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Vicarious Criminal Liability of a Partner When the Partnership Firm is Not an Accused Tried for the Primary/Substantive offence under Negotiable Instrument Act

Criminal Law, Negotiable Instruments

In the matter of Dilip Hariramani v. Bank of Baroda [Criminal Civil Appeal No. 767 of 2022 decided on 09.05.2022, a partner of the partnership firm challenged his conviction under section 138 read with section 141 of the Negotiable Instruments Act, 1881. He was made accused on account of dishonor of cheque issued by the authorized signatory of the firm for repayment of loan availed by the partnership firm. In the complaint filed by the Bank under Section 138 of the NI Act, the partner of the firm and the authorized signatory were made parties/accused while the firm was not. The accused partner along with the authorized signatory were convicted under Section 138 of the NI Act and sentenced to imprisonment for six months. They were also asked to pay compensation under Section 357(3) of the Code of Criminal Procedure, 1973. If they faltered, they were to suffer additional imprisonment. The appellate Court enhanced the compensation amount under Section 357(3) with the stipulation that the appellant partner and the authorized signatory shall suffer additional imprisonment for three months in case of failure to pay.

An important question arose for consideration of the Hon’ble Supreme Court – “whether a partner can be convicted and held to be vicariously liable when the partnership firm is not an accused and is not being tried for the primary/substantive offence”.

The Court analysed the provision under section 141 of the NI Act. The section has been reproduced herein below:

“141. Offences by companies.—(1) If the person committing an offence under Section 138 is a company, every person who, at the time the offence was committed, was in charge of, and was responsible to the company for the conduct of the business of the company, as well as the company, shall be deemed to be guilty of the offence and shall be liable to be proceeded against and punished accordingly:

Provided that nothing contained in this sub-section shall render any person liable to punishment if he proves that the offence was committed without his knowledge, or that he had exercised all due diligence to prevent the commission of such offence.

Provided further that where a person is nominated as a Director of a company by virtue of his holding any office or employment in the Central Government or State Government or a financial corporation owned or controlled by the Central Government or the State Government, as the case may be, he shall not be liable for prosecution under this chapter.

(2) Notwithstanding anything contained in sub-section (1), where any offence under this Act has been committed by a company and it is proved that the offence has been committed with the consent or connivance of, or is attributable to, any neglect on the part of, any director, manager, secretary or other officer of the company, such director, manager, secretary or other officer shall also be deemed to be guilty of that offence and shall be liable to be proceeded against and punished accordingly. Explanation.—For the purposes of this section,— (a) “company” means any body corporate and includes a firm or other association of individuals; and (b) “director”, in relation to a firm, means a partner in the firm.

The Court observed that expression ‘every person’ is wide and comprehensive, however, such person should also be in charge of and responsible to the company for the conduct of its business for being liable under the section. The initial onus and burden is on the prosecution to first establish the requirements of sub-section (1) to Section 141 of the NI Act.

The Court referred to the case of State of Karnataka v. Pratap Chand and Others (1981) 2 SCC 335 wherein the complaint against the firm and the partners was made under Section 34 of the Drugs and Cosmetics Act which is pari materia to Section 141 of the NI Act. The Court in the said matter quashed the conviction of the partner of the firm on the ground that he could not have been convicted merely because he had the right to participate in the firm’s business as per the partnership deed. The Court clarified that a partner is not vicariously liable for an offence committed by the firm, unless “he was in charge of, and was responsible to, the firm for the conduct of the business of the firm or if it is proved that the offence was committed with the consent or connivance of, or was attributable to any neglect on the part of the partner concerned.” The Court had in the case relied on the judgment in G.L. Gupta v. D.H. Mehta (1971) 3 SCC 189 wherein the expression ‘in-charge’ was explained stating that “It seems to us that in the context a person ‘in-charge’ must mean that the person should be in overall control of the day to day business of the company or firm. This inference follows from the wording of Section 23-C(2). It mentions director, who may be a party to the policy being followed by a company and yet not be incharge of the business of the company. Further it mentions manager, who usually is in charge of the business but not in overall charge. Similarly the other officers may be in charge of only some part of business”. The complaint in this case was filed under Section 23-C of the Foreign Exchange Regulation Act, 1947 which was parti materia with Section 34 of the Drugs and Cosmetics Act.

The Court further referred to National Small Industries Corporation Limited v. Harmeet Singh Paintal and Another (2010) 3 SCC 330, the judgment that summarized the law under section 141 of the NI Act. The Court in the case had laid down that “Section 141 does not make all the Directors liable for the offence. The criminal liability can be fastened only on those who, at the time of the commission of the offence, were in charge of and were responsible for the conduct of the business of the company.” It was further explained that “Vicarious liability can be inferred against a company registered or incorporated under the Companies Act, 1956 only if the requisite statements, which are required to be averred in the complaint/petition, are made so as to make the accused therein vicariously liable for offence committed by the company along with averments in the petition containing that the accused were in charge of and responsible for the business of the company and by virtue of their position they are liable to be proceeded with.”

The Court in the present matter once again applied the precedents laid down by it and ruled that “the appellant cannot be convicted merely because he was a partner of the firm which had taken the loan or that he stood as a guarantor for such a loan. The Partnership Act, 1932 creates civil liability. Further, the guarantor’s liability under the Indian Contract Act, 1872 is a civil liability. The appellant may have civil liability and may also be liable under the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 and the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002. However, vicarious liability in the criminal law in terms of Section 141 of the NI Act cannot be fastened because of the civil liability. Vicarious liability under sub-section (1) to Section 141 of the NI Act can be pinned when the person is in overall control of the day[1]to-day business of the company or firm. Vicarious liability under sub-section (2) to Section 141 of the NI Act can arise because of the director, manager, secretary, or other officer’s personal conduct, functional or transactional role, notwithstanding that the person was not in overall control of the day-to-day business of the company when the offence was committed. Vicarious liability under sub-section (2) is attracted when the offence is committed with the consent, connivance, or is attributable to the neglect on the part of a director, manager, secretary, or other officer of the company.”

The Court observed that in the present matter the initial legal notice was issued only to the authorized signatory. The complaint was filed against the authorized signatory and the partner who was the appellant. The Firm was neither accused nor summoned to be tried. In this background the Court referred to Dayle De’souza v. Government of India through Deputy Chief Labour Commissioner (C) and Another 2021 SCC OnLine SC 1012 (), State of Madras v. C.V. Parekh and Another (1970) 3 SCC 491 (wherein the complaint was filed under Section 10 of the Essential Commodities Act and the Court held rejected the argument that persons in charge of were responsible on the ground that it ignores the first condition for the applicability of Section 10 that the person contravening the order must be a company itself), Sheoratan Agarwal and Another v. State of Madhya Pradesh (1984) 4 SCC 352, Anil Hada v. Indian Acrylic Ltd. (2000) 1 SCC 1 and finally Aneeta Hada v. Godfather Travels and Tours Private Ltd. (2012) 5 SCC 661. In Aneeta Hada, the Court upheld the judgment in C.V. Parekh and confirmed “…for maintaining the prosecution under Section 141 of the Act, arraigning of a company as an accused is imperative.” and clarified that the judgments in Sheoratan Agarwal and Anil Hada are overruled. The Court therefore ruled in unqualified terms that “unless the company or firm has committed the offence as a principal accused, the persons mentioned in sub-section (1) or (2) [of section 141 of NI Act] would not be liable and convicted as vicariously liable.” The judgment in Aneeta Hada, however, laid down one exception and that was when there is a legal bar for prosecuting a company or a firm. Since this plea was neither taken nor application in the present case, the Court proceeded to set aside the conviction of the appellant partner of the firm.

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Can The Parties Restrict The Tribunal’s or Court’s Power To Award Interest and Costs?

Arbitration

An important question came for consideration before Hon’ble High Court in Delhi in Union of India v. Om Vajrakaya Construction Company [O.M.P. (COMM) 299/2021 & I.A. 12966/2021] when a petition under section 34 was filed challenging the arbitral award inter alia on the ground that the Ld. Arbitral Tribunal granted pendent lite or pre-award interest and arbitration cost which was allegedly in contravention of the express terms of the agreement between the parties. The contractual clause provided that where the arbitral award is for the payment of money, no interest shall be payable on whole or any part of the money for any period till the date on which the award is made and that the cost shall be borne by respective parties.

To address the first issue that the award of pendent lite interest runs contrary to the express provision in the contract, the Hon’ble Delhi High Court relied on the judgments of Hon’ble Supreme Court in Union of India v Bright Power Projects India (P) Ltd [2015 9 SCC 695] wherein it was held that award of pre-reference interest would not be permissible when the award of such interest is contracted out by the parties. The view was once again affirmed in  Jaiprakash Associates Limited v. Tehri Hydro Development Corporation (India) Ltd [2019 17 SCC 786]. Therefore, the award to the extent it granted the pre-award interest was set aside.

With regards to the issue of awarding the cost when the contract stipulated that the cost shall be borne by respective parties, the Court referred to the relevant provision of the Arbitration and Conciliation Act, 1996 (“1996 Act”). The Arbitral Tribunal had awarded costs of the arbitral proceedings, which included the Arbitral Tribunal’s fees paid by respondent and the counsel fee paid, limited to the Arbitral Tribunal’s fee. The Court observed that the objection against the prayer of cost was not raised by the party earlier and is liable to be rejected on this ground alone. The objection is also without any merits. Referring to Section 31A which contains provisions regarding determination of costs, the Court reiterated that “Unlike the power of the Arbitral Tribunal to award interest under Section 31 (7)(a) of the A&C Act, which is subject to the contract between the parties, there are no such fetters on the discretion of the Arbitral Tribunal to award costs under Section 31A of the A&C Act. The only exception being any agreement between the parties regarding costs which is entered into after the disputes have arisen.”

The Court explained that while the power to award interest under Section 31 (7)(a) of the 1996 Act is subject to the contract between the parties, the Arbitral Tribunal has discretion to award costs under Section 31A(5) of the 1996 Act except in the event of parties entering into an agreement regarding costs after the dispute has arisen. The Court further elaborated that Section 31A of the 1996 Act gives discretion to the Arbitral Tribunal as well as the Court to award cost and such power/discretion has an overriding effect over any contrary provisions in the contract as well as provisions contained in the Code of Civil Procedure, 1908. While applying the principle to the facts of the case, the Court held that although the agreement between the parties provided that parties would bear their own costs, it was not a valid agreement by virtue of Section 31A(5) of the 1996 Act as it was not entered into after the disputes arose.

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Appointment Of Arbitrator By A Party During Pendency Of Section 11(6) Petition

Arbitration

An appeal against the order of the Hon’ble High Court of Orissa, declining to appoint an arbitrator under section 11(6) of the Arbitration and Conciliation Act, 1996,  was filed before the Hon’ble Supreme Court in the matter of Durga Welding Works v. Railway Electrification [(2022) 3 SCC 98].

The parties entered into a contract agreement pursuant to a tender floated by the appellant. The agreement had an arbitration clause. On dispute having arisen between the parties, the appellant served a legal notice dated 03.08.2009 for appointment of arbitrator and settlement of claim. Since the parties failed to appoint an arbitrator, the Appellant filed an application under section 11(6) of the 1996 Act for appointment of an arbitrator. However, just after filing of the arbitration petition, the appellant forgot to take any action in furtherance to the application and no notice was served to the respondents at any stage.

In the meanwhile the respondents responded to the legal notice dated 03.08.2009 and suggested two names of arbitrators as an option in their response dated 28.01.2010. The appellant filed an application seeking to restrain the respondents from proceeding to appoint an arbitrator since the matter was pending in the Court under section 11(6) of the 1996 Act. The said application also remained unattended by the appellant and no further action was taken.

Subsequently, the appellant itself on 28.08.2010 selected two officers from the panel suggested by the respondents and accordingly, the respondents constituted an Arbitration Tribunal vide letter dated 24.09.2010. The appellant thereafter not only appeared before the Arbitral Tribunal but also preferred statement of claim. The respondents submitted their statement of defence. Thereafter, the appellant moved an application before the Tribunal stating that the Arbitral Tribunal was not nominated within the stipulated time and hence, the constitution of the Arbitral Tribunal was not valid and that the Tribunal should not proceed with the arbitration proceedings.

The Appellant, however, till this point of time had not proceeded with the application under section 11(6) of the 1996 Act filed in 2009. On the other hand, the Arbitral Tribunal conducted the arbitral proceedings wherein the Appellant did not participate any further. Consequently, while an award dated 21.06.2013 was passed by the Ld. Arbitral Tribunal ex-parte rejecting the claims of the Appellant, the notices in the application under section 11(6) were only issued in 2016. In the light of the peculiar facts of the case, the Hon’ble High Court dismissed the arbitration petition filed under section 11(6) by an order dated 26.07.2019.

The Hon’ble Supreme Court while deciding the issue expounded the law on the issue which has been long settled by the courts in the following terms:

“11. The exposition of legal principles is indeed well settled by this Court in Datar Switchgears Ltd. v. Tata Finance Ltd. [Datar Switchgears Ltd. v. Tata Finance Ltd., (2000) 8 SCC 151] followed in Punj Lloyd Ltd. v. Petronet MHB Ltd. [Punj Lloyd Ltd. v. Petronet MHB Ltd., (2006) 2 SCC 638] that once an application under Section 11(6) of the Act has been filed for appointment of an arbitrator before the High Court, the respondents forfeited their right to appoint an arbitrator and the High Court alone holds jurisdiction to appoint an arbitrator in exercise of power under Section 11(6) of the Act.”

In Datar Switchgears Ltd the respondent failed to pay the amount claimed under the legal notice and further did not appoint the arbitrator as stipulated in the arbitration clause conditionally invoked under the legal notice. The respondent, however, filed an application under section 9 of the 1996 Act for seeking interim reliefs. The 1st respondent thereafter also appointed the 2nd respondent as an arbitrator in November 1999 by invoking arbitration clause. Subsequently, the appellant filed an arbitration application before Hon’ble Bombay High Court praying for appointment of another arbitrator. 1st respondent opposed this application. The petition was rejected by the Court as not maintainable as the arbitrator had already been appointed by the first respondent. The Court held that “An application under sub-section (6) of Section 11 can be filed when there is a failure of the procedure for appointment of an arbitrator.” As per the arbitration clause there was no failure of the respondent as the arbitration clause gave unfettered right to the respondent to appoint an arbitrator and there was no necessity of putting the appellant to notice or taking its consent. The Court framed the issue whether for purposes of Section 11(6) the party to whom a demand for appointment is made, forfeits his right to do so if he does not appoint an arbitrator within the reasonable time or time stipulated.

In the said matter the Court held that “So far as cases falling under Section 11(6) are concerned — such as the one before us — no time limit has been prescribed under the Act, whereas a period of 30 days has been prescribed under Section 11(4) and Section 11(5) of the Act. In our view, therefore, so far as Section 11(6) is concerned, if one party demands the opposite party to appoint an arbitrator and the opposite party does not make an appointment within 30 days of the demand, the right to appointment does not get automatically forfeited after expiry of 30 days. If the opposite party makes an appointment even after 30 days of the demand, but before the first party has moved the court under Section 11, that would be sufficient. In other words, in cases arising under Section 11(6), if the opposite party has not made an appointment within 30 days of demand, the right to make appointment is not forfeited but continues, but an appointment has to be made before the former files application under Section 11 seeking appointment of an arbitrator. Only then the right of the opposite party ceases. We do not, therefore, agree with the observation in the above judgments that if the appointment is not made within 30 days of demand, the right to appoint an arbitrator under Section 11(6) is forfeited.” Since in that case the respondent made the appointment before the appellant filed the application under Section 11(6), though it was beyond 30 days from the date of demand, the appointment of the arbitrator by the respondent was held as valid. The Court further relied on the settled law that ‘court cannot interpose and interdict the appointment of an arbitrator’ generally, whom the parties have chosen under the terms of the contract and that due importance has to be given to such procedure as agreed by the parties.

In  Punj Lloyd Ltd.   the respondent had not made appointment as per the arbitration clause within the time stipulated in the notice invoking arbitration till the date of filing of the application under section 11(6) of the 1996 Act by the appellant and therefore, the application for the appointment of arbitrator was allowed by the Hon’ble Supreme Court while applying the principles laid down in Datar Switchgears Ltd.

The Court, after referring to the settled law laid down by the Supreme Court, took the view that although the appointment of an arbitrator was undisputedly made by the respondents after the appellant filed arbitration petition under Section 11(6) of the 1996 Act, however, the matter in hand had peculiar facts and circumstances that the on one hand Appellant slept over its arbitration application filed in 2009 and notices were issued only in 2016  and on the other hand appellant did not participate in the arbitral proceedings before the Tribunal constituted with the consent of  the appellant, and therefore, the High Court did not commit any error in declining to exercise its jurisdiction under Section 11(6) of the Act for appointment of an arbitrator and dismissing the arbitration petition. The Court held that although there is a settled law that after the application has been filed for appointment of an arbitrator under Section 11(6) of the Act, the respondents are deemed to have forfeited their right to appoint an arbitrator under the arbitration clause, however, the law would not be applicable to the facts of the present matter.

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Group Of Companies Doctrine Can Be Applied To Bind Non Signatory To An Arbitration Agreement

Arbitration, Uncategorized

In a recent judgment in Oil and Natural Gas Corporation Ltd. Versus M/s Discovery Enterprises Pvt. Ltd. & Anr. decided on 27.04.2022 by a three Judges Bench of the Hon’ble Supreme Court, once again the dispute regarding the applicability of the ‘group of companies’ doctrine has been discussed and decided by the Court. The issue arise out of the interim order allowing the application to delete the group entity Jindal Drilling and Industries Limited (JDIL) from the array of parties. A contract for operating a floating, production, storage and offloading vessel was awarded by ONGC to Discovery Enterprises Private Limited (DEPL), a company belonging to the D P Jindal Group. As per the contract, a vessel was to be imported. The vessel was accordingly imported and ONGC paid the customs duty on the understanding that the vessel would be re-exported after completion of work under duty drawback and DEPL shall complete the necessary formalities in this regard. The vessel left Indian territorial waters and did not return. According to ONGC, DEPL failed to complete the formalities for duty drawback and did not compensate ONGC for customs duty and other expenses (Disputed Amount).

Arbitration was invoked by ONGC wherein DEPL and JDIL were made respondent parties. An application under Section 16 of the Arbitration and Conciliation Act, 1996 was filed by JDIL seeking its deletion from the arbitral proceedings on the ground that it is not a party to the arbitration agreement. It was contended by ONGC that DEPL and JDIL belonged to the DP Jindal Group of Companies and since they constitute a single economic entity and the corporate veil should be lifted to compel the non-signatory, JDIL, to arbitrate. The contention of ONGC was based on the fact that JDIL has a vital business interest in DEPL, JDIL is the ultimate beneficiary of the business of DEPL, DEPL has close corporate unity with Jindal Group and the shareholders are almost common, DEPL has throughout represented that they are group company of Jindal amongst the fact that the letter head also depicted the same and that there existed a corporate and functional unity between them.

The Arbitral Tribunal passed an interim award and held that JDIL was not a party to the arbitration agreement and hence the Arbitral Tribunal lacked the jurisdiction to arbitrate on the claims against it. The name of JDIL was therefore deleted from the array of parties.  The Arbitral Tribunal relied on the judgment of Hon’ble Supreme Court in Indowind Energy Ltd. v. Wescare (I) Ltd. & Anr. [(2010) 5 SCC 306]. For the same reason that the Tribunal does not have the jurisdiction, an application filed by ONGC for discovery and inspection was also not allowed. The appeal against the interim award was dismissed by the Hon’ble Bombay High Court on the ground that ONGC failed to show that the companies had common shareholders and common board of directors. Even if this was the case, they do not become the single entity in the light of the judgment in Indowind Energy even if the son and daughter-in-law of the managing director of JDIL are directors in DEPL. The fact remained that JDIL was not the signatory to the contract.

The judgment was challenged under Article 136 of the Constitution.

In the mean while the final award was also delivered allowing the claims of ONGC. ONGC in turn withheld payment due to JDIL in another dispute arising out of 4 agreements between ONGC and JDIL as an adjustment against the dues owed to ONGC by DEPL in the first arbitration. The dispute culminated in an arbitral award in favour of JDIL. This award was challenged under section 34 which was dismissed. The appeal against the order was also dismissed and finally the jurisdiction of the Hon’ble Supreme Court under Article 136 was invoked. This case, on the request of ONGC, was transfered before the Bench looking into the validity of the interim award passed in the first arbitration deleting JDIL from the array of parties.

The Hon’ble Supreme Court started its analysis by looking into the definition of arbitration agreement provided under section 7 of the Arbitration and Conciliation Act, 1996.  Further, expression “party” is defined in Section 2(h) to mean a party to an arbitration agreement. The Court observed that the judgment in Indowind Energy deals with interpretation of the term “parties” vis-à-vis an arbitration agreement in the context of an application for the appointment of an arbitrator under Section 11(6) of the 1996 Act. The Court in the matter had concluded that Indowind in no communication had ever acknowledged or confirmed that it was a party to the arbitration agreement. It was held that “Each company is a separate and distinct legal entity and the mere fact that the two Companies have common shareholders or common Board of Directors, will not make the two Companies a single entity. Nor will the existence of common shareholders or Directors lead to an inference that one company will be bound by the acts of the other.” It was further observed that “The very fact that the parties carefully avoided making Indowind a party and the fact that the Director of Subuthi though a Director of Indowind, was careful not to sign the agreement as on behalf of Indowind, shows that the parties did not intend that Indowind should be a party to the agreement.”

The Court also analysed the judgments in Chloro Controls India Pvt. Ltd. v. Severn Trent Water Purification Inc. & Ors (2013) 1 SCC 641, Cheran Properties Ltd. v. Kasturi & Sons Ltd. & Ors (2018) 16 SCC 413 and MTNL v. Canara Bank & Ors. 16 (2020) 12 SCC 767. In Chloro Controls India it was held that “an arbitration agreement entered into by a company, being one within a group of companies, can bind its non-signatory affiliates or sister or parent concerns, if the circumstances demonstrate that the mutual intention of all the parties was to bind both the signatories and the non-signatory affiliates”. It was further held that in exceptional cases “a non-signatory party could be subjected to arbitration provided these transactions were with group of companies and there was a clear intention of the parties to bind both, the signatory as well as the non-signatory parties. In other words, “intention of the parties” is a very significant feature which must be established before the scope of arbitration can be said to include the signatory as well as the non-signatory parties.” Direct relationship to the party signatory to the arbitration agreement; direct commonality of the subject matter; and whether the agreement is of a composite transaction where the performance of a mother agreement may not be feasible without the execution or performance of a subsidiary or ancillary agreement were stated to be relevant questions to be applied in the facts and circumstances of the case while determining the applicability o fthe doctrine of group companies.

The principle was subsequently applied to Ameet Lalchand Shah & Ors. v. Rishabh Enterprises & Anr (2018) 15 SCC 678 where in it was held that “a non-signatory would be bound by the arbitration clause in the mother agreement, since it is a party to an inter-connected agreement, executed to achieve a common commercial goal.” In Cheran Properties group of companies doctrine was applied against a non-signatory to the arbitration agreement in the case of the enforcement of a domestic arbitration award. It was held that “the group of companies doctrine has been applied to pierce the corporate veil to locate the “true” party in interest, and more significantly, to target the creditworthy member of a group of companies.” A word of caution was however added that since the doctrine stares at the face of established principle companies being separate legal entity, the doctrine may be applied after construction of the arbitration agreement and analysis of the circumstances relating to the entry into and performance of the underlying contract. So where there is a conscious intention of the parties to subject themselves to separate arbitration agreements under their individual contracts, the doctrine shall not apply (Duro Felguera v. Gangavaram Port Limited (2017) 9 SCC 729). Similarly, a mere existence of an indemnity by the foreign company, in the absence of any other factors, would not signify its intention to be bound by the arbitration agreement (Reckitt Benckiser (India) P Ltd. v. Reynders Label Printing (2019) 7 SCC 62). In MTNL the Hon’ble Court had on the same lines observed that the doctrine is applicable where conduct of the parties evidences that there is clear intention of the parties to bind a non-signatory. The Courts generally satisfy themselves that non-signatory company was a necessary party to the contract. The instances of conduct may be when non-signatory entity on the group has been engaged in the negotiation or performance of the commercial contract, or made statements indicating its intention to be bound by the contract, the non-signatory will also be bound and benefitted by the relevant contracts.

The Court appreciated the work of Gary B. Born, according to whom a group of companies doctrine has also been invoked in cases where there is a tight group structure with strong organisational and financial links, so as to constitute a single economic unit, or a single economic reality or when that party is an ‘alter ego’ of an entity which is signatory.  As per John Fellas, the principle of binding a non-signatory can also be looked from the angle of the doctrine of estoppel where the non-signatory group entity which has been reaping the benefits of the contract shall be directly estopped from taking inconsistent position and disavowing the obligations under the contract.

On analysing various judgments and views of the scholars, the Court propounded that the factors of mutual intent of the parties, relationship of a non-signatory to a party which is a signatory, commonality of the subject matter, composite nature of the transaction and performance of the contract shall determine whether a company within a group of companies which is not a signatory to arbitration agreement would be bound by the arbitration agreement.

On facts, the Court observed that the Arbitral Tribunal erred in not deciding the application for inspection and discovery and deferring it instead despite the fact that inspection and discovery was relevant for the determination of applicability of doctrine of group companies. In addition to the submissions of ONGC before the Tribunal, it was also stated in the course of the evidence by ONGC’s witness that almost all the senior officers of JDIL, including its Managing Director, actively participated in matters relating to the hiring of the vessel, its deployment, performance and related issues. ONGC’s assertions were based on the fact that even in the initial meeting between ONGC and DEPL, General Manager of JDIL attended on behalf of the DEPL. The Court regretted to state that the Ld. Tribunal did not even consider whether the group of companies doctrine would be applicable and precluded itself from deciding as to whether the application for discovery and inspection should be allowed which in turn “goes to the root of the process in as much as it disabled ONGC from pursuing its fundamental claim based on the application of the group of companies doctrine.”  The Court further observed that if the Arbitral Tribunal accepts a plea that it lacks jurisdiction, the order of the Tribunal is amenable to a challenge in appeal under Section 37(2)(a) and therefore it cannot be conclusive as it is subject to an appellate remedy.

While applying the law to the two appeals arising out of two different transactions, the Court observed that the issue of jurisdiction arose only in the first set of proceedings between ONGC, DPEL and JDIL. DEPL was not a party to the second proceeding. However, the evidence in one proceedings was used in the subsequent proceedings. In the subsequent proceeding between ONGC and JDIL, ONGC did not plead any defence on merits but asserted a right to adjust the amounts which were due to JDIL against the claims which ONGC had against DEPL under a distinct contract which was in dispute in the first proceeding. In this light the Court observed that there was significant amount of overlapping in the two arbitrations which was further confirmed by the fact that the grounds on which ONGC opposed JDIL’s application under Section 16 in the first arbitral proceeding overlapped with the basis on which ONGC sought adjustment of the claims due to JDIL in the second arbitral proceeding and Arbitral Award in the second proceeding relied on the findings contained in the interim award of the first Arbitral Tribunal.

The Court further took note of the deposition of the ONGC’s witness. It was deposed that first meeting was attended by the General Manager of JDIL, the expression of interest was signed by Manager (Commercial and Development), JDIL, bid was submitted by DEPL with a resume that stated it to be the part of the DP Jindal Group of Companies, DEPL and JDIL shared a common addresses and telephone numbers, DEPL was created by the Jindal Group with the definite purpose of rendering a particular service to the oil and gas sector, DEPL has indicated on the website that it works under the “fraternal hood of the said group, DEPL is promoted and managed by the son and daughter in law of the Managing Director of JDIL, bid was submitted by employee of JDIL, the Managing Director of JDIL had negotiated with the owners of the vessel for hiring on behalf DEPL etc. The Court found the deposition relevant and stated that there was merit in the submission which was been urged on behalf of the ONGC that the application for discovery and inspection had to be decided before the plea of jurisdiction was adjudicated upon. The Court went on to observe that the primary basis for the determination by the Tribunal of an absence of jurisdiction was that the arbitration agreement was between ONGC and DEPL whereas the legal foundation of the group of companies doctrine was not evaluated, on facts or law.

The Court accordingly held that “the first Arbitral Tribunal has made a fundamental error of law in not deciding the application by ONGC on discovery and inspection of documents before it ruled on jurisdiction. In doing so, the first Arbitral Tribunal’s interim award dated 27 October 2010 goes against the principles of natural justice. The failure to consider the application for discovery and inspection of documents results in a situation where vital evidence that could have assisted the Tribunal in its determination of the challenge under Section 16 was shut out. As a matter of fact, it emerged from the record that no evidence was adduced by JDIL in support of its plea of the absence of jurisdiction under Section 16. JDIL having taken the plea of absence of jurisdiction was required to establish the grounds on which it set about to establish its plea.”

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Does non-compliance of Section 29A of Arbitration and Conciliation Act, 1996 vitiates the Arbitral Award?

Uncategorized

Section 29A of the Arbitration and Conciliation Act, 1996 prescribes the time limit for passing of arbitral award in case of domestic arbitrations. As per section 29A(1), the award shall be made by the arbitral tribunal within a period of 12 months from the date of completion of pleadings. As per sub-section (3), the parties by consent extend the period of 12 months for a further period not exceeding 6 months. As per sub-clause (4), the mandate of the arbitrator shall terminate in the event the award is not made within the period prescribed or within the extended period unless the court extends the period either prior to or after the expiry of the period so specified or extended. Any extension can be granted only on application of any of the parties stating sufficient cause. The Court may impose any terms and conditions while extending the time period. The Court deciding an application under section 29A of the 1996 Act is also empowered to order reduction in the fees of the arbitral tribunal if the Court is of the opinion that the delay in delivering award is attributable to the arbitral tribunal. The Court can further impose actual or exemplary costs upon any of the parties.

The question that arises for consideration is whether an award that is passed after the expiry of the period prescribed under section 29A of the 1996 Act or after the extended period, is a nullity and is unenforceable in law? The question is also whether section 29A addresses the said issue at all or it is a grey area? It is also important to understand as to under which proceeding the objection of award being nullity can be raised.

Hon’ble Division Bench of the Telangana High Court has recently in the matter of Roop Singh Bhatty v. M/s. Shriram City Union Finance Limited C.R.P.NO.1354 OF 2021 [decide on 08.04.2022] held that the award passed by the arbitral tribunal after one year of entering into reference is nullity and void ab initio since after one year so prescribed under Section 29A as it then existed, the arbitral tribunal became functus officio and is wholly incompetent to deal with the disputes or pass the arbitral award. Thus, in law there does not exist an arbitral award and therefore there is no question of enforcement of the award.

In the matter of Roop Singh Bhatty the dispute arose out of the default in repayment of loan by the petitioner to the respondent subsequent to which the Respondent invoked the arbitration clause. The arbitrator passed the award on 27.12.2017 in favour of the respondent. The respondent filed a petition in the Court seeking execution of the arbitral award which was allowed in favour of the Respondent. The Petitioner preferred a revision against the said execution order. The fulcrum of challenge was that award was not passed within one year from the date of filing claim, and therefore the award is a nullity and therefore cannot be enforced. When asked if such plea can be taken at the execution stage, it was submitted that plea of nullity can be raised in execution proceedings and not at the Section 34 proceeding as the scope of challenge to the award under Section 34 is limited. The Counsel for the respondent on the other hand argued that Section 29A of the 1996 Act only lays down procedure and non-compliance thereof does not vitiate the award.

The Hon’ble High Court began its analysis by looking into the relevant provision under section 29A and its scope as it stood at the time of adjudication of the disputes between the parties. As of then, Section 29A provided that the award should be passed within a period of twelve months from the date Arbitration Tribunal enters appearance. The relevant provision is reproduced herein below:

Section 29A. (1) The award shall be made within a period of twelve months from the date the arbitral tribunal enters upon the reference. Explanation:- For the purpose of this sub-section, an arbitral tribunal shall be deemed to have entered upon the reference on the date on which the arbitrator or all the arbitrators, as the case may be, have received notice, in writing, of their appointment.

(2) If the award is made within a period of six months from the date the arbitral tribunal enters upon the reference, the arbitral tribunal shall be entitled to receive such amount of additional fees as the parties may agree.

(3) The parties may, by consent, extend the period specified in sub-section (1) for making award for a further period not exceeding six months.

(4) If the award is not made within the period specified in sub-section (1) or the extended period specified under subsection (3), the mandate of the arbitrator(s) shall terminate unless the Court has, either prior to or after the expiry of the period so specified, extended the period: Provided that while extending the period under this sub-section, if the Court finds that the proceedings have been delayed for the reasons attributable to the arbitral tribunal, it may order reduction of fees of arbitrator(s) by not exceeding five per cent for each month of such delay.

(5) The extension of period referred to in sub-section (4) may be on the application of any of the parties and may be granted only for sufficient cause and on such terms and conditions as may be imposed by the Court.

(6) While extending the period referred to in sub-section (4), it shall be open to the Court to substitute one or all of the arbitrators and if one or all of the arbitrators are substituted, the arbitral proceedings shall continue from the stage already reached and on the basis of the evidence and material already on record, and the arbitrator(s) appointed under this section shall be deemed to have received the said evidence and material.

(7) In the event of arbitrator(s) being appointed under this section, the arbitral tribunal thus reconstituted shall be deemed to be in continuation of the previously appointed arbitral tribunal.

(8) It shall be open to the Court to impose actual or exemplary costs upon any of the parties under this section.

(9) An application filed under sub-section (5) shall be disposed of by the Court as expeditiously as possible and endeavour shall be made to dispose of the matter within a period of sixty days from the date of service of notice on the opposite party.

The arbitral tribunal is deemed to have entered the appearance when he receives the notice for its appointment from the parties. The date on which the arbitral tribunal entered the appearance was not disputed between the parties. The award, however, was not made within 1 year from that date. As per the Court, the provision under section 29A is in mandatory terms. The Court observed that “The provision as it stood was in mandatory terms and leaves no scope to infer otherwise. The intention of the Parliament is made abundantly clear from the reading of Sub-sections (3) and (4). Subsection (3) enables parties by consent to extend the time by further period of six months. But it also makes it clear that it should not be extended beyond six months. According to sub-section (4), after the initial period of one year and extended period of six months, if extended by consent, the mandate of the arbitrator terminates. Thus, he becomes functus-officio after that period and, therefore, seizes to be an arbitrator. An arbitrator is a creature of the statute and has to work within the four corners of the Act.”

This provision was subsequently amended vide Arbitration and Conciliation (Amendment) Act, 2019. As per section 6 of the Amendment Act of 2019 – “In Section 29A of the principal Act,- (a) for sub-section (1), the following sub-section shall be substituted, namely:-“(1) The award in matters other than international commercial arbitration shall be made by the arbitral tribunal within a period of twelve months from the date of completion of pleadings under sub-section (4) of Section 23: Provided that the award in the matter of international commercial arbitration may be made as expeditiously as possible and endeavour may be made to dispose of the matter within a period of twelve months from the date of completion of pleadings under sub-Section (4) of Section 23.”; (b) in sub-section (4), after the proviso, the following provisos shall be inserted, namely:- “Provided further that where an application under sub-section (5) is pending, the mandate of the arbitrator shall continue till the disposal of the said application: Provided also that the arbitrator shall be given an opportunity of being heard before the fees is reduced”.”

As per the counsel of the respondent, the operation of amendment was retrospective in nature. The argument was rejected by the Court. Although the amendment takes care of the drawbacks in the earlier provision, the Court explained that “merely because word substitution is used [in section 6 of the Arbitration and Conciliation (Amendment) Act, 2019], the amended provision does not relate back to the date of original provision that was amended. It depends on the language employed, effect of the amendment and the intendment of the legislature.” The position is rather made clear by the notification which appointed the effective date for the amendments under 2019 Amendment Act as 30th August, 2019.

The Court therefore finally concluded that the execution Court grossly erred in not appreciating the fact that the arbitral tribunal passed the award after one year of appearance when it became functus officio and wholly incompetent to deal with the disputes or pass the arbitral award. Thus, award passed by the arbitrator was nullity and void ab initio. Thus, in law there did not exist any arbitral award and there was no question of enforcement of the award.

The provision under section 29A of the 1996 Act or any other provision does not provide a clear answer to the question raised in the present case. It is however stated that the mandate of the arbitrator shall terminate after the expiry of the term provided under section 29A(1) or 29A(3) of the 1996 Act, as the case may be.  The position remains unchanged so far as the two amendments of 2015 and 2019 in the 1996 Act are concerned and therefore the reasoning given by the Hon’ble Telangana High Court shall be equally applicable to the disputes being adjudicated by the arbitral tribunals after the amendment to section 29A of 1996 Act in 2019.

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