Upholding Sanctity of Arbitral Process

A three-judge bench of the Supreme Court, recently, reiterated that Courts ought to be very circumspect in interfering with the arbitral process, especially when exercising their powers under Articles 226 and 227 of the Constitution.

In its judgment titled Bhaven Construction through Authorised Signatory Premjibhai K. Shah v. Executive Engineer Sardar Sarovar Narmada Nigam Ltd. & Anr. [2021 SCC OnLine SC 8], the Supreme Court has once again affirmed that, the mandate of the UNCITRAL model law on arbitration, as reflected in the preamble to the Arbitration and Conciliation Act, 1996 (Act) is to provide a “unified legal framework for the fair and efficient settlement of disputes” in which the supervisory role of Courts is minimal. As a practitioner, one hopes that this dicta is universally followed as that will bolster our attempts as a nation to make India a major hub for commercial arbitrations.

In this decision, the Supreme Court also shed light on various other legal principles but those are best appreciated if brief facts involved in the case before Court are first noted.

In Bhaven Construction, the parties had entered into a contract under which the appellant was to manufacture and supply bricks to the respondent. The said contract included an arbitration clause, which stipulated that the arbitration would be conducted in accordance with the provisions of the Indian Arbitration Act, 1940 or any statutory modification thereto. Disputes arose between the parties and the appellant issued a notice seeking appointment of the sole arbitrator as stipulated in the contract.

The respondent replied to the said notice for appointment and contended that in light of the fact that the State of Gujarat had passed the Gujarat Public Works Contracts Disputes Arbitration Tribunal Act, 1992 (the Gujarat Act), the disputes between the parties could be adjudicated only in accordance with the aforesaid statute. The respondent also contended that the appellants claim was time-barred.

Despite the respondent raising the aforesaid contentions, the appellant, in keeping with the contractual provisions, appointed a sole arbitrator. The respondent preferred an application under Section 16 of the Act, challenging the sole arbitrator’s jurisdiction, which application the arbitrator rejected in keeping with his powers under the said section. Against this rejection order, the respondent preferred a ‘Special Civil Application’, under Articles 226 and 227, before the High Court of Gujarat which was dismissed by the Single Judge.

The Single Judge held that in light of the decisions in Konkan Railway Corporation Limited v. Mehul Construction Company [(2000) 7 SCC 201] and SBP & Co. v. Patel Engineering Ltd. [(2005) 8 SCC 618] a petition under Articles 226 and 227, against the order of the arbitrator, was not maintainable and could not be entertained. The Single Judge confirmed that the only remedy available to the respondent was to wait till the award was passed by the sole arbitrator and challenge the same under Section 34 of the Act.

Aggrieved, the respondent preferred a Letters Patent Appeal before the High Court of Gujarat. Whilst allowing the appeal, the Division Bench held that the contract between the parties was a “works contract” and would be governed by the Gujarat Act, and the appellant could not have appointed a sole arbitrator.

The Division Bench further held that the appellant could not contend that as the arbitrator had already been appointed and exercised his powers, the only recourse open to the respondent would be to challenge the award under Section 34 of the Act. Against such order of the Division Bench, the appellant had approached the Supreme Court.

Upon hearing the parties, the Supreme Court framed for itself the question “whether the arbitral process could be interfered under Article 226/227 of the Constitution, and under what circumstance?”

In answering the above, the Court noted that the Act was a code in itself and, as stipulated in the non-obstante clause in Section 5, the intention of the legislature was to adopt the UNCITRAL Model Law and Rules, so as to reduce excessive judicial interference. The Court further observed that the Act itself laid-down the procedure and forum for the appointment of an arbitrator to be challenged, and the framework of the Act left minimal scope for extra statutory mechanisms of adjudication. Whilst making such an observation, the Court clarified that a legislative enactment could not curtail a Constitutional right.

However, it observed, placing reliance on the case titled Nivedita Sharma v. Cellular Operators Association of India [(2011) 14 SCC 337] that petitions under Article 226 could not be entertained as a matter of course, especially when a statutory forum was created by law for redressal of grievances and provided the aggrieved person an effective alternative remedy. Consequently, a writ petition, under Articles 226 and 227 should not be entertained ignoring the statutory dispensation.

The Court thus held that the power of a judge, to exercise discretion permitting judicial interference beyond the procedure established under the enactment, 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”. The Court opined that this high standard was in terms of the legislative intent to make arbitration “fair and effective.”

It would also help to note that the Supreme Court has previously, in the case of Michigan Rubber (India) Ltd. v. State of Karnataka [(2012) 8 SCC 216], held that “court before interfering in tender or contractual matters, in exercise of power of judicial review, should pose to itself the following questions:

(i) Whether the process adopted or decision made by the authority is mala fide or intended to favour someone; or whether the process adopted or decision made is so arbitrary and irrational that the court can say: “the decision is such that no responsible authority acting reasonably and in accordance with relevant law could have reached”? and

(ii) “Whether the public interest is affected”?

The Court held that, if the answers to the above questions are in the negative, then there should be no interference under Article 226. Separately, the Court has previously in the case of Kerala State Electricity Board & Anr. v. Kurien E. Kalathil & Ors., also noted that interpretation of contracts was not amenable to writ jurisdiction [AIR 2000 SC 2573].

The three-judge bench also referred to the observations made in M/s. Deep Industries Limited v. Oil and Natural Gas Corporation Limited [(2019) SCC Online SC 1602], in which the Supreme Court had dealt with the interrelation between section 5 of the Act and Article 227 of the Constitution, to hold that the statutory mandate of the Act provided for only “one bite at the cherry.”

However, it could not be lost sight of that Article 227 being a Constitutional provision was unaffected by section 5 of the Act. Thus, whilst a petition under Article 227 could be filed against a judgment allowing or dismissing first appeals under section 37, the High Court should be “extremely circumspect in interfering with the same, taking into account the statutory policy as adumbrated…so that interference is restricted to orders that are passed which are patently lacking in inherent jurisdiction.”

The Supreme Court also noted that in the case before it, the respondent had not been able to show exceptional circumstances or “bad faith.” And in any event, the arbitrator had passed a final award, which award itself was under challenge and pending in separate proceedings, under section 34 of the Act, and hence the Supreme Court concluded that the High Court “should not have used its inherent power to interject the arbitral process at this stage.”

Notably, the Court observed that arbitrations are modelled upon time limitations and referred to the “principle of unbreakability” as laid down in P. Radha Bai v. P. Ashok Kumar [(2019) 13 SCC 445], to opine 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.”

In conclusion, Supreme Court’s decision in Bhaven Construction once again makes clear that under the jurisprudential doctrine of kompetenz-kompetenz, the sole arbitrator or an arbitral tribunal is empowered to adjudicate on, and determine, its own jurisdiction. This is statutorily enshrined in Section 16 of the Act and thus any challenge to the jurisdiction of the arbitrator or tribunal would, in the first instance, necessarily have to be determined by the arbitrator or tribunal themselves, and can only subsequently be challenged in proceedings under Section 34 upon the passing of a final award.

In this case, the Apex Court has also noted that the arbitral process is modelled upon time limitations and the sanctity of the process or the time-line should under no circumstances be compromised by a party adopting filibuster tactics of initiating parallel proceedings. One is hopeful that, going forward, this three-judge bench decision will act as a deterrent for unscrupulous litigants who attempt to undermine the legitimacy of arbitration as an effective dispute resolution mechanism and will stop regarding it as just being an alternate process.

After all, in the words of William Howard Taft, the 27th president of the United States (1909–1913) and the tenth Chief Justice of the United States (1921–1930), the only person to have held both offices, “The development of the doctrine of international arbitration, considered from the standpoint of its ultimate benefits to the human race, is the most vital movement of modern times. In its relation to the well-being of the men and women of this and ensuing generations, it exceeds in importance the proper solution of various economic problems which are constant themes of legislative discussion and enactment.”

Let us recognise the true meaning on these words and strive mightily towards improving the arbitration landscape in India. Asides from helping economic activity, this will also help ease the immense burden on our Courts which are already saddled with back-logs and an unenviable case load.

Satvik Varma is an advocate based in New Delhi. A graduate of Harvard Law School, he’s admitted to practice in India and New York. [svarma@indlawchambers.com]