Welcome to the December edition of our Arbitration newsletter, where we delve into significant judgments that have shaped the legal landscape under the Arbitration and Conciliation Act, 1996. In this edition, we explore six noteworthy cases that touch upon the interpretation and valuable insights of the relevant provisions of the Act. 

In Re: Interplay Between Arbitration Agreements under the Arbitration and Conciliation Act 1996 and the Indian Stamp Act 1899 Curative Pet (C) No. 44/2023 In R.P.(C) No. 704/2021 In C.A. No. 1599/2020 (Supreme Court of India)

The Supreme Court held that unstamped/insufficiently stamped arbitration agreements are not unenforceable, they are merely inadmissible as evidence. 

In the present case, Indo Unique Flame Ltd. (“Indo Unique”) and N.N. Global Mercantile Pvt. Ltd. (“N.N. Global”) had entered into a sub-contract wherein a dispute arose between them and subsequently Indo Unique invoked the Bank Guarantee submitted by N.N. Global. Indo Unique filed an application under Section 8 of the Arbitration and Conciliation Act, 1996 (‘Arbitration Act’) for referring the dispute to Arbitration which was rejected by the Commercial Court. Subsequently, in a writ filed by Indo Unique before the Bombay High Court, it was observed that the Section 8 application was maintainable, and the issue of unregistered and unstamped contract could be raised in an application under Section 11 of the Arbitration Act. Accordingly, an appeal was filed in the Hon’ble Supreme Court (three-judge Bench) which upheld the order of the High Court (“N.N. Global 1”). On reference to a Constitution Bench of the Supreme Court, it was held by a 3:2 majority, that an unstamped arbitration agreement is unenforceable (“N.N. Global 2”). A Curative Petition was filed to decide the said issue and a five-judge Bench considering the ramification of the decision in N.N. Global 2 referred the same to a seven-judge Bench.

In a welcome move, on 13 December 2023, a seven-judge Bench of the Supreme Court held that an arbitration agreement contained in an unstamped/insufficiently stamped document merely renders it inadmissible as evidence and does not make the arbitration agreement unenforceable/void ab intio under the Stamp Act, 1899, as the non-payment of stamp duty is a curable defect. Further, the Supreme Court held that the issue of unstamped/insufficiently stamped arbitration agreement is not to be determined by the Court while dealing with an application under section 8 and 11 of the Arbitration Act, as the Court is only concerned with the prima facie existence of an arbitration agreement. While protecting the sanctity of the arbitration process, the Supreme Court considered Section 5 of the Arbitration Act and the doctrine of Kompetenz - Kompetenz to hold that any objection with respect to stamping of an agreement is to be determined by the arbitral tribunal. 

Cox and Kings Ltd. v. SAP India Pvt. Ltd. & Anr. SCC OnLine SC 1634 (Supreme Court of India)

On 06 December 2023, a Constitution Bench of the Supreme Court, upheld the Doctrine of Group of Companies.

In the present case, disputes arose between Cox and Kings Ltd and SAP India Pvt Ltd (“SAP”) with respect to a series of agreements. Cox and Kings Ltd invoked arbitration against SAP and its Parent Company (Non-signatory to the arbitration agreement). As SAP did not respond to the Notice of invocation of arbitration, Cox and Kings filed an application under Section 11(6) of the Arbitration Act for appointment of an arbitrator before the Supreme Court. The three-judge Bench referred the matter for adjudication to a larger Bench, due to the inconsistent approach adopted by the Supreme Court in applying the doctrine of Group of Companies in India.

The Group of Companies Doctrine entails, that a non-signatory company being one within a group of companies, may be bound by an arbitration agreement entered into by its affiliate companies, if it can be inferred that the mutual intention of all the parties was to bind both, signatories as well as non-signatories to the arbitration agreement.

The Supreme Court though observed that the signature of a party is an explicit expression of consent to be bound by an arbitration agreement, however, a written contract by default would not exclude non-signatories to the contract as long as there is a defined legal relationship between signatories and non-signatories. The determining factor would be whether the non-signatory intended to be bound by the arbitration agreement which will be inferred through the acts and conduct of all the parties. The Supreme Court traced the legal existence of the Doctrine of Group of Companies to Section 2(1)(h) and Section 7 of the Arbitration Act and held that the definition of “party” under the same, would include signatories as well as non-signatories.

Lombardi Engineering Ltd v. Uttarakhand Jal Vidyut Nigam Ltd 2023 SCC OnLine SC 1422 (Supreme Court of India)

In a Petition filed under Section 11(6) of the Arbitration Act for appointment of an arbitrator under an arbitration agreement between a Swiss company and the State of Uttarakhand, a three-judge Bench of the Supreme Court held that the court could test the validity of an arbitration clause against the anvil of arbitrariness enshrined under article 14 of the Constitution of India.

In the present case, certain disputes arose between Lombardi Engineering Ltd and Uttarakhand Vidyut Nigam Ltd. (“UVN”) (a wholly owned corporation of Government of Uttarakhand) under a contract to provide consultancy services, subsequent to which Lombardi Engineering issued a notice invoking arbitration to settle the said disputes. The Arbitration Agreement stipulated that 7% of the arbitration claim had to be pre-deposited as a security deposit by the party invoking arbitration. UVN terminated the contract after notice of arbitration was sent, citing non-fulfilment of obligations by Lombardi Engineering. Lombardi Engineering filed an application under section 11(6) of the Arbitration Act, for constitution of an arbitral tribunal before the Supreme Court.

The Supreme Court while rejecting the argument made by UVN, that Lombardi Engineering cannot challenge the pre-deposit clause after consenting to it, relied on the case of ICOMM Tele Limited v. Punjab State Water Supply and Sewerage Board and Another (2019) 4 SCC 401 to hold that in an application under section 11(6) of the Arbitration Act, one of the parties being the State of Uttarakhand in the present case, the Court can test the validity of the arbitration clause on the anvil of arbitrariness enshrined under Article 14 of the Constitution of India. The Supreme Court relied on the Grundnorm theory by Kelsen to hold that the Grundnorm in the context of an arbitration agreement would be:

i. Constitution of India, 1950;

ii. Arbitration Act and specifically Section 7 of Arbitration Act; and

iii. All other Central/State Laws.

Thus, an arbitration agreement needs to be in compliance with the above identified Grundnorm. The Supreme Court rejected the contention by UVN with respect to “party autonomy”, holding that parties cannot consent to a violation of operation of law. The Supreme Court went on to constitute the arbitral tribunal, ignoring the condition of pre-deposit, holding it to be unreasonable.

Rohan Builders (India) Pvt Ltd v. Berger Paints India Ltd 2023 SCC OnLine Cal 2645 (High Court of Calcutta)

The Calcutta High Court held that an arbitral tribunal is void after expiry of the time period for passing an award under Section 29A (1) of the Arbitration Act.

In the present case, the High Court of Calcutta was faced with three similar applications filed by Rohan Builders (India) Pvt. Ltd., seeking to extend the mandate of the Arbitral Tribunals under Section 29A (4) of the Arbitration Act. Berger Paints India Ltd. in all the cases had opposed the extension of the mandate of the Arbitral Tribunals. Further, in all the cases, the fact of the mandate of the Arbitral Tribunal having terminated under Section 29A (1) of the Arbitration Act before filing of the application was undisputed.

The High Court dismissed all three Applications holding that after the expiry of the time-period specified under Section 29A (1) & (3) of the Arbitration Act, the mandate of the arbitral tribunal terminates and thereby the tribunal becomes void. An application seeking extension of the mandate of the arbitral tribunal under Section 29A (4) would not be maintainable after the expiry of the statutory time-period specified in Section 29A (1) & (3) of the Arbitration Act.

A Special Leave Petition before the Supreme Court has been filed by Rohan Builders against the decision of the Calcutta High Court which is pending adjudication. The Supreme Court in the meantime has stayed the impugned judgment of the Calcutta High Court.

Interestingly, the High Court of Delhi has decided to allow such applications in the case of ATC Telecom Infrastructure Pvt Ltd. v. BSNL 2023 SCC OnLine Del 7135. The details are given below.

ATC Telecom Infrastructure Pvt Ltd. v. BSNL 2023 SCC OnLine Del 7135 (High Court of Delhi)

The Delhi High Court held that, an application seeking extension of the mandate of the arbitral tribunal under section 29A (4) of the Arbitration Act, can be filed even after expiry of the mandate of the tribunal under section 29A (1) & (3) of the Arbitration Act.

In the present case, certain disputes arose between ATC Telecom Infrastructure Pvt Ltd and BSNL, which were referred for arbitration. ATC Telecom filed an application before the Delhi High Court, seeking extension of the mandate of the Arbitral Tribunal under Section 29A (4) of the Arbitration Act, after the expiry of the mandate of the Arbitral Tribunal under Section 29A (1) of the Arbitration Act.

The Delhi High Court considered the judgment of the Calcutta High Court in Rohan Builders (India) Pvt Ltd v. Berger Paints India Ltd 2023 SCC OnLine Cal 2645 (“Rohan Builders”) but took a contrary view and held that an application for extension of the mandate of the tribunal can be filed even after expiry of the mandate of the tribunal under section 29A (1) & (3) of the Arbitration Act. The Court disagreed with the strict interpretation of Section 29A of the Arbitration Act taken by the Calcutta High Court in Rohan Builders. According to the Delhi High Court such a strict interpretation is contrary to the language of Section 29A (4) of the Arbitration Act and would defeat the efficiency of the arbitration process.

Unibros v. All India Radio, 2023 SCC OnLine SC 1366 (Supreme Court of India)

The Supreme Court held that an award granting damages for loss of profit without substantial evidence would be in violation of Public Policy of India under Section 34(2)(b) of the Arbitration Act.

In the present case, certain disputes arose between Unibros and All India Radio, due to delays in a work contract which was subsequently referred to arbitration. The Arbitrator awarded damages to Unibros for loss of profit. All India Radio preferred an appeal under Section 34 of the Arbitration Act. The High Court had set aside the Award, and the claims were remitted back to the Arbitral Tribunal for reconsideration and passing of a fresh award (“First Award”). The First Award was maintained by the Arbitral Tribunal upon reconsideration. (“Second Award”). All India Radio again preferred an appeal under Section 34 of the Arbitration Act which was set aside to the extent of awarding loss of profit on the ground of being in violation of Public Policy of India, under Section 34(2)(b)(ii) of the Arbitration Act. Subsequently, Unibros filed an appeal under Section 37 of the Arbitration Act before the Division Bench of the High Court which was dismissed. Unibros filed a Special Leave Petition before the Supreme Court.

The Supreme Court, while adjudicating the appeal before it, held that claims for loss of profit must establish the following conditions in order to succeed:

i. Delay in completion of the contract,

ii. Delay is not attributable to the claimant,

iii. Claimant’s status as an established contractor,

iv. Evidence to substantiate claim of loss.

The Supreme Court held that damages cannot be awarded without proof of injury, and any contravention of the same would result in a violation of public policy of India making the award liable to be set aside under section 34(2)(b) of the Arbitration Act. The Supreme Court thus dismissed the appeal preferred by Unibros, holding that there was no evidence to substantiate the claim of loss in the present case.

Contributors to the newsletter:

• Abhishek Sharma, Partner
• Shravan Yammanur, Partner
• Ragini Sharma, Associate