This article is written by Arundhati Pawar and further updated by Jyotika Saroha, The author, in this article, has discussed the concept of jurisdiction and its scope under Section 16 of the Arbitration Act. The article also discusses the applicability of Section 16 and its essential features, further, it talks about the fundamental doctrine of which found its inception under Section 16 of the Act. It also deals with the criticism and some important judgments related to Section 16 of the Arbitration and Conciliation Act, 1996.

Introduction 

Arbitration is a private practice of resolving disputes arising out of contractual agreements whereby the parties mutually decide to have their disputes resolved by one or more private individuals, i.e., the arbitrators, rather than by a court of law. It is a process where parties resolve disputes without approaching the formal course of the judiciary, i.e., the court. 

The present article deals with Section 16 of the Arbitration and Conciliation Act, 1996 and particularly talks about the competency of an arbitral tribunal to rule on its jurisdiction. 

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Section 16 of Arbitration Act : meaning, scope and application

Meaning of Section 16 of Arbitration Act

Section 16 of the Arbitration and Conciliation Act, 1996 originated from Article 16 of Chapter IV of UNCITRAL Model Law on International Commercial Arbitration (1985). Section 16 of the Act deals with the competence of an arbitral tribunal to decide upon its jurisdiction. It gives power to the arbitral tribunal to decide on the issue of jurisdiction in the dispute. 

Section 16 of the Arbitration and Conciliation Act, 1996, emphasises the competence of the arbitral tribunal to rule on its jurisdiction. It entitles the parties to raise jurisdictional questions. The provisions of Section 16 have been established in the UNCITRAL Model Law. Section 16 gives statutory recognition to the doctrine of “Kompetenz-Kompetenz.”

The purpose of adding this particular provision to the Act was to save the time and money of the parties to the dispute and also with regard to the time period of raising such an issue of jurisdiction of an arbitral tribunal. Jurisdiction refers to the power or authority of a person to decide upon particular issues pertaining to a dispute. It makes sure that there is no interference of the judiciary in the minimal matters of arbitration proceedings.

Scope of Section 16 of Arbitration Act

Section 16 specifies that the Arbitral Tribunal has the power to decide whether it has the locus to adjudicate the dispute or not. This provision is read along with Section 5 of the Arbitration and Conciliation Act, 1996. It envisages that civil courts have no power to intervene except where it is specifically stated. The arbitrators are entitled to make a conclusive ruling that defines their jurisdiction.

Before the 2015 Amendment Act, the Constitutional Bench of the Supreme Court held in Arcelor Mittal Nippon Steel India Ltd. v. Essar Bulk Terminal Ltd. (2021) that the jurisdiction issues should be decided at the commencement of the arbitration proceeding. It has to be decided under Section 11. This decision was subsequently reversed, and the principle was subsequently maintained in M/s Uttarakhand Purv Sainik Kalyan Nigam Ltd. v. Northern Coal Field Ltd. (2018). It said that the issue of limitation is a jurisdictional issue, which would be required to be decided by the arbitrator under Section 16, and not the High Court at the preference stage under Section 11 of the Act. Once the arbitration agreement is undisputedly accepted by both parties, all issues, including the question of jurisdiction are to be decided by the arbitrator.

Application of Section 16 of Arbitration Act

It is necessary to delve into the depth of Section 16 to understand the competence of the arbitral tribunal to rule on its jurisdiction. 

Section 16(1) states that the arbitral tribunal may decide on its own jurisdiction which includes the ruling on any issues or objections that pertain to the actuality or reasonableness of the arbitration agreement and for the said purpose:

  1. If, in any contract, there exists an arbitration clause, then that clause shall be treated as an arbitration agreement in itself. 
  2. If the tribunal declares that the contract is frustrated i.e., null and void then also the arbitration clause will be valid and reasonable. 

In the case of Shree Subhlaxmi Fabrics Pvt. Ltd. v. Chand mal Baradia (2005), the Hon’ble Supreme Court stated that, if any question arises regarding the invalidity of the arbitration agreement, then the proper forum to decide upon such a question is the arbitral tribunal.

Section 8 of the Act also mandates the courts to refer the matter to arbitration, and there should be a proper arbitration agreement between the parties which is not invalid. Whereas a combined reading of Section 16(1)(a) and 16(1)(b) determined that the proper authority or forum to decide upon whether there exists an arbitration agreement or not and whether the matter should be referred to arbitration or not should be decided by the arbitral tribunal.

Section 16(2) states that the plea with respect to claiming or arguing of no jurisdiction shall not be raised after the statement of defence has been submitted. However, this does not prevent the party from raising such a plea only because he has participated in the appointment of an arbitrator.

Section 16(3) states that the plea regarding the arbitral tribunal that it is exceeding its authority or working outside its jurisdiction shall be raised as soon as the matter alleged to be beyond the scope of the authority is raised during the course of arbitral proceedings.

Section 16(4) states that the delay in filing pleas under sub-section (2) and (3) shall be condoned if the delay is justified.

Section 16(5) states that, if the arbitral tribunal rejects the plea filed under sub-section (2) and (3), then the arbitral tribunal will continue with the course of proceedings and shall pronounce the arbitral award.

Lastly, Section 16(6) talks about the remedy available to the aggrieved party who can make an application under Section 34 of the Act against such arbitral award in order to set aside such award.

The Doctrine of Kompetenz-Kompetenz

The term “Kompetenz-Kompetenz” is derived from Germany which normally refers to “competence-competence”. The term signifies that an arbitral tribunal has the power to decide or rule on its own jurisdiction. Gary Born, a popular lawyer, stated that the principle of “Kompetenz-Kompetenz” forms a substratum and is a necessary factor in the arbitration proceedings, it aims to make the procedure of arbitration a bit more different and effective in the resolution of dispute”.

Features of the doctrine

The doctrine empowers an adjudicating body to make decisions on the issues submitted before it in its own jurisdiction. There are three major facets of this doctrine which are as follows:

  1. Firstly, the arbitral tribunal has the power to rule upon its own jurisdiction. 
  2. Secondly, the issues regarding jurisdiction shall be dealt with by the tribunal first and then by the Court. 
  3. Thirdly, there shall be no interference of Courts and it should be limited to decide merely on the existence of the arbitration agreement. 

The doctrine of “Kompetenz-Kompetenz” found its place under Section 16 of the Arbitration and Conciliation Act, 1996. Section 16(1) states that the arbitral tribunal has the power and authority to rule on its own jurisdiction. This includes any issues or objections raised about the existence or validity of the arbitration agreement.

Section 16 recognizes two basic principles that are mentioned below:

  1. It deals with the arbitration clause, which is a specific provision that specifies the idea of arbitration for settling the dispute as mentioned in the contract.
  2. Another basic principle is that, if the entire contract is null and void as determined by the arbitral tribunal, it does not mean that the arbitration clause is also invalid. These issues are to be addressed separately by the tribunal.

Section 11 of the Arbitration and Conciliation Act, 1996 deals with the power of the Supreme Court and High Courts to appoint an arbitrator in situations where the parties are unable to decide upon the appointment of an arbitrator. But, after the amendment made in the year 2015, which inserted section 11(6A) in the Arbitration and Conciliation Act, 1996, it restricts the power of courts merely to look upon whether the agreement exists or not or whether it is valid or not. If in case the agreement exists, then the arbitral tribunal has to be constituted and it will adjudicate upon the matter.

Limitations

It can be stated that the doctrine is of utmost importance for the arbitral tribunals as it makes them free to rule on their own jurisdiction. It also helps the arbitration process to work smoothly. 

The main aim of this doctrine is minimal judicial interference at the time of preliminary objections raised by the parties. This position was determined in the case of Uttrakhand Purv Sainik Kalyan Nigam v. Northern Coal Field Ltd. (2020) wherein the question came up before the Supreme Court whether as per Section 11 of the Arbitration and Conciliation Act, 1996 the Court can consider the issue of limitation at pre-reference stage. The Supreme Court by looking into the recommendations made by the Law Commission in its 246th report stated that the amendments were made regarding the limited judicial intervention and this intervention was expected only at the time of deciding on the existence of an arbitration agreement. It was stated that as per the requirements of new amended provisions in Section 8 and Section 11 of the said Act, the judicial authority will abstain itself from referring the parties to arbitration only if it is found that there is no valid arbitration agreement. On the other side, if it finds that there exists a valid arbitration agreement between the parties then it will refer the parties to arbitration. In the same case, while looking into the point of limitation, the Supreme Court stated that this was a mix question of facts, law and jurisdiction. Further, the Supreme Court placed reliance on the case of National Thermal Power Corporation Ltd. v. Siemens Atkiengesellschaft (2007) and submitted that the question of limitation would be dealt with by the arbitral tribunal under Section 16 of the Arbitration and Conciliation Act, 1996.

Negative effect of the doctrine

The doctrine provides power to the arbitrators to rule upon their jurisdiction but does not allow the Court to consider the question regarding jurisdiction at any later stage but only at a preliminary stage. The negative effect here states that the Court will not review the jurisdictional issues of arbitrators and refer such questions to the tribunal.

In P. Anand Gajapathi Raju v. PVG Raju (2000), it was held by the Supreme Court that as per Section 8(1) of the Arbitration and Conciliation Act, 1996 once the Court comes to its conclusion regarding the existence of an arbitration agreement then the parties should be directly referred for arbitration and it is compulsory for the Court to refer the parties to arbitration. Whereas in, S.B.P. & Co. v. Patel Engineering Ltd. & Anr. (2005) the Supreme Court expanded its scope as per Section 11 of the Act. The Supreme Court in the present case appointed an arbitrator and also decided on the existence and validity of an arbitration agreement. In the present case, the Supreme Court went against the principle as it expanded its scope and acted outside its purview.

Whereas, in the case of Booz Allen and Hamilton Inc. v. SBI Home Finance Ltd. & Ors. (2011)  the Supreme Court Court reversed its earlier verdict in S.B.P. & Co. v. Patel Engineering Ltd. & Anr (2005) and held that the Court cannot decide upon the dispute in which arbitration is involved and that needs to be done by the tribunal itself. 

Essential features of Section 16 of Arbitration Act 

In the case of M/s Indian Farmers Fertilizer Co-operative Ltd. v. M/s Bhadra Products (2018), the jurisdiction has been interpreted in a new light and features have been laid down to decide competent jurisdiction. Until these conditions are satisfied, the tribunal has no jurisdiction to adjudicate the matter.

Where there exists a valid arbitration agreement 

Section 16 of the Arbitration and Conciliation Act enables the arbitrator to decide about the existence of an arbitration clause. In Pradeep V. Naik v. Sulakshana A. Naik (2005), it was held that the issue about the existence of an arbitration agreement can only be decided by an arbitrator under Section 16 of the Act and not under Section 11 unless parties lead evidence. The arbitration clause is an independent part of the contract and has to be treated as an individual agreement. The whole contract, if deemed void, will not invalidate the arbitration clause. The arbitration clause would itself be referred to as a valid arbitration agreement.

Where the arbitral tribunal is properly constituted

An Arbitral Tribunal must be constituted according to the arbitration agreement with the mutual consent of the parties. It may constitute a sole arbitrator or a group of arbitrators. 

Where the subject matter is arbitrable

The subject matter should be arbitrable and should be in accordance with the agreement. Disputes pertaining to criminal cases, matrimonial disputes, tenancy disputes, and insolvency disputes are not arbitrable. It should not be barred by law or public policy.

Objection to the jurisdiction of Section 16 of Arbitration Act

Section 16(2) states that any objections about jurisdiction have to be raised before filing a statement of defence. The objective of this provision is to avoid wastage of time and acknowledge jurisdictional issues at the commencement stage of the proceeding. These limitations are subject to the power given to the arbitrator, which provides that the tribunal may, in either of the cases, admit a later plea if it considers the delay justified.

If the tribunal allows the objection raised by the parties, in such a scenario, an appeal can be made under Section 37 of the Arbitration and Conciliation Act, 1996. If the Tribunal rejects the objection raised by the parties, the Arbitral Tribunal continues its proceedings, and the party can set aside the award under Section 34 of the Act. 

When to consider the objection

Section 16(2) of the Act states that the plea regarding whether the arbitral tribunal has jurisdiction or not shall be raised before the submission of a statement of defence which implies that any kind of issue related to the jurisdiction of the arbitral tribunal should be raised at a preliminary or initial stage so that an appeal can be made under Section 37 of the Arbitration and Conciliation Act, 1996. There is a catena of judgments in which it has been ruled that the objection regarding the jurisdiction should be raised during the preliminary stage.

In some cases, it was opined that the jurisdictional issues shall be raised as a preliminary ground whereas in other judgments it was held that it is not necessary to raise a jurisdictional issue on a preliminary stage and the same can also be raised at the time of pronouncing the final award.

In Mcdermott International Inc. v. Burn Standard Co. Ltd. & Ors. (2006), Kvaerner Cementation India Ltd. v. Bajranglal Agarwal & Anr. (2001) and A. Ayyasamy v. A Paramasivam & Ors. (2016), it was stated that It is necessary to determine the issue related to jurisdiction to be raised as a preliminary ground. While in Maharshi Dayanand University & Anr. v. Anand Coop. L/C Society Ltd. & Anr. (2007) the Hon’ble Supreme Court held that it is not obligatory to decide the issue related to jurisdiction as a preliminary ground and the same can be considered or decided at the time of pronouncing the final award. 

An amendment was also made with respect to Section 16 of the Arbitration and Conciliation Act, 1996 which talks about the stages of consideration or when the issue related to jurisdiction shall be considered. The said amendment came into effect with an aim to make the procedure of arbitration cost-effective and less time-consuming. 

The time limit for filing such an objection 

The objections raised regarding the jurisdiction of an arbitral tribunal shall be raised before the submission of a statement of defence and not later than that. Moreover, a party shall not be inhibited from raising such a plea only because he/she has not participated in the appointment of the arbitrators. The arbitral tribunal may accept the plea at its own discretion if it thinks that the delay in filing such a plea is justified and reasonable.

Criticism of Section 16 of Arbitration Act

Lack of appeal under Section 16

There is no provision for an appeal under Section 16. If the tribunal decides it does not have competent jurisdiction, the decision rejecting the plea can be put forward only at the time of final award under Section 37 of the Act. This compels the parties to raise all kinds of objections while appointing the arbitrator, causing an unreasonable delay.

Preliminary issue

The Act does not specify whether the objection raised should be treated as an interim issue or at the final award. Since this position is not settled, the tribunal ends up wasting the time and money of the parties in cases where it does not have jurisdiction. This provision is widely misused by the parties, encouraging them to prolong proceedings, thereby defeating the very purpose of a speedy trial under the Act.

Failure to raise an objection 

arbitration

If the party fails to file an application raising objections to the jurisdiction at the commencement of the proceeding, it is permitted to do so at the final hearing by applying to set aside an arbitral award under Section 34. The timeline for setting aside such an award is 3 months from the date of award and not any further. This provision has been taken from Article 16 of the UNCITRAL Model Law, as adopted by the United Nations Commission. If the objection is accepted, the arbitral tribunal will not proceed further, and the proceeding shall be discontinued according to Section 37 of the Act.

In M/s Lion Engineering Consultants v. State of Madhya Pradesh and Ors (2015), the award was made in favour of the appellant, and the respondent sought to amend its applications three years after their rejection by the Trial Court. It was held that the amendment being “beyond limitation” is not allowed. But there is no restriction on requesting a question of jurisdiction be raised by way of an objection under Section 34 of the Act even if no such objection was raised under Section 16 of the Act.

Case laws

M/s Uttrakhand Purv Sainik Kalyan Nigam Ltd. v. Northern Coal Field Ltd.(2019)

Facts of the case 

In this case, an agreement was made between the petitioner and the respondent and the petitioner has to provide the amount of security by 27th November 2019. Later on, a dispute arose between the petitioner and the respondent i.e., a company with respect to the payment as per the contract and the deduction of the security amount from the bills. The petitioner sent a legal notice to the respondent and asked for the payment with proper interest and also requested the said respondent company to appoint a sole arbitrator to settle their dispute but the petitioner did not receive any reply. The petitioner also suggested an arbitrator by himself but again he has yet to receive a response from the respondent company. The petitioner, in the present case, approached the High Court and prayed before the Court to appoint an arbitrator under Section 11 of the Arbitration and Conciliation Act, 1996. The High Court while considering the petition of the petitioner stated that the claims made by him are barred by limitation and the court cannot appoint an arbitrator for the said case. Lastly, the petitioner went to the Supreme Court by way of a Special Leave Petition under Article 136 of the Indian Constitution.

Issue

The issue before the Hon’ble Supreme Court was whether the High Court erred while rejecting the application filed by the petitioner under Section 11 of the Arbitration and Conciliation Act, 1996 on the ground of bar on limitation.

Judgment

The Hon’ble Supreme Court in this case set aside the judgement of the High Court and relied upon the doctrine enshrined under Section 11 of the Arbitration and Conciliation Act, 1996 and held that the issue regarding the period of limitation shall be decided by the arbitral tribunal and not by the High Court. The High Court has mistaken it by not appointing an arbitrator in the present case. The Supreme Court appointed an arbitrator in the present case and also finalised the seat of arbitration as per the agreement.

S.B.P. & Co. v. Patel Engineering Ltd. & Anr (2005)

Facts of the case

In the present case, the State of Maharashtra handed over the responsibility of civil work of the Koyna Hydroelectric Project to respondent No.1 by way of its Department of Irrigation and, for the said purpose, respondent No. 1 and petitioner entered into a subcontract. Later on, some issues arose between the two parties. Respondent No. 2 was appointed as an arbitrator by the petitioner, whereas respondent No. 1 appointed S.N. Huddar as his arbitrator but he refused as he was directly involved in the said project. Later on, S.L. Jain was appointed as the arbitrator by respondent No. 1. He wrote a letter to respondent No. 2 that he could not act as a sole arbitrator and, as per the conditions of Section 15(2) of the Arbitration and Conciliation Act, 1996, there has to be an appointment of an arbitrator within the period of 30 days. In the said letter, three names of judges were mentioned from the High Court of Bombay who can act as a third arbitrator. Respondent No. 2 rejected the stance and said that there was no need for the appointment of a third judge regard to that respondent No. 2 approached the High Court of Bombay and in respect of that the application filed by him was accepted and the Court appointed a retired judge as a third arbitrator for the said purpose. Being aggrieved, respondent No. 2 approached the Supreme Court by way of filing a petition under Section 11 of the Arbitration and Conciliation Act, 1996.

Issue

Whether the power given to the Chief Justice of India or the Chief Justice of the High Court or to the judge appointed by him to do so for the appointment of arbitrators a judicial power or an administrative power?

Judgment

The Supreme Court in the present case overturned its earlier judgement in the case of Konkan Railway Corporation Ltd. & Anr. v. Rani Construction Pvt. Ltd. (2002) which declared that the power of the Chief Justice to appoint arbitrators is purely administrative in nature which leads to the limited scope of judicial intervention in the procedure of arbitration. 

The Supreme Court in the present case by overturning its above judgement held that the power given under Section 11(6) of the Arbitration and Conciliation Act, 1996 is judicial in nature. The power given under the said section not only gives the power to appoint arbitrators but also to keep a check upon the whole procedure of arbitration on how it is being conducted. After the present judgement, it allows judicial intervention in the cases of arbitration wherever it is required. 

Bhaven Construction through Authorised Signatory Premjibhai K. Shah v. Executive Engineer Sardar Sarovar Narmada Nigam Ltd. & Anr. (2021)

Facts of the case

In the present case, the respondent, who is the Executive Engineer of Sardar Sarovar Narmada Nigam, made a contract with the appellant of the present case, Bhaven Construction, in order to supply bricks. There was an arbitration clause in the said contract. Later on, some dispute arose between the two parties and the appellant sent a notice seeking the appointment of a sole arbitrator for settling the said dispute. The respondent in reply filed an application and challenged the jurisdiction of the sole arbitrator in the present dispute under Section 16 of the Arbitration and Conciliation Act, 1996. The sole arbitrator rejected the application filed by the respondent. Subsequently, the respondent approached the Gujarat High Court by filing a special civil application under Articles 226 and 227 of the Indian Constitution, but the bench led by a single judge dismissed that application too. Later on, the respondent preferred a Letters Patent appeal before the Division Bench of the High Court which was allowed and the Division Bench of the High Court set aside the appointment of a sole arbitrator. Aggrieved by the order of Division Bench of High Court of Gujarat the appellant approached the Supreme Court by filing the Special Leave Petition.

Issue

Whether the process of arbitration can be interrupted by Articles 226 and 227 of the Indian Constitution and in what situations?

Judgment

The Supreme Court while setting aside the order of the High Court passed by the Division Bench of the High Court of Gujarat stated that the High Court should not have used its power at this stage of arbitration. The High Court in the present case erred in using its inherent powers provided in Articles 226 and 227 of the Indian Constitution. 

Conclusion 

The arbitration law in India with respect to jurisdiction does not have a settled position. Various judgments referred to above have put forward inconsistent conclusions. The jurisdictional issues raised have shortcomings that need a solidified position in order to prevent misuse of this provision for slowing down the proceeding. The Arbitration and Conciliation Act has introduced the provision of Section 16 to expedite the proceedings of the Tribunal. The power to rule on its own jurisdiction is stipulated to help the Arbitral Tribunal self-sustain with minimal judicial intervention. The liberal approach taken by the courts hampers speedy remedy, thereby defeating the legislative intent behind this Section. Therefore, Section 16 should be modified to prevent its abuse.

Frequently Asked Questions (FAQs) 

Whether the tribunal should rule on an objection under Section 16 as a preliminary issue?

The Delhi High Court in Cadre Estate Pvt. Ltd. v. Salochna Goyal and Ors. (2010) has held that any kind of objection about jurisdiction should be raised before the filing of a Statement of Defense. The Act does not bar or prevent the party from raising such a plea at a later date if the Arbitral Tribunal is justified about the reasonable delay.

The Tribunal may reject the application under Section 16 and may further continue with the Arbitration proceedings. The party objecting to the decision of the Tribunal can object to setting aside the arbitral award under Section 34. The Act does not provide a separate provision for appeal against Section 16. 

In Maharshi Dayanand University and Ors. v. Anand Coop. L/C Society Ltd. and Ors. (2007), it was held that the court is at its discretion to decide whether to decide the jurisdictional question at the beginning of the proceeding or at the time of the final award. It is expressly opined by the court that there is no compulsion on the court/Tribunal to decide the jurisdictional issue at the early stage and it can be decided at the time of the final award.

In Shri Pankaj Arora v. AVV Hospitality LLP & Ors. (2020), an objection was raised under Section 16 that the arbitrator did not possess the requisite jurisdiction to adjudicate on the counter-claims. The objection was disposed of and was to be decided at the stage of the final argument. It was held that, though the decision on an application under section could be deferred until after the recording of evidence, the issue has to be decided “before making the final arbitral award,” not in the final award itself.

In M/s MSP Infrastructure Ltd. v. M.P. Road Development Corporation Ltd. (2014) it was held that the question of jurisdiction can be raised either under Section 16 or at the stage of the final award. The Supreme Court overruled the MSP Infrastructure judgement and held that there is no restriction to raising an objection under Section 34 of the Act. The objection can be raised at the first instance or the finality of the award.

In the case of Cadre Estate Pvt. Ltd. v. Sulochna Goyal and Ors. (2010) and Maharshi  Dayanand University and Ors. v. Anand Coop L/C Society Ltd. and Ors. (2007), the Court upheld that the arbitrator has to decide jurisdiction as a preceding issue, while, in Pankaj Arora v. AVV Hospitality LLP & Ors. (2020), it stipulates that there is no such mandate to decide the jurisdiction at the commencement of the proceeding.

Whether the decision of the Tribunal under Section 16 constitutes an order or an award?

The Arbitration Act does not clarify this position of the law. The Delhi High Court has discussed this issue in the case of Union of India & Anr. v. M/s. East Coast Boat Builders (1998), where it was held that the order under Section 16 would change its nature in two different situations if the order rejects the prayer of no jurisdiction, it becomes an interim award; if the arbitral tribunal allows the plea of no jurisdiction, it is not an interim award and only appealable. Therefore, it can easily be interpreted that in either case, it is only a preliminary order and not an interim award.

The intention appears to be that in such a case, the arbitral tribunal shall continue with the arbitral proceedings and make an award without delay and without being interfered with in the arbitral process at that stage by any court in their supervisory role.

What is the Kompetenz-Kompetenz principle?

The principle of Kompetenz-Kompetenz found its basis under Section 16 of the Arbitration and Conciliation Act, 1996. It is a German term which means competence-competence, it is considered as a bedrock or an essential doctrine in the field of arbitration. It refers to the power or authority of an arbitral tribunal to rule on its own jurisdiction. It basically derives the capability of the tribunal to decide the jurisdiction on its own and settle the dispute accordingly.

References

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