arbitration in the supreme court of india: 2011

7/28/2019 Arbitration in the Supreme Court of India: 2011

1/61Electronic copy available at: http://ssrn.com/abstract=2199370

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Arbitration in the

Supreme Court of

India: 2011

28 February 2012

Badrinath Srinivasan


2/61Electronic copy available at: http://ssrn.com/abstract=2199370

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Supreme Court on Arbitration in 2011: Landmark Decisions

Badrinath Srinivasan*

The Law on Arbitrationin India is a very vibrant area, especially in theinternational 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. State of Maharashtra v. Ark Builders (28.02.2011)2. Booz Allen & Hamilton v SBI Home Finance (15.04.2011)3. Union of India v. Tantia Constructions (18.04.2011)4. Videocon Industries v. Union of India (11.05.2011)5. State of Goa v. Praveen Enterprises (04.07.2011)6. Fuerst Day Lawson v. Jindal Exports (08.07.2011)7. 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: [email protected] . 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.


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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.

1Civil 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)2Hereinafter Ark Builders.


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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. Anotherreminder 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 January2004, 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 periodprescribed 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)


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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 arbitralmandate, 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 theaward.

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 SBIHome 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.

4Section 2(1)(h) of the 1996 Act reads: "party" means a party to an arbitration agreement. 5 Civil Appeal No. 5440/ 2002: MANU/SC/0533/2011: AIR 2011 SC 2507: 2011(2) Arb LR

155 (SC)


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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.

05.04.96 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 theremaining 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.

04.08.99 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.


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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 perClause 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 contemplatedby the said arbitration clause.

b) The detailed reply filed by Booz (dated 15.12.99) in regard to thenotice 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 isdeemed 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 20months from filing of the reply dated 15.12.99.

An appeal by special leave was filed to the Supreme Court. The SupremeCourt granted leave on 28.08.02.

Decision of the Supreme Court:

6Judgement 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.


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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 ofthe 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 ofliability 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 begoverned 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


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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, itwas 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 to

arbitration could be rejected as it was filed nearly 20 months?

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:

7 (2006) 7 SCC 275


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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 whenthese attempts ended in failure Booz had filed an application underSection 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) disputescapable 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 beresolved 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 onlyby 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 remas 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 (thatis, any other person claiming an interest in the subject matter at any

point of time). Consequently, a judgement in an action in personamis 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 remare to be pursued in a courtof 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 atransfer of a right in rembut 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 formortgage is an action in remfor 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 decreefor 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 suitsuch 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.

8Sukanya 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 Courtfor 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 Courtthat 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.

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

(SC)


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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 DisputesSubject 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 MANU/SC/0598/2011: AIR 2011 SC 204011Hereinafter PSC.


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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 thecase 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 therights, 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 fourcompanies) 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 inLondon. 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 Lawas 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 contendedthat 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:

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


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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 courtstated:

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 thisArticle 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 thevalidity of the main agreement;

b) parties could choose a law for the arbitration clause that is differentfrom 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 invalidatesuch 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 besuperfluous 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.

13 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.


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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 tochallenge 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 arbitrior 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 theperformance 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 ofholding 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 arbitraltribunal 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 theagreement 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 betweenthe 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);


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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 whetherLondon 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 casethat 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 haveapproached 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 proceedingsbetween 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


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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 the Supreme Court:

For Videocon:

Summary of Videocon's arguments are:

Delhi High Court did not have jurisdiction to pass an order underSection 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 HighCourt did not have jurisdiction as Part I was impliedly excluded by theparties as the lex arbitri was English Laws.

Having agreed for the shifting of seat, UoI is estopped from arguingthat the seat of arbitration was Kuala Lumpur.

If UoI was aggrieved by the partial award, it could have applied to theEnglish courts to annul the said award.

For UoI:

As per the arbitration agreement, Kuala Lumpur was the seat ofarbitration. 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 arbitrationand the record by the tribunal of proceedings to that effect.

The PSC was between ONGC Ltd., Videocon Petroleum, CommandPetroleum 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. Anychanges 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:


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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 Lumpurbeing 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 whichseat could be changed by the arbitral tribunal.

The distinction between the seat and holding hearings in venues otherthan 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 ofarbitration 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 Internationalwas 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, Indiancourts had no jurisdiction. According to the court, the Gujarat High Court in

Hardy Oil and Gas correctly applied the ratio of Bhatia International.

16 MANU/SC/0812/2010 : 2010 (9) UJ 4521 (SC)17 MANU/SC/0185/2002 : (2002) 4 SCC 10518 MANU/SC/0333/2008 : (2008) 4 SCC 19019 MANU/GJ/0392/2005 : (2006) 1 GLR 658


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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 Videoconwas 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 iswhat 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 expresslychosen English Law to be the law governing arbitration. It may also be noted

that the facts in Hardy Oil and Gasare 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


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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 bereferred 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 thesubstantive 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 hadrightly 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)


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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 begoverned 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 inVideoconwas 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 SupremeCourt.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)


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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 usesthe 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 instrumentb. The amendment must be signed by all the parties, andc. 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 theagreed manner of performance in the contract can be altered even extra-

contractually 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


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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 ofprudence 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 inwriting 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 subject-

matter 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 shalldecide 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.

21http://www.indiankanoon.org/doc/1904779/


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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 passinga 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 oralagreements. 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, becausethe 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 Indiaand 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

22http://indiankanoon.org/doc/476707/


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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 withequal 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 ofhis 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 partiesas if that is not so, it would obviate the purpose of making the concession or

the compromise in a court of law.

23 See, for instance, Pushpa Devi v. Rajinder Singh available at

http://indiankanoon.org/doc/1335849/24 MANU/SC/1003/2004


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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 significantbecause 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, drawingsand 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 suchdisputes. (emphasis supplied)

25 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.


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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 claimstatement 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 thereason 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-claimsbefore the arbitrator even if none was raised in the proceedings

under Section 11.

Since the Chief Justice does not refer disputes to arbitration underSection 11, the High Court was wrong in stating that there was noreference by the High Court of the counter-claims raised.

Charuvil Koshywas a decision under the Arbitration Act, 1940, whichis materially different from the 1996 Act.

The Respondent contended:

27 1998(2) ARb. LR 157 (Bom) (hereinafter Charuvil Koshy)


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In SBP & Co. v. Patel Engineering (2005) 8 SCC 6128 and NationalInsurance 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 theclaims are within limitation. Unless it is required that the counter-

claimant 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 offiling 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 andevery counter-claim not mentioned in objections to such applicationcannot be raised before the arbitrator.

In Law and Practice of Commercial Arbitration in Englan authored byMustill & 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 ofthe 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 commencewhen the notice invoking arbitration is received by the respondent.

Therefore, arbitration proceedings in respect of the counter claimscommence only after issuing a notice invoking arbitration

Questions before the Court:

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


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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 toarbitration, 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 thearbitration 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.


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agreement to the arbitrator, the arbitrator has jurisdiction to decide all

disputes that were made in the pleadings of the parties, including counter-

claims. 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 suitwithin 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 withrespect 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, therespondent 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.


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4. Section 23 does not restrict the claimant (which term includes a counter-

claimant) 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 fileadditional 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 werementioned 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 theChief 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 Indian Oil Corporation v. Amritsar Gas Service (1991) 1 SCC 53330 Indian Oil Corporation v. SPS Engineering 2011(1) Arb LR 373 (SC)


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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 counter-

claims 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)


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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 stampedwhen 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 theTransfer of Property Act, 1882 make registration of leases like the

one involved in this case compulsorily registrable. Relevant portions ofSection 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

32http://www.indiankanoon.org/doc/24736/


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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 isa collateral instrument or not. If it is so, the said clause would bevalid.

An arbitration clause, being unrelated to the performance of theagreement, 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 ischallenged 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 partythere 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 beregistered. Therefore, reading the exception carved out by Section49 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 aninstrument which is not duly stamped. This means that even anarbitration agreement co

arbitration in the supreme court of india: 2011

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