Guest Post: “Clean Slate Doctrine” under IBC

[Mr. Aakash Deep Anand is Law Graduate from IP University, Delhi and presently works in a Govt. Department.]

“Clean Slate Doctrine” under the Insolvency & Bankruptcy Code and its evolution

[Aakash Deep Anand]

Introduction

The process of insolvency has undergone a substantial change after the Insolvency and Bankruptcy Code, 2016 [“IBC” or “Code”] has come into force. The ball starts rolling after a Corporate Entity enters into a Corporate Insolvency Resolution Process [“CIRP”] and the Adjudicating Authority [“NCLT”] appoints an Interim Resolution Professional [“IRP”] forthwith. The IRP further constitutes the Committee of Creditors [“COC”].

In accordance with Regulation 6 of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 [“IBC Regulations”], the Claims should be submitted to the IRP within the time period stipulated in the Public Announcement, which should be fourteen days from the date of appointment of the IRP. Creditors who fail to submit their claims within the stipulated timeline may submit it on or before ninetieth day of the insolvency commencement date [Regulation 12 of the IBC Regulations].

After constitution of the COC, first meeting of the COC should be held within 7 days of its constitution [Section 22(1) of the Code]. In the said meeting, the concern of appointing the IRP as Resolution Applicant [“RP”], or appointing a new RP is resolved by the Financial Creditors by a majority vote of not less than sixty-six percent [Sec 22(2) of the Code].

It is the duty of the RP to preserve and to protect the value of the Corporate Debtor and manage the operations of the Corporate Debtor as a going concern [Section 22 of the Code]. Another foremost duty of the RP (under Section 18 of the IBC) is to collect all information relating to assets, finances and operations of the Corporate Debtor and to receive/collate all the claims submitted by the Creditors pursuant to the Public Announcement. Thereafter, the RP invites the potential Resolution Applicant and prepares the Information Memorandum, based on which the Resolution Applicants come up with their Resolution Plan. The Resolution Plans received are then presented before the COC.

On the approval of a suitable Resolution Plan by the COC, the same is submitted to the Adjudicating Authority for its final approval. Once the assent of the Adjudicating Authority is obtained, the successful Resolution Applicant acquires the control over the Corporate Debtor.

The “Clean Slate Doctrine”

Almost every day, we see new developments in IBC, either in the form of Judgments or in amendments to the existing Code/Regulations. One such example is the “Clean Slate Doctrine”. The theory has been put to the effect by the Hon’ble Supreme Court of India in the matter of Committee of Creditors of Essar Steel India Limited vs. Satish Kumar Gupta and Ors.

In the above judgment, the Hon’ble Supreme Court has held that a successful Resolution Applicant cannot suddenly be made to face the undecided claims after the resolution plan submitted by him has been accepted, as this would amount to a hydra head popping up which would throw into uncertainty amounts payable by a prospective Resolution Applicant who successfully took over the business of the Corporate Debtor. The Court added that all claims must be submitted to and decided by the RP so that a prospective resolution applicant knows exactly what has to be paid in order that it may then take over and run the business of the Corporate Debtor.

Thus, according to the Doctrine of Clean Slate, once the Adjudicating Authority approves the Resolution Plan, the plan becomes binding and thereafter, the Resolution Applicant should not face any undecided claim. The doctrine touches upon the intent of the IBC statute, which is very clear to give a suitable opportunity to the interested Resolution Applicant to acquire the dying entity and begin the functions on a clean slate.

Unfortunately, the issue is not that straightforward, as it appears to be. Questions pertaining to the claims being made after the approval of the Resolution Plan by the Adjudicating Authority are always debatable. Amongst the various concerns relating to the rejection of the claims coming up after the approval of the Resolution Plan, recently two High Courts i.e. Rajasthan and Jharkhand pronounced on the issue and reached seemingly diametrically opposite conclusions.

The Debate

Section 31 of the Code lays down that the resolution plan, once approved by the adjudicating authority, is binding on the corporate debtor and its employees, members, creditors, including the Central Government, any State Government or any other local authority such as authorities to whom statutory dues are owed, guarantors and other stakeholders involved in resolution plan.

However, the question arises as to what happen in an instance, where the debts of any creditor against the Corporate Debtor have not been decided during the CIRP or where the claims have been  made after the approval of the resolution plan. There have been two divergent views with regard to this issue which have been elaborated upon in the succeeding sections:

View 1: Clean Slate Doctrine will prevail

In this scenario, where the claim is filed after the approval of the Resolution plan, applying the Clean Slate Doctrine, the claim will be not accepted at the belated stage.

Recently, the Hon’ble High Court of Rajasthan while allowing the Writ Petition in the matter of Ultra Tech Nathawara Cement Limited vs. Union of India & Ors. [Civil Writ Petition No.9480/2019] had butteressed the scope of “Clean State”. The Hon’ble Court held that the purpose of the statute is very clear that it intends to revive the dying industry by providing an opportunity to a Resolution Applicant to take over the same and begin the operation on a clean slate and for that purpose, the evaluation of all dues and liabilities as they exist on the date of finalization of the Resolution Plan have been left in the exclusive domain of the Resolution Professional with the approval of the COC. Further, the Hon’ble Court added that the courts are given an extremely limited power of judicial review into the Resolution Plan duly approved by the COC.

Debts of the Corporate Debtor arising after the approval of the Resolution Plan are rejected for the reason that the same are not incorporated in the approved Resolution Plan. Thus, according to this view, it may not be possible for the Resolution Applicant to consider the claims that never came to his knowledge during the CIRP, as the same would also defeat the purpose of the “Clean Slate”.

View 2: Clean Slate Doctrine will not prevail

The latter view is polar opposite to the prior. There may be cases where the IRP/RP had left over certain claims during the CIRP or had omitted to identify the claims during the CIRP. Therefore, the same would have resulted in unexpected claims after the approval of the Resolution Plan.

In this regard, the Hon’ble Jharkhand High Court recently, in the matter of Electrosteel Steels Limited vs. The State of Jharkhand and Ors. dismissed the prayer of Electrosteel Steels Limited. The company (Electrosteel) entered into the CIRP and a successful Resolution Applicant, M/s Vedanta Limited took over the company pursuant to approval of the Adjudicating Authority.

The dispute arose when the state tax authorities initiated garnishee proceedings against Electrosteel to recover the unpaid taxes. The Petitioner Company (Electrosteel) has challenged the garnishee order issued by the Deputy Commissioner of Commercial Taxes (Bokaro, Jharkhand). The garnishee order was issued on the account of tax/penalty due from the Petitioner Company.

In this regard, the Hon’ble Jharkhand High Court quoted the relevant portion of Regulation 6 of the IBC Regulations which is as mentioned as below: -

 

"6. Public announcement

 

(1) An Insolvency professional shall make a public announcement immediately on his appointment as an interim resolution professional.

[Explanation: 'Immediately' means not later than three days from the date of his appointment.]

 

  (2) The public announcement referred to in sub-regulation (1) shall:

 

(a) be in Form A of the Schedule;

(b) be published-

(i) in one English and one regional language newspaper with wide circulation at the location of the registered office and principal office, if any, of the corporate debtor and any other location where in the opinion of the interim resolution professional, the corporate debtor conducts material business operations; ------------------."

In Electrosteel (supra), the Hon’ble Court observed that the Public Announcement was never made in Petitioner’s principal place of business or a place, where a registered office of the Petitioner Company was situated. The registered office of the Company was situated in the State of Jharkhand. However, the Public Announcement was published in the Business Standard of Kolkata Edition.

This omission resulted in demands of the state tax authorities, which has been made after the approval of the resolution plan. As the state tax auhtorities were not even a part of the CIRP, the purpose of “involved in resolution plan” under Section 31 of the Code was defeated and the Hon’ble Jharkhand High Court dismissed the petition.

In the meantime, the judgment was challenged before the Hon’ble Supreme Court of India by way of a Special Leave Petition [SLP (C) No.7147-7150/2020]. The matter is pending before the Apex Court as on date.

Comments

The “Doctrine of Clean Slate” justifies rejection of claims made after the approval of the plan so as to provide a fresh or a clean start to a successful Resolution Applicant.

The Code stipulates that the powers of the board of directors or partners shall be exercised by the IRP/RP from date of his/her appointment. As a result, the board stands substituted by the IRP/RP. The IRP/RP is also duty bound to reasonably be aware of the assets and liabilities of the Corporate Debtor. Such a duty necessarily entails the IRP/RP to find out if there are statutory dues owed by the Corporate Debtor.

If the existence of any statutory debt can be reasonably determined by the IRP/RP, it would be unjust or illegitimate to consider such debts as wiped out merely on the ground that no claims have been filed by the concerned government department/authority. Ultimately, these statutory debts are public money owed to the people of India. However, the legislative intent of the statute is to ensure the revival of the dying industry but the same shall not result into the loss of public money.

In sum, the doctrine of clean slate has to be applied with a lot of circumspection as regards statutory debts. If the IRP/ RP can reasonably determine pending statutory dues, the same should be brought on record even if no claims have been filed by the concerned department/authority. The nature of function of the IRP/ RP requires him/ her to go to the extent of communicating with statutory authorities, in cases where the IRP/ RP could, with reasonable diligence, find out if the Corporate Debtor owes statutory dues.

Irrelevance of Seat in Domestic Arbitration: SC Agrees in Principle

In a previous post in this blog, we had argued: "For domestic arbitrations, it is necessary to abandon the concept of seat as it is understood in international arbitration parlance." Readers are kindly request to read this post before reading the below post or the decision.

The Supreme Court of India seems to agree with this in principle in its decision today (29.04.2020) in the case of Quippo Construction Equipment Ltd. v Janardan Nirman Pvt. Ltd. (CA 2738/2020). Although the Supreme Court has not directly addressed the issue in depth, it has stated:

"The specification of “place of arbitration” may have special significance in an International Commercial Arbitration, where the “place of arbitration” may determine which curial law would apply. However, in the present case, the applicable substantive as well as curial law would be the same."

This is not the first time an Indian court has expressed doubts over BALCO and subsequent decisions importing the concept of seat from international commercial arbitration to domestic arbitration. The Calcutta High Court has held in the case of Debdas Routh and Ors. v. Hinduja Leyland Finance Ltd. and Ors. (2018) 4 CALLT 57 (HC): 2018 SCC OnLine Cal 14093 : AIR 2018 Cal 322 that juridical seat of arbitration was irrelevant in domestic arbitrations since arbitration law did not change based on the designation of place of arbitration (see Para 67 of the decision).

Therefore, it is time that courts revisit this fancy but needless innovation of importing the ICA concept of seat into domestic arbitration.

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).

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

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

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

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

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

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

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

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

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

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

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

Party Autonomy and NOM Clause in the UK SC: Rock Advertising v MWB Business Exchange

The true scope of the elusive but all pervasive party autonomy doctrine was at the heart of the debate in the case of Rock Advertising Limited v. MWB Business Exchange Centres Limited. On the day when Kings XI fell just three runs short of the 186 runs scored by Mumbai Indians, the UK Supreme Court delivered two opinions in the case settling and at the same time unsettling the law on the validity of oral amendments to a contractual provision which prohibited oral modifications to an agreement (No Oral Modification or NOM Clause). While the two opinions coincided in the outcome, the reasoning and the scope of the party autonomy doctrine in the context of validity of oral amendments to NOM clauses were vastly different. While one opinion preferred commercial certainty, the other side sought to strike a balance between certainty and reality. No wonder the leading opinion began with these lines: "Modern litigation rarely raises truly fundamental issues in the law of contract. This appeal is exceptional." (Para 1)

In this post we will provide a descriptive comment of the decision of the UK Supreme Court of the majority opinion in the case and in a later post, we will look at the minority view and the Indian law on the subject.

Facts

Rock Advertising Limited ("Rock") entered into an agreement with MWB Business Exchange Centres Limited ("MWB"), a company engaged in the business of operating serviced offices. Rock, the licensee, was supposed to pay a monthly consideration to the licensor, MWB. Clause 7.6 of the agreement, which was the term in issue, read:

“This Licence sets out all of the terms as agreed between MWB and Licensee. No other representations or terms shall apply or form part of this Licence. All variations to this Licence must be agreed, set out in writing and signed on behalf of both parties before they take effect.” (emphasis supplied)

Unfortunately, Rock defaulted in payments to MWB. Rock's sole director spoke over phone with an employee of MWB regarding the dues. The director contended that the MWB's employee agreed to vary the agreement by in line with the revised schedule of payment proposed by him, which MWB's employee denied. 

The Legal Proceedings

Thereafter MWB locked out Rock from the premises owing to Rock's failure to pay the arrears, then terminated the licence agreement,and sued for the arrears in the County Court. In the proceedings, Rock filed a counterclaim for damages for wrongful exclusion from the premises. 

Although the County Court found that (a) there was an oral agreement between the Director of Rock and the employee of MWB and (b) MWB's employee had the ostensible authority to enter into such an agreement, the court concluded that Clause 7.6 (quoted above) made such a variation agreement ineffective. Note that clause 7.6 (emphasised above) requires that a variation agreement should be agreed, in writing and signed on behalf of both the parties before they took effect.

The Court of Appeal decided in favour of Rock by holding that the oral agreement to revise the payment schedule amounted to an agreement to dispense with the requirements of Clause 7.6. On the contention that there was no consideration in the purported agreement, the Court held that the consideration was supported by consideration: that Rock would make payments as per the revised schedule of payments. MWB appealed to the Supreme Court.

Judgement of the UK Supreme Court

As noted above, there are two opinions, one by Mr Justice Sumption (with whom Ms Justice Hale, Mr  Justice Wilson and Mr Justice Lloyd-Jones agreed) and the other one by Mr Justice Briggs. We'll summarise the majority opinion in this post:

The Leading Decision by Justice Sumption

The reasoning part of Justice Sumption's opinion began by acknowledging the baseline legal position that "law should and does give effect to a contractual provision requiring specified formalities to be observed for a variation." Next, the judge gave the analogy of statutes requiring certain agreements to be in specific forms and stated that there is no principle prohibiting parties from doing what a statute does by adopting formal requirements by contract..

The judge noted three reasons why No Modifications Clauses are recognised despite common law placing virtually no formal requirements for a valid contract:

• Such clauses prevents attempts at undermining agreements by informal means;
• It avoids disputes between the parties as to whether there was a modification in the agreement and the exact nature of the modification;
• A level of formality provides a level of internal control to the corporations on authority to effect such contractual modifications.

The judge felt that such "legitimate commercial reasons" do not act against any public policy and that case law disregarding them were entirely "conceptual", that is to say, did not serve substantial practical purpose. The conceptual justification to disregard NOM clauses was that parties who could agree on such clauses could also undo them.

The judge took aid from the international legal systems such as the UNIDROIT Principles of international Commercial Contracts and the Vienna Convention on Contracts for International Sale of Goods regarding the absence of formal requirements for contracting and the paradoxical recognition of NOM clauses. These were taken to suggest that there was "no conceptual inconsistency between a general rule allowing contracts to be made informally and a specific rule that effect will be given to a contract requiring writing for a variation."

Drawing the attention to Entire Agreement clauses, the judge took note of the coupling of such clauses with NOM clauses and found the commonality between these provisions: contractual certainty. The court "clarified" the legal position on the enforceability of entire agreement clauses by holding that such clauses may not operate where there is a collateral agreement (whose effect is against the entire agreement clause) which is supported by its own consideration, then most standard form Entire Agreement clauses would not have the effect of preventing such agreement's enforceability. However, the court clarified that if otherwise, the entire agreement clause would be given effect to.

As regards the parties' right to orally modify the agreement, the court held that it was not that oral modifications were forbidden; they simply agreed that oral modifications were forbidden. This is not to mean a party who made a representation so as to make the other rely on that representation and act on it can go without accepting the consequences. But for such a situation to arise, there should have been atleast "some words or conduct unequivocally representing that the variation was valid notwithstanding its informality; and something more would be required for this purpose than the informal promise itself".

On the basis of the above principles, the Judge Sumption concluded on facts that the oral variation was invalid as it did not satisfy the requirements of Clause 7.6 of the Agreement. The opinion of Judge Sumption left the question as to whether the consideration was adequate enough for MWB to accept a less advantageous schedule of payments to a larger bench and on another occasion.

More in the next post on this topic. The decision can be accessed from this link.

RTI Act Overrides Arbitration & Conciliation Act but Conciliation Proceedings Are Confidential: CIC

The Chief Information Commission passed an order dt. 08.08.2015 in Rama Aggarwal v. Delhi State Legal Services Authority holding that notwithstanding that the Right to Information Act, 2005 overrode the provisions of the Arbitration and Conciliation Act, 1996, conciliation proceedings were confidential in nature and that the Public Information Officer was not bound to disclose information relating to, or pertaining to, conciliation proceedings in view of Sections 8(1)(e) and 8(1)(j) of the Right to Information Act, 2005.

Factual Background:

Anil and Rama Aggarwal had marital issues and were referred to the Delhi State Legal Services Authority for counselling and conciliation. Later, Rama Aggarwal filed proceedings under the Protection of Women from Domestic Violence Act, 2005 and for divorce. Rama Aggarwal filed an RTI application seeking, among other things, information pertaining to the conciliation proceedings before the Delhi State Legal Services Authority. The PIO of the Delhi State Legal Services Authority and the First Appellate Authority rejected the application (in respect of those queries on the conciliation proceedings).

Question before the CIC: 

On appeal, the CIC had to decide whether the PIO and the First Appellate Authority were wrong in denying information on conciliation-related proceedings. 

Decision of the CIC:

The CIC took into consideration the relevant provisions under the Hindu Marriage Act, 1955, the UNCITRAL Conciliation Rules (Article 14), the Arbitration and Conciliation Act, 1996 (Sections 70, 75 & 81), the (Delhi) Mediation & Conciliation Rules, 2004 (Rules 20 and 21) and the decisions of the Supreme Court in Haresh Dayaram Thakur v Maharashtra AIR 2000 SC 2281 and Moti Ram v. Ashok Kumar.

The CIC, after discussing Section 75 of the Arbitration & Conciliation Act, 1996 (1996 Act) which provides that notwithstanding anything to the contrary, the parties shall keep all matters relating to the conciliation proceedings confidential, stated that the RTI Act will definitely override the 1996 Act (irrespective of the non-obstante clause).

At the same time, the CIC held that conciliation proceedings would be exempt from disclosure on the ground that information in conciliation proceedings were made available in conciliation proceedings owing to the fiduciary capacity of the conciliator (and the institution administering conciliation). The CIC held:

"As per the traditional definition, a ‘fiduciary’ is a person who occupies a position of trust in relation to someone else, therefore requiring him to act for the latter's benefit within the scope of that relationship. Anything given and taken in confidence expecting confidentiality to be maintained will be information available to a person in fiduciary capacity. Therefore communication made during conciliation proceeding between the parties and also communication between mediator and other parties, qualifies to be made in fiduciary capacity."

Hence, the Court held that the PIO could refuse disclosure of information under Section 8(1)(a) of the RTI Act, which exempts disclosure on the ground that the information was made available to a person in his fiduciary relationship. 

The CIC also held that the proceedings of mediation related to personal information and the disclosure of the same would cause unwarranted invasion of the privacy of the individual concerned, which is a ground for refusing information under Section 8(1)(j) of the RTI Act. 

The CIC also recognised that disclosure of such information on account of larger public interest was allowed but held that it was in larger public interest that alternative dispute resolution (including mediation) proceedings are kept confidential. The CIC held that if mediation proceedings are allowed to be disclosed under the RTI Act, this would result in the parties not adopting such mechanisms thereby resulting in the burdening of the courts. The CIC also held that conciliation proceedings would also include counselling proceedings between spouses. 

On the basis of the above reasoning, the CIC rejected the appeal.

Key Takings:

The decision is correct in holding that mediation proceedings between private persons cannot be disclosed under the RTI Act as this would result in invasion of privacy and persons choosing court based dispute resolution. One of the chief reasons for choosing mediation and other ADR mechanisms is confidentiality. However, question arises whether mediation proceedings between the State and a private person could be afforded the same protection. The question is complicated and requires consideration but this blawgger would lean in favour of disclosure at least after the resolution of the dispute between the State and the private person.

Secondly, Section 22 of the RTI contains a non-obstante clause; so does Section 75 of the 1996 Act. Despite the conflict, the CIC did not provide justification(s) why the RTI Act overrode Section 75 of the 1996 Act. Nevertheless, the decision of the CIC is correct. Perhaps, it could have justified the same by referring to the ratione of the RTI Act and that the RTI Act was a later law.

The CIC has rightly balanced the need for confidentiality of mediation proceedings and the requirement of disclosure under the RTI Act. 

[A subsidiary point is that the CIC has stated that conciliation and mediation are interchangeable expressions thereby adding another authority on the vexing distinction between conciliation and mediation in Section 89 of the Code of Civil Procedure, 1908.]

Breaking (!) Ban on Penalty Clauses Survives! UK SC in Cavendish Square Holding v Talal El Makdessi

Regular readers of this Blog would be aware of the recent post on the UK Supreme Court's case of Cavendish Square Holding BV v Talal El Makdessi (Earlier posts on case in this blog can be accessed from here and here.). The issues involved in this case are:

1. Whether the rule against penalties applies to commercial contracts between sophisticated parties.
2. If the rule does apply to such contracts, whether clauses 5.1 and 5.6 are within the scope of the rule.
3. If the clauses are within the scope of the rule against penalties, whether the Court of Appeal was wrong to conclude that they were penal and therefore unenforceable.

In this case, it was contended  by one of the parties that the rule against penalties should go as a whole irrespective of whether the contract was a commercial contract. The UK SC would be authoritatively ruling on the rule against penalties which, rudimentarily put, restricts damages to the actual losses suffered and has been established for more than two centuries.

The Supreme Court has decided the case today (04.11.2015). Following is a summary of conclusions of the court on the rule against penalties (as taken from the UK SC Press Release):

1) The penalty rule is an “ancient, haphazardly constructed edifice which has not weathered well” but has stood the test of time. Similar rules exists in all all other developed systems of law.

2) Therefore, it should not therefore be abolished. At the same time, it should not also be extended unnecessarily.

3) Penalty clauses not merely apply to clauses relating to money penalties but also to obligations to transfer assets, or clauses where one party forfeits a deposit following its’ breach of contract.

4) The concepts of ‘deterrence’ and “genuine pre-estimate of loss” in determining whether a clause is a penalty or not are not relevant.

5) The true test, according to Lord Mance, is whether the impugned provision is a secondary obligation which imposes a detriment on the contract-breaker out of all proportion to any legitimate interest of the innocent party in the enforcement of the primary obligation.

6) The method of applying this test is as follows:

a) The first step is to consider whether any (and if so what) legitimate business interest is served and protected by the clause, and if so,

b) whether the provision made for that interest is extravagant, exorbitant or unconscionable.

7) The test to determine penalty clauses, according to Lord Hodge, is whether the sum or remedy stipulated as a consequence of a breach of contract is exorbitant or unconscionable when regard is had to the innocent party’s interest in the performance of the contract. A clause, according to Lord Hodge, fixing a level of damages payable on breach will be a penalty if there is an extravagant disproportion between the stipulated sum and the highest level of damages that could possibly arise from the breach.

The judgement can be accessed from here. The Press Summary of the UK Supreme Court can be accessed from here. More on this judgement and the Bunge SA judgement in the next few posts in this blog.

Judgement Cavendish Square Holding BV v Talal El Makdessi to be Delivered Tomorrow

Early August, we had blogged about the case of Cavendish Square Holding BV v Talal El Makdess pending before the UK Supreme Court. We had stated that the decisions would have huge ramifications on international commerce. For the issues involved, see the linked post. UK SC blog reports that the judgements would be delivered tomorrow. We will keep readers posted on this case.

We would also like to draw the attention of the readers to a recent decision, again, of the UK SC which deals with determination of market price for damages in cases of anticipatory breach. A prima facie reading of this judgement [Bunge SA v Nidera BV [2015] UKSC 43] indicates that the decision may provide a restatement of the legal basis of risk purchase/ risk and cost contracts and is therefore worth noting. The case comment of the decision in Bunge v. Nidera can be accessed from here.

Undue Delay Per Se is Not a Ground for Setting Aside Award

Recently, the English High Court (Commercial Court) had the occasion to consider the question whether delay in publishing the award after completion of hearings was a ground for setting aside the arbitral award under Section 68 of the English Arbitration Act, 1996. In BV Scheepswerf Damen Gorinchem v. The Marine Institute [2015] EWHC 1810 (Comm)], the arbitrator passed the award 376 days after the completion of the hearings. The losing party in the arbitration (“Damen”) challenged the award for the reason that the arbitrator had committed serious irregularity as provided under Section 68 primarily on three counts:

(1) the tribunal failed to comply with its general duty of avoiding unnecessary delay,
(2) the tribunal’s delay led to breach of Clause 20 of the applicable arbitral rules which provided that the award should “normally be made available within not more than six weeks from the close of the proceedings”, and
(3) owing to the delay, the tribunal failed to deal with all the issues that were put to it.

The Commercial Court, after analyzing the legal principles involved held the following:

(a) Section 68 deals with serious failures by the tribunal to comply with due process which should result in substantial injustice to the applicant. This “higher threshold” eliminates technical and unmeritorious challenges.

(b) Unless, it is shown that such serious irregularity resulted in substantial injustice to the applicant, the award cannot be set aside.  Damen had to show that but for the undue delay, the arbitrator might have reached a different conclusion more favourable to Damen.

(c) Damen’s reliance on authorities dealing with delays in courts is inappropriate as the authorities related to findings of fact but in Section 68 cases, the applicant cannot attack the tribunal’s findings on facts.

(d) This restriction (bar on review of findings of fact) on a court does not cease to exist merely because there is an inordinate delay in passing the arbitral award.

(e) Closer scrutiny of awards on the basis of delay is problematic because there is no principled basis to judge delay. For instance, it is a question whether three months or four months would constitute delay. Further, if the arbitrator delayed the award due to illness which was recorded in the Award itself, would such an award also invite closer scrutiny?

(f) However, merely because a party does not complain about the delay of the arbitrator before the award is issued, such failure will not result in a waiver or the right to complain about the delay after the award is issued.

(g) If the award has dealt with all the issues and is therefore impeachable otherwise, it does not matter if it was passed twelve months after the hearing.

(h) Once the arbitrator has dealt with a particular issue, the award cannot be challenged for the quality of the tribunal’s reasoning.

On the basis of the aforesaid reasons, the court rejected the Application although it held that the delay in passing the award was “extremely regrettable”.

Comment:

Arbitrators are obligated to pass awards within a reasonable time after completion of the hearings.  Such an obligation stems from the universally recognized duties of the arbitrators to devote proper time for the arbitrations they accept and to conduct the arbitral proceedings efficiently without undue delay. In view of these general obligations, the arbitrators are expected to render their awards within such time as may be considered reasonable.  What is reasonable time primarily depends on the complexity of the dispute, the extent of pleadings and documentation in the arbitration.

We had argued in in Undue Delayin Passing Arbitral Award as a Ground for Challenge? Volume 2, Issue 1, Indian Journal of Law and Policy Review, pp. 185- 195 (2013) that delay per se should not be a ground for setting aside the arbitral award. The English Court has taken a similar stand. It is also pertinent to note that there is similarity in the English court’s approach and that of the Delhi High Court in Oil India Ltd. v. Essar Oil Ltd., 2012(3) Arb. L.R. 220 (Delhi): MANU/DE/3862/2012.

[Also see,  Peter Wilske, Legal Challenges to Delayed Arbitral Awards, Contemporary Asia Arbitration Journal Vol. 6 No.2 pp. 153-186, November 2013, for a detailed discussion on the topic.]

Kishanganga Award in India's Favour: News Report

A Pakistani news report suggests that the Arbitral Tribunal constituted under the Indus Water Treaty has passed the award in India’s favour, subject to the conditions that half the water from the Kishanganga dam should go to Pakistan and that India cannot maintain water at a very low level in the dam.

The news report can be accessed from here. It may be recollected that the Tribunal had previously passed a partial award in India's favour. The Permanent Court of Arbitration page on the dispute does not contain the details at the time of this post. More once we get the updates.

Added After Posting:

The PCA website has uploaded the Final Award which can be accessed from here. According to the Press Release:

"The Court decided that India shall release a minimum flow of 9 cumecs into the Kishenganga/Neelum River below the KHEP at all times. However, the Court also decided that either India or Pakistan may seek reconsideration of this decision through the Permanent Indus Commission and the mechanisms of the Indus Waters Treaty after a period of seven years from the first diversion of water from the Kishenganga/Neelum River."

Further, it appears that India had sought clarification on the Partial Award as to whether India may deplete the reservoir level of a run-of-river Plant below Dead Storage Level in any circumstances except in the case of an unforeseen emergency was site specific or was applicable in general under the Treaty. The Tribunal held that it was of general application under the Indus Water Treaty.

Choice of Law of Arbitration Agreement: Corrections and Clarifications

One of our readers has commented on a recent post in this blog on Choice of Law in International Commercial Arbitration. The comments are pointed and raise several issues. Owing to the interesting issues raised in the comment, this blawgger has thought it fit to devote an entire post on the issues raised therein. Also, the comment points out a few errors in the said post. We’ll take this opportunity to correct or/and clarify. Each comment is dealt with under a separate heading.

Image from here.

Choice of five regimes: Whether a Choice or Whether a Matter of Applicability

The comment is probably correct in stating that it is not that parties could choose five regimes. It may so happen that five or even more regimes could apply to an international commercial arbitration. This is what even Redfern et al meant.

Choice of Law Governing Enforcement of Award:

As regards the comment that law governing enforcement cannot be chosen, it is not that parties have no choice. There exists an indirect choice- they can approach the jurisdiction of their choice (the choice is somewhat restricted by the relative advantage of choosing one jurisdiction over another, the existence of assets etc). But once a jurisdiction is chosen, there cannot be any law other than the law of that jurisdiction that would apply.

Choice of Law Governing the Capacity of Parties to the Arbitration Agreement:

As regards choice of the law governing capacity of the parties to enter into the arbitration agreement,there is a choice for the parties and the choice is through the choice of law of arbitration agreement itself. Even the Indian case of NTPC v Singer (link to the case in the post) itself states that “The substantive law governing arbitration, which concerns questions like capacity, validity, effect and interpretation of the contract etc."]. Several authorities also agree on this. Therefore, parties could have a choice on issues regarding validity of arbitration agreement. (It might probably be right to argue that parties cannot choose to apply two different laws for capacity and for validity of the arbitration agreement)  If the parties have expressly chosen the law of the arbitration agreement, issues pertaining to capacity of the parties to enter into the arbitration agreement would be governed by that law and not the seat. Readers are requested to cite an Indian or a foreign case that states otherwise. As regards incapacity, Article 34 of the Model Law refers to incapacity of “a party to the arbitration agreement”. The said ground, as confirmed by the report of the UNCITRAL in its 18^th session, is not different from the ground in the New York Convention. The relevant New York Convention ground (for refusing enforcement) is quoted in the original post and seems to suggest that incapacity is to be judged from the perspective of the law applicable to the arbitration agreement.

Law of Arbitration Agreement in the Absence of Express Choice by the Parties:

We had discussed the existence of two opinions on this issue in detail. NTPC v Singer states that in the absence of an express choice, the substantive law of arbitration would be the same as that of the contract. If so, then a choice of substantive law of contract would be deemed to be an indication of the law of the arbitration agreement and therefore the issues pertaining to incapacity, validity, etc of the arbitration agreement would be governed by the substantive law of contract.

On the English approach, the comment suggests that in the absence of an express choice of law of arbitration agreement, the recent trend is to take the law of the seat as the law of arbitration agreement. In Dallah Real Estate v Pakistan, the arbitration clause read:

"23. Any dispute or difference of any kind whatsoever between the Trust and Dallah arising out of or in connection with this Agreement shall be settled by arbitration held under the Rules of Conciliation and Arbitration of the International Chamber of Commerce, Paris, by three arbitrators appointed under such Rules."

 There was no express choice of law of arbitration agreement in the arbitration clause. Pakistan resisted enforcement of the arbitral award on the ground that the arbitration agreement was not valid under the law of the country where the award was made, in accordance with Section 103(2)(b) of the English Arbitration Act, 1996. The law where the award was made was French law. According to the English Courts, there was no arbitration agreement with Pakistan as per the French law and therefore, the English Courts refused enforcement for the reason that it was not valid in the law of the place where the award was made.This is in consonance with the New York Convention.Now, it could be argued that both approaches are different. On close analysis, they do not appear to be so. Sonatrach deals with the case where there was an express choice of substantive law of contract. It appears that the English Law is that where there is no express choice of substantive law, either of contract or arbitration agreement, the substantive law for both purposes is the law of the seat. Dallah adopts this approach. In Sonatrach, there was an express choice of the substantive law of contract. In such a case, the approach seems to be that the substantive law of arbitration agreement follows the substantive law of contract. This is a prudent approach. Therefore, the correct position in international arbitration appears to be that in case the substantive law of contract is provided, then the law of arbitration agreement follows the substantive law of contract. In case the substantive law of contract is not provided, then the substantive law of contract is, according to authorities, presumed to be the law of the seat. Even in this case, the substantive law of arbitration agreement follows the substantive law of contract, which is nothing but the law of the seat of arbitration.

As regards the implications of Bhatia, the judgement has made choice of law rules in India more out-of-sync with regard to international arbitration and therefore requires an independent treatment. We'll deal with this in subsequent posts on the topic.

Global Process Systems v. Syarikat Takaful Malaysia Berhad ( UK SC, 2011)- II

In the last post, we had discussed about rigs and their transportation on barges. In this post, we’ll discuss certain other technical aspects and also the judgement. The judgement, it may be noted, has a bearing on marine cargo insurance. We'll look into the judgement in this post.

But, to recap, during the voyage of the barge which carried the rig (see this picture), all the three legs of the rig broke of and fell into the sea. The owner of the rig , the insured, made a claim with its insurers for the loss caused. The insurers rejected the claim. The insured sued. The insurers argued that the insurer was not liable for the loss because the loss was caused due to inherent vice. The insurers contended that since the loss not caused by any an unexpected accident or casualty, therefore the loss was proximately caused by inherent vice. This ground of inherent vice was relied upon by the insurers as it was an exception to insurer liability under the contract. Section 55(2)(c) of the English Marine Insurance Act, 1906 also provided:

“Unless the policy otherwise provides, the insurer is not liable for ordinary wear and tear, ordinary leakage and breakage, inherent vice or nature of the subject matter insured, or for any loss proximately caused by rats or vermin, or for any injury to machinery not proximately caused by maritime perils.”

The Commercial Court determined that the loss was due to metal fatigue in the legs. As we discussed in the previous post, the legs in this rig were mat-type legs and therefore the legs were cylindrical structures.Fatigue occurs when there is repeated stress on the legs. According to the court, the stress in the legs were due to the pitching and rolling motion of the barge due to the height and direction of the waves.

An important aspect that had bearing on the case was that there was a risk of fatigue was well known to the insurers and the insured. Therefore, the insurers insisted that the rig be inspected again in Cape Town, South Africa and necessary remedial operations be conducted. On this condition, the insurers granted a certificate approving the voyage. Thus, both knew that the voyage was risky for the rig. Therefore, the insurers took the ground of inherent vice.

It was argued by the insurers that insurance was a contract aimed at protecting against risks and not certainties and since it was certain that the rigs would be affected by metal fatigue, they were not liable for the loss of the legs.

Inherent Vice: as the Proximate Cause
Loss due to Inherent vice means that the loss is caused due to the nature of the goods itself and not due to any external causes.

In Soya GmbH Mainz Kommanditgesellschaft v. White [1982] 1 Lloyd’s Rep 122, Soya beans were to be transported by ship. The goods were insured against the risk of heating, among other things. When the goods arrived to the port, it was in a heated condition. Relying on the ground of inherent vice, the insurers denied liability. Donaldson LJ held that a loss is proximately caused by inherent vice if the natural behavior of the goods is such that they suffer a loss in circumstances in which they are expected to be carried.

However, the House of Lords in the same case [1983] 1 Lloyd’s Rep 122, supplied a different definition. Lord Diplock held :

“[Inherent vice] means the risk of deterioration of the goods shipped as a result of their natural behavior in ordinary course of the contemplated voyage without the intervention of any fortuitous external accident or casualty.”

Now, there is a subtle difference between the above two definitions. To clarify, we would take the soya bean example. If the subject matter, that is, soya beans was wet when it was loaded in the ship, then the insurer is not liable because the subject matter inherently suffers from vice, that is, wetness. The proximate consequence of the heatedness would be the wetness of the subject matter. It was the fault of the insured to not keep the goods away from moisture. Therefore, it is right that the insurers should not be liable.

However, the definition of Donaldson LJ seems to suggest the incapability of the subject matter to stand the expected events of voyage as inherent vice. The UKSC in the present case favoured Lord Diplock’s definition. In T M Noten BV v. Harding –[1989] 2 Lloyd’s Rep 283, Bingham LJ held that the proximate cause of the loss was inherent vice of the subject matter, that is, the goods were shipped wet.

Noting the above decisions and another, the UKSC held:

“[T]hese cases do not provide authority for the proposition that inherent vice or nature of subject matter insured is established by showing that the goods in question were not capable of withstanding the normal incidents of the voyage, including weather reasonably expected. What they do establish is that where the only fortuity operating on the goods comes from the goods themselves, the proximate cause of the loss can be properly be said to be the inherent vice or the nature of the subject matter insured and so (in the absence of provisions to the contrary) falls outside the cover.”

The Court also disagreed with the decision in Mayban General Insurance v. Alstom Power Plants Ltd [2004] 2 Lloyd’s Rep 609, where a transformer, the cargo, was damaged due to the movement of the vessel due to wind and sea action. The court stated that the goods transported must be capable of withstanding the “forces” that could be reasonably expected during the voyage. The court stated that since there was no unusual cause which caused the damage.

This, according to the UKSC, would have the consequence of reducing “much of the purpose of cargo insurance, for the would then only extend to loss or damage caused by perils of the seas that were exceptional, unforeseen or unforeseeable, and not otherwise. This…would go far to frustrate the very purpose of all risks cargo insurance, which is to provide indemnity in respect of loss or damage caused by, among other things, perils of the seas.”

Seaworthiness:

Section 55(2)(c) also states that insurer is not liable for ordinary wear and tear. In Mayban General Insurance, the court implied that insurers would not be liable if the cargo was unseaworthy. Seaworthiness is defined in Section 39 of the Act to mean “reasonably fit in all respects to encounter the ordinary perils of the seas of the adventure insured.” Perils of the seas is defined in the Act to only mean fortuitous accidents or casualties of the seas and does not include action of the winds and waves. Therefore the court implied that seaworthiness did not include the ability of the cargo to withstand wind and wave action.

Seaworthiness of the vessel is an implied warranty in the marine insurance policy. If the vessel is not seaworthy, the insured is not entitled to be indemnified by the insurers irrespective of whether the loss was proximately caused by the unseaworthiness.

The court held, by an analogy to the seaworthiness standard in Section 39, the mere fact that the goods are not reasonably fit in all respects to encounter ordinary perils of the seas of the adventure insured does not by the reason alone deprive the assured of the right to be indemnified.

But then, when the seaworthiness standard in the Act refers to a higher standard, that is, the ability to withstand “fortuitous accidents or casualties of the seas”, does it not mean that seaworthiness would also include a lesser standard, I.e., the ability to withstand wave and wind action would also be covered?

In any case, Section 39 dealt with seaworthiness of a vessel (hull insurance) while the present case dealt with cargo insurance.

Two Proximate Causes:

The insurers also argued, without prejudice, that the loss was caused by two proximate causes- inherence vice and perils of the sea. They relied on a decision that dealt with hull insurance- Miss Jay Jay [1987] 1 Lloyd’s Rep 32 where it was held that where there were two proximate causes, and where the policy excluded one cause from the cover, the assured would not be entitled to be indemnified. While Lord Saville rejected the argument for the reason that it was not the case where there were two proximate causes, Lord Mance did not wish to go into the question without hearing arguments.

In any case, the court held that the rolling and pitching of wave the barge in the sea conditions encountered caused the damage and the insurers were liable for the loss.

 

Comments on the Case:

• INCE & Co., Incisive Risk
• Norton Rose, The true scope of inherent vice - The Cendor MOPU
• Waltons & Morse, The Supreme Court clarifies the scope of application of the "inherent vice" exclusion in cargo insurance
• Case Comment by the UKSC Blog
• Sam Tacey, Ajita Shah, Wave goodby to inherent vice exclusions? (Comment on the Court of Appeal Decision) 
• Shipping and Trade Law Case Update (Court of Appeal Judgement)

Global Process Systems v. Syarikat Takaful Malaysia Berhad ( UK SC, 2011)

Petroleum exploration is a technology-intensive activity. One of the chief equipments used in petroleum operations are drilling rigs. While, rigs built for drilling on land (onshore) are less complex, offshore (in the sea/ ocean) rigs are much more complex and expensive.

The rig in dispute in this case was a self elevating mat supported jack up rig. Jack up rigs are rigs which are self-elevating. These form one of the most popular offshore rigs used throughout the world. Essentially, a jack up rig floats in the water and the legs are jacked up. Once the destination (the drilling site) is reached, the legs of the rig go underwater into the sea bed and elevate the jack up rig floor to a certain height depending upon the depth of the sea water and the length of the legs of the rig. The figure here shows a jack-up rig that is jacked up.

When the drilling operations in a particular location is complete and the rig needs to move to a different location, the rigs are jacked down and are moved to different locations by the use of tugs. Where the next location is too far, the rig is taken on a barge. The below figure shows a jacked down rig on a barge.

Jack up rigs can be either mat type or independent leg type. In case of independent leg type, the tip of the legs consist of spud-cans. Spud-cans cylindrical steel shoes with pointed edges. These penetrate into the sea-bed and make the legs stable.

Jack-up rigs can also have mats instead of spud-cans. Mats consist of a flat surface which is laid on the sea bed and are attached to the edge of the legs.

The legs of the mat supported jack-up rig is cylindrical and is made of steel. Below is an example of how mat type jack up rigs look from the sea bed

In the present case, the legs were of 312 feet in length each and weighted about 312 tonnes. The rig was transported to convert it into a Mobile Offshore Production Unit. The rig was transported on a barge. Usually Production Platforms are fixed structures on the sea. However, it might be advantageous to use a movable platform from cost, convenience and re-use perspectives. Such a movable platform is known as a Mobile Offshore Production Unit.

While the legs were being transported on the barge with the legs extending in the air (see the second figure of the post. The legs are independent leg type. However in our case, the legs were of the mat type rig.

During the voyage, all the three legs broke of and fell into the sea. Syaikit Takaful Malaysia Berhad (STMB) who owned the rig made a claim with its insurers for the loss caused to STMB. Insurers rejected the claim. STMB sued the insurers before the commercial court. The insurers argued that the insurer was not liable for the loss because the loss was caused due to inherent vice. The insurers contended that since the loss not caused by any an unexpected accident or casualty, therefore the loss was proximately caused by inherent vice. This ground of inherent vice was relied upon by the insurers as it was an exception to insurer liability under the contract. Section 55(2)(c) of the English Marine Insurance Act, 1906 also provided:

“Unless the policy otherwise provides, the insurer is not liable for ordinary wear and tear, ordinary leakage and breakage, inherent vice or nature of the subject matter insured, or for any loss proximately caused by rats or vermin, or for any injury to machinery not proximately caused by maritime perils.”

The central argument of the insurers was that the loss was proximately caused by inherent vice in the rig. The court had to consider the validity of this argument. 

The judgement can be downloaded from here. The decision of the court will be analysed in a subsequent post.

(all images from Rigzone- http://www.rigzone.com/training/insight.asp?insight_id=339&c_id=24)

Some Very Interesting Reads on Contract Law and Arbitration

Recently, two interesting articles were published in SSRN on contract law

The first article titled “Contract Law, Party Sophistication and the New Formalism”, penned by Meredith Miller, criticizes the law as it exists on the impact of party sophistication in the interpretation of contracts. The author does not wholly discount the party sophistication concept. Rather, according to the author, the courts have not addressed the issue of party sophistication in a meaningful way. Do check this article out (44 pages).

In the case of Oceanbulk Shipping and Trading SA v TMT Asia Ltd [2010] UKSC 44, the UK Supreme Court dealt with the law pertaining to whether “without prejudice” communications during negotiations would form a part of factual matrix that is relevant extrinsic aid to contract interpretation.

This article titled “Without Prejudice Interpretation – With Prejudice Negotiations” by Adrian A. S. Zuckerman critically analyses the decision. Do check it out. Extremely interesting and short (10 pages).

Also do check out this case comment in the UK SC Blog on the said case.
A few interesting articles on arbitration. (ideally these must be a part of the monthly roundup of arbitration articles but then these are very hot reads.

David Schwartz hates using the term “mandatory arbitration” to the situation where the party that solely drafted the contract enforces the arbitration clause contained in it against the other party which has weaker bargaining power and had no positive role to play in the drafting of the contract. He wants to call such arbitration as “claim-suppressing arbitration” in this article titled “Claim-Suppressing Arbitration: the New Rules”. Do check it out. He is in favour of the passing of the Arbitration Fairness Act (USA). Interesting read.

Empirical Legal Studies Blog has come up with links to a couple of empirical studies on arbitration. I have not read the articles but the description in the ELS blog post projects the articles to be very interesting. The links to the said articles are provided below (subscription required):

An Empirical Study of Employment Arbitration: Case Outcomes and Processes, 8 Journal of Empirical Legal Studies 1 (2011) by Alexander Colvin

Punitive Damages in Securities Arbitration: An Empirical Study, 39 Journal of Legal Studies 497, 518 (tbl. 4) (2010) by Stephen J. Choi & et al.

Dallah Real Estate and Tourism Holding Company v. Ministry of Religious Affairs, Government of Pakistan (Part III)

In the previous post on this topic, we had discussed a portion of the landmark case of Dallah Real Estate and Tourism Holding Company v. Ministry of Religious Affairs, Government of Pakistan. We had in an earlier post given an overview of the case and started off the discussion on the case by discussing a very portion of the Commercial Court’s decision. In this post, we intend to analyse the decision of the Commercial Court further. As with most of our posts, we would simultaneously analyse the Indian law on too.

Issue 2: What is the scope of enquiry by a court when a party challenges the recognition and enforcement of a NYC award under S 103(2)(b)?

One of the parties had argued that the court had to conduct a “full hearing of all the relevant evidence” while the recognition and enforcement of a New York Convention award is challenged while the other party had argued that the nature of enquiry was a review of the arbitral tribunal’s decision on jurisdiction simpliciter.  What comes out of this question is this: according to Dallah, the argument was that the court cannot go into a full rehearing of whether Pakistan had proved, in accordance with French law, that it was not a party to the arbitration agreement. Pakistan took a contrary position. It was in Dallah’s interests that the scope of enquiry was limited.  

However, court was in favour of the former, ruling that the grounds under S 103(2)(b) were those of fact requiring the challenging party “to adduce all evidence necessary to satisfy the burden of proof on it to establish the existence of one of the grounds…”  The relevant provision states:

“103 Refusal of recognition or enforcement

…

(2) Recognition or enforcement of the award may be refused if the person against whom it is invoked proves—

…

(b) that the arbitration agreement was not valid under the law to which the parties subjected it or, failing any indication thereon, under the law of the country where the award was made;”

Thus, it is inherent in the language of S 103(2) that the party against whom the award is invoked (Pakistan) proves that the arbitration agreement was not valid under French Law. Thus:

“If a party has to "prove" a matter, that must mean, in the context of English civil proceedings, prove the existence of the relevant matters on a balance of probabilities.”

Issue 3: The parties are in agreement that the arbitration agreement would be tested on the touchstone of the French Law. But what are the French law principles applicable in the case?

A question as to foreign law is a question of fact, usually established through the use of experts. In this case, the French Law experts of both sides submitted a Joint Memorandum on the law in France on the principles pertaining to whether Pakistan had validly agreed to arbitration as per the arbitration agreement in issue., though they disagreed on several aspects. Following were some of the principles explicated by them:

• The test to decide whether Pakistan was a part of the arbitration agreement was to see if it was the common intention of all the parties to the said agreement to be bound by the arbitration agreement.

• The common intention could be established on the basis of facts. For this, the courts would look into all surrounding facts to see if they pointed to an intent to be bound by the arbitration clause.

• The ascertainment of subjective intention of the parties to be bound by the arbitration clause would be based on the objective conduct of the parties.

• The French Jurisprudence Constante* is that the international arbitration agreement “must be extended to parties directly implicated in the performance of the contract and in any disputes arising out of the contract.”

• It must be established that, notwithstanding the absence of any signature to the international arbitration agreement, “respective contractual situations and existing usual commercial relations” of the purported parties such an agreement gave rise to a presumption that the purported parties had bound themselves to the arbitration agreement.

• To establish common intention, “good faith” must be taken into account.

• A State or a State entity, when it enters into an arbitration agreement, waives the State immunity from the jurisdiction of the arbitral tribunal and the immunity against execution of the arbitral award against it.

We will continue the discussion on the remainder of third issue in a future post. The discussion on the third issue is extremely interesting and we might devote an independent post on the remaining portion of it.

* Jurisprudence Constante, a term of French origin, translates roughly as “uniform jurisprudence”. It refers to “a long series of previous decisions applying a particular rule of law carries great weight and may be determinative in subsequent cases.” According to Wikipedia, “Jurisprudence constante is a legal doctrine according to which a long series of previous decisions applying a particular rule of law is very important and may be determinative in subsequent cases. This doctrine is recognized in most civil law jurisdictions, in the civil law of Louisiana, for example. The rule of law applied in the Jurisprudence constante directly compares with stare decisis. But the Louisiana Supreme Court notes the principal difference between the two legal doctrines: a single court decision can provide sufficient foundation for stare decisis, however, ‘a series of adjudicated cases, all in accord, form the basis for jurisprudence constante’.” [The Wikipedia reference has been verified and seems to be correct. See foot note 17 to the case cited in the article. The case can be accessed from this link.]