(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.