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How Indian Courts Have Dealt With Resistance To Invocation Of Arbitration

Tariq Khan and Ausaf Ayyub
21 Feb 2022 4:07 AM GMT
How Indian Courts Have Dealt With Resistance To Invocation Of Arbitration
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It has become a trend to resist the invocation of arbitration proceedings firstly, at the stage of commencement of arbitration proceedings i.e., when the notice invoking arbitration u/s 21 of the Arbitration and Conciliation Act, 1996 ("the Act") is received by the Respondent and thereafter, either at the stage of appointment of arbitrator u/s 11 of the Act or when a judicial authority...

It has become a trend to resist the invocation of arbitration proceedings firstly, at the stage of commencement of arbitration proceedings i.e., when the notice invoking arbitration u/s 21 of the Arbitration and Conciliation Act, 1996 ("the Act") is received by the Respondent and thereafter, either at the stage of appointment of arbitrator u/s 11 of the Act or when a judicial authority is dealing with an application u/s 8 of the Act for referring parties to arbitration. Normally, the courts do not entertain such objections given the limited scope of power under Section 8 and 11. But there are certain cases where the courts have refrained from referring parties to arbitration. For example, where there is no arbitration agreement existing between the parties, where the claims are ex facie barred by limitation etc. Following are the most common objections used by the parties to resist arbitration proceedings and how the courts in India have dealt with such objections.

Dispute not being the subject-matter of the arbitration agreement

The Supreme Court in Hindustan Petroleum Corpn. Ltd v. Pinkcity Midway Petroleums,[i] held that when an agreement is found to exist between the parties, the court is bound to refer the parties to arbitration, any issue as to the disputes falling outside the ambit of the arbitration agreement must be decided by the tribunal only, the court should not go into these questions. However, in Sukanya Holdings v. Jayesh H. Pandya,[ii] the court took a contrary view to hold that when the dispute does not correlate with the arbitration agreement, the court shall decline the reference.[iii]

Expanding the scope of examination of the arbitration agreement, the Supreme Court in DLF Home Developers Ltd v. Rajapura Homes,[iv] while being cognizant of Section 11(6A) which envisages that while appointing an arbitrator, the court is only to examine the existence of the arbitration agreement, held that the courts are not supposed to act mechanically and deliver all the disputes at the door of the arbitrator, it can refuse to make an appointment if the alleged dispute does not correlate with the arbitration agreement.

Notified Claims

In NCC v. IOCL, it was held that an issue as to a claim not being a notified claim shall be decided by the arbitral tribunal and only in situation when there is no doubt that the claim was not notified with the concerned authority within the stipulated time, the court would refuse to appoint the arbitrator.[v]

Excepted Matters

In Mitra Guha v. ONGC, the SC held that when the parties consciously provide for the decision of an authority to be final and binding on the parties, such a matter falls under the category of "excepted matter" and the same cannot be referred to arbitration.[vi] However, a clause that only provides for quantification of damages but no adjudicatory process is stipulated in the clause, the court would not be precluded from appointing the arbitrator.[vii]

Non-arbitrability of dispute.

The issue of non-arbitrability of the subject matter was discussed in detail in the case of Booz Allen v. SBI Home Finance,[viii] wherein the court held that disputes that give rise to a right in rem are not to be decided in arbitration. Recently, the issue of non-arbitrability of the subject matter has been answered by the Supreme Court in Vidya Dilia v. Durga Trading Corpn.[ix] The court laid down a fourfold test to determine the non-arbitrability of the subject matter. It held that the subject matter would be non-arbitrable when it pertains to (i) actions in rem, (ii) affect third party rights or have erga omnes effect, (iii) relates to inalienable sovereign and public functions of the state, and (iv) when it is expressly, or by necessary implication excluded by statues. Moreover, it held that primarily, it is for the tribunal to determine the non-arbitrability of the subject matter and the court would relegate the parties to arbitration unless it is ex facie satisfied that the dispute is non-arbitrable.

Arbitrability of Fraud

A mere allegation of fraud would not prevent the courts from referring the matter to arbitration.[x] It is only when serious allegation fraud is made and the same goes to the root of the very arbitration agreement and renders it void[xi] and the when the allegation of fraud affect the public at large, the dispute would be non-arbitrable.[xii] An arbitration agreement is said to permeated with fraud only when the court is satisfied that the other party never entered into the agreement related to arbitration.[xiii] The courts have refused to relegate the parties to arbitration when it found that the arbitration agreement was itself vitiated on account of fraud or forgery.[xiv]

Unilateral Option Clauses

An agreement that confers the right to refer the dispute to arbitration only on one of the parties is known as a unilateral arbitration agreement. The issue concerning unilateral option clauses first arose for determination in Union of India v. Bharat Engineering Corporation,[xv] the court held that an arbitration agreement must confer the right to refer to arbitration, equally on both the parties, an agreement which confers such a right only on one party is not an arbitration agreement. Such a clause would be void in terms of Section 28 of the Indian Contract Act.[xvi]

In Tata Capital Housing Finance Ltd v. Shri Chand Construction,[xvii], the court held that unilateral option clauses are not arbitration agreements as they lack an essential element of an arbitration agreement i.e., mutuality. Therefore, the court would refuse to appoint an arbitrator or refer the parties to arbitration as there would be no valid arbitration agreement between the parties.

Unilateral Appointment Clauses

The High Court of Delhi in Jyoti Sarup Mittal v. SDMC, had to consider the validity of an arbitration clause that provided unilateral appointment of the arbitrator. The court held that in terms of the judgment of the Supreme Court in Perkins Eastman v. HSCC,[xviii] the unilateral appointment of an arbitrator is no longer valid in law, however, this does not entail that such an agreement would also become invalid and unenforceable. The court held that such a clause could be easily severed from rest of the clause and the court can appoint an independent and impartial arbitrator. A similar view was taken by the Bombay High Court in Tata Capital Financial Services v. Mitashi Edutainment[xix] and Dhargalkar Technologies v. MMRDA[xx]

Vague reference to Arbitration

The Supreme Court in Jagdish Chander v. Ramesh Chander,[xxi] had to examine the validity of a clause that provided that the parties can be referred to arbitration if they so determine. The court held that such a clause is not an arbitration agreement as it required a fresh consent of the parties to be bound by such a clause.

A clause that does not stipulate a judicial determination but rather an expert determination would not be an arbitration agreement, therefore the court would not appoint an arbitrator in such cases.[xxii] Use of the word "may" in a clause entails only a possibility of arbitration and makes arbitration optional, thus not a valid arbitration agreement.[xxiii] A clause that refers to a law that never existed would also be vague.[xxiv]

The High Court of Delhi has consistently taken the view that whenever the clause only stipulates a possibility of the arbitration or requires fresh consent, such a clause cannot be termed as a valid arbitration agreement.[xxv] Similar approach has been adopted by Bombay,[xxvi] Calcutta,[xxvii] Andhra Pradesh,[xxviii] Rajasthan[xxix] and, Punjab & Haryana High Court.[xxx]

Claims ex facie barred by limitation

In BSNL v. Nortel Networks,[xxxi] the Supreme Court held limitation is an admissibility issue rather than a jurisdictional issue, therefore the court can only interfere when it is certain that the claims are ex facie barred by limitation, if there is slightest of doubt, it must refer the parties to arbitration. It declined to appoint an arbitrator on the ground that the claims of the applicant were ex facie time-barred by over 5½ years.

Similarly, in Secunderabad Cantonment Board v. B. Ramchandraiah,[xxxii] the court held that the court can only reject the application when there is not even a vestige of doubt as to the substantive claims being barred by limitation. In Manish Engineering v. IFFCO,[xxxiii] Allahabad High Court refused to appoint an arbitrator when the claims of the applicant were ex facie time-barred.

Non-compliance with Pre-arbitral steps

In M.K.Shah Engineers v. State of M.P.,[xxxiv] the court held that when the arbitration clause itself provides for certain procedural pre-requisites, they are to be mandatorily complied with, otherwise, the reference would be invalid.

In S.K. Jain v. State of Haryana,[xxxv] the agreement postulated that the contractor must pay a security deposit before initiating arbitration proceedings against the government. The court held that the contractor must necessarily comply with the requirement. However, in Icomm Tele Ltd v. Punjab State Water Supply,[xxxvi] the court held such a stipulation to be violative of Art. 14 and invalid in law.

Failure of the party to respond to various communications from the other party would deprive it from later claiming that pre-condition of amicable settlement has not been complied with. The Court will refer the parties to arbitration if it feels that there is no scope for an amicable settlement between the parties and any attempt at mutual discussions would be an empty formality.[xxxvii]

The High Court of Delhi had earlier held pre-arbitral steps to be mandatory and refused to appoint an arbitrator.[xxxviii] However, in recent judgments the court has taken a different view by stating that these are only directory in nature and does not preclude the court from appointing an arbitrator or making a reference to arbitration.[xxxix]

The High Court of Bombay has recently held that the mandatory nature of the pre-arbitral steps will no longer preclude the parties from approaching the court if the communication exchanged between the parties renders the amicable settlement an impossibility.[xl]

Conclusion

The foregoing grounds may come to rescue of a party that has been unnecessarily dragged into a frivolous arbitration. However, as is evidenced by the various judicial pronouncements, these grounds are allowed in exceptional cases and not as a norm. Courts have given primacy to the intention of the parties over minor technicalities. Therefore, while dealing with an application u/s 8 or 11, the court must not conduct a full-fledged inquiry to determine the validity of the agreement, but only do a primary review. Further, as long as clear intention of the parties to refer their disputes to arbitration can be ascertained, the court must refer the parties to arbitration.

The Supreme Court has appositely observed that "No party can be allowed to take advantage of inartistic drafting of arbitration clause"[xli] and "when in doubt, do refer"[xlii] ,therefore, it is only in case of deadwood that the court should interfere on these grounds.

The article is authored by Tariq Khan, Registrar International Arbitration and Mediation Centre, Hyderabad and Ausaf Ayyub, 3rd Year law student at Jamia Millia Islamia.

Disclaimer: The views expressed in this article are the personal views of the authors.



[i] (2003) 6 SCC 503.

[ii] (2003) 5 SCC 531.

[iii] Yogi Agarwal v. Inspiration Clothes, (2009) 1 SCC 372; Zeneith Drugs v. Nichlas Piramal India, 2019 SCC OnLine SC 946.

[iv] 2021 SCC OnLine SC 781.

[v] NCC Ltd v. IOCL, 2019 SCC OnLine Del 6968.

[vi] Mitra Guha v. ONGC, (2020) 3 SCC 222.

[vii] BSNL v. Motorola India, (2009) 1 SCC 491.

[viii] (2011) 5 SCC 532.

[ix] (2021) 2 SCC 1.

[x] A. Ayyawamy v. A Paramasivam, (2016) 10 SCC 386.

[xi] N.N. Global Mercantile v. Indo Unique Flame Ltd, (2021) 4 SCC 379.

[xii] Rahid Raza v. Sadaf Akhtar, (2019) 8 SCC 710.

[xiii] Avitel Post Studios v. HSBC, (2021) 4SCC 713.

[xiv] Sulekh Aggarwal v. Shiv Astha Construction Co., 2017 SCC OnLine; Cogent Ventures v. Raj Karan, 2012 SCC OnLine Del 793; Vijay Vishwanath Talwar v. Meshreq Bank, 2003 SCC OnLine Del 962.

[xv] 1977 SCC OnLine Del 45.

[xvi] Emmsons Internatinal Ltd v. Metal Distributors, (2005) 116 DLT 559; Bhartia Cutler Hammer v. AVN Tubes, 1991 SCC OnLine Del 322; Lucent Technologies Inc v. ICICI Bank, 2009 SCC OnLine Del 3213.

[xvii] 2021 SCC OnLine Del 5091.

[xviii] 2019 SCC OnLine SC 1517.

[xix] COMM. ARBITRATION PETITION NO. 457 OF 2021.

[xx] 2020 SCC OnLine Bom 3436.

[xxi] (2007) 5 SCC 719.

[xxii] K.K. Modi v. K.N. Modi. (1998) 3 SCC 573; Bharat Bhusan Bansal v. U.P. Small Industries Coprn, (1999) 2 SCC 166.

[xxiii] Wellington Associates v. Kirit Mehta, (2000) 4 SCC 272.

[xxiv] System for International Agencies v. Rahul Coach Builders, (2015) 13 SCC 436.

[xxv] Linde Heavy Truch Divison Ltd v. Container Corporation of India Ltd., 2012 SCC OnLine Del 5434; Avant Garde Clean Room & Engg. Solutions Pvt. Ltd. v. Ind Swift Limited, 2014 SCC OnLine Del 3219; Panchsheel Constructions v. Davinder Pal 2019 SCC OnLine Del 7176, Sara International v. Golden Agri, 2010 SCC OnLine Del 2238; Ashwani Kumar v. Scraft Products Pvt. Ltd., judgment dated 26th July 2021 in ARB.P. 488/2020.

[xxvii] Jyoti Brothers v. Shree Durga Minig Co., 1956 SCC OnLine Cal 188; State Trading Corporation of India v. Owners & Parties, 1998 SCC OnLine Cal 357; Consulting Engineering Services v. Govt. Of W.B. 2014 SCC OnLine Cal 22716.

[xxviii] Gajulapalli Chenchu Reddy v. Koyyana Jaya Lakshmi, 2009 SCC OnLine AP 202.

[xxix] B. Gopal Das v. Kota Straw Board, 1970 SCC OnLine Raj 36; AIR 1971 Raj 528.

[xxx] Sudarshan Chopra v. Company Law Board, 2004 SCC OnLine P&H 128.

[xxxi] (2021) 5 SCC 738.

[xxxii] (2021) 5 SCC 705.

[xxxiii] 2021 SCC OnLine All 876.

[xxxiv] (1999)2 SCC 594.

[xxxv] (2009) 4 SCC 357.

[xxxvi] (2019) 4 SCC 401.

[xxxvii] Visa International v. Continental Resources, (2009) 2 SCC 55; Demerara Distillieries v. Demarara Distillers, (2015) 13 SCC 610.

[xxxviii] Haldiram Manufacturing Company v. DLF Commercial Complexes, 2012 SCC Online Del 2139 (India).

[xxxix] Ravindra Kumar Verma v. BPTP Ltd, 2014 SCC OnLine Del 6602 (India); Union of India v. Baga Brothers, 2017 SCC OnLine Del 8989; Siemens Limited v. Jindal India Thermal Power Limited, 2018 SCC OnLine Del 7158 (India).

[xl] Quick Heal Technologies Limited v. NCS Computech Pvt. Ltd. 2020 SCC OnLine Bom 693.

[xli] Visa International v. Continental Resources, (2009) 2 SCC 55.

[xlii] Vidya Drolia v. Dura Trading, (2021) 2 SCC 1.


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