The Supreme Court in an appeal arising out of an SLP against the decision of the Rajasthan HC, held that in arbitral proceedings governed by the pre-2015 amendment regime, a determination made at the Section 11 stage of the Arbitration and Conciliation Act, 1996 (“The Act”), regarding the existence and validity of an arbitration clause attains finality and operates as res judicata, thereby precluding the same issue from being re-agitated before the arbitral tribunal or in subsequent challenges.
The Division Bench of Justice K.V. Vishwanathan and Justice J.B. Pardiwala observed that the controversy in the appeals centred on the interpretation of Clause 23 of the contract agreement and whether a dispute concerning the existence and validity of the arbitration clause could have been raised before the arbitrator. The Court noted that the Arbitration and Conciliation (Amendment) Act, 2015 did not apply to the arbitral proceedings in question, and therefore, the legal position governing the matter ought to be determined under the pre-amendment framework.
The dispute arose from a construction contract awarded by the Rajasthan Housing Board to the Appellant for the development of residential units in Jaipur under a lump-sum agreement. The appellant claimed to have completed the work within the stipulated period and alleged non-payment of certain dues, which led to arbitral proceedings between the parties. For the settlement of the dispute, a Section 11 petition for the appointment of an arbitrator was filed before the Rajasthan High Court. Subsequently, the arbitrator was appointed vide order dated 23.05.2014, and the arbitral proceedings began, with no contestation or challenge by the Respondents over the said appointment. Thereafter, the award was decided in the Appellant’s favour.
Aggrieved by the said award, the Respondents approached the High Court with a Section 34 application, with a challenge pivoted on the point that Clause 23 of the agreement did not possess the character of an arbitration clause. The High Court accepted the submissions of the Respondents and set aside the said award, holding that the order appointing the arbitrator did not have a precedential value and also that the arbitrator erred in not adjudicating on the point of existence of the said arbitration agreement. This decision of the High Court was upheld in the Section 37 appeal. Thus, the Appellant, aggrieved by the said decisions of the High Court, approached the Supreme Court.
The Supreme Court emphasised that since the proceedings were governed by the pre-2015 legal regime, the law declared in SBP & Co. v. Patel Engineering Ltd. & Anr. (2005) 8 SCC 618, would apply. As per SBP& Co., the Supreme Court laid down that the Section 11 court performs a judicial function, and its determination on the existence and validity of the arbitration agreement shall be binding on the parties and the arbitral tribunal.
The Court noted that the High Court had relied on certain precedents to hold that Clause 23 did not constitute an arbitration clause and, on that basis, concluded that the Section 11 determination was erroneous. Distinguishing those authorities, the Court held that the High Court’s reliance was misplaced. Referring to State of Rajasthan v. Nemi Chand Mahela & Ors. (2019) 14 SCC 179, the Court reiterated that the correctness or otherwise of a determination made at the Section 11 stage is immaterial, and that once an adjudication has been made and the Respondents failed to challenge the appointment at the relevant stage, the determination attains binding finality.
Accordingly, the Court held that once an arbitrator was appointed following such judicial determination, the parties were barred from re-agitating the same issue in arbitral proceedings or in challenges under Sections 34 or 37 of the Act. The Court held that permitting such reconsideration would defeat the finality attached to a Section 11 decision under the pre-amendment scheme. It further opined that had the dispute arisen in the post-2015 amendment framework, the scope of scrutiny at Section 11 would have been confined to the mere existence of an arbitration agreement, which, in the facts of the present case, would have allowed the challenge to the award to be a successful one.
In light of the facts and legal position before the 2015 Amendment of the Arbitration Act, the Division Bench, while allowing the appeal, set aside the impugned decisions of the High Court.
Appearances:
For Appellant(s): Mr. Akshat Gupta, Adv., Mr. Lakhan Lal Gupta, Adv., Mr. Pranav Jain, Adv., Mr. Prakhar Saunakiya, Adv., Ms. Yoothica Pallavi, AOR
For Respondent(s): Mr. K. L. Janjani, AOR, Mr. Kailash J. Kashyap, Adv., Mr. Pankaj Kumar Singh, Adv., Ms. Archla, Adv.
