Curable procedural defects and arbitration

Posted On - 8 August, 2023 • By - Renjith Nair

The validity of arbitration proceedings may be called into question when procedural defects arise, and it may render the award susceptible to challenge. Procedural defects can occur at various stages of arbitration, such as the appointment of arbitrators, conduct of hearings, submission of evidence, or issuance of awards. When faced with procedural defects, parties involved in arbitration may seek remedies to address these issues. This may involve challenging the validity of the arbitration award, seeking setting aside of the award, or requesting correction or clarification of the procedural errors.

Arbitration is designed to offer a flexible and efficient alternative to traditional court litigation, and thus allowing it to be hindered by such defects is counterproductive. In a recent case, Palmview Investments Overseas Limited v. Ravi Arya and Others (Palmview Investments Case), the division bench of the Bombay High Court pronounced a judgment aimed at preventing procedural defects from undermining the integrity of arbitration.

Brief facts of the case

Palmview Investments Overseas Limited (Palmview), an investment company incorporated under the laws of the British Virgin Islands, found itself embroiled in a dispute with other shareholders of Arya Iron and Steel Company Private Limited (Arya Steel Company) regarding the valuation of shares. In line with the provisions of the shareholders’ agreement, Palmview initiated arbitration to resolve the matter.

Both parties submitted their respective pleadings, and the proceedings advanced to the stage of recording evidence. However, a point of contention arose when the other shareholders of Arya Steel Company (Other Shareholders) challenged the arbitration on two grounds before the arbitral tribunal. Firstly, they claimed that the board resolution authorizing Sunil Jain, Palmview’s nominee director in Arya Steel Company, to sign and verify the statement of claim and provide testimony on behalf of Palmview was invalid. Secondly, they argued that Palmview had failed to substantiate the validity of the said board resolution under the laws of the British Virgin Islands by presenting expert opinion on foreign law.

The arbitral tribunal passed an order acknowledging the invalidity of the board resolution but deemed the defect to be curable. Consequently, Palmview was granted an opportunity to rectify this defect. Aggrieved, the Other Shareholders challenged the arbitral tribunal’s decision before a single judge of the Bombay High Court, who subsequently set aside the order. Palmview then appealed the ruling before the division bench of the Bombay High Court.

Issues for consideration before the Bombay High Court

The following issues came up before the division bench of the Bombay High Court;

a)     Whether the petitions filed by the Other Shareholders before the Bombay High Court were maintainable; and

b)     Whether the arbitral tribunal could have allowed Palmview to cure defects in the board resolutions.

Bombay High Court’s Judgment

The Bombay High Court affirmed that any order or decision of an arbitrator that conclusively resolves an issue or “matter” between the parties constitutes an interim award. The court held that the expression “matter” is wide in nature and subsumes issues at which Palmview and the Other Shareholders are in dispute. This includes the determination of whether a claimant’s authorized representative is authorized to file a claim on its behalf. Therefore, the decision of the arbitral tribunal falls within the ambit of an “interim award” of the Arbitration and Conciliation Act, 1996[i]. Thus, Other Shareholders’ petition before the Bombay High Court challenging an “award” was found to be maintainable.

Furthermore, the Bombay High Court emphasized that substantive rights should not be nullified due to procedural defects or mere technicalities that do not strike at the heart of the dispute. Accordingly, the court held that Palmview could subsequently rectify the authorization for an individual to sign the pleadings on its behalf.

Additionally, the Bombay High Court determined that the arbitral tribunal had not acted contrary to any law, and by allowing the defect to be remedied in this case, it upheld the principles of natural justice.

Our Thoughts

The Palmview Investments Case bolsters the freedom and effectiveness of arbitration as a method of alternative dispute resolution in India. This decision recognizes the importance of allowing arbitrators and arbitral tribunals the necessary autonomy and procedural flexibility to amicably decide and resolve disputes. Otherwise, the efficacy of arbitration can be undermined if procedural constraints bog down the proceedings. The Palmview Investments Case judgment rightly emphasizes that the focus should be on the substantive issues at hand and the merits of the case, rather than allowing procedural defects to derail the arbitration process.

The court’s ruling ensures that arbitration has the freedom and space to grow, adapt, and flourish in India’s legal landscape. By acknowledging that the rights of parties should not be denied on mere technicalities, the judgment aligns with the overarching principle of arbitration, which is to achieve a fair and just resolution of disputes. This judgment marks a positive step in promoting arbitration as a preferred method for resolving disputes, fostering a climate of fairness, efficiency, and trust in India’s alternative dispute resolution landscape.

Authors: Renjith Nair and Altamash Qureshi

The information contained in this document is not legal advice or legal opinion. The contents recorded in the said document are for informational purposes only and should not be used for commercial purposes. Acuity Law LLP disclaims all liability to any person for any loss or damage caused by errors or omissions, whether arising from negligence, accident, or any other cause.

[i] Section 2(1)(c) read with Section 31(6) of the Arbitration and Conciliation Act, 1996