Introduction
As the legal principles related to arbitration is ever evolving, the year 2024 has also seen significant judicial developments that shape arbitration landscape in India. This article provides a summary of key judgments related to arbitration passed thus far in 2024 by the Supreme Court and High Courts offering insights into current trends and implications thereof. These rulings highlight critical aspects such as power of the courts under Section 34 of Arbitration and Conciliation Act, 1996 ("A&C Act"), circumstances under which an arbitral award is vitiated by patent illegality, incorporation of arbitration agreement from a referenced document, procedure pursuant to setting aside of award, interpretation of an arbitration clause.
- The Supreme Court held that an award is vitiated by patent illegality if it is in contradiction to the express terms of the contract or overlooks the evidence on record.
The dispute between Delhi Metro Rail Corporation Ltd. ("DMRC") and Delhi Airport Metro Express Pvt. Ltd. ("DAMEPL") went through a complex legal journey with exhausting all legal doors and finally getting the arbitral award set aside in a curative petition before the Supreme Court.
In May 2017, the arbitral tribunal passed a unanimous award holding that considering that DAMEPL terminated the concession agreement by DAMEPL due to DMRC's failure to rectify defects within the stipulated period, DAMEPL is entitled to termination payment and reimbursement of expenses incurred in operating the concerned project. The Single Bench of Delhi High Court in petition under Section 34 of A&C Act upheld the arbitral Award. The Division Bench of Delhi High Court, however, in petition under Section 37 of A&C Act partly allowed the appeal and partly set aside the arbitral award holding that the termination of concession agreement was invalid.
Against the order of the Division Bench, DAMEPL moved before the Supreme Court in a special leave petition under Article 136 of the Constitution of India, where the arbitral award by restored by the Supreme Court. The review petition against the order of restoring the arbitral award was also dismissed.
Finally, a curative petition was filed before the Supreme Court which was allowed by the Supreme Court.1 In the judgment of the curative petition, the Supreme Court reiterated the circumstances in which an arbitral award would be vitiated by patent illegality, such as (i) if the decision of the arbitrator is found to be perverse or so irrational that no reasonable person would have arrived at it; (ii) the construction of the contract is such that no fair or reasonable person would take such view or the view of the arbitrator is not even a possible view; (iii) a 'finding' based on no evidence at all or in ignorance of vital evidence; (iv) an award without reasons; (v) when the matter is not within the jurisdiction of arbitrator; and (vi) an award has been passed in violation of fundamental principle of natural justice.
The Supreme Court observed that the agreement expressly provided that if "effective steps" were taken during the cure period by DMRC then the contractual power to terminate the agreement could not be exercised by DAMEPL. However, the impugned award overlooked these express terms of the agreement and ignored the evidence on record. The impugned award was accordingly held to be unreasoned and suffering from perversity and patent illegality.
- The Supreme Court opined that parliament should amend A&C Act to prescribe specific period of limitation for preferring an application for appointment of arbitrator.
In the matter of M/s Arif Azim Co. Ltd. v M/s APTECH Limited2, the Supreme Court reiterated that the limitation period for preferring a petition under Section 11 of the A&C Act is three years from the date of failure or refusal by the other party to comply with the requirements mentioned in the arbitration notice.
The court further observed that there is a legislative vacuum, i.e., there is no specific statutory time limit for filing an application under Section 11 of A&C Act. Due to such vacuum, the courts have been applying Section 137 of the Limitation Act, 1963 to determine the time limit of application under Section 11 of the A&C Act. However, the period of three years is an unduly long period for filing the application under Section 11 of the A&C Act and is against the spirit of the A&C Act which aims to provide expeditious resolution of commercial disputes within a time-bound manner.
Observing the above, the Court opined that the Parliament should consider amending the A&C Act to prescribe specific period of limitation within which a party may prefer an application for appointment of arbitrator under Section 11 of the A&C Act.
- The Supreme Court held that general reference in the subsequent contract of earlier contract which has an arbitration clause would not lead to incorporation of the arbitration clause in the subsequent contract
In the matter of NBCC (India) Limited v Zillion Infra Projects Private Limited3, the Supreme Court observed that arbitration clause from an earlier contract can be incorporated into the contract (where such reference is made) only through a specific reference to the arbitration clause and not to the general reference to the earlier contract.
The Supreme Court also distinguished the observations made in the case of Inox Wind Limited v Thermocables Limited4. The Court observed that in the case of Inox Wind Limited (supra) it was held that general reference to a standard form of contract of one party along with those of trade associations and professional bodies will be sufficient to incorporate the arbitration clause and not general reference to the earlier contract. In the said case (i.e. Inox Wind Limited), this Court found that the purchase order was issued by the appellant therein in which it was categorically mentioned that the supply would be as per the terms mentioned therein and the attached standard terms and conditions. The respondent therein by his letter had confirmed its acceptance. This Court found that the case before it was a case of a single-contract and not two-contract and, therefore, held that the arbitration clause as mentioned in the terms and conditions would be applicable.
The Court also observed that Section 7(5) of A&C Act specially provides for a conscious acceptance of arbitration clause by another document. Therefore, a reference to document in the contract should be such that it shows the intention of the parties to incorporate the arbitration contract contained in the document into the contract. When there is a reference in the subsequent contract to the terms and conditions of the earlier contract, the arbitration clause would not ipso facto be applicable to the subsequent contract unless there is a specific mention/reference thereto.
- The Supreme Court has referred the issue of power of courts to modify the arbitral award under Section 34 of the A&C Act to a larger bench
In the matter of Gayatri Balasamy v M/s ISG Novasoft Technologies Limited5, a three-judge bench of the Supreme Court in its order dated 20.02.2024 observed that there are conflicting views of different benches of Supreme Court on the issue of whether the courts are empowered under Section 34 or Section 37 of A&C Act to modify an arbitral award.
The Court observed that while the Supreme Court in a set of judgments6 has held that under Section 34 of the A&C Act, the Court does not have power to modify the arbitral award and the power under Section 34 is limited to setting aside the award or rejecting the application, on the other hand, in number of cases, the Division Bench7 and Full Bench8 of Supreme Court has either modified or accepted modification of the arbitral awards under consideration.
Noting the same, the Supreme Court observed that an authoritative pronouncement is required to be made clarifying the issue for guidance of the courts. Accordingly, the court referred to larger bench inter-alia the question of whether the power of the courts under Section 34 or Section 37 of A&C Act include the power to modify an arbitral award and if yes, whether such power can be exercised severally i.e., if only a part of the award can be modified.
- The High Court of Bombay held that pursuant to setting aside an arbitral award, no fresh notice under Section 21 of A&C Act is required prior to appointment of new arbitrator.
In the matter of Kirloskar Pneumatic Company Ltd. v. Kataria Sales Corporation9, the Bombay High Court held that once an award is set aside on the ground that arbitrator was ineligible to act as an arbitrator10, a fresh notice under Section 21 of the A&C Act is not necessary prior to appointment of new arbitrator under Section 11(6) of A&C Act.
The Court held that mere setting aside of the award passed by an ineligible arbitrator is not sufficient to give new contour to the dispute as the dispute between the parties remains the same. The Court observed that when the notice of arbitration was issued by Kirloskar (before the appointment of the ineligible arbitrator), the arbitration mechanism had already been triggered. Therefore, for the appointment of an independent and impartial new arbitrator under Section 11 (6) of A&C Act, a fresh notice under Section 21 is not necessary.
- The High Court of Bombay held that individual members of a Society cannot be regarded as parties to the arbitration agreement.
In the matter of Shankar Vithoba Desai and Ors. v. Gauri Associates and Anr.11, the High Court of Bombay by its order dated 16.07.2024 held that individual members of a society cannot invoke an arbitration clause entered by the society with another party.
In the instant case, a few members of a society namely Dahisar Chunabhatti Panchratna Co-operative Housing Society Limited ("Society") preferred a petition under Section 11 of A&C Act in connection with a dispute arising out of the Development Agreement entered between the Society and Gauri Associates AOP ("Developer").
The Court held that the Development Agreement was between the two parties i.e., the Society and the Developer. The members of the Society were neither an independent party nor an independent signatory to the Development Agreement. Thus, the fundamental requirement under Section 7 of A&C Act i.e., the arbitration agreement must be in writing among the parties to the arbitration proceedings has not been met. Therefore, members of the Society cannot invoke arbitration for resolving the dispute emanating from the conduct of the Developer, where such dispute arises out of the Development Agreement.
- The High Court of Delhi held that the use of the word 'seat' is not compulsory in an arbitration clause.
In the matter of Anuj Jain & Anr. v. M/s WTC Noida Development Company Private Limited12, the High Court of Delhi in its judgment dated 08.04.2024 held that in an arbitration clause the use of word 'seat' is not compulsory, and the court must decipher the intention of the parties to determine the seat of arbitration.
In the present case, the arbitration clause provided that the arbitration shall be held in Delhi and subject to the arbitration clause, for all legal matters between the parties, the courts/tribunals/forums of Noida would have jurisdiction.
The Court held that the intention of the parties was clear that the seat of arbitration would be Delhi and only in cases when the matter is not referred to arbitration or if there are other disputes which have to be entertained by civil courts/tribunals/forums, the courts of Noida will have jurisdiction.
- The High Court of Calcutta held that the MSME Act does not bar independent arbitration under the Arbitration and Conciliation Act.
In the matter of Gita Refractories Private Ltd. v. Tuaman Engineering Ltd.13, the High Court of Calcutta through its order dated 10.09.2024 held that Section 18 of Micro Small and Medium Enterprises Development Act, 2006 ("MSME Act") does not bar independent arbitration initiated by parties under the A&C Act.
The Court observed that only when the party raising the dispute has chosen to submit to the jurisdiction of the Facilitation Council under Section 18 of the MSME Act, the process envisaged under the MSME Act becomes mandatorily applicable to the parties. The expression "may" as used in Section 18 (1) of the MSME Act clarifies that parties have a choice to take its dispute to the Facilitation Council under the MSME Act or under some other separate remedy before a different forum.
The Court opined that Section 18(1) of the MSME Act envisages reference only of disputes under Section 17 of the said Act which deals with recovery of amount due for any goods supplied or services rendered by the supplier. The Court observed that in the instant case, the claim of the buyer also includes direction to be issued to the buyer to purchase the goods procured by the supplier or in alternative pay damages/ compensation for the said goods which were not accepted by the buyer. Section 18 of the MSME Act does not envisage any such substantive relief or creation of rights and liabilities and thus, the claims of the buyer were beyond the scope of Section 18 of the MSME Act.
Thus, in the event the disputing party chooses to opt for arbitration independently under the A&C Act invoking the arbitration clause in the agreement, there is no provision in the MSME Act preventing such action.
Footnotes
1 Delhi Metro Rail Corporation Ltd. v. Delhi Airport Metro Express Pvt. Ltd., (2024) 6 SCC 357
2 (2024) 5 SCC 313
3 (2024) 7 SCC 174
4 (2018) 2 SCC 519
5 SLP (C) Nos. 15336-15337 of 2021
6 Project Director NHAI vs. M. Hakeem [(2021) 9 SCC 1]; Larsen Air Conditioning and Refrigeration Company vs. Union of India [(2023) SCC Online SC 982]; SV Samudram vs. State of Karnataka [(2024) SCC Online SC 19];
7 Vedanta Limited vs. Shenzden Shandong Nuclear Power Construction Company Limited [(2019) 11 SCC 465]; Oriental Structural Engineers Pvt. Ltd. vs. State of Kerala [(2021) 6 SCC 150]; M.P. Power Generation Co. Ltd. vs. Ansaldo Energia Spa [(2018) 16 SCC 661]
8 J.C. Budhraja vs. Chairman, Orissa Mining Corporation Ltd. [(2008) 2 SCC 444], Tata Hydroelectric Power Supply Co. Ltd. vs. Union of India [(2003) 4 SCC 172]; Shakti Nath vs. Alpha Tiger Cyprus Investment No.3 Ltd. [(2020) 11 SCC 685]
9 2024 SCC OnLine Bom 941
10 In the present case, the arbitrator was held to be ineligible to act as an arbitrator as it was unilaterally appointed by Kirloskar Pneumatic Company without consent of the other party.
11 (Comm. Arbitration Application (L.) No. 21070 of 2023)
12 ARB. P. No. 1329/2023
13 AP-COM/707/2024
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