Supreme Court clarifies the scope of Interim Awards under Arbitration and Conciliation Act: IFFCO vs. Bhadra Products (23 January 2018)

Date of the Judgment: 23 January 2018
Citation: M/S Indian Farmers Fertilizer Co-Operative Limited v. M/S Bhadra Products (2018) INSC 47
Judges: R.F. Nariman, J. and Navin Sinha, J.

Can an arbitrator’s decision on the issue of limitation be considered an interim award, and can it be challenged under Section 34 of the Arbitration and Conciliation Act, 1996? The Supreme Court of India addressed this question in a recent case, clarifying the scope of interim awards in arbitration proceedings. This judgment provides important guidance on the interpretation of the Arbitration Act, particularly regarding the challenge of interim decisions.

The Supreme Court, in this case, was composed of a two-judge bench of Justice R.F. Nariman and Justice Navin Sinha. The majority opinion was authored by Justice R.F. Nariman.

Case Background

The case involves a dispute between M/S Indian Farmers Fertilizer Co-operative Limited (IFFCO), the appellant, and M/S Bhadra Products, the respondent. IFFCO issued a tender for the supply of Defoamers, and Bhadra Products submitted a bid. A Letter of Intent was issued to Bhadra Products on 2nd November, 2006, for the supply of 800 Metric Tonnes of Defoamers.

Bhadra Products supplied the Defoamers by 11th April, 2007. However, the targeted production was not achieved by 1st November, 2007, which was the end of the supply period. After a delay, Bhadra Products issued a legal notice on 6th June, 2011, demanding payment of Rs.6,35,74,245/-. IFFCO denied any outstanding dues.

Due to the dispute, Bhadra Products invoked arbitration on 1st October, 2014. Justice Deepak Verma, a retired Judge of the Supreme Court, was appointed as the sole arbitrator on 25th January, 2015. Issues were framed on 3rd March, 2015. The arbitrator decided to address the issue of limitation first on 23rd July, 2015, based on documentary evidence. The arbitrator ruled that the claims were not time-barred.

IFFCO challenged this decision under Section 34 of the Arbitration and Conciliation Act, 1996, styling it as the ‘First Partial Award’. The District Judge, Jagatsinghpur, dismissed the petition on 8th October, 2015, stating that the award was not an interim award and therefore, the court lacked jurisdiction. The High Court of Orissa upheld this decision on 30th June, 2017.

Timeline

Course of Proceedings

The District Judge, Jagatsinghpur, dismissed IFFCO’s Section 34 petition, stating that the arbitrator’s decision on the issue of limitation was not an interim award and, therefore, the court lacked jurisdiction to entertain the petition. The High Court of Orissa upheld the District Judge’s decision, reiterating the same reasoning. IFFCO then appealed to the Supreme Court of India.

Legal Framework

The Supreme Court examined the following provisions of the Arbitration and Conciliation Act, 1996:

• Section 2(1)(c): Defines “arbitral award” to include an interim award.

  “2. Definitions.—(1) In this Part, unless the context otherwise requires,—
  (c) “arbitral award” includes an interim award;”

• Section 16: Deals with the competence of the arbitral tribunal to rule on its own jurisdiction.

  “16. Competence of arbitral tribunal to rule on its jurisdiction.—
  (1) The arbitral tribunal may rule on its own jurisdiction, including ruling on any objections with respect to the existence or validity of the arbitration agreement, and for that purpose,—
  (a) an arbitration clause which forms part of a contract shall be treated as an agreement independent of the other terms of the contract; and
  (b) a decision by the arbitral tribunal that the contract is null and void shall not entail ipso jure the invalidity of the arbitration clause.
  (2) A plea that the arbitral tribunal does not have jurisdiction shall be raised not later than the submission of the statement of defence; however, a party shall not be precluded from raising such a plea merely because that he has appointed, or participated in the appointment of, an arbitrator.
  (3) A plea that the arbitral tribunal is exceeding the scope of its authority shall be raised as soon as the matter alleged to be beyond the scope of its authority is raised during the arbitral proceedings.
  (4) The arbitral tribunal may, in either of the cases referred to in sub-section (2) or sub-section (3), admit a later plea if it considers the delay justified.
  (5) The arbitral tribunal shall decide on a plea referred to in sub-section (2) or sub-section (3) and, where the arbitral tribunal takes a decision rejecting the plea, continue with the arbitral proceedings and make an arbitral award.
  (6) A party aggrieved by such an arbitral award may make an application for setting aside such an arbitral award in accordance with section 34.”

• Section 31(6): Allows the arbitral tribunal to make an interim arbitral award on any matter it can make a final award on.

  “31. Form and contents of arbitral award. —
  (6) The arbitral tribunal may, at any time during the arbitral proceedings, make an interim arbitral award on any matter with respect to which it may make a final arbitral award.”

• Section 32(1): States that arbitral proceedings are terminated by the final arbitral award.

  “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).”

• Section 37: Specifies the orders that are appealable.

  “37. Appealable orders.—(1) An appeal shall lie from the following orders (and from no others) to the Court authorised by law to hear appeals from original decrees of the Court passing the order, namely:—
  (a) refusing to refer the parties to arbitration under section 8;
  (b) granting or refusing to grant any measure under section 9;
  (c) setting aside or refusing to set aside an arbitral award under section 34.
  (2) Appeal shall also lie to a court from an order of the arbitral tribunal—
  (a) accepting the plea referred to in sub-section (2) or sub-section (3) of section 16; or
  (b) granting or refusing to grant an interim measure under section 17.
  (3) No second appeal shall lie from an order passed in appeal under this section, but nothing in this section shall affect or take away any right to appeal to the Supreme Court.”

The Court also referred to Article 16 of the UNCITRAL Model Law, which deals with the competence of the arbitral tribunal to rule on its own jurisdiction.

“Article 16. Competence of arbitral tribunal to rule on its jurisdiction
(1) The arbitral tribunal may rule on its own jurisdiction, including any objections with respect to the existence or validity of the arbitration agreement. For that purpose, an arbitration clause which forms part of a contract shall be treated as an agreement independent of the other terms of the contract. A decision by the arbitral tribunal that the contract is null and void shall not entail ipso jure the invalidity of the arbitration clause.
(2) A plea that the arbitral tribunal does not have jurisdiction shall be raised not later than the submission of the statement of defence. A party is not precluded from raising such a plea by the fact that he has appointed, or participated in the appointment of, an arbitrator. A plea that the arbitral tribunal is exceeding the scope of its authority shall be raised as soon as the matter alleged to be beyond the scope of its authority is raised during the arbitral proceedings. The arbitral tribunal may, in either case, admit a later plea if it considers the delay justified.
(3) The arbitral tribunal may rule on a plea referred to in paragraph (2) of this article either as a preliminary question or in an award on the merits. If the arbitral tribunal rules as a preliminary question that it has jurisdiction, any party may request, within thirty days after having received notice of that ruling, the court specified in article 6 to decide the matter, which decision shall be subject to no appeal; while such a request is pending, the arbitral tribunal may continue the arbitral proceedings and make an award.”

The Court also examined Sections 30 and 31 of the English Arbitration Act of 1996, which define the scope of the arbitral tribunal’s jurisdiction.

“30 Competence of tribunal to rule on its own jurisdiction. – (1) Unless otherwise agreed by the parties, the arbitral tribunal may rule on its own substantive jurisdiction, that is, as to—
(a) whether there is a valid arbitration agreement,
(b) whether the tribunal is properly constituted, and
(c) what matters have been submitted to arbitration in accordance with the arbitration agreement.
(2) Any such ruling may be challenged by any available arbitral process of appeal or review or in accordance with the provisions of this Part.
31 Objection to substantive jurisdiction of tribunal. – (1) An objection that the arbitral tribunal lacks substantive jurisdiction at the outset of the proceedings must be raised by a party not later than the time he takes the first step in the proceedings to
contest the merits of any matter in relation to which he challenges the tribunal’s jurisdiction.
A party is not precluded from raising such an objection by the fact that he has appointed or participated in the appointment of an arbitrator.
(2) Any objection during the course of the arbitral proceedings that the arbitral tribunal is exceeding its substantive jurisdiction must be made as soon as possible after the matter alleged to be beyond its jurisdiction is raised.
(3) The arbitral tribunal may admit an objection later than the time specified in subsection (1) or (2) if it considers the delay justified.
(4) Where an objection is duly taken to the tribunal’s substantive jurisdiction and the tribunal has power to rule on its own jurisdiction, it may— (a) rule on the matter in an award as to jurisdiction, or (b) deal with the objection in its award on the merits. If the parties agree which of these courses the tribunal should take, the tribunal shall proceed accordingly.
(5) The tribunal may in any case, and shall if the parties so agree, stay proceedings whilst an application is made to the court under section 32 (determination of preliminary point of jurisdiction).”

Arguments

Appellant (IFFCO) Arguments:

• Mr. K.K. Venugopal, learned Attorney General, argued that the award made on 23rd July, 2015, is an interim award under the Arbitration and Conciliation Act, 1996, and is therefore amenable to challenge under Section 34 of the Act.

• He referred to various provisions of the Act and cited judgments, including the judgment of National Thermal Power Corpn. Ltd. v. Siemens Atkeingesellschaft [(2007) 4 SCC 451], to support his argument.

• He contended that the issue of limitation, being one of the issues raised by the parties, was finally decided by the award and could thus be challenged.

Respondent (Bhadra Products) Arguments:

• Shri Ajit Kumar Sinha, learned senior advocate, argued that a ruling on the point of limitation is a ruling on “jurisdiction” and any finding thereon goes to the root of the case.

• He contended that the drill of Section 16 of the Act has to be followed, and as the plea of limitation has been rejected by the Arbitrator, the arbitral proceedings have to continue further and the challenge has to be postponed only after all other issues have been decided.

• He argued that the scheme of Section 37, specifically Section 37(2)(a), makes it clear that appeals lie only from an order under Section 16 accepting the plea but not rejecting it.

• He submitted that the award cannot be considered an interim award, but merely an order passed under Section 16 of the Act.

• He relied on judgments that held that a decision on a point of limitation goes to jurisdiction, in which case Section 16 of the Act would get attracted.

Issues Framed by the Supreme Court

The Supreme Court framed the following issues:

1. Whether an award on the issue of limitation can be considered an interim award.
2. Whether a decision on a point of limitation would go to jurisdiction and, therefore, be covered by Section 16 of the Act.

Treatment of the Issue by the Court

The following table demonstrates as to how the Court decided the issues

Authorities

The following authorities were considered by the Court:

Cases

• National Thermal Power Corpn. Ltd. v. Siemens Atkeingesellschaft [(2007) 4 SCC 451]: This case was referred to by the appellant to support the argument that an interim award is amenable to challenge under Section 34 of the Act. The Supreme Court of India held that the issue of jurisdiction was not involved in the matter.
• Exmar BV v National Iranian Tanker Co. [1992] 1 Lloyd’s Rep. 169: This English case was cited to show that an interim final award can be made, which finally decides a particular issue between the parties.
• Satwant Singh Sodhi v. State of Punjab (1999) 3 SCC 487: This case was cited to show that an interim award, if it finally determines the rights of the parties, has the force of a complete award. The Supreme Court of India held that the first award that was made that finally determined one issue between the parties, with respect to Item no.1 of the claim, was held to be an interim award inasmuch as it finally determined claim 1 between the parties.
• McDermott International Inc. v. Burn Standard Co. Ltd. (2006) 11 SCC 181: This case was cited to show that an interim award is a final award on matters covered therein, made at an intermediate stage of the arbitral proceedings. The Supreme Court of India held that an interim award or partial award is a final award on matters covered therein made at an intermediate stage of the arbitral proceedings.
• Official Trustee v. Sachindra Nath Chatterjee (1969) 3 SCR 92: This case was cited to define the term “jurisdiction” as the power of a Court to hear and determine a cause.
• Ittavira Mathai v. Varkey Varkey (1964) 1 SCR 495: This case was cited to distinguish between an erroneous decision on limitation (an error of law) and a decision where the Court acts without jurisdiction. The Supreme Court of India held that a court having jurisdiction over the subject-matter of the suit and over the parties thereto, though bound to decide right may decide wrong.
• Pandurang Dhoni Chougule v. Maruti Hari Jadhav (1966) 1 SCR 102: This case was cited to show that a plea of limitation is a plea of law which concerns the jurisdiction of the court.
• Anisminic v. Foreign Compensation Commission (1969) 2 AC 147: This English case was referred to in the context of blurring the lines between errors of law and errors of jurisdiction.
• M.L. Sethi v. R.P. Kapur (1972) 2 SCC 427: This case was cited to explain the impact of the Anisminic case on the concept of jurisdiction.
• Hari Prasad Mulshanker Trivedi v. V.B. Raju (1974) 3 SCC 415: This case was cited to discuss the distinction between lack of jurisdiction and erroneous exercise of jurisdiction.
• ITW Signode India Ltd. v. CCE (2004) 3 SCC 48: This case was cited by the respondent to argue that the question of limitation involves a question of jurisdiction. The Supreme Court of India held that the question of limitation involves a question of jurisdiction.
• Foreshore Coop. Housing Society Ltd. v. Praveen D. Desai (2015) 6 SCC 412: This case was cited to discuss the meaning of “jurisdiction” in the context of Section 9A of the Code of Civil Procedure, 1908.

Legal Provisions

• Section 2(1)(c), Arbitration and Conciliation Act, 1996: Defines “arbitral award” to include an interim award.
• Section 16, Arbitration and Conciliation Act, 1996: Deals with the competence of the arbitral tribunal to rule on its own jurisdiction.
• Section 31(6), Arbitration and Conciliation Act, 1996: Allows the arbitral tribunal to make an interim arbitral award.
• Section 32(1), Arbitration and Conciliation Act, 1996: States that arbitral proceedings are terminated by the final arbitral award.
• Section 34, Arbitration and Conciliation Act, 1996: Provides for setting aside an arbitral award.
• Section 37, Arbitration and Conciliation Act, 1996: Specifies the orders that are appealable.
• Article 16, UNCITRAL Model Law: Deals with the competence of the arbitral tribunal to rule on its own jurisdiction.
• Sections 30 and 31, English Arbitration Act of 1996: Defines the scope of the arbitral tribunal’s jurisdiction.

Judgment

How each authority was viewed by the Court?

• National Thermal Power Corpn. Ltd. v. Siemens Atkeingesellschaft [(2007) 4 SCC 451]*: The Court distinguished this case, stating that it did not involve a question of jurisdiction in the context of Section 16.
• Exmar BV v National Iranian Tanker Co. [1992] 1 Lloyd’s Rep. 169*: The Court used this case to illustrate that an interim award can finally decide a particular issue.
• Satwant Singh Sodhi v. State of Punjab (1999) 3 SCC 487*: The Court relied on this case to support the view that an interim award can have the force of a complete award if it finally determines an issue.
• McDermott International Inc. v. Burn Standard Co. Ltd. (2006) 11 SCC 181*: The Court cited this case to clarify that an interim or partial award is a final award on the matters it covers.
• Official Trustee v. Sachindra Nath Chatterjee (1969) 3 SCR 92*: The Court referred to this case to define “jurisdiction” in the classic sense.
• Ittavira Mathai v. Varkey Varkey (1964) 1 SCR 495*: The Court used this case to distinguish between errors of law and errors of jurisdiction, stating that an erroneous decision on limitation is an error of law within jurisdiction.
• Pandurang Dhoni Chougule v. Maruti Hari Jadhav (1966) 1 SCR 102*: While acknowledging this case, the Court clarified that the concept of jurisdiction in Section 16 of the Arbitration Act is narrower.
• Anisminic v. Foreign Compensation Commission (1969) 2 AC 147*: The Court acknowledged the blurring of lines between errors of law and jurisdiction in this case but clarified that the concept of jurisdiction in Section 16 of the Arbitration Act is narrower.
• M.L. Sethi v. R.P. Kapur (1972) 2 SCC 427*: The Court used this case to explain the impact of the Anisminic case on the concept of jurisdiction.
• Hari Prasad Mulshanker Trivedi v. V.B. Raju (1974) 3 SCC 415*: The Court referred tothis case to further clarify the distinction between lack of jurisdiction and erroneous exercise of jurisdiction.
• ITW Signode India Ltd. v. CCE (2004) 3 SCC 48*: The Court distinguished this case, stating that it was in the context of a different statute and did not apply to the interpretation of “jurisdiction” in Section 16 of the Arbitration Act.
• Foreshore Coop. Housing Society Ltd. v. Praveen D. Desai (2015) 6 SCC 412*: The Court distinguished this case, stating that it was in the context of Section 9A of the Code of Civil Procedure, 1908 and did not apply to the interpretation of “jurisdiction” in Section 16 of the Arbitration Act.

Ratio Decidendi

The following table highlights the ratio of the judgment:

Flowchart of the Decision-Making Process

Conclusion

The Supreme Court’s decision in IFFCO v. Bhadra Products clarified that an arbitrator’s decision on the issue of limitation, when decided finally, is an interim award and can be challenged under Section 34 of the Arbitration and Conciliation Act, 1996. The Court clarified that the term “jurisdiction” under Section 16 is limited to the arbitral tribunal’s competence to embark upon an inquiry into the issues, and does not extend to the merits of the claim, including the issue of limitation. This judgment provides important clarity on the scope of interim awards and the interpretation of Section 16 of the Arbitration Act, ensuring that parties have an avenue to challenge interim decisions that finally decide a particular issue.