DELHI HIGH COURT DIRECTS THAT VALID ARBITRATION AGREEMENT IS SUPREME

Recently, a two-Judge Bench of the Delhi High Court comprising Justice Vibhu Bakhru and Justice Amit Mahajan passed a judgment dated 28.11.2022 in Web Overseas Limited Vs. Universal Industrial Plants Manufacturing Company Private Limited in Fao(Comm) 8/2021, and thereby held that the Court while determining the Application under Section 8 (Power to refer parties to arbitration where there is an arbitration agreement) cannot appoint an arbitrator or refer the disputes to arbitration under the Arbitration and Conciliation Act, 1996. The Court can only refer parties to arbitration if there is an arbitration agreement and thereafter, it is up to the parties to take appropriate action for the appointment of the arbitrator.

Facts

In this case, one, Web Overseas Limited (“Appellant”) and Universal Industrial Plants Manufacturing Company Private Limited (“Respondent”) entered into an Agreement for the purchase of an Oxygen Nitrogen Plant (“Plant”). The Respondent Company agreed to manufacture and supply the Plant with “Bochi, Italian Brand Oxygen Nitrogen Plant Model UBT –100” for a total consideration of USD 435,000 equivalent to ₹2,37,51,000/- (Rupees two crores thirty-seven lacs fifty-one thousand only) at the material time. The Respondent issued an Invoice dated 05.11.2012 for supplying the said Plant. As per the terms and conditions of the Agreement the Appellant had to pay 25% of the invoiced amount in advance i.e. ₹59,37,750/- and the balance 75% was required to be paid before the dispatch of goods.

Accordingly, the Appellant paid a sum of ₹20,00,000/- and sought extension of time for paying the balance from the Respondent. However, the Respondent refused the same. The Appellant’s contention was that both the Parties entered into discussions, and the Respondent, in supersession of the first offer, communicated a revised proposal by an Email dated 04.05.2013. As per the revised offer, the Respondent increased the price of the Plant from USD 435,000 to USD 497,500 and also hiked the consideration amount to 50% which is to be paid in advance as against 25% mentioned in the Invoice dated 05.11.2012.

The Appellant claims that it has one client in Iraq for which it had entered into the said Agreement. But the said client failed to pay the advance as required which ultimately resulted in failure of payment from the Appellant’s side. Thus the revised advance amount was not been paid and the offer lapsed. Further, the Appellant was not interested in accepting the revised terms dated 04.05.2013.

The Appellant sent multiple emails, reiterating that it had rejected the revised offer and requested a refund of ₹20,00,000/-. However, the Respondent did not refund the amount. On 18.10.2013, the Respondent sent a Legal Notice, stating that the amount of ₹20,00,000/-, advanced by the Appellant, was non-refundable.

The Appellant responded to the said Legal Notice by a Letter dated 11.11.2013, once again calling upon the Respondent to pay an amount of 20,00,000/- together with interest at the rate of 18% per annum from 30.07.2013 till the date of realization.

The Appellant instituted a Suit at Delhi District Court (“District Court”) on 13.05.2014 being CS(OS) 1467/2014 for recovery of the advance amount. The Respondent filed an Application under Section 8 (Power to refer parties to arbitration where there is an arbitration agreement) under the Arbitration and Conciliation Act, 1996 (“A&C Act”) seeking that the parties should be referred to arbitration. Thereafter, the Appellant filed an Application under Section 11 (Appointment of Arbitrator) of the A&C Act before the District Court, and the Court directed the Delhi International Arbitration Centre to appoint an arbitrator.

On 25.03.2017, the Appellant filed a Statement of Claim and the Respondent filed a Statement of Defence, on 17.05.2018 before the Arbitral Tribunal (“Tribunal”). Thereafter, on 07.07.2018, the Respondent filed a counter-claim. The Appellant filed an Application praying that the counter-claim be dismissed as being barred by limitation. The Tribunal rejected the said Application by an Order dated 24.06.2020 with the following observations:

The Tribunal had found that “the contract was snapped by the Original Claimant vide its letter dated 30.7.2013. Thus 30.7.2013 is the date when the cause of action allegedly accrued in favor of the Original Respondent to file a counterclaim for arbitration...” and the period of limitation for filing the counter-claim was three years from that date, as per Section 3(b)(ii) (Bar of limitation) of the Limitation Act, 1963 (“Limitation Act”).

Further, the Tribunal held that the Counter-Claim was barred by limitation as i.e. cause of action arose on 30.07.2013, and the Counter-Claim was filed on 07.07.2018. However, under Section 14 (Exclusion of time of proceeding bona fide in court without jurisdiction) of the Limitation Act, a counter-claim can be considered to be filed within the period of limitation as the time spent by the Respondent in pursuing its Application under Section 8 (Power to refer parties to arbitration where there is an arbitration agreement) of A&C Act was excluded. Aggrieved and dissatisfied with the Order dated 24.06.2020, the Appellant preferred an Appeal before the Delhi High Court (“High Court”).

Delhi High Court observations and conclusion

After considering the contention of both parties, the High Court found an error in the view of the Arbitral Tribunal with respect to extension of the prescribed period. The High Court added multiple grounds for reaching the said conclusion and they are as follows:

1. An application under Section 8, which essentially seeks that the parties be relegated to arbitration in respect of the subject matter of the action so instituted, cannot be construed directly and substantially as the subject matter of a counter-claim that was neither raised nor indicated in the said application.
2. Given the statutory scheme of the A&C Act, the date on which the application is filed under Section 8 of the A&C Act (or for that matter when it is disposed of) is not relevant for determining whether any claim is within the period of limitation. As stated above, in terms of Section 43(2) of the A&C Act, the date on which the arbitral proceedings commence, in terms of Section 21 of the A&C Act, is material to consider whether the claim has been raised within the period of limitation.
3. It is important to note that the scope of Section 8 of the A&C Act is limited to referring the parties to the arbitration. The court, while deciding the application under Section 8 of the A&C Act, neither has the power to appoint an arbitrator nor to refer the disputes to arbitration. If the judicial authority, before which an action is instituted, allows an application under Section 8 of the A&C Act, it merely refers the parties to the arbitration. After termination of the proceedings before the judicial authority, it would be essential for either party to take effective steps for appointment of the arbitrator, constitution of the arbitral tribunal and for reference of the disputes to arbitration.

Accordingly, the Delhi High Court, allowed the Appeal and set aside the Tribunal Order dated 24.06.2020.

Ankit Tiwari

Legal Associate

The Indian Lawyer