Skip to content

Challenges of Statute Mandated Arbitration under The National Highways Act, 1956

National Highway FELPR

Background

“Interminable, time-consuming, complex, and expensive court procedures impelled jurists to search for an alternative forum, less formal, more effective, and speedy for resolution of disputes, avoiding procedural claptrap and this led them to Arbitration Act, 1940. However, the way in which the proceedings under the Act are conducted and without exception challenged in courts has made Lawyers laugh and legal philosophers weep. Experience shows and law reports bear ample testimony that the proceedings under the Act have become highly technical accompanied by unending prolixity, at every stage providing a legal trap to the unwary. Informal forum chosen by the parties for expeditious disposal of their disputes has by the decisions of the Courts been clothed with ‘legalese’ of unforeseeable complexity. This case amply demonstrates the same”.

The first line of the above para written in the judgement by Justice Desai in Gurunank Foundation[1] succinctly describes the purpose of alternate dispute redressal mechanisms, especially of arbitration. He then goes on to, quite appropriately, describe the ineffective working of the Arbitration Act, 1940 which was enacted to surmount the difficulties of a formal adjudicatory process.

We seem to be once again staring at a somewhat similar situation in the case of Statute Mandated Arbitrations, particularly those under National Highways Act 1956 (NHA).

Before we delve deeper into the challenges such arbitration faces, it is important to briefly highlight the history of arbitration law in India.

The Arbitration and Conciliation Act, 1996 (the 1996 Act) as it stands today was preceded by Arbitration Act 1940 (the 1940 Act). Before the 1940 Act, the law on the subject of arbitration in India was contained in two separate enactments-The Indian Arbitration Act 1899 and the Second Schedule to the Code of Civil Procedure 1908. The 1940 Act consolidated the law on Arbitration in India but was not an effective or a successful legislation. Moreover, Arbitration Act, 1940, did not deal with enforcement of foreign awards. Hence, a separate law, the Foreign Awards (Recognition and Enforcement) Act, 1961 was enacted for the enforcement of awards under the Geneva Convention, 1927 and New York Conventions. Law Commission of India in its 76th report in 1978, did acknowledge that the working of the Arbitration Act 1940 was causing delay and unnecessary expense and recommended several amendments. However instead of making the recommended amendments in the existing arbitration law, in 1996 a brand new Arbitration and Conciliation Act 1996 was enacted (the 1996 Act).

The Arbitration and Conciliation Act,  1996 (1996 Act)

The 1996 Act was based on the 1985 model law, put together by United Nations Commission on International Trade Law (UNICTRAL) and repealed The Arbitration (Protocol and Convention) Act, 1937 (6 of 1937), the Arbitration Act, 1940 (10 of 1940) and the Foreign Awards (Recognition and Enforcement) Act,1961 (45 of 1961). This new law consolidated and amended the law relating to domestic arbitration, international commercial arbitration, enforcement of foreign arbitral awards and also defined the law relating to conciliation.

The preamble of the Act makes it evident that the main focus of this law is the desirability of uniformity of the law of arbitral procedure in the new interdependent economic world order. Thus the 1996 Act has a special focus on international commercial arbitration.

The Act does have comprehensive provisions for domestic arbitration and conciliation. But it needs improvements in several aspects to develop an efficacious alternate dispute resolution mechanism that does not compromise on the principles of natural justice and rule of law.

Arbitration is usually by the consent of the parties to a dispute. Not only do the parties agree upon the adjudication of their disputes by arbitration, but also the specifics of the arbitration, such as the scope of the arbitration, seat, venue, strength and composition of the tribunal, procedure, and language of the arbitration, are agreed upon.

But there are situations where the parties are compelled to resolve their dispute by the mandate of law. This gives rise to some peculiar problems, which we examine in this paper.

Statutory Arbitration under 1996 Act

There are several special legislations where the statute mandates a dispute to be mandatorily referred to an arbitration. The dispute is then resolved as per the provisions of the 1996 Act to the extent the provisions of the 1996 Act are consistent with the special Act under which compulsory reference to an arbitration is mandated.

Some examples of such special laws are National Highways Act 1956 (NHA), Micro, Small and Medium Enterprises Development Act, 2006, The Electricity Supply Act, 1948, the Cantonment act 2006, Electricity Act 2003, Railway Act 1989 and Forward Contracts Regulation Act, 1956. Each of these laws where arbitration is mandated by its provisions for dispute resolution has its own unique challenges which need to be understood in the special context of that particular law.

It is not possible to deal with all issues and challenges that arise under these different laws and legal contexts in one paper. In this write up the focus of analysis is the statute mandated arbitration under NHA.  

Land is being acquired at a frantic pace under this law across the country for construction of National Highways by the Ministry of Road Transport & Highways.  The target during the financial year 2022-23 is for construction of 12,200 km of National Highways adding approximately 33 kms every day.

People whose land is compulsorily acquired for National Highways under the provisions of NHA do not have the remedy of going to a court like other people whose land is acquired for other purposes under Right to Fair Compensation and Transparency in Land acquisition, Rehabilitation and Resettlement Act 2013 (RFCTLARR).

If the compensation awarded by the competent authority under NHA for compulsory acquisition of their land is insufficient (which it frequently is), the claim is referred to an arbitrator appointed by the central government[2].  By a legal fiction created by section 2(4) of 1996 Act, the enactment under which a provision for statutory arbitration is made, is also deemed an arbitration agreement between the parties. So the parties are bound by the terms of such an arbitration, without really having agreed to them and presided by unilaterally appointed arbitrator by the central government,. The NHA further states that the provisions of 1996 Act shall be applicable to such arbitration subject to the provisions of NHA meaning thereby that anything in the 1996 Act that conflicts with NHA shall not be applicable to the said arbitration[3].

Party autonomy is the backbone of any arbitration. A neutral, impartial and an independent arbitrator is a sine qua non for such proceedings. In a statute backed arbitration where the parties are presumed to have consented, the only other safeguard is to ensure that the arbitrator thus being appointed is neutral, independent and impartial.

These aspects were recognized by the Law Commission in it’s 246th report and written into the 1996 Act by way of amendments in 2015.[4]

The ex-officio member of the law commission representing the government sought an exception in the favour of State regarding appointment of employees as arbitrators where the State is a party. The Law Commission said that “in fact, when the party appointing an adjudicator is the State, the duty to appoint an impartial and independent adjudicator is that much more onerous”.

The 1996 Act, as amended, enumerates in Schedule V, circumstances which give rise to justifiable doubts regarding independence or impartiality of the arbitrators. No person who falls under any of the categories enumerated in Schedule VII of the Act can be appointed as an arbitrator. The 1996 Act invalidates appointment of arbitrators who flout the necessary conditions laid down in the Act for neutral arbitrators even if there is an agreement to that effect between the parties[5]. These conditions, however, can be waived by the parties subsequent to the dispute having arisen by an express agreement in writing. The 1996 Act therefore is built on the solid foundation of arbitrator neutrality without which the arbitration proceedings would just be a farce. This salutary principle runs into challenges when it comes to statute mandated arbitrations.

Neutrality of Arbitrator

Once a dispute is referred to an arbitrator under NHA the provisions of the 1996 Act shall be applicable. This should start from the very appointment of the Arbitrator. Though the central government has been given the authority to appoint the arbitrator they are bound by the mandate of the 1996 Act vis a vis who can be appointed an arbitrator.

The mandate of the 1996 Act regarding independent and impartial arbitrator is unambiguous. The Schedules attached to the Act describe in detail the circumstances which give rise to justifiable doubts as to the independence or impartiality of the arbitrator and also persons who can not be appointed as arbitrators due to their relationship with the parties, counsel or the subject matter of the dispute.

Unfortunately, the Central Government has been appointing serving civil servants (mostly Commissioners) as arbitrators. While senior civil servants in the All India Services are technically employees of the State Governments, their selection and terms of employment are determined by the Central Government, through the Department of Personnel and Training. As such, they are not disconnected from the Central Government. Though the highest court of the country has in its judgements expressed its reservation regarding not only such appointments[6] but also the scheme of the NHA which deprives a person whose land is compulsorily acquired under NHA 1956 of comprehensive judicial remedy, Courts are reluctant to interfere with specific instances of appointment. The Court in NHAI v. M. Hakim (2021) 9 SCC 1, has observed;

50. It can be seen from the aforesaid provisions that the speeding up of acquisition of land needed for national highways has been achieved. The challenge process to an award passed will, of necessity, take its own time, both under Section 3G of this Act as well as under the provisions of the Land Acquisition Act. This being the case, it is a little difficult to appreciate as to why the wholesome regime of appeals under the Land Acquisition Act has been replaced by a regime in which an award passed by an Arbitrator, who is not consensually appointed but appointed by the Central Government, can only be challenged not on merits, but on the limited grounds contained in Section 34 of the Arbitration Act, 1996.

In the said case the appeals were allowed as the Court, speaking through the bench of Justice Nariman and Justice Gavai strongly felt that the matter could not be sent for arbitration after a lapse of 7-10 years especially to an arbitrator who is not consensually appointed but appointed by the central government.

58. Given the fact that in several similar cases, the NHAI has allowed similarly situated persons to receive compensation at a much higher rate than awarded, and given the law laid down in Nagpur Improvement Trust (supra), we decline to exercise our jurisdiction under Article 136 in favour of the appellants on the facts of these cases. Also, given the fact that most of the awards in these cases were made 7-10 years ago, it would not, at this distance in time, be fair to send back these cases for a de novo start before the very arbitrator or some other arbitrator not consensually appointed, but appointed by the Central Government. The appeals are, therefore, dismissed on facts with no order as to costs.

The mandate of the 1996 Act[7] regarding arbitrator neutrality has been held by the Hon’ble Supreme Court in HARSAC and Anr V Pan India Consultants Private Ltd and Anr[8], to be an obligatory and non-derogable clause. Hon’ble court in this case, an SLP, took suo-moto cognisance of the invalidity of the appointment of the arbitrator as it fell foul on the provisions of the 1996 Act vis a vis arbitrator neutrality. The Hon’ble Supreme court invalidated the appointment of the arbitrator despite both parties having had submitted to the jurisdiction of the arbitrator and matter was nearing completion.

Timeframe for disposal of arbitration proceedings should be sacrosanct

One of the selling points of alternate dispute resolution methods is the promise of expeditious disposal that it holds out.

The 1996 Act provides that except international commercial arbitrations, the award in arbitration matters should be completed within a period of 12 months from the date the pleadings are completed[9]. The Act further mandates that the pleadings need to be completed within six months from the date the arbitrator/s receive the notice regarding their appointment.

In case of a statutory arbitration like the one under NHA, this date is irrelevant. State  governments have issued notifications  appointing serving civil servants, ex- officio arbitrators, who assume the duties of arbitrators as and when an application is made to them under the relevant provisions of NHA read with the 1996 Act so the time would start to run from the date when an application is made to them.

If the arbitration is not completed within the stipulated time period of 12 months from the completion of pleadings, then the parties with mutual consent can extend the term of the arbitrator for a period of another six months. If the award is not passed with in the extended time frame of six months then the mandate of the arbitrator stands terminated by efflux of time as per the provisions of the 1996 Act. The mandate of the arbitrator however can be revived if either of the parties approach the Court for the same and the Court has the discretion to grant extension if there is sufficient cause and on such terms and conditions as it deems fit.

It is unfortunate but true that arbitration proceedings under NHA are pending in these forums, despite the mandate of the arbitrator having got terminated, for a period exceeding in some cases even five-six years.

The affected people whose land is compulsorily acquired and would like to get a fair compensation at earliest possible in most cases are unaware of the plight of the arbitration proceedings. They are unaware that court has to be approached to revive these proceedings. Unbeknown to them the matters in many cases continue to languish for years which are void in the eyes of law unless revived by the Court on an application made by either party.

Scope of Section 34

In case of statute mandated arbitrations the limited scope of section 34 for judicial intervention is a big set back.

It is abundantly clear after Hon’ble Supreme Court decision in NHAI v. M. Hakim (2021) 9 SCC 1, that section 34 is not an appeal against the arbitration award. The limited grounds on which the arbitration award can be challenged have been categorically mentioned in the section itself.

There is a plethora of cases which shed light on the circumstances and situations covered by the grounds under section 34 but it is still an area where court discretion is paramount.

Partial Challenge and Partial Setting Aside of Arbitral Award

Quite surprisingly despite doctrine of severance being a well-known tool in our jurisprudence when it comes to applying this principle to an arbitration award, uncertainty still looms large.

There are apex court decisions and various High Courts’ decisions in this regard favouring the severance of arbitral award if the award needs to be challenged on only some grounds and not on others but there still doesn’t seem to be any certainty in this regard if one approaches the Court.

In J.G. Engineers (P) Limited vs. Union of India[10] Hon’ble Supreme Court set aside certain claims awarded by the arbitrator and upheld the remaining claims and held that if the award deals with several claims separately and distinctly, the court has the power to severe the claims which suffers from infirmity while upholding the remaining claims holding good in law. The ratio of this case was relied upon by the Bombay High Court in its full bench decision in R.S. Jiwani vs. Ircon International Limited[11](“R.S. Jiwani”) which inter alia laid down following important ratios;

  1. The principle of ‘Doctrine of Severability’ is also applicable to judgments and awards in the same manner as it is applied in terms of a contract or statute.
  1. Not applying the principle of ‘Doctrine of Severability’ when applicable in an award would serve as unjust and unfair to the parties involved.
  2. Hence, the bad part of the award is completely independent and separable from the good part of the award, a court has the power to set aside the bad part of the award under Section 34 of the Act. However, if it is practically not possible to separate the bad part of the award from the good part, in such cases setting aside the award partially might not be an option.

Telangana High Court also in the case of Saptarishi Hotels Private Limited vs. National Institute of Tourism and Hospitality Management[12], wherein the court held that by applying ‘Doctrine of Severability’ an award can be set aside partially.

Recently Hon’ble Kerala High Court in the case of M/s. Navayuga Engineering Company Limited vs. Union of India[13] was posed with the question “As to what constitutes ‘modification of an award’? Wherein if the Arbitrator has awarded separate amounts on various independent claims, then, would setting aside some of the claims, which are separable and independent of the remaining claims, constitute modification of the arbitral award?

The said question arose in light of the judgment of the Hon’ble Supreme Court in Project Director, National Highways Authority of India vs. M. Hakeem[14]where the Apex Court has held that Section 34 of 1996 Act does not contemplate modification of an award.

The Court in Navayuga Engineering, however distinguished the facts and circumstances of the case before it from those before Apex Court in M. Hakeem, in view that the Court in Navayuga Engineering was concerned about the power of a court to separate the separable claims which suffers from infirmity/illegality, and set aside those specific claims from the remaining claims awarded by the arbitrator which are not under challenge. The Court, while highlighting this distinction, held that separating the unsustainable claims from the sustainable claims, as noted in the arbitral award, does not fall in the category of ‘modification of award’, as described by the Apex Court in the case of M. Hakeem, where the issue inter alia was of district court enhancing the claimed amount granted by the arbitrator, even though the constitution of the tribunal was not legally sustainable.

The 1996 Act itself recognises the principle of severability in section 34(2)(a)(iv) and there is no express prohibition in 1996 Act for application of the same principle while challenging the arbitral award, therefore the same can be set aside partially only vis a vis grounds on which it is challenged. This view is supported by the Apex Court and various High Courts in the country. The Apex Court In NHAI V M Hakim did not comment upon this issue while pronouncing its judgement on the scope of section 34, meaning thereby that the ruling of the court on the matter in J.G. Engineers Private Limited vs. Union of India[15] still holds good.

If the doctrine of severability is not recognised in the context of arbitral awards it would be a great disservice to the system of alternate dispute resolution mechanism. This inability to apply doctrine of severability should necessarily mean having to challenge the entire award despite the fact that decision of the arbitrator has been given on different issues which are distinct and  therefore can be severed without impacting the overall integrity of the award. This is not the case. The arbitral award can be challenged partially only on issues which still need redressal and also fulfil the criteria laid down in section 34 of the 1996 Act. There is therefore no wisdom in accepting the proposition that the award will have to be set aside in totality even when it can be challenged partially. Award can surely be set aside partially, only on the issues on which the challenge in the court is mounted under section 34 of the 1996 Act. It would be a great injustice if  the award vis a vis issues which are resolved to the satisfaction of the parties and which in any case were adjudicated upon following the due process of law after parties having presented their case and leading evidence in this regard, also have to be set aside. This would be an unnecessary and unwarranted waste of time, money as well as delaying justice for the parties.

What Follows after Arbitral Award is Set Aside in Section 34

An important question that haunts the parties to a statute mandated arbitration award is the course of action that follows after the award is set aside. This causes a peculiar predicament in statute mandated arbitrations. Do the parties again go back to the same government appointed arbitrator? Do they have to again go over the entire process and cycle of arbitration which means another minimum two years if everything goes as per the mandate of the 1996 Act and having to approach the court if the time line is not followed? The 1996 Act is silent on the course of action to be taken after the award is set aside. In case where parties have opted for arbitration under a mutual agreement, the agreement takes care of the direction of the future course of action or the parties in case there is no such provision mutually agree upon an appropriate course of action. In the case of statute mandated arbitration by necessary implication there is no choice but to go through the process all over again. This however could not have been the intention of the law maker and looks like a detail that has escaped their attention. The purpose of alternate dispute resolution mechanism is to provide a speedy, efficacious, affordable and efficient remedy. In statute mandated arbitrations it seems like going in circles is inevitable as the 1996 Act is silent regarding the process that needs to be followed post setting aside of an award by the Court under section 34.

The only possible remedy is if the Court directs the arbitrator to adjudicate upon the issues that have been set aside within a reasonable period of time. If the Court’s order of setting aside of the award is a speaking order, that it must be, the same can also provide a guidance framework to the arbitrator to adjudicate upon the issues which come before it after the same have been set aside.

Conclusion/Recommendations

In view of the above discussion it is quite evident that people who have their land compulsorily acquired under NHA do not have a judicial remedy available to them if they are aggrieved by the inadequacy of the quantum of the compensation awarded to them by NHAI. There is an unreasonable classification based upon the purpose for which compulsory acquisition is done under NHA and others, between people whose land is compulsorily acquired under NHA and others whose land is compulsorily acquired under RFCTLARR resulting in discrimination against the former. The purpose of speedy acquisition of land for national highways is not affected whether judicial remedy under NHA is available to affected parties or not. The land gets vested in the central government free of all encumbrances as soon as declaration notification is issued by the government in the official gazette after objections of interested parties are duly heard and the government can enter upon and take possession of such land. 

The people aggrieved by the award of compensation by NHAI are subjected to statute mandated arbitration and the central government invariably does not follow the 1996 Act in letter and spirit in appointing neutral, impartial and independent arbitrators. Serving civil servants are appointed arbitrators in ex-officio capacity and their appointment is held valid in several judicial decisions imparted by various High Courts across the country despite there being a categorical prohibition of appointment of employee of either of the parties as per Schedule VII of the 1996 Act.

Section 34 of the 1996 Act admits challenge to the arbitral award on very limited grounds depriving the aggrieved parties under NHA an opportunity of adjudication of their case on merit in a judicial forum.

In such circumstances it is important to evaluate whether statutory arbitration should be or can be treated at par with consent-based arbitration.

In light of the problems enumerated above, we are left with the following questions:-

  1. Is section 34 challenge to such statutory arbitration award a sufficient remedy?
  2. Should statutory arbitrations have a different standard for setting aside the award, considering that one of the parties did not consent to an arbitration in the first place?
  3. In the event the award is set aside, should the Court necessarily remand it back to the arbitrator, or can they vary the award in the interest of justice and equity?
  4. Can statutory arbitration be treated on par with institutional arbitration with the statutory or regulatory requirements in the former performing the role that institutional rules play in the latter?
  5. In the event the award is set aside, should the Court necessarily remand it back to the arbitrator, or can they vary the award?

[1] Guru Nanak Foundation v Rattan Singh (1981 AIR 2075, 1982 SCR (1) 842)

[2] Section 3G(5) of NHA 1956

[3] Section 3G(6) of NHA 1956

[4] Arbitration and Conciliation (Amendment) Act, 2015

[5] Section 12 (5) of the Arbitration and Conciliation Act, 1996

[6] NHAI v. M. Hakim (2021) 9 SCC 1

[7] Section 12(5) of Arbitration and Conciliation Act 1996 read with Schedule VII

[8]

[9] Section 29A ibid

[10] (2011) 5 SCC 758

[11] 2009 SCC OnLine Bom 2021

[12] 2019 SCC OnLine TS 3543

[13] 2021 SCC OnLine Ker 5197

[14] (2021) 9 SCC 1

[15] Supra.

The article originally appeared on Livelaw and was authored/co-authored by one of FELPRs team member.