In Absence Of An Express Agreement Waiving Applicability Of S.12(5) Of Arbitration & Conciliation Act, Arbitration Clause Becomes Otiose: Patna HC

Briefs Facts:

Two contracts were entered between the Construction Division of the State of Bihar (Petitioner No. 1) and Kashish Developers Limited (Respondent). The Respondent was awarded the construction work of Vidhayak Awasan (MLA Parisar) at Patna, Bihar. The Respondent referred the disputes that arose out of these contracts to the Patna High Court, which appointed an arbitrator under Section 11(6) of the Arbitration and Conciliation Act, 1996 (referred to as “the Act”).

The petitioners filed the review petitions against the judgments of the Patna High Court, which appointed an arbitrator. The petitioners filed review petitions because the Respondent did not approach the petitioners as per the procedure contained in the arbitration clause in the agreement.

Contentions of the Parties:

Petitioners' Contention:

• The Respondent bypassed Clause 25 of the General Conditions of Contract. The clause stated that any dispute must first be taken up with the Superintending Engineer within 7 days, whose decision can be appealed to the Chief Engineer within 30 days. It also provided that if the contractor is dissatisfied with the decision of the Chief Engineer, then notice shall be given to the Chief Engineer for appointment of an arbitrator, which shall be made by the Engineer-in-Chief or the administrative head of the Public Works Division.
• The Respondent didn't take up the dispute with the Superintending Engineer or the Chief Engineer. Hence, the arbitrator couldn't have been appointed under Section 11(6) of the Act.
• In Nirman Engicons Private Limited v. The State of Bihar & Ors., the request for appointment was declined when the procedure under the arbitration clause was not complied with.
• Reliance was placed on Municipal Corporation of Greater Mumbai v. Pratibha Industries Limited [(2019) 3 SCC 203] to contend that a review is possible to an order appointing an arbitrator under the Act.

Respondent's Contention:

• Five request cases were allowed between the same parties on the same day and in all five cases, an arbitrator was appointed with consent. Hence, there was no case for review.
• There is no ground for review of the judgment passed appointing a sole arbitrator. Reliance was placed on Ashok Tubwell and Engineering Corporation v. Union of India [(2015) 5 SCC 702].

Observations:

The court referred to the Municipal Corporation of Greater Mumbai case, where the Supreme Court held that Article 215 of the Constitution of India designates the High Courts as courts of record, which inheres jurisdiction to review and to recall its order. The court also noted that the Arbitration and Conciliation (Amendment) Act, 2015 replaced the words “the Chief Justice” in section 11 of the Act with “the Supreme Court or, as the case may be, the High Court.” The court held that the High Court was vested with the power of review in proceedings under the Act.

Further, the court held that the procedure which prescribed an appointment to be made by the Engineer-in-Chief or the head of the Public Works Division is not permissible under section 12 read with Schedule V of the Act. The court referred to TRF Ltd. v. Energo Engineering Projects Ltd. [(2017) 8 SCC 377] and Perkins Eastman Architects DPC v. HSCC (India) Ltd. [(2020) 20 SCC 760], where it was held that the Managing Director after becoming ineligible by operation of law, would also be ineligible to nominate an arbitrator. The ineligibility as a result of the operation of law, would not only be the ineligibility to act as an arbitrator, but also to appoint anyone else as an arbitrator.

The court thus held that the Engineer-in-Chief would not be entitled to appoint an arbitrator as the designate had been disqualified by operation of law. Hence, by reason of substitution of section 12 by Act 3 of 2016, the arbitration clause enabling dispute settlement by arbitration became otiose since the Engineer-in-Chief or the administrative head of the Public Works Division was disentitled from appointing an arbitrator. The court noticed that after the amendment, there was no agreement entered into by the parties to waive the applicability of section 12(5) of the Act by an express agreement in writing, meaning that there was no arbitration clause.

The court referred to Ashok Tubwell and Engineering Corporation, where the Supreme Court had observed that when the Section 11 application was moved before the Chief Justice for the appointment of an arbitrator, both parties agreed to appointment of a former judge. The court noted that the consent of the parties was not evident in the case.

The court held that the arbitration clause became otiose due to the disability visited on the Petitioners. Its failure to notice this provision was an error apparent on the record. The court thus allowed the review petitions and recalled the judgments in the request cases.

Case Title: The State of Bihar vs. Kashish Developers Limited

LL Citation: 2024 LiveLaw (Pat) 78

Case Number: CIVIL REVIEW No.181 of 2023 In REQUEST CASE No.12 of 2023 with CIVIL REVIEW No. 182 of 2023

Date of Judgment: 04.10.2024

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