How not so carefully drafted one-side clause can backfire! Delhi High Court makes 2015 amendments to Arbitration Act applicable to proceedings initiated under the 1996 Act.

Yesterday on 11^th April 2017, Justice S. Muralidhar in Ratna Infrastructure Projects Pvt. Ltd. v. Meja Urja Nigam Private Limited, Arb. Pet 537/2016 made observations on the applicability of the 2015 amendments over the arbitration proceedings commenced under the Arbitration and Conciliation Act, 1996 (“Act”) i.e. before 23 October 2015. The Court interpreted the words “unless the parties otherwise agree” as used in the Section 26 of the Amendment Act in light of the standard agreement terms and held that the amendment act shall be applicable to the arbitral proceedings initiated before 23 October 2015, since the parties had agreed to statutory modification in their agreement and hence the 2015 amendments shall come within the ambit of the clause. Court held that it is not necessary for the parties to expressly enter into a separate agreement to make the 2015 amendments applicable to the arbitration proceedings.

-          Prakhar Deep[1]

1.                  Introduction

Since the enactment of the Arbitration & Conciliation Act (Amendment) Act, 2015, Courts in India are having a tough time interpreting the provisions of the amendments. Even the parties whose arbitration proceedings commenced prior to the cut-off date i.e. 23 October 2015 are too having a tough time deciding which of the amendments are in their favour and which are not. It is correct to suggest that no two opposite parties in the arbitration have jointly benefited from the amendments. This is evident from the nature of disputes which have reached the court. For instance, in Ardee Infrastrucure Pvt. Ltd v. Anuradha Bhatia & Ors.[2](Ardee infra), if we only see the issue from the party to the arbitration perspective, it was that it did not wish to pay the deposit as now mandated under section 36(3) of the amended Act. Thereafter, the matter was heard by the division bench of the Delhi High Court and the Court upon investigating recognized certain vested rights of the parties which cannot be taken away by the amendments and held the expression “to the arbitral proceedings” cannot be strictly interpreted.

In another case of Ratna Infrastructure Projects Pvt. Ltd. v. Meja Urja Nigam Private Limited[3] (“Ratna Infra”) where one can easily observe that the main grievance of the party was not willing to appoint an independent arbitrator and stick to the agreed terms of the contract mandating employee to the arbitrator. Unlike in Adree Infra wherein the Court recognised the right to challenge the award is vested right and held that old act shall apply, the Delhi High Court in Ratna infra rejected the contention of the Respondent stating that parties did not specifically agreed to applicability of the 2015 amendments. Respondent’s attempt to keep the appointment of its own employee as arbitrator was shot down by Justice S. Muralidhar who picked up the fine lines of one side arbitration clause and held that parties had agreed the applicability of the 2015 in the Contract itself. 

2.                  Facts and comments

Through the case has no binding value since it’s the section 11(6) Petition but the Court has effectuated the intent of the Act and has struck down the attempt of a party to appoint employee as an arbitrator. Some of the interesting facts and arguments placed before the Courts are hereunder along with come personal observation to the facts and parties conduct:

  i.                  Rana Insfrastrure Project Pvt. Ltd.(Petitioner) was awarded a contract by Meja Urja Nigam Private Limited in 2010. Disputes arose between the parties and contract was terminated. Both claims and the counter-claims were referred to the same arbitrator.  Claim was raised first which was quantified at. Approx. Rs. 27 Crore. Subsequently upon termination the government company referred a counter-claim of Approx. Rs. 207 Crore.

Comments- Opposite parties usually file a huge counter-claim often referred as counter-blast to pressurize the other side to settle. Facts are not given in the present case on the heads of damages as it was not part of the Section 11 Petition, therefore it cannot be said if the same was counter-blast or not.

  

ii.                  Clause 56 of the General Conditions of the Contract stated that CEO of the Respondent shall be the appointing authority and only the General Manager of the NTPC (The Respondent company was a JV of NTPC) shall be the sole arbitrator to adjudicate the dispute.

Comments- Standard terms of PSU’s and big corporations when they contract was parties with less bargaining power. The 2015 amendment act under section 12(5) read with the seventh schedule now bars employees, ex-exployees, advisors of agitating party to be appointed as arbitrator.

iii.                  Petitioner objected to the authority of the arbitrator under section 12 and 13 of the Act on the ground that as the arbitrator was not the project in-charge as mandated, he could not continue to be the arbitrator. The objections were dismissed by the arbitrator and therefore the Petitioner approached the High Court u/s 11.

iv.                  During the proceedings before the High Court of Delhi, the Respondent submitted that they have infact appointed a General Manager as a substitute arbitrator. It was further submitted that the provisions of the amendment act, 2015 putting bar to appoint employee as the arbitrator do not apply to the present arbitral proceedings since the section 26 uses the words “unless the parties otherwise agree”. The Respondent submitted that parties would have to agree, after coming into force of the Amendment Act, 2015 that the said Amendment Act would apply to the pending arbitration proceedings. It was submitted that a distinction is drawn between the words used in Section 26 of the Amendment Act and Section 37(1)(a) of the Act where the expression used is “unless the parties have otherwise agreed or the parties have agreed.” It is stated that the legislature has made a conscious departure and employed the expression “unless the parties otherwise agree” which makes it clear that the Amendment Act would apply to pending arbitral proceedings only after the parties enter into an agreement to this effect. Consequently, it is urged that Section 12(5) of the Act as amended is not applicable in the present case.

v.                  Comments- After the bar of section 12(5) and recent decision of Justice Manmohan Singh in Assignia-Vil v. Rail Vikas Nigam[4], wherein the court criticised the appointment of the employee as arbitrator. In light of the 2015 amendment and Assignia case several arbitrators who were employees, ex-employees have rescued themselves from continuing as the arbitrator. Such gesture was required to ensure that other party in the opposite party does not lose the confidence in the arbitration mechanism and justice delivery process in general. I fail to understand why Respondent in the present case continued to resist the appointment of an independent substitute arbitrator and sought to take the shelter of the technicalities of the interpretation.

3.                  Observation of the High Court of Delhi

The observation of the Delhi High Court to use the contract clauses which are often one sided to rebut the defence taken by the Respondent is plausible. Justice Muralidhar has infact very carefully and smartly interpreted the wordings of the clause of 56 by observing that:

22   …… The words “any statutory modification or re-enactment thereof and the rules made thereunder and for the time being in force shall apply to the arbitration...” satisfies the requirement of Section 26 of there being an agreement between the parties that the Act as amended with effect from 23rd October 2015 will apply. The Court is not prepared to draw the fine distinction between „agree‟ and „agreed‟. Once the amendment to the clause clearly stated that all statutory modifications and re-enactments would apply, then there is no need for further agreement in that respect after 23rd October 2015.

23. The net result is that Section 12(5) as amended with effect from 23rd October 2015 would apply. Section 12 (5) clearly prohibits the employee of one of the parties from being an Arbitrator. This would straightway disqualify Mr. Kher who happens to be a serving GM of the Respondent.

4.                  Conclusion

To conclude, the 2015 arbitration amendments have brought phenomenal changes to the arbitration law in India. It shall be in the interest of the evolving commercial jurisprudence, if the 2015 amendments are interpreted in a harmonious manner taking forward the intent of the legislature towards improving the deplorable condition of arbitration in India. Interpreting the amendments just to make them fit to a particular set of facts would lead to ambiguity and loss of confidence. Justice Muralidhar’s observation in Ratna Infra case is yet another example of how judiciary is taking the daunting task for the betterment of arbitration practice in India.

---

[1] Advocate, Delhi High Court, B.A LLb (Hon.) Rajiv Gandhi National University of Law, Patiala, 2014.

[2] 237 (2017) DLT 140 (DB)

[3] Arb. P. 537/2016, decided on 11 April 2017, High Court of Delhi

[4] Arb. P. No.677/2015, decided on 29 April 2016, High Court of Delhi

Delhi HC silently contradicts to Tufan Chatterjee v. Rangan Dhir while refusing to transfer the pending interim measures application to the Tribunal.

“We cannot allow the transfer of any application from Court to the Tribunal. The Courts have some sanctity” said the Bench while reserving its judgment after hearing the arguments on the scope of Section 9(3) of the Arbitration & Conciliation Amendment Act, 2015 in the case of Benara Bearings & Pistons Ltd. v. Mahle Engine Components India Pvt. Ltd. FAO(OS) (Comm) 66/2012 ("Benara'). The moot question before the Delhi High Court was whether a pending interim measures application can be transferred to the Arbitral Tribunal? This article favours this proposition. Though the Act does not provide any express provisions for transfer or relegation of pending application for interim measures but the harmonious interpretation of the word “entertain” used in Section 9(3) and analysing amended powers of the Arbitral Tribunal evidences that the intent of the Legislature was to reduce the burden of Court flooded with application for interim measures and relegate the same to the Tribunal at any stage if the Court is of the opinion that efficacious remedy is available with the Arbitral Tribunal.

I. Background

Arbitration & Conciliation Amendment Act, 2015 (“Amendment Act”) came into force to rectify the infirmities of the Arbitration & Conciliation Act, 1996 (“1996 Act”) discovered in the due course of time. One of the phenomenal amendments introduced is in the law of Arbitration is giving the Arbitral Tribunal equal powers of that of the Court while deciding the application of interim measures. Under the 1996 Act, Arbitral Tribunal’s order under Section 17 was not enforceable and hence unlike the order for interim relief by a Court under Section 9, the orders by the Tribunal were virtually ‘toothless’. The Legislature, therefore, introduced amendments to Section 17. Certain new provisions are added to existing Section 9 to compliment the amendment of Section 17. For instance, Section 9(3) is introduced which bars the Court from entertaining the interim measures application once the Arbitral Tribunal is constituted. Only if Court is of the opinion that an efficacious remedy may not be available with the Arbitral Tribunal then only it can entertain the interim measures application.

The moot question which arises is that Whether the Court during the pendency interim measures application can relegate the matter to the Tribunal for deciding the interim measures application? As after the amendment, the powers under Section 17 are now same of that under S. 9, the Tribunal is now vested with powers to adjudicate all such applications.

Since the Amendment Act does not contain any express provision permitting the transfer or relegation of the cases, an exhaustive interpretation of Section 9(3) considering Legislature’s intent must be looked into. Currently, the Division Bench of Calcutta High Court in the case of Tufan Chatterjee v. Rangan Dhir[2] has held that an interim measures application under S. 9(1) can be transferred to the Arbitral Tribunal and be decided under Section 17. However, the Division Bench of the Delhi High Court in Case of Benara Bearing and Pistons Ltd. v. Mahle Engine Components Private Ltd. FAO 66/2016 has set out clear that it shall not allow transfer of such applications since there is no express provision under the Act to transfer the pending application from Court to the Tribunal. Although Delhi High Court did not refer to the Tufan Chatterjee judgment in its decision or discussed the relevant precedents in this regard. Delhi High Court emphasized on the interpretation of work “entertain” as used in section 9(3). It is necessary to discuss the relevant precedents interpreting the word “entertain” as mentioned below.

II. Whether pending Application under S. 9 be transferred to Tribunal to be considered as S. 17 as per the Amendment Act

Courts while deciding whether to transfer a pending application to the Tribunal have put a strong emphasis on interpreting the word “entertain” as used in Section 9(3) to determine the legislative intent. Section 9 opening lines are “Once the arbitral tribunal is constituted, the Court shall not entertain”.

The word “entertain” has been interpreted by the Courts earlier. A full bench of the Supreme Court in the case of Lakhmiratan Engineering Works v. Assistant Commissioner (Judicial) I, Sales Tax[3] held that the expression ‘entertain’ does not mean the same thing was the filing of the application or admission of the application by the Court. The word “entertain” meant not “receive” or “accept” but “proceed to consider on merits” or “adjudicate upon”.

The aforesaid interpretation of the word “entertain” may suggest that a pending interim measures application which is already admitted by the Court but not decided may fall within Section 9(3). Since the Court has not decided the matter on merits it is refrained from further adjudicating the matter. The only option left with the Court is to either justify that “efficacious remedy” is not available with the Tribunal to continue adjudicating the matter or transfer it to the Arbitral Tribunal by the effect of bar u/s 9(3). This interpretation was followed in Tufan Chatterjee as well.

However, Lakhmiratan Engineering Works (Supra) and cases affirming it do not deal with a situation wherein the word “entertain” is to be interpreted in light of the pending applications after enactment of a new legislation as the case is in Section 9(1) after the introduction of Section 9(3). Such situation arose before another Supreme Court full bench in Dewaji v. Ganpati.[4] The Apex Court held that if the term “entertain” is used in the statute then it has no effect on the pending suit/application (similar to section 9(3) of the Amendment Act) as entertain means bar on entertaining new application only. The Court observed that had the legislature used the term “entertain or try any suit” then bar could have been on the pending application as well. Thus, use of “entertain” shall have only prospective effect. Therefore, if the provisions of S. 9(3) are strictly interpreted then pending applications under the S. 9(1) cannot be transferred to the Arbitral Tribunal. The division bench of the Delhi High Court in Benara has drawn the same conclusion but instead relied on the meaning provided in the Legal Glossary[5] and not on the Dewaji v. Ganpati case. However, the Delhi High Court has not recorded the legal glossary meaning in the judgment in Benara case.

III. Need for Harmonious interpretation of 9(3) and its distinction from a usual ousting jurisdiction clause

If the strict interpretation is given to S. 9(3) prohibiting the transfer of pending application to the Arbitral Tribunal, then the whole object bringing Arbitral Tribunal’s powers at par with the Court would become impuissant. Opinions favouring the strict interpretation of S. 9(3) often assert that S. 9(3) is not ouster jurisdiction clause and has no express provision for transfer of cases. The Delhi High Court has also observed the same. In my humble suggestion, instead of comprehending Section 9(3) as an ousting clause to circumvent judicial powers, the provision must be interpreted to reduce the burden of the Courts.

Erstwhile Chief Justice of India, Mr T.S Thakur, in his address at the Arbitration Conference expressed his concerns over the avalanche of cases Judiciary is handling.[6] If some volume of these cases which form interim measures applications are conveniently routed to Arbitral Tribunal, then it would certainly compliment the act and vision of the former Chief Justice. Further not in only the Amended Act but on several earlier occasions the Indian judiciary has supported the view that its role in the arbitration process is minimal and only of supervisory nature. This was in-fact one of the objects of the 1996 Act too.

In Sundaram Finance Ltd. v. NEPC India Ltd., the Supreme Court held that while passing any order under Section 9, courts must be satisfied that applicant will take effective steps for commencing arbitral proceedings.[7] The Delhi High Court in Softline Media Ltd. and Shalimar Advertisers v. Delhi Transport Corporation[8] held that the Courts must refrain from making observation on merits and Arbitrator must take a fresh look into the matter on the basis of pleadings, documents and other materials placed before him without in any way being influenced by the observations made by the Court.

An instance of Court relegating the interim measures application to the Arbitral Tribunal even under the old act is way back in 2002 when the Delhi High Court in India Financial Services Pvt.Ltd v. Jairaj Shetty (2004 (1) ARBLR 280 Delhi) exercised its discretionary power and converted the section 9 to section 17 Application . The Court transferred the Section 9 Application to the Arbitral Tribunal to be considered as Section 17. Similar view has been taken by Justice Manmohan Singh in Aquatech Systems (Asia) Pvt. Ltd. v. SKS Power Generation O.M.P. No. (I) No. 446/2015. However, the case of Aquatech does hold the binding value since appeal was filed before the same bench where case of Benara was pending and subsequently it was also withdrawn. Intention to refer the aforesaid cases is that the Court in past has taken such steps to relegate the application to the Tribunal since it lessens the Court burden.

IV.A pragmatic view towards Section 9(3)

Considering the aforesaid discussions, it is suggested that relegating the interim measures application to Arbitral Tribunal does not seem to be an absurd thought. This gives rise to another question i.e. Whether the interim protection order of the Court stays or gets vacated?

In any dispute involving an arbitration, parties often approach the Court before invoking the Arbitration clause and the whole process of getting an interim protection is so swiftly done, the other side is often not required to be served with the Section 9 Petition if no caveat is filed or arbitration is not invoked. It’s a common practice to secure an ex parte ad interim protection of the matter before invocation of the Arbitral clause. If the interpretation that upon the constitution of Arbitral Tribunal, the petition is to be transferred from the Court is accepted then it would limit the Court’s role to a body that only provides interim protection at the first instance. The situation would be similar to the admission of PIL or SLP wherein Court has to act with due care. This should not be construed as taking away the power of the Court as even then discretionary power is given to the Court to grant interim measures if it is of the opinion that an efficacious remedy may not be available with the Arbitral Tribunal.

Further, If protection order of the Court is not stayed till the disposal of interim measures application by Tribunal once it is relegated by the Court then it would defeat the whole purpose of the relegation. Following is a brief illustration in this regard:

V. Brief Illustration in support

A and B have a business relationship. The Parties enter a dispute. A is aggrieved by the fact that B may dispose of the assets. The arrangement provides that all issues are to be decided by Tribunal. However, since the Tribunal is not constituted, A due to urgency approached the Court under Section 9. Court issues notice and before the next date of hearing, Tribunal is constituted. B approaches the Court stating that Court has no jurisdiction since Tribunal is constituted.

Three scenarios:

1.  Court finds that efficacious remedy not available with Tribunal thus invokes its discretionary power and decided the matter under Section 9. (Note- Court must provide reasoning as to why it efficacious remedy not available with Tribunal)

2. The court finds that there is an efficacious remedy available under Section 17 and therefore it relegates the matter to Tribunal. However, Court does not grant any interim relief. (Note- In this case since A has no interim protection, its remedy under Section 17 before Tribunal would become infructuous and grave prejudice be caused)

3. The court finds that there is an efficacious remedy available under Section 17 and therefore it relegates the matter to Tribunal. Court makes no observation to merits of the matter and only takes a prima facie view and grants interim measures which are to be looked into by Tribunal on merits under Section 17. No prejudice caused to either party) (Note- This illustration suggests the harmonious interpretation of Section 9(3), 9(2) and Section 17 of the amended Act.)

 VI. CONCLUSION

In my opinion, while interpreting any provision of a statute, it is imperative to first analyse the object and intent of the statute and then interpret the statute using principle rather than just a precedent. Interpretation of the word “entertain” through the prism of precedents will not fulfil the primary aim and objectives of the 1996 Act which is to minimise judicial intervention of Courts.

It is true that Arbitration in India today is plagued by misconduct and riddled with procedural disputes which are disrupting the ethos of commercial jurisprudence. Legislature is putting efforts to remove infirmities and improve the Arbitration law in India. Therefore, even now the Courts are still proceeding with caution and not too comfortable giving complete autonomy to the Arbitral Tribunal.

Although division bench of Delhi High Court has thoughtfully observed in Benara (Supra) at para 24 of the judgement that:

“We may also note that if the argument of the appellant were to be accepted that the moment an Arbitral Tribunal is constituted, the Court which is seized of a Section 9 application, becomes coram non judice, would create a serious vacuum as there is no provision for dealing with pending matters.”

However, a blanket ban on relegation of pending interim measures to the Tribunal may be not a fruitful solution, the aforesaid issue needs to be addressed with aim to further interpret term “efficacious” as stated in section 9(3). It will be interesting to witness the decisions to come when Court will give meaning to “efficacious remedy” and set parameters and threshold on issues which can be dealt by the Arbitral Tribunal.

[1] Advocate, Delhi High Court, B.A LL.B (Hon.) Rajiv Gandhi National University of Law, Patiala, 2014. The Author was involved in the case Benara Bearings & Pistons Ltd. v. Mahle Engine Components India Pvt. Ltd. FAO(OS) (Comm) 66/2012, judgment delivered on 01.03.2017 before the Delhi High Court. The views expressed by the Author are personal.

[2] FMAT No. 47 of 2016 and CAN 308 of 2016, ¶¶ 43-45 (“Tufan Chaterjee”)

[3] (1968) 1 SCR 505, ¶¶7-9

[4] (1969) 1 SCR 573, ¶ 12

[5] http://lawmin.nic.in/olwing/legal%20glossary/D%20to%20G.pdf

[6] Closing Address of the erstwhile Chief Justice of India Hon’ble Mr. T.S Thakur at the Arbitration Conference organized by Neeti Ayog

[7] Sundaram Finance Ltd. v. NEPC India Ltd. 1999 (2) SCC 479, ¶19

[8] 2002 Supp ArbLR 632, ¶¶ 15,22