Below is a guest post from Bharatendu Agarwal. Bharatendu did his Bachelors from NLU, Jodhpur and Masters in International Arbitration from Stockholm University. He is currently interning at SIAC.
An earlier post on this blog
discussed the Bombay High Court’s decision dealing with the issue of delay in
rendering an arbitral award. Here, the Delhi High
Court’s decision of terminating a tribunal’s mandate on account of delay in the
arbitral proceedings had been highlighted.
In the recent decision of Union of India (UOI) v. U.P. State Bridge
Corporation Ltd.[1]
the Supreme Court addressed a similar issues with primary focus on the
issue of appointing substitute arbitrator(s)/tribunal. This post aims to
briefly map out the relevant issues, arguments and legal nuances involved,
followed by a short analysis on the case.
Brief Facts and Procedural
History
The case revolves around an
agreement entered into between the Railway Authority of India (the ‘Railway Authority’) and a Contractor (collectively
referred to as the ‘Parties’) for
the construction of a railway bridge across river Ganges. This agreement was
subject to certain terms and conditions, which provided for an arbitration agreement.
The relevant portion of the arbitration agreement reads as follows:-
64.(1)(i) Demand for Arbitration - In the event of any dispute or difference
between the parties as to the construction or operation of this contract, or
the respective rights and liabilities of the parties on any matter in question,
dispute or difference on any account or as to the withholding by the Railway of
any certificate to which the contractor may claim to be entitled to, or if the
Railway fails to make a decision within 120 days, then and in any such case,
but except in any of the expected matters referred to in Clause 63 of these
conditions, the contractor, after 120 days but within 180 days of his
presenting his final claim on disputed matters, shall demand in writing the
dispute or difference be referred to arbitration.
...
64.(3)(a)(ii) In cases not covered by
Clause 64(3)(a)(i), the Arbitral Tribunal shall consist of a panel of three
Gazetted Railway Officers not below JA grade, as the arbitrators. For
this purpose, the Railway will send a panel of more than 3 names of Gazetted
Railway Officers of one or more departments of the Railway to the contractor
who will be asked to suggest to General Manager upto 2 names out of the panel
for appointment as contractor's nominee. The General Manager shall appoint at
least one out of them as the contractor's nominee and will, also simultaneously
appoint the balance number of arbitrators either from the panel or from outside
the panel, duly indicating the presiding arbitrator from amongst the 3
arbitrators so appointed. While nominating the arbitrators it will be necessary
to ensure that one of them is from the Accounts department.
...
64.(3)(a)(iii) If
one or more of the arbitrators appointed as above refuses to act as arbitrator,
withdraws from his office as arbitrator, or vacates his/their office/offices or
is/are unable or unwilling to perform his functions as arbitrator
for any reason whatsoever or dies or in the opinion of the General Manager fails to act without undue
delay, the General Manager shall appoint new arbitrator/arbitrators to act in
his/their place in the same manner in which the earlier arbitrator/arbitrators
had been appointed. Such re-constituted Tribunal may, at its
discretion, proceed with the reference from the stage at which it was left by
the previous arbitrator(s).
After a while some dispute
arose between the Parties and pursuant to the arbitration agreement an arbitral
tribunal (the ‘Tribunal’) was
constituted in 2007. After the Tribunal’s constitution, four years passed,
however the arbitral proceedings were still pending on account of transfers,
retirements and adjournments. Frustrated by the delay the Contractor, in
accordance with Section 14(2) of the Arbitration and Conciliation Act, 1996
(the ‘Act’), approached the Patna
High Court (the ‘High Court’) so as
to seek fulfilment of a vacancy in the Tribunal. By the time the Contractor’s
application was taken up by the High Court the said vacancy was filled up by
the Railway Authority. In light of the developments, the High Court issued an
order by which it gave the Tribunal a lifeline and ordered for the arbitral
proceedings to be completed within three months from the date of receipt of the
order. The High Court, however, also stated that in case the proceedings were
not completed within the stipulated duration, the Contractor would be at
liberty to approach the High Court again which would then be forced to pass
appropriate orders in accordance with the Act.
Despite the High Court’s direction,
the proceedings were not completed within the stipulated three month duration
and the Contractor again approached the High Court alleging non-cooperative
attitude of the Tribunal members. The Railway Authority disputed this
contention by stating that the proceedings could not be completed within time
due the extreme urgency of the members of the Tribunal. After considering the Parties
respective arguments and materials on record the High Court concluded that the
delay in the proceeding was intentional and the Tribunal members continued
their dilatory tactics regardless of the Court’s order. Most of the times one
or the other member of the Tribunal were not available and they saw to it that
the three month time expired. The Court went on to state that:-
“these facts also
disclose a very sorry state of affairs that the members of the arbitral
tribunal are inept and ineffectual by any standard, completely negligent
towards their duties and having no sanctity for any law or for the orders of
the High Court, which are binding upon them.”[2]
Based on these findings the
High Court terminated the mandate of Tribunal and appointed a sole arbitrator
to conduct the arbitration expeditiously.
Proceedings before the Supreme
Court
The Railway Authority appealed
against the High Court’s decision in the Supreme Court arguing that the High
Court could not appoint the sole arbitrator as it was not empowered to
constitute a tribunal of its own, that too, contrary to the arbitration agreement.
Even if the tribunal’s mandate was to be terminated, a fresh tribunal could
only be constituted in accordance with the arbitration agreement, i.e. in
accordance with Clause 64(3)(a)(iii).
On the other hand, the
Contractor defended the High Court’s decision arguing that in circumstances
where the very purpose of arbitration was frustrated by the Tribunal members, who
were dragging the proceedings, the Court was not powerless to travel beyond the
framework of the arbitration agreement and appoint an arbitrator. The Contractor
supported its argument by reliance on North
Eastern Railway v. Tripple Engineering Works, (the ‘Tripple Engineering’ case) another
recent Supreme Court decision.
The Issue
Based on the Parties’ arguments
the Supreme Court categorized the issue as follows:-
“[w]hether .. a
course of action has to be necessarily adopted by the High Court in all cases,
while dealing with an application [u]nder Section 11 of the Act or there is a room
for play in the joints and the High Court is not divested of exercising
discretion under some circumstances?”[3]
Deliberations by the Supreme
Court
At the outset, the Supreme
Court highlighted that to decipher the answer to the issue Sections 11(6) &
(8) (appointment of arbitrators), 14 (failure or impossibility to act), 15
(termination of mandate and substitution of arbitrator) & 32 (termination
of proceedings) of the Act were the relevant sections.
The Supreme Court mentioned
that Section 14(2) allowed a party to approach the Court to seek termination of
mandate ‘when there is a failure on the
part of the Arbitral Tribunal to act and it is unable to perform its function
either de jure or de fact’.[4] Accordingly, the decision of
the High Court to terminate the Tribunal’s mandate, on account of its ‘cavalier manner’, was flawless.[5]
Moving on to Section 15, the
Supreme Court acknowledged that ordinarily, pursuant to Section 15(2),
substitute arbitrators have to be appointed according to the rules that were
applicable to the appointment of the arbitrator being replaced.[6]
At this point, however, the Court raised the question as to whether there could
arise circumstances in which there would be deviation from this approach. This
led the Court to the case of the Tripple Engineering case, which it discussed in length.
The Tripple Engineering case
had facts very similar to the case at hand and the Supreme Court in that case
had made reference to a series of judgements before stating that:-
“[t]he power of the
Court under the Act has to be exercised to effectuate the remedy provided
thereunder and to facilitate the mechanism contemplated therein. In a situation
where the procedure and process under the Act has been rendered futile, the
power of the Court to depart from the agreed terms of appointment of
arbitrators must be acknowledged in the light of the several decisions noticed
by us.”
A few of the decisions so noted
in the case were:-
- Ace Pipeline Contracts (P) Ltd. v. Bharat Petroleum Corporation Ltd. where the Supreme Court had taken the view that typically the contract between the parties must be adhered to, however deviations from it would be permissible in exceptional circumstances.
- Union of India v. Bharat Battery Manufacturing Co. (P) Ltd. where the Supreme Court had held that once an aggrieved party files an application under Section 11(6) of the Act to the High Court, the opposite party loses its right of appointment of the arbitrator(s) as per the terms of the contract.
- Northern Railway Administration, Ministry of Railway, New Delhi v. Patel Engineering Co. Limited where the Supreme Court emphasized on the expression ‘to take the necessary measure’ in Section 11(6) and stated that the expression has to be read along with the requirements of Section 11(8).
- Indian Oil Corporation Limited and Ors. v.Raja Transport Private Limited where the Supreme Court stated that while exercising power under Section 11(6) all efforts should be made to give effect to the appointment procedure prescribed in the arbitration agreement, however, if circumstances warrant ignoring the procedure prescribed, the Chief Justice or his designate may, for reasons to be recorded ignore such procedure.
- Union of India v. Singh Builders Syndicate where the Supreme Court upheld the appointment of an arbitrator contrary to the arbitration agreement on the grounds that the arbitration proceedings had not concluded for over a decade making a mockery of the process.[7]
The Supreme Court particularly quoted some paragraphs from Union of India v. Singh Builders Syndicate, the relevant parts for our discussion are:-
“The object of the alternative dispute resolution
process of arbitration is to have expeditious and effective disposal of the
disputes through a private forum of the parties' choice. If the Arbitral
Tribunal ... is made non-functional on account of the action or inaction or
delay ... the Chief Justice or his designate, required to exercise power Under
Section 11 of the Act, can step in and pass appropriate orders ... [T]he
matter has now been pending for nearly ten years from the date when the demand
for arbitration was first made with virtually no progress ... The delays and
frequent changes in the Arbitral Tribunal make a mockery of the process of
arbitration.”
Taking a note of the case laws
mentioned above the Court pointed out that the classical notion that the
respective authority while exercising its power under Section 11 of the Act
must appoint the arbitrator as per the agreement between the parties has seen a
significant erosion in recent past. The provisions of the Act have to be
applied purposively and hence the appointment of arbitrator by the court, of
its own choice, departing from the arbitration clause, has become an acceptable
proposition of law which can be termed as a legal principle established by a
series of judgments.[8]
Concluding
it findings the Supreme Court stated that courts were not powerless under
Section 11 and could spring into action to constitute an arbitral tribunal
so as to ensure that interest of parties were equally protected.[9]
Analysis
This decision of the Supreme
Court is a welcoming decision in the context of the arbitral regime in India.
Indian courts of late have been very particular not to repeat their mistakes by
poorly interpreting the provisions of the Act and interfering in the arbitral
proceedings. This decision, in fact, is a very informed one because the Supreme
Court realized that the issue of delay in arbitral proceedings on account of
the tribunal itself was often encountered in arbitration in India, particularly
where the arbitration clause provided for appointment of serving officers.
Although the same issue had been dealt with in bits and pieces before, with
this decision the Supreme Court has set the record straight once and for all.
With its decision the Supreme
Court in fact brings the position of the Act akin to the position taken by
leading arbitral institutions of the world, for example, the International
Chamber of Commerce (the ‘ICC’) and
the London Court of International Arbitration (the ‘LCIA’). Article 15(4) ICC Rules 2012 and Article 11(1) LCIA Rules
2014 both state that in situations where replacements have to be made,
discretion vests with the institution as to decide whether or not to follow the
original nominating process. Similar provisions can be found in the Stockholm
Chamber of Commerce Rules[10]
and the UNCITRAL Rules.[11]
The most direct implication of
this decision will be that arbitration proceedings will no longer suffer
because of an irresponsible or lackadaisical tribunal. In general, proceedings
will be completed within a reasonable time frame. Besides, the decision will
also push those who are not full time arbitrators or arbitration practitioner to
adopt a professional approach. Additionally, it would discourage counsels to
indulge in dilatory tactics by seeking outrageous extensions under the
patronage of the tribunal. All in all the Supreme Court has sought to ensure
that one of the fundamental features of arbitration, i.e. expeditiousness,
remains intact.
The decision indicates a
continuing trend on the part of Indian courts to develop and project India as
an arbitration friendly jurisdiction. Despite being modelled on the UNCITRAL
Model Law on International Commercial Arbitration (the ‘Model Law’), in the past there had been instances where
interpretation of the Act’s provisions were far from what was envisioned by its
drafters (there is, however, an interesting post by Advocate Sujoy
Chatterjee on the extent of making reference the Model Law to interpret the
provision of the Act). Therefore, in
conclusion, it can be said that unlike several earlier instances, this time
when the court took the matter in its own hands it was too aid, and not
intervene in the arbitration.
[1] Civil Appeal No. 8860 of 2014 (Arising out of Special Leave Petition (Civil)
No. 20183 of 2012) decided on 16.09.2014
[2] U.P. State Bridge Corporation Ltd.v. The
Union of India, 2012(1)ARBLR390(Patna) at paragraph 11
[3] Supra note 1, paragraph 15
[4] Ibid, paragraph 13
[5] Ibid
[6] Ibid, paragraphs 14,
15
[7] In
this case the Supreme Court also recommended to the government that they should
consider phasing out arbitration clauses providing for appointment of serving
officers and encourage professionalism in arbitration.
[8] Supra note 1, paragraph 21
