Bombay High Court
Sew And Ssnr Jv vs Union Of India Through Office Of The ... on 12 July, 2024
2024:BHC-OS:10227
CARAPL-16182-2023-J- F-12-7.doc
IN THE HIGH COURT OF JUDICATURE AT BOMBAY
ORDINARY ORIGINAL CIVIL JURISDICTION
IN ITS COMMERCIAL DIVISION
COMM. ARBITRATION APPLICATION (L.) NO. 16182 OF 2023
Digitally
signed by
SHRADDHA
SHRADDHA KAMLESH SEW & SSNR JV, a joint venture of
KAMLESH TALEKAR
TALEKAR Date: (i) SEW Infrastructure Ltd. and
2024.07.12
17:16:12
+0530
(ii) SSNR Projects Pvt Ltd.
Through its Authorized Representative
Mr Kalidindi Ravi Varma aged 35 years
Having its office address at
#51-8-40, behind BOC Limited,
Seethammadhara, Visakhapatnam
Pin code -530013, Andhra Pradesh. ... Applicant
Versus
Union of India
through Office of the Chief
Administrative Officer (Construction), West-
ern Railways, Churchgate, Mumbai-400020. ... Respondent
Mr. Jaideep Singh Khattar a/w. Mr. Rohit Balani i/b Fort Circle,
Advocates for Applicant.
Mr. Kedar B. Dighe, Advocate for Respondent.
CORAM : SOMASEKHAR SUNDARESAN, J.
Reserved on : June 20, 2024 Pronounced on : July 12, 2024 Judgement :
1. This Application has been filed on 31 st May, 2023 for appointment Page 1 of 32 July 12, 2024 Shraddha Talekar ::: Uploaded on - 12/07/2024 ::: Downloaded on - 21/07/2024 22:54:29 ::: CARAPL-16182-2023-J- F-12-7.doc of an arbitrator under Section 11 of the Arbitration and Conciliation Act, 1996 ("Arbitration Act") in connection with disputes and differences between the parties under Articles of Agreement dated 9 th January, 2019 ("Agreement").
Context of the Agreement:
2. The Applicant, "SEW and SSNR Joint Venture" is a joint venture between two companies, namely, SEW Infrastructure Ltd. and SSNR Projects Pvt. Ltd. The Respondent is the Union of India. The Agreement entailed the Applicant constructing a single-line rail tunnel of about 2.96 km in Madhya Pradesh (" Project") for the Indian Railways Administration for a Project cost of approximately Rs. 148.88 crores.
The parties are ad idem that the Indian Railways Standard General Conditions of Contract - November 2018 (" Standard Conditions"), bind their contractual relationship and form an integral part of the Agreement.
3. The arbitration clause in the Agreement provides that the place of arbitration would be within the geographical limits of the Division of the Railway where the cause of action arose or the Headquarters of the concerned Railway or any other place with the written consent of both Page 2 of 32 July 12, 2024 Shraddha Talekar ::: Uploaded on - 12/07/2024 ::: Downloaded on - 21/07/2024 22:54:29 ::: CARAPL-16182-2023-J- F-12-7.doc the parties. It is evident from the face of the record that the Project and the implementation of the Agreement were overseen and coordinated by the Western Railway Headquarters, Churchgate, Mumbai. Therefore, the place of arbitration could well be in Mumbai. Learned Counsel for both parties fairly submitted, jointly, that the territorial jurisdiction of this Court is not in doubt. Therefore, this Application was taken up for hearing and disposal by consent of the parties.
4. Learned Counsel for the parties were heard at length on 15 th June, 2024 and leave was granted to each of them to file short notes on propositions. The Respondent filed such written arguments on 21 st June, 2024 while the Applicant filed them on 25th June, 2024. Brief Factual Matrix:
5. A brief thumbnail sketch of the facts, discerned from an examination of the factual record "through the eye of the needle" (to borrow the Hon'ble Supreme Court's phrase in NTPC Ltd. Vs. SPML Infra Ltd. 1 ("NTPC") and in consonance with the principles declared in Vidya Drolia and Ors. vs. Durga Trading Corporation 2 ("Vidya Drolia"), may be summarised thus:-
1
(2023) 9 SCC 385 2 (2021) 2 SCC 1 Page 3 of 32 July 12, 2024 Shraddha Talekar ::: Uploaded on - 12/07/2024 ::: Downloaded on - 21/07/2024 22:54:29 ::: CARAPL-16182-2023-J- F-12-7.doc
a) Work commenced on the Project under the Agreement but with time over-runs. The cause of the time over-runs and what reason is attributable to which party, is a matter of detail and evidence to be assessed and is not relevant for purposes of dealing with this Application;
b) It is apparent from the record that the work on the Project came to a standstill during the Covid-19 pandemic and the resultant lockdown;
c) On 18th May, 2020, the Railway Board communicated to the Respondent a decision to keep the larger rail project (of which, the Project was a part) on hold, and "short close" all the existing contracts, "for the present";
d) On 25th June, 2020, the Respondent sought consent of the Applicant to close the Agreement without any liability on either side since the Project was being put on hold. The Applicant responded on the same day, refusing to discharge the Respondent from liability, and stated that it was being coerced into consenting to abandon the Project. The Applicant asserted that it was reserving the right to initiate arbitration to resolve disputes;
e) On 29th June, 2020, the parties executed the 1st Supplementary Contract to cover some additional works - indicating that the Project was no longer on hold;
f) On 19th August, 2020, the Respondent again asked the Applicant to freeze all further work at the site "till further orders";Page 4 of 32
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g) On 21st August, 2020, the Respondent asked the Applicant to positively confirm that it would waive all its rights, and confirm that there would be no financial liabilities on either side;
h) On 24th August, 2020, the Applicant reiterated that it would not discharge the Respondent of all liabilities, reserving again, the right to arbitrate. The Applicant also wrote in detail about the operational problems and the hardship that would arise from freezing all work;
i) On 16th September, 2020, in yet another reversal, the Respondent wrote to the Applicant stating that the deadline for completion of the Project is being extended, and asked that all work should be completed by 30th October, 2020, at the same rates as contracted, without any escalation of costs;
j) On 22nd October, 2020, the Applicant stated that it was impossible to complete the Project by 30 th October, 2020, and sought a 12- month extension explaining the problems arising out of the inability to re-mobilise labour and equipment due to the pandemic, and the sudden decision to revive the Project;
k) On 11th May, 2021, the Respondent communicated a fresh decision to "short close" the Agreement without any liability on either side. This time, the Respondent did not ask for consent, and only asked for acknowledging receipt of the communication;
l) On 24th May, 2021, the Applicant protested that despite there being no consent to discharge the Agreement without any liability on either side, the Respondent was now unilaterally declaring that Page 5 of 32 July 12, 2024 Shraddha Talekar ::: Uploaded on - 12/07/2024 ::: Downloaded on - 21/07/2024 22:54:29 ::: CARAPL-16182-2023-J- F-12-7.doc there would be no liability on either side, leaving the Applicant with no option but to invoke arbitration;
m) On 17th December, 2021, the Respondent wrote, all over again, that the Railway Board has "de-freezed" the work on the Project afresh, and sought a confirmation that the Applicant would complete execution on the same terms and rates as originally contracted;
n) On 14th January, 2022, the Applicant wrote to the Respondent outlining the flow of events and how equipment and labour had been demobilised and the sudden decision to de-freeze could not lead to the same rates being feasible. The Applicant asserted that the same rates could not be expected to continue, and sought guidance on the way forward;
o) On 31st January, 2022, the Respondent confirmed that the Railway Board would not be able to allow any cost escalation and sought a written confirmation that the old rates would be adhered to by the Applicant;
p) On 3rd November 2022, the Applicant wrote a detailed complaint against the manner in which the Agreement had been handled, making a claim for compensation and damages to the tune of approximately Rs. 22.52 crores. In a nutshell, the heads of the claims were:-
i. Loss of bank charges incurred for obtaining bank guarantees, performance security and security deposit and other extensions - Rs. 42,28,356;Page 6 of 32
July 12, 2024 Shraddha Talekar ::: Uploaded on - 12/07/2024 ::: Downloaded on - 21/07/2024 22:54:29 ::: CARAPL-16182-2023-J- F-12-7.doc ii. Loss incurred towards idling of men, machinery, equipment, establishment and permanent structural establishment - Rs. 9,38,55,519;
iii. Loss on account of demobilisation of material machinery and equipment - Rs. 73,85,033;
iv. Loss towards lease rentals and expenditure to be incurred to bring the leased land to its original condition - Rs. 2,71,39,937;
v. Loss of business opportunity due to abrupt short-closure of contract - Rs. 6,52,52,513;
vi. Loss of profit due to overstay at site beyond contractual completion - Rs. 2,73,19,337; and vii. Interest at 18% per annum from the respective due dates for the aforesaid amounts;
q) The Applicant requested the Respondent to amicably settle the matter "within 120 days" of receipt of the aforesaid letter, failing which "it would have no other option but to" resolve the dispute "by invoking the Arbitration Clause as stipulated" in the Agreement;
r) In response, the Chief Administrative Officer, Western Railways Headquarters, wrote to the Applicant on 23rd December, 2022, asking it to fill a form titled in the Standard Conditions as "Annexure XV", to "process further for appointment of arbitrators".
The document was digitally signed for the reason "Approved". The standard formats in Annexure XV essentially provide for the Page 7 of 32 July 12, 2024 Shraddha Talekar ::: Uploaded on - 12/07/2024 ::: Downloaded on - 21/07/2024 22:54:29 ::: CARAPL-16182-2023-J- F-12-7.doc counterparty to the Railways agreeing or not agreeing to waive the applicability of Section 12(5) of the Arbitration Act. This is because the Standard Conditions give a unilateral power to the Railways to appoint an arbitrator from among railway employees;
s) The arbitration agreement entails the Respondent providing a list of four names from which the Applicant could short list two names, from which, the Respondent would appoint one as the Sole Arbitrator. The list of four names would comprise names of only employees of the Indian Railways - placing the arbitration agreement in direct conflict with the Fourth Schedule of the Arbitration Act, read with Section 12(5) of the Arbitration Act;
t) If the Railways' counterparty waives the applicability of Section 12(5) of the Arbitration Act, the panel would comprise Gazetted Officers not lower than the rank of "Junior Administrative Grade". If the counterparty does not waive the applicability, the panel would comprise officers not lower than the rank of "Senior Administrative Grade";
u) On 21st January, 2023, the Applicant refused to waive the applicability of Section 12(5) of the Arbitration Act, and instead requested that the Respondent list names of retired judges of a High Court from which an arbitrator could be chosen;
v) On 7th February, 2023, the Respondent simply provided a list of four retired railway officers for the Applicant to choose from; and w) On 27th February, 2023, the Applicant wrote to the Respondent that it would have no confidence in the independence of four retired Page 8 of 32 July 12, 2024 Shraddha Talekar ::: Uploaded on - 12/07/2024 ::: Downloaded on - 21/07/2024 22:54:29 ::: CARAPL-16182-2023-J- F-12-7.doc railway officers and reiterated its request that a panel of four retired High Court judges be provided. The Applicant wrote that if the parties could not agree upon this approach, it would pursue the avenues in the Arbitration Act for appointment of an arbitrator. This exchange eventually led to this Application being filed. Respondent's Objections:
6. The Respondent has no dispute about the existence of an arbitration agreement in the Standard Conditions. However, the Respondent's objections to this Court appointing an arbitrator are twofold - primarily, that the dispute for which arbitration is proposed is outside the scope of the arbitration agreement, and secondarily, that the arbitration has not been properly invoked by the Applicant. According to the Respondent, the Project has been subjected to a "short closure"
and disputes relating to a short closure are expressly excluded from the scope of resolution by arbitration.
Standard Conditions - Arbitration Agreement:
7. Before delving into these objections, it would be instructive to examine a few provisions in the Standard Conditions that are germane to adjudicating this Application. Clauses 63 and 64 of the Standard Conditions contain the provisions governing arbitration. While Clause Page 9 of 32 July 12, 2024 Shraddha Talekar ::: Uploaded on - 12/07/2024 ::: Downloaded on - 21/07/2024 22:54:29 ::: CARAPL-16182-2023-J- F-12-7.doc 64 is a provision with a copiously detailed procedure for initiating and conducting arbitration, Clause 63 deals with reconciliation without arbitration, and exclusions from the scope of arbitration.
8. Clause 63.1 requires all disputes and differences of any kind whatsoever arising in connection with the Standard Conditions to be referred by the Applicant to the General Manager of the Respondent, who shall within 120 days "notify decisions" on the matters so referred. Matters for which provision has been made in a few clauses are deemed to be "excepted matters", and such "excepted matters" are specifically excluded from the arbitration agreement. Disputes and differences relating to Clauses 61(1) and 61(2) of the Standard Conditions feature among excepted matters. According to the Respondent, the disputes being raised by the Applicant relate to these clauses, and are hence not amenable to arbitration.
9. In matters other than excepted matters, under Clauses 64.1(i), if there is no decision in 120 days, the dispute may be referred to arbitration. Clause 64.3(c)(iii), which provides for qualification of arbitrators, merely lists the rank of the Railways Officers as qualifications, and not any area of technical expertise. Page 10 of 32
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10. Clause 61(1) of the Standard Conditions provides that the Respondent shall be entitled to determine and terminate the Agreement at any time should cessation of work become necessary, due to paucity of funds or due to any other reason whatsoever. In such event, the value of approved materials at site and work done until that date shall be paid for in full at the rate specified in the Agreement. Written notice of such determination and the reasons therefor shall be conclusive evidence of such determination.
11. Under Clause 61(2) of the Standard Conditions, should the Agreement be so determined and the Applicant seek payment for expenditure incurred by him in the expectation of completing the whole of the work, the Railways shall admit and consider such claims as are deemed reasonable and are supported by vouchers to the satisfaction of the Engineer. The Railway's decision on the necessity and propriety of such expenditure shall be final and conclusive.
12. From a plain reading of what exceptions these provisions create, it would prima facie appear that :-
A) The right of the Respondents to determine the Agreement, whether due to "paucity of funds or from any other cause whatsoever", would not be arbitrable (under Clause 61.1).Page 11 of 32
July 12, 2024 Shraddha Talekar ::: Uploaded on - 12/07/2024 ::: Downloaded on - 21/07/2024 22:54:29 ::: CARAPL-16182-2023-J- F-12-7.doc However, for a dispute to be regarded as being arbitrable or otherwise, one would need to interprete the phrase "or from any other cause whatsoever". One would argue that the phrase can only take meaning from the preceding phrase "paucity of funds". Another would argue otherwise. This is in the domain of the Arbitral Tribunal;
B) Disputes about the value of work done until determination, and material at site would not be arbitrable (under Clause 61.1); C) Disputes relating to the extent of admission of claims of expenditure incurred in the expectation of completing the whole work would not be arbitrable (under Clause 61.2); and D) Disputes around the necessity and propriety of such expenditure would not be arbitrable (under Clause 61.2).
13. Even a plain reading of the foregoing would show that whether a claim raised relates to these elements, and conforms to the necessary ingredients to fall within an excepted matter, would involve assessment of evidence and examination of the record.
Existence of an Arbitration Agreement:
14. It is now well settled (most recently, at the hands of a seven-judge bench of the Hon'ble Supreme Court3), that the rule governing the scope 3 In Re: Interplay Between Arbitration Agreements Under the Arbitration and Conciliation Act 1996 and the Indian Stamp Act 1899-2023 SCC OnLine SC 1666. Page 12 of 32
July 12, 2024 Shraddha Talekar ::: Uploaded on - 12/07/2024 ::: Downloaded on - 21/07/2024 22:54:29 ::: CARAPL-16182-2023-J- F-12-7.doc of jurisdiction of a Court under Section 11 of the Arbitration Act is that the Court must confine itself to examination of whether an arbitration agreement is in existence. Unless the arbitration agreement is non- existent, the Court must leave all facts of the matter, including the scope of whether a dispute is arbitrable, including even a trial on the existence of a valid arbitration agreement to the Arbitral Tribunal.
15. This Court ought to remain mindful of the emphatic declaration of the law by the Hon'ble Supreme Court on the subject and not embark on an exercise that has been prohibited. In the course of exercising its jurisdiction under Section 11, this Court cannot usurp and grab the jurisdiction of the Arbitral Tribunal - which has the sovereign right to adjudicate the issue as to whether a claim presented is arbitrable. A party contesting the initiation of arbitration would not be entitled to draw this Court into a detailed adjudication and assessment of evidence only to determine if the arbitrator should be appointed. Such party may indeed embark upon such an exercise before the Arbitral Tribunal.
16. The Hon'ble Supreme Court has repeatedly declared the law on the standard and degree of scrutiny to be deployed by the Court exercising jurisdiction under Section 11 and to what extent it can be Page 13 of 32 July 12, 2024 Shraddha Talekar ::: Uploaded on - 12/07/2024 ::: Downloaded on - 21/07/2024 22:54:29 ::: CARAPL-16182-2023-J- F-12-7.doc drawn into a detailed assessment of evidence. This Court can only examine the record through the "eye of a needle" 4 to see if the disputes and differences being raised are manifestly outside the purview of the arbitration agreement.
17. In the matter at hand, what is evident is that the parties have indeed agreed by way of the Standard Conditions that there are excepted matters that cannot be gone into by an Arbitral Tribunal. The Respondent invokes Clauses 61.1 and 61.2 to object to the very reference being made to arbitration. Suffice it to say, an adjudication of whether a dispute is of a non-arbitrable nature, is a question of fact that the Arbitral Tribunal would need to go into. One must not let a party to the contract, frustrate, obstruct and delay the very commencement of arbitration, since that would be counterproductive to the very objective of speedy and alternate dispute resolution in the form of arbitration.
18. Against this backdrop, the objections of the Respondent made on oath in its affidavit in reply dated 24th August, 2023, merits analysis. The Respondent has averred that the Applicant had accepted the "short closure" of the Agreement by its letter dated 25 th June, 2020, and consequently, the provision in the Standard Conditions that no claim 4 NTPC Ltd. Vs. SPML Infra Ltd. - (2023) 9 SCC 385 Page 14 of 32 July 12, 2024 Shraddha Talekar ::: Uploaded on - 12/07/2024 ::: Downloaded on - 21/07/2024 22:54:29 ::: CARAPL-16182-2023-J- F-12-7.doc may be made in the case of a short closure, would be attracted. A plain reading of the exchange of letters on 25 th June, 2020 would show that on that date, the Respondent did not claim short closure, but instead, communicated that it had decided to keep the Project "on hold". As seen above, the status of keeping the Project on hold kept changing. The Respondent requested if the Applicant would consent to a "short closure". The Applicant refused to consent. The Applicant asserted that he would have to resort to dispute resolution. Significantly, although the Respondent insists that short closure had been accepted on 25 th June, 2020, the Respondent appears to have executed the 1 st Supplementary Contract four days later, on the 29 th June, 2020. Therefore, the assertion that the Applicant had accepted the early termination is meaningless, since, far from determination of the contract, the parties supplemented the scope of work on the Project immediately thereafter.
19. The Respondent moved on from the position it took in June 2020, when it wrote to the Applicant on 16 th September, 2020 and asked for the Project to be completed by 30 th October, 2020. Therefore, it appears, prima facie, that the attempt to achieve a short closure by mutual consent was abandoned by the Respondent and the Project that Page 15 of 32 July 12, 2024 Shraddha Talekar ::: Uploaded on - 12/07/2024 ::: Downloaded on - 21/07/2024 22:54:29 ::: CARAPL-16182-2023-J- F-12-7.doc had been kept "on hold" at that "stage" was revived. Therefore, this Court is of the opinion that the argument of the Respondent that there had been consent from the Applicant for short closure on 25 th June, 2020 is ex facie untenable.
20. The revival of the Project in September 2020, had been preceded by a request from the Respondent vide its letter dated 21st August, 2020 asking the Applicant to confirm that it would not make any claims against the Respondent. It is true that in this letter, the Respondent has asserted that the disputes are not arbitrable in cases of determination under Clause 61(1) of the Standard Conditions. However, that very letter also requests the Applicant to accord consent for determination of the Project, without either party owing liabilities to the other party. The Respondent had until then, prima facie, only hedged its position vis-à- vis the Agreement, and had only kept the Project on hold "at that stage"
and not determined it. Evidently, going by the material disclosed by both parties in these proceedings, it is not possible to conclude whether the Respondent indeed sought to determine the Agreement, or if it was citing its power to declare determination as a leverage to keep bargaining with the Applicant. All these are matters for the Arbitral Tribunal to consider depending on how the parties plead in that forum.Page 16 of 32
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21. It also stands to reason that the conduct of a party to a contract pursuant to a provision of a contract executed by it would show that party's understanding of the contract. The Respondent's reaction to the purported invocation of arbitration by the Applicant's letter dated 3 rd November, 2022, prima facie does not appear to show that the Respondent believed the dispute to be non-arbitrable. After the letter from the Applicant making a claim for Rs. 22.52 crores plus interest, the Respondent did not assert that there was no scope for arbitration on the disputes. Instead, on 23rd December, 2022, the Respondent asked for a waiver from applicability of Section 12(5) of the Arbitration Act, indicating that the next step towards setting up the Arbitral Tribunal, as provided for in the Standard Conditions, was adopted.
22. The arbitration agreement in the Standard Conditions specifically entailed the Respondent's right to appoint an arbitrator of its choice, with the only choice for the Applicant being to eliminate two names from four names that the Respondent may propose. Even when the Applicant refused to waive applicability of Section 12(5), the Respondent did not assert that there was no question of the claims made being non-arbitrable. Instead, the Respondent provided a list of four names of retired officers of the Indian Railways, and asked the Applicant to pick two names out of them, for the Respondent to then Page 17 of 32 July 12, 2024 Shraddha Talekar ::: Uploaded on - 12/07/2024 ::: Downloaded on - 21/07/2024 22:54:29 ::: CARAPL-16182-2023-J- F-12-7.doc pick one name from such short list of two names. When this Court conducts an "examination" as required under Section 11, it would be impossible to hold that ex facie there is no scope for arbitration and that the arbitration agreement does not exist for the disputes and differences that have arisen between the parties.
23. The Learned Counsel for the Respondent has sought to rely on the judgment of the Hon'ble Supreme Court in Magic Eye Developers Pvt. Ltd. v. M/s. Green Edge Infrastructure Pvt. Ltd. and others. etc. 5 This judgement does not further the cause of the Respondent since it essentially declares that there is a distinction between the existence of a valid arbitration clause, and the non-arbitrability of a dispute under such clause. In the facts of that case, the Section 11 Court did not conclusively rule even on the existence of an agreement and had referred even that question to the Arbitral Tribunal. The Hon'ble Supreme Court intervened to require the Section 11 Court to conclusively and finally determine the existence and validity of the arbitration agreement before deciding that the disputes could be referred to arbitration. Evidently, in the instant case, there is an arbitration agreement between the Applicant and the Respondent and the core question as to whether disputes in question are arbitrable, 5 AIR 2023 SC 2339 Page 18 of 32 July 12, 2024 Shraddha Talekar ::: Uploaded on - 12/07/2024 ::: Downloaded on - 21/07/2024 22:54:29 ::: CARAPL-16182-2023-J- F-12-7.doc cannot be answered in the negative by an examination of the record.
24. In any case, all such analysis is unnecessary in view of the extensive articulation on the scope of interference by a Section 11 Court by the seven-judge bench of the Hon'ble Supreme Court. In Section of the judgement, the Hon'ble Supreme Court has reminded and reiterated that Section 11(6A) of the Arbitration Act is very much on the statute book and its deletion has not been brought into force. Therefore, there is a legislative stipulation that a Section 11 Court must confine its examination to the existence of an arbitration agreement. Even after the arbitration commences, it is for the parties to convince the Arbitral Tribunal that the nature of the claims made in arbitration do not conform to what the parties had agreed as being arbitrable. The following extracts would be noteworthy:-
164. Section 11(6A) uses the expression "examination of the existence of an arbitration agreement." The purport of using the word "examination" connotes that the legislature intends that the referral court has to inspect or scrutinize the dealings between the parties for the existence of an arbitration agreement. Moreover, the expression "examination" does not connote or imply a laborious or contested inquiry. On the other hand, Section 16 provides that the arbitral tribunal can "rule" on its jurisdiction, including the existence and validity of an arbitration agreement. A "ruling"
connotes adjudication of disputes after admitting evidence from the parties. Therefore, it is evident that the referral court is only required to examine the existence of arbitration agreements, whereas the arbitral tribunal ought to rule on its jurisdiction, Page 19 of 32 July 12, 2024 Shraddha Talekar ::: Uploaded on - 12/07/2024 ::: Downloaded on - 21/07/2024 22:54:29 ::: CARAPL-16182-2023-J- F-12-7.doc including the issues pertaining to the existence and validity of an arbitration agreement. A similar view was adopted by this Court in Shin-Etsu Chemical Co. Ltd. v. Aksh Optifibre Ltd.
166. When the referral court renders a prima facie opinion, neither the arbitral tribunal, nor the court enforcing the arbitral award will be bound by such a prima facie view. If a prima facie view as to the existence of an arbitration agreement is taken by the referral court, it still allows the arbitral tribunal to examine the issue in-depth. Such a legal approach will help the referral court in weeding out prima facie non-existent arbitration agreements. It will also protect the jurisdictional competence of the arbitral tribunals to decide on issues pertaining to the existence and validity of an arbitration agreement.
[Emphasis Supplied]
25. Consequently, this Court is of the view that there is no scope for returning a finding that an arbitration agreement is non-existent, for this Court not to allow this Application. It is in the domain of the Arbitral Tribunal to deal with all facets of arbitrability, which this Court will not usurp or trample upon.
Invocation of Arbitration:
26. The conduct of the Respondent also shows that it would not be possible for this Court, in the Section 11 jurisdiction to come to an inexorable ex facie conclusion in the matter that there had been no invocation of arbitration. The very actions of the Respondent would suggest that the Respondent understood the letter dated 3 rd November, Page 20 of 32 July 12, 2024 Shraddha Talekar ::: Uploaded on - 12/07/2024 ::: Downloaded on - 21/07/2024 22:54:29 ::: CARAPL-16182-2023-J- F-12-7.doc 2022 as being an invocation, which is why it engaged step after step, right up to the point of providing names of four retired officials of the Indian Railways for the Applicant to pick from. Faced with the Applicant insisting on independent retired judges and filing this Application, the Respondent has later taken a stance that arbitration has not been properly invoked.
27. The Respondent's conduct leaves no manner of doubt about how the Respondent had understood the communication of 3 rd November, 2022. If that communication was incapable of being perceived as invocation of arbitration, it begs the question why the Respondent sought confirmation on waiver of Section 12(5) of the Arbitration Act, and also came up with a list of four names of candidates to be appointed as arbitrators. The letter of invocation referred to a period of 120 days for amicable settlement, which too was evidently a requirement in the arbitration agreement, also making it clear that the communication dated 3rd November, 2022 constituted invocation.
28. Learned Counsel for the Respondent has cited D.P. Construction v. Vishvaraj Environment Pvt. Ltd.6, ("DP Construction") in order to underline the fact that invocation of the arbitration clause is a vital 6 2022 SCC OnLine Bom 1410 Page 21 of 32 July 12, 2024 Shraddha Talekar ::: Uploaded on - 12/07/2024 ::: Downloaded on - 21/07/2024 22:54:29 ::: CARAPL-16182-2023-J- F-12-7.doc element before this Court can entertain an application under Section 11 of the Arbitration Act. A Learned Single Judge of this Court has lucidly explained in this judgment, the importance and relevance of invocation. In the facts of that case, the Learned Single Judge found that the conciliation process prior to arbitration had been validly invoked but the specific invocation of arbitration after failure of conciliation was missing. Endorsing with approval, two judgments namely, Malvika Rajnikant Mehta v. JESS Construction 7 and Alupro Building Systems Pvt. Ltd. v. Ozone Overseas Pvt. Ltd. 8, the Learned Single Judge articulated the relevance of invocation. In a nutshell, the Learned Single Judge highlighted the following purposes behind the necessity for invocation:-
A) Invocation puts the adversary to notice as to the nature of the claim;
B) It provides an opportunity to the adversary, at the very threshold, to contest admissibility of the claims;
C) If the arbitrator is named, it allows the adversary to raise the issue of impartiality and consequent disqualification too, at the very threshold;
D) It enables the parties to determine the actual date of 7 2022 SCC OnLine Bom 920 8 2017 SCC OnLine Del 7228 Page 22 of 32 July 12, 2024 Shraddha Talekar ::: Uploaded on - 12/07/2024 ::: Downloaded on - 21/07/2024 22:54:29 ::: CARAPL-16182-2023-J- F-12-7.doc commencement of the arbitration, which would help discern the applicability of the rest of the scheme of the Arbitration Act.
29. The aforesaid principles point to how they enable putting the Respondent to notice about the nature of the claim and the scope of the claim. In the matter at hand, it is apparent that the Respondent had clearly been in no manner of doubt about the nature of the claims raised or the fact that arbitration was actually being invoked. In fact, the Respondent asked the Applicant to confirm if it would waive the applicability of Section 12(5) of the Arbitration Act to the arbitration agreement contained in the Standard Conditions. Upon the Applicant refusing consent to such waiver, the Respondent submitted the long list of four names of retired employees of the Indian Railways, for the Applicant to short list two names. It is seen that there was no manner of doubt in the Respondent's mind that arbitration had been invoked.
30. Yet another judgment in the case of Amit Guglani and Another v. L and T Housing Finance Ltd. Through-Managing Director and Another9 was cited by Learned Counsel for Respondent to submit that invocation under Section 21 is a mandatory prerequisite to the jurisdiction under Section 11 of the Arbitration Act becoming available. 9 2023 SCC OnLine Del 5206 Page 23 of 32 July 12, 2024 Shraddha Talekar ::: Uploaded on - 12/07/2024 ::: Downloaded on - 21/07/2024 22:54:29 ::: CARAPL-16182-2023-J- F-12-7.doc Here again, the decision underlines the same principles as enunciated by the Learned Single Judge of this Court in the case of DP Construction. In the facts of that case, it was held that the manner of purported invocation was no invocation at all. In sharp contrast, in the instant case, the invocation on 3rd November, 2022 was clear and unambiguous in terms of the nature of the claims being made and indeed put the Respondent to such clear notice that arbitration was being invoked, that the Respondent took the next steps stipulated upon invocation under the arbitration agreement. The Respondent evidently understood that arbitration had been invoked.
31. On facts, therefore, it is quite clear that the parties evidently understood the arbitration as having been invoked. There can be no doubt that the principles underlying the invocation of arbitration under Section 21 of the Arbitration Act, had been met. Independence and Impartiality - a core requirement:
32. There is one other facet of the matter that needs to be dealt with. It is now trite law that unilateral appointment of the arbitrator by one of the parties to the contract is in conflict with the principle of impartiality and independence expected in an arbitration process. There are two Page 24 of 32 July 12, 2024 Shraddha Talekar ::: Uploaded on - 12/07/2024 ::: Downloaded on - 21/07/2024 22:54:29 ::: CARAPL-16182-2023-J- F-12-7.doc foundational problems with Clause 64.(3) of the arbitration agreement in the Standard Conditions. First, the candidates for appointment would necessarily have an employer-employee relationship with the Respondent. Second, the appointment process is entirely dominated and controlled by the Respondent in an over-arching manner. Even if one assumes for the sake of argument that the agreement had not provided for Railways employees to be made arbitrators, if just one party picks the arbitrator, that would run counter to the very scheme of the Arbitration Act.
33. Arbitration entails the substitution of an independent court with an independent private contractual dispute resolution forum. Independence and impartiality is the key element in whichever form of dispute resolution that parties have recourse to. It is for this reason that Section 12(5) of the Arbitration Act, renders an arbitrator who is in such relationship with a party to the dispute as specified in the Seventh Schedule, to be ineligible for appointment. Any award rendered by an ineligible arbitrator would be unenforceable, which is why this prohibition has been set out in Section 12, which is captioned as "Grounds for Challenge". For felicity, the provisions of Section 12(5) are extracted below:-
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12. Grounds for challenge-
....
(5) Notwithstanding any prior agreement to the contrary, any person whose relationship, with the parties or counsel or the subject-matter of the dispute, falls under any of the categories specified in the Seventh Schedule shall be ineligible to be appointed as an arbitrator:
Provided that parties may, subsequent to disputes having arisen between them, waive the applicability of this sub-section by an express agreement in writing.
[Emphasis Supplied]
34. The very first item in the Seventh Schedule of the Arbitration Act that leads to ineligibility of an arbitrator is the existence of an employer- employee relationship or a past or present business relationship. The mere fact that a proposed arbitrator is not a current employee but a former employee would not change the position in law. Regardless of whether a counterparty to the Railways waives the applicability of Section 12(5) of the Arbitration Act, the arbitration agreement falls foul of the universal core principle of independence and impartiality that Courts have repeatedly declared as being at the core of the scheme of the Arbitration Act.
35. It is noteworthy that the Standard Conditions makes only two variations on whom to choose from - those in the rank of Junior Administrative Grade and those in the Senior Administrative Grade. Page 26 of 32
July 12, 2024 Shraddha Talekar ::: Uploaded on - 12/07/2024 ::: Downloaded on - 21/07/2024 22:54:29 ::: CARAPL-16182-2023-J- F-12-7.doc One would have to hold that a Gazetted Officer who is not below the rank of the Senior Administrative Grade would somehow magically become immune from loyalty to his employer and overcome the prohibition in the Seventh Schedule. This is because, under the Standard Conditions, if the counterparty to the Railways were to waive the applicability of Section 12(5) under the proviso to that sub-section, an officer not below the rank of Junior Administrative Grade would be the arbitrator. But, if the counterparty refuses to agree to such a waiver, an officer not below the rank of the Senior Administrative Grade would be the arbitrator.
36. Faced with this situation, the affidavit in reply of the Respondent has argued that the need for a railway employee to be an arbitrator is to ensure that there is experience and expertise of Railway staff that is brought to bear in the arbitration. A plain reading of Clause 64.(3)(c)
(iii)(i), which deals with qualifications of the arbitrator, would show that there is no reference, even by designation, to the area of expertise that an arbitrator is meant to possess. The qualification stipulated is the grade and rank of the officers, and not the job content. As if to pre-empt any insinuation that favourite and convenient arbitrator candidates are being listed, Clause 64.(3)(c)(iii)(ii) provides that an arbitrator may be appointed notwithstanding the total number of arbitration cases in Page 27 of 32 July 12, 2024 Shraddha Talekar ::: Uploaded on - 12/07/2024 ::: Downloaded on - 21/07/2024 22:54:29 ::: CARAPL-16182-2023-J- F-12-7.doc which he has been appointed by the Railways in the past. Put differently, the Railways would have a right to force upon its counterparties, the same person who it is comfortable with as an arbitrator in multiple proceedings.
37. Under Section 11(8) of the Arbitration Act, this Court is required to have regard to certain listed considerations that are likely to secure the appointment of independent arbitrators. The Hon'ble Supreme Court has time and again dealt with this facet of the matter and ruled that the "necessary measures" that this Court may take must be read with the considerations of having to achieve impartiality and independence of the Arbitral Tribunal. Thereby, the Section 11 Court make any procedural provisions governing appointment of arbitrators in the arbitration agreement yield to this fundamental requirement of ensuring independence and impartiality. In fact, this principle has been enunciated in a matter involving the Indian Railways in the case of Northern Railway Administration, Ministry of Railway, New Delhi vs. Patel Engineering Company Ltd.10
38. Employees of the Respondent, whose performance appraisal is effected by the Respondent cannot be regarded as bringing to the table 10 (2008) 10 SCC 240 Page 28 of 32 July 12, 2024 Shraddha Talekar ::: Uploaded on - 12/07/2024 ::: Downloaded on - 21/07/2024 22:54:29 ::: CARAPL-16182-2023-J- F-12-7.doc an element of independence and impartiality. Merely because the employees have retired, they would not become independent. Their pensions are administered by the Railways. To quote a trite maxim, justice must not only be done but should also be seen to be done.
39. It is noteworthy that despite the Hon'ble Supreme Court having called upon State agencies that contract with the rest of society to bring their contractual terms in conformity with the principles of independence and impartiality11 (in fact, again in a case involving the Railways), this has not been implemented by the Railways in the Standard Conditions. Even after Parliament stepped in to make independence and impartiality a core feature of the Indian legislative policy governing arbitration in 2015 by bringing in Section 12(5) read with the Seventh Schedule,the Standard Conditions made three years later in 2018, and have been adopted into the Agreement executed in 2019.
40. Applying the aforesaid principles, and taking into account the facts that have transpired so far - in particular, the Respondent gearing up for arbitration but only so long as the arbitrator was a person of its choice and that too, someone who is a current or former employee of the 11 Union of India vs. Singh Builders Syndicate (2009) 4 SCC 523 Page 29 of 32 July 12, 2024 Shraddha Talekar ::: Uploaded on - 12/07/2024 ::: Downloaded on - 21/07/2024 22:54:29 ::: CARAPL-16182-2023-J- F-12-7.doc Railways - this Court is of the view that appointment of a senior retired judge of a High Court as the arbitrator would be necessary in the situation at hand. Such an appointment would save the arbitration agreement from the vice of non-independence and allegations of partiality, and also bring to bear the gravitas to determine whether any facet of a claim that may be made in arbitration is excluded from the scope of arbitration.
41. It is not correct to suggest that current and former employees of the Railways, regardless of the role they play and the experience they have, alone would have the expertise to arbitrate. On the contrary, the only qualification appears to be their linkage with the Railways. Therefore, this would be a fit case to take the necessary measure of appointing a retired judge as the arbitrator.
42. It is made clear that all observations made in this judgement are in the context of the exercise of jurisdiction under Section 11 of the Arbitration Act. The findings recorded herein are prima facie in nature. The real forum for a clear finding on the questions of fact that would lead to determining the validity of the objections on the allegedly non- arbitrable nature of the Applicant's claims, is the Arbitral Tribunal. This Court has taken care not to pronounce conclusively upon any facet of Page 30 of 32 July 12, 2024 Shraddha Talekar ::: Uploaded on - 12/07/2024 ::: Downloaded on - 21/07/2024 22:54:29 ::: CARAPL-16182-2023-J- F-12-7.doc the evidence in the matter.
Directions :
43. In these circumstances, the Application is hereby allowed, and the following order is passed:
A) Justice Akil Kureshi, former Chief Justice of Rajasthan High Court and a former Judge of this Court, is hereby appointed as the Sole Arbitrator to adjudicate upon the disputes and differences between the parties arising out of and in connection with the Agreement referred to above, subject to him not being conflicted in the matter. The contact details of the Learned Sole Arbitrator are set out below :
Office Address : 617, Raheja Chambers, Nariman Point, Mumbai E-mail : [email protected] B) A copy of this Order will be communicated to the Learned Sole Arbitrator by the Advocates for the Applicant within a period of one week from today. The Applicant shall provide the contact and communication particulars of the parties to the Arbitral Tribunal along with the copy of this judgement;
C) The parties shall appear before the Learned Sole Arbitrator on such date and at such place as indicated, to obtain appropriate directions with regard to conduct of the arbitration including fixing a schedule for pleadings, examination of witnesses, if any, Page 31 of 32 July 12, 2024 Shraddha Talekar ::: Uploaded on - 12/07/2024 ::: Downloaded on - 21/07/2024 22:54:29 ::: CARAPL-16182-2023-J- F-12-7.doc schedule of hearings etc. At such meeting, the parties shall provide a valid and functional email address along with mobile and landline numbers of the respective Advocates of the parties to the Arbitral Tribunal. Communications to such email addresses shall constitute valid service of correspondence in connection with the arbitration;
D) The Learned Sole Arbitrator shall be free to fix his own fees in accordance with law;
E) All arbitral costs and fees of the Arbitral Tribunal shall be borne by the parties equally in the first instance, and shall be subject to any final Award that may be passed by the Tribunal in relation to costs; and F) The venue and seat of the arbitration will be in Mumbai. It is clarified that it shall be open to the Arbitral Tribunal to conduct the proceedings online through electronic mode, at the discretion of the Learned Sole Arbitrator.
44. This Application is accordingly disposed of in the aforesaid terms. No costs.
45. This order will be digitally signed by the Private Secretary/Personal Assistant of this Court. All concerned will act on production by fax or email of a digitally signed copy of this order.
[ SOMASEKHAR SUNDARESAN, J. ] Page 32 of 32 July 12, 2024 Shraddha Talekar ::: Uploaded on - 12/07/2024 ::: Downloaded on - 21/07/2024 22:54:29 :::