Citation: ARBITRATION PETITION (CIVIL) NO. 38 OF 2020
Judgement Date: 06.05.2022
Facts of the case:
Applicant (Cox and Kings Limited) and Respondent no. 1(SAP India Pvt. Ltd.) had entered into a SAP Software End user license agreement and SAP Enterprise Support Schedule wherein the applicant was made a licensee of certain ERP software developed and owned by respondents. After a while, certain dispute arose between the two parties and Respondent no. 1 initiated proceedings basis the arbitration clause in the agreement entered into between the parties.
Meanwhile, the NCLT (National Company Law Tribunal) admitted an insolvency application preferred against the Applicant. After appointing an Interim Resolution Professional, the Parties were directed to adjourn the Arbitration proceedings in view of the moratorium imposed upon the claims against the Applicant.
After which the Applicant sent a fresh notice to Respondent no. 2 who was not made a Party in any of the previous proceedings and while doing the same, the Petitioner relied heavily on the doctrine of ‘Group of Companies’ in its arguments, citing the Supreme Court’s decision in Chloro Controls India (P) Ltd. v. Severn Trent Water Purification Inc. & Anr. [(2013) 1 SCC 641] (Chloro Control).
The doctrine of ‘Group of Companies’ allows a non-signatory to an arbitration agreement to be included as a party to the arbitration agreement because this non-signatory belongs to the same group of companies as one of the signatories to the arbitration agreement. Furthermore, when applying this doctrine, the question of whether this non-signatory was intended to be bound by the agreement will be considered.
Issues:
Whether the doctrine of ‘Group of Companies’ apply to Respondent No. 1 and Respondent No.2 under the current circumstances?
Held:
The Supreme Court highlighted numerous inconsistencies in the ratio of the Chloro Control pronouncement. To begin with, it was argued that the decision in Chloro Control refers to the subjective intention of the parties to be bound by the arbitration agreement, stating that it was based on economic convenience rather than the application of law despite the fact that they were not parties to the agreement. It was decided that inferring the intent of a party who is not a signatory to an agreement is complicated and the sheer fact that a non-signatory is a member of a group of related companies will not be enough to rationalise an extension of the arbitration agreement. It was also noted that under section 7 of Arbitration Act, it is essential to have consent of the parties and same need to be expressed in a written form. Therefore, it requires the Supreme Court’s explanation. Furthermore, the Supreme Court stated that the inclusion of non-signatories has the effect of erasing commercial reality and the benefits of having unique corporate entities in the form of subsidiaries.
The bench consisting of Chief Justice of India, N.V. Ramana, Justices Surya Kant and A.S. Bopanna observed that there is a need to have a relook at components of the Group of Companies’ doctrine.
The 3-Judge bench expressed concern about the correctness of Chloro Controls on this issue and referred certain issues on the subject to the larger bench. The bench decided to refer the following questions to a larger bench:
- Whether phrase ‘claiming through or under’ in Sections 8 and 11 could be interpreted to include ‘Group of Companies’ doctrine?
- Whether the ‘Group of companies’ doctrine as expounded by Chloro Control Case (supra) and subsequent judgments are valid in law?
- Whether the ‘Group of Companies’ Doctrine should be read into Section 8 of the Act or whether it can exist in Indian jurisprudence independent of any statutory provision?
- Whether the Group of Companies Doctrine should continue to be invoked on the basis of the principle of ‘single economic reality’?
- Whether the ‘Group of Companies’ Doctrine should be construed as a means of interpreting the implied consent or intent to arbitrate between the parties?
- Whether the principles of alter ego and/or piercing the corporate veil can alone justify pressing the ‘Group of Companies’ Doctrine into operation even in the absence of implied consent?
This decision, as well as the questions referred to the larger bench by the Supreme Court regarding the doctrine of ‘Group of Companies,’ is essential to the practice of arbitration in India, and are likely to have a major impact on both procedures and jurisprudence of Arbitration law.
K S&CO Comments:
This is a very important judgment of Supreme Court regarding an important question of law i.e, whether a non-signatory party can be made a party in arbitration proceedings merely because it belongs to the same Group of Companies or is going to benefit out of the transaction. The fundamental principle of arbitration is that it is an agreement between the parties to settle all and any dispute via arbitration and hence ousting the jurisdiction of the court. Therefore, it becomes difficult to refer a matter to arbitration if there is no agreement between the parties to refer the matter to arbitration. We are hopeful that the larger bench of the Supreme Court will be able to effectively answer on this controversial issue of the validity of the Doctrine of Group of Companies after taking into consideration its far reaching implications.
Bharat Pumps and Compressors v. Chopra Fabricators
Citation: Civil Revision No. 53 of 2022
Judgement date: 27.05.2022
Facts of the case:
The parties in the case signed an agreement on July 5, 1983, for the manufacture of fabricated items and accessories, among other things. The contract included an arbitration clause and when the dispute arose; the opposing party invoked the arbitration clause and requested the Appellant to appoint an arbitrator in a notice dated May 5, 1991. The Appellant responded to the notice by arguing that they should appoint a sole arbitrator. The opposing party filed a claim with the arbitrator, and the arbitrator granted the opposing party’s claim in an award dated January 1, 1992. Following that, they made an application requesting that the award be made a rule of the court. The application was granted, and it filed for the award’s execution as a result. Following that, the Appellant filed an application under Section 47 of the Civil Procedure Code, 1908 (CPC), which was denied by the court. As a result, the appellant filed the petition for revision.
Issues:
Whether application under Section 47 of the CPC is maintainable in the execution proceedings under Section 17 of the Arbitration Act, 1940?
Held:
The court noted that the arbitrator made a specific finding in the award that the Appellant failed to show up despite being served with several notices. As a result, court rejected the claim that the award was made without notice to the Appellant.
The court held that an arbitration award is not a decree as defined in section 2(2) of the CPC, and thus the objection under section 47 of the CPC which can only be filed in the proceedings seeking execution of the award, is not maintainable in this case.
The court also held that because the Arbitration Act is a self-contained code, any objection to the arbitrator’s jurisdiction must be raised in accordance with the terms of the act and within the time period specified therein.
As a result, it dismissed the revision application.
K S&CO Comments:
In this case the court has taken an important view that a party to an arbitration agreement and also party to the arbitration proceedings cannot ignore directions of the arbitrator. In case a party fails to appear before the arbitral tribunal, the arbitrator has power to hear the matter ex parte and grant relief as per the facts and circumstances of the case. Any objection to the award for the reasons that the arbitrator has made an award ex parte is not valid because the party objecting was given notice and still failed to appear before the arbitrator. This judgment is in the right direction to encourage expeditious disposal of arbitration proceedings.
M/s Atul & Arkade Realty v. I.A. & I.C. Pvt. Ltd.
Citation – Arbitration Application No. 72 of 2013
Judgment date – 06.05.2022
Facts of the case:
The parties entered into a joint venture agreement in which the Applicant agreed to pay off the Respondent’s debt in exchange for the Respondent granting the Applicant development rights in the Respondent’s property and agreeing to share the net profit from the said development project. A dispute resolution clause in the agreement provided for arbitration as a method of dispute resolution.
Consequently, a dispute arose between the parties, so the Applicant filed an application for interim reliefs. The Respondents submitted that they would not dispose aforementioned property without giving the Applicant two weeks’ notice. The court accepted the Respondents’ submission, but it did not grant injunction as prayed for by the Applicant. Following that, the Applicant moved for the appointment of the arbitrator.
The Respondent resisted the application on the ground that the joint venture agreement is a false, forged and fabricated document and the Applicant has not paid sufficient stamp duty on the said agreement.
The court ordered a pre-arbitration trial to determine the agreement’s validity. The pre-arbitration trial lasted many years. With the passage of the Arbitration Amendment Act (2015), the Applicant filed an appeal claiming that a mini-trial is not lawful given the change in the position of law as a result of the amendment, which only allows the court to satisfy itself as to the existence of the arbitration agreement and nothing else in the Supreme Court against the High Court’s order. The Supreme Court did not explicitly overturn the High Court’s order; however, it directed the High Court to rule on the application as soon as possible, taking into account the current legal position. As a result, the Applicant filed an affidavit in support of the appointment of the arbitrator.
Issues:
Can the court decide on the genuineness of an arbitration agreement in cases where agreement is alleged to be fraudulent?
Held:
The court rejected the Respondents’ argument that the agreement could not be implemented because the stamp duty was insufficient. The court determined that there is no impediment to the agreement’s enforceability; however, the substantive rights arising from the agreement cannot be adjudicated when it is improperly stamped.
The court also laid out a list of considerations that would be relevant for the courts to decide on the issue of fraud when appointing an arbitrator, which includes- specificity, spontaneity, and the gravity of the allegation, whether the allegations relate to undermine the validity of the underlying contract or they pertain to transactions pursuant to the contract, or they concern allegations involving a public law element.
The court determined that, while the allegation of fraud is serious impediment to the administration of justice and concerns the execution of the agreement itself, there is a split opinion regarding the genuineness of the signatures on the agreement. One expert believed the signatures were genuine while the other did not; there was an uncertainty about the signature’s authenticity. The court ruled that when an allegation of fraud and forgery is made in the execution of an agreement and there is divergence of expert opinion on the genuineness of the agreement, the court shall refer the matter to the arbitrator for decision. As a result, the court appointed the arbitrator and directed him to decide on the validity of the agreement as a preliminary issue.
K S&CO Comments:
This judgment is the answer the question regarding the power of an arbitrator to decide on cases related to fraudulent execution of the arbitration agreement. The court has taken a view in a situation where there is split expert opinion in the genuineness of the arbitration agreement and even though a party may allege fraud, the court will have the power to appoint an arbitrator and mandate him for deciding on the issue of the validity of the arbitration agreement so that there is a speedy disposal of such cases.
Director General Central Reserve Police Force versus Fibroplast Marine Pvt. Ltd.
Citation: O.M.P. (COMM) 511/2019 & IA Nos. 17282/2019 & 17283/2019
Judgement dated: 04.05.2022
Facts of the case:
The Petitioner, Director General of Central Reserve Police Force (CRPF) issued tender, inviting bids. The Respondent, Fibroplast Marine Pvt. Ltd. was successful in the bid it submitted. . Following that, the parties entered into an agreement. After a certain dispute arose, the Respondent invoked the arbitration clause to refer the dispute to arbitration.
The Respondent filed a petition under Section 11 of the Arbitration Act before the Delhi High Court for appointment of an arbitrator. Thereafter, a sole arbitrator was appointed by Delhi High Court to adjudicate the disputes between the parties and further, directed that the arbitration be conducted under the supervision of the Delhi International Arbitration Centre (DIAC). The arbitrator rendered a decision in favour of the Respondent, including costs and interest. The Petitioner challenged the arbitral award under section 34 of Arbitration Act in Delhi High Court where in the Petitioner argued that arbitral award should be overturned as the award was awarded eighteen months after the trial ended and there was no justification given for excessive delay. The petitioner further claimed that the award violated the rules of the DIAC, which state that arbitral proceedings must be concluded within six months. The Petitioner went on to say that the award amount was arbitrary and, on the surface, inappropriate as it exceeded the total consideration agreed between the parties under the agreement.
Issue:
Whether an arbitral award can be set aside if there is an excessive and unexplained delay in passing the award?
Held:
The court noted that there was an excessive delay in issuing the award because the hearing before the Arbitral Tribunal lasted more than two years. The court determined that among other reasons, passing the arbitral award within reasonable time is to ensure the effectiveness of the oral submissions, and a large gap between the hearing of the submissions and the issuing of an award will hamper the purpose of using arbitration to settle disputes speedily.
The court further noted that the parties had agreed to arbitrate under the umbrella of DIAC and that the award would be issued within the time frame specified in the DIAC rules. The court noted that the parties continued to participate in the arbitration proceedings after the one-year period had expired, indicating that there was a mutual agreement among the parties to extend the time to make an award. However, a period of one and a half years cannot be considered reasonable in rendering the arbitral award, according to the court. The court also upheld the arbitral tribunal’s view in finding the Petitioner to be in breach of the agreement and, therefore, the Respondent was entitled to be compensated by the Petitioner. However, the court ruled that the arbitral tribunal’s quantification of the damages awarded was without any basis, and that the arbitral tribunal had also not indicated any calculation in support of its conclusions.
In the present circumstances, this court was of the view that inordinate and unexplained delay in rendering the award makes it amenable to challenge under Section 34(2) (b) (ii) of the Arbitration Act – that is, being in conflict with the public policy of India. The court thus set aside the arbitral award and allowed the petition.
K S&CO Comments:
The present judgement is significant for two particular reasons. Firstly, when the parties have agreed that arbitration will be conducted in accordance to the Institutional Arbitration rules then the rules laid down by the Institution is sacrosanct and in case the arbitrator breaches any rule in the conduct of arbitration proceedings, then the arbitration award can be set aside. Therefore, it is important for the arbitrator to follow the rules of the Institution. Secondly, the High Court set aside the judgement because of the inexcusable and inordinate delay stating it that this practice was against the Public Policy of India. Thus, court highlighted the importance of settling disputes in speedy and expeditious manner which is the foundation of the Arbitration Act.
