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SUPREME COURT ON ARBITRATION IN 2019: YEAR IN REVIEW

R. HARIKRISHNAN1

In this article, I attempt to examine some of the significant judgments delivered

by the Supreme Court on the Arbitration and Conciliation Act, 1996 [hereinafter

‘1996 Act’] this year and the impact of these judgments in the Indian Arbitration

law.

I. INVALIDATION OF SECTION 87 OF THE 1996 ACT (AS

INSERTED BY THE ARBITRATION AND CONCILIATION

(AMENDMENT) ACT, 2019: A FUTILE LEGISLATIVE EXERCISE

Decision:

Hindustan Construction Co. Ltd. v. Union of India [W.P. (C) 1074 of 2019.

Decided on 27.11.2019]

This issue has its genesis in Section 26 of the Arbitration and Conciliation

(Amendment) Act, 2015 [hereinafter ‘2015 Amendment Act’] which provided that

the 2015 Amendment Act shall not apply to arbitral proceedings commenced

in accordance with Section 21 of the 1996 Act before the commencement of the

2015 Amendment Act i.e. w.e.f. 23.10.2015, unless the parties otherwise agree

but shall apply in relation to arbitral proceedings commenced on or after

the said date.

The difficulty arose due to the different expressions- ‘to arbitral proceedings’ and

‘in relation to arbitral proceedings’ being used in the two limbs of the Section.

The anomaly that would arise is that the Amendment Act might get applied to

Court proceedings initiated after the Amendment pursuant to the arbitral

1
The author is a practising advocate at the High Court of Kerala. He can be contacted at
rhkrishnan.1990@gmail.com
proceedings commenced before the Amendment Act, thereby affecting the vested

right gained by a party prior to the Amendment. The resultant anomaly was the

cause of divergent verdicts of various High Courts on the applicability of the

Amendment.

The Supreme Court in Board of Control for Cricket in India v. Kochi

Cricket Pvt. Ltd. (2018) 6 SCC 287 [hereinafter ‘BCCI’] set this divergent

views to rest by holding that the Amendment Act is prospective in nature,

and will apply to those arbitral proceedings that are commenced, as understood

by Section 21 of the principal Act, on or after the Amendment Act, and to Court

proceedings which have commenced on or after the Amendment Act came into

force. One important advantage of this interpretation was that the benefit of

automatic stay of the award was no longer available even if the award was

passed prior to the 2015 Amendment Act.

As is evident from footnote no. 3 of the judgment in BCCI, at that time itself, a

proposal was made to incorporate Section 87 in the 1996 Act clarifying the

applicability of the 2015 Amendment Act. The proposed clarification sought to

provide that the 2015 Amendment Act shall not apply to arbitral proceedings

commenced before the 2015 Amendment Act as well as to Court proceedings

arising out of or in relation to proceedings irrespective of whether such Court

proceedings commenced prior to or after the 2015 Amendment Act. However, the

judgment in BCCI itself expressed dissatisfaction with this proposal as it had the

effect of putting the important amendments made by the 2015 Amendments in

the back-burner.

It seems that the legislature gave no attention to this warning by the Supreme

Court when it omitted Section 26 of 2015 Amendment Act and inserted Section
87 in the 1996 Act with retrospective effect from 23.10.2015 by the Arbitration

and Conciliation (Amendment) Act, 2019 [hereinafter ‘2019 Amendment’]. The

constitutional validity of Section 87 came up for consideration in Hindustan

Construction Co. Ltd. v. Union of India. Interestingly, Justice R.F. Nariman, who

also wrote the judgment in the BCCI case, was one of the Judges who heard the

constitutional challenge to Section 87. Following the reasoning similar to the

dissatisfaction expressed earlier to the proposal in BCCI, Section 87 was struck

down as unconstitutional for being manifestly arbitrary under Article 14 of the

Constitution of India.

The result is that the BCCI judgment will continue to apply so as to make

applicable the salutary amendments made by the 2015 Amendment Act to all

court proceedings initiated after 23.10.2015. Although the interpretation of

BCCI on the second limb of Section 26 that the second limb of section 26 applies

only to proceedings before a court, and not to those before an arbitral tribunal,

may be in conflict with the judgment in Thyssen Stahlunion GmBH v. Steel

Authority of India Ltd. (1999) 9 SCC 334, the attempt to directly stultify the

judgment by insertion of Section 87 was not the solution. One can only hope that

there are no further amendments or clarification to the applicability of the 2015

Amendment Act so that the desired outcomes of the said Amendment is promptly

achieved.

II. SEAT v. VENUE OF ARBITRATION: SETTING THE LAW

STRAIGHT

Decisions:

i) Brahmani River Pellets Ltd. v. Kamachi Industries Ltd. AIR 2019 SC

3658;
ii) BGS SGS SOMA JV v. NHPC LTD. [Civ. Appeal No. 9307 of 2019.

Decided on 10.12.2019]

The seat v. venue of arbitration has been a problematic issue in Indian

Arbitration law, especially with reference to International Commercial

Arbitrations. The prevailing confusion was laid to rest (at least one hoped so!) by

the Supreme Court in Union of India v. Hardy Exploration and Production

(India) INC 2018 SCC Online SC 1640 [hereinafter ‘Hardy Exploration’] by

holding that the expressions ‘seat’ and ‘venue’ are not interchangeable, and if an

arbitration clause does not explicitly mention the seat and only prescribes the

venue, the venue does not ipso facto assume the status of the seat and in such a

case, Part I of the Act would be impliedly excluded only if some additional

concomitant factor is appended to the choice of venue.

However, the seat v. venue of arbitration conundrum arose in the context of a

domestic arbitration before the Supreme Court in Brahmani River Pellets

Ltd. v. Kamachi Industries Ltd. In that case, the relevant clause in the

arbitration agreement provided that ‘the venue of arbitration shall be

Bhubaneswar’. One of the parties filed an application for appointment of

arbitrator before the High Court of Madras. The learned Judge of the Madras

High Court held that in the absence of any express clause excluding jurisdiction

of other Courts, both the Madras and Orissa High Courts will have jurisdiction

over the arbitration proceedings.

Setting aside the judgment of the Madras High Court, the Supreme Court held

that where the contract specifies the jurisdiction of the court at a particular

place, only such court will have the jurisdiction to deal with the matter and

parties intended to exclude all other courts. In other words, such designation of a
place is in the nature of an exclusive jurisdiction clause, as held by the Supreme

Court earlier in Swastik Gases (P) Ltd. v. Indian Oil Corporation Ltd. (2013) 9

SCC 32. In the present case, the parties have agreed that the “venue” of

arbitration shall be at Bhubaneswar, therefore the intention of the parties is to

exclude all other courts.

The Court surprisingly made no effort to determine the ‘seat’ of the arbitration

and its ultimate finding of treating ‘venue’ as the ‘seat’ seem to be directly in

conflict with the view in Hardy Exploration .The judgment, it is most respectfully

submitted, proceeds on the view that unlike international arbitrations, concept of

‘seat’ has no serious implications in domestic arbitration, except in determining

the ‘Court’ for filing appropriate applications under Part I of the 1996 Act. While

the said proposition may be correct, it cannot confer jurisdiction to a Court which

otherwise does not have jurisdiction. Therefore, jurisdiction can only be had by

the Court where the arbitration has its seat or where the subject matter of the

arbitration is situated as if it is a civil suit. This concurrent jurisdiction of Courts

is also recognised by the Constitution Bench in paragraph 96 of BALCO v.

KATSI (2012) 9 SCC 552

Recently, a three Judge Bench of the Supreme Court in BGS SGS SOMA JV v.

NHPC Ltd. [hereinafter ‘SOMA’] once again considered the question of seat v.

venue, though in the context of domestic arbitration, yet laid down the law for

international arbitrations also. In the said case, the arbitration clause provided

that the arbitration proceedings shall be held at New Delhi/Faridabad. Section

34 petition challenging the award was made before Faridabad, which was held

by the High Court, to be maintainable. Unlike in Brahmani, the Court took effort

to determine the juridical seat of arbitration. The Court proceeded to indicate the
tests to determine the juridical seat of arbitration relying on the English and

Indian decisions- particularly the English decision in Roger Shashoua v. Mukesh

Sharma [2009] EWHC 957, which was approved by the Constitution Bench in

BALCO, to hold that wherever there is an express designation of a “venue”, and

no designation of any alternative place as the “seat”, combined with a

supranational body of rules governing the arbitration, and no other significant

contrary indicia, the inexorable conclusion is that the stated venue is actually

the juridical seat of the arbitral proceeding.

However, this language has to be contrasted with language such as “tribunals

are to meet or have witnesses, experts or the parties” where only hearings are to

take place in the “venue”, which may lead to the conclusion, other things being

equal, that the venue so stated is not the “seat” of arbitral proceedings, but only

a convenient place of meeting. Although the Court was dealing with the issue in

the context of domestic arbitration, it has made several observations on the

determination of seat in the context of international arbitration. It is apposite to

extract one such observation occurring in paragraph 84 of the judgment that “in

an international context, if a supranational body of rules is to govern the

arbitration, this would further be an indicia that “the venue”, so stated, would be

the seat of the arbitral proceedings.”

Applying the same, it was held that Hardy Exploration is not a good law, for

having failed to correctly apply the Shashoua test as approved in BALCO. The

resultant anomaly, as the Court points out, is that the arbitral award could be

challenged not only at the place where it was made (viz. Kuala Lumpur) but also

in India under Part I of the 1996 Act.


The Court thereafter examined the arbitration clause in question and applied

the Shashoua test to the clause dealing with a dispute with foreign contractor to

the interpretation of the clause in question to hold that the expression “shall be

held” also indicates that the so-called “venue” is really the “seat” of the arbitral

proceedings. The fact that the proceedings in this case were held at New Delhi

would indicate that New Delhi was the seat of arbitration and therefore only

Courts in New Delhi will have jurisdiction over arbitral proceedings.

The judgment gives a lot of clarity to the seat v. venue conundrum and

summarises the law on the point. The important contribution of this judgment is

its interpretation of the concurrent jurisdiction of Courts as stated in paragraph

96 of BALCO. The Court holds that if concurrent jurisdiction were to be the

order of the day, despite the seat having been located and specifically chosen by

the parties, party autonomy would suffer, which BALCO (supra) specifically

states cannot be the case. Thus, once a seat has been designated by the

parties, there cannot be any concurrent jurisdiction of courts. It was

thus imperative in Brahmani to find out whether the clause actually intended

Bhubaneswar to be the seat of arbitration.

However, SOMA’s observations in holding Hardy Exploration as not a good law

and seat in the context of international arbitration may very well be treated as

obiter as there was no necessity to make any such observations in the fact

situation considered by the Court.

III. APPOINTMENT OF NEUTRAL ARBITRATORS: ENSURING

INDEPENDENCE AND IMPARTIALITY IN APPOINTMENTS

Decisions:

i. Government of Haryana v. G.F. Toll Road (P) Ltd. (2019) 3 SCC 505
ii. Bharat Broadband Network Ltd. v. United Telecoms Ltd. (2019) 5

SCC 755

iii. Perkins Eastman Architects DPC & Anr. v. HSCC (India) Ltd.

[Arbitration Application No. 32 of 2019. Decided on 26.11.2019]

One of the significant additions made by the 2015 Amendment was the

amendments made to Section 12 and the introduction of the Fifth and Seventh

Schedules to the 1996 Act providing certain guidelines as to the appointment of

neutral arbitrators. In Voestalpine Schienen GmBH (VSG) v. Delhi Metro Rail

Corporation Limited (2017) 4 SCC 665 the Supreme Court observed that Section

12 has been amended with the objective to induce neutrality of arbitrators, viz.,

their independence and impartiality. The amended provision is enacted to

identify the ‘circumstances’ which give rise to ‘justifiable doubts’ about the

independence or impartiality of the arbitrator. If any of those circumstances as

mentioned therein exists, it will give rise to justifiable apprehension of bias. The

Fifth Schedule to the Act enumerates the grounds which may give rise to

justifiable doubts of this nature. Likewise, Seventh Schedule mentions those

circumstances which would attract the provisions of sub-section (5) of Section 12

and nullify any prior agreement to the contrary. In 2019, the Supreme Court was

faced with certain interesting questions involving the applicability of Sections 12

and Fifth & Seventh Schedules.

Firstly, in Government of Haryana v. G.F. Toll Road (P) Ltd., the Court

was faced with the question of whether ex-employee of a party could be

appointed as arbitrator. At the outset, it needs to be said that this was a case

that arose before the 2015 Amendment.

In this case, the arbitrator sought to be appointed, a retired Chief Engineer, had

retired from the services of the petitioner about 10 years ago. The respondents
raised doubts as to his independence and impartiality to act as an arbitrator.

Overruling the objection of the respondents, it was held that the apprehension of

the Respondents was unjustified since the test to be applied for bias is whether

the circumstances are such as would lead to a fair-minded and informed person

to conclude that the arbitrator was in fact biased. The 1996 Act does not

disqualify a former employee from acting as an arbitrator, provided that there are

no justifiable doubts as to his independence and impartiality. Though, the 2015

Amendment was not applicable, the Court examined Entry (1) of Fifth Schedule

and its identical entry in the Seventh Schedule that “the arbitrator is an

employee, consultant, advisor or has any other past or present business

relationship with a party” and held that the words “is an” indicates that the

person so nominated is only disqualified if he/she is a present/current employee,

consultant, or advisor of one of the parties. An arbitrator who has “any other”

past or present “business relationship” with the party is also disqualified. The

word “other” used in Entry 1, would indicate a relationship other than an

employee, consultant or an advisor. The word “other” cannot be used to widen the

scope of the entry to include past/former employees.

It is respectfully submitted that the decision may be understood as holding a

general view there is no bar in appointing ex-employees as arbitrators. This is

not a correct understanding of law. While Entry (1) of Fifth Schedule may not be

interpreted to mean past or former employees, Entry (31) of the Fifth Schedule

specifically excludes “the arbitrator who had been associated within the past

three years with a party or an affiliate of one of the parties in a professional

capacity, such as a former employee or partner.’ The Court failed to examine

the mandate under Entry (31) of Fifth Schedule. Though the Supreme Court may

not have expressly considered Entry (31) of Fifth Schedule, it may nevertheless
have applied the same in reaching its eventual conclusion on the facts of the case

that an ex-employee, who retired about 10 years ago, is not disqualified from

acting as an arbitrator.

Secondly, in Bharat Broadband Network Ltd. v. United Telecoms Ltd., the

Supreme Court had an occasion to re-state the law, with some necessary

clarifications, as regards the appointment of ‘independent and impartial’

arbitrators following the 2015 Amendment. Earlier in TRF Energy Ltd. v.

Energo Engineering Projects Ltd. (2017) 8 SCC 377, it was held that a person,

who has by the 2015 Amendment, became ineligible to be act as an arbitrator,

could not himself appoint an arbitrator and any such appointment would be null

and void. In other words, appointment of a de jure ineligible arbitrator by a

person himself de jure ineligible to be an arbitrator vide Section 12(5) of the

1996 Act r/w Schedule 7, is void ab initio and proceedings conducted by such

arbitrator/awards passed, are also void. Bharat Broadband was concerned with

three interesting aspects of TRF Energy:

i) Does the decision in TRF Energy apply retrospectively?

ii) If it applied retrospectively, can the arbitrators appointed prior to the

decision be substituted?

iii) Can the parties by an express agreement waive their right to not allow an

ineligible party to be appointed as an arbitrator?

Answering issue (i), the Court held that the judgment in TRF Ltd. nowhere

states that it will apply only prospectively, that is, the appointments that have

been made of ineligible persons would be valid if made before the date of the

judgment. Considering that the appointment in the case of TRF Ltd. of a retired

Judge of Supreme Court was set aside as being non-est in law, the appointment

of an ineligible arbitrator in the present case must follow suit.


On issue (ii), the Court held that that Section 12(4) which permits a party to

challenge an arbitrator appointed by him, only for reasons of which he becomes

aware after the appointment has been made, has no applicability to an

application made to the court under Section 14(2) to determine whether the

mandate of an arbitrator has terminated as he has, in law, become unable to

perform his functions because he is ineligible to be appointed as such under

Section 12(5) of the Act.

On issue (iii), the Court examined the scope of the proviso to Section 12 (5),

which provided that the parties may, subsequent to the disputes having arisen

between them, waive the applicability of Section 12 (5) by an express agreement

in writing. The Court held that 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. Thus, the express agreement has to be in writing with full

knowledge of both parties that an ineligible arbitrator under Section 12 (5) is

appointed as an arbitrator and that the parties have full confidence in the

proceedings before him. Therefore, the fact that a statement of claim may have

been filed before the arbitrator, would not mean that there is an express

agreement in words which would make it clear that both parties wish to continue

proceedings before the ineligible arbitrator as arbitrator despite being ineligible

to act as such.

The judgment is in consonance with the object of the 2015 Amendment to ensure

independence and neutrality in the appointment of arbitrators. By adopting a

strict interpretation of the proviso to Section 12 (5), the Court has avoided

unnecessary confusion on questions of waiver and continuance of proceedings

before the ineligible arbitrator.


Thirdly, in Perkins Eastman Arhitects DPC v. HSCC (India) Ltd., the

Supreme Court dealt with the validity of an arbitration clause (similar to many

contracts with government entities) that permits only one of the parties to make

an appointment of the arbitrator and the consequence once the agreement

specifically states that no other person could be appointed as arbitrator. In the

present case, Clause 24 empowered the Chairman and Managing Director of the

respondent to make the appointment of a sole arbitrator and said Clause also

stipulated that no person other than a person appointed by such Chairman and

Managing Director of the respondent would act as an arbitrator.

The Supreme Court, heavily relying on the decision in TRF Energy (supra),

outlined two categories of arbitration clauses- The first category is where the

Managing Director himself is named as an arbitrator with an additional power to

appoint any other person as an arbitrator. In the second category, the Managing

Director is not to act as an arbitrator himself but is empowered or authorised to

appoint any other person of his choice or discretion as an arbitrator. Thereafter,

the Court held that both categories attract disqualification on the ground of bias

on account of having an interest in the outcome of the dispute. Naturally, the

person who has an interest in the outcome or decision of the dispute must not

have the power to appoint a sole arbitrator. According to the Court, this

understanding to be taken as the essence of the amendments brought in by the

Arbitration and Conciliation (Amendment) Act, 2015 (Act 3 of 2016) and

recognised by the decision in TRF Energy.

However, the situation where both parties could nominate an arbitrator would

stand on a different footing because then whatever advantage a party may derive

by nominating an arbitrator of its choice would get counter balanced by equal

power with the other party. But, in a case where only one party has a right to
appoint a sole arbitrator, its choice will always have an element of exclusivity in

determining or charting the course for dispute resolution.

On the issue of appointment of the arbitrator by the Hon’ble Supreme Court,

once a party has already made an appointment in terms of the agreement, it was

held that unless the appointment of the arbitrator is ex facie valid and such

appointment satisfies the Court exercising jurisdiction under Section 11(6) of the

Act, acceptance of such appointment as a fait accompli to debar the jurisdiction

under Section 11(6) cannot be accepted.

This judgment upholds the need for independence and impartiality in the

appointment of arbitrators. An arbitration clause that permits only one side to

make an appointment is really against the ethos of arbitration. As the Court

noted, the present view of the Court is really helpful in creating a healthy

arbitration environment.

IV. SCOPE OF SECTION 11 (6-A) OF THE 1996 ACT: THE CORRECT

APPROACH IN THE END

Decision

M/s. Mayavti Trading Pvt. Ltd. v. Pradyuat Deb Burman (2019) 8 SCC

744

One of the areas in which Indian arbitration law saw a lot of judicial

intervention was in the sphere of appointment of arbitrator under Section 11 of

the 1996 Act. The law appeared to be settled by the seven Judge Bench judgment

in S.B.P. & Co. v. Patel Engineering (2005) 8 SCC 618 wherein the Court held

that the power of appointment is a judicial function and that there are certain

issues that are to be decided by the Court itself, other than the question of
existence of an arbitration agreement, under Section 11. But this judgment was

against the spirit of minimal judicial intervention envisaged by the 1996 Act.

Section 11 was amended by the 2015 Amendment Act, by which a new Section

11 (6-A) was introduced wherein the mandate for the Court appointing

arbitrator was to confine itself to the examination of existence of an arbitration

agreement. While the judgment in Duro Felguera S.A. v. Gangavaram Port

Ltd. (2017) 9 SCC 729 [hereinafter ‘Duro Felguera S.A.’] held that the only

question to be considered by the Court is whether an arbitration agreement is in

existence or not, the decisions in United India Insurance Co. Ltd. v. Antique

Art Exports Pvt. Ltd. (2019) 5 SCC 362[hereinafter ‘Antique Arts’] and

Garware Wall Ropes v. Coastal Marine Constructions and Engineering

Ltd., (2019) 9 SCC 209 [hereinafter ‘Garware’] held that the function of

appointment is not an administrative but a judicial function and that the Court

can examine issues such as whether an arbitrable dispute subsists or whether an

arbitration agreement is duly stamped etc., apart from considering the question

of existence of arbitration agreement.

The above confusion was eventually laid to rest by the Supreme Court in M/s

Mayavti Trading Pvt. Ltd. v. Pradyuat Deb Burman by holding that

Antique Arts did not consider the intention behind Section 11 (6-A) and

therefore, the ‘examination of the existence of an arbitration agreement’ is to be

understood in the narrow sense as has been laid down in the judgment Duro

Felguera, S.A. (supra). Accordingly, the view in Antique Arts was overruled. It

is most respectfully submitted that the decision in Garware is also not correct

and needs a relook, as has been analysed by this author, here. 2

2
Can be accessed at : https://rmlnluseal.home.blog/2019/05/21/arbitration-clause-in-an-unstamped-
instrument-a-missed-opportunity-in-garware-wall-ropes-ltd-part-ii/
Recently, in Uttarkhand Purva Sainik Kalyan Nigam Ltd. v. Northern

Coal Field [SLP (Civil) 11476 of 2018. Decided on 27.11.2019], the Supreme

Court held that the issue of limitation cannot be considered by the arbitrator

under Section 11 (6-A) keeping in mind the principles of minimal judicial

intervention and Kompetenz-Kompetenz under Section 16 of the Act. The

appointment of an arbitrator could only be refused if the arbitration agreement

is not in writing, or the disputes are beyond the scope of the arbitration

agreement.

By the 2019 Amendment, Section 11 (6-A) has been omitted. With a view to

encourage institutional arbitration, the appointment of arbitrators will now have

to be done by the arbitral institutions designated by the High Courts and

Supreme Court. [Sections 11 (3-A) and 11 (4)]. As an abundant caution, Section

11 (6-B) clarifies that such designation by the High Court or Supreme Court

shall not be treated as delegation of judicial power. In the coming year, questions

about ‘grading’ of arbitral institution and the powers exercised by the newly

established Arbitration Council of India [Part I-A, Sections 43-A to 43-M] could

be the new area of controversy in the matter of appointment of arbitrators.

V. NON-SIGNATORIES TO ARBITRATION AGREEMENT:

STRENGTHENING THE ‘GROUP OF COMPANIES’ DOCTRINE

Decisions:

i) Reckitt Benckiser (India) Pvt. Ltd. v. Reynders Label Printing India

Pvt. Ltd. (2019) 7 SCC 262;

ii) MTNL v. Canara Bank 2019 (10) SCALE 619


The “Group of Companies Doctrine” is a doctrine, which was 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 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. The leading case in international

arbitration applying the doctrine is the ICC Award in Dow Chemicals

(France) v. Isover Saint Gobain 1984 Rev. Arb. 137 [popularly known as the

‘Dow Chemicals’ case], wherein it was held that the arbitration agreement can

bind the non-signatories in the same corporate structure, if they were involved in

the negotiation, performance and termination of the contract.

The Group of Companies doctrine received its approval in India with the decision

of Chloro Controls (I) P. Ltd. v. Severn Trent Water Purification Inc.

(2013) 1 SCC 641[hereinafter ‘Chloro Controls’]. However, a restrictive

interpretation was sought to be placed on the decision by arguing that for

effective application of the dictum in Chloro Controls, a Mother Agreement must

contain the arbitration clause, which is absent in the ancillary agreements. This

restrictive interpretation was turned down by the Supreme Court last year in

Cheran Properties Ltd. v. Kasturi and Sons Ltd. (2018) 16 SCC

413[hereinafter ‘Cheran Properties’], by holding that the principle which

underlies Chloro Controls is not that of a mother agreement-ancillary agreement

situation, but that an arbitration agreement which is entered into by a company

within a group of companies may bind non- signatory affiliates, if the


circumstances are such as to demonstrate the mutual intention of the parties to

bind both signatories and non-signatories. Cheran Properties saw the first

express application of the ‘Group of Companies’ doctrine in the Indian context

when it held that a non-signatory party is also bound by the arbitral award.

Though the doctrine was not expressly referred to but its principle was applied

in Ameet Lalchand Shah v. Rishabh Enterprises (2018) 15 SCC 678

The year 2019 saw the express application of the doctrine by the Indian Supreme

Court in two decisions. Firstly, in Reckitt Benckiser (India) Pvt. Ltd. v.

Reynders Label Printing India Pvt. Ltd.,[hereinafter ‘Reckitt’] the applicant

sought to implead Reynders Ttiketten NV, Respondent No. 2, the Belgian

subsidiary of the Indian company, which was not a signatory to the arbitration

clause. The applicant relied on the correspondence from one Frederik Reynders,

the promoter of the 2nd respondent, who also represented it in the negotiations

and also on the fact that the 2nd respondent was the disclosed principal of the 1st

respondent. Rejecting the contentions of the applicant, the Court held:

“Thus, respondent No.2 was neither the signatory to the arbitration

agreement nor did [it] have any causal connection with the process of

negotiations preceding the agreement or the execution thereof,

whatsoever. If the main plank of the applicant, that Mr. Frederik Reynders was

acting for and on behalf of respondent No.2 and had the authority of respondent

No.2, collapses, then it must necessarily follow that respondent No.2 was not a

party to the stated agreement nor had it given assent to the arbitration agreement

and, in absence thereof, even if respondent No.2 happens to be a constituent

of the group of companies of which respondent No.1 is also a constituent,

that will be of no avail. For, the burden is on the applicant to establish


that respondent No.2 had an intention to consent to the arbitration

agreement and be party thereto”

The above paragraph outlines the following requirements for the doctrine to

apply:

i. The non-signatory, to be bound by the arbitration agreement, has to

at least have a casual connection with the negotiations that

preceded the agreement.

ii. The mere fact that the company was a component of the group of

companies will not suffice unless it is shown that the company had

an intention to consent to arbitrate.

iii. The burden of proving the above is entirely on the applicant.

However, can post contract negotiations, be sufficient to bind a non-signatory?

This question was also considered by the Court in Reckitt and was answered in

the negative, as evidently it would change the meaning of the contract as

originally intended by the parties.

Secondly, in MTNL v. Canara Bank, wherein the facts were a little

straightforward. In this case, disputes arose out of CANFINA’s subscription of

bonds floated by MTNL, which was subsequently transferred to Canara Bank.

Since CANFINA did not pay the entire sale consideration for the bonds, MTNL

was constrained to cancel the same. CANFINA was a wholly owned subsidiary of

Canara Bank and its Board mostly comprised of the senior executives of Canara

Bank. In the arbitration proceedings, Canara Bank raised an objection in

impleading CANFINA as a party to the proceedings. On these facts, it was

evident that CANFINA is a necessary party to the proceedings. Even otherwise,

CANFINA had a tacit participation before the Committee on Disputes, Delhi

High Court and even the sole arbitrator.


It was in the above context, the Supreme Court made a detailed analysis of the

‘Group of Companies’ doctrine [paras. 10.3 to 10.6] The Court clearly laid out the

circumstances in which the Doctrine could be invoked to bind the non-signatory

party to an arbitration, which are:

i. If there is a direct relationship between the party which is a signatory to

the arbitration agreement;

ii. Direct commonality of the subject matter;

iii. The composite nature of the transaction between the parties. A ‘composite

transaction’ refers to a transaction which is inter-linked in nature; or,

where the performance of the agreement may not be feasible without the

aid, execution, and performance of the supplementary or the ancillary

agreement, for achieving the common object, and collectively having a

bearing on the dispute.

iv. The Group of Companies Doctrine has also been invoked in cases where

there is a tight group structure with strong organizational and financial

links, so as to constitute a single economic unit, or a single economic

reality. In such a situation, signatory and non-signatories have been

bound together under the arbitration agreement. This will apply

in particular when the funds of one company are used to financially

support or re-structure other members of the group.

Examining the facts in the light of the above law, the Supreme Court held that

there was a clear intention of the parties to bind both Canara Bank, and

CANFINA to the proceedings. The Court expressly applied the Group of

Companies doctrine and impleaded CANFINA.

These two decisions can be seen as firmly entrenching the ‘Group of Companies’

doctrine in Indian arbitration law. This is significant because the Doctrine is not
a widely approved doctrine in international arbitration law.3 However, the

clarity with which the Supreme Court has laid down the application is welcome

and the Indian approach could be useful for other jurisdictions intending to

apply the said doctrine.

VI. ARRBITRABILITY OF FRAUD: CLEARING THE CONFUSION

Decision:

Rashid Raza v. Sadaf Akhtar (2019) 8 SCC 710

No other issue on arbitrability has troubled Indian Courts like the arbitrability

of fraud. Beginning with Abdul Kadir Shamsuddin Bubere v. Madhav

Prabhakar Oak AIR 1962 SC 406 decided under the Arbitration Act, 1940, which

was followed by N. Radhakrishnan v. Maestro Engineers (2010) 1 SCC 72

[hereinafter ‘N. Radhakrishnan’] decided under the 1996 Act, the law was to

the effect that disputes involving serious allegations of fraud are not arbitrable.

Later, the Supreme Court distinguished the above decisions and declined to

apply the same in cases of international commercial arbitrations taking place

outside India in World Sport Group (Mauritius) Ltd. v. MSM Satellite

(Singapore) Ltd. (2014) 11 SCC 639 and in Swiss Timing v. Organising

Committee, CWG, Delhi (2014) 6 SCC 677 [hereinafter ‘Swiss Timing’] with

the latter decision, which was delivered by a Single Judge, even going to the

extent of declaring N. Radhakrishnan, a two-judge bench judgment, as per

incuriam.

Later, in A. Ayyasamy v. A. Paramasivam (2016) 10 SCC 386 [hereinafter

‘Ayyasamy’], the Supreme Court cleared the prevailing confusion by upholding

3
Globally, the application of the doctrine is limited and contentious. See: Max D. Passey, The Shortcoming of
Arbitration in the Modern World: The Third Parties Limitation’ accessed from
http://www.globalpoliticsreview.com/publications/2464-9929_v02_i02_p074.pdf
the view in Swiss Timing and created a distinction between fraud simplicitor

(simple allegations of fraud) and complex or serious allegations of fraud. It was

held that it was only in the latter cases of fraud that the dispute is not

arbitrable. In paragraph 25 of the judgment, two tests were laid out to

distinguish between the two classes of fraud:

i. Does the plea of fraud permeate the entire contract and above all, the

agreement of arbitration, rendering it void, or;

ii. Whether the allegations of fraud touch upon the internal affairs of the

parties inter se having no implication in the public domain.

However, being a two judge bench decision, it could not overrule the view in N.

Radhakrishnan. The decision in Ayyasamy was recently upheld by a three Judge

Bench in Rashid Raza v. Sadaf Akhtar [hereinafter ‘Raza’], thereby

effectively overruling N. Radhakrishnan. By upholding in Ayyasamy view, the

Courts, while dealing with serious allegations of fraud, are also empowered to

undertake a strict and meticulous inquiry into the allegations of fraud and only

when the Court is satisfied that the allegations are of serious and complicated

nature that it would be more appropriate for the Court to deal with the subject

matter rather than relegating the parties to arbitration. The decision in Raza is

thus a welcome decision and strengthens the pro-arbitration approach of the

Court.

VII. LEGALITY OF PRE-DEPOSIT CLAUSES IN ARBITRATION

AGREEMENT: ARE THEY STILL VALID?

Decision:

ICOMM Tele Ltd. v. Punjab State Water Supply & Sewerage Board

(2019) 4 SCC 401


Pre-deposit clause in arbitration agreements are incorporated with a view to

avoid parties from raising frivolous and vexatious claims. These type of clauses

are usually seen in contracts with Government bodies. The legality of pre-deposit

clause fell for consideration before the Supreme Court in ICOMM Tele Ltd. v.

Punjab State Water Supply and Sewerage Board [hereinafter ‘ICOMM’]. In

ICOMM, Clause 25 of the notice inviting tender contained an arbitration clause

which required a 10% of the amount claimed as pre-deposit to avoid “frivolous”

claims. The clause also stated that in the event of a favourable award, the

deposit will be refunded to him in an amount proportionate to the amount

awarded, and the balance, if any, will be forfeited and paid to the other party.

The petitioner claimed that this was arbitrary and opposed to public policy.

The Supreme Court rejected the primary contention of the petitioner that it was

a contract of adhesion as the parties were not having an unequal bargaining

power. However, the Court upheld the contention that pre-deposit clause is

arbitrary and thus violative of Article 14 of the Constitution as the deposit is

made before any determination as frivolous is arbitrary as a claim may be

dismissed but need not be frivolous, as is obvious from the fact that there could

be two plausible views on the same issue. Further, even where a claim is found

to be justified and correct, the amount that is deposited need not be refunded to

the successful claimant. The Court also observed that the pre-deposit clause

discourages arbitration as an alternative dispute resolution process. In doing so,

the Court also distinguished its earlier judgment in S.K. Jain v. State of

Haryana (2009) 4 SCC 357 [hereinafter ‘S.K. Jain’] wherein a pre-deposit

clause was upheld, as the clause in that case was materially different from the
one involved in this case and that there was no constitutional challenge to the

said clause. S.K. Jain was a judgment delivered by a three Judge Bench.

While the judgment in ICOMM can be hailed as extremely pro-arbitration

judgment, its reasons for distinguishing S.K. Jain is faulty. A reading of S.K.

Jain would indicate that the clause involved in that case was in fact challenged

on the ground of being arbitrary and was rejected relying on the dictum in

Assistant Excise Commissioner v. Issac Peter (1994) 4 SCC 104 that:

“It must be remembered that these contracts are entered into pursuant to

public auction, floating of tenders or by negotiation. There is no

compulsion on anyone to enter into these contracts. It is voluntary on

both sides. There can be no question of the State power being involved in

such contracts.”

If the above principle was applied, the Court was not right in looking into the

legality of pre-deposit clause. S.K. Jain was distinguished (not overruled-

which obviously the two judge bench in ICOMM could not do) on the basis that

while the clause in S.K. Jain required the entire deposit to be refunded upon the

culmination of the arbitral proceedings, ICOMM provided for a refund only on a

proportionate basis.

Therefore, the decision in ICOMM cannot be relied on to say pre-deposit clauses

are per se unconstitutional. The validity of such clauses will have to be examined

in the light of the particular facts of each case. The applicability of pre-deposit

clauses in private agreements, however, presents an interesting issue, which

going by the dictum in ICOMM may be held as violative of Section 23 of the

Contract Act.

VIII. CHALLENGE TO ARBITRAL AWARDS: MINIMAL JUDICIAL

INTERVENTION IN THEORY AND PRACTICE


Decision:

Ssangyong Engineering and Construction Co. Ltd. v. NHAI (2019) 8

SCALE 41

The most significant of the decisions rendered by the Supreme Court with

respect to Section 34 of 1996 Act in 2019 is the judgment in Ssangyong

Engineering and Construction Co. Ltd. v. NHAI [hereinafter ‘Ssangyong’]

In this case, the Supreme Court was concerned with the challenge to an arbitral

award passed by the Tribunal computing price adjustment payable to Ssangyong

contrary to the terms of the contract. The contract prescribed the computation of

price adjustment in accordance with the Wholesale Price Index following 1993-94

as base year, which was revised by NHAI through a circular adopting 2003-04 as

the base year. The majority award upheld the above revision. The challenge to

the award by Ssangyong under Section 34, as being opposed to public policy,

failed before the High Court.

The challenge to awards in India under the head of ‘being opposed to public

policy’ has been a controversial area following the wide interpretation given to

the term ‘public policy’ in ONGC v. Saw Pipes (2003) 5 SCC 705[hereinafter

‘Saw Pipes’]. One of the heads under Saw Pipes’ definition of ‘public policy’ was

‘being against the fundamental policy of Indian law’. The said expression came to

be defined by the Supreme Court in ONGC v. Western Geco International

(2014) 9 SCC 263 [hereinafter ‘Western Geco’] to include an award that “no

reasonable person would have arrived at or the Wednesbury principle of

reasonableness”. This wide view was later followed in Associated Builders v.

DDA. Thus, the Court’s power to interfere with an award under Section 34 stood

extended, contrary to the minimal judicial intervention envisaged by the 1996

Act. This broad understanding of Section 34 powers of the Court was taken note
of by the Law Commission and the Law Commission suggested in amendments

to reduce the scope of interference with arbitral awards.

The Supreme Court noticed in Ssangyong that the broad interpretation given to

“fundamental policy” in Western Geco does not find place under Section 34, as

amended by the 2015 Act. Thus, after the 2015 Amendment, under the guise of

interfering with an award on the ground that the arbitrator has not adopted a

judicial approach, the Court cannot intervene on the merits of the award. The

Court thereafter proceeded to clarify the scope of the expression ‘public policy of

India’ after the 2015 Amendment, to mean:

Firstly, that a domestic award is contrary to the fundamental policy of Indian

law, if it is in contravention of a statute linked to public policy or public interest,

disregarding orders passed by the superior courts of India and disregarding the

binding effect of the judgment of a superior court.

Secondly, that such award is against basic notions of justice or morality such as

an award that shocks the conscience of the Court, or may not be illegal awards

but will not be enforced given the prevailing mores of the day. However, the

interference on this ground is also only if it shocks the conscience of the Court.

Insofar as domestic awards made in India are concerned, an additional ground is

now available under sub-section (2A), added by the 2015 Amendment, to Section

34. Here, there must be patent illegality appearing on the face of the award,

which refers to such illegality as goes to the root of the matter but which does not

amount to mere erroneous application of the law. In short, what is not

subsumed within “the fundamental policy of Indian law”, namely, the

contravention of a statute not linked to public policy or public interest,

cannot be brought in by the backdoor when it comes to setting aside an

award on the ground of patent illegality.


Applying the above parameters, the Court interfered with the award in question

on the ground that by substitution of the workable formula under the agreement

by another formula de hors the contract between the parties, the arbitral award

created a new contract between the parties, which is contrary to fundamental

principles of justice as followed in this country, and a shock to the conscience of

this Court. The Court however made it clear that this ground was

available only in exceptional circumstances and under no circumstance

can any Court interfere with an arbitral award on the ground that

justice has not been done in the opinion of the Court as it would be an

entry into the merits of the dispute which, is contrary to the ethos of

Section 34 of the 1996 Act.

After setting aside the award, the Court invoked its powers under Article 142 of

the Constitution of India and directed execution of the minority award of the

Tribunal which was based on the formula agreed between the parties. This was

on the ground that though under the scheme of Section 34 once an award is set

aside the remedy available is a fresh arbitration, it would cause considerable

delay in the present case.

The decision in Ssangyong removes the uncertainty over the ground ‘public

policy of Indian law’ which has often resulted in excessive interference with

arbitral awards. The judgment is in tune with the Law Commission

recommendations that resulted in the 2015 Amendment of Section 34, thereby

restricting the scope of judicial interference in arbitral awards.

However, the decision raises an issue as to the status of a minority award, once

the majority award is set aside. The view of the Supreme Court that the scheme

of Section 34 is such that once the majority award is set aside, a fresh arbitration

is to be initiated, it will cause considerable delay and hampers the efficacy of


arbitration as an alternative dispute resolution, is correct. Since the decision in

Ssangyong was by invoking Article 142 of the Constitution, it has no

precedential value on this point. This is an area that requires an introspection by

the legislature.

IX. ENFORCEMENT: ENHANCING THE EFFICACY OF ARBITRAL

PROCESS

Decisions:

i. Pam Developments Pvt. Ltd. v. State of West Bengal (2019) 8 SCC

112

ii. LMJ International Ltd. v. Sleepwell Industries Co. Ltd. (2019) 5

SCC 302

By virtue of the amendment to Section 36 of the 1996 Act by the 2015

Amendment Act, there is no automatic stay on further proceedings pursuant to

the award once a Section 34 application is filed by the judgment debtor. Section

36 (2) of the 1996 Act now expressly says that “filing of an application under

Section 34 shall not by itself render that award unenforceable, unless the Court

grants an order of stay of operation of the said award in accordance with the

provisions of Section 36 (3)”. Section 36 (3) states that upon filing an application

under Section 36 (2) for stay of operation of the award, the Court may, subject to

such conditions as it may deem fit, grant stay of the operation of such award for

reasons to be recorded in writing. The proviso, however, stated that the Court

shall, while considering the application for grant of stay in case of an award for

payment of money, ‘have due regard’ to the provisions for grant of stay of a

money decree under the provisions of CPC.


In Pam Developments Pvt. Ltd. v. State of West Bengal, an interesting issue

arose as to the interplay of the proviso to Section 36 (3) of the 1996 Act and

Order XXVII Rule 8 A of the CPC, which provided that no security shall be

required from the Government for the purposes of obtaining a stay in appeal

against the decree. In other words, the amended Section 36 providing for no

automatic stay becomes inapplicable for the Government. If so, can the

Government claim any special treatment in the matter of stay under the 1996

Act?

The Supreme Court held, relying on the decision Shri Sitaram Sugar Company

Limited v. Union of India (1990) 3 SCC 223, that the expression ‘have due regard

to’ would only mean that the provisions of CPC are to be taken into

consideration, and not that they are mandatory. The phrase used is ‘having

regard to’ the provisions of CPC and not ‘in accordance with’ the provisions of

CPC. In the latter case, it would have been mandatory, but in the form as

mentioned in Section 36 (3) of the 1996 Act, it would only be directory or as a

guiding factor. Mere reference to CPC in Section 36 cannot be construed in such

a manner that it takes away the power conferred in the main statute itself.

Significantly, the Court also examined the legislative history of Order XXVII

Rule 8 A of CPC and held that the said provision was enacted during the British

era, giving certain safeguards to the then Government, which would not

applicable in today’s time when we have a democratic government. In conclusion,

the Court held that Section 36 of the Arbitration Act also does not provide for

any special treatment to the Government while dealing with grant of stay in an

application under proceedings of Section 34 of the 1996 Act. Keeping the

aforesaid in consideration and also the provisions of Section 18

providing for equal treatment of parties, there is no exceptional


treatment to be given to the Government in proceedings under Section 34

of the 1996 Act.

The decision is very significant for arbitration in India since a major litigant in

the arbitration proceedings is the Government or the entities of the Government.

By stating that there is no preferential treatment for Government in arbitration

proceedings, the principle of equality of parties in arbitration has been upheld

and this will encourage private parties to enter into arbitration with the

Government.

In LMJ International v. Sleepwell Industries Ltd., the Supreme Court

considered the import of Section 48 of the 1996 Act dealing with enforcement of

foreign arbitral awards. In the said case, the appellant initially raised an

objection as to the maintainability of the application under Section 48 of the

1996 Act, which was rejected by the High Court and later the Supreme Court.

Subsequently, the appellant raised an objection as to the enforcement of the

award. Rejecting the objections of the appellant as to the enforcement of the

award, the Court held that the scheme of Section 48 of the 1996 Act does not

envisage piecemeal consideration of the issue of maintainability of the execution

case concerning the foreign awards in the first place and then the issue of

enforceability thereof. Such a view is also justified, keeping in mind the

legislative intent of speedy disposal of arbitration proceedings and limited

interference by the courts in relation to execution of foreign awards.

The above view of the Court is fully in tune with the spirit of the 1996 Act. The

scope of interference with respect to foreign arbitral awards is restrictive and the

Courts in India cannot examine the merits of the award at that stage. The

grounds on merits of the award could be looked at only by the foreign court

where the award has been challenged. Any other interpretation would result in
the merits of the award being examined by both the executing Court as well as

the Court where the award is challenged, which is against the efficacy of

international commercial arbitration.

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