Annual Arbitration Review 2018

The State of Bihar and Ors v. Bihar Rajya Bhumi Vikas Bank Samiti

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Judgment:  The State of Bihar and Ors v. Bihar Rajya Bhumi Vikas Bank Samiti

 

Citation:(2018) 9 SCC 472

 

Court: The Supreme Court of India

 

Coram: Rohinton Fali Nariman and Indu Malhotra, JJ.

 

Date: July 30th, 2018

 

Overview:The moot question in this case pertained to whether Section 34 (5) of the Arbitration and Conciliation Act, 1996 was mandatory or directory in nature. The Supreme held that Section 34 (5) was directory in nature. The basis for arriving at this conclusion was that sinceno consequence has been stipulated in the event of non-service of notice, the intent of the Legislature is to keep this requirement directory in nature.

 

Issue: Whether Section 34(5) of the Arbitration and Conciliation Act, 1996, inserted by Amending Act 3 of 2016 (w.e.f 23rd October 2015), is mandatory or directory?

 

Factual background:

An application for setting aside an arbitral award under Section 34 of the Act before the High Court of Patna had been filed by the Appellants without issuing prior notice to the Respondents. The Respondents challenged the maintainability of the application on the ground that no prior notice had been issued to them. The contention advanced by the Appellants in this regard was that the requirement to provide notice under Section 34 (5) of the Act was only directory in nature.

 

The Patna HC while arriving at its decision relied on the SC ruling in Kailash v. Nankhu & Ors[1] to hold that the requirement to issue notice under Section 34(5) of the Act was only directory in natureHowever, a division bench of the Patna HC struck down the single judge’s order, opining that the language of the provision coupled with the object of the section, indicated that the provision was mandatory in nature. This order of the division bench of the Patna HC was challenged before the Supreme Court of India by the Appellant.

 

Analysis:

On appeal, the SC initially observed that the language of Section 34(5), namely the words ‘shall’, ‘only after’ and ‘prior notice’ supported the Respondents’ argument that the provision was mandatory in nature. The SC also took note of the 246th Indian Law Commission Report which documented that the object of Section 34(5) and 34(6) was that an application under Section 34 be disposed of expeditiously within a period of one year from the date of service of the notice.

However, the SC in its final ruling gave a judgment against the Respondents. The ruling was based on the fact that since no consequence has been stipulated in the event of non-service of notice, this requirement was held to be directory. The SC also drew a parallel with Section 29A of the Act which prescribes the time limit within which an arbitration award is required to be made and also provides that if the same is not met, the mandate of the arbitrator stands terminated. This stands in stark contrast to Sections 34(5) and 34(6) which did not prescribe a consequence if an application under Section 34 was not decided within the prescribed time limit. Taking this rationale further, the SC held that procedural provisions of law, such as Sections 34(5) and 34(6), ought not be construed in a manner that justice itself was trampled upon. The Law Commission Report indicated that the object behind them was to dispose of applications under Section 34 expeditiously. However, as had been observed in Kailash, the intent behind such provisions was to ‘expedite the hearing and not scuttle the same.’ Relying upon the principles propounded in this previous judgment, the SC held that to construe the requirement of ‘prior notice’ in Section 34 as mandatory in nature would defeat the advancement of justice.

Another significant portion of this judgment dealt with clarifying the divergent positions of law which had come into existence with the judgments ofKailashand New India Assurance Co. Ltd. v. Hilli Multipurpose Cold Storage Pvt. Ltd. [2]. The SC was conscious of the contrary finding in New India Assurance wherein it was held that the time period for filing a written statement under the CPA was mandatory.

The SC in the present case, however, noted that the judgement in New India Assurance had completely overlooked a crucial paragraph in Kailash and that therefore the critical ratio on the consequence of no penalty being provided had not been considered.Additionally, the reasoning in Kailash had been successively upheld by a three–judge bench in Salem Advocate Bar Association v. Union of India[3].In light of this, the SC reasoned that the reliance on the observations in New India Assurance was misplaced, and the judgment in Kailash was good law which was to be followed in this case as well.

Conclusion:

This judgment clarifies that before construing a particular provision to be mandatory or merely directory in nature, one has to assess whether there are any penal consequences provided for the same, and whether or not adhering to such a procedural requirement would in any manner take away a vested right of a party and in effect scuttle the administration of justice. This judgment would not only affect future cases in the realm of arbitration but in other fields as well such as corporate insolvency. Finally, through this judgment the court has reiterated as well as clarified that while adhering to procedure is important, administration of justice remains paramount.

[1]Kailash v. Nanhku and Ors, (2005) 4 SCC 480.

[2]New India Assurance Co. Ltd. v. Hilli Multipurpose Cold Storage Pvt. Ltd. – (2015) 16 SCC 20.

[3]Salem Advocate Bar Association v. Union of India, (2005) 6 SCC 344.

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