22 Jan 2121

Third parties are not entitled to invoke Section 9 of the Arbitration and Conciliation Act, 1996 for seeking interim measures against a party to the Arbitration Agreement - Bombay High Court

Case : Valentine Maritime Ltd v. Kreuz Subsea Pte Limited and Anr. Commercial Appeal (L) No. 7013 of 2020 in Comm. Arbitration Petition (L) No. 6973 of 2020

Court : Bombay High Court

Bench : Justice R. D. Dhanuka and Justice V. G. Bisht

Decided on : 22 Jan 2121

Relevant Statutes

Section 9, 36 and 37 of the Arbitration and Conciliation Act, 1996

Order 38 Rule 5 of the Code of Civil Procedure, 1908

Brief Facts and Procedural History

1. On 21 August 2019, Oil and Natural Gas Corporation Ltd. entered into a contract with Valentine Maritime Ltd. to lay a 165.77 km subsea pipeline spread in 23 segments including associated subsea activities. On 30 October 2019, Oil and Natural Gas Corporation Ltd. issued a Letter of Award in favour of Valentine Maritime Ltd. On 30 October 2019, Valentine Maritime Ltd. issued a Letter of Acceptance appointing Kreuz Subsea Pte Ltd. as a Sub-contractor for subsea installation work associated with the pipeline replacement project of Oil and Natural Gas Corporation Ltd.

2. A commercial dispute arose between Kreuz Subsea Pte Ltd. and Valentine Maritime Ltd. The Kreuz Subsea Pte Ltd. filed a Commercial Arbitration petition. On 11 November 2020 the Single Judge passed the following order:

3. The Valentine Maritime Ltd. was directed to deposit with Prothonotary and Senior Master an amount of US $2,403,073 or the rupee equivalent at the then prevailing exchange rate, being the value of the invoices dated 2nd June 2020 by 4 December 2020 and further directed the Prothonotary and Senior Master to invest the said amount for a period of no more than four weeks initially.

4. The Kreuz Subsea Pte Ltd. was directed to invoke arbitration before 1 December 2020 and thereafter take all steps to have the arbitral tribunal constituted as soon as the ICC Rules permit. If Kreuz Subsea Pte Ltd. failed to invoke arbitration on or before 1 December 2020, the said order will cease to operate and the amount deposited will have to be returned with any accrued interest to Valentine Maritime Ltd.

5. If Valentine Maritime Ltd. failed to make the deposit within the time prescribed, the Oil and Natural Gas Corporation Ltd. will deposit that amount out of the amounts, if any, due from it to Valentine Maritime Ltd. by 11 December 2020 under the PRP-VI contract between Oil and Natural Gas Corporation Ltd. and Valentine Maritime Ltd. without prejudice to the rights of Oil and Natural Gas Corporation Ltd. vis-a-vis Valentine Maritime Ltd. and the making of that deposit by Oil and Natural Gas Corporation Ltd. and a consequent reduction in the payment or payments by Oil and Natural Gas Corporation Ltd. to Valentine Maritime Ltd. will not, by virtue of compliance of the said order by Oil and Natural Gas Corporation Ltd., be claimed by Valentine Maritime Ltd. in any forum or any proceeding to be breach of the PRP-VI contract.

6. The Valentine Maritime Ltd., appellant in the 1st Commercial Appeal impugned the entire order passed by the Single Judge whereas Oil and Natural Gas Corporation Ltd., the appellant in 2nd Commercial Appeal impugned the directions issued by the Single Judge in the order dated 11 November 2020.

7. By consent of parties, both the appeals were heard together.

The Issues of the Case

Whether Oil and Natural Gas Corporation Ltd. could have been impleaded as a party respondent to the petition filed under Section 9 of the Arbitration Act by Kreuz Subsea Pte Ltd. though there was no Arbitration Agreement between the two?

Whether the Single Judge could have passed any order of interim measures against Oil and Natural Gas Corporation Ltd. including an order of deposit of the amount due and payable by Oil and Natural Gas Corporation Ltd. to Valentine Maritime Ltd. under PRP-VI contract between Oil and Natural Gas Corporation Ltd. and Valentine Maritime Ltd. to secure the claims in arbitration proposed to be made by Kreuz Subsea Pte Ltd. against Valentine Maritime Ltd. by way of garnishee order?

Whether Kreuz Subsea Pte Ltd. had made out a case for grant of interim measures against Valentine Maritime Ltd. as well as Oil and Natural Gas Corporation Ltd. or any of them to secure the claims proposed to be made by Kreuz Subsea Pte Ltd. against Valentine Maritime Ltd. or not?

The Observations of the Court

The High Court of Bombay observed that:

Issue 1

1. The impugned order passed by the learned Single Judge indicates that the invoices submitted by the Kreuz Subsea Pte Ltd. including the invoices for May 2020 were backed with Oil and Natural Gas Corporation Ltd. signed completion certificate. Under Clause 6.1.2 (c), Valentine Maritime Ltd. had agreed to notify Kreuz Subsea Pte Ltd. in writing of Valentine Maritime Ltd. submitting an invoice to Oil and Natural Gas Corporation Ltd. and thereafter in writing of the invoice processing progress and all communications between Valentine Maritime Ltd. and Oil and Natural Gas Corporation Ltd. related to the invoice submitted. Valentine Maritime Ltd. had also agreed to immediately inform Kreuz Subsea Pte Ltd. in writing once the payment was received from Oil and Natural Gas Corporation Ltd. by Valentine Maritime Ltd. Under Clause 6.1.2, Kreuz Subsea Pte Ltd. was required to submit invoices at the end of each month, for all progress earned by Kreuz Subsea Pte Ltd. based on the completion certificate signed by Oil and Natural Gas Corporation Ltd. furnished by Kreuz Subsea Pte Ltd. Valentine Maritime Ltd. was required to effect the payments, by wire transfer or as otherwise may be instructed by Kreuz Subsea Pte Ltd. in writing within 7 days after receipt by Valentine Maritime Ltd. of payment from Oil and Natural Gas Corporation Ltd.

2. Oil and Natural Gas Corporation Ltd. was not a party to the subcontract awarded by Valentine Maritime Ltd. to Kreuz Subsea Pte Ltd.

3. The Supreme Court in Firm Ashok Traders and Anr v. Gurmukhdas Saluja and Ors, AIR 2004 SC 1433 had observed that the right conferred by Section 9 of Arbitration and Conciliation Act, 1996 is on a party to an Arbitration Agreement. Section 9 has relevance to locus-standi as an applicant. A person not a party to an Arbitration Agreement cannot enter the Court for protection under Section 9. The party to an Arbitration Agreement can invoke the jurisdiction under Section 9 for securing relief which the Court has the power to grant before, during, or after arbitral proceedings.

4. On similar lines the Division Bench of the High Court of Bombay in Girish Mulchand Mehta and Anr. v. Mahesh S. Mehta and Anr., (2010) 1 Bom CR 31 held that:

The relief sought in Application under Section 9 is neither a suit nor a right arising from a contract. The Court under Section 9 only formulates interim measures to protect the right under adjudication before Arbitral Tribunal from being frustrated. The power of the Court under Section 9 is very wide and is not controlled by the provisions of the Code of Civil Procedure, 1908. The Court however has to be guided by the equitable consideration keeping in mind that the award to be passed by the Arbitral Tribunal is capable of enforcement.

5. The fact that the order would affect the person who is not a party to an Arbitration Agreement or Arbitration Proceedings does not affect the jurisdiction of the Court under Section 9 of the Arbitration and Conciliation Act, 1996 which is intended to pass interim measures of protection or preservation of the subject matter of the Arbitration Agreement.

6. Section 9 can be invoked even against a third party who is not a party to an Arbitration Agreement or Arbitration Proceedings if he were to be a person claiming under the party to the Arbitration Agreement and likely to be affected by the interim measures.

7. The Rule 803-E of the (Original Side) Rules provides that notice of filing the application to persons likely to be affected under the Arbitration and Conciliation Act, 1996 has to be issued to show-cause within the time specified in the notice as to why reliefs sought in the arbitration petition should not be granted. The third parties were accordingly impleaded.

8. Section 9(1)(ii)(c) indicates that the Court may authorize any person to enter upon any land or building in the possession of any party, authorizing any samples to be taken or any observation to be made or experiment to be tried, which may be necessary or expedient for obtaining full information or evidence for detention, preservation or inspection of any property which is the subject matter of the dispute in Arbitration. For granting such relief, third parties who are not parties to the Arbitration Agreement may be affected. Such third parties who want to seek any interim measures under Section 9 would not be entitled to invoke the said provision for seeking interim measures against a party to the Arbitration Agreement. However, there is no bar against the Court from granting interim measures under Section 9 of the Arbitration and Conciliation Act, 1996 against a party who is not a party to the Arbitration Agreement, if those reliefs fall under any of the reliefs provided in Section 9(1)(i), (ii) (a) to (e) of the Arbitration and Conciliation Act, 1996.

9. Court also has the power to grant such other interim measures and protection as may appear to be just and convenient.

10. Thus Oil and Natural Gas Corporation Ltd. had been appropriately impleaded as a party respondent to the petition under Section 9 of the Arbitration and Conciliation Act, 1996 filed by Kreuz Subsea Pte Ltd. even if there was no privity of contract between Kreuz Subsea Pte Ltd. and Oil and Natural Gas Corporation Ltd. or that Oil and Natural Gas Corporation Ltd. was not a party to the Arbitration Agreement between Kreuz Subsea Pte Ltd. and Valentine Maritime Ltd.

11. Rakesh S. Kathotia & Anr. v. Milton Global Ltd. and Ors., 2014 (4) Bom C.R. 512 also supports the same.

Issue 2

1. Clause 6.1.1 of the Letter of Award dated 30th October 2019 issued by Valentine Maritime Ltd. to the Kreuz Subsea Pte Ltd. indicates that Valentine Maritime Ltd. had undertaken to make all payments in a timely manner as per annexure VII to the said Letter of Award. The Kreuz Subsea Pte Ltd. was under an obligation to invoice Valentine Maritime Ltd. at the end of each month, for all progress earned by Kreuz Subsea Pte Ltd. based on completion certificates signed by the Oil and Natural Gas Corporation Ltd. furnished by Kreuz Subsea Pte Ltd. Valentine Maritime Ltd. was under an obligation to effect payments, by wire transfer or otherwise as may be instructed by the Kreuz Subsea Pte Ltd. in writing within 7 days after receipt by Valentine Maritime Ltd. of payment from Oil and Natural Gas Corporation Ltd. It was also an obligation of Valentine Maritime Ltd. to notify the Kreuz Subsea Pte Ltd. in writing of the day Valentine Maritime Ltd. submitting an invoice to the Oil and Natural Gas Corporation Ltd., thereafter the Kreuz Subsea Pte Ltd. in writing of invoice processing progress and all communications between the Valentine Maritime Ltd. and the Oil and Natural Gas Corporation Ltd. related to the invoice submitted.

2. Clause 6.1.1 of the Letter of Award, provides that for just cause and good faith, Valentine Maritime Ltd. was permitted to dispute an item invoiced, however, Valentine Maritime Ltd. shall within 5 days after receipt of the invoice, notify the Kreuz Subsea Pte Ltd. of the amount disputed and specify the reason, failing which, the Valentine Maritime Ltd. shall be deemed to have irrevocably accepted the invoice as correct and that the amount stated therein as due and owing to the Kreuz Subsea Pte Ltd. It further provides that in the event an amount is disputed, notwithstanding such dispute, Valentine Maritime Ltd. shall pay the Kreuz Subsea Pte Ltd. undisputed amount within the time limit applicable to the relevant invoice.

3. The High Court opined that under Clause 6.1.2(b) the Valentine Maritime Ltd. was under an obligation to effect the payment to the Kreuz Subsea Pte Ltd. within 7 days after receipt by Valentine Maritime Ltd. of payment from Oil and Natural Gas Corporation Ltd. It was not disputed by the Valentine Maritime Ltd. that it had received payment in respect of the said invoices submitted by the Kreuz Subsea Pte Ltd. upon Valentine Maritime Ltd. for May 2020.

4. The Valentine Maritime Ltd. having received the payment from Oil and Natural Gas Corporation Ltd. in respect of the same work which was carried out by the Kreuz Subsea Pte Ltd., the Valentine Maritime Ltd. could not have withheld the payment after the expiry of 5 days from the date of receipt of invoices from the Kreuz Subsea Pte Ltd. and more particularly in this case for the invoice in May 2020.

Issue 3

1. The Division Bench of the High Court of Bombay in Triangle Drilling Ltd. & Anr. v. Jagson International Ltd. & Anr., Appeal No. 704 of 1992 dated 15 October 1992 has held that the learned Single Judge was not right in taking the view that he had no power or jurisdiction to grant the prohibitory reliefs claimed, even assuming that there was no substance in the defence raised by the 1st defendant.

2. The grant of relief under Order 38 Rule 5 of the Code of Civil Procedure, 1908 is on different considerations from the grant of relief of temporary injunctions. It is a well-settled legal position, that at least for Chartered High Courts, the power to grant temporary injunctions is not confined to the statutory provisions alone. The Chartered High Courts had an inherent power under the general equity jurisdiction to grant temporary injunctions independently of the provisions of the Code of Civil Procedure, 1908.

3. In Nimbus Communications Limited v. Board of Control for Cricket in India & Anr, 2013(1) Mh.L.J. 39 the High Court of Bombay held that just as on the one hand the exercise of the power under Section 9 cannot be carried out in an uncharted territory ignoring the basic principles of procedural law contained in the Code of Civil Procedure, 1908, the rigours of every procedural provision in the Code of Civil Procedure, 1908 cannot be put into place to defeat the grant of relief which would sub-serve the paramount interests of justice. A balance has to be drawn between the two considerations in the facts of each case. The principles laid down in the Code of Civil Procedure, 1908 for the grant of interlocutory remedies must furnish a guide to the Court when it determines an application under Section 9 of the Arbitration and Conciliation Act, 1996. The underlying basis of Order 38 Rule 5, therefore, has to be borne in mind while deciding an application under Section 9(ii) (b) of the Arbitration and Conciliation Act, 1996.

4. The High Court of Bombay was of the prima facie view that Valentine Maritime Ltd. had no defence to the invoices issued by the Kreuz Subsea Pte Ltd. for May 2020. Valentine Maritime Ltd. had also admitted in the affidavit in reply that there is no dispute about the said invoice however attempted to adjust the disputed claim against the undisputed invoice for May 2020 issued by Kreuz Subsea Pte Ltd. The Kreuz Subsea Pte Ltd. had good chances of succeeding in the arbitral proceedings in respect of the said invoices for May 2020 which were not disputed by Valentine Maritime Ltd.

5. In Jagdish Ahuja & Anr. v. Cupino Ltd. in Comap/12/2020 with IA/1/2020 decided on 3rd August 2020 the Division Bench of the High Court of Bombay held that in an appropriate case, where the Court is of the view that there is practically no defence to the payability of the amount and where it is in the interest of justice to secure the amount, which forms part of the subject matter of the proposed arbitration reference, even if no case strictly within the letter of Order 38 Rule 1 or 2 is made out, though there are serious allegations concerning such case, it is certainly within the power of the Court to order a suitable interim measure of protection.

6. In Baker Hughes Singapore Pte v. Shiv Vani Oil and Gas Exploration, 2014 SCC Online Bom 1663 the High Court of Bombay held that since the arbitral tribunal is also empowered to make an interim award and to grant money claim based on the admitted claim and/or acknowledge liability, the arbitral tribunal also has the power to grant interim measures to secure the claim which is the subject matter of the dispute before the arbitral tribunal if such case is made out by the applicant. The provisions under Sections 9 and 17 of the Arbitration and Conciliation Act, 1996 are meant for protecting the subject matter of the dispute till the arbitration proceedings culminate into an award. The Court also considers whether a denial of such an order would result in grave injustice to the party seeking a protective order. The obstructive conduct of the party against whom such a direction is sought is also regarded as a material consideration.

7. The learned Single Judge had rightly made prima facie observation that:

a. The invoices for May 2020 and April 2020 submitted by the Kreuz Subsea Pte Ltd. were backed with the Oil and Natural Gas Corporation Ltd. signed completion certificate and were not disputed by the Valentine Maritime Ltd. within the 5 days period allowed for raising such dispute.

b. The Valentine Maritime Ltd. was unable to demonstrate as to how or why Valentine Maritime Ltd. was within its contractual rights to not issue the full Letter of Credit or to issue one for only part of the amount, or to add to its conditions apparently beyond the contract. The Valentine Maritime Ltd. did not complain about the invoice issued in May 2020 by Kreuz Subsea Pte Ltd.

c. The invoices thus issued by the Kreuz Subsea Pte Ltd. were deemed to have been accepted in full. All the invoices issued by the Kreuz Subsea Pte Ltd. were backed by Oil and Natural Gas Corporation Ltd. certifications of work actually done. Kreuz Subsea Pte Ltd. had not claimed compensation for damages.

d. The Valentine Maritime Ltd. could not refuse to pay the invoices in those circumstances abruptly invoking liquidated damages and the failure to furnish the performance bank guarantee notwithstanding its own default in not issuing the full Letter of Credit.

8. The Single Judge did not grant the entire relief as prayed for by Kreuz Subsea Pte Ltd. in the petition filed under section 9 but had passed a balanced and equitable order.

9. In the context of the garnishee order, the Single Judge had recorded that its contractual rights vis-a-vis Valentine Maritime Ltd. ought not to be allowed to be compromised in the least by any order the Court makes. As long as the rights of Oil and Natural Gas Corporation Ltd. vis-a-vis Valentine Maritime Ltd. are safeguarded, Oil and Natural Gas Corporation Ltd. is not concerned with this dispute and will of course be bound by orders of the Court.

10. Section 9(i)(ii)(b) empowers the Court to pass interim measures to secure the amount in dispute in the arbitration which may be in the form of the bank guarantee or deposit of the money in the Court. The said power can be exercised not only in the hands of the parties to the arbitration agreement but also in the hands of the third party who has to admittedly pay any amount to the party to the arbitration agreement by directing the said third party to deposit the amount on behalf of the party to the arbitration agreement in Court or by way of an injunction against such third party not to part with that amount in favour of the party to the arbitration agreement. Oil and Natural Gas Corporation Ltd. did not raise any dispute that the said amount was not payable to Valentine Maritime Ltd.

11. The Court while passing such an order against a third party does not adjudicate the dispute between the third party and the party to the arbitration agreement but is empowered to pass such an order only to secure the claim of the parties to the arbitration agreement.

12. The Single Judge clarified in the impugned order that the Oil and Natural Gas Corporation Ltd. will deposit the said amount without prejudice to the rights of the Oil and Natural Gas Corporation Ltd. vis-a-vis Valentine Maritime Ltd. and the making of that deposit by Oil and Natural Gas Corporation Ltd. and a consequent reduction in the payment or payments by Oil and Natural Gas Corporation Ltd. to Valentine Maritime Ltd. will not, by the compliance of that order by Oil and Natural Gas Corporation Ltd., be claimed by Valentine Maritime Ltd. in any forum or any proceeding to be a breach of the PRP-VI Contract.

13. The relief sought by the Kreuz Subsea Pte Ltd. against Oil and Natural Gas Corporation Ltd. was not under Order 21 Rules 46A, 46B, and 46C of the Code of Civil Procedure, 1908 but was under section 9 of the Arbitration and Conciliation Act, 1996. Section 9 can be invoked by a party before or during the arbitral proceedings or at any time after making the arbitral award but before it is enforced under Section 36 by making an application before the Court or the reliefs set out in the said provisions which include the relief of securing the amount in dispute in the arbitration.

14. Considering the conduct of Valentine Maritime Ltd. in illegally withholding the payment of undisputed invoice after receiving payment from Oil and Natural Gas Corporation Ltd., denial of the protective order to Kreuz Subsea Pte Ltd. would cause injustice to Kreuz Subsea Pte Ltd. If Valentine Maritime Ltd. or Oil and Natural Gas Corporation Ltd. do not deposit the crystallized amount, Kreuz Subsea Pte Ltd. would not be able to apply for withdrawal of the said undisputed amount.

15. Thus, no case was made out by Valentine Maritime Ltd. or Oil and Natural Gas Corporation Ltd. to interfere with the impugned order passed by the Single Judge under section 9 of the Arbitration and Conciliation Act, 1996.

The Decision held by the Court

The Honourable High Court of Bombay dismissed both the appeals and passed the following order:

1. Valentine Maritime Ltd. has to comply with the order of the Single Judge by 15 February 2021. In case of default, the Oil and Natural Gas Corporation Ltd. shall deposit the sum of US $2,403,073 or the rupee equivalent at the prevailing exchange rate on or before 31 March 2021 in the High Court without fail.

2. All the observations made by the learned Single Judge in the impugned order and made by the Supreme Court against Valentine Maritime Ltd. are prima facie and are made only for the passing of the impugned order passed by the Single Judge and by the High Court in this appeal respectively.

3. All pending Interim Applications were dismissed.

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