Supreme Court Upholds Contractual Arbitration Clauses, Limits Interference: Union of India vs. Parmar Construction Company (2019)

Introduction

Date of the Judgment: 29 March 2019
Citation: (2019) INSC 286
Judges: A.M. Khanwilkar, J., Ajay Rastogi, J. (authored the judgment)

When parties agree to a specific method for resolving disputes in their contracts, should courts interfere with that agreement? The Supreme Court of India recently addressed this question in a batch of appeals, clarifying the extent to which High Courts can appoint arbitrators when a contract already specifies how they should be chosen. This case also examined whether amendments to arbitration law should apply retroactively to ongoing disputes. The core issue revolved around whether the High Court was correct in appointing an independent arbitrator, ignoring the procedure agreed upon by the parties in their contract, and whether the 2015 amendments to the Arbitration and Conciliation Act, 1996, should apply to cases where arbitration was initiated before the amendments came into effect.

Case Background

The case involves multiple appeals by the Union of India against various contractors. These contractors had entered into agreements with the railway establishment for different construction works. A common thread in these cases is that disputes arose regarding payments, particularly concerning escalation costs and the acceptance of ‘no claim’ certificates. The contractors claimed that they were forced to sign ‘no claim’ certificates to receive their payments, which they argued was done under financial duress. When disputes arose, the contractors invoked the arbitration clause in their agreements. The Union of India, however, declined to appoint an arbitrator as per the contract, citing the ‘no claim’ certificates.

The contractors then approached the High Court under Section 11(6) of the Arbitration and Conciliation Act, 1996, seeking the appointment of an independent arbitrator. The High Court, considering the need for an impartial arbitrator, appointed a retired judge of the High Court as an independent arbitrator, applying the amended provisions of the Arbitration and Conciliation Act, 2015. The Union of India appealed this decision to the Supreme Court.

Timeline:

Course of Proceedings

The contractors, after failing to get the Union of India to appoint arbitrators as per the contractual agreement, filed applications under Section 11(6) of the Arbitration and Conciliation Act, 1996, before the High Court of Rajasthan. The primary objection of the Union of India before the High Court was that the ‘no claim’ certificates furnished by the contractors meant that no dispute subsisted that could be referred to arbitration. They also argued that the claims were time-barred.

The High Court, however, decided in favor of the contractors, noting the need for an independent and neutral arbitrator as per Section 12(5) of the Amendment Act, 2015. The High Court also observed that the amended provisions of the Act, 2015, would apply to pending proceedings and that merely furnishing a ‘no claim’ certificate would not take away the rights of the parties. The High Court appointed a retired judge of the High Court as an independent sole arbitrator.

Legal Framework

The core legal framework for this case is the Arbitration and Conciliation Act, 1996, and its subsequent amendment in 2015.

Section 11(6) of the Arbitration and Conciliation Act, 1996 (prior to the 2015 Amendment) allows a party to request the Chief Justice or his designate to appoint an arbitrator if the agreed-upon appointment procedure fails. This section is central to the High Court’s decision to appoint an independent arbitrator.

Section 21 of the Arbitration and Conciliation Act, 1996 states that arbitration proceedings commence when a request for arbitration is received by the respondent, unless the parties agree otherwise.

Section 26 of the Arbitration and Conciliation (Amendment) Act, 2015 specifies that the amended provisions do not apply to arbitral proceedings commenced before the amendment, unless the parties agree otherwise. This section is crucial in determining whether the 2015 amendments apply to the present case.

The judgment also references Clause 64 of the General Conditions of Contract (GCC) which outlines the procedure for arbitration, including the appointment of arbitrators. Clause 64(3) details the appointment of a sole arbitrator or a panel of three arbitrators, who are typically railway officers. Clause 43(2) states that contractors who sign a “No Claim” certificate are debarred from disputing the correctness of the items covered by the certificate or demanding arbitration.

Arguments

Appellants’ Arguments (Union of India):

• The appellants argued that the High Court erred by applying the amended provisions of the Arbitration and Conciliation Act, 2015, because the requests to refer to arbitration were received before the amendment came into force. They cited Section 21 and Section 26 of the Amendment Act, 2015, to support this argument.

• The appellants contended that the arbitration agreements stood discharged once the contractors signed the ‘no claim’ certificates and accepted final payments. They argued that no arbitral dispute could exist after a full and final settlement. They relied on cases such as Union of India and Others Vs. Master Construction Company [2011(12) SCC 349], New India Assurance Company Limited Vs. Genus Power Infrastructure Ltd. [2015(2) SCC 424], and ONGC Mangalore Petrochemicals Limited Vs. ANS Constructions Limited and Anr. [2018(3) SCC 373].
• The appellants submitted that the High Court should not have appointed an independent arbitrator without first adhering to the mutually agreed procedure under Clause 64(3) of the General Conditions of Contract (GCC). They argued that the High Court should have allowed the railway establishment to appoint the arbitrator as per the contract, as there were no allegations of bias against the railway-appointed arbitrators. They cited cases such as Union of India & Another Vs. M.P. Gupta [2004(10) SCC 504], Union of India & Another Vs. V.S. Engineering(P) Ltd. [2006(13) SCC 240], Northern Railway Administration, Ministry of Railway, New Delhi Vs. Patel Engineering Co. Limited [2008(10) SCC 240], and Union of India Vs. Singh Builders Syndicate [2009(4) SCC 523].
• The appellants argued that clause 64(7) of the GCC, which states that all statutory modifications apply to arbitration proceedings, means that the amended provisions of the Arbitration Act, 2015, should apply to the appointment of arbitrators. They cited S.P. Singla Constructions Pvt. Ltd. Vs. State of Himachal Pradesh and Others [2018(15) Scale 421].

Respondents’ Arguments (Contractors):

• The respondents argued that they were not in a bargaining position and were forced to sign ‘no claim’ certificates to get their final bills released. They claimed that this constituted financial duress and undue influence, which should be examined by the arbitrator. They cited National Insurance Company Limited Vs. Boghara Polyfab Private Limited [2009(1) SCC 267].
• The respondents argued that once the appellants failed to appoint an arbitrator under the terms of the agreement before the application was filed under Section 11(6), they forfeited their right to appoint an arbitrator. They cited cases such as Datar Switchgears Ltd. Vs. Tata Finance Ltd. and Another [2000(8) SCC 151], Punj Lloyd Ltd. Vs. Petronet MHB Ltd. [2006(2) SCC 638], and Union of India Vs. Bharat Battery Manufacturing Co. (P) Ltd. [2007(7) SCC 684].
• The respondents submitted that the Chief Justice or his designate, while dealing with Section 11(6), could overlook the qualifications of the arbitrator under the agreement. They argued that the appellants’ failure to appoint an arbitrator until the application was filed empowered the Court to deviate from the agreed terms. They cited North Eastern Railway and Others Vs. Tripple Engineering Works [2014(9) SCC 288] and Union of India and Others Vs. Uttar Pradesh State Bridge Corporation Limited [2015(2) SCC 52].
• The respondents contended that the primary objective of arbitration is a fair, speedy, and inexpensive trial, and that the neutrality of the arbitrator is paramount. They argued that the High Court rightly invoked Section 12(5) of the Amendment Act, 2015, to appoint an independent arbitrator.

Issues Framed by the Supreme Court

The Supreme Court framed the following issues for consideration:

1. Whether the High Court was justified in invoking the amended provisions introduced by the Arbitration and Conciliation (Amendment) Act, 2015, which came into effect on 23rd October 2015.
2. Whether the arbitration agreement stood discharged on the acceptance of the amount and signing of the ‘no claim/discharge’ certificate.
3. Whether it was permissible for the High Court under Section 11(6) of the Arbitration and Conciliation Act, 1996 (prior to the 2015 Amendment Act) to appoint a third party or an independent arbitrator when the parties had mutually agreed on a procedure for appointing a designated arbitrator.

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 cases and legal provisions:

Judgment

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

How each authority was viewed by the Court?

✓ The Court relied on M/s. Aravali Power Company Private Limited Vs. Era Infrastructure Engineering Limited [2017(15) SCC 32]* and S.P. Singla Constructions Pvt. Ltd. Vs. State of Himachal Pradesh and Others [2018(15) Scale 421]* to hold that the 2015 Amendment Act does not apply to arbitral proceedings commenced before the amendment.

✓ The Court distinguished Union of India and Others Vs. Master Construction Company [2011(12) SCC 349]*, New India Assurance Company Limited Vs. Genus Power Infrastructure Ltd. [2015(2) SCC 424]*, and ONGC Mangalore Petrochemicals Limited Vs. ANS Constructions Limited and Anr. [2018(3) SCC 373]*, stating that in those cases, the courts found that there was evidence of voluntary discharge of the contract, which was not the case here.

✓ The Court relied on Union of India & Another Vs. M.P. Gupta [2004(10) SCC 504]*, Union of India & Another Vs. V.S. Engineering(P) Ltd. [2006(13) SCC 240]*, Northern Railway Administration, Ministry of Railway, New Delhi Vs. Patel Engineering Co. Limited [2008(10) SCC 240]*, and Union of India Vs. Singh Builders Syndicate [2009(4) SCC 523]* to emphasize that the High Court should have first adhered to the agreed procedure for appointing an arbitrator.

✓ The Court used National Insurance Company Limited Vs. Boghara Polyfab Private Limited [2009(1) SCC 267]* to support its view that discharge vouchers signed under duress are not a bar to arbitration.

✓ The Court distinguished Datar Switchgears Ltd. Vs. Tata Finance Ltd. and Another [2000(8) SCC 151]*, Punj Lloyd Ltd. Vs. Petronet MHB Ltd. [2006(2) SCC 638]*, and Union of India Vs. Bharat Battery Manufacturing Co. (P) Ltd. [2007(7) SCC 684]*, stating that they were not applicable to the issue of whether the High Court should have directly appointed an independent arbitrator without first resorting to the agreed procedure.

✓ The Court relied on North Eastern Railway and Others Vs. Tripple Engineering Works [2014(9) SCC 288]* and Union of India and Others Vs. Uttar Pradesh State Bridge Corporation Limited [2015(2) SCC 52]*, to acknowledge that the court can appoint an independent arbitrator if the arbitral tribunal fails to perform, but emphasized that the agreed procedure should be followed first.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the need to uphold the sanctity of contracts and the agreed-upon arbitration procedures. The Court was also sensitive to the plight of the contractors, who were often in a weaker bargaining position and were compelled to sign ‘no claim’ certificates to receive their dues. The Court emphasized that the amended provisions of the Arbitration Act, 2015, should not be applied retroactively and that the agreed-upon arbitration procedure should be followed unless there are compelling reasons to deviate from it.

Fact:Law

The Court’s reasoning was influenced more by the factual aspects of the case, particularly the circumstances under which the ‘no claim’ certificates were signed. The legal considerations, such as the interpretation of the Arbitration Act and its amendments, were also significant, but the factual context of the financial duress experienced by the contractors played a larger role.

Logical Reasoning:

The Court’s reasoning followed a logical path, starting with the applicability of the 2015 Amendment Act, then addressing the validity of the ‘no claim’ certificates, and finally, deciding on the appointment of an independent arbitrator. The Court emphasized the need to adhere to the agreed procedure unless there were compelling reasons to deviate from it.

The Court considered alternative interpretations, such as the argument that Clause 64(7) of the GCC implied that the amended provisions of the Arbitration Act, 2015, should apply. However, the Court rejected this interpretation, stating that the clause could not be taken as an agreement between the parties to apply the amended provisions retroactively. The Court also considered the argument that the appellants had forfeited their right to appoint an arbitrator but emphasized that the agreed procedure should still be followed unless there were specific reasons to deviate from it.

The final decision was reached by carefully analyzing the facts of the case, the relevant legal provisions, and the precedents set by previous judgments. The Court concluded that the High Court had erred in applying the amended provisions of the 2015 Act and in directly appointing an independent arbitrator without first resorting to the procedure agreed upon by the parties.

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

• The 2015 Amendment Act does not apply retroactively to arbitral proceedings commenced before the amendment came into force.
• The ‘no claim’ certificates were not voluntary and were signed under financial duress, and therefore, did not discharge the contract.
• The High Court should have first resorted to the procedure for appointing an arbitrator as per the contract before appointing an independent arbitrator.

There were no dissenting opinions in this case.

The Court’s decision has implications for future cases by emphasizing the importance of upholding contractual agreements and the agreed-upon arbitration procedures. It clarifies thatthe amended provisions of the Arbitration Act, 2015, do not apply retroactively and that courts should be cautious in deviating from the agreed-upon arbitration procedures unless there are compelling reasons to do so. The judgment also highlights the need to protect weaker parties from financial duress and undue influence.

Final Order

In conclusion, the Supreme Court allowed the appeals by the Union of India. The Court set aside the High Court’s order appointing an independent arbitrator. The Court directed that the parties should follow the procedure for appointing an arbitrator as specified in Clause 64(3) of the General Conditions of Contract (GCC). The Court clarified that the arbitration proceedings should be governed by the provisions of the Arbitration and Conciliation Act, 1996, as it stood before the 2015 amendment.

Key Takeaways

The Supreme Court’s judgment in Union of India vs. Parmar Construction Company (2019) provides several key takeaways for arbitration law and contract enforcement in India:

• Non-Retroactivity of the 2015 Amendment Act: The judgment clearly establishes that the amended provisions of the Arbitration and Conciliation Act, 2015, do not apply to arbitral proceedings that commenced before the amendment came into effect, unless the parties agree otherwise. This clarifies the temporal scope of the 2015 amendments.
• Sanctity of Contractual Arbitration Clauses: The Supreme Court emphasized the importance of adhering to the agreed-upon procedure for appointing arbitrators as specified in the contract. Courts should not deviate from this procedure unless there are compelling reasons to do so.
• Validity of ‘No Claim’ Certificates: The judgment reiterates that ‘no claim’ certificates or discharge vouchers are not a bar to arbitration if they are signed under duress, coercion, or undue influence. Parties can challenge such certificates and seek arbitration to resolve their disputes.
• Protection of Weaker Parties: The Court acknowledged that contractors are often in a weaker bargaining position and can be forced to sign ‘no claim’ certificates to receive payments. This highlights the need to protect weaker parties from financial duress and undue influence.
• Procedural Fairness in Arbitration: The judgment underscores the importance of procedural fairness in arbitration. Courts should ensure that the agreed-upon procedures are followed and that parties are not denied their right to arbitration.
• Limits on Court Interference: The judgment limits the extent to which High Courts can interfere in the arbitration process. Courts should not directly appoint independent arbitrators without first resorting to the procedure agreed upon by the parties.

Implications for Future Cases:

• The judgment will serve as a precedent for future cases involving the applicability of the 2015 Amendment Act and the enforcement of contractual arbitration clauses.
• It will guide courts in determining whether to adhere to the agreed-upon procedure for appointing arbitrators or to deviate from it.
• It will encourage parties to approach the courts to challenge ‘no claim’ certificates signed under duress, thus ensuring that disputes are resolved through arbitration.
• It will promote fairness and transparency in arbitration proceedings by emphasizing the need to adhere to contractual agreements and protect weaker parties from undue influence.