In recent times, several noteworthy judgments have been rendered by Indian courts in matters involving the law of arbitration in India. Some decisions rendered in the second quarter of 2021 (April - June) that discuss and set out the legal position concerning the interpretation and applicability of provisions of the Arbitration and Conciliation Act, 1996 have been summarised below:
1. Shapoorji Pallonji and Co. Pvt. Ltd. v. Rattan India Power Ltd. & Anr.
High Court of Delhi
Citation: 2021 SCC OnLine Del 2875
Decided on: 19 March 2021 (available in April 2021)
A non-signatory third party can be compelled to arbitrate if the courts deem it to be a necessary and a proper party for the arbitration.
The 'group of companies' doctrine could be invoked to bind the non-signatory affiliate of a parent company if there was (i) a direct relationship with the signatory to the arbitration agreement; (ii) commonality of the subject matter; and (iii) a composite transaction between the parties at dispute.
Brief Facts: Shapoorji Pallonji and Co. Pvt. Ltd. (Petitioner) filed a petition under Section 11 of the Arbitration and Conciliation Act, 1996 (Arbitration Act), praying for the appointment of an arbitrator. The first respondent, previously known as India Bulls Power Ltd. (India Bulls), invited bids to execute some civil, structural works and a boiler turbine package (BTG Works). The second respondent (Elena) is a wholly-owned subsidiary of Indiabulls.
Petitioner's bid was accepted for the BTG Works. The Letter of Award (LoA) for the BTG Works was signed on behalf of Elena, but the letterhead carried the name of Indiabulls. Petitioner and Elena also entered into a Contract for the BTG Works (BTG Contract). Sometime later, disputes arose in respect of the execution of the works amongst the parties. Accordingly, the Petitioner issued a notice invoking arbitration. Indiabulls responded to the notice by stating that none of the contracts for the BTG Works were entered into by Indiabulls. Therefore, there was no arbitration agreement existing between the Petitioner and Indiabulls. Hence, the moot question before the High Court of Delhi (High Court) was whether Indiabulls could be compelled to arbitrate regarding the disputes that had arisen with the Petitioner.
Held: The High Court referred to multiple decisions1 to elaborately discuss upon the joinder of non-signatories to arbitral proceedings. The decision in Cheran Properties Ltd. v. Kasturi & Sons Ltd.2 was referred to reiterate that the adjudicatory trends indicated that in certain situations, an arbitration agreement between two or more parties could operate to bind other parties as well. Similarly, a reference was made to the decision in Gvozdenovic v. United Air Lines Inc.3 , wherein it was held that where a party conducted itself as if it were a party to a commercial contract by playing a substantial role in (i) negotiations or (ii) performance, it may be held to have impliedly consented to be bound by the arbitration agreement. The High Court then explained the 'group of companies' doctrine wherein it referred to the decision in Mahanagar Telephone Nigam Ltd. v. Canara Bank.4 In Mahanagar Telephone, the Hon'ble Supreme Court held that the group of companies doctrine could be invoked to bind the non-signatory affiliate of a parent company if there was (i) a direct relationship with the signatory to the arbitration agreement; (ii) commonality of the subject-matter; and (iii) a composite transaction between the parties. A composite transaction is referred to a transaction that is interlinked in nature.
On the factual front, it was observed that there was no dispute that Indiabulls had fully participated in the formation of the BTG Contract. It was Indiabulls who invited offers for the BTG Works. Moreover, Elena was a wholly-owned subsidiary of Indiabulls. The High Court ruled that by way of the group of companies doctrine, it was well settled that the corporate veil could be pierced in the circumstances such as the present case. The petition was thus allowed by the High Court.
2. Sanjiv Prakash v. Seema Kukreja and Ors.
Supreme Court of India
Citation: 2021 SCC OnLine SC 282
Decided on: 6 April 2021
Complex questions arising out of novation of contracts cannot be dealt with within the limited jurisdiction of the courts under Section 11 of the Arbitration and Conciliation Act, 1996.
Brief Facts: A private company was incorporated in 1971 by Prem Prakash, who paid for the entire amount of the paid capital from his personal funds. Prem Prakash then distributed the shares among his family members without receiving any consideration for the same. In 1997, the company was renamed as ANI Media Private Limited (Company). In 1996, Reuters Television Mauritius Ltd. (Thomson Reuters) approached Prem Prakash for long-term equity investment and collaboration. Pursuant to the same, a Memorandum of Understanding (MoU) was signed amongst the four members of the Prakash family. The MoU contained an arbitration clause under clause 12, which provided that the disputes would be amenable to Arbitration Act, 1940 or any other enactment or statutory modification thereof. Thereafter, a Shareholders Agreement (SHA) and Share Purchase Agreement (SPA) was entered into between the Prakash Family and Reuters, through which Thomson Reuters acquired 49% shares of the Company in 1996. Sanjiv Prakash (son of Prem Prakash) took over the Company as the Managing Director in the same year. Clause 16 of the SHA provided for the resolution of disputes through arbitration seated at London, governed by London Court of International Arbitration's (LCIA) rules. Disputes arose between the parties when Prem Prakash decided to transfer his shareholding to be held jointly between Sanjiv Prakash and himself, and Daya Prakash (wife of Prem Prakash) did likewise to transfer her shareholding to be held jointly between Seema Kukreja (sister of Sanjiv Prakash) and herself.
Sanjiv Prakash invoked the arbitration clause contained in the MoU against the three Respondents. However, in their reply filed by Seema Kukreja and Daya Prakash, it was pointed out that the MoU ceased to exist on and from the date of the SHA, which superseded and novated the same. Therefore, the existence and validity of an arbitral clause in the MoU was denied. As a result, the matter eventually reached the Hon'ble Supreme Court.
Held: The Hon'ble Apex Court relied upon the decision in Vidya Drolia v. Durga Trading Corporation5 to hold that a court under Section 11 of the Arbitration and Conciliation Act, 1996 (Arbitration Act) was not empowered to determine by way of a mini-trial, the validity of the arbitration agreement. The only aspect that a court must look into to refer the matter to arbitration is the existence of an arbitration agreement. Applying the test mentioned above, the Hon'ble Supreme Court held that the question as to whether the SHA had novated the MoU required detailed consideration of the clauses of the two agreements along with the surrounding circumstances. It was held that none of the aforementioned activities could be undertaken under the limited jurisdiction of a court under Section 11 of the Arbitration Act. Thus, the matter was referred to a sole arbitrator who would decide the dispute between the parties.
3. Inox Renewables Ltd. v. Jayesh Electricals Ltd.
Supreme Court of India
Case Number: Civil Appeal No. 1556 of 2021 (Arising out of SLP (C) No. 29161 of 2019)
Decided on: 13 April 2021
The parties at dispute are empowered to mutually decide upon the change in seat of the arbitration.
Brief Facts: A purchase order dated 28 January 2012 was entered into between M/s Gujrat Fluorochemicals Ltd. (GFL) and Jayesh Electricals Ltd. (Respondent) for the manufacture and supply of power transformers at wind farms (Agreement). The arbitration clause under the Agreement provided for the venue of the arbitration to be at Jaipur. Sometime later, a slump sale of the entire business of GFL took place in favour of the M/s Inox Renewables Ltd. (Appellant) by way of a business transfer agreement (BTA) dated 30 March 2012. The arbitration clause of the BTA, to which the Respondent was not a party, designated Vadodara as the seat of the arbitration, vesting the courts at Vadodara with exclusive jurisdiction qua disputes arising out of the BTA. Disputes arose amongst the parties, and the Respondent filed an application under Section 11 of the Arbitration and Conciliation Act, 1996 (Arbitration Act) seeking appointment of an arbitration under the Agreement. The High Court of Gujrat (High Court) admitted the application filed by the Respondent and appointed the sole arbitrator. The arbitrator passed an arbitral award dated 28 July 2018 in favour of the Respondent.
The Appellant challenged the award under Section 34 of the Arbitration Act, before the Commercial Court of Ahmedabad (Commercial Court) which was resisted by the Respondent. The Respondent relied upon the BTA which provided that the courts at Vadodara alone would have exclusive jurisdiction. The Commercial Court accepted the contentions of the Respondent. Consequently, the Appellant filed a special civil application before the High Court challenging the order of the Commercial Court. The High Court observed that even assuming that Ahmedabad would have jurisdiction, the Agreement's arbitration clause vested exclusive jurisdiction in the courts at Rajasthan. Despite this finding, the High Court found no error in the Commercial Court's decision and dismissed the special civil application. The matter eventually reached the Hon'ble Supreme Court.
Held: Hon'ble Supreme Court at the outset took note of the arbitrator's finding that the parties had shifted the venue of the arbitration from Jaipur to Ahmedabad by mutual agreement. The BTA was not signed between the Appellant and the Respondent making it irrelevant in the facts of the present case. Further, the Hon'ble Supreme Court held that it was not possible to accede to the Respondent's argument that the venue of the arbitration could have been shifted only through an agreement in writing.
Placing reliance on the judgment in the BGS SGS SOMA JV6 case, it was held that the moment the seat is chosen as Ahmedabad, it was akin to an exclusive jurisdiction clause, thereby vesting the courts at Ahmedabad with exclusive jurisdiction to deal with matters relating to the arbitration. Thus, the Hon'ble Supreme Court concluded that the courts at Rajasthan were no longer vested with jurisdiction. The impugned judgment was consequently set aside, and the parties were referred to the courts at Ahmedabad for the resolution of the Section 34 petition.
4. PASL Wind Solutions Pvt. Ltd. v. GE Power Conversion India Pvt. Ltd.
Supreme Court of India
Citation: 2021 SCC OnLine SC 331
Decided on: 20 April 2021
Two Indian parties can agree to arbitrate at a foreign seat.
Brief Facts: In 2010, the appellant issued three purchase orders to the respondent for the supply of converters. Disputes arose between the parties concerning the expiry of the warranty on the said converters. To resolve their disputes, the parties entered into a settlement agreement (Agreement) dated 23 December 2014. Under the Agreement, the respondent agreed to provide certain modules with warranties for the operation of the converters. In addition, the Agreement contained a dispute resolution clause that provided for the resolution of disputes through arbitration seated at Zurich, Switzerland.
Disputes continued to break out amongst the parties pursuant to the Agreement. Consequently, the appellant proceeded to initiate the arbitration by the International Chamber of Commerce (ICC). The respondent filed a preliminary application challenging the arbitrator's jurisdiction on the ground that two Indian parties could not have chosen a foreign seat of arbitration. The sole arbitrator, persuaded by multiple authorities7, dismissed the respondent's preliminary application holding that two Indian parties could arbitrate outside India. After the passing of the final award, the respondent initiated enforcement proceedings under Sections 47 and 49 of the Arbitration and Conciliation Act, 1996 (Arbitration Act) before the High Court of Gujarat. After rounds of litigation, the matter reached the Hon'ble Supreme Court, where the moot question was whether two Indian parties could elect a foreign seat.
Held: The Hon'ble Supreme Court returned its findings segmented under multiple heads briefly summarised as below.
I. On the seat of the arbitration
At the outset, the Hon'ble Supreme Court noted that the dispute resolution clause under the Agreement stated that the arbitration was to be held in Zurich, Switzerland. Accordingly, reliance was placed on the decision rendered in a circumstantially similar case in Mankastu Impex (P) Ltd. v. Airvisual Limited8 to hold that Zurich was the juridical seat of arbitration between the parties.
II. On Part I and Part II of the Arbitration Act being mutually exclusive
The Hon'ble Supreme Court held that Part I and Part II of the Arbitration Act were mutually exclusive of each other. The decision in Bharat Aluminium Co. v. Kaiser Aluminium Technical Services Inc.9 was referred to hold that the definitions contained in Sections 2(1)(a) to 2(1)(h) were limited to Part I of the Arbitration Act. Thus, the definition of 'international commercial arbitration' contained under Section 2(1)(f) could not be used to interpret provisions concerning enforcement of awards under Part II of the Arbitration Act. Moreover, Section 2(2) states explicitly that Part I applies only where the place of arbitration was in India. With regard to the proviso to Section 2(2), the Hon'ble Supreme Court held that it was a well-settled principle that a proviso cannot travel beyond the main enacting provision.10
III. On whether the impugned award in the instant matter was a foreign award under Section 44 of the Arbitration Act
The Hon'ble Supreme Court held that the following four ingredients are essential for an award to be designated as a foreign award under Section 44 of the Arbitration Act:
- The dispute must be considered to be a commercial dispute under the law in force in India.
- The award must be made in pursuance of an agreement in writing for arbitration.
- There must be a dispute that arises between "persons" (without regard to their nationality, residence, or domicile).
- The arbitration must conclude in a country that is a signatory to the New York Convention.
In the facts of the instant matter, the Hon'ble Supreme Court held that all of the ingredients mentioned above were fulfilled. Therefore, the impugned award was a foreign award in terms of Section 44 of the Arbitration Act.
IV. On whether a foreign award could be refused to be enforced since it was made between two Indian parties
Reliance was placed on Atlas Export Industries v. Kotak & Co.11 where the Hon'ble Apex Court, in context of the pari materia provisions of the Foreign Awards Act, 1961 held that the enforcement of a foreign award could not be refused merely because it was made between two Indian parties. The Hon'ble Supreme Court then approved of the findings in Sasan Power Limited v. North American Coal Corporation (India) Pvt. Ltd.12 , which held that two Indian companies/parties were permitted in law to arbitrate at a seat out of India.
In light of the above findings, the Hon'ble Supreme Court held that two Indian parties could engage in arbitrations seated at a foreign country.
5. Oriental Structural Engineers Pvt. Ltd. v. State of Kerala
Supreme Court of India
Citation: 2021 SCC OnLine SC 337
Decided on: 22 April 2021
When a contract provides for the payment of interest but the rate of interest is blank, the concerned party is obligated to pay the same.
A person deprived of legitimately entitled money must be compensated in form of interest or damages.
Brief Facts: Oriental Structural Engineers Pvt. Ltd. (OSEPL) was awarded the contract for upgrading the state highways (Contract) by the State of Kerala (Respondent). The Contract stated that the contractor would be entitled to interest on delayed interim payment. However, OSEPL left a blank at the space to record the exact quantum of the interest to be paid. A dispute emerged amongst the parties over the Respondent's delayed payment, which was eventually referred to arbitration. By way of a majority award, the arbitral tribunal decided the matter in favour of OSEPL directing the Respondent to pay interest calculated based on other clauses in the Contract. The tribunal rejected the contention of the Respondent that the interest to be paid on delayed payment had to be treated as 'zero' or 'nil' in absence of an actual figure in the Contract. The tribunal based its decision on the case in Secretary, Irrigation Department, Government of Orissa v. G.C. Roy13 , which held that a person deprived of legitimately entitled money must be compensated and such compensation could be in the form of interest compensation or damages. The State challenged the arbitral award under Section 34 of the Arbitration and Conciliation Act, 1996 (Arbitration Act) on the grounds of patent illegality.
Held: The Hon'ble Supreme Court noted that the Contract did not specifically exclude the payment of interest on late payments. On the contrary, the Contract permitted for the payment of interest on delayed payment. As a result, the Hon'ble Apex Court noted that the parties had merely not agreed to a specific rate of interest that would be paid up on delayed payment. It was also observed that the High Court's decision that OSPEL leaving a blank at the place for interest meant that the interest would be nil or zero was not only flawed but also contrary to the Contract itself. Such an interpretation would amount to rewriting the Contract by taking away the right to interest from OSPEL. If at all the parties intended to not have an interest paid on the delayed payments, the same would have been provided expressly in the Contract. The Hon'ble Supreme Court held that the primary premise that governs interest payments is that they are essentially compensatory in nature. As a result, the tribunal was held proper in awarding interest as a compensating or equitable measure, since the Contract did not contain a condition prohibiting interest payment on late payments.
6. ADM International Sarl v. Sunraja Oil Industries Pvt. Ltd.
High Court of Madras
Citation: Application Nos. 5723 to 5730 of 2019, O.A. Nos. 644, 645 of 2019 in C.S. Nos. 406 and 407 of 201
Decided on: 22 April 2021
The courts can grant an anti-arbitration injunction only when the arbitration agreement is (i) null and void, (ii) inoperative or (iii) is incapable of being performed.
Brief Facts: Two parties, namely, Sunraja Oil Pvt. Ltd. (Sunraja) and Gem Edible Oil Pvt. Ltd. (Gem), had entered into contracts for the purchase of Crude Sunflower Oil (CSFO) of edible grade from ADM International Sarl (ADM), a company based in Switzerland. However, disputes emerged amongst the parties regarding the contracts for the sale of CSFO. Accordingly, Sunraja and Gem filed two separate suits against ADM, which was arrayed as the first defendant in each suit, while the second defendant was the Federation of Oil Seeds and Fats Association (FOSFA).
The suits were filed for a declaration that the arbitration proceedings instituted by ADM against Sunraja and Gem, respectively, before FOSFA – an arbitral institution were void and against the public policy. The suits also prayed for a declaration that the contracts entered into between the plaintiff (i.e., Sunraja or Gem, as the case may be) and ADM are null and void. A permanent injunction to restrain ADM from initiating or continuing any arbitration proceeding was also sought by the plaintiffs apart from damages to the tune of INR 1,00,01,000 (One crore and one thousand).
The plaintiffs submitted that only a handful of companies sold CSFO, out of which they were constrained to procure CSFO only from ADM. The plaintiffs further submitted that as per the terms of the contracts, the buyer of the CSFO was entitled to exclusivity in the sense that the vessel transporting the CSFO could only carry cargo meant for the respective plaintiff and not other buyers. However, according to the plaintiffs, this condition of exclusivity was repeatedly breached by ADM. In addition, the plaintiffs alleged that there were various quality-related issues that they were facing concerning the CSFO bought.
As per the contracts, the seller could terminate the contracts while a corresponding right was not vested in the buyer. Resultantly, even though there were significant quality issues and repeated breaches of the exclusivity condition, the plaintiff in each case was constrained to continue procuring the CSFO from ADM. Thus, the plaintiffs alleged that the contracts were unconscionable since they were discriminatory against the buyer. The plaintiffs also alleged that the arbitration clause was void and could not be enforced since FOSFA was an organisation fully controlled by the prominent sellers of oilseeds, including ADM, and the rules of FOSFA did not permit a party to be represented by advocates.
In each suit, the respective plaintiff had filed an application for an interim injunction to restrain ADM and FOSFA from proceeding with the arbitration proceedings. By separate orders, an order of injunction was granted restraining FOSFA, which was extended until 14 November 2019. In such circumstances, as a countermeasure, ADM filed applications in each suit to vacate the interim injunction and refer the dispute for arbitration. The present matter deals with the applications filed by ADM.
Held: The High Court of Madras (High Court) at the outset examined the preamble of the FOSFA Rules of Arbitration and Appeal. The High Court observed that three aspects were evident from the preamble. Firstly, the parties had agreed to resolve disputes through arbitration. Secondly, the parties agreed that the arbitration would be governed by the Arbitration Act 1996 (English Arbitration Act). Lastly, the juridical seat had been designated as England in terms of the English Arbitration Act. The High Court also noted that the governing law clause stated that the contracts would be construed in accordance with the English law.
Further, a clause concerning "domicile" read that the contract shall be deemed to have been made in England and therefore governed in all respects by English law. Based on the provisions mentioned above, the High Court held that the disputes emerging out of the contracts would fall within the jurisdiction of the arbitral tribunal and thereafter, any challenge would lie before the English courts. The only exception being the interim measures to secure the claim or counterclaim as the case may be.
However, the High Court noted that the respective plaintiffs sought complete anti-arbitration injunctions. Therefore, the moot question in the instant matter was whether a case was made out to grant an anti-arbitration injunction. The High Court referred to the case in Modi Entertainment to reiterate that an anti-suit injunction would not be granted to forbear the exercise of jurisdiction by the forum chosen by the parties. Likewise, a reference was made to the decision in McDonald's India Pvt. Ltd. v. Vikram Bakshi and Ors.14 wherein a division bench of the Delhi High Court held that the principal considerations for anti-arbitration injunction would be those underpinning Section 45 of the Arbitration and Conciliation Act, 1996 (Indian Arbitration Act).15 In other words, an anti-arbitration injunction could be granted based on whether there is a proper arbitration agreement and whether such agreement is null and void, inoperative or incapable of being performed.
As regards the contention that the contract was unconscionable because it permits termination by the seller but not by the buyer, the High Court held that such contention was untenable given the incorporation of the FOSFA Form 54 in executed contracts which allowed termination by both parties.
On the respective plaintiffs' contention that the arbitral institution was biased, the High Court held that the test of "justifiable doubts of bias" as laid in the case of Laker Airways Inc v. FLS Aerospace Ltd.16 was a valid test. However, a higher threshold must be satisfied for an anti-arbitration injunction because the plaintiff should justify the departure from the contractual dispute resolution mechanism. The High Court held that there were several arbitral institutions spread across the world which would represent the interest of a specific trade. The rationale for establishing such arbitral institutions is that the domain expertise is necessary to adjudicate such disputes and trade practices effectively. The High Court concluded that, in the present case, unless it was ex facie evident that the contractual remedy is unconscionable and illusionary, there was no basis to interfere with the contractual dispute resolution process.
Based on the aforementioned findings, the High Court found no reason to continue the anti-arbitration injunction. Consequently, the order of interim injunction granted in the instant matter was vacated.
7. NTPC Ltd. v. M/s Deconar Services Pvt. Ltd.
Supreme Court of India
Case Number: Civil Appeal No. 6483 of 2014
Decided on: 4 March 2021 (made available in May 2021)
A court does not sit in appeal over the findings and decision of the arbitrator under Section 30 or 33 of the Arbitration Act, 1940.
Brief Facts: The appellant, in the instant matter, had issued two tenders for the construction of certain quarters in which the respondent had participated. After negotiations, the appellant decided to award both the contracts to the respondent based on an offer of a 16% rebate on the prices for completing the first project. The two letters of award were issued on 29 June 1988 to the respondent. However, the appellant caused some delay in handing over the land on which the construction was to occur. Consequently, there was a delay in the completion of the construction of quarters in both projects.
As disputes emerged amongst the parties, the respondent sought arbitration under the dispute resolution clause, and an arbitrator was appointed. With respect to the first contract, the arbitrator awarded a sum of INR 23,89,424 with an interest of 18% per annum pendente lite and 21% future interest to the respondent. Similarly, for the second contract, the arbitrator awarded INR 24,36,532 along with 18% interest per annum pendente lite and 21% future interest to the respondent.
Aggrieved by the aforementioned awards, the appellant filed objections against the same before the Delhi High Court (High Court) under Sections 30 and 33 of the 1940 Act. The Single Judge of the High Court dismissed the appellant's objections with costs except to the extent of modifying the interest rate granted by the arbitrator. Thus, the award was made an order of the Court. The appellant thereafter challenged the decision of the Single Judge before the High Court's Division Bench under Section 39 of the 1940 Act, which was dismissed by a common judgment dated 9 April 2010 with cost.
At the outset, the Hon'ble Supreme Court referred to the decision in Kwality Manufacturing Corporation v. Central Warehousing Corporation17 to highlight the limited scope of intervention by the Courts under Section 30 or 33 of the 1940 Act. It was held that a Court did not sit in appeal over the findings and decision of the arbitrator. Moreover, the Courts could not reassess or reappreciate evidence. The only question that arose for a Court was whether there was an error apparent on the face of the award and whether the arbitrator misconducted himself during the proceedings.
The Hon'ble Supreme Court then referred to position laid in Arosan Enterprises Ltd. v. Union of India18 wherein it was held that where the arbitrator had taken a possible view, even if a different view could be possible on the same evidence, the Court would not interfere with the award. The phrase "error apparent on the face of the record" did not by itself mean and imply closer scrutiny of the merits of the documents and materials on record. Merely showing that there is a reasonable alternative interpretation or possible view based on the material on the record is insufficient to allow for the interference by the Court.19
On the escalation charges being granted beyond the contractual terms, the Hon'ble Supreme Court referred to the decision in Assam State Electricity Board v. Buildworth Private Limited.20 In the Assam State case, the Apex Court was faced with almost identical circumstances where the arbitrator had granted escalation charges above what was permissible under the contract. Upholding such an award, the Hon'ble Supreme Court held that the arbitrator had correctly taken the view that the provision for price escalation would not bind the claimant beyond the scheduled date of completion. Accordingly, the Apex Court opined that the decision in the Assam State case applied to the instant matter.
On the delay in the instant matter, the Hon'ble Supreme Court held that substantial delay was attributable to the appellant in handing over the sites for the two contracts, which the appellant did not contest. Accordingly, the appellant was held in breach of the condition for the grant of the rebate. Since the view taken by the arbitrator was a possible one, the Hon'ble Supreme Court held that it saw no reason to interfere with the impugned judgment. Accordingly, the civil appeals filed by the appellant were dismissed.
8. Sirpur Paper Mills Limited v. I.K. Merchants Pvt. Ltd.
High Court of Calcutta
Citation: 2021 SCC OnLine Cal 1601
Decided on: 7 May 2021
An award holder cannot seek the enforcement of an arbitral award post the announcement of a moratorium under the Insolvency and Bankruptcy Code, 2016.
Brief Facts: The present case deals with an application for setting aside an arbitral award under Section 34 of the Arbitration and Conciliation Act, 1996 (Arbitration Act) passed in proceedings held between I.K. Merchants Pvt. Ltd. (Respondent) and Sirpur Paper Mills Limited (Petitioner). During the pendency of the proceedings, corporate insolvency resolution proceedings (CIRP) were initiated against the Petitioner and subsequently, a moratorium was also brought into effect under Section 14 of the Insolvency and Bankruptcy Code, 2016 (IBC). The Petitioner being the award debtor, contended that the proceedings under Section 34 of the Arbitration Act had become infructuous. The rationale given by the Petitioner was that a resolution plan was approved for the insolvency resolution of the Petitioner under the IBC. Thus, the award holder's claim was frustrated by the approval of the resolution plan under Section 31 of the IBC.
Held: The High Court noted that the moot question was whether the claim of an award-holder can be frustrated upon the approval of a resolution plan under Section 31 of the IBC. The High Court referred to two relevant decisions21 of the Hon'ble Supreme Court wherein it was held that once a resolution plan is approved, a creditor could not initiate proceedings for recovery of claims which were not a part of such resolution plan. The High Court observed that a successful resolution applicant who takes over the business of the corporate debtor starts the business on a 'fresh slate'. It was then reiterated the law laid in Edelweiss, where it was held that an approved resolution plan would be binding on the corporate debtor, its employees and other stakeholders by virtue of Section 31 of the IBC.
Keeping the various stages of IBC in mind, the High Court noted that the Respondent had sufficient opportunities to approach the NCLT for appropriate relief. Hence, the Respondent was under an obligation to take active steps under the IBC, instead of waiting for the adjudication of the application under Section 34 of the Arbitration Act. The High Court found that firstly, the Respondent was free to enforce the award against the Petitioner, especially in the absence of an application for stay under the amended provision of Section 36 of the Arbitration Act. Secondly, the Respondent could have pursued its claim before a forum contemplated under the IBC. The High Court thus concluded that the claim of the award holder had extinguished upon approval of the resolution plan under Section 31 of the IBC.
9. M/s Silpi Industries etc. v. Kerala State Road Transport Corporation
Supreme Court of India
Citation: 2021 SCC OnLine SC 439
Decided on: 29 June 2021
The Limitation Act, 1963 applies to arbitration proceedings conducted under the MSMED Act.
Brief Facts: The first respondent, Kerala State Road Transport Corporation (KSRTC) invited tenders for the supply of thread rubber for tyre rebuilding. The appellants herein who were the claimants before the arbitrator were given the purchase orders. As per the purchase orders, 90% of the total purchase price was payable to the appellants/ claimants on supply of materials and the balance 10% was to be paid subject to the final performance report. When the 10% balance amount was not paid as per the purchase order, the appellants herein approached Industrial Facilitation Council (presently under the Micro and Small Enterprises Facilitation Council (Council) constituted under Micro, Small and Medium Enterprises Development Act (MSMED Act). As attempts of conciliation failed, the parties were referred to arbitration and the award was passed in favour of the appellants. The awards were then challenged under Section 34 of the Arbitration and Conciliation Act, 1996 (Arbitration Act). When the applications were dismissed, respondents carried the matter by way of appeals under Section 37 of the Arbitration Act before the High Court of Kerala (High Court). The moot questions culled out in the present matter were as follows:
- Whether the Limitation Act, 1963 applies to arbitration proceedings held under Section 18(3) of the MSMED Act?
- Whether counter claim is entertainable in arbitration proceedings held pursuant to the provisions of the MSMED Act?
Held: The Hon'ble Supreme Court rendered its findings on the two issues as given below.
I. On whether the Limitation Act, 1963 applied to arbitral proceedings under the MSMED Act
The Hon'ble Supreme Court held that a bare reading of Section 43 of the Arbitration Act made it clear that the Limitation Act, 1963 applied to arbitrations as it did to proceedings before a court. Where a settlement could not be arrived at amongst the parties, the Council may take up the dispute for arbitration under clause (3) of Section 18 of MSMED Act. Such an arbitration would be similar to one initiated by way of a written agreement under Section 7 of the Arbitration Act.
II. On whether a counter claim can be entertained in arbitration proceedings under MSMED Act
The Supreme Court held that when the Arbitration Act itself provided for filing of counter-claims and set-off under Section 23, similar benefits could not be denied to the respondent for making counter-claim or set-off in proceedings before the Facilitation Council.
The Hon'ble Supreme Court held that to seek the benefits of the provisions under the MSMED Act, the party must be registered under the MSMED Act. Moreover, it was clarified that for transactions made prior to the registration under the MSMED, no benefit would accrue. A registration of a unit under the MSMED Act would always be prospective in nature. The Hon'ble Apex Court noted that there was no acceptable material to show that the supply of goods had taken place subsequent to the registration of the unit under the MSMED Act. Hence, the Hon'ble Supreme Court concluded that the appellant could not seek reference to arbitration under the MSMED Act.
10. BCCI v. Deccan Chronicle Holding Ltd.
High Court of Bombay
Citation: 2021 SCC OnLine Bom 834
Decided on: 16 June 2021
The principle of minimal curial intervention could not be a license to an arbitral tribunal to take shortcuts and render unreasoned awards on the purest speculation, leaving reasons to the imagination.
An arbitrator could act as an amiable compositeur only when the underlying contract permitted for the same.
Brief Facts: In 2008, Deccan Chronicle Holdings Ltd. (Respondent) entered into a 10 (ten) year Franchise Agreement (Agreement) with the Board of Cricket Control in India (Petitioner). By way of the Agreement, the Respondent was granted the right to operate a cricketing franchise based in Hyderabad, namely Deccan Chargers. However, disputes emerged amongst the parties due to Respondent's alleged contractual defaults relating to non-payment of salaries to players and a 'bankruptcy event' in the Agreement. Due to the Respondent's failure to remedy the aforementioned contractual defaults, the Petitioner terminated the Agreement in August 2012.
Thereafter, the Bombay High Court (High Court) appointed former Supreme Court Justice C K Thakker as the sole arbitrator (Arbitrator) to resolve the dispute based on a petition filed by the Respondent. The Arbitrator made and published the impugned award on 17 July 2020 in favour of the Respondent. The award required the Petitioner to pay an amount of ₹4814,67,00,000 (Rupees Four Thousand Eight Hundred Fourteen Crore and Sixty-Seven Lakh only) with interest at the rate of 10% (ten per cent) per annum from the date of arbitration proceedings till its realisation. Aggrieved by the award, the Petitioner filed the instant petition under Section 34 of the Arbitration and Conciliation Act, 1996 (Arbitration Act).
Held: The High Court rendered its findings under multiple heads, the brief description of which is given below.
I. On Substantial Compliance
The High Court noted that the arbitrator operated under the presumption that the Agreement's substantial compliance was enough against exact compliance. The High Court observed that the arbitrator is required to render a reasoned award. Merely considering rival submissions would not amount to giving reasons to the conclusions reached. Moreover, the principle of 'substantial compliance' was not recognised by any authority under private law in India. The principle may otherwise have significance under public law. However, the same would not fall within the domain of arbitration amongst parties in a private commercial transaction.
II. On Discrimination qua Respondent
The High Court noted the observations of the arbitrator that the Petitioner had mistreated the Respondent compared to other franchisees and their owners. The High Court held that the Respondent needed to present its pleadings on the same issue to arrive at such a finding. The High Court held that the instant arbitration could not be viewed from a public law perspective since the confines of the Agreement bound the arbitrator.
III. On Arbitrator acting as an "Amiable Compositeur."
The High Court clarified that an arbitrator could act as an amiable compositeur only when the underlying contract permitted for the same. However, where the parties did not expressly agree to have the dispute determined ex aequo et bono under Section 28 of the Arbitration Act, the arbitrator was not empowered to look into the notions of equity and fairness.
IV. On Damages
The High Court held that it was not a possible view to grant damages in lieu of specific performance when the Respondent did not press for specific performance in the first place. Similarly, damages in addition to specific performance could be granted only if specific performance was found to be a relief capable of being granted.
V. On Respondent's attempt to furnish reasons for the award
The High Court held that the principle of minimal curial intervention could not be a license to an arbitral tribunal to take shortcuts and render unreasoned awards on the purest speculation, leaving reasons to the imagination. An arbitral award should speak for itself. Therefore, it was impermissible for a party to supply reasons which the award did not have in the first place.
The High Court held that the award suffered from the vice of consisting inconceivable, unreasoned and impossible views. Thus, the award was set aside except for the limited extent of the award favouring the Respondent for Rs 36 crores less Rs.1.83 crores and interest on that amount.
11. KLA Const. Technologies Pvt. Ltd. and Ors. v. The Embassy of Islamic Republic of Afghanistan and Ors.
High Court of Delhi
Citation: 2021 SCC OnLine Del 3424
Decided on: 18 June 2021
The prior consent of the Central Government is not necessary under Section 86(3) of the Code of Civil Procedure to enforce an arbitral award against a foreign State.
A foreign State cannot claim sovereign immunity against the enforcement of an arbitral award arising out of a commercial transaction.
Brief Facts: The instant matter pertains to two enforcement petitions wherein the petitioners seek the enforcement of arbitral awards against the respondent foreign States. In the first petition, OMP (ENF) (COMM) 82/2019, the petitioner seeks the enforcement of an arbitral award dated 26 November 2018 against the Embassy of the Islamic Republic of Afghanistan. Whereas, in the second petition, OMP (EFA) (COMM) 11/2016, the petitioner seeks to enforce an arbitral award dated 25 October 2015 against the Ministry of Education, Federal Democratic Republic of Ethiopia.
In both the cases above, the respondents did not participate in the arbitration proceedings, leading to the passing of the ex-parte arbitral awards. The two moot questions that arose in these petitions are:
- Whether the prior consent of the Central Government is necessary under Section 86(3) of the Code of Civil Procedure to enforce an arbitral award against a foreign State?
- Whether a foreign State can claim sovereign immunity against the enforcement of an arbitral award arising out of a commercial transaction?
Held: The High Court referred to the decision in Bharat Aluminium Company v. Kaiser Aluminium Technical Services Ltd.,22 where the Hon'ble Supreme Court held that the legal fiction created under Section 36 of the Arbitration Act was for the limited purpose of enforcing an arbitral award as a decree. The fiction was not intended to make an arbitral award a decree for all purposes under all statutes. It was emphasised that legal fiction ought not to be extended beyond its legitimate field.
The High Court then referred to the case in Uttam Singh Duggal & Co. Pvt. Ltd. v. United States of America, Agency of International Development23. In Uttam Singh, the maintainability of a petition under Section 20 of the Arbitration Act, 1940 was brought into question. It was contended that the respondent being a foreign State, was immune from the jurisdiction of the Indian courts. The High Court rejected the contention by holding that no sovereign or public act was involved in a transaction. Additionally, the High Court held that a petition under Section 20 of the Arbitration Act, 1940 was not a suit under Section 86 of the Code of the Civil Procedure.
The High Court then referred to the case of Union of India v. U.P. State Bridge Corporation Ltd.24 to stress upon the three main principles of the Arbitration Act namely (i) speedy, inexpensive and fair trial by an impartial tribunal, (ii) party autonomy, and (iii) minimum court intervention.
On examining multiple other decisions25, the High Court summarised its findings as follows:
- The prior consent of the Central Government is not necessary under Section 86(3) of the Code of Civil Procedure to enforce an arbitral award against a foreign State. A foreign State cannot claim sovereign immunity against the enforcement of an arbitral award arising out of a commercial transaction.
- Section 36 of the Arbitration Act treats an arbitral award as a decree of the court for the limited purpose of enforcement of an award under the Code of Civil Procedure which cannot be read in a manner that would defeat the very underlying rationale of the Arbitration Act, i.e., speedy, binding and legally enforceable resolution of disputes between parties.
- An arbitration agreement is an implied waiver of the foreign State to preclude it from raising a defence against the enforcement of the principle of sovereign immunity. Once the foreign State wears the hat of a commercial entity, it would be bound by the rules of the commercial legal ecosystem and cannot be permitted to seek any immunity otherwise available to it in sovereign capacity.
- If foreign States were allowed to halt the enforcement of arbitral awards, which is the ultimate fruit of the arbitration, then the very edifice of International Commercial Arbitration would collapse.
In conclusion, the High Court held that both the petitions in the instant matter were maintainable. The respondents were directed to deposit the respective award amounts with the Registrar of the court within four weeks. If the respondents failed to deposit the amount, the petitioners were at liberty to seek attachment of the respondents' assets.
* The authors would like to acknowledge the research and assistance rendered by Harshvardhan Korada, a student of the Amity Law School, Delhi.
1. Dow Chemical v. Isover-Saint-Gobain, 1984 Rev Arb 137; Chloro Controls (India) (P) Ltd. v. Severn Trent Water Purification Inc., 2013 1 SCC 641; SEI Adhavan Power (P) Ltd. v. Jinneng Clean Energy Technology Ltd., 2018 SCC OnLine Mad 13299; Ameet Lalchand Shah v. Rishabh Enterprises, 2018 15 SCC 678.
2. Cheran Properties Ltd. v. Kasturi & Sons Ltd., 2018 16 SCC.
3. Gvozdenovic v. United Air Lines Inc., 933 F.2d 1100, 1105 (2d. Cir. 1991).
4. Mahanagar Telephone Nigam Ltd. v. Canara Bank, 2020 12 SCC 767.
5. Vidya Drolia v. Durga Trading Corporation, 2021 2 SCC 1.
6. BGS SGS Soma JV v. NHPC Ltd., 2019 SCC Online SC 1585.
7. Reliance Industries Ltd v. Union of India, 2014 7 SCC 603; Sasan Power Limited v. North American Coal Corporation India Private Limited, 2016 10 SCC 813; Atlas Export Industries v. Kotak & Company, 1999 7 SCC 61; GMR Energy Ltd. v. Doosan Power Systems India Pvt. Ltd., 2017 6 ArbLR 447 Delhi.
8. Mankastu Impex (P) Ltd. v. Airvisual Ltd., 2020 5 SCC 399.
9. Bharat Aluminium Co. v. Kaiser Aluminium Technical Services Inc., 2012 9 SCC 552.
10. Union of India v. Dileep Kumar Singh, 2015 4 SCC 421; DMRC v. Tarun Pal Singh, 2018 14 SCC 161; Kandla Export Corpn. v. OCI Corpn., 2018 14 SCC 715; Mavilayi Service Co-operative Bank Ltd. v. Commissioner of Income Tax, Calicut, 2021 SCC OnLine SC 16.
11. Atlas Export Industries v. Kotak & Co., 1999 7 SCC 61.
12. Sasan Power Limited v. North American Coal Corporation (India) Pvt. Ltd., 2015 SCC OnLine MP 7417.
13. Secretary, Irrigation Department, Government of Orissa v. G.C. Roy, 1992 1 SCC 508.
14. McDonalds India Pvt. Ltd. v. Vikram Bakshi and Ors., 2016 SCC Online Delhi 3949.
15. The decision in McDonalds India Pvt. Ltd. v. Vikram Bakshi and Ors. referred to principles analogous to those found in sections 8 and 45, as the case may be.
16. Laker Airways Inc v. FLS Aerospace Ltd., (1992) 2 Lloyd's Report 45.
17. Kwality Manufacturing Corporation v. Central Warehousing Corporation, 2009 5 SCC 142.
18. Arosan Enterprises Ltd. v. Union of India, 1999 9 SCC 449.
19. State of U.P. v. Allied Constructions, 2003 7 SCC 396; Ravindra Kumar Gupta and Company v. Union of India, 2010 1 SCC 409; Oswal Woollen Mills Limited v. Oswal Agro Mills Limited, 2018 16 SCC 219.
20. Assam State Electricity Board v. Buildworth Private Limited, 2017 8 SCC 146.
21. Essar Steel India Limited v. Satish Kumar Gupta, 2020 8 SCC 531; Ghanshyam Mishra and Sons Private Limited v. Edelweiss Asset Reconstruction Company Ltd., 2021 SCC OnLine SC 313.
22. Bharat Aluminium Company v. Kaiser Aluminium Technical Services Ltd., (2012) 9 SCC 552.
23. Uttam Singh Duggal & Co. Pvt. Ltd. v. United States of America, Agency of International Development, ILR 1982 2 Del. 273.
24. Union of India v. U.P. State Bridge Corporation Ltd., 2015 2 SCC 52.
25. Satyawati v. Rajinder Singh, 2013 9 SCC 491; Ethiopian Airlines v. Ganesh Narain Saboo, 2011 8 SCC 539; Syrian Arab Republic v. A.K. Jajodia, ILR 2004 2 Delhi 704; Rahimtoola v. Nizam of Hyderabad, 1957 3 WLR 884; Trendtex Trading Corporation v. Central Bank of Nigeria, 1977 2 WLR 356; Birch Shipping Corp. v. The Embassy of the United Republic of Tanzania, 507 F. Supp. 311, 1981 A.M.C. 2666.
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