M/s. S.B.P.and Co. vs M/s. Patel Engineering Ltd. and Anr.

I. Introduction

The Supreme Court of India, in this landmark judgment, addressed the crucial question concerning the nature of the function of the Chief Justice or his designate under Section 11 of the Arbitration and Conciliation Act, 1996. The threejudge bench decision in Konkan Railway Corporation Ltd. vs. Mehul Construction Co. [(2000) 7 SCC 201], as approved by the Constitution Bench in Konkan Railway Corporation Ltd. & Anr. vs. Rani Construction Pvt. Ltd. [(2002) 2 SCC 388], had taken the view that the Chief Justice's function under Section 11(6) of the Act is purely administrative and not judicial or quasi-judicial. The correctness of this view was questioned in the present case. (Paragraph 1)

II. Background

The Arbitration and Conciliation Act, 1996 (the Act) was intended to comprehensively cover international and commercial arbitrations and conciliations, as well as domestic arbitrations and conciliations. It aimed to establish a fair, efficient, and capable arbitral procedure to meet the needs of the concerned arbitration. The Act was based on the UNCITRAL Model Law on International Commercial Arbitration. (Paragraph 3

The Act replaced the procedure laid down in Sections 8 and 20 of the Arbitration Act, 1940. Part I of the Act deals with arbitration, Part II with the enforcement of certain foreign awards, and Part III with conciliation. The relevant provisions for this case are in Part I, dealing with arbitration. (Paragraphs 2-3)

III. Key Provisions

Section 7 of the Act defines an arbitration agreement, and Section 2(h) defines a 'party' as a party to an arbitration agreement. Section 11, titled 'Appointment of Arbitrators,' is the central provision in this case. (Paragraphs 4-5)

Under Section 11(6), if a party fails to act as required under the agreed appointment procedure, or if the parties or the appointed arbitrators fail to reach an agreement, or if a person or institution fails to perform the entrusted function, a party may request the Chief Justice or his designate to take the necessary measures for appointing an arbitrator. Section 11(7) gives finality to the decision rendered by the Chief Justice or his designate when moved under sub-sections (4), (5), or (6) of Section 11. (Paragraph 5)

IV. Analysis

A. Nature of the Chief Justice's Function under Section 11(6)

The Court analyzed the nature of the Chief Justice's function under Section 11(6) and concluded that it is a judicial power, not merely an administrative one. The reasoning is as follows:

1. Adjudicatory Process: While exercising the power under Section 11(6), the Chief Justice has to consider whether he has jurisdiction, whether there is a valid arbitration agreement, whether the applicant is a party to the agreement, and whether the conditions for exercising the power exist. This necessarily involves an adjudicatory process. (Paragraphs 8, 10)

2. Finality of the Decision: Section 11(7) gives finality to the Chief Justice's decision on matters entrusted to him under sub-sections (4), (5), or (6) of Section 11. This finality is indicative of a judicial decision rather than an administrative one. (Paragraph 8)

3. Conferment of Power on Highest Judicial Authority: The power under Section 11(6) is conferred on the Chief Justice of the High Court or the Chief Justice of India, the highest judicial authorities in the state or country, respectively. This suggests that the power is intended to be exercised judicially. (Paragraphs 12, 17)

4. Affecting Rights of Parties: The appointment of an arbitrator against the opposition of one party, or the rejection of objections regarding the existence of an arbitration agreement or a subsisting dispute, affects the rights of the parties. This cannot be considered a mere administrative act. (Paragraph 10)

5. Comparison with Section 8: Under Section 8, when a judicial authority is approached in a matter subject to an arbitration agreement, it has to decide whether a valid arbitration clause exists and whether the dispute is covered by it. It would be incongruous to hold that the Chief Justice cannot decide these issues under Section 11(6), while a judicial authority can do so under Section 8. (Paragraph 15)

6. Judicial Norms and Principles: The Court reasoned that when a statute confers power on the highest judicial authority, who normally performs judicial functions, it is difficult to assume that the power is conferred as a persona designata (personal capacity). The Chief Justice's power under Section 11(6) must be exercised judicially, following judicial norms and principles. (Paragraphs 13- 14)

B. Designation of Authority under Section 11(6)

The Court also addressed the issue of the Chief Justice's power to designate another person or institution to exercise the function under Section 11(6):

1. Designation of Non-Judicial Bodies: The Court held that the Chief Justice cannot designate a non-judicial body or institution to decide on the existence of an arbitration agreement or other contentious issues, as these are judicial or quasi-judicial decisions. However, the Chief Justice can seek the opinion of an institution in nominating a qualified arbitrator under Section 11(8), but the order appointing the arbitrator must be made by the Chief Justice or his designate judge. (Paragraphs 16, 39)

2. Designation of District Judges: The Court ruled that the Chief Justice cannot designate a district judge to perform the functions under Section 11(6), as the intention of the legislature was not to entrust this power to the District Court. (Paragraph 40)

3. Designation of High Court or Supreme Court Judges: The Chief Justice of the High Court can delegate the function under Section 11(6) to another judge of that court, and the Chief Justice of India can delegate it to another judge of the Supreme Court. In such cases, the designated judge would exercise the power vested in the Chief Justice under Section 11(6). (Paragraph 41)

C. Scope of the Chief Justice's Adjudication

The Court defined the scope of the Chief Justice's adjudication when entertaining an application under Section 11(6):

1. Jurisdiction: The Chief Justice has to decide his own jurisdiction, whether the party making the motion has approached the right High Court. (Paragraph 38)

2. Existence of Arbitration Agreement: The Chief Justice has to decide whether there is a valid arbitration agreement as defined in Section 7 of the Act and whether the applicant is a party to such an agreement. (Paragraph 38)

3. Barred or Dead Claims: The Chief Justice can decide whether the claim is barred by limitation or is a dead claim sought to be resurrected, or whether the parties have concluded the transaction by recording satisfaction of their mutual rights and obligations. (Paragraph 38)

4. Scope of the Arbitration Clause: While the Chief Justice can decide whether an arbitration agreement exists, it may not be possible for him to decide at that stage whether a live claim falls within the purview of the arbitration clause. This question can be left to the arbitral tribunal to decide along with the merits of the claims. (Paragraph 38)

5. Conditions for Appointment: The Chief Justice has to decide whether the applicant has satisfied the conditions for appointing an arbitrator under Section 11(6) of the Act. (Paragraph 38)

6. Procedure: For the purpose of taking a decision on these aspects, the Chief Justice can proceed based on affidavits and documents produced or take or record such evidence as may be necessary. (Paragraph 38)

D. Judicial Review and Appeals

The Court clarified the position regarding judicial review and appeals against orders passed under Section 11(6):

1. Appeal against the Chief Justice's Order: Since the Chief Justice's order under Section 11(6) is a judicial order, an appeal will lie against that order only under Article 136 of the Constitution of India to the Supreme Court. (Paragraph 43)

2. No Appeal against the Chief Justice of India's Order: 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. (Paragraph 43)

3. Judicial Review of Arbitral Tribunal's Orders: The Court disapproved of the stand adopted by some High Courts that any order passed by the arbitral tribunal is capable of being corrected by the High Court under Article 226 or 227 of the Constitution of India. Such intervention by the High Courts is not permissible. Once the arbitration has commenced, parties have to wait until the award is pronounced, unless a right of appeal is available under Section 37 of the Act. (Paragraphs 44-45)

E. Overruling of Konkan Railway Case

The Court overruled the decision in Konkan Railway Corporation Ltd. & Anr. vs. Rani Construction Pvt. Ltd. [(2000) 8 SCC 159], which had held that the Chief Justice's order under Section 11(6) was an administrative order and not amenable to judicial review. (Paragraph 46(xii))

V. Conclusion

In conclusion, the Supreme Court clarified that the power exercised by the Chief Justice of the High Court or the Chief Justice of India under Section 11(6) of the Arbitration and Conciliation Act, 1996, is a judicial power and not merely an administrative one. The Chief Justice or his designate judge has the right to decide preliminary aspects such as jurisdiction, the existence of a valid arbitration agreement, the existence of a live claim, and the conditions for exercising the power. The Court also provided guidance on the designation of authority under Section 11(6), the scope of the Chief Justice's adjudication, and the avenues for judicial review and appeals against orders passed under this provision.

This landmark judgment aimed to ensure credibility in the arbitration process and minimize judicial intervention while upholding the principles of natural justice and the rights of parties involved in arbitration proceedings.

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