Supreme Court Clarifies Arbitrator Appointment in Railway Contracts: Union of India vs. Pradeep Vinod Construction Company (2019)

Date of the Judgment: 14 November 2019

Citation: 2019 INSC 935

Judges: R. Banumathi, J., A.S. Bopanna, J., Hrishikesh Roy, J.

Can a High Court appoint an independent arbitrator for disputes arising from railway contracts, overriding the contractually agreed upon mechanism of appointing railway officers as arbitrators? The Supreme Court of India addressed this question in a recent judgment, clarifying the procedure for appointing arbitrators in railway contracts. The court emphasized that when a contract specifies the appointment of named arbitrators (in this case, railway officers), the appointment should adhere to the terms of the agreement. This judgment settles a conflict between the contractual obligations and the High Court’s power to appoint arbitrators under Section 11 of the Arbitration and Conciliation Act, 1996.

This judgment was delivered by a three-judge bench of the Supreme Court of India, consisting of Justice R. Banumathi, Justice A.S. Bopanna, and Justice Hrishikesh Roy. The judgment was authored by Justice R. Banumathi.

Case Background

The case involves two separate appeals filed by the Union of India (Railways) against two different contractors. Both cases concern disputes arising from construction contracts awarded by the Northern Railways.

In the first case (Civil Appeal No. 6400 of 2016), the Northern Railways awarded a contract to Pradeep Vinod Construction Company on 14 July 2010 for miscellaneous civil engineering works. The work was completed on 31 March 2012, and the Railways claimed final payments were made on 6 May 2014. On the same day, a supplementary agreement was signed, stating full accord and satisfaction. However, on 5 May 2014, the contractor alleged that they were forced to sign the final bill without protest and invoked the arbitration clause on 5 May 2014. The Railways rejected the arbitration claim on 25 July 2014, citing the supplementary agreement. The contractor then filed an arbitration petition in the High Court.

In the second case (Civil Appeal No. 6420 of 2016), the Northern Railways entered into an agreement with M/S. BM Construction Company on 17 January 2012 for the construction of a road over bridge. The work was completed on 3 August 2013. The Railways stated that the final payment was made on 29 January 2014, and a supplementary agreement was signed on 1 March 2014, acknowledging full settlement. The contractor raised claims on 15 January 2014 and requested arbitration. The Railways rejected this, stating the claims were “excepted matters.” The contractor also sent a “No Claim” letter on 28 August 2014, requesting the release of their security deposit. The contractor then filed an arbitration petition in the High Court.

Timeline

Course of Proceedings

In both cases, the contractors filed arbitration petitions under Section 11 of the Arbitration and Conciliation Act, 1996, in the High Court of Delhi after the Railways rejected their requests for arbitration. In the case of Pradeep Vinod Construction Company, the High Court appointed an independent arbitrator, stating that the issue of whether the discharge certificate and supplementary agreement were signed under duress needed to be examined by the arbitrator. The High Court also held that the Railways had forfeited their right to appoint an arbitrator under Clause 64 of the General Conditions of Contract (GCC) by failing to do so after the invocation of the arbitration clause by the contractor.
In the case of M/S. BM Construction Company, the High Court appointed an independent arbitrator and directed that the arbitration take place under the aegis of the Delhi International Arbitration Centre, holding that the issue of whether the disputes were “excepted matters” could be examined by the arbitrator. The Railways appealed both decisions.

Legal Framework

The primary legal framework in this case is the Arbitration and Conciliation Act, 1996, specifically Section 11, which deals with the appointment of arbitrators. The case also relies heavily on Clause 64 of the General Conditions of Contract (GCC), which outlines the procedure for arbitration in railway contracts.

Clause 64 of the GCC states:

“64. (1) (i) In the event of any dispute or difference between the parties hereto as to the construction or operation of this contract, or the respective rights and liabilities of the parties on any matter in question, dispute or difference on any account or as to the withholding by the Railway of any certificate to which the contractor may claim to be entitled to, or if the Railway fails to make a decision within 120 days, then and in any such case, but except in any of the “excepted matters” referred to in Clause 63 of these Conditions, the contractor, after 120 days but within 180 days of his presenting his final claim on disputed matters shall demand in writing that the dispute or difference be referred to arbitration.”

Clause 64(3) of the GCC further specifies the appointment of arbitrators:

“64. (3) (a)(i) In cases where the total value of all claims in question added together does not exceed Rs. 25,00,000 (Rupees twenty five lakh only), the Arbitral Tribunal shall consist of a Sole Arbitrator who shall be a Gazetted Officer of Railway not below JA Grade, nominated by the General Manager. The sole arbitrator shall be appointed within 60 days from the day when a written and valid demand for arbitration is received by GM.”

“64. (3) (a)(ii) In cases not covered by the Clause 64(3)(a) (i), the Arbitral Tribunal shall consist of a Panel of three Gazetted Railway Officers not below JA Grade or 2 Railway Gazetted Officers not below JA Grade and a retired Railway Officer, retired not below the rank of SAG Officer, as the arbitrators. For this purpose, the Railway will send a panel of more than 3 names of Gazetted Railway Officers of one or more departments of the Railway which may also include the name(s) of retired Railway Officer(s) empanelled to work as Railway Arbitrator to the contractor within 60 days from the day when a written and valid demand for arbitration is received by the GM. Contractor will be asked to suggest to General Manager at least 2 names out of the panel for appointment as contractor’s nominee within 30 days from the date of dispatch of the request by Railway. The General Manager shall appoint at least one out of them as the contractor’s nominee and will, also simultaneously appoint the balance number of arbitrators either from the panel or from outside the panel, duly indicating the ‘presiding arbitrator’ from amongst the 3 arbitrators so appointed. GM shall complete this exercise of appointing the Arbitral Tribunal within 30 days from the receipt of the names of contractor’s nominees.”

The court also considered the effect of the Amendment Act, 2015 to the Arbitration and Conciliation Act, 1996, which came into force on 23 October 2015. The court noted that the amendment would not apply to arbitral proceedings commenced before this date unless the parties agreed otherwise, as per Section 21 of the Act.

Arguments

Appellant (Union of India – Railways) Arguments:

• The appellant argued that since the request for the appointment of an arbitrator was made before the Amendment Act, 2015, the proceedings should be governed by the unamended Arbitration and Conciliation Act, 1996.
• The appellant contended that the High Court erred in appointing an independent arbitrator, as the contract (Clause 64 of GCC) specifies that the General Manager of the Railways should appoint railway officers as arbitrators.
• The appellant submitted that the disputes were not arbitrable because the contractors had signed final bills and supplementary agreements, acknowledging full and final settlement of all claims, and in one case, a “No Claim” letter was also issued.
• The appellant relied on previous Supreme Court judgments that upheld the contractual procedure for appointing arbitrators in railway contracts.

Respondent (Contractors) Arguments:

• The respondents argued that once the Railways failed to appoint an arbitrator as per the contract before the contractors filed petitions under Section 11(6) of the Arbitration Act, the authority forfeited its right to appoint an arbitrator.
• The respondents contended that Section 11(6) of the Arbitration Act empowers the court to deviate from the terms of the agreement and appoint an independent arbitrator.
• The respondents claimed that the “No Claim” certificates and supplementary agreements were signed under duress and undue influence by the railway authorities.
• The respondents argued that the issue of whether the “No Claim” certificates and supplementary agreements were valid could be adjudicated by the arbitrator and hence, it cannot be said to be an “excepted matter”.

Issues Framed by the Supreme Court

The Supreme Court did not explicitly frame issues in a separate section, but the core issues that the court addressed can be summarized as follows:

1. Whether the High Court was justified in appointing an independent arbitrator, ignoring the contractual clause (Clause 64 of GCC) that specifies the appointment of railway officers as arbitrators.
2. Whether the Amendment Act, 2015 to the Arbitration and Conciliation Act, 1996 applies to the present case.
3. Whether the disputes are not arbitrable due to the contractors signing final bills, supplementary agreements, and “No Claim” certificates.

Treatment of the Issue by the Court

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

Authorities

The Supreme Court relied on the following cases and legal provisions:

Judgment

The Supreme Court allowed the appeals filed by the Union of India (Railways) and set aside the judgments of the High Court of Delhi, which had appointed independent arbitrators. The Supreme Court directed the Railways to appoint arbitrators in terms of Clause 64(3) of the General Conditions of Contract (GCC) within one month from the date of the judgment. The court also directed the contractors to file their statement of claim within six weeks of the communication of the appointment of the arbitrator, and the Railways to file their reply within four weeks thereafter. The arbitrator was directed to proceed with the matter in accordance with the law and decide the claims expeditiously, preferably within four months.

How each authority was viewed by the Court:

• Union of India v. M.P. Gupta (2004) 10 SCC 504*: The court followed this authority to emphasize that the appointment of arbitrators should be in terms of the contract when the agreement specifies named arbitrators.
• Union of India v. V.S. Engineering (P) Ltd. (2006) 13 SCC 240*: The court relied on this authority to reiterate that the Arbitral Tribunal has to be constituted as per the General Conditions of Contract, and the High Court should not interfere under Section 11 of the Act.
• Union of India v. Singh Builders Syndicate (2009) 4 SCC 523*: The court used this authority to support its view that the appointment of arbitrators should be in terms of the contract.
• S.P. Singla Pvt. Ltd. v. State of Himachal Pradesh (2019) 2 SCC 488*: The court used this authority to determine that the Amendment Act, 2015 shall not apply to arbitral proceedings commenced before the amendment came into force, unless the parties otherwise agree.
• Union of India v. Parmar Construction Company 2019 (5) SCALE 453*: The court heavily relied on this authority to set aside the appointment of the independent arbitrator and direct the appointment of an arbitrator as per Clause 64(3) of the agreement.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the principle of upholding contractual agreements, especially in the context of arbitration clauses. The court emphasized that when parties have agreed to a specific mechanism for appointing arbitrators, that mechanism should be respected and followed. The court also considered the need for consistency in the application of arbitration laws and the importance of adhering to established legal precedents. The court also noted that the Amendment Act, 2015, did not apply to the present case, as the arbitration proceedings had commenced before the amendment came into force.

The court’s reasoning can be illustrated through the following logical flow:

The court considered the argument that the “No Claim” certificates and supplementary agreements were signed under duress but did not make a finding on it. Instead, the court left it to the arbitrator to decide on the validity of these documents. The court also did not accept the argument that the Railways had forfeited their right to appoint an arbitrator by not doing so before the contractor approached the court. The court held that the High Court was not justified in appointing an independent arbitrator, ignoring the contractual clause.

The court’s decision was based on the following key reasons:

• The principle of party autonomy in arbitration, which emphasizes that parties should be bound by the terms of their agreement, including the procedure for appointing arbitrators.
• The need to maintain consistency in the application of arbitration laws and to avoid deviating from established legal precedents.
• The specific provisions of Clause 64 of the GCC, which clearly specify the procedure for appointing arbitrators in railway contracts.
• The court also noted that the Amendment Act, 2015, did not apply to the present case, as the arbitration proceedings had commenced before the amendment came into force.

The Supreme Court quoted the following from the judgment:

“When the agreement specifically provides for appointment of named arbitrators, the appointment should be in terms of the agreement.”

“The High Court, in our view, was not right in appointing an independent arbitrator ignoring Clause 64 of the General Conditions of Contract.”

“It is for the arbitrator to consider the claim of the respondent(s) and the stand of the appellant-railways. This contention raised by the parties are left open to be raised before the arbitrator.”

Key Takeaways

• In railway contracts, when the arbitration clause specifies the appointment of railway officers as arbitrators, the appointment should be made as per the contract.
• The High Court cannot appoint an independent arbitrator, ignoring the contractual procedure for the appointment of arbitrators.
• The Amendment Act, 2015 to the Arbitration and Conciliation Act, 1996 does not apply to arbitration proceedings commenced before the amendment came into force, unless the parties agree otherwise.
• The issue of whether “No Claim” certificates and supplementary agreements were signed under duress is to be decided by the arbitrator.
• This judgment reinforces the principle of party autonomy in arbitration and the need to adhere to contractual terms.

Directions

The Supreme Court directed the following:

• The appellant (Railways) is directed to appoint the arbitrator in terms of Clause 64(3) of the agreement within a period of one month from the date of the judgment.
• The respondent (contractors) are directed to file their statement of claim within six weeks of the communication of the appointment of the arbitrator.
• The appellant (Railways) are directed to file their reply within four weeks thereafter.
• The arbitrator shall proceed with the matter in accordance with law and decide the claim after affording sufficient opportunity of hearing to both parties expeditiously preferably within a period of four months.

Development of Law

The ratio decidendi of this case is that when an arbitration agreement specifies the appointment of named arbitrators, the appointment must be made in accordance with the agreement. This judgment reinforces the principle of party autonomy in arbitration and the need to adhere to contractual terms. The Supreme Court reiterated the position of law laid down in the previous judgments of the Supreme Court in Union of India v. M.P. Gupta (2004) 10 SCC 504, Union of India v. V.S. Engineering (P) Ltd. (2006) 13 SCC 240, Union of India v. Singh Builders Syndicate (2009) 4 SCC 523 and Union of India v. Parmar Construction Company 2019 (5) SCALE 453.

Conclusion

The Supreme Court’s judgment in Union of India vs. Pradeep Vinod Construction Company clarifies the procedure for appointing arbitrators in railway contracts. It emphasizes that when a contract specifies the appointment of named arbitrators, the appointment should be made as per the contract, and the High Court cannot appoint an independent arbitrator, ignoring the contractual procedure. The court also clarified that the Amendment Act, 2015, does not apply to arbitration proceedings commenced before the amendment came into force. This decision reinforces the importance of adhering to contractual agreements and established legal precedents in arbitration matters.