Common Commercial Disputes Queries – October 2022

by Gunjan Chhabra

Questions Answered in this Month’s CCDQ:

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This was the issue which came up for consideration in Consulting Engineers Group Ltd. v. National Highways Authority of India (“NHAI”) (Delhi High Court, decided on 06.10.2022).

Here a consultancy Agreement was entered between NHAI on one hand, and a consortium of the Petitioner & one M/s Aecom on the other hand with M/s Aecom as the Lead Partner in the Joint Venture.

The consultancy Agreement also contained an arbitration clause. 

Due to some disputes in the quality of work, NHAI passed an Order debarring the Petitioner from participating in any tenders floated by NHAI and other bodies for a period of 3 months along with levying a penalty of INR 20 lakhs.

Against this debarment, the Petitioner approached the High Court under Section 9 of the #Arbitration & Conciliation Act, 1996 seeking stay on operation of debarment order, and for restraining NHAI on taking any action on the Order.

NHAI’s main contention was that there was no valid & existing arbitration clause between NHAI and the Petitioner in its individual capacity, as the agreement was between NHAI & the consortium. 

The Court while deciding the issue observed as follows:

1. The petitioner participated in the tender process as joint venture, after entering into MoU with M/s Aecom, by way of which a consortium had been formed between petitioner and M/s Aecom.
2. Thereafter, consultancy agreement was executed between NHAI & the consortium.
3. The terms of the consortium MOU did not confer any express and/or implied authority on the Petitioner to invoke dispute resolution clause or other pursue contractual matters in its individual capacity without the participation of the lead member, M/s Aecom.
4. Thus it is clear that it is only M/s Aecom in association with the Petitioner who can invoke the dispute resolution clause. It is the “consultants” and not the Petitioner in his individual capacity who are referred to as “parties” in the arbitration agreement, as contained in the Consultancy Agreement. (Reliance placed on Geo Miller and Company Limited 2016 SCC OnLine Del 6248)
5. A Joint venture itself is a legal entity, thus action by only one of the constituents is not acceptable or legally tenable. (Reliance placed on Gammon India Ltd. Vs Commissioner of Customs, Mumbai, (2011) 12 SCC 499 & Municipal Corporation of Delhi Vs M/s Asian-Techs-Progressive Constructions Joint Venture and Ors., 2017 SCC OnLine Del 6455).

In view of the above, it was held that the Section 9 Petition by only one constituent of the Joint Venture, being the Petitioner alone was not maintainable and the Petition was dismissed.

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In the case of Macro Marvel Projects Ltd. v. Venkatesh & Ors. (Madras High Court, division Bench, decided on 28.09.2022), the parties had entered into an Agreement of Sale for a property, in relation to which disputes arose between the parties. 

The Respondent refused to execute the sale deed, upon which the Appellant/developer invoked arbitration.

The Arbitral Tribunal allowed the claim of the appellant/developer by directing the respondents to execute the sale deeds in favour of the claimant in respect of the remaining plots & dismissed the counter claim filed by the respondents, for want of evidence.

When the Respondent filed a petition under Section 34 challenging the Award, the Ld. Single Judge observed that there was no investment made by the developer and the specific performance would be inequitable. He also held that the arbitrators failed to consider the provisions of the Specific Relief Act, section 14 under which the Court could not supervise transactions. This meant, according to the Ld. Single judge that the contract was in its nature not specifically enforceable. He then directed the Respondents to pay a sum of INR 50,00,000 instead of Specific Performance, to the Appellants.

It was now that the Appellant filed a Section 37 appeal against this order of the Ld. Single Judge, before the Madras High court. 

The High Court observed as follows:

1. There was no specific pleading about non-enforceability of contract under Sections 14 or 20 before the Ld. Arbitrators or in the Petition under Section 34. 
2. If the Appellant was a developer, the respondents themselves were also real estate developers, who entered into the agreement with eyes wide open. It could not be held that the transaction was inequitable or unfair to the Respondents.
3. Further, the Tribunal had appraised evidence & and rendered its findings on these issues, and to now say that the agreement would be inequitable would amount to sitting in appeal over the award, which is not a ground available for interference with the award under Section 34.
4. There is no doubt that under Section 34 of the #arbitration & conciliation Act, the Court does not have any power to modify an award. (Reliance placed on Project Director, NHAI Vs. M.Hakeem (2021) 9 SCC 1). The Ld. Single Judge was not right in modifying the award in ordering a specific sum to be paid to the Appellant instead of specific performance under Section 34, as this would amount to a modification of the Award.
5. The relief granted by Arbitrators is to sell the land. On the face of it there is nothing to continuously monitor and this the award would not be barred under Section 14 of the Specific Relief Act.

In view of the above, the Appeal was allowed and order of the Single Judge was set aside.

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In, Executive Engineer (R and B) v. Gokul Chandra Kanungo, (#SupremeCourtofIndia decided on 30.09.2022), the Respondent was awarded a construction contract for a missing portion of a highway.

In this contract, certain claims of the Respondent had arisen which were adjudicated before the Arbitrator (after a round of other litigation preceding the arbitration). In the award, the #arbitrator granted certain claims and also interest for all three periods, that is pre-reference (before #arbitration), pendent lite (during pendency of the arbitration), as well as future interest (post-award interest). 

The Appellant filed both, a Section 34 objection Petition, as well as a Section 37 Appeal before High Court, which were both dismissed, after which the Appellant approached the Supreme Court. 

The bone of contention for the Appellant was that the Respondent had caused major delays and also his action suffered from severe laches, therefore the award of interest was unreasonable. The Appellant also contended that the rate was also exorbitant (18%) which brought the interest amount alone to be more than 5 times the main claim amount. 

The Supreme Court observed as follows:

1. No doubt the Arbitral Tribunal (“AT”) is vested with discretion to include interest, on the whole or part of any money awarded, for the whole or part of period between cause of action and date of award, but Section 31(7)(a) of the Act requires interest to be at such rate as the AT deems reasonable. 
2. When a discretion is vested on the AT, then a duty would be cast upon the arbitral tribunal to give reasons as to how it deems the rate of interest to be reasonable. No reasons have been recorded by AT for grant of interest at 18% for all three periods.
3. The undisputed position was that the final measurement for the work was done in 1977, and for 12 years the Respondent did not raise its claims, that is till 1989. Even in a pending suit (which was pending before the 1996 Act was enacted), the Respondent displayed extreme laches. 
4. The Court has power under Article 142 to modify the amount of interest in order to do complete justice between the parties. (Reliance placed on Pure Helium India (P) Ltd. 2003) 8 SCC 593, Mukand Ltd. v. Hindustan Petroleum Corpn. Ltd. (2006) 9 SCC 383)
5. Keeping in mind the long period of interest awarded, the Court deemed fit to:
6. disentitle the Respondent for any interest from 1977 to 1989, and for the further period of 1 year from 2000 to 2001.
7. reduce the rate of interest from 18% to 9% for all three periods, that is pre-reference, pendente lite and post-award. 

On these terms the Appeal was disposed off. 

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In M/S Welspun Enterprises Ltd vs M/S NCC Limited (Delhi High Court, Division Bench, decided on 10.10.2022), the arbitration clause between the parties contemplated a pre-arbitration mechanism. The relevant portion of the clause is reproduced below:

“…Disputes & Settlement In the event of any dispute, arising between the parties relating to the various terms and conditions set forth hereinabove, the parties undertake to resolve the differences by mutual negotiation. If such dispute or difference cannot be resolved within one month from the date it is arisen, the same shall be referred to the Chief Executives of NCC and MSK. If the Chief Executives also fail to agree then such differences/disputes shall be referred to a Sole #Arbitrator to be appointed by NCC and MSK by mutual consent…”

When disputes arose, Welspun invoked #arbitration.The Arbitral Tribunal(“AT”) had disallowed several claims of Welspun as being barred by limitation. The AT observed that the cause of action for these claims had arisen on 03.08.2010, when NCC made promise to pay & then on 30.10.2010, when the Final Bill was certified. The AT held that therefore, Welspun’s notice invoking arbitration sent on 27.01.2014, was beyond the period of limitation. (Note: for an arbitration, the relevant action for stopping the limitation is sending a notice of invocation under S. 21 of the Arbitration & Conciliation Act, 1996).

It was against this award that Welspun had filed an objection Petition under S. 34, & when that failed, the present appeal under S. 37.

The Court observed as below:

1. The Dispute Resolution clause clearly required the parties to make an endeavour to resolve disputes by mutual negotiation. It was only when the Chief Executives of the respective parties fail to resolve the same then such differences & disputes would be referred to arbitration.
2. The period of limitation for a claim runs when a party acquires a right to refer the disputes to arbitration, and is required to be filed within a period of 3 years therefrom. (Reliance placed on In Panchu Gopal Bose v. Board of Trustee (1993) 4 SCC 338 21 & Hari Shankar Singhania & Ors. v. Gaur Hari Singhania (2006) 4 SCC 658).
3. Clearly, if the arbitration agreement requires the parties to exhaust the dispute resolution process as a pre-condition for invoking arbitration, the right to refer the dispute to arbitration would arise only after the parties have exhausted the said procedure.
4. A party cannot be expected to commence arbitration without exhausting the pre-reference procedure. Therefore period of limitation for referring the disputes to arbitration cannot commence till the parties have exhausted the necessary pre-reference procedure.
5. In accordance with the clause, an attempt to resolve the disputes by the Chief Executives failed on 21.12.2012. It is on the said date that the right to refer the disputes arose in favour of Welspun. Welspun invoked arbitration on 27.01.2014, that is well within the period of 3 years limitation.

In light of the above, AT’s decision of holding Welspun’s claims to be barred by limitation was erroneous & the award as well as the Single Judge’s order was set aside. The Claimant was held to be entitled to take steps for reference of disputes to arbitration afresh. 

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In Panasonic India Private Ltd. v. Shah Aircon (Delhi High Court, decided on 11.10.2022), Panasonic was to sell electronic goods to Shah Aircon under an Agreement. The Agreement contained an arbitration clause, portion of which was as follows:

“XXV. ARBITRATION: The parties will attempt to settle any dispute, claim or controversy arising out of this Agreement through consultation and negotiation in good faith and in a spirit of mutual co-operation. If those attempts fail, then either Party can refer the disputes, issues or claims arising out of or relating to this Agreement for arbitration by a sole arbitrator who shall be appointed by the Managing Director of the Panasonic. The arbitration proceedings shall be held in New Delhi, conducted in English, and shall be subject to the provisions of the Arbitration and Conciliation Act 1996. The Arbitrator shall give a reasoned award. In the event the Appoint Authority fails to act or appoint a sole arbitrator, then either Party can have the sole arbitrator appointed under the provisions of the Arbitration and Conciliation Act, 1996….”

Disputes arose between parties for unpaid invoices of Panasonic, and other claims parties had against each other, owing to which Panasonic eventually invoked the #arbitration clause. When no arbitrator was appointed Panasonic approached the Delhi High Court by filing a Petition under Section 11 of the Arbitration & Conciliation Act, 1996 for appointment of arbitrator. 

One of the contentions raised by Shah Aircon before Court was that since the word “can” was used in the arbitration agreement and the last part of the clause provided for recourse to civil proceedings in certain circumstances, the clause was not a binding agreement to refer disputes to arbitration. 

The Court observed as follows:

1. The use of the word “can” – which normally signifies an option, as opposed to the word “shall”- which is mandatory in nature, is not determinative of the nature of this clause at present. This is because the word “can” is juxtaposed with the words “either party”, which means the option is for either party to refer disputes to arbitration, and it does not signify the option to go to arbitration or not. (Distinguished Kedarnath Atmaram vs. Kesoram Cotton Mills I.L.R. (1950) 1 Cal 550)
2. The “civil court” portion of the clause only refers to procedure for appointment of an arbitrator by reference to the Court and for situations where arbitration is rendered impossible despite best efforts such as for injunctions, with an exclusive jurisdiction to the Delhi High Court. This does not mean that the clause is optional to go to arbitration or to civil court. The clause still maintains the mandatory nature of arbitration.

In view of the above, an #arbitrator was appointed by the Court.