Arbitration as a method of dispute resolution has only been growing from strength to strength in India and has been firmly established as an alternative to litigation that can be time consuming and ineffective for parties involved. This year the Supreme Court and various High Courts in India passed judgments on a wide range of issues evolving the jurisprudence on arbitration in India and bringing much needed clarity to the subject matter. This newsletter aims to examine 10 such judgments and orders and briefly discuss the principle of law that they elucidate.
1. An assertion by one party and denial of the said assertion by another is enough to give rise to a dispute.
The Madhya Pradesh High Court in Indian Oil Corporation Ltd. and Ors. v. M/s Tatpar Petroleum Centre[1] had to consider whether an assertion made by one party and its subsequent denial by another is sufficient to constitute a dispute. On 27th January 2022, the Court considered this question and passed its order on whether in the absence of any termination of a dealership agreement, any dispute arose between the rival parties to enable one of them to invoke Section 9 of the Arbitration Act. To address this issue, the High Court delved into the definition of ‘dispute’ and noted that despite not being defined in the Arbitration Act; it found reference in several provisions in the Act. In fact, the principal objective of the Act is to resolve disputes. The High Court held that from the meaning of the word “dispute”, it is evident that for a dispute to arise there should exist an assertion or claim from one side, which is then refuted by the other side. Thus, a dispute would only arise where a minimum of two rival parties disagree over a particular aspect and not when one party asserts and the other remains silent.
2. An arbitral award would be rendered patently illegal if the arbitrator fails to act in terms of contract or has ignored the specific terms of a contract.
In a decision dated 1st February 2022, the Supreme Court in Indian Oil Corporation Ltd. v. M/s Shree Ganesh Petroleum Rajgurunagar,[2] on disputes arising out of a lease and dealership agreement between the Appellant and Respondent decided that an arbitral award would attract patently illegality if the arbitrator fails to act in terms of contract or has ignored the specific terms of a contract. The findings of the Court can be summarized as under –
An arbitral tribunal is a creature of contract. Therefore, it is bound to act within the confines of the contract under which it is constituted.
An award will be deemed patently illegal when the tribunal does not act within the terms of the contract or has ignored any specific terms thereof.
While a tribunal is entitled to interpret the terms of a contract while adjudicating a dispute, an error in such interpretation, especially where there is a valid referral of the dispute to arbitration, would constitute an error within jurisdiction.
3. Invocation of Article 226 of the Constitution of India for a contractual dispute where there already exists an arbitration clause as a dispute resolution mechanism is not the appropriate remedy in law.
The Supreme Court in Gujarat Housing Board & Anr v. Vandemataram Projects Private Ltd[3] dated 21 March 2022 was addressing the issue of whether ‘the invocation of Article 226 of the Constitution of India for a contractual matter where there is an existing arbitration clause is the appropriate remedy in law? The Supreme Court observed that the invocation of Article 226 of the Constitution of India for a contractual matter where there was an existing arbitration clause was not the appropriate remedy. High Court could not have examined the matter and granted the relief as granted in the instant matter given that objections were raised with regards to the maintainability of the writ application on the ground of alternative remedy available to the writ-applicant in the form of of invoking the arbitration clause.
4. Change in venue of Arbitration owing to appointment of a new arbitrator will not automatically change the juridical seat of Arbitration.
In BBR (India) Pvt. Ltd. v. SP Singla Constructions Pvt. Ltd[4] dated 18th May 2022, The Supreme Court of India was faced with the question of whether ‘conducting arbitration proceedings at a new place owing to the appointment of a new arbitrator would shift the seat of arbitration?’ The Supreme Court held that when the seat is once fixed by the Arbitral Tribunal under Section 20(2) of the Arbitration Act, it should remain static and fixed; whereas the ‘Venue’ of Arbitration can change and move from ‘the seat’ to a new location. Therefore, the court held that the appointment of a new Arbitrator who holds the Arbitration proceedings at a different location would not change the jurisdictional ‘seat’ already fixed by the earlier or first Arbitrator. The Supreme Court observed that without express mutual consent of the parties to Arbitration, ‘the seat’ cannot be changed. The place of Arbitration in such an event should be treated as a venue where arbitration proceedings are held.
5. Two arbitration proceedings for the same contract or transaction is not permissible.
The Supreme Court in Tantia Constructions Limited v. Union of India[5] on 15th July 2022 held that there cannot be two arbitration proceedings with respect to the same contract or transaction. In the present case, the dispute was referred to arbitration earlier and the arbitrator passed an award based on the claims that were made. Thereafter, a fresh arbitration proceeding was sought to be initiated with respect to some further claims, after the final bill had been issued. The Supreme Court refused to refer the parties to a fresh arbitration in exercise of Section 11(6) of the Arbitration Act, and the decision of the Hon’ble Calcutta High Court was upheld. Once an arbitrator has adjudicated upon a certain set of claims, the arbitrability of those same claims stands extinguished. Just like in litigation, the doctrine of Res Judicata would apply.
6. Mandatory nature of section 12 A of the Commercial Courts Act, 2015- Mandatory Pre-Institution Mediation.
The Supreme Court in a significant ruling in Patil Automation Private Limited and Ors. VS. Rakheja Engineers Private Limited[6] dated 17th August 2022, held that Section 12A of the Commercial Courts Act 2015, which mandates pre-institution mediation, is mandatory and suits which are filed violating the mandate of Section 12A must be rejected under Order VII Rule 11. The Supreme Court made the following observations regarding the nature of the provision: “The Act did not originally contain Section 12A. It is by amendment in the year 2018 that Section 12A was inserted. The Statement of Objects and Reasons are explicit that Section 12A was contemplated as compulsory. The object of the Act and the Amending Act of 2018, unerringly point to at least partly foisting compulsory mediation on a plaintiff who does not contemplate urgent interim relief. The provision has been contemplated only with reference to plaintiffs who do not contemplate urgent interim relief.”
7. Arbitrators cannot unilaterally fix their fees in the absence of consent from the parties.
On August 30, 2022, the Supreme Court in the case of ONGC v. Afcons Gunanusa J[7]V whilst dealing with critical issues pertaining to the interpretation of the Fourth Schedule to the Arbitration and Conciliation Act, 1996 (‘Act‘) and unilateral fixation of arbitral fee, emphasized on party autonomy in arbitration proceedings and crystalised the law relating to arbitrator’s fees. The Court held that “arbitrator(s) do not possess an absolute or unilateral power to determine their own fees.” The Court elucidated that parties are involved in determining fees either at the threshold level; or negotiating with arbitrators when a dispute arises regarding fees; or by challenging fees determined by the arbitral tribunal before a court. The Court upheld party autonomy as the cardinal principle of arbitration in India. It is open to parties, by their agreement, to specify fees payable, or the modalities for determination of the same. With regard to court appointed arbitrators, the Court held that, in the absence of rules framed by the High Court for fixing fees in ad hoc arbitrations, the Fourth Schedule is by itself not mandatory.It was further held that an arbitral tribunal cannot issue any binding or enforceable order regarding their own remuneration as it violates the principle of party autonomy and the doctrine of prohibition of in rem suam.
8. Party cannot be forced to nominate its arbitrator from a narrow panel of arbitrators consisting of retired officers of the other party.
The High Court of Delhi in Gangotri Enterprises Ltd. v. General Manager Northern Railways[8] on the 14th of October 2022 has held that a panel of arbitrators with only four names to choose from does not satisfy the concept of neutrality of arbitrators because a narrow panel comprising of retired employees of a party creates a reasonable apprehension of bias and partiality. The bench held that it would be wrong to make the contractor choose its nominee arbitrator from a panel of only four names and that too when the final choice of appointing its nominee arbitrator rested on the Employer. Such an arbitration clause would be invalid in law. Moreover, the names on the panel should not be the employees or ex-employees of one of the parties. The Court laid stress on the fact that a party interested in the outcome of the arbitration cannot appoint or be appointed as an arbitrator because of Section 12(5) r/w Schedule 7 of the Act. Consequently, the Court allowed the petition and appointed the respondent’s nominee arbitrator. This decision is especially important given the numerous arbitrations that come out of government contracts with PSUs and will help even the playing field for contractors who might be faced with a potentially biased arbitral tribunal.
9. Despite the termination of a contract, the arbitration agreement contained therein would survive.
The Delhi High Court in an order dated 23rd November 2022 in PVR Limited versus Imperia Wishfield Private Limited[9] has ruled that since the arbitration clause relates to the resolution of disputes between the parties and not the performance of the contract, therefore, the arbitration agreement would survive even if the contract came to an end.
The bench held that the issue of whether the rights of parties under an agreement were superseded by a subsequent agreement was itself an issue, which had to be examined by the arbitrator. The question that an agreement containing an arbitration clause was novated by another agreement, could not be adjudicated at the time of hearing a Section 11 Petition under the Arbitration Act for seeking appointment of an arbitrator.
The Court held that the Doctrine of Severability necessarily dictated that an arbitration agreement would be deemed a separate and severable clause ensuring the survival of the arbitration agreement, even after the ending of the contract. Referring to earlier decisions of the Supreme Court, the Court ruled that the Apex Court has repeatedly adopted a pro-arbitration stance.
10. Issues pertaining to the merits of the dispute must be left to the exclusive jurisdiction of the arbitral tribunal, Courts must exercise limited intervention.
A bench of the Supreme Court of India on 23rd November 2022 in M/s Meenakshi Solar Power Private Limited v M/s Abhyudaya Green Economic Zones Private Limited & Ors[10]. has held that a court cannot consider issues pertaining to novation of contract while deciding an application under Section 11(6) of the Arbitration and Conciliation Act, 1996. The court observed that in the present case, issues relating to contract formation, existence, validity and arbitrability of an agreement are intertwined and connected with issues underlying the merits of the disputes or claims. It also observed that examination of issues like novation of an agreement would have a bearing on the merits of the disputes and must be left within the exclusive jurisdiction of an arbitral tribunal. These issues ought to be decided by an arbitral tribunal since they are factual and disputed. This judgment reiterates the settled position that a court examining an application under Section 11(6) of the Arbitration Act must exercise limited judicial intervention and leave issues that are interlinked with the merits of a dispute within the exclusive domain of an arbitral tribunal.
[1] Arbitration Appeal No. 80/2021
[2] 2022 SCC OnLine SC 131
[3] Civil Appeal No. 2093/2022
[4] 2022 SCC OnLine SC 642
[5] Petition for Special Leave to Appeal (C) No. 10722/2022
[6] 2022 SCC OnLine SC 1028.
[7] 2022 SCC OnLine SC 1122
[8] 2022/DHC/004520
[9] 2022/DHC/005052
[10] CIVIL APPEAL NO. 8818 OF 2022
