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Supreme Court Rejects Appointment of an Arbitrator by the State Government in a Private Contract

Overview

This case addresses an important question as to whether an arbitration can be considered valid if it is initiated without the consent of a party. The dispute came before the Supreme Court after the Bombay High Court set aside an arbitral award as well as a Civil Court order, which upheld that award. 

The main issue was whether the State Government of Maharashtra had the power to appoint an arbitrator in a dispute between the Municipal Council and a private contractor. The Court also analysed whether the actions of the Municipal Council during the process amounted to an acceptance of the arbitration. 

 

Facts of the Case

In 1994, the Ambernath Municipal Council invited tenders for collecting octroi, for a minimum price of ?6.74 crore. Bharat Udyog, the petitioners herein, won the contract with an even higher bid and entered into an agreement following the same. After starting the work, the petitioner claimed that the price was wrongly fixed and asked to reduce it by ?40 lakh. This was rejected by the Municipal Council.

The petitioner then approached the State Government, which then issued a resolution appointing the Commissioner of Konkan Division as an arbitrator. The Municipal Council at that time did not have any elected representatives, but they were functioning through an Administrator appointed by the government.

The arbitration proceedings began and in a very short period of time an award was passed, which reduced the amount of the contract, even more than what was originally requested by the petitioner. The petitioner then approached the Civil Court to make the award enforceable. 

The Municipal Council raised objections, which were dismissed due to delay. However, the Bombay High Court set aside both the order of the Civil Court and the award, and held that the arbitration was invalid. 

This led the matter to be placed before the Supreme Court.

 

Legal Issues

  1. Whether Clause 22 of the contract can amount to a valid arbitration agreement or only a departmental dispute process.
  2. Whether the State Government had the authority under Section 143-A(3) of the Maharashtra Municipal Councils Act to appoint an arbitrator.
  3. Whether initiating an arbitration proceeding, without the consent of one of the parties, satisfies the requirement of consensus ad idem.
  4. Whether the actions of the Municipal Council in the proceedings amounts to acceptance of arbitration. 
  5. Whether an arbitrary award passed without proper legal authority should be considered valid under law. 

 

Decision

The Supreme Court dismissed the petition and upheld the judgement of the Bombay High Court. It was held that there was no valid arbitration agreement between both of the parties. Clause 22 of the contract was considered as a departmental process to resolve disputes and not as an arbitration agreement. It was further held that the State Government had no authority to appoint an arbitrator in such a scenario. Section 143-A(3) the 1965 Act was limited to issuing basic directions as to the collection of octroi and could not be used to interfere in a concluded contract. 

As to the actions of the Municipal Council, the Court stated that mere involvement in the proceedings does not create any jurisdiction. Since the Municipal Council was controlled by a Government Administrator, its participation could not be treated as free consent.  

Finally, the Apex Court laid down that the entire arbitration process did not have any legal basis and was therefore void from the very beginning. The award was declared to be non-existent in the eyes of law, and the High Court’s decision to set it aside was upheld. 

 

Case Reference :- Bharat Udyog Ltd. (Formerly Known as M/s Jai Hind Contractors Pvt. Ltd.) {Petitioner(s)}  Vs. Ambernath Municipal Council through Commissioner and Another  {Respondent(s)} Special Leave Petition (C) No. 1127 of 2017 (DB, P.S. NARASIMHA AND ALOK ARADHE, JJ.)