Tag Archives: arbitration clause

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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Appeal u/s 37 of Arbitration & Conciliation Act – Delay Beyond 120 Days

Given the fact that an appellate proceeding is a continuation of the original proceeding as has been held in Lachmeshwar Prasad Shukul v. Keshwar Lal Chaudhuri, AIR 1941 FC 5, and repeatedly followed in various judgments, any delay beyond 120 days in the filing of an appeal under Section 37 from an application being either dismissed or allowed under Section 34 of the Arbitration & Conciliation Act, 1996 should not be allowed as it will defeat the overall statutory purpose of arbitration proceedings being decided with utmost dispatch. N.V. International v. State of Assam, (2020) 2 SCC 109. (See also Union of India v. Varindera Constructions Ltd., (2020) 2 SCC 111.)

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Non-Arbitrable Disputes

In Booz Allen & Hamilton Inc. v. SBI Home Finance Ltd. [Booz Allen & Hamilton Inc. v. SBI Home Finance Ltd., (2011) 5 SCC 532  the following has been laid down:

“ The Arbitral Tribunals are private fora chosen voluntarily by the parties to the dispute, to adjudicate their disputes in place of courts and tribunals which are public fora constituted under the laws of the country. Every civil or commercial dispute, either contractual or non-contractual, which can be decided by a court, is in principle capable of being adjudicated and resolved by arbitration unless the jurisdiction of the Arbitral Tribunals is excluded either expressly or by necessary implication. Adjudication of certain categories of proceedings are reserved by the legislature exclusively for public fora as a matter of public policy. Certain other categories of cases, though not expressly reserved for adjudication by public fora (courts and tribunals), may by necessary implication stand excluded from the purview of private fora. Consequently, where the cause/dispute is inarbitrable, the court where a suit is pending, will refuse to refer the parties to arbitration, under Section 8 of the Act, even if the parties might have agreed upon arbitration as the forum for settlement of such disputes.

 The well-recognised examples of non-arbitrable disputes are: (i) disputes relating to rights and liabilities which give rise to or arise out of criminal offences; (ii) matrimonial disputes relating to divorce, judicial separation, restitution of conjugal rights, child custody; (iii) guardianship matters; (iv) insolvency and winding-up matters; (v) testamentary matters (grant of probate, letters of administration and succession certificate); and (vi) eviction or tenancy matters governed by special statutes where the tenant enjoys statutory protection against eviction and only the specified courts are conferred jurisdiction to grant eviction or decide the disputes.

 It may be noticed that the cases referred to above relate to actions in rem. A right in rem is a right exercisable against the world at large, as contrasted from a right in personam which is an interest protected solely against specific individuals. Actions in personam refer to actions determining the rights and interests of the parties themselves in the subject-matter of the case, whereas actions in rem refer to actions determining the title to property and the rights of the parties, not merely among themselves but also against all persons at any time claiming an interest in that property. Correspondingly, a judgment in personam refers to a judgment against a person as distinguished from a judgment against a thing, right or status and a judgment in rem refers to a judgment that determines the status or condition of property which operates directly on the property itself.

Generally and traditionally all disputes relating to rights in personam are considered to be amenable to arbitration; and all disputes relating to rights in rem are required to be adjudicated by courts and public tribunals, being unsuited for private arbitration. This is not however a rigid or inflexible rule. Disputes relating to subordinate rights in personam arising from rights in rem have always been considered to be arbitrable.” Emaar MGF Land Ltd. v. Aftab Singh, (2019) 12 SCC 751

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Arbitral Award – Period of Limitation for Challenging

In Section 34(3) of the Arbitration and Conciliation Act, the commencement period for computing limitation is the date of receipt of award or the date of disposal of request under Section 33 (i.e. correction/additional award). If Section 17 of the Limitation Act were to be applied for computing the limitation period under Section 34(3) of the Arbitration & Conciliation Act, the starting period of limitation would be the date of discovery of the alleged fraud or mistake. The starting point for limitation under Section 34(3) would be different from the Limitation Act.

        In the context of Section 34(3) of the Arbitration & Conciliation Act, a party can challenge an award as soon as it receives the award. Once an award is received, a party has knowledge of the award and the limitation period commences. The objecting party is therefore precluded from invoking Section 17(1)(b) and (d) of the Limitation Act once it has knowledge of the award. Section 17(1)(a) and (c) of the Limitation Act may not even apply, if they are extended to Section 34, since they deal with a scenario where the application is “based upon” the fraud of the respondent or if the application is for “relief from the consequences of a mistake.” Section 34 application is based on the award and not on the fraud of the respondent and does not seek the relief of consequence of a mistake. P. Radha Rai v. P. Ashok Kumar, (2019) 13 SCC 445.   

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Waiver of Applicability of – Section 12(5) of the Arbitration & Conciliation Act

Section 12(5) of the Arbitration & Conciliation Act is a new provision which relates to the de jure inability of an arbitrator to act as such. Under this provision, any prior agreement to the contrary is wiped out by the non obstante clause in Section 12(5) the moment any person whose relationship with the parties or the counsel or the subject-matter of the dispute falls under the Seventh Schedule. The sub-section then declares that such person shall be “ineligible” to be appointed as arbitrator. The only way in which this ineligibility can be removed is by the proviso, which again is a special provision which states that parties may, subsequent to disputes having arisen between them, waive the applicability of Section 12(5) by an express agreement in writing. What is clear, therefore, is that where, under any agreement between the parties, a person falls within any of the categories set out in the Seventh Schedule, he is, as a matter of law, ineligible to be appointed as an arbitrator. The only way in which this ineligibility can be removed, again, in law, is that parties may after disputes have arisen between them, waive the applicability of this sub-section by an “express agreement in writing”. Obviously, the “express agreement in writing” has reference to a person who is interdicted by the Seventh Schedule, but who is stated by parties (after the disputes have arisen between them) to be a person in whom they have faith notwithstanding the fact that such person is interdicted by the eventh Schedule.

Unlike Section 4 of the Arbitration & Conciliation Act which deals with deemed waiver of the right to object by conduct, the proviso to Section 12(5) will only apply if subsequent to disputes having arisen between the parties, the parties waive the applicability of sub-section (5) of Section 12 by an express agreement in writing. For this reason, the argument based on the analogy of Section 7 of the Act must also be rejected. Section 7 deals with arbitration agreements that must be in writing, and then explains that such agreements may be contained in documents which provide a record of such agreements. On the other hand, Section 12(5) refers to an “express agreement in writing”. The expression “express agreement in writing” refers to an agreement made in words as opposed to an agreement which is to be inferred by conduct. Here, Section 9 of the Contract Act, 1872 becomes important. It states:

9. Promises, express and implied.—Insofar as the proposal or acceptance of any promise is made in words, the promise is said to be express. Insofar as such proposal or acceptance is made otherwise than in words, the promise is said to be implied.”

It is thus necessary that there be an “express” agreement in writing. Bharat Broadband Network Ltd. v. United Telecoms Ltd., (2019) 5 SCC 755.

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Appointment of Arbitrator – No Claim Certificate Obtained by Fraud, Coercion, Duress or Undue Influence

In Union of India v. Master Construction Company, (2011) 12 SCC 349, it was held as under:

            “In our opinion, there is no rule of the absolute kind. In a case where the claimant contends that a discharge voucher or no claim certificate has been obtained by fraud, coercion, duress or undue influence and the other side contests the correctness thereof, the Chief Justice/his designate must look into this aspect to find out at least, prima facie, whether or not the dispute is bona fide and genuine. Where the dispute raised by the claimant with regard to validity of the discharge voucher or no – claim certificate or settlement agreement, prima facie, appears to be lacking in credibility, there may not be a necessity to refer the dispute for arbitration at all.”

            From the proposition which has been laid down by the Hon’ble Apex Court, what reveals is that a mere plea of fraud, coercion or undue influence in itself is not enough and the party who alleged is under obligation to prima facie establish the same by placing satisfactory material on record before the Chief Justice or his Designate to exercise power under Section 11(6) of the Arbitration and Conciliation Act, 1996 which has been considered by the Hon’ble Supre Court in New India Assurance Co. Ltd. v. Genus Power Infrastructure Ltd., (2015) 2 SCC 424 as below:

            “It is therefore clear that a bald plea of fraud, coercion, duress or undue influence is not enough and the party who sets up a plea, must prima facie establish the same by placing material before the Chief Justice/ his Designate.”

            It is true that there cannot be a rule of its kind that mere allegation of discharge voucher or no claim certificate being obtained by fraud/coercion/undue influence practiced by other party in itself is sufficient for appointment of the arbitrator unless the claimant who alleges that execution of the discharge agreement or no claim certificate was obtained on account of fraud/coercion/undue influence practiced by the other party is able to substantiate the same, the correctness thereof may be open for the Chief Justice/his Designate to look into this aspect to find out at least prima facie whether the dispute is bona fide and genuine in taking a decision to invoke Section 11(6) of the Arbitration and Conciliation Act, 1996. United India Assurance Co. Ltd. v. Antique Art Exports Pvt. Ltd., (2019) 5 SCC 362.

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Arbitral Award – Interference With

An arbitral award can be set aside if it is contrary to (a) fundamental policy of Indian law, or (b) the interest of India, or (c) justice or morality. (Renusagar Power Co. Ltd. v. General Electric Co. [Renusagar Power Co. Ltd. v. General Electric Co., 1994 Supp (1) SCC 644] ) Patent illegality was added to the above three grounds in ONGC Ltd. v. Saw Pipes Ltd., (2003) 5 SCC 705. Illegality must go to the root of the matter and in case the illegality is of trivial nature it cannot be held that the award is against the public policy. It was further observed in ONGC Ltd. v. Saw Pipes Ltd., (2003) 5 SCC 705 that an award could also be set aside if it is so unfair and unreasonable that it shocks the conscience of the Court.

In  DDA v. R.S. Sharma and Co., (2008) 13 SCC 80 it was held that an award can be interfered with by the Court under Section 34 of the Act when it is contrary to:

(a) substantive provisions of law; or

(b) provisions of the 1996 Act; or

(c) against the terms of the respective contract; or

(d) patently illegal; or

(e) prejudicial to the rights of the parties.

The fundamental policy of India was explained in  ONGC Ltd. v. Western Geco International Ltd., (2014) 9 SCC 263 as including all such fundamental principles as providing a basis for administration of justice and enforcement of law in this country. It was held inter alia, that a duty is cast on every tribunal or authority exercising powers that affect the rights or obligations of the parties to show a “judicial approach”. It was further held that judicial approach ensures that an authority acts bona fide and deals with the subject in a fair, reasonable and objective manner and its decision is not actuated by any extraneous considerations. It was also held that the requirement of application of mind on the part of the adjudicatory authority is so deeply embedded in our jurisprudence that it can be described as a fundamental policy of Indian law. The Court further observed that the award of the Arbitral Tribunal is open to challenge when the arbitrators fail to draw an inference which ought to be drawn or if they had drawn an inference which on the face of it is untenable resulting in miscarriage of justice. The Court has the power to modify the offending part of the award in case it is severable from the rest, according to the said judgment ONGC Ltd. v. Western Geco International Ltd., (2014) 9 SCC 263.

The limit of exercise of power by courts under Section 34 of the Act has been comprehensively dealt in  Associate Builders v. DDA, (2015) 3 SCC 49. Lack of judicial approach, violation of principles of natural justice, perversity and patent illegality have been identified as grounds for interference with an award of the arbitrator. The restrictions placed on the exercise of power of a court under Section 34 of the Act have been analysed and enumerated in  Associate Builders v. DDA, (2015) 3 SCC 49 which are as follows:

(a) The court under Section 34(2) of the Act, does not act as a court of appeal while applying the ground of “public policy” to an arbitral award and consequently errors of fact cannot be corrected.

(b) A possible view by the arbitrator on facts has necessarily to pass muster as the arbitrator is the sole judge of the quantity and quality of the evidence.

(c) Insufficiency of evidence cannot be a ground for interference by the court. Re-examination of the facts to find out whether a different decision can be arrived at is impermissible under Section 34(2) of the Act.

(d) An award can be set aside only if it shocks the conscience of the court.

(e) Illegality must go to the root of the matter and cannot be of a trivial nature for interference by a court. A reasonable construction of the terms of the contract by the arbitrator cannot be interfered with by the court. Error of construction is within the jurisdiction of the arbitrator. Hence, no interference is warranted.

(f) If there are two possible interpretations of the terms of the contract, the arbitrator’s interpretation has to be accepted and the court under Section 34 cannot substitute its opinion over the arbitrator’s view. M.P. Power Generation Co. Ltd. v. ANSALDO Energia SPA, (2018) 16 SCC 661.

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Arbitration – Non-signatory Affiliates

In Chloro Controls India (P) Ltd. v. Severn Trent Water Purification Inc., (2013) 1 SCC 641, it was observed that ordinarily, an arbitration takes place between persons who have been parties to both the arbitration agreement and the substantive contract underlying it. English Law has evolved the “group of companies doctrine” under which an arbitration agreement entered into by a company within a group of corporate entities can in certain circumstances bind non-signatory affiliates. The test as formulated, is as follows:

       “Though the scope of an arbitration agreement is limited to the parties who entered into it and those claiming under or through them, the courts under the English Law have, in certain cases, also applied the “group of companies doctrine”. This doctrine has developed in the international context, whereby an arbitration agreement entered into by a company, being one within a group of companies, can bind its non-signatory affiliates or sister or parent concerns, if the circumstances demonstrate that the mutual intention of all the parties was to bind both the signatories and the non-signatory affiliates. This theory has been applied in a number of arbitrations so as to justify a tribunal taking jurisdiction over a party who is not a signatory to the contract containing the arbitration agreement.

       This evolves the principle that a non-signatory party could be subjected to arbitration provided these transactions were with group of companies and there was a clear intention of the parties to bind both, the signatory as well as the non-signatory parties. In other words, “intention of the parties” is a very significant feature which must be established before the scope of arbitration can be said to include the signatory as well as the non-signatory parties.”

       The court held that it would examine the facts of the case on the touchstone of the existence of a direct relationship with a party which is a signatory to the arbitration agreement, a ‘direct commonality’ of the subject matter and on whether the agreement between the parties is a part of a composite transaction:

       “A non-signatory or third party could be subjected to arbitration without their prior consent, but this would only be in exceptional cases. The court will examine these exceptions from the touchstone of direct relationship to the party signatory to the arbitration agreement, direct commonality of the subject matter and the agreement between the parties being a composite transaction. The transaction should be of a composite nature where performance of the mother agreement may not be feasible without aid, execution and performance of the supplementary or ancillary agreements, for achieving the common object and collectively having bearing on the dispute. Besides all this, the Court would have to examine whether a composite reference of such parties would serve the ends of justice. Once this exercise is completed and the court answers the same in the affirmative, the reference of even non-signatory parties would fall within the exception afore discussed.

       Explaining the legal basis that may be applied to bind a non-signatory to an arbitration agreement, it was held thus:

       “The first theory is that of implied consent, third party beneficiaries, guarantors, assignment and other transfer mechanisms of contractual rights. This theory relies on the discernible intentions of the parties and, to a large extent, on good faith principle. They apply to private as well as public legal entities.

       The second theory includes the legal doctrines of agent-principal relations, apparent authority, piercing of veil (also called “the alter ego”), joint venture relations, succession and estoppels. They do not rely on the parties’ intention but rather on the force of the applicable law.” Cheran Properties Ltd.v. Kasturi and Sons Ltd., (2018) 6 SCC 413.

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