Dr.

Ram Manohar Lohiya National Law University

Lucknow

Subject: Project of Alternative Dispute Resolution

Topic: Critical Analysis of Patel Engineering Case

SUBMITTED TO: SUBMITTED BY :

MS. SHAKUNTALA SANGAM BHARAT JOSHI

ASSISTANT PROFESSOR (LAW) B.A.LL.B (Hons.) VI SEM.

Dr. RMLNLU ENROLL. NO. 150101037

 INTRODUCTION

The Arbitration and Conciliation Act of 1996 was the result of recommendations for reform,
particularly in the matter of speeding up the arbitration process and reducing intervention by
the court and reducing litigation in the country. The Parties to an arbitration agreement are
free to agree on the procedure for appointing of arbitrators. The situations suitable for
intervention of the Chief Justice or his designate naming an arbitrator are:
 The procedure agreed is not followed;
 There is no agreement on procedure.
In both situations, the intervention of the Chief Justice or his designate is necessary. Under
the first situation, if a party fails to act under such procedure, or the parties (or the two
arbitrators, one appointed by each party) are unable to reach an agreement expected of them
under such procedure, or a third party (including an institution) fails to perform any function
entrusted to it under such procedure, any part may request the Chief Justice or his designate
to take necessary measure, unless such other measure have been provided in the agreement
for securing such appointment.

Section 11 provides for the procedure of appointment of Arbitrator by the Chief Justice.
Section 11 (7) of the 1996 Act provides that ‘a decision on a matter entrusted by ss. (4) or
ss.(5) or ss.(6) to the Chief Justice or the person or institution by him is final.’ This led to a
number of disputes regarding the nature of the order passed by the Chief Justice on
appointment of Arbitrators and whether the same was judicial or administrative in nature.

Earlier Interpretation: Order is Administrative

Amongst some of the earliest interpretations of the provision of S.11(7) was the case of
Sundaram Finance Ltd v. NEPC India Ltd.1 In this case it was held “Under the 1996 Act
appointment of arbitrator/s is made as per the provision of Section 11 which does not require
the Court to pass a judicial order appointing arbitrator/s.” This decision was reiterated in the
case of Ador Samia Private Ltd v. Peekay Holdings Limited,2 where it was held by the
Hon'ble Supreme Court that “It is now well settled that petition under Article 136 can lie for
challenging a judgment, decree, determination, sentence or order in any cause of matter
passed or made by any court or tribunal in the territory of India. As the learned Chief Justice
or his designate under Section 11(6) of the Act acts in administrative capacity as held by this
Court in the aforesaid decision it is obvious that this order is not passed by any court
exercising any judicial function nor it is a tribunal having trappings of a judicial authority...
In view of this settled legal position therefore, there is no escape from the conclusion that
orders passed by the learned Chief Justice under Section 11(6) of the Act being of an
administrative nature cannot be subjected to any challenge directly under Article 136 of the
Constitution of India.”

1
AIR 1999 SC 565
2
AIR 1999 SC 3246
This view of the Supreme Court in Ador Samia was referred by a two judge bench of the
Supreme Court referred for re-consideration by a larger bench. The decision of the bench of
three judges in Konkan Railway Corporation Ltd & Ors v. Mehul Construction Co.,3 affirmed
the view taken in Ador Samia, namely, that the order of the Chief Justice or his designate in
exercise of the power under section 11 of the Act was an administrative order and that such
an order was not amenable to the Jurisdiction of the Supreme Court under Article 136. The
effect of this judgment was that the decision of the Chief Justice being an administrative
order was now amenable to the Writ Jurisdiction under Article 226 of the Constitution and
hence, as one may say “The High Courts were flooded with Writ Petitions challenging the
appointment of the Arbitrators.”

Thereafter, in Konkan Railway Corporation Ltd Anr v. Rani Construction Pvt. Ltd.,4 a bench
of two learned judges of the Supreme Court referred to a larger bench the decision of the
three judge bench for re-consideration, which was taken up for hearing in the case of by a
bench of five judges in the case Konkan Railway Corporation Ltd Anr v. Rani Construction
Pvt. Ltd. The issue before the Court may be summed up in the following words of the referral
order “It appears that the Chief Justice or his nominee, acting under Section 11 of the
Arbitration and Conciliation Act, 1996, have decided contentious issues arising between the
parties to an alleged arbitration agreement and the question that we are called upon to decide
is whether such an order deciding issues is a judicial or an administrative order?”

The Hon'ble Supreme Court after examining the intricacies involved and after careful
examination of the case laws held that “In conclusion, we hold that the order of the Chief
Justice or his designate under Section 11 nominating an arbitrator us not an adjudicatory
order and the Chief Justice or his designate is not a tribunal. Such an order cannot properly be
made the subject of a petition for special leave to appeal under Article 136. The decision of
the three Judge Bench in Konkan Railway Corporation & Ors v. Mehul Construction Co. is
affirmed.”

Current Position

This decision of the Supreme Court was again challenged in challenged in the case of S.B.P.
& Co v. Patel Engineering & Anr.,5 where the question before the Hon'ble Supreme Court
was the nature of the function of the Chief Justice or his designate under S. 11 of the
Arbitration and Conciliation Act, 1996. The main issues which were examined in this case
are:
 What is the nature of the function of the Chief Justice or his designate under S. 11 (6)
of the Arbitration and Conciliation Act, 1996?
 What is the scope and power of the Chief Justice under S. 11?

3
AIR 2000 SC 2821
4
AIR 2002 SC 778
5
AIR 2006 SC 450
The Hon'ble Supreme Court examined the aforementioned issues in detail and held that the
power exercised by the Chief Justice or his designate under section 11 of the Act is a judicial
power and not an administrative power. The ratio decidendi of the case was :
 The power exercised by the Chief Justice of the High Court or the Chief Justice of
India under S. 11(6) of the Act is not an administrative power. It is a judicial power.
 The power under S. 11(6) of the Act, in its entirety, could be delegated, by the Chief
Justice of the High Court only to another judge of that court and by the Chief Justice
of India to another judge of the Supreme Court.
 The Chief Justice or the designated judge will have the right to decide the preliminary
aspects as indicated in the earlier part of this judgment. These will be, his own
jurisdiction, to entertain the request, the existence of a valid arbitration agreement, the
existence or otherwise of a live claim, the existence of the condition for the exercise
of his power and on the qualifications of the arbitrator or arbitrators. The Chief Justice
or the judge designated would be entitled to seek the opinion of an institution in the
matter of nominating an arbitrator qualified in terms of S. 11(8) of the Act if the need
arises but the order appointing the arbitrator could only be that of the Chief Justice or
the judge designate.
 Once the matter reaches the arbitral tribunal or the sole arbitrator, the High Court
would not interfere with orders passed by the arbitrator or the arbitral tribunal during
the course of the arbitration proceedings and the parties could approach the court only
in terms of Section 37 of the Act or in terms of S. 34 of the Act.
 Since an order passed by the Chief Justice of the High Court or by the designated
judge of that court is a judicial order, an appeal will lie against that order only under
Article 136 of the Constitution of India to the Supreme Court. 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 S. 11(6) of the Act. In a
case where an arbitral tribunal has been constituted by the parties without having
recourse to S. 11(6) of the Act, the arbitral tribunal will have the jurisdiction to decide
all matters as contemplated by S. 16 of the Act.

Therefore, it can be inferred that the Supreme Court has sanctioned further court
interventions in the arbitral process. The Court held that the Chief Justice, while discharging
this function, is entitled to adjudicate on contentious preliminary issues such as the existence
of a valid arbitration agreement. The Court rejected the argument that the Chief Justice limit
himself to a prima facie review of the facts while making this determination and held him
entitled to call for evidence to resolve jurisdictional issues. Significantly, the Court that the
Chief Justice’s findings on these preliminary issues would be final and binding on the arbitral
tribunal. This makes a mockery of the well-established principle of Kompetenz Kompetenz –
the power of an arbitral tribunal to determine its own jurisdiction – enshrined in section 16 of
the 1996 Act. It gives an incentive to the parties to indulge in dilatory tactics since a prima
facie examination of an arbitration agreement can be done at one hearing, as opposed to a
complete judicial adjudication, which may take several months. The jurisprudence in
arbitration worldwide is unanimous in rejecting the right of courts to interfere in the working
of arbitral process. It might also encourage parties to sabotage the appointment process of
arbitrators, make spurious arguments about preliminary issues and use evidentiary hearings in
courts to delay arbitral proceedings.
The other regrettable and even more serious consequence of the decision is that in arriving at
this conclusion the court has strained the legislative language beyond permissible limits. It is
relevant to note that the Parliament has departed from the text of Article 11 of the
UNCITRAL Model Law, which vests the default power to appoint an arbitrator in the ‘court’.
The default power has specifically been vested by the Parliament in the ‘chief justice’ and to
designate ‘any person or institution’. This function was deliberately entrusted to the Chief
Justice to ensure that the appointment is made by a person occupying the highest judicial
office. The fact that the Chief Justice is authorized to delegate his default power to appoint
arbitrators to ‘any person or institution’ clearly indicates that this function is not a judicial
function, because a judicial function cannot be delegated by the Chief Justice to ‘any person
or institution’.

Furthermore, the right to appoint the arbitrator or arbitrators basically is the right of parties. If
the parties fail to agree upon the appointment of an arbitrator or the party nominated
arbitrators fail to appoint the third arbitrator, the right by default passes to the Chief Justice,
who is authorized by the statute to delegate his function to appoint the arbitrator or arbitrators
to ‘any person or institution’. The phrase ‘any person or institution’ is of wide amplitude. It
cannot be tampered with by a judicial fiat. The majority opinion purports to change the
language of the statute by replacing the words “the appointment shall be made…by the Chief
Justice or any person or institution designated by him” with the court coined language “The
power under section 11(6) of the Act, in its entirety, could be delegated, by the Chief Justice
of the High Court only to another judge of that court and by the Chief Justice of India to
another judge of the Supreme Court.” This clearly goes beyond the delicate balance between
the legislative and judiciary, for it is for the legislature to make a law applicable to certain
situations contemplated by it and the judiciary has no power in entering into legislative
wisdom. While interpreting statutory provisions, it is not permissible for the court to replace
the words of the statute with some other words. Rewriting the statute in the court coined
language is tantamount to impermissible judicial legislation.

Moreover, the fact that Indian courts continue to not resist the temptation to intervene in
arbitrations is harmful in two ways.

First, for a legal system which is plagued by endemic delays, a pro-arbitration stance would
reduce the pressure on courts. Recent reports indicate that over 30 million cases are currently
pending resolution in the Indian judiciary. Clearly, Indian courts are struggling to cope with
the huge case-load. Arbitration is not merely an attractive option for resolving disputes – it is
absolutely essential to maintain the integrity of the Indian legal system. Encouraging parties
to arbitrate, however, requires more than mere lip service harping on the merits of arbitration;
it requires that the courts respect party autonomy and refrain from intervening in the arbitral
process unnecessarily. If disputes are going to end up in courts anyway, there is scant
incentive for parties to bother to arbitrate in the first instance.
Second, for a country seeking to attract foreign investment, it is imperative that its legal
system provides efficient and predictable remedies to foreign investors. When commercial
parties enter into transactions, they factor into their bargain the potential legal costs of
enforcing their rights. If a legal system does not hold the promise of speed or certainty, a
certain “risk premium” is added to the cost of the transaction which, if excessive, may make
the transaction commercially unviable. Foreign investors have typically preferred arbitration
and shied away from Indian courts due to prolonged delays in litigation caused by a backlog
of cases. As a result Patel Engineering, arbitration appears to have been reduced to a mere
prelude to protracted litigation in Indian courts, thereby increasing the “risk premium”
associated with Indian transactions. This surely is not good news for the Indian economy.

After the judgment of Supreme Court in the case of S.B.P. Company v. Patel Engineering Ltd
the role of arbitration institution has become almost nil. The Supreme Court may recommend
to the Parliament the need for amending section 11 by a legislative measure. This need is
underscored by the fact that the operation of this decision and its prescribed procedure in
arbitrations in India today not only serves as a hindrance to expeditious proceedings but sends
out the wrong signal to parties keen on seeking alternate methods of dispute resolution. At a
time when the trend worldwide points towards reduction of judicial interference, the SC has
in this case charted the opposite course, an approach not justified in principle as well as
practice. It may, however, be borne in mind that as long as this decision is not over-ruled by a
larger bench or by a legislative amendment clarifying the law, it will prevail and the
procedure prescribed in it has to be followed.

A proposal is made to transfer the power of appointment to the High Court (and Supreme
Court in the case of Section 11(9)) and grants the High Court the discretion to delegate the
power to any person or arbitral institution. Since this amendment would lead to a possible
appeal from a Section 11 order before a Division Bench of the High Court, the Law Ministry
has proposed the insertion of a provision stating that “no appeal including a letter patent
appeal shall lie against such decision”. However, such a provision does not preclude a special
leave petition before the Supreme Court under Article 136 of the Constitution of India since a
mere statutory provision cannot take away a constitutional right.
There is another proposal for automatic delegation of power of appointment to an arbitral
institution in case of a “Commercial Dispute of specified value” (this phrase is defined in the
Commercial Division of High Courts Bill, 2009). It has been suggested to expressly have in
writing arbitration agreement for contract with a consideration of specified value (Rs. 5 crore
or more). This arbitration agreement shall also contain that all disputes (except (here specify
the excepted disputes, if any) arising out of or in connection with the present contract shall be
finally settled under the Rules of Arbitration of approved arbitral institution by one or more
of the arbitrators appointed in accordance with the said Rules. Where the parties fail to
mention the Approved Arbitral Institution, High court will authorize to an Approved Arbitral
Institution to appoint arbitrator within 30 days of the reference made to it by either party for
the appointment of Arbitral Tribunal. Here “Commercial Contract” shall mean every contract
involving exchange of goods or services for money or money’s worth and includes carriage
of goods by road, rail, air, waterways, banking, insurance, transactions in stock exchanges
and similar exchanges, forward markets, supply of energy, communication of information,
postal, telegraphic, fax and Internet services, and the like. For making these changes
provisions in the Arbitration & Conciliation Act, 1996, many provisions of the Act including
Section 7 (which deals with arbitration agreement), Section 8, Section 2(1)(b) have to be
amended.

Conclusion

Therefore, it is concluded that the decision is an incorrect reading of section 11 of the

Arbitration and Conciliation Act, 1996 and amounts to judicial legislation. This ruling
amplifies the need for judicial and legislative clarification on the power of the court to
appoint an arbitrator, so as to fulfill the objectives of the Arbitration and Conciliation Act.
The Indian legislature and judiciary have a fundamental choice to make – to respect party
autonomy and finality of arbitral awards as envisaged by the 1996 Act or impose judicial
supervision on arbitration and revert to the days of the 1940 Act. This choice will shape the
course of Indian arbitration for the future.

REFERENCES
Web Sources:
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21226c148e18/Presentation/PublicationAttachment/9ab9418b-755a-4639-9f75
03a96723d26a/What_Next_for_Indian_Arbitration_Article2.pdf
- http://indiankanoon.org/doc/1641452/
- http://www.legalservicesindia.com/article/article/renovating-the-bridge-1062-1.html
- http://www.criticaltwenties.in/lawthejudiciary/proposed-amendments-to-the-
arbitration-and-conciliation-act-1996
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making.html
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ding+Saga+Of+Judicial+Interpretation