INDIA’S PRO-ARBITRATION APPROACH IN BHAVEN CONSTRUCTION CASE: A BIG STEP FORWARD

This article has been authored by Vidhi Udayshankar, a fourth year student at Amity Law School, Delhi.

Introduction

India has long struggled with wanting to project itself as an arbitration-friendly jurisdiction. The landmark judgment by a three judge bench of Supreme Court in Bhaven Construction v. Executive Engineer Sardar Sarovar Narmada Nigam Ltd. upheld the principle of minimal judicial interference. The same is reckoned by renowned arbitrator Prof. Gary Born who states that the effectiveness of an arbitral process rests on judicial non-interference in the conduct of arbitral proceedings. The three-judge bench observed that the High Courts power of interference under Article 226 and Article 227 of the Constitution of India in the context of arbitral proceedings, be exercised only in exceptional circumstances. Further, it remarked that excessive judicial interference can diminish the efficiency of arbitral process. This judgment ensures the uniformity of the law of arbitral procedures as echoed in the Statement of Objects and Reasons of the Arbitration & Conciliation Act, 1996 (“The Arbitration Act”).

Background

The Executive Engineer Sardar Sarovar Narmada Nigam Limited (“SSNN Ltd”) had entered into a contract with Bhaven Construction (“BC”) for the manufacturing and supply of bricks for the construction of canal work. A dispute arose during the execution of the contract regarding payment. Subsequently, BC invoked the arbitration clause contained in Clause 38 of the agreement. Thereafter, a notice of arbitration was sent to SSNN Ltd regarding the appointment of a sole arbitrator. Clause 38 of the agreement provides for arbitration as under:

“Clause 38 – Arbitration All disputes or differences in respect of which the decision has not been settled, shall be referred for arbitration to a sole arbitrator appointed as follows:

Within thirty days of receipt of notice from the Contractor of his intention to refer the dispute to arbitration the Chief Engineer shall send to the Contractor a list of three officers from the list of arbitrator appointment by the Government. The Contractor shall within fifteen days of receipt of this list select and communicate to the Chief Engineer the name of the person from the list who shall then be appointed as the sole arbitrator…..

..The arbitration shall be conducted in accordance with the provision of the Indian Arbitration Act, 1940 or any statutory modification thereof. The decision of the sole arbitrator shall be final and binding on the parties thereto. The Arbitrator shall determine the amount of costs of arbitration to be awarded to either parties.”

In response, SSNN Ltd. contested the notice on two grounds-

1. The disputes between the parties were to be adjudicated under Gujarat Public Works Contracts Disputes Arbitration Tribunal Act, 1992 (“Gujarat Act”) since Clause 38 reads “arbitration shall be conducted in accordance with the provision of the Indian Arbitration Act, 1940 or any statutory modification thereof.”

2. The arbitration proceeding stands time barred pursuant to Clause 38 as neither party is entitled to claim if the arbitrator isn’t appointed within 30 days after the defect liability period.

However, BC unilaterally appointed a sole arbitrator. Subsequently, an application under Section 16 was filed by SSNN Ltd of the Arbitration Act disputing the jurisdiction of the sole arbitrator, which was rejected. Aggrieved by sole arbitrator’s order, SSNN Ltd filed a Special Civil Application under Articles 226 and 227 of the Constitution of India before the Gujarat High Court. This application was dismissed by a Single Judge bench on grounds of it not being maintainable citing the Konkan Railway Corpn. Ltd. & Ors vs M/S. Mehul Construction Co.

SSNN Ltd challenged the Single Judge’s order through Letters Patent Appeal before Gujarat High Court. The Gujarat High Court allowed the appeal and observed the contract was a “works Contract”. It held that SSNN Ltd had at the earliest opportunity available challenged the ‘forum’ in which the dispute was adjudicated and due to lack of party consensus it would be unfair for arbitration proceedings to continue. Aggrieved by the impugned order, BC filed a special leave petition before the Supreme Court that invocation of High Court’s inherent powers is an attempt to bypass the framework of Arbitration Act. Thus, the main issue before SC was whether the arbitral process could be interfered under Article 226/227 of the Constitution of India and under what circumstances.

Analysis of SC Judgment

The Court while delivering the judgment shed light on certain key aspects to uphold the sanctity of arbitral process.

● Arbitration Act is a complete code in itself

The Court allowed the appeal and set aside the Gujarat High Court’s order stating that it was unnecessary interference in the arbitral process. The Court stated the Arbitration Act is a complete code in itself. It has a non-obstante clause in Section 5, which has been provided to show the intent of the legislature i.e. to adopt the UNCITRAL model law and rules, to minimise judicial interference in arbitral proceedings. The framework has mechanisms in place to address most of the issues within the ambit of the Arbitration Act itself, without seeking help through any extra statutory mechanism. Further, the Court stated Section 34 of Arbitration Act - 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 sub-section (3)’. The usage of the term “only” denotes the enactment a complete code and lays down the procedure.

● Constitutional right does not override Legislative enactment

The Court while referring to Nivedita Sharma v. Cellular Operators Association India stated that Article 226 is a basic feature of the Constitution and cannot be curtailed by parliamentary legislation (L. Chandra Kumar v. Union of India). However, the exercise of Article 226 should not be done when the aggrieved person already has an alternative effective remedy in place. The exercise would be deemed inappropriate and frustrate the object of the Arbitration Act. The Court further ruled that this power be exercised in “exceptional rarity”, wherein one party is left remediless under the statute or a “clear bad faith” is shown by one of the parties.

● Interplay of Section 5 and Article 227 of Constitution of India

The Supreme Court in Deep Chand Industries Ltd observed that the ambit of Article 227 is very broad and pervasive in nature. The High Court should not use its inherent power to interject the arbitral process at such a stage. It further stated that the hallmarks of arbitral process are time limitation and minimal judicial interference while referring to principle un-breakability held in P. Radha Bai v. P. Ashok Kumar.

Conclusion

The most significant result from this judgment is the restoration of faith and trust in the arbitral process. The Court has upheld the key principles of arbitration i.e. party autonomy and minimal judicial interference. This judgment prevents unwarranted judicial inroads chosen by parties to delay the arbitral process. India aims to be a nucleus of various foreign investments, thereby India has a great potential of turning into a global arbitration hub like its counterpart Singapore. The extreme backlog of cases in the Indian judiciary toppled with the Indian courts having an interventionist attitude in the arbitral process has often been the reason for India not being chosen as an arbitration jurisdiction. However, this judgment is an important step towards reformative measures in the existing arbitration regime in India and a positive approach towards turning India into an arbitration-friendly jurisdiction.