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Ergo Update

14-May-2020

Introduction

The division bench of the Supreme Court, comprising of Hon’ble Mr Justice UU Lalit and Hon’ble Mr Justice Vineet Saran, in its decision in Quippo Construction Equipment Ltd v Janardan Nirman Pvt Ltd, on 29 April 2020 has inter alia analyzed the provision under the Arbitration and Conciliation Act, 1996 (Act) regarding waiver of right to object by a party. The Supreme Court set aside an order of the High Court of Calcutta and arrived at the conclusion that if a party does not participate in the arbitral proceedings and does not raise objections regarding the jurisdiction and / or venue of the arbitral tribunal before the arbitral tribunal itself, it can amount to waiver under Section 4 of the Act.

Background

The Appellant (original claimant) and Respondent (original respondent) had entered into an agreement (Agreement 1) for supply of equipment for infrastructure development. Being satisfied with the supplies made by the Appellant, the Respondent entered into a further agreement (Agreement 2) with the Appellant in respect of the said equipment. Similarly, thereafter, certain further agreements (Agreement 3 and Agreement 4) were entered into between the parties.

Interestingly, the dispute resolution clause in Agreement 1 inter alia provided that the courts of New Delhi have exclusive jurisdiction and the venue for holding arbitration proceedings would be New Delhi. On the other hand, the dispute resolution clause in Agreement 4 inter alia provided that the applicable rules would be Construction Industry Arbitration Council (CIAC) Rules with an empaneled arbitrator and the venue would be Kolkata.

Since the payments were not forthcoming, the Appellant issued notice invoking arbitration and nominated a sole arbitrator in Delhi, in March 2012 and a copy was marked to CIAC. The Respondent, however, denied the existence of any agreement between the parties and did not participate in the arbitration.

Instead, the Respondent filed a suit and sought an anti-arbitration injunction from the Junior Division judge at Sealdah, Kolkata (Trial Court) inter alia seeking a declaration that the agreements were null and void and a permanent injunction restraining the Appellant from relying on the arbitration clauses. Initially, an interim order restraining the arbitration was passed which got vacated on the filing of an application under Section 8 of the Act. The Trial Court accepted the application and referred the matter to arbitration. This order was challenged by the Respondent and some adjournments were granted by the Learned Arbitrator on account of the same attaining finality. However, no interim order favorable to the Respondent was passed by the court.

Eventually, in March 2015, the arbitrator allowed the claims of the Appellant by a common ex-parte award (Ex-Parte Award) covering claims in respect of all agreements. Aggrieved by the Ex-Parte Award, the Appellant filed an application under Section 34 of the Act before the High Court at Calcutta and filed an application under Section 9 of the Act before the Delhi High Court, seeking post-award interim measures, both of which were rejected. The Appellant then filed a Section 34 before the District Court at Alipore which held that it did not have jurisdiction given the proceedings were in New Delhi. This order was challenged by the Appellant under Section 37 of the Act and the High Court remanded the matter to the Alipore court. This order was challenged in the present Appeal before the Supreme Court.

Issue

The issue for consideration in the present matter is whether the Respondent could be said to have waived the right to raise any of the aforesaid objections in light of its conduct and the interplay of Section 4 read with Section 16 and Section 20 of the Act.

Arguments

The Appellant inter alia argued that the Respondent chose not to participate in the arbitration and that it was only at the stage of preferring a petition under Section 34 of the Act that a submission was raised for the first time about the venue of arbitration. Further, given that the arbitrator was appointed by the CIAC, there could not be a challenge re the venue by the Appellant at the stage of Section 34 for the first time. Having chosen not to raise any objection on the issue of jurisdiction or competence of the arbitrator to go ahead with the matter pertaining to the issue covered by arbitration, the Respondent must be taken to have waived any such objection.

The Respondent inter alia argued that every arbitration agreement had to be considered independently and if an agreement (i.e. Agreement 4) specified the venue to be Kolkata, the principles of party autonomy in that regard ought to be respected. Further, in light of the decision in Narayan Prasad Lohia v Nikunj Kumar Lohia & Others (2002 (3) SCC 572), party autonomy is paramount and hence the stipulation of the venue in Agreement 4 should have been strictly construed.

Judgment

Analyzing Section 4 (waiver of right to object) and Section 16 (competence of arbitral tribunal to rule on its own jurisdiction) of the Act, the Supreme Court arrived at the conclusion that that the Respondent failed to participate in the arbitral proceedings and did not raise any submission or objection regarding the venue or the arbitrator’s lack of jurisdiction or the arbitrator exceeding the scope of his authority, the Respondent must be deemed to have waived all such objections. It was held that in the present case, the arbitration is domestic and an institutional arbitration since the appointment was under the aegis of CIAC. It was not that there were completely different mechanisms for appointment of arbitrator in each of the agreements. The only distinction was that according to Agreement 4, the venue was to be at Kolkata. The specification of ‘place of arbitration’ may have special significance in an international commercial arbitration, where the ‘place of arbitration’ may determine which curial law would apply. However, in the present case of domestic arbitration, the applicable substantive as well as curial law would be the same and hence that by itself does not nullify the proceedings.

The Supreme Court placed emphasis on the procedure under Section 16 of the Act which enables an arbitral tribunal to rule on its own jurisdiction in case of any objection with respect to the composition of the arbitral tribunal. In other words, an objection regarding the composition of the arbitral tribunal, terms of reference, or seat and venue of the arbitration, would have to be brought before the arbitral tribunal in the arbitration proceedings within the time prescribed under Section 16(2) of the Act.

Thus, the order of the High Court of Calcutta was set aside and the order of the Alipore court was restored in the instant case.

Comments

This judgment of the Supreme Court is a welcome change in a scenario where parties often resort to dilatory tactics on what they presume to be the more comfortable home-turf. A specific ruling on the waiver of right to object in such fact scenarios is necessary, especially since such objections are being increasingly used as dilatory tactics, or to force the claimant to litigate in a jurisdiction wherein the respondent has initiated proceedings.

Similarly, the use of anti-arbitration injunction suits to delay proceedings has gained some traction in India, but courts have correctly taken a strong stand against the same. Notably, the judgment dated 3 March 2020 of the Delhi High Court in Dr Bina Modi v Mr Lalit Modi (CS(OS) 84/2020 & IA No.2760/2020) restricts the scope of courts to injunct arbitration proceedings and in fact goes one step forward in paragraph 30(p) to make out a case re the maintainability of such suits in general, in light of Section 5 of the Act. However, the question in the present matter was whether the conduct of the party amounts to a waiver or the Respondent has a right to agitate jurisdictional issues once again at the stage of a Section 34 petition.

Judicial precedents on the issue of challenges to the jurisdiction of arbitral tribunals have historically seen conflicting opinions in India. Interestingly, a three-judge bench of the Supreme Court in its decision dated 22 March 2018 in M/s. Lion Engineering Consultants v State of Madhya Pradesh & Ors.((2018) 16 SCC 758) (Lion Engineering case) allowed the plea of the State of Madhya Pradesh which challenged the jurisdiction of the arbitral tribunal for the first time in a proceeding for setting aside of an arbitral award under Section 34 of the Act. The facts of the case were different from the present case, but the reasoning was that setting-aside proceedings are independent of the proceedings before an arbitral tribunal. A balanced view on this is found in the decision dated 11 May 2007 of the Supreme Court in Gas Authority of India Ltd. v Keti Constructions (I) Ltd. ((2007) 5 SCC 38) (GAIL-Keti case), whereby a jurisdictional challenge raised at the stage of setting-aside proceedings was rejected and it was held that jurisdictional challenges must be made before the arbitral tribunal itself. However, it is pertinent to note that in the GAIL-Keti case, the Supreme Court held that if a plea of jurisdiction is not taken before the arbitrator as provided under Section 16 of the Act, such a plea cannot be permitted to be raised in proceedings under Section 34 of the Act for setting aside the award, unless good reasons are shown. Thus, in view of these decisions, it would be interesting to see how the instant matter is eventually decided on the merits of the Award.

It is vital that once parties are aware of the arbitration proceedings, the challenge to the jurisdiction of the tribunal is brought under Section 16 of the Act, in compliance with the timelines mentioned therein. It would also be important for the parties to take due care while drafting their arbitration agreements. If there is any intention to bar the initiation of common proceedings under multiple related agreements, the same may be expressly stated. Multi-party arbitrations and clubbing of proceedings under different agreements is becoming increasingly prevalent, and hence the instant judgment is a welcome decision in dealing with conduct of parties and with respect to the interplay of Section 16 with Section 4 of the Act. 

-       Chakrapani Misra (Partner), Manavendra Mishra (Principal Associate) and Saasha Malpani (Associate)

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