December 08 2009
In SBP & Company v Patel Engineering Limited the Supreme Court made an important pronouncement concerning the scope and applicability of Section 15(2) of the Arbitration and Conciliation Act 1996.(1) The court was of the opinion that the mandate contained in Section 15(2),(2) which postulates the appointment of a substitute arbitrator, must be applied in accordance with the arbitration clause agreed between the parties.
In March 1992 the Maharashtra government awarded a contract to Patel Engineering to carry out certain works. Patel Engineering subcontracted a portion of that work to SBP & M/s BT Patil & Sons (Construction) Ltd. For this purpose the parties entered into two agreements, which both contained identical clauses for the resolution through arbitration of any disputes that may arise between the parties.
Clause 19 of the piecework agreement read as follows:
"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."
When disputes arose between the parties, SBP invoked the arbitration clauses contained in the subcontract agreement and the piecework agreement, and issued a letter appointing Shri TG Radhakrishna to act as an arbitrator on its behalf. Patel Engineering denied the claim and at the same time appointed Shri SN Huddar to act as an arbitrator on its behalf.
However, Huddar declined to arbitrate in the matter and thereafter Patel Engineering nominated a substitute arbitrator. On the same day, Patel Engineering informed Radhakrishna that under the terms of Section 15(2) of the act, it was entitled to appoint a substitute arbitrator who had consented to such appointment. SBP informed Patel Engineering that the appointment of Shri SL Jain as a replacement arbitrator was contrary to the terms of both agreements. SBP wrote to Radhakrishna and Huddar, requesting that they appoint the third arbitrator. Radhakrishna sent a letter informing the parties that in view of Huddar's refusal to act as an arbitrator, he had become the sole arbitrator, denying the claims of the substitute arbitrator to nominate a presiding arbitrator. Radhakrishna stated that Section 15(2) of the act had no application in the case, and that in terms of the agreement, he was entitled to act as the sole arbitrator.
Patel Engineering filed applications under Section 11 of the act for the appointment of the third arbitrator by asserting that in view of Huddar's refusal to act as an arbitrator, it had appointed Jain as a substitute arbitrator under the terms of Section 15(2) of the act. Therefore, Radhakrishna was not entitled to act as the sole arbitrator. The Bombay High Court allowed both applications and appointed Shri Justice MN Chandurkar (retired) as the third arbitrator. SBP challenged this order by filing writ petitions, but could not persuade the division bench of the Bombay High Court to entertain its request to nullify the appointment of Chandurkar as the third arbitrator. The division bench was of the opinion that writ petitions filed against the orders passed by the court were not maintainable. Aggrieved, SBP filed special leave petitions before the Supreme Court.
Since the divisional bench of the Bombay High Court had rendered the judgment prior to the decision of the seven-judge bench of the Supreme Court,(3) the instant judgment sought to dispose of the special leave petitions in accordance with the principles laid down in the seven-judge bench decision.
The principal question before the Supreme Court was whether the orders passed by the Bombay High Court under Section 11(6) of the act were legally correct.
The court was of the opinion that in Section 15(2) the legislature repeatedly emphasizes the necessity of adherence to the terms of the agreement between the parties in the matter of appointment of arbitrators and the procedure to be followed for such appointment.
Relying further on Datar Switchgears Ltd v Tata Finance Ltd,(4) the court ruled that when parties have entered into a contract and settled on a procedure, due importance must be given to such procedure. Even though the doctrine of 'freedom of contract' is now less strict, the court must still respect the terms of the contract entered into by the parties and endeavour to give them importance and effect. Where a party has not disputed the arbitration clause, it is usually bound by it and obliged to comply with the procedure laid down under the clause.
Referring to the disputed clause in the agreement, the court held that there was nothing in the clause from which it could be inferred that in the event of an arbitrator's refusal to accept the appointment or arbitrate in the matter, the party appointing such arbitrator has an implicit right to appoint a substitute arbitrator.
The court was of the opinion that Section 15(1) provides for termination of the arbitrator's mandate where he or she withdraws from office for any reason or pursuant to the parties' agreement, and not where the arbitrator appointed by either party declines to accept the appointment or refuses to act as such. The court held that the term 'rules' appearing in Section 15(2) incorporates not only the statutory rules, but also the terms of agreement entered into between the parties.
Clarifying the difference between the terms 'withdraw' and 'refuse', the court held that Section 15(2) of the act does not per se apply to a case where an arbitrator appointed by a party to the agreement declines to accept the appointment or refuses to arbitrate in the matter.
This case is an example of minimal judicial interference in the scope of arbitration proceedings. The court's decision takes into account party autonomy and is based on the premise that the agreement between the parties will be honoured as it is. Therefore, it can be concluded that in cases where agreements entered into between parties do not contain a provision for the appointment of a substitute arbitrator in case the arbitrator appointed by either party declines to accept the appointment or refuses to arbitrate in the matter, recourse to the provisions of Section 15(2) cannot be taken.
For further information on this topic please contact Bishwajit Dubey or Tamal Mandal at Amarchand & Mangaldas & Suresh A Shroff & Co by telephone (+91 11 4159 0700), fax (+91 11 2692 4900) or email (firstname.lastname@example.org or email@example.com).
"(2) Where the mandate of an arbitrator terminates, a substitute arbitrator shall be appointed according to the rules that were applicable to the appointment of the arbitrator being replaced."
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