"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.

Monday, December 24, 2018

Digital Archives of the Parliament Library & Why Law Univs Must Focus on Researching This

Recently, the Parliament of India has made public its archives in digitised format in the form of a separate page called Parliament Digital Library. We have just skimmed the surface of the archives. The most important thing is that it brings together in one place the legislative history of most of Indian statues, including the ones made by the British. For instance, it contains the discussions of the Council of the Governor General of India on laws such as the Indian Contract Act, 1872 (9 April 1872), and other laws enacted during the period. We will try to have detailed posts on certain laws. But this is an important resource and is a must read for all interested in Indian law, especially law academicians and researchers. 

I think it is now the solemn duty of law universities to research on this and write a lot of articles on these subjects. These will provide a better perspective on the purpose of drafting a particular provision in a particular manner. These will gave considerable insight on how statutes were enacted in India during that period.  

For instance, on liquidated damages, James Stephen said in the Council: 

"The only other matter of importance on which we have differed with the Commissioners is the question of liquidated damages. The law of England on the question whether, when a man promises in a certain event to pay a specified sum, he is bound or not to pay it in full, is rather intricate; and, in order to avoid that intricacy, the Commissioner proposed to enact that, in all cases, Such penalties should be treated as liquidated damages. We agreed that the intricacy should be removed, but, for the reasons assigned in our report, thought that it should be removed by the converse operation of turning all liquidated damages into penalties. This we proposed to qualify by an exception, which, 8.S it stands in the Bill, is not very neat, and which I propose to amend· It applies to the case of bail-bonds, recognizances, and the like, and to persons who, under the orders of Government, give bonds for the due performance of public duties."

At another place, a member of the Council noted: "As to the provisions of section 74 of the Bill, on the subject of liquidated damages, HIS HONOUR would say that he believed the Committee had done great service in putting it into a shape which, although in some respects opposed to the English law, appeared to be fair and equitable." 

Thus, the section as it originally stood was based on fairness and equity! But the way in which it was construed during the early period of the Act till 1899, as this post goes to show, was totally contrary to the intent of the drafters and the Council. It is also interesting to note that the Indian Law Commissioners, sitting in England (?), wanted to make all penalties as liquidated damages, until contrary is shown. 

Some of the information contained in the archives, such as those discussed above relating to contract law, are already in public domain in the form of secondary sources. But it is excellent to access the primary sources. Hence the excitement in this post.  

Happy researching!

Saturday, December 22, 2018

Consortium & Determination of "International"​ Character of Arbitration in India

Larsen and Toubro Limited Scomi Engineering BHD v. Mumbai Metropolitan Region Development Authority, MANU/SC/1151/2018

Case Details: Arbitration Petition (C) No. 28 of 2017
Date: 03.10.2018
Bench: Rohinton Fali Nariman and Navin Sinha, JJ.


Disputes arose between the parties under the monorail contract and the petitioners filed the application under Section 11 of the 1996 Act. The Contractor was the unincorporated consortium consisting of Larsen and Toubro Ltd. (L&T), was an Indian company, and Scomi Engineering Bhd (Scomi), a Malaysian company. The L&T and Scomi were jointly and severally liable under the contract with the Mumbai Metropolitan Region Development Authority (MMRDA). The consortium had its office in Mumbai.


  • Whether the arbitration was an “international commercial arbitration” and consequently whether the Supreme Court had jurisdiction to entertain the petition?
  • Whether an unincorporated consortium was an association of persons for the purposes of Section 2(1)(f) of the 1996 Act (as amended)?
  • When would an arbitration be an “international commercial arbitration” where the dispute is invoked by the contractor consortium, in which one of the members is a foreign company?
Some of the disputes that arose under the same contract were previously referred to arbitration. One of the preliminary issues was whether L & T and Scomi could file independent claims against MMRDA. The arbitrator negative the contention and held that they could only do so as a consortium because they bid for the project as a consortium an the contract treated them as such. This interim Award was questioned in the Bombay High Court where the High Court held upheld the interim award and negative the contentions of the petitioners, L&T and Scomi. The petitioners did not appeal against the decision and therefore the same attained finality.

Relevant legal Provisions

Section 2(1)(f), which defined the phrase “international commercial arbitration”, was amended by virtue of the Arbitration and Conciliation (Amendment) Act, 2015 and the amended provision read:
"international commercial arbitration" means an arbitration relating to disputes arising out of legal relationships, whether contractual or not, considered as commercial under the law in force in India and where at least one of the parties is—
(i) an individual who is a national of, or habitually resident in, any country other than India; or
(ii) a body corporate which is incorporated in any country other than India; or
(iii) an association or a body of individuals whose central management and control is exercised in any country other than India; or
(iv) the Government of a foreign country;”


The court rejected the petitioner’s contention that this was an “international commercial arbitration wherein the Supreme Court had the power to appoint the arbitrator and held on facts that the central management of the consortium was in India and therefore the arbitration was not an “international commercial arbitration. The Supreme Court’s decision is summarised below:

  • In view of the final decision of the Bombay High Court, L&T and Scomi could only raise disputes as a single entity. Therefore, Section 2(1)(f)(ii) will not be applicable and Section 2(1)(f)(iii) will be applicable.
  • Section 2(1)(f)(iii) speaks of “association” or “body” of persons. This is akin to the definition of “person” under Section 2(31) of the Income Tax Act, 1961, which includes an association of persons, whether incorporated or not. As such “association of persons” forms a separate category and is distinct from “body of persons”.
  • The Indian company, L&T, is the lead partner in the consortium as per the consortium agreement and the supervisory board constituted as per the consortium agreement empowers L&T to have the lead voice in the appointment of the chairman of the said board. The consortium agreement provides that the lead partner shall lead the arbitration proceedings. The office of the consortium is in Mumbai. All these factors point out that the central management and consortium are in India


The court concluded that the arbitration was not an “international commercial arbitration and dismissed the petition

Implications and Critique

The decision is significant because it explains the determination of an international commercial arbitration when one of the parties to the arbitration proceedings is a consortium and where one of the members of the consortium is an Indian party. The decision clarifies that a consortium is really an association of persons and provides guidance on the factors determinative of determining whether the central management and control is in India.

Given that classifying the Indian seated arbitration as “international commercial arbitration” and otherwise has implications on many aspects, including, especially the scope of interference into the arbitral award, the determination of the international character of the arbitration is of utmost importance.

Case comments on the decision have not evoked adverse critique or have cited past decisions. Even the Bombay High Court seems to have cited past decisions on the subject. Perhaps, the High Court need not have as the issue before it was slightly different. But the very same question in respect of a consortium of parties was raised before the Supreme Court in Reliance Industries Limited v. Union of India. The court passed three crucial orders, viz., orders dt. 31.03.2014, 02.04.2014 and 29.04.2014 in the matter. Of these, the last two orders merely modify the operative portion relating to the identity of the arbitrator. The order dt. 31.03.2014, reported in 'MANU/SC/0257/2014, is virtually on the same question where the SS Nijjar, J., acting as the designate of the Chief Justice, reached the opposite result, that the arbitration invoked by the consortium through its operator was an international commercial arbitration for the purposes of Section 2(1)(f). Similarities between the two cases are striking and are listed below:
  • Both related to a consortium, named as “contractor” in the contract, and some of the members of the consortium were Indian companies and some were non-Indian.
  • In both, the lead member (or the operator) who was empowered to act on behalf of the consortium was the Indian company.
  • The benefit of success or failure in the arbitration would have been to all the members of the consortium.
Of course, some would argue that Section 11 decisions pre-2015 amendments were not binding precedents. But then, is it really true? There are umpteen number of decisions have considered Section 11 determinations pre-23.10.2015 to be de facto binding. Even the Supreme Court in this very case (dt. 03.10.2018) stated: “This was for the reason that the judgment of this Court, in TDM Infrastructure Private Ltd. v. UE Development India Private Ltd.” (emphasis supplied). The Delhi High Court. in GMR Energy Limited vs. Doosan Power Systems India Private Limited and Ors. (14.11.2017 - DELHC) : MANU/DE/3689/2017 and the Madhya Pradesh High Court in Sasan Power Limited vs. North American Coal Corporation India Private Limited have held that the observations in TDM Infrastructure (para 36) that the observations of the court were in order to determine the court’s jurisdiction and not for other purpose meant that the decision was not a binding precedent. The High Courts are wrong. The observation in TDM does not mean that the decision should not be cited as precedent; rather, it means that the observations cannot be treated as observations on the merits of the case before the arbitrator or otherwise. This is pretty standard in Section 11 petitions and such observations are pretty common even in the decisions by the High Court designates. The Delhi High Court and the Madhya Pradesh High Court in the aforesaid cases seem to have misconstrued this observation in TDM Infrastructure.

Therefore we have two sets of decisions on whether an Indian seated arbitration invoked by a contractor-consortium consisting of a foreign party against an Indian party would be an international commercial arbitration. L&T mentions the “office of the consortium” as if to signify that distinct from the offices of the individual members of the consortium, the consortium had a separate office. This, coupled with the final decision of the Bombay High Court in L&T could be construed by future courts to be determinative factors in choosing from among the two opposite views of the Supreme Court.

Wednesday, December 12, 2018

Retrospective Operation of the Specific Relief (Amendment) Act, 2018

As stated in several previous posts in this blog, the Specific Relief (Amendment) Act, 2018 (“2018 Act”) brings several substantive changes in the Specific Relief Act, 1963 (“1963 Act”) thereby drastically altering contract remedies. Given that these amendments were brought into force from 01.10.2018, questions are likely to arise as to the retrospective operation of various provisions.

Bengaluru City Civil Court Decides

One of the first decisions on this issue is from the XII Additional City Civil Court, Bengaluru in OS No. 5395/2011 (Somashekar v. Lt. Col. Appu Ramanand Sharma (Retd.). The suit is for specific performance of an agreement to sell an immovable property and has been pending from 2011. When the matter was at the stage of arguments, the Plaintiff argued that the amendments to the 1963 Act have done away with the discretion of courts to order specific performance and that if the agreement is proved, the court is obligated to order specific performance.

The court rejected the contention of the plaintiff on this issue and held that the 2018 Amendment was not retrospective. The court relied on Section 1(2) of the 2018 Amendment, which provided:

"It shall come into force on such date as the Central Government may, by notification in the Official Gazette, appoint and different dates may be appointed for different provisions of this Act and any reference in any such provision to the commencement of this Act shall be construed as a reference to the coming into force of that provision."

On the basis of the above provision, the court concluded that the amendment was given a prospective effect. While the reasoning is not completely in accord with the legal provisions, the court was correct in rejecting the contentions of the Plaintiff on retrospectivity because the cause of action arose prior to the suit in 2011.

While the decision does not have any precedential value, this is perhaps one of the earliest decisions on the issue.

Whether the 2018 Act is Retrospective?

On the question of retrospectivity of the 2018 Act, readers would do well to have a look at this blog post on the subject. This post puts forth the following points:
  • The 2018 Act does not contain any savings clause or a transitory provision.
  • The 2018 Act is in the nature of substantive law since it provides for substantive changes in the law of remedies.
  • Remedial statutes are prospective.
  • In view of Section 6 of the General Clauses Act, 1897, the rights and obligations accrued prior to the bringing into force of 2018 Act (01.10.2018) would stand undisturbed by the 2018 Act.
  • The 2018 Act would be applicable to all breaches and disputes subsequent to bringing into its force.
  • This is irrespective of whether the contract was concluded before the 2018 Act came into force.
Thus, any breach (or cause of action) that arose on or after 01.10.2018 would be governed by the 2018 Act. This is even if the contract was signed before 01.10.2018.

Whether Absence of a Savings Provision or Transitory Clause is a Lacuna?

It is suggested in the aforesaid post that there is no savings provision or transitory clause and a similar absence has caused several problems in the context of the Arbitration and Conciliation (Amendment) Act, 2015. The analogy of the problems regarding retrospectivity, a subject well-discussed in this blog, with that of the 2018 Act is misconceived. While the arbitration amendments were both procedural and non-procedural, the amendments in the 2018 Act are substantive in nature, as the above blog states. Therefore, there is no reason why such a provision should be there. Such savings provisions are not common when an amending statute amends substantive law (as it is known), unless specific reasons warrant otherwise.

Tuesday, December 11, 2018

New Delhi International Arbitration Centre Bill, 2018 in the Winter Session of Lok Sabha

The Winter Session of the Parliament is beginning from today (11.12.2018). The New Delhi International Arbitration Centre Bill, 2018 is listed in the List of Business in the Lok Sabha for today. The broad aims of the Bill are to:
establishment and incorporation of New Delhi International Arbitration Centre for the purpose of creating an independent and autonomous regime for institutionalised arbitration and for acquisition and transfer of undertakings of the International Centre for Alternative Dispute Resolution and to vest such undertakings in the New Delhi International Arbitration Centre for the better management of arbitration so as to make it a hub for institutional arbitration and to declare the New Delhi International Arbitration Centre to be an institution of national importance and for matters connected therewith or incidental thereto, be taken into consideration. 

  • establish and incorporate the New Delhi International Arbitration Centre (NDIAC);
  • create NDIAC as an independent and autonomous institution for institutionalised arbitration;
  • acquisition and transfer of undertakings of the ICADR- International Centre for ADR and to vest such undertakings in the NDIAC for better management of arbitration so as to make it a hub of institutional arbitration; and
  • to declare NDIAC as an institution of national importance.
We had discussed the Bill in a previous post in the form of a presentation. Do have a look at it. With the election results being announced in a few states today and the current political climate, this blogger is not sure if the Parliament is going to discuss Bills today. Most likely the legislative bills would be taken after Wednesday. We'll keep the readers posted on further developments. 

Thursday, December 6, 2018

Comments on the (Indian) Arbitration & Conciliation (Amendment) Bill, 2018

The Arbitration & Conciliation (Amendment) Bill, 2018 (“2018 Bill”) has been passed by the Lok Sabha and is now to be taken up before the Rajya Sabha of the Indian parliament this winter session. The Arbitration and Conciliation Act, 1996 is an important legislation because arbitration constitutes a significant part of the ecosystem of dispute resolution mechanisms. Arbitration is the default mode of dispute resolution in commercial contracts. 

Recognising this, the Government has sought to tweak the arbitration law after gaining experience from the amendments made in 2015. The 2018 Bill is pursuant to the recommendations of the Srikrishna Committee constituted by the Government to improve the institutional arbitration mechanism in India. It seeks to establish India as a robust centre for international arbitration and modify some of the recent amendments made to the Arbitration & Conciliation Act, 1996 given the experiences gained in implementing those provisions. 

The amendments contained in the 2018 Bill are far reaching and has the potential to completely alter the way in which arbitration law functions in India. Many commentators have stated that the proposed amendments should not disturb the amendments already made since those amendments have markedly improved Indian arbitration. However, many have also criticized certain provisions of the 2015 amendments, especially those relating to Section 29A fixing time limits for arbitration and increase in court interventions.

This paper critically evaluates certain provisions of the 2018 Bill, suggests changes to the Bill, and provides detailed reasons in support of the changes proposed in this paper.

Thursday, November 22, 2018

NLSIR-Samvād Partners Symposium: on 'The Sovereign Rights Dichotomy: Exploring Migration, Refugees and Citizenship'

See the below invite from NLSIR for a symposium:

Invite for XII NLSIR-Samvād: Partners Symposium

As we live through the “century of people on the move”, several States are grappling with the challenges posed by large-scale movement of persons. Migrants moving for better opportunities, and refugees fleeing violence and persecution, are often viewed as threats to the national security of their country of destination. As a response, those who emphasize on the need for protection of human rights push for the political, social, and economic integration of these people, and the eventual grant of full membership as citizens. While this is essential, the sovereignty-rights discourse often overlooks the opportunities for economic development that are created due to these large-scale movements. The XII NLSIR Symposium attempts to discuss these challenges and opportunities in the context of India. Its legal framework governing migrants, refugees, and citizenship has become the subject of much debate in light of the changing political and legal landscape. A discussion on these issues is therefore relevant and the need to explore a viable way forward for India is indeed a pressing one. 

This Symposium is divided into three sessions. The first session places India’s migration policy in the larger context of the international legal framework governing migration. The second session seeks to highlight the position of refugees in India and explore the interplay between India’s constitutional guarantees and the obligations under international law for protection of refugees. The final session seeks to shed light on citizenship and social, political, and economic integration of persons within India. The questions here shall be viewed in the context of the ongoing National Register of Citizens (NRC) exercise in Assam and the pending Citizenship (Amendment) Bill, 2016, both of which pose crucial constitutional questions. 

We have following speakers lined up for the three sessions:

Session I: India’s Migration Policy: Institutionalized Stigma? 

Mr. Gurucharan Gollerkeri, Director, Public Affairs Centre, Bangalore. 

Ms. Hamsa Vijayaraghavan, Legal Director, Migration and Asylum Project. 

Ms. Madhurima Dhanuka, Coordinator, Commonwealth Human Rights Initiative. 

Ms. Seeta Sharma, Technical Officer, EU-India CAMM Project, International Labour 

Session II: On Shifting Sands: India’s Refugees And The Way Forward 

Dr. Ashwani Kumar, Senior Advocate, Former Union Minister of Law and Justice. 

Mr.. Saurabh Bhattacharjee, Assistant Professor, National University of Juridical Sciences, Kolkata (NUJS)

Dr. Srinivas Burra, Associate Professor, South Asian University (SAU) 

Mr. Prashant Bhushan, Advocate in Mohammad Salimullah v. Union of India 

Ms. Roshni Shanker, Founder, Migration and Asylum Project 

Ms. Cheryl D’souza, Advocate in Mohammad Salimullah v. Union of India 

Session III: Courting Issues of Citizenship 

Mr. Alok Prasanna Kumar, Senior Resident Fellow, Vidhi Centre for Legal Policy. 

Mr. Arijit Sen, Program Manager, Amnesty International India. 

Ms. Leah Verghese, Senior Campaigner & Researcher, Amnesty International India. 

Mr. Derek O’Brien, Member of Parliament, Rajya Sabha*

Dr. Ranabir Samaddar, Director, Mahanirban Calcutta Research Group*

The cost of participation will be Rs. 1000 per head which includes accommodation on 8th and 9th night, the delegate fee for the conference, and all meals during the conference. If delegates do not require accommodation, then the cost is Rs. 600 for the delegate fee for the conference and the meals during the conference. Further, we can only accommodate limited people on campus. Thus, the requests for accommodation for every delegation would be entertained on first-come-first-serve basis. We will provide individual certificates to students and a delegation certificate signifying that your esteemed university participated in the conference. 

This is also a mandatory registration form for all interested students - https://goo.gl/forms/SjyG0kWlUpMmAQz92. This form must be filled by December 1, 2018, failing which the students will not be able to attend the event.

For further information, please contact Mr. Sharan A. Bhavnani (Editor-in-Chief): +91-9686338767; Ms. Nikita Garg (Deputy Editor-in-Chief): +91-9945767507 or email us at nlsir@nls.ac.in with the subject – “Query: NLSIR Symposium”.

Thursday, November 8, 2018

Confidentiality under the Arbitration Amendment Bill 2018 & the Right to Information

The Right to Information Act, 2005 (2005 Act) is an important legislation through which transparency is ensured. It is an important tool in the fight against corruption. Reasons for non-transparency can also exist in the context of government contract and arbitration. It is precisely why the 2005 Act includes "contracts", "records", "documents", and generally "any material in any form" to include contracts, documents or records thereunder and even arbitral awards. Since public procurement in India is substantial, it is important that government actions through the records, including arbitration and court litigation, are accessible to public.

In Rama Aggarwal v. Delhi State Legal Services Authority, the Chief Information Commission held that the Right to Information Act, 2005 overrode the provisions of the Arbitration and Conciliation Act, 1996 (para 17/ 18).

This position is now likely to be upset owing to the upcoming Arbitration and Conciliation (Amendment) Bill, 2018 that is likely to be discussed in the Parliament this winter session. Section 9 of the Bill seeks introduction of Section 42A to the Arbitration and Conciliation Act, 1996 (1996 Act). Section 9 reads:

"Notwithstanding anything contained in any other law for the time being in force, the arbitrator, the arbitral institution and the parties to the arbitration agreement shall keep confidentiality of all arbitral proceedings except award where its disclosure is necessary for the purpose of implementation and enforcement of award."

A bare perusal of the proposed section conveys that the parties are mandated to keep the arbitral proceedings confidential irrespective of any law in force, except the award, which can be disclosed for the purpose of implementation and enforcement. The non-obstante clause theoretically includes the 2005 Act also. This has serious implications on transparency in government contracting and pursuit of government litigation. 

While the right to information is a constitutional right, Section 42A, if enacted in the current form, would only be a statutory right. Therefore, notwithstanding the notwithstanding form of Section 42A, courts are likely to hold that the duty of the Government to disclose the arbitral proceedings and the award overrides the duty to maintain confidentiality in Section 42A. But this is likely to take some years for the courts to decide. Meantime, the Information Commissioners will have a free ride in rejecting information relating to arbitration proceedings. 

Lawyers and others in the field need to write to the Government to exempt the Right to Information Act, 2005 from the operation of Section 42A with appropriate modifications. The provision can be modified by adding the phrase "but subject to the provisions of the Right to Information Act, 2005" in Section 42A in the following manner:

"Notwithstanding anything contained in any other law for the time being in force, but subject to the provisions of the Right to Information Act, 2005 (No. 22 of 2015) the arbitrator, the arbitral institution and the parties to the arbitration agreement shall keep confidentiality of all arbitral proceedings except award where its disclosure is necessary for the purpose of implementation and enforcement of award."

A problem with this wording would be that it could seem to allow disclosure even by the arbitrator or by the arbitral institution as well. Instead, a provsio could be added to Section 42A to the effect that: "Provided that nothing contained in Section 42A shall affect the Right to Information Act, 2005 (No. 22 of 2015)."

Readers may peruse the decision of the Australian High Court's decision in Esso Petroleum v Plowman which discusses confidentiality in arbitral proceedings and the public interest in disclosure of governmental actions.

Saturday, October 20, 2018

Opportunity of Hearing to Arbitrators? Arbitration & Conciliation (Amendment) Bill 2018

We had done several posts (see here, here, here, and here) critiquing various aspects of the Arbitration & Conciliation(Amendment) Bill, 2018 (2018 Bill) that is to be taken up by the Rajya Sabha in the coming winter session.In this relatively short post, we discuss a proposed amendment that requires reconsideration.

Section 6(b) of the 2018 Bill proposes two provisos to Section 29A(4) of the Arbitration and Conciliation Act, 1996 (1996 Act), one of which is the focus of this post. This proviso grants an opportunity of hearing to the arbitrator/ arbitral tribunal in the reduction of fee. It reads: “Provided also that the arbitrator shall be given an opportunity of being heard before the fees is reduced.”

To provide a brief background, the 1996 Act was amended in 2015 wherein Section 29A was introduced. Section 29A(1) fixed a period of twelve months from the date the tribunal enters upon reference to pass the arbitral award. Section 29A(3) provides for extension of up to six months based on agreement between the parties. Section 29A(4) provides that in case the award is not made within twelve months or the extended period, the court can order the termination of the arbitrator’s mandate.

Proviso to Section 29A(4) states that in extending the period, if the court finds that the tribunal was responsible for the delay, the court could reduce the fee of the tribunal. It is in respect of this proviso that the further provisos are sought to be added.  The 2018 Bill in adding a proviso seeks to grant the arbitrator/ tribunal an opportunity of hearing while considering whether to reduce the fee or not. 

This provision has been made pursuant to the recommendations of the Hon’ble Mr. Justice (Retd.) Srikrishna Committee. The relevant portion of the Report reads:

The Committee is also of the view that the power of the court in the provisos to section 29(4) and (6) to substitute the arbitrator(s) or order a reduction in the fees of the arbitrators when hearing an application for extension under section 29(5) is rather peculiar. These provisions ought to be modified, as the arbitrator is not being heard before he / she is penalised, as only the parties to the arbitration are before the court. Even if such an opportunity were to be afforded, practically, it would lead to problems affecting the integrity of the arbitral process. Arbitrators would be wary of being foisted with a reduction in fees and have a perverse incentive to rush through proceedings to render the award within the stipulated time period. Further, if an application for reduction of fees of the arbitral tribunal were to be denied and an extension granted, it would strain relations between the tribunal and the party applying for the same. The punitive nature of these provisions may also act as a deterrent for reputed arbitrators from accepting domestic arbitrations...  There also exist no provisions empowering the court to order a reduction of the fees of the arbitrator… A new sub-section should be inserted in section 29A providing that where the court seeks to reduce the fees of the arbitrator(s), sufficient opportunity should be given to such arbitrator(s) to be heard.”

The recommendation seeks to protect the interest of the arbitrator/ tribunal when it comes to reduction of fee. 

It is submitted that if this amendment is implemented, it would only lower the position of the arbitrator/ arbitral tribunal to the level of a party to the arbitral proceedings. Section 36 of the 1996 Act treats an award almost equivalent to the decree of a civil court. Although the arbitrator is a creation of the contract, the jurisdiction exercised is nearly the same as that of a District Court or of the original side of a Chartered High Court. The arbitrator/ tribunal is not even a necessary or a proper party in the proceedings relating to setting aside awards: it is sufficient if the record of the tribunal is handed over to the court. Given all these aspects, it is not correct to lower the position of the arbitral tribunal to that of a party in the proceedings. Therefore, it is not in the right spirit of the law to make the arbitrator a party to the proceedings. For the same reasons, it is not correct for the court to reduce the fee of the arbitrator. Would the court reduce the salary of judges if the proceedings drag on due to repeated adjournments?

If proceedings are pending before courts under Section 29A, parties would rarely seek reduction by withholding certain documents evidencing delay on their part since the other side would be likely to use such suppression of documents against the first party in the court or in the arbitral proceedings. If the arbitrator considers such reduction to be unreasonable, she could very well stop acting as the arbitrator. Hence, by the very nature of the proceedings, the arbitrator's interests are duly protected.  

In view of the above, the following can be done:
  • The proviso to Section 29A(4) can be deleted.
  • Instead, the Council to be established under Part IA of the 1996 Act could frame rules to the effect that grading of arbitrators should be on the basis of whether the arbitrators are able to strictly comply with the time limits provided in Section 29A.
  • If the amendments are passed without considering these aspects, courts should construe this proviso to provide an opportunity of hearing to arbitrators only in exceptional cases. 

More on the 2018 Amendments in another post.

Trade, Law and Development: Call for Submissions

Call for Submissions from Trade, Law and Development

Call for Submissions
Special Issue onTrade Facilitation
Founded in 2009, the philosophy of Trade, Law and Development has been to generate and sustain a constructive and democratic debate on emergent issues in international economic law and to serve as a forum for the discussion and distribution of ideas. In keeping with these ideals, the Board of Editors is pleased to announce Trade Facilitationas the theme for its next Special Issue (Vol. XI, No. 1).
Trade facilitation is the simplification, modernisation, and harmonisation of international trade procedures. It helps simplify customs procedures by reducing costs and improving their speed and efficiency through a multilateral understanding. The Trade Facilitation Agreement (‘TFA’) entered into force on February 22, 2017 and is one of the first major new agreements reached by the member countries of the WTO since its establishment in 1995. It contains provisions for expediting the movement, release and clearance of goods,sets out measures for effective cooperation between customs and other appropriate authorities on trade facilitation, and contains provisions for technical assistance and capacity building in this area.
There is extensive empirical data to suggest that trade facilitation can significantly boost trade. However, several concerns exist regarding the projected benefits of the TFA, its implementation, and its enforcement in an increasingly protectionist trade environment. There is also uncertainty as to how the TFA will bring uniformity and consistency in the border management of developing and least-developed countries and the role of the Committee on Trade Facilitation in this respect. Moreover, most regional and bilateral preferential trade agreements negotiated in the recent past have incorporated varying provisions related to trade facilitation. It is unclear whether the TFA has been successfully able to achieve broad application of these commitments. These subjects have not received sufficient attention from mainstream academia yet. Consequently, existing literature is inadequate to effectively equip policymakers to deal withsuch issues.
Alongside this, India has been championing trade facilitation in services at the WTO.Trade in services too faces various barriers at and behind the border, which poses difficulties for service providers from developing countries like India in accessing key markets. India’s proposal focussed on making existing market access meaningful through reduction in transaction costs arising from unnecessary regulation. The proposal received a mixed response. Some Members like China even supported the proposed agreement going beyond the scope of domestic regulation under GATS, while others expressed concerns regarding the need for a separate legal text for trade facilitation in services and the nature and scope of the obligations put forth therein.
This Special Issue, currently scheduled for publication in July 2019, will provide an ideal platform to deliberate on trade facilitation initiatives at the WTO and how they relate to more regional initiatives.Accordingly, the Board of Editors is pleased to inviteoriginal and unpublished submissions for the Special Issue on Trade Facilitation forpublication as ‘Articles’, ‘Notes’, ‘Comments’ and ‘Book Reviews’.
Manuscripts may be submitted via e-mail, ExpressO, or through the TL&D website. For furtherinformation about the journal and submission guidelines, please visit www.tradelawdevelopment.com.
In case of any queries, please feel free to contact us at: editors[at]tradelawdevelopment[dot]com.


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Saturday, October 6, 2018

Union of India v Hardy Exploration & Production (2018: SCI): A Critique

We had a guest post in this blog providing a descriptive comment on the decision of the two judge Bench in Union of India v Hardy Exploration & Production (India) Inc (2018: SCI)("Hardy I") referring the matter to a larger Bench of the Supreme Court. Thereafter, a three judge Bench of the Supreme Court consisting of Dipak Misra, CJI, AM Khanwailkar & Dr DY Chandrachud, JJ. have decided the issue ("Hardy II") on 25.09.2018 (see here for the decision). This post discusses the decision.

Agreement Concerned:

The agreement between Union of India ("UOI") and Hardy Exploration & Production (India) Inc ("HEPI") provided, among other things:

"32.1 This contract shall be governed and interpreted in accordance with the laws of India.
32.2 Nothing in this contract shall entitle the contractor to exercise the rights, privileges and powers conferred upon it by this contract in a manner which will contravene the laws of India.
33.2 Matters which, by the terms of this Contract, the Parties have agreed to refer to a sole expert and any other matters which the Parties may agree to so refer shall be submitted to an independent and impartial person of international standing with relevant qualifications and experience appointed by agreement between the Parties. Any sole expert appointed shall be acting as an expert and not as an arbitrator and the decision of the sole expert on matters referred to him shall be final and binding on the Parties and not subject to arbitration.
If the Parties fail to agree on the sole expert, then the sole expert shall be appointed, upon request by one of the Parties, by the Secretary General of the Permanent Court of Arbitration at the Hague, from amongst persons who are not nationals of the countries of any of the countries of any of the Parties.
33.3 Subject to the provisions herein, the Parties hereby agree that any unresolved dispute, difference or claim which cannot be settled amicably within a reasonable time may, except for those referred to in Article 33.2 be submitted to an arbitral tribunal for final decision as hereinafter provided.
33.5 Any Party(ies) may, after appointing an arbitrator request the other Party(ies) in writing to appoint the second arbitrator. If such other Party(ies) fails to appoint an arbitrator within forty five (45) days of receipt of the written request to do so, such arbitrator may, at the request of the first Party(ies), be appointed by the Secretary General of Permanent Court of Arbitration at Hague, within forty five (45) days of receipt of such request, from amongst persons who are not nationals of the country of any of the parties to the arbitration proceedings.
33.6 If the two arbitrators appointed by the Parties fail to agree on the appointment of the third arbitrator within thirty(30) days of the appointment of the second arbitrator and if the Parties do not otherwise agree the Secretary General of Permanent Court of Arbitration at Hague may at the request of either Party and in consultation with both, appoint the third arbitrator who shall not be a national of the country of any Party.
33.9 Arbitration proceedings shall be conducted in accordance with the UNCITRAL Model Law on International Commercial Arbitration of 1985 except that in the event of any conflict between the rules and the provisions of this Article 33, the provisions of this Article 33 shall govern.
33.10 Notwithstanding anything to the contrary contained in Article 30, the right to arbitrate disputes and claims under this Contract shall survive the termination of this Contract.
33.12 The venue of conciliation or arbitration proceedings pursuant to this Article unless the parties otherwise agree, shall be Kuala Lumpur and shall be conducted in English language. Insofar as practicable the parties shall continue to implement the terms of this contract notwithstanding the initiation of arbitration proceedings and any pending claim or dispute."

The agreement related to the Pre-BALCO period and therefore the law as stated in Bhatia International applied to it, that is, Part I of the Arbitration & Conciliation Act, 1996 (1996 Act) applied even to foreign arbitrations, unless excluded expressly or impliedly. 

Disputes arose between the parties and the same was referred to arbitration. The arbitral proceedings were held in Kuala Lumpur and the award was made and signed at Kuala Lumpur and was against the Union of India. The Union of India challenged the award u/s 34 of the Indian Arbitration & Conciliation Act, 1996 (1996 Act), which was dismissed as Part I, including S. 34, was not applicable since the place of arbitration was Kuala Lumpur. A review petition filed against the dismissal was also rejected. On appeal to a Division Bench of the Delhi High Court, the matter was dismissed. The Court's reasoning is quoted below:

"The said contract does not specifically mention the place or seat of arbitration. But, it is clear that the award was made at Kuala Lumpur. It is also clear that the UNCITRAL Model Law, 1985 is applicable. As already indicated above, Article 20(1) of the UNCITRAL Model Law, 1985 makes it clear that the parties are free to agree on the place of arbitration, failing which, the place of arbitration shall be determined by the arbitral tribunal having regard to the circumstances of the case, including the convenience of the parties. There is no express determination of the place of arbitration by the arbitral tribunal. However, the arbitration proceedings were conducted at Kuala Lumpur and the award has been made and signed at Kuala Lumpur. Because of Article 31.3 of the UNCITRAL Model Law, 1985, the date of making the award and the place of arbitration as determined in accordance with Article 20(1) is required to be stated in the award. Since there is no mention of any dispute with regard to the place of arbitration in the award made by the Arbitral Tribunal, it can safely be presumed that the award having been made at Kuala Lumpur, the place of arbitration as distinct from the venue of the arbitration, would also be Kuala Lumpur."

On facts, the court found that Part I of the 1996 Act was impliedly excluded, and therefore dismissed the appeal. Union of India appealed to the Supreme Court, whose decision is summarised below:
  • The decision in Sumitomo Heavy Industries was applicable in the context of the Arbitration Act, 1940 and would have no application in respect of the 1996 Act (Para 8).
  • The arbitration clause has to be properly construed to find out if the arbitration clause determines the seat or not (para 17). 
  • As a matter of principle, Part I could be excluded if, on facts, the juridical seat is outside India or the law governing the arbitration agreement is a law other than Indian law , as was held in Union of India v. Reliance Industries Ltd. (2015) 10 SCC 213 (Reliance II)(Para 18).
  • In IMAX Corporation (2017) 5 SCC 331, the Supreme Court held that the parties chose ICC arbitration and left the choice of seat to the ICC, which consulted the parties and chose ICC as the seat. The relevant awards were made in London. Therefore, the court concluded that Part I was excluded (Para 20).
  • In Roger Shashoua (2017) 14 SCC 722,  the Supreme Court held that where the parties had chosen a venue and there was something else the court has to determine whether these can be interpreted to mean a choice of juridical seat. In that case, since London was also the choice of the parties of the courts, London was decided to be the jurisdiction (Para 21).
  • The arbitration clause has to be read in a holistic manner to determine the jurisdiction of the court (Para 23).
  • If there is a mention of venue and something else is appended thereto, depending on the nature of the prescription the court can come to a conclusion as to the implied exclusion of Part I (Para 23).
  • UNCITRAL Model Law on International Commercial Arbitration 1985 which is applicable as per the agreement provides that the place of arbitration is to be determined by the arbitral tribunal (Para 27). Further Article 31(3) requires the tribunal to state in the award the date and place of the arbitration as determined under Article 20(1)(Para 29)
  • The parties had not chosen the seat and the arbitral tribunal was therefore required to determine the arbitral tribunal considering the convenience of the parties and the tribunal is clearly obligated to state the same in the award (Para 31).
  • Determination requires a positive act but the arbitrator held the meeting at Kuala Lumpur and passed the award. This does not amount to determination. The sittings held at various places are relatable to the venue and cannot be equated with the seat. (Para 32).
  • When the place is stated it is equivalent to seat "[b]ut if a condition precedent is attached to 'place', the condition precedent has to be satisfied so that the place can become equivalent to seat. In the instant case, as there are two distinct and disjunct riders, either of them have to be satisfied to become a place." (Para 33).
  • There is no determination here as determination signifies expressive opinion, as per Law Lexicon and Black's Law Dictionary.  (Para 33).
  • A venue can become a seat if one of the conditions precedent is satisfied and does not assume the status of seat. In the present case therefore Kuala Lumpur is not the seat of or place of arbitration and the interchangeable use cannot apply (Para 33). 
On the basis of the aforesaid reasoning, the Supreme Court held that Part I applied and Indian courts had jurisdiction. Consequently, the Supreme Court set aside the Delhi High Court's decision and remanded back the matter to the Delhi High Court to decide the Section 34 petition.


It is submitted that the reasoning and the eventual conclusion of the three Judge Bench of the Supreme Court consisting of Dipak Mistra, CJI, AM Khanwilkar & Dr. DY Chandrachud, JJ. are not correct. At the outset, this decision cannot be and should not be read as a general proposition regarding the rules of choice of seat in the absence of an expression determination thereof  in the BALCO regime. This should have a restricted application only regarding pre-BALCO regime: the ratio is only regarding an arbitration clause to which BALCO did not apply. Why? BALCO (2012) applied only prospectively.

Before we go into the detailed reasoning, we wish to draw the attention of the readers to these observations in the judgement:  

"When a 'place' is agreed upon, it gets the status of seat which means the juridical seat. We have already noted that the terms 'place' and 'seat' are used interchangeably. When only the term 'place' is stated or mentioned and no other condition is postulated, it is equivalent to 'seat' and that finalises the facet of jurisdiction. But if a condition precedent is attached to the term 'place', the said condition has to be satisfied so that the place can become equivalent to seat. In the instant case, as there are two distinct and disjunct riders, either of them have to be satisfied to become a place... The said test clearly means that the expression of determination signifies an expressive opinion. In the instant case, there has been no adjudication and expression of an opinion. Thus, the word 'place' cannot be used as seat. To elaborate, a venue can become a seat if something else is added to it as a concomitant. But a place unlike seat, at least as is seen in the contract, can become a seat if one of the conditions precedent is satisfied. It does not ipso facto assume the status of seat."

The above observation treats the term 'seat' and 'place' as two different concepts. Seat is place. Period. [see, Gary Born, International Commercial Arbitration 20152 (2014)- "it is important to distinguish between the “seat” of the arbitration (sometimes referred to as the “place” of the arbitration)".] UNCITRAL has a tradition of using the term 'place' to signify seat. Nothing more nothing less. Therefore, the observations in the first few sentences quoted above regarding conditions precedents and place are completely wrong and have been rendered without considering the evolution of international commercial arbitration and the UNCITRAL instruments, including the UNCITRAL Model Law based on which Section 21 of the 1996 Act is based. See, this link and the links provided under the head "Seat of Arbitration for a discussion regarding the use of the term "place" in UNCITRAL instruments.

At the cost of making this post lengthier, we quote some of the discussions held in the UNCITRAL during the revision of its Arbitration Rules. The then prevailing UNCITRAL Arbitration Rules, 1976, like our 1996 Act, employed the term 'place' to signify the arbitral seat. In its 45th Session, the Working Group discussed whether the  term should be substituted with "seat':

"88. A proposal was made to replace the words “place of arbitration” in article 16, paragraphs (1) and (4) with words such as “the seat of arbitration” or “the juridical seat of arbitration”. Reservations were expressed as to whether the proposed words would in fact improve the understanding of the provision. It was observed that users were often unaware of the legal consequences attached to the term “place of arbitration”. It was suggested that a reference to the “seat of arbitration” could signal the legal implications of that notion and could differ from the physical place where certain elements of the arbitral procedure were carried out or where an arbitrator might sign the award." Report of the Working Group on Arbitration and Conciliation on the work of its forty-fifth session A/CN.9/614

Ultimately the proposal to change the terminology was not retained as the usage of 'seat' was inconsistent with other UNCITRAL instruments such as the Model Law. Report of the Working Group on Arbitration and Conciliation on the work of its forty-fifth session A/CN.9/614That being the history of the use of the term 'place', the observations quoted in Para 33 of the judgement relating to 'place' are wholly wrong. 

Another error that the judgement suffers from is importing the requirement into the Model Law that place of arbitration has to be expressly determined. It need not be expressly stated or expressly determined. To support its conclusion that 'determination' signified 'expressive opinion', the Supreme Court cited Ramanatha Aiyer's Law Lexicon and Black's Law Dictionary. Both these works cited court decisions in totally different contexts. 

Aiyer's Law Lexicon cited the decision of the Supreme Court in Jaswant Sugar Mills Ltd. v. Lakshmi Chand AIR 1963 SC 677, which dealt with the meaning of the term "determination" in the context of Article 136 of the Constitution of India and had nothing to do with arbitration, let alone the interpretation of the term in the context of UNCITRAL instruments. Black's Law Dictionary cited the decision Dyken Joint Venture v. Van Dyken 279 N.W.2d 459. Nowhere in the decision does the Wisconsin Supreme Court define "determination". Even the use of the term in the judgement was in the context of interpreting a statute and this had nothing to do with "determination" in the context of international commercial arbitration, much less the UNCITRAL instruments. 

For the time being let us assume that the arbitration tribunal did not decide on the seat. What happens if neither the parties chose the seat nor the tribunal determined it? UNCITRAL's Digest on the Model Law states the following:

"Article 20 does not provide for the situation where an arbitral tribunal fails to make such a determination. If the place of arbitration is neither agreed upon by the parties, nor determined by the arbitral tribunal, the courts might have to determine the place of arbitration. In such a case, it was found that the effective place of arbitration, i.e. the place where all relevant actions in the arbitration have taken place or, if this cannot be determined, the place of the last oral hearing, should be the place of arbitration."

One would notice that not a single prominent work  on international commercial arbitration was cited in the Supreme Court's judgement, which is surprising considering Supreme Court's previous practice of citing from many major commentaries on the subject. Had it looked for such authorities, it would have found the the Model Law Digest cited the decision of the German Court (CLOUT case No. 374-also reproduced under CLOUT case No. 408) [Oberlandesgericht Düsseldorf, Germany, 6 Sch 02/99, 23 March 2000-link]. The decision partially supports the decision of the Supreme Court in the instant case but goes on to reach the opposite result based on another reasoning. The relevant portion of the decision is quoted here: 

"If the parties have not agreed on a place of arbitration, such place is determined by the arbitral tribunal.The mere mentioning of a geographical place in the arbitral award can not be understood as a determination. If neither the party nor the arbitral tribunal has determined the place of arbitration, search place is fixed by reference to the "effective place of arbitration" or, by reference to the place of arbitration the last oral hearing."

Note that in this decision the court holds that the "mere mentioning of a geographical place in the arbitral award" cannot be understood as a determination but then goes on to hold that if  neither the party nor the tribunal has determined the place of arbitration, the place is fixed by reference to the effective place of arbitration or by reference to the place of the last oral hearing. It appears on facts that the hearings were held in Kuala Lumpur and therefore even by this judgement, the effective place of arbitration and the place of the last oral hearing were in Kuala Lumpur, the seat should have been Kuala Lumpur. 

It is submitted that the German judgement is erroneous in its decision that mentioning of the geographical place cannot be a determination. So is the Supreme Court in reaching the same conclusion. Let us see why. 

Section 20(1) states: "The parties are free to agree on the place of arbitration. Failing such agreement, the place of arbitration shall be determined by the arbitral tribunal having regard to the circumstances of the case, including the convenience of the parties." Section 20(1) provides that in case parties do not agree on the place, the tribunal shall determine the place having regard to the circumstances of the case, including the convenience of the parties. In the instant case, there was no express choice by the parties. It appears that the hearings were held in Kuala Lumpur. It also appears that the tribunal did not expressly determine the place. But is this necessary? In other words, does Section 20(1) or any other provision in the Model Law require the tribunal to decide the place expressly? Ideally, it should. But what if not? 

Nowhere does the Model Law require the tribunal to decide expressly the place. It cannot be presumed that the absence of such express determination could mean that the tribunal did not determine the place. Even assuming that the tribunal committed a procedural error by not determining the place, would it not amount to a waiver of the right to object later as provided in Article 4 of the Model Law? (Article 4 reads: "A party who knows that any provision of this Law from which the parties may derogate or any requirement under the arbitration agreement has not been complied with and yet proceeds with the arbitration without stating his objection to such non-compliance without undue delay or, if a time-limit is provided therefor, within such period of time, shall be deemed to have waived his right to object."). It appears that the parties did not object to the purported non-express designation of the seat.

Article 31(3) of the Model Law provides: "The award shall state its date and the place of arbitration as determined in accordance with article 20 (1). The award shall be deemed to have been made at that place." Note that Article 31(3) talks of "determination in accordance with article 20 (1)" and 20(1) does not talk about express determination. Given Article 4 and the lack of any objection and the fact that the parties are deemed to have known about the mandatory requirement regarding place in Article 31(3), would it not be reasonable to suggest that the parties were completely agreeable to the tribunal expressly stating (and perhaps determining) the seat in the arbitral award? Interestingly, in Para 19 of the decision of the Delhi High Court in the instant case, the Division Bench makes a similar point: "Since there is no mention of any dispute with regard to the place of  arbitration in the award made by the Arbitral Tribunal, it can safely be presumed that the award having been made at Kuala Lumpur, the place of arbitration as distinct from the venue of the arbitrationwould also be Kuala Lumpur."

The purpose of Article 31(3) can be culled out from the Travaux Preparatoires of the Model Law, especially, A/40/17 - Report of the United Nations Commission on International Trade Law on the work of its eighteenth session: "254... there was a basic difference between the place stated on the award being deemed to be the place of the award and the date stated on the award being deemed to be the date of the award. The former is an irrebuttable presumption to assure the territorial link between the award and the place of arbitration. The latter must be rebuttable, since the arbitrators, as well as the parties, might have reasons for stating the date of the award to be earlier or later than the date it was actually rendered." 

Thus the effect of the insertion of the place as Kuala Lumpur in the award assured a territorial link between the award and Kuala Lumpur. Therefore, coming back to the German case, in view of the above Report, the decision of the German court is wrong and so is the decision of the Supreme Court.

Let us now look at the ex post implications of the Supreme Court's decision. For one, in the instant case, the Supreme Court has concluded that the designation by the tribunal of Kuala Lumpur was not a determination regarding the place of arbitration. This means that the Supreme Court has already concluded that the arbitral award is defective in that it has not complied with the mandatory requirement in Article 21(1) read with Article 31(3) relating to expressly declaring the place of arbitration. Would this alone be a ground to set the award aside would have to be decided by the Delhi High Court.

The Supreme Court concluded that the mere choice of foreign venue is not sufficient for presuming a foreign seat/ place. Three comments are worth noting here: 

(1) The present case was not simply a case of mere choice of foreign venue. There were many more things to the arbitration clause: Parties had agreed to choose a set of non-national arbitration rules in the form of the UNCITRAL Model Law. The appointing authority was to be the Secretary General of the Permanent Court of Arbitration. Weren't these choices sufficient to reach a conclusion of implied exclusion (Mere choice of a foreign appointing authority as opposed to Indian meant that Indian courts as the appointing authority under Section 11 of the 1996 Act was impliedly excluded.).

(2) In the context of post-BALCO decisions, the conclusion reached on the same facts would be different because Part I would not apply in foreign arbitrations. Considering the factors mentioned in point (1) above along with the choice of foreign venue, the arbitration in the BALCO regime would be foreign. 

(3) Many times, parties to the contract are either ignorant of cutting edge distinctions between seat and venue. Often they do not obtain legal advice and even if they do, some are not conversant with the implications of the usage of venue instead of seat especially if the native language of the parties is not English. Sometimes, the parties postpone the agreement on particular clauses such as the seat to after disputes have arisen because they are not able to agree on the place. Contract negotiations take place in a dynamic environment and courts should be conscious of these aspects while construing arbitration clauses and should not adopt an overly technical approach.

Lastly, the first para of the Supreme Court's decision states that the Single Judge who heard the Section 34 petition dismissed the same vide judgement dt. 09.07.2015 for the reason that "in view of the terms of the agreement and the precedents holding the field, the Indian courts have no jurisdiction to entertain the application." This is factually untrue. OMP No. 693/2013 was filed by Union of India challenging the arbitral award. The matter was heard and the court vide its judgement dt. 09.07.2015 did not accept any preliminary objection nor did it hold that Indian courts did not have any jurisdiction. The petition was in fact withdrawn. Thereafter a Review Petition was filed by the Union of India and the review petition was dismissed since the petition under Section 34 was withdrawn. Even at this stage, the Single Judge did not pass any order on merits. It was only the Division Bench that decided that Indian courts could not exercise jurisdiction since Part I was impliedly excluded. Consequently, Para 2 of the decision of the Supreme Court is also factually erroneous in that the Division Bench did not concur with the Single Judge's view on jurisdiction and applicability of Part I because no view was expressed by the Single Judge!

All said and done, the case is an apt example as to why arbitration agreements should be drafted precisely and should include the choice of seat or place of the arbitration.

Friday, October 5, 2018

Liquidated Damages under Indian Contract Law between 1872 & 1899

On 29 September 2018, we did a brief article review of S. Swaminathan’s erudite paper in the Chinese Journal of Comparative Law (link-subscription required) De-inventing the Wheel: Liquidated Damages, Penalties and the Indian Contract Act, 1872, 6 Chinese Journal of Comparative Law 103-127 (2018). This post is in respect of one of the topics addressed in the paper.

An important argument in the paper is that the 1899 amendment brought in the dichotomy of liquidated damages-penalty into the Indian Contract Act, 1872, before which such a dichotomy never existed. Although this view is more or less correct, it appears from a perusal of the decisions rendered prior to 1899 that the judges ended up judicially incorporating the dichotomy in their decisions. 

Section 74 as it Stood Originally

The original Section 74 was substituted by Section 4 of the Act VI of 1899. Para 1 of Section 74 as it originally stood read as below (Para 2 did not undergo any substantial amendment):

Title to compensation for breach of contract in which a sum is named as payable in case of breach- When a contract has been broken, if a sum is named in the contract as the amount to be paid in case of such breach, the party complaining of the breach is entitled, whether or not actual damage or loss is proved to have been caused thereby, to receive from the party who has broken the contract reasonable compensation not exceeding the amount so named.”

One of the chief aims of the original Section 74 was to do away with courts inquiring as to whether the amount named is liquidated damages or a penalty. Swaminathan argues that this did not happen primarily owing to the amendments in 1899 which introduced the dichotomy:

Just how did the exact opposite of what the drafters had envisaged come to be the state of the law and this, after they had been so careful about wanting to avoid the troublesome liquidated damages-penalty dichotomy?… The single most important contributing factor in bringing this about, it will be hypothesized, was an ambiguity unwittingly introduced by an amendment to section 74 in 1899 by a select committee headed by the ace draftsman Mackenzie Chalmers… However, the effect of the introduction of the word ‘penalty’ in the provision in sharp contrast to the neologisms used by the original provision was to prove troublesome. It was to create the misleading (and unintended) impression that the English concept of ‘penalty’ was being sought to be introduced into Indian law. Once penalty was in, liquidated damages was but not even a step away.”

“Controversy Surrounding “Sum is Named in the Contract”

The author also acknowledges that the way in which the original Section was drafted did not help matters and referred to the more controversial issue then regarding whether clauses providing for increased interest on account of default could be covered under the original Section 74:

"The phrase ‘sum named in the contract’ ostensibly meant that the provision applied only to in solido sums, thus leaving out stipulations for variations of interest, acceleration clauses which affected payment schedules rather than sums, and payments in specie. This ambiguity led to a great divergence of opinion among Indian courts on the applicability of section 74 to such clauses. A good fraction of the litigation on section 74 involved such stipulations.”

This is correct. A perusal of the decisions between 1872 and 1899 reveal this aspect. There were divergent views of various High Courts on the question as to whether the original section applied even to a stipulation that could be categorized penalty although the amount of penalty was not “named” in the contract. See, for instance, H. Mackintosh v. Hunt (1877) ILR 2 Cal 202, where the Calcutta High Court held:

We are of opinion that the contract to pay interest at 10 per cent, per mensem, if the principal sum of Rs. 400 were not paid on September 6th, the duo date of the promissory note, is not in the nature of a penalty… In such a provision there is nothing in the nature of a penalty more than there is in a provision, that the promissory note shall bear interest from the day of its date. The case seems to us to differ wholly from that class of cases in which a certain sum is agreed to be paid on a breach of contract, and therefore Section 74 of the Contract Act (IX of 1872) does not apply.”

A Full Bench of the Calcutta High Court upheld this view about twenty two years later in Deno Nath Santh v. Nibaran Chandra Chuckerbutty and Ors. MANU/WB/0158/1899 by holding that “this is not a sum named in the contract as the amount to be paid in case of such breach, and Section 74 does not apply.” There were equally a good number of cases where the fine distinctions between such clauses were made and contra view was upheld. See, for instance H. Mackintosh v. C. Crow and Anr. (1883) ILR 9 Cal 689 and a decision of the Full Bench of the Calcutta High Court in  Kala Chand Kyal v. Shib Chunder Roy I.L.R. 19 Cal. 392 (FB): MANU/WB/0013/1892.  It must also be noted that in cases where the courts held that Section 74 were not applicable, the debtor did not stand unprotected and could raise defences available to him in equity. See, for instance, H. Mackintosh v. Hunt (1877) ILR 2 Cal 202, Mackintosh v. Wingrove (1879) ILR 4 Cal 137 and Ram Prasad And Ors. v. Lalli (20 July 1886) (1887) ILR 9 All 74. Nevertheless, considering the decision of the Full Bench in Deno Nath (above), we are not sure the remedy was efficacious.

Now, coming back to Swaminathan’s article, the author argues: “Unsure about the applicability of this provision to such cases, Indian courts increasingly began to fall back on the English law to decide these cases.” The author seems to suggest from this argument that owing to the controversy regarding whether enhanced interest clauses were “sum named in the contract”, English law were relied on to decide those cases. The author’s argument that courts relied on English legal principles were the principles of equity. 

If the author's argument that the dichotomy was brought back into Indian law post 1899, in an ideal scenario, courts would never have referred to the dichotomy or decided the cases without referring to the “liquidated damages” and “penalty” nomenclatures. However, as we would see in the remaining portions of this post, the dichotomy never ceased to haunt Indian law post-1872.

Decisions Construing the Original Section 74 Pre-1899

In one of the earliest cases decided after the Indian Contract Act, 1872, H. Mackintosh v. Hunt (1877) ILR 2 Cal 202, the Calcutta High Court had to decide whether the clause was hit by Section 74. The Calcutta High Court held: “We are of opinion that the contract to pay interest at 10 per cent, per mensem, if the principal sum of Rs. 400 were not paid on September 6th, the duo date of the promissory note, is not in the nature of a penalty… The case seems to us to differ wholly from that class of cases in which a certain sum is agreed to be paid on a breach of contract, and therefore Section 74 of the Contract Act (IX of 1872) does not apply.” (emphasis supplied).  Notice above the use of “penalty” while referring to Section 74.

There are several other judgements which are in line with the above. Some of them are cited below along with the relevant observations of the court:

H. Mackintosh v. C. Crow and Anr. (1883) ILR 9 Cal 689: MANU/WB/0037/1883: “This section, it will be observed, does away with the distinction between a penalty and liquidated damages and this must be borne in mind in dealing with cases decided before the Contract Act, many of which turned upon this distinction. Under this section, whether a sum would formerly have been held a penalty or liquidated damages, if it be named in the contract as the amount to be paid in case of breach, it is to be treated, much as a penalty was before, as the maximum limit of damages.” Now, if the stipulated sum was to be treated as a penalty, it should be so determined and what followed was to import the test in English law. See, also Sungut Lal vs. Baijnath Roy and Anr. (17.06.1886 - CALHC) (1886) ILR 13 Cal 164: MANU/WB/0146/1886, where the dichotomy seems to have been used although the court recognised that Section 74 did away with it. Sundar Lal v Banke Behari (28.06.1893 - ALLHC) : MANU/UP/0058/1893 also imported the dichotomy although the Full Bench of the High Court held that the clause involved was not one to which Section 74 applied. Similar is the decision of Ram Prasad And Ors. v. Lalli (20 July 1886) (1887) ILR 9 All 74 where although the Allahabad High Court held that Section 74 did not apply nevertheless recognised the concept of penalty

See also, Dilbar Sarkar vs. Joysri Kurmi and A.M. Dunne and Ors. (12.08.1898 - CALHC) : MANU/WB/0261/1898 (“Undoubtedly, sec. 74 of the Contract Act has clone (sic done) away with the distinction between a penalty and liquidated damages and although, generally speaking, the distinction between these two classes of damages is fine, yet it is desirable to bear in mind that in some cases there is a broad distinction, In this case undoubtedly the sum agreed upon by way of damages was agreed upon as a penalty.”

It could thus be observed that importation of the dichotomy into Indian jurisprudence was not a phenomenon merely attributable to the 1899 amendment. As these cases, and many more, go to show, notwithstanding the doing away of the distinction, the dichotomy never went away. The implications of this inference may have an impact on the villainous portrayal by the authorof the 1899 amendment as having brought back the dichotomy. The 1899 amendment at the most normalized the importation of the dichotomy, which never went away, except in a miniscule number of cases.

Cases Decided on the Basis of the Original Section 74 Without Importation of the English principles

On the other side of the spectrum is the interesting case of Nait Ram vs. Shib Dat and Ors. (15.12.1882 - ALLHC) : MANU/UP/0103/1882. The suit was for the recovery of the principal amount of Rs. 200 issued under bond to the defendant and for Rs. 400 towards liquidated damages for breach of the bond. The plaintiff did not lead any evidence towards loss and the munsiff’s court applied Section 74 and declared the amount claimed towards LD as excessive thereby considerably reducing the claim towards liquidated damages. On appeal, the appellate court termed the decision regarding assessment of liquidated damages as erroneous and held Rs. 100 as LD to be reasonable.

On further appeal, the Division Bench of the Allahabad High Court recognised the legislative intent behind enactment of Section 74: to eliminate the LD-penalty dichotomy: “The section appears to have been introduced to obviate the difficulties which exist in distinguishing liquidated damages, from penalty under the English Law and the effect of it is, that the Court are not bound to award the entire amount of damages agreed upon by the parties in anticipation of the breach of contract. The only restriction is that the Court cannot decree damages exceeding amount previously agreed upon by the parties.”

On how reasonableness has to be determined, the court held: “The discretion of the Court in the matter of reducing the amount of damages agreed upon is left unqualified by any specific limitation though of course the expression "reasonable compensation" used in the section necessarily implies that the discretion so vested must be exercised with care, caution, and on sound principal (sic principles).”

On how the discretion has to be exercised, the court’s decision deserves summarizing:
  • Damages should be commensurate with the injury sustained.
  • It should be assessed with the view to restoring the advantage to the plaintiff that he might have received if the contract had been performed.
  • Where it is impossible to arrive at the exact damages, courts award the amount named, and nothing more.
Thereafter, the court held that this was not a case where it was impossible to arrive at the damages. On the assessment of damages, the court basically repeated the manner in which damages would be proved in a claim for general damages under Section 73. 

Another similar decision is that of Brahmaputra Tea Co. Ld. v. E. Scarth (MANU/WB/0175/1885 : (1885) ILR 11 Cal 545). The defendant entered into an agreement with the plaintiff to serve as an assistant tea planter for a salary. Clause 8 of the agreement named a sum as damages in case of breach of the agreement. The plaintiff initiated a suit to recover, inter alia¸ the named sum from the defendant as per clause 8 of the agreement. The plaintiff did not lead any evidence in the trial on the actual loss suffered and merely relied on the amount named in clause 8 of the agreement. However, the trial court held that the plaintiff was entitled to an amount that was far lesser than the amount stipulated in the agreement. On appeal, a two judge Bench of the Calcutta High Court consisting of McDonell and Macpherson, JJ was of the view that it was not necessary for the plaintiff to prove damages or loss. The Bench was of the opinion that the trial court erred in reducing the amount of compensation. It held:

“…the agreement by the defendant himself, so he knew full well what he was doing and what risk he was incurring, and, so far as we can see, there was no reasonable or sufficient ground for his act. No doubt the Court has a discretion to fix what it considers reasonable compensation; but when the parties have already agreed among themselves as to what the penalty should be, we think the Court should not, in fixing the compensation, wholly ignore the amount agreed on, unless this is, on its face, wholly unreasonable with reference to the position of the parties and the breach provided against.”

The court felt that the Liquidated Damages named in the agreement was not “wholly unreasonable” and must have been agreed between the parties after taking into consideration to all the circumstances attending the consequences of breach. However, the court doubted if the amount named in the agreement could be considered as reasonable “in the absence of any proof to the contrary”. Consequently, the court exercised its discretion in the matter and awarded a sum which was approximately half-way between the amount specified in the judgement of the trial court and the amount named in the agreement.

Thus, it would seem that even from the beginning, courts were grappling with the inconsistency in the text of the statute: on the one hand, the plaintiff was not required to prove the actual loss caused by the breach and, on the other, the court could grant only reasonable compensation for which it had to allow the parties to lead evidence on the reasonableness of the amount named in the contract. A way of resolving it was to simply suggest, like Nait Ram that damages should be proved akin to a claim under Section 73. Another way was to award damages in the absence of proof as a fraction (or percentage) of the amount in the contract as it happened in Brahmaputra Tea Co. in 1885 (see above) and in Construction and Design Services vs. Delhi Development Authority MANU/SC/0099/2015, one hundred and thirty years later.

Closing Remarks

In the light of Cavendish Square, is it not the time to move on and bring about a more nuanced and predictable model of determination of Liquidated Damages? The reasonableness standard does not offer certainty and inevitably allows promisors to challenge the imposition in courts regularly.