The blog is authored by Ujjawal Bhargava and Ajay Lulla, fourth-year law students at Institute of Law, Nirma University, Ahmedabad, India.
Recently, a three-judge bench of the Supreme Court of India in its judgment titled Bhaven Construction through Authorized Signatory Premjibhai K. Shah v. Executive Engineer Sardar Sarovar Narmada Nigam Ltd. &Anr. reiterated that while interfering with the arbitral process, the Courts ought to be very cautious, especially when Courts are exercising their power under Article 226 and 227 of the Constitution of India.
Background to the Dispute-
In Bhaven Construction, the parties entered a contract under which the appellant had to manufacture and supply bricks to the respondent. This contract also contained an arbitration clause, which specified that the arbitration proceeding would be conducted in accordance with the provisions of the Arbitration Act, 1940 or any statutory modification thereto. Disputes arose between the parties, as a result the appellant issued a notice seeking appointment of a sole arbitrator as provided in the contract. The respondent while responding to the said notice contended that since the State of Gujarat had passed the Gujarat Public Works Contracts Disputes Arbitration Tribunal Act, 1992, (“the Gujarat Act”) the disputes should be adjudicated in accordance with the Gujarat Act.
Despite the contentions raised by the respondent, the appellant, considering the provisions of the contract, appointed a sole arbitrator. Consequently, the respondent preferred an application, challenging the sole arbitrator’s jurisdiction under Section 16 of the Arbitration and Conciliation Act, 1996 (“the Act”). The arbitrator while using his powers under the said section, rejected the application, the validity of which was challenged in a different suit under Section 34 of the Act and is pending. However, aggrieved by the rejection order, the respondent still preferred a ‘Special Civil Application’, before the High Court of Gujarat under Articles 226 and 227 of the Constitution of India which was dismissed by the Single Judge. Further, the respondent preferred a Letters Patent Appeal before the High Court of Gujarat which the Court allowed and held that the appellant could not have appointed a sole arbitrator. Thus, the appellant approached the Supreme Court.
The Supreme Court’s Decision-
The Supreme Court had formulated one issue for itself that "whether the arbitral process could be interfered under Article 226/227 of the Constitution?”
The Supreme Court held that the non-obstante clause present in Section 5 of the Act stipulates the intention of the Legislature to adopt the UNCITRAL Model Law and Rules, so that the excessive judicial intervention can be reduced. Further, the Court observed that the Act itself has laid down the procedure for challenging the appointment of the arbitrator, leaving minimal scope for extra statutory mechanisms of adjudication. Further, the Court while observing that the Courts play a minimal and supervisory role in the Arbitration process, clarified that fundamental right could not be curtailed because of a legislative enactment.
Furthermore, the Court reiterated that Courts while interfering with the Arbitral Process, ought to be very cautious, especially under Articles 226 and 227 of the Constitution of India. Ultimately, the court concluded that since the award passed by the arbitrator was challenged and is still pending in a different proceeding under Section 34, the High Court should not have used its inherent powers under Articles 226 and 227 to interfere with the arbitral process.
Comments-
Parties concur for arbitration with the aim for speedy dispute settlement mechanism and autonomy to the concerned parties. However, extensive judicial intervention by Courts nullifies these aims. Ergo, extensive judicial decision is always frowned upon. Thus, the decision in the instant case, in view of the authors is good law as it refutes extensive judicial intervention by the Courts.
It is pertinent to note that the judgment given by the Supreme Court is in consonance with the framework of the Act and with various other judicial decisions. Firstly, the Supreme Court has affirmed the mandate of UNCITRAL Model Law and Rules on arbitration to provide a “unified legal framework for the fair and efficient settlement of disputes”. This mandate has also been reflected in the preamble of the Act.
Secondly, while highlighting the mandate, the Court affirmed that the Court plays only a minimal and supervisory role in the Arbitral Process. Notably, the Act under Section 5, derived from Article 5 of the UNCITRAL Model Law and Rules states that in cases of domestic arbitration, judiciary will have a minimal role in the Arbitral process. Pertinently, in Mcdonalds India v. VikramBakshi it was stated that arbitration relies on the courts to prevent the process from being sabotaged by one party or the other. Courts therefore need to keep in mind that they must intervene at the bare minimum, in accordance with the Act and let the tribunal exercise its powers. This is also the intention of the 1996 act. Moreover, in McDermott International v. Burn Standard it was held that the Act provides for a supervisory role of judiciary as they are allowed to intervene to set aside an award, but only if it is obtained by fraud or corruption or violates principles of natural justice. Relevantly, in P. RadhaBai v. P. Ashok Kumar it was observed that if “Courts are allowed to interfere with the arbitral process beyond the ambit of the enactment, then the efficiency of the process will be diminished.”
Thirdly, the observation of the court that the High Court should not have used its inherent powers under Articles 226 and 227 to interfere with the arbitral process is also correct. This is because in Michigan Rubber (India) Ltd. v. State of Karnataka, the Supreme Court held that before exercising the power of judicial review in matters of tender or contractual matters, the Court should pose itself the following questions:
-Whether the decision given by the arbitral tribunal is such that no responsible authority that has been acting responsibly and in accordance with relevant law could have reached such decision?
-Whether public interest is affected?
If the answers to the above mentioned questions are in the affirmative, then only the High Court should interfere under Article 226. Further in M/S Deep Industries Limited v. Oil and Natural Gas Corporation Limited, the Supreme Court while dealing with the relation between Section 5 of the Act and Article 226 of the Constitution of India held that according to the statutory mandate of the Act there can be only “one bite at the cherry”. The same was also held in Ashwani Minda v. U-Shin.
Thus, the decision of the Court is welcome as it is in consonance with the intent of the Act.
India’s endeavours to reduce judicial intervention-
Sometimes parties deliberately adopt tactics of initiating parallel proceeding which results in delay of the award because of intervention by the judiciary. Consequently, the aim of arbitration to provide speedy dispute settlement is compromised. Thus, to protect the aim of arbitration, India has started taking measures to reduce such judicial intervention. This is being done by way of meeting global standards and introducing amendments to the Act. Some of the recent amendments to reduce judicial intervention include:
Firstly, the scope of Section 34 of the Act is narrowed. Section 34 of the act is the only section under which an arbitral award can be challenged. It allows contesting the award on one single ground, the award being against the public policy of India. This is a very vast ground and is prone to misuse by parties. The ambit of ‘public policy’ in this regard was narrowed down by the 2015 amendment and an explanation was added stating that this ground will be applicable only if:
a) Award obtained by fraud and corruption.
b) Award against the fundamental policy of India.
c) Award against the basic principles of morality and justice.
Secondly, by an amendment in Section 17 of the Act in 2015 it has been clarified that courts can only grant interim reliefs when arbitral tribunal has not been constituted or becomes ‘functus officio’ after delivering the award. Otherwise, only the tribunal shall be allowed to do so.
Thirdly, there has been an active encouragement to shift towards institutional arbitration from ad-hoc proceedings recently. This can be established by addition of section 43A to section 43M in the Act by virtue of 2019 amendment. This amendment is regarding the Arbitration Council of India, which has been established with the purpose of promoting ADR and grading arbitral institutions. High graded arbitral institutions are granted power to appoint arbitrators under the same amendment, a power that was only vested before the courts under section 11 prior to it. These amendments further bolster the efforts of the legislature to reduce judicial intervention in arbitration and to achieve the aim of arbitration to provide speedy dispute settlement mechanism and to make the process as autonomous as possible.
Also read- INTERPRETATION OF SECTION 7(4)(b) OF ARBITRATION AND CONCILIATION ACT, 1996
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