Category Archives: Arbitration

Hon’ble Division Bench of the Delhi High Court recently in the matter of Jivanlal Joitaram Patel v. National Highways Authority of India[FAO (OS)(COMM) 70/2017] reaffirmed the position of law regarding when can the fee of the Arbitral Tribunal shall be fixed as per Schedule IV of the Arbitration and Conciliation Act, 1996 and what does the term ‘sum in dispute’ imply.

In 2018, an appeal was disposed of by the Hon’ble Delhi High Court appointing a sole arbitrator in a dispute between the Appellant and the Respondent. As per the order, the arbitral tribunal was required to fix the fee as per Schedule IV of the Arbitration and Conciliation Act, 1996 (hereinafter “1996 Act”). On entering reference, the Arbitral Tribunal vide its procedural order determined the total amount of claim and a total amount of counter claim along with the interest. Vide a subsequent procedural order, the Tribunal determined its fees in terms of ratio of the judgment of Hon’ble High Court in Rail Vikas Nigam Vs. Simplex Infrastructure Ltd. Both the parties objected to the fees. Therefore, the Arbitral tribunal heard both the parties on the question as to whether counter claim(s) is/are to be included cumulatively along with the claims in the expression “sum in dispute” appearing in the 4^th Schedule of the 1996, or the claim amount and counter claim amount are to be separately considered in terms of proviso to Section 38(1) of the Act. The Arbitral Tribunal held that applicable arbitral fee has to be assessed separately for the claim, and counter claim. The reasoning inter alia was based on the ground that proviso to Section 38(1) of the Act carves out a specific exception providing for Arbitral Tribunal to fix a separate fee for claims and counter claims. It was further observed by the Ld. Arbitral tribunal that “…combining claims and counter claims for the purposes of determining fee under the 4^th Schedule could result in inequitable situations contrary to the express language of Section 38(1) of the Act.” The Ld. Arbitral Tribunal drew a parallel from the law and practice in civil suits where the court fees is determined separately in case of counter claims.

The parties filed application before the Hon’ble Court seeking clarification regarding the moot question. Both the parties were not in dispute regarding the correctness of the decision in Delhi State Industrial Infrastructure Development Corporation Ltd. Vs. Bawana Infra Development Pvt. Ltd., 2018 SCC OnLine Del 9241 wherein it was held that “sum in dispute” would include both – the claim and counter claim amounts taken cumulatively. It was held that Sections 38(1) does not have any bearing on the interpretation of 4^th Schedule. The Hon’ble Court approved the decision in Delhi State Industrial Infrastructure Development Corporation Ltd. and held that proviso to Section 38(1) of the Act will apply only when the Arbitral Tribunal fixes its own fee and not when fees has to be fixed as per 4^th Schedule of 1996 Act.  Therefore, Section 38(1) of the Act cannot be resorted to for interpretation of the expression “sums in dispute” provided under 4^th Schedule.

The Hon’ble Court clarified that unlike in a civil suit where the counter claim can be with respect to entirely different transaction, the counter claim in an arbitration proceeding has to necessarily arise from the same contract and arbitration agreement. This is the reason why the court fees in case of a counter claim is to be calculated and affixed separately. The Court observed that “[T]herefore, in the context of arbitration proceedings it may not be correct to say that counter claim would be an “independent” cause of action”.

The Court further relied upon the judgment in National Highways Authority of India Vs. Gayatri Jhansi Roadways Limited 2019 SCC OnLine SC 906 wherein the Hon’ble Supreme Court held that if there is an agreement between the parties which lays down the fee structure for the arbitral tribunal then the fee will be fixed in terms of the agreement between the parties and not the 4^th Schedule to the Act. Therefore, it was concluded by the Hon’ble Court that Sections 31(8), 31A and Section 38(1) of the 1996 Act of the 1996 Act has no application in interpreting the expression ‘sums in dispute’ as provided in Schedule IV of the 1996 Act or in determination of Arbitral Tribunal fees if the fee structure has been expressly agreed between the parties.

In the recent case of Ratnam Sudesh Iyer v. Jackie Kakubhai Shroff [Civil Appeal No. 6112 of 2021], dispute arose between two parties who were shareholders in the investment holding company called Atlas Equifin Private Limited, India (‘Atlas’) which held 11,05,829 equity shares of Rs.10 each in Multi Screen Media Pvt. Ltd. (‘MSM’). The Appellant, who was based in Singapore, with an intention to sell its share in Atlas entered into a placement instruction in 2005 with the Respondent which authorised Standard Chartered Bank (‘SCB’) as their agent to identify the purchaser for the appellant’s shares in Atlas. However, the Respondent challenged the placement instruction and alleged that his signature was forged. The respondent lodged a complaint with the Economic Offences Wing, Mumbai Police (‘EOW’) in 2010 against both the appellant and the SCB.  Subsequently, the Parties decided to settle the matter and entered into a Deed of Settlement dated 03.01.2011 which provided, amongst other things, that respondent would withdraw all complaints and proceedings filed against the appellant and going forward shall not write any letter or communication or complaint to any police authority/ies and/or any other judicial, quasi-judicial authority or statutory authority or any person or entity complaining about the subject matter of the Settlement Deed.

In return, the Appellant was to pay to the Respondent an amount of US$ 1.5 million vide banker’s cheque which was to be held in an escrow account, and was to be handed over to the respondent on confirmation by the EOW that the complaint has been withdrawn. Further, the respondent was to be paid US$ 2 million within seven (7) days of the receipt of the proceeds from the sale of MSM’s shares.

On any breach on part of the respondent, the Settlement Deed was to terminate and the US$ 1.5 million kept in escrow would then be released back to the appellant. Very soon, the disputes arose and the Arbitration Clause was triggered when both the parties alleged breach of the terms of the Settlement Deed. The Appellant filed a Section 9 of the Arbitration and Conciliation Act, 1996 (the “Act”) application claiming that the amount should not be released to the respondent on account of the breach of the Deed of Settlement since the wife of the Respondent wrote an e-mails to the Appellant which were defamatory and therefore sought interim relief against the respondent, his wife, and the escrow agent. In the court proceedings the wife of the respondent was dropped from the array of parties and the matter was referred to arbitration with the direction that the escrow agent would hand over the cheque for US$ 1.5 million only after the direction of the arbitrator.

One of the claims of the Appellant before the Arbitrator was the refund of US$ 1.5 million with 18 per cent interest per annum.

The learned arbitrator made the final award on 10.11.2014, awarding a claim for liquidated damages of US$ 1.5 million in favour of the appellant, as per the Deed of Settlement. The award further held that the respondent would not be entitled to the second cheque of US$ 2 million held in escrow, on account of the respondent’s breach of the Deed of Settlement.

Against the Award, the Respondent preferred an application under Section 34 of the Act and the Appellant moved an application under section 36. Consequently, the respondent also filed for stay of the enforcement of the award which was granted and the Bombay High Court finally set aside the award vide judgment dated 19.05.2020. The Appellant filed an appeal under section 37 of the Act which was dismissed by the Division Bench of the Bombay High Court vide impugned judgment dated 20.04.2021. The High Court also granted interim protection against withdrawal of the amount specified under the Deed of Settlement for a limited period of time. In the Special Leave Petition while issuing notice on 02.08.2021, the interim arrangement by the High Court was extended.

The following questions arose for consideration:

Whether the award arose out of an international commercial arbitration and what is the distinction between a domestic award arising from an international commercial arbitration and a purely domestic award? Further, whether the test for interference was made more stringent by the amendment in respect of a domestic award arising from an international commercial arbitration?

The Court, on the nature of Award, held that since the Appellant was based out of Singapore, it would be an international commercial arbitration in term of section 7 of the Act.  The Court observed that vide  the Arbitration and Conciliation (Amendment) Act, 2015 (‘2015 Amendment Act’), Explanations to Section 34(2) of the said Act as well Sub-Section 2A to Section 34 were inserted and therefore, beyond doubt, the “scope of interference by the Court became more restrictive with the amendments coming into force. “

While interpreting the provision under sub- section 2A of Section 34 of the Act, the Court observed that “the plea of patent illegality is not available for an award which arises from international commercial arbitration post the amendment” and that “… the judgments of the learned Single Judge and the Division Bench decide the challenge to the award on the plea of patent illegality without noticing this distinction.” The Court observed that both the courts proceeded on the basis that the award cannot be sustained in either situation, i.e. for a purely domestic award or a domestic award arising from an international commercial arbitration.

The Court then proceeded to answer the question whether the 2015 Amendment Act would apply in the facts of the present case?

While observing that Section 34 proceedings in the matter commenced prior to 23.10.2015, the Court observed that the law provided under Section 26 of the 2015 Amendment Act as to when the amendment would apply in this regard was well settled.  The Court also referred to the decision in Board of Control for Cricket in India v. Kochi Cricket Pvt. Ltd. & Ors. (2018) 6 SCC 287 in this regard. The Court clarified that “The judgment derived that the intention of the legislature was to mean that the 2015 Amendment Act is prospective in nature and will apply to those arbitral proceedings that are commenced, as understood by Section 21 of the said Act, on or after the 2015 Amendment Act, and to court proceedings which had commenced on or after the 2015 Amendment Act came into force.”

The Court further referred to the decision in Ssangyong Engineering and Construction Company Ltd. v. National Highways Authority of India (2019) 15 SCC 131 and Hindustan Construction Company Ltd. and Anr. v. Union of India & Ors. 2019 SCC OnLine 1520, for understanding the applicability of sub-section 2A of section 34 of the Act. It was opined the said case that Section 34 as amended will apply only to Section 34 applications that have been made to the Court on or after 23.10.2015, irrespective of the fact that the arbitration proceedings may have commenced prior to that date.

The Appellant however, contended that as the Arbitration Clause in the Deed of Settlement, provided that “the Arbitration proceedings shall be governed by the Arbitration and Conciliation Act, 1996 of India or any amendment thereto”, and therefore, any future amendments to the said Act shall be applicable to the arbitration in question.

Therefore, the Court proceeded to examine the impact of the phraseology used in the arbitration clause, mainly, “the Arbitration proceedings shall be governed by the Arbitration and Conciliation Act, 1996 of India or any amendment thereto”.

The Court referred to S.P. Singla Constructions Pvt. Ltd. v. State of Himachal Pradesh & Anr. (2019)2SCC488 in which the arbitration clause provided that the arbitration would be subject to the provisions of the Arbitration Act, 1940 or any statutory modification or re-enactment thereof. In the matter the Supreme Court opined that such general conditions of the contract cannot be taken to be an agreement between the parties to apply the provisions of the 2015 Amendment Act and the provisions of the 2015 Amendment Act would apply only in relation to arbitral proceedings commenced on or after the date of commencement of the 2015 amendment. A similar view was taken in the case of Union of India v. Parmar Construction Company (2019) 15 SCC 682. It was further observed that the provisions of the 2015 Amendment Act shall not apply to arbitral proceedings which had commenced in terms of the provisions of Section 21 of the said Act unless the parties otherwise agree.

While the above referred cases were in relation to arbitration proceedings, the matter before the Court dealt with a section 34 application which was moved before the 2015 Amendment Act came into force. In this regard, the Court referred to the case of ABB India Ltd. v. Bharat Heavy Electricals Ltd. OMP (T) (Comm) No.48/2020 decided by the Single Bench of Delhi High Court which distinguished the judgment in Thyssen Stahlunion Gmbh v. Steel Authority of India Limited  (1999) 9 SCC 334 from Parmar Construction Company. The Court observed that Thyssen Stahlunion Gmbh dealt with Section 85(2)(a) of the said Act, which is dissimilar to Section 26 of the 2015 Amendment Act. Section 26 starts with a negative covenant which is subject to an exception in the case of an agreement between the parties, whereas the observations in Thyssen Stahlunion Gmbh were coloured by Section 85(2)(a) of the said Act which is structured differently.

The court therefore held that “the general phraseology of a clause which seeks to include any amendment to the Act would not be able to be availed of to expand the scope of scrutiny as it would appear to run contrary to the legislative intent of Section 26 of the Amendment Act..” The Court therefore reached the conclusion that it would be the pre-2015 legal position which would prevail. Keeping this in the background, the Court went on to analyse the correctness of the decisions reached by the courts below.

In the factual findings the court found that the necessary conditions of the Deed of Settlement stood satisfied since firstly, the respondent complied with the condition to withdraw all complaints and proceedings against appellant and all other named and unnamed persons before the EOW. Therefore, US $ 1.5 million, which were kept in escrow to ensure that those proceedings came to an end, had to be released to the respondent. Secondly, the sale of shares did take place, even though delayed and therefore, the respondent was also entitled to US$ 2 million which was to be paid on sale of shares. The Court further opined that it was not the case that the respondent breached clause 6 of the Settlement which provided that amount of US$ 1.5 million shall return to the Appellant in case the representations/assurances of the respondent turn out to be false or incorrect. The Court therefore concluded on facts that the effect of the arbitral award would be to deprive the respondent of the due valuation of the shares and what was paid to him to bring his complaints to an end. The court also went on to scrutinise the contents of the e-mails written by the wife of the respondent which according to the Court was never ratified by the respondent himself. Further, the wife was not party to the Deed. Although the Court found one of the wife’s e-mails as indiscreet, the Court held that this itself cannot deny the respondent of his dues.

In conclusion the court held that “We find that the arbitrator’s conclusions are not in accordance with the fundamental policy of Indian law, and can thus be set aside under the pre-2015 interpretation of S. 34 of the said Act. We may also note that clause 6 of the Deed of Settlement could not have been relied on to award liquidated damages in favour of the appellant, we agree with the observations of the Single Judge and the Division Bench in this regard.”

In a recent matter of Arcelor Mittal Nippon Steel India Ltd. v. Essar Bulk Terminal Ltd. (Civil Appeal No. 5700 OF 2021) an interesting question of law arose. The issue was “whether the Court has the power to entertain an application under Section 9(1) of the Arbitration and Conciliation Act, 1996, (“Arbitration Act”) once an Arbitral Tribunal has been constituted and if so, what is the true meaning and purport of the expression “entertain” in Section 9(3) of the Arbitration Act?”

The issues arose when the Appellant in the matter approached the High Court of Gujarat at Ahmedabad under Section 11(6) of the Arbitration Act, for appointment of an Arbitral Tribunal. Simultaneously, the both the parties in the matter also filed their applications under Section 9 of the Arbitration Act before the Commercial Court at Surat. The Commercial Court, heard both the Section 9 applications and reserved the orders on 7^th June, 2021.

In the interim but before the Commercial Court in Surat pronounced the order, the Gujarat High Court disposed of the application under Section 11 of the Arbitration Act and appointed a three-member Arbitral Tribunal. The Appellant immediately filed an interim application before the court to refer both the applications under section 9 filed by the parties, to the Arbitral Tribunal. The application was dismissed. The Appellant challenged the dismissal before the Gujarat High Court under Article 227 of the Constitution of India. The High Court dismissed the petition holding that the Commercial Court has the power to consider whether the remedy under Section 17 of the Arbitration Act is inefficacious.

The Appellant filed an appeal before the Apex Court.

Arguments on behalf of the Appellant:

• Section 9(3) of the Arbitration Act restricts the power of the Court to entertain an application under Section 9(1) of the Arbitration Act once an Arbitral Tribunal has been constituted and since the Tribunal was constituted, the court cannot proceed with the matter, unless it finds that circumstances exist, which may render the remedy under Section 17 of the Arbitration Act inefficacious.
• The term ‘entertain’ in Section 9(3) of the Arbitration Act, is to be interpreted to mean “adjudicate”. It would not merely mean admitting for consideration, but would mean the entire process upto its final adjudication and passing of an order on merits.
• The objective behind insertion of the sub-clause was emphasized that is to reduce the interference of court, to reduce burden of court, and that to ensure that the relief is granted in a timely and efficacious manner.

Arguments on behalf of the Respondent:

• Section 9(1) of the Arbitration Act provides that a party will apply to the court before, during or after the arbitral proceedings. The Courts therefore do not lose jurisdiction upon constitution of the Arbitral Tribunal.
• Section 9(3) of the Arbitration Act was neither a non-obstante clause nor an ouster clause that would render the courts coram non judice, immediately upon the constitution of the Arbitral Tribunal.
• In this case, only the formality of pronouncing the order in the Section 9 Applications remained and the application under Section 9 had been entertained, fully heard and arguments concluded;
• ‘Entertain’ means “admit into consideration” or “admit in order to deal with”.
• The Commercial Court has already given much judicial time for the matter.
• An appeal from an order passed by the Arbitral Tribunal in an application under Section 17, lies before the superior Court. It cannot, therefore, be said that Section 17 proceeding flows any differently from a proceeding in Court under Section 9 of the Arbitration Act or has any distinct hierarchy.

The Court after hearing both the parties observed that post 2015 amendments to the Arbitration Act, the Arbitral Tribunal has the same power to grant interim relief under section 17 as the Court and the remedy under Section 17 is as efficacious as the remedy under Section 9(1). The Court also observed that a judgment is said to be pronounced when it is done so in an open court and not when it is reserved or merely dictated. A judge becomes functus officio when he pronounces, signs and dates the judgment.

Relying on Energo Engineering Projects Ltd. v. TRF Limited 2016 SCC Online Del 6560 and various other judgments passed post 2015 Amendments including one passed by the Delhi High Court in Avantha Holdings Limited v. Vistra ITCL India Limited 2020 SCC OnLine Del 1717, the Court approved the findings of law that the Court, while exercising its power under Section 9 of the Arbitration Act, has to be acutely conscious of the power vested in the arbitral tribunal by Section 17 of the Arbitration Act. The sections are identically worded thus giving identical powers of “interim measures”. The Court explained that it is for this reason Section 9(3) proscribes grant of interim measures by the Court after the constitution of the arbitral tribunal with the exception where the Court finds that circumstances exist, which may not render the remedy, under Section 17, to be efficacious.

However, the Court disapproved the finding of the Delhi High Court to the extent it stated that the “Court, while exercising jurisdiction under Section 9, even at a pre-arbitration stage, cannot usurp the jurisdiction which would, otherwise, be vested in the arbitrator, or the Arbitral Tribunal, yet to be constituted”. The Court instead held that “The bar of Section 9(3) operates after an Arbitral Tribunal is constituted. There can therefore be no question of usurpation of jurisdiction of the Arbitral Tribunal under Section 17 before the Arbitral Tribunal is constituted. The Court is obliged to exercise power under Section 9 of the Arbitration Act, if the Arbitral Tribunal is yet to be constituted. Whether the Court grants interim relief or not is a different issue,”

The Court then went on to analyse the meaning and purport of the term ‘entertain’. While analysing the judgments in Lakshmi Rattan Engineering Works Ltd. v Asstt. Commissioner Sales Tax, Kanpur and Anr (1968) 1 SCR 505, the Court stated that ‘entertain’ means “admitting to consideration”. In the matter of Hindustan Commercial Bank Ltd. v Punnu Sahu (1971) 3 SCC 124, the Court held that the expression “entertain” in the proviso to clause (b) Order 21 Rule 90 of the CPC (as amended by Allahabad High Court), means to “adjudicate upon” or “proceed to consider on merits” and not “initiation of proceeding”.

The Court therefore agreed with the argument of the Appellant and concluded that it was well settled that the expression “entertain” means to consider by application of mind to the issues raised. The Court entertains a case when it takes a matter up for consideration. The process of consideration could continue till the pronouncement of judgment. However, the Court also agreed with the argument of the Respondent that intent of section 9(3) was “not to turn back the clock and require a matter already reserved for orders to be considered in entirety by the Arbitral Tribunal under Section 17 of the Arbitration Act”.

The Court clarified that the bar of Section 9(3) would not operate, once an application has been entertained and taken up for consideration, as in the instant case, where hearing has been concluded and judgment has been reserved. The Court while agreeing with the Appellant that the process of consideration continues till the pronouncement of judgment, posed a question for its consideration – whether the process of consideration has commenced, and/or whether the Court has applied its mind to some extent before the constitution of the Arbitral Tribunal. If the answer is in positive, the application can be said to have been entertained before constitution of the Arbitral Tribunal.

The court in detail discussed the concept of Negative Kompetenz-Kompetenz which as per the decision of the Court is a sequel to the rule of priority in favour of the Arbitrators, that is, the requirement for parties to an arbitration agreement to honour the arbitration agreement to submit their disputes to arbitration. On the flip side the Courts are prohibited from hearing such disputes. In this regard the Court analysed the decision in Chloro Controls India Private Limited v. Severn Trent Water Purification Inc. (2013) 1 SCC 641 and Vidya Drolia and Ors. v. Durga Trading Corporation (2021) 2 SCC 1. The Court finally, in the light of the Kompetenz-Kompetenz principle and the principle of no judicial interference, held that the court always has the discretion to direct the parties to approach the Arbitral Tribunal, if necessary by passing a limited order of interim protection, especially in the matters where the proceedings have not commenced or are at the initial stage. However, in present matter, it was not necessary for the Commercial Court to consider the efficacy of relief under Section 17, since the application under Section 9 was already entertained and considered by the Commercial Court.