In the case of Malvika Rajnikant Mehta & Ors v. JESS Construction, Arbitration Application No. 425 of 2019 dated 28.04.2022, the High Court of Bombay held that the mere nomination of an Arbitrator by the parties does not imply that the parties agreed to the waiver of requirement of notice invoking Arbitration under Section 21 of the Arbitration and Conciliation Act, 1996 (“the Act”).
Mr. Rajnikant Dhirajlal Mehta (hereinafter referred to as “the Applicant”) owned the property situated at Oghadbhai Chawl, Ghatkopar, Mumbai. The Applicant executed a Deed of Conveyance (hereinafter referred to as “the Deed”) for the said property in favour of JESS Construction (hereinafter referred to as “the Respondent”).
The Deed specified the Respondent’s obligation to construct a new building on the suit premises and hand over the premises, together with two car parking spots, within 42 months. In the event of default, the Respondent had agreed to pay interest and liquidated damages at the end of each month following the expiration of the 42-month term.
The terms of the Deed were thereafter modified to stipulate that the Applicant would deliver the newly built premises within 34 months. The Deed further stipulated the dispute resolution mechanism as Arbitration, to be presided over by Mr. Kirti K. Shah, an Architect, as the Sole Arbitrator.
When the Respondent failed to perform its obligations under the Deed, the Applicant claimed to have invoked Arbitration by filing a Statement of Claim before the named Sole Arbitrator. However, the Respondent took a stand that the Arbitrator was ineligible for appointment as an Arbitrator due to the restrictions contained in Section 12(5) read with the Seventh Schedule of the Act.
Thereafter, the Respondent filed an application before the Arbitral Tribunal, calling upon the Sole Arbitrator to recuse himself, due to his continued professional and familial relationship with the Applicant. Resultantly, the Sole Arbitrator recused himself from the Arbitration.
As the Arbitrator’s mandate had expired, the Applicant issued a notice to the Respondent to consent for the appointment of any of the three persons named by the Applicant as Sole Arbitrator. However, the Respondent by its reply suggested the names of three other people for appointment of Arbitrator, one of which was chosen by the Applicant to be appointed as the Sole Arbitrator. Thereafter, the person chosen as the Sole Arbitrator informed the parties that it would not be possible for him to act as an Arbitrator.
Concurrently, the Respondent brought claims against the Applicant in connection with the same transaction, invoked Arbitration, and proposed a former judge of the Bombay High Court as the Sole Arbitrator. The Applicant rejected the said appointment and called upon the Respondent to have a joint adjudication of the Applicant’s and the Respondent’s claims, and the Applicant proposed the name of a person for appointment as Arbitrator. In response, the Respondent offered the names of two more Arbitrators, which were declined by the Applicant. The said names were rejected by the Applicant and the Applicant again suggested another name for appointment as Arbitrator.
In light of the above facts, the Applicant approached the High Court of Bombay (hereinafter referred to as “the High Court”) with a case that multiple attempts made by the Applicant and the Respondent to appoint the Sole Arbitrator by consensus had failed. Therefore, the Applicant sought for the appointment of an Arbitrator by invoking the High Court’s power under Section 11 of the Act.
ISSUES BEFORE THE HIGH COURT
- Whether the entire exercise of invoking Arbitration and seeking appointment of an Arbitrator vitiated due to the absence of a proper notice invoking Arbitration pursuant to Section 21 of the Act?
- Whether the substantive claim is ex-facie barred by limitation?
CONTENTION OF THE PARTIES
The Applicant contended that as the parties had failed to appoint the Sole Arbitrator in accordance with the Arbitration Agreement, the High Court has the authority to appoint the Sole Arbitrator under Section 11(5) of the Act.
The Applicant submitted that the Statement of Claim filed before the Sole Arbitrator was forwarded to the Respondent, and thus, the Applicant had served the Respondent a notice invoking Arbitration in compliance with Section 21 of the Act.
The Applicant further stated that as the parties had arrived at a consensus on the appointment of an Arbitrator, the challenge to the invocation of Arbitration by resorting to Section 21 of the Act is legally untenable. The Applicant noted that as Section 21 of the Act provides that “unless otherwise agreed by the parties” and that the parties had agreed otherwise to appointment an Arbitrator, it cannot be said that the Arbitration was not lawfully invoked.
With regards to the issue of limitation, the Applicant submitted that the invocation of Arbitration by lodging the Statement of Claim with the previous Sole Arbitrator was well within the period of limitation. The Applicant further urged that the issue of limitation could not be legitimately inquired into by the High Court while exercising jurisdiction under Section 11 of the Act, and that the proper forum for determination of the said issue was the Arbitral Tribunal.
The Respondent resisted the present application and contended that the application is not tenable as the Applicant did not invoke the Arbitration Agreement contained in the Deed through notice of invocation of Arbitration as required by Section 21 of the Act. The Respondent argued that as the mandatory notice under Section 21 of the Act was not issued, the Arbitration cannot be said to have been lawfully invoked and thus, the High Court does not get the jurisdiction to appoint an Arbitrator under Section 11 of the Act.
The Respondent stated that the underlying substantive claim of the Applicant is ex-facie time barred by limitation, as the cause of action arose on 31.10.2015 whereas the Applicant called upon the Respondent to give consent to the Appointment of Arbitrator by notice dated 18.01.2019. Thus, the Respondent contended that the High Court would be justified in interdicting the Arbitral proceedings at the stage of reference itself as the claim falls in the category of rare and exceptional cases where the claim is manifestly barred by limitation.
DECISIONS AND FINDINGS
The High Court noted that the scope of legislative inquiry after the Arbitration and Conciliation (Amendment) Act, 2015 (hereinafter referred to as “the Amendment Act”) is restricted to the examination of existence of an Arbitration Agreement.
The High Court cited the Supreme Court’s decision in Duro Felguera S.A. v. Gangavaram Port Limited (2017) 9 SCC 729 with regard to the legislative changes introduced by the Amendment Act, wherein it was observed the wide scope of inquiry at the stage of Section 11 of the Act continued only till before the Amendment Act was enforced, as held in the cases of SBP & Co. v. Patel Engineering Ltd. (2005) 8 SCC 618 and National Insurance Co. Ltd. v. Boghara Polyfab Pvt. Ltd. (2009) 1 SCC 267.
The High Court observed that following the Amendment Act, the Courts are only required to determine the existence of an Arbitration Agreement, in accordance with the legislative policy to minimize Court’s intervention as incorporated in Section 11(6A) of the Act and held in Mayawati Trading (P) Ltd. v. Pradyuat Deb Burman (2019) 8 SCC 714 and Bharat Sanchar Nigam Limited and Others vs. Nortel Networks India Private Limited (2021) 5 Supreme Court Cases 738 (“Nortel Networks case”). The High Court emphasized the below mentioned position in law taken by the Supreme Court in the Nortel Networks case:
“47. It is only in the very limited category of cases, where there is not even a vestige of doubt that the claim is ex facie time-barred, or that the dispute is non-arbitrable, that the court may decline to make the reference. However, if there is even the slightest doubt, the rule is to refer the disputes to arbitration. Otherwise it would encroach upon what is essentially a matter to be determined by the tribunal.”
Taking into consideration the aforementioned judicial precedents, the High Court noted that there was no dispute about the existence of the main contract evidenced by the Deed or the existence of an Arbitration Agreement therein, and the fact that disputes had arisen between the parties was not contestable.
Regarding the issue of the claim being time barred, the High Court relied on the decision in Nortel Networks Case, wherein the Supreme Court held that:
“53.2 In rare and exceptional cases, where the claims are ex facie time-barred, and it is manifest that there is no subsisting dispute, the Court may refuse to make the reference.”
In light of the Supreme Court’s decision in Nortel Networks case, the High Court stated that the issue of limitation, which is generally a mixed question of fact and law, must be addressed by the Arbitral Tribunal. The High Court noted that the only case where the Court can decline to exercise jurisdiction under Section 11 of the Act is when the substantive claim is hopelessly barred by limitation, to ensure that a non-existent dispute is not referred to Arbitration.
The High Court thus held that the substantive claim cannot be inferred to be barred by limitation, as the lodging of Statement of Claim before the named Arbitrator, whereby the Applicant claimed to invoke Arbitration, prima facie appears within the period of limitation.
With regards to the issue of non-compliance with Section 21 of the Act, the High Court stated that as Section 21 of the Act begins with the exclusion clause “Unless otherwise agreed by the parties”, it is implied that the parties can by agreement opt out of the precondition of giving prior notice of Arbitration.
The High Court observed that the Applicant’s submission that the parties had named the Arbitrator for resolution of disputes cannot be stretched to their desire, and held that:
“The mere fact that the parties have named the Arbitrator would not imply that the parties have agreed to waive the requirement of notice contemplated under Section 21 of the Act. The notice under Section 21, as we have seen above, serves definite purposes. One, it puts the adversary on notice as to the nature of the claim, even when the Arbitrator is named by the parties. Two, it provides an opportunity to the adversary to contest the admissibility of the claims on the threshold. Three, it allows adversary to raise the issue of the impartiality of the Arbitrator and the consequent disqualification. Four, the date of the receipt of the notice has a bearing upon the date of the commencement of the arbitration. Therefore, an inference that the parties had waived the notice cannot be drawn merely for the reason that the parties had named an Arbitrator.”
The High Court noted that it is at dispute that whether the communication made by the Applicant to the Arbitrator was also served upon the Respondent, and whether the said communication constituted a notice of invocation of Arbitration under Section 21 of the Act.
In accordance with the legislative policy and judicial precedents of minimal intervention at the stage of reference to Arbitration, the High Court held that the said questions are to be legitimately left to be examined by the Arbitrator.
The High Court further observed that the Respondent’s notice of invoking Arbitration underscores the presence of the Arbitration Agreement, as well as the existence of disputes between the parties and even the arbitrability of such disputes. As a result, the only point of contention between both the parties was the appointment of an Arbitrator.
The High Court, therefore, noted that the other contentions raised by the parties in this application pale in significance and that the parties are at liberty to raise all other contentions as permissible in law before the Arbitrator, including those envisaged by Section 16 of the Act.
Resultantly, the High Court allowed the application and appointed a former Judge of the High Court as the Sole Arbitrator to adjudicate upon the claims and counterclaims, and the dispute arising out of the Deed between the parties.
The High Court, through this decision, emphasized on the importance of party neutrality and independence, with a focus on minimal judicial intervention in tune with the legislative policy behind the Act.
Although the application before the High Court was a straightforward issue of appointment of Arbitrator by determining the existence of the Arbitration Agreement, the parties put forth other issues before the High Court, which were beyond the scope of judicial purview in an application under Section 11 of the Act.
The High Court, keeping in mind the need for minimum judicial interference in Arbitral proceedings, passed an Order for the appointment of Arbitrator and directed the parties to refer the issues, including substantive claims being barred by limitation, and non-compliance with Section 21 of the Act, to the Arbitral Tribunal for adjudication.
However, the High Court made certain crucial observations with regards to the non-waiver of requirement to issue notice invoking Arbitration under Section 21 of the Act only on the mere nomination of an Arbitrator by the parties, and the four definite purposes of the notice invoking Arbitration.
Such observations of the High Court are of utmost significance to a party to an arbitrable dispute seeking to commence Arbitration, as it highlights the need for issuance and service of notice invoking Arbitration under Section 21 of the Act by one party to the other party, prior to the commencement of actual Arbitral proceedings.
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