Category: Arbitration

By Anurag Mohan Bhatnagar and Amiya Krishna Upadhyay, third-year students at NLUO, Orissa.

Introduction

In the case of NN Global Mercantile Pvt. Ltd. v. Indo Unique Flame Ltd. (‘NN Global’), a division bench of the Apex Court recently pronounced that an arbitration agreement would not be deemed ineffective just because stamp duty on a commercial transaction was not paid. It would be safe to see the pronouncement as a source of impetus towards creating an impartial process of arbitration in India. It pronounced that the view has become obsolete, and has to be done away with. With the onset of the particular judgment, Indian legislation has now come in similar lines with a lot of jurisdictions in the world of arbitration.

To comprehend the legal issue at hand, the article intends to evaluate (a) the coherence of the Stamp Act 1899 (‘the Act’) vis-à-vis the doctrine of separability; (b) application of the doctrine of separability; (c) cross-jurisdictional analysis with the legislations of the USA, the UK and Singapore; and lastly, (d) conclude with suggestions on the basis of the discussion on the aforementioned elements.

Factual Matrix of the Case

The case raises pertinent issues with regards to the future of arbitration proceedings in India, and the importance of getting the arbitration agreement stamped as per the relevant Act. Indo Unique was a company put in for a grant for work of washing of coal to the Karnataka Power Corporation Ltd. (‘KPCL’) in an open tender, which, later awarded the Work Order to Indo Unique. Later, Indo Unique furnished Bank Guarantees in favor of KPCL. Subsequently, Indo Unique entered into a sub-contract with Global Mercantile for the process of transportation. As per the contract, Global Mercantile also furnished a bank guarantee in favor of Indo Unique to secure the stocks. Later, KPCL invoked the bank guarantee furnished by Indo Unique owing to certain disputes between the two, due to which, Indo Unique also invoked the bank guarantee furnished by Global Mercantile under the sub-contract.  

Stamp Act- Coherent with Doctrine of Separability?

Anyone with legal authority is required by Section 33 of the Act, “to scrutinize the instrument in front of them and determine whether it is properly stamped; if it is not, the relevant authority may appropriate the instrument and command the parties to bill the adequate stamp duty with the added penalty of five or ten times the amount of the inadequate portion”. Under Section 35 of the Act, “an unstamped instrument cannot be used as evidence or acted upon”. Section 40 of the Act entails the procedure for instruments which have been impounded. It is necessary for the instrument to be endorsed within one month of the date of impounding as per Section 42(1) of the Act. Section 42(2) states that a document that has been lawfully stamped is admissible as evidence and can be acted upon. However, the Apex Court, in SMS Tea Estates Pvt. Ltd. v M/s Chandmari Tea Co. Pvt. Ltd. (‘SMS Tea’) failed to consider Section 3 read with Schedule I of the Act which states that only an arbitration award needs to be stamped and not an arbitration agreement. The court misinterpreted the basis behind the fiction of separability and erroneously linked the arbitration agreement to that of the fundamental substantive contract.

Finally, the court took a shift in its approach in N.N Global. The Apex Court concluded that there should be no legal hinderance in the enforcement of an arbitration agreement. This hinderance can be considered as the “outstanding payment of stamp duty” on the substantial contract. This is the reason for which the Court held that the arbitration agreement is not included as a stamp duty-chargeable instrument under the Maharashtra Stamp Act 1958.

Inconsistent and Indeterminate Approach Finally Settled?

The doctrine of separability was pronounced in the case of Heyman v Darwins Ltd. by the House of Lords. It held that, “an arbitration agreement is collateral to the substantial stipulations to the contract”. The application of the theory of separability of an arbitration agreement from the fundamental substantive contract into which it is incorporated presents severe issues. The Apex Court examined the rationale on an agreement of arbitration in an unstamped contract in SMS Tea.  Due to the lack of stamp duty payment, the arbitration agreement would remain void until the contract was seized and the tax and penalty were paid.

Following the 2015 Amendment, the Apex Court revisited the issue of stamp duty and arbitration agreements under Section 11 of the Arbitration and Conciliation Act (‘Arb. Act’) in Garware Wall Ropers Ltd v Coastal Marine Constructions (‘Garware Ropers’).  When a court determines that a contract is unstamped as a result of an application under Section 11 of the Arb. Act, the Stamp Act requires the court to impound the contract and ensure that stamp duty and penalty are paid until the agreement as a whole, can be acted on. The phrase “in a contract” of Section 7(2) of the Arb. Act was provided due weightage while analysing the fundamental meaning of an arbitration agreement in the Garware Ropers case. As a result, the arbitration clause in such a contract is incompatible with separation. This particular stand was upheld in Dharmaratnakara Rai v M/s Bhaskar Raju and was also affirmed in Vidya Drolia v Durga Trading Corporation, by a division bench.

However, the Apex Court in NN Global reverted from their previous stand and overruled the judgment in the previous cases. On the aspect of separability, it held that “an arbitration agreement is separate and different from the underlying commercial contract”. It is a contract that specifies the method for resolving disputes and can stand alone from the substantive contract. The Court further observed that non-payment under the Act was a corrigible fault; therefore, arbitration could not be postponed until stamp duty was paid. Thus, the court adopted a harmonious construction between the provisions of the Act and the enforcement of arbitration agreements. Hence, it held that, failure to pay a stamp duty on the commercial substantive contract would not make the arbitration agreement included therein null or unenforceable.

Cross-Jurisdictional Analysis

One of the abstract and practical cornerstones of domestic and international arbitration is the doctrine of separability. Article 16(1) of the United Nations Commission on International Trade Law (‘UNCITRAL Model Law’) recognizes the doctrine of separability and provides that “an arbitration clause which forms part of a contract shall be treated as an agreement independent of the other terms of the contract. A decision by the arbitral tribunal that the contract is null and void shall not entail ipso jure the invalidity of the arbitration clause”. Despite its limited scope, this regulation is followed by several jurisdictions. Most of the countries which have ratified the New York Convention, have accepted the idea of separability.

In English law, Section 7 of the Arbitration Act 1996 (‘AA 1996’) enshrines the idea of separability. The theory of separability, according to English courts, “is solely intended to give legal force to the parties’ choice to settle disputes through arbitration rather than to separate the arbitration agreement from the underlying contract for all purposes”. This approach by the courts could be called partial separability in layman terms. The Supreme Court of USA recognized the concept of separability in the case of Prima Paint Corp v Flood & Conklin Mfg. Co.case.

In the context of Singaporean arbitration, the Singapore High Court, in the case of BNA v BNB held that doctrine of separability is a “tool of arbitration law that treats an arbitration agreement as distinct from the substantive contract containing it”. In the case at hand, the High Court held that “the doctrine of separability could be used to save an arbitration agreement even where the purported defect was inherent to the arbitration agreement itself”. All in all, the judgment propounded in the NN Global case has now made the Indian arbitration regime consistent with UNCITRAL Model Law, New York Convention, and both the English as well as Singaporean jurisdictions, as far as the doctrine of separability is concerned.

Conclusion

The stand of various High Courts has been varied as far as the doctrine of separability is concerned. Needless to say, the Apex Court’s decision in NN Global will be welcomed by arbitration practitioners in India. As far as the foreign jurisdictions are concerned, the ruling will now be consistent with the New York Convention countries and the legislation in Singapore. The judgment in the case of NN Global has to be applied widely and practically. With the help of this ruling, the judiciary has resolved the dilemma that had been lingering owing to prior instances, and the court’s decision may be safely regarded as a stand that will benefit arbitration procedures in India.

BY ABHINAV GUPTA, FIFTH YEAR STUDENT AT NLU, JODHPUR

Introduction

The issue of arbitrability of fraud disputes has consistently been a predicament faced by the Indian Courts. The ever-developing jurisprudence on this issue did not seem to settle the debate and surely did not reflect the pro-arbitration ideology that Indian Courts seek to portray. The Courts in a quest to bring certainty and settle the position of law have ignored certain important questions that still need to be answered. In this article, the author seeks to highlight the recent developments in the jurisprudence regarding the arbitrability of fraud disputes and analyze the change in Indian Court’s stance over the years.

A brief overview of position till Ayyasamy

The issue regarding arbitrability of a dispute arises because the Arbitration and Conciliation Act, 1996 [‘the Act’] does not explicitly provide for disputes that are arbitrable or non-arbitrable. In such a scenario, while referring a case to arbitration under section 8 of the Act, a court has to see whether a valid arbitration agreement exists and if the subject matter of dispute is arbitrable.

The issue regarding arbitrability of fraud first arose in the case of Abdul Kadir v. Madhav Prabhakar Oak [‘Abdul Kadir’], where the court held that court will refuse to refer disputes to arbitration if there are serious allegations of fraud and the party charged with fraud desires that the matter be tried in court.

By placing reliance on this judgment Supreme Court of India[‘SCI’] in N. Radhakrishnan v. M/S. Mastero Engineers [‘N. Radhakrishnan’] held that matters of serious allegations of fraud cannot be properly dealt by an arbitrator and hence, in the interest of justice only a court of law can decide such complex matters. The position in N. Radhakrishnan has been discussed in detail in the post here.

Indian regime saw a paradigm shift in this position in the case of A. Ayyasamy v. A. Paramasivam [‘Ayyasamy’] where it was categorically laid down that simple allegations of fraud touching upon the internal affairs of the party inter se and having no implication in the public domain are arbitrable.

Development post-Ayyasamy

One of the first cases post Ayyasamy inculcating its reasoning was Ameet Lalchand Shah & Ors. v. Rishabh Enterprises & Ors., where the SCI declared that mere allegation of fraud by a party to obstruct arbitration would not render disputes inarbitrable. Court also observed that the arbitrator so appointed can examine the allegations related to fraud.

Even though there was consistency in court’s approach that mere allegation of fraud did not make a matter inarbitrable, there still was uncertainty as to what can be considered as “serious offence”. SCI to some extent tried tackling this uncertainty by explaining the judgment of Ayyasamy by delineating a twin test in Rashid Raza v. Sadaf Akhtar [‘Rashid Raza’].

1.  Does the plea permeate the entire contract and above all, the agreement of arbitration, rendering it void, or

2. Whether the allegations of fraud touch upon the internal affairs of the parties inter se having no implication in the public domain.

The most recent and significant development in this regard has been the case of Avitel Post Studioz Ltd. v. HSBC PI Holdings (Mauritius) Ltd. [‘Avitel’]. In this case, HSBC and Avitel entered into a Shareholders Agreement. Avitel informed HSBC that they are in the advanced stage of finalizing a contract with BBC and was expected to generate huge revenues. Subsequently, HSBC discovered that there was no such contract and it was fabricated by Avitel in order to induce HSBC to invest. Due to this, HSBC invoked arbitration proceedings before the Singapore International Arbitration Chamber as per the dispute resolution clause.

SCI while referring to Afcons Infrastructure v. Cherian Varkey and Booz Allen v. SBI Home Finance, observed that the statement “cases involving serious and specific allegation of fraud, fabrication of documents, forgery, impersonation, coercion etc.” have to be interpreted by applying the test laid down in Rashid Raza. It categorically laid down that same set of facts can lead to civil as well as criminal consequences and a matter will not cease to be arbitrable merely because criminal proceedings are pending in that matter. This is a significant deviation by the SCI from position in Ayyasamy which provided for a blanket bar on arbitrability by stating that if “serious allegations of fraud give rise to criminal office” then it is inarbitrable.

SCI referred the matter for arbitration and stated that, the fraud does not have a “public flavour” and is not such that it would render the contract and the arbitration agreement null and void.  While discussing the issue at hand SCI also clarified that N. Radhakrishnan does not have precedential value while affirming the observation in Swiss Timing v. Organising Committee, which held N. Radhakrishnan to be per incuriam as it failed to consider essential precedents.

Another judgment passed on the same day as Avitel was Deccan Paper Mills Co. Ltd. vs Regency Mahavir Properties [‘Deccan Paper Mills’], where the court relied on the observation in Avitel and held that if the matter has no “public overtone” and if a valid arbitration agreement exists, the court has to refer the dispute to arbitration.

Analysis of the developments

The observation in Ayyasamy and Rashid Raza that allegations of serious fraud are not fit to be decided in arbitration proceedings is problematic. The reasoning behind such observation by the court was that such a dispute requires collection and appreciation of evidence which can only be done by a civil court. This observation and reasoning is in complete disregard of section 27 of the Act. Section 27 of the Act allows the arbitral tribunal or a party to apply to the court for its assistance in taking of evidence and court can take evidence applying procedure as applicable in a proceeding before it. Moreover, even if party do not intend to take the assistance of courts, under section 19 of the Act, they are free to choose the rules of procedure. In such a scenario, parties can incorporate elaborate rules such as IBA Rules on Taking of Evidence for governing procedures related to evidence during arbitration proceedings.

It is noteworthy that the SCI did not resort to such a reasoning in Avitel. In fact, the Court tried explaining the two tests laid down by Rashid Raza. The issue regarding Ayyasamy and Rashid Raza was that even when these cases changed the position of law from what was observed in N. Radhakrishnan, the usage of phrase “serious allegations of fraud” continued since the 1960s’ (see Abdul Kadir).The court, in these cases, failed to explain and remove the ambiguity surrounding cases that  can be categorized as ‘mere allegations of fraud simplicitor’ and cases that can be considered as ‘complex cases of fraud’.

Avitel took a positive step towards explaining and narrowing the same. SCI referred to Rashid Raza to explain when the two tests can be considered satisfied. The first test is satisfied when the agreement or arbitration agreement could not have been entered into by the party if not for the fraud. The Court laid down the “public flavour” standard while explaining the second test. It observed that second test is satisfied when the allegations are made against the state or its instrumentalities and these allegations are questions arising in public domain rather than from a breach of contract.

This kind of observation will also clear the uncertainty regarding the kind of merit-based analysis a court can conduct while determining the arbitrability of a dispute. Under Section 8 of the Act the court only has to analyze if a prima facie valid arbitration agreement exists and not enter into a merit-based analysis. The Court laying down a narrow test in Avitel seen in conjunction with the fact that in the 2015 amendment, legislature inserted the phrase “prima facie” in section 8 to reduce the judicial intervention, signifies a true movement towards the pro-arbitration approach.

The aforementioned cases of Abdul Kadir, N. Radhakrishnan, and Ayyasamy show judiciary’s clear lack of confidence in capability of arbitral tribunals to handle complex matters with utmost care and caution. This may be due to the fact that India lacks an institutional arbitration setup. Where the objective of the 2015 amendment to the Act was to reduce judicial intervention, the 2019 amendment focused on the institutionalization of arbitration mechanism in India on recommendation of Justice Srikrishna Committee. Despite having some obvious concerns, this amendment is a positive step towards having qualified arbitrators and intuitional arbitration reinforcing the judiciary’s and international community’s trust in India as an arbitration hub.

Conclusion

Over the years, India has been criticized for being anti-arbitration and having unfettered judicial intervention in arbitration. In order to change this outlook, the 246^th Law Commission Report suggested major changes in the Act in order to reduce judicial intervention and adopt a pro-arbitration approach. Avitel acts as a progressive precedent that would strengthen India’s position internationally and help it in achieving the status of an arbitration friendly jurisdiction. A change initiated by Ayyasamy having certain faults was molded appropriately by SCI in Avitel by narrowing the scope for judicial scrutiny. It remains to be seen whether upcoming cases on arbitrability of fraud apply the broader test laid down in Ayyasamy or a narrow test propounded in Avitel.

BY SUNIL SINGH, FOURTH-YEAR STUDENT AND SOURAV VERMA THIRD-YEAR STUDENT AT HNLU, RAIPUR

Huawei is a Chinese phone-maker company. It is the world’s second largest smartphone supplier with 18% market share. It started its operation in the UK in 2001 and since then it had strong ties with the country. In 2012, The company surpassed Euro 2 billion five-year investment and procurement target for UK, thereby becoming one of Britain’s largest sources of investment from China. The Company invests in R&D partnerships with British universities and works with UK’s top academic institutions.

However, On 15^th July, the UK government banned Huawei from its 5G infrastructure, by reversing its January order where Huawei was excluded from participating in sensitive ‘core’ parts of 5G and gigabit-capable networks. According to the order passed in July, the telecom operators by the end of this year had to stop buying any 5G equipment from Huawei and also were directed to remove all the 5G gears installed in their telecom network by the end of 2027. This decision came forth as a result of a report submitted by the National Cyber Security Centre (‘NCSC’) which highlighted some “significant technical issues”. The core issue highlighted in the report was Huawei’s relation with the Chinese govt. This caused reasonable amount of apprehension that Huawei’s equipment could be used by the Chinese govt. for the purpose of conducting espionage.

However, the decision has some repercussions and can backfire against the UK in the form of investment claims resulting from the 1986 UK-China Bilateral Investment Treaty (‘BIT’). The authors through this article attempt to evaluate – whether the level of security contemplated by the BIT between the UK and China is impaired by the govt.’s decision to ban Huawei from participating from its 5g infrastructure. Further, the article analyses the safeguards that the UK could use under the BIT and customary international law in the context of investment arbitrations resulting from such infringements.

Protection against Expropriation

Expropriation is the act of a govt. claiming private property forcibly from the owners, ostensibly to be used for the benefit of the general public. In the context of international investment, an act/measure of state is said to be expropriatory  in nature if such an act deprives the foreign Investor from the economical or other benefits arising from his investment. Foreign investors are often protected by an expropriation clause provided in the BIT.

The expropriation clause, as provided in Article 5 of the UK-China BIT, stipulates the host state’s pledge not to forcefully deny the investor of the contracting party of its investment or to implement any action which might adversely affect the valuation of the invested property of the contracting party.

Regardless of the consequences of the individual expropriation cases, in expropriation disputes, tribunals usually look at the overall severity of the conduct of the host state to decide whether or not, the substantial protection under the expropriation clause can be conferred upon the investors. If the tribunal is of the view that an expropriation has taken place, such an action will be in the breach of relevant agreement or treaty unless the owner is not compensated. However, the liability of compensation stands precluded for acts concomitant with public interest, provided that the acts performed are not discriminatory in nature and the investors are duly reimbursed by the host state.

Usually, the state takes the defence of ‘The police powers doctrine’, which basically acts as a frontier safeguard in situations of expropriation. Police powers doctrine signifies powers that reside in the governments., allowing them to take bona fide, non-discriminatory action in general to preserve public welfare. Such rights grant the state the right to control the interests of the public in its jurisdiction, even though the investment is significantly impacted. The UK hence, can defend its act by contending that the measure was introduced as a part of the police forces of the state.

Even though the BIT does not include any specific clause in this respect, as a principle of customary international law, its acceptability is not subject to a specific provision to that effect. Additionally, several ISDS tribunals have also ruled that when operating in execution of their police powers, states do not breach any BIT obligations.

Another defence originating from customary international law is that of ‘necessity’ resulting from Article 25 of the Draft Articles on Responsibility of States for Internationally Wrongful Acts (‘ARSIWA’). Although the presence of urgency as a basis for the avoidance of wrongdoing under international law is no longer questioned, grounds of invocation of Article 25 of ARSIWA have a high threshold to avoid abuse[i]. Various sources of international law (present state policy, rulings of the international forum, and academic writings[ii]) amply support the need to take stringent approach in interpretation of ‘necessity’ as a defence. For instance, in the Rainbow Warrior arbitration[iii], the arbitral tribunal expressed doubt as to the existence of the defence of necessity. It observed that the Commission’s draft article “allegedly authorises a state to take unlawful action invoking the defence of necessity” and identified the commission’s proposal to be “controversial”. The plausibility of this defence may therefore rely on a case-by-case basis, paying attention to the responsibilities from the measures, as well as the circumstances surrounding them such as the scope of the obligation, the degree of the effect, the expediency of the contested measure and the factual conditions surrounding it.

National Treatment and Most Favoured Nation Clause

National Treatment and the Most Favoured Nation Clauses are the two types of status given by one contracting state to another for easy regulation of trade & investment. While under national treatment clause both – goods imported from contracting state and locally produced ones – are treated equally, MFN Clause ensures that one party is treated no less favourably by the respective member states to a treaty than any other member state. In other words, restricts the states from acting in a discriminate manner, under identical conditions, between the investors of the contracting state and local investors or other overseas investors. This means that pursuant to Article 3 of the UK-china BIT, the UK is under an obligation not to differentiate between Huawei and other locally or foreign investors under identical conditions. In order to safeguard UK’s position, the examination that needs to be made here is about interpreting the term ‘like circumstances’. The term ‘like circumstances’ ensures that only investors or investments with similar traits are compared. These conditions include not only competition in the relevant business sector or economic sectors but also other specific conditions, including the legal and regulatory system in place, or if the differential treatment is rendered on the basis of certain legitimate welfare goals[iv] .

Thus, invocation of these clauses requisites a traditional fact-specific interpretation and requires the conditions surrounding the investment disputes to be holistically considered. After looking into situations in entirety, some awards such as Daniel Midland v. United Mexican States, have held that investors or investments, despite being in “identical situations” have been treated unfairly on the basis of their nationality. However, awards have also been made, for instance, in the case of Grand River Enterprises v. the United States of America, where courts have recognised differences in treatment between investors or investments that are plausibly related to valid public welfare goals and also have given weight to whether investors or investments are subject to similar legal requirements according to their conditions.

In addition to investment law, a breach of the status of MFN through the prism of international trade law may theoretically amount to violation of the obligations of the World Trade Organization (‘WTO’) between UK and China. Nonetheless, it is important to note that member nations are entitled to exclude from being governed by these commitments in such matters relating to national security. Under the defence exceptions of Article XXI of the General Agreement on the Trade and Tariffs (‘GATT’), it is noteworthy that the exception is given to any action, which is deemed necessary for the safety of ‘critical security interests’. For instance, in 2019, in a WTO settlement between Russia and Ukraine, WTO affirmed the assertion of a national security exemption under the GATT in order to validate Russia’s trade blockade in breach of some WTO obligations with a regard to national security.

Conclusion

This ban can potentially trigger investment claims against the UK as Huawei already has made its intention to initiate investment claims against Canada, Australia the Czech Republic, if the ban violates its right as a foreign investor. However, this ban was applauded by countries like USA and Australia who already have banned Huawei from their 5G infrastructure. The UK govt. may justify the ban on grounds of national security. However, the BIT provides sufficient space to accommodate Huawei’s claims. It will be interesting to see how these claims will be dealt with by arbitral tribunals or some other quasi-judicial body.

Alternatively, a solution may also be adopted to avoid disputes: instead of blanket-banning Huawei, the UK government may provide Huawei a window of 6 months or 1 year to remove all gears that are susceptible of snooping and replace them with new gears under the strict supervision of NCSC – this may prove to be a win-win situation for both the parties. Howsoever, this idea too seems far-fetched and is unlikely to happen, for UK’s decision is influenced by the US govt., which is already in loggerheads with the Chinese govt. over trade policies.

[i] Commentary to the Articles on the Responsibility of States for Internationally Wrongful Acts, ILC Yearbook 2001/II (2),80 Para 2; CMS V Argentina (n 4) Para 317

[ii] August Reinisch, ‘Necessity in International Arbitration’ (2010) 41 Netherlands Yearbook of International Law 142, Badar AIModarra, ‘The defense of Necessity in International Law and Investor Versus State Dispute Settlement’ (2019) 23 (37) Journal of Legal Studies 78

[iii] France-New Zealand Arbitration Tribunal, 82 I.L.R. 500 (1990)

[iv] Drafter’s Note on Interpretation of “In like circumstances” under National Treatment and Most Favoured Nation Treatment, http’//www.mfat.govt.nz/assets/Trans-Pacific-Partnership/Other-documents/Interpretation-of-In-Like-Circumstances.pdf.

BY AYUSHI PANDIT, FOURTH-YEAR STUDENT AND PRANJAL PANDEY, FIFTH-YEAR STUDENT AT MNLU, NAGPUR

Introduction

The arbitration regime in India has been changing it facets from changing judicial mindset towards arbitration to making India the hub of ICA. The last quarter of 2019 saw significant developments with the Supreme Court rendering judgments that will have lasting impact on how the arbitrations are concluded in India. If India is to be seen as a country having a mature and efficacious arbitration regime, arbitration should be treated as an independent mechanism. There exists the cardinal rule of minimal judicial intervention under the Arbitration and Conciliation Act, 1996 (‘the Act’). When parties have chosen arbitration as their preferred mode of dispute resolution party autonomy needs to be respected and given full play. Thus, the scope of the same should be kept to minimum possible. Owing to the minimum judicial intervention, courts rarely review/recall their orders.

In case of a pre-existing arbitration agreement, parties have autonomy for the appointment of arbitrator. However, despite a pre-existing agreement to arbitrate it is possible for the party(s) unwilling to arbitrate to frustrate the terms of the agreement and delay the appointment of arbitrator. In any of the similar circumstances it is a right of either of the parties to seek for appointment of arbitrator from courts vide section 11 of the Act for both ICA and domestic Arbitrations.

The present article discusses the contemporary jurisprudence in the appointment of arbitrators by courts in light of the recent judicial pronouncements and legislative amendments. Making a reference to Adani Enterprises Limited v. Antikeros Shipping Corporation wherein the Bombay High Court recalled an order for appointment of arbitrator in an ICA within the meaning of section 2(1)(f) of the Act on the ground of order being null and non-est. HCs lack inherent jurisdiction for appointment of arbitrator, when either of the party fails to appoint an arbitrator in ICA. Recognizing that the body corporate in question is incorporated and functions out of India, an order passed by HC for the appointment of arbitrator calls for want of jurisdiction and was hence recalled in addition to being barred by limitation period. The subsequent portion of the article discusses at what stage of proceeding a review petition is maintainable asking for a review on procedural grounds.

Appointment of Arbitrator u/s 11

When the parties are unable to appoint arbitrators within 30 days from the receipt of request to do so, recourse to section 11 can be taken. In ICA jurisdiction for appointment of sole/third arbitrator vests solely with Apex Court. In any arbitration other than ICA, HCs are vested with the jurisdiction for appointment of sole/third arbitrators on request of the parties vide Section 11(12)(b) of the Act.  In ICA, when the dispute is of a specified value, the jurisdiction for filing all applications or appeals arising out of such arbitration under the Act vests solely with the commercial division of the respective HC. In similar circumstances, arbitrations other than ICA where the subject matter of dispute is commercial with specified value, the jurisdiction for filing all applications or appeals arising out of such arbitration under the Act vests solely with any principal civil court of original jurisdiction in a district and heard and disposed of by the commercial court exercising territorial Jurisdiction.

Jurisdiction of High Courts to recall their Orders

It was a contentious aspect, because the Act does not provide the Chief Justice with the power to review its order passed under section 11, and the Act being a self-contained Code impliedly excludes the applicability of general procedural law. Hence, the legislative intent of judicial non-intervention must be duly acknowledged.  To clarify, the SC carved out the difference between a procedural review and review on merits. It was held that procedural review is an inherent power of the court/tribunal to set aside a palpably erroneous order passed under a misapprehension and  on the contrary, a review on merits is specifically provided by the statute.

However, when the verdict of the court is erroneous due to a procedural default, the petitioners are not precluded from seeking a procedural review of the matter. HCs possess inherent jurisdiction to recall their orders when either of the parties have committed a procedural irregularity which stretches to the root of the matter inter alia, an order for appointment of arbitrator passed by a court lacking jurisdiction or an order for appointment of arbitrator passed in the absence of arbitration agreement.

The division bench of the Bombay HC set aside the order of a single bench in an appeal filed u/s 37 of the Act which recalled an order for appointment of arbitrator on the ground that Part 1 did not prescribe any provision for the court to review its own orders. A petition was raised before SC for consideration of this issue. Then the Apex Court in the case of Municipal Corporation of Greater Mumbai & Anr clarified that HCs being the courts of record must have an inherent jurisdiction to correct the records. The acts and proceedings enrolled in perpetual memory and testimony of the Court must be in accordance with law and entitled for review/recall if vitiated by any patent illegality. The SC relied on various judicial precedents inter alia National Sewing Thread Co. Ltd. v. James Chadwick & Bros. Ltd concluded that HC being constitutional courts and superior court of record have an inherent power to recall its own orders. In the instant case parties did not choose for arbitration as a forum for dispute resolution. The dispute resolution contract expressly stated an in-house dispute resolution mechanism as the first resort and expressly repudiated for arbitration as a method for dispute resolution, Hence, an order for appointment of arbitrator which is bad in law and is a sheer procedural default, must be ratified. 

The power of courts enshrined in section 11(6) is non-derogable. The same cannot be waived of by consent or acquiescence. It can be only vested by a statute. This non-derogable power is not barred by the law of limitation. It is well within the jurisdiction of the courts to condone the delay in filing for a review petition if the impugned order is vitiated by parent illegality. 

Adani Enterprises Limited v. Antikeros Shipping Corporation

The dispute arose between Antikeros Shipping Corporation (company incorporated in Liberia) and Adani Enterprises Limited (company incorporated in India). The parties on failing to appoint an arbitrator resorted to relief envisaged in section 11 of the Act. Being undisputed that the impugned dispute is an ICA. Hence, HCs inherently lacked jurisdiction for appointment of sole/third arbitrator in an ICA. Jurisdiction for the same exclusively vests with the SC.

A review petition was filed seeking a review of the order for appointment of arbitrator on the ground of suffering from procedural default. The Bombay HC concluded that the impugned order called for want of jurisdiction. The impugned dispute qualified to be an ICA. 

The dispute being an ICA, calls for an application for the appointment of arbitrator to be filed before SC and not before the HC. In view of the order being null and non-est in law condoned the delay of eight years and the review petition was allowed and the impugned order was recalled.

In another significant ruling the Allahabad HC refused to exercise its power under section 11 of the Act, as the recourse under section 15(6) was not taken by the applicant. The Court observed that where the mandate of an arbitrator terminates by virtue of section 15(6), a substituted arbitrator shall be appointed according to the rules that were applicable to the appointment of the arbitrator being replaced. Once the parties fail to appoint an arbitrator in terms of the rules, only then the Chief Justice or his delegate under section 11(6) on a request by a party can appoint an arbitration. In the instant case, the procedure was not followed therefore review petition was not held maintainable.

Conclusion

The Law Commission of India observed that ad hoc arbitration in India usually ends up in the shackles of litigation. Thus, to ensure a successful enactment of minimal judicial intervention both judiciary and the legislature are taking efforts for institutionalization of arbitration. This by and large includes referring to the rules of Arbitral Institutions at the stage of formation of arbitration agreement itself. The clause “Any Institution designated by such Court” in the act can be inferred as a statutorily formed Arbitration institution conferred with the status of national importance. In line with this school of thought, the 2019 Amendment Act  seeks to establish the body- The Arbitration Council of India, which is an integral step towards institutionalization of Arbitration. Bodies like Delhi International Arbitration Centre and Mumbai Council of International Arbitration (MCIA) have been successfully implementing the recommendations of the committee and Courts often refer the arbitral disputes to these institutions. Thus, this will thus ensure a paradigm shift to project India as the hub of arbitration.  

BY AANCHAL GUPTA, A FOURTH-YEAR STUDENT AT HNLU, RAIPUR

Introduction

The arbitration regime in India has struggled with the seat v. venue debate for quite some time now. The ‘venue’ of arbitration proceeding determine where the proceedings will be conducted whereas the ‘seat’ of arbitration proceeding determines which court has a supervisory jurisdiction over the proceeding and which substantive law will be applicable to the proceeding. Issue arises when the arbitration agreement does not mention the specifics of the venue and seat. There is a long list of cases discussing the issue in International Commercial Arbitrations as well as Domestic Arbitrations. The Supreme Court recently made pertinent observations regarding this issue in the case of Quippo Construction Equipment Ltd. v. Janardan Nirman Pvt. Ltd. and held that objections regarding the place of arbitration are not significant in a domestic arbitration proceeding.

Background of The Case

The case involved four distinct agreements for the supply of construction equipment, containing arbitration clauses. Three of these agreements assigned New Delhi as the venue of arbitration whereas one stated Kolkata as the venue. When a dispute arose, the appellant gave notice invoking arbitration and a sole arbitrator was appointed to conduct the proceedings according to the Construction Industry Arbitration Association Rules. The respondent denied the existence of any agreement between the parties and chose not to participate in the arbitral proceedings. Instead an application initiating civil proceedings was moved in the District Court of Sealdah seeking injunction against conducting arbitration proceedings under Section 5 and Section 8 of the Arbitration and Conciliation Act, 1996 (‘the Act’). An ex-parte award was passed in the appellant’s favour covering claims under all of the four agreements. Aggrieved by the award, the respondent filed a petition for setting aside of the award under Section 34 of the Act but was rejected due to lack of jurisdiction. However, the High Court of Calcutta observed that the respondent was amenable to the jurisdiction of the court and sent the case back to the lower court. A revision petition was filed in the Calcutta High Court which was dismissed as not being maintainable. Aggrieved by this order, the appellant has preferred the instant appeal.

Decision of The Court

The SC held that the venue in an arbitration proceeding is of significance in an international commercial arbitration proceeding as it determines which crucial law would be applicable, however in the instant case, the substantive law applicable to the proceedings would be the same in either of the venues. Hence, the court held that the venue of arbitration is not significant in a domestic arbitration proceeding. According to the court, a change in the venue of a domestic arbitration proceeding within the territorial limits of the country will not make a difference on the proceedings as the substantive law applicable throughout the territory is the same.

Analysis

Although prima facie the judgement of the court seems to be pro-arbitration for all the right reasons, on a closer look it reveals a problem. As a result the rules that can be adduced from the judgement lay on unsteady ground.

The court dismissed the set aside application filed by the respondent quoting ‘lack of jurisdiction’. The court determined that the seat of arbitration was at New Delhi based on the fact that arbitration proceedings were held at New Delhi and the award was made at New Delhi. The court stated that the venue of arbitration is only significant to determine the crucial substantive law that is applicable in the arbitral proceedings and in the instant case the substantive law applicable would be the same in either of the venues. However, the court failed to recognise that the choice of venue would result in the determination of the seat of arbitration and an essential consequence of the choice of seat would be the jurisdiction of the court.

The determination of the seat not only determines which crucial law would be applicable but is vital to determine which court has jurisdiction to set aside the award or make any order on other allied questions. In the instant case, the issue of venue and seat of arbitration is ambiguous. The four agreements between the parties with different venues were clubbed and an award was made which makes it difficult to determine the seat of arbitration clearly. No argument can be made to rely on a seat specified in one agreement as the arbitrator would have no jurisdiction to club all the agreements. The questions of jurisdiction of arbitrator and the selection of venue of arbitration are mixed and the court decides on the issue of waiver.

The SC in its earlier judgements regarding this issue has taken two different views. In the case of BGS SGS SOMA JV v. NHPC Ltd., the SC observed that choice of seat determines which court has the exclusive jurisdiction to deal with set-aside application or any other proceeding related matter. It held that the ‘venue’ of arbitration will be regarded as the ‘seat’ of arbitration in absence of any contrary indication. However, in the instant case one of the agreements related to arbitration designated Kolkata as the venue and seat of arbitration which clearly marks a contrary indication but the court did not consider the same and answered the question of the venue of arbitration partially.

In another case, Mankatsu Impex Pvt. Ltd. Vs Airvisual Ltd. , the SC made an observation on the question of place and seat of arbitration. They observed that the seat of arbitration cannot be decided on the basis of the place of arbitration and instead the seat should be decided by the conduct and agreement between the parties. However, in the instant case, the set-aside application of the respondent was rejected due to lack of jurisdiction. New Delhi was stated to be the seat of arbitration as the proceedings took place and the award was made there. The agreement between the parties also designated Kolkata as a venue for arbitration but it was neglected by the arbitrator and the court.

Suggestions and Conclusion

The SC in this case took steps towards a pro-arbitration approach in an attempt to make India arbitration friendly and hoped to strengthen the domestic arbitration system. The scope of judicial intervention in an arbitration proceeding was narrowed. The non-participation of parties in an arbitration proceeding is discouraged and the court did provide certain amount of clarity on the questions of waiver and time for raising objections regarding the arbitral process; however, the decision suffers from certain loopholes and the mixing up of issues which makes any rules carved out of it to stand on a steady ground. The court had an opportunity to settle the issue of ‘seat’ and ‘place’ of arbitration for once and for all but the court answered it partially and overlooked some important consequences. The issue needs to be tackled effectively soon to ensure that India is set out in on a pro-arbitration path. 

Drafting of the arbitration clause –A well drafted arbitration clause that not only sets out the parties’ intentions but also mentions the specifics of the arbitration proceedings can tackle the entire problem. Changes can be made in the Act to state that an arbitration clause must be well drafted and to be effective must contain the disputes that can be arbitrated and clearly mention the place of arbitration along with the seat of arbitration to avoid confusion. It should also mention the governing law of the arbitration agreement, the number of arbitrators and the method for establishing the arbitral tribunal. These specifics will ensure that the parties do not squander with the questions of intent, ambit and application of the arbitration agreement. The focus should be resolution of the dispute through effective proceedings rather than the frustration of the agreement due to parties’ failure to mention the particulars clearly and this step also ensures that party autonomy is not interfered with.

Prima facie standard of review – In case a dispute regarding the seat and venue of arbitration arises between the parties, the court should undertake the prima facie standard of review. A prima facie enquiry is conducted by the court to ascertain the consequences of selecting a particular seat and whether this will affect any of the terms of the arbitration agreement. A seat which is in consonance with all the other terms of the agreement and does not violate any term which was decided according to common consensus between the parties is picked as the seat of arbitration. The Singapore High Court in the case of K.V.C Rice Intertrade Co Ltd v Asian Mineral Resources Pte Ltd. applied the prima facie standard of review. In this case the bare arbitration clause did not specify the seat of arbitration and applying this standard, it was held that Singapore is the place and seat of arbitration in each of the cases. This step would effectively ensure that part autonomy is upheld in terms of other specifics of the agreement and a seat of arbitration can be decided.

There is an urgent need to put a rest to the issue of venue and seat of arbitration in domestic proceedings as well. Attempts made by the Indian system to be more arbitration friendly needs these specifics to be sorted out so that the focus of the parties is to resolve their dispute through an alternative mechanism outside the court rather than inevitably dragging the matter to the court.