Guest Post: Mid-Year Arbitration Review- Part II by Juhi Gupta

(Continuing with her mid-year arbitration review (see previous post), Ms. Juhi Gupta, an LL.M. graduate from Harvard Law School, has penned the second part of the series of posts on the topic. Do check out the awesome, crisp and to-the-point descriptive comment on prominent arbitration related cases decided in India in the first half of 2018. Happy reading!)

MID-YEAR ARBITRATION REVIEW – II

In the second of a series of posts, I continue to review important Supreme Court and High Court decisions on arbitration so far this year. The decisions covered in this post provide valuable insights into the questions of the status of an interim award, competence of arbitral tribunals and the scope of authority of tribunals to rule on their own jurisdiction.

Agreement to arbitrate - Parties’ written consent to arbitrate required for judicial referral to arbitration; oral consent of counsel is insufficient

Kerala State Electricity Board v Kurien E Kalathil (Supreme Court, 9 March 2018)

Brief facts: The respondent contractor filed a writ petition in the Kerala High Court to direct the appellant to pay certain sums as determined in a prior dispute between the parties. The Court allowed the writ petition and also referred the parties to arbitration under section 89 of the CPC upon the oral consent of their counsel to resolve certain pending matters. It was undisputed that there was no arbitration agreement between the parties. The arbitrator issued an award in the respondent’s favour. The appellant’s petition under section 34 of the Arbitration Act (hereinafter “the Act”) was dismissed and subsequently, its section 37 appeal was transferred to the Supreme Court as it had also challenged the High Court’s verdict in the writ petition before the Supreme Court.

Issue: Whether or not the High Court was right in referring the parties to arbitration on the appellant’s counsel’s oral consent without written instruction from parties?

Arguments: The respondent (Kalathil) argued that the party’s counsel has implied authority to consent to arbitration on behalf of the party.

Decision: The Supreme Court set aside the arbitral award holding that oral consent given by counsel without written memos of instruction from parties does not fulfil the requirement under section 89 of the CPC (Afcons Infrastructure). The Court emphasised the serious civil consequences of referring parties to arbitration under section 89 in the absence of an arbitration agreement:

“Once the parties are referred to arbitration, the proceedings will be in accordance with the provisions of Arbitration and Conciliation Act and the matter will go outside the stream of the civil court. Under Section 19 of Arbitration and Conciliation Act, the arbitral tribunal shall not be bound by the Code of Civil Procedure and the Indian Evidence Act. Once the award is passed, the award shall be set aside only under limited grounds. Hence, referring the parties to arbitration has serious civil consequences procedurally and substantively. When there was no arbitration agreement between the parties, without a joint memo or a joint application of the parties, the High Court ought not to have referred the parties to arbitration” (paragraph 39).

The Court rejected the respondent’s implied authority argument stating that counsel should not act on implied authority unless there is exigency of circumstances demanding immediate adjustment of suit by agreement or compromise (Byram Pestonji Gariwala v Union Bank of India and Ors., (1992) 1 SCC 31).

Further, the judicial order referring the parties to arbitration cannot be sustained in any event. This is because it made many observations affecting crucial areas of the dispute and therefore, encroached upon the arbitral tribunal’s competence and seriously prejudiced the appellant’s rights to pursue the matter in arbitration. The Court also noted that the appellant could not have challenged the absence of jurisdiction and arbitration agreement before the arbitral tribunal since it had challenged the High Court’s order before the Supreme Court.

Comment: This decision emphasises the essential requirement of an express agreement between parties to arbitrate, wherein the parties themselves consent as opposed to an agent acting on their behalf. The Court also makes an important observation regarding the High Court’s unjustified encroachment upon the arbitral tribunal’s competence.

Interim award and jurisdiction under section 16 – interim award can be challenged separately and independently under section 34, and arbitral tribunal’s authority to rule on its own jurisdiction is restricted and specific

M/S Indian Farmers Fertilizer Co-Operative Limited v. M/S Bhadra Products (Supreme Court, 23 January 2018)

Brief facts: In an arbitration of a contractual payment dispute between the parties, the arbitrator decided the issue of limitation in favour of the respondent, holding that the respondent’s claim was not time barred. The appellant challenged this award under section 34, labelling it as the ‘first partial award’. The District Court and High Court dismissed the section 34 petition on the ground that they lacked jurisdiction as the award in question could not be characterised as an interim award. The appellant subsequently appealed to the Supreme Court under section 37.

Issues: (1) Is an award deciding the issue of limitation an interim award; (2) can such interim award be directly set aside under section 34 or does it relate to jurisdiction, in which case the procedure under section 16 is required to be followed?

Arguments: The appellant argued that the impugned award was an interim award under the Act and therefore amenable to challenge under section 34. The point of limitation was one of the issues between the parties, which was finally decided by the arbitrator. The respondent argued that a ruling on limitation pertains to jurisdiction of the arbitral tribunal and is merely an order passed under section 16. Since the plea of limitation was rejected, the arbitral proceedings ought to continue as per section 16 (since appeals under section 37 are only available when a plea under section 16 is accepted) and the appellant’s challenge has to be deferred until all other issues have been determined.

Decision: On the first issue, the Supreme Court decided in favour of the appellant for the following reasons:

(i) Broad statutory scope of interim award

In the absence of an express definition in the Act of an interim award apart from section 2(c) stating that an arbitral award includes an interim award, the Court relied on the language of section 31(6) wherein it is stated that “the arbitral tribunal may, at any time during the arbitral proceedings, make an interim arbitral award on any matter with respect to which it may make a final arbitral award” [emphasis supplied]. The Court agreed with the appellant that limitation was a point of dispute between the parties and noted:

“the language of section 31(6) is advisedly wide in nature. A reading of the said sub-section makes it clear that the jurisdiction to make an interim arbitral award is left to the good sense of the arbitral tribunal, and that it extends to ‘any matter’ with respect to which it may make a final arbitral award. The expression ‘matter’ is wide in nature, and subsumes issues at which the parties are in dispute. It is clear, therefore, that any point of dispute between the parties which has to be answered by the arbitral tribunal can be the subject matter of an interim arbitral award” (paragraph 9) [emphasis supplied].

(ii) Availability of multiple interim awards

The Court adverted to section 32(1) that states that arbitral proceedings would be terminated only by a final award, as opposed to an interim award, “thus making it clear that there can be one or more interim awards, prior to a final award, which conclusively determine some of the issues between the parties, culminating in a final arbitral award which ultimately decides all remaining issues between the parties” (paragraph 10) [emphasis supplied].

Therefore, since the arbitrator disposed of the issue of limitation finally, it is clear that the award was an interim award that could be challenged under section 34.

While the Court decided this issue in the appellant’s favour, it cautioned against delivering interim awards as they delay resolution of disputes and increase parties’ expenses. The Court advised arbitral tribunals to consider whether there is any real advantage in passing interim awards as a fair means for resolution of disputes should be the principal consideration.

On the second issue as well, the Court decided in favour of the appellant. The Court undertook detailed legislative and judicial analyses of the kompetenz-kompetenz principle and concept of jurisdiction to clarify the import of the language of section 16(1) that the tribunal may rule on its own jurisdiction:

“the ‘jurisdiction’ mentioned in Section 16 has reference to three things: (1) as to whether there is the existence of a valid arbitration agreement; (2) whether the arbitral tribunal is properly constituted; and (3) matters submitted to arbitration should be in accordance with the arbitration agreement” (paragraph 20).

Accordingly, the Court concluded that a finding on limitation does not relate to jurisdiction and therefore, the procedure under section 16 is not required to be followed.

It is important to note that the Court opined that Parliament could consider amending section 34 in order to consolidate all interim awards with the final award so that a singular section 34 challenge can be made after the final award is delivered as opposed to piecemeal challenges that lead to “unnecessary” delay and additional expense.

Comment: While the Supreme Court may not have said anything new, it is nevertheless an important decision to keep in mind as it clarifies two significant concepts of the broad scope of an interim award as well as the restricted scope of “own jurisdiction” under section 16. It will be interesting to see whether the Court’s suggestion of consolidating interim and final awards will find its way into the Arbitration Act. The 2018 Amendment Bill is silent on this.

Competence of arbitral tribunal - tribunal has power to award interest pendente lite unless specifically and clearly barred by parties from awarding it

M/s Raveechee and Co. v Union of India (Supreme Court, 3 July 2018)

Brief facts: In an arbitration of a payment dispute between the parties regarding contractual works, the arbitral tribunal awarded the appellant (Raveechee and Co.) interest pendente lite on the award for damages. Upon the respondent’s challenge, the High Court set aside the award to the extent of the interest pendente lite granted.

Issue: Did grant of interest pendente lite fall within the arbitral tribunal’s competence?

Arguments: Union of India contended that the relevant contractual clause barred the arbitral tribunal from awarding interest pendente lite.

Decision: The Supreme Court upheld the award of interest pendente lite, observing that a plain reading of the relevant contractual clause (that barred interest on certain amounts) did not bar the arbitral tribunal from making such an award. The liability to pay interest pendente lite does not arise from any term of the contract but from the finding entitling the appellant to damages, payment of which was denied due to pendency of the arbitration i.e., pendente lite. Unless expressly barred, grant of interest pendente lite will predominantly be based on the arbitrator’s discretion. Upholding the kompetenz kompetenz principle (albeit not expressly), the Court ruled:

“Undoubtedly, such a power must be considered inherent in an Arbitrator who also exercises the power to do equity, unless the agreement expressly bars an Arbitrator from awarding interest pendente lite. An agreement which bars interest is essentially an agreement that the parties will not claim interest on specified amounts. It does not bar an Arbitrator, who is never a party to the agreement from awarding it” (paragraph 12; the Court relied on its prior decisions in Irrigation Dept., State of Orissa v G.C. Roy, (1992) 1 SCC 508 and Union of India v Ambica Construction, (2016) 6 SCC 36) [emphasis supplied].

Competence of arbitral tribunal – tribunal has power and jurisdiction to dissolve partnership on just and equitable grounds unless specifically and expressly excluded by parties

Yogendra N. Thakkar v Vinay Balse and Ors. (Bombay High Court, 13 June 2018)

Brief facts: The petitioner (Yogendra Thakker) submitted a claim to arbitration for dissolution of the partnership (between the respondents and him) on just and equitable grounds under section 44(g) of the Indian Partnership Act, 1932. This was challenged by the respondents under section 16 of the Arbitration Act on grounds of lack of jurisdiction. The arbitrator ruled that he lacked jurisdiction to dissolve the partnership under section 44(g), against which the petitioner filed a petition to the Supreme Court under section 37(2)(a) of the Arbitration Act.

The arbitration agreement in the partnership deed read as follows: “All dispute[s] and questions in connection with the Partnership of this Deed arising between Partners or their representatives shall be referred to [arbitration]” [emphasis supplied].

Issue: Whether an arbitral tribunal has the power and jurisdiction to dissolve a partnership on just and equitable grounds or does that power only vest in courts?

Arguments: The petitioner argued that (i) the arbitration agreement was very wide and conferred powers on the arbitrator to decide all disputes and questions in connection with the partnership deed, including dissolution under section 44(g); (ii) there is no statutory bar or impediment to an arbitrator’s powers to dissolve a partnership on just and equitable grounds under any law, including the Partnership Act; (iii) the two exceptions to the arbitrability of a dissolution dispute, namely (1) an express exclusion and (2) an action in rem, do not apply since a dissolution under section 44(g) is an in personam action; (iv) pursuit of arbitration under the partnership deed as well as a suit on just and equitable grounds could culminate in inconsistent outcomes; and (v) the respondents themselves did not argue that dissolution on just and equitable grounds violated public policy or constituted an action in rem.

The respondents argued that (i) the parties have specifically agreed on the mode and manner of dissolution in the partnership deed and since the arbitrator was a creature of contract, he derived his powers from the partnership deed and could not exceed the scope of agreement between the parties; (ii) section 44 does not refer to an agreement between parties for dissolution and only courts have inherent powers to order dissolution on just and equitable grounds, not arbitral tribunals; and (iii) in light of section 28(2) of the Arbitration Act (power of an arbitral tribunal to decide only if expressly authorised by parties), an arbitrator cannot dissolve a partnership on just and equitable grounds unless expressly authorised to do so by the parties. There was no such authorisation in the present case.

Decision: The Court agreed with the petitioner’s arguments and held that the arbitrator has jurisdiction to dissolve the partnership under section 44(g). Accordingly, the arbitrator was directed to proceed with the arbitration. The Court noted the parties’ intention, which must be given paramount consideration, as reflected in the wide arbitration agreement.

Although section 44 refers to dissolution of a partnership by a court (“at the suit of a partner”), it does not expressly or impliedly bar an arbitrator from dissolving a partnership. The Court relied upon the Supreme Court decision in V.H. Patel & Co. v Hirubhai Himabhai Patel ((2000) 4 SCC 368) wherein the powers of an arbitrator to dissolve a partnership under clauses (c) to (f) of section 44 were recognised. The High Court took the view that there was no reason to not extend this power to clause (g). The Court also agreed with the petitioner’s parallel proceedings argument holding that the petitioner cannot file a civil suit for dissolution on just and equitable grounds and simultaneously pursue an arbitration for dissolution on other grounds under section 44 by invoking the same arbitration agreement.

The Court pointed out that the respondents blew hot and cold by arguing that the powers under section 44(g) vest only in courts but at the same time acknowledging that an arbitral tribunal could have exercised these powers had the parties entered into an agreement to this effect. Further, the respondents could not urge that the arbitrator was empowered to dissolve the partnership under clauses (d), (e) and (f) but not clause (g) of section 44. Applying the Supreme Court decision in Booz Allen, the High Court affirmed the petitioner’s submission that an action under section 44(g) is in personam and therefore, arbitrable.

Comment: These two decisions on the competence of an arbitral tribunal underscore the minimal judicial encroachment and broad competence of arbitral tribunals that are generally, and now increasingly, favoured by courts. The onus is on parties to expressly and specifically circumscribe the tribunal’s powers and jurisdiction should by making the necessary inclusions and exclusions they wish to do so. This also ties in with the importance of carefully drafting an arbitration clause/agreement as the broader the language, the more easy it would be for courts to rule in favour of a tribunal’s competence.

(more in another post)

Arbitration & Conciliation (Amendment) Bill, 2018 and the Definition of Court

We had done about three posts on the Arbitration and Conciliation (Amendment) Bill, 2018 before it was formally introduced in the Lok Sabha. These posts are given below. Before you jump in into the posts, the official version of the Bill has been uploaded on the Lok Sabha website and can be downloaded from this link:

Prospectivity, Retrospectivity & the Arbitration & Conciliation (Amendment) Bill, 2018

Arbitration and Conciliation (Amendment) Bill 2018: Comments on Certain Amendments

Arbitration and Conciliation (Amendment) Bill 2018

This blogger is not sure if there are substantial changes between the Bill partially reviewed in the above posts and the Bill uploaded now. On a glance, it appears that they are the same and therefore, the aforesaid comments still hold good. 

Therefore, the controversial issue as to the retrospective applicability of the 2015 Amendments is sought to be closed with the introduction of Section 13 of this Amendment Act, which is critiqued in the second post listed above. The long and short of it seems to be that the Government has not heeded to the Supreme Court's advice in relation to the the said provision. We will attempt to do a detailed critique of the amendments in the next few posts. We hope proper discussions take place in the Parliament this time regarding the important amendments. In this post, we look at the controversial issue of definition of Courts and argue that the Bill should put to rest the controversy. 

Principal Civil Court of Original Jurisdiction: Does it Include Additional District Courts?

There is a raging controversy in many states in India as to whether "Principal Civil Court of Original Jurisdiction" as provided in Section 2(1)(e) of the Arbitration and Conciliation Act, 1996 would include Additional District Courts. It appears that the question is settled in some states while in some states such as Tamil Nadu, the practice seems to be that Principal District Courts hive off certain matters to the relevant Additional District Courts for disposal of arbitration matters. (For further examples, see Ashiana Infrahomes Pvt . Ltd . and Ors . vs . Adani Power Ltd . ( 18 . 05 . 2018 - DELHC ) MANU/DE/1893/2018; 

Section 2(1)(e) as was enacted reads:

"(e) "Court" means the principal Civil Court of original jurisdiction in a district, and includes the High Court in exercise of its ordinary original civil jurisdiction, having jurisdiction to decide the questions forming the subject-matter of the arbitration if the same had been the subject-matter of a suit, but does not include any civil court of a grade inferior to such principal Civil Court, or any Court of Small Causes;"

The definition was amended in 2015 in order to take away from the District Court the power to hear arbitration related petitions concerning international commercial arbitrations while letting the District Court retain the power to decide arbitration petitions in non-international commercial arbitrations. the amended Section 2(1)(e) reads:

"(e) “Court” means—

(i) in the case of an arbitration other than international commercial arbitration, the principal Civil Court of original jurisdiction in a district, and includes the High Court in exercise of its ordinary original civil jurisdiction, having jurisdiction to decide the questions forming the subject-matter of the arbitration if the same had been the subject-matter of a suit, but does not include any Civil Court of a grade inferior to such principal Civil Court, or any Court of Small Causes;

(ii) in the case of international commercial arbitration, the High Court in exercise of its ordinary original civil jurisdiction, having jurisdiction to decide the questions forming the subject-matter of the arbitration if the same had been the subject-matter of a suit, and in other cases, a High Court having jurisdiction to hear appeals from decrees of courts subordinate to that High Court;"

As one would notice, the expression "the principal Civil Court of original jurisdiction in a district" has been retained. Therefore, the question is whether the aforesaid expression would include an Additional District Court? The subsidiary question is whether, if it does not, it should include an Additional District Court?

Some Decisions

One of the earliest decisions is the case of I.T.I.Ltd., Naini, Allahabad vs District Judge, Allahabad, 1998 (3) AWC 2244: AIR 1998 All. 313 where the Allahabad High Court unequivocally held that while it may be true that an Additional District Court might exercise the same powers as the District Judge in relation to the powers assigned by the latter to the former, the term "principal" employed in Section 2(1)(e) of the 1996 Act refers only to the Principal District Court and not to and Additional District Court. Interesting the High Court recognised that such a construction could add additional burden to the Principal District Court but a different construction could not be adopted in view of the plain words of the statute. 

On the other side of the spectrum is the recent decision of the Full Bench of the Bombay High Court in Gemini Bay Transcription Private Ltd . and Ors . vs . Integrated Sales Service Ltd . and Ors MANU/MH/0265/2018 , where the court added another dimension to the debate. It held that for the purposes of execution of decrees, the provisions of the Code of Civil Procedure, 1908 govern and the Bombay Civil Courts Act, 1869 which govern. The Court held: "The emphasis is on the expression "District Court" and the reason is obvious as "the Principal District Judge" has not been contemplated as persona designata, at least in the matter of execution of an Award as a decree." Interestingly, the court recognised that if the Principal District Court alone is to be the court, it would burden the said court. The Court stated that the CPC does not restrict execution by any specific civil court. On these grounds the court held that "principal Civil Court or original jurisdiction" also included an Additional District Court for the purposes of enforcement/ execution of awards. The High Court also relied on the recent decision of the Supreme Court in Sundaram Finance Ltd. v Abdul Samad where the Supreme Court held that an arbitral award could be executed anywhere in India where the assets of the award-debtor were located and not merely in the court, which passed the decree.

We will look at the divergence in views of various High Courts on the issue in another post. Our aim in this post  was to highlight the difference in views as to what constituted "Court" for the purposes of the 1996 Act. The new Bill, sadly, does not address this divergence. It is important for the Government to introduce amendments to the definition of "Court" in Section 2(1)(e) to clarify and put to rest this controversy. 

Guest Post: Mid-Year Arbitration Review- Part I

(In this guest post, Ms. Juhi Gupta reviews significant developments that took place in the first half of 2018 in India on arbitration. Ms. Gupta is an LL.M. graduate from Harvard Law School and is deeply interested in dispute resolution, particularly alternative dispute resolution.)

MID-YEAR ARBITRATION REVIEW - I

In a series of posts, I will endeavour to review several decisions of the Supreme Court and High Courts of India on arbitration this year. The cases I will be reviewing have been selected because they reiterate the prevailing law, or because they demonstrate the increasing pro-arbitration judicial attitude, or because they raise interesting questions to be examined in the months to come.

Seat (or place) versus venue – SC refers issue to larger bench

Union of India v Hardy Exploration andProduction (India) Inc. (Supreme Court, 01 May 2018)

Brief facts: Petition filed by Union of India (appellant) against Hardy Exploration (respondent) under section 34 of the Arbitration Act, 1996 (hereinafter “the Act”) challenging the legality, validity and correctness of the arbitral award made in favour of respondent in an international commercial arbitration proceeding between the parties. The arbitration agreement designated Kuala Lumpur as the venue and did not expressly specify the seat/place of arbitration. The UNCITRAL Model Law on International Commercial Arbitration of 1985 governed the arbitration proceedings and Indian law was the substantive law of contract. The Delhi High Court decided the section 34 petition in favour of the respondent, against which the Union of India appealed to the Supreme Court under section 37 of the Act.

Issue: Maintainability of the section 34 petition and the related issue as to whether or not Kuala Lumpur was the seat/place of arbitration, which in turn would determine whether Indian courts had supervisory jurisdiction over the arbitral award (note: in a foreign-seated arbitration, the supervisory jurisdiction of Indian courts under Part 1 of the Act is excluded as per Balco).

Arguments: Union of India, on the basis of prior Supreme Court and English Courts decisions, contended that when the arbitration agreement specifies the venue for holding arbitration proceedings but does not specify the seat, then the supervisory jurisdiction of Indian courts cannot be excluded. Hardy Exploration argued that Indian courts do not have jurisdiction to entertain the section 34 petition challenging the legality and correctness of the award as the arbitration was foreign-seated. Neither party went into detailed arguments before the Supreme Court.

It is useful to briefly examine the parties’ arguments before the Delhi High Court: Union of India argued that (i) as per Balco, in the absence of any specific choice of the law of the arbitration agreement, the same would be determined by the substantive law of the contract. Since Indian law is the substantive law, it would also be the proper law of the arbitration agreement; (ii) as per the UNCITRAL model law, it is for the arbitral tribunal to decide the seat, which it did not and Kuala Lumpur does not become the seat just because the award was made and signed there; (iii) since the UNCITRAL Model Law was adopted by enacting the Arbitration Act, the parties’ intention behind designating the Model Law as the curial law was to incorporate Article 34 of the Model Law which is analogous to section 34 of the Act i.e. apply Part 1; and (iv) the parent contract containing the arbitration was entered into prior to Balco and was therefore governed by Bhatia International.

Hardy Exploration argued that (i) since it was a foreign company, the arbitration was an international commercial arbitration under section 2(1)(f) of the Act; (ii) Article 31(3) of the UNCITRAL Model Law stipulates that the award shall state its date and place of arbitration. Therefore, Kuala Lumpur was the place of arbitration; and (iii) post Balco, Part 1 is excluded when the seat is outside India.

Decision: The Supreme Court did not really engage in a detailed analysis of the issue. It noted that the question regarding the seat and venue needs to primarily be decided on the basis of the terms of the arbitration agreement itself; however, the court decided to refer the case to a larger bench taking into consideration the law laid down by different benches of variable strengths of the Supreme Court, submissions of the parties, and the fact that the issues involved in the case frequently arose in international commercial arbitration matters.

Comment: It will be interesting to see how the larger bench decides the issue that has come up repeatedly. Although the Law Commission recommended clarifying the place versus venue distinction in its 246^th Report, this suggestion was not incorporated in the 2015 Amendment Act and has also been left out of the 2018 Amendment Bill. In Roger Shashoua v Mukesh Sharma (2017 (14) SCC 722), where the parties designated Singapore as the venue and did not specify the seat, the Supreme Court concluded that Singapore was the seat of arbitration, despite the contract being a pre-2012 contract (i.e., prior to Balco). However, the circumstances in that case were unique as the Court relied on a prior English High Court ruling on the same issue between the same parties.

Public policy – judicial interference with arbitral award only permissible in instances of fraud or bias

Indian Oil Corporation Ltd. v Moni MadhavDutta (Gauhati High Court, 14 May 2018)

Brief facts: A contract between the appellant and respondent for the latter to transport gas cylinders excluded toll and ferry charges; however, the appellant reimbursed the respondent for these charges in the initial period of the contract. Subsequently, the appellant stopped reimbursing these charges. The respondent challenged the same via arbitration. The arbitrator issued an award in favour of the respondent, holding that it was entitled to reimbursement for toll and ferry charges. The appellant’s section 34 application was dismissed by the lower court, following which it appealed to the High Court under section 37.

Issue: Whether there is any patent illegality in the arbitral award on account of the arbitrator exceeding the scope of his reference?

Arguments: The appellant argued that the arbitrator did not confine himself to the contract between the parties while issuing his award and was therefore hit by section 34. The contract laid out an all-inclusive charge of transportation and contained no mention of toll and ferry charges. The reimbursements in the initial period of the contract were given by mistake and the fact that such reimbursements were issued by the appellant in the past to other transporters was insufficient grounds to claim reimbursements under the present contract.

The respondent argued that although the original tender document did not mention toll and ferry charges, the appellant agreed to this during the finalisation of the tender process as evidenced by the appellant’s written statements. The arbitrator took into account that the appellant reimbursed these charges historically and in the initial period of the contract at issue. Although the arbitrator did not stick to the four corners of the contract, his award on every issue was based on evidence and was not perverse under section 34.

Decision: The High Court upheld the arbitral award and lower court judgment, reiterating the minimal judicial supervision in arbitration proceedings wherein courts should only intervene in situations of fraud or bias. Agreeing with the respondent’s arguments, the Court determined that the arbitrator passed his award well within the prescribed law of the country and terms of contract, keeping in view the safety guidelines prescribed by the appellant for transportation of gas cylinders. The Court relied on McDermott International Inc v Burn Standard Co., where the Supreme Court held:

“the 1996 Act makes provision for the supervisory role of courts, for the review of the arbitral award only to ensure fairness. Intervention of the court is envisaged in few circumstances only, like, in case of fraud or bias by the arbitrators, violation of natural justice, etc. The court cannot correct errors of the arbitrators. It can only quash the award leaving the parties free to begin the arbitration again if it is desired. So, scheme of the provision aims at keeping the supervisory role of the court at minimum level” (paragraph 18) [emphasis supplied].

Public policy – fundamental policy of Indian law violated if damages for breach of contract claim automatically awarded without evidence being offered

Anila Gautam Jain v Hindustan PetroleumCorporation Limited (Bombay High Court, 03 May 2018)

Brief facts: Anila Gautam Jain (appellant) challenged an arbitral award under section 34 of the Act on grounds of patent illegality (section 34(2A)). The arbitration proceedings involved a breach of contract claim by Hindustan Petroleum (respondent) against the appellant. In response to the alleged breach of contract, the respondent made a counterclaim seeking penalty and other claims, and did not provide any corroborating evidence. The arbitrator issued an award in favour of the appellant, awarding it damages. The appellant’s section 34 petition challenging the award to the extent of the counter claim was dismissed, following which the appellant appealed to the High Court under section 37 of the Act.

Issue: Whether the counter claim as raised by the respondent could be allowed by the arbitrator?

Arguments: The appellant’s essential argument was that the respondent did not provide any evidence in support of its counterclaim. The arbitral award lacked reasons and was based solely on surmises and conjectures when instead the arbitrator was required to decide the issues on the basis of the evidence on record. On the other hand, the respondent argued that the arbitrator took into account the entire material placed on record, which was sufficient to award the respondent damages and did not require the respondent to lead oral evidence.

Decision: The High Court agreed with the appellant’s submissions. It held that while an arbitrator has the power to decide the question of liability for damages, the arbitrator in the instant proceedings gravely faltered in overlooking the fundamental provisions under section 73 of the Contract Act, which require a party to prove the damages it alleges to have suffered on account of breach of contract. If a party fails to furnish such proof, then it is not entitled to any damages or compensation. In the context of the contractual clauses, the respondent’s counter claims had to be proved on evidence and in any event, even if the parties were to agree on a quantum of liquidated damages, the party claiming such damages was required to prove the actual damages suffered by it. Further, the counter claims were clearly disputed by the appellant.

“…there is no discussion [in the award] whatsoever on the counter claims which are monetary claims as made by the respondent. The record does not indicate any cogent and acceptable evidence documentary which can be said to prove any of the counter claims of the respondent. The learned arbitrator completely discarded and dispensed with the obligation and burden on the respondent to prove the claim and straight way proceed to award the counter claims as per the operative part of the award. This approach of the learned Arbitrator was perverse to say the least” (paragraph 21).

Accordingly, the Court concluded that the arbitrator and lower court erred in holding that once there is a breach of contract, then damages are automatically required to be awarded without proof: “such a proposition certainly cannot be accepted in law. Thus, the impugned award was in conflict with the fundamental policy of Indian law and being contrary to the fundamental principles of law” (paragraph 25).

Comment: These two public policy decisions reiterate the increasingly pronounced non-interventionist judicial attitude to arbitral awards. The Bombay High Court decision serves as a useful illustration of the few instances when courts would intervene to set aside an award on grounds of patent illegality.

Reasoned award

Surajmal Yadav v Delhi State IndustrialInfrastructure Development Corporation Ltd. (Delhi High Court, 24 May 2018)

Brief facts: Surajmal Yadav (petitioner) filed a section 34 application on the limited ground that the arbitrator did not consider the petitioner’s entire prayer in his statement of claim while passing the arbitral award, namely the prayer to direct the DSIIDC (respondent) to refund stamp duty and interest on EMD and the bid amount paid by the petitioner under a lease deed which the respondent ultimately failed to execute. The arbitrator issued an award in favour of the petitioner as regards the payment of stamp duty, however he did not discuss or rule on the payment of interest.

Issue: Can a relief requested by a party be presumed to have been rejected by arbitrator if not discussed or ruled upon in the final award?

Arguments: The petitioner argued that the arbitrator did not consider the effect of the respondent’s failure to execute the lease deed as far as the EMD and bid amount deposited by the petitioner was concerned. The respondent argued that given the arbitrator passed a direction with respect to the stamp duty, it should be presumed that he rejected the prayer with respect to the interest.

Decision: The Court ruled that under section 31(3) of the Act, an arbitral tribunal has to state the reasons upon which the award is predicated. The petitioner’s prayer for refund and payment of interest could not be deemed to have been rejected by the arbitrator just because it was not granted in the final award. The arbitrator is required to give reasons for rejecting a prayer – “one cannot assume rejection of the prayer made by the petitioner and further assume reasons for rejection of such prayer” (paragraph 8). Although the Court noted that the arbitrator had clearly not considered this part of the petitioner’s claim given there was no discussion about it in the entire award, since neither party had challenged the award as passed, the court disposed the petition and granted leave to the petitioner to reagitate his claim. (Note: the Court clarified that the petitioner shall be entitled to claim the benefit of limitation in terms of section 43(4) of the Act in any such subsequent proceedings).

Comment: This decision reflects the well-established legal and judicial position that an arbitral award must set out the reasons on which it is based unless the parties have expressly agreed to the contrary.

 (More to follow in another post)

Norm Creation in Arbitration and the Supreme Court of India:

Way back in 2010, we did a post titled "Norm Creation (ADR) and Arbitration", which noted the inability of ADR processes in helping norm creation and amplification of law. The post also noted the problem was exacerbated by by the lack of a thorough appellate process and review on possibility of a correct decision instead of review on substantive correctness. We request readers to go through the post. 

Thereafter, the issue gained prominence owing to a speech made by The Right Hon. The Lord Thomas of Cwmgiedd, Lord Chief Justice of England and Wales in the Bailii Lecture in 2016 titled "Developing commercial law through the courts: rebalancing the relationship between the courts and arbitration". The lecture highlighted how arbitration had the potential in bring about uncertainty in commercial law by taking away cases from national courts:

"22. The effect of the diminishing number of appeals compounds the problem that arises from the diversion of more claims from the courts to arbitration. It reduces the potential for the courts to develop and explain the law. This consequence provides fertile ground for transforming the common law from a living instrument into, as Lord Toulson put it in a different context, “an ossuary”.27 Here lies the irony. As I have explained reform was effected to promote the use of London as a centre for dispute resolution largely based on contracts based on the common law as developed in the Commercial Courts of London. However, the consequence has been the undermining of the means through which much of the common law’s strength – its “excellence” was developed – a danger not merely to those engaged in dispute resolution in London, but more importantly to the development of the common law as the framework to underpin the international markets, trade and commerce.

23. Quite apart from this major issue, there are other issues which arise from the resolution of disputes firmly behind closed doors - retarding public understanding of the law, and public debate over its application. A series of decisions in the courts may expose issues that call for Parliamentary scrutiny and legislative revision. A series of similar decisions in arbitral proceedings will not do so, and those issues may then carry on being taken account of in future arbitrations."

For a critique of this position, see, Susan L. Karamanian, COURTS AND ARBITRATION: RECONCILING THE PUBLIC WITH THE PRIVATE, 9 Arb. L. Rev. 65 (2017)

The issues raised by the judge are serious questions that requires deeper research and understanding in the Indian context, especially when Indian commercial law is evolving and getting more nuanced.

It is in this context that this blawgger was happy to see the decision of the Supreme Court in National Highways Authority of India v. Progressive-MVT (JV) 2018(2) Arb LR 111 (SC). The case related to interpretation of the price variation clause of the standard form contract of the National Highways Authority of India (Sub-Clause 70.3 of the Conditions of Particular Application-COPA). The sub-clause had received divergent constructions by different arbitral tribunals (which were ultimately upheld by the High Court and SLPs against these decisions were dismissed). The Supreme Court noted that these divergent views on the construction of the said clause were both possible interpretations and therefore could not be interfered with ordinarily. The court also pointed out the resultant anomalous situation that one clause would then have two interpretations. This, according to the court, would severely affect various agreements entered into all over the country by NHAI containing the clause. On this basis, the Supreme Court offered clarity on the proper construction of the price variation clause. In the words of AK Sikri, J. who authored the judgement on behalf of the Division Bench also consisting of Ashok Bhushan, J.:

"The NHAI has entered into multiple contracts with different parties containing the same clauses of price variation. Once we find that Arbitral Tribunals are taking different views, and the view taken in favour of the NHAI is also one of the possible interpretations, the effect thereof would be to uphold both kinds of awards even when they are conflicting in nature in respect of the same contractual provision. It may not be appropriate to countenance such a situation which needs to be remedied. Therefore, under this peculiar situation, we deem it proper to go into the exercise of interpreting the said clause so that there is a uniformity in the approach of the Arbitral Tribunals dealing with this particular dispute and a sense of certainty is attached in the outcomes."

The court held that such a review is to be made to pending cases that have not attained finality. The court also clarified that the ground of issue estoppel would not apply bar the court from so reviewing. 

It is submitted that the court was correct to amplify the law by opening doors for review of arbitral awards on the ground of affording commercial certainty to a particular contractual term that is widely used. The court opened the doors for review on merits in such cases. Therefore, even the High Courts could use this to provide definitive views of standard form agreements. Care should be employed so that this does not give an opportunity to review the award on merits when there is no such conflict of awards/ decisions involved.

Part II: Party Autonomy and NOM Clause in the UK SC: Rock Advertising v MWB Business Exchange

In the previous post we discussed the majority opinion of the UK Supreme Court on whether an agreement could be amended orally despite a "No Oral Modification" (NOM) clause. In this post we discuss the minority view and the Indian position on the subject.

The Minority View

The minority view of Lord Briggs calls for a more open possibility of an oral modification to the agreement despite the NOM clause. Lord Brigg's view was that parties could not only unbind themselves from what they had agreed, they could also unbind themselves orally of any procedural restrictions to vary the agreement. But the agreed departure from the NOM will not be "lightly inferred". The underlying policy reasons for his differing view are aptly summed up in the concluding portions of the minority opinion and are quoted here:

"31. In my view this more cautious recognition of the effect of a NOM clause, namely that it continues to bind until the parties have expressly (or by strictly necessary implication) agreed to do away with it, would give the parties most of the commercial benefits of certainty and the avoidance of abusive litigation about alleged oral variation for which its proponents contend. It would certainly do so in the present case. It would probably leave only those cases where the subject matter of the variation was to be, and was, immediately implemented, where estoppel and release of the NOM clause by necessary implication are likely to go hand in hand. While it might in theory also leave open the case where it is alleged that the parties did have the NOM clause in mind, and then agreed to do away with it orally, that seems to me to be so unlikely a story that a judge would usually have little difficulty in treating it as incredible (if denied), and therefore as presenting no obstacle to summary judgment on the contract in its unvaried form.

32. In proposing this perhaps cautious solution to the problem thrown up by this case I am comforted by the perception that it represents an incremental development of the common law which accords more closely with the conceptual analysis adopted in most other common law jurisdictions, as Lord Sumption has described. By contrast the more radical solution which he proposes would involve a clean break with something approaching an international common law consensus, unsupported by any societal or other considerations peculiar to England and Wales. There may be cases where a pressing need to modernise the common law justifies such a break, perhaps in the expectation that other common law jurisdictions will in due course follow, but this case is not, in my opinion, one of them."

The Indian Position

In India, the Supreme Court has perhaps taken a view that more-or-less accords with the minority view of Lord Briggs. In BPCL v Great Eastern Shipping, the Supreme Court held that although ordinarily silence does not mean acceptance of an offer but in certain cases when the offer is coupled by silence but the conduct leads to the inference of acceptance, such acceptance would be acceptance subsilentio and a contract would deemed to have been formed. 

The acceptance subsilentio principle would equally apply to modifications "subsilentio" even in the context of a NOM clause. In Carrier Airconditioning and Refrigeration Pvt. Ltv. v. Linc Digital Systems Pvt. Ltd., the Delhi High Court had to decide whether the agreement could be extended beyond its validity period by conduct of the parties when there was a NOM clause. The court cited the BPCL case of the Supreme Court (discussed above) and held on facts that the conduct of the parties as evidenced by correspondences exchanged between them showed that they continued to bind themselves to the terms and conditions of the agreement. On that basis, the court concluded that the parties had by conduct extended the agreement despite the NOM. See also, Wire and Wireless India Pvt. Ltd. v. Information TV Pvt. Ltd. MANU/TD/0093/2011. 

The Indian position is not yet as chiselled as the English position is. However, the Indian precedents are more or less in line with the minority view of the decision of the UK Supreme Court, which needs no changes or interference.