Category Archives: Arbitration

In a recent case of M/s. Emaar India Ltd. v. Tarun Aggarwal Projects LLP & Anr [CIVIL APPEAL NO.  6774 OF 2022], once again question that emerged  for the consideration of Hon’ble Supreme Court was whether the High Court was justified  in allowing  the   application   under  Section   11(5)   &  (6)  of the Arbitration and Conciliation Act, 1996 for appointing the arbitrators without considering the aspect of arbitrability of dispute as per the relevant clauses under the Agreement.  As per the Agreement executed between the parties, if any conflict or difference arose between the parties or in case either party refuses or neglects to perform its part of the obligations under Agreement,  then such issues were not arbitrable but the other party had right to get the agreement specifically enforced through the appropriate court of law. Therefore, the question whether the dispute is arbitrable or not, was to be considered by the Court or by the arbitral tribunal in the light of the very terms of the said agreement.

The Court while analysing the issue went into underling the relevance of contract and observed that the reliefs to the parties shall not travel beyond the terms of the contract executed between the parties. It is because a contract is a transaction between two parties and has been entered into with open eyes and by understanding the nature of contract and that such contract has to   be interpreted giving literal meanings unless there is some ambiguity therein. The Court further referred to the judgment in Harsha  Construction  Vs.  Union  of  India and Ors.  (2014) 9 SCC 246 and observed that a contract with regard to arbitration has to be an expressed one. It must be in writing as per the legislation. In Harsha  Construction case it was clearly held that it was not open to the Arbitrator to arbitrate upon the disputes which had   been expressly  “excepted” and thus non-arbitrable. An award, therefore, so far as it related to disputes   regarding   non¬arbitrable   disputes  was bad in law  and liable to be quashed.

The Court further referred to the judgment in Vidya Drolia and Ors. Vs. Durga Trading Corporation (2021) 2 SCC 1 to elaborate on the aspect of arbitrability and its determination at the stage of application under section 11(6) of the Arbitration and Conciliation Act, 1996. The Court observed that the issue of non-arbitrability of a dispute is basic for arbitration as it relates to the very jurisdiction of the Arbitral Tribunal. As per Vidya Drolia and a catena of judgments decided earlier, the question of arbitrability, specially relating   to   the   inquiry whether   the   dispute   was   governed   by   the   arbitration clause, can be examined by the Courts at the reference stage itself. Further, Court can examine the validity   of   an arbitration   agreement, the authority which is covered by the expression, “existence of arbitration agreement” in Section 11 of the Arbitration   Act. Court shall not refer the matter for arbitration and as a demurrer interfere under section 8 and 11 when  it is manifestly and ex facie certain   that   the   arbitration   agreement   is   non-¬existent, invalid or the disputes are non-arbitrable and also when the matter is demonstrably “non-arbitrable   and   to   cut   off   the deadwood.”  The judicial scrutiny may however vary with the nature and   facet   of   non-arbitrability. If, however, the contentions relating to non–arbitrability are plainly arguable, the court by default shall refer the matter for arbitration. Applying the law laid down by this Court in the aforesaid decisions, the Court in the present matter held that the dispute is not arbitrable since the claims have been excepted by the clear term in the Agreement.

Hon’ble Supreme Court in a recent judgment[1] held that when a discretion is vested in the Arbitral Tribunal under Section 31(7) of the Arbitration and Conciliation Act, 1996 to determine the rate of interest, whether the interest is payable on whole or any part of the money  and whether it is to be awarded to the whole or any part of the  period stipulated, the Tribunal has the duty to apply its mind and give reasons as to how it deems a certain interest rate as reasonable and to decide why the interest is payable on whole or any part of the money and also as to why it is to be awarded to the whole or any part of the  period between the date on which the cause of action arose and the date on which the award is made. While exercising its jurisdiction under Article 142 of the Constitution of India, The Hon’ble Court reduced the rate of interest from 18% to 9% and further reduced the period by 20 odd years on account of the lapse of the Claimant-Respondent in taking timely action.

The Respondent was awarded the contract for construction of missing link of 3 kms stretch on NH­6 on 16^th December, 1971 to be completed within one year. The contract amount was Rs.4,59,330/­.   However the work could be completed by 30^th August 1977. The Respondent was already paid an amount of Rs.3,36,465/­ by then. The Respondent issued a notice to the Appellant regarding his claim only on 25^th July 1989 followed by the Respondent filing his claim of Rs.1,45,28,198/­ and interest @ 19.5% from 1^st April 1976 to 15^th March 2002.  The learned   Arbitrator,   vide   award   dated   24^th August   2004, awarded a sum of Rs.9,20,650/­ and an interest  pendent lite with effect from 1^st April 1976 to the date of the award at the rate of 18% per annum which came to Rs. 46,90,000/­. The learned Arbitrator further directed the future interest to be paid at the rate of 18% per annum on the total of the aforesaid two amounts till actual payment.

The Award was challenged on various grounds including on the ground that the interest   amount   of   Rs.46,90,000/­   is almost   five   times   that   of   the   main   award   amount   of Rs.9,20,650/­. The Appellant relied on the judgments in Rajendra   Construction   Co.   v.   Maharashtra Housing   &   Area   Development   Authority   and   Others [(2005) 6 SCC 678], Krishna   Bhagya   Jala   Nigam   Ltd.   v.   G.   Harischandra Reddy and Another [(2007) 2 SCC 720] and Mcdermott International Inc. v. Burn   Standard   Co.   Ltd.   and   Others [(2006) 11 SCC 181].

The Court examined the issue in the light of the discretion given to an Arbitral Tribunal under Section 31(7) of the Arbitration and Conciliation Act, 1996 (“1996 Act”) to determine the rate of interest, whether interest would be applicable on the whole or any part of the money awarded, and whether it shall be applicable for the whole or any part of the period between the date on which the cause of action arose and the date on which the award is made. The Court arrived at the decision that such discretion when vested in the Arbitral Tribunal, it has a duty to exercise the discretion while applying its mind to the facts and circumstances of the case and give reasons for arriving at a certain interest rate, the sum of which it shall be applicable, and period for which it shall apply.

The Court observed that the Arbitral Tribunal in the matter did not do any such exercise of reasoning and further failed to exclude the period of more than 20 years during which it was the Respondent-Claimant who did not raise its claim and further did not take any action after decree was passed in 1990 and then after passing of 1996 Act until 2001 when the Respondent-Claimant finally filed an application under section 11 of the 1996 Act. The Court in this regard held that a party cannot be permitted to derive benefits from its own lapses. With regard to the determination of the rate of interest, the Court made reference to various judgments including the observation made by the Court in Mcdermott International Inc. wherein it was held that given the long lapse of time, it will be in furtherance of justice to reduce the rate of interest while exercising the jurisdiction under Article 142 of the Constitution of India. The Court, accordingly found that the present case was also a fit case wherein this Court needed to exercise its powers under Article 142 of the Constitution of India to reduce the rate of interest. While taking into consideration the conduct of the Respondent in delaying the proceedings at every stage which led to a long pendency of the dispute, the Court concluded that, though it will not be in the interest of justice to interfere with the principal award, it would be a fit case wherein the interest at all the three stages, that is pre­reference period, pendente lite and post­award period, requires to be reduced. The Court, therefore, was pleased to reduce the rate of interest to 9% from 18%

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[1] Executive Engineer (R and B) and Ors. v. Gokul Chandra Kanungo (Dead) Thr. His Lrs. [CIVIL APPEAL NO. 8990 OF 2017 decide on 30.09.2022]

Recently, in the matter of Indian Oil Corporation Limited v. NCC Limited [CIVIL APPEAL NO. 341 OF 2022 decided on 20.07.2022] once again the Hon’ble Supreme Court confirmed that the judicial inquiry under Section 11(6A) of the Arbitration and Conciliation Act, 1996 is not confined   only   to ascertain   as to   whether   or not   a   binding arbitration agreement   exists and the Court cannot mechanically refer the dispute to arbitration. The Court needs to apply its mind and decide whether the arbitration agreement is valid and whether the dispute is covered by the arbitration clause.

As per the ratio in the case, “However, at the same time, we do not agree with the conclusion arrived at by the High Court that after the insertion of Sub-Section (6¬A) in Section 11 of the Arbitration Act, scope of inquiry by the   Court   in   Section   11   petition   is   confined   only   to ascertain   as  to   whether   or  not   a   binding  arbitration agreement   exists  qua  the   parties   before   it,   which   is relatable to the disputes at hand. We are of the opinion that though the Arbitral Tribunal may have jurisdiction and   authority   to   decide   the   disputes   including   the question of jurisdiction and non-arbitrability, the same can also be considered by the Court at the stage of deciding Section 11 application if the facts are very clear and glaring and in view of the specific clauses in the agreement   binding   between   the   parties,   whether   the dispute   is   non-arbitrable   and/or   it   falls   within   the excepted clause. Even at the stage of deciding Section 11 application, the Court may prima facie consider even the aspect with regard to ‘accord and satisfaction’ of the claims.”

The Court has essentially maintained the position of law as laid down in DLF Home Developers Limited v. Rajapura Homes Private Limited & Anr and DLF Home Developers Limited v. Begur OMR Homes Private Limited & Anr [both decided on September 22, 2021] wherein it had held that the Courts are “not expected to act mechanically merely to deliver a purported dispute raised by an applicant at the doors of the chosen Arbitrator.” The Court had ruled that the Courts are “obliged to apply their mind to the core preliminary issues, albeit, within the framework of Section 11(6-A) of the Act.” The position of law is an extension of what fundamentally the Apex Court ruled in Vidya Drolia and Others v. Durga Trading Corporation (2021) 2 SCC 1 and if we go backwards, in  Duro Felguera, S.A. v. Gangavaram Port Limited [(2017) 9 SCC 729]. The three judge bench in Vidya Drolia explained theconcept of limited prima facie review. The Court held that the scope of judicial review and jurisdiction under Sections 8 and 11 of the Act is extremely limited and is to be exercised in rare occasions only and went on to clarify that although a prima facie examination does not mean full review, the purpose of the scrutiny is to weed out manifestly invalid arbitration agreements and non-arbitrable disputes. Further, it may be that certain cases require a still deeper consideration during prima facie examination but this should be done with measured restraint. The Supreme Court, however, cautioned that the scrutiny made by the Courts should be done only to effectuate the arbitration process.

As per the Arbitration and Conciliation Act, 1996, when an application under section 34 of the 1996 Act is moved by the Award Debtor along with the application for remitting the matter to the Arbitrator, the only power invested in the Court is to adjourn the proceedings for the limited purpose mentioned in Section 34(4) of the 1996 Act. As per the Section 34(4), the Court can defer the hearing of the objection filed under Section 34 on a written request made by a party to enable the Arbitral Tribunal to resume the arbitral proceedings so that the grounds for setting aside or in other words, the deficiencies in the arbitral award may be eliminated by the Arbitral Tribunal. The matter cannot be remanded for fresh decision by the Arbitral Tribunal which has become functus officio.

The law has also been laid in clear terms in the matter of McDermott International Inc. v. Burn Standard Co. Ltd. [(2006) 11 SCC 181]. In the matter of Radha Chemicals v Union of India [Civil Appeal No. 10386 of 2018] it was once again laid down that “the court while deciding a Section 34 (Arbitration and Conciliation Act, 1996) petition has no jurisdiction to remand the matter to the Arbitrator for a fresh decision”. The issue has been addressed in the matters of Dyna Technologies Pvt. Ltd. v. Crompton Greaves Ltd. (2018) 11 SCC 328 wherein it was held that objective behind section 34(4) is to make the award enforceable and in Som Datt Builders Limited v. State of Kerala (2009) 10 SCC 259 wherein the Court held that in view of Section 34(4) of the Act, the High Court ought to give the Arbitral Tribunal an opportunity to give reasons, if the same have not been given in the original arbitral award.

Recently, in the matter of Dr. A. Parthasarathy & Ors v. E Springs Avenues Pvt. Ltd &Ors.  [SLP (C) Nos. 1805-1806/2022], the Hon’ble Supreme Court dealt with an impugned order wherein the High Court, in exercise of power under Section 37 of the 1996 Act, had set aside the award passed by the learned Arbitrator and has remanded the matter to the Arbitrator for fresh decision. While deciding the issue, the Hon’ble Supreme Court wholly relied upon its decisions in Kinnari Mullick and Anr. Vs. Ghanshyam Das Damani (2018) 11 SCC 328 and I-Pay Clearing Services Pvt. Ltd. Vs. ICICI Bank Ltd. (2022) SCC OnLine SC 4. The Court held that the High Court under section 37 of the 1996 Act either may refer the parties for fresh arbitration or may consider the appeal on merits on the basis of the material available on record within the scope and ambit of the jurisdiction under Section 37 of the 1996 Act. The Court clarified that the High Court does not have the jurisdiction to remand the matter to the same arbitrator for fresh decision/arbitration. This is otherwise permissible only by the consent of both the parties that the matter be referred to the same arbitrator.

In the Kinnari Mullick the Hon’ble Supreme Court elaborately discussed various aspects of power to remand the matter – when can the matter be remanded, what is the objective of remand and what are the limitations to the power in the light of provision under section 34(4) of the 1996 Act. The central issue involved in the case was whether Section 34(4) of the Arbitration and Conciliation Act, 1996 empowers the Court to relegate the parties back before the Arbitral Tribunal after having set aside the arbitral award in question. Additionally, it was also determined whether the court can exercise the power in absence of any specific application/prayer of the parties in this regard.

In Kinnari Mullick the award was challenged by the appellants and was set aside on the ground that it is devoid of any reasons for its findings. On appeal, the decision of the Single Bench of the Hon’ble High Court was affirmed. The Division Bench additionally suo moto decided to remand the matter back before the Ld. Arbitral Tribunal directing the Ld. Tribunal to provide reasons in support of the findings. The said part of the decision of the Division Bench was challenged before the Supreme Court.

Adverting to Section 34(4) of the 1996 Act, the Court observed that the Court can defer the hearing of the application filed under Section 34 only on a written request made by a party so that the grounds for setting aside or in other words, the deficiencies in the arbitral award may be eliminated by the arbitral tribunal. The Court cannot ive a direction suo moto. The Court added that “The quintessence for exercising power under this provision is that the arbitral award has not been set aside.” In other words, even a party cannot move an application under section 34(4) of the 1996 Act once the award has been set aside by the court. The Court explained that this is because consequent to disposal of the main proceedings under Section 34 of the 1996 Act, the Court would become functus officio.

In the matter of I-Pay Clearing, the appellant, along with the application under section 34, moved an application under section 34(4) seeking directions to adjourn the proceedings for a period of three months and direct the learned Arbitrator to issue appropriate directions with regard to an issue where the Arbitrator had failed to give its findings. The main objection was filed on the ground that the Arbitrator has failed to record detailed reasons for its findings and thus, the same is patently illegal and erroneous. The High Court dismissed the application under section 34(4) of the 1996 Act on the ground that the defect in the arbitral award is not curable. The appellant preferred an appeal before the Hon’ble Supreme Court against the said order of dismissal of application under section 34(4) of the 1996 Act.

The Court explained that there is a difference between a finding and reasons. Findings are the decision on an issue. Reasons are the links between the materials on which certain findings are based and the actual findings. Section 34(4) of the Act, can be resorted to record reasons on the finding already given in the award or to fill up the gaps in the reasoning of the award. However, when prima facie it is case of patent illegality, as was pleaded by the respondent also, the same is required to be considered by the Court itself. Further, the Court has discretion to decide on the question as to whether a good case has been made out for relegating the parties back to the arbitral tribunal under section 34(4) of the 1996 Act i.e. showing that “there is inadequate reasoning or to fill up the gaps in the reasoning, in support of the findings which are already recorded in the award”. It is not obligatory on the Court to remit the matter in all the cases where party makes an application. The Court further clarified that, “If there are no findings on the contentious issues in the award or if any findings are recorded ignoring the material evidence on record, the same are acceptable grounds for setting aside the award itself…. A harmonious reading of Section 31, 34(1), 34(2A) and 34(4) of the Arbitration and Conciliation Act, 1996, make it clear that in appropriate cases, on the request made by a party, Court can give an opportunity to the arbitrator to resume the arbitral proceedings for giving reasons or to fill up the gaps in the reasoning in support of a finding, which is already rendered in the award.” Therefore, we may conclude that the law is more than settled as to the limited purpose for which and in limited circumstances in which a matter may be relegated to the Arbitral Tribunal by the Court exercising its discretionary jurisdiction under section 34(4) of the 1996 Act on application moved by a party in this regard. Needless to say this is different from the power of the Arbitral Tribunal to correct the award under section 33 of the 1996 Act and to make an additional award under section 33(4) of the 1996 Act where the parties can move an application directly before the Arbitral Tribunal and seek an appropriate remedy.

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.