(Continuing with her mid-year arbitration review (see previous posts here, here & here), Ms. Juhi Gupta, an LL.M. graduate from Harvard Law School, has penned the fourth and last part of the series of posts on the topic. Happy reading!)
Fundamental policy of Indian law is
violated if core issues for grant of relief are not examined
National Highways Authority of India v Gwalior Jhansi
Expressway Limited (Supreme Court, 13 July 2018)
The
Supreme Court recently decided a very interesting case about the mandatory
participation in a tender process to exercise the right of first refusal. A
core issue was whether or not the impugned orders contravened the fundamental
policy of Indian law. The case provides a useful illustrative example of the
facts and circumstances that would lend to a finding that the fundamental
policy has been violated.
Brief facts: A dispute arose between the appellant
and respondent under a concession agreement regarding completion of contractual
works. Arbitration was invoked and subsequently, the appellant filed an
application under section 17 of the Arbitration Act before the tribunal seeking
permission to complete the remaining works by going through the tender process
again. The respondent moved a section 17 application asking NHAI to either
infuse Rs. 400 crores to finish the project or to issue a fresh tender, subject
to the respondent being granted the right of first refusal (hereinafter “ROFR”)
to match the lowest bid and in the event it did, the right to complete the
works subject to any conditions in the tender.
The
tribunal passed an order to this effect, following which the appellant issued a
fresh public tender for the balance works that was brought to the tribunal’s
notice. An important stipulation that repeated in several provisions of the
tender document was that if the respondent was also a responsive bidder, then
the respondent shall have the option of matching the lowest bid in terms of the
selection criteria. Several months later, the respondent filed an application
under section 17 before the tribunal seeking permission to complete the works,
claiming it was surprised by the appellant’s fresh tender of which it had only
received notice on the previous day. The appellant objected saying that the
respondent could have only invoked the ROFR if it had participated in the
bidding process. The tribunal ruled in favour of the respondent, which was
upheld by the Delhi High Court.
Issue: Whether the
tribunal’s orders and the Delhi High Court order violated fundamental policy of
Indian law?
Arguments: The appellant
argued that (i) the respondent could not exercise the ROFR without
participating in the bidding process and in violation of the tender conditions;
(ii) there was nothing in the tribunal’s first order exempting the respondent
from participating in the tender process or prohibiting the appellant from
incorporating a condition to this effect in the tender document; (iii) the
process of evaluation of tender and awarding of contract are commercial
functions that are outside the purview of judicial review, especially when the
decision of the statutory body (in this case the appellant) was bona fide and in public interest; and
(iv) the tribunal exceeded its jurisdiction under section 17 in both orders
because it could not pass an interim order concerning a separate contract (i.e.
the fresh tender).
The
respondent argued that (i) both the tribunal and High Court were of the view
that it was not necessary for the respondent to participate in the fresh tender
process to exercise the ROFR; (ii) the tribunal’s first order attained finality
since the appellant did not challenge it; (iii) the respondent’s capability to
complete the work was undisputed and therefore, there was no logic or rationale
to require the respondent to participate in the bidding process; (iv) clause
3.2(f) of the tender document was a deeming provision that essentially declared
the respondent as eligible and qualified; and (v) the respondent was not aware
of the provisions of the fresh tender document as the tender was neither
provided to the respondent nor placed before the tribunal.
Decision: The Supreme
Court decided in favour of the appellant and set aside the tribunal’s second
order and the High Court’s order, and dismissed the respondent’s section 17
application. The Court noted that the validity of the tender document was not
challenged and its provisions made it clear that the respondent was required to
participate in the tender process by submitting its sealed bid. The deeming
clause in the document did not exempt the respondent from such participation (“…[the respondent], if it has participated in the bidding process, it shall be deemed to
fulfil all the requirements of Clauses 3 to 6 of the RFP…”).
As
regards the tribunal’s first order, the Court noted that there was nothing in
the respondent’s application under section 17 to even remotely suggest that it
should be exempted from participating in the fresh tender process. Any such
exemption had to be expressly sought and granted, and disclosed in the tender
documents. The Court agreed with the respondent that the tribunal’s first order
was silent on requiring the respondent to participate in the bidding process as
a condition precedent to exercise the ROFR; however, the respondent could not
benefit from this as any exemption sought had to be expressly granted by the
court. While the Court said it was “debatable”
whether an arbitral tribunal could even issue an order like its first order
under section 17, it did not enter into a discussion about this as that order
was not challenged.
Further,
the Court found fault with the tribunal’s undue appreciation of the fact that
the respondent had completed a substantial portion of the contractual works and
that it would be just and proper to allow it to complete the balance in spite
of the respondent’s failure to take notice of the tender document that was duly
released in public and disclosed to the tribunal. In addition, the respondent
waited for very long to challenge the tender and even then did not file a
rejoinder to challenge the appellant’s claim in its reply affidavit that the
respondent was fully aware of the terms and conditions of the tender.
“The
Arbitral Tribunal made no effort to ascertain as to whether
the order dated 23rd July 2016 was a blanket and unconditional order
entitling the respondent to straightaway exercise ROFR without participating in
the bidding process. The Arbitral Tribunal merely adverted to the objection of
the appellant and rejected the same on the finding that involvement of a third
party in the Project would create serious problems. It took the view that
giving option to the respondent to match the lowest bid and to complete the
balance work, with a condition to periodically submit the progress report to
the Arbitral Tribunal for monitoring whether the balance work was successfully
completed to the satisfaction of the NHAI, would be a proper and equitable
arrangement. This approach is not in
conformity with the fundamental policy of Indian law” (paragraph 20)
[emphasis supplied].
Similarly,
the Court observed that the High Court violated the fundamental policy of
Indian law as it did not examine the
core issues for grant or non-grant of relief to the respondent:
“The
High Court did not find any error, much less manifest error, in the view taken
by the Arbitral Tribunal. Further, it can be gleaned…that the High Court was
more eager to know as to what prejudice would be caused to the appellant if the
respondent had not participated in the bidding process. This query of the High
Court is begging the question. For, that
cannot be the primary basis to answer the relief claimed by the respondent in
the application under Section 17 of the Act…The High Court has overlooked
the fact that the appellant is a body corporate under the 1988 Act. It has to
act in a just and fair manner in the matter of allocation of contract albeit
the balance and unfinished work of the Project…The respondent had the option to
participate in the bidding process which was not availed for reasons best known
to the respondent. The High Court also overlooked the fact that the tender
process was not an empty formality and with the initiation of the same, third
parties, who participated in the bidding process, were likely to be prejudiced
by allowing the respondent to match the lowest bid or exercise ROFR, without
participating in the bidding process despite the express stipulation in that
behalf in the tender documents” (paragraph 21) [emphasis supplied].
Non-signatories to arbitration agreement
can be referred to domestic arbitration based on group of companies doctrine
Cheran Properties Limited v Kasturi and Sons Limited
and Ors (Supreme Court, 24 April 2018)
Brief facts: An arbitral tribunal passed the final award in an arbitration between
Kasturi and Sons Limited (hereinafter “KSL”)
and Hindcorp Resorts Private Limited (HRPL) as the claimants, and Sporting
Pastime India Limited (SPIL) and KC Palanisamy (KCP) as the respondents, under
a shareholders agreement. The award contained a direction to SPIL and KCP to
return to the claimants the documents of title and share certificates relating
to 2,43,00,000 shares of SPIL. KCP’s challenge against the award under section
34 of the Arbitration Act was dismissed by the Madras High Court and
subsequently the Supreme Court, thereby lending finality to the award.
Following the award, KSL filed an application before the National
Companies Law Tribunal (NCLT) seeking rectification of SPIL’s register under
section 111 of the Companies Act, 1956. The application was preferred against Cheran
Properties Limited (hereinafter “Cheran
Properties”), which had purchased SPIL’s shares as KCP’s nominee. NCLT
allowed the application, which was further upheld by the appellate tribunal
(NCLAT).
What is important to note is that prior to the dispute arising, KCP sent
a letter to KSL as the authorised signatory of Cheran Properties (hereinafter “appellant’s letter”), requesting KSL to
execute share transfer deeds for registering the transfer of shares “in the following names…[including Cheran
Properties]”.
Issues: (1) were the non-signatories to the arbitration agreement bound by the
agreement; and (2) did the NCLT have jurisdiction to enforce the arbitral
award?
Arguments: The appellant argued that (1) it was not a party to the arbitration
agreement that was entered into between KCP, KSL, SPIL and HRPL. Therefore, it
was not bound by the arbitral award; (2) an arbitral award has to be enforced
as a decree of a civil court and therefore, the award could not have been
enforced by the NCLT; and (3) the principles of Chloro Controls are inapplicable as that case was decided in the
context of an international arbitration under section 45. The provisions of
section 45 of the Arbitration Act must be distinguished from the unamended
section 8.
The respondents argued that (1) the shareholders agreement specifically
provided that KCP’s nominees would be bound by the agreement, which would
include the provision containing the arbitration agreement; (2) the appellant
acted as KCP’s nominee at all material times and the appellant’s letter
establishes beyond doubt that the appellant assumed all obligations under the
shareholders agreement, including the remedy of arbitration; (3) an arbitral
award can bind a group company, which is an affiliate of a signatory to the
arbitration agreement, as decided in Chloro
Controls; (4) section 35 of the Arbitration Act expressly states that an
arbitral award binds parties to an arbitration and persons claiming under them;
and (5) since the consequence of the arbitral award was to transfer shares to
KSL, the NCLT had jurisdiction to order the formal rectification of SPIL’s
register, which was the only way to effect the transfer of shares to KSL.
Decision: The Supreme Court decided the first issue in favour of the
respondents. The Court relied on Chloro
Controls, wherein the “group of
companies” doctrine evolved under English law had been relied upon to
recognise that non-signatory affiliates
can be bound by an arbitration agreement in certain circumstances.
Accordingly, in the present case, the Court noted:
“In holding a non-signatory bound by an arbitration
agreement, the Court approaches the matter by attributing to the transactions a
meaning consistent with the business
sense which was intended to be ascribed to them. Therefore, factors such as
the relationship of a non-signatory to a party which is a signatory to the
agreement, the commonality of subject matter and the composite nature of the
transaction weigh in the balance. The group of companies doctrine is
essentially intended to facilitate the fulfillment of a mutually held intent
between the parties, where the circumstances indicate that the intent was to
bind both signatories and non-signatories. The effort is to find the true essence of the business arrangement
and to unravel from a layered structure of commercial arrangements, an intent
to bind someone who is not formally a signatory but has assumed the
obligation to be bound by the actions of a signatory” (paragraph 17) [emphasis
supplied].
The Court emphasised that the present case related to a post-award
situation and therefore, the material provision was section 35, and not
sections 8 and 45 as contended by the appellant. Section 35 clearly stipulates
that an arbitral award shall be final and binding on the parties and persons
claiming under them. The expression “persons
claiming under them” widens the net of those who are bound by an arbitral
award – it is a “legislative recognition [that]
an arbitral award binds every person
whose capacity or position is derived from and is the same as a party to the
proceedings” (paragraph 20).
The Court observed that the appellant, in purchasing the shares, was
conscious of and accepted the terms of the shareholders agreement. The
appellant’s letter unequivocally confirmed the acceptance of this position. The
facts and circumstances demonstrate the mutual
intention of the parties to bind both signatories and non-signatories to
the parent agreement and consequently, the arbitration agreement contained
therein. KCP was entitled to transfer his shareholding and in the appellant’s
letter, KCP indicated, as authorised signatory of the appellant, that his group
of companies agreed to purchase the shares.
The Supreme Court also decided the second issue in favour of the
respondents. The arbitral award had attained finality and the only remedy to
fully enforce the award was to seek rectification of the register under section
111 of the Companies Act.
Mere claim alleging duress and coercion
without proof does not lead to arbitrable dispute
M/s ONGC Mangalore Petrochemicals Ltd. v M/s ANS
Constructions Ltd. and Anr. (Supreme Court, 7 February 2018)
Brief facts: The respondent
was awarded a contract by the appellant. The respondent issued a no dues/claim
certificate on accepting full and final payment after execution of the work.
However, subsequently, the respondent withdrew the certificate stating that it
was only issued under the appellant’s duress and coercion in order to receive
payment. The respondent contended that several of its running account bills
remained uncleared and it had to incur other additional expenses on account of
causes attributable to the appellant. The appellant meanwhile issued a
completion certificate. The respondent initiated arbitration proceedings. The
appellant refused to accede to the arbitration request on account of
non-arbitrability of the dispute. The respondent approached the Karnataka High
Court under section 11 of the Arbitration Act to appoint an arbitrator on
behalf of the appellant. The High Court allowed the petition against which the
appellant filed a special leave petition to the Supreme Court.
Issue: Did a dispute
exist for reference to arbitration under section 11?
Arguments: The appellant
argued that (i) there was no genuine and serious dispute; (ii) there was no
duress or coercion; (iii) the alleged claim for losses incurred during
execution of the contract could not be raised at a belated stage; and (iv)
there was complete accord and satisfaction of the contract as the parties had
confirmed in writing that the contract was fully and finally discharged by
performance of all obligations. As such, there was no outstanding claim or
dispute to be arbitrated.
The
respondent argued that (i) there was a genuine and serious dispute as it had
incurred losses while executing the contract that remained unpaid and even the
final payment was made after delay; (ii) the no dues certificate was void as it
was issued under duress and therefore had no meaning in the eyes of law; and
(iii) it had the right to invoke the arbitration clause in the contract.
Decision: The Supreme
Court held that there was no genuine and
serious dispute for arbitration. Deciding the accord and satisfaction issue in favour of the appellant, the Court
relied on a prior decision to explain the thought process behind determining a
reference to arbitration under section 11 as follows:
“The
Chief Justice/his designate exercising jurisdiction under Section 11 of the Act
will consider whether there was really
accord and satisfaction or discharge of contract by performance. If the
answer is in the affirmative, he will refuse to refer the dispute to
arbitration. On the other hand, if [he] comes to the conclusion that the full
and final settlement receipt or discharge voucher was the result of any
fraud/coercion/undue influence, he will have to hold that there was no
discharge of the contract and consequently, refer the dispute to arbitration”
(paragraph 20) [emphasis supplied].
Applying
the law to the instant facts and circumstances, the Court concluded that there
was full and final settlement of the claim and there was accord and
satisfaction. The appellant was discharged of all liabilities pursuant to
issuing the completion certificate. Therefore, no arbitrable dispute existed so
as to warrant exercise of power under section 11. The respondent made mere bald
assertions bereft of any details or particulars, which could not lead to an
arbitrable dispute.
