Appointment of independent arbitrator by HC overlooking the contract procedure quashed by SC

High Court was not justified in appointing independent arbitrator without resorting to procedure for appointment of  arbitrator under the contract as agreed by the parties.- SC

ABCAUS Case Law Citation:
ABCAUS 2851 (2019) (03) SC

Important Case Laws Cited/relied upon by the parties
National Insurance Company Limited Vs. Boghara Polyfab Private Limited case
Union of India & Another Vs. M.P. Gupta

In the instant case, the High Court had passed separate orders in exercise of its powers u/s 11(6) of the Arbitration and Conciliation Act, 1996 (1996 Act) in appointing  an  independent  arbitrator without adhering to the mutually agreed procedure under the agreement executed between the parties.  

The question that arose for consideration of the Hon’ble Supreme Court, were as under:

(1) whether the High Court was justified in invoking amended provision introduced by Arbitration  and Conciliation(Amendment Act), 2015 with effect from 23rd October, 2015 (Amendment Act,  2015);

(2) whether the arbitration agreement stands discharged on acceptance of the amount and signing  no claim/discharge certificate and;

(3) whether it was permissible for the High Court u/s 11(6) of the Arbitration and Conciliation Act, 1996 (prior to the Amendment Act, 2015) to appoint third party or an independent Arbitrator when the parties have mutually agreed for the procedure vis­-à-­vis the authority to appoint the designated arbitrator.

The respondents were the registered contractors undertaking work contracts (construction) of various kinds. They raised a demand for escalation cost and the interest accrued thereon because the date of the completion of the project was delayed as alleged due to breach of obligations by the appellants and the scheduled date of completion had to be extended.

In the interregnum period, there was a rise in the prices of the raw material and the project became  impossible to be completed by the respondent contractors.   Hence, a request was made to the  appellants to either pay the enhanced escalation price expressing that otherwise the respondent contractors would not be in a position to conclude the contract and on the acceptance for payment of the escalation costs, respondent contractor completed work and delivered the project and raised final bills in the prescribed pre­determined format (which also included no dues certificate). 

However, the dispute arosewith respect to the payment of escalated cost, as demanded by  the respondent contractors, and their being a clause of arbitration in the agreement, each of the respondent contractors sent a notice for arbitration  invoking clause 64(3) of agreement which in majority of the cases declined by the appellants stating that no dues certificate had already been furnished and that entailed no subsisting dispute and that was the reason due to which each of the respondent contractor had approached the High Court by filing an application u/s 11(6) of the Act, 1996.  

The request for referring the dispute to arbitration was received by the appellants much prior to the enforcement of the Amendment Act, 2015 which came into force, w.e.f. 23rd October, 2015.

The dispute travelled to the High Court who after hearing the parties under the impugned judgment allowed the application of the respondent contractor and in exercise of power u/s 11(6) of the Act, 1996, appointed a retired judge of the High Court as an independent arbitrator to arbitrate the proceedings.

The High Court further observed that the amended provisions of Act, 2015 shall apply to the pending proceedings and mere furnishing of no claim certificate would not take away the right of the parties and it is open for adjudication before the arbitrator.

The Hon’ble Supreme Court observed that a conjoint reading of Section 21 of the 1996 Act read with Section 26 of Amendment Act, 2015 leave no doubt that the provisions of the Amendment Act, 2015 shall not apply to such of the arbitral proceedings which has commenced in terms of the provisions of Section 21 of the Principal Act unless the parties otherwise agree.  

The Hon’ble Supreme Court opined that the Amendment Act, 2015 which came into force, i.e. on 23rd October, 2015, shall not apply to the arbitral proceedings which has commenced in accordance with the provisions of Section 21 of the Principal Act, 1996 before the coming into force of Amendment Act, 2015, unless the parties otherwise agree. Therefore, the applications/requests made by the respondent contractors deserved to be examined in accordance with the principal Act, 1996.

The Hon’ble Supreme Court observed that it had, in a catena of judgments, had found some substance in the contention of the claimants that “no ­dues /no claims certificate or discharge vouchers” were insisted and taken (either on printed format or otherwise) as a condition precedent for release of the admitted dues and consequently the Court  held  that the disputes were arbitrable.

The Hon’ble Supreme Court stated that it cannot be oblivious of the ground realities  that  where a petty/small contractor has made investments from his available resources in executing the works contract and bills have been raised for the escalation cost incurred by him and the appellants without any justification reduced the claim unilaterally and take a defence of the no claim certificate being furnished which as alleged by the respondents to be furnished at the time of furnishing the final bills in the prescribed format. 

The Hon’ble Supreme Court opined that it was manifest from the pleadings that the respondent contractors who entered into contract for construction works with the railway establishment cannot afford to take any displeasure from the employer, the amount under the bills for various reasons which may include discharge of his liability towards the bank, financial institutions and other persons, indeed the railway establishment had a upper hand. 

According to the Hon’ble Supreme Court, a rebutable presumption could be drawn that when a no claim has been furnished in the prescribed format at the time of final bills being raised with unilateral deductions made even that acceptable amount will not be released, unless no claim certificate is being attached to the final bills.

The Hon’ble Supreme Court opined that to fulfil the object with terms and conditions prescribed in section 11(6) 1996 Act, which are cumulative in nature, it is advisable for the Court to ensure that the remedy provided as agreed between the parties in terms of the contract is first exhausted.

The Hon’ble Supreme Court observed that in various judgments, it had emphasised to act on the agreed terms and to first resort to the procedure as prescribed and open for the parties to the agreement to settle differences / disputes arising under   the   terms   of   the   contract   through appointment of a designated arbitrator although the name in the arbitration agreement is not mandatory or must but emphasis should always be on the terms of the arbitration agreement to be adhered to or given effect as closely as possible.

The Hon’ble Supreme Court stated that in the instant case, independence and impartiality of  the  arbitrator had never been doubted but where the impartiality of the arbitrator in terms of the  arbitration agreement is in doubt or where the Arbitral Tribunal appointed in terms of the  arbitration  agreement has not functioned, or has failed to conclude the proceedings  or  to  pass  an  award without assigning any reason and it became necessary to make a fresh appointment, Chief  Justice or his designate in the given circumstances after assigning cogent reasons in appropriate cases may resort to an alternative arrangement to give effect to the appointment  of  independent  arbitratoru/s 11(6) of the Act.

The Hon’ble Supreme Court opined that in the given circumstances, it was the duty of the High Court to first resort to the mechanism in appointment of an arbitrator as per the terms of contract as agreed by the parties and the default procedure was opened to be resorted to if  the  arbitrator appointed in terms of the agreement failed to discharge its obligations or to arbitrate the dispute which was not the case set up by either of the parties.

The Hon’ble Supreme Court held that the High Court was not justified in appointing an independent arbitrator without resorting to the procedure for appointment of an arbitrator which had been prescribed under the contract as inbuilt mechanism as agreed by the parties. Consequently, the orders passed by the High Court were quashed and set aside.

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