Only those disputes which existed on the date of reference to arbitration are within the scope of such arbitration and not any subsequent dispute

In the matter of Raghuvir Buildcon Pvt. Ltd. Vs. Ircon International Limited in Arb. A. (Comm) 15/2021 decided on 18.05.2021 by the Delhi High Court.

Facts: After disputes arose between the parties, the respondent threatened to initiate termination of contract, the necessary contractual consequence of which was encashment of bank guarantees furnished by the appellant. The appellant moved the Delhi High Court under Section 9 of Arbitration and Conciliation Act, 1996 for stay on encashment of the said BG. During the pendency of the petition under Section 9, it was mutually decided that the BG will be encashed and converted into demand drafts.
Vide order dated 11.10.2019, the Court disposed off the petition under Section 9 while recording that the issue of encashment of bank guarantees was settled between the parties for the time being and a sole arbitrator was appointed to decide the disputes between the parties. Further an interim direction was passed stating that the demand drafts were to be deposited with the sole arbitrator until further interim order under Section 17. After passing of the said order dated 11.10.2019, the Respondent terminated the contract.
Before the arbitrator, the appellant filed its statement of claim assailing the invocation and encashment of the bank guarantees on the ground that such invocation was contractually permitted only in case of termination/rescission of contract and not prior to it. The Appellant also assailed the termination of the contract.
The Respondent moved an application under Section 16 of the 1996 Act objecting to the inclusion of challenge to the termination of the contract by the appellant in its statement of claim. It was prayed that the arbitrator clarify that the jurisdiction of the arbitral tribunal was limited to the dispute relating to legality of invocation of BG and it cannot adjudicate any other disputes or claims relating to termination of contract which was a subsequent event.
The sole arbitrator disposed off the application of the Respondent reasoning that the disputes which existed at the time of passing of order dated 11.10.2019 by the Delhi High Court alone were referred for arbitration. Claims arising solely out of termination of contract which happened subsequently cannot be said to be within the scope of the present arbitration.
Aggrieved by this finding of the sole arbitrator, the appellant preferred an appeal under Section 37(2) of the Arbitration and Conciliation Act 1996.

Issues: Whether the constraints applicable to a Court while exercising jurisdiction under Section 34 would also apply to an appeal under Section 37(2)(a) of the 1996 Act.
Whether subsequent disputes which arose after appointment of arbitrator could be said to be within the scope of such arbitration

Held: While addressing the first issue, the Delhi High Court held that in the absence of any contrary statutory indication, jurisdiction of the court to interfere as against an interlocutory order under Section 37(2) shall be the same as that under Section 37(1) against a final award. The former cannot be said to be more expansive than the latter and the principles and therefore, constraints as applicable to the exercise of jurisdiction under Section 34 shall apply. Thus, the Court held that in the present appeal under Section 37(2)(a), it could only examine whether the order of the arbitrator suffers from any patent illegality or perversity, or is otherwise unconscionable in law on facts.
Regards the second issue, the Court observed that the arbitrator’s mandate was circumscribed by the order dated 11.10.2019. As per the said order the arbitrator was appointed to adjudicate disputes between the parties as they existed on the date when the order was passed. The notices for terminating the contract were issued after passing of order dated 11.10.2019 and therefore the dispute as to the legality of such termination was not in existence on the date of passing of the order.
In light of the above observations, the view of the sole arbitrator was found to be plausible and did not merit interference.