Presenting the 4th edition of Arbitration Roundup – a series of monthly updates on India’s arbitration landscape.

• Impleadment of a non-signatory does not come under the scope of an interim measure under Section 17 (Hindustan Prefab Ltd v. NCC Ltd , decided on 03.06.2021)

Background

The Appellant had filed an appeal under Section 37 of the Arbitration and Conciliation Act, 1996 to implead a non-signatory (hereinafter NLUO) in the arbitral proceedings between the Appellant and the Respondent.

The Appellant contended that since disputes between the parties arose in relation to a contract for construction of the proposed building of NLUO, NLUO would be a proper and necessary party to the arbitral proceedings.

Decision of the Court

The Delhi High Court opined that impleadment of a party is not an “interim measure” under Sec. 17 of the Act. Consequently, an order of the Arbitral Tribunal refusing to join any other party in the arbitral proceedings is outside the ambit of an appeal according to Section 37.

• Pre-arbitration negotiation is not compulsory when parties have no intention of reaching an amicable settlement (IMZ Corporate Pvt Ltd. v. MSD Telematics Pvt Ltd., decided on 04.06.2021)

Background

Dispute arose between the parties for which IMZ invoked arbitration at the Delhi International Arbitration Centre. When MSD did not respond to the Notice of arbitration, IMZ approached the Delhi HC for appointment of an Arbitrator. MSD contended that the arbitration agreement provided mandatory pre-arbitration negotiation before commencement of arbitration. Since this requirement was not complied with, an application under Section 11 is not maintainable. They further submitted that the agreement being an unstamped document was not a contract enforceable by law.

Decision of the Court

The Court observed that MSD had on the one hand initiated criminal proceedings against IMZ, while on the other, had agreed to resolve the disputes through negotiation. Where lack of intention to find an amicable solution is demonstrated, the Court opined that attempting mandatory negotiation would be an “empty formality”. Hence, parties should not be denied dispute resolution machinery that they have already agreed upon, by insisting on negotiation as a pre-condition to arbitration.

As for whether non-payment of stamp duty on a commercial contract would invalidate the arbitration agreement, the Court relied on N.N. Global Mercantile (P) Ltd. v. Indo Unique Flame Ltd. (this case has been analysed on the blog here) and reaffirmed that the plea of agreement being unstamped wouldn’t prevent the Court in appointing an arbitrator.

• Perversity is a ground under the ambit of patent illegality for setting aside arbitral awards under Section 34 of the Arbitration and Conciliation Act, demonstrates Bombay HC (Board of Control for Cricket in India v. Deccan Chronicle Holdings Ltd, decided on 16.06.2021)

Background

Disputes arose between the Parties following which, the Petitioner terminated the contract. On a petition filed by the Respondent, the Bombay High Court appointed a sole arbitrator to resolve the dispute. In July, the Arbitrator issued an award in favor of the Respondent ruling that the Petitioner had illegally terminated its contract with the Respondent and ordering the Petitioner to pay compensation, plus interest and legal fees. The Petitioner hence filed an application under Section 34 of the Arbitration and Conciliation Act, 1996.

The Petitioner contended that the Award considers completely irrelevant material and information that is not available on record. They further noted that the Arbitrator directed alteration of the contract provisions, which is not acceptable in light of Section 28(2) of the Act, which prevents the Arbitrator from going contrary to the contract clauses unless the parties expressly authorize it to do so.

Hence, it was stated that the Award’s findings and conclusions constitute “perversity”, a component of “patent illegality” and is liable to be set aside.

Decision of the Court

The High Court agreed with the submissions of the Petitioner. It delved into the ambit of Section 34, as settled by the Supreme Court in Ssangyong Engineering & Construction Co Ltd v National Highway Authority of India and observed that for a challenge under Section 34, either the award must be impossible in its making (by ignoring vital evidence, or being based on no evidence, etc.) or in its result (returning a finding that is not even possible). In the present case, instances of both were present.

When it came to the question of termination of the contract, although the Arbitrator had found that the termination was premature, the Arbitrator had not taken into consideration vital evidence which vitiated the findings.

Further, the Court observed that the tribunal is obligated under Section 28(3) of the Act to examine the terms of the contract before deciding the Award. Unless the contract allowed for it, the Arbitrator cannot conclude the dispute based upon his own notions of equity or fairness.

Accordingly, the Award was set aside except for the limited extent of the Award in favour of the Respondent for Rs 36 crores and interest.

• Delhi HC upholds the principle of restrictive immunity in proceedings enforcing arbitral awards against foreign states (KLA Const Technologies v. Embassy of Islamic Republic of Afghanistan, decided on 18.06.2021)

Background

The Embassy of Islamic Republic of Afghanistan (hereinafter Respondent 1) awarded KLA Const Technologies Pvt. Ltd. (hereinafter Petitioner 1) with the contract for rehabilitation of the Embassy of Afghanistan at New Delhi. Since disputes arose between the parties during the execution of work, Petitioner 1 invoked the arbitration clause and filed an application under Section 11 before the Supreme Court. Respondent 1 stopped appearing before the Sole Arbitrator. When the Sole Arbitrator passed an ex-parte award in favor of Petitioner 1, Respondent 1 did not challenge the award.

Matrix Global Pvt. Ltd. (hereinafter Petitioner 2) initiated arbitration proceedings against the Ministry of Education, Federal Democratic Republic of Ethiopia (hereinafter Respondent 2). An ex parte award was passed against Respondent 2 after they refrained from participating in the arbitration proceedings. Even in this case, the award was not challenged.

The questions the Court had to address were twofold:

1. Whether prior consent of the Central Government was necessary under Section 86 of the CPC to enforce an arbitral award against a Foreign State?
2. Whether a Foreign State could claim Sovereign immunity against enforcement of arbitral award arising out of a commercial transaction?

Decision of the Court

The Delhi High Court firstly directed the Union of India to clarify whether the prior consent of the Central Government under Section 86(3) of the CPC is necessary for enforcement of the arbitral award. The Central Government confirmed that Section 86(3) only applied to suits and hence, prior consent was not required for enforcement of an arbitral award. The HC further relied on multiple case laws where the same had been established and deduced that the Central Government’s approval is not required in the present instance.

As for the second issue, the Court found that when a foreign state opts to function as a commercial entity, it is subject to the same rules of the “commercial legal ecosystem” and is not allowed to claim immunity that it would otherwise have recourse to when acting in its sovereign role. Moreover, an arbitration agreement in a commercial contract between a party and a foreign state would be an implied waiver by the foreign state. Since arbitration is a consensual and binding mechanism for resolving disputes, a foreign state cannot claim that its consent must be sought again at the stage of enforcing an arbitral award against it. As Section 86 of the CPC has limited applicability, it would not cover cases of implied waiver

Therefore, the Court ruled that both the petitions for enforcement of arbitral awards are maintainable.

• A sole arbitrator’s appointment can be disputed if they were consultant/advisor to one of the parties to dispute, Delhi HC reaffirms (Monica Khanna v. Mohit Khanna, decided on 18.06.2021).

Background

The Petitioner in the present case sought appointment of an arbitrator under Section 11 of the Arbitration and Conciliation Act. The Parties had agreed to refer the dispute to a sole arbitrator, vide the arbitration agreement.

The Petitioners however contended that the sole arbitrator was not competent to act as an arbitrator as they were a consultant/advisor to the Respondent and a director and shareholder in the company where Respondent 1 was also a director.

On the other hand, the Respondents submitted that the petitioner had agreed to the named arbitrator cannot wriggle out of the arbitration agreement.

Decision of the Court

The High Court held that there was a serious doubt created as to the independence of the appointed sole arbitrator. It was moreover violative of in Section 12 of the Act. Hence in the interest of justice, the Court directed that an independent arbitrator be appointed to adjudicate the disputes between the parties.

• Delhi HC elucidates scope of judicial review of an arbitral award w.r.t CPC, evidence etc. (Pragya Electronics Pvt. Ltd. v. Cosmo Ferrites Ltd., decided on 23.06.2021)

Background

In the present dispute, the Arbitrator, after considering the evidence and material on record, concluded that a sum of ₹54,14,934/- was recoverable by the Respondent from the Petitioner against its outstanding dues. The Petitioner challenged the Award under Section 34 stating that the Award didn’t bear the signature of the Arbitrator on each and every page, and was even typed in three different fonts on three different types of sheets. In this regard, it was in total violation of Chapter XI of the CPC and it ought to be set aside.

Decision of the Court

The Delhi High Court dismissed the challenge to the Award, observing that it can only allow appeals under Section 34 of the Arbitration and Conciliation Act, 1996 in terms of grounds stipulated therein. In its absence, it is not possible to re-examine the facts and “find out whether a different decision can be arrived at”.

With regard to the award being typed in different fonts, the Court held that it is not sufficient to make the award invalid and the same was not supported by any rule of law.

The Court further found that even assuming there are any minor clerical errors, it does not affect the merits of the case. The appropriate course of action in this situation would have been to request the Ld. Arbitrator for correction under Section 33 of the Act.

• Supreme Court clarifies on applicability of the Limitation Act, 1963 to arbitration proceedings under Section 18(3) of Micro, Small and Medium Enterprises Development Act, 2006 (Silpi Industries v. Kerala State Road Transport Corporation, decided on 29.06.2021)

The Court observed that if any party has a dispute with regard to amount due under Section 17, a reference is required to be made to the Micro and Small Enterprises Facilitation Council. On such reference, the Council is empowered to conduct conciliation in the matter or seek assistance of any institution or centre providing alternate dispute resolution services as provided under Section 18.

If the conciliation is not successful, the Council has to either take up the dispute for arbitration by itself or refer it to any institution or centre providing alternate dispute resolution services for such arbitration and the provisions of Arbitration and Conciliation Act, 1996 will apply as if there was a valid arbitration agreement between the parties under Section 7 of the said Act.

Since a reading of Section 43 of the Arbitration Act itself makes it clear that the Limitation Act, 1963 shall apply to arbitrations, the Supreme Court held that the Limitation Act is also applicable on arbitrations under the MSMED Act.

• Arbitral award cannot be enforced till the extension of limitation granted by the Supreme Court Order in light of the COVID-19 pandemic, has expired (SREI Equipment Finance Limited v. MARG Limited, decided on 30.06.2021)

Background

The Petitioners in the present case filed for an execution petition under Section 36 of the Arbitration and Conciliation Act, 1996 seeking enforcement of an arbitral award that was passed on 31/08/2020. The Award directed the award-debtor to pay a sum of INR 26 crores to the award-holder. The award was received on 07/09/2020. Consequently, the period of limitation for filing a Section 34 application expired on 07/12/2020.

The Applicant contended that due to the Supreme Court’s order suspending limitation in view of the COVID-19 pandemic, the period for filing an application under Section 34 has not expired.

Decision of the Court

The Calcutta High Court extended the benefit of the Hon’ble Supreme Court’s order granting extension of limitation. The Court reasoned that since the SC order was passed to give relaxation to litigants, the award in the present instance cannot be enforced until the period of limitation has expired.