In continuation of the series on Construction Arbitration, Part VII of the series discusses and elaborates upon a few judicial pronouncements surrounding Construction Contracts and their disputes. Although Construction Arbitration is an efficient mode for speedy resolution of construction disputes, certain issues surrounding Construction Contracts and their arbitration have been decided by the judiciary, which may be referred to as precedents for future Construction Arbitrations.
JUDICIAL PRONOUNCEMENTS
1) Union of India v. Parmar Construction Co., 2019 (2) ARBLR 328 (SC)
In this case, the dispute arose between the Respondents, who were the contractors for undertaking construction works for the railways department, under the Government of India and the Appellants.
The Respondents failed to perform construction work which led to breach of contract and thereafter the Respondents issued an escalation cost demand and accrued interests. The price of raw material increased and the Respondents demanded that the Appellants pay an enhanced escalation price in order to conclude the said contract. The Appellants declined to pay the escalated costs on the grounds that ‘no dues certificate’ was furnished by the Respondents.
This was disputed between the parties and the arbitration clause was invoked to initiate arbitration proceedings. The Rajasthan High Court appointed an Independent Arbitrator and did not follow the mutually agreed procedure in the construction contract for appointment of arbitrator. Moving forward, this was challenged by the Appellants before the Supreme Court.
The Supreme Court held that the Court does not have power to appoint an Independent Arbitrator and overlook the procedure established by the parties in their contract.
The Supreme Court observed that Rajasthan High Court ought to examine the issues with respect to the Arbitration and Conciliation Act, 1996 (“the Act”) and not the Arbitration and Conciliation Amendment Act, 2015 as the latter is not applicable to the dispute in question.
Therefore, the Supreme Court quashed and set aside the High Court’s orders and enabled the Appellants to appoint an Arbitrator in accordance with the terms of the construction agreement. Further, the Supreme Court also noted that a ‘no claim/no due certificate’ issued by the Respondents would not take away the right of the employers to recover their losses.
Through this judgment, the Supreme Court has enabled the independence of parties in appointing the Arbitrator, and reduced the scope of judicial intervention. The Supreme Court affirmed that the independence and impartiality of the Arbitrator is of utmost importance but the Court cannot intervene in appointment as it was subject to the Act. The Supreme Court noted that the Arbitrator who is to be appointed can be further questioned under the Act.
2) Government of Haryana PWD Haryana (B and R) Branch v. M/s G.F. Toll Road Pvt. Ltd and Ors., 2019 3 SCC 505
In this case, the dispute was pertaining to a construction agreement for construction works entered into between the Government of Haryana and the Contractors.
The Agreement provided for an arbitration clause. In the event of the dispute, both the parties referred to arbitration and a retired engineer-in-chief was appointed as the Arbitrator. However, the Respondents objected to the appointment of the Arbitrator on the grounds that the Arbitrator would not be independent and impartial as he was a former employee of the Appellants. The Appellant approached the Indian Council of Arbitrator (ICA) for appointment of a Substitute Arbitrator, but the ICA had already appointed a Nominee Arbitrator and a Presiding Arbitrator.
This appointment was challenged by the Appellants before the District Court and further before the Punjab and Haryana High Court. Both the Courts dismissed the petition stating the Appellant is not empowered to challenge jurisdiction of the Arbitrator before the arbitral tribunal under Section 16 of the Act.
The Appellants further filed a petition before the Supreme Court, challenging the order of the Punjab and Haryana High Court.
The Supreme Court held that the appointment of a Substitute Arbitrator shall be done in conformity with the rules applicable to the appointment of Arbitrator which is to be replaced.
Further, the Supreme Court observed that a former employee cannot be disqualified from being an Arbitrator, as the Act did not specify any such ground for disqualification. The Court held that the question of reasonable apprehension of bias was wholly unjustifiable and unsubstantiated as the former employee had retired and severed its ties from the organisation 10 years ago.
The Supreme Court was reasonable in rejecting the appeal as not every former employee can be disqualified from acting as an Arbitrator in a dispute. The criteria of justifiable doubts have to be carefully rendered in order to hold an Arbitrator unfit to resolve a dispute.
3) Bharat Broadband Network Limited (“BBNL”) v. United Telecoms Limited (“UTL”), AIR 2019 SC 2434
A dispute arose between parties, following which the parties opted for arbitration. As per the terms of the agreement, Sole Arbitrator was to be appointed by the Managing Director of BBNL.
BBNL placed reliance on the Supreme Court’s judgment in TRF Ltd. v. Energo Engineering Projects Ltd., AIR 2017 SC 3889, wherein the Supreme Court held that since a company’s Managing Director was one of the parties to the arbitration, he was ineligible to serve as an Arbitrator and for the same reason, he could not nominate an Arbitrator either. Further, appointment of an Arbitrator by such an ineligible person would be null and void.
In view of this decision, BBNL made an application to remove the Arbitrator from the proceedings. The Supreme Court relied upon the decision in the TRF Ltd. case and held that appointment of the Sole Arbitrator was void ab initio.
The Supreme Court also held that ineligibility of Arbitrator under Section 12(5) of the Act is de jure in nature which meant that the mandate of such an ineligible Arbitrator terminated automatically.
The Supreme Court observed that the decision in TRF Ltd. case has a retrospective effect and would be applicable to all arbitrations commencing on and after 23rd October 2015.
The Supreme Court stated that parties could waive the objections regarding the ineligibility of an Arbitrator under Section 12 (5) of the Act, expressly through writing. It was concluded that the UTL’s filing of a claim statement before the Arbitrator could not be considered to be a waiver of its objections to the ineligibility of the Arbitrator.
It is imperative to ensure neutrality and impartiality of an Arbitrator in order to uphold the sanctity of the arbitration process. The Supreme Court through its decision have elucidated on this fundamental principle of arbitration.
It also enumerated that the appointment of an Impartial Arbitrator can only be waived off though a clear and explicit agreement in writing wherein the parties have complete knowledge of the Arbitrator’s legal ineligibility. This cannot be established through their implied behaviour.
4) National Highways Authority of India v. Sayedabad Tea Estate, 2019 SCC Online SC 1102
In the aforementioned judgment, the Supreme Court of India decided on an application under Section 11 of the Act for appointment of an Arbitrator in relation to disputes with National Highways Authority of India (“NHAI”).
The Supreme Court held that the application is not maintainable in view of Section 3G(5) of the National Highways Act, 1956 (“the National Highways Act”). Section 3G(5) of the National Highways Act. provides for appointment of the Arbitrator by the Central Government.
It was further held by the Supreme Court that the expression ‘subject to’ as used in the Section 3G(5) of the National Highways Act clearly indicates that the legislation intended to give overriding effect to the provisions of the National Highways Act over other laws, which empowers the Central Government for the appointment of Arbitrator. Therefore, it was held that Section 11 of the Act has no application in the present case.
The quintessential element of an application under Section 11 of the Act for the appointment of an Arbitrator is the absence of parties’ agreement regarding the procedure for appointment, or their inability to comply with the agreed procedure for appoint of the Arbitrator. Where a specific statute stipulates the procedure for appointment of Arbitrator, recourse cannot be made to Section 11 of the Act for appointment of Arbitrator.
In India, the general principle is that special statutes override the general statutes. Thereby, while entering into agreements with organizations instituted under a special statute, parties should possess adequate knowledge about implications of such special statute.
The Supreme Court clarified that the Section 11 of the Act will have no effect if the parties have explicitly agreed on the procedure for appointment under the special statute.
5) National Highways Authority of India v. Gayatri Jhansi Roadways, Civil Appeal No. 5383 of 2019 and Gammon Engineers and Contractors v. National Highways Authority of India, Civil Appeal No. 5384 of 2019
The Supreme Court for the aforementioned cases jointly held that parties to a contract are not prohibited from fixing a fee structure for the Arbitrator under Section 31(8) and 31A of the Act.
In the Gayatri Jhansi Roadways case, the parties had entered into a contract containing an Arbitration clause which stated that the fee to be paid to the Arbitrator should be paid in consonance to the Policy Circular issued by the NHAI. On occurrence of a dispute, the Arbitrator did not fix its fees as per the NHAI Policy Circular but in accordance with Fourth Schedule of the Act. Aggrieved, the Appellant appealed before the Delhi High Court regarding the fee structure. The Delhi High Court held that parties can no longer fix fee structure for the Arbitrator, as the fee structure had to be decided as per Fourth Schedule of the Act in view of Section 31(8) and Section 31A of the Act.
Pursuant to the aforementioned decision of the Delhi High Court, the Arbitral Tribunal in the Gammon Engineers and Contractors case fixed the Arbitrator’s fee in accordance with Fourth Schedule of the Act and in variance with the NHAI Policy Circular. The NHAI appealed to the Delhi High Court regarding the same. The High Court in this case, had different findings than as held in the Gayatri Jhansi Roadways case and held that the Arbitrator’s fee can be determined as per the agreement between the parties.
The decision of the Delhi High Court in Gammon Engineers and Contractors case was challenged before the Supreme Court. Thereafter, the Supreme Court upheld the decision in Gammon Engineers and Contractors case that Section 31(8) and 31A of the Act do not prevent parties from agreeing on a fee structure for the Arbitrators.
The Supreme Court has rendered its decision in line with the general rule that the Fourth Schedule of the Act is not mandatory but only suggestive in nature. Further, the mandate of the Arbitrator cannot be terminated if the Arbitrator relies upon the terms of the agreement between the parties to determine the Arbitrators’ fee. Henceforth, the Supreme Court upheld the party’s autonomy, which is a fundamental principle of arbitration.
AMLEGALS REMARKS
The judicial scenario of Construction Arbitration in India is ever-evolving as the Courts have passed numerous judgments which uphold and respect the independence and neutrality of Arbitrators taking into consideration the provisions of the Act.
The trend of judicial pronouncements concerning Construction Arbitration in India revolve around ensuring that the arbitration proceedings are conducted according to the Arbitration Agreement executed by the parties to the dispute. However, the Courts have always safeguarded the rights of the aggrieved party and upheld the provisions of the Act as and when applicable on such disputes, maintaining a harmonious balance between the autonomous nature of Construction Arbitration and the provisions stipulated in the Act.
Moving forward, the recent decisions of the Courts of Law in India regarding construction disputes and their arbitration thereof, have paved the way for speedy and neutral resolution of construction disputes.
For any query or feedback, please feel free to get in touch with rohit.lalwani@amlegals.com or riddhi.dutta@amlegals.com.
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