Gujarat HC Dismisses Writ Against Arbitrator’s Interim Order for Lack of Exceptional Circumstances

1. Heard learned Advocate Ms. Meghna Patel for the petitioner and learned Advocate Mr. Rushabh Shah for respondent No.2.

2. Learned Advocate Ms. Meghna Patel tenders a draft amendment. Draft amendment is granted. Amendment to be carried out forthwith.

3. The petitioner has questioned an order passed by the learned Arbitrator dated 13.4.2023, whereby a preliminary issue raised by the petitioner had been rejected.

4. The brief facts leading to filing of the present petition being that the present petitioner, a registered MSME, had entered into an agreement with respondent No.1 herein with regard to a Work Order issued by one M/s. Brink Foods Pvt. Ltd., Deesa, which Company later changed its name as M/s. Desai Brother Pvt. Ltd. It appears that the present petitioner had, in turn, awarded the said work to respondent No.2 herein and whereas later on, on account of alleged poor quality and delayed performance of work, the contract had been terminated. It also appears that supplementary/additional work order dated 28.3.2018 had been issued in favour of a new contractor by the name of one M/s. Vraj Construction. It also appears that respondent No.2 issued a legal notice to the present petitioner for compensation for breach of contract and whereas while there appears to be some attempts for settlement as per the averments in the petition, later on respondent No.2 herein filed a proceeding before MSME Council under Section 18 of the Micro, Small and Medium Enterprises Development Act, 2006 (hereinafter “MSMED Act” for short) dated 15.7.2019 and whereas it appears that the MSME Council had referred the dispute to the GCCI Arbitration, Mediation, Conciliation and Alternate Dispute Resolution Centre and whereas one Shri V. B. Sheth had been appointed as sole Arbitrator. It appears that in the interregnum, since it appeared to the petitioner that some documents, which had been submitted by respondent No.2 namely a document which was a CA Calculation as per the requirement of the MSMED Act to be submitted for referring the dispute for arbitration was a forged document, the petitioner had approached the ICAI and whereas it appears that the Institute had replied to the present petitioner with a statement of the CA in question, whereby they have submitted that the document in question was bogus and whereas it is not signed or sealed by the CA in question. The petitioner thereafter i.e. after the dispute had been referred to the learned Arbitrator, had during the course of arbitration proceedings requested the learned Arbitrator with an application to decide the issue as preliminary issue, issue being “whether claim of claimant deserves to be dismissed summarily and declared as being abusive, sham, and vexatious from its inception as the  same have been initiated based on a forged and fraudulent document ?” It appears that after hearing the parties, the learned Arbitrator vide an order dated 13.4.2023 had rejected the preliminary issue against the petitioner herein, which has prompted the petitioner to file this petition.

5. At the outset, it would be relevant to mention that Mr. Shah, who is appearing on caveat on behalf of respondent No.2 herein, had submitted a preliminary objection against the maintainability of the present petition, more particularly contending that the present petition cannot be moved against an interim/interlocutory order passed by the Arbitrator.

6. Learned Advocate Ms.Patel, in response to the preliminary objection, has relied upon a decision of the Hon’ble Apex Court in case of Bhaven Construction Vs. Executive Engineer, SSNNL and Another, reported in (2022) 1 SCC 75 and would submit that a petition against an arbitral process is maintainable, more particularly under exceptional circumstance.

7. Learned Advocate Ms.Patel would further submit that in addition to the preliminary question having been decided against the petitioner, the Arbitrator has not considered the fact that fraud has vitiated the entire proceedings and whereas even the issue framed does not contain an issue akin to the preliminary issue, which has been decided against the petitioner. Learned Advocate would submit that this has left the petitioner remediless, inasmuch as even as per the provisions of the MSMED Act, if the award of the learned Arbitrator has to be challenged at a later stage, in a worst scenario the petitioner would be required to deposit 75% of the awarded amount, which would otherwise be an onerous condition and whereas the petitioner is required to undergo the entire rigmarole, in spite of the fact that the very initiation of the proceedings had been vitiated by fraud. Learned Advocate would submit that the document, which as per the CA, who had allegedly issued the same, was not under their sign or seal and whereas since the said document was a mandatory document to be submitted MSME Council and based upon the said document, MSME Council having referred the dispute to arbitration, the proceedings being vitiated on account of the fraud deserves to be scrapped by this Court, more particularly the entire aspect of fraud being exceptional circumstance as being contended by the learned Advocate.

8. On merits, the present petition has been vehemently objected to by learned Advocate Mr.Shah. Learned Advocate would submit that the document in question, which is allegedly forged, was not, in any manner, the basis for referring the dispute to the Arbitrator. Learned Advocate would submit that as per the scheme of the MSMED Act, a set of documents, which is signed by a CA is to be submitted to the MSME Council and whereas it appears that initially the allegedly fraud certificate, which was in the nature of calculation at the rate of 20.25%, had been submitted, thereafter the MSME Council had sought for certain other documents to be submitted, including copy of the document in question certified by CA (as per interest rate RBI 18%). Learned Advocate would submit that as per the allegedly fraud document, the interest rate was calculated at the rate of 20.25% and whereas upon the above E-mail dated 13.10.2020 by the MSME Council respondent No.1 had submitted a fresh document i.e. a CA certified calculation at the rate of 18% and whereas according to learned Advocate, the said document is not a forged document though the petitioner has sought to question it, yet as of now, there has been no finding as regards the same. Learned Advocate would submit that it is the second calculation i.e. calculation at the rate of 18%, which has been relied upon by the MSME Council for referring the dispute to arbitration. Learned Advocate Mr.Shah would submit that under such circumstance, learned Arbitrator had not committed any error whatsoever in rejecting the preliminary issue and whereas learned Advocate would submit that there is no exceptional circumstance, which has been submitted by the petitioner, which requires interference by this Court at this stage.

9. Heard learned Advocates for the respective parties, who have not submitted anything else.

10. It appears that as regard the preliminary objection raised by learned Advocate for respondent No.2, it would appear that learned Advocate for the petitioner has relied upon the decision of the Hon’ble Apex Court in case of Bhaven Construction (supra), in the considered opinion of this Court, the Hon’ble Apex Court in case of Bhaven Construction, was considering an issue with regard to the inter-play of Section 5 and Section 34 of the Arbitration Act and whereas it would appear that the Hon’ble Apex Court, after relying upon earlier decisions of the Hon’ble Apex Court had inter alia observed that the non obstante clause in Section 5 would not have the effect of diluting the jurisdiction of this Court under Article 226/227 of the Constitution of India against judgements allowing or disposing First Appeals under Section 37 of the Arbitration Act. Paragraphs 18, 19 and 20 being relevant for the present purpose are reproduced herein below for benefit:-

“18. In any case, the hierarchy in our legal framework, mandates that a legislative enactment cannot curtail a Constitutional right. In Nivedita Sharma v. Cellular Operators Association of India, (2011) 14 SCC 337, this Court referred to several judgments and held:

“11. We have considered the respective arguments/submissions. There cannot be any dispute that the power of the High Courts to issue directions, orders or writs including writs in the nature of habeas corpus, certiorari, mandamus, quo warranto and prohibition under Article 226 of the Constitution is a basic feature of the Constitution and cannot be curtailed by parliamentary legislation – L. Chandra Kumar v. Union of India, (1997) 3 SCC 261. However, it is one thing to say that in exercise of the power vested in it under Article 226of the Constitution, the High Court can entertain a writ petition against any order passed by or action taken by the State and/or its agency/ instrumentality or any public authority or order passed by a quasi-judicial body/authority, and it is an altogether different thing to say that each and every petition filed under Article 226 of the Constitution must be entertained by the High Court as a matter of course ignoring the fact that the aggrieved person has an effective alternative remedy. Rather, it is settled law that when a statutory forum is created by law for redressal of grievances, a writ petition should not be entertained ignoring the statutory dispensation. (emphasis supplied)

It is therefore, prudent for a Judge to not exercise discretion to allow judicial interference beyond the procedure established under the enactment. This power needs to be exercised in exceptional rarity, wherein one party is left remediless under the statute or a clear tad faith’ shown by one of the parties. This high standard set by this Court is in terms of the legislative intention to make the arbitration fair and efficient.

19. In this context we may observe M/s. Deep Industries Limited v. Oil and Natural Gas Corporation Limited, (2019) SCC Online SC 1602, wherein interplay of Section 5 of the Arbitration Act and Article 227 of the Constitution was analyzed as under:

“16. Most significant of all is the non- obstante clause contained in Section 5 which states that notwithstanding anything contained in any other law, in matters that arise under Part I of the Arbitration Act, no judicial authority shall intervene except where so provided in this Part. Section 37grants a constricted right of first appeal against certain judgments and orders and no others. Further, the statutory mandate also provides for one bite at the cherry, and interdicts a second appeal being filed (See Section 37(2) of the Act)

17. This being the case, there is no doubt whatsoever that if petitions were to be filed under Articles 226/227 of the Constitution against orders passed in appeals under Section 37, the entire arbitral process would be derailed and would not come to fruition for many years. At the same time, we cannot forget that Article 227 is a constitutional provision which remains untouched by the non-obstante clause of Section 5 of the Act. In these circumstances, what is important to note is that though petitions can be filed under Article 227 against judgments allowing or dismissing first appeals under Section 37of the Act, yet the High Court would be extremely circumspect in interfering with the same, taking into account the statutory policy as adumbrated by us herein above so that interference is restricted to orders that are passed which are patently lacking in inherent jurisdiction.”

20. In the instant case, Respondent No. 1 has not been able to show exceptional circumstance or tad faith’ on the part of the Appellant, to invoke the remedy under Article 227 of the Constitution. No doubt the ambit of Article 227 is broad and pervasive, however, the High Court should not have used its inherent power to interject the arbitral process at this stage. It is brought to our notice that subsequent to the impugned order of the sole arbitrator, a final award was rendered by him on merits, which is challenged by the Respondent No. 1 in a separate Section 34 application, which is pending.”

11. A plain reading of the above observations of the Hon’ble Apex Court would clearly reveal that while a non obstante clause in Section 5 of the Arbitration Act would not bar the High Court from exercising jurisdiction under Article 226/227 of the Constitution of India, yet such interference would be an exceptional rarity, wherein one party is rendered remediless, or there is a clear bad faith or the order is patently lacking jurisdiction.

12. Furthermore, in this regard, this Court seeks to rely upon observations of an Hon’ble Division Bench (Coram: Vikram Nath, C.J. and J. B. Pardiwala, J. – both the Hon’ble Judges as then were) in case of Narmada Clean-Tech & Anr. Vs. Indian Council of Arbitration & Ors. Dated 30.7.2020 in Letters Patent Appeal No.308 of 2020. Paragraphs 28, 29, 34, 37, 38, 39 and 46 to 51 being relevant for the present purpose are reproduced herein below for benefit:-

“28 The law is extremely well settled that the powers of superintendence vested in the High Courts under Article 227 are not confined to administrative superintendence but include the power of judicial review also. A reference in this behalf may be made to the decision of the Apex Court in D.N. Banerjee vs. P.R.Mukherjee reported in AIR 1953 SC 58, which is the locus classicus on the subject.

29 The supervisory jurisdiction under Article 227 is exercised for keeping the subordinate Courts and Tribunals within the bounds of their jurisdiction. When a subordinate Court or Tribunal assumes jurisdiction which it does not have or fails to exercise jurisdiction which it does have or the jurisdiction though available is being exercised by the Court in a manner not permitted by law and leads to failure of justice, or grave injustice has occasioned thereby, then the High Court must step into exercise its supervisory jurisdiction. The High Court cannot convert itself into a Court of appeal and start reappreciating the evidence but can only interfere when there is an error of jurisdiction. The powers under Article 227 are very wide and can be used to secure the ends of justice and to ensure that people have faith in the judicial system. However, this power must be exercised sparingly to keep the subordinate Courts and Tribunals within the bounds of their authority and not to correct mere errors committed by them. With regard to the inferior tribunals, it has been held in a number of cases that the High Court can quash or set-aside the decision of an inferior tribunal in case the order has been passed without jurisdiction or is against the principles of natural justice or the Tribunal fails to exercise jurisdiction vested in it by law. Though every error is not to be corrected but if there is dereliction of duty or flagrant violation of law then the High Court must exercise its jurisdiction. Therefore, when a Tribunal does not exercise jurisdiction or acts in a manner which will sully the image of the judicial process or gives findings which are perverse then the High Court can and must exercise its powers of superintendence.

34. We have no doubt in our mind that an Arbitral Tribunal would come within the purview of Article 227 of the Constitution of India. In other words, an Arbitral Tribunal under the Act, 1996 is a Tribunal within the meaning of Article 227 of the Constitution of India as the Act, 1996 has conferred upon such Tribunal the inherent judicial power of the State.

37. We shall now look into the decision of the Supreme Court in the case of SBP and company (supra). In SBP and company (supra), the Supreme Court held that the Chief Justice or his delegate, exercising powers under Section 11(6) of the Act, 1996, exercises judicial powers and not administrative powers. The question whether the High Court can exercise power of superintendence under Article 227 or the writ jurisdiction under Article 226 of the Constitution of India in case of Arbitral Tribunal was also considered in this case. The Apex Court held as follows:

“45. It is seen that some High Courts have proceeded on the basis that any order passed by an arbitral tribunal during arbitration, would be capable of being challenged under Article 226 or 227 of the Constitution of India. We see no warrant for such an approach. Section 37 makes certain orders of the arbitral tribunal appealable. Under Section 34, the aggrieved party has an avenue for ventilating its grievances against the award including any in-between orders that might have been passed by the arbitral tribunal acting under Section 16 of the Act. The party aggrieved by any order of the arbitral tribunal, unless has a right of appeal under Section 37 of the Act, has to wait until the award is passed by the Tribunal. This appears to be the scheme of the Act. The arbitral tribunal is after all, the creature of a contract between the parties, the arbitration agreement, even though if the occasion arises, the Chief Justice may constitute it based on the contract between the parties. But that would not alter the status of the arbitral tribunal. It will still be a forum chosen by the parties by agreement. We, therefore, disapprove of the stand adopted by some of the High Courts that any order passed by the arbitral tribunal is capable of being corrected by the High Court under Article 226 or 227 of the Constitution of India. Such an intervention by the High Courts is not permissible.

46. The object of minimizing judicial intervention while the matter is in the process of being arbitrated upon, will certainly be defeated if the High Court could be approached under Article 227 or under Article 226 of the Constitution of India against every order made by the arbitral tribunal. Therefore, it is necessary to indicate that once the arbitration has commenced in the arbitral tribunal, parties have to wait until the award is pronounced unless, of course, a right of appeal is available to them under Section 37 of the Act even at an earlier stage.”

38. The majority view in the SBP and company (supra) is that once the matter reaches the Arbitral Tribunal or the sole Arbitrator, the High Court should not interfere with the orders passed by the Arbitrator or the Arbitral Tribunal during the course of the arbitration proceedings and the parties should approach the Court only in the terms of Section 37 of the Act or in terms of Section 34 of the Act. In other words, where the Arbitral Tribunal holds that it has jurisdiction, it shall continue with the arbitral proceedings and make an arbitral award.

39. Thus, our understanding of the ratio of the Supreme Court decision in SBP and company (supra) is that the High Court should not interfere with each and every order passed by the Arbitral Tribunal and judicial intervention should be minimal. We find it difficult to take the view interpreting the SBP and company (supra) that the High Court has no power at all to intervene either in exercise of its writ jurisdiction or supervisory jurisdiction under Article 227 of the Constitution of India with any of the orders that may be passed by the Arbitral Tribunal or the Arbitrator.

46. In M/s. Deep Industries Limited (supra), the Supreme Court observed as under:

“At the same time, we cannot forget that Article 227 is a constitution provision which remains untouched by the nonobstane clause of section 5 of the Act. In these circumstances, what is important to note is that though petitions can be filed under Article 227 against the judgments allowing or dismissing first appeals under Section 37 of the Act, yet the High Court would be extremely circumspect in interfering with the same, taking into account the statutory policy as adumbrated by us herein above so that interference is restricted to orders that are passed which are patently lacking in inherent jurisdiction.”

47. The bare reading of the aforesaid observations of the Supreme Court makes it clear that it was a case which had travelled right upto the stage of Section 37 of the Act. It is suggestive of the fact that an appeal was filed before the High Court against the order passed by the District Court under Section 34 of the Act. In such circumstances, a petition under Article 227 of the Constitution of India would definitely be maintainable with a rider that the High Court should be extremely circumspect in interfering with the same. In other words, the interference should be restricted to orders that are passed, which are patently lacking any inherent jurisdiction. However, the ratio, as propounded in M/s. Deep Industries (supra) does not, in any manner, dilute the principles propounded by the Supreme Court in the SBP and company (supra). This decision, in our opinion, is not in any manner helpful to Mr. Trivedi, the learned senior counsel appearing for the appellant.

48. In Punjab Agro Industries Corporation (supra), the appellant had entered into a collaboration agreement with the respondent for setting up of a project through a company to be jointly promoted by them. Certain disputes arose between the parties and the appellant by notice appointed its Arbitrator and called upon the respondent to appoint his Arbitrator. As the respondent failed to comply, the appellant filed a petition under Section 11(4) of the Act, 1996 in the Court of the Civil Judge, Senior Division, Chandigarh (a designate of the Chief Justice of Punjab and Haryana High Court). The said designate, by order dated 16th February 2002, dismissed the petition holding that the appointment of Arbitrator was not called for, as the matter had already been decided by the Board for Industrial and Financial Reconstruction (for short, “BIFR”). Being aggrieved, the appellant approached the High Court for quashing the order of the designate and for appointment of an Arbitrator in terms of the agreement. A Division Bench of the High Court disposed of the said writ petition by the following short order: “The Petitioner is aggrieved by rejection of application for appointment of arbitrator under Section 11(4) of Arbitration and Conciliation Act, 1996. Learned Counsel for the Respondent raises a preliminary objection that Writ Petition is not maintainable in view of judgment of Seven Judges of the Hon’ble Supreme Court in S.B.P. & Co. Vs. Patel Engineering Ltd. – 2005 (8) SCC 618 wherein it has been held that power of deciding an application for appointment of an arbitrator is judicial power and is not amenable to writ jurisdiction. After hearing learned counsel for the parties, we uphold the preliminary objection and dismiss the Writ Petition. It is made clear that this will not debar the Petitioner from taking such other remedy as may be available under the law.”

49. The aforequoted order of the High Court was challenged in appeal by special leave, on the following grounds: “(a) The order of the High Court is a non speaking order and it upholds the preliminary objection of the respondent without assigning any reason. (b) A writ petition under Article 227 was maintainable against the order of the Civil Judge, Senior Division (designate of the Chief Justice) and the High Court was wrong in assuming that the writ petition was not maintainable in view of the decision of this Court in SBP.”

50. The Supreme Court, while allowing the appeal, held as under: “8. We have already noticed that though the order under section 11(4) is a judicial order, having regard to section 11(7) relating to finality of such orders, and the absence of any provision for appeal, the order of the Civil Judge was open to challenge in a writ petition under Article 227 of the Constitution. The decision in SBP does not bar such a writ petition. The observations of this Court in SBP that against an order under section 11 of the Act, only an appeal under Article 136 of the Constitution would lie, is with reference to orders made by the Chief Justice of a High Court or by the designate Judge of that High Court. The said observations do not apply to a subordinate court functioning as Designate of the Chief Justice. This Court has repeatedly stressed that Article 136 is not intended to permit direct access to this Court where other equally efficacious remedy is available and the question involved is not of any public importance; and that this Court will not ordinarily exercise its jurisdiction under Article 136, unless the appellant has exhausted all other remedies open to him. Therefore the contention that the order of the Civil Judge, Sr. Division rejecting a petition under section 11 of the Act could only be challenged, by recourse to Article 136 is untenable. The decision in SBP did not affect the maintainability of the writ petition filed by Appellant before the High Court. 9. We therefore allow this appeal and set aside the order of the High Court. As a consequence, Civil Writ Petition No.9889 of 2002 shall stand restored to the file, and the High Court is requested to dispose it of in accordance with law.”

51. The aforesaid decision, in the case of Punjab Agro Industries (supra) has laid down the same principle of law as explained in the case of M/s. Deep Industries (supra).”

13. From the observations of the Hon’ble Division Bench, explaining decisions of the Hon’ble Apex Court, it would become abundantly clear that the High Court in exercise of jurisdiction under Article 227 of the Constitution of India would also be empowered to exercise supervisory jurisdiction over arbitral Tribunals. It would further be clear that while a writ petition questioning an order by the arbitral Tribunal is maintainable, yet the same would be entertained only if an exceptional cause is made out and that the High Court should be extremely circumspect in interfering with an order passed by an arbitral Tribunal.

14. A conjoint reading of the above observations of the Hon’ble Apex Court as well as of Division Bench of this Court would clearly reveal that while a non obstante clause in Section 5 of the Arbitration Act would not bar the High Court from exercising jurisdiction under Article 226/227 of the Constitution of India, yet normally such interference would only be in exceptional circumstances, viz., where one party is left remediless, there is clear bad faith or if the order is patently lacking jurisdiction.

15. In view of the above discussion, insofar as the preliminary objection by the respondent is concerned, while a writ petition under Article 226/227 of the Constitution of India could be maintainable against orders passed by Arbitral Tribunals, the same would not be entertained, unless in exceptional circumstances.

16. Again to appreciate whether the petition reveals an exceptional circumstance or not in the considered opinion of this Court, the merits of the issue would have to be examined. Insofar as the issue on merit is concerned, while learned Advocate Ms.Patel for the petitioner may be right in saying that the respondent may have resorted to fraud, but at the same time, it requires to be observed that the allegedly fraudulent document in question does not appear to have been relied upon by the MSME Council while referring the issue to the Arbitrator. It also requires to be mentioned that learned Arbitrator vide order dated 13.4.2023, which is impugned in the present petition, has observed as much. It would be relevant to mention that initially while respondent no.2 appears to have submitted the allegedly forged document, yet vide a communication dated 13.10.2020 the MSME Council had called upon respondent No.2 to submit a document with fresh calculation at RBI rate i.e. at 18% and whereas a CA certified fresh calculation had been tendered by respondent No.2 on 20.10.2020, as noted by learned Arbitrator. It is this document i.e. calculation at RBI rate of 18%, which has been the basis on which arbitration proceedings had commenced and whereas it does not appear that the earlier allegedly forged document had been relied upon by the MSME Council to refer to the dispute to arbitration.

17. In this view of the matter, as noted by the learned Arbitrator, while criminal aspect of fraud, forgery, or fabrication, which would be visited with penal consequence and criminal sanctions could be adjudicated only by an appropriate Court of law and whereas the petitioner may have remedy against the respondent, as regards the allegedly forged document is concerned, yet submitting such an allegedly forged document before MSME Council and MSME Council having not relied upon the same, while referring the dispute to arbitration, in the considered opinion of this Court, would not vitiate the proceedings requiring interference by this Court.

18. Considering the above discussion and observation, in the thoughtful opinion of this Court, the preliminary objection by the learned Advocate for the respondent would have to be upheld since no exceptional circumstance or bad faith having been shown by the learned Advocate for the petitioner, thus this Court would not exercise jurisdiction to interject the arbitration proceedings at this stage.

19. In this view of the matter, the petition is required to be rejected as not being maintainable. It is clarified that this Court has not gone into the merits of the matter and whereas the learned Arbitrator shall decide the dispute absolutely in accordance with law, without being influenced by any of the observations made herein above, which are purely for the purpose of deciding the aspect of maintainability of the petition.