Undue delay in passing Arbitral Award in violation of Public Policy?

A clause for Alternate dispute resolution (ADR) is incorporated in a contract to ensure avoidance of lengthy and costly legal procedures. Undue delay in arbitration procedure tends to vitiate this essential objective that ADR seeks to achieve.  Further, the ADR process is designed to minimize the interference of courts, however, it is more of fiction as parties unhappy with the outcome of the process take the legal recourse as a dilatory tactic. Therefore, it is essential that arbitral awards are set aside only when there is a grave injustice or is unreasonable on the face of it[I].

 

Some light was shed on the issue recently by the Hon’ble Madras High Court in the case of Mr. K. Dhanasekar v Union of India and Ors[ii]. The court set aside an arbitral award on an application made to it under section 34 of the Arbitration and Conciliation Act, 2015 holding that undue and/or inordinate delays in passing an award are in fact violative of public policy.

 

Factual Matrix:

 

The Petitioner, an engineering contractor, entered into an agreement with the Respondent, Southern Railways, for the collection and supply of 50 mm size machine crushed hard granite ballast for railway track doubling purposes. Certain disputes arose between the parties, and in accordance with the provisions of the contract which provided for settlement of disputes by arbitration, an arbitral tribunal consisting of three arbitrators was constituted. The learned arbitral tribunal dismissed the claim of the claimant in its entirety and allowed the counterclaim of the respondent. Challenging the same, the Petitioner approached the Hon’ble Madras High Court.

The Petitioner, inter alia, contended that there was a severe delay in passing the award. The arbitral tribunal passed the impugned award after a period of 3 years and 7 months which was not a reasonable time period. The Respondent countered that the learned arbitral tribunal, upon hearing the parties at length and upon consideration of all facts and circumstances, had passed the impugned award. Further, the delay in passing the award had not caused any prejudice to anyone and therefore, the award must not be set aside.

 

Issue:

 

Whether inordinate delays in passing an arbitral award was sufficient cause to set aside the impugned award.

 

Judgment:

 

The Hon’ble Court observed that the fact that there were delays in passing the impugned award was not disputed. What was disputed was whether such delay warranted the interference of the Hon’ble Court in setting aside the award.

To answer the question, reliance was placed on the decision of the Hon’ble Delhi Court in the case of Harji Engineering Works Pvt. Ltd. v Bharat Heavy Electricals Limited[iii], wherein the Hon’ble Delhi High Court had held that an arbitrator was required to make and publish an award within a reasonable period of time, and in the event that there is a delay, the same had to be adequately explained. The lack of any satisfactory explanation to such delays would be prejudicial to the interests of the parties. The Hon’ble Delhi High Court also held that the parties to an arbitration agreement had the right to be satisfied that the arbitrator was conscious of and had taken into consideration all contentions and claims before adjudicating on the claim. An inordinate delay from the last date of hearing would not provide such satisfaction to the parties.

The Hon’ble Madras High Court, adopting the same rationale found that arbitrators are likely to forget the contentions and pleas raised by parties during the course of arguments. Further, unexplained delay in passing an arbitral award was violative of the public policy of India and therefore liable to be set aside.  

       

Conclusion:

 

The Hon’ble High Court has proceeded on the assumption that the arbitrators must have forgotten the arguments placed by the parties, despite the fact that written submissions were placed on record by each party. Additionally, Section 29A introduced by the Arbitration Amendment Act, 2015 (further amended in 2019) has prescribed a time limit of 12 months from the date of completion of pleadings, within which period, the Arbitrator must necessarily make the award.  Although the amendment is not applicable to the case at hand (Consequent to the decision of the Supreme Court in Board of Control for Cricket in India v. Kochi Cricket Pvt. Ltd. and Ors[iv] on the retrospective application of the Arbitration Amendment Act, 2015), however, a similar case today would reach the same fate because of these set timelines. The said decision, as well as the amending provision, have the tendency of acting as a tool for the losing party to have the arbitral award set aside on procedural ground rather than on merits. These also increase the interference of the court which might result in unnecessary delays which the amending provision or the decision basically condemns. Further, with the 12 month or 18 months limit (if extended by the parties), the delay might not happen in ADR proceedings but may happen in the legal proceedings which the parties seek to avoid by opting for the ADR mechanism in the first place. In addition, court interference or dependence would hamper the confidentiality that parties seek to achieve through the ADR process. This is violative of the sanctity of arbitral awards and goes against the very fabric of the Arbitration and Conciliation Act itself.

Finally, the Arbitration Council being set up through the 2019 amendment, to undertake necessary measures to promote and encourage the ADR mechanism and to frame policy and guidelines for uniform professional standards, must take cognizance of this. Although provisions for penalizing arbitrators have not been provided in the amendment, the Arbitration Council should consider making regulations on the same to ensure compliance. This might provide an impetus to the overall arbitration process and ensure timely resolution in a fair and equitable manner while avoiding the interference of the court.

References:

 

[i] Oil and Natural Gas Corporation Ltd., v. Saw Pipes Ltd., [2003 (5) SCC 705]

[ii] O.P. No. 4 of 2015 and O.A. No. 31 of 2015 at http://164.100.79.153/judis/chennai/index.php/casestatus/viewpdf/489701

[iii] [2009 (107) DRJ 213]

[iv] (SLP (C.) No. 19545-19546 of 2016)

 

 

Image Credits: Photo by Aron Visuals on Unsplash

The Hon’ble High Court has proceeded on the assumption that the arbitrators must have forgotten the arguments placed by the parties, despite the fact that written submissions were placed on record by each party. Additionally, Section 29A introduced by the Arbitration Amendment Act, 2015 (further amended in 2019) has prescribed a time limit of 12 months from the date of completion of pleadings, within which period, the Arbitrator must necessarily make the award.

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Specific Relief (Amendment) Act, 2018: An Overview

The Specific Relief Act, 1963 (SRA) was amended last year with the objective of changing the approach from ‘damages being the rule and specific performance being the exception, to specific performance being the rule, and damages being the alternate remedy’. The Specific Relief (Amendment) Act, 2018 was passed to encourage foreign investment in India and make laws more business friendly. The expert committee set up for the purpose, in its report dated 26.05.2016[i], recognized the increasing complexity of large projects, and particularly the public interest involved in contracts with the Government and Government agencies for infrastructure development, public-private partnerships and other public projects involving huge investments. Consequently, the Legislature introduced changes to specifically address the infrastructural need of the country. The Amending Act received presidential assent on August 1, 2018 and came into force on October 1, 2018.

Applicability of the Specific Relief (Amendment) Act, 2018: Retrospective or Prospective?

Since the inception of the Act, there have been varied opinions on whether the Act should have retrospective or prospective application?

In the case of Church of North India v Ashoke Biswas[ii], the Calcutta High Court held that any suit that was not ‘decreed’ until the commencement of the Amendment i.e. 01.10.2018 would fall within the purview of the Amendments. The rationale used by the Court in arriving at this conclusion was that the question of enforcement of contract only arises on the date of passing of the decree and not on the date of the institution of the suit, therefore the said Act must necessarily have retrospective effect and apply to all pending suits.

The XIIth Additional City Civil Judge at the Bangalore District Court found that the Act is in-fact prospective in effect[iii]. According to the learned Judge, the Legislature has specifically sought for the amending Act to be prospective by using the following words:

“It shall come into force on such date as the Central Government may, by notification in the official gazette, appoint and different dates may be appointed for different provisions of this Act and any reference in any such provision to the commencement of this Act shall be construed as a reference to the coming into force of that provision”

The learned judge has construed the above to mean that the date of notification of enforcement of the act, i.e. October 1, 2018 is the date from which the said Act will also apply, thereby having prospective effect.

It is well settled that an amendment which is in the nature of a clarification or carries a declaratory flavor is retrospective in nature, whereas an amendment that alters substantive rights of a party is usually prospective in nature. The current amendment to the Specific Relief Act has changed the approach of the Act, in as much as it has made specific performance the norm and damages its exception. Therefore, the Specific Relief Act should be viewed prospectively. Having said that, the Supreme Court on one occasion[iv] has stated that when amending acts use the term “substitute” to effectuate an amendment to a particular provision, it should be deemed as if the substituted expression were included from the date of introduction of the original law.

The Supreme Court, in the recent case of Surinder Singh Deswal at Col. S.S. Deswal and Ors, v/s. Virendar Gandhi[v] has held that the amendment to section 148 of the Negotiable Instruments Act has retrospective application despite the fact that the amendment alters substantive right of the Parties. The Court, while arriving at the decision, looked at the objects with which the amendment was brought about i.e. to strengthen the credibility of cheques and to facilitate the growth of trade and commerce. The Court was of the view that the objects of the amending act can only be achieved by giving the provisions retrospective effect. 

The Specific Relief Act has been amended with the following objectives[vi]

  • Introduce Provisions for right of third parties
  • Change the approach to specific relief being the rule and damages the alternative
  • Promote injunction
  • Reduce the discretion granted to Courts
  • Right to cover
  • Expert Assistance
  • Unconscionable contracts
  • To encourage foreign investment
  • To make India business friendly and promote ease of doing business.

Drawing a parallel to the Negotiable Instruments judgment[vii], it may be argued that the objectives of the Amendment to the Specific Relief Act and the objectives of the Amendments to the Negotiable Instruments Act are similar in nature, and therefore, the Amendments to the Specific Relief Act must also be given retrospective effect.

It will however be interesting to see how this issue is going to be viewed in the future by different Courts and whether the Apex Court is going to intervene and settle the law. 

Key Changes brought about by the Specific Relief (Amendment) Act, 2018:

 
1. Change of Approach from Damages to Specific Performance

 

Under the erstwhile provision, to claim specific performance, a plaintiff had to satisfy a threshold test, i.e. he had to show that compensation was either unascertainable or was inadequate. This inadequacy test did not permit the remedy of specific performance (or injunction) for every contract. Further, the plaintiff may not be able to prove all losses he has suffered by the breach, nor will such amounts claimed be awarded to him. A decree of specific performance comes closest to protecting this interest: it gives the plaintiff what was promised. To uphold the moral obligation of a promise and deter individuals from breaching the same, the amendment removed this restriction and made specific performance a general remedy available to a promisee who wishes to claim them.

However, it is pertinent to note that the award of specific performance is subject to certain exceptions and also to the terms and conditions of the agreement between the parties. Therefore, the Court has to deny grant of specific performance in the following cases:

  • As found in the principal Act, contracts entered by a trustee on behalf of a trust in excess of his powers or in breach of trust cannot be directed to be specifically performed.
  • As retained from the principal Act, when a contract is completely dependent on the personal details or volition of the Parties, Courts cannot direct specific performance of such contracts.
  • As retained from the principal Act, contracts that are determinable are out of the purview of specific performance.
  • As retained from the principal Act, contracts involving the performance of a continuous duty that cannot be supervised by the Court cannot be specifically enforced
  • As retained from principal Act, where Substituted Performance has been received in lieu of the Contract.
  • Where the person seeking such specific performance has not performed his end of the Contract or is incapable of doing so.

The onus on ‘proving’ that he has been ‘ready and willing’ to perform his end of the contract lies with the Plaintiff even if he does not ‘aver’ it. This is in stark contrast to the earlier provision wherein an ‘averment’ to this effect was considered mandatory.  

It is also interesting to note that the erstwhile law barred granting of specific performance of contracts that contained an arbitration clause, however, the said provision has been done away with vide this amendment.

In addition, promoting the objective of encouraging specific performance of contracts, the amendment, in contrast to the earlier provision of claiming compensation in addition to and in substitution of Specific Performance, now allows for claiming compensation as an additional relief to seeking specific performance of the contract.

2. Right to Cover – Substituted Performance

An aggrieved party may now obtain substituted performance, on account of the breach, from a third party or from one of its own agencies and recover the expenses incurred in such substituted performance from the party in breach. Such substituted performance may be obtained only upon service of notice of a minimum of 30 days to the defaulting party. However, if there is a contract to the contrary between the Parties, the concept of substituted performance will have no applicability.

 3. Rights of Third Parties

The SRA was also amended with a view to enable a third party, on whom parties have conferred a benefit, to specifically enforce contracts, subject to rights of the contracting parties. This is in the nature of an exception to ‘privity of contract’ doctrine.

  • The erstwhile provision entitled a person who had been illegally dispossessed of her property alone to file a suit for specific performance. Now, the person through whom the dispossessed person received title to the property may also approach the court vide a specific performance suit.

Illustration: A leases out a flat admeasuring 30,000 sq. ft. to B. B grants a leave and license to C to the said flat. Any actionable claim that B has against C with respect to the said flat can also be initiated by A under the Specific Relief (Amendment) Act.

  • The amendment also recognizes a newly amalgamated Limited Liability Partnerships to seek specific performance of contracts entered into with one of its component Limited Liability Partnerships.

Illustration: When LLP “a” and LLP “b” amalgamate to form LLP “c”, LLP “c” can then seek specific performance of a contract that LLP “a” was privy to. Similarly, a third party can seek specific performance against LLP “c” for a contract that LLP “a” was a party to.

4. Reducing Discretion of Courts pertaining to Contracts in relation to a trust

As opposed to the earlier provision where Courts were given the discretion to direct specific performance of contracts that were agreed to be done in the performance wholly or partly of a trust, being trusts established under the Indian Trusts Act, 1882, now the words “may”, in the discretion of the Court has been substituted with the word “shall” indicating the mandatory nature of the clause. Therefore, now, the Courts are obligated to direct specific performance of a contract that is to be done in the performance of a trust, either wholly or partially, subject to the terms and conditions of the remainder of the provisions of the act as well as the underlying contract.

5. Expert Assistance

The Amendment empowers the Courts to appoint experts to determine the nature of the Contract, its breach and so on and so forth if it deems fit during the course of the suit. The parties may, with the permission of the Court examine such experts appointed.

6. Public Utility Contracts

The Amendment has placed an embargo on the power of the Court to grant an injunction in infrastructure-based projects that will, in any manner, delay or cause an impediment in the completion of such projects. The Amendment has provided an exhaustive list of the infrastructure projects covered under this statute. Special courts are to be designated by the State Governments to exercise jurisdiction and to try a suit under this Act in respect of contracts relating to infrastructure projects.

7. Expedited Resolution

The Amendment provides for a time limit to dispose off all matters filed under the SRA. All matters are to be expeditiously decided within 12 months from the date of service of summons to the defendant(s), extendable by a maximum period of an additional 6 months.

 

References:

[i] Report of the Expert Committee on Specific Relief Act, 1963 Government of India, May 2016

[ii] MANU/WB/0960/2019

[iii] O.S. No. 5395 of 2011

[iv] National Agricultural Cooperative Marketing Federation of India v/s. Union of India – MANU/SC/1221,2003

[v] Criminal Appeal No. 917 – 944 of 2019 arising out of SLP (Criminal) No.4948 to 4975 of 2019

[vi] Supra Note 1

[vii] Supra note iv

 

Image Credits- Photo by Paul Skorupskas on Unsplash

It is well settled that an amendment which is in the nature of a clarification or carries a declaratory flavor is retrospective in nature, whereas an amendment that alters substantive rights of a party is usually prospective in nature. The current amendment to the Specific Relief Act has changed the approach of the Act, in as much as it has made specific performance the norm and damages its exception.

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