Important decisions passed by Supreme Court of India on Arbitration Law, in 2023

Important decisions passed by Supreme Court of India on Arbitration Law, in 2023

 

  1. NTPC Ltd. Vs. SPML Infra Ltd.                                            2023(2) Arb LR 213 (SC)

In this case the Supreme Court was considering a challenge to the decision of Delhi High Court of appointing arbitrator by allowing SPML’s application under Section 11(6) of the Arbitration and Conciliation Act, 1996 (“Act”). NTPC’s case was that there were no subsisting disputes between the parties in view of the settlement agreement executed between them and that the application for appointment of arbitrator was an afterthought and abuse of the process.

Allowing the appeal of NTPC, the Supreme Court held that the pre-referral jurisdiction of the court under Section 11(6) of the Act is very narrow and inheres two inquires i.e. existence of valid arbitration agreement and arbitrable dispute.

The standard of scrutiny to examine non-arbitrability of claim is only prima facie not requiring full review of contested facts. Prima facie scrutiny of facts must lead to a clear conclusion that there is not even a vestige of doubt that claim is non-arbitrable. If there is slightest of the doubt disputes are to be referred to arbitration.

The limited scrutiny through the eye of the needle is necessary and compelling. It is inter-twin with the duty of referral court to protect the party from being forced to arbitrate when the matter is demonstrably non-arbitrable. Holding the contentions of SPML to be ex-facie and untenable, the Supreme Court held that this was a fit case where the High Court should have exercised the prima facie test to screen and strike down the ex-facie meritless and dishonest litigation.

  1. Shree Vishnu Constructions Vs. The Engineer-In-Chief, MES [2023(3) Arb L R 103 (SC)]

In this case, the notice invoking arbitration was issued on 20.12.2013 i.e. prior to the Arbitration & Conciliation (Amendment) Act, 2015 and the Application under Section 11(6) of the Act for appointment of an arbitrator was made post amendment, on 27.02.2016. Vide the Amendment Act, Section 11-6A was introduced that restricted the power of the Supreme Court or the High Court under Section 11(6) only to the examination of existence of a valid arbitration agreement and nothing more. MES successfully resisted appointment of arbitrator before the High Court pleading accord and satisfaction on signing of ‘no claim certificate’ by the contractor. The applicant/contactor contended that in terms of Section 11-6A the court has only to examine the existence of the arbitration agreement and no other issues like discharge of the contract on accord and satisfaction.

Rejecting the contractor’s appeal, the Supreme Court held that as the arbitration proceedings had commenced in pre-Amendment Act era, the provisions of Section 11-6A introduced by the Amendment Act, 2015 shall not apply.

  1. MAGIC EYE Developers Pvt. Ltd. Vs. Green Edge Infrastructure Pvt. Ltd. 2023(3) Arb L R 163 (SC)

In this case, while setting aside the orders of referring the parties to arbitration, the Supreme Court remitted the matter back to the Delhi High Court for deciding the case afresh. It was held by the Apex Court that the high court did not decide finally the issue regarding the existence and validity of the arbitration clause, which was mandatory in terms of Section 11-6A of the Act. The court held that if the dispute/issue with respect to the existence and validity of an arbitration agreement is not conclusively and finally decided by the referral court while exercising the pre-referral jurisdiction under Section 11(6) of the Act and it is left to the arbitral tribunal it will be contrary to Section 11(6A). It is the duty of the referral court to decide the said issue first conclusively to protect the parties from being forced to arbitrate when there does not exist any arbitration agreement and/or when there is no valid arbitration agreement at all.

  1. Glock Asia Pacific Ltd. Vs. UOI                               [2023(3) Arb L R 182 (SC)]

In this case the Supreme Court was dealing with an Application under Section 11(6) Act for appointment of a sole arbitrator in a contract which was executed between Glock Asia Pacific Ltd, a foreign company, and Union of India through the President of India. In terms of the arbitration clause, the sole arbitrator was to be appointed by the Secretary, Ministry of Home who had to be an officer in the Ministry of Law. Disputes having arisen, the foreign party invoked arbitration clause on 20.07.2022 thereby nominating a former high court judge as the sole arbitrator. This was objected to by UOI and it insisted on appointment of the sole arbitrator strictly as per the arbitration clause. UOI’s contention before the court was that the contract in this case was executed in the name of President of India and for that reason, the law laid down in the case of Perkins Eastman Architects DPC Vs. HCC (India) Ltd.; (2020) 20 SCC 760 was not applicable. UOI further pleaded that appointment of an officer of Ministry of Law was not in conflict with Section 12(5) of the Act.

Supreme Court negated both the contentions of UOI and appointed a former Supreme Court Judge as the sole arbitrator. It was held that a contract entered into in the name of the President of India cannot and will not create any immunity against the application of any statutory prescription imposing conditions on parties to an agreement when the government chooses to enter into a contract. It was further held that the appointing authority as well as officer to be appointed as arbitrator, in terms of the arbitration clause are ineligible in terms of Section 12(5) of the Act, which applies notwithstanding any prior agreement to the contrary.

  1. Unibros v. All India Radio                                   [2023 SCC Online SC 1366]

The Supreme Court emphasized that to support a claim for loss of profitability due to delay in performance of a contract, the claimant-Unibros must provide compelling evidence. This evidence should demonstrate the existence of a viable opportunity that the contractor could have pursued elsewhere, utilizing its resources, had the project been executed promptly.

The court emphasized that a claim for damages cannot automatically result in an arbitral award. Instead, it must be supported by proof that the claimant suffered actual injury. This underscores the need for a clear connection between the alleged breach (project delay) and the harm suffered (loss of profitability).

The court highlighted the necessity of compelling evidence to substantiate the claim for loss of profit. Mere assertion of a claim without substantial proof is insufficient. The evidence should convincingly establish the link between the project delay and the potential profits that could have been earned elsewhere.

  1. Hindustan Construction Company Limited v. NHAI 2023(4) Arb.LR 251 (SC)

The Supreme Court reiterated the long-standing jurisprudence that awards with reasons, especially those interpreting contractual terms, should not be interfered with lightly. The emphasis was on respecting the arbitrators' chosen interpretation unless there are clear grounds for interference.

NHAI’s challenge to the arbitral award was rejected by the Single Judge but was upheld by the Division Bench holding that the award was based on an implausible interpretation of the contract.

Overturning the decision of the Division Bench, the Supreme Court held that by training, inclination and experience, judges tend to adopt a corrective lens; usually, commended for appellate review. It was held that such a lens is unavailable when exercising jurisdiction under Section 34 of the Act. The award directing for payment of entire quantity of work of embankment as per BOQ item ‘embankment with fly ash’ without bifurcating the quantities into two different items of BOQ, was upheld by the SC.

The court emphasized that a dissenting opinion serves a specific purpose, usually related to procedural issues, and doesn't undergo the same scrutiny as the majority award. The conversion of a dissenting opinion into an award, especially when the majority award is set aside, was deemed inappropriate and improper.

  1. Reliance Infrastructure Ltd. v. State of Goa [2023 SCCOnline SC 604]

This case arose out of challenge to the arbitral award dated 16.02.2018 by the State of Goa whereby the arbitral tribunal had awarded a sum of Rs. 278.29 crore towards principal amount claimed plus interest upto 31.10.2017 in favour of Reliance Infrastructure Ltd. The tribunal further directed for payment of interest rate of 15% per annum from November 1, 2017 until the full payment was made.

While the Commercial Court dismissed the State's petition challenging the Arbitral Tribunal's award, the Division Bench of the High Court allowed the State's appeal, setting aside a significant portion of the arbitral award besides reducing interest to 10% as against 15% awarded by the Tribunal for the period from 1.11.2017 till the date of payment. The State challenged the award on the Tribunal had not considered relevant causes of the contract and hence committed patent illegality. Another contention raised by the State was violation of principle of natural justice in as much as its applications seeking production of documents from the Claimant were not decided by the Tribunal nor did the Tribunal allow the State to file additional written submissions.

Rejecting the contentions of the state, and upholding the award in its entirety, the Supreme Court clarified that the concept of patent illegality applies only when the illegality is evident on the face of the award and doesn't require re- evaluation of evidence. Mere errors, if any, not amounting to patent illegality cannot be a basis for challenging an award. The court noted that if the terms of the governing agreement are completely ignored, it could warrant interference. However, reasonable construction of the contract terms by the arbitrator, even if different from the interpretation drawn by the parties, should not be a basis for setting aside the award.

Regarding the allegation of nonproduction of certain documents by the Claimant, it was held that in absence of the GOG establishing any serious prejudice, there was no breach of principles of natural justice merely because the AT has failed to make a formal order on the application seeking production of document.

GoG’s contention that the opportunity was not granted by the Arbitral Tribunal to file additional written submission was held to have been rightly dealt with by the High Court with the finding that sufficient opportunity was given the AT since there were at least two meetings/hearings before the Ld. Arbitrator where the GOG did neither file nor seek leave to file the written submissions in response to the claimant’s written clarification/submission.

Reduction of rate of interest from 15% p.a. awarded by the AT to 10% pa. by Division Bench of High Court was also held to be not justified.

  1. Batliboi Environment Engineers Ltd. Vs. Hindustan Petroleum Corporation Ltd. & Anr. (Civil Appeal No. 1968/2012)

In this case, the Supreme Court upheld the decision of Division Bench of Bombay High Court for setting aside the arbitral award. It was held that the award was liable to be set aside due to its patent flaws and illegalities emanate from it, like manifest lack of reasoning in arriving at the conclusions and calculation of amounts awarded, which amounted to double or part-double payments, besides being contradictory.

Accepting the contention of one of the parties that party autonomy should not be treated as an absolute defense, the court held that mere agreement to refer the disputes/claims to a private tribunal consensually, does not barter away the constitutional and basic human right to have a fair and just resolution of the dispute. The court must exercise its power when the award is unfair, arbitrary, perverse, or otherwise infirm in law. While arbitration is a private forum of dispute resolution, the conduct of arbitration proceedings must meet the juristic requirements of due process and procedural fairness and reasonableness, to achieve a “judicially sound and objective outcome”. If these requirements, which are equally fundamental to all forms of adjudication including arbitration, are not sufficiently accommodated in the arbitral proceedings and the outcome is marred, then the award should invite intervention by the court.

  1. Cox and King Ltd. v. SAP India Pvt. Ltd. & Anr. SLP (C) No. 8607 of 2022 with SLP (C) No. 5833 of 2022                            (5 Judges’ Constitution Bench)

This case decided the issue of application of group of companies doctrine thereby making a non-signatory company in a group the part of the arbitration agreement signed by other company in the same group.

The judgment clarifies that the definition of parties under Section 2(1)(h) read with Section 7 of the Arbitration and Conciliation Act 1996 includes both those who have signed the agreement and those who haven't. The requirement of a written arbitration agreement under Section 7 does not rule out the possibility of binding non-signatory parties.

The conduct of non-signatory parties can be considered as an indicator of their consent to be bound by the arbitration agreement, even if they did not sign it. The 'group of companies' doctrine, which considers the corporate separateness of affiliated companies, is upheld as a valid principle for determining the common intention of binding non-signatories. The judgment specifies that the 'alter ego' or 'piercing the corporate veil' principle should not be the basis for applying the 'group of companies' doctrine.

The 'group of companies' doctrine is recognized to have an independent existence in law, stemming from a harmonious reading of relevant sections of the Arbitration Act. The application of the 'group of companies' doctrine should consider all cumulative factors, as laid down in Discover Enterprises judgment, and the single economic unit should not be the sole basis for invoking the doctrine. Despite caution, the judgment underscores the importance of retaining the 'group of companies' doctrine in Indian arbitration jurisprudence, especially in complex transactions with multiple parties and agreements.

The 'group of companies' doctrine must be applied cautiously, and mere affiliation with a group is not sufficient to extend the arbitration agreement to a non-signatory.

The judgment emphasizes the distinction between the concept of parties and the concept of parties "claiming through or under" a party to an arbitration agreement. Persons claiming "through or under" a party can only assert their rights in a derivative capacity. The judgment criticizes the Chloro Controls case for holding that 'non-signatories' can be included by invoking the phrase "parties claiming through or under." The court clarifies that this phrase is intended for successors-in-interest in a derivative capacity.

The referring court, at the referral stage, should leave it to the Arbitral Tribunal to decide whether non-signatories are bound by the arbitration agreement.

  1. Re Interplay Between Arbitration Agreements Under The Arbitration And Conciliation Act 1996 And The Indian Stamp Act 1899

Curative Pet(C) No. 44/2023 In R.P.(C) No. 704/2021 In C.A. No. 1599/2020 (Seven Judges’ Bench)

The judgment deals with the validity of unstamped arbitration agreements. The apex court held that the issue of stamping need not be gone into at the referral stages. The judgment also held that the courts are not required to deal with the issue of stamping at the stage of granting interim measure under Section 9 (para 186). The judgment reached following conclusions:

  • Agreements which are not stamped or are inadequately stamped are inadmissible in evidence under Section 35 of the Stamp Act. Such agreements are not rendered void or void ab initio or unenforceable;
  • Non-stamping or inadequate stamping is a curable defect;
  • An objection as to stamping does not fall for determination under Sections 8 or 11 of the Arbitration Act. The concerned court must examine whether the arbitration agreement prima facie exists;
  • Any objections in relation to the stamping of the agreement fall within the ambit of the arbitral tribunal; and
  • The decision in NN Global 2 [(2023) 7 SCC 1)] and SMS Tea Estates [(2011) 14 SCC 66 are overruled. Paragraphs 22 and 29 of Garware Wall Ropes [(2019) 9 SCC 209] overruled to that extent.

Search

Other Articles / Blogs by the Author

Practice Areas

Archives


Authors