Supreme Court Upholds Departmental Arbitrator Appointment in Construction Contract Dispute: SP Singla Constructions vs. State of Himachal Pradesh (2018)

Introduction

Date of the Judgment: 04 December 2018

Citation: (2018) INSC 1047

Judges: R. Banumathi, J. and Indira Banerjee, J.

Can a government department appoint its own employee as an arbitrator in a contract dispute? The Supreme Court of India recently addressed this question in a case involving a construction contract, focusing on the validity of departmental arbitration clauses and the applicability of amendments to the Arbitration and Conciliation Act, 1996. This judgment clarifies the position on appointment of departmental arbitrators and the retrospective application of the 2015 Amendment Act. The bench comprised of Justice R. Banumathi and Justice Indira Banerjee. Justice R. Banumathi authored the judgment.

Case Background

On December 19, 2006, SP Singla Constructions Pvt. Ltd. (the appellant) was awarded a contract for construction work by the Himachal Pradesh Public Works Department (HPPWD). The contract included an arbitration clause (Clause 65) which stated that disputes would be referred to an arbitrator appointed by the Chief Engineer of HPPWD. The work was initially scheduled to be completed by January 4, 2009, but was extended to June 30, 2010, and was eventually completed on June 4, 2011. After completing the work, the appellant raised a dispute and requested the appointment of an arbitrator on October 18, 2013.

In response, the Chief Engineer of HPPWD appointed the Superintendent Engineer, Arbitration Circle, HPPWD, Solan, as the arbitrator on October 30, 2013, in accordance with Clause 65 of the contract. The arbitrator began the proceedings on November 11, 2013. However, the appellant did not file a statement of claim and instead sought adjournments, stating an intention to challenge the arbitrator’s appointment. Consequently, the arbitration proceedings were terminated on August 6, 2014, under Section 25(a) of the Arbitration and Conciliation Act, 1996, due to the appellant’s failure to submit a claim.

Timeline

Course of Proceedings

The appellant, dissatisfied with the appointment of the Superintendent Engineer as arbitrator, filed a petition before the High Court of Himachal Pradesh under Section 11(6) of the Arbitration and Conciliation Act, 1996, seeking the appointment of an independent arbitrator. The High Court dismissed the petition, relying on the Supreme Court’s judgment in Antrix Corporation Limited v. Devas Multimedia Private Limited [(2014) 11 SCC 560], which held that if a party is aggrieved by the appointment of an arbitrator as per the agreement, their remedy lies under Section 13 of the Act, and subsequently under Section 34 while challenging the award. The High Court concluded that since the arbitrator’s appointment was in accordance with Clause 65 of the agreement, Section 11(6) could not be invoked. The appellant then appealed to the Supreme Court.

Legal Framework

The case primarily revolves around the interpretation and application of the following legal provisions:

• Section 11(6) of the Arbitration and Conciliation Act, 1996: This section deals with the procedure for appointing an arbitrator when parties fail to agree on the appointment process. It allows a party to approach the Chief Justice or any person or institution designated by him to appoint an arbitrator.
  
  “Section 11(6) of the 1996 Act, quite categorically provides that where the parties fail to act in terms of a procedure agreed upon by them, the provisions of sub-section (6) may be invoked by any of the parties.”
• Section 12(5) of the Arbitration and Conciliation Act, 1996 (as amended in 2015): This provision, introduced by the 2015 Amendment Act, specifies circumstances that give rise to justifiable doubts as to the independence or impartiality of an arbitrator. Specifically, it states that an employee of one of the parties cannot be an arbitrator.
• Section 25(a) of the Arbitration and Conciliation Act, 1996: This section allows the arbitral tribunal to terminate proceedings if the claimant fails to communicate their statement of claim.
  
  “Section 25(a) provides that the Arbitral Tribunal shall terminate the proceedings where the claimants failed to communicate his claim in accordance with sub-section (1) of Section 23 of the Act.”
• Section 26 of the Arbitration and Conciliation (Amendment) Act, 2015: This section clarifies the applicability of the 2015 amendments, stating that they apply to arbitral proceedings commenced on or after the date of the amendment unless the parties agree otherwise.
• Clause 65 of the General Conditions of Contract: This clause in the contract between the appellant and HPPWD specifies that all disputes will be referred to the sole arbitration of a person appointed by the Engineer-in-Chief/Chief Engineer, HPPWD. It explicitly states that there is no objection to the arbitrator being a government servant.
  
  “Clause 65 of the General Conditions of Contract- …..Except where otherwise provided in the contract all questions and disputes relating to the meaning of the specifications, designs drawings and instructions therein before mentioned and as to the quality of workmanship of materials used on the work or as to any other question, claim, right matter or thing whatsoever in any way arising out of or relating to the contractor designs drawings, specification and estimates, instructions orders or these conditions otherwise concerning the works of the execution or failure to execute the same whether arising during the progress of the work or after the completion or abandonment thereof shall be referred to the sole arbitration of the person appointed by the Engineer-in-Chief/Chief Engineer, Himachal Pradesh Public Works Department . It will be no objection to any such appointment that the arbitrator so appointed is a Government servant that he had to deal with the matters to which the contract relates, and that in the course of his duties as Government servant he had expressed views on all or any of the matters in dispute or different. The arbitrator to whom the matter is originally referred being transferred or vacating his office or being unable to act for any reason that (sic) the Chief Engineer, HPPWD at the time of such transfer vacation of office or inability to act shall appoint another person to act as arbitrator in accordance with the terms of the contract. Such person shall be entitled to proceed with the reference from the stage at which it was left by his predecessor, it is also a terms of this contract that no person other than a person appointed by the Chief Engineer, HPPWD, should act as arbitrator and if for any reason that is not possible the matter is not be claim in dispute is Rs.50,000/- (Rupees Fifty Thousand) and above, the arbitrator shall give reasons for the award. Subject as aforesaid the provision of the Arbitration Act, 1940 or any statutory modification or re-enactment thereof and the rules made thereunder and for the time being shall apply to the arbitration proceeding under this clause .”

Arguments

The appellant argued that the appointment of the Superintendent Engineer by designation, and not by name, was not in accordance with Clause 65. They contended that after the 1996 Act came into force, appointments could only be made under Section 11 of the Act. The appellant further argued that the arbitrator, being an employee of HPPWD, was barred under Section 12(5) of the 1996 Act (as amended in 2015). They relied on the judgment of the Delhi High Court in Ratna Infrastructure Projects Pvt. Ltd. v. Meja Urja Nigam Private Limited [(2017) SCC Online Del 7808] to support their argument that the amended provisions of the Arbitration Act should apply due to the clause in the contract which stated that any statutory modification or re-enactment shall apply to the arbitration proceedings.

The respondent-State argued that the appointment of the Superintendent Engineer was in accordance with Clause 65 of the agreement. They contended that Section 12(5) of the Amendment Act, 2015, would not apply to the present case as the arbitral proceedings commenced before the amendment came into force, as per the judgment in Board of Control for Cricket in India v. Kochi Cricket Private Limited and others [(2018) 6 SCC 287]. They argued that the clause in the contract does not amount to the parties agreeing to apply the amended Act.

The key arguments of both sides are summarized below:

Issues Framed by the Supreme Court

The main issue before the Supreme Court was:

1. Whether the appellant/contractor can challenge the appointment of the Superintendent Engineer, Arbitration Circle, as Arbitrator, considering Clause 65 of the general conditions of the contract.

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:

The Supreme Court also considered the following legal provisions:

• Section 11(1) of the Arbitration and Conciliation Act, 1996: This section states that a person of any nationality may be an arbitrator, unless otherwise agreed by the parties.
• Section 11(6) of the Arbitration and Conciliation Act, 1996: This section deals with the procedure for appointing an arbitrator when parties fail to agree on the appointment process.
• Section 12(5) of the Arbitration and Conciliation Act, 1996 (as amended in 2015): This provision specifies that an employee of one of the parties cannot be an arbitrator.
• Section 25(a) of the Arbitration and Conciliation Act, 1996: This section allows the arbitral tribunal to terminate proceedings if the claimant fails to communicate their statement of claim.
• Section 26 of the Arbitration and Conciliation (Amendment) Act, 2015: This section clarifies that the 2015 amendments apply to arbitral proceedings commenced on or after the date of the amendment unless the parties agree otherwise.

Judgment

The Supreme Court held that the appointment of the Superintendent Engineer, Arbitration Circle, as the arbitrator was valid. The court reasoned that Clause 65 of the contract allowed for the appointment of an arbitrator by designation and also explicitly stated that there was no objection to the arbitrator being a government servant. The court also held that the 2015 Amendment to the Arbitration and Conciliation Act, 1996, would not apply to the present case as the arbitral proceedings had commenced before the amendment came into force, and the parties had not agreed to apply the amended Act.

The court further observed that the appellant should have raised any objections to the arbitrator’s appointment before the arbitrator himself in the first instance. The court noted that the appellant had failed to file a statement of claim and had only sought adjournments, which led to the termination of the arbitration proceedings under Section 25(a) of the Act.

However, the court, in the interest of justice, set aside the order of termination by the arbitrator and directed the Chief Engineer, HPPWD, to appoint an arbitrator as per Clause 65 of the agreement. The court also directed the appellant to file its claim before the arbitrator and the arbitrator to proceed with the matter in accordance with the law.

The Court’s treatment of the submissions made by both parties is summarized below:

The Court’s view on the authorities cited is summarized below:

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the following factors:

• Contractual Agreement: The court emphasized that the parties had explicitly agreed in Clause 65 of the contract to have a departmental arbitrator. The court held that the agreement was clear and unambiguous in allowing the appointment of an arbitrator by designation and that the arbitrator could be a government servant.
• Applicability of the 2015 Amendment: The court held that the 2015 Amendment to the Arbitration Act would not apply retrospectively to arbitral proceedings that had commenced before the amendment came into force, unless the parties had expressly agreed to apply the amended provisions. The court found that the clause in the contract did not constitute an agreement to apply the amended Act.
• Procedural Correctness: The court noted that the appellant should have raised any objections to the arbitrator’s appointment before the arbitrator himself in the first instance. The court also observed that the appellant had failed to file a statement of claim, which led to the termination of the arbitration proceedings.
• Principle of Party Autonomy: The court upheld the principle of party autonomy, emphasizing that the parties had agreed to a specific arbitration procedure in their contract. The court was reluctant to interfere with the agreed-upon procedure unless there was a clear violation of law or public policy.

The sentiment analysis of the reasons given by the Supreme Court is shown below:

The ratio of Fact:Law that influenced the court to decide is as follows:

Key Takeaways

• Departmental arbitration clauses in government contracts are generally valid and enforceable.
• The 2015 Amendment to the Arbitration and Conciliation Act, 1996, does not apply retrospectively to arbitral proceedings commenced before the amendment unless the parties agree otherwise.
• Objections to the appointment of an arbitrator should be raised before the arbitrator in the first instance.
• Parties are bound by the arbitration procedure they have agreed to in their contract.
• Courts will generally not interfere with the agreed-upon arbitration procedure unless there is a clear violation of law or public policy.

Directions

The Supreme Court issued the following directions:

1. The proceedings of the arbitrator dated 06.08.2014 terminating the arbitral proceedings were set aside.
2. The Chief Engineer, Himachal Pradesh Public Works Department, was directed to appoint an arbitrator in terms of Clause 65 of the agreement.
3. The appellant was directed to file its claim before the arbitrator, and the arbitrator was directed to proceed with the matter in accordance with the law.

Development of Law

The Supreme Court’s judgment reinforces the validity of departmental arbitration clauses in government contracts and clarifies the retrospective application of the 2015 Amendment to the Arbitration and Conciliation Act, 1996. The ratio decidendi of the case is that the 2015 amendment to the Arbitration Act does not apply retrospectively unless the parties agree to it, and the appointment of a departmental arbitrator is valid if it is as per the terms of the contract. This judgment upholds the principle of party autonomy and provides clarity on the interpretation of arbitration clauses in government contracts.

Conclusion

In conclusion, the Supreme Court upheld the validity of the appointment of a departmental arbitrator in the construction contract dispute between SP Singla Constructions Pvt. Ltd. and the State of Himachal Pradesh. The court emphasized the importance of adhering to contractual agreements and clarified that the 2015 Amendment to the Arbitration Act does not have retrospective effect unless explicitly agreed upon by the parties. The court set aside the termination of the proceedings and directed the appointment of an arbitrator as per the contract, allowing the appellant to pursue its claim.