Judicial intervention in arbitration

JUDICIAL INTERVENTION IN ARBITRATION LAW IN INDIA

Author: Sankalpita Pal

Introduction

The evolution of arbitration law in India has a long-running history. Modern Arbitration was first introduced during British India in 1772 through the Bengal Regulations.  However, the eventually Arbitration and Conciliation Act, 1996 came into being. In the initial stage, when a dispute arises with regard to the appointment of an arbitrator, necessarily requires the court’s intervention. During the proceedings, the court’s intervention is required to assist the proceedings. The court can provide assistance by providing interim protection or otherwise. Finally, when the arbitral award is declared, judicial intervention is required for either the enforcement of the award or to challenge it.

Legislative intent behind the 1996 Act

The 1996 act only came into being after two ordinances were passed after the New Economic Policy of 1991 was functioning.[1] The scheme of the 1996 act is such that the supervisory role of the courts in the arbitration proceedings and arbitral awards would be reduced. It is mentioned in the preamble of this Act that it’s based on the UNCITRAL Model Law. However, not all safeguards provided by the UNCITRAL Model Law were incorporated in this Act.  Under Article 16 of the Model law provided that Arbitration Tribunals may rule in its own Jurisdiction and jurisdictional issues were to be decided as preliminary issues by the arbitral tribunal, before appealing to the Court. This was eliminated from the Act.

It is provided under the Model Law that court has the power to grant an interim measure of protection if it depends upon where the arbitration is being held and whether it is in the place in which the court is situated. However in the 1996 Act in order to curtail the court a certain section was introduced. Section 2(2) was introduced as opposed to Article 1(2) of the Model Law, to exclude such power of the court.

Judicial intervention in Arbitration Law

Three ways in which judicial intervention in arbitration takes place:-

• Before proceedings- Section 5 of the 1996 act
• During proceedings- Section 9 of the 1996 Act
• After proceedings- with regard to arbitral awards

Judicial intervention before Arbitration Proceedings

The extent of judicial intervention statutorily permitted is laid under Section 5 of the Arbitration and Conciliation Act, 1996.[2] Interestingly this section is analogous to Article 5 of UNCITRAL Model Law. It is also inspired by the English Arbitration Act 1996 as well. However, a significant amount of unnecessary judicial intervention is practiced in reality while applying the Arbitration Law.

The construction of Section 5 of the Act makes it pretty clear that the legislature wanted to limit the role of Court in arbitration. Parties are given autonomy over the court’s intervention in order to achieve the two-fold objective of expediting justice and economic resolution of disputes. Disputes can be resolved by either Domestic or International commercial arbitration.

Section 5 starts with a Non- obstante clause. This eliminates the possibility of intervention by courts. The term “no judicial authority” is wide enough and the Act also ensures by using the word “shall intervene” that there is no judicial discretion involved.[3] A certain extent of judicial intervention is allowed in order to kick start the arbitral process only. Judiciary just plays an administrative role and not a judicial one. The Act provides exceptions to the non-obstante clause by including words like “except where so provided in this part”. The SC explained the same in Secur Industries Ltd V. Godrej and Boyce Mfg. Co. Ltd[4].

The SC in Surya Dev Rai V. Ram Chander Rai[5] observed that “If it intervenes in pending proceedings there is bound to be a delay in termination of proceedings. If it does not intervene, the error of the moment may earn immunity from correction……..Thus, the power is there but the exercise is discretionary which will be governed solely by the dictates of judicial conscience enriched by the judicial experience and practical wisdom of the Judge”.

How does the intervention function at start?

1. When in contravention to the arbitration agreement an application is made to stay the court proceedings, a judicial authority steps in to resolve disputes. It is interesting to note at this point that Courts cannot compel arbitration on the claimants. They are entitled to avail a remedy through Courts and can also avail arbitration.
2. Section 8 refers to domestic arbitration and Section 45 and 54 refer to International commercial arbitration. A party involved in court proceedings can receive a reference of their dispute to arbitration by virtue of these sections.[6]
3. The power to refer parties to arbitration only arises when a valid arbitration agreement exists. Such agreements are contractual understanding between parties. Yet Parties try to approach traditional courts. The object of arbitration is speedy and inexpensive dispute resolution.
4.  Judicial intervention must only be to support arbitration and not overstep its jurisdictional authority. As per Section 8 of the Act, the judicial authorities are mandatorily required to refer the parties to the arbitration.[7]
5. In P. Anand Gajapathy Raju V. P.V.G. Raju[8] it was held that “the language of section 8 is preemptory and brings about a legal obligation upon Courts to refer parties to the arbitration. Furthermore, ‘arbitration may be commenced or continued and concluded by making an arbitral award’ while the application is pending.[9]
6. The essentials laid down under Section 8 of the 1996 Act in order to refer parties to the arbitration.
7. there is an arbitration agreement
8. a party to the agreement brings an action in the Court against the other
9. the subject matter of the action is the same as the subject matter of the arbitration agreement
10. the other party moves the Court for referring the parties to arbitration before it submits his first statement on the substance of the dispute.

What shall be considered as “Judicial Authority”?

The Courts have widened the scope of this term as and when required in order to widen the scope of applicability of the law laid down in this Act.

1. In Fair Air Engineers Pvt Ltd., V. NK Modi[10] the Apex Court held that the District Forum, the State Commission and the National Commission under the Consumer Protection Act 1986 are to be considered as “Judicial Authority”.
2. Even a Commission set up under the Monopolies and Restrictive Trade Practices Act 1969 is also judicial authority.[11]
3. The legislature have well utilized the term “Matter” instead of using the term Suit as it would have limited the scope of what could be called a judicial authority.
4. In case of Canara Bank V. Nuclear Power Corporation of India Ltd[12] the Supreme Court observed that the Company Law Board is a ‘judicial authority’.

However, arbitration doesn’t take away the possibility of advancing criminal proceedings against an accused if the prima facie case constitutes a criminal offence.

Judicial intervention during Arbitration Proceedings

There are various sections involved where the judiciary steps in during proceedings as well. Section 9 of the Act lays down interim measures that can be granted by the Court. Section 17 of the Act on the other hand empowers arbitral tribunals to make orders as per the section. Section 9 confers the same powers to judicial authorities and courts. However, the purpose of both sections is absolutely different.

Implications of Section 9 of the Act- Interim measure by Court

1. The power conferred by Section 9, to courts is mandatory in nature. It is not subject to the autonomy of the parties in dispute. Interim measures are not a substantive relief.[13] An application under Section 9 is not a suit and the relief sought under it is not a right arising out of the contract. The role of the court is such that it only protects the rights of adjudication before an arbitral tribunal from being frustrated.[14]
2. Now one of the challenges that props up is as under Section 17 of the Act shows the lack of any suitable legislative mechanism in the Act itself for the enforcement of interim orders of the arbitral tribunal. The Delhi High Court in the case of Sri Krishan v. Anand[15]attempted to suggest amendments to section 17 which would give more authority and security to the interim measures by arbitral tribunals. So that parties don’t need to show up to the court to challenge the same.
3. In M/s. Sundaram Finance Ltd., V. M/s. N.E.P.C. India Limited[16] the N.E.C.P could not have approached the Civil Court to sought relief in order to facilitate delay in the proceedings pending adjudication before the arbitrator. The court explained that the provisions under Section 9 of the Act have been laid down to facilitate the smooth sailing of arbitral proceedings. Unscrupulous parties involved can’t utilize it to misuse this section so as to hamper the progress of the proceedings. This case, however, did not deal with judicial intervention with arbitral awards.
4. In the case ITI Ltd V. Siemens Public Communications Network Ltd[17] it was held that the provisions of the Civil Procedure Code, 1908 which lays down rules for interim injunctions by the court, has to be kept in mind while deciding an application under Section 9. This shows that the arbitral provisions are not independent and have to look up to courts in order to serve its own purpose.

Judicial Intervention with regard to Arbitral Award

One of the most significant provisions of the Act is Section 34. This Section lays down the permissible grounds upon which an arbitral award can challenge. The Court doesn’t entertain appeal over arbitral awards. This section is also a testament to the limited scope of judicial intervention that is statutorily allowed.[18] 

Sections 34 encompass 4 important sub-sections that lay down the permissible grounds for setting aside an arbitral award. Presently, the pendency of a petition under this section renders an arbitral award unenforceable. The SC in National Aluminum Co. Ltd. v. Pressteel & Fabrications[19], criticized the present situation and has suggested certain amendments.

Enforcement of Final Arbitral award by Tribunal

Enforcement of such awards has the same impact as that of a decree passed by a Court. Section 35 of the Act lays down provisions for the Finality of the Arbitral awards. Only the losing party is allowed to make an application to challenge the enforcement of Arbitral Awards.

Limitation of Time

An application for setting aside an arbitral award can be made to the Court within 3 months from the date of receipt of the award. The limit of three months can be extended to a maximum of 30 days and not more than that if the party is able to satisfy the court on the sufficient cause from not filing it timely.

The SC in State of Maharashtra & Ors. V. M/s. Ark Builders Pvt. Ltd[20] held that the application for setting aside the award must be made within the period of limitation and it has to be made if it satisfies the grounds laid down under Section 34 of the 1996 Act.

Cases which are adversely criticized and later reformed

The Supreme Court delivered a controversial decision in S.B.P & Co. v. Patel Engineering[21]. In this case, it held that to appoint an arbitrator under Section 11 of the Act is a judicial order that has given rise to a lot of criticism.

Similarly, in the case Bhatia International v. Bulk Trading[22], the power of Judicial authorities to grant interim relief; extended to arbitration outside India, was another decision looked down upon and adversely criticized. Finally, the Supreme Court also commented upon the scope of interference in awards under Section 34 in the O.N.G.C. v. Saw Pipes[23] where patent illegality was articulated as a ground for setting aside the award. This one of the most flawed judgments regarding the above subject. In this case, it was held that an arbitral award can be set aside if it is contrary to:-

1. fundamental policy of Indian law; or
2. the interest of India; or
3. justice or morality, or
4. In addition, if it is patently illegal.

In this case, The Apex Court relied upon the narrow approach to the term “public policy” laid down in Renusagar Power Co. Ltd. vs. General Electric Co.[24]However, once again the SC corrected its error in Phulchand exports Ltd. v. OOO Patriot[25]anddidn’t follow the “Saw Pipes” case and thereafter, overruled its earlier decision in the case of Sri Lal Mahal Ltd. vs. Progetto Grano Spa[26] and expanded the interpretation of the term public policy.

At some point, question arose as to whether there is a need to raise additional grounds for setting aside arbitral awards. The SC in State of Maharashtra v. M/s. Hindustan Construction Company Ltd[27] took note of this question and said that presently including additional grounds would mean increasing the scope of judicial intervention and that would be contrary to the intent behind the 1996 Act.

Recent Development

In October 2019, the Apex Court in the State of Jharkhand v. HSS Integrated SDN & Anr[28], dealt with the scope of judicial interference in proceedings under section 34. The Court took the view it laid under the case of the National Highway Authority of India v. Progressive-MVR[29]. It was held that the view taken by the arbitrator is a plausible view, and/ or when two views are possible, a particular view taken by the arbitral tribunal which is also reasonable should not be interfered with in a proceeding under section 34 of the Arbitration Act.

Importance of the Concept of Doctrine of Separability

This concept mainly recognized the fact that the jurisdiction of arbitral tribunals is not easily challenged on the basis of invalidity of the contract containing the arbitration clause. Elaborating the same, according to this doctrine, that arbitration clause is considered separate & independent from any contract of which it was initially a part of before it was rendered invalid. Therefore, any infirmity in the contract does not ipso jure invalidate the arbitration agreement attached to it.

Applying this doctrine is important in order to defeat the possibility of unscrupulous litigation. Further explaining this point, when a dispute arises, unscrupulous respondents may resort to dilatory tactics to show the invalidity or inoperativeness of a part of the contract, thus rendering the whole invalid and inarbitrable. But if this doctrine is applied this won’t be possible and the dispute resolution would be arbitrable and speedy justice is guaranteed to the claimants.

This Doctrine is important as it maintains the sanctity of arbitration law and upholds its purpose.

However, in practice in India, this doctrine is mostly ignored. For example, in 2006 in UOI v. Jagdish Kaur[30], when the dispute arose between landlord and tenant as the tenant remains on the premises of the property after the termination of the agreement. The landlady filed a suit for ejectment of the tenant. The Court said that the arbitration agreement came to an end due to the end of the contract and yet again overstepped its duty. The same has happened in the case of India Household and Healthcare Ltd. v. LG Household and Healthcare Ltd[31], where it was held by the SC that if the whole contract is void, the arbitration clause is also void and the Courts must step in instead to decide on such cases.

Recent Development

It is only in the past few years that Courts including the Supreme Court, have realized the importance of this doctrine and how it facilitates arbitration. The SC has rendered judgments in favour of this concept.

In 2019 in Vidya Drola & Ors. v. Durga Trading Corporation[32] the SC allowed arbitration proceedings to resolve disputes in the landlord-tenant agreement. The Court also referred judgment to a three-Judge bench to relook into the case of Himangni Enterprises versus Kamaljeet Singh Ahluwalia[33]. In 2014 the SC in World Sport Group (Mauritius) Ltd. v. MSM Satellite (Singapore) Pvt. Ltd[34] applied the doctrine and said that ‘Section 45 did not empower a court to decline reference to arbitration on the ground that another suit on the same issue is pending in the Indian court”. Thus, the arbitration clause is absolutely operative.

Brief analysis of the 2015 amendments to the 1996 Act.

The amendments in 2015 were made in order to diminish judicial intervention as the legislature realized the real scenario. The effectiveness of the amendment is still questioned. In Konkan Railway Corporation vs. Mehul Construction Co.[35] the Court stated that the provisions of the 1996 Act is to minimize judicial intervention. But the actual reality, however, has been far from ideal.

1. Section 8[36] of the Act, prior to the 2015 amendment, gave certain discretionary power to the Courts by using the word MAY. This changed as the post the amendment, MAY was replaced by SHALL. This gave certainty to the extent of the limitation of judicial intervention.
2. A new sub-section (7) was inserted under Section 11[37] of the act which made decisions passed under Sub-sections (4), (5), and (6) non-appealable and final.
3. Interim reliefs under Section 17 was unenforceable before the amendment. Thus, parties used to seek the same from courts under Section 9. This diluted the purpose of the Act to unburden the Judiciary. Thus, post amendment this position changed due to several subsections which were inserted were to be r/w Section 17.

These are the few significant amendments that made sure to minimize judicial intervention in arbitration. In 2019 in M/s Mayavati Trading Pvt. Ltd. vs. Pradyuat Deb Burman[38] the SC held that the Courts should only restrict themselves to the whether an arbitration agreement exists or not and preliminary grounds shouldn’t be entertained. The SC also overruled United India Insurance Company vs. Antique Art Exports Private Limited[39].

Is Judicial Intervention justified?

After analyzing the judicial trend a few justifications have been placed.

1. In India mostly domestic arbitrations take place. Thus there is a natural dearth of any foreign element. The government or such agencies only become opposing parties. The arbitrators appointed by the center are government employees themselves who may be biased towards a particular party for various reasons.
2. Politics, power, and wealth can purchase justice. And it is easier in arbitration processes as they are a bit informal in character and arbitrators are more often than not, not familiar with how to effectively conduct arbitral processes.
3. The practical legal market isn’t coherent with the theory behind arbitration law. Thus, defeating its purpose.

For example- The SC also intervened in Hindustan Zinc v. Friends Coal Carbonisation[40] and Delhi Development Authority v. R.S. Sharma[41]. In the former case, the Court interfered with an arbitral award. The calculation for price escalation made by the arbitrators was not in accordance with the contract. In the latter case, an award for extra compensation was set aside as it was contrary to a certain specific clause in the contract. Thus, in both cases, awards were set aside because it was contrary to the terms of the contract.

Conclusion

It is accepted that the Indian Courts have an expansive role to play. However, it oversteps its duty and intervenes more than necessary with the Arbitration law in order to fill in the lacuna in the Statute. The 2015 amendment act has done its part. But there are many flaws that leave loopholes and facilitate the delay in arbitration matters. It is abundantly clear that from the very beginning minimization of judicial interference was the purpose of the arbitration. However, in practice, the courts still disregard it as seen in few cases above. The court has a duty and statutory obligation to support arbitration in order to shift its own burden. A stitch in time saves nine, if proper amendments are incorporated with farsighted judicial assistance, Arbitration can gain unimaginable importance in the Indian scenario.

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[1] A.K. Ganguly, The Proposed Amendments to the Arbitration and Conciliation Act , 1996 Critical Analysis, , 45 JILI 3, 5-6 (2003)

[2] Section 5: Extent of Judicial Intervention: Notwithstanding anything contained in any other law for the time being in force, in matters governed by this Part, no judicial authority shall intervene except where so provided in this Part.

[3] P. Anand Gajapathi Raju V. PVG Raju, (2000) 4 SCC 539, 541

[4] Secur Industries Ltd., v. Godrej and Boyce Mfg. Co. Ltd, AIR 2004 SC 1766

[5] Surya Dev Rai V. Ram Chander Rai, AIR 2003 SC 3044

[6] Kotak Mahindra Bank Ltd.V. Sundaram Brake Lining Ltd., (2008) 4 CTC 1

[7] Hindustan Petroleum Corporation Ltd., V. Pink City Midway Petroleums, (2003) 6 SCC 503

[8] P. Anand Gajapathy Raju V. P.V.G. Raju, (2000) 4 SCC 539

[9] Kaplana Kothari V. Sudha Yadav, AIR 2002 SC 404

[10] Fair Air Engineers Pvt Ltd., V. NK Modi, (1996)6 SCC 385

[11] Shri Balaji Traders V. MMTC Ltd., (1999) CLA 261

[12] Canara Bank V. Nuclear Power Corporation of India Ltd, (1995) Supp 3 SCC 81

[13] Liverpool and London Steamship Protection and indemnity Association Ltd., V Arabian Tankers Company 2004 (1) RAJ 311 (Bom)

[14] Firm Ashoka Traders V. Gurumukh Das Saluja, 2004 (3) SCC 155

[15] Sri Krishan v. Anand, (2009) 3 Arb LR 447 (Del).

[16] M/s. Sundaram Finance Ltd., v. M/s. N.E.P.C. India Limited, AIR 1999 SC 565

[17] ITI Ltd V. Siemens Public Communications Network Ltd, 2002 (5) SCC 510

[18] P.R. Shah, Shres and Stock Broker (P) Ltd., V.B.H.H. Securities (P) Ltd, AIR 2012 SC 1866

[19] National Aluminum Co. Ltd. v. Pressteel & Fabrications, (2004) 1 SCC 540

[20]State of Maharashtra & Ors. V. M/s. Ark Builders Pvt. Ltd, (2011) 4 SCC 616

[21] S.B.P & Co. v. Patel Engineering, (2005) 6 SCC 288

[22] Bhatia International v. Bulk Trading, 2002 4 SCC 105

[23] O.N.G.C. v. Saw Pipes, (2003) 5 S.C.C. 705

[24] Renusagar Power Co. Ltd. vs. General Electric Co., (1994 SCC supp. (1) 644

[25] Phulchand exports Ltd. V. OOO Patriot (2011 11 SCALE 475)

[26] Sgri Lal Mahal Ltd. vs. Progetto Grano Spa (2014 2 SCC 433)

[27] State of Maharashtra v. M/s. Hindustan Construction Company Ltd, (2010) 4 SCC 518

[28] State of Jharkhand v. HSS Integrated SDN & Anr, (2019) 9 SCC 798

[29] National Highway Authority of India v. Progressive-MVR (JV), (2018) 14 SCC 688

[30] UOI v. Jagdish Kaur, AIR 2007 All 67

[31] India Household and Healthcare Ltd. v. LG Household and Healthcare Ltd, (2010) 1 SCC 72

[32]Vidya Drola & Ors. versus Durga Trading Corporation, 2019 SCC OnLine SC 358

[33] Himangni Enterprises versus Kamaljeet Singh Ahluwalia, (2017) 10 SCC 706

[34] World Sport Group (Mauritius) Ltd. v. MSM Satellite (Singapore) Pvt. Ltd, (2014) 11 SCC 639

[35] Konkan Railway Corporation vs. Mehul Construction Co, 2000 (7) SCC 201

[36]Section 8 of Arbitration and Concilliation Act, 1996- Power to refer parties to arbitration where there is an arbitration agreement

[37] Section 11 of Arbitration Concilliation Act, 1996- Appointment of arbitrators.

[38] M/s Mayavati Trading Pvt. Ltd. vs. Pradyuat Deb Burman, (2019) 8 SCC 714

[39] United India Insurance Company vs. Antique Art Exports Private Limited, (2019) 5 SCC 362

[40] Hindustan Zinc v. Friends Coal Carbonisation, (2006) 4 SCC 445

[41] Delhi Development Authority v. R.S. Sharma, (2008) 13 SCC 80