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)

Norm Creation in Arbitration and the Supreme Court of India:

Way back in 2010, we did a post titled "Norm Creation (ADR) and Arbitration", which noted the inability of ADR processes in helping norm creation and amplification of law. The post also noted the problem was exacerbated by by the lack of a thorough appellate process and review on possibility of a correct decision instead of review on substantive correctness. We request readers to go through the post. 

Thereafter, the issue gained prominence owing to a speech made by The Right Hon. The Lord Thomas of Cwmgiedd, Lord Chief Justice of England and Wales in the Bailii Lecture in 2016 titled "Developing commercial law through the courts: rebalancing the relationship between the courts and arbitration". The lecture highlighted how arbitration had the potential in bring about uncertainty in commercial law by taking away cases from national courts:

"22. The effect of the diminishing number of appeals compounds the problem that arises from the diversion of more claims from the courts to arbitration. It reduces the potential for the courts to develop and explain the law. This consequence provides fertile ground for transforming the common law from a living instrument into, as Lord Toulson put it in a different context, “an ossuary”.27 Here lies the irony. As I have explained reform was effected to promote the use of London as a centre for dispute resolution largely based on contracts based on the common law as developed in the Commercial Courts of London. However, the consequence has been the undermining of the means through which much of the common law’s strength – its “excellence” was developed – a danger not merely to those engaged in dispute resolution in London, but more importantly to the development of the common law as the framework to underpin the international markets, trade and commerce.

23. Quite apart from this major issue, there are other issues which arise from the resolution of disputes firmly behind closed doors - retarding public understanding of the law, and public debate over its application. A series of decisions in the courts may expose issues that call for Parliamentary scrutiny and legislative revision. A series of similar decisions in arbitral proceedings will not do so, and those issues may then carry on being taken account of in future arbitrations."

For a critique of this position, see, Susan L. Karamanian, COURTS AND ARBITRATION: RECONCILING THE PUBLIC WITH THE PRIVATE, 9 Arb. L. Rev. 65 (2017)

The issues raised by the judge are serious questions that requires deeper research and understanding in the Indian context, especially when Indian commercial law is evolving and getting more nuanced.

It is in this context that this blawgger was happy to see the decision of the Supreme Court in National Highways Authority of India v. Progressive-MVT (JV) 2018(2) Arb LR 111 (SC). The case related to interpretation of the price variation clause of the standard form contract of the National Highways Authority of India (Sub-Clause 70.3 of the Conditions of Particular Application-COPA). The sub-clause had received divergent constructions by different arbitral tribunals (which were ultimately upheld by the High Court and SLPs against these decisions were dismissed). The Supreme Court noted that these divergent views on the construction of the said clause were both possible interpretations and therefore could not be interfered with ordinarily. The court also pointed out the resultant anomalous situation that one clause would then have two interpretations. This, according to the court, would severely affect various agreements entered into all over the country by NHAI containing the clause. On this basis, the Supreme Court offered clarity on the proper construction of the price variation clause. In the words of AK Sikri, J. who authored the judgement on behalf of the Division Bench also consisting of Ashok Bhushan, J.:

"The NHAI has entered into multiple contracts with different parties containing the same clauses of price variation. Once we find that Arbitral Tribunals are taking different views, and the view taken in favour of the NHAI is also one of the possible interpretations, the effect thereof would be to uphold both kinds of awards even when they are conflicting in nature in respect of the same contractual provision. It may not be appropriate to countenance such a situation which needs to be remedied. Therefore, under this peculiar situation, we deem it proper to go into the exercise of interpreting the said clause so that there is a uniformity in the approach of the Arbitral Tribunals dealing with this particular dispute and a sense of certainty is attached in the outcomes."

The court held that such a review is to be made to pending cases that have not attained finality. The court also clarified that the ground of issue estoppel would not apply bar the court from so reviewing. 

It is submitted that the court was correct to amplify the law by opening doors for review of arbitral awards on the ground of affording commercial certainty to a particular contractual term that is widely used. The court opened the doors for review on merits in such cases. Therefore, even the High Courts could use this to provide definitive views of standard form agreements. Care should be employed so that this does not give an opportunity to review the award on merits when there is no such conflict of awards/ decisions involved.

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

In the previous post we discussed the majority opinion of the UK Supreme Court on whether an agreement could be amended orally despite a "No Oral Modification" (NOM) clause. In this post we discuss the minority view and the Indian position on the subject.

The Minority View

The minority view of Lord Briggs calls for a more open possibility of an oral modification to the agreement despite the NOM clause. Lord Brigg's view was that parties could not only unbind themselves from what they had agreed, they could also unbind themselves orally of any procedural restrictions to vary the agreement. But the agreed departure from the NOM will not be "lightly inferred". The underlying policy reasons for his differing view are aptly summed up in the concluding portions of the minority opinion and are quoted here:

"31. In my view this more cautious recognition of the effect of a NOM clause, namely that it continues to bind until the parties have expressly (or by strictly necessary implication) agreed to do away with it, would give the parties most of the commercial benefits of certainty and the avoidance of abusive litigation about alleged oral variation for which its proponents contend. It would certainly do so in the present case. It would probably leave only those cases where the subject matter of the variation was to be, and was, immediately implemented, where estoppel and release of the NOM clause by necessary implication are likely to go hand in hand. While it might in theory also leave open the case where it is alleged that the parties did have the NOM clause in mind, and then agreed to do away with it orally, that seems to me to be so unlikely a story that a judge would usually have little difficulty in treating it as incredible (if denied), and therefore as presenting no obstacle to summary judgment on the contract in its unvaried form.

32. In proposing this perhaps cautious solution to the problem thrown up by this case I am comforted by the perception that it represents an incremental development of the common law which accords more closely with the conceptual analysis adopted in most other common law jurisdictions, as Lord Sumption has described. By contrast the more radical solution which he proposes would involve a clean break with something approaching an international common law consensus, unsupported by any societal or other considerations peculiar to England and Wales. There may be cases where a pressing need to modernise the common law justifies such a break, perhaps in the expectation that other common law jurisdictions will in due course follow, but this case is not, in my opinion, one of them."

The Indian Position

In India, the Supreme Court has perhaps taken a view that more-or-less accords with the minority view of Lord Briggs. In BPCL v Great Eastern Shipping, the Supreme Court held that although ordinarily silence does not mean acceptance of an offer but in certain cases when the offer is coupled by silence but the conduct leads to the inference of acceptance, such acceptance would be acceptance subsilentio and a contract would deemed to have been formed. 

The acceptance subsilentio principle would equally apply to modifications "subsilentio" even in the context of a NOM clause. In Carrier Airconditioning and Refrigeration Pvt. Ltv. v. Linc Digital Systems Pvt. Ltd., the Delhi High Court had to decide whether the agreement could be extended beyond its validity period by conduct of the parties when there was a NOM clause. The court cited the BPCL case of the Supreme Court (discussed above) and held on facts that the conduct of the parties as evidenced by correspondences exchanged between them showed that they continued to bind themselves to the terms and conditions of the agreement. On that basis, the court concluded that the parties had by conduct extended the agreement despite the NOM. See also, Wire and Wireless India Pvt. Ltd. v. Information TV Pvt. Ltd. MANU/TD/0093/2011. 

The Indian position is not yet as chiselled as the English position is. However, the Indian precedents are more or less in line with the minority view of the decision of the UK Supreme Court, which needs no changes or interference.

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

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

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

Facts

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

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

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

The Legal Proceedings

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

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

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

Judgement of the UK Supreme Court

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

The Leading Decision by Justice Sumption

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

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

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

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

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

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

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

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

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