This case is a part of our Annual Arbitration Review 2017.
JUDGMENT NAME: Aravali Power Company Pvt. Ltd. vs. M/S. Era Infra Engineering Ltd.
CITATION: (2017) 15 SCC 32
COURT: SUPREME COURT OF INDIA
CORAM: A.K. GOEL and UDAY UMESH LALIT, JJ.
DATE: 12th SEPTEMBER 2017
In a challenge to the appointment of the arbitrator and constitution of the Arbitral Tribunal the Supreme Court overruled the High Court’s judgment on the ground that, first, the applicable statutory provisions would be the un-amended arbitration act and second that in order to make out a case under section 11(8) the criteria under section 11(6) must be satisfied. It was laid out by the apex court that in the present case, the law as held in Northern Railway Administration, would be followed i.e., “The terms of the agreement ought to be adhered to and/or given effect to, as closely as possible.”
Whether the challenge to the constitution of the Arbitral Tribunal would follow the amended or un-amended Arbitration and Conciliation, 1996 Act (“A&C Act”)? And subsequently, under what circumstances can the Chief Justice or his designate intervene with such appointment of an arbitrator?
The Respondents (Era Infra) entered into a contract with the Appellants (Aravali Power) for construction work of a permanent township. The contract was dated 17.09.2009 and contained arbitration Clause 56 of the General Conditions of Contract (“GCC”). Due to slow progress of work, the Appellants cancelled remaining works by multiple letters and the Respondent following this invoked arbitration. In reply to this, the Appellant proceeded to appoint its Chief Executive Officer (“C.E.O.”) as the sole Arbitrator on 19.08.2015 as stipulated under Clause 56. The parties proceeded to attend hearings fixed by the Arbitrator on 07.10.2015 and 09.04.2016. On 12.01.2016 following the Amendment Act being gazetted, the Respondent sought challenge to the Arbitrator and raised objections regarding the constitution of the Arbitral Tribunal. As the objection was rejected by the Arbitrator, the Respondent approached the High Court of Delhi under a section 14 petition of the A&C Act and also filed a section 11(6) petition for appointment of an independent arbitrator. On 01.03.2016 the High Court stayed further proceedings in the arbitration and by its judgment and order, set aside the appointment of the arbitrator.
The Appellant’s challenged the High Court’s order, in the present SLP, on the ground that the appointment was in tune with Clause 56. Also part of the order was challenged by the Respondents, stating that an Officer who had either dealt with the project or was directly subordinate to the Authority whose decision was the subject matter of the dispute, could not be an arbitrator in the matter.
Justice U.U. Lalit stated at the outset, that in light of invocation of arbitration, the appointment of an arbitrator and the appearance of the parties before the arbitrator, being well before 23.10.2015, the applicable statutory provision would be the un-amended act. The Court opined, in context of the old act, that so long as there is no justifiable apprehension about the arbitrator’s independence or impartiality, the appointment could not be rendered invalid and unenforceable. This issue was dealt by the Supreme Court in Indian Oil Corporation Ltd., wherein they held, that the mere fact that the arbitrator is an employee is not ipso facto a ground to raise any presumption of bias or partiality. The apex court further extracted the following propositions from the Northern Railway case (supra). First, the Chief Justice or his designate should as priority ensure that the remedies provided under the arbitration agreement are exhausted, and secondly to make sure the twin requirements of 11(8) are satisfied. Essentially, the court should first appoint arbitrators as stipulated in the arbitration agreement and only where the independence and impartiality of the arbitrator(s) is in doubt or where the arbitral tribunal had not functioned adequately, then the Chief Justice or his designate may make appropriate alternative arrangements, in order to give effect to the arbitration provision.
Reference was further made to the Voestalpine Schienen GMBH which discussed the amended section 12 on ‘neutrality of arbitrators’. The Court observed in Voestalpine (supra), that the purpose of amending section 12 was to provide for the neutrality of arbitrators. So where an arbitration agreement is in conflict with the amended provision, the non-obstante in section 12(5) would cause the act to override the arbitration agreement. While this observation stands true for cases under the new act, the law laid down in Northern Railway (supra) case applies to pre-amendment cases as in the present matter. Thus the applicable rule is, that the terms of the agreement ought to be adhered/given effect to as closely as possible, and second, the jurisdiction of the court under section 11 can only be invoked where the conditions under clauses section 11(6)(a), (b) and (c) are satisfied. Thus for exercise of power under section 11(8), a case must first be made out under section 11(6).
On a side note, an interesting development soon to take effect is the Arbitration and Conciliation (amendment) Bill 2018, which proposes to introduce arbitral institutions as an appointing authority. This move would surely be a better example of the international principle of kompetence-kompetence and more in line with international standards. The Bill is based on the Srikrishna Committee Report, a report geared towards promoting institutional arbitration. The report identifies the failure of the A&C Act to promote institutional arbitration, which is in stark contrast to jurisdictions like Singapore and Hong Kong where the Singapore International Arbitration Centre (“SIAC”) and Hong Kong International Arbitration Centre (“HKIAC”) have been designated the appointing authorities (default authority in case of Hong Kong). The present regime in India is reportedly arbitration “un-friendly” due to the trigger-happy courts, which jump at every opportunity to intervene in arbitral proceedings (initial or enforcement stage). While the present case doesn’t go into the full effect section 11, the SBP & Co. case, interpreted the exercise of power by the Chief Justice in appointing an arbitrator as a judicial power, thus altogether ousting the role of arbitral institutions. This leaves the courts to examine the arbitration agreements, which results in huge delays. The arbitration legislation of Hong Kong incorporates Article 11 of the UNCITRAL Model Law relating to the appointment of arbitrators and India too should look to following SIAC and HKIAC models to not only avoid delays but also in order to give importance to institutional arbitration.
Thus merely being an employee of one of the parties is not ipso facto a ground to raise a presumption of bias. Justifiable doubt would be considered where such appointed person was a controlling person or the dealing authority in relation to the subject matter of the contract or even if he was a direct subordinate officer of such authority. Without satisfying the requirements under section 11(6) an action under section 11(8) would not be valid. The Chief Justice and his designate are to give priority to the arbitration agreement procedure and any exception to this rule would have to be substantiated by valid reasons.
 Northern Railway Administration v. Patel Engineering Co. Ltd., (2008) 10 SCC 240
 Indian Oil Corporation Ltd. v. Raja Transport Private Ltd., (2009) 8 SCC 520
 id. at para 34 & 35
 Voestalpine Schienen GMBH v. Delhi Metro Rail Corporation Limited, (2017) 4 SCC 665
 Justice Srikrishna Committee Report to Review the Institutionalization of Arbitration in India released in July, 2017, available at http://legalaffairs.gov.in/sites/default/files/Report-HLC.pdf
 SBP & Co. v. Patel Engineering Ltd., (2005) 8 SCC 618