Recent Rulings in Commercial Arbitration, April 2023 – Issue n.1
By Gunjan Chhabra
(Visit here to read more Case Briefs by Gunjan Chhabra)
𝐖𝐨𝐮𝐥𝐝 𝐭𝐡𝐞 𝐔𝐧𝐢𝐥𝐚𝐭𝐞𝐫𝐚𝐥 𝐀𝐩𝐩𝐨𝐢𝐧𝐭𝐦𝐞𝐧𝐭 𝐨𝐟 𝐚𝐧 𝐀𝐫𝐛𝐢𝐭𝐫𝐚𝐭𝐨𝐫 𝐡𝐢𝐧𝐝𝐞𝐫 𝐭𝐡𝐞 𝐄𝐱𝐞𝐜𝐮𝐭𝐢𝐨𝐧 𝐨𝐟 𝐚𝐧 𝐀𝐰𝐚𝐫𝐝?
Cholamandalam Investment and Finance Company Ltd. V. Amrapali Enterprises and Anr. (Calculatta High Court, decided on 14.03.2023) was a petition under Section 36 of the Arbitration & Conciliation Act, 1996 (“A&C Act”) for execution of an Arbitral Award.
A Section 34 petition had also been filed for challenging the award but the same was time barred.
One key issue which arose was what impact would the unilaterally appointed arbitrator have on the execution of the award.
The Court observed as follows:
1. The position of law regarding unilateral appointment of arbitrator is no longer res integra & is already settled. (Reliance placed on HRD Corporation Vs. GAIL (2017) ibclaw.in 234 SC; TRF Limited Vs. Energo Engineering Projects Limited (2017) ibclaw.in 269 SC; Perkins Eastman vs HSCC (India) Ltd. (2019) ibclaw.in 206 SC; Bharat Broadband Network Limited vs United Telecoms Limited (2019) ibclaw.in 153 SC.
2. It can be said with unambiguous certainty that the unilateral appointment of the arbitrator by the award holder is illegal and void.
3. Regarding the impact of the unilateral appointment on the execution, the Court observed that an arbitral award passed by a person ineligible to act as an arbitrator cannot be considered as an arbitral award under the provisions of the A&C Act. (Reliance placed on Ram Kumar v. Shriram Transport Finance Co. Limited, 05.02.2022, Delhi HC).
4. In view of the above, the award was unsustainable and non-est in the eyes of law being in violation of Section 12(5) r/w schedule VII of the A&C Act. An arbitral reference which itself began with an illegal act vitiates the entire proceedings from its very inception making it void ab initio. It was equivalent to a decree passed without jurisdiction.
5. Decrees passed by bodies lacking inherent jurisdiction are unenforceable. (Reliance placed on Sunder Dass vs. Ram Prakash 1977 AIR 1201).
In light of the above, the execution petition was dismissed, and after consent of parties, fresh arbitrator was appointed.
𝐓𝐡𝐢𝐫𝐝 𝐏𝐚𝐫𝐭𝐲 𝐅𝐮𝐧𝐝𝐢𝐧𝐠 𝐭𝐡𝐞 𝐋𝐢𝐭𝐢𝐠𝐚𝐭𝐢𝐨𝐧 𝐟𝐨𝐫 𝐆𝐚𝐢𝐧: 𝐂𝐚𝐧 𝐢𝐭 𝐄𝐬𝐜𝐚𝐩𝐞 𝐋𝐢𝐚𝐛𝐢𝐥𝐢𝐭𝐲 𝐢𝐟 𝐭𝐡𝐞 𝐑𝐞𝐬𝐮𝐥𝐭 𝐢𝐬 𝐔𝐧𝐟𝐚𝐯𝐨𝐮𝐫𝐚𝐛𝐥𝐞?
In SBS Holding INC v. Anant Kumar Choudhary & Ors. (Delhi High Court, decided on 07.03.2023), the Respondents no. 1 to 4 were being funded by Respondent no. 5 under a Funding Agreement.
As per the Funding Agreement, R-5 was to have exclusive prior rights on any damages that could have been awarded in favour of R-1 to 4 against the Petitioner.
The arbitration award, however was in favour of the Petitioner against R- 1 to 4.
The Petitioner filed the present Petition under Section 9 of the Arbitration & Conciliation Act, 1996 (“A&C Act”) seeking interim measures of protection against all Respondents, stating that in another enforcement proceedings against R-1 to 4, they had encumbered all assets so as to negate the other award.
The issue was whether such an interim measure could be passed against R-5 especially considering:
a. The award was only against R-1 to 4
b. As per the Funding Agreement, R-5’s liability was restricted to the costs to be incurred by R-1 to 4 in the arbitration proceedings & not thereafter.
c. The Funding Agreement was to terminate in case claim filed by R-1 to 4 was not a success.
The Court observed as follows:
1. A party having funded litigation for a gain in the result thereof, cannot escape its liability in case the result is contrary to its expectation. (Arkin v. Borchand Line Ltd (2005) EWCA Civ 655 & Excalibur Ventures LLC v. Texas Keystone Inc & Ors.)
2. A balance needs to be struck between the need to ensure access to justice through funding arrangements & the cost that the defendant would bear in case such litigation fails due to being found completely meritless, as in the present case. The Defendant cannot be left high & dry.
3. In fact the costs levied by the award will become the cost to be paid by R-5 as if it were the costs of R 1 to 4 as per the Funding Agreement.
4. Clause stating that the Funding Agreement would stand terminated incase claim is not successful would also not affect right of the Petitioner, as the award & costs are part of the arbitration proceedings, & the proceedings continue till passing of the award.
5. The Petitioner by placing reliance on the Funding Agreement has at least prima facie, been able to show that R-5 had a vested interest in the outcome of the arbitral proceedings having funded R-1 to 4 for benefit of return therefrom.
6. The Petitioner has also established prima facie case by showing past conduct of R-1 to 4 in the earlier enforcement proceedings.
In view of the above, R-1 to 5 were directed to make disclosures of assets & bank accounts with credit balance, & were also restrained from creating any third party interest in respect of unencumbered immoveable assets for the sum awarded in favour of the Petitioner.
𝐃𝐢𝐬𝐩𝐮𝐭𝐞𝐬 𝐮𝐧𝐝𝐞𝐫 𝐚 𝐇𝐲𝐩𝐨𝐭𝐡𝐞𝐜𝐚𝐭𝐢𝐨𝐧 𝐀𝐠𝐫𝐞𝐞𝐦𝐞𝐧𝐭 𝐰𝐢𝐭𝐡 𝐚 𝐁𝐚𝐧𝐤: 𝐂𝐚𝐧 𝐭𝐡𝐞𝐲 𝐛𝐞 𝐫𝐞𝐟𝐞𝐫𝐫𝐞𝐝 𝐭𝐨 𝐀𝐫𝐛𝐢𝐭𝐫𝐚𝐭𝐢𝐨𝐧?
Mantras Green Resources Ltd. & Ors. vs Canara Bank (2023) ibclaw.in 146 HC was a Petition under Section 11 of the #arbitration & Conciliation Act, 1996(“A&C Act”) seeking appointment of #Arbitrator.
In this case Mantras was a borrower under a Hypothecation Agreement entered into with the Respondent Bank.
Here Mantras was relying on the arbitration clause and the Bank was vehemently opposing it contending that the dispute was non-arbitrable since a special forum being the Debt Recovery Tribunal (“DRT”) had been established for recovery of debts due to banks and financial institutions.
The Court observed as follows:
1. On a reading of Sections 17, 18 & 19 of the Recovery of Debts and Bankruptcy Act, 1993 (“RDB Act”), it is evident that there is no provision under by which the remedy of a civil suit by the defendant in a claim by the bank is ousted. It is only in applications by the Bank where the jurisdiction of Civil Court is barred. (Reliance placed on Bank of Rajasthan v. VCK Shares & Stock Broking (2022) ibclaw.in 126 SC.
2. Therefore option is left to the borrower to file a civil suit or a counterclaim in the said proceeding before DRT or before civil Court. (Reliance placed on Vidya Drolia & Ors. Vs. Durga Trading Corporation (2020) ibclaw.in 78 SC.
3. Once the borrower has an option to file a suit, section 8 of the A&C Act immediately comes into play since an arbitration clause already exists. The Court will relegate the parties to arbitration, being the forum chosen by the parties.
In view of the above, the arbitrator was appointed.
𝐃𝐨𝐞𝐬 𝐭𝐡𝐞 𝐏𝐥𝐚𝐜𝐞 𝐨𝐟 𝐭𝐡𝐞 𝐌𝐒𝐌𝐄 𝐂𝐨𝐮𝐧𝐜𝐢𝐥 𝐰𝐡𝐢𝐜𝐡 𝐩𝐚𝐬𝐬𝐞𝐬 𝐭𝐡𝐞 𝐀𝐰𝐚𝐫𝐝, 𝐟𝐨𝐫𝐦 𝐭𝐡𝐞 ‘𝐕𝐞𝐧𝐮𝐞’ 𝐨𝐫 𝐭𝐡𝐞 ‘𝐒𝐞𝐚𝐭’? (𝐒𝐢𝐧𝐠𝐥𝐞 𝐉𝐮𝐝𝐠𝐞 𝐨𝐯𝐞𝐫𝐫𝐮𝐥𝐞𝐝)
IRCON International Ltd. v. Pioneer Fabricators (Delhi High Court, Division Bench, Decided on 27.03.2023), was an Appeal filed under Section 37 of the Arbitration & Conciliation Act, 1996 (“A&C Act”).
Here the Appellant had issued a Purchase Order to the Respondent for supply, erection & commissioning of certain underground LPG Storage Bullet & Pipeline for Rail Coach Factory in Rae Bareily, UP.
Since the Respondent was registered under Section 8 of the Micro, Small, and Medium Enterprises Development Act, 2006 (“MSMED Act”), when disputes arose between the parties, the matter was referred to Facilitation Council. Once conciliation failed, #arbitration was conducted, and an award was passed in favour of the Appellant by the Facilitation Council in Kanpur.
The Petitioner filed a petition under Section 34 of the A&C Act challenging the award, before District Judge, Karkardooma Courts, Delhi which petition was dismissed by the District Judge on the ground of lack of territorial jurisdiction. The reason was the award being passed by Facilitation Council at Kanpur
The Petitioner challenged the said order.
The Court observed as followed:
1. The contract clause specifically provided a jurisdiction clause which stated the contract to be “subject to jurisdiction of Delhi Courts (India).
2. The jurisdiction of #MSME Council, is decided on the basis of the location of the supplier. This determine only the ‘venue’ and not the ‘seat’ of Arbitration. (Reliance placed on Indian Oil Corporation Ltd. v. FEPL Engineering (P) Ltd. & Ors., MANU/DE/3140/2019)
3. Therefore, for purpose of challenging the award, it is the place over which the Court has been conferred with exclusive jurisdiction, as agreed between the parties.
4. MSMED Act despite being a special legislation does not eclipse or nullify the jurisdiction clause agreed between the parties. By operation of the provisions of the MSMED Act, only the procedure of constitution of the Arbitral Tribunal is obliterated and not the jurisdiction. (Reliance placed on Gujarat State Civil Supplies Corporation Ltd. vs. Mahakali Foods Pvt. Ltd.(Unit 2) and Another, (2022) ibclaw.in 131 SC.
5. The Court disagreed with the Ld Single Judge in Ahluwalia Contracts (India) Ltd. vs. Ozone Research & Applications (I) Pvt. Ltd. and Ors.,(2023) ibclaw.in 112 HC who had held that the place of facilitation council shall be ‘seat’ & not ‘venue’.
In view of the above, the District Judge’s Order dismissing the Section 34 Petition was set aside and the objection Petition was restored.
𝐖𝐡𝐞𝐧 𝐢𝐬 𝐢𝐭 𝐅𝐢𝐭 𝐟𝐨𝐫 𝐂𝐨𝐮𝐫𝐭 𝐭𝐨 𝐑𝐞𝐟𝐮𝐬𝐞 𝐀𝐩𝐩𝐨𝐢𝐧𝐭𝐦𝐞𝐧𝐭 𝐨𝐟 𝐚𝐧 𝐀𝐫𝐛𝐢𝐭𝐫𝐚𝐭𝐨𝐫 𝐮𝐧𝐝𝐞𝐫 𝐚 𝐒𝐞𝐜𝐭𝐢𝐨𝐧 11 𝐏𝐞𝐭𝐢𝐭𝐢𝐨𝐧?
NTPC Ltd. v. M/s SPML Infra Ltd.(2023) ibclaw.in 41 SC, was an appeal against Delhi High Court’s order allowing the Respondent’s application for appointment of arbitration under Section 11(6) of the #arbitration & Conciliation Act, 1996 (“A&C Act”).
The parties had entered into a contract for Installation of a piping package for a Thermal Power Project in Vishakhapatnam.
The project had been completed in 2019. The Appellant had also obtained a No-Demand Certificate from the Respondent, as the payment under the contract was made conditional on the receipt of the same.
The contention raised by the Appellant was that there were no disputes subsisting between the parties, & therefore an #arbitrator should not have been appointed by the High Court.
The Supreme Court observed as follows:
1. The case concerns pre-referral jurisdiction. Of the High Court under Section 11, & the limited scope of scrutiny available to a High Court.
2. The jurisdiction of a Court under Section 11(6) is limited to examining whether an arbitration agreement exists between the parties – “nothing more, nothing less”. (Reliance placed on Duro Felguera, S.A. v. Gangavaram Port Ltd. (2017) ibclaw.in 238 SC.
3. Court has to undertake a restricted & limited review, only to protect parties from being forced to arbitrate, when the matter is demonstrably “non-arbitrable” & to cut off dead wood. At this stage the court should not get lost in thickets & decide debatable questions of facts. Referral proceedings are preliminary & not a mini trial.
4. If it appears that prima facie review would be inconclusive, as it would require detailed examination, the matter should be left for final determination by Arbitral Tribunal. (Reliance placed on Vidya Drolia & Ors. v. Durga Trading Corporation (2020) ibclaw.in 78 SC.
5. An Inquiry as to the parties to the arbitration agreement & the applicant’s privity to the said agreement, need to be thoroughly reviewed by court in a referral matter. However, on secondary aspect of non-arbitrability a limited interference is warranted.
6. Limited scrutiny through the eye of the needle is necessary & compelling at this stage. However, this needs to be balanced with the need to not force parties to go for arbitration if the matter is ex-facie barred by arbitration. In such a case the Court is right to refuse referral.
7. No-Demand Certificate was issued by Respondent in April 2019 & in the same month, the final payment was released. There was nothing on record to show any pending claims of the Respondent.
8. It was on the non-release of Bank Guarantees (“BGs”) by the Appellant, that the Respondent in May 2019 raised a claim. Thereafter a settlement agreement was arrived between the parties, when the BGs were released in June 2020.
9. In July 2020, the Respondent sent a letter repudiating the settlement agreement after reaping its benefits of return of the BGs, & in October 2020 the Respondent then filed a section 11 application for appointment of arbitrator alleging coercion & economic duress in the execution of the settlement agreement.
10. The perusal of events led the Court to come to the conclusion that the allegations of coercion & economic duress were not made out.
In view of the above, the Court concluded that the Respondent was now conducting an ex-facie meritless & dishonest litigation, & the parties should not be forced to litigate. The Order of the High Court was set aside & the Appeal was allowed.
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