Failure to Adjudicate on a 'Fundamental Issue' could render an Arbitral Award contrary to 'Public Policy'

The Delhi High Court recently passed an important judgment pertaining to the power of courts to set aside arbitral awards under Section 34 of the Arbitration and Conciliation Act, 1996. The case involved a dispute between the National Highway Authority of India ("NHAI") and Ssangyong Engineering & Construction Co. Ltd. ("Ssangyong") regarding the construction of a highway project.

 

NHAI had awarded the contract for the project to Ssangyong. The agreement between the parties contained an arbitration clause for resolution of disputes. A dispute arose between the parties regarding certain payment certificates issued by the engineer. Ssangyong invoked arbitration.

Before the arbitral tribunal, NHAI raised several objections to the payment certificates. However, the tribunal passed an award in favor of Ssangyong. Aggrieved by the award, NHAI approached the Delhi High Court seeking to set aside the award under Section 34 of the Arbitration Act.

 

NHAI's primary contention was that the tribunal failed to adjudicate on key issues raised during the arbitration proceedings. It argued that the tribunal did not examine NHAI's objections to the payment certificates and simply concluded that the amount was accepted by NHAI without demur.

 

The Delhi High Court agreed with NHAI's arguments. It held that non-adjudication of issues going to the root of the matter would violate principles of natural justice and render the award opposed to public policy. By not examining NHAI's objections to the payment certificates, the tribunal failed to discharge its basic functions.

 

The Court thus set aside the arbitral award, holding that non-adjudication of a key issue referred to arbitration amounts to an award contrary to public policy under Section 34 of the Arbitration Act. This judgment reinforces the importance of a full and fair adjudication of disputes by arbitral tribunals.

JUDGMENT

Supreme Court Examining the Scope of High Courts' Power to Grant and Vacate Interim Relief

Introduction

The Supreme Court of India, in its judgment dated February 29, 2024, addressed the scope of High Courts' power to grant and vacate interim relief in civil and criminal proceedings. The case arose from a reference made to a larger bench to reconsider certain aspects of the Court's earlier decision in Asian Resurfacing of Road Agency Private Limited & Anr. v. Central Bureau of Investigation.

The key issues examined by the Supreme Court

Whether the Supreme Court can, under Article 142 of the Constitution, order the automatic vacation of all interim orders of High Courts staying civil and criminal proceedings upon the expiry of a certain period.

Whether the Supreme Court can, under Article 142, direct High Courts to decide pending cases involving interim stay orders on a day-to-day basis and within a fixed period.

Factual Background

The judgment provides a detailed factual background leading up to the present reference. In the earlier decision of Asian Resurfacing, the Supreme Court had laid down guidelines regarding the High Courts' power to grant and extend interim stays of criminal trials, particularly under the Prevention of Corruption Act. The Court had directed that interim stays would automatically lapse after six months unless extended by a reasoned order.

However, certain concerns were raised regarding the automatic vacation of interim stays without the application of judicial mind. The present reference was made to re-examine the correctness of the directions issued in Asian Resurfacing.

Key Observations and Findings on Automatic Vacation of Interim Orders

The Supreme Court noted that the principle of automatic vacation of interim orders, without the application of judicial mind, was liable to result in a serious miscarriage of justice. The Court observed that the delay in disposing of cases is not always attributable to the conduct of parties, and may also be on account of the inability of the court to take up proceedings expeditiously.

The Court held that an order granting or vacating interim relief must be the result of a judicial application of mind, and cannot be automatic. Automatic vacation of interim orders was characterized as a form of "judicial legislation" which the Court cannot engage in.

Time-Bound Disposal of Cases with Interim Stays

The Court acknowledged the need to ensure expeditious disposal of cases where interim stays have been granted. However, it noted that the Constitution Bench decisions in Abdul Rehman Antulay and P. Ramachandra Rao had held that it is not permissible for the Supreme Court to fix rigid timelines for the completion of trials.

The Court observed that while the objective of speedy justice is important, it must be balanced with the principles of natural justice and fair procedure. Directing High Courts to decide cases with interim stays on a day-to-day basis and within a fixed period was held to be an excessive encroachment on the High Courts' jurisdictional powers.

High Courts' Power under Article 226

The judgment emphasized that Article 226 of the Constitution, which empowers High Courts to issue writs, is a part of the basic structure of the Constitution. This power of the High Courts cannot be shut out or whittled down by the exercise of the Supreme Court's powers under Articles 141 and 142.

The Court recognized the High Courts as coordinate constitutional courts, not judicially subordinate to the Supreme Court. It held that the High Courts' discretion in granting and vacating interim relief cannot be taken away by the Supreme Court's exercise of powers under Article 142.

Conclusions

The Supreme Court ultimately concluded that the directions issued in Asian Resurfacing regarding the automatic vacation of interim orders and the time-bound disposal of cases with interim stays cannot be sustained. The Court held that interim orders can only be vacated through a reasoned judicial order, after due consideration of the relevant factors.

The judgment reaffirms the High Courts' constitutional position and their autonomy in exercising their powers under Article 226, particularly with respect to the granting and vacating of interim relief. It cautions against excessive judicial interventions that may undermine the principles of natural justice and the separation of powers between the judiciary.

This landmark decision serves as an important precedent on the scope and limits of the Supreme Court's power under Article 142, as well as the High Courts' jurisdiction in matters of interim relief.

Judgment

THE ISSUE OF UPDATION OF COUNTERCLAIMS IN ARBITRATION

INTRODUCTION

The recent judgment of the Delhi High Court in NTPC Ltd. v. Larsen & Toubro Ltd. & Anr. examines important questions relating to the scope and power of an arbitral tribunal to allow updation or revision of counterclaims during the pendency of arbitration proceedings. The case arose from a contract dispute between NTPC Ltd. and a joint venture of Larsen & Toubro Ltd. and Alpine Mayreder Bau GmbH (referred to as the 'JV') relating to an infrastructure project. Certain disputes arose between the parties leading to termination of the contract by NTPC and invocation of arbitration proceedings.

During the pendency of the arbitration, NTPC filed an application before the arbitral tribunal seeking permission to update/revise the amounts claimed in certain counterclaims to bring them up to date. However, the tribunal rejected the application holding that it was filed belatedly. Aggrieved, NTPC filed a petition under Section 34 of the Arbitration & Conciliation Act, 1996 challenging the tribunal's order. The key issues before the High Court pertained to the maintainability of the petition, scope of amendment/updation in arbitration and whether the tribunal exceeded its jurisdiction in rejecting NTPC's application.

This article analyses the various issues discussed and principles laid down by the High Court in this significant judgment, which offers useful guidance on an arbitrator's powers relating to amendment/updation of pleadings.

MAINTAINABILITY OF THE PETITION UNDER SECTION 34

One of the preliminary issues debated before the High Court was whether the impugned order of the tribunal rejecting NTPC's application for updation was an 'award' against which a challenge could lie under Section 34 of the Arbitration Act.

NTPC contended that the order had the trappings of finality as it conclusively determined that the updated claims could not be adjudicated. By rejecting the application, substantive rights of NTPC were decided, precluding it from claiming the relief sought in future. It was argued this amounted to dismissal of claims, making the order an 'award' under Section 2(1)(c) read with Section 31(6).

The High Court accepted NTPC's arguments and held the petition to be maintainable. It relied on precedents like Cinevistaas Ltd. v. Prasar Bharti and Farmers Fertilizer Co-operative Ltd. v. Bhadra Products which laid down that any point of dispute which has to be answered by the tribunal can be the subject matter of an interim award. By finally rejecting the updated claims, the tribunal had conclusively determined the lis, making the order challengeable under Section 34. This establishes the wide scope of interim awards under the Arbitration Act.

SCOPE OF AMENDMENT/UPDATION IN ARBITRATION

The next issue was whether the tribunal could have allowed amendment/updation of counterclaims. NTPC argued that its application sought mere updation of amounts without changing the cause of action or pleadings. Further, the counterclaims were filed reserving the right to revise them as the situation arises, and cause of action was still continuing due to non-completion of works.

The High Court accepted NTPC's submissions and held that where the amendment does not add new facts but is only a technical updation, it ought to be permitted broadly. It noted that amendment is considered liberally under Section 23 unlike suits governed by rigid CPC provisions. Reliance was placed on A.K. Gupta wherein amendment was allowed despite limitation having expired. The court further observed that no prejudice was caused to the other side due to mere updation.

On the question of delay, the High Court held that as per clauses 63.1 to 63.3 of the contract, cause of action would persist till 3 years after defect liability period. As the work was still incomplete, cause of action for counterclaims was continuing. Hence, there was no delay or limitation in seeking mere updation.

The judgment thus lays down the principle that where the amendment/updation is technical in nature without changing the cause of action or pleadings, and where cause of action is continuing, the arbitral tribunal should allow such updation/revision of claims to bring amounts up to date. A liberal approach is to be adopted in this regard keeping in mind the objectives of arbitration.

WHETHER TRIBUNAL EXCEEDED ITS JURISDICTION?

Finally, the High Court considered whether the tribunal exceeded its jurisdiction in rejecting the application. It noted that the rejection was solely based on delay under Section 23(3) of the Act ignoring the specific clauses of the contract fixing timelines.

Relying on ONGC v. Saw Pipes, the court held that an arbitral tribunal acts as a court as well as creature of the contract. It must remain faithful to the terms of reference and the contract. By rejecting the application solely on ground of delay without considering the contract, the tribunal had exceeded its jurisdiction and acted against the consent of parties.

The High Court thus set aside the tribunal's order, holding that it failed to properly appreciate the terms of contract and the facts of the case. The rejection of the application was unsustainable being contrary to principles of amendment and liberal approach in arbitration.

CONCLUSION

The NTPC v. L&T judgment provides valuable guidance on an arbitrator's powers regarding amendment/updation of pleadings and claims during arbitration proceedings. It establishes that arbitral tribunals must adopt a broad and flexible approach while dealing with such requests, keeping in mind objectives of speed and economy. Where the amendment is merely technical updating amounts without altering cause of action or prejudice to other side, it should be permitted. Most importantly, the terms of contract and facts of each case require careful examination before rejecting any such application. The ruling will ensure that substantive rights of parties are safeguarded and technicalities do not come in the way of full and final settlement of disputes in arbitration.

LINK to Judgment: https://www.livelaw.in/pdf_upload/ntpc-vs-lt-465754.pdf

The Importance of Incentives in the Pre-pack Resolution Route - A Key Consideration

Introduction:

The Insolvency and Bankruptcy Code (IBC) has recently undergone an amendment that introduces the concept of a pre-packaged insolvency resolution process (PIRP) for micro, small, and medium enterprises (MSMEs). This development comes as a response to the financial strain faced by MSMEs due to the COVID-19 pandemic. The PIRP aims to provide a hybrid mechanism for negotiated debt restructuring, which, upon approval by the National Company Law Tribunal (NCLT), becomes binding on all stakeholders. However, to ensure the effectiveness of the PIRP, it is crucial to incentivize MSMEs to utilize this route.

Background:

MSMEs play a significant role in the Indian economy, accounting for approximately 30% of the gross domestic product and employing over 110 million individuals. These enterprises often lack formal corporate structures and rely on the personal assets of their founders for debt funding. The informal nature of their organization and the dependence on founder management make MSMEs hesitant to engage in an insolvency resolution process that could potentially displace their founders. Additionally, the complexity of the process, high costs involved, and the social stigma associated with personal insolvency further discourage MSMEs from accessing available mechanisms.

The Pre-Pack Resolution Route:

The PIRP aims to minimize disruption to business operations and ensure job preservation by allowing the existing management of the MSME to retain control during the process. Unlike the corporate insolvency resolution process (CIRP), the PIRP requires certain fundamental decisions to be approved by the Committee of Creditors (CoC) and is monitored by a resolution professional (RP). In cases where the existing management mismanages the affairs of the MSME or commits fraud, the management can be handed over to the RP, subject to the approval of the CoC and the NCLT.

Challenges and Considerations:

While the PIRP is a well-intentioned initiative, its success in resolving stress on corporate debtors in the MSME sector depends on addressing implementation challenges and potentially revisiting its design. The ambitious timeline for completing the PIRP could prove to be a significant challenge, considering the delays experienced in the CIRP process. Potential delays in inviting and considering resolution plans, as well as the approval process by the CoC, cannot be overlooked. Moreover, the requirement for duplicate information from the MSME and the RP could also lead to additional delays.

The Need for Incentives:

To encourage MSMEs to opt for the PIRP route, it is essential to provide them with incentives. These incentives could include reduced costs, a simplified process, alleviating the fear of losing one's business, and relaxing eligibility conditions for submitting the base resolution plan. Currently, the design of the PIRP closely resembles that of the CIRP, albeit with truncated timelines. While it is crucial to have appropriate checks and balances, an over-prescriptive approach could deter MSMEs from exploring the PIRP route.

Conclusion:

In conclusion, the introduction of the PIRP in the IBC for MSMEs is a significant step towards addressing financial distress caused by the pandemic. However, the success of this resolution process depends on ironing out implementation challenges and providing the necessary incentives to encourage MSMEs to utilize the route. By striking the right balance between regulatory oversight and practical considerations, the PIRP can effectively contribute to the recovery and growth of the MSME sector in India.

Promoting Timely Payments to Micro and Small Enterprises: Understanding Section 43B(h) of the Income Tax Act, 1961

Introduction:

In today's competitive business landscape, it is crucial to support the growth of micro and small enterprises (MSEs). To encourage prompt payments by business enterprises to MSEs, Section 43B(h) was introduced in the Income Tax Act, 1961. This provision outlines the implications for tax deduction and allowance when payments to MSEs are not made within the prescribed timeline. In this article, we will delve into the details of Section 43B(h) and its impact on taxpayers.

Key Provisions:

Section 43B(h) of the Income Tax Act states that any sum payable to a 'micro enterprise' or a 'small enterprise' beyond the specified time outlined in the Micro, Small and Medium Enterprises Development Act, 2006 (MSMED Act) will only be allowed as a tax deduction or allowance in the year in which the payment is actually made. It is important to note that this provision is excluded from the first proviso of Section 43B, which allows deductions for expenses made after the relevant financial year but within the due date of filing the income tax return.

Classification of MSEs:

To determine the classification of MSEs, criteria have been provided by the Ministry of Micro, Small and Medium Enterprises (MSME). A 'micro enterprise' is defined as an enterprise with an investment in plant and machinery or equipment not exceeding INR 10 million and turnover not exceeding INR 50 million. On the other hand, a 'small enterprise' is an enterprise with an investment in plant and machinery or equipment not exceeding INR 100 million and turnover not exceeding INR 500 million.

Payment Timelines:

The payment timelines for MSEs are outlined in Section 15 of the MSMED Act. If payment timelines have been specified in an agreement between the buyer and MSE, the payment should be made within the due date specified in the agreement or within 45 days from the 'day of acceptance,' which refers to the actual delivery of goods or rendering of services. If payment timelines have not been specified, the payment should be made within 15 days from the day of acceptance.

Implications and Exceptions:

Failure to make payments within the specified timelines can have implications for tax deductions and allowances. Payments made within the same financial year or within the specified time will not be subject to disallowance. However, payments made after the specified time may be disallowed, and the amount disallowed in the preceding financial year will be allowed on payment in the subsequent year. It is worth noting that interest on delayed payments under Section 16 of the MSMED Act will also be disallowed.

Capital Expenditure and GST Component:

Section 43B(h) is applicable to payments made to MSEs that are otherwise allowable under the Income Tax Act. However, it is important to understand that capital expenditure is subject to specific provisions of the IT Act, and Section 43B(h) may not be applicable in all cases. Similarly, the treatment of the GST component of payments to MSEs varies depending on whether it is claimed as input credit or charged as expenditure.

Conclusion:

Section 43B(h) of the Income Tax Act plays a crucial role in promoting timely payments to micro and small enterprises. By understanding the provisions and implications of this section, both businesses and MSEs can ensure compliance and support the growth of the MSE sector. It is important for taxpayers to meet the payment timelines specified in the MSMED Act to avoid potential disallowances and optimize their tax deductions and allowances.

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