Supreme Court Upholds Arbitration Clause in Bihar Public Works Contracts Dispute

The case of State of Bihar vs. M/S. Brahmaputra Infrastructure Limited is a significant ruling on the applicability of arbitration clauses in government contracts. The Supreme Court had to decide whether the arbitration agreement between the parties should be governed by the Arbitration and Conciliation Act, 1996 (Central Act) or the Bihar Public Works Contracts Arbitration Tribunal Act, 2008 (State Act). The ruling reinforced the supremacy of contractual agreements and addressed the unconstitutionality of a provision in the State Act.

Background of the Case

The dispute arose from a contract executed on June 22, 2012, between the State of Bihar and M/S. Brahmaputra Infrastructure Limited for public works. The contract contained an arbitration clause stating that disputes would be resolved as per the provisions of the Arbitration and Conciliation Act, 1996. However, the Bihar Government argued that arbitration should be conducted under the Bihar Public Works Contracts Arbitration Tribunal Act, 2008.

The respondent sought the appointment of an arbitrator under Section 11(6) of the Central Act. The Bihar Government contested this, asserting that the State Act applied exclusively. The High Court ruled in favor of the respondent, leading the Bihar Government to appeal to the Supreme Court.

Claims of the State of Bihar

The Bihar Government contended:

• The Bihar Public Works Contracts Arbitration Tribunal Act, 2008, provides a statutory mechanism for resolving disputes in government contracts.
• Section 22 of the State Act provides an overriding effect, making it applicable to all disputes under government contracts.
• The appointment of an arbitrator under the Central Act was incorrect, as the State Act was the governing law.

Claims of M/S. Brahmaputra Infrastructure Limited

The respondent countered:

• The contract explicitly stipulated that arbitration would be governed by the Central Act.
• The State Act could not override a mutually agreed arbitration clause.
• Arbitration agreements must be upheld per established contract law principles.

Supreme Court’s Observations

The Supreme Court analyzed the provisions of both laws and held:

“Since in the present case, an arbitration agreement exists and stipulates applicability of the Central Act, the State Act will not apply.”

The Court reaffirmed that the parties’ contract prevails over conflicting provisions of the State Act, provided there is no express exclusion of the Central Act.

Key Findings of the Supreme Court

• The existence of an arbitration agreement under the Central Act precludes the application of the State Act.
• Section 8 of the State Act states that its provisions are in addition to and supplemental to the Central Act, and where a conflict arises, the Central Act prevails.
• The arbitration clause explicitly mentioned that disputes would be resolved under the Arbitration and Conciliation Act, 1996.
• The Supreme Court saw no reason to interfere with the High Court’s decision.

Unconstitutionality of Section 4(3)(b) of the Bihar Act

The Supreme Court also examined Section 4(3)(b) of the Bihar Public Works Contracts Arbitration Tribunal Act, which states:

“The Chairman and any other member shall hold office at the pleasure of the Government.”

The Court ruled that this provision was unconstitutional, stating:

“A provision that the tenure of Chairman and other members of the Arbitration Tribunal is at the pleasure of the Government is inconsistent with the constitutional scheme, particularly Article 14 of the Constitution of India.”

The Court held that tribunal members must function independently, free from government control, to ensure fair and impartial arbitration.

Final Judgment

The Supreme Court ruled:

• The appeal by the State of Bihar was dismissed.
• The arbitration clause in the contract would be upheld, and disputes would be resolved under the Central Act.
• Section 4(3)(b) of the Bihar Act was unconstitutional.
• The State Government may approach the High Court for appointing a neutral arbitrator if there are concerns about bias.

Key Takeaways from the Judgment

• Arbitration Agreements Prevail: Contractual arbitration clauses cannot be overridden by State laws unless expressly excluded.
• State Laws Cannot Undermine the Central Act: If a contract refers to the Central Act, it will govern arbitration, even if a State law exists.
• Independence of Arbitration Tribunals: Tribunal members cannot be removed at the government’s pleasure, as it violates the principles of fairness and neutrality.

The ruling reinforces the supremacy of contractual agreements in arbitration matters and strengthens the independence of dispute resolution mechanisms.

Petitioner Name: State of Bihar
Respondent Name: M/S. Brahmaputra Infrastructure Limited
Judgment By: Justice Adarsh Kumar Goel, Justice Rohinton Fali Nariman, Justice Uday Umesh Lalit
Place Of Incident: Bihar, India
Judgment Date: 22-03-2018

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