Tag Archives: arbitration

Arbitral Award – Interference With

An arbitral award can be set aside if it is contrary to (a) fundamental policy of Indian law, or (b) the interest of India, or (c) justice or morality. (Renusagar Power Co. Ltd. v. General Electric Co. [Renusagar Power Co. Ltd. v. General Electric Co., 1994 Supp (1) SCC 644] ) Patent illegality was added to the above three grounds in ONGC Ltd. v. Saw Pipes Ltd., (2003) 5 SCC 705. Illegality must go to the root of the matter and in case the illegality is of trivial nature it cannot be held that the award is against the public policy. It was further observed in ONGC Ltd. v. Saw Pipes Ltd., (2003) 5 SCC 705 that an award could also be set aside if it is so unfair and unreasonable that it shocks the conscience of the Court.

In  DDA v. R.S. Sharma and Co., (2008) 13 SCC 80 it was held that an award can be interfered with by the Court under Section 34 of the Act when it is contrary to:

(a) substantive provisions of law; or

(b) provisions of the 1996 Act; or

(c) against the terms of the respective contract; or

(d) patently illegal; or

(e) prejudicial to the rights of the parties.

The fundamental policy of India was explained in  ONGC Ltd. v. Western Geco International Ltd., (2014) 9 SCC 263 as including all such fundamental principles as providing a basis for administration of justice and enforcement of law in this country. It was held inter alia, that a duty is cast on every tribunal or authority exercising powers that affect the rights or obligations of the parties to show a “judicial approach”. It was further held that judicial approach ensures that an authority acts bona fide and deals with the subject in a fair, reasonable and objective manner and its decision is not actuated by any extraneous considerations. It was also held that the requirement of application of mind on the part of the adjudicatory authority is so deeply embedded in our jurisprudence that it can be described as a fundamental policy of Indian law. The Court further observed that the award of the Arbitral Tribunal is open to challenge when the arbitrators fail to draw an inference which ought to be drawn or if they had drawn an inference which on the face of it is untenable resulting in miscarriage of justice. The Court has the power to modify the offending part of the award in case it is severable from the rest, according to the said judgment ONGC Ltd. v. Western Geco International Ltd., (2014) 9 SCC 263.

The limit of exercise of power by courts under Section 34 of the Act has been comprehensively dealt in  Associate Builders v. DDA, (2015) 3 SCC 49. Lack of judicial approach, violation of principles of natural justice, perversity and patent illegality have been identified as grounds for interference with an award of the arbitrator. The restrictions placed on the exercise of power of a court under Section 34 of the Act have been analysed and enumerated in  Associate Builders v. DDA, (2015) 3 SCC 49 which are as follows:

(a) The court under Section 34(2) of the Act, does not act as a court of appeal while applying the ground of “public policy” to an arbitral award and consequently errors of fact cannot be corrected.

(b) A possible view by the arbitrator on facts has necessarily to pass muster as the arbitrator is the sole judge of the quantity and quality of the evidence.

(c) Insufficiency of evidence cannot be a ground for interference by the court. Re-examination of the facts to find out whether a different decision can be arrived at is impermissible under Section 34(2) of the Act.

(d) An award can be set aside only if it shocks the conscience of the court.

(e) Illegality must go to the root of the matter and cannot be of a trivial nature for interference by a court. A reasonable construction of the terms of the contract by the arbitrator cannot be interfered with by the court. Error of construction is within the jurisdiction of the arbitrator. Hence, no interference is warranted.

(f) If there are two possible interpretations of the terms of the contract, the arbitrator’s interpretation has to be accepted and the court under Section 34 cannot substitute its opinion over the arbitrator’s view. M.P. Power Generation Co. Ltd. v. ANSALDO Energia SPA, (2018) 16 SCC 661.

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Appointment of Arbitrator – Arbitrability of Dispute

In Booz Allen and Hamnilton Inc. v. S.B.I. Home Finance Ltd., (2011) 5 SCC 532, Hon’ble Supreme Court considered the arbitrability of dispute and scope of Section 11 of the Arbitration and Conciliation Act and held as under:

       “The nature and scope of issues arising for consideration in an application under Section 11 of the act for appointment of arbitrators, are far narrower than those arising in an application under Section 8 of the Act, seeking reference of the parties to a suit to arbitration. While considering an application under Section 11 of the Act, the Chief Justice or his designate would not embark upon an examination of the issue of “arbitrability” or appropriateness of adjudication by a private forum, once he finds that there was an arbitration agreement between or among the parties, and would leave the issue of arbitrability for the decision of the Arbitral Tribunal. If the arbitrator wrongly holds that the dispute is arbitrabe, the aggrieved party will have to challenge the award by filing an application, under Section 34 of the Act, relying upon sub-section 2(b)(i) of that Section.”
       In Dura Felguera, S.A. v. Gangavaram Port Ltd., (2017) 9 SCC 729, Hon’ble Supreme Court considered the provisions of sub-section (6) and sub-section (6A) of Section 11 of the Arbitration and Conciliation Act, 1996 and held as under:

       “From a reading of Section 11(6A), the intention of the legislature is quite clear, i.e. the court should and need only look into one aspect – the existence of an arbitration agreement. What are the factors for deciding as to whether there is an arbitration agreement is the next question. The resolution to that is simple – it needs to be seen if the agreement contains a clause which provides for arbitration pertaining to the disputes which have arisen between the parties to the agreement.” Swatantra Properties (P) Ltd. v. Airplaza Retail Holdings Pvt. Ltd., 2018 (5) AWC 5168.

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Injunction To Restrain Encashment of a Bank Guarantee – Principles of

In Himadri Chemicals Industries Ltd. v. Coal Tar Refining Company, (2007) 8 SCC 110, the Hon’ble Apex Court has crystallized the principles which should be followed in the matter of injunction to restrain encashment of a Bank Guarantee or a letter of credit and it was held as under:

       “(1) While dealing with an application for injunction in the course of commercial dealings, and when an unconditional bank guarantee or letter of credit is given or accepted, the beneficiary is entitled to realize such a bank guarantee or a letter of credit in terms thereof irrespective of any pending disputes relating to the terms of the contract.

       (2) the bank giving such guarantee is bound to honour it as per the terms irrespective of any dispute raised by its customer.

       (3) The courts should be slow in granting an order of injunction to restrain the realization of a Bank Guarantee or a Letter of Credit.

       (4) Since a Bank Guarantee or a Letter of Credit is an independent and a separate contract and is absolute in nature, the existence of any dispute between the parties to the contract is not a ground for issuing an order of injunction to restrain enforcement of Bank Guarantees or Letters of Credit.

       (5) Fraud of an egregious nature which would vitiate the very foundation of such a Bank Guarantee or Letter of Credit and the beneficiary seeks to take advantage of the situation.

       (6) Allowing encashment of an unconditional Bank Guarantee or a Letter of Credit would result in irretrievable harm or injustice to one of the parties concerned.”

       In Adani Agri Fresh Ltd. v. Mahaboob Sharif and Others, (2016) 14 SCC 517, it was held that bank guarantee is an independent contract between bank and the beneficiary thereof. Bank is always obliged to honour its guarantees as long as it is an unconditional and irrevocable one. The dispute between the beneficiary and the party at whose instance bank has given guarantee is immaterial and of no consequence.

       In Mahatma Gandhi Sahakra Sakkare Karkhane v. National Heavy Engineering Corporation Ltd., (2007) 6 SCC 470, it was held that if bank guarantee is an unconditional and irrevocable one, it is not open to the bank to raise any objection whatsoever to pay the amounts under the guarantee. The person in whose favour guarantee is furnished by the bank cannot be prevented by way of an injunction in enforcing the guarantee in terms of the agreement entered between the parties has not been fulfilled. M/s Drake & Skull Water Energy India Pvt. Ltd. v. Paschimanchal Vidyut Vitran Nigam Ltd., 2008 (128) ALR 843.

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Existence of Dispute

The expression “existence” has been understood as follows:

“Shorter Oxford English Dictionary gives the following meaning of the word “existence”:

  • Reality, as opp. to appearance.
  • The fact or state of existing; actual possession of being. Continued being as a living creature, life, esp. under adverse conditions.

Something that exists; an entity, a being. All that exists.

Two extremely instructive judgments, one of the Australian High Court, and the other of the Chancery Division in the UK, throw a great deal of light on the expression “existence of a dispute” contained in Section 8(2)(a) of the Insolvency and Bankruptcy Code, 2016. The Australian judgment is reported as Spencer Constructions Pty. Ltd. v. G & M Aldridge Pty Ltd., 1997 FCA 681 (Aust).

The expression “genuine dispute” was held to mean the following:

“Finn, J. was content to adopt the explanation of “genuine dispute” given to McLelland, C.J. Eq in Eyota Pty Ltd.v. Hanave Pty Ltd., (1994) 12 ACSR 785 (Aust)  wherein it was held as under:

‘The expression connotes a plausible contention requiring investigation, and raises much the same sort of considerations as the “serious question to be tried” criterion which arises on an application for an interlocutory injunction or for the extension or removal of a caveat. This does not mean that the court must accept uncritically as giving rise to a genuine dispute, every statement in an affidavit ‘however equivocal, lacking in precision, inconsistent with undisputed contemporary documents or other statements by the same deponent, or inherently and probable in itself, it may not be having ‘sufficient prima facie plausibility to merit further investigation as to its truth or a patently feeble argument or an assertion of facts unsupported by evidence.”

Reliance was placed on Rohalo Pharmaceutical Pty. Ltd. v. RP Scherer, (1994) 15 ACSR 347 (Aust), wherein it was held as under:

“The provisions of Sections 459-H(1) and (5) of the Corporations Law assume that the dispute and offsetting have an “objective” existence the genuineness of which is capable of being assessed. The word “genuine” is included in “genuine dispute” to sound a note of warning that the propounding of serious disputes and claims is to be expected but must be excluded from consideration.”

A “genuine” dispute requires that:

  • The dispute be bona fide and truly exist in fact;
  • The grounds for alleging the existence of a dispute are real and not spurious, hypothetical, illusory or misconceived.

In Hayes v. Hayes, 2014 EWHC 2694 (Ch) under the UK Insolvency Rules, it was held:

“It is clear that on the one hand, the court does not need to be satisfied that there is a good claim or even that it is a claim which is prima facie likely to succeed. In Bayoil S.A., In re, (1990) 1 WLR 147 (CA) it was held:

“The majority decided in that case that, shadowy as the cross claim was and improbable as the events said to support it seemed to be, there was just enough to make the principle work, namely, that it was right to have the matter tried out before the axe fell.”

On the other hand the court should be alert to detect wholly spurious claims merely being put forward by an unwilling debtor to raise what has been called “a cloud of objections.”

Section 5(6) of the Insolvency Code only deals with suits or arbitration proceedings which must “relate to” one of the three sub-clauses, either directly or indirectly. A dispute is said to exist, so long as there is a real dispute as to payment between the parties that would fall within the inclusive definition contained in Section 5(6). Mobilox Innovations Pvt. Ltd. v. Kirusa Software Pvt. Ltd., (2018) 1 SCC 353.

 

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Non-Arbitrable Disputes

Ordinarily every civil or commercial dispute whether based on contract or otherwise which is capable of being decided by a Civil Court is in principle capable of being adjudicated upon and resolved by arbitration “subject to the dispute being governed by the arbitration agreement” unless the jurisdiction of the Arbitral Tribunal is excluded either expressly or by necessary implication.
In Booz-Allen and Hamilton Inc. v. SBI Home Finance Ltd., (2011) 5 SCC 532, the Hon’ble Apex Court set down certain examples of non-arbitrable disputes such as:
(a) Disputes relating to rights and liabilities which give rise to or arise out of criminal offences;
(b) Matrimonial Disputes relating to divorce, judicial separation, restitution of conjugal rights and child custody;
(c) Matters of Guardianship;
(d) Insolvency and Winding Up.
(e) Testamentary matters, such as the grant of probate, letters of administration and succession certificates; and
(f) Eviction or tenancy matters governed by special statutes where a tenant enjoys special protection against eviction and specific courts are conferred with the exclusive jurisdiction to deal with the dispute.
(g) The enforcement of a mortgage has been held to be a right in rem for which proceedings in arbitration would not be maintainable. In Vimal Kishore Shah v. Jayesh Dinesh Shah, 2016 (119) ALR 428, the Hon’ble Apex Court added a seventh category of cases, namely, disputes relating to trusts, trustees and beneficiaries arising out of a trust deed and Trust Act.

In Skypak Courier Ltd.v. Tata Chemicals Ltd., 2000 (40) ALR 255, it was held that the existence of an arbitration clause will not be a bar to the entertainment of a complaint by a forum under the Consumer Protection Act, 1986, since the remedy provided under the law is in addition to the provisions of any other law for the time being in force. Hindustan Petroleum Corporation Ltd. v. Kamalkant Automobiles, 2017 (123) ALR 369.

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Arbitration – Independence and Impartiality are two different concepts

Independence and impartiality are two different concepts. An arbitrator may be independent and yet, lack impartiality, or vice versa. Impartiality, as is well accepted, is a more subjective concept as compared to independence. Independence, which is more an objective concept, may, thus, be more straightforwardly ascertained by the parties at the outset of the arbitration proceedings in light of the circumstances disclosed by the arbitrator, while partiality will more likely surface during the arbitration proceedings.
The United Kingdom Supreme Court has highlighted this aspect in Hashwani v. Jivraj, (2011) 1WLR 1872 in the following words:
“the dominant purpose of appointing an arbitrator or arbitrators is the impartial resolution of the dispute between the parties in accordance with the terms of the agreement and, although the contract between the parties and the arbitrators would be a contract for the provision of personal services, they were not personal services under the direction of the parties.” Voestalpine Schienen GMBH v. Delhi Metro Rail Corporation Ltd., (2017) 4 SCC 665.

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Appointment of an Impartial Arbitrator

It is settled that in exercise of jurisdiction under Section 11 of the Arbitration and Conciliation Act, the Court is to enforce terms of agreement for securing appointment of arbitrator. However, it is not denuded of jurisdiction to follow a different course, for justifiable cause, by giving reasons. Different contingencies requiring such departure have clearly been noticed. The ultimate object is to secure appointment of an impartial arbitrator and secure speedy resolution of dispute by way of arbitration. The scheme underlying the Arbitration and Conciliation Act has to be construed by harmoniously interpreting its provisions. It is imperative for the court to examine qualification and impartiality of arbitrator as well as to secure speedy resolution of dispute. The terms of arbitration agreement providing for arbitrator to be named by designation cannot be read in isolation. It also cannot be construed in a manner inconsistent with the scheme of the Act. The question is answered holding that an application under Section 11(6) of the Arbitration and Conciliation Act would lie also in a case where arbitrator is named, by designation, where (i) arbitrator named is not impartial, or (ii) he lacks required qualification, or (iii) for any other justifiable cause to secure speedy resolution of dispute, by way of a reasoned order. M/s AARGEE Engineering and Company v. ERA Infra Engineering Ltd., 2017 (122) ALR 179.

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