ALTERNATIVE DISPUTE RESOLUTION

PROJECT ON

THE IMPACT OF PATEL ENGINEERING CASE ON THE

COMPETENCE OF ARBITRAL TRIBUNALS

SUBMITTED BY,
ARCHANA
ROLL NO 653
X SEMESTER

TABLE OF CONTENTS

S NO

TOPIC

PG NO

INTRODUCTION

BACKGROUND

CRITICISMS

CONCLUSION

INTRODUCTION

In India, the backlog of cases and delay is far higher than in most other progressive
jurisdictions. Arbitration is one of the alternative dispute resolution mechanisms available for
the resolution of dispute bypassing the strenuous and complicated litigation structure in the
country. The most attractive feature of the arbitral process over that of other alternate dispute
settlement mechanisms is the binding nature of the arbitral award and because the parties
themselves nominate a neutral person or persons whom they believe will be objective and
impartial in their interpretation of the dispute, it increases the acceptability of the award even
for the losing party1.
Although India already had the old Indian Arbitration Act 1940 (hereinafter 1940 Act) in
place, there was a need to pass a more robust law that would be in line with international
standards particularly the one set by the UNCITRAL Model Law 19852. This lead to the
passing of the Arbitration and Conciliation Act, 1966.
BACKGROUND
Section 11 of the Act provides that when the parties fail to appoint one or more arbitrators
according to the terms of the arbitration agreement, or when two arbitrators fail to choose the
third or presiding arbitrator, or the designated appointment mechanism otherwise fails, the
parties can approach the Chief Justice to resolve the issue and appoint an arbitrator3. Similar
to the Model Law, Section 11 envisages the Chief Justice performing an ordinary,
administrative function in making the appointment, similar to the appointing role that arbitral
institutions take on4.
The question that was addressed in the Patel Engineering Case as well as the decisions before
that is Whether the function of the Chief Justice or his designate, under sub-sections (4), (5),
and (6), of section 11 to appoint an arbitrator is of a judicial nature5.

http://rostrumlegal.com/negative-effect-of-kompetenz-the-only-way-to-save-arbitral-law-in-india-by-aniketghosh/
2
Id.
3
http://blog.mylaw.net/the-role-of-courts-in-arbitrator-appointments-patel-engineering-andbeyond/#sthash.LxsC5fRQ.dpuf
4
Id.
5
http://www.manupatra.co.in/newsline/articles/Upload/30693C83-676B-4CD5-9D46-73C1810E46BC.pdf

In Sundaram Finance Ltd. V. NPEC India Ltd., a two Judge Bench of the Court, as obiter,
stated that under the 1996 Act, appointment of arbitrators is made as per the provisions of
Section 11, which does not require the Court (sic, actually Chief Justice) to pass a judicial
order appointing the arbitrators.6 This Obiter was affirmed by another two Judge Bench in
Ador Samia Pvt. Ltd. V. Peekay Holdings Ltd.7 which was affirmed by a three Judge Bench in
Konkan Railways Corporation v. Mehul Construction Co.8. The latter decision too was
referred to a larger Bench by another two Judge Bench in Konkan Railway Corporation v.
Rani Construction (P) Ltd.9
Thus the case came up before a Constitution Bench of the Supreme Court. The Court
affirmed the ruling in Mehul construction Co. and held that the default power of the Chief
Justice or any person or institution designated by him under section 11 is not adjudicatory.
It was also held that since the power so exercised is not a tribunal, a Special Leave Petition
appeal under Article 136 shall not lie.
In 2005, the Apex Court had to decide in the case of S.B.P. & Co vs Patel Engineering Ltd. &
Anr10 and determine the nature of function of the Chief Justice or his designate under Section
11 of the Act11. It was also to decide whether the Chief Justice should decide any contentious
jurisdictional issues before referring the parties to arbitration12.
The Apex Court concluded the following13(i) When a statute confers power on the highest judicial authority, the authority has to
necessarily act judicially unless the statute states otherwise. Therefore, the Chief Justice,
under Section 11 of the Act, performs a judicial function.
ii) Before exercising jurisdiction, a tribunal has to be satisfied with the existence of
conditions, known as jurisdictional facts, which permit it to do so. Moreover, when under
Section 8 a Court decides on the existence of the arbitration agreement, it is inappropriate that
the highest judicial authority cannot decide under Section 11 on the existence of the
arbitration agreement.

Id, (1998) 9 SCC 782.

(1998) 8 SCC 572.
8
(2000) 7 SCC 201.
9
(2000) 8 SCC 159.
10
AIR 2006 SC 450.
11
Supra at n. 3.
12
Id.
13
Ibid.
7

(iii) If the highest judicial authority decides on a jurisdictional question, the tribunal cannot
have the power to decide to the contrary on the same question. The decision of the Chief
Justice is binding on the parties and the tribunal. In order to make a decision, 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.
The exact scope of enquiry of the Chief Justice was set out by the Supreme Court as
follows14:
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
In National Insurance Company Ltd. v. Boghara Polyfab Pvt. Ltd., (2009) 1 SCC 267, a twojudge bench of the Supreme Court held that the Chief Justice, in exercising his powers under
Section 11, does not have to decide all the preliminary questions set out in Patel
Engineering15. The Court segregated the preliminary issues into three categories, that is, (i)
issues which the Chief Justice or his designate is bound to decide; (ii) issues which he can
also decide, that is, issues which he may choose to decide; and (iii) issues which should be
left to the Arbitral Tribunal to decide.16 They are extrapolated as follows17:

14

Supra at n.5.
Id.
16
Ibid.
17
http://lexarbitri.blogspot.in/2010/07/recent-developments-on-scope-of-s-11.html.
15

Under the first category is the foundational question of whether there is an arbitration
agreement between the parties. To this extent, the jurisdiction of the Tribunal under s. 16
cannot be exercised, as it is bound by the finding of the appointing authority. Under the
second category falls questions that affect the validity of the arbitration agreement, but which
are not as fundamental as its very existence for example, whether the claim is live, or, as
in Boghara Polyfab, whether the discharge of the contract was valid. These are questions that
the appointing authority is empowered but not required to decide. However, if the authority
chooses to exercise its discretion, the Tribunal remains bound by its finding, notwithstanding
its jurisdiction under s. 16. Finally, the Court in Boghara Polyfab identified two types of
questions that cannot be resolved by the appointing authority whether a claim falls within
an arbitration clause, and merits or any claim involved in the arbitration.
In Shree Ram Mills Ltd. v. Utility Premises (P) Ltd., (2007) 4 SCC 599, the Supreme Court
had suggested that the second category of cases, involving the decision of whether the claim
is a live claim or not, has to be decided by the court as it is only by deciding this limitation
issue that the court can decide whether to constitute a tribunal or not18.
In Chloro Controls India Private Ltd v. Severn Trent Water Purification Inc., (2013) 1 SCC
641, a three-judge bench of the Supreme Court said that there is no variance between the
Shree Ram Mills Ltd. and Boghara Polyfab Private Limited judgments; both judgments were
in line with the law declared in the Patel Engineering Case. - The Chief Justice only has to
record his satisfaction that prima facie and should not decide it finally19.
The Court also upheld the categorisation laid down in Boghara Polyfab Private Limited: We
have no reason to differ with the classification carved out in National Insurance Co. as it is
very much in conformity with the judgment of the Constitution Bench in SBP20.
In Arasmeta Captive Power Company Private Limited v. Lafarge India Private Limited, the
Supreme Court in December, 2013, reiterated another aspect of the Patel Engineering
decision, namely that the Chief Justice should not decide on whether the claim in question is
one which comes within the purview of the arbitration clause or not21.
CRITICISMS

18

Id.
Ibid.
20
Supra at n. 18.
21
Id.
19

It has been debated to create an absurd proposition not envisaged by the legislature. To delve
into a more than prima facie examination of the materials and documents will defeat the
Kompetenz-Kompetenz rule as well as delay the proceedings in the initial stage itself.
The phrases used in the provision points towards a very less degree of permissible
intervention. The Parliament has departed from the text of the UNCITRAL Model Law, and
uses the words Chief Justice in place of the word Court as mentioned in the Rules. And
the default power is specifically vested in the Chief Justice or his designate. This points
towards the conclusion that this is not a judicial function since a judicial function cannot be
delegated.
It was severely criticized to have entered into the Legislative wisdom and change or interpret
the intention of the legislature. It also increases cost and uncertainty.

246TH LAW COMMISSION REPORT, 2015 AMENDMENT & CONCLUSION

The Report suggested and recommended the following to S.11, in order to restrict judicial
intervention 22 In so far as the nature of intervention is concerned, it is recommended that in the
event the Court/Judicial Authority is prima facie satisfied against the argument
challenging the arbitration agreement, it shall appoint the arbitrator and/or refer the
parties to arbitration, as the case may be.
The amendment envisages that the judicial authority shall not refer the parties to
arbitration only if it finds that there does not exist an arbitration agreement or that it is
null and void.
If the judicial authority is of the opinion that prima facie the arbitration agreement
exists, then it shall refer the dispute to arbitration, and leave the existence of the
arbitration agreement to be finally determined by the arbitral tribunal.
However, if the judicial authority concludes that the agreement does not exist, then
the conclusion will be final and not prima facie. The amendment also envisages that
there shall be a conclusive determination as to whether the arbitration agreement is
null and void.
22

http://lawcommissionofindia.nic.in/reports/Report246.pdf

The 2015 amendment replaced the words Chief Justice or a person or institution
designated by him with High Court. The following explanations had also been
suggested by the Report Explanation 1: If the High Court is prima facie satisfied regarding the existence of an
arbitration agreement, it shall refer the parties to arbitration and leave the final
determination of the existence of the arbitration agreement to the arbitral tribunal in
accordance with section 16, which shall decide the same as a preliminary issue.

Explanation 2: For the removal of any doubt, it is clarified that reference by the High
Court to any person or institution designated by it shall not be regarded as a
delegation of judicial power.

Explanation 3: The High Court may take steps to encourage the parties to refer the
disputes to institutionalised arbitration by a professional Indian or International
Arbitral Institute.
However the Amendment Act omitted Explanation 1. There have been criticisms relating
to the precedential value of the decisions of the Court under this section since Chief
Justice is not a Court23. The effect of the new amendment has been further criticised not
to achieve the intended effect of the inculcation of the Patel decision. It remains to be
seen how the courts further interpret and preserve the sanctity and object of Alternative
Dispute Resolution mechanisms by limiting judicial intervention.

23

State of West Bengal vs. Associated Contractors [AIR 2015 SC 260].