of the Delhi High Court held that Section 43 was “confined to cases where a person, whether a party or a third person, is required to appear as a witness before the arbitrator” and that where a witness was guilty of contempt to the arbitrator or the umpire, he could be taken to task by the court. Notably, the High Court held that Section 43 was “confined to witnesses and witnesses alone.”. This position has been affirmed by the Supreme Court in Delta Distilleries Limited v. United Spirits Limited and Anr. [2013(4) Arb LR 47 (SC)]

(4) The interpretation affording the power to refer for contempt for all kinds of disobedience is not correct. Section 27(4) employs the term “witnesses” while Section 27(5) speaks of “persons”. Consequently, it is possible to contend that Section 27(5) is not merely restricted to witnesses but to any person, including a person who disobeys an interim order of the arbitral tribunal. However, the placement of Section 27(5) in Section 27 (which is titled “Court assistance in taking evidence”) itself militates against this argument. Even otherwise, the said contention might not hold much water. Section 27(2)(c) provides that an application under Section 27(1) shall specify the name and address of a “person” to be heard as witness or expert witness. Section 27(4) employs the term “witnesses” and not “persons”. Reading Sections 27(2)(c) with Section 27(5), it is clear that “person” employed in both sections refer either to a third party witness or to a party-witness. Consequently, the difference in references in Sections 27(4)(witness) and 27(5)(person) cannot be determinative of the applicability of Section 27(5) to disobedience of orders under Section 17.

For these reasons the decision of the Supreme Court is erroneous. 

It is pertinent to note that the Supreme Court observed that the 2015 amendments making Section 17 enforceable provide a better remedy and therefore reference to the Court under Section 27(5) may "no long be necessary".  The decision can be accessed from here.

Force Majeure under Indian Contract Law: Energy Watchdog v CERC (SCI)

Recently, newspapers reported that certain power producers proposed to sell large amount of their stake in the Ultra Mega Power Projects.  The proposal to sell their stakes is a direct outcome of the recent decision of the Supreme Court of India in Energy Watchdog & Ors. v. Central Electricity Regulatory Commission & Ors. The dispute between power producers such as the Tata Power Co. Ltd. (“Tata”) and Adani Power Ltd. (“Adani”) on the one hand and the electricity regulators on the other was adjudicated upon finally by the Supreme Court by ruling in favour of the latter.

Followers of commercial law in India would be well aware of this issue on compensatory tariff allowed by the Central Electricity Regulatory Commission and the appellate proceedings thereon in the case of these power producers. The case has enormous implications on contract law, in general, and the law on force majeure, in particular. The seminal decision also impacts energy and regulatory laws. This post analyses the decision and its possible impact on contract law and the electricity sector in India.

Brief Facts

Mundra Ultra Mega Power Project (“MUMPP”) was conceived to be a huge power project which was to supply power to at least three states- Gujarat, Haryana and Rajasthan through the state power procurers. The tariff for the sale of power was to be determined through a competitive bidding process as per the electricity regulatory laws, which was undertaken. In the competitive bidding process, the bidders had the flexibility to choose escalable or non-escalable tariff (that is, tariff based on an increase in tariff formula). Both Adani and Tata quoted a non-escalable tariff. This was because the only major component that required an escalable tariff was an increase in fuel (coal) price. Since Adani and Tata had long term fuel supply agreements from coal mines in Indonesia at fixed/ predictable prices, there was no need to factor in price escalation.

Accordingly the lowest tariff was arrived at and power producers began to sell power at the said tariff after executing Power Purchase Agreements (PPAs) with the state power procurers. In two-three years after the determination of tariff, there was a massive jolt to the power producers in the form of new regulations passed by the Indonesian Government. The effect of these regulations was that the coal price under the long term fuel supply agreements  was to be benchmarked to the international prices instead of the then prevailing pricing mechanisms. This meant that the price under those agreements had drastically increased, thereby making the tariff at which these price producers sold price to the power procurers totally unviable. It may be recollected that a non-escalable tariff was quoted because of the long term fuel supply agreements.

Proceedings before the CERC and the APTEL

Consequently, Adani filed an application in 2012 with the Central Electricity Regulatory Commission (CERC) under the Electricity Act either to discharge them from performance of the PPA due to frustration of contract or to evolve a mechanism to restore them to the same economic position prior to occurrence of force majeure and/ change in law. The CERC did not accept the prayer of Adani but held in April 2013 that the CERC had the power to redress grievances of power producers considering larger public interest and constituted a committee to look into the difficulties of power producers so as a to find an acceptable solution. A Committee was constituted in August 2013 and the Committee recommended grant of compensatory tariff to Adani in its report. Consequent to the report, the CERC proceeded to grant compensatory tariff in February 2014.

Against this decision, appeals and cross-appeals were filed before the Appellate Tribunal for Electricity (APTEL). A summary of APTEL’s decision on the dispute is worth noting here:

• Performance of the PPAs was hit by force majeure under the provisions of the Indian Contract Act, 1872 (ICA).

• Changes in Indonesian law did not come within the purview of “Change of Law” clause in the PPA.

• The purported power exercised by the Commission in constituting a committee and awarding compensatory tariff was beyond the statutory mandate of the Commission and the terms and conditions of the sale and purchase of power was governed by the PPAs.

• Where there is an express or implied term of contract on force majeure, the same is covered under Section 31 of the ICA dealing with contingent contracts. Where there is no such term, force majeure is governed by Section 56.

• In Indian law, under Section 56, as held in Satyabrata Ghose v. Mugneeram Bangur 1954 SCR 310 impossibility is not simply physical or literal impossibility but means impracticability and futility in performance from the perspective of object and purpose of the parties.

• A more onerous performance method of performance or a mere rise in price would not amount to frustration.

• Application of the frustration doctrine required a multi-factorial approach and some of the factors that are to be considered are the contract itself, the context, the parties’ knowledge, expectations, assumptions and contemplations, especially as regards risk at the time of contracting which the parties could reasonably foresee.

• Application of the doctrine is not straightforward since it involves not only the contract but also an inquiry into the “contemplation of the parties”.

• The “Change of Law” contemplated in the PPA was only of Indian law and which were made by Indian Governmental Instrumentalities or Competent Courts in India.

• Certain clauses referred to the expression “Indian law” but such an expression nowhere found its place in the clause pertaining to “Change of Law”. Consequently, it would be dangerous to interpret the Change of Law clause merely on the basis of such usage in other parts of the PPA.

• For these reasons, the contention that since the PPA envisaged import of fuel, Law should also be taken to mean non-Indian law should also be negated.

The APTEL remanded the matter back to the Commission to determine the impact of force majeure so as to grant compensatory tariff to the power producers. The Commission arrived at a compensatory tariff in December 2016. 

Judgement of the Supreme Court

Appeals were filed to the Supreme Court. The Supreme Court held against the power producers on the force majeure as well as the change of law arguments. 

Summary of the judgement of the Supreme Court on contentions relating to force majeure is given below:

• The doctrine of frustration is inapplicable to the present case as the fundamental basis of the PPA remains unaltered, the PPA nowhere states that coal is to be procured only from Indonesia at a particular price, and the fuel supply agreement is only a part of the PPA to establish that fuel supply is available and is in order. When the power producers quoted the tariff, they very well knew the existence of the risk of increased prices of Indonesian coal and knowingly took it by quoting a non-escalable tariff. However, mere fact that they quoted non-escalable tariff does not mean that they would be disentitled from raising a plea of frustration if they were otherwise entitled to under law.
• Force majeure clauses are to be narrowly construed. On a construction of the force majeure clause in the PPA, “Hindrance” could mean an event wholly or partly preventing performance.
  But mere rise in prices is not hindrance, whole or part. Clause 12.4 specifically excluded rise in fuel cost or agreement becoming onerous to perform from the purview of force majeure. 
• Since Clause 12.4 specifically excluded rise in fuel cost from force majeure, since the fundamental basis of the contract was never dislodged and since alternative modes of performance were available even though at a higher price, there was no force majeure. Further, since there was a specific clause addressing force majeure, Section 56 did not have any application.

Another argument taken up by the power producers was that the change in Indonesian regulations fell within the scope of the “change of law” clause in the PPA and that they were entitled to relief under the said clause. Among other things, the PPA defined “Law” to mean “all laws including Electricity Laws in force in India… and any statute…. Or any interpretation of any of them by an Indian Governmental Instrumentality... and shall include all applicable rules… by an Indian Governmental Instrumentality…” Article 13.2 of the PPA provided that in case a party was affected by Change of Law, such party was entitled to be restored through Monthly Tariff Payments to the same economic position as if such change had not occurred. The Court dismissed the argument of the power producers and the following is a summary of the judgement on this aspect:

On facts, the court also noted that there was a Change of Law insofar as a change in India law was concerned. During the currency of the PPAs, the Ministry of Power issued a Notification in 2013, which was reflected in the Revised Tariff Policy of 2016. The Court held that if these notifications resulted in affecting Indian coal procurement, the Change of Law clause would be applicable. But change in Indonesian law affecting coal supply or prices would not amount of “Change of Law” for PPA purposes.

The Court ultimately set aside the decisions of the APTEL and the Commission and remanded the matter back to the Commission on the minor issue as to determination of effect on Change of Indian law on the power producers.

The decision of the Supreme Court clarifying the law on the issue is of fundamental importance on several counts. First, the judgement constitutes an important restatement on the law of force majeure. Second, special word about RF Nariman, J. Since assuming judgeship, he has passed several judgements clarifying and restating various aspects of commercial law thereby rendering clarity and updating various contract law concepts to the present times and breathing in fresh air to the 145 year old Indian Contract Act, 1872. Third, in the context of regulatory law, the decision offers clarity in the extent to which a tribunal/ court can go in balancing the competing interests of protecting consumers on the one hand and preserving the efficacy of the industry sought to be regulated on the other. Balancing the competing aims of preserving the efficacy of the industry by upholding the legitimate interests of the regulated on the one hand and protecting consumer interests on the other is the fundamental challenge in regulatory law. This case affords considerable clarity in the extent to which a regulator of a tribunal could or could not rewrite contractual terms between the regulator and the regulated.

The decision calls for an off-the-cuff remark. One of the arguments of the power producers was that Section 56 ICA operated de hors the force majeure clause in PPA. It may be recollected from the above analysis that the court negatived this contention. It would have been great if RF Nariman, J. referred to the concept of default rules to explain away how Section 56 operated as a default rule and how the PPA clause on force majeure eclipsed Section 56 and occupied its field instead. Even so, the effect of RF Nariman, J’s analysis remains the same.

One last remark. The decision of the Supreme Court has received considerable criticisms from the power industry. A direct result of the judgement has been that both Adani and Tata have asked the State power procurers to take control of the power projects (see here). Adani seems to have discontinued power supply from its power plant (see here). Experts also argue that the once-power surplus state of Gujarat could be facing the risk of power scarcity (See here). There is a strong argument that the power producers are to be protected considering that they had invested in public goods which was meant for consumption of the economy and that in case of failure to protect such investors, economy, and ultimately, the consumers will suffer. From the other end of the spectrum it has been argued that the power producers attempted to engage in crony capitalism by entering into unviable contracts knowing fully well that they could later demand renegotiation of the PPAs (see here). The reality, perhaps, lies somewhere in between.

Power producers have suggested two alternatives for the current arrangement. The first one is that they would forego their security deposits under the PPA and that fresh bids should be called from power generators. The second alternative is that the state power procurers should import coal directly and that the power producers would offer their power generation capacity (see here). It will be interesting how this issue would be resolved. For now, the Centre has taken a stand that the issue is for the power producers and the State power procurers to resolve but it doubtable if the stance is correct considering that the problem pertains to the nation as a whole.