Supreme Court reiterates the Patel Engineering ruling on Competence - Competence

On 25th August, the Supreme Court, in Bharat Rasiklal Ashra vs Gautam Rasiklal Ashra reiterated its previous position on what issues are to be considered by the Chief Justice or his designate in disposing an application under Section 11 of the Arbitration and Conciliation Act and what questions are to be left to the arbitrators to decide.

Relying on its previous decisions in S.B.P. & Co. vs. Patel Engineering Ltd. [2005 (8) SCC 618] and  National Insurance Co. Ltd. vs. Boghara Polyfab Pvt. Ltd. [2009 (1) SCC 267] the Court arrived at the following conclusions:

1. Issues to be necessarily decided by the Chief Justice or his designate before appointing arbitrators under Section 11:

(a) Whether the party making the application has approached the appropriate High Court.

(b) Whether there is an arbitration agreement and whether the party who has applied under section 11 of the Act, is a party to such an agreement.

2. Additional issues that may be decided by the Chief Justice or his designate:

(a) Whether the claim is a dead (long barred) claim or a live claim.

(b) Whether the parties have concluded the contract/ transaction by recording satisfaction of their mutual rights and obligation or by receiving the final payment without objection.

3. Issues that are to be necessarily left to the consideration of the arbitrators:

(i) Whether a claim made falls within the arbitration clause (as for example, a matter which is reserved for final decision of a departmental authority and excepted or excluded from arbitration).

(ii) Merits or any claim involved in the arbitration.

Guest Post: Prelude to Introduction of Modern Arbitration Laws in Colonial India - a Brief Account

Following is a Guest Post by Mr. Adithya Reddy, who needs no introduction for readers of this blog. He has posted on this blog in the past, and today brings us a brief but fresh look at the introduction of modern arbitration laws in colonial India.

It is now well recognized that the first attempt to codify arbitration practices in India was made by the British in the late 18th century through a series of regulations made applicable to the three presidency towns.

The Orissa High Court in State of Orissa and Ors. v. Gangaram Chhapolia, gives a brief description of the sequence of legal developments leading to the formal codification of arbitration laws in the Code of Civil Procedure, 1859, as they occurred in eastern India -

"The first attempt at codifying the law was made by the Bengal Regulations of 1772 and 1780 where provision was made for submission of disputed accounts to decision by arbitration. In 1781, Sir Elijah Impey's Regulation included a provision that "the Judge do recommend, and so far as he can, without compulsion, prevail upon the parties to submit to the arbitration of one person, to be mutually agreed upon by parties." In 1787, regulation for the Administration of Justice was passed and it contained rules for referring suits to arbitration with consent of parties. There was no detailed provision, however, to regulate the arbitration proceedings. In 1793 Regulation XVI was enacted with a view to promoting reference of disputes of certain categories to arbitration and to "encourage people of credit and character to act as arbitrators". Regulation VI of 1813 made some improvement to the Regulation of 1793 and arbitration was available in cases of disputes in regard to land. Bengal Regulation VII of 1822 authorised the Revenue Officers to refer rent and revenue disputes to arbitrators and the Collectors were enjoined to induce parties to agree to such arbitration. Bengal Regulation IX of 1883 authorised the Settlement Officers to refer disputes to arbitration."

The various regulations framed by the East India Company touching upon arbitration were: Bengal Regulations I of 1772, 1781, 1787, XVI of 1793, 1795, 1893, etc.; Bombay Regulations I of 1799, IV, VI of 1827 and Madras Regulations I of 1802 and IV, VI, VII of 1822. The regulations introduced compulsory arbitration, prescribed the limits of judicial intervention, provided safeguards to ensure fairness and laid down the procedure for attendance and examination of witnesses. Many of these provisions were rudimentary and even inconsistent with each other. But there can be no doubt that they contained the first albeit unrefined versions of provisions that form part of modern arbitration law. A brief description of the notable features of these regulations can be found in the Law Commission of India's Sixth Report on the Arbitration Act, 1940.

The events preceding the introduction of these regulations offer an interesting account of how the Company not necessarily ensured progression from the pre-colonial era but only attempted to repair the functioning of a legal system that had never adapted itself to the parallel functioning of indigenous legal systems and colonial courts. While much has been written about the virtues of arbitration-like dispute settlement mechanisms in ancient India, it is more or less accepted among modern scholars that indigenous dispute management even in pre- and early-colonial India was centered on arbitration at various levels. A Jesuit missionary living in south India, Joannis Bouchet "described in 1714 the indigenous judiciary as consisting of three levels- the local headman who would determine local disputes. Appeals could be taken to the maiagar, who controlled a number of villages and finally to the king. In addition to this…caste leaders decided matters relating to the rules of the community. Bouchet praised the system for cheapness and efficiency…" (Niels Brimnes, Beyond Colonial Law: Indigenous Litigation and the Contestation of Property in the Mayor's Court in Late Eighteenth Century Madras, Modern Asian Studies, Vol. 37, No. 3 (2003), at p. 519). Another prominent scholar explains how the colonialists understood the efficacy of these systems, especially in communal matters- "…the superstitious fear which the caste Hindus had of excommunication or of anathema at the hands of tribunals…and the helplessness of a defeated litigant or delinquent who would not accept the decision of a tribunal entitled to apply a complete boycott, impressed Europeans with the notion that this system hardly required civil or criminal penalties in the western sense, and that it was grounded in immemorial usage and unalterable custom…" (J. Duncan. M. Derret, The Administration of Hindu Law by the British, Comparative Studies in Society and History, Vol. 4, No. 1 (Nov., 1961), at p. 19). The British therefore left dispute settlement amongst natives to the panchayats or Kacheri courts, which performed very much the same function as arbitral tribunals.

The establishment of the Mayor's Court, first in Madras in 1687 and later in Bombay and Calcutta, marked the first significant attempt to dispense justice to all inhabitants of the towns through colonial institutions. The Mayor's Court proved to be so popular with the natives that important residents of Madras, concerned primarily with the loss of authority, petitioned that "they might be restor'd to their former liberties and privileges of deciding all disputes and difference which may arise among them by their accustomary (sic) Method of Arbitration among themselves…"(Beyond Colonial Law, at p. 520) The popularity of the Mayor's Court with the natives appears to have stemmed partly from the "belief…that except for direct and downright bribery, an Englishman had no motive to hold the scales of justice evenly between Indian disputants." (P. B. Vachha, Famous Judges, Lawyers and Cases of Bombay, 2011 reprint, Universal Law Publishing Co., at p. 13) The other reason behind the Indian preference for the Mayor's Court over indigenous arbitrations was the tremendously effective albeit merciless methods of execution of judicial orders by colonial authorities (the Sheriff). A party facing an adverse order from the Mayor's Court had no chance of evading consequences. This coupled with the costs involved in litigation ensured that a mere threat of litigation before the Mayor's Court forced an erring party to settle or give-in. To put it crudely, the Mayor's Court emerged as an effective 'alternative dispute resolution mechanism' for the natives.

The Company, however, never intended to displace indigenous arbitrations nor did it expect its courts to assume jurisdiction over disputes between natives. Therefore in 1753, in response to petitions from locals, it expressly excluded from the jurisdiction of the Mayor's Court disputes between natives unless both parties submitted them to its determination. This however did not prevent natives from continuing to knock the doors of the Mayor's Court, sometimes even without the required mutual consent (See Beyond Colonial Law, at p. 533).

By and large the Company strived to maintain the dual system of having indigenous arbitrations for exclusively native disputes and Courts for the rest. This system left the natives in a 'precarious situation' because by the second half of the 18th century indigenous arbitration councils and mechanisms were no longer functioning in the same way as they used to in most parts of the Country, resulting in the domination of the system by native officials with little accountability. About the situation in Bengal it is written that though "military forces available for extorting land revenue and keeping the peace might be used to enforce compliance with decrees… Actual determination was in the hands of subordinate native officials who tried ineffectively to end disputes which would previously have been settled at leisure amongst the local leaders, or might never have arisen in the form of litigation at all. The results of this system spelt to Warren Hastings nothing but corruption. It became essential to dispose of disputes through well-qualified arbitrators or arbitrators chosen by the parties, to whose "award" the judges should give the force of a decree" (The Administration of Hindu Law, at p. 21). This perception led to the first major attempt at judicial reform through Hastings's Judicial Plan of 1772, which provided for arbitration under the supervision of the proposed judicial institutions. In Madras the situation appears to have been more acute. Stephen Popham, the Company solicitor and the first person to have warned the Court of Directors against leaving natives at the mercy of defunct indigenous arbitrations, wrote that "the references of arbitration are said to have been generally made under the immediate influence of the native Dubashes of the British Magistrates and carried into execution under their auspices, by which a door has been opened for the commitment of a multitude of frauds & impositions." The Dubashes were peculiar creatures of Madras colonialism whose primary job was that of translators to English officials. They are said to have acquired so much clout and disrepute for corruption that their hand was suspected "whenever land settlement plans in the neighboring districts were subverted, when low castes rebelled, when investigations into allegations of corruption involving Company officials were thwarted, or when the Mayor's Court's decisions seemed clearly biased against particular individuals." (Susan Neild-Basu, The Dubashes of Madras, Modern Asian Studies, Vol. 18, No. 1 (1984), at p. 3). Not only did they preside over and influence indigenous arbitrations, but even the Mayor's Court made them arbitrators if it chose to refer any dispute before it for arbitration or reconciliation. With the more equitable Mayor's Court kept out of their reach and traditional arbitrations having lost their original character, the situation was indeed precarious for native litigants.

To the credit of the Company the situation was taken note of and remedied to a large extent by introducing major judicial reforms that brought about a system more akin to modern ones. These changes were partly a result of the expansion of British power in India. "With the victories of Clive, Sir Eyre Coote and Lord Lake, and development of trade and commerce, the need for the establishment of a more regular and satisfactory system of civil and judicial administration became imperative. This was recognized by the Regulating Act, 1773 by which Warren Hastings was appointed Governor General of Bengal and the Supreme Court of Calcutta was established." (Famous Judges, at p. 19). The changes have also been attributed to the shift in British politics from an era of corruption and nepotism under Sir Robert Walpole and his ilk to one of benignity under ministers and parliamentarians of 'purer principles' like William Pitt the younger, Edmund Burke and James Fox. (Famous Judges, at p. 20).

The establishment of the Supreme Courts in Bengal and Madras and the Recorder's Court in Bombay through these reforms changed the entire landscape of the Indian judicial system, including the conduct of arbitrations, for the better.

The Essential Kishanganga Guest Post.

We have earlier covered the arbitration between India and Pakistan on the Kishanganga Project which can be accessed here, here, here and here.

Below is a Guest Post on further development of the dispute from Shashank P. Kumar. Shashank recently completed his LL.M. from Yale Law School, with a special focus on international arbitration and dispute settlement. The post first appeared on Shashank's blog "International Law Curry" here.

Readers may be aware of an international dispute between India and Pakistan over the Kishanganga (var. Kishenganga) project under the Indus Waters Treaty (1960, available here) currently pending at the Permanent Court of Arbitration (PCA). (India is also involved in another arbitration with Bangladesh pending at the PCA [see here].) This is the first time a dispute under the Indus Waters Treaty (persistently surviving many wars for over 50 years now) has been referred to arbitration. From an international legal perspective (which is certainly not the only one, see below), the use of arbitration as a means for dispute settlement between India and Pakistan certainly seems quite promising. Earlier, in a dispute over the Baglihar project between the two countries, the matter was referred to a neutral expert under the Treaty, who, under the aegis of the World Bank and ICSID, issued his expert determination in 2007 (summary of expert report here).

Without getting into the merits of the dispute at this stage, this post notes some recent developments and resources on the Kishanganga arbitration:

1. The Tribunal (headed by Stephen Schwebel, composition here) conducted a week-long site visit in June, 2011. Arriving in Islamabad, they traveled to inspect the Neelum-Jhelum hydroelectric project, crossed the Line of Control and traveled to Srinagar, inspecting the Kishanganga project, before finally reaching Delhi. According to the PCA Press Release, the Tribunal observed “expert briefings and features” during the visit. The PCA Press Release is available here, and is accompanied by this photograph of the members inspecting the Kishanganga project (I quite like the transparency of the PCA on this thus far)

2. A wonderful summary of the dispute and the main arguments by both the countries is provided by Athar Parvaiz (available here). Parvaiz notes:

Pakistan has raised objections to a number of controversial projects undertaken by India in Kashmir in the past, including the Baglihar project on the Chenab River and the Wullar Barrage on the Jhelum River. But the Kishanganga dispute assumes a greater significance because Pakistan is also vying to construct its own project – the Neelum-Jhelum hydro scheme – on the Pakistani side of the Neelum River. The IWT states that the country that completes its project first will secure priority rights to the river.

…

The dispute over the Kishanganga project itself centres on the diversion of water from one tributary of the Indus River to another. Pakistan said this violates the IWT, while India argues the diversion is well within treaty provisions. India maintains that it will only divert the Neelum to join the Jhelum River, which also flows through Pakistan – and that therefore the water will ultimately reach Pakistan anyway.

3. A different, and essentially non-legal, perspective is offered by Maaz Gardezi of the LUMS Water Programme here. Gardezi argues that there is a “trust deficit” between the two riparians and that:

The difference between Kashmir and the water issue is that the latter is an existential issue. Therefore, the consequence of bringing water to a pedestal on India-Pakistan relations can have devastating effects on regional security and prosperity. We need to work closely with our neighbours in order to share this resource, rather than divide it.

4. There have been several reports about a domestic controversy in Pakistan over its legal representation in the dispute. Details on this can be found here (posted Jan. 18, 2011), here (posted Jul. 2010), and here (posted Jul. 7 2011).

5. Ramaswamy Iyer, a noted Indian expert on water, recently published an insightful opinion on the issue (available here). According to Iyer, water has the potential of becoming a new ‘core issue’ of even greater importance than Kashmir. He goes on to identify and analyze the common arguments raised by Pakistan against Indian actions. He concludes noting that:

Right or wrong, certain misperceptions on water persist and are widespread in Pakistan. This has serious implications for India-Pakistan relations and for peace on the subcontinent. Persistent efforts are needed at both official and non-official levels to remove misperceptions and to reassure the people of Pakistan that their anxieties are uncalled for.

(Interestingly, even after the matter was referred to arbitration, Iyer published an article in June 2010 (available here) arguing that despite the initiation of arbitration, India and Pakistan should settle the dispute by an agreement, as opposed to arbitration which is an expensive, time consuming and adversarial process.)

6. Meanwhile, in addition to the Kishanganga dispute, other reports indicate that a recent meeting between officials of India and Pakistan in May 2011 over the Wullar Barrage dispute also failed to resolve the deadlock. (report here.)

News from here and there

Indian Court of Arbitration for Sports

Acting on the directives of the International Olympic Committee, the Indian Olympic Association has constituted the Indian Court of Arbitration for Sports (ICAS). All disputes relating to sports under the Indian Olympic Association will be decided henceforth by the ICAS. The ICAS will have eight members, all retired judges of the higher judiciary.

LCIA without LC

We had earlier posted about a petition by the Association of Indian Lawyers seeking to remove the phrase "London Court" from "London Court of International Arbitration". The Delhi High Court has directed the LCIA the file a written statement within four weeks. The matter is listed for September 9. Watch this space for more.

New Arbitration Centre

The Government of Mauritius, LCIA and a new Mauritian company, Mauritius International Arbitration Centre Limited (MIAC), have entered into an agreement for establishing a new arbitration centre in Mauritius, to be known as the LCIA-MIAC Arbitration Centre. The LCIA is really expanding its horizons! More on that here.

Are arbitrators 'employees'?

A question that arose for consideration before the UK Supreme Court in Jivraj v. Hashwani, was whether a contract exists between the parties and arbitrators, such that the arbitrators may be considered 'employees' of the parties. This question was important to determine whether arbitrators are subject to the law prohibiting discrimination by employers and thus, whether a clause in the arbitration agreement requiring a particular religious belief for all arbitrators was discriminatory.

Whereas the English Commercial Court had held that the relationship between the parties and arbitrator was not a contract of employment, the Court of Appeal (CA), in 2010, held that such a contract does indeed exist, however, its precise nature is irrelevant. Arbitrators are 'employees' since they act under "a contract personally to do any work". The religion requirement was thus struck down as void.

This decision sparked off a debate, not so much as regards the religion requirement, but as to whether nationality requirements in arbitration agreements could be struck down as void by English courts.

The Supreme Court, today, overturned the CA's decision, holding that arbitrators are not employers within the meaning of the English anti-discrimination law. Since the statute defined employment as "employment under a contract of ...", the Court held that the role of an arbitrator is not naturally defined as one of employment. Arbitrators are independent providers of service, not subordinated to the person receiving the services, which is the case in employment.

Thus, arbitrators cannot be considered as employed by parties who appoint them, either directly, or through a designated arbitral institute.

Suits for declaration of nullity of arbitration clauses not maintainable, Delhi High Court

Today, the Delhi High Court held in Dr. Devinder Kumar Gupta vs Realogy Corporation & Anr. that no civil suit seeking a declaration that an arbitration clause is void is maintainable.

It was argued before the Court that it was well settled that civil courts could go into questions of existence and validity of arbitration clauses. However, the Court rightly pointed out that this position would hold true only while disposing off an application under Section 8 or Section 45 of the Arbitration & Conciliation Act whereby a party to an already instituted suit requests reference to arbitration contending that an arbitration clause between the parties to the suit covers the subject matter of the dispute. The Court held that precedents that clarify the scope of examination under Section 8 and Section 45 cannot be extended to allow suits seeking declaration of nullity of an arbitration clause.

The relies on the decision of the Supreme Court in Kvaerner Cementation India Ltd. v Bajranglal Agarwal, 2001(6) SCC 265 while arriving its conclusion.

Registration, stamp duty and enforceability of arbitration clauses

On 20th July, the Supreme Court came out with its decision in M/S Sms Tea Estates P.Ltd. vs M/S Chandmari Tea Co.P.Ltd. The decision clarified (i) that an arbitration clause in an unregistered, but compulsorily registrable, instrument can be enforced and (ii) that an arbitration clause in a document which is not duly stamped cannot be enforced till the stamp duty and the penalty thereon have been paid.

An application was filed before the Chief Justice of the Guwahati High Court seeking the appointment of an arbitrator under Section 11 of the Arbitration and Conciliation Act, 1996. The same was dismissed on the ground that the lease deed that contained the arbitration clause was not registered and duly stamped and was hence unenforceable. A special leave appeal was preferred before the Supreme Court challenging this order of the Chief Justice.

The issues considered in this case were summarised by the Supreme Court in the following words:

"(i) Whether an arbitration agreement contained in an unregistered (but compulsorily registrable) instrument is valid and enforceable?

(ii) Whether an arbitration agreement in an unregistered instrument which is not duly stamped, is valid and enforceable?

(iii) Whether there is an arbitration agreement between the appellant and respondent and whether an Arbitrator should be appointed?"

The following paragraphs summarise the Court's reasoning and conclusion with respect to the first two of these questions.

i. Arbitration clauses in Unregistered, but compulsarily registrable instruments: 

A yearly lease deed is a compulsorily registrable instrument under Section 17 of Registration Act, 1908 and Section 107 of the Transfer of Property Act, 1882. 

The effect of non-registration of a compulsorily registrable instrument is provided in Section 49 of the Registration Act as follows:

"Effect of non-registration of documents required to be registered
No document required by section 17 or by any provision of the Transfer of Property Act, 1882 to be registered shall-

(a) affect any immovable property comprised therein, or

(b) confer any power to adopt, or

(c) be received as evidence of any transaction affecting such property or conferring such power, unless it has been registered:

PROVIDED that an unregistered document affecting immovable property and required by this Act or the Transfer of Property Act, 1882, to be registered may be received as evidence of a contract in a suit for specific performance under Chapter II of the Specific Relief Act, 1877, or as evidence of part performance of a contract for the purposes of section 53A of the Transfer of Property Act, 1882, or as evidence of any collateral transaction not required to be effected by registered instrument."

The Court observed that the proviso to Section 49 clearly indicates that an unregistered (but compulsorily registrable) instrument may be used as evidence of any collateral transactions that may not require registration. Relying on the well established jurisprudence on severability of the arbitration clause, the Court reasoned that inclusion of an arbitration clause into a lease deed was like rolling a lease deed (which requires registration) and an arbitration agreement (which does not require registration) together. Hence, the arbitration clause is a collateral agreement in whose evidence the unregistered lease deed may be relied upon as per proviso to Section 49 of the Registration Act.

Therefore, the Court concluded that an arbitration clause in an unregistered, but compulsorily registrable, lease deed is enforceable.

(ii) Arbitration clauses in unregistered and not duly stamped instruments:

Section 35 of the Indian Stamp Act, 1899 provides:

"Instruments not duly stamped inadmissible in evidence, etc.

No instrument chargeable with duty shall be admitted in evidence for any purpose by any person having by law or consent of parties authority to receive evidence, or shall be acted upon, registered or authenticated by any such person or by any public officer, unless such instrument is duly stamped :

Provided that--

(a) any such instrument shall be admitted in evidence on payment of the duty with which the same is chargeable, or, in the case of an instrument insufficiently stamped, of the amount required to make up such duty, together with a penalty of five rupees, or, when ten times the amount of the proper duty or deficient portion thereof exceeds five rupees, of a sum equal to ten times such duty or portion."

Based on this clear statutory injunction, the Court held that an arbitration clause in an instrument which is not duly stamped can be enforced only upon the stamp duty and the penalty thereon being paid by the party relying on the instrument to establish the existence of the arbitration clause.

Happy Birthday, Professor Bergsten: Launch of Journal of Dispute Prevention and Resolution

‘Lex Arbitri – The Indian Arbitration Blog’ has, for sometime, acted as a forum to bring together persons interested in arbitration and allied areas of law. We have discussed developments in India and abroad in the areas of our interest and have attained moderate success in becoming a preferred source of information and analysis in the areas we cover. The encouraging responses we received include those from the French Arbitration Committee, the Singapore International Arbitration Centre, the organizers of the Willem C. Vis International Commercial Arbitration Moot and several readers who left encouraging comments on the blog. This warm reception from our readers gives us the confidence and the sense of responsibility to embark on an expansion of our activities.

Today, on the ocassion of the 80th birthday of Professor Eric Bergsten, who, apart from being a professor at Pace University and former Secretary of UNCITRAL is primarily responsible for the Willem C Vis International Commercial Arbitration Moot, and in honour of him, the Lex Arbitri team would like to announce the launch of The Journal of Dispute Prevention and Resolution.

While blog posts offer several benefits like flexibility, immediate publication and accessibility, a journal comes with its own set of advantages – peer review, wider acceptance in academic circles, etc. We at Lex Arbitri seek to tap the advantages that both these mediums can offer. With the launch of the Journal, Lex Arbitri will move to a registered domain – http://dispute-resolution.in. Upon reaching the home page, the reader will be able to access the Lex Arbitri Blog or the journal. In interest of access, we plan to make all articles in the journal accessible online for free. Also, in interest of immediate publication, we will upload each article as and when it is approved for publication by the editorial board. Print issues will be taken out biennially.

As you can imagine, starting a journal and making it a success requires a highly spirited, talented and dedicated team. Therefore, Lex Arbitri is currently looking to put together a Board of Editors for the new Journal. The Board will be selected by the Lex Arbitri team by a three pronged process – (i) evaluation of CVs and Statements of Purpose; (ii) Editing Test; (iii) telephonic/personal interview.

Applications are invited for the following positions

1. Content Editor – 3 positions

2. Citations Editor – 2 positions

3. Administrative Secretary to the Board of Editors – 1 position

The applications (with CV and Statement of Purpose) are to be emailed to deepakelanthoor[at]gmail[dot]com, on or before 23:59 hrs., August 5, 2011.

Transformation of Section 34 to a substantive appeal - yet another example

We have discussed in several posts how the Supreme Court of India has carved out for itself and other courts infinite powers of intereference with arbitration. We have also discussed how the definition of public policy under Section 34 and how its expansive interpretation allows courts to review decisions allows courts to revisit questions of substantive law that arbitral tribunals have already decided.

Yesterday (14th July, 2011) the Supreme Court gave its decision in Shipping Corporation Of India ... vs Mare Shipping Inc. This decision is (at least in my opinion) not a significant one for a student of arbitration. But it provides yet another example of reconsideration of substantive questions of law by courts.

The decision quotes the appellant's counsel: "Mr. Gupta submitted that the scope of a petition under Section 34 of the 1996 Act had been considered by this Court in detail in Oil and Natural Gas Corporation Ltd. Vs. Saw Pipes Ltd. [(2003) 5 SCC 705], and it was indicated therein that if the Award passed by the Arbitral Tribunal was contrary to any of the provisions of the Act or the substantive law governing the parties or was against the terms of the contract, the same could be set aside". This is the only reference in the decision to Section 34 and the permissibility and scope of intervention under that Section. Having made this passing reference, the Court proceeds directly to re-examine matters of substantive law that had already been decided by the arbitral tribunal.

While the omission of references to or discussion on the line of precedents on Section 34 is commentable on account of much needed brevity of Indian judicial decisions, it also shows how revisiting substantive questions in a Section 34 application (and appeals arising from such applications) has become an everyday affair which does not even merit elaboration upon.

Arbitrators cannot award interest where the contract prohibits it - Supreme Court's latest decision

Yesterday (12th July, 2011), the Supreme Court came out with a decision clarifying the law on award of interest by arbitrators when the contract prohibits it. In Union Of India vs M/S.Krafters Engineering, a dispute that arose from a construction contract, the sole question before the Supreme Court was: "whether an arbitrator has jurisdiction to grant interest despite the agreement prohibiting the same?"

The contract between the parties stated: "Interest on Amounts - No interest will be payable upon the Earnest Money or the Security Deposit or amounts payable to the Contractor under the Contract but Government Securities deposited in terms of clause 1.14.4 will be repayable with interest accrued thereon". However, the umpire, who was called in to arrive at a decision as the arbitrators could not resolve the dispute within the stipulated time frame, awarded interest pendente lite. The Union of India challenged this award of interest before the Supreme Court. The respondent sought to argue that the arbtirators have power to award interests not-withstanding any stipulation in the contract to the contrary, relying on Board of Trustees for the Port of Calcutta vs. Engineers-De-Space-Age, (1996) 1 SCC 516 and Madnani Construction Corporation Private Limited vs. Union of India and Others, (2010) 1 SCC 549.

The Court started its discussion with a brief summarisation of the principles governing the award of interest where the contract is silent. These principles, as summarised in Secretary, Irrigation Department, Government of Orissa and Others vs. G.C. Roy, (1992) 1 SCC 508 are as follows:

"(i) A person deprived of the use of money to which he is legitimately entitled has a right to be compensated for the deprivation, call it by any name. It may be called interest, compensation or damages. This basic consideration is as valid for the period the dispute is pending before the arbitrator as it is for the period prior to the arbitrator entering upon the reference. This is the principle of Section 34, Civil Procedure Code and there is no reason or principle to hold otherwise in the case of arbitrator.

(ii) An arbitrator is an alternative form (sic forum) for resolution of disputes arising between the parties. If so, he must have the power to decide all the disputes or differences arising between the parties. If the arbitrator has no power to award interest pendente lite, the party claiming it would have to approach the court for that purpose, even though he may have obtained satisfaction in respect of other claims from the arbitrator. This would lead to multiplicity of proceedings.

(iii) An arbitrator is the creature of an agreement. It is open to the parties to confer upon him such powers and prescribe such procedure for him to follow, as they think fit, so long as they are not opposed to law. (The proviso to Section 41 and Section 3 of Arbitration Act illustrate this point). All the same, the agreement must be in conformity with law. The arbitrator must also act and make his award in accordance with the general law of the land and the agreement.

(iv) Over the years, the English and Indian courts have acted on the assumption that where the agreement does not prohibit and a party to the reference makes a claim for interest, the arbitrator must have the power to award interest pendente lite. Thawardas has not been followed in the later decisions of this Court. It has been explained and distinguished on the basis that in that case there was no claim for interest but only a claim for unliquidated damages. It has been said repeatedly that observations in the said judgment were not intended to lay down any such absolute or universal rule as they appear to, on first impression. Until Jena case almost all the courts in the country had upheld the power of the arbitrator to award interest pendente lite. Continuity and certainty is a highly desirable feature of law.

(v) Interest pendente lite is not a matter of substantive law, like interest for the period anterior to reference (pre- reference period). For doing complete justice between the parties, such power has always been inferred."

The Court went on to examine Port of Calcutta case on which the respondents heavily relied. In that case, based on the power of the arbitrators to interpret the arbitration clause, the Court had held that the bar on interest in the contract was a mere bar on the Government and departments against paying interest and it did not preclude the arbitrators from awarding interest. However, this very proposition was examined later in Sayeed Ahmed and Company vs. State of Uttar Pradesh and Others, (2009) 12 SCC 26 in which a similar argument was rejected stating: "Whether the provision in the contract bars the employer from entertaining any claim for interest or bars the contractor from making any claim for interest, it amounts to a clear prohibition regarding interest. The provision need not contain another bar prohibiting the arbitrator from awarding interest." Based on this, the Court held that reliance of the respondent on Port of Calcutta was misplaced as that case was overruled in Sayeed Ahmed.

Based on the above discussion, the Court arrived at the following conclusion: "We reiterate that where the parties had agreed that no interest shall be payable, the arbitrator cannot award interest for the amounts payable to the contractor under the contract. Where the agreement between the parties does not prohibit grant of interest and where a party claims interest and the said dispute is referred to the arbitrator, he shall have the power to award interest pendent elite. As observed by the Constitution Bench in G.C. Roy's case (supra), in such a case, it must be presumed that interest was an implied term of the agreement between the parties. However, this does not mean that in every case, the arbitrator should necessarily award interest pendente lite."

Arbitration Act is a self contained code; No LPA against non-appealable orders - Supreme Court

Section 50 of the Arbitration and Conciliation Act, 1996 states:

"(1) An appeal shall lie from the order refusing to -

(a) refer the parties to arbitration under section 45;

(b) enforce a foreign award under section 48,

to the court authorised by law to hear appeals from such order.

(2) No second appeal shall lie from an order passed in appeal under this section, but nothing in this section shall affect or take away any right to appeal to the Supreme Court."

In Fuerst Day Lawson Ltd. vs Jindal Exports Ltd., (decided on July 8, 2011), the Supreme Court was faced with the question of whether this provision precludes Letters Patent Appeals.

Before the Court could move on to answering this question, it had to deal with an application placed before it by the petitioners for the transfer of this case to a larger bench. The petitioners referred to  Orma Impex Pvt. Ltd. v. Nissai ASB PTE Ltd., (1999) 2 SCC 541, in which a two-judge bech of the Supreme Court had referred the same question to a three judge bench citing an apparent conflict in precedents. However, before the three judge bech could answer the question the matter was compromised. The Court held that Orma Impex was not a binding precedent as the matter was compromised before a decision could be reached. As to the conflict referred to in Orma Impex, the Court drew a distinction between the statutory schemes of Part I and Part II of the Act. While the opening language of Section 37 and Section 50 of the 1996 Act is similar to that of Section 39 of the 1940 Act, only Section 37 (and not Section 50) is similar in its statutory scheme and object and purpose to Section 39 of the 1940 Act. Hence, judgments rendered on whether Section 39 of the 1940 Act excluded Letters Patent Appeals was not relevant in interpreting Section 50.

Before going on to determine whether the current statutory framework excludes Letters Patent Appeals, the Court lays down several 'broad principles' gathered from precedents:

"1. Normally, once an appeal reaches the High Court it has to be determined according to the rules of practice and procedure of the High Court and in accordance with the provisions of the charter under which the High Court is constituted and which confers on it power in respect to the method and manner of exercising that power.


2. When a statute merely directs that an appeal shall lie to a court already established then that appeal must be regulated by the practice and procedure of that court.


3. The High Court derives its intra-court appeal jurisdiction under the charter by which it was established and its powers under the Letters Patent were recognized and saved by section 108 of the Government of India Act, 1915, section 223 of the Government of India Act, 1935 and finally, by Article 225 of the Constitution of India. The High Court, therefore, cannot be divested of its Letters Patent jurisdiction unless provided for expressly or by necessary intendment by some special statute.


4. If the pronouncement of the single judge qualifies as a "judgment", in the absence of any bar created by a statute either expressly or by necessary implication, it would be subject to appeal under the relevant clause of the Letters Patent of the High Court.


5. Since section 104(1) CPC specifically saves the letters patent appeal it could only be excluded by an express mention in section 104(2). In the absence of any express mention in section 104(2), the maintainability of a letters patent appeal is saved by virtue of section 104(1).


6. Limitation of a right of appeal in absence of any provision in a statute cannot be readily inferred. The appellate jurisdiction of a superior court cannot be taken as excluded simply because a subordinate court exercises its special jurisdiction.


7. The exception to the aforementioned rule is where the special Act sets out a self-contained code and in that event the applicability of the general law procedure would be impliedly excluded. The express provision need not refer to or use the word "letters patent" but if on a reading of the provision it is clear that all further appeals are barred then even a letters patent appeal would be barred."

Based on these 'broad principles' the Court goes on to hold that a Letters Patent Appeal would stand excluded under the present statutory scheme of Section 50.

For this proposition, the Court advances two independent reasons -

1. Under Section 6(2) the Foreign Awards (Recognition and Enforcement) Act, 1961, all appeals including LPAs were barred except where an enforcing court issued a decree which was in excess of the award which was being enforced. In the present statutory scheme, no decree in terms of the award is necessary for a foreign award to enforced. By doing away with this procedural requirement, the statute has also done away with the possibility that a decree in excess of the award can be issued and hence has removed the only limited ground on which a LPA could have been entertained under the 1961 Act. "It would be futile, therefore, to contend that though the present Act even removes the limited basis on which the appeal was earlier maintainable, yet a Letters Patent Appeal would lie notwithstanding the limitations imposed by section 50 of the Act. The scheme of sections 49 and 50 of the 1996 Act is devised specially to exclude even the limited ground on which an appeal was earlier provided for under section 6 of the 1961 Act."

2. The Arbitration and Conciliation Act is a self contained code. "It is, thus, to be seen that Arbitration Act 1940, from its inception and right through 2004 (in P.S. Sathappan) was held to be a self-contained code. Now, if Arbitration Act, 1940 was held to be a self-contained code, on matters pertaining to arbitration the Arbitration and Conciliation Act, 1996, which consolidates, amends and designs the law relating to arbitration to bring it, as much as possible, in harmony with the UNCITRAL Model must be held only to be more so. Once it is held that the Arbitration Act is a self- contained code and exhaustive, then it must also be held, using the lucid expression of Tulzapurkar, J., that it carries with it a negative import that only such acts as are mentioned in the Act are permissible to be done and acts or things not mentioned therein are not permissible to be done. In other words, a Letters Patent Appeal would be excluded by application of one of the general principles that where the special Act sets out a self-contained code the applicability of the general law procedure would be impliedly excluded."

Recent decision of the Supreme Court on existence of an arbitration agreement

The Supreme Court, in a judgment last Monday, clarified the law regarding existence of an agreement to arbitrate under section 7 of the Arbitration and Conciliation Act, 1996.

In State of Orissa & Ors. v. Bhagyadhar Dash, contractors had applied under section 11, Arbitration and Conciliation Act, for appointment of arbitrators to decide disputes between them and the state government. Clause 10 of the 'Conditions of Contract', part of the series of agreements between the parties, was held to be an arbitration clause by the Chief Justice of the Orissa High Court and the same was challenged before the Supreme Court.

Grounds of Decision

The Supreme Court decided the case on two grounds: first, based on judicial precedent on the essentials of an arbitration agreement and second, by tracing the history of the Standard Conditions of Contract of the Orissa government.

The Clause in Question

Clause 10 of the contract, purported to contain an arbitration agreement, stated thus:

"The Engineer-in-Charge shall have power to make any alterations in or additions to the original specifications, drawings, designs and instructions that may appear to him necessary and advisable during the progress of work, and the contractor shall be bound to carry out the work in accordance with any instructions which may be given to him in writing signed by the Engineer-in-Charge and such alterations shall not invalidate the contract, and any additional work which the contractor may be directed to do in the manner above specified as part of the work shall be carried out by the contractor on the same conditions in all respects on which he agreed to do the main work, and at the same rates as are specified in the tender for the main work. The time for the completion of the work shall be extended in the proportion that the additional work bears to the original contract work and the certificate of the Engineer-in-Charge shall be conclusive as to such proportion. And if the additional work includes any class of work for which no rate is specified in this contract, then such class of work shall be carried out at the rates entered in the sanctioned schedule of rates of the locality during the period when the work is being carried on and if such last mentioned class of work is not entered in the schedule of rates of the district then the contractor shall within seven days of the date of the rate which it is his intention to charge for such class of work, and if the Engineer-in-Charge does not agree to this rate he shall be noticed in writing be at liberty to cancel his order to carry out such class of work and arrange to carry it out in such manner as he may consider advisable.

No deviations from the specifications stipulated in the contract nor additional items of work shall ordinarily be carried out by the contractor, nor shall any altered, additional or substituted work be carried out by him, unless the rates of the substituted, altered or additional items have been approved and fixed in writing by the Engineer-in-Charge, the contractor shall be bound to submit his claim for any additional work done during any month on or before the 15th days of the following month accompanied by a copy of the order in writing of the Engineer-in-Charge for the additional work and that the contractor shall not be entitled of any payment in respect of such additional work if he fails to submit his claim within the aforesaid period.

Provided always that if the contractor shall commence work or incur any expenditure in respect thereof before the rates shall have been determined as lastly hereinbefore mentioned, in such case he shall only be entitled to be paid in respect of the work carried out or expenditure incurred by him prior to the date of the determination of the rates as aforesaid according to such rate or rates as shall be fixed by the Engineer-in-Charge. In the event of a dispute, the decision of the Superintending Engineer of the Circle will be final."

Attributes of an agreement to arbitrate

Relying on K. K. Modi v. K. N. Modi, Bihar State Mineral Development Corporation v. Encon Builders, Jagdish Chander v. Ram Chandra, State of U. P. v. Tipper Chand, State of Orissa v. Damodar Das and Bharat Bhushan Bansal v. U. P. Small Industries Corporation Ltd., the Court gleaned the following attributes of an arbitration agreement:

written consent to submit future disputes to arbitration, contemplation of a binding decision of an impartial Tribunal which will decide in a judicial manner, contemplation that substantive rights of parties will be determined by the agreed tribunal, enforceability of the decision of the Tribunal in a court of law, and intention that the tribunal will make a decision upon a dispute which is already formulated at the time when a reference is made to the Tribunal.

Further, there is no specific form of an arbitration agreement, even absence of words like 'arbitrator' or 'arbitral tribunal' does not retract from the clause being an arbitration agreement if all requisite elements are present. Conversely, mere use of these words do not render it an arbitration agreement.

Where an agreement requires or permits an authority to decide a claim or dispute without hearing, or requires the authority to act in the interests of only one of the parties, or provides that the decision of the Authority will not be final and binding on the parties, or that if either party is not satisfied with the decision of the Authority, he may file a civil suit seeking relief, it cannot be termed as an arbitration agreement.

If the purpose of the clause is only to vest in the named Authority, the power of supervision of the execution of the work and administrative control over it from time to time, it is not an arbitration agreement.

The Apex Court has laid emphasis on the distinction between adjudication of disputes and prevention of disputes, the latter not amounting to arbitration.

The clause under consideration in this case related to power of the Engineer-in-Chief to make additions and alterations in the drawings and specifications and execution of non-tendered additional items of work (that is items of work which are not found in the bill of quantities or schedule of work). The last sentence of the proviso to clause 10 was purported to be an arbitration agreement. It stated: "in the event of a dispute, the decision of the Superintending Engineer of the Circle will be final".

This, according to the Court, did not refer to arbitration as the mode of dispute resolution and it did not provide for reference of disputes between the parties to arbitration. There was no displayed intention to make the Superintending Engineer an arbitrator in respect of disputes that may arise between the Engineer-in-Charge and the contractor. It operated in a limited sphere.

It intended to avoid future disputes regarding rates for non-tendered items, not to refer future disputes for settlement. The decision of the Superintending Engineer was not a judicial determination, but a decision open to challenge in a court of law.

Thus relying on precedent alone, the Court held that clause 10 was not an agreement to arbitrate.

Amending History of Standard Conditions of Contract

Second, the Court analysed the history of the Standard Conditions of Contract of the Orissa government. Prior to 1981 there was a clause 23 in the Standard Contract which provided for binding arbitration. Since this was consciously deleted, according to the Court, therefore the intention was not to have any arbitration clause.

Furthermore, the Court relied on Executive Engineer RCO v. Suresh Chandra Panda, which held that even when the Standard Conditions of Contract contained a provision for arbitration (clause 23), clause 10 was considered to be a provision dealing with a matter excepted from arbitration. Thus, in the absence of the arbitration clause, clause 10 cannot be considered an agreement to arbitrate.

Thus, from prior history of the Standard Conditions of Contract, it became evident that the clause in question was not an agreement to arbitrate.

This judgment provides a useful recapitulation of the legal position regarding the existence of an arbitration agreement.

The Peculiar Case of Pakistan

This April, Pakistan enacted the Investment Disputes Act to make awards under the ICSID Convention enforceable in Pakistan. This was following a ruling in SGS v. Pakistan before an ICSID Tribunal. The Bill was passed following an ordinance issued almost four years ago which has been renewed under successive regimes, before finding fruition in April. This puts Pakistan in a unique and unenviable position as it does not have a law to bring the New York Convention or the UNCITRAL Model Law into effect, but will now recognise ICSID awards.

Background

Arbitration in Pakistan is still largely governed by the 1940 Act which was enacted by the British for the undivided Indian colony. Though Pakistan has signed the NYC, the enforceability of foreign arbitral awards is unclear as the NYC has not been implemented. The first attempt to implement the NYC was made in 2005, when the new Arbitration Act was passed as an Ordinance (along with an Ordinance to implement the ICSID Convention in 2006, which is now the Investment Disputes Act) almost 50 years after they signed on the NYC.

Ordinances in Pakistan have a limited life under Article 89 of the Constitution and must be tabled before the Houses of Parliament within 4 months of issue. Owing to the declaration of Emergency, they never saw the light of day and in Sindh High Court Bar Association v. The Federation of Pakistan, they were repealed as they were not passed within the requisite period.

Enactment and Controversy

But, in April 2010 President Zardari controversially re-promulgated the repealed Ordinances along with 11 others while the National Assembly was still in session, in alleged violation of Article 89. On the expiry of successive 4 month periods, the Ordinances were granted further 4 month extensions until April this year when the Investment Disputes Act was finally passed.

However, there is no word on when the new Arbitration Act will be enacted, but it is expected to follow the Investment Disputes Act. Thus, Pakistan finds itself in a position where it has given full effect to the ICSID Convention while not bringing the NYC or the UNCITRAL Model Law into effect. In doing so, Pakistan is not only one of the few countries to have not implemented the NYC, but is probably the only country to have implemented the ICSID Convention, while not implementing the NYC.

Lessons for India?

Unlike Pakistan, India is not a party to the ICSID Convention. However, India still lacks a framework for the implementation of Investment Treaty Awards. The issues surrounding ITAs have been dealt with in some detail in this paper, co-authored by Deepak.

The enactment of the Investment Disputes Act in Pakistan is part of the larger trend of settling investment disputes through arbitration. It also underscores the need for a legislation or an adequate mechanism to deal with Investment Disputes in India.