The Bombay High Court recently delivered a significant ruling regarding arbitration proceedings. A Division Bench consisting of Justices Revati Mohite Dere and Dr. Neela Gokhale held that an arbitrator can allow parties to withdraw their existing claims with the liberty to file fresh ones. This is permissible as long as it does not adversely affect the legitimate interests of the opposing party.
Case Background:
The case involved multiple writ petitions filed by Central Depositories Services (India) Limited (CDSL) against individual respondents, including Ketan Shah and others. The respondents had previously initiated arbitration proceedings under CDSL’s byelaws, alleging losses due to the negligence of CDSL and its depository participant, Anugrah Stock & Broking Pvt. Ltd.
Ketan Shah opened a trading and demat account with Anugrah in 2009. Over time, funds and securities were transferred for margin obligations and trading activities. Disputes arose, and Shah issued a notice on September 15, 2023, invoking arbitration and seeking compensation for his losses.
He later requested the Arbitral Tribunal for permission to withdraw his claim and sought liberty to file a fresh arbitration proceeding. This was mainly due to the need to include additional documents and revised claims, based on an audit he was conducting.
The Arbitral Tribunal accepted this request in its order dated April 18, 2024. It dismissed the ongoing proceedings as withdrawn and granted liberty to file a fresh claim through a new notice of arbitration. It also allowed CDSL to raise objections such as limitation and jurisdiction in the future.
Petition Before the High Court:
CDSL challenged the Arbitral Tribunal’s order under Articles 226 and 227 of the Constitution, claiming the tribunal had no authority to grant liberty to initiate a fresh claim after proceedings were terminated.
The petitioner argued:
- Arbitral tribunals are not courts and lack general jurisdiction.
- Section 19 of the Arbitration and Conciliation Act, 1996, does not allow overriding substantive provisions like Section 32(2)(a) and 32(3).
- After termination, the tribunal becomes functus officio and cannot grant liberty for future claims.
- The impugned order causes prejudice as it denies the petitioner a final resolution.
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The petitioner also contended that even if civil court principles under Order 23 of the Civil Procedure Code applied, such liberty must be justified and is not automatic.
The respondents argued that:
- The petition was not maintainable under Articles 226/227 unless the order was patently perverse.
- The tribunal had discretion under Section 19 to decide its procedure.
- Withdrawal was based on a procedural constraint as the tribunal’s mandate was expiring, and the tribunal itself offered the withdrawal option.
They highlighted that similar judgments have stressed minimal interference in arbitration and only in rare, exceptional circumstances.
The Court made several important observations:
“Interference under Articles 226/227 is permissible only in exceptional cases or when an order is patently lacking jurisdiction.”
It referred to the Delhi High Court’s decision in IDFC First Bank Ltd. vs. Hitachi MGRM Net Ltd. (2023), which clarified that writ jurisdiction over arbitral tribunals must be exercised sparingly.
The Court noted that the withdrawal was not unconditional but was made after the tribunal offered the option due to time constraints. The tribunal was aware that its mandate would end upon withdrawal, and thus rightly permitted a fresh notice of arbitration.
The judges emphasized that Section 32 outlines when proceedings terminate but does not prevent the tribunal from permitting a fresh start if both sides’ rights are preserved.
Furthermore, the Court pointed out:
“In light of massive fraud committed by Anugrah and the need to ascertain the extent of loss, allowing a withdrawal with liberty was fair.”“We find no perversity or exceptional circumstance to warrant interference. The impugned order does not cause any prejudice or irreparable damage to the petitioner.”“The tribunal’s order does not show any recognition of a ‘legitimate interest’ of the petitioner that would justify rejecting the claimants’ request to withdraw.”
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It added that CDSL’s right to challenge issues like limitation and res judicata remained intact for any future arbitration.
Since the petitioner had no counterclaim and no legitimate interest in insisting on a final award, the Court concluded that no prejudice was caused.
The Court dismissed the petitions and ruled:
Thus, the liberty granted by the Arbitral Tribunal to the claimants to initiate fresh proceedings was upheld as valid and legally sound.
