This guest post is authored by Rishabh Malaviya. Rishabh is an advocate at Arista Chambers, Bangalore. He can be contacted via email at malaviyarishabh@gmail.com.

The Indian Supreme Court’s recent decision in the case of United India Insurance Co. Ltd. & Anr. v Hyundai Engineering and Construction Co. Ltd. & Ors. is a welcome (albeit partial) clarification of the scope of Section 11 of the Arbitration & Conciliation Act, 1996 (the Act). The Supreme Court confirmed that despite the pro-arbitration approach of the 2015 amendments, the courts would not blindly partake in the appointment of an arbitrator under Section 11.

Factual Background

The case concerned a ‘Contractor All Risk Insurance Policy’ obtained from the Appellant Company by a Joint Venture of the Respondents, in respect of a project for the design, construction, and maintenance of a bridge across the River Chambal.

The arbitration clause in the insurance contract provided as follows: “If any difference shall arise as to the quantum to be paid under this Policy (liability being otherwise admitted) such difference shall independently of all other questions be referred to the decision of an arbitrator … It is clearly agreed and understood that no difference or dispute shall be referable to arbitration as herein before provided, if the Company has disputed or not accepted liability under or in respect of this Policy …”.

After an accident occurred during the construction phase, the Appellant insurers rejected that they were liable to pay under the policy. Aggrieved, the Respondents applied to the Madras High Court under Section 11 seeking appointment of an arbitrator. The Appellant insurers claimed that the arbitration clause was only applicable where they had admitted their liability to pay and when the dispute was only about the quantum to be paid.

Madras High Court’s Analysis

The Madras High Court, in light of Section 11(6A) of the amended Act found that as long as an arbitration agreement existed, the duty of the court was to appoint the arbitrator and let the tribunal decide whether the dispute was covered by the arbitration clause. In doing so, it relied on the decision of the Supreme Court in Duro Felguera, SA v M/s. Gangavaram Port Limited (Duro), wherein it was held that in considering a petition under the amended Section 11, the court would consider the existence of the arbitration agreement alone- “nothing more, nothing less”.[1]

The High Court also relied on its decision in Jumbo Bags v New India Assurance Company Limited where it was held that under the amended provisions of Section 11, the court was not to “embark upon an examination of the issue of arbitrability … once it is found that an arbitration agreement exists between the parties”.[2]

Supreme Court’s Analysis  

The Supreme Court, in reversing the decision of the High Court, found that the arbitration clause was only a “conditional expression of intent”. Such a clause would only be “activated” if the dispute between the parties was limited to the quantum to be paid under the underlying policy. Admission of liability to pay under the policy was a pre-condition to the triggering of the arbitration clause. Thus, the arbitration clause was “ineffective and incapable of being enforced, if not non-existent”. The High Court’s reliance on Duro was found to be misplaced, as the statement made therein was a “general observation about the effect of the amended provision”.

Comment

In theoretical terms, it can now be said that the 2015 amendments were not an absolute acceptance of the negative effect of the competence-competence principle. Competence-competence means the power of an arbitral tribunal to determine its own jurisdiction when challenges are made to the same. This is also known as the ‘positive effect’ of the competence-competence principle and it is widely accepted by countries and international conventions, without much controversy.[3]

Arguably, the negative effect of the competence-competence principle is that national courts cannot fully consider challenges to the jurisdiction of the tribunal, until after the tribunal has had the opportunity to do so.[4] It is this latter effect which is controversial. This controversy has led to stark differences among countries in their allocation of jurisdictional competence-competence between national courts and arbitral tribunals. Essentially, some countries allow their courts to consider challenges to the tribunal’s jurisdiction even before the tribunal itself considers the same, whereas other countries prohibit such an approach.

India’s Tryst with Arbitrator Appointment

India’s approach to the allocation of jurisdictional competence-competence between courts and tribunals has varied considerably over the years. Section 11 of the pre-amended Arbitration Act dealt with elaborate provisions regarding the appointment of arbitrators, including appointment by the courts. However, the plain language of the section provided little guidance as to the approach of the court if a party were to object to the jurisdiction of the tribunal at this stage.

Indian courts did not address the issue in terms of allocation of jurisdictional competence-competence or in terms of the positive and negative effects of competence-competence. The courts “obfuscated” the real issue by framing it in terms of whether the power exercised under these two sections was an “administrative power” or a “judicial power”.[5] An analysis of the relevant cases reveals the reasoning for this approach.

Initially, these cases were Special Leave Petitions (SLPs) under Article 136 of the Constitution of India, filed against the order of a Chief Justice (or his designated judge) under Section 11 of the Act. The issue in these SLPs became one of maintainability, with a petition against a judicial or quasi-judicial order being maintainable and one against an administrative order not being maintainable. Therefore, the judicial or administrative nature of the power under Section 11 came into question.

Later, an incidental issue seemed to become the effect of the nature of this power on the scope of the power. If the power was considered an administrative power, the court would not be entitled to decide any contentious issues (such as the jurisdiction of the tribunal) at this stage, whereas the court would be entitled to decide contentious issues if the power was judicial.[6]

Thus, in 1999, the Supreme Court, while comparing the provisions of the 1940 Act with the 1996 Act, held that Section 11 “does not require the Court to pass a judicial order”.[7] Again in 1999, the Supreme Court held that an SLP does not lie against administrative orders issued under Section 11(6) of the Act.[8]

Then in Wellington Associates Ltd. v. Mr Kirit Mehta it was held that where challenges to the tribunal’s jurisdiction were made at the stage of Section 11, the Chief Justice (or his designated judge) would have the jurisdiction to decide them, even if the power under Section 11 was administrative.[9]

A few months later, in Konkan Railway Corporation Ltd. v. Mehul Construction Co., a three judge bench of the Supreme Court was asked to reconsider the position that the power exercised by the Chief Justice was administrative and not judicial.[10] The Court held that the power under Section 11 was administrative in nature, and all contentious issues were for the tribunal to decide initially. A similar approach was followed in Nimet Resources Inc. & Anr. v. Essar Steels Ltd,[11] and later by a Constitution bench of the Supreme Court in Konkan Railway Corporation Ltd. v. Rani Construction Pvt. Ltd.[12]

Finally, in a judgment that would rule the roost for close to a decade, a seven judge bench of the Supreme Court overruled the long line of cases thus far. In S.B.P. v. Patel Engineering Ltd. & Anr. (Patel Engineering), the Court held that the power of the Chief Justice under Section 11 was a judicial power, and that the court was entitled to decide certain contentious issues (like the existence and validity of the arbitration agreement) if raised at the time of appointment of the arbitrator under Section 11.[13]

However, the indecisiveness on this issue was not to end there. The 246^th Report of the Law Commission of India in August 2014 suggested certain amendments to sections 8 and 11 of the Arbitration Act. The suggestion was to have only a prima facie confirmation of the existence of the arbitration agreement, before referring the matter to arbitration under Section 8 or appointing an arbitrator under Section 11.[14]

The 2015 amendments incorporated some, but not all, of the suggestions of the Law Commission. Eventually, Section 8 was amended to require (and require only) a prima facie finding of the existence of the arbitration agreement. Section 11, on the other hand, was amended (through the insertion of subsection 6A) to provide that the “High Court” or “Supreme Court” shall “confine to the examination of the existence of an arbitration agreement”.

Concluding Remarks

While it is clear that subsection 6A was inserted to counter the decision in Patel Engineering, the extent of the Court’s powers (or the standard of review to be adopted) under Section 11 was left open to interpretation. It is in this context that the Supreme Court pronounced its decision in United India Insurance Co. Ltd. v. Hyundai Engineering and Construction Co. Ltd.

In coming to the conclusion that the arbitration agreement was ineffective and unenforceable, if not non-existent, the Apex Court adopted a pragmatic and commercially sensible approach to the interpretation of Section 11(6A). Given the wording of the arbitration clause described above, it was obvious that the dispute was not covered by the admittedly existent clause.

Forcing the parties to resort to arbitration would lead to time-consuming and expensive jurisdictional hearings before the arbitral tribunal, only for the tribunal to (most likely) decline jurisdiction under the clause- which order would then be appealable under Section 37 of the Act. Worse would be a situation in which the tribunal wrongly accepts jurisdiction under the clause. As per the amended Act, the party contesting jurisdiction would have no immediate remedy, and would have to wait for a final award before challenging the same under Section 34 of the Act.[15] Clearly this would be contrary to the goals of efficient and cost-effective dispute resolution.

Thus, despite the wording of Section 11(6A), the Courts will not blindly appoint an arbitrator once an arbitration agreement is produced. In the event of an obvious defect such as non-fulfilment of a pre-condition to arbitration (or where the dispute is obviously outside the scope of the arbitration agreement), the courts will decline to appoint an arbitrator.

 

 

[1] Duro Felguera, SA v M/s.Gangavaram Port Limited, (2017) 9 SCC 729.

[2] Jumbo Bags v New India Assurance Company Limited, 2016 SCC OnLine Mad 9141.

[3] Gary Born, International Commercial Arbitration (2^nd ed. 2014), p. 1060.

[4] E. Gaillard & J. Savage (eds.), Fouchard Gaillard Goldman on International Commercial Arbitration (1999), p. 406.

[5] 246^th Law Commission of India Report, Amendments to the Arbitration and Conciliation Act, 1996, (2014) p. 18, available at http://lawcommissionofindia.nic.in/reports/Report246.pdf.

[6] Konkan Railway Corporation Ltd. v. Mehul Construction Co., AIR 2000 SC 2821.

[7] M/s. Sundaram Finance Ltd. v. M/s. NEPC India Ltd., AIR 1999 SC 565.

[8] Ador Samia Private Limited vs Peekay Holdings Limited & Ors., AIR 1999 SC 3246.

[9] Wellington Associates Ltd. v. Mr. Kirit Mehta, AIR 2000 SC 1379.

[10] Konkan Railway Corporation Ltd. v. Mehul Construction Co., AIR 2000 SC 2821.

[11] Nimet Resources Inc. & Anr. v. Essar Steels Ltd., AIR 2000 SC 3107.

[12] M/s. Konkan Railway Corpn. Ltd. & Anr. v. M/s. Rani Construction Pvt. Ltd., [2002] 1 SCR 728.

[13] S.B.P. and Co. v. Patel Engineering Ltd. & Anr., AIR 2006 SC 450.

[14] 246^th Law Commission of India Report, Amendments to the Arbitration and Conciliation Act, 1996, (2014) p. 20, http://lawcommissionofindia.nic.in/reports/Report246.pdf.

[15] Arbitration & Conciliation Act, 1996, Section 16(6).