Dispute Can't Be Referred To Arbitration In Absence Of An Arbitration Agreement Under Article 226 Of Constitution: Patna High Court

The High Court of Patna has held that no dispute can be referred to arbitration by a Court exercising powers under Article 226 of the Indian Constitution when there is no agreement between the parties.

The bench of Justice Partha Sarthy held that the remedy of arbitration is the creature of a contract and the same cannot be utilised in absence of a written agreement between the parties as provided under Section 7 of the A&C Act.

Facts

The relevant background of the case involves the Multi-State Cooperative Land Development Bank ('the Bank') filing CWJC no. 1730 of 2010 in the Patna High Court. The objective was to compel the State of Bihar (Appellant) to release Rs. 570.79 crores, claimed by the Bank as outstanding dues under various heads, along with accrued interest. The Bank asserted that it had granted loans for agricultural purposes based on the Appellant's assurance to compensate any losses incurred by the Bank.

Given the complex nature of the issues involving conflicting claims and intricate documents, the High Court, in its order dated 19.10.2012, directed the Parties to appoint an Arbitrator under section 11 of the Act for dispute resolution. Alternatively, the Bank could request the Appellant to form a committee, including senior officials, with at least one serving with the Central Government.

Following the court's directive, the Bank filed Request Case no. 4 of 2013. On 7.3.2014, the court disposed of the case, appointing Hon'ble Mr. Justice Shubash Chandra Jha (Retd.) as the sole arbitrator, however, it reserved the liberty with the Appellant to raise a challenge to the jurisdiction of the tribunal on ground of lack of agreement. Against this order, the Appellant preferred an SLP. The Supreme Court, in its order dated 14.7.2014, dismissed the SLP in limine without any observation on the merits.

A preliminary objection was raised regarding the jurisdiction of the arbitral tribunal, challenging the referral in the absence of an arbitration agreement. The sole arbitrator, in his order dated 24.5.2015, dismissed this objection, invoking the principle of res judicata/constructive res judicata due to the earlier dismissal of S.L.P (Civil) no.15552 of 2014 by the Supreme Court.

The sole arbitrator continued with the arbitration proceedings and, on 6.1.2016, issued an award directing the State of Bihar to pay Rs. 493.7 crores. The award specified that if paid by 30.6.2016, no interest would accrue; otherwise, interest at 8% per annum from April, 2014, would be applicable, amounting to Rs. 39.50 crores.

Challenging the award, the appellants filed an application under section 34 of the Act, registered as Miscellaneous Case no. 32 of 2016. The Additional District Judge-X, Patna, by judgment dated 9.10.2020, dismissed the case, leading to the instant appeal.

Submissions by the Parties

Appellant's Submissions:

• The appellant argued that there was no arbitration agreement, and the respondent's claim was barred by limitation, making it inappropriate for arbitration proceedings. The appellant referred to the order appointing the sole arbitrator, stating that if they dispute the claims or have any objections, they could raise them before the arbitrator.
• The appellant contended that the Additional District and Sessions Judge-X, Patna, lacked jurisdiction to adjudicate the miscellaneous case under section 34 of the Act, as it was a commercial dispute. They argued that the District Judge, not the Additional District Judge, was entitled to hear the case.
• The appellant claimed that both the arbitral award and the judgment suffered from patent illegality due to the lack of reasoning. They cited relevant judgments to support this contention.
• In response to the respondent's arguments, the appellant asserted that challenging the arbitrator's jurisdiction and raising objections on grounds of limitation could not be barred by the principles of res judicata.

Respondent's Submissions:

• The respondent argued that the grounds of arbitration not being maintainable and the limitation were raised by the appellant in previous proceedings and rejected at all stages. They claimed that these grounds were barred by the principles of constructive res judicata.
• Regarding jurisdiction, the respondent contended that the Additional District Judge had the authority to decide commercial disputes, citing relevant judgments supporting this position. They also argued that the dispute in question was not a commercial one.
• The respondent asserted that the arbitral award and the lower court's judgment were just and proper, with adequate reasons provided. They emphasized the narrow scope of appeal under section 37 and the limited powers of the court to interfere with arbitral awards.
• Concluding, the respondent stated that the appeal lacked merit and should be dismissed.

Analysis by the Court

The Court observed that the High Court while appointing the arbitrator had granted liberty to the Appellant to raise any jurisdictional challenge before the arbitral tribunal. Moreover, the SLP against this order was dismissed in limine.

The Court observed that the Appellant at no stage of the dispute, agreed to the reference of the dispute to the arbitration in absence of an agreement. Moreover, it took this objection at every stage possible.

The Court held that the arbitrator erred in dismissing the application under Section 16 merely on the ground that the SLP against the order of the High Court was dismissed, therefore, it the objection was barred by res judicata/constructive res judicata. It held that order of Supreme Court dismissing an SLP through a non-speaking or an unreasoned order does not have the effect of res judicata on the lis between the parties. Moreover, the order against which the SLP was dismissed had itself granted liberty to the petitioner to raise any objection to the jurisdiction of the tribunal. Ergo, in view of this liberty the arbitrator could not have dismissed the objection at the threshold without examining the application on its merit.

The Court held that no dispute can be referred to arbitration by a Court exercising powers under Article 226 of the Indian Constitution when there is no agreement between the parties.

The Court held that the remedy of arbitration is the creature of a contract and the same cannot be utilised in absence of a written agreement between the parties as provided under Section 7 of the A&C Act.

Accordingly, the Court held that the arbitrator did not have any jurisdiction to adjudicate the dispute between the parties and set aside the award as well as the impugned order upholding the award.

Case Title: State of Bihar v. Bihar Rajya Vikas Bank Samiti, Miscellaneous Appeal No. 238 of 2021

Date: 08.01.2024

LL Citation: 2024 LiveLaw (Pat) 8

Counsel for the Petitioner: Mr. Pushkar Narain Shahi, Sr. Advocate with Mr. Patanjali Rishi

Counsel for the Respondents: Mr. Y.V. Giri, Sr. Advocate with Mr. Rajesh Prasad Choudhary and Mr. Ashutosh Kumar Upadhaya.

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