Arbitration Newsletter | September 2024

Welcome to the September edition of our Arbitration Newsletter where we have explored significant judgments touching on the interpretation of the relevant provisions of the Arbitration and Conciliation Act, 1996 Act (the "Arbitration Act") and its interplay with other statutes. We also examine the guidelines issued by the Department of Expenditure, Ministry of Finance, on utilising arbitration and mediation in domestic procurement contracts.

1.Cox & Kings Ltd. Vs. SAP India Pvt. Ltd. & Anr., 2024 SCC OnLine SC 2452 (Supreme Court of India)

A three-judge bench of the Supreme Court has reiterated that once a valid arbitration agreement exists, it is not appropriate for courts to address contested issues involving complex facts at the referral stage.

This case involved a dispute regarding the impleadment/non-impleadment of a party in the arbitration proceedings. Cox and Kings sought to make, the parent company of SAP India, a party in the arbitration proceedings even though the parent company was not a signatory to the main agreement.

The Supreme Court, relying on the judgment of the Constitution Bench in Cox and Kings v. SAP India Pvt Ltd (2023), 2024 4 SCC 1, held that the court, at the referral stage, is not required to examine the merits of the case to determine whether a non-signatory is bound by the arbitration agreement. Instead, the referral court should defer this determination to the arbitral tribunal.

The Supreme Court emphasized the doctrine of competence-competence enshrined in Section 16 of the Arbitration Act. It held that in considering a petition for the appointment of an arbitrator under Section 11(6) of the Arbitration Act, the referral courts should limit their examination to whether a valid arbitration agreement exists. It is impermissible for courts to engage in a detailed inquiry into contested issues involving complex facts at the referral stage. Further, the bench observed that the decisions of the Supreme Court in Lombardi Engineering Ltd v. Uttarakhand Jal Vidyut Nigam Ltd. (2024) 4 SCC 341 and In Re Interplay Between Arbitration Agreements under the Arbitration and Conciliation Act 1996 and The Indian Stamp Act 1899, 2024 6 SCC 1 have already established that there is limited scope for judicial interference at the referral stage.

2. DLF Ltd. and anr. Vs. Koncar Generators and Motors Ltd., 2024 SCC OnLine SC 1907 (Supreme Court of India)

A two-judge bench of the Supreme Court has reaffirmed that the correct date for determining the conversion rate of an award amount expressed in foreign currency is the date the award becomes enforceable. The date of deposit is the relevant date for deciding the conversion rate in cases where the award debtor deposits an amount before a court during the pendency of the challenge proceedings, and the award holder is permitted to withdraw the deposit.

DLF Ltd. (Appellant), an Indian company, entered a contract with Koncar Generators and Motors Ltd (Respondent), a Croatian company, for the supply of two generators. Disputes between the parties led to an ICC arbitration in Paris, resulting in an award in favour of the Respondent. After multiple legal challenges, including petitions under Sections 34, 37, and 48 of the Arbitration Act, the Appellant's efforts to set aside the award were rejected.

During the enforcement of the award, a dispute arose over the date of the conversion rate of the award amount from Euros to Indian Rupees. Contrary to the Appellant's contention, the Trial Court, subsequently affirmed by the High Court, determined the correct date as the date when all objections to the award were resolved. The Appellant then preferred an appeal before the Supreme Court.
The issues that arose for consideration before the Supreme Court were twofold. The first issue was the correct date to determine the foreign exchange rate for converting the award amount. The second issue was the date of such conversion when the award debtor deposits some amount before a court during the pendency of proceedings challenging the award.

The Supreme Court, in its exposition of the statutory framework, clarified that a foreign award becomes enforceable as a court decree under Section 49 of the Arbitration Act only after objections under Section 48 of the Arbitration Act are resolved, with its enforceability being automatic. Relying on the landmark case of Forasol v. ONGC [1984] 1 S.C.R. 5326, the Supreme Court reaffirmed that the appropriate date for currency conversion is the date of the decree, as this is when the award becomes enforceable and attains finality. As regards the second issue, i.e. what would the date of such conversion be in a scenario where a portion of the amount of the arbitral award has been deposited by the award debtor before the court. The Supreme Court held that regardless of whether the award holder withdraws a portion of the amount from the total amount deposited by the award debtor, the conversion of the award amount should be based on the exchange rate on the date of the deposit. The principle relied upon by the Supreme Court was that the award holder should not be permitted to serve his interest to benefit from a higher exchange rate prevailing on a later date.

This decision reaffirms the principle that the relevant date for conversion is when the award becomes enforceable as a decree of the court.

3. Kalanithi Maran v. Ajay Singh and Anr., 2024 SCC OnLine SC 1876 (Supreme Court of India)

A three-judge bench of the Supreme Court has underscored the need for courts, in exercise of their jurisdiction under Section 34 of the Arbitration Act, to apply their mind to the grounds of challenge before deciding whether it is necessary to interfere with the arbitral award.

In July 2023, a Single Judge Bench of the Delhi High Court upheld an arbitral award in favour of Mr. Maran (Appellant) and KAL Airways. Mr. Singh (Respondent) applied to set aside the Single Judge's order before a Division Bench of the Delhi High Court. The Division Bench remanded the matter back to the Single Judge, citing a lack of clarity and substance in its order dismissing the application under Section 34 of the Arbitration Act. The Appellant thus filed a Special Leave Petition before the Supreme Court.

The Supreme Court affirmed the Division Bench's decision to remand the proceedings back to the Single Judge for reconsideration of the Section 34 petition. The Supreme Court observed that there was no substance in the decision of the Single Judge and further pointed to the Single Judge's lack of consideration of arguments made by the parties. The Supreme Court agreed with the Division Bench's decision that the order passed by the Single Judge was not conclusive and determinative.

This case is relevant to understand the significant supervisory role of the courts at the seat of arbitration. Although it is well-established that the grounds for deciding a Section 34 application are limited and confined by the statute, however, courts hearing such an application must not absolve itself of the responsibility to apply their mind in gauging whether the award warrants interference by courts.

4. Meenakshi Agrawal Vs M/s Rototech, 2024 SCC OnLine Del 6213 (Delhi High Court)

The Delhi High Court held that when a party seeking arbitration encounters a scenario where the opposing party either fails to respond to a notice under Section 21 of the Arbitration Act or refuses to consent to arbitration, the only remedy available is to approach the Court under Section 11(5) or Section 11(6) of the Arbitration Act.

The Delhi High Court further clarified that a party cannot unilaterally bestow jurisdiction upon the arbitrator, even if the arbitrator has been appointed. The court noted that an arbitrator lacks the authority to summon the opposing party to attend the arbitration proceedings independently.

Meenakshi Agrawal (Petitioner) and M/s Rototech (Respondent) entered into a lease deed whereby the Petitioner leased premises in New Delhi to the Respondent. Subsequently, disputes arose between the parties regarding the terms of the lease deed. Clause 11 of the lease deed stated that any disputes arising from the agreement would be resolved through arbitration. This clause identified Atul Kumar as the mutually agreed-upon arbitrator for resolving such disputes.

In November 2022, the Petitioner sent a notice to the Respondent under Section 21 of the Arbitration Act, requesting that the disputes be referred to arbitration with Atul Kumar being the arbitrator, as specified in the lease deed. The Respondent, however, did not respond to this notice. Instead of filing a motion with the court under Section 11(5) of the Arbitration Act to seek the appointment of Atul Kumar as the arbitrator, the Petitioner erroneously allowed Atul Kumar to issue a notice directly to the Respondent. When the Respondent failed to appear for the arbitration, Atul Kumar proceeded with the arbitration proceedings ex-parte.

As Mr. Atul Kumar's term as arbitrator was approaching its end, the Petitioner filed an application to extend his mandate. Subsequently, the Petitioner withdrew this application and filed another petition in the High Court, requesting the termination of Atul Kumar's mandate and the appointment of a substitute arbitrator.

The High Court observed that the Petitioner's request for the appointment of an arbitrator was unwarranted. The lease deed clearly designated Atul Kumar as the arbitrator, and therefore, there was no justification for appointing an alternative arbitrator. The High Court held that the Petitioner erred by not seeking recourse under Section 11(5) of the Arbitration Act after the Respondent failed to respond to the Section 21 notice.

Concerning the appointment of a substitute arbitrator, the Delhi High Court observed that both parties had agreed on reappointing Atul Kumar as the arbitrator, and therefore, the court reappointed Atul Kumar as the arbitrator.

5. M/s SAB Industries Limited v. The State of Himachal Pradesh & Anr., Special Leave Appeal (C) No(s). 21111/2024

A two-judge bench of the Supreme Court, while hearing a challenge to the order of the Himachal Pradesh High Court, has noted that the legal position of non-condonation of delay exceeding 120 days in filing a Section 37 appeal under the Arbitration Act may need to be reviewed in view of Section 43 of the Arbitration Act.

The Himachal Pradesh High Court, in its order impugned before the Supreme Court, condoned a delay of 166 days in filing an appeal under Section 37 of the Arbitration Act. The Petitioner, aggrieved by the High Court order, filed a Special Leave Petition and relied on the Supreme Court's judgment in Union of India vs. Varindera Constructions Ltd (2020) 2 SCC 111 to argue that delays beyond 120 days in filing of a Section 37 appeal under the Arbitration Act cannot be condoned.

The Supreme Court has issued notice in the case while expressing its prime facie view, that its decision in Union of India vs. Varindera Constructions Ltd may require reconsideration as in Varindera Constructions Ltd the Supreme Court had held that condonation of delay beyond 120 days is not permissible.

6. Guidelines for Arbitration and Mediation in Contracts of Domestic Public Procurement issued by Ministry of Finance vide Office Memorandum No.F. 11212024-PPD

The Department of Expenditure, Ministry of Finance issued an Office Memorandum on 03.06.2024, titled "Guidelines for Arbitration and Mediation in Contracts for Domestic Public Procurement" ('Guidelines'). These Guidelines address arbitration in disputes involving government entities, including Central Public Sector Enterprises, Public Sector Banks, and Government Companies in domestic procurement contracts. Some points to note include:

• Limiting arbitration to disputes with value less that Rs. 10 crores: Arbitration should not be routinely included in tenders, especially large contracts. If included, arbitration should typically be limited to disputes with a value less than Rs. 10 crores. It may specifically be stipulated in the contract that in all other cases, arbitration will not be the dispute resolution method. If the arbitration clause covers disputes exceeding the threshold of Rs 10 crores, it should be on careful application of mind and with necessary approval.
• Use of Institutional arbitration: Institutional arbitration may be given preference where appropriate.
• Limited use of challenge to arbitral awards: Challenges to arbitral decisions and subsequent appeals should only occur there is a strong likelihood of success in the court/higher court.
• Formation of a High-Level Committee ("HLC"): In matters of high value, a HLC may be constituted which may include a retired judge and a retired high-ranking officer/technical expert. The disputing parties may (i) negotiate and place a tentative solution before HLC; or (ii) undergo mediation and place the tentative mediated agreement before the HLC; or (iii) use the HLC as the mediator.
• Mediation: Mediation agreements need not be routinely or automatically included in procurement contracts/tenders. The absence of a mediation agreement in the contract does not preclude pre-litigation mediation; such a clause may be incorporated where it is consciously decided to do so.

The Guidelines appears to be inconsistent with the efforts of the Government of India to strengthen the Indian arbitration system and encourage India as an arbitration hub. Arbitration is essential in disputes of significant value, as they necessitate dedicated judicial time for resolution. This is due to the fact that such matters typically involve intricate issues and extensive evidence that must be examined.

This shift towards litigation is likely to exacerbate delays that may impact the procurement, countering the government's goals of enhancing the business climate in India.

Contributors to the newsletter:

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

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