By Shivam Sharma
On December 6, the Supreme Court said: “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.” This observation was made after an appeal was allowed against an order of the Gujarat High Court which had quashed the appointment of an arbitrator by one of the parties in a case.
On February 13, 1991, an executive engineer of Sardar Sarovar Narmada Nigam (Respondent No 1) entered into a contract with Bhaven Construction (appellant) to manufacture and supply bricks. The contract had an arbitration clause. When a dispute arose regarding payment in the manufacturing and supplying of bricks, Bhaven issued a notice on November 13, 1998, seeking the appointment of an arbitrator as per the agreement. But the engineer did not agree with this request.
Despite this, Bhaven appointed an arbitrator. The engineer put an application under Section 16 of the Arbitration and Conciliation Act of 1996 disputing the jurisdiction of the arbitrator. On October 20, 2001, the arbitrator rejected the application of the engineer and held that he had jurisdiction to adjudicate the dispute.
Aggrieved by this, the engineer filed a Special Civil Application under Articles 226 and 227 of the Constitution before the High Court of Gujarat. But the single-judge bench dismissed it. Aggrieved, the engineer preferred a Letters Patent Appeal. The High Court on September 17, 2012, allowed the appeal and observed: “Provision of Indian Arbitration Act, 1940 and any statutory modification thereof will be applicable.” It said that the respondent cannot appoint a sole arbitrator and cannot contend that now he had already exercised power under the provisions of the Arbitration and Conciliation Act, 1996. Aggrieved by the order, Bhaven moved the Supreme Court.
Their counsel argued that the High Court erred in interfering with the order of the single-judge under Articles 226 and 227 of the Constitution. The fact that the final award was passed by the arbitrator and is now challenged under Section 34 of the Arbitration Act clearly shows the attempt of the engineer to bypass the Act. He said that Section 16(2) of the Arbitration Act mandates that the arbitrator had the jurisdiction to adjudicate the preliminary issue of jurisdiction, which can only be challenged under Section 34 of the Act.
On the other hand, the counsel for the engineer contended that since the enactment of the Gujarat Act, the Arbitration Act was substituted with respect to disputes arising out of work contracts. It was contended that under Articles 226 and 227, the engineer could 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 Supreme Court bench comprised Justices NV Ramana, Surya Kant and Hrishikesh Roy and the issue they considered was whether the arbitral process could be interfered with under Article 226/227 of the Constitution and under what circumstance.
The Court noted that the Arbitration Act was a code in itself. This phrase is not merely perfunctory, but has definite legal consequences. One such consequence is spelled out under Section 5 of the Arbitration Act, which says: “Not with standing anything contained in any other law for the time being in force, in matters governed by this Part, no judicial authority shall intervene except where so provided in this Part.”
It further said:
“Any party can enter into an arbitration agreement for resolving any disputes capable of being arbitrable. Parties, while entering into such agreements, need to fulfill the basic ingredients provided under Section 7 of the Arbitration Act. Arbitration being a creature of contract, gives a flexible framework for the parties to agree for their own procedure with minimalistic stipulations under the Arbitration Act. If parties fail to refer a matter to arbitration or to appoint an arbitrator in accordance with the procedure agreed by them, then a party can take recourse for court assistance under Section 8 or 11 of the Arbitration Act.”
The Court placed reliance on its 2014 judgment in Nivedita Sharma vs Cellular Operators Association of India and the 2019 judgment in M/s Deep Industries Limited vs Oil and Natural Gas Corporation Limited. In M/s Deep Industries Limited vs Oil and Natural Gas Corporation Limited, the Court analysed the interplay between Section 5 of the Arbitration Act and Article 227 and held that High Courts should be extremely circumspect while interfering in judgments allowing or dismissing first appeals. “It is therefore, prudent for a Judge to not exercise discretion to allow judicial interference beyond the procedure established under the enactment. This power needs to 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. This high standard set by this Court is in terms of the legislative intention to make the arbitration fair and efficient,” the Court further observed.
The appellant in this case acted in accordance with the procedure laid down under the agreement to unilaterally appoint a sole arbitrator, without the engineer mounting a judicial challenge at that stage. He then appeared before the arbitrator and challenged his jurisdiction in terms of Section 16(2) of the Arbitration Act. Thereafter, he chose to impugn the order passed by the arbitrator under Section 16(2) of the Arbitration Act through a petition under Article 226/227 of the Constitution.
The Arbitration Act provides for a mechanism of challenge under Section 34. It reads: “Recourse to a Court against an arbitral award may be made only by an application for setting aside such award in accordance with subsection (2) and subsection (3).” The use of the term “only” serves two purposes of making the enactment a complete code and laying down the procedure, it was held in the judgment.
The bench further said the contract between the parties was in the nature of a works contract as it held that the manufacturing of bricks was only an ancillary obligation, while the primary obligation on the appellant was to supply the bricks. It, therefore, held that the Gujarat Act holds primacy rather than the Arbitration Act.
The Court said that the engineer was not successful in showing exceptional circumstance or “bad faith” on the part of the appellant to invoke a remedy under Article 227. “No doubt the ambit of Article 227 is broad and pervasive, however, the High Court should not have used its inherent power to interject the arbitral process at this stage. 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 remarked.
The top court said that the High Court had erred in utilising its discretionary power under Articles 226 and 227. Thus, the Court allowed the appeal and the impugned order of the Gujarat High Court was set aside.
In 2019, the Supreme Court in Hindustan Construction Company Limited & anr vs Union of India settled the issue of automatic stays on the enforcement of arbitral awards. It struck down Section 87 of the Arbitration and Conciliation Act 1996 as being “manifestly arbitrary”.
Arbitration is most commonly used for the resolution of commercial disputes, particularly international commercial transactions, and is sometimes used to enforce credit obligations. It is also used in some countries to resolve other types of disputes such as labour, consumer or family and for certain disputes between states and between investors and states.
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As fundamental changes are made in the law governing arbitration in India, it is necessary for the highest court to adopt, interpret, clarify and elucidate the scope of public policy for setting aside arbitral awards.
—The writer is an advocate in the Lucknow bench of the Allahabad HC