ELP Arbitration Update – Essential ingredients of the notice invoking arbitration under Section 21 of the Arbitration & Conciliation Act, 1996

Essential ingredients of the notice invoking arbitration under Section 21 of the Arbitration & Conciliation Act, 1996

M/s D.P. Construction v. M/s Vishvaraj Environment Private Ltd. [1]

Recently in context of an application under section 11 of the Arbitration and Conciliation Act, 1996 (the Act) seeking appointment of an arbitrator, the question which arose for determination before the High Court of Bombay, Nagpur Bench (Court) was whether the notice issued prior to the said application satisfied the requirement under section 21 of the Act. Section 21 of the Act provides that, in the absence of any agreement to the contrary between the parties, arbitral proceedings commence on the date on which the respondent receives a request for that dispute to be referred to arbitration.

The Nagpur Municipal Corporation awarded a contract for pipeline works in favor of Vishvaraj Environment Private Ltd. (the Respondent). In relation to the said works, the Respondent engaged D.P. Construction (the Applicant) under a Work Order (Work Order). The Work Order included an arbitration clause[2] for settlement of disputes between the parties.

Dispute arose between the parties and the Applicant issued a notice dated October 7, 2020 (Notice) to the Respondent through its advocate. By the Notice, the Applicant quantified its claims, set out its grievances, and stated that if its claimed amounts were not paid by the Respondent, recourse would be taken before the competent court for redressal of grievances. In response, the Respondent’s advocate addressed a reply dated October 29, 2020 (Reply) to the Notice wherein the Respondent repudiated the claim and sought payment towards penalty.

Thereafter, the Applicant preferred an application under section 11 of the Act, before the Court, seeking court assistance in constitution of the tribunal (Section 11 Application).

Challenging the maintainability of the section 11 Application, the Respondent contended that while the arbitration clause provided a two-tier procedure for dispute resolution, the Applicant had not exhausted the first tier and therefore, the section 11 Application was premature. The first tier required the dispute to be referred to the Respondent itself for a decision that would be final and binding. If this step failed, the dispute would be referred to arbitration before a sole arbitrator which would be governed by the provisions of the Act. In response, the Applicant contended that it was entitled to pursue arbitration as the Notice satisfied the requirement as per the first tier of the procedure.

Assuming the first tier of the procedure was satisfied, the Respondent further contended that the Notice did not qualify as a notice invoking arbitration under section 21 of the Act. The Notice neither referred to the arbitration clause nor did it aver that arbitration was being invoked. Since the agreed procedure between the parties was yet to be followed, the jurisdiction of the Court could not be invoked under section 11 of the Act.  On the other hand, the Applicant contended that the Notice stated the claims, the points of dispute, and quantified the interest rate. Accordingly, the Notice was in consonance with section 21 of the Act.

Upon examining the Notice and the arbitration clause, the Court observed that the Applicant had sufficiently complied with the requirements of the first tier of the arbitration clause and was then constrained to escalate the dispute to the second tier.

Examining section 11 of the Act, the Court observed that the said provision comes into play when the conditions specified therein have occurred, including failure of a party to act as required under the agreed procedure i.e., only when the agreed procedure under section 11(2) of the Act has failed, the jurisdiction of the Court under section 11(6) of the Act can be invoked.

Reflecting upon the importance of section 21 of the Act, the Court observed that the provision provides that the arbitral proceedings shall commence on “the date on which a request for that dispute to be referred to arbitration” is received by the respondent. Hence, for commencement of arbitral proceedings, there must be a request for the dispute to be referred to arbitration.

Referring to the jurisprudence in relation to section 21 of the Act, the Court observed that:

• In Nortel Networks Private Ltd.[3], the Supreme Court noted the significance of section 21 of the Act to compute the date from which the limitation period is to be calculated for the purpose of an application under section 11 of the Act. Please refer to the link here for our analysis on BSNL v. Nortel.
• In Secunderabad Cantonment Board[4], the Supreme Court reiterated the necessity to invoke arbitration under section 21 of the Act to answer the question of limitation.
• In Malvika Rajnikant Mehta[5], the Court examined the manner in which arbitration ought to be invoked under section 21 of the Act and the purpose of such notice under section 21 of the Act i.e., it provides the adversary (a) notice as to the nature of the claim, (b) an opportunity to contest the admissibility of the claim at the threshold; (c) an opportunity to raise any issues regarding impartiality of the arbitrator. Further, the date of receipt of the notice has an impact on the date of commencement of the arbitration.
• In Alupro Building Systems Pvt. Ltd.[6], the Delhi High Court set out the purpose of the notice under section 21 of the Act and inter alia observed that “unless there is such a notice invoking the arbitration clause, it will not be possible to know whether the procedure as envisaged in the arbitration clause has been followed” and the “trigger for the Court’s jurisdiction under section 11 of the Act is such failure by one party to respond”.
• In Veena wd/o Naresh Seth[7], the Bombay High Court held that even when the notice invoking arbitration does not state the claims proposed to be made in the reference, it would be necessary for the notice to indicate the disputes which had arisen and that the subject arbitration clause was being invoked.

Upon perusing the judicial precedents and the language of Section 21 of the Act, the Court held that:

• The notice invoking arbitration ought to be absolutely clear with reference to the arbitration clause and with clear intent of calling upon the opposite party to proceed for the appointment of an arbitrator and for reference of disputes to arbitration.
• Unless there is a request by the party to refer the disputes to arbitration, mere setting out of the claims and disputes would not suffice.
• When the parties have not triggered the agreed procedure (in the arbitration clause) for reference of the dispute to arbitration, the question of failure does not arise. Therefore, the precondition of invoking jurisdiction under section 11 of the Act is not satisfied. This aspect goes to the root of the matter and hits the jurisdiction of the Court.
• As elaborated in the judicial precedents, there are legal consequences which follow once notice is issued in accordance with section 21 of the Act, including computation of limitation.

In the circumstances, the Court observed that the Notice did not satisfy the requirements of a valid notice under section 21 of the Act. The Court reserved the Applicant’s right to initiate arbitration on issuance of a fresh and valid notice under section 21 of the Act, along with its right to file a fresh application under section 11 of the Act, should the parties fail to appoint an arbitrator.

This decision reiterates the importance of a notice under section 21 of the Act, which serves several key purposes, as enumerated by the Court. Section 21, begins with the words “unless otherwise agrees by the parties.” This is but one more example of party-autonomy being the cornerstone of arbitration law. Thus, parties may agree to waive the requirement of such notice under section 21 of the Act. However, in the absence of such waiver, the provision must be given full effect.[8]

Earlier this year, in Malvika Rajnikant Mehta[9], the Bombay High Court inter alia considered whether a purported communication constituted lawful invocation of the arbitration under Section 21 of the Act, 1996. In view of the facts and disputed correspondences, the court held that the said question could be determined by the arbitrator and the “language of Section 16(1) of the Act, 1996 is elastic enough to subsume in its fold determination of the question as to whether arbitration is lawfully invoked under Section 21 of Act, 1996”. In doing so, the court relied upon the policy of minimal interference under section 11 of the Act.

While the courts in India have drawn light on the importance and purpose of section 21 of the Act, the essential ingredients of a notice under section 21 are not expressly set out in the Act. In the circumstances, the key elements of such a notice have evolved though jurisprudence. In the present decision, the Court emphasized that the notice must refer to the arbitration clause and the party must be able to demonstrate that the agreed procedure had failed before preferring an application under section 11 (6) of the Act.

[1] Miscellaneous Civil Application (Arbitration) No. 31 of 2021 in the High Court of Judicature at Bombay, Nagpur Bench, decided on July 6, 2022.
[2] “29. Settlement of Disputes: All disputes arising out of this work order failing amicable settlement at site shall be referred to the VEPI and the decision is final and binding both parties. In case it fails, the dispute shall be referred to the arbitration and arbitration shall be conducted as per Arbitration and Conciliation Act 1996 as amended from time to time. The Arbitral Tribunal shall be sole arbitrator and shall appointed by both parties. The place of the arbitration shall take place in Nagpur.”
[3] BSNL v. Nortel Networks Private Ltd., (2021) 5 SCC 738.
[4] Secunderabad Cantonment Board v. B. Ramachandraiah & Sons, (2021) 5 SCC 705.
[5] Malvika Rajnikant Mehta v. JESS Construction, Arbitration Application No. 425 of 2019, decided on 28.04.2022 by the Bombay High Court.
[6] Alupro Building Systems Pvt. Ltd. v. Ozone Overseas Pvt. Ltd. 2017 SCC Online Del 7228.
[7]Veena wd/o Naresh Seth v Seth Industries Ltd., 2011 (2) Mh.L.J. 223
[8] Alupro Building Systems Pvt. Ltd. v. Ozone Overseas Pvt. Ltd., 2017 SCC Online Del 7228
[9] Malvika Rajnikant Mehta v. JESS Construction, Arbitration Application No. 425 of 2019, decided on 28.04.2022 by the Bombay High Court.