Common Commercial Disputes Queries - August 2024

Questions Answered in this Month’s CCDQ:

1.     Can the Arbitrator Award Escalation Loss Despite there being an Escalation Barring Clause in the Contract?

2.     𝐖𝐡𝐞𝐧 𝐝𝐨𝐞𝐬 𝐭𝐡𝐞 𝐥𝐢𝐦𝐢𝐭𝐚𝐭𝐢𝐨𝐧 𝐩𝐞𝐫𝐢𝐨𝐝 𝐟𝐨𝐫 𝐒𝐩𝐞𝐜𝐢𝐟𝐢𝐜 𝐩𝐞𝐫𝐟𝐨𝐫𝐦𝐚𝐧𝐜𝐞 𝐚𝐫𝐢𝐬𝐞?

3.     Arbitrator not releasing the Award unless Tribunal Fee is paid, what Can you Do?

4.     Does a Copy-Paste Job Warrant the Setting Aside of an Award?

5.     𝐀𝐫𝐞 𝐏𝐫𝐞-𝐀𝐫𝐛𝐢𝐭𝐫𝐚𝐭𝐢𝐨𝐧 𝐒𝐭𝐞𝐩𝐬 𝐚𝐥𝐰𝐚𝐲𝐬 𝐌𝐚𝐧𝐝𝐚𝐭𝐨𝐫𝐲?

6.     Have you unilaterally Appointed an Arbitrator? Can you still challenge his Appointment?

Can the Arbitrator Award Escalation Loss Despite there being an Escalation Barring Clause in the Contract?

Union of India v. M/s Vishva Shanti Builders (India) Pvt. Ltd. (Delhi High Court, 08.07.2024), was a petition under section 34 of the Arbitration & Conciliation Act, 1996 seeking to set aside arbitral award passed in the disputes between the parties.

The contract was for provision of accommodation at Delhi Cantt. During the pendency of the project, extension of time (EOT) was granted by UOI for completion of work without levy of Liquidated Damages. While seeking EOT, the Respondent had reserved its right to seek compensation for escalation, overhead losses and other losses due to delays by UOI.

The Arbitrator had allowed the claim of escalation raised by the Respondent and one of the key issues raised in the present objection petition was that the Arbitrator could not have allowed this claim when there was a clear prohibition in the contract that no escalation would be permissible.    The Court observed as follows:     

1.     The actual time taken to complete the work was 38 months as opposed to original 21 months. During this time, an increase of 54% was seen after absorbing an anticipated escalation of 10% for all materials, being cement, steel, bricks, sand and aggregate.

2.     Respondent had also notified its intention to claim damages vide various letters. These letters were found by the arbitrator to be in substantial compliance of Sections 55 and Section 73 of the Indian Contract Act, 1872. However, the UOI did not reply to these letters and continued with the work to be performed by the Respondent.

3.     Therefore the Prohibitory clause barring escalation became redundant and claim of escalation could be permitted where contractor notified its claim and EOT was granted without levy of LD. (Norther Railway v. Sarvesh Chopra (2002) 4 SCC 45, PM Paul v. UOI 1989 Supp (1) SCC 368).

4.     Arbitrator also noted that in a competitive tender, a contractor can anticipate a reasonable increase in his quotation that is 10% but cannot foresee actual increase of more than 100% of 80% in cement and steel.

In view of the same, the findings of the Arbitrator were found reasonable and the award was upheld.

𝐖𝐡𝐞𝐧 𝐝𝐨𝐞𝐬 𝐭𝐡𝐞 𝐥𝐢𝐦𝐢𝐭𝐚𝐭𝐢𝐨𝐧 𝐩𝐞𝐫𝐢𝐨𝐝 𝐟𝐨𝐫 𝐒𝐩𝐞𝐜𝐢𝐟𝐢𝐜 𝐩𝐞𝐫𝐟𝐨𝐫𝐦𝐚𝐧𝐜𝐞 𝐚𝐫𝐢𝐬𝐞? Usha Devi v. Ram Kumar Singh (Supreme Court of India, 05.08.2024), was an appeal against Jharkhand High Court's order in Second Appeal confirming the First Appellate Court's order decreeing suit for specific performance filed by the Respondents. The dispute related to an agreement entered for the sale of land, which provided that the sale deed was to be executed within one month. The agreement to sell also incorporated a clause that the said agreement would be valid for five years.   Since the sale deed was not executed, the Respondents instituted a suit for specific performance of the Contract in September 1993. The key issue involved was the issue of limitation. The Supreme Court observed:

1.     The limitation for filing a suit for Specific performance of a contract is three years from the date fixed for performance, or if no such date is fixed, when the Plaintiff has notice that the performance is refused (Article 54 of the Limitation Act, 1963).

2.     The agreement specifically provided that sale deed would be executed within one month of the agreement, which period would expire in January 1990. Therefore once a specific date has been fixed, the limitation would be three years from the said date, which would be January 1993. The suit filed in September 1993 was beyond this period.

3.     it is totally irrelevant that the agreement was to remain valid for 5 years. Validity of the Agreement is something different from the performance, and cannot change the date of performance. 

In view of the above, the Appeal was allowed, the Second Appellate Court's order was set aside as the suit was clearly barred by limitation.

Arbitrator not releasing the Award unless Tribunal Fee is paid, what Can you Do?

In Ahluwalia Contracts India Limited vs UOI, (DelhiHighCourt, 24.07.2024), the Court had appointed a sole arbitrator and had directed that the Arbitrator's fee would be determined in terms of Schedule IV of the Arbitration & Conciliation Act, 1996 ("A&C Act"). The present petition was filed under Section 39(2) of the A&C Act seeking directions to the sole arbitrator to deliver the arbitral award in the matter.         The main issue was whether the ceiling of AT fees under Schedule IV was to be calculated on claims and counterclaims together or separately for claims and counterclaims.     The Court observed as follows:

1.     The judgment of Rail Vikas Nigam Limited v. simplex (2020)SCCOnline Del 2101 provided that that the upper limit/ceiling of fee payable to a sole Arbitrator as per fourth schedule would be calculated assuming that the 'sum in dispute' would be a consideration of the claims and counterclaims together. As a result the maximum fee under the A&C Act Schedule IV would be Rs. 62,34,375 (Rs. 49,87,500 x 1.25).

2.     This judgment was overruled by ONGC vs Afcons Gunanusa JV ( in 2022 SCC Online SC 1122), which provided that the ceiling would be calculated separately for claims and separately for counterclaims.

3.     The Arbitrator had observed that since he was appointed prior to the ONGC judgment, calculation of his fee would be in terms of the earlier RVNL judgment.

4.     The Court observed that when the Arbitrator passed the order declaring the fee in August 2023, the ONGC judgment (30.08.2022) had already declared that RVNL judgment was not good law. Therefore, reliance by arbitrator on RVNL judgment was erroneous.

5.     Arbitrators do not have power to unilaterally issue binding enforceable orders determining their own fees. This would violate principle of party autonomy and doctrine of 'no man can be judge in his own cause'.

6.     Any party can approach Court to review the fees demanded by arbitrators if it believes the fees are unreasonable under Section 39(2) of the Arbitration & Conciliation Act, 1996.

In view of the above, the Court held the arbitrator had erroneously applied the RVNL judgment, the ceiling for both claims and counterclaims had to be applied separately, and as per this calculation, some amounts were directed to be refunded to the Petitioner.

Does a Copy-Paste Job Warrant the Setting Aside of an Award?

DJO v. DJP & Ors. (Singapore International Commercial Court of Republic of Singapore, 19.08.2024), was an application filed under s. 24(b) of the Singapore International Arbitration Act, 1994 seeking to set aside an award in an ICC Arbitration case.

The contract, out of which the dispute arose was CPT-13 based on FIDIC yellow book, 1999. Seat was Singapore, substantive law was Indian law.

The application was filed by DJO, an Indian SPV responsible for operation of network oif railway lines in India serving freight trains ("Dedicated Freight Corridors"). Defendants/Claimants in the arbitration were a consortium of two Indian and one Japanese company.

There were 2 other similar paralellel arbitrations CP-301, CP-302, and these two had the same presiding judge, Judge C, who was also the presiding judge in the current matter that is CPT-13. Issues involved were similar but there were substantial differences in the parties and law involved. The present arbitration was the last to be taken up.

The challenge in this case was based on the fact that Judge C, who was the same presiding arbitrator had taken the 'template' of the other two awards and written the present award without application of mind.

The Court observed as under:

1.     Rather than approaching the issues de-novo, the tribunal elected to use the other awards as a template for its Award in the Arbitration and to "massage" it into a state where it "appeared" to deal with the issues in the present arbitration.

2.     278 of the 451 paragraphs of the award were reproduced from the award for the other packages.

3.     Weight was placed on submissions made, authorities cited, contractual provisions, and lex arbitri which were relevant in the earlier arbitrations and completely absent/incorrect/irrelevant as far as the present arbitration was concerned.

4.     The aforementioned conduct of the Tribunal's copy-and-pasting meant that there was a violation of Arbitration 32(2) of the ICC Rules that Tribunal should give reasons of its decision, and such a copy-pasting meant there were no reasons at all. (Yah ah lai v. Public Prosecutor [2014]3SLR180 - an impartial observer would think that in neither case had the judge properly applied his mind to the facts of the case)

5.     This was also clearly a breach of natural justice, ie. rule against bias (nemo judex in causa sua) and right to fair hearing (audi alteram partem) (So Beng Tee & Co Pte Ltd. v. Fairmount Development [2007] 2 SLR(R) 86 ("Soh Beng Tee") at [43]).

6.     This also meant, that while presiding arbitrator Judge C had prepared the award, the two co-arbitrators A & B had not even read the draft award properly or at all.

in view of the above the Court held the award was made in breach of natural justice and was therefore set aside.       

𝐀𝐫𝐞 𝐏𝐫𝐞-𝐀𝐫𝐛𝐢𝐭𝐫𝐚𝐭𝐢𝐨𝐧 𝐒𝐭𝐞𝐩𝐬 𝐚𝐥𝐰𝐚𝐲𝐬 𝐌𝐚𝐧𝐝𝐚𝐭𝐨𝐫𝐲?       M/s Larsen & Toubro v. Rajasthan Urban Sector Development Project (RUIDP) (Rajasthan High Court, 13.08.2024) was an application for appointment of arbitrator under Section 11(6) of the Arbitration & Conciliation Act, 1996.   

Contract related to construction of work of water supply, sewerage etc for 10 years at Pali. The claims related to variation due to extra work for hard rock strata.

 In this case, the contract provided for resolution of disputes by Disputes Adjudication Board (DAB) before invoking arbitration.

While L&T’s submission was that they had prayed for DAB to be appointed but the respondents had refused it, it was the Respondent’s contention that failure to follow this pre-arbitration step was mandatory and the present application for appointment was premature.   The Court observed as followed:

1.     L&T had written letters to the Respondent proposing to place their dispute relating to variation under Clause 13.3 to the DAB, and a specific letter had also been written praying to constitute the DAB.

2.     The Respondent rejected the proposal to constitute refer the dispute to DAB and clearly denied the same.

3.     It was after this that L&T invoked arbitration, which was met with no response whereafter L&T approached the present court for appointment of arbitrator. In view of the above it is clear that the procedure to appoint DAB & adjudicate disputes could not fructify between the parties. At this time any attempt to resolve disputes by mutual discussion or mediation would be an empty formality. (Demerara Distilleries Pvt. Ltd. v. Demerara Distilleries Ltd. (2015)13SCC610].

 The court therefore held that it could not be said that the present application was pre-mature and it went on to appointed the arbitrator.        

Have you unilaterally Appointed an Arbitrator? Can you still challenge his Appointment?

Ram Chander Aggarwal v. Ram Kishan Aggarwal (Delhi High Court, decided on 16.08.2024), was an objection petition under section 34 of the #Arbitration & Conciliation Act, 1996 (“A&C Act”) challenging an arbitral award rendered in disputes arising out of partnership deed between the parties.

 When disputes arose between the parties, the Petitioner/Claimant appointed an #arbitrator. The same was objected to by the Respondent on the ground of unilateral appointment. However, the arbitrator commenced the matter, and when the Respondent filed an application challenging the jurisdiction of the arbitrator on ground of unilateral appointment, the arbitrator observed that the same would be decided at the time of final hearing. 

During the final hearing the arbitrator while holding that his unilateral appointment was not in line with the arbitration clause in the contract, also held that the claims of the Petitioner/Claimant were not made out.   

It was submission of both counsel that the arbitrator had no jurisdiction to decide any claims once it had come to the conclusion it had no jurisdiction due to his appointment being unilateral.

The court observed as follows:

1.     The impermissibility of arbitral proceedings at the hands of a unilaterally appointed arbitrator is now well established. Such proceedings are void ab initio (TRF Limited v. Energo Engineering Projects Limited (2017) 8 SCC 377 and Perkins Eastman Architects DPC v. HSCC (India) Limited (2020) 20 SCC 760).

2.     Even absent a challenge under Section 34 of the A&C Act, an award rendered by a unilaterally appointed arbitrator has been held to be unenforceable. This challenge can even be taken up by the party who has themselves appointed the arbitrator. (Telecommunication Consultants India Ltd. v. Shivaa Trading [2024 SCC OnLine Del 2937)

3.     The arbitration clause itself required the arbitrator to be appointed by all parties.

4.     Once the arbitrator had decided he was not appointed in consonance with the arbitration clause, the matter ought to have rested there and he should not have gone on to decide the claims on merits.

In view of the above, the award was set aside on the ground that the composition of the arbitral tribunal was violative both, of the arbitration agreement as well as provisions of the A&C Act, and fresh arbitrator was appointed.