Investment Arbitration – The Assignation & its Way Ahead in India

Madhu Sweta


22/08/2017  

India has given notice of unilateral termination of 58 Bilateral Investment Treaties (BIT) on 31st March 2017 and it is in process of signing some crucial BITs, such as the US-India BIT. All of this in conjunction with India’s aim of increasing foreign investment flow into the country makes the topic BITs and Investment Treaty Arbitration all the more important.

Introduction – The Regression of Gunboat Diplomacy

In the gamut of a sound and systematized International Arbitration regime, Investment Arbitration (IA) is more than often described as an insurgent counter against “Gunboat Diplomacy[1].” Investment Arbitration usually arises out of Investment treaties that are entered into by the foreign investors and the Host States, with a view to make an investment by one party in the business ventures of the other. The chariot of Investment Arbitration (IA) thrives upon its following wheels:

  1. An investment treaty, either multilateral (MIT) or bilateral (BIT).
  2. The national law of the Host State pertaining to Investments.
  3. An independent Investment Agreement, if entered.
  4. Choice of Independent and individual Arbitrator/Arbitral Tribunal.

The failure of either of the wheels makes the functioning of the entire regime a fruitless exercise. As a general way of practice, a majority of Investment Arbitrations are treaty based which are governed by either Bilateral or Multilateral Treaties. Essentially, International Investment Arbitration adopts the body of procedure and enforcement from International Commercial Arbitration and applies the same to disputes between foreign investors and host states. The regime works hand in glove with the International Commercial Arbitration to create a conducive environment for Foreign Direct Investment (FDI) and business to flourish in any country. Thus the key aspect of investment arbitration is that it transplants the private adjudicative model from the sphere of International Commercial Arbitration into the realm of government, thereby giving individual investors/private parties a chance to seek redressal for treatment accorded to them by the Government of India.

Objective & Procedure

The dispute resolution clause which provides for the appointment of arbitrator is based either on treaties or general agreements. Such clauses entrust power and discretion to the appointed Arbitrators to make findings on the behavior of the Host State towards the foreign investors. The parties to an Investment Arbitration are free to engage independent arbitrators to make what are in quintessence; governmental decisions. These dispute resolution clauses which are common to all Investment Arbitrations are carefully drafted to either concur to an institutional arbitration format or an ad-hoc format, depending on the nation and its relevant treaties.

Dispute resolution by way of an institutional format or an ad-hoc basis comes with an elaborate procedure of rules which must be adhered to depending on the format the parties chose. Several treaties are either governed by the terms of International Convention for Settlement of Investment Disputes (“ICSID Convention”) or the UNCITRAL Rules for Arbitration (“UNCITRAL”).The basic structure, procedure and formats of Investment Arbitration are reproduced as follows:

 

The Indian Endeavor

The 1965 ICSID convention[2] created first of its kind forum for resolution disputes between states and the investors (directly), by way of including arbitration clauses in contract between states. India like many other developing countries hasn’t signed or ratified this convention (ICSID). Despite that India has entered into ‘Bilateral Investment Treaties’ commonly known as Bilateral Investment Protection Agreements (“BIPAs”)[3]with many countries, been part of various arbitrations and even had two major Investment Arbitration awards against it. The obligations that the contracting parties i.e. The Government of India and the foreign Investor are largely independent of the domestic legal systems, thereby pave way for public international law. The following are the essential clauses which involves BIT/BIPA:

  1. Applicability
  2. Fair and Equitable Treatment (FET)
  3. Full Protection and Security
  4. Most favored nation treatment (MFN)
  5. Expropriation
  6. Dispute Resolution Regime

India signed its first BIT with the United Kingdom[4] in 1994, and since then has signed more than 83 BITs with various nations across the globe, out of which 72 are still in force, while the remaining ones have not been enforced. Although India promises to be one of the most attractive destinations for FDI, but the relaxation of FDI norms still does not gel with many states making India a difficult jurisdiction to do business with.[5] Consequently, the investor-state disputes are inevitable.

The Union Government released the text for the new Model Indian BIT in December 2015[6]. This new Model BIT contains some controversial and debatable clauses, such as the updated ‘Most Favoured Nation’ (‘MFN”) clause, which may not gel with the interests of many contracting states. The issue of lack of awareness and the prevalence of misconceptions on BIT’s and BIPA’s implies that the investors are consequently unaware of all the protections that are afforded by such Investment Treaties. Under the Indian regime, the Investors should keep the following points in mind:[7]

  1. The conceptual framework of an ‘investment’ covers multitude of activities and contributions that might broadly be said to lead to acquisition of any right or asset by the investor.
  2. The protection afforded by investment treaties is usually in addition to the normal contractual rights that the investor will have against its counterpart.
  3. The protection afforded by investment treaties are directly enforceable by the investor against the Host State- often through international arbitration and without the need to litigate in the Host State’s Courts.
  4. Indian investment treaties do not just benefit foreign investors investing into India; claims can also be brought by Indian investors against foreign governments.

But much stands to be changed now as recently the Union Minister for Commerce and Industry has announced that the Indian Government intends to unilaterally terminate all existing BITs by 31st March, 2017. The Government of India had already conveyed this to all the contracting states of the existing BITs. What the Indian Government wants to convey with this is the intent to sign new BITs based on the new Model BIT that it published in December 2015, replacing all the existing BITs.

This comes at a juncture when around 23 BITs between India and various EU nations are on the verge of renewal/replacement. These numbers make the Indian BIT programme one of the biggest amongst developing countries. This bilateral regulatory framework is significant in terms of its effect on the domestic regulatory behavior of India as regards investment inflows from its treaty partners. The basic idea that persists is that investments and investor covered under the BITs are not to be put under risks, which are inappropriate or unreasonable.[8] The current Indian BITs do not give ‘a right to make investments’ in India. This is one of the most noticeable features of the BITs to which currently India is a party. Thus, what it conveys is that the rights under the BITs can only be exercised after making Investments in India.

White Industries vs. Republic of India

The dispute in this matter between Coal India Ltd. (a PSU) and White Industries (Australian Company) arose out of an ICC Arbitration Clause in relation to contract of development of a mine in Piparwar in India, valued at 206.6 Australian Dollars (AUD). The Arbitration whose seat was fixed in Paris resulted in effecting the Republic of India with an award worth 4.06 Million Dollars in favor of White Industries. In pursuance to the legal battle with respect the enforcement of such award, it is in 2009 when White Industries invoked the provisions of the India-Australia BIT, and opted for Investor-State Dispute Resolution. As a result, an Ad Hoc tribunal was constituted and the Investment Arbitration proceedings were conducted according to UNCITRAL Arbitration Rules.

The Tribunal observed in its award dated November 30, 2011[9], that “India had breached its obligation to provide effective means of asserting claims and enforcing rights”. What led the Republic of India to such knell was the “Most Favoured Nation” (MFN) clause which entailed the India-Australia BIT. White Industries had argued that Article 4(5) of the India- Kuwait BIT, made it mandatory for the host State to provide “effective means of asserting claims and enforcing rights” to investors, would be applicable to the India-Australia BIT as well, owing to MFN clause in the India-Australia BIT.

Antrix Devas Case[10]     

In 2005, an agreement to lease out satellite spectrum was entered into between ‘Antrix’, the commercial arm of Indian Space Research Institute (ISRO) and ‘Devas Multimedia’, a Bangalore based company backed by Mauritius based foreign investors. Under the agreement, Antrix was to provide the spectrum to Devas Multimedia on lease for a period of 12 years, in return of payment of 30 million dollars as fees upfront. But in 2011, ISRO annulled the above agreement citing ‘larger national and local interests’. Devas Multimedia initiated International Commercial Arbitration proceedings under an ICC Arbitration Tribunal. This resulted in an award of Rs.4,400 crores. Simultaneously, Devas Multimedia also initiated Investor-State dispute resolution proceedings against Antrix under the India-Mauritius BIT, as Devas Multimedia was backed by foreign investors. What followed was an award against India under the Investment Treaty Arbitration by the Tribunal at Permanent Court of Arbitration (PCA) at The Hague in July 2016. The tribunal ruled that annulment of Devas-Antrix agreement amounted to ‘expropriation’ and resulted in breach of treaty commitments under India-Mauritius BIT, to accord ‘Fair and Equitable Treatment’ to Devas’ foreign investors.

Besides the White Industries and Antrix-Devas awards, India has received several notices for Investment Treaty Arbitration under various BITs by several investors. Pending claims against India include challenges to various regulatory measures such as cancellation of telecom licenses and imposition of retrospective taxes. As on date, there are fourteen known pending proceedings of claims brought against India. Due to the adverse award in the White Industries case and several other notices for Investment Treaty Arbitrations under various BITs, the focus on BITs got renewed. The White Industries case in particular compelled India to rethink its BIT program. Consequently, the Union Government of India undertook a review of the 2003 BIT Model and what followed was the new Model BIT of India in March 2015.

India has given notice of unilateral termination of 58 BITs on 31st March 2017 and it is in process of signing some crucial BITs, such as the US-India BIT. All of this in conjunction with India’s aim of increasing foreign investment flow into the country makes the topic BITs and Investment Treaty Arbitration all the more important.

Conclusion

A spectrum of recent incidents ranging from cancellation of 2G licenses, retrospective tax amendments etc. have resulted in the issuance of BIT Notices to the Government of India. Furthermore, the main problem with India’s new Model BIT lies in its ‘Dispute Resolution ‘clause. The pre-requisite of exhausting and pursuing all domestic remedies before bringing claims under the BIT is a redundant course of action as the same could render the whole purpose of BIT futile. However, the Indian government in its counter strike to avoid claims under the BITs is rather creating a plethora of future disdains. The need of the hour demands an amended ‘Dispute Resolution’ clause of the Indian Model BIT of 2015 which is more pragmatic. In order to achieve this, the Indian government has to work hand in glove with the Indian Judiciary to promote a regime of a rapid inland dispute resolution mechanism.

(The author would like to thank Kanika Tandon, Associate of the firm for the valuable assistance in researching for this article.)

 

[1] Cable, James. “Gunboat Diplomacy: Political Applications of Limited Naval Force” Chatto and Windus for the Institute for Strategic Studies, 1971, p. 10.

In international politics, Gunboat Diplomacy (or “Big Stick ideology” in U.S. history) refers to the pursuit of foreign policy objectives with the aid of conspicuous displays of naval power – implying or constituting a direct threat of warfare, should terms not be agreeable to the superior force. For instance- Great Britain, Germany, and Italy sent warships to the Venezuelan coast to demand reparation for the losses incurred by their nationals when Venezuela defaulted on its sovereign debt.

[2] Campbell MCLachlan et al., International Investment Arbitration: Substantive Principles, 315-49 (2008) as cited in S. I. Strong, Mass Procedures in Abaclat v. Argentine Republic: Are They Consistent with the International Investment Regime? 3 Yearbook on International Arbitration (Forthcoming), at p. 17.

[3] Bilateral Investment Promotion and Protection Agreements, Ministry of Finance, Government of India, available at http://www.finmin.nic.in/bipa/bipa_index.asp http://finmin.nic.in/bipa/bipa_index.asp?pageid=1

[4] Bilateral Investment Promotion and Protection Agreements, Ministry of Finance, Government of India, available at http://www.finmin.nic.in/bipa/bipa_index.asp http://finmin.nic.in/bipa/bipa_index.asp?pageid=1

[5] India an Attractive FDI Destination, Ministry of External Affairs, Government of India, Investment and Technology Promotion Division, available at http://indiainbusiness.nic.in/newdesign/index.php?param=advantage/171; Fact Sheet on Foreign Direct Investment, DIPP available at http://dipp.nic. in/English/Publications/FDI_Statistics/2014/india_FDI_March2014.pd

[6] Article 14.7 (i) of the Indian Model BIT text of 2015- “Applicable Rules- (i) The arbitration shall be conducted under the Arbitration Rules of the United Nations Commission on International Trade Law inforce at the time of the commencement of the dispute or any other rules agreed to -between the parties in writing prior to the commencement of arbitration, and as modified by this Treaty.”

[7] V. Inbavjayan & Kirthi Jayakumar; Arbitration and Investments – Initial Focus, Indian Journal of Arbitration Law, Volume II, Issue 1.

[8]https://www.mygov.in/sites/default/files/master_image/Model%20Text%20for%20the%20Indian%20Bilateral%20Investment%20Treaty.pdf

[9]  https://www.italaw.com/sites/default/files/case-documents/ita0906.pdf

[10] Antrix Corporation Limited v. Devas Multimedia Pvt. Ltd. (2014) 11 SCC 560

The Fate of Automatic Stay on Section 34 Petitions Filed Post Amendment

Madhu Sweta


22/08/2017  

INTRODUCTION

The Division bench[1] of the Delhi High Court (“HC”) in a batch of Petitions titled, “Ardee Infrastructure Pvt. Ltd. v. Ms. Anuradha Bhatia & Ardee Infrastructure Pvt. Ltd. v. Yashpal & Sons”[2] augments more ambiguity to the already existing controversy with regard to the applicability of the amended provisions viz. Section 34 and Section 36 of the Arbitration and Conciliation (Amendment) Act, 2015 (“The Amendment Act”).

The HC observed that all petitions filed under Section 34 of the Arbitration and Conciliation Act, 1996 (“The Act”) prior to the amendment i.e. 23.10.2015, would be considered under the unamended provisions of the 1996 Act and consequently, the contesting party would be entitled to automatic stay of enforcement of the award till the disposal of the said petitions.

The Bench keeping Section 26 of The Amendment Act as the axis of the dispute, not only discusses the applicability of the amended Section 34 and Section 36(2), 36(3) of The Amendment Act, but also hinges out the much awaited interpretation of Section 26 of The Amendment Act in regard to arbitral and court proceedings. It thus pivots a clear interpretation of the amended section, thereby adding to the spectrum of conflicting decisions.

FACTUAL BACKGROUND:

An Arbitration notice was sent on 07.06.2011 by the Respondents. The statement of claim was filed in February 2013 and an interim award was made on 10.07.2014. The final award was made by the Arbitral tribunal on 13.10.2015. The batch petitions challenging the award under Section 34 was however filed on 04.01.2016.

On 31.05.2016, learned Single Judge of the HC passed an order directing the Appellants to deposit Rs. 2.70 crores without prejudice to the rights and contentions of the parties. It was further directed that failure to make such a deposit would result in dismissal of objections filed by the Appellant under Section 34 of The Act whereas successful deposit of the said amount would amount to issuance of notice to the Respondents regarding the objections filed by the Appellants under Section 34.

The Appellants contended that their petitions under Section 34 of The Act shall be governed by the unamended provisions and they shall thus have the right to an automatic stay on the award upon filing the said petitions. Whereas the Respondents argued that the amended provisions shall apply thereby denying an automatic stay to the Appellants and requiring them to deposit Rs.2.70 crores as ordered by the Court.

ARGUMENTS BY THE APPELLANT:

  1. The Act gives a vested right in the form of an automatic stay on the enforcement of an award to a party filing an objection under Section 34. However, The Amendment Act, by virtue of Section 36(2) and Section 36(3) takes away such right.
  2. Section 26 of The Amendment Act[3] does not express any intention of retrospective operation; and therefore the amended provisions of Sections 34 and 36 would have a prospective operation and would not be applicable to the present case. In such scenario, Section 6 of the General Clauses Act, 1897[4] would be applicable which states that the repeal of an enactment would not affect any right accrued or acquired under the previous enactment, unless a different intention appears in the repealing act.

ARGUMENTS BY THE RESPONDENTS:

  1. The legislature in the first half of Section 26 of The Amendment Act has deliberately used the phrase “to arbitral proceedings” instead of “in relation to arbitral proceedings” to limit its scope so that it cannot be expanded to include post arbitration proceedings (including court proceedings).
  2. Section 6 of the General Clauses Act ought not to be resorted because of the use of the restrictive phrase in Section 26 of The Amendment Act. Section 6 does not apply to the present case as the legislature deliberately kept “post-arbitral proceedings” outside the application of the first part of Section 26 of The Amendment Act.
  3. Hence, automatic stay can only be viewed as an interim relief and not a right and such relief is not completely taken away but made subject to an order of the Court upon application.

ISSUES:

Whether there is/was any difference in the expressions “to the arbitral proceedings” and “in relation to arbitral proceedings” appearing in the two parts of Section 26 of The Amendment Act?

JUDGMENT:

The HC observed that if a narrow view of the expression “to the arbitral proceedings” is to be taken, then Section 26 of the Amendment Act is silent on those categories of cases where the arbitral proceedings were commenced prior to 23.10.2015 and where the award was made prior to 23.10.2015, but where either a petition under Section 34 was under contemplation or was already pending on 23.10.2015.

If the applicability of the amendments to both parts of Section 26 is treated differently, it would lead to serious inconsistencies especially in the interplay between Section 9 and 17, where the court proceedings (in relation to arbitral proceedings which commenced before the amendment) would be under Section 9 of the new Amendment Act and the arbitral proceedings (which commenced before the Amendment) would have to be under the old regime (including Section 17).

The Court further classified all arbitral proceedings which commenced in accordance with Section 21, prior to 23.10.2015 into three categories:

  1. where the arbitral proceedings had commenced prior to 23.10.2015 and were pending before an arbitral tribunal on 23.10.2015;
  2. where the arbitral proceedings had commenced prior to 23.10.2015 and the award was also made prior to 23.10.2015, but the petition under Section 34 seeking the setting aside of the award was made after 23.10.2015;
  3. Where the arbitral proceedings had commenced prior to 23.10.2015 and not only the award was made prior to 23.10.2015, but the petition under Section 34 had also been instituted before court prior to 23.10.2015.

With respect to these categories the HC opined that if the first part of Section 26 would only deal with the first category of cases i.e. before arbitral tribunals and not to court proceedings, then nothing in Section 26 of the Amending Act shall pertain to the second or third category of cases.

Thus, if the expression ‘to arbitral proceedings’ used in the first limb of Section 26 is given the same expansive meaning as the expression ‘in relation to arbitration proceedings’ as appearing in the second limb of Section 26, then, the matter becomes very simple and does not result in any anomaly. It would certainly not be the intention of the legislature to have the arbitral tribunal and the courts apply different standard in relation to the same proceedings.

HC while relying on the observations of the Supreme Court in Thyssen Stahlunion Gmbh v. Steel Authority of India Limited[5] held with regard to automatic stay that all aspects of enforceability of an award entail an accrued right both; in the person in whose favour the award is made and against whom the award is pronounced and henceforward, an automatic stay on the award upon filing of petition under Section 34 of The Act was an accrued right in favour of the Appellants. Thus, all the arbitral proceedings (the entire gamut, including the court proceedings in relation to proceedings before the arbitral tribunal), which commenced in accordance with the provisions of Section 21 of the said Act prior to 23.10.2015, would be governed, subject to an agreement between the parties to the contrary, by the unamended provisions and, all those in terms of the second part of Section 26, which commenced on or after 23.10.2015 would be governed by the amended provisions.

Analysis:

Although this decision comes as a refreshing respite for some, it adds to the prevailing confusion infused by the contradictory decisions of various High Courts with regard to the application of the provisions of Section 26 & Section 36 of The Amendment Act, wherein it was opined that ‘arbitral proceedings’ do not include ‘court proceedings’ and thus, the amendments would apply to court proceedings but not to arbitral proceedings. These decisions are discussed as follows:

  1. The Division Bench of Kolkata High Court in Sri Tufan Chatterjee v. Sri Rangan Dhar[6], held that even the pending court proceedings relating to arbitration, which were pending as on date when the amendments were notified, must be governed by The Amendment Act and not the unamended one.
  2. The Madras High Court in the matter of New Tirupur Area Development Corporation Ltd. v. M/s Hindustan Construction Co. Ltd[7], decided against the use of provisions contained in The Amendment Act to court proceedings, for such arbitrations which commenced prior to amendments being notified.
  3. Bombay High Court, adding to the confusion, held in the matters of Rendezvous Sports World v. BCCI[8] that amendments brought to Section 36 of The Act are procedural in nature and further balances the rights of both parties and ordered the BCCI to file an application seeking stay against enforcement of arbitral awards under challenge. This decision is pending adjudication before the Supreme Court of India now.
  4. Although, The Delhi High Court had previously also taken a view contradictory to that of the Bombay High Court and in consonance with the current judgment in the case of Ministry of Defence, Government of India v. Cenrex SP. Z.O.O. & Ors[9], The Court while relying upon Section 6 of the General Clauses Act, came to a conclusion that an Act (or an Ordinance for that matter) cannot have retrospective operation unless so provided in the Act and any vested right in such Act/ provision cannot be deemed to be taken away by means of the amending or the repealing Act.
  5. Amidst the opposing views of different High Courts across the realm, if the ratio of the present case in hand is accepted and followed, then the mere intention and purpose behind the amendment of Section 36 of The Act is lost. Although the present decision may seem plausible enough, but the conflict between these wide-ranging observations and judgments across the nation has to be settled by the Supreme Court at the earliest, giving such polemic it’s logical and peaceful conclusion.

(The author would like to thank Kanika Tandon, Associate of the firm for the valuable assistance in researching for this article.)

[1] Comprising of Hon’ble Mr. Justice BD Ahmed and Hon’ble Mr. Justice Ashutosh Kumar[2] FAO(OS) no. 221/2016 and FAO(OS) No.222/2016, judgment delivered on 06.01.2017[3]Section 26, Nothing contained in this Act shall apply to the arbitral proceedings commenced, in accordance with the provisions of Section 21 of the principal Act, before the commencement of this Act unless the parties otherwise agree but this Act shall apply in relation to arbitral proceedings commenced on or after the date of commencement of this Act.[4] Section 6, Effect of repeal. Where this Act, or any 1 [Central Act] or Regulation made after the commencement of this Act, repeals any enactment hitherto made or hereafter to be made, then, unless a different intention appears, the repeal shall not?

(a) revive anything not in force or existing at the time at which the repeal takes effect; or

(b) affect the previous operation of any enactment so repealed or anything duly done or suffered thereunder; or

(c) affect any right, privilege, obligation or liability acquired, accrued or incurred under any enactment so repealed; or

(d) affect any penalty, forfeiture or punishment incurred in respect of any offence committed against any enactment so repealed; or

(e) Affect any investigation, legal proceeding or remedy in respect of any such right, privilege, obligation, liability, penalty, forfeiture or punishment as aforesaid, and any such investigation, legal proceeding or remedy may be instituted, continued or enforced, and any such penalty, forfeiture or punishment may be imposed as if the repealing Act or Regulation had not been passed.

[5] 1999 (9) SCC 334[6] AIR (2016) Cal 213[7] Application No. 7674 of 2015 in O.P. No. 931 of 2015[8] 2016 SCC Online Bom 255.[9] 2016 (1) Arb LR

Emergency Arbitration in India: Concept and Beginning

Madhu Sweta


22/08/2017  

INTRODUCTION

In the gamut of a sound and systematized International Arbitration, an emergency relief is often described as an “Achille’s Heel”[1]. Emergency Arbitration (EA) in the guise of an emergency relief is an upcoming concept in the field of arbitration suitable for those who want to protect their assets and evidence that might otherwise be altered or lost. Such arbitration is usually agreed to and arranged by the parties themselves without recourse to a Tribunal at the first instance. The proceedings either domestic or international are conducted by an Arbitrator as per the agreement between the parties or with the concurrence of the parties.

AIM & ROLE

The objective of EA is to provide urgent pro tem or conservatory measures to a party or parties that cannot await the formation of an Arbitral Tribunal. The efficacy of an Emergency Arbitration, invoked by a party, survives on a chariot of two wheels:

  1. Fumus boni iuris– Reasonable possibility that the requesting party will succeed on merits;
  2. Periculum in mora – if the measure is not granted immediately, the loss would not and could not be compensated by way of damages.

The main role of Emergency Arbitration comes into play in a situation, when there is no arbitral tribunal in place or in a situation where sufficient time would be wasted in setting up one, depending upon the requirements of an arbitration agreement or the institutional rules. EA proliferates as a promise because of various other defects in the system such as lack of confidence in the national courts to grant urgent reliefs, leakage of confidential information, exaggerated litigation cost, etc. Amongst many, two major procedures have to be ineludibly adopted once a party decides to pursue the remedy of EA:

  1. Filing of proof of service of such application upon the opposite parties.
  2. Payment of the decided fee schedule depending upon the schedule for each center, where such arbitration is to be carried out with an implicit understanding that the application of EA would be limited to signatories to the Arbitration agreement or their successors.

POWERS VESTED

An Emergency Arbitration is capable of granting interim measures or conservatory relief only for a stipulated period of time. For all purposes, it exercises similar if not same functions as that of an ad hoc tribunal which has been constituted for a limited purpose and would immediately be dissolved, once the purpose is served or the said time frame in which such issues have to be decided, lapses. Most Arbitration Rules across nations follow an ‘opt-out’ policy with respect to emergency which means that only if the agreement between the parties specifically excludes “Emergency Arbitrator Provisions would these provisions not apply in toto.

An Arbitrator appointed for the purposes of an Emergency Arbitration is known as an Emergency Arbitrator. The Emergency Arbitrator exercises the following functions and becomes functus officio after the Interim Order is made:

  1. The Emergency Arbitrator shall, as soon as possible but in any event within two business days of appointment, establish a schedule for consideration of the application for emergency relief.
  2. Such schedule shall provide a reasonable opportunity to all parties to be heard. It may provide for proceedings by way of telephonic conference or on written submissions as alternatives to a formal hearing.
  3. Due to strict time-lines, the emergency arbitrator may never actually hear or consult with the parties apart from certain major clarifications and simply give his order on the basis of the documents and written submissions placed before him.
  4. Timelines do vary under various International Arbitration rules, but a typical emergency arbitration takes around eight to ten days from the date of application to the date of award.
  5. The Emergency Arbitrator shall have the powers vested in the Arbitral Tribunal pursuant to these Rules, including the authority to rule on his own jurisdiction, and may order any party to take such interim measure of protection, as the arbitrator may consider necessary considering the subject matter of the dispute.
  6. The nature of the interim orders include asset freezing orders, both prohibitive and mandatory injunctions, orders for the preservation and inspection of evidence, preventive orders to avoid misuse of intellectual property or confidential information as well as anti-suit injunctions.

Although the emergency arbitrator’s order is not binding on the arbitral tribunal with respect to any question, issue or dispute determined, yet, the interim order has to be definitely varied, discharged or revoked, in whole or in part, by a subsequent order or award made by the Arbitral Tribunal upon application by any party or upon its own initiative.

LAW COMMISSION’S REPORT:

In order to recognise emergency arbitrations, The Law Commission’s 246th Report[2] on amendments to the Arbitration and Conciliation Act, 1996, proposed an amendment to Section 2(d) of the Act. This amendment was to ensure that institutional rules such as the SIAC Arbitration Rules, or ICC Rules or any other rule which provide for an appointment of an emergency arbitrator are given statutory recognition in India:

“Section 2(d): “Arbitral tribunal” means a sole arbitrator or a panel of arbitrators and, in the case of an arbitration conducted under the rules of an institution providing for appointment of an emergency arbitrator, includes such emergency arbitrator.”

It was expected that the Arbitration and Conciliation (Amendment) Act, 2015[3] would embrace this global turn of tide and create provisions for appointment of Emergency Arbitrator. The Amendment of 2015, however, failed to incorporate the recommendation of the Law Commission and does not provide at all for Emergency Arbitration.

INDIA’S INITIATIVE TOWARDS EA:

Notwithstanding the fact that the term “Emergency Arbitration” is omitted from the amended Arbitration and Conciliation (Amendment) Act, a new move has emerged by way of which, arbitration institutions are trying to absorb the term “Emergency Arbitration” in their rules and are making simultaneous procedures thereof. Although, the Indian arbitral institutions statutorily are not cogent enough (in realm of an expressly omitted provision), yet they have framed rules which are by large synonymous to the leading international arbitration institutional rules. Some notable institutions with their respective regulations are:

  1. The Delhi International Arbitration Center (DAC[4]), of the Delhi High Court in Part III of its Arbitration Rules includes “Emergency Arbitration”. Further Section 18A enumerates ‘Emergency Arbitrator’ and further explains the appointment, procedure, time period and powers of an Emergency Arbitrator.
  2. Court of Arbitration of the International Chambers of Commerce-India, under Article 29 of the ‘Arbitration and ADR Rules’ r/w Appendix V enumerate the provisions of EA and Emergency Arbitrator.
  3. International Commercial Arbitration (ICA), under Section 33 r/w Section 36(3) w.e.f 01.01.2014, enumerates the provisions of EA and Emergency Arbitrator.
  4. Madras High Court Arbitration Center (MHCAC) Rules, 2014, under Part IV, Section 20 r/w Schedule A and Schedule D enumerate the provisions of EA and Emergency Arbitrator.
  5. Mumbai Center for International Arbitration (Rules) 2016, under Section 3 w.e.f 15.June.2016 enumerates the provisions of EA and Emergency Arbitrator.
    ENFORCEMENT IN INDIA

Enforcement of a foreign seated award in India is highly unlikely as the enforcement shall only be recognized under Part II of the Arbitration and Conciliation Act, 1996. In accordance with the decision laid down by the Supreme Court of India in BALCO vs. Kaiser Aluminum Technical Services[5], the powers of Indian courts are prospectively excluded to grant interim relief in relation to foreign seated arbitrations.

However, India’s approach towards an EA order is that of ancillary enforceability. Judicial decisions concerning emergency arbitration are scant. In the leading cases of HSBC v. Avitel[6] and Raffles Design International India Private Limited & Ors. v. Educomp Professional Education Limited & Ors[7], the Bombay High Court and the Delhi High Court respectively, have emerged as the torch bearers wherein interim reliefs were granted by the Courts in sync with the order of the Emergency Arbitrator. However, a glaring difference between both of these orders is the fact, whether the ratio of BALCO applies to the said cases or not.

HSBC v. Avitel : The case involved an arbitration agreement in which the parties reserved their right to seek interim reliefs before the national Courts of India, even though the Arbitration was conducted outside the country. The parties resorted to EA seated in Singapore, where a favorable order was given to the party who sought to enforce the same in India. The Bombay High Court while upholding the award of the Emergency Arbitrator and granting interim relief observed that the ‘…petitioner has not bypassed any mandatory conditions of enforceability.[8]’ since it was not trying to obtain a direct enforcement of the interim award. It is germane to note that the subject agreements were entered into between the parties prior to the BALCO judgment, thus the ratio decidendi of BALCO did not apply to this case.

Raffles Design International India Private Limited & Ors. v. Educomp Professional Education Limited & Ors : The case involved an arbitration agreement which was governed and construed in accordance with the laws of Singapore. The parties resorted to EA seated in Singapore, wherein an interim order was passed, which was later enforced in the High Court of the Republic of Singapore. The party who obtained the favorable order later filed an application under the amended Section 9 of The Arbitration and Conciliation (Amendment) Act, 2015 seeking interim reliefs alleging that the other party is acting in contravention to the orders passed in the Emergency Award. The Delhi High Court while allowing the maintainability of such petitions highlighted the relevancy of the amended Section 2(2) of the Act. The proviso to Section 2(2) of the amended act has widened the ambit of the powers invested in the Court to grant interim reliefs, as Section 9 shall now apply to international commercial arbitrations, even if the place of arbitration is outside India. It is germane to note, that the subject agreements were entered between the parties after the BALCO judgment. The main matter is yet to be decided on merits by the Delhi High Court.

GLOBAL SCENARIO

Presently, the Singapore International Arbitration Centre (SIAC)[9], the Stockholm Chamber of Commerce (SCC),[10] the Swiss Chambers Arbitration Institution (SCAI)[11], the Mexico City National Chamber of Commerce (CANACO)[12], and the Netherlands Arbitration Institute (NAI)[13] provides for both expedited formation of the Arbitral tribunal as well as the EA. Whereas, the London Court of International Arbitration (LCIA)[14], and the Hong Kong International Arbitration Centre (HKIAC)[15], the International Centre for Dispute Resolution of the American Arbitration Association (ICDR/AAA)[16] and the International Chamber of Commerce (ICC) [17] have opted to provide solely for EA.

Asian Jurisdictions such as Singapore and Hong Kong are considered to be torch bearers. Both countries have passed amendments to provide express recognitions to the interim orders of the Emergency Arbitrator. The Singapore International Arbitration Act has amended its definition of ‘arbitral tribunal’ to bring Emergency Arbitrator within its ambit. Similarly, Hong Kong amended its Arbitration Ordinance by inserting Part 3A which further allows the recognition and enforcement. Following the lead, the London Court of International Arbitration (LCIA)[18], American Arbitration Association (AAA)[19] and International Chamber of Commerce (ICC) have also amended their rules to incorporate this new concept which not only saves time and money, but also expedites the process and makes the amendments enforceable in nature.

The New York Convention only recognizes a final award which can be enforceable in nature and not an interim order. The order is tested on the touchstone of finality under the said convention. In a 2013 case before the District Court of New York concerning the EA order in Yahoo! Inc. v. Microsoft Corporation case[20], Yahoo’s motion to vacate an EA award was rejected. The Court found that the relief awarded by the Emergency Arbitrator was, “in essence final” and therefore confirmed it for the purposes of recognition and enforcement. The Court, reasoned that the Emergency Arbitrator is not barred from awarding final reliefs for the purposes of preserving status quo in the subject matter, irrespective of the fact that a final award of the Arbitral Tribunal is yet to follow.

However, in 2011, Southern District Court of California came to the opposite conclusion in Chinmax Medical Systems v. Alere San Diego[21]. In this case, the Court addressed a request to vacate a decision of an emergency arbitrator. The Court denied jurisdiction purporting that the decision was not final and binding for the purposes of the NY Convention.

CONCLUSION

The emergency arbitrator’s order shall take the form of an interim award which the parties undertake to comply with. In the event that a party fails to comply with such order, it may be enforceable in nature under the provisions of various national laws depending upon the discretion of national courts and national laws which may or may not include Emergency Arbitration provisions.

Although, Emergency Arbitration steps in as a turning tide for the global scenario in view of injunctions in Arbitration proceedings, India still awaits a formal statutory recognition of the awards of the Emergency Arbitrator.

(The author would like to thank Kanika Tandon, Associate of the firm for the valuable assistance in researching for this article.)

[1] Martin Davies, Court ordered Interim measures in aid of International Commercial Arbitration, 17 AM, Rev. Int’l Arb. 299, 300 (2006).

An Achilles’ heel is a weakness in spite of overall strength, which can actually or potentially lead to downfall. In Greek mythology, when Achilles was a baby, it was foretold that he would die young. To prevent his death, his mother took Achilles to the River Styx, which was supposed to offer powers of invulnerability, and dipped his body into the water; however, as Thetis held Achilles by the heel, his heel was not washed over by the water of the magical river. Achilles grew up to be a man of war but, One day, a poisonous arrow shot at him was lodged in his heel, killing him shortly afterwards.

[2] The Law Commission’s 246th Report dated 05.08.2014.[3]The Arbitration and Conciliation (Amendment) Act, 2015 (No. 3 of 2016), dt. 31.12.2015, w.r.e.f. 23.10.2015.[4] Delhi International Arbitration Center (DAC)[4], Part III, Section 18A.[5] BALCO Kaiser Aluminum Technical Services (2012) 9 SCC 552[6] HSBC PI Holdings (Mauritius) Ltd. v. Avitel Post Studioz Ltd & Ors., Arbitration Petition No. 1062/2012 dated January 22nd, 2014.[7] Raffles Design International India Private Limited & Ors. v. Educomp Professional Education Limited & Ors, O.M.P (I) (Comm.) 23/2015, CCP(O) 59/2016 and IA Nos. 25949/2015, 2179/2016 dated October 7th, 2016.[8] HSBC PI Holdings (Mauritius) Ltd. v. Avitel Post Studioz Ltd & Ors., Arbitration Petition No. 1062/2012 dated January 22nd, 2014, Para 89.[9] Singapore International Arbitration Center (SIAC) included the provision for Emergency Arbitration only in July 2010. The International Chamber of Commerce (ICC) included Emergency Arbitration Provisions in the 2012 Rules via Article 29 and Appendix V[10] SCC Rules (2010), Expedited Rules and Appendix II.[11] Swiss Rules (2012),Articles 42–43[12] CANACO Rules (2008), Articles 36 and 50.[13] NAI Rules (2010) Articles 42a and 42b.[14] London Court of International Arbitration (LCIA) amended its Rules of 1988 in 2014 to create a provision for Emergency Arbitration (Article 9).These rules are applicable to agreements concluded on or after 01.10.2014, unless the parties opt-in[15] HKIAC Administered Arbitration Rules (2008) Article.38.[16] ICDR / AAA Rules (2006), Article.37.1.[17] ICC Rules (2012) , Article 29(1) and Appendix II.[18] London Court of International Arbitration (LCIA) amended its Rules of 1988 in 2014 to create a provision for Emergency Arbitration (Article 9).These rules are applicable to agreements concluded on or after 01.10.2014, unless the parties opt-in[19] American Arbitration Association (AAA) issued revision to its Rules on 08.09.2013. Rule 38 particularly deals with Emergency Arbitration.[20] Yahoo! Inc. v. Microsoft Corporation, United States District Court, Southern District of New York, 13 CV 7237, October 21, 2013.[21] Chinmax Medical Systems Inc., v. Alere San Diego, Inc., Southern District of California, Case No. 10cv2467 WQH (NLS), May 27, 2011.

Contributions Made By Employer Toward Social Security Funds Are Not A Taxable Perquisite

Madhu Sweta


22/08/2017  

The Hon’ble High Court of Delhi recently decided the issue of taxability of social security, pension and medical contributions made by the employer company on behalf of the employee. The issue was decided disposing of a series of connected appeals on the same issue vide a common judgment in the case of Yoshio Kubo Vs Commissioner of Income Tax (ITA 441/2003).

ISSUE

Whether contributions made by a foreign employer towards foreign social security schemes, on behalf of an employee seconded to work in India, are in the nature of perquisites and liable to be included in taxable salary under Section 17(1) of the Income Tax Act, 1961?

COMMON BACKGROUND OF FACTS:

The employees (assessees) of foreign employers were seconded to work in Indian subsidiaries or in the Indian operations of the foreign company. The employers made contributions towards the social security benefits of the employees in accordance with the laws and regulations of their respective countries. The Revenue contended that all such contributions were for the benefit of the employees and vested in them. What is determinative is the purpose or objective of the expenditure. Hence, it is taxable income of the employees under Section 17(1) by classifying them as perquisites. The employees on the other hand, contended that the contributions do not ‘vest’ in them at the time of payment and that the monetary benefits accrue only at the time the payments are withdrawn hence, the contributions are not taxable.

The Assessing Officer has treated the contribution made by the Employers as a ‘perquisite’ and thereby, adding it to the salary as taxable. This was challenged before the Income Tax Appellate Tribunal (ITAT) who allowed the employees’ appeals and held that the social security and pension fund contributions are not taxable. Hence, the Revenue had come in appeal before the Delhi High Court.

ARGUMENTS ADVANCED BY THE REVENUE

The Revenue contended that the contributions made are in the nature of perquisites and are to be included in taxable salary under Section 17(1) of the Income Tax Act, 1961. This is evident from the definition of the term ‘perquisite’ to mean any payment made for the benefit of the employee. Thus, the contributions vest in the employees irrespective of the time when it was to be paid.

The Income Tax Act, 1961 distinctly differentiates between approved and unapproved funds. Section 17(2)(v) of the Act exempts certain specific funds from being included as perquisites. Hence, contributions to the remaining unapproved funds, “….to effect, an assurance on the life of the employees or to effect a contract for an annuity” are perquisites, and forms part of taxable salary.

The Revenue submitted that the ITAT’s reliance on the decision of Hon’ble Supreme Court of India in Commissioner of Income Tax vs. L.W. Russel AIR 1965 AIR SC 49 (hereinafter referred to as ‘L.W.Russel’) was misplaced. The judgment in the case of L.W.Russel cannot be considered as binding in view of the change in the wordings of the 1961 statute and that the test adopted in L.W.Russel of ‘whether the payment ‘vests’ in the employee’ cannot be given undue importance.

Since, there is no uncertainty of the right of the employees to enjoy the ultimate benefits, the contributions made shall vest in them immediately, even though the occasion or event for their enjoyment may have been postponed.

ARGUMENTS ADVANCED BY THE ASSESSEES

The employees submitted that the social security payments were involuntary payments (made as per law or the policy of the foreign company) and did not confer any benefit in praesenti to the employees. It was emphasized that the benefits arising from the social security contributions made by the employers actually accrue when the funds are withdrawn or disbursed at the time of retirement and no monetary or indirect benefit to the employees was achieved in the financial year under consideration. Despite their objection, the Revenue had failed to establish from the record or through supporting material that any benefit or advantage, either pecuniary or capable of expression in monetary terms accrued during the year in question, and thus the contributions made were not vested in the employees.

It was submitted that even if the contribution is made to an unapproved fund, the employer’s contribution is taxable in the hands of the employee as profit in lieu of salary under section 17(3)(ii) of the Act only when the same is either due to or received by the assesses.

It was further submitted that the findings of the Supreme Court in L.W.Russel are squarely applicable to the present appeals as in L.W.Russel also, the issue was regarding taxability of the employer’s contributions towards premium payable by the employee. It was stated that the Revenue’s contention that Sections 15 & 17 of the Income Tax Act, 1961 are differently worded from Section 7(1) of the old Income Tax Act, 1922 have no merit. Both Section 17 of the 1961 Act and Section 7 of the old Act specify that payments to unrecognized funds are taxable when they are due to the assessees and hence, the judgment in the case of L.W.Russel, which has been followed and upheld by various Courts, is binding even in context of the 1961 Act.

CONCLUSION:

The Hon’ble High Court of Delhi negated the argument of the Revenue that the contribution is vested in the assessees at the time of making the payment. In the cases under appeal, the amounts standing to the credit of the pension fund account or social security would remain invested till the assessees withdraws the same or is entitled to receive the same. In this context, the Court considered the finding of the Apex Court in L.W. Russel where it was held that ‘One cannot be said to allow a perquisite to an employee if the employee has no right to the same’. The Hon’ble High Court held that the judgment of L.W.Russel is applicable to the facts of the present case.

The Court also relied upon the findings in CIT vs Lala Shri Dhar (1972) 84 NR 192 (Del) and CIT vs Mehar Singh Sampuran Singh Chawla (1973) 90 ITR 219(Del). In the aforesaid judgments, the High Court held that the contributions made by the employer towards a fund established for the welfare of the employees would not be deemed to be a perquisite in the hands of the employees concerned as they do not acquire a vested right in the sum contributed by the employer.

The Hon’ble Delhi High Court considered the construction of Sections 17(2)(v) of the 1961 Act and Section 7(1) of the Indian Income Tax Act, 1922 and held that there is no material change in the new Act as contended by the Revenue. It was observed that Section 7(1) of the old Act excluded from the definition of ‘perquisite’ payments into schemes described under Schedules IXA and IXB. Similarly, Section 17(2)(v) also excludes payments to ‘a recognized provident fund or in an approved superannuation fund or a Deposit-linked Insurance Fund established under section 3G of the Coal Mines Provident Fund and Miscellaneous Provisions Act, 1948 (46 of 1948), or, as the case may be, section 6C of the Employees Provident Funds and Miscellaneous Provisions Act, 1952 (19 of 1952)’ from the definition of ‘perquisite’.

Therefore, the Court held that the amounts paid by employers to pension, or social security funds, or for medical benefits, are not perquisites as defined under Section 17(1)(v) and therefore, are not taxable in the hands of the employee

Blacklisting Of Contractors By The Government And Public Sector Undertakings

Madhu Sweta


22/08/2017  

A contractual relationship necessarily implies consensus of two minds, and a private citizen is free to contract, with any person of his choice. This right by definition is inherent in every person capable of entering into a contract and where a person has the right to make a contract, he also has a concomitant right not to make a contract. The right to refuse to contract does not vest with the Government, its instrumentalities, or Public Sector Undertakings in the same manner as it vests with a common Undertakings citizen. The Government’s right to contract flows from Article 298 of the Constitution. Hence, the parallel right not to contract also rests with the Government who can choose to blacklist any particular person or member of the public. However, this decision has to be taken by the Government reasonably and in accordance with the principles of natural justice. The traditional view that the executive is not answerable in the matter of exercising of prerogative power has long been discarded.

The development of law on this issue began with the full bench decision in the case of V. Punnen Thomas vs State of Kerala . The Petitioner claimed that the decision of deleting the name of the appellant from the list of qualified contractors, in effect, amounts to blacklisting which has serious civil consequences and hence, merits an opportunity of being heard. The majority opinion of the Kerala High Court held that the term ‘civil consequences’ does not imply merely consequences which the person concerned finds unfavourable, but infact means that there must be the possibility of an invasion of some civil rights of that person. It was further held that the principle of audi alteram partem could not be applied in such cases as it could lead to hampering of the administration by widening the scope for judicial interference. However, Justice Mathew in the dissenting opinion held that an act of debarring a public entity or member, for a set number of years, without any notice or opportunity to be heard is against all notions of fairness in a democratic government and cannot be sustained. Interestingly, the dissenting view of Justice Mathew is now the law as the majority view stands overruled by the Supreme Court in the Eurasian case.

In the landmark judgment of Eurasian Equipment & Chemicals Ltd. vs State of West Bengal , the Supreme Court laid down the law for notice to be given before blacklisting. The Petitioner Company who was engaged in the purchase and export of Cinchona had alleged that their tenders were being rejected by the State Government, despite being the highest in most cases. It was contended that this act of the State Government was discriminatory and against the principles of fairness. The State Government submitted that due to charges of malpractice and misconduct, the State Government had resolved not to deal with the Petitioner-company till the charges were cleared. The State Government further submitted that the rights granted under Articles 14, 19 and 21 of the Constitution cannot be used to compel the Government to negotiate or enter into a contract and the Government was free to contract with companies in whom it had “trust for integrity”. The Hon’ble Supreme Court held that the blacklisting order involves serious civil consequences, as in effect it casts a slur on the reputation of the Company. The Court held that the Government being a Government of laws and not of men is bound to act in conformity with the principles of natural justice when interacting with members of the public. An order of blacklisting creates a disability for the concerned person. The fact that a disability is created by the order of blacklisting indicates that the relevant authority is to have an objective satisfaction. Fundamentals of fair play require that the person concerned should be given an opportunity to represent his case before he is put on the blacklist.

Again, in the case of Raghunath Thakur vs State of Bihar , where the State Government had blacklisted the Petitioner without any notice or an opportunity to be heard, it was contended by the State that there was no specific requirement in any rule that a notice had to be given to the Petitioner before a blacklisting order. The Supreme Court held that even if the rules do not specify so, it is an implied principle of law that an order having civil consequences should be passed only after following the principles of natural justice. The blacklisting order in respect of business ventures has serious implications upon the future business of the concerned person and merits an opportunity of being heard and making representations against the order.

The law stands settled that an order of blacklisting attracts the principle of audi alteram partem, but does this duty of the State include any other facet or aspect of the principles of natural justice. In Grosons Phamaceuticals (P) Ltd. vs the State of Uttar Pradesh, the company had been blacklisted by the State Government after issuing a show cause notice. The company submitted that the principles of natural justice require that the show cause notice ought to have been supplied with all materials which formed the basis for issuing show cause notice. The Supreme Court held that it is true that an order blacklisting an approved contractor results in civil consequences and in such a situation in the absence of statutory rules, the only requirement of law while passing such an order was to observe the principle of audi alteram partem which is one of the facets of the principles of natural justice. The contention that it was incumbent upon the respondent to have supplied the material on the basis of which the charges against the appellant were based, was not the requirement of the principle of audi alteram partem. There was sufficient requirement of law that an opportunity of ‘show-cause’ was given to the appellant before it was blacklisted.

In all the cases cited above, the decision to blacklist was taken due to charges of fraudulent or corrupt practices by the affected parties. However, recently the Supreme Court has ruled that an order of blacklisting is sustainable even if it is for dereliction of legal obligation by the concerned person or company. In the case of Patel Engineering Ltd. vs Union of India, the Petitioner-contractor was declared the highest bidder for a development development operation and maintenance project of National Highways Authority of India (NHAI). NHAI called upon the Petitioner to confirm its acceptance who declined stating its inability to confirm the acceptance as, on a subsequent look, the bid was found to be commercially unviable. NHAI sent a show cause notice and after receiving the reply from the Petitioner, blacklisted the company from participating and bidding for future projects for one year. The Supreme Court held that the absence of a contract provision providing for blacklisting is not determinative of NHAI’s authority to blacklist a bidder. The power of NHAI to enter into a contract or not to enter into a contract flows from Section 3 of the National Highways Authority Act which is similar to Article 298 of the Constitution. NHAI being a statutory corporation is bound by the constitutional limitations which binds the State in dealing with members of the public. The Court held that the Petitioner had been given an opportunity of being heard by way of a show cause notice. There is no requirement for the State to give a personal or oral hearing before taking a decision of blacklisting and hence no violation of any principles of natural justice had occurred in the matter to warrant interference by the Court.

Recently, the Calcutta High Court has clarified on the validity of a show cause notice or blacklisting order in cases where an arbitration agreement exists between the parties. In the case of Haldia Bulk Terminal Private limited vs. Board of Trustees for the Port of Kolkata, the Petitioner challenged the show cause notice for blacklisting issued by the Respondent. The Petitioner’s stand was that the show cause notice is covered by the arbitration agreement between them. It would be unfair for the Petitioner to be blacklisted before the arbitral reference is concluded. The Respondent contended that an order to blacklist the Petitioner will only affect the future contracts and is de hors the contract and the arbitration agreement. The High Court held that the mere existence of an arbitration agreement does not preclude the Petitioner from blacklisting the Respondent. The existence of recourse to arbitration or even recourse to civil action cannot prevent an employer from blacklisting the contractor on the basis of the employer’s perception of the contractor’s performance qua the contract. However, the show cause notice for blacklisting and subsequently blacklisting can be challenged on the grounds of arbitrariness and mala fides.

The authority of the State to blacklist a person is a necessary concomitant to the executive power of the State to carry on the trade or the business and making of contracts for any purpose, etc. There need not be any statutory grant of such power. The only legal limitation upon the exercise of such an authority is that the State is to act fairly and rationally without in any way being arbitrary.