Supreme Court Limits High Court Intervention in Arbitration Matters: Deep Industries vs. ONGC (28 November 2019)

Date of the Judgment: 28 November 2019
Citation: [Not Available in Source]
Judges: R.F. Nariman, J., Aniruddha Bose, J., V. Ramasubramanian, J.

Can a High Court interfere with an order passed in an arbitration proceeding, especially when the Arbitration and Conciliation Act, 1996, aims for minimal judicial intervention? This question was at the heart of a recent Supreme Court judgment. The Supreme Court in this case clarified the extent to which High Courts can exercise their supervisory jurisdiction under Article 227 of the Constitution in matters related to arbitration. The Court emphasized the need to respect the statutory scheme of the Arbitration Act, which promotes speedy resolution of disputes with limited judicial interference. The judgment was delivered by a three-judge bench consisting of Justice R.F. Nariman, Justice Aniruddha Bose, and Justice V. Ramasubramanian.

Case Background

M/s Deep Industries Limited (the appellant) and Oil and Natural Gas Corporation Limited (ONGC, the respondent) entered into a contract for the supply of a Mobile Air Compressor. ONGC terminated the contract on 11 October 2017, alleging that the equipment supplied was not new. The next day, ONGC blocked the appellant’s vendor code, preventing them from bidding on future contracts. On 18 October 2017, ONGC issued a show cause notice to the appellant, proposing to blacklist them for two years.

The appellant invoked the arbitration clause on 2 November 2017, challenging the termination and proposed blacklisting. A sole arbitrator was appointed on 21 December 2017. The appellant filed a claim petition on 2 February 2018, challenging the termination and seeking damages. Following this, ONGC blacklisted the appellant on 15 February 2018. The appellant then amended their claim petition and a Section 17 application to include the challenge to the blacklisting order, which was allowed by the arbitrator on 10 March 2018.

Timeline:

Course of Proceedings

ONGC filed a Section 16 application before the arbitrator, arguing that the blacklisting issue was beyond the scope of the arbitration notice. The arbitrator dismissed this application on 9 May 2018, holding that the notice included the blacklisting issue. On the same day, the arbitrator also stayed the blacklisting order under Section 17 of the Arbitration and Conciliation Act, 1996, conditional on the appellant losing the final arbitration.

The City Civil Court, Ahmedabad, upheld the arbitrator’s order on 31 May 2018, dismissing ONGC’s appeal under Section 37 of the Act. Subsequently, ONGC filed a Special Civil Application under Article 227 of the Constitution before the High Court of Gujarat at Ahmedabad. The High Court set aside the City Civil Court’s order on 25 July 2018, stating that the ban order was not related to the contract and that the arbitrator lacked jurisdiction. The High Court also held that a stay could not be granted as damages could be awarded later.

Legal Framework

The Supreme Court examined key provisions of the Arbitration and Conciliation Act, 1996.

Section 5 of the Act states:

“Notwithstanding anything contained in any other law for the time being in force, in matters governed by this Part, no judicial authority shall intervene except where so provided in this Part.”

This section emphasizes that judicial intervention in arbitration matters should be minimal and only as specifically provided in the Act.

Section 37 of the Act outlines the appealable orders:

“(1) An appeal shall lie from the following orders (and from no others) to the Court authorized by law to hear appeals from original decrees of the Court passing the order, namely:-
(a) refusing to refer the parties to arbitration under section 8;
(b) granting or refusing to grant any measure under section 9;
(c) setting aside or refusing to set aside an arbitral award under section 34.
(2) An appeal shall also lie to a Court from an order of the arbitral tribunal.-
(a) accepting the plea referred in sub-section (2) or sub-section (3) of section 16; or
(b) granting or refusing to grant an interim measure under section 17.
(3) No second appeal shall lie from an order passed in appeal under this section, but nothing in this section shall affect or take away any right to appeal to the Supreme Court.”

This section specifies the limited grounds on which appeals can be made against orders passed under the Arbitration Act, and it expressly prohibits a second appeal.

Section 29A of the Act, inserted by the Amendment Act, 2016, sets a time limit of 12 months for arbitral awards to be made. Section 34(6), also added by the same amendment, mandates that applications to set aside awards must be disposed of within one year. These provisions highlight the Act’s emphasis on speedy resolution of disputes.

Arguments

Arguments by the Appellant (M/s Deep Industries Limited):

• The High Court did not address the preliminary objection regarding the maintainability of the Article 227 petition.

• Given the non-obstante clause in Section 5 and the limited right of appeal under Section 37, a second challenge to the arbitrator’s order is impermissible.

• The Arbitration Act is a self-contained code, and second appeals are expressly prohibited under Section 37(2).

• The High Court’s observations on the merits of the case were erroneous, and “serious disputes as to jurisdiction” do not equate to a lack of jurisdiction.

• At best, the arbitrator’s decision was an error of law, which cannot be interfered with under Article 227.

Arguments by the Respondent (ONGC):

• The arbitration notice was limited to the illegal termination of the contract and did not include the two-year ban.

• The judgment in SBP & Co. vs. Patel Engineering Ltd. & Another, (2005) 8 SCC 618, applies only when an order of the Arbitral Tribunal is directly challenged under Article 226/227.

• The present case involves a challenge to the first appellate court’s order, which is subject to the High Court’s supervisory jurisdiction under Article 227.

• The High Court can exercise its power under Article 227 in cases of patent lack of jurisdiction.

• The arbitrator’s order was fundamentally flawed as it granted an injunction where damages could have been awarded.

Issues Framed by the Supreme Court

The Supreme Court addressed the following key issues:

1. Whether the High Court’s exercise of jurisdiction under Article 227 of the Constitution was justified in the context of the Arbitration and Conciliation Act, 1996.
2. Whether the High Court was correct in holding that the Arbitrator lacked the jurisdiction to deal with the issue of blacklisting of the appellant.

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 authorities:

SBP & Co. vs. Patel Engineering Ltd. & Another, (2005) 8 SCC 618 (Supreme Court): This case was referred to emphasize the object of minimizing judicial intervention in arbitration matters. The Court noted that while this case does not directly apply to the present facts, the principle of minimal intervention should be kept in mind when disposing of a petition under Article 227.

Fuerst Day Lawson Limited vs. Jindal Exports Limited, (2011) 8 SCC 333 (Supreme Court): This case was cited to support the proposition that the Arbitration Act is a self-contained code, which implies that only the procedures mentioned in the Act are permissible, thereby excluding other general laws and procedures.

Punjab Agro Industries Corporation Limited vs. Kewal Singh Dhillon, (2008) 10 SCC 128 (Supreme Court): This case was distinguished by the Court as it dealt with a non-appointment of an arbitrator, where no appeal was provided, thus justifying the High Court’s supervisory jurisdiction. In the present case, an appeal was provided under Section 37.

Nivedita Sharma vs. Cellular Operators Association of India and Others, (2011) 14 SCC 337 (Supreme Court): This case was referred to reiterate the principle that while the High Court has the power to issue writs under Article 226, it should not entertain a writ petition if an effective alternative remedy is available.

Union of India vs. M/s Varindera Const. Ltd., dated 17.09.2018, disposing of SLP (C) No. 23155/2013 (Supreme Court): This case was cited to highlight the importance of timely resolution of matters covered by arbitration awards, including first appeals under Section 37.

Tek Singh vs. Shashi Verma and Another, 2019 SCC OnLine SC 168 (Supreme Court): This case was referred to emphasize the legislative policy that revisions under Section 115 of the Civil Procedure Code are not maintainable against interlocutory orders.

Section 5, Arbitration and Conciliation Act, 1996: The Court considered this section, which contains a non-obstante clause to emphasize minimal judicial intervention in arbitration matters.

Section 37, Arbitration and Conciliation Act, 1996: The Court considered this section to emphasize the limited right of appeal under the Act.

Judgment

The Supreme Court allowed the appeal, setting aside the High Court’s judgment.

The Supreme Court also discussed how the authorities were viewed:

• SBP & Co. vs. Patel Engineering Ltd. [(2005) 8 SCC 618]*: While the case did not directly apply, the principle of minimal judicial intervention was emphasized.
• Fuerst Day Lawson Limited vs. Jindal Exports Limited [(2011) 8 SCC 333]*: The Court reiterated that the Arbitration Act is a self-contained code, limiting the applicability of general laws and procedures.
• Punjab Agro Industries Corporation Limited vs. Kewal Singh Dhillon [(2008) 10 SCC 128]*: This case was distinguished, as it dealt with a non-appointment of an arbitrator, which is different from the facts of the present case.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the need to uphold the statutory scheme of the Arbitration and Conciliation Act, 1996, which aims for minimal judicial intervention and speedy resolution of disputes. The Court emphasized that the High Court, while having constitutional powers under Article 227, must exercise these powers judiciously, especially in arbitration matters.

The Court also noted that the High Court had erred in going into the merits of the case and in overturning the arbitrator’s order on the scope of the arbitration notice and the jurisdiction of the arbitrator.

The Court’s reasoning was based on the following points:

• The Arbitration Act is a special act and a self-contained code.
• Judicial intervention should be minimal.
• The High Court should not have interfered with the arbitrator’s order unless there was a patent lack of inherent jurisdiction.
• The High Court erred in going into the merits of the case.
• The arbitrator was correct in interpreting the arbitration notice to include the blacklisting issue.

The Supreme Court quoted from the judgment in Fuerst Day Lawson Limited (supra):

“Once it is held that the Arbitration Act is a self-contained code and exhaustive, then it must also be held, using the lucid expression of Tulzapurkar,J., that it carries with it “a negative import that only ‘such acts as are mentioned in the Act are permissible to be done and acts or things not mentioned therein are not permissible to be done”.

The Court also quoted from the judgment in Tek Singh vs. Shashi Verma and Another (supra):

“A reading of this proviso will show that, after 1999, revision petitions filed under Section 115 CPC are not maintainable against interlocutory orders.”

The Court emphasized that even if the arbitrator made an error of law in granting the stay order, it was not a jurisdictional error that could be corrected under Article 227.

Key Takeaways

• High Courts should be extremely cautious while exercising jurisdiction under Article 227 in matters related to arbitration.
• Interference should be restricted to cases where there is a patent lack of inherent jurisdiction.
• The statutory scheme of the Arbitration Act promotes minimal judicial intervention and speedy resolution of disputes.
• The Arbitration Act is a self-contained code, and only the procedures mentioned in the Act are permissible.
• Errors of law made by an arbitrator are not subject to interference under Article 227.

Directions

The Supreme Court directed that the arbitration proceedings should be disposed of as expeditiously as possible, in accordance with the mandate contained in the Act.

Development of Law

The ratio decidendi of this case is that the High Court’s power under Article 227 of the Constitution to interfere with orders passed in arbitration matters is limited to cases where there is a patent lack of inherent jurisdiction. This judgment reinforces the principle of minimal judicial intervention in arbitration matters, as mandated by the Arbitration and Conciliation Act, 1996. The judgment clarifies that even if an arbitrator makes an error of law, it is not a ground for interference under Article 227. This ruling reinforces the idea that the Arbitration Act is a self-contained code, and its provisions should be strictly followed to ensure speedy resolution of disputes.

Conclusion

The Supreme Court’s judgment in M/s Deep Industries Limited vs. Oil and Natural Gas Corporation Limited & Anr. clarifies the scope of High Court intervention in arbitration matters. The Court emphasized the need to respect the statutory scheme of the Arbitration Act, which promotes minimal judicial intervention and speedy resolution of disputes. The judgment sets a precedent for High Courts to be circumspect in exercising their powers under Article 227 in arbitration cases, ensuring that the arbitral process is not unduly delayed or derailed.