Case Note & Summary
The Supreme Court allowed the appeal filed by National Aluminium Company Limited (NALCO) against the order of the High Court of Punjab & Haryana which had confirmed the grant of interim injunction restraining the arbitrator from proceeding. The dispute arose from a tender issued by NALCO for construction of Ash Pond-IV. Subhash Infra Engineers Pvt. Ltd. (SIE) submitted its offer, which was accepted by NALCO, and a work order was issued. However, SIE expressed inability to execute the work unless specifications were changed and later stated the work order was not acceptable. NALCO informed SIE that the work would be carried out at its risk and cost and claimed a loss of Rs.4,86,61,440/-. NALCO invoked the arbitration clause and appointed its former CMD as arbitrator. SIE filed a civil suit seeking declaration that the appointment was null and void and for permanent injunction restraining arbitration proceedings. The trial court rejected the interim injunction, but the appellate court granted it, which was upheld by the High Court. The Supreme Court held that a civil suit for declaration and injunction regarding the existence or validity of an arbitration agreement is not maintainable; such objections must be raised under Section 16 of the Arbitration and Conciliation Act, 1996. The Court also held that the appointment of the former CMD as arbitrator was invalid under the Fifth Schedule of the Act. With consent of both parties, the Court appointed Hon'ble Mr. Justice M.L. Mehta, Former Judge of Delhi High Court, as arbitrator. The Court clarified that SIE may raise jurisdictional objections before the arbitrator under Section 16, which shall be decided on merits uninfluenced by any observations of the Court.
Headnote
A) Arbitration Law - Maintainability of Civil Suit - Section 7, 16 Arbitration and Conciliation Act, 1996 - Civil Court cannot entertain a suit for declaration and injunction regarding existence or validity of arbitration agreement; objections must be raised before arbitrator under Section 16 of the Act (Paras 12-14). B) Arbitration Law - Appointment of Arbitrator - Fifth Schedule, Arbitration and Conciliation Act, 1996 - Appointment of former Chairman-cum-Managing Director of a party as arbitrator is invalid under Fifth Schedule introduced by Act 3 of 2016 (Para 16). C) Arbitration Law - Concluded Contract - Section 7 Arbitration and Conciliation Act, 1996 - Acceptance of tender by appellant constituted a concluded contract and arbitration agreement; respondent's inability to execute work did not negate existence of contract (Paras 3, 10).
Issue of Consideration
Whether a civil suit for declaration and injunction is maintainable when the existence or validity of an arbitration agreement is disputed, and whether the appointment of a former CMD of a party as arbitrator is valid.
Final Decision
Appeal allowed. Impugned order of High Court set aside. Injunction granted by Additional District Judge vacated. Appointment of second respondent as arbitrator quashed. Hon'ble Mr. Justice M.L. Mehta, Former Judge of Delhi High Court, appointed as arbitrator to adjudicate disputes. Respondent may raise jurisdictional objections under Section 16 before the arbitrator.
Law Points
- Civil Court cannot entertain suit for declaration and injunction regarding existence or validity of arbitration agreement
- objections must be raised under Section 16 of Arbitration and Conciliation Act
- 1996
- arbitrator appointed by party who is former CMD of same company is ineligible under Fifth Schedule of Act.
