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JSA Prism | Dispute Resolution | April 2024

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An arbitral tribunal has the power to implead a non-signatory to arbitration proceedings under Section 16 of Arbitration Act

A single bench of the Bombay High Court (“Bombay HC”) has in Cardinal Energy and Infra Structure Private Limited & Anr. v. Subramanya Construction and Development Co. Limited & Ors.[1] held that the power to implead a non-signatory to an arbitration proceeding vests in an arbitral tribunal on the basis of the group of companies doctrine laid down in Cox and Kings Limited v. SAP India Private Limited & Anr[2] (“Cox and Kings”).

Brief Facts

Subramanya Construction and Development Company Limited (“SCDCL”, respondent no. 1) and Prakruthi Infrastructure and Development Company Limited (“PIDCL”, respondent no. 2) entered into a memorandum of understanding (“MoU”) with Swan Energy Limited (“Swan”, respondent no. 3). The MoU contained an arbitration agreement. Disputes arose between the parties leading to the issuance of a notice invoking arbitration by SCDCL and PIDCL against Swan. Pursuant to an application filed by SCDCL and PIDCL against Swan under Section 11 of the Arbitration and Conciliation Act, 1996 (“Arbitration Act”), the Bombay HC appointed a sole arbitrator to adjudicate the disputes arising out of the MoU.

The parties filed their respective pleadings before the arbitral tribunal. In the Statement of Defence filed by Swan, a preliminary objection was raised alleging that Cardinal Energy and Infra Structure Private Limited (“Cardinal”, petitioner no. 1) and Pegasus Energy and Infrastructure Private Limited (“Pegasus”, petitioner no. 2) (together referred to as the “Petitioners”) were necessary parties without whom the claim was not maintainable since the Petitioners had performed an aspect of the contract.

Given the averment made in the Statement of Defence, SCDCL and PIDCL filed an application under Order 1 Rule 10 of the Code of Civil Procedure, 1908 (“CPC”) to implead the Petitioners as respondents to the arbitration proceedings. Swan opposed the application on the ground that the arbitral tribunal did not have the power to direct impleadment of the Petitioners and that this could have only been done by the referring court. The parties, including the Petitioners, were heard by the arbitral tribunal. After considering the submissions made, the arbitral tribunal passed an ‘order’ / ‘award’ allowing the application (“Impugned Award”).

Aggrieved by this decision, the Petitioners filed a petition under Section 34 of the Arbitration Act challenging the Impugned Award before the Bombay HC.

Issue

Whether the arbitral tribunal could have of its own accord allowed the impleadment of the Petitioners who were non-signatories to the arbitration agreement without such a power being expressly endowed upon it by the referral court at the time of reference.

Findings and Analysis

The Bombay HC dismissed the petition and inter alia held as follows:

In Cox and Kings, the Supreme Court has held that when at a referral stage, impleadment of a non-signatory to the arbitration agreement is raised, the referral court should leave it for the arbitral tribunal to decide whether the non-signatory is bound by the arbitration agreement. The Supreme Court has considered the arbitral tribunal to be the appropriate forum to determine the issue as to joinder of a non-signatory to an arbitration agreement.
The arbitral tribunal has the power to decide whether the non-signatory is bound by the arbitration agreement and to implead the non-signatory if answered in the affirmative.
The applicability of the group of companies doctrine is not excluded merely by there being no prayer for impleadment of a non-signatory in the Section 11 application.
Despite the arbitral tribunal not having the specific power to consider an application for impleadment and/or the power of a civil court under Order 1 Rule 10 of the CPC, the Cox and Kings judgment has changed the law with respect to impleadment of non-signatories on the basis of the group of companies doctrine and has left the issue to be determined by an arbitral tribunal.
The Supreme Court in National Insurance Company Ltd. v. Boghara Polyfab Private Limited[3] has referred to issues which the Chief Justice or his designate is bound to decide, including whether there is an arbitration agreement and whether the party who has applied under Section 11 of the Arbitration Act is a party to such an agreement. However, the same does not preclude the arbitral tribunal from deciding the issue of impleadment of a non-signatory to an arbitration agreement, particularly when the issue is not before the referral court.
In the present case, the Arbitral Tribunal was justified in determining the issue of whether the Petitioners as non-signatories to the arbitration agreement could be impleaded as parties to the arbitration.
The decision of the arbitral tribunal in an application under Section 16 of the Arbitration Act can always be challenged in a petition under Section 34 of the Arbitration Act after the final award has been passed. The Impugned Award was not in the nature of a final determination since it would be open to the Petitioners to lead evidence on the issues framed and invite a final adjudication by the arbitral tribunal.

Conclusion

This judgement clarifies the position that an arbitral tribunal has inherent powers under Section 16 of the Arbitration Act to implead a non-signatory / third party to an arbitration proceeding on the basis of the ‘group of companies’ doctrine. This is even in the absence of a specific prayer for impleadment of a non-signatory before a referral court. The judgment gives effect to the decision of the Supreme Court in Cox and Kings to reduce judicial intervention and leave issues including in respect of the impleadment of non-signatory parties to be decided by an arbitral tribunal.

This Prism has been prepared by:

Farhad Sorabjee
Partner

Shanaya Cyrus Irani
Partner

Siddhesh Pradhan
Principal Associate

Meher
Mistri
Associate

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[1] Comm Arbitration Petition (L) No. 2603 of 2024

[2] 2023 INSC 1051

Tags Arbitration Act, Bombay High Court, Dispute Resolution, JSA, JSA Prism, Leading Law Firm, Leading Lawyers, Legal Updates, Supreme Court

JSA Prism | Dispute Resolution | April 2024

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Supreme Court holds that stamp duty is not payable on every increase in the authorized capital of a company if the prescribed maximum duty is already paid

The Supreme Court of India (“Supreme Court”) in its recent judgement State of Maharashtra & Anr., Vs National Organic Chemical Industries Limited [1], has held that once the maximum duty payable on the authorised share capital of a company is paid, as prescribed under the relevant stamp laws, no additional duty is payable for subsequent increase in the share capital, unless the law specifically requires payment of additional stamp duty. The Supreme Court further clarified that the form filed with the registrar of companies (“RoC”), notifying the increase in the authorised share capital of a company is not an instrument for the purpose of levying stamp duty. This judgement of the Supreme Court is significant since it settles the law that, if the state laws do not expressly provide for stamping every increase in the authorized capital, then no additional duty is payable for increase in the authorized capital, if the maximum prescribed duty has been paid earlier.

Brief Facts

In 1992, National Organic Chemical Industries Limited (“NOCIL”) paid a stamp duty of INR 1,12,80,000 (Indian Rupees one crore twelve lakh eighty thousand) after it increased its share capital from INR 36,00,00,000 (Indian Rupees thirty-six crore) to INR 600, 00,00,000 (Indian Rupees six hundred crore) under the Bombay Stamp Act, 1958 (“Stamp Act”)[2]. In 1994, the State of Maharashtra amended[3] the Stamp Act, introducing a cap of INR 25,00,000 (Indian Rupees twenty-five lakh) for companies increasing the authorised share capital. NOCIL subsequently increased its authorised share capital to INR 1,200 crore (Indian Rupees one thousand two hundred crore) inadvertently paying INR 25,00,000 (Indian Rupees twenty-five lakh) as stamp duty. NOCIL had also filed Form No.5[4] with the RoC as required under the Companies Act, 1956 (“CA 1956”). NOCIL sought refund which was rejected by the Deputy Superintendent of Stamps. NOCIL challenged this before the Bombay High Court which allowed the writ petition and directed the State of Maharashtra to refund the stamp duty plus interest. Against the said order, the State of Maharashtra and Deputy Superintendent of Stamps preferred an appeal before the Supreme Court.

Contentions

The State of Maharashtra contended that the stamp duty was payable every time a company increased its share capital and filed Form No.5[5] with the RoC. The State of Maharashtra further contended that the instrument liable to tax is Form No. 5 filed for increase in authorised capital. Section 14A of the Stamp Act was relied upon to contend that any material or substantial alteration in the character of an instrument requires a fresh stamp duty according to its altered character. It was further contended that the stamp duty paid earlier cannot be taken into consideration since the earlier payment was made in 1992 and the amendment imposing a cap on duty payable was introduced subsequently, in 1994.

NOCIL contended that the stamp duty was only payable on the article of association (“AoA”), which alone is the instrument referred to Article 10 of Schedule-I of the Stamp Act; and the filing of Form No. 5 to the RoC was merely to notify the increase in share capital, and the form is not an instrument under the Stamp Act. It was further contended that increase in the share capital of a company does not materially or substantially alter the character of the AoA in order to fall within Section 14A of the Stamp Act. Reliance was placed on Section 31 of the CA 1956 to contend that any alterations made to the AoA are valid and are to be taken as if originally contained therein.

Decision of the Supreme Court

The Supreme Court by relying on the view taken by Allahabad High Court in New Egerton Wollen Mills[6], held that filing of Form No. 5 is only for intimating the RoC about the increase in the share capital. The instrument as per Section 2(1) of the Stamp Act, that is liable to be assessed for stamp duty is the AoA as mentioned in Article 10 of Schedule-I of the Stamp Act.

The Supreme Court while dealing with the interplay between Section 14A of the Stamp Act and Section 31 of the CA 1956, held that CA 1956 being a special law and Stamp Act being a general law with regard to AoA, the special law will override the general law, in case of conflict. The Supreme Court clarified that in terms of Section 31 of the CA 1956, any increase in the share capital of the company shall be valid as if it were originally there when the AoA was first stamped; and that the amended AoA cannot be considered as a fresh instrument.

In view of the above and considering that the resolution to increase the authorised capital was passed by NOCIL after the amendment in 1994 was introduced, the Supreme Court held that stamp duty paid by NOCIL on the AoA in 1992 will have to be taken into account, while calculating the duty payable on the increased authorised capital. The Supreme Court further held that no additional duty is payable by NOCIL on the increased authorised capital, since the maximum duty payable under the Stamp Act had already been paid. Consequently, the Supreme Court dismissed the appeal; and directed the State of Maharashtra to refund the stamp duty with interest.

Conclusion

The judgement reiterates the position of law that taxing / fiscal statutes must be interpreted strictly. The judgement also affirms the proposition that a codified law overrides common practices, in as much as, it is clarified that the practice of stamping Form No. 5 does not make it an instrument and the actual instrument liable to be assessed for duty is the AoA as stated in Article 10 of Schedule 1 to the Stamp Act.

Subject to the state specific laws, the benefit based on this judgement can be availed by the companies not only for mere increase in authorized capital, but also during restructuring such as mergers.

This Prism has been prepared by:

Vinod Kumar
Partner

Srinivasan M.D
Partner

Sai Barath
Associate

For more details, please contact km@jsalaw.com

[1] Judgement dated April 5, 2024 in Civil Appeal No.8821 of 2011.

[2] The stamp duty payable on articles of association at that point in time was INR 1000 (Indian Rupees five thousand) for every INR 5,00,000 (Indian Rupees five lakh) or part thereof.

[3] The amendment to Article 10 of Schedule-I of the Stamp Act was introduced vide notification dated August 2, 1994.

[4] Form No. 5 of the Companies (Central Government’s) General Rules & Forms, 1965 is the prescribed form of notice, which has to be sent under Section 97 of the CA 1956. Under Section 64 of the Companies Act, 2013 read along with Rule 15 of the Companies (Share Capital and Debentures) Rules 2014, there is a requirement for the company to notify the RoC in Form SH-7 regarding the increase in the authorized share capital of the company.

[6] 1899 SCC Online All 22

Tags Dispute Resolution, JSA, JSA Prism, Leading Law Firm, Leading Lawyers, Legal Updates, Stamp Act, Supreme Court

JSA Prism | Dispute Resolution | April 2024

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Bombay High Court upholds the authority of the State of Maharashtra to levy stamp duty on delivery orders under the Maharashtra Stamp Act, 1958

The division bench of the Bombay High Court (“Bombay HC”) has in Saurer Textile Solutions Pvt Ltd v. The State of Maharashtra & Ors and Connected Writ Petitions[1] (“Writ Petitions”) held that the action of the State of Maharashtra in levying stamp duty on delivery orders (“DO”) under Article 29 of Schedule I of the Maharashtra Stamp Act, 1958 (“Stamp Act”) – (a) is within the legislative competence of the State; (b) does not intrude upon the legislative domain of the Parliament as reserved in Entries 41 and 83 of List I of Schedule VII to the Constitution of India; and (c) is not ultra vires Articles 246(1), 286(1)(b) and 286(2) of the Constitution of India.

Brief Facts

Saurer Textile Solutions Pvt. Ltd. and the other petitioners (“Petitioners”) are corporate entities who import goods from outside India and are required by the State of Maharashtra to pay stamp duty on the DOs to receive the delivery of imported goods. The Petitioners have been paying the stamp duty on the DOs since the enactment of the Stamp Act in 1958.

The process of import and export of goods begins with a foreign exporter/supplier engaging a ship owner to be the carrier of goods to be exported. The carrier issues a ‘Bill of Lading’ (“BoL”) to the exporter which stipulates the type, quantity and destination of the goods being carried. On the arrival of the goods at the port of destination, the carrier files the ‘Import General Manifest’ before the customs authority based on the invoice and the BoL. The containers are then unloaded at the port and taken for customs clearance.

Meanwhile, the importers file a ‘Bill of Entry’ (“BoE”) with the customs authority based on which the customs duty is computed. Once the customs duty is paid, the goods can be cleared out of the customs area but not before the carrier issues a DO directing the custodian of the goods to deliver the same to the person named therein or holder thereof. The importers are then required to pay stamp duty at 0.10% of the total assessed value of the goods under the Stamp Act and are not entitled to receive the delivery of the goods till the stamp duty on the DO is paid.

In February 2010, a single judge of the Gujarat High Court held that stamp duty cannot be levied on the BoE since – (a) it is not an instrument creating any right or liability in any person in respect of the goods; and (b) it does not amount to a DO within the meaning of the Bombay Stamp Act, 1958.[2] The division bench of the Gujarat High Court upheld this decision with a limited modification to hold that a BoL was a DO[3] (“Gujarat High Court Judgement”).

Persuaded by the Gujarat High Court Judgement, the Petitioners filed Writ Petitions before the Bombay HC assailing the legislative competence of the State of Maharashtra to impose, levy, collect the stamp duty on DOs under Article 29 of the Stamp Act where the supply of goods takes place in the course of import of such goods into the territory of India as being ultra vires Articles 246(1), 286(1)(b) and 286(2) read with Entries 41 and 83 of List I of Schedule VII to the Constitution of India. The Petitioners inter alia contended that the constitutional scheme confers exclusive legislative competence on the Union of India in respect of import and export customs frontiers and the State was not empowered to levy any charges on the same.

Issue

Whether the State of Maharashtra has the legislative competence to levy, impose and collect stamp duty on a DO under the MSA.

Findings and Analysis

The division bench of the Bombay HC dismissed the writ petitions and inter alia observed the following:

The power to legislate under Article 246 of the Constitution of India must be read with the entries in the 3 (three) Lists which define the respective areas of legislative competence of the Union and State legislatures. The doctrine of pith and substance must be applied to ascertain the true nature of the legislation and the entry within which it would fall. When an enactment substantially falls within the powers expressly conferred by the Constitution of India upon the legislature which enacted it, it cannot be held to be invalid merely because it incidentally encroaches on matters assigned to another legislature.
The MSA is a fiscal measure enacted to secure revenue for the State on certain types of instruments. Under the Constitution of India, Parliament has the power to levy stamp duty on instruments specified in Article 246 read with Entry 91 of List I of Schedule VII whereas the State Governments have the power to levy stamp duty on instruments falling under Article 246 read with Entry 63 of List II of Schedule VII.
The Customs Act, 1962 (“Customs Act”) provides for levy of customs duty when goods are transported across borders between countries. Customs duty are taxes that governments impose on export and import of goods. Customs duty falls within List I of Schedule VII to the Constitution of India and the Parliament enjoys exclusive jurisdiction to levy customs duty.
The definitions under the Customs Act demonstrate that the goods are cleared for home consumption only when cleared by customs authority. A BoE is presented for computing the customs duty. Once such duty is paid, the customs authority clears the goods and the import process insofar as the Customs Act stands concluded. It is only thereafter that the DO is issued by the shipper upon proof of payment of customs duty and its own charges. Accordingly, the DO does not form part of the chain of the import process and the taxing event occurs beyond the course of import. There is thus no overlap in the legislative field; and the State and the Centre are both well within their own occupied areas of legislation. The imposition of stamp duty on a DO in no manner encroaches upon the parliamentary legislative power in Entry 83 of List I of Schedule VII.
A plain reading of the Stamp Act suggests that a DO mentioned in Article 29 therein is not excluded from the definition of ‘instrument’ under Section 2(l) of the Stamp Act. Section 2(l) of the Stamp Act defines an ‘instrument’ to include every document which creates any right or liability but specifically excludes BoL. A DO is neither a BoL nor a BoE; and merely entitles the person named therein to take the delivery of goods after discharging the dues of a shipper (whose lien on the goods then stands extinguished). It is not necessary for a DO to be a document of title to fall within the purview of the definition of ‘instrument’ under the Stamp Act.
The computation of the stamp duty amount based on the valuation of goods does not preclude a DO from being an ‘instrument’ chargeable to stamp duty by the State. It is not the transaction which is liable to stamp duty but the ‘instrument’.
The Gujarat High Court Judgement has no application in the State of Maharashtra since – (a) the challenge therein was with respect to the levy of stamp duty on a BOE which was held to be distinct from a DO and not an instrument contemplated under Article 24 of the Bombay Stamp Act, 1958 (as applicable in Gujarat); (b) the State of Maharashtra had not formulated any regulation equivalent to Regulation 16 of the Gujarat Maritime Board (Landing & Wharfage) Regulations, 1956 which provided for a BOL to be a DO; and (c) a BoL was specifically excluded from the definition of ‘instrument’ under Section 2(l) of the MSA (as applicable in Maharashtra) and a DO was not covered by any exclusions under the MSA.

Conclusion

By this judgement, the Bombay HC has clarified the authority of the State of Maharashtra in levying stamp duty on DOs under the Stamp Act in respect of imported goods. This judgement carries significant fiscal implications on corporate entities in diverse sectors who import goods as a part of their business activities in Maharashtra. Simultaneously, this judgement also has a bearing on the revenue of the State of Maharashtra. It may be noted that the State of Gujarat has appealed against the Gujarat High Court Judgement before the Supreme Court of India which is currently pending adjudication. At present, there is no appeal against this Bombay HC judgement.

This Prism has been prepared by:

Farhad Sorabjee
Partner

Pratik Pawar
Partner

Shanaya Cyrus Irani
Partner

For more details, please contact km@jsalaw.com

[1] 2024 SCC OnLine Bom 950.

[2] Essar Steel Limited v. Superintendent of Stamps, 2010 SCC OnLine Guj 1826.

[3] State of Gujarat v. Reliance Industries Ltd., 2011 SCC OnLine Guj 5032.

Tags Bombay High Court, Constitution, Constitutional Rights, Dispute Resolution, JSA, JSA Prism, Leading Law Firm, Leading Lawyers, Legal Updates

Sidharth Sethi | Panel Discussion | International Conference on Cross-Border and Group Insolvency in India | New Delhi

Sidharth Sethi was invited at the ‘International Conference on Cross-Border and Group Insolvency in India’ for a panel discussion on “Group Insolvency: Challenges and Opportunities”.

This conference was organised on 13 April 2024 by the Indian Institute of Insolvency Professionals of ICAI (“IIIPI”), in association with the Insolvency and Bankruptcy Board of India (“IBBI”), Foreign, Commonwealth and Development Office, Government of the United Kingdom (“UKFCDO”) and Institute of Chartered Accountants of India (“ICAI”). Ernst & Young (“E&Y”) were the technical partners for the conference.

The other distinguished speakers on the panel were:

Mr. Virender Ganda, Senior Advocate (President, NCLT and NCLAT Bar Association);
Mr. Benjamin Barker, Senior Policy Advisor, The Insolvency Service, UK;
CA Hansraj Chugh, Central Council Member, ICAI;
Mr. Ashok Kumar, Partner, Black Oak LLC, Singapore;
Mr. Abhilash Lal, Insolvency Professional.

The session was moderated by Mr. Ganda, and explored various nuances, challenges and opportunities concerning Group Insolvency in India.

Tags Insolvency, JSA, Leading Law Firm, Leading Lawyers

Supreme Court in exercise of curative jurisdiction, sets aside arbitral award on the grounds of patent illegality and perversity

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A 3 (three) judge bench of the Supreme Court of India (“Supreme Court”), while deciding a curative petition[1] filed with regard to the decision in Delhi Airport Metro Express Pvt. Ltd. v. Delhi Metro Rail Corporation Ltd.[2] (“Curative Petition”), has set aside an arbitral award on the ground of patent illegality and perversity, recognised as grounds for challenge under Section 34(2A) of the Arbitration and Conciliation Act, 1996 (“Arbitration Act”).

The decision reaffirms the position of law enunciated in Ssangyong Engineering & Construction Co. Ltd. v. NHAI[3] and Associate Builders v. Delhi Development Authority[4]. It is well settled that an award rendered is perverse or irrational where the findings are: (a) based on no evidence; (b) based on irrelevant material; and (c) award ignores vital evidence. Further, an award is considered patently illegal when the award contains no reasons at all, so as to be considered as a reasoned award.

Brief Facts

The disputes arose from a concession agreement (“Agreement”) between Delhi Metro Rail Corporation Ltd. (“DMRC”) and Delhi Airport Metro Express Private Limited (“DAMEPL”), for construction, operation and maintenance of Airport Metro Express Line Project (“AMEL”).

DAMEPL suspended the operation of AMEL in 2012, alleging that it was unsafe to operate, owing to serious design and quality issues.

DAMEPL issued a notice under Clause 29.5.1 of the Agreement requiring DMRC to cure the list of defects within a period of 90 (ninety) days, failing which an event of default would be triggered in terms of the Agreement and entitling DAMEPL to terminate the Agreement. Clause 29.5.1(i) of the Agreement entitled DAMEPL to terminate the Agreement if DMRC failed to cure “such breach or take effective steps for curing such breach” within 90 (ninety) days of receipt of notice from DAMEPL.

Thereafter, upon DMRC’s alleged failure to cure defects within the 90 (ninety) days period, on October 8, 2012, DAMEPL terminated the Agreement.

On October 23, 2012, DMRC initiated the arbitration proceedings, after exhausting the pre-reference remedies stipulated in the Agreement.

On November 19, 2012, DAMEPL and DMRC made a joint application to the Commissioner of Metro Railway Safety (“CMRS”) for re-opening of AMEL. After due inquiry and inspection, the CMRS issued the sanction on January 18, 2013.

Based on the CMRS certification, operations of AMEL were resumed on January 22, 2013. Shortly thereafter, on June 30, 2013, DAMEPL halted operations and handed over assets of AMEL to DMRC.

In August 2013, a 3 (three) member Arbitral Tribunal (“Tribunal”) was constituted. The Tribunal passed a unanimous award in favour of DAMEPL (“Award“). The Award inter alia held that DAMEPL was entitled to: (a) termination payment in terms of the Agreement; (b) expenses incurred in operating the AMEL from January 7, 2013 to June 30, 2013 and debt service made by DAMEPL during this period; (c) refund of bank guarantee, which had been encashed, along with interest thereon; (iv) refund of security deposits with service providers along with interest thereon. It was also held that DMRC was entitled to concession fee for the period from February 23, 2012, to January 7, 2013.

The Award was based on the following findings: (a) the termination notice issued by DAMEPL was valid; (b) DMRC had failed to cure the breach within 90 (ninety) days, nor had effective steps been taken to cure such defects; and (c) this resulted in a material adverse effect on the concessionaire.

Assailing the Award, DMRC filed a challenge petition under Section 34 of the Arbitration Act. The said petition was dismissed by a Single Judge of the Delhi High Court. It was held that so long as the Award was reasonable and plausible, considering the material before the Tribunal, no interference was warranted, even if an alternative view was possible.

This gave rise to an appeal under Section 37 of the Arbitration Act before a Division Bench of the Delhi High Court (“Division Bench”). The Division Bench set aside the Award on the grounds of perversity and patent illegality.

Against the decision of the Division Bench, DAMEPL filed a Special Leave Petition (“SLP”) under Article 136 of the Constitution. A 2 (two) judge bench of the Supreme Court allowed the SLP and restored the Award. The review petition assailing this decision was dismissed. DMRC then filed a curative petition.

Issues before Supreme Court in the Curative Petition

The issues considered by the Supreme Court in the Curative Petition included: (a) whether the curative petition was maintainable; and (b) whether the 2 (two) judge bench of the Supreme Court was justified in restoring the Award, which had been set aside by the Division Bench on the grounds that it suffered from patent illegality.

Supreme Court’s Decision

The decision of the Supreme Court on both the primary issues was interlinked.

On the first issue, it was held that in essence, the jurisdiction of the Supreme Court, while deciding a curative petition, extended to cases where the court had acted beyond its jurisdiction, resulting in a grave miscarriage of justice.

The Supreme Court, thereafter, examined the scope of interference with arbitral awards under Section 34 of the Arbitration Act. In this regard, it was held that although the interpretation of a contract was exclusively within the domain of the arbitrator, construction of a contract in a manner that no fair-minded or reasonable person would take, was impermissible, and would result in the award suffering from the vice of patent illegality.

On the second issue, the Supreme Court concluded that the 2 (two) judge bench of the Supreme Court erred in interfering with the decision of the Division Bench. While holding so, the Supreme Court concluded that the decision of the Division Bench was based on a correct application of the test under Section 34 of the Arbitration Act.

It was further held that the decision of the Division Bench provided adequate reasons to come to the conclusion that the Award suffered from perversity and patent illegality inter alia: (a) the Award overlooked crucial facts and evidence on record that were crucial to the determination of the issues before the Tribunal, particularly the CMRS certificate which had led to resumption of the AMEL services, although all defects had not been cured; (b) the Award overlooked the express terms of the terms of the Agreement i.e., Clause 29.5.1(i) which stipulated that “if effective steps” were taken during the cure period by DMRC, the contractual power to terminate the Agreement, could not be exercised.

In view of the foregoing, the Supreme Court held that the decision of Division Bench of the Delhi HC was in line with the settled precedent including Ssangyong (supra) and Associate Builders (supra) and that the Division Bench had correctly held that the Tribunal ignored vital evidence on record, resulting in perversity and patent illegality, warranting interference. It was further held that “by setting aside the judgement of the Division Bench, this Court restored a patently illegal award which saddled a public utility with an exorbitant liability. This has caused a grave miscarriage of justice.”

Accordingly, the Supreme Court held that the facts of the case warranted exercise of the curative jurisdiction of the Supreme Court, in terms of the judgment in Rupa Hurra v. Ashok Hurra[5], and set aside the Award.

The Supreme Court did, however, caution that the curative jurisdiction should not be used to open the floodgates and create a fourth or fifth stage of court intervention in an arbitral award.

Conclusion

On the face of it, the decision of the Supreme Court may be said to be in consonance with the law laid down and the position of law enunciated in the Ssangyong (supra) and Associate Builders (supra) decisions. However, the setting aside of the Award, that too in exercise of curative jurisdiction, appears to be contrary to the principles of minimal judicial intervention under the Arbitration Act. The fact that the Supreme Court has effectively reappreciated the evidence on record and has examined the interpretation of the terms of the Agreement between the parties, both of which are ordinarily within the domain of the tribunal, leads to the concern that floodgates will be opened for another layer of judicial scrutiny of arbitral awards, notwithstanding the words of caution in this regard in the judgment. The judgment also begs the question whether curative jurisdiction would have been exercised with respect to an arbitral award if a public utility was not a party to the proceedings.

This Prism has been prepared by:

Ananya Kumar
Partner

Kamaljeet Singh
Partner

Shriya Luke
Principal Associate

For more details, please contact km@jsalaw.com

[1] Delhi Metro Rail Corporation Ltd. v. Delhi Airport Metro Express Pvt. Ltd. Curative Petition (C) Nos. 108 -2019 of 2022 in Review Petition (C) No. 1158 – 1159 of 2021 in Civil Appeal Nos. 5627 – 5628 of 2021.

[2] (2022) 1 SCC 131.

[3] (2019) 15 SCC 131.

[4] (2015) 3 SCC 49.

[5] 2022 4 SCC 388.

Tags Arbitration Act, Dispute Resolution, JSA, JSA Prism, Leading Law Firm, Leading Lawyers, Legal Updates, Supreme Court

Jet Airways’ Return to the Skies

After a long and arduous litigation Jet Airways’ insolvency woes have finally reached a conclusion. At least that is the hope unless the litigation is taken to the Supreme Court. Having said that, the National Company Law Appellate Tribunal (“NCLAT”) in its decision dated 12.03.2024, in Company Appeal (AT) (Insolvency) No. 129 & 130 of 2023, approved the transfer of ownership of Jet Airways to the Jalan Kalrock Consortium (“JKC”). This hopefully leads the path for the commencement of a new era for the airline.

Prior to 2019, Jet Airways operated as one of India’s leading airlines. However, owing to the significant debt, high operational cost, exorbitant fuel prices, etc., coupled with the cut-throat competition of the aviation sector, Jet Airways halted its operations on 17.04.2019.

Please click here to read the full article by Poonam Verma Sengupta and Pradyumn Amit Sharma, published in Lexology.

Tags JSA, Leading Law Firm, Leading Lawyers, National Company Law Appellate Tribunal, Nclat, Supreme Court of India

JSA Prism | Dispute Resolution | March 2024

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Supreme Court lays down two-pronged test for considering issue of limitation for appointment of arbitrators; suggests Parliament should amend ‘unduly long period’ available for seeking arbitrators’ appointment

In the recent decision of Arif Azim Co. Ltd. v. Aptech Ltd.[1] , the Hon’ble Supreme Court of India (“Supreme Court”) held that while considering the issue of limitation at the stage of appointment of arbitrators, courts should satisfy themselves on first, whether the petition seeking arbitrators’ appointment is barred by limitation, and second, whether the claims sought to be arbitrated are ex facie dead and barred by limitation. The Supreme Court held that courts may refuse to appoint an arbitrator if either of these questions are answered against the party seeking appointment.

In the facts of the case, the Supreme Court concluded that both, the Petitioner’s claims and its petition under Section 11(6) of the Arbitration and Conciliation Act, 1996 (“Arbitration Act”), were not barred by limitation. However, the Supreme Court observed that the period of 3 (three) years available for seeking appointment of an arbitrator is an unduly long period, which goes against the spirit of the Arbitration Act. Accordingly, the Supreme Court suggested that the Parliament should consider amending the Arbitration Act to prescribe a specific period of limitation for approaching courts for appointment of arbitrators.

Brief Facts

The parties’ relationship: On March 21, 2013, the petitioner and the respondent executed various franchise agreements, whereby the Petitioner was granted a non-exclusive license to set up a training centre in Kabul, Afghanistan for imparting training in relation to content and courses developed by the Respondent.

Additional work: Later, in 2016, the Indian Council for Cultural Relations, Delhi (“ICCR”) selected the respondent for providing a short-term english training course to Afghans who had been selected for admission in Indian universities. This course was also implemented and provided by the petitioner in Kabul in 2017.

The ‘breaking point’: Thereafter, disputes arose between the parties. On March 20, 2018, the Respondent called upon the Petitioner to pay amounts outstanding on account of royalties under the franchise agreements. In its response dated March 23, 2018, the petitioner called upon the respondent to make payments for the additional course provided by the petitioner at the respondent’s behest in 2017. On March 28, 2018, the respondent stated that the reason for the payments being delayed was that it had not received the corresponding payments from the ICCR, and once again called upon the petitioner to make the royalty payments under the franchise agreements.

Legal notice: Ultimately, the petitioner issued a legal notice on August 26, 2021, calling upon the respondent to pay dues for the additional ICCR course provided by the petitioner.

Notice invoking arbitration: The parties participated in a round of mediation proceedings, which failed in 2022. After the failure of mediation, the Petitioner invoked arbitration through notice dated November 24, 2022. In this notice, the petitioner called upon the respondent to pay its outstanding dues and appointed its nominee arbitrator. Since the respondent failed to appoint its own nominee arbitrator, the Petitioner filed a petition under Section 11(6) of the Arbitration Act on April 19, 2023, before the Supreme Court.

Issues

After hearing the parties, the Supreme Court framed 2 (two) issues for consideration:

Whether the Limitation Act, 1963 (“Limitation Act”) is applicable to a petition under Section 11(6) of the Arbitration Act. If yes, whether the present petition was barred by limitation.
Whether the court may refuse to make a reference under Section 11 of the Arbitration Act where the claims were ex facie and hopelessly time barred.

Findings

Issue (1): Proceeding on the premise that the issue of limitation is of threshold importance and ought to be decided at the pre-reference stage, the Supreme Court found that:
- Since neither Section 11(6) of the Arbitration Act nor the Schedule to the Limitation Act prescribe any period of limitation for seeking appointment of arbitrators, the same would fall under Article 137 (i.e. the residual provision) of the Limitation Act, and parties would have a period of 3 (three) years from when the right to apply accrues.
- Courts are not bound to appoint arbitrators unless the mechanism prescribed under Section 11(6) (which inter alia provides for invocation of arbitration through a notice) is exhausted. However, once the procedure laid down under Section 11(6) of the Arbitration Act is exhausted by the party and the application passes all other tests of limited judicial scrutiny, the court becomes duty-bound to appoint an arbitrator. In terms of Hohfeld’s Scheme of Jural Relations, a claimant’s ‘right to apply’ for appointment of arbitrators is correlated with the court’s ‘duty to appoint’ arbitrators, both of which would arise only after the steps contemplated by Section 11(6) of the Arbitration Act are completed.
- Therefore, the limitation period for appointing an arbitrator would commence after a valid arbitration notice was issued, and the opposing party fails or refuses to make an appointment as per the procedure agreed between the parties.
- In the facts of the case, the petitioner invoked arbitration through notice dated November 24, 2022 (delivered on 29 November 2022). The respondent failed to nominate its arbitrator by December 28, 2022. The petitioner would, thus, have a period of 3 (three) years from December 28, 2022 to apply for appointment of arbitrators under Section 11(6) of the Arbitration Act.
Issue (2): At the outset, the Supreme Court observed that there are 2 (two) kinds of issues that may be raised at the stage of appointment of arbitrators under Section 11(6) of the Arbitration Act:
- First, ‘jurisdictional issues/objections’ – issues pertaining to the power and authority of the arbitrators to hear and decide a case, such as objections as to competence of arbitrators, existence or validity of the arbitration agreement, absence of parties’ consent to submit disputes to arbitration, and scope of the arbitration agreement.
- Second, ‘admissibility issues/objections’ – issues as to the nature of the claim, failure to fulfil procedural requirements or pre-arbitration steps, and issues of limitation.

Finding that though the issue of limitation is one of admissibility, the Supreme Court held that it is the duty of courts to prima facie examine and reject non-arbitrable or dead claims, so as to protect the opposing party from being drawn into a time-consuming and costly arbitration process.

After conducting an extensive analysis of various decisions,[2] the Supreme Court found that:

Mere failure to pay may not give rise to a cause of action. However, once a party asserts its claim and the opposing party denies the claim or fails to reply, the cause of action will arise after such denial or failure.
It is important to find the ‘breaking point’ at which a reasonable party would have abandoned efforts at arriving a settlement and contemplated invocation of arbitration. This breaking point would be the date on which cause of action can be said to have commenced.
In the facts of the case, the rights of the petitioner can be said to have been crystallised on March 28, 2018, when the respondent failed to make payment towards the additional ICCR course provided by the petitioner.
In ordinary circumstances, the petitioner would have a period of 3 (three) years from March 28, 2018, i.e., by March 27, 2021 for raising its claims. However, in terms of the directions passed in Suo Motu Civil Writ Petition No. 03/2020, the time period between March 15, 2020 –February 28, 2022 would stand excluded for the purposes of limitation, and the balance period of limitation available to the petitioner on March 15, 2020 would become available from March 1, 2022. Taking this into account, the period of limitation available to the Petitioner was to end on March 13, 2023.
Arbitration is deemed to have commenced when one party to the arbitration agreement serves on the other a notice requiring the appointment of an arbitrator – the issuance/ service of such notice is determinative of the commencement of the arbitral proceedings.
In the present case, the arbitration notice was received by the Respondent on November 29, 2022, well within the time period available to the Petitioner for raising its claims. Therefore, the claims cannot be said to be ex facie time barred or dead as on the date of commencement of arbitration.

JSA Analysis and Conclusion

This judgment consolidates the law on limitation applicable for seeking appointment of arbitrators. After conducting an exhaustive analysis of precedent, it reiterates that: (a) the ‘breaking point’ between the parties would be considered as the date of commencement of the cause of action for raising claims; (b) arbitral proceedings may be commenced within a period of 3 (three) years from the ‘breaking point’; (c) the date of service of the arbitration notice would be considered as the date on which arbitral proceedings commenced; and (d) where the opposing party fails or refuses to comply with the arbitration notice, another period of 3 (three) years from the date of such failure or refusal would be available to the claimant for seeking appointment of arbitrator(s).

Significantly, the Supreme Court also notes that applications for appointment of arbitrator(s) are governed by the 3 (three) year period provided by the residual provision under the Limitation Act only because of a legislative vacuum. The Supreme Court rightly observes that this period is unduly long and goes against the spirit of the Arbitration Act, one of the prime objections of which is speedy resolution of disputes. Accordingly, the Supreme Court has suggested that the Parliament should consider introducing amendments for prescribing a specific period of limitation for filing applications under Section 11 of the Arbitration Act. We feel this suggestion is quite welcome and aligned not only with the stated legislative intent of the Arbitration Act, but also the commercial interests of private parties. If the suggestion of the Supreme Court is implemented by the Parliament, a number of negligent litigants could be weeded out, and precious judicial time could be used only for adjudication of genuine interests and disputes.

This Prism has been prepared by:

Divyam Agarwal
Partner

Pallavi Kumar
Principal Associate

Aniket Aggarwal
Associate

For more details, please contact km@jsalaw.com

[1] 2024 SCC OnLine SC 215

[2] SBP & Co. v. Patel Engineering Ltd., (2005) 8 SCC 618; Geo Miller & Company Private Limited v. Chairman, Rajasthan Vidyut Nigam Utpadan Nigam Limited, (2020) 14 SCC 643; BSNL v. Nortel Networks India, (2021) 5 SCC 738; Vidya Drolia v. Durga Trading Corporation, (2021) 2 SCC 1; NTPC Ltd. v. SPML Infra Ltd., (2023) 9 SCC 385; Major (Retd.) Inder Singh Rekhi v. Delhi Development Authority, (1988) 2 SCC 338; Milkfood Ltd. v. GMC Ice Cream, (2004) 7 SCC 288.

Tags Dispute Resolution, JSA, Leading Law Firm, Leading Lawyers, Legal Updates, Parliament of India, Supreme Court

The Interplay Between International Arbitration and Insolvency Proceedings: Indian Perspective

The interplay of insolvency and arbitration laws has been a topic of jurisprudential discussion and scholarship24 for some time now. Insolvency and arbitration are fundamentally conﬂicting regimes. Their co-existence has been best described by the US Courts as a ‘conﬂict of near polar extremes’ as bankruptcy exerts an inexorable pull towards centralization of dispute resolution, while arbitration advocates a decentralised approach.

In India too, the insolvency and arbitration regimes are separately codiﬁed. While the (Indian) Arbitration & Conciliation Act, 1996 (“Arbitration Act”) has been in force for much longer, the Insolvency and Bankruptcy Code, 2016 (“IBC”) is more recent and has replaced and consolidated the insolvency laws in India.

Please refer to the below document to read the full article by Dheeraj Nair and Vishrutyi Sahni, published in SIAC India Newsletter, 4th Edition.

To read further details, click here or refer to the below document.

Tags Arbitration, IBC Code, Insolvency, JSA, Leading Law Firm, Leading Lawyers

In the absence of contrary indications, ‘venue’ is ‘seat’: Delhi High Court reiterates

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In the recent decision of Axalta Coating Systems v. Madhuban Motors[1], the Hon’ble High Court of Delhi (“Delhi HC”) while allowing a petition under Section 11 of the Arbitration and Conciliation Act, 1996 (“Arbitration Act”) reiterated that in the absence of any other contrary indicia, the ‘venue’ mentioned in the arbitration clause would amount to the ‘seat’ of the arbitral proceedings. In the facts of the case, the Delhi HC found that the provision for exclusive jurisdiction of the courts at New Delhi, coupled with the provision designating New Delhi as the venue, clearly evinced the parties’ intention to anchor the arbitral proceedings in New Delhi, which would thus be the seat of arbitration.

Brief Facts

The disputes raised by Axalta Coating Systems (“Petitioner”) arose out of a supply agreement. After a demand raised by the Petitioner under the supply agreement was rejected by Madhuban Motors (“Respondent”), the Petitioner invoked arbitration under the supply agreement. Since the parties failed to agree on the appointment of the sole arbitrator, the Petitioner approached the Delhi HC under Section 11 of the Arbitration Act.

The sole issue of contention before the Delhi HC was whether it had the requisite jurisdiction to appoint the sole arbitrator.

The Petitioner argued that the Delhi HC had jurisdiction, since (a) the supply agreement provided for exclusive jurisdiction of courts at New Delhi; and (b) the arbitration clause provided that “the venue for the arbitration proceedings shall be New Delhi, India”.

Contesting the jurisdiction of the Delhi HC, the Respondent contended that in the absence of a specifically designated ‘seat’, the competent court to exercise powers under Section 11 of the Arbitration Act would be the court in whose jurisdiction the cause of action had arisen. It was further contended that the Delhi HC would not have jurisdiction since no part of the cause of action arose in Delhi. Reliance was placed inter alia on the Hon’ble Supreme Court’s decision in Ravi Ranjan Developers v. Aditya Kumar Chatterjee[2].

In rejoinder, the Petitioner submitted that where the designation of a place as the venue had the effect of anchoring the arbitral proceedings to that place, such a venue would really be the seat of arbitration. Reliance was placed inter alia on Reliance Infrastructure v. Madhyanchal Vidyut Vitran Nigam[3] and Sikka Motors v. Hyundai Motor India[4].

Findings

The Delhi HC found that it had the requisite jurisdiction to entertain the petition under Section 11 of the Arbitration Act and appointed a sole arbitrator for resolution of disputes.

The decision of the Delhi HC was guided by the following principles:

The Hon’ble Supreme Court in BGS SGS Soma v. NHPC Ltd.[5] found that in the absence of any other contrary indicia, the ‘venue’ mentioned in an arbitration clause would amount to the ‘seat’ of arbitral proceedings.
As per the Hon’ble Supreme Court in Mankastu Impex v. Airvisual Ltd.[6], the determination of what the parties intended to be the ‘seat’ should be made “from other clauses in the agreement and the conduct of the parties”.

Applying the above principles, the Delhi HC distinguished the Hon’ble Apex Court’s decision in Ravi Ranjan Developers (supra) that the Respondent had relied upon. The Delhi HC noted that in Ravi Ranjan Developers (supra), the contract merely provided that “the sitting of the said Arbitral Tribunal shall be at Kolkata”, apart from which, there were no other contractual clauses to demonstrate the intention of the parties. The Delhi HC also noted that the case of Ravi Ranjan Developers (supra) had also been distinguished in the cases of Reliance Infrastructure (supra) and Sikka Motors (supra), which the petitioner had relied upon.

Therefore, the Delhi HC concluded that:

The decision in Ravi Ranjan Developers (supra) proceeded on its own facts. There, the arbitration agreement was not supplemented by any other provision, which was not the case in the present matter.
Since the parties had agreed to subject all disputes to the exclusive jurisdiction of courts at New Delhi, and since the parties had agreed that the venue for the arbitration will be New Delhi, the parties’ intention was for New Delhi to be designated not only as the place for some of the hearings (i.e., as the venue) but as “the place where the arbitration proceedings would be conducted as a whole”.
The language used signified that the parties intended to anchor the arbitral proceedings to New Delhi, which would be the seat of arbitration.
There was no other significant indicia in the arbitration agreement to suggest that the ‘venue’ stipulated was merely a convenient place for meeting for arbitration.
Thus, the Delhi HC had the territorial jurisdiction to entertain and decide the Section 11 petition.

JSA Analysis and Conclusion

Where the contract specifically provides for a seat of arbitration, it is settled that courts at the seat alone would exercise supervisory jurisdiction over the arbitration, and that the jurisdiction of courts in other places would be ousted, even if part or the whole of the cause of action arose outside the place designated as seat. However, where such an express provision is not agreed in the contract, the issue of determining the seat causes controversy.

The decision in Axalta Coating Systems (supra) follows a spate of decisions holding that in the absence of a specifically prescribed ‘seat’ of arbitration, the place agreed as the ‘venue’ would also be the ‘seat’, even if the contract confers exclusive jurisdiction to courts at a different place[7] (though in Axalta Coating Systems (supra), there was no conflict between the exclusive jurisdiction clause and the designation of venue). However, another line of decisions endorses the diametrically opposite view, holding that the designation of venue would be controlled and superseded by the exclusive jurisdiction clause.[8]

In view of the seemingly endless divergence of opinion on the issue, in spite of jurisprudence and scholarship on the topic being ubiquitous, it would be apposite for the Hon’ble Supreme Court to once again intervene and settle the law on the point. We feel that a clarification on what constitutes “significant contrary indicia” under the tests laid down by BGS SGS Soma (supra) would be decisive in clearing much, if not all, of the existing confusion.

This Prism has been prepared by:

Divyam Agarwal
Partner

Aniket Aggarwal
Associate

For more details, please contact km@jsalaw.com

[1] 2024:DHC:1104

[2] 2022 SCC OnLine SC 568

[3] 2023 SCC OnLine Del 4894

[4] 2022 SCC OnLine Del 1187

[5] 2020 4 SCC 234

[6] 2020 5 SCC 399

[7] Raman Deep Singh v. Crown Realtech, 2017 SCC OnLine Del 11966; Global Credit Capital v. Krrish Realty, 2018 SCC OnLine Del 9178; Cinepolis India v. Celebration City Project, 2020 SCC OnLine Del 301; Mayank Agrawal v. Jaiprakash Associates, 2021 SCC OnLine Del 4445; Reliance Infrastructure v. Madhyanchal Vidyut Vitran Nigam, 2023 SCC OnLine Del 4894; Vasudev Garg v. Embassy Commercial Projects, 2023 SCC OnLine Del 6977; Damodar Valley Corpn. v. BLA Projects, 2023 SCC OnLine Cal 3769; Balapreetham Guest House v. Mypreferred Transformation and Hospitality, 2021 SCC OnLine Mad 1126.

[8] Virgo Softech v. National Institute for Electronics, 2018 SCC OnLine Del 12722; Spentex Industries v. Louis Dreyfus Commodities, (2019) 258 DLT 138; Kush Raj Bhatia v. DLF Power, 2022 SCC OnLine Del 3309; Cravants Media v. Jharkhand State Cooperative Milk Producers Federation, 2021 SCC OnLine Del 5350; Meenakshi Nehra v. Wave Megacity, 2022 SCC OnLine Del 3744; Homevists Décor v. Connect Residuary, 2023 SCC OnLine Cal 1405; Aseem Watts v. Union of India, 2023 SCC OnLine Raj 1462.

Tags Delhi HC, Dispute Resolution, JSA, JSA Prism, Leading Law Firm, Leading Lawyers, Legal Updates

Sidharth Sethi | Panel Discussion | Future-proofing Investments: Trends in Arbitration | New Delhi

Sidharth Sethi was invited by the Indian Institute of Arbitration & Mediation (“IIAM”) for a panel discussion on “Future-proofing Investments: Trends in Arbitration”.

The other distinguished speakers on the panel were:

Hon’ble Mr. Justice Sudhanshu Dhulia, Judge, Supreme Court of India
Hon’ble Mr. Justice S.R. Bhat, Former Judge, Supreme Court of India
Mr. Avnit Singh Arora, Director, Ministry of Law and Justice, Government of India
Mr. Friedrich Rosenfeld, Partner at Hanefeld, Paris and Global Adjunct Professor of Law at NYU, Paris
Mr. Tejas Karia, Partner & Head, Arbitration at Shardul Amarchand Mangaldas, New Delhi
Mr. Anil Xavier, President, IIAM and Chairman, Asia Pacific Centre for Arbitration and Mediation (“APCAM”).

The session was moderated by Ms. Iram Majid, Director, IIAM and Executive Director, APCAM, and explored various nuances of investment treaty arbitrations.