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)

Interpretation of ‘Court’ in Section 14 of the Arbitration Act

Edit: The position of law laid written about in this article seem to have changed with the decision of Swadesh Kumar Agarwal v. Dinesh Kumar Agarwal, (2022) 10 SCC 235. For a change in law, see this article

Section 14 of the Arbitration Act which is contained in Chapter III deals with the failure or impossibility of an arbitrator to act in an arbitration. S. 14(1) provides that the mandate of an arbitrator shall be terminated terminate and he shall be substituted by another arbitrator if he becomes de jure or de facto unable to perform his duties [S. 14(1)(a)]

S. 14(2) provides that in case a controversy remains with respect to any of the grounds referred to in S. 14(1)(a), a party may apply to the ‘court’ to decide on the termination of the mandate of the arbitrator.

The present article seeks to examine whether, in the case of a domestic commercial arbitration, a petition under Section 14 for the termination of the arbitration and his substitution thereof would lie before the District Commercial Court or only the High Court.

Analysis of Chapter III of the Arbitration Act

Chapter III of the Act deals with the ‘composition of the arbitral tribunal’ and its allied aspects such as the number of arbitrators[1], the procedure for the appointment of arbitrators[2], their termination thereto[3] and the grounds on which the mandate of the arbitrator can be terminated[4]. Being mindful of the importance of maintaining independence and impartiality in arbitration, the lawmakers have included Section 12 and S. 13 of the Act which stipulate the grounds and procedure for challenging the mandate of an arbitrator.

S. 12(1) mandates that when a person has approached for his possible appointment as an arbitrator, such person shall have to make a disclosure as to his independence and impartiality. This disclosure has to be done as per the Sixth Schedule of the Act[5]. Section 12(1)(a) mandates that such person should declare any circumstances which are likely to give rise to ‘justifiable doubts as to his independence and impartiality’.

It is pertinent to mention that the scope of Section 12 has been expanded by virtue of the Arbitration and Conciliation (Amendment) Act, 2015 [‘2015 Amendment’]. The purpose of this amendment has been explained by the Supreme Court in Bharat Broadband Network Ltd. v. United Telecoms Ltd., (2019) 5 SCC 755[6] to hold that, firstly, Section 12(1) imposes a duty upon the arbitrator disclose in writing any circumstances which may raise justifiable doubts as to his independence of impartiality[7]. Secondly, S. 12(1) now also mandates that the disclosure has to be made in the form of 6th schedule[8]. Finally, the existence of justifiable doubts as to the independence and impartiality of the arbitrator have to be determined by the guiding factors laid down in the 5th schedule[9].

The difference between Section 13 and S. 14 was explained thus - when there is a disclosure in writing which is likely to give justifiable doubts as to the independence and impartiality of the arbitrator, the appointment of such arbitrator has to be challenged under Section 13 before the arbitrator himself[10]. However, when the disclosure points to a case under Section 12(5), then the arbitrator becomes de jure incapable of performing his functions as per S. 14(1)(a), and in such a case, a party has to apply to the court to decide on the termination of the mandate[11]

Competent forum for the purposes of Section 14

There is an inherent contradiction in Section 14 as to the forum in which an Application under this Section would lie.

The first interpretation of this Section is that such an application would lie before the High Court. The line of argument runs thus: S. 14(1) provides for the substitution of the arbitrator once his mandate is terminated. Substitution of an arbitrator necessarily involves the appointment of a new arbitrator and is a facet of appointment. Since the appointment of an can arbitrator can only be done by the High Court in exercise of its power under Section 11 of the act, his substitution can therefore only be done by the High Court as well. Thus, the District commercial court would have no jurisdiction to entertain such a petition and the value of the claim would be irrelevant for determining the jurisdiction.

The other interpretation runs thus: S. 14(2) specifically mentions ‘Court’ thus,

(2)If a controversy remains concerning any of the grounds referred to in clause (a) of sub-section (1), a party may, unless otherwise agreed by the parties, apply to the Court to decide on the termination of the mandate.

S. 2(e)(i) of the arbitration act defines ‘court’ in case of a domestic commercial arbitration to mean the principal civil court of original jurisdiction in the district and includes the High Court in exercise of its ordinary original civil jurisdiction having jurisdiction to decide the questions forming the subject matter of the arbitration if the same had been the subject matter of a Suit

Thus, S. 14(2) read with S. 2(e)(i) would indicate that the question whether the Section 14 application would lie before the High Court or the District Commercial Court would depend upon the on the value of the claim Petition. In other words, such a petition (specifically in context of Delhi) would lie before the High Court only if the claim value is about to 2 Crores. Else, such an application would lie only before the District Commercial Court.

While this conflict has not been considered in great detail by any court, it seems that the Delhi High Court has been swayed by the first interpretation.

In Raksha Vigyan Karamchari Sahkari Awas Samiti Ltd. v. Proto Developers and Technologies Pvt. Ltd., 2021 SCC OnLine Del 2731, a single Bench of the Delhi High Court considered this issue in context of an application made under Section 14. The Delhi High Court adopted the 1st interpretation suggested above and opined that the provision of Section 14 of the Act is unequivocal towards the appointment of a substitute Arbitrator once the mandate of an Arbitral Tribunal has been terminated by this Court under the said provision, and thus, such a petition would lie only before the Delhi High Court irrespective of the pecuniary jurisdiction[12].

The court however failed to give any reasons for departing from the explicit definition of court as defined under S. 14(2) read with S. 2(1)(e) of the Act.

A more elaborate reason may be gauged from the decision of DDA v. Tara Chand Sumit Construction Co 2020 SCC OnLine Del 2501. In this case, the Delhi High Court was dealing with a petition made under S. 29(A) of the act for extension of the time period and for substitution of the mandate of the arbitrator. S. 29(A)(5) and S. 29(A)(6) of the act read thus,

(5)The extension of period referred to in sub-section (4) may be on the application of any of the parties and may be granted only for sufficient cause and on such terms and conditions as may be imposed by the Court.

(6)While extending the period referred to in sub-section (4), it shall be open to the Court to substitute one or all of the arbitrators and if one or all of the arbitrators are substituted, the arbitral proceedings shall continue from the stage already reached and on the basis of the evidence and material already on record, and the arbitrator(s) appointed under this section shall be deemed to have received the said evidence and material.

A specific objection was raised that value of the claim Petition was under 2 crores, such a petition would not lie before the High Court, and would lie only before the District Commercial court. The court however repelled the contention thus,

29. In case a petition under Section 29A of the Act is filed before the Principal Civil Court for extension of mandate and the occasion for substitution arises, then the Principal Civil Court will be called upon to exercise the power of substituting the Arbitrator. In a given case, the Arbitrator being substituted could be an Arbitrator who had been appointed by the Supreme Court or the High Court. This would lead to a situation where the conflict would arise between the power of superior Courts to appoint Arbitrators under Section 11 of the Act and those of the Civil Court to substitute those Arbitrators under Section 29A of the Act. This would be clearly in the teeth of provisions of Section 11 of the Act, which confers the power of appointment of Arbitrators only on the High Court or the Supreme Court, as the case may be. The only way, therefore, this conflict can be resolved or reconciled, in my opinion, will be by interpreting the term ‘Court’ in the context of Section 29A of the Act, to be a Court which has the power to appoint an Arbitrator under Section 11 of the Act. Accepting the contention of the respondent would lead to an inconceivable and impermissible situation where, particularly in case of Court appointed Arbitrators, where the Civil Courts would substitute and appoint Arbitrators, while extending the mandate under Section 29A of the Act.

Thus, the court held that such a petition would lie before the High Court irrespective of the value of the claim Petition because there could be a conflict between the power of superior courts to appoint arbitrators under Section 11 of the Act and those of civil court to substitute those arbitrators under Section 29(A) of the act.

Further, the court also held that since the petitions under Section 11 of the Act are filed irrespective of the pecuniary jurisdiction of the Court ‘the same analogy would apply to the petitions under Section 29A of the Act’ [13]

Extending the above argument, it can be argued that the same logic would apply to an application made under Section 14 as well. It is submitted that the author respectfully disagrees with the above view because of the following reasons:

1. The said interpretation fails to take into account the plaintext of the above sections. It is submitted that while Section 11, specifically gives the power to the ‘High Court’, Section 14/S. 29A only talk about the ‘Court’. It is submitted that the said approach amounts to redefining ‘Court’ for the purposes of S. 14 as S. 29A as the ‘High Court’. The legislature consciously has distinguished between the said phrases and has not used them interchangeably. For example, an application under Section 34 of the Act for setting aside of the arbitration award can only lie before the court which would mean the court as determined by the pecuniary jurisdiction.

2. While it is true that there may be some conflict between the power of the High Court under Section 11 to appoint the arbitrator, and the power of the District Commercial court under Section 14 to substitute him, such a conflict would not arise in all situations. Such conflict would only arise when a Section 11 application has been filed before the High Court in the 1st place. It is submitted that in case the appointment of the arbitrators has been done mutually without approaching the High Court under Section 11, such conflict would not arise. Thus, there seems to be no reason why a litigant should be forced to a more expensive remedy of approaching the High Court without approaching the Civil Court.

3. Finally, the said interpretation may also lead to multiplicity of proceedings. In this regard, consider the case where an arbitrator has been appointed unilaterally by one of the parties to the arbitration agreement and such arbitrator proceeds to pass an interim order under Section 17(1) of the Act. Even though such appointment is illegal in light of the law laid down in Proddatur Cable TV Digi Services v. Citi Cable Network Limited : (2020) 267 DLT 51, the party would still have to challenge the interim award under S. 37 of the Act. While such an appeal under Section 37 of the act would lie before the District Commercial court, the party would have to challenge the arbitration as a whole before the High Court in view of the interpretation of DDA v Tara Chand (supra) case. It is submitted that such an approach may be counter productive, as neither of the courts would be able to appreciate the situation as a whole and there is a possibility of conflicting findings by different courts.

[1] S. 10, Arbitration and Conciliation Act, 1996

[2] S. 11, Arbitration and Conciliation Act, 1996

[3] S. 13 – S. 15, Arbitration and Conciliation Act, 1996

[4] S. 12, Arbitration and Conciliation Act, 1996

[5] Explanation 2 of S. 12, Arbitration and Conciliation Act, 1996

[6] Bharat Broadband Network Ltd. v. United Telecoms Ltd., (2019) 5 SCC 755

[7] Para 14, Bharat Broadband (supra)

[8] Para 14, Bharat Broadband (supra)

[9] Para 14, Bharat Broadband (supra)

[10] Para 17, Bharat Broadband (supra)

[11] Para 17, Bharat Broadband (supra)

[12] Para 14, Raksha Vigyan Karamchari Sahkari Awas Samiti Ltd. v. Proto Developers and Technologies Pvt. Ltd., 2021 SCC OnLine Del 2731

[13] Para 31, Raksha Vigyan Karamchari Sahkari Awas Samiti Ltd. v. Proto Developers and Technologies Pvt. Ltd., 2021 SCC OnLine Del 2731