Delhi High Court: Technical breach of Natural Justice to challenge the enforcement of foreign award in India

Delhi-High-Court

In a recent case of LDK Solar Hi-Tech (Suzuhou) Co. Ltd. vs. Hindustan Cleanenergy Limited (formerly Moser Bear Clean Energy Limited) EX.P.278/2015 dated 4th July, 2008, the Delhi High Court of India addressed the challenge to the enforcement of China International Economic and Trade Arbitration Commission (CIETAC) award on the ground of breach of natural justice due to alleged lack of jurisdiction of the arbitral tribunal and improper service of notice. Brief analysis given below:

Factual Matrix

The dispute culminated from a contract executed for the supply of solar panel between Enertec and LDK Solar Hi-Tech (Suzuhou) Co. Ltd. (Suzuhou) which is the subsidiary of Hindustan Cleanenergy Limited (HCL). HCL was the guarantor on behalf of Suzuhou  for the due discharge of obligations by Enertec under the contract. Suzuhou failed to discharge its liability and as a result Suzuhou commenced arbitration. During the arbitration proceedings Enertec was deleted as a party on request of Suzuhou.

Applicable Legal Principles

Section 48 of the Indian Arbitration Act

48. Conditions for enforcement of foreign awards.

(1) Enforcement of a foreign award may be refused, at the request of the party against whom it is invoked, only if that party furnishes to the court proof that—

(a) the parties to the agreement referred to in section 44 were, under the law applicable to them, under some incapacity, or the said agreement is not valid under the law to which the parties have subjected it or, failing any indication thereon, under the law of the country where the award was made; or

(b) the party against whom the award is invoked was not given proper notice of the appointment of the arbitrator or of the arbitral proceedings or was otherwise unable to present his case; or

(c) the award deals with a difference not contemplated by or not falling within the terms of the submission to arbitration, or it contains decisions on matters beyond the scope of the submission to arbitration:

Provided that, if the decisions on matters submitted to arbitration can be separated from those not so submitted, that part of the award which contains decisions on matters submitted to arbitration may be enforced; or

(d) the composition of the arbitral authority or the arbitral procedure was not in accordance with the agreement of the parties, or, failing such agreement, was not in accordance with the law of the country where the arbitration took place ; or

(e) the award has not yet become binding on the parties, or has been set aside or suspended by a competent authority of the country in which, or under the law of which, that award was made.

(2) Enforcement of an arbitral award may also be refused if the Court finds that—

(a) the subject-matter of the difference is not capable of settlement by arbitration under the law of India; or

(b) the enforcement of the award would be contrary to the public policy of India.”

Article 2(7) and Article 2(8) of CIETAC Rules, 2005

“Article 2 Name and Structure

7 The CIETAC is based in Beijing, and has a South China Sub-Commission (formerly known as Shenzhen Sub-Commission) in Shenzhep Special Economic Zone and a Shanghai Sub-Commission in Shanghai. These Sub-Commissions are integral parts of the CIETAC. The Sub-Commissions have their respective secretariats, which handle their day-to-day work under the direction of the Secretaries-General of the respective Sub-Commissions.

8 The parties may agree to have their disputes arbitrated by the CIETAC in Beijing, the South China Sub-Commission in Shenzhen or the Shanghai Sub-Commission in Shanghai. In the absence of such an agreement, the Claimant shall have the option to submit the case for arbitration by the CIETAC in Beijing, the South China Sub-Commission in Shenzhen or the Shanghai Sub-Commission in Shanghai. When such option is exercised, the first choice by the party shall prevail. In case of any dispute, the final decision shall be made by the CIETAC.”

HCL’s Contentions

HCL contended that CIETAC had no jurisdiction to entertain the claims filed by the Suzuhou as in terms of the Arbitration Agreement the parties were to refer the disputes between them for adjudication to the CIETAC, Shanghai Sub-Commission and the parties had agreed to have their disputes arbitrated through Shanghai Sub-Commission and not through CIETAC in Beijing.

Further it was contended that CIETAC issued revised CIETAC Arbitration Rules in 2012 whereunder, CIETAC Shanghai Sub-Commission, which was renamed as Shanghai International Economic and Trade Arbitration Commission and is also referred to as Shanghai International Arbitration Centre, became independent of CIETAC and implemented its own Arbitration Rules. As the Arbitration Agreement between the parties was to refer disputes to CIETAC Shanghai Sub-Commission, it was the contention of HCL that the disputes could only have been referred to Shanghai International Economic and Trade Arbitration Commission / Shanghai International Arbitration Centre and not to CIETAC, Beijing, as was done by Suzuhou.

HCL also challenged the award on the ground of breach of principles of natural justice under Section 48(1)(b) of the Indian Arbitration Act contending that the appointment of the substitute Arbitrator by the CIETAC is in violation of Article 31(3) of the CIETAC Rules. Under Article 35 of the CIETAC Rules, the parties are to be given an advance notice of atleast 20 days for an oral hearing therefore, as the Arbitral Tribunal itself was wrongly constituted, the notice of arbitration issued by the Secretariat of CIETAC informing the parties of the date of hearing cannot be considered as a valid notice. It was contended that due to inadequacy of notice period, HCL could not produce its witnesses.

Arbitration Clause

“Clause 13

Any and all claims, disputes, controversies or differences arising between the Parties out of or in relation to or in connection with this Bond shall be submitted for arbitration before China International Economic and trade Arbitration Commission (CIETAC) in Shanghai by three Arbitrators appointed in accordance with the corresponding rules of arbitration.

The arbitration shall be conducted in English.

The award though arbitration shall become final and binding on the Parties, and the Parties agree to waive any right of appeal against the arbitration award. ”

Analysis

The Court discarded the contention of HCL stating that the arbitration clause provides that arbitration shall be conducted by CIETAC and the place of arbitration shall be Shanghai. It does not state that it would be CIETAC Shanghai Sub-Commission that would conduct the arbitration proceedings. CIETAC Shanghai Sub-Commission was an integral part of CIETAC. Under the CIETAC Rules it was clearly known that there is a Shanghai Sub Commission which has a separate Secretariat for handling its day to day work. If the parties wanted their disputes to be arbitrated only by Shanghai Sub Commission they would have mentioned it in their Agreement. On the contrary, as is evident from clause 13 of the Agreement, they had agreed for arbitration by CIETAC.

After analyzing Article 2(7) and Article 2(8) of CIETAC Rules, 2005, the Court concluded the parties have an option to have their disputes arbitrated through CIETAC in Beijing or South China Sub-Commission in Shenzhen China or Shanghai Sub-Commission in Shanghai. In any case, the final decision was to be made by CIETAC.

With regard to inappropriate service of notice, the Court opined that HCL was duly informed of the next date of hearing by the Secretariat of CIETAC by its communication. Even in its earlier communication, while granting time to the parties to jointly agree on a Presiding Arbitrator, the Secretariat of CIETAC had expressly and equivocally clarified that this would not have any effect on the next date of hearing. On a subsequent request made by HCL, CIETAC reiterated its stand and communicated the same to the applicant in its order. The said order of CIETAC shows that HCL had sufficient notice of the date of oral hearing as provided under Article 35 of the CIETAC Rules and also of the fact that merely because it has been given time to explore the possibility of jointly nominating the Presiding Arbitrator to be appointed, the date of oral hearing so fixed will not be changed.

With regard to breach of natural justice, the Court observed that natural justice is no unruly horse. It cannot be put in a straightjacket formula. It cannot be put into rigid rules and there is no such thing as mere technical infringement of natural justice. The requirement of natural justice must depend upon the facts and circumstances of the case and some real prejudice must be shown to have been suffered by the party complaining of the violation of Principles of Natural Justice.

With regard to breach of natural justice in arbitration, the Court cited its earlier dictum in National Ability S.A. vs. Tinna Oil & Chemicals Ltd. & Ors., 2008 (105) DRJ 446 wherein the Court held that

One cannot be oblivious of the nature of such international arbitration proceedings. The schedule fixed by the arbitral tribunals is strictly adhered to and only in exceptional circumstances adjournments are given. There is a rational and justification for the same. In respect of disputes relating to international commercial dealings, such arbitral tribunals ensure that they are decided with utmost alacrity and promptness. Such proceedings are not allowed to be dragged on unnecessarily causing delays. In fact, this is the culture which needs to be set-in in all kinds of arbitration proceedings, whether international or domestic…….If such procedure is followed as prevalent in the country where the arbitration took place (in this case England), it cannot be said that the same would be in violation of principles of natural justice when considered on the touchstone of law prevailing in India.”

In that case, the Court had cited the Supreme Court case of R. Vishwanathan & Ors. v. R. Gajambal Ammal & Ors., AIR 1963 SC 1, observing trends relating to enforcement of foreign judgments in India. From that judgement, the excerpts from the book “Private International Law” by Cheshire, 6th Edition pp. 675 to 677 is worth mentioning here

“The expression contrary to natural justice’ has, however, figured so prominently in judicial statements that it is essential to fix, if possible, its exact scope. The only statement that can be made with any approach to accuracy is that in the present context the expression is confined to something glaringly defective in the procedural rules of the foreign law. As Denman, C.J. said in an early case :

“That injustice has been done is never presumed, unless we see in the clearest light that the foreign law, or at least some part of the proceedings of the foreign court, are repugnant to natural justice : and this has often been made the subject of inquiry in our Courts”

In other words, what the Courts are vigilant to watch is that the defendant has not been deprived of an opportunity to present his side of the case. The wholesome maxim audi alteram partem is deemed to be of universal, not merely of domestic application. The problem, in fact, has been narrowed down to two cases.

The first is that of assumed jurisdiction over absent defendants…. Secondly, it is a violation of natural justice if a litigant, though present at the proceedings, was unfairly prejudiced in the presentation of his case to the Court.”

I have analysed the provisions regarding setting aside the award on the ground of breach of natural justice and are available at following link:

Comparative Analysis of Challenging an Award on the ground of breach of Natural Justice in England and Wales, Singapore and India

Conclusion

The Court upheld the enforcement of foreign (CIETAC) award and dismissed the application to set it aside.

 

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