Guest Post: Mid-Year Arbitration Review- Part I

(In this guest post, Ms. Juhi Gupta reviews significant developments that took place in the first half of 2018 in India on arbitration. Ms. Gupta is an LL.M. graduate from Harvard Law School and is deeply interested in dispute resolution, particularly alternative dispute resolution.)

MID-YEAR ARBITRATION REVIEW - I

In a series of posts, I will endeavour to review several decisions of the Supreme Court and High Courts of India on arbitration this year. The cases I will be reviewing have been selected because they reiterate the prevailing law, or because they demonstrate the increasing pro-arbitration judicial attitude, or because they raise interesting questions to be examined in the months to come.

Seat (or place) versus venue – SC refers issue to larger bench

Union of India v Hardy Exploration andProduction (India) Inc. (Supreme Court, 01 May 2018)

Brief facts: Petition filed by Union of India (appellant) against Hardy Exploration (respondent) under section 34 of the Arbitration Act, 1996 (hereinafter “the Act”) challenging the legality, validity and correctness of the arbitral award made in favour of respondent in an international commercial arbitration proceeding between the parties. The arbitration agreement designated Kuala Lumpur as the venue and did not expressly specify the seat/place of arbitration. The UNCITRAL Model Law on International Commercial Arbitration of 1985 governed the arbitration proceedings and Indian law was the substantive law of contract. The Delhi High Court decided the section 34 petition in favour of the respondent, against which the Union of India appealed to the Supreme Court under section 37 of the Act.

Issue: Maintainability of the section 34 petition and the related issue as to whether or not Kuala Lumpur was the seat/place of arbitration, which in turn would determine whether Indian courts had supervisory jurisdiction over the arbitral award (note: in a foreign-seated arbitration, the supervisory jurisdiction of Indian courts under Part 1 of the Act is excluded as per Balco).

Arguments: Union of India, on the basis of prior Supreme Court and English Courts decisions, contended that when the arbitration agreement specifies the venue for holding arbitration proceedings but does not specify the seat, then the supervisory jurisdiction of Indian courts cannot be excluded. Hardy Exploration argued that Indian courts do not have jurisdiction to entertain the section 34 petition challenging the legality and correctness of the award as the arbitration was foreign-seated. Neither party went into detailed arguments before the Supreme Court.

It is useful to briefly examine the parties’ arguments before the Delhi High Court: Union of India argued that (i) as per Balco, in the absence of any specific choice of the law of the arbitration agreement, the same would be determined by the substantive law of the contract. Since Indian law is the substantive law, it would also be the proper law of the arbitration agreement; (ii) as per the UNCITRAL model law, it is for the arbitral tribunal to decide the seat, which it did not and Kuala Lumpur does not become the seat just because the award was made and signed there; (iii) since the UNCITRAL Model Law was adopted by enacting the Arbitration Act, the parties’ intention behind designating the Model Law as the curial law was to incorporate Article 34 of the Model Law which is analogous to section 34 of the Act i.e. apply Part 1; and (iv) the parent contract containing the arbitration was entered into prior to Balco and was therefore governed by Bhatia International.

Hardy Exploration argued that (i) since it was a foreign company, the arbitration was an international commercial arbitration under section 2(1)(f) of the Act; (ii) Article 31(3) of the UNCITRAL Model Law stipulates that the award shall state its date and place of arbitration. Therefore, Kuala Lumpur was the place of arbitration; and (iii) post Balco, Part 1 is excluded when the seat is outside India.

Decision: The Supreme Court did not really engage in a detailed analysis of the issue. It noted that the question regarding the seat and venue needs to primarily be decided on the basis of the terms of the arbitration agreement itself; however, the court decided to refer the case to a larger bench taking into consideration the law laid down by different benches of variable strengths of the Supreme Court, submissions of the parties, and the fact that the issues involved in the case frequently arose in international commercial arbitration matters.

Comment: It will be interesting to see how the larger bench decides the issue that has come up repeatedly. Although the Law Commission recommended clarifying the place versus venue distinction in its 246^th Report, this suggestion was not incorporated in the 2015 Amendment Act and has also been left out of the 2018 Amendment Bill. In Roger Shashoua v Mukesh Sharma (2017 (14) SCC 722), where the parties designated Singapore as the venue and did not specify the seat, the Supreme Court concluded that Singapore was the seat of arbitration, despite the contract being a pre-2012 contract (i.e., prior to Balco). However, the circumstances in that case were unique as the Court relied on a prior English High Court ruling on the same issue between the same parties.

Public policy – judicial interference with arbitral award only permissible in instances of fraud or bias

Indian Oil Corporation Ltd. v Moni MadhavDutta (Gauhati High Court, 14 May 2018)

Brief facts: A contract between the appellant and respondent for the latter to transport gas cylinders excluded toll and ferry charges; however, the appellant reimbursed the respondent for these charges in the initial period of the contract. Subsequently, the appellant stopped reimbursing these charges. The respondent challenged the same via arbitration. The arbitrator issued an award in favour of the respondent, holding that it was entitled to reimbursement for toll and ferry charges. The appellant’s section 34 application was dismissed by the lower court, following which it appealed to the High Court under section 37.

Issue: Whether there is any patent illegality in the arbitral award on account of the arbitrator exceeding the scope of his reference?

Arguments: The appellant argued that the arbitrator did not confine himself to the contract between the parties while issuing his award and was therefore hit by section 34. The contract laid out an all-inclusive charge of transportation and contained no mention of toll and ferry charges. The reimbursements in the initial period of the contract were given by mistake and the fact that such reimbursements were issued by the appellant in the past to other transporters was insufficient grounds to claim reimbursements under the present contract.

The respondent argued that although the original tender document did not mention toll and ferry charges, the appellant agreed to this during the finalisation of the tender process as evidenced by the appellant’s written statements. The arbitrator took into account that the appellant reimbursed these charges historically and in the initial period of the contract at issue. Although the arbitrator did not stick to the four corners of the contract, his award on every issue was based on evidence and was not perverse under section 34.

Decision: The High Court upheld the arbitral award and lower court judgment, reiterating the minimal judicial supervision in arbitration proceedings wherein courts should only intervene in situations of fraud or bias. Agreeing with the respondent’s arguments, the Court determined that the arbitrator passed his award well within the prescribed law of the country and terms of contract, keeping in view the safety guidelines prescribed by the appellant for transportation of gas cylinders. The Court relied on McDermott International Inc v Burn Standard Co., where the Supreme Court held:

“the 1996 Act makes provision for the supervisory role of courts, for the review of the arbitral award only to ensure fairness. Intervention of the court is envisaged in few circumstances only, like, in case of fraud or bias by the arbitrators, violation of natural justice, etc. The court cannot correct errors of the arbitrators. It can only quash the award leaving the parties free to begin the arbitration again if it is desired. So, scheme of the provision aims at keeping the supervisory role of the court at minimum level” (paragraph 18) [emphasis supplied].

Public policy – fundamental policy of Indian law violated if damages for breach of contract claim automatically awarded without evidence being offered

Anila Gautam Jain v Hindustan PetroleumCorporation Limited (Bombay High Court, 03 May 2018)

Brief facts: Anila Gautam Jain (appellant) challenged an arbitral award under section 34 of the Act on grounds of patent illegality (section 34(2A)). The arbitration proceedings involved a breach of contract claim by Hindustan Petroleum (respondent) against the appellant. In response to the alleged breach of contract, the respondent made a counterclaim seeking penalty and other claims, and did not provide any corroborating evidence. The arbitrator issued an award in favour of the appellant, awarding it damages. The appellant’s section 34 petition challenging the award to the extent of the counter claim was dismissed, following which the appellant appealed to the High Court under section 37 of the Act.

Issue: Whether the counter claim as raised by the respondent could be allowed by the arbitrator?

Arguments: The appellant’s essential argument was that the respondent did not provide any evidence in support of its counterclaim. The arbitral award lacked reasons and was based solely on surmises and conjectures when instead the arbitrator was required to decide the issues on the basis of the evidence on record. On the other hand, the respondent argued that the arbitrator took into account the entire material placed on record, which was sufficient to award the respondent damages and did not require the respondent to lead oral evidence.

Decision: The High Court agreed with the appellant’s submissions. It held that while an arbitrator has the power to decide the question of liability for damages, the arbitrator in the instant proceedings gravely faltered in overlooking the fundamental provisions under section 73 of the Contract Act, which require a party to prove the damages it alleges to have suffered on account of breach of contract. If a party fails to furnish such proof, then it is not entitled to any damages or compensation. In the context of the contractual clauses, the respondent’s counter claims had to be proved on evidence and in any event, even if the parties were to agree on a quantum of liquidated damages, the party claiming such damages was required to prove the actual damages suffered by it. Further, the counter claims were clearly disputed by the appellant.

“…there is no discussion [in the award] whatsoever on the counter claims which are monetary claims as made by the respondent. The record does not indicate any cogent and acceptable evidence documentary which can be said to prove any of the counter claims of the respondent. The learned arbitrator completely discarded and dispensed with the obligation and burden on the respondent to prove the claim and straight way proceed to award the counter claims as per the operative part of the award. This approach of the learned Arbitrator was perverse to say the least” (paragraph 21).

Accordingly, the Court concluded that the arbitrator and lower court erred in holding that once there is a breach of contract, then damages are automatically required to be awarded without proof: “such a proposition certainly cannot be accepted in law. Thus, the impugned award was in conflict with the fundamental policy of Indian law and being contrary to the fundamental principles of law” (paragraph 25).

Comment: These two public policy decisions reiterate the increasingly pronounced non-interventionist judicial attitude to arbitral awards. The Bombay High Court decision serves as a useful illustration of the few instances when courts would intervene to set aside an award on grounds of patent illegality.

Reasoned award

Surajmal Yadav v Delhi State IndustrialInfrastructure Development Corporation Ltd. (Delhi High Court, 24 May 2018)

Brief facts: Surajmal Yadav (petitioner) filed a section 34 application on the limited ground that the arbitrator did not consider the petitioner’s entire prayer in his statement of claim while passing the arbitral award, namely the prayer to direct the DSIIDC (respondent) to refund stamp duty and interest on EMD and the bid amount paid by the petitioner under a lease deed which the respondent ultimately failed to execute. The arbitrator issued an award in favour of the petitioner as regards the payment of stamp duty, however he did not discuss or rule on the payment of interest.

Issue: Can a relief requested by a party be presumed to have been rejected by arbitrator if not discussed or ruled upon in the final award?

Arguments: The petitioner argued that the arbitrator did not consider the effect of the respondent’s failure to execute the lease deed as far as the EMD and bid amount deposited by the petitioner was concerned. The respondent argued that given the arbitrator passed a direction with respect to the stamp duty, it should be presumed that he rejected the prayer with respect to the interest.

Decision: The Court ruled that under section 31(3) of the Act, an arbitral tribunal has to state the reasons upon which the award is predicated. The petitioner’s prayer for refund and payment of interest could not be deemed to have been rejected by the arbitrator just because it was not granted in the final award. The arbitrator is required to give reasons for rejecting a prayer – “one cannot assume rejection of the prayer made by the petitioner and further assume reasons for rejection of such prayer” (paragraph 8). Although the Court noted that the arbitrator had clearly not considered this part of the petitioner’s claim given there was no discussion about it in the entire award, since neither party had challenged the award as passed, the court disposed the petition and granted leave to the petitioner to reagitate his claim. (Note: the Court clarified that the petitioner shall be entitled to claim the benefit of limitation in terms of section 43(4) of the Act in any such subsequent proceedings).

Comment: This decision reflects the well-established legal and judicial position that an arbitral award must set out the reasons on which it is based unless the parties have expressly agreed to the contrary.

 (More to follow in another post)