Common Commercial Disputes Queries, December 2022

By Gunjan Chhabra

Questions Answered in this Month’s CCDQ:

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In Simran Sodhi v Sandeep Singh (Delhi High Court, decided on 11.09.2022), the parties had entered into a Partnership Deed for carrying out manufacturing and trading of plastics, electronics and electrical items. Due to losses, the partners decided to amicably dissolve the partnership. Herein several disputes arose, various third parties also got involved during the dissolution process, when the pending orders of the partnership needed to be taken care of.

Both parties filed applications for appointment of arbitrator before the Delhi High Court under Section 11 of the #Arbitration & Conciliation Act, 1996. The question was  whether the third parties which had gotten involved in the dealings and disputes between the partners could also be impleaded in the same arbitration proceedings.

Here the Court relying on its previous decision, KKR India Private Financial Services Limited & Anr. v. Williamson Magor & Co. Limited & Ors., 2020 SCC OnLine Del 2413, reiterated all principles with regard to the Doctrine of Group of Companies. The same are reiterated below:

1. Section 9 cannot be confined only to the parties to the arbitration agreement.
2. “Group Companies Doctrine‟, is an exception whereby arbitration agreement binds a non-party or a nonsignatory as well;
3. The arbitration agreement entered into by one of the companies in the group and the non-signatory affiliate, or sister, or parent concern is held to be bound by the arbitration agreement, if the facts and circumstances of the case indicate a mutual intention of all parties to bind both the signatories and non-signatory affiliates in the group, or;
4. This Doctrine gets attracted when a non-signatory entity on the Group, was engaged in the negotiation or performance of the commercial contract, or made statements indicating its intention to be bound by the contract, or;
5. In cases where there is a tight group structure with strong organizational and financial links, so as to constitute a single economic unit, or a single economic reality, especially when funds of one company is used to financially support or re-structure other members of the group, or;
6. Doctrine can be invoked to bind non-signatory affiliate of a parent company or inclusion of a third party to arbitration, where there is a direct relationship between the party which is a signatory to the arbitration agreement or there is direct commonality of the subject matter
7. Even if all parties to the lis were not signatory to all the agreements, but none of the Companies was a stranger to these transactions; parties intended, executed and implemented a composite transaction.

The Court then went on to observe as follows:

1. Doctrine of Group of Companies can be invoked in certain exceptional circumstances to bind non-signatory affiliates to an arbitration agreement.
2. However here the partner in the partnership firm was trying to bind a company, the Respondent no. 3 to the arbitration agreement between the parties.
3. This was clearly impermissible as a partnership in its very nature could not be equated with a company to invoke the Doctrine. This doctrine would be applicable only where one of the companies in a group has entered into an arbitration agreement, and the non-signatory affiliate company is held to be bound by arbitration, which was clearly not the case here.
4. It was also not the case pleaded that the Respondent no. 3 was engaged in any negotiations or performance of commercial obligations, indicating its intention to bind itself to the arbitration agreement.

In view of the above, it was held that the Respondent no. 3 could not be referred to arbitration, but the arbitrator was appointed for disputes between the Petitioner and the Respondent no. 1.

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This was the issue called into discussion in the case of Rahul Jain v. Atul Jain (Delhi High Court, decided on 17.11.2022).

The disputes between the parties had arisen out of Memorandum of Family Settlement between different family members.

Here the question was whether the invocation of arbitration was valid and also whether the Court can look into such a question at the stage of deciding an application for appointment of an #arbitrator.

The Court observed as follows:

1. It is well settled that an application under Section 11 for appointment of arbitrator can only be filed after notice invoking arbitration has been sent, and there is failure to make the appointment. (Relied on Bharat Sanchar Nigam Limited & Anr. vs. Nortel Networks India Private Limited (2021) 5 SCC 738)
2. Where parties have agreed on a procedure for appointment, unless such a notice is sent, it will not be possible for the party seeking appointment to demonstrate that there was failure by one part to adhere to the procedure and accede to the request for appointment of an arbitrator.
3. The theme of the Arbitration & conciliation Act, 1996 is consent. Notice of invocation under 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.
4. It also serves the important purpose of inviting them to participate in the due constitution of the arbitral tribunal in the manner contemplated under the agreement, without which the claimant cannot initiate proceedings under Section 11.
5. Therefore, a notice under Section 21 of the #Arbitration & conciliation Act, 1996 for invoking arbitration is mandatory and performs many important functions. It is not a mere technicality.
6. The Petitioner had only sent letter of invocation to one party with a mere copy to the other parties. No letter of invocation was addressed to the other parties.
7. Invocation of arbitration has to be in clear terms. Mere reference to claims and disputes and existence of clause would not itself mean that arbitration has been invoked. (Reliance placed on D.P. Construction vs. Vishvaraj Environment (P) Ltd. 2022 SCC OnLine Bom 1410)
8. Since the pre-condition of invoking Section 11 and approaching the Court for appointment was not fulfilled by either party, the present application deserved to be rejected.

In light of the above, the Court held that the issue of invocation goes to the very root of the matter, the Petition for appointment of arbitrator deserved to be dismissed.

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In Bhoj Raj Garg Versus Goyal Education & Welfare Society & Ors. (#SupremeCourtofIndia, decided on 18.11.2022), the Petitioner complained to the Supreme Court that the Execution Court was not deciding the Execution Proceeding in a timely manner.

The Supreme Court observed as follows:

1. Previously the Supreme Court has already held that the executing Court must dispose of the Execution Proceedings within six months from date of filing, which may be extended only by recording reasons in writing for such delay. (Reliance placed on Rahul S. Shah Vs. Jinendra Kumar Gandhi & Ors., (2021) 6 SCC 418).
2. This means it is the duty of the Execution Court to dispose of the execution proceedings at the earliest.
3. Every effort should be made to dispose of the execution petition within the said time limit of six months and the Execution Court should have reasons for not being able to dispose of the execution petition.
4. The Execution Court is duty bound to record reasons in writing when it is unable to dispose of the matter

Subject to these observations the Special Leave Petition was disposed of.

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Naresh Nayalal Rajwani v. Kotak Mahindra Bank Ltd. (Bombay High Court, decided on 23.11.2022), was a Petition under Section 34 challenging the award passed in an arbitration proceeding between the parties.

Disputes had arisen due to non-repayment of loan taken by the Petitioner from the Respondent Bank. The #arbitration proceedings between the parties had culminated in an award in January 2013.

The said award was then challenged under Section 34 of the Arbitration  & Conciliation Act, 1996 which was allowed by the Ld. Single Judge, due to violation of principles of natural justice.

Again the Bank invoked arbitration clause afresh, unilaterally appointed the #arbitrator and an award came to be passed in August 2019. Against this second award the present petition under Secton 34 was filed.

One of the main grounds on which the Section 34 Petition was argued was that the arbitration proceedings were vitiated due to the operation of Section 12(5) (the disqualification of arbitrator due to the unilateral appointment).

The Court observed as follows:

1. The ground of the proceedings being vitiated from the inception, due to Section 12(5) goes to the very root of the matter. All other grounds pay into insignificance.
2. The said ground, even though not specifically raised in the petition, gets covered under the ground of “being perverse, against settled provisions of law and public policy”.
3. Section 12(5) was inserted with effect from 23.10.2015 & it starts with ‘Notwithstanding any prior agreement to the contrary’. So even if the arbitration agreement entered into before this date provides for unilateral appointment, it would fall foul of Section 12(5) read with 7th Schedule. (Reliance placed on Perkins Eastman Architects DPC and Anr. Vs. HSCC (India) Limited (2020) 20 SCC 620 and TRF Ltd. Vs. Energo Engineering Projects Limited (2017) 8 SCC 377)
4. Since the Bank initiated the second proceeding in 2018 this provision would very much be applicable.
5. The said provision also specifically provides the manner for waiving the provision, that is by an express agreement in writing.
6. Therefore, it could not have been said that due to Section 4 of the Arbitration & Conciliation Act, merely because the Petitioners participated in arbitration proceedings, they were dis-entitled from raising the ground of the proceedings being vitiated due to unilateral appointment.

In view of the above, the Petition was allowed, and the award was set aside.

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NEW INDIA ASSURANCE COMPANY LIMITED(THE) v. Khanna Paper Mills Ltd. (Decided on 05.12.2022) was a petition under Section 34 of the Arbitration & Conciliation Act, 1996 challenging an award which had allowed some claims of the Respondent.

The key issue which had arisen was whether the claims of the Respondent had been discharged due to “accord and satisfaction” and therefore owing to the same, whether the award suffered from “patent illegality”.

The Court, regarding the plea of “accord and satisfaction” noted as below:

1. The claim of accord and satisfaction as raised by the Petitioner was based on a “Joint” Discharge Voucher signed by both parties.
2. The Respondent had contended both before the #arbitrator & before Court that, due to there being undue delay by the Petitioner in payments, it had signed a blank discharge voucher under duress, in which the details had been filled later by the Petitioner.
3. The Court compared the blank voucher, with the completed voucher which revealed that they were the same document, with details relating to amount of final settlement filled in later by the Petitioner.
4. The Arbitral Tribunal had also noted, that while the Petitioner had not lead any evidence on the signing of the Discharge Voucher, the Respondent had led evidence regarding signing of the Blank Voucher by the Respondent with the help of witnesses and also the filing of the blank discharge form.
5. Further, the Arbitral Tribunal had observed that this was the only explanation of how the Respondent could even get a hold of a blank voucher signed by it alone. Otherwise The Respondent would have been sent a copy of the fully filled voucher to ask for his signatures by the Petitioner, and the Respondent would not then possess the Black voucher copy.
6. The Court noted that in fact the Petitioner had not contended that the blank discharge voucher was a fabrication before the Court.

In view of the same the Court held that the signing of a blank discharge voucher, even by itself indicated elements of duress and coercion, and on this preliminary objection, the Award was upheld as the claim would not be extinguished by accord and satisfaction.

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In the case of Union of India v. Reliance Industries Limited (Delhi High Court, decided on 09.12.202), Ministry of Petroleum & Natural Gas (“MOPNG”) had instituted proceedings under Section 14 & 15 of the #Arbitration & Conciliation Act, 1996 (“A&C Act” for a declaration that the Arbitral Tribunal (“AT”) nominated by the Respondents was de jure/de facto unable to discharge their functions due to “apparent bias” & should stand terminated in terms of Section 14.

The Respondent made a preliminary objection to the maintainability of the Petition.

The Court while deciding the matter held as follows:

1. Sections 12, 13 & 14 of the A&C Act, are a trinity of provisions constituting a composite statutory scheme for challenging the mandate of an #arbitrator, & termination thereof.
2. Where sections 12 & 13 lay down procedure for challenge which must mandatorily be mounted before the Arbitrator, Section 14 speaks of challenges which may be instituted before Court.
3. section 12(1) of the A&C Act states that the grounds stated in 5th Schedule to the A&C Act shall act as guide to determine independence & impartiality of an #arbitrator or “justifiable doubts”. The issue of “Bias” is covered under Schedule 5.
4. Therefore the issue of Bias needs to be established in fact &“circumstances”. Mere presence of 5th Schedule factors does not lead to an automatic disqualification of the arbitrator.
5. The 7th schedule on the other hand deals with non-derogable disqualifications. The 7th Schedule deals with the existence of specific relationship of the arbitrator with parties, counsel or dispute. If the objection is under 7th schedule it leads to per se disqualification. It is these disqualifications alone which are “de jure”, which automatically render an arbitrator ineligible.
6. The challenge procedure where an objection of bias or “justifiable doubts” under the 5th schedule is taken is specifically set out in Section 13(2) which provides that a party is supposed to send a written statement of such a challenge with reasons to the AT.
7. Upon receipt of such a challenge, the arbitrator under Section 13(3) can either recuse, withdraw, or refuse to recuse/withdraw & decide on the challenge.
8. Under Section 13(4) if the challenge fails, the AT is entitled to continue the proceedings & make an award.
9. The allegation of bias would not fall within the scope of a challenge under Section 14 before the Court as it does not fall within the 7th schedule but within the 5th schedule & the specific procedure set out above would need to be followed before the AT as explained above.

In view of the above, Petition was dismissed as not being maintainable, keeping it open for the MOPNG to raise the contention of bias before the AT in the appropriate application.

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In the case of ALWAYS REMEMBER PROPERTIES PRIVATE LIMITED v Reliance Home Finance Ltd. & Anr. (Delhi High Court, decided on 07.12.2022), the applicants had sought the recall of an earlier order by Court.

In the earlier order, the Court in an application under Section 11 had noted that since Insolvency proceedings had begun against the Respondents, moratorium would take into effect & therefore all proceedings would stand interdicted.

Both parties were ad-idem that there was indeed a factual error, as no Insolvency had been instituted against Respondent no. 1 against whom the appointment of #arbitrator was sought.

However it was the Respondent’s contention that a Court exercising powers under Section 11 of the Arbitration & Conciliation Act, 1996 would not be entitled to undertake a substantive review.

The Court observed as follows:

1. The power of a Court under Section 11 is no longer a mere administrative function, it is judicial. (Reliance placed on United India Insurance Company Limited vs. Antique Art Exports private Ltd., [(2019) 5 SCC 362].
2. The review or re-opening of proceedings sought is not with respect to any power exercised by the Court under Section 11 on merits, it is on account of a factual mistake in the order.

In view of the above, the previous Order of Court was recalled and the Application for appointment of arbitrator, placed for fresh consideration.