BHAVEN CONSTRUCTION CASE: SETTING THE STANDARD FOR JUDICIAL INTERFERENCE
[Yagya Sharma is a 4th year BA LLB (Hons.) student and Paridhi Rastogi is a 4th year B.Com. LLB (Hons.) student at the Institute of Law, Nirma University, Ahmedabad]
On 6th January 2021, the Supreme Court of India in Bhaven Construction v. Executive Engineer Sardar Sarovar Narmada Nigam Ltd. (SSNN Ltd.) decided on the scope of power of the High Courts under Article 226/227 of the Constitution while interfering with an arbitration process. The Court held that the High Courts need to exercise its jurisdiction only in exceptional circumstances. The Court cited the special framework of an arbitral process as a reason for not interfering beyond the ambit of the enactment. Further, it observed that excessive interference can diminish the efficiency of the whole process.
SSNN Ltd. entered into a contract with Bhaven Construction to manufacture and supply bricks, where the contract contained an arbitration clause. Later, a dispute arose regarding a payment, following which Bhaven Construction issued a notice to SSNN Ltd., seeking the appointment of a sole arbitrator according to the terms of the contract. However, SSNN Ltd. opposed Bhaven Construction’s request on two main grounds. Firstly, 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 passed the Gujarat Public Works Contracts Disputes Arbitration Tribunal Act, 1992. Therefore, the disputes between the parties were to be adjudicated in accordance with the aforesaid statute. Secondly, the arbitration was time-barred, as the arbitration clause in the contract mandated that neither party was entitled to any claim, if the arbitrator has not been appointed before the expiration of thirty days after the defect liability period.
Regardless of the above objections, Bhaven Construction went on to appoint a sole arbitrator for adjudication of the disputes. SSNN Ltd. preferred an application under Section 16 of the Arbitration and Conciliation Act of 1996 (“the Arbitration Act”) disputing the jurisdiction of the sole arbitrator. The sole arbitrator rejected the application and retained the jurisdiction with himself to adjudicate the dispute. Aggrieved by the order of the sole arbitrator, SSNN Ltd. approached the High Court of Gujarat under Articles 226 and 227 of the Constitution of India.
The Single Judge dismissed the petition and held that the petition under Articles 226 and 227 of the Constitution of India against the order of the sole arbitrator is not maintainable and the only remedy available to the petitioner is to wait till the award is passed by the sole arbitrator and to challenge the same under Section 34 of the Act. SSNN Ltd. challenged the Single Judge bench decision before the Division Bench, wherein it was observed that the objection is raised by SSNN Ltd. at the earliest available opportunity about the ‘forum’ in which the dispute is to be adjudicated. Resultantly, Bhaven Construction filed an appeal before the SC.
The issue before the SC was whether the arbitral process could be interfered with under Article 226/227 of the Constitution, and under what circumstances?
It is pertinent to note that Section 5 of the Arbitration Act is a non-obstante clause, the purpose of which is to uphold the intention of the legislature to adopt UNCITRAL Model Law and Rules, to reduce excessive judicial interference. The Arbitration Act has its inherent procedures and forums to challenge the appointment of an arbitrator. The framework intends to address most of the issues within the ambit of the Act itself, without any extra statutory mechanism to provide just and fair solutions. Specifically, Section 34 of the Arbitration Act provides for a mechanism of challenge. According to the said Section,
“recourse to a Court against an arbitral award may be made only by an application for setting aside such award in accordance with sub-section (2) and subsection (3).”
Here, it is significant to understand that a legislative enactment cannot curtail a Constitutional right. In L. Chandra Kumar v. Union of India, the SC has held that jurisdiction conferred on the High Court under Article 226 and 227 of the Constitution is a part of the basic structure of the Constitution. The Supreme Court in Srei Infrastructure Finance Ltd. v. Tuff Drilling Pvt. Ltd. has clearly stated that it considers an arbitral tribunal to be no different from a tribunal constituted statutorily. Keeping this in mind, Article 227 clearly states that every High Court shall have superintendence over all courts and tribunals throughout the territory in which it exercises jurisdiction. This establishes that the High Courts may exercise superintendence over arbitral tribunals, through the wide-reaching power under Article 227.
However, the courts in different cases have acknowledged the special nature of the Arbitration Act and restrained themselves from interfering with arbitral proceedings by way of petitions under Article 226/227. The courts have taken the stand that in view of the object of the Arbitration Act to minimise judicial interference, it would be inappropriate for the High Courts to interfere with every order or action of an arbitral tribunal while proceedings are ongoing, as this would frustrate the object of the Act. The Supreme Court in M/s. Deep Industries Limited v. Oil and Natural Gas Corporation Limited analysed the interplay of Section 5 of the Arbitration Act and Article 227 of the Constitution. The Court observed that even though petitions can be filed under Article 227, the High Court must be cautious while interfering with the same, taking into account the statutory policy. Additionally, the Court restricted such interference to only those orders which are patently lacking inherent jurisdiction.
Time-limits are also relevant here as they are extremely essential to the Arbitration Act and are integral to the very nature of arbitration. Time-limits are also desirable for the purpose of certainty and expediency. If courts are allowed to interfere with the arbitral process beyond the scope of the enactment and entertain every single petition under Article 226/227, it may cause to hamper the efficiency of the process. The SC has also emphasized the importance of time limits in the recent case of P. Radha Bai v. P. Ashok Kumar.
Further, the SC disagreed with the observation of the Gujarat High Court that SSNN Ltd. is left remediless. Section 16 of the Arbitration Act necessarily mandates that the issue of jurisdiction must be first dealt with by the tribunal before the Court examines the same under Section 34. Therefore, SSNN Ltd. has statutorily been provided a chance of appeal. In this regard, the SC in Deep Industries Case noted that:
“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 Section 16 application being dismissed must await the passing of a final award at which stage it may be raised under Section 34”.
The SC relied on various past decisions and observed that the standard for entertaining a petition under Articles 226 and 227 in arbitration cases is reasonably high. This power of the High Court 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”. The said standard has not been met in the present case, however, SSNN Ltd. can raise the preliminary issue of jurisdiction, when challenging the arbitral award under Section 34 of the Arbitration Act.
The decision in the present case is a slight departure from the widely criticized decision of the SC in SBP & Co. v. Patel Engineering Ltd. In the said case, the SC observed that the practice of the High Courts, allowing challenges to any orders made by the arbitral tribunals is unwarranted. Once the matter is in the hands of an arbitral tribunal or the sole arbitrator, the High Court or the Supreme Court cannot further interfere in the matter, unless the parties challenge the award before the Court under Section 34 or 37 of the Act. However, SBP & Co. Case failed to acknowledge that there can be a situation wherein an arbitral tribunal may issue orders which are prima facie wrong in law. When an appeal or revision has not been provided for under the Act before the conclusion of arbitral proceedings, it is unfair for an aggrieved party to have to wait for the proceedings to conclude, even when the arbitral tribunal was not acting as per its mandate under the Act. In order to address such instances, the SC in the present case has created an exception that under exceptional circumstances, the High Court can entertain a petition under Article 226/227 in an arbitration case. However, technically, the present decision does not overrule the decision in SBP & Co. Case as it was a Seven Judge Constitution Bench decision.
Only the future decisions of the courts will provide more clarity regarding the situations that will meet the standard of ‘exceptional circumstances’, allowing the High Courts to interfere in the arbitral proceedings before an award is passed.