Welcome to the September edition of our Arbitration newsletter, where we delve into significant judgments that have shaped the legal landscape under the Arbitration and Conciliation Act, 1996 (‘Act’). In this edition, we explore eight noteworthy cases that touch upon the interpretation and valuable insights of the relevant provisions of the Act. This edition further deals with the Mediation Act, 2023 which has recently received the assent of the President of India. The Mediation Act aims to reduce the burden on the Indian judiciary to become an effective means for alternative dispute resolution.  

N.N. Global Mercantile Pvt. Ltd. v. Indo Unique Flame Ltd. and Other, 2023 SCC OnLine SC 495

In the present case, the Supreme Court held by a 3:2 majority that an arbitration agreement in an unstamped contract is unenforceable.

The Parties in the present case had entered into a sub-contract wherein a dispute arose between the Parties and subsequently the Respondent invoked the Bank Guarantee submitted by the Petitioner. The Respondent 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 the Respondent 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 before the Hon’ble Supreme Court.

A 5-judge bench was constituted and with the majority of three it was held that an arbitration agreement cannot be acted upon in view of Section 35 of the Indian Stamp Act, 1899 if it is unstamped or insufficiently stamped unless the requisite stamp fees is paid. It was further observed that at the stage of an application under Section 11 of the Arbitration Act, the court is supposed to examine the instrument and if it is found to be insufficiently stamped or unstamped, the instrument would be impounded at that stage.

The minority held that an unstamped or insufficiently stamped substantive instrument would not render the arbitration agreement unenforceable. Non stamping is a curable defect which would not render the arbitration agreement unenforceable.

However, the Petitioner has preferred a curative petition raising its concerns about the validity of the judgment delivered by a five-judge bench of the Hon’ble Supreme Court of India. The Supreme Court while hearing the curative petition has referred the issue to a seven-judge bench to consider the correctness of the decision in the NN Global case. 

ARG Outlier Media Pvt. Ltd. v. HT Media Ltd. 2023 O.M.P (COMM) 161/2023, (High Court of Delhi)

In the present case, the Delhi High Court held that once an arbitrator has accepted an arbitration agreement and passed an award based on the agreement, the same cannot be set aside on the ground that the arbitration agreement was improperly or insufficiently stamped.

The parties herein had entered into an agreement of barter that contained an arbitration agreement and when the Arbitrator was approached for adjudication of disputes between the parties, the Arbitrator directed the Petitioner to pay a sum of Rs. 5 crores along with interests and costs. This Award was challenged by the Petitioner under Section 34 of Arbitration and Conciliation Act, 1996 (‘Arbitration Act’) before the Delhi High Court on the ground that the arbitration agreement in the Agreement of Barter was improperly stamped.

The Court while dismissing the petition held that since the Petitioner had not raised an issue regarding the agreement being insufficiently stamped at any stage while leading evidence nor had the Petitioner raised an objection as to the validity of the agreement before the Arbitrator, the same cannot be brought into question under Section 34 of the Arbitration Act once the Arbitrator has already passed an award based on such an agreement. It was also held by the court that even if the principles established in the NN Global Mercantile judgment are relied on, once the Arbitrator admitted the agreement and passed an award, the award cannot be challenged on the ground that it was insufficiently stamped. 

Hindustan Construction Company Ltd. v. National Highways Authority of India, 2023 SCC OnLine SCC 1063, (Supreme Court of India)

In the present case, a dispute arose between the contractors/Appellants and the National Highways Authority of India (‘NHAI’) with regard to different areas of contract of the Allahabad by-project. Since the appellants were unsatisfied with the decision of the Dispute Resolution Board, the matter was referred to arbitration. The Arbitral Tribunal consisted of three persons who gave a unanimous award except on a few issues where one of the arbitrators gave a dissenting opinion. The Appellant challenged the award under section 34 of the Arbitration Act. The Single Judge opined that the Tribunal’s majority view was justified and did not warrant interference. However, the Division Bench set aside the Single Judge’s opinion and held that the Tribunal’s majority view was based on an incorrect interpretation of the contract. 

The Appellant moved the Supreme Court which held that when technical experts are appointed as arbitrators, the role of the Court under section 34 of the Arbitration Act becomes limited. The Court also held that awards that contain reasons while interpreting the contractual terms, cannot be lightly interfered with and held that a situation wherein the dissenting opinion is treated as an award arises in some arbitral proceedings. Thus, while allowing the appeal the court held that a dissenting opinion cannot be treated as an award if the majority award is set aside. 

M/s B and T AG v. Ministry of Defence, 2023 SCC OnLine SC 657 (Supreme Court of India)

In 2009, the Ministry of Defence (‘Ministry’) issued a tender for Sub Machine Guns, with M/s B and T AG (‘Petitioner’) winning the bid. Due to alleged delays in delivery by the Petitioner, the Ministry directed the encashment of the Bank Guarantee provided by the Petitioner to recover the liquidated damages in year 2016. Consequently, negotiations between the parties failed, leading the Petitioner to issue a notice invoking Arbitration to the Ministry in the year 2021. Finally, the Petitioner filed a petition in 2023 before the Supreme Court seeking the appointment of an arbitrator under Section 11(6) of the Arbitration and Conciliation Act, 1996 (‘Arbitration Act’). The question for consideration before the Supreme Court was whether the application under Section 11 of Arbitration Act for appointment of arbitrator was barred by limitation.

The Supreme Court stated that the cause to action to appoint an Arbitrator commences from the ‘Breaking Point’ when any reasonable party would forswear efforts to settle amicably and would rather refer the dispute to arbitration. It was held that “The entire history of the negotiation between the parties must be specifically pleaded and placed on record. It is only after the entire history of negotiation is pleaded and placed on record that the Court would be in a position to consider such history so as to find out what was the “Breaking Point” at which any reasonable party would have abandoned efforts at arriving at a settlement and contemplated referral of the dispute for arbitration.”

The Supreme Court while placing reliance on letter dated 24.02.2016, reiterated that disputes between the Parties had cropped up in 2014 itself. The Bench rejected the arbitration petition as a hopelessly barred claim.

Indian Oil Corporation & Anr. v. Sathyanarayana Service Station & Ors., 2023 SCC OnLine SC 597 (Supreme Court of India)

The Supreme Court held that a Court cannot, after setting aside the award, proceed to grant further relief by modifying the award. The dispute herein related to the termination of the dealership by the Appellant. Subsequently, upon termination of the dealership, the Respondent initiated arbitration proceedings and it culminated in an award upholding the termination. The Respondent being aggrieved by the arbitral award preferred a petition under Section 34 of the Arbitration and Conciliation Act, 1996 (‘Arbitration Act’) before the District Court which ultimately was dismissed. Thereafter, the Respondent moved before the High Court which allowed the appeal filed by the Respondent under Section 37 of the Arbitration Act and ordered restoration of the dealership.

The Petitioner being aggrieved by the order of the High Court preferred an appeal before the Supreme Court alleging that the observation made by the Arbitrator was a plausible view and that a construction of the contract by the Arbitrator is not open to interference by the court. The Supreme Court held that “The High Court also erred in proceeding to order restoration of the dealership to the first respondent after setting aside the award and going further by leaving it open to the first respondent to claim damages. It is beyond the pale of any doubt that the Court cannot, after setting aside the award, proceed to grant further relief by modifying the award. It must leave the parties to work out their remedies in a given case even where it justifiably interferes with the award.” 

M/s Vindhya Vasini Construction Co. v. M/s Bharat Heavy Electricals Ltd., 2023 SCC OnLine Del 2768 (High Court of Delhi)

A petition was filed before the Hon’ble High Court of Delhi (‘High Court’) seeking appointment of an arbitrator to resolve disputes arising out of  a contract between the parties. The Respondent opposed the appointment of an Arbitrator submitting that the arbitration agreement stipulates that only the Head of the Transmission Business group (“Head TBG”) or their nominee to act as an Arbitrator, and if that is not possible, the matter should not be referred to arbitration. The Petitioner argued that the agreement is severable and would still be valid. It was further reiterated that the provision limiting the appointment of an Arbitrator were unreasonable and unfair.

While referring to the arbitration clause stipulated under the Contract, the High Court observed that the arbitration clause specifically provides that no person other than a person appointed by such Head TBG should act as an Arbitrator, and if for any reason that is not possible, the matter is not to be referred to Arbitration at all. Thus, the arbitration agreement became ineffective because the nominee of the Head TBG could not be appointed as an Arbitrator and the parties would need to seek remedies through regular civil courts for any disputes. Furthermore, the High Court asserted that the parties while agreeing to Arbitration may also stipulate conditions necessary for their reference and they are bound to adhere to the same.

M/s Mahesh Construction v. Municipal Corporation of Delhi and Anr., (2023) 144 SCC 552, (High Court of Delhi)

In this case the Hon’ble Delhi High Court (‘High Court’) held that a clause prohibiting payment of interest on delayed payments does not create a bar for the Arbitrator to grant interest under Section 31(7) of the Arbitration and Conciliation Act, 1996 (‘Arbitration Act’).

The Respondent had floated a tender under which the Appellant was issued a work order. A dispute arose between the parties regarding non-payment under the Contract and it was subsequently referred to Arbitration. The Arbitrator awarded and allowed the claims of the Appellant along with interest on the sums claimed for pre-preference, pendente-lite and future (post-award) period under Section 31(7) of the Arbitration Act. The Award was challenged by the Respondent wherein the Trial Court had set aside the Award. The Appellant thereafter referred an appeal before the High Court.
The High Court held that it is a settled position of law that Arbitral Tribunal has the power to award interest for all the three periods i.e, pre-preference, pendente-lite and post award and the Award of the Arbitrator was not in contradiction to Section 31(7) of the Arbitration Act.

NHAI v. Trichy Thanjavur Expressway Ltd. 2023 SCC OnLine Del 5183, (High Court of Delhi)

When an arbitral award is challenged under Section 34 of the Arbitration and Conciliation Act, 1996 (‘Arbitration Act’), the Court is not empowered to modify the award but only set aside parts of the award that are severable.

The Supreme Court of India in the case of NHAI v. M Hakeem, (2021) 9 SCC 1 had held that an arbitral award could not be modified by a court that is hearing a petition challenging the award under section 34. This raised a dispute as to whether a blanket restriction on a court’s power to modify an award under section 34 would pose as a prohibition on the partial setting aside of the award.
The Court held that partial setting aside of the award is not contrary to the judgment rendered in NHAI v. M Hakeem and the power to partially set aside an award emanates from the statute, i.e., section 34 of the Arbitration Act. Moreover, a separate and distinct claim in an award forms an award in itself and award in respect of such a claim can be set aside while upholding the award in respect of other claims. Thus, an arbitral award cannot be entirely set aside in a case where there is some part of the award that can be saved and upheld.

The Mediation Act, 2023

The Parliament has passed the Mediation Bill, 2023 with the Lok Sabha giving its assent to the Bill on 07.08.2023 along with  Rajya Sabha clearing  it on 1st August, 2023..The Mediation Act, 2023 (‘the Act’) received the assent of the President of India and is notified in the Gazette of India on 15.09.2023.

The objective of the Act is to “promote and facilitate mediation, especially institutional mediation, for resolution of disputes, commercial or otherwise, enforce mediated settlement agreements, provide for a body for registration of mediators, to encourage community mediation and to make online mediation as acceptable and cost-effective process and for matters connected therewith or incidental thereto” is in line with the vision of reducing burden on the judiciary by adopting alternate means of dispute resolution.

The Act defines mediation as a process whereby parties appoint a neutral third party (a mediator) to amicably settle the disputes between the parties. Some of the key features of the Act are:

• Mediation Council of India
• Pre-Litigation Mediation
• Applicability of Mediation  
• Appointment of Mediators 
• Disputes involving claims against minors or persons of unsound mind, disputes involving criminal prosecution and disputes affecting rights of third parties cannot be referred to mediation. 
• The mediation process is confidential and must conclude within 180 days. A party may choose to opt out of the mediation process only after completion of two sessions. 
• Mediation Settlement Agreement resulting from the process of mediation will be final, binding, and enforceable in a court of law. 
• Community Mediation

Contributors to the newsletter:

Abhishek Sharma, Partner

Ragini Sharma, Associate