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A Critique of the Defence of Nullity in the Enforcement of Arbitration Awards

-Haaris Moosa[1]


Facts and Judgment


The judgment of the Delhi High Court in Hindustan Zinc Ltd. v. National Research Development Corpn[2] puts forth important questions regarding the use of the defence of nullity for challenging the enforcement of arbitral awards under Section 47 of the Code of Civil Procedure, 1908 ('CPC, 1908’). The rationale of the section is to avoid multiplicity of litigation for settling questions relating to the status of discharge, nullity and non-executability of the decree etc.[3] In the instant case, the defence of nullity was raised based on the bar of limitation under section 3 of the Limitation Act, 1963, according to which the claims preferred after the period of limitation are to be dismissed.


However, the Delhi High Court in this case went on to place reliance on Morgan Securities & Credits Pvt. Ltd. v. Morepen Laboratories Ltd [4] wherein all remedies other than section 34 of the Arbitration and Conciliation Act 1996 (‘1996 Act’) for challenging the enforcement of an arbitral award were proscribed. The court in Morgan Securities held that the proscription extended to all the objections under section 47 of the CPC, 1908. The court went on to hold that ‘a challenge to an award on the ground that it is a “nullity” or is otherwise illegal can be addressed only in proceedings that may be initiated in accordance with Section 34 of the Act.[5] The court in Hindustan Zinc repeats this ratio by holding that section 34 of the 1996 Act is exhaustive and challenges falling outside it cannot be accepted.


Discussion


The Supreme Court in Perkins Eastman Architects DPC v. HSCC (India) Ltd.[6] retrospectively nullified (from the date of the Arbitration and Conciliation (Amendment) Act, 2015 No. 3 of 2016) all arbitration agreements that involved unilateral appointment of arbitrators. The awards that were pronounced by such unilaterally appointed arbitrators were held to be non-est. Consequently, a large number of cases involving vehicle finance agreements, wherein unilateral appointment of arbitrators by the lender was the norm for years, became legally untenable. It is settled law that a non est award is no award.


In the experience of this author, arbitrations between the lender and the borrower in the vehicle finance industry are mostly ex parte, under Section 25 of the 1996 Act, which says that the arbitrator can continue the proceedings if the defendant fails to submit the statement of defence in the time period agreed upon by the parties. This is because of the disproportionate bargaining power of the lender, which results in the selection of arbitral venues and seats in the agreements that parties find difficult to travel to. In the experience of the author, the borrowers become aware of the arbitration award only when the notice for execution under Order 21 Rule 22 or 37 of the CPC, 1908 and Section 36 of the 1996 Act is served on them. Order 21 of the CPC, 1908 allows the Decree Holder to enforce the decree against the Judgment Debtor and thus realise the fruits of the judgment/claim/award. Section 36 of the 1996 Act makes it clear that enforcement of the arbitration award is to be “in accordance” with the provisions of the CPC, 1908. Rule 22 and 37 of Order 21 deal with situations that warrant the issuance of notice to the Judgment Debtor. An execution petition (under section 36 of the 1996 Act and Order 21 CPC,1908) can only be filed after the 120 days required for preferring a challenge to the arbitration award under section 34 of the 1996 Act. This leaves the borrowers holding the bag since they would have an ex parte arbitral award against them passed by a unilaterally appointed arbitrator without having the legal right to make a challenge under section 34 of the 1996 Act.


Recently, the Supreme Court has categorically held that arbitration awards cannot be challenged under writ proceedings and especially during their enforcement.[7] In such a situation the only remedy for the borrower/award debtor is an objection under section 47 of the CPC. Hindustan Zinc proposes to take away this right.


Further, a three judge bench of the Supreme Court in Vasudev Dhanjibhai Modi v. Rajabhai Abdul Rehman[8] had earlier held that “Again, when the decree is made by a Court which has no inherent jurisdiction to make it, objection as to its validity may be raised in an execution proceeding if the objection appears on the face of the record”. There are several judgments from various High Courts which have adhered to the above Supreme Court ruling. The Calcutta High Court in Saraswat Trading Agency v. Union of India[9] had held that the Court was duty-bound to declare the non-executability of a decree if it is a nullity. Similarly, the High Court of Chhattisgarh, while dealing with an argument of non-executability of an arbitration award in R.S. Bajwa & Company v. State of Chhattisgarh[10] had ruled that the declaration of nullity can be done by “any court in which it is presented,” and that “nullity can be set up whenever it is sought to be enforced or relied upon and even at the stage of execution or even in collateral proceedings.” Furthermore, the High Court of Kerala in India Cements Capital Limited v. William[11] while dealing with the enforcement of an arbitration award, held that the court is obliged to decide the question of non-executability due to nullity under Section 47 of the CPC, 1908, and that “the remedy available under Section 47 of the Code cannot be denied to an affected party”. A division bench of the High Court of Kerala in Food Corporation of India v. A. Mohammed Yunus [12] had also categorically held that when the challenge is to the manner of appointment of the arbitrator, interference by the executing court is warranted. Even though the court in Hindustan Zinc engaged with the submissions of the counsel for the judgment debtor based on Khanna Traders vs. Scholar Publishing House P. Ltd. & Ors[13] a single bench judgment of the Delhi High Court, wherein the defence of nullity under section 47 of CPC, 1908 was accepted relying on Vasudev Dhanjibhai Modi, the court in the instant case refused to accept it citing another single bench judgment of the Delhi High Court in Morgan Securities.


Conclusion


It is evident from the above discussion that the decision of the Delhi High Court in Hindustan Zinc Ltd. [14] goes against the ruling laid down by the Supreme Court in Vasudev Dhanjibhai Modi v. Rajabhai Abdul Rehman[15] and has the potential to perpetuate the misery of award debtors who have received ex parte unilateral arbitration awards against them, especially in case of vehicle financing contracts.

 

[1] A pureplay lawyer specialising in Commercial Arbitration, Customs and Insolvency based out of Kochi, Kerala. LLM in International Law (Class of 2020) from South Asian University, New Delhi. Email - harismoosa@gmail.com [2]2023 SCC OnLine Del 330 [3]Justice Kurian Joseph and Namit Saxena, Mulla , The Code of Civil Procedure, Volume 1 (20th Ed., Lexis Nexis 2021),728 and 729 [4] 2006 SCC OnLine Del 774 [5] 2023 SCC OnLine Del 330, Para 22 [6] (2020) 20 SCC 760 [7]Bhaven Construction v. Sardar Sarovar Narmada Nigam Ltd. 2022 (1) SCC 75; Deep Industries vs. Oil and Natural Gases Corporation Limited and another 2020 (15) SCC 706. [8] (1970) 1 SCC 670 [9] 2004 SCC OnLine Cal 141 [10] 2008 SCC OnLine Chh 14 [11] 2015 SCC OnLine Ker 24805 [12] 1987 SCC OnLine Ker 12 [13] 2017 SCC OnLine Del 7684 [14] 2023 SCC OnLine Del 330 [15] (1970) 1 SCC 670

Opmerkingen


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