Section 16 of the Arbitration & Conciliation Act, 1996 – A Model Law Approach in India?

[Rahul Saraswat is a 5th year student at Gujarat National Law University, Gandhinagar and Aditi Nandanwar a 5th year at Hidayatullah National Law University, Raipur]

One of the fundamental principles of arbitration is “Kompetenze-Kompetenze”, which empowers the arbitral tribunal to rule upon its jurisdiction and other related issues. Section 16 of the Arbitration and Conciliation Act, 1996, which has been framed in accordance with article 16 of the UNCITRAL Model Law, recognises this important principle. Moreover, section 16(2) empowers a party to challenge the jurisdiction of the arbitral tribunal, and the tribunal can decide upon it according to powers conferred upon it under section 16(1). Whenever a party to the dispute challenges or raises a plea as to the lack of jurisdiction of the tribunal, the tribunal will either accept the objection or reject it. Upon acceptance of the objection, the opposite party has a right to appeal under section 37 of the Arbitration Act and, on being rejected, the opposite party may again raise the objection along with the final award under section 34 of the Arbitration Act. While section 16 stipulates the timeline for raising the issue of lack of jurisdiction of the arbitral tribunal, it however does not specify whether the tribunal should rule on such objection as a preliminary issue or in an award on merits.   

“Kompetenze – Kompetenze” under the Model Law

Article 16(3) of the UNCITRAL Model Law provides: “The arbitral tribunal may rule on a plea referred to in paragraph (2) of this article either as a preliminary question or in an award on the merits…”. The Model Law has retained neutrality in the formulation of this clause pursuant to extensive discussion in the conferences. Representatives of several countries, including India, had argued that if the issue of jurisdiction was not taken up as a preliminary issue and, in the end, the arbitrators finally decided that they did not have jurisdiction, it would incur unnecessary expenses and result in a waste of time. On the other hand, representatives of a few other countries voiced an opposing opinion stating that parties may misuse the provision to cause unwarranted delays in the proceedings. Therefore, to create a balance between the conflicting opinions, the provision was formulated such that the tribunal has the ultimate power to decide the issue of jurisdictional challenge either as a preliminary issue or in the award, depending upon the factual matrix of the case.

The Current Position in India

The Arbitration Act has been formulated in accordance with the Model Law. Section 16 of the Arbitration Act corresponds with the article 16 of the Model Law. However, under the Arbitration Act, the provision does not retain the diction of article 16(3) of the Model Law verbatim. The Act remains silent as to whether the jurisdictional challenge should be decided upon by the tribunal as a preliminary issue. Consequently, the courts in India have taken a diverse stand on the jurisdictional challenge as a preliminary issue. The first case in this regard was McDermott International Inc. v. Burn Standard Co. Ltd., wherein a division bench of the Supreme Court held that ‘the jurisdictional challenge is required to be determined as a preliminary ground’.  However, the Court in this case did not provide the reasoning for referring the challenge as a preliminary issue.

Moreover, the Supreme Court in Maharishi Dayanand University v. Anand Coop. L/C Society Ltd held that the jurisdictional issues are not required to be decided as preliminary matter and the arbitrator may provide its ruling on jurisdictional challenge along with the final award. While adjudicating upon the issue, the Court did not take into consideration its previous decision in McDermott International. Further, a three judge bench of the Supreme Court in Kvaerner Cementation India Limited v. Bajranglal Agarwal, while discussing the scope of section 16 of the Arbitration Act, held that the “tribunal would do well in disposing of the jurisdictional challenge as a preliminary issue so that it may not be necessary to go into the entire gamut of Arbitration proceedings”. In this case as well, the Court, without taking into consideration and discussing its previous ratio, passed a contradictory judgement.

Another important pronouncement in relation to this issue was given by the Delhi High Court in the case of Steel Authority of India v. Indian Council of Arbitrators. After deliberating upon the Supreme Court’s precedents adjudicated, the Delhi High Court upheld the position that it shall be the discretion of the arbitral tribunal to decide the issue related to the jurisdictional challenge as preliminary or otherwise. In the most recent case on this issue, Ayyaswami v. A. Paramasivam, a division bench of the Supreme Court confirmed the ratio given in the Kvaerner Cementation with respect to the primacy of jurisdictional challenge, i.e., that the jurisdictional issue should be adjudicated as a preliminary issue. 

Analysis

Article 16 of the Model Law has empowered arbitral tribunals to not only decide upon their own jurisdiction but has also granted a discretionary power under article 16(3) while deciding upon the challenge to jurisdiction. Such a provision or discretionary power is absent under section 16 of the Arbitration Act. Moreover, the precedents with respect to this law are still not settled in India since the Supreme Court has rendered contradicting judgements on the issue. Therefore, the issue demands discussion in order to develop certainty and ensure smooth functioning of the arbitral tribunal. To understand the uncertainty in this law, we must take into consideration the situations which might arise due to this uncertainty.

Scenario I – Challenge Decided as a Preliminary Issue

In such a scenario, the tribunal, on deciding the challenge will pass an order as it deems fit. Deciding the jurisdictional challenge as a preliminary issue would enable parties to know where they stand. In England, the position of the court in this respect was settled in Brown v. Genossenschaft Osterreichischer Waldbesitzer, wherein the court held that the tribunal, before going into the arbitration, must satisfy themselves as a preliminary matter whether they have jurisdiction or not. Further, the Indian Supreme Court in Kavaerner Cementation and McDermott International has laid down a similar position which has been recently upheld by the Court in Ayyasamy.

Scenario II – Challenge Decided as Final Award on Merit

In this scenario, there is a possibility where the tribunal may find that there is no jurisdiction, thereby rendering the final award invalid. Therefore, the time and cost involved in the proceedings would be wasted. It would further increase the intervention of court. The party may also lose a chance to approach the appropriate authority for resolution of dispute in a timely manner.

The commission, while framing article 16(3) considered various opinions and came to a conclusion that the tribunal shall be the better judge of such decision depending upon the factual matrix of the case. This was because, many a time, the jurisdictional issue is so intertwined with the substantial claim that, without going into the merits of the substantial claim, the jurisdictional issue cannot be resolved. This position was adopted by the Supreme Court of India in Maharishi Dayananda and Steel Authority of India.

The existence of these two situations has provided parties to a dispute in India some scope to manipulate the proceedings. This unsettled principle creates a problem in cases where the arbitral tribunal does not adjudicate upon the matter in the very beginning and, thereafter, might decide in the end as a final award that the tribunal did not have the jurisdiction to do the same. Situations may also arise where the parties may use such a measure to delay the proceedings and pose a hindrance in providing justice. Under the Model Law, the provision offers a liberty to the tribunal to prevent such malicious intentions on behalf of either of the parties. Therefore, such power should be provided under the Arbitration Act to the tribunals in India as well.

Such an addition would not only help in domestic arbitration but also in international commercial arbitration. Developed seats have flexible arbitration legislatures which helps attract foreign investors. The Arbitration act has been framed and reformed in order to make India the international hub of arbitration; therefore, such ambiguities in the Arbitration Act affect the flexibility and thereby distract the investors.

Recommendation

The authors believe that the provision in under section 16 of the Arbitration Act should be amended so as to accommodate article 16(3) of the Model Law and confer the power to the tribunal to adjudicate upon the jurisdictional issue on its own consideration, as provided for in the cases of Maharishi Dayananda and Steel Authority of India Limited discussed above. Further, the authors also recommend that, in case the jurisdictional issue is to be decided as a preliminary issue, there must be a timeline to guide the proceedings to prevent any misuse of section 16 of the Arbitration Act by the parties.

– Rahul Saraswat & Aditi Nandanwar