Bhaven Construction Through Authorised Signatory Premjibhai K. Shah vs Executive Engineer Sardar Sarovar Narmada Nigam LTD.& Anr.

EXECUTIVE ENGINEER SARDAR … RESPONDENTS SAROVAR NARMADA NIGAM LTD.& ANR.

JUDGMENT

N.V. RAMANA, J.

1. This Civil Appeal raises an important question of law

concerning arbitration law in India and special enactments

enacted by States concerning public works contract.

2. A brief reference to facts in this case is necessary for the

disposal of the case. On 13.02.1991, Respondent No. 1 entered

into a contract with the Appellant to manufacture and supply

Signature Not Verified bricks. The aforesaid contract had an arbitration clause. As Digitally signed by Vishal Anand

some dispute arose regarding payment in furtherance of Date: 2021.01.06 15:59:16 IST Reason:

manufacturing and supplying of bricks, the Appellant issued 1 a notice dated 13.11.1998, seeking appointment of sole

arbitrator in terms of the agreement. Clause 38 of the

agreement provide for arbitration as under:

Clause 38 – Arbitration

All disputes or differences in respect of which the decision has not been settled, shall be referred for arbitration to a sole arbitrator appointed as follows:

Within thirty days of receipt of notice from the Contractor of his intention to refer the dispute to arbitration the Chief Engineer shall send to the Contractor a list of three officers from the list of arbitrator appointment by the Government. The Contractor shall within fifteen days of receipt of this list select and communicate to the Chief Engineer the name of the person from the list who shall then be appointed as the sole arbitrator. If Contractor fails to communicate his selection of name, within the stipulated period, the Chief Engineer, shall without delay select one officer from the list and appoint him as the sole arbitrator. If the Chief Engineer fails to send such a list within thirty days, as stipulated, the contractor shall send a similar list to the Chief Engineer within fifteen days. The Chief Engineer shall then select one officer form the list 2 and appoint him as the sole arbitrator within fifteen days. If the Chief Engineer fails to do so the contractor shall communicate to the Chief Engineer the name of one Officer from the list, who shall then be the sole arbitrator.

The arbitration shall be conducted in accordance with the provision of the Indian Arbitration Act, 1940 or any statutory modification thereof. The decision of the sole arbitrator shall be final and binding on the parties thereto. The Arbitrator shall determine the amount of costs of arbitration to be awarded to either parties.

Performance under the contract shall continue during the arbitration proceedings and payments due to the contractor by the owner shall not be withheld, unless they are the subject matter of the arbitration proceedings.

All awards shall be in writing and in case of awards amounting to Rs. 1.00 lakh and above, such awards, shall state reasons for the amounts awards.

Neither party is entitled to bring a claim to arbitration if the Arbitrator has not been appointed before the expiration of thirty days after defect liability period.

(emphasis supplied)

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3. Respondent No. 1, by replies dated 23.11.1998 and

04.01.1999, did not agree to the Appellant’s request on two

main grounds:

a. That the arbitration was agreed to be conducted in accordance with the provision of the Indian Arbitration Act and any statutory modification thereof. Accordingly, the State of Gujarat had passed the Gujarat Public Works Contracts Disputes Arbitration Tribunal Act, 1992 (hereinafter referred to as “the Gujarat Act”). Therefore, the disputes between the parties were to be adjudicated in accordance with the aforesaid statute. b. That the arbitration was time barred, as Clause 38 mandated that neither party was entitled to claim if the arbitrator has not been appointed before the expiration of thirty days after the defect liability period.

4. In any case, the Appellant appointed Respondent No. 2 to act

as a sole arbitrator for adjudication of the disputes.

Respondent No. 1 preferred an application under Section 16 of

the Arbitration and Conciliation Act of 1996 (hereinafter

referred to as “the Arbitration Act”) disputing the jurisdiction

of the sole arbitrator. On 20.10.2001, the sole arbitrator

rejected the application of the Respondent No. 1 and held that

the sole arbitrator had jurisdiction to adjudicate the dispute.

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5. Aggrieved by the order of the sole arbitrator, Respondent No.

1 preferred Special Civil Application No. 400 of 2002, under

Articles 226 and 227 of the Constitution of India before the

High Court of Gujarat. The Single Judge, while dismissing the

Special Civil Application, held as under:

“……At this stage, the judgment of the Hon’ble Supreme Court in the case of Konkan Railway Corporation Limited v. Mehul Construction Company, (2000) 7 SCC 201 is also required to be considered along with the judgment of the Hon’ble Supreme Court in the case of SBP & Co. v. Patel Engineering Ltd., (2005) 8 SCC 618. Considering the aforesaid two judgments of the Hon’ble Supreme Court and the order passed by the learned sole arbitrator passed under Section 16(4) of the Act dismissing the application submitted by the petitioner challenging the jurisdiction of respondent no. 2 as a sole arbitrator and challenging his appointment as a sole arbitrator, it is to be held that the petition under Articles 226 and 227 of the Constitution of India against the said order is not maintainable and/or the same is not required to entertained and the only remedy available to the petitioner is to wait till the award is passed by the learned Sole Arbitrator and to challenge the same under Section 34 of the Act…”

6. Aggrieved by the order of the Single Judge, Respondent No. 1

preferred Letters Patent Appeal No. 182 of 2006 in Special Civil 5 Application No. 400 of 2002. The High Court of Gujarat, by the

impugned order dated 17.09.2012, allowed the appeal and

observed the following:

“11. As discussed hereinabove, ‘the contract’ is a “works Contract” and a dispute is raised by the petitioner at the earliest available opportunity about the ‘forum’ in which the dispute be adjudicated. It was as early as on 23.11.1998, the appellant denied that in view of Clause-38, wherein it is provided that, ‘provision of Indian Arbitration Act, 1940 and any statutory modification thereof will be applicable’, the respondent cannot appoint a sole arbitrator and thereafter cannot contend that 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.”

7. Aggrieved, the Appellant filed this appeal by way of special

leave petition.

8. Counsel for the Appellant argued that the Division Bench of

the High Court erred in interfering with the order of the Single

Judge under Articles 226 and 227 of the Constitution. The fact

that the final award has been passed by the sole Arbitrator

and is now challenged under Section 34 of the Arbitration

6 Act clearly shows the attempt of Respondent No. 1 to bypass

the framework laid down under the Arbitration Act. He points

out that Section 16(2) of the Arbitration Act mandates that the

sole arbitrator had the jurisdiction to adjudicate the

preliminary issue of jurisdiction, which can only be challenged

under Section 34 of the Arbitration Act.

9. On the other hand, learned counsel for Respondent No. 1

contended that since the enactment of the Gujarat Act, the

Arbitration Act was substituted with respect to the disputes

arising out of the works contract. It was contended that under

Articles 226 and 227 of the Constitution, it was always open

for Respondent No. 1 to invoke the writ jurisdiction of the High

Court to set aside an arbitration which was a nullity as it was

in conflict with the State enactment.

10. Having heard both parties and perusing the material available

on record, the question which needs to be answered is whether

the arbitral process could be interfered under Article 226/227

of the Constitution, and under what circumstance?

11. We need to note that the Arbitration Act is a code in itself. This

phrase is not merely perfunctory, but has definite legal

7 consequences. One such consequence is spelled out under

Section 5 of the Arbitration Act, which reads as under

“Notwithstanding anything contained in any other law for the

time being in force, in matters governed by this Part, no judicial

authority shall intervene except where so provided in this Part.”

The non-obstante clause is provided to uphold the intention of

the legislature as provided in the Preamble to adopt UNCITRAL

Model Law and Rules, to reduce excessive judicial interference

which is not contemplated under the Arbitration Act.

12. The Arbitration Act itself gives various procedures and forums

to challenge the appointment of an arbitrator. The framework

clearly portrays an intention to address most of the issues

within the ambit of the Act itself, without there being scope for

any extra statutory mechanism to provide just and fair

solutions.

13. Any party can enter into an arbitration agreement for resolving

any disputes capable of being arbitrable. Parties, while

entering into such agreements, need to fulfill the basic

ingredients provided under Section 7 of the Arbitration Act.

Arbitration being a creature of contract, gives a flexible

8 framework for the parties to agree for their own procedure with

minimalistic stipulations under the Arbitration Act.

14. If parties fail to refer a matter to arbitration or to appoint an

arbitrator in accordance with the procedure agreed by them,

then a party can take recourse for court assistance under

Section 8 or 11 of the Arbitration Act.

15. In this context, we may state that the Appellant acted in

accordance with the procedure laid down under the agreement

to unilaterally appoint a sole arbitrator, without Respondent

No. 1 mounting a judicial challenge at that stage. Respondent

No. 1 then appeared before the sole arbitrator and challenged

the jurisdiction of the sole arbitrator, in terms of Section 16(2)

of the Arbitration Act.

16. Thereafter, Respondent No. 1 chose to impugn the order

passed by the arbitrator under Section 16(2) of the Arbitration

Act through a petition under Article 226/227 of the Indian

Constitution. In the usual course, the Arbitration Act provides

for a mechanism of challenge under 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

9 aside such award in accordance with sub-section (2) and sub-

section (3)’. The use of term ‘only’ as occurring under the

provision serves two purposes of making the enactment a

complete code and lay down the procedure.

17. In any case, the hierarchy in our legal framework, mandates

that a legislative enactment cannot curtail a Constitutional

right. In Nivedita Sharma v. Cellular Operators

Association of India, (2011) 14 SCC 337, this Court referred

to several judgments and held:

“11. We have considered the respective arguments/submissions. There cannot be any dispute that the power of the High Courts to issue directions, orders or writs including writs in the nature of habeas corpus, certiorari, mandamus, quo warranto and prohibition under Article 226 of the Constitution is a basic feature of the Constitution and cannot be curtailed by parliamentary legislation - L. Chandra Kumar v. Union of India, (1997) 3 SCC 261. However, it is one thing to say that in exercise of the power vested in it under Article 226 of the Constitution, the High Court can entertain a writ petition against any order passed by or action taken by the State and/or its agency/ instrumentality or any public authority or order passed by a quasi-

judicial body/authority, and it is an 10 altogether different thing to say that each and every petition filed under Article 226 of the Constitution must be entertained by the High Court as a matter of course ignoring the fact that the aggrieved person has an effective alternative remedy. Rather, it is 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.

(emphasis supplied)

It is therefore, prudent for a Judge to not exercise discretion

to allow judicial interference beyond the procedure established

under the enactment. This power needs to be exercised in

exceptional rarity, wherein one party is left remediless under

the statute or a clear ‘bad faith’ shown by one of the parties.

This high standard set by this Court is in terms of the

legislative intention to make the arbitration fair and efficient.

18. In this context we may observe M/s. Deep Industries Limited

v. Oil and Natural Gas Corporation Limited, (2019) SCC

Online SC 1602, wherein interplay of Section 5 of the

Arbitration Act and Article 227 of the Constitution was

analyzed as under:

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“15. Most significant 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. Section 37 grants a constricted right of first appeal against certain judgments and orders and no others. Further, the statutory mandate also provides for one bite at the cherry, and interdicts a second appeal being filed (See Section 37(2) of the Act)

16. 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 12 that interference is restricted to orders that are passed which are patently lacking in inherent jurisdiction.”

19. In the instant case, Respondent No. 1 has 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. No doubt the ambit of Article 227 is broad and

pervasive, however, the High Court should not have used its

inherent power to interject the arbitral process at this stage. It

is brought to our notice that subsequent to the impugned

order of the sole arbitrator, a final award was rendered by him

on merits, which is challenged by the Respondent No. 1 in a

separate Section 34 application, which is pending.

20. Viewed from a different perspective, the arbitral process is

strictly conditioned upon time limitation and modeled on the

‘principle of unbreakability’. This Court in P. Radha Bai v. P.

Ashok Kumar, (2019) 13 SCC 445, observed:

36.3. Third, Section 34(3) reflects the principle of unbreakability. Dr Peter Binder in International Commercial

13 Arbitration and Conciliation in UNCITRAL Model Law Jurisdictions, 2nd Edn., observed:

“An application for setting aside an award can only be made during the three months following the date on which the party making the application has received the award. Only if a party has made a request for correction or interpretation of the award under Article 33 does the time-limit of three months begin after the tribunal has disposed of the request. This exception from the three-month time-limit was subject to criticism in the working group due to fears that it could be used as a delaying tactics. However, although “an unbreakable time-limit for applications for setting aside” was sought as being desirable for the sake of “certainty and expediency” the prevailing view was that the words ought to be retained “since they presented the reasonable consequence of Article 33”.

According to this “unbreakability” of time-limit and true to the “certainty and expediency” of the arbitral awards, any grounds for setting aside the award that emerge after the three-

month time-limit has expired cannot be raised.

37. Extending Section 17 of the Limitation Act would go contrary to the

14 principle of “unbreakability” enshrined under Section 34(3) of the Arbitration Act.

(emphasis supplied)

If the Courts are allowed to interfere with the arbitral process

beyond the ambit of the enactment, then the efficiency of the

process will be diminished.

21. The High Court did not appreciate the limitations under

Articles 226 and 227 of the Constitution and reasoned that the

Appellant had undertaken to appoint an arbitrator

unilaterally, thereby rendering the Respondent No. 1

remediless. However, a plain reading of the arbitration

agreement points to the fact that the Appellant herein had

actually acted in accordance with the procedure laid down

without any mala fides.

22. Respondent No. 1 did not take legal recourse against the

appointment of the sole arbitrator, and rather submitted

themselves before the tribunal to adjudicate on the

jurisdiction issue as well as on the merits. In this situation,

the Respondent No. 1 has to endure the natural consequences

of submitting themselves to the jurisdiction of the sole 15 arbitrator, which can be challenged, through an application

under Section 34. It may be noted that in the present case, the

award has already been passed during the pendency of this

appeal, and the Respondent No. 1 has already preferred a

challenge under Section 34 to the same. Respondent No. 1 has

not been able to show any exceptional circumstance, which

mandates the exercise of jurisdiction under Articles 226 and

227 of the Constitution.

23. The Division Bench further opined that the contract between

the parties was in the nature of a works contract as it held

that the manufacturing of bricks, as required under the

contract, was only an ancillary obligation while the primary

obligation on the Appellant was to supply the bricks. The

Division Bench therefore held that the Gujarat Act holds the

field, and not the Arbitration Act.

24. The Gujarat Act was enacted in 1992 with the object to provide

for the constitution of a tribunal to arbitrate disputes

particularly arising from works contract to which the State

Government or a public undertaking is a party. A works

contract is defined under Section 2(k) of the Gujarat Act. The

16 definition includes within itself a contract for supply of goods

relating to the execution of any of the works specified under

the section. However, a plain reading of the contract between

the parties indicates that it was for both manufacturing as well

as supply of bricks. Importantly, a contract for manufacture

simpliciter is not a works contract under the definition

provided under Section 2(k). The pertinent question therefore

is whether the present contract, which is composite in nature,

falls within the ambit of a works contract under Section 2(k)

of the Gujarat Act. This is a question that requires contractual

interpretation, and is a matter of evidence, especially when

both parties have taken contradictory stands regarding this

issue. It is a settled law that the interpretation of contracts in

such cases shall generally not be done in the writ jurisdiction.

Further, the mere fact that the Gujarat Act might apply may

not be sufficient for the writ courts to entertain the plea of

Respondent No. 1 to challenge the ruling of the arbitrator

under Section 16 of the Arbitration Act.

25. It must be noted that Section 16 of the Arbitration Act,

necessarily mandates that the issue of jurisdiction must be

17 dealt first by the tribunal, before the Court examines the same

under Section 34. Respondent No. 1 is therefore not left

remediless, and has statutorily been provided a chance of

appeal. In Deep Industries case (supra), this Court observed

as follows:

“22. One other feature of this case is of some importance. As stated herein above, on 09.05.2018, a Section 16 application had been dismissed by the learned Arbitrator in which substantially the same contention which found favour with the High Court was taken up. The drill of Section 16 of the Act is that where a Section 16 application is dismissed, no appeal is provided and the challenge to the Section 16 application being dismissed must await the passing of a final award at which stage it may be raised under Section 34.” (emphasis supplied)

26. In view of the above reasoning, we are of the considered

opinion that the High Court erred in utilizing its discretionary

power available under Articles 226 and 227 of the Constitution

herein. Thus, the appeal is allowed and the impugned Order

of the High Court is set aside. There shall be no order as to

costs. Before we part, we make it clear that Respondent No. 1

18 herein is at liberty to raise any legally permissible objections

regarding the jurisdictional question in the pending Section 34

proceedings.

…………………………………………J (N.V. RAMANA)

…………………………………………J (SURYA KANT)

…………………………………………J (HRISHIKESH ROY)

NEW DELHI;

JANUARY 06, 2021.

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