Tag Archives: arbitration clause

Arbitral Award – Concept of Public Policy

In Oil and Natural Gas Corporation Ltd. v. Saw Pipes Ltd., (2003) 5 SCC 705 it was observed as under:

       “Therefore, in our view, the phrase “public policy of India” used in Section 34 in context is required to be given a wider meaning. It can be stated that the concept of public policy connotes some matter which concerns public good and the public interest. What is for public good or in public interest or what would be injurious or harmful to the public good or public interest has varied from time to time. However, the award which is, on the face of it, patently in violation of statutory provisions cannot be said to be in public interest. Such award/judgment/decision is likely to adversely affect the administration of justice. Hence in addition to the narrower meaning given to the term “public policy” in Renusagar Power Company Ltd. v. General Electric Company, (1994) Supp (1) SCC 644, it is required to be held that the award could be set aside if it is patently illegal. The result would be – award could be set aside if it is contrary to:

  • Fundamental policy of India law; or
  • The interest of India; or
  • Justice or morality; or
  • In addition, if it is patently illegal.

Illegality must go to the root of the matter and if the illegality is of trivial nature, it cannot be held that award is against the public policy. Award could also be set aside if it is so unfair and unreasonable, that it shocks the conscience of the Court. Such award is opposed to public policy and is required to be adjudged void.” Uttar Haryana Bijli Vitran Nigam Ltd. v. M/s P.M. Electronics Ltd., 2020 (140) ALR 852.

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Acquiescence – On Appointment of Arbitrator

In Dharma Pratisthanam v. Madhok Construction (Pvt.) Ltd., (2005) 9 SCC 686, a three Judge Bench of the Hon’ble Supreme Court had the occasion to consider the effect of acquiescence on appointment of arbitrator. In that regard, the Hon’ble Supreme Court examined the difference between the unilateral appointment and unilateral reference. While both were termed to be illegal, at the same time, it was observed that it would make a difference if in respect of unilateral appointment and reference, other party submits to the jurisdiction of the arbitrator and waives its rights which it had under the agreement. In that situation, the arbitrator was held entitled to proceed with reference and the party submitting to his jurisdiction and participating in the proceedings precluded and estopped from raising any objection in that regard, at a later stage. If, however, that party had failed to act when called upon, it could not lead to an inference of implied consent or acquiescence being drawn. Thus, the appellant in that case was found to have not responded to the proposal by the other side to join in the appointment of the sole arbitrator. Such an act was not construed as its consent. Meerut Development Authority v. Civil Engineering Construction Corporation, 2020 (3) AWC 2532.

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Petition Under Section 11(6) of the Arbitration & Conciliation Act – Cause of Action

Sub-Section (5) of Section 11 clearly provides that if the parties fail to agree upon any procedure for appointment of an arbitrator, then the party has to call upon other with a request regarding the appointment of an arbitrator requested and in case if the other person declines or the appointment procedure fails, then it gives a cause of action to the person so concerned to file a petition under Section 11(6) of the Arbitration and Conciliation Act, 1996. Invocation of Section 11(6) of the Arbitration and Conciliation Act, 1996 is squarely based on a default of a party.        

Under Section 11(6) of the Arbitration and Conciliation Act, 1996 the Court has jurisdiction to make the appointment only when the person including an institution, fails to perform any function entrusted to it under that procedure. Deepak Goel v. Avinash Chandra, 2020 (4) AWC 3720 (LB).

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Rule for – Appointment of a Substitute Arbitrator

Under Section 15(2) of the Arbitration and Conciliation Act, 1996, in a situation where the mandate of an arbitrator terminates, a substitute arbitrator is required to be appointed according to the rules that were applicable to the appointment of the arbitrator who is replaced. In Yashwith Constructions (P) Ltd. v. Simplex Concrete Piles India Ltd., (2006) 6 SCC 204, the term “rules” appearing in Section 15(2) of the Act has been understood to be referring to the provisions for appointment contained in the arbitration agreement or any rules of any institution under which the disputes are to be referred to arbitration.

        The Hon’ble Apex Court in Government of Haryana v. G.F. Toll Road Pvt. Ltd., (2019) 3 SCC 505, it was held as under:

        “The High Court while considering the appointment under Section 15 failed to take note of the provisions of Section 15(2) of the Arbitration and Conciliation Act. Section 15(2) provides that a substitute arbitrator must be appointed according to the rules that are applicable for the appointment of the arbitrator being replaced. This would imply that the appointment of a substitute arbitrator must be according to the same procedure adopted in the original agreement at the initial stage. Deepak Goel v. Avinash Chandra, 2020 (4) AWC 3720 (LB).

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Nature of Arbitral Proceedings – Determination of

When both the purchase order as also the pricing agreement subsists and both the said documents contain the arbitration clauses which are not similar to one another, in order to determine the nature of the arbitral proceedings the said two documents will have to be read in harmony or reconciled so as to take note of the nature of the dispute that had arisen between the parties which would require resolution through arbitration and thereafter arrive at the conclusion as to whether the application filed under Section 11 of the Arbitration and Conciliation Act, 1996 would be sustainable so as to appoint an Arbitrator by invoking Clause 7 of the purchase order; more particularly in a situation where the Arbitral Tribunal has already been constituted in terms of Clause 23 of the agreement.    

    In that view of the matter, when admittedly the parties had entered into an agreement and there was no consensus ad idem to the terms and conditions contained therein which is comprehensive and encompassing all terms of the transaction and such agreement also contains an arbitration clause which is different from the arbitration clause provided in the purchase order which is for the limited purpose of supply of the produce with more specific details. In that view, it would not be appropriate for the applicant to invoke clause 7 of the purchase order more particularly when the arbitration clause contained in the agreement has been invoked and the Arbitral Tribunal has already been appointed. Balasore Alloys Limited v. Medima LLC, (2020) 9 SCC 136.

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Invocation of Arbitration Clause – After Final Settlement

In Nathani Steels Ltd. v. Associated Constructions, 1995 Supp (3) SCC 324, it was held as under:        

“Even otherwise we feel that once the parties have arrived at a settlement in respect of any dispute or difference arising under a contract and that dispute or the difference is amicable settled by way of a final settlement by and between the parties, unless that settlement is set aside in proper proceedings, it cannot lie in the mouth of one of the parties to the settlement to spurn it on the ground that it was a mistake and proceed to invoke the arbitration clause. If this is permitted the sanctity of contract, the settlement also being a contract, would be wholly lost and it would be open to one party to take the benefit under the settlement and then to question the same on the ground of mistake without having the settlement set aside.” WAPCOS Ltd. v. Salma Dam Joint Venture, (2020) 3 SCC 169.

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Appointment of Substitute Arbitrator

The legal consequence is well taken care of by the provisions of Section 15(1) of the Arbitration and Conciliation Act, 1996 read with Section 2 of the Act which provides, where the Arbitrator withdraws from office for any reason, a substitute arbitrator should be appointed according to the Rules that were applicable to the appointment of the arbitrator being replaced.        Therefore in the first place a substitute arbitrator may be appointed in view of the clear provisions of law in that regard. Second as to the procedure to be followed, again there is no doubt that it would have to remain the same as had been followed at the time of appointment of the arbitrator who has rescued himself. M/s Manish Engineering Enterprises v. Indian Farmers Fertilizers Cooperative Ltd., 2020 (138) ALR 930.

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Single Contract Case and Two Contract Case – Distinction Between

 In Habas Sinai Ve Tibbi Gazlar Isthisal Endustri AS v. Sometal SAL, 2010 Bus LR 880, a distinction was made between a “single contract case” and a “two contract case”. A “single contract case” is one where the arbitration clause is contained in a standard form contract to which there is a general reference in the contract between the parties. On the other hand, where the arbitration clause is contained in an earlier contract/some other contract, and a reference is made to incorporate it in the contract between the parties, it is a “two contract case”. The Court held that incorporation by general reference in a single contract case is valid. However, in a “two contract case”, where reference is made to an arbitration clause in a separate contract, the reference must be specific to the arbitration clause. The judgment in  Habas Sinai Ve Tibbi Gazlar Isthisal Endustri AS v. Sometal SAL, 2010 Bus LR 880  has been affirmed by the Queen’s Bench Division in SEA 2011 Inc. v. ICT Ltd., 2018 EWHC 520 (Comm).

The Court recognised the following broad categories in which the parties attempt to incorporate an arbitration clause:

“(1A and B make a contract in which they incorporate standard terms. These may be the standard terms of one party set out on the back of an offer letter or an order, or contained in another document to which reference is made; or terms embodied in the rules of an organisation of which A or B or both are members; or they may be terms standard in a particular trade or industry.

(2A and B make a contract incorporating terms previously agreed between A and B in another contract or contracts to which they were both parties.

(3A and B make a contract incorporating terms agreed between A (or B) and C. Common examples are a bill of lading incorporating the terms of a charter to which A is a party; reinsurance contracts incorporating the terms of an underlying insurance; excess insurance contracts incorporating the terms of the primary layer of insurance; and building or engineering sub-contracts incorporating the terms of a main contract or sub-sub-contracts incorporating the terms of a sub-contract. (4A and B make a contract incorporating terms agreed between C and D. Bills of lading, reinsurance and insurance contracts and building contracts may fall into this category.” Giriraj Garg v. Coal India Ltd., (2019) 5 SCC 192.

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Arbitration Agreement – Does Not Require Registration

An arbitration agreement does not require registration under the Registration Act. Even if it is found as one of the clauses in a contract or instrument, it is an independent agreement to refer the disputes to arbitration, which is independent of the main contract or instrument. Therefore having regard to the proviso to Section 49 of the Registration Act read with Section 16(1)(a) of the Arbitration and Conciliation Act, an arbitration agreement in an unregistered but compulsorily registerable document can be acted upon and enforced for the purpose of dispute resolution by arbitration. Garware Wall Ropes Ltd. v. Coastal Marine Constructions and Engineering Ltd., (2019) 9 SCC 209.

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Invalidity of the Main Agreement – May attach itself to the Arbitration Agreement

Where the contract or instrument is voidable at the option of a party (as for example under Section 19 of the Contract Act, 1872), the invalidity that attaches itself to the main agreement may also attach itself to the arbitration agreement, if the reasons which make the main agreement voidable, exist in relation to the making of the arbitration agreement also. For example, if a person is made to sign an agreement to sell his property under threat of physical harm or threat to life, and the said person repudiates the agreement on that ground not only the agreement for sale, but any arbitration agreement therein will not be binding. Garware Wall Ropes Ltd. v. Coastal Marine Constructions and Engineering Ltd., (2019) 9 SCC 209.

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