In a significant development, Hon’ble Supreme Court has held that non- payment of stamp duty on the commercial contract will not invalidate the arbitration agreement. This judgment lays down various guidelines which courts and tribunals must follow while dealing with the objection qua non-stamping or insufficient stamping. Apart from this, there have been various other significant developments relating to domestic arbitration. In this Newsletter, we have covered the arbitration related judgments passed by the Indian Courts in the month of January & February 2021 and our views on the same.
March 9, 2021
Arbitration Newsletter- January & February 2021
Non Payment of stamp duty on the commercial contract will not invalidate the arbitration agreement
Non-payment of stamp duty on the commercial contract will not invalidate the arbitration agreement, holds the Hon’ble Supreme Court
In an important judgment titled as N.N Global Merchantile Pvt Ltd Vs Indo Unique Flame Ltd., Hon’ble Apex Court while setting aside Hon’ble High Court’s order held that there is no legal impediment to the enforceability of the arbitration agreement, pending payment of Stamp Duty on the substantive contract. It held that the non-payment of the stamp duty on the substantive contract would not invalidate the main contract because it is a deficiency which is curable on the payment of the requisite stamp duty. The court further laid down guidelines as to how Courts and Tribunals should deal with an objection regarding non-stamping or insufficient stamping. An important finding of this landmark judgment was that it held that High Court or Supreme Court while exercising powers under Section 11 of the Arbitration Act, can impound the substantive agreement which is either unstamped or insufficiently stamped and can direct the parties to cure the defect before the arbitrator/tribunal. Court may grant ad-interim relief under Section 9 of the Act, however shall then impound the substantive contract and direct the parties to cure the defect.
In this case the Defendant (Indo Unique Flame Ltd.) had entered into a sub contract with the Plaintiff for the transportation of coal. The Plaintiff furnished a bank guarantee. Disputes arose between the parties and the Defendant invoked the bank guarantee. The Plaintiff filed a civil suit. Since, the sub-contract contained an arbitration clause, the Defendant filed an application under Section 8 of the Arbitration and Conciliation Act, 1996 seeking reference to the Arbitration. Later, the decision was appealed in the SC.
Our Comments:-
This judgment though, has been referred to the Constitution bench but the ratio propounded in it is certainly in accordance with the provisions of the Arbitration and Conciliation Act, 1996. It correctly interprets that the arbitration clause is severable from the main substantive contract and hence does not invalidate the entire contract even when the deficiency is non-payment of stamp duty, since the same is a curable defect. It also ruled over its previous judgment in Garware Wall Ropes Limited v. Coastal Marine Constructions and Engineering Limited (2018) 18 SCC 313, wherein it was held that the arbitration clause would be non-existent in law and unenforceable till the Stamp duty is adjudicated and paid on the substantive contract. This judgment has been referred due to conflicting judgment passed by the co-ordinate bench of the same court i.e. in Vidya Drolia & Ors. vs Durga Trading Corporation.
Hon’ble Supreme Court holds that Section 12(5) of Arbitration and Conciliation Act, 1996 which deals with Ineligibility of Appointment as Arbitrator is a mandatory and non-derogable provision
Recently, Hon’ble Apex Court in case titled Haryana Space Application Centre and Ors. vs. Pan India Consultants Pvt. Ltd held that the appointment of a sole arbitrator is subject to the declarations made under Section 12 of the Arbitration and Conciliation Act, 1996 with respect to independence and impartiality of the arbitrator. The Court observed that Section 12(5) of the Arbitration and Conciliation Act, 1996 read with the Seventh Schedule, which deals with ineligibility of a person to be appointed as an arbitrator is a mandatory and non- derogable provision of the Act.
In this case an appeal was filed by the Haryana Space Application Centre (HARSAC) against an order of the Punjab and Haryana High Court which had, in light of the Covid Pandemic, granted an extension of 4 months to enable the parties to conclude their arguments within 3 months, and a period of 1 month for the Arbitration Tribunal to pass the Award. The Arbitration Tribunal was constituted in the year 2016 in view of the dispute between HARSAC and PAN India Consultants. The HARSAC appointed Principal Secretary to the Government of Haryana as their nominee arbitrator. The Hon’ble Supreme Court held that the appointment of the Principal Secretary, Government of Haryana as the nominee arbitrator of HARSAC which is a Nodal agency of the government of Haryana, would be invalid under Section 12(5) of the Arbitration and Conciliation Act, 1996 read with the Seventh Schedule.
Our Comments:
This Judgment correctly interprets the statutory provisions, thereby upholding the mandate of the Act.
An order of termination of arbitral proceedings under Section 32(2)(c) of the Arbitration and Conciliation Act, 1996 is not an award and can be challenged via Section 14(2) of the Act.
Hon’ble Delhi High Court in a judgment dated 12.01.2021, passed in PCL Suncon vs. National Highway Authority of India, held that termination of arbitral proceedings under Section 32(2)(c) is not an award under the Act. It held that an order, which terminates the arbitral proceedings as the Arbitral Tribunal finds it impossible or unnecessary to continue the arbitral proceedings, would not be an award. This is so because it does not answer any issue in dispute in arbitration between the parties; but is an expression of the decision of the Arbitral Tribunal not to proceed with the proceedings.
The court held that that the decision of an Arbitral Tribunal to terminate the arbitral proceedings cannot constitute an arbitral award which can be challenged under Section 34 of the Arbitration and Conciliation Act, 1996. It can only be
In this case, the impugned Order under challenge was passed by two arbitrators, as the functioning of the Arbitral Tribunal was stalled due to the vacancy caused by resignation of the petitioner’s nominated arbitrator.
Our Comments:
The judgment passed by Hon’ble Delhi High Court is in accordance with the law laid down by Hon’ble Supreme Court in the case of Lalit Kumar v Singhavi wherein it was observed that an award constitutes a final determination of a particular issue or claim in arbitration. In order for a decision of the Arbitral Tribunal to qualify as an award, the same must finally decide a point at which the parties are at issue. In cases where the same is dispositive of the entire dispute referred to the Arbitral Tribunal, the said award would be a final award.
100% deposit/security of the Awarded amount, or any part thereof is not mandatory in all cases as a pre-condition for having Section 34 heard, need to be seen on case to case basis.
In SEPCO Electric Power Construction Corporation v Power Mech Projects Ltd, the High Court of Delhi held that deposit/security of the Awarded amount, or any part thereof is not mandatory in all cases and it would need examination on a case by case basis as to what arrangement should be worked out by the Court to secure the Awarded amount. However, in the facts of the present case, the Court upheld the order directing the deposit of 100% of the principal awarded amount as the Appellant before it was a foreign entity having negligible assets within the jurisdiction of this Court, or even within the territory of India coupled with the fact that Appellant had not complied with previous directions of deposit, and its overall failure in satisfying the court of its financial health.
Our comments:
The condition of pre-deposit or security amount is generally ordered to ensure that section 34 proceedings are not misused and to avoid frivolous petitions. However, to make it mandatory for all unilaterally is not correct. Therefore, the law laid down in the present case to decide the condition of pre-deposit on case to case basis is rationale and in accordance with law.
Bombay High Court passes order against the third parties in the Arbitration proceedings.
The Hon’ble Bombay High Court in the case of Valentine Maritime Ltd v Kreuz Subsea Pte Ltd., recently confirmed that it is only a party to an arbitration agreement who can approach a court under Section 9 of the Arbitration and Conciliation Act, 1996. However, the power of the court passing orders under Section 9 of the Act is not confined to passing orders against the “parties” to the agreement per se. Orders can be passed under a Section 9 petition even against the third parties. Such third parties however do not possess the necessary locus standi to bring a section 9 petition.
Our Comments:
The correctness of this judgment must be adjudged by our Apex Court inasmuch as the finding of this case goes against the principles of natural justice which mandates a reasonable hearing to even a third party prior to issuance of any adverse order. It would be also interesting to note whether such powers will also be conferred upon the arbitrators under section 17 of the Act so as to allow them to issue any orders on a third party who is not a party to the arbitration. By passing such orders, it may be possible that the matters in personam could be converted to matters in rem. These questions must be adjudged in an appellate proceedings.
Hon’ble Supreme Court holds that an order of Refusal to condone delay for an appeal under Section 34 is appealable under Section 37 of the Arbitration Act.
Hon’ble Supreme Court recently, in a significant judgment dated 11.02.2021 passed in “Chintels India Ltd v Bhayana Builders Private Ltd”, was pleased to held that an order refusing to condone the delay in filing an appeal under Section 34 of the Arbitration and Conciliation Act, 1996 is appealable under Section 37 of the Act. Court answered this important Question of law in an appeal arising out of a Delhi High Court Judgment which held such appeal as not maintainable. The 3 Judge Bench observed that the expressions setting aside or refusing to set aside an arbitral award” does not stand by itself. The expression has to be read with expression that follows- “under section 34”. The Hon’ble Apex Court rejected the argument that since Arbitration Act allows for minimal judicial intervention, appeals against orders rejecting appeals should not be entertained. On the contrary it held, that when the language of the Section 37 provision allows such appeal could be filed, court cannot limit its scope.
Comments:
This landmark judgment has set the widespread confusion to rest. It reaffirms the settled legal proposition that when there is no bar embodied under a statute, the same should not be inferred or created by the judiciary. After this judgment appeals can be filed under Section 37 of the Act in all matters where the petitions have been dismissed on account of delay.
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