Default Rules (Finally!) Enters into Indian Jurisprudence: SC Decides on Unreasoned Arbitral Awards

In this blog, we have been writing about the concept of default rules for the past decade. In many posts, we have lamented the absence of this useful concept in analysing various provision in Indian Contract Law. Finally, a recent three judge Bench of the Supreme Court in Dyna Technologies v. Cromption Greaves (SC: 2019) has expressly recognised the concept of default rules. The Supreme Court stated:

"29. Similar to the position under the Model Law, India also adopts a default rule to provide for reasons unless the parties agree otherwise. As with most countries like England, America and Model Law, Indian law recognizes enforcement of the reasonless award if it has been so agreed between the parties.
30. There is no gainsaying that arbitration proceedings are not per se comparable to judicial proceedings before the Court. A party under Indian Arbitration Law can opt for an arbitration before any person, even those who do not have prior legal experience as well. In this regard, we need to understand that the intention of the legislature to provide for a default rule, should be given rational meaning in light of commercial wisdom inherent in the choice of arbitration." 

With the introduction of the concept, hopefully there will be more clarity on the classification of various contract law rules as default and mandatory. 

The case dealt with the issue relating to the interpretation of Section 31(3) of the 1996 Act, which provided: "(3) The arbitral award shall state the reasons upon which it is based, unless- (a) the parties have agreed that no reasons are to be given, or (b) the award is an arbitral award on agreed terms under section 30.” (Section 31(3) has remained unamended since enactment of the 1996 Act.)

The Supreme Court held that the requirement of reasons in Section 31(3) meant that the reasoning should be intelligible and adequate. The court also held that in addition to intelligibility and adequacy, a reasoned award should be proper. However, the court took pains to clarify that propriety or pervasity in the reasoning of the award should be judged "strictly on the grounds provided in Section 34".

On intelligibility, the court held that if the award suffers from unintelligibility, it is "equivalent of providing no reasons at all". 

On adequacy, the court stated that the validity of the award should be tested on the touchstone of "degree of particularity of reasoning having regard to the nature of issues" that the tribunal had to decide. The court was not in favour of any precise formulation of the concept of "degree of particularity" but clarified that even if "there were gaps in the reasoning for the conclusions reached by the Tribunal, the Court needs to have regard to the documents submitted by the parties and the contentions" so as to ensure that "awards with inadequate reasons are not set aside in a casual and cavalier manner".

Distinguishing between the tests for setting aside the award suffering from inadequacy of reasoning and unintelligibility, the court held that unlike inadequacy in reasoning, even "ordinarily unintelligible awards" could be set aside, the only restriction being where parties agree that no reasoning is required. 

These aspects have been dealt with in Paras 35 and 36 of the court's decision.

The court also provided guidance on how an award suffering from the aforesaid infirmities could be dealt with. The court stated that Section 34(4) can be used in cases where there is "complete pervasity in reasoning" (by which the award could be challenged under Section 34) so as to cure the defects (Para 38). Even so, the court did not want to apply the said provision on facts considering that it had taken 25 years for the adjudication of the dispute. On facts, the Supreme Court set aside the award for want of reasons. 

It is also to be noted that Section 34(4) can be used when there is a request from a party [See, Kinnari Mullick and Ors. vs. Ghanshyam Das Damani (20.04.2017 - SC) : MANU/SC/0514/2017]. The SC did not take the said decision into consideration. It should not be taken that the decision of the SC in the case under discussion in any away deviates from the requirements under Section 34(4) as clarified in Kinnari Mullick, where another three Judge Bench of the SC held:

"In any case, the limited discretion available to the Court Under Section 34(4) can be exercised only upon a written application made in that behalf by a party to the arbitration proceedings. It is crystal clear that the Court cannot exercise this limited power of deferring the proceedings before it suo moto. Moreover, before formally setting aside the award, if the party to the arbitration proceedings fails to request the Court to defer the proceedings pending before it, then it is not open to the party to move an application Under Section 34(4) of the Act. For, consequent to disposal of the main proceedings Under Section 34 of the Act by the Court, it would become functus officio. In other words, the limited remedy available Under Section 34(4) is required to be invoked by the party to the arbitral proceedings before the award is set aside by the Court."

Guest Post: Whether Decision on Limitation is a Jurisdictional Issue under S. 16 Arbitration Act

[This guest post penned by Mr. Sameer Sharma, a final year student of the National Law University, Jodhpur, points out and critiques the observations in the recent decision of the Supreme Court of India in Uttarakhand Purv Sainik Kalyan Nigam Limited v. Northern Coal Field Limited (2019:SC) that issues of limitation are jurisdictional issues for the purpose of Section 16 of the Arbitration and Conciliation Act, 1996 although they have been held not to be, as per IFFCO v Bhadra Products (2018:SC).] 

The seemingly inconspicuous observation by the SC in Uttarakhand Purv on limitation: A potential breeding ground for confusion.

-          Sameer Sharma (5^th year law student at NLU Jodhpur)

In its judgement dated 27.11.2019, the Supreme Court (“SC”) in Uttarakhand Purv Sainik Kalyan Nigam Limited v. Northern Coal Field Limited,[1] held that the issue of limitation is a "jurisdictional issue" which would be required to be decided by the arbitral tribunal under Section 16 of the A&C Act, 1996, and not by the High Court under Section 11. The purpose of this write-up is to assess the validity and tenability of this particular observation by the SC, as well as its reliance on certain cases to reach such conclusion.

For this limited purpose, it would be adequate to state that the petitioner in the said matter issued a legal notice dated 29.05.2013 to the respondent seeking payment of dues owed to it under the contract. On 09.03.2016, almost three years later, the said petitioner invoked the arbitration clause under the contract by issuing a notice of arbitration to the respondent. Subsequently, the petitioner approached the High Court under Section 11 of the Act for the appointment of an arbitrator. The High Court, vide the order impugned before the SC in the aforesaid case, refused to appoint an arbitrator stating that the claims of the petitioner stood barred by limitation.

The SC noted that the invocation of the arbitration clause in the matter occurred after the 2015 Amendments to the Act came into force. As a result, the SC considered the insertion of Section 11(6A) in the Act while dealing with the instant case before it. By relying on its earlier judgement in Duro Felguera S.A. v. Gangavaram Port Limited,[2] the SC in Uttarakhand Purv held as follows: -

“9.8. In view of the legislative mandate contained in Section 11(6A), the Court is now required only to examine the existence of the arbitration agreement. All other preliminary or threshold issues are left to be decided by the arbitrator under Section 16, which enshrines the Kompetenz-Kompetenz principle.”

(emphasis supplied)

After observing the same, the SC went on to hold: -

“9.11. Sub-section (1) of Section 16 provides that the arbitral tribunal may rule on its own jurisdiction, “including any objections” with respect to the existence or validity of the arbitration agreement. Section 16 is as an inclusive provision, which would comprehend all preliminary issues touching upon the jurisdiction of the arbitral tribunal. The issue of limitation is a jurisdictional issue, which would be required to be decided by the arbitrator under Section 16, and not the High Court at the pre-reference stage under Section 11 of the Act. Once the existence of the arbitration agreement is not disputed, all issues, including jurisdictional objections are to be decided by the arbitrator.”

(emphasis supplied)

 Thus, the SC interpreted the scope of Section 16 of the Act to state that it is wide and inclusive in its import, so as to include “all preliminary or threshold issues” and “preliminary issues touching upon the jurisdiction of the arbitral tribunal”. As per the SC, within these formulations would lie the decision regarding the question on limitation. In order to buttress its reasoning, the SC relied on ITW Signode India Limited v Collector of Central Excise,[3] in which the SC had ruled that the issue of limitation involves the element of “jurisdiction” within it. Further, the SC relied on NTPC v. Siemens Atkein Gesell Schaft,[4] to observe that the issue of limitation would have to be addressed by the arbitral tribunal under Section 16 of the Act. Moreover and interestingly enough, the SC also relied on IFFCO v. Bhadra Products,[5] which is a recent judgement rendered by the SC. In relation to the said case, the SC stated in Uttarakhand Purv as follows: -

“9.12. In Indian Farmers Fertilizers Cooperative Ltd. v. Bhadra Products, this Court held that the issue of limitation being a jurisdictional issue, the same has to be decided by the tribunal under Section 16, which is based on Article 16 of the UNCITRAL Model Law which enshrines the Kompetenze principle.”

(emphasis supplied)

Right at the outset, it would not be incorrect to state that the reasoning employed by the SC in the instant case relating to the issue of limitation, is ridden with anomalies. There are two broad reasons for this contention. Firstly, it is contrary to the SC’s earlier decision in IFFCO (which was, akin to Uttarakhand Purv, a judgement rendered by two judges). In IFFCO, the SC definitively and categorically held that an issue of limitation dealt with by an arbitral tribunal does not fall under Section 16 of the Act; rather, such decision by the tribunal would amount to an “interim award” (which can only be subject to challenge under Section 34 of the Act).[6] In fact, the SC in Uttarakhand Purv has quoted and relied on IFFCO (as can be seen from the extracted paragraph no. 9.12 reproduced above) to state the exact opposite of what has actually been held in it!

Secondly, the SC’s reliance on ITW Signode and NTPC v. Siemens is also misplaced. The SC in IFFCO clearly makes the effort to address the reliance placed by the party therein on ITW Signode to state as to how such judgement does not apply to the facts contained in that matter therein. The SC elaborately distinguishes ITW Signode in IFFCO.[7] However, despite such exposition, the SC in Uttarakhand Purv rather carelessly resorts to ITW Signode to fortify its reasoning. Insofar as NTPC v. Siemens is concerned, nowhere does the SC state in the said case that a decision on the issue of limitation would come under Section 16 of the Act (as has been suggested by the SC in Uttarakhand Purv). Again, this point has also squarely been addressed by the SC in IFFCO.[8]

In light of the foregoing analysis, it is the view of the author that the SC’s holding in Uttarakhand Purv suffers from infirmities as it is manifestly contrary to established case-law and as it misinterprets precedents laid down by the SC. It must be borne in mind that the SC in Uttarakhand Purv was dealing with a Section 11-scenario (appointment of arbitrators) and with the question as to whether it is the Court u/S 11 or the arbitral tribunal u/S 16 of the Act which must adjudicate on an issue related to limitation. However, while the SC’s conclusion that the Court u/S 11 must not deal with the issue of limitation as it must confine itself to deciding the “existence of arbitration agreement” is statutorily sound, the dictum that such issue of limitation must be dealt with under Section 16 is per incuriam. In other words, while the end sought to be achieved is valid, the means employed to achieve such end is what is problematic. It is per incuriam because it explicitly refers to judgements to ultimately end up stating the opposite of what the case referred to actually holds.

It seems to be the case that the SC has employed an all-or-nothing approach to the extent wherein it has held that “all preliminary or threshold issues” have to be dealt with only u/S 16 of the Act and not u/S 11 of the Act. The SC has not contemplated a situation in which certain issues can be outside the ambit of determination u/S 11 and yet be beyond the (limited) realm of Section 16 of the Act. This eventuality, as has been discussed in the foregoing analysis, is very well plausible, with the prime example being the ratio in IFFCO. Thus, the SC could have, in the author’s respectful submission, stated that while the issue of limitation cannot be gone into by the Court u/S 11 of the Act, it could most certainly be dealt with by the arbitral tribunal in the usual course as per relevant provisions of the Act. This would have prevented the conflict of opinion with IFFCO. The need for judicial discipline, adherence to precedents and legal certainty would necessitate courts to render as few conflicting decisions as possible, especially when it comes to co-ordinate bench judgements. A scenario, for instance, like the one relating to the interpretation of the amended Section 6 of the Hindu Succession Act, 1956, which today involves the need to harmonise conflicting decisions,[9] must be avoided. 

With the decision in Uttarakhand Purv, the already settled issue on whether a decision on limitation constitutes an “award” or an “order” (u/S 16 of the Act) has now been thrown open to re-interpretation and disputation. One can expect this to be a ripe ground for future litigation and resultant uncertainty.

[1] Uttarakhand Purv Sainik Kalyan Nigam Limited v. Northern Coal Field Limited, MANU/SC/1634/2019, para 9.11 (hereinafter “Uttarakhand Purv”).

[2] Duro Felguera S.A. v. Gangavaram Port Limited, (2017) 9 SCC 729.

[3] ITW Signode India Limited v Collector of Central Excise, (2004) 3 SCC 48 (hereinafter “ITW Signode”).

[4] NTPC v. Siemens Atkein Gesell Schaft (2007) 4 SCC 451 (hereinafter “NTPC v. Siemens”).

[5] IFFCO v. Bhadra Products (2018) 2 SCC 534 (hereinafter “IFFCO”).

[6] IFFCO v. Bhadra Products (2018) 2 SCC 534, Para 30.

[7] IFFCO v. Bhadra Products (2018) 2 SCC 534, Para 29.

[8] IFFCO v. Bhadra Products (2018) 2 SCC 534, Paras 23-25.

[9] Vineeta Sharma v. Rakesh Sharma, MANU/SC/1593/2018.