- Purbasha Panda
On 29 April, 2020, a Division Bench of the Apex Court consisting of Justice Uday Umesh Lalit and Justice Vineet Saran delivered a landmark judgment on waiver of right to object in arbitration proceedings. This case has also opened a myriad of questions regarding validity of consolidation of arbitral claims and ‘composite reference’ in case of multiple arbitration agreements arising out of a single transaction. Further, it raised some pertinent questions on scope and exclusivity of supervisory jurisdiction of courts at the seat of arbitration.
B. FACTUAL BACKGROUND OF THE CASE
The instant case dealt with disputes arising out of four ‘equipment rental agreements’ entered between the claimant company which was engaged in the business of manufacturing infrastructural equipments and the respondent company which hired those equipments for a construction project. These four agreements were entered by the parties in series. The arbitration clause of the first agreement which was entered between the parties on 1.8.2010 conferred exclusive jurisdiction to the courts of New Delhi to decide any dispute arising out of the agreement. It further mentioned New Delhi to be the place of arbitration. Following this, two more agreements of the same nature were entered between the parties for supply of more equipments. The final agreement in this series was entered between the parties on 14.4.11 which conferred exclusive jurisdiction to the courts of Kolkata to deal with any dispute arising out of the agreement.
A default with respect to payment was made by the respondent and subsequent to this, the claimant invoked the arbitration clause. Arbitration clauses of all these agreements provided that the appointment of the arbitrator would be made in accordance with the ‘Construction Industry Arbitration Association Rules [‘CIAA Rules’]. In accordance with these rules, a sole arbitrator was appointed, and the arbitral tribunal entered upon reference in New Delhi. In its reply to the notice of arbitration the respondent denied existence of any agreement between the parties and filed a title suit at the Court of Civil Judge (Junior Division), Sealdah praying for a permanent injunction restraining the claimant from relying on the arbitration clause. At the interim stage, the trial court passed the restraint order putting a stay on the arbitration proceedings. Meanwhile, the claimants appealed against the order and also filed an application under Section 5 read with Section 8 of the Arbitration and Conciliation Act, 1996 [‘the Act’] at the trial court. The trial court observed that the dispute clearly fell under the scope of the arbitration clause and referred the parties to arbitration.
A common ex-parte arbitral award covering claims of all four agreements was passed in favour of the claimants. This award was challenged by the respondent before the Calcutta High Court, which got dismissed on ground of lack of jurisdiction. After which, the respondents approached the court of District Judge at Alipore, to challenge the arbitral award. Here, the respondents pleaded non-existence of the arbitration agreement and also for the first time pleaded that the arbitrator appointed at New Delhi did not have the requisite authority to conduct the arbitration. They argued that the agreement dated 14.4.11 provided the arbitration proceedings to be conducted in Kolkata, thus the arbitration proceedings were conducted beyond the scope of authority of the arbitrator. This petition was dismissed by the Alipore court on the ground of lack of jurisdiction. The Alipore court marked that the jurisdiction to entertain a Section 34 petition under the Act is conferred on the courts of the place where the arbitration is usually conducted, these courts are also known as ‘courts exercising supervisory jurisdiction’ over the arbitration proceedings. In this case, it was observed by the court that the arbitration agreements clearly provided the place of conduction of the arbitration proceedings to be New Delhi, therefore only courts of New Delhi can exercise supervisory jurisdiction over the proceedings. A revision petition was filed against this order before the Calcutta High Court which was also dismissed on the ground of existence of alternative remedy u/s 37. After which, an appropriate petition was filed by the respondents before the Calcutta High Court by which the order passed by the Alipore court upholding the award was dismissed and the case was restored back to the court of Additional District Judge Alipore. This order was brought to challenge before the Supreme Court.
C. ISSUES BEFORE THE COURT
(i.) Scope of right of a party to object to arbitral proceedings
It was argued by the claimants before the Apex Court that it was only at the stage of preferring the Section 34 petition before the Alipore Court that the respondents raised the issue of jurisdiction of the arbitrator appointed at New Delhi, thus in accordance with Section 4 of the Act, the respondents have waived their right to raise an objection on this ground. Moreover, Section 16 of the Act provides that any objection regarding jurisdiction of tribunal must be raised before the tribunal at the first instance. Therefore, the prime question before the Apex Court was ‘whether the respondents have waived their right to raise an objection in the instant case?’
To answer this question, in the instant case the Apex Court undertook a combined reading of Section 4 as well as Section 16 of the Act. Section 4 of the Act provides that right of objection to an arbitration proceeding can be exercised by a party when there has been non-compliance of (a) any derogable provision of Part I of the Act (b) any requirement under the arbitration agreement. However, when such objection is not raised without undue delay or within the time limit provided under the agreement, it would be considered that the parties have waived off their right to object. To decide on amplitude and applicability of Section 4 read with Section 16 of the Act to the present set of facts, the court referred to two its decision namely, Narayan Prasad Lohia vs. Nikunj Kumar Lohia and others (‘Lohia Case’) and Konkan Rly. Corpn. Ltd. v. Rani Construction (P) Ltd (‘Konkan Railway Case’). The ‘Lohia Case’ essentially dealt with a challenge to an arbitral award which was passed by a tribunal consisting of even number of arbitrators. Section 10 of the Act clearly creates a mandate that no arbitral tribunal can be formed with even number of arbitrators. Thus, one of the grounds in this case for challenging the arbitral award was that the award was passed by a tribunal formed outside the confines of the Act. To decide, if waiver under Section 4 of the Act has occurred or not, the court ventured to find out if Section 10 is a derogable provision. It is also important to mention here as discussed in the case of Krishan Lal v. State of J&K, that Section 4 only covers non-compliance of derogable provisions, because if it would cover non-compliance of mandatory provisions then that would not have been allowed considering that mandatory requirement of a statute cannot be waived by consent or acquiescence.
In the ‘Lohia Case’ the Apex Court has marked that Section 10 is a derogable provision, therefore a waiver can arise with respect to it. Section 16(2) of the Act provides that a plea that the arbitral tribunal does not have jurisdiction must be raised not later than the submission of statement of defence. In ‘Lohia Case’, it was marked by the Apex Court that, a conjoint reading of Section 10 and Section 16 shows that an objection to the composition of arbitral tribunal is derogable and must be raised within the time prescribed under Section 16(2) and if a party chooses not to do so, then it would be considered as a ‘deemed waiver’.
In the instant case, relying on the ‘Lohia Case’ the court marked that, the respondent raised its object to conduction of arbitral proceedings in New Delhi only at stage of the Section 34 petition. It did not raise any such objection on the jurisdiction of the arbitral tribunal or the venue of the arbitral proceedings during the arbitration, rather the sole arbitrator in its award had marked that even when details of each sitting was being sent to the respondent, the respondent deliberately choose not to participate in the award and kept on taking adjournments. The Apex court considered this to be a deemed waiver of right to object on behalf of the respondents.
(ii.) Separability of the arbitration agreements in case of a composite reference
In this case, a common award was passed by the sole arbitrator covering claims arising out of four arbitration agreements entered between the parties. The seat of arbitration as provided under the arbitration clause in the agreement dated 4.4.11 was Kolkata, whereas the other three arbitration agreements conferred exclusive jurisdiction on New Delhi courts. It was argued by respondents in this case that every arbitration agreement had to be considered independently and if an agreement specified the place of arbitration to be Kolkata, the party autonomy in that behalf ought to be respected. The respondents relied on Duro Felgeura S.A v. Gangavaram Port. Limited (‘Duro Case’) on separability of arbitration agreements and the disputes arising out of them.
In ‘Duro Case’ the court had rejected the approach of making a composite reference to arbitration covering all claims arising out of the arbitration agreements even if they are part of a single transaction. It was discussed in the ‘Duro Case’ that to be able to bind multiple arbitration agreements in a common thread, for their composite reference, it is essential that the agreements refer to each other and constitute a valid arbitral clause by reference. Section 7(5) of the Act provides that ‘mere reference of a document cannot lead to an inference that arbitration clause in the document becomes part of the agreement by reference’. Interpreting this very provision, the court in ‘Duro Case’ held that for incorporating an arbitral clause by reference that is reading arbitral clause of one document as part of another document, there has to be ‘conscious acceptance’ of arbitral clause of that another document. The courts could not find such ‘conscious acceptance of arbitral clause of one agreement in other agreements’ and therefore in ‘Duro Case’ the court ruled in favour of separability of arbitration agreements. However, in the instant case, the Apex Court refused to rely on the ratio of ‘Duro Case’, on the ground that the factual circumstances of both the cases are starkly different. The ‘Duro Case’ essentially dealt with a series of six arbitral agreements out of which four dealt with ‘Domestic Arbitration’ and two specifically dealt with ‘International Commercial Arbitration’. In ‘ Duro Case’ another reason the court did not allow for composite reference was because the nature of all the six agreements in the series were not the same and allowing for composite reference would have given rise to chaotic legal circumstances, however the Apex Court in the instant case marked that all the four agreements in the series were more or less of the same nature, apart from one agreement which provides for a different venue, therefore the court refused to rely on ‘Duro Case’ and allowed for composite reference of arbitration for claims arising out of all six agreements. While making this observation the Apex Court in the instant case also marked that in case of ‘International Commercial Arbitration’ place of arbitration has a special significance as the place of arbitration may determine which curial law will apply. However, the court marked that in case of domestic arbitration, substantive law and curial law would be the same. In the instant case, the Apex Court did not further elaborate on this statement, however the author would like to highlight on the implication of the observations of the Apex Court.
(iii.) Scope of the ‘Seat theory of Arbitration’
In the instant case, the Apex Court has also made some observation regarding the scope of exclusivity of Delhi Courts to entertain cases arising out of arbitration proceedings seated at Delhi. To decide on this issue, the Apex Court referred to the case of Indus Mobile Distribution Pvt Ltd v Datawind Innovations Pvt. Ltd., herein the Apex Court had held that the moment a seat is designated it is akin to having an exclusive jurisdiction clause. In the instant matter, the ‘Indus Case’ was also referred by the claimants to establish the sanctity of the ‘seat theory’ of arbitration to justify the valid jurisdiction of Delhi courts to entertain a case arising out of the arbitration proceedings. In the instant case, the Apex Court held that the very fact that arbitration proceedings were conducted in Delhi, therefore by virtue of the seat theory the courts in Delhi have jurisdiction to entertain cases arising out of this arbitration. The Apex Court has time and again ruled on scope of ‘seat theory of arbitration’ in numerous cases. For example, in the recent case of BGS SGS Soma JV v. NHPC, the Apex Court has ruled in favour of the ‘seat theory’ of arbitration. In the scheme of the act, Section 2(1)(e) provides for the definition of ‘court’. It provides that those courts which would have jurisdiction over subject matter of arbitration as if the same have been subject matter of a ‘suit’ would fall under the definition of court. This definition points towards the principles of place of suing provided under Section 15 to 20 of the Code of Civil Procedure, further pointing towards existence of jurisdiction of courts where a cause of action might have occurred. On the other hand, Section 20(2) of the Act allows parties to select a seat of the arbitration. The courts at seat of arbitration essentially exercises supervisory jurisdiction over disputes arising out of the arbitration, this is called the ‘seat theory’, the underlying logic behind this is to honour the principle of party autonomy, that is if parties have chosen a particular place as the situs of arbitration, they obviously intended for the disputes arising out of the arbitration to be referred to courts at that seat. Thus, a combined reading of these two provision points out towards a seeming existence of concurrent jurisdictions for disputes arising out of an arbitration. However, the dubiety around this was cleared in the ‘Soma Case’. The pre-existing interpretation of Para 96 of BALCO pointed towards existence of this concurrent jurisdiction, however in the ‘Soma Case’ the court clarified that such interpretation of para 96 is highly misplaced. The Court further marked that Para 96 of BALCO has to be read in light of the entire judgement and not in isolation.
D. ANALYSIS AND CONCLUSION
To summarize, the court essentially dealt with three issues in the instant case (a) Waiver of right to object in an arbitration proceedings (b)Separability of arbitration agreements (c) Scope of seat theory in arbitration proceedings. With respect to ‘waiver of right to object’ in arbitration proceedings, the Apex Court in light of Section 4 read with Section 16 of the Act held that any objection with respect to jurisdiction of arbitrator or seat of arbitration has to be raised before the arbitral tribunal in accordance with Section 16 of the Act, after which it would be considered that parties have waived off their right to object to arbitral proceedings. In the instant case, the Apex Court held that the Hon’ble Calcutta High Court had erred in setting aside the award. The court also further marked any objection with respect to place of arbitration or scope of authority of arbitrator cannot be raised by the respondents in any further proceedings in any forum
With respect to separability of arbitral agreements, the Apex Court marked that in the instant case, the four arbitral agreements forming a series had common characteristics, like all of them dealt with ‘Domestic arbitration’, the manner of appointment of arbitrator in all the four agreements were similar, therefore the Apex Court found a thread of commonality between all the four arbitral agreements and did not see any harm in allowing for composite reference. It is important to note here that the entire ‘separability of arbitral agreements’ issue, was discussed by the Apex court in the light of the ‘Duro Case’, on this issue the court did not make any observation on composite reference v/s separability of arbitral agreements as an independent question of law. .It would have been much better for sake of clarity on this question of law, if the Hon’ble Lordships would have shed some light on it as an independent question of law, going little beyond the precedents presented before the court. While deciding on this issue, the court has also made an observation that in case of ‘Domestic Arbitrations’ the curial law, lex Arbitri as well as the substantive law are one and the same in contrast to ‘International Commercial Arbitration’, where curial law and substantive law might be different.
To understand the implication of this ratio, it is imperative to have some clarity on some essential theories of jurisdictions referred in ‘International’ as well as ‘Domestic’ arbitration. The term ‘substantive law’ of the court refers to the law governing the substantive issues in dispute. ‘Curial Law’ on the other hand essentially refers to the law that governs the procedure of arbitration. In addition to this, ‘Lex Arbitri’ essentially refers to the law of the country of situs of arbitration. These three theories basically govern the quagmire of jurisdiction in ‘Domestic’ as well as ‘International Commercial Arbitration’. Lex Arbitri is important because the seat of the arbitration essentially determines the curial law which would govern the arbitration proceedings, unless there is an agreement that some other law would govern the arbitral proceedings. This is referred to as ‘Lex Loci Arbitri’.
In the case of BGS SGS Soma JV v. NHPC (Soma Case), the Apex Court has marked that there is an inextricable link between ‘Lex Arbitri’ and ‘Curial law’. The court went on to mark that “the territorial link between the place of arbitration and the law governing the arbitration is well established in international instruments, namely New York Convention of 1958 which maintains that reference to “law of the country where arbitration took place [Article V (1) (d)], synonymously to “law of the country where award is made” [Articles V (1) (a) and (e)]”. These observations clearly indicate towards existence of this inextricable link. This relationship is very crucial in case of ‘International Commercial Arbitration. For instance, an arbitral tribunal with its seat in France may be required to decide the substantive issues in dispute between the parties in accordance with the law of Switzerland or the laws of India, or some other law as the case may be. However, the arbitration itself and the way in which it is conducted, will be governed, even though in outline by relevant French Law on international arbitration. However, in case of domestic arbitration in India, the ‘Lex Arbitri’, ‘Curial Law’ as well as ‘Substantive Law’ would be the same. Thus, in the instant case the court marked that making a distinction between courts of Delhi or Kolkata to entertain cases arising out of the arbitration proceedings does not have any such dire implication.
Finally, with respect to the scope of ‘seat theory of arbitration’, the court relied on the ‘Indus Case’ and held that designation of seat is akin to having an exclusive jurisdiction clause, therefore the fact the arbitration proceedings were duly conducted in Delhi, makes Delhi the situs of arbitration , granting the courts of Delhi an exclusive jurisdiction to deal with disputes arising out of the arbitration.
 Purbasha is a law student currently pursuing BA.LLB (Hons.) from National University of Study and Research in Law, Ranchi. She is a Staff Writer at the Arbitration Workshop and can be reached at email@example.com.  Prasad Lohia vs. Nikunj Kumar Lohia and others (2002) 3 SCC 572  Konkan Rly. Corpn. Ltd. v. Rani Construction (P) Ltd (2002) 2 SCC 388  Krishan Lal v. State of J&K (1994) 4 SCC 422  Duro Felgeura S.A v. Gangavaram Port. Limited (2017) 9 SCC 729  Indus Mobile Distribution Pvt Ltd v Datawind Innovations Pvt. Ltd. (2017) 7 SCC 678  BGS SGS Soma JV v. NHPC 2019(6) Arb.L.R 393(SC)  Bharat Aluminium Co. v. Kaiser Aluminium Technical Services Inc.(2012) 9 SCC 552  Bharat Aluminium Co. v. Kaiser Aluminium Technical Services Inc. (2012) 9 SCC 552  O.P Malhotra, The Law & Practice of Arbitration and Conciliation, Third Edition, Thomson Reuters. Pg 900.  BGS SGS Soma JV v. NHPC 2019 (6) Arb.L.R 393(SC)