Between the Lines | Bombay High Court: Reiterated that a choice of seat is itself an expression of party autonomy and carries with it the legal effect of conferring exclusive jurisdiction on the courts of the seat

The Hon’ble Bombay High Court (“BHC”) has in its judgment dated January 29, 2021 (“Judgement”), in the matter of Aniket SA Investments LLC v. Janapriya Engineers Syndicate Private Limited and Others [Commercial Appeal No. 504/2019], held that a choice of seat is itself an expression of party autonomy and carries with it the legal effect of conferring exclusive jurisdiction on the courts of the seat.

Facts

Aniket SA Investments LLC (“Appellant”), a foreign investor and Janapriya Engineers and Syndicate Private Limited (“Respondent No. 1”) were shareholders of Janapriya Townships Private Limited (“Respondent No. 2”), a special purpose vehicle carrying out a real estate development project in Telangana. The Appellant, Respondent No. 1 and Respondent No. 2 had entered into a share subscription and shareholders agreement dated August 21, 2008 (“the Agreement”). The other respondent nos. 3 to 6, party to the petition, were the promoters of Respondent No. 1 (“Promoters”). Respondent No. 1, Respondent No. 2 and the Promoters are collectively referred to as “Respondents”.

Disputes arose between the Appellant and the Respondents in relation to the implementation and execution of the Agreement. Therefore, the Appellant issued a notice of default dated March 19, 2019. Subsequently, Appellant issued a notice to Respondent No. 1 exercising a ‘Put Option’ under the shareholders agreement dated July 08, 2019, and finally a dispute notice dated August 22, 2019, to invoke arbitration. The relevant clauses of the Agreement are Clause 20.3 (Governing Law and Jurisdiction) that provided jurisdiction to courts at Hyderabad (“Jurisdiction Clause”) and Clause 20.4 (Arbitration) that provided jurisdiction to courts at Mumbai (“Arbitration Clause”).

Thereafter, the Appellant had filed a petition under Section 9 (Interim measures, etc., by Court) (“Section 9 Petition”) of the Arbitration and Conciliation Act, 1996, (“Act”). Therein, by order dated October 22, 2019 (“Impugned Order”), the learned single judge, BHC, extensively relied on paragraph 96 of the decision of the Supreme Court (“SC”) in Bharat Aluminium Company v. Kaiser Aluminium Technical Services Inc [(2012) 9 SCC 552] (“BALCO”), among other judgements, and held that there was concurrent jurisdiction of court where the cause of action accrued and the court of the seat of arbitration. The Impugned Order further held that as a matter of party autonomy, the parties had made an express choice in conferring jurisdiction on the courts at Hyderabad and that to give effect to this plain commercial term of the Agreement, the expression ‘subject to’ must be read as ‘notwithstanding’ and that expression ‘seat’ must be read as ‘venue’. Therefore, the Impugned Order disregarded the choice of Mumbai as a ‘seat’. Hence, the appeal was filed under Section 37 of the Act to challenge the Impugned Order.

Issues
1. Whether the Impugned Order was correct in relying on paragraph 96 of BALCO to recognize concurrent jurisdiction under Section 2(1)(e) (definition of court) of the Act or whether a choice of seat of arbitration has the legal effect of conferring exclusive jurisdiction on the courts of that seat (“Issue 1”).

2.  If there is concurrent jurisdiction of two courts, is the Impugned Order correct to hold that as a matter of party autonomy, the parties have made an express choice in conferring jurisdiction on the courts at Hyderabad and that to give effect to this plain commercial term of the Agreement, the expression ‘subject to’ must be read as ‘notwithstanding’ and that expression ‘seat’ must be read as ‘venue’.

Arguments

Contentions raised by the Appellant:

The Appellant submitted that, even if it is to be assumed that by law, two courts had concurrent jurisdiction under the Act, the clear intent of the parties as gathered by the plain meaning of the clauses is that, choice of courts at Hyderabad in Jurisdiction Clause is made “subject to” Arbitration Clause that provides for the seat at Mumbai. Therefore, in the event of any conflict the latter must prevail in consonance with the well settled meaning of the expression “subject to”. There was no warrant for reading “subject to” as “notwithstanding” and giving it the very opposite meaning to the clear words chosen by the parties. The Appellant suggested that one way of reconciling both the clauses is that, the Jurisdiction Clause will apply in relation to a dispute that is not covered by arbitration, and in relation to all disputes under the arbitration agreement, the choice of seat being at Mumbai, the choice of court will also be at Mumbai even in a situation of concurrent jurisdiction with two court

The expression ‘seat’ could never have been read as a mere venue, rather the law in fact leans in favour of reading a reference to ‘venue’ as ‘seat’. When the parties make an express reference to a place as being the ‘seat’, that choice under the principles of party autonomy must be given full effect. The Appellant relied on the judgment of BGS SGS SOMA JV v. NHPC LIMITED [(2020) 4 SCC 234] (“BGS SGS”), being completely applicable to answer the Issue 1. The SC therein had held that paragraph 96 of BALCO must be read consistently with the entire judgment, that is, when properly construed, it was held that, the courts of the seat of arbitration would have exclusive jurisdiction in relation to disputes arising in relation to the arbitration. The SC in BGS SGS noted the ratio laid down in the case of Antrix Corporation Limited v. Devas Multimedia Private Limited [2018 SCC OnLine Del 9338] (“Antrix”), as relied upon in the Impugned Order, as incorrect and contrary to the ratio in BALCO. It was also observed in BGS SGS that, a reference to a ‘place’ or ‘venue’ in an arbitration agreement will generally be understood as being a reference to a ‘seat’ of the arbitration unless there is a clear indication to the contrary.

Contentions raised by the Respondents:

The SC’s decision in BGS SGS does not have a direct bearing on Issue 1. Further, the judgment in BGS SGS does not apply to the present situation, as while analysing precedents and considering ‘seat’ as being akin to exclusive jurisdiction, it did not consider possibility of an agreement stipulating different places being mentioned in respect of ‘seat’ in the arbitration clause and an exclusive jurisdiction provided generally in the contracts.

The Arbitration Clause should not be read as being a choice of ‘seat’ so as to displace an exclusive jurisdiction of the courts at Hyderabad, as stated expressly, as the choice in Jurisdiction Clause. The Impugned Order was correct in reading the expression ‘subject to’ as ‘notwithstanding’ so as to give effect to the intent of the parties as was apparent in the Agreement. The Promoters contended that in the year 2008, when the Agreement was entered into between the parties, the expression ‘seat’ was understood to mean ‘venue’. The expression ‘seat’ as it is now understood was unknown to the parties at that time. Therefore, for the purpose of vesting jurisdiction on courts, the phrase ‘exclusive jurisdiction’ was stipulated in the Jurisdiction Clause. It was submitted that, therefore, disregarding common usage at the relevant time will amount to disregarding the intent of parties.

The concept of ‘seat’ is relevant only to international commercial arbitration. In domestic arbitrations or international commercial arbitrations seated in India, parties would retain the right to vest exclusive jurisdiction with a court from amongst multiple courts which would naturally have jurisdiction over the subject matter or cause of action. It is submitted that reference to ‘seat’ in domestic arbitrations or international commercial arbitrations seated in India would not subsume within it an exclusive jurisdiction of courts of that ‘seat’.

Observations of the Bombay High Court

Jurisprudence laid down in BALCO and BGS SGS on exclusive jurisdiction of the courts at the ‘seat’:

The BHC extensively noted the observations made in the BGS SGS case by the SC. The BHC noted that the judgment of BALCO was previously understood by some high courts to recognize concurrent jurisdiction of the ‘cause of action’ court and the ‘seat’ court. It was noted that the conflicting observations made in the BALCO judgement were clarified in the case of BGS SGS by the SC. The BHC further observed that if, as laid down in paragraph 96 of BALCO, the concurrent jurisdiction was to be the order of the day, despite seat having been located and specifcally chosen by the parties, party autonomy would sufer. The BHC noted the observations of the SC that paragraph 96 of BALCO was not in consonance with other observations as made therein in the judgement. The BHC observed that, the very fact that the parties have chosen a place to be the seat would necessarily carry with it the decision of both the parties that the courts at the seat would exclusively have jurisdiction over the entire arbitral process.

The SC in BGS SGS upheld the ratio of Indus Mobile Distribution Private Limited v. Datawind Innovations Private Limited [(2017) 7 SCC 678] (“Indus Mobile”) wherein it was clarified that, the moment a seat is designated by agreement between the parties, it is akin to an exclusive jurisdiction clause, which would then vest the courts at the ‘seat’ with exclusive jurisdiction for the purposes of regulating arbitral proceedings.

The BHC observed that the Antrix case as relied upon by the Impugned Order, is no longer good law as it did not follow BALCO. The BHC observed that it is incorrect to state that the example given in paragraph 96 of BALCO reinforces the concurrent jurisdiction. The judgment in BALCO when read as a whole, applies the concept of ‘seat’ and harmoniously construes Section 20 (Place of arbitration) with Section 2(1)(e) of the Act to effectively broaden the definition of ‘court’, to take within its ken the courts of the ‘seat’ of the arbitration. It was observed that the narrow construction of Section 2(1)(e) of the Act was expressly rejected in BALCO.

The BHC further observed that an application under Section 9 of the Act may be preferred before a court in whose jurisdiction part of cause of action arises, in two situations, one, if parties have not agreed on the ‘seat’ of arbitration, and the other, before such ‘seat’ may have been determined on the facts of a particular case by the arbitral tribunal under Section 20(2) of the Act. In both these situations, the earliest application having been made to a court in which a part of the cause of action arises would then be the exclusive court under Section 42 (Jurisdiction) of the Act, which would have control over the arbitral proceedings.

Applicability of BGS SGS to Impugned Order:

The BHC observed that the Impugned Order in so far as it held paragraph 96 of BALCO to recognize concurrent jurisdiction of the ‘cause of action’ court and the ‘seat’ court could not be sustained as it was inconsistent with the judgment in BGS SGS. The BHC further rejected the contentions of Promoters that the judgment of BGS SGS did not apply to the instant case because the present case is an international commercial arbitration seated in India, while law laid down in BGS SGS was on a situation where it was a domestic arbitration. The BHC observed that, it would be incorrect and contrary to the reading of the judgment itself to restrict the application of the law it laid down, to apply only to some situations and not others as had been contended by Promoters. The BHC concluded that on a reading of the entire judgment, the judgement was clearly applicable to Issue 1 irrespective of whether it is a domestic arbitration or an international commercial arbitration seated in India, such as in the present case.

The BHC further observed that, in the case of BGS SGS it had been held that there is no concurrent jurisdiction of two courts under Section 2(1)(e) of the Act. The BHC further observed that the principles applied in the Impugned Order, that, as a matter of party autonomy the parties can choose one of the two courts and confer exclusive jurisdiction on one of those courts, by relying, inter alia, upon paragraph 96 of BALCO, would have no application in a situation where the parties had chosen a seat of arbitration. The BHC observed that a choice of seat, as the SC had also explained, is itself an expression of party autonomy and carries with it the effect of conferring exclusive jurisdiction on the courts of the seat.

The BHC rejected the contentions of the Promoters, that the choice of ‘seat’ in the year 2008 when the Agreement was entered into was not understood as a choice of courts of the ‘seat’ and that this could not be the intention attributed to the parties. The BHC observed that the law as laid down in BGS SGS to the effect of choice of ‘seat’ as conferring exclusive jurisdiction is by no means prospective or applicable only after a particular date. Even the judgment in BALCO, as explained in BGS SGS, must be understood as stating the legal position under the Act and which must be given effect to, even if the Agreement was executed a date prior to the judgment.

The BHC was of the opinion that, in view of the SC’s analysis of Indus Mobile in the case of BGS SGS, the Impugned Order was not correct in distinguishing Indus Mobile only because of the clauses in the agreement in Indus Mobile were conferring exclusive jurisdiction on the same court as that of the seat.

Interpretation of the clauses of the Agreement:

The BHC observed that it is a well settled rule of interpretation of agreements that the courts must give effect to the plain language used by the parties and that the intention of the parties must be gathered from the plain meaning of words used in the agreement. The BHC noted that, the Jurisdiction Clause conferred exclusive jurisdiction on the courts at Hyderabad, and that this was not part of the Arbitration Clause of the Agreement. The BHC noted that significantly, the choice of court at Hyderabad was made clearly ‘subject to’ Arbitration Clause. Therefore, the plain language used in the Agreement, was that Mumbai is chosen as the seat of arbitration proceedings.

The BHC commended the ratio of the judgment in South India Corporation Private Limited v. Secretary Board of Revenue [AIR 1964 SC 207], that the meaning of the expression ‘subject to’ is the opposite of ‘notwithstanding’ and, therefore, ‘subject to’ could never have been interpreted as ‘notwithstanding’ as had been done in the Impugned Order. The BHC, hypothetically analysed that, even if one were to accept that concurrent jurisdiction of two courts is possible, the choice of Mumbai as the seat of arbitration would in any view of the matter mean that the courts at Mumbai had concurrent jurisdiction to entertain disputes under the Agreement. The BHC emphasized that, the choice of courts at Hyderabad is made ‘subject to’ the seat at Mumbai, which implied prevalence of choice of courts at Mumbai, and therefore in the event of any conflict the latter clause should prevail. The BHC stated that this is the plain meaning, beyond any doubt, of the words ‘subject to’ and ‘seat’ and, therefore, this would have the effect of conferring exclusive jurisdiction on the courts at Mumbai.

The BHC observed that the Jurisdiction Clause and the choice of courts expressed therein would apply in a situation not covered by a dispute that is governed by the arbitration agreement in Arbitration Clause. In any view of the matter, even if Jurisdiction Clause does overlap with Arbitration Clause in determining which court would have jurisdiction to entertain applications made under the Act, since Jurisdiction Clause is made ‘subject to’ Arbitration Clause, the BHC observed that the court of the ‘seat’ would even under the Agreement have exclusive jurisdiction to entertain applications made under the Act.

The BHC noted that, the SC in BGS SGS had observed that, even when parties use the expression ‘venue of arbitration proceedings’ with reference to a particular place, the expression ‘arbitration proceedings’ would make it clear that the ‘venue’ should be read as ‘seat’. The BHC observed that thus, there is no basis for reading Mumbai as a ‘venue’, only because effect had to be given to the choice of courts at Hyderabad, which is itself ‘subject to’ the Arbitration Clause.

Decision of the Bombay High Court

The BHC held that the Impugned Order in so far as it related to the interpretation of the Agreement, could not be sustained. The BHC answered the first part of the Issue 1, in the negative; and the second part of the Issue 1 in the affirmative. Further, the issue 2 as mentioned above was answered in negative.

It thus held that, where a provision in the Agreement conferred exclusive jurisdiction on one place and another provision separately provided for a seat of arbitration in another place and the Agreement provides that the first provision is subject to the second provision, the courts at the latter place would have jurisdiction for entertaining the Section 9 Petition. Therefore, the BHC conclusively held that the Arbitration Clause would prevail over the Jurisdiction Clause and hence the courts at the seat, that is, at Mumbai, had the exclusive jurisdiction.

Therefore, the BHC set aside the Impugned Order and allowed the appeal. The Section 9 Petition was ordered to proceed on merits before the BHC and was accordingly restored.

VA View:

The BHC in this Judgement has analysed multiple precedents relied upon by the parties. The BHC relied on the case of BGS SGS to reiterate the clear position of law and reinforced the premise that the concept of juridical seat of arbitral proceedings had to be developed in accordance with the international practice on a case-by-case basis. The BHC after analysing various precedents, and provisions in agreement with the observations made by the SC, noted that it is too late in the day, to contend that the seat of arbitration is not analogous to an exclusive jurisdiction clause.

The BHC in this Judgement has clarified that, BALCO, did not hold that two courts, that is, the seat court and the court within whose jurisdiction the cause of action arises, had concurrent jurisdiction. The BHC noted that the various high courts missed the subsequent paragraphs in BALCO, which clearly and unmistakably stated that the choosing of a ‘seat’ amounted to the choosing of the exclusive jurisdiction of the courts at which the ‘seat’ is located.

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

Between the Lines | Supreme Court: A contract is void if prohibited by a statute under a penalty, even without an express declaration that the contract is void

Supreme Court: (i) A contract is void if prohibited by a statute under a penalty, even without an express declaration that the contract is void (ii) The condition predicated in Section 31 of the Foreign Exchange Regulation Act, 1973, of obtaining ‘previous’ general or special permission of the Reserve Bank of India for transfer or disposal of immovable property situated in India by a person, who is not a citizen of India, is mandatory.

The Hon’ble Supreme Court (“SC”) has in its judgment dated February 26, 2021 (“Judgement”), delivered by a three judge bench, in the matter of Asha John Divianathan v. Vikram Malhotra & Others [CIVIL APPEAL NO. 9546 OF 2010], held that a contract is void if prohibited by a statute under a penalty, even without an express declaration that the contract is void. It was further held that the condition predicated in Section 31 of the Foreign Exchange Regulation Act, 1973 (“FERA”), of obtaining ‘previous’ general or special permission of the Reserve Bank of India (“RBI”) for transfer or disposal of immovable property situated in India by a person, who is not a citizen of India, is mandatory.

Facts

Mrs. F.L. Raitt, a foreigner, was the owner (“Owner”) of an immovable property bearing No.12 (old No.10A), Magrath Road (“Property”). The Owner had executed an agreement of sale dated April 05, 1976, whereunder, the title deed of the Property was delivered in favour of Mr. R. P. David (“Mr. David”) who was the father of Asha John Divianathan (“Appellant”) and the husband of Mrs. R.P. David (“Respondent No.4”). Subsequently, the Owner gifted a portion of Property admeasuring 12,306 square feet, by a gift deed dated March 11, 1977, and a supplementary gift deed dated April 19, 1980, (“Gift Deeds”) in favour of Mr. Vikram Malhotra (“Respondent No.1”) without obtaining previous permission of the RBI under Section 31 of FERA.

Thereafter, the Owner executed a ratificatory agreement dated December 04, 1982 to transfer the Property, admeasuring 35,470 square feet in favour of Mr. David and a formal permission of RBI under Section 31 of FERA was sought. The RBI granted permission on April 02, 1983. Consequently, a registered sale deed dated April 09, 1983 (“Sale Deed”) was executed by the Owner in favour of Mr. David. However, subsequently, the Owner filed a suit, on July 30, 1983, for cancellation and setting aside of the Sale Deed. The Owner expired on January 08, 1984, and thereafter, Mrs. Ingrid Greenwood was substituted as her legal representative in the pending suit. The said suit was dismissed by the City Civil and Sessions Judge, Mayo, Bangalore (“Trial Court”).

Subsequently, Mr. David filed a suit on February 10, 1984, against Respondent No. 1 and sought relief for declaring the Gift Deeds executed as null, void and not binding and consequentially for relief of possession, permanent injunction and mesne profits. The said suit was dismissed by the Trial Court by a judgment and decree dated August 31, 2001. Thereafter, the Appellant along with Respondent No. 4, had filed first appeal before the High Court of Karnataka (“KHC”) against abovementioned judgement of the Trial Court.

The KHC examined the issue raised by the Appellant on the validity of the Gift Deeds being in violation of Section 31 of FERA. The KHC relied on Piara Singh v. Jagtar Singh and Another [AIR 1987 Punjab and Haryana 93], and held that lack of RBI’s permission under Section 31of FERA did not render the Gift Deeds as void, much less illegal and unenforceable. Accordingly, the first appeal was dismissed by impugned judgment dated October 01, 2009 of KHC.

Issues
1.  Whether Section 31 of FERA is mandatory or directory in nature.
2.  Whether the Gift Deeds executed in favour of Respondent No. 1, in contravention of Section 31 of FERA, are void or voidable. Further, whether it can be voided, if so, then at whose instance?

Arguments Contentions raised by the Appellant: The dispensation specified in Section 31 of FERA is mandatory. Therefore, the Gift Deeds being in violation of Section 31 of FERA, are null and void and unenforceable in law, consequently, not binding on the Appellant and Respondent No. 4. Further, the Appellant stated that this position of law is reinforced by Section 47 (Contracts in evasion of the Act) of FERA and that violation of Section 31 of FERA has also been made punishable under Section 50 (Penalty) of FERA, in support of this submission, reliance was placed on the ratio of a constitution bench judgment in Life Insurance Corporation of India v. Escorts Limited and Others [(1986) 1 SCC 264].

The Appellant contended that the reasons and judgement in Piara Singh (supra) are manifestly wrong since it failed to analyse the true scope and purport of Section 31 of FERA. The Appellant contended that, the entire Property stood validly transferred in favour of Mr. David based on the Sale Deed.

Contentions raised by Respondent No. 1:

The transfer through Gift Deeds in favour of Respondent No. 1 cannot be regarded as ineffective, unenforceable or invalid. Section 31 of FERA is a directory provision. Hence, not obtaining ‘previous’ permission of the RBI would not render the Gift Deeds invalid. No consequence has been provided in Section 31 or any other provision of FERA to treat the transaction in violation of Section 31 of FERA as void. It was further submitted that the stipulation under Section 31 of FERA is only a regulatory measure and not one prohibiting transfer. The consequence of such violation is provided for as penalty under Section 50 of FERA, for which the concerned parties can be proceeded against. However, no action had been taken by any party, including the RBI, in this regard.

The RBI is exclusively entrusted with the task of determining the permissibility of the transaction, being the repository of management of foreign exchange of the country. The Respondent No. 1 further relied on the provisions of the Indian Contract Act, 1872 (“1872 Act”) to state that there is a distinction between void and voidable transactions. Therefore, the transfer in favour of Respondent No. 1 would at best be voidable, that too, at the instance of the RBI only and no one else.

Respondent No. 1 relied on Waman Rao and Others v. Union of India and Others [(1981) 2 SCC 362] and contended that different high courts have consistently opined that transaction in contravention of Section 31 of FERA cannot be regarded as void and that view needs no interference. Therefore, following the principle of stare decisis and the fact that FERA had been repealed, the SC ought not to countermand the consistent view taken by the high courts prevailing since 1987.

Observations of the Supreme Court

The SC noted that, Mr. David had acquired clear title of the Property transferred to him by virtue of the Sale Deed as it was executed only after receipt of ‘previous’ permission from the RBI. However, Gift Deeds in favour of Respondent No. 1 were not backed by such previous permission of the RBI. Admittedly, no permission had been sought from the RBI in that regard.

Object and purpose of FERA:

The SC noted the object of FERA was to consolidate and amend the law relating to dealings in foreign exchange and securities, transactions indirectly affecting foreign exchange and the conservation of the foreign exchange resources of the country and the proper utilisation thereof in the interests of the economic development.

The SC observed that while introducing the bill in the Lok Sabha, Mr. Y.B. Chavan, the then Minister of Finance, explained the object of Section 31 of FERA as follows, “As a matter of general policy it has been felt that we should not allow foreign investment in landed property/buildings constructed by foreigners and foreign controlled companies as such investments offer scope for considerable amount of capital liability by way of capital repatriation. …, there is no reason why we should allow foreigners and foreign companies to enter real estate business.”

Therefore, the SC noted that the avowed object of Section 31 of FERA was thus to minimise the drainage of foreign exchange by way of repatriation of income from immovable property and sale proceeds in case of disposal of property by a person, who is not a citizen of India.

Understanding the distinction between a void and a voidable transaction:

The SC analysed the purport of expression “void” and “voidable” and hence adverted to the exposition in the case of Dhurandhar Prasad Singh v. Jai Prakash University and Others [(2001) 6 SCC 534] wherein it was noted that, it is necessary to distinguish between two kinds of invalidity, the one kind is where the invalidity is so grave that the list is a nullity altogether, such that, there is no need for an order to quash it. It is automatically null and void. The other kind is when the invalidity does not make the list void altogether, but only voidable, such that, it stands valid unless and until it is set aside.

The SC noted that in the case of Union of India & Others. v. A.K. Pandey [(2009) 10 SCC 552], it was observed that where a contract, express or implied, is expressly or by implication forbidden by statute, no court will lend its assistance to give it effect. The SC observed that it is settled that prohibition and negative words can rarely be directory. The SC noted that it is well established that a contract is void if prohibited by a statute under a penalty, even without express declaration that the contract is void, because such a penalty implies a prohibition. In the case of Union of India v. Colonel L.S.N. Murthy and Another [(2012) 1 SCC 718] it was opined that the contract would be lawful, unless the consideration and object thereof is of such a nature that, if permitted, it would defeat the provisions of law and in such a case the consideration or object is unlawful and would become void and that unless the effect of an agreement results in performance of an unlawful act, an agreement which is otherwise legal cannot be held to be void and if the effect of an agreement did not result in performance of an unlawful act, as a matter of public policy, the court should refuse to declare the contract void with a view to save the bargain entered into by the parties and the solemn promises made thereunder.

Understanding Section 31 of FERA:

The SC observed that the title of Section 31 of FERA restricts acquisition, holding and disposal of immovable property in India by foreigners/non citizens. It is crystal clear that a person, who is not an Indian citizen, is not competent to dispose of by sale or gift, as in this case, any immovable property situated in India without ‘previous’ general or special permission of the RBI, except as provided in the proviso, that is, by way of lease for a period not exceeding 5 years. Section 31(2) of FERA mandated a person, who is not an Indian citizen, to make an application to the RBI with necessary disclosures. The second proviso to Section 31(3) of FERA provided for a deemed permission, if no response was received within a period of 90 days from receipt of the application by the RBI. The SC noted that, as per Section 31(4) of FERA, every person, who was not an Indian citizen, holding immovable property situated in India at the time of commencement of FERA, was obliged to make disclosure and declaration within 90 days from the commencement of FERA or such further period as was allowed by the RBI. The SC observed that it is true that the consequences of failure to seek such ‘previous’ permission had not been explicitly specified in Section 31 of FERA or any other provision in FERA. The SC noted that, the purport of Section 31 of FERA must be understood in the context of legislative intent with which it was enacted, that is, basis the general policy to not allow foreign investment in landed property/buildings constructed by foreigners or enter into real estate business to eschew capital repatriation.

The SC, for harmonious interpretation of provisions, observed the purport of the other provisions of FERA. Section 47(1) of FERA clearly envisaged that no person shall enter into any contract or agreement which would directly or indirectly evade or avoid in any way the operation of any provision of FERA or of any rule, direction or order made thereunder and Section 47(2) of FERA declared that an agreement shall not be invalid if it provides, that thing shall not be done without the permission of the Central Government or the RBI.

The SC noted that, though ostensibly the agreement would be conditional subject to permission of the Central Government or the RBI, as the case may be, and if such term is not expressly mentioned in the agreement, it shall be an implied term of every contract governed by the law of obtaining permission of the Central Government or the RBI before doing the thing provided for in the agreement. In that sense, such a term partakes the colour of a statutory contract. Notably, Section 47 of FERA applied to all the contracts or agreements covered under FERA, which required previous permission of the RBI.

Section 50 (Penalty) of FERA reinforced the position that transfer of land situated in India by a person, who is not an Indian citizen, would be penalized. The SC noted that indeed, inserting such a provision did not mean that FERA was a penal statute, but is to provide for penal consequence for contravention of provisions, such as Section 31 of FERA. Further, Section 63 (Confiscation of currency, security, etc.) empowers the court trying a contravention, to confiscate the currency, security or any other money or property in respect of which the contravention has taken place.

The SC noted that in the case of Mannalal Khetan and Others. v. Kedar Khetan and Others [(1977) 2 SCC 424] it was observed that, in the present dispensation provided under Section 31 of FERA read with Sections 47, 50 and 63 of FERA, although it may be a case of seeking ‘previous’ permission, it is in the nature of prohibition. In every case where a statute imposes a penalty for doing an act, though, the act not prohibited, yet the thing is unlawful because it is not intended that a statute would impose a penalty for a lawful act. When penalty is imposed by statute for the purpose of preventing something from being done on some ground of public policy, the thing prohibited, if done, will be treated as void.

The SC concluded that from the analysis of Section 31 of FERA and upon conjoint reading with Sections 47, 50 and 63 of FERA, the requirement of taking ‘previous’ permission of the RBI before executing the sale deed or gift deed is the quintessence; and failure to do so must render the transfer unenforceable in law. The dispensation under Section 31 of FERA mandates ‘previous’ or ‘prior’ permission of the RBI before the transfer takes effect and, therefore, contract or agreement including the gift pertaining to transfer of immovable property of a foreign national without previous general or special permission of the RBI, would be unenforceable in law.

Validity of the Gift Deeds:

The clear title would pass on and the deed can be given effect to only if permission is accorded by the RBI under Section 31 of FERA to such transaction. There is no possibility of ex post facto permission being granted by the RBI under Section 31 of FERA, as noted in the case of Life Insurance Corporation of India (supra).

In light of the general policy prevalent at that time, the SC observed that foreigners should not be permitted/allowed to deal with real estate in India, the peremptory condition of seeking ‘previous’ permission of the RBI before engaging in transactions specified in Section 31 of FERA and the consequences of penalty in case of contravention, the transfer of immovable property situated in India by a person, who is not a citizen of India, without previous permission of the RBI must be regarded as unenforceable and by implication a prohibited act. Therefore, until permission is accorded by the RBI, it would not be a lawful contract or agreement within the meaning of Section 10 read with Section 23 of the 1872 Act.

The SC commended the decision of the Bombay High Court (“BHC”) in Joaquim Mascarenhas Fiuza v. Jaime Rebello and Another [1986 SCC OnLine Bom 234], that dealt with the case of transfer of property, which according to the respondent therein, could not be held by the plaintiff/petitioner, who was a not a citizen of India, in absence of permission given by the RBI in that regard. The BHC took the view that the requirement of seeking ‘previous’ permission of the RBI in Section 31 of FERA is mandatory.

The SC observed that, the judgment of Piara Singh (supra) relied upon by KHC, erroneously assumed that there was no provision regarding confiscation of the immovable property referred to in Section 31 of FERA. The expression ‘property’ in Section 63 of FERA is an inclusive term and, therefore, there is no reason to assume that consequence of confiscation may not apply to immovable property in respect of which contravention of the provisions of Section 31(1) of FERA had taken place. The SC further noted that, the basis of that judgment is tenuous and is palpably wrong. Merely because no provision in the FERA made the transaction void or says that no title in the property passes to the purchaser in case there is contravention of the provisions of Section 31 of FERA, will be of no avail.

A priori, the SC concluded that the various decisions of concerned high courts taking the view that Section 31 of FERA is not mandatory and the transaction in contravention thereof is not void or unenforceable, is not a good law. Accordingly, the SC deemed it appropriate to overrule the decisions of the high courts, taking contrary view, albeit, prospectively. The SC however cautioned that transactions which have already become final including by virtue of the decision of the court of competent jurisdiction, need not be re-opened or disturbed in any manner because of this Judgement. This declaration/direction was issued in exercise of the SC’s plenary power under Article 142 of the Constitution of India.

Decision of the Supreme Court

The SC set aside the judgment and decree of the Trial Court as confirmed by the KHC and held that, the condition of seeking ‘previous’ general or special permission of the RBI for transfer or disposal of immovable property situated in India, by a person, who is not a citizen of India, under Section 31 of FERA is mandatory. Resultantly, the SC declared the Gift Deeds invalid, unenforceable and not binding on the Appellant. The SC observed that a fortiori, the Appellant was entitled for possession of the Property from Respondent No. 1 and also mesne profits for the relevant period for which a separate inquiry needs to be initiated under Order 20 (Judgment and Decree) Rule 12 (Decree for possession and mesne profits) of the Code of Civil Procedure, 1908.

With respect to the second part of issue 2, the SC stated that, the transaction can be voided by the RBI and also by anyone who is affected directly or indirectly by such a transaction. A person affected by such a transaction could set up challenge thereto, by direct action or even by way of collateral or indirect challenge.

The SC correctly observed that this would nevertheless be a case of transaction opposed to public policy and, thus, the fact that a transaction can be taken forward after grant of permission by the RBI did not make the transaction any less forbidden at the time it was entered into.

VA View:

In the present case, the transaction was executed close to the coming into force of FERA, in the year 1977, when considerations were different and governed by different policy manifested in FERA. The SC relied on the objectives of FERA as stated at the time of introduction of the bill in the Lok Sabha, forbidding foreigners from dealing with real estate in India. This Judgment has on perusal of multiple precedents and resources, clearly interpreted the purpose of Section 31 of FERA in light of the legislative intent with which it had been enacted, that is, keeping in mind the then general policy to not allow foreigners to transact in or hold real estate in India. The SC observed that Section 31 of FERA was mandatory in nature.

The SC rightly observed that behind the simple dichotomy of void and voidable acts (invalid and valid until declared to be invalid), lurked terminological and complex conceptual conundrum, that if an act, order or decision is ultra vires, in the sense being beyond/outside the jurisdiction, it would be invalid, or null and void. However, if it is intra vires, it was, of course, valid. The SC further observed that, if it is flawed by an error perpetrated within the area of authority or jurisdiction, it was usually said to be voidable; that is, valid till set aside on appeal or in the past quashed by certiorari for error of law on the face of the record. The SC eventually concluded that the position of law is clear, that when the enforcement of the contract is against any provision of law, it will amount to enforcement of an illegal contract even though the contract per se may not be illegal. Such contracts, where enforcement requires compliance of statutory conditions, failure of such compliance of conditions will amount to statutory violation.

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

Between the Lines | Delhi High Court: Order terminating arbitration proceedings under Section 32(2)(c) of Arbitration and Conciliation Act, 1996 is not an award

The Delhi High Court (“DHC”) has in its judgment dated January 12, 2021 in the matter of M/s PCL Sunconv. M/s National Highway Authority of India [O.M.P. (T) (COMM.) 80/2020], held that an order terminating arbitration proceedings under Section 32(2)(c) of the Arbitration and Conciliation Act, 1996 (“ACA”) is not an award, and can be disputed under Section 14(2) of the ACA.

Facts

The National Highway Authority of India (“Respondent”) had invited bids for “Four laning and strengthening of the existing two lanes between Km. 317 and Km. 65 on NH-2, in the State of U.P. and Bihar for construction package IV-A: Contract Agreement No. GTRIP/5.”. Pursuant to the same, M/s.PCL Suncon (“Petitioner”), a joint venture constituted by Progressive Construction Limited and SUNCON Construction Berhard, Malaysia, submitted its bid on December 15, 2001. The Petitioner’s bid was accepted and by a letter dated February 23, 2002, the Petitioner was awarded the contract for an amount of INR 3,96,47,78,901/-. Pursuant thereto, a formal agreement between the parties was executed on March 28, 2002 (“Contract”). Due to a dispute arising between the parties, the Petitioner invoked the arbitration clause under the Contract, inter alia, claiming INR 57,84,00,000/- towards overstay/ overhead charges; INR 2,50,00,000/- as refund of the liquidated damages deducted by the Respondent; and INR 40,04,000/- for rehabilitation of Bridge 58/1. For the purpose of constituting the arbitral tribunal, the Petitioner nominated Justice E. Padmanabhan as its nominee and the Respondent appointed Mr. S. R. Pandey as its nominee, and both the nominated arbitrators nominated Mr. B. Majumdar as the presiding arbitrator (“Presiding Arbitrator”). With the appointment of the Presiding Arbitrator on August 3, 2015, the arbitral tribunal was constituted (“Arbitral Tribunal”) where upon the Petitioner filed its statement of claims to which the Respondent filed its counter claims before the said Arbitral Tribunal. The Arbitral Tribunal last sat on October 11, 2017, when the arguments on behalf of the Petitioner were heard and dates for further hearings were allotted on January 16, 2018, January 17, 2018 and January 18, 2018. However, the said hearings were cancelled due to non- availability of Justice E. Padmanabhan who subsequently resigned as an arbitrator and requested the Petitioner to nominate another arbitrator in his place. Copies of Justice E. Padmanabhan’s resignation letter were forwarded to the other co-arbitrators as well.

The Petitioner attempted to appoint a substitute arbitrator but the process was delayed as the persons who were approached by the Petitioner, did not consent to be appointed as an arbitrator, and in addition, the authorized officer of the Petitioner, who was pursuing the matter on its behalf, abandoned his assignment due to personal reasons. Consequently, on April 20, 2020, the Arbitral Tribunal passed the impugned order terminating the arbitral proceedings under Section 32(2)(c) of the ACA (“Order”). The Petitioner, however, did not receive any communication from the remaining two arbitrators informing it of their intention to terminate the arbitral proceedings nor was the said Order communicated to the Petitioner. On May 22, 2020, the Petitioner sent a letter to the Respondent and the arbitrators, nominating Mr. Subhash I. Patel as its nominee arbitrator and requested

the Presiding Arbitrator to schedule a hearing. In response to the same, the Petitioner was informed about the Order by a letter dated May 27, 2020.

In the Order, the arbitrators had noted that hearings could not be fixed as no response had been received from Justice E. Padmanabhan to the communication letters sent by the Presiding Arbitrator. It was further noted that there was also lack of initiative on the part of the Petitioner as no proposal had been made for fixing any new dates to proceed with the adjudication process. The Petitioner was accordingly advised to check the convenience of Justice E. Padmanabhan for further hearings, but while the Arbitral Tribunal was awaiting the Petitioner’s response, Justice E. Padmanabhan had by a letter dated February 19, 2019, resigned as an arbitrator and requested the Petitioner to nominate another arbitrator. The arbitrators noted that more than a year had elapsed and the Petitioner had not appointed an arbitrator in his place. The arbitrators noted that because of the deadlock, the continuation of proceedings had become impossible and accordingly, terminated the arbitral proceedings under Section 32(2)(c) of the ACA. The Petitioner, thereafter, filed the present petition under Section 14(1)(a) read with Section 15 of the ACA before the DHC, against the said impugned Order.

Issue

Whether the Order terminating arbitration proceedings under Section 32(2)(c) of ACA is an award.

Arguments

Contentions raised by the Respondent:

The Respondent, inter alia, contended that the present petition was not maintainable as the entire arbitral proceedings had been terminated in terms of Section 32(2)(c) of the ACA and this was not a case where arbitrators had withdrawn from the proceedings or the mandate of any arbitrator had been terminated as contemplated under Section 14(1)(a) of the ACA. It was further argued that the Petitioner could approach the court under Section 15 of the ACA only in a case where the arbitrator had withdrawn from the arbitral proceedings or had become de jure or de facto unable to perform its functions. In such circumstances, a substitute arbitrator could be appointed. However, in a case where the entire arbitral proceedings had been terminated, there was no case for appointing any arbitrator under Section 15(2) of the ACA. The Respondent referred to the decision of the Division Bench of the Calcutta High Court in The India Trading Company v. Hindustan Petroleum Corporation Limited [2016 SCC OnLine Cal 479] and basis the same, contended that the decision of the Arbitral Tribunal to put an end to the proceedings was a final award, which could be challenged only by way of an application for setting aside the same under Section 34(2) of the ACA. The Respondent contended that in view of the said decision, the recourse to an application under Section 14 of the ACA was not available to the Petitioner. In addition, reference was also made by the Respondent to the decision of a Coordinate Bench of DHC in Angelique International Limited v. SSJV Projects Private Limited and Another [2018 SCC OnLine Del 8287], wherein the court had accepted the contention that the termination of proceedings in respect of the claim filed by the petitioner would amount to an arbitral award, which could be challenged only by a petition under Section 34 of the ACA. It was also contended

that the Petitioner was responsible for the delay in appointment of an arbitrator in place of Justice E. Padmanabhan and therefore, the decision of the Arbitral Tribunal to terminate the arbitral proceedings could not be faulted.

Contentions raised by the Petitioner:

The Petitioner on the other hand contended that it was well settled that an order terminating the proceedings under Section 32(2) of the ACA could not be considered as an award. The Petitioner submitted that termination of the arbitral proceedings on account of non-prosecution of claims also could not be construed as an award and which could be challenged under Section 34 of the ACA. It was further argued that the abovementioned decision in Angelique International Limited v. SSJV Projects Private Limited and Another [2018 SCC OnLine Del 8287] (supra) struck a discordant note inasmuch as it held that only a petition under Section 34 of the ACA would be maintainable against an order terminating the arbitral proceedings under Section 32(2)(c) of the ACA. It was argued that the said decision was per in curiam as it ignored the binding decisions of the DHC in Bridge and Roof Co. (India) Limited v. Guru Gobind Singh Indraprastha University and Another [2017 SCC OnLine Del 10412], Puneet Kumar Jain v. MSTC Limited and Others [MANU/DE/7910/2017], Shushila Kumari and Another v. Bhayana Builders Private Limited [2019 SCC OnLine Del 7243], Gangotri Enterprises Limited v. NTPC Tamil Nadu Energy Company Limited [(2017) 237 DLT 690] and Pandit Munshi and Associates Limited v. Union of India and Others [2015 (2) ARB LR 40 (Delhi)]. Lastly, the Petitioner argued that the Order was liable to be set aside as no pre-emptory notice was issued by the arbitrators before proceeding to terminate the arbitral proceedings.

Observations of the Delhi High Court

The DHC observed that, as per Section 34 of the ACA, “(1) Recourse to a Court against an arbitral award may be made only by an application for setting aside such award in accordance with sub-section (2) and sub-section (3).” The use of the word ‘only‘in Section 34(1) of the ACA was significant and it clearly implied that except under Section 34 of the ACA, no other recourse was available against an arbitral award, to which Part-I of the ACA applied. The contention that the present petition was not maintainable and the only recourse available to the Petitioner was to file an application under Section 34 of the ACA was founded on the assumption that the impugned Order was an award. Clause (c) of Sub-section (1) of Section 2 of the ACA, defines an ‘arbitral award‘ to include an interim award. Section 31 of the ACA provides for the form and the content of an arbitral award. The question as to the distinction between an award and an order of an arbitral tribunal had been a subject matter of a number of rulings. It was now well settled that an award constituted a final determination of a particular issue or a claim in arbitration.

It was also observed that Section 32 of the ACA drew a clear distinction between a final arbitral award and interim orders passed by an arbitral tribunal. In terms of Section 32(1) of the ACA, arbitral proceedings stood terminated by a final award or by such orders as were specified under Section 32(2) of the ACA. In Rhiti Sports Management Private Limited v. Power Play Sports and Events Limited [2018 SCC OnLine Del 8678], the DHC had noted that “A plain reading of Section 32 of the Act indicates the fact that the final award would embody the terms of the final settlement of disputes (either by adjudication process or otherwise) and would be a final culmination of the disputes referred to arbitration.….To put it in the negative, any procedural order or an order that does not finally settle a matter at which the parties are at issue, would not qualify to be termed as ‘arbitral award’.”

As opposed to the reasoning held in Angelique International Limited v. SSJV Projects Private Limited and Another [2018 SCC OnLine Del 8287] by the DHC, the Supreme Court (“SC”) had, in the case of Indian Farmers Fertilizer Cooperative Limited v. Bhadra Products [(2018) 2 SCC 534] considered the question of whether an award on the issue of limitation could be considered to be an interim award and whether the decision on the point of limitation was a matter of jurisdiction and therefore, be covered under Section 16 of the ACA and held that since the award had finally determined one of the issues between the parties, the same could be considered as an interim award inasmuch as it finally determined a claim that could not be re-adjudicated all over again. Thus, 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, which would result in termination of the arbitral proceedings. In light of the above, the DHC observed that, it was clear that an order which terminated the arbitral proceedings as the arbitral tribunal found it impossible or unnecessary to continue the arbitral proceedings, would not be an award. This was because it did not answer any issue in dispute in arbitration between the parties but was an expression of the decision of the arbitral tribunal not to proceed with the proceedings. Section 32 of the ACA made a clear distinction between an award and an order under Sub-section (2) of Section 32 of the ACA. Indisputably, an order under Sub-Section (2) of Section 32 of the ACA was not an award.

Further, the DHC observed that the Order passed by the arbitrators expressly stated that the arbitral proceedings were terminated under Section 32(2)(c) of the ACA as in their view, it had become impossible to continue with the said proceedings. Indisputably, an order terminating the proceedings under Section 32(2)(c) of the ACA could be impugned under Section 14(2) of the ACA. The Respondent’s contention that even though an application under Section 14(2) of the ACA may be filed, the present application which is under Section 14(1)(a) and Section 15 of the ACA is not maintainable, appeared to be unpersuasive. A plain reading of Sub-section (2) of Section 14 of the ACA indicated that unless otherwise agreed by parties, a party could apply to a court to decide on the question of termination of the mandate, if a controversy remained concerning any of the grounds referred to in Sub-section 14(1)(a) of the ACA.

Decision of the Delhi High Court

Allowing the petition, the DHC noted that, although the arbitrators had passed the Order, it was not disputed that a notice intimating that they were contemplating terminating the proceedings was not issued to the Petitioner, prior to passing of the Order. However, it could not be denied that the Petitioner was responsible for the stalling of the proceedings as it had inordinately delayed the appointment of an arbitrator. Whilst the DHC was of the view that the Petitioner ought not be rendered remediless to urge its claims, the Respondent’s contention that the Petitioner must be visited with costs was merited. Hence, the DHC set aside the impugned Order, albeit, subject to payment of costs of INR 25,000/- by the Petitioner.

Since the Petitioner had already nominated an arbitrator, Mr. Subhash I. Patel, the Arbitral Tribunal was directed to resume the arbitration proceedings. The Arbitral Tribunal was further directed to conclude the arbitral proceedings as expeditiously as possible and preferably within one year from date of the DHC’s judgement.

Vaish Associates Advocates View:

In light of the previous judgments on same question of law and interpretation, dealt with and decided by the SC, the DHC has fittingly interpreted Section 32 and Section 34 of the ACA, to distinguish between an ‘award’ and an ‘order’.

Aside from the clear intent of the legislation, which is evident in the text of Section 32, it would appear logically inconsistent to treat a procedural order as an award, while provision has been given for both in the law and in the way they are to be dealt with in case parties to a contract want to challenge the same before a court of law. Also, considering that the impugned Order itself stated that the same was passed under Section 32 (2)(c) of the ACA, to treat it as an award under Section 32 (1) would have been inappropriate.

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