Arbitration Process: Supreme Court Appoints New Arbitrator After Setting Aside Ex-Parte Award in M/s. Narinder Singh and Sons vs. Union of India (18 November 2021)

Introduction

Date of the Judgment: 18 November 2021
Citation: Not Available
Judges: M.R. Shah, J. and Sanjiv Khanna, J.
Can an arbitral award be set aside if the arbitrator proceeds with undue haste, thereby denying a party a fair opportunity to present their case? The Supreme Court of India recently addressed this question in a dispute between M/s. Narinder Singh and Sons and the Union of India. The court found that the arbitrator had indeed acted with undue haste, violating principles of natural justice, and thus set aside the award, appointing a new arbitrator to resolve the matter. The judgment was delivered by a two-judge bench comprising of Justice M.R. Shah and Justice Sanjiv Khanna.

Case Background

In 1993, M/s. Narinder Singh and Sons (the appellant) was awarded a tender by the Northern Railway (the respondent) for additional washing line at Jammu Tawi Railway Station. Disputes arose, and the respondent terminated the contract in 1996, citing non-performance by the appellant. The appellant, however, alleged that the respondent had modified the original work and changed the scope of work several times, causing the breach.

Timeline:

Course of Proceedings

Initially, the appellant invoked the arbitration clause, and an arbitrator was appointed by the General Manager, Northern Railways. The appellant then approached the District Court for the termination of the mandate of the appointed arbitrator and substitution with an independent arbitrator. The District Judge, Gurdaspur, appointed Mr. Justice A.L. Bahri (Retd.) as the sole arbitrator in 2006. However, the High Court set aside this appointment, stating that the appointment could only be done by the Chief Justice or a judge nominated by him. Subsequently, in 2010, the Chief Justice of the Punjab and Haryana High Court re-appointed Mr. Justice A.L. Bahri (Retd.) as the arbitrator. The arbitrator then passed an ex-parte award against the respondent in 2010. The respondent’s objections under Section 34 of the Arbitration and Conciliation Act, 1996, were dismissed by the Additional District Judge, Gurdaspur. However, the Punjab and Haryana High Court allowed the respondent’s appeal under Section 37 of the Act, setting aside the award primarily on the grounds of violation of natural justice and undue haste by the arbitrator. The High Court also held that the arbitrator could not have awarded pre-reference and pendente lite interest.

Legal Framework

The Supreme Court considered the following provisions of the Arbitration and Conciliation Act, 1996:

• Section 18: This section mandates that both parties shall be treated with equality and each party shall be given a full opportunity to present his case.
• Section 19: This section states that the arbitral tribunal is not bound by the Code of Civil Procedure, 1908 or the Indian Evidence Act, 1872, and may conduct proceedings as it considers appropriate, in the absence of an agreement between the parties.
• Section 34(2)(a)(iii): This clause allows an arbitral award to be set aside if the party making the application was not given proper notice of the appointment of an arbitrator or of the arbitral proceedings or was otherwise unable to present his case.
• Section 34(2)(b)(ii): This clause allows an arbitral award to be set aside if the court finds that the award is in conflict with the public policy of India.
• Section 43(4): This section allows for the exclusion of time spent in arbitration proceedings and related litigation when determining limitation periods.
• Section 31(7): This section deals with the award of interest in arbitral proceedings.

Arguments

Appellant’s Submissions:

• The appellant argued that the High Court erred in setting aside the arbitral award and that the arbitrator had followed due procedure.
• They contended that the respondent was given sufficient opportunity to present their case but failed to do so.

Respondent’s Submissions:

• The respondent argued that the arbitrator had proceeded with undue haste and had not provided them with a fair opportunity to present their case, thereby violating principles of natural justice.
• They contended that the arbitrator had closed their evidence and had not taken their affidavit on record due to non-payment of costs, which was a denial of justice.
• They argued that the arbitrator had wrongly awarded interest, both pre-reference and pendente lite, which was not permissible under the contract.

Issues Framed by the Supreme Court

The Supreme Court did not explicitly frame issues in a separate section but addressed the following key issues:

1. Whether the High Court was correct in setting aside the arbitral award on the grounds of violation of principles of natural justice and undue haste by the arbitrator.
2. Whether the respondent was given a fair opportunity to present their case before the arbitrator.
3. Whether the matter should be remanded back to the arbitrator or whether a new arbitrator should be appointed.

Treatment of the Issue by the Court

The following table demonstrates as to how the Court decided the issues

Authorities

The Supreme Court considered the following legal provisions:

• Section 18 of the Arbitration and Conciliation Act, 1996: This section mandates equal treatment of parties and full opportunity to present one’s case.
• Section 19 of the Arbitration and Conciliation Act, 1996: This section states that the arbitral tribunal is not bound by the Code of Civil Procedure, 1908 or the Indian Evidence Act, 1872, and may conduct proceedings as it considers appropriate.
• Section 34(2)(a)(iii) of the Arbitration and Conciliation Act, 1996: This clause allows setting aside of an award if a party was unable to present their case.
• Section 34(2)(b)(ii) of the Arbitration and Conciliation Act, 1996: This clause allows setting aside of an award if it conflicts with the public policy of India.
• Section 31(7) of the Arbitration and Conciliation Act, 1996: This section deals with the award of interest in arbitral proceedings.

The Supreme Court did not rely on any specific case laws for its decision.

Judgment

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

• The Court held that the arbitrator had violated Section 18 of the Arbitration and Conciliation Act, 1996 by not providing a full opportunity to the respondent to present their case.
• The Court noted that while the arbitrator is not bound by CPC or the Evidence Act as per Section 19 of the Arbitration and Conciliation Act, 1996, they must still ensure a fair process.
• The Court held that the award was liable to be set aside under Section 34(2)(a)(iii) of the Arbitration and Conciliation Act, 1996 as the respondent was unable to present their case.
• The Court held that the award was in conflict with the public policy of India under Section 34(2)(b)(ii) of the Arbitration and Conciliation Act, 1996 due to violation of principles of natural justice.
• The Court noted that the arbitrator had relied upon Section 31(7) of the Arbitration and Conciliation Act, 1996 for awarding interest.

What weighed in the mind of the Court?

The Supreme Court was primarily concerned with ensuring a fair and just arbitration process. The Court emphasized that while expeditious disposal of cases is important, it should not come at the cost of denying a party a reasonable opportunity to present their case. The Court noted that the arbitrator had acted with undue haste, particularly by closing the respondent’s evidence and not allowing cross-examination of the appellant’s witness. This, in the Court’s view, amounted to a violation of the principles of natural justice and a denial of a fair hearing.

Logical Reasoning

Key Takeaways

• An arbitral award can be set aside if the arbitrator does not provide a fair opportunity to both parties to present their case.
• Arbitrators must ensure that the principles of natural justice are followed, and that undue haste does not compromise the fairness of the proceedings.
• The Supreme Court can appoint a new arbitrator if the previous arbitrator’s conduct is deemed unfair.
• The issue of pre-reference and pendente lite interest is left open for the new arbitrator to decide.

Directions

The Supreme Court appointed Mr. Justice S.N. Aggarwal (Retd.) as the new arbitrator. The Court also directed that:

• The arbitration proceedings shall continue from the stage at which the respondent was to cross-examine Paramdeep Singh (PW-1).
• The respondent would file their affidavits by way of evidence within four weeks from the date the new arbitrator enters upon reference.
• The respondent would pay 50% of the arbitration fee and expenses to the new arbitrator within one month from the date of the first hearing, and the appellant would pay its share of 50% fee on the date when the final arguments commence.

Development of Law

The ratio decidendi of this case is that an arbitral award can be set aside if the arbitrator violates the principles of natural justice and does not provide a fair opportunity to a party to present their case. This reaffirms the importance of procedural fairness in arbitration proceedings. There is no change in the previous positions of law.

Conclusion

The Supreme Court’s decision in M/s. Narinder Singh and Sons vs. Union of India highlights the importance of fairness and natural justice in arbitration proceedings. By setting aside the ex-parte award and appointing a new arbitrator, the Court ensured that both parties would receive a fair hearing. This judgment underscores that while expeditious disposal of cases is desirable, it must not come at the cost of compromising the principles of natural justice and fair opportunity.