Tag Archives: arbitration agreement

Non-Arbitrable Disputes

In Booz Allen & Hamilton Inc. v. SBI Home Finance Ltd. [Booz Allen & Hamilton Inc. v. SBI Home Finance Ltd., (2011) 5 SCC 532  the following has been laid down:

“ The Arbitral Tribunals are private fora chosen voluntarily by the parties to the dispute, to adjudicate their disputes in place of courts and tribunals which are public fora constituted under the laws of the country. Every civil or commercial dispute, either contractual or non-contractual, which can be decided by a court, is in principle capable of being adjudicated and resolved by arbitration unless the jurisdiction of the Arbitral Tribunals is excluded either expressly or by necessary implication. Adjudication of certain categories of proceedings are reserved by the legislature exclusively for public fora as a matter of public policy. Certain other categories of cases, though not expressly reserved for adjudication by public fora (courts and tribunals), may by necessary implication stand excluded from the purview of private fora. Consequently, where the cause/dispute is inarbitrable, the court where a suit is pending, will refuse to refer the parties to arbitration, under Section 8 of the Act, even if the parties might have agreed upon arbitration as the forum for settlement of such disputes.

 The well-recognised examples of non-arbitrable disputes are: (i) disputes relating to rights and liabilities which give rise to or arise out of criminal offences; (ii) matrimonial disputes relating to divorce, judicial separation, restitution of conjugal rights, child custody; (iii) guardianship matters; (iv) insolvency and winding-up matters; (v) testamentary matters (grant of probate, letters of administration and succession certificate); and (vi) eviction or tenancy matters governed by special statutes where the tenant enjoys statutory protection against eviction and only the specified courts are conferred jurisdiction to grant eviction or decide the disputes.

 It may be noticed that the cases referred to above relate to actions in rem. A right in rem is a right exercisable against the world at large, as contrasted from a right in personam which is an interest protected solely against specific individuals. Actions in personam refer to actions determining the rights and interests of the parties themselves in the subject-matter of the case, whereas actions in rem refer to actions determining the title to property and the rights of the parties, not merely among themselves but also against all persons at any time claiming an interest in that property. Correspondingly, a judgment in personam refers to a judgment against a person as distinguished from a judgment against a thing, right or status and a judgment in rem refers to a judgment that determines the status or condition of property which operates directly on the property itself.

Generally and traditionally all disputes relating to rights in personam are considered to be amenable to arbitration; and all disputes relating to rights in rem are required to be adjudicated by courts and public tribunals, being unsuited for private arbitration. This is not however a rigid or inflexible rule. Disputes relating to subordinate rights in personam arising from rights in rem have always been considered to be arbitrable.” Emaar MGF Land Ltd. v. Aftab Singh, (2019) 12 SCC 751

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Arbitral Award – Period of Limitation for Challenging

In Section 34(3) of the Arbitration and Conciliation Act, the commencement period for computing limitation is the date of receipt of award or the date of disposal of request under Section 33 (i.e. correction/additional award). If Section 17 of the Limitation Act were to be applied for computing the limitation period under Section 34(3) of the Arbitration & Conciliation Act, the starting period of limitation would be the date of discovery of the alleged fraud or mistake. The starting point for limitation under Section 34(3) would be different from the Limitation Act.

        In the context of Section 34(3) of the Arbitration & Conciliation Act, a party can challenge an award as soon as it receives the award. Once an award is received, a party has knowledge of the award and the limitation period commences. The objecting party is therefore precluded from invoking Section 17(1)(b) and (d) of the Limitation Act once it has knowledge of the award. Section 17(1)(a) and (c) of the Limitation Act may not even apply, if they are extended to Section 34, since they deal with a scenario where the application is “based upon” the fraud of the respondent or if the application is for “relief from the consequences of a mistake.” Section 34 application is based on the award and not on the fraud of the respondent and does not seek the relief of consequence of a mistake. P. Radha Rai v. P. Ashok Kumar, (2019) 13 SCC 445.   

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Waiver of Applicability of – Section 12(5) of the Arbitration & Conciliation Act

Section 12(5) of the Arbitration & Conciliation Act is a new provision which relates to the de jure inability of an arbitrator to act as such. Under this provision, any prior agreement to the contrary is wiped out by the non obstante clause in Section 12(5) the moment any person whose relationship with the parties or the counsel or the subject-matter of the dispute falls under the Seventh Schedule. The sub-section then declares that such person shall be “ineligible” to be appointed as arbitrator. The only way in which this ineligibility can be removed is by the proviso, which again is a special provision which states that parties may, subsequent to disputes having arisen between them, waive the applicability of Section 12(5) by an express agreement in writing. What is clear, therefore, is that where, under any agreement between the parties, a person falls within any of the categories set out in the Seventh Schedule, he is, as a matter of law, ineligible to be appointed as an arbitrator. The only way in which this ineligibility can be removed, again, in law, is that parties may after disputes have arisen between them, waive the applicability of this sub-section by an “express agreement in writing”. Obviously, the “express agreement in writing” has reference to a person who is interdicted by the Seventh Schedule, but who is stated by parties (after the disputes have arisen between them) to be a person in whom they have faith notwithstanding the fact that such person is interdicted by the eventh Schedule.

Unlike Section 4 of the Arbitration & Conciliation Act which deals with deemed waiver of the right to object by conduct, the proviso to Section 12(5) will only apply if subsequent to disputes having arisen between the parties, the parties waive the applicability of sub-section (5) of Section 12 by an express agreement in writing. For this reason, the argument based on the analogy of Section 7 of the Act must also be rejected. Section 7 deals with arbitration agreements that must be in writing, and then explains that such agreements may be contained in documents which provide a record of such agreements. On the other hand, Section 12(5) refers to an “express agreement in writing”. The expression “express agreement in writing” refers to an agreement made in words as opposed to an agreement which is to be inferred by conduct. Here, Section 9 of the Contract Act, 1872 becomes important. It states:

9. Promises, express and implied.—Insofar as the proposal or acceptance of any promise is made in words, the promise is said to be express. Insofar as such proposal or acceptance is made otherwise than in words, the promise is said to be implied.”

It is thus necessary that there be an “express” agreement in writing. Bharat Broadband Network Ltd. v. United Telecoms Ltd., (2019) 5 SCC 755.

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Arbitrator – Appointed by Government Department/Company

In Union of India v. U.P. State Bridge Corporation Ltd., (2015) 2 SCC 52, it was held as under:

        “In the case of contracts between Government Corporations/State owned companies with private parties/contractors, the terms of the agreement are usually drawn by the Government Company or public sector undertakings. Government contracts have broadly two kinds of arbitration clauses, first where a named officer is to act as sole arbitrator; and second, where a senior officer like a Managing Director, nominates a designated officer to act as the sole arbitrator. No doubt, such clauses give the Government a dominant position to constitute the Arbitral Tribunal are held to be valid. At the same time, it also casts an onerous and responsible duty upon the persona designata to appoint such persons/officers as the arbitrators who are not only able to function independently and impartially, but are in a position to devote adequate time in conducting the arbitration. If the Government has nominated those officers as arbitrators who are not able to devote time to the arbitration proceedings or become incapable of acting as arbitrators because of frequent transfers, etc., then the principle of “default procedure” at least in the cases where the Government has assumed the role of appointment of arbitrators to itself, has to be applied in the case of substitute arbitrators as well and the court will step in to appoint the arbitrator by keeping aside the procedure which is agreed to between the parties. However, it will depend upon the facts of a particular case as to whether such a course of action should be taken or not. S.P. Singla Constructions (P) Ltd. v. State of H.P., (2019) 2 SCC 488.

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Arbitration – Notice Under Section 21 of the Act is Mandatory

Considering that the running theme of the Arbitration and Conciliation Act is the consent or agreement between the parties at every stage, Section 21 performs an important function of forging such consensus on several aspects viz., the scope of the disputes, the determination of which disputes remain unresolved; of which disputes are time-barred; of identification of the claims and counter claims and most importantly, on the choice of arbitrator. Thus, the inescapable conclusion on a proper interpretation of Section 21 of the Act is that in the absence of an agreement to the contrary, the notice under Section 21 of the Act by the claimant invoking the arbitration clause, preceding the reference of disputes to arbitration, is mandatory. In other words, without such notice, the arbitration proceedings that are commenced would be unsustainable in law. Alupro Building Systems Pvt. Ltd. v. Ozone Overseas Pvt. Ltd., 2017 SCC Online Del 7228.   

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Arbitral Award – Correction of Errors

In Mcdermott International Inc. v. Burn Standard Company, (2006) 11 SCC 181, it was held as under:

            “Section 33 of the Arbitration and Conciliation Act empowers the Arbitral Tribunal to make correction of errors in arbitral award to give interpretation of a specific point or a part of the arbitral award and to make an additional award as to claims, though presented in the arbitral proceedings, but omitted from the arbitral award. Sub-section (4) empowers the Arbitral Tribunal to make additional arbitral award in respect of claims already presented to the Tribunal in the arbitral proceedings but omitted by the Arbitral Tribunal provided:

  1. There is no contrary agreement between the parties to the reference;
  2. A party to the reference, with notice to the other party to the reference, requests the Arbitral Tribunal to make the additional award;
  3. Such request is made within thirty days from the receipt of the arbitral award;
  4. The Arbitral Tribunal considers the request so made, justified; and
  5. Additional arbitral award is made within sixty days from the receipt of such request by the Arbitral Tribunal.”

The powers under Section 33 (4) of the Arbitration and Conciliation Act cannot be invoked for raising fresh claims or seeking an appeal against the arbitral award. The powers of the Arbitral Tribunal in these proceedings are restricted to making an award for such claims which formed a matter for adjudication and on which the parties had led arguments. Pramod v. Union of India, 2019 (1) AWC 969.

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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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