Dispute Resolution And Arbitration Update - November 2024

M/s. Pro Knits Vs. The Board of Directors of Canara Bank & Ors.

2024 INSC 565

Background facts

• The case stems from the declaration of loan accounts of several borrowers ("Appellants") registered under the Micro, Small and Medium Enterprises Development Act, 2006 ("MSMED Act") as NonPerforming Assets ("NPA") by banks and Non-Banking Financial Companies ("NBFC's/Respondents") under the provisions of Section 35 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 ("SARFAESI Act").
• The Appellants filed writ petition under Article 226 of the Constitution before the Bombay High Court ("HC") in order to enforce the restructuring procedure laid out in the notification dated May 29, 2015 issued by the Central Government in exercise of the powers conferred under Section 9 of the MSMED Act, notifying instructions for the Framework for Revival and Rehabilitation of Micro, Small and Medium Enterprises ("Notification").
• However, the HC rejected the writ petition and held that banks and NBFC's are not mandated to follow the restructuring process laid out in the Notification unless borrowers make an application themselves and the directions are not of a mandatory nature.
• Aggrieved by said Order, the Appellants filed the present Petition before the Hon'ble Supreme Court ("SC") so as to get declared all the actions of the Respondents under the SARFAESI Act as void ab initio.

Issue(s) at hand

• Whether the Notification issued under Section 9 of MSMED Act and further under Section 21 read with 35A of the Banking Regulation Act ("BRA Act") is of mandatory nature?
• Whether the SARFAESI Act overrides the provisions of the MSMED Act?

Findings of the Court

• At the outset, the SC noted that the objective of the MSMED Act is to facilitate the promotion and development and enhance the competitiveness of MSME's. To this end, Section 9 empowers the Central Government to take measures for this purpose by issuing Notifications.
• The SC deliberated that under Section 10 of the MSMED Act, policies and practices with regard to credit to MSME's may be specified in guidelines issued by the Reserve Bank of India ("RBI") from time to time, to ensure timely and smooth flow of credit to such enterprises.
• The SC analysed the BRA Act to show that under Section 21(3), every banking company is bound to comply with directions given to it. Further, Section 35A of the said Act provides for a similar mandate. Thus, Section 21 read with 35A makes it abundantly clear that directions issued by RBI to banking companies are binding and they are bound to comply with such directions.
• The said Notification was amended by RBI to make it compatible with the existing regulatory guidelines on "Income Recognition, Asset Classification and provisioning pertaining to Advances" issued to the banks by the RBI. Thereafter, the RBI issued the revised Framework vide communication dated 17^th March, 2016 addressed to all Scheduled Commercial Banks.
• The SC then noted that under the powers of Section 21 and 35A of the BRA Act, RBI issued the Master Direction called the "Reserve Bank of India (Lending to Micro, Small and Medium Enterprises Directions), 2016," vide notification dated July 21, 2016.
• Upon examining the facts of this case, the SC opined that the Master Directions issued by RBI have statutory force and are binding on all Scheduled Commercial Banks licensed to operate in India. The entire exercise envisaged under the framework, wherein banks identify incipient stress and classify MSME's into one of the given categories, must be undertaken before categorising the loan account as NPA.
• It was also held that proceedings under Section 35 of SARFAESI Act can only be initiated when a loan account is deemed to be NPA under Section 13(2) of the same Act. Thus, action under the notification precedes declaration of NPA and Section 35 proceedings.
• However, the SC created a caveat that it is incumbent on the part of the concerned MSME also to produce authenticated and verifiable documents/material for substantiating its claim of being MSME, before its account is classified as NPA. Once the account is classified as NPA, banks may take recourse to the SARFAESI Act. Thus, the Order of the HC was declared as erroneous and set aside and the appeal was allowed to this extent

Indus Power Tech Inc Vs. Echjay Industries Pvt. Ltd.

2024 SCC OnLine Bom 3349

Background facts

• The case stems from a Master Supply Agreement ("agreement") between Indus Power Tech Inc ("Company/Appellant") and Echjay Industries Pvt. Ltd. ("Respondent/Supplier") on March 31, 2015.
• Under this agreement, the Supplier undertook to supply various products to the Company. The Master Service Agreement ("MSA Agreement") had a non-compete clause under Clause 3 which gave the Company exclusive rights to deal with customers and prevented the Company from sourcing products from any other forging company in India for the duration of the agreement and 24 months post termination of said agreement.
• On 27 February, 2023, the Supplier terminated the agreement under Clause 15 of the MSA Agreement. Thereafter, on 21 June, 2023, the Supplier filed an Arbitration Application under Section 9 of the Arbitration and Conciliation Act, 1996 ("Arbitration Act") seeking an injunction against the Company for sourcing products from RKFL, thereby violating the non-compete clause.
• The Single Judge passed an order restraining the Company from sourcing products from RKFL, thus providing an injunction. The Appellant, aggrieved by this decision, filed the current appeal before the Bombay High Court ("HC") under Section 37 of the Arbitration Act.

Issue(s) at hand?

• Whether the question of operation of non-compete clause post-termination is maintainable if it is being argued for the first time at appeal stage?
• Whether, if maintainable, operation of a non-compete clause post-termination of an agreement would violate Section 27 of the Indian Contract Act?

Findings of the Court

• At the outset, the HC noted that the voidness of Clause 3 of the MSA Agreement being in violation of Section 27 of the Indian Contract Act had not been raised before in the proceedings under Section 9 of the Arbitration Act. It further stated that the question of maintainability can only be answered by determining whether the said issue is a question of law or a question of fact.
• The court then analysed and relied on Rajendra Shankar Shukla v. State of Chhatisgarh¹ to say that when a question of law is raised for the first time in a court, it is expedient, in the interests of justice, to entertain the plea. Similarly, VLS Finance Limited v. Union of India² was relied on to say that, if the facts pleaded go into a pure question of law going to the root of the matter, the Court possesses the discretion to maintain it.
• Upon examining the facts of this case, the HC held that the question of breach of Section 27 of the Indian Contract Act was a pure question of law and must be maintained and decided by the Court.
• The HC then noted that the MSA agreement had been terminated and the requisite notice period of 180 days under Clause 15 of the agreement ended on 28 July 2023. The operation of such noncompete clauses has been treated as valid during the currency of an agreement but as a restraint prohibited by Section 27 of the Indian Contract Act after the termination of an agreement
• The HC relies on the judgments of Percept D'Mark (India) Pvt Ltd v. Zaheer Khan³ to say that the test of reasonableness and partial restraint are not applicable in India and Gujarat Bottling Co.Ltd. v. Coca Cola Co.⁴ to say that a negative stipulation operates only during period of operation of the agreement
• Upon examining the facts of this case, the HC held that the Company cannot be restrained from undertaking its business after termination of the agreement as a non-compete clause cannot operate post-termination of the agreement without violating Section 27 of the Indian Contract Act. Thus, the appeal was allowed.

In The Supreme Court of India R. P. Garg [Appellant] Vs. The Chief General Manager, Telecom Department and Ors. [ Respondents]

Civil Appeal No. 10472 of 2024

Background facts

• R. P. Garg ("Appellant") and the Telecom Department of Haryana ("Respondent") entered into a contract for trenching and laying underground cables ("contract") on October 17^th, 1997.
• As per the contract the Appellant was required to furnish a security deposit of Rs 10 Lakhs.
• During the execution of the contract, disputes arose between the parties regarding the nonpayment of bills submitted by the Appellant.
• These disputes were referred to arbitration on October 24^th, 2000, under Section 11 of the Arbitration and Conciliation Act, 1996 ("Act").
• On March 8^th, 2001, the arbitrator passed an award in favour of the Appellant. However, the arbitrator denied the Appellant's claim for interest on the awarded amount, citing a specific contractual clause that allegedly prohibited the payment of such interest.
• During the execution of the arbitral award, the Appellant raised objection and claimed for payment of post-award interest.
• The Learned Civil Judge Senior division vide its order dated October 10^th, 2002, dismissed the objection raised by the Appellant.
• Being aggrieved by the same the Appellant filed an appeal. The said appeal filed by the Appellant was allowed and the Learned District Judge vide its order dated March 4^th, 2003, directed payment of post-award interest at the rate of 18% on the award amount.
• Being aggrieved by the order allowing the appeal filed by the Appellant, the Respondent filed a Civil Revision Petition before the Hon'ble High Cout.
• The Hon'ble High Court proceeded to allow the revision and set aside the interest granted on the award amount.
• Being aggrieved by the order of the High Court the Appellant filed the present appeal.

Issue at hand?

• Whether the Appellant is entitled to post-award interest on the sum awarded by the Arbitrator?

Findings of the Court

• At the outset, the Hon'ble Supreme Court held that Section 31(7) of the Act creates distinction between the interest payable before and after passing an arbitral award.
• The Hon'ble Supreme Court observed that Section 31(7)(a) of the Act governs pre-award interest and stated that as per Section 31(7) pre-award interest is subject to arbitral agreement between the parties.
• The Hon'ble Supreme Court further observed that Section 31(7)(b) of the Act governs post-award interest and held that Section 31(7)(b) of the Act clearly provides that an arbitral award shall contain post-award interest i.e. interest on the sum awarded from the date from passing of the award till the actual realization of the award amount, at the rate prescribed in the arbitral award or at the default rate as prescribed in the Act.
• The Hon'ble Supreme court relied on the judgement in the case of Morgan Securities & Credits (P) Ltd. v. Videocon Industries Ltd.⁵ wherein it was held that grating of post-award interest is not subject to the contract entered into between the parties.
• The Hon'ble Supreme Court finally held that the judgement in the case of Jaiprakash Associates Ltd. v. Tehri Hydro Development Corporation (India) Ltd.⁶ deals with the issue of prohibition of pendente-lite interest and hence does not apply to the facts of the present case.
• In view of the above the Hon'ble Supreme Court allowed appeal and granted interest restored the order dated March 4^th, 2003, directed payment of post-award interest at the rate of 18% on the award amount.

Before the Hon'ble High Court of Delhi Power Grid Corporation of India Ltd. [Petitioner] Vs. Mirador Commercial Pvt. Ltd. [Respondent]

O.M.P (T) (Comm.) No. 88 of 2024

Background facts

• The present matter pertains to a dispute arising between Power Grid Corporation of India Ltd. ("Petitioner") and Mirador Commercial Pvt. Ltd. ("Respondent"), arising out of three contractual agreements executed in 2010, between the Petitioner and a Joint Venture ("JV") of SPIC-SMO and Aster Teleservices Pvt Ltd.
• The dispute resolution process for the aforesaid contractual agreements was outlined in the General Conditions of Contract ("GCC"), which were identical in all three contractual agreements. In case of a dispute between the parties, the GCC prescribed for an initial attempt at amicable settlement by mutual consultation, followed by reference to the dispute to the Project Manager, and finally to arbitration as per the Arbitration and Conciliation Act, 1996 ("Act") if necessary.
• Furthermore, Clause 39 of the GCC prescribed for an arbitral tribunal of three arbitrators, wherein the parties would appoint one arbitrator each, and the two appointed arbitrators would appoint the third and final arbitrator. Additionally, Clause 39 of the GCC prescribed that in failure of any party to appoint its arbitrator within sixty (60) clays after receipt of a notice from the other party invoking the Arbitration clause, the arbitrator appointed by the party invoking the arbitration clause shall become the sole arbitrator to conduct the arbitration.
• In 2016, owing to certain disagreements between the parties, the Respondent issued a formal notice to the Petitioner, thereby seeking an amicable settlement as per Clause 38 of the GCC, however, the aforesaid notice was referred to only one of the three contractual agreements between the parties.
• Thereafter, the Respondent issued another notice to the Petitioner in 2024, thereby invoking arbitration as the GCC, for settlement of disputes, under all three contractual agreements between the parties. The response thereto, the Petitioner contended that that the arbitration could not be consolidated across all three contractual agreements, since all the contractual agreements had separate, distinct and specific features and particulars (although the dispute resolution clauses under the GCC were similar in all three contractual agreements). The Petitioner also raised the issue that the respondent had failed to exhaust the required pre-arbitral step of reference to the dispute to the Project Manager, as prescribed under the GCC.
• In light of the Petitioner's challenge to the invocation of arbitration by the Respondent, the Petitioner did not nominate an arbitrator within the stipulated timeframe, whereas the Respondent nominated and appointed its arbitrator and claimed a principal amount of INR 3.33 crores from the Petitioner. In response thereto, the Petitioner called upon the Respondent to revoke the notice invoking arbitration and called upon the Respondent to approach the Project Manager for the settlement of the dispute, as per Clause 38 of the GCC.
• Pursuant thereto, the Respondent informed the Petitioner that owing to the failure of the Petitioner to nominate an arbitrator, and by the effect of Clause 39 of the GCC, the Respondent's arbitrator would be appointed as the sole arbitrator and accordingly the arbitration proceedings commenced.
• Aggrieved the commencement of the arbitration proceedings, with the Respondent's arbitrator being appointed as the sole arbitrator, the Petitioner filed the present petition under Section 14 of the Arbitration and Conciliation Act, 1996 before the Hon'ble High Court of Delhi ("Hon'ble Court"), seeking the termination of the sole arbitrator's mandate. Hence the present Petition.

Issue(s) at hand?

The following issues was put before the Hon'ble Court:

• Whether one composite arbitration proceeding, for all three contractual agreements, would be valid?
• Whether the appointment of the Respondent's arbitrator as the sole arbitrator, because of Clause 39 of the GCC, is in the nature of unilateral appointment of an arbitrator, and thereby not valid in law?

Findings of the Court

• The Hon'ble Court opined that the Petitioner's arguments regarding the validity of the arbitration, timeliness of the claims, and the Respondent's failure to exhaust pre-arbitral protocols were within the arbitrator's jurisdiction under Section 16 of the Act. Accordingly, the Hon'ble Court referenced the decision of the Hon'ble Supreme Court of India's in the case of SBI General Insurance Co Ltd v Krish Spinning Mills⁷ , wherein it was emphasized that jurisdictional questions and objections to claims should generally be decided by the arbitral tribunal itself, and not the courts.
• However, the Petitioner also contended that the commencement of the arbitration proceedings, with the Respondent's arbitrator as the sole arbitrator, amounted to the unilateral appointment of the arbitrator, which is not permissible in law and violated the law established by the Hon'ble Supreme Court of India in the case ofPerkins Eastman Architects DPC v HSCC (India) Ltd⁸ , which laid down the principle that a party with a vested interest in the outcome of a dispute could not unilaterally appoint an arbitrator.
• The Hon'ble Court, after taking the submissions made by the parties into consideration, opined that Clause 39 of the GCC, did not grant any one party with the authority for unilateral appointment of arbitrators. Instead, the aforesaid Clause allowed each party to nominate an arbitrator and specified that if the other party did not nominate an arbitrator within a certain timeframe, the arbitrator appointed by the first party would function as the sole arbitrator.
• The Hon'ble Court further noted that, in the present case, the Petitioner had failed to nominate an arbitrator after the Respondent issued the arbitration notice, effectively allowing the arbitrator appointed by the Respondent to function as the sole arbitrator. Consequently, the Hon'ble Court found that the Petitioner's failure to appoint an arbitrator amounted to an implied consent for the Respondent's arbitrator to act alone. This arrangement, in the eyes of the Hon'ble Court, differentiated the present case from the case of Perkins Eastman, but nonetheless warranted a detailed consideration.
• Accordingly, the Hon'ble Court held that while the Petitioner's challenge pertaining to validity of the arbitration, timeliness of the claims, and the Respondent's failure to exhaust pre-arbitral protocols, would have to be decided by the arbitrator himself. However, the Hon'ble Court further held that the question of whether Clause 39 of the GCC was hit by the principle laid down in the case of Perkin Eastman would require further consideration, and the arbitration proceedings would be subject to the final outcome of the present Petition. Accordingly, the Hon'ble Court is set to consider the aforesaid pending issue in January 2025.

Footnotes

1 2015 (10) SCC 400

2 (2013) 6 SCC 278

3 2006 (4) SCC 227

4 1995 SCC (5) 545

5 (2023) 1 SCC 602

6 (2019) 17 SCC 786

7 (2024) SCC OnLine SC 1754

8 (2020) 20 SCC 760

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