2018 was a rather interesting year for India’s evolving arbitration landscape. Among other things, last year witnessed several clarificatory decisions on arbitration that were much needed for much long.
While Parliament was preparing to enact yet another amendment to the Arbitration and Conciliation Act, 1996 (Arbitration Act), Indian courts continued to interpret and flesh out the true meaning and purport of the Arbitration and Conciliation (Amendment) Act, 2015 (2015 Amendments/Amendment Act).
On the other hand, Indian courts in certain instances have also caused an arguably excessive and unwarranted interference arbitral processes and awards. Perhaps India still needs to cover a few more steps before achieving ‘arbitral zen’, if one may call it so.
Nevertheless, and without further ado, here’s presenting IAB’s top picks and summary of important arbitration judgments passed by Indian Courts in 2018. While the author has attempted to cover all key judgments, one surely cannot rule out the possibility of this list having missed out on certain other judicial developments. Our readers are welcome to share with us any such judgments, which we can try and incorporate in the list below.
The author extends his sincere thanks to Kingshuk Banerjee for his efforts and insights on the post below. Additionally, the author would also like to acknowledge the efforts of Harish Adwant and Jigar Parmar in this regard.
Happy reading, and a very happy new year from IAB!
– Ritvik M. Kulkarni
Table of Contents
I. APPLICABILITY OF THE 2015 AMENDMENTS: RETROSPECTIVE/PROSPECTIVE?
II. SEAT vs. VENUE: DETERMINING THE JURISDICTION OF INDIAN COURTS IN INTERNATIONAL ARBITRATION
III. PREREQUISITES OF AN ARBITRATION AGREEMENT
IV. REFERENCE TO ARBITRATION
A. Referring non-signatories to domestic arbitration
B. Arbitral reference based on oral statements by counsel
C. Appeal against arbitral reference by NCLT in oppression and mismanagement proceedings
V. ARBITRATOR APPOINTMENT BY COURTS
D. Legal status of a consortium in arbitration
E. Limitation period for filing an application under Section 11
VI. ANTI-ARBITRATION INJUNCTION AGAINST INVESTMENT ARBITRATION
VII. INTERIM RELIEF IN AND AFTER ARBITRATION
F. Standard of review to test interim orders passed by arbitral tribunal
G. Post-award interim relief relating to a foreign arbitral award
VIII. CHALLENGING DOMESTIC ARBITRAL AWARDS
H. Fate of an arbitrator’s decision on limitation
I. Requirement of prior notice under Section 34(5): Mandatory or Directory?
J. Scope of evidentiary proceedings in a Section 34 Application
K. Raising jurisdictional issues in a Section 34 Application
L. Permissibility of penal interest in arbitral awards
IX. ENFORCING AWARDS IN INDIA
M. Forum for enforcement/execution of arbitral awards
N. Enforcement by and against Third Parties
O. Enforceability of foreign award: testing determinations on fraud, assessment of consequential damages, limitation, and findings against minors. (long summary)
X. INTERPLAY WITH OTHER STATUTORY REGIMES
P. Commercial Courts, Commercial Division and Commercial Appellate Division of High Courts Act, 2015 (Commercial Courts Act)
Q. Insolvency Law
R. Consumer Protection Law
I. APPLICABILITY OF THE ARBITRATION & CONCILIATION (AMENDMENT) ACT, 2015: RETROSPECTIVE/PROSPECTIVE?
Three years on, the temporal applicability of the 2015 Amendment Act remained unclear and unsettled. In BCCI v. Kochi Cricket Pvt. Ltd., the Supreme Court was required to decide if Section 36 of the Arbitration Act, in its amended form, is applicable to petitions under Section 34 filed (i) before the 2015 Amendments came into force, i.e. on 23 October 2015 (Commencement Date); and/or (ii) after the amendments came into force but arose out of arbitrations commenced prior thereto.
Firstly, the Court observed that Section 26 must be interpreted to mean that the 2015 Amendments will apply prospectively, i.e. after the Commencement Date. That said, Section 26 was read by the Court to comprise two separate parts. The first part applies to arbitral proceedings, i.e. to proceedings before an arbitral tribunal which commenced under Section 21 on or after the Commencement Date, unless the parties otherwise agree. On the other hand, the second part applies ‘in relation to’ arbitral proceedings, e.g. court proceedings relating to arbitrations such as under Sections 9 and 34, regardless of when the arbitral proceedings commenced.
Secondly, the Court noted that Section 36 is only a procedural provision dealing with enforcement of an arbitral award in the same manner as a decree is executed under the Civil Procedure Code, 1908 (CPC). Relying on its previous decisions, the Apex Court emphasized that no person has any vested right in matters of procedure. Given that execution proceedings are purely procedural in nature, it was observed that any change/amendment in law made during the pendency of the cause is deemed to be retroactively applicable and the relevant court should take the relevant change in consideration. Accordingly, the Supreme Court held that Section 36 in its amended form will also apply to Section 34 petitions pending as on the Commencement Date.
N. B. :- The Court noted that the Indian Government had proposed to introduce a new Section 87 to clarify that “unless parties agree otherwise the Amendment Act 2015 shall not apply to (a) Arbitral proceedings which have commenced before the commencement of the Amendment Act of 2015 (b) Court proceedings arising out of or in relation to such arbitral proceedings irrespective of whether such court proceedings are commenced prior to or after the commencement of the Amendment Act of 2015 and shall apply only to Arbitral proceedings commenced on or after the commencement of the Amendment Act of 2015 and to court proceedings arising out of or in relation to such Arbitral proceedings.”
In response to the aforesaid proposal, the Apex Court strongly remarked that the immediate effect of its implementation would be “to put all the important amendments made by the [2015 Amendments] on a back-burner […]”. In this regard, the Court also laid emphasis on the two-pronged design of Section 26 of the Amendment and specifically directed that a copy of its judgment in BCCI be sent to the Law Ministry and the Attorney General for their consideration in light of the Court’s findings.
It is indeed unfortunate that the Arbitration and Conciliation (Amendment) Bill, 2018, passed by the Lok Sabha on 10 August 2018, retains the new Section 87 despite the Supreme Court’s specific recommendation to the contrary in BCCI v. Kochi.
II. SEAT vs. VENUE: DETERMINING THE JURISDICTION OF INDIAN COURTS IN INTERNATIONAL ARBITRATION
In Hardy Exploration and Production (India) INC v. Union of India, the Supreme Court observed that Indian courts will retain jurisdiction to hear the Indian Government’s application to set aside an arbitral award passed in Kuala Lumpur, Malaysia (the Award). The parties had agreed that their contract will be governed by Indian laws. They also agreed to resolve their disputes by arbitration in accordance with the UNCITRAL Model Law, 1985 (Model Law) and that the “venue of … arbitration proceedings… unless the parties otherwise agree shall be Kuala Lumpur […]”.
Article 20 of the Model Law provides that parties are free to agree on the place of arbitration; failing which the place of arbitration is required to be determined by the arbitral tribunal having regard to the parties’ convenience. Notwithstanding the aforesaid, Article 20(2) provides that the tribunal can meet at any place it deems appropriate for consultation among its members, for hearing witnesses, etc. In Hardy Exploration, the tribunal conducted its hearings and passed a final award in Kuala at Lumpur, Malaysia (Award). However, there was no specific determination in the Award regarding the seat/venue of arbitration.
The Supreme Court observed firstly that the parties had not agreed upon a place of arbitration in their agreement. It was further observed that the tribunal should have made a positive determination of the place of arbitration after duly considering the parties submissions on the same. Given the tribunal’s failure to do so, it was held that Kuala Lumpur was only a ‘venue’, as opposed to the juridical seat of arbitration. Consequently, the Supreme Court held that Indian courts were entitled exercise jurisdiction through Part I of the Arbitration Act, thereby including Section 34.[1]
III. PREREQUISITES OF AN ARBITRATION AGREEMENT
Section 7(3) of the Arbitration Act mandates an arbitration agreement to be in writing. That said, the Supreme Court has ruled in M/s Caravel Shipping Services Pvt. Ltd. v. M/s Premier Sea Foods Exim Pvt. Ltd. that an arbitration agreement need not necessarily be signed by the parties. This finding was returned in the context of a signed bill of lading under which the parties had agreed to be bound by certain printed terms which, albeit unsigned, were incorporated in the bill of lading by way of reference.
The Supreme Court also noted that Section 7(4) only adds that an arbitration agreement would be found in the circumstances mentioned in its three sub-clauses; but this does not mean that in all cases an arbitration agreement needs to be signed. It was clarified that the only prerequisite for an arbitration agreement is that it be in writing.
A. Referring non-signatories to domestic arbitration
In Chloro Controls v. Severn Trent, the Supreme Court clarified inter alia that even non-signatories can be referred to arbitration under Section 45 of the Arbitration Act if they are parties claiming through or under a party to the arbitration agreement and if the overall transaction was of a composite nature with the ‘mother agreement’ containing an arbitration clause. However, this principle had not hitherto been applied to domestic arbitrations since Section 8 of the pre-amended Arbitration Act read differently from Section 45.
In Ameet Lalchand Shah & Ors. v. Rishabh Enterprises & Anr., the Supreme Court was required to decide whether an arbitral reference can be sought by non-signatories to the arbitration agreement under Section 8 of the Arbitration Act. Several parties were involved in a single commercial project executed through several agreements. The Supreme Court examined the 2015 Amendments to clarify that Section 8 has been brought in alignment with Section 45 inasmuch as a reference could now be sought even by a party claiming through or under a party to the arbitration agreement. Based on the parties’ intentions towards their overall commercial goal, it was observed that the dispute between the parties to various agreements could be resolved only by referring all four interconnected agreements and their signatories to arbitration.
The Supreme Court’s decision in Ameet Lalchand Shah v. Rishabh Enterprises is discussed by the author here on the Kluwer Arbitration Blog.
B. Arbitral reference based on oral statements by counsel
An arbitration agreement is mandatorily required to be in writing pursuant to Section 7(3) of the Arbitration Act. However, not all written agreements will pass muster. In Kerala Estate Electricity Board & Anr. v. Kurien E. Kalathil, the Supreme Court held that when there is no arbitration agreement between the parties, the relevant judicial authority should not refer the parties to arbitration on the basis of oral statements made by the parties’ counsel at a hearing. The Apex Court clarified that parties should file a written joint memo/application made by the Parties.
The Supreme Court disallowed an arbitral reference on similar grounds in Municipal Corporation of Greater Mumbai & Anr. v. Pratibha Industries.
C. Appeal against arbitral reference by NCLT proceedings for oppression and mismanagement
In Thota Gurunath Reddy v & Ors. V. Continental Hospitals Pvt. Ltd., the National Company Law Appellate Tribunal (NCLAT) was required to decide the maintainability of an appeal filed under Section 421 of the Companies Act, 2013 (Companies Act) against the NCLT’s reference of the matter to arbitration in accordance with Section 45 of the Arbitration Act.
The Appellant had originally filed an application before the NCLT (Hyderabad) inter alia under Sections 241 and 242 of the Companies Act alleging oppression and mismanagement. The Respondent filed an application under Section 45 of the parties’ shareholders’ agreement seeking a reference of the dispute to arbitration. Acting in its capacity as a ‘judicial authority’ within the meaning of Section 45 of the Arbitration Act, the NCLT referred the matter to arbitration. Aggrieved, the Appellant challenged the aforesaid order before the NCLAT under Section 421 of the Companies Act.
Upon examination of a plethora of similar case law, the NCLAT concluded that no appeal can be filed before it under Section 421 of the Companies Act since the NCLT passed an order under the arbitration statue and not under any provisions under the Companies Act. The NCLAT also emphasized that a decision under Section 45 of the Arbitration Act, whether made by the NCLT or otherwise, must be tested only on the touchstone of Section 50 of the Arbitration Act. This is because Section 50 is a complete code in itself when it comes to matters under Section 45. Further, if at all any remedy is available under Section 50, e.g. if a Section 45 application is rejected, then such proceedings too must be filed before the appropriate court as defined by the Arbitration Act and not the Companies Act.
V. ARBITRATOR APPOINTMENT BY COURTS
D. Legal status of a consortium in arbitration
In Larsen and Toubro Limited SCOMI Engineering Bhd v. MMRDA, the Supreme Court was required to determine if a ‘consortium’ of companies is to be treated as an unincorporated ‘association’ as a whole or each of its constituents as a separate ‘body corporate’.
Even though L&T and SCOMI (together, Consortium) were jointly and ‘severally’ liable to MMRDA, the Supreme Court noted that the underlying works contract and the consortium agreement both referred to the Consortium as an unincorporated association of its constituents acting in collaboration – with L&T as the lead member. Incidentally, the Bombay HC had also observed in a related proceeding that it was not open for the members of the Consortium to adopt their separate identities while dealing with MMRDA.
Based on the Court’s analysis in TDM Instructure v. UE Development (2008) – coupled with the comparatively large extent of control exercised over the Consortium by L&T – the Supreme Court concurred with MMRDA’s contention that the Consortium must be identified as an un-incorporated ‘association’ within the meaning of Section 2(1)(f)(iii) of the Act. It was clarified that the SCOMI, albeit a Malaysian corporation, could not be therefore referred to as an independent foreign entity as per Section 2(1)(f)(iii) to transform the proceedings an international commercial arbitration. Accordingly, the Section 11(9) Application was dismissed, leaving the parties to approach the appropriate high court to seek an arbitral reference.
E. Limitation period for filing an application under Section 11
In Deepdarshan Builders v. Saroj & Ors., the Bombay High Court settled several key questions on the applicability of the Limitation Act, 1963 (Limitation Act) to applications filed under Section 11 of the Arbitration Act. Before the 2015 Amendments came into force, the Limitation Act was not applicable applications under Section 11 since they were not filed before a Court per se; but before Chief Justice of the High Court (or the Chief Justice of India in case of international arbitration).
Since Section 11 applications are now required to be filed before the relevant High Court (or the Supreme Court), the Article 137 of the Limitation Act was held to be applicable to them. It was clarified that the amended Arbitration Act will apply to all Section 11 applications filed after 23 October 2015, regardless of when arbitration was invoked. It was also clarified that the Supreme Court’s narrow interpretation of Section 11(6A) in M/s. Duro Felgeura SA Vs. M/s. Gangavaram Port Limited will not affect the Court’s jurisdiction to decide if the Section 11 application was filed within the applicable period of limitation.
The Bombay HC observed that the limitation period will commence from the date the Arbitration Notice was received and/or the proposed arbitrator is rejected by the counterparty. Lastly, the Court observed that time spent in bonafide prosecution of proceedings relating to stamp duty adjudication can be excluded while computing the limitation period in accordance with Section 14 of the Limitation Act.
The Bombay HC’s decision in Deepdarshan Builders v. Saroj & Ors. is covered here on IAB.
VI. ANTI-ARBITRATION INJUNCTION AGAINST INVESTMENT ARBITRATION
In a landmark judgement, the Delhi High Court in Union of India v. Vodafone Group PLC United Kingdom & Anr.[2] has expounded India’s position on arbitrations arising out of Bilateral Investment Protection Agreements (BIPA).
Initially, the Court had granted[3] an ex-parte ad-interim injunction restraining the Defendant from proceeding with a parallel arbitration under the India-UK BIPA for claims which were already pending adjudication under an arbitration commenced under the India-Netherlands BIPA. However, the Court was thereafter required to decide whether Indian courts can assume jurisdiction over a BIPA dispute at all.
The Court held that there is no threshold bar, whether in the BIPA or otherwise, or inherent lack of jurisdiction in Indian courts to deal with BIPA arbitrations. It was also held that Indian courts retain the jurisdiction to restrain BIPA arbitrations which are oppressive, vexatious, inequitable or constitute an abuse of the legal process.
That said, the Court observed that the Plaintiff’s apprehensions against vexatious parallel proceedings could be resolved by accepting the Defendant’s offer to apply for consolidation of the two parallel BIPA arbitrations. The Delhi HC observed that dismissed the suit for an anti-arbitration injunction by giving liberty to the Union (Plaintiff) to raise the issue of abuse of process before the India-UK BIPA Tribunal. Separately, since the Plaintiff had already appointed its appointed its arbitrator in the impugned IIA arbitration, the Court held that all jurisdictional objections must now be decided by the tribunal constituted in accordance with the India-UK BIPA (Tribunal). Accordingly, the Court dismissed the Indian Government’s anti-arbitration suit with liberty to raise the issue of procedural abuse before the Tribunal.
Curiously, however, the Court has traced its jurisdiction to its ‘inherent powers’ and not to any provisions in the Arbitration Act. On the contrary, the Court held that BIPA disputes are not ‘commercial disputes’ within the meaning of the Arbitration Act because they are “fundamentally different from commercial disputes as the cause of action [in IIA disputes] (whether contractual or not) is grounded on State guarantees and assurances (and are not commercial in nature)”. Consequently, it was held that neither the Arbitration Act, nor the New York Convention will even apply to BIPA arbitrations.
VII. INTERIM RELIEF IN AND AFTER ARBITRATION
F. Standard of review to test interim orders passed by arbitral tribunal
In NHAI v. Gwalior Jhansi Expressway Limited, the Supreme Court was required to review an interim order passed under Section 17 of the Arbitration Act. Briefly put, the Respondent had completed a considerable portion of its work before receiving a defect-cure notice for the remaining work. While the Respondent was agreeable to the Appellant inviting a fresh tender for the remaining work (Fresh Tender), it sought protective measures under Section 17 and obtained a right of first refusal (ROFR) to match the lowest bid in the Fresh Tender.
The Appellant eventually went ahead to award the Fresh Tender to a third party without allowing the Respondent to match the lowest bid as the Respondent didn’t participate in the Fresh Tender. Aggrieved, the Respondent approached the arbitral tribunal under Section 17 of the Arbitration Act and obtained an interim measure restraining the Appellant from taking any adverse steps in this regard against the Respondent (Section 17 Order). The Section 17 Order was confirmed by the Delhi High Court in an appeal under Section 37(2)(b).
A full bench of the Supreme Court observed that the Respondent’s stance must be tested on touchstone of the terms of the tender document – which required that an ROFR would come into play only if the Respondent participated in the tender. The Court also emphasized the necessity of transparency and fair competition in a public tender. Accordingly, the Supreme Court held that the Appellant needn’t show prejudice caused on account of the Respondent’s non-participation in the fresh tender. Any decision to the contrary, it was observed, would be against the fundamental policy of Indian law.
The Supreme Court dismissed the Respondent’s reliance on the tribunal’s first interim order granting an ROFR, because it did not expressly exempt the Respondent from actually participating in the fresh tender. Eventually, therefore, the Court set aside the Section 17 Order for being in violation of the fundamental policy of Indian law.
G. Post-award interim relief relating to a foreign arbitral award
In Trammo DMCC v. Nagarjuna Fertilizers, the Bombay High Court was required to decide if it can entertain a Section 9 petition filed by a foreign-award holder to secure the amount awarded since the award-debtor has monies in the Court’s jurisdiction (the Petition). It was clarified at the outset that the reliefs under Section 9 were available even in relation to arbitrations seated outside India in accordance with the amended Arbitration Act.
The award-debtor relied on the meaning of ‘Court’ as defined in Section 2(1)(e) of the Arbitration Act – which provides that a Section 9 Petition can be filed only before the High Court which would have jurisdiction to decide the questions forming the ‘subject matter of the arbitration’ if the same had been the subject matter of a suit. Accordingly, the award-debtor argued that the Bombay HC lacked jurisdiction as the award-debtor had no presence in the state of Maharashtra and no part of the cause of action in the arbitral dispute arose within the state.
On the other hand, the award-holder argued that the correct definition of ‘Court’ should be imported from Section 47, which bestows jurisdiction on a High Court that would have jurisdiction to decide questions relating to the ‘subject-matter of the award’. This interpretation would include High Courts having territorial jurisdiction over the award-debtor’s assets.
The Court adopted a contextual interpretation of Section 2(1)(e) since the main clause, i.e. Section 2, itself clarifies that it its sub-provisions are applicable ‘unless the context requires otherwise’. Accordingly, the Court noted that applying the definition under Section 2(1)(e) to a post-award situation will create an incongruity, inasmuch as the award-holder will be prevented from seeking interim measures even when the award-debtor has monies lying in the Court’s jurisdiction only because such monies do not form ‘the subject matter of arbitration’. Therefore, it was held that the definition under Section 47 would be applicable and that post-award interim relief under Section 9 can be obtained from any Court having jurisdiction over the award-debtor’s assets.
(p.s. While this judgment was delivered in late 2017, it has been included here since it decodes an important issue on interim relief in international arbitration)
VIII. CHALLENGING DOMESTIC ARBITRAL AWARDS
H. Fate of an arbitrator’s decision on limitation
In M/s Indian Farmers Fertilizer Co-operative Ltd v. Bhadra Products, the Supreme Court was required to decide if an arbitrator’s decision on limitation must be treated as an interim award; so as to make it amenable to challenge under Section 34 of the Arbitration Act. The Court interpreted the language of Section 31(6) to mean that the jurisdiction to make an interim award is left to the good sense of the arbitral tribunal and extends to “any matter” with respect to which it may make a final award.
The Court cautioned against dealing with an arbitration in a piecemeal manner with interim award since dispute resolution will eventually be delayed and parties will be put to additional expense. Further, the Apex Court further advised that arbitral tribunals should consider whether there is any real advantage in delivering interim awards instead of proceeding with the matter as a whole and delivering a final award.
The Court concluded that the arbitrator’s award on limitation was an interim award, which being an arbitral award could be challenged under Section 34 of the Arbitration Act. The Court clarified that such an award does not relate to the arbitral tribunal’s own jurisdiction under Section 16 and therefore need not follow the process prescribed under subsections (5) and (6) of Section 16. That said, the Court opined that Parliament should consider amending Section 34 so as to consolidate all interim awards together with the final award, so that one challenge under Section 34 can be made after the final award is delivered.
I. Requirement of prior notice under Section 34(5): Mandatory or Directory?
In State of Bihar & Ors. v. Bihar Rajya Bhumi Vikas Bank Samiti, the Supreme Court was required to determine if the notice requirement under Section 34(5) of the Arbitration Act is mandatory or directory in nature.
Introduced by the 2015 Amendments, Section 34(5) requires that a Section 34 application can be filed by a party only after issuing a prior notice to the counterparty. Additionally, Section 34(5) provides that Section 34 application must be accompanied by an affidavit by the applicant endorsing compliance with the said requirement.
While the language of Section 34(5) may appear mandatory, the Court noted that the Arbitration Act does not provide for any penal consequences for non-compliance of Section 34(5). The Court also remarked that if there is general inconvenience or injustice without promoting the real aim and object of an enactment, then the provision in question must be declared to be directory.
Lastly, it was also observed that Section 34(1) only requires a Section 34 application to be made in accordance with subsections (2) and (3); but does not include compliance with subsection (5) as a condition precedent. Accordingly, the Supreme Court held that the provisions of Section 34(5) are directory in nature.
That said, it was clarified that every Court must nevertheless endeavor to dispose of a Section 34 Application within the time limit of one year from the date of service of notice of the application on the opposite party.
J. Scope of evidentiary proceedings in a Section 34 Application
In Emkay Global Financial Service Limited v. Girdhar Sondhi, the Supreme Court reaffirmed that a challenge to an arbitral award under Section 34 is to be treated by Courts as a summary procedure. Even though Section 34(2)(a) expressly requires the challenging party to furnish ‘proof’ that a ground under Section 34 is made out, the Apex Court clarified that adjudication of a Section 34 application will not ordinarily require anything outside the record before the arbitral tribunal. If there are relevant particulars which are not contained in the record, they can be brought to the notice of the Court by way of affidavits filed by both parties. Lastly, the Court observed that cross-examination of persons swearing the aforesaid affidavits should not be allowed unless absolutely necessary.
Pertinently, as also discussed in Emkay Global, the Arbitration and Conciliation (Amendment) Bill, 2018 seeks to fix this problem once and for all by substituting the words ‘furnishes proof that’ in Section 34(2)(a) with the words ‘establishes on the basis of the record of the arbitral tribunal’.
K. Raising jurisdictional issues in a Section 34 Application
In M/s Lion Engineering Consultants v State of Madhya Pradesh & Ors (Lion Engineering), the award-debtor sought to argue for the first time in a Section 34 application that the applicability of the Arbitration Act was excluded by operation of the Madhya Pradesh Madhyastam Adhikaran Adhiniyam, 1983 (MP Act). A full bench of the Supreme Court decided that there is no bar on raising a jurisdictional objection under Section 34 of the Application even if no such objection was raised before the arbitral tribunal under Section 16.
In doing so, the Supreme Court expressly overruled its findings in MSP Infrastructure Ltd. v. Madhya Pradesh Road Development Corporation Ltd.[4] (2015) insofar they were contrary to their observations in Lion Engineering. It was also clarified that the expression public policy of India encompasses both state laws and central laws alike. Finally, the matter in Lion Engineering was remanded to the trial court to actually decide in the Section 34 proceedings as to whether the Arbitration Act could be excluded by the MP Act.
L. Permissibility of penal interest in arbitral awards
In Vedanta Ltd. v. Shenzen Shandong Nuclear Power Construction Co. Ltd. , the Petitioner had challenged the interest component of an award arising out of an India-seated international commercial arbitration (Award). Among other things, the Respondent was awarded a 9% uniform interest on the decretal amounts, calculated from the date of institution of the arbitration until the date of realization. The Award further provided that the interest rate would be scaled up to 15% if the Petitioner failed to satisfy the award within a period of 120 days from the date of the Award.
The Apex Court agreed with the Petitioner’s contention that the dual interest rate was exorbitant, unjustified, unwarranted and penal. The Court also held arbitrary the Tribunal’s decision to apply the same interest rate to INR and EUR amounts. Consequently, the Court deleted the 15% interest rate, retained the 9% interest rate for the INR amount, and reduced the interest rate on the EUR component from 9% to LIBOR+3% on the date of the Award till the date of realization.
M. Forum for enforcement/execution of arbitral awards
Several High Courts shared a divergent view on whether an arbitral award should be first filed for execution/enforcement with the court having jurisdiction or directly executed through the court having jurisdiction over the award-debtor’s assets. The Madhya Pradesh High Court, for instance, opined[5] that an award-holder should first file the award with a court having jurisdiction as per Section 42 of the Act; and then formally seek transfer of the award, in the same manner as a decree, to a Court which has territorial jurisdiction over the relevant assets.
In Sundaram Finance Ltd. v. Abdul Samad & Anr, the Supreme Court concurred with the Madras High Court’s view[6] that the Arbitration Act transcends all territorial barriers and concluded that an arbitral award can be filed anywhere in the country where such decree can be executed. It was confirmed that there is no requirement for obtaining a transfer of the decree from the Court, which would have jurisdiction over the arbitral proceedings since the jurisdictional limitations in Section 42 were meant to operate against ‘arbitral proceedings’ – which terminate with the passing of the final award in accordance with Section 32 of the Act.
N. Enforcement by and against Third Parties
In a landmark decision, the Supreme Court observed in Cheran Properties Limited v. Kasturi and Sons Ltd. that arbitral awards are binding on and enforceable even against persons who are neither party to the arbitration agreement nor the arbitration, when such non-party is a person claiming under a party to the arbitration.
Section 35 of the Arbitration Act categorically provides that an award is binding on parties and ‘persons claiming under them’. While interpreting the purport and reach of an arbitration agreement, the Court remarked that “’the effort is to find the essence of the business arrangement and to unravel from a layered structure of commercial arrangements, an intent to bind someone who is not formally a signatory but has assumed the obligation to be bound by the actions of a signatory”.
Since arbitral proceedings are deemed to be terminated after the award is made, the Supreme Court observed that the provisions of Section 42 of the Arbitration Act become irrelevant in post-award proceedings. Accordingly, in the facts of Cheran Propoerties, it was held that an award-holder is entitled to obtain execution of the award before the National Company Law Tribunal when such execution contemplates the transmission of shares under the Companies Act, 2013.
The Supreme Court’s decision in Cheran Properties v. Kasturi and Sons Ltd. is covered here on IAB.
O. Enforceability of foreign award: testing determinations on fraud, assessment of consequential damages, limitation, and findings against minors. (long summary ahead)
In 2008, Daiichi Sakyo Company Limited (Daiichi) acquired the entire shareholding in Ranbaxy Laboratories Limited (Ranbaxy) from (i) Malvinder Singh and other individuals, including minors, under a Share Purchase and Share Subscription Agreement (SPSSA) and (ii) Ranbaxy’s public shareholders through applicable means, for an aggregate amount of around INR 19,804 crores.
However, after the aforesaid amounts was transferred, Daiichi discovered in about 2009 that Malvinder Singh and his business associates had actively concealed a crucial Self-assessment Report (SAR). The SAR contained particulars of the major regulatory fraud perpetrated by Ranbaxy officials. Daiichi was required to pay around USD 500 million in order to settle all claims with US authorities.
In about 2012, Daichii commenced arbitration against the Respondents under the SPSSA. The arbitration was seated in Singapore, whereby its International Arbitration Act was made applicable as the procedural law for the arbitration. The SPSSA itself was governed by Indian law. Meanwhile in 2015, Daiichi sold its stake in Ranbaxy to Sun Pharma for an aggregate amount of INR 22,679 crores.
The majority in the three-member decided in Daiichi’s favour and awarded (i) damages of INR 2,562 crore, (i) pre-award at 4.44% and post-award interest at 5.33% until realization; and (iii) legal costs of USD 14,549,684 (Award).
In Daiichi Sankyo Company Limited v. Malvinder Singh & Ors., Daiichi filed an application under Section 47 of the Arbitration Act before the Delhi High Court, seeking enforcement of the Award in India. The Respondent resisted enforcement under Section 48 of the Act on grounds that the tribunal had exceeded its jurisdiction inter alia by (i) awarding consequential damages when the parties had contractually agreed otherwise, (ii) disregarding the bar of limitation on the Petitioner’s claim; (iii) awarding interest which in effect amounts to multiple damages; (iv) affixing liability on certain Respondents who are minors.
The Court observed that it will not act as an appellate court. In the circumstances, the Petitioner would be refused enforcement only if the Award went against the fundamental policy of Indian law. The Court clarified that patent illegality is not a ground in this determination.
The Court held that the damages component in the Award could not be construed as ‘consequential damages’ under section 19 of the Indian Contract Act, 1872 and, in any case, was not wrong enough to shock the conscience of the Court. The Court upheld the Tribunal’s decision that damages recoverable by a party defrauded under Section 19 of the Contract Act would be similar to those recoverable for fraudulent misrepresentation under general tort principles. Even though Daiichi eventually sold the Ranbaxy shares at a higher price, the Court also sustained the Tribunal’s finding that Daiichi nevertheless also suffered loss in the form of (i) opportunity costs for six years for not transacting with a different company; (ii) loss of business opportunities and the (iii) onerous costs involved in settling with US authorities.
It was held that Section 19 of the Contract Act envisages taking into account various facts including costs and damages that a party may suffer had there not been any misrepresentation. Accordingly, the Court also observed that the use of any particular formula for quantifying damages falls within the realm of the arbitrator. The Court upheld the quantification by way of discounting the amount received by Daiichi from Sun Pharma by a WACC of 4.4% to obtain the value of the shares in November 2008 in order to put Daiichi back in the same position as if the Respondents’ misrepresentations were true.
Even though the SPSSA clearly prevented the Tribunal from awarding ‘punitive, exemplary, multiple or consequential damages’, the Court used the doctrine of ‘noscitur a sociis’ to find that the term ‘consequential damages’ must be read in juxtaposition with the remaining phrases. It was held that the parties could not have intended to exclude damages which are needed to put the wronged party back in its original state. Separately, the Court also rejected the Respondents objections on limitation and grant of interest.
However, the Court held that it was against the fundamental policy of Indian law to enforce any liability of damages against a minor. To that extent, the Award was refused enforcement against the minor Respondents. The Award was held enforceable against all other respondents.
X. INTERPLAY WITH OTHER STATUTORY REGIMES
P. Commercial Courts, Commercial Division and Commercial Appellate Division of High Courts Act, 2015 (Commercial Courts Act)
In Kandla Export V OCI & Anr. (2018), an award passed in London was sought to be enforced in India through the Gujarat High Court. When allowed, the award-debtor sought to appeal this decision before the Commercial Appellate Division of the Gujarat HC under Section 13(1) of the Commercial Courts Act.
However, the Supreme Court disallowed such an appeal and held that the provisions of Section 13(1) cannot be construed in a manner as to defeat the construct and objectives of the Arbitration Act, which would prevail as lex specialis. The Court also laid emphasis on the fact that “enforcement of foreign awards should take place as soon as possible if India is to remain as an equal partner, commercially speaking, in the international community”.
In K. Kishan Vs. Vijay Nirman Company Pvt. Ltd, the Respondent had issued a demand notice under Section 8 of the Insolvency and Bankruptcy Code, 2016 (IBC/the Code) calling for payment under certain invoices which were subject matter of an arbitral award passed in the Respondent’s favour (the Award). However, the Petitioner disputed the aforesaid invoice and filed an application under Section 34 of the Arbitration challenging the Award after receiving the Section 8 Notice.
Relying on Mobilox Innovations Private Limited v Kirusa Software Private Limited, the Court also noted that an application under Section 9 of the Code must be dismissed even if prima-facie there exists a pre-existing dispute in relation to the amount payable. In particular, the Court remarked that the Code cannot be used in terrorem by operational creditors to extract a relatively small amount of money from a corporate debtor who is otherwise solvent.
Accordingly, the Court held that even the filing of a petition under Section 34 of the Arbitration Act shows the existence of a pre-existing dispute which culminates at the first stage of the arbitral proceedings and continues at least until the completion of the final adjudicatory process under Sections 34 and 37 of the Arbitration Act.
The Supreme Court did make an exception, inasmuch as a Section 9 application can be admitted when the limitation period for filing a Section 34 petition has elapsed. The Court also clarified that Section 238 of the Code will not operate in this case since there is no inconsistency between the Arbitration Act and the Code. Therefore, while an arbitral award is certainly a record of debt, an application under Section 9 must nevertheless be rejected if the debt/award is disputed.
In 2017, the National Consumer Dispute Redressal Commission (NCDRC) held in Aftab Singh v. Emar MGF that remedies available under the Consumer Protection Act, 1986 (COPRA) cannot be ousted on account of the existence of an arbitration agreement between the disputing parties. In particular, the NCDRC observed that when disputes are governed by a legislation enacted to sub-serve a specific public purpose, such disputes cannot be settled by arbitration. Accordingly, the NCDRC refused a request under Section 8 of the Arbitration Act for the parties to be referred to arbitration. Appeals against the NCDRC’s decision were dismissed by the Supreme Court.
In 2018, the Apex Court was required to finally settle the arbitrability of consumer disputes in a review petition by the Appellants. Unsurprisingly, the Supreme Court answered in the negative and upheld the decision and reasoning of the NCDRC. In fact, the Court had observed in previous decisions[7] that the existence of an arbitration agreement does not preclude a party from taking the benefit of COPRA. This is mainly because Section 3 amply clarifies that remedies under COPRA are available in addition to and not in derogation of other enactments.
In 2015, however, Section 8 of the Arbitration Act was amended to apply “notwithstanding any judgment, decree or order of the Supreme Court or any Court”. Nevertheless, the Court noted that Section 2(3) of the Arbitration Act makes Part I thereof inapplicable to all such laws by virtue of which certain disputes cannot be submitted to arbitration. It was held that the 2015 amendment to Section 8 was not intended to, and does not, obliterate the jurisprudence on matters that are not arbitrable in the first place as contemplated by Section 2(3) of the Arbitration Act. That said, the Court concluded by clarifying that if a person consciously elects arbitration over any other special remedy available to her, then there is no inhibition in the dispute being arbitrated.
[1] In HEPI v. UOI, the three-judge bench of the Supreme Court was required to examine the law developed in the following judgments:
[Foreign judgments] Naviera Amazonica Peruana S.A. v. Compania Internacional De Seguros Del Peru (1988) (1) Lloyd’s Law Reports 116; Hiscox v. Outhwaite (1992) 1 AC 56; Union of India v. McDonnell Douglas Corpn. (1993) 2 Lloyd’s Law Reports; C v. D (2007) EWCA Civ 1282 (CA), C v. D (2008) 1 Lloyd’s Law Reports 239; Braes of Doune Wind Farm (Scotland) Limited v. Alfred McAlpine Business Services Limited (2008) EWHC 426 (TCC), Shashoua and Ors. v. Sharma (2009) EWHC 957 (Comm.); Sulamerica Cia Nacional De Seguros S.A. and Ors. v. Enesa Engenharia SA & Ors. (2012) EWCA Civ 638; (1) Enercon GMBH (2) Wobben Properties GMBH v. Enercon (India) Ltd. (2012) EWHC 3711 (Comm.); and Govt. Of India v. Petrocon India Ltd. (2016) SCC Online MYFC 35.
[Indian judgments] Sumitomo Heavy Industries Ltd. v. ONGC Ltd. and Others (1998) 1 SCC 305; Bhatia
International v. Bulk Trading S.A. and Another (2002) 4 SCC 105, Venture Global Engineering v. Satyam Computer Services Ltd. & another (2008) 4 SCC 190; Videocon Industries Limited v. Union of India and another (2011) 6 SCC 161; Dozco India Private Ltd. v. Doosan Infracore Co. Limited (2011) 6 SCC 179; Bharat Aluminium Company v. Kaiser Aluminium Technical Services INC (2012) 9 SCC 552; Enercon (India) Ltd. & Others v. Enercon GMBH & Another (2014) 5 SCC 1; Reliance Industries Limited and another v. Union of India (2014) 7 SCC 603; Harmony Innovation Shipping Ltd. v. Gupta Coal India Limited and another (2015) 9 SCC 172; Union of India v. Reliance Industries Limited and Others (2015) 10 SCC 213; Eitzen Bulk A/s & others v. Ashapura Minechem Limited and another (2016) 11 SCC 508; Imax Corporation v. E-City Entertainment (India) Pvt. Ltd. (2017) 5 SCC 331; and Roger Shashoua and others v. Mukesh Sharma and others (2017) 14 SCC 722
[2] 2018 SCC OnLine Del 8842
[3] 2017 SCC OnLine Del 9930
[4] (2015) 13 SCC 713.
[5] Computer Sciences Corporation India Pvt. Ltd. v. Harishchandra Lodwal & Anr
[6] Kotak Mahindra Bank Ltd. v. Sivakama Sundari & Ors (2011) 4 LW 745
[7] Fair Air Engineering Pvt. Ltd. and Anr. v. N. K. Modi (1996) 6 SCC 385; Sypak Couriers Ltd. v. Tata Chemicals (2000) 5 SCC 294; National Seeds Corporation Limited v. M. Madhusudhan Reddy and Anr. (2012) 2 SCC 506
Koinos 