Nine Judge Bench of SCI in Mineral Area Development Authority v SAIL, 2024 INSC 554: Summary

One of the most important matters in the recent times has been decided by a nine-judge bench of the Hon’ble Supreme Court in Mineral Area Development Authority v. SAIL, 2024 INSC 554. It deals with the important issue of the distribution of legislative powers between the Union and the States as regards taxation of mineral rights. It also decided on the nature of royalty insofar as it is applicable to minerals.

The issue of royalty came into play in the context of its classification. It royalty is classified as a tax, prior decisions have held that State legislatures lacked competence to levy taxes on mineral rights as they were dealt with under Entry 54, List I, VII Schedule, where Union had the exclusive competence. Some decisions held that royalty was not tax and therefore the State legislatures were competent to make laws further to Entry 49, List II, VII Schedule, where States had the exclusive competence. This conflict is the subject of decision of the nine judge Bench of the Supreme Court.

Initially, about 11 questions were recorded by a three judge Bench as having to be determined. During the hearing before the nine judge Bench, there was consensus between the counsels for the Petitioners and the Respondents as to the questions that were to be determined by the nine judge-Bench. Union of India filed an affidavit stating that Entry 53, List I, Schedule VII which related to mineral oils/ petroleum/ oil fields, was not covered in the issues before the court. So, the Supreme Court did not discuss these aspects in the decision. The questions to be determined reduced from 11 to merely five. Of the nine judges, Justice Ms. Nagaratna dissented. The majority view was penned by Chief Justice Mr. Chandrachud.

The court’s ultimate determination vis-à-vis these questions as contained in Para 342 of the Majority judgment is provided below:

Question a. What is the true nature of royalty determined under Section 9 read with Section 15(1) of the MMDR Act? Whether royalty is in the nature of tax;

Finding:

“a. Royalty is not a tax. Royalty is a contractual consideration paid by the mining lessee to the lessor for enjoyment of mineral rights. The liability to pay royalty arises out of the contractual conditions of the mining lease. The payments made to the Government cannot be deemed to be a tax merely because the statute provides for their recovery as arrears;”

b. What is the scope of Entry 50 of List II of the Seventh Schedule? What is the ambit of the limitations imposable by Parliament in exercise of its legislative powers under Entry 54 of List I? Does Section 9, or any other provision of the MMDR Act, contain any limitation with respect to the field in Entry 50 of List II?

c. Whether the expression “subject to any limitations imposed by Parliament by law relating to mineral development” in Entry 50 of List II pro tanto subjects the entry to Entry 54 of List I, which is a non-taxing general entry?  Consequently, is there any departure from the general scheme of distribution of legislative powers as enunciated in M P V Sundararamier (supra)?

Determination: “b. Entry 50 of List II does not constitute an exception to the position of law laid down in M P V Sundararamier (supra). The legislative power to tax mineral rights vests with the State legislatures. Parliament does not have legislative competence to tax mineral rights under Entry 54 of List I, it being a general entry. Since the power to tax mineral rights is enumerated in Entry 50 of List II, Parliament cannot use its residuary powers with respect to that subject-matter;”

c. Entry 50 of List II envisages that Parliament can impose “any limitations” on the legislative field created by that entry under a law relating to mineral development. The MMDR Act as it stands has not imposed any limitations as envisaged in Entry 50 of List II;

d. The scope of the expression “any limitations” under Entry 50 of List II is wide enough to include the imposition of restrictions, conditions, principles, as well as a prohibition;

d. What is the scope of Entry 49 of List II and whether it covers a tax which involves a measure based on the value of the produce of land? Would the constitutional position be any different qua mining land on account of Entry 50 of List II read with Entry 54 of List I?

e. Whether Entry 50 of List II is a specific entry in relation to Entry 49 of List II, and would consequently subtract mining land from the scope of Entry 49 of List II?”

Determination: “f. The yield of mineral bearing land, in terms of the quantity of mineral produced or the royalty, can be used as a measure to tax the land under Entry 49 of List II. The decision in Goodricke (supra) is clarified to this extent;

g. Entries 49 and 50 of List II deal with distinct subject matters and operate in ifferent fields. Mineral value or mineral produce can be used as a measure to impose a tax on lands under Entry 49 of List II;

h. The “limitations” imposed by Parliament in a law relating to mineral development with respect to Entry 50 of List II do not operate on Entry 49 of List II because there is no specific stipulation under the Constitution to that effect;”

Prior Decisions: “i. The decisions in India Cement (supra), Orissa Cement (supra), Federation of Mining Associations of Rajasthan (supra), Mahalaxmi Fabric Mills (supra), Saurashtra Cement (supra), Mahanadi Coalfields (supra), and P Kannadasan (supra) are overruled to the extent of the observations made in the present case.”

The minority judgment of Justice Ms. BV Nagarathna held that royalty was in the nature of a tax, that Sections 9, 9A and 25 of the Mines and Minerals (Development and Regulation) Act, 1957 denuded/ limited the scope of Entry 50, List II and that taxes on lands and buildings contemplated taxes directly levied on the land as a unit and did not include mineral bearing lands within its scope. The minority judgment recognized that Entry 50, List II was the only entry in Lists I and II which subjected the taxing power of the States to limitations imposed by the Parliament by law relating to mineral development.

The Supreme Court Observer (SCO) has an excellent page on the decision, providing links to the hearing transcripts and prior decisions. Link to SCO page on the case is here. Happy reading!

Time as Essence in Construction Contracts: Need for a Comprehensive Relook

The issue of time as essence in construction contracts is controversial and is frequently litigated. The law on the subject is largely unsatisfactory. In a paper titled "The Law on Time as Essence in Construction Contracts: A Critique" published in Volume 8 Issue 1 of the RGNUL Financial and mercantile Law Review (here), the law on the subject is critically evaluated. The paper argues that the precedent on the issue, Hind Construction Contractors v. State of Maharashtra, AIR 1979 SC 720 ("Hind Construction"), was wrongly decided and requires reconsideration. It also argues that:

• Hind Construction is no more relevant to the current times and provides incentives to inefficient contractors leading to delay in project completion; 
• Contracting parties do not appear to have circumvented the adverse effect produced by Hind Construction through the use of appropriate language in their contracts despite various decisions following the said decision; and 
• One of such reasons for the phenomena appears to be a lack of direction by courts as to what contracting language could constitute future courts to construe a contractual condition providing that time is of the essence as such.

The paper concludes by arguing that concludes by highlighting possible contractual clauses and contract management strategies that could further party intent that time is of the essence in construction contracts notwithstanding Hind Construction and later decisions following it.

Abstract of the Paper is provided below:

"The concept of time as essence in construction contracts is a controversial topic. Even though parties routinely provide in their agreements that time is of the essence, these clauses inevitably figure in construction disputes. Arbitral tribunals and courts have mostly decided such disputes holding those clauses to be of no legal effect, mainly by relying on the decision of a three-judge bench of the Hon’ble Supreme Court in Hind Construction Contractors v. State of Maharashtra. This paper argues that Hind Construction was wrongly decided, that it is not good law and that it requires reconsideration given the changing times. The paper further notes that parties do not appear to have circumvented the adverse effect of Hind Construction. Usually, in such situations, there is a change in contracting behaviour by the use of appropriate contracting language. Perhaps, this is due to the lack of direction by courts as to what appropriate language could be used in contracts to make time as the essence of the contract. This paper concludes by suggesting possible methods by which courts and arbitral tribunals could validly enforce time-as-essence clauses."

Critique of the paper is welcome as comments to this post. Readers can also write to lawbadri@gmail.com

* Image from here.

Vidya Drolia v DTC: Part II: Interesting Aspects- Contradiction between Patel Engineering & Booz Allen

Para 17-19 of Vidya Drolia v Durga Trading Corporation is the next interesting aspect we take up in this post. We had discussed the nature of an arbitration agreement and its relation to the law of contracts in the previous post on this subject. In this post, we will discuss the contradiction between Booz Allen and Patel Engineering on whether subject-matter arbitrability is to be decided by a court under Section 8 and11.

In Vidya Drolia, the Supreme Court observed:

" When public policy mandates and states that a case or a dispute is non-arbitrable, the court would not allow an application under Section 8 (or even Section 11 as observed supra) even if the parties have agreed upon arbitration as the mechanism for settlement of such disputes." (Para 19, P. 24).

Justice Ramana's opinion also touches on this topic in many places but does not explicitly note the contradiction between the approaches in these judgments (Patel Engineering &  Booz Allen) noted above. So what exactly is the issue?

The issue relates to whether power exercised under Sections 8 and 11 are similar. What turns on this question is the point whether a court hearing a petition under these sections has to decide subject-matter arbitrability.

In Patel Engineering, the SC held that Sections 8 and 11 were complementary in that the judicial authority under Section 8 or 11 has to decide the jurisdictional issues raised before it. This would logically include questions as to arbitrability of the subject-matter as well. In Booz Allen, however, a two-judge Bench of the Supreme Court held that the nature and scope of issues that arise for consideration in a Section 11 application were narrower than those under Section 8. The court held that arbitrability was not to be determined by the court under Section 11. It is this contradiction that the court in Vidya Drolia highlighted and held: 

"We are clearly bound by the dictum of the Constitutional Bench judgment in Patel Engineering Ltd. that the scope and ambit of court’s jurisdiction under Section 8 or 11 of the Arbitration Act is similar." (Para 17, p. 20).

We invite readers to access this post in this blog written almost a decade back where we argued that given the decision of the larger Bench in Patel Engineering, Booz Allen's approach as regards arbitrability question under Section 11 (that the same has to be decided by the arbitrator) was not consistent with Patel Engineering:

"The pertinent question for the purposes of this post would be whether Patel Engineering gives an indication of whether a decision under Section 11 included a decision on issues of Arbitrability. This blawgger’s view is that it would. Two reasons: (1) In line with the Patel Engg approach, Arbitrability of the dispute would be a jurisdictional fact/ condition precedent for the Chief Justice to exercise jurisdiction; (2) Supreme Court’s concern was for the party who had not agreed to an arbitration agreement but had to go through the entire process of arbitration (because the Act did not permit a court to interfere unless provided so in the Act) and could only challenge the award under Section 34. The same situation applies to Arbitrability as well. In a petition under Section 11, if the contention is that the dispute was not arbitrable, and if the court mechanically refers the parties to arbitration, the party which raised such a contention will be unnecessarily put to the trouble of going through the entire arbitration process...

Therefore, this blawgger is of the view that the obiter dicta of the Supreme Court in Booz Allen ought to be placed below the decision of the Seven Bench Supreme Court in Patel Engineering in terms of binding force."

However, this "contradiction" is a virtually an academic issue, given that Sections 8 and 11 have been amended. We will address Vidya Drolia on the implication of these amendments in another post. But we will conclude this post summarising the concluding observations in Vidya Drolia on this question:

• Judicial review and court's jurisdiction u/ss 8 and 11 are identical but extremely limited [Para 96(b)]
• Patel Engineering is no more good law in view of the 2015 and 2019 amendments to the 1996 Act. [96(a)]
• By virtue of separability and competence principles, arbitral tribunal is the "preferred first authority" to decide all aspects of non-arbitrability and courts can have a second look in terms of Sections 34(2)(a)(i), (ii), or (iv) or 34(2)(b)(i) of the 1996 Act. [96(c)]
• But courts can exercise its jurisdiction where the subject-matter of the dispute is "manifestly and ex facie" non-arbitrable. [96(d)].

[Note that Para 96(d) of the court's view confers very limited jurisdiction on the courts in respect of non-existence or invalidity of agreements as well but we did not deal with these aspects in this post.] 

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.

Seat, Venue and All that Needless Confusion

This blog began its journey about twelve years back, when International Commercial Arbitration in India was at a nascent state. With the help of great readers, who commented on various aspects of the subject, we were able to clarify several concepts to readers. Gradually, international arbitration reached a state in India where there were hardly any bloopers and thus the need for pointing out errors in decisions became lesser and lesser. Of late, we have not been regular in our posts mainly because Indian arbitration law, except for certain aberrations, is moving in the right direction. And then comes this Seat, Venue and Place confusion, which is toootally needless. As a prelude to this, readers are advised to have a look at this short post: The Mystery of Seat and Place in International Arbitration: History & the Indian Connection. 

There are two fundamental errors in the seat, place and venue debate. If these two gross errors are corrected, there would be very less confusion: (1) For domestic arbitrations, it is necessary to abandon the concept of seat as it is understood in international arbitration parlance. (2) Courts should stop using the term "seat" although it sounds stylish and use the term "place" in all its seriousness, as it is used in Section 20(1) and (2) of the Arbitration and Conciliation Act, 1996.

The reason why (2) above is suggested is because of a recent decision of the Supreme Court in Mankastu Impex Pvt. Ltd. v. Airvisual Ltd. (2020: SC), where the three judge Bench of the Supreme Court had the occasion to determine whether parties had agreed on Hong Kong as the place of arbitration and had to therefore decide if a petition for appointment of arbitrator could be filed in India. The arbitration clause in question read:

"17. Governing Law and Dispute Resolution

17.1 This MoU is governed by the laws of India, without regard to its conflicts of laws provisions and courts at New Delhi shall have the jurisdiction.

17.2 Any dispute, controversy, difference or claim arising out of or relating to this MoU, including the existence, validity, interpretation, performance, breach or termination thereof or any dispute regarding non-contractual obligations arising out of or relating to it shall be referred to and finally resolved by arbitration administered in Hong Kong.

The place of arbitration shall be Hong Kong.

The number of arbitrators shall be one. The arbitration proceedings shall be conducted in English language.

17.3 It is agreed that a party may seek provisional, injunctive, or equitable remedies, including but not limited to preliminary injunctive relief, from a court having jurisdiction, before, during or after the pendency of any arbitration proceeding."

Clause 17.2 is clear. The place of arbitration is Hong Kong. To paraphrase the oft-cited statement, the moment there is a designation of place (in international commercial arbitration), it operates akin an exclusive jurisdiction clause. The arbitration was to be administered in Hong Kong. Nevertheless, there is a slight aberration. Clause 17.1 provides that courts at New Delhi shall have the jurisdiction. This was needless as there was no need for designation of a court, especially given that Clause 17.3 allows a party to approach a court having jurisdiction for equitable relief. But whether this choice can create a doubt on the intent of the parties over the place designation clause? Don't think so.

The court, rightly, came to the conclusion that the place of arbitration was Hong Kong and so the petition was maintainable. But the journey it went through to reach the ultimate conclusion had a howler: "It has also been established that mere expression “place of arbitration” cannot be the basis to determine the intention of the parties that they have intended that place as the “seat” of arbitration." (Para 20) Indian arbitration law uses the term "place" for seat. Therefore, the general rule is and should be that the expression of "place of arbitration" is the basis for determining party intent that they intended the place to mean seat. There is no term called "seat" used in the 1996 Act. Also, the judgment, like this post, is badly edited: "Hardy Exploration is not a god [!] law".

The correct course of action for the court is to do what the Supreme Court did almost a decade ago in a decision on international commercial arbitration. See, this post, on what happened. To cut the story short, the court has to once again list the matter and correct these errors in the decision. Would be great if one of the counsels files an IA and gets the errors corrected.

Happy Holi!

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

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

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

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

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

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

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

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

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

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

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

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

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

Guest Post: Whether Decision on Limitation is a Jurisdictional Issue under S. 16 Arbitration Act

[This guest post penned by Mr. Sameer Sharma, a final year student of the National Law University, Jodhpur, points out and critiques the observations in the recent decision of the Supreme Court of India in Uttarakhand Purv Sainik Kalyan Nigam Limited v. Northern Coal Field Limited (2019:SC) that issues of limitation are jurisdictional issues for the purpose of Section 16 of the Arbitration and Conciliation Act, 1996 although they have been held not to be, as per IFFCO v Bhadra Products (2018:SC).] 

The seemingly inconspicuous observation by the SC in Uttarakhand Purv on limitation: A potential breeding ground for confusion.

-          Sameer Sharma (5^th year law student at NLU Jodhpur)

In its judgement dated 27.11.2019, the Supreme Court (“SC”) in Uttarakhand Purv Sainik Kalyan Nigam Limited v. Northern Coal Field Limited,[1] held that the issue of limitation is a "jurisdictional issue" which would be required to be decided by the arbitral tribunal under Section 16 of the A&C Act, 1996, and not by the High Court under Section 11. The purpose of this write-up is to assess the validity and tenability of this particular observation by the SC, as well as its reliance on certain cases to reach such conclusion.

For this limited purpose, it would be adequate to state that the petitioner in the said matter issued a legal notice dated 29.05.2013 to the respondent seeking payment of dues owed to it under the contract. On 09.03.2016, almost three years later, the said petitioner invoked the arbitration clause under the contract by issuing a notice of arbitration to the respondent. Subsequently, the petitioner approached the High Court under Section 11 of the Act for the appointment of an arbitrator. The High Court, vide the order impugned before the SC in the aforesaid case, refused to appoint an arbitrator stating that the claims of the petitioner stood barred by limitation.

The SC noted that the invocation of the arbitration clause in the matter occurred after the 2015 Amendments to the Act came into force. As a result, the SC considered the insertion of Section 11(6A) in the Act while dealing with the instant case before it. By relying on its earlier judgement in Duro Felguera S.A. v. Gangavaram Port Limited,[2] the SC in Uttarakhand Purv held as follows: -

“9.8. In view of the legislative mandate contained in Section 11(6A), the Court is now required only to examine the existence of the arbitration agreement. All other preliminary or threshold issues are left to be decided by the arbitrator under Section 16, which enshrines the Kompetenz-Kompetenz principle.”

(emphasis supplied)

After observing the same, the SC went on to hold: -

“9.11. Sub-section (1) of Section 16 provides that the arbitral tribunal may rule on its own jurisdiction, “including any objections” with respect to the existence or validity of the arbitration agreement. Section 16 is as an inclusive provision, which would comprehend all preliminary issues touching upon the jurisdiction of the arbitral tribunal. The issue of limitation is a jurisdictional issue, which would be required to be decided by the arbitrator under Section 16, and not the High Court at the pre-reference stage under Section 11 of the Act. Once the existence of the arbitration agreement is not disputed, all issues, including jurisdictional objections are to be decided by the arbitrator.”

(emphasis supplied)

 Thus, the SC interpreted the scope of Section 16 of the Act to state that it is wide and inclusive in its import, so as to include “all preliminary or threshold issues” and “preliminary issues touching upon the jurisdiction of the arbitral tribunal”. As per the SC, within these formulations would lie the decision regarding the question on limitation. In order to buttress its reasoning, the SC relied on ITW Signode India Limited v Collector of Central Excise,[3] in which the SC had ruled that the issue of limitation involves the element of “jurisdiction” within it. Further, the SC relied on NTPC v. Siemens Atkein Gesell Schaft,[4] to observe that the issue of limitation would have to be addressed by the arbitral tribunal under Section 16 of the Act. Moreover and interestingly enough, the SC also relied on IFFCO v. Bhadra Products,[5] which is a recent judgement rendered by the SC. In relation to the said case, the SC stated in Uttarakhand Purv as follows: -

“9.12. In Indian Farmers Fertilizers Cooperative Ltd. v. Bhadra Products, this Court held that the issue of limitation being a jurisdictional issue, the same has to be decided by the tribunal under Section 16, which is based on Article 16 of the UNCITRAL Model Law which enshrines the Kompetenze principle.”

(emphasis supplied)

Right at the outset, it would not be incorrect to state that the reasoning employed by the SC in the instant case relating to the issue of limitation, is ridden with anomalies. There are two broad reasons for this contention. Firstly, it is contrary to the SC’s earlier decision in IFFCO (which was, akin to Uttarakhand Purv, a judgement rendered by two judges). In IFFCO, the SC definitively and categorically held that an issue of limitation dealt with by an arbitral tribunal does not fall under Section 16 of the Act; rather, such decision by the tribunal would amount to an “interim award” (which can only be subject to challenge under Section 34 of the Act).[6] In fact, the SC in Uttarakhand Purv has quoted and relied on IFFCO (as can be seen from the extracted paragraph no. 9.12 reproduced above) to state the exact opposite of what has actually been held in it!

Secondly, the SC’s reliance on ITW Signode and NTPC v. Siemens is also misplaced. The SC in IFFCO clearly makes the effort to address the reliance placed by the party therein on ITW Signode to state as to how such judgement does not apply to the facts contained in that matter therein. The SC elaborately distinguishes ITW Signode in IFFCO.[7] However, despite such exposition, the SC in Uttarakhand Purv rather carelessly resorts to ITW Signode to fortify its reasoning. Insofar as NTPC v. Siemens is concerned, nowhere does the SC state in the said case that a decision on the issue of limitation would come under Section 16 of the Act (as has been suggested by the SC in Uttarakhand Purv). Again, this point has also squarely been addressed by the SC in IFFCO.[8]

In light of the foregoing analysis, it is the view of the author that the SC’s holding in Uttarakhand Purv suffers from infirmities as it is manifestly contrary to established case-law and as it misinterprets precedents laid down by the SC. It must be borne in mind that the SC in Uttarakhand Purv was dealing with a Section 11-scenario (appointment of arbitrators) and with the question as to whether it is the Court u/S 11 or the arbitral tribunal u/S 16 of the Act which must adjudicate on an issue related to limitation. However, while the SC’s conclusion that the Court u/S 11 must not deal with the issue of limitation as it must confine itself to deciding the “existence of arbitration agreement” is statutorily sound, the dictum that such issue of limitation must be dealt with under Section 16 is per incuriam. In other words, while the end sought to be achieved is valid, the means employed to achieve such end is what is problematic. It is per incuriam because it explicitly refers to judgements to ultimately end up stating the opposite of what the case referred to actually holds.

It seems to be the case that the SC has employed an all-or-nothing approach to the extent wherein it has held that “all preliminary or threshold issues” have to be dealt with only u/S 16 of the Act and not u/S 11 of the Act. The SC has not contemplated a situation in which certain issues can be outside the ambit of determination u/S 11 and yet be beyond the (limited) realm of Section 16 of the Act. This eventuality, as has been discussed in the foregoing analysis, is very well plausible, with the prime example being the ratio in IFFCO. Thus, the SC could have, in the author’s respectful submission, stated that while the issue of limitation cannot be gone into by the Court u/S 11 of the Act, it could most certainly be dealt with by the arbitral tribunal in the usual course as per relevant provisions of the Act. This would have prevented the conflict of opinion with IFFCO. The need for judicial discipline, adherence to precedents and legal certainty would necessitate courts to render as few conflicting decisions as possible, especially when it comes to co-ordinate bench judgements. A scenario, for instance, like the one relating to the interpretation of the amended Section 6 of the Hindu Succession Act, 1956, which today involves the need to harmonise conflicting decisions,[9] must be avoided. 

With the decision in Uttarakhand Purv, the already settled issue on whether a decision on limitation constitutes an “award” or an “order” (u/S 16 of the Act) has now been thrown open to re-interpretation and disputation. One can expect this to be a ripe ground for future litigation and resultant uncertainty.

[1] Uttarakhand Purv Sainik Kalyan Nigam Limited v. Northern Coal Field Limited, MANU/SC/1634/2019, para 9.11 (hereinafter “Uttarakhand Purv”).

[2] Duro Felguera S.A. v. Gangavaram Port Limited, (2017) 9 SCC 729.

[3] ITW Signode India Limited v Collector of Central Excise, (2004) 3 SCC 48 (hereinafter “ITW Signode”).

[4] NTPC v. Siemens Atkein Gesell Schaft (2007) 4 SCC 451 (hereinafter “NTPC v. Siemens”).

[5] IFFCO v. Bhadra Products (2018) 2 SCC 534 (hereinafter “IFFCO”).

[6] IFFCO v. Bhadra Products (2018) 2 SCC 534, Para 30.

[7] IFFCO v. Bhadra Products (2018) 2 SCC 534, Para 29.

[8] IFFCO v. Bhadra Products (2018) 2 SCC 534, Paras 23-25.

[9] Vineeta Sharma v. Rakesh Sharma, MANU/SC/1593/2018.

Supreme Court on Arbitrability of Fraud: Rashid Raza (2019)

A three-judge Bench of the Supreme Court in Rashid Raza v Sadaf Akhtar (2019: SC) had the occasion to clarify the law relating to arbitrability of fraud. The Supreme Court also reiterated and re-stated the law in the two-judge Bench decision in Ayyasamy v. Paramasivam, (2016) 10 SCC 386. The re-stated test as per the three-judge Bench is as follows:

"Two working tests laid down in paragraph 25 are: "(1) does this plea [of fraud] permeate the entire contract and above all, the agreement of arbitration, rendering it void, or (2) whether the allegations of fraud touch upon the internal affairs of the parties inter se having no implication in the public domain."

Note the use of "or" for these two tests, conveying the meaning that one has to establish either of the grounds to enable the court hold the dispute to be non-arbitrable. The focus of the second aspect of the "working tests" suggests that the court has not considered correct the previous position that arbitral tribunals are incapable of handling complicated facts involving collecting evidence. This is a subtle but significant shift in position. Without overruling Ayyasamy insofar the position of law that the "dispute may require voluminous evidence on the part of both the parties to come to a finding which can be only properly undertaken by a civil court of competent jurisdiction”, the court in effect abandoned this position. Now, the two working tests are the only tests for deciding whether a dispute involving allegation of fraud is arbitrable. 

De Jure ineligibility of Arbitral Tribunal after 2015: SCI Clarifies

Post the TRF decision [TRF Ltd. v. EnergoEngineering Projects Ltd., (2017) 8 SCC 377] of the Supreme Court, there was a doubt as regards the appropriate forum to approach in case of appointment of an arbitrator whose appointment is void at the inception owing to the reason that the proposed arbitrator fell within one of the items in Schedule VII. The Supreme Court has now clarified in the decision of Bharat Broadband Network Ltd. v. United Telecoms Ltd. that since the appointment of such an arbitrator falls foul of Section 12(5), the appropriate forum to challenge such an appointment is not before the arbitrator but before the court under Section 14(2). 

The court was of the view that when such a person is appointed, his mandate terminates automatically (Para 17). The Supreme Court further clarified that two questions are to be decided in a petition under Section 14(2) in the above facts: (1) whether the appointee comes within the purview of Schedule VII; (2) if so, whether there has been a waiver?

The court also distinguished between waiver in terms of Section 4 and Section 12(5). The court stated that the threshold for waiver in Section 12(5) is much higher than Section 4 in that 12(5) required that the waiver should be through an express written agreement. The court also held that the 12(5) threshold is much higher than the "writing" requirement for an arbitration agreement as provided in Section 7 of the Act.

Do read the interesting decision. It compensates for the lack of depth in the TRF decision, where the Supreme Court missed the bus by not citing or analysing the international arbitration jurisprudence regarding the role of appointing authorities and non-conflation of the role of appointing authority and arbitral tribunal.  

Further Comments on Icomm v PSWSSB (March 2019: SCI)

In the previous post, we critiqued the decision of the Supreme Court in Icomm v PSWSSB (11 March 2019). Some more comments/ clarifications form the content of this post.

Whether High Courts Should Interfere in Government Contracts?

Generally, High Courts should not interfere in Government contracts unless the party will be unable to seek relief through the contracted dispute resolution mechanisms or the civil courts. Availability of alternative efficacious remedy is a well-entrenched defence in writs. Instead, courts have this nebulous test of arbitrariness and interfere at their discretion, especially when arbitrariness is such a nebulous term. 

In the instant case, the court could very well have interfered considering the contracted dispute resolution clause was onerous on the claimant. But for reasons stated in the previous post, such an argument is not well-founded. 

Another distinction in Government contracts must be kept in mind. There is a difference between commercial procurement by the state/ state entities as an end-in-itself and as a means to an end. For instance, procurement of 10 crores worth stationery for consumption by central government (end-in-itself) is totally different from procurement of goods for manufacture by a central PSU (means to an end). Although both are commercial and not sovereign acts of the state, there is a marked difference: The latter is usually a listed company competing in the market with other private players and should have a level playing field to enable it to compete. They are accountable to their shareholders ultimately. By ordering stay on their projects, the courts are only disabling them from being efficient by competing in open market. Therefore, the court interference in the latter cases should be only when absolutely necessary. There are agencies such as vigilance, government audit, etc. to take care of these things and court interfere in corrupt conduct is called for only if these institutions fail. 

Whether the fact that the Appellant in the instant case accepted the Tender Conditions meant that he had accepted it and cannot later complain?

This argument is well-founded. The Appellant, along with all other bidders, seem to have accepted the tender conditions, including the arbitration clause. It somehow does not comport with justice and prudence to challenge it much after accepting it, taking the benefit of being awarded the contract, and then later challenging it at its convenience.

Further, even in those judicial review cases, courts would not generally go into the question of invalidity of tender clauses but only of processes. Even when courts question tender clauses, such clauses should have laid down arbitrary processes. There are umpteen judgments which state that courts would not decide how tender conditions should be framed [See, for instance, Directorate Of Education v. Educomp Datamatics Ltd. (2004) 4 SCC 19]. The same principle would apply here. 

Now the question is whether the clause was a bad process. For reasons in the previous post, we disagree. Day in and day out, we see exaggerated claims being made in litigation/ arbitration. Many of the times, adjudicators don't really examine the evidence threadbare to see if the damages claimed is actually suffered.

Whether the Proportionality Test is Applicable only to Purely Public Law Aspects?

The proportionality test has been used in the realm of public law to review public law acts. While contracting by government is not a purely private act, contract law applies to it. 

The proportionality test looks at the following questions:

(a) the action must be sanctioned by law;

(b) the proposed action must be necessary in a democratic society for a legitimate aim; 

(c) the extent of such interference must be proportionate to the need for such interference;

(d) There must be procedural guarantees against abuse of such interference

How can one imagine to incorporate these sub-tests in the current context? Look at the second sub-test: "the proposed action must be necessary in a democratic society for a legitimate aim"? I am sure an expert in public law while provide us with insights on all the facets of the proportionality test as is applied in India. But even the most commonly found formulation of the test is wholly inappropriate for application in the present context.

Whether the Decision is Against the Party Autonomy Doctrine?

The doctrine of party autonomy cannot be simply raised as an argument because the dynamics of the party autonomy doctrine's application in government contracts has not yet been analysed theoretically in the Indian context. Many government contracts operate on a take it or leave it basis or government parties agree only to minor tweaks in the arbitration clause in the international context. A theoretical base has to be built in the Indian context before addressing the question. At the most, it could be argued that this clause found place in the tender document and was accepted by all the other bidders. It would now be unjust on the other bidders that Icomm should be awarded the contract and should then be allowed to say that certain clauses should not be applied to it.

[Post Script: Thanks to Ms. Juhi Gupta for raising somewhat similar questions on the decision and our previous post.]

Conflating Public Law & Private Law: Has the SC Blundered?

Punjab State Water Supply & Sewerage Board had a lengthy arbitration clause containing a unique provision:

“viii. It shall be an essential term of this contract that in order to avoid frivolous claims the party invoking arbitration shall specify the dispute based on facts and calculations stating the amount claimed under each claim and shall furnish a “deposit-at-call” for ten percent of the amount claimed, on a schedule bank in the name of the Arbitrator by his official designation who shall keep the amount in deposit till the announcement of the award. In the event of an award in favour of the claimant, the deposit shall be refunded to him in proportion to the amount awarded w.r.t the amount claimed and the balance, if any, shall be forfeited and paid to the other party.”

The first sentence of clause viii stated the objective of the clause: to avoid frivolous claims. It further provided that the party invoking arbitration (Claimant) would have to specify the dispute based on facts and calculations and has to state the amount claimed under each claim. So far so good. It then provided that the Claimant should furnish a "deposit-at-call" to the tune of 10% of the claim amount in the name of the arbitrator in a bank till the announcement of the award.

The clause stated that if the award was in favour of the Claimant, the deposit was to be refunded to him in proportion to the amount awarded with respect to what is claimed and the balance would be forfeited and paid to the Respondent. To explain this with an illustration, if the amount claimed is Rs. 10 lakhs, the deposit-in-call would be 10% thereof, that is, Rs. 1 lakh. If the Claimant is awarded only 6 lakhs out of Rs. 10 lakhs claimed, the Claimant would be entitled to be refunded Rs. 60,000/- of the deposit and the remaining Rs. 40,000/- in the deposit would be forfeited by the Respondent. If the Claimant was successful in the whole claim, she would be refunded the entire amount but if the claim was dismissed, Rs. 1 lakh deposited would be forfeited in full by the Respondent.

Clause xv of the agreement provided: "xv. No question relating to this contract shall be brought before any civil court without first invoking and completing the arbitration proceedings, if the issue is covered by the scope of arbitration under this contract. The pending arbitration proceedings shall not disentitle the Engineer-in-charge to terminate the contract and to make alternate arrangements for completion of the works."

From a purely objective stand point and seeing it without being prejudiced by the fact that clause viii was struck down as being violative of Article 14 of the Constitution of India, the drafter of this innovative clause has to be appreciated for the application of mind. The clause has three distinct advantages:

1. It provides negative incentives on the Claimant. It guards against exaggerated claims by the Claimant and provides a negative incentive for the Claimant not to do so.
2. If the Claimant is prevented from making exaggerated claims, the fee of the arbitrators is also kept at a reasonable level since it is ad valorem.
3. As we have argued in the past (see, here and here), the costs mechanism in India is not up to the mark and the arbitrators and the tribunals rarely award costs. This clause requires the tribunal to do what it should have otherwise done: award costs in favour of the Respondent and against the Claimant in respect of exaggerated claims. This is fairly standard in international arbitration practice.

The court held that the clause was violative of Article 14 of the Constitution of India, which is really erroneous and unfortunate. The unreasonable court interference in the commercial (as opposed to sovereign) acts of the state is uncalled for and the decision requires to be revisited by a larger Bench, The unjustified application of the public law principles in such disputes stifles innovation and protection of interests of the government sector. As such government sectors, especially, public sector undertakings, face a lot of heat with regard to competing with private sector and at the same time fulfilling the socio-economic obligations . The step-motherly treatment of these sectors from the courts, the unjustified contempt and prejudice shown by the courts when it comes to the public sector needs to be relooked at by courts.

Clearly, the court's invocation of Article 14 means that the private sector which is immune from claims regarding violation of fundamental (and not contractual or statutory) rights could insist on such a clause without qualms. With these preliminary remarks, let us how the court held the clause to be invalid:

Facts

Punjab State Water Supply & Sewerage Board, Bhatinda (PSWSSB) invited tenders for a project and Icomm Tele Ltd. (Icomm) was the successful bidder. A contract was entered into between the parties and it contained a arbitration clause, which included the above quoted provision. Disputes arose and Icomm wrote to PSWSSB for appointment of arbitrator and for waiver of the 10% deposit fee, which was not responded to.

Icomm challenged the clause through a writ petition contending that clause viii was unreasonable and arbitrary but the petition was dismissed. So Icomm approached the Supreme Court.

Contentions

Icomm challenged above clause on three grounds:

• The contract was hit by Section 23 of the Indian Contract Act, 1872 in that it was a contract of adhesion and was against the public policy of India.
• A 10% deposit is a clog on the arbitration process.
• The clause is arbitrary and highhanded.

PSWSSB on the other hand argued that the clause applied to both parties equally and that the argument as regards public policy is not applicable in case of commercial contracts.

Decision

On the first argument that the contract was against public policy and hit by virtue of the Supreme Court's decision in Central Inland Water Transport Corpn. v. Brojo Nath Ganguly, (1986) 3 SCC 156, the court held that this being a commercial contract, Icomm cannot make a valid argument that the clause was hit by Section 23 of the Indian Contract Act, 1872.

But the court accepted the argument that the clause in issue was arbitrary. Following were the reasons that led the court to so decide:

• Frivolous claims could be dismissed with exemplary costs, as was held in Dnyandeo Sabaji Naik v. Pradnya Prakash Khadekar, (2017) 5 SCC 496
• In General Motors (I) (P) Ltd. v. Ashok Ramnik Lal Tolat, (2015) 1 SCC 429, the concept of punitive damages was discussed and the important principle that unless the litigation was held to be frivolous, exemplary costs would not follow.
• In this case, the deposit-at-call clause called for 10% of the claim amount, which could amount to a large sum of money does not have any direct nexus to the filing of frivolous claims, as it applies to all claims, even non-frivolous, at the threshold.
• The deposit-at-call clause is totally disproportionate to the object sought to be achieved, that is, prevent frivolous claims.
• The clause is arbitrary in that it is unfair and unjust and no reasonable man would agree to it. There are situations where a claim may be dismissed not for reasons of frivolity as is the case with majority and minority awards. Take a case of illegal termination of contract. If the court declares the termination to be illegal and awards only one-tenth of the claim, the respondents gets to hold 10% of the that amount, which means that the party which lost the arbitration will be entitled to forfeit nine-tenths of the amount deposited. This is arbitrary, disproportionate, and would lead to unjust results.
• Arbitration being an important part of the dispute resolution process, such a clause would be a clog on arbitration and cannot be encouraged. The primary objective of arbitration is speedy and efficient resolution of disputes but such a clause militates against these purposes. This clause would render the arbitration process expensive.

Further Comments

Apart from the critique in the first part of this post, a few other aspects are noteworthy.

Unequal Bargaining Power: The court rightly rejected the argument that the clause is invalid in view of the unequal bargaining power between the parties. The concept of unequal bargaining power is generally not applied in commercial contracts and the law is fairly settled in this regard: see, for instance, Central Inland Water Transport Corporation Ltd. and Anr. v. Brojo Nath Ganguly and Anr. MANU/SC/0439/1986, Para 89; SK Jain v Haryana MANU/SC/0323/2009; General Assurance Society Ltd. v. Chandmull Jain and Anr. MANU/SC/0180/1966; Patel Engineering v BT Patil 2016(3) Arb LR 162 (Bom).

Are Frivolous Claims Dismissed with Exemplary Costs? The ground relied on by the court that there was another way to deal with frivolous claims: "It is well settled that a frivolous claim can be dismissed with exemplary costs." This argument is not at all convincing for two reasons: (1) It is well known that rarely do Indian courts and tribunals award costs, even in proceedings of commercial nature such as arbitration proceedings (see, here, here, and here). Therefore, that courts and tribunals can grant exemplary costs is really a mirage. They don't do that, especially when the Government and the PSUs are at the receiving end.

In this blogger's experience in PSUs for ten years, courts rarely penalise petitioners for frivolous claims. Government subsidising frivolous litigation is a drain on taxpayer's money. Subsidisation of frivolous claims in commercial contracts is a massive drain on government's and taxpayer's wealth, especially in the context of PSUs. In the annals of Indian legal history, one can rarely find courts ordering costs on frivolous and unsuccessful challenges to awarding of contracts on a party instead of the petitioners. In sum, the argument relied on by the court is mere rhetoric and not a well-founded argument.

On the one hand, law is purported to be certain that assessment of damages is possible prior to a decision from a court and on the other hand, the court puts forth a hypothetical test wherein the claimant actually makes an exaggerated claim but the court gives the claimant the benefit. The hypothetical argument doesn’t comport with justice or any legitimate moral, social or economic principle.

Note that the clause does not state that if the claimant claims Rs. 10 lakhs and is awarded Rs. 10 lakhs, the respondent could forfeit the whole or part of it. It only states that if the claimant is awarded Rs. 1 lakh as against a claim of Rs. 10 lakhs (exaggerated), the respondent would be entitled to foreit Rs. 90,000 from Rs. one lakh deposited.

Stifling of Innovation: Stifles innovation in government sector, especially in the commercial contracts entered into by the Government and the Public Sector Undertakings. Having held that the contract is a commercial contract, invocation of Article 14 is shocking to the least, and is against the trends in jurisprudence of limited interference.

Application of Proportionality Test to Contractual Clauses: Private law proceeds on the principle that that the contracting parties are best judges of their contractual arrangement and the state cannot and should not interfere in contracts, unless absolutely justified. In this case, the bidder assessed the risk associated with all clauses in the tender and submitted its bid agreeing to all the clauses therein, including the arbitration clause when a contract is entered into. Therefore, interference by the Supreme Court by applying the proportionality test on a contract clause was wrong. The Supreme Court cannot be a judge of what is essentially an economic decision: using the deposit-at-call clause as a disincentive to frivolous claims. In fact, the clause fills the gap or defect in the application of law by courts and tribunals in ordering costs in case of exaggerated or frivolous claims. Can the proportionality test which is used in constitutional contexts be applied to test the validity of a contract clause is the larger question that requires a detailed consideration. The decision has created a new Frankenstein monster akin to public policy by applying the proportionality test to examine the validity of contractual clauses.

Is the Impugned Clause a Clog on Arbitration?: The finding that the clause is a clog on arbitration does not appeal to reason. It is only a clog on an exaggerated claim in arbitration and cannot be considered a clog on arbitration. Had the clause provided, for instance, that even if the Claimant is awarded the claim, the Claimant and not the PSWSSB will bear the costs of arbitration, will probably be a clog on arbitration. The court has not really justified how it will be so.

In all, the decision is least convincing and lacks an objective and incisive analysis of the underlying justifications that the issue really called for.

[Food for Thought: If the impugned clause is construed as an agreement to pay costs, wouldn’t it be hit by Section 31A(5)of the Arbitration and Conciliation Act, 1996?]

The decision can be accessed from here.