CPWD CONTRACTS AND THE WAY TO RESOLVE DISPUTES ARISING OUT OF THEM

CPWD, i.e. Central Public Works Department is the Principal Engineering Organisation of the Government of India and is an attached office of the Ministry of Housing and Urban Affairs. The primary functions of CPWD are construction and maintenance of two kinds of structures. First is building structures such as residential office, hospitals, educational institutes, sports complexes, auditoria and other such buildings. The second type is non-building structures such as airports, runways, highways, tunnels, bridges, flyovers, sports facilities, border fencing, and various other structures. CPWD has expanded its activities rapidly through the years and has been a keep participant in the national development process.

CPWD has expanded its activities rapidly through the years and has been a key participant in the national development process. CPWD has in the previous year received new sanctions of over Rs. 9000 crores and apart from that it already has works amounting to over Rs. 35000 crores under its belt which are currently in progress. CPWD Contracts therefore present boundless opportunities to Contractors interested in turning huge profits while contributing to the nation at the same time. There are several kinds of CPWD Contracts for projects that are offered to Contractors. Depending on the requirements of the project, the contracts can either be fixed priced contracts, i.e. contracts in which the cost is already provided with certain provisos for change in certain pricing included in the contract; or the contracts can be cost-reimbursement contracts, i.e. contracts in which Contractors can claim their expenses subject to conditions along with surplus payment for providing services.

While the CPWD Contracts or for that matter contracts by any Public Works Department are lucrative deals with great incentives, these contracts are very intricate and require meticulous planning and due diligence while performing the contract on part of all the parties, be it the representatives of the government or the Contractors. It is in the best interest of all parties involved to complete the project successfully as per the Contract in a timely manner and avoid any disputes as far as possible. A dispute may arise when either of the parties to the Contract asserts its right or claim and the other party denies or repudiates the same whether in writing or by its conduct. The disputes or differences may arise between the Government, its authorized representative and the contractor at any stage i.e. before the commencement of work, during the progress of work, or after completion/termination of work. At every stage, both the parties shall consciously avoid actions/situations likely to result in disputes, but without showing laxity in effectuating the provisions of the contract or neglect of their duties.

Nevertheless, in a situation where a dispute is unavoidable, then a resolution process has to be adopted in order to decide the dispute. Parties at times do resort to litigation, but it often is a long and tedious process. Litigation of PWD Contract disputes can lead to the projects being suspended indefinitely.This leaves a lot of room for uncertainty, making litigation undesirable for large government projects on which Crores of rupees are riding and hundreds of labourers and employees are dependent. It is a norm to have an arbitration clause in the Contract itself in accordance with Section 7 of Arbitration and Conciliation Act, 1996. The clause enables either party to invoke arbitration in case a dispute arises. CPWD has a dedicated Techno-Legal Cell that is responsible for dealing with Contract dispute litigation as the arbitration cases. It deals with various facets of disputes resolution such as approval of counter statements of facts in Arbitration cases, other litigation matters and issuing of circulars regarding them.

CPWD elaborates on settlement of dispute and arbitration in the General Conditions of Contracts (GCC) that are released for both Maintenance Projects as well as Engineering- Procurement- Construction Projects (EPC projects) . GCC are conditions that CPWD Contracts have to comply with. They provide for constitution of Dispute Resolution Committee (DRC). All disputes, except for those mentioned in the contract specifically, are to be first addressed to the DRC within 15 days of such disputes arising. The DRC is to then give its decision within 60 days extendable by 30 days with consent of both parties. The decision is to be submitted to the Chief Engineer or, in the absence of one, to Additional Director General. If the DRC fails to submit a decision or either party is not satisfied with the decision then such party can invoke arbitration by sending a notice to the Chief Engineer.

The arbitral process has to adhere to a certain set of compliances provided for in the GCC. It provides that Disputes with claims of Rs. 20 Crore or less shall be referred for adjudication through arbitration by a Tribunal having sole arbitrator, appointed by the Chief Engineer or Director General. Where claimed Value is more than Rs. 20 Crore, Tribunal shall consist of three Arbitrators, with contractor and Engineer-in- charge appointing one each. The two arbitrators then appoint a third arbitrator who acts as the presiding arbitrator. GCC also states that it is mandatory that member(s) of the Arbitral Tribunal shall be a Graduate Engineer with experience in handling public works engineering contracts, and further he shall have earlier worked at a level not lower than Chief Engineer/ equivalent.

For Contractors, it is crucial to not only know the intricacies of the Contract entered into and the demands to be fulfilled and conditions to comply with but also have an understanding of the forms of disputes that can arise during a project and the recourse that is available to resolve such disputes in a timely manner.

RIGHT OF PARTIES TO DEVISE PROCEDURE

Introduction

This case arises out of dispute between ‘Jagjeet Singh Lyllpuri’ and ‘Unitop Apartments and Builders limited’[1]. Following a dispute, the respondent invoked the arbitration and a retired Judge of the Supreme Court was appointed as the sole arbitrator. Award was passed in the favor of appellants. Aggrieved by the award the respondent filed a petition under section 34 of the Arbitration and Conciliation Act, 1996, in the Court of Additional District Judge, Ludhiana. The Court upheld the award. Respondent filed an appeal under section 37 of the Act before the High Court. The High Court passed the order in the favor of the respondent and remanded the matter to learned arbitrator for fresh consideration. Hence this appeal was filed by the appellants before the Supreme Court.

Facts of the case

The appellants and the respondents entered into a joint venture for construction of a residential cum commercial complex on the land of the appellant for which agreement was entered into between the parties. Work was to be completed in three years’ time.

The respondent commenced the construction in August, 1997, and continued until 31.03.1999. Thereafter, the project was abandoned by the respondent. Since the construction was not completed, the appellants issued a legal notice and terminated the agreement.

Subsequently the parties entered into a compromise and a cancellation agreement was arrived at and recorded in the agreement.

The respondents filed an application under section 9 of the Act, to restrain the appellants from damaging or demolishing the construction which had been raised by the respondents and invoked the arbitration clause.

An applicationunder section 11 was filed by the respondent for appointment of arbitrator. Court appointed a retired Judge of Supreme Court as the sole learned arbitrator.

The parties appeared before the arbitrator and filed their respective claim and counter­claims. After hearing both the parties the arbitrator made and published the award.

Petition under section 34 of the Act in court of Additional District Judge, Ludhiana

The respondent aggrieved by the award passed filed a petition under section 34. The learned Additional District Judge upheld and affirmed the award and dismissed the petition filed by the respondent.

Appeal under section 37 of the Act before the High Court

The High Court set aside the order of the Additional District Judge and held that the learned arbitrator did not grant appropriate opportunity to the parties to tender evidence by examining the witness. The matter was ordered to beremanded to the arbitrator for fresh consideration. The appellant filed a Special Leave petition against the order of the High Court.

Supreme Court’s Judgment

In the case presented, primarily two questions were placed before the Hon’ble Supreme Court.

Firstly, whether the non-granting of opportunity to cross-examine the witness was a valid ground for setting aside the award under section 34 of the Act when the parties themselves agreed to such procedure under section 19 of the Act?Secondly, whether the learned arbitrator adverted to all claims in the award?

Regarding the first issue, the contention raised by the respondent was that the procedure followed by the learned arbitrator was contrary to law and relied upon section 19 of the Act which states-

  1. Determination of rules of procedure.

(1) The arbitral tribunal shall not be bound by the Code of Civil Procedure, 1908 (5 of 1908) or the Indian Evidence Act, 1872 (1 of 1872).

(2) Subject to this Part, the parties are free to agree on the procedure to be followed by the arbitral tribunal in conducting its proceedings.

(3) Failing any agreement referred to in sub-section (2), the arbitral tribunal may, subject to this Part, conduct the proceedings in the manner it considers appropriate.

(4) The power of the arbitral tribunal under sub-section (3) includes the power to determine the admissibility, relevance, materiality and weight of any evidence.

The arbitrator in the presence of the parties and their counsel, recordedin order dated 28.11.2009 that the parties did not wish to cross-examine any of the witnesses and one of the witness who was present was discharged without being cross-examined. Neither any grievance, nor any application was filed before the learned arbitrator to recall said order and provide opportunity to tender evidence or cross-examine,nor any challenge was raised by initiating any other proceeding, prior to passing of the award.

The Supreme Court held that the respondent consented to the said procedure and it would not be open for the respondent to approbate and reprobate the same. The respondent having accepted the said procedure was estopped form raising such contentions and it was only after the passing of the award that the respondent raised such contentions and thus, the same were not accepted. Also the learned Single Judge of High Court was not justified in remanding the matter to the learned arbitrator.

Regarding the second issue, the Supreme Court held that the arbitrator has dealt with the contention relating to the cost incurred for the extent of construction made, as claimed by the respondent and has rejected the same. Also a perusal of the award indicates that the arbitrator has adverted to all aspects in a sequential manner and has recorded his conclusion to contentions that were put forth.

The Supreme Court also held that there was no valid ground to challenge the award passed by the arbitrator under section 34 of the Act and therefore the order passed by the High Court was set aside and the award passed by the arbitrator was restored.

Conclusion

In the light of the above judgment, it can be inferred that Section 19 of the Act exempts the arbitral tribunal from the shackles of the Civil Procedure Code, 1908 and also from the rules of evidence contained in the Indian Evidence Act, 1872 and empowers the parties to decide on the procedureto be followed. If the parties cannot agree, then the tribunalhas been given the power to formulate its own rules of procedure to be followed in the arbitral proceedings. The procedure, however, should be in conformity with the principles of natural justice and fair play and an equal opportunity must be given to both the parties. The award, interim or final, passed by the arbitral tribunal must be based upon the material and evidence placed by the parties on the record and after due analysis and appreciation, by giving proper and correct interpretation to the terms of the contract, subject to the provisions of law.

[1](2020) 2 SCC 279

APPOINTMENT OF SUBSTITUTE ARBITRATOR BY COURT

Introduction:

The present case[1]revolves around sections 11 and 15(2) of the Arbitration and Conciliation Act, 1996 (“Act”) where an arbitrator appointed by the Court had withdrawn from his mandate and a substitute Arbitrator was to be appointed. Section 15(2) of the Act specifies that in case the mandate of an arbitrator terminates, a substitute arbitrator shall be appointed according to the rules that were applicable to the appointment of the arbitrator being replaced.

Facts of the Case:

Disputes pertaining to the retirement deed arose between the partners of a partnership firm for which the applicants had first sent a letter-cum-notice, on August 14, 1998 to the respondents. Subsequently, a notice was sent to the respondent to appoint an arbitrator. On the failure of the respondents to do so within 30 days of the notice, the applicants approached the Hon’ble Court by means of an application under Section 11(6) of the Act.

Respondent in its defence submitted that the dispute is of such a nature that it cannot be adjudicated by the arbitrator and requires adjudication under the provisions of the Trade and Merchandise Marks Act, 1958, to which, the Court passed an order appointing a retired judge of the court to act as arbitrator.

The arbitrator issued notices to the parties for preliminary and subsequent hearing to which the parties sought adjournment on the ground that they were negotiating a compromise. Approximately a period of 6 years passed in which no arbitration proceedings took place. Since the arbitrator was resigning from such professional work, he terminated his mandate under section 25(a) of the Act and affirmed that the parties are free to appoint another arbitrator.

 Issues before the Court:

  1. Whether a substitute arbitrator can be appointed after a sole arbitrator resigns where the arbitration clause/agreement is silent on the procedure to be followed to appoint anarbitrator under section 11 read with section 15(2) of the Arbitration and Conciliation Act, 1996?
  2. Whether in present case,the parties are free to choose a substitute arbitrator?

Arguments of the Petitioner:

Petitioner argued that the arbitrator has terminated his mandate under section 25(a)[2] of the Act as no arbitration proceedings took place, inasmuch as, no claim petition was ever filed. Further stating that due to absence of any procedure to be followed by the parties for the appointment of an arbitrator under the retirement deed, the only course open to the parties was to apply for appointment of a substitute arbitrator under section 15(2) of the Act for which reliance was placed onvarious decisions of the Supreme Court.

The petitioner placed reliance onShaileshDhariyavan v. Mohan BalKrishan[3], where for the purpose of appointment of a substitute arbitrator, the agreed procedure, already existing between the parties for the appointment of arbitrator would fall within the meaning of the word “rules” mentioned in section 15(2) of the Act. Therefore, the same must be followed for appointing a substitute arbitrator as it had been applied for appointment of the original arbitrator.

Further, the petitioner referred to the matter reported on Anil v. Rajendra[4], stating thatonce the objections have been raisedby the respondent under section 11 of the Act in the original proceedings, no further scope survives for any fresh or other objections, on the principle of res-judicata.

 Arguments of the Respondent:

Section 15(1)(a) of the Act provides for termination of the mandate of an existing arbitrator. Thus, it was submitted thatneither any arbitration claim came to be filed by the applicant nor any proceedings were conducted by the arbitrator when the mandate of the arbitrator terminated owing to his withdrawal.

Respondent further submitted that in view of the clear mandate of section 15(2) of the Act, for the purpose of appointment of a substitute arbitrator, the ‘rules’ that were applicable to the appointment of the first Arbitrator, would have to be re-applied. Thus, relying on section 11(5) of the Act, it has been further submitted that the present application is not maintainable in the absence of any statutory notice having been first issued by the applicant for appointment of a substitute Arbitrator.

Judgment:

It was held that:

  1. In all the cases cited by the arbitrator, the first arbitrator was appointed by the parties and not by the respective High Court or the Supreme Court. Since, in the case under reference, the arbitrator was appointed by the court, therefore, the authority to appoint the substitute Arbitrator is also vested with the court.
  2. Also in cases cited, there pre-existed a set of agreed ‘rules’ between the parties to appoint a consented arbitrator. Along with that, the parties have exercised their power to appoint such/first Arbitrator. Whereas in the case under reference, no agreed ‘rules’ exist between the parties.

Therefore,when the parties failed to appoint an arbitrator within the statutory time limit of thirty days, the court appointed an independent arbitrator. It was further held that there is no provision under the Act where the parties could, thereafter regain their authority to appoint an arbitrator.

The court further explained its point by citing a Supreme Court judgment i.e. in ShaileshDhairyavan[5], in which it was held thatthe same ‘rules’ must be followed for appointing a substitute arbitrator as it had been applied for appointment of the original arbitrator. TheHon’ble Court alsorelied on certain Apex Court judgments likeS.B.P. and Company v. Patel Engineering Limited[6], Government of Haryana PWD Haryana Branch v. G.F. Toll Road Private Limited and others[7] and Yashwith Constructions (P) Ltd. v. Simplex Concrete Piles[8]where it was laid down that a substitute Arbitrator may be appointed according to the rules that were applicable to the appointment of the original arbitrator where the word ‘rules‘ would not be confined to statutory rules or the rules framed by the competent authority but would also include the terms of agreement, entered into between the parties.

Conclusion:

The present judgment throws light on the question of termination and substitution of arbitrator.In ACC Ltd. v. Global Cements Ltd.[9], the Hon’ble Court held that the procedure agreed by the parties for the appointment of the original arbitrator is equally applicable to the appointment of a substitute arbitrator, even if the arbitration agreement does not specifically say so. Interestingly, in the present case, the Apex Court relied of many of its judgments stating that it has the authority to appoint a substitute arbitrator, but it is respectfully submitted that the parties to the dispute must be given the authority to choose a substitute arbitrator and if they fail to do so, then the court can intervene as, while appointing the original arbitrator, it was the parties to the dispute who had the authority to appoint an arbitrator and on their failure to do so, the court interceded.

[1] M/S BasantIspatUdyog P. Ltd. v. M/S Basant Industries and 2 others, 2019(6) R.A.J. 256(All).

[2] The claimant fails to communicate his statement of claim in accordance with sub-section (1) of Section 23, the arbitral tribunal shall terminate the proceedings.

[3]2016(3) SCC 619.

[4]2015(2) SCC 583.

[5]Supra 2.

[6]2009(10) SCC 293.

[7]2019(3) SCC 505.

[8]2006(6) SCC 204.

[9]ACC Ltd. v. Global Cements Ltd., (2012) 7 S.C.C. 71 (India).

“EXCEPTED MATTERS”- WHETHER ARBITRABLE

Introduction:

Usually, the parties choose arbitration as the dispute resolution mechanism to resolve all disputes arising from or related to a contract. In such circumstances, the arbitrator has full discretion on all questions raised by the parties. However, in certain contracts, the parties choose to exclude certain matters from being adjudicated in arbitration. In such a situation, court might set aside the part or even the whole award, if it is challenged.

Sometimes parties to a contract ex ante agree upon the amount of compensation to be paid if one of them breaches the contract in future. Such stipulated damages are called ‘liquidated damages’. The parties at the time of entering in a contract may provide that in case of breach, the party in default is to pay to the other a sum certain provided in, or ascertainable from, the contract. This sum may be either liquidated damages, in which case it is not to be interfered with by the court, or a penalty, which covers the loss if proved but does not assess it. If it is a sum genuinely regarded as a pre-estimate of the loss by the parties which they contemplated, at the time of entering into contract, would flow from the breach, it is called liquidated damages. If, on the other hand, the sum does not attempt to assess the loss, but is imposed as security for the due performance of the contract, it is a penalty[1]. Hence, liquidated damages must be aresult of “genuine pre-estimate of damages” whereas the essence of a penalty is a payment of money “in terrorem”of an offending party[2].

 Facts of the Case:

In the present case[3], the respondent being disappointed by the order passed by learned Single Judge of the High Court of Delhi, challenged such order by filing an appeal under Section 37 of the Arbitration and Conciliation Act, 1996 (“Act”) before the High Court of Delhi. The Single Judge of the High Court upheld the order of the Arbitrator, where the learned Arbitrator allowed the claim of the Claimant and disallowed the liquidated damages/compensation presuming the same to be a penalty.

The Division Bench reversed the findings of the award passed by the learned Arbitrator and the order of the learned Single Judge by holding that:

  1. Clause 2 of the agreement provided that the decision of the Superintending Engineer (SE) on the question of levy of liquidated damages is final and that the same could not have been agitated in the arbitration proceeding.
  2. When the parties have consciously agreed that the decision of the SE be final only to exclude the issue of “excepted matter” from the scope of the arbitration, therefore, the arbitrator ought not to have dealt with the same.
  3. When ONGC first gave notices to the claimant to rectify the defects and thereafter, gave notices to levy liquidated damages to the appellant that the final bill was ready, it cannot be said that the liquidated damages had been imposed as a counter blast to the appellant’s claim.

Assailing the judgment of the High Court, the appellant approached the Supreme Court contending that the High Court failed to appreciate Clause 25 of the contract.

 Issues before the Court:

  1. Whether the levy of pre-estimated liquidated damages and reasonable compensation by the Superintending Engineer in terms of Clause 2 of the contract between the parties is “arbitrable”?
  2. Whether the respondent is right in contending that the levy of liquidated damages as per Clause 2 of the contract is final and an “excepted matter” not falling within the jurisdiction of the Arbitrator?

 Case of Appellant:

By relying upon BSNL v. Motorola India (P) Ltd.[4], and by referring to Clause 16(2) in the concerned agreement, the learned counsel for the appellant submitted that for quantification of liquidated damages, there has to be a delay first of all, and for ascertaining as to who was responsible for the delay, such an issue will be within the jurisdiction of the arbitrator.The learned counsel for the appellant however, submitted that the High Court neglected Clause 25 of the contract which authorizes the quantum of reduction along with the reduction of rates for substantive works that cannot be interpreted to empower the SE to unearth the issue of levy of liquidated damages. It was contended that the High Court failed to appreciate that the dispute relating to levy of compensation for delay provided under Clause 2 read with Clause 25 of the contract is not an “excepted matter” and the same has been rightly adjudicated upon by the learned Arbitrator.

Case of Respondent:

ONGC contended that no delay was caused by the respondent. In fact, the appellant was responsible for the delay of 39 weeks (39 x 7 = 273 days) out of 640 days, for which the appellant is liable to pay compensation in terms of Clause 2 of the contract which provides for compensation to be paid @ ½% per week subject to maximum 10% of the cost of the executed work and the decision of the SE is final in this regard. Thus, the respondent made aclaim recoverable from the appellant as compensation for the delay caused in completing the work.

Judgment:

The Supreme Court held that the intention of the High Court is very clear with respect to setting aside the order of Single Judge and also of Arbitrator by holding that levy of liquidated damages is an “excepted matter” under Clause 2 read with Clause 25 of the Contract and is not arbitrable. While considering similar contractual provisions viz. Clause 2 of the agreement, in VishwanathSood v. Union of India and Another[5],the Apex Court held that once the parties have decided that certain matters are to be decided by the SE and his decision would be final, the same cannot be the subject matter of arbitration.

Conclusion:

In the present case, the Hon’ble Apex Court has rightly held that where a Clause in a contract clearly excludes the arbitrator to take any matter falling under the category of “excepted matter”, in such cases it is outside the jurisdiction of arbitral tribunal to pass an award. An arbitrator is a creature of a contract and cannot exceed the stipulations of the contract. In other words, if an agreement explicitly excludes certain matters from being adjudicated by arbitral tribunal, then the same cannot be agitated in arbitration. Thus, Supreme Court of India in Harsha Constructions case[6]set aside that part of the part which fell under the category of “excepted matters”.

However, it needs to be noted that in J.G. Engineers[7]case, the Apex Court held that where there is no dispute as to who committed the breach, but the dispute arises on the issue relating to the quantification of liquidated damages, then such an issue can only be dealt by an adjudicating forum, i.e., by a Court or an arbitral tribunal, even if it falls under the category of “excepted matters”. Whereas, in the present case, the Hon’ble Court held that where a clause in a contract excludes the arbitrator to take any matter falling under the category of “excepted matter”, in such cases it is outside the jurisdiction of such arbitrator to pass an award for the same.

[1] UOI v. VasdeoAgarwal, AIR 1960 Pat 87.

[2]Dunlop Pneumatic Tyre Co Ltd v.New Garage and Motor Co Ltd, (1915) AC 79.

[3]M/S MitraGuha Builders (India) Company v. Oil and Natural Gas Corporation Limited, 2019(6) R.A.J. 663(SC).

[4]Bharat Sanchar Nigam Limited and another v. Motorola India (P) Ltd., (2009) 2 S.C.C. 337.

[5]VishwanathSood v. Union of India and Another, (1989) 1 S.C.C. 657 (India).

[6]Harsha Constructions v. Union of India, (2014) 9 S.C.C. 246 (India).

[7]J.G. Engineers Private Limited v. Union of India, (2011) 5 S.C.C. 758 (India).

CAN ‘APPREHENSION OF BIAS’ PROVE TO BE FATAL TO ‘ARBITRATION AWARD’ CHALLANGED UNDER SECTION 34 OF ARBITARTION ACT, 1996?

‘Justice cannot be for one side alone, but must be for both’ as rightly quoted by the famous First Lady Eleanor Roosevelt, still holds sanctity and validity in the current realm of arbitration as means of resolving disputes. ‘Fairness ‘and ‘Unbiased Approach’ are vital tenets that need to be traced in an ‘Arbitrator’. They are quintessential for an efficient and fair ‘arbitral proceedings’ to be carried out, ultimately culminating in an effective ‘arbitral award’, leaving very limited or no scope of challenging the same in the courts subject to the satisfaction of the parties. But what if an ‘Arbitral Award’ suffers from the vices of ‘unfairness’ and ‘biasness’? Can the same be challenged if there is just an ‘apprehension of bias’ rather than ‘actual bias’ being alleged by one of the parties to the dispute?  Such questions have been dealt by the Hon’ble Kerala High Court, in the case of P.V. Jojo and Others. v. Indian Cements Capital and Finance Ltd[i].The case involving contentious issue as to whether ‘real likelihood of bias’ rather than ‘actual bias’ reflected by the ‘arbitrator’ while passing an ‘arbitral award’ is a valid ground to vitiate the entire ‘arbitral proceedings’ and whether the above said ‘arbitral award’ challenged by the aggrieved party is likely to be set aside or not, has been aptly dealt with by the Hon’ble High Court.

The intricacies involved in the case have been dealt by the court keeping in mind the bare provisions of the Section 34, Section 13 and Section 12 of the Act[ii]and relying upon the judgements of the apex court. The award in the above said case was passed before the amendment of 2015; hence the provisions prior to the amendment of 2015 shall stand applicable in the present case.

 

PROVISONS OF THE ACT[iii] APPLICABLE IN THE PRESENT CASE

Before delving into the facts of the case it is important to read out the provisions of the Act[iv](prior to amendment of 2015) which are as follows:-

  1. Section 34- Application for setting aside arbitral award

(1) 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).

(2) An arbitral award may be set aside by the Court only if—

(a) the party making the application furnishes proof that—

(i) a party was under some incapacity, or

(ii) the arbitration agreement is not valid under the law to which the parties have subjected it or, failing any indication thereon, under the law for the time being in force; or

(iii) the party making the application was not given proper notice of the appointment of an arbitrator or of the arbitral proceedings or was otherwise unable to present his case; or

(iv) the arbitral award deals with a dispute not contemplated by or not falling within the terms of the submission to arbitration, or it contains decisions on matters beyond the scope of the submission to arbitration:

Provided that, if the decisions on matters submitted to arbitration can be separated from those not so submitted, only that part of the arbitral award which contains decisions on matters not submitted to arbitration may be set aside; or

(v) the composition of the arbitral tribunal or the arbitral procedure was not in accordance with the agreement of the parties, unless such agreement was in conflict with a provision of this Part from which the parties cannot derogate, or, failing such agreement, was not in accordance with this Part; or

(b) the Court finds that—

(i) the subject-matter of the dispute is not capable of settlement by arbitration under the law for the time being in force, or

(ii) the arbitral award is in conflict with the public policy of India.

Explanation. —Without prejudice to the generality of sub-clause (ii) it is hereby declared, for the avoidance of any doubt, that an award is in conflict with the public policy of India if the making of the award was induced or affected by fraud or corruption or was in violation of section 75 or section 81.

(3) An application for setting aside may not be made after three months have elapsed from the date on which the party making that application had received the arbitral award or, if a request had been made under section 33, from the date on which that request had been disposed of by the arbitral tribunal: Provided that if the Court is satisfied that the applicant was prevented by sufficient cause from making the application within the said period of three months it may entertain the application within a further period of thirty days, but not thereafter.

(4) On receipt of an application under sub-section (1), the Court may, where it is appropriate and it is so requested by a party, adjourn the proceedings for a period of time determined by it in order to give the arbitral tribunal an opportunity to resume the arbitral proceedings or to take such other action as in the opinion of arbitral tribunal will eliminate the grounds for setting aside the arbitral award.

  1. Section 12. Grounds for challenge

(1) When a person is approached in connection with his possible appointment as an arbitrator, he shall disclose in writing any circumstances likely to give rise to justifiable doubts as to his independence or impartiality.

(2) An arbitrator, from the time of his appointment and throughout the arbitral proceedings, shall, without delay, disclose to the parties in writing any circumstances referred to in sub-section (1) unless they have already been informed of them by him.

(3) An arbitrator may be challenged only if—

(a) circumstances exist that give rise to justifiable doubts as to his independence or impartiality, or

(b) he does not possess the qualifications agreed to by the parties.

(4) A party may challenge an arbitrator appointed by him, or in whose appointment he has participated, only for reasons of which he becomes aware after the appointment has been made.

  1. Section 13- Challenge procedure

(1) Subject to subsection (4), the parties are free to agree on a procedure for challenging an arbitrator.

(2) Failing any agreement referred to in sub-section (1), a party who intends to challenge an arbitrator shall, within fifteen days after becoming aware of the constitution of the arbitral tribunal or after becoming aware of any circumstances referred to in sub-section (3) of section 12, send a written statement of the reasons for the challenge to the arbitral tribunal.

(3) Unless the arbitrator challenged under sub-section (2) withdraws from his office or the other party agrees to the challenge, the arbitral tribunal shall decide on the challenge.

(4) If a challenge under any procedure agreed upon by the parties or under the procedure under sub-section (2) is not successful, the arbitral tribunal shall continue the arbitral proceedings and make an arbitral award.

(5) Where an arbitral award is made under sub-section (4), the party challenging the arbitrator may make an application for setting aside such an arbitral award in accordance with section 34.

(6) Where an arbitral award is set aside on an application made under sub-section (5), the Court may decide as to whether the arbitrator who is challenged is entitled to any fees.

 

FACTS OF THE CASE

 

The appellants entered into a loan agreement with the respondent company, namely, M/s India Cement Capital and Finance Ltd. On failing to pay the loan amount, the respondent filed a civil suit in the Sub Courts of Thirussar, to which the appellant moved an application for appointment of an arbitrator as the loan agreement contained an arbitration clause thereby invoking the arbitration proceedings. An arbitral award was rendered by the Arbitrator which was challenged by the appellants under section 34(1)[v]and the said arbitral award was rightly dismissed by the District Court of Thirussar. An appeal was filed against the above-said order which has been allowed by the Hon’ble High Court in the present case.

 

LEGAL OPINION OF THE COURT

 

The High court after hearing the arguments advanced by the learned counsels of both the parties gravitated towards the observation that in order to reach a ‘fair’ and ‘just decision’ it is important to expound the term ‘Bias’ which can be enumerated in the following manner :-

  1. Implication of ‘Actual Bias’ and ‘Real Likelihood of Bias’

Bias means predisposition of an adjudicator to decide for or against one party, without proper regard to the true merits of the dispute. ‘Bias’ is in violation of the principles of natural justice which forms the bedrock of the concept of ‘Arbitration’.

The Court opined that the ‘real likelihood of bias’ should be based on ‘cogent material’ and not on ‘mere whimsical apprehension’. The real test to see whether the ‘arbitrator’ smacks of ‘bias’ can be made out if the same was brought to the notice of the ‘arbitrator’ from the initial stage of the arbitration and has not been addressed by the ‘arbitrator’before or during the said ‘arbitral proceedings’.The court dismissed the plea of the respondent contending that the appellants gave their consent in the statement in ‘arbitral award’ thereby vitiating their challenge to the ‘appointment of the arbitrator’.

 

  1. Challenge made under Section 13(3) does not vitiate if the arbitration proceedings are going on and the same has not been addressed by the arbitrator.

In the present case, the appellants challenged the ‘appointment of the arbitrator’ under Section 13 (3) of the Act[vi], on the grounds that the ‘arbitrator’ had assisted his senior counsel in the suit involving the same subject matter to the dispute but the ‘arbitrator’ did not decide the challenge to the same till the final passing of the ‘arbitral award’. The appellant challenged the above-said order by virtue of Section 13(3) and Section 12 of the Act[vii]in the High Court of Kerala and according to the court if the same has not been addressed by the arbitrator then it shall not stand vitiated.

The court while evaluating the scope of the Section 13(3) of the Act[viii] was of the view that the provisions of the section are merely ‘directory’ and not ‘mandatory’ in nature and there is no provision for any consequences thereof. The object of the provision in Section 13(3) does not render otiose on account of the absence of the decision by the arbitrator.

 

  1. Conjoint reading of provisions of Section 13(5)[ix]and Section 34is necessary while interpreting the scope of ‘arbitral award’ under challenge

The court while redefining the limitations of the ‘arbitral award’ challenged under Section 34[x]is of the view that the expression ‘such an arbitral award’ can be challenged on the ground of ‘biases’ and ‘partiality of the arbitrator.’

 

  1. No adverse inference can be drawn against the aggrieved party if the party complies to the statement in the arbitral award whilst the challenge to the ‘appointment of the arbitrator’ is still subsisting

The court is also of the view that simply because the statement in the arbitral award was made, the challenge to the said appointment shall not be rendered useless.  In the absence of any express consent for the continuance of the arbitration proceedings or in the absence any cogent material to show that the allegation has been withdrawn by the aggrieved party, no adverse inference can be made against the aggrieved party challenging the award. The cumulative effect is sufficient to create ‘substantial possibility of bias’. Moreover the arbitrator never specifically denied or accepted the allegation levelled against his appointment and an adverse inference has been taken by the court.

 

  1. ‘Neutrality’- A paramount prerequisite for rendering an effective ‘arbitral award’

The High Court relied on the findings of the Apex Court in the case of Ranjit Thakur vs. Union of India[xi], wherein it has been observed that purity in administration demands party to arbitration proceedings should not have any apprehension that the arbitrator is biased and is likely to decide against him.

In the instant appeal, the previous conduct of the arbitrator has  put serious doubt in the minds of the aggrieved party in relation to the ‘neutrality’ of the arbitrator while conducting the arbitration proceedings and rendering an effective ‘arbitral award’.Furthermore, the High court while relying onVoestalpine case[xii]has laid emphasis on the ‘independence’ and ‘impartiality’ of the arbitrator which is very critical to arbitration process. Similarly in the case of ManakLal vs. Dr.Prem Chand Singhvi[xiii], the Apex Court has laid the test to ascertain the ‘biasness’ of an arbitrator.

 

 

 

CRITICAL EVAULATION OF THE JUDGEMENT

The High Court of Kerala has rightly inferred that in the absence of any ‘cogent material’ available against the aggrieved party to show that the challenge to arbitral award has been withdrawn during arbitral proceedings, the ‘arbitral award’ is likely to be set aside on the grounds of the ‘mere apprehension of bias’ rather than ‘actual apprehension of bias’. Also, an adverse inference has to been drawn against the ‘arbitrator’ if the same has not been either ‘denied’ or ‘admitted’ by the ‘arbitrator’, while conducting the ‘arbitral proceedings’ thereby rendering the arbitrator award as ‘ineffective’.

Principles of Natural Justice demand that an arbitrator has to ensure that ‘fairness’ and ‘neutrality’  is maintained at all the times and even if an iota of doubt arises in the minds of the party, the same has to be addressed as soon as possible without any undue delay. It is incumbent upon the arbitrator to ensure that ‘justice should not only be done but must appear to have been done.’ The judgment passed by the Hon’ble High Court has certainly to a great extent instilled more faith and trust in the minds of the parties who wish to resolve disputes via arbitration as an alternative mode of redressal. The scope of the word ‘bias’ has been redefined keeping in mind the satisfaction of the parties and ensuring that the ‘arbitral award’ rendered does not reflect a prejudiced mindset of an ‘unfair arbitrator’.

[i]2019 (6) Arb. LR 365 (Kerala) (DB)

[ii]  The Arbitration and Conciliation Act of 1996

[iii]  Ibid

[iv]  ibid

[v]  Ibid

[vi]  ibid

[vii]  Ibid

[viii]  ibid

[ix]  ibid

[x]  ibid

[xi] AIR 1987 SC 2386

[xii] 2017 (2) Arb. LR 1(SC)

[xiii]  AIR 1957 SC 425