Thursday, May 26, 2011

Arbitration Clause: Exercise of Writ Jurisdiction not bar

Exercise of writ jurisdiction not absolute bar in case of arbitration clause

May 26 2011

Introduction

In Union of India v Tantia Construction Pvt Ltd(1) the Supreme Court considered the extent to which the high courts in India are entitled to exercise their powers under Article 226 of the Constitution (writ jurisdiction), notwithstanding the presence of an arbitration clause in the agreement entered into between the parties. The court held that the presence of an alternate remedy (ie, going down the arbitration route) did not constitute a bar on the high court from entertaining the dispute in its writ jurisdiction, especially in light of the injustice apparent from the facts of the case.

This latest judgment raises some interesting questions regarding whether the Indian courts have succeeded in laying down an objective test on the basis of which courts would refrain from exercising their writ jurisdiction because of the presence of an arbitration clause in the agreement.

Facts

In early 2007 the East Central Railway (petitioner) awarded a project for the construction of a rail overbridge to the respondent, pursuant to which an agreement was entered into between the parties. The agreement contained an arbitration clause. Subsequently, due to an alteration of the layout and plan for construction, the respondent was instructed by the petitioner to execute additional work at the originally agreed contractual price instead of a revised appreciated price. Aggrieved, and notwithstanding the arbitration clause present in the agreement, the respondent filed a writ petition under Article 226 before the high court, asking that a writ of certiorari be issued quashing the petitioner's order through which it had rejected the respondent's claim for additional costs and further asking that a writ of mandamus be issued directing the petitioner to allow the respondent to complete only the original work and not carry out any additional work. Since the respondent succeeded in the writ petition, the petitioner appealed to the Supreme Court arguing, among other things, that the courts could not interfere in the dispute as there was an arbitration clause in the agreement.

Decision

The Supreme Court rejected this contention and reasoned that it was not obligatory for the courts to direct the parties to pursue the alternative remedy of arbitration when injustice was clear from the facts of the case.

The court's reasoning may be examined on the threshold of the settled law that where the agreement executed by the parties contains an arbitration clause, a party cannot approach the court by invoking writ jurisdiction to claim breach of contract or by seeking writ in the nature of mandamus to enforce the terms of contract, as the appropriate remedy would be to approach the civil court/arbitration.

In Harbanslal Sahnia v Indian Oil Corporation Ltd(2) the Supreme Court summarised the exemptions to the above-settled law that no writ would be competent to enforce contractual obligation. At the discretion of the court, an exemption would occur in the following cases:
  • where the writ petitioner seeks enforcement of any fundamental rights;
  • where there is a failure of principles of natural justice;
  • where proceedings are totally without jurisdiction; or
  • where an act or its provisions are challenged.
Thus, it is clear that the presence of an arbitration clause in the agreement is not an absolute bar from invoking the writ jurisdiction of the court, although it may well be a good ground for disallowing the same. It is also settled that this is essentially a discretionary power, to be exercised with restraint, depending on the facts and circumstances of each case. However, where does the court draw the line and what are the guiding tests for exercise of such discretion, if any?

In 1976, in Bisra Stone Lime Co Ltd v Orissa State Electricity Board,(3) the Supreme Court indicated that all questions of law (one of which may be interpretation of the agreement) need not necessarily be withdrawn from the arbitral tribunal simply because the court has discretion under Article 226 of the Constitution and because the court may be better positioned to decide such questions.

Subsequently, in Titagarh Paper Mills v Orissa State Electricity Board(4) the Supreme Court held that ordinarily, when a dispute between parties requires adjudication of disputed question of facts where the parties are required to lead both oral and documentary evidence, the same must be determined by the domestic forum chosen by the parties, and that in such cases the court may not entertain a writ application. Applying this test to the case at hand, the court held that all of the contentions raised by the appellant therein should be squarely covered by the arbitration agreement. Hence there was no reason why the appellant should not pursue the remedy of arbitration which it had solemnly accepted under the agreement, rather than invoking the extraordinary jurisdiction of the high court under Article 226 of the Constitution to determine questions which really formed the subject matter of the arbitration agreement.

A new dimension was added to the above tests when in Sanjana M Wig (Ms) v Hindustan Petroleum Corporation Ltd(5) the Supreme Court laid down that notwithstanding an arbitration clause in the agreement, access to justice by way of public law remedy would not be denied when a case involves public law character and when the forum chosen by the parties would not be in a position to grant appropriate relief. Further, it was held that a writ petition will also be entertained when it involves a question arising out of public law functions on the part of one of the parties.

Comment

In its latest judgment the Supreme Court has justified entertaining a writ petition despite the existence of an arbitration clause on the grounds that there was clear injustice warranting the exercise of discretion by the court and allowing the writ petition under Article 226 of the Constitution.

Therefore, although the general rule appears to be that in cases where an alternative forum is available, which may include the resolution of disputes through the arbitration process, the high court will not generally exercise its writ jurisdiction under Article 226 of the Constitution, this is not an inflexible rule or an absolute bar on the high court from exercising its writ jurisdiction. One such exception, as in the latest judgment, is to curb injustice and uphold the rule of law.

For further information on this topic please contact Sanjeev Kapoor at Khaitan & Co by telephone (+91 11 4151 5454), fax (+91 11 4151 5318) or email (sanjeev.kapoor@khaitanco.com).

Endnotes

(1) Judgment dated April 18 2011 in SLP 18914/2010. [http://indiankanoon.org/doc/609434/]

(2) (2003) 2 SCC 107. [http://indiankanoon.org/doc/1603548/]

(3) [1976] 2 SCR 307. [http://indiankanoon.org/doc/888433/]

(4) (1975) 2 SCC 436. [http://indiankanoon.org/doc/23675/]

(5) AIR 2005 SC 3454. [http://indiankanoon.org/doc/1172863/]

Courtesy_


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