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National Aluminium Company Ltd. v. Subhash Infra Engineers Pvt. Ltd. & Anr.

Civil Appeal · 2019 INSC 951Decided 23 Aug 2019
Civil Appeal No. 6605 of 2019
Justice Abhay Manohar Sapre · Justice R. Subhash Reddy

Background

NALCO (a government enterprise) floated a tender for construction work in Odisha, which Subhash Infra Engineers (SIE) initially won, but a dispute arose over whether a binding contract had actually come into existence after SIE sought changes to the specifications and later refused to proceed. When NALCO invoked arbitration and appointed its own former Chairman as the sole arbitrator, SIE went to a civil court instead, seeking a declaration that the appointment was void and an injunction stopping the arbitration. The trial court refused an interim injunction, but the District Court (on appeal) and then the Punjab & Haryana High Court granted SIE an injunction halting the arbitration, prompting NALCO to appeal to the Supreme Court.

Decision Breakdown

The Supreme Court held that any objection to the existence or validity of an arbitration agreement must be raised before the arbitrator under Section 16 of the Arbitration and Conciliation Act, 1996, not through a civil suit for declaration and injunction, relying on its earlier ruling in Kvaerner Cementation India Ltd. v. Bajranglal Agarwal. It therefore set aside the orders of the District Judge and the High Court that had granted the injunction. However, since NALCO's own former Chairman-cum-Managing Director had been appointed as arbitrator, the Court held that under the Fifth Schedule to the Act (introduced by the 2016 amendment) he could not continue as arbitrator, and, with both parties' consent, appointed a retired High Court judge, Justice M.L. Mehta, as the new arbitrator to decide the dispute.

Lesson Learnt

If a contract contains an arbitration clause, disputes over whether that clause/contract is even valid must first be raised before the arbitrator (under Section 16), not by filing a separate civil suit; separately, a company cannot validly appoint its own senior executive as a "neutral" arbitrator in a dispute involving itself, since post-2016 amendments disqualify arbitrators with such a conflict of interest.

Official source (sci.gov.in)View Judgment (PDF)

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