hammer, horizontal, court

SBP and Co. V. Patel Engineering Ltd. And ors.

(Civil appeal no.4168 of 2003)

2006 (1) UJ 156 (SC) [FB]


Facts:

The state of Maharashtra through its irrigation department handed over the civil work of stage IV of Koyna Hydroelectric Project to Respondent no.1. For the purpose of the same, respondent no.1 entered into a sub-contract with petitioner. While entering into the contract an agreement was made so as to define the process after any kind of indifferences are faced between the parties to the contract. The clause 19 of the agreement was as follow:

“The continuance of this piece work agreement/contract or at any time after the termination thereof, any difference or dispute shall arise between the parties hereto in regard to the interpretation of any of the provisions herein contained or act or thing relating to this agreement/contract, such difference or dispute shall be forthwith referred to two Arbitrators for Arbitration in Bombay one to be appointed by each party with liberty to the Arbitrators in case of differences or their failure to reach an agreement within one month of the appointment, to appoint an umpire residing in Bombay and the award which shall be made by two Arbitrators or umpire as the case may be shall be final, conclusive and binding on the parties hereto. If either party to the difference or dispute shall fail to appoint an arbitrator within 30 calendar days after notice in writing having been given by the parties or shall appoint an arbitrator who shall refuse to act then the arbitrator appointed by the other party shall be entitled to proceed with the reference as a Sole Arbitrator and to make final decision on such difference or dispute and the award made as a result of such arbitration shall be a condition precedent to any right of action against any two parties hereto in respect of any such difference and dispute.”

Both the parties agreed to the terms of the agreement. Later there were indifferences between the parties. Petitioner appointed Respondent no.2 as his arbitrator. Respondent no.1 appointed S.N. Huddar as his arbitrator but he rejected the proposal as he was earlier connected with the Koyna Hydroelectric Project and subsequently S.L. Jain was appointed as the arbitrator. Respondent no. 1 then wrote a letter to respondent no.2 saying that he cannot act as a sole arbitrator and as per sec. 15(2) of the Arbitration and Conciliation Act, 1996, the arbitrator has to be reappointed within 30 days of decline of the first arbitrator. This letter also included names of three learned judges from Bombay High Court who can be appointed as third arbitrator/ umpire. Respondent no.2 said that there was no need to appoint a third judge and in furtherance of the same respondent no.1 approached the high court of Bombay. A learned judge accepted the appeal of respondent no.1 and appointed one retired judge of the same court as the third arbitrator. Being aggrieved from this decision passed by High Court, this petition was filed under section 11, Arbitration and Conciliation Act, 1996.

Issue raised:

Whether the power of appointing an arbitrator by chief justice of India or chief justice of high court or judge designated by him a judicial or administrative power?

Contention:

Respondent no.2 strongly opposed the appointment of the third arbitrator/ umpire as he said that Shri Jain, arbitrator appointed by Respondent no.1 was not a valid arbitrator and hence the argument has to be decided by a sole arbitrator.

Rationale:

The case was filed in high court questioning the appointment of the third arbitrator, but the plea was dismissed as the high court had no jurisdiction over the case and it should have been filed in the arbitral tribunal by the parties. Later, the question whether the appointment of the arbitrator is a judicial/ administrative duty was posed in front of the Supreme court. The supreme court in this regard over ruled the judgment passed in Konkan Railway Corpn. Ltd. & Anr. Vs Rani Construction Pvt. Ltd. In this judgement the nature of the function was administrative function, that is neither judicial nor quasi-judicial. Chief Justice or his nominee performing the function under sec 11(6) cannot decide any contentious issue between the parties.

In this case the court has explained the function under sec 11(6), Arbitration and Conciliation Act,1966(hereinafter the “Act”) which deals with the appointment of the arbitrator. Balasubramanyan, J. held that “the power exercised by the chief justice of India or the chief justice of High court under section 11(6) of the Act is not an administrative power. It is judicial one.” Thus, the court will appoint an arbitrator only if the conditions under this section are satisfied. To rationalize the holding of the Supreme Court with the Arbitral Tribunal to decide the jurisdiction under section 16 of the Act, the court forced the rule of Kompetenz-kompetenz will operate only in the cases where the arbitrator is not been appointed.

Also, it was stated that under section 11(6) of he Act, the word ‘Institution’ means only a judge of any High court or of any Supreme Court, as the term institution was severely mutilated.

Defects in the law:

The power to appoint arbitrator was vested upon the ‘court’. So, the default power was given to the ‘Chief Justice’ with a view to hand over the responsibility to the highest judicial authority. But the fact that the authority can be delegated to ‘any person or institution’ clearly indicates that this function cannot be considered as a judicial function. Because a judicial function cannot be delegated by the Chief Justice to ‘any person or institution.’

As the right passes on to the Chief Justice after the failure of the parties, it can be considered as his default duty. For the purpose of the same, majority has suggested to change the language of the statute. But judiciary changing the language of the statute would be a complete intervention in the works of the legislature.

Inference:

Many people reviewed this judgment to be a fundamental flaw. This judgement requires a reconsideration by larger bench. Even then the decision rendered cannot be over ruled ad infinitum. it is therefore suggested to seek for a suitable amendment. In a similar case, on the decision rendered by the court, the parliament enacted a new Act.
Arbitration being a most useful and effective alternate method of dispute resolution should be clear and helpful to people. If this system has flaws in it that it shall be a difficult task for the judiciary to look over all the cases and pass judgements. Hence, it is quite important to raise a question on this issue and clear the same.

But as long as the decision is not over ruled by a larger judge bench, this judgement shall prevail and appointment of arbitrator by Chief Justice or ‘any other person or institution’ delegated by him shall be a judicial duty, and same shall be followed and obeyed.

Author :

Avantika Kharade (Maharashtra national law university, Aurangabad)