[This article is authored by Aditya Sethi, Associate at Khaitan & Co.]

Keywords: Section 11, Appointment of Arbitrators, Arbitrability.

Introduction

The Indian Arbitration and Conciliation Act, 1996 (“the Act”), aimed at reducing judicial intervention in arbitral matters, has been a subject matter of distinct interpretations and deliberations. The Act has also witnessed progressive evolution following the developments in international principles.

Though the Act contemplates an approach to prevent judicial intervention in the arbitral process, the same is not the case under Section 11 for the appointment of arbitrators. The law of arbitration in India is at its crossroads. It is, therefore, incumbent upon the judiciary to contain the interventionist role that it has assumed for itself and have greater trust in the arbitral process to meet the basic expectations of the litigating community.

Through this article, the author seeks to examine the transitional shift in the authority of judges in appointing arbitrators, the settled judicial position after the 2015 Amendment and the recommendations of the Justice Srikrishna Committee Report to formalize the process of appointment of arbitrators to uphold the autonomous nature of the arbitration regime which would be imperative in improving legal coherence and significance.

Shift of the Authority: Administrative to Judicial

The provisions under Section 11 of the Act facilitate in providing effective machinery for the appointment of arbitrators, if necessary by the special interference of the Chief Justice [i]. The Supreme Court (“SC”) has on numerous occasions attempted to determine the finality on the question of whether the power of the court to appoint an arbitrator is administrative or judicial in nature.

The Court in Konkan Railway v. Mehul Construction held that the power of the Chief Justice or his designate to appoint an arbitrator is administrative in nature. A similar view was reinforced by a larger bench in Konkan Railway v. Rani Construction (“Konkan Railways”). The same position was further reiterated in Shree Ram Mills v. Utility Premises (P) Ltd. and Arasmeta Captive Power Ltd. v. Lafarge India Private Ltd. In Shin Etsu Chemicals Co. Ltd. (“Shin Etsu”), the majority categorically ruled in favour of limited judicial interference in respect of the arbitration agreement while determining the scope of any judicial authority under Section 45 of the Act. This implied that the Chief Justice had powers limited to the extent of determining the prima facie validity of the arbitration clause in an arbitration agreement.

Position Subsequent to ‘Patel Engineering’

The SC in the momentous Seven Judge Constitutional Bench decision of S.B.P. & Co. v. Patel Engineering (“Patel Engineering”) held that the power of the Chief Justice in the appointment of an arbitrator is a judicial act, thereby overruling the decision laid down in Konkan Railways. This decision widened the scope of Section 11 (6), allowing the arbitrator to venture into the questions of arbitrability of the claim, validity of the arbitration agreement and other jurisdictional matters.

Scope of Intervention

The decision further clarified that preliminary issues would have to be decided by the Chief Justice himself. The decision of the Chief Justice in these matters would be considered final, and the power of the arbitral authority to decide these issues under Section 16 would be excluded in such instances. The Court in Boghara Polyfab (“Polyfab”) further elucidated the ruling in Patel Engineering and distinguished between three types of intervention:

(i) Issues which the Chief Justice has to necessarily decide;

(ii) Issues which the Chief Justice “can” decide if he chooses; and

(iii) Issues which the Chief Justice will have to leave for determination by the arbitral tribunal.

Arbitration and Conciliation (Amendment) Act, 2015 – Amendment to Section 11

The Legislature, upon the recommendations of the 246th Law Commission Report and in furtherance of the ruling in Shin Etsu Chemicals, enacted Section 11(6A).

The application of Section 11(6A) is premised on the larger intention of the legislature to restrict judicial intervention. Therefore, the enactment of Section 11(6A) limited the scope allowed by Patel Engineering and Polyfab. It provided that the scope of the judicial authority is limited to determining the prima facie existence of the arbitration agreement. The question of whether arbitration would be the appropriate remedy in resolving disputes in a matter should be left to the arbitral tribunal to decide. The same view was upheld in Jumbo Bags v. New India Assurance. The preliminary determination of the validity of the arbitration agreement has also been considered in IBI Consultancy India Private Limited v. DSC Limited.

The scheme of Section 11 (6A) was further examined in Duro Felguera SA, where the court opined that the legislative intent of minimizing judicial intervention was absolutely clear and hence, should be respected.

Renewal of the Conundrum

In United India Insurance v. Hyundai Engineering (“Hyundai Engineering”), the issue for consideration before the court was whether the claims made by the parties were within the scope of the arbitration agreement. The dispute resolution clause in the agreement provided that the dispute could not be referred to arbitration if the company had not accepted liability under the insurance policy.

The SC reversed the impugned decision of the Madras High Court, which was delivered on the basis of the settled position in Duro Felguera SA. In Duro Feguera SA, it was observed that the agreement has to be referred to ascertain whether the clause provides for arbitration to settle disputes between the parties. In Hyundai Engineering, the SC held that the two-judge bench in Duro Feguera SA only made general observations with respect to the amended provision of Section 11(6A). Hence, the decision in the case was erroneous.

The SC also placed reliance on Oriental Insurance Co. Ltd., which held that if circumstances mandate that the dispute cannot be referred to arbitration, then the question of appointment of arbitrators does not arise.

The SC in Hyundai Engineering held that the arbitration clause in the agreement has to be construed in strict terms subject to the conditionality clause. It was further observed that “an arbitration clause would enliven or invigorate only if the insurer admits or accepts its liability under or in respect of the concerned policy.” Upon examination of these issues, the SC exceeded the legislative mandate of Section 11 (6A) of the Act, which restored the position that existed before the 2015 Amendment.

Conclusion

The Amendment Bill of 2018 provides for the appointment of arbitrators through designated arbitral tribunals, which would obviate the need to file a formal application for appointment in the Court. The High-Level Committee on Institutionalization of Arbitration Mechanism in India has observed that the 2015 Amendment facilitates the speedy disposal of appointment of arbitrators; however, the aspect of limiting court interference has not been resolved completely.

The Committee has recommended the adoption of the practice followed by the arbitration institutions in Singapore and Hong Kong in the Indian scenario. This practice would encourage and provide practical impetus to institutional arbitration in India. The arbitration legislations of Hong Kong and Singapore have incorporated Article 11 of the UNCITRAL Model Law relating to the appointment of arbitrators. The Committee further recommended the amendment of Section 11 to provide that the appointment of arbitrators shall only be made by arbitral institutions designed by the Supreme Court or the High Court. The High-Level Committee, in its pursuit to reduce judicial intervention, has not taken into consideration the provision of Section 18 of the English Arbitration Act, 1996, which is in consonance with Section 11 of the Act. The English Arbitration Act, 1996 provides that it is the mandate of every party to establish before the court sufficient cause to suggest that the arbitral tribunal has jurisdiction to hear the dispute, which is concurrent with the doctrine of kompetenz-kompetenz [ii]. Therefore, the proposal to delete Section 11 (6A) would be precarious in fulfilling the initial threshold for the court to even determine upon the very existence of an arbitration agreement.

Though it is imperative that the mechanism of institutional arbitration is given a formalized structure, rules and guidelines must be framed for the appointment of arbitrators through arbitral tribunals since the Amendment Bill, 2018 does not specifically delve into the role scope and powers of the Arbitration Promotion Council of India.

The decision in Hyundai Engineering is contrary to the scheme of Section 5 of the Act and Article 5 of the UNCITRAL Model Law. It allows undue advantage to the disputants to delay the arbitration proceedings because of the delay in the appointment of arbitrators.

[i] Gopalji Kuverji v. Morarji Jeram NaraGopalji Kuverji v. Morarji Jeram Naranjinji, 1919 SCC OnLine Bom 126. [ii] Silver Dry Bulk Company Limited v. Homer Hulbert Maritime Company Ltd, [2017] EWHC 44 (Comm).