India - The Story Of Distinction Between Seat And Venue A Vexed Question Under The Arbitration Law.

Legal News & Analysis - Asia Pacific - India - Dispute Resolution

1 April, 2020

 

The Courts exercise supervisory jurisdiction over the arbitration proceedings. This supervision is limited to granting interim measures, appointment of arbitrator, assistance in evidence taking and setting aside of the arbitral award. We need to analyse whether the Indian courts have justified their limited role, or whether they have been interventionist. In this newsletter, we cover the latest arbitration related judgments of different courts in India. 

 
The story of distinction between seat and venue 

 

The trail of distinction between seat and venue still continues to be a vexed question under the Arbitration Law in India. Recently, the Supreme Court of India again addressed this ongoing uncertainty, in the case of BgS SgS Soma J.V. v. NHPC Ltd., 2019 (6) ARB LR 393(SC). The judgment was delivered on 10th December, 2019, declaring the previous judgment, Hardy Exploration, AIR 2018 SC 4871, (on the similar issue) as incorrect. 

 
The contract was signed between NHPC and BgS SgS Soma which stated that, any dispute would be referred to arbitration under the Indian Arbitration Act and the proceeding would be held in New Delhi or Faridabad. When the dispute arose, the arbitration proceeding took place in New Delhi and the award was passed in BgS’s favor. Subsequently, NHPC filed an application for setting aside the Arbitral Award under Section 34, before the District Court of Faridabad. BgS filed an application under Section 151 r/w Order VII Rule 10 of CPC, 1908 in the District Court of Delhi; the matter was referred to a Special Court in Gurugram, and it ordered the transfer of the application made by NHPC under Section 34 to the New Delhi Court from Faridabad Court. 
 
The Supreme Court stated that the court of place of Arbitration has exclusive jurisdiction over the matter. Further, the court determined the seat of Arbitration to be Delhi, even though the place of Arbitration according to the contract was the Delhi/ Faridabad. The party chose New Delhi when the dispute arose, giving New Delhi Court the exclusive jurisdiction over the matter. 

 

Further, Supreme Court held that the place of arbitration is seat of arbitration as Lex Fori (the venue decides the law applicable to the matter). The Supreme Court declared the Hardy Exploration case to be incorrect as the term seat and venue were distinguished wrongly. In the Hardy Exploration case, the venue of the arbitration according to the agreement was Kuala Lumpur and nothing indicated any contradiction for the seat of arbitration, in-spite of which the Supreme Court applied the Part 1 of A&C Act (only applicable to domestic Arbitration) and the foreign award was challenged under Section 34. Therefore, the Supreme Court in the present case declared that the Hardy Exploration was a bad law.

 

Our Comments

 
The Indian courts have struggled to draw a uniform standard in order to determine the seat of arbitration in case the parties have failed to do so. Both the present case and Hardy Exploration were judgments passed by a three-judge benches of the SC. Therefore, the present judgments’ declaration of the latter as "no longer (being) good law" may not lead to an overruling of Hardy Exploration, and there is a possibility that the issue may be referred to a larger bench.

 

Principles of Natural Justice prevail over the Arbitration Clause 

 

Recently, the Supreme Court in the case of Perkins Eastman Architects DPC & Anr v. HSCC (India) Ltd., AIR 2020 SC 59, addressed the issue, where the Arbitration clause gave power to one party for the appointment of “Sole Arbitrator”. The Supreme Court held that an interested party is disqualified from appointing a Sole Arbitrator. 

 
The agreement was signed between Perkins Eastman Architects and the Edifice Consultants and the HSCC (India) Ltd. for the architectural planning and other design related works. In this agreement, the clause 24 authorized one of the parties, i.e. Chief Managing Director (CMD) of HSCC, to appoint the sole arbitrator. When the dispute arose, Perkins Eastman issued a notice to HSCC, seeking for the appointment of a sole arbitrator. HSCC’s CMD appointed an arbitrator.However Perkins approached the Supreme Court and questioned the appointment of the arbitrator by the CMD, being a party interested in the outcome of the Arbitration which can lead to justifiable doubts. 
 
The Supreme Court focused on issue of the appointment by one party. The appellant argued that the Section 12 of the Act provides for grounds for disqualification of an arbitrator.
 
The CMD appointment would fall within such disqualification. The Court said that the interested party should not have the authority to appoint the Sole Arbitrator, reaffirming its earlier decision of TRF Ltd. Case, AIR 2017 SC 3889. 
 
Further, according to 2015 Amendment of the Arbitration Act, if an Arbitrator appointed, is related to one of the parties, he is statutorily incompetent and also disqualified to nominate a Sole Arbitrator even if the consent for the same was given by the parties. 

 

Our Comments 

 
The right of Independent and Impartial tribunal is one of the cornerstones of the Arbitration & Conciliation Act, 1996. The Court reinstated this right through this judgment and recognized that such right cannot be waived even with the consent of the parties.

 

Even in case of Statutory Arbitration, Arbitral Tribunal can grant interim measure under Section 17 

 

The Supreme Court in the case of State of Gujarat through Chief Secretary & Anr. v. Amber Builders, Civil Appeal No. 8307 of 2019 decided on 8th January 2020, that a Statutory Arbitration Tribunal has the power to act outside the scope of the Statute, if it is permissible under A&C Act. 

 
In the State of Gujarat, all the disputes arising out of the works contract entered by the State Government or the Public Sector Undertakings with any person are governed under the Gujarat Public Works Contracts Dispute Arbitration Tribunal Act, 1992 (the Act). The matters of dispute are referred to Gujarat Public Works Contract Dispute Tribunal under Section 3 of the Act. 
 
The contract was entered between the State and the contractor for a period of 4 years after which the contractor demanded the release of security amount. The State issued a letter for contractor to pay Rs. 1,09,00,092/-, as the road work was not as in accordance to the contract and threatened to withhold the payments from the security deposit and the bills that were pending. The contractor challenged the notice by filing writ petition in the Gujarat High Court, arguing that the State is not competent to withhold such an amount.
 
The State claimed that the work was defective and they had to get the work done from the third party and had to bear the necessary cost for the same. The High Court held that without proper evaluation of the amount, that is to be recovered, the State government cannot recover the said amount unilaterally from the payment that is due. 
 
The State contended that the High Court does not have the jurisdiction as all the matters of the dispute were dealt by the Tribunal. The contractor argued that the statute under which the Tribunal was formed does not provide for the tribunal the power to pass such an order. 
 
On an appeal by the State, matter went to the Supreme Court and the Court held that, in order to arrive at an appropriate remedy for the contractor, the had to approach the Arbitral Tribunal constituted under the Gujarat Act. The jurisdiction therefore is with the tribunal to decide whether there is a prima facie case by the contractor for the grant of Interim relief. 
 
The Court further stated that the power is vested in the Arbitral Tribunal under Section 17 of the A&C Act such powers can be exercised by the Tribunal constituted under the Gujarat Act as there is no inconsistency in the two acts in regards with the interim relief. The power already vests in the tribunal under the Gujarat Act and Section 17 of the A&C Act compliments these powers and therefore it cannot be said that the provisions of Section 17 of the A&C Act are inconsistent with the Gujarat Act. The appeal by State was allowed and High Court Order was set aside. 

 

Our Comments 

 
The judgment is appreciated as it clarifies the interplay between the Arbitration & Conciliation Act, 1996 and the statute which is governing the statutory arbitration. This judgment signals the pro arbitration approach of the court as it recognizes that the arbitral tribunal has power to grant interim measures in cases of statutory arbitration also.

 

Section 87 of the A & C Act, 1996 struck down 

 

The automatic stay on the arbitration award upon the filing of a challenge under Section 34, for setting aside an Arbitration Award has caused a lot of trouble to the parties waiting for the enforcement of Arbitral Award. The SC in Hindustan Construction Company Limited & Anr v. Union of India, 2019 (6) ARB LR 171 (SC), held, Section 87 of A&C Act, as unconstitutional. 

 
Section 87 was introduced through A&C (Amendment) Act, 2019. It states that there will be an automatic stay on the enforcement of the award, in cases where the award was challenged that arose out of Arbitration that commenced prior to October 23, 2015. 
 
The Court noted that automatic Stay on awards marks as an old disorder that existed in the A&C Act, 1996. This provision led to challenging of most of the awards in order to cause delay. The 2015 Amendment resolved this issue and provided that there will be no automatic stay of the award, however, the amendment failed to answer if this will have retrospective effect. The Supreme Court answered this in BCCI Case, (2018) 6 SCC 287, stating that Section 26 of the 2015 Amendment clarified that unless otherwise decided it will be prospective. Most importantly, the court held that there would be no automatic stay even in cases where challenge was filed prior to the commencement date.
 
Petitioner, a construction engineering company that worked on Government Projects was in a situation where a large amount of money was locked because of the automatic stay on award passed in its favor. The Supreme Court primarily discussed the NALCO judgment, 2004 1 SCC 540, and said the judgment incorrectly interpreted Section 36, as it was said that the award shall be enforced as a decree only when the time to file the application under Sec. 34 has expired or such application has been refused. The court failed to consider Section 9 (the courts the liberty to pass any interlocutory even after passing of the award prior to its enforcement) and Section 35 of the Act (that Section 36 has to be read in the light of Section 35, which states that award is binding on the parties and persons claiming under them). Therefore, the concept of automatic Stay was never there, further 2015 Amendment clarified it. The Court also held that 2019 Amendment Act failed to observe the Supreme Court’s decision in BCCI. The insertion of Section 87 and deletion of Section 26 was arbitrary and is contrary to public interest. Court accordingly struck down Section 87 as it violates Article 14 of the Constitution. 

 

Our Comments 

 
This judgment was essential as Section 87 opened the flood gate of litigations as post the BCCI judgment, there was no automatic stay on the arbitral award. This judgment strengthens the arbitration regime of the country as removal of automatic stay further provides finality to the arbitral award.

 

Initiation notice requirement for commencing arbitration proceeding 

 

The Delhi High Court in Badri Singh Vinimay Pvt. Ltd. v. MMTC Ltd. O.M.P. 225/2015, decided on 6 January 2020 held that communication claiming a disputed amount and contemplating arbitration in the alternative is sufficient notice of a request for arbitration. 

 
In this case, the award debtor challenged the award under Section 34 of the Arbitration & Conciliation Act, 1996 (‘Arbitration Act’). In these proceedings, the award debtor contended that the proceedings of the arbitration themselves were vitiated by an improper invocation of arbitration since no notice of commencement of arbitration in terms of Section 21 of the Arbitration Act was served upon the award debtor. 
 
The Delhi High Court held that Section 21 requires a party to send a request to the counter-party for the dispute to be referred to arbitration and the above communication from award creditor meets this requirement. Thus, the initiation of arbitration proceedings in such a situation was expressly contemplated.

 

Our Comments 

 
This judgment of the court emphasizes that no special format requirement is there under Section 21 of the A& C Act, 1996. This judgment will discourage the parties in raising unreasonable argument just to delay the enforcement of the arbitral award.

 

herbert smith Freehills

 

For further information, please contact:

 

Krrishan Singhania, Managing Partner, Singhania & Co

mumbai@singhanialaw.com