Common Commercial Disputes Queries – September 2022

By Gunjan Chhabra

Questions Answered in this Month’s CCDQ:

1. ??? ??? ?????????? ?????? ?? ????? ??? ??????? ?????? ??????? ?? ??? ???????? ???? ?? “??? ?? ???????” ?? 4?? ????????? ??? ????? ????????? ????????
2. ?? ??? ??????????? ?????? ???? ??? ??????? ? ????? ??????????? ?????????, ???? ??? ?????? ????????????? ???? ?? ?? ????
3. ???? ?????? ??????? ????? ?? ????? ????? ??????? 34 ?????? ?? “????????????” ?? ??? ??????
4. ???? ??? ?????????? ???? ?????????? ?? ????? ????-????? ???????? ???? ?? ??? ????????? ?????? ??????
5. ??? ???????? ???????? ?? ??? ??????????? ???????????
6. ???? ??????????? ????? ??????? ??? ??????? ?????????? ????? ??????? 9, ???? ????? ??????? ???? 5 ??? ???? ?? ?? ???????? ?????????
7. ???? ??? ??? ????????? ??????????? ?? ? ????? ??????????? ???????
8. ??? ? ????? ??????? ??? ???????????? ??????? ??? ?? ??? ???? ????? ??? ?????? ? ?????? ??????
9. ???? ????????? ??? ?&? ?? ? ??????? ?????? ?? ???????? ? ????? ??????????? ???????

 

??? ??? ?????????? ?????? ?? ????? ??? ??????? ?????? ??????? ?? ??? ???????? ???? ?? “??? ?? ???????” ?? 4?? ????????? ??? ????? ????????? ????????

In the case of ONGC v. Afcons Gunanusa JV (#SupremeCourtofIndia, three judge bench, decided on 30.08.2022), the Arbitrators sent out a procedural order fixing its fee as Rs. 1.5 Lakh per arbitrator per sitting, along with an additional reading fee or conference fee. On receiving such a fee, ONGC resisted it before the Arbitrators asking them to restrict their fee as per the fourth schedule to a cap of INR 30 lacs, albeit unsuccessfully.

Upon being unsuccessful, ONGC then filed a petition under Section 14 read with Section 15 of the #arbitration & conciliation Act, 1996 before the Bombay High Court, which was also dismissed, after which ONGC approached the Supreme Court of India.

Similar facts had given rise to the present appeal in three other matters which were being heard collectively before the Supreme Court.

The Supreme Court had the following issues before it:

1. Whether the arbitrator(s) are entitled to unilaterally determine their own fees;
2. Whether the term ―”sum in dispute” in the Fourth Schedule to the Arbitration Act means the cumulative total of the amounts of the claim and counterclaim;
3. Whether the ceiling of Rs 30,00,000 in the entry at Serial No 6 of the Fourth Schedule of the Arbitration Act is applicable only to the variable amount of the fee or the entire fee amount; and (meaning in footnote[1]).
4. Whether the ceiling of Rs 30,00,000 applies as a cumulative fee payable to the arbitral tribunal or it represents the fee payable to each arbitrator.

The Supreme Court then held as follows:

1. The Fourth schedule is not mandatory to abide by, however, it is open to parties by agreement to specify the fees payable to arbitrators. (Reliance placed on Court in Gayatri Jhansi Roadways Ltd).
2. Section 38 of the Act, which provides for the tribunal to have the power to determine and demand an advance is only applicable to “costs” and not to “fees”. Any demand of an Arbitral Tribunal regarding its “fees” fixed without consent of the parties, is a non-binding and non-enforceable demand. To hold anything contrary would be against principles of party autonomy and the principle that arbitrators cannot be the judge of their own claim against parties regarding their own remuneration.
3. Claims & counterclaims are treated as distinct proceedings from the lens of the arbitration act. Determining the arbitrators’ fee on a combined basis for both claim and counterclaim would not match up to the separate effort they require for each. Therefore the words “sum in dispute” in the 4th schedule is to be considered separately for the claim and the counterclaims, and the ceiling fee will also be applicable separately to both.
4. The ceiling of INR 30,00,000 in fourth schedule is applicable to the total amount, not just to the variable amount as it is in keeping with the legislative intent of the 2015 amendment.
5. The fee and the ceiling provided in the fourth schedule is for each #arbitrator, and is not the total sum payable to the tribunal, irrespective of the number.

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In the case of Yashovardhan Sinha HUF v. Satyatej Vyapaar Pvt. Ltd. (Calcutta High Court, decided on 24.08.2022), the parties had entered into a loan agreement, which contained an arbitration clause.

The relevant portion of the #arbitration clause is as hereunder:

“19. Any disputes or differences between the parties arising out of or in relation to or in connection with or in anyway related to this Agreement or in relation to dealings and transactions under this Agreement shall be referred to the sole arbitration of a person to be nominated by Lender and the arbitration proceedings shall be governed by the Arbitration and Conciliation Act, 1996. The Borrower and/or the Guarantor shall not be entitled to have any objection regarding the personnel of the Sole Arbitrator for the reasons that he may be an associate or advisor of Lender or connected or related to Lender and/or its directors or executives on personal, business or professional basis……”

The High Court observed as follows:

1. There can neither be unilateral appointment, nor unilateral nomination of a sole arbitrator by one party to the dispute or by a party interested in the outcome of the dispute. (Reliance placed on TRF Limited v. Energo Engineering Projects Ltd. (2017) 8 SCC 377 & Perkins Eastman Architects DPC & Anr. v. HSCC (India) Ltd. (2019) SCC Online SC 1517).
2. In view of the above, no doubt the unilateral appointment as provided in the arbitration clause was illegal.
3. The mandate of an #arbitrator appointed pursuant to such a unilateral appointment is automatically terminated due to his de jury ineligibility under Section 14(1)(a) owing to his inherent lack of jurisdiction. (Reliance placed on Bharat Broadband Network Ltd. vs. United Telecoms Ltd. (2019) 5 SCC 755 & HRD Corporation (Marcus Oil and Chemical Division) vs. GAIL (India) Limited (2018) 12 SCC 471).
4. However, it cannot be said that the arbitration clause itself becomes null and void due to this reason. The Court has the power to sever portions of the arbitration agreement which are hit by illegality.

Effect must be given to the arbitration clause sans the illegal portion.

In light of the above discourse, the Court went on to substitute the arbitrator under the Section 11 Petition being heard before it and disposed off the Petition accordingly.

???? ?????? ??????? ????? ?? ????? ????? ??????? 34 ?????? ?? “????????????” ?? ??? ??????

In the case of National Highway Authority Of IndiaÊ(Nhai) vs. Additional Commissioner, Nagpur & Ors. (Bombay High Court, decided on 20.08.2022), NHAI had initially filed an objection petition under Section 34 of the #arbitration & Conciliation Act, 1996 before the Principal District Judge, Nagpur.

The matter concerned land acquisition of the lands of various respondents. The Respondents had invoked arbitration regarding compensation and various other issues arising out of the land acquisition in which an award was passed in favour of the Respondents. It was against this award that NHAI had filed the Section 34 petition.

The section 34 petition filed by NHAI was partly allowed in its favour in as much as the arbitrator had failed to appreciate that the Respondents had not placed any evidence regarding difficulty in developing the land.

Against the section 34 order of the Principal District Judge NHAI had approached the Supreme Court on the ground that the Principal District Judge had committed a grave error in law in “partly” setting aside the Award, as an Award could only be set aside in entirety with arbitration afresh and no part setting aside could be ordered under Section 34. NHAI’s pleas were based on the law laid down by various Supreme Court judgments where modification of the award is not permitted under Section 34, and according to NHAI part setting aside amounted to modification of an award.

The Supreme Court observed as follows:

1. The Court exercising power under Section 34, no doubt has no power to modify an arbitral Award. (Reliance placed on Mcdermott International Inc. Vs. Burn Standard Co. Ltd. & Ors. (2006) 11 SCC 181 & National Highways Authority of India(NHAI) Vs. M. Hakeem and another (2021) 9 SCC 1 etc.).
2. The question here is not of modification but of part setting aside of the award. None of the judgments cited apply to this proposition.
3. The Full Bench of the Supreme Court has already held that doctrine of severability can be applied to awards under Section 34 and awards can be set aside partially. (R.S. Jiwani v. Ircon International Ltd. (2020) 1 Mh.L.J. 547, also see J.G. Engineers v. UOI (2011(5)SCC758).
4. If parties are required to go for arbitration afresh in entirety, even where arbitral award is party set aside, it would lead to multiple rounds of litigation, going against the very purpose of alternate dispute resolution mechanisms like arbitration.
5. Where each of the issues decided by the arbitrator are separate & district, it cannot be set said that there is an error of law in partly setting aside the award.

Accordingly, the Appeal was set aside.

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In MORGAN SECURITIES AND CREDITS PRIVATE LIMITED Pvt. Ltd. v. Videocon Industries Ltd. (#SupremeCourtofIndia, decided on 01.09.2022), the issue raised was whether the arbitrator has the discretion to grant post-award interest only on the principal sum due Under Section 31(7)(b) of the #Arbitration & Conciliation Act, and not the combined sum of principal and pre-award interest.

The main contention raised, on which the Supreme Court had admitted the SLP was that the arbitrator had erred in granting post award interest on the principal sum alone based on State of Haryana v. SL Arora(2010) 3 SCC 690 (“SL Arora”), when this decision had already been overruled in Hyder Consulting (UK) Ltd. v. State of Orissa 2013) 2 SCC 719 (“Hyder Consulting”)

The Supreme Court observed as under:

1. SL Arora (2 Judge bench) was referred to a 3 Judge Bench in Hyder Consulting on the question of whether post-award interest could be granted on the aggregate of the principal and the pre-award interest arrived at Under Section 31(7)(a) of the Act.
2. Hyder Consulting held that the #arbitrator MAY grant post-award interest on the aggregate of the principal and the pre-award interest(“sum”). It did not discuss the issue of whether the arbitrator could use their discretion to award post-award interest on a part of the ‘sum’ awarded Under Section 31(7)(a).
3. The phrase ‘unless the award otherwise directs’ in Section 31(7)(b) only qualifies the rate of interest.
4. According to Section 31(7)(b), if the arbitrator does not grant post-award interest, the award holder is entitled to post-award interest at eighteen percent.
5. Section 31(7)(b) does not fetter or restrict the discretion that the arbitrator holds in granting post-award interest. The arbitrator has the discretion to award post-award interest on a part of the sum (such as principal alone).
6. Since the impugned arbitral award granted interest on the principal amount alone, it was well within the domain of the arbitrator, to award post award interest on only a part of the sum, that is the principal alone.

Thus, there was no error apparent in the award and the SLP was dismissed.

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In Shree Enterprises Coal Sales Private Limited v. Union of India (#SupremeCourtofIndia, decided on 12.09.2022) this was the question which had arisen before the Supreme Court.

Here Shree Enterprises had purchased coal from Northern Coal Fields Limited (“NCFL”) through an e-auction, upon which NCFL had charged a concessional tax rate of 2 percent. Disputes arose between the parties when NCFL failed to issue the relevant form, and also failed to grant benefit of form C while charging a tax rate of 4 percent.

Consequent to this Shree Enterprises filed a writ Petition before the Allahabad high court seeking relief. One of the grounds on which the Writ Petition was dismissed was that the terms of the e-auction provided for an arbitration clause and therefore all disputes should have been referred to #arbitration.

In the appeal before the Supreme Court on this issue, the Court observed as follows:

1. If Shree Enterprises had asserted a contractual claim then the disputes would indeed be arbitrable.
2. However, Shree Enterprises had not asserted a contractual claim in pursuance of the e-auction. A tax dispute was not a claim of this nature.

In view of the same, the matter was remanded back to the High Court with a direction to dispose the matter expeditiously.

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This was answered in ESSAR HOUSE PRIVATE LIMITED v. Arcellor Mittal Nippon Steel India Limited (#SupremeCourtofIndia ,14.09.2022)

In this case Essar House Private Limited (“EH”) had entered into a Rental Agreement with Essar Steel (“ES”) in which a portion of the Essar House was let out to ES.

In 2017 the Corporate Insolvency Resolution Process was started against ES. Arcellor Mittal (“AM”) submitted a resolution plan in respect of ES which was approved in 2019.

Thereafter in November 2019 EH wrote to AM to vacate the rented property, which was vacated in December 2019 & in December 2019 itself AM also took over ES pursuant to the resolution plan approved.

Here disputes arose between EH & AM when AM sought refund of security deposit under the rental agreement, which EH claimed had already been adjusted against some loans.

Subsequently AM approached court U/S 9 of the #Arbitration & Conciliation Act, 1996 seeking deposit of the security deposit amount. This resulted in a series of appeals being filed, the final one being a S. 37 Appeal before the Division Bench of Bombay HC.

Consequently appeal was filed by EH before SC, against Bombay HC’s DB order. The main contention raised by EH was that while deciding a S. 9 application even under the Arbitration Act, the principles of the Code of Civil Procedure Act, 1906 (“CPC”) are to be strictly followed.

The Supreme Court observed as follows:

 

1. In deciding a S. 9 Petition the court cannot ignore the basic principles of CPC, but at the same time the court’s power under S. 9 is not curtailed by rigours of procedural provisions, specifically Order XXXVIII Rule 5.
2. Procedural safeguards, meant to advance the cause of justice cannot be interpreted in such manner, as would defeat justice.
3. Courts have been empowered to pass any interim measure of protection under S\ 9, & not just the specific power of securing amount in dispute. All that Court is required to see is, whether the applicant has a good prima facie case, whether balance of convenience is in favour of interim relief & whether the applicant has approached the court with reasonable expedition.
4. Proof of actual attempts to deal with, remove or dispose of the property with a view to defeat or delay the realisation of an impending Arbitral Award is not imperative for grant of relief under S. 9. A strong possibility of diminution of assets would suffice.
5. Prime facie it is admitted that the amount of security deposit was paid. EH’s denial is based on a series of internal arrangements between the then group companies for diversion of the security deposit, which is not sufficient to tilt the prima facie case in its favour.

In view of the above, it was held that the order of the Division Bench suffered from no infirmity & the Appeal was dismissed.

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This question was discussed in Babanrao Rajaram Pund v. Samarth Builders & Developers (#SupremeCourtofIndia, 07.09.2022)

Here the Builder & the Appellant had entered into a development agreement, which required the builder to construct apartments on the Appellants’ land whithin 15 months’ time.

Disputes arose between the parties when the development of the plot was delayed.

The dispute resolution clause in the development agreement read as under:

 

“18. All the disputes or differences arising between the parties hereto as to the interpretation of this Agreement or any covenants or conditions thereof or as to the rights, duties, or liabilities of any part hereunder or as to any act, matter, or thing arising out of or relating to or under this Agreement (even though the Agreement may have been terminated), the same shall be referred to arbitration of a Sole Arbitrator mutually appointed, failing which, two Arbitrators, one to be appointed by each party to dispute or difference & these two Arbitrators will appoint a third Arbitrator & the Arbitration shall be governed by the Arbitration & Conciliation Act, 1996 or any re-enactment thereof.”

 

When the Appellant invoked the High Court for appointment of #arbitrator U/s 11 of the #Arbitration & Conciliation Act, 1996(“Act”), the High Court dismissed the application stating that the dispute resolution clause lacked the essential ingredients of an arbitration agreement, as it did not mandate that the decision of the arbitrator would be final & binding on the parties.

The Supreme Court while discussing the validity of the clause, observed as below:

1. Section 7 of the Act does not mandate any particular form for an arbitration clause (Reliance placed on Rukmanibai Gupta v. Collector, Jabalpur (1980)4SCC556 & K.K.Modi v. K.N.Modi (1998)3SCC573).
2. The arbitration clause in the present agreement Firstly is valid, because it not only clearly uses the terms Arbitration & #Arbitrator, but also enunciates the mandatory nature of the reference to arbitration by using the term “shall be referred to arbitration”.
3. Secondly the method of appointing the third arbitrator has also been clearly mentioned wherein the two selected Arbitrators are to appoint a third arbitrator.
4. Thirdly Even the governing law has been chosen by the parties to be “the Arbitration & Conciliation Act, 1996 or any re-enactment thereof.”
5. These three recitals strongly point towards an unambiguous intention of the parties at the time of formation of the contract to refer their disputes to arbitration.
6. The intention to be bound by the tribunal’s decision is evident, even though words “final & binding” are not incorporated expressly.

 

In view of the above, the Court held that the arbitration clause was valid & the appeal was allowed.

This judgment also reiterated the important ingredients of a valid arbitration clause as laid down in K.K.Modi v. K.N.Modi (1998)3SCC573

“17. Among the attributes which must be present for an agreement to be considered as an arbitration agreement are:

(1) The arbitration agreement must contemplate that the decision of the tribunal will be binding on the parties to the agreement,

(2) that the jurisdiction of the tribunal to decide the rights of parties must derive either from the consent of the parties or from an order of the court or from a statute, the terms of which make it clear that the process is to be an arbitration,

(3) the agreement must contemplate that substantive rights of parties will be determined by the agreed tribunal,

(4) that the tribunal will determine the rights of the parties in an impartial and judicial manner with the tribunal owing an equal obligation of fairness towards both sides,

(5) that the agreement of the parties to refer their disputes to the decision of the tribunal must be intended to be enforceable in law and lastly,

(6) the agreement must contemplate that the tribunal will make a decision upon a dispute which is already formulated at the time when a reference is made to the tribunal.

 18. The other factors which are relevant include, whether the agreement contemplates that the tribunal will receive evidence from both sides and hear their contentions or at least give the parties an opportunity to put them forward; whether the wording of the agreement is consistent or inconsistent with the view that the process was intended to be an arbitration, and whether the agreement requires the tribunal to decide the dispute according to law.”

 

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This question was answered in SEPCO Electric Power Construction Corporation v. Power Mech Projects Limited (Supreme Court of India, decided on 19.09.2022).

Sepco, a Chinese entity was awarded various coal based power projects in India, and Power Mech was its sub-contractor.

Pursuant to an #arbitration award in favour of Power Mech, Sepco filed an application challenging the award under Section 34 along with an application under Section 36 of the Arbitration & Conciliation Act, 1996 seeking stay of the award.

Later, Power Mech approached High Court seeking deposit of security for the amount awarded, by way of a section 9 Petition.

The application under Section 9 was decided first, and Sepco ordered to deposit 100% of the award amount. It was at the same hearing that the Single judge decided Sepco’s Section 36 application for stay of the award, and directed that upon deposit of the entire award amount, the award would be stayed. This was done by way of a single order.

This order was challenged by Sepco before Supreme Court in the present SLP, wherein Sepco’s contention was that the lower Court should not have clubbed the Section 36 application along with the Section 9 application since the Section 36 application was filed prior in time. This was because it deprived Sepco of its remedy of appeal under against Section 9 order, since a Section 36 order is not appealable.

The #SupremeCourtofIndia while deciding the appeal observed as follows:

 

1. There is no hard & fast rule that an application made prior in time must be heard earlier. Both applications relate to the same award.
2. One of the grounds for grant of interim relief under Section 9, is that the Court has to consider prima facie case, and in this case there was an award of a huge amount in favour of Power Mech, so it did have a strong case for interim relief.
3. Under Section 36(3) of the Act, while considering an application for grant of stay, Court has to be satisfied of the provisions for grant of stay of money decree under provisions of the CPC.
4. No cogent ground has been made out by Sepco prima facie, for interference with the impugned award.

In view of the same, the Supreme Court found no grounds to interfere with the Single Judge’s order and the appeal was dismissed.

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In Ingram Micro India Private Limited v. Mohit Raghuram Hedge (Bombay High Court, decided on 30.08.2022), both parties were in the business of IT products & services.

Ingram had approached Court for appointment of an arbitrator, pursuant to an #arbitration agreement which was contained in the “Sales Terms and Conditions” as accepted by the respondent, which was available on Ingram’s website.

Further, the KYC form prescribed by Ingram and signed by the Respondent also contained a declaration by the Respondent that he confirmed acceptance of the Sales Terms & Conditions.

The Respondent on the other hand contended, that there was no valid arbitration clause between the parties and the same was vitiated by fraud.

The Bombay High Court observed as follows:

1. Section 7 of the Arbitration & Conciliation Act, provides that an arbitration agreement can be inferred through a series of correspondence or even on demur of one of the parties to an arbitration proceeding.
2. A General Reference to a standard form of contract of one party would suffice for incorporation of an arbitration clause. (Reliance placed on Inox wind Ltd,-v. Thermocables, (2018) 2 SCC 519)
3. The Respondent’s contentions were such which he was free to raise before the Arbitral Tribunal. However, a mere allegation of fraud does not prima facie make the dispute non-arbitrable. Arbitration can only be refused if it is clear that there is a serious allegation of fraud. (Reliance placed on Avitel Post Studioz Limited & Ors. vs. HSBC PI Holdings (2021) 4 SCC 713).
4. In order to appoint an arbitrator the Court only needs to be see if prima facie arbitration agreement exists. (Reliance placed on Duro Felguera, S.A. versus Gangavaram Port Limited, (2017) 9 SCC 729).
5. Here the Respondent subscribing to the KYC of Ingram, agreeing to the terms and conditions of sales on Ingram’s website, and then the parties operating on these terms for a substantial period of time, all point to the existence of an arbitration agreement.

 

In view of the above, #arbitrator was appointed.

 

[1] The highest level of “sum in dispute” provided in the fourth schedule is the amount “above INR 20,00,00,000/. The model fees payable for this amount is stated as Rs. 19,87,500 plus .5 percent of the claim amount over and above Rs. 20,00,00,000 with a ceiling of Rs. 30,00,000. Here:

 

• the base amount is referred to the sum of Rs. 19,87,500.
• the addition of the 0.5% of the claim amount over and above Rs. 20,00,00,000 is referred to as the variable amount.
• the total amount is the sum of (i) & (ii) above.

 

The question was whether the ceiling of Rs. 30,00,000 fee applies to only the variable amount or to the total amount.