Arbitration Under Section 42 Of Special Economic Zones Act, 2005 Would Override A Contractual Arbitration Clause: Telangana High Court

The bench of Chief Justice Ujjal Bhuyan held that Special Economic Zones Act, 2005 is a special legislation and Sections 42 and 51 of the Act gives it an overriding act over other acts and Section 42 of the Act provides for statutory arbitration wherein the arbitrator would be appointed by the Central Government, therefore, it would override the provisions of the Arbitration and Conciliation Act and application under Section 11 of the A&C Act for the appointment of the arbitrator would not be maintainable.

The Court held that when the special legislation provides for a mechanism for the appointment of the arbitrator, the same has to be followed and recourse to Section 11 would be a defect of jurisdiction that cannot be cured even by the consent of the parties, thus, the petition for the appointment of the arbitrator would not be maintainable merely because the parties had initially subjected themselves to the contractual arbitration clause.

Facts

The petitioners were the owner and possessors of their respective lands situated at Nanakramguda Village, Serilingamapally Mandal of Ranga Reddy District, Telangana. The respondent is in the business of executing joint ventures in development, construction of multi-stories building and complexes in and around Hyderabad.

The respondent approached the petitioners view a proposal to develop on their lands and on the adjacent lands in a Special Economic Zone or Building for the purpose of IT or Information Technology Enables Services(ITES) or Commercial Office Space or Residential Complexes. The parties had agreed to have 1:3 ratio in the project.

Accordingly, parties entered into an agreement dated 06.12.2015. Clause 23 of the agreement provided for resolution of disputes by way of arbitration. Thereafter, the petitioners came to know that the respondent is further expanding the project work to other adjacent areas, they accordingly, demanded their share in the increased project area. Consequently, the parties entered into an addendum/supplemental agreement to increase the petitioner’s share in the agreed ratio.

However, a dispute arose between the parties when the respondent allegedly increased the project area and obtained permissions from the government authorities without intimating the petitioners. Accordingly, the petitioners sought increase in their shares as per the agreed ratio. The parties exchanged various communications; however, they were unable to arrive at an amicable resolution. Accordingly, the respondent invoked the arbitration clause and nominated its arbitrator. In reply to this notice, the respondent, without prejudice to its objections, nominated its arbitrator. However, the two nominated arbitrators failed to mutually appoint the presiding arbitrator.

Accordingly, the petitioner approached the Court for the appointment of the presiding arbitrator.

Objections to the maintainability of the petition

The respondent objected to the maintainability of the petition on the following grounds:

• There is no arbitrable dispute between the parties as there is no clause in the agreement that permitted revision in the share of allocated area, therefore, the relief claimed is beyond the purview of agreement and non-arbitrable.
• The subject property is part of a Special Economic Zone as defined under Section 2(za) of the Special Economic Zones Act, 2005 (for short, ‘the SEZ Act’ hereinafter). Applicants themselves have collectively been approved as ‘co-developers’ as defined under Section 2(f) of the SEZ Act.
• Definition of ‘developer’ under Section 2(g) of the SEZ Act includes ‘co-developer’. Dispute raised by the applicants in respect of increase in the share proportionate to the built-up area in the larger extent which is located within the Special Economic Zone is nothing but a civil dispute. As per Section 42(1) of the SEZ Act which starts with a non-obstante clause, such a dispute is referable to the designated court but if there is no such designation, such a dispute shall be referred to arbitration and the arbitrator in such an arbitration is to be appointed by the Central Government. Moreover, Section 42 and 51 of the Act starts with an non-obstante clause, therefore, SEZ Act will prevail over the A&C Act.
• Also, negotiation was the condition precent to invoke arbitration, however, no negotiation has taken place and pre-arbitration mechanism has not been satisfied.
• Further, the petitioner number 14-16 were not parties to the agreement, thus, they have no privity of contract.

The petitioners countered the above submissions by raising the following counter-arguments:

• Scope of judicial examination under Section 11 is limited to prima facie examination of existence of arbitration agreement, therefore, the objections raised by the respondent cannot be entertained under Section 11.
• The respondent has already submitted itself to the arbitration clause by nominating its arbitrator, therefore, it cannot now resile from its position.
• The subject property and the project work is a ‘real estates project’ as given under Section 2(zn) of the Real Estates Act, 2016 and not a special economic zone as contended by the respondents.

Analysis by the Court

The Court observed that indisputably the respondents had nominated their arbitrator and the two nominated arbitrators failed to appoint the presiding arbitrator and the objection regarding the applicability of SEZ Act was never taken before, however, the nature of objection is such that it is a jurisdictional issue and goes to the root of the matter, therefore, the same deserved to be examined.

The Court observed that the Ministry of Commerce and Industry, Department of Commerce (SEZ Section) vide letter dated 07.12.2016 addressed to the first respondent granted formal approval to the proposal of the first respondent contained in its application dated 23.05.2016 for development, operation and maintenance of the sector specific Special Economic Zone for Information Technology/Information Technology Enabled Services.

Thereafter, Ministry of Commerce and Industry (Department of Commerce) had issued notification dated 22.02.2017 which was published in the Gazette of India in its issue dated 02.03.2017. The notification says that first respondent had proposed under Section 3 of the SEZ Act to set up a sector specific Special Economic Zone. The Central Government was satisfied that requirements under sub-section (8) of Section 3 of the SEZ Act and other related requirements were fulfilled and accordingly had granted Letter of Approval under sub-section (10) of Section 3 for development, operation and maintenance of the above sector specific Special Economic Zone on 07.12.2016. Accordingly, the subject area was declared a SEZ by the Central Government.

Accordingly, the Court held that Section 42 of the SEZ Act would apply to the dispute between the parties and the resolution is to be made in accordance with that section only. The Court observed that since no court as provided under Section 42 has been designated, therefore, the dispute is to be referred to an arbitrator to be appointed by the Central Government.

The Court held that arbitration under Section 42 of the Special Economic Zones Act, 2005 would override a contractual arbitration clause entered into between the parties.

It held that Special Economic Zones Act, 2005 is a special legislation and Sections 42 and 51 of the Act gives it an overriding act over other acts and Section 42 of the Act provides for statutory arbitration wherein the arbitrator would be appointed by the Central Government, therefore, it would override the provisions of the Arbitration and Conciliation Act and application under Section 11 of the A&C Act for the appointment of the arbitrator would not be maintainable.

The Court relied on the decisions of the Hon’ble Supreme Court in National Highways Authority of India v. Sayedabad Tea Company, MP Power Trading Company Limited v. Narmada Equipments and Silpi Industries v. Kerala State Road Transport to hold that when the special legislation provides for a mechanism for the appointment of the arbitrator, the same has to be followed and recourse to Section 11 would be a defect of jurisdiction that cannot be cured even by the consent of the parties, thus, the petition for the appointment of the arbitrator would not be maintainable merely because the parties had initially subjected themselves to the contractual arbitration clause.

Accordingly, the Court dismissed the petition and held that the petitioners would have their remedy under Section 42 of the SEZ Act.

Case Title: Ranganath Properties Pvt. Ltd. v. Phoenix Tech Zone Pvt. Ltd. Arbitration Application No. 72 of 2022

Citation: 2023 LiveLaw (Tel) 8

Date: 24.02.2023

Counsel for the Petitioner: Mr. B.Venkat Rama Rao

Counsel for the Respondent: Mr. V.Ravinder Rao, Senior Counsel with Mr. P.Sambasiva Rao.

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