Appointment of Arbitrator u/s 11 of the Arbitration & Conciliation Act : Extinguishment of Right

Justice RM Lodha
Supreme Court of India

A 3 Judge Bench of the Supreme Court in Deep Trading Company Vs. Indian Oil Corporation and Ors. has upheld the legal position enunciated by the Supreme Court in earlier judgments of Datar Switchgear and Punj Lloyd, which laid down that the right to appoint an arbitrator is not extinguished on the mere expiry of 30 days of a demand from the other side. However, if such party has not appointed an arbitrator before the filing of a petition / application under S. 11 of the Arbitration & Conciliation Act, 1996 the right to appoint is lost by such party. While upholding the above stated position of law, the Supreme Court observed as under;

2. The questions that arise for consideration in this appeal, by special leave are, whether respondent No. 1 has forfeited its right to appoint the arbitrator having not done so after the demand was made and till the appellant had moved the court under Section 11(6) and, if the answer is in the affirmative, whether the appointment of the arbitrator by respondent No. 1 in the course of the proceedings under Section 11(6) is of any legal consequence and the Chief Justice of the High Court ought to have exercised the jurisdiction and appointed an arbitrator? 

3. The above questions arise from these facts : On 01.11.1998, an agreement for kerosene/LDO dealership was entered into between the first respondent – Indian Oil Corporation (for short, “the Corporation”) and the appellant – Deep Trading Company (for short, “the dealer”) for the retail sales supply of kerosene and light diesel oil in the area specified in the schedule. In the course of dealership agreement allegedly some violations were committed by the dealer. Following the show cause notice dated 04.03.2004, the Corporation on 12.03.2004 suspended the sales and supplies of all the products to the dealer with immediate effect. 

4. Aggrieved by the action of the Corporation, the dealer filed a petition under Section 9 of the Arbitration and Conciliation Act, 1996 (for short, “1996 Act”) before the District Judge, Etawah seeking an order of injunction against the Corporation from stopping the supply of Kerosene/LDO. On 25.03.2004, the District Judge, Etawah passed a restraint order against the Corporation. 

5. The Corporation challenged the order of the District Judge, Etawah dated 25.03.2004 before the Allahabad High Court and also prayed for an interim relief. On 12.07.2004, the Allahabad High Court refused to grant any interim relief to the Corporation. 

6. On 09.08.2004, the dealer made a demand to the Corporation by a written notice to refer the disputes between the parties to the arbitrator under the terms of the agreement. In the demand notice, it was also stated by the dealer that if the Corporation fails to appoint the arbitrator, the dealer may be constrained to approach the court under Section 11 of the 1996 Act. 

7. It appears that the Corporation challenged the order of the Allahabad High Court in the special leave petition before this Court but that was dismissed on 06.12.2004 being an interlocutory order. 

8. On or about 06.12.2004, the dealer moved the Chief Justice of the Allahabad High Court under Section 11(6) for the appointment of an arbitrator as the Corporation had failed to act under the agreement. While the said proceedings were pending, on 28.12.2004, the Corporation appointed Shri B. Parihar, Senior Manager, (LPG Engineering) of its U.P. State Office as the sole arbitrator. 

9. When the above application came up for consideration, the Chief Justice found no reason to appoint the arbitrator, as sought by the dealer, since the arbitrator had already been appointed by the Corporation. The brief order dated 06.12.2007, by which the dealer’s application under Section 11(6) was dismissed by the Chief Justice of the Allahabad High Court, reads as under: 

“1. Heard Mr. Siddharth Singh, in support of this application and Mr. Prakash Padia, learned counsel appearing for the respondents. 

2. The dispute in this matter is regarding suspension of the petitioner’s agency as a kerosene dealer for sometime. The applicant applied for appointment of an arbitrator by writing a letter in March, 2004, but filed the present proceeding on 06.12.2004. An Arbitrator was appointed by the respondents on 28.12.2004. Earlier arbitrator has been replaced by another arbitrator. 

3. The contract of the applicant is continuing with the respondents in view of an injunction granted by the Civil Court. 

4. The submission of the applicant is that the respondents ought to have moved within thirty days from the date of a request being made. In any case arbitrator has been appointed within thirty days from the filing of the application. Mr. Siddharth Singh, says that the arbitrator conduct should have been appointed after filing of an application under Section 11 of the Arbitration and Conciliation Act. 

5. In my view, there is no reason to appoint any fresh arbitrator, as sought by the applicant. 

6. The application is dismissed.” 10. Clause 29 of the agreement dated 01.11.1998 provides as under: 

“29. Any dispute or difference of any nature whatsoever or regarding any right, liability, act, omission on account of any of the parties here to arising out or in relation to this Agreement shall be referred to the sole arbitration of the Director (Marketing) of the Corporation, or of some Officer of the Corporation who may be nominated by the Director (Marketing). It is known to the parties to the Agreement that the arbitrator so appointed is a share holder and employee of the Corporation. In the event of the arbitrator to whom the matter is originally referred being transferred or vacating his office or being unable to act for any reason, the Director (Marketing) as aforesaid at the time of such transfer, vacation of office or inability to act, shall designate another person to act as arbitrator in accordance with the terms of the Agreement. Such person shall be entitled to proceed with the reference from the point at which it was left by his predecessor. It is also a term of this contract that no person other than the Director (Marketing) or a person nominated by such Director (Marketing) of the Corporation as aforesaid shall act as arbitrator hereunder. The award of the arbitrator so appointed shall be final conclusive and binding on all parties, to the Agreement, subject to the provisions of the Arbitration and Conciliation Act, 1996 or any statutory modification of or reenactment thereof and the rules made thereunder and for the time being in force shall apply to the arbitration proceeding under this clause. The award shall be made in writing within six months after entering upon the reference or within such extended time not exceeding further four months as the sole arbitrator shall by a writing under his own hands appoint.” 

11. Sub-sections (1), (2), (6) and (8) of Section 11 are relevant for consideration of the present matter which read as follows : 

“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) to (5) xxx xxx xxx (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) xxx xxx xxx 

(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) to (12) xxx xxx xxx”. 

12. Sub-sections (3), (4) and (5) of Section 11 have no application in the present case as the parties have agreed on a procedure for appointing the arbitrator in Clause 29. Sub-section (2) provides that subject to sub-section (6), the parties are free to agree on a procedure for appointing the arbitrator or arbitrators. Sub-section (6) makes provision for making an application to the concerned Chief Justice for appointment of an arbitrator in three circumstances, (a) a party fails to act as required under the agreed 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. If one of the three circumstances is satisfied, the Chief Justice may exercise the jurisdiction vested in him under Section 11(6) and appoint the arbitrator. In the present case, the dealer moved the Chief Justice of the Allahabad High Court under Section 11(6)(a) for an appointment of the arbitrator as the Corporation failed to act as required under Clause 29. 

13. The three basic facts are not in dispute, namely, (i) on 09.08.2004, the dealer called upon the Corporation by a written notice to appoint an arbitrator in accordance with the terms of Clause 29 of the agreement; (ii) the dealer made an application under Section 11(6) for appointment of the arbitrator on 06.12.2004; and (iii) the Corporation appointed the sole arbitrator on 28.12.2004 after the application under Section 11(6) was already made by the dealer. 

14. On behalf of the appellant, Mr. K.K. Venugopal, learned senior counsel, relied heavily upon decisions of this Court, (one) Datar Switchgears [Datar Switchgears Ltd. v. Tata Finance Ltd. and Another: [(2000) 8 SCC 151]] and (two) Punj Lloyd[Punj Lloyd Ltd. v. Petronet MHB Ltd.: [(2006) 2 SCC 638]] and submitted that the learned Chief Justice erred in holding that there was no reason to appoint any fresh arbitrator since the arbitrator has been appointed by the Corporation. 

15. Mr. Abhinav Vashishta, learned senior counsel for the respondents, on the other hand, relied upon a decision of this Court in Northern Railway Administration[Northern Railway Administration, Ministry of Railway, New Delhi v. Patel Engineering Company Limited: [(2008) 10 SCC 240]] and submitted that while considering application under Section 11(6) for appointment of arbitrator, the Court must keep in view twin requirements of Section 11(8) and, seen thus, the view of the learned Chief Justice in the impugned order does not call for any interference. 

16. In Datar Switchgears, a two-Judge Bench of this Court considered the scheme of Section 11, noted the distinguishing features between Section 11(5) and Section 11(6) and then considered the question whether in a case falling under Section 11(6), the opposite party cannot appoint an arbitrator after the expiry of thirty days from the date of demand. This Court held that in cases arising under Section 11(6), if the opposite party has not made an appointment within thirty days of the demand, the right to make appointment is not forfeited but continues, but such an appointment has to be made before the first party makes application under Section 11 seeking appointment of an arbitrator. If no appointment has been made by the opposite party till application under Section 11(6) has been made, the right of the opposite party to make appointment ceases and is forfeited. 

17. In Punj Lloyd, the agreement entered into between the parties contained arbitration clause. The disputes and differences arose between the parties. Punj Lloyd (appellant) served a notice on Petronet (respondent) demanding appointment of an arbitrator and reference of disputes to him. Petronet failed to act. On expiry of thirty days, Punj Lloyd moved the Chief Justice of the High Court for appointment of the arbitrator under Section 11(6). Petronet had not made appointment till the date of moving the application. The designate Judge refused to appoint the arbitrator holding that the remedy available to it was to move in accordance with the agreement. Aggrieved by the said order, a writ petition was filed which was dismissed and the matter reached this Court. A three- Judge Bench of this Court referred to Datar Switchgears and held that the matter was covered squarely by that judgment and the view taken by the designate Judge in dealing with the application under Section 11(6) and the Division Bench was not right. This Court restored the application under Section 11(6) before the Chief Justice of the High Court for fresh consideration and appointment of the arbitrator in accordance with Section 11(6). 

18. We are in full agreement with the legal position stated by this Court in Datar Switchgears which has also been followed in Punj Lloyd. 

19. Section 11(8) provides that Chief Justice or the designated person or institution, in appointing an arbitrator, shall have due regard to two aspects, (a) 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. In Northern Railway Administration3, a three-Judge Bench of this Court considered the scheme of Section 11. Insofar as Section 11(8) is concerned, this Court stated that appointment of the arbitrator or arbitrators named in the arbitration agreement is not a must, but while making the appointment the twin requirements mentioned therein have to be kept in view. 

20. If we apply the legal position exposited by this Court in Datar Switchgears1 to the admitted facts, it will be seen that the Corporation has forfeited its right to appoint the arbitrator. It is so for the reason that on 09.08.2004, the dealer called upon the Corporation to appoint the arbitrator in accordance with terms of Clause 29 of the agreement but that was not done till the dealer had made application under Section 11(6) to the Chief Justice of the Allahabad High Court for appointment of the arbitrator. The appointment was made by the Corporation only during the pendency of the proceedings under Section 11(6). Such appointment by the Corporation after forfeiture of its right is of no consequence and has not disentitled the dealer to seek appointment of the arbitrator by the Chief Justice under Section 11(6). We answer the above questions accordingly. 

21. Section 11(8) does not help the Corporation at all in the fact situation. Firstly, there is no qualification for the arbitrator prescribed in the agreement. Secondly, to secure the appointment of an independent and impartial arbitrator, it is rather necessary that someone other than an officer of the Corporation is appointed as arbitrator once the Corporation has forfeited its right to appoint the arbitrator under Clause 29 of the agreement. 

22. Learned senior counsel for the Corporation, however, referred to an unreported order of this Court in Newton Engineering[M/s. Newton Engineering and Chem. Ltd. v Indian Oil Corporation Ltd. & Ors.: [Civil Appeal No. 7587 of 2012; Decided on 18.10.2012]]. The arbitration clause in that case was similar to the arbitration clause in the present case. The contractor had written to the Corporation to appoint E.D. (NR) as sole arbitrator as per the agreement. But the Corporation wrote back to the contractor that office of E.D. (NR) has ceased to exist due to internal re-organisation. The Corporation offered to the contractor to substitute E.D.(NR) with Director (Marketing) to which contractor did not agree. The Corporation then appointed Director (Marketing) as arbitrator. The contractor made an application under Section 11(6)(c) read with Sections 13 and 15 of the 1996 Act for appointment of a retired Judge as a sole arbitrator. The Single Judge dismissed the petition filed by the contractor. Against that order, the special leave petition was filed by the contractor. This Court in paragraph 9 of the order stated as follows : 

“9. Having regard to the express, clear and unequivocal arbitration clause between the parties that the disputes between them shall be referred to the sole arbitration of the ED(NR) of the Corporation and, if ED(NR) was unable or unwilling to act as the sole arbitrator, the matter shall be referred to the person designated by such ED(NR) in his place who was willing to act as sole arbitrator and, if none of them is able to act as an arbitrator, no other person should act as arbitrator, the appointment of Director (Marketing) or his nominee as a sole arbitrator by the Corporation cannot be sustained. If the office of ED(NR) ceased to exist in the Corporation and the parties were unable to reach to any agreed solution, the arbitration clause did not survive and has to be treated as having worked its course. According to the arbitration clause, sole arbitrator would be ED(NR) or his nominee and no one else. In the circumstances, it was not open to either of the parties to unilaterally appoint any arbitrator for resolution of the disputes. Sections 11(6)(c), 13 and 15 of the 1996 Act have no application in light of the reasons indicated above.” 

23. We are afraid that what has been stated above has no application to the present fact situation. In Newton Engineering, this Court was not concerned with the question of forfeiture of right of the Corporation for appointment of an arbitrator. No such argument was raised in that case. The question raised in Newton Engineering4 was entirely different. In the present case, the Corporation has failed to act as required under the procedure agreed upon by the parties in Clause 29 and despite the demand by the dealer to appoint the arbitrator, the Corporation did not make appointment until the application was made under Section 11(6). Thus, the Corporation has forfeited its right of appointment of an arbitrator. In this view of the matter, the Chief Justice ought to have exercised his jurisdiction under Section 11(6) in the matter for appointment of an arbitrator appropriately. The appointment of the arbitrator by the Corporation during the pendency of proceedings under Section 11(6) was of no consequence. 

24. In the course of arguments before us, on behalf of the appellant certain names of retired High Court Judges were indicated to the senior counsel for the Corporation for appointment as sole arbitrator but the Corporation did not agree to any of the names proposed by the appellant. In the circumstances, we are left with no choice but to send the matter back to the Chief Justice of the Allahabad High Court for an appropriate order on the application made by the dealer under Section 11(6). 

25. Civil Appeal is, accordingly, allowed. The impugned order is set aside. Arbitration Case No. 107 of 2004, M/s. Deep Trading Company v. M/s. Indian Oil Corporation and others, is restored to the file of the High Court of Judicature at Allahabad for fresh consideration by the Chief Justice or the designate Judge, as the case may be, in accordance with law and in light of the observations made above. No costs. 

Lock In Charges are not "Debt" : Delhi High Court Rules

The Division Bench of the Delhi High Court in Tower Vision India Pvt. Ltd. v. Procall Pvt. Ltd. has examined whether unpaid "lock in charges" would amount to "debt" under Section 433 / 434 of the Companies Act. The matter came up before the Division Bench owing to a reference by the Single Judge, expressing doubts over the correctness of an earlier judgment rendered by another Single Judge in Manju Bagai vs. Magpie Retail Ltd. While answering the reference, the Division Bench has opined that the views expressed by the Single Judge in Manju Bagai vs. Magpie Retail Ltd. was the correct view and "lock in charges" were not "debt" within the meaning of the Companies Act. The Division Bench held as under;

1. All these three company petitions are referred by the learned Company Judge to the Division Bench for decision. Initially Company Petition No.458/2010 had come up before the Company Judge and was heard on 31.10.2011 when following order was passed: 

"After hearing the parties at length, this Court is of the view that following question need to be answered by a Division Bench of this Court as the said issue arises in a number of matters and an authoritative pronouncement of the same is required:-

i) Whether in a contract for rendering of service/use of site, a stipulation to pay an amount for the "lock-in‟ period, is an admitted debt within the meaning of Section 433(e) of the Companies Act, 1956 or whether the same is in the nature of damages?

The present reference has been made as this Court has some doubts with regard to the judgment rendered by another learned Single Judge of this Court in Manju Bagai vs. Magpie Retail Ltd., 175 (2010) DLT 212.

Accordingly, the present matter is referred to a Division Bench. Let the papers be placed before appropriate Division Bench on 1st December, 2011, subject to orders of Hon‟ble the Acting Chief Justice."

2. As this issue came up subsequently in other two petitions, they have also been referred to the Division Bench. That is how we have heard these matters. It would be pertinent to point out that at the time of hearing, the counsel for all the parties in all these petitions agreed that it is not only the question which is formulated to be answered, but on the basis of answer given to the aforesaid question and applicability thereof in each case, the company petitions themselves be decided on merits as it would be reflected in our discussion, answer to the question cannot be in vacuum and may vary depending upon the facts of each case. 

What is 'debt' : The legal position

12. We have already extracted the order dated 31.10.2011 vide which reference was made to the Division Bench in Co.Pet. 458/2010. That order takes note of the judgment of another learned Single Judge in Manju Bagai (supra) and reason for referring the matter to Division Bench was that vide reference order, the Company Judge raised some doubts about the legal position formulated therein, though while doing so, no reasons because of which doubts are nurtured have been given in the reference order. In this scenario, it would be appropriate to first look into the raison de‟tre of Manju Bagai (supra). That was a case where petitioner had filed winding up petition under Section 433(e) of the Act on the ground that the respondent company therein had taken on rent certain premises from the petitioner. The rent was fixed at Rs.1,29,580/- excluding water and electricity charges. The company started paying rent with effect from 1.11.2006 and paid rent till February, 2007. It did not pay rent for the months of March, April and May, 2007 and handed over the possession of the premises on 31.5.2007. Thus, rent for March, 2007 to May, 2007 amounting to Rs.3,88,740/- was admittedly due which the company was to pay. However, as per the petitioner, agreement to lease entered into between the parties contained a clause to the effect that this agreement shall not be cancelled before the lock-in period of three years. Since the premises were vacated after seven months, according to the petitioner, the company was also liable to pay rent for the remaining period of 29 months because of the aforesaid clause containing lock-in period of three years. The said rent for unexpired period was claimed as liquidated damages in the sum of Rs.37,57,820/-. The petitioner made a total claim of Rs.41,46,560/- as well as interest and since the respondent company failed to pay the same, company petition for winding up was filed on that basis claiming that the aforesaid amount was debt payable. It was on these facts the question arose as to whether liquidated damages for the remaining lock-in period could be treated as „debt‟ entitling the petitioner to maintain petition for winding up of the respondent company. Though the learned Single Judge noted that agreement to lease in question was an unregistered document and could not be relied upon for making the claim, even on merits, the Court took the view that the claim for "liquidated damages" was not sustainable. In the opinion of the Court:

"10. ....The distinction between 'liquidated' and 'un- liquidated' damages is well settled. Mere use of the term 'liquidated' damages in a document cannot be the criteria to determine and decide whether the amount specified in the agreement is towards 'liquidated' damages or 'un-liquidated' damages. Amount specified in an agreement is liquidated damages; if the sum specified by the parties is a proper estimate of damages to be anticipated in the event of breach. It represents genuine covenanted pre-estimate of damages. On the other hand 'un-liquidated' damages or penalty is the amount stipulated in terrorem. The expression 'penalty' is an elastic term but means a sum of money which is promised to be paid but is manifestly intended to be in excess of the amount which would fully compensate the other party for the loss sustained in consequence of the breach. Whether a clause is a penalty clause or a clause for payment of liquidated damages has to be judged in the facts of the each case and in the background of the relevant factors which are case specific. Looking at the nature of the Clause and even the pleadings made by the petitioner, I am not inclined to accept the contention of the petitioner that Clause 5 imposes liquidated damages and is not a penalty clause. No facts and circumstances have been pleaded to show that Clause 5 relating to lock-in-period was a genuine pre-estimate of damages which by the petitioner would have suffered in case the respondent company had vacated the premises. No such special circumstances have been highlighted and pointed out.

11. The decision in the case of Food Corporation of India and Others (supra) is distinguishable. In the said case a civil suit was filed and there was evidence to show that the plaintiff therein had performed his part of the contract and altered his position, having constructed the plinths according to specifications of the defendant i.e. FCI. The defendant had promised to plaintiff that on completion of the construction, they would hire the premises for a period of three years but later on backed out. The trial court and the finding of the Supreme Court was that the construction was made in accordance with the design and specification prescribed by the defendant. Therefore, it was held that the defendant cannot back out from the promise held out and escape from the liability.

12. It may be also noted that the Doctrine of Unavoidable Consequence or Mitigation of Damages is applicable in cases of un-liquidated damages....

13. A person therefore, must take reasonable steps to minimize the loss and refrain from taking unreasonable steps which would increase the loss. Defence cannot be held liable to pay a loss which the claimant could have avoided or which arises due to the neglect and failure of the claimant to take such reasonable steps. Damages is compensation for the wrong suffered by the claimant and the loss incurred by him but this is subject to the rule that the claimant must take reasonable steps to avoid their avoidable accumulation. It is difficult to accept that the petitioner was unable to rent out the premises for the lock-in-period of three years despite the highly commercially viable location of the premises. Decline in the rate of rent is not pleaded. The onus in this regard is on the petitioner and no evidence and material has been placed on record to show that the premises could not be rented out. Even the date on which the premises was subsequently rented out has not been stated."

13. The aforequoted reasoning demonstrates the following factors which influenced the Court not to treat the amount of unexpired lock-in period as debt or liquidated damages:

(i) Whether a particular clause about pre-determined liquidated damages represents genuine covenanted pre-estimate of damages or it is in the nature of penalty has to be judged in the facts of each case and in the background of relevant factors which are case specific. In that case, no facts and circumstances were pleaded to show that clause relating to lock-in period was a genuine pre-estimate of damages which the petitioner would have suffered in case the respondent company vacated the premises before the expiry of lock- in period.

(ii) In order to prove that amount mentioned as payable for the lock-in period is genuine pre-estimate of damages, proper evidence is required of specific nature, namely, the landlord had altered its position by making the premises available to the tenant keeping in view the tenants‟ requirements and spending thereupon. Certain expenditure was incurred on infrastructure specifically provided to the tenant as per tenant‟s requirements; certain other expenditure incurred on whitewashing, fixtures and fittings and the landlord was forced to incur such expenditure again before giving the premises to new tenant and, therefore, lock-in period was treated as reasonable period to avoid duplication of such expenditure, etc. (iii) The doctrine of mitigation of damages may also apply in such cases and even if the tenant had committed breach by leaving the premises before the expiry of lock-in period, it was for the landlord to prove that he had taken reasonable steps to minimize the loss, but could not award the loss to the extent mentioned in the clause and, therefore, the same is to be treated as genuine pre-estimation of the loss.

On this reasoning, in that case, winding up petition was dismissed.

14. As pointed out above, in the reference order, the learned Company Judge has expressed some reservations about the aforesaid ratio from which we infer that the learned Company Judge has hinted that the amount of unexpired lock-in period can be treated as debt though no specific reasons are given in the reference order.

15. Before we give our final comments, we would like to traverse through the statutory provisions as well as some case law on the subject cited before us during the arguments by counsel for the parties.

16. Consequences for breach of the contract are provided in Chapter VI of the Contract Act which contains three sections, namely, Section 73 to Section 75. As per Section 73 of the Contract Act, the party who suffers by the breach of contract is entitled to receive from the defaulting party, compensation for any loss or damage caused to him by such breach, which naturally arose in usual course of things from such breach, or which the two parties knew when they make the contract to be likely the result of the breach of contract. This provision makes it clear that such compensation is not to be given for any remote or indirect loss or damage sustained by reason of the breach. The underlying principle enshrined in this Section is that a mere breach of contract by a defaulting party would not entitle other side to claim damages unless the said party has in fact suffered damages because of such breach. Loss or damage which is actually suffered as a result of breach has to be proved and the plaintiff is to be compensated to the extent of actual loss or damage suffered. When there is a breach of contract, the party who commits the breach does not eo instant i.e. at the instant incur any pecuniary obligation, nor does the party complaining of the breach becomes entitled to a debt due from the other party. The only right which the party aggrieved by the breach of the contract has is the right to sue for damages. No pecuniary liability thus arises till the Court has determined that the party complaining of the breach is entitled to damages. The Court in the first place must decide that the defendant is liable and then it should proceed to assess what the liability is. But, till that determination, there is no liability at all upon the defendant. Courts will give damages for breach of contract only by way of compensation for loss suffered and not by way of punishment. The rule applicable for determining the amount of damages for the breach of contract to perform a specified work is that the damages are to be „assessed at the pecuniary amount of difference between the state of the plaintiff upon the breach of the contract and what it would have been if the contract had been performed and not the sum which it would cost to perform the contract, though in particular cases the result of either mode of calculation may be the same. The measure of compensation depends upon the circumstances of the case. The complained loss or claimed damage must be fairly attributed to the breach as a natural result or consequence of the same. The loss must be a real loss or actual damage and not merely a probable or a possible one. When it is not possible to calculate accurately or in a reasonable manner, the actual amount of loss incurred or when the plaintiff has not been able to prove the actual loss suffered, he will be, all the same, entitled to recover nominal damages for breach of contract. Where nominal damages only are to be awarded, the extent of the same should be estimated with reference to the facts and circumstances involved. The general principle to be borne in mind is that the injured party may be put in the same position as that he would have been if he had not sustained the wrong.

17. In Murlidhar Chiranjilal v. Harishchandra Dwarkadas and Anr., AIR 1962 SC 366, the Supreme Court highlighted two principles which follow from the reading of Section 73 of the Contract Act. The first principle on which damages in cases of breach of contract are calculated is that, as far as possible, he who has proved a breach of a bargain to supply what he contracted to get is to be placed, as far as money can do it, in as good a situation as if the contract had been performed; but this principle is qualified by a second, which imposes on a plaintiff the duty of taking all reasonable steps to mitigate the loss consequent on the breach and debars him from claiming any part of the damages which is due to his neglect to take such steps.

18. Thus, while on one hand, damages as a result of breach are to be proved to claim the same from the person who has broken the contract and actual loss suffered can be claimed, on the other hand, Section 74 of the Act entitles a party to claim reasonable compensation from the party who has broken the contract which compensation can be pre-determined compensation stipulated at the time of entering into the contract itself. Thus, this section provides for pre-estimate of the damage or loss which a party is likely to suffer if the other party breaks the contract entered into between the two of them. If the sum named in the contract is found to be reasonable compensation, the party is entitled to receive that sum from the party who has broken the contract. Interpreting this provision, the Courts have held that such liquidated damages must be the result of a "genuine pre-estimate of damages". If they are penal in nature, then a penal stipulation cannot be enforced, that is, it should not be a sum fixed in terrarium or interrarium. This action, therefore, merely dispenses with proof of "actual loss or damage". However, it does not justify the award of compensation when in consequence of breach, no legal injury at all has resulted, because compensation for breach of contract can be awarded to make good loss or damage which naturally arose in the usual course of things, or which the parties knew when they made the contract, to be likely to result from the breach.

19. The Supreme Court in the case of Union of India v. Raman Iron Foundry, AIR 1974 SC 1265, expounded this very principle in the following words:

"9. Having discussed the proper interpretation of Clause 18, we may now turn to consider what is the real nature of the claim for recovery of which the appellant is seeking to appropriate the sums due to the respondent under other contracts. The claim is admittedly one for damages for breach of the contract between the parties. Now, it is true that the damages which are claimed are liquidated damages under Clause 14, but so far as the law in India is concerned, there is no qualitative difference in the nature of the claim whether it be for liquidated damages or for unliquidated damages. Section 74 of the Indian Contract Act eliminates the somewhat elaborate refinements made under the English common law in distinguishing between stipulations providing for payment of liquidated damages and stipulations in the nature of penalty. Under the common law a genuine pre-estimate of damages by mutual agreement is regarded as a stipulation naming liquidated damages and binding between the parties : a stipulation in a contract in terrorem is a penalty and the Court refuses to enforce it, awarding to aggrieved party only reasonable compensation. The Indian Legislature has sought to cut across the web of rules and presumptions under the English common law, by enacting a uniform principle applicable to all stipulations naming amounts to be paid in case of breach, and stipulations by way of penalty, and according to this principle, even if there is a stipulation by way of liquidated damages, a party complaining of breach of contract can recover only reasonable compensation for the injury sustained by him, the stipulated amount being merely the outside limit. It, therefore makes no difference in the present case that the claim of the appellant is for liquidated damages. It stands on the same footing as a claim for unliquidated damages. Now the law is well settled that a claim for unliquidated damages does not give rise to a debt until the liability is adjudicated and damages assessed by a decree or order of a Court or other adjudicatory authority. When there is a breach of contract, the party who commits the breach does not eo instanti incur any pecuniary obligation, nor does the party complaining of the breach becomes entitled to a debt due From the other party. The only right which the party aggrieved by the breach of the contract has is the right to sue for damages. That is not an actionable claim and this position is made amply clear by the amendment in Section 6(e) of the Transfer of Property Act, which provides that a mere right to sue for damages cannot be transferred. This has always been the law in England and as far back as 1858 we find it stated by Wightman, J., in Jones v. Thompson [1858] 27 L.J.Q.B. 234 "Exparte Charles and several other cases decide that the amount of a verdict in an action for unliquidated damages is not a debt till judgment has been signed". It was held in this case that a claim for damages does not become a debt even after the jury has returned a verdict in favour of the plaintiff till the judgment is actually delivered. So also in O'Driscoll v. Manchester Insurance Committee [1915] 3 K. B. 499, Swinfen Eady, L.J., said in reference to cases where the claim was for unliquidated damages : "... in such cases there is no debt at all until the verdict of the jury is pronounced assessing the damages and judgment is given". The same view has also been taken consistently by different High Courts in India. We may mention only a few of the decisions, namely, Jabed Sheikh v. Taher Mallik 45 Cal. Weekly Notes, 519, S. Malkha Singh v. N.K. Gopala Krishna Mudaliar 1956 A.I.R. Pun. 174 and Iron & Hardware (India) Co. v. Firm Shamlal & Bros. 1954 A.I.R. Bom. 423. Chagla, C.J. in the last mentioned case, stated the law in these terms:

In my opinion it would not be true to say that a person who commits a breach of the contract incurs any pecuniary liability, nor would it be true to say that the other party to the contract who complains of the breach has any amount due to him from the other party.

As already stated, the only right which he has is the right to go to a Court of law and recover damages. Now, damages are the compensation which a Court of law gives to a party for the injury which he has sustained. But, and this is most important to note, he does not get damages or compensation by reason of any existing obligation on the part of the person who has committed the breach. He gets compensation as a result of the fiat of the Court. Therefore, no pecuniary liability arises till the Court has determined that the party complaining of the breach is entitled to damages. Therefore, when damages are assessed, it would not be true to say that what the Court is doing is ascertaining a pecuniary liability which already existed. The Court in the first place must decide that the defendant is liable and then it proceeds to assess what that liability is. But till that determination there is no liability at all upon the defendant.

This statement in our view represents the correct legal position and has our full concurrence. A claim for damages for breach of contract is, therefore, not a claim for a sum presently due and payable and the purchaser is not entitled, in exercise of the right conferred upon it under Clause 18, to recover the amount of such claim by appropriating other sums due to the contractor. On this view, it is not necessary for us to consider the other contention raised on behalf of the respondent, namely, that on a proper construction of Clause 18, the purchaser is entitled to exercise the right conferred under that clause only where the claim for payment of a sum of money is either admitted by the contractor, or in case of dispute, adjudicated upon by a court or other adjudicatory authority. We must, therefore, hold that the appellant had no right or authority under Clause 18 to appropriate the amount of other pending bills of the respondent in or towards satisfaction of its claim for damages against the respondent and the learned Judge was justified in issuing an interim injunction restraining the appellant from doing so.

20. In that case, Clause 18 of the contract entered into between the parties provide that whenever any claim for the payment of a sum of money arises out of or under the contract against the contractor, the purchaser shall be entitled to recover such sum by appropriating in whole or in part, the security, if any, deposited by the contractor. The purchaser/Union of India, invoking this clause, wanted to recover and adjust liquidated damages in terms of clause 14 of the contract. As is seen from the aforesaid extracted portion, the Court held that a claim for liquidated damages does not give rise to a debt until the liability is adjudicated and damages assessed by a decree or order of a Court or other adjudicatory authority. When there is such a clause, the only right which the plaintiff has is the right to go to Court and recover damages.

21. The Supreme Court also explained that damages are the compensation which a Court of Law gives to a party for the injury which he has sustained and the plaintiff does not get damages or compensation by reason of any existing obligation on the part of the person who has committed the breach. He gets compensation as a result of fiat of the Court. Therefore, it has to be decided by the Court, in the first instance, that the defendant is liable and then it proceeds to assess what liability is. Till that determination, there is no liability at all upon the defendant. The Court further went to the extent of holding that there would not be any debt payable unless the Court determines the liability. In this process, the Court also explained the concept of „debt‟ in the following manner:

"6. The first thing that strikes one on looking at Clause 18 is its heading which reads: "Recovery of Sums Due". It is true that a heading cannot control the interpretation of a clause if its meaning is otherwise plain and unambiguous, but it can certainly be referred to as indicating the general drift of the clauses and affording a key to a better understanding of its meaning. The heading of Clause 18 clearly suggests that this clause is intended to deal with the subject of recovery of sum due. Now a sum would be due to the purchaser when there is an existing obligation to pay it in praesenti. It would be profitable in this connection to refer to the concept of a 'debt', for a sum due is the same thing as a debt due. The classical definition of 'debt' is to be found in Webb v. Stenton [1883] 11 Q.B.D. 518 where Lindley, L.J., said :"... a debt is a sum of money which is now payable or will become payable in the future by reason of a present obligation". There must be debitum in praesenti; solvendum may be in praesenti or in future- that is immaterial. There must be an existing obligation to pay a sum of money now or in future. The following passage from the judgment of the Supreme Court of California in People v. Arguello [1869] 37 Calif. 524 which was approved by this Court in Kesoram Industries v. Commissioner of Wealth Tax : [1966] 59 ITR 767 (SC) clearly brings out the essential characteristics of a debt:

Standing alone, the word 'debt' is as applicable to a sum of money which has been promised at a future day as to a sum now due and payable. If we wish to distinguish between the two, we say of the former that it is a debt owing, and of the latter that it is debt due."

22. The Supreme Court in the matter of ONGC Ltd. v. Saw Pipes Ltd., AIR 2003 SC 2629, in para 65 has discussed provisions of Section 73 and 74 of the Indian Contract Act and held as under:

"Under Section 73, when a contract has been broken, the party who suffers by such breach is entitled to receive compensation for any loss caused to him which the parties knew when they made the contract to be likely to result from the breach of it. This Section is to be read with Section 74, which deals with penalty stipulated in the contract, inter alia [relevant for the present case] provides that 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, the party complaining of breach is entitled, whether or not actual 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.

Section 74 emphasizes that in case of breach of contract, the party complaining of the breach is entitled to receive reasonable compensation whether or not actual loss is proved to have been caused by such breach. therefore, the emphasis is on reasonable compensation. If the compensation named in the contract is by way of penalty, consideration would be different and the party is only entitled to reasonable compensation for the loss suffered. But if the compensation named in the contract for such breach is genuine pre-estimate of loss which the parties knew when they made the contract to be likely to result from the breach of it, there is no question of proving such loss or such party is not required to lead evidence to prove actual loss suffered by him. Burden is on the other party to lead evidence for proving that no loss is likely to occur by such breach..."

23. In the matter of Keshoram Industries & Cotton Mills Ltd. v. Commissioner of Wealth Tax (Central), Calcutta, 1966 (2) SCR 688, the Supreme Court considered the meaning of expression "debt owed". What does the word „debt‟ mean was also considered with reference to various English decisions and held as under:

"a debt is a sum of money which is now payable or will become payable in further by reason of a present obligation : debitum in presenti, solvendum in future."

The said decisions also accept the legal position that a liability depending upon a contingency is not a debt in presenti or in future till the contingency happened. But if there is a debt the fact that the amount is to be ascertained does not make it any the less a debt if the liability is certain and what remains is only the quantification of the amount."

24. What follows from the above is that even if there is a clause of liquidated damages, in a given case, it is for the Court to determine as to whether it represents genuine pre-estimate of damages. In that eventuality, this provision only dispenses with the proof of "actual loss or damage". However, the person claiming the liquidated damages is still to prove that the legal injury resulted because of breach and he suffered some loss. In the process, he may also be called upon to show that he took all reasonable steps to mitigate the loss. It is only after proper enquiry into these aspects that the Court in a given case would rule as to whether liquidated damages as prescribed in the contract are to be awarded or not. Even if there is a stipulation by way of liquidated damages, a party complaining of breach of contract can recover only reasonable compensation for the injury sustained by him and what is stipulated in the contract is the outer limit beyond which he cannot claim. Unless this kind of determination is done by the Court, it does not result into "debt".

25. At this juncture, we would like to refer to the judgment of Bombay High Court in the case of E-City Media Private Limited a Private Limited Company v. Sadhrta Retail Limited a Public Limited Company, [2010] 153 Comp.Cas 326 (Bom.) (rendered by Single Judge). In this case also, winding up petition was filed on account of alleged dues stipulated in the contract in case of breach. Facts of the case disclose that the petitioner had appointed the respondent as an exclusive agent for designated branding sites situated within the premises of a shopping mall. The petitioner had permitted the respondent to display advertisements at the Mall, in a theatre and upon ticket jackets. The contract was to commence on 22.5.2008 and was to conclude on 31.7.2009. This term was extended by a formal amendment till September, 2009. The agreement also provided that in the event respondent fail to make payment for a period of one month, during the term of the agreement, the petitioner would be at liberty to terminate the agreement with notice of seven days. In that event, respondent was obliged to make good losses and damages which may be suffered by the petitioner. The respondent was liable to pay entire royalty/minimum guaranteed amount mentioned in the agreement with interest @ 18% per annum on alleged breach committed by the respondent. The petitioner terminated the contract and demanded the entire amount of royalty/minimum guaranteed amount. On the respondents failure to pay, winding up petition was filed. The Court dismissed the said petition holding that it was not maintainable upon a claim for damages which could not be treated as debt. It was held that damages become payable only when they are crystallized upon adjudication. Until and unless an adjudication takes place with a resultant decree for damages, there is no debt due and payable. Damages require adjudication. Until then, the liability of a party in alleged breach of a contract does not become crystallized. In support of this view, the Court referred to a Division Bench judgment of Karnataka High Court in Greenhills Exports (P) Ltd. v. Coffee Board, Bangalore, [2001] 106 Comp.Cas 391 (Kar) in the following words:

" ...Mr. Justice R.V. Raveendran (as the Learned Judge then was) speaking for the Division Bench formulated the propositions of law which emerge from judgments of the Supreme Court and the High Court. The Court held as follows:

(i) A "Debt" is a sum of money which is now payable or will become payable in future by reason of a present obligation. The existing obligation to pay a sum of money is the sine qua non of a debt.

"Damages" is money claimed by, or ordered to be paid to; a person as compensation for loss or injury. It merely remains a claim till adjudication by a court and becomes a "debt" when a court awards it.

(ii) In regard to a claim for damages (whether liquidated or unliquidated), there is no "existing obligation" to pay any amount. No pecuniary liability in regard to a claim for damages, arises till a court adjudicates upon the claim for damages and holds that the defendant has committed breach and has incurred a liability to compensate the plaintiff for the loss and then assesses the quantum of such liability. An alleged default or breach gives rise only to a right to sue for damages and not to claim any "debt". A claim for damages becomes a "debt due", not when the loss is quantified by the party complaining of breach, but when a competent court holds on enquiry, that the person against whom the claim for damages is made, has committed breach and incurred a pecuniary liability towards the party complaining of breach and assesses the quantum of loss and awards damages. Damages are payable on account of a fiat of the court and not on account of quantification by the person alleging breach.

(iii) When the contract does not stipulate the quantum of damages, the court will assess and award compensation in accordance with the principles laid down in Section 73. Where the contract stipulates the quantum of damages or amounts to be recovered as damages, then the party complaining of breach can recover reasonable compensation, the stipulated amount being merely the outside limit.

(iv)...

(v) Even if the loss is ascertainable and the amount claimed as damages has been calculated and ascertained in the manner stipulated in the contract, by the party claiming damages, that will not convert a claim for damages into a claim for an ascertained sum due. Liability to pay damages arises only when a party is found to have committed breach. Ascertainment of the amount awardable as damages is only consequential."

26. Reading of the aforesaid judgments and the ratio laid down therein would amply demonstrate that the legal position propounded by learned Single Judge in Manju Bagai (supra) is the correct legal position of law and we agree with the same. We now proceed to apply this legal principle to each of the cases before us.

Guest Post : The Jurisdiction of Indian Courts in International Commercial Arbitration

by Raj R. Panchmatia, Associate Partner at Khaitan & Co.

Modern international commercial contracts usually tend to have arbitration as their preferred mode of dispute resolution. One can attribute this largely – other than its less palpable advantages such as party autonomy, confidentiality, venue etc – to the fact that it is relatively faster. However, till a recent change, this was subject to a caveat, for, as an eminent jurist observed, “In the Indian legal system, there is ample – sometimes excessive – due process; and one has to be patient and persevering.”

The recent change was the result of a judgement, dated September 6, 2012, of a Constitution Bench of the Supreme Court of India in the case of Bharat Aluminium Co v Kaiser Aluminium Technical Services Inc (BALCO v Kaiser), which clarified the scope of jurisdiction of Indian Courts in international commercial arbitration. The Constitution Bench overruled the full bench decision of the Supreme Court in Bhatia International v Bulk Trading S A and Anr, (2002) 4 SCC 105) (Bhatia International) and the division bench decision of the Supreme Court, which followedBhatia International, in Venture Global Engineering v Satyam Computer Services Ltd and Anr, (2008) 1 Scale 214) (Venture Global Engineering). In Bhatia International and Venture Global Engineering the Supreme Court had held that Indian Courts could interfere to the fullest extent allowed by Part I of the Arbitration and Conciliation Act, 1996 (Act) even when the seat of arbitration was outside India. 

Law Prior to BALCO v Kaiser

The Act, which was inter alia enacted to consolidate and amend the law relating to domestic arbitration, international commercial arbitration and enforcement of foreign arbitral awards, was made on the basis of the UNCITRAL Model Law on International Commercial Arbitration, with a stated objective of excluding judicial interference in arbitrations. Further, the Act, which was divided into four parts, provided in Section 2 (2) that Part I, entitled “Arbitration”, will apply where the seat of arbitration is in India – thus begging the question of whether the provisions dealing with interim measures by court (Section 9 of the Act), and setting aside arbitral awards (Section 34), contained in Part I of the Act, could be resorted to if the seat of the arbitration was outside India.

The position of law prior to BALCO v Kaiser has been formulated by the Supreme Court in several of its judgments. The very first judgment that laid down the principles governing international commercial arbitration was that of Bhatia International. The issue for consideration before the Supreme Court was whether an application under Section 9 of the Act was maintainable in a foreign seat arbitration.

In what was regarded as a judgement that is in the teeth of the Act, the Supreme Court held that interim reliefs could be granted to a foreign party in India, since the provisions of Part I of the Act would apply to all arbitrations and related proceedings held outside India. While holding that Part I of the Act would compulsorily apply to arbitrations held in India, and parties would be allowed to deviate only from the derogable provisions of said Part I to the extent permitted by the Act, the Court further held that in the case of an international commercial arbitration with its seat outside India, provisions of Part I of the Act would apply unless the parties had expressly or impliedly excluded all or any of its provisions.

The decision in Bhatia International was followed in the later judgment of Venture Global Engineering. The issue for consideration before the Supreme Court in Venture Global Engineering was whether an aggrieved party to a foreign seat arbitration, is entitled to challenge a foreign award in terms of Section 34 of the Act. The Supreme Court held in the affirmative.

Another significant decision which could impact the extent of judicial interference in arbitration, is that of a single judge bench of the Supreme Court in TDM Infrastructure Private Limited v UE Development Private Limited (2008) 14 SCC 271) (TDM Infrastructure). In this case, the Supreme Court observed that Section 28, which inter alia provides that Indian law would apply to the substance of the dispute where place of arbitration is India and parties to the arbitration are Indian, was “imperative” in character. With reference to the provision, it stated that the “intention of the legislature appears to be clear that Indian nationals should not be permitted to derogate from Indian law. This is part of the public policy of the country”. Thus when parties to an arbitration agreement were Indian, the merits of the dispute must be decided in accordance with Indian law.

Thereafter in 2011, came the judgment in Yograj Infrastructure Ltd v Ssang Yong Engineering and Construction Co Ltd (AIR 2011 SC 3517) (Yograj), wherein a division bench of the Supreme Court distinguished the decision rendered in Bhatia International on the basis that the parties had expressly chosen a foreign place as the seat of the arbitration and the rules of a foreign institution to apply to the arbitral process. The legal issue in question was the maintainability of an appeal under Section 37(2) of the Act. The agreement between the parties, one Indian party and the other Korean, was to be conducted in Singapore, in accordance with the Singapore International Arbitration (SIAC) Rules. The governing law of the agreement was Indian law.

The Supreme Court held that Part I of the Act would not be applicable to the arbitration agreement, since the parties had expressly chosen the SIAC Rules as the curial law. The parties were thus bound by Rule 32 of the SIAC Rules that makes Singaporean arbitration law applicable to arbitrations with their seat in Singapore.

The way to BALCO v Kaiser

Given the state of the existing Indian law on international commercial arbitration, every award that was passed outside India became open to challenge in India. This resulted in excessive interference by Indian courts in arbitration that was held outside India (despite the stated objective of the Act and the express provisions of Section 5 of the Act). Several parties started approaching Indian courts for interim reliefs that only delayed and caused hindrances to the smooth conduct and operation of the arbitration proceedings held outside India, thereby defeating the very purpose of choosing arbitration as a favourable option for dispute resolution. BALCO v Kaiser came up for final hearing, at this point of time.[5]

BALCO v Kaiser

In a staggering decision that spawned over a hundred and seventy pages, five judges of the Supreme Court inBALCO v Kaiser unanimously held that Part I of the Act would only apply to arbitrations whose seat was in India. The court reasoned as follows:

a. The Act has adopted the territoriality principle, which emphasizes on the seat of arbitration as opposed to the nationality of parties for the ascertainment of jurisdiction.

b.Part I of the Act and Part II of the Act are mutually exclusive. Part I applies to an award made in India, whether it is rendered in a domestic arbitration or whether it is domestically rendered in an international commercial arbitration (international award). Part II of the Act, applies to only certain foreign awards.

c. Section 2(2) lays down the scope of Part I of the Act by stating that “This Part shall apply where the place of arbitration is in India”. The absence of the word ‘only’ in Section 2(2) does not indicate that Part I was also applicable to arbitrations where the seat was outside India.

d.The ‘seat’ of the arbitration must be distinguished from the ‘venue’ of the arbitration. The seat of arbitration is location by law and the venue of arbitration is location by fact.

e.If parties expressly choose the Act as the law governing the arbitration proceedings, only those provisions of law which are concerned with the internal conduct of the arbitration and are not inconsistent with the foreign procedural law would be applicable to the arbitral proceedings. Hence, Part I would not apply as it applies only to arbitrations held in India.

f. Non-applicability of Part I to foreign seat arbitrations would not create a lacunae with respect to awards which were not made pursuant to either the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, 1958 (The New York Convention) or the Protocol on Arbitration Clauses, 1923 and The Convention on the Execution of Foreign Arbitral Awards, 1927 (The Geneva Convention). Parliament had intentionally not included the aforesaid categories of awards within the definition of ‘foreign award’ in Section 44 and Section 53 of the Act since these awards were not included in the three statutes that were consolidated by the Act.

g. Section 28(1)(a) makes it clear that in an arbitration under Part I of the Act to which Section 2(1)(f)[6] does not apply, the dispute has to be resolved using the substantive law applicable to the contract. This ensures that two or more Indian parties do not circumvent the substantive Indian law by resorting to arbitration. On the other hand, if such arbitration is an international commercial arbitration under Part I of the Act within the meaning of Section 2(1)(f) of the Act, then the parties would be free to agree on any substantive law of their choice.

h.Section 9 of the Act must be interpreted in the same way as any other provision of Part I of the Act and so parties to a foreign seat arbitration agreement would not be entitled to relief under Section 9 of the Act.

i.. Non applicability of Part I of the Act to a foreign seat arbitration agreement would not leave the parties to the same ‘remedy-less’ as once parties voluntarily choose the seat of the arbitration to be outside India, they have impliedly accepted the necessary incidents and consequences of such a choice.

j. In a foreign seat arbitration, an inter-parte suit in India for interim relief pending arbitration would not be maintainable even if it is limited to the purpose of protecting the subject matter of the arbitration. In order to obtain an injunction, the existence of a suit seeking final relief, based on a recognised cause of action, is a prerequisite.

k. Ordinarily, international arbitration law recognises the competence of courts of two nations to set aside or suspend an award: the courts in the country where the seat of arbitration is located (first alternative) and the courts of the country whose laws govern the arbitral proceeding (second alternative). The power to suspend or annul an award primarily vests in the courts of the first alternative country, the second alternative country being available only in the event of failure of the first alternative. However, in the context of India, it must be noted that the Act does not confer any jurisdiction on Indian courts to set aside an international commercial award made outside India. This is because under the Act, the power to annul an arbitral award is only provided in Section 34 of the Act. Section 34 however is contained in Part I and is, therefore, limited in its applicability to awards made in India.

The Way Forward

The Supreme Court’s judgment in BALCO v Kaiser reinforces the objective of international commercial arbitration by ensuring minimal legal intervention in arbitral proceedings conducted outside of India. It clarifies the much debated position of law on the applicability of Part I of the Act to an arbitration held outside India. Till the judgment in BALCO vKaiser was rendered, determining whether an arbitration clause had impliedly or expressly excluded Part I of the Act, in accordance with the ruling in Bhatia International, remained a highly subjective test, often resulting in prolonged proceedings. However, some issues remain unresolved.

The remedies available to an Indian party

The Supreme Court ruling, by emphasizing on the sanctity of the seat of the arbitration, has reinforced a governing principle of arbitration - that of respecting parties’ autonomy.

The decision will have a major impact on the way arbitration agreements are drafted. Till now, parties to an arbitration agreement could choose a foreign seat and also state that notwithstanding the choice of the seat, recourse to provisions contained in Part I of the Act would be permitted. Now, express introduction of such exception will also not make any of the provisions of Part I applicable.

Theoretically, a natural conclusion of the judgment should be that Indian parties will choose to make India the seat of their arbitration in future international commercial arbitration agreements, in order to ensure recourse to Indian courts for interim reliefs or for challenging the award. However, whether Indian parties will have the bargaining power to ensure that India is made the seat in an international commercial arbitration agreement is a moot point. It also remains to be seen how many Indian parties will have the resources to initiate and continue legal proceedings in a foreign country. Given these considerations, arguably some Indian parties may have still been left “remedy-less”.

Choice of proper law of Contract in an agreement between two Indian parties

The issue that arose after TDM Infrastructure was whether the Supreme Court’s observation on the applicability of Indian law to arbitrations between Indian parties would extend to such arbitrations if they were held outside India.

In TDM Infrastructure the seat of arbitration was in India and the observation was made only with reference to Section 28(1)(a), a pre-condition of whose application is that the “place of arbitration is situate in India”. However, it can be argued that the “public policy” of India would apply to Indian parties even if they were to choose to arbitrate outside of India. Furthermore, since TDM Infrastructure was rendered when the judgment in Bhatia International was still good law, even when the arbitration clause specified a foreign country as the seat of the arbitration, if on the basis of the test in Bhatia International application of Part I was found to not be excluded, Section 28 of the Act would have applied to the arbitration. Therefore, in such a situation as well, two Indian parties could have been compelled to apply Indian law to the merits of their dispute.

In BALCO v Kaiser, the Supreme Court did not explicitly discuss TDM Infrastructure, noting that it was a case under Section 11 of the Act and so choice of law was not an issue that specifically arose for consideration in the case.

Nonetheless, in BALCO v Kaiser, the Supreme Court clearly stated that with respect to an Indian seated arbitration agreement between Indian parties, there was no choice for the arbitral tribunal but to decide the merits of the dispute by applying Indian law. It is ex facie apparent that such a proposition (of applying Indian law to disputes between Indian parties) cannot be extended to foreign seat arbitrations, since Section 28 is contained in Part I of the Act, which, post the judgment in BALCO v Kaiser, does not apply to a foreign seat arbitration. 

Nonetheless, the Constitution Bench has also stated that the import of Section 28 is to “ensure that two or more Indian parties do not circumvent the substantive Indian law, by resorting to arbitrations”. Arguably, such circumvention is also resorted to when two Indian parties choose foreign law as the proper law of the contract in a foreign seat arbitration agreement.

Status of arbitration petitions currently pending in Indian courts

In the concluding paragraph of its decision the Constitution Bench has stated that the law declared in BALCO vKaiser shall apply prospectively, i.e., to agreements entered into after the date of the judgement. Therefore, with respect to pending petitions filed in relation to arbitration agreements entered into before September 6, 2012, the law prior to BALCO v Kaiser would apply. Therefore, now, two interpretations of the law would be in force till disputes in agreements entered up to September 6, 2012, are resolved.

It is also significant to note that with respect to non-applicability of Section 9 of the Act to foreign seat arbitrations, the Supreme Court has stated that the responsibility of removing any “perceived lacuna” would be with the Parliament and not with it. The Government of India, in its Consultation Paper dated 7 April 2010, proposed to amend the Act so as to extend the application of Section 9 of the Act and Section 27 of the Act to foreign seat arbitrations. Given this proposal and the judgment’s limited applicability, the question of whether this judgment would go a long way in affecting international commercial contracts remain to be seen.

This article has been prepared by Khaitan & Co. Associate Partner, Mr. Raj R. Panchmatia and his associates, R. Arunadhri Iyer, Sukanya Bhaumik, Srinivasan Saimani, and Vatsala Sahay, and has been published after due permission from the author(s).

Disclaimer : This article was originally posted on Bar & Bench, and the weblink to the same is available here.

Exclusion of Arbitration Where Disputes Covered by Specialised Tribunals : The Law

The Full Bench of the Delhi High Court was seized with an interesting question, in HDFC Bank v. Satpal Singh Bakshi, as to whether the remedy of arbitration stands excluded in cases where specific tribunals are set up to decide the disputes between the same parties, more particularly in view of the exclusion of jurisdiction clauses set out in such acts. While distinguishing between rights 'in rem' and 'in personam', the Full Bench carved out a neat distinction between what is arbitrable and what is not. The relevant extracts from this important judgment are reproduced hereinbelow;

2. It is clear from the brief description of the factual matrix noted above that the core issue is which of the two enactments, namely, Arbitration Act and RDB Act is to prevail over the other. The Division Bench has framed this legal question in the following format:

"Whether the provisions of the Arbitration and Conciliation Act, 1996 (hereinafter referred to as the Arbitration Act) are excluded in respect of proceedings initiated by banks and financial institutions under the Recovery of Debts due to Banks and Financial Institutions Act, 1993 (hereinafter referred to as the RDB Act)."

3. When the matter came up for hearing before the Division Bench, another judgment of Division Bench of this Court in Kohinoor Creations and Ors. v. Syndicate Bank, 2005 (2) Arb. LR 324 (Delhi) was referred to wherein it has been inter alia held that in view of the provisions of Section 34 of the RDB Act, the provisions of Arbitration Act stand excluded and on that basis, it was argued that the view held by DRT and DRAT in the impugned orders did not reflect the correct legal position which was contrary to the aforesaid judgment of this Court. The Division Bench considered it proper that the matter required to be settled by a larger bench giving the following reasons therefor:

"Learned counsel for the petitioner has referred to a judgment of Division Bench of this court in Kohinoor Creations and Ors. Vs. Syndicate Bank 2005 (2) ARBLR 324 Delhi wherein it has been inter alia held that in view of the provisions of section 34 of the RDB Act, the provisions of the Arbitration Act stand excluded. In coming to this conclusion, specific emphasis is laid on sub-section (2) of Section 34 of the RDB Act. Section 34 of the RDB Act reads as under:-

"34. Act to have over-riding effect-

(1). Save as otherwise provided in sub-section(2), the provisions of this Act shall have effect notwithstanding anything inconsistent therewith contained in any other law for the time being in force or in any instrument having effect by virtue of any law other than this Act.

2). The provisions of this Act or the rules made there under shall be in addition to, and not in derogation of the Industrial Finance Corporation Act, 1948, the State Financial Corporation Act, 1951, the Unit Trust of India Act, 1963, the Industrial Reconstruction Bank of India Ltd., 1984, the Sick Industrial Companies (Special Provisions) Act, 1985 and the Small Industries Development Bank of India Act, 1989."

The submission of the learned counsel for the petitioner thus is, relying on the aforesaid judgment, that if a claim is over Rs.10 Lakh then jurisdiction of the Civil Court is excluded qua banks and financial institution, and therefore banks and financial institution have to necessarily approach the DRT for recovery of the amount in terms of the RDB Act. In other words, the applicability of the Arbitration Act stands ousted. In our considered view, sub-section(2) of section 34 of the RDB Act only provides that the provision of that Act are in addition to certain acts specified therein. The question which arises for consideration is whether by implication all other Acts not referred to in sub-section (2) of Section 34 are overridden by the provisions of the RDB Act. While considering this aspect, it will have to be borne in mind that firstly, the Arbitration Act was enacted after the enforcement of the RDB Act and secondly, the exclusivity of jurisdiction conferred on the DRTs‟ is perhaps applicable to public forums as against private forums such as an arbitral tribunal. To test the proposition, if one were to ask whether the DRT would refuse to pass an order on a compromise application where parties agree to an intercession of an arbitrator on a portion of a claim during the pendency of the matter before it; the answer may perhaps be in the negative. There are therefore, to our mind, several unanswered aspects of the matter which require closer examination.

We are thus of the view that this matter is of some importance and thus the question of law as aforesaid, needs to be settled by a Larger Bench of this court..."

4. This is how the matter was placed before this Bench. Keeping in view the importance of the issue involved and also that the respondent has failed to put in appearance inspite of service, we had requested Mr. Parag P. Tripathi, learned senior counsel to assist the Court. Mr. Tripathi stated that after examining the whole matter, he was of the view that RDB Act was a special statute which would prevail over the Arbitration Act. He thus argued on these lines thereby supporting the cause of the bank. Mr.Tripathi opened his submission by explaining the special status of the RDB Act and the raison d'etre behind this enactment. He impressed upon the fact that this Act was enacted in the background of swelling Non Performing Assets (NPAs) and difficulty of banks and financial institutions to recover loans and enforcement of the same. Mostly, these institutions are public financial institutions and monies are public money. The focus was therefore expeditious adjudication and recovery of debts. The validity of the Act was upheld by the Supreme Court in Union of India v. Delhi High Court Bar Association,(2002) 4 SCC 275 which set aside the judgment of the High Court. Referring to preamble of the RDB Act, he pointed out that the same provides for "establishment of tribunals for expeditious adjudication and recovery of debts due to banks and financial institutions". Going by the Objects and Reasons behind the RDB Act, it was crystal clear that the purpose was to unlock the locked potentials of NPAs. In this sense, he submitted, RDB Act was special statute enacted for specific purpose. In this context, explaining the concept of a special law or statute, of Mr.Tripathi endeavored to build step by step edifice of his submissions in the following manner:

(a) Section 9 of CPC makes it clear that every party has a right of recourse to civil remedy before a duly constituted civil court unless the remedy is barred either expressly or by implication. It is also a settled law that any provision ousting the jurisdiction of civil court must be strictly construed. [Sahebgouda v. Ogeppa, (2003) 6 SCC 151].

(b) He then explained the working of RDB Act pointing out that RDB Act is relatable to Entry 45 of List I (Banking). Preamble of this Act provides for "establishment of tribunals for expeditious adjudication and recovery of debts due to banks and financial institutions....". Under Section 19, only a bank or a financial institution [as defined under Section 2(d) and (h) of the RDB Act] can trigger the provisions of the RDB Act when the „debt‟ [as defined under Section 2(g)] is more than `10 Lakhs [Section 1(4)]. Therefore, RDB Act operates within a very narrow compass and deals with a very special situation of recovery of debts due to banks and financial institutions, which clearly makes it a special law dealing with a specific situation.

(c) On the other hand, Arbitration Act relates to Entry 11A (Administration of Justice) and Entry 13 (Civil Procedure, including Arbitration) of List III. As per the preamble of this Act, it "consolidates and amends the law relating to domestic arbitration, the international arbitration and enforcement of foreign arbitral awards as to define the law relating to Constitution....". Premised on this, submission of Mr. Tripathi was that the Arbitration Act takes within its sweep all possible arbitrations dealing with an exceptionally wide cross sections and possible areas of disputes. Any dispute, which is arbitrable in nature, would be governed by the provision of the Arbitration Act, which exposes its general nature as regards the subject matter of disputes it deals with. Further, an arbitral tribunal is an alternative to civil courts and its jurisdiction would coincide with a civil court [Executive Engineer, Dhenkanal Minor Irrigiation Division v. N.C. Budharaj, (2001) 2 SCC 721]. (d) Advancing his plea predicated on his aforesaid submission pointing out the nature of RDB Act and Arbitration Act, Mr. Tripathi argued that the Arbitration Act is a general statute vis-à-vis RDB Act which is a special statute with regard to recovery of debts of banks and financial institutions and, therefore, the provisions of special statute, i.e. RDB Act, would prevail over those of general statute, i.e. Arbitration Act.

(e) Mr. Tripathi accepted that Arbitration Act may be special statute when it is placed in juxtaposition with the jurisdiction of civil courts to entertain and adjudicate civil disputes inasmuch as in that sense, the Arbitration Act provided for special forum, chosen by the parties who wanted to remain away from the civil court for the adjudication of their inter se disputes. His submission, however, was that there have been instances where the same statute has been treated as a special statute vis-à-vis one legislation and as a general statute vis-à- vis another legislation. The issue arose in Life Insurance Corporation of India v. D.J. Bahadur, (1981) 1 SCC 315, viz. whether in the context of a dispute between workmen and management (of LIC), the LIC Act or the Industrial Disputes Act is a special statute. It was observed:

"52. In determining whether a statute is a special or a general one, the focus must be on the principal subject matter plus the particular perspective. For certain purposes, an Act may be general and for certain other purposes it may be special and we cannot blur distinctions when dealing with finer points of law.

The Apex Court further held:

"....vis-a-vis 'industrial disputes' at the termination of the settlement as between the workmen and the Corporation the ID Act is a special legislation and the L.I.C. Act a general legislation. Likewise, when compensation on nationalisation is the question, the L.I.C. Act is the special statute."

Similarly in the case of Damji Valji Shah v. LIC of India, AIR 1966 SC 135, the Supreme Court held:

"Further, the provision of the special Act, i.e. the LIC Act, will override the provisions of the general Act, viz., the Companies Act which is an Act relating to companies in general."

He also drew our attention to the decision of Snehadeep Structures Pvt. Ltd. v. Maharashtra Small-Scale Industries Development Corporation Ltd., (2010) 3 SCC 34, where the Supreme Court while dealing with applicability of provisions of the interest on delayed payment to Small Scale and Ancillary Industrial Undertaking Act, 1993 vis-à-vis Arbitration Act, held:

"38. The preamble of Interest Act shows that the very objective of the Act was "to provide for and regulate the payment of interest on delayed payments to small scale and ancillary industrial undertakings and for matters connected therewith or incidental thereto." Thus, as far as interest on delayed payment to Small Scale Industries as well as connected matters are concerned, the Act is a special legislation with respect to any other legislation, including the Arbitration Act. The contention of the respondent that the matter of interest payment will be governed by Section 31(7) of the Arbitration Act, hence, is erroneous. Section 4 of the Interest Act endorses the same which sets out the liability of the buyer to pay interest to the supplier 'notwithstanding anything contained in any agreement between the buyer and the supplier or in any law for the time being in force.' Thus, Interest Act is a special legislation as far as the liability to pay interest, or to make a deposit thereof, while challenging an award/decree/order granting interest is concerned."

He, thus, impressed that insofar as comparison of RDB Act with Arbitration Act is concerned, RDB Act is to be treated as special statute vis-à-vis Arbitration Act and on the application of settled principle of generalia specialibus non derogant the former would prevail over the latter to the limited extent of proceeding initiated by the Banks/Financial Institutions for the recovery of debts.

5. In his attempt to carry home these points, other submissions of Mr.Tripathi were as follows:

(i) Section 17 of the RDB Act makes it clear that the DRT alone is to decide the applications of the Banks and Financial Institutions for recovery of debts due to them. Also, Section 18 of the Act clearly bars the jurisdiction of any other court, except High Court and Supreme Court, from entertaining matters specified in Section 17. Furthermore, Section 31 of the Act transfers all such cases pending before any Court to the DRT. It is therefore evident from the scheme of the RDB that an exclusive jurisdiction has been given to the DRT. He argued that the law on this point has already been conclusively settled by the Supreme Court in the matter of Allahabad Bank v. Canara Bank, (2000) 4 SCC 406, where the issue was with regard to jurisdiction of DRT and Recovery Officers under the DRT Act vis-à- vis Company Court (when a winding up petition is pending, or a winding up order has been passed). It was held that the adjudication of liability and execution of the certificate in respect of debt payable to banks and financial institutions is within the exclusive jurisdiction of the DRT and the concerned Recovery Officer, and in such a case the jurisdiction of the Company Court under Section 442, 537 and 446 of the Companies Act, 1956 stands ousted.

(ii) On the other hand, the Arbitration Act is a substitute for a civil Court within the meaning of Section 9 to adjudicate civil disputes, subject to the additional limitation where it is a right in rem, which is to be adjudicated. Taking sustenance from the judgment of Supreme Court in the matter of Booz Allen and Hamilton Inc. v. SBI Home Finance Limited & Ors., (2011) 5 SCC 532, he pointed out that the Supreme Court while dealing with the issue of „arbitrability‟ of dispute held that Arbitral Tribunals are „private fori‟ chosen by the parties in place of Courts or Tribunals which are „public fori‟ constituted under the laws of the country. All disputes relating to „right in personam‟ are considered to be amenable to arbitration and all disputes relating to „right in rem‟ are required to be adjudicated by courts and public tribunals, being unsuited for private arbitration. He attempted to apply the ratio of the aforesaid judgment to the given case arguing that when the legislature has expressly made a particular kind of dispute to be decided by a public forum, then the same has been by implication excluded from the purview of arbitrability and therefore cannot be decided by a private forum like arbitration.

(iii) Mr. Tripathi also tried to draw support from Section 34 of the RDB Act which provides a non-obstante clause. Section 34(2) stipulates that RDB Act is „in addition to and not in derogation‟ to any law or force. On the contrary, the Arbitration Act does not have any non- obstante clause except a limited extent insofar as judicial intervention is concerned as provided in Section 5 of the Arbitration Act. He thus submitted that where there are two Acts, the one having a non- obstante clause will prevail over the other and for this reason also, RDB Act should prevail over Arbitration Act. He also submitted that a finer reading of the provisions of RDB Act, particularly Section 34 thereof, would reveal that application of Arbitration Act had been expressly as well as impliedly excluded. He also submitted that even if the Arbitration Act is a latter Act, the concept of arbitration was well known to Parliament right from Arbitration Act, 1891 through to the Arbitration Act, 1940. Apart from Section 34, even Section 18 of the RDB Act ousts jurisdiction of all other courts in relation to matters specified in Section 17. Since arbitration is an alternative to the jurisdiction of civil courts and its jurisdiction would be confined and in alternative to cases where civil courts have jurisdiction, therefore, when the jurisdiction of civil courts are ousted, it would impliedly oust the jurisdiction of the arbitral tribunal also. It is Section 18 which is somewhat in pari materia with Section 5 of the Arbitration Act.

(iv) Mr. Tripathi concluded his submissions by referring to the judgment of the Supreme Court in Nahar Industrial Enterprise Ltd. v. Hong Kong and Shanghai Banking Corporation, (2009) 8 SCC 646 and submitted that the issue at hand stands settled by the aforesaid judgment. In that case, the issue was whether the High Court or Supreme Court has the power to transfer a suit pending in a Civil Court to DRT. The Court enunciated the law as under:

"117. The Act, although, was enacted for a specific purpose but having regard to the exclusion of jurisdiction expressly provided for in Sections 17 and 18 of the Act, it is difficult to hold that a civil court's jurisdiction is completely ousted. Indisputably the banks and the financial institutions for the purpose of enforcement of their claim for a sum below Rs. 10 lakhs would have to file civil suits before the civil courts. It is only for the claims of the banks and the financial institutions above the aforementioned sum that they have to approach the Debt Recovery Tribunal. It is also without any cavil that the banks and the financial institutions, keeping in view the provisions of Sections 17 and 18 of the Act, are necessarily required to file their claim petitions before the Tribunal. The converse is not true. Debtors can file their claims of set off or counter-claims only when a claim application is filed and not otherwise. Even in a given situation the banks and/or the financial institutions can ask the Tribunal to pass an appropriate order for getting the claims of set-off or the counter claims, determined by a civil court. The Tribunal is not a high powered tribunal. It is a one man Tribunal. Unlike some Special Acts, as for example Andhra Pradesh Land Grabbing (Prohibition) Act, 1982 it does not contain a deeming provision that the Tribunal would be deemed to be a civil court."

5. Mr. Puneet Bhalla, learned counsel appearing for the bank adopted the aforesaid arguments. In addition, he heavily relied upon the reasons given by the Division Bench in Kohinoor Creations (supra) and submitted that the approach of the Division Bench in the said case was in tune with the legal position which should be maintained.

6. From the detailed submissions made by Mr. Tripathi and Mr. Bhalla as noted above and the reading of judgment of the Division Bench in Kohinoor Creations (supra), it is clear that the entire rationale sought to be projected is the exclusiveness of the RDB Act to deal with the matters which fall within the jurisdiction of the Debt Recovery Tribunals constituted under the said Act. On that basis, the attempt is to show that all those matters which are covered by the RDB Act for which special machinery in the form of Debt Recovery Tribunal and Debt Recovery Appellate Tribunal is constituted, such matters come within the sole and exclusive domain of Debt Recovery Tribunal and no other body or forum has any jurisdiction to deal with such disputes.

7. There is no doubt that those matters which are covered by the RDB Act and are to be adjudicated upon by the Debt Recovery Tribunal/ Debt Recovery Appellate Tribunal, jurisdiction of civil courts is barred. Up to this point, we are in agreement with the learned counsels. However, the answer to the question posed before us does not depend upon the aforesaid principle. That principle only ousts the jurisdiction of civil courts. Focus of the issue, however, has to be somewhat different viz. even when a special Tribunal is created to decide the claims of banks and financial institutions of amounts more than `10 Lakhs, can the parties by mutual agreement still agree that instead of the Tribunal constituted under the RDB Act, these disputes shall be decided by the Arbitral Tribunal. If answer to this question is in the negative, then those submissions made by the counsels shall prevail. On the other hand, if we find that it is permissible for the parties, by agreement, to agree for domestic forum of their own choice, namely, Arbitral Tribunal under the Arbitration Act to deal with such claims, then the edifice of the apparent forceful submissions of Mr. Tripathi would collapse like house of cards as all those submissions would be relegated to the pale of insignificance.

8. No doubt, for determination of disputes the State provides the mechanism in the form of judicial fora, i.e. administration of justice through the means of judicial system established in this country as per the Constitution and the laws. However, it is also recognized that that is not the only means for determination of lis or resolution of conflicts between the parties. Still the parties are given freedom to choose a forum, alternate to and in place of the regular courts or judicial system for the decision of their inter se disputes. There has been a recognition of the concept that notwithstanding the judicial system, parties are free to chose their own forum in the form of arbitration. This was first recognized by enacting Arbitration Act, 1891. Introduction of Section 89 in the Code of Civil Procedure by amendment to the said Code in the year 2002 takes this concept further by introducing various other forums, known as Alternate Dispute Resolution. Thus, even when the matter is pending in the Court, parties to the dispute are given freedom to resort to Lok Adalat, conciliation, mediation and also the arbitration.

9. All civil societies demand a proper, effective and independent judicial system to resolve the disputes that may arise. Resolution of disputes by Municipal Courts is, therefore, prevalent in all countries and independence of judiciary is endeavoured in democratic set ups. While courts are State machinery discharging sovereign function of judicial decision making, various alternate methods for resolving the disputes have also been evolved over a period of time. One of the oldest among these is the arbitration. This is a forum for dispute resolution in place of municipal court. Important feature of arbitration is that parties to the dispute voluntarily agree to get the disputes decided by one or more persons, rather than the Court. Though the Indian Arbitration and Conciliation Act, 1996 does not contain a definition of "arbitration", Statement of Objects and Reasons contained therein gives an indication of the general principles on which arbitration is founded. These are:

i. The object of arbitration is to ensure a fair resolution of disputes by an impartial tribunal without unnecessary delay or expense. ii. The parties should be free to agree how their disputes are resolved subject only to such safeguards as are necessary in the public interest.

iii. Intervention of the courts should be restricted.

10. Thus, the Courts have not been the only forum for conflict resolutions. As already pointed about above, arbitration in the form of statute was given recognition in the year 1899 though even earlier to that, arbitration in some or other form prevailed in this country. What is important is that arbitration as an alternate to resolution by municipal courts is recognized and in the process, sanctity is attached to the domestic forum which is chosen by the parties themselves. In that sense, party autonomy is recognized as paramount. It is a recognition of the fact that the parties are given freedom to agree how their disputes are resolved. Even the intervention by the Courts is restricted and is minimal.

11. What follows from the above? When arbitration as alternate to the civil courts is recognized, which is the common case of the parties before us, creation of Debt Recovery Tribunal under the RDB Act as a forum for deciding claims of banks and financial institutions would make any difference? We are of the firm view that answer has to be in the negative. What is so special under the RDB Act? It is nothing but creating a tribunal to decide certain specific types of cases which were earlier decided by the civil courts and is popularly known as „tribunalization of justice‟. It is a matter of record that there are so many such tribunals created. Service matters of the civil servants and employees of public bodies/authorities which were hitherto dealt with by the civil courts and the High Court are now given to the Central Administrative Tribunal and State Administrative Tribunals with the enactment of Administrative Tribunals Act, 1985. Disputes of defence personnel are now dealt with by special tribunals called Armed Forces Tribunal constituted under the Armed Forces Tribunal Act, 2007. With the creation of all these special tribunals, the matters which were up to now dealt with by civil courts or High Courts are to be taken up by these tribunals in the first instance. (We would like to point out that in so far as High Court is concerned, constitutional remedy provided under Article 226 of the Constitution of India remains intact as held in L. Chandrakumar v. Union of India, (1994) 5 SCC 539. However, it is not necessary to dilate on this issue as that does not have any bearing on the present issue).

12. With the creation of these alternate fora with all trappings of the Court and with the decision of the disputes which were hitherto dealt with by the civil courts, can it be said that parties are now totally precluded and prohibited of exercising their choice of domestic forum in the form of arbitral tribunal. Before we answer this question, we would like to refer to the judgment in the case of Booz Allen and Hamilton Inc. (supra). The Supreme Court in that case dealt with the issue of "arbitrability of disputes" and held that all disputes relating to „right in personam‟ are considered to be amenable to arbitration and disputes relating to „right in rem‟ are those disputes which are not arbitrable and require to be adjudicated by courts and public tribunals, being unsuited for private arbitration. Law in this respect is explained by the Supreme Court with utmost clarity, precision and erudition in the following terms:

"32. The nature and scope of issues arising for consideration in an application under Section 11 of the Act for appointment of arbitrators, are far narrower than those arising in an application under Section 8 of the Act, seeking reference of the parties to a suit to arbitration. While considering an application under Section 11 of the Act, the Chief Justice or his designate would not embark upon an examination of the issue of 'arbitrability' or appropriateness of adjudication by a private forum, once he finds that there was an arbitration agreement between or among the parties, and would leave the issue of arbitrability for the decision of the arbitral Tribunal. If the arbitrator wrongly holds that the dispute is arbitrable, the aggrieved party will have to challenge the award by filing an application under Section 34 of the Act, relying upon Sub-Section 2(b)(i) of that section.

33. But where the issue of 'arbitrability' arises in the context of an application under Section 8 of the Act in a pending suit, all aspects of arbitrability have to be decided by the court seized of the suit, and cannot be left to the decision of the Arbitrator. Even if there is an arbitration agreement between the parties, and even if the dispute is covered by the arbitration agreement, the court where the civil suit is pending, will refuse an application under Section 8 of the Act, to refer the parties to arbitration, if the subject matter of the suit is capable of adjudication only by a public forum or the relief claimed can only be granted by a special court or Tribunal.

34. The term 'arbitrability' has different meanings in different contexts. The three facets of arbitrability, relating to the jurisdiction of the arbitral tribunal, are as under:

(i) whether the disputes are capable of adjudication and settlement by arbitration? That is, whether the disputes, having regard to their nature, could be resolved by a private forum chosen by the parties (the arbitral tribunal) or whether they would exclusively fall within the domain of public fora (courts).

(ii) Whether the disputes are covered by the arbitration agreement? That is, whether the disputes are enumerated or described in the arbitration agreement as matters to be decided by arbitration or whether the disputes fall under the 'excepted matters' excluded from the purview of the arbitration agreement.

(iii) Whether the parties have referred the disputes to arbitration? That is, whether the disputes fall under the scope of the submission to the arbitral tribunal, or whether they do not arise out of the statement of claim and the counter claim filed before the arbitral tribunal. A dispute, even if it is capable of being decided by arbitration and falling within the scope of arbitration agreement, will not be 'arbitrable' if it is not enumerated in the joint list of disputes referred to arbitration, or in the absence of such joint list of disputes, does not form part of the disputes raised in the pleadings before the arbitral tribunal.

35. Arbitral tribunals are private fora chosen voluntarily by the parties to the dispute, to adjudicate their disputes in place of courts and tribunals which are public fora constituted under the laws of the country. Every civil or commercial dispute, either contractual or non-contractual, which can be decided by a court, is in principle capable of being adjudicated and resolved by arbitration unless the jurisdiction of arbitral tribunals is excluded either expressly or by necessary implication. Adjudication of certain categories of proceedings are reserved by the Legislature exclusively for public fora as a matter of public policy. Certain other categories of cases, though not expressly reserved for adjudication by a public fora (courts and Tribunals), may by necessary implication stand excluded from the purview of private fora. Consequently, where the cause/dispute is inarbitrable, the court where a suit is pending, will refuse to refer the parties to arbitration, under Section 8 of the Act, even if the parties might have agreed upon arbitration as the forum for settlement of such disputes.

36. The well recognized examples of non-arbitrable disputes are: (i) disputes relating to rights and liabilities which give rise to or arise out of criminal offences; (ii) matrimonial disputes relating to divorce, judicial separation, restitution of conjugal rights, child custody; (iii) guardianship matters; (iv) insolvency and winding up matters; (v) testamentary matters (grant of probate, letters of administration and succession certificate); and (vi) eviction or tenancy matters governed by special statutes where the tenant enjoys statutory protection against eviction and only the specified courts are conferred jurisdiction to grant eviction or decide the disputes.

37. It may be noticed that the cases referred to above relate to actions in rem. A right in rem is a right exercisable against the world at large, as contrasted from a right in personam which is an interest protected solely against specific individuals. Actions in personam refer to actions determining the rights and interests of the parties themselves in the subject matter of the case, whereas actions in rem refer to actions determining the title to property and the rights of the parties, not merely among themselves but also against all persons at any time claiming an interest in that property. Correspondingly, judgment in personam refers to a judgment against a person as distinguished from a judgment against a thing, right or status and judgment in rem refers to a judgment that determines the status or condition of property which operates directly on the property itself. (Vide: Black's Law Dictionary).

38. Generally and traditionally all disputes relating to rights in personam are considered to be amenable to arbitration; and all disputes relating to rights in rem are required to be adjudicated by courts and public tribunals, being unsuited for private arbitration. This is not however a rigid or inflexible rule. Disputes relating to sub-ordinate rights in personam arising from rights in rem have always been considered to be arbitrable."

13. What is discernible from the above is that all disputes relating to „right in personam‟ are arbitrable and choice is given to the parties to choose this alternate forum. On the other hand, those relating to „right in rem‟ having inherent public interest are not arbitrable and the parties‟ choice to choose forum of arbitration is ousted. Examined in this line, it is obvious that a claim of money by the bank or financial institution against the borrower cannot be treated as „right in rem‟. Each claim involves adjudication whether, on the facts of that case, money is payable by the borrower to the bank/financial institution and if so to what extent. Each case is the decision on the facts of that case with no general ramifications. A judgment/decision of the Debt Recovery Tribunal deciding a particular claim can never be „right in rem‟ and is a „right in personam‟ as it decides the individual case/claim before it with no elements of any public interest.

14. Merely because there were huge NPAs and lot of monies belonging to the banks and financial institutions was stuck up and the legislature in its wisdom decided to create a special forum to have expeditious disposal of these cases would not mean that decisions rendered by Debt Recovery Tribunal come in the realm of „right in rem‟. At the same time, we find from the judgment in Booz Allen and Hamilton Inc. (supra) that certain kinds of disputes for which tribunals are created are held to be non- arbitrable. Examples are Rent Control Tribunal under the Rent Control Act and Labour Court/Industrial Tribunal under the Industrial Disputes Act, 1947. Obviously, question that would immediately strike is as to what would be the yardstick to determine some kind of disputes to be decided by the tribunals are non-arbitrable whereas some other disputes become arbitrable. According to us, cases where a particular enactment creates special rights and obligations and gives special powers to the tribunals which are not with the civil courts, those disputes would be non-arbitrable.

It is a matter of common knowledge that Rent Control Act grants statutory protection to the tenants. Wherever provisions of Rent Control Act are applicable, it overrides the contract entered into between the parties. It is the rights created under the Act which prevail and those rights are not enforceable through civil courts but only through the tribunals which is given special jurisdiction not available with the civil courts. Likewise, Industrial Disputes Act, 1947 creates special rights in favour of the workman or employers and gives special powers to the industrial adjudicators/tribunals to even create rights which powers are not available to civil courts. Obviously such disputes cannot be decided by means of arbitral tribunals which are substitute of civil courts. On the other hand, in so far as tribunal like Debt Recovery Tribunal is concerned, it is simply a replacement of civil court. There are no special rights created in favour of the banks or financial institutions. There are no special powers given to the Debt Recovery Tribunal except that the procedure for deciding the disputes is little different from that of CPC applicable to civil courts. Otherwise, the Debt Recovery Tribunal is supposed to apply the same law as applied by the civil courts in deciding the dispute coming before it and is enforcing contractual rights of the Banks. It is, therefore, only a shift of forum from civil court to the tribunal for speedy disposal. Therefore, applying the principle contained in Booz Allen and Hamilton Inc. (supra), we are of the view that the matters which come within the scope and jurisdiction of Debt Recovery Tribunal are arbitrable.

15. Once that conclusion is arrived at, obviously the parties are given a choice to chose their own private forum in the form of arbitration.

16. Another significant fact which has to be highlighted is that the bank entered into agreement with the respondent herein on its own standard form formats. The terms and conditions of the loan were set out and decided by the bank. The respondent signed on dotted lines. In this scenario, when it was the proposal of the bank to have an arbitration clause to which the respondent had agreed, bank cannot now be permitted to say that this arbitration clause is of no consequence. Accepting the contention of bank would mean that the arbitration clause is rendered nugatory. It defeats the very effect of the said arbitration clause which was foisted by the bank itself upon the respondent, though in law, it becomes mutually acceptable between the parties.

17. Matter can be looked into form another angle as well. Had the bank invoked the arbitration on the basis of aforesaid clause containing arbitration agreement between the parties and referred the matter to the arbitral tribunal, was it permissible for the respondent to take an objection to the maintainability of those arbitration proceedings? Answer would be an emphatic no. When we find that answer is in the negative, the Court cannot permit a situation where such an arbitration agreement becomes one sided agreement, namely, to be invoked by the bank alone at its discretion without giving any corresponding right to the respondent to have the benefit thereof.