Arbitration agreement valid even if appointment mechanism rendered invalid by law: Supreme Court

The Supreme Court recently ruled that arbitration agreements remain operative even if the appointment mechanism contained in the arbitration clause has become inoperative due to statutory amendments [Offshore Infrastructure Vs Bharat Petroleum Corporation Limited]..A Bench of Justices Dipankar Datta and Augustine George Masih further clarified that applications filed in court for appointment of arbitrators under Section 11 of the Arbitration and Conciliation Act, 1996 would get the benefit of the COVID-19 limitation exclusion."Merely because the procedure to appoint an arbitrator provided in the clause has become inoperative due to subsequent changes in statutory provisions, would not mean that the core of the contract referring the dispute for adjudication to arbitrator would be rendered nugatory," the judgment said.The Court made the observations while setting aside Madhya Pradesh High Court orders that had dismissed a Section 11(6) petition against Bharat Petroleum Corporation Limited (BPCL) as time-barred..By way of background, Offshore Infrastructures Limited (Offshore/ appellant) was awarded a contract by Bharat Oman Refineries Limited (now merged with Bharat Petroleum Corporation Limited) on December 31, 2016, for composite works at the Bina Refinery. The work was completed on January 31, 2018 and the final bill was raised on March 20, 2018. Following disputes over payment, Offshore sought arbitration on June 14, 2021, but Bharat Oman refused to appoint an arbitrator.The contractual arbitration clause (Clause 8.6 of the General Conditions of Contract) designated the Managing Director of Bharat Oman Refineries Limited or a nominated officer as the arbitrator. However, the 2015 amendments to the Arbitration and Conciliation Act, specifically Section 12(5) read with the seventh schedule, rendered such appointments legally impermissible due to concerns about neutrality and impartiality.The Madhya Pradesh High Court at Jabalpur dismissed the arbitration application on December 19, 2023, ruling it was time-barred. The High Court held that limitation began from the issuance of the "No Claim Certificate" on October 3, 2018, meaning the three-year period expired on October 2, 2021. Since the arbitration application was filed on March 15, 2022, it was deemed beyond the limitation period. A review petition was also dismissed on April 10, 2024..The Supreme Court examined two key questions:Effect of statutory amendments on the arbitration clause – Clause 8.6 named the company's Managing Director or nominee as sole arbitrator. Following the 2015 amendment to the Arbitration Act, such appointments became impermissible under Section 12(5) read with the Seventh Schedule. BPCL argued this invalidated the arbitration clause itself.Limitation under Section 11(6) – Whether the petition filed in March 2022 was within the three-year period, considering the final bill became due in April 2018..On the first issue, the Court relied on Perkins Eastman v. HSCC and Voestalpine Schienen v. DMRC to hold that statutory disqualification of a named authority does not extinguish the agreement to arbitrate."The very existence of the arbitration clause referring disputes to arbitration is the core part of the contract. The amendment enforcing neutrality of arbitrators cannot be read to nullify the agreement itself," the Bench said.The Court emphasised purposive interpretation over literal reading of contracts. It held that the 2015 amendments were enacted to enforce arbitrator neutrality, not to eliminate arbitration mechanisms entirely..On limitation, the Court applied Geo Miller v. Rajasthan Vidyut Utpadan Nigam Limited and held that the cause of action arose when the final bill became due in April 2018. Ordinarily, the March 2022 application would be time-barred.However, the Court applied its order in In Re: Cognizance for Extension of Limitation, which excluded March 15, 2020 to February 28, 2022 from limitation computation due to COVID-19."It would be unjust and detrimental to not consider the hardship faced during COVID-19 while deciding upon limitation. Once the excluded period is accounted for, the Section 11(6) application is within time," the Court noted..Hence, it set aside the High Court's orders and directed that the dispute be referred to the Delhi International Arbitration Centre (DIAC), which has been tasked with appointing an independent arbitrator to adjudicate the matter..The petitioners were represented by Advocates Gaurav Dudeja, Akarsh Garg, Kaushik Choudhury, Dhruval Singh, Subhan Shankar Gogoi and Abhijit Debnath from Phoenix Legal. .The respondents were represented by Senior Advocate Balbir Singh with advocates Parijat Sinha, Divyam Dhyani, Reshmi Rea Sinha, Deepak Joshi, Sanjay Sharma and Naman Tandon..[Read Judgment]