Common Commercial Disputes Queries – August, 2022

By Gunjan Chhabra

Questions Answered in this Month’s CCDQ:

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In the case of Indian Oil Corporation Limited v. NCC Limited, (#SupremeCourtofIndia, 20.07.2022), the Contract between the parties provided that if the contractor considers himself entitled to any extra payment or compensation he is required to “notify” his claim to the Engineering In Charge (EIC) within 10 days (“notified claims”), and they should also be included in the Final Bill if they remain pending at that stage. 

Only those claims which were specifically notified and included in the Final Bill, could be referred to arbitration. 

The Contract also provided for specific matters to be excluded from the scope of #arbitration. The relevant exclusions were as under:  

1. The decision regarding whether a claim is a “notified claim” or not.
2. The decision whether the contractor has included its “notified claim” in the Final Bill or not. etc.

(“Excepted disputes”).           

The contract also provided that if the claims were not notified in time, & certain other conditions would be unsatisfied then IOCL would be discharged absolutely from such claims. 

In this case, NCC made certain claims which were also specifically included in the Final Bill. NCC also informed IOCL, that incase it accepted its EOT requests along with price adjustment then all extra/addiitonal claims including Notified Claims should be treated as withdrawn. 

Consequently, IOCL approved some claims but not the others. After this, NCC invoked arbitration, & IOCL replied saying since NCC had withdrawn certain claims, there were no “notified claims” to be referred to arbitration. Also IOCL replied that some other claims, despite being notified, stood discharged due to non-compliance with the contract.

After this NCC approached the Delhi High Court who appointed a sole arbitrator under Section 11(6). 

IOCL filed an SLP before the Supreme Court of India (SC), submitting that excepted disputes could not be referred to arbitration in terms of the agreement. The Supreme Court observed as follows:

1. Parties are governed by the contract, & dispute resolution through arbitration is agreed only in terms of the contract. Court cannot transplant equity where parties are bound by explicit terms. (Narbheram Power & Steel (P) Ltd. (2019) 9 SCC 209).
2. Parties have autonomy to decide not only procedural law, but even substantive law. Joint intent of parties has to be seen. (Centrotrade Minerals & Metal Inc., DLF Universal Ltd. & Anr. v. Director, Town & Country Planning Department, Haryana & Ors. [(2010) 14 SCC 1]).
3. If a non-arbitrable dispute is referred to an arbitrator, there cannot be a presumption that the parties had agreed to refer the issue to the #arbitrator. Even if appointed the arbitrator could not have decided the said “excepted disputes”.
4. Despite the 2015 arbitration amendment, rarely the Court may interfere at the stage of Section 11 when it is manifestly & ex facie certain that the arbitration agreement is non existent, invalid or the disputes are non-arbitrable. The restricted review is to check & protect parties from being forced to arbitrate when the matter is demonstrably “nonarbitrable” & to cut off the deadwood.
5. Where there is even the slightest doubt, the rule is to refer the parties to arbitration.
5. In the present case, whether the claim is settled & discharged is definitely arbitrable. However, whether the claims themselves were notified or not, is not an arbitrable dispute, which is evident from a reading of the clauses of the contract.
6. Therefore, certain claims which the GM had said were notified claims, the AT would go on to decide the arbitrability based on to the plea of discharge. However, for those claims where the GM has said the claims are not notified, it shall not be open to the Court to refer the same to arbitration under Section 11.

With these directions the SLP was disposed off & the Court directed that the arbitrator would adjudicate only on those claims declared by the General Manager, IOCL as notified claims.

This was the question posed in the case of Y Harish v. Y Satish (Karnataka High Court, decided on 1.07.2022).  

The Respondent had sent a notice of invoking arbitration to the Petitioner, who in its reply had stated that the dispute does not fall within the arbitration clause contained in the contract between parties.            

Thereafter the Respondent filed a suit seeking adjudication of the dispute. In response the Petitioner filed an Application under Order 7 Rule 11 (d) of the Code of Civil Procedure (where suit seems to be barred in law based on the averments in the Plaint). The Plea taken by the Petitioner was that since the Respondent had already invoked arbitration, the correct remedy would have been to file an Application for appointment of #arbitrator under Section 11 of the #Arbitration & conciliation Act, 1996 and not a suit. The said application was decided against the Petitioner. 

It was against this order, that the Petitioner had filed a Writ Petition before the Karnataka High Court. 

The Karnataka High Court observed as follows:

1. The Petitioner’s reply to the Respondent’s arbitration notice makes it clear that the Petitioner has waived its right to settle dispute in an arbitration proceeding. Once waived such a right cannot be reclaimed.       
2. In any case the correct remedy for the Petitioner would have been to file an application under Section 8 of the Arbitration & Conciliation Act, 1996 before or at the time of filing its first statement on the substance of the dispute. Apart from section 8, there is no provision which ousts the jurisdiction of the civil court. (Reliance placed on P.Tarachand vs. Seshamal M.Jain 2019 SCC Online Kar 2768).
3. Since the Petitioner, had even till date, taken no recourse to Section 8, the single judge’s order did not warrant any interference. 
4. The court observed that the Petitioner cannot keep its rights in sleeve and be then use them at will. The Petitioner by its conduct had already waived its rights to arbitration.

In view of the above, the Writ Petition was dismissed.

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In the case of VISION PROJECTS TECHNOLOGIES PVT.LTD. P (“VP”) v. OSV Crest Mercury (“OSV”) (Bombay High Court, decided on 26.07.2022), VP had filed a commercial admiralty suit praying for sums to be paid to VP and also for arrest and sale of OSV’s vessel and for the sale proceedings to be applied towards VP’s claims.

VP’s claims arose under a Bimco Standard Bareboat Charter, as per which VP had carried out special survey, dry-docking and various repairs to OSV’s vessel. Apprehending that OSV’s vessel may be re-exported out of Indian waters, by circumventing the necessary customs procedure and without following proper re-export formalities and OSV’s vessel may be taken to a location beyond jurisdiction of the Court, VP had moved for arrest of the vessel, which was allowed by the Bombay High Court.

Subsequently, OSV filed an application for vacating the order of arrest, on the grounds that VP had created false case of urgency, and since the charterparty provided for resolution of the dispute through arbitration, an admiralty action in rem in aid of security of #arbitration proceeding is not permitted, amongst other grounds. 

As of this date, arbitration proceedings were already pending between the parties. 

On the issue of the Arrest of Vessel, the Court observed as follows:

1. The fact that the dispute is amenable to arbitration does not ipso facto imply that the vessel cannot be arrested in an action in rem.
2. The power of court to arrest the ship is contained in Section 4 of the Admiralty Act, 2017. The presence of an arbitration agreement does not oust the jurisdiction of civil court under Section 4 of the Admiralty Act. (Reliance placed on Siem Offshore Redri AS vs. Altus Uber 2018 SCC OnLine Bom 2730).
3. It needs to be seen on the facts and circumstances of every case, whether the admiralty suit has been instituted merely to secure the claim in arbitration or not. 
4. In this particular case, a reading of the plaint as a whole leads to the inference that VP has instituted a comprehensive suit for recovery of the amount which is asserted as its maritime claim. So the suit is not for interim relief alone but is a substantive action for recovery of maritime claims has also been filed. So it cannot be said that the interim relief is for security of claims in arbitration. 

In view of the above, the issue of arrest of the vessel was decided in favour of VP and OSV’s application was dismissed. 

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UNICON ENGINEERS v. M/s Jindal Steel & Power Ltd. (Delhi High Court, decided on 26.07.2022), was an execution Petition filed seeking the execution of an order passed my the Micro & Small Enterprises Facilitation Council, Coimbatore Region (“MSEFC”).

The said order was passed by the MSEFC in the #conciliation proceeding itself. The MSEFC held, that there has been no conciliation possible between the parties, and based on the detailed examination of Unicon’s claims, MSEFC issued “final orders” recording the Respondent’s liability to pay.

Pertinent to note, that this order was passed in conciliation, and no #arbitration was held after this. 

The Court observed as follows:

1. Under Section 18(3) of the Micro & Small Enterprises Development Act, 2006 (MSMED Act), when conciliation fails and stands terminated, the dispute between the parties can be resolved by arbitration. It is open to MSEFC to arbitrate and pass an award, after following procedure under relevant provisions of the #Arbitration & Conciliation Act, 1996, particularly sections 20,23,24 and 25 or to appoint an #arbitrator who follows the same procedure.
2. There is a fundamental difference between conciliation & arbitration, the former being an amicable settlement, and the latter being an adjudication of disputes. The claim has to be proved before the #arbitrator, if necessary by adducing evidence, in the case of arbitration. (Reliance placed on Jharkhand Urja Vikas Nigam Limited vs. The State of Rajasthan & Ors. Civil Appeal No. 2899/2021, Supreme Court, decided on 15.12.2021).
3. In this case, instead of following the procedure under Section 18(3) of the MSMED Act, the Council proceeded to direct that the Petitioner was entitled to recover part of its claim from the Respondent. Such a direction is a nullity and not an award at all. The applicability of Section 34 of the Arbitration & Conciliation Act, 1996 is specifically negated. 
4. The enforcement proceedings are therefore not maintainable. 

In view of the same, the Petitioner was permitted to approach the arbitrator and the arbitrator would consider all its claims, even those “permitted” by the MSEFC. 

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In the case of Mahanadi Coalfields Ltd. v. M/s IVRCL AMR Joint Venture (#SupremeCourtofIndia decided on 25.07.2022), when disputes had arisen between the parties, the Respondent approached the High Court of Orissa for appointment of arbitrator under Section 11 of the Arbitration & Conciliation Act, which was allowed by the Single Judge.

Against the said order the Appellants filed an Appeal before the Supreme Court of India.

 The dispute resolution clause in the contract read as follows:

 Clause 15 titled as ‘Settlement of Disputes/Arbitration’ read as follows:

“15. Settlement of Disputes/Arbitration:

15.1 It is incumbent upon the contractor to avoid litigation and disputes during the course of execution. However, if such disputes take place between the contractor and the department, effort shall be made first to settle the disputes at the company level. The contractor should make request in writing to the Engineer-in-Charge for settlement of such disputes/claims within 30 (thirty) days of arising of the case of dispute/claim failing which no disputes/claims of the contractor shall be entertained by the company.

15.2 If differences still persist, the settlement of the dispute with Govt. Agencies shall be dealt with as per the Guidelines issued by the Ministry of Finance, Govt. of India in this regard. In case of parties other than Govt. Agencies, the redressal of the disputes may be sought in the Court of Law.”

The Supreme Court held regarding the dispute resolution clause as follows:

1. As regards the form of an arbitration agreement provided under Section 7 of the #arbitration & Conciliation Act, 1996, While there is no specific form of an arbitration agreement, the words used should disclose a determination and obligation to go to arbitration and not merely contemplate the possibility of going for arbitration. Where there is merely a possibility of the parties agreeing to arbitration in future, as contrasted from an obligation to refer disputes to arbitration, there is no valid and binding arbitration agreement.
2. Mere use of the word “arbitration” or “arbitrator” in a clause will not make it an arbitration agreement, if it requires or contemplates a further or fresh consent of the parties for reference to arbitration. (Reliance placed on Jagdish Chander v. Ramesh Chander (2007) 5 SCC 719)
3. In the present case, clause 15 is titled “arbitration” but the provision makes it abundantly clear that there is no arbitration agreement between the parties agreeing to refer either present or future disputes to arbitration. It is a dispute resolution mechanism at the company level, rather than an arbitration agreement. (Reliance placed on IB Valley Transport, Vijay Laxmi (P) Ltd. v. Mahanadi Coalfields Ltd (2014) 10 SCC 630).
4. The single Judge’s order proceeds on an understanding that the counsel for both parties did not dispute the existence of arbitration agreement. However, the understanding of counsel cannot be regarded as a binding statement of law on existence of the arbitration agreement.

 In view of the above, the Court held that the invocation of Section 11 for appointment of arbitrator was not valid, since there was no arbitration agreement between the parties.

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In the case of Continental India Private Limited v. General Manager Northern Railway (#SupremeCourtofIndia decided on 27.07.2022), a Clause in the General Conditions of Contract (GCC) between the parties governed dispute resolution. The said clause provided that in the event of any question, dispute or difference arising under or in connection with agreement, the same shall be referred to the sole arbitration of a person appointed to be the arbitrator, by the General Manager of the Respondent.

When disputes arose between the parties, the Appellant sent a notice invoking arbitration to the Respondent, asking it to appoint the arbitrator. However, the Respondent failed to appoint the #arbitrator, consequent to which the Appellant filed an application under Section 11(6) of the #arbitration & conciliation Act, 1996 before the High Court. 

The High Court, despite noting the failure of the Respondent went on to direct the Respondent to abide by the clause in the GCC and to appoint the arbitrator.

Against the High Court’s order, the Appellant approached the Supreme Court, and the Supreme Court observed as follows:

1. Once the dispute arose between the parties & despite invocation of the arbitration clause in terms of the agreement between the parties, no arbitrator was appointed, the Respondent has forfeited its right to appoint the arbitrator in terms of the clause in the GCC. (Reliance placed on Deep Trading Company vs. Indian Oil Corporation and Others; (2013) 4 SCC 35). 
2. The Chief Justice of the High Court ought to have appointed an arbitrator under Section 11(6) of the Arbitration & Conciliation Act, 1996 as the Respondent had forfeited its right to appoint. 
3. The High Court has committed a serious error in directing the Respondent to constitute an Arbitral Tribunal instead of appointing the arbitrator in exercise of its powers under Section 11(6).

In view of the above, the Supreme Court was of the view that the matter ought to be remanded to the high Court, but in order to avoid further delays it appointed an arbitrator with the consent of the parties. 

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In the case of General Manager, East Coast Railway Rail Sadan (#SupremeCourtofIndia decided on 22.07.2022), the arbitrator was appointed by the Appellant in response to the Petitioner’s request. However, being dissatisfied by the appointment the Petitioner had approached the High Court of Orissa at Cuttack under Section 11(6) of the #arbitration & Conciliation Act, 1996.

Important to note, that prior to this the Respondent had approached District Court in Vishakhaptnam, Andhra Pradesh under Section 9 of the Arbitration & Conciliation Act, 1996 seeking interim injunction against encashment of Bank Guarantee which was decided in favour of the Respondent.

Before the High Court of Orissa, the Appellant had raised an objection under Section 42 of the arbitration & Conciliation act, stating that the application under Section 11(6) should have been filed before the High Court of Andhra Pradesh at Amaravati as the respondent itself earlier filed Section 9 application before the Court at Vishakhapatnam.

However, without deciding on this jurisdictional objection, the Orissa High Court appointed the sole arbitrator stating that relegating the Respondent to the appropriate High Court would just delay adjudication of disputes.

 It was against this order of the High Court, that the Appellant had approached the Supreme Court.

The Supreme Court observed as follows:

1. There was no doubt, that considering section 42, the High Court of Andhra Pradesh alone would have jurisdiction to decide all subsequent applications including the section 11 application.
2. Without deciding the jurisdictional objection which went to the root of the matter, the High Court had entertained and appointed the sole arbitrator under Section 11 of the Act.
3. The appellant might not have opposed t appointment of an arbitrator, but that by itself is not enough to confer jurisdiction upon the High Court of Orissa, if the otherwise, the High Court had no jurisdiction.

 In view of the above, Orissa High Court’s judgment was set aside and quashed.

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This issue arose in the case of Brij Raj Oberoi v. Secretary, Tourism & Civil Aviation Department (#SupremeCourtofIndia , decided on 18.08.2022),

The Respondent had leased out its property to the Appellant in terms of a lease which contained an arbitration clause. When the lease was due to expire, the Appellant sought a renewal of the lease which the Respondent rejected.

 As the lease was due to expire, the Appellant filed an Application under Section 9 of the #arbitration & conciliation Act, 1996 (“A&C Act”) seeking stay on termination of the lease until the disputes and differences were decided through arbitration. This was decided in favour of the Appellant & the Respondent was so restrained.

This order was set aside in appeal under Section 37 of the A&C Act, and the Appellant’s Section 11 Petition for appointment of #arbitrator was also rejected on the ground that the renewal of lease was not an arbitrable dispute in terms of the arbitration clause in the lease. The Court had stated in its decision that a plain reading of the arbitration clause revealed that the dispute relating to renewal of lease was not arbitrable. 

The arbitration clause read as follows:

“The lessee shall in the last year of the lease tenure and not later than six months prior to the expiry of the present lease, communicate in writing to the lessor his terms and conditions for the renewal of the present lease and if the same is accepted by the lessor, then the present lease may be renewed for such further period and on such rent as may be mutually agreed upon between the parties thereto, failing which the matter shall be referred to arbitration by an arbitrator to be appointed by the Chief Justice of the Sikkim High Court”

It was against this order that the Appellant had approached the Supreme Court of India.

The Supreme Court observed as follows:

1. The arbitration clause was worded in a manner that if the renewal was agreeable to both parties then the disputes relating to period and rent amount were arbitrable disputes.
2. In the present case, the disagreement of the parties on the renewal was due to the disagreement on rent and period of lease.
3. The arbitration clause could not be simply rendered otiose due to the refusal of the Respondent state to renew the lease.
4. The issue of arbitrability of the dispute over non-renewal of the lease was very much within the realm of the Arbitral Tribunal/arbitrator.

 In view of the above, the appeals were allowed, the judgment of the division bench was set aside and the arbitrator was appointed to adjudicate disputes between the parties. The order of status quo was also continued until 3 months or until further orders of the Arbitral Tribunal, whichever earlier.