[The guest post is authored by Saloni Neema, third year law student from Damodaram Sanjivayya National Law University, Visakhapatnam]
It is well-settled law that arbitrators are creatures of the contract between the parties. In cases where the agreement excludes certain aspects from the purview of the arbitral tribunal, the settled law is that an arbitrator being a creature of the contract, cannot go beyond the scope allocated by the parties. If an agreement excludes certain items expressly from the scope of Arbitration, the parties have agreed to limit the size of the arbitrator. In such a situation, if the arbitrator ignores the said limitation and decides on an excluded item, it may exceed the jurisdiction. The court might set aside the part or even full award if the award is challenged in such a situation.
Government contracts usually contain clauses wherein some matters are excluded from the purview of arbitration and a Senior Officer of the department is instead given the sole authority and power to adjudicate the same. Excepted matters do not require any further adjudication since the agreement itself provides a named adjudicator. An arbitrator in such instances cannot go beyond the terms of the contract between parties. In the guise of doing Justice, he cannot award contrary to the terms of the agreement. If he does so, he will have misconducted himself.
In the instant case of Mitra Guha Builders (India) Company vs. Oil and Natural Gas Corporation Limited, the Hon’ble Supreme Court was asked to assess whether the matter to be decided by the Superintending Engineer is arbitrable and if the Superintending Engineer’s decision can be challenged in arbitration. The arbitration clause in the agreement opens with the words, “Unless otherwise specified, the matters where the decision of the Engineer-in-Charge is deemed to be final and binding as provided in the Agreement and the issues/disputes which cannot be mutually resolved within a reasonable time, all disputes shall be referred to arbitration by Sole Arbitrator”.
In this regard, the Hon’ble Supreme Court dealt with the issues in the case under consideration in the manner that “In the present case, the parties themselves have agreed that the decision of the Superintending Engineer in levying compensation is final and the same is an “excepted matter” and the determination shall be only by the Superintending Engineer, and the correctness of his decision cannot be called in question in the arbitration proceedings and the remedy if any will arise in the ordinary course of law.“
Reliance was also placed upon Food Corporation of India v. Sreekanth Transport, wherein, the Supreme Court interpreted Clause 12 of the agreement. Clause 12 of the agreement in Food Corporation of India reads as under: “The decisions of the Senior Regional Manager regarding such failure of the contractors and their liability for the losses etc. suffered by the Corporation shall be final and binding on the contractors…” The Court stated that when the Senior officials have been given the authority to adjudicate some matters for which the parties have agreed that their decision is final, these matters are classed as “excepted matters” and thus fall outside the scope of the arbitration.
The same view has been taken by Hon’ble Supreme Court in a plethora of cases. In the case of Prabartak Commercial Corpn. Ltd. v. Chief Administrator, Dandakaranya Project, a claim covered by “excepted matter” was referred to the arbitrator despite such reference having been objected to, and the arbitrator gave an award. This Court held that the arbitrator had no jurisdiction in the matter and that the reference of the dispute to the arbitrator was invalid. The entire proceedings before the arbitrator, including the awards made by him, were null and void when the arbitration clause opens with the words ‘except where otherwise provided in the contract’, and somewhere in the contract, finality was attached to the decisions of the specified authorities on the aid matters. Further in the case of State of Rajasthan v. M/s. Nav Bharat Construction Company it was held that an arbitrator is limited to the provisions of the parties’ contract. He cannot award against the contract terms in the name of justice. He will have committed malfeasance if he does so. In Steel Authority of India Ltd., v. JC Budharaja, it was noted that “If the arbitration clause or a specific term in the contract or the law does not permit or give the arbitrator the power to decide or to adjudicate on a dispute raised by the claimant, or there is a specific bar to the raising of a particular dispute or claim then any decision given by the arbitrator in respect thereof would be more than his jurisdiction”.
However, it is pertinent to look at these judgments through the lens of the 2015 Amendment to the Arbitration Act. Section 28 (3) of the Arbitration and Conciliation Act of 1996 is the subject of the amendment in question. In general, Section 28 of the Arbitration and Conciliation Act of 1996 requires the applicable rules that an Arbitral Tribunal must consider in making a determination on the disputes before it, while Section 28 (3) explicitly addresses the interpretation of contract terms and trade usages. As per Section 28 (3) of the A&C Act 1996 while deciding and making an award, the arbitral tribunal shall, in all cases take into account the terms of the contract and trade usages applicable to the transaction. In light of the aforementioned amendment to Section 28 (3), the approach to prohibition clauses and their legal interpretation may require a complete overhaul. The oft-quoted argument that the Arbitral Tribunal is a creature of the contract and that, as a result, a finding adverse to the contract must be interfered with by a Court hearing a challenge to an Arbitral Award is no longer undisputed.
When disputes arise between parties relating to the payment of compensation, an extension of time, the power of any authority under the Contract to decide on any issue relating to the Contract and similar other matters, and when the aggrieved party to the Contract raises such a claim, naturally the other party to the arbitration will raise the objection contending that the said claim(s) fall under excepted matters and as such they are outside the scope and jurisdiction of the arbitrator/arbitral tribunal, because of the specific provision in the agreement. An arbitrator cannot act arbitrarily, irrationally, capriciously, or independently of the contract. His function should be to arbitrate in terms of the contract. The object of making the decision of Engineer-in-charge is to get the benefit of his skill and knowledge as an independent man to decide the dispute without recourse to the enormous expense and trouble involved in judicial proceedings. Hence the consistent view of Courts in India is that the Arbitrator being a creature of the Contract, excluded items are beyond his jurisdiction and dealing with those excluded items is a misconduct of the Arbitrator.