High Courts Should Exercise Caution Before Invoking Article 227 In Ongoing Arbitration: Supreme Court

The Supreme Court on Tuesday ruled that High Courts should exercise "extreme circumspection" before using their supervisory powers to interfere with ongoing arbitral proceedings.

It held that orders rejecting jurisdictional objections during arbitration are ordinarily challengeable only after the final arbitral award.

A bench of Justice K.V. Viswanathan and Justice Vijay Bishnoi observed that the constitutional power of High Courts cannot be taken away. At the same time, it observed that the Arbitration and Conciliation Act is intended to ensure the expeditious resolution of disputes through arbitration with minimal judicial interference.

"Orders passed by the Tribunal on an application under Section 16 of the Act are ordinarily amenable to challenge only under Section 34 of the Act upon the conclusion of the arbitral proceedings and the passing of the final award. It is always safe for the High Courts that, before entertaining revision petitions under Article 227 of the Constitution of India against the Orders passed by the Arbitral Tribunal, while exercising powers under Section 16 of the Act, it should record a prima facie finding regarding the patent lack of inherent jurisdiction and that too after providing an opportunity of hearing to the rival party/parties.", the court held.

"Although Section 5 of the Act restricts judicial intervention, except as expressly provided under the Act, such restriction cannot curtail or oust the constitutional jurisdiction of the High Courts under Article 227 of the Constitution of India. At the same time, it is imperative to note that the Act was enacted with the objective of ensuring the expeditious resolution of disputes through arbitration, with minimal judicial interference and without the supervisory involvement of traditional courts, except to the limited extent expressly contemplated under the Act.", the court added

The ruling arose from a dispute involving Boloma Tea Company, an Assam-based family tea business. Manash Kamal Bezboruah filed a civil suit alleging financial irregularities and mismanagement in the affairs of the partnership and three related companies. He also sought rendition of accounts.

The dispute eventually reached the Supreme Court. With the parties' consent, the court referred the matter to arbitration and appointed former Gauhati High Court judge Justice (Retd.) B.P. Katakey as the sole arbitrator.

During the arbitration, three companies objected to being made parties on the ground that they had not signed the arbitration agreement. The tribunal rejected their objection. The companies then approached the Gauhati High Court. The High Court stayed the notices issued to them and held that it could examine the tribunal's order in exercise of its supervisory jurisdiction.

Before the Supreme Court, Bezboruah argued that the companies were "veritable parties" to the dispute. He also contended that they had not challenged the earlier Supreme Court order referring the matter to arbitration despite being parties to those proceedings. The companies maintained that they had neither consented to nor intended to be bound by the arbitration agreement. They argued that the tribunal therefore lacked jurisdiction over them.

Allowing the appeals, the court reiterated that the Arbitration Act is a self-contained code. It observed that the legislation is intended to minimise judicial intervention during arbitral proceedings.

"The Act is a Code in itself. This phrase is not merely perfunctory, but has definite legal consequences. One such consequence is stated under the non-obstante clause given in Section 5 of the Act, which limits the extent of judicial intervention unless explicitly contemplated under the Act.", the top court ruled.

The court held that the arbitral tribunal has the authority to determine whether non-signatories are "veritable parties" to an arbitration agreement. It further observed that orders rejecting jurisdictional objections should ordinarily be challenged only after the final arbitral award.

The bench also criticised the companies for initiating another round of litigation instead of seeking modification or review of the earlier Supreme Court order.

"These types of practices must be avoided by parties to an arbitration proceedings, as these multiple judicial interventions create unnecessary delay in proceedings, which ultimately destroys the object with which the Act was introduced.", the top court noted. 

The court set aside the Gauhati High Court's orders and dismissed the revision petition before the High Court.

It directed the arbitral tribunal to independently determine the status of the three companies in the arbitration, without being influenced by the observations in the judgment. The court also directed the tribunal to conclude the proceedings expeditiously.

For Appellant (Manash Kamal Bezboruah): Advocate Abir Phukan, instructed by KMNP Law, Advocate-on-Record.

For Respondents (Bokahola Tea Company Private Limited & Ors.): Senior Advocate Madhavi Diwan; Advocate Megha Karnwal (for Respondent Nos. 1, 2 & 3), Advocate Prashant Rawat (for Respondent No. 6), Advocate Shaveer Ahmed (for Respondent No. 7).