Arbitration, one of the methods of Alternate Dispute Resolution (ADR), was first introduced in India through the Arbitration Act, 1940. Later, after taking into consideration international models like the UNCITRAL Model Law on International Commercial Arbitration, arbitration in India was standardized and institutionalized through the Arbitration and Conciliation Act, 1996 (Act). Over the years, several amendments have been made to the Act. At the time when the Act was enacted, arbitration was gaining popularity as a means of dispute resolution mechanism as an alternative to litigation in India. The courts were overburdened with excessive load of cases and the Act attracted parties to this alternative to traditional route of litigation. The Act ensured to incorporate provisions that limit judicial interference in the dispute resolution process to achieve a two-fold purpose, first, to provide some relief to the already overburdened courts and second, not to make arbitration a time-consuming process.
Over the years, the courts in India through several pronouncements have well established the principle of minimum judicial interference in arbitration proceedings, thus, keeping in line with the objects of the Act. Recently, a three-judge bench of the Supreme Court of India observed the High Court's power of interference under Articles 2261 and 2272 of the Constitution of India (Constitution) in relation to arbitration proceedings in the case of Bhaven Construction v. Executive Engineer Sardar Sarovar Narmada Nigam Ltd. and Anr3 . The apex court observed that the High Court's power of interference under Articles 226 and 227 of the Constitution in relation to arbitration proceedings may be exercised in 'exceptional rarity'. Commenting on the term 'exceptional rarity', the court pointed out that such interference would be warranted only in cases wherein a party is left remediless under the Act or clear bad faith is shown by one of the parties.
FACTS OF THE CASE
The Executive Engineer Sardar Sarovar Narmada Nigam Limited (Respondent No. 1) had entered into a contract with Bhaven Construction (Appellant) in 1991 to manufacture and supply bricks (Contract). The procedure for appointment of a sole arbitrator was contained in an arbitration clause in the Contract. Certain disputes arose between the parties over the course of time and consequently, the Appellant invoked the arbitration clause under the Contract thereby seeking appointment of a sole arbitrator.
Two main grounds were taken up by Respondent No.1 in opposition to the Appellant's request:
- Arbitration was agreed to be conducted in accordance with the provisions of the Arbitration and Conciliation Act, 1940 and any statutory modification thereof. The state of Gujarat had passed the Gujarat Public Works Contracts Disputes Arbitration Tribunal Act, 1992 (Gujarat Act) and so the disputes between the parties were to be adjudicated in accordance with the said statute;
- Clause 38 of the Contract mandated that neither party would be entitled to claim if the arbitrator had not been appointed before the expiration of thirty days after the defect liability period and so arbitration proceeding was time barred.
The Appellant however went ahead and appointed the sole arbitrator (Respondent No. 2). As a result, Respondent No. 1 filed an application under Section 164 of the Arbitration Act wherein it disputed the jurisdiction of the sole arbitrator. The sole arbitrator, however, vide his order dated 10.10.2001 rejected the Section 16 application. Respondent No. 1 then moved to the High Court of Gujarat wherein it filed an application under Articles 226 and 227 of the Constitution. The application was dismissed by the Single Judge on the ground of it being not maintainable.
Being aggrieved with the Single Judge's order, Respondent No. 1 filed a Letters Patent Appeal before a Division Bench of the Gujarat High Court. The Division Bench on 17.09.2012 while allowing the appeal observed that as the Respondent No. 1 (who was the Appellant at that stage) had challenged the 'forum' in which the dispute was being adjudicated at the earliest opportunity, the Appellant (who was the Respondent at that stage) cannot contend the following: "now that the arbitrator is already appointed and he (the arbitrator) has already exercised power under the provisions of the Arbitration and Conciliation Act, 1996, the petitioner has to wait till the arbitration award is passed, to challenge the same under Section 34 and Section 37 of the 1996 Act"
CASE IN THE SUPREME COURT
Accordingly, the Appellant preferred an appeal before the Supreme Court of India and the main issue before the court was whether the arbitral process could be interfered under Article 226 and/or 227 of the Constitution, and if yes, then under what circumstances.
The Appellant's main contention was that Section 16 (2) of the Arbitration Act mandates that the sole arbitrator has jurisdiction to adjudicate the preliminary issue of jurisdiction, and this can only be challenged under Section 345 of the Arbitration Act. Respondent No. 1 argued that under Articles 226 and 227 of the Constitution, it was always open for it to invoke the writ jurisdiction of the High Court to set aside an arbitration which was a nullity as it conflicted with the enactment of the State.
The apex court allowed the appeal and set aside the impugned order of the division bench of the Gujarat High Court. It held that the division bench of the High Court of Gujarat had made an error in exercising the discretion available under Articles 226 and 227 of the Constitution.
ARBITRATION ACT - A CODE IN ITSELF
The apex court noted that the Arbitration Act was a 'a code in itself'. Commenting on this note, it said that it was not merely perfunctory but had definite legal consequences, one of which was the non-obstante clause contained in Section 5 of the Arbitration Act that has been provided to uphold the intention of the legislature as provided in the Preamble to the Arbitration Act, that is to adopt UNCITRAL Model Law and Rules and to reduce excessive judicial interference. As observed by the court, the framework contained in the Arbitration Act clearly projected an intention to address most of the issues within the ambit of the Act itself without leaving any scope for extra statutory mechanism.
In the present case, the Appellant had clearly acted in accordance with the procedure laid down under the Contract whereas the Respondent No. 1 had appeared before the sole arbitrator and challenged his jurisdiction under Section 16 (2) of the Arbitration Act and thereafter, on being aggrieved by the sole arbitrator's order, had challenged the order through a petition under Article 226 and 227 of the Constitution. The apex court observed that the Arbitration Act has a well-defined regime for deciding a jurisdictional challenge as contained in Section 34. The opening phase of Section 34 reads as 'Recourse to a court against an arbitral award may be made only by an application for setting aside such award in accordance with sub-section (2) and sub-section (3).' The court emphasised that the use of term 'only' as occurring under the said section served a two-fold purpose: (i) making the enactment a complete code; and (ii) laying down the procedure
Further, Section 16 of the Act necessarily mandates that the issue of jurisdiction must first be dealt with the tribunal and then examined by the court under Section 34. Accordingly, Respondent No. 1 had not been left remediless and its act of resorting to Article 226 when a chance of appeal had been provided statutorily was clearly unwarranted in this case.
INTERPLAY OF ARBITRATION ACT AND JUDICIAL INTERFERENCE UNDER ARTICLE 226/227 OF THE CONSTITUTION
The apex court noted that it is a settled law that when a statutory forum is created by law for redressal of grievances, a writ petition should not be entertained ignoring the statutory dispensation already in existence.6 In such cases, it is prudent for a judge to not exercise discretion in allowing judicial interference beyond the procedure established under the enactment. The court ruled that this power needs to be exercised in exceptional rarity, wherein one party is left remediless under the statute, or a clear 'bad faith' is shown by one of the parties.
Commenting on the high standard set by the apex court in this instant case, the court held that this is in terms with the legislative intention to make arbitration fair and efficient. In the case at hand, Respondent No. 1 had not been able to show exceptional circumstance or 'bad faith' on the part of the Appellant, to invoke the remedy under Article 227 of the Constitution. As a result, despite the ambit of Article 227 being broad and pervasive, the High Court should not have used its inherent power to interfere with the arbitral process at that stage.
Furthermore, it was observed that if the courts were allowed to interfere with the arbitral proceedings beyond the ambit of the enactment, the efficiency of the process would be diminished. However, the court explicitly clarified that Respondent No. 1 was at liberty to raise any legally permissible objections regarding the jurisdictional question of the arbitrator in the pending Section 34 proceedings.
The leading case of M/s Deep Industries Ltd. v. ONGC Ltd.7 may be noted here where interplay of Section 5 of the Arbitration Act and Article 227 of the Constitution was analysed. It was observed that the most significant aspect of all is the non-obstante clause contained in Section 5 which states that notwithstanding anything contained in any other law, in matters that arise under Part I of the Arbitration Act, no judicial authority shall intervene except where so provided in this Part. This being the case, there is no doubt whatsoever that if petitions were to be filed under Articles 226/227 of the Constitution against orders passed in appeals under Section 37, the entire arbitral process would be derailed and would not come to fruition for many years. At the same time, we cannot forget that Article 227 is a constitutional provision which remains untouched by the non-obstante clause of Section 5 of the Act. In these circumstances, what is important to note is that though petitions can be filed under Article 227 against judgments allowing or dismissing first appeals under Section 37 of the Act, yet the High Court would be extremely circumspect in interfering with the same, taking into account the statutory policy as adumbrated by us herein above, so that interference is restricted to orders that are passed which are patently lacking in inherent jurisdiction.
This judgment of the Supreme Court is surely another step towards making India an arbitration-friendly jurisdiction as it attempts to drift away from the non-conducive intervening attitude of Indian courts. It strikes a balance between parties' choice to avoid conventional litigation and the need of judicial scrutiny. The well-established principle of minimum judicial interference in arbitral proceedings has been upheld in this case with the apex court highlighting that the parties to an arbitration agreement must only seek adjudication within the contours of the Arbitration Act. The court has specifically noted that parties are not expected to resort to any other statutory assistance except when they are left remediless or there is an element of bad faith involved. Henceforth, before filing frivolous writ petitions unscrupulous parties must keep in mind that even though the power of the courts under Article 226 and 227 of the Constitution is broad and extensive, the same is available only in exceptional circumstances.
1. Article 226 of the Constitution of India- Power of High Courts to issue certain writs
2. Article 227 of the Constitution of India - Power of superintendence over all courts by the High Court
3. Civil Appeal No. 14665 OF 2015, decided on January 6th, 2021.
4. Section 16 of the Arbitration and Conciliation Act, 1996- Competence of arbitral tribunal to rule on its jurisdiction
5. Section 34 of the Arbitration and Conciliation Act, 1996- Application for setting aside arbitral award
6. Nivedita Sharma vs Cellular Operators Association of India, Civil Appeal No. 10706 of 2011, decided on December 7, 2011.
7. (2019) SCC Online SC 1602.
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