Supreme Court ruling
Section 11 of the Arbitration and Conciliation Act 1996 deals with the procedure for the appointment of arbitrators. Section 11(2) provides that the parties are free to agree on a procedure for such an appointment. Section 11(6) further provides that if the agreed procedure between the parties has not been followed, the parties can approach the chief justice or his or her designate to appoint an arbitrator. Sections 11(3), 11(4) and 11(5) contemplate different situations in which the chief justice or his or her designate can be requested to appoint an arbitrator.
The Indian courts recently had the opportunity to explore the scope of the powers that the chief justice or his or her designate can exercise when appointing an arbitrator under Section 11 of the act. In National Insurance Co Ltd v Boghara Polyfab (P) Ltd (2009 (1) SCC 267) the Supreme Court categorised the issues that may arise for determination in a petition under Section 11 before the chief justice or his or her designate, and identified the approach to adopt. It was held that the issues which can be examined and decided in such petitions under Section 11 can be broadly divided into three categories.
First, the chief justice or his or her designate must decide whether:
- the party making the application has approached the appropriate court (ie, the court with jurisdiction to consider the application); and
- an arbitration agreement exists between the parties and, if so, whether the party that has applied under Section 11 of the act is a party to the agreement.
Second, the chief justice or his or her designate must choose either to decide or to leave to the arbitral tribunal the issues of whether:
- the claim is a dead (ie, time-barred) claim or a live claim; and
- the parties have concluded the contract or transaction by recording the satisfaction of their mutual rights and obligations or by receiving final payment without objection.
Finally, the chief justice or his or her designate must leave exclusively to the arbitral tribunal the issues of whether:
- the claim falls within the scope of the arbitration clause; and
- the claim in question has merit.
The courts have tried to give a restrictive interpretation to the nature and scope of enquiry and the jurisdiction of the chief justice or his or her designate when dealing with petitions under Section 11 of the act. This reasoning was reiterated by the Supreme Court in its latest judgment in Indian Oil Corporation v SPS Engineering (2011(2) SCALE 291). In this case the court held that when exercising powers under Section 11 of the act, the chief justice or his or her designate cannot decide on the issues of whether the claims are barred by principles of res judicata (ie, a matter already judged) or by limitation. Furthermore, an application under Section 11 of the act does not extend to a consideration of the merits of the claim or its chances of success.
The appellant, Indian Oil Corporation, had entered into a contract with the respondent for the execution of certain works at its refinery within a stipulated timeframe. However, owing to a delay in completion of the works, the appellant terminated the contract, pursuant to which the respondent invoked the arbitration proceedings and brought certain claims against the appellant. The sole arbitrator issued a final award in the matter after allowing claims and certain adjustment of some counterclaims. This award was not challenged and thus became final.
Subsequently, the arbitration clause was invoked for a second time when the appellant claimed extra costs in relation to the contract and accordingly filed a petition under Section 11 for the appointment of an arbitrator. The High Court dismissed the Section 11 petition, holding it to be misconceived, as the claim was barred by res judicata and by limitation.
Thereafter, an appeal was brought before the Supreme Court. The question was whether the chief justice or his or her designate, in exercising his or her power under Section 11 of the act, can examine the tenability of a claim - in particular, whether the claim is barred by res judicata and whether the application was misconceived or made in bad faith.
According to the Supreme Court, in order to decide on the issue of res judicata or whether a claim has been made in bad faith, it is necessary to examine the facts and relevant documents. The court held that a decision on res judicata requires consideration of the pleadings, the claims, issues and points and the award in the first round of arbitration in juxtaposition with the pleadings and the claims, issues and points in the second arbitration. It was held that:
- the limited scope of Section 11 of the act does not permit an examination of whether a claim is tenable, either on the facts or in law;
- it is for the arbitral tribunal to examine and decide whether the claim is barred by res judicata; and
- there cannot be a threshold consideration and rejection of a claim on the grounds of res judicata in an application under Section 11 of the act.
The Supreme Court clarified that in a Section 11 application, the chief justice or his or her designate is not expected to consider the merits of the claim or examine its tenability. However, the chief justice or his or her designate may undertake a limited inquiry to determine whether a claim is a dead claim (ie, whether it is evidently time-barred), which involves no detailed consideration of evidence or, alternatively, whether the arbitration agreement has not survived because all rights, obligations and remedies under the contract are exhausted.
The court's distinction between claims barred by res judicata and dead claims is simple. In SBP and Co v Patel Engineering Ltd ((2005) 8 SCC 618) the court gave examples of what would constitute a dead claim and the circumstances in which a court would be capable of determining this in a Section 11 petition. These examples included cases where claims for the appointment of an arbitrator were based on an arbitration agreement made 10 or 20 years after the contract had come to an end, or where the appointment of an arbitrator had been sought after the parties had settled the accounts and the party concerned had certified that it had no further claims against the other contracting party. Similarly, in Shree Ram Mills Ltd v Utility Premises (P) Ltd ((2007) 4 SCC 599) the court held that in a Section 11 petition the chief justice need only record his or her satisfaction that, prima facie, the issue has not become dead by the lapse of time, and that no party to the agreement has abandoned its rights to query the issues covered by the agreement. Thus, in effect, all that the chief justice or his or her designate must do is record his or her satisfaction that the parties have not abandoned their rights and the matter is not barred by limitation.
The Indian Oil decision reiterates a legal principle which discourages the filing of merit-based substantive legal claims that are raised by parties at the threshold stage of a Section 11 petition, when such claims properly fall within the domain of the arbitral tribunal and not the chief justice or his or her designate.
For further information on this topic please contact Sanjeev Kapoor at Khaitan & Co by telephone (+91 11 4151 5454), fax (+91 11 4151 5318) or email ([email protected]).