This case comment is a part of our Annual Arbitration Review of the year 2017.
Judgment Name: BESCO Limited v. Union of India
Citation: Civil Appeal No. 4483 of 2017
Court: Supreme Court of India
Coram: Kurian Joseph, R. Banumathi JJ.
Date: 27th March 2017
Keywords: Appointment of Arbitrator, 2015 Amended Act, Coercion, Fraud, Undue Influence.
An important reason why parties resort to arbitration is that they can mutually decide who arbitrates their dispute. This enables a fair intervention by an expert, and it inspires confidence in the outcomes of the adjudicatory process.
This judgement in Besco Ltd. details the circumstances under which the Chief Justice of a High Court, or any person or institution designated by her, may appoint an arbitrator under Section 11(6) of The Arbitration and Conciliation Act, 1996 (“the Act”). Appointments such as these are made by deviating from the arbitration agreement arrived at by both parties.
The judgement lays down the principles that enable such a deviation from the arbitration agreement. These principles, and the circumstances that are required for its operation, are derived from the provision for the appointment of arbitrators, i.e. Section 11 of the Act. The Court adds to these principles and circumstances with a few points of its own that it deems necessary or relevant.
The application of this judgement is limited to the pre-amendment requests made by either party to an agreement and addressed to the Chief Justice or any person or institution designated to appoint an arbitrator. The limited nature of such an application flows from the 2015 amendment to the Act that altered the rules pertaining to Court-appointment of arbitrators. This post-amendment change has made such appointments an administrative function of the Court. This has decreased the interference of the Court in arbitral appointments to the extent that the Court has only to examine the existence of an arbitration agreement. This feature is discussed later in the analytical portion of this brief.
Whether the Chief Justice of a High Court or any person or institution designated by her, while exercising power under Section 11(6) of the Act, is allowed to deviate from the appointment of an arbitrator as specified in the agreement for arbitration?
The dispute arose from an impugned amendment in the contract of supply of railway wagons from the Petitioner to the Respondent. The Petitioner, claiming that there was fraud, coercion and undue influence while making the supposed amendment, raised the dispute on the day following the amendment. Hence, the High Court held that the Respondent, having failed to appoint an arbitrator, lost the mandate to appoint one. A Special Leave Petition ("SLP") was filed because the Delhi High Court could not have nominated an independent arbitrator upon the claimant’s failure to appoint one within the time frame permitted under the arbitration agreement and, further, could not do so outside of the provisions of the arbitration agreement. The Additional Solicitor General, relying on two cases, submitted that the Court while exercising its powers under Section 11(6) of the Act, is bound to nominate a person as stipulated in the arbitration agreement. These cases (discussed later in this brief) were neatly distinguished from the issue at hand. The Respondents relied on two cases (also discussed later in this brief). The Court added a third case to the list and laid down the circumstances under which the Chief Justice or the designated Judge can deviate from an arbitration clause.
The Petitioners relied on the M.P Gupta [i] case decided by the Supreme Court. In that case, an arbitration clause contained a proviso that the arbitrator to a dispute should be a Gazetted Railway Officer. A special provision contained in that clause stated that in case a Gazetted Railway Officer could not be appointed, the matter is not to be referred for arbitration at all.
In the present case there, no special proviso of this kind existed. In fact, the arbitration clause specifically stated that “In the event of any question, dispute or difference arising under these conditions or any special condition of contract, or in connection with this contract (except as to any matters the decision of which is specially provided for by these or the special conditions), the same shall be referred to the sole Arbitration of a person appointed to be arbitrator, by the General Manager in the case contracts entered into by the Zonal Railways and Production Units by the member of the Railway Board concerned, in the case of contracts entered into by the Railway Board and by the head of the organizations in respect of the contracts entered into by the other organizations under the Ministry of Railways. There will be no objection if the arbitrator is a Government Servant that he had to deal with matters to which the contract relates or that in the course of his duties as a Government Servant, he has expressed views on all or any of the matters in disputes or difference. The award of the Arbitrator shall be final and binding on the parties to this contract.”
Thus, it can be seen that the designated judge was not bound to appoint a railway officer, and he exercised his powers according to the terms of the agreement by nominating an independent arbitrator.
The first case used by the Respondents to substantiate their argument was the Patel Engineering case which stated that the designated judge, if required, was free to deviate from the arbitration clause and nominate an independent person, subject to the qualifications prescribed in the arbitration agreement under Section 11(8) of the Act. This point was reiterated in the Tripple Engineering case where the term “to take the necessary measures” in Section 11(6) of the Act was interpreted to mean that Section 11(8) must be read with Section 11(6). This was because Section 11(8) keeps the autonomy of a party intact as the required qualifications of the arbitrators need to be in accordance with their agreement. The non-compliance of this, interestingly, may later become a ground for setting aside an award under Section 34(2)(a)(v) of the Act. Lastly, the Raja Transport case stated that “Ignoring the named arbitrator/Arbitral Tribunal and nominating an independent arbitrator shall be the exception to the rule, to be resorted for valid reasons.”
Initially, the decision of the Court in appointing arbitration tribunals was not taken to be an adjudicatory function carried out by the Court and was only considered an administrative function. Later this position was changed, and the Court needed to look into various factors before appointing an arbitrator. The Court entertained questions pertaining to the existence of a valid arbitration agreement, the expiry of the limitation period, a person being party to the agreement and jurisdictional issues. These resulted in delays in the appointment of arbitrators and defeated the purpose of keeping the Courts away from the dispute (supra). The 2015 amendment – insofar as it pertains to the insertion of Section 11(6-A) – is a pro-arbitration development, as it constricts the Court’s role, eventually leading to the speedier disposal of cases. This addition confines the Court’s effort to examine the existence of an arbitration agreement while appointing arbitrators. Also, the amendment to Section 11(7) made the order passed under Section 11(6) non-appealable, giving effective finality to the Court’s order.
The starting of judicial proceedings before the amendment makes the pre-amendment Act applicable to the case in hand. However, the Court seems to have taken a pro-arbitration approach by letting the tribunal decide the questions of coercion and undue influence and restricting its role to the appointment of an arbitrator. The latter is done by solely examining the existence of the arbitration agreement. Also, the Apex Court, dismissing the SLP, made it clear that the appointment was made according to the arbitration agreement, and the appeal had no merit. The Court did well to answer this question even though the independent arbitrator appointed did have the prerogative to decide on its jurisdiction – i.e. the arbitral tribunal, under the 1996 Act.
The Court seems to have taken inspiration from the 2015 Amended Act and opted for a pro-arbitration approach. Though this ruling may not apply to many cases because of the amendment, it still tells us about the hands-off approach the Court appears to take to promote arbitration in India. Under the latest 2018 Bill, the Supreme Court and High Court have designated arbitral institutes for International and Domestic Arbitration, respectively. In case of any dispute, these institutes can be directly approached by the parties for the appointment of arbitrators. This is a significant step towards strengthening institutional arbitration and reducing the heavy burden on Courts, thereby disposing of applications in an expeditious manner.
[i] Union of India and another v. M.P Gupta, (2004) Civil Appeal No. 2053 of 1999