Can High Courts Interfere In The Arbitral Process Under Article 226 and 227 Of The Constitution? Supreme Court Answers

  • Dev Vrat Arya
  • 12:45 PM, 08 Jan 2021

Read Time: 10 minutes

The Supreme Court has held that the power of High Courts under Article 226 & 227 of the Constitution to interfere with an arbitration process needs to be exercised in exceptional rarity.

A bench of Justices NV Ramana, Surya Kant & Hrishikesh Roy observed that the exceptional rarity arises when one party is left remediless under the statute or a situation arises where there is 'bad faith' shown by one of the parties.

The bench has extrapolated on the issue of whether the arbitral process could be interfered under Article 226/227 of the Constitution and if yes, under what circumstances? In order to explain this issue, the court analyses the Arbitration Act in depth.

Facts:

A brief summation of facts are that on February 13, 1991, Respondent No. 1 entered into a contract with the Appellant for the manufacture and supply of bricks.

Apart from stipulating the Arbitration Clause, the contract also specified the procedure for appointment of a sole arbitrator for the adjudication of disputes.

A dispute regarding the payment arose in furtherance of manufacturing and supplying of bricks.

The Appellant appointed Respondent 2 as the sole arbitrator for the adjudication of the dispute. Respondent 1 challenged the sole arbitrator’s jurisdiction by filing an application under Section 16 of the Arbitration and Conciliation Act of 1996.

However, on November 20, 2011, the sole arbitrator rejected the application and held that the sole arbitrator had jurisdiction over the dispute.

The respondent then approached the High Court of Gujarat where the single-judge bench referring to the case of Konkan Railway Corporation Limited v. Mehul Construction Company, (2000) 7 SCC 201 and SBP & Co. v. Patel Engineering Ltd., (2005) 8 SCC 618  which had held that the petition under Articles 226 and 227 of the Constitution of India against the said order were not maintainable. Court added that the only remedy available to the petitioner was to wait until the order was passed by the Sole Arbitrator and challenge the same under Section 34 of the Act.

Aggrieved by order of the single judge, Respondent then filed a Special Civil Application, where the court allowed the appeal and observed that the Appellant could not have appointed the sole arbitrator and cannot go on to contend that as the arbitrator is already appointed, the respondent has to wait for the arbitral award to challenge before the Section 34 and 37 of the Act.

Aggrieved, the Appellant approached the Supreme Court by way of Special Leave Petition.

Holding:

The bench allowed the plea and observed that a plain reading of the agreement clearly showed that the Appellant had acted in accordance with the procedure laid down in the agreement without any mala fide intention.

Respondent No. 1 was ordered to endure the natural consequences of submitting themselves to the jurisdiction of the sole arbitrator, which can be challenged through the provision laid down under the Arbitration act i.e., by filing an application under Section 34.

Reasoning:

The Court recognised that The Arbitration Act itself gives various procedures and forums to challenge the appointment of an arbitrator.

"The framework portrays an intention to address most of the issues within the ambit of the Act itself, without there being scope for any extra statutory mechanism to provide just and fair solutions. Arbitration act gives a flexible framework for the parties to agree for their own procedure with minimalistic stipulations under the act," the bench noted.

Court has observed that in the present case, the Appellant has acted in accordance with the procedure laid down under the agreement by unilaterally appointing a sole arbitrator. However, the respondent has challenged the order under Article 226 and 227 of the Indian Constitution rather than going through the mechanism provided under Section 34 of the Arbitration act. The Court focuses on the term ‘only’ in Section 34 and observed that the enactment is a complete code and lays down a procedure.

Bench noted that the legislative framework cannot curtail a Constitutional right.

The Hon’ble Court, while referring to the judgements of Nivedita Sharma v. Cellular Operators Association of India, (2011) 14 SCC 337 and M/s. Deep Industries Limited v. Oil and Natural Gas Corporation Limited, (2019) SCC Online SC 1602, has held that,

"It is prudent for a Judge to not exercise discretion to allow judicial interference beyond the procedure established under the enactment. This power 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."

In the present case Respondent no. 1 had failed to show ‘bad faith’ on the part of Appellant, said the bench

Hence, the Court observed that it should not interject the arbitral process because if the Courts are allowed to interfere with the arbitral process beyond the ambit of the enactment, then the efficiency of the process will be diminished.

Case Title: Bhaven Construction Through Authorised Signatory Premjibhai K. Shah Vs. Executive Engineer Sardar Sarovar Narmada Nigam Ltd. & Anr.