Wed. Mar 20th, 2019

“Interim award on limitation amenable to Section 34 challenge” observes SC but with a note of caution

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The Supreme Court of India has, in a recent decision – M/s Indian Farmers Fertilizer Co-Operative Limited v. Bhadra Products, held that an order of the arbitrator deciding the issue of limitation can be termed as an ‘interim award’ under the Arbitration and Conciliation Act, 1996 (“Act”) and it can be challenged before a court under section 34 of the Act. At the same time, the Court, through its Bench comprising Justices R F Nariman and Navin Sinha, has also recommended the Parliament to suitably amend the Act so as to consolidate all interim awards together with the final arbitral award so that “piecemeal challenges like piecemeal awards” do not lead to wastage of time and money.

The decision came in an appeal from High Court of Orissa. After a dispute arose between the parties, Respondent issued a legal notice for payment of money and also invoked arbitration under the agreement. Justice (Retd.) Deepak Verma, who was appointed as the sole arbitrator, decided that the issue of limitation could be decided as the first issue. After this issue was decided in favour of the Respondent (claimant), Appellant challenged the order before District Court under section 34 of the Act, terming the said order as the “first partial award”. The District Court declined to recognise the said order as an interim award and held that it had no jurisdiction to hear such challenge under section 34 of the Act. It held: “As the order of the Hon’ble Arbitrator did not decide the claim or even any part of the claim or any issue of liability, it could not be held to be an interim award.” On an appeal, the High Court of Orissa affirmed the stand taken by the District Court.

When the matter reached the Supreme Court, the questions which fell for its adjudication were: (i) whether an award delivered by an arbitrator, which decides the issue of limitation, can be said to be an interim award; and (ii) whether such interim award can then be set aside under section 34 of the Act.

The Appellant, relying upon National Thermal Power Corpn. Ltd. v. Siemens Atkeingesellschaft, (2007) 4 SCC 451 (“NTPC”), argued that the point of limitation being one of the issues raised by the parties, was finally decided by the aforesaid award and therefore it had to be amenable to challenge. The Respondent argued that a decision on the issue of limitation is a decision on the ‘jurisdiction’ which goes to the root of the case and hence the “drill of section 16” has to be followed. Respondent thus suggested that as per section 16(5) and 16(6) of the Act, the Appellant could have challenged the issue of limitation only along with a challenge to the final award by the arbitrator. Further, referring to section 37 of the Act, Respondent also submitted that as per section 37(2)(a) of the Act, an appeal may lie only against an order under section 16 accepting the plea but not rejecting it.

To answer the two questions raised in the matter, the Court observed that the issues which would decide the matter are (i) whether an award on the issue of limitation can first be said to be an interim award; and (ii) whether a decision on a point of limitation would go to jurisdiction and, therefore, be covered by Section 16 of the Act.

After referring to sections 2(c) and 31(6) of the Act, Court noted that the Act being silent on the definition of ‘interim award’, a recourse has to be made to section 31(6) of the Act which delineates the scope of interim arbitral awards and states that the arbitral tribunal may make an interim arbitral award on any matter with respect to which it may make a final arbitral award.

Court observed that the language of section 31(6) has deliberately kept wide in nature. Court observed that it is very clear from the said sub-section that the arbitral tribunal is possessed with a jurisdiction to make an interim arbitral award on “any matter” with respect to which it may make a final arbitral award. Court noted that the term “matter” would include all the issues in respect of which the parties are in dispute. Court noted:

“It is clear, therefore, that any point of dispute between the parties which has to be answered by the arbitral tribunal can be the subject matter of an interim arbitral award.”

However, being conscious of the fact that such dealing of matters in parts would give rise to multiple litigation, Court extended a note of caution to the arbitral tribunals and observed:

“The arbitral tribunal should, therefore, consider whether there is any real advantage in delivering interim awards or in proceeding with the matter as a whole and delivering one final award, bearing in mind the avoidance of delay and additional expense. Ultimately, a fair means for resolution of all disputes should be uppermost in the mind of the arbitral tribunal.”

Referring to the case of Satwant Singh Sodhi v. State of Punjab (1999) 3 SCC 487, Court observed that in the said case first award in relation to first item was held to be an interim award and adjudication with respect to that issue was final and could not have been re-adjudicated again. Court also referred to McDermott International Inc. v. Burn Standard Co. Ltd. (2006) 11 SCC 181, and relying on the observation “…we may state that both the partial award and the final award are subject-matter of challenge under Section 34 of the Act”, Court observed that an interim award or partial award is a final award on matters covered therein made at an intermediate stage of the arbitral proceedings.

Following the above two cases, Court held that one issue – limitation, was disposed of finally and such award was an ‘interim award’ within the meaning of Section 2(1)(c) of the Act and being subsumed within the expression “arbitral award”, this issue could therefore be challenged under section 34 of the Act.

To counter the argument of the Respondent that a decision on the issue of limitation is a decision on the ‘jurisdiction’, Court referred to the section 16 of the English Arbitration Act of 1996 and observed that the ‘jurisdiction’ mentioned in section 16 has reference to three things: (i) as to whether there is the existence of a valid arbitration agreement; (ii) whether the arbitral tribunal is properly constituted; and (iii) matters submitted to arbitration should be in accordance with the arbitration agreement. Thus, the Court rejected the argument that raising an issue of limitation would be same as challenging the jurisdiction of the arbitral tribunal under section 16 of the Act.

After having already observed that an award deciding the issue of limitation can be termed as an interim award, the Court observed that “[NTPC] judgment is determinative of the issue at hand and has our respectful concurrence”. Court finally held:

“In our view, therefore, it is clear that the award dated 23rd July, 2015 is an interim award, which being an arbitral award, can be challenged separately and independently under Section 34 of the Act. We are of the view that such an award, which does not relate to the arbitral tribunal’s own jurisdiction under Section 16, does not have to follow the drill of Section 16(5) and (6) of the Act.”

The Court however, conscious of the fact that interim awards carry a potential to hamper the arbitration proceedings, felt the need for a suitable amendment to the Act to counter the same. It observed:

“Having said this, we are of the view that Parliament may consider amending Section 34 of the Act so as to consolidate all interim awards together with the final arbitral award, so that one challenge under Section 34 can be made after delivery of the final arbitral award. Piecemeal challenges like piecemeal awards lead to unnecessary delay and additional expense.”

Read the complete judgment here.

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