Between the Lines | BHC: Once parties acknowledge existence of arbitration clause, court can appoint arbitrator even if stamp duty is insufficiently paid

The Bombay High Court (“BHC”) has in the judgement dated February 28, 2022 (“Judgement”), in the matter of Pigments and Allieds v. Carboline (India) Private Limited and Official Liquidator and Liquidator of Octamec Engineering Limited [Arb. Application 225 of 2016] held that once parties acknowledge existence of arbitration clause, court can appoint arbitrator even if stamp duty is insufficiently paid.

Facts

Pigments & Allieds, a partnership firm (“Applicant”) filed an application under Section 11 of the Arbitration and Conciliation Act, 1996 (“Act”) and sought appointment of a sole arbitrator in furtherance of invoking the arbitration clause under a Tripartite Agreement dated February 06, 2013 (“Agreement”), executed between the Applicant, Carboline (India) Private Limited (“Respondent no. 1”) and Official Liquidator and Liquidator of Octamec Engineering Limited (“Respondent no. 2”) (collectively referred to as “Respondents”). A original copy of the Agreement was not available with any of the parties.

As per the Agreement, the Applicant was required to carry out work including construction and maintenance for Vodafone Shared Services Limited pursuant to a Subcontractor Agreement dated September 18, 2012 between the Respondents inter se (“Subcontractor Agreement”). Essentially the work involved supply and application of intumescent paint fire protection system and anti- corrosive paint to steel columns, fire and rust protection systems for the Vodafone Data Centre. The Respondent no.2 had placed a work order and a purchase order (“PO”) issued under the Subcontractor Agreement on October 08, 2012, on the Respondent no.1 for supply and application of the aforesaid. The PO was placed by the Respondent no. 1 on the Applicant for supply of paint, as aforesaid for a consideration of Rs.18,00,77,644/- approx. Payment was to be made by way of a Letter of Credit (“LoC”) of 90 days.

Pursuantly, Applicant had ordered 21 full container loads of the paint from Jordan. But the Respondent no. 1 had defaulted in making payments. The Respondent no. 1 apparently entered into negotiations with the Applicant to revise payment terms. Thereafter a new purchase order dated December 26, 2012 (“NPO”) was issued reflecting negotiated terms for supply of 3,32,597 ltrs. (approx.) of paint for a consideration of Rs.19,19,13,125/- approx. The consignments had begun arriving at Nhava Sheva Port around January 2013 and the Applicant was incurring high demurrage charges and port charges. However, the Respondent no. 1 did not make payments under the NPO as well. The Respondent no. 1 then suggested that the Respondent no. 2 would open the requisite LoCs in favour of the Applicant and that the Respondent no. 2 should accept a combination of advances payable by post-dated cheques as guarantee against the LoCs being issued to the Applicant by the Respondent no. 2. Subsequently, the Agreement was executed on February 06, 2013. After much follow-up, some part payments were made in February 2013 and March 2013. Corresponding quantity of paint was released after payment was made towards detention charges, demurrage and customs duty.

The first shipment was then delivered at Vodafone site on February 26, 2013. The Applicant reminded Respondent no. 2 that they were incurring huge costs by way of customs duty, demurrage charges since the paint had not been collected due to the default of Respondent no. 1. The 3rd and 4th consignments were awaiting clearance and this has caused enormous loss to the Applicant. Under clause 10(b) of the Agreement, disputes between the parties were to be referred to Arbitration. The Applicant’s case was that both the Respondents had avoided interacting with the Applicant and that they had jointly and severally failed to make payments for a shipment. A claim for a sum of Rs.8,92,97,690/- approx. had been made along with Rs.1,24,04,618/- approx. towards demurrage, detention and other port charges. Interest had also been claimed @ 18% P.A. In these circumstances, the Applicant invoked arbitration by its letter-cum-demand notice dated June 2, 2016 (“Demand Notice”), and a sole arbitrator had been nominated.

It was stated that, on November 09, 2017, court had ordered impounding of the Agreement since it was found to be inadequately stamped. On December 10, 2019, the Superintendent of Stamps, Mumbai passed an order and issued a demand notice for payment of duty amounting to Rs.10,72,140/- , penalty of Rs.15,01,000/-, and a sum of Rs.200/- was payable towards indemnity.

Issues

• Once parties acknowledge existence of arbitration clause, whether court can appoint an arbitrator even if stamp duty is insufficiently paid.
• In the absence of the original copy of the Agreement, whether it was possible to impound a copy of the Agreement and have the copy stamped with ad-valorem duty payable.

Arguments

Contentions raised by the Appellant:

By virtue of the decision in InterContinental Hotels Group (India) Private Limited and Another v. Waterline Hotels Private Limited [Arbitration Petition (Civil) No.12 of 2019], when a court was faced with an issue of insufficient stamping, it was observed that there was no bar against proceeding and appointing an arbitrator. Further that after Applicant’s response to the notice of demand, an order was expected to be passed, which could be challenged by way of a statutory appeal under Section 40 of the Maharashtra Stamp Act, 1958 (“MSA”). Relying upon the decision of Pradeep Shyamrao Kakirwar v. Dr. Seema Arun Mankar and Others [(2020) SCC OnLine Bom 799], the Applicant urged that though the photocopy was not an instrument, it did not come in way of stamp-duty being paid upon it pursuant to an impounding order of the court.

The Applicant cited the observations of the judgment in Intercontinental Hotels Group (supra), where the court held that until the larger bench decides the issue of existence of the arbitration agreement by virtue of reference made to the larger bench in N.N. Global Mercantile Private Limited v. Indo Unique Flame Limited and Others [(2021) 4 SCC 379], the court should ensure that the arbitrations are carried on, unless the issue before the court patently indicates existence of deadwood. In conclusion, it was Applicant’s case that an arbitrator must be appointed.

Contentions raised by Respondents:

The Respondent no. 1 contended that the obligation to make payment was equally of the Respondent no. 2, which however, had been ordered to be wound-up. According to the Respondent no. 1, there was no dispute that existed and the question of appointment of an arbitrator did not arise. The Respondent no. 1 submitted that terms of the Agreement were not followed since there was no attempt to explore good faith negotiations as contemplated under Clause 10(a) of the Agreement prior to arbitration being invoked. According to the Respondent no. 1, unless the negotiations were held and had failed, arbitration could not have been invoked. Furthermore, it was contended that the Respondent no. 2 was also required to nominate an arbitrator and not just Respondent no. 1. It was the Respondent no. 1’s case that an arbitration, if any, could only proceed as amongst the three parties. Hence, if the Applicant had a claim, it had to proceed against both the Respondents.

It was the Respondent no. 1’s case that an instrument could be stamped even if it was a copy and the original were unavailable. Per contra, the Respondent no. 1 submitted that the court should not have proceeded and appointed an arbitrator since the instrument was not sufficiently stamped. Therefore the copy was inadmissible in evidence. According to the Respondent no. 1, stamp-duty of a sum of Rs.100/- on the Agreement had been paid in Tamil Nadu. However, the stamp-paper purchased in Tamil Nadu would have been of no relevance when the agreement was executed in Mumbai. According to the Respondent no. 1, ad-valorem stamp duty was to be paid under the MSA and no stamp- duty having been paid after it was brought into Maharashtra, the Agreement was not stamped at all.

Observations of the BHC

The BHC noted that the Chapter III of the Arbitration Act dealing with the composition of the arbitral tribunal requires the court to act on behalf of a party to an arbitration agreement when the party fails to act as required under Section 11(5) and 11(6). Applying the above provisions to the case at hand, the BHC found that when the document was first executed, it should have been stamped with duty chargeable as per Section 2(d) of MSA. In the instant case therefore, it was suffice to say that when the agreement was first executed, it appeared to have been executed by the Respondent no. 1 , a Chennai based company, on a stamp paper purchased in its name from a vendor in Chennai and thereafter sent to the two other parties being the Applicant and Respondent no. 2 in Mumbai, therefore duty chargeable in Chennai would be applicable. No doubt, the Agreement mentioned that the agreement was executed in Mumbai, but that does not take away the possibility that first execution appears to be in Chennai. Thus, the BHC observed that, it would be upto the arbitral tribunal to consider this aspect of the case.

In the present case, on a fair reading of the provisions of the MSA, it was evident under definition 2(d) of the MSA that the Agreement was required to be stamped when it was first executed. The Agreement was first executed by the Respondent no. 1 presumably with appropriate stamp duty, since it was not the case of the Respondent no. 1 that it was under-stamped in Chennai. The BHC observed that as far as liability of duty on the instrument was concerned, Section 3 of the MSA provides that every instrument, which is not previously executed by any person and is executed in the State of Maharashtra on and after the commencement of the MSA, shall be chargeable with duty, as set out in Schedule-I of the MSA. The proviso to Section 3(b) of the MSA clarifies that a copy, whether true copy or not, including a facsimile image of the original instrument, on which duty is chargeable under the provisions of that section, shall also be chargeable with full stamp duty, as set out in Schedule-I of the MSA, if proper duty is not paid on such original instrument. Further, the BHC observed that, it was evident that under Section 7 of the MSA, unless it was proved that stamp duty had been paid on the Agreement, being the original instrument, duty chargeable under the MSA would have to be paid on a copy of the instrument.

In N.N. Global (supra), the Hon’ble Supreme Court had considered the validity of the arbitration agreement in an unstamped document holding that on the basis of the doctrine of separability, the arbitration agreement need not be stamped. The BHC noted the fact that N.N. Global (supra) also dealt with the Supreme Court’s decision in Hindustan Steel Limited v. Dilip Construction Co [(1969) 1 SCC 597], which observed that the stamp act is a fiscal measure enacted to secure revenue of the state on certain classes of instruments. It was not enacted to arm a litigant with a weapon of technicality to meet the case of his opponent. The judgment reiterated that the stringent provisions of the stamp act are in the interest of the ‘Revenue’ and once that object is secured in accordance with law, the party taking itsclaim on the instrument will not be defeated on the ground of the initial defect in the instrument. Thus, the BHC was unable to accept the Respondent no. 1’s contention that the Agreement was unstamped and that the BHC had a case of deadwood at hand.

The enquiry that the court was required to make was to ascertain whether an arbitration agreement existed between the parties and in that behalf, the Applicant was the claimant and the defendant was the Respondent no. 1. In any event, upon receipt of the Demand Notice, it was open to the Respondent no. 1 to state that the parties should engage in negotiations prior to acting on the invocation. However, the BHC found an averment in the Application that after the Demand Notice was served, neither the Respondent no. 1 nor the Respondent no. 2 had replied. The Respondents failed to establish that negotiations were proposed and they were denied by the Applicant. The BHC found no substance in the objection that under clause 10(a) of the Agreement, negotiations had not been held. In BHC’s view, under Clause 10(a) of the Agreement, if negotiations were not initiated by either party, reference to arbitration would not be bad.

The BHC was unable to accept the contention of the Respondent no. 1 that, the Respondents were required to appoint an arbitrator jointly and not solely by the Respondent no. 1. The BHC observed that, the provisions of the Agreement clearly stated that where there was a claimant and a defendant, the claimant would appoint one arbitrator and the defendant the other. Hence, merely because the Respondent no. 2 was in liquidation, did not mean that the instant application had to be rendered ineffective or deadwood. The BHC noted that, it was upto the Applicant to decide whether it had a claim against the liquidator or not and proceed in accordance with law. The Applicant had chosen not to proceed against the Respondent no. 2.

The BHC cited that in the case of InterContinental Hotels Group (supra), the Supreme Court had considered the jurisdiction of the court to adjudicate on existence of an agreement at the pre-appointment stage, and the fact that case by case, courts have restricted themselves in occupying the space provided for the arbitrators in line with party autonomy. Furthermore, the BHC observed that notwithstanding the decision in Vidya Drolia v. Durga Trading Corporation [(2021) 2 SCC 1], which clearly expounded that courts have limited jurisdiction under Section 11(6) of the Act, the narrow exception carved was that court could adjudicate to cut out the deadwood.

Decision of the Bombay High Court

Pending the decision of the Collector of Stamps, the BHC was of the view that the non-availability of the original Agreement at this stage would not prevent the BHC from appointing an arbitrator. The BHC noted that, it was possible that the document might still be lying undiscovered with either of one of the parties and could surface any day. The Agreement and its contents having been accepted and relied upon by both sides, there was no merit in contending that the original Agreement being absent, no reference could be made. Further, in BHC’s view, one need not await the decision of the claimant in the case at hand, as to whether or not to pay stamp-duty, as adjudicated. If this is not to be so, a large number of arbitration proceedings will be held up right at the inception, which is not desirable. It was left to the arbitral tribunal to decide admissibility of the Agreement. Mr. Rajendra M. Savant, Former Judge of the BHC, was appointed as sole arbitrator for and on behalf of the Respondent no. 1. The parties were asked to appear before the sole arbitrator on a date fixed by him.

VA View:
The BHC has in this Judgement correctly observed that, arbitration is seen as a speedy remedy. But if applicants and respondents who may have counter-claims, have to await the fate of adjudication of documents for stamping and conclusion of the statutory challenge, the purpose of arbitration may be defeated. Further, the decision in InterContinental Hotels Group (supra) was cited, wherein it was held that, when in doubt, one must refer the matter to arbitration.

In BHC’s view, once parties are ad-idem on the fact that they have signed the writing containing an arbitration clause, the parties having acknowledged that an arbitration clause was embodied in the substantive contract, one cannot prevent the court from disposing an application under Section 11 of the Act.

For more information please write to Mr. Bomi Daruwala at [email protected]

Between the Lines | Supreme Court: Compensation in lieu of specific performance cannot be granted under the Specific Relief Act, 1963 unless specifically claimed in the plaint

The Hon’ble Supreme Court of India (“SC”) has in its judgement dated February 18, 2022 (“Judgement”), in the matter of Universal Petro Chemicals Limited v. B.P. PLC and Others [Civil Appeal No.3128 of 2009], held that compensation in lieu of specific performance cannot be granted under the Specific Relief Act, 1963 (“SRA”) unless specifically claimed in the plaint.

Facts

Universal Petro Chemicals Limited (“Appellant”) entered into a collaboration agreement dated November 1, 1994 (“Collaboration Agreement”) with one of the respondents, a German company, by which the Appellant had to manufacture lubricants using the formulation of Aral and was given exclusive license regarding the distribution, blending, rebranding and marketing of Aral lubricants in India. Subsequent to this, necessary approvals were obtained from the Reserve Bank of India (“RBI”) under the Foreign Exchange Management Act, 1973 on November 25, 1994 (“Approvals”), which were incorporated in the Collaboration Agreement by a supplementary agreement dated January 3, 1995.

In 2002, Veba Oil, the holding company of the German company referred above was acquired by BP Public Limited Company, a UK entity (“Respondent(s)”). As the Approvals were lapsing, the Appellant applied to the Ministry of Commerce and Industry, Government of India for extension of the Approvals with respect to the Collaboration Agreement. On November 13, 2002, the Government approved the request of the Appellant and extended the Approvals. However, it was specified that the royalty was payable from January 1, 2003, to December 31, 2009 and that the duration of the extended Collaboration Agreement would be from January 1, 2003, to December 31, 2009. This updated approval was also made an integral part of the Collaboration Agreement by execution of yet another supplementary agreement dated December 27, 2002 (“Supplementary Agreement”).

Thereafter, a termination notice was issued by the Respondent on April 14, 2004 on the ground that the Collaboration Agreement would come to an end on October 31, 2004 as per Clause 5 of the Collaboration Agreement and that there would be no extension thereafter (“Termination Notice”). Against the Termination Notice, the Appellant filed Civil Suit No.214 of 2004 before the High Court of Calcutta (“High Court”). The High Court by an interim order dated August 19, 2004, restrained the Respondents from giving effect to the Termination Notice and from interfering with the Appellant’s usage of ‘Aral’. The interim order was extended on three occasions and was vacated thereafter by the High Court in its order dated January 10, 2005. The High Court refused to grant a decree of specific performance of the Collaboration Agreement. Aggrieved thereby, the Appellant filed an appeal which was dismissed by an order of the Division Bench of the High Court dated February 18, 2008. Hence, the present appeal was filed before the SC for compensation in lieu of specific performance.

Issue

• Whether compensation in lieu of specific performance can be granted under the SRA if not specifically claimed for in the plaint.

Arguments

Contentions raised by the Appellant:

The Appellant contended that the Collaboration Agreement stood extended till December 31, 2009 in view of the Supplementary Agreement. Further, the relief of specific performance of the Collaboration Agreement cannot be granted as the Collaboration Agreement expired on December 31, 2009, however, it was entitled for damages for the period from August 24, 2005 to December 31, 2009. Relying on various case laws, it was argued that the Appellant is entitled for damages even though such a relief was not specifically sought for either in the suit or in the appeal before the High Court. The Appellant referred to the proviso to Section 21(5) of the SRA to contend that the Appellant should be allowed to seek compensation at any stage of the proceeding and that on the basis of Section 73 of the Indian Contract Act, 1872 (“ICA”) it is entitled for compensation due to the breach of contract.

It was further submitted that specific performance of the Collaboration Agreement was a relief that could have been granted at the time when the Appellant approached the SC in 2008 but cannot be done at this point of time. Therefore, the Appellant is entitled for damages, especially after the Appellant succeeded before the High Court which declared the Termination Notice as illegal.

Contentions raised by the Respondent:

The Respondent contended that the judgments cited by the Appellant pertained to award of compensation under the Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act, 2013, wherein the manner of calculation of compensation was either ascertainable or expressly agreed upon between the parties, and are not applicable to the facts of this case.

The Respondent submitted that the Appellant failed to plead relief for damages before the Civil Court, the High Court and even before the SC and even assuming that the Collaboration Agreement expired on December 31, 2009, the Appellant did not raise this ground or seek to amend the relief during the pendency of this appeal for the past 13 years.

The Respondent also referred to a judicial pronouncement of Shamsu Suhara Beevi v. G. Alex and Another ((2004) 8 SCC 569) (“Shamsu Case”) to contend that the plaintiff who has been remiss in expressly seeking the relief of damages under Section 21(5) of the SRA, is not entitled for any such relief. Lastly, as per Section 73 of the ICA, it contented that the damages can only be granted for the loss suffered and not for the loss of profits.

The Respondent further contended that approval granted by the RBI and the Government of India related only to payment of royalty which did not impinge on the power of the parties to terminate the agreement as provided under Clause 5 of the Collaboration Agreement.

Observations of the Supreme Court

The SC observed that the Appellant admitted to the fact that no relief for damages or compensation was claimed in the suit by the Appellant and such a relief was not sought for either before the Division Bench or before the SC. Further, the Appellant also did not take any steps to amend the appeal even after the date of expiry of the Collaboration Agreement.

The SC further examined the scope of sub-sections (4) and (5) of Section 21 of the SRA and stated that as per the judicial pronouncement of the Shamsu Case wherein the recommendations of the Law Commission of India (“Law Commission”) were discussed, in no case the compensation should be decreed, unless it is claimed by a proper pleading. It further stated that the Law Commission was of the opinion that it should be open to the plaintiff to seek an amendment to the plaint, at any stage of the proceedings in order to introduce a prayer for compensation, whether in lieu or in addition to specific performance. However, in this case, no claim for compensation for breach of agreement of sale was claimed either in addition to or in substitution of the performance of the agreement. It might be true that the Appellant was interested in the relief of specific performance of the Collaboration Agreement when it filed the Special Leave Petition in 2008 as the Collaboration Agreement subsisted till December 31, 2009. However, even thereafter no steps were taken by the Appellant to specifically plead the relief of damages or compensation.

Further, with respect to the judicial pronouncement cited by the Appellant, the SC stated that the judgments relied upon by the Appellant were not applicable to this case.

Decision of the Supreme Court:

In view of the above, the SC stated that the Appellant is not entitled to claim damages for the period between August 24, 2005 to December 31, 2009 and thus, refused the request of the Appellant for grant of damages.

VA View:
The SC in this Judgement has correctly observed that, the Appellant had erred in asking for compensation under Section 21 of the SRA in addition to the relief of specific performance, in the absence of a prayer made to that effect either in the plaint or by amending the same at any later stage of the proceedings to include the relief of compensation in addition to the relief of specific performance.

On equitable consideration, the court cannot ignore or overlook the provisions of the statute and equity must yield to law. In light of this Judgement, the parties, while drafting their plaint for any dispute with respect to specific performance should explicitly mention to claim damages in lieu of specific performance.

For more information please write to Mr. Bomi Daruwala at [email protected]

Between the Lines | DHC: Multiple arbitrations can exist if the cause of action continues or arises after the constitution of a tribunal

The High Court of Delhi (“DHC”) has in its judgment dated January 17, 2022 (“Judgement”), in the matter of Panipat Jalandhar NH 1 Tollway Private Limited v. National Highways Authority Of India [ARB.P. 820/2021], held that multiple arbitrations can exist if the cause of action continues or arises after the constitution of a tribunal.

Facts

The petition had been filed by Panipat Jalandhar NH-1 Tollway Private Limited (formerly known as M S Soma Isolux NH 1 Tollway Private Limited) (“Petitioner”) under Section 11(6) of the Arbitration and Conciliation Act, 1996 (“Act”) to seek (i) appointment of a nominee arbitrator of the National Highways Authority Of India (“Respondent”/ “NHAI”) for adjudication of disputes with regard to concession agreement dated May 09, 2008 entered into for a duration of 15 years commencing from May 11, 2009 till May 11, 2024 (“Concession Agreement”) and (ii) to declare that the purported appointment of Justice (Retd.) G.P. Mathur, former Judge, Supreme Court, was non est and bad in the eyes of law.

The Petitioner had entered into the Concession Agreement with NHAI for development of the six-lanes of Panipat-Jalandhar Section of NH-1 having a total length of 291.10 km in the State of Haryana and Punjab. Subsequently, certain disputes arose between the parties in the year 2013 and these were pending adjudication before an independent arbitral tribunal. Therein, the Petitioner had claimed that out of the total 291.10 km, work on 269 km had been completed when the Respondent took a decision to delink 22.1 km out of the total length, on the ground of delay and failure on the part of the Respondent to hand over the stretch. Consequently, due to this delinking, the Petitioner suffered severe loss to the tune of more than INR 2,000 crores. Accordingly, the Petitioner had sent a notice of dispute dated October 25, 2019 (“Notice of Dispute”) to the Respondent. Since the parties failed to resolve the disputes, the Petitioner invoked arbitration under Clause 44.3 of the Concession Agreement and issued a notice dated February 7, 2020 calling upon the Respondent to confer a set of arbitrators. However, on December 4, 2020 the Respondent suspended the Concession Agreement against which the Petitioner preferred a petition under Section 9 of the Act. During pendency of the aforesaid petition, the Respondent terminated the Concession Agreement on March 5, 2021, which was also challenged by the Petitioner.

According to the Petitioner, the disputes with regard to aforesaid suspension and termination of Concession Agreement were pending adjudication before the second arbitral tribunal comprising of (i) Justice (Retd.) M.K. Sharma, Presiding Arbitrator; (ii) Justice (Retd.) A.K. Sikri (the “Petitioner’s Nominee Arbitrator”); and (iii) Justice (Retd.) G.P. Mathur as proposed by the Respondent and appointed by order dated May 4, 2021 (“Appointment Order”) of the DHC (the “Respondent’s Nominee Arbitrator”), hereinafter referred to as the “Arbitral Tribunal”. A declaration was given on May 25, 2021 by Respondent’s Nominee Arbitrator that he had been appointed arbitrator in three other matters by the Respondent in last three years and his fourth appointment was by virtue of the Appointment Order on the second Arbitral Tribunal (“Declaration 1”). Therefore, if nomination of Respondent’s Nominee Arbitrator in response to the Petitioner’s Invocation Notice (defined below) was accepted, this would be his fifth appointment on behalf of the Respondent.

Further, since the parties failed to resolve their disputes mentioned in the dispute notice, the Petitioner issued a notice dated June 4, 2021 to the Respondent invoking arbitration, appointed Mr. V.K. Tyagi as its nominee arbitrator and called upon the Respondent to appoint its nominee arbitrator within 30 days (“Invocation Notice”). However, to avoid multiplicity of the proceedings, instead of appointing an alternate arbitrator, the Respondent had requested to consolidate the second and third arbitrations. Further, the Respondent appointed Justice (Retd.) G.P. Mathur as its nominee arbitrator and intimated the Petitioner as well as the Petitioner’s Nominee Arbitrator. The aforesaid requests were objected by the Petitioner by its letter dated July 6, 2021, explaining that the disputes raised in proposed third and the second arbitration were completely different and independent even though they arose out of the same Concession Agreement. Further that, if these disputes were consolidated then it would result in delaying the outcome of second arbitration, as pleadings therein were complete. Further, the Petitioner objected to the appointment of Respondent’s Nominee Arbitrator since he had already been appointed by the Respondent in four matters, including the second arbitration between the same parties.

Issue

• Whether multiple arbitrations can exist if the cause of action continues or arises after the constitution of an arbitral tribunal.

Arguments

Contentions raised by the Petitioner:

It was submitted that the Respondent had failed to appoint its nominee arbitrator within 30 days of receiving the Invocation Notice. The Petitioner drew attention of the DHC to the twin pre-conditions to the appointment of Respondent’s Nominee Arbitrator, (i) that by filing petition under Section 11 of the Act, the Respondent had in fact forfeited its right to appoint an arbitrator in view of Supreme Court’s (“SC”) decision in Datar Switch gears Limited v. Tata Finance Limited [(2000) 8 SCC 151]; and (ii) All arbitrators had to comply with the requirements of the relevant Schedules of the Act. The Petitioner raised doubts on the independence and impartiality of the Respondent’s Nominee Arbitrator. The Petitioner elaborated that the appointment and the Declaration 1 of Respondent’s Nominee Arbitrator was in contravention of Entry No. 22 of the Fifth Schedule of the Act. The Petitioner submitted, the interpretation that, the Respondent’s Nominee Arbitrator considered his appointment in the present matter as an appointment by the DHC and not by the Respondent, is in contravention of Entry No. 22 of the Fifth Schedule of the Act.

Further, even the subsequent declaration dated August 5, 2021 by Respondent’s Nominee Arbitrator (“Declaration 2”) was not in accordance with Sixth Schedule of the Act. The Declaration 1 and Declaration 2 (“Declarations”) were bereft of all material particulars as required under the Act. It was submitted that, the Declarations did not provide information of the total ongoing arbitrations and whether other three arbitrations wherein Respondent’s Nominee Arbitrator was appointed as arbitrator were pending or not. The Petitioner submitted that Section 11(8)(b) of the Act required the DHC to have due regard to the ‘contents of the disclosure and other considerations to secure impartial and independent arbitrator’.

Contentions raised by the Respondent:

The Respondent submitted that the present petition was not only ill-conceived and motivated but also filed with mala fide intention to create confusion. The Respondent submitted that it had been in regular touch with the Petitioner over appointment of its nominee arbitrator and thereby, the Petitioner could not claim that the Respondent had failed to take steps to nominate its arbitrator within 30 days of the Invocation Notice. The Respondent submitted that appointment of the Respondent’s Nominee Arbitrator was in compliance with the Act and disputes should be referred to the second Arbitral Tribunal. Therefore, when an arbitrator had been appointed by a party and intimation thereof has been conveyed to the other, an application for appointment of an arbitrator under Section 11 of the Act was not maintainable. The present petition under the provisions of Section 11(6) of the Act deserved to be rejected as it had been filed on the false pretext that the Respondent had failed to appoint its nominee arbitrator within 30 days.

With regard to the plea of the Petitioner that the Respondent’s Nominee Arbitrator had made insufficient Declarations, the Respondent submitted that the learned arbitrator had specifically stated that he had been nominated by the Respondent in three other matters out of which one nomination was made way back on June 1, 2018, that is, more than three years ago. It was also submitted that the fourth nomination was by the DHC by virtue of the Appointment Order.

The Respondent further submitted that by filing this petition, the Petitioner was seeking appointment of third arbitral tribunal for adjudication of disputes relating to a project for which second Arbitral Tribunal had already been constituted. This would lead to multiplicity of proceedings which is wholly unwarranted and unsustainable. It was also submitted that appointment of the Respondent’s Nominee Arbitrator in the second Arbitral Tribunal was with the consent of the Petitioner and, therefore, the Petitioner could not raise objection with regard to his impartiality. It was submitted that, it would be a wholesome approach while deciding all the disputes which might be interlinked, if all the disputes between the parties for the same project arising out of common Concession Agreement were referred to the same Arbitral Tribunal. Since the disputes sought to be resolved in the present petition pertain to the same project between the parties, the Petitioner’s objection to refer it to the second Arbitral Tribunal could not sustain.

Observations of the Delhi High Court

The DHC observed that the jurisdiction of the court under Section 11 of the Act is primarily to find out whether there exists a written agreement between the parties for resolution of disputes through arbitration and whether the aggrieved party has made out a prima facie arbitrable case. In Vidya Drolia and Others v. Durga Trading Corporation [Special Leave Petition (Civil) Nos. 5605-5606 of 2019], the SC had clarified that, with a view to prevent wastage of public and private resources, court may conduct ‘prima facie review‘ beyond the bare existence of an arbitration clause, at the stage of reference to weed out any frivolous or vexatious claims. Such a review, is not intended to usurp the jurisdiction of the arbitral tribunal but is aimed at streamlining the process of arbitration. The DHC noted that, the Invocation Notice was replied to by the Respondent on June 17, 2021 stating that with respect to the Concession Agreement, the Arbitral Tribunal was constituted in May, 2021 and, therefore, these disputes should have been referred to the same Arbitral Tribunal. Further, the Respondent appointed the Respondent’s Nominee Arbitrator, hence, it could not be said that the Respondent had failed to respond to the Invocation Notice. The Invocation Notice records that “all claims raised by the Concessionaire in its Notice of Dispute is being referred to Arbitral Tribunal to be formed in accordance with Clause 44.3 of the Concession Agreement …”. The DHC further observed that, during the course of the hearing, the Petitioner time and again reiterated that no question had been raised to the integrity and fairness of Respondent’s Nominee Arbitrator but the only objection raised is that he had been appointed as an arbitrator on more than three previous occasions.

The DHC noted that, in Gammon India Limited and another v. National Highways Authority of India [AIR 2020 Delhi 132] while dealing on the aspect of multiplicity-multiple invocations, multiple references, multiple arbitral tribunals, multiple awards and multiple challenges, between the same parties, in respect of the same contract or the same series of contracts, the court therein had observed that, filing of different claims at different stages of a contract or a project is permissible in law, inasmuch as the contract can be of a long duration and the parties may wish to seek adjudication of certain disputes, as and when they arise. Further, the endeavour of courts in the domain of civil litigation is always to ensure that claims of parties are adjudicated together, or if they involve overlapping issues, the subsequent suit is stayed until the decision in the first suit. The DHC observed that it is with the intention of avoiding multiplicity that the principle of res judicata is a part of the Code of Civil Procedure, 1908. It was also observed by the DHC that, multiple arbitrations before different arbitral tribunals in respect of the same contract is bound to lead to enormous confusion and refute the purpose of arbitration being speedy resolution of disputes. It was also observed by the DHC that a previously appointed tribunal was already seized of the disputes between the parties under the same contract and the constitution of three different tribunals was unwarranted and inexplicable. The DHC further noted that, there was no justification for the Petitioner having invoked third arbitration by virtue of the Invocation Notice within less than a month of constitution of second Arbitral Tribunal in respect of the Concession Agreement and Notice of Dispute.

The Fifth Schedule of the Act provided that, the following grounds give rise to justifiable doubts as to the independence or impartiality of arbitrators: (Arbitrator’s relationship with the parties or counsel) – “…The arbitrator has within the past three years been appointed as arbitrator on two or more occasions by one of the parties or an affiliate of one of the parties.” Further, on the aspect of applicability of Entry No. 22 of the Fifth Schedule of the Act, the SC in HRD Corporation v. GAIL (India) Limited [(2018) 12 SCC 471], had observed as follows, “The disqualification contained in Items 22 and 24 is not absolute, as an arbitrator who has, within the past three years, been appointed as arbitrator on two or more occasions by one of the parties or an affiliate, may yet not be disqualified on his showing that he was independent and impartial on the earlier two occasions…” . The DHC noted that, the fact that an arbitrator had already rendered an award in a previous arbitration between the parties would not, by itself, on the ground of reasonable likelihood of bias, render him ineligible to be an arbitrator in a subsequent arbitration.

The DHC noted that a perusal of the Declarations made it manifestly clear that all necessary disclosures under the relevant provisions of the Act had been made. The Declarations clarified that the Respondent’s Nominee Arbitrator or any of his family members had no relationship with the Respondent. The DHC observed that, the stand of the Respondent while nominating name of Mr. Justice (Retd.) G.P. Mathur was clearly with the intent to refer the disputes to the second Arbitral Tribunal, of which he was a member. Further, the decision in HRD Corporation (supra) made it clear that there was no bar in appointment of an arbitrator in multiple cases, if so warranted. In the light of afore-noted discussions, the DHC found that objections raised by the Petitioner with regard to nomination and appointment of Respondent’s Nominee Arbitrator were baseless and liable to be rejected.

The DHC was informed that the disputes pertaining to the year 2013 were pending before the first arbitral tribunal. The suspension and termination of the Concession Agreement in question are subject matter of consideration before the second Arbitral Tribunal. In the considered opinion of the DHC, forming another tribunal would lead to multiple observations and findings by two different tribunals, which could not be permitted.

Decision of the Delhi High Court

The DHC was informed that the proceedings before the second Arbitral Tribunal were in progress, however, not yet complete. The DHC noted that , since the members of the second Arbitral Tribunal were well conversant with the facts and disputes raised between the parties, having dealt the same Concession Agreement and Notice of Dispute, it would enable it to expedite the resolution of disputes rather than delaying it. Moreover, there shall be no confusion or complexity in the outcome of the arbitration, having avoided multiple proceedings.

The DHC held that, multiple arbitrations could exist if the cause of action continues or arises after the constitution of a tribunal. Consequently, it was directed that the subject matter of disputes raised in Invocation Notice with regard to the Concession Agreement and the Notice of Dispute shall be dealt by the second Arbitral Tribunal. Therefore, the present petition was accordingly disposed of.

VA View:
The DHC in this Judgement observed that constitution of multiple tribunals is inherently counter-productive. Further, in any agreement or contract, an arbitration clause is inserted with an object of speedy resolution of disputes. Therefore, a situation where multiple arbitral tribunals parallelly adjudicate different claims arising between the same parties under the same contract, especially raising overlapping issues, should be avoided. In cases where the disputes are of larger magnitude and multiple in number, to avoid any confusion or infirmity, the disputes should be referred to the same arbitral tribunal prior to the constitution of a tribunal.

The DHC rightly observed that, there was no doubt that the Act had been brought in force to ensure independence and impartiality of an arbitrator. Further, at the same time, provisions of the Act do not incapacitate the courts in arriving at just decision given the facts of a particular case. However, multiple arbitrations could exist if the cause of action continues or arises after the constitution of a tribunal.

For more information please write to Mr. Bomi Daruwala at [email protected]

Between the Lines | NCLAT: No possibility negotiating the resolution plan in the intervening period between approval by the CoC, and pending the approval of the NCLT

The Hon’ble National Company Law Appellate Tribunal, New Delhi (“NCLAT”) has in its judgment dated January 27, 2022, in the matter of Union Bank of India v. Kapil Wadhawan and Others [Company Appeal (AT) (Insolvency) No. 370, 376-377 & 393 of 2021] (“Judgement”) held that once the resolution plan is approved by the Committee of Creditors (“CoC”), the jurisdiction of the adjudicating authority is confined by the provisions of Section 31(1) of the Insolvency and Bankruptcy Code, 2016 (“IBC”) to determining whether the requirements of Section 30(2) of the IBC have been fulfilled in the plan as approved by the CoC.

Facts

In the instant case, the Union Bank of India (“Appellant”) filed the appeal on behalf of the CoC of Dewan Housing Finance Limited (“DHFL”/”Corporate Debtor”) against the order of the NCLT, Mumbai (“NCLT”) dated May 19, 2021 (“Impugned Order”) whereby the NCLT directed the administrator of DHFL to place the letter dated December 29, 2021 (“Second Settlement Proposal”) sent by Kapil Wadhwan (“Respondent No. 1”), erstwhile promoter and director of DHFL, before the CoC for its consideration, and to inform the NCLT the outcome of the same within 10 days from the date of Impugned Order. The NCLT noted that the Respondent No. 1 had addressed various letters to the administrator, the CoC and also submitted a settlement proposal dated December 13, 2020 (“First Settlement Proposal”) but did not receive any reply and, therefore, submitted the Second Settlement Proposal. The Fist Settlement Proposal and the Second Settlement Proposal are hereinafter collectively referred to as “Settlement Proposals”. Respondent No. 1, DHFL and the Reserve Bank of India (“RBI”) are hereinafter collectively referred to as “Respondents”.

Subsequently, the Appellant had orally requested the NCLT for a stay of the Impugned Order, which was set aside (“Second Impugned Order”). The Impugned Order and the Second Impugned Order are hereinafter collectively referred to as “Impugned Orders”.

Aggrieved, the Appellant raised the appeal in the instant case against the Impugned Orders, before the NCLAT.

Issues

Whether after the CoC’s approval of the resolution plan as submitted by the Piramal Group (“Resolution Plan”), and pending approval of the NCLT, the NCLT can direct the CoC to convene a meeting and place the Second Settlement Proposal as offered for consideration, decision and voting.

Arguments

Contentions raised by the Appellant:

The Appellant submitted that the CoC by the Impugned Orders was being compelled to consider the Second Settlement Proposal without any provision of law requiring the CoC to consider such offer, which is in direct contravention of the IBC and Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (“CIRP Regulations”). The NCLT had acknowledged that there is no provision in the IBC or the CIRP Regulations by which it is empowered to pass the Impugned Orders. Hence, the adjudicating authority has passed the Impugned Orders by exercising its inherent power under Rule 11 (Inherent Powers) of the National Company Law Tribunal Rules, 2017 and Section 60(5) of the IBC.

Further, Respondent No. 1, throughout the corporate insolvency resolution process (“CIRP”), sent various letters and proposals, all of which had been placed before the CoC, who felt that such proposals cannot be considered. The Second Settlement Proposal was nothing but the First Settlement Proposal in a different form. An order compelling the CoC to consider every offer by the promoter, who was once in control of the corporate debtor, would gravely hamper the CIRP causing inordinate delays, and materially impacting the sanctity of the process in which the CIRP has been conducted.

The Appellant contended that the NCLT by the Impugned Orders has asked the CoC to consider the Second Settlement Proposal, which has neither been submitted in compliance with the Request for Resolution Plan (“RFRP”) nor in compliance with Section 12A (Withdrawal of application admitted under section 7, 9 or 10) of the IBC (and related regulations), and that such a direction of the NCLT was passed after the CoC had, by an overwhelming majority, approved the Resolution Plan, and the administrator had already filed the plan approval application, which had been heard and reserved for orders by the NCLT. Moreover, the RBI had granted its no-objection certificate regarding the Resolution Plan contemplated in Rule 5(d)(iii) of the Insolvency and Bankruptcy (Insolvency and Liquidation Proceedings of Financial Service Providers and Application to Adjudicating Authority) Rules, 2019. Therefore, it was submitted that these directions of the NCLT were without jurisdiction, and prejudicial to the stakeholders’ interests and are very likely to adversely impact the timely conclusion of the CIRP.

The Appellant contended that only a Resolution Plan compliant with the provisions of the IBC or an application under Section 12A of the IBC could be placed before the CoC. The Second Settlement Proposal was neither a compliant Resolution Plan nor an application under Section 12A of the IBC. The Appellant further contended that inherent powers could not override express provisions of the law. The provisions in relation to settlement proposals are codified under Section 12A of the IBC and Regulation 30A (Withdrawal of application) of the CIRP Regulations. The Appellant argued that there was no provision of law that permits the NCLT to compel the CoC to consider an offer that is not a settlement under Section 12A of the IBC nor even a proposal as per the provisions of the IBC.

Contentions raised by Respondents:

The Respondents submitted that the Second Settlement Proposal is different from the First Settlement Proposal and that on a perusal of the minutes of the meeting of the CoC, wherein the First Settlement Proposal was purportedly discussed, would show that the said proposal was never considered on merits and was rejected on hyper technicalities.

They argued that objections by the Appellant alleging lack of jurisdiction on the part of the NCLT are misconceived. It was further argued that the objection by the Appellant that the Impugned Order will interfere with the commercial wisdom of the CoC was incorrect as the adjudicating authority had merely directed consideration of the Second Settlement Proposal and not interfere with the commercial wisdom of the CoC. The Respondents further argued that the Resolution Plan is not in the interest of creditors and, therefore, the Second Settlement Proposal must be considered.

Observations of the NCLAT

The NCLT by the Impugned Order had directed the COC to consider the Second Settlement Proposal of Respondent No. 1 when the Resolution Plan after approval from the CoC was pending adjudication under Section 31 (Approval of Resolution Plan) of the IBC. The CoC contends that the Second Settlement Proposal was neither submitted in compliance with the RFRP nor with Section 12A of the IBC and related regulations. Such a direction of the NCLT was passed despite the fact that the CoC of the corporate debtor had by an overwhelming majority approved the Resolution Plan. The administrator had already filed the plan approval application, and that application was heard and reserved for orders by the learned NCLT.

It is pertinent to mention that the Supreme Court (“SC”) in the case of Ebix Singapore Private Limited v. Committee of Creditors of Educomp Solutions Limited, [2021 SCC online SC 707] (“Ebix Judgement”), has very recently dealt with the same issue which has arisen in this appeal. In the Ebix Judgement, the SC had observed that “CoC-approved Resolution Plans, before the Approval of the Adjudicating Authority under Section 31, are a function and product of the IBC’s mechanisms. Their validity, nature, legal force and content is regulated by the procedure laid down under the IBC, and not the Contract Act. The voting by the CoC also occurs only after the R.P. has verified the contents of the Resolution Plan and confirmed that it meets the conditions of the IBC and the regulations therein.

[…]

The Court held that there was no scope for negotiations between the parties once the Resolution Plan has been approved by the CoC. Thus, contractual principles and common law remedies, which do not find a tether in the wording or the intent of the IBC, cannot be imported in the intervening period between the acceptance of the CoC and the Approval by the Adjudicating Authority.
[…]

We cannot afford to be swayed by abstract conceptions of equity and ‘contractual freedom’ of the parties to freely negotiate terms of the Resolution Plan with unfettered discretion, that are not grounded in the intent of the IBC.”

Further, in the case of Pratap Technocrats Private Limited v. Monitoring Committee of Reliance Infratel Limited [2021 SCC Online SC 569], the SC held that “neither the adjudicating Authority (NCLT) nor the appellate Authority (NCLAT) has been endowed with the jurisdiction to reverse the commercial wisdom of the dissenting financial creditors and that too on the specious ground that it is only an opinion of the minority financial creditors.”

Based on the law laid down in the cases mentioned above, the NCLAT, in the instant case observed that once the Resolution Plan was approved by a 100% voting share of the CoC, the jurisdiction of the NCLT was confined by the provisions of Section 31(1) of the IBC to determining whether the requirements of Section 30(2) of the IBC have been fulfilled in the plan as approved by the CoC. Once the requirements of the IBC have been fulfilled, the NCLT and the NCLAT are duty-bound to abide by the discipline of the statutory provisions. Neither the NCLT nor the NCLAT has an unchartered jurisdiction in equity. The jurisdiction arises within and as a product of a statutory framework. The jurisdiction of the adjudicating authority is confined by the provisions of Section 31(1) of the IBC to determining whether the requirements of Section 30(2) of the IBC have been fulfilled in the plan as approved by the CoC. There was no scope for negotiations between the parties once the CoC had approved the Resolution Plan.

It was further observed that the principles of contractual construction and interpretation may serve as interpretive aids, in the event of ambiguity over the terms of a Resolution Plan, however, remedies that are specific to the Indian Contract Act, 1872 (“Contract Act”) cannot be applied, de hors the over-riding principles of the IBC. It was also observed that if resolution applicants are permitted to seek modifications after subsequent negotiations or a withdrawal after a submission of a resolution plan to the NCLT as a matter of law, it would dictate the commercial wisdom and bargaining strategies of all prospective resolution applicants who are seeking to participate in the process and the successful resolution applicants who may wish to negotiate a better deal, owing to myriad factors that are peculiar to their own case. The broader legitimacy of this course of action can be decided by the legislature alone, since any other course of action would result in a flurry of litigation which would cause the delay that the IBC seeks to disavow.

Decision of the NCLAT

In the instant case, the NCLAT noted that after approval of the Resolution Plan by the CoC, the application was pending before the NCLT under Section 31 of the IBC, for approval of the Resolution Plan, during which the NCLT directed the CoC to consider the Second Settlement Proposal within 10 days and take an appropriate decision. The NCLAT concluded that the Impugned Order was liable to be set aside. Relying on the ratio of the Ebix Judgement, which expressly laid down that there was no scope for negotiations between the parties once the CoC has approved the resolution plan, the NCLAT set aside the Impugned Order deeming it to be unsustainable.

VA View:
The NCLAT through this Judgement re-emphasised on the postulate that commercial or business decisions of the financial creditors are not open to any judicial review by the NCLT or NCLAT. The NCLAT upheld the law laid down by the SC in the Ebix Judgement that once the resolution plan is approved by the CoC, the plan cannot be revisited and modified. The NCLAT rightly upheld the principle that a resolution plan cannot be construed purely as a contract governed by the Contract Act, in the period intervening its acceptance. Even during such intervening period, the resolution plan is binding owing to the IBC framework. Through this Judgement, the NCLAT has reiterated that CIRP proceedings should not be taken lightly by those intending to submit resolution plans for approval.

Thus, when the plan has been approved by the CoC and pending the NCLT’s approval, the jurisdiction of the NCLT is limited to the extent of verifying the compliance of the plan with regard to the provisions laid down under the IBC and the NCLT should not interfere with the CoC’s decision, thereby second guessing its commercial wisdom.

For more information please write to Mr. Bomi Daruwala at [email protected]

Between the Lines | Supreme Court: An arbitral tribunal constituted in violation of the neutrality clause under Section 12(5) of the Arbitration and Conciliation Act, 1996 will lose its mandate and cannot be given effect

The Hon’ble Supreme Court (“SC”) has in its judgment dated January 4, 2022 (“Judgment”), in the matter of Ellora Paper Mills Limited v. The State of Madhya Pradesh [Civil Appeal No. 7697 of 2021] held that an arbitral tribunal constituted in violation of the neutrality clause under Section 12(5) of the Arbitration and Conciliation Act, 1996 (“Act”) will lose its mandate and cannot be given effect.

Facts

The State of Madhya Pradesh (“Respondent”) had issued a tender for supply of cream wove paper and duplicating paper for the year 1993 to 1994. Ellora Paper Mills Limited (“Appellant“) participated in the tender process and was awarded the contract by way of a supply order dated September 22, 1993. Thereafter, a dispute arose when the Respondent did not make 90% of the payments as per the terms of the contract for the paper supplied by the Appellant and rejected some consignments without providing any justifications and subsequently by a letter dated November 15, 1993, the Respondent informed the Appellant that the paper supplied did not conform to their specifications.

The Appellant filed a civil suit in the Civil Court, Bhopal, seeking the relief of permanent injunction against the Respondent, restraining it from awarding the contract to a third party. However, the suit had become infructuous since the Respondent had already awarded the contract to a third party. Thereafter, the Appellant filed another suit before the Civil Court to recover Rs. 95,32,103, and in the said suit the Respondent preferred an application under Section 8 of the Act and sought a stay of proceedings on the ground that there existed an arbitration clause in the contract between the Appellant and the Respondent. However, the said application was rejected by the Civil Court. The Respondent filed a revision petition before the Madhya Pradesh High Court (“HC”) and the parties were referred to arbitration by the Stationery Purchase Committee (“Arbitral Tribunal”) comprising officers of the Respondent.

The Appellant filed its objections to the constitution of the Arbitral Tribunal and also challenged its jurisdiction by filing an application under Section 13 of the Act, which was rejected. Thereafter, the Appellant filed another application under Section 14 read with Sections 11 and 15 of the Act before the HC seeking termination of the mandate of originally constituted Arbitral Tribunal and for appointment of a new arbitrator. The Appellant, relying on Section 12 (5) of the Act, submitted that since all the members of the Arbitral Tribunal were employees of the Respondent, a new Arbitral Tribunal had to be constituted.

However, the HC dismissed the application filed by the Appellant and held that since Section 12(5) of the Act was made effective from October 23, 2015 and was introduced through the Arbitration and Conciliation (Amendment) Act, 2015 (“Amendment Act, 2015”), it cannot have retrospective operation in the arbitration proceedings already commenced prior to the Amendment Act, 2015, unless the parties otherwise agree (“Impugned Judgment”). Being aggrieved by the Impugned Judgment, the Appellant filed the present appeal before the SC (“Appeal”).

Issue

• Whether the Arbitral Tribunal consisting of the officers of the Respondent had lost its mandate as per Section 12 (5) read with the Seventh Schedule of the Act.
• Whether a fresh arbitrator had to be appointed as per the Act.

Arguments

Contentions raised by the Appellant:

It was contended that the Impugned Judgment was contrary to the decision of the SC in Jaipur Zila Dugdh Utpadak Sahkari Sangh Limited v. Ajay Sales & Suppliers [AIR 2021 SC 4869] and that the continuation of the Arbitral Tribunal consisting of the officers of the Respondent would frustrate the object and purpose of the Amendment Act, 2015, by which Section 12(5) read with the Seventh Schedule was inserted to keep in check the impartiality and neutrality of the arbitrators. It was further contended that the HC erred in observing that the arbitration proceedings had commenced since there was a stay granted by the HC and the earlier members of the Arbitral Tribunal had already retired. Hence, it could not be claimed that the arbitration proceedings had commenced and that further steps were taken by the Arbitral Tribunal.

In view of the above, it was submitted that the members of the Arbitral Tribunal had lost their mandate as per Section 12(5) of the Act and were ineligible to continue as members of the Arbitral Tribunal and therefore a fresh arbitral tribunal was to be constituted.

Contentions raised by the Respondent:

It was submitted that the Arbitral Tribunal was constituted in the year 2000, and Section 12(5) read with the Seventh Schedule of the Act was inserted into the statute with effect from October 23, 2015. Therefore, it would not be retrospectively applicable in the present factual background, as had been held in the Impugned Judgment.

It was further submitted that the decision of the SC in Jaipur Zila Dugdh Utpadak Sahkari Sangh Limited (supra) was not applicable since in the aforementioned case, the arbitrator was appointed after the Amendment Act, 2015. However, in the present case, the arbitrator was appointed approximately 20 years prior thereto and thereafter the arbitration proceedings commenced and the Appellant had also participated.

Observations of the Supreme Court

The SC observed that the Arbitral Tribunal was constituted in the year 2001 as per the agreement entered into between the parties, however, the arbitration proceedings could not commence due to the proceedings initiated by the Appellant. In the meanwhile, the officers of the originally constituted Arbitral Tribunal had also retired. Hence, the SC was of the view that given the circumstances, technically the arbitration proceedings had not commenced.

The SC by placing reliance on Jaipur Zila Dugdh Utpadak Sahkari Sangh Limited (supra) and Bharat Broadband Network Limited v. United Telecoms Limited [(2019) 5 SCC 755], further observed that Section 12 of the Act was amended by Amendment Act, 2015 based on the recommendations of the Law Commission, which specifically dealt with the issue of neutrality of arbitrators. To achieve the main purpose for amending the provision, Section 12(5) of the Act specifically provides that when an arbitration clause is found to be foul with the amended provision, the appointment of the arbitrator would be outside the scope of the arbitration agreement, empowering the court to appoint such an arbitrator as may be permissible and the other party cannot insist upon the appointment of the arbitrator in terms of the arbitration agreement. When the party appointing an adjudicator is the State, the duty to appoint an impartial and independent adjudicator is that much more onerous and the right to natural justice cannot be said to have been waived only on the basis of a “prior” agreement between the parties at the time of the contract and before arising of the disputes.

Decision of the Supreme Court

In view of the above, the SC held that the Arbitral Tribunal comprising of officers of the Respondent had lost its mandate in view of Section 12(5) read with Seventh Schedule of the Act. Considering that the dispute between the parties was pending since the year 2000, instead of remanding the matter back to the HC, the SC decided to appoint a former Judge of the SC as the new arbitrator.

VA View:
In this Judgment, the SC considered and relied upon its earlier decisions and emphasised that independence and impartiality of an arbitrator are the hallmarks of any arbitration proceedings and the rule against bias is a fundamental principle of natural justice. When an arbitrator is appointed in terms of a contract and by parties to the contract, he is required to be independent of the parties. Thus, where the balance between the principles of natural justice and binding nature of the contract between the parties is considered, party autonomy cannot be stretched beyond the requirement of impartial and independent adjudicators for resolution of disputes.

Hence, the principles of impartiality and independence cannot be abandoned at any stage of the proceedings, more importantly at the stage of constitution of the arbitral tribunal, and it would be implausible to consider that the autonomy of the party can be exercised in disregard of these principles even if the same was agreed prior to the disputes arising between the parties.