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Introduction

Arbitration, one of the globally prominent techniques of Alternate Dispute Resolution (ADR), was first established in India by the Arbitration Act of 1940. Later, after considering foreign models such as the UNCITRAL Model Law on foreign Commercial Arbitration, India’s arbitration system was standardised and institutionalised by the Arbitration and Conciliation Act of 1996.[1] The Act has been amended multiple times throughout the years. Arbitration was gaining prominence as a dispute settlement procedure in India at the time the Act was implemented. With the Court overburdened with Disputes, the Act drew parties to this alternative to traditional and a time-consuming litigation. The speed at which a dispute is resolved through an Arbitration setting is significantly greater that what a litigation would generally take. The importance given to confidentiality and the relative cost of arbitration compared with litigation is considered to be a strong reason for preferring arbitration among the major corporates in India.[2]

Section 16(1) of the Arbitration and Conciliation Act of 1996 was drafted in conformity with Article 16(2) of the UNCITRAL Model Law, that contains the fundamental jurisprudential concept known as “Kompetenze – Kompetenze”.[3] This idea allows the court or arbitral tribunal to decide on its ‘own’ jurisdiction, as proposed by any of the parties in an arbitration setting. Section 16 (1)(3) of the Arbitration Act specifies that “an arbitral tribunal may rule on its own jurisdiction”. The question pertaining to mere existence or the legality of the arbitration agreement is covered in this scope.[4]

The Case of Indian Farmers Fertilizers Cooperative Limited v. Bhadra Products[5] was a case where the Supreme Court of India interpreted the object of incorporating Section 16 of the Act. To understand the issues framed in this case, it is pertinent to know what the Section 34 of the Arbitration Act says. The Section 34 of the Arbitration Act provides for provision for setting aside an arbitral by a court.[6] The issues formed in the Indian Farmers Fertilizers Cooperative Limited case were regarding firstly, “whether an award on the issue of limitation can be said to be an interim award and can be set aside under Section 34 of the Act” and secondly, “whether a decision on a point of limitation would go to jurisdiction and therefore be covered by Section 16 of the Act.” The Supreme Court while addressing the second issue in this case reiterated the fact the Section 16(1) and Section 16(2) of the Act are an imitation of the UNCITRAL Model law and the “Kompetenze – Kompetenze” doctrine deals with the arbitral tribunal’s jurisdiction in the restricted sense of determining on objections, and it is construed that the purpose of Section 16(1) of the Act is to allow the tribunal to rule on its own jurisdiction.

The facets of ‘Minimal Judicial Interference’

As envisaged in Article 5 of the UNCITRAL model law, the Section 5 of the Arbitration Act[7] uses the expression “in matters governed in this part”. The landmark case where the Supreme Court decided that Unstamped Arbitration Agreements are enforceable, the Supreme Court held that by using this expression the drafters aim to curtails judicial intervention to the matters as prescribed by the Part I of the Arbitration Act.[8] However, Section 5 can be viewed from a positive, as well as a negative perspective. The positive leg of the provision empowers the judiciary with appropriate jurisdiction over arbitration matters approved under the Part I of the Arbitration and Conciliation Act. The tougher side of this approach is that judicial authorities must abstain from intervening in arbitral proceedings in cases where the arbitral panel has been granted with exclusive jurisdiction. It was decided by the Supreme Court in Secur Industries Ltd v. Godrej & Boyce Mfg. Co. Ltd that the non-obstante clause under the Arbitration Act restricts the judiciary to interfere in the cases expressly mentioned in the Arbitration Act.[9]  Furthermore, in Bhaven Construction v. Sardar Sarovar Narmada Nigam Ltd, a three judge bench of the Supreme Court had the “non-obstante clause is provided to uphold the intention of the legislature as provided in the Preamble to adopt UNCITRAL Model Law and Rules, to reduce excessive judicial interference which is not contemplated under the Arbitration Act”.[10]

As was previously mentioned, the arbitral tribunal is empowered by Section 16 of the Arbitration Act to resolve matters pertaining to its own jurisdiction, such as challenges to the validity or existence of the arbitration agreement. Through the concept of minimal judicial intervention, Section 16 prohibits judicial authorities from intervening in subjects related to the arbitral tribunal’s authority. Through Sections 16(5)[11] and 16(6)[12] of the Arbitration Act, the Parliament has tied the jurisdiction of courts to interfere during the arbitrations. This means that the courts can intervene only after the final award has been passed by the arbitral tribunal. Thus, Section 16 is intended to fully implement both the procedural and substantive parts of the competence-competence doctrine. Moreover, a two-judge bench of the Supreme Court in the case of Uttarakhand Purv Sainik Kalyan Nigam Ltd v. Northern Coal Field has held that “Section 16 of the Arbitration Act is an inclusive provision of very wide ambit” by stating that the issue of limitation is also to be decided by the Arbitrator by exercising their powers under the Section 16 of the Act. It was stated in the judgement that “Once the existence of the arbitration agreement is not disputed, all issues, including jurisdictional objections are to be decided by the arbitrator.”[13]

‘Jurisdiction’ of the Arbitral Tribunal: Judicial Development

Jurisdiction is normally the authority of a court or any tribunal to entertain, decide a case and to adjudicate or to exercise any judicial functions pertaining to such a case. The idea that an Arbitral Tribunal, as an entity created by a contract, must operate within the parameters of the contract that established it, has been repeatedly affirmed by the Courts. The same was again reiterated by the Supreme Court in Indian Oil Corporation. Ltd. v. Shree Ganesh Petroleum.[14] It is always the arbitration agreement that mainly determined the jurisdiction considering the requirements of both the parties. The clause of an agreement that prescribes arbitration as a mode of dispute resolution. Another development with respect to Jurisdictional Challenges in Arbitration took place when the Supreme Court of India in its verdict in the case of M/s Lion Engineering Consultants v. State of MP & Ors. said that if a party fails to raise a jurisdictional challenge before an arbitral tribunal through Section 16 of the Arbitration Act, then the party shall be permitted to raise such a challenge when they attempt to set aside the arbitral proceedings under Section 34 of the Arbitration Act.[15]

A matter can be referred to arbitration by a judicial authority as per Section 8 of the Arbitration Act.[16] The same was affirmed in Haryana Telecom v. Sterlite Industries where the Supreme Court had held that what can be referred to the arbitrator is only that dispute or matter which the arbitrator is competent or empowered to decide.[17] Furthermore, competence or the jurisdiction of the arbitral tribunal is an implicit ground for entering into an arbitration agreement between any parties as discussed by the Supreme Court in Booz-Allen & Hamilton Inc v. SBI Home Finance Ltd & Ors.[18]

The Section 16 deadlock

Whenever a party files an application under the Section 16(2)[19] and 16(3)[20] of the Arbitration Act, it is done so to challenge the jurisdiction of the arbitral tribunal and questioning its competence to decide the said dispute. The reasons for the same can be multi-fold, ranging from the arbitration agreement, parties, effectiveness of arbitration agreement form of the arbitration agreement, subject matter and the scope of issue and powers of the arbitrators. Such jurisdictional challenges are mentioned in the Article 2 of the International Arbitration Practice Guideline on Jurisdictional Challenges.[21] The arbitral tribunal then has the authority to decide upon such an application filed by the contesting party by allowing such an application or dismissing such an application under Section 16(5)[22] of the Arbitration Act. If the arbitral tribunal allows such an application by holding that the matter is ‘non-arbitrable’ then a party has a remedy to challenge the order.

However, when the Arbitral Tribunal decides to dismiss a section 16 application which claims that the tribunal itself cannot exercise its jurisdiction, then such an order cannot be appealed and the aggrieved party has to wait for the final order to be passed and challenge the same in a court under Section 34 of the Arbitration Act, but when the Arbitral Tribunal allows such an application and rules that the “jurisdiction is missing”, then under Section 37(2)[23] of the Arbitration Act an aggrieved party has the power to appeal. The Delhi High Court in Nav Sansad Vihar Coop. Group Housing Society Ltd. (Regd.) v. Ram Sharma and Associates upheld the fact that when an arbitral tribunal dismisses a section 16 application the whole arbitration shall take place along with the being declared and the aggrieved party has to meanwhile wait for the award to be passed since no remedy is available. [24]

In Union of India v. M/s. East Coast Boat Builders & Engineers Ltd., the Hon’ble Delhi High Court stated that the design of the act made it apparent that the legislature did not provide an appeal against a decision under Section 16(5) if an arbitral tribunal concludes that it lacks jurisdiction. Because the court is supervising the arbitral process, it is apparent that the goal is for the arbitral tribunal to carry out the arbitral proceedings and issue an award without any delay or interference.[25]

Furthermore, in the case of Pharmaceutical Products of India Ltd. vs. Tata Finance Ltd. as well, the Bombay High Court stated that if the Arbitral Tribunal rejects a jurisdictional plea, Section16(5) of the Arbitration Act evidently empowers the Tribunal to continue with the arbitral proceedings and declare an award. Furthermore, Section 16(5) provides a method for challenging an arbitral award. It specifies that such an award may only be appealed under Section 34.[26] The Supreme Court in SBP & Co. v. Patel Engineering Ltd.[27]also dealt with the aspect of filing petitions under Articles 226 and 227 of the Constitution to challenge an order dismissing a Section 16 Application.

Supreme Court and the Judicial Softening of the Section 16 Appeals

Until 2019, an order passed by an arbitral tribunal dismissing a Section 16 application preferred by either of the parties could not have been challenged at any court in India. The party aggrieved by such a dismissal was left with no remedy and had to wait for the arbitrator to pass the final award and then challenge the same on the grounds of dismissal at a court of law. This was the scenario until 2019 when a Three Judge Bench of the Supreme Court in a judgement authored by Justice R.F Nariman  in the case of M/S Deep Industries Ltd. v Oil And Natural Gas Corporation held that it is possible to challenge such a dismissal order through a writ at a High Court under articles 226[28] and 227[29] of the Constitution of India,[30] but the same laid down some stringent terms to challenge a Section 16 dismissal order.

The Judgement laid down a law that allowed an appeal against such an order shall be allowed but there are three conditions or situations per se affixed to it. The first is the patent lack of inherent jurisdiction, second being any depiction of malice or bad faith by either of the parties and the third being a party being left remediless. It is consequently critical to distinguish between jurisdictional claims based on an inherent lack of jurisdiction and those based on bad faith by the parties. Their nature would decide whether a party would be barred from mounting such objections or allowed if “good reasons” justified them. This intermediate strategy may alleviate the current misunderstanding and prevent parties from using dilatory tactics.[31]

Moreover, the Supreme Court in the case of Bhaven Construction through Authorised Signatory Premjibhai K. Shah v. Executive Engineer, Sardar Sarovar Narmada Nigam Ltd. & Another allowed an appeal arising out of an impugned order passed by a Division Bench of the Gujarat High Court where the Supreme Court noted that the High Court erred in utilizing its discretionary power available under Article 226 and 227 of the Constitution herein to set aside a section 16 dismissal order by an Arbitral Tribunal and further narrowed down the fact that a petition under Article 226 or 227 of the Constitution of India can be filed before the appropriate forum challenging the order of the arbitral tribunal dismissing application under Section 16 of the Act, only if the possible conclusion is that there is a ‘patent lack in inherent jurisdiction’ or on the ground of ‘bad faith’ exercised by the other party.[32]

The same stance was reiterated by the High Courts in newer appeals, example being the Delhi High Court in Oriel Financial Solutions Private Ltd v. Bestech Advisors Pvt Ltd where the court said that no writs should be filed against an order rejecting application under section 16 of the Arbitration Act unless ‘it shocks the conscience of the Court’[33] and the Calcutta High Court in M.D. Creations & Others versus Ashok Kumar Gupta where it was stated by the Court that the revisional application filed under the Article 227 of the Constitution to challenge a section 16 order passed by an arbitral tribunal only on ground of the Arbitrator’s patent lack in inherent jurisdiction, or exceptional circumstances, or ‘bad faith’ on part of the other party[34] by reiterating precedents set up by the Supreme Court in Deep Industries and Bhaven Construction.

Conclusion

Section 16, which embodies the principle of “Kompetenze – Kompetenze,” gives arbitral tribunals the right to rule on their own jurisdiction, a key feature derived from the UNCITRAL Model Law. This clause seeks to reduce court intrusion in the arbitration procedure, therefore simplifying and improving its efficiency. However, the practical execution of Section 16 of the Arbitration Act has shown substantial difficulties, notably in terms of the appealability of jurisdictional decisions. The objective of limited judicial involvement, as emphasised by Sections 16(5) and 16(6), as well as Section 5 of the Arbitration Act, seeks to prevent courts from participating in arbitration procedures prematurely. While this improves the efficiency and finality of arbitral rulings, it raises questions about the balance between judicial control and arbitral autonomy.

This deadlock was eased by the Supreme Court through its rulings in Bhaven Construction and Deep Industries Judgements by allowing writ petitions under Articles 226 and 227 of the Constitution to challenge Section 16 dismissal orders, albeit under stringent conditions such as inherent lack of jurisdiction, bad faith or exceptional circumstances, wherein the Court has provided a limited but critical avenue for recourse by not leaving an aggrieved party remediless.