10 February 2021
Introduction
Recently, a three-judge bench of the Supreme Court in Bhaven Construction v. Executive Engineer Sardar Sarovar Narmada Nigam Ltd. and Anr[1] has observed that the High Courts’ power of interference under Articles 226[2] and 227[3] of the Constitution of India (“Constitution”), in the context of arbitral proceedings, may be exercised in ‘exceptional rarity’. Clarifying the term ‘exceptional rarity’, the Court pointed out that such interference would be warranted only in cases wherein a party is left remediless under the Arbitration and Conciliation Act, 1996 (“Arbitration Act”) or clear bad faith is shown by one of the parties.
Factual Matrix
On February 13, 1991, Executive Engineer Sardar Sarovar Narmada Nigam Limited (“Respondent No. 1”) had entered into a contract with Bhaven Construction (“Appellant”) to manufacture and supply bricks (“Contract”). The Contract contained an arbitration clause which inter alia specified the procedure for appointment of a sole arbitrator. In course of time, certain disputes arose between the parties over payments in relation to manufacture and supply of bricks. Accordingly, the Appellant invoked the arbitration clause under clause 38 of the Contract by issuing a notice dated November 13, 1998, seeking appointment of a sole arbitrator.
Respondent No. 1 vide its replies dated November 23, 1998 and January 4, 1999 opposed the Appellant’s request on two main grounds, namely (i) the arbitration was agreed to be conducted in accordance with the provisions of the Arbitration and Conciliation Act,1940 and any statutory modification thereof. As the state of Gujarat had passed the Gujarat Public Works Contracts Disputes Arbitration Tribunal Act, 1992 (“Gujarat Act”), the disputes between the parties were to be adjudicated in accordance with the said statute; and (ii) the arbitration proceeding was time barred as clause 38 mandated that neither party would be entitled to claim if the arbitrator had not been appointed before the expiration of thirty days after the defect liability period.
Nevertheless, the Appellant appointed Respondent No. 2 as the sole arbitrator, for adjudication of the disputes between the parties. Thereafter, Respondent No. 1 filed an application under Section 16 of the Arbitration Act (“Section 16 Application”), disputing the jurisdiction of the sole arbitrator. Vide his order dated October 20, 2001, the sole arbitrator rejected the Section 16 Application (“Arbitrator’s Order”).
Being aggrieved by the Arbitrator’s Order, Respondent No. 1 filed an application under Article 226 and 227 of the Constitution before a single judge of the High Court of Gujarat. The said application was dismissed on the grounds of it not being maintainable (“Single Judge’s Order”). Challenging the Single Judge’s Order, Respondent No. 1 a letters patent appeal before a division bench of Gujarat High Court. On September 17, 2012, the Gujarat High Court allowed the appeal and observed that the Contract was a “works contract.” It held that as Respondent No. 1 (at that stage the appellant) had, at the earliest opportunity, challenged the ‘forum’ in which the dispute was being adjudicated, the Appellant (at that stage the respondent) could not contend that ‘now that the arbitrator is already appointed and he (the arbitrator) has already exercised power under the provisions of the Arbitration and Conciliation Act, 1996, the petitioner has to wait till the arbitration award is passed, to challenge the same under Section 34 and Section 37 of the 1996 Act’(“Impugned Order”). Aggrieved by the Impugned Order, the Appellant preferred an appeal before the Supreme Court (“Appeal”). The primary issue before the Court was whether the arbitral process could be interfered under Article 226/ 227 of the Constitution, and under what circumstances.
Arguments Advanced
The Appellant inter alia submitted that (i) the division bench of the Gujarat High Court erred in interfering with the Single Judge’s Order under Articles 226 and 227 of the Constitution; (ii) the fact that the final award was passed by the sole arbitrator and was now challenged under Section 34 of the Arbitration Act clearly shows the attempt of Respondent No. 1 to bypass the framework laid down under the Arbitration Act; and (iii) Section 16 (2) of the Arbitration Act mandates that the sole arbitrator had jurisdiction to adjudicate the preliminary issue of jurisdiction, which can only be challenged under Section 34 of the Arbitration Act.
Respondent No. 1 inter alia contended that (i) since the enactment of the Gujarat Act, the Arbitration Act was substituted with respect to the disputes arising out of the works contract; (ii) under Articles 226 and 227 of the Constitution, it was always open for Respondent No. 1 to invoke the writ jurisdiction of the High Court to set aside an arbitration which was a nullity as it conflicted with the enactment of the State.
Findings
On hearing both parties and perusing the material available on record, the Court allowed the Appeal and set aside the Impugned Order. It held that the division bench of the Gujarat High Court had erred in exercising the discretion available under Articles 226 and 227 of the Constitution, in this case.
Whilst holding that the Arbitration Act was a ‘code in itself’, the Court noted that the said phrase was not merely perfunctory but had definite legal consequences. Explaining one such legal consequence, the Court highlighted that the non-obstante clause contained in Section 5[4] of the Arbitration Act had been provided to uphold the intention of the legislature as provided in the Preamble to the Arbitration Act i.e. to adopt UNCITRAL Model Law and Rules, to reduce excessive judicial interference which is not contemplated under the Arbitration Act. The Court further observed that the framework contained in the Arbitration Act clearly portrayed an intention to address most of the issues within the ambit of the Act itself, without there being scope for any extra statutory mechanism, to provide just and fair solutions.
In the context of the facts of the present case, the Court stated that the Appellant had acted in accordance with the procedure laid down under the Contract. Revisiting the subsequent factual development, the Court found that Respondent No. 1 had then appeared before the sole arbitrator and challenged his jurisdiction under Section 16(2) of the Arbitration Act. Thereafter, Respondent No. 1 had challenged the order passed by the arbitrator under Section 16(2) of the Arbitration Act through a petition under Article 226/227 of the Constitution. Highlighting the well-defined regime for deciding a jurisdictional challenge under the Arbitration Act, the Court noted that in the usual course, the Arbitration Act provided for a mechanism of challenge under Section 34. It highlighted that the opening phase of Section 34 read as ‘Recourse to a Court against an arbitral award may be made only by an application for setting aside such award in accordance with sub-section (2) and sub-section (3).’ The Court emphasised that the use of term ‘only’ as occurring under the provision served two purposes of (i) making the enactment a complete code; and (ii) laying down the procedure.
The Court observed that Section 16 of the Arbitration Act necessarily mandated that the issue of jurisdiction must be dealt first by the tribunal, before the Court examined the same under Section 34. Accordingly, as Respondent No. 1 was not left remediless, and had statutorily been provided a chance of appeal, its act of resorting to Article 226 was unwarranted.
In this context the Court noted that it is settled law that when a statutory forum is created by law for redressal of grievances, a writ petition should not be entertained ignoring the statutory dispensation. It observed that it is prudent for a Judge to not exercise discretion to allow judicial interference beyond the procedure established under the enactment. The Court ruled that this power needed 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. It held that the high standard set by the Court in the instant case was in terms of the legislative intention to make the arbitration fair and efficient. The Court held that in the instant case, Respondent No. 1 had not been able to show exceptional circumstance or ‘bad faith’ on the part of the Appellant, to invoke the remedy under Article 227 of the Constitution. As a result, despite the ambit of Article 227 being broad and pervasive, the High Court should not have used its inherent power to interject the arbitral process at that stage.
Further, with respect to the issue whether the Contract was a works contract under the Gujarat Act, the Court observed that the same was a question that required contractual interpretation, and was a matter of evidence, especially when both parties had taken contradictory stands regarding the same. In this regard, the Court emphasised that it was settled law that the interpretation of contracts in such cases should generally not be done in the writ jurisdiction. It also stated that the mere fact that the Gujarat Act might apply may not be sufficient for the writ courts to entertain such pleas as that of Respondent No. 1 to challenge the ruling of the arbitrator under Section 16 of the Arbitration Act.
The Supreme Court observed that if the Courts were allowed to interfere with the arbitral process beyond the ambit of the enactment, the efficiency of the process would be diminished. However, the Court explicitly clarified that Respondent No. 1 was at liberty to raise any legally permissible objections regarding the jurisdictional question in the pending Section 34 proceedings.
Conclusion
Keeping in line with the well-established principle of minimum judicial interference, the Supreme Court has highlighted that the parties to an arbitration agreement must only seek adjudication within contours of the Arbitration Act. The Court has specifically noted that parties are not expected to resort to other statutory assistance unless they are left remediless or there is an element of bad faith involved. Parties ought to bear in mind that even though the power of the Court under Article 226 and 227 of the Constitution is broad and pervasive, the same is available only in exceptional circumstances. The judgment of the Supreme Court is another step in the direction of making India an arbitration-friendly jurisdiction.
For further information, please contact:
Aditya Mehta, Partner, Cyril Amarchand Mangaldas
aditya.mehta@cyrilshroff.com
[1] Judgment dated 6th January 2021 passed in Civil Appeal No. 14665 of 2015
[2] 226. Power of High Courts to issue certain writs.—(1) Notwithstanding anything in article 324***, every High Court shall have power, throughout the territories in relation to which it exercises jurisdiction, to issue to any person or authority, including in appropriate cases, any Government, within those territories directions, orders or 5[writs, including writs in the nature of habeas corpus, mandamus, prohibition, quo warranto and certiorari, or any of them, for the enforcement of any of the rights conferred by Part III and for any other purpose.
(2) The power conferred by clause (1) to issue directions, orders or writs to any Government, authority or person may also be exercised by any High Court exercising jurisdiction in relation to the territories within which the cause of action, wholly or in part, arises for the exercise of such power, notwithstanding that the seat of such Government or authority or the residence of such person is not within those territories.
(3) Where any party against whom an interim order, whether by way of injunction or stay or in any other manner, is made on, or in any proceedings relating to, a petition under clause (1), without—
(a) furnishing to such party copies of such petition and all documents in support of the plea for such interim order; and
(b) giving such party an opportunity of being heard,
makes an application to the High Court for the vacation of such order and furnishes a copy of such application to the party in whose favour such order has been made or the counsel of such party, the High Court shall dispose of the application within a period of two weeks from the date on which it is received or from the date on which the copy of such application is so furnished, whichever is later, or where the High Court is closed on the last day of that period, before the expiry of the next day afterwards on which the High Court is open; and if the application is not so disposed of, the interim order shall, on the expiry of that period, or, as the case may be, the expiry of the said next day, stand vacated.
(4) The power conferred on a High Court by this article shall not be in derogation of the power conferred on the Supreme Court by clause (2) of article 32.
[3] 227. Power of superintendence over all courts by the High Court.— (1) Every High Court shall have superintendence over all courts and tribunals throughout the territories in relation to which it exercises jurisdiction.
(2) Without prejudice to the generality of the foregoing provision, the High Court may—
(a) call for returns from such courts;
(b) make and issue general rules and prescribe forms for regulating the practice and proceedings of such courts; and
(c) prescribe forms in which books, entries and accounts shall be kept by the officers of any such courts.
(3) The High Court may also settle tables of fees to be allowed to the sheriff and all clerks and officers of such courts and to attorneys, advocates and pleaders practising therein:
Provided that any rules made, forms prescribed or tables settled under clause (2) or clause (3) shall not be inconsistent with the provision of any law for the time being in force, and shall require the previous approval of the Governor.
(4) Nothing in this article shall be deemed to confer on a High Court powers of superintendence over any court or tribunal constituted by or under any law relating to the Armed Forces.
4(5)* * * * *
[4] “Notwithstanding 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.”
