Supreme Court Upholds Arbitrator’s Authority Post-Retirement in Construction Dispute (20 September 2021)

Introduction

Date of the Judgment: 20 September 2021

Citation: 2021 INSC 611

Judges: M.R. Shah, J. and A.S. Bopanna, J.

Can an arbitrator, appointed by virtue of their position, continue the arbitration process after retirement? The Supreme Court of India recently addressed this critical question in a case involving a construction dispute. The core issue revolved around whether an arbitrator’s mandate automatically ends when they retire from their position, even if the arbitration agreement doesn’t specify such a condition. This judgment clarifies the extent of an arbitrator’s authority post-retirement, impacting ongoing and future arbitration proceedings.

The Supreme Court bench, comprising Justices M.R. Shah and A.S. Bopanna, delivered the judgment. Justice M.R. Shah authored the opinion for the bench.

Case Background

M/s Laxmi Continental Construction Co. (the appellant) entered into a contract with the State of Uttar Pradesh (the respondent) on 06 February 1988 for earthwork and lining of a specific section of a project. Disputes arose during the execution of the work, leading to arbitration as per Clause 52 of their agreement. The arbitration clause stipulated that disputes would be resolved by a sole arbitrator appointed by the Chief Engineer from a list of three officers of Superintending Engineer rank or higher. The Chief Engineer appointed Shri S.S. Manocha, who was also a Chief Engineer, as the arbitrator on 31 October 1992. The arbitration proceedings commenced on 19 November 1992. The arbitrator, Shri S.S. Manocha, retired on 30 November 1995. Despite his retirement, the arbitrator continued the proceedings. The appellant filed a suit on 1996 to extend the time for the award, while the respondent filed a suit to declare the reference as inoperative, both of which were heard together. The Civil Judge extended the arbitration period by 30 days on 11 December 1997, and the arbitrator issued an award on 08 January 1998, ordering the respondent to pay Rs. 10,97,024.00 with interest. The Civil Judge upheld the award on 20 April 2001. The respondent appealed to the High Court, which set aside the award, leading to the current appeal before the Supreme Court.

Timeline

Course of Proceedings

The Civil Judge (Senior Division), Roorkee, extended the arbitration period by 30 days on 11 December 1997, overruling the respondent’s objection that the arbitrator’s mandate ended upon retirement. The arbitrator then issued an award on 08 January 1998, which the Civil Judge upheld on 20 April 2001. The High Court of Uttaranchal at Nainital overturned these decisions on 19 June 2007, stating that the arbitrator had misconducted himself by continuing the proceedings after retirement. The High Court set aside the award and the order of the Civil Judge making the award the Rule of the Court. This led to the appeal before the Supreme Court.

Legal Framework

The core of the legal framework in this case is Clause 52 of the agreement between the parties, which deals with arbitration. Clause 52 reads:

“52. ARBITRATION: All disputes or differences in respect of which the decision is not final and conclusive, shall be referred for arbitration to a sole arbitrator appointed as follows: Within thirty days of receipt of notice from the contractor of his intention to refer the dispute to arbitration the Chief Engineer shall send to the contractor a list of three officers of the rank of Superintending Engineer or higher, who have not been connected with the work under this contract. The contractor shall within fifteen days of receipt of this list select and communicate to the Chief Engineer the name of one officer from the list who shall then be appointed as the sole arbitrator. If contractor fails to communicate his selection of name, within the stipulated period, the Chief Engineer shall without delay select one officer from the list and appoint him as the sole arbitrator. If the Chief Engineer fails to send such a list within thirty days, as stipulated, the contractor shall send a similar list to the Chief Engineer within fifteen days. The Chief Engineer shall then select an officer from the list and appoint him as the sole arbitrator within fifteen days. If the Chief Engineer fails to do so the contractor shall communicate to the Chief Engineer the name of one officer from the list, who shall then be the sole arbitrator. The arbitration shall be conducted in accordance with the provisions of the Indian Arbitration Act, 1940 or any statutory modification thereof. The decision of the sole arbitrator shall be final and binding on the parties thereto. The arbitrator shall determine the amount of costs of arbitration to be awarded to either parties. Performance under the contract shall continue during arbitration proceedings and payments due to the contractor by the owner shall not be withheld, unless they are the subject matter of the arbitration proceedings. All awards shall be in writing and in case of awards amount to Rs.1.00 Lakh and above, such awards shall state reasons for the amounts awarded. Neither party is entitled to bring a claim to arbitration if arbitrator has not been appointed before the expiration of thirty days after defect liability period.”

The judgment also references the Indian Arbitration Act, 1940, particularly Section 4, as amended by the State of Uttar Pradesh. The state amendment to Section 4(2) of the Arbitration Act, 1940 reads:

“(2) In every such case where any appointed arbitrator neglects or refuses to act, or becomes incapable of acting or dies, the vacancy shall be supplied by the person designated as aforesaid.”

Arguments

Appellant’s Arguments:

• The appellant argued that Clause 52 of the agreement does not stipulate that an arbitrator’s mandate ends upon retirement.
• They contended that once an arbitrator is appointed, they continue until the conclusion of the proceedings, unless disqualified under the Indian Arbitration Act, 1940.
• The appellant highlighted that the respondents participated in the arbitration proceedings even after the arbitrator’s retirement.
• They pointed out that the Civil Judge’s order dated 11 December 1997, extending the arbitration period, was not challenged and had attained finality.
• The appellant relied on the decisions in Himalayan Construction Co. Vs. Executive Engineer, Irrigation Division, J&K and Anr., (2001) 9 SCC 359, Prasun Roy Vs. Calcutta Metropolitan Development Authority and Anr., (1987) 4 SCC 217 and N. Chellappan Vs. Secretary, Kerala State Electricity Board and Anr., (1975) 1 SCC 289 to support their position.

Respondent’s Arguments:

• The respondent argued that the arbitrator’s mandate terminated upon his retirement as he was appointed in his capacity as a Chief Engineer.
• They contended that a new arbitrator should have been appointed as per Clause 52 of the agreement.
• The respondent asserted that they had raised objections against the arbitrator continuing the proceedings after his retirement.
• They relied on the State Amendment of Section 4 of the Arbitration Act, 1940, arguing that the arbitrator became incapable of acting upon retirement.

The innovativeness of the argument of the appellant lies in the interpretation of the arbitration clause that once an arbitrator is appointed, he continues to be so till the conclusion of the proceedings unless there is a specific clause to the contrary. The respondent’s argument was that the arbitrator was appointed in his capacity as Chief Engineer and once he retired, his mandate stood terminated.

Issues Framed by the Supreme Court

The Supreme Court framed the following issues for consideration:

1. Whether once an officer of the department is appointed as an Arbitrator considering the arbitration clause, whether his mandate to continue the arbitration proceedings shall come to an end on his retirement?
2. Whether continuance of the arbitration proceedings by such an Arbitrator after his retirement can be said to be committing a misconduct by such a Sole Arbitrator?

Treatment of the Issue by the Court

Authorities

The Supreme Court considered the following authorities:

Judgment

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

How each authority was viewed by the Court?

• Himalayan Construction Co. Vs. Executive Engineer, Irrigation Division, J&K and Anr., (2001) 9 SCC 359*: The Supreme Court followed this precedent, which held that an arbitrator appointed by designation does not cease to have authority upon retirement.
• Prasun Roy Vs. Calcutta Metropolitan Development Authority and Anr., (1987) 4 SCC 217*: The Supreme Court cited this case to support the principle that an arbitrator’s mandate continues unless explicitly terminated by the agreement.
• N. Chellappan Vs. Secretary, Kerala State Electricity Board and Anr., (1975) 1 SCC 289*: The Supreme Court considered this case to reinforce the idea that the arbitrator’s authority is not automatically terminated by retirement.
• Section 4 of the Arbitration Act, 1940 (as amended by the State of U.P.)*: The Supreme Court held that this amendment was not applicable in this case as the arbitrator did not become incapable of acting upon retirement.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the interpretation of the arbitration clause and the absence of any provision for termination of the arbitrator’s mandate upon retirement. The Court emphasized that once an arbitrator is appointed, they continue to be so until the conclusion of the proceedings, unless there is a specific clause to the contrary or a disqualification under the Indian Arbitration Act, 1940. The fact that the respondents participated in the proceedings even after the arbitrator’s retirement and the Civil Judge’s order extending the arbitration period also weighed heavily in the Court’s decision.

Fact:Law Ratio

The court’s decision was more influenced by legal considerations than the factual aspects of the case.

The Court reasoned that the arbitration clause did not provide for the termination of the arbitrator’s mandate upon retirement. The Court held that once an arbitrator is appointed, he continues to be the arbitrator till the conclusion of the proceedings unless he incurs disqualification under the provisions of the Indian Arbitration Act, 1940. The Court also considered that the Civil Judge had extended the time for arbitration after overruling the objections of the respondents, and therefore, the arbitrator’s actions were within the extended period. The Court found that the High Court’s view that the arbitrator had misconducted himself was not tenable at law.

The Court quoted from the judgment:

“Once such an officer is appointed as an Arbitrator, he continues to be the Sole Arbitrator till the arbitration proceedings are concluded unless he incurs the disqualification under the provisions of the Indian Arbitration Act, 1940.”

“Clause 52 of the agreement does not provide at all that on the retirement of such an officer, who is appointed as a Sole Arbitrator, he shall not continue as a Sole Arbitrator and/or the mandate to continue with the arbitration proceedings will come to an end.”

“It cannot be said that the Sole Arbitrator had become incapable of acting on his retirement from service.”

There were no minority opinions in this case. The bench was unanimous in its decision.

Key Takeaways

• An arbitrator’s mandate does not automatically terminate upon retirement if the arbitration clause does not explicitly state so.
• Arbitrators appointed by virtue of their position can continue the proceedings after retirement unless disqualified under the Indian Arbitration Act, 1940.
• Parties cannot object to the continuation of arbitration proceedings by a retired arbitrator if they have participated in the proceedings after the arbitrator’s retirement.
• Orders extending the time for arbitration, if not challenged, attain finality and cannot be revisited.
• This judgment provides clarity on the continuity of arbitration proceedings and reduces the potential for delays due to arbitrator retirement.

This judgment clarifies that the retirement of an arbitrator does not automatically terminate their mandate. This will have implications for future arbitration proceedings, ensuring that such proceedings are not disrupted due to an arbitrator’s retirement. This judgment will also impact how arbitration clauses are drafted, with parties now needing to explicitly state if the arbitrator’s mandate terminates upon retirement.

Directions

There were no specific directions given by the Supreme Court in this case.

Specific Amendments Analysis

The Court analyzed the State Amendment of Section 4 of the Arbitration Act, 1940, applicable to the State of Uttar Pradesh. The Court held that this amendment did not apply in this case as the arbitrator did not become incapable of acting upon retirement. The Court emphasized that the amendment refers to situations where an arbitrator neglects or refuses to act, or becomes incapable of acting, or dies, and retirement does not fall under any of these categories.

Development of Law

The ratio decidendi of this case is that an arbitrator’s mandate does not automatically terminate upon retirement if the arbitration clause does not explicitly state so. The Supreme Court reaffirmed the position that once an arbitrator is appointed, they continue to be so until the conclusion of the proceedings unless there is a specific clause to the contrary or a disqualification under the Indian Arbitration Act, 1940. This judgment clarifies the law on the continuity of arbitration proceedings post-retirement of an arbitrator and provides guidance for drafting arbitration clauses.

Conclusion

The Supreme Court allowed the appeal, setting aside the High Court’s judgment. The Court restored the award passed by the arbitrator and the order of the Civil Judge, making the award the Rule of the Court. The Court held that an arbitrator’s mandate does not automatically terminate upon retirement if the arbitration clause does not explicitly state so. The judgment clarifies the law on the continuity of arbitration proceedings and ensures that such proceedings are not disrupted due to the arbitrator’s retirement.

Category

Parent Category: Arbitration Law

Child Categories:

• Appointment of Arbitrator
• Termination of Arbitrator
• Arbitration Act, 1940
• Clause 52, Arbitration Agreement

Parent Category: Indian Arbitration Act, 1940

Child Category: Section 4, Indian Arbitration Act, 1940

FAQ

Q: Can an arbitrator continue the arbitration process after they retire?

A: Yes, according to this Supreme Court judgment, an arbitrator can continue the arbitration process even after retirement, unless the arbitration agreement explicitly states that their mandate terminates upon retirement.

Q: What happens if the arbitration clause doesn’t mention anything about retirement?

A: If the arbitration clause is silent on the issue of retirement, the arbitrator’s mandate does not automatically end upon retirement. They can continue the proceedings.

Q: Can a party object to a retired arbitrator continuing the proceedings?

A: If a party has participated in the proceedings after the arbitrator’s retirement, they cannot later object to the arbitrator continuing the proceedings.

Q: Does this judgment affect how arbitration clauses should be drafted?

A: Yes, this judgment highlights the importance of explicitly stating in the arbitration clause whether the arbitrator’s mandate terminates upon retirement. Parties should now include specific provisions to avoid any ambiguity.

Q: What if the arbitrator was appointed because of their position?

A: Even if the arbitrator was appointed because of their position, such as a Chief Engineer, their mandate does not automatically end upon retirement from that position, unless the arbitration agreement specifies otherwise.

Q: What does this mean for ongoing arbitration proceedings?

A: This judgment ensures that ongoing arbitration proceedings are not disrupted due to an arbitrator’s retirement, providing continuity and reducing potential delays.