Brief case: Civil suit stands back for arbitration

A weekly selection of key court orders

When an agreement is terminated by one party alleging breach committed by the other, the arbitration clause still survives and continues to be operative. This is particularly so when the contract is revoked by mutual consent and the arbitration clause is framed in general terms, the Supreme Court stated in the case, Hema Khattar Vs Shiv Khera, while setting aside the ruling of the Delhi High Court. In this case, there was an agreement to reconstruct a building between the two parties. But, the land owner found that the construction was faulty and the agreement was terminated. The owner named a sole arbitrator invoking the arbitration clause. But the builder moved the high court in a civil suit claiming dues and other points. The owner opposed it on the ground of the arbitration clause. The high court, however, proceeded on the line of the suit. On appeal, the Supreme Court quashed the orders of the high court and allowed the sole arbitrator named by the owner to decide the issues.

Correspondence doesn’t make a contract 

The Supreme Court has set aside the judgment of the Madras High Court and two lower courts in a dispute between Vedanta Ltd and Emirates Trading Agency, ruling that there was no concluded contract between the parties.  Emirates wanted phosphoric acid from Vedanta and communications followed over the quantity and duration of supply. It also bid in response to the international tender published by Bangladesh Chemical Industries Corporation assuming that the supplies will be available from Vedanta. Because of Vedanta’s denial of supplies, Emirates’ performance guarantee was forfeited and it suffered other losses. The lower courts accepted the complaint of breach of contract as they understood the communications as concluded contract and decreed the suit. Vedanta had told the district judge and appellate courts that there were only communications regarding proposals and counter-proposals but they were not accepted and hence no contract was signed, stamped and confirmed. But those courts did not agree. Vedanta appealed to the Supreme Court reiterating its stand which was accepted.

Govt’s discretion in excise law  

The Supreme Court declared last week that when a law vests a discretionary power in the government, the court would not interfere with the exercise of such discretion “unless it is made with oblique end or extraneous purposes or upon extraneous considerations, or arbitrarily, without applying its mind to the relevant considerations, or where it is not guided by any norms which are relevant to the object to be achieved”.  The court stated so while dismissing the appeal case, Mangalam Organics Ltd vs Union of India, against the order of the Delhi High Court. Section 11C of the Central Excise Act grants a discretionary power to the government to issue or not to issue a notification exempting units if there was a “generally prevalent practice”. The petition was filed by a manufacturer of rosin and turpentine and it demanded a notification claiming that it fulfilled the conditions for getting exemption, namely, it used a manual method without using power and such procedure was exempted from duties in other cases. The Supreme Court rejected the contention and stated there was no such general practice obliging the government to issue a notification.

Tax liability after amalgamation  

Income tax assessment of a company which takes over a sick unit with liabilities was examined by the Supreme Court in its recent judgment in the case, Mcdowell Co vs CIT. The sick company, Hindustan Polymers Ltd (HPL), was amalgamated with Mcdowell. HPL owed a lot of money to banks and financial institutions. However, they waived interest on them. The interest was shown as expenditure by HPL. Mcdowell claimed benefit on that account, invoking Section 72A of the Income Tax Act. According to that provision, the company which takes over the sick company is allowed to set off losses of the amalgamated company as its own losses, subject to certain conditions. The assessing officer treated the income at the hands of the company and adjusted it from the accumulated losses. Mcdowell challenged it before the tribunal which ruled in its favour, stating income was that of HPL, which was a different entity. But the Karnataka High Court held that the tribunal was wrong in treating the waiver of interest as not income of Mcdowell. The company’s appeal was dismissed. 

Validity of ship’s registration

The Supreme Court has ruled that a provisional certificate of registration of a ship has validity only for six months or till the ship arrives at an Indian port for registration. If the ship is in the territory of another country where there is an Indian consul, he can grant temporary registration but it will mandatorily expire within six months or when it arrives in a port where it can get registration. The conditions for temporary and permanent registration are the same and they are meant to develop the shipping industry, the Supreme Court stated in its judgment in the case, Halliburton Offshore Services Inc vs Mercantile Marine Department. The appeal arose when the Oil and Natural Gas Commission invited competitive bids for the charter hire of a stimulation vessel for Mumbai Offshore. The principal officer of the marine department revoked the provisional certificate of the vessel, Sita Devi. The order was quashed by the Bombay High Court raising the question of validity of the provisional certificate under the Merchant Shipping Act. Interpreting its provisions, the judgments, delivered separately by two judges, added that the ship must be fully built and sea-going and it must satisfy other conditions under the rules.

Impartiality of arbitrators

The Delhi High Court last week rejected the objection raised by US firm HRD Corporation against the appointment of two judges as arbitrators in its dispute with Gas Authority of India Ltd (GAIL). According to the corporation, the two were ineligible to act as arbitrators under the Arbitration and Conciliation Act, which was amended in 2015 to settle disputes over the impartiality and independence of arbitrators. The allegation against the two judges was mainly about their relationship with GAIL. One of them allegedly acted as an arbitrator in a case involving GAIL, but the court stated that it could not be called a “business relationship”, disqualifying him from the present arbitration. The other judge had reportedly given legal advice to GAIL in another matter, but that would not disqualify him as he was not giving advice regularly. A “relationship” of an advisor would signify an association that is continuing and would not include obtaining a solitary opinion from an independent practitioner. Taking a legal opinion does not constitute a relationship of an advisor to the party seeking such opinion, the judgment explained.