Section 37(2)(b) - Grounds of appeal against interim measures

This article seeks to examine the grounds on which an interim order under Section 17 of the Arbitration and Conciliation Act, 1996 (‘the act’) can be challenged in an appeal under Section 37 of the act. Specifically, the article seeks to examine whether unilateral appointment of sole arbitrator is a valid ground to set aside a Section 17 order.

Section 17 - Interim measures ordered by arbitral tribunal

Section 17 of the Arbitration Act deals with the interim measures that can be ordered by the Arbitral Tribunal. Section 17(1) provides that any party may apply to the arbitral tribunal for the following interim measures:-

• Appointment of guardian of minor for the arbitral proceedings [S. 37(1)(i)]

• Preservation, interim custody or sale of goods [S. 37(1)(ii)(a)]

• Securing the amount in dispute [S. 37(1)(ii)(b)]

• Detention, preservation or inspection of any property or thing which is the subject-matter of the dispute in arbitration [S. 37(1)(ii)(c)]

• Interim Injunction or Appointment of receiver [S. 37(1)(ii)(d)]

• Any other relief [S. 37(1)(ii)(e)]

While Section 9 of the act deals with the Interim Measures, etc. by the court, Section 17 deals with the interim measures by the arbitral tribunal. Before the Arbitration and Conciliation (Amendment) Act, 2015 (“2015 Amendment”), there was a stark distinction between the two sections which has been noted by the Supreme Court in Managing Director, Army Welfare Housing Organisation v. Sumangal Services (P) Ltd., (2004) 9 SCC 619. Examining the nature of power provided by Section 17, the court in MD Army Welfare Housing (supra) held that ‘an Arbitral Tribunal is not a court of law. Its orders are not judicial orders’[1], and that the power under Section 17 is a limited one[2]

The above position has been overturned by the 2015 Amendment with the insertion of S. 17(2) which provides that “any order issued by the arbitral tribunal under this section shall be deemed to be an order of the Court for all purposes”, thus bringing Section 9 and Section 17 at par[3].

Section 37 - Appealable Orders

S. 37 of the act deals with ‘Appealable Orders’. S. 37(1) which starts with a non-obstante clause provides that an appeal shall lie from the order enumerated in the Section (and from no others) to the Court authorized by law to hear appeals from original decrees of the Court passing the order.

S. 37(2)(b) specifically provides that an appeal shall lie to the court from an order of the arbitral tribunal ‘granting or refusing to grant an interim measure’ under Section 17 of the act.

While S. 37 specified that an appeal would be maintainable against an order passed by the arbitral tribunal under Section 37, it is silent on the grounds which such an appeal can be filed. This gap has led to the various high courts laying down the scope of this section when the appellate court is faced with an interim order passed under Section 17 of the Arbitration Act.

First Restriction – Party to the arbitration agreement

It is to be noted that the first restriction posted in the section is explicitly mentioned in S. 17 itself. S. 17(1) allows only a ‘party’ to approach the arbitral tribunal for interim measures. A ‘Party’ has been defined under S. 2(1)(h) of the Act to mean a party to the arbitration agreement. Arbitration Agreement has been defined under Section 7(1) of the Arbitration Act to mean ‘an agreement by the parties to submit to arbitration all or certain disputes which have arisen or which may arise between them in respect of a defined legal relationship, whether contractual or not’.

Thus, it is has been held in Mashreq Bank PSC v. Indian Overseas Bank, 2021 SCC OnLine Guj 2678 in the context of S. 9(1) which is pari materia to S. 17(1), that a relief under Section 9 cannot be granted to a person who is not a party to the arbitration agreement. The principle has been expanded subsequently to hold that not only can a party apply to the arbitral tribunal for interim relief, such interim relief can not be granted against a third party[4].

This rule, however, would be subject to the exceptions laid down by the Supreme Court in Chloro Controls India (P) Ltd. v. Severn Trent Water Purification Inc., (2013) 1 SCC 641 wherein arbitration has been allowed in the cases of implied consent, third-party beneficiaries, guarantors, assignment and other transfer mechanisms of contractual rights[5]

Second Restriction – ‘Wander v Antox’ Principle

The second way in which the courts have dealt with Section 17 orders is to treat it how an appellate court would while dealing with appeals against interim injunctions passed under Order XXXIX Rules 1 and 2 or Order XXXVIII Rule 5. It is to be noted that the power under Section 17 is to be guided by the exercise of Order 39 Rules 1 and 2 or Order XXXVIII Rule 5 as provided in the CPC[6].

In the case of civil suits, the classic proposition as to how the appellate courts are to deal with challenges to an interim order has been laid down by the Supreme Court in Wander Ltd. v. Antox India (P) Ltd. 1990 Supp SCC 727 as under,

14. The appeals before the Division Bench were against the exercise of discretion by the Single Judge. In such appeals, the appellate court will not interfere with the exercise of discretion of the court of first instance and substitute its own discretion except where the discretion has been shown to have been exercised arbitrarily, or capriciously or perversely or where the court had ignored the settled principles of law regulating grant or refusal of interlocutory injunctions. An appeal against exercise of discretion is said to be an appeal on principle. Appellate court will not reassess the material and seek to reach a conclusion different from the one reached by the court below if the one reached by that court was reasonably possible on the material….If the discretion has been exercised by the trial court reasonably and in a judicial manner the fact that the appellate court would have taken a different view may not justify interference with the trial court's exercise of discretion.

The principle has been adopted in the context of arbitration by the Delhi High Court in the case of Shiningkart Ecommerce Pvt. Ltd. v. Jiayun Data Limited, 2019 SCC OnLine Del 11464, wherein it has been held the appellate court should not interfere with such discretion if the view taken by the Tribunal is a plausible view and does not suffer from any ‘perversity’[7]

‘Perversity’ as a ground for setting aside the interim order

While Wander (supra) and Shiningkart (supra) specifically imported perversity as a ground for setting aside the Section 17 order, the phrase has been vastly expanded by subsequent judgments.

In Sanjay Arora v. Rajan Chadha, (2021) 3 HCC (Del) 654, the Delhi High Court was dealing with a challenge to an order passed under Section 17. While dealing with the scope of interference under Section 37(2)(b) of the Act, the court not only applied[8] the principle laid down in Wander (supra) but went ahead to apply Dinesh Gupta v. Anand Gupta, 2020 SCC OnLine Del 2099 and Augmont Gold (P) Ltd. v. One97 Communication Limited, (2021) 4 HCC (Del) 642 and to hold that “the considerations guiding exercise of appellate jurisdiction under Section 37(2)(b) are, fundamentally, not really different from those which govern exercise of jurisdiction under Section 34 of the 1996 Act”

Further, in World Window Infrastructure (P) Ltd. v. Central Warehousing Corpn., (2021) 3 HCC (Del) 731, the Delhi High Court similarly held that the considerations which apply to Section 34 would also apply to Section 37(ii)(b)[9]

The above mentioned dicta suggests that it would be possible to challenge the order passed under Section 17 on the ground that the Arbitrator was unilaterally appointed by one of the parties in contravention of Perkins Eastman Architects DPC v. HSCC (India) Ltd., (2020) 20 SCC 760.

Another case of the Kerala High Court - Hedge Finance v Bijish Joseph[10] also suggests that such an approach would indeed be possible. The Kerala High Court has taken a different approach to come to the conclusion that a challenge to the jurisdiction of the arbitrator could be raised in any collateral proceedings. The Ld. Single Judge of the Kerala High Court was dealing with a challenge to the Section 17 order raised during execution proceedings under Section 17(2) of the Act and framed the issue as to whether “an interim award passed by an ineligible Arbitrator be enforced through a Court under Section 17 (2) of the Act”[11]

Answering the question in the negative, the court applied Chiranjilal Shrilal Goenka v Jasjit Singh, (1993) 2 SCC 507 wherein it has been held that since an order passed by a court without jurisdiction would be a nullity and the challenge to such an order could be raised even at the stage of execution and even in collateral proceedings, and held that a Section 17 order can be set aside in execution proceedings since once “the infrastructure collapses, the superstructure is bound to collapse”.

Conclusion

A perusal of the above case law would suggest that the grounds that can be taken in appeal under Section 37 when an order passed under Section 17 are as under:

·       That the party who has filed the application is not a party to the arbitration agreement

·       Principles of Wander v Antox – that the order is arbitrary, capricious and perverse

·       Grounds specified under Section 34 of the act

Thus, it can be safely concluded that the scope of S. 37 has been expanded and now the grounds that would be available under Section 34 of the act can also be taken in an appeal under Section 37 of the act. The views of various High Courts also suggests that it is possible to raise the ground of unilateral appointment of an arbitrator even at the stage of appeal under Section 37 to an interim order under Section 17 of the Act.

It is submitted that the above approach is welcome and is consistent with the objects of the arbitration act as such an approach would also iron and smooth out the issues with respect to jurisdiction at the beginning of the arbitration itself whenever an order under Section 17 is challenged. Such an approach would also prevent multiplicity of proceedings as such a plea can be raised even before the filing of a petition under Section 14 of the Act, and would act as a check on the power of an arbitrator appointed illegally.

References 

[1] Para 43, Managing Director, Army Welfare Housing Organisation v. Sumangal Services (P) Ltd., (2004) 9 SCC 619

[2] Para 58, Managing Director, Army Welfare Housing Organisation v. Sumangal Services (P) Ltd., (2004) 9 SCC 619

[3] The position and the background for adding S. 17(2) has been examined by the Supreme Court in Paras 70 – 72, Amazon.com NV Investment Holdings LLC v. Future Retail Ltd., (2022) 1 SCC 209

[4] Para 53, Mashreq Bank PSC v. Indian Overseas Bank, 2021 SCC OnLine Guj 2678

[5] Para 103.1, Chloro Controls India (P) Ltd. v. Severn Trent Water Purification Inc., (2013) 1 SCC 641

[6] Para 29, Shiningkart Ecommerce Pvt. Ltd. v. Jiayun Data Limited, 2019 SCC OnLine Del 11464; Para 16, Sanjay Arora v. Rajan Chadha, (2021) 3 HCC (Del) 654

[7] Para 40, Shiningkart Ecommerce Pvt. Ltd. v. Jiayun Data Limited, 2019 SCC OnLine Del 11464

[8] Para 8, Sanjay Arora v. Rajan Chadha, (2021) 3 HCC (Del) 654

[9] Para 67, World Window Infrastructure (P) Ltd. v. Central Warehousing Corpn., (2021) 3 HCC (Del) 731

[10] https://www.casemine.com/judgement/in/632e88ad66c77f7b4ff23313; https://www.legaleraonline.com/pdf_upload/hedge-finance-pvt-ltd-v-bijish-joseph-765787.pdf

[11] Para 23, Hedge Finance v Bijish Joseph (supra)