Arbitration In IndiaCommercial Agreements & Contracts In IndiaProcedural Flexibility to decide Jurisdictional Issue under Section 16

HIGH COURT OF DELHI

Pankaj Arora v. AVV Hospitality LLP & ors.

O.M.P. (T) (COMM.) 32/2020 | Date: 20.07.2020

FACTS 

The Respondent Nos. 2 and 3 are the partners in the Respondent firm that runs a restaurant, Firki Bar. Disputes arose between the Parties pursuant a Memorandum of Understanding dated 28 September 2017 according to which Petitioner was to become a partner of the Respondent Firm.

Petitioner involved the arbitration clause under the MoU which provided –

“That all the disputes/differences, of any nature arising between the parties regarding their rights, obligation, the interpretation of these presents, and all matters arising under this agreement, will be resolved through co-operation and consultation. If the said disputes etc. cannot be resolved by co-operation and consultation, the said matter shall be referred to an arbitrator, who shall be appointed with the mutual consent of all the parties to this MOU. The arbitrator under this clause will be an arbitrator under the Arbitration and Conciliation Act, 1996 or any statutory modification or re-enactment thereof.”

An application was filed before the Court for appointment of the arbitrator to resolve the dispute, and thereby a Sole Arbitrator was appointed.

The counter claim filed before the Arbitrator was based on a receipt-cum-agreement allegedly executed between the Parties.

The Petitioner filed an application under Section 16 of the Arbitration and Conciliation Act, 1996 (“the Act”) challenging the jurisdiction of the Sole Arbitrator on the ground that there was no arbitration clause in the receipt-cum-agreement. Thus, the Sole Arbitrator did not have the jurisdiction over the counter claims filed by the Respondent Nos. 2 and 3 as it did not constitute an arbitrable dispute.

The receipt-cum-agreement provided the clause to approach the Court through suit for specific performance.

The application was dismissed by the Sole Arbitrator and kept the issue of jurisdiction to be decided after recording the evidence and at the stage of final arguments.

Thus, the Petition was filed under Sections 14 and 15 of the Act seeking termination of the mandate of the sole arbitrator to adjudicate on the counter claims of the Respondent. Moreover, the Petitioner in his submission laid emphasis on his plea that the Sole Arbitrator be directed to decide the application under Section 16 of the Act.

ISSUE BEFORE THE DELHI HIGH COURT

The following issue were considered by the Delhi High Court:

Whether the Sole Arbitrator need to mandatorily adjudicate on the issue of jurisdiction before the recording the evidence and not defer the issue to the stage of final arguments?

OBSERVATION

The Court firstly observed the averments submitted by the Petitioner to the query that why did he not challenge the order rejecting Section 16 application under Section 34 of the Act. The Petitioners submission was that Section 16 (5) of the Act mandated the arbitrator to allow the application under Section 16 of the Act before recording the evidence and that therefore the Sole Arbitrator was de jure incompetent to adjudicate  on the counter claims of the Respondent.

The Court noted the submissions of the Petitioner that if the Sole Arbitrator is permitted to defer the issue of jurisdiction after recording the evidence, then it would amount to violation of Section 16 (5) of the Act.

The Court disregarded the submissions and noted that the order the Sole Arbitrator is in the nature of an interim order which was amenable to be challenged under Section 34 of the Act.

The Court observed that there was not case made out to direct the Sole Arbitrator to take decision on Section 16 application at that stage, without deferring the issue for decision after recording the evidence.

CONCLUSION 

The Delhi High Court held that without exhausting the provision to challenge the order rejecting Section 16 application available under Section 34 of the Act, the Petitioner’s petitioner for termination of the mandate of the Sole Arbitrator cannot be allowed.

The Court held that; 

“The procedure to be followed, in arbitral proceedings, is essentially the province of the arbitrator, or the arbitral tribunal. Unless the decision, in that regard, falls foul of any mandatory stipulation, contained in the 1996 Act, this Court would be loath to interfere, the autonomy of the arbitral proceedings, and of the arbitrator, being statutorily pre-eminent.”

The Court held that Section 16 (5) of the Act does not puts a mandate on the arbitrator to decide on the issue of jurisdiction or decided on the any claim or counter claim before recording the evidence. The Court held that; 

“No doubt, issues of jurisdiction are, ordinarily, to be addressed at the outset. That, however, is more a rule of prudence than one of inflexible procedure. Legally, so long as the said decision is taken prior to the making of the final arbitral award, in my view, no infraction of Section 16 could be said to have occurred.”

AMLEGALS REMARKS 

The Delhi High herein has elucidated on the procedural flexibility available with the arbitrator to adjudicate on the issue of jurisdiction in the preliminary stages of the arbitration proceedings. Moreover, the arbitrator on its discretion can postpone its decision on the application at the later stage before passing the final award.

The Court herein have interpreted Section 16 (5) of the Act to encompass allowing the arbitrator to decide on rejecting the application challenging the jurisdiction along with the  pronouncement of its decision regarding the dispute in its entirety in the final award itself.   

The decision of the Court is in consonance with its earlier decision in the case of Glencore International AG v. Indian Potash Limited & Ors., 263 (2019) DLT 663, wherein it had held that there is no fundamental mandate for the arbitral tribunal to adjudicate on the issue of jurisdiction at the preliminary stage and before hearing the matter on merits.

Nonetheless, in order to resolve the dispute in a timely manner and minimize judicial interference, it is imperative that arbitral tribunal use the discretion to adjudicate the jurisdictional issue at the preliminary stage itself as there may be ample cases where the entire arbitration proceedings need not be undergone but disposed at the pretext of jurisdictional flaws.

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