Supreme Court Clarifies Applicability of Arbitration Acts in Bihar Works Contracts: State of Bihar vs. Brahmaputra Infrastructure Ltd. (2018)

Date of the Judgment: 22 March 2018

Citation: 2018 INSC 210

Judges: Adarsh Kumar Goel J., Rohinton Fali Nariman J., Uday Umesh Lalit J.

Can a state law override a central law when it comes to arbitration, especially when the parties have agreed to be governed by the central law? The Supreme Court of India addressed this question in a recent case concerning a dispute arising from a works contract in Bihar. The core issue revolved around whether the Bihar Public Works Contracts Arbitration Tribunal Act, 2008 (State Act) would apply, or the Arbitration and Conciliation Act, 1996 (Central Act) would apply, given that the parties had an arbitration agreement stipulating the applicability of the Central Act. The bench, consisting of Justices Adarsh Kumar Goel, Rohinton Fali Nariman, and Uday Umesh Lalit, unanimously decided the matter.

Case Background

The case involves a dispute between the State of Bihar and M/S. Brahmaputra Infrastructure Limited and M/S. Supreme Brahmaputra (JV) concerning works contracts. The agreements, dated 22nd June 2012, contained an arbitration clause that explicitly stated that the arbitration would be conducted according to the provisions of the Arbitration and Conciliation Act, 1996 (Central Act). Despite this, the State of Bihar argued that the Bihar Public Works Contracts Arbitration Tribunal Act, 2008 (State Act) should apply, which would exclude the application of the Central Act. The State of Bihar was aggrieved by the appointment of an arbitrator under Section 11(6) of the Central Act.

Timeline

Course of Proceedings

The State of Bihar challenged the appointment of an arbitrator under Section 11(6) of the Arbitration and Conciliation Act, 1996 (Central Act). The State argued that the Bihar Public Works Contracts Arbitration Tribunal Act, 2008 (State Act) should apply, which would exclude the application of the Central Act. The matter reached the Supreme Court of India after the State was aggrieved by the appointment of the arbitrator under the Central Act.

Legal Framework

The Supreme Court examined the relevant provisions of both the Central Act and the State Act. Key provisions of the Bihar Public Works Contracts Arbitration Tribunal Act, 2008 (State Act) included:

• Section 8: This section states that the State Act is in addition to and supplemental to the Arbitration and Conciliation Act, 1996 (Central Act). It also mentions that in case of any conflict, the Central Act would prevail.
  
  “8. Act to be in addition to Arbitration & Conciliation Act, 1996. Notwithstanding anything contained in this Act, and of the provisions shall be in addition to and supplemental to Arbitration & Conciliation Act, 1996 and in case any of the provision contained herein is construed to be in conflict with Arbitration Act, then the latter Act shall prevail to the extent of conflict.”
• Section 9: This section outlines the process for referring a dispute to the Tribunal for arbitration, irrespective of whether the contract contains an arbitration clause. It also specifies the timeline for making an award.
  
  “9. Reference to Tribunal and making of award.- (1) Where any dispute arises between the parties to the contract, either party shall, irrespective of whether such contract contains an arbitration clause or not refer, within one year from the date on which the dispute has arisen, such dispute in writing to the Tribunal for arbitration in such form and accompanied by such documents or other evidence and by such fees, as may be prescribed.”
• Section 22: This section gives the State Act an overriding effect, stating that any dispute as defined in the Act shall be regulated under the provisions of the State Act, regardless of any other law, rule, or contract agreement.
  
  “22. Overriding effect of this Act. Notwithstanding any thing contained in any other Law, Rule, Order, Scheme, or Contract Agreement entered into before or after commencement of this Act, any dispute as defined in Section 2 (e) of this Act shall be regulated under the provisions of this Act, Rules and Regulations framed thereunder, and absence of arbitration clause in any contract agreement shall not have effect excluding any dispute from the purview of this Act.”
• Section 4(3)(b): This section discusses the terms and conditions of service of the Chairman and other members of the Tribunal. It states that they shall hold office at the pleasure of the Government and in case of premature termination, they shall be entitled to three months pay & allowances in lieu of compensation.
  
  “Section 4. Terms and conditions of service of the Chairman and other members of Tribunal.- (3) (b) The Chairman and any other member shall hold the office at the pleasure of the Government, provided that; in case of premature termination; they shall be entitled to three months pay & allowances in lieu of compensation.”

The Court also noted that the arbitration agreement between the parties specified that the Arbitration and Conciliation Act, 1996 (Central Act) would apply to any arbitration proceedings.

Arguments

Arguments by the State of Bihar:

• The State of Bihar argued that the Bihar Public Works Contracts Arbitration Tribunal Act, 2008 (State Act) should apply to the dispute, despite the arbitration agreement specifying the applicability of the Arbitration and Conciliation Act, 1996 (Central Act).
• The State contended that Section 22 of the State Act gives it an overriding effect, meaning that the State Act should govern all disputes related to public works contracts in Bihar, regardless of any agreement to the contrary.
• The State also raised an objection of neutrality, suggesting that the appointed arbitrator might not be impartial.

Arguments by M/S. Brahmaputra Infrastructure Limited and M/S. Supreme Brahmaputra (JV):

• The respondents argued that the arbitration agreement between the parties explicitly stated that the Arbitration and Conciliation Act, 1996 (Central Act) would apply.
• They contended that Section 8 of the State Act clarifies that it is supplemental to the Central Act and that the Central Act would prevail in case of any conflict.
• The respondents also argued that Section 4(3)(b) of the State Act, which allows the government to terminate the tenure of the Chairman and members of the Tribunal at its pleasure, is unconstitutional.

Issues Framed by the Supreme Court

The Supreme Court did not explicitly frame issues in a separate section. However, the primary issue before the court was:

1. Whether the Bihar Public Works Contracts Arbitration Tribunal Act, 2008 (State Act) would apply to the dispute, or the Arbitration and Conciliation Act, 1996 (Central Act) would apply, given the existence of an arbitration agreement stipulating the applicability of the Central Act.
2. Whether Section 4(3)(b) of the Bihar Public Works Contracts Arbitration Tribunal Act, 2008 (State Act) is unconstitutional.

Treatment of the Issue by the Court

The following table demonstrates how the Court decided the issues:

Authorities

The Supreme Court did not explicitly cite any previous cases or books in its judgment. However, the Court considered the following legal provisions:

• Section 8, Bihar Public Works Contracts Arbitration Tribunal Act, 2008: This section states that the State Act is supplemental to the Central Act and that the Central Act would prevail in case of conflict.
• Section 9, Bihar Public Works Contracts Arbitration Tribunal Act, 2008: This section outlines the process for referring a dispute to the Tribunal for arbitration.
• Section 22, Bihar Public Works Contracts Arbitration Tribunal Act, 2008: This section gives the State Act an overriding effect over other laws and agreements.
• Section 4(3)(b), Bihar Public Works Contracts Arbitration Tribunal Act, 2008: This section allows the government to terminate the tenure of the Chairman and members of the Tribunal at its pleasure.
• Arbitration and Conciliation Act, 1996 (Central Act): The Central Act was considered as the primary law governing arbitration proceedings as per the agreement between the parties.
• Article 14 of the Constitution of India: The Court considered the provision of equality before law while declaring Section 4(3)(b) of the State Act as unconstitutional.

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 Section 8 of the Bihar Public Works Contracts Arbitration Tribunal Act, 2008* clarifies that the State Act is supplemental to the Central Act and that the Central Act would prevail in case of any conflict.
• The Court noted that Section 22 of the Bihar Public Works Contracts Arbitration Tribunal Act, 2008* which gives it an overriding effect, does not override the arbitration agreement specifying the applicability of the Central Act.
• The Court declared Section 4(3)(b) of the Bihar Public Works Contracts Arbitration Tribunal Act, 2008* as unconstitutional, as it allows the government to terminate the tenure of the Chairman and members of the Tribunal at its pleasure, which is inconsistent with the constitutional scheme and rule of law.
• The Court upheld the applicability of the Arbitration and Conciliation Act, 1996* as per the arbitration agreement between the parties.
• The Court relied on Article 14 of the Constitution of India* to declare Section 4(3)(b) of the State Act unconstitutional.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the presence of a valid arbitration agreement between the parties that explicitly stipulated the application of the Arbitration and Conciliation Act, 1996 (Central Act). The Court also emphasized that Section 8 of the Bihar Public Works Contracts Arbitration Tribunal Act, 2008 (State Act) makes it supplemental to the Central Act and that the Central Act would prevail in case of conflict. Furthermore, the Court was concerned with the constitutional validity of Section 4(3)(b) of the State Act, which allowed the government to terminate the tenure of Tribunal members at its pleasure, as it infringed upon the principles of impartiality and independence expected from a quasi-judicial body. The court also considered the neutrality of the arbitrator appointed.

Logical Reasoning:

The Court’s reasoning was based on the principle that the arbitration agreement between the parties should be respected. The Court also considered the constitutional principle of equality before the law and the need for an independent and impartial judiciary. The Court rejected the State’s argument that Section 22 of the State Act gave it an overriding effect, as it would undermine the sanctity of contracts and the parties’ autonomy to choose the applicable law. The Court also emphasized that a provision allowing the government to terminate the tenure of the Chairman and members of the Tribunal at its pleasure would interfere directly with the impartiality and independence expected from such members.

The Court stated: “The scheme of Sections 8, 9 and 22 of the State Act shows that in the absence of an agreement stipulating the applicability of the Central Act, the State Act applies to works contracts. Since in the present cases, an arbitration agreement exists and stipulates applicability of the Central Act, the State Act will not apply.”

The Court also noted: “Termination of the said tenure cannot be at pleasure within the term stipulated as the arbitration tribunal has quasi judicial functions to perform. Any termination of the service of such member by a party to the dispute would interfere directly with the impartiality and independence expected from such member.”

The Court further added: “The said provision is, thus, manifestly arbitrary and contrary to the Rule of Law.”

The Court did not consider any alternative interpretations of the legal provisions. The decision was unanimous, with all three judges agreeing on the outcome and reasoning.

Key Takeaways

• When an arbitration agreement exists, specifying the applicability of the Arbitration and Conciliation Act, 1996 (Central Act), the Central Act will generally apply, even if a state law exists that could potentially govern the dispute.
• State laws that are supplemental to the Central Act should not be interpreted to override the Central Act when there is a clear agreement between the parties.
• Provisions in state laws that allow the government to terminate the tenure of members of quasi-judicial bodies at its pleasure are likely to be considered unconstitutional, as they undermine the impartiality and independence of the judiciary.
• The parties are free to choose the procedure and the law that would govern the arbitration proceedings.

Directions

The Court directed that it would be open to the State of Bihar to move the High Court for a change of the arbitrator if a case for lack of neutrality is made out.

Development of Law

The ratio decidendi of this case is that when parties have explicitly agreed to be governed by the Arbitration and Conciliation Act, 1996 (Central Act), that agreement will be upheld, and the Central Act will apply, even if there is a state law that might otherwise apply. This clarifies the relationship between the Central Act and the Bihar Public Works Contracts Arbitration Tribunal Act, 2008 (State Act) in cases where an arbitration agreement exists. This case also establishes that any law that allows for arbitrary termination of members of a quasi-judicial body is unconstitutional. There is no change in the previous positions of law.

Conclusion

In conclusion, the Supreme Court ruled that the Arbitration and Conciliation Act, 1996 (Central Act) would apply to the dispute between the State of Bihar and M/S. Brahmaputra Infrastructure Limited and M/S. Supreme Brahmaputra (JV), as the parties had explicitly agreed to it in their arbitration agreement. The Court also declared Section 4(3)(b) of the Bihar Public Works Contracts Arbitration Tribunal Act, 2008 (State Act) unconstitutional. This judgment clarifies the applicability of arbitration laws in cases where there is an agreement between the parties and reinforces the importance of judicial independence.

Category

Parent Category: Arbitration Law

Child Categories:

• Arbitration and Conciliation Act, 1996
• Bihar Public Works Contracts Arbitration Tribunal Act, 2008
• Section 8, Bihar Public Works Contracts Arbitration Tribunal Act, 2008
• Section 22, Bihar Public Works Contracts Arbitration Tribunal Act, 2008
• Section 4(3)(b), Bihar Public Works Contracts Arbitration Tribunal Act, 2008
• Article 14, Constitution of India

FAQ

Q: What is the main issue in this case?

A: The main issue was whether the Arbitration and Conciliation Act, 1996 (Central Act) or the Bihar Public Works Contracts Arbitration Tribunal Act, 2008 (State Act) would apply to a dispute arising from a works contract in Bihar, where the parties had an arbitration agreement specifying the applicability of the Central Act.

Q: What did the Supreme Court decide?

A: The Supreme Court decided that the Arbitration and Conciliation Act, 1996 (Central Act) would apply, as the parties had explicitly agreed to it in their arbitration agreement. The Court also declared Section 4(3)(b) of the Bihar Public Works Contracts Arbitration Tribunal Act, 2008 (State Act) unconstitutional.

Q: Why did the Court declare Section 4(3)(b) of the State Act unconstitutional?

A: The Court declared Section 4(3)(b) unconstitutional because it allowed the government to terminate the tenure of the Chairman and members of the Tribunal at its pleasure, which is inconsistent with the constitutional scheme and the rule of law, as it interferes with the impartiality and independence expected from such members.

Q: What does this judgment mean for future arbitration cases in Bihar?

A: This judgment clarifies that when parties have an arbitration agreement specifying the applicability of the Central Act, that agreement will generally be upheld, and the Central Act will apply. It also means that any provision in a state law that allows for arbitrary termination of members of a quasi-judicial body is likely to be considered unconstitutional.

Q: Can the State of Bihar change the arbitrator?

A: Yes, the Supreme Court allowed the State of Bihar to move the High Court for a change of the arbitrator if a case for lack of neutrality is made out.