"I realise that some of my criticisms may be mistaken; but to refuse to criticize judgements for fear of being mistaken is to abandon criticism altogether... If any of my criticisms are found to be correct, the cause is served; and if any are found to be incorrect the very process of finding out my mistakes must lead to the discovery of the right reasons, or better reasons than I have been able to give, and the cause is served just as well."

-Mr. HM Seervai, Preface to the 1st ed., Constitutional Law of India.

Thursday, June 30, 2016

Prejuding a Dispute in a Section 11 Related Proceeding? A Case Comment

It was expected that the Supreme Court would pass several judgements on the first day of the Court after the vacations (29.06.2016). The Supreme Court did pass several decisions and twenty three of them have been uploaded onto the Court’s website. One such decision is M/s. Emm Enn Associates v. Commander, Works Engineer (Civil Appeal 7184/2008)(AM Sapre & A. Bhushan, JJ.), which is the subject of this post. 

The Supreme Court granted Special Leave to Appeal against a decision by the High Court under Section 11 of the Arbitration and Conciliation Act, 1996 refusing to refer a dispute to arbitration. The reason for refusal by the High Court was that there was no live claim. Payment on the final bill was made in April 2001 and the Appellant chose to invoke arbitration in February 2005.

An interesting argument was put forth by the Appellant that the Audit Clause contained in the Contract meant that limitation period would begin to run only from the expiry of the two year period specified in the Contract. If this was so, the two year period would have expired in April 2003 and the arbitration would have been invoked within three years from April 2003. 

Readers may note that Audit Clause is a standard term in Government Contracts, which allows the Government to (a) audit and examine the relevant documents and papers of the Contractor for any over-payment or other erroneous payment by the Government entity to the Contractor, and (b) if such over-payment or erroneous payment is discovered, demand/ adjust the said amount from the Contractor. The power to do so exists for a limited period, usually three to four years. The interpretation of audit clauses has rarely come up before the courts. Unfortunately, the Supreme Court did not give a ruling on the impact of the audit clause on limitation, although it was raised by the Appellant (see, Para 24-25). 

[The Court got its reference to case law wrong. Having extracted Para 13(!) of the SBP & Co., the Court stated that it had cited para 14 of the judgement in “Indian Oil Corporation Ltd.” The extracted para was para 13 and it was not from Indian Oil Corpn. but was from v. SBP v. Patel Engineering.] 

The Court decided the issue on based on different reasons. The Court found that the Appellant had signed the No-Claims Certificate (as is a practice in Government Contracts) only as regards the undisputed portion of the final Bill and the payment was made for the undisputed portion alone. As regards the disputed portion of the final bill, the Court held that whether there was a live claim or not cannot be decided, on facts, in the proceedings under Section 11 but only by the arbitrator. 

Having gone ahead with this view, the court unfortunately chose to comment on the merits of the case: “The claim raised by petitioner in the facts of the case could not have been said to be a dead claim.”. Surprisingly, the Court did not give any substantive reason for it but merely stated that such a conclusion was drawn “[e]specially in view of the additional documents which have been placed” before it. The reason why it is so was not fully substantiated by the Court. 

Ultimately, the Court remitted the case to the High Court to pass consequential orders for appointment of the arbitrator for deciding the disputes between the parties. 

Three questions:
  1. If the Court stated that it was not right on the part of the High Court to decide the question as to whether there was a dead claim or not, why did it choose to give a finding on the same issue? The arbitrator ought to consider the view of the Supreme Court on this point as only a prima-facie view and has to decide the issue de novo and in full, especially given that the Supreme Court did not offer a full justification as to why it reached the conclusion that the claim was not dead one. The only justification offered, that the No-Claims Certificate was only as regards undisputed amounts is not relevant in determining whether the debt was long time-barred in the facts. No other specific and compelling reason was given by the Court.
  2. Why did the Court not decide on the contention regarding the impact of the Audit Clause on limitation when it could have either taken up the issue head on or could have stated that it was for the arbitrator to decide? 
  3. The dispute related to an Agreement that was entered into in 1998. The dispute arose by 2001. The Special Leave to Appeal was probably granted in 2008. The adjudication of the dispute is yet to begin. Despite this, was the Court correct in remitting the matter back to the High Court for appointment of arbitrators? [There was two ways of seeing this. On the one hand, it could be argued that the Court simply wasted another month in the long march of the parties towards justice by remitting the matter. See, this article (pardon the self-promotion) at p.28 & 34) On the other hand, it could be argued that the Supreme Court could not have appointed the arbitrator since it probably did not have a list of arbitrators from whom it could appoint a suitable arbitrator depending on the location of the parties and the High Court was better suited to appoint a suitable arbitrator.] 


A Layman said...

The article says, "Having gone ahead with this view, the court unfortunately chose to comment on the merits of the case: “The claim raised by petitioner in the facts of the case could not have been said to be a dead claim.”."

As the point does not seem to have been necessary for the Judgment, could one argue that the remark was merely obiter?

Badrinath Srinivasan said...

A Layman. That should technically be correct. But I am not sure if the courts, especially the High Courts and courts lower to it will view it. I do not think they'll disregard it.