Supreme Court of India; 2-judge bench, A.M. Khanwilkar and Ajay Rastogi JJ; decided on 29 March 2019

Appointment of arbitrator must be following the terms of the agreement

(A) Appointment of Independent Arbitrator by the High Court

This matter concerned construction contracts awarded by the Railways where the arbitration clause—found in the General Conditions of Contract (“GCC”) at Clause 64--gave the General Manager of Railways substantial powers in appointment of the arbitral tribunal which was to consist of serving and retired employees of Railways. ^[1] [1] Where the value of claims did not exceed Rupees twenty-five lakh: One Gazetted Officer of Railway nominated by the General Manager as sole arbitrator. Where the value exceeded that sum, as presumably in this case: three serving railways officers or 2 serving railway officers plus one retired officer. Railway to send a panel of names to contractor. Contractor to choose at least two names, from which one to be appointed (by General Manager, Railways) as contractor’s nominee. The General Manager to appoint the remaining two from the panel or outside it, also indicating the presiding arbitrator. Show More

A bunch of petitions was before the Supreme Court in the context of disputes involving payment of escalated costs and delay. The contractors had first sent a notice to appoint an arbitrator under the arbitration clause. The Railways resisted in each case the submission of dispute on the ground that a no-dues/no-claim certificate had already been furnished by the contractors and accord and satisfaction reached. Each contractor filed an application under Section 11(6) ACA for appointment of arbitrator.

The High Court applied the 2015 Amendments and appointed an independent arbitrator. It also held that the issue of no-claim was arbitrable.

The contractors approached the Supreme Court.

(A) In The Supreme Court

1. The Pre-Amended Provisions Applied Not the 2015 Amendments

The court concluded that the 2015 Amendment, which came into force on 23 October 2015 shall not apply to the arbitral proceedings which commenced before that date unless the parties otherwise agree. Here, “the request was made” before 23^rd October; hence the 2015 Amendments do not apply.^[2] [2] The law on applicability of the 2015 Amendments has been clarified in the 2-judge bench decision in BCCI v. Kochi, (2018) 6 SCC 287, which was approved in HCC v. Union of India, 2019 SCC OnLine SC 1520, a 3-judge bench case. See, however, Anchit Oswal and Akshay Mahajan, Supreme Court Rules on the applicability of Amendments to Arbitration and Conciliation Act: What is still not Clear?, https://www.mondaq.com/india/Litigation-Mediation-Arbitration/686352 Supreme-Court-Rules-On-The-Applicability-Of-Amendments-To-Arbitration-And-Conciliation-Act-What-Is-Still-Not-Clear Show More

2. Signing the No-Claim Certificate Did Not Discharge the Arbitration Agreement

The contractors had furnished no-claim certificate and received payment of final bills. Did any dispute subsist? The court said yes:

1. First, it referred to the “plenitude of decisions of this Court” and concluded that “the aforesaid cases fall under two categories,” that is, where on facts the court found that there was no substance in the allegations of coercion/undue influence, and where it found that there was.
2. Second, the court cited to National Insurance Company Limited v. Boghara Polyfab Private Limited, (2009) 1 SCC 267 and reproduced the illustrations set out at paragraph 52 of that case as to when claims are ‘arbitrable’ and when they are not.
3. Third, the court on the facts of the case concluded that illustration (iii) in paragraph 52 of Boghara ^[3] [3] Boghara, paragraph 52 (iii): “A contractor executes the work and claims payment of say rupees ten lakhs as due in terms of the contract. The employer admits the claim only for rupees six lakhs and informs the contractor either in writing or orally that unless the contractor gives a discharge voucher in the prescribed format acknowledging receipt of rupees six lakhs in full and final satisfaction of the contract, payment of the admitted amount will not be released. The contractor who is hard-pressed for funds and keen to get the admitted amount released, signs on the dotted line either in a printed form or otherwise, stating that the amount is received in full and final settlement. In such a case, the discharge is under economic duress on account of coercion employed by the employer. Obviously, the discharge voucher cannot be considered to be voluntary or as having resulted in discharge of the contract by accord and satisfaction. It will not be a bar to arbitration.” Show More covers the cases of the contractors. They acted in financial/economic duress.

3. The High Court Was Not Right in Appointing an Arbitrator De Hors the Agreement.

1. First, the Court noted Section 11 (6) ACA (before 2015 Amendment) ^[4] [4] Pre-2015 Amendment Section 11 (6): Where, under an appointment procedure agreed upon by the parties,— a party fails to act as required under that procedure; or the parties, or the two appointed arbitrators, fail to reach an agreement expected of them under that procedure; or a person, including an institution, fails to perform any function entrusted to him or it under that procedure, a party may request the Chief Justice or any person or institution designated by him to take the necessary measure, unless the agreement on the appointment procedure provides other means for securing the appointment. Show More and said that under Section 11 (6) (c) the agreed procedure has to be given its precedence and the terms of the agreement have to be given its due effect as agreed by the parties to the extent possible. The corrective measures have to be taken first, and the Court is the last resort.
2. Second, the court noted Section 11 (8) ACA under which due regard must be given to the qualifications required of the arbitrator by the agreement and other considerations as are likely to secure the appointment of an independent and impartial arbitrator. The court said that “to fulfil the object with terms and conditions which are cumulative in nature,” the court must ensure that the remedy provided in the agreement is first exhausted.
3. Third, the court cited several judgments in the context of Railways contracts and the same/similar GCC where appointment of arbitrator other than under the procedure agreed had been disapproved.

Fourth, the court distinguished Datar Switchgears Ltd., (2000) 8 SCC 151; Punj Lloyd, 2006(2) SCC 638 and Union of India v. Bharat Battery Manufacturing Co. (P) Ltd., (2007) 7 SCC 684 holding that the question in those cases related to forfeiting the right to appoint, whereas in this case the question related to appointment of an independent arbitrator without, in the first instance, resorting to agreed procedure.

1. Lastly, the court held that an independent arbitrator could be appointed where the impartiality of the arbitrator is in doubt or where the tribunal has not functioned or has failed to conclude the proceedings or to pass an award without assigning any reason. It distinguished a few cases which fell in this alternative category and concluded this was not the case here.