A Constitution Bench of the Supreme Court in a recent judgment in State of Jharkhand v. Hindustan Construction Company (“HCC”) held that even if the Supreme Court retains some degree of control over an arbitration proceeding, it does not become the court of appropriate jurisdiction to entertain an application for making the resultant arbitral award as rule of the court. In doing so, the Supreme Court expressly overruled two of its prior judgments, viz., State of Madhya Pradesh v. M/S Saith & Skeleton and Guru Nanak Foundation v. Rattan Singh (“Guru Nanak”).
The State of Jharkhand, on April 10, 1996, filed a money suit before Sub-Judge, Saraikella for realization of certain sum with interest, pursuant to a contract dated April 25, 1989. Hindustan Construction Company filed an application for stay of the suit under section 34 of the Arbitration Act, 1940 (the “Act”). The Sub-Judge allowed the application for stay and expressed the view that it was desirable for parties to settle the dispute through arbitration. The State appealed to the High Court which dismissed the appeal in August 2002.
The State then preferred an appeal to the Supreme Court which, through its order dated January 2013, appointed an arbitrator and also directed the arbitrator to file the award before the Supreme Court. After conclusion of the arbitration proceedings, the arbitrator filed the award before the Supreme Court. The State of Jharkhand challenged this award before the civil court while Hindustan Construction Company filed an affidavit before the Supreme Court requesting it to pronounce judgment in terms of the award. It contended that since the SC had directed to filed the award before itself, it alone had the jurisdiction to pronounce judgment in terms of the award.
The Supreme Court extensively analyzed section 31(4) of the Act which, where an application is made in relation to an arbitration proceeding, confers upon a court the exclusive jurisdiction over all subsequent applications related to those arbitration proceedings. In Guru Nanak, section 31(4) was relied upon to conclude that Supreme Court can also become the court with exclusive jurisdiction if it retains control over the proceedings.
However, the Court in HCC held that, keeping in mind the meaning of the term ‘court’ in the definition clause, its meaning as employed in section 31(4), and appreciating the same in the context of the provisions and the scheme of the Act, the Supreme Court can never be the court that assumes exclusive jurisdiction under section 31(4). The reasoning behind this is that if the Supreme Court does assume exclusive jurisdiction, it would amount to the Court taking over original jurisdiction. However, the Supreme Court cannot assume original jurisdiction in matters outside the realm of those provided in articles 32 and 131 of the Constitution.
Further, the Court held that it cannot assume original jurisdiction because, by doing so, it would be depriving the party of the right to appeal which is statutorily provided under section 39 of the Act. The Court, after alluding to its previous judgments, held that right to appeal is a substantive and vested right, and the Supreme Court cannot take away that right by assuming original jurisdiction. Thus, in conclusion, it held that the civil court is the court conferred with jurisdiction under the statute and the same cannot be allowed to shift or be made flexible because of a superior court’s intervention in the matter in a different manner.
Section 31(4): Much Ado About Nothing?
The Court extensively discussed section 31(4) of the Act and whether the Supreme Court can retain exclusive jurisdiction based on it. However, on a plain reading of the section, this seems an exercise in futility.
Section 31(4) provides that the court where the application is made in any reference will be the court that will retain exclusive jurisdiction over the arbitral proceedings . In the instant case, the application was not made before the Supreme Court, and the matter had reached it only by way of an appeal. Thus, section 31(4) simply cannot be used to confer exclusive jurisdiction over the Supreme Court, as the application was not made before it, which is an essential requirement of the section. Moreover, this would apply to all cases because, in a domestic arbitration, an application in reference to the arbitration is never initially made before the Supreme Court.
This simple requirement has been completely ignored by the Court in HCC. Interestingly, in Guru Nanak, this contention was raised before the Supreme Court. It was argued that since the first application under section 20 of the Act was filed before the Delhi High Court, that court should retain exclusive jurisdiction. However, the Supreme Court did not accept this contention and retained exclusive jurisdiction.
Assuming that the above argument does not apply to deny the Supreme Court with exclusive jurisdiction under section 31(4), the violation of a right of appeal cannot be a ground for the same. Admittedly, section 39 of the Act does provide the parties a right to appeal the orders passed by a lower court. However, as the judgment itself notes, the right of appeal is not an absolute right and there can be limitations imposed on it.
It is important to note that section 31(4) starts with a non-obstante clause which means that the effect of this provision would prevail over any other provision in the Act. Thus, section 31(4), which confers exclusive jurisdiction to the Court, must prevail over the right of appeal. The right of appeal is limited to that extent. Hence, there is no question of violation of the right of appeal as it is not available in cases that fall within the ambit of section 31(4) of the Act.
As is noted in the judgment itself, the purpose behind section 31(4) is to vest exclusive jurisdiction regarding all arbitration proceedings with one court. This is to ensure that the proceedings are conducted smoothly, with certainty, without any confusion or conflict created by applicants approaching different courts at different stages.
As a result of the judgment in HCC, while the filing of the award will have to happen before the Supreme Court, the challenge to the award will have to be made before a civil court. This clearly does not meet the purpose of one court having exclusive jurisdiction and the parties not having to approach different courts at different stages. The Court has failed to address this issue.
Section 31(2): Twice Ignored by the Supreme Court?
Section 31(2) of the Act provides that all questions regarding the validity, effect or existence of the award shall be decided by the court where the award is filed. Thus, if the award is filed with the Supreme Court, the section mandates that it would be the Supreme Court that will deal with the question of validity or existence of the award.
Now, when the Supreme Court asked for the award to be filed with itself, if it was aware of the existence of section 31(2) and its consequences, then perhaps it was the intention of the Court to take up exclusive jurisdiction. However, if it did not have section 31(2) in mind and it merely wanted to supervise the arbitration to a limited extent, then perhaps the Court erred and went too far in asking for the award to be filed with itself. It is interesting to note that both in Saith & Skeleton as well as Guru Nanak, the Supreme Court had not explicitly asked for filing the award with itself.
Having said that, once the Court has asked for the filing, erroneously or intentionally, section 31(2) must be followed. However, the Constitution Bench failed to consider this provision in deciding which court will have jurisdiction to decide challenge to the award.
In this case, the court has restricted the application of section 31(4) by excluding the Supreme Court from retaining exclusive jurisdiction over arbitration proceedings. It is commendable that the court has protected rights of the parties such as the right of appeal. However, on a simple reading of section 31(4), it is clear that it can never be used to confer exclusive jurisdiction over the Supreme Court.
However, even if that is not correct, the Court erroneously uses right of appeal as a ground for denying the Supreme Court with exclusive jurisdiction under section 31(4). Moreover, the Court does not consider the implication of its judgment in so far as it defeats the purpose of section 31(4).
It is important to note that this issue does not arise under the Arbitration and Conciliation Act, 1996. This is because, unlike the 1940 Act, the 1996 Act contains an exhaustive definition of the term “Court” which is limited to district court and High Court. This was clarified in State of West Bengal v. Associated Contractors.