Arbitration Clause Remains Valid Even If Statutory Amendments Made Appointment Procedure Inoperative: Supreme Court
The Apex Court held that the non-operation of the arbitration clause does not result in the forfeiture of the entire arbitration mechanism, stating that the arbitration agreement must be interpreted in a purposive manner.
Justice Dipankar Datta, Justice Augustine George Masih, Supreme Court
The Supreme Court has ruled that an arbitration clause, as the core part of a contract, remains valid even when the procedure for appointment of an arbitrator becomes inoperative owing to statutory amendments.
The Apex Court was hearing an appeal arising from the judgment of the Madhya Pradesh High Court, which had dismissed an application filed under Section 11(6) of the Arbitration and Conciliation Act, 1996, seeking the appointment of an arbitrator, on the ground that it was barred by limitation.
A Bench comprising Justice Dipankar Datta and Justice Augustine George Masih, while adjudicating the matter, observed that “the very existence of the arbitration clause in the GCC referring to all disputes to arbitrator is the core part of contract.” The Bench further clarified that “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.”
Advocate Gaurav Dudeja represented the appellant, while Advocate Parijat Sinha appeared on behalf of the respondent.
Background
The respondent corporation (BPCL) had invited tenders for composite works related to the establishment of a modular unit at its refinery. The appellant was awarded the contract governed by the General Conditions of Contract (GCC), which contained an arbitration clause naming the Managing Director of the respondent corporation as an arbitrator.
After completion of the work, the appellant raised a final bill and issued a No Claim Certificate. The respondent released part payment after deducting liquidated damages on account of the delayed completion. Later, the appellant raised a consolidated claim and invoked arbitration under the clause in the GCC and sought the appointment of a neutral arbitrator.
When no arbitrator was appointed, the appellant approached the High Court under Section 11(6) of the Arbitration and Conciliation Act, 1996. The High Court dismissed the application as barred by limitation and subsequently rejected the review petition. Aggrieved thereby, the appellant filed the present appeal before the Supreme Court.
The respondent, however, contended that the ineligibility of the Managing Director or his nominee to act as arbitrator under Section 12(5) of the Act had extinguished the clause itself after the statutory amendments introduced by the Arbitration and Conciliation (Amendment) Act, 2015, rendered such a contractual provision otiose.
Court’s Observation
The Supreme Court, while hearing the matter, examined whether the arbitration clause in the General Conditions of Contract had become inoperative due to the ineligibility of the named arbitrator following the 2015 amendment to the Arbitration and Conciliation Act, 1996.
Referring to TRF Ltd. v. Energo Engineering Projects Ltd. and Perkins Eastman Architects DPC v. HSCC (India) Ltd., the Court held that “ the jurisdiction under Section 11(6) of the 1996 Act is not ousted merely because an appointment has already been made by the respondent if such appointment is ex facie invalid or contrary to the agreed procedure.”
The Court further clarified that even where the appointment mechanism becomes inoperative, “the Appellant is entitled to file application under section 11(6) of the 1996 Act for appointment of arbitrator and thereby the power is vested with the court to appoint an arbitrator upon filing of such application.”
On the issue of limitation, the Apex Court held that “In normal course of action, the application filed by the Appellant would have been hit by the statutory bar of three years”. However, while referring to the order passed in Cognizance for Extension of Limitation, the Bench excluded the period from 15 March 2020 to 28 February 2022 due to the COVID-19 pandemic and consequently held that the appellant’s application under Section 11(6) had been filed within the limitation.
Conclusion
Allowing the appeals, the Supreme Court set aside the orders of the High Court, while directing that the dispute be referred to the Delhi International Arbitration Centre for the appointment of an independent arbitrator in accordance with law.
Cause Title: Offshore Infrastructures Limited v. Bharat Petroleum Corporation Limited. (Neutral Citation: 2025 INSC 1196)
Appearances
Appellant: Advocates Gaurav Dudeja, Akarsh Garg, Kaushik Choudhury, Dhruval Singh, Archit Gupta, Abhijit Debnath, and Subhan Shankar Gogoi.
Respondent: Advocate Parijat Sinha, AOR.
