Annual Arbitration Review 2018

Union of India v. Parmar Construction Company

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Judgment: Union of India v. Parmar Construction Company

Court: Supreme Court of India

Coram: A.M. Khanwilkar & Ajay Rastogi

Date: 29thMarch 2019

Overview: This Supreme Court looks primarily at three issues relating to which act has to govern the proceedings at hand, whether signing of no claim certificated led to discharge of the arbitration agreement and whether the HC could ignore the procedure of arbitrator appointment decided by parties.

Issue:

  1. Whether the HC was justified in invoking the amended provisions as introduced by the Amendment Act?
  2. Whether the arbitration agreement stood discharged on acceptance of the final amount by the contractor and signing of no-claim certificate?
  • Whether the HC erred in appointing an independent arbitrator outside the procedure for appointment agreed upon by the parties?

Factual Background: Parmar Construction Company (Respondents) were all registered contractors with the Railways (Appellants) undertaking various kinds of construction works. Respondent No. 1 had been allotted certain construction works. At the time of submission of the final bill, the Appellant allegedly refused to pay the amount unless the Respondent No. 1 signed a ‘no-claim certificate’, which it did.

Thereafter, in 2013, Respondent sent a demand notice to the Appellants, asking them to appoint an arbitrator as per the arbitration agreement under Clause 64(3) of the General Clauses of Contract (“GCC”) between the parties. Clause 64(3) laid out the procedure to appoint an arbitrator. However, the Appellants refused to appoint an arbitrator, ostensibly on the grounds that since Respondent No. 1 had signed a no-claim certificate, there was no dispute to be referred to arbitration.

Respondent approached the Rajasthan High Court (HC) for appointment of an independent arbitrator under Section 11(6) of the Arbitration and Conciliation Act, 1996 (“1996 Act”). The matters were decided by the HC after the promulgation of the Arbitration and Conciliation (Amendment) Act, 2015 (“Amendment Act”), and the HC opined that the amended 1996 Act would be applicable to the said matters. In light of the same, the HC found that the arbitration agreement under the GCC – which provided for appointment of a Railways employee as arbitrator – would be violative of Section 12(5) of the amended 1996 Act, and thus exercised its powers under Section 11(6) and passed separate orders appointing independent arbitrators

Analysis:

SC adverted to its earlier judgment inM/s Aravali Power Company Private Limited v. Era Infra Engineering Limited[1]. Following the principles of the said judgment, the SC held that the arbitral proceedings had to be governed by the 1996 Act. It would be immaterial that the Amendment Act had come into effect while applications under Section 11(6) were still pending. The SC ruled that the HC ought to have decided the matters under the 1996 Act.

The second issue for the SC’s consideration was the effect of the no-claim certificate having been signed by the Respondents, who alleged that they had done so under economic coercion and duress. The SC categorised the precedents relied upon by the parties in two categories. The first category was where the court upon analysing the facts of the case found that there was indeed full and final settlement and the allegations of coercion by contractors were baseless. The second category was where the court did find some substance in allegations of coercion, as the no-claim / no-dues certificates would be taken as a condition precedent for release of even admitted amounts, and small contractors would have no choice but to comply.

While the SC referred to the principles for such determination as laid down in National Insurance Company Limited v. Boghara Polyfab Private Limited[2], it recognised that such principles are not exhaustive, and a determination would have to be made on a case-to-case basis.

In the present case, the SC, considering the imbalance of bargaining power, the fact that no-claim certificates were being furnished along with the final bill (and not after its payment), and found that it fell squarely within one of the principles laid down in Boghara Polyfab. Thus, the no-claim certificate was prima facie not found to have been submitted voluntarily. For the purpose of deciding the third issue, the SC inter alia discussed the judgment of Union of India & Another v. M.P. Gupta[3], to demonstrate the settled law that where the arbitration agreement contained express terms regarding the appointment of arbitrator(s), the High Court would not be justified in acting beyond the provision and appointing an independent arbitrator.

Conclusion: In view of above factors SC quashed and set aside orders of the HC and directed the Appellant to appoint Arbitrators in terms of clause 64(3) of the GCC.

[1](2017) 15 SCC 32

[2](2009) 1 SCC 267

[3](2004) 10 SCC 504

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