Bombay High Court Promotes the Pro-Arbitration Policy

Background

Recently, the Bombay High Court in the case of Prabhat Steel Traders Private Limited v. Excel Metal Processors Private Limited,[1]decided on the issue as to whether a third party can challenge the interim measures granted by an arbitral tribunal under Section 17[2]of the Arbitration and Conciliation Act, 1996.[3]In this case, there were 13 petitioners and 3 respondents namely, Excel Metal Processors Private Limited, Shakti International Private Limited and Arisha Metal Precisions Private Limited.[4] 

The petitions were filed under Section 37[5]wherein the petitioners applied for setting aside the impugned order dated 17thNovember 2017 which granted interim measures against respondent No. 1, but in favour of respondent No. 2. 

The major issue that was presented before the Honourable Bombay High Court was whether the remedy of an appeal under Section 37 could be availed off by a third party who is affected by an order of interim measures granted by the arbitral tribunal under the Section 17 of the Arbitration and Conciliation Act, 1996.

Submissions Made By The Petitioner

Primarily, the respondent No. 2 raised a preliminary objection regarding the maintainability of the arbitration petition and asserted that the Section 37 of the Arbitration Act 1996 cannot be invoked. It relied on the ground that none of these petitioners was a party to any arbitration agreement between respondents No. 1 and No. 2.

In response to this, the counsel for the petitioner relied on the meaning of a ‘party’ which has been defined under Section 2(1)(h) of the Arbitration Act, 1996. The counsel also and stated that provisions contained under Section 17 can cause prejudice to the interest of the third parties and that the parties to the arbitration proceedings may obtain a drastic order in respect of the properties of a third person collusively.

Moreover, the petitioner also stated that if any order that affects the third party is passed by the Court upon exercising powers under Section 9[6], such third party can always approach the Court for vacating or modifying such order passed by the Court. Further, the petitioner stated that a third party can file an appeal under Section 37 before a Court if it is affected by the order passed by the arbitrator under Section 17. However, a third party cannot file an application before the arbitrator for modification or vacation of the order since the third party is not a party to the arbitration agreement.

Moreover, the petitioner also contended that the other provisions such as Sections 8[7], 17 and 34[8]contemplate a requirement wherein an application has to be made by a party only. However, the same requirement is not contemplated under Section 37 of the Arbitration Act, which reads as “An appeal shall lie from the following orders…”.  Therefore, the Arbitration Act intended to provide a third party with a right to file an appeal under Section 37 when the third party is affected by the impugned order of the arbitrator passed under Section 17 of the Act. 

The petitioner also stated that if a third party who is affected by an order of an arbitrator as per Section 17 is not allowed to challenge such an order under Section 37, an arbitration proceeding can be conveniently used to cause grave prejudice to such third parties and this would, in turn, result in great injustice to a third party.

Submissions Made By The Respondent

It is pertinent to note that respondent No. 2 majorly had only one argument. It stated that since none of the petitioners is a party to the arbitration agreement with the respondent, the appeals filed under Section 37 are not maintainable. It contended that the only remedy that is available to the petitioner is to wait for the outcome of the arbitral proceedings and if any application for execution of the arbitral award is made, the petitioner can oppose the execution application. Further, it was also contended that Section 17 applies only to the parties and thus Section 37 can only be invoked by the parties to the agreement but not by a third party. 

Moreover, a constructive reading of Section 17 and Section 37 was suggested by the counsel for respondent No. 2. The reasoning was that since Section 17 can only be invoked by a party to the agreement, the same logic would also apply to Section 37, thereby disallow a third party to invoke Section 37 of the Arbitration Act. Furthermore, it was stated that the Amendment Act, 2015 has expanded the powers of the arbitral tribunal with respect to granting interim measures under Section 17 of the Arbitration Act, however, the remedy under Section 37 is not expanded.

Judgment

The Learned Single Judge of the Bombay High Court held that appeals filed by petitioners under Section 37 are maintainable. The High Court carefully perused the provisions of the Arbitration Act, 1996 and held that Section 2(1)(h) defines the expression ‘party’ and Sections 2(1)(h) to 36 refer to the expression ‘party’ for different purposes. However, the term ‘party’ is absent in Section 37. The High Court referred to the judgment laid down in the case of Girish Mulchand Mehta v.  Mahesh Mehta[9]wherein the Court had entertained an appeal under Section 37 filed by a third party as the rights were being affected because of an order passed under Section 9.

The Court further held that there is a deliberate exclusion of the expression ‘party’ as far as Section 37 is concerned, and this clearly reflects the legislative intent as the legislature intended to provide a remedy of an appeal to a third party who is affected by any interim measures granted by an arbitral tribunal or a court. Furthermore, it also deliberated on the point that there can be a situation wherein parties could collusively act in order to produce an interim order which could thereby affect the rights of an innocent third party.

Furthermore, the Court also delved upon the argument of respondent No. 2 which stated that the petitioner must wait until an application for execution of the arbitral award is made. However, the Court held that this argument is without any merit, absurd and is ex-facie which is contrary to the plain reading of Section 37 and legislative intent. Thus, the Court held that the interpretation given by the counsel for the petitioner was right, and as there is no mention of the term ‘party’ in Section 37, it can be safely concluded that a third party who is affected by an order of interim measures, is entitled to avail the remedy of appeal provided under Section 37 of the Arbitration Act, 1996.

Analysis

This article chronicles that the Bombay High Court has issued a landmark ruling regarding a third party’s right to challenge interim measures. It is pertinent to note that interests of innocent third parties would be safeguarded and protected as even third parties have the right to challenge interim measures ordered by an arbitral tribunal or a court.

It’s worth highlighting that Section 37 of the Arbitration Act, 1996 applies to international commercial arbitration. So, if an arbitral tribunal grants an interim measure as per Section 17, which affects the right of a third party, the third party could approach the Indian court to challenge an order if they are aggrieved by such an order. Moreover, this sets an example for other countries that have been at the forefront of building a pro-arbitration regime. This monumental ruling takes us many steps closer to protecting the interests of innocent parties. 

The judgment is extremely crucial in the present scenario as this would take care of the interests of both, parties to the arbitration agreement and non-signatories. The Court rejected the argument of respondent No. 2 when they stated that the remedy of a petitioner would be to wait and watch until the arbitration proceedings culminate into an arbitral award and only when the party files an execution application, can the third party resist the execution proceedings. This argument was unreasonable and had it been accepted, it would have caused a great harm and an injustice to the third parties.

Hence, the main takeaway is that if an order is passed by an arbitral tribunal for interim measures at the behest of one of the parties to the arbitration agreement which prejudices the interest of a third party, the third party would not be allowed to apply for modification and/or vacating the order of interim relief.  However, the third party will certainly have the right to appeal under Section 37 of the Arbitration and Conciliation Act, 1996 against such order.  Apart from this, if the Supreme Court follows the Bombay High Court’s footsteps in a situation where respondent No. 2 files a Special Leave Appeal, the pro-arbitration policy would further be promoted at a much wider range.


[1]https://indiankanoon.org/doc/188191011/

[2]Section 17 provides that an arbitral tribunal may, at the request of a party, order a party to take any interim measure of protection as an arbitral tribunal may consider necessary in respect of the subject matter of a dispute. 

[3]The Arbitration and Conciliation Act 1996 is essentially based on the UNCITRAL Model Law, the UNCITRAL Arbitration Rules and the New York Convention. India signed the New York Convention on June 10, 1958 and ratified it on July 13, 1960. The convention entered into force on October 11, 1960. Part I of the Act talks about the general provisions is based on the UNCITRAL Model Law, whereas Part II which addresses the enforcement of foreign awards is based on the New York Convention.

[4]Respondent No. 1 (Excel Metal Processors Private Limited) is the parent company of respondent No. 3 (Arisha Metal Precisions Private Limited). Also, respondent No. 2, (Shakti International Private Limited) was originally the claimant in the arbitral proceedings.

[5]Section 37 provides a remedy of an appeal to a party who is aggrieved by an order passed under Section 17.

[6]Section 9 states that a court has the power to grant interim measures of protection.

[7]Section 8 provides that a judicial authority shall, on the basis of an arbitration agreement between the parties, direct parties to go for arbitration

[8]Section 34 provides for grounds on which an arbitral award can be set aside by a court.

[9]Girish Mulchand Mehta v. Mahesh Mehta and Anr., 2010(2) Mh.L.J. 657.

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