The Arbitration Practitioner’s Series by MKBAC: A purposive interpretation of Section 21 Arbitration Act

Recently, in M/s Bhagheeratha Engineering Ltd v. State of Kerala, the Supreme Court revisited the object and scope of Section 21 of the Arbitration and Conciliation Act, 1996. It examined whether a claim can be decided by the arbitral tribunal even if the same was not specifically raised in the notice issued under Section 21 of the Act.

The Court observed that even where no notice has been issued under Section 21 of the Act, it is not fatal and cannot be a ground for setting aside an arbitral award under Section 34.

Bhagheeratha Engineering (contractor) was awarded four road maintenance contracts by the State of Kerala (employer) for development of roads in Kerala.

Disputes arose between the parties relating to (i) the value of work for price adjustment of bitumen and POL; (ii) entitlement to escalation during extended periods of the contract; (iii) the applicable price of bitumen for price adjustment; and (iv) entitlement to interest on delayed payments. While the parties decided to settle the disputes in accordance with the escalation mechanism contained in the dispute resolution clause, th employer sought to invoke the arbitration clause with respect to one dispute only (value of work to be considered for calculating the price adjustment for bitumen and POL) and also asked the contractor to nominate an arbitrator.

While initially the contractor refused to refer disputes for arbitration, it eventually nominated an arbitrator by way of communication dated November 29, 2004. Accordingly, the arbitral tribunal was constituted on January 11, 2005. On December 16, 2005, the tribunal passed an order under Section 16 holding that the claims of the contractor were still unsettled and that the arbitration clause between the parties “was comprehensive enough to include any matter arising out of or connected with the Agreement”.

On June 29, 2006, the tribunal passed the award, deciding all four issues in favour of the contractor. Consequently, the contractor was awarded an amount of ₹1,99,90,777 along with post-award interest at 10% per annum.

Aggrieved with the award, the employer challenged the same before the District Judge, Thiruvananthapuram under Section 34 of the Act. On June 26, 2010, the District Judge allowed the employer’s plea, observing that the constitution of the tribunal was not as per the timeline provided under the arbitration clause. It also held that the employer invoked the arbitration clause contrary to the procedure prescribed under the contract between the parties.

On appeal filed by the contractor under Section 37, the Kerala High Court upheld the dismissal of the award, holding that since the employer’s notice under Section 21 was in respect of one issue only, the tribunal could not have decided the other claims.

Aggrieved, the contractor approached the Supreme Court.

The Supreme Court cited its previous decision in MK Shah Engineers & Contractors v. State of Madhya Pradesh to hold that the employer, having invoked the arbitration clause contrary to the procedure prescribed under the contract, could not have challenged the award on the ground that the appointment of the arbitrator was not in compliance with the agreement between the parties.

Interestingly, on the point of Section 21 notice not specifying all the claims, the Supreme Court observed that failure to issue a Section 21 notice “would not be fatal to a party in Arbitration if the claim is otherwise valid and the disputes arbitrable”.

Relying on State of Goa v. Praveen Enterprises it was observed that merely because certain claims were not mentioned in the notice issued under Section 21, the same would not preclude the arbitral tribunal from deciding other claims. Accordingly, the Supreme Court allowed the appeal of the contractor and upheld the arbitral award dated June 29, 2006.

At the outset, the Supreme Court’s judgment is on the right track and underscores the pro-arbitration approach of the Supreme Court. The Supreme Court rightly followed its previous judgments in Praveen Enterprises and ASF Buildtech (P) Ltd v. Shapoorji Pallonji & Co (P) Ltd to observe that merely because certain claims were not mentioned in the notice issued under Section 21 of the Act, this would not preclude the arbitral tribunal from deciding other claims.

At the same time, it appears that the Supreme Court’s judgment is contrary to the settled principle of law that a notice under Section 21 of the Act is mandatory. In this case, the effect of the Supreme Court’s ruling is that issuance of a notice under Section 21 of the Act is not a mandatory requirement and the absence of such a notice does not affect the jurisdiction of the arbitral tribunal. Therefore, merely because no notice was issued under Section 21, the same would not be fatal and would not be a ground to set aside an award under Section 34.

The authors respectfully contend that this was never the issue before the Supreme Court in the instant case and the limited issue was whether a claim can be decided by the arbitral tribunal even if the same was not specifically raised in the Section 21 Notice. This issue was adequately dealt with by the Supreme Court in Praveen Enterprises as discussed in this judgment itself.

However, the Supreme Court went further and observed that lack of issuance of Section 21 notice would not be fatal and would not be a ground to set aside an award under Section 34. This is contrary to the judgments of the Supreme Court including Adavya Projects Private Limited v. Vishal Structurals Private Limited and Regenta Hotels Private Limited v. Hotel Grand Center Point. Therefore, an authoritative pronouncement is required to settle the proposition.

In the opinion of the authors, in the absence of any other provision specifying the date of commencement of arbitral proceedings, a Section 21 notice must be construed as mandatory, unless the parties have waived its requirement. As noted in a catena of judgments including ASF Buildtech, a notice under Section 21 serves multiple purposes, including (i) informing the other party as to the claims of the claimant; (ii) giving the other party an opportunity to point out if any of the claims are time–barred, barred in law, or if there are counter-claims which the other party will raise; (iii) helping parties agree on the constitution of the Arbitral Tribunal; (iv) for triggering the referral court’s jurisdiction under Section 11 of the Act where the parties have failed to appoint an arbitrator; and (vi) for fixing the date of commencement of arbitration in view of Section 43(1).

Pertinently, the judgment does not appear to analyse whether the parties in the instant case had waived the requirement of a notice under Section 21. An argument was raised by the contractor before the Supreme Court that since the issue of lack of notice under Section 21 was not raised before the arbitral tribunal, the challenge could not have been raised in these proceedings. However, curiously, the Supreme Court did not analyse whether the requirement of a notice under Section 21 is derogable or not. The answer to that is in Section 21, which itself uses the expression, “unless otherwise agreed by the parties”.

Raghav Bhatia and Ankur Singhal are Advocates practicing before the Supreme Court of India and High Court of Delhi.