Arbitration Dossier (2021-22)| A Snapshot of Major Developments in Lex Arbitri

Summary

The Supreme Court (the “Court”) held that a legislative enactment cannot curtail a constitutional right and thus remedy under Articles 226 and 227 would still be available despite the mandate of Section 5 of the IAAC but held that it is prudent for a Judge to not exercise discretion to allow judicial interference beyond the procedure established under the enactment.

The Court held that power under Articles 226 and 227 needs to be exercised in exceptional rarity, wherein one party is left remediless under the statute or a clear “bad faith” is shown by one of the parties and held that this high standard set by this Court is in terms of the legislative intention to make the arbitration fair and efficient.

Viewed in this perspective, the Court did not find either of the two exceptional circumstances existing in the case at hand and set aside the order of the High Court where the High Court had exercised jurisdiction under Article 226 to set aside the order of the arbitrator passed under Section 16 of the IAAC.

The Supreme Court held that the issue of novation of a contract requires detailed consideration of the clauses of the memorandum of understanding and the shareholders agreement, together with the surrounding circumstances in which these agreements were entered into, and a full consideration of the law on the subject. It held that such exercise cannot be done given the limited jurisdiction of a court under Section 11 of the IAAC.

It is further stated that detailed arguments on whether an agreement which contains an arbitration clause has or has not been novated cannot possibly be decided in exercise of a limited prima facie review as to whether an arbitration agreement exists between the parties.

It held that the court cannot, at this stage, enter into a mini trial or elaborate review of the facts and law which would usurp the jurisdiction of the Arbitral Tribunal.

The Supreme Court held that period of limitation for filing an application under Section 11 of the IAAC would be governed by Article 137 of the First Schedule of the Limitation Act, 1963. The Court held period of limitation will begin to run from the date when there is failure to appoint the arbitrator. The court made a distinction between jurisdictional issues (such as issues with respect to the existence, scope and validity of the arbitration agreement) and admissibility issues which relate to procedural requirements (such as a breach of pre-arbitration requirements, for instance, a mandatory requirement for mediation before the commencement of arbitration, or a challenge to a claim or a part of the claim being either time-barred, or prohibited, until some precondition has been fulfilled). It further held that limitation is an admissibility issue and in rare and exceptional cases, where the claims are ex facie time-barred, and it is manifest that there is no subsisting dispute, the court may refuse to make the reference under Section 11 of the IAAC.

The court while dealing with an appeal from a petition under Section 11(6) of the IAAC observed that by a process of judicial interpretation, this Court in Vidya Drolia v. Durga Trading Corpn.¹⁸,(Vidya Drolia)has now read the “prima facie test” into Section 11(6-A) so as to bring the provisions of Sections 8(1) and 11(6) read with Section 11(6-A) of the IAAC on par, whereas in cases decided under Section 8, a refusal to refer parties to arbitration is appealable under Section 37(1)(a), a similar refusal to refer parties to arbitration under Section 11(6) read with Sections 6(A) and 7 is not appealable. The Court, thus, observed that in the light of what has been decided in Vidya Drolia¹⁹, Parliament may need to have a relook at Sections 11(7) and 37 so that orders made under Sections 8 and 11 are brought on par qua appealability as well. On facts of the case, the court held that there were enough facts which cast a doubt on the existence of arbitration agreement and would require further examination by an arbitrator upon leading of evidence and thus upheld the order appointing arbitrator but set aside the findings of the High Court upholding existence of arbitration agreement.

The Court held that the arbitration agreement is an independent agreement between the parties, and is not chargeable to payment of stamp duty. The non-payment of stamp duty on the commercial contract would not invalidate the arbitration clause since it has an independent existence. However, the court also held that adjudication of the rights and obligations under the substantive commercial contract would however not proceed before complying with the mandatory provisions of the Stamp Act.

Further, the Court observed that the finding in SMS Tea Estates (P) Ltd. v. Chandmari Tea Co. (P) Ltd.²¹, and Garware Wall Ropes Ltd. v. Coastal Marine Constructions & Engg. Ltd.²² that the non-payment of stamp duty on the commercial contract would invalidate even the arbitration agreement, is not the correct position in law, and referred the issue to a larger Bench.

Recently, in the decision of Intercontinental Hotels Group (India) (P) Ltd. v. Waterline Hotels (P) Ltd.²³, the Supreme Court relied on the decision of N.N. Global Mercantile²⁴ while holding that pending adjudication on this issue before the constitutional bench, courts should ensure that arbitrations are carried on, unless the issue clearly indicates existence of deadwood i.e. when the matter is non-arbitrable.

The Court held that in an Arbitral Tribunal comprising of a panel of three members, if one of the members gives a dissenting opinion, it must be delivered contemporaneously on the same date as the final award, and not on a subsequent date, as the Tribunal becomes functus officio upon the passing of the final award. The period for rendering the award and dissenting opinion must be within the period prescribed by Section 29-A of the IAAC. The Court held that at the stage of judicial scrutiny by the court under Section 34, the court is not precluded from considering the findings and conclusions of the dissenting opinion of the minority member of the Tribunal. On the facts of the case, Court held that award was pronounced on 27-4-2018 but only a copy of the award was provided to the parties to point out any computation error, any clerical or typographical error. The signed copy of the award was provided to the parties only on 19-5-2018 and Court held time under Section 34(3) would be reckoned from 19-5-2018 and not 27-4-2018.

The Court upheld the award passed by the arbitrator and set aside the judgments of the District Court and High Court which had set aside the award. The Court held that once there was a specific term of the agreement executed between the parties which provided for payment of interest on delayed payment, the mere fact that rate of interest was not specified or that blank space has been left where rate was to be provided cannot be construed as cancellation of the clause providing for payment of interest of delayed release of funds. The Court held that that to come to such an inference, active exclusion of payment of interest under that head was necessary to have been incorporated in the agreement. The Court upheld the award granting interest on delayed payments but reduced the rate of interest awarded by the arbitrator.

The Court held that Section 34 of the IAAC cannot be held to include within it a power to modify an award. It held that position under the Arbitration Act, 1940 was different but the IAAC was enacted based on the UNCITRAL Model Law on International Commercial Arbitration, 1985 and it makes it clear that, given the limited judicial interference on extremely limited grounds not dealing with the merits of an award, the “limited remedy” under Section 34 is coterminus with the “limited right”, namely, either to set aside an award or remand the matter under the circumstances mentioned in Section 34 of the IAAC. However, while the court set aside the High Court judgment on law, it did not interfere with the judgment on facts, as it found the justice of the case does not require interference under Article 136 of the Constitution of India.

The Supreme Court held that moratorium under Section 14 of the IBC would be imposed on proceedings under Section 34 of the IAAC. It reasoned that Section 34 proceeding is a proceeding against the corporate debtor in a court of law pertaining to a challenge to an arbitral award and would be covered just as an appellate proceeding in a decree from a suit and such a proceeding which may result in an arbitral award against the corporate debtor being upheld, as a result of which, monies would then be payable by the corporate debtor. The Supreme Court, inter alia, held that judgment in Power Grid Corpn. of India Ltd. v. Jyoti Structures Ltd.²⁹, which held that a Section 34 application will not be covered by Section 14 of the IBC, does not state the law correctly.

The Supreme Court stated that the Commercial Courts Act, 2015 which establishes a stipulated value for application, would only apply to appeals under Section 37 of the IAAC if the specified value exceeded three lakh rupees. The limitation period would be 60 days in such situations when an appeal under Section 37 of the IAAC was directed by Section 13 of the Commercial Courts Act, 2015.

Where the Commercial Courts Act does not cover an appeal under Section 37 of the IAAC because the stated value is less than three lakhs, the provisions of Articles 116 and 117 of the Limitation Act, 1963 apply. According to Article 116 of the Limitation Act, if an appeal was brought to the High Court from an order of a subordinate court, the term of limitation was set at 90 (ninety) days from the day the order was passed by the subordinate court. Similarly, if an appeal is brought from a High Court order to the same court or a court other than the High Court, the term of limitation is 30 (thirty) days under Article 117 of the Limitation Act. However, any delay beyond such period is to be condoned by way of exception and not by way of rule.

The Supreme Court held that a reading of Section 44 of the IAAC would show that there are six ingredients to a foreign award.

1. It must be an arbitral award rendered on differences between persons arising out of legal relationships.
2. These differences may be in contract or outside of contract, for example, in tort.
3. The legal relationship of parties ought to be considered “commercial” under the law in India.
4. The award must be made on or after the 11th day of October 1960.
5. The award must be a New York Convention award.
6. It must be made in one of such territories which the Central Government by notification declares to be territories to which the New York Convention applies.

The Supreme Court held that all requirements posed under Section 44(1) were procedural in nature and the object of which was to satisfy that an award was indeed a foreign award.

The Supreme Court observed that Section 47(1)(c) being procedural in nature did not go to the extent of requiring substantive evidence to “prove” that a non-signatory to an arbitration agreement can be bound by a foreign award. In fact, Section 47(1)(c) only spoke of evidence as may be necessary to prove that an award is a foreign award.

The Supreme Court, while stating the difference between Sections 44 and 48 of the IAAC observed that, since Section 44 refers to “persons” and not “parties”, a foreign award could be binding on the “persons” not being signatories to such an arbitration agreement.

The 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 IAAC:

(i) The dispute must be considered to be a commercial dispute under the law in force in India.

(ii) The award must be made in pursuance of an agreement in writing for arbitration.

(iii) There must be a dispute that arises between “persons” (without regard to their nationality, residence, or domicile).

(iv) The arbitration must conclude in a country that is a signatory to the New York Convention.

In the facts of the instant matter, the 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 IAAC.

Based on definition of foreign award, the court arrived at a conclusion that two Indian parties can select foreign seat.

The Supreme Court held that a dispute will be non-arbitrable when a proceeding is in rem and a IB Code proceeding is to be considered in rem only after it is admitted. The Court held that to consider a proceeding in rem, it is necessary that the adjudicating authority ought to have applied its mind, recorded a finding of default and admitted the petition and it is on admission, that third party right is created in all the creditors of the corporate debtors and will have erga omnes effect. Mere filing of the petition and its pendency before admission, therefore, cannot be construed as the triggering of a proceeding in rem.

The Court further held that even if an application u/Section 8 is filed, the adjudicating authority has a duty to advert to contentions put forth on the application filed u/Section 7 of IB Code and examine the material placed before it by the financial creditor and record a satisfaction as to whether there is default or not and while doing so the contention put forth by the corporate debtor shall also be noted to determine as to whether there is substance in the defence and to arrive at the conclusion whether there is default. It held that if the irresistible conclusion by the adjudicating authority is that there is default and the debt is payable, the bogey of arbitration to delay the process would not arise despite the position that the agreement between the parties indisputably contains an arbitration clause.

Ultimately, once the NCLT is satisfied that the there is a financial debt and a default within the meaning of Section 7 of the IBC, any subsequent application under Section 8 of the ACA is not maintainable.

Only when the application under Section 7 of the IBC fails, the NCLT may refer the dispute to arbitration.

The Supreme Court held that even after the constitution of an Arbitral Tribunal, the court was not denuded of the power to grant interim relief under Section 9(1) of the IAAC. The Supreme Court clarified that once an Arbitral Tribunal is constituted, the court cannot take up an application under Section 9 for consideration, unless the remedy under Section 17 is inefficacious. However, once an application is taken up for consideration and the court has applied its mind, the court can certainly proceed to adjudicate the application. The Supreme Court accepted the respondent’s submission that the intent behind Section 9(3) was not to turn the clock back and require a matter already reserved for orders to be considered in entirety by the Arbitral Tribunal under Section 17 of the IAAC. Even after an Arbitral Tribunal is constituted, there could be myriads of reasons why the Arbitral Tribunal may not provide an efficacious alternative to Section 9(1).

The Supreme Court held that for Indian-seated arbitrations, interim orders passed in an emergency arbitration are enforceable as equivalent to an order under Section 17 passed by the Arbitration Tribunal. No appeal lies under Section 37 of the IAAC against an order of enforcement of an emergency arbitrator’s order made under Section 17(2) of the Act.

The Supreme Court observed that having regard to the language used in Section 34(2-A) which uses the term “the court finds that”, enables a court to test an appealable order under Section 37 on the ground of patent illegality. A failure on part of the arbitrator to decide in accordance with the terms of the contract governing the parties would constitute patent illegality.

Additionally, the Supreme Court in NHAI v. P. Nagaraju³⁷ recently held that the Court cannot modify the award but only set aside the award and remand the matter back to the Tribunal in such cases.

The Supreme Court while adjudicating on the scope of review to be exercised by the courts for an application under Section 11(6-A) observed that, while appointing an arbitrator, the court must not act mechanically. If upon examination, it is found that the arbitration agreement does not correlate to the dispute at hand, the court can decline the reference.

The Supreme Court observed as follows:

17. There is no gainsaying that by virtue of the Arbitration and Conciliation (Amendment) Act, 2015, by which Section 11(6-A) was introduced, the earlier position of law as to the scope of interference by this Court at the stage of referral has been substantially restricted. It is also no more res integra that despite the subsequent omission of Section 11(6-A) by the Arbitration and Conciliation (Amendment) Act, 2019, the legislative intent behind thereto continues to be a guiding force for the courts while examining an application under Section 11 of the Act.

18. The jurisdiction of this Court under Section 11 is primarily to find out whether there exists a written agreement between the parties for resolution of disputes through arbitration and whether the aggrieved party has made out a prima facie arbitrable case. The limited jurisdiction, however, does not denude this Court of its judicial function to look beyond the bare existence of an arbitration clause to cut the deadwood. A three-Judge Bench in Vidya Drolia³⁹, has eloquently clarified that this Court, with a view to prevent wastage of public and private resources, may conduct “prima facie review” at the stage of reference to weed out any frivolous or vexatious claims.

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20. To say it differently, this Court or a High Court, as the case may be, are not expected to act mechanically merely to deliver a purported dispute raised by an applicant at the doors of the chosen arbitrator. On the contrary, the court(s) are obliged to apply their mind to the core preliminary issues, albeit, within the framework of Section 11(6-A) of the Act. Such a review, as already clarified by this Court, is not intended to usurp the jurisdiction of the Arbitral Tribunal but is aimed at streamlining the process of arbitration. Therefore, even when an arbitration agreement exists, it would not prevent the court to decline a prayer for reference if the dispute in question does not correlate to the said agreement.

The Supreme Court held that Section 12(5) of the IAAC (as amended by the 2015 Amendment Act) provides that notwithstanding any prior agreement to the contrary, any person whose relationship with the parties, or counsel, falls within any of the categories specified in the Seventh Schedule, shall be ineligible to be appointed as an arbitrator.

Section 12(5) read with the Seventh Schedule is a mandatory and non-derogable provision of the Act. In the facts of the present case, the Principal Secretary to the Government of Haryana was held to be ineligible to be appointed as an arbitrator, since he would have a controlling influence on the appellant Company being a nodal agency of the State.

The Supreme Court held that an appeal under Section 37(1)(c) of the IAAC would be maintainable against an order refusing to condone delay in filing an application under Section 34 of the IAAC to set aside an award. It was emphasised by the court that an order refusing to condone delay in filing an application under Section 34 has the effect of finally disposing of the original petition. Such an order can, therefore, be treated as an award, and hence is appealable.

The Supreme Court held that an analysis of Section 2(1)(f) would show that whatever be the transaction between the parties, if it happens to be entered into between persons, at least one of whom is either a foreign national, or habitually resident in, any country other than India; or by a body corporate which is incorporated in any country other than India; or by the Government of a foreign country, the arbitration becomes an international commercial arbitration notwithstanding the fact that the individual, body corporate, or government of a foreign country referred to in Section 2(1)(f) carry on business in India through a business office in India.

The Supreme Court held that the principles of impartiality and independence cannot be discarded at any stage of the proceedings, specifically at the stage of constitution of the Arbitral Tribunal. The court noted that it would be incongruous to say that party autonomy can be exercised in complete disregard of these principles, even if the same has been agreed prior to the disputes having arisen between the parties. The concept of party autonomy cannot be stretched to a point where it negates the very basis of having impartial and independent adjudicators for resolution of disputes. In fact, when the party appointing an adjudicator is the State, the duty to appoint an impartial and independent adjudicator on the courts is that much more onerous and the right to natural justice cannot be said to have been waived only on the basis of a prior agreement between the parties at the time of the contract and before arising of the disputes.

The Supreme Court, while making observations on the group of companies doctrine, noted that:

17. Doctrine of group of companies is one such area which is utilised to bind third parties to an arbitration agreement. Theoretically, the policy consideration of efficiency is argued to allow such joinders. However, until a legal basis for the same is provided, efficiency cannot itself be the sole ground to bind a party to arbitration.

Justice Surya Kant, in his concurring opinion, framed the following additional questions for deliberation by a larger Bench:

104. (A) Whether the group of companies doctrine should be read into Section 8 of the Act or whether it can exist in indian jurisprudence independent of any statutory provision?

(B) Whether the group of companies doctrine should continue to be invoked on the basis of the principle of “single economic reality”?

(C) Whether the group of companies doctrine should be construed as a means of interpreting the implied consent or intent to arbitrate between the parties?

(D) Whether the principles of alter ego and/or piercing the corporate veil can alone justify pressing the group of companies doctrine into operation even in the absence of implied consent?

The Supreme Court held that the phrase “unless the award otherwise directs” in Section 31(7)(b) of the IAAC only qualifies the rate of interest and if no post-award interest is granted by the arbitrator, the award holder would be entitled to post-award interest at 18 % (eighteen per cent).

The Supreme Court further held that the arbitrator enjoys the discretion to award post-award interest on a part of the sum. However, such discretionary power of granting post-award must be exercised reasonably and in good faith. The Supreme Court further noted that the arbitrator’s discretion may only be limited by an express clause to this effect.

Supreme Court held the following in this case:

(i) Arbitrators are not entitled to unilaterally determine their own fees as it would be violative of the principle of party autonomy and the doctrine of the prohibition of in rem suam decisions, meaning, arbitrators cannot be a judge of their own cause.

(ii) Further, the Court held that the term “sum in dispute” shall be considered septely for the amount in dispute in the claim and counterclaim. As a result, arbitrators would be entitled to charge septe fees for the claim and counterclaim.

(iii) On the INR 30,00,000 ceiling, the Court held that the ceiling is applicable to the cumulative amount of the base and variable amount, and in the case of a sole arbitrator it would be INR 37,50,000 (including the additional component prescribed in the Act). This would mean that the highest fee to be charged by an Arbitral Tribunal (except in the case of a sole arbitrator) shall be INR 30,00,000, which is in line with the legislative intent, which was also indicated in the commission report.

(iv) The Court held that the ceiling is applicable to each individual arbitrator, and any other interpretation would lead to absurd consequences.

The Delhi High Court, answering in the negative, summarised the position of law as follows:

44. The prior consent of Central Government is not necessary under Section 86(3) of the Code of Civil Procedure to enforce an arbitral award against a foreign State.

45. A foreign State cannot claim a sovereign immunity against enforcement of an arbitral award arising out of a commercial transaction.

46. Section 36 of the Arbitration and Conciliation Act treats an arbitral award as a ‘decree’ of a court for the limited purpose of enforcement of an award under the Code of Civil Procedure which cannot be read in a manner which would defeat the very underlying rationale of the Arbitration and Conciliation Act, namely, speedy, binding and legally enforceable resolution of disputes between the parties.

47. Section 86 of the Code of Civil Procedure is of limited applicability and the protection thereunder would not apply to cases of implied waiver. An arbitration agreement in a commercial contract between a party and a foreign State is an implied waiver by the foreign State so as to preclude it from raising a defence against an enforcement action premised upon the principle of sovereign immunity.

48. In a contract arising out of a commercial transaction, such as the transactions which are subject-matter of the present petitions, a foreign State cannot seek sovereign immunity for the purpose of stalling execution of an arbitral award rendered against it. Once a foreign State opts to wear 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, which is otherwise available to it only when it is acting in its sovereign capacity. It is the purpose and nature of the transaction of the foreign State which would determine whether the transaction, and the contract governing the same, represents a purely commercial activity or whether the same is a manifestation of an exercise of sovereign authority.

49. Arbitration being a consensual and binding mechanism of dispute settlement, it cannot be contended by a foreign State that its consent must be sought once again at the stage of enforcement of an arbitral award against it, while ignoring the fact that the arbitral award is the culmination of the very process of arbitration which the foreign State has admittedly consented to.

50. This proposition is in consonance with the growing international law principle of restrictive immunity, juxtaposed with the emergence of arbitration as the favoured mechanism of international dispute resolution in the past few decades. It needs no gainsaying that international commercial arbitration has witnessed increasing adoption across the world over the past few decades on account of it being a flexible yet stable, efficient, and legally binding mechanism of dispute resolution for entities engaging in global and cross-border transactions while eschewing the particularistic difficulties and complexities encountered in domestic legal systems. However, if foreign States are permitted to stymie the enforcement of arbitral awards, which are the ultimate fruits of the above consensual process, on the specious ground that they are entitled to special treatment purely on account of being foreign States, then the very edifice of international commercial arbitration would collapse. Foreign States cannot be permitted to act with impunity in this regard to the grave detriment of the counterparty in the arbitration proceedings.

The Embassy of Islamic Republic of Afghanistan filed a special leave to appeal before the Supreme Court against the impugned final judgment and order dated 18-6-2021 passed by the High Court. However, this SLP was withdrawn on grounds of compromise.

The High Court of Delhi held that while grant/issue of patents and registration of trade marks are exclusive matters falling within the sovereign and government function and are non-arbitrable but disputes arising from trade mark licence or assignment agreements are disputes under contract and do not involve exercise of any sovereign function and are thus arbitrable. The court thus allowed the application u/Section 8 and referred the disputes pertaining cancellation of assignment to arbitration.

The High Court of Delhi held that unlike Section 34, Section 33(1) does not contain any provision permitting condonation of the period of limitation stipulated therein. The Court held that it cannot read into Section 33(1), a power of condonation of delay, where none exists. Further held, the fact that delay cannot be automatically condoned by the Arbitral Tribunal, in the case of application under Section 33(1), also stands underscored by the stipulation contained by the words “unless another period of time has been agreed upon by the parties” in Section 33(1).

It held the intent of the legislature is that the period of 30 days, stipulation in Section 33(1), is relaxable only if the parties agree to another period for filing the application thereunder. In absence of any such mutual agreement between the parties, the period of 30 days in Section 33(1) is sacrosanct and is not relaxable.

The Madras High Court observed as follows:

“22. … The principles relating to the grant of anti-suit injunctions were examined and formulated in p 24 of Modi Entertainment, wherein the Supreme Court held, inter alia, that an anti-suit injunction would not be granted to forbear the exercise of jurisdiction by the forum chosen by the parties. Likewise, the law on anti-arbitration injunctions was considered in McDonald’s India (P) Ltd. v. Vikram Bakshi⁵¹ (McDonalds) by a Division Bench of the Delhi High Court, wherein the Court underscored the fact that the threshold tests for an anti-arbitration injunction are more exacting than that applicable for an anti-suit injunction and concluded that the principal considerations would be those underpinning Section 45 of the Arbitration Act i.e. whether there is an arbitration agreement; and whether such agreement is null and void, inoperative or incapable of being performed.

I respectfully concur with the principles set out therein. Therefore, these tests should be applied to the case at hand.”

The High Court held that it was the obligation of the award holder to take active steps under the IBC instead of waiting for the adjudication of the application under Section 34 of the IAAC. Merely because a Section 34 petition was filed, does not imply that award holder was stayed from filing claim as an operational creditor under IBC.

The court noted that an operational creditor who fails to lodge a claim in the CIRP literally missed boarding the claims bus for chasing the fruits of an award even where a challenge to the award is pending in a civil court. Therefore, the petition was dismissed as infructuous.