Supreme Court Upholds Contractual Arbitration Clause: Rajasthan Small Industries Corporation vs. Ganesh Containers (2019)

Date of the Judgment: January 23, 2019
Citation: 2019 INSC 65
Judges: R. Banumathi, J. and Indira Banerjee, J.
Can a party bypass a pre-agreed arbitration clause and seek the appointment of an independent arbitrator? The Supreme Court of India recently addressed this question in a dispute between Rajasthan Small Industries Corporation Limited and M/S Ganesh Containers Movers Syndicate. The court examined whether the High Court was correct in appointing an independent arbitrator, deviating from the contractual arbitration clause. The bench comprised Justices R. Banumathi and Indira Banerjee, with Justice R. Banumathi authoring the judgment.

Case Background

The Rajasthan Small Industries Corporation Limited (appellant) invited tenders for handling and transporting containers. M/S Ganesh Containers Movers Syndicate (respondent) participated and was awarded the contract on January 21, 2000. An agreement was executed on January 28, 2000, initially for three years, later extended by two years until January 31, 2003. Disputes arose regarding transit penalties and handling charges. The contract included an arbitration clause (4.20.1) stating that the Managing Director or their nominee would be the sole arbitrator. The respondent requested arbitration, and an arbitrator was appointed on February 21, 2005. Due to unsatisfactory progress, this arbitrator was removed on March 26, 2009, and the Chairman-cum-Managing Director of the appellant corporation was appointed as the sole arbitrator with the consent of both parties.

Timeline

Course of Proceedings

The High Court of Rajasthan at Jaipur Bench allowed the respondent’s application under Section 11 and Section 15 of the Arbitration and Conciliation Act, 1996, appointing Mr. J.P. Bansal, a retired District Judge, as the sole arbitrator. The High Court noted that the respondent had to approach it due to the prolonged proceedings and frequent changes of arbitrators. It also observed that the arbitrator had expedited the proceedings and passed an ex-parte award on January 21, 2016, only after the arbitration petition was filed in the High Court, which the High Court viewed as an attempt to frustrate the arbitration application.

Legal Framework

The core of this case revolves around the interpretation and application of the arbitration clause (4.20.1) in the agreement between the parties. Clause 4.20.1 of Schedule-4 (General Conditions) of the agreement states:

“4.20.1 All disputes and difference arising out of or in any way concerning this Contract, shall be referred to the Managing Director himself, herself or his or her nominees for the sole arbitration. There will be no objection to any such appointment on the ground that the person so appointed is an employee of the Corporation, that he has dealt with the matters to which the contract relates and that in the course of his duties. As such arbitration shall be final and binding on the parties to the contract. If the person to whom the matter was originally referred to for arbitration becomes unable to function on account of vacation of office, transfer, resignation, retirement from services, suspension or for any other reason, whatsoever, the Managing Director shall nominate another person to take over his function as soon as possible. Such person shall proceed further from the stage where the matter was left by his predecessor. The arbitrator shall give reasons for the award.”

The Supreme Court also considered Section 12 of the Arbitration and Conciliation (Amendment) Act, 2015, which deals with the grounds for challenging the appointment of an arbitrator. Additionally, Sections 11, 14, and 15 of the Arbitration and Conciliation Act, 1996, concerning the appointment, termination, and substitution of arbitrators, were also examined.

Arguments

Appellant’s Submissions:

• The High Court erred by not considering Clause 4.20.1 of Schedule-4, which specifies that disputes should be resolved by the Managing Director or his nominee.
• The respondent could not have filed an application under Section 11 and Section 15 of the Arbitration and Conciliation Act, 1996, given the existing agreement and the competence of the arbitral tribunal.
• The arbitrator was ready to proceed, but the respondent was either absent or continually seeking adjournments.
• Since a final arbitral award had been passed, the respondent should have challenged it under Section 34 of the Arbitration and Conciliation Act, 1996, instead of seeking a new arbitrator.

Respondent’s Submissions:

• Under Section 12 of the Arbitration and Conciliation (Amendment) Act, 2015, the Chairman-cum-Managing Director, being an employee/advisor, is disqualified from being an arbitrator.
• The disqualification under the Seventh Schedule of the Arbitration and Conciliation (Amendment) Act, 2015, is a legal right, and the agreement cannot override it.
• Relying on Union of India and Others v. Uttar Pradesh State Bridge Corporation Limited (2015) 2 SCC 52, the respondent argued that the court can appoint a substitute arbitrator if the arbitral tribunal fails to act.
• The respondent was justified in approaching the High Court due to the long delay and frequent changes of arbitrators.
• The arbitrator only accelerated proceedings after the respondent approached the High Court, resulting in a hurried award.

The innovativeness of the respondent’s argument lies in invoking the 2015 Amendment to the Arbitration Act to disqualify the Managing Director, despite the original agreement, and arguing that the delay and changes in arbitrators warranted court intervention.

Issues Framed by the Supreme Court

The Supreme Court framed the following issues for consideration:

1. Whether the respondent was correct in filing an arbitration petition before the High Court under Section 11 and Section 15 of the Arbitration Act, 1996, given the ongoing proceedings before the sole arbitrator?
2. Whether the High Court was right in deviating from the terms of the agreement (Clause 4.20.1) and appointing an independent arbitrator when the parties had agreed to resolve disputes through the Managing Director or his nominee?
3. Whether the Chairman-cum-Managing Director became ineligible to act as an arbitrator under Section 12 of the Arbitration and Conciliation (Amendment) Act, 2015?
4. Whether the High Court was right in terminating the mandate of the arbitrator and appointing a substitute arbitrator based on the ground that there was a delay in passing the award?

Treatment of the Issue by the Court

Authorities

Cases Relied Upon by the Court:

Legal Provisions Considered by the Court:

• Section 12 of the Arbitration and Conciliation (Amendment) Act, 2015: Deals with the grounds for challenging the appointment of an arbitrator.
• Sections 11, 14, and 15 of the Arbitration and Conciliation Act, 1996: Concern the appointment, termination, and substitution of arbitrators.

Judgment

How each authority was viewed by the Court?

• The Supreme Court followed Indian Oil Corporation Limited and Others v. Raja Transport Private Limited (2009) 8 SCC 520*, stating that the fact that the arbitrator is an employee of one of the parties is not a ground to raise a presumption of bias.
• The Supreme Court followed Board of Control for Cricket in India v. Kochi Cricket Private Limited and others (2018) 6 SCC 287*, holding that the 2015 Amendment Act does not have retrospective operation.
• The Supreme Court distinguished TRF Limited v. Energo Engineering Projects Limited (2017) 8 SCC 377*, noting that in that case, the notice invoking arbitration was issued after the 2015 Amendment Act came into force, which is not the case here.
• The Supreme Court followed Aravali Power Company Private Limited v. Era Infra Engineering Limited (2017) 15 SCC 32*, stating that the statutory provisions in force before the 2015 Amendment Act would apply when arbitration was invoked before the amendment.
• The Supreme Court followed S.B.P. and Company v. Patel Engineering Limited and Another (2009) 10 SCC 293*, emphasizing the importance of adhering to the terms of agreement between the parties in the matter of appointment of arbitrators.
• The Supreme Court followed Yashwith Constructions (P) Ltd. v. Simplex Concrete Piles India Ltd. and Another (2006) 6 SCC 204*, holding that Section 11(6) of the Act would come into play only when there was failure on the part of the party concerned to appoint an arbitrator in terms of the arbitration agreement.
• The Supreme Court followed Raj Kumar and others v. Union of India and another (2006) 1 SCC 737*, and Ashok Kumar Gupta and another v. State of U.P. and others (1997) 5 SCC 201* to emphasize the use of powers under Article 142 for complete justice.

What weighed in the mind of the Court?

The Supreme Court’s decision was significantly influenced by the principle of party autonomy in arbitration, emphasizing the importance of adhering to the terms of the arbitration agreement. The court noted that the respondent had initially agreed to the Managing Director as the arbitrator and had participated in the proceedings for a considerable time. The court also highlighted that the 2015 amendment to the Arbitration Act does not apply retrospectively unless the parties agree, and that mere delay by an arbitrator is not sufficient grounds to deviate from the agreed terms.

The court’s reasoning was primarily based on legal principles and the interpretation of the Arbitration Act. The factual aspects of the case, such as the delay in proceedings and the respondent’s conduct, were considered, but the legal framework and the principles of arbitration were the decisive factors.

Logical Reasoning

The court considered the argument that the arbitrator was disqualified under the 2015 amendment but rejected it because the amendment did not apply retrospectively. The court also rejected the argument that the delay in the proceedings justified the appointment of a new arbitrator, stating that mere delay is not sufficient grounds to deviate from the agreed arbitration clause.

The Supreme Court’s decision was based on the following reasons:

• The parties had a valid arbitration agreement specifying the Managing Director or his nominee as the arbitrator.
• The respondent had participated in the arbitration proceedings for a considerable time and had expressed faith in the arbitrator.
• The 2015 amendment to the Arbitration Act does not apply retrospectively to arbitral proceedings that commenced before the amendment, unless the parties agree otherwise.
• Mere delay by an arbitrator is not sufficient grounds to deviate from the agreed terms.

The Supreme Court quoted the following from the judgment:

“The legislative intent is that the parties should abide by the terms of the arbitration agreement.”

“The term “rules” in Section 15(2) obviously referred to the provision for appointment contained in the arbitration agreement or any rules of any institution under which the disputes were referred to arbitration.”

“in exercise of our powers under Article 142 of the Constitution in order to do complete justice to a section of the personnel who would otherwise be placed in an inequitable situation for which the authorities are also partly to blame. It is open to this Court to mould the relief by safeguarding the interest of the parties even while declaring the law. The paramount consideration in such cases should be to ensure that there is no injustice caused.”

There were no minority opinions.

The decision reinforces the principle of party autonomy in arbitration and emphasizes the importance of adhering to the terms of the arbitration agreement. It clarifies that the 2015 amendment to the Arbitration Act does not apply retrospectively unless the parties agree otherwise. The decision also clarifies that mere delay by an arbitrator is not sufficient grounds to deviate from the agreed terms.

Key Takeaways

• Parties must adhere to the arbitration clauses in their agreements.
• The 2015 amendment to the Arbitration and Conciliation Act, 1996, does not apply retrospectively unless the parties agree.
• Mere delay by an arbitrator is not sufficient grounds to deviate from the agreed terms of the arbitration clause.
• Courts should respect the autonomy of the parties in choosing their arbitrators.

Directions

The Supreme Court set aside the High Court’s order and directed that the current Managing Director of the Rajasthan Small Industries Corporation Limited shall be the sole arbitrator. The Managing Director was directed to continue the proceedings, provide sufficient opportunities to both parties, and pass the final award within four months. The arbitrator was instructed not to be influenced by any views expressed by the High Court. The ex-parte award passed by the arbitrator on 21.01.2016 was also set aside.

Development of Law

The ratio decidendi of this case is that parties must adhere to the terms of the arbitration agreement, and the 2015 amendment to the Arbitration and Conciliation Act, 1996, does not apply retrospectively unless the parties agree. This decision reinforces the principle of party autonomy in arbitration and clarifies the circumstances under which a court can deviate from the agreed terms of an arbitration clause. There is no change in the previous position of law, but there has been an affirmation of the principle of party autonomy.

Conclusion

The Supreme Court allowed the appeal, setting aside the High Court’s order. The court held that the High Court erred in appointing an independent arbitrator, deviating from the arbitration clause agreed upon by the parties. The court reaffirmed the importance of adhering to contractual terms in arbitration agreements and clarified that the 2015 amendment to the Arbitration Act does not apply retrospectively unless the parties agree. The court also set aside the ex-parte award passed by the arbitrator and directed the Managing Director of the appellant corporation to act as the sole arbitrator, providing sufficient opportunities to both parties to present their case.