Commercial updates – May, 2023
By Gunjan Chhabra
(Visit here to read more Case Briefs by Gunjan Chhabra)
1. Is a Dispute Regarding Cancellation of an Instrument Arbitrable?
M/s Asian Avenues Pvt. Ltd. v. Sri Syed Shoukat Hussain (2023) ibclaw.in 51 SC
The parties had entered into a Development Agreement for a particular property. When disputes arose between the parties, the Respondent cancelled the Development Agreement. The Respondent then filed a suit for a decree directing the Appellant to execute a deed of cancellation & delivery up of possession of the suit property.
The Appellant filed an application under Order VII Rule 11 of the Code of Civil Procedure, 1908 (Rejection of Plaint), on the ground that the Development Agreement contained an arbitration clause, with a prayer made under Section 8 of the Arbitration & Conciliation Act, 1996 for referring disputes to arbitration. This was allowed by the trial court.
When the Respondent moved a revision application the High Court interfered with the trial court’s order.
Against the order of the High Court, the Respondent had moved the Supreme Court.
The bone of contention was whether adjudication on the issue of grant of cancellation of Development Agreement will operate in rem, and therefore whether arbitration clause could be invoked for such a relief.
The Court observed as follows:
- The Arbitration clause specifically used the words “All the disputes arising out of or in connection with this Agreement”… were to be referred to Arbitration.
- The dispute regarding cancellation of the Development Agreement was very much a dispute arising out of or in connection with the Agreement, and therefore had to be referred to arbitration.
- An action instituted under Section 31 of the Specific Relief Act for cancellation of an instrument cannot be said to be an action in rem. (Reliance placed on Deccan Paper Mills Company Limited v. Regency Mahavir Properties and Ors.(2020) ibclaw.in 163 SC).
In view of the above, the appeal was allowed as the disputes were clearly arbitrable. The Order of the High Court was set aside and the Ld. Trial Court’s order was reinstated.
2. Is the Ancestry of an Agreement relevant while Analyising whether Disputes can be Referred to Arbitration?
Gujarat Composite Ltd.(“G”) Vs. A Infrastructure Ltd. & Ors (“A”) ((2023) ibclaw.in 57 SC) was an appeal against Gujarat High Court’s order dismissing an appeal against commercial court’s order, dismissing G’s Application under Section 8 of the Arbitration & Conciliation Act, 1996 seeking reference of disputes to arbitration.
G Entered into two licensing agreements for the purpose of operations of 3 manufacturing units of G. One was in favour of A, & 1 in favour of a Sister Concern of A (“S”).
Thereafter a supplementary agreement was also executed by G & A with S as the confirming party for certain financial assistance of G. A tripartite agreement was also thereafter entered into between the Bank, A & G for dealing with deposit of title deeds. Conveyance deeds were also entered between G & other respondents.
When disputes arose between A & G and attempts at resolution failed, G preferred a composite arbitration petition before Gujarat High Court in 2017. A on the other hand filed a suit against G for its claims, several of which arose under the tripartite agreement.
In this suit, G filed an application under Section 8 seeking reference of disputes to arbitration.
The commercial court dismissed the section 8 application as the arbitration clause was contained only in the licensing agreement between G & A and not in any other agreement, & the disputes arose under various agreement & with various parties. This order was also upheld in appeal in High Court.
Against this Order G finally filed an appeal before Supreme Court
The Supreme Court observed as follows:
- Except the Licence Agreement between G & A none of the other agreements contained an arbitration clause, even if they related to the same property &, alongwith other parties, also involved G & A.
- The reliefs claimed in the suit were not limited to the issues which arose in the Licence Agreement between G & A alone.
- Even if the original Licence Agreement between G & A was the genesis of the contractual relations between G & A it will not ipso factor lead to availability of arbitration agreement for disputes emanating from tripartite agreement.
- The disputes raised in A’s suit & the reliefs sought therein, could not be resolved without involving the Bank or looking at the tripartite agreement, & thus the ancestry of the tripartite agreement is irrelevant.
- Once the substantive reliefs claimed in the suit fell outside the arbitration clause, it cannot be said that these can be referred to arbitration.
In view of the above, the Supreme Court observed that in the nature of transactions & reliefs claimed in A’s suit, refusing reference to arbitration could not be faulted. Hence orders of lower courts were upheld and appeal dismissed.
3. How Important is the Correlation of the Dispute to the Arbitration Agreement?
GTM Builders and Promoters Pvt. Ltd. v. Sneh Development (Delhi High Court, decided on 15.03.2023) was a Petition under Section 11 of the Arbitration & Conciliation Act, 1996 seeking appointment of an Arbitrator.
The parties entered into an Agreement for construction of a housing project in Gurugram, Haryana. This Agreement contained an arbitration clause.
When disputes arose between the parties, GTM approached court seeking appointment.
The disputes were that GTM was seeking recovery of costs, that GTM had been directed to pay as compensation to those homebuyers who had approached NCDRC against delayed handover of possession under the project.
For this purpose GTM was relying on two undertakings given by SNEH.
The Court observed as follows:
- None of the undertakings provided by SNEH dealt with a scenario where GTM could claim compensation from SNEH, for the payments directed by NCDRC, to be paid by GTM to the homebuyers for delays in the housing project.
- Therefore the disputes which GTM has raised, in no manner arise out to the construction Agreement entered into between the parties.
- While adjudicating a petition under section 11 a Court has to endeavour to evaluate the existence of a written arbitration agreement and whether a prima facie arbitrable case has been made out. But the mere existence of a clause is not sufficient to allow prayer for reference. (Reliance placed on DLF Home Developers Limited vs. Rajapura Homes Private Limited and Another, (2021) ibclaw.in 211 SC).
- In the guise of reference to arbitrator, GTM is seeking recovery from SNEH for a cost which is neither arising out of the construction Agreement, nor covered under the undertakings furnished by SNEH qua amount involved in the Construction Agreement.
- GTM has failed to show a) that dispute arises under Arbitration Agreement b) dispute is arbitrable in nature.
In view of the above, the Petition was dismissed.
4. Can a retired judge escape Mandatory Provisions of Ineligibility for Arbitrator Appointment?
Prime Store & Ors. v. Sugar Vanijya Holdings Pvt. Ltd. (Madras High Court, decided on 20.04.2023) was an objection Petition under Section 34 of the Arbitration & Conciliation Act, 1996 (“A&C Act”) seeking to set aside an arbitral award.
The Petitioner being engaged in the business of running textile outlets in Tamil Nadu entered into lease deed with Respondent to take on lease a space in a mall in Chennai for their outlet.
Due to unforeseen circumstances the Petitioners terminated the lease, even before the lock-in period expired and sought refund of security deposit. The Respondent on the other hand, claimed rent for lock-in period as well as fit out expenses.
When disputes arose between the parties as such, the Respondent unilaterally appointed a Sole Arbitrator, a Retired Judge of the Madras High Court, under the Arbitration clause contained in the lease deed.
The parties filed their pleadings and award was pronounced. This award was then challenged in the present proceedings by the Petitioner.
The Court while dealing with the issue of unilateral appointment observed as follows:
- The unilateral appointment was made in 2019, by which the law regarding unilateral appointments is well settled in terms of S. 12(5) of the A&C Act. Such appointments are clearly vitiated. (Reliance placed on TRF Ltd. v. Energo Engineering Projects Ltd., (2017) ibclaw.in 269 SC & Perkins Eastman Architects DPC & Anr. v. HSCC (India) Ltd (2019) ibclaw.in 206 SC).
- Although the Perkins judgment was passed after the appointment was already made, but the law laid down therein was moulded basis the TRF judgment passed in 2017 itself. In fact such an interpretation would apply from date of commencement of Section 12(5) in 2015 as it is an interpretation of the same provision.
- Consent of the other party in writing within 30 days could have saved such a unilateral appointment, but the same was never given. (Proviso to S. 12(5)).
- Even if both parties participated in the arbitration proceedings, the award is as good as a judgment given by a Kangaroo Court.
- Law will not recognise such an award by a disqualified person and it is honest in law.
- It is irrelevant that it was a judge who was unilaterally appointed. S. 12(5) r/w 7th schedule is a mandatory and non-derogable provision, and it would be applicable even to a retired judge. It cannot be therefore said, that merely due to being a retired judge, bias cannot be attributable.
“Kangaroo Court” – “1. A self-appointed tribunal or mock court in which the principles of law and justice are disregarded, perverted, or parodied . . . . 2. A court or tribunal characterized by unauthorized or irregular procedures, esp. so as to render a fair proceeding impossible. 3. A sham legal proceeding.” (Black’s Law Dictionary, 9th Edn. 2000)
5. Notice Invoking Arbitration Issued in December 2013: does the old (Pre-Amendment) Act apply or the New Act (post 2015 amendment) Apply?
This question was answered in Shree Vishnu Constructions v. The Engineer in Chief Military Engineering Service & Ors. (2023) ibclaw.in 65 SC.
Here the facts were that although the notice invoking arbitration was issued in 2013, the Application for Appointment of Arbitrator under Section 11(6) of the Arbitration & Conciliation Act, 1996 (“A&C Act”) was filed after the coming into force of the Arbitration & Conciliation (Amendment) Act, 2015 (“2015 Amendment). As a result the lower court had held the Pre-amendment Act to be applicable and dismissed section 11 application on account of accord & satisfaction.
The main contention raised by the Appellant was that the Supreme Court in the decisions of Union of India Vs. Parmar Construction Company, (2019) ibclaw.in 204 SC (“Parmar Construction”) & of Union of India Vs. Pradeep Vinod Construction Company, (2019) ibclaw.in 179 SC (“Pardeep Vinod”) had failed to take note of the Court’s decision in Board of Control for Cricket in India (BCCI) Vs. Kochi Cricket Private Limited and Ors., (2018) ibclaw.in 125 SC (“BCCI”), which had held that the 2015 Amendment was prospective in nature.
The Court observed as follows:
- This Court in BCCI has held that the 2015 Amendment is prospective in nature insofar as the proceedings under Section 34 & 36 are concerned, that is these specific court proceedings.
- Section 11(6) (appointment of arbitrator) was not in issue before Court in BCCI, so it was not discussed as to what would happen if the notice was sent prior to the 2015 Amendment but Section 11 application was filed post 2015 Amendment.
- On the other hand, decisions in Parmar Constructions & Pardeep Vinod specifically ruled on this issue. The Court held that since the date of issuance of notice invoking arbitration is considered as commencement of arbitration, therefore as per section 26 of the 2015 Amendment, the Amended Act will not be applicable & the parties would be governed by the pre-amendment Act.
- In view of the above, the Court held that it could not be said that Parmar Constructions or Pardeep Vinod were per incurium or/in conflict with the BCCI decision.
In light of the above, the decision of the High Court was upheld and the appeal was dismissed.
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