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When disputes arose[1], the claimant approached the other party for referring the disputes for arbitration.  As per the arbitration clause, no person other than a person appointed by the Chief-Executed Officer of the Respondent was to act as arbitrator and if for any reason, that was not possible, “the matter is not to be referred to the arbitration at all.” The arbitration clause, thus, was couched in such a manner that the arbitration itself would not be possible as the Chief Executive Officer of the Respondent Authority, being an officer was denuded of jurisdiction to act as arbitrator or to appoint an arbitrator by virtue of 7^th Schedule read with Section 12(5) of the Arbitration and Conciliation Act, 1996 (the “Act”).

Relying on the clause, the Respondent declined the request on the ground that Chief Executive Officer of the Authority alone was competent to arbitrate in the matter as per the agreement and as he had become ineligible by virtue of Section 12(5) of the Act, therefore, the arbitration clause itself had ceased to exist.

When the Claimant approached Hon’ble Allahabad High Court under section 11 of the Act, the Respondent relied upon the judgment in the case of Nandini Constructions,Through Attorney, Authorised Signatory v. State Of U.P.Through Prin.Secy.Irrigation,Lucknow And Ors. [Arbitration Application No. – 54 of 2017 decided by the Hon’ble Allahabad High Court on 14.2.2019] to object the petition for appointment of arbitrator. In this case [Nandini Constructions,], the application under section 11 of the Act was objected to on the basis of similarly worded arbitration clause. The application for appointment of arbitrator was rejected by the Hon’ble Court on the ground of party autonomy. According to the judgment, the words in arbitration clause clearly evinced the agreed intent of the parties not to refer the dispute to Arbitration if such arbitration could not be held by the ‘Chief Engineer or any person nominated by him’. The Court in Nandini Constructions, held that since the agreed intent not to refer the matter to arbitration in such an eventuality is evident from the arbitration clause, and the stipulation in the Agreement is binding upon the parties including the applicant, the application under section 11 of the Act was not maintainable.

The Claimant, on the other hand, contended that the arbitration agreement is broadly in two parts, firstly, agreement for reference of dispute to arbitrator and secondly, the procedure to be followed in the matter on such reference. It was contended that the procedure part contemplating party autonomy is always subservient to the statutory interdict contained in Section 12(5) of the Act of 1996 and cannot be construed as obliterating the first part of the agreement for reference of dispute to arbitrator. It was further argued that the authority of the Chief Executive Officer to act as arbitrator or to appoint an arbitrator forms part of the procedure for appointment and even if such authority ceases to exist by virtue of Section 12(5) of the Act, the core clause contemplating adjudication of dispute by arbitrator would continue to subsist.

The Court, after hearing the submissions from the parties, was of the opinion that the agreement between the parties to refer all disputes arising out of contract to arbitrator is the core part of the agreement. The manner to appoint the arbitrator would, at best, fall in the realm of procedure. Merely because the person, who could act as an arbitrator in terms of arbitration clause becomes ineligible to act as arbitrator by virtue of Section 12(5) of the Act read with 7th Schedule, it would not mean that the core part of the agreement for referring the dispute for adjudication to arbitrator would be rendered nugatory.

The Court opined that if the Respondent’s argument was accepted that would clearly defeat the object of neutrality of arbitrator or reference of dispute to arbitration. Section 12(5) of the Act read with 7th Schedule has been introduced so as to lend greater legitimacy to the process of arbitration by providing for an independent person to act as arbitrator and exclude the other party from becoming a judge in their own cause. The Court was therefore inclined to lean in favour of an interpretation which effectuates the remedy of arbitration consistent with the legislative intent i.e. Section 12(5) of the Act of 1996 read with the 7th Schedule.

The Court further dived deep to look into the objective behind the Act and further the objective of introducing of Schedule VII in the Act. The Court relied upon Chloro Controls India (P) Ltd. v. Severn Trent Water Purification Inc., (2013) 1 SCC 641 wherein it was held that in light of the necessity to encourage arbitration, the court is required to exercise its jurisdiction in a pending action, to hold the parties to the arbitration clause and not to permit them to avoid their bargain of arbitration by bringing civil action involving multifarious causes of action, parties and prayers. The Court further relied on judgment of the Hon’ble Apex Court in Ellora Paper Mills Ltd. v. State of M.P., (2022) 3 SCC 1,  wherein it was observed that since the principles of impartiality and independence cannot be discarded at any stage of the proceedings, specifically at the stage of constitution of the Arbitral Tribunal, it would be incongruous to say that party autonomy can be exercised in complete disregard of these principles — even if the same has been agreed prior to the disputes having arisen between the parties.

Applying the principles laid down by the Apex Court, the Court was of the view that stipulation under the Agreement clearly manifests the intent of Respondent to retain the power of adjudication, which goes against the spirit of neutrality of arbitrator for which alone Section 12(5) of the Act of 1996 is introduced. It was dictated by the Court that the principles of impartiality or independence has to be respected in the matter of appointment of arbitrator. Once the statute has stepped in to enforce neutrality of arbitrator in an arbitration agreement, by virtue of Section 12(5) of the Act, the Court would not be justified in literally interpreting the clause in the agreement to keep the power of adjudication or the party autonomy with the Respondent at the cost of abandoning the arbitration itself. Such arbitration clause which ousts the arbitration in case of neutrality of arbitrator has thus to be necessarily construed as being subservient to Section 12(5) of the Act of 1996.

The Court relied upon the judgment in Ram Kripal Singh Construction Pvt. Ltd. Vs. NTPC, ARB.P 582/2020, dated 9.11.2022 (Delhi High Court) to emphasize the distinction between the procedure of appointment from right to refer dispute to arbitration under the agreement. In Ram Kripal Singh it was held that “The procedure for appointment of an arbitrator is clearly distinct and separable from the agreement to refer disputes to arbitration, even if these are contained in the same arbitration clause. If therefore, by reason of amendment, re-statement or re- interpretation of the law, as has happened in the present case by insertion of section 12(5) in the A&C Act and the verdicts of the Supreme Court in TRF Ltd. and Perkins Eastman (supra), the procedure for appointment of arbitrator at the hands of one of the parties becomes legally invalid, void and unenforceable, that does not mean that the core agreement between the parties to refer their inter-se disputes to arbitration itself perishes. In the opinion of this court – this “my way or the highway” approach – is not tenable in law; and in such circumstances, that part of the arbitration agreement which has been rendered invalid, void and enforceable is to be severed or excised from the arbitration clause, while preserving the rest of the arbitration agreement”.

The Court, on the aforesaid reasoning, allowed the application and appointed an arbitrator.

[1] M/S Bansal Construction Office v.  Yamuna Expressway Industrial Development Authority And 2 Others  ARBITRATION AND CONCILI. APPL.U/S11(4) No. – 142 of 2019

In a recent case decided by the Hon’ble Supreme Court, in a dispute between M/S SPML Infra Ltd. (“Contractor”) and NTPC Ltd. (“NTPC”), the Court once again went into the analysis and scope of pre-referral jurisdiction of the High Court under Section 11 of the Act. The dispute had arisen when after the completion of work assigned through the contract, NTPC withheld the bank guarantees on account of pending liabilities and disputes between the parties with respect to other projects. When the Contractor approached the High Court, the parties entered into a settlement agreement wherein NTPC agreed to release the withheld Bank Guarantees. The Contractor as per the settlement agreed to withdraw its pending Writ Petition and undertook not to initiate any other proceedings, including arbitration, under the subject contract. Subsequently, the Bank Guarantees were released by NTPC.

The Contractor, however, repudiated the Settlement Agreement and filed the present application under Section 11(6) of the Act in the Delhi High Court alleging coercion and economic duress in the execution of the Settlement Agreement. The High Court appointed a former Judge of the Delhi High Court as the Arbitrator on behalf of NTPC, and directed the respective arbitrators to appoint the presiding Arbitrator.

NTPC approached the Apex Court. The Supreme Court at the outset clarified that position of law with respect to the pre-referral jurisdiction, as it existed before the advent of Section 11(6A) in the Act, was based on principle laid down in National Insurance Co. Ltd. v. Boghara Polyfab (P) Ltd [(2009) 1 SCC 267]. In Boghara Polyfab it was held that “the issue of non-arbitrability of a dispute will have to be examined by the court in cases where accord and discharge of the contract is alleged.” Further in the matter of Union of India & Ors. v. Master Construction Co. 2011) 12 SCC 349 it was held that “Where the dispute raised by the claimant with regard to validity of the discharge voucher or no-claim certificate or settlement agreement, prima facie, appears to be lacking in credibility, there may not be a necessity to refer the dispute for arbitration at all”. The Court had held that in such cases the Court must look into this aspect to find out at least, prima facie, whether or not the dispute is bona fide and genuine.

In a legislative response to these precedents, sub-section (6A) was added to Section 11 of the Act wherein while considering any application for appointment of arbitral tribunal, the Courts were to confine to the examination of the existence of an arbitration agreement. Section 11(6A) was strictly construed in the case of Duro Felguera, S.A. v. Gangavaram Port Ltd. [(2017) 9 SCC 729]. It was held that the jurisdiction of the court under Section 11(6) of the Act is limited to examining whether an arbitration agreement exists between the parties – “nothing more, nothing less”. The position of law was however changed in the matter of United India Insurance Co. Ltd. v. Antique Art Exports Pvt. Ltd. (2019) 5 SCC 362 wherein the scope of examination was widened. The provision was finally interpreted Vidya Drolia and Ors. v. Durga Trading Corporation (2021) 2 SCC 1. It was held that the expression “existence of an arbitration agreement” in Section 11 of the Arbitration Act, would include aspect of validity of an arbitration agreement, albeit the court at the referral stage would apply the prima facie test on the basis of principles set out in the judgment. Further it was held that the restricted and limited review is to check and protect parties from being forced to arbitrate when the matter is demonstrably “non-arbitrable” and to cut off the deadwood. The court by default would refer the matter when contentions relating to non-arbitrability are plainly arguable; when consideration in summary proceedings would be insufficient and inconclusive; when facts are contested.” The Court observed that conversely, if the court becomes too reluctant to intervene, it may undermine effectiveness of both the arbitration and the court. The legal order needs a right balance between avoiding arbitration obstructing tactics at referral stage and protecting parties from being forced to arbitrate when the matter is clearly non-arbitrable. When it appears that prima facie review would be inconclusive, or on consideration inadequate as it requires detailed examination, the matter should be left for final determination by the Arbitral Tribunal.

On reviewing the precedents, the Court concluded that the general rule is that the inquiry by the court must be prima facie, however, such prima facie scrutiny of the facts must lead to a clear conclusion that there is not even a vestige of doubt that the claim is non-arbitrable. On the contrary, even if there is the slightest doubt, the rule is to refer the dispute to arbitration. Applying the law to the fact of the case, the Court found that there were no pending claims between the parties for submission to arbitration. Since entire dispute revolves around the solitary act of the NTPC, in not returning the Bank Guarantees despite the successful completion of work, the plea of coercion and economic duress must be seen in the context of the execution of the Settlement Agreement not being disputed, and its implementation leading to the release of the Bank Guarantees which also was not being disputed. The Court held that High Court ought to have examined the issue of the final settlement of disputes in the context of the principles laid down in Vidya Drolia. The Court allowed the appeal and disposed the matter in favour of NTPC.

In a recent  matter between M/s Alpine Housing Development Corporation Pvt. Ltd. (“Appellant”) and  Ashok S. Dhariwal and Others (“Respondents”) [CIVIL APPEAL NO. 73 OF 2023], the Appellant  approached  Hon’ble Supreme Court against the order by the High Court of Karnataka in a Writ Petition, by which the High Court had set aside the order passed by the learned Additional City Civil and Sessions Judge, and permitted the Respondents to adduce evidence in an interim application under Section 34 of the Arbitration & Conciliation Act, 1996 (“Act”). The award, passed in 1998, was an ex-parte arbitral award wherein no evidence was led by the Respondents.

The interim application filed along with the application under Section 34 of the Act by the Respondents, was rejected by the learned Additional City Civil and Sessions Judge refusing to permit the Respondents to adduce evidence on the ground that it would delay further hearing of section 34 application. The Court relied on Section 34(2)(a) of the Act, as amended in the year 2019, by which expression “furnish proof” in section 34(2)(a) came to be substituted with the expression “establish on the basis of record of arbitral tribunal”.

The Hon’ble High Court while following the decision of Supreme Court in the case of Fiza Developers and Inter-Trade Private Limited v. AMCI (India) Private Limited & Another [(2009) 17 SCC 796] allowed the writ petition filed by the Respondents and set aside the order passed by the lower court permitting them to adduce evidence in the proceedings under section 34 of the Act. The Court reasoned that the provisions of Section 34 (2)(a) of the Act, as it stood prior to the amendment in 2019, would apply.

The Appellant approached the Hon’ble Supreme Court.

The Supreme Court, at the very outset, laid down that since the arbitration proceedings commenced and even the award was declared prior to the amendment of Section 34(2)(a) in 2019, therefore, Section 34(2)(a) pre-amendment shall be applicable. The Court further reasoned that there was a substantial change vide amendment of section 34(2)(a) by 2019 amendment. Prior to the amendment of section 34(2)(a), an arbitral award could be set aside by the Court if the party making an application “furnishes proof” and the grounds set out in section 34(2)(a) and section 34(2)(b) are satisfied. However, subsequent to the amendment of section 34(2)(a), the words “furnishes proof” have been substituted by the words “establishes on the basis of the record of the arbitral tribunal”. The Court, therefore opined that in case of arbitration proceedings commenced and concluded prior to the amendment of section 34(2)(a) by Act 33/2019, pre-amendment of section 34(2)(a) shall be applicable.

The Court, after examining the findings in the judgments of  Fiza Developers, Canara Nidhi Limited v. M. Shashikala [(2019) 9 SCC 462] and Emkay Global Financial Services Limited v. Girdhar Sondhi [(2018) 9 SCC 49], concluded that the three judgments lay down the position and the scope and ambit of section 34(2)(a) pre-amendment. Section 34 application will not ordinarily require anything beyond the record that was before the arbitration and that cross-examination of persons swearing in to the affidavits should not be allowed unless absolutely necessary. The Court made the observation saying that the ratio of the aforesaid three decisions on the scope and ambit of section 34(2)(a) pre-amendment would be that applications under sections 34 of the Act are summary proceedings. An award can be set aside only on the grounds set out in section 34(2)(a) and section 34(2)(b). Speedy resolution of the arbitral disputes is the objective behind the legislation. Therefore in the proceedings under section 34 of the Arbitration Act, the issues are not required to be framed which would otherwise defeat the said object of speedy resolution.

So far as leading evidence is concerned the Court observed that ordinarily in the Section 34 proceedings, the examination by the Court shall not require anything beyond the record that was before the arbitrator. However, the Court added, if there are matters not contained in such records and the relevant determination to the issues arising under section 34(2)(a), they may be brought to the notice of the Court by way of affidavits filed by both the parties in exceptional cases, although cross-examination of the persons swearing in to the affidavits should not be allowed unless absolutely necessary.  The Court further added that the requirement of “furnishing proof” as per pre-amendment of section 34(2) (a) of the Arbitration Act shall also be equally applicable to the application for setting aside the award on the grounds set out in section 34(2)(b) such as the ground of public policy, provided the same cannot be established and proved from the record before the arbitrator.

After setting the law, the Court went on to examine whether the Respondents were able to establish  an exceptional case that it is necessary to grant opportunity to the Respondents to file affidavits and adduce evidence. Factually, the Court found that the evidence sought to be brought on record vide the interim application was subsequent to the passing of the award and therefore naturally the same shall not be forming part of the record of the arbitral tribunal. Additionally, the award of the arbitral tribunal was an ex-parte award and no evidence was before the arbitral tribunal on behalf of the Respondents. The affidavit, on the other hand, discloses specific document and the evidence required to be produced in order to determine the issue at hand. In that view of the matter, the Court found that a strong exceptional case is made out by the Respondents to permit them to file affidavits/adduce additional evidence. The Court also allowed the Appellant to cross-examine and/or produce contrary evidence at the same time. In the light of the reasoning thus, the Judgment of the High Court was upheld by the Supreme Court.