Common Commercial Disputes Queries, October 2024

Questions Answered in this Month’s CCDQ:

1. Does the availability of Remedy under the MSME Act Bar Independent Arbitration if an Arbitration Clause exists?
2. Does the Mandate of an Arbitral Tribunal automatically Terminate After Expiry of Period for Making of Arbitral Award?
3. Can a Non-Signatory Party Be Bound by an Arbitration Agreement?
4. What Are the Consequences of Unilateral Appointment of an Arbitrator?
5. Does an Admitted Liability also Imply an Entitlement to Interest on the Admitted Amount?
6. Can Objections to the Jurisdiction of an Arbitrator Raised Under Section 34 Be Rejected Solely on Jurisdiction Without Considering the Merits of the Case?

?

Does the availability of Remedy under the MSME Act Bar Independent Arbitration if an Arbitration Clause exists?

Gita Refractories Pvt Ltd v. Tuaman Engineering Limited (Calcutta High Court, 10.09.2024) was an application under Section 11 of the Arbitration & Conciliation Act, 1996 (“A&C Act”) seeking appointment of an arbitrator owing to existence of an Arbitration Clause.

?

One of the issues involved was whether Section 18 of the Micro Small and Medium Enterprises Act (MSME Act) restricts a party from pursuing independent arbitration under the A&C Act, despite an existing arbitration clause in their agreement.

?

The Court observed as follows:

1.???? Section 18 of the MSME Act does not impose any substantive rights or liabilities; it merely provides an alternative method for dispute resolution. The use of "may" in Section 18(1) indicates that parties have the option to choose between resolving disputes through the MSME Act or through other legal forums, including arbitration.

2.???? Only when the party raising the dispute has chosen to submit to the jurisdiction of the Facilitation Council under Section 18 of the MSME Act does the rest of the provision become mandatorily applicable to the parties.

3.???? If the disputing party chooses to opt for arbitration independently under the A&C Act, there is nothing in the MSME Act which can compel the Petitioner to the relief contemplated in Section 18 of the MSME Act which only covers disputes raised under Section 17 of the MSME Act.

4.???? Further, the petitioner’s claim was broader than the recovery of amounts due under Section 17 of the MSME Act. It included reliefs relating to specific performance and compensation for the respondent's failure to purchase goods. This broadened scope would not be covered within the ambit of the limitations provided in Section 17 of the MSME Act.

In view of the above, the Petitioner’s application was allowed and #arbitrator was appointed.

?

Does the Mandate of an Arbitral Tribunal automatically Terminate After Expiry of Period for Making of Arbitral Award?

Rohan Builders (India) Private Limited v. Berger Paints India Limited (#SupremeCourtofIndia, decided on 12.09.2024) was a civil appeal against a judgment of Calcutta High Court holding that once the period of making arbitral award expires, the mandate of arbitral tribunal automatically expires and application for extension of time under Section 29 of the Arbitration & Conciliation Act, 1996 (“A&C Act”) cannot be entertained thereafter.?

On this issue the Court observed as follows:-

1.???? Section 29A of the A&C Act envisages two time limits for making an arbitral award. First to be made within twelve months, and second that as per sub-section 29A(3) the parties by consent can extent the time limit upto an additional six months. Beyond this period extension by consent is not permissible. (this section is not applicable to international commercial arbitration).

2.???? Section 29A(4) of the A&C Act provides that where award is not made within specified period of twelve or eighteen months, the mandate of the tribunal will terminate, unless, “either period to or after expiry of the period so specified” the court extends this period.

3.???? An interpretative process must recognize the goal or purpose of legal text. In this case, the intention of Section 29A of the A&C Act is to ensure timely completion of arbitral proceedings while allowing flexibility to grant extensions. Prescribing a limitation period unless clearly stated in words or necessary should not be recognized. (Shailesh Dhairyawan v. Mohan Balkrishna (2016) 3 SCC 619, North Eastern Chemicals v. Ashok Paper Mill 2023 SCC OnLine SC 1649).

4.???? It cannot be accepted that permitting applicants to file an extension application post expiry period would encourage rogue litigants, because as per Section 29A(5) of the A&C Act, the power of court to extend the time limit is to be exercised only where there is “sufficient cause” for such an extension. It is not to be granted mechanically on mere filing of application.

?In view of the above it was held that an application for extension of time period for passing an arbitral award under Section 29A(4) read with Section 29A(5) is maintainable even after expiry of twelve month or eighteen month period, as the case may be. The termination of arbitral mandate is conditional upon non-filing of extension application and the word termination cannot be taken strictu sensu.

?

Can a Non-Signatory Party Be Bound by an Arbitration Agreement?

Ajay Madhusudan Patel & Ors. v. Jyotrindra S. Patel & Ors. (#SupremeCourtofIndia, decided on 20.09.2024) was an Application under Section 11(6) &11(9) of the #Arbitration & Conciliation Act, 1996 (“A&C Act”) for appointment of #arbitrator.?

The Court observed as follows:

1.???? Section 11(6-A) of the A&C Act uses the expression “examination of the existence of an arbitration agreement”. The use of the word “examination” connotes that the Court has to scrutinize dealings between the parties for existence of the agreement, but does not connote a detailed or laborious inquiry. (AT has power to rule on its own jurisdiction – section 16 of the A&C Act, Kompetenz Kompetenz).

2.???? Owing to the complexity of the determination of whether a non-signatory is a party to the arbitration agreement or not, the referral court should leave it to the AT to decide whether the non-signatory is indeed a party or not on the basis of factual evidence and application of legal doctrine.

3.???? Intention of a non-signatory to be bound by an arbitration agreement can be gauged FIRSTLY from circumstances that surround participation of the non-signatory in negotiation, performance and termination of the underlying contract containing the arbitration agreement. SECONDLY the conduct of non-signatory may be in harmony with the conduct of other members of the group and THIRDLY other party has legitimate reasons to rely on appearance created by non-signatory so as to bind it to the arbitration agreement. (Cox & Kings Ltd. v. SAP India (2024) 4 SCC 1).

4.???? The involvement must be positive, direct and substantial and not merely incidental.

5.???? In the present case, owing to the complexity of numerous disputed questions involved, the court stated it had limited jurisdiction under Section 11(6) of the A&C Act owing to which the question of whether the non-signatory was a party or not, was left to be dealt with by the arbitral tribunal.

In view of the above, the Court appointed the Arbitrator. ?

?

What Are the Consequences of Unilateral Appointment of an Arbitrator?

M/s PGL Estatecon Pvt. Ltd. vs. M/s Jyoti Enterprises (Delhi High Court, order on 11.09.2024) was an Objection Petition under Section 34 of the #Arbitration & Conciliation Act, 1996 (“A&C Act”) challenging an award passed in an arbitration proceedings between the parties.?

One of the key objections for challenging the award was that the arbitrator had been unilaterally appointed in the present matter.

?The Court observed as follows:

1.???? The Respondent had served a notice to the opposite party in the nature of a demand notice, which did not mention reference of disputes to arbitration as such.

2.???? Even if the said notice could be treated as a notice under Section 21 of the A&C Act (notice invoking arbitration), it was an admitted fact that the Respondent had never approached the Court under Section 11 of the A&C Act for appointment of arbitrator, before the #arbitrator in the impugned award, entered refeence.

3.???? In view of the same, the arbitration was observed to be prima facie invalid ab initio.

?In view of the above, the execution of the award was stayed till the next date.

?

Does an Admitted Liability also Imply an Entitlement to Interest on the Admitted Amount?

?Shutham Electric Ltd. v. Vaibhav Raheja & Anr. (Delhi High Court, Division Bench, decided on 10.09.2024), was an Appeal under section 37(1)(c) of the Arbitration & Conciliation Act, 1996 (“A&C Act”) challenging the order passed by the Ld. Single Judge in a Section 34 Objection Petition upholding the #award in an arbitration proceeding.

The Sole #arbitrator had granted the claim of the Claimant in its application under Order XII Rule 6 of the Code of Civil Procedure, 1908 on the basis of admissions made by the Respondent regarding its liability.

One of the issues discussed was whether the #Arbitrator could award interest on the admitted amount of the Claim.

The Court observed as follows:

?

1.???? The rule under Order XII Rule 6 of the CPC is that where a claim is admitted the Court has jurisdiction to enter a judgment for the Plaintiff and to pass a decree on the same. The object of the rule is to enable the party to obtain a speedy judgment at least to the extent of the admission. (Uttam Singh Duggal v. United Bank of India (2000) 7 SCC 120).

2.???? As per the correspondence between the parties, the Appellant has acknowledged its liability of repayment of the loan in question.

3.???? The factum of the loan was not denied both in pleadings before the Arbitrator and the reply to the Respondent no. 1’s application under Order XII Rule 6.

4.???? The logical sequitur of the admission would be that the Appellant would also have to pay the interest on the outstanding amount. Therefore, the Arbitrator had correctly exercised his power and passed the award both for the outstanding amount as well as the interest.

5.???? The appellant cannot be permitted to believe as if the arbitral award is not the end of the road but a prelude to stage two of their disputes – this time before Courts, as such a belief is contrary to the intent of the A&C Act. The Court will not re-assess and re-examine evidence placed before Sole Arbitrator in a proceeding under Section 37 of the A&C Act.

In view of the above, the Ld. Single Judge’s order as well as the award was upheld and the present appeal was dismissed.

?

Can Objections to the Jurisdiction of an Arbitrator Raised Under Section 34 Be Rejected Solely on Jurisdiction Without Considering the Merits of the Case?

?

M/S Lion Engineering Consultants Pvt. Ltd. v. The State of Madhya Pradesh & Ors. (Madhya Pradesh High Court, decided on 03.10.2024) was an arbitration appeal under Section 37 of the Arbitration and Conciliation Act, 1996 (A&C Act) against the High Court’s order allowing an objection petition under Section 34 of the A&C Act, whereby an #arbitration award had been set aside for want of jurisdiction.

?The parties had entered into a contract for consultancy services whereby the Appellant was to provide consultancy services for a construction project. When certain bills remain unpaid, disputes arose between the parties and the Appellant was eventually served with a show cause notice to explain why the contract should not be terminated.

?The Appellant thereafter, filed an application under Section 11(6) of the A&C Act for appointment of an #arbitrator. When the award was passed by the arbitrator, the Respondent challenged this award under Section 34 of the A&C Act, later seeking to amend the application to include a jurisdictional objection. The objection raised was on the ground that since the present disputes related to a Works Contract, the disputes ought to have been raised under the MP Adhikaran Adhiniyam, 1983 and not under the A&C Act.

This objection was initially not entertained by the Court, but after a round of litigation and Supreme Court’s direction, the section 34 Court took cognizance of the jurisdictional objection. However, at this point, it allowed the Section 34 solely on the ground of the jurisdictional issue without looking into the merits of the case.

This was the ground on which the present Appeal was filed.

The Court observed as follows:

1.???? Admittedly, the Respondents had not raised any jurisdictional objections before the Sole Arbitrator.

2.???? The #SupremeCourtofIndia has previously held that in cases where no objection to the jurisdiction of arbitration was taken at the relevant stage, the award may not be annulled only on that ground. ?(M.P. Rural Road Development Authority Vs. L.G. Chaudhary Engineers (2018) 10 SCC 826)

3.???? The Apex Court did not direct the Section 34 Court to decide the Section 34 Application only on the issue of maintainability without touching merits of the case.

4.???? In view thereof, the Section 34 Court was wrong to reject the section 34 application only on jurisdictional grounds without addressing the merits of the case.

In light of the above, the High Court restored the section 34 application and directed the commercial court to decide the same on both jurisdiction and merits.