Arbitration agreement

Arbitrability

Are there any types of disputes that are not arbitrable?

Yes, there are certain disputes that are not arbitrable in India, although the Arbitration Act does not expressly exclude any dispute as non-arbitrable. However, courts can set aside the award if the substance of the dispute is such that settlement by arbitration is not possible under the laws in force, or if the award conflicts with the public policy of India.

In general, disputes that can be decided by a civil court that involve rights in personam can be referred to arbitration.

However, the following subject matters are barred from being referred to arbitration:

  • matrimonial cases;
  • testamentary cases;
  • guardianship of a minor or disabled person;
  • insolvency;
  • criminal proceedings;
  • winding up or dissolution of a company;
  • matters arising out of a trust deed or the Indian Trusts Act;
  • matters relating to competition law; and
  • matters relating to eviction or tenancy governed by special statutes; enforcement of mortgage; matters under the securitisation laws; and in general matters for which the jurisdiction lies with the Debt Recovery Tribunal.

 

In Shri Vimal Kishor & Ors v Mr Jayesh Dinesh Shah & Ors, decided on 17 August 2016, the Supreme Court held that cases arising out of a trust deed cannot be the subject matter of arbitration.

In Booz Allen and Hamilton Inc v SBI Home Finance Ltd & Ors (AIR 2011 SC 2507), the Supreme Court ruled that a suit for enforcement of a mortgage by sale of the mortgaged asset was non-arbitrable, as it involved a right in rem.

The Bombay High Court in Eros International Media Ltd v Telemax Links India Pvt Ltd (decided on 12 April 2016), held that copyright disputes were held to be arbitrable.

In N Radhakrishnan v Maestro Engineers and Ors (2010) 1 SCC 72, the Supreme Court held that when the seat of arbitration is in India, issues involving criminality, serious fraud and financial malpractices can only be resolved by a court.

In World Sport Group (Mauritius) Ltd v MSM Satellite (Singapore) Pte Ltd (AIR 2014 SC 968), the Supreme Court held that:

 

In the case of such arbitrations covered by the New York Convention, the Court can decline to make a reference of a dispute covered by the arbitration agreement only if it comes to the conclusion that the arbitration agreement is null and void, inoperative or incapable of being performed, and not on the ground that allegations of fraud or misrepresentation have to be inquired into while deciding the disputes between the parties.

 

However, the decision in N Radhakrishnan was not held to be per incuriam. This decision has also been distinguished in Swiss Timing v Organising Committee, Commonwealth Games (2014) 6 SCC 677 and A Ayyasamy v A Paramasivam (2016) 10 SCC 386, which held that even domestic disputes involving allegations of fraud arising out of contracts bearing an arbitration clause shall be referred to arbitration.

The Supreme Court in its recent decision in Avitel Post Studioz Ltd v HSBC PI Holdings dated 19 August 2020 (arising out of Civil Appeal No. 5145 of 2016) set out the tests to determine 'serious allegations of fraud' that cannot be arbitrated. Adopting the reasoning enumerated in the Swiss Timing decision, the Court held that the earlier decisions ought to have considering a combined interpretation of sections 5, 8 and 16 of the Arbitration Act that sets out an approach whereby, ‘when a judicial authority is shown an arbitration clause in an agreement, it is mandatory for the authority to refer parties to arbitration bearing in mind the fact that the arbitration clause is an agreement independent of the other terms of the contract and that, therefore, a decision by the arbitral tribunal that the contract is null and void does not entail ipso jure the invalidity of the arbitration clause’. As for the tests to make such determination, the Court placed reliance on the Ayyasamy decision which stipulated the following two tests:

  • ‘does allegation permeate the entire contract and above all, the agreement of arbitration, rendering it void’; or
  • ‘whether the allegations of fraud touch upon the internal affairs of the parties inter se having no implication in the public domain’.

 

The Supreme Court held that in view of the above decisions, ‘serious allegations of fraud’ would arise only if either of the two tests above are satisfied, and not otherwise.

Requirements

What formal and other requirements exist for an arbitration agreement?

The Arbitration Act provides that all arbitration agreements must be in writing. Section 7 of the Arbitration Act states that an arbitration agreement:

1. May be in the form of an arbitration clause in a contract or in the form of a separate agreement;

2. Is in writing if it is contained in:

(a) document signed by the parties;

(b) an exchange of letters, telex, telegrams or other means of telecommunication which provide a record of the agreement; or

(c) an exchange of statements of claim and defence in which the existence of the agreement is alleged by one party and not denied by the other.

3. Can also be a reference in a contract to a document containing an arbitration clause if the contract is in writing and the reference is such as to make that arbitration clause part of the contract.

Section 7(4)(b) of the 2015 Amendment Act permits the creation of arbitration agreements through electronic communication. Such agreements shall also be regarded to fulfil the requirements of section 7.

Enforceability

In what circumstances is an arbitration agreement no longer enforceable?

An arbitration agreement is unenforceable in the following circumstances:

  • if the party to the arbitration was under some incapacity;
  • the arbitration agreement is not valid under the law to which the parties have subjected it or, failing any indication thereon, under the law for the time being in force;
  • the subject matter of the dispute is not capable of settlement by arbitration under the law for the time being in force;
  • if the agreement is void or otherwise not valid on account of incapacity or disqualification of one of the parties to the contract; or
  • in a contract wherein one of the contracting parties is an insolvent and a dispute arises, the arbitration agreement cannot be enforced unless the receiver seeks permission from the judicial authority for an order directing that the matter in question shall be submitted to arbitration.

 

Recently, courts have ensured that poorly drafted (or even ‘pathological’) arbitration clauses will be given effect to in the best possible way and parties will be referred to arbitration. In Pricol Ltd v Johnson Controls Enterprises Ltd & Ors (2015) 4 SCC 177, the Supreme Court referred parties to arbitration even though the clause provided for reference to arbitration under the arbitration rules of the Singapore Chamber of Commerce (a non-existent institution), by construing it to mean a reference to the Singapore International Arbitration Centre (SIAC)

Separability

Are there any provisions on the separability of arbitration agreements from the main agreement?

Yes, the doctrine of separability of arbitration agreements from main agreements finds expression in the Arbitration Act under section 16(1)(b) which states that a decision by the arbitral tribunal that the contract is null and void shall not entail ipso jure the invalidity of the arbitration clause. Interpreting this provision and applying the doctrine, the Supreme Court, in National Agricultural Co-op Marketing Federation India Ltd v Gains Trading Ltd (2007) 5 SCC 692, held:

An arbitration clause is a collateral term in the contract which relates to resolution (of?) disputes and not performance. Even if performance of the contract comes to an end on account of repudiation, frustration or breach of contract, the arbitration agreement would survive for the purpose of resolution of disputes arising under or in connection with the contract.

Third parties – bound by arbitration agreement

In which instances can third parties or non-signatories be bound by an arbitration agreement?

The Arbitration Act does not provide for third parties or non-signatories to be bound by an arbitration agreement. An arbitration agreement remains valid even if the underlying contract has been assigned to a third party.

Section 37 of the Indian Contract Act 1872 provides that a contract may be performed by a person’s legal heirs on his or her death, unless a contrary intention is evident from the contract. The same principle would apply to arbitration agreements. In the case of insolvency, as stated above, the receiver may adopt the contract to be enforceable by or against him or her.

The 2015 Amendment Act has provided for third parties to subject themselves to an arbitration agreement (domestic arbitrations seated in India) by amending section 8 to allow parties, or those claiming through or under such party, to apply to the court to refer the dispute to arbitration. This amended wording is identical to the wording contained in section 45 (international commercial arbitration), which provides for a party, or any person claiming through or under him or her, to apply to the court to refer a dispute to arbitration.

Non-signatories to an arbitration agreement have also been referred to arbitration under a section 45 application in Chloro Controls (I) P Ltd v Severn Trent Water Purification Inc and Ors (2013) 1 SCC 641, wherein the Supreme Court observed that any person claiming through or under a party to the arbitration agreement could also initiate arbitration.

The 2015 Amendment Act now permit such references in accordance with the language in section 45 and the decision of the Supreme Court in Chloro Controls. More recently, in its decision in Mahanagar Telephone Nigam Ltd v Canara Bank & Ors AIR 2019 SC 4449, the Supreme Court invoked the group of companies doctrine in allowing the impleading of non-signatories.

In the case of Rickitt Benckinser (India) Private Limited v Raynders Label Printing India Private Limited and Another (2019) 7 SCC 62, the Supreme Court, while deciding a section 11 application for the appointment of arbitrators, discussed the non-binding nature of an arbitration agreement on non-signatory. The Court particularly held that the intention of a non-signatory to consent to the agreement was essential and the burden of proof rested on the party making an assertion of the non-signatory being bound by the agreement. Since this burden was not discharged in this case, the Court said that the non-signatory therein cannot be subjected to the proposed arbitration proceedings.

Third parties – participation

Does your domestic arbitration law make any provisions with respect to third-party participation in arbitration, such as joinder or third-party notice?

The Arbitration Act does not provide for joinder or third-party participation in arbitration. In Sukanya Holdings, the Supreme Court held that parties who were not signatories to the agreement cannot be added to the proceedings by the Court.

Similarly, in Indowind Energy Limited v Wescare (India) Ltd & Anr (2010) 5 SCC 306, the Supreme Court held that a company that was not party to an arbitration agreement could not be joined as a party to the proceedings solely by virtue of its conduct.

Groups of companies

Do courts and arbitral tribunals in your jurisdiction extend an arbitration agreement to non-signatory parent or subsidiary companies of a signatory company, provided that the non-signatory was somehow involved in the conclusion, performance or termination of the contract in dispute, under the ‘group of companies’ doctrine?

The group of companies doctrine, used to extend the scope of a tribunal’s jurisdiction to companies that are not signatory to the agreement itself but are part of the corporate group that the signatory company is a part of, was until recently not recognised in India.

However, in Chloro Controls, the Supreme Court held that where there are multiple transactions between parties involving several composite agreements that may have a collective bearing on a dispute, the courts will have the power to direct even a non-signatory to be joined as a party to the arbitration. This would be applicable in exceptional cases only, depending on the commonality of the subject matter and whether the various agreements formed a composite transaction, where the performance of the main agreement would not be possible without the execution of the other agreements. More recently, the Supreme Court has invoked this doctrine in its decision in Mahanagar Telephone Nigam by allowing non-signatory parties to be impleaded in an arbitration.

The case of Charan Properties Limited v Kasturi and Sons Limited and Ors. (2018) 16 SCC 413 discussed the circumstances when a non-signatory can be bound by an arbitration agreement. Discussing the group of companies doctrine, the Court held that the relationship of the non-signatory with the signatory, the commonality of the subject-matter of the contract or transaction and the composite nature of such contract or transaction are significant pointers to determine the issue of binding a non-signatory to the arbitration.

Multiparty arbitration agreements

What are the requirements for a valid multiparty arbitration agreement?

The Arbitration Act does not stipulate any particular requirements for a valid multiparty arbitration agreement. The requirements contained in section 7 of the Arbitration Act for single arbitration agreements are deemed to apply to multiparty arbitration agreements.

In Olympus Superstructures v Meena Vijay Khetan (1999) 5 SCC 651, the Supreme Court found that in cases where the main agreement exists among multiple parties, and disputes arise under various sub-agreements to which all parties are not signatories, and a dispute arises in relation to issues that overlap, parties may be referred to a single arbitration by relying upon a widely drafted clause in the main agreement.

Consolidation

Can an arbitral tribunal in your jurisdiction consolidate separate arbitral proceedings? In which circumstances?

The Arbitration Act does not contemplate consolidation of arbitration proceedings. Parties, however, have frequently approached courts or made applications for consolidation of arbitral proceedings. In such cases, the courts endeavour to determine the true essence of the commercial arrangement between the parties in order to uncover the intent of binding a non-signatory who is bound by the actions of a signatory. In Cheran Properties Ltd v Kasturi and Sons Ltd (2018) 16 SCC 413 the court applied the group of companies doctrine where circumstances indicate that the intent of the arbitration agreement was to bind both signatories and non-signatories.

In order to comprehensively address this question, the position of law must be gleaned from decisions of the Supreme Court in this regard. The Supreme Court, in P R Shah, Shares and Stock Broker (P) Ltd v B H H Securities (P) Ltd (2012) 1 SCC 594 opined as follows:

 

If A had a claim against B and C, and there was an arbitration agreement between A and B but there was no arbitration agreement between A and C, it might not be possible to have a joint arbitration against B and C. A cannot make a claim against C in an arbitration against B, on the ground that the claim was being made jointly against B and C, as C was not a party to the arbitration agreement. But if A had a claim against B and C and if A had an arbitration agreement with B and A also had a separate arbitration agreement with C, there is no reason why A cannot have a joint arbitration against B & C. Obviously, having an arbitration between A and B and another arbitration between A and C in regard to the same claim would lead to conflicting decisions. In such a case, to deny the benefit of a single arbitration against B and C on the ground that the arbitration agreements against B and C are different, would lead to multiplicity of proceedings, conflicting decisions and cause injustice. It would be proper and just to say that when A has a claim jointly against B and C, and when there are provisions for arbitration in respect of both B and C, there can be a single arbitration.

 

Thereafter, in Chloro Controls, the Supreme Court had occasion to consider a scenario wherein disputes had arisen under multiple agreements signed between different parties, some of which contained arbitration clauses and others which did not. The disputes, having arisen in the context of an incorporated joint venture and various agreements thereunder, were held to be capable of reference to arbitration on the basis that the shareholders’ agreement between the parties to the joint venture was the ‘principal agreement’ to which all subsequent agreements were ‘ancillary or incidental’. In arriving at its decision, the Supreme Court, although refusing to opine on the correctness of its decision in Sukanya Holdings, seemingly departed from the ratio laid down in that case.

In its decision in Duro Felguera S A v Gangavaram Port Ltd (2017) 9 SCC 729, the Supreme Court declined to consolidate arbitration proceedings arising out of multiple agreements executed in the course of a tender bidding process. In this particular case, certain disputes were the subject matter of domestic arbitration while certain others were the subject matter of international arbitration. In such a circumstance, the Supreme Court held that a ‘composite reference’ to arbitration would not be appropriate considering that a party aggrieved by an arbitral award has wider scope of challenge in the case of a domestic arbitration as compared to an international arbitration. Furthermore, the Supreme Court distinguished the case before it from the decision in Chloro Controls on the ground that the arbitration clause considered therein covered disputes arising under or in connection with the principal agreement. It was held that the words ‘under or in connection with’ were very wide and thus brought within the ambit of the clause all other agreements executed ancillary to the principal agreement. In the absence of a similar clause in the facts before it, the Supreme Court refused to make a composite reference.

The position of law in respect of consolidation of arbitral proceedings is not codified in India and the applicability of ‘the doctrine of composite reference’ as developed by the Supreme Court in these decisions mainly hinges on the language of the arbitration agreement or clause and the intent of the parties that can be discerned therefrom.

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20 November 2020