by Gunjan Chhabra

Questions Answered in this Month’s CCDQ

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  2. ??? ??? ? ????-????? ??? ????? ??? ???? ????? ????? ???? ??? ?????????? ???????????? ?? ????? ???? ?????? ?? ??? ????? 
  3. ?????? ?????? ?? ???????? ??????? 11 ????????? ?? ??????, ???? ??? ??? ??????? ????? ???
  4. ??? ??? ? ?????????? ??? ??? ?????? ????????? ??? ??? ??? ??? ????? ?? ?????? ???????? ??? ????????? ???? ???? ?????????? 
  5. ???? ??????? ?? ? ?? ?????? ??????????? ????? ??? ???? ??????? ??????? ???????
  6. ??? ??? ???????? ?? ?????? ?? ????? ???, ?? ???? ???? ???? ???????? ?? ??????????? ????? ??????? 8?

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In the case of Himanshu Shekhar v. Prabhat Shekhar, a dispute which arose between between two brothers, was consensually referred to #arbitration, and one of the brothers had challenged the jurisdiction of the #arbitrator on the ground of automatic disqualification being a related party. 

The Seventh Schedule of the Arbitration & Conciliation Act, 1996(“A&C Act”) contains entries which are per se disqualifications for an arbitrator. Entry number 9 of the seventh schedule in particular provides:

9. The arbitrator has a close family relationship with one of the parties and in the case of companies with the persons in the management and controlling the company.”

The Court observed as follows:

  1. The seventh schedule draws from the Non-waivable Red List contained in the IBA Guidelines (International Bar Association Guidelines on conflict of interest in International Arbitration). 
  2. Explanation I to the Seventh Schedule of the A&C Act, defines ‘close family member’ as “refers to a spouse, sibling, child, parent or life partner.”
  3. In the present case, it was contended that one of the parties, had a close family relationship as the party was the “father in law of his daughter”. (Obviously since the parties were brothers, the arbitrator was also somehow related to the other party).
  4. In view of the above, the Court held that the above relationship could not be considered to be a “close family member” within the meaning of the Seventh Schedule, and as such the Court did not need to look into the automatic disqualification any further.
  5. As far as the fifth schedule is concerned, it was clear that the party who had placed the challenge did not have any doubts as to the impartiality or independence or bias of the arbitrator. A statement to this effect was also signed in the Reference letter signed by both parties, who agreed that the arbitrator was identically related to both parties, and had no doubts in terms of Fifth Schedule. This was also confirmed in the Application before Court. 

In light of the above, the Court held that it was unnecessary to decide the question of waiver in terms of Section 12(5) of the A&C Act as the arbitrator’s qualifications did not fall within the seventh schedule. The Petition was therefore dismissed.

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Puneet Kaur v. KV Developers & Ors (NCLAT, decided on 01.06.2022), was a case where 5 appeals had been filed by Homebuyers against the builder/ Corporate Debtor (“CD”). 

The Home buyers had filed their claims after a delay of eight months from the cut-off date advertised by the Resolution Professional, & since, the Resolution Plan had already been approved, the claims were rejected. 

These Home buyers had approached the NCLAT against the rejection of their claims by NCLT. 

The NCLAT observed as follows:

  1. Home-buyers are a class of Financial Creditors who are required to file their claims within the time provided by Resolution Professional as advertised in two newspapers. There is a very real possibility that homebuyers may not be able to submit their claims within time, being in hundreds of numbers, & not necessarily being in the area where the advertisements were published. However, the law as it stands today, these homebuyers cannot be included in the List of Creditors, that too after approval of Plan by the Committee of Creditors(“COC”). (Reliance placed on Mukul Kumar vs. M/s RPS Infrastructure – Company Appeal (AT) (Insolvency) No. 1050 of 2020 & Harish Polymer Product v. George Samuel – Company Appeal (AT) (Insolvency) No.420 of 2021).
  2. However, the extinguishment of claims of homebuyers will happen only after approval of Plan by NCLT, not merely approval by COC. (Reliance placed on Ghanashyam Mishra & Sons Pvt. Ltd. vs. Edelweiss Asset Reconstruction Co. Ltd. (2021) 9 SCC 657). Therefore as on today, the homebuyers claims do not stand extinguished.
  3. All documents pertaining to homebuyers, even if no claim is filed, are on record with the CD Builder & the Interim Resolution Professional. Regulation 36 of CIRP regulations states that the Information Memorandum is to contain details of all assets and liabilities, thus liabilities towards even these homebuyers need to be included in the Information Memorandum. As such even though Resolution Professional is not obliged to include these belated claims in the list of creditors, these claims must be included in the Information Memorandum as they are clearly reflected from records of the CD.
  4. The non inclusion of claims of homebuyers who could not file their claims, but clearly reflected from record, leads to inequitable and unfair resolution. 

In view of the above, the Resolution Professional was directed to prepare an addendum to the Resolution plan with the details of those homebuyers whose records were being reflected, & the same would be placed before the COC for consideration. The NCLT was also directed to await this consideration, who may then consider the addendum & minutes of COC in that regard, while considering the Resolution Plan. 

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Section 11(13) of the Arbitration & Conciliation Act, 1996 provides that an application for appointment of arbitrator(s) shall be disposed off expeditiously and an endeavour shall be made to dispose off the matter within SIXTY DAYS from date of service of notice to the opposite party.

Despite such a clear provision, I have seen delays of more than 3 years in different High Courts. 

Fortunately, recently this issue has come to the notice of the Supreme Court of India in M/s Shree Vishnu Constructions Versus The Engineer in Chief, Military Engineering Service & Ors (Order passed on 19.05.022), who has made the following observation:

“ It is seen that numbers of applications under Sections 11(5) and 11(6) of the Arbitration Act are pending since more than one year. In many High Courts, applications for appointment of the arbitrator(s) are pending for more than four to five years.

“In that view of the matter, we request all the Chief Justices of the respective High Courts to ensure that all pending applications under Sections 11(5) and 11(6) of the Arbitration Act and/or any other applications either for substitution of arbitrator and/or change of arbitrator, which are pending for more than one year from the date of filing, must be decided within six months from today. The Registrar General(s) of the respective High Courts are directed to submit the compliance report on completion of six months from today. All endeavour shall be made by the respective High Courts to decide and dispose of the applications under Sections 11(5) and 11(6) of the Arbitration Act and/or any other like application at the earliest and preferably within a period of six months from the date of filing of the applications.”

Hopefully this will provide some relief, and bridge the “slip between the cup and the lip”.

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In Ocean Sparkle Limited v. Oil and Natural Gas Corporation Ltd (Bombay High Court, decided on 06.06.2022) ONGC had hired a vessel of the Petitioner to perform its offshore activities as per an Agreement between the parties, under which the Petitioner had also issued a Bank Guarantee in favour of ONGC.

Here, the contract stood performed completely, & ONGC had not disputed the performance of the contract. However, ONGC had made a claim of damages for an incident of collision of vessels, and was not releasing the payment of Petitioner’s agreed invoices due to this “counterclaim”. 

Here the Petitioner had filed a Petition under Section 9 of the #Arbitration & Conciliation Act, 1996, & sought various reliefs from the Court, which were as follows:

  1. That ONGC be directed to deposit the undisputed sum of the Petitioner’s invoices before Court.
  2. That ONGC be restrained from any likely invocation for the Bank Guarantee.
  3. That ONGC return & discharge the Bank Guarantee.

The relevant term of the Bank Guarantee was as follows: 

“5. The Bank further agrees that the Guarantee herein contained shall remain in full force during the period that is taken for the performance of the CONTRACT and all dues of ONGC under or by virtue of this CONTRACT have been fully paid and its claim satisfied or discharged or till ONGC discharges this guarantee in writing, whichever is earlier.”

The Court observed as follows:

  1. ONGC has not disputed performance of the contract, or that amounts are indeed due under the Petitioner’s invoices.
  2. The amounts demanded by ONGC are at best unliquidated damages, because different reports exist as on date whether the Petitioner was indeed negligent regarding the collision caused.
  3. The Court is not bound by the strict vigors of Order 38 Rule 5 of CPC while adjudicating a Petition under Section 9 of A&C Act, 1996 & therefore ONGC was directed to deposit the amount of the invoices in Court.
  4. The Bank Guarantee is titled “Performance Bank Guarantee”. The Contract has already been performed, and although the Bank Guarantee has not been discharged by ONGC, the purpose for which bank guarantee has been given has been fulfilled. The claim of ONGC is of unliquidated damages in any case.
  5. Therefore ONGC cannot be allowed to invoke the Bank Guarantee, & claim of unliquidated damages would be outside the scope of the Bank Guarantee.

On the above terms the Petition was disposed off.

I have several Qualms which the judgment which are contained as hereunder:

  1. Does “Performance” of a Contract, not also include the negligence in performance, if any?
  2. Can Order 38 Rule 5 CPC be completely overlooked while granting an order of deposit of moneys? (Seeing as ONGC is not likely to run away with the moneys any time soon).
  3. Would ONGC be in a better position had it unnecessarily disputed the invoice payments?
  4. Was the Petition not premature for stay on invocation, when there was no actual threat of invocation from ONGC?
  5. Did the Court unnecessarily obsess with the title of the guarantee rather than the form? The terms did provide that the guarantee is to expire (a) When all claims of ONGC are fully paid & claim satisfied OR (b) When ONGC discharges the contract. None of these events had occurred.
  6. How has court come to the conclusion that ONGC’s claims had to be of liquidated damages, to come within the scope of the Bank Guarantee, and not unliquidated damages? The terms of the Bank Guarantee simply uses the word “claims”.
  7. Has the Court glossed over the need to look at “special equities(irretrievable injury)” & “fraud of an egregious nature” grounds, which are essentials for staying invocation of Bank Guarantees?

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In the case of M/s BPR Infrastructure Limited versus M/s. Rites Limited – Government Of India Enterprise. and Anr. (Telangana High Court, decided on 08.06.2022), an application under Section 11(6) of the #Arbitration & Conciliation Act, 1996 had been filed for appointment of arbitrator.

in this case, when the Applicant had sought its payments from the Respondent, the Respondent had stated that payments under the Final Bill would not be released unless the applicant furnished a No Claim Certificate (NCC). 

Thereafter when the Applicant agitated its remaining claims, the Respondent cited the NCC. Owing to this denial disputes arose between the parties. 

Clause 25 of the Contract is relevant which was as follows:

“5) Signing of ‘No Claim” certificate: The Contractor shall not be entitled to make any claim whatsoever against the Employer under or by virtue of or arising out of the Contract, nor shall the Employer entertain or consider any such claim if made by the Contractor after he shall have signed a ‘No Claim Certificate’ in favour of the Employer in such form as stipulated by the Employer, after the works are finally measured up. The Contractor shall be debarred from disputing the correctness of any item covered by the ‘No Claim Certificate’ or demanding a reference to arbitration in respect thereof.”

The court was faced with the dilemma of whether the arbitrator can deal with the question of the NCC being issued under fraud or coercion.

The Court observed as follows:

  1. There is no rule of an absolute kind, that issuance of NCC would discharge the contract in every case. If prima facie it appears to Court that the validity of the NCC is a bona fide dispute, the matter can very well be referred to arbitration. (Reliance placed on Union of India Vs. Master Construction Company (2011) 12 SCC 349).
  2. The effect of the Arbitration and Conciliation (Amendment) Act, 2015 by insertion of Sub Section 6A is that while considering any application under Section 11 for appointment, if the existence of arbitration agreement is not in dispute, all other issues should be left for the #arbitrator to decide. (Reliance placed on Bharat Sanchar Nigam Limited Vs. M/s. Nortel Networks India Pvt. Limited Civil Appeal Nos.843-844 of 2021).
  3. The existence of the arbitration clause is definitely not disputed between the parties, and the Applicant’s claim cannot be said to be deadwood. 
  4. Prima facie the bargaining powers of the parties seem to be unequal, but the aspect of whether NCC would foreclose raising further claims, or would discharge the contract, is certainly an issue which can be dealt with, by the arbitrator. 

In view of the above, the Court appointed the arbitrator keeping all contentions open, including the effect of the NCC. 

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In the case of A-One realtors Pvt. Ltd. v. Energy Efficiency Services Ltd. (Delhi High Court, Decided on 23.05.2022), the Plaintiff had filed a suit, in response to which the Defendant filed an application under Section 8 of the #Arbitration & Conciliation Act, 1996(A&C Act) (for reference of disputes to arbitration due to existence of arbitration clause).

Pursuant to filing the application the court referred the parties to arbitration.

Thereafter the Plaintiff applied to Court to get a refund of is court fee deposited in the suit, citing section16 of the Court Fees Act, 1870 and Section 89 of the Code of Civil Procedure, 1908 (CPC).

The relevant portions of the sections are reproduced below:

“16. Refund of fee.—Where the Court refers the parties to the suit to any one of the mode of settlement of dispute referred to in section 89 of the Code of Civil Procedure, 1908 (5 of 1908), the plaintiff shall be entitled to a certificate from the Court authorising him to receive back from the collector, the full amount of the fee paid in respect of such plaint.”

“89. Settlement of disputes outside the Court.—(1) Where it appears to the Court that there exist elements of a settlement which may be acceptable to the parties, the Court shall formulate the terms of settlement and give them to the parties for their observations and after receiving the observations of the parties, the Court may reformulate the terms of a possible settlement and refer the same for :— (a) arbitration; (b) conciliation; (c) judicial settlement including settlement through Lok Adalat: or (d) mediation (2) Were a dispute has been referred— (a) for arbitration or conciliation, the provisions of the Arbitration and Conciliation Act, 1996 (26 of 1996) shall apply as if the proceedings for arbitration or conciliation were referred for settlement under the provisions of that Act …”

Regarding the entitlement of the Plaintiff for refund of Court fee, the Court observed as follows:

  1. The provisions being Section 16 of #courtfees act, and  Section 89 of CPC are applicable when the matter is referred for arbitration in the context of “settlement”
  2. In the present case, the matter had been referred to arbitration pursuant to an application under Section 8 of the A&C Act & not in terms of Section 89 of the CPC for settlement.
  3. It is settled law that litigant is not entitled to refund of Court fees in case of rejection of plaint under Order VII Rule 11 of CPC where plaint does not disclose cause of action. Section 8 of the A&C Act falls under the same analogy, because the Plaintiff invoked a wrong remedy of filing a suit when it should have invoked arbitration.
  4. The case of RV Solutions Pvt. Ltd. v. Ajay Kumar Dixit, 2019 SCC OnLine Del 6531 is a one off case where court directed refund in a similar matter. However, the issue was not in dispute in that case and the same would not constitute a dicta for the plaintiff being entitled to refund of Court fee where a section 8 application has been filed & allowed.

In view of the above, the application for refund of Court fee was rejected.

My two cents: invoking a wrong remedy can cost parties dearly even if the Indian law doesn’t penalize parties(or advocates) in costs for the same as such.

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