[This guest post is authored by Sparsh Mallya, a student of Jindal Global Law School]
The Indian Supreme Court in Bhaven Construction v Executive Engineer Sardar Sarovar Narmada Nigam Ltd. recently dealt with the issue of whether a writ petition under Articles 226 and 227 of the Constitution of India Act, 1950 seeking to set aside an order of an arbitral tribunal under Section 16 of the Arbitration and Conciliation Act, 1996 (‘Arbitration Act’), was maintainable.
In Bhaven Construction, the Supreme Court reiterated the paramount importance of the arbitral process but held that the jurisdiction under Articles 226 and Article 227 of the Indian Constitution being a constitutional right is not covered by the non-obstante clause of Section 5 of the Act. However, any interference in exercise of the court’s powers under Articles 226 and 227 of the Indian Constitution should only be exercised in exceptional circumstances. These exceptional circumstances entail a situation where there is ‘bad faith’ shown by one of the parties or if one party is left without remedy under the Arbitration Act.
In the instant case, the parties entered into a contract under which the appellant, Bhaven Construction was obliged to manufacture and supply bricks to the respondent, Executive Engineer. This contract encapsulated an arbitration clause, which stated that arbitration would be conducted as per the Indian Arbitration Act, 1940 (including any statutory changes vis-à-vis the Arbitration Act). Due to the emergence of a dispute between parties, the appellant issued a notice demanding the appointment of a sole arbitrator as mentioned in the contract. In reply to the notice, respondent opposed this on two grounds: firstly, while the contract was ongoing, the State of Gujarat had passed the Gujarat Public Works Contracts Disputes Arbitration Tribunal Act, 1992 (“Gujarat Act”), which was the applicable statute in accordance with their agreement; and, secondly, the Appellant’s claim was time-barred.
Despite the respondent’s objections, the appellant obtained the appointment of a sole arbitrator. Subsequently, the respondent filed an application under Section 16 of the Arbitration Act, challenging the jurisdiction of the arbitrator. The arbitrator dismissed respondents’ application.
The respondent then filed a special civil application under Articles 226 and 227 of the Indian Constitution before the Gujarat High Court challenging the order of the sole arbitrator. The single-judge bench dismissed this application. The respondent preferred a Letters Patent Appeal against the aforesaid order, which was allowed by a Division Bench of the same High Court.
The Division Bench set aside the appointment of the sole arbitrator, stating that the contract between the parties was a ‘works contract’ and should only be governed by the Gujarat Act. Thus, the appellant could not have validly appointed a sole arbitrator. Aggrieved by the Division Bench’s order, the appellant preferred an appeal before the Supreme Court.
Supreme Court’s Decision
The primary question before the Supreme Court was whether the arbitral process could be interfered with under Articles 226 and 227 of the Constitution. In L. Chandra Kumar v. Union of India, the Supreme Court had settled that in the hierarchy of the Indian legal framework, the power of the High Courts to issue directions, orders and writs under Article 226 of the Constitution is a basic feature of the Constitution and cannot be curtailed by parliamentary legislation. However, in Nivedita Sharma v. Cellular Operators Association of India, the Supreme Court held that when a statutory forum like the Arbitration Act is expressly created for redressal of grievances, a petition under Articles 226 and 227 of the Constitution should not be entertained in ignorance of the statutory provision.
In Bhaven Construction, the Court emphasised that the provisions in the Arbitration Act espoused a fair and just arbitral process. It also stated that judicial intervention needs to be exercised “in exceptional rarity, wherein one party is left without remedy under the Arbitration Act or a clear ‘bad faith’ is shown by one of the parties.” This high standard was to uphold the legislative intention of making arbitration a speedy and efficient forum.
The Arbitration Act grants a restricted right of appeal against certain judgments and orders through Section 37 of the Arbitration Act. The Supreme Court, relying on M/s. Deep Industries Limited v. Oil and Natural Gas Corporation Limited, held that “if petitions were to be filed under Articles 226 and 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.” Notably, the right to first appeal under Articles 226 and 227 of the Constitution would still hold, however, the High Court should be extremely circumspect while interfering in the arbitral process and it is important for exceptional circumstances or bad faith to be displayed.
While relying on P. Radha Bai v. P Ashok Kumar, the Indian Supreme Court also utilised the application of ‘unbreakable time-limit.’ This principle elucidates that ‘certainty and expediency’ are fundamental to the arbitration process. Any judicial interference beyond the time-limit stipulated in the Arbitration Act (3 months) would be impermissible. In the present instance, the award had been passed and Respondent had already preferred a challenge under Section 34 of the Act (application for setting aside arbitral award). Moreover, the Respondent had not been able to show any exceptional circumstance, which mandates the exercise of jurisdiction under Articles 226 and 227 of the Constitution. Thus, the Supreme Court set aside the impugned order of the High Court, thereby reinforcing its pro-arbitration stance and placing faith in the arbitral process for redressal of grievance of Respondent.
A valuable precursor to this judgement was the case of Michigan Rubber (India) Ltd. v. State of Karnataka, where the Supreme Court discussed important considerations to be kept in mind before judicial intervention in contracts regarding tenders. It involved instances where: i) There was an element of mala fide displayed or the process/decision taken by the authority was irrational or capricious that no rational authority acting reasonably in accordance with relevant law could have reached the same; and, ii) public interest was impacted by the process/decision. If the above two considerations were not satisfied, judicial intervention under Article 226 was not warranted.
Keeping in mind the fundamental fairness and effectiveness of arbitration, Bhaven Construction used this consideration of bad faith coupled with an instance where a party is left without remedy under the Arbitration Act, to constitute exceptional circumstances which warrant judicial interference. It is important to note the court’s finding that Article 227 as a constitutional provision remains untouched by the non-obstante clause of Section 5 of the Act. Thus, even though petitions can be filed under Article 227 against judgement allowing or dismissing first appeals under Section 37 of the Arbitration Act, the High Courts may be extremely wary of interfering, and their interference would be limited to such orders passed which are ‘patently lacking in inherent jurisdiction.’
The decision in Bhaven Construction elucidates the Supreme Court’s support of the principle of kompetanz-kompentaz i.e. the arbitral tribunal’s power to adjudicate and determine its own jurisdiction under Section 16 of the Arbitration Act. Thus, the norm is that any challenge vis-à-vis jurisdiction will first need to be determined by the arbitral tribunal; which decision can only be challenged again under Section 34 of the Arbitration Act when a final award is passed.
The Indian arbitration framework has undergone legislative amendments and recommendations all in a bid to make it more accommodating to grievances of commercial parties in the arbitral process. The Supreme Court’s decision in Bhaven Construction is a welcome step to curb unwarranted judicial intervention and align India with International best practice. The Supreme Court placed immense faith in the arbitral process and recognised the Arbitration Act as a fair and just composition of provisions for the efficient resolution of disputes subject to it. This judgement will go a long way in preventing dilatory tactics and parallel proceedings which prejudice the expedient enforcement of a domestic arbitral award.