Arbitration Clause Superseded: Supreme Court Appoints Sole Arbitrator in GR Green Life Energy vs. Leitwind Shriram Manufacturing Dispute (22 February 2021)

Introduction

Date of the Judgment: 22 February 2021

Citation: [Not Available in Source]

Judges: Justice Indu Malhotra and Justice Ajay Rastogi

When parties agree to resolve their disputes through arbitration, can the agreed-upon process be altered by a court? The Supreme Court of India addressed this question in a recent case involving a dispute over a wind farm project. The Court, in this case, appointed a sole arbitrator, superseding the original agreement for a three-member arbitration panel. This decision highlights the Court’s role in ensuring efficient dispute resolution. The judgment was delivered by a two-judge bench comprising Justice Indu Malhotra and Justice Ajay Rastogi.

Case Background

GR Green Life Energy Pvt. Ltd. (the Appellant), a contractor, and Leitwind Shriram Manufacturing Pvt. Ltd. (the Respondent) entered into a Development Agreement on 10 February 2014. The agreement aimed to establish a wind farm project in Sangli District, Maharashtra. A key part of this agreement was Clause 20, which included an arbitration clause stipulating that any disputes would be resolved through arbitration in Chennai, under the Arbitration and Conciliation Act, 1996. The arbitration panel was to consist of three arbitrators, one appointed by each party, and a third presiding arbitrator appointed by the two nominated arbitrators.

Disputes arose between the parties, leading the Appellant to issue a legal notice on 21 April 2018, seeking payment of outstanding dues amounting to Rs. 3,26,08,545. The Respondent rejected these claims on 21 January 2019, asserting that the Appellant had failed to provide the agreed-upon services. The Respondent also claimed a refund of Rs. 10,26,00,000 with 15% interest per annum, along with liquidated damages of Rs. 1,54,00,000 from the Appellant.

The Respondent then invoked the arbitration clause and nominated its arbitrator. When the Appellant failed to nominate its arbitrator, the Respondent filed a petition before the High Court of Madras seeking appointment of an arbitrator on behalf of the Appellant.

Timeline

Course of Proceedings

The Respondent filed a petition under Section 11(6) of the Arbitration and Conciliation Act, 1996, before the High Court of Madras on 18 March 2019, seeking the appointment of an arbitrator on behalf of the Appellant, as the Appellant had failed to nominate one.

During the proceedings, the Appellant registered itself under the Micro, Small and Medium Enterprises Development Act, 2006 (MSMED Act) and applied for dispute resolution before the Facilitation Council, Pune.

The High Court observed that the MSMED Act does not provide for the reference of counter-claims to the Facilitation Council. It noted that while Section 24 of the MSMED Act gives it overriding effect, this would not apply in this case because there is no provision under the MSMED Act to deal with counter-claims against a supplier-contractor.

The High Court concluded that since the parties had agreed to resolve all disputes under the Arbitration and Conciliation Act, 1996, and there was no provision for counter-claims under the MSMED Act, it was appropriate to appoint an arbitrator. The High Court directed the Appellant to appoint an arbitrator, and upon such nomination, the two arbitrators would appoint the presiding arbitrator.

Legal Framework

The primary legal frameworks relevant to this case are:

✓ The Arbitration and Conciliation Act, 1996: This Act governs the process of arbitration in India. Section 11 deals with the appointment of arbitrators.

✓ The Micro, Small and Medium Enterprises Development Act, 2006 (MSMED Act): This Act aims to facilitate the promotion and development of micro, small, and medium enterprises. Sections 15 to 18 of the MSMED Act provide for the reference of disputes with respect to claims made by a supplier/contractor registered under the MSMED Act. Section 24 of the MSMED Act gives overriding effect to the MSMED Act.

Clause 20 of the Development Agreement between the parties stated:

“20. Governing Law and Jurisdiction and Service of Process
….
c) All disputes, differences and claims or any non-payment concerning the
project work hereby created and / or touching this presents, arising out of or in
relation to anything contained herein shall be referred to arbitration to be held
at Chennai, under the provisions of Arbitration and Conciliation Act, 1996
(inforce from time to time). The arbitration panel shall consist of three
arbitrators, one arbitrator shall be appointed by each party and the arbitrators
so appointed shall appoint the presiding arbitrator. The parties here to shall
duly observe any interim award/s or direction/s of the arbitration tribunal and
the award in pursuance to arbitration shall be final and binding on the parties
hereto. The arbitration proceedings shall be in English language.”

Arguments

The Appellant-Contractor challenged the High Court’s order before the Supreme Court. During the proceedings, both parties agreed to have their disputes adjudicated under the Arbitration & Conciliation Act, 1996, by a Court-appointed Sole Arbitrator.

The core arguments can be summarized as follows:

• Appellant’s Submission:
  • The Appellant initially sought to have the dispute resolved under the MSMED Act through the Facilitation Council, Pune.
  • The Appellant argued that the MSMED Act should have precedence due to Section 24, which gives it overriding effect.
• Respondent’s Submission:
  • The Respondent argued for the enforcement of the arbitration clause in the Development Agreement, which stipulated a three-member tribunal.
  • The Respondent contended that the MSMED Act does not provide for the adjudication of counter-claims, which they had raised against the Appellant.
  • The Respondent argued that the agreement between the parties was to have all disputes resolved under the Arbitration and Conciliation Act, 1996.

Innovativeness of the argument: The Appellant’s argument to apply the MSMED Act was innovative. However, the Respondent’s argument that the MSMED Act does not provide for counter-claims was crucial in the court’s decision.

Issues Framed by the Supreme Court

The Supreme Court did not explicitly frame issues in this order. However, the main issue before the court was:

• Whether the arbitration clause in the Development Agreement should be superseded by the MSMED Act or by a mutual agreement to appoint a sole arbitrator.

Treatment of the Issue by the Court

Authorities

The Supreme Court did not explicitly cite any case laws or legal provisions in its order. However, the court considered the following:

• Arbitration and Conciliation Act, 1996: The court considered the provisions of this Act, particularly Section 11, which deals with the appointment of arbitrators.
• Micro, Small and Medium Enterprises Development Act, 2006 (MSMED Act): The court considered Sections 15 to 18 and Section 24 of the MSMED Act, which relate to dispute resolution and the overriding effect of the Act.
• Clause 20 of the Development Agreement: The court considered the arbitration clause in the agreement, which stipulated a three-member arbitration tribunal.

Judgment

What weighed in the mind of the Court?

The primary factor that weighed in the mind of the Court was the mutual agreement of both parties to have their disputes resolved by a sole arbitrator appointed by the Court. The Court’s decision was driven by the need to facilitate an efficient and speedy resolution of the dispute, rather than strictly adhering to the originally agreed upon three-member arbitration panel. The Court emphasized the importance of party autonomy in choosing their dispute resolution mechanism, especially when both parties agreed to modify their initial agreement. The Court also considered the practical aspects of resolving the dispute, given the counter-claims involved and the limitations of the MSMED Act in handling such claims.

Fact:Law Ratio:

The Court’s decision was primarily driven by the mutual agreement of the parties to supersede the original arbitration clause and resolve their disputes through a sole arbitrator. The Court’s reasoning was based on the principle of party autonomy and the need for efficient dispute resolution.

The Supreme Court, in its judgment, did not delve into a detailed analysis of the legal precedents or philosophical principles. The primary focus was on the mutual agreement of the parties to supersede the original arbitration clause. The Court’s decision was based on the principle of party autonomy and the need for efficient dispute resolution. The Court did not consider any alternative interpretations or reject any specific legal points. The decision was reached based on the agreement of the parties and the practical need for a sole arbitrator to resolve the dispute.

The decision was delivered by a two-judge bench, with no dissenting opinions. The Court’s reasoning was clear and concise, focusing on the mutual agreement of the parties and the practical aspects of resolving the dispute. The Court’s decision to appoint a sole arbitrator has implications for future cases, particularly where parties mutually agree to modify the terms of their arbitration agreements.

The Court did not introduce any new doctrines or legal principles. The decision was based on the existing legal framework and the specific circumstances of the case.

Key Takeaways

• Parties can mutually agree to modify the terms of their arbitration agreements, even after a dispute has arisen.
• The Supreme Court can appoint a sole arbitrator to resolve disputes if both parties agree, even if the original agreement specified a different arbitration process.
• The MSMED Act’s dispute resolution mechanism may not apply if counter-claims are involved and parties agree to resolve disputes under the Arbitration and Conciliation Act, 1996.
• The decision emphasizes the importance of party autonomy in choosing dispute resolution mechanisms.

The judgment could impact future cases by highlighting the flexibility in arbitration proceedings when both parties agree to modify their original agreements. It also clarifies the limitations of the MSMED Act in cases involving counter-claims, where arbitration under the 1996 Act may be preferred.

Directions

The Supreme Court gave the following directions:

• Justice K. Kannan, former Judge of the Madras High Court, was appointed as the Sole Arbitrator.
• The arbitration will be conducted in accordance with the Arbitration and Conciliation Act, 1996.
• The arbitral proceedings will be conducted by the Madras High Court Arbitration Centre in accordance with its Rules.
• The appointment of the Sole Arbitrator is subject to declarations under Section 12 of the Arbitration and Conciliation Act, 1996.
• The Sole Arbitrator will be paid fees as per the Schedule of the Madras High Court Arbitration Centre (Administrative Cost and Arbitrators’ Fees) Rules, 2017.
• The Application filed by the Appellant-Contractor under the MSMED Act will stand closed by the Facilitation Council, Pune.

Specific Amendments Analysis

There is no specific amendment discussed in the judgment.

Development of Law

The ratio decidendi of this case is that parties can mutually agree to supersede the arbitration clause in their agreement and agree to have their disputes resolved by a sole arbitrator appointed by the court. This decision reinforces the principle of party autonomy in arbitration and highlights the court’s role in facilitating efficient dispute resolution. There is no change in the previous positions of law but it clarifies the position of law when the parties agree to supersede the arbitration clause.

Conclusion

In the case of GR Green Life Energy Pvt. Ltd. vs. Leitwind Shriram Manufacturing Pvt. Ltd., the Supreme Court appointed a sole arbitrator, superseding the original arbitration clause that stipulated a three-member tribunal. This decision was based on the mutual agreement of both parties to modify their initial agreement. The Court’s decision emphasizes party autonomy and the need for efficient dispute resolution. The MSMED Act was not applied due to the presence of counter-claims and the parties’ agreement to resolve the dispute under the Arbitration and Conciliation Act, 1996. The judgment clarifies the position of law when the parties agree to supersede the arbitration clause.