By Kishlaya Pal *
Arbitration agreements are essentially contracts and thus are governed by the principles of contract law.[1] One such principle which finds its application in various facets of arbitration is repudiatory breach. Repudiatory breach or fundamental breach occurs when prior to the performance or during the performance, a party to the contract expressly or impliedly makes it clear that it does not want to fulfil the contract and that he will no longer be bound by it. This breach gives rise to certain rights to the innocent party which include that it is excused from further performance and immediate right to seek damages for the repudiation. Over the years, various jurisdictions discussed what all actions and conducts of parties’ amount to repudiatory breach of the arbitration agreement, which is a contract in and of itself. This raises a question that whether commencement of court proceeding by a party amount to repudiation of the arbitration agreement. This question will then determine whether the other party will be entitled to terminate the agreement at its own discretion.
What constitutes repudiatory breach.
Repudiation can be broadly be classified into three types depending upon the action of the breaching party. They are as follows:
- renunciation of the contract,
- self-induced impossibility of performance
- a sufficiently serious failure to perform in accordance with the terms of the contract.
In the case of parallel proceeding, only determination of whether there was sufficient failure to perform in accordance with the terms of the contract is necessary. This is because renunciation and impossibility are out of the purview of this discussion.
In India, the apex court in various cases like HPA International v Bhagwandas Fateh Chand and Maharashtra State Electricity Distribution Co. Ltd. v Dadar Switchgear Ltd. has equated ‘repudiatory breach’ with the concept of fundamental breach. This notion is based on the understanding that every contract has a ‘core’ or root that is so integral to the contract that its breach would render the contract infructuous. Fundamental breach can also be actuated by an action which amounts to departure from the main purpose of the contract.[2]Now, if a dispute is covered under an arbitration clause and still one of the parties commences parallel proceedings, it raises question on its intention to arbitrate. If no intention to arbitrate is made out, repudiatory breach would be established which will entitle the innocent party to terminate the agreement.
The conflicting positions
In the case of Marty Ltd v Hualon Corporation, it was held that the commencement of court proceedings amounts to repudiation of the arbitration agreement. In this case the Respondents sued the appellants in court and submitted claims. While the claim was unsuccessful, the Respondent also initiated arbitration proceedings against the Appellant with the same claims based on the Subsidiary’s company charter. The Appellant unsuccessfully challenged the tribunal’s jurisdiction on grounds of repudiatory breach of the Arbitration agreement in lower courts and finally appealed to the court of appeals.
The courts across jurisdictions have applied various rationales to reach a conclusion to the question of whether initiation of parallel proceedings amount to repudiatory breach. One of the early landmark judgements on this proposition was pronounced in the case of Rederi Kommanditselskaabet Merc-Scandia v Couniniotis SA (“Mercaunaut”) which ruled that commencement of proceedings did not evince an intention not to be bound. In the case of Maple Flock Co Ltd v Universal Furniture Co Ltd,it was observed that the breach has to be viewed from a qualitative point of view. A breach would be ‘qualitative’ enough to constitute a repudiatory breach if such action is in contravention of a substantial ratio of the whole contract.
To have greater objectivity in our understanding, the applications of these propositions on factual matrix have to be examined. Similarly in the case of BEA Hotels v NV Bellway LLC, an initiation of court proceedings did not constitute a repudiatory breach as the pleadings were found to be concerned with matters peripheral to the matters raised in the arbitration. However, the peripherality of matters was not regarded in another case of Dubai Islamic Bank PJSC v PSI Energy Holding Co BSC and it was held that even if the same matters are raised in court proceedings as in arbitration, there will not be repudiation of contract.
Analysing the rationale of the Marty Judgement
We see that the Marty judgement is one of the standout pronouncements which has held the position that commencement of parallel proceedings constitutes a repudiatory breach of the contract. This active discouragement from pursuing litigation where the dispute can be arbitrated is in line with the pro-arbitration approach prevalent in these jurisdictions
Very interestingly, the court went one step ahead of the appellant’s submission on the point that the surrounding circumstances implied repudiatory breach and ruled that commencement of court proceeding by itself prima facie constitutes repudiatory breach and the burden will be on the breaching party to prove the opposite by explaining the circumstances. Based on this reasoning, the Mercaunaut judgement was also distinguished as the court had observed in this case that the court proceedings were only commenced because the charter was about to expire and the innocent party refused to grant an extension. Therefore, a reasonable person would not have inferred that the court proceeding was commenced with the intention of breaching the arbitration agreement.
It was emphasised that a party to a contract that contains an arbitration clause is entitled to expect that disputes arising out of the said contract be arbitrated. Therefore, any action in contravention to that will ipso facto be deemed repudiatory breach. The court noted that the respondent could have expressly acknowledged the obligation to arbitrate but took the view that the dispute did not fall within the scope of the clause or that it commenced court proceedings only for ancillary relief.
The Indian Context: Question of arbitrability
In the Indian context, this question should be investigated from the point of view of arbitrability. This is because, the legislature through Section 8 of the Arbitration and Conciliation act 1996 and judiciary through various pronouncements in no ambiguous terms has upheld that, once the court is satisfied as to the prima facie existence of arbitration agreement, it must refer the dispute to arbitration. So, this yields a precarious situation. On one hand, if we are to look at the issue of repudiatory breach in isolation, commencement of legal proceeding in the Indian scenario makes a better case for repudiatory breach than others. The repudiatory intent is even more pronounced in the Indian scenario as because of Section 8 of the Arbitration Act of India there is no purport of a court proceeding if the dispute is covered by an arbitration agreement that to in a prima facie manner. Therefore, the intention behind not pursuing arbitration and commencing legal proceeding instead to stall the proceeding is manifest. The only other impediment to initiation of arbitration is whether the matter is arbitrable or not.
However, the current position of courts is that the arbitral tribunal itself is empowered to decide on the issue of arbitrability thus negating the role of courts even further. Also, Section 28 of the Indian Contract Act legitimises restraining legal proceedings by way of arbitration agreements. On the other hand, the court itself orders the parties to initiate arbitration which means that arbitration cannot be avoided by the innocent party as a matter of right to terminate the agreement obtained as a consequence of repudiatory breach.
Juxtaposition and suggestion
Therefore, from a principled point of view, we arrive at situation where the parties are directed to arbitrate a dispute but the very arbitration agreement can be rendered inoperative at the option of the innocent parties. While this ambiguity has so far been academic, it might rear its ugly head in the practical realm in times to come.
Therefore, the court must find some reconciling stance. One conception that can be considered to reconcile the two is to bring to light the lus gentium rationale arbitration is founded upon. Lus gentium means basic the justificatory principle of law is its treatment of the human individuals within its scope. One of the objectives of arbitration is also to fulfil the primary precepts of law. This means that arbitration is not just a culmination of a private agreement between two parties to arbitrate but also the collective intent of stakeholders to reduce the burden on courts and simplify dispute resolution. In this paradigm, the courts will have a genesis for arbitration other than the arbitration agreement.
However, this will throw up a raft of issues with respect to the modalities of the arbitration proceeding as the applicability of the strength of tribunal, place of arbitration, applicable rules etc. mentioned in the now repudiated arbitration agreement will be put to question. Therefore, if the arbitration agreement stipulated for an arbitral tribunal for three arbitrators, it could now be flung open for deliberation. This is bound to create more conflicts and thus there is need for judiciary clarity on these issues right at the outset.
[1] Mallika Taly, Arbitration Law, A Primer (EBC Publishing, 1st Edn., 2011), Pg, 44. [2] Harold W. Fuson, Jr., Telling It All: A Legal Guide to the Exercise of Free Speech 57–58 (1995).
Kishlaya Pal is a 5th year law student at Dr. Ram Manohar Lohiya National Law University, Lucknow. You can reach out to him here.