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.

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

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

Case Details: Arbitration Petition (C) No. 28 of 2017

Date: 03.10.2018

Bench: Rohinton Fali Nariman and Navin Sinha, JJ.

Description

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

Questions

• Whether the arbitration was an “international commercial arbitration” and consequently whether the Supreme Court had jurisdiction to entertain the petition?

• Whether an unincorporated consortium was an association of persons for the purposes of Section 2(1)(f) of the 1996 Act (as amended)?

• When would an arbitration be an “international commercial arbitration” where the dispute is invoked by the contractor consortium, in which one of the members is a foreign company?

Some of the disputes that arose under the same contract were previously referred to arbitration. One of the preliminary issues was whether L & T and Scomi could file independent claims against MMRDA. The arbitrator negative the contention and held that they could only do so as a consortium because they bid for the project as a consortium an the contract treated them as such. This interim Award was questioned in the Bombay High Court where the High Court held upheld the interim award and negative the contentions of the petitioners, L&T and Scomi. The petitioners did not appeal against the decision and therefore the same attained finality.

Relevant legal Provisions

Section 2(1)(f), which defined the phrase “international commercial arbitration”, was amended by virtue of the Arbitration and Conciliation (Amendment) Act, 2015 and the amended provision read:

“"international commercial arbitration" means an arbitration relating to disputes arising out of legal relationships, whether contractual or not, considered as commercial under the law in force in India and where at least one of the parties is—

(i) an individual who is a national of, or habitually resident in, any country other than India; or

(ii) a body corporate which is incorporated in any country other than India; or

(iii) an association or a body of individuals whose central management and control is exercised in any country other than India; or

(iv) the Government of a foreign country;”

Decision

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

• In view of the final decision of the Bombay High Court, L&T and Scomi could only raise disputes as a single entity. Therefore, Section 2(1)(f)(ii) will not be applicable and Section 2(1)(f)(iii) will be applicable.

• Section 2(1)(f)(iii) speaks of “association” or “body” of persons. This is akin to the definition of “person” under Section 2(31) of the Income Tax Act, 1961, which includes an association of persons, whether incorporated or not. As such “association of persons” forms a separate category and is distinct from “body of persons”.

• The Indian company, L&T, is the lead partner in the consortium as per the consortium agreement and the supervisory board constituted as per the consortium agreement empowers L&T to have the lead voice in the appointment of the chairman of the said board. The consortium agreement provides that the lead partner shall lead the arbitration proceedings. The office of the consortium is in Mumbai. All these factors point out that the central management and consortium are in India

Outcome

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

Implications and Critique

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

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

Case comments on the decision have not evoked adverse critique or have cited past decisions. Even the Bombay High Court seems to have cited past decisions on the subject. Perhaps, the High Court need not have as the issue before it was slightly different. But the very same question in respect of a consortium of parties was raised before the Supreme Court in Reliance Industries Limited v. Union of India. The court passed three crucial orders, viz., orders dt. 31.03.2014, 02.04.2014 and 29.04.2014 in the matter. Of these, the last two orders merely modify the operative portion relating to the identity of the arbitrator. The order dt. 31.03.2014, reported in 'MANU/SC/0257/2014, is virtually on the same question where the SS Nijjar, J., acting as the designate of the Chief Justice, reached the opposite result, that the arbitration invoked by the consortium through its operator was an international commercial arbitration for the purposes of Section 2(1)(f). Similarities between the two cases are striking and are listed below:

• Both related to a consortium, named as “contractor” in the contract, and some of the members of the consortium were Indian companies and some were non-Indian.
• In both, the lead member (or the operator) who was empowered to act on behalf of the consortium was the Indian company.
• The benefit of success or failure in the arbitration would have been to all the members of the consortium.

Of course, some would argue that Section 11 decisions pre-2015 amendments were not binding precedents. But then, is it really true? There are umpteen number of decisions have considered Section 11 determinations pre-23.10.2015 to be de facto binding. Even the Supreme Court in this very case (dt. 03.10.2018) stated: “This was for the reason that the judgment of this Court, in TDM Infrastructure Private Ltd. v. UE Development India Private Ltd.” (emphasis supplied). The Delhi High Court. in GMR Energy Limited vs. Doosan Power Systems India Private Limited and Ors. (14.11.2017 - DELHC) : MANU/DE/3689/2017 and the Madhya Pradesh High Court in Sasan Power Limited vs. North American Coal Corporation India Private Limited have held that the observations in TDM Infrastructure (para 36) that the observations of the court were in order to determine the court’s jurisdiction and not for other purpose meant that the decision was not a binding precedent. The High Courts are wrong. The observation in TDM does not mean that the decision should not be cited as precedent; rather, it means that the observations cannot be treated as observations on the merits of the case before the arbitrator or otherwise. This is pretty standard in Section 11 petitions and such observations are pretty common even in the decisions by the High Court designates. The Delhi High Court and the Madhya Pradesh High Court in the aforesaid cases seem to have misconstrued this observation in TDM Infrastructure.

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

Are the Supreme Court and the High Courts not Complying with Section 11(8) of the Amended Arbitration Law?

Section 11(8) of the amended Arbitration and Conciliation Act, 1996 as it now exists in the statute book was inserted through the Arbitration and Conciliation (Amendment) Act, 2015. Sub-section 8 reads:

“(8) The Supreme Court or, as the case may be, the High Court or the person or institution designated by such Court, before appointing an arbitrator, shall seek a disclosure in writing from the prospective arbitrator in terms of sub-section (1) of section 12, and have due regard to—

(a) any qualifications required for the arbitrator by the agreement of the parties; and

(b) the contents of the disclosure and other considerations as are likely to secure the appointment of an independent and impartial arbitrator.” (emphasis supplied)

Section 11(8) provides that prior to appointing an arbitrator, the Supreme Court, the High Court or the designated institution should mandatorily seek a disclosure from the prospective arbitrator as mandated in Section 12(1) (disclosure per Schedule VI) and should have due regard to the qualifications of the arbitrators and importantly, the contents of the disclosure and other considerations as are likely to secure the appointment of an independent and impartial arbitrators.

It appears from a perusal of the decisions of the Supreme Court and the High Court that these are not being done post-2015. Take the case of National Collateral Management Services Ltd. v. Food Corporation of India, 2017(5) Arb LR 288 (Del.). The case was pertaining to reference to the CMD of one of the parties for resolution of disputes. The Delhi High Court held that since the CMD was an employee, he could not act as arbitrator owing to the bar in Section 12(5) r/w VII Schedule. Consequently, the High Court appointed an arbitrator with a statement that the arbitrator would decide his fees in consultation with the parties. The decision has nothing to state on whether Section 11(8) was complied or nor. Also, take the recent decision of the Supreme Court in Trans Asian Shipping Services (Pvt.) Ltd. v. Beacon Shipping Lines Ltd. MANU/SC/1014/2018, where the Supreme Court appointed the arbitrator and then directed the Registry to send a copy of the order to the arbitrator. 

With great respect, this procedure is in contravention of Section 11(8) of the 1996 Act as amended vide the 2015 Amendment Act. When the Parliament of India through the 2015 Amendments has laid down a procedure, it is for the High Courts and the Supreme Court to comply with the same in their letter and spirit. The judges of the Supreme Court and the High Court, even if they are acting in their judicial capacity, have to comply with the statute in full. The decision of the Supreme Court and the High Court noted above do not even disclose if the requirements in Section 11(8) were satisfied or not.

When a body is appointing an arbitrator, it is duty bound to ensure that the arbitrators appointed have the capability to decide a dispute and are independent and impartial as regards the dispute. Hence, such a power is endowed upon the Supreme Court and the High Court. The courts cannot shy away from such a duty.  

This blawgger has argued elsewhere:

"The question as to whether prior to appointing a person as arbitrator, consent from such person is taken by the Designate, was answered by six courts on merits. It appears that none of the courts obtain consent from the prospective arbitrator to be appointed in a particular dispute. It may be noted that the schemes made under Section 11(10) of the 1996 Act generally provide that the decision taken by the Designate to appoint an arbitrator shall be communicated to the arbitrator appointed pursuant to the request.This might lead to a few problems. 

One, it may lead to a conflict of interest situation involving the arbitrator and one of the parties. For instance, a person holding a substantial number of shares in a company may be appointed by the Designate as arbitrator in a dispute concerning the said company. Unless the Designate approaches a prospective arbitrator, it would not be possible for the arbitrator to disclose in writing such circumstances prior to appointment. In this regard, Section 12(1) of the Act mandates that when a person is approached in connection with his possible appointment as an arbitrator, he/she shall disclose in writing any circumstances likely to give rise to justifiable grounds as to his/ her independence or impartiality. Even if the arbitrator declines to proceed with the arbitration for that reason after the appointment is made by the Designate, the parties would be put in the same position as they were prior to the filing of the petition under Section 11, leading to delays of several months and, at times, several years (Srinivasan 2012: 27, 29).

Two, a person may make himself/herself available for being appointed as arbitrator. However, subsequently, at the time of appo intment by the Designate, the person might be unable or might not be ready to act as an arbitrator for reasons related to a particular dispute, or might not be ready to act as arbitrator in any dispute owing to illness or any other reason.

Hence, it would be prudent to seek consent prior to appointing a person as the arbitrator in a particular dispute." (See, Badrinath Srinivasan, Appointment of Arbitrators by the Designate under

the Arbitration and Conciliation Act: A Critique, vol xlix no 18, Economic & Political Weekly, p. 59-66- subscription required)

It would do well for the Supreme Court and the High Court to follow the below said procedure:

• Once the Court determines the prospective judge to be appointed depending on the requirements of the arbitration agreement and the nature of the dispute, the prospective candidate has to be informed by the court through the Registry.
• The Registry has to send a letter to the prospective candidate seeking the relevant declarations of independence, impartiality and availability.
• On receipt of the declarations, the High Court or the Supreme Court, as the case may be, should appoint the arbitrator.
• During this process, neither the Registry  nor the prospective arbitrator should interact with the parties or either party.

The Supreme Court and the High Courts should duly follow the law. If there is any difficulty in the above, the Registry could write to the Ministry expressing difficulties or problems with the law so that the same could be corrected. Already there is a Bill to amend the arbitration law pending in the Parliament. If the Ministry finds merit in the issue, it could very well amend the law. 

Change of Seat Should not be Easily Presumed on the Basis of Change of Venue

Recently, the Delhi High Court in the case of Ashiana Infrahomes Pvt. Ltd. v. Adani Power Ltd. had to decide on whether the parties agreed to transfer the seat.

The agreement provided:

“10. Dispute Resolution Any dispute or differences relating to or in connection with the MoA shall be referred to the sole Arbitrator Mr. Puneet Saran son of Prem Vallabh Saran r/o F 22 Indraprastha CGHS Plot 114, Patparganj New Delhi, whose decision shall be final and binding on the Parties. The proceedings of Arbitration shall be in Gurgaon in accordance with the provisions of the Arbitration & Conciliation Act 1996 as amended up-to date.”

Disputes arose and the matter had to be referred to arbitration by the chosen arbitrator. Ashiana Infohomes challenged the arbitrator on the ground that the arbitrator was a consultant and an employee of Adani. The Delhi High Court, correctly, decided the petition on merits in favour of Ashiana Infohomes. However, the reasoning as regards jurisdiction appears to be erroneous.

As is apparent, the arbitration clause states that the “proceedings of Arbitration shall be in Gurgaon”. The first question is whether this is a choice of seat or place? The parties did not use the term “seat” or “place”. Although this uncertainty did not play a part in the outcome of the case on the jurisdicitonal aspect, it is advised to use the term "seat" or "place" in making the choice. 

Coming back to the facts, it appears that Adani had approached the Additional District Court, Gurgaon (as it was then) and the court held that since the 2015 amendments, the parties had to approach the arbitral tribunal for interim relief when the tribunal was already in place.

Later, the arbitrator commenced his proceedings and in a decision to decide the modalities of how to proceed with the arbitration, he is said to have stated that the venue of arbitration would be a particular address in New Delhi till the parties agree on some other venue. Later, in another decision, the arbitrator declared that the venue of the arbitration would be mutually decided.  These decisions were consented to by the parties. About 40 hearings were held in New Delhi.  

In the petition before the Delhi High Court, the question was whether in view of the decisions of the arbitrator and the hearings conducted, whether parties had agreed to transfer the seat from Gurgaon to Delhi? The Delhi High Court held:

“20. In the facts of this case in my opinion, in view of the consent of the parties as recorded in the proceedings before the learned arbitrator dated 09.12.2014 and 19.12.2014 and the subsequent conduct of the parties i.e. that the proceedings that have all taken place in Delhi, the original agreement stating that the proceedings be held at Gurgaon have been given a go bye. In view of the agreement/conduct of the parties it is the courts in Delhi which would have jurisdiction. Delhi is now the seat of arbitration.”

On a perusal of the aforesaid Para, it appears that the court has decided that the parties had agreed to transfer the seat from Gurgaon to Delhi. With respect, this conclusion is wrong for the following reasons:

• Once the arbitration clause is interpreted to mean that Gurgaon was the seat, the parties should be deemed to be bound by it.
• The arbitrator did not state anything in his decisions regarding the change of seat. The decisions only refer to venue. This means that the parties and the arbitrator left the choice of seat in the agreement undisturbed.
• Adani approached the Addl. District Court, Gurgaon for interim relief. But the details of the case are not given in the judgement of the Delhi High Court. On some digging out, it appears that Adani has filed Arb Petition No. 50/2014 for interim relief. The Petition was disposed of on 20.10.2016 (see order). The following conclusions can be drawn from the order:
• Asiana did not raise any ground regarding the ADJ Gugaon not having jurisdiction.
• Asiana did not raise any contention that Delhi was the seat
• Most importantly, as on the date of the order of the ADJ Gurgaon (20.10.2016) several hearings were conducted before the arbitrator (as example there were two orders dt. 09.12.2014 and 19.12.2014 pursuant to hearings). Even then, Asiana did not raise jurisdiction at the end of the proceedings. It never did raise any arguments that the place of arbitration was transferred. Theoretically, nothings stopped Asiana from questioning jurisdiction even on the last day of the hearings before the ADJ that the seat was transferred.
• The High Court stated that Gurgaon court was not the appropriate court and therefore Section 42 did not apply. This is clearly wrong. Section 42 applied and this exception did not apply because:
• Even as on the date of the order of the ADJ, Gurgaon, there was no transfer of seat.
• If the transfer had taken place vide the decisions in 2014, nothing stopped Ashiana from moving a petition for dismissal on the ground of lack of jurisdiction sicne the parties had changed the seat.
• It is settled law that proceedings need not take place in the seat. In fact, there are several arbitrations were only some or at times none of the hearings take place in the seat.  The Delhi High Court had in fact quoted BALCO (which quoted Redfern & hunter) recognizing this aspects(See, Para 21 of the Delhi High Court’s decision). Despite this the Delhi High Court held that the seat was transferred.

As discussed above, the decision on jurisdiction is clearly wrong. While the decision was probably right on the eventual outcome that the named person could not act as arbitrator, the court has overlooked the ex post implications of this judgement. What this judgement does is to hold that if the arbitrator decides as a matter of procedure on a venue different from the seat and a substantial number of hearings are held in the venue, that would amount to a transfer of seat to the place of the venue. This is a dangerous conclusion and would result only in unsettling the distinction between seat and venue.  Transfer of seat cannot be so easily presumed merely on the basis of the discussions between the parties and the arbitrator in the hearings on the venue of arbitration. 

It is tempting to do justice to a party. But in a legal regime that follows the doctrine of precedents, doing justice by doing violence to the statute and settled principles will do more harm in the long run. Bhatia International was a clear example of such an outcome. 

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)

Guest Post: Mid-Year Arbitration Review- Part I

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

MID-YEAR ARBITRATION REVIEW - I

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Reasoned award

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

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

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

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

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

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

 (More to follow in another post)