SECTION 34 v. SECTION 48: THE SCOPE OF COURT INTERVENTION

INTRODUCTION
The Arbitration and Conciliation Act, 1996 (“the Act”) empowers the Indian Courts to intervene in cases relating to domestic arbitral awards and foreign arbitral awards under Section 34 and Section 48 of the Act respectively. The grounds for intervention are very similar in both section 34 and Section 48 of the Act. However, the scope of Court intervention under Section 34 is much wider in comparison to Section 48 of the Act. In the light of two recent judgments of the Supreme Court, this blog analyses the difference between the scope of Court intervention in matters relating to Section 34 and Section 48 of the Act.

INTERVENTION UNDER SECTION 34
Section 34 of the Act provides for the grounds for setting aside a domestic arbitral award in India. The contours of Court’s intervention in setting aside arbitral awards under Section 34 were properly defined by the Apex Court in the recent judgment of Ssangyong Engineering Construction Ltd. v. NHAI (2019) 15 SCC 131 (“Ssangyong”). In Ssanyong, the Supreme Court gave two notable findings to facilitate the interpretation of certain grounds for setting aside arbitral awards under Section 34 of the Act. They are:

  1. A. Scope of ‘patent illegality’ as a ground for setting aside arbitral awards under Section 34.

    Section 34(2A) of the Act, introduced through the 2015 Amendment, provides that an arbitral award can be set aside when the Court finds that such award is vitiated by ‘patent illegality’ appearing on the face of the award. While interpreting this term, the Apex Court held that ‘patent illegality’ means illegality that goes to the root of the matter, but excluding erroneous application of law by an arbitral tribunal or re-appreciation of evidence by an appellate Court. However, an arbitral award can only be set aside under this ground when:

    1. a. No reasons are given for an award.
    2. b. The view taken by an arbitrator is an impossible view of construing the contract.
    3. c. An arbitrator decides questions beyond a contract or his terms of reference.
    4. d. If a perverse finding is arrived at based on no evidence, or overlooking vital evidence, or based on documents, taken as evidence, without notice of the parties.
  2. B. Scope of ‘public policy’ as a ground for setting aside arbitral awards under Section 34.

    Section 34(2)(b)(ii) of the Act states that an arbitral award can be set aside if such award is in conflict with the ‘public policy’ of India. Section 34 also provides that an arbitral award will be considered to be in conflict with the ‘public policy’ of India when it fulfils any one of the following conditions:

    • • The arbitral award is affected by fraud or corruption or is in violation of Section 75 and 81 of the Act;
    • • The arbitral award is in contravention to the fundamental policy of Indian law; and
    • • The arbitral award is in conflict with the most basic notions of morality and justice.

    In order to bring clarity to the ‘public policy’ ground for setting aside arbitral awards, the Supreme Court provided a well-defined ambit for the interpretation of the following phrases:

    • • Fundamental policy of Indian law; and
    • • Most basic notions of morality and justice.

    While dealing with the question regarding the interpretation of the phrase ‘fundamental policy of Indian law’, the Apex Court placed heavy reliance on the judgment given in the case of Renusagar Power Co. v. General Electric Co. (1994) 1 SCC 644 and observed that an arbitral award can be set aside under the ‘public policy’ ground as being in contravention to ‘fundamental policy of Indian law’ when such award is in contravention to:

    1. a. A law protecting national interest;
    2. b. Orders of superior Courts in India; and
    3. c. The principles of natural justice.

    On the other hand, the Apex Court also held that an award would be termed to be in contravention to the “most basic notions of morality or justice” when such award shocks the conscience of the Court. Furthermore, it was held that the term ‘morality’ has to be determined on the basis of the ‘prevailing mores of the day’. By clearly defining the ambit of interpretation regarding these terms, the Apex Court provided the much-needed clarification in the ‘public policy’ ground for setting aside arbitral awards under Section 34 of the Act.

INTERVENTION UNDER SECTION 48
Section 48 of the Act provides several grounds that allow the Indian Courts to refuse the enforcement of a foreign arbitral award in India. The scope of Court intervention in cases regarding the enforcement of a foreign arbitral award in India has been comprehensively provided by the Apex Court in the recent judgment reported as Vijay Karia v. Prysmian Cavi E. Sistemi Srl and Ors (2020) SCC OnLine SC 177. (“Vijay Karia”). In this case, the Apex Court provided two important findings that clarify the power of the Courts to interfere with enforcement of an award under Section 48 of the Act. They are:

  1. A. Scope of the Apex Court’s jurisdiction with respect to petitions challenging the enforcement of foreign awards in India.
    In this case, Vijay Kariafiled a special leave petition before the Supreme Court to challenge the Order of Bombay High Court that upheld the enforcement of a foreign Award in India. At the very outset,the Apex Court observed that the power of the Court to refuse the enforcement of a foreign award in India is very restricted and the Court must ensure that there is ‘minimal intervention’ in the enforcement of such awards in India. In this context, Justice R.F Nariman speaking for the two-judge bench stated that,
    “The Policy of the legislature is that there ought to be only one bite at the cherry in a case where objections are made to the foreign award in the extremely narrow grounds of Section 48.”
  2. B. Discretionary Powers of the Court in cases relating to the enforcement of foreign arbitral award.
    Section 48 provides the grounds under which the Courts ‘may’ refuse to enforce a foreign arbitral award in India. Vijay Karia, these grounds were divided into three categories in order to facilitate the interpretation of the term ‘may’ enshrined in Section 48. The three categories are:

    • • Conditions that affect jurisdiction, such as invalidity or illegality of the arbitral agreement. (“Category I”)
    • • Grounds that affect party interest alone such as inability of a party to present its case. (“Category II”)
    • • Grounds that deal with public policy of India. (“Category III”)

    In the context of the grounds enshrined in Category I and Category III, the Apex Court held that the term ‘may’ enshrined in Section 48 is to be read as ‘shall’, i.e., the Court must refuse the enforcement of the foreign arbitral award when such grounds are established before the Court. For instance, in cases where it is established before the Court that the foreign arbitral award is in contravention to the public policy of India, the Court must refuse to enforce such foreign arbitral awards in India. On the other hand, in cases relating to Category II, the term ‘may’ enshrined in Section 48, allows the Courts to enforce a foreign award even when the party requesting the refusal of the enforcement of the foreign award successfully establishes the conditions enshrined in Category II, provided that the Court is satisfied that no prejudice has been caused to such party. For instance, if a party establishes before the Court, that it has been unable to present its case before the arbitral tribunal, which is a ground for waiver or abandonment of the foreign award in Category II, the Court may still allow the enforcement of the foreign award in cases where such inability does not cause any prejudice against such party.

ANALYSIS AND CONCLUDING REMARKS
There are several factors to illustrate the wider scope of Court invention under Section 34 as compared to Section 48 of the Act. The 246th Law Commission Reportelucidated that the scope of Court intervention in domestic awards ought to be wider as the same was recognized by introducing ‘patent illegality’ in Section 34(2A) by the 2015 Act without making the same amendment to Section 48. Furthermore, the judgment of the Apex Court in Vijay Karia also provided that the Courts should follow a ‘minimal intervention’ approach while dealing with cases relating to Section 48. Moreover, in another recent judgment of the Apex Court in M/s Controtrade Minerals & Metal Inc. v. Hindustan Copper Ltd.(2020) SCC OnLine SC 479 it was observed that the legislative intent behind Section 48 inclines towards a ‘pro-enforcement’ bias. By taking the abovementioned factors into account, it is clear that the position with regard to the scope of Court intervention under Section 48 is considerably restricted in nature in comparison to Section 34 of the Act.

INTERIM ORDERS – WHEN CAN BE PASSED

Introduction:

Under the Arbitration Act, 1940,a party could commence proceedings in a court by moving an application under Section 20 for appointment of an arbitrator and simultaneously it could move an application for interim relief under the Second Schedule read with Section 41(b) of the old Act. Whereas, Section 17 of the new Act[1] gives an arbitral tribunal the power to issue interim order in respect of the subject matterof dispute at the request of a party, unless the agreement prohibits such power. Section 9 gives similar power to the court, where either party can approach any court of competent jurisdiction for the issue of interim orders. Section 9(3) lays down the rule that prevents courts from entertaining any such requests if an arbitral tribunal stands constituted.

 

Facts of the Case[2]:

The contractor was awarded a contract for strengthening a section of National Highway under work order dated 31.07.2007 which was completed on 30.04.2008 and final bill was paid to the contractor.Later, the contractor did the repairs as and when required for a period of three years as mentioned in the contract. By letter dated 11.11.2014, the State called upon the contractor to pay a certain sum as the contractor had not carried out the road repair work in accordance with the contract. The appellant state threatened that it may withhold the payments from the security deposits and bills of other pending works to recover the sum. Aggrieved by the threat, the contractor filed a writ petition in the High Court on the ground that the State was not competent to withhold the amount payable to the contractor under other contracts until the liability of the contractor was determined and quantified by a court of competent jurisdiction.

 

The High Court held that without quantification or crystallization of the amount sought to be recovered, the employer cannot unilaterally recover the said amounts from the on-going contract work of the same contractor in connection with another contract. Liberty was, however, given to the State to seek recovery through other means as may be permissible under law. This judgment was challenged before the Supreme Court.

 

Issues before the Court:

  1. Whether the Tribunal constituted under Section 3 of the Gujarat Public Works Contracts Disputes Arbitration Tribunal Act, 1992 ( “the Gujarat Act”) has jurisdiction to make interim orders in terms of Section 17 of the Arbitration and Conciliation Act, 1996 (“the A&C Act”) ?
  2. Whether the appellant is justified in withholding the amount payable to the respondent for other works, by stating that the previous work was defective?

 

Arguments of the Appellant:

The appellant contended that the respondent contractor should have approached the State tribunal as constituted under the Gujarat Act, to seek remedy, if any, and not to the High Court of Gujarat as it had no jurisdiction in the present matter.

 

Arguments of the Respondent:

The respondent relied upon the judgment reported asGangotri Enterprises Ltd. v. UOI[3]to submit that the Government had no right to withhold the money of the contractor tillthe time suchclaim was adjudicated upon. This judgment placed its reliance on UOI v.Raman Iron Foundary[4].

 

The respondent further contended that the tribunal constituted under the Gujarat Act had no jurisdiction to grant such relief. The same was proved by placing reliance on an order of the State tribunal wherein the tribunal held that it could only exercise jurisdiction, powers and authority conferred on it by or under the Gujarat Act of which it was a creation.

 

Judgment:

The Apex Court relied on the judgmentH.M. Kamaluddin Ansari & Co. v. UOI[5] which overruled the judgment of Raman Iron Foundary[6].In this case the Supreme Court held as follows:

“22. It is true that the order of injunction in that case was in negative form. But if an order injuncted a party from withholding the amount due to the other side under pending bills in other contracts, the order necessarily means that the amount must be paid. If the amount is withheld there will be a defiance of the injunction order and that party could be hauled up for infringing the injunction order. It will be a contradiction in terms to say that a party is injuncted from withholding the amount and yet it can withhold the amount as of right. In any case if the injunction order is one which a party was not bound to comply with, the court would be loath and reluctant to pass such an ineffective injunction order. Once this Court came to the conclusion that the court has power under Section 41 (b) read with Second Schedule to issue interim injunction but such interim injunction can only be for the purpose of and in relation to arbitration proceedings and further that the question whether any amounts were payable by the appellant to the respondent under other contracts, was not the subject matter of the arbitration proceedings and, therefore, the court obviously could not make any interim order which, though ostensibly in form an order of interim injunction, in substance amount to a direction to the appellant to pay the amounts due to the respondent under other contracts, and such an order would clearly be not for the purpose of and in relation to the arbitration proceedings; the subsequent observation of the Court that the order of injunction being negative in form and substance, there was no direction to the respondent to pay the amount due to the appellant under pending bills of other contracts, is manifestly inconsistent with the proposition of law laid down by this Court in the same case.”

 

On a collective reading of the Acts together, the court was of the view that with regard to the powers of the arbitral tribunal under Section 17 of the A&C Act, these powers can be exercised by the tribunal formed under the Gujarat Act, since there is no contradiction in these two Acts, as far as the grant of interim relief is concerned. The tribunal is already vested with this power under Gujarat Act, and Section 17 of the A&C Act complements these powers. Therefore, the provisions of Article 17 of the A&C Act cannot be said to be inconsistent with the Gujarat Act.

 

The Court was of the view that the appropriate remedy for the contractor was to approach the arbitral tribunal constituted under the Gujarat Actsince that would have jurisdiction to decide whether the notice issued by the appellant was a legal notice and whether the appellant was, in fact, entitled to recover any amount from the contractor. The Apex Court further held that the tribunal would have the jurisdiction in deciding whether the contractor has made out a prima facie case for the grant of interim relief.

 

Conclusion:

While drafting arbitration clause, one should keep in mind whether the arbitral tribunal should be given the power to grant interim relief or not. If arbitration clause provides for such power to arbitral Tribunal, then one need not approach the court for such relief. Speaking about case under reference, the Apex Court concluded that there was no inconsistency in the two Acts, i.e., the Gujarat Act and the A&C Act, therefore, this Court rightly held that the appropriate remedy for the parties was to turn to the arbitration tribunal established under the Gujarat Act.

[1]Arbitration and Conciliation Act, 1996.

[2]State of Gujarat v. Amber Builders, (2020) SCC Online SC 13.

[3]Gangotri Enterprises Limited v. Union Of India, (2016) 11 S.C.C. 720 (India).

[4] Union Of India v. Raman Iron Foundary, (1974) 2 S.C.C. 231 (India).

[5] H.M. Kamaluddin Ansari & Co. v. Union Of India,  (1983) 4 S.C.C. 417 (India).

[6]Supra 2.

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).