Arbitration can only be challenged before the courts once the award is passed : Supreme Court

IN THE CIVIL APPELLATE JURISDICTION CIVIL APPEAL NO. 14665 OF 2015 BHAVEN CONSTRUCTION THROUGH AUTHORISED SIGNATORY PREMJIBHAI K. SHAH … APPELLANT EXECUTIVE ENGINEER SARDAR SAROVAR NARMADA NIGAM LTD.& ANR. … RESPONDENTS 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 bricks. The aforesaid contract had an arbitration clause. As some dispute arose regarding payment in furtherance of manufacturing and supplying of bricks the Appellant issued 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 respect of which the decision has not been settled shall be referred arbitration to a sole arbitrator appointed as follows: to refer the dispute Within thirty days of receipt of from the Contractor of his 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 fifteen days. and appoint him as the sole arbitrator 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 thereof. The statutory modification 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) 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 the Gujarat Public Works Contracts Disputes Arbitration Tribunal Act 1992disputing 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. 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. 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. 1806 in Special Civil Application No. 4002. 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 in which the dispute be about the ‘forum’ 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 hehas 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 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 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 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 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 framework for the parties to agree for their own procedure with minimalistic stipulations under the Arbitration Act. 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. 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 aside such award in accordance with sub sectionand sub section 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 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 authority or order passed by a quasi judicial body authority and it is an 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 redressal of grievances a writ petition should not be 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. In this context we may observe M s. Deep Industries Limited v. Oil and Natural Gas Corporation Limited SCC Online SC 1602 wherein interplay of Section 5 of the Arbitration Act and Article 227 of the Constitution was analyzed as under: “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 filedof 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 is that though important to note petitions can be filed under Article 227 dismissing first appeals under Section 37 of the Act yet the High Court would 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 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 13 SCC 445 observed: 36.3. Third Section 34(3) reflects the principle of unbreakability. Dr Peter in International Commercial 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 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 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 Limitation Act would go contrary to the principle of “unbreakability” enshrined under Section 34(3) of the Arbitration 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 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 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. It must be noted that Section 16 of the Arbitration Act necessarily mandates that the issue of jurisdiction must be 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 casethis 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 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 dismissed must await the passing of a final award at which stage it may be raised under Section 34.” emphasis supplied) 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 herein is at liberty to raise any legally permissible objections regarding the jurisdictional question in the pending Section 34 N.V. RAMANA) SURYA KANT) HRISHIKESH ROY) NEW DELHI JANUARY 06 2021. 

Summary: Higher Courts cannot use their inherent power under Article 227 of the Constitution to interject the arbitral proceedings before the award is given except in rare and exceptional cases. The Supreme Court bench consisting of J. N V Ramana, J. Surya Kant and J. Hrishikesh Roy, explained upon the principle of unbreakability and jurisdictional conflict of an already appointed arbitrator in the matter of Bhaven Construction through Authorised Signatory Premjibhai K. Shah v. Executive Engineer Sardar Sarovar Narmada Nigam Ltd. &amp; Anr. [Civil Appeal No. 14665 of 2015].  The Respondent entered into a contract with the Appellant to manufacture and supply bricks. The said contract had an arbitration clause. As some dispute arose regarding the payment in furtherance of the manufacturing and supplying of bricks, the appellant issued a notice seeking appointment of a sole arbitrator in accordance with Clause 38 of the contract. The respondent replied and did not agree to the appellant’s request on two main grounds – 1. That the disputes between the parties were to be adjudicated in accordance with the Gujarat Public Works Contracts Disputes Arbitration Tribunal Act, 1992 and 2. That the arbitration was time barred and neither of the parties were entitled to claim if the arbitrator had not been appointed within 30 days after the defect liability period. Regardless, the appellants appointed a sole arbitrator who rejected the application of the respondent holding that he had the jurisdiction to adjudicate the dispute. Aggrieved, the respondent preferred a Special Civil Application under Articles 226 and 227 of the Constitution before the High Court which was further dismissed on the grounds that “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…”. Aggrieved again, the respondents preferred a Letters Patent Appeal in Special Leave Application which was allowed by the HC holding that “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”.