Domestic Judgments affecting Arbitration regime of India

If one finds it challenging to enforce a commercial contract, then rest of the aspect of ease of doing business becomes significantly less relevant. Enforcement of contract and pendency of cases is one area that continues to be a concern. One aspect that could help alleviate concerns with commercial contracts, as well as help reduce the burden on the court and consequently pendency, is through Alternate Dispute Resolution (ADR). Since the government of India is committed to improve its ranking in ease of doing business, it has made major strides towards greater efficiency and efficacy in resolving commercial disputes, including major legislative measures on promoting ADR. With top class arbitration, many of the concerns regarding enforcement and delays in the court would dissipate.

An unsigned arbitration agreement can be valid in certain cases: SC

The Hon’ble Supreme Court in the case of M/s Caravel Shipping Services Pvt. Ltd. v. M/s Premier Sea Foods Exim Pvt. Ltd., Civil Appeal Nos. 10800-10801 of 2018, held that an arbitration agreement needs to be in writing though it may not be signed. The appellants and respondents signed an agreement through a document styled as “Multimodal Transport Document/Bill of Lading”. The opening clause of the Bill of Lading specifies that in accepting it, the merchant expressly agrees to be bound by the bill of lading, its conditions, clauses and exceptions. The respondent filed a suit before the Sub-Judge’s Court in Kochi to recover a sum of Rs. 26,53,593/-. Subsequently, the appellants filed an Interlocutory appeal under Section 8 of the Arbitration and Conciliation Act, 1996, and shed light on the presence of an arbitration clause (Clause 25 of the Bill of lading) in the Bill. But, the Sub-Court, Kochi, dismissed the appeal. The apex court held that the respondent cannot argue that for the purposes of its Suit, it will rely on Bill of Lading, though not signed but for the purposes of arbitration, there is a requirement of a signature as mentioned under Section 7(4) of the Arbitration Act. Hence, the Court allowed the appeal on the grounds that arbitration clause forms part of the agreement and hence, would be governed by Section 7 of the Arbitration Act, even though it has not been expressly signed.

Our comments/views

The judgment signifies that the Apex Court also considers conduct of the party while deriving consent to arbitrate. The parties shall understand that mere non signature by a party will not make the arbitration clause invalid. The related circumstances and conduct of the parties can also show the intention of the parties to arbitrate.

Supreme Court gives guidelines for determination of seat of arbitration when the agreement is silent with regard to the choice of seat

In the case of Union of India v. Hardy Exploration and Production (India) Inc., Civil Appeal No. 4628 of 2018, the Supreme Court emphasized on the determination of the seat of arbitration in absence of express choice by the parties. The parties entered into a production sharing contract which had an arbitration clause. A dispute arose and it was referred to arbitration. The award was made in favour of respondent which was challenged in the court under Section 34 of the Arbitration & Conciliation Act, 1996. The respondent contended that Indian Courts have no jurisdiction over international arbitration and cannot entertain such matters. The dispute resolution clause was silent with regard to the choice of seat and mentioned Kuala Lumpur as the venue.The Court held that the Indian Courts will have jurisdiction if the seat of arbitration is in India. The court further stated that there should be either an express provision stating the seat of arbitration in the arbitration agreement or the agreement should mention the procedure to determine the seat. If it is not stated and the procedure is not followed then there should be some additional factors for the consideration of the venue mentioned to be considered as the seat. Additional factors may be such that of membership of the arbitrators, the law governing the arbitration.

Our comments/views

Determination of seat is essential for the international arbitration disputes as the courts of the seat have supervisory jurisdiction over the conduct of arbitration. The parties shall make clear reference with regard to the choice of seat in their dispute resolution clause as its absence can lead to results which parties never intended.

Supreme Court laid down the framework for the Arbitral Tribunal to decide on the rate of interest

The Supreme Court in Vedanta Ltd. v. Shenzhen Shandong Nuclear Power Construction Co. Ltd., Civil Appeal No. 10394 of 2018, laid down the factors which are to be considered while making an award for interest. In this case, the parties had an arbitration clause in their contract which provided for a compensation of 105% the amount of the cost incurred and stated nothing about the rate of interest. A dispute arose between the parties which led to termination of the contract. A three member bench of arbitral tribunal awarded the claimant partly in Indian rupees and partly in euros. They levied an interest on the amount @9%p.a. for the first 120 days and @15%p.a. after 120 days. The aggrieved appealed in the single judge and division bench of the High Court where his appeal was dismissed. He filed a special leave petition at the apex court where he challenged the rate of interest awarded by the arbitral tribunal. The Supreme Court held that the rate of interest should be uniform and it must correspond to the currency in which the award is made. Further, it said that the arbitral tribunal should consider some factors while making an award for interest like the ‘loss of use’ of the sum, the types of principal sum, the time period for which the interest applies, the internationally prevailing rate of interest, type of interest i.e. simple or compound, rate of inflation. It should be economically prudent and be proportional to the count awarded as interest. It ordered a uniform rate of interest of 9% p.a. for the award to be made in INR and at the LIBOR rate + 3% p.a. for the award to be made in euros.

Our comments/views

Determination of interest rate by the arbitral tribunal is not uniform and tribunals across the globe have adopted various methods and applied different interest rate. The best practice in this regard would be that parties in their contract mention about the applicable interest rate on the award or their process of determining it.

Prior notice to be filed under Section 34 (5) is not mandatory

Section 34 gives the right to the award-debtor to file an application to set aside the arbitral award. Section 34(5) states that the appellant shall give a prior notice to the opposite party before filing the application. The Supreme Court in the case of State of Bihar v. Bihar Rajya Bhumi Vikas Bank Samiti, Civil Appeal No. 7314 of 2018, held that giving prior notice under Sec 34(5) to the other party is not mandatory. The arbitral tribunal granted an award in a dispute between the parties on 24.05.2015. The aggrieved party filed for an appeal before the single judge and then the division bench of the Patna High Court under Sec 34. The prior notice to the opposite party under Sec 34(5) was not provided. A notice was issued to the opposite party by the Court on 18.07.2016. Both the single judge and division bench of the Patna High Court held that providing a notice under the section is mandatory. The matter then appealed before the Supreme Court. The issue before the Court was that whether notice under Sec 34(5) is mandatory or not. The Supreme Court set aside the judgements of the High Court and allowed the appeal. The rationale behind making such decision was that the purpose of sending such notice has been fulfilled by the letter sent by the court and therefore the requirement is directory and not mandatory.

Our comments/views

]The Apex Court in this judgment recognizes that the setting aside application has to be decided in a required time of one year and the noncompliance of such technical issues will delay the decision of the court. Such delay will directly affect the expedited resolution of dispute for which the parties opted for arbitration. This judgment shows that the courts in India have adopted a pro arbitration policy.

An Arbitration Agreement can be invoked numerous times in case the right is reserved by the Party: Delhi HC

The Delhi High Court in the case Parsvnath Developers Limited and Anr. v. Rail Land Development Authority, Arbitration Petition No. 724/2018, held that Order II Rule 2 which contains provision for relinquishment of part of claim and states that where a plaintiff omits to sue in respect of, or internationally relinquishes, any portion of his claim, he shall not afterwards sue in respect of the portion so omitted or relinquished. In the present case, the petitioners invoked the Arbitration Agreement via its notices appointing its Arbitrator and calling upon respondent to nominate its arbitrator. The respondent replied via its notice in negative stating that the arbitration proceedings between parties had been adjudicated by the Arbitral Award and therefore there was no dispute to be adjudged, and moreover, the respondent contended that the petition was barred by Order II Rule 2 of CPC and also by principles of estoppels or res judicata. The counsel on behalf of petitioners invited attention of the court towards the award of previous Arbitral Award, in which the petitioners had expressly reserved rights for separate arbitration proceedings. The Court relied on three Judgements of the Hon’ble Supreme Court and passed a Judgement in favour of the petitioners stating that an Arbitration Agreement can be invoked a number of times and does not cease to exist only with the invocation on the first time. Moreover, the Court also pointed out that by way of the Amendment of 2015 and insertion of Section 11(6A), there is a restriction imposed on scrutiny of the Court at the stage of adjudicating an application under Section 11 of the Act only to the exercise of the Arbitration Agreement.

Our comments/views

It is agreed that the provisions of Civil Procedure Code are not applicable to the arbitration. However, the Delhi High Court failed to recognize the finality of the award. Reserving a claim and raising it on later stage will somewhere affect the finality of the arbitral award and will lead to multiplicity of the proceedings.

Third party has a right to appeal under Section 37 of the Arbitration & Conciliation Act, 1996

The Hon’ble Bombay High Court in the matter of Prabhat Steel Traders Pvt. Ltd. and Ors. v. Excel Metal Processors Pvt. Ltd. and Anr., Arbitration Petition No. 619 of 2017, held that a third party having vital interest in the subject matter of an arbitration agreement can appeal against the arbitral order which hampers its interest under Section 37 of the Arbitration and Conciliation Act, 1996. In the present case, the petitioners had purchased 46 HR steel coils, subsequently entered into a Conducting Agreement with the respondent no. 3, whereby the former gave the said coils to the latter for storing, handling and recoiling on job work basis. Acknowledgements were issued by respondent no. 3 on delivery and recipient of the said coils from the petitioner. One day, the petitioner paid a visit to the said warehouse to take the delivery and found that some of the coils including the said coils were marked as “SIPL” in yellow paint. Subsequently, respondent no. 1 (parent company of respondent no. 3) along with respondent no. 3 informed the petitioner about some arbitral proceedings pending between respondent no. 1 and respondent no. 2. Further, they informed the petitioner that the coils which were claimed by respondent no. 2 were attached/injuncted pursuant to an order passed on 27th December, 2016 by the learned arbitrator. The petitioners (13 appeals) filed an arbitral petition under Section 37 of the Act against the impugned order of the arbitrator and also prayed for setting aside the said order granting relief to respondent no. 1, and against respondent no. 2. The Court shed light on the legislative intent behind the words of Section 37, wherein the expression “party” is absent, it is deliberately not inserted so as to provide a remedy of an appeal to a third party who is affected by any interim measure granted by the arbitral tribunal or by the Court in the proceedings filed by and between the parties to the arbitration agreement. Moreover, it was stated that that powers of Court under section 9 to grant interim measures and powers of the arbitral tribunal under section 17 of the Act, and even a third party who is directly or indirectly affected by interim measures granted by the arbitral tribunal will have a remedy of an appeal under section 37 of the Act. Hence, there is no total bar for the maintainability of an arbitral appeal by a third party and it has to be decided in the facts of each case.

Our comments/views

Allowing third parties to file appeal under Section 37 of the Act against the order of the tribunal is something laudable as it will not leave the third party remediless in case they are affected by the order of the arbitral tribunal.