Power of Courts to appoint Arbitrators: An Endless Tussle

I. Introduction

‘Party autonomy’ and ‘minimum court intervention’ are the two foundational bases on which the jurisprudence of arbitration is built upon and appointment of arbitrators is no exception to these cardinal rules. Section 11 of the Arbitration and Conciliation Act, 1996 (‘the Act’) provides the procedure for appointment for appointment of arbitrator(s). Primarily, the parties are free to determine such procedure and can choose to appoint either a sole arbitrator or a tribunal consisting of any odd number of arbitrators. It is only upon the failure of the parties to appoint the sole arbitrator or their respective arbitrator or upon the failure of two appointed arbitrators (in case of an arbitral tribunal of 3 arbitrators) to nominate the third arbitrator, the courts come into picture. The power to appoint an arbitrator vests with the Supreme Court and the High Courts or arbitral institutions designated by such Court(s).

However, the nature and extent of such power have been a major source of controversy and differing opinions with the legislative and judiciary at times being at loggerheads regarding the same. The present article sets out the evolution of this power through legislative amendments and various judicial precedents.

II. The Pre Patel Engineering phase

Prior to 2015, the power of appointment of an arbitrator, under Section 11 of the Act, was vested in the Chief Justice of India or Chief Justices of different High Courts (as the case maybe) or any institution designated by him. The Act did not provide any guidance over the nature and scope of power of a court. Therefore, the question as to whether the nature of such function was judicial or administrative remained unanswered.

One of the first cases to deal with this question was the matter of Konkan Railways Corporation Ltd. v. Rani Construction Pvt. Ltd. . Therein the limited question before the Apex Court was determining as to what should be the correct approach of the Chief Justice or his nominee in relation to the matter of appointment of an arbitrator under Section 11(6) of the Act and what is the true nature of the said function.

After careful consideration of the precedents and the legislative intent behind the transition from the Arbitration Act, 1940 to the present Act, the court concluded that the order of appointing an arbitrator is not a judicial order rather an administrative one. The Court had opined that the enactment of the 1996 Act was aimed towards attracting the confidence of the international mercantile community and thereby converting India into an arbitration friendly destination. In furtherance to the same, the Act of 1996 being based on the UNCITRAL Model aimed towards limiting the intervention of a court in an arbitral process to minimum. Therefore, when a matter is placed before the Chief Justice or his nominee under Section 11, it is imperative that such person discharges his function keeping in mind the aforementioned legislative intent. The scheme of the Act indicate that there is ample power vested upon the arbitrators to decide questions of their jurisdiction and validity of the arbitration agreement. The only function required to be dispensed is appointing an arbitrator without further delay. Therefore, such power is to be classified as a mere administrative power.

While arriving at the aforementioned conclusion, the court also examined the consequences if such power is considered to be judicial in nature, which would in turn frustrate the entire purpose of the Act by equipping parties with dilatory tactics in approaching a court of law.

III. SBP & Co. v. Patel Engineering Ltd. and Anr.- A paradigm shift

This question was once again raised before a larger bench of the Supreme Court in the matter of SBP & Co. v. Patel Engineering & Anr. wherein the Hon’ble Apex Court had overruled the decision in the matter of Konkan Railways by a 6:1 majority. It was held that the power exercised by the Chief Justice under Section 11(6) is not an administrative power. The majority had opined that once a statutes creates an authority for adjudication of disputes and confers a status of finality to its decisions, any decision taken thereto cannot be mere administrative decision. Unless the authority satisfies itself that the conditions for exercise of such power exist, it cannot accede to a request made thereto. Under Section 11(6) of the Act, the Chief Justice has to ascertain the questions of its jurisdiction, validity of the arbitration agreement and existence of a dispute. Further, the Chief Justice has to determine as to whether the claim is dead one or whether the parties have concluded the transaction. These questions are the ones which adjudicate upon the rights of the parties.

The Court was of the opinion that an arbitral tribunal cannot be constituted without ascertaining these basic aspects. This is also the legislative intent which can be ascertained from the fact that the highest judicial authority like the Chief Justice has been entrusted with such duty and his decision is considered as final. The appointment of an arbitrator involves questions that affect the rights of the parties, who may have to contest an entire arbitration proceeding in the absence of an arbitration agreement or an arbitrable claim. With regard to delegation of such power, the majority opined that the power can be delegated to only judicial authorities like the judges of the Supreme Court and High Court and not to an institution.

The minority opinion (C.K. Thakker, J.) was of the view that the function performed by the Chief Justice is pure administrative function. The question as to whether a function is judicial or administrative cannot be concluded by the mere fact that the adjudicating authority has to apply its mind and determine questions that affect the rights of the parties. Further finality of an order has nothing to with the nature of function performed by the Chief Justice.

The principle enunciated in Patel Engineering case (supra) was taken a step further in the judgement of National Insurance Company Limited v. Boghara Polyfab Private Limited. In this judgement, the Supreme Court classified the contentious issues, while exercising powers under Section 11, into three categories. The first category relates to issues that the Chief Justice must decide i.e. whether the party making the application has approached the appropriate High Court and whether there is an arbitration agreement and party who has applied under Section 11 is a party to such agreement. The second category relates to the issues which are left to the discretion of the Chief Justice to determine i.e. whether the claim is live claim and whether the parties have concluded the transaction recording satisfaction of their mutual rights and obligations. The third category relates to issues that the court must leave for determination by the arbitral tribunal i.e merits of the claim, whether the claim falls under the arbitration clause etc.

IV. The Arbitration Amendment Act of 2015: Nullifying effect of Patel Engineering

The law postulated in the Patel Engineering case and subsequently clarified in the Boghara Polyfab case (supra) gave wide powers to the courts under Section11. This position came under criticism for being contrary to the basic tenets of arbitration i.e. minimum judicial intervention and the principle of Kompetenz – Kompetenz i.e. competence of an arbitral tribunal to determine its own jurisdiction. This position continued until the enactment of Amendment Act of 2015. This Amendment Act introduced a new provisions [Sections 11(6-A) and 11(6-B) which expressly defined nature of function of a court under Section 11. As per Section 11(6-A), the court was mandated to ascertain the limited question of ‘existence of arbitration agreement’ while exercising powers under Section 11. Further under Section 11(6-B), it has been stipulated that such powers are administrative in nature..

V. Judicial Pronouncements Post The Amendment Act – Legislative Intent Upheld

One of the first cases where the scope of the newly inserted Section 11(6-A) was determined was Duro Felguera SA v Gangavaram Port Limited. The Supreme Court while analysing the provisions of Amendment Act of 2015 acknowledged the legislative intent of limiting the role of a court to only identifying the existence of an arbitration agreement. The Court clarified that “after the amendment, all that the Courts need to see is whether an arbitration agreement exists - nothing more, nothing less”. .

The principle of minimum judicial interference confirmed in the Duro Felguera case was distinguished in the case of United India Insurance v. Antique Art Exports, (2019) 5 SCC 362. It was held that the power of Chief Justice and his designates under Section 11 is not merely an administrative power but has judicial trappings with some degree of judicial intervention. While examining the scope of the phrase ‘existence of an arbitration agreement’, the Court can go into the existence of dispute to ensure that the dispute resolution process is not unnecessarily protracted. On the basis of such observation, the Supreme Court set aside the arbitrator appointed by the High Court.

However, this position established by Antique Art Exports (supra) was overruled by a three judge bench of the Supreme Court in the matter of Mayavati Trading v Pradyuat Dev Burman which restored status-quo ante as confirmed in Duro Felguera (supra). The Court reaffirmed the narrow interpretation of role of court under Section 11. The Court further clarified that the omission of Section 11 (6-A) proposed under the 2019 Amendment Act was not intended to enhance the power of courts but was to enable appointment of arbitrators by arbitral institutions.

VI. Conclusion

One of the key factors weighing in favour of arbitration, as an alternate dispute resolution mechanism, is the lack of delay otherwise associated with traditional court litigation. The ruling in the matter of Patel Engineering (supra) was in direct contradiction to this principle. It had far reaching consequences and took away one of the major advantages of arbitration i.e. time effectiveness due to multiple challenges against the order passed under Section 11.

Judicial intervention is considered to be an anathema to arbitral proceeding and the Amendment Act of 2015 has tried to cure this anomaly and fortify the principle of minimum court intervention. It is a laudable step for ensuring that the jurisdiction of an arbitral tribunal is not interfered with. Pronouncements like Duro Felguera and Mayavati Trading have also gone a long way in upholding such legislative intent. However, does this conclusively settle this eternal tussle or is there another Antique Art Exports around the corner? Only the future holds the answers to these queries.