19 Jan 2018

COMMERCIAL ARBITRATION IN INDIA: 2017 A YEAR IN REVIEW

2017 has been a busy year for the Indian courts dealing with arbitration related matters. The courts have had the opportunity to interpret and clarify a number of provisions of the Arbitration and Conciliation Act, 1996 (the “Act”) as amended, while dealing with a number of issues from the pre-amendment era that have continued to plague the courts. The courts have, by and large, continued to exercise restraint in their interventions (barring some notable exceptions) but some of the jurisprudence is on shaky ground. The note aims to provide a birds-eye view of some key recent developments.

• Applicability of the amended Act
• Arbitration Agreements
• Arbitrations seated outside India
  • Indian parties choosing a foreign seat
  • Seat v Venue of Arbitration
  • Reference to Arbitration
  • Resisting Enforcement
  • Enforcing Interim Orders
  • Applicability of Part I of the Act
• Arbitrations seated in India
  • Supervisory Jurisdiction of Courts
  • Appointment of Arbitrators (Scope of Review)
  • Appointment of Arbitrators (Grounds of Challenge)
  • Pre-Arbitral Dispute Resolution
  • Powers of Arbitral Tribunal
  • Arbitrability
  • Challenging an Arbitral Award

There is a lot of uncertainty presently as to whether, and to what extent, the provisions of the amended Act would apply in the context of arbitration proceedings initiated prior to the coming into force of the amendment on 23 October 2015.

The language of S. 26 of the Amending Act which appears to be prospective in its application is unfortunately not clearly drafted. A number of courts including the Calcutta High Court in Tufan Energy and the Madras High Court in New Tirupur had applied the provision with retrospective effect in the context of denying an automatic stay of an arbitral award upon the filing of a setting aside application (as would have been permissible for pre-amendment applications). On the other hand, the Delhi High Court in Ardee Infrastructure clarified that once an arbitration is initiated prior to the amendment, all provisions of the Act, including those that relate to court assistance/ interference relating to such arbitrations, would apply as prevalent prior to the amendment

The Supreme Court is currently hearing a batch of matters on this issue. In the meanwhile, the Supreme Court in Aravalli Power Company has clarified that the provisions of the amended Act in so far as they relate to appointment of arbitrators and the grounds for challenge available to parties, is prospective. Therefore, an arbitral appointment made prior to the coming into force of the amendment cannot be challenged under the new grounds set out under the amendment.

There has been some uncertainty as to the enforceability of unilateral option clauses in India, with some old decisions of the Delhi High Court indicating that they may not be enforceable. However, in Sundarban Marine, the Supreme Court has upheld the validity of a unilateral option clause which provided only one party the right to refer matters to arbitration in the event of a dispute. The court refused to interpret the clause as permitting both parties to refer disputes to arbitration, and held that the party who was not vested with the right to refer matter to arbitration was entitled to seek recourse before the jurisdictional court.

There has been some uncertainty as to whether two Indian parties can choose a foreign seat of arbitration in light of conflicting decisions. The Bombay High Court in the case of Addhar disallowed two Indian parties to seat their arbitration outside India while the Madhya Pradesh High Court in the case of Sasan recognised such a choice as valid. The Delhi High Court in the recent decision of GMR Energy, has sided with the Madhya Pradesh High Court view and recognised the choice of two Indian parties to choose a foreign seat for their arbitration.

A number of law firms – both Indian and foreign – have taken a conservative stance and advised parties to refrain from choosing a foreign seat. There are practical considerations which may justify such a view, but a correct reading of Supreme Court decisions (including the decision in Atlas Exports and Reliance Industries) lends credence to parties’ freedom to choose a foreign seat. Further, the downside to choosing an Indian seat are immense, especially since Indian courts have the right to set aside an arbitral award on grounds of patent illegality where the arbitration is between two Indian parties and seated in India. Therefore, parties are advised to tread carefully and weigh competing interests before taking a decision on this issue.

Courts in India have continued to take a sensible approach while dealing with the distinction between the seat and venue of arbitration. In Roger Shashoua, the Supreme Court, while recognising the distinction between the two concepts held that where a contract specifically identifies a venue (which is different from the country whose laws apply to the substance of the dispute), fails to identify a seat, and also contains a stipulation that a transnational set of rules would apply to the arbitration, then the inference is that the choice of venue amounts to a choice of the seat of arbitration. This decision was significant also because of the court’s willingness to give due deference to the decision of the UK courts (which were the courts at the seat of arbitration) on the question of the seat of arbitration.

The decision of the Delhi High Court in the case of GMR Energy is a significant development in the context of foreign seated arbitration in so far as it explains and clarifies the contours of the decision of the Supreme Court in Chloro Controls. Under the law as laid down by Chloro Controls, courts were required to make a final determination of the question of whether an arbitration agreement is “null and void, inoperative or incapable of being performed” before referring parties to arbitration under S. 45 of the Act. At a practical level, this meant a detailed and time-consuming consideration of the validity of the arbitration agreement even in the context of foreign seated arbitrations. The Delhi High Court in GMR Energy has clarified that the Supreme Court’s findings in Chloro Controls were only relevant where an arbitration was not commenced, and not where an arbitration has already been commenced without the involvement of the court. The import is that a far lower degree of interference is warranted in such cases. This is consistent with the general approach of the Indian courts to reduce interference in foreign seated arbitrations.

A key concern for a number of foreign parties contracting with Indian counterparties and choosing a foreign seat of arbitration, has been the uncertainty regarding enforceability of interim orders. This uncertainty stems from the fact that while S. 17 of the Act specifically makes interim orders of arbitral tribunals seated in India enforceable, there exists no corollary for foreign seated arbitration. The decision of the Supreme Court in Alka Chandewar gives a glimmer of hope. The court recognised that it has the power to punish parties for contempt for violation of any order of an arbitrator. This power stems from S. 27 of the Act – which has been made specifically applicable to foreign seated arbitrations. Therefore, it is now open for parties to approach the Indian courts for relief against a recalcitrant party who fails to comply with interim orders of foreign seated tribunals.

The Bombay High Court in Integrated Sales enforced a foreign arbitral award even against non-signatories to the arbitration agreement. The court upheld the application of the kompetenz-kompetenz doctrine, especially where it was specifically provided under the relevant arbitration rules, even to foreign seated arbitrations, despite the absence of a provision like S. 16 in Part II of the Act. The court recognised that there can be a distinction between “parties to an arbitration agreement” and “parties to an arbitral award” such as where a non-signatory has been made a party to the arbitration by the tribunal after lifting the corporate veil.

The court also held that if there were errors in the application of foreign law which can be corrected by making an application before the courts at the seat of arbitration, then such grounds cannot by themselves constitute a ground to refuse enforcement.

Due to the ostensibly prospective nature of the amendments to the Act, the pre-amendment jurisprudence pertaining to the application of Part I of the Act (which provides for various grounds of interference, including setting aside of arbitral awards) in respect of arbitration proceedings which are not seated in India, continues to be relevant. In these matters, courts have continued to exercise restrain and have limited the scope of judicial interference.

The Supreme Court in Union of India v Reliance Industries had stated (albeit incorrectly, in my view) that where the juridical seat is outside India or where the law other than Indian law governs the arbitration agreement, Part I of the Act would be excluded by necessary implication. This view was followed in recent cases and the Calcutta High Court has held that where the parties had chosen a foreign seat and a transnational set of arbitration rules to apply, Part I of the Act would be excluded.

The Supreme Court in Imax Corporation expanded the scope of such exclusion and held that Part I of the Arbitration Act is excluded even if the parties do not consciously choose a seat of arbitration outside India, but recognise that a seat outside India may be chosen by an arbitration institution authorised by the parties to choose the seat, and the arbitration institution in fact chooses a seat of arbitration outside India.

The Supreme Court in Indus Mobile held that the courts at the seat of arbitration have exclusive jurisdiction to entertain applications under the Act. The court held that in an arbitration, parties are free to choose a neutral seat in India, even if no part of the cause of action has arisen within the jurisdiction of that court, and by doing so, vest jurisdiction in such a court even if the court otherwise would not have had jurisdiction. The decision is poorly reasoned and inconsistent with the plain meaning of the statute but is presently the law of the land.

The amendments to S. 11 of the Act were intended to limit the scope of court interference. The Supreme Court in the case of Duro Felguera had the opportunity to consider and explain the import of this amendment. The court clarified that the power of the courts to pass orders under S. 11 of the Act is judicial in nature. However, the court is required to confine its enquiry at this stage to the existence of an arbitration agreement i.e. whether the agreement containing the clause provides for arbitration pertaining to the disputes which have arisen between the parties to the agreement. Powers that were previously available to the court: such as the power to consider issues of limitation, arbitrability of disputes etc., are no longer available under the amended regime.

The import of the decision in Duro Felguera is significant. In addition to making it very difficult for the courts to make a common reference to arbitration in cases involving composite contracts (as happened in Duro Felguera itself), the decision suggests that several past decisions on arbitrability, including those pertaining to arbitrability of fraud, may not be relevant in future S. 11 applications.

The amended Act also introduced Schedule V and Schedule VII to the Act to provide guidance to courts on the grounds on which an arbitrator may be challenged before Indian Courts. The schedules were heavily influenced by the traffic light system adopted in the Guidelines issued by the IBA on Conflict of Interest. A key feature of the amendments was to disallow the practice of parties appointing one of their employees as an arbitrator.

In this context, in the case of Voestalpine, the Supreme Court held that:

• a clause in the contract restricting parties’ choice of arbitrators to a panel constituted by a governmental agency, formed primarily of retired government servants, was valid;
• a past-government servant was not disqualified from being an arbitrator in respect of dispute concerning a different government agency, simply because the contracting entity it was also a “government” agency;
• where there was a panel, it was impermissible for one of the parties to pre-select a small selection of members from the panel and require the other party to choose members of the tribunal from out of the smaller set.

The Delhi High Court in Afcons Infrastructure went one step further and held that there was no restriction against a past employee of a party acting as an arbitrator as such a person would not fall within the definition of having any “other past or present business relationship with the party.” The court however held that the independence of such an appointee could be challenged on other grounds. The court also frowned upon the practice of appointing retired employee and held that appointing such persons “would do little to instill any confidence in the arbitral process” and proceeded to ignore the contractual appointment procedure and appoint a neutral arbitrator.

The Supreme Court had the opportunity to further expand and clarify the import and scope of the schedules to the Act pertaining to arbitral appointments in two further cases.

In HRD Corporation, the court explained that where an arbitrator falls within a circumstance covered by Schedule VII, he/she would lack the inherent jurisdiction to proceed as an arbitrator and the court can terminate his/her mandate. However, if the arbitrator’s circumstance falls within the grounds under Schedule V, it would not make him/her de jure ineligible to act as an arbitrator. A challenge to his/her appointment in such a case must be made before the tribunal itself and not before court. A court can only entertain a challenge on these grounds at the stage of setting aside of the award.

In TRF, the court held that:

• A court when entertaining an application to appoint an arbitrator under S. 11 of the Act is entitled to consider the ex facie validity of a previous appointment keeping in mind the grounds for challenge in the Act, even without a specific application for challenge.
• A person who was would have acted as an arbitrator, except for the disqualification under Schedule V, cannot nominate another to act as an arbitrator as it would “tantamount to carrying on the proceeding of arbitration by himself”. The court justified the ruling on the basis that what one cannot do directly, he cannot do indirectly.
• The court specifically affirmed the right of parties to nominate an arbitrator – where such a right is given to both parties. However, the court did not specifically address the validity of clauses that provide one of the parties to unilaterally appoint an arbitrator.

The reasoning of the court in TRF is circumspect and does not follow logical reasoning. If the court recognised as valid a party’s right to appoint an arbitrator, then there appears to have been no basis to reject the ability of a nominee to make the appointment – however conflicted he/she may be.

There have been some divergent views on whether a contractual requirement to escalate disputes internally before proceeding to arbitration are binding, and whether they can serve to prevent a party from proceeding with arbitration. Adding to the existing body of case law on this point, the Bombay High Court in the case of S Kumar held that where:

• pre-arbitral dispute resolution provisions have not been specifically identified as being prerequisites to arbitration,
• pre-arbitral dispute resolution provisions are intended to resolve disputes during the course of the works, or
• an arbitration agreement is broadly worded and covers more disputes than that covered by the pre-arbitral dispute resolution provisions,

then a party cannot be restrained from initiating arbitration for failure to follow the pre-arbitral dispute resolution provisions.

The Supreme Court in Alka Chandewar gave a shot in the arm to the enforceability of orders of an arbitrator by recognising that the court has the power to punish parties for contempt for violation of any order of an arbitrator, and not only where the non-compliance relates to the taking of evidence, despite the language of the heading of S. 27 of the Act.

The National Consumer Disputes Redressal Commission in the case of Aftab Singh held that the existence of an arbitration clause in the arbitration agreement cannot override the statute and prevent parties from resorting to dispute resolution mechanisms created under special statutes. Since the court supported this conclusion, inter alia, on grounds of arbitrability, there is now significant uncertainty as to whether a party is precluded from proceeding with arbitration where there exists a more beneficial legislation, or whether he has an option of choosing one or the other.

P.S:  The question of whether a court can at all consider issues of arbitrability before these questions are considered by an arbitral tribunal is now unclear in light of the Supreme Court decision in Duro Felguera discussed above.

The decisions of the courts pertaining to setting aside of arbitral awards under the new regime are a mixed bag. On the one hand, there are decisions like that of the Supreme Court in Chittaranjan Maity where the court thwarted a party’s attempt to derail an award and held that a party cannot challenge the jurisdiction of an arbitrator in S. 34 (setting aside) or S. 37 (appeal) proceedings unless the challenge to jurisdiction has been made before the arbitral tribunal itself.

On the other hand, there are decisions like that rendered by the Bombay High Court in the case of Raipur Alloys where the court expanded the scope of interference. The Court found that where an award is perverse or a result of non-application of mind, then it violated the “fundamental policy of Indian law”. The court held that the court is not entitled to microscopically examine an award for faults, and can only set aside an award where illegality is manifest on the face of the award – such as where an arbitrator had assumed a key fact without evidence. The court went on to find that the arbitrator’s failure to record a finding on one of the various submissions made by a party was fatal to the award, even though the court recognised that the relevant submission may not have had a bearing on the ultimate outcome of the case.

The court also had the opportunity to clarify the powers available to it at the stage of setting aside an award. In Kinnari Mullick the Supreme Court held that court cannot suo moto defer hearing an application for setting aside an arbitral award and allow an arbitral tribunal to resume proceedings to take such action as may eliminate the grounds for setting aside an arbitral award. Such a step can only be taken upon a specific application. The court also clarified that it cannot remand the matter to the arbitral tribunal for fresh consideration after disposing of the matter.

 

VIKAS MAHENDRA

 

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[1] Sri Tufan Chatterjee v. Sri Rangan Dhar, AIR 2016 Cal 213.

[2] New Tirupur Area Development Corp. Ltd. vs. Hindustan Construction Co. Ltd, App. No. 7674/2015 in O.P. No. 931/2015.

[3] Ardee Infrastructure Pvt. Ltd. v. Yashpal & Sons, (2017) 237 DLT 140 (DB).

[4] Aravalli Power Company Pvt. Ltd. v. M/s Era Infra Engineering Ltd, Civil Appeal Nos. 12627- 12628 of 2017.

[5] Sundarban Marine Products Pvt. Ltd. v. Waterbase Ltd., 2017 SCC OnLine SC 681.

[6] Addhar Mercantile Pvt. Ltd. v. Shree Jagdamba Agrico Exports Pvt. Ltd., 2015 SCC OnLine Bom 7752.

[7] Sasan Power Ltd. v. North American Coal Corp., 2015 SCC OnLine MP 7417.

[8] GMR Energy Ltd. v. Doosan Power Systems India, 2017 SCC OnLine Del 11625.

[9] Atlas Exports Industries v. Kotak & Co, (1999) 7 SCC 61.

[10] Reliance Industries Ltd. v. Union of India, 2016 (11) SCC 508.

[11] Roger Shashoua v. Mukesh Sharma, 2017 SCC OnLine SC 697.

[12] GMR Energy Ltd. v. Doosan Power Systems India, 2017 SCC OnLine Del 11625.

[13] Chloro Controls v. Severn Trent, 2013 (1) SCC 641.

[14] Alka Chandewar v. Shamshul Ishrar Khan, 2017 SCC OnLine SC 758.

[15] Integrated Sales Services Ltd. v. Arun Dev, 2017 SCC OnLine Bom 1.

[16] Union of India v. Reliance Industries, Order dated 22 September 2015 in Special Leave Petition (Civil) No.11396 of 2015.

[17] Government of West Bengal v Chatterjee Petrochem, AP No 1046 of 2016 and GA No 211 of 2017

[18] Imax Corporation v. E-City Corp., 2017 SCC OnLine SC 239.

[19] Indus Mobile Distribution Pvt. Ltd. v. Datawind Innovations Pvt. Ltd., (2017) 7 SCC 678.

[20] Duro Felguera v. Gangavaram Port Ltd., 2017 SCC OnLine SC 1233.

[21] Voestalpine Schienen GmbH. V. Delhi Metro Rail Corp. Ltd., (2017) 4 SCC 665.

[22] Afcons Infrastructure Ltd. v. Rail Vikas Nigam Ltd., Judgment dated 29 May 2017 in ARB.P. 21/2017.

[23] HRD Corp. v. GAIL (India) Ltd., 2017 SCC OnLine SC 1024.

[24] TRF Ltd. v. Energo Engineering Projects Ltd., (2017) 8 SCC 377.

[25] S Kumar Construction v Municipal Corp of Greater Bombay, 2017 SCC Online Bom 130.

[26] Alka Chandewar v. Shamshul Ishrar Khan, 2017 SCC OnLine SC 758.

[27] Aftab Singh v Emaar MGF Land Ltd., Consumer Case No. 701 of 2015

[28] Sri Chittaranjan Maity v Union of India, (2017) 9 SCC 611.

[29] Raipur Alloys & Steel Ltd. v. Environmental Engineers Incorporation, (2017)3 Bom CR 852.

[30] Kinnari Mullick v. Ghanshyam Das Damani, MANU/SC/0514/2017.