Category Archives: Arbitration

In the matter of Amit Guglani & Anr.  V. L and T Housing Finance ltd. Through Managing Director & Anr.  [Arb.P. 1317/2022 and I.A. No. 19286/2022], dispute arose between the parties to a Loan Agreement wherein the Respondent disbursed the loan to the Petitioners. The dispute was primarily in relation to the Basic Prime Lending Rate (BPLR) which was increased by the Respondent after execution of the Loan Agreement. The Petitioners continuously protested through various communications, however, with no avail. The Respondent, instead of addressing the issues raised by the Petitioners, sent a legal notice followed by a notice  under Section 13(2) of SARFAESI Act, stating therein that owing to defaults in the payment of loan instalments, the loan account of the Petitioners had been classified as Non-Performing Asset and 60 days’ time was given to the Petitioners to pay the entire outstanding amounts.

The Petitioners invoked arbitration clause by directly approaching the court under Section 11(6) of the Arbitration and Conciliation Act, 1996 (the “Act”). As per the Petitioners, they approached the Court since the Arbitration Clause envisages unilateral appointment of a sole Arbitrator by lender/Respondent No.1, which cannot be sustained in law, being in violation of Section 12(5) of the Act and the judgment of the Supreme Court in Perkins Eastman Architects DPC And Another v. HSCC (India) Limited, (2020) 20 SCC 760. As per the Petitioners, no purpose would have been achieved by sending a notice under Section 21 of the Act as the authority under the said clause suffers from a disability to appoint the Arbitrator. Petitioners also filed an IA along with the petition under section 11(6) of the Act seeking exemption from serving an invocation notice under Section 21 of the Act on the ground stated above.

Out of the two preliminary objections raised by the Respondent, one was that mandatory notice of invocation under Section 21 of the Act has not been given by the Petitioners and in the absence of mandatory notice under Section 21 of the Act, the petition deserves to be dismissed.  

The Court, after hearing both the sides on the said issue, disapproved all of the arguments raised by the Petitioners. The Court firstly reasoned that there are certain conditions that Section 11(6) of the Act comes into play when the contingencies stipulated therein occur which includes failure of a party to act as required under the procedure agreed by the parties and, it is only when the agreed procedure does not lead to appointment of Arbitrator, on account of failure on the part of either party, that jurisdiction of a Court can be invoked under Section 11(6) of the Act. Therefore, invocation of the Court’s jurisdiction under Section 11(6) presupposes initiation of procedure agreed upon by the parties under the Arbitration Clause. The Court further opined that Section 21 comes into play as a part of this procedure. A reading of the Section makes it clear that the crucial words in the provision are “the date on which a request for that dispute to be referred to arbitration” and thus, there is little room for doubt that for commencement of arbitral proceedings, either party has to make a request to the other party for reference of the dispute to Arbitration.

The Court made reference to several judgments of the Delhi High Court including Alupro Building Systems Pvt. Ltd. v. Ozone Overseas Pvt. Ltd., (2017) SCC OnLine Del 7228, Rahul Jain and Others v. Atul Jain and Others, 2022 SCC OnLine Del 3860 and Anil Goel v. Satish Goel, 2022 SCC OnLine Del 3774. The Court affirmed that  aggrieved party has to invoke arbitration and at the very least, it has to refer to the clause in the contract which envisages reference of the dispute to arbitration. Merely sending a notice, setting out the disputes between the parties and informing the addressee that civil and criminal legal remedies would be availed in the event of failure, cannot constitute a notice invoking arbitration.” The Court further referred to the judgment in Shriram Transport Finance Company Limited v. Narender Singh, 2022 SCC OnLine Del 3412.

Applying the law as laid down by the Hon’ble High Court in the other judgments, the Court concluded that it cannot be argued by Petitioners that notice under Section 21 of the Act is not mandatory. The argument of the Petitioners that since the Arbitration Clause envisages unilateral appointment, the exercise of sending an invocation notice was futile cannot be sustained in law. The court further referred to the judgment in D.P. Construction v. Vishvaraj Environment Pvt. Ltd., 2022 SCC OnLine Bom 1410 wherein it was held that unless there is a request by a party that the dispute is to be referred to arbitration, merely stating the claims and disputes in the notice would not suffice.

The Court, in the light of the judgments, therefore, dismissed the petition under section 11(6) of the Act.

Recently, a Single Bench of Hon’ble Delhi High Court issued a common order in the matter
of twenty petitions under section 11 of the Arbitration Act where either the arbitration
agreements or the agreement incorporating the arbitration clause were unstamped. The
matters were dealt in consonance with the judgment rendered by a Constitution Bench of the
Supreme Court in the case of N.N. Global Mercantile (P) Ltd. v. Indo Unique Flame Ltd
(2023) 7 SCC 1 wherein it has been held that the agreement would have no ‘existence’ under
section 11(6-A) of the Arbitration and Conciliation Act, 1996 (the “Act”) in law where it is
required to be stamped under the Stamp Act and is unstamped or is not duly stamped.
Similarly, an unstamped contract, containing an arbitration agreement, cannot be said to be a
contract enforceable in law within the meaning of Section 2(h) of the Contract Act and is not
enforceable under Section 2(g) of the Contract Act and therefore would not exist as it has no
existence in law. The intention behind the insertion of Section 11(6-A) in the Act was to
confine the Court, acting under Section 11, to examine and ascertain about the existence of an
arbitration agreement

The stamping has to take place before or at the time of the execution of the instrument after
which it can be taken before Registry Office for registration. In other words, an instrument,
which is registered, necessarily involves being duly stamped before it is so registered. On
other hand, an instrument, which is not duly stamped and which is produced before the
Registering Authority, would be liable to be impounded under Section 33 of the Stamp Act
and sent for collection of stamp duty and penalty. Similarly, if the original of the instrument
is produced and it is unstamped, the Court, acting under Section 11 is duty-bound to act under
Section 33 of the Stamp Act. When it does so, the other provisions, which, in the case of the
payment of the duty and penalty would culminate in the certificate under Section 42(2) of the
Stamp Act, would also apply. An arbitration agreement, within the meaning of Section 7 of
the Act, which attracts stamp duty and which is not stamped or insufficiently stamped, cannot
be acted upon, in view of Section 35 of the Stamp Act, unless following impounding and
payment of the requisite duty, necessary certificate is provided under Section 42 of the Stamp
Act.

In the light of the findings in the case of NN Global, the Single Bench of the Delhi High
Court was set to examine as to how to maintain a harmony between Section 11(13) of the Act
which mandates that application under Section 11 for appointment of arbitrator be disposed
of as expeditiously as possible and an endeavour be made to dispose of the matter within a
period of sixty days from the date of service of notice on the opposite party on one hand and
the obligation imposed vide the judgement in N. N. Global i.e. to act in tune with the
statutory dictate of the Indian Stamp Act, 1899 and to impound agreements which are
unstamped or insufficiently stamped for appropriate action. The Court, in order to carve
essential procedure and modalities, framed the four issues for consideration. The issues
frames and the conclusion reached by the Court have been provided here under:

(i) Whether it is incumbent on the petitioner, in a petition filed under Section 11 of
the Arbitration and Conciliation Act, 1996, to file the original of the duly stamped
arbitration agreement/contract or whether it would suffice for a ‘true copy’ thereof
to be filed?

Conclusion: Since what is liable to be impounded under Section 33 of the Stamp
Act, is the original of the concerned agreement, which alone is to be treated as an
instrument under Section 2(14) of the Stamp Act, the Court concluded that it is
incumbent for a petitioner who files a petition under Section 11 of the Act, on the
basis of an unstamped/ insufficiently stamped arbitration agreement, to file the
original instrument as executed. In cases where the arbitration agreement is duly
stamped, the Court was of the opinion that the filing of the original instrument can
be obviated provided the true copy or certified copy thereof clearly indicates that
it has been duly and properly stamped and it is also accompanied by a clear and
cogent statement to that effect in the petition filed under Section 11 of the Act.
(ii) Whether in terms of proviso (b) to Section 33(2) read with proviso (a) to Section
35, Section 38 and Section 42 of the Indian Stamp Act, 1899, is it permissible for
the petitioner to pay the deficient stamp duty together with penalty in these
proceedings or whether it is incumbent/mandatory to send the concerned
agreement/contract to the Collector for adjudication as to the proper stamp and
penalty payable thereon?

Conclusion: The Court concluded that it has two options after impounding of the
instrument as may be deemed expedient by the Court, depending upon the facts
and circumstances of the case:
(a) Send the impounded agreement/ instrument to the concerned Collector of
Stamps who shall proceed as per section 40 of the Stamp Act and then
under section 42 of the Stamp Act to endorse the payment of stamp duty
and grant a certificate; or
(b) Take recourse to Section 35 of the Stamp Act and enable deposit of the
requisite stamp duty along with penalty as contemplated under proviso
(a) to Section 35 of the Stamp Act. In such case, it is open for this Court
to delegate [under proviso (b) of Section 33(2) of the Stamp Act] the duty
of examining and impounding the concerned instrument, preparation of
report on nature and character of document and amount of duty payable
and endorsement on the original instrument in terms of Section 42(1) that
the instrument is now duly stamped, preparation of copy of the original,
preparation of certificate and transmission of the a) Authenticated Copy;
b) Certificate; and c) the total amount of the stamp duty and penalty
collected to the concerned Collector to such officer as the Court appoints
in that behalf or to Registrar of this court in exercise of the power
conferred under Rule 3 (61) of the Chapter-II of the Delhi High Court

(Original Side) Rules, 2018. The duty of determining the nature of the
instrument and the stamp duty payable thereon cannot be delegated and
the same has to be performed by the Court itself, it being part of judicial
function. [reliance was placed on Black Pearl Hotels Pvt. Ltd. v. Planet
M. Retail Ltd. (2017) 4 SCC 498]

(iii) Whether the adjudication by the Collector under Section 40 of the Indian Stamp
Act can be made time bound?

Conclusion: As per the Court, it shall be open for Court to issue time bound
directions to the concerned Collector to perform the adjudicatory functions in
terms of the relevant provisions of the Stamp Act. The Court relied upon Uno
Minda Ltd. v. Revenue Department 2023 SCC OnLine Del 3598 wherein the
Court directed that the Collector of Stamps shall usually adjudicate the stamp duty
payable and communicate the same to parties within 30 days. The Court reasoned
that as per Rule 16 of the Delhi High Court (Original Side) Rules, 2018, the Court
has inherent power to make such orders as may be necessary for the ends of
justice or to prevent abuse of the process of Court. Consequently, it would be
apposite for this Court to issue time bound directions to the concerned Collector
(Stamps), to ensure that the statutory mandate under Section 11(13) of the Act is
not defeated.
(iv) Whether the stamping of the arbitration agreement/contract must conform to the
local laws/stamping rate(s) prescribed at the place where the arbitration
agreement/contract was executed and/or whether the same are required to conform
to the relevant prescription at the place where the petition under Section 11 of the
Arbitration and Conciliation Act, 1996 has been filed?
Conclusion: The Court concluded that in answer to the said question, the same is
required to be adherent to the law enunciated by the Constitution Bench of the
Supreme Court in New Central Jute Mills Co. Ltd. v. State of W.B. AIR 1963 SC
1307 wherein it was clarified that “if an instrument after becoming liable to duty
in one State on execution there becomes liable to duty also in another State on
receipt there, it must first be stamped in accordance with the law of the first State
and it will not require to be further stamped in accordance with the law of the
second State when the rate of that second State is the same or lower; and where
the rate of the second State is higher, it will require to be stamped only with the
excess amount and that in accordance with the law and the rules in force in the
second State.”
Thus, all the broad but substantial aspects of the modalities for due implementation of the
judgment in N.N. Global was decided by the Single Judge Bench and the individual cases
were left to be heard separately on the next date of hearing.

As per section 37 of the Arbitration and Conciliation Act, 1996 (“Act”) an appeal shall lie from the orders (and from no others) as listed under the provision, one of which is order setting aside or refusing to set aside an arbitral award under section 34 of the Act. As per sub-clause (3) to section 37, “[n]o second appeal shall lie from an order passed in appeal under this section, but nothing in this section shall affect or take away any right to appeal to the Supreme Court.” The rights provided under section 37, being in the nature of appeal, unlike rights under section 34 of the Act, being in the nature of challenge to the award on the limited grounds provided thereunder, give rise to a natural question that what is the scope of interference under each of these sections – what is the difference in terms of degree, if any – and what are the limitations. In other words, does the scope of interference provided under section 37 of the Act, in any manner, wider than the scope of interference permitted/stipulated under section 34 of the Act? In order to understand the same, the article first dives into the meaning of ‘appeal’.

WHAT IS AN APPEAL

The provision for first appeal arising out of a decree in a civil suit has been provided under Code of Civil Procedure, 1908 (“CPC”). There is, however, no formal definition of an “appeal” under the CPC 1908. As per Section 96(1) of CPC, an aggrieved party can file an appeal to a superior court against a decision of a subordinate court either on a question of fact or a question of law or a question involving a mix of both fact and law. In an appeal, the appellate court may reverse or modify the impugned order or dismiss the appeal. Section 100 (1) allows the filing of second appeals in the High Court if it is satisfied that the case involves a “Substantial Question of Law”. A test for whether a substantial question of law is involved in a case was given by the Supreme Court of India in Chunilal Mehta and Sons Ltd. V. Century Spg. & Mfg. Company, wherein it was held that it is ‘substantial question of law’ when matter is of general importance (that it has a far-reaching effect in the justice administration of the state) or it directly and substantially affects the rights of parties and if so.

CHALLENGE UNDER SECTION 34 OF THE ACT

While decree in a civil suit is appealable under section 96 or under the specific statutory provisions, an arbitral award cannot be appealed against but can be challenged on the basis of limited grounds provided under section 34 of the Act. It has been held that while considering a petition under Section 34 of the Act, it is well-settled that the court does not act as an appellate forum. In The Project Director, National Highways No.45 E and 220 National Highways Authority Of India v. M. Hakeem & Anr. SLP (Civil) No.13020 of 2020] decided on July 20, 2021, it was laid down that given the limited judicial interference on extremely limited grounds not dealing with the merits of an award, the ‘limited remedy’ under Section 34 is coterminus with the ‘limited right’, namely, either to set aside an award or remand the matter under the circumstances mentioned in Section 34 of the Arbitration Act, 1996. This is unlike the jurisdiction in case of a regular appeal. In the same case it was further made clear that unlike the provision under Arbitration Acts of England, the United States, Canada, Australia and Singapore and also under erstwhile Indian legislation, the Arbitration Act, 1940, where there have been express provisions which permit the varying of an award, there is no such provision under Section 34 of the present Act and therefore, an arbitral award cannot be modified under section 34 of the Act.

The Supreme Court in the matter of Mcdermott International Inc. v. Burn Standard co. Ltd., (2006) 11 SCC 181 concluded in unequivocal terms that it is quite obvious if one were to include the power to modify an award in Section 34, “one would be crossing the “Lakshman Rekha”. Parliament very clearly intended that no power of modification of an award exists in Section 34 of the Arbitration Act, 1996 and it is only for Parliament to amend the aforesaid provision in the light of the experience of the courts in the working of the Arbitration Act, 1996, and bring it in line with other legislations the world over.

APPEAL UNDER SECTION 37 OF THE ACT

A decision made under Section 34 of the Act is appealable under section 37 of the Act. However, an appeal under section 37 of the Arbitration and Conciliation Act is different from regular first appeal from a decree in a civil suit. In the case of Punjab State Civil Supplies Corporation Ltd & A v. M/s Ramesh Kumar and Company & Ors Civil Appeal No 6832 of 2021, it was held that “[t]he jurisdiction in a first appeal arising out of a decree in a civil suit is distinct from the jurisdiction of the High Court under Section 37 of the 1996 Act arising from the disposal of a petition challenging an arbitral award under Section 34 of the 1996 Act.”

In the case of Punjab State Civil Supplies Corporation Ltd & A, the sole arbitrator rejected the claims of the first and second respondents and upheld the action of the appellants of forfeiting the security deposit. When Section 34 application was also rejected by the District Court, the decision by the District Court was challenged before the High Court under section 37 of the Act. The High Court, while erroneously exercising the jurisdiction under section 37 of the Act, not only set aside the judgment of the District Judge rejecting the petition under Section 34 of the Act, but also awarded the claim of the respondents, together with interest. The Supreme Court, while hearing the SLP in the matter sharply disapproved of the unwarranted interference by the High Court with the arbitral award while exercising its jurisdiction under section 37 of the Act. It was held that “While considering a petition under Section 34 of the 1996 Act, it is well-settled that the court does not act as an appellate forum. The grounds on which interference with an arbitral award is contemplated are structured by the provisions of Section 34. The District Judge had correctly come to the conclusion that there was no warrant for interference with the arbitral award under Section 34. The High Court seems to have proceeded as if it was exercising jurisdiction in a regular first appeal from a decree in a civil suit. The jurisdiction in a first appeal arising out of a decree in a civil suit is distinct from the jurisdiction of the High Court under Section 37 of the 1996 Act arising from the disposal of a petition challenging an arbitral award under Section 34 of the 1996 Act.” The Court further went on to explain the scope of section 37 while holding that “the High Court was required to determine as to whether the District Judge had acted contrary to the provisions of Section 34 of the 1996 Act in rejecting the challenge to the arbitral award. Apart from its failure to do so, the High Court went one step further while reversing the judgment of the District Judge in decreeing the claim in its entirety. This exercise was clearly impermissible. The arbitrator was entitled to draw relevant findings of fact on the basis of the evidence which was adduced by the parties. This was exactly what was done in the arbitral award. The award of the arbitrator was challenged unsuccessfully by the respondents under Section 34 of the 1996 Act. In this backdrop, there was no basis in law for the High Court to interfere with the judgment of the District Judge and, as we have noted earlier, to even go a step further by decreeing the claim.”

The scope of section 37, therefore, has also been well defined by the Apex Court.

SCOPE OF SECTION 37 VIS-À-VIS SECTION 34

It is settled law that a Section 34 proceeding does not contain any challenge on the merits of the award. It was decided in MMTC Ltd. v. Vedanta Ltd. (2019) 4 SCC 163 that interference under Section 37 cannot travel beyond the restrictions laid down under Section 34. It is therefore that the court cannot undertake an independent assessment of the merits of the award under section 37, and must only ascertain that the exercise of power by the court under Section 34 has not exceeded the scope of the provision. It was further stated that the above principle is to be followed more strictly in cases where arbitral award has been confirmed by the court under Section 34 and by the court in an appeal under Section 37. In such cases, the Supreme Court must be extremely cautious and slow to disturb such concurrent findings.

SECTION 34(4) AND RIGHT OF MODIFICATION OF AWARD

As per section 34(4) of the Act when an application for setting aside arbitral award is moved, the Court may, where it is appropriate and it is so requested by a party, adjourn the proceedings for a period of time in order to give the arbitral tribunal an opportunity to resume the arbitral proceedings or to take such other action as in the opinion of arbitral tribunal will eliminate the grounds for setting aside the arbitral award. In the matter of Union of India v. Modern Laminators 2008 (3) Arb LR 489 (Del) it was held that the parties ought to be left to the forum of their choice i.e. to be relegated under Section 34(4) of the Act to further arbitration or other civil remedies if the courts were to find that they are unable to modify within the confines of interference permissible or on the material before the arbitrator and if the same would include further fact finding or adjudication of intricate questions of law.

Under Section 34(2) of the Act, the Court is empowered to set aside an arbitral award on the grounds specified therein. The remand to the Arbitrator under Section 34(4) is to a limited extent of requiring the Arbitral Tribunal “to eliminate the grounds for setting aside the arbitral award”. There is no specific power granted to the Court to itself allow the claims originally made before the Arbitral Tribunal where it finds the Arbitral Tribunal erred in rejecting such claims. If such a power is recognised as falling within the ambit of Section 34(4) of the Act, then the Court will be acting no different from an appellate court which would be contrary to the legislative intent behind Section 34 of the Act.

In Mcdermott International Inc. v. Burn Standard co. Ltd., (2006) 11 SCC 181, it was held that the Act makes provisions for supervisory role of courts, for the review of the arbitral award only to ensure fairness. Intervention of the court is envisaged in few circumstances only, like, in case of fraud or bias by the arbitrators, violation of natural justice, etc. It can only quash the award leaving the parties free to begin the arbitration again if it is desired. Hence, in an application taken out under section 34 of the Act, the Court can set aside the award leaving the parties free to begin the arbitration again if it is desired.

RECENT JUDGMENTS

Following the law as interpreted and laid down by the Apex Court, the Delhi High Court most recently in the matter of Municipal Corporation of Delhi v. Sweka Powertech Engineers Pvt. Ltd., 2023 SCC OnLine Del 833, held that no grounds for interference under Section 37 of the Act were made out and the challenge to the findings of the Arbitrator are essentially based on the re-appreciation of evidence, which is beyond the scope of Section 37 of the Act.

In the case of Municipal Corporation of Delhi v. Mr Narinder Kumar FAO (COMM) 20/2023 & CM APPL. 2925-2928/2023 decided 20^th January, 2023 has most clearly laid down the reasoning for non-interference at the stage of appeal under section 37 of the Act by drawing a corollary from the provisions of Section 34 of the Act and Section 37 of the Act. According to the Court, “what is not permissible to be gone into by the adjudicating Court below under a petition under the provisions of Section 34 of the Act can certainly not be permitted to be adjudicated upon by the appellate Court under the provisions of Section 37 of the Act.” This in turn was derived from the fact that the position across all the legislations is same and the scope of interference by an appellate Court is statutorily very limited and restricted from that which is provided in the Court of first instance below.  

In the matter of Reliance Infrastructure Ltd. v. State Of Goa CIVIL APPEAL NO. 3615 OF 2023 decided on May 10, 2023 a part of the impugned judgment and order which modified the award under section 37 of the Act was set aside and the award in question was restored in its entirety.

It was held that “the High Court has substituted its own view and has reinterpreted the documentary evidence before it for setting aside the award. Such a substitution of view is not permissible for the Court under Section 34 of Act. There arises no question of it being permissible under Section 37 of the Act.” The Court further declined to uphold the reduction of rate of interest by the High Court. As per Section 31(7)(b) of the Act unless the award otherwise directs, the sum payable under the arbitral award shall carry interest at the rate of 2% higher than the current rate of interest prevalent on the date of the award, from the date of the award to the date of payment and the expression “current rate of interest” has been explained in the Explanation to the said section to have the same meaning as assigned under Section 2(b) of the Interest Act, 1978. The Court was of the opinion that the reliance of the High Court on the decision in Vedanta Ltd. v. Shenzhen Shandong Nuclear Power Construction Co. Ltd (2019) 11 SCC 465 to hold that a Court may reduce interest awarded by the Arbitrator was incorrect. The Court held that they do not find any basis in the impugned judgment of the High Court for reducing the rate of interest, as in the case of Vedanta Ltd., the Court was dealing with an International Commercial Arbitration involving rupee as well as euro components. Moreover, in the case of Vedanta Ltd., the reasoning was that the interest can be reduced when such interest does not reflect the prevailing economic condition or where it is not found reasonable or where it promotes interest of justice whichis not application in the case before the Court. The rate of interest was reduced in the case of Vedanta Ltd. in respect of the foreign currency component to bring the interest rate in line with the international rate on the ground that the rate of interest prevailing on the rupee debt in India and on international currency abroad were different and the international rates were lower.

In the most recent case namely, M/s Larsen Air Conditioning And Refrigration Company v. Union of India & Ors. [CIVIL APPEAL NO(S). 3798 OF 2023 decided on AUGUST 11, 2023], it has been laid in unwavering terms yet again that “the limited and extremely circumscribed jurisdiction of the court under Section 34 of the Act, permits the court to interfere with an award, sans the grounds of patent illegality, i.e., that “illegality must go to the root of the matter and cannot be of a trivial nature”; …The other ground would be denial of natural justice. In appeal, Section 37 of the Act grants narrower scope to the appellate court to review the findings in an award, if it has been upheld, or substantially upheld under Section 34 of the Act.” The Court, accordingly, set aside the award to the extent of modification of rate of interest for past, pendente lite and future interest. The rate of interest awarded by the arbitrator was reinstated.

EXCEPTIONAL POWER UNDER ARTICLE 142 TO MODIFY THE ARBITRAL AWARD

There are also a number of judgments of Supreme Court in which awards have been modified. These are, however, done under the powers of this Court under Article 142 of the Constitution of India. In Tata Hydro-Electric Power Supply Co. Ltd. v. Union of India, (2003) 4 SCC 172, for example, the Supreme Court while exercising its power under Article 142  of the Constitution modified the award qua interest, granting interest at the same rate but with reference to a different period from that stated in the award.

It can therefore be safely concluded that the limitation on interference by the court which is clearly laid down under section 5 of the Act has been applied uniformly and consistently i.e. in letter and in spirit. Whether it is section 34 or section 37 of the Act, the arbitral award can only be either set aside for parties to start a fresh proceeding where the time spent in the previous proceedings shall be exempted. The Courts, under section 34 or section 37 of the Act, can alternatively, remit the award back to the Arbitral Tribunal for removing the grounds because of which the award may be set aside. The scope of interference is narrow under section 34 and it is even narrower under section 37 of the Act.

When disputes arose[1], the claimant approached the other party for referring the disputes for arbitration.  As per the arbitration clause, no person other than a person appointed by the Chief-Executed Officer of the Respondent was to act as arbitrator and if for any reason, that was not possible, “the matter is not to be referred to the arbitration at all.” The arbitration clause, thus, was couched in such a manner that the arbitration itself would not be possible as the Chief Executive Officer of the Respondent Authority, being an officer was denuded of jurisdiction to act as arbitrator or to appoint an arbitrator by virtue of 7^th Schedule read with Section 12(5) of the Arbitration and Conciliation Act, 1996 (the “Act”).

Relying on the clause, the Respondent declined the request on the ground that Chief Executive Officer of the Authority alone was competent to arbitrate in the matter as per the agreement and as he had become ineligible by virtue of Section 12(5) of the Act, therefore, the arbitration clause itself had ceased to exist.

When the Claimant approached Hon’ble Allahabad High Court under section 11 of the Act, the Respondent relied upon the judgment in the case of Nandini Constructions,Through Attorney, Authorised Signatory v. State Of U.P.Through Prin.Secy.Irrigation,Lucknow And Ors. [Arbitration Application No. – 54 of 2017 decided by the Hon’ble Allahabad High Court on 14.2.2019] to object the petition for appointment of arbitrator. In this case [Nandini Constructions,], the application under section 11 of the Act was objected to on the basis of similarly worded arbitration clause. The application for appointment of arbitrator was rejected by the Hon’ble Court on the ground of party autonomy. According to the judgment, the words in arbitration clause clearly evinced the agreed intent of the parties not to refer the dispute to Arbitration if such arbitration could not be held by the ‘Chief Engineer or any person nominated by him’. The Court in Nandini Constructions, held that since the agreed intent not to refer the matter to arbitration in such an eventuality is evident from the arbitration clause, and the stipulation in the Agreement is binding upon the parties including the applicant, the application under section 11 of the Act was not maintainable.

The Claimant, on the other hand, contended that the arbitration agreement is broadly in two parts, firstly, agreement for reference of dispute to arbitrator and secondly, the procedure to be followed in the matter on such reference. It was contended that the procedure part contemplating party autonomy is always subservient to the statutory interdict contained in Section 12(5) of the Act of 1996 and cannot be construed as obliterating the first part of the agreement for reference of dispute to arbitrator. It was further argued that the authority of the Chief Executive Officer to act as arbitrator or to appoint an arbitrator forms part of the procedure for appointment and even if such authority ceases to exist by virtue of Section 12(5) of the Act, the core clause contemplating adjudication of dispute by arbitrator would continue to subsist.

The Court, after hearing the submissions from the parties, was of the opinion that the agreement between the parties to refer all disputes arising out of contract to arbitrator is the core part of the agreement. The manner to appoint the arbitrator would, at best, fall in the realm of procedure. Merely because the person, who could act as an arbitrator in terms of arbitration clause becomes ineligible to act as arbitrator by virtue of Section 12(5) of the Act read with 7th Schedule, it would not mean that the core part of the agreement for referring the dispute for adjudication to arbitrator would be rendered nugatory.

The Court opined that if the Respondent’s argument was accepted that would clearly defeat the object of neutrality of arbitrator or reference of dispute to arbitration. Section 12(5) of the Act read with 7th Schedule has been introduced so as to lend greater legitimacy to the process of arbitration by providing for an independent person to act as arbitrator and exclude the other party from becoming a judge in their own cause. The Court was therefore inclined to lean in favour of an interpretation which effectuates the remedy of arbitration consistent with the legislative intent i.e. Section 12(5) of the Act of 1996 read with the 7th Schedule.

The Court further dived deep to look into the objective behind the Act and further the objective of introducing of Schedule VII in the Act. The Court relied upon Chloro Controls India (P) Ltd. v. Severn Trent Water Purification Inc., (2013) 1 SCC 641 wherein it was held that in light of the necessity to encourage arbitration, the court is required to exercise its jurisdiction in a pending action, to hold the parties to the arbitration clause and not to permit them to avoid their bargain of arbitration by bringing civil action involving multifarious causes of action, parties and prayers. The Court further relied on judgment of the Hon’ble Apex Court in Ellora Paper Mills Ltd. v. State of M.P., (2022) 3 SCC 1,  wherein it was observed that since the principles of impartiality and independence cannot be discarded at any stage of the proceedings, specifically at the stage of constitution of the Arbitral Tribunal, it would be incongruous to say that party autonomy can be exercised in complete disregard of these principles — even if the same has been agreed prior to the disputes having arisen between the parties.

Applying the principles laid down by the Apex Court, the Court was of the view that stipulation under the Agreement clearly manifests the intent of Respondent to retain the power of adjudication, which goes against the spirit of neutrality of arbitrator for which alone Section 12(5) of the Act of 1996 is introduced. It was dictated by the Court that the principles of impartiality or independence has to be respected in the matter of appointment of arbitrator. Once the statute has stepped in to enforce neutrality of arbitrator in an arbitration agreement, by virtue of Section 12(5) of the Act, the Court would not be justified in literally interpreting the clause in the agreement to keep the power of adjudication or the party autonomy with the Respondent at the cost of abandoning the arbitration itself. Such arbitration clause which ousts the arbitration in case of neutrality of arbitrator has thus to be necessarily construed as being subservient to Section 12(5) of the Act of 1996.

The Court relied upon the judgment in Ram Kripal Singh Construction Pvt. Ltd. Vs. NTPC, ARB.P 582/2020, dated 9.11.2022 (Delhi High Court) to emphasize the distinction between the procedure of appointment from right to refer dispute to arbitration under the agreement. In Ram Kripal Singh it was held that “The procedure for appointment of an arbitrator is clearly distinct and separable from the agreement to refer disputes to arbitration, even if these are contained in the same arbitration clause. If therefore, by reason of amendment, re-statement or re- interpretation of the law, as has happened in the present case by insertion of section 12(5) in the A&C Act and the verdicts of the Supreme Court in TRF Ltd. and Perkins Eastman (supra), the procedure for appointment of arbitrator at the hands of one of the parties becomes legally invalid, void and unenforceable, that does not mean that the core agreement between the parties to refer their inter-se disputes to arbitration itself perishes. In the opinion of this court – this “my way or the highway” approach – is not tenable in law; and in such circumstances, that part of the arbitration agreement which has been rendered invalid, void and enforceable is to be severed or excised from the arbitration clause, while preserving the rest of the arbitration agreement”.

The Court, on the aforesaid reasoning, allowed the application and appointed an arbitrator.

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[1] M/S Bansal Construction Office v.  Yamuna Expressway Industrial Development Authority And 2 Others  ARBITRATION AND CONCILI. APPL.U/S11(4) No. – 142 of 2019

In a recent case decided by the Hon’ble Supreme Court, in a dispute between M/S SPML Infra Ltd. (“Contractor”) and NTPC Ltd. (“NTPC”), the Court once again went into the analysis and scope of pre-referral jurisdiction of the High Court under Section 11 of the Act. The dispute had arisen when after the completion of work assigned through the contract, NTPC withheld the bank guarantees on account of pending liabilities and disputes between the parties with respect to other projects. When the Contractor approached the High Court, the parties entered into a settlement agreement wherein NTPC agreed to release the withheld Bank Guarantees. The Contractor as per the settlement agreed to withdraw its pending Writ Petition and undertook not to initiate any other proceedings, including arbitration, under the subject contract. Subsequently, the Bank Guarantees were released by NTPC.

The Contractor, however, repudiated the Settlement Agreement and filed the present application under Section 11(6) of the Act in the Delhi High Court alleging coercion and economic duress in the execution of the Settlement Agreement. The High Court appointed a former Judge of the Delhi High Court as the Arbitrator on behalf of NTPC, and directed the respective arbitrators to appoint the presiding Arbitrator.

NTPC approached the Apex Court. The Supreme Court at the outset clarified that position of law with respect to the pre-referral jurisdiction, as it existed before the advent of Section 11(6A) in the Act, was based on principle laid down in National Insurance Co. Ltd. v. Boghara Polyfab (P) Ltd [(2009) 1 SCC 267]. In Boghara Polyfab it was held that “the issue of non-arbitrability of a dispute will have to be examined by the court in cases where accord and discharge of the contract is alleged.” Further in the matter of Union of India & Ors. v. Master Construction Co. 2011) 12 SCC 349 it was held that “Where the dispute raised by the claimant with regard to validity of the discharge voucher or no-claim certificate or settlement agreement, prima facie, appears to be lacking in credibility, there may not be a necessity to refer the dispute for arbitration at all”. The Court had held that in such cases the Court must look into this aspect to find out at least, prima facie, whether or not the dispute is bona fide and genuine.

In a legislative response to these precedents, sub-section (6A) was added to Section 11 of the Act wherein while considering any application for appointment of arbitral tribunal, the Courts were to confine to the examination of the existence of an arbitration agreement. Section 11(6A) was strictly construed in the case of Duro Felguera, S.A. v. Gangavaram Port Ltd. [(2017) 9 SCC 729]. It was held that the jurisdiction of the court under Section 11(6) of the Act is limited to examining whether an arbitration agreement exists between the parties – “nothing more, nothing less”. The position of law was however changed in the matter of United India Insurance Co. Ltd. v. Antique Art Exports Pvt. Ltd. (2019) 5 SCC 362 wherein the scope of examination was widened. The provision was finally interpreted Vidya Drolia and Ors. v. Durga Trading Corporation (2021) 2 SCC 1. It was held that the expression “existence of an arbitration agreement” in Section 11 of the Arbitration Act, would include aspect of validity of an arbitration agreement, albeit the court at the referral stage would apply the prima facie test on the basis of principles set out in the judgment. Further it was held that the restricted and limited review is to check and protect parties from being forced to arbitrate when the matter is demonstrably “non-arbitrable” and to cut off the deadwood. The court by default would refer the matter when contentions relating to non-arbitrability are plainly arguable; when consideration in summary proceedings would be insufficient and inconclusive; when facts are contested.” The Court observed that conversely, if the court becomes too reluctant to intervene, it may undermine effectiveness of both the arbitration and the court. The legal order needs a right balance between avoiding arbitration obstructing tactics at referral stage and protecting parties from being forced to arbitrate when the matter is clearly non-arbitrable. When it appears that prima facie review would be inconclusive, or on consideration inadequate as it requires detailed examination, the matter should be left for final determination by the Arbitral Tribunal.

On reviewing the precedents, the Court concluded that the general rule is that the inquiry by the court must be prima facie, however, such prima facie scrutiny of the facts must lead to a clear conclusion that there is not even a vestige of doubt that the claim is non-arbitrable. On the contrary, even if there is the slightest doubt, the rule is to refer the dispute to arbitration. Applying the law to the fact of the case, the Court found that there were no pending claims between the parties for submission to arbitration. Since entire dispute revolves around the solitary act of the NTPC, in not returning the Bank Guarantees despite the successful completion of work, the plea of coercion and economic duress must be seen in the context of the execution of the Settlement Agreement not being disputed, and its implementation leading to the release of the Bank Guarantees which also was not being disputed. The Court held that High Court ought to have examined the issue of the final settlement of disputes in the context of the principles laid down in Vidya Drolia. The Court allowed the appeal and disposed the matter in favour of NTPC.