"Intent Of Parties To Refer Their Dispute To Arbitration Cannot Be Nullified In Anxiety To Retain Power Of Adjudication By Employer": Allahabad HC

While emphasizing that Section 12(5) of the Act read with the 7th Schedule has been introduced to lend greater legitimacy to the process of arbitration by providing for an independent person to act as arbitrator and exclude the other party from becoming a judge in their own cause, the Allahabad High Court held that restricting the reference of the dispute to an adjudication by the departmental officer, clearly manifests the intent of employer i.e. YEIDA to retain the power of adjudication, which goes against the spirit of neutrality of arbitrator for which alone Section 12(5) of the Arbitration Act of 1996 is introduced.

Stating that the manner to appoint the arbitrator would, at best, fall in the realm of procedure, a Single Bench of Justice Ashwani Kumar Mishra observed that “Merely because the person, who could act as an arbitrator in terms of arbitration clause becomes ineligible to act as arbitrator by virtue of Section 12(5) of the 1996 Act read with 7th Schedule, it would not mean that the core part of the agreement for referring the dispute for adjudication to arbitrator would be rendered nugatory”.

The Court held, "In any case, the intent of parties to refer their dispute to arbitration cannot be nullified in the anxiety to retain power of adjudication by the employer i.e. YEIDA."

The Bench stated that the interpretation, which is sought to be culled out by the respondents, would clearly defeat the object of neutrality of the arbitrator or reference of the dispute to arbitration.

Advocate J.P. Pandey appeared for the Applicant, whereas Advocate Aditya Bhushan Singhal appeared for the Opposite Party.

The brief facts of the case were that the applicant was awarded a contract for the construction of 12-meter and 24-meter roads in Sector-18 near the village Usmanpur. The contracted work was completed in 2017 and payments were released by the authority against running bills from time to time, after making deductions. When the dispute arose, the applicant requested for reference of the dispute to the arbitrator, which was declined on the ground that the Chief Executive Officer of the Authority alone is competent to arbitrate in the matter and as he has now become ineligible by virtue of Section 12(5) of the Act of 1996, therefore, the arbitration clause itself would cease to exist.

After considering the submission, the Bench accepted that the arbitration clause in the present case is couched in such a manner that the arbitration itself would not be possible in terms of Clause 33 as the Chief Executive Officer of the Authority, being an officer would clearly be denuded of jurisdiction to act as arbitrator or to appoint an arbitrator by virtue of 7th Schedule read with Section 12(5) of the Act.

The Bench however clarified that the clause should be interpreted to cull out the real intent of the parties, and the agreement between the parties to refer all disputes arising out of a contract to the arbitrator is the core part of the agreement.

“Clause 33 in the present agreement while contemplating reference of the dispute to arbitration essentially restricts its applicability to an adjudication by the departmental officer i.e. Chief Executive Officer or his nominee. The further stipulation in Clause 33 that where reference to such officer is not possible the arbitration itself would not be available”, added the Bench.

The High Court elucidated that principles of impartiality or independence have to be respected in the matter of appointment of an arbitrator and it would be incongruous to hold that party autonomy can be exercised in complete disregard of these principles.

“Once the statute has stepped in to enforce the neutrality of arbitrator in an arbitration agreement, by virtue of Section 12(5) of the Act, the Court would not be justified in literally interpreting the clause in the agreement to keep the power of adjudication or the party autonomy with the employer at the cost of abandoning the arbitration itself”, added the Court.

Therefore, while concluding that the intent of parties to refer their dispute to arbitration cannot be nullified in the anxiety to retain power of adjudication by the employer, the High Court appointed Justice P.K.S. Baghel (Former Judge), Allahabad, as an Arbitrator to enter upon the reference and adjudicate the dispute in accordance with provisions of Arbitration and Conciliation Act, 1996, subject to his consent in terms of section 11-A of the Arbitration and Conciliation Act.

Cause Title: Bansal Construction Office v. Yamuna Expressway Industrial Development Authority and Ors.

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