India: The Changing Landscape Of Construction Arbitration

Last Updated: 5 November 2019
Article by Achintya Rawal

Arbitration is becoming a favored dispute resolution process in the infrastructure sector owing to the complexities of construction disputes. The challenges faced during construction disputes include high stakes of the infrastructure project, involvement of multiple parties, calculation of the quantum of damages, review and analysis of a large volume of data at the time of the dispute, and requirement of technical experts. These factors make arbitrations in the construction sector more demanding. With this background, we would like to highlight some important judgments of the Supreme Court of India that are shaping the arbitration regime in the construction sector.

  1. Person ineligible to be appointed as an Arbitrator cannot nominate an Arbitrator – this decision to have retrospective effect

In the case of Bharat Broadband Network Limited ("BBNL") v. United Telecoms Limited ("UTL"), AIR 2019 SC 2434, a dispute arose between the parties and UTL invoked arbitration on 3rd January 2017. This called for the Chairman and Managing Director of BBNL to select a sole arbitrator as per the terms of the arbitration clause. Mr. K.H. Khan was appointed as the sole arbitrator on 17th January 2017. Subsequently, on 3rd July 2017, the Supreme Court ruled in TRF Ltd. v. Energo Engineering Projects Ltd., AIR 2017 SC 3889, that since a company's managing director was one of the parties to the arbitration, he was ineligible to serve as an arbitrator and being ineligible could not nominate an arbitrator. Further, appointment of an arbitrator by such an ineligible person would be null and void. In view of this decision, BBNL made an application to remove the arbitrator from the proceedings. The sole arbitrator, however, rejected such an application. The Supreme Court relied upon the decision in the TRF Ltd. case and held that appointment of Mr. K. H. Khan as the sole arbitrator was void ab initio. The Court also held that ineligibility of arbitrator under Section 12(5) of the Arbitration & Conciliation Act, 1996 ("1996 Act") is de jure in nature which meant that the mandate of such an ineligible arbitrator terminated automatically. The Apex Court also held that the decision in the TRF Ltd. case had retrospective effect and would be applicable to all arbitrations starting on and after 23rd October 2015. It was also noted that parties could waive the objections to ineligibility of an arbitrator under Section 12 (5) of the 1996 Act only expressly through writing. UTL's filing of a claim statement before the arbitrator could not be considered to be a waiver of its objections to the ineligibility of the arbitrator.

Our Comments:

The sanctity of arbitration process depends upon the neutrality and impartiality of the arbitrator. Thus this judgment reinforces the fundamental principle of arbitration. Further, it clarifies that the appointment of an impartial arbitrator can be waived only by a clear written agreement where both parties are fully aware of the arbitrator's legal ineligibility and not just by their implied behavior.

  1. National Highways Act, 1956 will prevail over the Arbitration And Conciliation Act, 1996

The Supreme Court of India in the case of National Highways Authority of India v. Sayedabad Tea Estate, 2019 (11) SCALE 520, decided on 27th August 2019 that an application under Section 11 of the 1996 Act for appointment of an arbitrator in relation to disputes with National Highways Authority of India ("NHAI") is not maintainable in view of Section 3G(5) of the National Highways Act, 1956. Section 3G(5) of the National Highways Act, 1956 ("National Highways Act") provides for appointment of the arbitrator by the Central Government.

In this case, the Appellant (NHAI) acquired land in Sayedabad Tea Estate for construction of highways. The National Highways Act provides for acquisition and determination of compensation by the competent authority in accordance with Section 3G(5) of the National Highways Act. If the amount so determined by the competent authority is not acceptable to either of the parties then on application by either of the parties, the amount should be determined by the arbitrator appointed by Central Government. The Respondent being unsatisfied with the award of compensation determined by the competent authority filed an application to the Central Government ("CG") for appointment of an arbitrator. The CG did not respond to request and then the application was filed to Chief Justice for appointment of arbitrator invoking Section 11(6) of the 1996 Act. The CG then appointed an arbitrator as per Section 3G(5) of National Highways Act after the appointment of sole arbitrator under Section 11(6) of the 1996 Act.

The question arose as to which of the two appointments made was valid. The Apex Court held that the expression 'subject to' as used in the Section 3G(5) of the National Highways Act clearly indicates that the legislation intended to give overriding effect to the provisions of the National Highways Act where it relates to the appointment of arbitrator to be made by CG. Therefore, it was held that Section 11 of 1996 Act has no application in the present case.

Our Comments:

The essential element to file Section 11 petition for appointment of arbitrator is absence of parties' agreement to the appointment procedure or their inability to comply with the agreed procedure to appoint the arbitrator. The general principle in India is that special statutes override the general statutes. Hence, when entering into agreements with organizations instituted under a special statute, one must be aware of such special statute. This judgment reinforces the position that Section 11 of the 1996 Act will not operate if the parties have agreed for an appointment procedure mentioned under the special statute.

  1. Arbitrator fees agreed between parties will prevail over the Schedule under the Arbitration & Conciliation Act, 1996

The Supreme Court of India in the case of National Highways Authority Of India (Appellant) v. Gayatri Jhansi Roadways (Respondent), Civil Appeal No. 5383 of 2019, with Gammon Engineers and Contractors v. National Highways Authority of India, Civil Appeal No. 5384 of 2019, held that the Section 31(8) and 31A of the 1996 Act does not prevent parties from agreeing on a fee structure for the arbitrators.

In this case, the Appellant entered into a contract dated 7th February 2016 with the Respondent. The contract contained an arbitration clause which stated that the fees should be paid to the arbitrators under the policy circular issued by National Highways Authority. Respondent moved an application for deciding the fees as per agreement of the parties. The tribunal considered the application and held that the fees shall be fixed as per Fourth Schedule of the Arbitration and Conciliation (Amendment) Act, 2015. The Delhi High Court in Gayatri Jhansi case1 held that the arbitrator's fees must be fixed in accordance with Fourth Schedule, irrespective of an agreement to the contrary between the parties.

The Delhi High Court in Gammon Engineers case2 differed with the findings of Gayatri Jhansi case and held that deletion of words 'unless otherwise agreed by the parties' in Section 31A only signifies that parties, by an agreement cannot contract out of payment of 'cost'. Thus, the Delhi High Court held that the Arbitration and Conciliation (Amendment) Act, 2015 does not take away earlier position under the 1996 Act and parties are free to agree on the fees of the arbitrator. The Supreme Court upheld the Gammon Engineers case on Section 31(8) and 31A and set aside the Gayatri Jhansi case.

Our Comments:

This decision is appreciated as the Fourth Schedule of the 1996 Act is not mandatory but only suggestive in nature. Also, the mandate of the arbitrator cannot be terminated if the arbitrator disregards the agreement between the parties regarding the arbitrators' fee. This judgment respects the autonomy of the parties which is the foundation of arbitration.

  1. Former employee not disqualified from acting as arbitrator

The Apex Court in the case of the Government of Haryana PWD Haryana (B and R) Branch v. M/s G.F. Toll Road Pvt. Ltd and Ors., 2019 3 SCC 505, held that the former employee of one of the parties is not disqualified from acting as an arbitrator. In this case, the parties entered into a concession agreement for construction works that contained an arbitration clause. Dispute arose and both the parties appointed retired engineer-in-chief as their nominee arbitrator. Respondents raised an objection on the grounds that being a former employee, there are justifiable doubts regarding his independence and impartiality. Appellant requested the Indian Council of Arbitration (ICA) to appoint a substitute arbitrator within a period of 30 days. However, ICA had already appointed a nominee arbitrator on behalf of the appellant, as well as the presiding arbitrator.

Aggrieved by the appointment, appellant filed an application under Section 15 and Section 16 of the 1996 Act before the District Court, Chandigarh. The District Court and the HCigh Court of Punjab and Haryana dismissed the petition on the ground that the appellant could raise the issue of jurisdiction under Section 16 of the 1996 Act before the arbitral tribunal.

Aggrieved by the order, the appellant filed the petition before the Supreme Court. The Court emphasized on Section 15(2) of the 1996 Act which states that for any reason, a substitute arbitrator shall be appointed according to the rules applicable to the appointment of the arbitrator being replaced. The Apex Court also noted that the present case was governed by the pre-amendment 1996 Act which did not contain any such ground for disqualification. The objection of reasonable apprehension of bias raised was wholly unjustified and unsubstantiated as the former employee retired 10 years ago.

Our Comments:

The Court was justified in rejecting the challenge as not every former employee can be disqualified from acting as an arbitrator. The threshold of justifiable doubts has to be met in order to remove the arbitrator.

  1. Court cannot appoint an independent arbitrator unless it first resorts to the procedure agreed by the parties

The Apex Court in the case of Union of India v. Parmar Construction Co., 2019 (2) ARBLR 328 (SC), held that Court cannot appoint an independent arbitrator unless it first resorts to the procedure prescribed in the arbitration agreement.

In this case, the respondents contracted with railway establishment to undertake construction works of various kinds. The respondents raised a demand for escalation cost and the interest accrued thereon because the project was delayed due to breach of obligations by the appellants. In the meantime, the prices of raw material increased and hence appellants were requested to pay the enhanced escalation price. Dispute arose when the appellant refused to pay the escalated cost. Each of the respondents sent notice, invoking the arbitration clause which was declined by the appellant on the grounds that 'no dues certificate' has been furnished.

The Rajasthan High Court appointed an independent arbitrator without adhering to the mutually agreed procedure. Aggrieved by this, appellant filed a special leave petition in the Apex Court. The Supreme Court of India granted the leave and observed that the independence and impartiality of the arbitrator was never doubted. It also observed that the requests deserve to be examined in accordance with the 1996 Act and that the amendments of 2015 were not applicable to the present case. Further, the Court quashed the orders passed by the Rajasthan High Court and passed directions to appoint the arbitrator as per the terms of clause 64(3) of the arbitration agreement. The Apex Court also observed that mere furnishing of no claim certificate would not take away the right of the parties.

Our Comments:

This decision once again respected party autonomy and minimized judicial intervention. Even though the amendments of 2015 were not applicable to the present case it is important for the parties to ensure that the arbitrator to be appointed is independent and impartial as per the provisions of the amended 1996 Act. In the present case, the Railway employee was to be appointed as the arbitrator whose independence and impartiality could be questioned under the amended 1996 Act.

Conclusion

These judgments throw light on the fact that the India is moving towards its goal of being an international arbitration hub. The judiciary has been taking steps towards the same by respecting party autonomy and ensuring the independence and impartiality of the arbitrator. We are positive that these developments will bring much relief to the parties and ensure a speedy and neutral dispute resolution process.

Footnotes

1 National Highways Authority of India v. Gayatri Jhansi Roadways Limited, ARB.A. 1/2017, I.A. NOS.8086/2017 (Stay Application) & 9441/2017 (Application for waiver of costs), Delhi High Court.

2 National Highways Authority of India v. Gammon Engineers and Contractors Pvt. Ltd., O.M.P.(T)(COMM)-39/2018, Delhi High Court, 20th July 2018.

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