Contracts and arbitration for managers 9789351506379, 9351506371, 9789351506362, 9351506363, 9789351506386, 935150638X

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Advance Praise [This is] an outstanding book written authoritatively on the topic of contract and arbitration. It fills a huge void on the topic and would be useful and of great interest to every business manager at all levels. Professor Agarwal’s academic distinction and professional brilliance in engineering and law with a vast experience on these subjects make him ideally suited to write the book: A unique book of its kind. — Bishwajit Bhattacharyya Senior Advocate (Supreme Court) and Former Additional Solicitor General of India Professor Agarwal has straddled business, law and academia providing his book with the rigour of a researcher, the world view of management and the practical issues noticed by lawyers in their professional life. His multiple viewpoints strengthened by his interaction with industry participants at the IIM Ahmedabad (IIMA) campus give him a strong foundation on the subject which is never divorced from reality. This is a must-read for managers, students and law professionals who are interested in the subject. — Sandeep Parekh Founder, Finsec Law Advisors, Mumbai I am happy to know that Professor Anurag K. Agarwal, an engineer turned lawyer, turned Professor of business law at IIMA has come out with another unconventional book titled Contracts and Arbitration for Managers, bringing holistic

perspective of the concept of contract and arbitration with a practical approach. In the post-liberalisation era, it is fairly common for commercial contracts, whether with private corporations or with the government, to usually contain an arbitration clause, which requires sound legal strategy right from the language of terms of contract including arbitration clause, till the execution/enforcement stage. I am sure stakeholders will find this book to be a complete encyclopaedia on the subject. — Justice N.N. Mathur Former Vice Chancellor, National Law University, Jodhpur It is one of the most lucid read. Only Professor Agarwal could pull up such a work, where the intricate concept of laws are explained in the most understandable terms. I believe it is a must-read for corporate managers. Especially in modern times when every manager is facing issues with contract management and alternative dispute resolution, this book comes as an interesting read. I have had the occasion of attending Professor Agarwal’s classes during my MBA days from IIMA. Let me say there are very few teachers who can teach the complex legal principles in such simple language. Most of my understanding of contract laws and international commercial arbitration is courtesy the teachings of Professor Agarwal. I can say he is one of the best teachers that IIMA has. — Mukul Shastry Chief Manager—Legal, KEC International Limited, Mumbai Ten years back, during my brief stint as an intern under Professor Agarwal, one of the projects I loved working on

was in relation to mental health laws in India and abroad. As it was my first internship, I tried hard to include all relevant sections of the legislations. When I took my work over to him, he asked me if I had watched the movies Seema and Sadma. We saw portions of both movies in his chamber and debated over unsoundness of mind and consent. He always managed to bring any subject alive. That is exactly what he has done with this book. Peppering each chapter with instances that draw up parallels in real life, the book goes on to explore the origin of the contract and arbitration law, analyses them from an international as well as Indian perspective, clearly enumerates the various facets involved and contains some very direct takeaways, answering the practical doubts that every manager faces when dealing with contracts filled with legalese and arbitration clauses. Simply put, this book effectively demystifies the law and would be an effective guide for all professionals. — Karishma Baria Senior Associate, Wadia Ghandy & Co., Mumbai In today’s topsy-turvy but engulfing and dynamic business, Indian markets are equally pulsating with international market and its parties. The parties which have global footprints are entering into contracting relationship with Indian counterparts and their managers. These managers, who are mostly from engineering background, have proven their mettle in the global business world from number crunching to applying business strategies. In today’s scenario, the onus of interpretation between the contracting entities on risks and rewards, and considerations and obligations is required to be understood with bare threaded details by our responsible Indian managers who are

administrating the contracts. But Indian managers feel suffocated when they are on collision path in certain business entangles and unable to understand contracts, arbitration and litigation aspects of contracting. They do not feel that their legal armour is foolproof to understand the take on such business entangles. However, now they have a chance to peep into the world of contracting and arbitration through this book by Professor Anurag K. Agarwal who is an engineer-turned-lawyer-turnedprofessor at IIMA. His sheer magic of changing complex legal concepts to chewable and simpler form for today’s Indian managers to understand legal concepts would act as effective enabler to take on such legal entangles with confidence by bringing them on the path of awareness of laws of contracts. I wish Professor Agarwal continues to connect the legal world and the ambit of fast-growing business, seamlessly helping today’s engineers-turned-managers. — Vikas Sobti Manager—Purchase and Supply Chain Management, Cairn India Limited A major hiccup for companies willing to do business in India is their concern over how to make way through the labyrinthine legal structure. Enforcement of contracts and a swift hassle-free dispute resolution mechanism is at the heart of rule of law. Suitable guiding literature in this regard has been missing and this book can equip professionals, managers, entrepreneurs and the like to understand the intricacies of this vital domain. This book comes handy both for the working professional as well as for the curious academic. Professor Agarwal emerges at his best in this book and comes out as the master of his art. His grasp of the subject matter at hand is profound and the coherence in his ideas

impeccable. The book reflects years of his experience in legal, managerial and academic arenas. We hope to see more such marvels from Professor Agarwal in future. — Rohan Anand Class of 2011, IIMA Indian Police Service, 2013 Batch, Gujarat Cadre Contracts and arbitration are things everyone need to understand. Professor Agarwal’s classes proved absolutely invaluable to me when I started working. It is great that he will now be sharing the benefit of his knowledge and experience with a much wider audience through this book. — Aditi Krishnakumar Class of 2007, IIMA Risk and Compliance Officer, Ocean Dial Asset Management, Singapore

CONTRAC TS

and Arbitration FOR

S R E G A N A M

CONTRAC TS

and Arbitration FOR

S R E G A N A M Anurag K. Agarwal

Copyright © Anurag K. Agarwal, 2016 All rights reserved. No part of this book may be reproduced or utilised in any form or by any means, electronic or mechanical, including photocopying, recording or by any information storage or retrieval system, without permission in writing from the publisher. First published in 2016

SAGE Publications India Pvt Ltd B1/I-1 Mohan Cooperative Industrial Area Mathura Road, New Delhi 110 044, India www.sagepub.in SAGE Publications Inc 2455 Teller Road Thousand Oaks, California 91320, USA SAGE Publications Ltd 1 Oliver’s Yard, 55 City Road London EC1Y 1SP, United Kingdom SAGE Publications Asia-Pacific Pte Ltd 3 Church Street #10-04 Samsung Hub Singapore 049483 Published by Vivek Mehra for SAGE Publications India Pvt Ltd, typeset in 11/14 pt ITC Century by Diligent Typesetter, Delhi and printed at Sai Print-o-Pack, New Delhi. Library of Congress Cataloging-in-Publication Data Names: Agarwal, Anurag K., author. Title: Contracts and arbitration for managers / Anurag K. Agarwal. Description: Thousand Oaks : SAGE Publications, 2015. | Includes   bibliographical references. Identifiers: LCCN 2015039144| ISBN 9789351506379 (pbk. : alk. paper) | ISBN   9789351506386 (ebook) | ISBN 9789351506362 (epub) Subjects: LCSH: Contracts—India. | Arbitration and award—India. | Dispute   resolution (Law)—India. | Contracts. | Arbitration and award. | Dispute   resolution (Law) Classification: LCC KNS810 .A43 2015 | DDC 346.5402/2024658—dc23 LC record available at http://lccn.loc.gov/2015039144 ISBN: 978-93-515-0637-9 (PB) The SAGE Team: Sachin Sharma, Sandhya Gola and Ritu Chopra

To my father, Late Shri Ram Lakhan Agarwal, Advocate

Thank you for choosing a SAGE product! If you have any comment, observation or feedback, I would like to personally hear from you. Please write to me at [email protected] Vivek Mehra, Managing Director and CEO, SAGE Publications India Pvt Ltd, New Delhi

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Contents List of Abbreviations Preface   1. Introduction 

ix xi 1

 2. Contracts

12

  3. Arbitration 

45

  4. Institutional and Ad Hoc Arbitration 

68

  5. Liquidated Damages 

83

  6. Force Majeure 

100

  7. Arbitration Clause 

114

  8. Mandate of an Arbitrator 

134

  9. Challenging an Award 

149

10. Public Policy 

168

11. Interest 

189

Epilogue  Appendix: Important Definitions Notes Glossary  About the Author 

209 212 220 227 231

List of Abbreviations AB ADR BIT BRCC CAG CIF CJI DDA EMD FERA FCI FIDIC GE FOB HPCL IPLA ICC ICSID JMC IIMA LBW LD L&T MPRDC MHB

Associate Build­ers alternative dispute resolution bilateral investment treaty Bimal and Raman Construction Company (fictitious) Comptroller and Auditor General of India cost, insurance, freight Chief Justice of India Delhi Development Authority earnest money deposit Foreign Exchange Regulation Act Food Corporation of India Fédération Internationale Des Ingénieurs-Conseils General Electric free on board Hindustan Petroleum Corporation Limited Intellectual Property License Agreement International Chamber of Commerce International Centre for Settlement of Investment Disputes J. M. Combines IIM Ahmedabad leg before wicket liquidated damages Larsen and Toubro M.P. Road Development Corporation Mohan Lal Harbans Lal Bhayana

x

CONTRACTS AND ARBITRATION FOR MANAGERS

MSP MSP Infrastructure Limited NITI Aayog National Institution for Transforming India Aayog NHAI National Highways Authority of India NME Navodaya Mass Entertainment ONGC Oil and Natural Gas Corporation Limited PIL public interest litigation PPP public–private partnership SCOPE Standing Confer­ence of Public Enterprises SHA Share Holding Agreement SSHAs Supplementary Share Holding Agreements STKHA Supplementary Technical Know-How Agreement TKHA Technical Know-How Agreement T&Ps tools & plants TSR time, score and result UNCITRAL United Nations Commission on International Trade Law WCC Wonkul Construction Com­pany (fictitious)

Preface I wish this book could have been published when my father, Shri Ram Lakhan Agarwal, Advocate, was alive. He passed away in February 2014. A self-made man, he rose to the highest levels of professional success in his six decades of career as a lawyer in Lucknow. He had mastery over civil law and was the District Government Counsel (Civil) in Lucknow in 1980s. He was the doyen of arbitration law and had the uncanny ability to explain intricate aspects in a very lucid manner. A generation of lawyers learnt the basics of law at his feet, and I am fortunate to be one of them. I assisted him in numerous arbitration matters. The courses I teach at IIM Ahmedabad (IIMA)—particularly International Business Dispute Resolution—do have his indelible impression. He has been the true inspiration for writing this book. The book deals with contracts and arbitration from a business perspective and is not meant for experts in contracts and the law of arbitration. It is also not a textbook on the subject of contracts and arbitration. It is meant for those professionals who are responsible for managing projects. Many a time, most of these professionals in a large number of companies, both private and government, are engineers, who are expected to work as managers by the top management. This entails thinking and delivering like managers. This is a tall order as most of the projects, or rather all, involve contracts and dispute resolution clauses, which even to the best of the managers look like Greek and Latin. I have

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CONTRACTS AND ARBITRATION FOR MANAGERS

been involved in teaching a large number of students—most of them engineers—at IIMA and managers—again, many of them engineers—in numerous executive programmes for the government and private companies. I graduated as a mechanical engineer and worked with Bharat Petroleum before I decided to study law. Hence, I can very well understand their feelings. This book, therefore, targets the managers— chiefly engineers but performing the role of a manager—who grapple with issues related to contracts and arbitration very often. Therefore, this book is not supposed to be daunting, extremely thick and full of references. The book starts with an introductory chapter, which talks about a hypothetical story, ‘Bimal and Raman Construction Company’, and describes the relationship between business and contracts, and how companies may use the contractual clauses to avoid disputes. The story tells us about different issues involved in typical contracts and dispute resolution. It also touches upon dealing with the government. Most of these shall be discussed in separate chapters with the help of landmark and interesting cases largely from the Supreme Court of India. These court judgements are in public domain and can be used by anyone. In fact, the effort should be wider dissemination of these judgements, as these are an integral part of the ‘law of the land’. I have not always given the entire judgement, but only the important parts have been culled. I have made an effort to not use legal jargons so that they are palatable to everyone. But, in some cases, I have deliberately included ticklish legal terms and detailed discussions so as to give business managers a taste of the real thing. In this process, I have tried that the judgements retain their original feel and flavour. Selection of the cases has been made in a manner to have the latest cases, to highlight the concerned topic and in relation to the name of a product or company with which the reader would be familiar. To enhance readability, I have selectively given citations and endnotes.



Prefacexiii

The book covers the following topics in different chapters— contracts, arbitration, institutional and ad hoc arbitration, liquidated damages (LD), force majeure, arbitration clause, mandate of an arbitrator, challenging an award, public policy and interest. Each chapter is not a watertight compartment. Issues flow from one chapter to another. Thus, the approach to understand the subject is not modular. It has to be integrated learning. While trying to understand a particular topic the entire attention should be on that topic itself and thereafter the manager must develop the ability to assimilate it and integrate it with the overall understanding. There are many other issues related to contracts and arbitration which a manager may be concerned with. Most of them are beyond the scope of this work, as it is not expected to be daunting and unwieldy. I have selected the ones which have been repeatedly highlighted in class discussions with the students and executives over the last 10 years. The book, hopefully, will connect well and touch upon—if not answer all—a lot many issues, concerns and queries, which often trouble a manager. I envisage this book to be a useful companion to the managers. I would like to sincerely thank all the students and executives with whom I had such wonderful and rich discussions in class. Deliberating about the practical problems that the executives face helped me sharpen the subject and explore further. Thanks to SAGE and its entire team, particularly Sachin Sharma, whose persistence made this possible. It was he who suggested the title also. Special thanks to my family—wife Manjari and sons Anant and Akshat—for encouraging me to work on this subject in my father’s memory. The work has seen the light of the day because of their unstinted support, care and motivation. Anurag K. Agarwal Indian Institute of Management Ahmedabad

1

Introduction

Business managers have to deal with contracts almost on a daily basis, but, very often, despite the best efforts to avoid, disputes occur. In such a scenario, it is imperative for them to understand the implications of such disputes in the context of contracts and the dispute resolution clauses. It is a tightrope walk to get work done by contractors and at the same time raise contractual issues with them. Many a time, strict legality takes the back seat and practicality wins hands down. After all, a business manager, and rightly so, must be concerned more about the business, rather than the technicality of legal issues. Still, it makes sense for business managers to be conversant with the basics of contractual aspects and also the dispute resolution clauses, so that they, at least, get the confidence to tackle the situation. I am using the term ‘business manager’ throughout the book in a liberal sense with wider interpretation. It includes any person who is responsible for making business decisions at all levels in a business. Hence, the term ‘business manager’ may be used interchangeably and synonymously with chief executives, businesspersons, entrepreneurs, etc. This book deals with various aspects of contracts and the dispute resolution clauses, with arbitration in particular. It does not focus much on theoretical aspects, though there will surely be references to the legal theories and principles applicable in different situations. It focuses on different case studies; by cases, we mean court judgments, which have been picked from different courts in India, with the majority of them being from the Supreme Court of India and a few from different High Courts in India and courts of other countries.

2

CONTRACTS AND ARBITRATION FOR MANAGERS

Business managers, despite their best intentions, cannot have the luxury of ignorance of law. It applies not only to the business manager, but everyone, as it is the most fundamental principle which makes legal systems work around the world. The Latin maxim which governs it is ignorantia facti excusat, ignorantia juris non-excusat which means that ignorance of facts can be excused, but ignorance of law can never be excused. Hence, ignorance of law can never be taken as a plea in legal proceedings. Thus, it is important for business managers to know the basic principles of law and understand their application to the business. With international trade becoming more common and popular, business managers have to often deal with international contracts, which also create international business disputes that may be governed either by international law or national laws as determined by the parties. In most of the cases, the parties agree to get the disputes resolved in the courts of one of the countries, with enforcement of the final decision, still remaining a difficult proposition. However, business continues throughout the world despite the legal issues and problems. In such a scenario, it is desirable for business managers to be aware of the basic principles which apply in such cases. For resolution of these disputes—whether domestic or international—all matters except the ones which are settled by the parties amicably without going to a court of law have to reach the same in one way or the other. In most of the countries, there is a three-tier judicial mechanism, with courts at the district level at the lowest hierarchy, moving on to the High Courts at the appellate stage and the Supreme Court at the apex level. India follows the same system. For almost all the contractual matters and disputes in India, the judicial process starts at the District Court level, which itself may be following a two-level system with the court of the Civil Judge at the initial level and moving on to



Introduction3

the District Judge level, which also includes the Additional District Judges. In most of the districts in India, the role of the District Judge—which pertains to civil jurisdiction—is clubbed with that of the Sessions Judge—which pertains to criminal jurisdiction. Hence, the designation for such a position is ‘the District and Sessions Judge’ in most of the districts in India. The person holding this position is supposed to devote time to both these roles, and very often, criminal matters take precedence, with long pending, complex civil matters detailed in thick files being pushed to the back burner. Once the matter is decided at the District Judge’s level, the aggrieved party may take the matter to the High Court. Moving to the appellate court is either a matter of right as provided in the procedural law or may be discretionary and, thus, filed in the High Court with a prayer to the Bench to exercise discretion to admit the matter and decide appropriately as per the facts and circumstances of the case. The aggrieved party at the High Court level has another option, and that is to move to the Supreme Court, again as a matter of right in certain cases and praying to exercise discretion in the rest of the matters, whose number is much larger as compared to the former cases. At each and every level, litigation takes time and costs money. There is usually a quantum jump in the costs involved as one moves from one level to the other due to exponentially rising lawyers’ fees and other costs associated with the proceedings as one has to physically be present in the cities in which the High Courts and the Supreme Court are situated. It is very rare that all the courts are situated in the same city, and that too can happen only for a certain number of factors in which the parties reside on usually conducted businesses in the city in which the Supreme Court is situated, which happens almost invariably in the capital of the country. Thus, it is a sheer luxury for the parties situated in the

4

CONTRACTS AND ARBITRATION FOR MANAGERS

capital of the country to follow all the proceedings at the same geographical location; otherwise, disputing parties have essentially to think about the costs—both monetary and non-monetary—involved in pursuing litigation to the highest level. The United States of America (US), the United Kingdom (UK) and most of the other countries in the world follow the three-tier system, with almost similar issues as have been discussed about India. Let us start with a story which tells us about the importance of contracts and arbitration, and different related issues. It is a fictitious story and all the names mentioned are imaginary.

Bimal and Raman Construction Company Raman proudly and humbly received the prize for the ‘Best Businessperson of the Year Award’ from the minister. It was a well-deserved award, and Raman had really worked very hard in his life. He was requested to say a few words. He was filled with emotions as the award took him back to his childhood days in the village Chakmansab. It has been a long journey for him from the village Chakmansab to this prestigious award.

Childhood and Education His father was a farmer in Chakmansab and used to work extremely hard in the fields. He loved the greenery all around his village. But even as a child he used to think about the poor conditions of his village folks. At a young age, he was fortunate to go to the village school and get scholarship to study higher secondary, and thereafter in the prestigious engineering college in Wonkul city. Despite being poor, his father taught him the value of qualities such as honesty and hard work.



Introduction5

During school and college days, Raman became an avid reader and had read numerous books on varied subjects. He had picked up some golden words from different books and tried to follow them in his life. His favourites were: first, ‘a stitch in time saves nine’ and, second, ‘slow and steady wins the race’. These two were the most important guiding principles in his life.

Philosophy of Life In his life, Raman had perfected the art of doing small things at the right moment. He would not unnecessarily wait for things to take a nasty turn and then try to fix them. He had also mastered the art of being patient with constant practise. He was never attracted to anything which would give fast returns as he was always suspicious of such plans. His firm belief was in being slow and steady and doing the right thing with great patience. For this, according to his competitors, he had paid a heavy price. He could have been a far more successful businessperson had he been a little bit ‘practical’ and gone with the tide. But Raman did not have any of that. He had always trodden the straight and narrow path. He was very much content with what he had and was extremely grateful to the business community for recognising his work and bestowing the honour on him.

Days at Wonkul Construction Company He remembered the days in the Wonkul Construction Company (WCC) which he had joined after graduating as an engineer. WCC was very well known, but Raman found the culture of the company unethical and unacceptable. He tried to point out such issues to his bosses but rather being appreciated, he was categorically told to work as per the set

6

CONTRACTS AND ARBITRATION FOR MANAGERS

practices and traditions of the company. Everyone in WCC believed in chalta hai (it’s OK) for corruption, violation of legal norms, non-adherence to contracts, inflating claims, cooking account books and so on. It was considered to be heroic to be able to get business by hook or by crook, and anyone who used to pay too much attention to niceties and ethics was branded ‘chicken hearted’ and ‘sissy’.

Bimal in His Life Raman used to share his views with Bimal, another engineer in WCC. Bimal’s friend Kamla was a lawyer in the company’s legal department and the three often used to get into heated discussion regarding company’s working over cups of coffee. She would usually share her lunch with him and was of the similar opinion. While Kamla agreed with Raman and Bimal generally, there was one main difference: She used to say that whatever the company was doing was by being on the right side of the law. Though the practices followed by the company might have been unethical, yet they were all legal. Raman was usually at a loss with such an explanation. Trying to understand the relationship and balance between law, ethics, engineering and his personal values often confused him. But he was dead sure about the two fundamental principles he had and was following both. Bimal appreciated those principles and admired Raman for his simplicity and frankness. They got married.

Their Own Company, Bimal and Raman Construction Company (BRCC) With the passage of time, both of them found the working in WCC suffocating and attitude of bosses nauseating. They decided to resign and start their own construction company.



Introduction7

They named the company ‘Bimal and Raman Construction Company’ (BRCC). For BRCC, survival was difficult as there were hardly any contracts coming its way. Somehow, with just petty contracts, BRCC remained afloat. Kamla often met them and willingly advised them on legal matters, but could not do much for long as it was not possible for her to meet them regularly and because there were confidentiality reasons also. Bimal always used to tell Raman to have some understanding of the legal provisions in contracts, dealings with the government, dispute resolution clauses and issues related to banks and other investors. Due to Kamla’s availability for advice, Raman did not pay much attention, but then he realised that after all it was his business and he should not depend too much on Kamla. Bimal had become too engrossed with family and had consciously decided to take a back seat in the company’s matters, though she was Raman’s silent pillar of strength.

Legal Help Keeping the importance of ‘a stitch in time saves nine’ in mind, he decided to engage a competent lawyer with his company and also develop good understanding of the legal provisions related to business. The former was not much difficult and he zeroed in on Dev, a young lawyer with fantastic understanding of business law, and engaged him with BRCC. The latter part was not so easy and Raman told himself, ‘slow and steady wins the race’ and to be patient. He started interacting with Dev frequently and also read basic books about business and law. But things were proceeding very slowly, and very often there were new terms and concepts which he was not able to understand despite his best efforts. When he told Dev about this problem, Dev suggested him not to go too deep into the legal technicalities

8

CONTRACTS AND ARBITRATION FOR MANAGERS

and rather try to understand the basic principles and how they were applied in day-to-day business. Dev had also suggested him to ask a few questions to himself whenever he encountered a legal document, such as why, how, when, where, etc. This really helped as Raman started trying to find answers either on his own or with the help of material available in libraries and on the Internet, and by interaction with his peers as well.

Dealing with the Government The first issue that came before him was that of L1. In almost all government notices inviting tender for projects, two bids were invited from interested parties—technical and financial bids. BRCC was always able to qualify on technical grounds, but could rarely get any government contract on the basis of financial bid as there was a condition of L1—with all things being equal technically, contract was awarded to the party asking for the lowest payment, L1. Raman had never been able to understand how any of his competitors could bid for extremely low amounts, which were practically impossible, and forget about making profit. According to him, each of such contracts would have surely ended with losses. After studying the matter and discussing it with a number of people, Raman was able to understand that most of his competitors were writing a different amount as L1 in the financial bid and were able to extract much more from the government by using escalation clauses and making exorbitant claims in arbitration proceedings. Raman was now able to understand the modus operandi used by a number of companies seeking government contracts. He was not comfortable doing the same thing and abhorred the idea. With the passage of time, BRCC was able to get contracts after writing realistic figures as L1 as a number of government



Introduction9

organisations had realised the importance of the quality of work done by BRCC and were willing to award the contract to BRCC. Such was the reputation gained by BRCC that most of the government organisations did not insist on a bank guarantee of a large amount of money. It was rare in the business fraternity that anyone reported that BRCC’s bank guarantee was encashed. BRCC was following the best of the global standards and most of its contracts complied with the Fédération Internationale Des Ingénieurs-Conseils (FIDIC) conditions, named after the famous French organisation ‘International Federation of Consulting Engineers’ established in 1913 and headquartered in Paris.

Reputation Building BRCC paid a lot of attention to detailing and dealing with realistic figures and timeframes. Being realistic, honest to the core, proactive, doing things patiently and not cutting corners helped the company to achieve tremendous heights. BRCC would always adhere to the contracts and never misuse the clauses of contracts. There were hardly any arbitration proceedings going on with BRCC as the company was quite satisfied with the amount paid according to the contract, and in the rare cases when there were genuine disputes, BRCC would always try to negotiate and settle the matter. BRCC was very careful about the force majeure clause in the contracts. Often there were clauses for LD to be deducted in the contracts. BRCC honestly figured out whether the force majeure clause would apply or not in a plain and simple meaning, rather than going for legal hairsplitting. Raman was able to anticipate any delay or change in the schedule quite early in the project and would point it out to the other party at the earliest opportunity. As Raman’s reputation was of a no-nonsense person, due seriousness

10

CONTRACTS AND ARBITRATION FOR MANAGERS

was given to his views and usually the other parties were willing to modify the contract.

Realistic Claims In very few matters, when claims were either made by BRCC or the other party, Raman ensured in the contract that the arbitration clause had mentioned institutional arbitration, with an institution of high repute. Though Raman had nothing against ad hoc arbitration, and it would have been very easy for him to get persons willing to act as an arbitrator on the arbitral tribunal, yet he preferred the institutional mechanism primarily for a streamlined procedure and expertise. So far, BRCC under Raman had a smooth sail. And that is why there is such high regard for Raman’s leadership capabilities. It is of no wonder that Raman has been awarded the Business Person of the Year award.

The Most Troublesome Contract There was one contract which gave maximum trouble to Raman. It ended up in a dispute, and despite the arbitration proceedings and award, the matter is still pending in the courts. BRCC had entered into a contract with the government for construction of a 10-km-long road. It was a small project for BRCC, but Raman had agreed to do it at the insistence of one of his business friends, who had political ambitions. There was no problem in the beginning with the project; however, after a month some persons had filed public interest litigation (PIL) and the court had passed a stay order. After that neither the government nor BRCC was able to get the stay vacated and the matter had been pending for several years, with the government accusing BRCC for noncompletion of the road. BRCC did not accept the allegations



Introduction11

and tried its best to negotiate, but when the negotiations failed, BRCC was left with no other option but to fight it out in the legal forum. As there was an arbitration clause in the contract between BRCC and the government, BRCC invoked that clause and made a claim, which was awarded by the arbitral tribunal. This award was challenged by the government in the District Court, where it lost the case; then the government appealed it in the High Court, when again the award was upheld and the government lost it; thereafter, as the last resort the government challenged it in the Supreme Court. The amount involved is not much; however, the interest accumulated is even more than the claimed amount as too much time has elapsed. While challenging the award, issues were raised regarding the wrongful appointment of the arbitrators, and therefore, improper mandate of the arbitral tribunal was alleged. Also, the award was challenged on the grounds of public policy in India which has not been defined, and the courts have always been relying on judicial interpretations. This matter was going on and on, and Raman was really fed up with this. He somehow had wanted to put it behind his back, but the case appeared to go on endlessly. Bimal shook him and Raman realised where he was. He said, ‘It seems to me like a dream, from Chakmansab to this award. It couldn’t have been possible without Bimal. The person who really deserves it is Bimal.’

2

Contracts

Do you enter into more than a dozen contracts every day? You will say ‘no’. OK, but do you buy milk, bread, fruit and vegetables daily? Do you hire an auto-rickshaw or taxi? Have your ever gone for a haircut; booked railway tickets; ordered pizza; given a dress for dry cleaning; enjoyed paani-puri, bhel puri or pav bhaji1 at a roadside stall; bought a car; bought an expensive smartphone? Each of these is a contract. When you work in office, it is a contract between you and your employer. Every day we enter into several contracts; some in our individual and personal capacity and others in official capacity, for and on behalf of the company; some are oral and others are written; some are routine and others are notable; some are of low monetary value while for others we pay through the nose; some are through electronic means of communication and some through face-to-face communication and on paper.

Salient Features Contract—as per its definition in the Indian law, and that is true as far as the basic principle is concerned, all over the world—means ‘an agreement enforceable by law’. The agreement can be between two or more parties; by parties we mean legal entities, which include companies. An agreement creates rights and obligations for the parties concerned and is legally binding, which means that for non-performance or unsatisfactory performance the aggrieved party can sue the



Contracts13

other party in a court of law. Managers have to deal with contracts almost on a daily basis and either perform to the satisfaction of the other party—who maybe the employer or any client, or anyone else for whom they might have agreed to perform the contract—or get satisfactory performance from vendors, sub-contractors, suppliers, employees, etc. The logical conclusion to a contract is satisfactory performance; however, many a time, due to a variety of reasons, there may not be mutual agreement between the two parties to a contract regarding the performance of the contract and a dispute may arise. A large number of cases which have been decided all over the world in different courts tell us that the liability of a party that, allegedly, has not performed the contract depends to a large extent on the terms of the contract, context, any unusual circumstances, the understanding of the terms between the parties and several other factors; some of them may be beyond the scope of the contract law and provide a legitimate excuse to the non-performing party for being exonerated. As the stakes in contracts rise, the effort on the part of the parties—both aggrieved and the party in breach—is to take the maximum help of the contractual provisions to extract the maximum in case of the former and not to be held liable even for a single penny in case of the latter. Legal hair-splitting by top-notch lawyers has helped evolve the contract law to a great extent; however, still, there are many grey areas which provide a fertile ground for numerous legal battles.

Contracts in India Contracts in India are governed by the Contracts Act, 1872. The law has stood the test of time. It is one of the bestdrafted laws of the British time, and the best example can be of cases which have transcended from pre-Independence

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to post-Independence using this law. One case which comes to my mind is that of Col MacPherson, which related to the sale of a bungalow in Coorg. The dispute had started in preindependent India but the final judgement was taken in the newly formed Supreme Court of India in 1951. We will discuss this case a bit later in this chapter. Contract is defined in Section 2(h) as, ‘An agreement enforceable by law is a contract,’ and one can easily understand it as a mathematical formula or a formula in Physics, with each term being defined clearly in the Act, leading to a train of definitions and, thus, to clear understanding. So, the term ‘agreement’ in the definition of contract is defined in Section 2(e) as, ‘Every promise and every set of promises, forming the consideration for each other, in an agreement.’ Now, promise and consideration are also defined. Promise is defined in Section 2(b) as, ‘A proposal, when accepted, becomes a promise,’ and consideration is defined in Section 2(d) as, ‘An act or abstinence or promise to act or abstain.’ A contract begins with a proposal— also called an offer—made by the proposer (or offeror) to the proposee (or offeree). The offer can be for doing something, abstaining from doing something, or promising to do or abstain. An offer may be for the past, present or future. Thus, the scope of an offer is very wide and spans a large time span. However, it has to be for only those things which are within the legal periphery. Detailed definitions are reproduced at the end of this book in the appendix for ready reference.

Dynamic Nature of the Legal Periphery A contract has to be within the legal periphery, which often is dynamic in nature and may change with time and place. In rare circumstances, the legal periphery can be static



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and may not change with place or time. That might happen in highly orthodox and rigid societies but in most of the evolved jurisdictions, the law changes with the needs of the people. At the same place at two different periods of time, the law may be different. There is another possibility that at the same point of time at two different places the law may be different. These present interesting scenarios with the formation and enforcement of a contract depending heavily on the nature of law. Not only at the time of formation of a contract should it be well within the legal periphery, but it should also be within the legal ambit while being enforced. It might appear to be simple, however, there are circumstances which may make a contract void at the time of enforcement, or the contract may be declared void ab initio if it was outside the ambit of law from the very beginning. The most interesting scenario is when the contract was legal at the time of formation; however, as the law changed the contract did not remain within the legal periphery and had to be declared void. Law may change with the passage of time, either by an action of the legislature or by a fresh new interpretation given by the judiciary to the same black-letter law. Almost all the sovereign nations retain the power of changing the law, mostly in public interest, and some in the interest of the monarch or the dictator, as the case may be. Not only the law may be changed with prospective effect, sovereign nations may even exercise the right of changing the law retrospectively. Thus, there can be a very interesting scenario in which a contract which was absolutely legal at the time of formation, and even at the time of enforcement, may be declared to be illegal if a change is made in the law with retrospective effect. Such an exercise of sovereign power creates uncertainty and unpredictability in the legal environment; however,

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there is hardly anything which can be done against sovereign powers. These possibilities make contracts one of the most interesting legal aspects to be understood and practised in business. It is, however, expected, desired and demanded by businesses all over the world that there should be certainty and predictability in the legal environment, which will lead to more foreign investment, therefore, resulting in a robust business environment with the virtuous cycle in operation. Good legal environment for business attracts more investment and business, resulting in a better legal environment for business, which in turn attracts much more investment and business to it, and it goes on like this. Though dynamism is good for business and society in general, sticking to the core values of the system does have merit in the long run. It is very much desired and appreciated that certain fundamentals of the system do not undergo drastic change with the passage of time and only the peripheral and tangential things change. Businesspersons find a somewhat static core with dynamic outer boundary reassuring.

Free Consent and Consensus Ad Idem A contract has to be voluntary. The parties enter into a contract on their own volition: on their own sweet will. No one forces them to enter into a contract. For a valid contract, there must be free consent. Any element of fraud, coercion, misrepresentation, undue influence or similar negative elements may make the contract either void or voidable. The parties should be major and of sound mind. They must have an intention to create a contractual relationship. They must think alike, that is, there has to be meeting of minds, called consensus ad idem. Both the parties should benefit from the relationship, which means that there has to be ‘consideration’ for each party in the contract. Ordinarily, consideration is



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understood in monetary terms. Without consideration, a contract is void. It is not necessary that a contract has to be in writing. It can be oral. Even without uttering a single word, parties may enter into a contract. However, it is advisable to have contracts in writing when either the monetary value is high or the contract is of great importance though of low monetary value, and may need to be produced later as evidence. For example, it is better to take a receipt after paying the library fine of even one rupee.

Consideration: Peppercorn Theory The law is not bothered about the adequacy or inadequacy of consideration. This is known as the Peppercorn theory—A corn of pepper can be an adequate consideration for something valuable. Thus, the courts are not going to look into the matter whether a person has paid inadequate or more than adequate consideration for something which has been done to one, or which one has bought. For instance, on being hungry one may go to either a five-star hotel or a roadside eating joint to satisfy hunger. The law is not concerned whether the person is satisfied or happy after paying a small sum of money at the roadside eating joint, whereas the same person may not be satisfied or happy after eating at the five-star hotel and paying through the nose. So far, the restaurant at the five-star hotel served him as promised; here, is no reason to complain for unreasonably high price of the food. Similarly, if a person flies business class or first class, it is that persons’ individual choice, made voluntarily, and the law has no role in it. Again, there is no reason for the person to complain that the fare was too high. In the same way, if a huge bungalow worth several crores is sold at a throwaway price, assuming the consent was free, the law considers it to be a valid contract. However, for stamp

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duty and registration purposes, the government fixes certain circle rates so that unease scrupulous buyers and sellers are not able to misuse this provision. Another interesting example is of a painting made by an artist. Certain buyers may be willing to pay a heavy price for that, whereas some others may not take it even if given for free. Thus, consideration can be any amount; however, there has to be consideration for a valid contract and consent must be free.

Performance of a Contract Once a contract has been entered into, both the parties must endeavour to perform it as envisaged. In case there are problems which make the performance extremely difficult or impossible, the law has made certain provisions in the contract act to take care of such scenarios. If the situation is something beyond the control of the parties, the law allows the parties not to perform the contract and consider the contract to be discharged. But any such problem should be a legal difficulty—called force majeure. The law does not bother about commercial difficulty, for instance, increase in the prices of certain goods or services which make performing the contract commercially unviable. This is supposed to be the risk-taking by the parties while entering into a contract and promising to perform it. That is, in fact, one of the main purposes of entering into a contract: to move from a zone of uncertainty to a zone of certainty. The parties, who are entering into a contract, must have the capability to do so. They should be of sound mind, of the age of majority, and if a person is acting for and on behalf of a company, then the authority must flow from the board of directors, according to the articles of association of the company and as per the legal provisions of the applicable companies’ laws and other related laws.



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Public–Private Partnerships and Contracts Of late, there has been a trend to enter into concession agreements, which are part and parcel of the public–private partnership (PPP) contracts. There are a number of issues related to PPP contracts, which invariably are between the private party and one of the state entities. Obviously, the bargaining power of the state entity is higher and private companies are expected to toe the line; however, unrealistic provisions in the contracts often lead to disputes. A manager working on either side of the contract needs to be extremely cautious about the provisions of the contract, as applicable to the ongoing projects. Concession agreements, typically, are for long duration, and private companies strategise to break even and earn profits, keeping in mind the long duration of the contracts. Problems arise when there are disputes between the private company and the state entity with an injunction order passed by a court. Public interest becomes the touchstone for the success of any PPP project. Any private company proactively can suggest a project to the government; however, as the contract is awarded according to a transparent and open mechanism providing level playing field to other players also, such projects are offered to everyone for consideration, but the company, which had suggested the project initially, is given opportunities to match the bid amount. This method is known as Swiss Challenge, and it has experienced partial success in India.

Bank Guarantee Often, the state entities would like certain type of guarantee to be provided by the contractors, and bank guarantee is usually the first choice. An unconditional bank guarantee from a nationalised bank, which guarantees payment without demur

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on invocation, is preferred. The question arises as to why a bank would give the guarantee. For the service, the bank earns certain amount of money as commission or fee and promises to do as per the bank guarantee clauses in case the guarantees invoked. But, what is the guarantee that the bank will do as it has promised? Now that depends on the reputation of the bank, and because of this reason, most of the government entities rely on a nationalised bank, and in contracts between private parties, the party engaging the contractor may specify the names of the banks acceptable to it. It all depends on trust. The higher the trust and the bank, the more sought after it is. The previous conduct of a bank is also important to be considered while negotiating for bank guarantee.

Government Contracts Government contracts are ultimately for the purpose of public interest and are all open to scrutiny by the legislature and numerous constitutional bodies and government agencies. The government is answerable to the elected representatives, and hence, contracts coming in have to strictly comply with the provisions of fundamental rights in the Constitution, the right to information act, and PIL. There are tens of thousands of government contracts entered into between the state on one side and a private company on the other side. These may be for something as insignificant and for low monetary value as painting the footpath signs, or as significant and of extremely high monetary value as purchase of defence aircraft. Managers have to manage these contracts at all levels and under all conditions. While entering into most of the government contracts, the private party bidding for them is supposed to offer its services at the lowest cost and this is either done through a tendering process or may be by an auction. It is called L1. The EPC



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contracts—engineering, procurement and construction—or some of the major contracts entered into by major private companies with the state entities. Most of these contracts are detailed, complex and, unfortunately, result in a dispute.

Fédération Internationale Des Ingénieurs-Conseils (FIDIC) To standardise a number of things and to align with the global practice, a number of contracts of highly reputed companies incorporate the FIDIC conditions, which are provided as per the institution called FIDIC in Paris. It stands for International Federation of Consulting Engineers. Globally, the FIDIC conditions are supposed to be the benchmark for international contracts, and often, these have been incorporated into domestic contracts also. One of the greatest advantages of these conditions is that the parties save a lot of time in negotiation and also avoid a number of disputes later for the simple reason that these conditions are so very well known and established in the business that these are supposed to be taken as standard conditions, and several companies would not like even to negotiate any of these conditions. Realistically speaking, FIDIC conditions only provide a template or a framework and the parties are free to work around them because the first and foremost condition of a contract is that the parties act voluntarily and must give free consent.

Boiler Plates For managers, it is important to understand the structure of an agreement. There are boiler plates—standard conditions and clauses. These are also known as contracts of adhesion or standard form contracts. Some of the important clauses are jurisdiction, waiver, amendment or modification, position

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of counterparts, headings or constitution of the contract, severability or invalidity of certain clauses, indemnity, guarantee or limitation of liability, intellectual property rights, issues of improvement, ownership, status, whether the work is for higher or not, whether the agreement is between principal to principal and several other issues. We would not like to go into too much of details as most of these things are to be understood from a legal perspective, and managers need not go into the legal jargon; however, they must understand the basic principles involved and the purpose of including any clause in the contract. It is important to understand that in case a manager needs to have clarity regarding something, the first place to look for that is the contract itself. Almost everything—barring what cannot be anticipated or is not considered to be necessary by the parties—strikes to be incorporated in the contract clauses by mature and evolved parties. If something is missing, the best approach is to talk to the other party and try to come to a mutual understanding. Such an approach minimises the possibility of having disputes later on. Let us discuss a few cases to get the real feel of issues in contracts. Our emphasis will be on the overall managerial understanding, rather than legal technicalities. However, while doing so, we will go through the court judgements and at times go just a bit deeper into the legal provisions to appreciate the issues. As we proceed we may like to develop our understanding to some of the commonly used legal terms and relevant matters.

CASE 1: Col MacPherson versus Appanna (Supreme Court of India, 1951)2 It so happened that one of the British Army officers, Col MacPherson, decided to quit India just after the freedom fighters in India had started the Quit India Movement in 1942.



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The Second World War was also on and Col MacPherson might have felt at that time that it was not a very opportune time to live in India, so he left India—the land of heat and dust— to settle in the cooler climes of England. However, he was prudent enough not to go for any distress sale and must have decided to retain certain immovable property—a bungalow— in Coorg, for which he had engaged two caretakers— Youngman and White—for getting some income out of it by commercially using it as a lodge called ‘Movern Lodge’. A local person, Appanna, liked the lodge a lot and had a desire to possess that lodge. Out of curiosity, he went and asked the caretakers whether the bungalow was for sale, and if yes, how much was needed to be paid for it. The caretakers checked with their master in England through cable—as in those days there was hardly any other facility to communicate in a speedy manner—and got the reply from MacPherson that he would have accepted nothing less than `10,000. Now in those days, `10,000 used to be a big sum of money, but Appanna immediately agreed on being informed by the caretakers for the amount and told them that he would arrange the money in a few days, as he had ‘accepted the offer’ of the sale of the bungalow for `10,000 made by Col MacPherson. In the meanwhile, another gentleman called Subbayya made the offer of `11,000 for the same bungalow, and the bungalow was sold to him and possession also handed over. When Appanna got to know of it, he made the allegation that MacPherson through the caretakers had entered into a contract with him for the sale of the bungalow and by selling the same to Subbayya and handing over the possession as well, MacPherson through his agents had breached the contract made with Appanna. Appanna filed a case in the court of Judicial Commissioner of Coorg for specific performance—that is, the bungalow should be handed over to him for the amount

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MacPherson had promised. The court did not allow specific performance, however, ordered that there was a concluded contract between MacPherson and Appanna and, therefore, MacPherson must compensate Appanna for the breach of contract by paying `3,000. MacPherson was taken aback; he challenged it in the Supreme Court of India and argued that there was no concluded contract between him and Appanna as he never made any offer to Appanna. According to MacPherson, whatever he had conveyed to Appanna by saying, ‘won’t accept less than `10,000’ was not at all an offer, but was a mere piece of information furnished on an enquiry made by Appanna. The Supreme Court accepted the contention of MacPherson by highlighting the difference between ‘an offer’ and ‘an invitation to offer’. The court held that MacPherson had never made any offer, rather, he had only provided a piece of information, and when Appanna had said that he was willing to buy the bungalow for `10,000, it was for MacPherson to make a decision whether to accept the offer or to reject it. Thus, the offer was never made by MacPherson to Appanna, and hence, there was no question of the offer being accepted by Appanna. The Supreme Court set aside the decree passed by the Judicial Commissioner of Coorg.

Comments and Questions This is one of the most interesting cases which was decided by the newly formed Supreme Court of India in 1951. The case became even more interesting because of the fact that it had started in pre-independence India in 1944 and was decided finally during post-independence that too after India became a republic in 1950, with the Supreme Court of India also being established the same year. The case distinguishes between an offer and an invitation to offer. It is often said that an acceptance to an offer is like a



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lighted matchstick to a train of gunpowder. The moment there is a valid offer and it is accepted—provided all of the conditions necessary for the formation of contract exist—a valid contract comes into existence. The acceptance of an offer can be in any manner unless prescribed by the offer itself. In the present case, Appanna considered the information provided by the caretaker that MacPherson would not accept anything less than `10,000, whereas MacPherson firmly said that it was only a piece of information and not an offer. An important question arises at this juncture: What is that something little extra which differentiates an offer from an invitation to offer? It is often said that for a statement to be understood as an offer, there must be an intention on the part of the person making that statement to enter into a contractual relationship. That particular statement must be so complete in itself, including the intention, that what is needed to convert it into a contract is only acceptance, and nothing else. At times, it may be disputable and the judges are expected to decide it as per the context; however, the basic principle remains the same. The application of this basic principle in day-to-day life is based on simple common sense, and on most of the occasions, reasonable and prudent persons are able to differentiate between an offer and an invitation to offer without going through a course of law. Thus, it is not very difficult for a manager to think and analyse in this manner and understand. In case, in response to a statement made, finality can be reached by another statement, in all probability that would be offer and acceptance. Specific performance is a sought-after legal remedy for breach of contracts. However, specific performance cannot be a remedy if the object of the contract exists no more, the changed law does not allow it to be done, it is no more possible due to certain natural forces or if according to the judges the balance of convenience is not in favour of specific performance, or in most of the contracts of an individual’s

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performance, for instance, singing, painting, dancing, etc. When specific performance is not the desired remedy, compensation is the next best alternative, and at times, a combination of the two can serve the purpose better. For example, if A had promised to hand over the possession of a house to B on a certain date and A did not do that, B can pray for specific performance—handing over the possession of the house— and compensation for the delay in such handing over.

CASE 2: BHEL versus Tata Projects (Supreme Court of India, 2014)3 Moving from 1950s to the current time, we find a case with simple contractual terms but facing difficulties of being interpreted. This is a case decided by the Supreme Court of India in 2014 between two very well-known names in India— Bharat Heavy Electricals Ltd, a public sector undertaking, and Tata Projects Ltd, a private company and part of the highly reputed and renowned Tata group of companies. BHEL wanted to set up certain boilers, and for this very purpose it issued a notice inviting tenders for getting the work of erecting, testing and commissioning two boilers done by a sub-contractor. The contract for this purpose was awarded by BHEL to Tata Projects Ltd, and the value of the contract was about `7 crores (70 million). The contract between the two had an arbitration clause for the resolution of disputes, and when disputes arose between the two, an arbitral tribunal of three arbitrators awarded about `70 lakh (7 million) and about `25 lakh (2.5 million) as interest to Tata. Hence, a total of almost `1 crore (10 million) was to be paid by BHEL to Tata. BHEL challenged the award, which was partially upheld by the single judge bench at the Calcutta High Court. BHEL’s objections with regard to overrun charges, crane hire charges and interest were allowed.



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These were appealed by Tata Projects before a division bench of the Calcutta High Court, which decided in favour of the Tata Projects for crane-hire charges and interest. BHEL moved to the Supreme Court against the order of the division bench of the Calcutta High Court only in respect of the crane hire charges and interest. Before we proceed further and going to the discussion of the case in the Supreme Court, it would be useful to have a look at the contractual provisions between the parties regarding the two heads. This information has been provided in the text box following this para. The contract between the two parties very clearly tells us that Tata Projects was liable to pay hiring charges in case

Relevant Extract of Work Order Dated 16 March 1999 Terms and conditions 12.0 TOOLS & PLANTS AND CONSUMABLES You shall provide all necessary consumables and tools and plants (T&Ps) (other than those specified below), measuring instruments and handling equipment as per the provision of contract for timely completion of the total job as per contract within the accepted rates. 12.2 Following T&Ps will be provided by BHEL to you free of charge as per the provision of contract on availability. Sl. Description 01. Electric winches 10 MT 02. 10 Sheave pulley block 03. Hydro test pump 04. High Capacity crane (250 T)*

Capacity 2 nos. 100 MT

Quantity 4 nos. 1 no. 1 no.

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The above T&Ps will be made available for the project. You may make use of the T&Ps as per the provision of tender document. * In case of 250 T capacity crane, operator and consumable shall be provided by BHEL. However, the fuel for operation of this crane shall have to be arranged by you. 250 T Crane shall be available only up to ‘drum lifting of Unit-2’.

Relevant Extract of Tender Document No. PSER:SCT:JBA:B2 2.8.11 It is not obligatory on the part of BHEL to supply any tools and tackles or other materials other than those specifically agreed to do so by BHEL; however, depending upon the availability, BHEL’s customer handling equipment and other plants may be made available to the contractor on payment of the hire charge as fixed, subject to the conditions laid down by BHEL/customer from time to time. Unless paid to advance, such hire charges, if applicable, shall be recovered from contractor’s bill/ security deposit in one instalment. 3.38.3 The operation of all BHEL equipment (except 250 T Crane) will be in the scope of the contractor. BHEL will provide free of cost (including operator and consumables) one number 250 T Crane only up to the Drum Lifting Milestone of Unit II only. However, the Fuel for operating this 250 T Crane shall have to be arranged by the contractor. 3.38.14 BHEL will provide free of cost (including operator, fuel and consumables) 250 MT Crane only for the first unit (Unit-2).



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it had used tools equipment and other material owned by BHEL. It was, therefore, quite surprising that the arbitrator had awarded an amount regarding crane hiring charges, which had been deducted by BHEL, to be paid back to Tata Projects, and it was later ordered in a similar fashion by the division bench of the Calcutta High Court. The Supreme Court read the contractual terms in a simple manner and interpreted the language used in a manner it had been written. It is, therefore, very important to have clauses between the contracting parties, in simple language, which give unambiguous meaning. The Supreme Court, later on, in this case decided the issue of interest which was also decided by the division bench in favour of Tata Projects. Clause 1.15.5 of the agreement between the two had provided, ‘No interest shall be payable by BHEL on earnest money/security deposit or any money due to the contractor with BHEL.’ As we can see from this clause, there is hardly any ambiguity, and it is quite surprising that the arbitral tribunal awarded interest in favour of Tata Projects and later upheld by the division bench. It was rightfully overturned and decided in favour of BHEL by the Supreme Court.

Comments and Questions There are certain useful thoughts to be kept in mind while drafting a contract. Assuming that the contract will be drafted by a legal team, the question is, Should the managers be concerned about the contractual provisions? The answer is a clear ‘Yes’. It is for the managers to tell the lawyers as to what they would like to have in the contract as far as the work is concerned; adding the legal jargon and putting the contract in a proper legal format is the job of the lawyers

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thereafter. Thus, in the beginning, the parties should be very clear about their rights and obligations in simple, plain and understandable terms without the use of technical or legal language. It is that clarity of thought on the part of the parties which helps lawyers to prepare an effective and useful contract, which can be relied on, in case a dispute arises between parties. The moment there can be more than one meaning assigned to contractual terms, legal teams from both sides would try to stick to their position and argue vehemently with a large number of case laws, depending on the size and capability of the legal team, to prove their point. To a large extent, the basic purpose and objective of writing the understanding between the parties on a piece of paper in a contract are defeated. In the instant case, we find that the terms are quite clearly written and it could not be said that the parties were careless at the time of formation of the contract. Then, why did the arbitral tribunal and later on the division bench did not pay attention to the simple and plain meaning, as could have been ascribed to the clauses of the contract? There may be several reasons to it; however, the most commonly observed reason is that due to rich facts of the case and copious arguments being made by the counsel for either of the parties, it becomes a tad difficult for the arbitrators to separate the grain from chaff, creating a picture with fuzzy lines rather than a sharp one. That depends on the ability of the individuals manning these positions and their keenness to separate different issues in a very objective manner. What can a business manager do in such a scenario? Well, in the very initial stages of formation of contract, it is important for the business manager to bring it to the notice of the legal counsel as to what are the necessary business terms and conditions that they would like to have in the contract, and thereafter go through the final document



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just before signing it, so as to ensure that nothing is left and the proper and desirable meaning emerges out of the document. It is extremely important to keep the documents handy and make them available as proper evidence in case a dispute arises.

CASE 3: Larsen and Toubro versus Mohan Lal (Supreme Court of India, 2014)4 This is a wonderful case of a back-to-back contract. A day, which happens only once in four years—February 29, 1988— the highly reputed and famous company of India, Larsen and Toubro (L&T) entered into a contract with Standing Conference of Public Enterprises (SCOPE) for construction of a twin tower office complex at Laxmi Nagar District Centre Delhi. The contract was for `27 crore (270 million), which surely was a huge sum of money during that time. It was a large contract consisting of civil and subsidiary work, and the contract had a provision for having the company Mohan Lal Harbans Lal Bhayana (MHB) as a sub-contractor. The sub-contractor was supposed to perform the finishing work, such as brickwork, wood work, flooring, furnishing, aluminium work and waterproofing. The value of the sub-contract was about `12 crore (120 million) and it was a pass through contract on a back-toback basis. This contract was entered between the parties on 3 March, 1988, just three days after the signing of the main contract. One of the important clauses of this contract was that L&T would have made the payment to MHB only after receiving the same from SCOPE. Also, MHB was supposed to perform to the satisfaction of SCOPE. The dispute resolution clause provided for arbitration, with any claim up to `10 lakh (1 million) was to be decided by a sole arbitrator

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who would have been appointed by L&T, and in case the claim was over `10 lakh (1 million), the dispute was supposed to be decided by a panel of three arbitrators, one each to be appointed by L&T and MHB, and the third appointed by the two arbitrators so appointed. The most noticeable aspect of the dispute resolution clause was that in case there was an award in favour of MHB, L&T would have made the payment only when it had raised a similar claim before SCOPE and got it decided in its favour. A dispute arose between L&T and MHB, and it was decided as per the dispute resolution clause; however, the parties reached an important understanding so as to avoid the double exercise, thereby deciding upon the claims efficaciously and speedily. The parties entered into a supplementary agreement which provided that MHB and L&T would jointly refer all disputes to SCOPE for settlement by negotiation, and in case negotiations failed, then the disputes would have been referred for resolution to arbitration. Later, MHB raised a claim, and as per the new contractual arrangement, it was to be jointly pursued by MHB and L&T against SCOPE. As alleged by MHB, L&T did not take interest and the matter was delayed for the appointment of an arbitrator for almost 10 years. Fed up with the delay, MHB filed a petition in the Delhi High Court for appointment of an arbitrator, which was challenged by L&T in the Supreme Court. The Supreme Court held that the new arrangement between the parties for jointly pursuing arbitration, rather than doing it independently and in two steps, prevented MHB to go solo. Thus, even if there had been considerable delay, the hands of the Supreme Court were tied by the new contractual arrangement between the parties. The Supreme Court clearly held that in a comparison between contract and equity, contract comes first.



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Comments and Questions During those days this part of Delhi was expanding and was trans-Yamuna on the eastern side of the city. It would be interesting to note that Delhi had seen a lot of development and expansion since the late 1970s and early 1980s, and one of the main reasons for that expansion during the early years was the hosting of the Asian games in New Delhi, 1982. In a back-to-back contract, the contractor passes his/her obligations and liabilities towards the employer to either one or more than one sub-contractors. These are also pass through contracts, which are becoming quite common in the construction industry. The primary reason for having sub-contractors is the requirement to have expertise in a large number of activities, which may not be possible for any one single company to develop. Moreover, backto-back contracts provide the option of seeking the best sub-contractor for a particular work. These are also contracts between a contractor and sub-contractors, and a lot depends on proper drafting of this contract, as well as on execution in good faith. As the payment typically depends on the payment from the employer to the contractor, and thereafter to the sub-contractor, there may be issues between the contractor and sub-contractor, which may get aggravated due to the souring of relationship between the employer and the contractor. The dispute resolution clause with the provision that L&T would have made the payment only when it got it from SCOPE was most surprising because in such a scenario it was clearly not at all in control of L&T, and MHB would have suffered because of delay in proceedings between L&T and SCOPE; also, there was no certainty that L&T would have got the claim decided in its favour when it would have raised it before SCOPE.

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The question arises that why MHB would have agreed to such a provision in the dispute resolution clause with L&T and SCOPE. Any business manager needs to think about it while agreeing to sign on the dotted line. It is noteworthy for a manager that if there are changes made in a contract by mutual consent between the parties, then there is no way by which a party may rely on the earlier provisions as those are supposed to be replaced by the new understanding, howsoever problematic the new provisions may prove to be for one of the parties. It is the basic principle of a contract that contracts are voluntarily made between the parties and that the parties must give free consent to make a valid contract—which has been upheld by the court. If one of the conditions of the contract—whether an old provision or a new one—is onerous for one of the parties, then the party suffering because of that provision cannot complain on the grounds of equity, fairness and reasonableness. This is on the assumption that the provision is onerous but legal, and the parties have given free consent. It is not difficult to understand that the legal proceedings for arbitration and any other litigation would have been done at a much faster pace had there been mutual interest for both the parties.

CASE 4: ONGC versus WesternGeco (Supreme Court of India)5 In this chapter, we will discuss the formation of a contract in this case and talk about the force majeure clause later on. Oil and Natural Gas Corporation Limited (ONGC)—a public sector undertaking in India—wished to modernise and technically upgrade its seismic survey vessel. For this purpose, ONGC invited tenders, and one of the main items mentioned in the notice inviting tenders was streamers fitted



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with hydrophones; however, the notice did not mention the national origin of hydrophones. WesternGeco—a company headquartered in the UK—responded by submitting a bid to supply Nessie 4 streamers equipped with American Geopoint hydrophones. ONGC awarded the contract in October 2000 and it was accepted by WesternGeco a few days later. The vessel was handed over. But a formal contract was executed in June 2001. As the events unfolded, the tragedy of 9/11 happened and WesternGeco faced serious problems in procuring the American hydrophones. The rest of the things will be discussed in the chapter ‘Force Majeure’. At this point, it is interesting to see how the contract was formed and what conditions were material, particularly related to the national origin of hydrophones.

Comments and Questions We have discussed earlier in this chapter that given all the favourable conditions the moment an offer is accepted, it becomes a contract. These favourable conditions primarily are: free consent of the parties, meeting of the minds, everything within the legal framework, parties having authority, presence of consideration, etc. The questions which arise are: When was the offer made? Was the offer made with the notice inviting tender? Or was it made when WesternGeco submitted its bid? It is well settled that notice inviting tender is only an invitation to offer, and hence, whatever is written in the notice is not a part of an offer and cannot be binding on any of the parties. It is only the basis of this notice when one party submits its bid that the bid becomes an offer for the other party to consider. Now, in the instant case, it was WesternGeco which submitted its bid to make an offer that it would be willing to

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supply streamers equipped with Geopoint hydrophones of American origin. In the notice inviting tender, ONGC did not mention the national origin of the hydrophones, but once WesternGeo had mentioned it in the bid, which was an offer made to ONGC, it became binding and an important and material condition of the contract. But still, for contract purposes, it was not yet complete. ONGC prepared an offer letter with detailed terms, which included the supply of Geopoint hydrophones of American origin. Till this point in time, the parties were not bound as there was no acceptance. A few days later, in October 2000, when WesternGeco accepted the offer made by ONGC, it became a concluded contract for all practical purposes. Although the formal contract was executed in June 2001, the parties started acting as per the understanding between them in October 2000. ONGC had handed over the vessel and WesternGeco had started working on it. Thus, the formal signing of a contract in June 2001 would not make much difference. It is important for managers to understand that a contract can come into existence even with a work order, purchase order or a letter of intent to the letter of interest. Provided there has been a norm in the particular industry that such letters would be dealt seriously by the other party, it would start performing and would not wait for a formal contract to be signed. In today’s world where most of the communication is electronic, an e-mail, fax, SMS, telephonic conversation, etc. can be considered as a valid and concluded contract. The only thing to be kept in mind is that such communication has to be inferred according to the relationship of the parties, norms practised in that particular business, customs and traditions and exigencies, if any. Therefore, we can say in a nutshell that the inference drawn will be highly contextual. In this case, though ONGC had not mentioned earlier the national origin of the hydrophones, yet later, it insisted that



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because WesternGeco had not been able to supply American hydrophones it could not be considered to be a complete and satisfactory performance of the contract. The issue became much more complex with WesternGeco requesting for supplying Canadian hydrophones and ONGC agreeing to this quite late. At each and every step there were issues regarding meeting of minds and whether the parties acted at a reasonable speed. It is extremely difficult, or rather impossible, to write all these conditions—time to be taken by each party to respond, what will happen if material is not available from a particular country, etc.—in a contract, and often disputes arise because of ambiguity and possibility of more than one interpretation. In such a case, typically one party insists on one interpretation, whereas the other party would insist on the other interpretation, leading to a difference of opinion, resulting in a dispute.

CASE 5: Swiss Timing Limited versus Organising Committee, Commonwealth Games 2010, Delhi (Supreme Court of India, 2014)6 The Commonwealth Games were held in Delhi in 2010. In March 2010, Swiss Timing—a company registered in Switzerland—entered into an agreement with the organising committee for providing the services related to keeping the time, and providing scores and all results. These were called as TSR systems and services. TSR stands for time, score and result. Both the parties had agreed to the fees to be paid to Swiss Timing for the services provided in a satisfactory manner. Payment was to be made in instalments. Swiss Timing was supposed to raise invoices every month and the organising committee had agreed to make the payment in a month’s time from the end of the month in which

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invoices were raised. The currency used was Swiss Francs. Swiss Timing was supposed to furnish a bank guarantee to secure the performance of the contract. The total consideration for the contract was about Swiss Francs 25 million. Swiss Timing had paid `15 lakh (1.5 million) as earnest money deposit (EMD). One of the interesting conditions of the contract was that though the invoices were to be settled on a monthly basis, 5 per cent of the total service fee was to be paid only upon the satisfactory completion of the games. The contract provided for arbitration as the dispute resolution method. It also provided that Swiss Timing would not have indulged in any act of corruption. If found to be indulging in any such activity, then Swiss Timing had promised to indemnify the organising committee against all losses suffered due to such act. Also, in such a condition, the organising committee could have terminated the contract. Interesting and unfortunate events took place. There were widespread allegations of corruption. Media reports were full of such stories. All this led to payment not made finally and Swiss Timing invoked the arbitration clause. Rest of the things will be discussed in forthcoming chapters.

Comments and Questions The games were marred by controversy and it had a negative impact on the contract. What is baffling is the reason as to why Swiss Timing had agreed to the conditions in the contract: EMD, 5 per cent of the payment after the end of the game, an overarching clause about corruption and the indemnity clause. It is quite normal to have an EMD clause in most of the tender documents. Its purpose is to attract serious players and discourage non-serious and non-competent players to stay away from the tender proceedings. The amount of `15 lakh (1.5 million) is also quite reasonable given the total consideration for the contract. In certain contracts with



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state entities, the government and public sector companies are exempted from EMD. The rationale for the exemption is that these are public companies and not any fly-by-night operators. After all, each of these companies has the sovereign backing and public support. Also, these are serious players in business and their mandate is promotion of business keeping public interest in mind. Hence, EMD would not serve any purpose. In a few interesting cases, private companies have challenged such a provision in the Supreme Court on the ground of equality as guaranteed in the Constitution of India. However, the Supreme Court had upheld the exclusion clause while interpreting equality as ‘equality among equals’, which means that all private companies shall be treated alike and all government and public sector undertaking companies shall be treated alike. With regard to the 5 per cent payment to be finally made after the completion of the games, it is also reasonable for the organising committee to keep something in their hands to get anything done by Swiss Timing to wrap up the contractual arrangement. It is definitely helpful for the party supposed to make the payment to keep a little control with itself and that is precisely the reason why Swiss Timing would have agreed, and also because the sum was only 5 per cent. What is surprising is the issue of corruption and the promise made by Swiss Timing to indemnify the organising committee. Indemnity clause is a contractual arrangement by which a party promises to make good the loss suffered by the other party due to a contingent event. Indemnity clauses are highly comforting for the party with a better bargaining power and provide the security blanket. However, openended clauses capable of broad interpretation can be detrimental to the party promising compensation. That party is called indemnifier and the party benefitting from the indemnity clause is called indemnified. Why would any party agree to such broad clauses depends on the desperation of that

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party to enter into the contract to get business. There was always the possibility for the Swiss Timing to negotiate that clause and limit its liability. But, what appears is that the bargaining power of the organising committee was too high and Swiss Timing did not consider the indemnity clause to be a big risk in its contractual obligation. It did not even anticipate that the entire contract may be jeopardised due to this indemnity clause, and not only would the 5 per cent final payment may get under cloud, but even the payments made earlier may be questioned and scrutinised. Swiss Timing would have never thought that clawing back was also possible. Hence, legal proceedings in Indian Courts on the basis of corruption issues and indemnity clause were shocking for Swiss Timing. Could Swiss Timing have saved itself from this ignominy? Yes and no. Yes, because it was well within its rights to negotiate initially realising its strengths and weaknesses. No, because the proceedings were based on public outcry on corruption charges. Those things were beyond its control and, hence, there was not much which Swiss Timing could have done. The only plausible option available was to proceed in a legal manner as per the agreed procedure in the contract. And, that is what Swiss Timing did.

Takeaways for Managers

There are two very important things which a manager should remember. First, never take a contract lightly. Second, try not to be penny wise and pound foolish. Expanding from these two basic thoughts, let us understand them in a bit of detail. 1. How carefully should the manager read the draft? Very carefully. As the contract should not be taken



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lightly, due effort must be made to understand it. It cannot be read in the manner one scrolls down the computer screen while reading the terms and conditions at the time of an online transaction. Reading between the lines is important. It may not be possible for the manager to understand each and every word in a draft, but it is possible to get a sense of the document and make a note of difficult portions. These portions can first be checked on the Internet, and thereafter, one can take the help of legal counsel. Managers have to understand and remember that if they have signed the contract for and on behalf of the company, the company becomes bound by it. It is immaterial whether they read the conditions or not, whether they understood them or not. If any of the clauses in the draft are not worth agreeing to, they must point it out to the other party, try to negotiate and get it modified with mutual consent. 2. Should you worry about consideration? Of course, yes. Without consideration, a contract is void. But the consideration must be as per the market rate until and unless the manager has agreed to some other value with complete knowledge. In case the consideration is much lower than the normal, there is always a possibility of it being challenged later on the grounds of fraud, coercion, misrepresentation, etc. to make the agreement voidable. The onus of proving that it was a valid contract lies on the party paying much lower consideration. Hence, if a vendor is willing to do a job at a much lower rate than the normal, then it is not a good idea to award the contract to him. The same applies to a much higher consideration than the normal when the other party that is paying the very high price may make the allegation. For instance, if a person has to buy a bottle of water for `100 each,

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which is ordinarily available for `20, then there is surely a problem. Another example can be of a construction contract. If a work can ordinarily be done for `10 crore (100 million) and if the contract is awarded for `100 crore (1 billion), then there may be a problem. In such cases of very low or very high consideration, there must be evidence of free consent to avoid any future problems. 3. Anticipate: From the L&T and MHB case, the takeaway for managers is never to agree to something which they can anticipate to create problems, and those problems may be avoided by not agreeing. The basic rule to be followed is to say no when you want to say no. In this case, it was not at all so difficult to anticipate for any reasonable and prudent person that once L&T was supposed to jointly pursue the arbitration matter, it would not do so with full vigour until and unless there was certain tangible and substantial benefit for it. That benefit was clearly missing and MHB might have agreed to in good faith, which did not work later on. Thus, business managers have to be extremely cautious and, at times, a little bit of suspicion might help while agreeing to anything which might appear to be beneficial and useful in good faith, but may give an entirely different meaning and practical implications by interpreting the written word. 4. Realistic performance: It is a good feeling to have complete faith and trust in the other party, and also in one’s own ability to perform. But a little bit of realism helps in performance of a contract. Overambition and overconfidence do not work well in performance. Often, the time taken to complete a task is more than envisaged. Also, the cost involved may be higher than expected. Time and cost overrun are very common



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in projects. Business managers will cut a sorry figure if they are excessively guided by the contractual document without keeping track of real developments in the overall business. 5. Maintaining a logbook: Creating evidence is best done by keeping a logbook with detailed entries made. It can either be a hardcopy or electronic. At times of dispute, evidence is needed and the best form of evidence is documentary evidence. Highly evolved companies keep the documents very carefully with each and every voucher filed. It is done even for petty expenses of `10 or less. Each and every communication is recorded and kept in the file. Even telephonic conversations are later transcribed and got approved by the other party. It all helps in having a very sound backing of documents as evidence. Also, personnel get transferred or retired, and hence, it is only the file which speaks on behalf of the company. Witnesses can be called, but it is not very practical. 6. Dispute avoidance: Simply to save a few pennies, it is not at all advisable to waste pounds. It helps to avoid disputes and be reasonable. Many a time it so happens that what is written in a contract may not be possible to be done in exactly the same manner, but can be performed with a little deviation. At that time, it is surely prudent for the business manager to understand the purpose of the contract rather than stick to the written word. If one sticks to the written word, there is definitely scope for creation of a dispute. It is better to avoid the dispute rather than take the legal rights as determined by the contract very seriously. Any manager can do the best for the company by getting the work done without getting embroiled in a dispute. Dispute avoidance is always better than dispute resolution.

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The last thing a manager should remember is that the contract entered between the parties is not only for the sake of a contract. The foremost and primary purpose of the contract is to get something done. Hence, as a manager, the approach has to be to reach the goal. Blindly following the contract without keeping the basic purpose in mind is the worst thing a manager can do.

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Arbitration

Tom was a fruit vendor. He took pride in selling fresh and good quality fruits. One day a customer, Dick, bought a kilogram of apples from Tom. Before making the purchase, Dick had repeatedly asked Tom whether the apples were fresh and of good quality. Tom assured Dick of the freshness and quality. He said that in case any apple was not up to the mark, he would refund the money. Also, Dick would have been free to bring any person to judge the quality of the apples. As Dick’s bad luck would have it, half of the apples were rotten from inside. He was reminded of Shakespeare’s quote in The Merchant of Venice, ‘A goodly apple rotten at the heart’. He was furious and took the apples back to Tom for refund. Tom shrewdly said that the apples were good from outside when Dick bought them and that is what he had promised, and also how he could not have possibly known what was inside the apples. He simply refused to acknowledge the bad quality and, hence, there was no question of refund. Harry, a common friend of Tom and Dick, happened to be at the scene. Dick said that they should let Harry decide. Tom agreed. Both clearly understood that whatever Harry would decide would be final and binding. They requested Harry to resolve the dispute. Harry told them that he was in a hurry at that time, and would hear them and resolve the dispute the next day. But Harry also told them that for the efforts he would have to make, they would need to buy him a cup of coffee. Tom and Dick said ‘Yes’, and agreed to share the bill for the coffee. Now, consider that instead of apples this were a case for the delivery of good quality steel for making cars, and

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the contract was between a steel mill and a car company, in place of Tom and Dick, respectively. An expert in steel manufacturing and sales would be the person in place of Harry, and would be the arbitrator appointed by the parties with mutual consent. His decision would be final and binding, though it could be challenged if outrageous and unconscionable. Therefore, the principles of law remain the same whether it is related to the sale of apples or steel.

Alternative Dispute Resolution Arbitration is a method of alternative dispute resolution (ADR), with the other methods of ADR being conciliation, mediation, negotiation and a variety of a mixture of these methods. These are alternative methods to the age-old and regular method of dispute resolution called litigation. The primary purpose of these methods is to resolve the disputes in a speedy and inexpensive manner. As compared to the other methods, arbitration has a greater level of sanctity as it is supposed to be binding in nature on both the parties, and, therefore, has been the method of choice for the resolution of commercial disputes, both domestic and international. In business disputes, the warring parties, until and unless on a self-destructive path, do not like to waste even a single penny or a single minute, and that is why most of them prefer to resolve the disputes by arbitration. However, if one of the parties is unwilling to cooperate, the matter can simply linger on for years and years.

Historical Perspective Arbitration is a term derived from the nomenclature of the Roman law. It is applied to an arrangement for taking and abiding by the judgement of a selected person in some



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disputed matter instead of carrying it to the established courts of justice. According to Halsbury’s Laws of England, ‘An arbitration is the reference of dispute or difference between not less than two parties, for determination, after hearing both sides in a judicial manner, by a person or persons other than a court of competent jurisdiction.’1 In a broad sense, arbitration is a substitution by consent of parties of a domestic tribunal for the tribunals established by law. It is an alternative to litigation. It does not replace the ordinary judicial machinery in all its aspects, but rather exists with the established judicial process. It may include provisions which are lawful, but it cannot oust the jurisdiction of court completely.

Advantages of Arbitration Resolution of disputes through arbitration—domestic or international—has the following advantages as compared with litigation: 1. Certainty of jurisdiction. This is particularly true for international commercial arbitration. The parties— countries A and B—at the time of entering into a contract clearly decide the jurisdiction of the arbitral tribunal, which determines the court that shall have jurisdiction to intervene in the arbitration proceedings if things go wrong. Even for domestic arbitrations, a similar clause restraining the jurisdiction to one geographical location creates certainty. This can very well be true for litigation also; however, arbitration coupled with other benefits makes it an attractive proposition. 2. Expertise. The arbitrators have expertise in the subject matter. This is based on the assumption that the

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disputing parties have chosen the arbitrators with care. These parties have the freedom to choose the arbitrators and if they do not appoint a person with expertise, then they themselves only have to be blamed. There is no such freedom in litigation. The parties have no control over the allotment of judge(s) to their case. 3. Party autonomy. Parties are free to decide various aspects of arbitration. The applicable law, the procedure to be followed, etc. have to be decided by them. All this has to be done within the framework of law. This freedom is not available in litigation. 4. Final and binding. The decision of the arbitral tribunal is final and binding. There are limited grounds on which it can be challenged in a court of law. In litigation, there is always a provision for appeal and review. An appeal can be filed as a matter of right with a much wider scope. 5. Recognition and enforceability. As compared to international judgements, the recognition and enforceability of foreign awards is easier as the process is facilitated by international conventions such as the New York Convention. 6. Inexpensive. The basic purpose of arbitration was to make it an inexpensive legal remedy. It is difficult to say that arbitration has been fully successful. It is often seen that arbitrations turn out to be costlier than litigation. However, there is no clear-cut conclusion drawn on this aspect. It depends on each case. 7. Confidentiality. Arbitration proceedings are conducted in private. They are not open to public. However, court proceedings are public proceedings and there is nothing confidential. In arbitrations, till the time an award is not challenged in a court of law, the proceedings remain confidential and private.



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Limitations of Arbitration Howsoever good it may appear, arbitration also has its limitations. Intricate questions of law cannot be decided by arbitration. If the number of parties in a dispute is more than two, arbitration may become difficult to handle. Once the arbitration clause is invoked, a party may try to avoid arbitration, which results in more litigation. That is not possible if the matter is directly filed in a court of law. For interim relief and extremely speedy enforcement, arbitration is not the best method. There are matters such as pure constitutional issues or human rights issues which cannot be decided by arbitration.

Arbitration: Waiving the Right to Litigate While choosing arbitration to be the method of resolution of disputes, the parties agree to waive their rights to raise the matter in a court of law, which in common knowledge has a much stricter procedure and is conducted in an extremely formal manner. Once the parties have agreed to arbitration, it is not at all acceptable that they insist on the procedure adopted in a court of law, and this distinction has been very well thought out in an American judgement by the Circuit Judge Learned Hand—a judge in the second circuit court with such sharp intellect that it was considered to be really surprising that he was not elevated to the US Supreme Court—in the American Almond Products Co. Case of 1944. The relevant portion is as follows: Arbitration may or may not be a desirable substitute for trials in courts; as to that the parties must decide in each instance. But when they have adopted it, they must be content with its informalities; they may not hedge it about with those procedural limitations which it is precisely its purpose to avoid.

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They must content themselves with looser approximations to the enforcement of their rights than those that the law accords them, when they resort to its machinery.2

Private Court by a Private Judge Arbitration, in simple words, is a private court by a private judge, as has been said by Russell, an authority on arbitration. In a large number of business contracts, even after taking all the precautions to avoid disputes, the contracting parties may not be able to agree on certain contentious issues. In such a scenario, it is always advisable to resolve the dispute amicably rather than escalating it and taking it to a court of law for resolution. All over the world arbitration is a very popular method for resolving business disputes, which entails the involvement of one or more arbitrators appointed with the mutual consent of the contracting parties. The greatest benefit of arbitration as compared to a regular court is the appointment of experts in the subject matter as arbitrators. This expertise contributes to speedy decisionmaking by professionals who understand the subject matter like the back of their hand.

Arbitrator The dispute is referred to an arbitral tribunal. It may consist of one arbitrator, called the sole arbitrator, or more than one arbitrator. Earlier, arbitral tribunals could have two arbitrators, but there were serious problems of agreement between the two, and hence, it was made a legal requirement to have only odd number of arbitrators. So, disputes with heavy stakes usually have three arbitrators and others have one. The sole arbitrator is appointed by mutual consent of the parties. In case of three, generally each party appoints one arbitrator and the third is appointed by two arbitrators so



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appointed. There can be other mechanisms also of appointing the arbitrators. If nothing works, the appointment is done by the courts. Whatever the method of appointment, there are certain qualities which an arbitrator must have. We can call them as the qualities of an ideal arbitrator. It is practically difficult to find a person with all of them. The most important quality needed in an arbitrator is that he/she should be neutral and of unimpeachable and impeccable integrity. There are often big companies—due to their size, reach and deep pockets—which may try to influence the arbitrator. The arbitrator must be someone who shall not buckle under such tremendous pressure. Thus, qualities of importance are:   1. Expertise—knowledge of the subject matter like the back of his/her hand.  2. Legal understanding—knowledge of law and legal environment; desirable but not essential.   3. Neutral, Unbiased, Fearless, Independent, Not greedy.  4. Cultural Issues—must have an understanding of the cultural background of parties.   5. Language—fluent with the language or languages to be used in the proceedings. This is especially important in international commercial arbitrations.   6. Experience and track record—must have prior experience with a good track record.   7. Costs—his/her fee need not be very high; otherwise it would be difficult to engage him/her.   8. Nationality—at times it is an important issue in international commercial arbitration.   9. Relation—should not be related to party A or party B, directly, indirectly or even remotely. 10. Confidentiality—should be able to maintain confidentiality and privacy.

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11. Dignified reputation—should be dignified and of some repute in the business and legal circles so that his/her word is taken seriously. 12. Availability—must not be utterly busy and should be reasonably available. 13. Reasonable, no ego, no whims and fancies—a person with strong likes, dislikes, whims and fancies is not suited for the role of an arbitrator. He should be someone reasonable. 14. Patient and meticulous—arbitration proceedings can be long and time-consuming. So, the arbitrator must be patient and should go through the proceedings in a proper manner. Also, he/she should be meticulous in taking note of everything that transpires during the proceedings. 15. Willing to travel—the meetings may be held at different places as per the convenience of arbitrators and parties. A good arbitrator must be ready to travel. 16. Healthy—physical and mental health is a very important factor to be considered. Most of the arbitrators are retired persons and health may be an issue due to old age. Though an arbitrator is not supposed to take part in a 100-m race, he/she must be fit enough to conduct the proceedings. 17. Tries to resolve—an arbitrator should try to resolve the issue and not complicate it further. His intention must be to bring the two parties together and not to create further differences. The list is not exhaustive. It is only illustrative. It is very difficult to find an individual with all these qualities, but the parties should try to get a person with as many qualities as possible. The priority of qualities for different parties shall also vary.



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Award The decision of the arbitrator(s) is called an award. It is final and binding on the parties. However, there are certain grounds on which the award can be challenged in a court of law, and it has been frequently observed that whenever the stakes are very high, the awards are definitely challenged and the losing party, usually, fights the legal battle till the last court. And that is true not only for India, but for most of the countries. Because of the provision of challenging the award—which is an essential safeguard against inadvertent and negligent errors, intentional wrong doings, etc.—one of the most important benefits of arbitration, the speedy redressal for disputes, often takes a back seat. Inordinate delays have been experienced, sometimes defeating the very purpose of arbitration.

The New York Convention Internationally, the New York Convention was a major success in making international commercial arbitration more acceptable and effective. The business communities used to face the serious problem of having an award in their favour but that award was neither recognised nor enforced in a foreign country, reducing the award into a piece of waste paper. In 1958, 45 countries, including India and the US, participated in the UN conference that culminated in the New York Convention that encourages the recognition and enforcement of international arbitration agreements and awards. India was a signatory of the Convention and the Indian Parliament ratified it on 13 July 1960. The US, however, signed it only in September 1970. The US delegation to the conference had recommended that the US should not enter into the Convention. The delegation was concerned that the US would not

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benefit if the Convention were implemented in a manner that avoided conflict with state anti-arbitration laws. For the US to benefit, the Convention would need to override state anti-arbitration laws, which would require changes in state and possibly federal court procedural rules. At that time, courts in the US viewed arbitration agreements with a jaundiced eye to oust their jurisdiction. Within a decade, however, the domestic attitude towards the Convention had changed. American businesses were having difficulty enforcing arbitral awards against parties situated abroad. In October 1968, the Senate gave its advice and consent to the Convention and on 30 September 1970, the US signed the Convention, however, with the following ‘declarations and reservations’: 1. The US will apply the Convention, on the basis of reciprocity, to the recognition and enforcement of only those awards made in the territory of another Contracting State. 2. The US will apply the Convention only to differences arising out of legal relationships, whether contractual or not, which are considered as commercial under the national law of the US. In 1970, international business transactions totalled US$10 billion a day. Today, that number is perhaps US$10 billion a minute or more. Over 160 states have by now pledged adherence to the New York Convention, 1958 and its provisions have been incorporated into the domestic laws of these states. More than 40 countries have now adopted or adapted the United Nations Commission on International Trade Law (UNCITRAL) Model Law of 1985 and have made its provisions part of their respective national legal systems. International Commercial Arbitration has, thus, acquired a new status of global acceptability.



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UNCITRAL Model Law Since its inception in 1966, the United Nations Commission on International Trade Law (UNCITRAL) has worked to improve the effectiveness of international commercial arbitration. In particular, UNCITRAL has sought to improve the enforceability of arbitral awards and to remove obstacles to their recognition and enforcement. In 1976, UNCITRAL adopted a set of ‘rules’ for guiding contracting parties resorting to arbitration and for streamlining the arbitration process. Today, the UNCITRAL rules have been widely accepted and are considered to have worldwide significance. In 1985, UNCITRAL produced the final draft of a ‘Model Law’ on International Commercial Arbitration. The Model Law process involved the creation of uniform rules to eliminate local peculiarities which make international consistency impossible in certain areas of law. The promulgation of the Model Law was consistent with UNCITRAL’s general mandate ‘to promote the progressive harmonisation and unification of the law of international trade.’ The Model Law is a comprehensive work governing the arbitration agreement, the composition and jurisdiction of the arbitral tribunal, the conduct of arbitral proceedings, and the making of and the recourse against the award. On 11 December 1985, the General Assembly of the United Nations (UN) recommended that all member states should adopt the Model Law as their domestic law regulating the conduct of international commercial arbitration. In the area of enforcement, UNCITRAL hoped that the Model Law would provide for the ‘uniform treatment of all awards, irrespective of their country of origin’. To attain this goal, UNCITRAL included in the Model Law an enforcement mechanism almost identical to that of the New York Convention, which provides a ‘generally satisfactory’ means of enforcing arbitral awards. Ironically, at the time the Model

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Law was promulgated, a large number of states, in fact the majority of all state members of the UN, had not ratified or acceded to that Convention. The major obstacle to accession to or ratification of the New York Convention is a problem of politics rather than any dissatisfaction with the law. Because of its limited scope and the universal lack of adherence to it, the New York Convention has not succeeded in harmonising all national laws governing the enforcement of international arbitral awards. The Model Law appears to have a better future. Whatever the law and differences between the states were, the courts rose to the occasion and provided relief to the much harried international business community.

Arbitration in India Panchayats have been known in ancient India for speedy resolution of disputes. The basic idea of arbitration, which is presently the chosen method for dispute resolution, is based on the fundamental idea of panchayat. It is interesting to note that many matters related to arbitration take a very long time to be finally decided as the enforcement is through the courts. Somehow it has been experienced that arbitration matters are still plagued with several problems. According to experts, these problems can magically disappear if the parties follow the arbitration in spirit, as was done in panchayats in ancient India. So, what is that spirit? In simple words, it means to follow the verdict of the arbitrators or the panchs—the wise persons—without questioning it, without doubting it, without resorting to appeals and without hair-splitting the verdict using every plausible legal tool. Discussing the relationship between arbitration and panchayat, the Supreme Court observed in 1989 in the Food Corporation of India (FCI) case that there has been a long



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history of arbitration in India. Typically, individuals of importance were selected to resolve disputes. These were usually wealthy, influential and elderly persons from the community. Their decision was final and binding, and in case anyone disobeyed, he/she was excommunicated and ostracised by the community. However, there was no agreement between the disputing parties and the elderly persons, and it was the norm—rather than a contract willingly consented—to abide by their decision. The Court wrote: In India, there is a long history of arbitration. Arbitration is a mode of settlement of disputes evolved by the society for adjudication and settlement of the disputes and the differences between the parties apart from the courts of law. Arbitration has a tradition, it has a purpose.3

During the British time, the arbitration law in India had been formalised and made quite technical and complex. It would be better if it is made less formal and more flexible. In the case cited above—FCI—the Supreme Court made another observation, The Law of arbitration should be made simple, less technical and more responsible to the actual realities of the situation, but must be responsible to the Canons of justice and fair play. The arbitrator should be made to adhere to such process and norms which will create confidence, not only by doing justice between the parties, but by creating a sense that justice appears to have been done.4

The 1996 and the 1940 Acts in India Presently, the governing law in India is the Arbitration and Conciliation Act, 1996. Prior to this, the governing law was the Arbitration Act, 1940. Post-Independence, there were several flaws which were noticed in the working of the 1940

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law. Because of these problems, arbitration had almost lost its effectiveness. Many suggestions were made to make the law effective. Piecemeal solutions were tried occasionally. During this time period there was a global movement to harmonise the arbitration law by preparing the Model Law. When the UNCITRAL Model Law of 1985 was adopted, India had to change its law being a signatory to the international body. The law of 1996 was enforced. It provides for domestic arbitration, international arbitration and also conciliation. It has been there now for almost two decades and several loopholes have been pointed out by the practitioners. It is not a perfect law. It has proved to be far less effective than envisaged. The Law Commissions in India, the Supreme Court, academicians and practitioners have given suggestions for making it really effective. The legislature and the government are working them and hopefully these will be implemented in the near future. The main suggestions are to streamline the process to cut the delay and make post-award challenge a bit more onerous. Let us discuss two cases to illustrate the working of domestic and international arbitrations.

CASE 1: Ashoka Tubewell versus Union of India (Supreme Court of India, 2014)5 Indian Railways—mentioned as Union of India in the title of the case—entered into a contract with Ashoka Tubewell for certain engineering works. The contract contained an arbitration clause for resolution of disputes. Interestingly, the clause clearly mentioned that a gazetted railway officer would be the arbitrator, and in case, it was not possible to appoint any such officer as an arbitrator, the dispute would not have been referred to arbitration, which meant that the dispute was supposed to be decided by any other method



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but arbitration. The most obvious method thus used would have been to file a suit in the lowest court of competent jurisdiction, that is, the civil court in the district. Certain disputes arose between the parties, but the Indian Railways did not appoint an arbitrator for a long time. Ashoka Tubewell filed an application in the Calcutta High Court for the appointment of arbitrator under Section 11 of the 1996 Act. A retired High Court judge was appointed, and while the appointment was made, Indian Railways did not raise any objection. Rather, it agreed in writing to this appointment. The arbitrator so appointed heard the dispute and gave the award. Thereafter, Indian Railways challenged the award in the Calcutta High Court on grounds of wrong appointment of the arbitrator and by raising the point that the contract had mentioned appointment of only a gazetted railway officer, and no one else, as the arbitrator. The Division Bench of Calcutta High Court agreed with Indian Railways and set aside the award. Ashoka Tubewell appealed in the Supreme Court that Indian Railways had given its consent to the appointment of the retired High Court judge and took part in the arbitration proceedings on its own volition. The Supreme Court upheld the appointment of the arbitrator on grounds of novation of the contract. As Indian Railways did not challenge the award on any other ground, the award was also upheld.

Comments and Questions The appointment of senior officers from the Railways as an arbitrator for contracts between Indian Railways and contractors has been an age-old practice and is clearly a continuation of the colonial mindset. Though such a practice is in clear violation of one of the fundamental principles of natural justice—one should not be a judge in his/her own

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cause—yet the practice has been followed till date. The other most important principle of natural justice is that each party should be given an opportunity to present its case. This is called the principle of audi alteram partem, which means ‘hear the other side’ or ‘no one should be condemned unheard’. Another principle which is often added to the list is giving a ‘reasoned decision’. These principles of natural justice have been incorporated in most of the statutory laws in evolved jurisdictions, India being one of them. An application for the appointment of an arbitrator is filed to the Chief Justice of the concerned High Court for domestic arbitrations and to the Chief Justice of India (CJI) for international arbitrations. The Chief Justice may make the appointment himself or designate another judge from the same court to do so. Mostly, retired judges from the same court are appointed as arbitrators. Sometimes, the fee of the arbitrator(s) so appointed is also fixed by the Chief Justice or the designate judge. However, arbitrator’s fee is a matter to be decided by the two parties—the judge on one side and the disputing parties on the other. It is also a contract. Some of the retired judges are known to decide their terms and conditions and not be bound by what has been decided by the Chief Justice. Novation of a contract means replacing an earlier agreed obligation by something new. This change happens with mutual consent. It can be done expressly or in an implied manner. Express consent would be when the parties do that in writing or agree orally or by any other means of communication. Implied consent means by conduct. It is extremely important for managers to understand novation, which becomes necessary in many contracts due to the change in circumstances and the position of the parties for any reason. Such situations often compel the parties to renegotiate a contract while it is being performed. It is necessary for the manager to note that novation is not a matter



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of right and can only be done if the other party agrees to the change. The question is, ‘Why would the other party agree to any such change?’ That would depend on the changed scenario and the possibility of the contract to be performed by the parties. The keenness of any party to get it done somehow in the new circumstances or to stick to the original plan depends on its desperation or position of comfort. But, once both the parties have agreed to the new conditions in a contract, that part of the earlier contract remains no more effective. It is similar to a computer file being modified and saved; the earlier file simply goes away.

CASE 2: Scherk versus Alberto-Culver Co. (US Supreme Court, 1974)6 Alberto-Culver, an American company, had entered into a contract with German seller Scherk, with the dispute resolution clause specifying international arbitration to be conducted at International Chamber of Commerce, ICC, Paris. Certain disputes arose between the parties, and the American company preferred to file the matter in the district court in the US, rather than filing it in ICC Paris. Scherk objected to this in the American court; however, the district court on the basis of certain legal technicality held that it had jurisdiction and that there was no need for the matter to be referred to ICC Paris. Scherk appealed in the Court of Appeals, which surprisingly upheld the decision of the district court. In this way, the American company was very easily not keeping its promise of getting any dispute resolved in ICC Paris, rather in the American courts. Scherk appealed in the Supreme Court, and the US Supreme Court in 1974 did not agree with the Court of Appeals and the district court. The Supreme

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Court held that the parties were bound by the arbitration clause and the proper forum for getting the dispute resolved was ICC Paris and not the American courts. The decision of the Supreme Court was by a razor-thin majority, 5:4.

Comments and Questions This was a landmark judgement. The dispute had allegations of fraud under the Securities Exchange Act of 1934. An earlier decision of the US Supreme Court had held that any issue regarding the Securities Act of 1933 was public in nature and that by a contractual arrangement the statutory right to judicial resolution could not be waived. Thus, in the earlier decision it was held that any arbitration agreement under the securities act was void. The lower courts had decided in favour of the American company on the basis of this decision; however, the Supreme Court distinguished it, as the applicable law in the earlier decision and the present case were different statutes. Interestingly, the Supreme Court also highlighted the fact that the age-old judicial hostility to arbitration should end. The contract between the American company and the German seller was truly international in character. It is highlighted by the fact that Alberto-Culver was a US corporation with its principal place of business and business activities in the US; Scherk was a German citizen; the companies were organised under the laws of Germany and Liechtenstein; the contract negotiations occurred in the US, England and Germany; the signing occurred in Austria; the closing occurred in Switzerland and the subject matter concerned the sale of businesses organised under the laws of and primarily situated in European countries, whose activities were largely directed at the European market. A question that arises is: How far was it proper for domestic courts to usurp the jurisdiction for agreements of



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international character and when the parties have decided to get any disputes resolved in an international forum? The Supreme Court categorically stated that it was not at all proper for the domestic courts to entertain such matters. According to the intention of the parties and the agreement made, such cases should be resolved in the forum decided by the parties. Any deviation from such a promise would make a mockery of the agreement between the parties. The courts with all their powers should try to make the parties honour their promise, rather than repudiating it. Nothing could have been done had the US Supreme Court decided otherwise. It could have very well upheld the decision of the Court of Appeals and the district court. No one would have been able to do anything. So, why was the US Supreme Court so much concerned about eliminating the judicial hostility against arbitration? It was not a sudden spurt of feeling in favour of arbitration and a sense of honouring each and every promise made. The decision of the US Supreme Court had a lot to do with the geopolitical situation at that time. Post Second World War, the world had seen the rise of Japan, and globally the importance of the Middle East regarding oil had increased. The bargaining power which the US had commanded at one point of time had eroded to a certain extent, and in such a global position, it was not at all possible for the US to call the shots without taking into consideration the interests of other parties. It was essential for the US Supreme Court to send a positive signal to the entire global business community that it was very serious about honouring the contracts made, particularly about the dispute resolution clauses specifying European and other places as the seat of arbitration. In the absence of any such signal, or rather in the worst case of sending the signal that American Supreme Court was in favour of getting the disputes resolved only in American courts, it would have been extremely difficult for the businesses in the

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US to find business partners internationally. Thus, it was a very strategic decision made by the Supreme Court, which became a landmark judgement, and had its impact on the practice of law of arbitration, not only in the US, but all over the world. Autonomy of the parties was upheld along with due recognition given to foreign institutional arbitrations.

Takeaways for Managers

1. Should one go for arbitration? A business manager must understand that it is not essential for him/her to always agree for arbitration as the dispute resolution mechanism. It is a matter of choice and the parties have to agree to it. Until and unless there are advantages, keeping in mind one’s particular situation, it is not necessary to mechanically agree for arbitration in every contract. The first factor is the stakes involved. If the stakes are not very high, it may not be advisable to go for any dispute resolution mechanism other than negotiation and mediation. If the stakes are very high, it has been experienced that even with the best of the arbitral tribunals the losing party challenges the award and the matter is only decided finally in the Supreme Court. In such situations, arbitration results as another tier in the already established three-tier judicial system of district courts, high courts and the Supreme Court. If one of the parties to the contract is the government or a public sector undertaking, arbitration is usually mentioned as one of the conditions of the contract and in such a situation the other party has to think about it before giving consent. Not only arbitration, but also



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whether to litigate or not is a question which deserves to be answered by the parties before taking any step. Thus, it has to be a conscious decision on the part of the business manager whether to negotiate, arbitrate or litigate, or to simply avoid taking any of these routes. There is no clear-cut formula. 2. How to appoint an arbitrator? This is a million dollar question. The arbitrator is the fulcrum of arbitration. Everything depends on him/her. Thus, it is of utmost importance to have the right person appointed as the arbitrator. Any person can be appointed as the arbitrator. There are no qualifications prescribed in the law. But, it is desirable that the arbitrator must be an expert of the subject matter and better if he/she understands a little bit of the legal aspects too. What does a business manager want in case of a dispute? Ultimately, he/she wants to win. So, the business manager would always like to appoint an arbitrator with whom his/ her chances of winning would increase. But, please remember the final win is not with the award only. The award can be challenged in a court of law. There it must stand the scrutiny of judicial review. Thus, it is a good idea to push for the appointment of an arbitrator who understands your cause and has a soft corner for you and your business. This thought is also, however, not enough. It has to be reflected in clear legal terms in the award. If the award smells of bias, then it stands no chance of being upheld and executed. So, it is advisable to go for an arbitrator who understands your case on merits and decides on the same basis. 3. What should be the applicable law? This question needs to be answered in international contracts. Primarily, two laws have to be decided. One, the law of the contract and, two, the law of arbitration. Mostly, these two shall be the same. For a dispute between

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companies from two different countries A and B, should the law for A or B be the law of the contract and/or arbitration? There is no formula to make the decision. It depends on the level of comfort of the parties with the judicial system and the overall legal environment in either of the jurisdictions. Company from A may not be at ease in B, and the company from B may not be at ease in A. In such a situation, they may even decide on another country C. The only thing important is that the legal system in C should be able to support the dispute resolution process. For instance, UK had been a popular choice earlier and now Singapore is gaining popularity.   For domestic arbitration matters, no such choice is available. The law of the same country shall apply and courts in that country only will exercise jurisdiction. 4. Bargaining power. Which law should be applicable? Where should the parties meet for negotiating the terms and conditions of the arbitration clause or the contract? It all depends on the relative bargaining power of the parties. In international contracts, the applicable law for the contract and arbitration shall be determined by the party with better bargaining power. In domestic arbitration, the party with better bargaining power determines most of the clauses of the contract. The bargaining power of the parties is dynamic in nature. If between two parties, A and B, A is in a better position today, then the situation may change in future. In such a scenario, B, which gets in a better position, may like to renegotiate the terms of contract. Should A agree to the suggested changes? It depends on the desperation of A to continue doing business with B. While negotiating an agreement initially, it also depends on the desperation of one of the parties to enter into a contract with the other party.



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  It is important for a business manager to understand the ever-changing power balance and to try to get the clauses drafted reasonably to suit his/her company’s interest as and when it is in a commanding situation. However, it in no way means that they should be opportunistic and exploit the situation. 5. Prepare for the long legal battle. The basic purpose of arbitration is to provide a speedy and inexpensive dispute resolution mechanism. However, before agreeing for arbitration and invoking the clause, a business manager needs to prepare himself/herself and his/her company for a long legal battle. Arbitration may take a very long time for the final execution. During the process, tonnes of documents may be required as evidence, dozens of persons may be called as witnesses, and hours and hours of arbitration sittings may be conducted. Thereafter, the award may be challenged in a court of law. This shall be as per the procedural law, starting from the lowest court of competent jurisdiction. In most of the districts it shall be the court of the District Judge. From there the decision can be appealed to the High Court and then to the Supreme Court. Phew!   After all this, if the award is upheld, execution shall start. It is easier said than done. Execution is a fresh ordeal. Thus, it is suffice to say that the business manager should not paint a rosy picture regarding the resolution of disputes by arbitration. He/she and his/her company may be plain lucky if they do not have to go through a very long and time-consuming process. Do not expect miracles.

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Institutional and Ad Hoc Arbitration

Ram and Shyam used to work in the same office. Both of them were promoted. Their colleagues asked for a party. Ram invited them to home and arranged everything separately on his own and from the best service providers. Food was catered by the choicest of caterers: starters by Mohan bhai (brother), main course by Lalji and desserts by Tiwari; light decoration by Mukesh, flower arrangement by Arshad and live ghazal and music by Diljeet. Everyone enjoyed the party thoroughly. Shyam, on the other hand, invited everyone at the new five-star hotel Moonlight. Everything was arranged by the hotel. Moonlight had gained very high reputation in a short time since it started but was known to be prohibitively expensive. Moonlight took pride in arranging whatever the guests wanted. Shyam had chosen the best food, decoration and live music band by the poolside. The invitees were highly appreciative of Shyam for inviting them to Moonlight and spending so much money. Ram had to spend only a fraction of what Shyam did. What Ram did was an ad hoc arrangement, whereas Shyam made institutional arrangement. The same is true for domestic and international commercial arbitrations. It can be done ad hoc or by an institution.

Developments in the Last Few Decades Arbitration, as we understand, is a private affair between the parties that have mutually accepted to have an arbitrator or arbitrators resolve a dispute. Over the last several decades,



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arbitration, which is primarily ad hoc in nature, has been institutionalised with several professional institutions established all over the world, catering to the resolution of disputes in a speedy, structured and expert manner. Ad hoc arbitration has its own problems, the most important being: finding a mutually acceptable arbitrator or arbitrators, locating a venue for the meetings, arranging secretarial staff, taking care of the detailed procedure which entails frequent communication between the parties, the arbitrators, the counsel and any statutory body if concerned, and above all, maintaining the paperwork meticulously. All this is not easy and requires a lot of time, effort and money. Even if one of the parties, usually the claimant, is willing—or is otherwise forced, due to the possibility of the claim to be decided—to do the heavy lifting, it is not possible—not because of any ill intention, but simply because of lack of expertise—to get everything done in a professional manner.

Expertise and Professionalism Institutional arbitrations take care of most of these issues, and the concerned institutions develop expertise by conducting arbitrations related to a particular subject matter repeatedly. There are competing institutions globally and expert arbitrators consider it to be a proud privilege to be associated with a particular institution. The same is true vice versa. Such is the reputation of certain arbitrators that it is a matter of great prestige for certain institutions to be associated with them. It is, truly speaking, a marketplace where proper matching needs to be done between the institutions and the arbitrators, and that takes place in a dynamic manner. Usually, a virtuous cycle can be experienced—better known institutions are able to attract better arbitrators, and better arbitrators enhance the reputation of these institutions. Thus, it is about a symbiotic relationship between the

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institutions and the arbitrators. Other aspects pertaining to the secretarial work, venue and other related issues, usually, are secondary and the fact of the matter is that these are the support activities; the primary being the one performed by the arbitrators.

Arbitral Institutions Some of the well-known global institutional arbitration centres are located in major cities in the world. For instance, very popular arbitration centres are located in Paris, London, Geneva, Stockholm, Hong Kong, Singapore, Tokyo, Dubai, Kuala Lumpur, Melbourne and so many other cities around the globe. There is an effort by all the major cities to attract as much arbitration matters as possible to its centre. Some of the emerging cities which do not yet have an arbitration centre have the task of establishing the same, one of global reputation and importance, as a priority item in their to-do list. Arbitration centres are being set up in African countries and emerging economies in Asia. There are arbitration centres in India also, which are gearing themselves up for global competition, yet there is a long way for them to go; the same applies to large number of arbitration centres in the world. Arbitration centres may either specialise in one particular business domain, for example, maritime disputes, investment disputes, etc., or provide services to any business, irrespective of specialisation.

Maritime Arbitration Maritime arbitration, just to take an example, is an ageold dispute resolution method for shipping businesses and involves intricate issues related to loading, unloading, bill of lading, bills of transfer, letter of intent, bank guarantee,



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insurance, territorial waters, jurisdiction, international law, technology, cost, insurance and freight (CIF), free on board (FOB), etc. It has developed is a very special branch of arbitration law; however, basic principles of arbitration remain the same. Some of the most important institutional arbitration centres for maritime law are situated in major port cities of the world. Maritime arbitration law provides an extremely lucrative practice for the lawyers, chiefly because the stakes are extremely high in maritime disputes. One can simply imagine the disputed amount with a ship loaded with oil.

Investment Arbitration Investment arbitrations, of late, have been very popular and the investor companies as well as the countries to which those companies belong get a lot of comfort by including an arbitration clause for investment arbitration with the country and the company with which they are entering into a contract for investment. Very often, investment arbitrations are backed by something like a sovereign guarantee—though not exactly a sovereign guarantee—which primarily promises to ensure a level playing field and providing fair opportunities to the investor, as well as the speedy resolution of disputes in the destination country. An important forum for investment arbitration is the International Centre for Settlement of Investment Disputes (ICSID), a member of the World Bank Group.

Flexibility versus Fixed Framework The two methods of conducting commercial arbitration are, therefore, institutional and ad hoc. These apply to all commercial arbitrations, that is, domestic as well as international. The institutional arbitration is also known as administered

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or supervised arbitration. Different institutions can perform these according to their own rules and regulations, whereas the ad hoc arbitration does not depend on any institution and the parties have to fend for themselves without any supervision and guidance of an institution. The parties are very much free to decide the time limits for the arbitral proceedings to be concluded as there is no monitoring by any institution. The parties can also decide about the rules to be followed for the arbitration—of course, within the framework of law—without bothering about any institutional mechanism to be followed. These rules can either be incorporated at the outset in the contract or maybe added later on. There is flexibility in ad hoc arbitration, which provides the freedom to adapt the rules of any arbitral institution, either in total or partially. An ad hoc arbitration gives the freedom of undergoing mediation or conciliation, or a hybrid version of one of the mechanisms of ADR, which provides freedom from being monitored by any institution. The entire ad hoc arbitration depends on the goodwill and good faith between the parties and the arbitrator. It is the relationship between the parties, and between the parties and the arbitrator, that governs the success of an ad hoc arbitration.

Originated with Merchant Community Historically, most of the current arbitration methods, particularly of the institutional arbitration, originated as the norms followed by the merchants in Europe. The association of these merchants would follow their own norms, traditions, practices and customs—which were not necessarily aligned with the law meant for the masses—would hold courts in the marketplace—ports, fairs, commercial areas, etc.—and would decide the matters based on their expert understanding



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of the intricate matters of business. Such courts dispensed speedy justice and ensured that the traders strictly abided by their orders as their reputation was at stake. Such a practice resulted in the development of an institutionalised mechanism of resolving commercial disputes, in an easy manner which was speedy and made the best use of expert advice available. In today’s world, we see such a practice being followed by different merchant organisations either related to any particular business or multiple businesses. In almost all the ad hoc arbitrations, it is the relationship between the parties and the arbitrator which is crucial to the success of arbitration. However, when a dispute arises between the parties, good faith and trust erode very fast, and then trying to agree to even some of the certain basic requirements to initiate the arbitration proceedings turns out to be an extremely difficult situation. In such a scenario, it may lead to an extremely difficult position if the parties are not willing to sit down and discuss. Let us go through a few cases with institutional and ad hoc arbitration clauses.

CASE 1: Renusagar versus General Electric (Supreme Court of India, 1993)1— Institutional Arbitration In 1964, Renusagar Power Co. Ltd, an Indian private company, had entered into a contract with General Electric (GE), the American company, for the supply and erection of a thermal power plant in Uttar Pradesh. The contract contained a dispute resolution clause which provided for the resolution of disputes by arbitration in accordance with the rules of International Chamber of Commerce (ICC), Paris. The arbitral tribunal was supposed to have three arbitrators—one

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appointed by each of the parties and the third by ICC Paris. The substantive law for the contract was agreed between the parties to be the laws of the State of New York, USA. Certain disputes had arisen between the two parties, and for their resolution, GE invoked the arbitration clause in 1982. Renusagar tried its best by filing applications in courts in India to scuttle the arbitration proceedings on one pretext or the other. A petition was also filed in the Calcutta High Court regarding the bank guarantee. Renusagar took part in arbitration proceedings under protest and without prejudice to its claim. A large number of documents—33 bound volumes—were furnished by the parties. In 1985, the tribunal by 2:1 decided most of the claims in favour of GE. In 1986, GE started proceedings in the Bombay High Court for the enforcement of the award, whereas Renusagar filed a suit in the Mirzapur District Court for setting aside the same. The legal proceedings in the District Court and the High Court, and thereafter in the Supreme Court, took seven years to be finally decided in 1993 in favour of GE.

Comments and Questions In late 1950s and early 1960s, the position of India, as far as the situation of power is concerned, was extremely poor and the country relied heavily on foreign technology, support and expert manpower to build power plants, be it nuclear, hydel or thermal. Today, the situation is far better but still a lot needs to be done; however, at that time, India’s bargaining power was quite low and it reflected in Renusagar accepting the substantive law of the contract as the prevalent law of the State of New York. The importance of ICC, Paris, as an institutional arbitral forum had been recognised at that time as it was extremely difficult for a foreign company such as GE to agree to the



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jurisdiction of an arbitral tribunal in India. Also for the Indian company it might have been a bit difficult to accept the jurisdiction of any American institutional arbitration, and in such a scenario, the most acceptable institution appeared to be ICC Paris, which had already gained significant reputation and trust in the global business community. The noted lawyer, jurist and once India’s Ambassador to the US, Mr Nani A. Palkhivala, had commented about international commercial arbitration and ICC Paris: When the International Chamber of Commerce at Paris started offering the services of its Court of Arbitration, businessmen in different countries found it convenient to avail themselves of that facility. In course of time that ‘convenience’ became a ‘preference’ and the preference has now ripened into a necessity…. If I were appointed the dictator of a country, in the short period between my appointment and my assassination I would definitely impose a law making international arbitration compulsory in all international commercial contracts.2

Such has been the reputation build of ICC Paris that GE was quite assured of effective redressal of any disputes. However, intervention of courts in the arbitration proceedings had been a serious problem to the practice of arbitration law in the country, and it had become a matter of routine to file an application at the very initial stages, when the arbitration had just begun, and pray for an injunction to any such proceedings based on a number of reasons. The earlier law of 1940 had number of such loopholes, and an effort was made to plug them by the 1996 law. To a large extent, it has been successful and the courts in India have been stricter in intervening in arbitration proceedings, just for frivolous reasons. However, still, there are grounds on which some parties try to get the proceedings stopped in between.

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There are some fantastic advantages of institutional arbitration, which are used by multinational corporations by relying on the expertise of the arbitral panel devised by globally well-known arbitration institutions. Institutions such as ICC, Paris, London Court of International Arbitration, Singapore International Arbitration Centre and other well-known institutions are able to attract some of the finest arbitrators in the world willing to resolve the disputes related to their matter of expertise. For the services which these institutions provide, very often, the parties have to pay through the nose. Also, the institutional rules govern the proceedings and are at times so technical and rigid—like the number of copies of documents to be submitted even in this age of electronic submissions—that parties have a feeling of getting bound in bureaucratic red tape. Despite such procedures being followed by some of the best-known institutions, there is availability of business for them—not only availability, but these institutions thrive. A question to be asked at this juncture is: What makes these well-known institutions able to attract business despite high fee and procedural rigidity? Another question, related to the above-mentioned, is the prudence of the thought of giving preference to institutional arbitration as compared to ad hoc arbitration by most of the well-known global companies. In the Renusagar Case, ICC, Paris, did not take much time in deciding the matter, and notably its final decision was upheld by the Supreme Court finally. However, the legal procedure of challenging the award in the lowest court of competent jurisdiction—that is, the Civil Judge in the District Court—and thereafter appealing to the High Court and finally to the Supreme Court took such a long period of time that the apparent advantage of getting the dispute resolved through arbitration was lost.



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CASE 2: White Industries versus Republic of India3 (Arbitral Tribunal, London, 2011)— Ad Hoc Arbitration White Industries Australia Ltd and the public sector undertaking Coal India Ltd entered into a contract in 1989 for the supply of equipment, technology, etc. for the development of a coal mine in Bihar, India. The contract included a dispute resolution clause of arbitration in ICC, Paris. Certain disputes arose between the parties and White Industries invoked the arbitration clause. Award of about US$4 million was given in favour of White Industries, which was challenged by Coal India in the Calcutta High Court in 2002. While the proceedings for challenging the award were on in the Calcutta High Court, White Industries filed an application for the enforcement of the award in the Delhi High Court. Enforcement of the award was stayed and the proceedings in both the courts faced significant delay. White Industries filed a petition in the Supreme Court for speedy action on the enforcement of the award. A long time elapsed and till 2010, the award was not executed. India and Australia had signed a bilateral investment treaty (BIT) by which it was decided between the parties that each country will provide a level playing field and security to investments made by the investor country in the host country. This BIT also had an arbitration clause which provided for ad hoc arbitration to be decided by three arbitrators, who were to be appointed by the parties by mutual consent. The clause provided that the investor company could directly invoke the arbitration clause against the host country. Exasperated by the inordinate delay in the execution of the award, White Industries was left with no other option but to invoke the BIT signed between Australia and India. The seat of arbitration was Singapore, but meetings were held in

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London. The arbitral tribunal consisting of three arbitrators gave an award against the Republic of India and found that the Republic of India had violated the India–Australia BIT. This award was a major blow to the reputation of India.

Comments and Questions What may appear to be surprising in this matter was that despite the stakes being very high, and the issue being related to BIT between two sovereign nations, the parties had agreed for ad hoc arbitration. What could be the reason for choosing ad hoc arbitration and not institutional arbitration? Institutional arbitration could have given much more certainty and a very well streamlined procedure to be followed by the concerned parties with firm deadlines to be met. What might have been the critical factor is the issue of flexibility with sovereign nations not willing to get bound by institutional proceedings. It is important to appreciate that any nation would not like to have its hand tied behind its back by agreeing to a global arbitration institution. There may be acceptable factors such as agreeing to the conditions imposed by the United Nations or any of its bodies, for example, UNCITRAL. Any World Bank institution may also be acceptable; however, sovereign nations with a mind of their own, would surely like to keep the right to appoint an arbitrator of their choice with themselves, and this choice is subject to the changing context. In another interesting matter4 pertaining to oil and gas exploration, a consortium of companies led by Reliance India Ltd and a few foreign companies also had an ad hoc arbitration clause in the contract with the government, and the appointment of arbitrators went through a dramatic exercise of acceptance and rejection of offers made of names of different persons as arbitrators by different parties. The matter later



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on went to the Supreme Court of India for appointment of a presiding arbitrator; the Supreme Court made the appointment of an Australian judge, and within a short period of time recalled its order.5 What we can understand from this experience is that such time-consuming exercises could have been avoided if the parties had agreed for an institutional arbitration. However, as discussed in the earlier paragraph, it is not very common for a sovereign nation to agree to an institutional commercial arbitration. Thus, it is not difficult to conclude that the level of trust that is expected with an institution to conduct arbitration proceedings in a free and fair manner somehow does not match with the expectations of the Government of India. Notably, a large chunk of commercial disputes faced by the government and its agencies are resolved by design through institutions only, and in most cases the institutions are either one of the government parties to the contract or any other government body. So, what happened after the award in the instant case? The impact of the White Industries award has been that the Government of India is reconsidering entrance into BIT with different investor countries, particularly keeping in mind that there may be a large number of arbitration proceedings initiated if dispute resolution between the parties takes longish time, which ordinarily is the norm in India.

Validity of Awards by International Arbitration Centres In international commercial arbitration, there are two major problems faced regarding the awards by international arbitration centres. These are the problems of recognition and enforcement, which are even faced by ad hoc arbitration; however, in institutional arbitration, these issues become prominent as the users of the services of an institutional

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centre also rely on the reputation of that particular institution for recognition and enforcement. Without enforcement of an award, it remains a piece of paper which is of almost no value. The reputation and credibility of certain institutions help in enforcement as municipal courts—as the local courts in different countries are called vis-à-vis the international courts—often give due importance to awards made by well-known institutions of arbitration. Some of these, as we have mentioned earlier, are the ICC, Paris, London Court of International Arbitration, the Arbitration Centre at Geneva, at Hong Kong, at Singapore, etc. Among these, the award from that of the Centre will get better. Recognition is a matter of choice and discretion to be exercised by the judicial officer, recognising in enforcing the award. The pecking order keeps changing, and there is hardly any visible and declared list with centres listed in a particular priority. It is a matter of choice for the litigants. And they would like to file the case in a centre which is somewhere geographically near. For instance, the Singapore Centre for arbitration is quite popular among businesses in Southeast Asia, whereas the ICC, Paris, is quite popular among businesses in Europe. It goes without saying that there are other competing centres in Europe, particularly at Stockholm, Geneva, London and other prominent cities; however, ICC, Paris, has built its reputation over several decades and is the leading institution. This fact is well taken into cognizance by the courts recognising and enforcing the awards. The mere fact that an award has been made by a particular institution does not guarantee that the municipal courts are definitely going to enforce the award. It simply facilitates the process and makes it a little bit smooth; however, it is up to the judicial officer to make his/her decision after going through the merits of the case. It has often been experienced that the awards from well-known institutional centres have been shredded to pieces by the enforcing courts. Thus, it



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is important for a manager to understand that despite the fact that the company might have spent a huge sum of money in going through an institutional arbitration proceeding internationally, yet, the final decision regarding enforcement may not be a cakewalk. The only solace one may get is that the matter has been handled in a professional manner with the application of global standards and a timely decision had been made by the arbitral tribunal. Also, the litigants can be satisfied that they have done their best and beyond a certain point neither the decision nor the dispute can be managed by them while invoking the arbitration clause.

Takeaways for Managers

The two most important things a manager must understand are the budget and the requirement. Cut your coat according to your cloth. Just because everyone else is wearing a coat it does not mean that you also need a coat. Give it a thought. If you really need a coat, then cut it as per the cloth available. Thus, first you need to think whether you should go for arbitration as the dispute resolution mechanism. If you have thought about it and have made up your mind that arbitration is the only method by which you would get the disputes resolved, only then think about making a choice between ad hoc and institutional arbitrations. Consider the fact that institutional arbitration is typically expensive. Is the disputed amount large enough to be decided by an institutional arbitration? Remember, the institutional arbitration requires payment of high fees and administrative expenses, if not included in the fees. Also, this payment would not include other related expenses of travel, board and lodging. Lawyer’s fees are also not included. Hence, do

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not get overexcited by knowing only the fees payable to the institution. There are other substantial expenses involved. The same shall apply to ad hoc arbitration, however, with a difference. The disputing parties are mentally prepared for making expenses for various heads in ad hoc arbitration, and hence, they usually do not consider a lump-sum payment while making the decision. There is no shock factor when told about a new head of expenditure. Whereas, in institutional arbitration, there is something at the back of the mind which tells that you have paid and now there is nothing else to be paid. It is not only the cost aspect, expertise of arbitrators must be ensured in institutional arbitration. There is typically a panel of arbitrators which each institution maintains and if the parties are not satisfied with the list, there is not much that can be done. What is there for a manager in the Renusagar Case? Any manager who could have thought in a straight manner would have never anticipated that there could be obstacles created in the performance of a contract, right from the beginning, and that any party could continue with legal proceedings for such a long period of time. While the contract terms were renegotiated between the parties, it could have been better to try to use other means of resolving the dispute, such as negotiation, conciliation and mediation. Once the matter is taken to an institutional arbitration, it is well within the control of the institution and a little bit, if not complete, of flexibility and agility is lost. Now, with competition heating up in the institutional arbitration business, disputing parties are getting their voice back regarding changes to be made in the procedure to suit their needs and budget. The way businesses are progressing and dispute resolution is getting streamlined, institutional arbitration is being preferred. To get the most out of it, business managers need to be aware and astute.

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Liquidated Damages

You have ordered a pizza from Domino’s with delivery guaranteed within 30 minutes, otherwise you get the pizza free. The delivery person delivers it after an hour. Do you get two free pizzas? No. You still get the same pizza free. Can you ask him to warm it up as it is very cold after an hour? No. Had it been delivered after 31 minutes, it would have been practically as good as delivered at the 29th minute, but at 31st minute you could have enjoyed it for free. So, after an hour or even more, you neither get more than one pizza nor get a warmed-up pizza. This is what is said to be predetermined LD. Have you ever returned a library book after the due date? There is a fine stipulated to be paid. For example, if the fine is Re. 1 per day, then if the book is returned five days after the due date, the fine to be paid shall be five multiplied by 1, that is, `5. During this five-day period, no other member might have requested for the book, still you have to pay the fine. Thus, the library might have suffered no loss, but fine has to be paid. This is also an example of predetermined LD. Similarly, if a project is completed six weeks after the agreed date of completion and the compensation to be paid was decided between the parties as `10 lakh (1 million) per week, a compensation of `60 lakh (6 million) has to be paid. Nothing more, nothing less. This is the concept of LD. Let us understand what damages are first and then study about LD in detail.

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Damages Issues regarding compensation are often the most contentious between the disputing parties. It is one of the settled principles of law that parties entering into a contract must honour the contractual conditions, and in case one of the parties is not able to do so, it must compensate the other party in a manner that the other party is in a position similar to what it would have been had the contract been performed. Making a decision about such compensation is not an easy exercise. The term ‘damages’ is used in law for the compensation to be awarded to the aggrieved party. Damage, usually, is a sum of money and this sum can either be predetermined at the time of entering the contract—known as LD—or the parties might not have thought about it at the time of entering the contract and left it as an open undiscussed clause, known as unliquidated damages. The contract may even be absolutely silent about it. Inclusion of an LD clause in a contract signifies the level of maturity, ability to anticipate and the degree of evolution of the parties concerned. It is extremely important for the parties at the time of entering the contract to understand the implications of the contract, and in case some of the provisions, or the entire contract itself, are not performed—either fully or unsatisfactorily—then what would be the compensation to be paid by the defaulting party. While negotiating, the parties have to exhibit mutual agreement regarding the level of compensation, and also the willingness to honour it.

When Time Is the Essence of Contract It is often seen, especially in infrastructure construction contracts and also in the supply of material contracts, that time is of the essence of a contract and that delay in performance by any of the parties triggers deceleration of the progress



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of the project. Usually a blame game starts, with the parties blaming each other for the delay and somehow getting out of the difficult position of being blamed for the fault. Many a time, LD are to be calculated according to a formula which simply is a product of the number of unit time and the compensation to be paid per unit time. The dispute is often, first, regarding the issue of who is liable for the delay and, second, regarding the measurement of time, with the compensation per unit time being a constant.

Compensation or Penalty Another interesting issue is that whether the damages are to be awarded as compensation or as a penalty? In a number of decisions, several courts have concluded in clear terms that the purpose of damages is not to impose a penalty but simply to compensate the aggrieved party. In case the terms of the LD clause have an impact of terrorising the aggrieved party, the courts have held such clauses to be in terrorem (in fear) and not held them to be legally binding.

The Law in India The law on the subject of compensation is contained in Sections 73 and 74 of the Indian Contract Act, 1872. These are as follows:

Section 73. Compensation for Loss or Damage Caused by Breach of Contract When a contract has been broken, the party who suffers by such breach is entitled to receive, from the party who has broken the contract, compensation for any loss of

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damage caused to him thereby, which naturally arose in the usual course of things from such breach, or which the parties knew, when they made the contract, to be likely to result from the breach of it. Such compensation is not to be given for any remote and indirect loss or damage sustained by reason of the breach.

Section 74. Compensation for Breach of Contract where Penalty Stipulated for When a contract has been broken, if a sum is named in the contract as the amount to be paid in case of such breach, or if the contract contains any other stipulation by way of penalty, the party complaining of the breach is entitled, whether or not actual damage or loss is proved to have been caused thereby, to receive from the party who has broken the contract reasonable compensation not exceeding the amount so named or, as the case may be, the penalty stipulated for. Explanation—A stipulation for increased interest from the date of default may be a stipulation by way of penalty.

Discussing Sections 73 and 74 of the Indian Contract Act, 1872, the Supreme Court made the following observation in ONGC vs. SAW Pipes case, referred to hereinafter, From the aforesaid Sections, it can be held that when a contract has been broken, the party who suffers by such breach is entitled to receive compensation for any loss which naturally arise in the usual course of things from such breach. These



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sections further contemplate that if parties knew when they made the contract that a particular loss is likely to result from such breach, they can agree for payment of such compensation. In such a case, there may not be any necessity of leading evidence for proving damages, unless the Court arrives at the conclusion that no loss is likely to occur because of such breach. Further, in case where Court arrives at the conclusion that the term contemplating damages is by way of penalty, the Court may grant reasonable compensation not exceeding the amount so named in the contract on proof of damages. However, when the terms of the contract are clear and unambiguous then its meaning is to be gathered only from the words used therein. In a case where agreement is executed by experts in the field, it would be difficult to hold that the intention of the parties was different from the language used therein. In such a case, it is for the party who contends that stipulated amount is not reasonable compensation, to prove the same.1

Intention of the Parties Thus, the Supreme Court was very clear in this observation that when the parties entering into a contract were evolved and became experts in their respective fields, then it was to be expected that they understand each and every word, phrase, punctuation mark and the overall meaning of what they were writing in the contract. Their intention was very well exhibited by the contract itself, and it could not be assumed that the exact meaning of the contract was not clearly explained by the words. Hence, the intention of the parties could be gathered from the overall reading of the contract and until and unless there was any grave ambiguity, and following of any such unreasonable interpretation might have led to absurdity, the courts must follow the plain and simple meaning emerging out of the contract. That would be a true reflection of the intention of the parties.

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This observation provides the basic understanding required for interpreting and finally arriving at the practical meaning of the contractual clauses. Let us go through a few court judgements.

CASE 1: ONGC versus SAW Pipes (Supreme Court of India, 2003)2 One of the landmark judgements in the legal history of India has been ONGC vs. SAW Pipes, decided by the Supreme Court of India in 2003, giving an expanded interpretation to public policy while deciding issues related to LD and force majeure. In this chapter we will focus on the issues related to LD and refer to the case later on in the chapters on force majeure and public policy. Briefly, the facts of the case were as follows: In June 1996, ONGC entered into a contract with SAW Pipes, both Indian companies, the former a public sector undertaking and the latter a private company, for the supply of certain pipes used for offshore oil exploration and maintenance. The pipes were to be supplied by November 1996. The raw material for making the pipes was supposed to be procured by SAW Pipes from reputed suppliers, as approved by ONGC. The suppliers, were foreign companies and SAW Pipes placed an order in August 1996 with an Italian supplier for supplying the material latest by the end of September 1996. Time was of the essence of the contract, and it was clearly understood by the parties, including the Italian supplier. Incidentally, Europe faced a general strike of the steel mill workers in September and October, 1996, because of which the Italian supplier was unable to send the raw material in time to SAW Pipes in India. Because of this delay, SAW



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Pipes was not able to supply the finished pipes to ONGC as per the stipulated deadline. An extension of 45 days was granted by ONGC on the request of SAW Pipes; however, it was mentioned by ONGC in the letter granting extension that LD for delay in the supply of pipes would be deducted as per the LD clause in the contract between the parties. While settling the payment, later on, ONGC deducted an amount of roughly US$300,000 and about `16 lakh (1.6 million) as LD. SAW Pipes disputed the deduction and alleged that the delay was due to strike in Europe, and hence, it should be covered under force majeure clause. ONGC did not agree. SAW Pipes invoked arbitration. The arbitral tribunal held that striking Europe would not be covered under the force majeure clause; however, to deduct the LD ONGC should have proved the loss it had suffered. The tribunal held that as ONGC was not able to prove any such loss, the amount was wrongfully deducted and awarded the same with interest to SAW Pipes. The award was challenged on the basis of public policy by ONGC and was set aside finally by the Supreme Court of India. We shall discuss these issues in the next few chapters. As of now, let us focus on the issues related to LD. Arguing on behalf of SAW Pipes, Mr Dushyant Dave submitted that the law regarding breach of contract provisions under Section 74 was quite well settled and compensation had to be awarded only if the loss had been suffered by the aggrieved party due to breach of the contract. He cited the following paragraph from a very old case of Privy Council of 1929, ‘The effect of S. 74, Contract Act of 1872, is to disentitle the plaintiffs to recover simplicitor the sum of `10,000/whether penalty or liquidated damages. The plaintiffs must prove the damages they have suffered.’3

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It would be useful to refer to the relevant clauses in the contract between ONGC and SAW Pipes. These are reproduced in the following box item:

11. Failure and Termination Clause/LD Time and date of delivery shall be essence of the contract. If the contractor fails to deliver the stores, or any instalment thereof within the period fixed for such delivery in the schedule or at any time repudiates the contract before the expiry of such period, the purchaser may, without prejudice to any other right or remedy available to him, recover damages for breach of the contract: (a) Recovery from the contractor as agreed LD are not by way of penalty, a sum equivalent to 1 per cent of the contract price of the whole unit per week for such delay or part thereof (this is an agreed, genuine pre-estimate of damages duly agreed by the parties) which the contractor has failed to deliver within the period fixed for delivery in the schedule, where delivery thereof is accepted after expiry of the aforesaid period. It may be noted that such recovery of LD may be up to 10 per cent of the contract price of whole unit of stores which the contractor has failed to deliver within the period fixed for delivery, or (c) It may further be noted that Clause (a) provides for recovery of LD on the cost of contract price of delayed supplies (whole unit) at the rate of 1 per cent of the contract price of the whole unit per week for such delay or part thereof upon a ceiling of 10 per cent of the contract price of delayed supplies (whole unit). LD for delay in supplies thus



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accrued will be recovered by the paying authorities of the purchaser specified in the supply order, from the bill for payment of the cost of material submitted by the contractor or his foreign principals in accordance with the terms of supply order or otherwise. (f) Notwithstanding anything stated above, equipment and materials will be deemed to have been delivered only when all its components or parts are also delivered. If certain components are not delivered in time, the equipment and material will be considered as delayed until such time all the missing parts are also delivered.

12. Levy of LD Due to Delay in Supplies LD will be imposed on the total value of the order unless 75 per cent of the value ordered is supplied within the stipulate delivery period. Where 75 per cent of the value ordered has been supplied within stipulated delivery period, LD will be imposed on the order value of delayed supply(ies). However, where in judgement of ONGC, the supply of partial quantity does not fulfil the operating need. LD will be imposed on full value of the supply order.

34.4 Delay in Release of Payment In case where payment is to be made on satisfactory receipt of materials at destination or where payment is to be made after satisfactory commissioning of the equipment as per terms of the supply order. ONGC shall make payment within 60 days of receipt of invoice/

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claim complete in all respects. Any delay in payment on undisputed claim/amount beyond 60 days of the receipt of invoice/claim will attract interest @ 1 per cent per month. No interest will be paid on disputed claims. For interest or delayed payments to small-scale and ancillary industrial undertakings, the provisions of the ‘Interest of delayed payments to small scale and Ancillary Industrial Undertakings Act, 1993,’ will govern.

Arguing on behalf of ONGC, Mr Ashok Desai submitted that intention of the parties was necessary to be understood for the construction of contracts—meaning of a contract—which had to be gathered from the words used by the parties in the contract. Thus, when the parties had quite clearly mentioned in the contract for recovery from the contractor for breach of the contract as pre-estimated genuine LD and not as penalty, the contract was bound to do that, and there was no reason for the arbitral tribunal to arrive at a different conclusion, that is, of proving loss suffered by ONGC because of delay in supply of pipes. Also, while seeking extension, SAW Pipes did not object to the condition imposed by ONGC that LD would be deducted and still supplied the pipes. Neither raising an objection nor refusing to supply the pipes despite the conditional letter by ONGC stopped SAW Pipes from objecting later on. The Supreme Court did not agree with the lawyer for SAW Pipes and decided in favour of ONGC.

Comments and Questions There were elaborate arguments made by the counsel for both the parties. The Supreme Court decided the matter on LD after using an analogy of the construction of a road or a



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bridge. The court observed that if there was delay in the construction of a road or a bridge, what has been the loss to the society and the state would be a difficult calculation, and in the absence of any such objective calculation, it would be better to go ahead with deduction of LD as agreed between the parties. This has always been very difficult and the Comptroller and Auditor General of India (CAG) is now emphasising on performance audits, rather than going simply by the numbers. Performance audit includes the impact on society, social cost, loss which the society might have suffered and other intangible losses. As we understand, it is very difficult to arrive at a number to quantify these losses, and when it is compared to something objective and tangible like LD, any reasonable and prudent person would say that it is better to proceed further with enforcement of the LD clause. In the present case, it was admitted that there was delay in the supply of pipes, which was one of the reasons which led to a change in the deployment of the plan and the redeployment of the rigs. The parties had agreed to a pre-estimated compensation, and it was never argued that such compensation was unreasonable. The parties had clearly agreed that the payment of LD was in no way a penalty. At the time of delivery also, SAW Pipes was informed that it would have to pay LD. During these reasons, the Supreme Court made the following observation: ‘There was no reason for the tribunal not to rely upon the clear and unambiguous terms of agreement stipulating pre-estimate damages because of delay in supply of goods.’ Among other things, the Supreme Court held that it was not at all necessary every time for the aggrieved party to prove actual loss or damage. The court is expected to exercise discretion and award reasonable compensation in case of breach and now actual damage has been proved. Whenever it is not possible

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to quantify the compensation, it would be prudent for the court to award pre-estimated compensation if it is not by way of penalty. On this basis, the Supreme Court set aside the award, which meant that ONGC was legally justified in deducting LD. Also, ONGC was not supposed to prove any loss as the parties had agreed to a reasonable sum of money to be paid as pre-estimated genuine compensation to be awarded in case of breach of the contract. The question as to whether the amount agreed between the parties was reasonable or unreasonable is a ticklish one to be answered and the reasonableness of the amount had to be understood as per the context, which includes the parties, the events, time and place, special circumstances, if any, and so on and so forth. It is a subject decision to be made; however, discretion has to be exercised by the arbitral tribunal in making the decision. It cannot be done in an arbitrary manner devoid of any logic and objectivity. Keeping all these factors in mind, it can be concluded that in ordinary circumstances, the courts will stick to the contractual clauses, and only in exceptional cases will it deviate to arrive at a new meaning. We will discuss the ONGC versus SAW Pipes case once again, and in a little bit of detail from another perspective, in Chapter 10, a phrase which was given a liberal meaning by the Supreme Court. The case opened the floodgates for a number of challenges to awards on the basis of interpretation to public policy.

CASE 2: ONGC versus WesternGeco (Supreme Court of India, 2014) In 1999, ONGC wanted to upgrade one of its seismic survey vessels and for that purpose, certain equipment—streamers fitted with hydrophones—was needed. WesternGeco—a



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world famous company manufacturing seismic equipment and headquartered in the UK—entered into a contract with ONGC after bidding successfully for supply of the equipment of US origin. Interestingly, the tender conditions, according to ONGC did not mention the national origin of the equipment. Thereafter, 9/11 happened and WesternGeco was not able to get the equipment from the US. There was delay in supply of the equipment and WesternGeco suggested procuring the equipment from Canada instead of the US, with no financial implications for ONGC. To this proposal, ONGC agreed, but with a condition that for the delay LD would be deducted as per the contract. There was considerable delay on account of late reply by ONGC to the offer made by WesternGeco to supply Canadian equipment in place of the American one. ONGC deducted LD for the entire period of delay, and attributed it to WesternGeco, which used the force majeure clause—things beyond one’s control—to justify the delay. The dispute was referred to an arbitral tribunal of three former CJIs—a very rare arbitral tribunal. The tribunal held that there was definitely delay in handing over the vessel, but the entire delay could not be attributed to WesternGeco and, hence, ONGC should pay back with interest that sum of money which it deducted for the time of delay for which it was responsible itself. This amount was related to excess engagement charges. Regarding the LD, attributing a part of delay to ONGC did not make any difference as there was a capping provision for LD in the contract, and the cap was less than the amount payable to ONGC. The award was challenged by ONGC following the legal procedure and the case finally reached the Supreme Court of India. The bench disagreed with the tribunal partially and reduced the number of days attributed to ONGC for the delay. Thus, the award in favour of WesternGeco was reduced.

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Comments and Questions One of the most important and troublesome things for any business manager can be the exposure to open-ended LD. Such an exposure can be most damaging and may even make the entire business disappear with a court order. It is prudent to impose a cap on such LD so that the upper limit is known very well. On most of the occasions when we entire into contracts, there is a ceiling for compensation which is to be paid in case of breach of a contract. Whether it is dry-cleaning of a suit, dispatching a packet by courier or even ordering a pizza for delivery, there is an upper limit which shall be paid in case of breach and that is clearly told to the consumer. The basic principle remains the same for even big projects. Most of the contractors would like to have a cap on the LD, whereas the other party—usually called the employer—would like to have no such limit and claim the entire sum of money including consequential damage to be recovered from the contractor. This is often a major issue while negotiations are made. For instance, the nuclear liability issue between India as a country and private companies in the US is clearly being deliberated between the concerned parties about the liability. The private companies—without the sovereign guarantee of the US—are not in favour of unlimited liability, whereas India is keen to have the unlimited liability clause. What should a manager do while negotiating? There is no clear-cut answer to this. It all depends on the circumstances and the desperation for getting business from the other party. It is a tightrope walk and the ideal thing in such a situation is to follow the middle path. However, it all depends on the temperament of the parties. Some are highly risk-averse, whereas some are risk bearing. Some would like to grab a business opportunity at all cost, whereas some would play according to the well-set rules of business, law, finance and simple prudence. Thus, it is for the manager to make a



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decision according to the context and the ability of his/her company to take the risk. Another interesting point to be noted from this case is that an arbitral tribunal of three former CJIs is no guarantee that the award shall be enforced without challenge. Not even challenge, but there is no guarantee of the award being upheld by the courts. Hence, the managers need to understand that former judges of the Supreme Court and High Courts do bring a lot of legal expertise on the arbitral tribunal, but their word is not the final word. Each of the awards can be challenged. According to procedural law, it shall be challenged in the lowest court of competent jurisdiction, which in most of the cases is the Court of the District Judge and in some cases the High Court. Thereafter, the decision can be appealed at the High Court and Division Bench of the High Court, and after that at the Supreme Court. It may appear to be ironical that even the decision of the arbitral tribunal comprising three former CJIs has to go through the same process; in this process, each of the judicial officers applying his/her mind in different courts is junior to the arbitrators. There are some judges from the Supreme Court and the High Courts who willingly do not want to put themselves in such an embarrassing position and do not accept arbitration matters. Though it is true that the awards written by retired judges from the Supreme Court and the High Courts are given due regard and respect, there is no assurance that such awards will always be upheld. Business managers must be extremely cautious in appointing a retired judge to the arbitral tribunal. Until and unless the retired judge brings value—expertise, experience and erudition—there is no need to go for his appointment. Thus, do not appoint a retired judge to the arbitral tribunal only because of the fact that he is retired. The case as has been discussed had two components for compensation—LD and engagement charges. There was a

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cap for LD; however, as WesternGeco returned the vessel late, it was supposed to pay excess charges which were different from LD. A manager must understand to have a cap even on the excess engagement charges so that the ultimate amount of money which needs to be paid in case of delay is known beforehand. Another interesting aspect of the case was deduction of certain taxation charges that WesternGeco was supposed to pay because there was a change in taxation law in India and according to those changes WesternGeco was liable to pay a certain sum of money to the Government of India. ONGC had deducted that amount from the payment made to WesternGeco, which, however, stated that the vessel throughout the repairing period was at Singapore and, hence, there was no jurisdiction with the Indian tax authorities to impose any taxation. This was finally upheld by the Supreme Court of India. The bench of judges in the Supreme Court and the retired judges in the arbitral tribunal exercised their discretion while deciding the matter and arrived at different decisions. The facts remained the same, and the law also remained the same for each of the individual, but the authority to exercise discretionary power by each individual manning a different position made it possible to arrive at different decisions.

Takeaways for Managers

There are three most important things about LD that a business manager must understand. These are penalty, preestimated damages and mitigation of damages. One has to understand that the reasonable pre-decided and pre-estimated compensation is not penalty but is LD, and the aggrieved party deserves to be paid the complete



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amount without proving the loss suffered. On the contrary, if the agreement between the parties has been that only the loss suffered will be compensated, then the aggrieved party has to prove the loss. Another interesting aspect is that the job is not finished by simply proving the loss. The aggrieved party has to prove that it took all steps a reasonable will take to mitigate the loss. Mitigation is a very important principle used in determining the loss. It is the principle which states that the party which suffered loss must take all reasonable actions to minimise the loss suffered. Thus, the principle takes care of the mindset that because the other party is legally bound to compensate let me suffer the loss. Why should I take any steps to minimise the loss? There is an old saying in Hindi–Urdu: maal-e-muft, dil-eberaham, which means a person is careless with something available for free. A business manager must not think in this manner. It is a very negative thought and is detrimental to long-term business gains. Even legally, it will not hold good in a court of law. Thus, a business manager should be careful and vigilant, not only for the resources belonging to his/her company but also for those belonging to the partner in the contract. This approach helps extensively in avoiding disputes.

6

Force Majeure

Have you seen the delightful movie OMG: Oh My God! released in 2012 with Paresh Rawal, the versatile and highly talented actor, in the lead role? It was the story of a merchant whose antique shop was destroyed in an earthquake. He had insured his shop, but the insurance company denied his claim as the earthquake was an act of God and, hence, the insurance company was not liable. Thereafter, Rawal decided to sue God and the entertaining story started. The incidents which are beyond the control of human beings are said to be acts of God, and the clause in the contract, which exempts any liability, is called the force majeure clause.

Act of God One of the most important assumptions in a contract is that the parties will perform the contract to the best of their ability, and parties do enter into a contract in good faith. There are, however, certain situations in which, despite the best intentions, one of the parties may not be in a position to perform the contract. Some of these situations may be because of man-made reasons and some may be due to reasons beyond the control of human beings. For those situations which are beyond the control of human beings, any party, and rightly so, cannot be held liable for non-performance, as the understanding is that it is simply impossible humanly to do a certain set of activities due to special circumstances happening because of nature. These are commonly called ‘acts of God’.



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There are certain other situations which make the performance of contracts impossible but are not created due to acts of God; these situations may be due to certain decisions made by human beings, and the question arises as to what are those situations which allow a party not to perform and take the shelter of law, legitimately. This is often a very difficult decision, and the thin dividing line has to be made by the judge while deciding individual cases. Situations such as unprecedented earthquakes, floods, tsunami and rains fall in the first category and others such as strikes, war, curfew and riots fall in the second category. Most of the courts in different jurisdictions recognise and accept many situations beyond the control of human beings, both man-made and acts of God; however, the situations do vary in their implications geographically and even in the same geographical positions at different points of time. Thus, there is nothing universal for a particular event—for instance, snowfall, earthquake, rains, etc.—to be construed; it all depends on the context. Commercial difficulty for not performing a contract is not supposed to be force majeure. It is, rather, a business risk which one party takes while entering into a contract, and, is, therefore, bound by such a condition in the contract.

Model Concession Agreement and Force Majeure In 2006, the Planning Commission—now defunct and replaced by the National Institution for Transforming India Aayog (NITI Aayog)—released the model concession agreement for PPP in national highways. The document dealt in detail with force majeure and termination in part V. It included not only the natural events, but also non-political events, indirect political events and political events. It had

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provisions for the effect of the force majeure event on the concession agreement, allocation of costs arising out of this force majeure, termination notice for the force majeure event, termination payment, dispute resolution and excuse from the performance of obligations. The model concession agreement defined force majeure as: As used in this Agreement, the expression ‘Force Majeure’ or ‘Force Majeure Event’ shall mean occurrence in India of any or all of Non-Political Event, Indirect Political Event and Political Event as defined in Clauses 34.2, 34.3 and 34.4 respectively, if it affects the performance by the Party claiming the benefit of Force Majeure (the ‘Affected Party’) of its obligations under this Agreement, and which act or event (i) is beyond the reasonable control of the Affected Party, and (ii) the Affected Party could not have prevented or overcome by exercise of due diligence and following Good Industry Practice, and (iii) has Material Adverse Effect on the Affected Party.

The non-political events primarily included acts of God, strikes or boycotts, a court judgement, discovery of certain geological conditions and any of the events similar to earlier mentioned. Indirect political events included an act of war, industry-wide or state-wide strikes, civil commotion or political agitation, or any event similar to those mentioned earlier. Political events meant change in law, compulsory acquisition in national interest or expropriation of any project assets, unlawful renewal of any approval, license or permit necessary for the concessionaire to perform and other events similar to those mentioned earlier. Though the classification had been easier, the application was not so easy and it was extremely difficult to divide these events into three categories in a practical manner. It has been experienced in different court decisions that while



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making a decision, the bench of judges does not necessarily analyse the facts of the case by consciously putting them in one of the categories. It is the holistic picture of the situation at hand, which is to be evaluated and the decision arrived at by exercise of discretion, keeping in mind all the relevant facts and legal principles. Let us discuss a few cases.

CASE 1: ONGC versus SAW Pipes (Supreme Court of India, 2003)1 As discussed in the previous chapter on LD, the case ONGC versus SAW Pipes was to be decided on one critical issue and that was whether steam mill workers’ strike in Europe would be considered to be force majeure or not. Ordinarily, these matters may not be specifically dealt with in the contractual clauses and are left open to be decided at the time of interpretations to be made. Learning from such experiences, as I have noted earlier in this chapter, the model concession agreement drafted by the Planning Commission categorically mentioned not only about strikes, but even about political unrest. Though it is good to see clarity on paper while preparing the contract, yet it is not so easy for the parties to concur with the interpretation when a dispute arises. Typically, there is always room for more than one interpretation, especially in matters such as definition of the strike, law and order problems, political unrest and other events which may not be totally dependent on the intervention of the Almighty. Mere involvement of human beings makes it difficult to arrive at only a single interpretation. Something similar had happened in the present case. There was a strike in Europe for which SAW Pipes in India could have hardly done anything. It is absolutely beyond its control and something which could not have even been anticipated.

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But the probability of a strike happening in Europe was also not so low that a reasonable and highly evolved business party could not have even remotely thought about it and tried to safeguard its interest against any such eventuality. It was definitely not an act of God, and the arbitral tribunal was quite clear about this fact that workers’ strike could not fit under the definition of force majeure in the absence of an express understanding between the parties to that effect. Guided by this reasoning, the arbitral tribunal rightly decided that the workers’ strike was not an act of force majeure and that the defaulting party could not get the benefit of the protection of force majeure clause.

Comments and Questions Though the arbitral tribunal did not uphold the deduction of LD, yet, the Supreme Court upheld it making it absolutely clear that the force majeure clause could not be invoked and also ONGC need not have proved the losses suffered due to late delivery of pipes. Had the matter been decided the other way round—workers’ strike was within the ambit of the force majeure clause—it would have been a cakewalk for SAW Pipes. Thus, the moral of the story is that to protect its interests ONGC should in the future contracts very clearly mention the scope of the force majeure clause. Also, if any of the private parties, SAW Pipes in this case, is not interested to d business with ONGC on these terms and conditions, it could very well negotiate keeping its interest in mind.

CASE 2: Phulchand Exports Limited versus OOO Patriot (Supreme Court of India, 2011)2 In 1997, Phulchand Exports Ltd, Mumbai, India, entered into a contract with OOO Patriot, Moscow, Russia, for supply of 1,000 metric tons of Indian rice. The terms were CIF,



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Novorossiysk, Russia. It was at a fixed price which included almost everything—value of the goods, packing and marking, loading into hold, stowing of the cargo, fulfilling the customs formalities, insurance, freight charges, berthing charges and unloading charges. The total value of the contract was Indian `12,450,000. The sellers shipped the goods in January/February 1998. The vessel carrying the goods suffered an engine failure and it was declared ‘general average’ by the master of the vessel. It was taken in the salvage operation to the port of Eregli, Turkey. The Admiralty Court of Eregli ordered the vessel to be arrested towards the cost of rescue. The entire cargo was sold out. Thus, the goods—Indian rice—never reached the port of destination in Russia. The buyer—OOO Patriot—claimed insurance from the United India Insurance Co. Ltd in August 1998. The insurance company denied its liability, as according to the company the risk of detention was not covered. The insurance company informed both the buyer and the seller that they should proceed further as if the goods were not insured. In November 1998, the buyer invoked the arbitration clause in the International Court of Commercial Arbitration at the Chamber of Commerce and Industry of the Russian Federation. The seller, surprisingly, insisted that the risk in the goods had passed when the goods were loaded on the ship, and, therefore, it was not liable to compensate the buyer. The fact of the matter was that the contract was CIF and the seller was duty bound to deliver the goods at the port of destination. The Court of Arbitration held that the seller was not able to prove that the case was within the ambit of force majeure—engine failure was not supposed to be beyond the control of the seller, though indirectly—and hence it could not be discharged from its liability. The primary condition of the contract was the arrival of the cargo at the destination port, which never happened. For very interesting reasons—delay by buyers also in correspondence—the

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Court of Arbitration held that the buyer was not entitled to be fully compensated by the seller, and both the buyer and the seller would bear the loss equally. So, the seller was supposed to pay half the sum along with interest to the buyer. As the award of the Court of Arbitration was to be executed in India, the seller challenged the award in Bombay High Court on the grounds that it was in conflict with the public policy of India. The single judge bench did not find any merit in the challenge, and the same was the case in the division bench, and later on in the Supreme Court. While dismissing the challenge, the Supreme Court observed: Whether particular transaction is contrary to a public policy would ordinarily depend upon the nature of transaction. Where experienced businessmen are involved in a commercial contract and the parties are not of unequal bargaining power, the agreed terms must ordinarily be respected as the parties may be taken to have had regard to the matters known to them. The sellers and the buyers in the present case are business persons having no unequal bargaining powers. They agreed on all terms of the contract being in conformity with the international trade and commerce. Having regard to the subject matter of the contract, the clause for reimbursement or repayment in the circumstances provided therein is neither unreasonable nor unjust; far from being extravagant or unconscionable. It is the precise sum which the sellers are required to reimburse to the buyers, which they had received for the goods, in case of the non-arrival of the goods within the prescribed time. More so, the fact of the matter is that goods never arrived at the port of discharge. The Arbitral Tribunal has only awarded reimbursement of half the price paid by the buyers to the sellers and, therefore, the award cannot be held to be unjust, unreasonable or unconscionable or contrary to the public policy of India.… In view of the above there is no merit in the appeal and it is dismissed accordingly. Since the



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buyers (respondent) have not chosen to appear, there shall be no order as to costs.3

Comments and Questions This had been an interesting case involving two foreign parties with an international commercial arbitration clause. The issue pertained to the sale of goods and when the risk passes, along with the most crucial aspect of force majeure. Failure of engine was not agreed upon by the parties in the contract as force majeure, and hence, the Russian party had a clear claim. Also, the Indian seller had agreed for allinclusive prices which made it responsible for delivering the goods to the destination port and even unloading the goods. The aspect of force majeure was dealt by the Court of Arbitration in Russia and it was very clearly held that the shipping company was responsible directly and the seller was responsible indirectly. But the responsibility of the shipping company was to the seller and as per the contractual provisions it was a matter between the seller and the shipping company. Thus, even if it was held to be within the ambit of force majeure, the seller would still be liable to the buyer as the contract was CIF and risk in the goods had not passed to the buyer with the loading of goods on the shipping at the port of origin. As contradistinguished with CIF, the other type of contracts—on the other extreme—is FOB. It can also be FOR, which is Free on Rail. FOB is the general term for the goods being loaded on any means of transport as agreed and understood in the business world. If the contract is FOB, the responsibility of the seller is over once the goods are loaded on the carriage, whether a truck, a rail, a ship or an airplane. The risk in the goods passes with the loading of goods and for all practical purposes the title, that is ownership, also

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passes to the buyer once the goods have been loaded satisfactorily. Thereafter, it is a matter between the carrier and the buyer, not the seller. The seller’s job is done and it is the responsibility of the buyer. The carrier in such contracts acts as an agent of the buyer. However, in the present case of the rice seller and the Russian buyer, the contract was CIF, which in business transactions is clearly understood to imply the passing of ownership at the destination. Thus, the responsibility and liability of the seller continues till the end. It is discharged only when the buyer receives the goods to its satisfaction.

CASE 3: HPCL versus Batliboi (Bombay High Court, 2007)4 Hindustan Petroleum Corporation Limited (HPCL) had entered into a contract with Batliboi Environmental Engineers Limited for certain work to be done by Batliboi for HPCL. The contract had an arbitration clause of dispute resolution and also a force majeure clause. The work was to be completed in March 1993; however, it could not be completed, first, due to Mumbai riots in December 1992, and its immediate effects till March 1993, and, second, due to labour strike in HPCL in April 1993. Invoking the force majeure clause both for riots and strike, Batliboi sought an extension in July 1993, which was allowed by HPCL, without any mention of LD. About a year later, Batliboi again sought an extension on grounds of certain difficulties. HPCL granted the extension without mentioning that LD would be deducted. Also, Batliboi did not mention that the extension was sought because of delay on the part of HPCL and it would later claim compensation for the delay. Batliboi worked for some time and competed 80 per cent of the work; however, in 1996, it stopped the work



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completely and alleged that the delay was because of HPCL. It claimed compensation for the delay and invoked the arbitration clause. The arbitrator decided in favour of Batliboi and awarded compensation; however, the award was challenged by HPCL before a single judge bench in the Bombay High Court, which upheld the award. HPCL later on, appealed before a division bench in the Bombay High Court, which allowed the appeal and set aside the award and also the judgement of the single judge bench. The division bench of the Bombay High Court held that when the delay was due to force majeure—riots and strike—there could not be any delay because of HPCL, and, so, Batliboi could not take advantage of the situation later on. Also, the second delay was due to Batliboi, or it can be assumed that HPCL also contributed to the delay, and, hence, there was delay in the performance of the contract because of both the parties, and, again the entire delay could not be attributed only to HPCL. Thus, the arbitrator did not consider the facts and legal situation properly and arrived at a wrong conclusion. The Bombay High Court observed: Arbitrator is creation of the contract between the parties and he gets jurisdiction under the terms of contract. He is expected to interpret and apply provisions of the contract and pass an award accordingly. While passing the award he has to bear in mind the provisions of S. 28 of the Act, which clearly provides that in case of domestic arbitration in India, the Arbitral Tribunal shall decide the dispute in accordance with substantive law for the time in force in India. If the Arbitrator ignores the substantive law in force in India and passes an award, it is bound to cause injustice and is liable to be set aside. For example law requires that the claim should be within limitation. If the award is passed on a claim, which is clearly barred by the limitation, that will be against the provisions of law and the award cannot be sustained. In the present case, it is the contention of the petitioner that the learned Arbitrator ignored the terms of the contract, relevant documents as well as the provisions

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of S. 55 of the Contract Act and, therefore, the award is liable to be set aside. It will be necessary to examine the record to find out in the light of this contention…. On perusal of the record, it becomes clear that while the period of contract was to expire on 26-3-1993, the contractor sought extension of time by letter dated 3-7-1993. Paragraph 1 of that letter is material which reads as follows: ‘1. You are aware of the difficult period that we had gone through in the month of December 1992, January 1993 and March 1993 due to riots. This difficult period was followed by a labour strike in HPCL in the month of April 1993. A very good working period was lost due to force majeure conditions.’ From this it is clear that delay was not on account of any laches on the part of petitioner. The contractor himself accepted that very good working period was lost due to the force majeure conditions and this was one of the grounds on which the time could be extended under the contract and in such circumstances, no compensation could be claimed by the contractor merely because of delay.5

The Division Bench of the Bombay High Court held: Taking into consideration the terms of the contract, legal provisions and the award passed by the learned Arbitrator, it is clear that the award is clearly against the terms of the contract, provisions of law and in fact, it is perverse and cannot stand judicial scrutiny. In our considered opinion, the award is liable to be set aside. At the same time, we may also note that the petitioner is also not entitled to any counter claim on account of any delays on the part of the contractor as the petitioner had extended time on request of the contractor and that too without indicating that the petitioner would claim any compensation as required under S. 55 of the Contract Act. Though there was provision in terms of the contract for liquidated damages, in fact as pointed out above, the petitioner also could not establish that delay was only on account of the contractor. In view of the above, the appeal deserves to be allowed and the impugned judgment and the award are liable to be set aside.6



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Comments and Questions Comparing ONGC vs. SAW Pipes and HPCL vs. Batliboi These are two interesting cases and a comparison of them gives us certain useful insights. In both the cases, there was delay in performance of the contract. In ONGC, while extension was given, it was clearly mentioned in the letter that SAW Pipes would be liable to pay LD, and so these damages were deducted. In the case of HPCL, it was nowhere mentioned that Batliboi would be liable to pay LD while giving the extension letter. Also, Batliboi never mentioned that it would claim compensation for the delay in the execution of the work and that it was attributing the delay to HPCL. This lack of clarity at the outset, while giving the extension letter or demanding an extension, led to confusion and both the parties were not able to claim any compensation, neither LD nor compensation, because the delay alleged to be attributed to one of the parties. Thus, it can be said that for all practical purposes the delay was understood to be as per the force majeure clause, whereas, in the ONGC case, the workers’ strike was not counted as force majeure; hence SAW Pipes was held to be liable to pay for the delay caused as per the LD clause.

The Bombay Riots, 1992 India witnessed one of the worst rioting, postIndependence, in December 1992, in Mumbai. As per media reports, it all started after the demolition of the Babri mosque—some prefer to call it the disputed structure— in early December 1992, which led to severe polarisation among religious factions in the country, leading to deep mistrust and heightened feelings of taking revenge.

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About a thousand people were killed over a period of one to two months. Such anarchy and lack of law and order situation was neither routine nor normal, and it was highly unreasonable and imprudent to expect business to be continued as if nothing had happened. The situation was undoubtedly beyond anyone’s control, and in such a scenario, parties entering into commercial contracts could not be expected to perform the contract by keeping their promises. The situation was surely to be covered by the force majeure clause.

Takeaways for Managers

There are three important things for the manager to remember. One, commercial difficulty is not force majeure. Two, everything which is beyond an individual’s control is not force majeure. And, three, the most important, it is prudent to own up and not blame others. The contract law is very clear about the fact that any person entering into a contract must bear the risk. A party to a contract should not be able to wriggle out of the solemn promise it has made on the basis of frivolous excuses. There must be some seriousness into the contracts. At any given point of time, there may be a number of problems that an individual might face, and some of those may be beyond his control, but each and every problem cannot be taken as a ground for not performing a contract. For example, while leaving for duty a pilot is lovingly stopped by his child, and the doting father is not able to see even a single tear in the eyes of the young child as it is beyond his control, and so he did not report for duty. Should these circumstances be



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said to be something beyond one’s control and falling under the ambit of force majeure clause? Definitely not. Thus, it is important for a manager to understand that undue reliance on the force majeure clause will not take a company further. The same applies to commercial difficulty, which we have discussed earlier in this chapter. The third takeaway as we have talked about is to own up, rather than blaming it on others, when one has really done something wrong. There are two main reasons for this. The first is that it is the best to be honest and truthful in your dealings as it is always easy to defend the truth. The second is that in case you are on the wrong side and still blaming others, the courts take a very unfavourable stand. The bottom line in legal proceedings is to present your case with ‘clean hands’.

7

Arbitration Clause

Just imagine you have gone to a shop to buy a shirt to gift your friend on his birthday. You are in a hurry and point out a blue full-sleeve shirt to the salesperson. Next to it is hanging a blue half-sleeve shirt, a full-sleeve green shirt and a half-sleeve green shirt. You enquire about the price and size, which are `1,800 per shirt and ‘XL’, respectively. Blue is your friend’s favourite colour and to be sure about the colour you lay emphasis on buying only a blue shirt and not a green one. You tell him to gift-wrap it and to do it really fast. Within a few minutes you are carrying the gift with you and zooming to the friend’s place. With best wishes you hand over the gift and insist that he should open it right then. His eyes sparkle seeing the blue shirt but the very next moment when he unfolds it, his face shows disappointment. He is a Devanand fan and wears only full-sleeve, buttoned collar shirts; and the shirt you got for him is half-sleeved. You find it unbelievable. Incredulous! How can that happen? You knew all that and you have paid so much attention while making the purchase and have been extremely careful of keeping in mind his likings. But, a little slip and the fun is gone. Your intention was to make him happy and he also thanked you from the bottom of his heart, but on seeing a shirt which he cannot use he was not able to fake his disappointment. In the same manner, business managers have to be extre­ mely careful in working on each and every aspect. The intention, howsoever good, must be reflected in expressions— written and oral—that must be in alignment with actions and conduct. A slight mismatch in any of these can result in a



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faulty clause in a contract, which may appear fine when seen in isolation but does not convey the intention very well in the big picture.

Arbitration Clause Survives on Its Own Most of the contracts provide a clause describing the dispute resolution method to be adopted in case a dispute arises between the contracting parties. If the method to be adopted is arbitration, this particular clause is known as the arbitration clause. The arbitration clause can be either a part of the main contract itself, or it may be a separate contract on its own. In case it is a separate contract, it is linked with the main contract pertaining to the business, assuming the contract was entered for some business reasons. We would be talking about the business contracts, which involve commercial arbitration. It has been held in court decisions that an arbitration clause may survive even if the main contract maybe held null and void. This is very interesting as the survival of the arbitration clause is not fully dependent on the main contract.

Disputes Arising Due to the Clause It goes without saying that while the parties are entering into a contract, and deciding that any disputes shall be resolved through arbitration, the arbitration clause itself should not create disputes for the parties. But it is not uncommon to see that the arbitration clause becomes the root cause for the preliminary dispute, and for the interpretation of this clause, litigating parties have gone up to the Supreme Court. Whether one likes it or not, it is true that the Supreme Court, in such cases, would only decide the arbitration clause and not the original dispute between the parties, which, thereafter, needs

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to be decided as per the interpretation of the clause. So, it is possible—and it happens in certain cases—that after getting the final interpretation regarding the arbitration clause from the Supreme Court, the disputing parties go back to arbitration itself to get the substantive dispute resolved. Such an exercise can easily be avoided by having a little more faith and trust in the other party; but, as is quite obvious, once a dispute arises between the parties all the trust and faith vanish into thin air and the respondent—against whom the claim is filed—typically tries its best to delay the matter, and the existence of an ambiguous clause is surely welcome.

Arbitration Agreement under the New Arbitration Law Section 7 of the 1996 Act defines arbitration agreement and lays emphasis on the fact that any arbitration agreement must be in writing. It is reproduced in the appendix for ready reference. According to the section, the parties may agree for arbitration for any past disputes, future disputes, all the disputes which may arise related to certain work or some specific disputes. The section further says that the arbitration agreement may be part of the contract or a separate contract. It should necessarily be in writing. This is a clear departure from the early 1940 law, which did not specifically make it compulsory to be in writing. Writing can be interpreted as exchange of letters, an electronic communication, a document signed by both the parties, etc. Thus, a very broad meaning has been given to the term ‘writing’. The contract law in India, however, is different and allows even oral agreements to be recognised as contracts. With the experience of the earlier law in the country—the Arbitration Act, 1940—which did not clearly state that the



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arbitration agreement should only be in writing, the lawmakers felt the importance of having a written clause, so as to ensure having minimum number of disputes, at least because of the clause itself.

Hitting the ‘Send’ Button As the law does not strictly say that a written clause means only when both the parties sign on a piece of paper at one time, a written clause can be inferred from an exchange of written communication, which can even be in electronic format. With a large number of modern day tools of communication, which have almost made hard copy of a letter as a rarity, the parties do interact with each other, primarily with electronic means of communication, saving time in communicating and thereafter responding. But as there may be a negative side of even some of the most positive things, electronic communication also may create disputes because of the agility shown by a sizeable number of persons in responding by pressing or touching the ‘send’ button, without adequately thinking about the issue. An interesting case has been between the German company and an Indian company regarding the transfer of technology, intellectual property license agreement (IPLA) and whether there was a concluded arbitration clause between the parties or not.

CASE 1: Enercon (India) versus Enercon GmbH (Supreme Court of India, 2014)1 In a case involving two wind energy companies—one German and another Indian—besides the original business dispute, there was a dispute between the parties regarding the dispute resolution clause itself. The German company insisted

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that there had been mutual communication through letters, e-mail and even text messages, which should all be interpreted to be leading to a concluded contract with the dispute resolution clause providing for arbitration in London. On the other hand, the Indian company was of the view and argued the same in the court that there had never been a concluded contract between the parties, and in the absence of a concluded contract, there was no question of an arbitration clause which the parties had agreed upon. According to the Indian company, there was no concluded contract and the parties had just entered into the ‘Agreed Principles’ on 29 September 2006, to which a draft IPLA was annexed. The relevant clauses of the IPLA as cited in the judgement and relied on by the German company clearly mentioned that the substantive law for the contract and the dispute resolution shall be the Indian law. It also mentioned that in case of any disputes, controversies or differences, the parties would try to resolve them amicably by mutual consultation; however, if it was not possible within 30 days after the commencement of discussions, the parties would get the dispute resolved through arbitration, and the number of arbitrators would be three. The German party had the right to appoint the presiding arbitrator. Proceedings were to be conducted in English language in London. In May 2006, the parties had agreed regarding the heads of agreement for the proposed IPLA. It provided for the German law to be the governing law for the agreement. It also mentioned that the parties had proceeded on the basis of good faith and these heads of agreement were not legally binding, and the primary purpose was to agree on certain principles. There was utter confusion with the Indian party claiming that there was no concluded contract, and hence, there could be no arbitration proceedings, whereas the German



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company vehemently said that there was a concluded contract in the shape of IPLA, and other agreements, and therefore, both the parties were bound by the arbitration clause, which provided for arbitration in London. To get this issue resolved the parties filed several petitions—in the district court in Daman, the Bombay High Court, the Supreme Court of India and also in courts in London. Finally, the matter was decided by the Supreme Court of India in February 2014, when the court held that it appeared that when the parties had decided to enter into a business agreement in 1994, they had since then decided that the disputes shall be resolved through arbitration in London.

Comments and Questions It can easily be seen that there were contradictory things mentioned in the communication between the parties. There was not one single document which was accepted by both parties as the concluded contract. With so many exchanges being made, each party relied on the communication that favoured it. The Supreme Court, however, held that the absence of a concluded contract after 10 years of the initial contract—in 2004—would not cast a shadow on the applicability of the dispute resolution clause agreed by the parties in the very beginning. But, it had been a very long legal journey for both the parties and the parties must have wasted huge sums of money, time and effort. All these resources could have been very well utilised by the parties for their business had the parties been a bit more cautious at the time of entering into the contract, and making it clear as to whether the arbitration clause would be applicable or not. One question that arises is: Was it not possible for the parties to anticipate the problems which could have arisen

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due to the absence of a clear-cut and a single piece of paper recognised as a contract? It is difficult to agree that wellinformed business parties were not able to anticipate such a problem. Now, if they could have anticipated, then why did they not take action to prevent avoidable disputes? Any reasonable and prudent business manager would take note of such issues which could easily be anticipated and tackled at the earliest opportunity. Remember, a stitch in time saves nine. Let us go through the reasoning of the Supreme Court while arriving at the final decision. The Supreme Court had to reason it out as to why the courts in India would have exclusive jurisdiction. Though the venue of arbitration was London, it did not mean that the seat of arbitration was London. The difference between the venue and seat of arbitration was discussed and the fact that the contract had to be performed in India was taking into consideration. With none of the parties being English, it was not possible for the Supreme Court of India to agree to the jurisdiction of the English courts simply on the basis of London being the venue for arbitration. The Supreme Court upheld the supremacy of arbitration and party autonomy. It ordered that all the disputes related to all the agreements, including the status of IPLA being a concluded contract or not to the arbitral tribunal. The Supreme Court decided on the following words, ‘All the disputes arising between the parties in relation to the following agreements viz. SHA, TKHA, SSHAs and STKHA, Agreed Principles and IPLA, including the controversy as to whether IPLA is a concluded contract are referred to the Arbitral Tribunal for adjudication.’2 It is useful to understand abbreviations used in this judgement. SHA meant Share Holding Agreement, TKHA meant Technical Know-How Agreement, SSHAs meant



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Supplementary Share Holding Agreements, and STKHA meant Supplementary Technical Know-How Agreement. After recognising the fact that the matter needs to be decided in arbitration, and the courts in India would have jurisdiction over the arbitration as contradistinguished with the English courts, the Supreme Court went a step further. It appointed the third arbitrator who would be presiding over the arbitral tribunal. It observed: In the normal circumstances, we would have directed the parties to approach the two learned arbitrators … to appoint … the presiding arbitrator. However, keeping in view the peculiar facts and circumstances of this case and the inordinate delay which has been caused due to the extremely convoluted and complicated proceedings indulged in by the parties, we deem it appropriate to take it upon ourselves to name the third arbitrator.3

This is unusual as the core issues to be decided by the Supreme Court did not include appointment of the third arbitrator; however, the court took a pragmatic and proactive approach, though not legally very sound as far as fundamental principles of practice of arbitration law are concerned. But such is the wide power of discretion of the Supreme Court that even such an action would fall under the ambit of its powers. With such exercise of power by the Supreme Court, a question arises about the party autonomy and the intention of the parties while entering into a contract. Appointment of an arbitrator is a matter to be decided by the parties themselves, and in the absence of an application made for appointing an arbitrator, the Supreme Court action may amount to interference of court in arbitration proceedings. However, when neither of the parties has raised any objection to the decision of the Supreme Court, it would be deemed to be accepted by them.

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All this could have been avoided had the communication between the parties been clear and the dispute resolution clause been firm.

CASE 2: Wellington Associates versus Kirit Mehta (Supreme Court of India)4 In 1995, Wellington Associates Inc., a company registered in the Republic of Mauritius, entered into a contract with Kirit Mehta, who was the promoter and managing director of CMM Ltd, Mumbai. The contract was for dealing in equity shares with an interesting dispute resolution clause. After going through the clause it was not clear whether the parties wanted the disputes to be resolved in the courts in Mumbai or through arbitration. Let us have a look at the clauses: Clause 4: It is hereby agreed that, if any dispute arises in connection with these presents, only Courts in Bombay would have jurisdiction to try and determine the suit and the parties hereto submit themselves to the exclusive jurisdiction of the Courts in Bombay. Clause 5: It is also agreed by and between the parties that any dispute or differences arising in connection with these presents may be referred to arbitration in pursuance of the Arbitration Act, 1947 [sic], by each party appointing one arbitrator and the arbitrators so appointed selecting an umpire. The venue of arbitration shall be at Bombay.5

A dispute arose between the parties and Wellington Associates invoked arbitration clause as mentioned above in Clause 5 and appointed its arbitrator. Kirit Mehta, however, did not agree and relied on Clause 4, which mentioned that courts in Mumbai would have exclusive jurisdiction. The matter ultimately reached the Supreme Court of India, which decided that the clauses were not clear and, hence,



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it was not possible for the court to conclude that the parties intended to get the disputes resolved through arbitration. The Supreme Court ordered that the parties were, however, free to initiate arbitration, if they wished to do so. Otherwise, the matter would have to be decided in the lowest court of competent jurisdiction.

Comments and Questions The clauses, as is obvious, did not give a clear indication as to what the intention of the parties was. Whether the parties wanted the disputes to be resolved in courts or did they want the matter to be resolved through arbitration was not at all clear. In case any of the clauses is ambiguous, typically one party likes to go ahead with one meaning, whereas the other prefers to stick to the other meaning. The same happened in this case. One party relied on the words used in Clause 5—may be referred—and argued that ‘may be’ meant that it was not at all mandatory to refer the matter to arbitration; however, it was simply a suggestion and provided a choice to the parties. On the contrary, Wellington Associates argued that ‘may be’ had to be interpreted as ‘shall’, because once the parties had entered into a contract providing a dispute resolution clause with arbitration as the mechanism for resolving disputes, it was a mandatory clause, and with that clause the parties had agreed to exclude the jurisdiction of courts. These contradictory provisions in the contract nullified the existence of any dispute resolution clause and the parties were back to square one. The parties to any contract are always free to refer any dispute to arbitration, if they had not decided to do that before the dispute arose, and they are also free to file the case in the lowest court of competent jurisdiction if they do not want to take the matter to arbitration.

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However, in case the parties had decided to refer any matter to arbitration, the parties waive their freedom and become bound to get the dispute resolved through arbitration only. One question needs to be answered. Were the parties at the time of drafting the contract not able to understand the implications of putting the two clauses together? On a plain and simple reading, the two clauses seem to convey two different meanings; however, a harmonious construction may imply that the parties intended to get the disputes resolved through arbitration, but for any proceedings post-arbitration, the parties had the intention of getting that resolved only in courts in Mumbai. Now this can be one of the interpretations which could be given to the two clauses, if read together. The other interpretation, obviously, is reading the two statements in contradiction. Needless to say, the parties must have a clear understanding while drafting the contract and the 7Cs of communication come handy at that time. Let us have a cursory look at them.

7Cs of Communication 1. Complete—the clauses of the contract and the contract as a whole must be complete in themselves. 2. Concise—it should be written in as few words as possible, however, not at the cost of being incomplete. Brevity is the soul of wit. Verbose clauses are of no use. Rambling does not help in gathering the real meaning. 3. Content—there must be some content in the contract which is the core part and has to be communicated to the other party. The main content must stand out in the document. It should be conspicuous and not hidden in heaps of words. 4. Context—a contract document needs to refer to the context in which the clauses have to be interpreted,



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as a change in the context may give a completely new meaning to the words used in a particular clause. 5. Courteous—the clauses should have a semblance of courteous communication and words have to be carefully used keeping in mind the other party and the business and social norms. 6. Clear—there must be absolute clarity on what the parties want to convey to each other, and to any third person who reads the document. They should not be any scope for ambiguity. 7. Correct—whatever statements have been made in the contractual document must be correct factually. The parties must also express their correct intention regarding the rights and obligations. By having a clear understanding while drafting a contract, and using the above-mentioned 7Cs as a checklist before finalising it, many issues which arise during the performance of a contract can easily be avoided, and if needed can be resolved speedily and effectively.

CASE 3: Shin Satellite versus Jain Studios (Supreme Court of India, 2006)6 In 1999, Shin Satellite, a company registered in Thailand, entered into a contract with Jain Studios, an Indian company, New Delhi, for availing broadcasting services. There was a dispute resolution clause, numbered 23, providing for arbitration. When certain disputes arose, Shin Satellite invoked the arbitration clause and appointed an arbitrator; however, Jain Studios did not agree and contended that there was no valid arbitration clause between the parties. The clause provided for any dispute to be resolved by arbitration under UNCITRAL rules. The seat of arbitration was decided as

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New Delhi, and the language to be used for proceedings was agreed upon as the English language. The clause also provided that the decision of the arbitrator would be final and binding, and the parties had waived their rights to appeal or challenge the award in any jurisdiction. Jain Studios had objected that by making the award as final and binding and by waiving their rights to appeal or challenge the award, the parties had violated Section 28 of the Arbitration and Conciliation Act, 1996, and also the provision was against public policy. Section 28 provides that any arbitration clause cannot be against the substantive law of the country, and providing the right to appeal or challenge the award is one of the most fundamental rights, which cannot be waived by an agreement between the parties. Shin Satellite argued that the agreement also provided for severability of clauses, which means that any particular clause which needs to be invalidated can be done, without having a negative impact on the remaining clauses. This clause was itself provided in Clause 20. It is useful to go through the complete clauses, which are reproduced: Clause 23. Arbitration: Any dispute arising from the interpretation or from any matter relating to the performance of this Agreement or relating to any right or obligation herein contained which cannot be resolved by the parties shall be referred to and finally resolved by arbitration under the rules of the United Nations Commission on International Trade Law (UNCITRAL). The arbitration shall be held in New Delhi and shall be in the English language. The arbitrator’s determination shall be final and binding between the parties and the parties waive all rights of appeal or objection in any jurisdiction. The costs of the arbitration shall be shared by the parties equally.   Clause 20. Severability: If any provision of this agreement is held invalid, illegal or unenforceable for any reason, including by judgment of, or interpretation of, relevant law, by any Court of competent jurisdiction, the continuation in



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full force and effect of the remainder of them shall not be prejudiced.

Clause 20 very clearly provides for severability, and hence, Shin Satellite argued that if the portion pertaining to waiver of rights to appeal or challenge the award were invalid, this could easily be severed, and rest of the contract could be enforced. The Supreme Court upheld the arbitration clause by using the blue pencil doctrine and severing the invalid portion.

Comments and Questions One of the important things which has often been highlighted and emphasised by the courts in India is that even if one of the parties expressly mentions it in a contract that the other party waives its rights to appeal or raise the matter in a higher court, such a provision does not have legal validity, and because of this reason it is not proper to consider the entire contract as invalid. The Constitution of India, in very strong terms, provides the right to legal remedies as a fundamental right, and the doors of courts are always open for the litigants. One of the exceptions is the arbitration law itself, which provides that if two parties have agreed to get the disputes resolved through arbitration rather than normal litigation, they are bound by this agreement, and it is not a violation of any of the fundamental rights or civil rights. Now it is to be considered whether closing the doors for challenging an award will constitute the violation of the basic rights or will it be conflicting with the public policy of the country, which undeniably recognises the supremacy of courts vis-àvis arbitral tribunals. It has been held by the courts that forcing the parties to get the dispute resolved through arbitration once they have agreed to do so is desirable, so that a party cannot

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repudiate its solemn promise; however, keeping the higher courts accessible for challenging the award is not only desirable but essential to uphold the dignity and majesty of the courts in any country. It is beyond imagination to even consider that an arbitral tribunal can be of equal status of that of the Supreme Court of a country. The courts necessarily must have the last say, so that a parallel system of arbitral tribunals is not beyond a judicial review. For this very purpose, the courts use the blue pencil doctrine. It has been used by the British courts for almost hundred years to somehow save the provisions of a contract which are valid and exclude some invalid ones, rather than holding the entire contract as void. However, it can only be done in cases when severance of enforceable parts is possible by using the blue pencil. The colour blue needs to be contradistinguished with the red colour, which signifies nullity while being used in proceedings. The same principle has been followed by Indian courts in Indian cases. The problem arises if the invalid and valid portions of a contract are so intertwined that it is impossible to separate the two, and in such a case severance is not possible. Let us take an example of an apple. If a portion of an apple is rotten, then that portion can easily be pared with a knife, but if a rotten apple has been used along with good apples to make apple juice, the juice prepared with rotten apple cannot be separated from the juice prepared with good apples, and hence, the entire juice becomes unfit for consumption. Thus, if an arbitration clause is so separately written in the contract that it can be taken out with ease, this clause can survive even if the entire contract is declared to be invalid and void. Arbitration clause in several contracts survives, particularly when the contract itself becomes void due to undesirable issues.



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Takeaways for Managers

1. Undue Haste. One of the most commonly observed reasons for confusion in dispute resolution clause is the undue haste with which parties act at the time of entering into a business deal. As is normally seen, there is a tendency to pay utmost attention to the business details; however, legal aspects take a back seat and often dispute resolution clauses do not even find mention in the list of agenda items to be discussed between the parties at the time of negotiation. This is of utmost importance as businesspersons would not like to be embroiled in controversies if a dispute is unnecessary, particularly those disputes which can be easily avoided by being clear at the time of formation of the contract. A little bit of circumspection at that time is of great value for the future relationship to be strong. 2. Lack of Understanding. It has also been observed on a number of occasions that business parties do not have a very good or clear understanding regarding the dispute resolution procedure to be followed, particularly when they are entering into an international business contract. Lack of knowledge and understanding of the legal aspects, coupled with aversion for the legal issues makes it uncertain and unpredictable, and if both the parties believe in ‘ignorance is bliss’, then, of course, they suffer whenever a dispute arises; at that time the party in a better bargaining power position is able to dominate, which precisely is contrary to the objective of a weaker party in a business contract at the time of formation of a contract. One of the main purposes

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of entering into a contract is to strengthen the position of the weak party and provide legal ammunition in the form of enforceable clauses in the contract. It is, therefore, necessary that the parties themselves develop an understanding of the legal provisions, and if they are not in a position to do that, they should be willing to take the help of legal counsel at the earliest opportunity, preferably at the time of formation of the contract. 3. The Devil Is in the Detail. A closely related issue with ‘lack of understanding’ is the importance of going into the details of a contract, particularly the dispute resolution clause mentioning arbitration. It is very often seen that if one of the parties is able to understand the skeletal structure of the contract and other clauses, there may be certain very important and critical words and phrases used in the clauses which may, along with punctuation marks, give an entirely different meaning to what the parties, specifically one of the parties, understood while entering into the contract. There should not be any disconnect between the parties in terms of their understanding and what is written in the clause to ensure that there is no difference. It is essential for the parties to understand the details of the dispute resolution clause to the last word and the last punctuation mark. For this purpose, the help of an able legal counsel is needed, and, therefore, for successful businesses—which in other words, also means successful dispute resolution and avoidance—a competent legal counsel acts as a friend, philosopher and guide. The beauty of law is and its interpretation and a single line contract may suffice the purpose if the parties have clarity; however, in case the parties are not clear about it, extremely long contracts even with hundreds of pages may not serve the purpose.



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4. Too Vague or Too Precise. On many occasions, the dispute resolution clauses are found to be extremely vague with just a faint idea expressed in writing about how the parties intend to resolve the dispute. In case a dispute arises. Such a clause works very well when the parties have mutual trust and faith and are willing to resolve the dispute in an amicable manner with their best efforts; however, it has been experienced that whenever a dispute arises the parties are not willing to agree on anything, and the dispute resolution clause itself becomes the first victim. It is, therefore, important not to leave the dispute resolution clause too vague and at least specify some of the essential elements, such as the applicable law, jurisdiction of which court, institutional or ad hoc arbitration, seat of arbitration, number of arbitrators, language to be used and a couple of other essential things which the parties can very well anticipate at the time of entering the contract. But, making the dispute resolution clause too precise also has its own problems. The major problem is that of tying the hands of the parties at the back and leaving them with almost no option and flexibility in making prudent choices at the time of resolving the dispute. It is very simple to understand that when a dispute arises, one party would like to continue delaying the resolution, whereas the other party would like to hasten the process. A little bit of flexibility is definitely needed, and if the parties had made the resolution clause so precise that there is no room for flexibility, then things become absolutely rigid and it is difficult to make it work. Hence, a fine balance needs to be achieved and that depends on the discretion of the parties at the time of entering the contract. 5. Unworkable. Besides the reason of the dispute resolution clause being either too vague or too precise, there

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are other reasons which may make the resolution clause unworkable. The most notable reasons are nomination of an unsuitable person as an arbitrator at the outset or the parties being in agreement for the arbitral expenses at the time of entering the contract without understanding the implications. It is extremely important for the parties to understand at the time of the formation of a contract that the clause must be realistic in nature, and therefore, the parties must make efforts to resolve the business dispute, rather than trying to set very high standards which may not be achievable for the parties concerned. This may be related to the qualifications of an arbitrator, choice of the venue, choice of the organisation in case the parties have decided to go for institutional arbitration, the engagement of lawyers, etc. For every such thing, there are different levels of services available, and it is for the parties to decide—jointly and severally—as to how to prioritise their requirements and to what level—both high and low—would each like to swing. 6. Heavily One-sided. It is the endeavour of the party having more bargaining power in a contractual relationship to get the contract, including the dispute resolution clause drafted in a manner which suits that party; however, the extra zeal and enthusiasm to get a contract drafted in a manner which is heavily tilted in its favour may boomerang, even if the other party is willing to sign on the dotted line. The most important thing for a contract is that it should be fair, and even if the party with a better bargaining power has got the contract drafted to suit it, it should not be heavily one-sided as such contracts may not be upheld in a court of law—particularly in democratic countries with evolved judiciary, keeping public interest in mind.



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Egalitarian values and public interest are paramount in a large number of countries were one-sided contracts are looked down upon, and courts—as we have seen very often in India—can go to the extent of exercising their extraordinary discretion to terminate such contracts. Thus, what is important for prudent business is to realise that lopsided contracts in favour of one party may not serve the purpose at the end of the day. Hence, the contracts should be reasonable and just, providing almost equal and fair opportunity to both the parties in the contract for both performance and resolution of any disputes.

8

Mandate of an Arbitrator

Have you read the short story Panch Parmeshwar written by the legendary Hindi story writer Munshi Premchand? If not, it is in very brief as follows. If yes, your memory will be refreshed. In a village in India, there were two friends—Jumman Sheikh and Algu Choudhary. Jumman had an old aunt who gifted him her entire property. After the registration of the property in his name, Jumman and his wife started ill-treating the aunt. In those days, disputes were resolved by a panchayat, comprising five elderly, wise persons of the village called panch with the presiding person called sarpanch. The aunt referred the matter to the panchayat and nominated Algu as the sarpanch. The aunt reminded Algu that for a panch there is no friend and no enemy. A panch must be neutral and totally unbiased. The moment Algu took over the position of sarpanch, he was filled with a sense of responsibility and duty. He decided the case in an unbiased manner, without letting the bond of friendship interfere with the decision-making. The decision went in favour of the aunt. Since then, Jumman Sheikh became Algu’s sworn enemy, and he kept seeking for an opportunity to take revenge. As luck would have it, sometime later, there was a dispute between Algu and the village moneylender. The panchayat was called for resolving the dispute and the moneylender nominated Jumman Sheikh as sarpanch. Everyone thought that the moneylender had played the masterstroke and Jumman would surely decide against Algu. But, the same thing happened again. The moment Jumman took over the



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position of sarpanch, he kept all animosity with Algu aside and decided the dispute on merit in Algu’s favour. Everyone in the village praised the spirit and dignity of the panchayat and the role of the panch. They equated the panch with God and, hence, the name of the story was Panch Parmeshwar. There cannot be a better portrayal of the appointment and mandate of an arbitrator, who is a modern-day panch.

Creation of the Contract An arbitrator is the creation of a contract and the mandate of the arbitrator or arbitrators is determined by the arbitration clause. Principles applicable to any contract also apply to the arbitration clause, and, therefore, also apply to the mandate of an arbitrator. A contract is created by the mutual consent of two or more parties, and the same applies to the appointment of an arbitrator. Thus, an arbitrator or arbitrators are chosen mutually by the parties. In case there is more than one arbitrator, typically three, the method usually adopted is to allow each party to appoint one arbitrator and then the third arbitrator is appointed either by mutual consent of the first two arbitrators appointed by the two parties or by an independent organisation which has expertise in the subject matter of the dispute. There is also a possibility that the third arbitrator may be appointed by a professional institution conducting arbitration.

Within the Four Corners of the Contract Whatever is the method of appointment of the arbitrator, the periphery within which the arbitrator can function is determined by the two parties—based on the principle of party autonomy—and the arbitrator has to respect the outer

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boundary within which he/she is supposed to conduct the proceedings. Thus, the arbitrator has to work within the four corners of the contract. In case an arbitrator transgresses the boundary, both the parties may either ratify such transgression or, in case one party does not accept this transgression, it may challenge the conduct of the arbitrator in a court of law. In all probability, the courts strike down any decision made by the arbitrator which goes beyond the acceptable limits of the parties; there is an imminent risk in such transgression as the courts can even strike down all the decisions made by the arbitrator, whether within or without the acceptable boundary. It, therefore, goes without saying that the arbitrator must always conscientiously work within the periphery and avoid the temptation of going even a little beyond as besides the dispute in hand; the reputation of the arbitrators also is at stake. Any arbitrator would not like to have his/her decisions made during the arbitration proceedings challenged in a court and the court coming to a conclusion that the arbitrator did not have any mandate to do so. In case it is so held, it is one of the worst forms of humiliation and embarrassment for the arbitrator.

Appointment of an Arbitrator(s) The appointment of an arbitrator can be a tricky business. The basic premise is that the arbitrator is appointed by mutual consent of the parties. It depends on the arbitration clause as to which party will first suggest the name of an arbitrator. However, usually it is the party which invokes the arbitration clause that gets the opportunity to first suggest the name of an arbitrator. Typically, a party will suggest the name of an arbitrator with whom it might be comfortable in working. It must have evaluated the pros and cons, and



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thereafter concluded that that particular person would be more suitable to decide the dispute at hand. But, it is not necessary that the other party may give its consent for the suggestion made by the first party. The fact of the matter is that usually the other party either outrightly rejects the suggestion or gives its consent with conditions. Let us take a simple situation. The disputing parties are A and B, with an arbitration clause in the contract for a sole arbitrator. A dispute arises, and ‘A’ invokes the arbitration clause and suggests ‘P’ as the arbitrator. ‘B’ rejects the suggestion and instead suggests ‘Q’ as the arbitrator. A rejects Q, and suggests R. B rejects R and suggests S. A rejects S, and suggests …. The story goes on. There is no end to it. The purpose of arbitration gets defeated in this process as the parties are not able to arrive at mutual agreement for the appointment of an arbitrator. The situation becomes extremely difficult and complex when there is more than one arbitrator to be appointed for dispute resolution. Is there a way out?

Appointment by a Court In such a scenario, the arbitration law provides for the appointment of an arbitrator by the court. Ironical though it may sound, that is the only option available despite the basic purpose of avoiding the courts by choosing for the resolution of disputes by arbitration. The 1996 law in the country provides for the appointment of arbitrators for domestic arbitrations by the High Courts, and for international commercial arbitrations by the Supreme Court of India. Section 11 of the 1996 Act deals with this, and is reproduced in the appendix. However, the crux of Section 11 is to give ample freedom to the parties to appoint an arbitrator or arbitrators of their choice, but in case they are not able to

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do so for any reason, the Act gives adequate powers to the High Courts and the Supreme Court to make the necessary appointments so that the matter does not reach a deadlock, and there is some mechanism by which the dispute can be resolved despite disagreement between the parties even for the appointment of an arbitrator. At times, one of the parties may try to misuse the provisions of Section 11 by using the influence of the courts in the appointment of arbitrators, so that it does not have to stick to the arbitration clause agreed upon between the parties.

Terminating the Mandate of the Arbitral Tribunal Arbitrators are a creation of the contract between the parties, and, hence, their mandate also lasts till such time that the parties have confidence in them. This was observed by the Bombay High Court in the HPCL case. ‘Arbitrator is creation of the contract between the parties and he gets jurisdiction under the terms of contract. He is expected to interpret and apply provisions of the contract and pass an award accordingly.’1 However, in case of a dispute, it rarely happens that both the parties to a dispute and a contract lose confidence in the arbitrators. Often, one of the parties loses confidence due to a variety of reasons, such as new information about the arbitrators, incompetence because of lack of knowledge of the subject matter, jurisdictional incompetence, bias towards one party and misconducting himself or the proceedings. In such a scenario, it is not at all prudent to continue with the arbitral tribunal and stick to the fundamental principle of arbitration that the award shall be binding on the parties. It would be a mockery of justice in the name of resolution of dispute if it is allowed to happen. To take care of such situations, the arbitration law provides for a mechanism. Any party may object to the mandate



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of the arbitrators. Not to allow such objections to be made in a very easy and routine manner, and also to minimise the intervention of the courts, the new arbitration law—the 1996 Act—provides for the objection to be made before the arbitral tribunal itself, and that too at a fairly early stage, that is, at the time of filing of the reply to the claim made. As is obvious, if certain new information comes to the knowledge of either of the parties, then the objection has to be made at the earliest given opportunity. In all likelihood, the arbitrators would deny and continue with the proceedings, but the entire proceedings can be challenged later on in a court of competent jurisdiction. Thus, it is essential to object to the mandate of the arbitrators at an early stage. How early? This shall be decided as per the facts of each and every case, and in case objection is not made at that right time, it cannot be done later. The purpose is that the party making an allegation against the tribunal cannot simply sleep over the matter and rake up the issue of terminating the mandate at any time according to its convenience and need. To a large extent, such legal provisions ensure that the parties do not object to the mandate just for the heck of it. There must be seriousness shown on the part of the party making such an objection, and also a sense of urgency. Objection to an appointment should, in all propriety, be made either at the time of appointment or at the earliest opportunity. Let us discuss two cases highlighting appointment and termination.

CASE 1: You One Engineering versus NHAI (Supreme Court of India, 2006)2 You One Engineering of South Korea and the NHAI— National Highways Authority of India—had entered into three contracts for the construction of highways as part of

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the National Highways Development Programme in different areas. These pertained to Delhi, Hyderabad and Visakhapatnam. After partial execution of the contract, disputes arose between the parties and the contract was terminated in December 2004. The arbitration clause was invoked by the South Korean company, claiming the payment of consequential damages due to the alleged illegal and arbitrary termination of the contract. To appreciate the facts further, it would be useful to go through the relevant clauses of the contract, which provided for the resolution of disputes by arbitration. The arbitration clause provided that any dispute with the Indian contractor would be settled by arbitration following the new arbitration law in India, the 1996 Act. There would be three arbitrators, one each appointed by the two parties and the third appointed by the two arbitrators so appointed. The third arbitrator would act as the presiding arbitrator. It was also provided that if the two arbitrators fail to reach any conclusion to appoint the third arbitrator, the presiding arbitrator shall be appointed by the president, Indian Road Congress. The clause also provided that in case of a foreign contractor the dispute would be resolved as per the UNCITRAL arbitration rules. There would be three arbitrators, one each appointed by the two parties, and the third and presiding appointed by the two arbitrators so chosen. Again, if the two arbitrators fail to appoint the third arbitrator within a period of 30 days, the president of the Indian Road Congress would appoint the third arbitrator who would act as the presiding arbitrator. To this effect, the clause was similar, both for Indian contractors and foreign contractors, with the only difference being in the applicable law. For domestic arbitration, the applicable law was the Indian law of 1996, whereas for foreign contracts, the applicable law was the UNCITRAL rules.



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The clause clearly defined the Indian contractor and a foreign contractor as: [T]he term ‘Indian Contractor’ means a contractor who is registered in India and is a juridical person created under Indian Law as well as a Joint Venture between such a Contractor and a Foreign Contractor…. [T]he term ‘Foreign Contractor’ means a contractor who is not registered in India and is non juridical person created under Indian Law.3

The South Korean company appointed Mr Justice A.K. Srivastava, a retired judge of the Delhi High Court, as its arbitrator. NHAI appointed Mr Bageshwar Prasad as its arbitrator. Justice Srivastava and Mr Prasad met for the appointment of the presiding arbitrator; however, they could not agree as the former was insisting that the presiding arbitrator should be a retired judge, and that too senior to him. The two arbitrators thus failed to appoint the presiding arbitrator. As provided in the contractual provisions for the appointment of the presiding arbitrator in case the two arbitrators failed to appoint one, the then president of the Indian Road Congress appointed Mr E.V. Narayanan as the presiding arbitrator. For reasons not on record, You One was not comfortable with this appointment, and it filed an application in the Supreme Court under Section 11(6) for challenging the appointment of the presiding arbitrator on the grounds that the Indian Road Congress was a technical body with all technical experts and the presiding arbitrator so appointed was also a person of technical expertise, whereas according to the South Korean company the dispute with NHAI was legal in nature and, hence, there was a requirement of a person well-versed in law to act as the presiding arbitrator. The Supreme Court upheld the appointment of the arbitrator.

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Comments and Questions This is one of the interesting cases in which the Supreme Court of India did not allow the application of a foreign company for challenging the appointment of an arbitrator, as the foreign party wanted the Supreme Court to appoint an arbitrator rather than follow the clause which provided for some other procedure. The Supreme Court did not agree with the contention of the South Korean company and maintained the appointment of the presiding arbitrator by the president of the Indian Road Congress. Remarkably, the argument of the South Korean company did not cut any ice with the Supreme Court, as it was very clearly mentioned in the arbitration clause that the presiding arbitrator shall be appointed by the president of the Indian Road Congress. Why was the reference to the qualifications or expertise of such person not mentioned at all? It was conspicuous by its absence. Thus, it can be quite easily inferred that the president of the Indian Road Congress was expected to exercise his discretion while making the appointment of the presiding arbitrator, taking into account the entire dispute and suitability of a person to resolve the dispute as an arbitrator. While dismissing the application, the Supreme Court made the following observation, The Arbitration Agreement clearly envisages the appointment of Presiding Arbitrator by the IRC. There is no qualification that the arbitrator has to be a different person depending on the nature of the dispute. If the parties have entered into such an agreement with open eyes, it is not open to ignore it and invoke exercise of powers in Section 11(6). On an overall assessment, I am satisfied that the appointment of the Presiding Officer by the IRC is perfectly valid and justified, as no occasion had arisen for the petitioner to move the Chief Justice of India under Sec. 11 (6) of the Act.4



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This particular case emphasises the importance of adhering to the arbitration clause as agreed to by the parties, which they had done with full knowledge and in good faith. The Supreme Court categorically refused to entertain any such application, which would really mean wriggling out of a contractual obligation by misusing a provision of law necessarily meant for providing the way forward in cases of deadlock. A question arises for our consideration: Was the intention of the parties very clearly articulated in the contract? Or, was it to have a person with expertise in the subject matter appointed as the presiding arbitrator? Now, if the intention of the parties was to have an expert as the presiding arbitrator, it could have very well been articulated in the contract itself, so that later on, there was no confusion and ambiguity. It appears that the parties might have thought about it and quite possibly taken it for granted that the president of the Indian Road Congress would appoint only a person with expertise in the subject matter as the presiding arbitrator. Thus, either due to good faith and trust, or on the basis of reasonable understanding, the parties did not bother too much to have it included in the contract. There is a learning here for business managers. That is, in case we would like something to be included in the clauses, it is prudent to have it included even if at that moment it may sound to be something too obvious.

CASE 2: MSP Infrastructure versus M.P. Road Development Corporation (Supreme Court of India, 2014)5 In this remarkable case, decided by the Supreme Court of India in December 2014, the mandate of the arbitral tribunal was objected to after a substantial period of time had elapsed

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post-award. The Supreme Court dismissed the objection both on technical grounds of extremely late objection and also on the basis of merit. In 2002, the M.P. Road Development Corporation (MPRDC) entered into a contract with MSP for the development and upgradation of about 100-km of the road between Raisen and Rahatgarh. Disputes arose and MPRDC terminated the contract, encashing the bank guarantee. MSP Infrastructure Limited (MSP) filed a civil suit in the Calcutta High Court which was disposed of as the contract between the parties included an arbitration clause. Arbitration proceedings started and the award of about `7 crore (70 million) and release of fixed deposit receipts was given in 2006 in favour of MSP. The award was challenged by MPRDC in the lowest court of competent jurisdiction, which happened to be the court of the District Judge in Bhopal, according to the provisions of the 1996 Act. After two years, MPRDC filed an application for adding additional grounds of objection. It was rejected on the grounds that it was too late and much beyond the time permitted by Section 16 of the Act. MPRDC appealed in the M.P. High Court at Jabalpur, which allowed the application for adding additional grounds of objection. This order was challenged by MSP in the Supreme Court. The Supreme Court while deciding the matter referred to Section 16 of the 1996 Act, which is reproduced in the appendix. This section, inter alia, provides that an objection to jurisdiction should not be raised later than the submission of the statement of defence. The relevant portion for the instant case is Section 16(2) and is as follows: A plea that the arbitral tribunal does not have jurisdiction shall be raised not later than the submission of the statement of defence; however, a party shall not be precluded from raising such a plea merely because that he has appointed, or participated in the appointment of, an arbitrator.



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In the instant case, MPRDC had raised this objection two years after filing the application for setting aside the award. The main ground was that the state of M.P. had its own law—M.P. Madhyastham Adhikaran Adhiniyam, 1983— for the resolution of such disputes, and because of the presence of a state law, the dispute should have been resolved under that particular law and not under the Indian Arbitration and Conciliation Act of 1996. This is in fact most surprising as the state law of 1983 was very well known at the time of entering into the contract with MSP, during the entire arbitration proceedings and even at the time of challenging the award. Hardly any new developments had taken place, which would have warranted MPRDC to file the application objecting to the jurisdiction of the arbitral tribunal. The Supreme Court did not terminate the mandate of the arbitral tribunal.

Comments and Questions At times, it is rather unbelievable that state corporations, which are public bodies and are expected to be highly responsible with orientation towards public interest, conduct themselves in an irresponsible manner simply to delay the enforcement of an arbitral award. Such conduct is a clear misuse of the provisions of law, and the highest court of the country, rightly, decided against it. It is important for public corporations to resolve the disputes at the earliest possible opportunity, rather than protracting the resolution of the dispute in each and every possible judicial forum. Questions that arise are: Should a delay in raising objection to the mandate of an arbitral tribunal not be condoned? Assuming there is illegality in an appointment, should that illegality be allowed to continue as there has been a delay in raising the objection? These are important questions to be considered by the courts whenever there is an application

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for condonation of delay. A similar argument was raised in the Supreme Court. The counsel for MPRDC had also argued that it was a well-settled law that an objection to the jurisdiction of any forum or tribunal can be raised at any stage to meet the ends of justice and to ensure that injustice is not perpetrated by allowing a forum to act without any jurisdiction. The Supreme Court agreed with this contention in principle, but it did not agree with its application in arbitrations conducted under the 1996 Act. This was for the simple reason that while enacting the law the legislature must have taken cognizance of all the laws applicable and keeping everything in mind, it had made its decision to allow an objection to be made only in the early stages as detailed out in Section 16. Thus, the intention of the legislature was very clear in plain and simple language, and it would not be proper for any court to superimpose its own understanding and interpretation when a plain meaning can be attributed to the black letter law. As per the settled principles of interpretation, courts should deviate from plain and simple meaning only if it results in certain absurdity, unreasonableness and imprudence. The instant case, clearly, does not fall in this category, and hence, it was decided to stick to the plain and simple meaning of the section. Discussing the conduct of the MPRDC in the light of Section 16(2), the Supreme Court observed, The intention is very clear. So is the mischief that it seeks to prevent. This provision disables a party from petitioning a Tribunal to challenge its jurisdiction belatedly, having submitted to the jurisdiction of the Tribunal, filed the statement of defence, led evidence, made arguments and ultimately challenged the award u/s. 34 of the Arbitration Act, 1996.6

In this case, actually, the intention of the corporation was without doubt to accept the mandate of the arbitral tribunal



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till the very end. It was very clear that the objection to the mandate was raised as an afterthought because the corporation had not questioned the jurisdiction of the tribunal at any stage. The objection was not raised at the first given opportunity, that is, at the time of filing the statement of defence; the objection was also not raised during the entire proceedings of arbitration, nor when the award was challenged, and out of blue there was an objection made to the appointment and mandate of the arbitral tribunal after almost two years of challenging the award. Any litigant, who is not vigilant enough to raise the objection at the right time, does not deserve to get the desired remedy. The court in very clear terms emphasised the importance of the idiom, ‘A stitch in time saves nine.’ The Supreme Court did not agree with the High Court’s decision, and set it aside.

Takeaways for Managers

There are two primary takeaways: lay emphasis on merits and better safe than sorry. To illustrate: One, a business manager should not rely on friendship with the arbitrator or animosity of the arbitrator with the other party. For true arbitrators, as depicted in the story at the beginning of this chapter, there is nothing like making a decision on the basis of friendship or animosity. The matter has to be decided on merit and merit alone. Thus, it is a good practice for a manager to seek the appointment of a person who is an expert in the field, and very well reputed. Two, a business manager should never try to indulge in illegal gratification. Trying to influence the arbitrator in any manner often boomerangs. It is best to go and present your

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case before the arbitral tribunal with clean hands, rather than get your image sullied by allegations of graft and corruption. There is a very thin dividing line between trying to influence with subtlety and trying to be polite and courteous. For refined persons, the fine difference between the two is not difficult to understand. It may become a challenge during arbitral proceedings, for the main reason that arbitration proceedings are informal in nature and the parties usually interact with each other, with the lawyers, with the arbitrators and others present during the meeting in a relaxed, casual and friendly manner. At times, owing to the goodnatured conduct of the arbitrators and others present, a person is likely to take a few things for granted. A liberty taken in an informal setting, which would have not otherwise been taken in a formal court of law, may not go very well with the arbitrators. After all, most of them are seasoned, highly experienced and knowledgeable persons. They are quick to understand the nuances, and hence, it is advisable to be a bit formal, rather than face the music later.

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Challenging an Award

Have you ever enjoyed watching children play gully cricket? Gully cricket is played in the back streets, lanes, by-lanes and at any place which can provide space for a batsman to stand and a bowler to throw the ball. Many of us would have watched such a game of cricket, simply standing as an onlooker either in the balcony of a house or somewhere precariously by the roadside, or just waiting for a visitor to arrive at a meeting point, or in any other situation. If you had the chance of being there and watching the game for just a substantial period of time to get noted by the players, and if you appear to be older than and mature than the players themselves, there is always a possibility that the children will approach you for the correct decision regarding a leg before wicket (LBW). In such situations, the two teams usually disagree and even do not abide by the decision of the umpire, if there is any. You will be asked to decide on the matter by the children with the promise that your decision will be binding on them. With whatever expertise you have in the game of cricket, you make a decision and think that children will abide by it. Though they had agreed to be bound by your decision, there is no certainty for it. The team against which you will make the decision, may come up with certain reasons not to agree with your decision and even question your ability and expertise, or may make allegations against you that because you did not pay attention to the game, you could not decide properly. Your decision may be challenged on several grounds, some reasonable and some being absolutely frivolous and far-fetched. The same is more or less true about arbitration awards.

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Binding, but Can Be Challenged Though the decision of the arbitrator—known as an award— is binding on the parties, the award has to be within the framework of law and the arbitrator must have proceeded as per the mandate given to him/her by the parties according to the arbitration clause. The arbitration law in almost all the jurisdictions has an inbuilt provision for challenging the award in a court of law. On what grounds can an award be challenged may be different in different jurisdictions; however, there are certain universal grounds which include the arbitrability of the subject matter of dispute, following principles of natural justice, issues of dishonesty and unfair means, public policy, etc. There are certain categories of arbitration, which usually are challenged in a court of law, and two of them, the most prominent, are when stakes are very high and when government is involved. For the first category, the reasons are obvious that the losing party would not like to stop challenging the decision till it approaches the highest court in the country; however, for the second category, a lot depends on the working style of the government of the day. Often, it has been observed, at least in India, that awards against the government and government bodies are usually challenged, even if the awards have been reasonable; the primary reasons being risk-averse behaviour and passing the buck.

Finding the Legal Ground for Challenge While challenging the award, the applicant has to somehow fit in his/her case with one of the several grounds mentioned in the law of the land, entailing different reasons as to why the award need not be enforced. This is not so easy, and the



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counsel has to somehow squeeze in its case within one of the grounds mentioned. The more objective the ground, the narrower it is. The more subjective the ground, the broader it will be by providing opportunities for interpreting it in a number of manner, thereby, in most cases, providing a toehold, if not a foothold, to the applicant. While challenging the award the losing party has to find a ‘legal peg’ on which it can hang its challenge, as the party cannot simply go to a court of law and say that it is challenging the award as it has lost the case. Even if it is quite evident to everyone concerned that the losing party is challenging only to delay the proceedings and to delay the execution of the award, there have to be certain provisions accepted by the law—either by statutory provisions or by the interpretation of a court of law—which can support the case.

Where to Challenge the Award? Challenging an award can be a long and arduous journey and may not always reach its logical conclusion by arriving at the desired consequences. It has been observed that in several cases the challenge path is so labyrinthine that towards the end of the final decision even the winning party feels like a loser, if not in terms of the final decision, but surely in terms of time, effort, money and opportunities lost. An award can be challenged in the lowest court of competent jurisdiction; the specific court is to be decided as per the facts and circumstances of each case. In most of the cases, it is the court of the District Judge; however, in certain matters, particularly with the jurisdiction in the four metros in the country—and that too because of historical reasons—the matter can be filed in the High Court. Thereafter, the appeal lies in the High Court—Division Bench—and after that in the Supreme Court of India. Obviously, this is a long and uncertain

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legal journey and the time taken to arrive at the final decision may itself drain both the parties. We will go through a couple of such cases which had gone through all the three stages, and till the time the parties were able to reach the final decision, a long duration of time had elapsed. It will not be wrong to say that a longish challenge to an award after a short and sweet arbitration proceeding is like waiting inordinately for air traffic controller’s permission to land after completing a short flight. There have been instances when the arbitration proceedings were over in less than a year or in a few years’ time, but the challenge procedure took several years. The worst happens when after the long-time challenge the award is set aside, bringing the parties back to square one. That situation is the most frustrating for the party, which had the award in its favour.

Challenging an Award under the 1996 Act In India, the 1996 Act provides for challenging the award in Section 34. The entire section is reproduced in the appendix. The most important aspects relate either to the contractual aspects, including natural justice, or to the public policy aspects. Arbitration, in whatever manner one may consider, is a contract, though of a special type and being dealt by a different law. Thus, the parties that agree on arbitration must not be incapacitated by any reason, whatsoever, to enter into a contract: the primary being the age of majority and proper delegation of authority. The entire subject matter for the arbitration shall be well within the legal periphery, and principles of natural justice—fairness and reasonableness—should be followed up at each and every step. Both the parties should follow the contractual limits created between them strictly. And, in any case, the arbitration award should be in consonance with the public policy of



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the country. Several of these issues can be handled in a very objective manner; however, subjectivity does creep in while dealing with issues such as public policy and principles of natural justice. No matter how well these can be defined, it is next to impossible to convert each and everything into an objective question; some of the matters do remain subjective in nature and require exercise of discretion by the deciding authority. This power, or rather the duty, has expanded the scope of Section 34 in a manner which could not have been envisaged by legal experts. Let us go through a few court decisions.

CASE 1: Associate Builders versus Delhi Development Authority (Supreme Court of India, 2014)1 The Delhi Development Authority (DDA) entered into a contract for certain construction work with Associate Builders (AB) in 1992. The DDA was building a big colony in the trans-Yamuna area in Delhi and it awarded a contract for the construction of more than 200 houses to AB for an amount of roughly `90 lakh (9 million). The construction was to be completed in nine months’ time; however, it took almost three years to be completed. Even after this much time, all the houses which were required to be constructed as per the contract were not completed. The work completed was roughly of the value of `60 lakh (6 million). AB made allegations that the work could not be completed in time and the entire delay was attributed to DDA. Because of this, AB made 15 claims on different grounds. Some of them included hiring charges of centring shuttering; hiring charges of tools, plants and scaffolding; compensation on account of establishment due to prolongation of the contract compensation for doing certain extra work; the

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reimbursement of statutory increase in labour charges; compensation for the increase in cost of material, etc. As the contract contained an arbitration clause, the claims were decided by the arbitral tribunal, comprising a sole arbitrator. The arbitrator held that the delay of almost two years was fully attributed to the DDA and in May 2005 awarded an amount of `23 lakh (2.3 million) out of the total claim of `37 lakh (3.7 million). The arbitrator had given a reasoned award after going through all the evidence and discussing each claim in detail. The award was challenged before a single judge bench at the Delhi High Court. In April 2006, the single judge bench upheld the award and dismissed objections raised by DDA. Thereafter, DDA approached the division bench of the Delhi High Court. In February 2012, the division bench set aside the judgement of the single judge bench and rejected most of the claims. Two of the claims for which the awarded amount was about `7 lakh (700,000) were truncated to `5.5 lakh (550,000). While ordering this, the division bench made the observation that those two claims were lowered by doing ‘rough and ready justice’. This was most unusual and AB obviously moved the Supreme Court against it. The counsel for the builders contended that the division bench had acted as an appellate forum, which obviously is not the role envisaged as per the arbitration law, and there was no reason for the division bench to do rough and ready justice when statutory law was very well in place. The approach followed by the division bench was, therefore, untenable. The counsel for DDA, on the other hand, argued that the judgement of the division bench was absolutely correct as there had been duplication of certain claims. Serious objections were made against the division bench that it had ignored the interpretation of Section 34—full text of this section is reproduced in the appendix towards the



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end of this book—in a series of judgements and that it acted beyond its powers as evolved and understood since the enactment of the 1996 law. The Supreme Court upheld the award and the decision of the single judge bench. The decision of the division bench was set aside as there was no reason for the bench to interfere with the award in a manner which could only be possibly done by an appellate court. The Supreme Court held, ‘The Single Judge is clearly right …. The appeal is, therefore, allowed and the judgment of the Division Bench is set aside…. [T]he Arbitral award dated 23rd May, 2005 is as a whole upheld.’2

Comments and Questions This decision raised important questions regarding public policy and the role of courts while deciding on matters pertaining to the challenge of awards. The Supreme Court discussed in great detail the expression ‘public policy’ and various heads which have evolved under this expression over a period of time. Reference was also made to the landmark judgements on the subject, namely Renusagar versus General Electric, the Supreme Court of India, 1993, and ONGC versus SAW Pipes, Supreme Court of India, 2003. We will discuss these in detail in the Chapter 10. At this stage, it is suffice to say that in Renusagar a narrow meaning was given to the phrase public policy, whereas in ONGC case, the expression public policy was given a broader meaning. Since then, ONGC case has been consistently followed by courts in India. Thus, a much liberal meaning has been given to public policy, which, in fact, means the grounds for challenging an award on the basis of public policy have been broadened and courts have been given much more discretionary power while making the decision for challenge of an award.

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While deciding certain claims the arbitrator of the present case had applied a well-known and well-understood formula used in the construction industry—Hudson’s formula. There are two other formulae which might be used, namely Emden formula and Eichleay formula. These are used to calculate the increased overheads and loss of profit, and each formula has a different application, though these are not in watertight compartments and there is no clear exclusivity. Thus, an expert may choose which formula is to be applied, given the facts and circumstances of the case. Use of experts as arbitrators is one of the biggest advantages of getting disputes resolved through arbitration. It is up to the experts to decide which formula should be applicable, and the courts, in all propriety, must give due regard to the decision made by experts. This has been the position of the Supreme Court for a very long time and as recent as in 2006 it was observed in McDermott’s case, We do not intend to delve deep into the matter as it is an accepted position that different formulae can be applied in different circumstances and the question as to whether damages should be computed by taking recourse to one or the other formula, having regard to the facts and circumstances of a particular case, would eminently fall within the domain of the arbitrator.3

The division bench, surprisingly, did not take the completion certificate under consideration. The Supreme Court rightly disagreed with the division bench in the strongest of the words. It is the bounden duty of any bench to take into consideration the material facts while making a decision. It is sacrilege not to consider an important document and also equally sacrilege to take into consideration a document which is not material for the case in hand. There appeared to be just no reason why the division bench should have gone for ‘rough and ready justice’. Had there been no formula



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applicable, one can for a moment except that the bench wished to judiciously resolve the matter, and for that reason it resorted to rough and ready justice. But, in the instant case that had not been the situation. Experts already had agreed regarding the use of a formula and compensation was being computed according to that formula. The Supreme Court used strong words against the division bench and observed, This document shows not only that the Division Bench was wholly incorrect in its conclusion that the contractor has tried to pull the wool over the eyes over the DDA…. The Division Bench has lost sight of the fact that it is not a first appellate court and cannot interfere with errors of fact.4

Had the Supreme Court decided the other way round, the entire arbitral tribunal’s work—which as per the court record had been meticulously done giving details and reasons for each and every decision made—would have gone wasted. Not only that, confidence, trust and faith in arbitration as a dispute resolution mechanism would have also been eroded to a certain extent. It has been extremely important for the superior courts in India and elsewhere to uphold the dignity and credibility of arbitration as one of the chosen methods of resolution of commercial disputes. The provision of Section 34 in the act had been made to incorporate a certain mechanism by which instances of grave injustice could be handled in a statutory manner; however, over the last two decades or so the provision has been used to challenge the awards in a routine manner. Somehow, the scope of this section has also been expanded to include almost each and every conceivable objection, most of them being brought in under the expression of public policy. It is of utmost importance that judicial officers exercise discretion judiciously so that the real purpose of arbitration is not defeated and speedy and inexpensive redressal mechanism in the form of arbitration does not lose efficacy. To achieve

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this goal, the government and public sector undertakings have to have an important role of not dragging cases in different judicial forums by using the ever-expanding scope of Section 34. Challenging each and every arbitral award in a mechanical manner is detrimental to the practice of arbitration.

CASE 2: Navodaya Mass Entertainment versus J.M. Combines (Supreme Court of India, 2014)5 It is an interesting case related to an amusement park and entertainment. Though the purpose of the contract signed between the parties was amusement and entertainment, it ended up in arbitration and litigation. In one of the biggest metros in southern India, Chennai, there is an amusement park called Kishkinta. It has several amusement rides, a waterpark and other facilities for visitors. Navodaya Mass Entertainment (NME), a private company, maintains the park. For the purpose of procurement, installation and operation of an amusement ride, NME entered into a contract with J.M. Combines (JMC), another private company, in 1998. The entire functioning, including repairs, was the responsibility of JMC. For this, collection from the ride was supposed to be divided 60:40 between JMC and NME in the first year and 50:50 thereafter. The contractual terms also provided that NME was liable to pay a minimum gross collection of `10 lakh (1 million) for the first year and `8.33 lakh (833,000 million) for the next nine years. Thus, the agreement between the parties was for a period of 10 years, which could have been renewed or terminated. After the first year, NME defaulted in making the payments and despite several reminders it did not pay the remuneration. JMC sent a notice for payment, but still NME did not pay. The claimed amount was increasing with interest



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accumulating on the outstanding dues day by day. A dispute arose, and the arbitration clause was invoked. A sole arbitrator was appointed as per the clause and JMC made a claim with interest in October 2006. The claim included the amount as per the 50:50 clause and also according to the minimum guaranteed payment. The arbitrator, in his wisdom, allowed the claimed amount as per the 50:50 clause but rejected the minimum guaranteed payment claim. Interest was awarded at 12 per cent per annum from the date of the claim. The award left both the parties dissatisfied, and both of them challenged the award in the lowest court of competent jurisdiction, that is, the single judge bench in the Madras High Court. The single judge bench upheld the award and dismissed the challenge application of both the parties. Again, both of them were dissatisfied and appealed before the Division Bench of the Madras High Court. The division bench dismissed NME’s appeal, and at the same time allowed JMC’s appeal. The effect was that NME was now ordered to pay the minimum guaranteed amount, as well as share the collection as 50:50, and also to pay interest at the rate of 12 per cent per annum from the date of the claim. NME appealed in the Supreme Court and its counsel argued about the invalidity of the agreement as it was onesided and also that the contract was terminated by NME. None of these arguments were made before the single judge bench or the division bench. The Supreme Court did not find any perversity with the award and upheld the decision of the division bench.

Comments and Questions The Supreme Court emphasised the fact that the scope of interference by the courts in challenge of arbitral awards is extremely limited. In case there is more than one view

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possible after going through the facts of the case and the arbitrator has gone ahead with one of the views, there is hardly anything which the courts can do in that case. Until and unless the arbitrator has misconducted himself/herself or the proceedings, or ignored and neglected the facts, or there is an error apparent in the face of the record, there is very little scope of interference by the courts. That has been precisely the purpose for which the arbitration law in India had been tightened in 1996. The Supreme Court observed, ‘Where there is an error apparent on the face of the record or the Arbitrator has not followed the statutory legal position, then and then only it would be justified in interfering with the award.’ This had been the view of the Supreme Court in a catena of judgements. And in the present case also, the Supreme Court followed them by not interfering in a plausible decision arrived at by the arbitral tribunal. Two interesting questions arise: First, at what stage can fresh arguments be made while an award has been challenged? And, second, what is the scope of interference by courts in an arbitral award? It is very important for the party challenging the arbitral award that the grounds of challenge should be raised at the first give an opportunity. There is hardly any time to wait and watch the situation and keep the arguments safe to be made at the last minute, or at the last stage, for example, at the Supreme Court stage. Such a tactic is bound to boomerang. It is extremely important to make those arguments at the earliest, and before the right forum. Even regarding the appointment of an arbitrator, any objection has to be raised at the first opportunity after the appointment and that too, before the tribunal itself, according to new arbitration law in 1996. Only then, that argument can be made later on in courts. Regarding the second question about the scope of interference by courts in arbitral awards, the 1996 law is very clear on the subject and tends to make all possible steps



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to minimise the interference of courts in arbitral proceedings. Hence, several grounds on which courts could have interfered with the arbitral proceedings, and after the award has been made according to the earlier law of 1940, have been removed in the new law of 1996. Still, there are certain grounds that have been mentioned in Section 34 on the basis of which the award can be challenged; however, the scope has been extremely narrowed down, but it depends on the ingenuity of the parties and their lawyers to raise innovative grounds and challenge the award in a court of law.

CASE 3: Harsha Constructions versus Union of India (Supreme Court of India, 2014)6 A contract was signed between Harsha Constructions, a private company, and South Central Railway for the construction of a road bridge at a level crossing in the erstwhile state of Andhra Pradesh. The contract between the two parties mentioned clearly in the dispute resolution clause that any dispute between them would first be resolved by the engineer and if the party was dissatisfied with the division of the engineer, then it could appeal to the chief engineer, whose decision was binding on the parties. Thus, it is clear that in this clause there was no scope for any arbitration. As a matter of fact, the company did some extra work for which there was a dispute between the company and the railways regarding the rates, and therefore payment. For some other contract, arbitration was proceeding between the parties, and the retired Andhra Pradesh High Court Judge was appointed as the arbitrator. The company referred the dispute regarding the payment of extra work—which was not at all arbitrable according to the contract—to the arbitrator appointed in another matter. The arbitrator decided the disputes regarding the extra work also and it was challenged by the railways.

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The matter finally reached the Supreme Court, which held that the arbitrator should not have decided anything which was agreed between the parties not to form part of arbitrable disputes. Thus, the award of the arbitrator in this respect was set aside.

Comments and Questions It may appear to be unbelievable that how can an arbitrator decide a dispute which did not form a part of the contract. But, as it appears that if it happened and a retired Andhra Pradesh High Court judge did the same. What could have been the reason for the arbitrator to conduct himself in this manner? Typically, in such proceedings where a person of eminence and authority is appointed as an arbitrator, the parties find it extremely difficult to oppose or challenge the conduct of the arbitrator. It was a presumption of both the parties that a retired judge who is considered to be erudite, scholarly and experienced would of course have known the law and proceeded accordingly. Thus, during such proceedings it is not at all possible for the parties, until and unless they have really been counselled well, to raise any objection. However, it is after the proceedings that the award has to be enforced and the parties, along with their counsel, apply their minds and try to find out some legal ground on which the award can be challenged in a court of law. Otherwise, it is a very simple case and is based on basic theoretical concepts of arbitration law that an arbitrator is the creation of the contract between the two parties and does not have any mandate outside the periphery of the contract. It is really surprising and shocking that an arbitrator took upon himself to decide the matter, which did not form part of the contract. It would have been a different scenario had the two parties, while referring these disputes, entered into



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a fresh agreement for arbitration, which never happened in the instant case. One thing should be clear at this stage: An arbitral contract between the parties can be entered into at any stage. It can be in the initial stage when the contract had been entered into, or during the performance of the contract at any time the parties decide to enter into a fresh arbitration agreement or even at the stage when a dispute has arisen between the two parties that may decide to go for arbitration rather than litigation. Usually, it is extremely uncommon to find an arbitral contract being entered into at the third stage as referred. Typically, the parties would enter into an arbitral agreement at the very first stage when the contract is being signed. Thus, the parties in this case could have decided to go for arbitration, even at that time when the private company, Harsha Constructions, decided to refer the disputes to the arbitrator. But, as there was no consent expressly given by the Indian Railways and at no place it has been averred that the acceptance was even impliedly made, it was an absolutely one-sided affair, and there were no identity of minds between the parties, which resulted into the decision of the arbitrator being turned into nullity. The ‘excepted’ disputes in a contract cannot be referred to an arbitral tribunal until and unless expressly or impliedly agreed to between the parties.

Takeaways for Managers

1. Do not rely on challenging an award. A manager needs to be extremely cautious during the performance of a contract and should jot down important points in his/her diary, whether electronic or paper. In

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the absence of a systematic memory in the form of personal notes, it will not be possible for the manager to raise critical questions and objections while any arbitration proceedings are going on. As appears in the amusement park case, the managers never pointed extremely important issues to the counsel while the arbitration was going on. Hence, it was a fag end in the Supreme Court when certain issues were raised pertaining to illegality of the contract and the contract being one-sided. It is not at all advisable for business managers to rely on challenging the award and to take the risk of being saddled with an unfavourable and improper award, as no one can say with certainty that all improper awards will be set aside in the courts. Thus, a manager must act at the earliest given opportunity to put things in order and not wait to straighten out things by challenging the award and getting it set aside, which is a tall order. 2. Accept others’ authority with care. Getting influenced by someone in position of power is very natural and business managers are no exception. During the performance of a contract or at times when a dispute is to be resolved—either through arbitration or any other ADR mechanism—certain individuals are involved, who are usually persons of eminence and repute. It is extremely important for business managers not to be unduly influenced by their eminence and reputation. A manager must take proper care of reasonably scrutinising what they say and how they conduct themselves. In case, their expressions and conduct do not converge or do not make sense in an obvious manner, it is quite logical for the manager to flag the issue to the concerned persons in his/her company, both on the managerial side and on the legal side. In Harsha



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Constructions’ case, the entire rigmarole of getting unarbitrable issues decided in arbitration proceeding could have been avoided by questioning at the outset the authority of the arbitrator regarding those issues. A little bit of confidence is needed to withstand the overenthusiasm of the opposite party regarding the eminence and experience of an individual being held in high esteem. However, it should not be taken to the other extreme of disrespecting anyone. 3. Use fairly established formulae. While performing a contract, managers are often expected to use certain formulae to complete certain tasks. Literature developed by management experts on the basis of the research done provides some formulae to be used for business purposes. For a number of projects, engineers perform the role of managers and have to use some engineering formulae; however, for a given task to be performed there may be more than one available formula which can be applied. A choice has to be made at that time. A manager is to select the formula to be applied in the given situation. At this juncture, it is very important for the manager to select the right formula according to the facts and circumstances. It is generally advisable to use fairly well-established formulae, until and unless there are cogent and convincing reasons against that. Hence, before using a formula which is not so very common, the manager would do well to record the reasons in writing for doing so. Such a piece of reasoning on the file can be extremely helpful in case there is a dispute. As we discussed in the DDA case, there were three formulae for compensation, and the use of a particular formula by the arbitrator was questioned later on in a court of law. Thus, the application of any formula at any stage should not be done in a

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simple mechanical manner and rather the application of mind should be recorded. 4. Cannot ignore important documents. A manager has to be extremely careful in handling documents. It is the duty of the manager to keep the documents safely and retrieve them in an easy manner when needed. In today’s technological era, storage and retrieval of electronic documents has become quite easy; however, on several occasions, especially in a court of law, hardcopies are needed. It is expected at that particular moment when any hardcopy is needed as documentary evidence, the manager must produce it on demand. A little more is expected from smart managers. They need to be proactive in bringing an important document to the attention of the legal counsel and emphasising the use of the document as evidence. At times it may so happen that either of the lawyer, or the judge, or both have ignored a very important document which could have been critical in the decisionmaking process. It had happened in the DDA case, as discussed earlier, when the division bench ignored the completion certificate. Should the manager do something at that point in time? The manager in such situations must take it up with the lawyer and discuss with him/her the options available for getting that particular important document taken into consideration for decision-making. Every effort should be made using the legal procedure available, which can either be an appeal or a review petition. 5. If dissatisfied, terminate the contract at the earliest. One of the most important takeaways for a manager is to terminate the contract if not satisfied after giving a warning and reasonable time. There is no point in lingering on with the matter and procrastinating making



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a hard decision. In a contract, both the parties should mutually gain from each other, and if it is realised by a party at an early stage that the other party is not performing as agreed upon, the issue can be flagged. However, it is necessary for a business manager to create other options before terminating the contract. At the end of it, the manager is concerned about getting the task completed, and need not necessarily think like a lawyer. However, keeping in mind the legal rights according to the contract, he/she should not be submissive. The same principle applies during the arbitration proceedings. The relationship between the arbitrator and the parties is also contractual in nature and it is advisable for a party to remember that any arbitrator is also supposed to behave in a reasonable manner. The parties are well within their rights to terminate the relationship with the arbitrator if the arbitrator misconducts himself/herself or the proceedings. Such an action should be taken at the earliest and need not be delayed.

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Public Policy

Have you ever punished your child for doing something wrong? Maybe yes. The type of punishment may vary depending on the wrongdoing. In some families, forms of punishment may be not allowing watching television for two days, no outing on a weekend, no pocket money for a week, etc. In some families, the child has to go without food. There are many families which do not agree with this and say that punishment should not be related to food, and forcing the child to go without food is not their ‘family policy’. In the same manner, there are countries in the world where capital punishment has been abolished as it is considered to be against their ‘public policy’. On the contrary, there are countries including India, where capital punishment is awarded in the rarest of the rare cases. So, the policy of a family, or the policy of the country, may be very different from that of another family or country, respectively. Let us have a look at an excellent case in point. A lady named Vervaeke from Belgium was living in London. She used to indulge in illegal activities. When arrested by police she was let off with a warning that she would be deported to Belgium if found doing such activities again. Vervaeke married a British national just to get a marriage certificate from the British government, with no intention of living together. They did not see each other again. After some time, she wanted to marry an Italian multi-millionaire Messina. According to British law, a marriage is a marriage, whether they live together or not. But, Belgian law was different. If they were not living together she could get her marriage nullified. As her husband was nowhere to be found,



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instead of getting a divorce in the UK, she got a decree of nullity from Belgium. Later, she married Messina. Marriage was solemnised during the day and, unbelievably, Messina died in the evening. Vervaeke, as his wife, got his property as the successor. His other relatives challenged the succession on the grounds that she was already married and, hence, her so-called marriage to Messina was null and void. The matter went to the British court and the short question to be decided was whether the British courts would recognise the Belgian decree of nullity? If yes, her marriage to Messina was valid, and if not, it was null and void. On the grounds of conflict with British public policy, the courts did not recognise the Belgian decree as there was stark difference in the idea of marriage in the two jurisdictions. This has been a real case with heavy emphasis on public policy. The same is true for commercial disputes and resolution by arbitration. Recognition and enforcement of arbitral awards can be denied on the grounds of being in conflict with the public policy.

Public Policy and the Voice of the People One of the highly subjective grounds for challenging an arbitration award is public policy. It is a very contentious issue and provides tremendous flexibility to the parties desiring to challenge an award as the phrase public policy is capable of being interpreted in more than one manner. It has been held by different courts that public policy is dynamic in nature and the true meaning of the phrase has to be construed according to the changing times and aspirations of the people, particularly in a democratic country. It is desirable that the law of the land and public policy are in alignment; the law of the land primarily means the

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interpretation given to the statutory law by different courts in the country, especially the Supreme Court. And, who will determine the public policy is a difficult question to be answered. Again, in a democratic set-up, it is the voice of the people—vox populi—which determines what the public policy should be; however, the aspirations of the people and their voice should truly be reflected in the decisions made by the legislative bodies. At times it is not like this, and there is divergence between the two. This gap can very well be taken care of by the legislative processes, but, the larger gap between the legislative intent and judicial interpretation, at times, leaves much to be desired. In their over-eagerness, sometimes the judges of the superior courts do interpret the law and public policy reflecting their own voice and opinion, rather than the collective voice of the country at large. This is quite dangerous and while testing an arbitration award on the grounds of challenge, judges have to be extra cautious as the awards are written usually by professionals—experts in certain subject matter—who would not have the benefit of having a legal training. Still, the decision of the parties to get the dispute resolved by arbitration has to be respected by the court and until and unless the award, unmistakably, is in conflict with the public policy of the country, the judges need to tread with caution.

No Precise Definition In the last 10 years or so, one of the most important cases which have been decided by the Supreme Court of India on the basis of public policy is ONGC versus SAW Pipes.1 In this judgement, the Supreme Court cited from an earlier judgement, Central Inland Water Transport Corporation Limited and another versus Brojo Nath Ganguly and another 2 and made it very clear that public policy could not be given a



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static treatment as it changes with the passage of time and the aspirations of the people, particularly in a democratic country. In Ganguly’s case, the Supreme Court observed that the expression public policy was not defined in the Indian Contract Act, and the expression was very difficult to be precisely defined. It was something which was meant for public benefit and public interest. It is enlightening to quote from the judgement itself: Public policy, however, is not the policy of a particular government. It connotes some matter which concerns the public good and the public interest. The concept of what is for the public good or in the public interest or what would be injurious or harmful to the public good or the public interest has varied from time to time. As new concepts take the place of old, transactions which were once considered against public policy are now being upheld by the courts and similarly where there has been a well-recognized head of public policy, the courts have not shirked from extending it to the new transactions and changed circumstances and have at times not even flinched from inventing a new head of public policy.3

Two Schools of Thought: Narrow and Broad The ‘Central Inland Water’ is a very interesting case in which the Supreme Court had reproduced enlightening paragraphs from certain British cases and explained the relevance in the light of application to the Indian scenario, which, of course, would have certain special characteristics as compared to the British society. However, the basic principle of the dynamism and subjectivity of public policy remains, and that needs to be appreciated while applying it to particular facts and circumstances. The Supreme Court explained the concept of public policy, according to two schools of thought: narrow and broad. According to the narrow view, no new heads of public policy could be created by

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the courts. However, according to the broad view, it was the duty of the courts to bridge the gap between law and justice and create new heads of public policy, as and when needed.

The Unruly Horse Some of the judges in the British courts had not liked the idea of public policy and had even gone to the extent of saying, ‘Public Policy is always an unsafe and treacherous ground for legal decision.’4 In 1824, Justice Burrough had compared public policy to an unruly horse, ‘[A] very unruly horse, and when once you get astride it you never know where it will carry you.’5 However, in 1970 the great British judge, Lord Denning unequivocally said that the unruly horse can be controlled, With a good man in the saddle, the unruly horse can be kept in control. It can jump over obstacles. Had the timorous always held the field, not only the doctrine of public policy but even the Common Law or the principles of Equity would never have evolved.6

While having referred to Lord Denning and the ability of a good horse rider, it will be enlightening to know a little bit about him.

Lord Denning Lord Denning was a highly celebrated British Judge, well known for his wisdom and the uncanny ability to balance law and justice, and to somehow manoeuvre through a maze of binding precedents and still have his own voice. He was a great fan of the game of cricket and like a true cricketer did not miss his century; passed away a few months later after



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celebrating his hundredth birthday in 1999, he is remembered for hundreds of fantastic judgements, which were all full of pearls of wisdom well mixed with simple plain common sense, reasonableness and prudence. It was difficult, well-nigh impossible, to bind him with legal technicalities. He was able to see through numerous legal defences and shields and on most of the occasions would find a way to blow off the otherwise impermeable legal arguments. Though as a matter of aside as far as arbitration is concerned, it will be interesting to read a little more about him.

His Love for Cricket One of the judgements that testifies his love for the game of cricket is worth going through. It is the 1977 judgement of Miller versus Jackson.7 In the village of Lintz in County Durham, the village cricket team played on Saturdays and Sundays. In mid-1970s, a family moved into a newly constructed house adjacent to the field, and obviously one of the attractions was the open piece of land, which was used by the local players to play cricket. Every now and then, whenever a six was hit, the family faced problems, and they were so disturbed by this that they even decided to go away on the weekends. Fed up with their unending struggle with the local club, the family filed a case in the court against the club and sought an injunction and compensation. The court went through the meticulously kept record by the club and analysed the number of sixes hit during a certain period of time, and as to how many times the ball ended up landing in their house. The judge, in its wisdom, decided to grant an injunction and also awarded compensation. The club, evidently, felt aggrieved by this decision and appealed in the higher court, which did not agree with the injunction order; however, granted the compensation.

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The minority view was written by Lord Denning and the opening paragraph is like music to the ears of any fan of the game of cricket. A few lines are as follows:

In summertime village cricket is the delight of everyone. Nearly every village has its own cricket field where the young men play and the old men watch. In the village of Lintz in County Durham they have their own ground, where they have played these last 70 years. They tend it well. The wicket area is well rolled and mown. The outfield is kept short. It has a good club house for the players and seats for the onlookers. The village team play there on Saturdays and Sundays. They belong to a league, competing with the neighbouring villages. On other evenings after work they practise while the light lasts. Yet now after these 70 years a judge of the High Court has ordered that they must not play there anymore. He has issued an injunction to stop them. He has done it at the instance of a newcomer who is no lover of cricket. This newcomer has built, or has had built for him, a house on the edge of the cricket ground which four years ago was a field where cattle grazed. The animals did not mind the cricket. But now this adjoining field has been turned into a housing estate. The newcomer bought one of the houses on the edge of the cricket ground. No doubt the open space was a selling point. Now he complains that when a batsman hits a six the ball has been known to land in his garden or on or near his house. His wife has got so upset about it that they always go out at week-ends. They do not go into the garden when cricket is being played. They say that this is intolerable. So they asked the judge to stop the cricket being played and the judge, much against



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his will, has felt that he must order the cricket to be stopped: with the consequence, I suppose, that the Lintz Cricket Club will disappear. The cricket ground will be turned to some other use. I expect for more houses or a factory. The young men will turn to other things instead of cricket. The whole village will be much the poorer, and all this because of a newcomer who has just bought a house there next to the cricket ground.8 Differentiating between tax avoidance, which is legal, and tax evasion, which is illegal, he had said, ‘The avoidance of tax may be lawful, but it is not yet a virtue.’9 Can anyone say it in better and simpler words? Let us go through the most important and landmark case decided in the Indian courts on the issue of public policy and arbitration—ONGC versus SAW Pipes.

CASE 1: ONGC versus SAW Pipes (Supreme Court of India, 2003)10 As discussed earlier in the chapters on LD and Force Majeure, this judgement proved to be a major milestone in the development of case law related to the law of arbitration in India in the recent times, particularly after the enactment of the new law, the 1996 Act. In this chapter, we will go through the public policy aspects in detail.

Understanding ONGC–SAW Pipes in Brief Just to refresh our memory, the brief facts and the chain of events are as follows. ONGC entered into a contract with SAW Pipes for the supply of pipes for which the raw

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material was to be procured from an Italian supplier. As there was workers’ strike in Europe, SAW Pipes could not deliver the pipes in time to ONGC. For this delay, ONGC deducted LD while settling account with SAW Pipes. Thereafter, SAW Pipes invoked the arbitration clause primarily on two grounds: first, the strike was beyond their control and should be covered under force majeure with no liability on SAW Pipes, and, second, ONGC did not prove any loss because of the delay, and, therefore, no LD could be deducted. The arbitral tribunal decided in favour of SAW Pipes on the basis of the second ground while disagreeing with the first one. The arbitral tribunal awarded LD deducted by ONGC to be paid to SAW Pipes with interest. The contract did not provide for interest on disputed claims, whereas the tribunal had awarded interest on LD, which surely was a disputed claim. Section 28(3) of the 1996 Act says that the arbitral tribunal shall decide the dispute in accordance with the terms of a contract. In the instant case, the tribunal clearly went beyond the mandate given by the contract as agreed between the parties. Also, the tribunal misinterpreted the law on the subject and did not follow it properly by holding that ONGC should have proved the loss suffered. Section 28(1) of the 1996 Act provides that in case of domestic arbitration, the arbitral tribunal shall decide the dispute in accordance with the substantive law for the time being in force in India. By misinterpreting the law, the arbitral tribunal violated Section 28(1) and by awarding interest it violated Section 28(3). Thus, there clearly was violation of the provisions of law. Interestingly, the new law—the 1996 Act—did not provide for dealing with cases in which there was clear violation of the provisions of law. There was no provision in the Act to set aside such awards. The counsel for ONGC—Mr Ashok



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Desai—used with success the provision of public policy in the Act. Section 34 of the 1996 Act gives details of various grounds on which an award can be challenged and set aside. One of the grounds is that the award can be set aside if it is in conflict with the public policy of India. It is a longish section; however, the portion pertaining to public policy reads as follow: ‘Section 34: Application for setting aside arbitral award: … (2) An Arbitral award may be set aside by the court only if … (b) the court finds that … (ii) the arbitral award is in conflict with the public policy of India.’ Mr Desai’s contention was that violation of the provisions of law would mean conflict with the public policy of India, as it could not be the public policy of the country to allow violations of provisions of law. To agree to this argument, it was necessary to understand the meaning of the expression ‘public policy’ which was not defined clearly anywhere. It took the Supreme Court to a detailed discussion of the phrase, and what had been its various interpretations in India. In brief, the courts in India had earlier given a narrow meaning—referred mostly as in the Renusagar case—but in the instant case, the Supreme Court gave it a broader meaning. Thus, it was held that violation of the provisions of law would certainly be in conflict with the public policy of India, and the award was set aside.

Now to the Detailed Discussion of How the Expression ‘Public Policy’ Got a Broader Meaning While trying to answer the legal validity of the award, the Supreme Court had to first decide the meaning of the expression ‘public policy of India’. It was not easy at that time as the expression was not defined anywhere and the Supreme Court took it upon itself to give a meaning to the expression

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in the context of contracts, arbitration and basic constitutional framework. The Court observed, The phrase ‘Public Policy of India’ is not defined under the Act. Hence, the said term is required to be given meaning in context and also considering the purpose the section and scheme of the Act…. ‘[P]ublic policy’ is considered to be vague, susceptible to narrow or wider meaning depending upon the context in which it is used.11

The Supreme Court referred to a number of judgements cited by both the parties—some Indian and some foreign— and thereafter tried to arrive at the meaning which can be used for the instant case, and also be used as a precedent in future. Earlier in this chapter, we have already discussed a few of the cases cited in this judgement. A very important case which was referred to by the Supreme Court was the Renusagar case.

Renusagar versus General Electric12 In the Renusagar case, which was not governed by the 1996 Act, it was a matter to be governed by the Arbitration (Protocol and Convention) Act, 1937, and the Foreign Awards (Recognition and Enforcement) Act, 1961. It was an international commercial arbitration and before the 1996 act came into enforcement such disputes were resolved under these two laws in India. It had been and still is an important matter of consideration for sovereign countries to recognise and enforce foreign arbitral awards. For that purpose, it is important that there should not be any conflict of laws while enforcement of the arbitral award is undertaken in a particular jurisdiction. Whatever may be the award, the country enforcing it will not enforce it, in case the award is in conflict with the public policy of that country. The same applies to India and in Renusagar case the issue came up before the



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Supreme Court of India for the interpretation of the expression ‘public policy of India’. The Supreme Court concluded that the expression public policy mentioned in those laws meant the public policy of India and not the public policy of any other country. After going through various international treaties and case laws, the Supreme Court commented that the term public policy had been used in a narrower sense and to trigger its use, there must be something more than violation of the law of India. The Supreme Court gave a narrow meaning by allowing the use of public policy only in the field of private international law, and observed, Applying the said criteria it must be held that the enforcement of a foreign award would be refused on the ground that it is contrary to public policy if such enforcement would be contrary to (i) fundamental policy of Indian law; or (ii) the interests of India; or (iii) justice or morality.13

The Supreme Court after going through everything on record and hearing patiently the counsel for both the parties was of the opinion that any violation of the provisions of Foreign Exchange Regulation Act, 1973 (FERA) was undoubtedly against the public policy of India. The Supreme Court held, Keeping in view the aforesaid objects underlying FERA and the principles of governing enforcement of exchange control laws followed in other countries, we are of the view of that the provisions contained in FERA have been enacted to safeguard the economic interests of India and any violation of the said provisions would be contrary to the public policy of India as envisaged in Section 7(1)(b)(ii) of the Act.14

Back to ONGC versus SAW Pipes In Renusagar, public policy was given a narrow meaning; however, the counsel for ONGC argued that in that particular case, narrow meaning was given to an award which

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had attained finality, but in the instant case, validity of the award had been challenged, and both were not identical situations, and hence, the need to be dealt with differently. Thus, it would not be proper to give a narrow meaning to the expression ‘public policy’ while interpreting Section 34 of the 1996 Act. The Supreme Court agreed with this contention and explained it by giving an analogy of finality and execution of a decree of a court; once a decree becomes a finality at the time of execution of the decree, the court of execution has extremely limited and narrow options on which the execution proceedings can be challenged, whereas while a decree has been challenged before any appellate or revisional court, such courts have wider jurisdiction. The same applies to an arbitral award. While an arbitral award is being enforced, the enforcing court’s power is extremely limited, whereas the powers of a court where an arbitral award has been challenged are broader, and it is important not to give a narrow meaning to take care of any such situation where by tying the hands of the court, absurdity may be the final result. The Supreme Court observed: Therefore, in a case where the validity of award is challenged there is no necessity of giving a narrower meaning to the term ‘public policy of India’. On the contrary, wider meaning is required to be given so that the ‘patently illegal award’ passed by the arbitral tribunal could be set aside. If narrow meaning is contended by the learned senior counsel Mr. Dave is given, some of the provisions of the Arbitration Act would become nugatory. Take for illustration a case wherein there is a specific provision in the contract that for delayed payment of the amount due and payable, no interest would be payable, still however, if the Arbitrator has passed an award granting interest, it would be against the terms of the contract and thereby against the provision of Section 28(3) of the Act.15



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By giving the expression ‘public policy’ a wider meaning, the Supreme Court made the following observation: From this discussion it would be clear that the phrase ‘public policy of India’ is not required to be given a narrower meaning. As stated earlier, the said term is susceptible of narrower or wider meaning depending upon the object and purpose of legislation. Hence, the award which is passed in contravention of Sections 24, 28 or 31 could be set aside. In addition to Section 34, Section 13(5) of the Act also provides that constitution of the arbitral tribunal could also be challenged by a party. Similarly, Section 16 provides that a party aggrieved by the decision of the arbitral tribunal with regard to its jurisdiction could challenge such arbitral award under Section 34. In any case, it is for the Parliament to provide for limited or wider jurisdiction to the Court in case where award is challenged. But in such cases, there is no reason to give narrower meaning to the term ‘public policy of India’ as contended by learned senior counsel Mr. Dave. In our view, wider meaning is required to be given so as to prevent frustration of legislation and justice.16

The Supreme Court reiterated that public policy is dynamic in nature and cannot be given a static definition; its meaning changes from time to time, and thus, it would not be proper to give a narrow meaning and tie the hands of the higher judiciary behind their backs. Expanding the heads provided under the Renusagar case for public policy; the Supreme Court added the grounds of patent illegality with the proviso that the illegality must go to the root of the matter and should not be trivial in nature. It included unfairness and unreasonableness, which might shake the conscience of the court. The entire paragraph written by the Supreme Court is worth going through and is reproduced: Therefore, in our view, the phrase ‘Public Policy of India’ used in Section 34 in context to be given a wider meaning. It can be

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stated that the concept of public policy connotes some matter which concerns public good and the public interest. What is for public good or in public interest or what would be injurious or harmful to the public good or public interest has varied from time to time. However, the award which is, on the face of it, patently in violation of statutory provisions cannot be said to be in public interest. Such award/judgment/decision is likely to adversely affect the administration of justice. Hence, in our view in addition to narrower meaning given to the term ‘public policy’ in Renusagar’s case (supra), it is required to be held that the award could be set aside if it is patently illegal.   Result would be—award could be set aside if it is contrary to: (a) (b) (c) (d)

fundamentally policy of Indian law; or the interest of India; or justice or morality, or in addition, if it is patently illegal.

  Illegality must go to root of the matter and if the illegality is of trivial nature it cannot be held that award is against the public policy. Award could also be set aside if it is so unfair and unreasonable that it shocks the conscience of the Court. Such award is opposed to public policy and is required to be adjudged void.17

After giving a wider meaning to the expression ‘public policy’, the Supreme Court applied it to the instant case of ONGC versus SAW Pipes and came to the conclusion that the arbitral tribunal, which was a creation of the contract, clearly went beyond the terms of the contract, and also violated the provisions of the Arbitration and Conciliation Act, 1996, particularly those of Section 28(3). The Supreme Court expanded the scope of Section 34, set aside the award and made the following observations: It is to be reiterated that it is the primary duty of the arbitrators to enforce a promise which the parties have made



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and to uphold the sanctity of the contract which forms the basis of the civilized society and also the jurisdiction of the arbitrators. Hence, this part of the award passed by the arbitral tribunal granting interest on the amount deducted by the appellant from the bills payable to the respondent is against the terms of the contract and is, therefore, violative of Section 28(3) of the Act…. In the result, it is held that: … The impugned award requires to be set aside mainly on the grounds: (i) there is specific stipulation in the agreement that the time and date of delivery of the goods was the essence of the contract; (ii) in case of failure to deliver the goods within the period fixed for such delivery in the schedule, ONGC was entitled to recover from the contractor LD as agreed; (iii) it was also explicitly understood that the agreed LD were genuine pre-estimate of damages; (iv) on the request of the respondent to extend the time limit for supply of goods, ONGC informed specifically that time was extended but stipulated LD as agreed would be recovered; (v) LD for delay in supply of goods were to be recovered by paying authorities from the bills for payment of cost of material supplied by the contractor. (vi) there is nothing on record to suggest that stipulation for recovering LD was by way of penalty or that the said sum was in any way unreasonable. (vii) In certain contracts, it is impossible to assess the damages or prove the same. Such situation is taken care by Sections 73 and 74 of the Contract act and in the present case by specific terms of the contract. For the reasons stated above, the impugned award directing the appellant to refund US$ 3,04,970.20 and `15,75,559/- with interest which were deducted for the breach of contract as per the agreement requires to be set aside and is hereby set aside. The appeal is allowed accordingly. There shall be no order as to costs.18

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Comments and Questions The moment this judgement was pronounced, all hell broke loose. A part of the legal and corporate fraternity criticised the judgement as being antibusiness and killing the very idea of arbitration. It was said that such a decision would take back India to stone age as far as business dispute resolution was concerned because there can never be any certainty and predictability with regard to an arbitral tribunal’s decision, and hence, for all practical purposes, the Supreme Court had expanded the role of the courts and given to themselves unbridled discretionary powers which could be misused to set aside any arbitral award on the grounds of being in conflict with the public policy of India. On the other hand, another part of the legal and corporate fraternity hailed the decision as being a landmark and a tectonic shift from the unacceptable thought of having to live with unreasonable and unconscionable decisions to looking forward to having the courts exercise discretionary powers to strike at some of the most unreasonable and blatantly wrong decisions pronounced by arbitral tribunals. To whichever part one may belong and have loyalty too, the decision has stood the test of time, has been regularly followed by all the court since then and has become an integral part and parcel of the practice of arbitration law in India.

British Law Vis-à-Vis Indian Law The counsel for SAW Pipes had argued that the 1996 Act did not make any provision for setting aside any award in case there was any error of law. Such provisions had been made in a similar law enacted at the same time in the UK— the Arbitration Act, 1996, in Section 68 under the heading ‘Challenging the Award: Serious Irregularity’. It is interesting to note that the law on the subject of arbitration was enacted in India and in the UK in the same



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year; however, there is a notable difference in the names of both the laws and one needs to be a bit careful while referring to them. The British law is ‘The Arbitration Act, 1996’, whereas the Indian law is ‘The Arbitration and Conciliation Act, 1996’. Ordinarily, when there is no comparative discussion and focuses only on the Indian law, one may for the sake of convenience or brevity call even the Indian law as the Arbitration Act, 1996; however, technically speaking, that is a wrong practice. The English law provides for dealing with and setting aside awards which exhibit an error of law, but the Indian law lacks any such provision. Thus, one may argue that either it was the intention of the legislature in India that any award infested with an error of law should neither be challenged on that ground nor obviously be set aside or that the absence of any such provision in the law was an oversight and happened inadvertently. The latter seems to be the more obvious possibility, and that is what the Supreme Court was also inclined to believe, much to the chagrin of the counsel for SAW Pipes.

Intention of the Legislature It is a very difficult argument to be made that the intention of the legislature in India was to allow an error of law perpetrate in an award, and the courts in India should not have any jurisdiction to correct that anomaly, and rather be legally bound to enforce such awards. Accepting such a proposition would lead to absurdity and mockery of the judicial proceedings, reducing the role of higher judiciary to a mere spectator with hardly any powers to do anything to rectify an obvious error of law. This can never be the intention of the legislature, and rightly so, the Supreme Court did not agree with it. One of the main challenges that is being faced now by the legal and business communities is the ever-expanding scope

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of Section 34. The expression ‘public policy’ is used now to challenge almost all the awards, where it is not possible to find any of the grounds of challenge. Such has been the broader scope of the expression ‘public policy’ that almost anything and everything can be fitted into it. That is the biggest cause for worry. Uncertainty looms large. Contracting parties are not at all sure as to what lies ahead even after getting an award in their favour. Even a rock-solid award can be shredded to pieces by using the expression ‘public policy’. Is it really going to prove as the unruly horse? Will it be controlled by the person in the saddle? These are the questions which deserve an answer.

CASE 2: Associate Builders versus Delhi Development Authority (Supreme Court of India, 2014)19 After more than 10 years, in another interesting case of AB versus DDA—which we have discussed earlier in the chapter ‘Challenging an Award’—the issue of public policy was deliberated upon in great detail. Supporting fully the SAW Pipes decision, the court discussed each head of public policy as mentioned in the concluding paragraph of the ONGC– SAW Pipes decision and observed that while applying the test of public policy to any arbitration award the courts must remember that an arbitrator is not necessarily a trained judge, and hence, it would not be proper to set aside the award on strict legal technicalities. The Supreme Court cited the advice given by Lord Mansfield, a famous British judge, to a high military officer in Jamaica who needed to act as a judge, General, you have a sound head, and a good heart; take courage and you will do very well, in your occupation, in a court



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of equity. My advice is, to make your decrees as your head and your heart dictate, to hear both sides patiently, to decide with firmness in the best manner you can; but be careful not to assign your reasons, since your determination may be substantially right, although your reasons may be very bad, or essentially wrong.20

Takeaways for Managers

The most important takeaway for managers in this chapter is that when all other grounds fail for challenging an arbitral award, public policy can be used to challenge an award because there is no precise and clear-cut definition of the expression ‘public policy’. So, when everything, including the arbitral award, goes against your company, do not lose heart. The award can still be challenged on the ever-expanding expression of public policy. It is a matter of legal hair-splitting and the work is mostly to be done by the lawyers, still a business manager has a definite role to play. To use the ground of public policy for challenging an award a lawyer cannot simply go to the court and argue that just because the award is against his/ her client, he/she wants to challenge it on the basis of public policy. The lawyer has to find a legal peg to hang his/her argument. The manager can play the vital role of providing inputs, which are not reflected in the record of the case and can be deftly used by the lawyer to provide the complete picture of what has already been presented and what should have been presented. Public policy is the sum total of so many things, and the courts have readily been expanding the scope of the expression of public policy by interpreting it in the broadest of the terms that it is quite possible to bring almost anything under

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the ambit of public policy. The key factors for a business manager will be to try to bring the elements of customs, traditions, norms and unwritten rules of conduct in a particular business to the knowledge of the lawyers. This is true for the managers who have to challenge the award. The managers who would like the award to be enforced need to be quite apprehensive of the expression of public policy, as any award can be challenged on this ground. They must do the homework, again on the same lines as mentioned above, to document all the things which have not been put in black and white, but were important for the transaction. A business manager will do well to keep a tab on the changes in public policy in general, and related to his/her business in particular, as it is dynamic in nature.

11

Interest

Have you read the fascinating story Sawa Ser Gehun written by Munshi Premchand? It is a masterpiece from the great storywriter. A poor farmer borrowed a little more than a kilogram of wheat from the village moneylender. As far as the farmer was concerned, this was not recorded as something borrowed, and he did not even remember this. But the moneylender had made a record of this borrowing in his account books. Later, the farmer had given so much wheat to the moneylender on different occasions on one pretext or another, but as he did not remember about the wheat he had borrowed, he did not pay any attention to remind the moneylender that he was returning the wheat he had borrowed. So, according to the moneylender’s account books, the farmer still owed him the wheat and interest on that borrowed wheat, which was accruing every minute. One day, the moneylender raised the demand of more than a maund (about 40 kg) of wheat. The farmer was shocked and because of his poverty, he could not pay back. As a substitute, he and his coming generations were compelled to work for the moneylender without any payment, like bonded labourers. Literature is replete with such examples. Shakespeare had written in The Merchant of Venice about the usurious rates of interest charged by Shylock and the proverbial pound of flesh. In Indian society, it is very well known and people take pride in saying that, to a person, a grandchild is dearer than the child. That is, to a lender, interest is dearer than the principal. Such is the importance of interest that businesses try avoid getting into—it is a trap. Let us discuss how interest has an impact on arbitration awards.

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Time Does Not Fly Legal decision-making, whether in a court of law or in arbitration, takes time, and the claimant keeps waiting with tremendous patience as to when he is going to get his money? But as the procedure takes a long time, the claim that he had made long ago deserves to be paid with interest for the period of time the arbitration and the challenge of award were on. It has often been seen that the interest amount in a number of cases is more than the principal to be paid as the law had taken its circuitous route. There are highly contentious issues while calculating the interest to be paid, and these are related to the time period for which the interest has to be paid and also the rate at which it needs to be paid. That rate, as we can understand, is mutually decided by the parties and, hence, may not pose to be a very difficult decision for the court to be made. However, the time period for which the interest has to be paid is a very difficult decision. As is obvious, the time period while calculating the interest will end when the payment has been made. The real problem lies with finding the time when the clock would have started ticking for calculating the interest. The claimant would like that starting time to be as early as possible, so as to increase the time period, whereas the respondent would like the starting time to be pushed towards the present day, so as to reduce the time period.

Simple or Compound Whether the interest is to be calculated as simple interest or compound interest, expectedly, must be mentioned in the arbitration clause; however, at times the clause may be silent about it. The rate of interest, also, is expected to be mentioned in the arbitration clause, but on many occasions,



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the parties, while entering into a contract, do not anticipate the problems that may arise by not mentioning that rate, and leave it unmentioned. In such instances, the courts decide that rate, which may be prevalent in the related businesses at that point of time, keeping in mind the time period for which the interest has to be awarded. Thus, the rate of interest determined by the court is dependent on volatility in the market and will appear to one party as fair, whereas the other party will complain it to be unfair. The moral of the story, therefore, is to clearly mention the rate of interest in the arbitration clause itself. There is another issue of the interest being awarded for the time period of arbitration by the arbitrator, which is finally to be approved by the judge in a court of competent jurisdiction if the award has been challenged. The judge, on his own, would award interest from the date of the arbitration award till the date of settling the claim by making the payment; there can be variation between the interest awarded by the arbitrator and the judge, in terms of the rate of interest, as well as the principal amount considered for the computation of interest. Let us have a look at a few interesting cases.

CASE 1: Microsoft versus Samsung, 2014–2015 In 2013, Microsoft had acquired Nokia’s handset business. In October 2014, Samsung initiated arbitration proceedings in Hong Kong against Microsoft for a dispute which pertained to the non-payment of the interest of roughly US$7 million by Samsung to Microsoft. Prior to this, Microsoft had filed a petition in a New York court for the same matter. This interest had accrued on the patent royalty payment of roughly US$1 billion by Samsung to Microsoft; the payment was delayed

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as alleged by Microsoft, and that is why the company had claimed interest on late payment. Samsung on the other hand had raised a number of controversial issues, primarily the acquisition of Nokia by Microsoft and issues related to that acquisition. My hunch at the time when dispute arose was that parallel legal proceedings—both in New York and Hong Kong—may continue for some time, and until and unless better sense prevailed in both the parties for settlement—because US$7 million was not such a big amount of money for either of them—both may continue the legal fight. Well, one of the most important characteristics of interest might have motivated them to settle. ‘Interest keeps growing’, if not by the minute or by the hour, definitely by the day, and hence, it is prudent to settle. At a rate of 12 per cent per annum simple interest, a sum of US$1 billion will yield roughly `2 crore per day (20 million), assuming `60 to a dollar. And, that is not a small sum. And that is precisely what the companies did. In February 2015, the companies settled but kept the terms of settlement confidential. With this settlement, Samsung decided not to go ahead with the arbitration at Hong Kong, which must have been an important condition in the settlement.

Comments and Questions There were two interesting aspects which every business person must appreciate: The first one related to jurisdiction of courts regarding the resolution of disputes, and the second one being the interest claimed. Jurisdiction issues in international business disputes are of great significance as business parties belonging to two different nationalities may keep on harping on the jurisdiction of their domestic courts or the courts in a particular



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jurisdiction where they are comfortable, and that is why it is extremely important to decide at the outset—at the time of formation of a contract and signing the dispute resolution clause—about the jurisdiction of courts, which is typically done by mutual agreement. In the instant case, we find that judicial proceedings are on in a court in New York, as well as in Hong Kong, which leads to the duplicity of proceedings as well as utter confusion regarding the supremacy and dominance, and thereby the acceptability and enforcement of the decision, of either of the courts. Any dispute regarding jurisdiction is easily avoidable and the parties are expected to anticipate it and clarify their stand in writing. The second matter regarding interest on the claimed amount is a bit ticklish; however, it can also be resolved if the parties are very clear as to whether interest is payable on the claimed amount or not, and also at what rate. As we all understand, one of the most important factors in computing interest is the time period, which is the difference between the final time and the initial time. The final time is to be taken as the date on which the payment is actually made; however, there may not be a clear understanding between the parties as to when the clock started ticking as regards the computation of interest. One party may say that the interest is due from the date the payment was supposed to be made, the other party may come up with an argument that it can only be due from the date when the work was completed, another point of initiation can be the date from which the arbitrator or the court decided for the payment of the money and there may be several other starting points according to different parties. Unless it has been agreed between the parties, it is a highly contentious issue as to what point of time should be taken as the starting point. The time period and, therefore, the amount of interest depend directly on this initial point of time.

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CASE 2: Hyder Consulting (UK) versus Governor, State of Orissa (Supreme Court of India, 2014)1 This is a thought-provoking case, which was decided in December 2014 by a three-judge bench of the Supreme Court of India, with the CJI being a part of the bench, who notably wrote the minority dissenting judgement, whereas the two other judges had the similar opinion and wrote the majority judgement. As is obvious, the majority judgement is the judgement of the court. The basic question which was decided by the court was regarding the authority of the arbitrator to award interest on interest, that is, compound interest, or not. As we have discussed earlier, there are three time periods for which an arbitrator can award interest: First, the time from when the payment was due till the time of invocation of arbitration; second, during the pendency of arbitration, that is, pendentelite and, third, from the date of the award till the date of payment. There is usually no quarrel about the fact that the arbitrator can award interest from the first and second period; however, the issue is whether the interest which shall be awarded from the date the payment was due till the date of the award can be included in the sum on which further interest will accrue till the time of payment or not. In case interest can be paid on this sum, then it will amount to compound interest, and if interest is not allowed to be paid on this sum, then it will amount to simple interest. This matter has often been raised before the courts as on many occasions due to extremely slow pace of arbitration proceedings, and after the final enforcement of the award, the interest amount keeps on growing and becomes so humongous that the parties cannot simply ignore it, rather the winning party looks forward to recover the entire amount of interest from the losing party, whereas the losing



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party would not like to pay that much, and would at least fight not pay the compound interest. In the instant case, the discussion primarily hovers around the issues of the payment of interest, and facts related to the contract are not of much significance. As it appears from the decision of the Supreme Court, there must have been a contract between Hyder Consulting, UK, and the state of Orissa for certain work; after disputes must have arisen, arbitration would have been invoked. As mentioned in the judgement, in April 2000, an arbitral award for `2.3 crore (22.9 million) was given in favour of Hyder Consulting, UK. The award was challenged in the lowest court of competent jurisdiction in Orissa, which was in 2006 upheld by the division bench of Orissa High Court. Pursuant to the upholding of the award by the division bench, enforcement proceedings had started in the court of the District Judge, Khurda, Orissa, for a claim of almost `9 crore (90 million), which included the principal amount awarded by the arbitral tribunal, interest on the principal amount during the pendency of the arbitration proceedings, and most importantly, post-award interest on the aggregate of the principal sum awarded and interest awarded, thus making it an interest on interest. The District Judge had started the proceedings for the enforcement of the claimed amount. It was challenged by the state of Orissa in the Orissa High Court, which, in July 2010, quashed the proceedings of enforcement by the Judge and ordered recalculation of the total amount payable based on the Supreme Court decision in S.L. Arora2 case of 2010, wherein the Supreme Court had decided against the payment of interest on interest. The Orissa High Court decision was challenged before a two-judge bench of the Supreme Court. As it was a two-judge bench, there was a possibility that the two judges might not have agreed, and the same happened. The judges did not agree and referred the matter to the CJI for placing it before a larger bench.

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In this manner, the petition came before a three-judge bench. The main issue to be decided by this bench was the legality of the Arora case. If the Arora case had been upheld by the Supreme Court bench, then the challenge to the Orissa High Court decision would have failed, whereas if the Arora case had been negated, the challenge to the Orissa High Court decision would have been successful. Now, another interesting aspect in the Arora case had been that it had considered two earlier decisions—McDermott3 case of 2006 and Three Circles4 case of 2009—and held them to be per incuriam (discussed a bit later in the box), thereby ignoring them while making the final decision. In the instant case, this was the argument of Hyder Consulting that both the cases were wrongly held to be per incuriam, and the moment it was held that the two cases were not per incuriam and were valid, the Arora judgement would have to be set aside, paving the way for striking down the Orissa High Court decision— which was based on the Arora decision—and, thus, execution as per the arbitral award would proceed further.

Per incuriam In simple words, per incuriam means any judgement of a court which has been pronounced for want of care; and some of the material facts, documents or law might not have been produced before the court and, thus, that particular judgement cannot be a binding precedent. The expression per incuriam was discussed by Chief Justice Dattu in the instant judgement, where and earlier judgement had been cited and the following portion is worth reproducing: Before I consider the correctness of the aforementioned decisions, it would be necessary to elaborate upon the



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concept of ‘per incuriam’. The latin expression per incuriam literally means ‘through inadvertence’. A decision can be said to be given per incuriam when the Court of record has acted in ignorance of any previous decision of its own, or a subordinate court has acted in ignorance of a decision of the Court of record. As regards the judgments of this Court rendered per incuriam, it cannot be said that this Court has ‘declared the law’ on a given subject matter, if the relevant law was not duly considered by this Court in its decision. In this regard, I refer to the case of State of U.P. v. Synthetics and Chemicals Ltd., (1991) 4 SCC 139; 1991 Indlaw SC 702, wherein Justice R.M. Sahai, in his concurring opinion stated as follows: 40. ‘Incuria’ literally means ‘carelessness’. In practice per incuriam appears to mean per ignoratium. English courts have developed this principle in relaxation of the rule of stare decisis. The ‘quotable in law’ is avoided and ignored if it is rendered, ‘in ignoratium of a statute or other binding authority’. ... Therefore, I am of the considered view that a prior decision of this Court on identical facts and law binds the Court on the same points of law in a later case. In exceptional circumstances, where owing to obvious inadvertence or oversight, a judgment fails to notice a plain statutory provision or obligatory authority running counter to the reasoning and result reached, the principle of per incuriam may apply.5

Thus, any judgement to be held per incuriam is a blot on the decision-making process followed by the bench and simply becomes a piece of waste paper, without any value as binding precedent. Hence, it can be a legal strategy used by well-experienced lawyers to prove a binding precedent per incuriam through their sharp intellect and meticulous reasoning and make the binding precedent absolutely ineffective. Later, if it can be proved that the decision was

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wrongly held to be per incuriam, then that decision goes, which was made by holding the earlier decision per incuriam, and the earlier decisions are revived. The tool or weapon of per incuriam is extremely powerful and should be used with utmost caution and that too sparingly.

The law on the subject is contained in Section 31(7) of the Arbitration and Conciliation Act, 1996, and it is as follows: 31. Form and contents of arbitral award. (7) (a) Unless otherwise agreed by the parties, where and in so far as an arbitral award is for the payment of money, the arbitral tribunal may include in the sum for which the award is made interest, at such rate as it deems reasonable, on the whole or any part of the money, for the whole or any part of the period between the date on which the cause of action arose and the date on which the award is made. (b) A sum directed to be paid by an arbitral award shall, unless the award otherwise directs, carry interest at the rate of eighteen per centum per annum from the date of the award to the date of payment.

The important issue has been the interpretation of the word ‘sum’ as used in this particular section. There are two clear views on the subject—One says that the sum includes the principal plus the amount of interest awarded pendentelite by the arbitrator, whereas the other view is that the sum is only the principal amount that had been claimed and awarded by the arbitrator and does not include in any manner any interest, which had been awarded by the arbitrator pendentelite. In case we go with the former view, it means that on the date of the award, the sum awarded means the principal plus the interest till that point of time, and thereafter the losing party



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has to pay interest again on this sum, till the date of payment, which in other words means compounding of interest. The latter view, however, does not support this and is clearly against compounding of interest, if any. The Arora case held the latter view to be true, whereas the McDermott and the Three Circles cases were in favour of the former view. In McDermott case, it was held that: The Arbitrator has awarded the principal amount and interest thereon upto the date of award and future interest thereupon which do not amount to award on interest on interest as interest awarded on the principal amount upto the date of award became the principal amount which is permissible in law.6

In Three Circles case, the Supreme Court relied on the McDermott judgement and observed: Now the question comes which is related to awarding of ‘interest on interest’. According to the appellant, they have to pay interest on an amount which was inclusive of interest and the principal amount and, therefore, this amounts to a liability to pay ‘interest on interest’. This question is no longer res integra at the present point of time. This Court in McDermott International Inc. v. Burn Standard Co. Ltd and Ors., (2006) 11 SCC 181 has settled this question.7

The expression res integra used in the Three Circles case means an entirely new or untouched matter; some of those points which have not yet been decided by the court. In the case of Three Circles, the Supreme Court had relied on the McDermott judgement, and hence, as it was rightly written that the subject matter had already been decided on that point, and there was no need to consider it afresh. Chief Justice Dattu, by discussing the cases decided earlier, made the observation that the portion of the judgement from McDermott that relied upon in the Three Circles case

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was simply a submission made by one of the counsel, and was not the ratio decidendi of the judgement, and hence, it was wrongly relied upon in the Three Circles case. And if that is the case, the Arora case rightly held these two judgements to be per incuriam.

Ratio decidendi and Obiter dicta Ratio decidendi is the heart of any judgement, and literally means, in Latin, the reason or the rationale for making the decision. It is the basic point on which any case has been decided by a court. It is the principle which has been established by the court in any judgement, and, therefore, goes to the root of the matter. It is to be clearly contradistinguished with any other observation made while making the decision. Any such observation made is known as obiter dicta, which is something said by the bench as a remark on or in passing reference, but is not the core issue to be decided in a particular case before the bench. Thus, one has to be extremely careful while using the ratio or the obiter as a binding precedent. There are two schools of thought on the subject. The first one says that only the ratio decidendi of any judgement pronounced by a higher court should be considered as binding precedent, whereas the second one says that even the orbiter dicta of the Supreme Court is binding. There is an agreement to a large extent in the legal fraternity that each and every observation made by the Supreme Court of India is not a binding precedent on the lower courts in India, and the same applies to the judgements pronounced by the High Courts in the country. Still, at times, there are shades of grey and it is difficult to draw the thin dividing line to decide as to whether a certain statement made by the court is an obiter or a ratio.



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While hearing this matter, the Supreme Court discussed in great detail the interpretation which could be given to the words ‘sum’ and ‘interest’, and for this purpose definitions from various sources were collated:

‘Sum’: Meaning and Interpretation Webster’s Third New International Dictionary, Volume III defines ‘sum’ to mean, inter alia, the following: ‘Sum: An indefinite or specified amount of money.’ P. Ramanatha Aiyar’s Advanced Law Lexicon, Third Edition, 2005, Book 4, defines ‘sum’, inter alia, as the following: ‘Sum. When used with reference to values, ‘sum’ imports a sum of money.’ Corpus Juris Secundum, Volume LXXXIII, defines the word ‘sum’ as follows: ‘Sum. While the word ‘sum’ must be construed in connection with the context, it has a definite meaning appropriate to use with reference to dollars and cents, and, except where a different meaning plainly appears, it is restricted in its application to money, and in sense it is lexically defined as meaning money, and this is said to be the sense in which the word is most commonly used.’ The Oxford Dictionary gives the following meaning to the word ‘sum’: Sum, ‘if noun’:- A particular amount of money. Sum, ‘if verb’:- The total amount resulting from the addition of two or more numbers, amounts, or items.

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In Black’s Law Dictionary, the word ‘sum’ is given the following meaning:‘Sum. In English law- A summary or abstract; a compendium; a collection. Several of the old law treatises are called ‘sum.’ Lord Hale applies the term to summaries of statute law. Burrill. The sense in which the term is most commonly used is ‘money’; a quantity of money or currency; any amount indefinitely, a sum of money, a small sum, or a large sum.’

‘Interest’: Meaning and Interpretation Wharton’s Law Lexicon, Fourteenth Edition, defines ‘interest’ as follows: ‘Interest. 1. Money paid at a fixed rate per cent for the loan or use of some other sum, called the principal.’ Black’s Law Dictionary, Seventh Edition, 1999, defines ‘interest’ as: ‘Interest. 1. Advantage or profit, esp. of a financial nature.’ Webster’s Third New International Dictionary, Volume III defines ‘interest’ to mean, inter alia, the following: ‘Interest. The price paid for borrowing money generally expressed as a percentage of the amount borrowed paid in one year.’ Corpus Juris Secundum, Volume XLVII, explains the word ‘interest’ as follows: ‘Interest is the compensation allowed by law, or fixed by the parties, for the use or forbearance of money, or as damages for its detention.’



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Stroud’s Judicial Dictionary, Seventh Edition, 2008, Volume 2, p. 1385, defines the term ‘interest’ as follows: ‘Interest is compensation paid by the borrower to the lender for deprivation of the use of his money.’

Minority View After discussing various other case laws on the subject, the Chief Justice, Dattu, made the following observation and held (minority view): Therefore, in my considered view, the term ‘sum’ … would refer to the money as adjudicated by the arbitral tribunal based on the claim of the parties to the arbitral proceedings. It has already been noticed that this money would be distinct from the interest as may have been awarded by the arbitral tribunal … the interest … would be imposed on money awarded by the arbitral tribunal on the basis of the claims of the parties, and the said money cannot merge within it any interest as imposed in the period from the date of cause of action to the date of the award…. I find no infirmity with the S.L. Arora case (supra), whereby it was held that if the arbitral award is silent about interest from the date of award till the date of payment, the person in whose favour the award is made will be entitled to interest at 18% per annum on the principal amount awarded, from the date of award till the date of payment.8

Majority View Justice S.A. Bobde and Justice A.M. Sapre pronounced the majority judgement. While Justice Bobde agreed with CJI Dattu that McDermott was not the binding precedent on the subject of interest on interest, he did not agree with the decision in Arora case, and hence, differed with CJI Dattu.

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Justice Bobde clearly said that Arora’s view that the ‘sum’ in Section 31(7) did not include the interest accrued till the date of the award was faulty. According to him, a simple plain reading of 31(7) would convey otherwise. Justice Sapre agreed with Justice Bobde, and that formed the majority view, different from the minority opinion of CJI Dattu. Justice Bobde discussed ‘sum’ in the light of Section 31(7) as follows: Thus, when used as a noun, as it seems to have been used in this provision, the word ‘sum’ simply means ‘an amount of money’; whatever it may include – ‘principal’ and ‘interest’ or one of the two. Once the meaning of the word ‘sum’ is clear, the same meaning must be ascribed to the word in cl. (b) of sub-s. (7) of S. 31 of the Act, where it provides that a sum directed to be paid by an Arbitral Award ‘shall carry interest …’ from the date of the Award to the date of the payment i.e. post-award. In other words, what cl. (b) of sub-s. (7) of S. 31 of the Act directs is that the ‘sum,’ which is directed to be paid by the Award, whether inclusive or exclusive of interest, shall carry interest at the rate of eighteen per cent per annum for the post-award period, unless otherwise ordered.9

He gave the following very convincing reasoning: Thus … the Act provides, firstly … that the Arbitral Tribunal may include interest while making an award for payment of money in the sum for which the Award is made and further…the sum so directed to be made by the Award shall carry interest at a certain rate for the post award period. The purpose of enacting this provision is clear, namely, viz. to encourage early payment of the awarded sum and to discourage the usual delay, which accompanies the execution of the Award in the same manner as if it were a decree of the court…. In this view of the matter, it is clear that the interest, the sum directed to be paid by the Arbitral Award … is inclusive of interest pendent lite.10



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Arora Case: Wrongly Decided Justice Bobde finally held the Arora case to have been wrongly decided: In the result, I am of the view that S.L. Arora’s case is wrongly decided in that it holds that a sum directed to be paid by an Arbitral Tribunal and the reference to the Award on the substantive claim does not refer to interest pendentelite awarded on the ‘sum directed to be paid upon Award’ and that in the absence of any provision of interest upon interest in the contract, the Arbitral Tribunal does not have the power to award interest upon interest, or compound interest either for the pre-award period or for the post-award period. Parliament has the undoubted power to legislate on the subject and provide that the Arbitral Tribunal may award interest on the sum directed to be paid by the Award, meaning a sum inclusive of principal sum adjudged and the interest, and this has been done by Parliament in plain language.11

Justice Sapre agreed with Justice Bobde; however, he wrote additional reasons for arriving at the same conclusion. He explained succinctly the pre-award and post-award interest and their rationale in the following words: S. 31(7)(a) of the Act deals with grant of pre-award interest while sub-cl. (b) of S. 31(7) of the Act deals with grant of postaward interest. Pre-award interest is to ensure that arbitral proceedings are concluded without unnecessary delay. Longer the proceedings, would be the period attracting interest. Similarly, post-award interest is to ensure speedy payment in compliance of the award. Pre-award interest is at the discretion of Arbitral Tribunal, while the post-award interest on the awarded sum is mandate of statute - the only difference being that of rate of interest to be awarded by the Arbitral Tribunal. In other words, if the Arbitral Tribunal has awarded post-award interest payable from the date of award to the date of payment at a particular rate in its discretion then it will prevail else the party will be entitled to claim post-award

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interest on the awarded sum at the statutory rate specified in cl. (b) of S. 31(7) of the Act, i.e., 18%. Thus, there is a clear distinction in time period and the intended purpose of grant of interest.12 [F]or the purposes of an award, there is no distinction between a ‘sum’ with interest, and a ‘sum’ without interest. Once the interest is ‘included in the sum’ for which the award is made, the original sum and the interest component cannot be segregated and be seen independent of each other. The interest component then loses its character of an ‘interest’ and takes the colour of ‘sum’ for which the award is made.13

Interpretation Justice Sapre in very strong words expressed that once the arbitral tribunal gives an award, there is one sum to be awarded and there is no such thing as principal and interest. It is on this sum that the losing party must pay interest till the time of payment. Hence, he was of the opinion that there is nothing like interest on interest. He based his decision on the principles of interpretation as mentioned in the book by Justice G.P. Singh, an authority on the subject. Thus, plain and simple meaning has to be given to the words used in Section 31(7). Justice Sapre very respectfully wrote the following words: My aforesaid interpretation of S. 31 (7) of the Act is based on three golden rules of interpretation as explained by Justice G.P. Singh—Interpretation of Statute (13th Edition, 2012) where the learned author has said that while interpreting any Statue, language of the provision should be read as it is and the intention of the legislature should be gathered primarily from the language used in the provision meaning thereby that attention should be paid to what has been said as also to what has not been said; second, in selecting out of different interpretations ‘the Court will adopt that which is just, reasonable, and sensible rather than that which is none of those



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things’ ; and third, when the words of the Statute are clear, plain or unambiguous, i.e., they are reasonably susceptible to only one meaning, the Courts are bound to give effect to that meaning irrespective of the consequence. I have kept these principles in mind while interpreting S. 31(7) of the Act.14

So, finally, the Supreme Court held that interest has to be paid from the date of the award till the date of payment on the sum awarded by the arbitral tribunal, which included the principal amount awarded and interest pendentelite.

Takeaways for Managers

Business managers would do well to remember two things. First, a stitch in time saves nine. Nowhere can it apply better than the issue of interest. Whenever there is an issue of payment to be made, the best policy is to make it as early as possible. The more the payment is delayed, the more the interest accrues on it. If a business manager is on the other side of the table, that is, he/she has to receive the payment, but the other party is not willing to make it, then it is incumbent on this business manager to include each and every penny as interest payment due in the claim to be made. Second, a business manager should close the chapter once and for all. Do it once and finish it off. Any part of payment which is not disputed should not remain unpaid. It is the temptation for any business manager not to pay the entire amount if there is a dispute regarding a certain sum of money. By adopting this tactic, a business manager thinks that he would get in a better bargaining power position and the other party will try to negotiate with him for the complete payment. This approach may work in a few instances;

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however, if used repeatedly with the same party, it may backfire. Thus, a business manager should be very careful in not making the payment and trying to negotiate it just once or twice, but it does not help to be stubborn and not make the payment. The reason is that the other party gets entitled to claim interest from the time the payment was due. This interest amount may prove to be severely damaging. Going a little further, it would not harm you to be a little more practical. Of course, you should pay the undisputed amount. Also, you should think twice or thrice about the disputed amount and if you feel in the heart of hearts that there is some merit in the claim made by the other party, it will be your long-term interest to make the payment, at least to a reasonable extent, which may not prove to be prejudicial to your company. The basic idea is to save on the interest which may accrue if the payment is not made. After all, a bad settlement is better than a good litigation.

Epilogue After going through different aspects of contracts and arbitration, there are certain key points for the managers. There is, however, a word of caution: These key points, in no way, are any theories or doctrines or rules for doing business. These are simply certain understandings based on simple plain common sense and reason, which may help in providing an elementary framework for making managerial decisions in business. It is not at all suggested that the key points may supplant the use of the advice of a legal counsel; the facts and circumstances of each and every case need to be understood and evaluated by the business manager and the legal counsel together, so as to arrive at a mutually agreed set of issues to be handled. Basic understanding of the contractual provisions of the law of the land and issues related with dispute resolution clauses provides a lot of confidence to the business manager and the ability to articulate them in a better manner to his/her colleagues in the company, including the in-house counsel, and also to the individuals representing the other party, regulatory institutions, government functionaries and anyone else concerned with the matter. It is expected that business managers would be careful about the ambiguities which creep in during the formation of a contract—either because of ignorance or negligence— and also later on during its performance. A special mention needs to be made about proper paperwork, which often is the clinching factor in a legal battle: one which, in the first

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instance, must be avoided by putting in the best efforts to negotiate and settle the matter at the very outset. In case negotiations fail, meticulous paperwork comes to one’s rescue. It is significant to avoid a dispute rather than to think about its resolution; however, it may not always be possible to avoid disputes and, hence, the business manager must be truly prepared to deal with the situation. Such preparation is not only restricted to preparing the papers, but also an important aspect is to know about the legal environment in which the issue has to be managed. The legal system in different countries may not be the same, and, therefore, conducting international business knowledge of the finer aspects of the system in the countries they deal with is mandatory for managers. Even while doing business in India, there are different local laws in various states. If the business is spread out in more than one state, then managers have to broadly know the legal environment in all the states where their companies conduct business. Now given the fact that the legal system in a country is heavily dependent on its political system, astute business managers have to be proactive in keeping a tab on the political developments happening in the countries in which they conduct businesses. There is another important aspect which pertains to global business organisations and their working: International businesses are very often guided by the norms set by the World Trade Organisation, several other multilateral treaties and numerous bilateral treaties that the host country might have signed with other countries. Anticipating as to what may happen in the near future both in the political and legal systems, using all the information available, will stand any business manager in good stead. This book, hopefully, would have kindled some curiosity to know more. Thousands of pages are available on any topic at the click of a mouse. A reader faces the problem of



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plenty. After going through this book, I expect managers to develop some understanding about the subject and knowledge of certain keywords and concepts. I am quite sure that with that understanding they will be able to sift properly the material as per their requirement and interest.

Appendix: Important Definitions The Contract Act, 1872 Section 2. Interpretation Clause In this Act the following words and expressions are used in the following senses, unless contrary intention appears from the context: (a) When one person signifies to another his willingness to do or to abstain from doing anything, with a view to obtaining the assent of that other to such act or abstinence, he is said to make a proposal. (b) When a person to whom the proposal is made, signifies his assent thereto, the proposal is said to be accepted. A proposal, when accepted, becomes a promise. (c) The person making the proposal is called the ‘promisor’, and the person accepting the proposal is called ‘promisee’. (d) When, at the desire of the promisor, the promisee or any other person has done or abstained from doing, or does or abstains from doing, or promises to do or to abstain from doing, something, such act or abstinence or promise is called a consideration for the promise. (e) Every promise and every set of promises, forming the consideration for each other, is an agreement. (f) Promises which form the consideration or part of the consideration for each other are called reciprocal promises.



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(g) An agreement not enforceable by law is said to be void. (h) An agreement enforceable by law is a contract. (i) An agreement which is enforceable by law at the option of one or more of the parties thereto, but not at the option of the other or others, is a voidable contract. (j) A contract which ceases to be enforceable by law becomes void when it ceases to be enforceable.

The Arbitration and Conciliation Act, 1996 Section 7. Arbitration Agreement (1) In this part, ‘arbitration agreement’ means an agreement by the parties to submit to arbitration all or certain disputes which have arisen or which may arise between them in respect of a defined legal relationship, whether contractual or not. (2) An arbitration agreement may be in the form of an arbitration clause in a contract or in the form of a separate agreement. (3) An arbitration agreement shall be in writing. (4) An arbitration agreement is in writing if it is contained in: (a) 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. (5) The reference in a contract to a document containing an arbitration clause constitutes an arbitration

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agreement if the contract is in writing and the reference is such as to make that arbitration clause part of the contract.

Section 11. Appointment of Arbitrators (1) A person of any nationality may be an arbitrator, unless otherwise agreed by the parties. (2) Subject to Sub-section (6), the parties are free to agree on a procedure for appointing the arbitrator or arbitrators. (3) Failing any agreement referred to in Sub-section (2), in an arbitration with three arbitrators, each party shall appoint one arbitrator, and the two appointed arbitrators shall appoint the third arbitrator who shall act as the presiding arbitrator. (4) If the appointment procedure in Sub-section (3) applies and (a) a party fails to appoint an arbitrator within 30 days from the receipt of a request to do so from the other party or (b) the two appointed arbitrators fail to agree on the third arbitrator within 30 days from the date of their appointment, then the appointment shall be made, upon request of a party, by the Chief Justice or any person or institution designated by him. (5) Failing any agreement referred to in Sub-section (2), in an arbitration with a sole arbitrator, if the parties fail to agree on the arbitrator within 30 days from receipt of a request by one party from the other party, then to so agree the appointment shall be made, upon request of a party, by the Chief Justice or any person or institution designated by him.



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(6) Where, under an appointment procedure agreed upon by the parties: (a) a party fails to act as required under that procedure or (b) the parties, or the two appointed arbitrators, fail to reach an agreement expected of them under that procedure or (c) a person, including an institution, fails to perform any function entrusted to him or it under that procedure, a party may request the Chief Justice or any person or institution designated by him to take the necessary measure, unless the agreement on the appointment procedure provides other means for securing the appointment. (7) A decision on a matter entrusted by Sub-section (4) or Sub-section (5) or Sub-section (6) to the Chief Justice or the person or institution designated by him is final. (8) The Chief Justice or the person or institution designated by him, in appointing an arbitrator, shall have due regard to: (a) any qualifications required of the arbitrator by the agreement of the parties and (b) other considerations as are likely to secure the appointment of an independent and impartial arbitrator. (9) In the case of appointment of sole or third arbitrator in an international commercial arbitration, the CJI or the person or institution designated by him may appoint an arbitrator of a nationality other than the nationalities of the parties where the parties belong to different nationalities.

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(10) The Chief Justice may make such scheme as he may deem appropriate for dealing with matters entrusted by Sub-section (4) or Sub-section (5) or Sub-section (6) to him. (11) Where more than one request has been made under Sub-section (4) or Sub-section (5) or Sub-section (6) to the Chief Justices of different High Courts or their designates, the Chief Justice or his designate to whom the request has been first made under the relevant sub-section shall alone be competent to decide on the request. (12) (a) Where the matters referred to in Sub-sections (4), (5), (6), (7), (8) and (10) arise in an international commercial arbitration, the reference to ‘Chief Justice’ in those sub-sections shall be construed as a reference to the ‘Chief Justice of India’. (b) Where the matters referred to in Sub-sections (4), (5), (6), (7), (8) and (10) arise in any other arbitration, the reference to ‘Chief Justice’ in those sub-sections shall be construed as a reference to the Chief Justice of the High Court within whose local limits the principal Civil Court referred to in Clause (e) of Sub-section (1) of Section 2 is situated, and where the High Court itself is the Court referred to in that clause, to the Chief Justice of that High Court.

Section 16. Competence of Arbitral Tribunal to Rule on Its Jurisdiction (1) The arbitral tribunal may rule on its own jurisdiction, including ruling on any objections with respect to the existence or validity of the arbitration agreement, and for that purpose:



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(a) an arbitration clause which forms part of a contract shall be treated as an agreement independent of the other terms of the contract and (b) a decision by the arbitral tribunal that the contract is null and void shall not entail ipso jure the invalidity of the arbitration clause. (2) A plea that the arbitral tribunal does not have jurisdiction shall be raised not later than the submission of the statement of defence; however, a party shall not be precluded from raising such a plea merely because that he has appointed, or participated in the appointment of, an arbitrator. (3) A plea that the arbitral tribunal is exceeding the scope of its authority shall be raised as soon as the matter alleged to be beyond the scope of its authority is raised during the arbitral proceedings. (4) The arbitral tribunal may, in either of the cases referred to in Sub-section (2) or Sub-section (3), admit a later plea if it considers the delay justified. (5) The arbitral tribunal shall decide on a plea referred to in Sub-section (2) or Sub-section (3) and where the arbitral tribunal takes a decision rejecting the plea, continue with the arbitral proceedings and make an arbitral award. (6) A party aggrieved by such an arbitral award may make an application for setting aside such an arbitral award in accordance with Section 34.

Section 34. Application for Setting Aside Arbitral Award (1) Recourse to a Court against an arbitral award may be made only by an application for setting aside such award in accordance with Sub-section (2) and Sub-section (3).

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(2) An arbitral award may be set aside by the Court only if: (a) the party making the application furnishes proof that: (i) a party was under some incapacity, (ii) 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, (iii) the party making the application was not given proper notice of the appointment of an arbitrator or of the arbitral proceedings or was otherwise unable to present his case, (iv) the arbitral award deals with a dispute not contemplated by or not falling within the terms of the submission to arbitration, or it contains decisions on matters beyond the scope of the submission to arbitration: Provided that, if the decisions on matters submitted to arbitration can be separated from those not so submitted, only that part of the arbitral award which contains decisions on matters not submitted to arbitration may be set aside, (v) the composition of the arbitral tribunal or the arbitral procedure was not in accordance with the agreement of the parties, unless such agreement was in conflict with a provision of this Part from which the parties cannot derogate, or, failing such agreement, was not in accordance with this Part; or (b) the Court finds that: (i) the subject-matter of the dispute is not capable of settlement by arbitration under the law for the time being in force or



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(ii) the arbitral award is in conflict with the public policy of India. Explanation. Without prejudice to the generality of Sub-clause (ii) it is hereby declared, for the avoidance of any doubt, that an award is in conflict with the public policy of India if the making of the award was induced or affected by fraud or corruption or was in violation of Section 75 or Section 81. (3) An application for setting aside may not be made after three months have elapsed from the date on which the party making that application had received the arbitral award or, if a request had been made under Section 33, from the date on which that request had been disposed of by the arbitral tribunal: Provided that if the Court is satisfied that the applicant was prevented by sufficient cause from making the application within the said period of three months, it may entertain the application within a further period of 30 days, but not thereafter. (4) On receipt of an application under Sub-section (1), the Court may, where it is appropriate and it is so requested by a party, adjourn the proceedings for a period of time determined by it in order to give the arbitral tribunal an opportunity to resume the arbitral proceedings or to take such other action as in the opinion of arbitral tribunal will eliminate the grounds for setting aside the arbitral award.

Notes Chapter 2 1. These are popular roadside snacks readily available in most of the Indian cities and towns. 2. Col D.I. Mac Pherson vs. M.N. Appanna and Another; Supreme Court of India; AIR 1951 SC 184; Appeal from a Judgment and Decree of the Judicial Commissioner of Coorg, dated 1 April 1946, in Original Suit No. 1 of 1945 decided on 9 February 1951; Present: The Hon’ble Justice Saiyid Fazl Ali, The Hon’ble Justice Mukherjea and The Hon’ble Justice Chandrasekhara Aiyar. 3. Bharat Heavy Electricals Limited (BHEL) vs. Tata Projects Limited; Supreme Court of India; Bench: Shiva Kirti Singh, Fakkir Mohamed Ibrahim Kalifulla, JJ.; Reported: 2014 Indlaw SC 567; 1 September 2014; C.A. No. 8373 of 2014 [Arising out of S.L.P.(C) No. 35021 of 2013]; The Judgment was delivered by: Shiva Kirti Singh, J. 4. Larsen and Toubro Limited vs. Mohan Lal Harbans Lal Bhayana; Supreme Court of India; Bench: A.K. Sikri, Surinder Singh Nijjar, JJ.; Reported: 2014 Indlaw SC 174; 2014 (3) AWC 2579; JT 2014 (3) SC 485; 2014(3) SCALE 54; 25 February 2014; C.A. No. 7586 of 2009; The Judgment was delivered by: A. K. Sikri, J. 5. Oil and Natural Gas Corporation Limited vs. Western Geco International Limited; Supreme Court of India; Bench: T.S. Thakur, Adarsh Kumar Goel, C. Nagappan, JJ.; Reported: 2014 Indlaw SC 587; 4 September 2014; C.A. No. 3415 of 2007; The Judgment was delivered by: T.S. Thakur, J. 6. Swiss Timing Limited vs. Organising Committee, Commonwealth Games 2010, Delhi; Supreme Court of India; Bench: Surinder Singh Nijjar, JJ.; Reported: 2014 Indlaw SC 387; 28 May 2014; Arbitration Petition No. 34 of 2013.

Chapter 3 1. Halsbury’s Laws of England, 4th Edition, vol. 2, para 501. 2. Circuit Judge Learned Hand in American Almond Products Co. vs. Consolidated Pecan Sales Co., Inc.; US Court of Appeals, Second Circuit, 1944; 144 F.2d 448, 450.



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3. AIR 1989 SC, 1263; Food Corporation of India vs. Joginderpal Mohinderpal. 4. FCI case, SC, 1989. 5. Ashoka Tubewell and Engineering Corporation etc. vs. Union of India etc.; Supreme Court of India; Bench: Anil R. Dave, Uday U. Lalit, JJ.; Reported on 2014 Indlaw SC 758; 2014(12) SCALE 310; 22 September 2014; C.A. Nos. 9852-53 of 2014 (Arising out of S.L.P.(C) Nos. 1015859 of 2014) (Arising out of impugned final judgement and order Dt. 24/12/2013 in APO No. 203 of /2013, 24/12/2013 in AP No. 333 of 2007, 24/12/2013 in APO No. 207 of 2013 passed by Calcutta High Court); The judgement was delivered by Anil R. Dave, J. 6. US Supreme Court; Scherk vs. Alberto-Culver Co.; 417 US 506 (1974); Certiorari to the United States Court of Appeals for the Seventh Circuit.; No. 73-781.; Argued 29 April 1974.; Decided 17 June 1974. Decided 5:4; Stewart, J., delivered the opinion of the Court, in which Burger, C. J., and Blackmun, Powell, and Rehnquist, JJ., joined. Douglas, J., filed a dissenting opinion, in which Brennan, White, and Marshall, JJ., joined.

Chapter 4 1. Renusagar Power Co. Limited vs. General Electric Co.; Supreme Court of India; 7 October 1993; Bench: S.C. Agrawal, M.N. Venkatachaliah, A.S. Anand, JJ.; Reported in 1993 Indlaw SC 1441; (1994) Supp1 SCC 644; AIR 1994 SC 860; 1994 (2) ARBLR 405; [1994] 81 Comp Cas 171; 1994 (1) Comp LJ 58; JT 1993 (Supp) SC 211; 1993(4) SCALE 44; The judgement was delivered by S.C. Agrawal, J. 2. Palkhivala, Nani A., ‘We, The Nation: The Lost Decades (New Delhi: U B S Publishers’ Distributors Ltd, 1994). 3. An UNCITRAL Arbitration under the agreement between the Government of Australia and the Government of the Republic of India on the promotion and protection of investments between White Industries Australia Limited and the Republic of India; Arbitral Tribunal—The Hon. Charles N. Brower, Christopher Lau SC, J. William Rowley QC (Chairman); at London; Date of award 30 Nov 2011. 4. Reliance Industries Limited and others vs. Union of India; Supreme Court of India; Bench: Surinder Singh Nijjar, J.; Reported on 2014 Indlaw SC 193; 2014 (3) AWC 2712; JT 2014 (4) SC 549; 2014(4) SCALE 390; 31 March 2014; Arbitration Petition No. 27 of 2013; The judgement was delivered by Surinder Singh Nijjar, J.; The judgement was recalled a few days later. 5. Supreme Court withdraws Australian judge as arbitrator in Reliance Industries case; Economic Times; 3 April 2014; http://articles.economictimes.indiatimes.com/2014-04-03/news/48834838_1_reliance-industriesltd-presiding-arbitrator-justice-nijjar (last accessed 30 April 2015).

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Chapter 5 1. Oil and Natural Gas Corporation Ltd vs. SAW Pipes Ltd; Supreme Court of India; 2003 Indlaw SC 362: AIR 2003 SC 2629; Bench: M.B. Shah and Arun Kumar, JJ.; 17 April 2003. 2. Ibid. 3. Bhai Panna Singh and others vs. Bhai Arjun Singh and others AIR 1929 PC 179.

Chapter 6 1. Oil & Natural Gas Corporation Ltd vs. SAW Pipes Ltd; Supreme Court of India; 2003 Indlaw SC 362: AIR 2003 SC 2629; Bench: M.B. Shah and Arun Kumar, JJ.; 17 April 2003. 2. Phulchand Exports Limited vs. OOO Patriot, Supreme Court of India, Bench: R.M. Lodha, Jagdish Singh Khehar, JJ., Reported in 2011 Indlaw SC 737; 2011 (10) SCC 300; 12 October 2011; Civil Appeal No. 3343 of 2005; The judgement was delivered by Hon’ble Justice R.M. Lodha. 3. Phulchand Exports Limited vs. OOO Patriot, Supreme Court of India, Bench: R.M. Lodha, Jagdish Singh Khehar, JJ., Reported in 2011 Indlaw SC 737; 2011 (10) SCC 300; 12 October 2011; Civil Appeal No. 3343 of 2005; The judgement was delivered by Hon’ble Justice R.M. Lodha; paragraphs 31–33 of the Indlaw judgement. 4. Hindustan Petroleum Corporation Limited (HPCL), Jamshedji Tata Road, Mumbai vs. (1) Batliboi Environmental Engineers Limited, Govandi (West), Mumbai; (2) K. Narayanan, Sole Arbitrator, Navi Mumbai; Bombay High Court; 02 November 2007; Bench: J.H. Bhatia and D.K. Deshmukh, JJ.; Reported in 2007 Indlaw MUM 543; 2008(1) ALL MR 736; 2008 (1) Bom.C.R. 89; 2008 (2) MahLJ 542. 5. HPCL vs. Batliboi, paragraph 9 of the 2008 (2) MahLJ 542. 6. HPCL vs. Batliboi, paragraph 18 of the 2008 (2) MahLJ 542.

Chapter 7 1. Enercon (India) Limited and others vs. Enercon GmbH and another, as reported in 2014 Indlaw SC 92; JT 2014 (3) SC 49; 2014(2) SCALE 452; Supreme Court of India dated 14 February 2014. 2. Enercon (India) vs. Enercon GmbH, 2014 Indlaw SC 92, paragraph 144. 3. Ibid., paragraph 145.



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4. 2000 Indlaw SC 2668: AIR 2000 SC 1379; Supreme Court of India; Wellington Associates Limited vs. Kirit Mehta; Hon’ble Justice M. Jagannadha Rao; 4 April 2000. 5. Ibid. 6. 2 SCC 628, 2006 INDLAW SC 24; Supreme Court of India; Shin Satellite Public Company Limited vs. Messrs Jain Studios Limited; 31 Jan 2006; Bench: C.K. Thakker, J.

Chapter 8 1. HPCL vs. Batliboi, paragraph 9 of the 2008 (2) MahLJ 542. 2. You One Engineering and Construction Company Limited and Another vs. National Highways Authority of India; Supreme Court of India; 2006 Indlaw SC 607; March 10, 2006; Bench: Hon’ble Justice B.N. Srikrishna. 3. Ibid. 4. You One Engineering vs. NHAI, 2006 Indlaw SC 607; paragraphs 10–11. 5. MSP Infrastructure Limited (MSP) vs. Madhya Pradesh Road Development Corporation (MPRDC); Supreme Court of India; 5 December 2014; Bench: Sharad Arvind Bobde, Jasti Chelameswar, JJ.; Reported in 2014 Indlaw SC 849; AIR 2015 SC 710; 2015 (1) AWC 392; 2015 (1) BC 395; 2015 (1) Law Herald (P&H) 66; 2014(13) SCALE 601; C.A. No. 10778 of 2014 [Arising out of S.L.P. (Civil) No. 16539 of 2010]; the judgement was delivered by Sharad Arvind Bobde, J. 6. MSP vs. MPRDC; 2014 Indlaw SC 849; paragraph 14.

Chapter 9 1. Associate Builders (AB) vs. Delhi Development Authority (DDA); Supreme Court of India; 25 November 2014; Bench: R.F. Nariman, Ranjan Gogoi, JJ.; Reported in 2014 Indlaw SC 801; C.A. No. 10531 of 2014 (Arising out of S.L.P. (Civil) No. 14767 of 2012) (Arising out of impugned final judgement and order Dt. 08/02/2012 in FAO No. 667/2006 passed by the Delhi High Court); The judgement was delivered by R.F. Nariman, J. 2. AB vs. DDA; Supreme Court of India; 2014 Indlaw SC 801; paragraphs 28 and 29. 3. McDermott International Inc. vs. Burn Standard Co. Ltd (2006) 11 SCC 181; 2006 Indlaw SC 1268; paragraph 106 from SCC judgement. 4. AB vs. DDA; Supreme Court of India; 2014 Indlaw SC 801; paragraphs 18 and 22. 5. Navodaya Mass Entertainment Limited (NME) vs. J.M. Combines (JMC); Supreme Court of India; Bench: Pinaki Chandra Ghose,

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M.Y. Eqbal, JJ.; Reported in 2014 Indlaw SC 563; JT 2014 (9) SC 401; 26 August 2014; C.A. Nos. 7128–7129 of 2011; The judgement was delivered by Pinaki Chandra Ghose, J. 6. Harsha Constructions vs. Union of India and others; Supreme Court of India; Bench: Anil R. Dave, Vikramajit Sen, JJ.; Reported: 2014 Indlaw SC 593; 5 September 2014; C.A. No. 534 of 2007; The judgement was delivered by Anil R. Dave, J.

Chapter 10   1. Oil & Natural Gas Corporation Ltd vs. SAW Pipes Ltd; Supreme Court of India; 2003 Indlaw SC 362: AIR 2003 SC 2629, 17 April 2003; Bench: M.B. Shah and Arun Kumar, JJ.   2. Central Inland Water Transport Corporation Limited and Another vs. Brojo Nath Ganguly and Another, Supreme Court of India, 06 April 1986, Bench: D.P. Madon and A.P. Sen, JJ., Reported in 1986 Indlaw SC 645; (1986) 3 SCC 156; AIR 1986 SC 1571.   3. Central Inland Water case, Indlaw citation, 1986 Indlaw SC 645, paragraph 108.   4. Janson Appellant vs. Driefontein Consolidated Mines Limited Respondents, House of Lords, 5 August 1902, [1902] A.C. 484, Earl of Halsbury L.C., Lord Macnaghten, Lord Davey, Lord Brampton, Lord Robertson and Lord Lindley.   5. Richardson vs. Mellish, Court of Common Pleas, 02 July 1824, Reported in 130 E.R. 294; (1824) 2 Bing. 229.   6. Central Inland Water case, Indlaw citation, 1986 Indlaw SC 645, paragraph 109.   7. Miller and Another vs. Jackson and Others; Court of Appeal; 6 April 1977; Reported in [1977] Q.B. 966; Bench: Lord Denning M.R., Geoffrey Lane and Cumming-Bruce L.JJ.   8. Miller vs. Jackson; [1977] Q.B. 966; Opening paragraph of Lord Denning’s judgement.   9. Re Weston’s Settlements; Court of Appeal; 31 July 1968; Reported in [1967 W. No. 4242], [1969] 1 Ch. 223; Bench: Lord Denning M.R., Harman and Danckwerts L. JJ.; at page 245 of [1969] 1 Ch. 223. 10. Oil & Natural Gas Corporation Ltd vs. SAW Pipes Ltd; Supreme Court of India; 2003 Indlaw SC 362: AIR 2003 SC 2629; 17 April 2003; Bench: M.B. Shah and Arun Kumar, JJ. 11. ONGC vs. SAW Pipes; 2003 Indlaw SC 362, paragraph 16. 12. Renusagar Power Co. Limited vs. General Electric Co.; Supreme Court of India; 7 October 1993; Bench: S.C. Agrawal, M.N. Venkatachaliah, A.S. Anand, JJ.; Reported in 1993 Indlaw SC 1441; (1994) Supp1 SCC



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644; AIR 1994 SC 860; 1994 (2) ARBLR 405; [1994] 81 Comp Cas 171; 1994 (1) CompLJ 58; JT 1993 (Supp) SC 211; 1993(4) SCALE 44; the judgement was delivered by S.C. Agrawal, J. 13. Renusagar vs. GE; 1993 Indlaw SC 1441, paragraph 65. 14. Renusagar vs. GE; 1993 Indlaw SC 1441, paragraph 74. 15. ONGC vs. SAW Pipes; 2003 Indlaw SC 362, paragraph 22. 16. ONGC vs. SAW Pipes; 2003 Indlaw SC 362, paragraph 28; emphasis supplied. 17. ONGC vs. SAW Pipes; 2003 Indlaw SC 362, paragraph 31; emphasis supplied. 18. ONGC vs. SAW Pipes; 2003 Indlaw SC 362, paragraphs 74–75. 19. AB vs. DDA; Supreme Court of India; 25 November 2014; Bench: R.F. Nariman, Ranjan Gogoi, JJ.; Reported in 2014 Indlaw SC 801; C.A. No. 10531 of 2014 (Arising out of S.L.P. (Civil) No. 14767 of 2012) (Arising out of impugned final judgement and order Dt. 08/02/2012 in FAO No. 667/2006 passed by Delhi High Court); the judgement was delivered by R.F. Nariman, J. 20. Ibid.

Chapter 11   1. Hyder Consulting (UK) Limited vs. Governor, State of Orissa Through Chief Engineer; Supreme Court of India; Bench: H.L. Dattu, CJI and S.A. Bobde, Abhay Manohar Sapre, JJ.; Reported: 2014 Indlaw SC 799; 25 November 2014; C.A. No. 3148 of 2012 with C.A. No. 3147 of 2012 C.A. No. 3149 of 2012, C.A. No. 1390 of 2013, S.L.P. (C) No. 19895 of 2008, S.L.P. (C) No. 20282 of 2008, S.L.P. (C) No. 21896 of 2010 and S.L.P. (C) No. 18614 of 2012; Minority judgement delivered by: H.L. Dattu, CJI.; Majority judgement delivered by S.A. Bobde and Abhay Manohar Sapre, JJ.   2. State of Haryana and Others vs. S. L. Arora and Company; Supreme Court of India; Bench: R.V. Raveendran, K.S. Panicker Radhakrishnan, JJ.; Reported: 2010 Indlaw SC 416; (2010) 3 SCC 690; AIR 2010 SC 1511; 2010 (3) AWC 2615; 2010 (3) CGLJ 348; 2010 (1) CLT(SC) 370; JT 2010 (2) SC 534; 2010(3) M.P.H.T. 113; 2010 (2) RCR(Civil) 223; 2010(2) SCALE 541; [2010] 2 S.C.R. 297; 29 January 2010; C.A. No. 1094 of 2010; The judgement was delivered by R.V. Raveendran, J.   3. Mcdermott International Inc vs. Burn Standard Company Limited and Others; Supreme Court of India; Bench: S.B. Sinha, B.P. Singh, JJ.; Reported: 2006 Indlaw SC 1268; (2006) 11 SCC 181; 2006 (5) ALD(SC) 84; 2007 (3) CompLJ 213; JT 2006 (11) SC 376; 2006(6) SCALE 220; [2006] Supp2 S.C.R. 409; 12 May 2006; Appeal (civil) 4492 of 1998, I.A.

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Nos. 2-3, C.A. No. 4492 of 1998; The judgement was delivered by S.B. Sinha, J.   4. U.P. Cooperative Federation Limited vs M/S. Three Circles; Supreme Court of India; Bench: Tarun Chatterjee, H.S. Bedi, JJ.; Reported: 2009 Indlaw SC 2050; (2009) 10 SCC 374; 2009 (4) AWC 4150; JT 2009 (12) SC 123; 2009 (4) RCR(Civil) 546; 2009(12) SCALE 443; [2009] 14 S.C.R. 310; 10 September 2009; Civil Appeal No. 2732 of 2001; The judgement was delivered by Tarun Chatterjee, J.   5. S. L. Arora case; 2010 Indlaw SC 416; paragraphs 13–14.   6. McDermott International Inc. vs. Burn Standard Co. Ltd and Others.; Supreme Court of India; (2006) 11 SCC 181; 2006 Indlaw SC 1268; paragraph 44 of the SCC judgement.   7. Three Circles case 2009 Indlaw SC 2050.   8. Hyder Consulting (UK) vs. Governor, State of Orissa; 2014 Indlaw SC 799; paragraphs 60–61, H.L. Dattu, CJI; minority view.   9. Hyder Consulting (UK) vs. Governor, State of Orissa; 2014 Indlaw SC 799; paragraph 69, S.A. Bobde, J.; majority view. 10. Hyder Consulting (UK) vs. Governor, State of Orissa; 2014 Indlaw SC 799; paragraphs 70–72, S. A. Bobde, J.; majority view. 11. Hyder Consulting (UK) vs. Governor, State of Orissa; 2014 Indlaw SC 799; paragraph 77, S.A. Bobde, J.; majority view. 12. Hyder Consulting (UK) vs. Governor, State of Orissa; 2014 Indlaw SC 799; paragraph 82, A.M. Sapre, J.; majority view. 13. Hyder Consulting (UK) vs. Governor, State of Orissa; 2014 Indlaw SC 799; paragraph 84, A.M. Sapre, J.; majority view. 14. Hyder Consulting (UK) vs. Governor, State of Orissa; 2014 Indlaw SC 799; paragraph 89, A.M. Sapre, J.; majority view.

Glossary Act of God: Vis major, Natural calamity. Adjournment: Putting off a court hearing to a future date or time. Adjudicate: Judgment or decision settling a legal dispute. Admission: Acknowledging of one’s own accord certain facts. Affidavit: Voluntarily signed and sworn written statement before a judge or notary public. Allegation: Unproved statement or assertion. Appeal: Request made to a higher court to rectify the decision of a lower court. Appellant: The person who files an appeal. Appellate Court: The court in which an appeal can be filed. Arbitral Tribunal: Panel of one or more arbitrators. Arbitration: A method of ADR. Disputes are resolved by neutral arbitrator(s) instead of regular courts. Arbitrator: A neutral and independent person appointed to resolve a dispute as per the law of arbitration. Award: The decision of the arbitrator(s) in an arbitration proceeding. Bank Guarantee: The promise made by a bank to cover the loss in case a borrower defaults.

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Complainant: One who initiates legal proceedings or files a complaint. Contract: An agreement enforceable by law. Contractor: Person who undertakes to perform a contract. Counsel: A lawyer, barrister, attorney, advocate, etc. representing a client. Damages: Compensation for loss suffered. Defendant: The person against whom an action is brought. Equity: The idea of fairness, reasonableness and being just. Estoppel: Precluding a person from denying an act or statement made earlier. Ex parte: Proceedings in the absence of the other party. Force majeure: Unforeseen circumstances beyond one’s control. Fraud: Unfair financial advantage gained by intentional deceit. Indemnity: Promise to compensate another person’s loss. Injunction: Interim or permanent. It is a court’s order usually restraining certain action. Kompetenz-kompetenz: Arbitral tribunal may rule to extend its own competence or jurisdiction over issues before it. Lex Fori: Laws of a forum. Laws of the jurisdiction in which a case is filed. Liquidated Damages: Pre-estimated, predetermined or ascertainable damages; also called as LD. Litigation: The process by which a dispute is resolved in a court of law.



Glossary229

Mitigation of Loss: Action to reduce the severity of loss. Natural Justice: Rule against bias, right to a fair hearing and reasoned decision. Obiter Dicta: Observation made by a judge in a judgment. Not binding as a precedent. Penalty: Sum payable in case of a breach of a contract. Whether the agreed sum payable is penalty or LD depends on the facts and circumstances of the case, and the term used in the clause is not conclusive. Pendentelite: During or pending the litigation. Person: A legal person: natural born or created by legal fiction, such as a company. Petition: A formal request made to a court—High Courts or the Supreme Court in India—praying for a specific legal remedy. Petitioner: Person filing the petition. Plaintiff: Person initiating civil action in a court. Prima Facie: On the face of it, of first appearance, sufficient evidence supporting a case. Quash: Discharge or set aside. Ratio Decidendi: Reason for the decision, the principle established by the case, binding as a precedent. Respondent: Person against whom the petition or appeal is filed. Set Aside: Quash; make it a nullity, of no value. Sole Arbitrator: Arbitral tribunal with a single arbitrator. Stay order: A court order restraining certain ongoing action.

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Sub-contractor: A person undertaking work from a contractor in a large contract. Trial: Determination of issues of facts and law, usually in the lowest court of competent jurisdiction. Umpire: An arbitrator to resolve arbitration when original arbitrators cannot agree. Unliquidated Damages: Unascertained compensation by the parties: to be determined by the court. Writ Petition: Formal, written order by courts to the executive and lower courts.

About the Author Anurag K. Agarwal, after completing Master of Laws from Harvard Law School, plunged into the world of academics and has been with IIMA since 2004. He graduated as a mechanical engineer from Motilal Nehru Regional Engineering College (MNREC), Allahabad, (now known as MNNIT) in 1990. He worked with Bharat Petroleum for less than a year, before deciding to study law, completed Bachelor, Master and Doctor of Laws from Lucknow University, and a second Master of Laws from Harvard Law School. He practised as an advocate in Lucknow for about seven years and in Delhi for about a year–and-a-half, switched over to full-time teaching in 2004, with a brief stint at Management Development Institute (MDI), Gurgaon, and then with IIMA, in the Business Policy area. He has been the recipient of the first Marti Mannariah Gurunath Outstanding Teacher Award for the batch of 2011– 2013, instituted by Professor Marti G. Subrahmanyam, Stern School, New York University (PGP 1969, IIMA), in the memory of his father. He has been the chairperson of the One Year PostGraduate Programme in Management for Executives (PGPX), the chairperson of the Post-Graduate Programme in Public Management and Policy (PGP-PMP), the chairperson of the Business Policy area and the students exchange coordinator at IIMA. He has coordinated and conducted executive education programmes for the government and for a large number of public and private companies.

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His teaching and research interests primarily are in the area of business dispute resolution by arbitration. Other areas of interest are infrastructure, corporate governance, government and law and intellectual property. He has authored the book Business and Intellectual Property: Protect Your Ideas (2010) and writes ‘Lawfully Yours’, a popular weekly column for DNA, Ahmedabad.