Arbitration Court Reckoner : August 2020

Section 8

1. Narrows scope of the fraud exception to make a dispute non-arbitrable

In Avitel Post Studioz Ltd & Ors v HSBC PI Holdings (Mauritius) Limited^[1], Supreme Court held ratio in N. Radhakrishnan v. Maestro Engineers, (2010) 1 SCC 72 would not be a good precedent for applying fraud exception in arbitration. It further held that fraud to make a dispute non-arbitrable must be of a very serious nature (twin test): must be of a nature so as to make the contract or arbitration clause not exist in a clear case in which the court finds that the party against whom breach is alleged cannot be said to have entered into the agreement relating to arbitration at all and secondly it must have a public law domain element - allegations made against the State or its instrumentalities of arbitrary, fraudulent, or malafide conduct. If the subject matter of an agreement between parties falls within section 17 of the Indian Contract Act, 1872, or involves fraud in the performance of the contract, which would amount to deceit, being a civil wrong, the subject matter of such agreement would certainly be arbitrable. Further, held that merely because a particular transaction may have criminal overtones as well, does not mean that its subject matter becomes non-arbitrable if separate civil action is maintainable.

2. Relief of Cancellation of registered instruments arbitrable

In Deccan Paper Mills v Regency Mahavir Properties & Ors.^[2] Supreme Court firstly reiterated the law as laid down by it in Avitel Post Studioz (supra) with regards to "fraud exception" and held the dispute to be arbitrable. It further held that the cancellation of the instrument under S. 31 of the Specific Relief Act, 1963 is as between the parties to the action and their privies and not against all persons generally, as the instrument that is cancelled is to be delivered to the plaintiff in the cancellation suit and thus an action instituted under S. 31 of the Specific Relief Act, 1963 is not an action in rem to make the dispute non-arbitrable, irrespective of whether the instrument sough to be cancelled is registered or not and held that an action that is started under S. 31(1) cannot be said to be in personam when an unregistered instrument is cancelled and in rem when a registered instrument is cancelled. On the facts of the case, thus, held, that merely cause cancellation of certain registered instruments is sought the same was not an action in rem and the disputes would be arbitrable.

3. Specific application or prayer under S.8 not needed

In Huawei Telecommunication (India) Pvt. Ltd. and Ors. v Palathara Constructions^[3], High Court of Madras was seized of the question that should the civil court, before which a suit is brought in a matter which is subject to an arbitration agreement, refer the parties to it to arbitration under the provisions of S. 8 of the Act, when the opposite side brings to its notice- through its first statement on the substance of the dispute- that there exists such a valid agreement, but without specifically seeking or applying for such reference. The question arose as while the defendant in the said case had pointed out the existence of arbitration agreement and stated that the suit was not maintainable but had not made a specific application or prayer for seeking reference S. 8(1) of the Act. The Court held that language, terminology and phasing used may be different, but when the defendant sufficiently and abundantly makes it clear that the Court obtains no jurisdiction to consider the suit on account of the existence of a valid arbitration agreement and that they do not accede to its jurisdiction with respect to the disputes, the statutory obligation of the Court, under S. 8(1) emanates and it then becomes imperatively enjoined to consider if the parties are to be referred to Arbitration, subject to all other legal criterion as are applicable.

4. Issue of Reference under S. 8 must be seen by Court having territorial jurisdiction

In Josephine Ancilda v HDFC Bank Ltd. & Ors.^[4] High Court of Madras held that mere fact that the clause conferring exclusive jurisdiction on courts in Delhi was combined with the arbitration clause and appearing under the head 'Arbitration', would not reduce its scope and applicability only to the Arbitration proceedings and not to other legal proceedings. It held that the words "in connection with any matters, which might arise out of this agreement," are definitely wider in scope so as to include other legal proceedings also. It further held that the plaint was to be retuned under Order 7 Rule 10 CPC and the existence of valid arbitration agreement and reference of parties under S. 8, as was sought to by the Defendant to the suit, would have to be seen by the competent judicial authority before which it is filed upon return.

Section 9

5. Grant of Interim Injunction in the nature of specific performance post termination

In Jaguar Overseas Ltd. v Seagull Maritime Agencies P. Ltd.^[5], High Court of Delhi was seized of a petition, inter alia, seeking direction to the Respondent therein, who was the handling agent of the Petitioner, to pay 'detention & demurrage charges' to the port authorities at Dar es Salaam to facilitate the release of the containers containing the Petitioner's goods and to complete their shipment to the final destination at Zambia. That the agreement between the Petitioner and Respondent had been terminated by the Petitioner but it was the case of the Petitioner that the Respondent had to complete the shipment of the containers already assigned to it which were lying in Dar es Saleem. The Respondent sought to oppose the prayer as sought on the ground that that an injunction can only be granted to restore status quo and not to establish a new factual scenario and also sought to rely on S. 14(1) (c) of Specific Relief Act provides that specific performance cannot be granted in cases where the contract is terminable but the said argument was rejected by the Court in view of the stipulation in the agreement that even if the agreement is terminated by the petitioner by serving a notice, the respondent is still under an obligation to transport the containers handed over to it till the service of notice as per the agreement. Accordingly injunction as prayed for was granted but with some charges being shared by the parties.

6. Test of Emergent Necessity for grant of relief under S. 9

In Avantha Holdings Ltd. v Vistra ITC India Ltd.^[6] High Court of Delhi held that the Court, while exercising its power under Section 9 of the Act, has to be acutely conscious of the power, vested in the arbitrator/arbitral tribunal, by Section 17 of the same Act and cannot, therefore, usurp the jurisdiction which would, otherwise, be vested in the arbitrator, or the arbitral tribunal, yet to be constituted. It further held that the Court is also required to ensure that Section 9 is not employed, by litigants, who feel that it is easier to obtain interim relief from a Court, rather than from an arbitrator or arbitral tribunal, to forum shop. It further held that while passing orders under Section 9, the Court is required to satisfy itself that (i) the applicant, before it, manifestly intends to initiate arbitral proceedings7 , (ii) the criteria for grant of interim injunction, which apply to Order 39 of the CPC, stands satisfied, and (iii) circumstances also exist, which renders the requirement of ordering interim measures an emergent necessity, which cannot await a Section 17 proceeding, before the arbitrator, or arbitral tribunal. In assessing whether such an emergent necessity exists, or not, the Court would, essentially, have to satisfy itself that failure to order interim measures, under Section 9, would frustrate, or would render the recourse, to arbitration – which is yet to take place – a futility. On the facts of the said case ,which sought transfer of pledged shares back into Demat account and restraint on sale of pledged shares , held that invocation of the pledged shares has taken place, the shares have been dematerialised, sold in the open market, and Section 9 of the Act, howsoever wide its amplitude, cannot justify setting the clock back to a stage anterior to the invocation of the pledge, by the Respondent, which took place as far back as in March, 2019.

7. Grant of injunction enforcing negative covenant

In LifeCell International P. Ltd v. Vinay Katrela^[7], High Court of Madras was seized with a petition seeking an injunction with regards to enforcement of a negative covenant in the form of a non-compete clause contained in a franchise agreement post termination of the said agreement. The Court held that there are two scenarios – First, where the knowledge acquired by a person during his employment as an agent, due to his efficiency and intelligence is personal to him and his ability to persuade or canvas or communicate with the parties cannot be said to be a property of his Principal nor thus there could not be any restraint from using his individual skills after termination of relationship. On the other hand, the second scenario would be, if for a particular purpose, a specialized training is imparted at the cost of the company, with regard to the trade secrets, then it is a special knowledge given in confidence by the employer to its employee or agent and the special secrets regarding the trade shall not be divulged to rival parties as it will be detrimental to the future prospects of the Principal. On the said analysis, it was held that the business of the Petitioner of testing, processing, preserving and storage of Umbilical Cord Stem Cells is not a common business but one which requires a special knowledge and process. The respondent, being an agent was imparted with the special knowledge on the processes created by the applicant company and thus it would fall in the second scenario and granted in the interim injunction in terms of the negative covenant on the prima facie case made out while holding that the questions as to whether the restraint is reasonable or not? and whether there is breach of agreement or not? would be decided in arbitration.

8. Special equities vis a vis injunction against invocation of bank guarantees

In Hindustan Construction Co. Ltd. National Hydro Electric Power Corporation Ltd.^[8], High Court Of Delhi while rejecting a petition seeking restraint on encashment of bank guarantees held that inter se disputes between the parties on the amounts recoverable as also questions of delay can only be decided in arbitration and cannot be a ground to seek restraint from encashment of unconditional, irrevocable bank guarantees. The Court further rejected the argument of special equities that was sought to be premised on the fact that the bank guarantees were sought to be invoked by giving constantly changing reasons for the same. The Court held that while the letter of invocation may not be happily worded but would have to be read with other correspondence which disclose that there were several other, concurrent reasons for the respondent to invoke them. It further held that the term 'special equity' cannot be compartmentalized and may include cases wherein the petitioner is able to prove that (i) encashment of the bank guarantees would cause irrecoverable loss to the petitioner or (ii) would prick the judicial conscience of this Court.

9. Cross liability or Cross collateralisation

In Sunil Goel v Indiabulls Housing Finance Ltd.^[9], High Court of Delhi while dealing with a petition for release of pledged shares, inter alia, held that the very concept of cross-liability or cross-collateralisation, as applicable to commercial contracts, predicates reciprocity of security and commonality of the parties to the contract. Further held that, cross-collateralisation, as a concept known to commercial contracts, necessarily predicates the usage of the collateral, available as security against one loan, as collateral against a second loan. If, however, the two loans are governed by independent loan agreements, the inclusion of a cross collateralisation clause, in one of them, cannot, proprio vigore, justify proceeding against the collateral, provided in the said loan agreement, for satisfaction of the loan in the other agreements, unless the said security is also collateral under such other agreements. It is open, to contractual parties, to provide for such a dispensation in the loan agreements. Absent such dispensation, however, the mere existence of a cross collateralisation, or cross liability, clause in one of the agreements, would be insufficient. On the facts of the said case, held, that while there was a cross liability clause, the pledged shares had not been secured against the dues of the other loan agreement and thus the existence of said clause by itself would not be enough especially when the obligor was not a party to the other loan agreement in which there was a default and thus directed release of pledged shares. It reiterated that construction of the covenants of commercial contracts has to be guided by commercial sense.

Section 11

1. Consent to appointment cannot be implied from mere attendance of arbitral proceedings

In Manish Chibber v Anil Sharma & Anr.^[10], High Court of Delhi held that where the clause stipulated that the arbitrator was to be appointed with consent of the parties, mere fact that the Petitioner attended the proceedings before the Arbitrator appointed by the Respondent and took adjournments before the said Arbitrator or the vague use of the word consent in the order sheet of one such proceedings would not constitute consent, on the part of the Petitioner, to the appointment of the Arbitrator and accordingly the Court appointed an independent arbitrator to adjudicate the disputes between the parties.

1. Failure to comply with requirement of S. 10(1) does not invalidate arbitration clause

In M/s. JMC Projects (India) Ltd. v South Delhi Municipal Corporation^[11] High Court of Delhi held that to qualify as an arbitration agreement, a clause in the agreement must meet four ingredients/essentials of an Arbitration Agreement, highlighted by the Supreme Court in the case of Bihar State Mineral Development Corporation and Another v. Encon Builders (I) (P) Ltd. (2003) 7 SCC 418. It further held that mere fact that a clause provides an even number of arbitrators and would be hit by S. 10(1) of the Act does not invalidate the arbitration agreement itself and a reference to S 10(2) of the Act would make it clear that it enables appointment of a Sole Arbitrator where the Parties fail to provide an odd number of Arbitrators under S10(1).

2. Arbitration clause by incorporation

In Aarti Razee v S. Sivagurunathan and Ors.^[12] High Court of Madras was seized of a petition for appointment of arbitrator which was sought to be resisted by the Respondent who was a newly inducted partner of a partnership firm , and who sought to oppose the appointment of an arbitrator as per the arbitration clause contained in the partnership deed. The Court held that only because the said partner had signed only in the deed of amendment or reconstitution does not mean that he is not governed by the clauses of the original contract and the same would apply to him by incorporation.

Section 12(5)

3. Requirements of an agreement under S. 12(5)

In JMC Projects (India) Ltd. v Indure Private Ltd.^[13] High Court of Delhi held that the filing of applications for extension of time for continuance and completion of the arbitral proceedings, or applications to the arbitrator, for extension of time to file the affidavit of evidence, etc., cannot constitute an agreement in writing within the meaning of the proviso to S. 12(5) of the Act. The said agreement in writing, referred to in the proviso, must reflect awareness, on the parties, to the applicability of the said provision as well as the resultant invalidation, of the learned arbitrator, to arbitrate on the disputes between them, as well as a conscious intention to waive the applicability of the said provision, in the case of the disputes between them.

Section 34

4. Determination of compensation could be delegated by AT but not to Respondent

In GMR Hyderabad Vijaywada Expressways P. Ltd. v. National Highways Authority of India^[14], High Court of Delhi reiterated that, even on questions of law, the arbitrator, or the arbitral tribunal, is the final word, absent, in its findings in that regard, perversity or "patent illegality". Patent illegality may be said to exist, in the interpretation of the law, by the arbitrator, only where such interpretation is, ex facie, erroneous as well as unacceptable, and not where the Court feels that another, and more appropriate, view, exists. The Court upheld the finding of the Arbitral Tribunal that the expression "change in law" used in the contract between the parties would not to be limited to "primary legislation", and would embrace subordinate legislation, or executive orders having the force of law. It was further held that where the words used in the clause are, on their face, broader than the heading, it is impermissible to limit the words in the clause, on the basis of the heading and that it would be folly to employ the noscitur a sociis principle to deliberately constrict the scope of an expression of words of wide import, consciously used. Held, reduction in revenue would be covered in the expression "other financial burden" provided in the relevant clause. The Court further held that while the Arbitral Tribunal could assign the task of determining the actual entitlement of compensation, assigning of said task to the Respondent NHAI itself, as had been done by the majority Award, would be violative of Section 12(5) of the Act and thus impermissible and the Court, thus, appointed a sole Arbitrator to undertake and complete the said task.

5. Endeavour must be to have substantial compliance with S. 34(5) & (6)

In Aakash Engineers & Contractors v Presiding Officer Commercial Court Gautam Buddh Nagar & Ors.^[15], High Court of Allahabad held that Section 34(5) and (6) of the Act being directory in nature, prevent the courts from being rushed into decisions by breaching fundamental norms of fairness and justice and the timeline set by the statute, cannot stampede the courts into passing orders which cause miscarriage of justice. It held, that, however, the courts cannot extend the statutory time frame indefinitely or unreasonably and neither can the courts be purblind to the timeframe provided in the statute on the pretext that provision is directory. The Court held that substantial compliance of the said provisions is sufficient to satisfy the legislative mandate and proceeded to fix timelines for disposal of the Section 34 petition by the subordinate court.

Section 36

6. Sets out form and contents of the affidavits to be filed by judgment debtor

In M/s. Bhandari Engineers & Builders P. Ltd. v M/s. Maharia Raj Joint Venture & Ors.^[16], High Court of Delhi held that execution of decrees/awards deserve special attention considering that inordinate delay in execution proceedings would frustrate the decree holders from reaping the benefits of the decrees/award and passed detailed directions and guidelines with regards to the conduct of execution proceedings, kinds of affidavits required to be filed by the judgment debtor – the format and contents of the same. The Court further held that if any ground for lifting of the corporate veil of a judgment-debtor company is made out as per law, then all the Directors/Promoters (other than independent/non-executive and nominee directors) of the judgment-debtor Company shall be directed to disclose their personal assets and income in an affidavit and provided the format of the same. The Court further held that these modified directions/guidelines shall apply to all execution proceedings including the execution proceedings under Section 36 of the Arbitration and Conciliation Act.

Section 44

7. Power to grant Anti-Arbitration injunction exists but to be used sparingly

In Balasore Alloys Ltd. v Medima LLC^[17], High Court of Calcutta while dealing with an anti-arbitration suit held that SBP &Co. v Patel Engineering^[18] had implicitly overruled Kvaerner Cementation India Ltd. v Bajranglal Agarwal & Anr.^[19] as far as an arbitral tribunal, alongside civil courts, being competent to rule on issues of jurisdiction as well as examining the existence and validity of an arbitration agreement, are concerned. It held that courts in India do have the power to grant anti-arbitration injunction, however, this power is to be used sparingly and with abundant caution. It also held that where a contract between the parties provides that the execution or performance of that contract shall be in terms of another contract (which contains the terms and conditions relating to performance and a provision for settlement of disputes by arbitration),then, the terms of the referred contract in regard to execution/performance alone will apply, and not the arbitration agreement in the referred contract, unless there is a special reference to the arbitration clause also if the same is repugnant to the arbitration clause already present in the contract at hand. It further held that the mere possibility that "multiplicity of proceedings" may arise, is not a ground in itself for the grant of an anti-arbitration injunction, if such ground is not coupled with the plea of either forum non-conveniens or vexatious or oppressive proceedings launched before such a neutral foreign forum and thus refused to grant anti arbitration injunction.