2017 (2) TMI 1570 - HC - Indian Laws

Award set aside: no arbitration agreement under Section 7, mandatory Section 21 notice failed, Section 12(2) non-disclosure

ALUPRO BUILDING SYSTEMS PVT LTD Versus OZONE OVERSEAS PVT LTD

The HC set aside the arbitral award, holding there was no arbitration agreement under Section 7 so the arbitrator lacked jurisdiction. The Court further ... Challenge to Arbitral Award - no arbitration agreement between the parties as contemplated under Section 7 of A&C Act - HELD THAT:- The Court finds that the facts of the case at hand are more or less similar to the facts of the above decision in Taipack Limited & Ors. v. Ram Kishore Nagar Mal [2007 (5) TMI 654 - DELHI HIGH COURT]. Here also, the Respondent seeks to rely upon the endorsement on each of the invoices. That endorsement is only for the quantities as indicated in the invoices having been received. There is no deemed acceptance of the conditions appended to the invoices. The mere endorsement of Mr. Sanjeev that the quantity is ok cannot lead to an inference that the Petitioner agreed to the arbitration clause printed o the invoice - In the present case, there was no arbitration agreement between the parties which could be validly invoked by the Respondent. Consequently, the Arbitrator lacked jurisdiction to enter upon reference and proceed with the arbitration. The impugned Award must, therefore, be declared to be null and void. Is the notice under Section 21 mandatory? - HELD THAT:- Considering that the running theme of the Act is the consent or agreement between the parties at every stage, Section 21 performs an important function of forging such consensus on several aspects viz. the scope of the disputes, the determination of which disputes remain unresolved; of which disputes are time-barred; of identification of the claims and counter-claims and most importantly, on the choice of arbitrator. Thus, the inescapable conclusion on a proper interpretation of Section 21 of the Act is that in the absence of an agreement to the contrary, the notice under Section 21 of the Act by the claimant invoking the arbitration clause, preceding the reference of disputes to arbitration, is mandatory. In other words, without such notice, the arbitration proceedings that are commenced would be unsustainable in law. One of the prayers in the suit was for a declaration that invocation of the arbitration clause by Defendant No. 1 was invalid and liable to be struck down. The suit was resisted by Defendant No. 1 by pointing out that as long as the existence of the arbitration clause was not denied by the Plaintiff, all questions pertaining to the validity of the arbitral proceedings, including non-compliance with the procedure for invocation of the arbitration clause, ought to be raised before and examined by the sole Arbitrator. The Court is of the view that the present arbitration proceedings, being held without a notice by the Respondent under Section 21 invoking the arbitration clause being received by the Petitioner, are invalid. The only exception to this would have been an agreement to the contrary between the parties. There is no such agreement by which the Petitioner could be said to have waived the requirement of notice under Section 21 of the Act. The impugned Award in the present case is therefore opposed to the fundamental policy of Indian law since the mandatory requirement of the Act has not been complied with. The ground under Section 34 (2) (b) (ii) of the Act is attracted. Therefore, the impugned Award is liable to be set aside on this ground as well. Failure by the Arbitrator to make the requisite disclosure - HELD THAT:- Section 12(2) of the Act requires an Arbitrator from the time of his appointment and throughout the arbitral proceedings, to mandatorily disclose to the parties, “without delay” and “in writing any circumstances referred to in sub-section (1) unless they have already been informed of them by him.” The circumstances under sub-section (1) of Section 12 of the Act as it stood prior to 23rd October, 2015 were “any circumstances likely to give rise to justifiable doubts as to his independence or impartiality.” Turning to the case on hand, there is no denial that at the time he entered upon reference, the Arbitrator was adjudicating at least one of the claims of the Respondents in other arbitration proceedings. Admittedly, he did not disclose this fact at any time at the commencement of or during the arbitration proceedings. This fact was discovered later by the Petitioner. The averment on this aspect in the present petition has not been denied by the Respondent. In the circumstances, the Court is of the view that this is yet another ground on which the impugned Award is liable to be set aside as it is opposed to the fundamental policy of Indian law. It attracts the ground under Section 14 (1) read with Section 15 (1), viz. the Arbitrator being rendered de jure incapable of acting as such. It also attracts Section 34 (2) (b) (ii) of the Act. In view of the fact that the Court has found the impugned Award to be invalid on the three grounds as elaborated hereinbefore, the Court does not consider it necessary to examine the other grounds of challenge - The impugned Award dated 14th November 2014 is, accordingly, set aside. The petition is allowed with costs of Rs. 20,000 which will be paid by the Respondent to the Petitioner within four weeks from today. ISSUES PRESENTED AND CONSIDERED 1. Whether an arbitration agreement existed between the parties such that the arbitrator had jurisdiction to adjudicate the disputes arising from the purchase orders and invoices. 2. Whether invocation of an arbitration clause by unilateral filing of a statement of claim with an arbitrator, without prior delivery of a request to refer the dispute to arbitration under Section 21 of the Act, is permissible or fatal to the arbitration proceedings. 3. Whether an arbitrator's failure to disclose contemporaneous appointments or circumstances likely to give rise to justifiable doubts as to independence or impartiality (as required by Section 12 of the Act, pre-amendment) vitiates the award. 4. Whether the impugned award is liable to be set aside under Section 34 of the Act on grounds including lack of jurisdiction, public policy of India, breach of natural justice and arbitrator incapacity. ISSUE-WISE DETAILED ANALYSIS - Issue 1: Existence of an arbitration agreement and jurisdiction of the arbitrator Legal framework: Section 7 of the Act defines 'arbitration agreement' and prescribes that it may be contained in a document signed by the parties or in an exchange of communications providing a record of the agreement; consent and 'consensus ad idem' are essential. Jurisdiction of the arbitral tribunal depends on existence of an arbitration agreement. Precedent treatment: The Court examined prior decisions which held that terms printed on a supplier's invoice may, in certain circumstances, amount to an offer but require clear acceptance by the purchaser to form an arbitration agreement; mere acceptance of goods or payment does not automatically establish consent to invoice terms. Interpretation and reasoning: The purchase orders (POs) did not contain any arbitration clause and expressly reserved jurisdiction to courts. Invoices issued by the claimant contained an arbitration clause, but the only endorsements on invoices were quantity acknowledgements by a purchaser's agent. The Court found that such endorsements (e.g., 'quantity ok') did not amount to acceptance of the arbitration clause printed on the invoice; there was no 'agreement' or consensus on dispute resolution mode. The Court distinguished unilateral insertion of terms on an invoice from a signed agreement reflecting mutual consent. Ratio vs. Obiter: Ratio - An arbitration clause printed on the claimant's invoice is not binding unless there is evidence of the purchaser's acceptance of those specific terms; endorsements acknowledging receipt of quantity do not constitute acceptance of arbitration terms. Obiter - Observations on potential application of contractual doctrines such as implied acceptance where differently evidenced. Conclusions: No arbitration agreement existed that could validly be invoked by the claimant; the arbitrator lacked jurisdiction to adjudicate the dispute on that basis and the award is null and void for want of jurisdiction. ISSUE-WISE DETAILED ANALYSIS - Issue 2: Mandatory nature of notice under Section 21 and commencement of arbitral proceedings Legal framework: Section 21 provides that, unless otherwise agreed, arbitral proceedings commence on the date on which a request for referring the dispute to arbitration is received by the respondent. Section 43(1) and limitation implications are linked to commencement under Section 21. Precedent treatment: The Court reviewed authorities holding that Section 21 fixes the date of commencement for limitation purposes and that receipt of a request to refer the dispute is a condition precedent to commencement; some authorities hold arbitrator can decide whether Section 21 was complied with, while others concern limitation and counterclaims and do not negate the mandatory nature of Section 21. Interpretation and reasoning: The Court read Section 21 purposively: beyond limitation, it ensures the respondent is informed of claims, allows narrowing of disputes, facilitates agreement on appointment procedure, enables objections to proposed arbitrator (including disqualifications), and advances natural justice. Absent an express waiver, the notice requirement under Section 21 is mandatory; filing a statement of claim directly with a unilaterally appointed arbitrator without serving a Section 21 request frustrates consent-based appointment processes and is unsustainable. Ratio vs. Obiter: Ratio - In absence of agreement to the contrary, a claimant must serve a request under Section 21 before commencing arbitral proceedings; failure to do so invalidates the arbitration proceedings and the award. Obiter - Discussion of counterclaims and limitation clarifications in precedent does not give a license to dispense with Section 21. Conclusions: The claimant's failure to serve a notice under Section 21 rendered the arbitral proceedings invalid; the impugned award is opposed to the fundamental policy of Indian law and is liable to be set aside on this ground (attracting Section 34(2)(b)(ii) among others). ISSUE-WISE DETAILED ANALYSIS - Issue 3: Disclosure obligations under Section 12 and apparent/imputed bias Legal framework: Section 12 (pre-amendment) required an arbitrator, from appointment and throughout proceedings, to disclose in writing any circumstances likely to give rise to justifiable doubts as to independence or impartiality. Principles of natural justice and tests for bias (actual bias and apparent bias; 'real danger' and 'reasonable suspicion' tests) govern validity. Precedent treatment: The Court relied on established administrative and arbitration jurisprudence emphasizing that justice must be seen to be done and that non-disclosure creating a reasonable apprehension of bias vitiates proceedings; earlier cases set out the duty to disclose and consequences of non-disclosure. Interpretation and reasoning: The arbitrator was adjudicating contemporaneous claims involving the claimant and failed to disclose that fact at any stage. The omission was undisputed and only discovered later. Given the mandatory statutory disclosure duty and the objective tests for apparent bias, non-disclosure of such circumstances gave rise to justifiable doubts as to impartiality and rendered the arbitrator de jure incapable of acting. Ratio vs. Obiter: Ratio - Failure to disclose circumstances that could reasonably give rise to doubts as to impartiality is a ground to set aside the award; such non-disclosure attracts arbitrator incapacity principles and Section 34(2)(b)(ii). Obiter - Elaboration on tests for bias and policy justifications. Conclusions: The arbitrator's non-disclosure of contemporaneous appointments constituted a breach of Section 12 (pre-amendment), gave rise to a reasonable apprehension of bias, rendered the arbitrator incapable of acting, and independently justified setting aside the award. ISSUE-WISE DETAILED ANALYSIS - Issue 4: Setting aside the award under Section 34 - interplay of jurisdictional defect, natural justice and public policy Legal framework: Section 34 lists grounds for setting aside an award, including where the subject-matter is not capable of settlement by arbitration or the award is in conflict with the public policy of India; provisions addressing lack of proper notice and arbitrator incapacity are relevant. Precedent treatment: Authorities confirm limited interference by courts but permit setting aside where core mandatory procedures (consent-based agreement, Section 21 notice, disclosure under Section 12) are violated or where awards offend fundamental policy or natural justice. Interpretation and reasoning: The Court found at least three independent and cumulative defects: (a) absence of a binding arbitration agreement; (b) failure to serve a Section 21 request prior to commencing proceedings; and (c) arbitrator's failure to disclose circumstances raising justifiable doubts as to impartiality. Each ground independently satisfies statutory and public policy thresholds to set the award aside; together they demonstrate contravention of the Act's consent and fairness principles. Ratio vs. Obiter: Ratio - An award can be set aside under Section 34 where there is no valid arbitration agreement, where mandatory invocation/commencement procedures (Section 21) are not complied with, or where an arbitrator fails to make required disclosures causing reasonable apprehension of bias; such defects offend the fundamental policy of Indian law. Obiter - The Court did not examine additional procedural or evidentiary complaints given sufficiency of the main grounds. Conclusions: The impugned award was set aside on the above grounds; the Court declined to examine other challenges. The award was declared null and void and set aside with costs.