Report No. 176
2.5 Jurisdictional issues arising before the arbitrators under Section 16 of the Act in cases where disputes are referred to arbitrators by one party to the dispute or/by both the parties, (without reference to the court).
As stated in Chapter-I the objective the 1996 Act is the same as that of the Model law in enabling the arbitration to move faster keeping intervention by the Court at the minimum. It must, however, be noted that the Model law contains a balance between such an objective and also immediate Court supervision. The Model law recognises the need to have jurisdictional issues finally decided as preliminary issues and with a right of appeal then and there.
It also provides that when the jurisdictional issues are raised before the Court there should be 261 no stay but that it should be left to the arbitrators whether to stay the proceedings or to go on with the arbitration. This procedure does not enable parties to file a frivolous appeals and it will not enable the appellant to unduly delay the disposal of the appeal.
The arbitrators will have sufficient control to see that the appeal process is not used for dilatory purposes. That is how the Model law achieves a balance between speedy disposal of arbitration and prompt supervision and control by the Court.
In the Indian Act, 1996 the difficulties have arisen because undue emphasis has been laid on speedy disposal than even what the Model law intends and no provision is made for decision on preliminary issues which go to the root of the matter resulting in a quick and prompt decision on those issues before the arbitrator as well as in the Appellate Court. Question for consideration is whether the Arbitration Act 1996 should be appropriately amended in regard to Sec.16 (and also in regard to Sec.13) so as to bring it on par with the Model law in all its respects.
In fact almost all countries which have followed the Model law have allowed, in provisions corresponding to Sec.13 and 16, jurisdictional issues to be decided as preliminary issues with an immediate right of appeal and so far as stay is concerned they leave it to the arbitrators either to go on with the arbitration or not, depending upon the manner in which the unsuccessful party is pursuing the appeal.
Under Section 16, arbitrators have been conferred with power to decide their own jurisdiction which includes the power to rule on any objection as to the existence or validity of the arbitration agreement. Such a power was not specifically conferred on the arbitrators under the 1940 Act. Sec.16 of the Indian Act 1996 corresponds to Art.16 of the Model law.
Every country which has adopted the Model law has conferred such powers on the arbitrators. This principle is called the principle of Competence, i.e., competence to decide one's own competence. Section 16 of the Indian Act 1996 reads as follows:
"Section 16: (1) The arbitral tribunal may rule on its own jurisdiction, including ruling on any objections with respect to the existence or validity of the arbitration agreement, and for that purpose,-
(a) An arbitration clause which forms part of a contract shall be treated as an agreement independent of the other terms of the contract; and
(b) a decision by the arbitral tribunal that the contract is null and void shall not entail ipso jure the invalidity of the arbitration clause.
(2)...... ........................ .............
(3)....... ........................ .............
(4)....... ........................ ..............
(5) The arbitral tribunal shall decide on a plea referred to in subsection (2) or subsection (3) and, where the arbitral tribunal takes a decision rejecting the plea, it may, continue with the arbitral proceedings and make an arbitral award.
(6) A party aggrieved by such an arbitral award may make an application for setting aside such an arbitral award in accordance with section 34."
When we come to the Model law, its Art.16 contains only three clauses. Clauses 1 and 2 thereof correspond to clauses 1 to 4 of sec. 16 of the Indian Act of 1996 but the Model law contains a further sub-clause (3) in Article 16 which reads as follows and which is absent in Sec.16 of the Indian Act of 1996. Clause (3) of Article 16 of the Model law reads as follows:
"16(3) The arbitral tribunal may rule on a plea referred to in paragraph (2) of this article either as a preliminary question or in an award on the merits. If the arbitral tribunal rules as a preliminary question that it has jurisdiction, any party may request, within thirty days after having received notice of that ruling, the court specified in article 6 to decide the matter, which decision shall be subject to no appeal; while such a request is pending, the arbitral tribunal may continue the arbitral proceedings and make an award."
As stated earlier, the Indian Act of 1996 does not contain a provision in Section 16 enabling the arbitrators to decide the above issues as preliminary issues as in the Model Law. Further though the sub-clause (6) of Sec16 of the Indian Act enables the aggrieved party to make an application to set aside the final award, which is passed after rejecting the jurisdictional points, no specific provision is made in Sec.34, or Sec.37 of the Act providing an appeal immediately, in case the objection as to the jurisdiction is rejected.
Under Sec.37 (2) (a) of the Act, an appeal is provided to the Court ,only against an Order of the arbitrators accepting the pleas referred in Sec.16(2) or (3) but not where the said pleas are rejected. In Sec.16(5) of the Indian Act 1996, it appears that the word 'shall' governs the word 'decide' as well as the word 'continue' which means that even if an appeal is filed under Sec.16(6), there is no discretion left with the arbitrators not to proceed with the arbitration.
This goes contrary to the corresponding provision in the Model Law in Art.16(3). It is therefore necessary to amend Sec.16(5) by using the words "it may" after the words "rejecting the plea" and before the words "continue with."
In fact Sec.1040 of the German Act 1998 provides in Sub-Clause (3) for a preliminary ruling by the arbitrators and for an appeal to the Court; similarly article 16 (3) of the Zimbabwe Act, 1996, Article 16(5) of the Korean Act 1999, Article 16 (3) of the Irish Act 1998, Article 16(3) of the Canadian Act 1985 and Article 16 of the first schedule to the New Zealand Act 1996 permit the arbitrators to decide the jurisdictional issues as preliminary issues, with a right of appeal to the Court.
The Model law and all these various Acts further provide that pending the decision by the Court, it will be open to the arbitrators either to proceed with the arbitration or not. All the statutes use the word 'may' in this context. That would ensure that frivolous appeals are not filed and also that the appeals are not unnecessarily allowed to be prolonged.
Such a provision will take care to see that there is no undue delay in the arbitration process and that the arbitrators have control over the parties who have filed the appeal so as to ensure that the appellants do not unreasonably prolong the appeals. In this context the following observations by Mr. Aron Broches, Kluwer in the Commentary on UNCITRAL Model Law are useful:
"At the Working Group's fourth session, a resolution was adopted which, on the one hand, permitted immediate recourse to the Court, with the attendant risk that such recourse may be used as a delaying tactic and, on the other hand, permitted (but did not oblige) the arbitral tribunal to continue the arbitral proceedings.
This enables the tribunal either to limit the adverse effects of an unjustified challenge for dilatory purposes by continuing the proceedings, or to suspend the proceedings where it considers that the interest of the parties is best served by getting the challenge question out of the way rather than letting them run the risk of waste of time and money on an award which may ultimately be set aside under article 34."
The U.K. Act of 1996, however, deals with the problem in a different manner. When jurisdictional issues arise before the arbitrators, the parties have the choice to have the matters decided by the arbitrators and allow them to pass the award also and then to file an appeal, or the parties may by mutual consent approach the court for a decision on the question of jurisdiction.
It is also permissible for the parties to approach the court with the permission of the tribunal, i.e., in a situation when all the parties do not agree for such reference. Section 32 of the English Act, 1996, deals with the question of 'Determination of preliminary point of jurisdiction' and says in sub-section (2) as follows:
"Sec.32(2): An application under this section shall not be entertained unless-
a) it is made with the agreement in writing of all the other parties to the proceedings, or
b) it is made with the permission of the tribunal and the court is satisfied-
i) that the determination of the question is likely to produce substantial savings in costs,
ii) that the application was made without delay and
iii) that there is good reason why the matter should be decided by the Court."
It is therefore to be decided whether the Indian Act 1996 is to be amended enabling the arbitrators to decide jurisdiction issues as preliminary issues as in the Model law with an immediate right of appeal and also with a discretion vested in the arbitrators either to proceed with the arbitration or not. Alternatively, it is to be considered whether the provisions of Sec 32 (2) of the U.K. Act of 1996 are to be followed?