Mere Participation In Arbitration Does Not Estop Party From Challenging Inherent Lack Of Jurisdiction Of Arbitrator : Supreme Court

The Supreme Court has ruled that in the absence of an arbitration agreement, a mere participation of a party to a unilaterally invoked arbitration proceedings would not operate as an estoppel to bar it from raising the legality of the arbitral award being non-est in law.

A bench of Justices PS Narasimha and Alok Aradhe affirmed the Bombay High Court's decision which had declared the award passed against the Respondent to be non-est, as the award was passed by the arbitrator who lacked the jurisdiction to pass the award because of the non-existence of an arbitration agreement, making the entire proceedings a nullity.

The dispute arose from an octroi collection contract between the petitioner and the Respondent, Ambernath Municipal Council for the period April 1, 1994 to March 31, 1995. After the contract was executed and the petitioner commenced work, it sought a reduction in the minimum reserve price, a demand rejected by the Municipal Council.

Instead of invoking the dispute resolution mechanism provided in the contract (which involved reference to the Collector and appeals to the Divisional Commissioner and State Government), the petitioner approached the State Government directly. The State Government, purporting to act under Section 143-A (3) of the Maharashtra Municipal Councils Act, 1965, unilaterally appointed the Commissioner, Konkan Division, as arbitrator.

The arbitrator had called upon the Respondent-Council to submit a reply and the award was delivered in favour of the Appellant, reducing the minimum reserve price for the proposed contractual work.

The Respondent-Municipal Council, which was under a State-appointed Administrator at the time, submitted a reply defending the reserve price but did not consent to arbitration. Upon receiving notice of the petitioner's application to make the award a rule of court, the Municipal Council filed objections challenging jurisdiction.

The civil court decision to direct drawing up a decree was challenged before the High Court, which had set aside the Civil Court's decision, and held that “the dispute resolution clause in the contract did not constitute a valid “arbitration agreement” under the law, but rather provided for a departmental dispute-resolution mechanism.”

The High Court found that the State Government lacked jurisdiction to “foist” arbitration on a concluded contract and that the petitioner was estopped from challenging the tender price after voluntarily participating in and winning the bid.

Aggrieved by the High Court's decision, the private contractor moved to the Supreme Court.

Affirming the impugned finding, the Supreme Court found that since there existed no arbitration agreement between the parties, thus the resulting award was non-est in law.

The Court rejected the Appellant's argument that a participation of the Respondent to the arbitration proceedings signified its consent to be bound by the outcome. Instead, the Court said that mere “participation does not confer Jurisdiction”.

“There is no estoppel against the Municipal Council for the reason that it had initially participated in the arbitral proceedings. This is for the reason that they were forced into arbitration without consent and contract. At the same time, they challenged the award on jurisdictional grounds before the Civil Court as well as the High Court.”, the court said.

“Since the Arbitrator lacked inherent jurisdiction due to the absence of an arbitration agreement, the entire proceedings were a nullity (coram non judice) and the resulting award was non-est.”, the court observed.

Accordingly, the appeal was dismissed.

Headnote

Arbitration Act, 1940 – Section 2(a) and Section 39 – Absence of Arbitration Agreement – Jurisdiction of State Government – The Supreme Court upheld the High Court's decision setting aside an arbitral award, holding that there was neither a valid arbitration agreement nor informed consent by the Municipal Council to resolve disputes through arbitration - Noted that Clause 22 of the contract, which provided for dispute referral to the Collector with subsequent appeals to the Divisional Commissioner and the State Government, constituted a departmental dispute-resolution mechanism and not an "arbitration agreement".

Maharashtra Municipal Councils, Nagar Panchayats and Industrial Townships Act, 1965 – Section 143-A(3) – The State Government lacks the authority under Section 143-A(3) to unilaterally "foist" arbitration on parties governed by a concluded contract - The power of the State to issue directions under this section is limited to regulating the manner and procedure of octroi collection and does not extend to appointing an arbitrator for the Municipal Council and its agent.

Estoppel and Participation – Jurisdictional Nullity – Participation in arbitral proceedings does not confer jurisdiction where an arbitration agreement is inherently absent. Since the arbitrator lacked inherent jurisdiction, the proceedings were a nullity (coram non judice) and the award was non-est - The Municipal Council was not estopped from challenging the award as it was "forced" into arbitration without consent while functioning under a State-appointed Administrator - Supreme Court rejected the application of these precedents, affirming the High Court's finding that there is no acquiescence or estoppel where a party is compelled to participate in proceedings that are a jurisdictional nullity. [Relied on N. Chellappan v. Secretary, Kerala State Electricity Board and Anr. (1975) 1 SCC 289; Inder Sain Mittal v. Housing Board, Haryana and Ors. (2002) 3 SCC 175; Paras 19-26]

Cause Title: M/S BHARAT UDYOG LTD. (FORMERLY KNOWN AS M/S JAI HIND CONTRACTORS PVT. LTD.) VERSUS AMBERNATH MUNICIPAL COUNCIL THROUGH COMMISSIONER & ANR.

Citation : 2026 LiveLaw (SC) 291

Click here to download judgment

Appearance:

For Petitioner(s) :Mr. P.B. Suresh, Sr. Adv. Mr. Abhishek Bharti, Adv. Mr. Balaji Srinivasan, AOR Ms. Diksha Gupta, Adv. Ms. Mb Ramya, Adv. Ms. Aarti Mahto, Adv.

For Respondent(s) :Mr. Vinay Navare, Sr. Adv. Mr. Yashodan Chandurkar, Adv. Ms. Manshi Jain, Adv. Ms. Abha R. Sharma, AOR Mr. Nitin Lonkar, Adv. Mr. Siddharth Dharmadhikari, Adv. Mr. Aaditya Aniruddha Pande, AOR Mr. Shrirang B. Varma, Adv.