(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)