Unveiling the Gavel’s Verdicts: July 2023 Commercial Judgments Update-Part 2

Unveiling the Gavel’s Verdicts: Expert Analysis of Recent Commercial Rulings

By Gunjan Chhabra

(Visit here to read more Case Briefs by Gunjan Chhabra)

Section 8 Application filed after the Written Statement, can the matter be referred to Arbitration?

 Dwarkadas Himatlal Shah v. Girishbhai Himatlal (Gujarat High Court, decided on 14.07.2023), was an appeal filed against an order of Trial Court allowing an application under Section 8 of the Arbitration & Conciliation Act, 1996 (“A&C Act”) (for reference of disputes to arbitration).

The disputes had arisen under an MOU entered into between the parties regarding a family dispute of partition of property. The MOU contained an arbitration clause but the Petitioner had filed a civil suit.

As per the contention of the Petitioner, the section 8 application could not be allowed as it was filed after the filing of the written statement. This was contended because the mandate of section 8 provides that such an application needs to be raised before submission of the first statement on the substance of the dispute.

The Court observed as follows:

  1. The Written Statement filed by the Respondent mentioned that the parties were governed by the arbitration clause contained in the MOU. 
  2. Thereafter an application under Order 7 Rule 11 of the CPC (rejection of Plaint), and the aforementioned application under Section 8 was also filed by the Respondents on the same day.
  3. The provisions of section 8 provide that a party merely needs to insinuate the judicial authority about the arbitration clause before filing the first statement on the substance of the disputes. Thereafter the judicial authority is compelled to refer disputes to arbitration. 
  4. Once the objection regarding the existence of arbitration & the disputes being governed by the same was already raised in the written statement, which was the first statement on the substance of the disputes.

In view of the above, no interference was called for in the order of the trial court, the Petition was dismissed.

Unable to Quantify your claim; is this a bar to the Grant of an Early Freezing Order?

This issue was discussed in Kee Management Pty Ltd. v. Casey [2023]WASC259 (Supreme Court of Western Australia, 13.07.2023)

In this case, the Defendant had entered into a contract of employment with the Plaintiff, upon alleged breach of which, the Plaintiff had suffered loss and damages.

A writ had been filed by the Plaintiff, along with an application seeking urgent relief of Freezing Order (“FO”) over the Defendant’s assets, to prevent him from disposing off or dissipating proceeds of his alleged breaches of duty.

The key principles for grant were summarised as below:

  1. The court has inherent jurisdiction to make a FO, the purpose being the preserve the efficacy of execution lying against a prospective judgment debtor.
  2. The object of FO is not merely providing a security to the Plaintiff.
  3. FO is a drastic remedy not to be granted lightly.
  4. FO is to be granted where Plaintiff can show a good arguable case. (Not necessarily more than 50% success).
  5. Plaintiff must show, (i) assets of Defendant might be disposed off. ii) danger that prospective judgment may be wholly/partly unsatisfied. iii) danger arises because assets of defendant are disposed off, or diminished in value.
  6. Risk/danger must be real or substantial & not merely theoretical. But it is not necessary to establish that it is more probable than not that judgement will be ultimately unsatisfied. Decision has to be taken on basis of Balance of probabilities.
  7. Acts of the respondent for avoiding judgment are not necessary before FO can be granted.
  8. The Court deemed fit that all conditions were satisfied. Plaintiff had shown a good prima facie case and the risk of dissipation was also shown.
  9. The Plaintiff had this stage only indicated an approximate amount it would suffer if it was successful. It was not an exact quantification. However, the Court observed, “The inability to quantify a claim at this early stage is not necessarily a bar to the grant of a freezing order.”
  10. The discretionary consideration was also, that the Plaintiff was a relatively large company, with a well-established business, while the Defendant appeared to have no assets of note. Phe Plaintiff also rendered an undertaking as to damages. On the other hand, the Defendant had refused to give information as to his bank records/assets & also declined to voluntarily sign an undertaking not to deal with the moneys received as a result of the alleged breaches.

In view of the above, the Court granted the FO.

A note on the expeditiousness of the matter. The Plaintiff had commenced proceedings on 10th July 2023 and also served it on the Defendant on the same date. The case was listed on the 11th, the Defendant appeared in person, and submitted a lack of opportunity to seek legal advice. The Court gave him complete opportunity of hearing, and also took into account his lack of opportunity to seek legal advice into account, but still delivered the decision on 11th July 2023 (albeit being published on 13th July 2023).

How far Can Claims based on Novel Formula be Permitted in Construction Contracts?

Satluj Jal Vidyut Nigam v. M/s Jaiprakash Hyundai Consortium (2023) ibclaw.in 571 HC, was a petition under Section 34 of the Arbitration & Conciliation Act, 1996 (“A&C Act”) challenging an Order passed by arbitrator.

The disputes between parties pertained to a contract for construction civil works in a Hydro-Electric project in Himachal Pradesh.

One of the Claimant’s claims in arbitration was additional costs incurred on account of increase in Minimum Wages. Amongst other grounds, it was the Petitioner’s contention, that the Claimant’s claim was based merely on a formula & not actual evidence.

The Court’s findings were as follows:

  1. To support this claim of additional costs, the Claimant had produced Statement-1 which was supported by muster rolls reflecting wage increase on unskilled labour (but not skilled and semi-skilled).
  2. Statement-2 was a calculation of total expenditure on labour, based on the premise that labour expenditure amounts to 10% of total work done. This 2nd statement made no reference on Statement 1.
  3. While Statement-2 used the words “actually paid”, the computation is only a mathematical derivation with no supporting evidence as to the actual labour. The amount shown was 77.26 Crores.
  4. Yet for the basis of the award of this claim, this amount, while being duly noted to be a mathematical calculation in the award, was taken as actual expenditure. In doing so, the Arbitral Tribunal acted without evidence.
  5. Apart from this even when viewed from another angle, when applying the price escalation (duly paid to the claimant) the total amounts to INR 78.75 Cr which was more than the expenditure claimed. As such this in itself would have been more than adequate compensation for the additional cost on account of minimum wage increase. However, the tribunal had applied some vague formulae to notionally reduce this amount to justify the additional award.

In view of the above, the Award was set aside, the Petition stood allowed.

Key observation of the Court was:

“Entertaining financial claims based on novel mathematical derivations, without proper foundation in the pleadings and/or without any cogent evidence in support thereof can cause great prejudice to the opposite party.  Especially in the context of construction contracts where amounts involved are usually astronomical, any laxity in evidentiary standards and absence of adequate diligence on the part of an arbitral tribunal in closely scrutinizing financial claims advanced on the basis of mathematical derivations or adoption of novel formula, would cast serious aspersions on the arbitral process. The present case is an example where substantial liability has sought to be fastened on one of the contracting parties based on specious paper calculations. It cannot be overemphasized that arbitral tribunals must exercise due care and caution while dealing with such claims.”

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