Source: Supreme Court 

Why in News? 

Recently, the Supreme Court in the matter of Aslam Ismail Khan Deshmukh V. Asap Fluids Pvt. Ltd. & Anr. has held that arbitral tribunal has the authority to impose cost on the party who refrains the other party to participate in the arbitration proceedings by taking advantage of the minimum interference of the courts at referral stage. 

What was the Background of Aslam Ismail Khan Deshmukh V. Asap Fluids Pvt. Ltd. & Anr  Case? 

• In the present case, the petitioner is a Non-Indian Resident (NRI) and ASAP Fluids Pvt. Ltd (respondent No. 1) and  Gumpro Drilling Fluids Pvt. Ltd. (respondent No. 2) are Indian Private Ltd Companies. 
• The petitioner and respondents entered into Shareholder agreement where it was agreed that the petitioner was to hold 4,00,000 equity shares of respondent no. 1 and also participate in the management of respondent no.1 company. 
• The Managing Director of respondent no.2 informed the petitioner, that 2,00,010 equity shares of respondent no.1 which belong to the petitioner were being held by respondent no.2 in its name. 
• It was stated that the arrangement was made to provide comfort to the potential investors in the respondents and the shares shall not be pledged or sold at any time without the written consent of the petitioner.  
• At the time of sale of respondent no.1, it was confirmed that the value of these shares net of taxes would be paid to the petitioner or his nominee. 
• Subsequently the following agreements were executed by the respondent No. 1: 
  • A Service Agreement between Respondent No. 1, its Dubai subsidiary (ASAP Fluids DMCC), and the Petitioner 
  • A Commercial Expertise Agreement between the Petitioner and both Respondents 
• Under the Service Agreement:  
  • The Petitioner was appointed as Director of both Respondent No. 1 and its Dubai subsidiary 
  • He was responsible for the full operations of the Dubai subsidiary 
  • The appointment was for an initial period of 3 years. 
  • The agreement specified his remuneration and benefits 
• Under the Commercial Expertise Agreement:  
  • The Petitioner agreed to transfer his commercial expertise, knowledge, and experience to Respondent No. 1 
  • This included his expertise in government approvals, administrative, and legal aspects of the business 
  • In exchange, Respondent No. 1 agreed to issue 400,000 equity shares (₹10 each) to the Petitioner 
• Key Disputes:  
  • The Petitioner claims Respondent No. 2 failed to transfer 200,010 shares in Respondent No. 1 that belonged to him 
  • Respondent No. 1 allegedly failed to issue share certificates for the additional 200,010 shares 
  • Despite allegedly holding 400,000 equity shares per the Shareholders Agreement, the Petitioner never received the share certificates 
  • The Petitioner couldn't exercise his "Right of First Refusal" under Clause 6 of the Shareholders Agreement due to lack of share certificates. 
• Subsequently:  
  • The Petitioner made multiple requests for either the share certificates or equivalent monetary compensation 
  • He sent an Arbitration Notice to both Respondents. 
  • Due to no response from the respondents the petitioner filed two separate applications under Section 11(6) of the Arbitration & Conciliation Act, 1996 (A & C) for adjudication of disputes pertaining to the 4,00,000 equity shares and Arbitration clause was invoked. 
  • The Respondents replied after 10 months, denying all claims but appointing two arbitrators and called upon the petitioner to appoint the third arbitrator. 
  • The Respondents contested that the dispute over 200,010 shares couldn't be referred to arbitration 
  • The Petitioner eventually resigned as Director from both Respondent No. 1 and its Dubai subsidiary, which was accepted via Director's Resolution. 
• The Bombay High Court on the application held that the petitioner is a Non-Resident Indian who habitually resides and works in Dubai. The proceedings would constitute an “international commercial arbitration” and therefore, the Section 11 applications filed before it was not maintainable. 
• Aggrieved by the same the present petition has been filed by the petitioner before the Supreme Court. 

What were the Court’s Observations? 

• The observation of the Supreme Court are as follows: 
  • Limited Jurisdiction Recognition: 
    • The Court acknowledged concerns about parties being forced into arbitration due to the courts' limited jurisdiction under Section 11(6-A) of the A & C Act. 
    • Some parties might exploit this limited judicial interference to compel others into costly and time-consuming arbitration proceedings 
  • Scope of Court's Examination: 
    • At the referral stage, courts should only examine two aspects: 
      • The existence of a valid arbitration agreement between parties 
      • Whether the application for arbitrator appointment was filed within three years 
  • Powers of Arbitral Tribunal: 
    • The Arbitral Tribunal has authority to impose entire arbitration costs on parties who misuse the court's limited jurisdiction 
    • This acts as a safeguard against parties forcing others into unnecessary arbitration 
    • Courts should refer matters like time-barred claims and non-signatory inclusion to arbitration 
    • Detailed examination of such issues should be left to the Arbitral Tribunal 
  • Limitation Period Analysis: 
    • Courts should conduct only a prima facie examination of the limitation period 
    • Detailed evidentiary inquiry into time-barred claims should be avoided at the referral stage 
    • Such determinations are better left to the arbitrator's decision  
  • Trust in Arbitral Tribunal: 
    • The Court expressed confidence in arbitral tribunals' ability to identify frivolous litigation. 
    • Arbitrators are better equipped to conduct extensive examination of pleadings and evidence  
  • Precedential Support: 
    • The Court reaffirmed principles established in two previous cases: 
      • In Re: Interplay 
      • SBI General Insurance v Krish Spinning 
  • Judicial Restraint: 
    • Courts should avoid intricate evidentiary inquiries at the referral stage 
    • The focus should be on maintaining a balance between judicial oversight and arbitral autonomy 
• The Supreme Court, after making the above observations, held that the arbitral tribunal has the authority to impose cost on the party who refrains the other party to participate in the arbitration proceedings by taking advantage of the minimum interference of the courts at referral stage. 
• Therefore, the court allowed the present petition, and the appointment of sole arbitrator was allowed considering the appointment of the same for the resolution of dispute related to service agreement between the same parties. 

What is Section 11 of the A & C Act?

• Nationality of Arbitrators:   
  • Any person of any nationality can be an arbitrator, unless the parties agree otherwise.  
  • Appointment procedure:   
  • Parties are free to agree on a procedure for appointing arbitrators, subject to subsection (6).  
  • In the absence of an agreement, for a three-arbitrator tribunal, each party appoints one arbitrator, and the two appointed arbitrators select the third (presiding) arbitrator.  
• Role of Arbitral Institutions:   
  • The Supreme Court and High Courts can designate graded arbitral institutions for appointing arbitrators.  (subsection 3A) 
  • In jurisdictions without graded institutions, the Chief Justice of the High Court may maintain a panel of arbitrators.  
  • These arbitrators are deemed to be arbitral institutions and are entitled to fees as specified in the Fourth Schedule.  
• Appointment in Case of Failure: (subsection 4) 
  • If a party fails to appoint an arbitrator within 30 days of receiving a request, or if the two appointed arbitrators fail to agree on the third within 30 days, the appointment is made by the designated arbitral institution.  
  • For international commercial arbitration, the Supreme Court designates the institution; for other arbitrations, the High Court does so.  
• Sole Arbitrator Appointment:   
  • If parties fail to agree on a sole arbitrator within 30 days, the appointment is made as per subsection (4).  
• Failure to Act under Agreed Procedure: (subsection 6) 
  • If a party, the appointed arbitrators, or a designated person/institution fails to perform under the agreed procedure, the court-designated arbitral institution makes the appointment.  
• Disclosure Requirements:   
  • Before appointing an arbitrator, the arbitral institution must seek a written disclosure from the prospective arbitrator as per Section 12(1).  
  • The institution must consider any qualifications required by the parties' agreement and the contents of the disclosure.  
• International commercial arbitration:  (Subsection 6-A) 
  • For sole or third arbitrator appointments in international commercial arbitrations, the designated institution may appoint an arbitrator of a nationality different from the parties.  
• Multiple appointment requests:   
  • If multiple requests are made to different institutions, the one receiving the first request is competent to appoint.  
• Time frame for appointment:   
  • The arbitral institution must dispose of an application for appointment within 30 days of serving notice on the opposite party.  
• Fees determination:   
  • The arbitral institution determines the arbitral tribunal's fees and payment manner, subject to rates in the Fourth Schedule.  
  • This doesn't apply to international commercial arbitrations or where parties have agreed on fee determination as per arbitral institution rules.  
• Non-delegation of judicial power:   
  • The designation of a person or institution by the Supreme Court or High Court is not considered a delegation of judicial power.