Arbitrators Cannot Be Disqualified For Merely Participating In Prior Arbitration Involving Interpretation Of Similar Clause: Delhi High Court

The Delhi High Court dismissed a petition under section 34 of the Arbitration and Conciliation Act, 1996 (Act) filed by Steel Authority of India Limited (SAIL) against an arbitral award passed in favor of British Marine PLC.(Respondent). SAIL entered into Contract of Affreightment (COA) with the respondent for transportation of 3 million metric tonnes (±5%) of coking coal over five years. The court further held that just because arbitrators had interpreted a similar clause in the previous arbitration, they could not be disqualified. Justice Jyoti Singh held that “merely because the Arbitrators had taken a view in the SeaSpray Arbitration with respect to Clause 62, which was also the subject matter of adjudication in the present arbitral proceedings, cannot be a ground to hold that they were disqualified or ineligible to continue as Arbitrators and the award stands vitiated on the doctrine of 'issue conflict'. It needs no reiteration that grounds of ineligibility or disqualification cannot be outside the Fifth and Seventh Schedule to the 1996 Act. Issue conflict, on which jurisdiction of the Arbitrators is questioned, is not a ground in either of the two Schedules.” Background: Under the contract, SAIL was to declare stems and the respondent was to nominate a suitable vessel for the transport. Following the global financial crisis in 2008, the SAIL's coal requirement reduced drastically due to which it ended the contract in 2010 by invoking clause 62 of the COA, the so-called default clause, which permitted the termination without liability on either side. The respondent initiated the arbitration claiming damages for loss of freight and demurrage. The Arbitral Tribunal partly allowed the claim stating that the petitioner wrongly terminated the COA. Aggrieved, SAIL had filed the petition under section 34. Findings: The petitioner submitted that clause 62 of the COA gave unfettered power to terminate the contract without any liability due to market collapse and disruption of coal supply. The Court while rejecting the petitioner's contentions observed that this clause did not permit the SAIL to unilaterally terminate the contract for its own non-performance. It held that “Clause 62 was designed to legislate for events constituting frustration of the agreement and was directed at the supplier in Australia, not at SAIL. It cannot be read to permit a party to declare the contract at an end for its own breach.” The court agreed with the tribunal's conclusion that allowing the petitioner's contentions would lead to absurdity as benefits would be taken by the defaulting party from its own wrong. SAIL also submitted that the global economic meltdown and subsequent disruptions in coal supply constituted Force Majeure under Clause 61 of the COA. The court however observed that the force majeure clause was never invoked at the relevant time by the petitioner and it continued to operate in the spot market. It held that “Force Majeure conditions existed in 2010, yet SAIL executed Addendum-2 in April 2011, agreeing to ship additional quantities. Hence, the plea of Force Majeure is an afterthought.” SAIL further argued that two arbitrators in the tribunal had previously ruled against it in another arbitration involving a similar clause, giving rise to issue conflict. The court however rejected this contention holding that issue conflict is not a recognised ground of challenge under section 12 or fifth schedule of the Act. It held that “Berry and Mr. Chakraborty were not de jure ineligible on the touchstone of doctrine of issue conflict. No doubt both had dealt with interpretation of Clause 62 in the SeaSpray arbitration and taken a particular view, this by itself is not a disqualification sans any evidence that the Arbitrators will decide the issue with a closed mind and without any objectivity or were not impartial in the earlier arbitration involving the Petitioner, which I may note, Petitioner has failed to demonstrate.” The Court upheld the tribunal's reasoning regarding damages, holding that the damages were properly computed based on the difference between the contractual freight rate and the prevailing market rate at the time of breach. It held that “The methodology adopted by the tribunal accords with settled commercial practice. British Marine duly proved its loss, and the award cannot be termed speculative.” The court also rejected SAIL's contention on mitigation stating that the burden to prove duty to mitigate was on the petitioner which it failed to discharge. Rejecting the plea that dual interests were illegal, the court held that “the award of 6% pre-award interest and 9% post-award interest in case of delayed payment is consistent with Section 31(7) of the Arbitration Act and cannot be termed punitive.” Accordingly, the present petition was dismissed. Case Title: STEEL AUTHORITY OF INDIA LIMITED...

Arbitrators Cannot Be Disqualified For Merely Participating In Prior Arbitration Involving Interpretation Of Similar Clause: Delhi High Court

Mohd Malik Chauhan

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