Contributed by: Khaitan & Co
A bench of the Supreme Court comprising of Hon’ble Mr Justice NV Ramana, Hon’ble Mr Justice Surya Kant and Hon’ble Mr Justice Hrishikesh Roypassed a judgment dated 6 January 2021 in the matter of Bhaven Construction vs. Executive Engineer Sardar Sarovar Narmada Nigam Ltd. and Another [Civil Appeal No. 14665 OF 2015] The Court adjudicating upon an appeal against an order of the High Court of Gujarat (“High Court”) which had allowed a plea under Articles 226 and 227 of the Constitution of India (“Constitution”) and quashed the appointment of arbitrator by one of the parties to the case.
The case questioned the grounds for the exercise of powers of the High Court under Article 226 and Article 227 of the Constitution while dealing with the arbitral process. Key observations as to the circumstances and exceptions when such power could be exercised were made.
Appellant, Bhaven Construction had entered into a contract with the Respondent, Executive Engineer of Sardar Sarovar Narmada Nigam for manufacture and supply of bricks. The contract contained an arbitration clause. When a dispute arose between the parties, the Appellant issued a notice seeking appointment of a sole arbitrator to settle the same. Even though the Respondent refused, the Appellant appointed a sole arbitrator.
Aggrieved by the same, the Respondent preferred an application under Section 16 of the Arbitration and Conciliation Act,1996 (“Act”) disputing the jurisdiction of the arbitrator. The arbitrator dismissed the same whereupon the respondent preferred a special civil application under Articles 226 and 227 of the Constitution before the High Court. The Single Judge dismissed the application. The Respondent further preferred a Letters Patent Appeal which was allowed by a Division Bench of the High Court. In the order dated 17 September 2012, the Division bench set aside the appointment of sole arbitrator. Aggrieved by the same, the Appellant moved the Supreme Court. Subsequently, the Respondent challenged the final award under the Section 34 of the Act.
Whether the arbitral process could be interfered under Article 226/227 of the Constitution, and under what circumstance?
Submissions by the parties
It was argued by the Appellant that the fact that the final award has been passed by the sole Arbitrator and is now challenged under Section 34 of the Act clearly shows the attempt of Respondent No. 1 to bypass the framework laid down under the Act.
It was further submitted that Section 16(2) of the Act mandates that the sole arbitrator, who has the jurisdiction, to adjudicate the preliminary issue of jurisdiction, which can only be challenged under Section 34 of the Act. The Appellant in support of its contentions submitted that the Division Bench of the High Court erred in interfering with the order of the Single Judge under Articles 226 and 227 of the Constitution.
To begin with, the Respondent first highlighted and pointed out that since the enactment passed by the State of Gujrat, the Gujarat Public Works Contracts Disputes Arbitration Tribunal Act, 1992 (“Gujarat Act”), the Act was substituted with respect to the disputes arising out of the works contract. It was argued that under Articles 226 and 227 of the Constitution, it was always open for the Respondent to invoke the writ jurisdiction of the High Court to set aside an arbitration which was a nullity as it was in conflict with the State enactment.
The Apex Court noted that the Section 5 of the Act is in the form of a non-obstante clause aimed to reduce excessive judicial interference unless provided by that part of the Act. The Act itself provides procedures to challenge the appointment of the arbitrator and even portrays an intention for minimum interference from any extra statutory mechanism to provide just and fair solutions. It was further observed that arbitration being a creature of contract, gives a flexible framework for the parties to agree for their own procedure.
Further, it was held that it is only when the parties fail to comply by the rules in accordance with the procedure agreed upon, then they can avail court’s assistance under Section 8 or 11 of the Act. The use of the word ‘only’ in Section 34 is to serve two purposes, to establish the Act as a complete code and to lay down procedure.
The Court relied on Nivedita Sharma v. Cellular Operators Association of India (2011) 14 SCC 337, to highlight that a legal framework cannot curtail a constitutional right. This power of judicial interference must be exercised in exceptional rarity, wherein one party is left remediless under the statute or a clear ‘bad faith’ shown by one of the parties to be in accordance with the terms of the legislative intention to make the arbitration fair and efficient.
Further reference was made to M/s. Deep Industries Limited v. Oil and Natural Gas Corporation Limited, (2019) SCC Online SC 1602, wherein the Court held that the High Courts must be ‘extremely circumspect’ in their interference and restrict themselves to orders that are passed lacking in inherent jurisdiction.
Lastly, the Court relied on P. Radha Bai v. P. Ashok Kumar, (2019) 13 SCC 445 and observed that if the Courts are allowed to interfere with the arbitral process beyond the ambit of the enactment, then the efficiency of the process will be diminished., The Court referred to the the principle of unbreakability. The principle propounds “unbreakability” of time-limit and true to the “certainty and expediency” of the arbitral awards, any grounds for setting aside the award that emerge after the three-month time-limit has expired cannot be raised. Besides, the Court held that the Respondent has a remedy that is an appeal, and as to Section 16, tribunal must deal with the issue of jurisdiction first before a court examines it under Section 34.
It is pertinent to note that the Gujarat Act provides for the constitution of a Tribunal to arbitrate in disputes arising from works contracts to which the State Government or a public undertaking is a party and provides for matters connected therewith. The Court noted here that the mere fact that the Gujrat Act might apply is not sufficient for the writ courts to entertain the plea of Respondent no. 1 to challenge the ruling of the arbitrator under Section 16 of the Act.
The Court took the view that the High Court erred in utilizing its discretionary power available under Articles 226 and 227 of the Constitution. It, thus, allowed the appeal and the impugned Order of the High Court was set aside.
In light of the object of the Act, this judgement by the Supreme Court assumes significance with regard to outlining the respective jurisdiction of Courts and the exercise of their powers pertaining to the extent of interference in matters relating to the arbitral process. Curtailing the exercise of discretionary powers, by virtue of this judgement, the Supreme Court has reiterated the grounds on which judicial interference in similar matters would be entertained, of which failure to comply with the rules of procedure is the foremost. Granting supreme priority to the object of the Act, the Court highlighted that the impetus of the Act makes apparent the intention for minimum interference from any extra statutory mechanism to provide just and fair solutions.
This judgement of the Supreme Court would act as a reminder of the respective spheres of operation of the various judicial fora as well as arbitral tribunals under the Act.
Contributed by Khaitan & Co
The above article is authored by Mr. Aseem Chaturvedi (Partner), Mr. Shivank Diddi (Senior Associate), and Ms. Natasha Syal (Associate)