Supreme Court Clarifies Termination of Arbitration Proceedings Under Section 32 of the Arbitration Act: Dani Wooltex Corporation vs. Sheil Properties (2024)

Date of the Judgment: May 16, 2024

Citation: 2024 INSC 433

Judges: Abhay S. Oka, J., Pankaj Mithal, J.

Can an arbitral tribunal terminate proceedings simply because a claimant doesn’t actively push for hearings? The Supreme Court of India recently addressed this crucial question in a case concerning the termination of arbitral proceedings under Section 32(2)(c) of the Arbitration and Conciliation Act, 1996. The court examined whether a claimant’s perceived inaction constitutes sufficient grounds for terminating arbitration. This judgment clarifies the circumstances under which an arbitral tribunal can terminate proceedings, emphasizing the tribunal’s duty to adjudicate disputes. The bench was composed of Justice Abhay S. Oka and Justice Pankaj Mithal, with the judgment authored by Justice Abhay S. Oka.

Case Background

The case involves a dispute between Dani Wooltex Corporation (a partnership firm owning land in Mumbai), Sheil Properties Pvt. Ltd. (a real estate development company), and Marico Industries Ltd. (a consumer goods company). Dani Wooltex had a development agreement with Sheil Properties and a Memorandum of Understanding (MOU) with Marico. Sheil objected to the transaction between Dani Wooltex and Marico, leading to disputes.

Sheil filed a suit against Dani Wooltex and Marico for specific performance of the MOU. Marico also filed a suit against Dani Wooltex, with Sheil as a defendant. The parties agreed to refer the disputes to a sole arbitrator. The arbitrator was appointed on October 13, 2011, in the suit filed by Marico. Subsequently, on November 17, 2011, the dispute in Sheil’s suit was also referred to the same arbitrator.

The Arbitral Tribunal was tasked with handling claims from both Sheil and Marico against Dani Wooltex. Marico’s claim was heard first, resulting in an award on May 6, 2017. However, Sheil’s claim did not proceed. Dani Wooltex then requested the Arbitral Tribunal to dismiss Sheil’s claim, arguing that Sheil had abandoned the proceedings due to inaction. The Arbitral Tribunal terminated the proceedings based on Section 32(2)(c) of the Arbitration Act. Sheil challenged this termination before the High Court of Judicature at Bombay.

Timeline:

Course of Proceedings

The Arbitral Tribunal, relying on a decision of the Calcutta High Court in NRP Projects Pvt. Ltd. & Anr. v. Hirak Mukhopadhyay & Anr, terminated the arbitral proceedings under Section 32(2)(c) of the Arbitration Act. Sheil challenged this order before the High Court of Judicature at Bombay, invoking Section 14(2) of the Arbitration Act. The High Court set aside the Arbitral Tribunal’s order, directing the tribunal to continue the proceedings. The High Court held that the Arbitral Tribunal had incorrectly terminated the proceedings and that Sheil had not abandoned its claim.

Legal Framework

The case revolves around the interpretation of several provisions of the Arbitration and Conciliation Act, 1996.

• Section 23 of the Arbitration and Conciliation Act, 1996, deals with the timelines for filing statements of claim and defense. Sub-section (4) states that the filing of pleadings should be completed within six months from the date the arbitrator receives notice of appointment.
• Section 24(2) of the Arbitration and Conciliation Act, 1996, mandates that parties receive sufficient advance notice of any hearing or meeting of the Arbitral Tribunal.
• Section 25 of the Arbitration and Conciliation Act, 1996, addresses the default of a party. It states:
  
  “25. Default of a party.—Unless otherwise agreed by the parties, where, without showing sufficient cause,—
  (a) the claimant fails to communicate his statement of claim in accordance with sub-section (1) of section 23, the arbitral tribunal shall terminate the proceedings;
  (b) the respondent fails to communicate his statement of defence in accordance with sub-section (1) of section 23, the arbitral tribunal shall continue the proceedings without treating that failure in itself as an admission of the allegations by the claimant and shall have the discretion to treat the right of the respondent to file such statement of defence as having been forfeited.
  (c) a party fails to appear at an oral hearing or to produce documentary evidence, the arbitral tribunal may continue the proceedings and make the arbitral award on the evidence before it.”
• Section 32 of the Arbitration and Conciliation Act, 1996, concerns the termination of arbitral proceedings. It states:
  
  “32. Termination of proceedings.—(1) The arbitral proceedings shall be terminated by the final arbitral award or by an order of the arbitral tribunal under sub-section (2).
  (2) The arbitral tribunal shall issue an order for the termination of the arbitral proceedings where—
  (a) the claimant withdraws his claim, unless the respondent objects to the order and the arbitral tribunal recognises a legitimate interest on his part in obtaining a final settlement of the dispute,
  (b) the parties agree on the termination of the proceedings, or
  (c) the arbitral tribunal finds that the continuation of the proceedings has for any other reason become unnecessary or impossible.
  (3) Subject to section 33 and sub-section (4) of section 34, the mandate of the arbitral tribunal shall terminate with the termination of the arbitral proceedings.”

The Supreme Court’s analysis focuses on the interpretation of Section 32(2)(c) of the Arbitration and Conciliation Act, 1996, specifically whether the continuation of proceedings had become “unnecessary or impossible”.

Arguments

Submissions by the Appellants (Dani Wooltex Corporation):

• The learned senior counsel for the appellant, Mr. Nakul Divan, argued that the High Court of Judicature at Bombay had previously held in Kothari Developers v. Madhukant S Patel that an Arbitral Tribunal could invoke Section 32(2)(c) of the Arbitration Act if proceedings became unnecessary due to the claimant’s inaction.

• He contended that Section 14 of the Arbitration Act does not allow the Court to second-guess the Arbitral Tribunal, especially when the decision is based on facts and a plausible view.

• He highlighted that the Arbitral Tribunal had tried to ensure Sheil’s participation in Marico’s arbitration. After the award in Marico’s case, Sheil declined to attend a meeting on March 11, 2020.

• He argued that there was no indication that the arbitration based on Sheil’s claim would proceed only after Marico’s arbitration.

• He submitted that Sheil took no interest in moving the Arbitral Tribunal for a long time since 2012.

• He submitted that the word “unnecessary” in Section 32(2)(c) of the Arbitration Act should be interpreted broadly.

Submissions by the Respondents (Sheil Properties Pvt. Ltd.):

• The learned senior counsel for the respondent, Mr. Shekhar Naphade, argued that the power under Section 32(2)(c) of the Arbitration Act cannot be exercised without a positive finding that it is either unnecessary or impossible to continue the proceedings.

• Relying on Lalitkumar V Sanghavi & Anr. v. Dharamdas V Sanghavi & Ors., he argued that the Court, under Section 14(2) of the Arbitration Act, must examine the legality of the termination of mandate by the Arbitral Tribunal.

• He submitted that abandonment cannot be inferred and relied upon Godrej and Boyce Manufacturing Company Limited v. Municipal Corporation of Greater Mumbai & Ors.

• He contended that the suits filed by Marico and Sheil were separate, and therefore, the arbitral proceedings were also separate.

• He submitted that Sheil had agreed to proceed with its reference after Marico’s reference was decided due to overlap in issues.

• He argued that no further directions were issued by the sole Arbitrator in Sheil’s reference after preliminary directions were issued on November 8, 2011.

• He submitted that the decision of the Calcutta High Court in NRP Projects Pvt. Ltd. is confined to its specific facts.

• He contended that Marico’s reference took six years, which is why Sheil’s reference was postponed.

Submissions Table

Issues Framed by the Supreme Court

The Supreme Court considered the following issue:

1. Whether the Arbitral Tribunal was justified in terminating the arbitral proceedings under clause (c) of sub-section (2) of Section 32 of the Arbitration Act?

Treatment of the Issue by the Court

Authorities

The Supreme Court considered the following authorities:

Judgment

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

✓ The Court distinguished the Calcutta High Court’s decision in NRP Projects Pvt. Ltd. & Anr. v. Hirak Mukhopadhyay & Anr., stating that it was confined to the facts of that case.

✓ The Court referred to the High Court of Judicature at Bombay’s judgment in Kothari Developers v. Madhukant S Patel, but clarified that the power under Section 32(2)(c) must be exercised judiciously.

✓ The Court relied on its own decision in Lalitkumar V Sanghavi & Anr. v. Dharamdas V Sanghavi & Ors. to emphasize that the Court, while exercising power under Section 14(2) of the Arbitration Act, is required to go into the issue of the legality of the termination of mandate by the Arbitral Tribunal.

✓ The Court referred to Godrej and Boyce Manufacturing Company Limited v. Municipal Corporation of Greater Mumbai & Ors to support its view that abandonment cannot be readily inferred.

What weighed in the mind of the Court?

The Supreme Court’s decision was heavily influenced by the following factors:

• The Arbitral Tribunal’s Duty: The Court emphasized that an Arbitral Tribunal has a duty to adjudicate disputes and cannot avoid this responsibility by expecting parties to constantly request hearings. The Tribunal must take the initiative to fix hearing dates.

• Misinterpretation of Section 32(2)(c): The Court clarified that Section 32(2)(c) of the Arbitration Act can only be invoked when the continuation of proceedings has genuinely become “unnecessary or impossible,” not merely due to a party’s perceived inaction.

• Absence of Abandonment: The Court found no evidence of abandonment of claim by Sheil. The Court noted that Sheil had attended all hearings in the Marico arbitration, and the Arbitral Tribunal had not fixed any dates for hearing Sheil’s claim until March 2020.

• Procedural Fairness: The Court highlighted the importance of procedural fairness, stating that the Arbitral Tribunal should have considered Section 25 of the Arbitration Act if a party failed to appear at a hearing, rather than terminating the proceedings outright.

• Object of Arbitration Act: The Court reiterated that the object of the Arbitration Act is to provide an efficient dispute resolution process, which is defeated by casual termination of proceedings.

The Court’s reasoning focused on ensuring that arbitral proceedings are not terminated prematurely without proper justification.

Fact:Law Ratio

The court’s decision was primarily influenced by legal considerations (70%), focusing on the interpretation of the Arbitration Act and procedural fairness, while also considering the factual aspects of the case (30%).

Logical Reasoning

Judgment

The Supreme Court held that the Arbitral Tribunal’s decision to terminate the proceedings under Section 32(2)(c) of the Arbitration Act was incorrect. The Court emphasized that the power under Section 32(2)(c) should only be exercised when the continuation of proceedings has become genuinely “unnecessary or impossible.” The Court noted that the Arbitral Tribunal had a duty to fix a date for a hearing, even if the parties did not request it. The Court also clarified that mere inaction by a party does not amount to abandonment of a claim.

The Court stated that “The appointment of the Arbitral Tribunal is made with the object of adjudicating upon the dispute covered by the arbitration clause in the agreement between the parties.” The Court further added, “An Arbitrator who has accepted his appointment cannot say that he will not fix a meeting to conduct arbitral proceedings or a hearing date unless the parties request him to do so. It is the duty of the Arbitral Tribunal to do so.”

The Court clarified that “Abandonment can be either express or implied. Abandonment cannot be readily inferred. One can say that there is an implied abandonment when admitted or proved facts are so clinching and convincing that the only inference which can be drawn is of the abandonment.”

The Court also noted that the Arbitral Tribunal should have considered Section 25 of the Arbitration Act, which deals with the default of a party, instead of terminating the proceedings under Section 32(2)(c).

The Court concluded that there was no material on record to conclude that Sheil had abandoned its claim and that the Arbitral Tribunal’s finding was entirely illegal. The Court upheld the High Court’s decision to set aside the Arbitral Tribunal’s order.

Key Takeaways

• Arbitral Tribunals’ Duty: Arbitral tribunals have a proactive duty to manage proceedings and fix hearing dates, even if parties do not request them.

• Limited Scope of Section 32(2)(c): Section 32(2)(c) of the Arbitration Act should not be used to terminate proceedings merely due to a party’s perceived inaction. The continuation of proceedings must genuinely be “unnecessary or impossible.”

• Abandonment Requires Clear Evidence: Abandonment of a claim must be clearly established, either expressly or through strong implied circumstances. Mere inaction is not sufficient.

• Procedural Fairness: Arbitral tribunals must adhere to procedural fairness and consider all relevant provisions of the Arbitration Act, such as Section 25, before terminating proceedings.

• Object of Arbitration: The judgment reinforces the object of the Arbitration Act to provide an efficient dispute resolution process, which is undermined by the casual termination of proceedings.

This judgment clarifies the scope of Section 32(2)(c) of the Arbitration Act and ensures that arbitral proceedings are not terminated prematurely without valid reasons. It also emphasizes the proactive role of arbitral tribunals in managing proceedings.

Directions

As theSupreme Court dismissed the appeal, the order of the High Court of Judicature at Bombay setting aside the order of the Arbitral Tribunal was upheld. The Arbitral Tribunal was directed to continue the arbitral proceedings from the stage they were terminated. The Court also clarified that the Arbitral Tribunal must fix a date for hearing and proceed with the matter.