Supreme Court of India: Whether the Court can refer the parties to arbitration on the oral consent given by the counsel without written instruction from the party

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In the case of Kerala State Electricity Board and anr. v. Kurien E. Kalathil and anr. (Civil Appeal Nos.3164-3165 of 2017 decided on March 09, 2018), the Supreme Court of India dealt with the question of whether the High Court can refer the parties to arbitration on the oral consent given by the counsel without written instruction from the party and held that Insofar reference of the parties to arbitration, oral consent given by the counsel without a written memo of instructions does not fulfill the requirement under Section 89 of the Code of Civil Procedure, 1908 of India which gives the Court the power to refer the dispute for settlement or conciliation was introduced with a purpose of amicable, peaceful and mutual settlement between parties without intervention of the court. Detailed analysis is given below:

Factual Matrix

Kerala State Electricity Board (KSEB) entered into an agreement with the Contractor for construction of a composite dam. After commencement of work, Government of Kerala issued a notification by which minimum wages payable to certain categories of workers employed in works mentioned in notification was revised. The contractor claimed labour escalation charges and the Government of Kerala referred the matter to the industrial tribunal for adjudication of the dispute. The industrial tribunal passed the award holding that the notification of Government of Kerala was applicable to workmen employed by the Contractor.

Contractor filed a writ in High Court claiming the escalation amount along with interest. When the said writ was pending, KSEB terminated the contract with Contractor which again came to be challenged before the High Court. The High Court disposed of both the petitions by a common judgment dated holding

  • that the termination of contract was arbitrary and directed KSEB to pay the amount claimed by the Contractor for payment of labour escalation with interest.
  • directed the KSEB to pay the amount claimed by the Contractor towards additional work done by the Contractor.

KSEB went to Supreme Court against this decision of High Court. The Supreme Court held that contract between the parties is in the realm of private law and not a statutory contract and the matter could not have been agitated in the writ petition. However, in the peculiar facts and circumstances, this Court did not interfere with the order of the High Court directing the payment of amount to the Contractor but reduced the rate of interest.

Three years after the payment under the order was pending, the Contractor filed application in Supreme Court seeking direction of the court to make payments due under judgment of this Court, with further interest to be paid forthwith. The Supreme Court provided liberty to the Contractor to move the High Court seeking further steps for the recovery of the amount. Contractor then filed a writ in High Court in this regard which was allowed by the High Court. The High Court held that High Court directed KSEB to pay within three months with reduced simple interest. So far as the claim as to the additional work done, the High Court directed the parties to mutually discuss among themselves on disputed items in appeal.

Further with the consent of the counsel for the parties, the High Court referred the matter to the sole arbitrator to resolve the dispute relating to items which they could not amicably resolve. KSEB filed a review against this decision and therefore, KSEB went to Supreme Court against this decision of High Court.

Issue

Out of all the issues raised before the Supreme Court, the one which is relevant for arbitration is as follows:

Whether the High Court can refer the parties to arbitration on the oral consent given by the counsel without written instruction from the party.

Relevant Legal Principles

Section 7 of the Indian Arbitration and Conciliation Act, 1996 (the Act)

7 Arbitration agreement. —

(1) In this Part, “arbitration agreement” means an agreement by the parties to submit to arbitration all or certain disputes which have arisen or which may arise between them in respect of a defined legal relationship, whether contractual or not.

(2) An arbitration agreement may be in the form of an arbitration clause in a contract or in the form of a separate agreement.

(3) An arbitration agreement shall be in writing.

(4) An arbitration agreement is in writing if it is contained in—

(a) a document signed by the parties;

(b) an exchange of letters, telex, telegrams or other means of telecommunication which provide a record of the agreement; or

(c) an exchange of statements of claim and defence in which the existence of the agreement is alleged by one party and not denied by the other.

(5) The reference in a contract to a document containing an arbitration clause constitutes an arbitration agreement if the contract is in writing and the reference is such as to make that arbitration clause part of the contract.

Section 89 of the Code reproduced below:

89. Settlement of disputes outside the Court.- (1) Where it appears to the court that there exist elements of a settlement which may be acceptable to the parties, the court shall formulate the terms of settlement and give them to the parties for their observations and after receiving the observations of the parties, the court may reformulate the terms of a possible settlement and refer the same for—

(a) arbitration;

(b) conciliation;

(c) judicial settlement including settlement through Lok Adalat; or

(d) mediation.

(2) Where a dispute has been referred—

(a) for arbitration of conciliation, the provisions of the Arbitration and Conciliation Act, 1996 shall apply as if the proceedings for arbitration or conciliation were referred for settlement under the provisions of that Act;

(b) to Lok Adalat, the court shall refer the same to the Lok Adalat in accordance with the provisions of sub-section (1) of section 20 of the Legal Services Authority Act, 1987 and all other provisions of that Act shall apply in respect of the dispute so referred to the Lok Adalat;

(c) for judicial settlement, the court shall refer the same to a suitable institution or person and such institution or person shall be deemed to be a Lok Adalat and all the provisions of the Legal Services Authority Act, 1987 shall apply as if the dispute were referred to a Lok Adalat under the provisions of that Act;

(d) for mediation, the court shall effect a compromise between the parties and shall follow such procedure as may be prescribed.

Contentions

The Contractor relied on earlier judgment of the Supreme Court of Byram Pestonji Gariwala v. Union Bank of India and Ors., (1992) 1 SCC 31 and contended that the counsel has the implied authority to consent for arbitration on behalf of a party.

Analysis

The Court observed that Arbitrator/Tribunal is a creature of the contract between the parties. There was no arbitration agreement between the parties. Jurisdictional pre-condition for reference to arbitration under Section 7 of the Act is that the parties should seek a reference or submission to arbitration.

So far as reference of a dispute to arbitration under Section 89 CPC, the same can be done only when parties agree for settlement of their dispute through arbitration in contradistinction to other methods of alternative dispute resolution mechanism stipulated in Section 89 CPC.

Insofar reference of the parties to arbitration, oral consent given by the counsel without a written memo of instructions does not fulfill the requirement under Section 89 CPC.

The Court further held that since referring the parties to arbitration has serious consequences of taking them away from the stream of civil courts and subject them to the rigour of arbitration proceedings, in the absence of arbitration agreement, the court can refer them to arbitration only with written consent of parties either by way of joint memo or joint application; more so, when government or statutory body like the KSEB is involved.

The Court referred to its earlier dicta in Afcons Infrastructure Ltd. and Anr. v. Cherian Varkey Construction Co. (P) Ltd. and Ors. (2010) 8 SCC 24 wherein it emphasized that under Section 89 of the Code, referring the parties to arbitration could be made only when the parties agree for settlement of the dispute through arbitration by a joint application or a joint affidavit before the court.

Further the Court observed that in Byram Pestonji Gariwala (Supra), the Supreme Court made it clear that the counsel should not act on implied authority unless there is exigency of circumstances demanding immediate adjustment of suit by agreement or compromise and the signature of the party cannot be obtained without undue delay. In a subsequent decision in the context of examining the compromise under Order XXIII Rule 3 of the Code, in Banwari Lal v. Chando Devi (Smt) (Through LRs.) and Anr. (1993) 1 SCC 581, this Court has observed that the case of Byram Pestonji Gariwala (Supra) had ignored the law laid down in Gurpreet Singh v. Chatur Bhuj Goel (1988) 1 SCC 270 and held that when parties enter into a compromise, the court must insist upon the parties that the compromise be reduced into writing.

The Court held that referring the parties to arbitration has serious civil consequences. Once the parties are referred to arbitration, the proceedings will be in accordance with the provisions of the Act and the matter will go outside the stream of the civil court. Under Section 19 of the Act, the arbitral tribunal shall not be bound by the Code and the Indian Evidence Act. Once the award is passed, the award shall be set aside only under limited grounds. Hence, referring the parties to arbitration has serious civil consequences procedurally and substantively.

Conclusion

When there was no arbitration agreement between the parties, without a joint memo or a joint application of the parties, the High Court ought not to have referred the parties to arbitration.

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