Highlights of Amendment to the Arbitration and Conciliation Act 1996 via Arbitration Ordinance 2015

Vikas Goel


1/12/2016  

The Government of India decided to amend the Arbitration and Conciliation Act, 1996 by introducing the Arbitration and Conciliation (Amendment) Bill, 2015 in the Parliament. The Union Cabinet chaired by the Prime Minister, had given its approval for amendments to the Arbitration and Conciliation Bill, 2015 taking into consideration the Law Commission’s recommendations, and suggestions received from stake holders.

In an attempt to make arbitration a preferred mode of settlement of commercial disputes and making India a hub of international commercial arbitration, the President of India on 23rd October 2015 promulgated an Ordinance (“Arbitration and Conciliation (Amendment) Ordinance, 2015) amending the Arbitration and Conciliation Act, 1996.

Amendments

The following are the salient features of the new ordinance:

  1. The first and foremost welcome amendment introduced by the ordinance is with respect to definition of expression ‘Court’. The amended law makes a clear distinction between an international commercial arbitration and domestic arbitration with regard to the definition of ‘Court’.  In so far as domestic arbitration is concerned, the definition of “Court” is the same as was in the 1996 Act, however, for the purpose of international commercial arbitration, ‘Court’ has been defined to mean only High Court of competent jurisdiction. Accordingly, in an international commercial arbitration, as per the new law, district court will have no jurisdiction and the parties can expect speedier and efficacious determination of any issue directly by the High court which is better equipped in terms of handling commercial disputes.
  2. Amendment of Section 2(2):  A proviso to Section 2(2) has been added which envisages that subject to the agreement to the contrary, Section 9 (interim measures), Section 27(taking of evidence), and Section 37(1)(a), 37(3) shall also apply to international commercial arbitrations, even if the seat of arbitration is outside India, meaning thereby that the new law has tried to strike a kind of balance between the situations created by the judgments of Bhatia International and Balco v. Kaiser. Now Section 2(2) envisages  that Part-I shall apply where the place of arbitration is in India and that provisions of Sections 9, 27, 37(1) (a) and 37 (3) shall also apply to international commercial arbitration even if the seat of arbitration is outside India unless parties to the arbitration agreement have agreed to the contrary.
  3. Amendment to Section 8: (Reference of parties to the dispute to arbitration): In Section 8, which mandates any judicial authority to refer the parties to arbitration in respect of an action brought before it, which is subject matter of arbitration agreement . The sub-section(1) has been amended envisaging that notwithstanding any judgment, decree or order of the Supreme Court or any court, the judicial authority shall refer the parties to the arbitration unless it finds that prima facie no valid arbitration agreement exists. A provision has also been made enabling the party, who applies for reference of the matter to arbitration, to apply to the Court for a direction of production of the arbitration agreement or certified copy thereof in the event the parties applying for reference of the disputes to arbitration is not in the possession of the arbitration agreement and the opposite party has the same.
  4. Amendment to Section 9 (Interim Measures): The amended section envisages that if the Court passes an interim measure of protection under the section before commencement of arbitral proceedings, then the arbitral proceedings shall have to commence within a period of 90 days from the date of such order or within such time as the Court may determine. Also, that the Court shall not entertain any application under section 9 unless it finds that circumstances exist which may not render the remedy under Section 17 efficacious. The above amendments to Section 9 are certainly aimed at ensuring that parties ultimately resort to arbitration process and get their disputes settled on merit through arbitration. The exercise of power under Section 9 after constitution of the tribunal has been made more onerous and the same can be exercised only in circumstances where remedy under Section 17, appears to be non-efficacious to the Court concerned.
  5. Amendment to Section 11 (Appointment of Arbitrators): In so far as section 11, “appointment of arbitrators” is concerned, the new law makes it incumbent upon the Supreme Court or the High Court or person designated by them to dispute of the application for appointment of arbitrators within 60 days from the date of service of notice on the opposite party. As per the new Act, the expression ‘Chief Justice of India’ and ‘Chief Justice of High Court’ used in earlier provision have been replaced with Supreme Court or as the case may be, High Court, respectively. The decision made by the Supreme Court or the High Court or person designated by them have been made final and only an appeal to Supreme Court by way of Special Leave Petition can lie from such an order for appointment of arbitrator. The new law also attempts to fix limits on the fee payable to the arbitrator and empowers the high court to frame such rule as may be necessary considering the rates specified in Fourth Schedule.
  6. Amendment to Section 12: Amendment to Section 12, as per the new law makes the declaration on the part of the arbitration about his independence and impartiality more onerous. A Schedule has been inserted (Fifth Schedule) which lists the grounds that would give rise to justifiable doubt to independence and impartiality of arbitrator and the circumstances given in Fifth Schedule are very exhaustive. Any person not falling under any of the grounds mentioned in the Fifth Schedule is likely to be independent and impartial in all respects. Also, another schedule (seventh schedule) is added and a provision has been inserted that notwithstanding any prior agreement of the parties, if the arbitrator’s relationship with the parties or the counsel or the subject matter of dispute falls in any of the categories mentioned in the seventh schedule, it would act as an ineligibility to act as an arbitrator. However, subsequent to disputes having arisen, parties may by expressly entering into a written agreement waive the applicability of this provision. In view of this, it would not be possible for Government bodies to appoint their employees or consultants as arbitrators in arbitrations concerning the said Government bodies.
  7. Amendment to Section 14: Amendment of Section 14 aimed at filling a gap in the earlier provision, which only provided for termination of mandate of the arbitrator. If any of the eventualities mentioned in sub-section (1) arises. The new law also provides for termination of mandate of arbitration and substitution and his/her substitution by another one.
  8. Amendment to Section 17 (Interim Measures by Arbitral tribunal): The old Act had lacunae where the interim orders of the tribunal were not enforceable. The Amendment removes that lacunae and stipulates that an arbitral tribunal under Section 17 of the Act shall have the same powers that are available to a court under Section 9 and that the interim order passed by an arbitral tribunal would be enforceable as if it is an order of a court. The new amendment also clarifies that if an arbitral tribunal is constituted, the Courts should not entertain applications under Section 9 barring exceptional circumstances.
  9. Amendment to Section 23: The new law empowers the Respondent in the proceedings to submit counter claim or plead a set-off and hence falling within the scope of arbitration agreement.
  10. Amendment to Section 24: It requires the arbitral tribunal to hold the hearing for presentation of evidence or oral arguments on day to day basis, and mandates the tribunal not to grant any adjournments unless sufficient causes shown.  It further empowers the tribunal the tribunal to impose exemplary cost where adjournment is sought without any sufficient cost.
  11. Insertions of new Section 29A and 29B( Time limit for arbitral award and Fast Track Procedure): To address the criticism that the arbitration regime in India is a long drawn process defying the very existence of the arbitration act, the Amended Act envisages to provide for time bound arbitrations. Under the amended act, an award shall be made by the arbitral tribunal within 12 months from the date it enters upon reference. This period can be extended to a further period of maximum 6 months by the consent of the parties, after which the mandate of the arbitrator shall terminate, unless the Court extends it for sufficient cause or on such other terms it may deem fit. Also, while extending the said period, the Court may order reduction of fees of arbitrator by upto 5% for each month such delay for reasons attributable to the arbitrator. Also, the application for extension of time shall be disposed of by Court within 60 days from the date of notice to the opposite party. The Ordinance also provides that the parties at any stage of arbitral proceeding may opt for a fast track procedure for settlement of dispute, where the tribunal shall have to make an award within a period of 6 months. The tribunal shall decide the dispute on the basis of written pleadings, documents and submissions filed by the parties without oral hearing, unless the parties request for or if the tribunal considers it necessary for clarifying certain issues. Where the tribunal decides the dispute within 6 months, provided additional fees can be paid to the arbitrator with the consent of the parties.
  12. Amendment to Section 25: The new Act empowers the tribunal to treat Respondent’s failure to communicate his statement of defence as forfeiture of his right to file such statement of defence. However, the tribunal will continue the proceedings without treating such failure as admission of the allegations made by the Claimant.
  13. Amendment to section 28: The new law requires the tribunal to take into account the terms of contract and trade usages applicable to the transaction. In the earlier law, the arbitral tribunal was mandated to decide disputes in accordance with the terms of the contract and to take into account the trade usages applicable to the transaction. To that extent, the new law seeks to relieve the arbitrators from strictly adhering to the terms of the contract while deciding the case. However, the arbitrator can still not ignore the terms of the contract. Therefore, the new amendment seems to bring in an element of discretion in favour of the arbitrators while making of an award.
  14. Amendment to Section 31: This provides for levy of future interest in the absence of any decision of the arbitrator, on the awarded amount @2% higher than current rate of interest prevalent on the date of award. The current rate of interest has been assigned the same meaning as assigned to the expression under Clause (b) of Section 2[1] of the Interest Act, 1978.
  15. In addition, the new Act lays down detailed parameters for deciding cost, besides providing that an agreement between the parties, that the whole or part of the cost of arbitration is to be paid by the party shall be effective only if such an agreement is made after the dispute in question had arisen. Therefore, a generic clause  in the agreement stating that cost shall be shared by the parties equally, will not inhibit the tribunal from passing the decision as to costs and making one of the parties to the proceedings to bear whole or as a part of  such cost, as may be decided by the tribunal.
  16. Amendment of Section 34 (Limiting the gamut of Public Policy of India): As per the new amendment, an award passed in an international arbitration, can only be set aside on the ground that it is against the public policy of India if, and only if, – (i) the award is vitiated by fraud or corruption; (ii) it is in contravention with the fundamental policy of Indian law; (iii) it is in conflict with basic notions of morality and justice. The present amendment has clarified that the additional ground of “patently illegality” to challenge an award can only be taken for domestic arbitrations and not international arbitrations. Further, the amendment provides that the domestic awards can be challenged on the ground of patent illegality on the face of the award but the award shall not be set aside merely on the ground of an erroneous application of law or by re-appreciation of evidence. The new Act also provides that an application for setting aside of an award can be filed only after issuing prior notice to the other party. The party filing the application has to file an affidavit along with the application endorsing compliance with the requirement of service of prior notice on the other party. A time limit of one year from the date of service of the advance notice on the other parties has been fixed for disposal of the application under Section 34. Significantly, there is no provision in the new Act which empowers the court or the parties to extend the aforesaid limit of one year for disposal of the application under Section 34.
  17. Amendment to Section 36 (Stay on enforcement of award): The Ordinance provides that an award would not be stayed automatically by merely filing an application for setting aside the award under Section 34. There has to be a specific order from the Court staying the execution of award on an application made for the said purpose by one of the parties. The Ordinance aims to remove the lacunae that existed in the previous Act where pending an application under Section 34 for setting aside of arbitral award, there was an automatic stay on the operation of the award. The new law also empowers the Court to grant stay on operation of arbitral award for payment of money subject to condition of deposit of whole or a part of the awarded amount.
  18. Amendment to Section 37:Under Section 37(1), the new law makes provision for filing of an appeal against an order of judicial authority refusing to refer the parties to arbitration under Section 8.
  19. As regards enforcement of certain foreign awards, the new law seeks to add explanation of Sections 48 and 57 thereby clarifying as to when an award shall be considered to be in conflict within public policy of India. The parameters are the same as are provided under Section 34. Similarly, the expression “Court” used in Sections 47 and 56 have been defined to mean only the High Court of competent jurisdiction.

Conclusion

The amendment brought to the 1996 Act is certainly a positive step towards making arbitration expeditious, efficacious and a cost effective remedy. The new amendments seek to curb the practices leading to wastage of time and making the arbitration process prohibitively a costly affair. The new law also makes the declaration by the arbitrator about his independence and impartiality more realistic as compared to a bare formality under the previous regime. Making the arbitrator responsible for delay in the arbitration proceedings, for the reasons attributable to him, would ensure that the arbitrators do not take up arbitrations, which are beyond their capacities. Such a deterrent would imbibe self-discipline and control amongst the arbitrators. It can be said that the present amendments certainly travel an extra mile towards reducing the interference of the Court in arbitration proceedings that has been a consistent effort of the legislature since passing of the 1996 Act.

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

  1. [1] Section (2) (b) : “Current rate of interest” means the highest of the maximum rates at which interest may be paid on different classes of deposits (other than those maintained in savings account or those maintained by charitable or religious institutions) by different classes of scheduled banks in accordance with the directions given or issued to banking companies generally by the Reserve Bank of India under the Banking Regulation Act, 1949 (10 of 1949).

The Real Estate (Regulation and Development) Act, 2016 – An Overview

Vikas Goel


1/12/2016  

Introduction:

Over the past few decades, the demand for housing has increased manifold. Despite Government’s efforts through various schemes, it has not been able to cope up with the increasing demand. Taking advantage of the situation, various private players have taken over the Real Estate Sector, who are completely non-sensitive towards the interests of consumers. Contracts with unfair and one sided conditions have left the consumers helpless and the current existing laws have failed to check the largely unregulated Real Estate and Housing Sector in India. Consequently, consumers are forced to sign on dotted lines with absolutely discriminatory clauses giving the developers unbridled and unreasonable power. Besides, consumers are also unable to procure complete information or even enforce accountability against erring developers in the absence of an effective mechanism. The need for a legislation to regulate Real Estate Sector was felt badly for establishing an effective mechanism to enforce accountability against the Real Estate Sector and providing expeditious adjudication machinery, which ultimately led to passing of “Real Estate (Regulation and Development) Act, 2016”.

The Bill received the assent of the President on 25th March 2016, thus making it a law. It will come into effect on a date to be notified by the Central Government.

The primary purpose of the Act is to restore the confidence of consumers in the Real Estate Sector by introducing transparency and accountability therein. It will also help in accessing the financial and capital markets in the long term goals.

The Real Estate (Regulation and Development) Act, 2016 aims to regulate and promote the real estate sector by regulating the transactions between buyers and promoters of residential as well as commercial projects. It also has provisions for establishing a regulatory authority at state level called “Real Estate Regulatory Authority” (RERA) for monitoring the real estate sector and adjudicating disputes relating to Real Estate Projects. The main aim of the Act is to protect buyers and help investment in Real Estate Sector.

Main Objectives:

  1. enhance transparency and accountability in real estate and housing transactions;
  2. providing uniform regulatory environment to ensure speedy adjudication of disputes and orderly growth of the real estate sector;
  3. boosting domestic and foreign investment in the Real Estate sector;
  4. promote orderly growth through efficient project execution and standardization;
  5. offer single window system of clearance for real estate projects.

Salient Features of the Act:

  1. Establishment and incorporation of Real Estate Regulatory Authority (RERA) at every State in India for monitoring and adjudicating disputes relating to real estate projects (Section 20).
  2. Establishment of fast track dispute resolution mechanism for settlement of real estate disputes through dedicated adjudicating officers and Appellate Tribunal (Section 43 & 44).
  3. Registration of all real estate projects is made mandatory with RERA having territorial jurisdiction over such projects. No sale in a real estate project can be made without registration of the project with RERA (Section 3). RERA can also refuse to register a project, if the same is not compliant with provisions of the Act. Registration of a project can even be cancelled, in case, RERA receives any complaint and the same is found to be correct after inquiry.
  4. It is mandatory for a promoter to upload details of proposed project on the website of RERA, including details of registration, types of apartments or plots booked, list of approvals taken and the approvals which are pending subsequent to commencement certificate, status of the project, sanction plan, layout plan etc. (Section 11).
  5. RERA shall approve or reject the application for registration within 30 days, failing which it shall be deemed to have accepted the application for registration (Section 5).
  6. Any promoter shall not accept a sum more than ten per cent of the cost of the apartment, plot, or building as the case may be, as an advance payment or an application fee, from a buyer without first entering into a written agreement for sale with such person and register the same. (Section 13)
  7. It has been made obligatory for the promoters to deposit 70% of the money collected from buyers for a particular project in a separate account that will cover the cost of land and construction and the same can be withdrawn only after certification from an engineer, an architect and a chartered accountant. [Section 4(2)(l)(D)].
  8. It is now obligatory for all the promoters to obtain insurance in respect of title of the land and buildings and construction of every project. (Section 16).
  9. The promoter shall not transfer or assign his majority rights and liabilities in respect of a real estate project to a third party without obtaining prior written consent from at least 2/3rd no. of allottees, except the promoter, and without the prior written approval of RERA [Section 15(1)].
  10. Both promoter and buyer are liable to pay equal rate of interest in case of any default from either side (Section 2 (za)(i)).
  11. The promoter shall compensate the buyer in case any loss caused to him due to defective title of the land, on which the project is being developed or has been developed, in the manner as provided under this Act, and the claim for compensation under this subsection shall not be barred by limitation provided under any law for the time being in force. (Section 18)
  12. An aggrieved person may file a complaint with RERA, as the case may be, for any violation or contravention of provisions of this Act or rules and regulations made thereunder against any promoter, buyer or real estate agent. (Section 31)
  13. During the pendency of enquiry, RERA can restrain any promoter, buyer or agent from continuing with the act complained of. (Section 36)
  14. A person aggrieved by any direction or decision or order made by RERA or by an adjudicating officer under this Act may prefer an appeal before the Appellate Tribunal having jurisdiction over the matter. (Section 43)
  15. If a promoter continues to violate the provisions of Section 3, he shall be punished with imprisonment for a term which may extend to three years or fine which may extend to ten percent of the estimated cost of the project or both [Section 59(2)].
  16. If a promoter fails to comply with orders or directions of RERA, he shall be liable to a penalty, which may extend up to five percent, of the estimated cost of the project as determined by the Authority (Section 63).
  17. If a promoter fails to comply with the orders or directions of the Appellate Tribunal, he shall be punished with imprisonment for a term which may extend to three years or fine, which may extend up to ten percent of the estimated cost of the project, or with both (Section 64).
  18. Where an Offence under this Act has been committed by a company, every person who, at the time, the offence was committed was in charge of, or was responsible for the conduct of business of the company, as well as the company, shall be deemed to be guilty of the offence and shall be liable to be proceeded against and punished. (Section 69)
  19. No civil court shall have jurisdiction to entertain any suit or proceeding in respect of any matter which RERA or the adjudicating officer or the Appellate Tribunal is empowered by or under this Act to determine and no injunction shall be granted by any court or other authority in respect of any action taken or to be taken in pursuance of any power conferred by or under this Act. (Section 79).

Conclusion:

The Real Estate Act, 2016 is one robust step towards regulating the highly unregulated real estate sector and bringing more transparency to real estate transactions. It was a long due measure which has now finally been implemented. However, a closer scrutiny of the provisions of the Act would reveal that the Act has certain loopholes, which ought to have been filled while enacting the same and which may make the consumers liable to suffer. Some of such loopholes are as follows:

The Act only covers new projects and the projects where completion certificate is not issued on the date when the Act is notified, but not the existing projects i.e. the projects that are ongoing as on date or where partial completion certificate has been issued, completed immediately before the Act is notified, or stuck as on date for any reason;

  1. The Act doesn’t make any provision for selling flats/ apartments on carpet area basis, leaving a scope for promoters for manipulation;
  2. Under the Act, it is not mandatory to register projects, which are smaller than 500 square meters and 8 apartments. It could lead to the exclusion of a large number of small housing projects, which also have great share in the market.

However, despite the abovementioned loopholes, the Act will benefit both promoters as well as buyers. It is an initiative to protect the interest of consumers, to promote fair play in real estate transactions and to ensure timely execution of projects. With a clear intention of protecting the interests of buyers, the Act helps the consumers to safeguard themselves from any foul play or exploitation by promoters. The legislation is considered to be a game changing step in the real estate sector.

Enforcement Of Foreign Award-Affirmation By Court Is Not A Condition Precedent

Vikas Goel


1/12/2016  

The Hon’ble Supreme Court in a recent judgment titled Escorts Limited Vs. Universal Tractor Holding LLC upheld the decision of a Single Judge of the Delhi High Court that the principle of ‘double exequatur’ (meaning double recognition) has no application in view of the change in the Arbitration & Conciliation Act, 1996, which did away with the application of the rule. The Apex Court examined the issue “whether affirmation of the foreign award by the court of the country, where arbitration took place, is necessary before enforcing the same in India”. The facts of the case, (briefly stated) were that a dispute arose between Escorts Ltd (Indian Company) and Universal Tractor Holding LLC (US Company). Escorts Ltd through its subsidiary held a 51% stake in a company called Beever Greek Holdings (BCH). The balance 49% shares of BCH were held by Universal Tractor Holding LLC, a US Company. By an agreement, the said Company sold its shareholding in BCH for a price of Rs.1.2 million dollars to the Petitioner’s subsidiary. The purchase price was agreed to be paid in four installments. After payment of the first two installments, Petitioner’s subsidiary defaulted in making payment of the balance of the purchase price. The US Company filed a suit in the State of North California, USA. In the proceeding before the USA Court, a consent order was passed whereby both the parties agreed to refer the matter for arbitration. The relevant part of the aforesaid consent order is extracted below:
“2. The case will be stayed from the date and time of entry of this order until completion of arbitration between the plaintiff and EAMI. Upon the issuance of a decision by the arbitrators, this Court may confirm and enter judgment upon such decision in accordance with the Federal Arbitration Act and may conduct such further proceedings as are necessary to resolve plaintiff’s claims against Escorts Limited.”

“8. The plaintiff agrees that entry of this order resolves the defendant’s motion to dismiss. The Court shall retain jurisdiction for the purposes of entering an order confirming the arbitration decision pursuant to the Federal Arbitration Act.”

At the arbitration, the US Company succeeded and sought to enforce arbitration award by filing execution proceedings in India. The Petitioner, the Indian Company, objected to the enforcement of the foreign award on the ground that unless the foreign court confirms the award, the same could not be executed in India. The Petitioner emphasized that Section 48(1)(e) of the Arbitration and Conciliation Act, 1996 requires that the foreign award which is sought to be enforced should have become binding on the parties under the law from which the award has been made. Petitioner cited Section 9 of Federal Arbitration Act of US and the judgment of the Supreme Court of India in the case of ONGC Vs Western Company of North America2 to buttress the argument that enforcement of the award is to be refused if the award has not become binding on the parties. The Respondent, the US Company, on the other hand, countered Petitioner’s arguments by submitting that Section 9 as cited by the Petitioner was relevant for domestic awards and the foreign awards are governed by Section 202 of the Federal Arbitration Act of US. The Respondent submitted that requirement of a double exequatur has been removed in view of the provisions of New York Convention which have been adopted under the Arbitration and Conciliation Act, 1996. The Respondent cited judgments of foreign courts in support of its contention that it was not material for enforcement of a foreign award that such an award is affirmed by judgment of a foreign court before it could be enforced in India.

The Supreme Court after noticing the contentions of the parties, upheld the order passed by the High Court and dismissed the SLP. The Supreme Court held that Petitioner’s submissions to the effect that the Respondent ought to have proceeded for confirmation of the foreign award under the US Law before coming to India for its execution, was not tenable in view of the changed law doing away with the rule of double exequatur. The Supreme Court further noticed that even as per the requirement of US Law, the party who does not want the award to be enforced has to give a three months’ notice, which has not been done by the Petitioner and even on that ground, the stand of the Petitioner was not tenable.

Choice Of Seat Of Arbitration Akin To Exclusive Jurisdiction Clause-Pre Balco Arbitrations

Vikas Goel


1/12/2016  

The question of applicability of the provisions of Part I of the Arbitration and Conciliation Act 1996 (hereinafter referred as 1996 Act) to the international commercial arbitrations held outside India has time and again come up before the Supreme Court of India (“Supreme Court”) and various High Courts.

The Bhatia International[1] had initially settled the question of applicability of the provisions of Part I of the 1996 Act to International Commercial Arbitrations held outside India, by holding that the 1996 Act shall be applicable to all arbitrations, including those arbitrations which are held outside India, unless the parties expressly or impliedly exclude the applicability of all or any of its provisions. The Bhatia International judgment was eventually overruled by a constitution bench judgment in Balco v. Kaiser[2], but only prospectively i.e. was made applicable only for disputes arising out of agreements which were entered after 6th September 2012. This meant that the Bhatia International judgment is still applicable to all arbitrations agreements entered prior to 6th September 2012.

The Supreme Court and various High Courts have considered a variety of foreign factors including procedural rules of a foreign arbitral institution[3], law governing the arbitration agreement[4]which along with the foreign seat could exclude the application of Part I of the 1996 Act.

In all the disputes arising out of Pre-Balco arbitration agreements, the Courts have been consistently holding that the ‘foreign seat’ is not akin to exclusive jurisdiction clause, i.e. mere choosing of a foreign seat does not confer exclusive jurisdiction to the said venue and will not exclude the applicability of Part I of the 1996 Act.

However, in a course correction, the Supreme Court in the case of Eitzen Bulk A/S v. Ashapura Minechem Ltd. & Anr.[5], has observed that the mere choosing of juridical seat of arbitration attracts the law applicable to such location and that it would not be necessary to specify which law would apply to the arbitration proceedings, since the law of the particular country would apply ipso jure.

Factual Background

Eitzen Bulk A/S of Denmark (hereinafter referred to as `Eitzen’) entered into the contract with Ashapura Minechem Limited of Mumbai (hereinafter referred to as `Ashapura’) as charterers for shipment of bauxite from India to China. The Charter Party contained an Arbitration Clause having London as seat of arbitration and made the English law to apply to arbitration.

Disputes having arisen between the parties, the matter was referred to Arbitration by a sole Arbitrator. The Arbitration was held in London according to English Law. The Arbitral Tribunal published the Award dated 26.05.2009 thereby holding that Ashapura was liable and directed it to pay a sum of US$ 36,306,104 together with compound interest at the rate of 3.75 % per annum, besides other reliefs to Eitzen.

Having failed to stall the arbitration and then having failed in arbitral proceedings, Ashapura filed a petition under Section 34 of the 1996 Act challenging the award passed in London and seeking a restraint on the enforcement of the award before the District Court, Jamnagar. After a series of proceedings, the Division Bench of Gujarat High Court held that Ashapura is entitled to challenge the foreign award under Section 34 of the 1996 Act. Simultaneously, Eitzen proceeded before the Bombay High Court for enforcement of the foreign award on the basis that Part I of the 1996 Act has no application to a foreign award made in London under English Law. The learned Single Judge of the Bombay High Court allowed the petition for enforcing the foreign award holding that since the parties had agreed that juridical seat as London and made the English law to apply, there was an express and in any case an implied exclusion of Part I of the 1996 Act.

The current judgment arose out of the appeals against the decision of the Gujarat High Court holding that a Court in India has jurisdiction under Section 34 to decide objections raised in respect of a Foreign Award because Part I of the Arbitration Act is not excluded from operation in respect of a Foreign Award and also the decision of the Bombay High Court holding that Part I is excluded from operation in case of a Foreign Award and thereupon directing enforcement of the Award.

Judgment

The main question before the Supreme Court was whether Part I of the Arbitration Act is excluded from its operation in case of a Foreign Award where the Arbitration is not held in India and is governed by foreign law. The Supreme Court went on to hold that since the arbitration clause clearly stipulates that the dispute shall be settled in London and English law would apply to the arbitration, the intention of the parties is manifestly clear to exclude the applicability of Part I of the 1996 Act and thus, the conduct of the arbitration as well as any objections relating thereto including the award shall be governed by English law. It further held that in this case two factors exclude the operation of Part I of the 1996 Act, first, the seat of arbitration which is in London and second, the clause that English law would apply.

The Supreme Court referred the judgment of Reliance Industries Limited and Anr. v. Union of India[6] which in turn relied upon Sulamerica v. Enesa, High Court of Justice (England) which says that seat of the arbitration is an important factor in determining proper law of the arbitration agreement. The Supreme Court held that it has been settled for quite some time now that Part I of the 1996 Act is excluded where the parties choose that the seat of arbitration is outside India and the arbitration is governed by the law of a foreign country. Quoting the famous passage from Redfern and Hunter on International Arbitration[7], the Supreme Court parting with the judgment made an interesting observation that

“as a matter of fact the mere choosing of juridical seat of arbitration attracts the law applicable to such location and that it would not be necessary to specify which law would apply to the arbitration proceedings, since the law of the particular country would apply ipso jure (emphasis supplied).”

In view of the above, the Court held that the foreign award passed in London cannot be interfered with under Section 34, which occurs in Part I of the 1996 Act and hence, dismissed the proceedings under Section 34 before the Gujarat High Court as untenable and upheld the judgment of the Bombay High Court enforcing the Foreign Award under Part II of the 1996 Act.

Conclusion

Prior to this judgment, as of now, the cases dealing with implied exclusion held that a mere designation of foreign seat will not exclude Part I of the 1996 Act and implicitly rejected the principle that choice of the seat of arbitration is akin to an exclusive jurisdiction clause ( for all Pre-Balco Agreements).[8] However, by this judgment Supreme Court holds that a mere choice of foreign seat would attract the law applicable to such location and would suffice to exclude the applicability of Part I of the 1996 Act.

It appears the Hon’ble Supreme Court has applied the principles enunciated by Balco to a Pre-Balco arbitration, also harmonizing itself with the standard international practice, giving importance to the seat of an arbitration to the extent that it amounts to conferring exclusive jurisdiction to the chosen location.

[1]Bhatia International v. Bulk Trading SA, (2002) 4 SCC 105.

[2] Bharat Aluminum and Co. vs. Kaiser Aluminium and Co. (2012) 9 SCC 552

[3]Yograj Infrastructure Ltd. vs. Ssangyong Engineering Construction Co. Ltd, AIR 2011 SC 3517;

[4]Videocon Industries Ltd. v. Union of India, (2011) 6 SCC 161; Reliance Industries v. Union of India, 2014 (4) CTC 75; Harmony Innovation Shipping Ltd. v. Gupta Coal India Ltd, (2015) 9 SCC 172; Max India Ltd. v. General Binding Corporation, 2009(3) ARBLR162(Delhi); Union of India v. Reliance Industries Ltd., MANU/SC/1064/2015

[5]CA No. 5131-5133 of 2016; CA No. 5134-5135 of 2016; CA No. 5136 of 2016; Decided on 13 May 2016; 2016(3) Arb LR Vol.121.

[6]Reliance Industries v. Union of India, 2014 (4) CTC 75

[7]“It is also sometimes said that parties have selected the procedural law that will govern their arbitration, by providing for arbitration in a particular country. This is too elliptical and, as an English court itself held more recently in Breas of Doune Wind Farm it does not always hold true. What the parties have done is to choose a place of arbitration in a particular country. That choice brings with it submission to the laws of that country, including any mandatory provisions of its law on arbitration. To say that the parties have ‘chosen’ that particular law to govern the arbitration is rather like saying that an English woman who takes her car to France has ‘chosen’ French traffic law, which will oblige her to drive on the right-hand side of the road, to give priority to vehicles approaching from the right, and generally to obey traffic laws to which she may not be accustomed. But it would be an odd use of language to say this notional motorist had opted for ‘French traffic law’. What she has done is to choose to go to France. The applicability of French law then follows automatically. It is not a matter of choice. Parties may well choose a particular place of arbitration precisely because its lexarbitri is one which they find attractive. Nevertheless, once a place of arbitration has been chosen, it brings with it its own law. If that law contains provisions that are mandatory so far as arbitration are concerned, those provisions must be obeyed. It is not a matter of choice any more than the notional motorist is free to choose which local traffic laws to obey and which to disregard.”

[8] As Balco laid down the seat centricity principle and held that choice of seat of arbitration is akin to an exclusive jurisdiction clause.

Liquidated Damages – A Chimera without Proven Loss

Vikas Goel


1/12/2016  

The present article aims at discussing various issues that invariably arise concerning a provision/term in the contract on ‘Liquidated Damages’ (“LD”). The first and foremost being ‘if the whole of the LD provided in the contract is recoverable by the aggrieved party without proving the actual losses suffered by it’. The expression ‘Liquidated Damages’ is not per se defined under the Indian Contract Act but the relevant Sections, i.e. 73 and 74 which are extracted below, set out the elements, which constitute LD.

Section 73 provides as under:

“When a contract has been broken, the party who suffers by such breach is entitled to receive, from the party who has broken the contract, compensation for any loss or damage caused to him thereby, which naturally arose in the usual course of things from such breach, or which the parties knew, when they made the contract, to be likely to result from the breach of it”.

Section 74 of the Contract Act reads as under:

“When a contract has been broken, if a sum is named in the contract as the amount to be paid in case of such breach, or if the contract contains any other stipulation by way of penalty, the party complaining of the breach is entitled, whether or not actual damage or loss is provided to have been caused thereby, to receive from the party who has broken the contract reasonable compensation not exceeding the amount so named, or the case may be, the penalty stipulated for.”

For a better understanding of the concept of LD it will be useful to look at the definition of ‘Liquidated Damages’ in The Black’s Law Dictionary, and the same is as under:

“An amount contractually stipulated as a reasonable estimation of actual damages to be recovered by one party if the other party breaches; also

If the parties to a contract have agreed on Liquidated Damages, the sum fixed is the measure of damages for a breach, whether it exceeds or falls short of the actual damages.”

A perusal of the above clarifies that LD is nothing but a pre-estimated damage, which the parties agree while making the contract, as likely to arise in case of a breach.

The Courts, while dealing with the issue of validity of imposition of LD by one party to the contract on the other, read Section 73 & 74 of the Contract Act together.

Under the Indian Law, the damages are awarded to recompense the aggrieved party. In other words, the aggrieved party has to be placed, as far as the money can do, in the same position in which it would have been if no breach had occurred. As a necessary corollary, it means that the damages are to compensate the aggrieved party for the consequences directly and naturally arising from the breach and no one can be allowed to make an unjust enrichment under the garb of claiming compensation for a breach.

The definition in Section 73 of the Indian Contract Act necessarily pre-supposes that the damages are payable only if some loss has been occasioned by the breach. Succinctly stated, the principle is – No loss from the breach no damages. The same principle would, therefore, apply to a case of LD i.e. to be entitled to claim LD the aggrieved party must prove that it had suffered some loss arising out of the breach. To put it differently, even the LD cannot be claimed if it is proved that no actual damages were caused by the breach as held by the Delhi High Court in [Indian Oil Corporation Vs. Messrs Lloyds Steel Industries Limited; 2007 (144) DLT 659)]. In this case the Court held mere delay in construction and commissioning of the terminal at Jodhpur by the contractor did not entitle IOC to recover Liquidated Damages because there was no loss suffered by IOC. The Court found that pipeline reached Jodhpur terminal (on 31.8.1996) much after the date of completion of construction (31.3.1996) and the terminal could not be put to commercial use without pipeline reaching the terminal.

Few questions/concerns that generally arise concerning LD and our response thereto are mentioned herein below:

Difference between LD and a Penalty

A question frequently asked is ‘what is the difference between LD and a Penalty’. While the LD is a pre-assessed loss agreed to between the parties at the time of making a contract, as likely to arise from the breach. On the other hand, a Penalty is a stipulation in the contract in the nature of terroram. A Penalty, generally speaking is a stipulation to award an imposition which is so disproportionate or excessive that no prudent person would consider the same as a reasonable assessment of damages arising out of the breach. For example, a stipulation in the contract providing that the party in breach would be liable to pay ten times of the contract price to the aggrieved party in case of a breach is in the nature of Penalty. Therefore, while both the LD as well as a Penalty are based on the stipulations mentioned in the contract itself, there is a stark distinction between the two terms. LD represents reasonable stipulation of likely losses, a Penalty is far from being reasonable and is intended to secure performance of the contract.

Whether the use of expression “genuine pre-estimate of likely damages” is essential or indicative of a stipulation in the nature of LD?

More often than not, a party opposing imposition of LD raises a point that unless the contract clause, which is said to be providing stipulation for imposition of LD, uses the expression “genuine pre-estimate of likely losses”, it cannot be considered as a provision for LD. The parties then attempt to equate every such provision with that of Penalty to avoid imposition of damages as provided under the contract. Whether a provision is in the nature of LD or is a stipulation as a Penalty has to be seen from the quantum of damages provided for therein. Mere use of expression “genuine pre-estimate damages agreed between the parties” is not at all determinative of the nature of stipulation. The Court before which such stipulation is challenged will have to decide the same based on the facts and circumstances of each case and the relevant contractual clause. To qualify as a provision for LD, it must pass the test of being ‘reasonable estimation of the parties’.

Can the Liquidated Damages be reduced proportionately depending upon the status of performance of the contract till the date of imposition of Liquidated Damages?

Another concern that engages the attention of the Courts and the Arbitrators is whether the amount of Liquidated Damages provided for under the contract can be reduced proportionately depending on the quantum of work done till the date of occurrence of breach. While it is true that wherever it is possible to prove actual damages, the party claiming LD will have to prove the losses actually suffered by it and confine its claim to that limit alone and not the full amount of agreed Liquidated Damages. However, it would not be correct to state that the provision of LD would itself get proportionately reduced depending on the quantum of performance achieved till the date of breach. This would amount to re-writing the contract, which is not permissible in law. Furthermore, such concept goes contrary to the basic idea of providing the LD, i.e. the parties taking informed decision at the time of entering into a contract and providing for pre-estimated damages.

Whether LD can be recovered without proving actual loss?

The Courts have repeatedly held that the provision for LD is not different from non-liquidated damages and in both the situations i.e. LD and non-Liquidated Damages, breach and the damage has to be proved [Egon Zhender Internaional Pvt. Ltd. Vs. Namgayal Institute For Research On Ladakhi Art and Culture; 2013(4) Arb.L.R. 273 (Delhi)]. However, when in certain situations it would be impossible for the Courts to assess the compensation arising from the breach, the Court can award the full liquidated damages if it is found to be a genuine pre-estimate by the parties as a measure for reasonable compensation. In Oil & Natural Gas Commission v. Saw Pipes Ltd – (2003) 5 SCC 705, the Supreme Court held that Arbitral Tribunal was wrong in refusing to award LD in favour of ONGC for want of proof of actual losses. Supreme Court held that delay in deployment of rigs resulted in change of the actual production of gas by ONGC. The Apex Court held that in such contracts it would be difficult to prove exact loss and after finding that the compensation provided for in the contract was not unreasonable, the Court upheld imposition of LD by ONGC on Saw Pipes Ltd.

Whether in all cases the Courts should allow full amount of Liquidated Damages?

The answer to the above question is obviously in the negative. Merely because the stipulation of LD is available in the contract, the aggrieved party cannot claim full amount of Liquidated Damages as a matter of right. Its entitlement would be to recover damages only to the extent of actual losses proved to have been suffered by it. In those cases, where no actual loss is proved, but undeniably losses have been caused, the Courts would not be powerless to award reasonable damages to the aggrieved party. There can be yet another type of situation i.e. where the nature of contract is such that assessing damages is not possible. In such a situation, the Court would be empowered to grant full amount of Liquidated Damages provided it is of the view that the same are fair and reasonable pre-estimate of damages agreed between the parties. [Herbicides (India) Ltd. vs. Shashank Pesticides Pvt. Ltd. 180 (2011) DLT 243].