While acknowledging the apparent legislative lacuna in the Arbitration and Conciliation Act, 1996, which is silent on the remedy available to a party against an order terminating the arbitral proceedings, the Supreme Court ruled that any termination order is effectively an order under Section 32(2) of the Arbitration Act, and the arbitral tribunal possesses no inherent power to recall such an order.
The Court clarified that an arbitral tribunal is legally empowered to terminate proceedings under Section 38(2) of the Arbitration Act, when a party fails to pay its share of the arbitrator’s fees. Once such a termination occurs, the remedy available to the party is to seek the recall of the order before the Arbitral Tribunal itself.
The Court therefore urged the Department of Legal Affairs, Ministry of Law and Justice, to consider the prevailing uncertainty while the Arbitration and Conciliation Bill, 2024, is under consideration. At the same time, the Court suggested for explicitly providing for the nature and effect of a termination order and clarifying the tribunal’s power to entertain a recall application.
The Court also suggested considering the inclusion of a statutory appeal in Section 37 against an order terminating proceedings, and cautioned that taking a policy decision on whether a party whose contumacious conduct leads to termination should be permitted to re-initiate arbitration.
Essentially, the Apex Court concluded that the High Court had erred in law by directing the appellants to seek a recall of the termination order from the Sole Arbitrator, as the arbitrator had become functus officio. The appropriate remedy for the appellants was to seek the appointment of a substitute arbitrator under Section 11(6) read with Section 15(2) of the Arbitration Act.
A Two-Judge Bench of Justice J.B. Pardiwala and Justice R. Mahadevan observed that Section 32 of the Arbitration Act is the sole and exhaustive provision that empowers an arbitral tribunal to pass an order terminating the proceedings. Thus, the termination of arbitral proceedings can occur in only two ways as stipulated in Section 32(1), (i) by the final arbitral award, or (ii) by an order of the arbitral tribunal under sub-section (2).
On the interplay between Sections 25, 30, 38 and 32 of the Arbitration Act, the Bench clarified that Sections 25(a) (default of claimant), 30 (settlement), and 38 (non-payment of deposits) do not independently confer a power to terminate. Instead, they merely enumerate the different circumstances or grounds in which the arbitral tribunal would be empowered to take recourse to Section 32(2) and thereby issue an order for termination. This interpretation is fortified by the legislative history of the UNCITRAL Model Law, which ensures that termination is not automatic but requires a specific procedural decision by the tribunal.
Moving forward, the Bench observed that the expression “mandate of the Arbitral Tribunal” is merely descriptive of the function, authority, and duty entrusted to the tribunal to adjudicate the disputes. It is not a term of art that creates different legal consequences upon termination.
Further, the Bench clarified that the omission of this phrase in Sections 25, 30, and 38 of the Arbitration Act cannot be construed to mean that the nature of termination under these circumstances is distinct from a termination under Section 32. Irrespective of the reason for termination, be it default, settlement, impossibility, or the passing of a final award, the legal effect remains the same, i.e., the arbitral reference stands concluded, the tribunal is divested of its authority, and it becomes functus officio.
Briefly, the dispute stemmed from the order of the Sole Arbitrator, which terminated the arbitral proceedings on the ground of non-payment of the arbitrator’s fees by the parties. The appellants contested the unilateral enhancement of fees by the Sole Arbitrator, and the High Court of Punjab & Haryana, relying on the decision in SREI Infrastructure Finance Ltd. v. Tuff Drilling Pvt Ltd., held that the appellants’ primary remedy was to apply for recall of the termination order before the Sole Arbitrator. Alternatively, the High Court suggested that the appellants could challenge the termination of the arbitrator’s mandate under Section 14(2) of the Arbitration Act.
Case Distinguished:
SREI Infrastructure Finance Ltd. v. Tuff Drilling Pvt Ltd. [(2018) 11 SCC 470]
Appearances:
AOR Mithu Jain, along with Advocates Samarth Sagar, Sanchit Garga, Shashwat Jaiswal, and Bhanu Pratap Singh, for the Appellant
NA, for the Respondent
