The Supreme Court on Wednesday (06.01.2021) has observed that the power of the High Courts under Article 226/227 of the Constitution of India to interfere with an arbitration process 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. (Bhaven Construction v. Sardar Sarovar Narmada Nigam).
The bench comprising Justices NV Ramana, Surya Kant, and Hrishikesh Roy, while setting aside a judgment of Gujarat High Court allowing a writ petition challenging the jurisdiction of the sole arbitrator observed, 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.
“It is, therefore, prudent for a Judge to not exercise discretion to allow judicial interference beyond the procedure established under the enactment. This high standard set by this Court is in terms of the legislative intention to make the arbitration fair and efficient,” the Court said.
The judgment was passed by a Bench of Justices NV Ramana, Surya Kant, and Hrishikesh Roy in an appeal against an order of the Gujarat High Court which had allowed a plea under Articles 226 and 227 and quashed the appointment of an arbitrator by one of the parties to the case.
Appellant, Bhaven Construction had entered into a contract with the Respondent, Executive Engineer of Sardar Sarovar Narmada Nigam to manufacture and supply bricks. The contract had an arbitration clause.
When a dispute arose between the two, the appellant appointed a sole arbitrator to settle the same. The Respondent preferred an application under Section 16 of the Arbitration and Conciliation Act of 1996 disputing the jurisdiction of the arbitrator. The arbitrator dismissed the same whereupon the respondent preferred a special civil application under Articles 226 and 227 of the Constitution before the Gujarat High Court.
The single-judge dismissed the same and the respondent preferred a Letters Patent Appeal which was allowed by a Division Bench of the High Court.
In its order passed in September 2012, the Division set aside the appointment of a sole arbitrator. Aggrieved by that order, the Appellant moved the Supreme Court.
The issue in the petition was whether under Article 226 and 227 the arbitral process can interfere and if so then under what circumstances.
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 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.
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.
The bench stated that the Arbitration Act is a code having a non-obstante clause in Section-5, which has been provided to further the intention of the legislature in adopting the UNCITRAL model law and rules, to reduce the excess of judicial interference in arbitration proceedings.
The Court said that the Arbitration Act’s framework clearly shows that the intention is to address most of the issues within the Act itself without any extra-statutory mechanism for resolution. Parties who enter into arbitration have to fulfill the ingredients of Section 7 of the Act. If a party fails to put up the matter for arbitration or appoint the arbitrator according to the procedure that was agreed upon by them, then a party can take the route of Section 8 or 11 of the Act and approach the court for assistance.
In this case, the court observed that the order given by the arbitrator under Section 16(2) of the Arbitration Act was challenged under Article 226 and 227 through a petition. The court observed the intention behind using the term “only” in Section 34 of the Act. The term is used to signify that the Act is a complete enactment and that it lays down the procedure.
The court also referred to other judgments and further observed that it is prudent that a judge does not allow judicial interference to be beyond what is laid down in the Act.
The court observed that in the present case there was no bad faith or any exceptional circumstance.
The court stated that the ambit of Article 227 is very wide but the High Court at this stage should not have brought its inherent power into use. The court also took note of the pending challenge to the final award of the arbitrator under Section 34 of the Act by Respondent No.1. This final order was passed subsequent to the impugned order.
The court set aside the High Court judgment and stated that as per the Act jurisdictional questions have to be first looked into by the tribunal before they can be brought to the court under Section 34. Therefore, Respondent No.1 was not remedied and had a chance given by the statute to appeal.
The court observed that the High Court erred in using its power under Article 226 and 227 and set aside the High Court order.
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