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Background
The appellant and the respondent herein have entered into a contract for construction of a ‘City Centre’. The appellant trust issued a letter of intent to the respondent and entered into an agreement which includes an arbitration clause. Dispute arose between parties and the respondent chose to seek arbitration. They filed a petition for appointment of arbitrator before the Punjab and Haryana HC under section 11 (6) of the Arbitration and Conciliation Act, 1996. The court appointed an arbitrator which is being challenged in the present appeal.
Contentions
The contention of the appellant is that the main agreement itself is been fraudulently obtained, therefore the arbitration agreement is void and unenforceable. The HC failed to appreciate the dictum of Seven Judges in S.B.P. and Company v. Patel Engineering Ltd. [2005 (8) SCC 618]. This case had held that the CJI while appointing an arbitrator under section 11 is exercising a judicial power and will have to decide on preliminary matters about jurisdiction, existence of arbitration agreement and arbitrable cause. It was contended that the HC followed the Konakn Railway decision (Konkan Railway Corporation Ltd. v. Rani Construction Private Ltd., [2002 (2) SCC 388], which was overruled by higher bench in Patel.
The respondent on the other hand “contended that the main Agreement and the Arbitration Agreement contained therein could not be equated as they were for different purposes. According to Mr. Shanti Bhushan, even if the main Agreement was held to be void, it [would] not affect the arbitration agreement which had been included in the main Agreement for the purpose of deciding such issue.”
Decision
17. … Unfortunately, relying on the earlier Constitution Bench decision of this Court in the Konkan Railway case (supra), the High Court left it to the learned Arbitrator appointed by it to decide the said issues under Section 16 of the 1996 Act, which was contrary to the directions given by the seven-Judge Bench of this Court in the Patel Engineering case (supra), which categorically overruled the decision of the Constitution Bench in the Konkan railway case. In fact, in sub-paragraphs (10) and (12) of Paragraph 47 of the said judgment, the seven-Judge Bench specifically indicated that the orders which had already been passed in applications under Section 11(6) of the 1996 Act, prior to the decision in the Patel Engineering case (supra), would be treated as valid, leaving all objections to be decided under Section 16 of the Act. It was also indicated that from the date of the judgment, however, the decision rendered in the Patel Engineering case (supra), would govern all applications and even pending applications under Section 11(6) of the 1996 Act.
18. We have, therefore, no option but to set aside the order of the Chief Justice and remit the matter for a fresh decision in keeping with the decision of the seven-Judge Bench in S.B.P. & Company vs. Patel Engineering Limited and Another [2005 (8) SCC 618].
Excerpts from Patel
38. It is necessary to define what exactly the Chief Justice, approached with an application under Section 11 of the Act, is to decide at that stage. Obviously, he has to decide his own jurisdiction in the sense, whether the party making the motion has approached the right High Court. He has to decide whether there is an arbitration agreement, as defined in the Act and whether the person who has made the request before him, is a party to such an agreement. It is necessary to indicate that he can also decide the question whether the claim was a dead one; or a long barred claim that was sought to be resurrected and whether the parties have concluded the transaction by recording satisfaction of their mutual rights and obligations or by receiving the final payment without objection. It may not be possible at that stage, to decide whether a live claim made, is one which comes within the purview of the arbitration clause. It will be appropriate to leave that question to be decided by the arbitral tribunal on taking evidence, along with the merits of the claims involved in the arbitration. The Chief Justice has to decide whether the applicant has satisfied the conditions for appointing an arbitrator under Section 11(6) of the Act. For the purpose of taking a decision on these aspects, the Chief Justice can either proceed on the basis of affidavits and the documents produced or take such evidence or get such evidence recorded, as may be necessary. We think that adoption of this procedure in the context of the Act would best serve the purpose sought to be achieved by the Act of expediting the process of arbitration, without too many approaches to the court at various stages of the proceedings before the Arbitral tribunal.
46. We, therefore, sum up our conclusions as follows:
i) The power exercised by the Chief Justice of the High Court or the Chief Justice of India under Section 11(6) of the Act is not an administrative power. It is a judicial power.
ii) The power under Section 11(6) of the Act, in its entirety, could be delegated, by the Chief Justice of the High Court only to another judge of that court and by the Chief Justice of India to another judge of the Supreme Court.
(iii) In case of designation of a judge of the High Court or of the Supreme Court, the power that is exercised by the designated, judge would be that of the Chief Justice as conferred by the statute.
(iv) The Chief Justice or the designated judge will have the right to decide the preliminary aspects as indicated in the earlier part of this judgment. These will be, his own jurisdiction, to entertain the request, the existence of a valid arbitration agreement, the existence or otherwise of a live claim, the existence of the condition for the exercise of his power and on the qualifications of the arbitrator or arbitrators. The Chief Justice or the judge designated would be entitled to seek the opinion of an institution in the matter of nominating an arbitrator qualified in terms of Section 11(8) of the Act if the need arises but the order appointing the arbitrator could only be that of the Chief Justice or the judge designate.
(v) Designation of a district judge as the authority under Section 11(6) of the Act by the Chief Justice of the High Court is not warranted on the scheme of the Act.
(vi) Once the matter reaches the arbitral tribunal or the sole arbitrator, the High Court would not interfere with orders passed by the arbitrator or the arbitral tribunal during the course of the arbitration proceedings and the parties could approach the court only in terms of Section 37 of the Act or in terms of Section 34 of the Act.
(vii) Since an order passed by the Chief Justice of the High Court or by the designated judge of that court is a judicial order, an appeal will lie against that order only under Article 136 of the Constitution of India to the Supreme Court.
(viii) There can be no appeal against an order of the Chief Justice of India or a judge of the Supreme Court designated by him while entertaining an application under Section 11(6) of the Act.
(ix) In a case where an arbitral tribunal has been constituted by the parties without having recourse to Section 11(6) of the Act, the arbitral tribunal will have the jurisdiction to decide all matters as contemplated by Section 16 of the Act.
(x) Since all were guided by the decision of this Court in Konkan Railway Corpn. Ltd. & anr. Vs. Rani Construction Pvt. Ltd. [(2000) 8 SCC 159] and orders under Section 11(6) of the Act have been made based on the position adopted in that decision, we clarify that appointments of arbitrators or arbitral tribunals thus far made, are to be treated as valid, all objections being left to be decided under Section 16 of the Act. As and from this date, the position as adopted in this judgment will govern even pending applications under Section 11(6) of the Act.
(xi) Where District Judges had been designated by the Chief Justice of the High Court under Section 11(6) of the Act, the appointment orders thus far made by them will be treated as valid; but applications if any pending before them as on this date will stand transferred, to be dealt with by the Chief Justice of the concerned High Court or a Judge of that court designated by the Chief Justice.
(xii) The decision in Konkan Railway Corpn. Ltd. & anr. Vs. Rani Construction Pvt. Ltd. [(2000) 8 SCC 159] is overruled.
Remaining Issue
The principle of Kompentenz-Kompetenz leaves the authority to decide upon the jurisdiction with the arbitrator. Section 16 of the Act reflects this principle and prescribes procedure for challenges. The Patel decision is actually duplicating this function by enabling the CJ also to perform the same function of determining preliminary issues.
The jugglery done by the Patel Court is that, the function of CJ in appointing an arbitrator is declared as not a mere administrative function but a judicial one, which empowers or rather mandates the office to determine preliminary disputes. Once it is so decided by the CJ, the arbitrator is ceased to entertain such issues. The court seemingly fears a situation where the CJ has appointed an arbitrator and the arbitrator finds that there is no arbitration agreement or arbitrable cause, the efforts and order of the CJ goes waste. The court apprehends that the creation will be in a position to annihilate the creature.
The matter to be discussed in this context is the purpose of the Act and the particular provision. Was this to see that where there is an arbitration possibility, the duty of the court is to set that machinery in motion as expeditiously as possible or to intervene and determine the preliminary issues and leave it then for arbitration. The whole tempo of the enactment stand for the first. The rejected arguments of Nariman in Patel holds much water. The court of course has a duty and possibility of intervention under section 34 once the award is passed.
The present decision has revived this question. Should the court decide the preliminary issue before appointing an arbitrator in a petition under section 11 of the Act.
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