Vidya Drolia v DTC: Part I: Interesting Aspects- Arbitration Law as a Special Contract Law

 Vidya Drolia v Durga Trading Corporation is an interesting and important decision of a three judge Bench of the Supreme Court of India on arbitrability in Indian arbitration and the allocation of powers between the court and the arbitral tribunal to decide questions relating to arbitrability, especially in the context of Section 8 (where the court refers a dispute covered by an arbitration agreement to arbitration) and Section 11 (power of the supervisory court to arbitrators).

This post and the posts following this one are not run-of-the-mill case comments. Rather, the objective here is to discuss certain interesting points about this 242 page decision. 

The first interesting aspect covered in the judgement is the relationship between general contract law (covered in Sections 1-75 of the Indian Contract Act, 1872) and arbitration law, which deals with a type of special contract, that is, arbitration agreement. Paras  11 to 15 of the decision (p. 12-17) deal with this issue. 

According to the Court, the meaning of "agreement" is derived from Section 10 of the Indian Contract Act, 1872 ("Contract Act") and therefore, "an arbitration agreement should satisfy the mandate of Section 10 of the Contract Act..." (Para 11). Thus, the arbitration agreement should satisfy the general contract law requirements of free consent and other such requirements. A contract is an agreement enforceable by law. An arbitration agreement not enforceable by law is void and is not legally valid (Para 11). 

Thus, arbitration is "a matter of contract". The immediate implication of this is that "the parties are entitled to fix boundaries as to confer and limit the jurisdiction and legal authority of the arbitrator." (Para 15).

If an arbitration agreement is a contract, taking this proposition to its logical end, an arbitration agreement can be specifically enforced. The mechanism of specific enforcement is provided in Section 8 of the Arbitration and Conciliation Act, 1996. The question further arises, whether specific performance is the only remedy for breach of an arbitration agreement. 

Many jurisdictions and commentaries have explored the question of whether damages would lie where a party breaches an arbitration agreement. A popular commentary on the subject argues on the breach of an arbitration agreement: "If it is broken, an award of damages is unlikely to be a practical remedy, given the difficulty of quantifying the loss sustained." (Para 1.55, Redfern, Hunter et al, Redfern & Hunter on International Arbitration, 2015). See also, Julio César Betancourt, Damages for breach of an international arbitration agreement under English arbitration law, Arbitration International, Volume 34, Issue 4, December 2018, Pages 511–532, https://doi.org/10.1093/arbint/aiy030. Born argues:

"Nevertheless, while inadequate when considered alone, damages for breach of an arbitration agreement can be an appropriate supplementary means of enforcing arbitration agreements, by increasing the disincentives for such conduct. A few contemporary judicial decisions in the United States, England and Switzerland have either awarded damages for the breach of an arbitration agreement or indicated that the possibility for doing so existed. Nonetheless, some contemporary judicial decisions deny the existence of a right to damages for breaches of arbitration agreements (ironically, effectively resurrecting the historic hostility to arbitration agreements, but in reverse form)." (Gary B Born, International Commercial Arbitration 1305-1306 (2014).

An aspect to be considered is: whether the provision relating to costs as contained in Section 31A could be considered as damages for breach of an arbitration agreement? See, "Costs Allocation Under the Amended Indian Arbitration Law: A Critique" which criticizes the practice of Indian courts in not adhering to the spirit behind the enactment of Section 31A. Before Indian courts delves on these aspects, Indian courts should uniformly allocate costs as per the general rule provided in Section 31A(2)(a) that "unsuccessful party shall be ordered to pay the costs of the successful party". 

If not damages, whether courts could order costs on an indemnity basis for breach of arbitration agreement could be explored. Such a movement would, prima facie, be in the right direction.

More on the decision in another post.

No Injunction/ Interim Measure Against Infrastructure Projects: Calcutta HC Decides

Golden Edge Engineering Private Limited vs. Bharat Heavy Electricals Limited (18.06.2020 - CALHC) : MANU/WB/0558/2020 is an important decision under the Specific Relief (Amendment) Act, 2018. Petitioner was the contractor of the Owner, BHEL in respect of an Infrastructure Project as defined in Explanation to Section 21A r/w Schedule to the Specific Relief Act, 1963 (as amended) (SRA).

The Petitioner (Contractor), in an agreement entered into in 2017, contended that BHEL had delayed in providing the frontage for the work and in making payments. The Contractor also relied on the lockdown due to Covid19 to argue that delay in performance was beyond the control of the Contractor. The Contractor argued that despite assurances of completion, BHEL had gone ahead with floating a tender for performance of the remaining works that the Contractor was yet to complete. Consequently, the Contractor prayed for an injunction restraining BHEL from withdrawing the work from the Contractor and awarding it through a new tender to some other person.

The court rejected the said contentions on several grounds, some of which are provided below:

• BHEL allowed time to the Contractor to complete the work after the lockdown period but the after the lifting of restrictions, it cannot be said that there has been uncertainty as the availability of manpower. In reality, there has been no migration of workers from the State of Jharkhand, which is the state where the project is located.
• The Contractor could not adhere to the schedule even before the Covid19 pandemic. 
• The prayer granted in the petition was barred by the SRA, as amended. in terms of Sections 41(ha) and 20A. 
• There is no provision in the Tender/ Contract specifically restricting BHEL from proceeding on risk and cost.
• Even if there is a legal injury to the Contractor, the same can be adequately compensated in terms of money. 
• Balance of convenience is in favour of BHEL. As a PSU, if it is prevented from engaging a new contractor in case the existing Contractor is unable to perform, it will lead to a situation where BHEL will be stuck with the non-performing Contractor and substantial time will be wasted and project will come to a standstill in the event BHEL is unable to go ahead with the new tender. 

Comments

Para 42 of the judgment is interesting and important, for it seeks to examine the issues at stake if an injunction is passed. It deserves noting, as it is, in the judgment:

"42. So, the balance of convenience is entirely in favour of the Respondent as a Public Sector Undertaking engaged in power generation ought not to be prevented from engaging a new contractor if the existing contractor is unable to provide the requisite standard of work as the documents on record clearly show that ample opportunities have been provided and are being provided by the respondent to the petitioner to complete their outstanding work as per requisite standards but instead of utilising the same the petitioner intends to secure a monopoly and ensure the Respondent is stuck with the Petitioner in whatever performance and/or quality of work they offer. It is stated and submitted that the entire project has been severely lagging behind the requisite standards and the Respondent's employer i.e. the National Thermal Power Corporation has been constantly reprimanding the Respondent because of the cascading effect the Petitioner's under performance has been having on the entire project. A lot of time will be wasted and the project will come to a standstill in the event the Respondent is unable to go ahead with the New Tender and have a candidate ready to replace the Petitioner in the event of the failure to complete the work as such new tender would have to be conducted post the Petitioners failure."

There are three interesting points in the decision:

• In respect of infrastructure projects, courts will not grant stay in view of the statutory mandate pursuant to the amendments to the SRA.
• Covid19 cannot be used as an excuse in respect of infrastructure projects especially where the Contractor is unable to perform the contract expeditiously;
• Tendering processes in respect of risk and cost contracting can be commenced even before termination, and would not be a ground for granting injunction.  

All the three points made above are significant in the current context. The court, rightly, analysed the importance of not passing stay orders on infrastructure projects. The judgment seems to be in line with the recent legislative mandate and seeks to balance competing interests and further the general principle of specific relief: injunctions will not be passed when damages would be adequate remedy.

However, the ultimate conclusion that: "I am of the opinion that the petitioner would be left with a claim for equitable compensation as there would be no significant prejudice to the petitioner in the event of refusal to grant interim injunction at this stage." is not entirely clear. Was the court indicating that the Petitioner/ Contractor could pursue the remedy of seeking compensation but that no prejudice would be caused to the Contractor if its prayer was refused.

[full disclosure: Till early last year, this blawgger was an employee of BHEL. However, this blawgger was in no way connected to the case or the subject-contract.]