Covid-19 and the Extension of Period of Limitation: The Partial Undoing of ‘Complete Justice’

On 23rd March 2020, the Supreme Court had taken suo motu cognizance of the extraordinary circumstances prevailing on account of the Covid-19 pandemic and the resultant challenges before litigants in filing cases in courts and tribunals across the country. The Court ruled that the “period of limitation in all such proceedings, irrespective of the limitation prescribed under the general law or Special Laws whether condonable or not shall stand extended w.e.f. 15th March 2020 till further order/s to be passed by this Court in present proceedings.” This Order (“Extension Order”) was passed by the Court in exercise of its powers under Article 142 of the Constitution and declared to be binding on all courts and tribunals in India under Article 141 of the Constitution. Given the general nature of the Extension Order, its precise scope and extent is bound to give rise to further litigation. One such instance is the Supreme Court’s recent judgment in Sagufa Ahmed v. Upper Assam Plywood Products Pvt. Ltd.

The Issue and Decision in Sagufa Ahmed

In Sagufa Ahmed, the Court was called upon to decide whether the benefit of the Extension Order could be claimed by a litigant where the period of limitation expired prior to 15th March 2020 and the extended period upto which delay may be condoned (“Extended Period”) expired on or after 15th March 2020. The Court answered this question in the negative and held that the Extension Order would be applicable only if the period of limitation (and not the Extended Period) expired on or after 15th March 2020.

The central reason behind the Court’s conclusion was premised on its interpretation of the phrase ‘period of limitation’ used in the Extension Order. The Court referred to Section 10 of the General Clauses Act, 1897 and Section 4 of the Limitation Act, 1963. Both these provisions state that where the ‘prescribed period’ for any act/filing expires on a day when the court is closed, the limitation period is deemed to expire on the day the court reopens. The phrase ‘prescribed period’ is defined in Section 2(j) of the Limitation Act to mean the ‘period of limitation’, i.e. the period specified for instituting a proceeding, and it does not include the Extended Period. Section 4 is inapplicable where the Extended Period expires on a day on which the court is closed. Therefore, the Court held that the benefit of the Extension Order would not be available where the period of limitation has expired before 15th March 2020 and the Extended Period has commenced on or before this date.

The Errors in the Court’s Reasoning and the Partial Undoing of ‘Complete Justice’

There cannot be any quarrel with the Court’s interpretation of Section 4 of the Limitation Act and its reliance placed on the decision in Assam Urban Water Supply and Sewerage Board v. Subash Projects and Marketing Limited for this purpose. However, it is submitted that the application of Section 4 of the Limitation Act, whether directly or by analogy, to the issue before the Court in Sagufa Ahmed is incorrect and leads to an unjust outcome for litigants. This is for the following two reasons.

First, as the Extension Order records, the exclusion of time with effect from 15th March 2020 is on account of the practical difficulties faced by litigants in instituting proceedings in courts and tribunals. The Extension Order was passed under Article 142 of the Constitution and without any reference to Section 4 of the Limitation Act. Section 4 of the Limitation Act applies to a situation “when the court is closed”, which, even as per the wide scope of the phrase stipulated in the Explanation to Section 4, has not always been the case during the lockdown. Consequently, Section 4 has no bearing on the interpretation of the Extension Order.

Second, the phrase ‘period of limitation’ in the Extension Order must be construed in light of the context in which the Extension Order was passed, and the Court in Sagufa Ahmed could not have simply borrowed the meaning of this phrase from the Limitation Act. Ordinarily, where a statute allows litigants to institute proceedings during the Extended Period and seek condonation of delay, the litigants are entitled to avail this opportunity. The fact that it is the court’s prerogative whether or not to condone the delay does not dilute a litigant’s right to institute proceedings during the Extended Period and request for condonation of delay. The extraordinary circumstances that prevailed (and continue to prevail) due to the pandemic meant that litigants could not practically exercise this right. Therefore, the broad and general phraseology of the Extension Order, without any reference to the Limitation Act, must be construed to include instances where the ‘period of limitation’ expired prior to 15th March 2020. A literal interpretation of the phrase ‘period of limitation’ in the Extension Order and assigning the same meaning to it as contained in the Limitation Act is contrary to the well settled that an order of a court is not to be construed as if it were a statute.

It may be argued that the position of a litigant who is adversely affected by the principle laid down in Sagufa Ahmed is no different from one who seeks to institute proceedings during the Extended Period and is denied the benefit of Section 4 of the Limitation Act. However, this contention does not withstand further scrutiny. In the latter situation, the principle of law is clearly laid down in a statute and the annual calendar of the court/tribunal is known to the litigant in advance. The litigant is expected to arrange its affairs accordingly. On the other hand, litigants covered by the Sagufa Ahmed rule are those who have been unable to institute proceedings during the Extended Period on account of unforeseeable events, and are armed with a seemingly all-encompassing order of the Supreme Court, i.e. the Extension Order, which extends the period of limitation prescribed under all central and state legislations for instituting any proceeding. The Extension Order does not in any manner suggest that the words ‘period of limitation’ were intended to carry the same meaning as under the Limitation Act. In such circumstances, the Court’s reliance on the definition of ‘period of limitation’ in the Limitation to Act to restrict the scope of the Extension Order partly negates the ‘complete justice’ that was sought to be done in the Suo Motu Writ Petition under Article 142 of the Constitution.

Edit: This post has been edited to account for the Explanation to Section 4 in the Section titled ‘The Errors in the Court’s Reasoning and the Partial Undoing of ‘Complete Justice’

Termination of Contracts During Corporate Insolvency Resolution Process: Part III

In Parts I and II, I had discussed the provisions of Section 14 of the Insolvency and Bankruptcy Code prior to the Insolvency and Bankruptcy Code (Ordinance), 2019, and the changes introduced to Section 14 by the Ordinance on the aspect of termination of contracts during the CIRP period. In this final Part, I look at the judgments on this issue.

Rajendra K. Bhutta v. MHADA and Section 14(1)(d)

While there is a wealth of jurisprudence on most vital issues concerning the insolvency resolution process of a corporate person, the consequence of a moratorium on the termination of contracts is an area that remains relatively unevolved. One of the earlier decisions on this issue was rendered by the Mumbai Bench of NCLT in Rajendra K. Bhutta v. Maharashtra Housing and Area Development Authority. Although this decision was eventually set aside by the Supreme Court (on a different issue), its reasoning throws some light on the Tribunal’s approach towards the issue.

In this case, the corporate debtor had entered into a Joint Development Agreement (“JDA”) with Maharashtra Housing and Area Development Authority (“MHADA”). MHADA terminated the JDA while the corporate debtor was undergoing insolvency. The NCLT rejected the corporate debtor’s submission that the moratorium imposed pursuant to Section 14(1) precluded MHADA from terminating the JDA. It held that sub-clause (a) of Section 14(1) was irrelevant to the termination since the termination could be effected without any ‘proceedings’ to be conducted before any ‘authority’. As to sub-clause (d) of Section 14(1), the NCLT held that in the facts of the case, this sub-clause did not preclude MHADA from taking possession of the property in question from the corporate debtor and consequently, sub-clause (d) did not have any bearing on the validity of the termination as well.

This reasoning of the NCLT assumes that sub-clause (d) may not merely prohibit the owner or lessor of a property from recovering the property occupied by or in possession of the corporate debtor, but it would also render invalid the termination of a contract which would entitle such owner or lessor to recover the property. The NCLT’s reading of sub-clause (d) has also been endorsed by the Insolvency Law Committee (Chapter I, para 8.5 of the Report). This broad construction of sub-clause (d) of Section 14(1) is not unassailable, as it is arguable that sub-clause (d) as per its express terms merely prohibits the recovery of any property occupied by or in possession of the corporate debtor, and not the termination of a contract which may lead to such recovery.

The PPA Cases

The other decisions concerning the legality of termination of a contract during the CIRP period have been in the context of power purchase agreements (“PPAs”). The first of these is the NCLT’s (New Delhi Bench) judgment in Astonfield Solar (Gujarat) Private Ltd. v. Gujarat Urja Vikas Nigam Limited (dated 29th August 2019). Here, the corporate debtor was in the business of generation of solar power and its only buyer was Gujarat Urja Vikas Nigam Limited (“GUVNL”). After the corporate debtor went into insolvency, GUVNL terminated the PPA entered into with the corporate debtor solely on the ground of insolvency (which was permitted under the terms of the PPA). There was no default on the part of the corporate debtor in performing its obligations under the PPA. The NCLT declared the termination as invalid, ruling that the termination of the PPA “may have adverse consequences on the status of the Corporate Debtor as ‘going concern’”. It then relied upon the non-obstante clause in Section 238 of the Code to hold that even though the PPA allowed termination solely on the ground of insolvency, the provisions of the PPA would be overridden by the provisions of Code.

It is submitted that the NCLT’s reasoning in Astonfield is inadequate and unconvincing. First, the fact that the PPA may be vital to ensure that the corporate debtor survives as a going concern is in itself insufficient to declare the termination of the PPA as invalid. The NCLT ought to have traced the invalidity to specific provision(s) of the Code relevant to this issue. While it is crucial to ensure that the corporate debtor continues as a going concern during the CIRP period, this broad policy objective can be implemented in specific contexts only through statutory means. This is particularly where the rights of counter parties (here, GUVNL) are impacted as a result of the termination being held invalid. Second, the non-obstante clause in Section 238 would come into effect only if there is a conflict between the provisions of the Code and any other ‘law’ or ‘instrument’. The NCLT failed to elaborate as to which provision of the Code came into conflict with the provision of the PPA which empowered GUVNL to terminate the PPA solely on the ground of insolvency. Finally, the NCLT (perfunctorily) made an observation that the prohibition on termination of PPA would not apply if the corporate debtor went into liquidation. This remark was entirely unwarranted since the NCLT was not concerned with this question at all, and the issue requires a detailed examination of the provisions of the Code before it can be conclusively answered.

Despite the many flaws in the reasoning in Astonfield, GUVNL’s appeal against the NCLT’s decision was dismissed by the NCLAT. The NCLAT also simply held that the PPA was necessary to keep the corporate debtor as a going concern, without explaining as to how this in itself was sufficient to hold the termination invalid. It, however, set aside the NCLT’s ruling on the legality of termination of PPA during liquidation and held that the PPA could not be terminated even during liquidation. The NCLAT’s decision in GUVNL was cited by the NCLT (Hyderabad Bench) in Yes Bank Limited v. Gujarat Urja Vikas Nigam Limited to hold that a PPA cannot be terminated during liquidation process of the corporate debtor solely on the ground of liquidation.

The most recent decision of the NCLAT on the legality of termination of a PPA during the CIRP period is GRIDCO Limited v. Surya Kanta Satapathy. As in GUVNL, the NCLAT in GRIDCO held that the termination of PPA during the CIRP period was invalid. This time, however, the NCLAT expressly founded the illegality on Section 14(1) of the Code (amongst other reasons). It did not explain any further as to how the termination during the CIRP was in violation of Section 14(1). A crucial distinguishing factor in GRIDCO was that the ground for termination was not the mere fact of commencement of insolvency, but a default on the part of the corporate debtor in performing its contractual obligations, viz. the failure to supply power to GRIDCO according to the terms of the PPA. Nonetheless, the NCLAT held that such a default could not justify the termination of the PPA.

The absence of any reasoning behind the NCLAT’s conclusion that the termination of the PPA was in violation of Section 14(1) of the Code could perhaps give the erroneous impression that the illegality of the termination is a well-settled consequence of the moratorium under Section 14(1). Far from it, the issue is a vexed one and the NCLAT lost an opportunity to expound on it while taking into account the amendments to Section 14 introduced vide the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2019 and confirmed by the Insolvency and Bankruptcy Code (Amendment) Act, 2020. At the least, the NCLAT ought to have considered as to whether the amendments were clarificatory in nature. This is because if they are held to be clarificatory (which, it is submitted, is not the case), the amendments would be applicable retrospectively and govern the facts of GRIDCO as well.

Had the NCLAT in GRIDCO considered the amendments to Section 14 and applied them to the facts of the case, it may have arrived at the opposite conclusion and held that GRIDCO’s termination of the PPA was justified on account of the default on the part of the corporate debtor in supply of power, especially during the moratorium. The Explanation to Section 14(1) and sub-section (2A) of Section 14 both allow the termination of contract for default in payment of dues during the moratorium period. Though these two provisions were not directly applicable to facts in GRIDCO, their purport is clear: that a default on the part of the corporate debtor in performance of its contractual obligations during the CIRP period would entitle the counter party to terminate the contract. There is no reason why this rationale should not be applied where the corporate debtor defaults in its capacity as a supplier, entitling the counter party to terminate the contract.

Conclusion

The state of the law on operation of contracts during the corporate insolvency resolution process subsequent to the amendments introduced in 2019 has become more nuanced and it does seek to fairly balance the competing interests of the corporate debtor and the counter party. At the same time, it is far from exhaustive and the norms for termination in scenarios not included within the Explanation to Section 14(1) and Section 14(2A) need to be laid down clearly. (Some such scenarios are discussed in Part II). An application of the general provisions relating to moratorium under Section 14(1) on an ad-hoc basis would lead to inconsistent outcomes, which would not only create uncertainty for counter parties but also ensnare the corporate debtor in litigation over the issue of legality of termination of a contract by the counter party. This is evidenced by the judgments of the NCLT and NCLAT available on this issue. Till the next round of legislative intervention, it is hoped that the Supreme Court will have an opportunity to elucidate and set right the law within the existing statutory framework.

Termination of Contracts During Corporate Insolvency Resolution Process: Part II

In Part I, I had discussed the regime under the unamended Section 14 governing the issue of termination of contracts. In this Part, I discuss the amendments to Section 14 introduced by the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2019 and retained by the Insolvency and Bankruptcy Code (Amendment) Act, 2020.

The Ordinance inter alia inserted the following two provisions in Section 14.

A) Explanation to Section 14(1):

Explanation to Section 14(1) provides for instances where, broadly, a government or an authority established under law has granted a license, permit or a similar grant or right to the corporate debtor. The Explanation clarifies that the moratorium under Section 14(1) prohibits the suspension or termination of such licence, permit, etc. available with the corporate debtor “on the grounds of insolvency” of the corporate debtor. These prohibited grounds include not only the commencement of insolvency, but also other factors which are related to insolvency, such as non-payment of dues (Chapter I, para 8.9 of the Report of the Insolvency Law Committee).

The Explanation clarifies that the moratorium does not apply in the event that the corporate debtor defaults on its current dues payable as consideration for such licence, permit, etc. during the CIRP period. In other words, dues pending for the period prior to the commencement of CIRP do not constitute a ground for the termination of such licence, permit etc. The rights and obligations of the corporate debtor prior to the commencement of CIRP are, in effect, severed from its rights and obligations during the CIRP period. This approach is somewhat different from that prescribed by the UNCITRAL Legislative Guide on Insolvency Law. While the UNCITRAL (in Recommendation 79) also proposes that the counter party can be mandated to continue with the contract despite contractual breaches committed by the corporate debtor prior to the commencement of insolvency, it also requires the insolvency professional to cure the breach and put the counter party in substantially the same economic position it was in before the breach. The additional requirement imposed by UNCITRAL more adequately addresses the concerns of counter parties, as they may be reluctant to continue the contractual relationship with the corporate debtor on account of the prior defaults.

The Explanation to Section 14(1), gauged from its express terms – “[f]or the purposes of this sub-section, it is hereby clarified that”, suggests that it is intended to be clarificatory in nature. However, the scope of the Explanation indicates that it also substantively amends Section 14(1) insofar as termination of contracts is concerned. The express terms of the Explanation are not determinative of its supposedly clarificatory nature (Sedco Forex International Drill Inc. v. CIT). According to the unamended Section 14(1), once sub-clause (a) or sub-clause (d) was found to be applicable, the prohibition on termination of contracts was absolute and not subject to any exception. However, the Explanation to Section 14(1) restricts the scope of this prohibition in two ways: a) the prohibition applies only if the termination is on grounds related to insolvency; b) the prohibition does not apply if the corporate debtor defaults in payment of dues for use of the license, permit, etc. during the moratorium. Prior to the amendment, the phraseology of Section 14(1) did not permit these two exceptions to be read into it.

The substantive change brought about by the insertion of Explanation to Section 14(1) lends further ambiguity to the issue of effect of moratorium on termination of contracts. Should the two exceptions to the prohibition on termination of contracts be extended to scenarios where the Explanation is inapplicable but the termination is other prohibited under sub-clause (d) of Section 14(1), say, where the grant is conferred by a private entity? The first exception, which restricts the prohibition on termination to insolvency-related grounds, is founded on the notion that “the moratorium under Section 14 is not intended to dispense with obligations to comply with non-pecuniary requirements during the moratorium period” (Chapter I, para 8.10 of the Report of the Insolvency Law Committee). The second exception recognises that no counter party ought to be coerced into continuing with the grant if the corporate debtor is unable to pay for it during the CIRP period. The justification behind both the exceptions to the prohibition on termination of contracts during the CIRP period would be equally applicable where the counter party is a private entity and similarly, to any other contract entered into by the corporate debtor. Therefore, the two exceptions to the prohibition on termination contained in the Explanation must also be applied to instances where the Explanation is inapplicable.

B) Insertion of sub-section (2A) in Section 14:

The other amendment made to Section 14 by the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2019 is the insertion of sub-section (2A). According to this provision, it is now the prerogative of the interim resolution professional or the resolution professional to determine the goods or services which are critical for the continuation of the corporate debtor as a going concern. The supply of such goods and services cannot be terminated, suspended or interrupted during the CIRP period.

This prohibition does not apply in the event that the corporate debtor defaults on the payment for supply of such critical goods or services made during the CIRP period. This is in contrast to Section 14(2), which does not contain any such exception for supply of ‘essential goods or services’. The obvious rationale behind this exception is also stated in the Report of the Insolvency Law Committee (Chapter I, para 8.18), i.e. compelling suppliers to continue supplying critical goods or services in the absence of any payment by the corporate debtor would cause distress to such suppliers.

The insertion of sub-section (2A) is laudable, as it recognises that besides the essential supplies referred to in Section 14(2), certain other goods and services may be essential for the survival of the corporate debtor as a going concern. It is premised on the correct assumption that the nature of such critical goods or services may vary and therefore, empowers the insolvency professional to determine on a case-to-case basis as to which goods or services are critical and whose supplies cannot be terminated by the counter party. However, it fails to appreciate that it is not only contracts relating to supplies made to the corporate debtor, but also other contracts, including contracts relating to supplies made by the corporate debtor which may be vital to ensure that the corporate debtor continues as a going concern. It is not unusual that the subsistence of a contract under which the corporate debtor is the exclusive supplier of goods or services is essential for its survival. The termination of such a contract by the counter party may not be affected by Section 14(2A) (or Section 14(1)). A wider phraseology of Section 14(2A) to include all contracts would have adequately addressed this concern.

Termination of Contracts During Corporate Insolvency Resolution Process: Part I

The commencement of corporate insolvency resolution process under the Insolvency and Bankruptcy Code (“Code”) results in a moratorium, inter alia, on any coercive action against the assets of the corporate debtor. The moratorium is aimed at ensuring that the corporate debtor continues as a going concern, which in turn enhances the possibility of revival of the corporate debtor. The nature and extent of the moratorium is stipulated in Section 14 of the Code. An important issue that arises in this context is the effect of the moratorium on the corporate debtor’s contractual obligations, particularly the right of a counter party to terminate a contract entered into with the corporate debtor. In this three-part series, I examine the legality of termination of contracts by counter-parties during the corporate insolvency resolution process (“CIRP”). Part I lays down the relevant statutory framework prior to the amendments introduced by the Insolvency and Bankruptcy Code (Ordinance), 2019; Part II discusses the changes brought about by the Ordinance; and Part III looks into the judicial dicta on this issue.

Prior to the Code, the issue of operation of contracts (albeit, not termination of contracts) had been specifically addressed in the Sick Industrial Companies (Special Provisions) Act, 1985 (“SICA”). SICA conferred extremely wide powers on the Board for Industrial and Financial Reconstruction (“BIFR”) to regulate the contractual rights and obligations of the sick industrial company during the pendency of a reference under SICA. Under Section 22(3) of SICA, the BIFR could order the suspension of operation of ‘all or any of the contracts’ or ‘all or any of the rights, privileges, obligations and liabilities accruing or arising’ under a contract. This extensive authority to regulate the operation of contracts included within its umbrella not only contracts to which the sick industrial company was a party, but also contracts which were applicable to the sick industrial company (see Morgan Securities and Credit Pvt. Ltd. v. Modi Rubber Ltd.). It was, therefore, the BIFR’s prerogative to ascertain and customize the contractual obligations of the sick industrial company. The position under the Code, however, is different.

The commencement of CIRP in relation to a corporate debtor leads to the imposition of a moratorium under Section 14 of the Code. Sub-section (1) of Section 14 requires the Adjudicating Authority (i.e. the National Company Law Tribunal) to declare a moratorium inter alia on: a) the institution or continuation of any legal proceedings against the corporate debtor in any forum; b) transfer of assets by the corporate debtor; c) any action to enforce any security interest created by the corporate debtor; and d) the recovery of any property in the occupation or possession of the corporate debtor. Additionally, Section 14(2) precludes suspension or termination of supply of essential goods or services during the CIRP period.

Section 14, as it originally stood, did not contain any unambiguous provision prohibiting the termination of contracts by a contracting party during the CIRP period. In fact, besides empowering the insolvency professional to amend or modify existing contracts (Section 20(2)(b)), the originally enacted Code did not contain any provision on the effect of insolvency on the operation of contracts. This lacuna was conspicuous, given that the contractual rights and obligations of the corporate debtor can significantly impact the outcome of the insolvency resolution process. For instance, an exclusive right to supply power possessed by the corporate debtor pursuant to a contract may make the corporate debtor an attractive proposition for a prospective resolution applicant. However, if the contracting party terminates the contract during the CIRP, the committee of creditors may fail to find an appropriate buyer for the corporate debtor.

That said, the unamended Section 14(1) of the IBC was not entirely irrelevant to the issue of operation of contracts. As the most recent Report of the Insolvency Law Committee notes (Chapter I, para 8.5), given the extremely broad definition of ‘property’ in Section 3(27) of the Code, a license obtained from the government may constitute ‘property’. Consequently, the termination of such a license would be prohibited by sub-clause (d) of Section 14(1), which imposes a moratorium on “the recovery of any property by an owner or lessor where such property is occupied by or in the possession of the corporate debtor”. Further, in instances where the termination requires formal proceedings to be conducted before any authority, it would be prohibited by sub-clause (a) of Section 14(1) (see Chapter I, para 8.6 of the Report of the Insolvency Law Committee). At the same time, it can be no one’s case that the moratorium envisaged in unamended Section 14(1) prohibited the termination of all contracts to which the corporate debtor was a party. For instance, it would be absurd to suggest that an employee who does not wish to continue working for the corporate debtor was precluded from terminating his employment contract on account of the moratorium.

The absence of any specific provision dealing with the effect of the moratorium on the corporate debtor’s contractual obligations meant that unless the termination was secondarily struck by one of the four sub-clauses of Section 14(1), there would be no bar on a counter party terminating contracts, including in situations where the termination would paralyse the business of the corporate debtor. Moreover, in situations where Section 14(1) did get attracted resulting in a prohibition of termination, the prohibition would be absolute in nature; any default committed by the corporate debtor in performing its own obligations under the contract, whether before or during the CIRP, would be inconsequential. To illustrate, where the corporate debtor had the exclusive right under a power purchase agreement to supply power to the other party to the contract and defaulted in supplying power much before the commencement of CIRP, the default committed by the corporate debtor would be irrelevant if it was established that sub-clause (d) of Section 14(1) would prohibit the termination of the agreement by the counter party.

The legislative vacuum concerning the termination of contracts during a moratorium has, to some extent, been filled by the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2019, which was promulgated pursuant to the recommendations of the Insolvency Law Committee. The amendments introduced by the Ordinance, 2019, have been retained by the Insolvency and Bankruptcy Code (Amendment) Act, 2020. These amendments shall be discussed in Part II.

Section 106 of Transfer of Property Act and Unregistered Lease Deeds

A recent decision of the Supreme Court in Siri Chand v. Surinder Singh proposes an unusual (and, with respect, flawed) application of Section 106 of the Transfer of Property Act, 1882 (“Act”). Section 106 prescribes the duration of a lease where the lease deed is silent on it. If the lease is not for an agricultural or an industrial purpose, it is deemed to be from month to month and may be terminated by either party with 15 days’ notice. The limited purpose of Section 106 is to ascertain the duration and terminable nature of a lease. However, the Court in Siri Chand has expanded the deeming fiction under Section 106 and employed it to determine whether a lease deed is compulsorily registrable as per Section 17(1)(d) of the Registration Act, 1908.

The relevant facts of Siri Chand are these. The respondent was the tenant of a shop owned by the appellant. The respondent executed an agreement on 27th July 1993 wherein he undertook to pay Rs. 2,000/- per month as rent along with house tax and electricity charges. The respondent was liable to be evicted from the shop in the event of his failure to pay rent by the 5th day of every month. Clause 9 of the agreement stipulated that the rent was to increase by 10% every year.

In 2006, the appellant instituted proceedings before the Rent Controller under the East Punjab Urban Rent Restriction Act, 1949 seeking eviction of the respondent and payment of arrears of rent from 28th January 2004 to 28th February 2005 as well as house tax. The Rent Controller held in favour of the appellant, but the Appellate Court and the High Court ruled in favour of the respondent. In appeal before the Supreme Court, the Court held that as per the terms of the agreement, the respondent could be evicted on grounds of failure to pay the rent and house tax. However, the Court had to preliminarily rule on whether the agreement between the parties could be enforced given that it was not registered.

According to Section 107 of the Transfer of Property Act and Section 17(1)(d) of the Registration Act, an agreement creating a lease is compulsorily registrable if the lease isfrom year to year, or if the term of the lease exceeds one year, or if the lease reserves a yearly rent. The agreement in Siri Chand did not create a lease from year to year, nor did it reserve yearly rent. The Supreme Court was, therefore, required to ascertain if the term of the lease as per the agreement exceeded one year. For this purpose, the Court relied upon Section 106 of the Act and held that since the agreement did not stipulate the duration of the lease, the lease was deemed to be from month to month. It then concluded that an agreement creating a lease from month to month did not require registration under Section 17(1)(d) of the Registration Act and therefore, the unregistered nature of the agreement did not render it unenforceable. This is despite the fact that the landlord-tenant relationship subsisted between the appellant and the respondent for a period far exceeding one year. In essence, therefore, according to the Court in Siri Chand, an agreement creating a month to month tenancy does not require registration irrespective of the total duration of the tenancy.

It is submitted that this conclusion is incorrect and stems from a flawed notion of a month to month tenancy. As the Bombay High Court has held in Utility Articles Manufacturing Co. v. Raja Bahadur Motilal Bombay Mills, Ltd., a tenancy from month to month does not mean that a new tenancy is created upon the expiry of each month. It is simply that the period of the original tenancy continues to increase by a month till the time the tenancy subsists. Therefore, if an agreement creates a month to month tenancy, it cannot constitute the basis of a lease for more than a year unless it is registered.

The legal foundation of a tenancy created by an unregistered agreement which does not prescribe the duration of the tenancy can be assessed with the help the Supreme Court’s decision in Biswabani Pvt. Ltd. v. Santosh Kumar Dutta, where it opined on the nature of a tenancy created by an oral agreement accompanied by delivery of possession for more than a year. The Court held that “an oral agreement accompanied by delivery of possession, if for more than one year is valid, by delivery of possession, for the first year, and thereafter the lessee continuing in possession with the assent of the lessor becomes a tenant by holding over under Section 116 of the Transfer of Property Act.” Similarly, where possession is transferred pursuant to an unregistered lease deed which does not specify the duration of the lease, the tenancy can be founded on the unregistered lease deed at the most for a year. Beyond that period, the tenancy has a statutory basis, viz. Section 116 of the Act. Consequently, the terms of the unregistered lease cannot be relied upon to claim arrears of rent for the period beyond one year (except, as discussed below, if they can be admitted in evidence under Section 49 of the Registration Act) and the Court in Siri Chand erred in ruling to the contrary.

The fallacy of Siri Chand can be examined from another perspective. The Court’s approach leads to a situation where an agreement creating a month to month tenancy as per the deeming fiction under Section 106 does not require registration, irrespective of the total duration of the tenancy. This is plainly contrary to Section 107 of the Act, which makes it unequivocally clear that any agreement creating a lease of more than a year requires registration. In effect, therefore, the Court has ruled that Section 106 overrides the mandatory registration requirement under Section 107, which constitutes a departure from the settled position of law that Section 106 ought to be read subject to Section 107, laid down by the Supreme Court in Samir Mukherjee v. Davinder K. Bajaj.

In view of the above, the agreement in Siri Chand was enforceable only for a period of one year from the date of its execution, i.e. till 27th July 1994. Does this imply that its terms could not be adduced in evidence to establish the sum recoverable as arrears of rent for the period after 27th July 1994? This depends upon whether determining the rent of the tenancy constitutes a ‘collateral purpose’ within the meaning of Section 49 of the Registration Act.

In Biswabani (supra) and Satish Chand Makhan v. Govardhan Das Byas, the Supreme Court has held that if a lease deed is invalid for want of registration, neither party can rely on any of its terms insofar as the tenancy is concerned. However, the Calcutta High Court and Bombay High Court have held that the rate of rent stipulated in the unregistered agreement constitutes a collateral purpose and it can be relied upon even for the period beyond one year. It is submitted that the High Courts’ view is not in consonance with the meaning of ‘collateral purpose’ as laid down by the Supreme Court. In K.B. Saha & Sons Pvt. Ltd. v. Development Consultant Ltd., the Court held that “a collateral transaction must be independent of, or divisible from, the transaction to effect which the law required registration” and to use an inadmissible document “for the purpose of proving an important Clause would not be using it as a collateral purpose”. The tenancy which subsists beyond the one-year period cannot possibly be considered to be independent of the transaction which the unregistered lease agreement was meant to create. The landlord-tenant relationship, which exceeded a year, is precisely what the agreement was supposed to govern and which required registration under Section 107 of the Act and Section 17 of the Registration Act. Therefore, the terms of an unregistered agreement governing the tenancy beyond the one-year period cannot constitute collateral purpose within the meaning of Section 49 of the Registration Act and could not have been relied upon by the landlord in Siri Chand to establish the sum recoverable as arrears of rent.

Section 34(3) and Non-est Filings: Finding the Middle Ground

[This is a Guest Post by Mansi Sood, who is a Delhi-based lawyer.]

In the past year, a series of judgments by the Delhi High Court have chalked out the contours of S.34(3) of the 1996 Act in the context of non-est filings. While their pro-arbitration stance is exemplary, their inconsistency and over-enthusiastic intervention undermine any positive takeaways. In this post, I highlight the impact of these decisions and argue that a more balanced and less intrusive approach is both possible and necessary.

The interpretation of the term ‘non-est’ in an arbitration context is best outlined in the 2013 judgment of DDA v. Durga Construction Co., which dealt with a key question i.e. whether delay in re-filing a S.34 petition beyond the statutory limitation period of 3 months and 30 days under Section 34(3) can be condoned. Although it ultimately refused to condone the delay on facts, this decision lent clarity on two important points:

  • S.34(3) is applicable only to the initial filing of the petition and not to anything thereafter; filing and re-filing stand on different footings [subsequently affirmed by the Supreme Court in Northern Railway] and courts can condone re-filing delays, even beyond the statutory period. The rationale being that once a party demonstrates its intention to take recourse to its legal remedies, it cannot be assumed that it has given up its rights.
  • The only exception to this rule is in cases where the initial filing is hopelessly inadequate and insufficient or contains defects which are fundamental to the institution of the proceedings, such that the filing is non-est i.e. of no consequence. In such cases, the initial date of filing will be treated as the date on which a ‘proper’ petition is filed. Further, the determination of a non-est petition is based on the nature of the defects i.e. defects that are not formal or ancillary and would render the petition as an invalid pleading in law will make it non-est.

Thus, the court’s scrutiny of applications for condonation of delay under S.34(3) is effectively divided into two stages – a determination of whether the petition was non-est, followed by an examination of sufficient cause (for filing delays) and/or due diligence (for re-filing delays).

This formula was reiterated and applied in several subsequent cases. Three, in particular, are relevant. For brevity, their specific facts are not repeated here. However, it is pertinent that in all three cases, the initial filing was without signatures, vakalatnama, affidavits and the statement of truth.

In SKS Power Generation Ltd. v. ISC Projects Pvt. Ltd., the court placed reliance on Sravanthi Infratech and Durga Construction and held that the initial filing was deliberately mischievous and merely intended to stop the running of limitation. It observed that despite the individual defects being procedural (and presumably non-fatal), they could collectively be ‘fundamental’ enough to qualify a petition as non-est. In doing so, it took the Durga Construction line of reasoning further and illustrated the kind of defects that would qualify as ‘not formal or ancillary’. On the flip side, its narrow tailoring also created ambiguity by leaving their individual status open – if only one of these defects was present, would it still be a non-est petition?

The second important ruling, on nearly identical facts, came in Director-cum-Secretary, Department of Social Welfare v. Sarvesh Security Services. Here, the court attempted to positively outline the specific compliances required for a ‘proper’ petition i.e. “signatures of the parties, the affidavits accompanying the petition and the vakalatnama” and laid emphasis on due diligence. Its reasoning suggested that these defects are not individually fatal and the delay on this account could be condoned in light of a reasonable explanation – an interpretation that was explicitly negated in ONGC v. Joint Venture of M/s. SREE and M/s. MEIL.

After an extensive survey, the court in ONGC laid down the basic parameters necessary for an authentic and ‘proper’ petition, as follows:

“(1) Signature of the party and advocate on each page and the last page of the petition

 (2) Vakalatnama signed by the party and advocate, with the party’s signature being identified by the advocate

(3) Statement of Truth/Affidavit signed by the party and attested by the Oath Commissioner”

This cemented the elevation of procedural defects to something more substantive and clarified that the absence of even one would prove fatal; by implication, it gave short shrift to the role of due diligence, making compliance of the fundamental pre-requisites a binary question. In my view, while these cases discouraged half-baked and routine petitions under S.34, their hyper-technical view sent them down the slippery slope of creeping judicial intervention.

It is notable here that all three decisions have been rendered by coordinate benches. Until a higher bench positively settles this issue, the differences in the minutiae of the ‘basic pre-requisites’ across the three decisions will result in ambiguity and differing standards of application. For instance, ONGC states that signatures must be appended to each page, whereas previous decisions had limited this to signature on the last page of the petition. This successive addition of new pre-requisites erodes certainty in the law and leaves parties dependent on the court’s discretion.

Union of India v. Bharat Biotech is but one example of this. Here, even though the initial filing had a vakalatnama, statement of truth/affidavit and signatures (albeit with some deficiencies), the non-filing of the impugned arbitral award proved fatal. Strictly speaking, annexing the arbitral award was not one of the ONGC pre-requisites; and yet, the court chose to base its decision primarily on its absence, holding it to be ‘a defect of such gravity that it would render the original filing as a mere dummy filing’. It appears from this decision that complying with the pre-requisites for a proper filing laid down in ONGC is not sufficient. As such, there is no way to assess whether the petition being filed is proper or non-est.

Therefore, when put together, these cases raise three important questions.

First, what is the extent of a court’s power to elevate procedural defects into substantive faults that can deprive a party of the right to agitate the merits of its case? Surely, the oft quoted adage “procedure is the handmaiden of justice” has not become so old that it can be completely overridden. There is no doubt that ensuring the authenticity of filings and discouraging parties from making dummy petitions are laudable goals. And perhaps the peculiar facts of these decisions were gross enough to warrant dismissal. But even so, it seems logical that the purpose of authentic filings would be better served by an unambiguous rule preventing changes to the body and substance of the petition, rather than microscopic requirements for accompanying documents. In fact, by removing the scope for altering the very petition that is being authenticated, this could perhaps ensure that the attendant procedural compliances are also completed in the first go.

Second, what happens in cases that do not fall in the black or white but in the grey? If the purpose of these pre-requisites is to establish authenticity, errors which do not render a petition ‘hopelessly inadequate’ should not deprive a party of the chance to contest on merits. This could include instances involving substantial but not full compliance as also intricacies of individual v. cumulative defects. And yet, the ONGC approach does not even follow its own logic. Not only is its adoption of a binary approach in this singular category of cases arbitrary and inconsistent, it also crosses the boundary between making and interpreting rules. Further, by losing sight of its self-professed goal of ensuring authenticity and instead, micro-managing filing specifications through judicial pronouncement, the court risks wasting future judicial time. In turn, this has the potential to clog up an already over-burdened legal system and deprive commercial parties of the quick and painless adjudication of disputes promised to them. While procedural requirements are certainly not dispensable, they cannot be used as funnels either; doing so renders the procedure-substance separation obsolete. Instead, courts could strike a more commercially-minded balance by imposing heavier costs on irresponsible litigants, without depriving them of a substantive hearing altogether.

Third, what are the precise standards of scrutiny applicable to filing and re-filing delays? While the answer to this issue should be obvious in light of Durga Construction, in practice, courts continue to examine the ‘overall conduct’ of the parties, particularly within the 3-month-and-30-day period. This blurring of the lines gives the impression that parties must clear all defects before the 3-month-and-30-day deadline, which is incorrect and has no basis in the 1996 Act or the Delhi High Court Original Side Rules, 2018. This kind of interpretation only enhances uncertainty and the consequent need for judicial interference. As the Delhi High Court now hears appeals from SKS Power Generation and ONGC, one hopes that it will lend some clarity and strike a balance between strictly upholding statutory intent and affording a reasonable margin of error.

Enforcement of Foreign Awards: Two Steps Forward, One Step Back?

[This is a Guest Post by Kaustav Saha, who is a Delhi-based lawyer.]

This post will examine the Supreme Court’s most recent interpretation of the public policy exception to enforcement of foreign awards in National Agricultural Cooperative Marketing Federation of India v. Alimenta S.A. (‘NAFED’).It is submitted that the court’s application of the public policy exception to refuse enforcement of the foreign award in question was flawed and shows that even today, notwithstanding the legislative attempt to clearly articulate the contours of the public policy exception by way of the 2015 amendments to the 1996 Act, courts can, on occasion, greatly exceed their jurisdiction to review a foreign award on this ground.

The material facts in NAFED were that arbitration proceedings were initiated by Alimenta before the Federation of Oil, Seeds and Fats Associations Ltd. (FOSFA), London in relation to a dispute concerning NAFED’s failure to supply the entire contracted quantity of 5000 tons of Indian HPS groundnut pursuant to a contract entered into in 1980. The key issue in both the arbitration and enforcement proceedings was whether NAFED was prevented from performing its obligations by order of the Government of India. NAFED’s excuse for not supplying the required quantity was that it did not have government permission by way of export quotas to use the next year’s stock of groundnuts to make up the supply deficiency of a previous year. The arbitrator decided this issue in favour of Alimenta, the claimant, and held that NAFED was not prevented from performing its obligations. As a result, by way of award dated 15.11.1989, damages and interest were awarded in favour of Alimenta, and confirmed by an appellate award by FOSFA’s Board of Appeal dated 14.09.1990, which also enhanced the rate of interest payable. Alimenta sought enforcement of both awards in India.

The Supreme Court observed that NAFED was prevented from performing its obligations by way of a government order, and as a result, by operation of Clause 14 of the FOSFA 20 standard form contract incorporated by agreement between the parties, this was a force majeure event which had the effect of terminating the contract. It also observed that Clause 14 was in the nature of a contingent contract covered by Section 32 of the Indian Contract Act and the exception of self-induced frustration would only apply to cases covered by Section 56 of the Act. As a result, the court held that on a combined reading of Clause 14 and Section 32 of the Contract Act, the contract had become void and parties were released from their obligations. Therefore, neither the foreign award, which awarded damages against NAFED for failure to perform the contract, nor the appellate award, could be enforced in India as they were contrary to public policy, being “ex facie illegal, and in contravention of fundamental law.”

It is submitted that the court’s reasoning and conclusion are flawed on a number of grounds:

First,when examining the position of law on the issue, the court relied on the well established Renusagar case which was decided under the Foreign Awards (Recognition and Enforcement) Act, 1961 [‘1961 Act’], also applicable to the present case. However, the court also examined cases decided under the 1996 Act, particularly the Shri Lal Mahal case, which adopted the principles laid down in Renusagar to the 1996 Act. It is therefore curious that the court did not take notice of its own decision by a three-judge bench in Vijay Karia v Prysmian E Sistemi SRL. The Supreme Court in Vijay Karia held the foreign award in question to be enforceable and also laid down important principles about the application of Section 48 of the Act, powerfully reiterating the limited jurisdiction of the court to interfere with foreign awards. While it remains speculation whether taking note of this decision would have altered the outcome in NAFED, it is submitted that the pro-arbitration approach outlined by the court in Vijay Karia may well have led to a different outcome.

Secondly, it is submitted that the court’s approach in NAFED amounts to review of a foreign award on merits in the guise of public policy. The court expressly states that its refusal to enforce is solely based on the ground that the award of damages for a contract that became void would render the foreign award contrary to the public policy of India. This conclusion is in turn based on findings that NAFED required permission from the government to supply the required goods, that this permission was never given, that Clause 14 would come into operation and render the contract void, and that this was not a case of self-induced frustration. It is submitted that all of these findings are entirely within the domain of the arbitrator and the court does not have jurisdiction under Section 48 to review them. In fact, at para 29 of the judgement, the court notes a submission on behalf of Alimenta S.A. that “The question of imposition of ban by the Government was gone into by the Arbitral Tribunal, and conclusion was recorded that it was a self­-imposed restriction by NAFED. There was no such ban on the export by the Government of India.” Curiously, the court does not deal with this submission at all and proceeds to examine the issue itself, without setting out the arbitrator’s reasoning and conclusion on this crucial point. It is also relevant to note that Clause 18 of the FOSFA 20 contract made English law the law applicable to all questions regarding the “construction, validity and performance” of the contract. Despite noting this provision, the court inexplicably goes on to examine the Indian legal position on frustration of contract, notes that Indian law and English law are different on the issue, and rests its conclusion on the basis of its own understanding of Indian law (an earlier post has examined and disputed the validity of this understanding, but that is a separate matter). Leaving aside questions of the correctness of the court’s analysis, the important argument here is that the court’s purported application of the public policy exception amounts to a review on merits and is not even contemplated by the Renusagar definition of public policy, let alone the more recent authorities on the subject. Even assuming that the court considered the government’s export quotas as constituting the ‘fundamental policy of Indian law’, the judgement is completely silent on what provisions of law the court is relying upon to reach this conclusion or for that matter, what the arbitrator’s findings on this issue were.

Thirdly, there is a troubling inarticulate premise for the court’s decision, which would perhaps be more justifiable as a major premise than public policy. In the enforcement proceedings, NAFED had also raised a number of objections as to the conduct of the arbitration proceedings, and inter alia contended that it had not been given a fair opportunity of presenting its case. Several allegations of bias were made, notably that Alimenta’s nominee arbitrator in the first instance arbitration acted as its counsel before the Board of Appeal, and that the Board of Appeal enhanced the rate of interest without even a prayer for such relief being made by Alimenta. In addition, the court notes that the arbitration proceedings had been continued by FOSFA in disregard of interim orders by Indian courts directing that the arbitration proceedings be stayed. While these factors are noted or examined only briefly, and the court makes it clear in para 79 that the other grounds urged by NAFED are not material to its decision as the award is contrary to public policy, there is a very real chance these factors influenced the ultimate decision of the court to refuse enforcement. It is submitted that while the court does not attach much importance to them, these facts raise considerable doubt about the fairness of the arbitration proceedings, and would have been arguable grounds to refuse enforcement. While the facts of every case are undoubtedly different, and NAFED does not depart from the legal principles laid down in earlier authorities, it is nonetheless a matter of concern that courts are still prone to misapplying the public policy exception in such a stark manner. It is respectfully submitted that future cases would do well to treat NAFED as an outlier in a line of otherwise progressive authorities, particularly as it does not take note of the three-judge bench’s decision in Vijay Karia.

Covid-19 and Force Majeure: Part IV

A recognised exception to the doctrine of frustration under Section 56 of the Contract Act is self-induced frustration, i.e. the event which is alleged to have frustrated the contract must not arise from the acts of the promisor. To illustrate, A undertakes to manufacture and supply certain goods to B but fails to do so since A’s factory caught fire. If the fire was caused due to A’s own acts, A cannot contend that the contract is frustrated. An important issue which arises in relation to the exception of self-induced frustration (‘Exception’) is its applicability to cases of discharge under Section 32.

It is well settled that if a contract contains a force majeure clause, the consequence of a force majeure event on the contractual rights and obligations of parties is governed by Section 32 of the Contract Act. Usually, such clauses would suspend or terminate parties’ obligations only if the force majeure event is not caused due to the fault of the promisor. In such cases, the Exception applicable in the context of Section 56 is contractually incorporated and will preclude the promisor from seeking discharge under Section 32. The complexity arises when a force majeure clause is silent on the Exception. In such a situation, is the promisee precluded from relying on the Exception?

This issue arose in the Supreme Court’s recent decision in National Agricultural Cooperative Marketing Federation of India v. Alimenta S.A. NAFED had contracted to supply 5000 tons of groundnuts to Alimenta in the 1979-80 season, for which it had obtained prior government approval. The contract contained a force majeure clause which stated that if the export was prohibited by the government, the contract would be cancelled. NAFED could supply only 1900 tons in the 1979-80 season and the parties agreed in an addendum that the balance 3100 tons would be supplied in the 1980-81 season. Even though the government had allotted export quota to NAFED for the 1980-81 season, the quota was only for new contracts and did not permit carrying forward exports from previous years’ contracts. Consequently, NAFED pleaded that the contract had been frustrated. The Arbitral Tribunal held that the frustration was self-induced as NAFED had itself proposed to the government to deny permission for carrying forward previous years’ exports. The High Court did not interfere with Tribunal’s finding, but the Supreme Court set it aside. The Court cited several judgments for the proposition that where the contract contains a force majeure clause, dissolution of the contract would take place under the terms of the contract and such cases would be outside the purview of Section 56. It then observed as follows:

“52. In the present case, the High Court observed that it was a case of self-induced frustration. The High Court ignored and overlooked that it was not a case of frustration under section 56 of the Contract Act, but there was a stipulation in Clause 14 of the Agreement, the effect of which was ignored and overlooked…”

It, thus, appears that the Court’s reason for not applying the Exception was that the force majeure clause (Clause 14) in the contract did not provide for it. Consequently, according to the Court, if a force majeure is silent on the Exception, the promisee cannot rely on Section 56 and the promisor can be excused for non-performance on account of impossibility of performance even though the impossibility occurred due to the promisor’s fault.

It is submitted that this conclusion is incorrect and based on the assumption that Sections 32 and 56 are mutually exclusive in nature. Although the Supreme Court has indeed held that a contract which contains a provision for discharge on the happening of a force majeure event would be governed by Section 32 and not Section 56, it does not imply that the exceptions to the doctrine of frustration under Section 56 cease to be applicable. It simply implies that if the force majeure clause compels performance by, or discharges, the promisor, on the happening of certain events, the promisor cannot rely on Section 56 to argue the contrary. This is best explained by the Supreme Court’s decision in Energy Watchdog v. CERC. In that case, the contract contained a force majeure clause and the promisor alleged that contract was frustrated on account of rise in prices of Indonesian coal. The Court held that according to the force majeure clause, the rise in prices did not discharge the promisor from its obligations under the contract. The promisor could not, thereafter, take recourse to Section 56 to contend that the contract stood frustrated.

As I have discussed in an earlier post, the justification behind the non-application of Section 56 where the contract contains a force majeure clause is that the force majeure event has already been contemplated by the parties and therefore the contract must govern the relationship between the parties on the occurrence of that event. At the same time, the non-application of Section 56 on the ground that parties contemplated the force majeure events does not imply that Section 56 ceases to apply in its entirety on issues not contemplated by parties. As the Supreme Court observed in Energy Watchdog, force majeure clauses need not be exhaustive. The failure to incorporate the exception of self-induced frustration (or the exception contained in the third paragraph of Section 56) cannot be to the detriment of parties. A contrary interpretation would lead to exonerating the promisor for its own deliberate act (which may also constitute a breach of contract) which frustrated the contract. Taken to its logical conclusion, it would mean that an artist who has contracted to perform at a theatre may deliberately destroy the theatre by fire and successfully claim that she is discharged from performance, if the contract contains a force majeure clause but is silent on the Exception. This manifestly absurd interpretation must be rejected. It is only if the force majeure clause expressly excludes the Exception that the exception may not apply. So, for instance, in NAFED, had the force majeure clause stated that the contract would be cancelled in the event of impossibility of performance irrespective of whether either party caused or contributed to the impossibility, the Exception would not apply. The express exclusion of the Exception, however, is an unlikely scenario.

Proper Law of Arbitration Agreement: The Indian Position

In the previous post, I had discussed the three systems of law that govern an international arbitration and the English Court of Appeal’s landmark decision in Enka v. Chubb, which held that there is a “strong presumption” that parties have impliedly chosen the curial law as the AA law. In this post, I examine the position under Indian law for determining the law governing the arbitration agreement where parties have chosen a proper law of the contract different from curial law. I argue that while earlier decisions accorded primacy to the proper law of contract, recent judgments have veered towards the Enka principle, albeit in a different context. As in the previous post, I will refer to the proper law of contract as the ‘main contract law’ and the law governing the arbitration agreement as ‘AA law’.

The starting point for discussion is the Supreme Court’s decision in NTPC v. Singer, rendered prior to the enactment of the Arbitration and Conciliation Act, 1996 (‘1996 Act’). Here, the parties chose Indian law as the main contract law and the contract contained an ICC arbitration clause. Since the parties had not chosen the seat of arbitration, the ICC Court designated London as the seat. The Court was required to determine whether the AA law was Indian law. The Court held that in the absence of an “unmistakable intention to the contrary”, AA law is the same as the main contract law. Even though on facts, parties had not chosen the seat of arbitration, as a matter of law, the Court extended the primacy of the main contract law to cases where parties had expressly designated the seat of arbitration.

Subsequently, a similar issue arose before the Supreme Court in Sumitomo Heavy Industries Ltd. v. ONGC Ltd. The contract provided for Indian law as the main contract law and designated London as the seat of arbitration. The Court cited the terms of the contract to hold that the AA law was also Indian law. It did not explain the basis of this conclusion, which is explained by the fact that this was the agreed position between the parties. Hence, Sumitomo is not an authority for the proposition that the AA law is to be the same as the main contract law where parties fail to choose the former. Nonetheless, as discussed below, the Supreme Court has subsequently referred to Sumitomo for this proposition.

Although NTPC and (arguably) Sumitomo accorded primacy to the main contract law for determining the AA law, the weight of both these decisions has been significantly weakened for twin reasons: (a) they were rendered in the specific context of the Arbitration Act, 1940 and Foreign Awards Act, 1961, both of which have now been replaced by the 1996 Act; and (b) they reflect an archaic understanding of international arbitration where seat of arbitration did not constitute the “centre of gravity” of arbitration, as it does under the 1996 Act.

Let us analyse the judicial treatment of both these decisions. The Supreme Court in Indtel Technical Services v. W.S. Atkins Rail Ltd. reiterated the NTPC principle and held that a choice of English law as the main contract law would extend to the AA law as well. Subsequently, a Constitution Bench in BALCO held that NTPC has been rendered irrelevant under the 1996 Act. However, this observation was made in the context of the repeal of Section 9(b) of the Foreign Awards Act. The Court in BALCO was not concerned with the legal test for determination of AA law. After BALCO, the Court’s assessment of the NTPC principle has been inconsistent, as it has questioned its applicability on one occasion while applying it on the other. It is no different with Sumitomo. In a three-Judge Bench decision in BALCO, Sumitomo has been construed to hold that the AA law is the same as the main contract law in the absence of an express agreement to the contrary. Subsequently, the Court in Hardy Exploration held that Sumitomo was not relevant under the 1996 Act. But Hardy Oil was itself held to be bad law in BGS SGS SOMA JV.

This topsy-turvy treatment of NTPC and Sumitomo is a result of the Supreme Court’s unending tryst with the significance of seat of arbitration. Quite apart from this, however, the Court’s decisions post-BALCO, when called upon to apply the Bhatia International principle, suggest that Indian law has departed from the NTPC position and inched closer to the Enka principle of primacy of curial law while determining the AA law. I explain this below.

To recall, the Court in Bhatia International had held that Part I of the 1996 Act would apply even to foreign-seated arbitrations unless it was expressly or impliedly excluded by parties. Although the Court in BALCO overruled Bhatia International, it held that disputes arising out of arbitration agreements entered into prior to BALCO would continue to be governed by the Bhatia International principle. Post-BALCO, the Court was frequently called upon to assess the scenarios in which Part I was impliedly excluded according to the Bhatia International principle. One such decision, which is reflective of the Enka approach, is Reliance Industries v. Union of India (‘Reliance Industries (I)’).

In Reliance Industries (I), parties had chosen Indian law as the main contract law and English law as the AA law, and had consented to London as the seat of arbitration. The Union of India initiated setting aside proceedings under Section 34 of the 1996 Act to challenge a partial award before the Delhi High Court. The High Court held that Part I was applicable and the Section 34 proceedings were maintainable. On appeal, the Supreme Court reversed the Delhi High Court’s ruling and held that Part I of 1996 had been impliedly excluded by the parties. The Court reasoned, inter alia, that it is the AA law which governs setting aside proceedings and the AA law in this case had been chosen as English law. As a result, setting aside proceedings under Part I of the 1996 could not be initiated.

In another decision arising out of the same contract, the Supreme Court in Union of India v. Reliance Industries (‘Reliance Industries (II)’) followed its earlier decision in Reliance Industries (I) and held that in cases governed by the Bhatia International principle, Part I of the 1996 Act would necessarily be excluded where the AA law was not Indian law.

These decisions of the Supreme Court post-BALCO are depictive of an emphatic link between the AA law and Part I of the 1996 Act and an endorsement of the fact that Part I contains provisions governing substantive rights arising out of the arbitration agreement. The setting aside of an arbitral award has been held to be governed by AA law and resultantly, the choice of a foreign AA law implies that parties intended to exclude the applicability of Part I – which contains the setting aside provision under Indian law (Section 34). Similarly, as the Court has held in other decisions, AA law also governs the constitution of the arbitral tribunal (Section 11 of the 1996 Act) and the formal validity of the arbitration award (Section 31). Indubitably, therefore, Part I of the 1996 Act, which necessarily applies to arbitrations seated in India (See Section 2(2)) as curial law, also contains elements governed by AA law. This overlap between the AA law and curial law was one of the fundamental reasons which led Popplewell LJ in Enka to conclude that there is a strong presumption that parties have impliedly chosen the curial law as the AA law. In fact, Popplewell LJ opined that the overlap is not a feature unique to English law, as the [English] Arbitration Act, 1996 is based on the UNCITRAL Model Law. This, and other, reasons of Enka squarely apply in the Indian context. Indian courts, when called upon to rule on the test for determining the AA law, simply to need to extend the rationale of decisions such as Reliance Industries (I and II) and whole-heartedly adopt the Enka principle.

Determining the Proper Law of Arbitration Agreement: English Court of Appeal Decides

There are three main systems of laws applicable to an international arbitration: (a) proper law of the contract, i.e. the law governing the substantive rights and obligations of parties under the main contract; (b) proper law of arbitration agreement, i.e. the law governing issues such as the validity, interpretation and existence of the arbitration agreement; and (c) curial law, i.e. the law governing the procedural aspects of arbitration. Curial law is the law of the seat of arbitration. Ordinarily, international contracts stipulate the proper law of the main contract and the seat of arbitration (and thus, the curial law). However, parties rarely choose the proper law of arbitration agreement.

Against this background, an issue that arises frequently, across jurisdictions, is the test for determining the proper law of the arbitration agreement. Where the parties do not choose either the proper law of contract or the proper law of arbitration agreement and only designate the seat, it is the curial law which is invariably held to be the proper law of arbitration agreement. The complexity arises when parties choose the proper law of contract and a different curial law (by designating the seat or otherwise). In such case, determining the proper law of arbitration agreement involves a choice between the proper law of the contract and the curial law (French law and Swiss law offer two other sui generis solutions). The English Court in a magnificent decision in Enka v. Chubb has sought to put the issue to rest. In this post, I discuss the findings of the Court of Appeal on this issue. I adopt the terminology of the Court in Enka and will refer to the proper law of contract as ‘main contract law’ and the proper law of arbitration agreement as ‘AA law’.

Prior to Enka, a 2008 decision of the Court of Appeal in C v. D had accorded primacy to the curial law for deciding the AA law. The Court held that the test to determine the AA law is to “discover the law with which the agreement to arbitrate has the closest and most real connection” and “it would be rare for the law of the (separable) arbitration agreement to be different from the law of the seat of the arbitration.” Subsequently, the Court of Appeal in Sulamérica Cia Nacional de Seguros SA v Enesa Engelharia SA discarded the C v. D test. The Court held that the AA law is to be determined by undertaking a three-step inquiry into (i) express choice, (ii) implied choice and (iii) closest and most real connection. Where the arbitration agreement forms a part of the main contract, “[a] search for an implied choice of proper law to govern the arbitration agreement is therefore likely (as the dicta in the earlier cases indicate) to lead to the conclusion that the parties intended the arbitration agreement to be governed by the same system of law as the substantive contract, unless there are other factors present which point to a different conclusion.”

In Enka, the Court of Appeal engaged in a comprehensive analysis of the existing authorities on this issue and restored the primacy of curial law in determining the AA law. The facts of the case are these: the contract contained an arbitration agreement designating London as the seat of arbitration and the parties agreed that the main contract law was Russian law. The first respondent (‘Chubb’) filed proceedings before the Moscow Arbitrazh Court against Enka (and 10 other parties), which, according to the appellant (‘Enka’), were in breach of the arbitration agreement. Enka instituted proceedings before the High Court of Justice seeking an anti-suit injunction against Chubb and its associate companies. The High Court refused to grant the injunction relying on forum non conveniens. In Enka’sappeal, two issues fell for the Court of Appeal’s consideration.

The first issue was whether an English court has the jurisdiction to grant an anti-suit injunction to restrain foreign court proceedings initiated in breach of a London arbitration clause. Popplewell LJ held that a London arbitration clause empowers English courts to exercise all powers under law, and not merely supervisory jurisdiction under the English Arbitration Act, 1996. (Interestingly, the Court termed the English court’s jurisdiction as ‘curial jurisdiction’ and rejected the often-used phrase – ‘supervisory jurisdiction’ – to more accurately indicate the scope of its powers). Consequently, this includes the power to grant anti-suit injunctions.

The second and more crucial issue (for the purposes of this post) was whether the AA law in this case was Russian law or English law. The Court held that the AA law is to be determined in accordance with the three-step enquiry under English common law as held in Sulamerica, viz. (i) express choice; (ii) implied choice; (iii) closest and most real connection. Where the arbitration agreement does not expressly provide for the AA law, “there is a strong presumption that the parties have impliedly chosen the curial law as the AA law.” This general primacy of curial law may yield to the main contract law only if there are“powerful countervailing factors” in the facts of a given case. Two bases of the Court’s reasoning are particularly noteworthy.

First, the Court held that the presumption of AA law being the same as the curial law is a matter of implied choice and not – as was held in C v. D – an application of the closest and real connection test. Enka, therefore, envisages a stronger link between the seat of arbitration and the AA law than what was contemplated in C v. D.

Second, the overlap between the scope of curial law and that of AA law “strongly suggests” that the two should be the same. The Court noted that the provisions of the [English] Arbitration Act, 1996, which would apply where the seat of arbitration is London, do not merely affect the procedural rights of parties. They govern substantive aspects such as the formal validity of the arbitration agreement as well. In each case where parties choose London as the seat of arbitration, there will be an overlap between the scope of curial law and of AA law. Interestingly, and rightly, the Court found that this overlap is not unique to English law, since the English legislation is modeled on the UNCITRLA Model Law on International Commercial Arbitration. Given this scenario, parties must be intended to have chosen the same system of law to apply to “two closely related aspects of their relationship”.

It is submitted that parties’ presumed intention of subjecting the arbitration agreement and curial law to the same legal system is also reflected in the Convention on Recognition and Enforcement of Foreign Arbitral Awards, 1958. Article V(1)(a) of the Convention, which is the choice of law provision governing the validity of the arbitration agreement, directs the enforcement court to apply the curial law where parties have failed to choose the AA law. Determining the validity of the arbitration agreement in accordance with curial law would align the methodology of curial courts and the arbitral tribunal along with that of enforcement courts. This is not to suggest that the outcome would necessarily be the same in the two instances (the Dallah case is a classic example of the curial court and the enforcement court arriving at opposite conclusions). It would nonetheless diminish the possibility of inconsistent results at the two stages of arbitration.

Consequently, Enka rightly tilts the scale back in favour of the curial law for determining the AA law. It also reinforces the distinction between two distinct features of an international contract, i.e. the rights and obligations of parties as to the substance of the dispute on one hand and all aspects relating to the dispute settlement mechanism on the other.