Arbitration in the Supreme Court of India: 2011

28 February 2012

Badrinath Srinivasan

Electronic copy available at: http://ssrn.com/abstract=2199370

Supreme Court on Arbitration in 2011: Landmark Decisions Badrinath Srinivasan* The Law on Arbitrationin India is a very vibrant area, especially in the international arena. 2011 has been an interesting year in arbitration. There have been a few decisions which are worth noting. These judgements are noted in this paper. Judgements have been selected primarily on the basis of three factors (1) importance of subject matter; (2) non-existence of prior Supreme Court decisions/ clarity on existing law; (3) alteration/ clarification of the existing law. Based on these criteria, the following decisions have been selected for analysis: 1. 2. 3. 4. 5. 6. 7. State of Maharashtra v. Ark Builders (28.02.2011) Booz Allen & Hamilton v SBI Home Finance (15.04.2011) Union of India v. Tantia Constructions (18.04.2011) Videocon Industries v. Union of India (11.05.2011) State of Goa v. Praveen Enterprises (04.07.2011) Fuerst Day Lawson v. Jindal Exports (08.07.2011) SMS Tea Estates Pvt. Ltd. v.Chandmari Tea Company Pvt. Ltd. (20.07.2011) 8. Yograj Infrastructure v Ssangyong Engineering (I) (01.09.2011) & Yograj Infrastructure v. Ssangyong (II) (15.12.2011) 9. Phulchand Exports Ltd. v. OOO Patriot (12.10.2011) 10. PR Shah, Shares & Stock Broker (P) Ltd. v. BHH Securities (P) Ltd. & Ors. (14.10.2011) II State of Maharashtra v. Ark Builders In State of Maharashtra v. Ark Builders1, the Supreme Court had to decide on the following question:
* B.A. (Law) LL.B. (S.D.M. Law College, Mangalore, India), LL.M. (West Bengal National University of Juridical Sciences Kolkata, India). Email id: lawbadri@gmail.com . The author is currently working in a Public Sector Undertaking. The views stated herein are his own and do not represent the views of anyone else. The substance of this paper is available as several blog posts in the Practical AcademicBlog, available at www.practicalacademic.blogspot.in. 2

Electronic copy available at: http://ssrn.com/abstract=2199370

whether the period of limitation for making an application under Section

34 of the Arbitration and Conciliation Act, 1996 for setting aside an arbitral award is to be reckoned from the date a copy of the award is received by the objector by any means and from any source, or it would start running from the date a signed copy of the award is delivered to him by the arbitrator?
The relevant provision in the 1996 Act which lays down the period of limitation referred above is Section 34(3) which reads as follows: An application for setting aside may not be made after three months

have elapsed from the date on which the party making that application had received the arbitral award, or, if a request had been made under section 33, from the date on which that request had been disposed of by the arbitral tribunal: Provided that if the Court is satisfied that the applicant was prevented by sufficient cause from making the application within the said period of three months if may entertain the application within a further period of thirty days, but not thereafter. (emphasis added)
In Ark Builders, the Supreme Court had to interpret the expression party making that application had received the arbitral award. The question was whether receipt of award meant receipt from the tribunal or it included receipt from any other source as well, such as receipt from the other party/ parties. Relevant Facts: Disputes arose between Union of India and Ark Builders Pvt. Ltd.2 and were referred to arbitration. The award was in favour of (Ark Builders). The tribunal gave the award to Ark Builders on 20th March 2003. The tribunal did not give a copy of the award to the appellant apparently because the appellant refused to bear the costs of the arbitration.

Civil Appeal No. 2152 of 2011 (Arising out of S.L.P. (Civil) No. 14308 of 2010); MANU/SC/0158/2011; AIR 2011 SC 1374; 2011(1) Arb LR 512 (SC); also available at http://indiankanoon.org/doc/1098837/ (visited on 27 February 2012) (hereinafter Ark Builders) 2 Hereinafter Ark Builders. 3

Ark Builders submitted the award to the office of the Executive Engineer (one of the appellants) on 29 March 2003 asking for payment as per the arbitral award. A proposal was filed by the Executive Engineer on 16 April 2003 to the Chief Engineer, the Financial Advisor and the Joint Secretary for challenging the award. On 13 June 2003, Ark Builders sent a reminder to the Chief Engineer for payment on the basis of the arbitral award. Another reminder was sent to the Secretary and Special Commissioner on 8th January 2004. On 15 January 2004, that is, after almost ten months, the Executive Engineer acknowledged the receipt of letter of Ark Builders dated 29 March 2003 and the subsequent reminders but informed Ark Builders that the award would be challenged before the appropriate forum. On 17 January 2004, a messenger was sent by the Executive Engineer to the arbitrator asking for a certified copy of the award. On 19 January 2004, the appellant received a certified copy of the arbitral award. On 28 January 2004, a petition for challenging the arbitral award was made before the appropriate court. Judgement and Comment: The question before the court was whether the limitation period specified in Section 34(3) (quoted above) started running from 29 March 2003, when Ark Builders submitted the arbitral award to the Executive Engineer, or from 19 January 2004, when the appellants received a certified copy of the arbitral award. The Supreme Court, after referring to the above provisions and to the Supreme Court decision in Union of India v. Tecco Trichy Engineers and Contractors3, held that the limitation period prescribed in Section 34(3) would start running only from the date when the party received from the arbitrator a signed copy of the arbitral award. In Tecco Trichy, a similar question arose before a three judge Bench of the Supreme Court. There, the question was whether the limitation period prescribed in Section 34(3) commenced from the date on which the award was received by Railways and acknowledged by a clerk in the office of the General Manager of Southern Railways or from the date on which it was received by the Chief Engineer. The three judge Bench held that in a large
3

MANU/SC/0214/2005: AIR 2005 SC 1832: 2005(1) Arb LR 409 (SC) (hereinafter Tecco Trichy) 4

organisation such as the Railways, party defined in Section 2(1)(h)4must be read together with Section 34(3) of the 1996 Act and construed as the person directly connected with and involved in the proceedings and who is in control of the proceedings before the Arbitrator. Further, the court held that the delivery of the award is not a mere matter of procedure but has substantive consequences such as automatic termination of the arbitral mandate, commencement of limitation periods, etc. In a government organisation like Railways, the court opined, a decision is not taken unless the papers have reached the person concerned and then an approval, if required, of the competent authority or official above has been obtained. All this could not have taken place unless the Chief Engineer had received the copy of the award when only the delivery of the award within the meaning of sub-Section (5) of Section 31 shall be deemed to have taken place. Therefore, the court concluded that delivery of award as contemplated in Section 31(5) was concluded only on the receipt by the Chief Engineer of the award. In view of the decision of the Supreme Court in Tecco Trichy, the court held that since the Appellants received the certified copy of the award,that is, 19 January 2004, the three months period prescribed in Section 34(3) would start running from that date. Relying on Section 31(5) of the 1996 Act, which reads: After the arbitral award is made, a signed copy shall be delivered to each party,the court held that where the law prescribed that a copy of the order/award was to be communicated, delivered, dispatched, forwarded, rendered or sent to the parties concerned in a particular way and where it also set a period of limitation for challenging the order/award in question by the aggrieved party, then the period of limitation could only commence only from the date on which the order/award was received by the party concerned in the manner prescribed by the law. Booz Allen & Hamilton v SBI Home Finance The question before the Supreme Court in Booz Allen & Hamilton Inc. v SBI Home Finance5 was the arbitrability of a suit for mortgage. The judgement is also important because the court also comprehensively dealt with the concept of arbitrability in action.
Section 2(1)(h) of the 1996 Act reads: "party" means a party to an arbitration agreement. Civil Appeal No. 5440/ 2002: MANU/SC/0533/2011: AIR 2011 SC 2507: 2011(2) Arb LR 155 (SC) 5
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Facts: 03.12.94 Capstone Investments Pvt Ltd (Capstone) and Real Value Appliances Pvt Ltd (Real) were owners of two flats (9A & 9B). Capstone and Real borrowed loans from SBI Home Finance Ltd (SBI) under two loan agreements with 9A and 9B as security. Capstone and Real entered into separate Leave and Licence Agreements (LLA) with Booz Allen & Hamilton (Booz), the term being from 01.09.96 to 31.08.99. SBI also signed on each of the two such agreements as aa confirming party. Also, each of the Capstone and Real Value signed the others Leave and Licence Agreement. Also, a Tripartite Deposit Agreement (TDA) was entered into between Real and Capstone jointly as the first party with Booz and SBI being the other two parties. According to the TDA, Booz paid Rs. 6.5 crores as deposit to Real and Capstone (jointly) in furtherance of conditions in the TDA and the LLA. Further, the TDA provided that the the two LLA and the TDA formed a single transaction. Further, according to Para 5A of the TDA, notwithstanding repayment of dues by Sapstone, 9A (owned by Capstone) would be available as security for the remaining dues of Real and for that purpose, Capstone would be the guarantor for the dues of Real. The clause also stated that SBI had no objection to Booz occupying the flat as long as Capstone and Real (if they fail, Booz) paid its dues. July 97 Real made a reference to Board of Industrial and Financial Reconstruction (BIFR) under the Sick Industrial Companies (Special Provisions) Act, 1985. Pursuant to the reference, the Liquidator took over flat 9B (owned by Real. Booz informed Capstone and Real that it was not interested in exercising the option to renew the licences on the expiry of the original term [There was such an option in the LLAs] and asked the Licensors to return the Rs. 6.5 crore deposit.

05.04.96

04.08.99

26.08.99

A further letter was written to Capstone and Real stating that unless the Deposit was made, Booz would continue to occupy the flats.

Procedural History: On 28.10.99, SBI filed a suit in the Bombay High Court against Capstone, Real and Booz in regard to 9A since the loan amount due by Real was not repaid. Against Booz, SBI asked for an order to vacate 9A and hand over the possession to SBI. On 25.11.99, the High Court of Bombay, through an interim order pursuant to a notice of motion taken out by SBI, let Booz continue to occupy the flat. On 15.12.99, Booz filed a reply to the notice of motion wherein it contended that SBI had a contractual obligation towards Booz as SBI had agreed for the continuance of Boozs occupation till refund of the deposit. On 10.10.01, Booz filed a notice of motion wherein it was prayed that the matter had to be referred to arbitration agreement as per Clause 16 of the DA and that the suit has to be dismissed. SBI resisted the application. On 07.03.02, the High Court dismissed the application6 on the following grounds: a) Reference of the dispute between the parties was not contemplated by the said arbitration clause. b) The detailed reply filed by Booz (dated 15.12.99) in regard to the notice of motion for interim relief amounted to the first statement on the substance of the dispute. As per Section 8 of the Act, a party is deemed to have waived its right to ask for reference of the matter to arbitration under Section 8 if an application for reference is made after the submission of first statement on the substance of the dispute c) Application for reference under Section 8 was filed only after 20 months from filing of the reply dated 15.12.99. An appeal by special leave was filed to the Supreme Court. The Supreme Court granted leave on 28.08.02. Decision of the Supreme Court:

Judgement and Order of the High Court of Bombay dated 07.03.2002 in in Notice of Motion No. 2476 of 2001 in Suit No. 6397 of 1999. 7

The Supreme Court framed four issues arose in the case: (i) Whether the subject matter of the suit fell within the scope of the

arbitration agreement contained in Clause 16 of the deposit agreement? (ii) Whether the Appellant had submitted his first statement on the substance of the dispute before filing the application under Section 8 of the Act? (iii) Whether the application under Section 8 was liable to be rejected as it was filed nearly 20 months after entering appearance in the suit? (iv) Whether the subject matter of the suit is 'arbitrable', that is capable of being adjudicated by a private forum (arbitral tribunal); and whether the High Court ought to have referred the parties to the suit to arbitration under Section 8 of the Act?
The decision of the Supreme Court in each of the four issues is discussed below: Issue 1: Whether the subject matter was within the scope of the arbitration ageement? Clause 16 of the Deposit Agreement read: In case of any dispute with respect to creation and enforcement of

charge over the said shares and the said Flats and realization of sales proceeds there from, application of sales proceeds towards discharge of liability of the Parties of the First Part to the parties of the Second Part and exercise of the right of the Party of the Second Part to continue to occupy the said Flats until entire dues as recorded in Clause 9 and 10 hereinabove are realized by the party of the Second Part, shall be referred to an Arbitrator who shall be retired Judge of Mumbai High Court and if no such Judge is ready and willing to enter upon the reference, any Senior Counsel practicing in Mumbai High Court shall be appointed as the Sole Arbitrator. The Arbitrator will be required to cite reasons for giving the award. The arbitration proceedings shall be governed by the Arbitration and Conciliation Ordinance 1996 or the enactment, re-enactment or amendment thereof. The arbitration proceedings shall be held at Mumbai.
The Supreme Court held that the nature of the suit filed by SBI against the others was for the enforcement of mortgage/ charge and for ordering Booz

to vacate the mortgaged property. These issues were, for the court, covered by the arbitration clause (dispute pertaining to creation and

enforcement of charge over the said shares and the said Flats, exercise of the right of the Party of the Second Part [Booz] to continue to occupy the said Flats until entire dues as recorded). These were therefore within the
purview of the arbitration clause. Issue 2: Whether Booz had submitted its first statement on the substance of the dispute before filing the application under Section 8 of the Act? This issue arose in the first place because Section 8 grants a party to the arbitration agreement the right to have the dispute referred to sarbitration by the court. However, such right is available only before filing the applicants first statement on the substance of the dispute. In this case, it was contended by SBI that by filing the detailed counter to the application for temporary injunction, Booz lost the right to apply to have the dispute arbitrated. The test is even a statement, application or affidavit, filed by a defendant prior the written statement could be construed as a statement on the substance of the dispute if by filing such statement/application/affidavit, the Defendant shows his intention to submit himself to the jurisdiction of the court and waive his right to seek reference to arbitration. The court, relying on Rashtriya Ispat Nigam Ltd. v Verma Transport Company7, held that merely filing an application for temporary injunction or a reply to the same would not amount to submission on the substance of the issue. Further, the reply affidavit stated that it was being filed for the limited purpose of opposing the interim relief. Issue 3: Whether the application for referring the dispute arbitration could be rejected as it was filed nearly 20 months? to

The court held that a lapse of 20 months for filing the application to refer the dispute to arbitration under Section 8 after entering into appearance did not amount to a waiver of the right to arbitrate. The court offered the following reasons:

(2006) 7 SCC 275 9

Section 8 does not prescribe a time limit for filing the application When applications for temporary relief are filed, it takes time to be decided by the court, and can involve appeal against the courts order as well. In this case, there were attempts to settle the disputes and when these attempts ended in failure Booz had filed an application under Section 8.

Therefore, the court held that a delay of 20 months did not amount to waiver of the right to have the matter arbitrated. Issue 4: Whether the subject matter of the suit is 'arbitrable'? The discussion in the judgement on arbitrability is summarized herebelow: There are three different conceptions of Arbitrability: (i) disputes capable of being adjudicated through arbitration, (ii) disputes covered by the arbitration agreement, and (iii) disputes that parties have referred to arbitration. In principle, any dispute that can be decided by a civil court can be resolved through arbitration. The legislature has, nevertheless, reserved certain disputes to be decided exclusively by public fora. Apart from those reserved by the legislature, there are certain disputes the resolution of which can, by necessary implication, be only by public fora. Some examples according to the court are: (i) disputes relating to rights and liabilities which give rise to or arise out of criminal offences; (ii) matrimonial disputes relating to divorce, judicial separation, restitution of conjugal rights, child custody; (iii) guardianship matters; (iv) insolvency and winding up matters; (v) testamentary matters (grant of probate, letters of administration and succession certificate); and (vi) eviction or tenancy matters governed by special statutes where the tenant enjoys statutory protection against eviction and only the specified courts are conferred jurisdiction to grant eviction or decide the disputes.

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The cases above are actions in rem as opposed to actions in personam. Actions pertaining to rights which are exercisable against the world at large (rights in rem) are actions in rem. Actions in personam are actions pertaining to rights and interests of the parties between themselves. In the former, there is a determination of right not only as between the parties to the action but against the world itself (that is, any other person claiming an interest in the subject matter at any point of time). Consequently, a judgement in an action in personam is a judgement against a person while in an action in rem is a judgement that determines the status or the condition of the property. The general rule is that all actions in rem are to be pursued in a court of law while other actions may be brought before a private forum. The exception is the case where the action pertains to rights (in the nature of rights in personam) subordinate to a right in rem. An agreement to sell or an agreement to mortgage does not involve a transfer of a right in rem but is in the nature of a right in personam. Therefore disputes pertaining to such agreements are arbitrable. Arbitrability of Suits for Mortgage: On the other hand, a suit for mortgage is an action in rem for the enforcement of a right in rem. Therefore, such suits would have to be necessarily decided by courts and cannot be adjudicated in private fora. The scheme for adjudication of mortgage suits is contained in Order XXXIV of the Code of Civil Procedure, 1908. It prescribes the procedure for adjudication of mortgage suits, rights of mortgagees and mortgagors, thereby implying that such disputes are to be adjudicated by civil courts alone. For instance, Rule 1 of the said Order provides that all persons having an interest in the mortgage security shall be joined as a party to the suit relating to the mortgage. The rationale for this provision is to eliminate chances of multiplicity of proceedings. Similarly, in the said proceedings, the court safeguards not only the interests of the mortgagor and the mortgage but also of other persons having an interest such as puisne/ mesne mortgagees, persons entitled to the equity of redemption, auction purchasers etc.A decree for sale of mortgaged property is akin to an order of winding up-it requires the court to protect the interests of persons other than the suit parties. Therefore, a suit for enforcement of mortgage is not arbitrable. However, there might be some questions pertaining to a mortgage suit such as the amount due to the morgtagee etc that a tribunal could

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decide. However, the issues in a mortgage suit cannot be divided and decided by two fora.8 Consequently, the court upheld the decision to dismiss the application under Section 8 for the reason of non-arbitrability if the subject matter but not for reasons provided by the lower courts.

Sukanya Holdings (P) Ltd. v. Jayesh H. Pandya (2003) 5 SCC 531

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Union of India v. Tantia Constructions In Union of India v. Tantia Constructions Ltd.9, the issuebefore the court was the scope of interference of the High Court under Article 226 in contractual matters. Tantia Constructions had approached the High Court for the issuance of a writ of Certiorari for quashing the order of the Deputy Chief Engineer calling upon it to execute the extra work and for a writ of Mandamus directing the Railways to let it complete the reduced quantity of work under the contract and, thereafter, to make payment for the contract work which it had executed. Both the High Court and the Supreme Court found the decision of the Railways to compel Tantia Constructions to perform work beyond the scope of the contract to be unreasonable. The Supreme Court held: "[I]t is now well-established that an alternative remedy is not an absolute

bar to the invocation of the writ jurisdiction of the High Court or the Supreme Court and that without exhausting such alternative remedy, a writ petition would not be maintainable. The various decisions cited by Mr. Chakraborty would clearly indicate that the constitutional powers vested in the High Court or the Supreme Court cannot be fettered by any alternative remedy available to the authorities. Injustice, whenever and wherever it takes place, has to be struck down as an anathema to the rule of law and the provisions of the Constitution. We endorse the view of the High 28 Court that notwithstanding the provisions relating to the Arbitration Clause contained in the agreement, the High Court was fully within its competence to entertain and dispose of the Writ Petition filed on behalf of the Respondent Company."
Consequently, the Supreme Court held that the High Court was right in allowing the writ petition.

Special Leave Petition (C) No. 18914 of 2010; MANU/SC/0436/2011: 2011(2) Arb LR 115 (SC) 13

Videocon Industries v. Union of India Videocon Industries Ltd. v. Union of India10 is significant for its discussion on two issues: (a) Implied exclusion of Part I of the 1996 Act, and (b) Implications of holding arbitral proceedings elsewhere than the seat. Facts: The dispute arose out of provisions of a Production Sharing Contract (PSC)11signed between the Government of India (UoI) on the one hand and a consortium consisting of four companies on the other. The relevant provisions of the PSC dated 28.10.1994 are as follows: 33.1 Indian Law to Govern

Subject to the provisions of Article 34.12, this Contract shall be governed and interpreted in accordance with the laws of India. 33.2 Laws of India Not to be Contravened Subject to Article 17.1 nothing in this Contract shall entitle the Contractor to exercise the rights, privileges and powers conferred upon it by this Contract in a manner which will contravene the laws of India. 34.3 Unresolved Disputes Subject to the provisions of this Contract, the Parties agree that any matter, unresolved dispute, difference or claim which cannot be agreed or settled amicably within twenty one (21) days may be submitted to a sole expert (where Article 34.2 applies) or otherwise to an arbitral tribunal for final decision as hereinafter provided.
34.12. Venue and Law of Arbitration Agreement

The venue of sole expert, conciliation or arbitration proceedings pursuant to this Article, unless the Parties otherwise agree, shall be Kuala Lumpur, Malaysia, and shall be conducted in the English language. Insofar as practicable, the Parties shall continue to implement the terms of this Contract notwithstanding the initiation of arbitral proceedings and any pending claim or dispute. Notwithstanding the provisions of Article 33.1,
10 11

MANU/SC/0598/2011: AIR 2011 SC 2040 Hereinafter PSC. 14

the arbitration agreement contained in this Article 34 shall be governed by the laws of England.
35.2 Amendment

This Contract shall not be amended, modified, varied or supplemented in any respect except by an instrument in writing signed by all the Parties, which shall state the date upon which the amendment or modification shall become effective.
In the late 1990s, the Government of India felt that there was a need to accelerate the pace of hydrocarbon exploration and production and sought to liberalize the petroleum sector. After holding consultations with the State Governments on the terms of the Exploration Licence, the Ministry of Petroleum and Natural Gas held the first NELP bidding round in 1999. So far contracts under eight rounds of NELP have been awarded. The PSC in the case was a Pre-NELP PSC. As regards dispute resolutions provisions, NELP PSCs are not as liberal as some of the Pre-NELP PSCs are. Non-Indian juridical seats have not been permitted under the NELP PSCs. For instance, the Model PSC for the NELP IX round below does not contemplate a foreign seat: 32.1 This Contract shall be governed and interpreted in accordance with

the laws of India. 32.2 Nothing in this Contract shall entitle the Contractor to exercise the rights, privileges and powers conferred upon it by this Contract in a manner which will contravene the laws of India. 33.9 The arbitration agreement contained in this Article 33 shall be governed by the Arbitration and Conciliation Act, 1996 (Arbitration Act). Arbitration proceedings shall be conducted in accordance with the rules for arbitration provided in Arbitration Act 33.12 The venue of the sole expert, conciliation or arbitration proceedings pursuant to this Article, unless the Parties agree otherwise, shall be New Delhi, India and shall be conducted in the English language. Insofar as practicable, the Parties shall continue to implement the terms of this Contract notwithstanding the initiation of proceedings before a sole expert, conciliator or arbitral tribunal and any pending claim or dispute.
Most of the PSCs in other countries do not allow foreign arbitration seats.

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The Dispute: Provisions pertaining to cost recovery is one of the most controversial provisions in PSCs and disputes have arisen even in India on numerous occasions pertaining to the same.12In this case, disputes arose between the Government and the Contractor (consisting of a consortium of four companies) on cost recovery. In furtherance of the dispute resolution provisions, the arbitral tribunal was constituted and the first hearing was to take place in Kuala Lumpur in March 2003. The March hearing did no take place because of the SARS epidemic. Thetribunal shifted the venue of the proceedings to Amsterdam (the Netherlands) and London (UK). In October 2003, the Tribunal passed a consent order which read: "By consent of parties, seat of the arbitration is shifted to London. Subsequently, all the proceedings pertaining to the dispute were held in London. A partial award was passed by the tribunal in March 2005. Union of India challenged the petition in the High Court of Malaysia. At the same time, Union of India also sought directions under Section 9 of the 1996 Act from the Delhi High Court to stay the arbitral proceedings. Videocon objected to the maintainability of the petition. Arguments on Non-maintainability of the Petition: Before the Delhi High Court, Videocon argued that by choosing English Law as the Law of the Arbitration Agreement, the parties have excluded the applicability of Part I of the 1996 Act andconsequently the Delhi High Court did not have jurisdiction. Apart from the argument that Part I was applicable, UoIs argument was that English Law governed the substantive aspects of the arbitration agreement while the procedural aspects of the arbitration agreement were governed by the curial law, which was the law of the seat of arbitration. In the dispute, UoI contended that since the seat of arbitration was Kuala Lumpur, the Malaysian Laws on arbitration governed the conduct of the arbitral proceedings. Against this, Videocon contended that English Law was the curial law and not Malaysian Law in view of the agreement of the parties to shift the seat of arbitration to London. Decision of the Delhi High Court:

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See, for example, Niko Resources Ltd. v Union of India 16

The Delhi High Court held that the petition was special case and that since the governing procedural law is yet to be determined, the question as to the seat of arbitration is to be determined by a court which has the closest connection to the parties or the dispute. Accordingly, the court held that since Indian courts were most closely connected to the dispute, which arose out of an Indian PSC, the Delhi High Court would have jurisdiction. The court stated: In the absence of any indication to the contrary, the governing law of

the contract or the proper law (in the words of Dicey) of the contract being Indian Law, it is that system of law which must necessarily govern matters concerning arbitration, although in-certain respects the law of the place of arbitration may have its relevance in regard to procedural matters.
The High Court also reasoned that the dispute between the parties pertaining to the seat of arbitration had resulted in a stalemate as the annulment proceedings in Kuala Lumpur were in a standstill due to issues of jurisdiction. Further, UoI stated that for the English courts to assume jurisdiction, the place of arbitration was a relevant factor. The High Court apprehended that in such a situation, the arbitration would become a stalemate and such a situation would be an affront to the spirit of Section 9. Comment: The Arbitration Agreement: Article 33.1 of the PSC provided that the Contract was to be governed by the laws of India. Now, when there is such a clause in the contract, it implies that the choice of the Substantive Law of Contract was Indian Law. Therefore, the issues pertaining to formation, validity, performance, interpretation etc were to be governed by the Indian Contract Law. Article 33.1 also uses the expression subject to Article 34.12. Relevant portion of Article 34.12 provides: Notwithstanding the

provisions of Article 33.1, the arbitration agreement contained in this Article 34 shall be governed by the laws of England. Thus, according to the
PSC, the arbitration agreement would be governed by English Law. But what is the precise difference between these two? A single agreement (the arbitration clause is a part of the PSC) is governed by laws of two different jurisdictions. This situation arises due to an important theoretical

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construct in international arbitration known as the severability of the arbitration agreement. The severability doctrine provides that an arbitration clause in the agreement is severable from the main contract. This independence leads to two crucial consequences (among many others)relevant to the current context: a) the validity of the arbitration clause does not depend merely on the validity of the main agreement; b) parties could choose a law for the arbitration clause that is different from that of the main contract. In general, however, authorities agree that there is a presumption13 that the substantive law of the arbitration clause would be the same as that of the main agreement which contains the arbitration clause, unless there is an agreement to the contrary. Under the PSC in Videocon, issues pertaining to formation, validity, interpretation, performance etc of the arbitration agreement were to be governed by English Law. Hypothetically, if English Law provides for a mandatory rule that the arbitral tribunal should consist of odd number of arbitrators and an arbitration agreement whose governing law is English law provides for two arbitrators, such an agreement would be void as per the (hypothetical) English rule even if the main contract containing the said arbitration clause is governed by a jurisdiction which does not invalidate such a clause. This option for the parties to choose a law for the arbitration agreement distinct from the main contract exists possibly because parties could enter into submission agreements, i.e., an independent agreement to arbitrate, and choose a separate governing law for it. For instance, parties could enter into a contract with Indian laws as the substantive law but could agree upon an independent agreement to arbitrate disputes arising out of the Indian contract with English Law as the governing law. Hence, it would be superfluous to deny a choice to the parties to have their arbitration clause contained governed by a law different from the substantive law of the main contract.

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The term presumption is perhaps not an apt description of the nature of the provision. It would be more precise to call it a default rule. 18

Article 34.12 provides that the venue of the arbitral proceedings shall be Kuala Lumpur. In short, the implication of this choice, as far as international arbitration is concerned, is that the parties have agreed that the legal validity of the arbitration proceedings and the outcome of the arbitration proceedings would be recognized by the Malaysian Laws. One of the consequences of this is that if a party to such proceedings wants to challenge the legal validity of the arbitration or its outcome, the challenge is to be in Malaysia. Therefore, the arbitral tribunal is to apply three different laws to the proceedings (1) the substantive law of contract- Indian Laws, (2) substantive law of arbitration agreement- English Laws, and (3) the Lex arbitri or the governing law of arbitration-Malaysian laws. Redfern & Hunter differentiate between the law governing the parties capacity to enter into an arbitration agreement and the law governing the arbitration agreement and the performance of that agreement. It is not necessary to go into this distinction for the simple reason that the distinction is more theoretical than practical. Consequences of the Agreement of the Parties to Shift the Seat of Arbitration: It was previously noted that the chain of events as described in the Delhi High Court judgement is significant:the original seat of arbitration was Kuala Lumpur. However, the arbitral tribunal decided to hold the arbitral proceedings in Amsterdam and London. What is the consequence of holding the proceedings in Amsterdam or in London as far as the seat of arbitration is concerned? The answer is it depends on the law of the seat. For instance, if the parties to an agreement have agreed on an Indian seat but hold the arbitration proceedings in, say, London, there is no implied agreement to have the seat in London. Section 20(3) of the 1996 Act provides: Notwithstanding [the choice of the place of arbitration or the

determination by the tribunal of the place of arbitration], the arbitral tribunal may, unless otherwise agreed by the parties, meet at any place it considers appropriate for consultation among its members, for hearing witnesses, experts or the parties, or for inspection of documents, goods, or other property.

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If the Malaysian laws do not prohibit conducting hearings outside Malaysia, the seat of arbitration would be Malaysia even if the hearings are held elsewhere for convenience. In fact, Section 22(3) of the Malaysian Arbitration Act, 2005 (which came into force after the arbitration in this case commenced) contains a provision similar to Section 20(3) of the Indian Act.14 In Videocon, due to SARS, the tribunal conducted its proceedings in Amsterdam and London. Even then, the seat of arbitration was Kuala Lumpur and the Malaysian Law was the lex arbitri. Subsequently, the parties expressly agreed to shift the arbitration to London. This agreement cannot be construed as an agreement merely to hold arbitration proceedings outside the seat of arbitration (Malaysia) for convenience for two reasons: (1) there was no necessity for such an agreement because the tribunal had been doing the same by holding proceedings in Amsterdam and London even before the agreement was reached, (2) the agreement uses the term seat of arbitration. The seat of arbitration specifically connotes the jurisdiction which would grant the legal touch to the arbitration proceedings. These were parties that had sophisticated legal counsel (for obvious reasons- the agreement was reached during the arbitration proceedings and was recorded by the tribunal). Therefore, the usage of the term seat of arbitration could not have been in reference to any thing other than the jurisdiction which grants the legal touch to the arbitration. The consequence of this agreement (in the absence of more information on the agreement between the parties) was a transfer of the seat of arbitration from Kuala Lumpur to London and not merely an agreement to hold proceedings outside the seat for convenience reasons. Rarely does a transfer of seat take place. But if it happens, the question is what happens to the proceedings that were held prior to the shifting of the seat? Another issue is what if a party against whom an award is passed after the transfer goes to the original seat and challenges the award (as it happened in Videocon?.15

14

Since the Malaysian Arbitration Act, 1952 was based on the English Arbitration Act, 1950, and since the latter allowed hearings to be conducted outside the seat of arbitration, it is assumed that the Malaysian Laws permitted hearings to be conducted outside the seat. 15 See, GARY BORN, INTERNATIONAL COMMERCIAL ARBITRATION 1695-1696 (VOLUME II) (2009); 20

The Dispute as to the Seat: It is surprising why the Delhi High Court had to deal with the issue as to the seat of arbitration in the proceedings under Section 9 in the first place and hold that the governing procedural law is yet to be determined. Videocons argument was that in view of London choice of seat of the parties, Part I was impliedly excluded. UoI contended that Malaysia was the seat of arbitration. The question as to whether London or Malaysia was the seat of arbitration was immaterial in deciding whether Part I was excluded impliedly because the argument was that the choice of a foreign seat had impliedly excluded applicability of Part I. So the court had to simply decide whether the choice of a foreign seat, of English Law as the law of arbitration agreement and of Indian law as the substantive law of contract excluded the applicability of Part I. Existence of a Stalemate: The Delhi High Courts reasoning for holding the Section 9 petition to be valid was the peculiar circumstances in the case that arose out of the dispute between the parties pertaining to the seat of arbitration. In the absence of access to entire records, and based on the facts as stated in the Supreme Courts decision, this reasoning sounds unconvincing. If there was a dispute as to the seat of arbitration, the parties could have approached the arbitral tribunal first. In international arbitration, in the absence of any agreement by the parties, seat of arbitration is often determined by the arbitral tribunal itself. Even if the parties could not have gone to the tribunal, they could have approached to the English courts to decide the question. The Delhi High Courts reasoning on why the petitioner was right in not approaching the English courts is not convincing: The petitioner has already expressed its dissidence about the English

Court deciding the question of seat of arbitration for the reason that for the English Court to assume jurisdiction, it is the place of arbitration which is the relevant factor. In such a situation, of the Indian Court does not adjudicate upon the present petition, the arbitral proceedings between the parties will invariably end in a stalemate.
In simple, the court held that the petitioner did not go to the English Courts because the petitioner did not consider London to be the seat of arbitration. The court simply repeated the argument of UoI in different words but did not decided on the correctness of the argument. The

21

existence of a stalemate was dependent on whether UoI was right in arguing that London was not the seat of arbitration. This decision was never made by the High Court. Therefore, the reason for granting the prayer asked by UoI was not in accordance with the well-established principles of international arbitration. Arguments of the Parties before For Videocon: Summary of Videocon's arguments are: the Supreme Court:

Delhi High Court did not have jurisdiction to pass an order under Section 9 to stay the arbitral proceedings because such relief was beyond the scope of Section 9, especially in view of Section 5. Even if such relief could be granted under Section 9, the Delhi High Court did not have jurisdiction as Part I was impliedly excluded by the parties as the lex arbitri was English Laws. Having agreed for the shifting of seat, UoI is estopped from arguing that the seat of arbitration was Kuala Lumpur. If UoI was aggrieved by the partial award, it could have applied to the English courts to annul the said award.

For UoI: As per the arbitration agreement, Kuala Lumpur was the seat of arbitration. Once Kuala Lumpur was the seat of arbitration, the seat could not have been changed except by amending the PSC as per Article 35.2. Arbitral tribunal was not entitled to determine the seat of arbitration and the record by the tribunal of proceedings to that effect. The PSC was between ONGC Ltd., Videocon Petroleum, Command Petroleum and Ravva Oil and therefore the venue of arbitration cannot be treated to have been amended on the basis of the agreement between the two parties to the arbitration agreement. Any changes in the PSC required concurrence by all the parties. Every written agreement was to be in the name of the President of India and shifting the seat to London did not change the juridical seat of arbitration. Therefore, London was the seat of arbitration.

Decision of the Supreme Court:

22

According to the Supreme Court, two questions arose for its consideration 1. Whether Kuala Lumpur was the designated seat of arbitration? 2. Whether the Delhi High Court could entertain the petition filed by UoI under Section 9? Decision on Kuala Lumpur as the Seat of Arbitration: The Supreme Court's reasoning and decision on this question is summarized below: The PSC was entered into between five parties with Kuala Lumpur being the seat of arbitration. If the parties were to amend the PSC, they could do so only by amending the PSC as per Article 35.2 through a written instrument. Therefore, there was no transfer of seat but of shifting of venues to different places for convenience. There is no provision in the Arbitration and Conciliation Act by which seat could be changed by the arbitral tribunal. The distinction between the seat and holding hearings in venues other than the seat has, however, been recognized in international arbitration. Even in Dozco India Ltd. V. Doosan Infracore16, the Supreme Court recognized the difference between juridical seat of arbitration and hearings taking place in a jurisdiction outside the seat. Therefore, there was no agreement to transfer the seat of arbitration to London. The agreement was merely an agreement to hold proceedings outside the seat.

Decision on Implied Excludability of Part I: On the second question, the Court stated that the three judge Bench of the Supreme Court in Bhatia International v. Bulk Trading SA17 held that in respect of arbitrations taking place outside India even non-derogable provisions of Part I could be excluded impliedly and that the ratio of Bhatia International was applied in Venture Global Engineering v. Satyam.18 Further, the court held that in Hardy Oil and Gas v. Union of India19, the Gujarat High Court had held that Part I was since the Governing Law of arbitration was English Law, Indian courts had no jurisdiction. According to the court, the Gujarat High Court in Hardy Oil and Gas correctly applied the ratio of Bhatia International.
16 17 18 19

MANU/SC/0812/2010 : 2010 (9) UJ 4521 (SC) MANU/SC/0185/2002 : (2002) 4 SCC 105 MANU/SC/0333/2008 : (2008) 4 SCC 190 MANU/GJ/0392/2005 : (2006) 1 GLR 658 23

On the basis of the above reasoning the court held that the choice of substantive law of the arbitration agreement as English law implied that Parties had agreed to exclude provisions of Part I. Therefore, the court concluded that the petition under Section 9 was not maintainable. Comment: Itwas previously noted here that it was not necessary for the Delhi High Court to rely on the uncertainty of the seat of arbitration for interfering in the arbitral proceedings under Section 9. We are unsure why the Supreme Court had to decide the issue of the seat of arbitration, in the first place. Perhaps, the parties had raised arguments regarding the same. In any case, we consider it unnecessary for the court to have done so as the issue before the Delhi High Court was whether Part I of the Arbitration and Conciliation Act, 1996 (Act) was excluded in view of the arbitral clause. Therefore, the issue as to the seat subsequent to the analysis on implied exclusion of Part I will be addressed first. Implied Exclusion of Part I: The law as it stood at the time of the judgement in Videocon was by merely choosing foreign laws, Part I could be impliedly excluded; but unless it is excluded, Part I would apply even to arbitrations held outside India. This principle, whose source is Bhatia International, is fairly well established. But what is not well-established is what are the choices to be made that would lead to exclusion of Part I. The contours of implied excludability are a matter of considerable confusion. The Supreme Court was of the opinion that Hardy Oil and Gas was a case similar to Videocon. In Hardy Oil and Gas, the substantive law of the contract was Indian Law, the law governing arbitration was English Law, the arbitration was to be conducted as per Rules of the London Court of International Arbitration and the venue was London. The Gujarat High Court held that Part I was impliedly excluded because the parties had expressly chosen English Law to be the law governing arbitration. It may also be noted that the facts in Hardy Oil and Gas are virtually similar to the present case because as per the arbitration clause in the case, the law of the arbitration agreement was English Law. The relevant clause in Hardy Oil and Gasread: "9.5 Governing Law and Arbitration

24

1. This Agreement (except for the provisions of Clause 9.5.4 relating to arbitration) shall be governed by and construed in accordance with the substantive laws of India. 2. Any dispute or difference of whatever nature arising under, out of, or in connection with this Agreement, including any question regarding its existence, validity or termination... shall at the instance of any Party be referred to and finally resolved by Arbitration under the rules of the London Court of International Arbitration (SLCIA), which Rules (Rules) are deemed to be incorporated by reference into this clause. ... 4. The place of arbitration shall be London and the language of arbitration shall be English. The law governing arbitration will be the English law. 5. Any decision or award of an arbitral tribunal shall be final and binding on the Parties."
On the face of it, it could be argued that Indian Law was the substantive law of arbitration agreement. But on a close readingof Article 9.5.1,it could be argued that apart from the governing law of arbitration being English Law, the governing law of arbitration agreement was also English Law because of the bracketed portions of 9.5.1. It must however be noted that in Hardy Oil and Gas, the Gujarat High Court did not go into the question of whether a choice of a foreign law as the substantive law of the arbitration agreement impliedly excluded Part I. At least the decision of the Gujarat High Court discloses no analysis to that effect. Therefore, the ratio of Hardy Oil and Gas is that a choice of a foreign arbitral seat acts as a an exclusive jurisdiction clause and Part I is deemed to be impliedly excluded for the same. This is confirmed by the Supreme Courts decision in Videocon, relevant portion of which is quoted below: In our opinion, the learned Single Judge of Gujarat High Court had

rightly followed the conclusion recorded [in Bhatia International] and held that the District Court, Vadodara did not have jurisdiction to entertain the petition filed under Section 9 of the Act because the parties had agreed that the law governing arbitration will be English Law.
(emphasis supplied)

25

However, the reasoning of the Supreme Court in Videocon was that the choice of English Law as the law of arbitration agreement meant that Part I was excluded. The court held: In the present case also, the parties had agreed that notwithstanding

Article 33.1, the arbitration agreement contained in Article 34 shall be governed by laws of England. This necessarily implies that the parties had agreed to exclude the provisions of Part I of the Act. As a corollary to the above conclusion, we hold that the Delhi High Court did not have the jurisdiction to entertain the petition filed by the respondents under Section 9 of the Act and the mere fact that the appellant had earlier filed similar petitions was not sufficient to clothe that High Court with the jurisdiction to entertain the petition filed by the respondents.
(emphasis supplied) As is apparent from the above two quotes, in Hardy Oil and Gas, the Gujarat High Court held that a mere choice of foreign arbitration law as the governing law meant that Part I was excluded. In Videocon the arbitration agreement was an English Arbitration Agreement. The court held that because there the substantive law of arbitration agreement was English Law, it was implied that Part I was excluded. The court did not explain why. One plausible explanation would be that the validity and the interpretation of the arbitration agreement in Videocon was to be decided in accordance with English Law. As per English Law, an agreement to have a matter arbitrated in a seat operates similar to an exclusive jurisdiction clause and no court in another country would have jurisdiction over the arbitration proceedings20 unless the parties have agreed otherwise. Therefore, the choice of English Law as the substantive law of arbitration agreement meant that no other country had jurisdiction over the matter. However, the question would be whether English Law prohibits a party from seeking interim relief in any other jurisdiction. Probably this should have been the methodology of analysis by the Supreme Court.Even so, shouldnt the question of whether the English Arbitration Agreement excluded the applicability of the Indian Act have been a question of fact (being a question as to foreign law)?

20

Shashoua v. Sharma [2009] EWHC 957 (Comm) 26

In any case, the law as it stands today post-Videocon is that if the arbitration agreement is governed by a foreign law, if the seat of arbitration is foreign, Part I would be impliedly excluded even if the substantive law of arbitration the main agreement was Indian Law. This decision does not deal with the law pertaining to implied exclusion of Part I if the substantive law of contract is Indian Law and the seat of arbitration is not India. Transfer of Seat: It must be admitted that the argumentof Mr. Gopal Subramaniam, the Solicitor General, discussed above appears forceful on the face of it. Even so, contrary to what was argued, the order of the arbitral tribunal was for a transfer of the seat of arbitration and not merely an agreement to hold the arbitral proceedings outside Kula Lumpur. The reasons are as follows: One, there was no necessity for such an agreement because the tribunal had been holding the arbitral proceedings in Amsterdam and London even before the agreement was reached. Two, the agreement uses the term seat of arbitration. The seat of arbitration specifically connotes the jurisdiction which would grant the legal touch to the arbitration proceedings. These were parties that had sophisticated legal counsel (for obvious reasons- the consensus was reached during the arbitration proceedings and was recorded by the tribunal). Therefore, the usage of the term seat of arbitration could not have been for any purpose other than to transfer the jurisdiction which grants the legal touch to the arbitration. Three. Article 35.2 of the PSC provides for three mandatory steps as regards amendment of the PSC: a. An amendment must be through a written instrument b. The amendment must be signed by all the parties, and c. The amendment must provide for the date from which amendment would become effective. This was admittedly not done. But the question is, notwithstanding Article 35.2, whether a consensus was reached between the parties to have the seat changed to London and whether the same is binding?It is submitted that the agreed manner of performance in the contract can be altered even extracontractually by an undertaking given in a court of law. The Supreme Court was not correct stating that any consensus to transfer the juridical seat to London required an amendment of the contract as per Article 35.2. Even though the effect of the consensus was alteration in the manner of dispute resolution, it was, in effect, a concession made before a tribunal which is

27

virtually a court of law. If the interpretation afforded by the court is accepted, the problem would be that any concession made by counsel of a government party in a contractual issue would have to comply with the requirements of Article 299 of the Indian Constitution, which is actually not the case. This aspect is dealt with in detail below: Nature of Concessions made in a Court of Law: In Jamilabai Abdul Kadar v Shankarlal Gulabchand andOrs.21, a three judge Bench consisting of A.C. Gupta, R.S. Sarkaria and V.R. Krishna Iyer, JJ. had to consider whether a compromise signed by the pleader of one of the parties was binding on that party. Holding in the affirmative, the court stated that the pleader had an implied authority to enter into a compromise on behalf of his client even when the client has not expressly authorized the pleader to do so. Despite such authority, the court advised as a matter of prudence that the advocate should take the clients concurrence. Subsequent to this decision, Rule 3, Order XXIII of the Code of Civil Procedure, 1908 was amended. The Rule reads as below (the underlined portions are some of the insertions made in 1976, that is, one year after Jamilbai) Where it is proved to the satisfaction of the Court that a suit has been

adjusted wholly or in part by any lawful agreement or compromise in writing and signed by the parties, or where the defendant satisfies the plaintiff in respect of the whole or any part of the subject-matter of the suit, the Court shall order such agreement, compromise or satisfaction to be recorded, and shall pass a decree in accordance therewith so far as it relates to the parties to the suit, whether or not the subject-matter of the agreement, compromise or satisfaction is the same as the subjectmatter of the suit: Provided that where it is alleged by one party and denied by the other that an adjustment or satisfaction has been arrived at, the Court shall decide the question; but no adjournment shall be granted for the purpose of deciding the question, unless the Court, for reasons to be recorded, thinks fit to grant such adjournment.

21

http://www.indiankanoon.org/doc/1904779/ 28

Explanation.--An agreement or compromise which is void or voidable under the Indian Contract Act, 1872 (9 of 1872), shall not be deemed to be lawful within the meaning of this rule.
The above provision, as amended, seems to suggest that a court compromise (a compromise between the parties which submitted to the court for passing a decree on the basis of the same) cannot be reached without the signature of the party. However, in Byram Pestonji Gariwala v. Union Bank of India and Ors.22, a two judge Bench of the Supreme Court consisting of T.K. Thommen and R.M. Sahai, JJ. held that notwithstanding the amendments made in 1976, a compromise in writing and signed by counsel of the parties was binding on the parties. The court relied on the Statement of Objects and Reasons for the amendment which provided that the amendment was, among other things, intended to clarify that a compromise has to be in writing signed by the parties to avoid delay which might arise from the uncertainties of oral agreements. On whether the 1976 amendment altered the law on the implied authority of the advocates to enter into compromise on behalf of the client, the court held: After the amendment of 1976, a consent decree, as seen above, is

executable in terms thereof even if it comprehends matters falling outside the subject-matter of the suit, but concerning the parties. The argument of the appellant's counsel is that the legislature has intended that the agreement or compromise should be signed by the parties in person, because the responsibility for compromising the suit, including matters falling outside its subject-matter, should be borne by none but the parties themselves. If this contention is valid, the question arises why the legislature has, presumably being well aware of the consistently followed practice of the British and Indian Courts, suddenly interfered with the time-honoured role of lawyers in the conduct of cases without specifically so stating, but by implication? Can the legislature be presumed to have fundamentally altered the position of counsel or a recognised agent, as traditionally understood in the system of law and practice followed in India and other 'common law countries' without expressly and directly so stating?
Therefore the court held that the advocate had the implied authority to enter into a written compromise on behalf of his client. Subsequent

22

http://indiankanoon.org/doc/476707/ 29

decisions also recognized this position.23In Commissioner of Endowments v Vittal Rao24, a compromise was made during the course of writ proceedings. The court recognized the same despite non-compliance with Rule 3 of Order XXIII on the ground that writ proceedings stand on a different footing when compared to proceedings pertaining to suits or appeals. The point about the above discussion in the current context is to establish that even a concession or compromise by the advocate of a party binds the client. Indian jurisprudence recognizes circumstances when compromises and concessions could be made without amending the contract. If that is so, it is difficult to conceive that in contracts involving governments, counsels would have no implied authority to make concessions and compromises or that compromises and concessions should be strictly in accordance with Article 299 of the Indian Constitution. The rationale for the existence of implied authority of advocates as held in Byram Pestonjiquoted below applies with equal force to this situation: To insist upon the party himself personally signing the agreement or

compromise would often cause undue delay, loss and inconvenience, especially in the case of non-resident persons. It has always been universally understood that a party can always act by his duly authorised representative. If a power-of-attorney holder can enter into an agreement or compromise on behalf of his principal, so can counsel, possessed of the requisite authorisation by vakalatnama, act on behalf of his client. Not to recognise such capacity is not only to cause much inconvenience and loss to the parties personally, but also to delay the progress of proceedings in court. (emphasis supplied)
In conclusion, it is submitted that the concession made before the tribunal to transfer the seat was not an amendment to the agreement. The court erred in not considering the concession as a species different from a contractual amendment. A decision by the tribunal based on concession by parties would obviously override any previous agreement made by the parties as if that is not so, it would obviate the purpose of making the concession or the compromise in a court of law.

See, for instance, Pushpa http://indiankanoon.org/doc/1335849/ 24 MANU/SC/1003/2004

23

Devi

v.

Rajinder

Singh

available

at

30

State of Goa v. Praveen Enterprises In State of Goa v. Praveen Enterprises25, the issue was whether it is necessary to raise counter-claims in proceedings under Section 11 to entitle the Respondent to raise them in the arbitration. The decision is significant because the Supreme Court filled several gaps in the Arbitration and Conciliation Act, 199626 pertaining to Reference, claims and counter-claims in arbitration, especially as regards circumstances when a party cannot raise counter-claims in the pleadings for the first time, the need for mentioning the list of specific disputes for which arbitrator is appointed under Section 11, admissibility of counter-claims in arbitration under an arbitration agreement which requires specific disputes to be referred to arbitration and restricts the jurisdiction of the arbitrator to only those disputes so referred to arbitration. Facts: Relevant portions of the arbitration clause in the Agreement dated 04.11.1992 between the State of Goa (Goa) and Praveen Enterprises (Praveen) read: Except where otherwise provided in the contract, all questions and

disputes relating to the meaning of the specifications, designs, drawings and instructions herein before mentioned and as to the quality of workmanship or materials used on the work or as to any other question, claim right matter or thing whatsoever, in any way arising out of or relating to the contract shall be referred to the sole arbitration of the person appointed by the Chief Engineer, Central Public Works Department in charge of the work at the time of dispute It is a term of contract that the party invoking arbitrations shall specify the dispute or disputes to be referred to arbitration under this clause together with the amount or amounts claimed in respect of each such disputes. (emphasis supplied)

Civil Appeal No. 4987/ 2011 [arising out of SLP (C) No. 15337 of 2009]; 2011(3) Arb. LR 209 (SC) 26 Hereinafter Act or 1996 Act. 31

25

Disputes arose between the parties. Praveen sent a notice invoking arbitration of certain claims and asked Goa to appoint the Chief Engineer as per the arbitration clause. Since Goa did not appoint an arbitrator, Praveen applied to the Chief Justice under Section 11 of the Act. The Chief Justice appointed a Retired Advisor, Konkan Railway Corporation (Sole Arbitrator) as arbitrator. In the arbitration proceedings, Praveen filed its claim statement and Goa filed its reply and counter-claim. Some of the claims in the claim statement and the counter-claim were allowed. Praveen applied to the Additional District Court(District Court) to set aside the award on two counts: the arbitrator wrongly rejected of some of its claims the arbitrator wrongly allowed one of the counter-claims of Goa

The District Court accepted Praveens plea on the second ground for the reason that the arbitrator did not have the power to enlarge the scope of reference and entertain fresh claims by the claimant or counter-claims by the respondent. The Bombay High Court rejected the appeal by Goa against the decision of the District Court. The rationale for the High Courts decision was that Goa did not place these counterclaims in the proceedings before the Chief Justice under Section 11. The High Court relied on its decision in Charuvil Koshy Verghese v. State of Goa.27

Contentions: On appeal to the Supreme Court, Goa contended as follows: There was no bar in the arbitration agreement to raise counter-claims before the arbitrator even if none was raised in the proceedings under Section 11. Since the Chief Justice does not refer disputes to arbitration under Section 11, the High Court was wrong in stating that there was no reference by the High Court of the counter-claims raised. Charuvil Koshy was a decision under the Arbitration Act, 1940, which is materially different from the 1996 Act.

The Respondent contended:

27

1998(2) ARb. LR 157 (Bom) (hereinafter Charuvil Koshy) 32

In SBP & Co. v. Patel Engineering (2005) 8 SCC 6128 and National Insurance Co. v. Boghara Polyfab (2009) 1 SCC 267 where the Supreme Court held that in an application under Section 11, the Chief Justice could decide whether an disputes raised were time-barred. Therefore, the application under Section 11 should show that the claims are within limitation. Unless it is required that the counterclaimant mention counter-claims in the proceedings under Section 11, the counter-claimant would merely circumvent this requirement and refer to arbitration even time-barred claims. Limitation period under Section 21 is reckoned only from the date of filing of the notice invoking arbitration. Therefore, sending a notice invoking arbitration is mandatory even in case of counter-claims. Every claim not mentioned in the application under Section 11 and every counter-claim not mentioned in objections to such application cannot be raised before the arbitrator. In Law and Practice of Commercial Arbitration in Englan authored by Mustill & Boyd (1989), at p. 131, it is stated: The arbitrator should

carefully consider whether the subject matter of the counter-claim was one of the matters submitted to him at the time of appointment.
The court is bound under Section 11 to ascertain the precise nature of the dispute and then appoint an arbitrator. This is possible only if the claims and the counter-claims are stated in the proceedings in Section 11. In Heyman v Darwins [(1942) AC 356], the House of Lords stated: "Where proceedings at law are instituted by one of the parties to a

contract containing an arbitration clause and the other party, founding on the clause, applies for a stay, the first thing to be ascertained is the precise nature of the dispute which has arisen The next question is whether the dispute is one which falls within the terms of the arbitration clause.
In accordance with Article 21, arbitration proceedings commence when the notice invoking arbitration is received by the respondent. Therefore, arbitration proceedings in respect of the counter claims commence only after issuing a notice invoking arbitration

Questions before the Court: According to the Supreme Court, the following questions arose in the case:

33

Whether the respondent in an arbitration proceedings is precluded from

making a counter-claim, unless a) it had served a notice upon the claimant requesting that the disputes relating to that counter-claim be referred to arbitration and the claimant had concurred in referring the counter claim to the same arbitrator; and/or b) it had set out the said counter claim in its reply statement to the application under section 11 of the Act and the Chief Justice or his designate refers such counter claim also to arbitration.
Decision: Summary of the decision is below28 On Reference in Arbitration: 1. The phrase reference to arbitration may mean any of the following: where an agreement provides for reference of future disputes to arbitration, reference is the reference by the parties to arbitration of disputes after such disputes have arisen; nomination of arbitrator by the appointing authority appointed in the arbitration agreement and reference by the appointing authority of disputes raised to arbitration; and where either of the parties approach the court for whatsoever reason for appointment of the arbitrator under Section 11 and if the court appoints the arbitrator, such appointment automatically results in reference to arbitration.

2. Reference contemplated under Section 8 is not a reference of disputes but of parties to arbitration. Subsequently, parties appoint the tribunal and refer the disputes to arbitration. On Reference and Jurisdiction: 1. If the agreement provides for reference of all disputes under the
28

The below summary has been mentioned keeping in mind the comprehensive manner in which the court has dealt with the issue. Each of the points may be taken as propositions laid down by the court. 34

agreement to the arbitrator, the arbitrator has jurisdiction to decide all disputes that were made in the pleadings of the parties, including counterclaims. But where the reference to the arbitrator is to decide specific

disputes enumerated by the parties/ court/ appointing authority, the arbitrators jurisdiction is circumscribed by the specific reference and the arbitrator can decide only those specific disputes.
2. In case of arbitration agreements entered into after specific disputes have arisen, the arbitrator cannot go beyond the disputes specifically referred to in the arbitration agreement, unless the parties agree to refer additional disputes to arbitration. Claims, Additional Claims, Counter-Claims and Limitation 1Section 3 of the Limitation Act, 1963 provides for institution of a suit within the limitation period. In accordance with Section 43(1) of the Act, the Limitation Act applies to arbitration as it applies to court proceedings. Question then arises as to what is the equivalent of institution of the suit in arbitration proceedings. This question is answered by Sections 43(2) and 21 of the Act. Accordingly, arbitral proceeding commences on the date of receipt by the respondent of the notice invoking arbitration. 2. Where a party files additional claims through amendment to the claim statement under Section 23(3), the limitation period is reckoned not with respect to the date of notice invoking arbitration or the original claims but with respect to the date on which the additional claims were introduced. 3. Claims of set-off and counter-claims are treated as independent suits. A claim of set-off is deemed to have been made on the date when it is pleaded in the court and a counter-claim is deemed to have been made on the date on which that counter-claim is made in the court. Section 21 does not deal with counter-claims but Section 43(1) read with Section 3(2)(b) of the Limitation Act, 1963 does, except when in reply to a notice invoking arbitration, the respondent raises certain claims and subsequently files those claims as counter-claims in the arbitration proceedings. In case of the latter, the arbitration commences when the counter-claims were raised for the first time in the reply to notice invoking arbitration. In the former situation, counter-claims, like in suits, are deemed to have been made on the date on which the counter-claims are made in the arbitration proceedings.

35

4. Section 23 does not restrict the claimant (which term includes a counterclaimant) from raising disputes not contemplated in the notice invoking arbitration (or the reply, in case of counter-claimant), unless the parties have agreed otherwise. The claimant is free to amend his claim. Section 2(9) read with Section 23 allows a party to file counter-claims and amend or file additional counter-claims, unless the arbitration agreement refers only particular disputes to arbitration. 5. Therefore, Praveens contention that it is mandatory to give notice of arbitration for raising counter claims is not correct. A party could even add extra claims to its claim statement without giving a notice of arbitration. Counter-claims and Section 11 Proceedings: 1. One of the differences between the 1940 Act and the 1996 Act is that under Section 20 of the former, the court had to refer the disputes to the arbitrator while in the latter, consistent with the principle of minimum judicial interference, the Chief Justice merely appoints the arbitrator. 2. Under Section 11, the Chief Justice merely appoints the arbitrator after ensuring that certain jurisdictional facts exist for the exercise of his jurisdiction and does not refer the parties to arbitration. Therefore, the claimant need not restrict his claim statements to disputes that were mentioned in the application under Section 11 nor is there a need for the respondent in proceedings under Section 11 to mention counter-claims. 3. Even in arbitration proceedings initiated pursuant to Section 20 of the 1940 Act, the Respondent could directly raise counter-claims before the arbitrator even without mentioning the same in the Section 20 proceedings.29 4. The Respondents contentions are based on an erroneous premise that the Chief Justice is liable to decide on the issue of limitation. As per Patel Engineering&Boghara Polyfab, the Chief Justice is has the discretion to decide whether a claim is a stale/dead claim [a claim which is patently long time barred.30 The exercise of discretion in such case depends on whether
29 30

Indian Oil Corporation v. Amritsar Gas Service (1991) 1 SCC 533 Indian Oil Corporation v. SPS Engineering 2011(1) Arb LR 373 (SC) 36

it is clear at the outset that the claim was a dead claim. A question as to whether a claim was barred by limitation or not (and not whether it was patently long time barred) is a question for the arbitrator to decide. If the Chief Justice is not the right forum to decide questions on limitation, there is obviously no need to refer in details to the claims and counterclaims in Section 11 proceedings. 5. The reliance placed on Mustill & Boyds commentary is misconceived as the discussion there was pertaining to English Law prior to the Arbitration Act, 1996. Further, the observations therein were made in the context of agreements referring specific disputes to arbitration. 6. Respondent contends that in Section 11 proceedings, the court needs to ascertain the precise nature of the dispute and decide whether the dispute arises out of the arbitration agreement. Such a decision is possible, according to the Respondent, only of the claims and counter-claims are set in detail in the Section 11 proceedings. The Respondent relied on English case of Hayman v Darwins Ltd.31 This decision is not applicable as it was rendered in respect of proceedings similar to those under Section 8 of the Act. The questions to be decided under Section 8 and 11 are different and therefore the decision is of no assistance to the Respondent. 7. In the present case, although the arbitration clause requires a party invoking arbitration to specify the disputes to be referred to arbitration, such clause cannot be taken as requiring the appointing authority to mention specific disputes to arbitration. Nor does it bar the arbitrator from deciding counter-claims.

31

[1942] AC 356 (HL) 37

SMS Tea Estates Pvt. Ltd. v. Chandmari Tea Company Pvt. Ltd. In SMS Tea Estates Pvt. Ltd. v. Chandmari Tea Company Pvt. Ltd.32, the Supreme Court had to decide on the validity of unstamped and unregistered deeds containing arbitration clauses. Brief Facts: SMS Tea Estates Pvt. Ltd. (SMS) filed an application before the Guwahati High Court under Section 11 of the Arbitration and Conciliation Act, 1996 (Act) for the constitution of arbitral tribunal as per the arbitration clause contained in the lease deed (a thirty year lease) executed between SMS and Chandmari Tea Company Pvt. Ltd. (CTC). The application was opposed by CTC, inter alia, on the ground the lease deed was invalid, unenforceable and not binding between the parties because it was neither registered nor stamped when the laws required the lease deed to be registered and stamped. The Guwahati High Court accepted CTCs contention and held that since the lease deed was neither stamped nor registered in breach of applicable laws, no term in the lease deed could be relied upon for any purpose. Further, the High Court held that the arbitration clause cannot be held binding on the ground that it was a collateral transaction. The said provision was not a collateral transaction. Decision: The Supreme Courts decision on the question is summarized below: On the Validity of an Arbitration Clause Contained in an Unregistered Lease Deed: Section 17(1)(d) of the Registration Act, 1908 and Section 107 of the Transfer of Property Act, 1882 make registration of leases like the one involved in this case compulsorily registrable. Relevant portions of Section 49 of the Registration Act provide that such an unregistered document shall not affect any immovable property or be received as evidence of any transaction affecting such property or conferring such power, unless it is registered. The exception to this rule is provided in Section 49 itself: such unregistered document affecting

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immovable property could be received as evidence in a suit for specific performance under the Specific Relief Act as evidence of any collateral transaction not required to be effected by a registered instrument. The question is whether an arbitration clause in such an instrument is a collateral instrument or not. If it is so, the said clause would be valid. An arbitration clause, being unrelated to the performance of the agreement, is incidentally connected to the performance, is a collateral term. Therefore, the deed could be received as evidence under the exception carved out by Section 49 for the purpose of proving the existence of the arbitration clause. Even if the contract is terminated or the performance completed, the arbitration clause would survive for resolution of disputes between the parties. In this case, even if the deed for transferring immovable property is challenged for its validity, there would be no effect on the arbitration clause merely because of such challenge. This has been accorded statutory recognition in Section 16(1) of the Arbitration and Conciliation Act, 1996. However, where the agreement is voidable at the option of a party there may be situations where the reason for invalidity of the agreement also exists in the arbitration agreement. The Registration Act does not require an arbitration agreement to be registered. Therefore, reading the exception carved out by Section 49 of the Registration Act, 1908 and Section 16(1)(a) of the Act together, an arbitration clause contained in an unregistered but compulsorily registrable instrument would be enforceable.

On the Validity of an Arbitration Clause Contained in an Unstamped Lease Deed: Section 35 of the Stamp Act provides that court cannot act upon an instrument which is not duly stamped. This means that even an arbitration agreement contained in an unstamped instrument cannot be acted upon. Section 35 is different from Section 49 of the Registration Act as the former does not contain a proviso similar to the latter. The Scheme for Appointment of Arbitrators by the Chief Justice of the Guwahati High Court 1996 requires an application under Section 11

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of the Act to be accompanied by the original arbitration agreement or a duly certified copy of such agreement. The same requirement is found in Schemes of all other High Courts. Under Section 33 of the Stamp Act, any person having the power to receive evidence, whether by law or consent, or any person holding a public office to impound an unstamped instrument on which stamp duty is compulsorily to be paid (Unstamped Instrument). Therefore, a court is duty bound under Section 38 to impound an Unstamped Instrument. When a lease deed or other instrument containing an arbitration clause is sought to be relied, the court should, at the outset, consider whether the instrument is duly stamped. The court cannot act upon such instrument or arbitration clause therein, unless the deficit duty and penalty is paid as per Section 35 or Section 40 of the Stamp Act.

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Yograj Infrastructure v Ssangyong Engineering (I&II) There are two judgements of the Supreme Court in 2011 in Yograj Infrastructure v Ssangyong Engineering that are worth noting here. Both the judgements deal with the implied exclusion of Part I of the Arbitration and Conciliation Act, 1996. Yograj Infrastructure v Ssangyong Engineering (I)33 Facts: 12.04.06 National Highways Authority of India (NHAI) awarded a contract to Ssang Yong Engineering & Construction Co. Ltd. (Ssang), a Korean Company for converting an existing highway into a four lane highway. 13.08.06 Ssang sub-contracted (Contract) the entire work to Yograj Infrastructure (Yograj). 22.09.09 Disputes pertaining to delay in performance arose and Ssang terminated the Contract with Yograj. Yograj approached the District Court at Narsinghpur, Madhya Pradesh for relief under Section 9 of the Arbitration and Conciliation Act, 1996. 30.12.09 Another application under Section 9 was filed. 20.05.10 Disputes between the parties were referred to the sole arbitrator appointed pursuant to the arbitration clause in the agreement. 04.06.10 Yograj filed an application before the sole arbitrator for interim relief. 05.06.10 Ssang filed an application before the sole arbitrator for interim relief. 29.06.10 The arbitrator passed an interim order. Aggrieved by the order, Yograj filed an appeal under Section 37(2)(b) of the Act before the District Judge for setting aside the interim relief granted by the sole arbitrator under Section 17. Ssang contended before the District Judge that the
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Civil Appeal No. 7652/ 2011 (arising out of SLP (C) No. 25624/ 2010) 41

appeal was not maintainable as the seat of arbitration was Singapore and the proceedings were governed according to the Singaporean laws. 23.07.10 The District Judge accepted the contention of Ssang and dismissed the appeal. 31.08.10 Yograj filed a Civil Revision Petition in the High Court, which was dismissed. Yograj filed a Special Leave Petition before the Supreme Court against the decision of the High Court. Relevant Extract of the Agreement: 27.1 All disputes, differences arising out of or in connection with the

Agreement shall be referred to arbitration. The arbitration proceedings shall be conducted in English in Singapore in accordance with the Singapore International Arbitration Centre (SIAC) Rules as in force at the time of signing of this Agreement. The arbitration shall be final and binding. 27.2 The arbitration shall take place in Singapore and be conducted in English language. 27.3 None of the Party shall be entitled to suspend the performance of the Agreement merely by reason of a dispute and/or a dispute referred to arbitration.
28. This agreement shall be subject to the laws of India. During the

period of arbitration, the performance of this agreement shall be carried on without interruption and in accordance with its terms and provisions.
Judgement: Summary of the judgement is as below: The arbitration proceedings were to be conducted as per the SIAC Rules. The seat of arbitration was Singapore. Consequently, the

procedural law with regard to the arbitration proceedings is the SIAC Rules. (Para 33)

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Clause 28 indicates that the governing law of the agreement would be the law of India, i.e., the Arbitration and Conciliation Act, 1996. (Para 35) The proper law is the law that governs the agreement. Where the agreement is silent as to the law which would apply in respect of the arbitral proceedings but the proper law of the agreement is provided for, the latter would also be the law applicable to the arbitral tribunal. (Para 35) Clause 27.1 clearly provides that the curial law which regulates the

procedure to be conducted in conducting the arbitration would be the SIAC Rules. (Para 35) In Bhatia International (supra), wherein while considering the applicability of Part I of the 1996 Act to arbitral proceedings where the seat of arbitration was in India, this Court was of the view that Part I of the Act did not automatically exclude all foreign arbitral proceedings or awards, unless the parties specifically agreed to exclude the same. (Para 36)
Bhatia International would not apply to the arbitration because parties have agreed that SIAC Rules would be the curial law. Rule 32 of the SIAC Rules provided: Where the seat of arbitration is

Singapore, the laws of the arbitration under these Rules shall be the International Arbitration Act [] or its modification or reenactment thereof.
Once the parties have agreed that Singapore would be the arbitral seat, that the arbitration would be conducted as per the SIAC Rules and that the Singapore International Arbitration Act would be the law of arbitration, Part I would not apply. The Petitioners contention that Respondent had previously approached the Indian court under Section 9 cannot stand because the application was prior to the commencement of arbitration. The curial law, the SIAC Rules, became applicable once the arbitration commenced and excluded the Applicability of Part I.

Critique: Typographical/ Other Flaws in the Judgement: 1. While narrating the facts, at Para 3, the court stated: Clause 27 and 28 provided for arbitration and the governing law agreed to was the Arbitration and Conciliation Act, 1996.

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Clauses 27 and 28 of the Agreement were silent on the applicability of the Arbitration and Conciliation Act, 1996. In fact, it was the courts judgement that the governing law was the Rules of the Singapore International Centre and not the Arbitration and Conciliation Act, 1996. 2. While recounting the case history, at Para 4, the court stated: A similar application under Section 9 [] was filed by the Appellant

before the [District and Sessions Judge, Narsinghpur, Madhya Pradesh] on 30th December 2009, also for interim reliefs.
It was the Respondent which filed an application for interim relief on 30th December 2009.34 3. At Paras 4 & 5 of the judgement, the court stated that the Appellant and the Respondent filed applications before the sole arbitrator for interim relief under Section 17 of the Arbitration and Conciliation Act, 1996. How could have the parties applied to the sole arbitrator under Section 17 of the Arbitration and Conciliation Act, 1996 if Part I was excluded? See Para 24, where the judgement states that [b]oth the parties filed applications

before the learned Arbitrator seeking interim relief under Rule 24 of the SIAC Rules
4. In Para 36 of the judgement, the Court stated:

Bhatia International (supra), wherein while considering the applicability of Part I of the 1996 Act to arbitral proceedings where the seat of arbitration was in India, this Court was of the view that Part I of the Act did not automatically exclude all foreign arbitral proceedings or awards, unless the parties specifically agreed to exclude the same.
The emphasised portion above should have been where the seat of arbitration was outside India and not where the seat of arbitration was India. Comment: The judgement is notable for two reasons:
34

In

See the order dated 21.05.2010 of the Madhya Pradesh High Court. 44

1. It states that even if the agreement is subject to the laws of India, if the seat is Singapore and the arbitration is to be conducted in accordance with SIAC Rules, Part I is deemed to have been excluded. This judgement overrule impliedly several judgements of the Indian court where the choice of substantive law of contract of Indian law was cited as the reason for the applicability of Part I despite a Non-Indian choice of seat. 2. The judgement partially brings the Indian law on interim measures in international commercial arbitration held outside India in tune with the UNCITRAL Model Law on International Commercial Arbitration, 1985 (Model Law). According to this judgement, even if parties choose to exclude Part I impliedly by choosing the SIAC Rules, parties could nevertheless approach the Indian courts before the commencement of arbitration for interim relief under Section 9 of the Act. This is significant because the original text of the Act (prior to the voodoo interpretation of the Act by Bhatia International) did not contain a provision for interim measures in arbitrations held outside India. Courts (see, Bhatia International, for example) considered this to be an unconscious omission. This omission might have been deliberate. Article 1(2) of the Model Law provided that although the Model Law applied only if the place of arbitration was within the territory of the country adopting the Model Law, Article 9, which dealt with interim measures of protection by court, was applicable even if the place of arbitration was outside the territory of that country. This provision was not adopted in the 1996 Act. The absence of a provision for interim relief in Non-Indian arbitrations probably made the Supreme Court in Bhatia International to indulge in the interpretative adventure which the case is now notorious for. After Bhatia International, implied exclusion acted, mostly, in an all or nothing fashion (although Bhatia International stated that parties could impliedly exclude all or some of Part I)- either Part I applied or did not apply. Now, after Yograj Infrastructure, even if parties impliedly excluded Part I, nothing prevented them from approaching the Indian courts under Section 9 of the 1996 Act before the commencement of arbitration. Ambiguous, Unclear and Irrational Choice of Law Rules? In Yograj, the Supreme Court probably got the analysis of the implications of choice of law and of forum completely wrong. It would seem that the courts reasoning/ analysis on curial law, consequence of choice of the law of seat etc is erroneous. The Supreme Court held that as per the choice of the

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parties in Clause 27.1, the curial law or the procedural law (see, para 33 of the judgement, for the synonymous treatment of curial law and procedural law), that is, the law which regulates the procedure to be adopted in conducting the arbitration, was the Arbitration Rules of the Singapore International Arbitration Centre. (Para 35). Subsequently, at Para 39, the Supreme Court held that the SIAC Rules- the curial law- becomes applicable only after the arbitral proceedings were commenced. Following conclusions can be deduced from these findings of Supreme Court: 1. In an international commercial arbitration, where parties choose the Rules of a particular arbitration institution for the conduct of arbitration, such Rules is the curial law or the procedural law of arbitration. 2. Curial law or the procedural law begins to operate when the arbitration commences. These two propositions are erroneous. The judgement is against well settled principles of international arbitration recognized by prominent authorities for the reasons discussed below: Choice of a Foreign Seat: As per settled principles of international arbitration, what does a choice of foreign seat indicate? As it happened in this case, the Indian party and the South Korean party chose to conduct their arbitration in a country which was connected to neither of them. It is normal for parties to choose a forum which is unconnected to either parties. They chose Singapore as the seat of arbitration. Now, what does the choice of Singapore as the seat of arbitration imply? Well look at the relevant provisions of the New York Convention: Article V provides the grounds on which the recognition and enforcement of foreign awards may be refused. India is the signatory of the New York Convention. Article V.1 provides: 1. Recognition and enforcement of the award may be refused, at the

request of the party against whom it is invoked, only if that party furnishes to the competent authority where the recognition and enforcement is sought, proof that: (a) The parties to the agreement referred to in article II were, under the law applicable to them, under some incapacity, or the said agreement is not valid under the law to which the parties have subjected it or,

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failing any indication thereon, under the law of the country where the award was made; or (d) The composition of the arbitral authority or the arbitral procedure was not in accordance with the agreement of the parties, or, failing such agreement, was not in accordance with the law of the country where the arbitration took place; or (e) The award has not yet become binding on the parties, or has been set aside or suspended by a competent authority of the country in which, orunder the law of which, that award was made.
Thus, three kinds of broad roles have been accorded to the seat of arbitration. [It may be noted that we are considering the law of the country where the award was made and the law of the country where arbitration took place to be the law of the seat of arbitration itself. While both are treated distinctly by the New York Convention, in practice and in most cases, both are the same.35 The three broad roles are as follows: a) Where the parties have not indicated the law applicable to their arbitration agreement, an arbitral award under that agreement could be refused enforcement if the parties were under some incapacity under the laws of country where the award was made, which in most cases is the law of the seat of arbitration. b) Where the parties had agreed to a procedure or the composition of tribunal and such agreement had failed, and such composition or the arbitral procedure was to be in accordance with the law of the seat of arbitration. c) The award is not binding or has been set aside or suspended by the country in which the award has been made or under the law under which the award is made, which, in most cases, but not always, is the law of the seat of arbitration. By virtue of point (c) and to an extent point (b) above, the law of the seat of arbitration is endowed with the power to virtually ensure that the award by the tribunal is not an award that could be recognized even under the NYC. Born reluctantly concedes:

35

See, GARY B. BORN, INTERNATIONAL COMMERCIAL ARBITRATION 1258-1262 (VOLUME II), (2009). 47

[T]he New York Convention is often interpreted as affording the law of

the arbitral seat essentially plenary power over the procedures used in international arbitration.36
While Born argues for structural limits37 on the power of the law of the seat, Redfern et al seem to be content with the state of affairs. According to the latter scholarly work, affording primacy to the law of the seat of arbitration gives an established legal framework to an international commercial arbitration.38 The debate over which of the two approaches is better is a topic for another day; for now, the point is that it is been recognized in almost prominent jurisdictions and by popular commentators that the choice of a particular jurisdiction as the place of arbitration results in the automatic applicability of the law pertaining to provisional measures pending, prior to, or after arbitration, procedures pertaining to arbitration, setting aside arbitral awards and so on. This law of arbitration, known in international arbitration lingo as the lex arbitri, is the arbitration law of the seat of arbitration. There is considerable confusion on what lex arbitri is. The short answer isit depends. When two parties resolve their disputes through arbitration in a particular jurisdiction, the rules of that jurisdiction will govern the arbitration because, ultimately, it is that jurisdiction which will give the legal touch (not always, though) to the arbitration. The fundamental error in Yograj (and judgements prior to Yograj right from Bhatia International) was the complete disregard to this consequence: when parties chose Singapore as the seat, the Singaporean arbitration law applied including in respect of provisions pertaining to interim relief prior to the commencement of arbitration.39 Thus, the Singaporean International Arbitration Act applied even before the commencement of arbitration. Therefore, the applicability of the said Act is not consequent to Rule 32 of the SIAC Rules but because the said Act is a part of the Singaporean Arbitration Law and the Act provided that it applied to international arbitration.

36 37 38

Supra, p. 1264 Supra, at p. 1265

COMMERCIAL

REDFERN ET AL, LAW AND PRACTICE OF INTERNATIONAL ARBITRATION 109 (2004) 39 See, Section 12A(4) of the Singaporean International Arbitration Act

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Yograj Infrastructure v Ssangyong Engineering (II)40 A Two Judge Bench of the Supreme Court consisting of Altamas Kabir & Cyraic Joseph, JJ passed a judgement on 15 December 2011 correcting certain errors that were made by the same Two Judge Bench in the earlier judgement in the same matter. The Correction Judgement is discussed below. The Correction Judgement was pursuant to an Interlocutory Application made by Mr. Dharmendra Rautray, Advocate-on-Record for SSANGYONG Engineering under Order XIII Rule 3 of the Supreme Court Rules, 1966 which reads as below: "Subject to provisions contained in Order XL of these rules a judgement

pronounced by the Court or by a majority of the Court or by a dissenting Judge in open court shall not afterwards be altered or added to, save for the purpose of correcting a clerical or arithmetic mistake or an error arising from any accidental slip or opinion."
The Application was for clarification and correction of the following errors in the Earlier Judgement: At Para 5, the Earlier Judgement states that the application for interim relief was filed by Ssangyong under Section 17 of the Arbitration and Conciliation Act, 1996 (Act). However, the applications were filed under Rule 24 of the then Arbitration Rules of the Singapore International Arbitration Centre (SIAC Rules) and not under Section 17. Para 35 of the Earlier Judgement mentions that SIAC Rules was the curial law. However, as stated in Para 37 of the Earlier Judgement, the Singaporean International Arbitration Act was the curial law. The Earlier Judgement (para 36) stated that as per Bhatia International, Part I was applicable even if the seat was in India. However, as per Bhatia International, Part I was applicable if the seat was outside India. Para 4 of the Earlier Judgement erroneously mentions that the Appellant, Yograj Infrastructure, applied to the court under Section 9

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MANU/SC/1495/2011 49

of the Act. In fact, the Respondent had applied to the court under Section 9. Yograj Infrastructure objected to the first request for clarification but the same was dismissed considering that Rule 32 clearly provided that the Singaporean International Arbitration Act was to be the law of arbitration. Thus the court concluded that the law of arbitration was the Singaporean International Arbitration Act.

The Application was allowed. Yograj Infrastructure objected to the first request for clarification but the same was dismissed considering that Rule 32 clearly provided that the Singaporean International Arbitration Act was to be the law of arbitration. The Application was allowed andthe court concluded that the law of arbitration was the Singaporean International Arbitration Act.

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Phulchand Exports Ltd. v. OOO Patriot41 Facts: November 1997: Phulchand Exports (Phulchand) and OO Patriot (OOO) entered into a contract wherein Phulchand was to supply 1000 Metric Tons (MT) of a particular variety of polished rice to OOO, a Russian company at Rs. 12,450 per MT. Some of the terms were: "Goods on CIF Novorossiysk Port, Russia" "The Price is fixed on the terms of "CIF (liner out) Novorossiysk, Russia according to Incoterms-90" "Payment for the Goods, delivered under the present contract is to be

effected by irrevocable documentary Letter of Credit opened in favour of the sellers for the total value of the contract for the period of 45 days" "The L/C should be opened within 10 working days from the date of signing of the contract." "The L/C is executed by the beneficiary's bank against presentation by the sellers of the following documents..." "The Goods sold under the present contract should be shipped within 40 days from the date of opening the L/C.The date of shipment is the date of loading of the Goods to the board of vessel... Shipment should be done by a vessel that is on the way to Novorossiysk as the first port of discharge."
03.12.97: OOO opened Letter of Credit (L/C) with the last date of shipment as 12.01.98. On presentation of the required documents by the L/C, the banker paid the amount to Phulchand. 29.01.98: The goods were shipped from Port Kandla, Gujarat fifty six days after the opening of L/C instead of the 40 days time period allowed under the contract. The vessel left Kandla only on 20.02.98. Under the bill of lading given by the seller, the carrier had the right to determine the order of destination of sea ports for unloading of cargoes in contradiction to the contractual terms.

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The vessel did not reach Novorossiysk because of its engine failure. It had to be salvaged but the owners could not pay for the salvage. Therefore, the vessel and its cargo were sold and the proceeds were used to compensate the rescue vessel. 24.08.98: Claim was made by OOO with the insurers for non-delivery of goods to the desginated port. The claim was denied on the ground that the policy did not cover risk of detention. 27.11.98: OOO invoked arbitration in the International Court of Commercial Arbitration of the Chamber of Commerce and Industry of the Russian Federation. The arbitral tribunal held in favour of OOO on the ground that the sellers had breached the terms of the contract because: The shipment was made after 16 days from the last due date under the contract vessel departed after 38 days from the said due date As per the bill of lading, Novorossiysk was not the first port of discharge, though the same was mandatory under the contract As per Clause 4 of the contract, Phulchand had to reimburse the consideration if the goods were not delivered. (the contract provided: "In case the Goods do not arrive to the customs are of Russian

Federation within 180 days from the date of payment the transferred amount is to be reimbursed to the buyer's account."
Phulchand's act of going to the Turkish port where the ship was arrested and sold to assess the situation conveyed that Phulchand never considered it to be exempt from the commitment due to the alleged fprce majeure circumstance.

The tribunal also found OOO in default because: OOO did not pass the insurance certificate and the cargo documents to Phulchand in time. OOO did not ask for reimbursement immediately after the expiry of the 180 days period within which goods were to arrive at the deginated port as per contract. Since both the parties committed contractual breaches, the tribunal split the losses between the parties. OOO filed an application under Ss 47 and 48 of the Arbitration and Conciliation Act, 1996 to enforce the arbitral award. Phulchand resisted

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enforcement on the ground that the award was contrary to the public policy of India. Both the Single Bench and the Division Bench held against Phulchand. Phulchand appealed to the Supreme Court. Contentions: Mr. Venugopal, Sr. Counsel for Phulchand contended: The Division Bench wrongly applied the test of public policy as propounded in Renusagar v GE while the definition was subsequently expanded in the case of ONGC v SAW Pipes. The contract was a CIF contract and the risk in the goods passed once the shipment was made. In any case, the property passed when the shipping documents were handed over to them through banking channels on negotiation of L/C on 19.02.98 and therefore the liability of Phulchand ceased to exist on the said date. Clause 4 of the Contract which provided for retransfer of the consideration in case of failure to deliver the goods within 180 days amounted to a penalty and was prohibited under Section 74 of the Contract Act. The said provision also amounted to an unconscionable bargain and was void as per Section 23 of the Contract Act. Decision: The decision of the court is summarized below The decision of the Divison Bench (dated 03.05.02) was based on Renusagar v GE. In ONGC v SAW Pipes, "public policy" was given a wider meaning. "13. There is merit in the submission of learned senior counsel that

in view of the decision of this Court in Saw Pipes Ltd., the expression 'public policy of India' used in Section 48 (2)(b) has to be given wider meaning and the award could be set aside, 'if it is patently illegal'. At the first blush we thought of remanding the matter to the High Court, but on a deeper thought, we decided to hear the objections relating to patent illegality in the award ourselves as the award by the Arbitral Tribunal was given as far back as on October 18, 1999 and about 12 years have elapsed since then. We thought that the issue relating to enforceability of the

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subject award must be brought to an end finally one way or the other."
o CIF contracts are well recongised in commerce as well as in law. Standard works (Kennedy's CIF Contracts) and decisions [Johnson v Taylor Bros (1920) AC 144, 155] recognise the following as features of CIF contracts o CIF contracts relate to carriage of goods by sea. They form the most common form of shipping contracts. o The seller is obligated to ship the goods at the appointed time in a vessel which would go to the destination port provided in the contract. o Tendering the shipping documents as soon as the goods are despatched, mainly the bill of lading for carriage of the goods, reasonable insurance cover for the goods and invoice for the amount due from the buyer. o The delivery of documents to the buyer is the symbolic delivery of the goods. Once the documents are delivered, the goods are at the buyer's risk and the seller is entitled to the price. Under S 26 of the Sale of Goods Act (which reads as below), is subject to an agreement between the parties to the contrary, considering the usage of the expression "unless otherwise agreed". "Risk prima facie passes with property.-- Unless otherwise agreed,

the goods remain at the seller's risk until the property therein is transferred to the buyer, but when the property therein is transferred to the buyer, the goods are at the buyer's risk whether delivery has been made or not: Provided that, where delivery has been delayed through the fault of either buyer or seller, the goods are at the risk of the party in fault as regards any loss which might not have occurred but for such fault: Provided also that nothing in this section shall affect the duties or liabilities of either seller or buyer as bailee of the goods of the other party."
If the shipment is delayed or if the seller puts the goods on a ship not destined for the contractually appointed port, the seller has breached the contract. In the instant case, both have happened. The seller has breached these fundamental terms of the contract "at the very threshold". Therefore, it cannot be said that property and risk passed to the buyer once the shipping documents were handed over.

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"In such a case as this one [where the seller had breached the

'primary' contractual obligations], the seller's failure [] can be held to have resulted in postponement of transfer of title in goods to the buyers."
Even if the property is deemed to have been transferred to the buyer, the risk therein has not been as there was no delivery at all owing to the contractual breaches by the buyer. In such a case, the first proviso is attracted. Therefore, Phulchand's argument that its liability ceased on shipment is rejected. The contractual stipulation in the form of Clause 4 (which provided for retransfer of the consideration in case of failure to deliver the goods within 180 days) is not in the nature of a penalty as it is neither punitive nor is it vindictive. It merely provided for repayment of price. Even in the absence of such a clause, the seller was liable under law to return the consideration. For the same reason, the clause is also not violative of Section 23. These terms are in conformity with international trade and between parties with equal bargaining powers. Consequently, the court dismissed the appeal but without imposing costs as the buyer did not appear before the Supreme Court in the matter. Thus, even if it is contractually agreed that risk passes on shipment of goods, if the seller had breached the terms relating to performance prior to or at the time of shipment, risk does not pass and the seller would be liable for the loss/ damage of the goods in transit.

Comment: There are two points worth mentioning in the context of arbitration and civil procedure: 1) "Public policy" in ONGC v SAW pipes was decided in the context of Section 34(2)(b)(ii) of the Act which deals with setting aside arbitral awards under Part I. The Delhi High Court in Penn Racquet Sports v. Mayor International Ltd.42 where it was held: "As held by the Supreme Court, the recognition and enforcement of a

foreign award cannot be denied merely because the award is in contravention of the law of India. The award should be contrary to the fundamental policy of Indian law, for the Courts in India to deny recognition and enforcement
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of a foreign award. The other grounds recognized by the Supreme Court to refuse recognition and enforcement of a foreign award are that the award is contrary to the interests of India, or justice or morality."
A perusal of Para 13 of the judgement (quoted) conveys the meaning that according to the Supreme Court, "public policy" in S 48 has the same meaning as it has in Section 34 (after SAW Pipes). This is in contradiction to the judgement of the Delhi High Court. 2) The second point that we wish to make is a short but important one. Allocation of costs by courts in India lacks rational basis. In this case, now costs were awarded in favour of the Buyer, OOO Patriot because it did not appear before the Supreme Court. But what about costs expended before the Single and the Division Benches? A comprehensive costs-awarding policy for the courts is of utmost necessity.

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PR Shah, Shares & Stock Broker (P) Ltd. v. BHH Securities (P) Ltd. In PR Shah, Shares & Stock Broker (P) Ltd. v. BHH Securities (P) Ltd. & Ors.43, the Supreme Court comprehensively dealt with consolidation of two arbitrations. Facts: PR Shah, Shares & Stock Broker (P) Ltd (PR Shah) and BHH Securities (P) Ltd (BHH) were members of the Bombay Stock Exchange (the SC refers to the stock exchange as Mumbai stock exchange, which is inaccurate). BHH invoked arbitration against PR Shah and the second respondent, Continental Securities (P.) Ltd (Continental). According to BHH, PR Shah and Continental were sister concerns with a common director. The said common director had approached BHH for certain shares-related transactions. A deal was reached and a few share related transactions were carried out. Since amounts were due to BHH in respect of the transactions, BHH asked PR Shah and Continental to clear the dues. The Bills in respect of the amounts due were raised against Continental as required by PR Shah but with an assurance from the common director that both PR Shah and Continental were jointly and severally liable. On failure of Continental and PR Shah to pay despite several requests from BHH, BHH invoked arbitration against both companies. In the arbitration proceedings, a total of Rs. 36,98,384.3 was claimed as the total sum due alongwith interest. PR Shah and Continental objected to the claim on common grounds. PR Shah alleged that BHH had raised the claims in the arbitration proceedings based on forged documents. Further, As regards joinder, the following contentions were made on behalf of Continental and PR Shah: a) There was no arbitration agreement between the BHH and PR Shah. b) the reference was bad for misjoinder of parties and of causes of action. c) PR Shah was a member of the Stock Exchange while Continental was not. Since the Stock Exchange had different rules for resolving disputes between members on the one hand and a member and a non-member on the other.

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Civil Appeal No. 9238/ 2003 57

Two members of the arbitral tribunal, consisting of Mr. Hemant V Shah and Mr. Sharad Dalal, held that Continental was liable to pay BHH and in case of failure by Continental, PR Shah was liable to pay BHH . However, one of the members of the tribunal, Justice DB Deshpande, agreed with the view of the majority that the claim of BHH against Continental was valid but disagreed that the tribunal did not have jurisdiction to decide disputes between BHH and PR Shah. PR Shah petitioned the court under Section 34 of the Arbitration and Conciliation Act, 1996, where one of the chief contentions of PR Shah was that Bye-Law No. 248 did not deal with disputes between two members of the Stock Exchange (Bye-Law 282 deals with disputes between members of the stock exchange). Bye-Law No. 248, as it was then, reads: "All claims (whether admitted or not) difference and disputes between a

member and a non-member (the terms non-member and non-members shall include a remisler, authorised clerk, a sub-broker who is registered with SEBI as affiliated with that member or employee or any other person with whom the member shares brokerage) arising out of or in relation to dealings, transactions and contracts made subject to the Rules, Bye-laws and Regulations of the Exchange or with reference to anything incidental thereto or in pursuance thereof or relating to their construction, fulfilment or validity or in relation to the rights, obligations and liabilities of remislers, authorised clerks, sub-brokers, constituents, employees or any other persons with whom the member shares brokerage in relation to such dealings, transactions and contracts shall be referred to and decided by arbitration as provided in the Rules, Bye-laws and Regulations of the Exchange." (emphasis supplied)
The Single Judge rejected the Petitioners (PR Shah) contention and held that if the dispute between a member and a non-member in an incidental or connected claim cannot be referred to arbitration under Bye-law 248, the Claimant would have to approach two tribunals for a single claim, which might lead to multiplicity of findings . Therefore, the Single Judge held: [A}

claim against the member can be entertained under By-law 248 where the said claim is incidental to or connected to a claim against a non-member.
Consequently, the Single Judge ruled in BHHs favour. On appeal, the Division Bench of the High Court held that if it is ruled that disputes between a

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member on the one hand and a member and a non-member on the other are to be split and heard separately under Bye-Law 248 and 282, then disputes in which a member and a non-member are liable jointly and severally cannot be heard. Further, if the claimant is asked to approach multiple fora, it might lead to inconsistent decisions on the same set of facts. To prevent such a situation, the Division Bench dismissed PR Shahs plea. On, appeal the Supreme Court dismissed the appeal filed by PR Shah. Following is a summary of the reasoning: 1) The arbitration is not an ad hoc arbitration held as per an arbitration agreement but is an institutional arbitration. There is no need of a separate arbitration agreement. Even questions as to the validity of the transaction, bargain, contract or dealing were arbitrable. 2) The Bye-law provided for appeal from a decision of the tribunal constituted to resolve disputes between two members. PR shah contends that such a right was denied to it by the tribunal by joinder of BHHs claim against it with its claims against Continental. 3) If A had a claim against B and C, and there was an arbitration agreement

between A and B but there was no arbitration agreement between A and C, it might not be possible to have a joint arbitration against B and C. A cannot make a claim against C in an arbitration against B, on the ground that the claim was being made jointly against B and C, as C was not a party to the arbitration agreement. But if A had a claim against B and C and if A had an arbitration agreement with B and A also had a separate arbitration agreement with C, there is no reason why A cannot have a joint arbitration against B & C.
4) If two different arbitration proceedings are held for the same claim, it might lead to multiplicity of proceedings and conflicting decisions. Therefore, ifA has a claim jointly against B and C, and when there are

provisions for arbitration in respect of both B and C, there can be a single arbitration.
5) In the instant case, since Bye-Law 248 provides for arbitration between a member and a non-member and Bye-law 282 provides for arbitration between members, there can be a single arbitration.

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Comment: Thus, the decision not only provides that in case of arbitration under the Bye-Laws, arbitration could be invoked against a member and a non-member; it does not merely provide that such claim against the member should be incidental; it also provides that notwithstanding the nature of the claim, if the Claimant is claiming jointly against two parties, there can be single arbitration for deciding the joint claim if there is an arbitration agreement between A and C and between A and B. The purpose of quoting portions of the judgement at points 3 and 4in the above summary is to highlight this aspect. Although the decision might prevent inefficiency by eliminating the possibility of different proceedings for the same claim, there are a few questions left unanswered by the court. The future courts applying this judgement must take due care in answering those questions. Some of such questions are: (1) how would the arbitral tribunal be constituted in case of such arbitration? (2) how would the cost be apportioned between the parties? (3) whether an agreement prohibiting consolidation of arbitration would be valid? (4) whether consolidation of arbitration proceedings contemplating different arbitral seats is valid?

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III Conclusion Apart from the cases discussed above, there are other important cases such as Union of India v. Krafters Engineers44 andFuerst Day Lawson v. Jindal Exports, which are worth noting. In Krafters Engineers, the Supreme Court had to interpret a clause in the agreement which provided: 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. The question was whether such a
clause mandated the arbitral tribunal to not grant interest in respect of the pre-award period. The court answered the question in the affirmative, holding that the tribunal could not grant interest for the pre-award period as the grant of interested was prohibited by the said clause. In Fuerst Day Lawson v. Jindal Exports, the question before the court was whether there was a right to maintain letters patent appeal under the Letters Patent of the relevant High Court even in the absence of explicit right under the 1996 Act. The Supreme Court answered in the negative.

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