Insolvency of parties
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This article is written by Vaibhav Sachde, pursuing a Certificate Course in Introduction to Legal Drafting: Contracts, Petitions, Opinions & Articles from Lawsikho.com.

Introduction

Lindsay International Private Limited vs. IFGL Refractories Limited is a case heard by Calcutta High Court on 25 June 2021. The court had established an ordinary original civil jurisdiction and the judge for the case was Hon’ble Justice, Moushumi Bhattacharya. This was a case to set aside the order of a sole arbitrator which the petitioner claimed as “Interim Award”. Where the judge accordingly dismissed the allegations against the arbitrator and declared the order to not be an interim award.

Background of the case

Lindsay International Private Limited (buyer) and IFGL Refractories Limited (seller) were dealing in refractory products. The buyer placed twelve purchase orders on the seller for supply of refractory products having general terms and conditions governing all the orders. The actual person to whom the delivery was to be made as specified in the purchase order was the overseas buyer. The buyer made the general terms and conditions for the supply and these conditions had an arbitration clause in clause 19. All these terms and conditions formed a contract between the parties. The arbitration was to be settled according to the rules of arbitration of the Indian Arbitration and Conciliation Act, 1996. Thereafter an issue arose between both regarding the default of payment of the amount. As an arbitration clause was present, the dispute was dealt with through arbitration where the applicant was IFGL Refractories Limited and the respondents were Lindsay International Private Limited. 

Procedural history 

In the arbitration proceedings, Lindsay International Private Limited after submitting their statement of defence applied for amendment of the statement of defence. In the amendment, they asked for the inclusion of counter-claims/equitable set-off, which was denied by the Arbitrator and they made an application in Calcutta High Court against this order of the arbitrator, which they considered to be an interim award. They demanded setting aside this “Interim Award” dated 15th October 2020 passed by a learned sole arbitrator.

Hence a case was made with the High court of Calcutta and the petitioner was Lindsay International Private Limited and IFGL Refractories Limited was the respondent. Here the petitioner had established that the disputed order of the arbitrator is an interim award because ultimately the arbitrator decided the counter-claim/ set-off and held that the claims made by Lindsay were barred by limitation. The petitioner further alleged that the Arbitrator ended the dispute between the parties by rejecting the claims. Moreover, the judge accordingly dismissed the allegations without any order as to costs; because the order impugned is not an award and hence is not amenable to challenge under Section 34 of the Act.

Issues of the case

The High Court of Calcutta, after hearing all the arguments dealt with the following issues;

  1. Whether the application brought is Maintainable?
  2. Is the impugned award is amenable to be challenged under Section 34of the Act if the application is maintainable?
  3. Is Section 23(3)  of The Arbitration and Conciliation Act, 1996 relevant, and to what extent?

Statements and claims 

Statement of claim of IFGL

In their statement of claim, IFGL submitted the following:

  1. They claimed an amount of Rs 3,20,52,000 and additional interest on account of supply as per the twelve purchase orders.
  2. The twelve purchase orders based on general terms and conditions for supply provided that Lindsay was required to pay IFGL within three days of receiving payment from the Arcelor Mittal companies (overseas buyer). Despite receiving payments from overseas buyers, Lindsay failed to meet its payment obligations to IFGL. Thus, IFGL claimed an unpaid amount that had been received by Lindsay from overseas buyers.
  3. The chief financial officer had admitted a receipt of Rs.4,21,70,432.21/- from the overseas buyers to the account of IFGL. Out of this amount only Rs.207.88 lacs is related to the 12 Purchase orders. Here IFGL refers to and claims of acceptance by Lindsay of the amount received.
  4. The new term introduced in the purchase orders issued from 1st august 2016 by Lindsay that IFGL can’t have any direct relation with any overseas buyer will not be applicable here because all the 12 purchase orders were issued before August 1.
  5. A Memorandum of Understanding (MOU) executed between the parties contains an admission by Lindsay that it received 4.21 crores from the overseas buyer and the amount was due to the IFGL group. IFGL had cancelled the MOU on 5th December 2016 because they claim that Lindsay did not act upon the MOU and effectively condemned it by violating its key requirements.

Statement of defence of Lindsay

In their statement of defence Lindsay submitted the following:

  1. Lindsay claims that IFGL supplied refractory goods to them on an exclusive basis, which were then sold by them to the overseas buyer in 1999. Thus, IFGL can’t supply directly to overseas buyers.
  2. They also claim that the arbitration clause present in terms and conditions of the purchase order cannot be relied upon because the parties did not sign an arbitration agreement.
  3. According to Lindsay, the twelve purchase orders stand novated and superseded by an MOU, and the MOU is terminated illegally by IFGL. Thus, IFGL was in breach of the MOU.
  4. They claim that the parties are bound by an arbitration agreement, and thus IFGL could not have invoked any arbitration clause and the remaining statements in the SOD are denials of IFGL’s statements in the SOC.

Lindsay applied to amend their statement of defence and to include a counterclaim via it. The following were pleaded in amendments:

  1. Lindsay made out a case of an express agreement that had been mentioned in the statement of defence and claimed that this form of arrangement was within the knowledge and consent of overseas buyers.
  2. But, IFGL and overseas buyers conspired and disregarded the arrangement by directly dealing with each other. Which they discovered in 2016 and thus withheld payments claimed by IFGL.
  3. Lindsay claims that by entering the MOU for settling disputes they agreed to the payment of Rs 4.21 crores for supplies made by IFGL being kept in abeyance and a methodology for future payments would be worked out. But IGL reneged on the MOU and cancelled it on 5th December 2016 which was not accepted by Lindsay.
  4. They claimed that MOU had no arbitration clause and was an independent agreement that extinguished all previous arrangements. Thus, Lindsay prayed to make MOU binding and IFGL made a breach. A decree of Rs.10 crores was prayed as damages against IFGL for such breach as well as damages for future supplies.

Summary of issues 

1. First and second issue

The petitioner argued on the maintainability under Section 34 of the Arbitration and Conciliation Act, 1996 (hereinafter referred to as the act) and that the Interim Award (impugned order) dated 15th October 2020 is amenable to challenge before the Court. Petitioner supported its arguments on basis of Indian Farmers Fertilizer Cooperative Limited vs Bhadra Products(2018) and LT. Col. H.S Bedi Retd. & Anr. vs STCI Finance Limited. 

The respondent denied the maintainability because the order of rejecting a new claim by way of amendment to the Statement of Defence is not an interim award. Further, the application by the petitioner for the interim award was not under Section 31(6) of the act instead was for incorporation of a new claim by way of amendment of the Statement of Defence under Section 23(3)  of the Act. He also backed this because the impugned order has not been described as an interim award by the arbitrator. To deny the order as interim award he referred to the definition and the characteristic of an interim award given in Ranjiv Kumar and Anr. vs Sanjiv Kumar and Anr and Indian Farmers. The petition under Section 34 is not maintainable because according to him the order was not an interim award.

After hearing both sides the court had established that one of the important decisions for maintainability was to know the meaning of the interim award.

Firstly, for the part that whether the impugned order can be classified as an interim award the court looked at the point of defining the meaning of an interim award in such a case. For establishing a meaning court referred to the meaning of interim award in Section 31(6) and the judgment of McDermott International vs Burn Standard (2006), which clarified that an interim award “may be a final award on the matters covered thereby, but made at an interim stage.” Also referring to Ranjiv Kumar vs Sanjiv Kumar, a Division Bench of this Court was of the view that ‘any matter’ under Section 31(6) covers only such matters which would close a part of the list, while the Bombay High Court in Harinarayan G. Bajaj vs Share deal Financial Consultants (2003), where it was implied that an interim award must be in respect of claims or counterclaims which have been the subject of submission of reference to the arbitral tribunal. Thus, the court observed that the matters within which the tribunal can make an award are held under Section 31(6) and that an interim award is on a matter in respect of which a final award can be made by the Arbitrator.

Hence after establishing the meaning of interim award the court further decided to deal with the factual contentions urged on behalf of Lindsay, which had a bearing with the pleadings. The contentions were that the counterclaim is within the scope of the arbitration agreement. Second, the arbitrator had held in an application filed by Lindsay under Section 16 that the arbitrator had negated the existence of the MOU and further that the disputes between the parties were settled by the MOU which does not have an arbitration clause. Lastly, it was argued that the arbitration is not confined to the 12 POs and further that the POs do not contain the arbitration agreement governing the transactions between the parties.

To deal with the contentions the court established that an important point to look upon was whether the application of the arbitration agreement stood superseded by the subsequent MOU or not. For dealing with this the court looked at the decision for the same in arbitration proceedings. In the proceedings, Lindsay’s claim that the MOU had changed or replaced the parties’ previous contract was rejected by the arbitrator and the arbitrator found that the MOU does not state that the parties will be unable to approach the arbitrator for dispute resolution. 

The court observed that in any case, Lindsay’s argument did not appear to have been made in their amendment application, which resulted in the impugned order rejecting the application. Also, Lindsay stated explicitly in the application for amendment of the SOD that the MOU does not contain an arbitration clause. Lastly, Lindsay’s claim that the arbitration went beyond the 12 POs was not supported by the relevant documents. Further, it was observed that the claims under 12 POs that were referred to arbitration were tabulated in IFGL’s Letter of Invocation dated December 9, 2016, and also the court looked upon a previous case between the parties i.e. IFGL Refractories Limited V Lindsay International Private Limited, dated 22nd January 2019, for appointment of the arbitrator. In this case, it had been seen that the dispute raised by IFGL to which the court-appointed an arbitrator was concerning twelve purchase orders. This court observed that the arbitration is restricted to the 12 purchase orders issued for the supply of refractories and concerns payment for the goods supplied by IFGL to Lindsay.

Further, the MOU was not part of the reference because it could be established from Lindsay’s stand in the application for amendment of the statement of defence. The amendment by Lindsay sought to introduce an entirely new factual dispute, namely, Lindsay’s claim for damages from IFGL’s breach of the MOU and equitable set off in the event of a finding of liability against Lindsay. 

So, after referring to all the things the court declined Lindsay’s contentions with the MOU and the impugned order of the arbitrator rejecting Lindsay’s amendment application because these were irrelevant to the question of whether the order meets the criteria of an interim award.

After defining an interim award and rejecting Lindsay’s contentions, the court considered whether the order in question meets the criteria for an interim award capable of being inserted through the Section 34 route, or whether it is simply an order that, despite the apparent prejudice to Lindsay, must be kept outside the scope of the Act’s Section 34 remedy. For this, the court referred to statements and claims mentioned above in subheading 4 and looked at whether the MOU or the consequences of breach thereto as part of the reference before the arbitrator. 

The court referred to Section 31(6) of the act, which forms an outline of the power for an arbitral tribunal in terms of making an interim award. And also referred to several decisions with a similar factual issue, where a matter in respect of which a final award can be made would be whether an order of the Arbitrator refusing amendment of pleadings for incorporation of new claims which were not referred to arbitration or involving a decision on the claims already referred. 

The decisions included Container Corporation of India vs Texmaco Limited, where the Delhi High Court was of the view that dismissal of an application for amendment of the written statement whereby the petitioner was not allowed to include the counterclaim at a belated stage cannot be termed as an interim award. Harinarayan vs. Sharedeal, which considered a rejection of an application under Section 27 of the Act. The Bombay High Court held that to be an award, the decision must result in a final determination of the claim, part of the claim, or counterclaim submitted to arbitration. 

Punj Lloyd Limited vs. Oil and Natural Gas Corporation Ltd, which dealt with whether the refusal by the tribunal to permit amendment to one of the claims can be construed as an award/interim award. The Bombay High Court held that since the decision was made on an application under Section 23 and there was no adjudication of the claim on merits, the decision could not be construed as an award under Section 2(1)(c) of the Act.

Cinevistaas Ltd. vs Prasar Bharti, here the Delhi High Court considered whether the order of the Arbitrator rejecting the proposed amendments for incorporation of additional claims on the ground of limitation resulted in an interim award under the provisions of the 1996 Act. The Court held that the facts would point to an interim award since there was a final adjudication of the issues by the arbitrator.

Lt Col H.S. Bedi vs STCI Limited, which dealt with the rejection of the amendment of the Statement of Defence by the arbitrator. The Delhi High Court, following Cinevistaas, held in favour of the decision being an interim order under Section 31(6) of the Act. The Calcutta High Court when applying to the present case observed that none of these decisions were concerned with an amendment to the Statement of Defence and incorporating counterclaims that were not part of the reference.

The fact that Lindsay’s claim for damages of Rs 10 crores did not emerge out of the 12 transactions that were the subject matter of the reference was noted by the court after analysing the issue in the current case. For this case court observed that regardless of other factors, the essential concept is that denying an attempt to bring a new cause of action that is not part of the reference’s subject matter cannot result in an interim award under Section 31(6) of the Act. For this reason, the decision (of rejection) of the matter (being a claim for damages arising out of the alleged breach of the MOU) was not a part of and had no causal or factual link to the claim arising out of the 12 POs.

Hence, the court announced that the impugned order is not an interim award as defined under Sections 2(1)(c) and 31(6) of the act and thus, must be kept outside the recourse available in Section 34 of the Act.

2. Third issue

The third issue dealt with the relevance of Section 23(3) of the act which is referred for any discussion of amendment of pleadings in an arbitration. The court has also referred to Section 23(2A) in this application.

Section 23(2A) was established in 2015 which allowed the counterclaim if it is within the scope of the arbitration agreement. The above-mentioned Lindsay’s set-off and counter-claim under subheading 4 show that the alleged breach of which by IFGL results in the claim for damages does not contain an arbitration clause. Hence, the statutory bar under Section 23(2A) in the matter of adjudication by the arbitral tribunal on the proposed amendments becomes operative.

Now, looking at Section 23(3), a party can amend his statement of defence unless the arbitral tribunal considers it inappropriate to allow the amendment or supplement having regard to the delay in making it. And the time period is also provided in Section 23(4) [established in August 2019] i.e. the statement of claim and defence under this section shall be completed within a period of six months from the date the arbitrator received notice, in writing, of their appointment. So, considering this in the present case it is examined whether there was a delay in the making of Lindsay’s application and if yes, then whether the rejection of the amendment by the Arbitrator was justified on that ground.

After looking into the relevant dates of the case it was established by the court that there was a 9 months delay on the part of Lindsay. The court had also made a point that the wordings in Section 23(3) do not limit the Arbitrator from taking into consideration of other factors for rejecting an amendment although delay remains the foremost among such considerations. This was established by referring to the judgment of  Shri Sitaram Sugar Company vs. Union of India (1990).

The court referred to arbitration proceedings to consider that Lindsay’s application, that IFGL was bound by MOU and that IFGL was in breach of the MOU, was barred by an arbitrator under Article 58 of the Limitation Act and also because the cause of action for suing IFGL for the said relief first accrued on 5th December 2016 while the application was filed on 23rd January 2020. The other prayer for a decree of Rs. 10 crores as damages for breach of the MOU by IFGL under application of Lindsay was barred by an arbitrator under Article 55 of the Limitation Act as the alleged breach in the form of repudiation of the MOU was on 5th December 2016.

The court after equating the delay on the part of Lindsay in making the application for amendment under Section 23 with its failure to enforce the contract or sue for damages within the prescribed period of limitation despite having rejected the repudiation of the contract by IFGL, established that Lindsay’s application for amendment was rejected under a different statute of limitations than the delay contemplated under Section 23(3) and (4) of the Act. 

Because there was an admitted delay on Lindsay’s part in meeting the time frame outlined in Section 23(4), the Court found no flaw, in fact, or law, in the reasons given by the Arbitrator for reaching his decision.

Critical analysis of the case

The court was right in dismissing the application. The court properly looked in the meaning of the arbitration award as given in Sections 2(c)and 31(6)as well as very well analysed the scope of Section 23 of the act and duly differentiated the basis (bar of limitation) on which arbitrator rejected the application of Lindsay and the delay established under Section 23(3) and 23(4). Lastly, it is commendable how the court after considering all relevant aspects deduced that the impugned order was not amenable under section 34. Most importantly the court was very clear about its decision and did not go into other factual disputes which were not relevant. Also, the judges reviewing the aspects to all possibilities is to be looked upon like the judge tried to understand the meaning of words in every aspect under Article 23(3) and did not restrict it to literal understanding. Hence, the court’s decision to dismiss the petitioners’ appeal is right. 

Conclusion 

While deciding whether an interim relief granted by an Arbitrator would constitute an interim award this case found that the impugned order did not constitute an interim award as defined under Sections 2(c) and 31(6) of the Act, thereby allowing it to be set aside under Article 34 of the Arbitration and Conciliation Act, 1996. 

The court looking into the definition of interim award, its scope to be amenable under Section 34 of the act, and looking at the extent of applicability of Section 23 in the following case established that the arbitral tribunal could not make an interim arbitral award based on Lindsay’s counter-claim because it was outside the scope of the arbitration agreement and as a result, the impugned order dated 15th October 2020 falls outside the purview of the recourse available for setting aside an arbitral award under Section 34 of the Act. Hence, the court dismissed the case without any order as to costs. Also, the respondents’ prayer to stay was refused considering the period since which the arbitration proceedings had been going.


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