Joinder of Parties in Arbitration Proceedings: Supreme Court of India Clarifies

On October 14 this year, the Supreme Court decided on an important issue pertaining to joinder of parties in arbitration, which might be considered as an important development in Indian arbitration. In this post, we discuss the relevant aspect of the decision dealing with joinder of parties.

Title: PR Shah, Shares & Stock Broker (P) Ltd. v. BHH Securities (P) Ltd. & Ors.

Case No.: Civil Appeal No. 9238/ 2003

Date of Decision: 14.10.2011

Bench: RV Raveendran & AK Patnaik, JJ.

Facts:

PR Shah, Shares & Stock Broker (P) Ltd (“PR Shah”) and BHH Securities (P) Ltd (“BHH”) were members of the Bombay Stock Exchange (the SC refers to the stock exchange as “Mumbai” stock exchange, which is inaccurate). BHH invoked arbitration against PR Shah and the second respondent, Continental Securities (P.) Ltd (“Continental”). According to BHH, PR Shah and Continental were sister concerns with a common director. The said common director had approached BHH for certain shares-related transactions. A deal was reached and a few share related transactions were carried out. Since amounts were due to BHH in respect of the transactions, BHH asked PR Shah and Continental to clear the dues. The Bills in respect of the amounts due were raised against Continental as required by PR Shah but with an assurance from the common director that both PR Shah and Continental were jointly and severally liable. On failure of Continental and PR Shah to pay despite several requests from BHH, BHH invoked arbitration against both companies.  

In the arbitration proceedings, a total of Rs. 36,98,384.3 was claimed as the total sum due alongwith interest. PR Shah and Continental objected to the claim on common grounds. PR Shah alleged that BHH had raised the claims in the arbitration proceedings based on forged documents. Further, As regards joinder, the following contentions were made on behalf of Continental and PR Shah:

a) There was no arbitration agreement between the BHH and PR Shah.

b) the reference was bad for misjoinder of parties and of causes of action.

c) PR Shah was a member of the Stock Exchange while Continental was not. Since the Stock Exchange had different rules for resolving disputes between members on the one hand and a member and a non-member on the other.

Two members of the arbitral tribunal, consisting of Mr. Hemant V Shah and Mr. Sharad Dalal, held that Continental was liable to pay BHH and in case of failure by Continental, PR Shah was liable to pay BHH . However, one of the members of the tribunal, Justice DB Deshpande, agreed with the view of the majority that the claim of BHH against Continental was valid but disagreed that the tribunal did not have jurisdiction to decide disputes between BHH and PR Shah. PR Shah petitioned the court under Section 34 of the Arbitration and Conciliation Act, 1996, where one of the chief contentions of PR Shah was that Bye-Law No. 248 did not deal with disputes between two members of the Stock Exchange. (Bye-Law 282 deals with disputes between members of the stock exchange)

Bye-Law No. 248, as it was then, reads:

"All claims (whether admitted or not) difference and disputes between a member and a non-member (the terms non-member and non-members shall include a remisler, authorised clerk, a sub-broker who is registered with SEBI as affiliated with that member or employee or any other person with whom the member shares brokerage) arising out of or in relation to dealings, transactions and contracts made subject to the Rules, Bye-laws and Regulations of the Exchange or with reference to anything incidental thereto or in pursuance thereof or relating to their construction, fulfilment or validity or in relation to the rights, obligations and liabilities of remislers, authorised clerks, sub-brokers, constituents, employees or any other persons with whom the member shares brokerage in relation to such dealings, transactions and contracts shall be referred to and decided by arbitration as provided in the Rules, Bye-laws and Regulations of the Exchange." (emphasis supplied)

The Single Judge rejected the Petitioner’s (PR Shah) contention and held that if the dispute between a member and a non-member in an incidental or connected claim cannot be referred to arbitration under Bye-law 248, the Claimant would have to approach two tribunals for a single claim, which might lead to “multiplicity of findings” . Therefore, the Single Judge held:

“[A} claim against the member can be entertained under By-law 248 where the said claim is incidental to or connected to a claim against a non-member.”

 Consequently, the Single Judge ruled in BHH’s favour. On appeal, the Division Bench of the High Court held that if it is ruled that disputes between a member on the one hand and a member and a non-member on the other are to be split and heard separately under Bye-Law 248 and 282, then disputes in which a member and a non-member are liable jointly and severally cannot be heard. Further, if the claimant is asked to approach multiple fora, it might lead to inconsistent decisions on the same set of facts. To prevent such a situation, the Division Bench dismissed PR Shah’s plea.

On, appeal the Supreme Court dismissed the appeal filed by PR Shah. Following is a summary of the reasoning:

1) The arbitration is not an ad hoc arbitration held as per an arbitration agreement but is an institutional arbitration. There is no need of a separate arbitration agreement. Even questions as to the validity of the transaction, bargain, contract or dealing were arbitrable.

2) The Bye-law provided for appeal from a decision of the tribunal constituted to resolve disputes between two members. PR shah contends that such a right was denied to it by the tribunal by joinder of BHH’s claim against it with its claims against Continental.

3) “If A had a claim against B and C, and there was an arbitration agreement between A and B but there was no arbitration agreement between A and C, it might not be possible to have a joint arbitration against B and C. A cannot make a claim against C in an arbitration against B, on the ground that the claim was being made jointly against B and C, as C was not a party to the arbitration agreement.”

4) But “if A had a claim against B and C and if A had an arbitration agreement with B and A also had a separate arbitration agreement with C, there is no reason why A cannot have a joint arbitration against B & C.”

5) If two different arbitration proceedings are held for the same claim, it might lead to multiplicity of proceedings and conflicting decisions.  Therefore, if:

“A has a claim jointly against B and C, and when there are provisions for arbitration in respect of both B and C, there can be a single arbitration.”

6) In the instant case, since Bye-Law 248 provides for arbitration between a member and a non-member and Bye-law 282 provides for arbitration between members, there can be a single arbitration. 

Comment: 

Thus, the decision not only provides that in case of arbitration under the Bye-Laws, arbitration could be invoked against a member and a non-member; it does not merely provide that such claim against the member should be incidental; it also provides that notwithstanding the nature of the claim, if the Claimant is claiming jointly against two parties, there can be single arbitration for deciding the joint claim if there is an arbitration agreement between A and C and between A and B. The purpose of quoting portions of the judgement at points 3, 4 and 5 in the above summary is to highlight this aspect.

(Added after Posting: Although the decision might prevent inefficiency by eliminating the possibility of different proceedings for the same claim, there are a few questions left unanswered by the court. The future courts applying this judgement must take due care in answering those questions. Some of such questions are: (1) how would the arbitral tribunal be constituted in case of such arbitration? (2) how would the cost be apportioned between the parties? (3) whether an agreement prohibiting consolidation of arbitration would be valid? (4) whether consolidation of arbitration proceedings contemplating different arbitral seats is valid?)

Article Review: Remoteness Re-invented? by David McLauchlan

McLauchlan, David, Remoteness Re-Invented? (January 31, 2010). Victoria University of Wellington Legal Research Paper No. 3. Available at SSRN: http://ssrn.com/abstract=1866167

"Remoteness Re-invented?" by David McLauchlan, a professor of law at the University of Wellington, discusses one of the most important cases in the recent times on damages in contract law- Transfield Shipping Inc v. Mercator Shipping Inc. (The Achilleas) [2008] UKHL 48. This blog post briefly reviews the article.

The Achilleas

Mercator Shipping (Mercator) was the owner of the ship the Achilleas. Mercator and Transfield Shipping (Transfield) entered into a time charter of the Achilleas at a daily rate of USD 16,750 and the latest date of redelivery was May 2.  On April 20, Mercator sent a notice for redelivery between April 30 and May 2. In the meanwhile, Mercator entered into a “follow-on” time charter (the second charter was to commence after redelivery by Transfield) with Cargill for four to six months at a daily rate of USD 39,500.  The huge difference in rates between the two charters was due to a dramatic rise in the market rates. Cargill had an option to cancel the time charter in case the vessel was not delivered it by May 8.

Despite the notice of redelivery, Mercator could not redeliver the vessel by May 2. It appeared that the vessel would be redelivered only by May 11. By May 5, it became apparent to Cargill that the vessel could not be delivered by May 8. Instead of exercising its right to cancel the time charter, Cargill renegotiated with Mercator to reduce the daily rate to USD 31,500, consistent with the fall in market prices.

Mercator sued Transfield for the difference between the original rate of USD 39,500 and the renegotiated rate of USD 31,500 (USD 8,000) for the entire period of the time charter (four to six months), which amounted to USD 1.4 million.

Transfield contended that that Mercator was not entitled to the claim as the damages was too remote and that Mercator was entitled only to the difference between the contract rate and market rate for nine days, that is, the due date for redelivery and the actual date of redelivery.

There were five judgements of the House of Lords some with different reasoning but with the consistent final decision that Mercator was not liable to the claim of USD 1.4 million as it was too remote.

Remoteness Re-Invented?

The author structured his article in the following manner:

A. Introduction
B. Academic Debates (consisting of case comments/ articles dealing with the case/ the subject)
C. Achilleas (discussing the decisions of the courts below and the four judgements in the House of Lords)
D.Effects of the Decision
E. Conclusion

According to the author, the decision by the House of Lords took the contract law scholars by surprise because the arbitral awards were by arbitrators with specialized knowledge in the field and the judgements by the High Court and the Court of Appeal were admittedly by judges with great commercial experience. In fact, one of the decisions in the Court of Appeal was by the renowned Rix, LJ. Nevertheless, the House of Lords overturned the decisions of the arbitral tribunal and the lower courts.

In Part B of the paper, the author discusses the various academic theories surrounding the determination of whether damages claimed was remote such as the instrumental promises theory, agreement-centric approach and the default rule approach. After a brief analysis, the author concludes that “from a practical point of view [the academic debates] should not matter” as long as it is recognized that “[r]easonable foreseeability will usually be necessary but it is certainly ‘not sufficient for liability’”.

In Part C, the author discusses the decision of the lower courts and judgements of by each of the five judges sitting in the House of Lords. The author notes that the judges were ultimately of the view that the owner was not entitled to the loss claimed but only for what the charterer conceded as the entitlement of the owner. In Part D, the author attempts to formulate the ratio of the majority as different reasoning was provided by the judges of the House of Lords. The ratio according to Mclauchlan is as follows:

“A loss may not be considered too remote even if it was of the type or kind that would have been within the reasonable contemplation of the parties as a not unlikely result of the breach. Defendants will escape liability for foreseeable loss if it cannot be reasonably be inferred that they accepted responsibility for that loss”.

The author explains that the court’s view meant that the plaintiff could recover damages for “unusual” losses on the basis of the knowledge of special circumstances only if it was established from an objective point of view that the defendant had accepted the contract with the special circumstance attached to it. The effect of the decision, according to the author, is:

“[W]hether or not a particular kind of loss is held to be foreseeable because of imputed knowledge or actual knowledge of special circumstances, the defendant can escape liability if the court is satisfied that it would be unreasonable to infer that the defendant accepted the responsibility for that loss.”

This, according to the author is a positive development because the judges would not longer hide behind “bland assertions” but would have to clearly spell out how there was assumption of the risk. The author also discusses a few categories of factors that might lead the court to conclude one way or the other.Another possible consequence of the judgement discussed in the article is that it courts might be reluctant to award damages which are substantially disproportionate to the consideration received because it may be possible to reasonably infer that the defendant never “agreed” to bear liability for such a loss.

Case Comments on the Decision:

• Adam Kramer, ‘An Agreement-Centred Approach to Remoteness and Contract Damages’ in Nili Cohen & Ewan McKendrick (eds), Comparative Remedies for Breach of Contract (Hart Publishing, Oxford and Portland 2005) 249;
• Andrew Tettenborn, ‘Hadley v Baxendale Foreseeability: A Principle Beyond Its Sell-by Date?’ (2007) 23 J of Contract L 120;
• Andrew Robertson, ‘The Basis of the Remoteness Rule in Contract’ (2008) 28 Legal Studies 172. 
• Edwin Peel, ‘Remoteness Revisited’ (2009) 125 LQ Rev 6

An Indian reader perusing this post might wonder about the position in India on this issue. We'll do a post in the near future on this.

Reference, Counter-Claims and Limitation in Arbitration: SCI Clarifies

In a recent decision, the Supreme Court filled several gaps in the statute (the Arbitration and Conciliation Act, 1996 or Act or 1996 Act) pertaining to Reference, claims and counter-claims in arbitration, especially as regards circumstances when a party cannot raise counter-claims in the pleadings for the first time, the need for mentioning the list of specific disputes for which arbitrator is appointed under Section 11, admissibility of counter-claims in arbitration under an arbitration agreement which “requires specific disputes to be referred to arbitration” and restricts the jurisdiction of the arbitrator to only those disputes so referred to arbitration. We provide a descriptive comment of the case in this post.

Case: State of Goa v. Praveen Enterprises 2011(3) Arb. LR 209 (SC)
Date of judgement: 04.07.2011
Civil Appeal No. 4987/ 2011 ariising out of SLP (C) No. 15337 of 2009
Bench: RV Raveendran & AK Patnaik, JJ.

Facts:

Relevant portions of the arbitration clause in the Agreement dated 04.11.1992 between the State of Goa (Goa) and Praveen Enterprises (Praveen) read:

“Except where otherwise provided in the contract, all questions and disputes relating to the meaning of the specifications, designs, drawings and instructions herein before mentioned and as to the quality of workmanship or materials used on the work or as to any other question, claim right matter or thing whatsoever, in any way arising out of or relating to the contract… shall be referred to the sole arbitration of the person appointed by the Chief Engineer, Central Public Works Department in charge of the work at the time of dispute… It is a term of contract that the party invoking arbitrations shall specify the dispute or disputes to be referred to arbitration under this clause together with the amount or amounts claimed in respect of each such disputes.” (emphasis supplied)

Disputes arose between the parties. Praveen sent a notice invoking arbitration of certain claims and asked Goa to appoint the Chief Engineer as per the arbitration clause. Since Goa did not appoint an arbitrator, Praveen applied to the Chief Justice under Section 11 of the Act. The Chief Justice appointed a Retired Advisor, Konkan Railway Corporation (Sole Arbitrator) as arbitrator. In the arbitration proceedings, Praveen filed its claim statement and Goa filed its reply and counter-claim. Some of the claims in the claim statement and the counter-claim were allowed. Praveen applied to the Additional District Court(District Court) to set aside the award on two counts:

• the arbitrator wrongly rejected of some of its claims
• the arbitrator wrongly allowed one of the counter-claims of Goa

The District Court accepted Praveen’s plea on the second ground for the reason that the arbitrator did not have the power to enlarge the scope of reference and entertain fresh claims by the claimant or counter-claims by the respondent. The Bombay High Court rejected the appeal by Goa against the decision of the District Court. The rationale for the High Court’s decision was that Goa did not place these counterclaims in the proceedings before the Chief Justice under Section 11. The High Court relied on its decision in Charuvil Koshy Verghese v. State of Goa [1998(2) ARb. LR 157 (Bom)] (Charuvil Koshy)

Contentions:

On appeal to the Supreme Court, Goa contended as follows:

• There was no bar in the arbitration agreement to raise counter-claims before the arbitrator even if none was raised in the proceedings under Section 11.
• Since the Chief Justice does not “refer” disputes to arbitration under Section 11, the High Court was wrong in stating that there was no reference by the High Court of the counter-claims raised.
• Charuvil Koshy was a decision under the Arbitration Act, 1940, which is materially different from the 1996 Act.

The Respondent contended:

• In SBP & Co. v. Patel Engineering (2005) 8 SCC 6128 and National Insurance Co. v. Boghara Polyfab (2009) 1 SCC 267 where the Supreme Court held that in an application under Section 11, the Chief Justice could decide whether an disputes raised were time-barred. Therefore, the application under Section 11 should show that the claims are within limitation. Unless it is required that the counter-claimant mention counter-claims in the proceedings under Section 11, the counter-claimant would merely circumvent this requirement and refer to arbitration even time-barred claims.
• Limitation period under Section 21 is reckoned only from the date of filing of the notice invoking arbitration. Therefore, sending a notice invoking arbitration is mandatory even in case of counter-claims.
• Every claim not mentioned in the application under Section 11 and every counter-claim not mentioned in objections to such application cannot be raised before the arbitrator. 
• In “Law and Practice of Commercial Arbitration in Englan” authored by Mustill & Boyd (1989), at p. 131, it is stated: “The arbitrator should carefully consider whether the subject matter of the counter-claim was one of the matters submitted to him at the time of appointment.”
• The court is bound under Section 11 to ascertain the precise nature of the dispute and then appoint an arbitrator. This is possible only if the claims and the counter-claims are stated in the proceedings in Section 11. In Heyman v Darwins [(1942) AC 356], the House of Lords stated:

"Where proceedings at law are instituted by one of the parties to a contract containing an arbitration clause and the other party, founding on the clause, applies for a stay, the first thing to be ascertained is the precise nature of the dispute which has arisen The next question is whether the dispute is one which falls within the terms of the arbitration clause.”

• In accordance with Article 21, arbitration proceedings commence when the notice invoking arbitration is received by the respondent. Therefore, arbitration proceedings in respect of the counter claims commence only after issuing a notice invoking arbitration

Questions before the Court:
According to the Supreme Court, the following questions arose in the case:

“Whether the respondent in an arbitration proceedings is precluded from making a counter-claim, unless
a) it had served a notice upon the claimant requesting that the disputes relating to that counter-claim be referred to arbitration and the claimant had concurred in referring the counter claim to the same arbitrator;
and/or
b) it had set out the said counter claim in its reply statement to the application under section 11 of the Act and the Chief Justice or his designate refers such counter claim also to arbitration.”

Decision:
 

Summary of the decision is below. The below summary has been prepared keeping in mind the comprehensive manner in which the court has dealt with the issue. Each of the points may be taken as propositions laid down by the court.

On Reference in Arbitration:

1. The phrase ‘reference to arbitration’ may mean any of the following:

• where an agreement provides for reference of future disputes to arbitration, reference is the reference by the parties to arbitration of disputes after such disputes have arisen;
• nomination of arbitrator by the appointing authority appointed in the arbitration agreement and reference by the appointing authority of disputes raised to arbitration; and
• where either of the parties approach the court for whatsoever reason for appointment of the arbitrator under Section 11 and if the court appoints the arbitrator, such appointment automatically results in reference to arbitration.

2. Reference contemplated under Section 8 is not a reference of disputes but of parties to arbitration. Subsequently, parties appoint the tribunal and refer the disputes to arbitration.

On Reference and Jurisdiction:

3. If the agreement provides for reference of all disputes under the agreement to the arbitrator, the arbitrator has jurisdiction to decide all disputes that were made in the pleadings of the parties, including counter-claims. “But where the reference to the arbitrator is to decide specific disputes enumerated by the parties/ court/ appointing authority, the arbitrator’s jurisdiction is circumscribed by the specific reference and the arbitrator can decide only those specific disputes.”

4. In case of arbitration agreements entered into after specific disputes have arisen, the arbitrator cannot go beyond the disputes specifically referred to in the arbitration agreement, unless the parties agree to refer additional disputes to arbitration.

Claims, Additional Claims, Counter-Claims and Limitation

5 The Limitation Act, 1963 (Section 3) provides for institution of a “suit” within the limitation period. In accordance with Section 43(1) of the Act, the Limitation Act applies to arbitration as it applies to court proceedings. Question then arises as to what is the equivalent of institution of the suit in arbitration proceedings. This question is answered by Sections 43(2) and 21 of the Act. Thus, arbitral proceeding commences on the date of receipt by the respondent of the notice invoking arbitration.

6. Where a party files additional claims through amendment to the claim statement under Section 23(3), the limitation period is reckoned not with respect to the date of notice invoking arbitration or the original claims but with respect to the date on which the “additional claims were introduced”.

7. Claims of set-off and counter-claims are treated as independent suits. A claim of set-off is deemed to have been made on the date when it is pleaded in the court and a counter-claim is deemed to have been made on the date on which that counter-claim is made in the court. Section 21 does not deal with counter-claims but Section 43(1) read with Section 3(2)(b) of the Limitation Act, 1963 does, except when in reply to a notice invoking arbitration, the respondent raises certain claims and subsequently files those claims as counter-claims in the arbitration proceedings. In case of the latter, the arbitration commences when the counter-claims were raised for the first time in the reply to notice invoking arbitration. In the former situation, counter-claims, like in suits, are deemed to have been made on the date on which the counter-claims are made in the arbitration proceedings.

8. Section 23 does not restrict the claimant (which term includes a counter-claimant) from raising disputes not contemplated in the notice invoking arbitration (or the reply, in case of counter-claimant), unless the parties have agreed otherwise. The claimant is free to amend his claim. Section 2(9) read with Section 23 allows a party to file counter-claims and amend or file additional counter-claims, unless the arbitration agreement refers only particular disputes to arbitration.

Therefore, Praveen’s contention that it is mandatory to give notice of arbitration for raising counter claims is not correct. A party could even add extra claims to its claim statement without giving a notice of arbitration.

Counter-claims and Section 11 Proceedings:

9. One of the differences between the 1940 Act and the 1996 Act is that under Section 20 of the former, the court had to refer the disputes to the arbitrator while in the latter, consistent with the principle of minimum judicial interference, the Chief Justice merely appoints the arbitrator.

10. Under Section 11, the Chief Justice merely appoints the arbitrator after ensuring that certain jurisdictional facts exist for the exercise of his jurisdiction and does not “refer” the parties to arbitration. Therefore, the claimant need not restrict his claim statements to disputes that were mentioned in the application under Section 11 nor is there a need for the respondent in proceedings under Section 11 to mention counter-claims.

11. Even in arbitration proceedings initiated pursuant to Section 20 of the 1940 Act, the Respondent could directly raise counter-claims before the arbitrator even without mentioning the same in the Section 20 proceedings [Indian Oil Corporation v. Amritsar Gas Service (1991) 1 SCC 533].

12. The Respondent’s contentions are based on an erroneous premise that the Chief Justice is liable to decide on the issue of limitation. As per Patel Engineering & Boghara Polyfab, the Chief Justice is has the discretion to decide whether a claim is a stale/dead claim [a claim which is “patently long time barred”- Indian Oil Corporation v. SPS Engineering 2011(1) Arb LR 373 (SC)]. The exercise of discretion in such case depends on whether it is clear at the outset that the claim was a dead claim. A question as to whether a claim was barred by limitation or not (and not whether it was “patently long time barred”) is a question for the arbitrator to decide. If the Chief Justice is not the right forum to decide questions on limitation, there is obviously no need to refer in details to the claims and counter-claims in Section 11 proceedings.

13. The reliance placed on Mustill & Boyd’s commentary is misconceived as the discussion there was pertaining to English Law prior to the Arbitration Act, 1996. Further, the observations therein were made in the context of agreements referring specific disputes to arbitration.

14. Respondent contends that in Section 11 proceedings, the court needs to ascertain the precise nature of the dispute and decide whether the dispute arises out of the arbitration agreement. Such a decision is possible, according to the Respondent, only of the claims and counter-claims are set in detail in the Section 11 proceedings. The Respondent relied on English case Hayman v Darwins Ltd. This decision is not applicable as it was rendered in respect of proceedings similar to those under Section 8 of the Act. The questions to be decided under Section 8 and 11 are different and therefore the decision is of no assistance to the Respondent.

15. In the present case, although the arbitration clause requires a party invoking arbitration to specify the disputes to be referred to arbitration, such clause cannot be taken as requiring the appointing authority to mention specific disputes to arbitration. Nor does it bar the arbitrator from deciding counter-claims.

See this post at myLAW analyses the case.

ICC Arbitration Rules 2012: Resources (Updated)

We had a post on internet resources pertaining to the new ICC Dispute Resolution Rules, 2012. The said post has been updated and links to more resources have been given. You can access the updated post from here.