Arbitration Roundup: 1 to 15 March 2021

Presenting Arbitration Roundup – a series of fortnightly updates on India’s arbitration landscape. The 1st edition contains a list of key developments which took shape between 1-15 March 2021.

  • Proceedings under Section 34 of the Arbitration Act are also covered under Section 14 of the Insolvency and Bankruptcy Code

The Supreme Court in the case of P Mohanraj and others vs M/s Shah Brothers Ispat Lt, on 1 March 2021, disagreed with an earlier judgment of the Delhi High court (see Power Grid Corporation of India Ltd. vs Jyoti Structures Ltd. (2018) 246 DLT 485) wherein it was held that a Section 34 application to set aside an award would not be covered by Section 14 of the IBC.

Stating that a Section 34 proceeding is “certainly a proceeding against the corporate debtor which may result in an arbitral award against the corporate debtor being upheld”, the Apex Court observed that a Section 34 proceeding would be covered in the same manner as an appellate proceeding in a decree from a suit.

  • Limitation period for filing petition under Section 34 to be counted from the date of receipt of signed copy of the arbitral award

In the case of Dakshin Haryana Bijli Vitran Nigam Ltd. vs Navigant Technologies Pvt. Ltd, the Supreme Court held that the period of limitation for filing a petition under Section 34 of the Arbitration and Conciliation Act, 1996 would commence from the date on which the signed copy of the arbitral award was received and not the date on which the draft award was circulated to the parties.

Section 34 of the Act, which deals with applications for setting aside an arbitral award, lays down a limitation period of 3 months for filing objections. Consequently, in a judgment dated 2 March 2021, the Court expounded that an arbitral award is only made final and legally valid when authenticated by the signatures of the arbitrator(s). The Court clarified further that where an arbitral tribunal comprises of three arbitrators and one member gives a dissenting opinion, it must be delivered on the same date as the final award, and not later, as the tribunal becomes functus officio upon the passing of the final award.

  • IPR disputes that arise out of a breach of contract are arbitrable

In a judgment dated 2 March 2021 the Delhi High Court in Hero Electric Vehicles (P) Ltd. vs Lectro E-Mobility (P) Ltd once again clarified the position with regards to arbitrability of IPR disputes.

The parties to the present dispute had entered into an agreement granting exclusive rights to the plaintiff to use the trademark ‘Hero’ and ‘Hero Electric’ on all-electric vehicles, including electric bikes. However, when the defendant had allegedly utilized the same trademark for manufacturing and selling electric bikes, the plaintiff moved the High Court under Section 8 of the Arbitration and Conciliation Act, 1996, seeking permanent injunction. The defendants contended, inter alia, that although the agreement contained an arbitration clause, IPR being rights in rem cannot be the subject matter of arbitration.

While deciding on the scope of Court’s jurisdiction under S. 8, the Bench relied heavily upon the Supreme Court decision of Vidya Drolia vs Durga Trading Corporation and held that since the dispute is of a violation of the agreement and not the provisions of the Trademarks Act, it is a contractual dispute. The right that the plaintiff seeks to exercise emanates from the contract and is not against the world but only against the defendant. It therefore cannot be asserted as a right in rem. Accordingly, the petition was referred to arbitration.

  • If the proprietorship that is party to an arbitration is a foreign resident, the dispute will be classified as an International Commercial Arbitration according to Section 2(1)(f)

The Respondent had entered into a distributorship agreement with Amway and when certain issues arose, sought arbitration as per the agreement. Upon approaching the Delhi High Court for appointment of an arbitrator according to Section 11(6) of the Arbitration and Conciliation Act, 1996, Amway opposed the petition on the grounds that the matter was an international commercial arbitration as the respondents were residents of the U.S.A.

International Commercial Arbitration is defined in Section 2(1)(f) of the Act under 3 grounds. The High Court held that since the central management and control of the Respondent’s proprietorship is exercised only in India as per sub-clause (iii), the dispute does not fall under international commercial arbitration. However, the Supreme Court on 4 March 2021 clarified in Amway India vs Ravindranath Rao and another, that when the issue is covered under Section2(1)(f)(i), there is no requirement to look into the other sub-clauses.

Accordingly, the High Court was found to have no jurisdiction to appoint an arbitrator and its order was set aside.

  • India to appeal arbitration ruling in tax dispute with Cairn

In December 2020, an arbitral tribunal ruled that India had breached its obligations to Cairn under the U.K – India Bilateral Investment Treaty, awarding Cairn Energy PLC, a U.K. firm, damages of roughly $1.3 billion (plus interest and costs).

The issue was over a claim made by India for past taxes. This tax, demanded retrospectively, was found to be invalid and devoid of fair and equitable treatment. However, the Finance Minister on 5 March 2021 announced that India will be appealing the award rendered.

  • Supreme Court highlights need for amending Sections 11(7) and 37 of the Arbitration Act

While hearing a matter on 8 March 2021, the Supreme Court noted the vacuum in the law with respect to Sections 11 and 37 of the Arbitration and Conciliation Act, 1996. Currently, Section 37 allows for appeals against an order refusing to refer the parties to arbitration under Section 8 (vide the 2015 amendment). However, no amendment was made to Section 37 to allow appeals against an order refusing to appoint an arbitrator under Section 11 of the Act.

Hence, in Pravin Electricals Pvt. Ltd. vs Galaxy Infra and Engineering Pvt. Ltd, the Supreme Court, referencing the “prime facie test” laid down in Vidya Drolia vs Durga Trading Corporation, highlighted the need to correct this anomaly and bring orders under Sections 8 and 11 on par.

  • Delhi High Court reiterates stance on arbitrability of fraud and clarifies whether third-parties can be party to arbitration

In Laxmi Civil Engineering Services Ltd. & Ors. vs GAIL (India) Ltd., a breach of contract terms led to the subsequent invoking of the arbitration clause by the Petitioners, asking GAIL to fulfil its contractual obligations. In response, GAIL claimed that there existed no privity of contract between them and the sub-contractors who were Petitioner Nos. 2 to 4 in the present dispute. Additionally, GAIL alleged that Petitioner No. 1 had fraudulently assigned the contract and since the dispute involves an allegation of fraud, it was not arbitrable.

Deciding on whether the sub-contractors were also parties to the arbitration agreement, the Delhi High Court on 8 March 2021 held that non-signatories to the arbitration agreement cannot be party to the arbitration unless they satisfy the exceptions as laid down by the Supreme Court in Chloro Controls India (P) Ltd. vs Severn Trent Water Purification Inc.

As to the question of arbitrability of fraud the Court reiterated the position that the allegation of fraud must go “to the root of the matter”. Merely the fact that one party had assigned the contract without permission and had concealed the same, does not render it inarbitrable. Accordingly, the matter was found to be arbitrable and the tribunal appointed as per the parties’ request.

  • Arbitral tribunal holds that Zo Rooms is entitled to 7% shareholding in Oyo

Zostel Hospitality Pvt Ltd and Oravel Stays Pvt Ltd (Oyo) had entered into a merger agreement in 2015 according to which Oyo was to transfer 7% of its shareholding to Zo Rooms’ shareholders. To this effect, Zostel had completed all its obligations under the agreement and was claiming that Oyo had defaulted in fulfilling their end. Oyo on the other hand claimed the agreement to be non-binding due to certain objections it had raised at the start.

After seeking arbitration that lasted 3 years, the arbitral tribunal on 9 March 2021 found that the agreement was binding and directed Oyo to satisfy its dues accordingly.

  • Limitation period for filing an application under Section 11 is to be read with Article 137 of the Limitation Act

The Supreme Court in Bharat Sanchar Nigam Ltd. vs Nortel Networks India Pvt. Ltd. dated 10 March 2021 observed that there is a lacuna in the current arbitration law as there has been no reference to a period of limitation under Section 11 of the Arbitration and Conciliation Act, 1996, which deals with appointment of arbitrators. Hence, recourse is to be taken to Article 137 which provides a period of 3 years from the date when there is a failure in appointing the arbitrator.

However, the Court also remarked that the object of the Arbitration Act is to provide for expeditious dispute resolution, which is defeated by this long three-year period. Therefore, the need to amend Section 11 of the Act to prescribe a specific period of limitation was noted.

Further, it was clarified that only when there is not even a vestige of doubt that the claims are ex facie time barred, or that the dispute is non-arbitrable, may the Court refuse to make the reference under this section.

  • The Arbitration and Conciliation (Amendment) Act, 2021 comes into force

The Central Government on 12 March 2021 notified the Arbitration and Conciliation (Amendment) Act, 2021 which replaces the Ordinance issued in November 2020. This amendment comes amidst need to open up the scope for international commercial arbitration in India.

Key Points of the Act:

1. Qualification of Arbitrators: The qualification provided under the 8th schedule is omitted. Instead, regulations will now prescribe the qualification of arbitrators.

2. Unconditional Stay on Arbitral Awards: A stay on the arbitral award may be granted by the Court, if it is prima facie satisfied that the arbitration agreement or contract/ making of the award was induced by fraud or corruption.

However, certain reservations as to what constitutes fraud or corruption when Section 34(2)(b) already exists and whether allowing for a retrospective application of the automatic stay (as the Act envisions) will prove harmful in the long run, remains.

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