In Haskins v. First American Title Insurance Co., the United States District Court for the District of New Jersey expanded the reach of a “litigation hold” to include independent agents of a title insurance company. The Court held that once litigation was reasonably anticipated, First American Title Insurance Company (“First American”) had a duty to instruct its independent insurance agents to preserve all potentially relevant documents and to suspend routine destruction of such documents. The ruling in Haskins gives important e-discovery guidance for many companies, as it clarifies that document preservation rules apply to independent agents in addition to a company’s in-house employees.
Category Archives: Litigation
CAG has no power to conduct Excise & Service Tax Audit of private
The Calcutta High Court delivered a judgment that Comptroller & Auditor General and any officers subordinate to him have no power to conduct audit of private enterprises unless these are financed or funded by Government or grants given by government. The High Court also quashed the letter issued by CERA a wing of CAG to conduct audit of Kolkatta based stock broker Company, SKP Securities Ltd [Writ Petition No 21053 of 2011] & held that there is no provision under Central Excise Act or Finance Act 1994 empowering CAG to undertake audit of private enterprises which are not funded by government. The High Court further held that Rule 5A (2) is ultra vires to the extent for directing every assessee to provide records to Audit Party of CAG. The High Court is of the view that only in case of Special Audit envisaged under section 72A of the Finance Act or Section 14A or Section 14AA of Central Excise Act; assessee is required to provide records, not otherwise, to audit party. In a writ petition no. 20517 of 2012 of Infinity INFOTECH Park Limited, Kolkatta, wherein also similar issues were raised, similar judgment was passed, by referring to SKP Securities Ltd judgment. In both the writ petitions in last few days, extensive arguments were made. Hon’ble High Court delivered judgement in open Court by accepting arguments made on behalf of the Petitioners & by covering the provisions of various Acts relating to Audit by holding that except for Government Companies there are no provisions in any Act empowering CAG to conduct audit of any company. Court even held that C& AG Act also does empower to CAG audit of companies registered under Companies Act, 1956. The High Court has also referred the matter to division bench of High Court by noting that another coordinating bench has taken view in Berger Paint case that both Department & CAG can conduct audit by specifically noting that in Central Excise Rules 173, which is pera materia to Rule 5A, was not pressed & in that judgment subject matter was to interpret the word “or” appearing in Rule, whether it has to be read as “and” and both authority, Department & CAG can simultaneous conduct
audit or not.
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Indian Law for Foreign Seated Award
The Constitutional Bench of the Supreme Court (“Court”) on September 6, 2012 in its decision in Bharat Aluminum Co. (“Appellant”) v Kaiser Aluminum Technical Service, Inc.(“Respondent”), after laudable consideration of jurisprudence laid down by various Indian & foreign judgments and writings of renowned international commercial arbitration authors, ruled that findings by the Court in its judgment in Bhatia International v Bulk Trading S.A & Anr(“Bhatia International”) and Venture Global Engineering v Satyam Computer Services Ltd and Anr(“Venture Global”) were incorrect. It concluded that Part I of the Arbitration and Conciliation Act, 1996(“Act”) had no application to arbitrations which were seated outside India, irrespective of the fact whether parties chose to apply the Act or not. Hence getting Indian law in line, with the well settled principle recognized internationally that “the seat of arbitration is intended to be its center of gravity”. But this welcome overruling by the Court of its previous decisions will provide no relief to the parties who have executed their arbitration agreements prior to the current judgment as the Court, right at the end of its judgment, directed that the overruling was merely prospective and the laws laid down therein apply only to arbitration agreements made after September 6, 2012. The appeal filed by Bharat Aluminum Co. before the Division Bench was placed for hearing before a three Judge Bench as one of the judges in the Division Bench found that judgment in Bhatia International and Venture Global was unsound and the other judge disagreed with that observation. Subsequently it was directed to be placed before the Constitution Bench on January 10, 2012 along with other similar matters. Relevant Issues dealt by the Court The Court was unable to support the conclusions recorded by it in its previous decisions in Bhatia International and Venture Global. It concluded that the Act has adopted the territorial principle unequivocally accepted by the UNCITRAL Model Law, thereby limiting the applicability of Part I to arbitrations, which take place in India. It further stated that the territoriality principle of the Act precludes Part I from being applicable to a foreign seated arbitration, even if the agreement purports to provide that the Arbitration proceedings will be governed by the Act (emphasis supplied). The pertinent issue for consideration before the Court was whether absence of the word “only” in Section 2(2) makes Part I of the Act applicable to all arbitrations, including arbitrations seated outside India. The previous judgments including Bhatia International and Venture Global clearly held that Part I would apply to all arbitrations including those held out of India, unless the parties by agreement, express or implied, exclude all or any of its provisions. The primary contention put forth by the Appellant was that absence of the word “only” in Section 2(2) of the Act permits applicability of Part I of the Act to arbitrations held outside India, there being a conscious deviation from Article 1(2) of UNCITRAL Model Law. Further, restricting the applicability of this provision would lead to conflict
with the rest of the provisions of the Act. The Court following the principles of
literal interpretation and in regard of the legislative intention held that applicability of Part I of the Act is limited only to arbitrations held in India and omission of the word “only” from Section 2(2) has no relevance. It further observed that the present wording of the Act does not deviate from the territoriality principle as accepted under Model Law and absence of “only” in the said provision does not change the content/intention of the legislation. It was observed that it is not permissible for the court while construing a provision to reconstruct the provision. The Court cannot produce a new jacket, while ironing out the creases of the old one. The Court dealt with the aspect whether the above interpretation of Section 2(2) of the Act would be in conflict with Sections 2(4) & 2(5). The Appellant contended that the language of Sections 2(4) & 2(5) makes Part I applicable to every arbitration, whether in India or outside. The Court categorically held that there exists no conflict among the said provisions as Section 2(4) is applicable to “every arbitration under any other enactment for the time being in force” covered by Part I (emphasis supplied) and for the purposes of this section “enactment” would mean only an Act made by the Indian Parliament. Section 2(5) is merely an extension to Section 2(4) to deal with all proceedings in relation to arbitration with the exception of statutory or compulsory arbitrations in case of inconsistency and “all arbitrations” includes only those to which Part I is applicable. Thus, by virtue of the above provisions, Part I of the Act applies to all arbitrations held in India in accordance with the provisions of any Indian enactments unless inconsistent with the provisions of the Act. The scheme of the Act indicates that Part I applies to domestic arbitrations as well as international arbitrations conducted in India. International Commercial Arbitration included within Part I contemplate arbitrations between two foreign parties under foreign law with seat in India. Therefore, domestic awards made within Part I of the Act includes within
its scope both, award rendered in an international arbitration held in India as well as arbitration between two domestic parties and not awards rendered in arbitration held outside India. The object of Section 2(7) is to differentiate between domestic and foreign awards as covered under Part II of the Act. There is no overlapping between the two parts of the Act as the latter deals only with arbitrations held outside India, thereby categorizing them as foreign awards. The Court held that Act being based on the territoriality principle excludes applicability of Part I to foreign seated arbitrations even if the agreement is governed by the provisions of the Act. The Act permits the parties to decide the place of arbitration. The Court interpreting Section 20 of the Act pertaining to place/seat of arbitration has clarified that if seat of arbitration is India, parties are free to choose any place or venue within India for conducting the arbitration proceedings. However, the said provision is to be read with Section 2(2) of the Act to understand the applicability of principle of territoriality. In the absence of parties failing to specify law governing arbitration proceedings, the same would be governed as per the law of the country in which arbitration is held, having the closest connection with the proceedings. The Court has distinguished the concept of “seat” and “venue” and explained their significance in arbitration proceedings. The distinction between seat and venue of arbitration assumes significance when foreign seat is assigned, with the Act as the curial law governing the arbitration proceedings. In such scenario, Part I would be inapplicable to the extent inconsistent with arbitration law of the seat. Further, elaborating on the issue of choice of substantive law, the Court interpreting Section 28 of the Act held that arbitrations under Part I of the Act not being international commercial arbitration would be compulsorily governed by the Indian substantive law, to prevent domestic parties from resorting to arbitration with foreign governing law, whereas no such compulsion prevails in case of international commercial arbitration as defined under Section 2(1) (f) of the Act. The very objective of the Section is to segregate domestic and international arbitrations and convey the legislative intention of not providing extra-territorial applicability to Part I of the Act. The Court held that there is no overlapping of the provisions of Part I and Part II of the Act and Part II is not merely supplementary. There is complete segregation between both the parts as Part I deals with all four phases of arbitration-commencement, conduct, challenge and recognition and enforcement whereas Part II pertains only to recognition and enforcement of foreign awards. Further, the Court held that regulation of conduct of arbitration and challenge would be done by the Courts of the country in which arbitration is conducted, thereby application of Part I provisions to foreign awards would defeat the very object of the Act. Elaborating on the said issue, the Court has also clarified that approaching judicial authority under the non-obstante clause in Section 45 of the Act, does not make Part I applicable to foreign arbitrations held outside India. No provision for annulment of foreign award is provided under the Act. Section 34 pertaining to challenge of awards being included within Part I clearly reflects the legislative intention to restrict its scope to domestic awards. Section 48 of the Act recognizes that Courts of two nations are competent to annul or suspend an award including the country in “which the award was made” and “under the law of which the award was made”. Enforcement of foreign award in India would be refused only if the said award is set aside by Courts of either of the countries as specified above. The Appellant contended that Courts in both the countries have concurrent jurisdiction to annul the award. The Court has clarified that the expression “under the law of which the award was made” refers to the procedural law/curial law of the country and has no reference to the substantive law of the contract between the parties. Rejecting the contrary views upheld in its previous judgments annulling foreign award on the basis of law governing the dispute, the Court held that awards passed in arbitrations conducted outside India cannot be annulled under the provisions of the Act. The major contention of the Appellant for applicability of Section 9 relief to foreign awards was not to leave any party remediless and correct interpretation being adopted in Bhatia International. The applicability of Part I was extended only to the extent of granting interim reliefs and not annulment as the same would invite extra-territorial operations. Section 9 of the Act acts in aid of the arbitration proceedings and provides interim reliefs before or during arbitration or at any time after the making of award but prior to the enforcement of the award under Section 36 of the Act. The Court held that Section 36 being applicable only to domestic awards, pertains only to arbitrations with Indian seat, thereby Section 9 cannot be made applicable to arbitrations held outside India in contravention of the territoriality principle established under Section 2(2) of the Act. It was further clarified that if parties voluntarily chose a foreign seat, it would be implied that consequences of such choice would be known to them and non-applicability of Section 9 would not render them remediless. Awards passed in non-convention countries are not included within the ambit of the Act. The Court held that non-inclusion of the same does not amount to a lacunae as the legislative intention needs to be understood from the language and aspects not included therein cannot be incorporated vide interpretation. The ability to remove such defects is vested only with the Parliament and in its absence; applicability of the Act is limited to awards passed under the Act and in convention countries. Existence of cause of action is the basis to maintainability of suits under the Code of Civil Procedure, 1908 (“Code”). Pendency of arbitration proceedings does not constitute sufficient ground for maintainability of a suit for interim relief. The Court has specified that no suit on the merits of the arbitration would be maintainable as the same would be subject to Sections 8 and 45 of the Act and relief if any would be purely to safeguard the property in dispute before the Arbitrator. No substantive reliefs on the merits of the arbitration could be claimed in the suit and in the event of a valid cause of action; no such suit would be maintainable. The relief claimed would be subject to future award that may be passed and contingent cause of action would not suffice to get proper reliefs. No provision of the Code or the Act vests powers to grant interim relief in suits in the absence of
existence of a substantive suit, in pending arbitrations held outside India.
Arbitrator Law Appointment of Independant Arbitrator India
The Supreme Court (“SC”) in the case of Denel (Proprietary Limited) vs. Govt. of India, Ministry of Defence exercising its powers under Section 11 (6) of the Arbitration and Conciliation Act, 1996 (“Act”) reiterated that right to appointment of an Arbitrator does not get automatically forfeited after expiry of 30 days as prescribed under Section 11(4) & 11(5) of the Act unless petition is filed for appointment of Arbitrator under Section 11(6) of the Act prior to appointment by opposite party. The SC appointed an independent Sole Arbitrator due to apprehensions of bias and impartiality, contrary to the clauses of the contract necessitating appointment of DGOF or government servant, as the Sole Arbitrator.
The parties entered into a contract for supply of 42,000 base bleed units. However, the quantity was later increased to 52,000 units as per clauses of the contract. Denel (“Petitioner”) supplied substantial amount of the goods by January, 2005 though some were rejected by the Government (“Respondent”). The Petitioner was ready and willing to supply the remaining units however, received no response from the Respondent with regard to its dispatch leading to losses and damage being suffered by them. The Petitioner after a series of discussions with the Respondent later became aware that units rejected earlier were owing to usage of improper fuzes by the Respondent. Thereafter, the Respondent kept on hold all contracts and sent a notice seeking refund of amounts to the extent of US $ 23,20,240. Non-refund of the said amounts led to dispute between the parties.
The appointment of the said Arbitrator was objected to by the Petitioner on the grounds of apprehension of bias and terminated the appointment by Notification under Section 14 of the Act. The Arbitrator continued with the proceedings despite the passing of the said Notification dated January 23, 2009. The Petitioner filed application before the District Court, Chandrapur for termination of the mandate of the Arbitrator. The Hon’ble Court passed orders terminating mandate of the earlier Arbitrator and provided for appointment of Director General, Ordnance Factory (“DGOF”) as the Arbitrator or any other government servant appointed by him, as per the terms of the contract. The DGOF did not commence arbitration proceedings or appoint anyone else within 30 days of the passing of the abovementioned Order leading to the present petition being filed under Section 11 before the SC on March 2, 2011.
The SC hearing both the parties held that the petition filed in the present case is maintainable as the same was filed prior to appointment of a new Arbitrator by the Respondent. The SC relying on the precedents of Datar Switchgears Ltd. vs. Tata Finance Limited and Punj Lloyd Limited vs. Petronet MHB Ltd. held that non-appointment of an Arbitrator within 30 days does not amount to forfeiture of rights under Section 11(6) of the Act. Unlike Section 11(4) and 11 (5) which prescribes a period of 30 days for appointment of an Arbitrator, there is no time limit for filing petition under Section 11 (6) of the Act. The right to appointment continues provided the same is made prior to the other party filing petition. In the instant case, the mandate of the earlier Arbitrator was terminated owing to him not acting in a fair and impartial manner but appointment of a new Arbitrator by the Respondent was delayed and not done prior to filing of the present petition. As a result, the Respondent’s right was forfeited as they failed to appoint an Arbitrator prior to the filing of the petition.
With regard to the second issue on appointment of DGOF or a government servant as an Arbitrator, the SC relying on its previous ruling held that it is settled law that arbitration agreements in government contracts providing that an employee of the department (usually a high official unconnected with the work or the contract) will be the arbitrator are neither void, nor unenforceable. These officers are expected to act independently and impartially. Further, it is not mandatory to appoint the named arbitrator but at the same time, due regard has to be given to the qualifications required by the agreement and other considerations. Referring the disputes to the named arbitrator shall be
the rule. Ignoring the named arbitrator and nominating an independent arbitrator shall be the exception to the rule, which is to be resorted to for valid reasons. However, the SC in the present case, declined to appoint an Arbitrator as per the terms of the contract as the apprehensions putforth by the Petitioner had merits as established through correspondences and attitude towards resolving the dispute. The same issue has been dealt earlier in the case of Denel (Proprietary) Limited v. Bharat Electronics Ltd & Anr.
The SC held that under Section 11(6) of the Act, if the circumstances demand, an independent Arbitrator can be appointed as per Section 11(8) (b) contrary to the procedure provided under the terms of the contract. A new and independent Arbitrator was appointed considering the prior approach and attitude of the DGOF towards the dispute.
Confidentiality Provision in Arbitration Proceeding
The Company may be inclined to seek the shelter of confidential arbitration. The impetus for such a strategy lies in the twin goals of obtaining a fair adjudication on the merits while avoiding unwanted, and perhaps, misguided criticism in the court of public opinion that has the potential not only to tarnish a corporate’s image, but to encourage other potential litigants. Company considering confidential alternatives to litigation, however, need to be aware of several pitfalls that can lead to the public disclosure of arbitration proceedings, evidence, and results, as well as the use of the same by other litigants in non-confidential proceedings.
A ruling by the Massachusetts Superior Court highlights the difficulty company face in relying on private arbitration as a means to keep sensitive information confidential. In Dever v. Oppenheimer, the court ruled that a blanket confidentiality agreement imposed by the arbitration panel to protect sensitive documents was contrary to public policy. There, the arbitration centered on Dever’s claim that Oppenheimer fired him for cooperating with the Massachusetts Securities Division that was investigating an ex-broker accused of defrauding an elderly couple. After the arbitration panel awarded Dever $73,000, Dever sought to confirm and modify the award by striking the confidentiality provision. In support of his request that the arbitration award be stripped of its confidentiality provisions, Dever argued that the subject documents should be made public to clear his name of any wrong doing. Oppenheimer argued that the confidentiality provision was necessary to protect sensitive documents that contained embarrassing personal information.
In confirming and modifying the award, Judge McIntyre struck the confidentiality provision, concluding that it was contrary to public policy which favors open access to information, especially in the securities industry. As a result of the ruling in Dever, several sensitive documents were made public, including a draft settlement offer that Oppenheimer submitted to the Massachusetts Securities Division in which it admitted several email policy violations as well as several oversights in its handling of the broker’s case.
The Dever decision underscores the courts’ aversion to treating arbitration awards as confidential and demonstrates the potential for “public policy” arguments to unravel protections that may have been the primary motivation for entering into a “confidential” arbitration to begin with. Care needs to be taken to structure confidentiality provisions narrowly so that they will better withstand judicial scrutiny and to consider adding provisions to arbitration agreements on the front end that attempt to prohibit or limit a party’s ability to seek to have the confidential proceedings made public.
