Welcome to the December edition of our Arbitration Newsletter where we have explored significant judgments touching on the interpretation of the relevant provisions of the Arbitration and Conciliation Act, 1996 Act (the "Arbitration Act") and its interplay with other statutes. We also look at the notable reforms proposed in the Draft Arbitration and Conciliation (Amendment) Bill, 2024.
1. Central Organization for Railway Electrification v. ECI SPIC SMO MCML, 2024 SCC OnLine SC 3219
In a landmark ruling, a 5-judge bench of the Hon'ble Supreme Court has held that unilateral appointment of arbitrators is in contravention of the principles of equality. Importantly, unilateral appointment clauses in case of public-private contracts are additionally in violation of Article 14 of the Constitution of India.
In a 2019 decision involving the same parties ("2019 decision"), a three-judge bench of the Supreme Court addressed two key issues. First, that appointment of retired officers as arbitrators is valid under Section 12 of the Arbitration Act read with its Seventh Schedule. The Supreme Court, relying on its decision in Voestalpine Schienen GmbH v. DMRC Ltd., 2017 (4) SCC 665 held that Section 12(5) does not prohibit former employees from being appointed as arbitrators. Second, that the General Managers of an enterprise could be appointed as arbitrators from a panel, provided the counterparty could nominate at least one arbitrator. The Court, considered the decisions in TRF Ltd. v. Energo Engg. Projects Ltd., 2017 (8) SCC 377 and Perkins Eastman Architects DPC v. HSCC (India) Ltd., 2020 (20) SCC 760 but found them to be inapplicable as it found that the counterparty's right to choose from a panel ensured impartiality and balance.
However, in Union of India v. Tantia Constructions Ltd., 2023 (12) SCC 330, another 3-judge bench of the Supreme Court expressed prima facie disagreement with the finding in the 2019 decision and referred the issue of to a larger bench for reconsideration.
Upon reference, the five-judge bench undertook a scholarly analysis of the fundamental tenets of the Arbitration Act viz. party autonomy, independence and impartiality of arbitrators, equal treatment of parties, natural justice in arbitrations, etc. Notably, the Supreme Court expounded the doctrine of bias by applying the test of 'real likelihood of bias', i.e., the determination of bias does not require actual proof but hinges on whether a real possibility of bias exists based on the relevant facts and circumstances. Adopting this test, the court concluded that whenever a party is forced to choose from a set list of arbitrators decided by the other party or when there is a unilateral appointment of the arbitrator, then there is a likelihood of bias operating against the principles of natural justice. The court observed that there is a presumption that such an arbitrator chosen from a pre-determined list might have an interest in the outcome of the proceedings. This test is aligned with Section 12 of the Arbitration Act that provides for challenge on the appointment of an arbitrator in cases where there are justifiable doubts to the impartiality and independence of the arbitrator. Accordingly, the Supreme Court ruled against the unilateral appointment of arbitrators.
This decision by a constitutional bench of the Supreme Court is seminal as it clearly establishes the applicable standard to determine the interplay between party autonomy and independence and impartiality of the arbitral tribunal. The appointment mechanisms in government contracts will now need to be compliant with this decision or fall susceptible to challenge. In existing contracts with unilateral appointment clauses or with a unilaterally created panel of arbitrators, the counterparty can approach courts for appointment of arbitrators.
2. Arif Azim Co Ltd. v. Micromax Informatics FZE, 2024 SCC OnLine SC 3212
A three-judge bench of the Hon'ble Supreme Court, re-affirming the Shashoua principle, has clarified that an express designation of a place in an arbitration agreement, in the absence of significant contrary indicators, establishes it as the seat, even if referred to as a venue in the contract. By doing so, the Court has effectively ruled out the applicability of the 'closest connection' test in determining the seat of arbitration when the arbitration agreement specifies a particular place or venue. However, the court observed that the closest connection test would continue to be an appropriate test in cases where there was no express or implied designation of the place or venue of arbitration.
In this case, the arbitration agreement between the parties stipulated the venue of the arbitration as Dubai, UAE and the arbitration was envisaged to be conducted under the UAE Arbitration and Conciliation rules. The arbitration agreement also conferred non-exclusive jurisdiction upon Dubai courts. This gave rise to two main issues. First, whether the designation of Dubai as the venue should be construed as the seat. Second, since Dubai courts were conferred with non-exclusive jurisdiction, whether Indian courts could concurrently exercise jurisdiction over the dispute.
On the aspect of the determination of seat, the Supreme Court relied on its decision in BGS SGS SOMA JV v. NHPC Ltd, 2020 (4) SCC 234 and reaffirmed the principle laid down in the famous case of Roger Shashoua v. Sharma,[2009] EWHC 957 (Comm) also known as the Shashoua principle. The principle lays down that when an arbitration agreement explicitly designates a place of arbitration, such designation, absent contrary indicia, would be construed as the juridical seat of arbitration. The court added that this holds true even if the place is described merely as a venue in the arbitration agreement. The court further observed that in such a case, the established choice of law test – closest connection test - which determines the seat of arbitration by identifying the law with which the arbitration agreement has its closest and most real connection, would not be appropriate. Instead, the express designation of a place serves as the most appropriate criterion for determining the seat of arbitration.
On the aspect of concurrent jurisdiction, the Supreme Court relied on the decisions in Indus Mobile Distribution (P) Ltd. v. Datawind Innovations (P) Ltd, 2017 (7) SCC 678 and Swastik Gases (P) Ltd. v. Indian Oil Corpn. Ltd., 2013 (9) SCC 32 and held that since the agreement designates Dubai as the seat of arbitration (as decided by the Supreme Court), the same would be akin to an exclusive jurisdiction clause, with only the courts in Dubai having jurisdiction.
This judgement is important to note the approach of the courts when faced with a choice of law question. In upholding the Shashoua principle, the Supreme Court has delineated the correct test applicable in scenarios where the arbitration agreement designates an exclusive place.
3. M/S HPCL Bio-Fuels Ltd. versus M/S Shahaji Bhanudas Bhad, 2024 SCC OnLine SC 3190
A two-judge bench of the Hon'ble Supreme Court held that once an unconditional withdrawal of an application has been made for the appointment of an arbitrator under Section 11(6) of the Arbitration Act, then subsequently another application cannot be made for the appointment of an arbitrator under the same cause of action.
HPCL Bio-Fuels Ltd. (Appellant), a government company, entered into a turnkey contract with Shahaji Bhanudas Bhad (Respondent). Disputes arose between them over payment and performance which led to the Respondent invoking arbitration under the contract terms. The Respondent initially filed a petition under Section 11(6) for arbitration which was withdrawn. Subsequently, they filed a fresh petition under the same provision, which was contested by the Appellant on grounds of limitation and abandonment of the original petition.
The Supreme Court emphasized that Order XXIII Rule 1 of the Code of Civil Procedure, 1908 applies to Section 11(6) arbitration petitions, effectively barring a party from filing a subsequent application after withdrawing it unconditionally. The court noted that such a withdrawal is an abandonment of the arbitration process itself and prevents subsequent applications for the same cause of action. The court further clarified that while the principles of Order XXIII Rule 1 apply, they do not preclude the invocation of the same arbitration clause for new or different causes of action arising after the appointment of an arbitral tribunal. The court relied on Sarguja Transport Service Vs S.T.A.T, (1987) 1 SCC 5, which established the principle that withdrawal under Order XXIII Rule 1 precludes a subsequent filing without leave to refile.
The Supreme Court held that the principles in Order XXIII Rule 1 being in the nature of public policy are applicable to arbitration proceedings as well. The court further held that an unconditional withdrawal amounts to abandoning of the claim for arbitration itself, and fresh claims can only be filed for a different cause of action.
4. SPML Infra Ltd. v. Power Grid Corporation of India Ltd., 2024 SCC OnLine Del 8401
A single-judge bench of the High Court of Delhi has ruled that an arbitrator cannot unilaterally issue binding and enforceable orders determining their own fees. This decision echoes the doctrine of prohibition of in rem suam decisions, which means that an arbitrator cannot adjudicate matters related to their own remuneration, as established in ONGC v. Afcons Gunansua JV, 2022 SCC OnLine SC 1122. The High Court further clarified that if an objection is not raised during an order passed on an enhancement of the fees, it does not amount to giving consent for the increase in fees.
In this case, the mandate of the arbitral tribunal was increased by a year by the order of the High Court of Delhi. SPML Infra Ltd. (Petitioner) was aggrieved by an order of the arbitral tribunal to increase its fees significantly post the extension of the mandate of the arbitral tribunal. The court relied on the ruling of the Hon'ble Supreme Court in ONGC v. Afcons which laid down guidelines on the enhancement of fees of arbitrators in ad-hoc arbitrations. The Supreme Court therein had further laid down that unilateral enhancement of fees goes against the principle of party autonomy which is central to arbitration proceedings.
The High Court viewed the issue of unilateral enhancement of fee as against the basic principles of arbitration and clarified that mere absence of an objection to the proposed fees by an arbitrator cannot be construed as consent to the fees. In doing so, the court has distinguished "no objection" from real consent in relation to proposed fees by arbitrator.
5. Airports Authority of India v. Delhi International Airport Ltd., 2024 SCC OnLine Del 7284 (Delhi HC)
A single-judge bench of the High Court of Delhi held that courts should refrain from entertaining a Section 34 application under the Arbitration Act for setting aside an arbitral award merely because the arbitral tribunal has taken a possible alternate view on the merits of the case.
The dispute arose with respect to the interpretation of the word "Revenue" in the agreement between the parties. Airports Authority of India (Appellant) interpreted "Revenue" to mean all "pre-tax gross revenue" while Delhi International Airport Ltd. (Respondent) interpreted it to mean all pre-tax gross revenue including the exclusions implied in the definition of revenue.
The Delhi High Court found that the arbitral tribunal had correctly interpreted the term 'Revenue' in the OMDA to mean projected revenue, in line with the business plan and not gross receipts. It further noted that under Section 34 of the Arbitration Act, court's role is not to substitute its judgement for that of the arbitrators unless there is a legal error in the award. The court emphasized that the award shall only be set aside if it was manifestly erroneous. The court also agreed with the tribunal's decision to appoint an independent auditor to determine the relevant fees. The Court relied on DLF Universal Ltd. Vs Town and Country Planning Department (2010) 14 SCC 1, where the Supreme Court held that the primary test for the interpretation of contracts is the ascertainment of the purpose and objective based on which the parties formed the contract.
Through this judgement, the High Court reiterated the test of "unpardonable perversity". The court reiterated that curial intervention is permissible only if the award is legally flawed or suffers from perversity and that an award cannot be set aside merely due to a difference in the interpretation of the contract.
6. Arbitration Amendment Bill, 2024
The Draft Arbitration and Conciliation (Amendment) Bill, 2024 ("Amendment Bill"), aims to enhance institutional arbitration, reduce judicial interference, and expedite dispute resolution in India. Based on recommendations from a committee chaired by Dr. T.K. Viswanathan (former Secretary, Ministry of Law and Justice), the bill proposes several key reforms, such as:
- Introduction of Section 34-A which authorizes arbitral institutions to establish an Appellate Arbitral Tribunal with the jurisdiction to hear application under Section 34 of the Arbitration Act for setting aside arbitral awards. According to the proposed amendment, in the event that the parties have agreed to take recourse to an Appellate Arbitral Tribunal, they would be barred from filing a Section 34 application before the court.
- Section 9 of the Arbitration Act has been amended such that the ability of the court to issue interim measures is restricted to pre-arbitration and post-award stages only, this further limits judicial interference during the arbitration proceedings but raises questions about the lack of court assistance to assist in the compliance of any arbitral tribunal's orders.
- The Amendment Bill formally incorporates provisions for urgent interim relief from emergency arbitrators before the arbitral tribunal is fully constituted.
- In recognition of the growing use of digital technology in arbitration, the Arbitration Act is amended to formally provide for electronic arbitration and virtual hearings, aligning India with global technological trends.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
