Section 16 – A Domineering Power in the Hands of Arbitrator

For quite some time now, Indian courts have been promoting alternate modes of resolving disputes amongst the parties, provided such alternate modes of resolving disputes are agreed upon by the parties consensually, and thus, eliminating the need to delve into intricacies of the case itself and referring the parties to opt for alternative mechanisms for speedy and effective resolution of disputes.

Generally, while appointing an arbitrator, the courts primarily and solely take into consideration whether there exists an arbitration agreement between the parties, in writing, or if there stands any communication with that effect in terms of Section 7¹ of the Arbitration and Conciliation Act, 1996² (Statute). Further, the courts have held that any grievance of the party(ies) referred to arbitration based on the arbitration clause, has to be raised before the arbitrator itself and not before the court, including the validity of the agreement containing the arbitration clause including the jurisdiction of the appointed arbitrator to adjudicate the disputes/claims/counterclaim raised or propose to be raised.

Section 16³ of the Statute itself provides for the Arbitral Tribunal⁴ to rule on its own jurisdiction as whether to preside over a particular dispute referred to it or not. This power of the Arbitral Tribunal aims at reducing the burden on the already overburdened courts of our country. However, the power given to an Arbitral Tribunal to rule on its own jurisdiction is not something, which should be exercised in a usual/carefree manner but the same has to be exercised with great caution and responsibility because as per the provisions of the Statute, if the Arbitral Tribunal uses its power to affirm its jurisdiction over a dispute, then the party aggrieved has to await completion of the arbitral proceedings and in terms of Section 16(6) of the Statute, the only remedy left is to voice its concerns via filing of objections under Section 34⁵ of the Statute. Therefore, it is discretionary concomitant power vested with the Arbitral Tribunal that must be exercised responsibly, judicially and in manifest compliance of principles of natural justice.

Adding to the prowess of the already empowered Arbitral Tribunal, the courts have interpreted that such power covers within its sweep the power to rule on its own jurisdiction⁶ in cases where the issue is raised on the power of the Arbitral Tribunal regarding joinder of third parties to arbitral proceedings.

The power of the Arbitral Tribunal to implead or add a non-signatory as a party in an ongoing arbitral proceeding has been opined variedly by the High Courts. While on one hand the Delhi High Court has held that no power to implead a non-signatory is vested with the Arbitral Tribunal⁷ and on the other hand held that such power is duly vested with the Arbitral Tribunal.⁸ Further, the Bombay High Court has clearly recognised the power of the Arbitral Tribunal to implead non-signatory as a party to the ongoing arbitral proceedings and decide on its own jurisdiction over such issue, if objected by such non-signatory during the arbitral proceedings.⁹

The Supreme Court in Cox & Kings Ltd. v. SAP India (P) Ltd.¹⁰ followed by Ajay Madhusudan Patel v. Jyotrindra S. Patel¹¹, has put a quietus on the issue regarding the power of the Arbitral Tribunal to implead a non-signatory in the arbitral proceedings and its power to decide on its jurisdiction in case of non-signatory challenging the jurisdiction of an Arbitral Tribunal, by affirming that it is for the Arbitral Tribunal to decide, as per the facts and circumstances of each case, if such non-signatory is to be impleaded as a party to the arbitral proceedings.

The Supreme Court in “SBI General Insurance Co. Ltd. v. Krish Spinning¹²” and Ajay Madhusudan Patel case¹³ stated that all the courts have to see solely is the prima facie existence of arbitration clause or an agreement, in writing, including the conduct of the parties regarding referring their disputes to arbitration. If the courts at a prima facie view arrive at a decision as to the existence of the arbitration agreement between the parties, then all the objections of the parties with respect to the validity/illegality/jurisdiction/legality should be raised before the Arbitral Tribunal itself and not before the courts. This proposition stems from the object and reason of the Arbitration and Conciliation Act, 1996 which aims at reducing judicial interference in the matters pertaining to arbitration. It is all the more necessary because the parties who have mutually decided to settle their disputes byway alternate dispute resolution mechanisms, deem to have surrendered their right to agitate the disputes so arisen before the courts i.e. they shall first knock the doors of the Arbitral Tribunal for adjudication of the disputes and if aggrieved by the orders or the award passed by the Arbitral Tribunal, they can challenge the same before the courts.

Earlier there was a trend that the courts used to go into the merits of the case so as to satisfy themselves regarding the existence and validity of the arbitration agreement between the parties and check whether the disputes are arbitrable or whether the Arbitral Tribunal has exceeded his jurisdiction or not. This practice of the courts was discouraged by the Supreme Court. The Supreme Court in Martin Burn case¹⁴ in para 27 has held that—

A prima facie case does not mean a case proved to the hilt, but a case which can be said to be established if the evidence which is led in support of the case were to be believed.

The courts have now shifted their stance from entertaining such jurisdictional and maintainability issues to leaving such issues for the dispute resolution mechanism, opted by the parties for the adjudication of such disputes, thereby reducing their burden and paving the way for minimum judicial interference, which was the intention behind the enactment of a special law by way of Statute.

In A. Ayyasamy case¹⁵, the Supreme Court held that when an application under Section 8¹⁶ of the Statute is filed before the civil court then the courts must not see that whether they have jurisdiction to try this case before them, instead it must be seen that whether their jurisdiction is being ousted or not by any law in force. Following the maxim “general law should yield to the special law ¾ generalia specialibus non-derogant”, it has been the rule that when there is a special law in force for a particular kind of dispute then the general rule should not be applied unless and until the special rule provides for it.

Under Section 16 of the Statute, the Arbitral Tribunal itself has been vested with the power to rule upon its jurisdiction. Further, various courts while scrutinising upon the jurisdiction of the Arbitral Tribunal to decide upon disputes with the allegation of fraud have opined that the allegations of fraud have been long dealt with by the civil courts in the context of civil and commercial disputes.¹⁷ So, there should not be any reason to exclude such disputes from getting resolved through arbitration.

The Supreme Court in Vidya Drolia case¹⁸ observed that allegations of fraud until they relate to a civil dispute can be made subject-matter of the arbitration. Also, in Deccan Paper Mills case¹⁹, it was held that merely because a transaction involves criminal overtones, it does not mean that the subject-matter becomes non-arbitrable.

Recently, the Delhi High Court in the matter titled Home & Soul (P) Ltd. v. T.V. Today Network Ltd.²⁰, wherein the appellant has approached the Court in writ jurisdiction aggrieved from an order passed by the Arbitral Tribunal, who has disposed of the application filed by the appellant under Section 16 of the Statute challenging the jurisdiction of the Arbitral Tribunal on the point of limitation, held that if any challenge to the jurisdiction of the Arbitral Tribunal is raised before the arbitrator under Sections 16(2) and (3) of the Statute, then the arbitrator may either accept or reject such contention raised and in such case if the contention of the party, raising the issue of the lack of jurisdiction of the Arbitral Tribunal to adjudicate, is accepted by the Arbitral Tribunal then the said order is appealable under Section 37²¹ of the Statute otherwise the same has to be challenged, if aggrieved by such order, only after the passing of the arbitral award under Section 34 of the Statute. Simply put, if the Arbitral Tribunal rejects the contention raised by a party regarding the lack of jurisdiction of Arbitral Tribunal, then the only remedy left with the party is to challenge the said order passed by the Arbitral Tribunal under Section 34 of the Statute i.e. after passing of the arbitral award by the Arbitral Tribunal, until which the arbitral proceedings shall continue without any hindrance.

Taking into consideration the narrow scope of Section 34 of the Statute, the parties must be very careful and mindful before agreeing to a dispute resolution clause in an agreement because such contentions/issues raised and if adjudicated against, leave no or little scope of overturning of such decision by the Division Bench under Section 37 of the Statute or by High Court under writ jurisdiction or Supreme Court under special leave. All this eventually leads to unwanted delay which defeats the very purpose of the party to resolve the disputes via alternative dispute resolution (ADR) mechanism.

In Booz Allen case²², the Supreme Court provided with non-exhaustive list to act as an example as nowhere all the disputes can be made subject-matter of arbitration. Whilst differentiating between the actions in rem i.e. the actions that affect the world at large, as contrasted from the actions/rights in personam, which involves an action that affects the parties only, the Supreme Court held that traditionally all the disputes that arose out of actions in personam are considered as arbitration-friendly and can be settled through a private forum, while on the other hand all the rights that arose from the actions in rem are needed to be adjudicated by a public forum such as courts, being not suitable for arbitration. However, it was also observed that this not being a rigid or inflexible rule, disputes that relate to subordinate rights in personam arising from rights in rem are and have always been considered to be arbitrable.

The Delhi High Court in the matter titled NCC Ltd. v. Indian Oil Corpn. Ltd.²³ held that unless there is a chalk and cheese or black and white situation, the Court concerned under Section 11²⁴ should follow the conservative course and allow parties to have their say in front of the Arbitral Tribunal. If there is any contest concerning the issue as to whether the dispute concerned falls within the realm of the arbitration agreement, then the best recourse to this would be to allow the arbitrator to form a view in the matter and the courts should avoid adjudicating on the same. This will save the cost incurred by the parties due to unnecessary litigation. The courts should check the ulterior motive and discourage such litigation strategies/activities of the parties avoiding recourse to arbitration.

The Statute and then the pro-arbitration approach of the higher courts has led to the widening of the scope of the powers vested with the Arbitral Tribunal to decide a particular dispute without judicial intervention. This widening of the scope of the Arbitral Tribunal is aimed at reducing judicial intervention of the courts sans which object of the Statute cannot be achieved and entertaining every challenge or appeal made before them against any order passed by the Arbitral Tribunal would tantamount to adding burden to an already burdened judicial system.

The moot question which arises at this point is whether the Arbitral Tribunal should or should not be clothed with such powers against which there is a solution but with limited focus? One cannot shy away from the fact that the only remedy left with the aggrieved party in an instance if the arbitrator is in cahoots with the other party, be it for impleading a non-signatory or passing of a biased award, is to wait until the award is passed by the Arbitral Tribunal and hope that the same suffers from grave patent error so as to enable him to challenge the same under Section 34 of the Statute.

In the present scenario, where alternate dispute resolution mechanisms are being promoted both by the judicial system and are also been actively preferred by the parties, one needs to take into consideration all the pros and cons of such dispute resolution mechanism and only thereafter make a mindful decision to enter into an agreement providing their consent for adjudication of the disputes through such mechanisms.

In conclusion it is but necessary that since we are aware of the overburdening of the judicial system of our country, where disputes are so common, one requires desperate measures. Therefore, transparent and unbiased arbitration is not only just only an alternate remedy but the need of the hour, since the judicial system of the country is overburdened where the pendency with the High Courts is more than 8.3 lakhs cases, which is pending since last 10 years. It is rightfully said that “justice delayed is justice denied” which stands true in the present scenario of the judicial system. Therefore, to curtail such biasedness of the Arbitral Tribunal, institutionalised arbitration shall be preferred by the parties where the presiding arbitrators are not known to either of the parties or it should be left for the courts to appoint the Arbitral Tribunal for the adjudication of disputes. Such mode of resolving disputes reduce the chances of one sided or staged arbitral proceedings. Furthermore, even the arbitrators should be mindful of the fact that the exercise of their discretion while adjudicating the disputes is of such high amplitude that the parties have a very narrow scope to get it set aside or modified. Thus, the Arbitral Tribunal which has been vested with some great power, the same shall be exercised with abundant caution and responsibility.