Interplay between Article 227 of the Constitution and Arbitration and Conciliation Act, 1996

[This guest post is authored by Manya Anjaria. He is currently studying in the 4th Year student at the Institute of Law, Nirma University.]

The Arbitration and Conciliation Act, 1996 (‘The Act’) is a great leap in India’s legal framework of recognizing alternative dispute resolution mechanisms. Drafted on the lines of UNCITRAL Model Law on International Commercial Arbitration 1985, the Act envisages functioning of the arbitral tribunal with minimal judicial intervention. However, despite the best intentions of the drafters, orders of arbitral tribunal have been subjected to court interventions time and again. One of the frequent methods employed by lawyers is filing a petition under Article 226 and 227 of the Indian Constitution.

The post will analyze whether arbitral orders can be challenged under Article 227. It would focus on two tests formulated by the Supreme Court of India namely the ‘Patently lacking in inherent Jurisdiction Test’, and the ‘Exceptional Rarity Test’. The jurisdiction of High Courts in entertaining the petitions under Article 226 and 227 is largely similar, therefore the analysis done in the following post equally applies to petitions filed under Article 226.

Mapping the Problem

The Arbitration Act was enacted with a vision that arbitral tribunals will work efficiently with minimal court intervention. Section 5 of the Act provides that court shall not interfere in the arbitration process except where the statute provides so. The section starts with the non-obstante clause, which gives the section precedence over all the laws enacted in the country in case of any conflict. Descending to the realm of practice, the sanctity of arbitral tribunal is seldom protected. The Act mandates that no appeal has to be filed except against the circumstances mentioned under Section 37. However, litigants always attempt to stall the arbitration process and file petitions in courts. The arbitration process is derailed by filing an application or petition in the court, and passing of award gets delayed. This defeats the objective of submitting the dispute to a private forum for getting speedy remedy.

Article 227 is one of the many ways which allow the parties to knock the doors of the court. Article 227 gives High Court power of superintendence over all courts and tribunals of the country.

Being a constitutional provision, it remains unaffected by the non-obstante clause in Section 5. It is imperative to clarify whether ‘arbitral tribunal’ being a forum constituted by the agreement of the parties would come under the ambit of ‘Tribunal’ under Article 227. In SREI Infrastructure Finance Ltd. v. Tuff Drilling Pvt. Ltd., the Court held that arbitral tribunal will come under the ambit of tribunal because: Firstly, it decides lis between the parties. Secondly, its functioning is regulated by the Act. Thirdly, it is bound by the principles of natural justice. The Court further drew many similarities between a statutory tribunal and arbitral tribunal.

Keeping this is mind, it becomes clear that the orders passed by the arbitral tribunal are amenable to power given in Article 227. However, the Supreme Court has cautioned on allowing the High Courts the power of superintendence over the arbitral tribunals.[1] Such caution, however, in line with the objectives of the Act, is susceptible to unfair practices which would lead to denial of justice. Therefore, there is a need to balance both these opposite claims. The Supreme Court, in furtherance of this, has formulated two tests which would help settling the problem.

Tale of Two Tests

The Supreme Court in Deep Industries Ltd v. Oil and Natural Gas (‘Deep Industries’) and Bhaven Construction v. Executive Engineer Sardar Sarovar Narmada Nigam (‘Bhaven Construction’) developed two tests to allow the Court to entertain the petition on very narrow grounds. These tests are the ‘Patently Lacking in inherent Jurisdiction Test’ and the ‘Exceptional Rarity Test’

In Deep Industries, the arbitral tribunal passed an interim order under Section 17 of the Act, which was challenged before the City Civil Court, Ahmedabad but got rejected. Consequently, a petition was filed under Article 227 in the Gujarat High Court which was admitted and the judgement was passed on merits. Appeal was filed against this judgment

by the way of special leave petition. The Supreme Court recognized the conflict between  Section 5 of the Act and the jurisdiction of appellate courts which is a basic feature of the Constitution The Court held that High Courts should be circumspect in interfering with the orders and should be restricted to the orders passed which are patently lacking in inherent jurisdiction. Thus, this case was the genesis of ‘Patently lacking in inherent Jurisdiction Test’. The Court however did not elaborate what would amount to lacking in inherent jurisdiction. Therefore, the effect of the test in curtailing the intervention of the Court was not achieved. Fortunately, the Apex Court was presented with another opportunity to set things right. In  Punjab State Power Limited v. Emta Coal Limited, an arbitrator’s order under Section 16 of the Act was challenged under  Article 227. The Court clarifying on the first test, opined that a patent lack of jurisdiction is when perversity is found on the face of it.

The second test formulated in Bhaven Construction is on the similar lines but presents a different dimension to the approach. In the case, the respondents challenged an order in the Gujarat High Court under Article 227 on grounds that the arbitrator was acting without jurisdiction. While the single judge dismissed the petition, the respondents successfully filed a letters patent appeal before a Division Bench. The appellant then challenged the Division Bench decision before the Supreme Court. The Supreme Court held that the Act is a code in itself and violation of its provisions had legal consequences. Therefore, the tribunal ought to be shielded from judicial intervention. The Court also acknowledged the supremacy of constitutional provision and Article 227 being part of basic structure. The Court formulated the ‘Exceptional Rarity Test’. It was propounded that High Court shall only entertain the petition if the party shows that it is ‘remediless’ and failure of admitting the petition would amount to denial of justice or there is clear ‘bad faith’ shown by one of the parties. The Court further dictated that judges should restrict themselves to these high standards while entertaining the petition under Article 227.

These two tests help create a balance between the Act’s objective to minimize judicial intervention and the High Court’s supervisory power derived from the Constitution.

Concluding Remarks

The judgements of Deep Industries and Bhaven Construction will be put in the shelf of long-standing jurisprudence developed by the courts restraining themselves to allow all the petitions filed under Article 227. Courts are prohibited from acting as the appellate courts under the garb of supervision or else it would open flood gates of litigation.

The success of arbitration in India will only depend on how free and respected the arbitral tribunal is. The vision behind allowing minimal interference by the courts is that the courts should have faith in the award given by the arbitral tribunal and would not sit as an appellant body second guessing the awards. If the statutes prohibit the judiciary’s intervention to a great extent, the recourse under Article 227 should not be used to circumvent the scheme of the Act. The court, in its prudence, should allow the petition if it can be proved that the failure to admit would lead to undesirable consequences for any of the parties.

Both these judgements are welcome judgements denoting the “Pro-Arbitration” approach of the courts. However, how far these tests would curtail the judicial intervention and stop derailing the arbitration have to be tested in due time.

[1] SBP and Co. v. Patel Engineering, (2005) 8 SCC 618.

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