Quippo Construction Equipment Ltd v Janardan Nirmal Pvt Ltd : A Critical Analysis

Thus, the finding of the court on an issue which necessarily arises in the case and which is required to be determined for the final disposal of a matter is the ratio of the judgment. The obiter relates to the finding of the court of an issue, which although arises in the matter, but is not required to be decided for the final disposal of the case.

It is in the above context, that the authors have analysed the recent judgment of Division Bench of the Supreme Court in Quippo Construction EquipmentLimited v. Janardan Nirman Pvt. Ltd. (Civil Appeal No. 2378 of 2020,decided on 29.04.2020) ("Quippo Construction").

Factual Background

The Civil Appeal emanates from the judgment passed by Calcutta High Court in an Appeal filed under Section 37 of the Arbitration and Conciliation Act, 1996 ( "the Act") arising out of an order passed by the District Court, Alipore, dealing with a challenge to arbitral award under Section 34 of the Act. The dispute arose out of four contracts entered into between two parties in relation to providing construction equipments for infrastructure activities. Each of these contracts contained an arbitration clause. Three out of the four arbitration clauses designated New Delhi as the venue, whereas one agreement mentioned Kolkata as the place of arbitration.

In pursuance of the four agreements, construction equipments were provided by the Appellant to the Respondent. As per the terms of the agreements, the Respondent had to make payment within 7 days of the submission of monthly bill. Since, the Respondent defaulted in making the payment within the time period stipulated in the contracts, the Appellant invoked arbitration. A sole arbitrator was appointed in terms of the Arbitration clauses and the proceedings were conducted in New Delhi. The Respondent denied the existence of any agreement between the parties, decided not to participate in the arbitral proceedings and instead filed a suit before Civil Judge, Junior Division, Sealdah, praying that the agreements be declared null and void. The Appellant filed an application under Section 5 and 8 of the Act submitting that the dispute be referred to arbitration. The Trial Court allowed the application of the Appellant, against which the Respondent filed an Appeal. During the pendency of the Appeal, since no order injuncting the arbitral proceedings was passed, the arbitral tribunal passed an ex-parte award wherein claims preferred by the Appellant were accepted. The aforesaid appeal filed by the Respondent was eventually dismissed.

The Respondent being aggrieved by the ex-parte arbitral award, challenged the same by filing a Section 34 petition before the Calcutta High Court (wrongly) and later before the District Court, Alipore. Apart from stating the non-existence of any agreement, the Respondent contended that the venue of the arbitration in terms of the arbitration clause had to be Kolkata. The said contentions were rejected. The District Court held that there existed an arbitration clause, that the arbitrator was appointed at New Delhi, the award was passed at New Delhi and hence, court at New Delhi will have jurisdiction to hear the challenge to the arbitral award. Against this order, the Respondent filed an Appeal under Section 37 of the Act before the Calcutta High Court. The High Court set aside the order passed by the District Court and restored the Section 34 Petition before the District Court. The High Court held that it is evident from the cause title itself that the respondent was amenable to the jurisdiction of the Alipore court.

Issues that arose for consideration

Against this order, a Special Leave Petition (Civil Appeal No. 2378 of 2020) was filed by the Appellant before the Supreme Court. Two issues arose before the Court-

• whether a party which has failed to participate in the arbitral proceedings and raise objections before it, is deemed to have waived his right to raise the objection and is precluded from raising them in subsequent proceedings and
• whether the judgment of the District Court, Allipore holding that Section 34 Petition is not maintainable before it in view of the fact that the arbitration took place in Delhi, is correct?

The finding of the Court arrived at on these issues will be the ratio decidendi of the judgment and the same shall have a precedential value as has been held in Mohandas Issardas (Supra) and a catena of judgments of the Supreme Court and High Court following it.

Analysis of the Findings

The Supreme Court has answered both the issues in affirmative.

Issue No. 1

With respect to the first issue, the Court held that the Respondent, by not participating in the arbitration proceedings and by not raising his objections inter- alia with respect to the place of the arbitration, appointment of arbitrator and the arbitrator rendering a common award despite their being four contracts each containing a separate arbitration clause, is deemed to have waived his right to raise objection and is precluded from raising them in subsequent proceedings.

In the authors' opinion, the aforesaid finding of the Court might not be entirely correct in view of the law laid down in Lion Engg. Consultants v. State of M.P.^[3]("Lion") wherein the Supreme Court held that the legal pleas which are purely legal in nature, even if not raised before the Arbitral Tribunal, can be raised at the stage of Section 34 petition

The matter arose out of a dispute in execution of a works contract in which an award was passed and the same was challenged under Section 34 of the Act. The objector sought to amend the objections raised in the Application under Section 34, after a period of three years. One of the objection which the objector sought to include was the legal plea that the Arbitration and Conciliation Act, 1996 stands excluded by the M.P. Madhyastham Adhikaran Adhiniyam, 1983. The amendment sought to the petition was rejected by the trial court, however, on a petition under Article 227 of the Constitution of India, the High Court allowed the said amendments. SLP was filed before the Supreme Court. Before Supreme Court, it was inter alia submitted that the objection having not been raised under Section 16(2) of the Act before the arbitrator, could not be raised under Section 34 of the Act. This is exactly what the plea was in Quippo Construction(Supra).

However, it may be noted that even the judgment in Lion (Supra) does not take note of another earlier coordinate bench Judgment in Narayan Prasad Lohia vs. Nikunj Kumar Lohia and others as reported in (2002) 3 SCC 572 ("Lohia"). The judgment in Lohia(Supra) has been extensively quoted and relied upon by the Supreme Court in Quippo Construction. In Lohia, a Section 34 Petition was filed on the ground that the arbitral award was passed a Tribunal comprising two Arbitrators, which is contrary to Section 10 of the Arbitration Act which clearly states that the number of arbitrators cannot be even. The Hon'ble Supreme Court held that composition of a Tribunal can be challenged under Section 16 of the Act. A conjoint reading of Section 10 and 16 shows that an objection to the composition of an Arbitral tribunal is a matter which is derogable. It is derogable because a party is free not to object the constitution of Tribunal within the time prescribed in Section 16. In case, the party chooses not to object the constitution of Tribunal, the same would amount to waiver under Section 4 of the Act and such a plea cannot be raised in future proceedings.

The gist of the judgement in Lohia (Supra) is that the objection with respect to composition of Tribunal cannot be raised at the stage of filing of Section 34 petition, if the same was not raised at the stage of Section 16. Whereas the Supreme Court in Lion(Supra) holds that the pleas which are purely legal in nature can be raised even at the stage of Section 34 petition. Since there were two judgments of equal bench strength, the Supreme Court in Quippo Construction (Supra) ought to have atleast sought to distinguish as to how the judgment in Lion (Supra) was inapplicable to the present facts, especially in view of the fact that the objection which the Respondent had raised in his Section 34 petition was not confined to composition of Tribunal alone. In the authors' view, such an exercise would have entailed the Supreme Court to decide whether issue relating to seat is a pure legal plea or not.

The authors contend that the objections such as the place of the arbitration, arbitrator passing a common award despite their being four separate contracts each containing an arbitration clause, being purely legal pleas, could have been raised at the stage of Section 34 proceedings. Non-participation of the Respondent in the arbitral proceedings will not preclude him from raising such a plea at later stage.

Issue No. 2

The second issue deals with jurisdiction of Court before which Section 34 petition was maintainable. The Supreme Court agreed with the reasoning given by the District Court, Allipore that the Section 34 petition filed before it was not maintainable as the arbitration took place in Delhi and that only Courts in Delhi can exercise jurisdiction over it. The Supreme Court set aside the judgment of the Calcutta High Court and upheld that of the District Court. However, while holding so, the Court has made an observation that the case at hand "is a domestic and institutional arbitration where CIAA was empowered to and did nominate the Arbitrator. It is not as if there were completely different mechanisms for appointment of Arbitrator in each of the agreements. The only distinction is that according to one of the agreements the venue was to be at Kolkata. The specification of "place of arbitration" may have special significance in an International Commercial Arbitration, where the "place of arbitration" may determine which curial law would apply. However, in the present case, the applicable substantive as well as curial law would be the same."

Although the conclusion arrived at by the Supreme Court i.e. the District Court in Delhi will have jurisdiction since the arbitration took place in Delhi, is correct, the observation made by the Court that the "place of arbitration" does not hold significance in domestic arbitration since the applicable substantive and curial law would be the same, is worrisome. This observation goes against the well-established concept of "juridical seat" which has been accepted by the Courts in India.

The concept of "juridical seat" received imprimatur of the Supreme Court in the Constitution Bench judgment of Bharat Aluminium and Co. vs. Kaiser Aluminium and Co.^[4] ("Balco"). In the said judgment, the Court held that arbitration is anchored to the seat and that seat is the centre of gravity. That the court within whose jurisdiction the arbitration takes place will have supervisory jurisdiction over the arbitral proceedings. It was held that the term "subject matter of arbitration" used in the definition of Court in Section 2(1)(e) cannot be confused with the term "subject matter of the suit". The subject matter of arbitration is arbitration itself and hence, the term Court would mean the Court of the seat of arbitration. The Court while holding so also took note of Section 20 of the Act which is a statutory provision in support of party autonomy and enables party to choose a place of arbitration. It will not be out of place to mention that one paragraph in Balco (Supra)(discussed in the later part of this paper) created some confusion.

The aforesaid judgment has been followed in a catena of judgments, one such being the judgment in Indus Mobile Distribution Pvt. Ltd v. Datawind Innovations Pvt. Ltd.^[5] ("Indus Mobile"). The Supreme Court held that the place chosen by the parties in the arbitration agreement to hold arbitral proceedings, may not in the classical sense have jurisdiction i.e. no part of the cause of action may have arisen at such a place, however, in arbitration law, the moment such a place is chosen, it becomes the juridical seat, which is akin to exclusive jurisdiction clause. It is pertinent to note that Indus Mobile (Supra) was also a case of domestic arbitration.

The aforesaid position has been upheld by the Supreme Court in BGS SGS Soma JV v. NHPC Ltd.,^[6] ("BGS SGS Soma")

Apart from the fact the BGS SGS Soma (Supra) is a recent judgment which upholds the relevance of juridical seat in determining the exclusive jurisdiction of court, the judgment is crucial as it puts to rest the controversy surrounding the decision in Balco (Supra). The Constitution Bench in para 96 of the Balco (Supra) judgment had observed that two courts will exercise jurisdiction over arbitral proceedings viz. (i) the court which would have jurisdiction where the cause of action is located and (ii) supervisory Court (within whose local limits the arbitration takes place).

An isolated reading of Para 96 of the judgment reveals that courts have concurrent jurisdiction and parties can either choose the court where the cause of action has arisen or the court exercising supervisory jurisdiction over the arbitral proceedings. This observation in Para 96 runs contrary to the law which Balco(Supra) seeks to lay down i.e. the Courts at seat alone will have jurisdiction to hear the challenge to arbitral award. The confusion surrounding jurisdiction of court prevailed till very recently (till the decision in SGS BGS Soma(Supra)) and many courts in India exercised their jurisdiction despite them not being the courts within whose jurisdiction the arbitration had taken place. The above ambiguity which crept in, in Balco (Supra) owing to Para 96 of the judgment, only proves the impact which any observation made by Supreme Court in its judgment have over the decision making process of High Court and lower courts. In the humble opinion of the authors, the Supreme Court ought to have taken cue from the confusion that arose due to one stray observation in Balco (Supra), and ought to have avoided making observation at para 22 of Quippo Constructions (Supra) that seat does not make any difference in a case of domestic arbitration.

Since, under law governing arbitration, the jurisdiction of a Court flows from the seat of arbitration in contrast to Code of Civil Procedure, where the jurisdiction is subject matter centric, an observation of Supreme Court, howsoever innocuous, that seat does not have relevance in case of domestic arbitration, dilutes the decision in SGS BGS Soma (Supra) that once a seat is chosen by the parties, the same would amount to conferring exclusive jurisdiction to the Court within whose local limit the seat of arbitration is located.