High Court's power under Article 226/227 to interfere with arbitral procedure must be exercised in exceptional cases: Supreme Court

High Court's power under Article 226/227 to interfere with arbitral procedure must be exercised in exceptional cases: Supreme Court

The Supreme Court of India (SC) observed on 6 January 2021 that the inherent powers of the High Courts (HC) to interfere with an arbitration process should be done in exceptional rarity wherein one party is left remediless under the statute or a clear 'bad faith' shown by one of the parties

The Supreme Court (SC) observed, "If the Courts are allowed to interfere with the arbitral process beyond the ambit of the enactment, then the efficiency of the process will be diminished." It stated that the ambit of Article 227 of the Constitution of India is very wide but the HC at this stage should not have brought its inherent power into use.

The facts of the case are, M/s Bhaven Construction (Appellant) had entered into a contract with the Executive Engineer of the Sarovar Narmada Nigam Ltd. & Anr. (Respondents) to manufacture and supply bricks. The contract had an arbitration clause.

A dispute arose between the parties and the appellant appointed a sole arbitrator. The Respondent preferred an application under Section 16 of the Arbitration and Conciliation Act, 1996 (Arbitration Act) arguing over the jurisdiction of the arbitrator.

The arbitrator dismissed the contentions of the respondent and the respondent preferred a special civil application under Articles 226 and 227 of the Constitution before the Gujarat High Court (HC).The single-judge dismissed the same.

The respondent preferred a Letters Patent Appeal which was allowed by a Division Bench of the High Court. The Division Bench set aside the appointment of a sole arbitrator. Aggrieved by the said order, the Appellant moved to the SC.

The issue was whether, under Article 226 and 227 of the Constitution, the High Court can interfere in the arbitral process and if so, then under what circumstances?

The matter was taken up by the SC and it was listed before the Bench comprising Justices NV Ramana, Surya Kant, and Hrishikesh Roy. The order of the HC was set aside and the SC allowed the appeal.

The bench noted that the Arbitration Act is a code in itself and the non-obstante clause under Section 5 of the Act is provided to uphold the intention of the legislature as provided in the Preamble to adopt UNCITRAL Model Law and Rules, to reduce excessive judicial interference which is not contemplated under the Arbitration Act.

The SC said "It is, therefore, prudent for a Judge to not exercise discretion to allow judicial interference beyond the procedure established under the enactment. This high standard set by this Court is in terms of the legislative intention to make the arbitration fair and efficient."

The judgment in the case of M/s. Deep Industries Limited v. Oil and Natural Gas Corporation Limited, (2019) SCC Online SC 1602 was referred wherein the SC stated, "The drill of Section 16 of the Arbitration Act is that where a Section 16 application is dismissed, no appeal is provided and the challenge to the Section 16 application being dismissed must await the passing of a final award at which stage it may be raised under Section 34."

The SC allowed the appeal by setting aside the judgment of the HC and stated, "Section 16 of the Arbitration Act, necessarily mandates that the issue of jurisdiction must be dealt first by the Tribunal, before the Court examines the same under Section 34. The respondent is therefore not left remediless, and has statutorily been provided a chance of appeal. We are of the considered opinion that the High Court erred in utilizing its discretionary power available under Articles 226 and 227 of the Constitution herein. Thus, the appeal is allowed and the impugned order of the HC is set aside."

The SC observed that the HC has erred in using its power under Article 226 and 227 of the Constitution.