RECENT SUPREME COURT JUDGMENTS ON ARBITRATION

[Mr. M. GOVINDARAJAN]

Arbitration

The noun arbitration comes to English  via the Latin word ‘arbitrari’ meaning ‘to judge’.  In English, arbitration is both the process of using an arbiter to settle a dispute and the act of that arbiter making a judgment.  Arbitration is a formal method of alternative dispute resolution involving a neutral third party who makes a binding decision. The dispute will be decided by one or more persons (the ‘arbitrators’, ‘arbiters’ or ‘arbitral tribunal’), which renders the ‘arbitration award’.   An arbitration decision or award is legally binding on both sides and enforceable in the courts, unless all parties stipulate that the arbitration process and decision are non-binding.  Arbitration is often used for the resolution of commercial disputes, particularly in the context of international commercial transactions.   The Arbitration and Conciliation Act, 1996 provides the procedure for the conduct of arbitration proceedings, passing awards, challenging the awards.  There are various case laws decided by the High Court, Supreme Court in regard to arbitration.  In this article some recent judgments delivered by the Supreme Court are discussed.

Existence of valid agreement

In NTPC LTD. VERSUS M/S SPML INFRA LTD. - 2023 (4) TMI 652 - SUPREME COURT, the High Court allowed the application of SPML Infra Limited for the appointment of arbitrator under Section 11(6) of the Act.  NTPC filed an appeal against the order of High Court.  The NTPC contended that there was no subsisting dispute between the parties in view of the settlement agreement executed between the parties.  Therefore the appointment of arbitration was an afterthought and abuse of process.  The Supreme Court allowed the appeal of NTPC Limited.  The Supreme Court held that the pre-referral jurisdiction of the Court under Section 11(6) of the Act is very narrow and inheres two inquiries-

• existence of valid arbitration agreement; and
• arbitrable dispute.

The standard of scrutiny to examine non arbitrability of claim is only prima facie not requiring full review of contested facts.  Prima facie scrutiny of facts must lead to a clear conclusion that there is not even a vestige of doubt that claim is non arbitrable.  If there is slightest of the doubt disputes are to be referred to arbitration.

The limited scrutiny through the eye of the needle is necessary and compelling.  It is inter-twin with the duty of referral court to protect the party from being force to arbitrate when the matter is demonstrably non arbitrable.  Holding the contentions of SPML to be ex-facie and untenable, the Supreme Court held that this was a fit case where the High Court should have exercised the prima facie test to screen and strike down the ex-facie meritless and dishonest litigation.

In M/S. SHREE VISHNU CONSTRUCTIONS VERSUS THE ENGINEER IN CHIEF MILITARY ENGINEERING SERVICE & ORS. - 2023 (5) TMI 426 - SUPREME COURT, the notice invoking arbitration was issued on 20.12.2023 i.e., prior to the Arbitration and Conciliation (Amendment) Act, 2015.  The application for appointment of arbitration under Section 11(6) of the Act was made on 27.12.2016 i.e., after amendment.  Vide the said amendment Section 11(6A) was introduced which restricted the power of the Supreme Court or High Court under Section 11(6) only to the examination of existence of a valid arbitration agreement and nothing more.  MES successfully resisted the appointment of arbitrator before the High Court pleading accord and satisfaction on signing of ‘no claim certificate’ by the contractor.  The contractor applicant contended that in terms of Section 11(6A) the Court has only to examine the existence of the arbitration agreement and no other issues like discharge of the contract on accord and satisfaction.  The Supreme Court rejected the appeal of the contractor and held that as the arbitration proceedings had commenced in pre amendment Act, 2015 etc., the provisions of Section 11(6A) introduced by the amendment Act shall not apply.

In MAGIC EYE DEVELOPERS PVT. LTD. VERSUS M/S. GREEN EDGE INFRASTRUCTURE PVT. LTD. & ORS. ETC. - 2023 (5) TMI 510 - SUPREME COURT, the Supreme Court set aside the orders of High Court and remitted the matter back to the High Court for deciding the case afresh.  The Supreme Court held that the High Court did not decide finally the issue regarding the existence and validity of the arbitration which is mandatory under Section 11(6A) of the Act.  If the dispute with respect to the agreement is not conclusively and finally decided by the referral Court while exercising the pre-referral jurisdiction under Section 11(6) of the Act and it is left to the Arbitral Tribunal it will be contrary to Section 11(6A).  It is the duty of the referral court to decide the said issue first conclusively to protect the parties from being force to arbitrate when there does not exist any arbitration agreement and/or when there is no valid arbitration agreement at all.

Government Officer - Arbitrator?

In M/S GLOCK ASIA-PACIFIC LTD. VERSUS UNION OF INDIA - 2023 (5) TMI 886 - SUPREME COURT, the Supreme Court has dealt with an application under Section 11(6) of the Act for appointment of a sole arbitrator in a contract which was executed between the petitioner and Union of India through the President of India.  In terms of the contract the arbitrator is to be appointed by the Secretary, Ministry of Law.  The disputes have arises, the petitioner invoked the arbitration clause on 20.07.2022 thereby nominating a former High Court judge as the sole arbitrator.  The same was objected by the Union of India.  The Union of India insisted on appointment of the sole arbitrator strictly as per the arbitration clause. The appointment of an officer, Ministry of Law, as an arbitrator was not in conflict with Section 12(5) of the Act.  The Supreme Court negated the contentions of the Union of India and appointed a former Supreme Court Judge as the sole arbitrator.  The Supreme Court held that a contract entered into in the name of the President of India cannot and will not create any statutory prescription imposing conditions on parties to an agreement when the government chooses to enter into a contract.  The appointing authority as well as the officer to be appointed as arbitrator, in terms of the arbitration clause is ineligible in terms of Section 12(5) of the Act which applies notwithstanding any prior agreement to the contrary.

Claim of damages

In M/S UNIBROS VERSUS ALL INDIA RADIO - 2023 (10) TMI 951 - SUPREME COURT, the Supreme Court emphasized that to support a claim for loss of profitability due to delay in performance of a contract, the claimant-Unibros must provide compelling evidence.  This evidence should demonstrate the existence of a viable opportunity that the contractor could have pursued elsewhere, utilizing its resources, had the project been executed promptly.  The Supreme Court further held that a claim for damages cannot automatically result in an arbitral award.  Instead it must be supported by proof that the claimant suffered actual injury.  This underscores the need for a clear connection between the alleged breach and the harm suffered.    Mere assertion of a claim without substantial proof is insufficient.  The evidence should convincingly establish the link between the project delay and the potential profits that could have been earned elsewhere.

Interpretation

In M/S HINDUSTAN CONSTRUCTION COMPANY LIMITED VERSUS M/S NATIONAL HIGHWAYS AUTHORITY OF INDIA - 2024 (4) TMI 425 - SUPREME COURT, the Supreme Court reiterate the long standing jurisprudence that awards with reasons, especially those interpreting contractual terms, should not be interfered with lightly.  The emphasis was on respecting the arbitrator’s chosen interpretation unless there are clear grounds for non interference.  In this case NHAI challenged the arbitral award.  The same was rejected by the Single Judge.  On appeal the Division Bench held that the award was based on an implausible interpretation of the contract.   Appeal was filed against the judgment of Division Bench before the Supreme Court. The Supreme Court held that by training, inclination and experience, judges tend to adopt a corrective lens; usually commended for appellate review.  Such a lens is unavailable when exercising jurisdiction under Section 34 of the Act.  The Supreme Court upheld the award directing for payment of entire quantity of work of embankment as per BOQ item ‘embankment with fly ash’ without bifurcating the quantities into two different items of BOQ.   The Supreme Court further held that a dissenting opinion serves a specific purpose, usually related to procedure issues, and does not undergo the same scrutiny as the majority award.  The conversion of a dissenting opinion into an award, especially when the majority award is set aside, was deemed inappropriate and improper.

Patent illegality

In RELIANCE INFRASTRUCTURE LTD. VERSUS STATE OF GOA - 2023 (5) TMI 1319 - SUPREME COURT, the arbitrator passed an award  a sum of Rs.278.29 crore towards principal amount and interest up to 31.10.2017 in favor of Reliance Infrastructure Limited. The Tribunal further directed for payment of interest @ 15% per annum from 01.10.2018 until the full payment was made.  The State of Goa challenged the award dated 16.02.2018.  The Commercial Court dismissed the State’s petition challenging the award.  On appeal the Division Bench allowed the appeal by the State of Goa, setting aside a significant portion of the arbitral award besides reducing interest to 10% as against 15% awarded by the Tribunal for the period from 01.11.2017 till the date of payment.  The Reliance Infrastructure filed an appeal before the Supreme Court.

The State contended that the Arbitral Tribunal had not considered relevant causes of the contract and hence committed patent illegality.  There was violation of principles of Natural Justice in as much as its applications seeking production of documents from the claimant were not decided by the Tribunal nor did the Tribunal allow the State to file additional written submissions.

The Supreme Court rejected the contentions of the State.  It upheld the award in its entirety.  The concept of patent illegality applies only when the illegality is evidence on the face of the award and does not require re-evaluation of evidence.  Mere errors, if any, will not amount to patent illegality. If the terms of the agreement are completely ignored, it could warrant interference.  However, reasonable construction of the contract terms by the arbitrator, even if different from the interpretation drawn by the parties, should not be a basis for setting aside the award.  The Supreme Court also held that the reduction of interest by the Division Bench of the High Court was not justified.