[Arbitration Act] S.2(1)(f) Is Non-Derogable, Applicability Cannot Be Excluded Even By Mutual Consent Of Parties: Delhi High Court

Brief Facts

This petition has been filed under section 34 of the Arbitration Act against two awards passed by the Arbitral Tribunal.

The petitioner contended that the petitioner is a resident of Kenya therefore the award being an International Commercial Award cannot be set aside on ground of patent illegality as the scope of interference is limited after the introduction of section 34 (2A) of the Arbitration Act in 2015.

It also contended that multiple documents like passport etc. which were in knowledge of the respondent clearly establish that the petitioner in fact belonged to Kenya.

It is the case of the petitioner that section 2(1)(f) of the Arbitration Act is non derogable provision which means that it cannot be waived even by consent of the parties. Based on this it was argued that once it is established that the arbitration is an International Commercial Arbitration, it cannot be converted into a Domestic Arbitration by the consent of the parties.

It was also contended that the Supreme Court in Ssangyong Engineering & Construction Co. Ltd. v. National Highways Authority of India, 2019 has held that amended section 34 would be applicable to all the application made after its enforcement notwithstanding the arbitration proceedings commenced before it came into force.

Reliance was also placed on AMWAY India Enterprises Pvt. Ltd. Vs. Ravindranath Rao, (2021) wherein the Supreme court has held that if any of the parties fulfils the requirements of section 2(1)(f) of the Arbitration Act, Arbitration would be an ICA regardless of the nature of transaction.

In response, the respondent contended that the appointment was made by the Delhi High Court under 11(6) of the Arbitration Act. Had the parties considered the Arbitration to be an ICA, they would have approached the Supreme Court under section 11(6) of the Act to get the Arbitrator appointed. This clearly shows that the parties have derogated the provision of section 2(1)(f).

In Narayan Prasad Lohia, the Delhi High Court held that when two foreign nationals did not raise any objections as to the nature of Arbitration during the constitution of the Arbirtal Tribunal, they shall be deemed to have derogated section 2(1)(f) of the Act.

No objections were raised to the appointment of the Arbitral Tribunal during the Arbitral proceedings. They came to be raised only at the fag end of the section 34 petition and that too after 7 years of the award having been passed. Based on this, it was argued that no new ground can be raised under section 34 as it would be hit by the limitation period specified under section 34(3) which is non breachable.

Observations:

The court at the outset observed that the Arbitration Act gives parties autonomy to choose any procedure from which they want to be governed, method of appointment of the Arbitrators etc.

The court further referred to the recent judgment of the Supreme Court in CORE wherein the court has held that “the Act gives party autonomy great importance in the arbitral process and the same is evident from the use of “phrases such as “unless otherwise agreed by the parties”,“failing any agreement”, “the parties are free to agree”, “failing such agreement” …” in the Section 3, Section 11(1)-(3) & (5), Section 13(1) & (2), etc.These are left to be ascertained by the Parties and are derogable in the sense that they may be modified or adjusted mutually. However, certain Sections of the Act, like S.2 which is the definition section, form the basic structure of Law of Arbitration, and are non-derogable.”

While noting the above observations of the Supreme Court, the court observed that while the Arbitration Act recognises the autonomy of the parties which can be used to derogate the provisions of the Act by mutual consent, there are some fundamental principles of the Act which cannot be derogated even by the mutual consent.

The court rejected the contention of the respondent that new issue cannot be raised under section 34 of the Act. The court observed that legal issue can be raised even at the stage of section 34. In support of this observation, the court noted the Supreme Court judgment in Yeswant Deorao Deshmukh vs. Walchand Ramchand Kothari, 1950 wherein it was held that “if the factual foundation for a case has been laid and the legal consequences of the same have not been examined, the examination of such legal consequences would be a pure question of law.”

The court also rejected the contention of the respondent that it wasn't aware of the nationality of the petitioner. It observed that the benefit of ignorance cannot be given to the respondent when it is clear from the materials on record that the petitioner was a foreign national.

The court further referred to the Supreme Court judgment in Amway India Enterprises Private Limited vs. Ravindranath Rao Sindhia and Anr., (2021) wherein the court has held that “an analysis of Section 2(1)(f) would show that whatever be the transaction between the parties, if it happens to be entered into between two persons, at least one of whom is either a foreign national, or habitually resident in, any country other than India; or by the Government of a foreign country, the arbitration becomes an international commercial arbitration.”

The court further analysed the distinction between foreign award and International Commercial Arbitration.

The court referred to the Madhya Pradesh High Court judgment in Sasan Power Ltd v North American Coal Corp India Pvt Ltd., 2015 wherein the distinction between the two was elucidated as under:“when an arbitration contains an international element, it can be categorised on two parameters – Nationality and Seat. “International Commercial Arbitration” is based on the nationality of the parties.”

The court in the above also observed that “It affects the procedure of appointment of Arbitrator under Section 11 of the Act, the law governing the arbitration where the seat of arbitration is in India as provided for under Section 28 of the Act, and finally, the scope of challenge to which an award can be subjected to under Section 34 of the Act. On the other hand, the Seat determines whether the Award is a Foreign Award and accordingly, define the procedure of its enforcement, under Part-II and Part-III, whereas a Domestic Award is to be enforced under Part-I”.

The court also observed that definition section is non derogable which means that its applicability cannot be done away with even by mutual consent of the parties. Accordingly, the preliminary objection was answered and the matter was directed to be listed before the appropriate bench.

Case Title: Suresh Shah versus Tata Consultancy Services Limited

Case Number: O.M.P. 5/2017, I.A. 9676/2019

Judgment Date: 2/12/2024

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