Defective Petitions to Challenge Arbitral Awards: Delhi High Court Settles the Law

 There have been numerous judgments on whether particular classes of defects in petitions under Section 34 of the Arbitration and Conciliation Act, 1996 (1996 Act) for challenging arbitral awards make the petitions "non-est" in the eyes of law. Consequence of holding a petition invalid in the eyes of law means that time specified for filing challenge petitions in S. 34 would continue to run, notwithstanding filing of such incurably defective petitions. 

A Full Bench of the Delhi High Court has, on 07.02.2025, settled the law in Pragati Construction Consultants v UoI, 2025:DHC:717-FB. Para 97 of the judgment summarises the decision of the Full Bench on points of law and is quoted below:

"97. We summarise our answer to the Reference, as under:

a) Non-filing of the Arbitral Award alongwith an application under the Section 34 of the A&C Act would make the said application liable to be treated and declared as non-est, and the limitation prescribed under Section 34(3) of the A&C Act shall continue to run in spite of such filing;

b) Mere non-filing of the Statement of Truth or a defect in Statement of Truth being filed, that is, including with blanks or without attestation, would not ipso facto, make the filing to be non-est. However, if accompanied with other defects, the Court may form an opinion, based on a cumulative list of such defects, that the filing was nonest;

c) Similarly, non-filing or filing of a defective Vakalatnama; the petition not being signed or properly verified; changes in the content of petition being made in form of addition/deletion of facts, grounds, or filing of additional documents from arbitral record, or filing with deficient court fee, each of these defects, individually would not render to filing of an application under Section 34 of the A&C Act to be treated and declared as non-est. However, presence of more than one of such defects may, in the given set of facts involved in a case, justify the conclusion of the Court that filing of the application was never intended to be final and therefore, is liable to be declared non-est."   

Stereotyping & Setting Aside Arbitral Awards: Why East Asia was Correctly Decided

Why are cliches a problem? They are an issue because they amount to stereotyping. What is a stereotype? It is regarded as an over-generalised belief about something. In India, there is an over-generalised beliefs that arbitral awards should not be set aside at all. That is not correct. 

"Nonsense" A decision with scant regard for contract or law cannot pass off as an arbitral award. [Note that the word "nonsense" is being used here to signify how rude and bad it looks. A pleading drafted by a foreign law firm used the term "nonsense" on a contention by the other side. What happened to courtesy? But then, for some, whatever foreign law firms, especially of the first world, do is gospel truth and good to emulate!- another stereotype. Litigation or arbitration is not a fish market with disputing parties hurling choicest of abuses against each other. One has to show grace and courtesy in submissions.]

Almost a decade back, while discussing the case of Sumitomo Heavy Industries v ONGC, we had argued in this blog as follows:

"Though the SC's decision seems to be reasonable, it is sad that the court did not consider the law on the liability of a contractual party to bear increase in costs due to change of law during the currency of the contract. This is the problem with arbitration. The courts are forced to rule on whether the award was perverse or not rather than consider what should actually be the law on the issue. The main issue is taken outside the realm of the court. Essentially what the court has stated here is that Article 17.3 could either be narrowly construed like the Division Bench wanted it to be or broadly constructed as was done by the arbitrator. But what is the true law?" (emphasised)

In the same year, we did another post titled "Norm Creation (ADR) and Arbitration" (2010). A summary of the post is important to understand the context of this post and is as under:

• The judiciary performs the important function of amplificiation of law. Amplification of law refers to the judiciary’s functions of filling the gaps that the statute leaves, making law in the absence of a statute, resolving contradictions in statutes and updating the law after taking into consideration the latest developments (such as those of technology, etc).
• This function of amplification of law does not take place in private arbitration for a few reasons. One reason is that there are no incentives for the arbitral tribunal to produce precedents as there exists difficulty in establishing property rights over them.
• The second problem with private arbitration is that the absence of review on merits of the award may lead to the production of inconsistent decisions on the same question of law leading to uncertainty of law. This would mean that parties would never predict outcomes of disputes and this would discourage settlement of disputes. The law in such a situation will be indeterminate and inaccurate.

Interestingly, many reputed commentators on arbitration law have highlighted the above aspects. In a lecture titled "Developing commercial law through the courts: rebalancing the relationship between the courts and arbitration", Right Hon. The Lord Thomas of Cwmgiedd, Lord Chief Justice of England and Wales (2016)  highlighted how arbitration had the potential in bring about uncertainty in commercial law by taking away cases from national courts. The lecture merits reading.

In short, arbitration law's limited error correction function creates a potentially uncertain position in law. An award would not be set aside if two plausible views in the case as to contract interpretation are possible. But what is the correct interpretation? In a jurisdiction like India where law as applied to facts is nascent, especially in the context of contract law, courts perform an important function of amplification of law and making the law more certain. This is the reason why a sort of balance is maintained in purely domestic arbitrations by retaining the ground of patent illegality in Section 34(2A). This function is important. In the past, the Supreme Court has donned the role of error corrector and decided on the correctness of arbitral awards. See, for instance, National Highways Authority of India v. Progressive-MVT (JV) 2018(2) Arb LR 111 (SC). (see this post)

Image from here

The decision in SEAMEC v OIL (2020) has to be seen in the same light. A contention similar to the one made in the arbitral award and upheld: that increase in diesel prices is a change in law is most common in construction arbitrations. Those practising on that side of commercial law would vouch that a Contractor- Claimant is sure to bring a claim on this count if there is an escalation or a change of law or a force majeure clause. Although not a construction arbitration, in this case, the Claimant brought about a similar contention. There seems to be no Supreme Court decision directly on whether such increases in diesel prices amount to force majeure or change of law or entitle the Contractor for escalation. See, for instance, Lift and Shift India Pvt. Ltd. vs. Central Warehousing Corporation (06.03.2017 - DELHC) : MANU/DE/0543/2017. [See also, The State of Bihar vs. Hardeo Singh (11.02.2019 - PATNAHC) : MANU/BH/0174/2019, Atlanta Limited and Ors. vs. Executive Engineer, Road Development and Ors. (04.05.2018 - BOMHC) : MANU/MH/1148/2018.]

Given the importance of the issue, the Supreme Court took the correct approach in settling the law once and for all. [Note that the law applied by the Supreme Court was the one prior to the 2015 amendments]. Although the court did not expressly state so, the effect of the court's judgment settles this vexatious issue. That the SC decided on an area which was uncertain is clear from the outcomes of the proceedings before the tribunal (which held that increase in price of diesel amounted to change of law for which the Contractor could claim compensation) and the High Court (where it was held otherwise). The High Court had also committed the error of conflating the basis of change of law clause with the force majeure clause, which the Supreme Court corrected.

The SC held that fluctuations in price of certain items which a prudent contractor would have to take into consideration while bidding cannot be brought within the scope of the change of law clause unless specific language pointed out to such an inclusion (Para 30) and that the "liberal" construction afforded by the Tribunal to Clause 23 to hold that change in the price of diesel was a change in law was incorrect.

The law is now certain. No more can unscrupulous persons bring about a claim for increase in diesel prices under the change of law clause. Had this clarity not been there, what would have happened? In almost every dispute under works contracts with a change of law or a general escalation clause (which does not encompass increase in diesel prices), Contractors would have brought about a claim on account of increase in diesel prices. The marginal cost of defending an additional claim and of deciding an additional claim would be incurred by the parties. Imagine if such costs are incurred in several arbitrations arising out of works contracts all over India. It could potentially run to crores of rupees. Now, because to the clarity afforded by the Supreme Court, an unscrupulous Contractor or an advocate would think twice before making a claim on account of change in diesel prices. Even if made, the Tribunal would (and is obligated to) award costs on the other side for such bogus claims.

Thus, it is submitted that the SC had rightly set aside the arbitral award. We found many write-ups on the decision, especially from law firms, simply parroting that the SC was not correct in setting aside the arbitral award or similar cliches. There should be deference to the arbitral process but that deference is only for the purpose of facilitating commercial dispute resolution. Such deference cannot be at the cost of certainty in law. Legal certainty affords clear direction to future course of conduct. 

Parties should expend their money on value creation rather than bickering on such issues merely because one party wants to "take a chance" to see if the tribunal can award the claim and because the (uncertain) law allows her to do so. 

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

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

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

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

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

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

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

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

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

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

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

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

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

Hindustan Construction Company v UoI: A Critical Appraisal (Part I)

A critique should not be suppressed because it is unpopular. In line with the mandate of this blog (which reproduces the words of HM Seervai), as noted at the top of this page, this post along with subsequent posts critically appraises the recent decision of the Supreme Court in Hindustan Construction Company v  UoI (pdf)(2019: SC).

Readers of this blog, we are sure, would have read the decision. Therefore, we do not present a descriptive comment of the decision and instead move straight to criticisms of the decision and possible arguments that go against the said criticisms.

Our task in this endeavour is to explore the justifiability of justifications proffered in the said decision. It is not only the eventual conclusions that are important, but the justifications offered therefor. The first criticism is addressed in this post.

Criticism 1: The Supreme Court entertained a writ under Article 32 filed by commercial entities questioning the constitutional validity of a law that is avowedly economic in nature

A set of writ petitions were filed by commercial/ corporate entities directly in the Supreme Court and claimed violation of the fundamental rights, including the rights under Articles 14, 19, and 21, and the constitutional right to property under Article 300A. The Supreme Court entertained it, without any whisper as to the maintainability of a writ petition on what is really a commercial issue by commercial organisations directly in the Supreme Court. How could the Supreme Court directly entertain a writ petition in an issue relating to commercial affairs?

In the recent times, the Supreme Court has refused to hear more serious issues, directly affecting life and liberties of persons, in at least two matters, whose news reports are here and here. Surprisingly, the SC did not give any justifications as to why it was entertaining the writ petitions in Hindustan Construction, despite the settled law. 

The court did not even justify why it was directly hearing the writ petition without even a justification.

Contra Arguments: Ideally, the Supreme Court should have explained why it was doing so: the law has been in disarray several times in the past four years, and it was in the interest of commerce that there is a finality to the issue as regards the retrospective applicability of the 2015 amendments. An uncertain legal state of affairs would affect the economy of the nation, and therefore, it was important to settle the law swiftly and surely. 

Think of a counterfactual: Assume that a scenario where the Supreme Court dismissed the writ petitions and directed the parties to approach the relevant High Courts. It is possible that the amendment could have been challenged in different High Courts and it is possible that different High Courts could have reached opposite conclusions just like how they had post-2015 on the question of retrospective applicability of the 2015 amendments. Again, it would have taken a few months or so for the matter to reach the Supreme Court, by which time several HC decisions would have been rendered and parties could have altered their stance based on outcomes of such decisions. Therefore, it was important for the Supreme Court to immediately settle the law. 

Another important argument against the aforesaid criticism is that if a High Court hold the statute unconstitutional, it would bring again to the fore the territorial applicability of the decision of the High Court. To avoid such uncertainties, it was perhaps important for the Supreme Court to address the situation on an urgent basis. The decision does not record if this issue was ever raised before the Supreme Court. It would be interesting to have a look at the record to see if it was. 

More on the decision in another post. 

Scope of Public Policy in Setting Aside Awards: Ssangyong v NHAI

As stated in the previous post, the decision of the Supreme Court in Ssangyong Engineering & Construction Co. Ltd. V. NHAI [Civil Appeal No. 4779/2019 dt. 8 May 2019]  is significant for several reasons and one of the important reasons is because it lays down the contours of setting aside arbitral awards on the grounds of public policy and patent illegality post the 2015 amendments. 

In this post, we look at what the Supreme Court held as regards the scope of the ground of public policy in setting aside the arbitral award.

Provisions of Law

Some salient provisions of the amended Arbitration and Conciliation Act, 1996 ("Act" or "1996 Act") are given below:

Section 28(3): "While deciding and making an award, the arbitral tribunal shall, in all cases, take into account the terms of the contract and trade usages applicable to the transaction."

Section 34(2)(b)(ii): "An arbitral award may be set aside by the Court only if—... 

(b) the Court finds that—...

(ii) the arbitral award is in conflict with the public policy of India.

Explanation 1.For the avoidance of any doubt, it is clarified that an award is in conflict with the public policy of India, only if,

(i) the making of the award was induced or affected by fraud or corruption or was in violation of section 75 or section 81; or

(ii) it is in contravention with the fundamental policy of Indian law; or

(iii) it is in conflict with the most basic notions of morality or justice. 

Explanation 2.For the avoidance of doubt, the test as to whether there is a contravention with the fundamental policy of Indian law shall not entail a review on the merits of the dispute."

Section 34(2A): "An arbitral award arising out of arbitrations other than international commercial arbitrations, may also be set aside by the Court, if the Court finds that the award is vitiated by patent illegality appearing on the face of the award:

Provided that an award shall not be set aside merely on the ground of an erroneous application of the law or by reappreciation of evidence."

The Contours of Public Policy and Patent Illegality: Ssangyong

The Supreme Court laid down what can be done and what cannot be done in a petition for setting aside an arbitral award on the ground of public policy and patent illegality. These are given below:

General

• The amended provisions would apply for petitions filed on or after 23 October 2015 (see last post)
• "Public policy" under Section 34(2)(b)(ii) and Section 48(2)(b) will have the same meaning. Additionally, purely domestic awards could be set aside on the ground of patent illegality appearing on the face of the record.
• The ground of interest of India as was recognised in Renusagar v GE  has been deleted and no more exists.

Fundamental Policy of Indian Law

• "Fundamental policy of Indian law" would not entail a review on merits of the dispute. 
•  Disregarding orders passed by superior courts of India, violation of foreign exchange laws  and contravention of statute linked to public policy or public interest would amount to contravention of the fundamental policy of Indian law.
• But fundamental policy of Indian law does not entail a review on the merits of the dispute.
• Fundamental policy of Indian law does not mean perversity. Wednesbury principles do not apply to the ground of fundamental policy of Indian law and decisions which fall short of reasonableness cannot be questioned on this ground. 
• While audi alterem partem principle is of great importance, it falls is already covered in Section 34(2)(a)(iii) and therefore does not fall within the scope of fundamental policy of Indian law. 

Justice and Morality

• The ground of justice and morality as provided in Renusagar v GE has been replaced with the most basic notions of morality or justice. These grounds as explained in p. 26 to 29 of Associate Builders would apply.
• An award which shocks the conscience of the court is likely to be set aside under this ground. If the claimant claims, say, Rs. X but the tribunal awards Rs. X + Y (i.e., Y is not at all claimed) without reason or justification, the award is liable to be set aside it is is opposed to the most basic notions of justice.
• Morality would obtain the meaning as is given in Section 23 of the Indian Contract Act, 1872. As such it would include sexual morality, such as an award providing for specific performance of an agreement involving prostitution. 
• Morality would also cover agreements that, though not illegal, are against the prevailing mores of the day. 
• However, if an award has to be set aside under this ground, it has to shock the court's conscience. 

In the next post, we shall see what the Supreme Court stated on the scope of Section 34(2A) and its impact on the interpretation of "public policy" in Section 48(2)(b).

Whether Section 34 Amendments are Retrospective?: Ssangyong v NHAI

The decision of Ssangyong Engineering & Construction Co. Ltd. V. NHAI [Civil Appeal No. 4779/2019 dt. 8 May 2019] is important in the history of Indian arbitration. It not only clarifies the scope of the ground of public policy for setting aside an arbitral award post the 2015 amendment but also decides the vexed question regarding the applicability of these amendments to petitions for setting aside awards that were passed in arbitrations commenced prior to 23 October 2015. In doing so, it impliedly overrules decisions of several High Courts which applied the amended provisions retrospectively to S 34 petitions that were filed much before 23 October. After BCCI v. Kochi Cricket (P) Ltd. [(2018) 6 SCC 287], most High Courts and District Courts began applying the amended Section 34 to petitions that were filed even prior to 23 October 2015. This decision clarifies that the amendments did not apply to Section 34 petitions filed before that date and is in the right direction.   

There are several aspects to the decision that would be the subject of many posts in this blog. This post, however, looks at the limited aspect of retrospective applicability of the amended Section 34. Before embarking on this exercise, it would do well to recap what the Supreme Court stated in BCCI v. Kochi Cricket (P) Ltd. [(2018) 6 SCC 287].

In Para 39 of the Supreme Court's decision in BCCI v Kochi, it held that "where the Section 34 petition is filed after the commencement of the Amendment Act, and an application for stay having been made under Section 36 therein, will be governed by Section 34 as amended and Section 36 as substituted." In order to make the amended Section 36 apply to even pending Section 34 applications, the Supreme Court used the procedure-substance dichotomy and held that the 2015 amendments applied to procedural provisions retrospectively. The consequence of this reasoning was that Section 36 as amended applied even to pending S. 34 petitions.

In para 54 of the decision, the Supreme Court noted the argument of Sr. Counsel Mr. KV Viswanathan that although the amendments to Section 34(2) regarding public policy were styled as clarificatory, they were substantive in nature and that since these amendments did away with at least two precedents, ONGC v. SAW Pipes (2003) and ONGC v. Western Geco (2015) on setting aside arbitral awards on the ground of public policy the amendments could only be prospective. [Readers may kindly note that para 54 of the decision is cited in Ssangyong as para 75, probably referring to the numbering in the SCC report.]. 

But the court in Kochi Cricket held that it was not expressing any final opinion on the issue: "We do not express any opinion on the aforesaid contention since the amendments made to Section 34 are not directly before us. It is enough to state that Section 26 of the Amendment Act makes it clear that the Amendment Act, as a whole, is prospective in nature. Thereafter, whether certain provisions are clarificatory, declaratory or procedural and, therefore, retrospective, is a separate and independent enquiry, which we are not required to undertake in the facts of the present cases, except to the extent indicated above, namely, the effect of the substituted Section 36 of the Amendment Act."

In Ssangyong, the court had to deal with the issue. The court agreed that the amendments were clarificatory in its language. However, the court viewed that the effect of these provisions was that it substantively changed the law and held: "Therefore, even in cases where, for avoidance of doubt, something is clarified by way of an amendment, such clarification cannot be retrospective if the earlier law has been changed substantively." In support of its conclusion, the Supreme Court cited Sedco Forex International v CIT (2005) 12 SCC 717, which was cited by Sr. Counsel Mr. KV Viswanathan in Kochi Cricket.

The court held that since fundamental changes were made in the ground of public policy, it cannot be retrospective and would apply only to Section 34 applications that were filed on or after 23 October 2015 (para 12).

It must be borne in mind that retrospectivity for the purposes of Section 34 is not the date of signing the arbitration agreement or the date of the dispute but the date when the Section 34 petition was filed. If an agreement (with arbitration clause) is signed on 01.01.2012 and a dispute arose on 01.01.2015 and the award is passed on 01.10.2015, the unamended law would apply if the application is filed on  22.10.2015 but the amended law would apply if the application is filed on 23.10.2015.

Scope of Interference in Section 34 Applications on Public Policy & Patent Illegality Grounds

One of the most important topics that has always caught the attention of scholars and commentators on arbitration is the scope of review of arbitral awards on the ground of public policy. The Indian scenario is no exception. In the past few years, there have been many clarificatory amendments and judgements attempting to elucidate the law but there are certain questions that have required answers and are rarely forthcoming.

The law as it stands today is that if the court finds that an arbitral award is in conflict with public policy, the award can be set aside [Section 34(2)(b)(ii)]. By virtue of the 2015 amendments, the scope of public policy has been made even narrower. Explanation 1 to Section 34(2)(b)(ii) explains what public policy is. It says that an award is in conflict with public policy only if:

• the making of the award was induced by fraud or affected by fraud or corruption or was in violation of Section 75 (confidentiality) or Section 81 (admissibility of conciliation material in other proceedings), or 
• the award is in contravention with the fundamental policy of Indian law. The second explanation states that the test as to whether the award is in contravention of the fundamental policy of Indian law does not entail the review of merits of the award, or
• the award is in conflict with the basic notions of morality or justice.

Section 34(2A) carves out an exception to the above rule. It says in purely domestic awards (without international context), a review of the arbitral award on the ground of patent illegality on the face of the award is permissible but not on mere erroneous application of law or re-appreciation of evidence. 

This is the entire gamut of provisions permitting review of arbitral awards on the ground of public policy and patent illegality. There are a few notable things:

1. Patent illegality does not include public policy post-2015. Both grounds are different. Public policy is dealt with under Section 34(2)(b)(ii) and the two explanations while patent illegality is provided in Section 34(2A).
2. Mere error in interpretation of contract is not a sufficient ground for testing the validity of the award. 
• Where two plausible views can be taken and the arbitrator has taken one such views, the award cannot be reviewed that she did not take the other. 
• The question regarding whether a contractual clause is against public policy of India is different from the question as to whether the interpretation of a contractual provision necessitates setting aside the arbitral award. The former comes under Section 34(2)(b)(ii) while the latter comes under Section 34(2A)[as applicable for awards rendered after 2015]. Hence, unless Section 34(2A) is pleaded, an arbitral award cannot be questioned for error in contractual interpretation under Section 34(2)(b)(ii), except in exceptional situations. 
• Further, Section 28(3) has been amended such that post-2015, the tribunal needs to "take into account the terms of the contract" while rendering the award as against the earlier position that the "tribunal shall decide in accordance with the terms of the contract". The effect of this is aptly explained in a recent article: "Whereas as per the pre-amended Section, the Arbitral Tribunal was necessarily required to decide the dispute strictly ‘in accordance’ with the terms of the contract, while being entitled to merely ‘take into account’ the usages of trade; under the amended Section, the necessity to decide ‘in accordance’ with the contract has been done away with and replaced with a softer approach requiring the Tribunal to ‘take into account’ the terms of a contract just as it would ‘take into account’ usages of the trade." Thus, even if the tribunal deviates from the contract, so long as sufficient and cogent reasons for the deviation, the award should be upheld. 
• On the other hand, if no reason is given for the deviation or if the deviation is patently wrong, the award could be set aside. But the patent illegality as provided in Section 34(2A) in the deviation from the contract should appear on the face of the award and not on the materials relied upon. In other words, if the tribunal interprets or ignores a contractual provision and such an act is grossly wrong and shocks the conscience of the court on the perusal of the arbitral award, such an act can entail review of merits.  
3. In all cases in Section 34(2A), the patent illegality should be apparent on the face of the arbitral award. This means that that in order to make a case for setting aside an arbitral award under this provision, the petitioner cannot rely on any material except the arbitral award. However, this provision does not prohibit the award holder from relying on the materials in the arbitration proceedings to support an interpretation. For instance, if the conclusion of the arbitral tribunal is that an agreement is actually an integral part of another agreement based on interpretation of the contract, the petitioner can only rely on the award to support his reasons for setting aside, while the Respondent can rely on, say, a term of the contract defining the term "agreement" even if the definition does not appear in the award. 

The next post will deal with the the concepts such as "review on merits", "erroneous application of the law", "reappreciation of evidence", etc. and also with the other aspects relating to setting aside the award on the grounds of patent illegality and public policy such as the procedure to be followed, and the restrospective operation of the 2015 amendments for reviewing awards. 

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.

Comments

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.9/614. That 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 arbitration, would 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.

Guest Post: Mid-Year Arbitration Review- Part II by Juhi Gupta

(Continuing with her mid-year arbitration review (see previous post), Ms. Juhi Gupta, an LL.M. graduate from Harvard Law School, has penned the second part of the series of posts on the topic. Do check out the awesome, crisp and to-the-point descriptive comment on prominent arbitration related cases decided in India in the first half of 2018. Happy reading!)

MID-YEAR ARBITRATION REVIEW – II

In the second of a series of posts, I continue to review important Supreme Court and High Court decisions on arbitration so far this year. The decisions covered in this post provide valuable insights into the questions of the status of an interim award, competence of arbitral tribunals and the scope of authority of tribunals to rule on their own jurisdiction.

Agreement to arbitrate - Parties’ written consent to arbitrate required for judicial referral to arbitration; oral consent of counsel is insufficient

Kerala State Electricity Board v Kurien E Kalathil (Supreme Court, 9 March 2018)

Brief facts: The respondent contractor filed a writ petition in the Kerala High Court to direct the appellant to pay certain sums as determined in a prior dispute between the parties. The Court allowed the writ petition and also referred the parties to arbitration under section 89 of the CPC upon the oral consent of their counsel to resolve certain pending matters. It was undisputed that there was no arbitration agreement between the parties. The arbitrator issued an award in the respondent’s favour. The appellant’s petition under section 34 of the Arbitration Act (hereinafter “the Act”) was dismissed and subsequently, its section 37 appeal was transferred to the Supreme Court as it had also challenged the High Court’s verdict in the writ petition before the Supreme Court.

Issue: Whether or not the High Court was right in referring the parties to arbitration on the appellant’s counsel’s oral consent without written instruction from parties?

Arguments: The respondent (Kalathil) argued that the party’s counsel has implied authority to consent to arbitration on behalf of the party.

Decision: The Supreme Court set aside the arbitral award holding that oral consent given by counsel without written memos of instruction from parties does not fulfil the requirement under section 89 of the CPC (Afcons Infrastructure). The Court emphasised the serious civil consequences of referring parties to arbitration under section 89 in the absence of an arbitration agreement:

“Once the parties are referred to arbitration, the proceedings will be in accordance with the provisions of Arbitration and Conciliation Act and the matter will go outside the stream of the civil court. Under Section 19 of Arbitration and Conciliation Act, the arbitral tribunal shall not be bound by the Code of Civil Procedure and the Indian Evidence Act. Once the award is passed, the award shall be set aside only under limited grounds. Hence, referring the parties to arbitration has serious civil consequences procedurally and substantively. When there was no arbitration agreement between the parties, without a joint memo or a joint application of the parties, the High Court ought not to have referred the parties to arbitration” (paragraph 39).

The Court rejected the respondent’s implied authority argument stating that counsel should not act on implied authority unless there is exigency of circumstances demanding immediate adjustment of suit by agreement or compromise (Byram Pestonji Gariwala v Union Bank of India and Ors., (1992) 1 SCC 31).

Further, the judicial order referring the parties to arbitration cannot be sustained in any event. This is because it made many observations affecting crucial areas of the dispute and therefore, encroached upon the arbitral tribunal’s competence and seriously prejudiced the appellant’s rights to pursue the matter in arbitration. The Court also noted that the appellant could not have challenged the absence of jurisdiction and arbitration agreement before the arbitral tribunal since it had challenged the High Court’s order before the Supreme Court.

Comment: This decision emphasises the essential requirement of an express agreement between parties to arbitrate, wherein the parties themselves consent as opposed to an agent acting on their behalf. The Court also makes an important observation regarding the High Court’s unjustified encroachment upon the arbitral tribunal’s competence.

Interim award and jurisdiction under section 16 – interim award can be challenged separately and independently under section 34, and arbitral tribunal’s authority to rule on its own jurisdiction is restricted and specific

M/S Indian Farmers Fertilizer Co-Operative Limited v. M/S Bhadra Products (Supreme Court, 23 January 2018)

Brief facts: In an arbitration of a contractual payment dispute between the parties, the arbitrator decided the issue of limitation in favour of the respondent, holding that the respondent’s claim was not time barred. The appellant challenged this award under section 34, labelling it as the ‘first partial award’. The District Court and High Court dismissed the section 34 petition on the ground that they lacked jurisdiction as the award in question could not be characterised as an interim award. The appellant subsequently appealed to the Supreme Court under section 37.

Issues: (1) Is an award deciding the issue of limitation an interim award; (2) can such interim award be directly set aside under section 34 or does it relate to jurisdiction, in which case the procedure under section 16 is required to be followed?

Arguments: The appellant argued that the impugned award was an interim award under the Act and therefore amenable to challenge under section 34. The point of limitation was one of the issues between the parties, which was finally decided by the arbitrator. The respondent argued that a ruling on limitation pertains to jurisdiction of the arbitral tribunal and is merely an order passed under section 16. Since the plea of limitation was rejected, the arbitral proceedings ought to continue as per section 16 (since appeals under section 37 are only available when a plea under section 16 is accepted) and the appellant’s challenge has to be deferred until all other issues have been determined.

Decision: On the first issue, the Supreme Court decided in favour of the appellant for the following reasons:

(i) Broad statutory scope of interim award

In the absence of an express definition in the Act of an interim award apart from section 2(c) stating that an arbitral award includes an interim award, the Court relied on the language of section 31(6) wherein it is stated that “the arbitral tribunal may, at any time during the arbitral proceedings, make an interim arbitral award on any matter with respect to which it may make a final arbitral award” [emphasis supplied]. The Court agreed with the appellant that limitation was a point of dispute between the parties and noted:

“the language of section 31(6) is advisedly wide in nature. A reading of the said sub-section makes it clear that the jurisdiction to make an interim arbitral award is left to the good sense of the arbitral tribunal, and that it extends to ‘any matter’ with respect to which it may make a final arbitral award. The expression ‘matter’ is wide in nature, and subsumes issues at which the parties are in dispute. It is clear, therefore, that any point of dispute between the parties which has to be answered by the arbitral tribunal can be the subject matter of an interim arbitral award” (paragraph 9) [emphasis supplied].

(ii) Availability of multiple interim awards

The Court adverted to section 32(1) that states that arbitral proceedings would be terminated only by a final award, as opposed to an interim award, “thus making it clear that there can be one or more interim awards, prior to a final award, which conclusively determine some of the issues between the parties, culminating in a final arbitral award which ultimately decides all remaining issues between the parties” (paragraph 10) [emphasis supplied].

Therefore, since the arbitrator disposed of the issue of limitation finally, it is clear that the award was an interim award that could be challenged under section 34.

While the Court decided this issue in the appellant’s favour, it cautioned against delivering interim awards as they delay resolution of disputes and increase parties’ expenses. The Court advised arbitral tribunals to consider whether there is any real advantage in passing interim awards as a fair means for resolution of disputes should be the principal consideration.

On the second issue as well, the Court decided in favour of the appellant. The Court undertook detailed legislative and judicial analyses of the kompetenz-kompetenz principle and concept of jurisdiction to clarify the import of the language of section 16(1) that the tribunal may rule on its own jurisdiction:

“the ‘jurisdiction’ mentioned in Section 16 has reference to three things: (1) as to whether there is the existence of a valid arbitration agreement; (2) whether the arbitral tribunal is properly constituted; and (3) matters submitted to arbitration should be in accordance with the arbitration agreement” (paragraph 20).

Accordingly, the Court concluded that a finding on limitation does not relate to jurisdiction and therefore, the procedure under section 16 is not required to be followed.

It is important to note that the Court opined that Parliament could consider amending section 34 in order to consolidate all interim awards with the final award so that a singular section 34 challenge can be made after the final award is delivered as opposed to piecemeal challenges that lead to “unnecessary” delay and additional expense.

Comment: While the Supreme Court may not have said anything new, it is nevertheless an important decision to keep in mind as it clarifies two significant concepts of the broad scope of an interim award as well as the restricted scope of “own jurisdiction” under section 16. It will be interesting to see whether the Court’s suggestion of consolidating interim and final awards will find its way into the Arbitration Act. The 2018 Amendment Bill is silent on this.

Competence of arbitral tribunal - tribunal has power to award interest pendente lite unless specifically and clearly barred by parties from awarding it

M/s Raveechee and Co. v Union of India (Supreme Court, 3 July 2018)

Brief facts: In an arbitration of a payment dispute between the parties regarding contractual works, the arbitral tribunal awarded the appellant (Raveechee and Co.) interest pendente lite on the award for damages. Upon the respondent’s challenge, the High Court set aside the award to the extent of the interest pendente lite granted.

Issue: Did grant of interest pendente lite fall within the arbitral tribunal’s competence?

Arguments: Union of India contended that the relevant contractual clause barred the arbitral tribunal from awarding interest pendente lite.

Decision: The Supreme Court upheld the award of interest pendente lite, observing that a plain reading of the relevant contractual clause (that barred interest on certain amounts) did not bar the arbitral tribunal from making such an award. The liability to pay interest pendente lite does not arise from any term of the contract but from the finding entitling the appellant to damages, payment of which was denied due to pendency of the arbitration i.e., pendente lite. Unless expressly barred, grant of interest pendente lite will predominantly be based on the arbitrator’s discretion. Upholding the kompetenz kompetenz principle (albeit not expressly), the Court ruled:

“Undoubtedly, such a power must be considered inherent in an Arbitrator who also exercises the power to do equity, unless the agreement expressly bars an Arbitrator from awarding interest pendente lite. An agreement which bars interest is essentially an agreement that the parties will not claim interest on specified amounts. It does not bar an Arbitrator, who is never a party to the agreement from awarding it” (paragraph 12; the Court relied on its prior decisions in Irrigation Dept., State of Orissa v G.C. Roy, (1992) 1 SCC 508 and Union of India v Ambica Construction, (2016) 6 SCC 36) [emphasis supplied].

Competence of arbitral tribunal – tribunal has power and jurisdiction to dissolve partnership on just and equitable grounds unless specifically and expressly excluded by parties

Yogendra N. Thakkar v Vinay Balse and Ors. (Bombay High Court, 13 June 2018)

Brief facts: The petitioner (Yogendra Thakker) submitted a claim to arbitration for dissolution of the partnership (between the respondents and him) on just and equitable grounds under section 44(g) of the Indian Partnership Act, 1932. This was challenged by the respondents under section 16 of the Arbitration Act on grounds of lack of jurisdiction. The arbitrator ruled that he lacked jurisdiction to dissolve the partnership under section 44(g), against which the petitioner filed a petition to the Supreme Court under section 37(2)(a) of the Arbitration Act.

The arbitration agreement in the partnership deed read as follows: “All dispute[s] and questions in connection with the Partnership of this Deed arising between Partners or their representatives shall be referred to [arbitration]” [emphasis supplied].

Issue: Whether an arbitral tribunal has the power and jurisdiction to dissolve a partnership on just and equitable grounds or does that power only vest in courts?

Arguments: The petitioner argued that (i) the arbitration agreement was very wide and conferred powers on the arbitrator to decide all disputes and questions in connection with the partnership deed, including dissolution under section 44(g); (ii) there is no statutory bar or impediment to an arbitrator’s powers to dissolve a partnership on just and equitable grounds under any law, including the Partnership Act; (iii) the two exceptions to the arbitrability of a dissolution dispute, namely (1) an express exclusion and (2) an action in rem, do not apply since a dissolution under section 44(g) is an in personam action; (iv) pursuit of arbitration under the partnership deed as well as a suit on just and equitable grounds could culminate in inconsistent outcomes; and (v) the respondents themselves did not argue that dissolution on just and equitable grounds violated public policy or constituted an action in rem.

The respondents argued that (i) the parties have specifically agreed on the mode and manner of dissolution in the partnership deed and since the arbitrator was a creature of contract, he derived his powers from the partnership deed and could not exceed the scope of agreement between the parties; (ii) section 44 does not refer to an agreement between parties for dissolution and only courts have inherent powers to order dissolution on just and equitable grounds, not arbitral tribunals; and (iii) in light of section 28(2) of the Arbitration Act (power of an arbitral tribunal to decide only if expressly authorised by parties), an arbitrator cannot dissolve a partnership on just and equitable grounds unless expressly authorised to do so by the parties. There was no such authorisation in the present case.

Decision: The Court agreed with the petitioner’s arguments and held that the arbitrator has jurisdiction to dissolve the partnership under section 44(g). Accordingly, the arbitrator was directed to proceed with the arbitration. The Court noted the parties’ intention, which must be given paramount consideration, as reflected in the wide arbitration agreement.

Although section 44 refers to dissolution of a partnership by a court (“at the suit of a partner”), it does not expressly or impliedly bar an arbitrator from dissolving a partnership. The Court relied upon the Supreme Court decision in V.H. Patel & Co. v Hirubhai Himabhai Patel ((2000) 4 SCC 368) wherein the powers of an arbitrator to dissolve a partnership under clauses (c) to (f) of section 44 were recognised. The High Court took the view that there was no reason to not extend this power to clause (g). The Court also agreed with the petitioner’s parallel proceedings argument holding that the petitioner cannot file a civil suit for dissolution on just and equitable grounds and simultaneously pursue an arbitration for dissolution on other grounds under section 44 by invoking the same arbitration agreement.

The Court pointed out that the respondents blew hot and cold by arguing that the powers under section 44(g) vest only in courts but at the same time acknowledging that an arbitral tribunal could have exercised these powers had the parties entered into an agreement to this effect. Further, the respondents could not urge that the arbitrator was empowered to dissolve the partnership under clauses (d), (e) and (f) but not clause (g) of section 44. Applying the Supreme Court decision in Booz Allen, the High Court affirmed the petitioner’s submission that an action under section 44(g) is in personam and therefore, arbitrable.

Comment: These two decisions on the competence of an arbitral tribunal underscore the minimal judicial encroachment and broad competence of arbitral tribunals that are generally, and now increasingly, favoured by courts. The onus is on parties to expressly and specifically circumscribe the tribunal’s powers and jurisdiction should by making the necessary inclusions and exclusions they wish to do so. This also ties in with the importance of carefully drafting an arbitration clause/agreement as the broader the language, the more easy it would be for courts to rule in favour of a tribunal’s competence.

(more in another post)