Recent Cases on Arbitration Law in India

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May 29, 2018

SC says Arbitration Clause in Insurance Policy is to be Construed Strictly

Also read Law of Arbitration in India- In a Nutshell

Case name: Oriental Insurance Company Limited v. M/s Narbheram Power and Steel Pvt. Ltd.- In this May, 2018 judgment, the Apex Court held that an arbitration clause is required to be strictly construed. Any expression in the clause must unequivocally express the intent of arbitration.

In this case, the Respondent had suffered damages on account of cyclone in Odisha in 2013. Accordingly, the respondent intimated the Appellant Insurance Company of the damages suffered by it and requested the appellant to settle the claim. However, the claim was not settled and consequently the respondent invoked the arbitration agreement and requested the appellant to concur with the name of the arbitrator whom it had nominated.

The appellant on the other hand objected to arbitration proceedings and declined to refer the disputes to arbitration in view of Clause 13 of the policy which stated that once the claim was repudiated and the insurer had disputed or not accepted the liability under or in respect of the policy, no difference or dispute could have been referred to arbitration.

Bench’s Verdict

The Three-Judge Bench of the Supreme Court headed by Chief Justice Dipak Misra in the case allowed the appeal and consented to appellant’s plea that the impugned matter could not be referred to arbitration. While allowing the appeal, the Supreme Court relied on plethora of earlier judgments and made following observations in the case:

That the parties are bound by the clauses enumerated in the policy and the court does not transplant any equity to the same by rewriting a clause.

That the Court can interpret such stipulations in the agreement. It is because they relate to commercial transactions and the principle of unconscionability of the terms and conditions because of the lack of bargaining power does not arise.

That an arbitration clause is required to be strictly construed. Any expression in the clause must unequivocally express the intent of arbitration. It can also lay the postulate in which situations the arbitration clause cannot be given effect to.

That if a clause stipulates that under certain circumstances there can be no arbitration, and they are demonstrably clear then the controversy pertaining to the appointment of arbitrator has to be put to rest.

With reference to the instant case, the Court opined that Clause 13 categorically postulated that if the insurer has disputed or not accepted the liability, no difference or dispute shall be referred to arbitration. Thus, such a situation squarely fell within the concept of denial of disputes and non-acceptance of liability.

The entire case can be accessed here.

SC on whether Arbitration Agreement can be Binding on Non-Signatory to the Agreement

Case name: Cheran Properties Limited v. Kasturi and Sons Limited and Ors.- In this case of April, 2018, the Supreme Court Bench while deciding the issue \ whether a non-signatory to an arbitration agreement is bound by the same or not, the Apex Court has held that that in certain situations, an arbitration agreement between two or more parties may operate to bind other parties as well. The Court’s observation was that the fact that the appellant was not a party to the arbitral proceedings will not conclude the question as to whether the award can be enforced against it on the ground that it claims under a party.

Brief Facts of the case: In the case an arbitration agreement was entered into between KC Palanisamy (KCP), KSL and SPIL and a company by the name of Hindcorp Resorts Pvt. Ltd. (Hindcorp). Later on disputes arose between the parties resulting in the commencement of arbitral proceedings. Under the terms of the award, a direction was issued under which KCP and SPIL were required to return documents of title and share certificates contemporaneously with KSL paying an amount of Rs 3,58,11,000 together with interest at 12% p.a. on a sum of Rs 2.55 crores. KCP challenged the award of the arbitral tribunal under Section 34 of the Arbitration and Conciliation Act, 1996 on the ground that the arbitral award could not be executed against the appellant which is admittedly not a signatory to the agreement.

Bench’s Verdict:

The Three-Judge Bench of the Supreme Court headed by Chief Justice Dipak Misra dismissed the appeal and made the following observations in the case:

Whether a non-signatory to arbitration agreement is bound by the same?

The Court opined that in holding a non-signatory bound by an arbitration agreement, the Court approaches the matter by attributing to the transactions a meaning consistent with the business sense which was intended to be ascribed to them. Therefore, factors such as the relationship of a non-signatory to a party which is a signatory to the agreement, the commonality of subject matter and the composite nature of the transaction weigh in the balance.

The Court also made reference to the group of companies’ doctrine to state that the doctrine essentially intended to facilitate the fulfilment of a mutually held intent between the parties, where the circumstances indicate that the intent was to bind both signatories and non-signatories. The effort is to find the true essence of the business arrangement and to unravel from a layered structure of commercial arrangements, an intent to bind someone who is not formally a signatory but has assumed the obligation to be bound by the actions of a signatory.

Why does the law postulate that there should be a written agreement to arbitrate?

The Court held that the mandate to have a written agreement is to exclude the jurisdiction of national courts. Where parties have agreed to resolve their disputes by arbitration, they seek to substitute a private forum for dispute resolution in place of the adjudicatory institutions constituted by the state.

Does the requirement, as in Section 7  that an arbitration agreement be in writing exclude the possibility of binding third parties who may not be signatories to an agreement between two contracting entities?

In this context the Court remarked that the evolving body of academic literature as well as adjudicatory trends indicate that in certain situations, an arbitration agreement between two or more parties may operate to bind other parties as well.

The group of companies doctrine has been applied to pierce the corporate veil to locate the “true” party in interest, and more significantly, to target the creditworthy member of a group of companies. Though the extension of this doctrine is met with resistance on the basis of the legal imputation of corporate personality, the application of the doctrine turns on a construction of the arbitration agreement and the circumstances relating to the entry into and performance of the underlying contract.

While the alter ego principle is a rule of law which disregards the effects of incorporation or separate legal personality, in contrast the group of companies doctrine is a means of identifying the intentions of parties and does not disturb the legal personality of the entities in question.

Section 35 of Arbitration and Conciliation ActThe Apex Court also made reference to Section 35 of the Arbitration and Conciliation Act 1996 to state that the statutory provision postulates that an arbitral award “shall be final and binding on the parties and persons claiming under them respectively”. The expression ‘claiming under’, in its ordinary meaning, directs attention to the source of the right. The expression includes cases of devolution and assignment of interest. The expression “persons claiming under them” in Section 35 widens the net of those whom the arbitral award binds. It does so by reaching out not only to the parties but to those who claim under them, as well.

That the expression “persons claiming under them” is a legislative recognition of the doctrine that besides the parties, an arbitral award binds every person whose capacity or position is derived from and is the same as a party to the proceedings. Having derived its capacity from a party and being in the same position as a party to the proceedings binds a person who claims under it. The issue in every such a case is whether the person against whom the arbitral award is sought to be enforced is one who claims under a party to the agreement.

The Apex Court in the case has eventually held that the fact that the appellant was not a party to the arbitral proceedings will not conclude the question as to whether the award can be enforced against it on the ground that it claims under a party. Thus, in such cases the Court is called upon to consider whether the test embodied in Section 35 is fulfilled so as to bind the non-signatory party to the agreement.

The entire case can be accessed here.

SC: Referring Parties to Arbitration has Serious Civil Consequences

Case name: Kerala State Electricity Board and Anr. v. Kurien E. Kathilal- In this case of March, 2018 the Supreme Court held that if no arbitration agreement exists between the parties then without a joint memo or a joint application of the parties, the  parties cannot be referred to arbitration. Under Such circumstances, the procedural mechanism as enumerated under Section 89 Code of Civil Procedure is to be duly adhered to.

In the case, the Appellant State Electricity Board had entered into an agreement  with respondent contractor for construction of a composite dam  in connection with Banasura Sagar Scheme. Later in view of revised minimum wages of labours, the respondent contractor claimed labour escalation charges. However, the Government of Kerala referred the matter to the industrial tribunal for adjudication of the dispute with regard to the said claim of workmen. While the adjudication with reference to the concerned issue was pending, the Appellant terminated the contract with the contractor. When the case came before the High Court, the  Court with reference to the amount payable for additional work done by the Respondent contractor with the consent of the counsel for the parties,  referred the matter to arbitration to resolve the dispute relating to items which they could not amicably resolve.

In view of the aforesaid facts, the issue for consideration by the Supreme Court was whether the High Court was right in referring the parties to arbitration on the oral consent given by the counsel without written instruction from the party?

  • In the aforesaid context, the Supreme Court noted that the Jurisdictional pre-condition for reference to arbitration under Section 7 of the Arbitration and Conciliation Act  is that the parties should seek a reference or submission to arbitration.
  • That so far as reference of a dispute to arbitration under Section 89 Code of Civil Procedure (settlement of dispute outside the Court), the same can be done only when parties agree for settlement of their dispute through arbitration in contradistinction to other methods of alternative dispute resolution mechanism stipulated in Section 89 Code of Civil Procedure. That for reference of the parties to arbitration, oral consent given by the counsel without a written memo of instructions does not fulfill the requirement under Section 89 Code of Civil Procedure.
  • That referring the parties to arbitration has serious consequences of taking them away from the stream of civil courts and subject them to the rigour of arbitration proceedings, in the absence of arbitration agreement, the Court can refer them to arbitration only with written consent of parties either by way of joint memo or joint application.
  • That under Section 89 Code of Civil Procedure, referring the parties to arbitration could be made only when the parties agree for settlement of the dispute through arbitration by a joint application or a joint affidavit before the Court[1].
  • That referring the parties to arbitration has serious civil consequences. Once the parties are referred to arbitration, the proceedings will be in accordance with the provisions of Arbitration and Conciliation Act and the matter will go outside the stream of the civil court. Under Section 19 of Arbitration and Conciliation Act, the arbitral tribunal shall not be bound by the CPC and the Indian Evidence Act. Once the award is passed, the award shall be set aside only under limited grounds. Hence, referring the parties to arbitration has serious civil consequences procedurally and substantively.
  • That when there was no arbitration agreement between the parties, without a joint memo or a joint application of the parties, the High Court ought not to have referred the parties to arbitration.

The entire case can be accessed here.

SC: Arbitration Clause Does not Bar Filing of Complaint with Consumer Forum

In a recent case M/S Emaar MGF Land Limited & Anr. v. Aftab Singh, the Two-Judge Bench of the Supreme Court agreed with NCDRC’s holding in July 2017 whereby, the National Commission ruled that an Arbitration Clause in Buyer’s Agreement cannot circumscribe the jurisdiction of a Consumer Fora, notwithstanding the amendments made to Section 8 of the Arbitration Act.

The NCDRC’s order in the case is encapsulated below:

Brief Facts of the case: In the case, the National Consumer Dispute Redressal Commission (NCDRC) took up a batch of petitions wherein the subject matter pertained to complainants who had booked residential villas/flats/plots in Projects of the Builder to be developed in Gurgaon/Mohali and accordingly executed Buyers’ Agreements. The cause of action in the case arose when Complainants approached the Consumer Forum alleging that the Builder had failed to deliver possession of these villas/flats/plots under the Project by the date committed in the Buyers Agreement and hence, sought directions to the Builder for delivery and possession of the villas, etc. along with compensation.

However, the Builder in the case filed a set of applications under Section 8 of the Arbitration Act praying therein that the parties be referred to Arbitration as per the Buyers’ Agreements executed between them.

The Builder relied upon Section 8 (1) of the Arbitration Act, as amended by the Arbitration & Conciliation (Amendment) Act, 2015 to make their claim for a reference to Arbitration.

Section 8 before and after Amendment of 2015In the pre-amendment era, only a party to the Arbitration Agreement could seek reference to Arbitration; however, as a result of the amendment, even persons claiming through such parties may seek reference to Arbitration.

The issue before the NCDRC was whether the newly inserted Sub-Section (1) of Section 8 of the Arbitration Act mandates Consumer Forums, constituted under the Consumer Act, to refer parties to Arbitration in terms of valid Arbitration Agreement, notwithstanding other provisions of the Arbitration Act and the provisions of the Consumer Act?

NCDRC made the following observations in the case:

  • That prior to the amendment, the Hon’ble Supreme Court had resolved and settled that the Consumer Forums were not bound to refer disputes to Arbitration under Section 8 of the Arbitration Act. In other words, an Arbitration Clause in a contract could not circumscribe the jurisdiction of the Courts and the Tribunals, especially those which are constituted to achieve a particular purpose and objective.
  • Arbitrability of Disputes– In this context, NCDRC made reference to Supreme Court’s decision in the case of Booz Allen and Hamilton Inc. v. SBI Home Finance Limited & Ors.[2] which delineates the conceptual framework behind making only some kinds of disputes arbitrable. The NCDRC accordingly observed that disputes are not characterized as arbitrable and non-arbitrable at the whim and fancy of the Legislature. The classification is based on the crucial distinction, repeatedly explained by the Hon’ble Supreme Court.
  • Jurisprudence on Arbitrability of Consumer Disputes– the NCDRC in view of catena of decisions of Supreme Court on this aspect held that existence of an Arbitration Clause will not be a bar for the entertainment of the Complaint by a Consumer Fora. Heavy reliance was placed on the case of Skypak Couriers Ltd. Vs. Tata Chemicals Ltd., whereby the Supreme Court inter alia observed that even if there exists an arbitration clause in an agreement and a complaint is made by the consumer, in relation to a certain efficiency of service, then the existence of an arbitration clause will not be a bar to the entertainment of the complaint by the Redressal Agency, constituted under the Consumer Protection Act, since the remedy provided under the Act is in addition to the provisions of any other law for the time being in force.

In view of the afore-going discussion, NCDRC made the following conclusions in the case:

  • the disputes which are to be adjudicated and governed by statutory enactments, established for specific public purpose to sub-serve a particular public policy are not arbitrable;
  • there are vast domains of the legal universe that are non-arbitrable and kept at a distance from private dispute resolution;
  • the subject amendment was meant for a completely different purpose, leaving status quo ante unaltered and subsequently reaffirmed and restated by the Hon’ble Supreme Court;
  • Section 2(3) of the Arbitration Act recognizes schemes under other legislations that make disputes non-arbitrable
  • In light of the overall architecture of the Consumer Act and Court-evolved jurisprudence, amended sub-section (1) of Section 8 cannot be construed as a mandate to the Consumer Forums, constituted under the Act, to refer the parties to Arbitration in terms of the Arbitration Agreement.

In view of the aforesaid findings and observations, the NCDRC held that an Arbitration Clause in the afore-stated kind of Agreements between the Complainants and the Builder cannot circumscribe the jurisdiction of a Consumer Fora, notwithstanding the amendments made to Section 8 of the Arbitration Act.

SC: Appeal against Enforcement of Foreign Award to Lie u/Section 50 of Arbitration Act Only

Case name: Kandla Export Corporation & Anr. v. M/s OCI Corporation & Anr. In this recent case of February, 2018, the Supreme Court has held that appeals filed under Section 50 of the Arbitration Act would have to follow the drill of Section 50 alone and not Section 13(1) of the Commercial Courts Act.

In this case the seminal issue confronted by Two-Judge Bench of the Supreme Court was whether an appeal, not maintainable under Section 50 of the Arbitration Act , is nonetheless maintainable under Section 13(1) of the Commercial Courts, Commercial Division and Commercial Appellate Division of High Courts Act, 2015 (“the Commercial Courts Act”)?

In the case, the Appellants had filed an appeal under the Commercial Courts Act, which was dismissed stating that the Commercial Courts Act did not provide any additional right of appeal which is not otherwise available to the Appellants under the provisions of the Arbitration Act.

Considering the fact that Section 50 of the Arbitration Act  only provided for an appeal in case a petition to enforce a foreign award was rejected, the High Court held, keeping in view the legislative policy of the Arbitration Act, (to speedily determine matters relating to enforcement of foreign awards) that since an appeal did not lie from a judgment enforcing a foreign award under the said section, no such appeal would be maintainable under the Commercial Courts Act.

Bench’s Verdict

The Court while delivering its judgment in the case heavily relied on the Fuerst Day Lawson Limited v. Jindal Exports Limited[3] wherein it was observed that that the Arbitration Act is a self-contained Code on all matters pertaining to arbitration, which would exclude the applicability of the general law contained in Section 13 of the Commercial Courts Act.

Other key observations made by the Court in the case are as under:

  • That no change was made in Section 50 of the Arbitration Act when the Commercial Courts Act was brought into force, which clearly implies that Section 50 is a provision contained in a self-contained code on matters pertaining to arbitration, and which is exhaustive in nature.
  • That Section 13(1) of the Commercial Courts Act, being a general provision vis-à-vis arbitration relating to appeals arising out of commercial disputes, would obviously not apply to cases covered by Section 50 of the Arbitration Act.
  • That the ratio decidendi[4] of the judgment in Fuerst Day Lawson case would apply, and this being so, appeals filed under Section 50 of the Arbitration Act would have to follow the drill of Section 50 alone. This, in fact, follows from the language of Section 50 itself. In all arbitration cases of enforcement of foreign awards, it is Section 50 alone that provides an appeal.
  • That the forum of appeal is left “to the Court authorized by law to hear appeals from such orders”. Section 50 of the Arbitration Act properly read would, therefore, mean that if an appeal lies under the said provision, then alone would Section 13(1) of the Commercial Courts Act be attracted as laying down the forum which will hear and decide such an appeal.

Read the entire case here.

Exclusive jurisdiction Clause in Arbitration Agreement Ousts Jurisdiction of other Courts

Case name: CVS Insurance and Investments vs. Vipul IT Infrasoft Pvt. Ltd. In the case, the Delhi High Court gave the ruling that there shall be only one seat of arbitration though venues may be different and where the arbitration seat is fixed only such court shall have an exclusive jurisdiction.

In this case, the seminal issue between the parties was whether the seat of the arbitration should be at Delhi or Noida when the agreement between the parties give exclusive jurisdiction to courts at Noida?

In the case, parties entered into Arbitration Agreement in 2013 and later on had some disputes related to payments. The impugned provision in the agreement which is the cause of action in the instant case is reproduced herein below:

12.1 This Agreement shall be construed, interpreted and applied in accordance with and shall be governed by the laws of India. 12.2 Any dispute arising between the parties in relation to this Agreement and its schedules, annexures (if any) or the Maintenance Agreement or any other congruent Agreement, shall first be tried to be amicably resolved by the parties. Failing amicable resolution within 30 days of the commencement of negotiations, the dispute shall be referred to a Sole Arbitrator as appointed by the Company. The Intending Sub Lessee hereby agrees and confirms that it shall have no objection to such appointment. The Arbitration shall be conducted as per the Arbitration and Conciliation Act, 1996  or its statutory modifications, amendments or re- enactments thereof. The Award of the Arbitrator shall be final and binding upon the parties. The venue of arbitration shall be Noida/New Delhi.

It is agreed by and between the Parties hereto that the arbitration proceedings and all other matters connected to arbitration and any disputes, suits, complaints, litigation, claim or any other matter arising out of or in relation to this Agreement, shall be subject to the exclusive jurisdiction of Courts at Noida.

Bench’s Verdict

  • That there cannot be two or more seats of arbitration though the venue of arbitration may depend upon convenience of the parties. Article 12 of the Agreement gives exclusive jurisdiction to courts at Noida while keeping Delhi and Noida as venue for arbitration.
  • Difference between seat and venue- The Bench referred to Supreme Court’s verdict in the recent case of Indus Mobile Distribution Pvt. Ltd. v. Datawind Innovations Pvt. Ltd. & Ors[5].  wherein the Apex Court ruled that Section 20(1) and 20(2) where the word “place” is used, refers to “juridical seat”, whereas in Section 20 (3), the word “place” is equivalent to “venue”. In this case it was further held that the moment the seat is designated, it is akin to an exclusive jurisdiction clause.
  • Section 20 of the Arbitration and Conciliation Act provides for the place of arbitration.
  • That there shall be only one seat of arbitration though venues may be different and where the arbitration seat is fixed only such court shall have an exclusive jurisdiction.
  • That in view of the facts barring the registered office of the respondent company at Delhi, none of the cause of action arose within the jurisdiction of Delhi High Court. Admittedly the agreement was executed at Noida; it was to be performed at Noida; payments pursuant to the agreement were to be made at Noida; the agreement pertains to a sub- lease of unit based in Noida; the stamp paper on which the agreement was executed pertains to Utter Pradesh; and that the petitioner and respondent had agreed to an exclusive jurisdiction of Noida as per Article 12(3).
  • That the contention that there is no High Court in Noida would not confer the jurisdiction upon the Courts at U.P. and that would result in stretching Article 12 in the Agreement too much. The subject agreement when refer to the venues of arbitration be at Noida/New Delhi it relate only to the convenience of parties in holding arbitral hearings and does not in any way confer jurisdiction upon Delhi Courts.
  • That in the light of an exclusive jurisdiction clause in relation to arbitration proceedings, which excludes the jurisdiction of all other Courts than the Court mentioned therein, the application would only lie before the High Court exercising jurisdiction over Noida, Uttar Pradesh and not before this Court.

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[1] Afcons Infrastructure Ltd. and Anr. v. Cherian Varkey Construction Co. (P) Ltd. and Ors. (2010) 8 SCC 24

[2] (2011) 5 SCC 532

[3] (2011) 8 SCC 333

[4] the rule of law on which a judicial decision is based

[5] (2017) 7 SCC 678