Arbitration: Supreme Court Allows Jurisdictional Challenge in Setting Aside Proceedings

[Ayush Chaturvedi and Chandni Bhatia are 4th Year B.A.LLB (Hons) students at Dr. Ram Manohar Lohiya National Law University, Lucknow]

In Lion Engineering Consultants v. State of M.P., the Supreme Court allowed the plea of the State of Madhya Pradesh challenging the jurisdiction of the arbitral tribunal for the first time in a proceeding for setting aside of an arbitral award under section 34 of the Arbitration and Conciliation Act, 1996 (the “Act”).

Factual Background

The matter arose out of a dispute in the execution of a works contract which was referred for arbitration by the High Court. The arbitrator made his award in favour of Lion Engineering. It was challenged under section 34 the Act before the District Court, Bhopal, by the State of Madhya Pradesh, in which it sought to amend its objections after three years in order to challenge the jurisdiction of the arbitral tribunal, which was rejected by the District Court. However, on a petition under article 227 of the Constitution, the same was allowed by the High Court.

Judgment of the Supreme Court

In the appeal, Lion Engineering argued that the challenge to jurisdiction had not been made in front of the arbitrator in the course of the arbitral proceeding under section 16(2), and thus the same cannot be allowed to be raised at the stage after the arbitration award.

The State of Madhya Pradesh argued that the legal plea arising on undisputed facts is not precluded by section 34(2)(b) of the Act and further “even if an objection to jurisdiction is not raised under Section 16 of the Act, the same can be raised under Section 34 of the Act.”The Supreme Court, agreeing with the argument of the State, upheld the decision of the High Court thereby allowing the State to amend the plea which would resultantly allow it to raise an objection to the jurisdiction of the arbitral tribunal for the first time at the setting aside stage. The relevant part of the judgement reads as follows:

We do not see any bar to plea of jurisdiction being raised by way of an objection under Section 34 of the Act even if no such objection was raised under Section 16.

Comment

In the authors’ opinion, the judgment of the Supreme Court is unfounded and against settled principles of arbitration law on this issue. It is further submitted that the Supreme Court decision in MSP Infrastructure ltd v Madhya Pradesh Road Development Corporation, which was overruled in this case, lays down the correct position of law as far as permissibility of raising jurisdictional challenge for the first time in a setting-aside proceeding is concerned. The decision of the Supreme Court in the present case runs contrary to two fundamental principles of the arbitration law.

Firstis the principle of competence-competence according to which the arbitral tribunal is presumed to have the ability to adjudicate on challenges to its own jurisdiction. It has been established that such jurisdictional challenge may be of two types:

– Challenge to the jurisdiction of the tribunal itself. For example, in the case where existence of arbitration agreement is challenged.

– Challenge to the scope of arbitration agreement i.e. limits to the jurisdiction of the arbitral tribunal.

Under the principle of competence-competence the arbitral tribunal has the jurisdiction to entertain challenges falling under either head. The parties are required to raise any jurisdictional challenge in front of the arbitrator and, in case such a challenge is not put up in front of the tribunal, it is taken to be waived and thus the parties are precluded from raising it at any later stage of the arbitral proceedings or in any proceeding in relation to it. However, if a challenge for the same is put up, and the tribunal rules against the challenge and continues to give an award on the merits of the case, the jurisdiction can be challenged in the later stage by filing an application under section 34 of the Act. This principle finds legislative recognition in the form of section 16(2) read with section 4(b) of the Act which requires the parties to raise any challenge to jurisdiction not later than the submission of statement of defence and in case where a party is aware of such non-compliance and yet fails to raise is without undue delay, such non-compliance will be presumed to have been waive by such party.

The Supreme Court has, in the case in question, defied these norms by allowing the objection made on the jurisdiction of the arbitral tribunal when it was not raised at all before the arbitral tribunal under section 16.  

Fouchard, Gaillard, Goldman on International Commercial Arbitration [1] states:

The positive effect of the competence-competence principle is to enable the arbitrators to rule on their own jurisdiction, as is widely recognized by international conventions and by recent statutes on international arbitration. However, the negative effect is equally important. It is to allow the arbitrators to be not the sole judges, but the first judges of their jurisdiction. In other words, it is to allow them to come to a decision on their jurisdiction prior to any court or other judicial authority, and thereby to limit the role of the courts to the review of the award.

In this respect, Russel on Arbitration [2] states:

what a party contesting jurisdiction cannot do is to participate in the reference without making clear his objections to the tribunal’s jurisdiction. If he does, the right to object will be lost and he cannot then seek to challenge the tribunal’s jurisdiction after the award has been made either by challenging it …. or by resisting its enforcement.

It further cites an English decision [3] where it was observed that the party raising the jurisdictional objections should not reserve it for a challenge to jurisdiction in the court. A long line of decisions from the Supreme Court itself on this point further consolidates this position.

Second, the judgment is flawed on the ground that it runs against the principle of least-intervention of courts, the touchstone on which arbitration law is centred around throughout the world. It is because in allowing the parties to raise a jurisdictional challenge for the first time in a setting-aside proceeding which was not raised at an appropriate forum, the court widens the scope of the grounds which should be strictly avoided in a section 34 proceeding.

The same can be inferred from the fact that section 34 had been a centre of controversy for a very long time over the ambits of this principle. From the decision in Oil & Natural Gas Corporation Ltd. v. Saw Pipes Ltd. to Oil & Natural Gas Corporation Ltd. v. Western Geco International Ltd., the debate was always centred around the degree of intervention that a court should be allowed under section 34. The legislative intent in this regard has been cleared by the Arbitration and Conciliation (Amendment) Act, 2015 (the “Amendment”) which has restricted the scope of challenges that can be entertained under the statutory provision.

It should be further noted that under the above principle, the court should act as a ‘review court’ and not as an ‘appellate court’. This has been reiterated by the Law Commission of India in its 246thReport and supplement report to the same. In light of this, allowing a party to raise a wholly new ground at the post-award stage would amount to giving up on the spirit of any setting aside proceeding. Furthermore, the grounds under section 34 have to be given a narrow interpretation since clause (2), which is the substantive part of the section, opens with the phrase that “an arbitral award may be set aside only if”.Therefore, any widening of the scope or ambit of the provisions of section 34 is meant to be avoided at all cost.

However, the Supreme Court decision does the opposite by allowing a party to raise an objection for the first time in a section 34 proceeding, and the same is liable to be used as a dilatory tactic against the enforcement of the award.

Conclusion

It is to be noted that that the Amendment has introduced changes to section 36 whereby any challenge under section 34 would not impose any automatic stay on the enforcement proceedings of the award, unless the same is explicitly issued by the court. This amendment prescribes a higher requirement on the party challenging the award in order to stay the enforcement while a challenge under section 34 is pending. In addition, the Board of Control for Cricket in India v. Kochi Cricket Pvt. Ltd. decision has rendered a wider application to section 36 which is bound to benefit the award-holder, including where such jurisdictional objections are raised for the first time in order to delay the enforcement.

However, in case courts start allowing jurisdictional challenges to be raised for the first time at post-award stage, it would give rise to unnecessary and prolonged litigation which should be avoided at all costs for preserving the spirit of the arbitration process.

Ayush Chaturvedi and Chandni Bhatia

[1] Fouchard, Philippe. Fouchard, Gaillard, Goldman On International Commercial Arbitration, Kluwer Law International, The Hague, xxxiii, 3, 1999.

[2] David St John SuttonJudith GillMatthew Gearing, Russell on Arbitration, Edn. XXIV, 2005.

[3] Primetrade AG v. Ythan Limited, [2006] 1 All ER 367.

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