Supreme Court Clarifies Arbitration Dispute: Appointment of Arbitrator and Validity of Arbitration Agreement

The Supreme Court of India, in its judgment dated August 23, 2019, addressed a significant legal issue concerning arbitration agreements and the jurisdiction of civil courts in arbitration matters. The case, National Aluminium Company Limited v. Subhash Infra Engineers Pvt. Ltd. & Anr., revolved around whether a civil court could intervene in disputes arising from an arbitration clause and whether the appointment of an arbitrator by a government company was valid.

The Court ruled that once an arbitration agreement exists, disputes over its validity or scope should be decided by the arbitrator under Section 16 of the Arbitration and Conciliation Act, 1996. It further held that civil suits seeking a declaration on the non-existence of an arbitration agreement are not maintainable.

Background of the Case

The dispute arose when National Aluminium Company Limited (NALCO), a government enterprise, floated a tender on May 5, 2011, for the construction of an ash pond in Odisha. Subhash Infra Engineers Pvt. Ltd. (SIE) submitted its bid, which was accepted on November 9, 2011. A work order was issued, but the respondent (SIE) later refused to execute the contract, citing concerns over project specifications.

When SIE failed to execute the contract, NALCO invoked the arbitration clause and appointed an arbitrator, C.R. Pradhan, a former chairman of NALCO. SIE, however, challenged this appointment and filed a civil suit in Gurgaon, seeking a declaration that no valid arbitration agreement existed. The trial court refused to grant an injunction, but the appellate court and subsequently the High Court ruled in favor of SIE, restraining the arbitrator from proceeding.

Petitioner’s Arguments (NALCO)

NALCO, represented by its counsel, argued:

• The arbitration agreement was valid: The contract contained a clear arbitration clause under Clause 22 of the Notice Inviting Tender (NIT) and Clause 87 of the General Conditions of Contract.
• Civil courts lack jurisdiction: Once an arbitration clause exists, disputes over its validity should be decided by the arbitrator under Section 16 of the Arbitration and Conciliation Act.
• The arbitrator had jurisdiction: The arbitrator was appointed as per the agreed contractual procedure, and his jurisdiction should not have been questioned through a civil suit.

Respondent’s Arguments (Subhash Infra Engineers Pvt. Ltd.)

SIE countered these claims, arguing:

• No binding contract existed: The acceptance of the bid was not unconditional, and thus no concluded contract came into effect.
• The arbitration clause was inapplicable: Since the contract itself was disputed, SIE contended that the arbitration clause could not be enforced.
• Biased arbitrator: The appointment of a former chairman of NALCO as an arbitrator was unfair and raised concerns of impartiality.

Supreme Court’s Observations

The Supreme Court carefully examined the validity of the arbitration agreement and made several key observations:

1. Arbitration Clause Forms Part of the Contract

The Court reiterated that an arbitration clause survives disputes over the contract itself. It stated:

“Once a contract contains an arbitration clause, the dispute regarding the existence of the contract itself must be decided by the arbitrator.”

2. Civil Courts Cannot Intervene in Arbitration Matters

The Court emphasized that under the Arbitration Act, civil courts have limited jurisdiction in matters governed by arbitration agreements. It noted:

“The civil suit seeking a declaration that the arbitration agreement is non-existent is not maintainable.”

3. Section 16 of the Arbitration Act Governs Jurisdictional Disputes

The Court referred to the doctrine of kompetenz-kompetenz, which grants arbitrators the power to rule on their own jurisdiction. It ruled:

“The question of the validity or existence of an arbitration agreement falls within the exclusive domain of the arbitral tribunal under Section 16.”

4. Arbitrator Appointment Must Be Impartial

The Court acknowledged that appointing a former chairman of NALCO as arbitrator raised concerns of bias. Citing the Fifth Schedule of the Arbitration Act, the Court observed:

“The appointment of an arbitrator who is a former employee of the appointing party is problematic under the amended Arbitration Act.”

Final Verdict

The Supreme Court allowed the appeal and set aside the orders of the High Court and the Additional District Judge, restoring the trial court’s ruling. However, recognizing the issue of bias in arbitrator selection, the Court quashed the appointment of C.R. Pradhan as arbitrator.

To ensure fairness, the Court exercised its powers and appointed Justice M.L. Mehta, a former judge of the Delhi High Court, as the new arbitrator to resolve the dispute.

Impact of the Judgment

This judgment is significant in multiple ways:

• Strengthening the Arbitration Framework: It reaffirms that arbitration clauses must be honored and that civil courts cannot intervene unnecessarily.
• Ensuring Arbitrator Impartiality: By striking down the appointment of a biased arbitrator, the Court reinforced fairness in arbitration.
• Clarity on Jurisdiction: The ruling upholds the principle that the arbitral tribunal, not civil courts, should decide disputes about its jurisdiction.

Conclusion

The Supreme Court’s ruling in National Aluminium Company Limited v. Subhash Infra Engineers Pvt. Ltd. strengthens India’s arbitration law by affirming the autonomy of arbitral tribunals and limiting judicial interference. By appointing an independent arbitrator, the Court ensured a fair resolution while maintaining the integrity of the arbitration process.

This decision will serve as a guiding precedent for future arbitration-related disputes, emphasizing that parties must abide by their contractual commitments and that any concerns regarding an arbitrator’s jurisdiction must be addressed within the arbitration framework itself.

Petitioner Name: National Aluminium Company Limited.
Respondent Name: Subhash Infra Engineers Pvt. Ltd. & Anr..
Judgment By: Justice Abhay Manohar Sapre, Justice R. Subhash Reddy.
Place Of Incident: Odisha.
Judgment Date: 23-08-2019.

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