Supreme Court clarifies arbitration agreement pre-enforcement, emphasizes contract terms

The Supreme Court held that the High Court erred in invoking the amended provisions of the Arbitration and Conciliation (Amendment Act), 2015, for a case initiated before its enforcement. The Court found that the arbitration agreement was not discharged by the signing of no claim certificates under financial duress. Additionally, the High Court's appointment of an independent arbitrator deviated from the agreed procedure in the contract. The Supreme Court set aside the High Court's orders, directing the parties to appoint an arbitrator as per the contract terms and proceed with the arbitration process promptly.

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Issues Involved:

1. Whether the High Court was justified in invoking the amended provision introduced by the Arbitration and Conciliation (Amendment Act), 2015.
2. Whether the arbitration agreement stands discharged on acceptance of the amount and signing no claim/discharge certificate.
3. Whether it was permissible for the High Court under Section 11(6) of the Arbitration and Conciliation Act, 1996 (prior to the Amendment Act, 2015) to appoint a third-party or an independent Arbitrator when the parties have mutually agreed on the procedure for appointing the designated arbitrator.

Issue-wise Detailed Analysis:

1. Justification of High Court in Invoking the Amended Provision:

The High Court invoked the amended provisions of the Arbitration and Conciliation (Amendment Act), 2015, which came into effect on 23rd October 2015. However, the Supreme Court noted that the request for arbitration was received by the appellants before the Amendment Act, 2015 came into force. According to Section 21 read with Section 26 of the Amendment Act, 2015, the proceedings should commence in accordance with the pre-amended provisions of the Act, 1996. The Supreme Court referred to the principles laid down in Aravali Power Co. Private Limited v. Era Infra Engineering Limited and S.P. Singla Constructions Pvt. Ltd. v. State of Himachal Pradesh, emphasizing that the Amendment Act, 2015 does not apply to arbitral proceedings commenced before its enforcement unless the parties agree otherwise. The Court concluded that the High Court erred in applying the amended provisions.

2. Discharge of Arbitration Agreement on Signing No Claim Certificate:

The appellants argued that the signing of a no claim certificate by the contractors indicated a full and final settlement, thereby discharging the arbitration agreement. However, the respondents contended that the no claim certificates were signed under financial duress and undue influence. The Supreme Court reviewed various precedents, including National Insurance Company Limited v. Boghara Polyfab Private Limited, which categorized cases where no claim certificates were signed under coercion and those where they were not. The Court noted that in the present case, the no claim certificates were likely signed under financial duress, and thus, the arbitration agreement was not discharged. The Court held that the arbitral dispute subsists and the contract has not been discharged as claimed by the appellants.

3. Permissibility of High Court to Appoint Independent Arbitrator:

The High Court appointed an independent arbitrator without adhering to the mutually agreed procedure under Clause 64(3) of the agreement. The Supreme Court emphasized that the agreed procedure for appointing an arbitrator should be exhausted first, as per the terms of the contract. The Court referred to several judgments, including Union of India v. M.P. Gupta, Northern Railway Administration, Ministry of Railway, New Delhi v. Patel Engineering Co. Limited, and Union of India v. Singh Builders Syndicate, which reiterated that the terms of the arbitration agreement should be adhered to as closely as possible. The Court concluded that the High Court was not justified in appointing an independent arbitrator without first resorting to the procedure prescribed under Clause 64(3) of the agreement.

Conclusion:

The Supreme Court quashed and set aside the orders passed by the High Court. It directed the appellants to appoint an arbitrator in terms of Clause 64(3) of the agreement within one month. The statement of claim should be furnished by each respondent within four weeks thereafter, and the arbitrator should decide the claim expeditiously. The batch of appeals was disposed of on these terms, and no costs were awarded. Pending applications, if any, were also disposed of.

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