Tag Archives: Indian Contract Act

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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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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Specific Performance of Contract – Starting Point of Limitation

Hon’ble Gujarat High Court in the case of Somabhai Kanjibhai Patel v. Abbasbhai Jafarbhai Daginawala, 1993 (2) GLR 1337, has held that in a contract for sale of all seven plots, sale of one plot only would amount to refusal to perform the contract in its entirety. The starting point of limitation would come into play as soon as performance of the contract in its entirety is refused either expressly or by necessary implication evinced by such contract of sale of one plot therefrom. It is held that if the starting point of limitation is not allowed to run on the ground of refusal of performance of the contract in part, no suit could be instituted till the performance of the contract in its entirety is refused. In that case, the suit filed before the entire contract is broken might be branded as premature. It is held that besides, the starting point of limitation cannot be permitted to be postponed indefinitely as in that case. The prescribed period of limitation under Article 54 of the Act is three years from the date performance of the contract is refused to the knowledge of the litigating party. Shetty Associates Pvt. Ltd. v.Samta Builders Private Limited, (2019) 4 Bom CR 735.

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Damages – Arising out of Breach of Contract

Section 73 of the Indian Contract Act makes it clear that damages arising out of a breach of contract is treated separately from damages resulting from obligations resembling those created by contract. When a contract has been broken, damages are recoverable under Paragraph 1 of Section 73 of the Indian Contract Act. When, however, a claim for damages arises from obligations resembling those created by contract, this would be covered by Paragraph 3 of Section 73 of the Indian Contract Act. Mahanagar Telephone Nigam Ltd. v. Tata Communications Ltd., (2019) 5 SCC 341.

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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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Interpretation of Deed of Contract

The well known rule of interpretation of contracts is that the deed ought to be read as a whole in order to ascertain the true meaning of its several clauses and a word of each clause should be so interpreted as to bring it into harmony with the other provisions of the deed, if that interpretation does no violence to the meaning of which they are naturally susceptible.

        In Multi-Link Leisure Developments Ltd. v. North Lanarkshire Council, 2010 UKSC 47, it was held as under:         “The Court’s task is to ascertain the intention of the parties by examining the words they used and giving them their ordinary meaning in their contractual context. It must start with what it is given by the parties themselves when it is conducting this exercise. Effect is to be given to every word, so far as possible, in the order in which they appear in the clauses in question. Words should not be added which are not there, and words which are there should not be changed, taken out or moved from the place in the clause where they have been put by the parties. It may be necessary to do some of these things at a later stage to make sense of the language. But this should not be done until it has become clear that the language the parties actually used creates an ambiguity which cannot be solved otherwise.” State of Bihar v. Tata Iron and Steel Company Ltd., (2019) 7 SCC 99.

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Relief of Specific Performance – Is Discretionary

A perusal of Section 20 of the Specific Relief Act clearly indicates that the relief of specific performance is discretionary. Merely because the plaintiff is legally right, the Court is not bound to grant him the relief. True it is, that the court while exercising its discretionary power is bound to exercise the same on established judicial principles and in a reasonable manner. Obviously, the discretion cannot be exercised in an arbitrary or whimsical manner. Sub-clause (c) of sub-section (2) of Section 20 provides that even if the contract is otherwise not voidable but the circumstances make it inequitable to enforce specific performance, the court can refuse to grant such discretionary relief. Explanation (2) to the Section provides that the hardship has to be considered at the time of the contract, unless the hardship is brought in by the action of the plaintiff. Surinder Kaur v. Bahadur Singh, (2019) 8 SCC 575.

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