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Report No. 176

2.8.3 Preliminary or jurisdictional issues raised at sec. 11 stage - whether can be decided by an administrative authority.

The question whether, at the stage of Sec. 11, if parties raise preliminary issues - such as

(i) there is no dispute in existence because athe contractor has given in writing that he has no claim, or

(ii) the dispute relates to an excepted matter, or

(iii) only departmental arbitrator should be appointed, or

(iv) there is no arbitration agreement in existence, or

(v) the arbitration agreement is null and void, or not valid or capable of enforcement. Whether they can be decided?

This question is now before the Constitution Bench. We may, however, point out in this connection that under the ICC Rules, 1998, the ICC Court appoints the arbitrators and the decision of the arbitrators appointed by it is to be submitted to the ICC Court for scrutiny. The ICC Court is a private body to which parties frequently resort for international arbitration.

It is not a court of law established under any statute by any State. It is an institution which facilitates arbitration. Under Art. 6 (2), the ICC Court does go into the preliminary issues and if it is held that there is no arbitration or agreement under the ICC Rules of arbitration, it can refuse to appoint arbitrators. We may refer to Articles 6 (2) of the ICC Rules. It reads as follows:

"Art.6(2): If the Respondent does not file an answer as provided by Art. 5, or if any party raises one or more pleas concerning the existence, validity or scope of arbitration agreement, the Court may decide, without prejudice to the admissibility or merits of the plea or pleas, that the arbitration shall proceed if it is prima facie satisfied that an arbitration agreement under the Rules of Arbitration of the ICC may exist.

In such a case, any decision as to the jurisdiction of the Arbitral Tribunal shall be taken by the Arbitral Tribunal itself. If the Court is not so satisfied, the parties shall be notified that the arbitration cannot proceed. In such a case, any party retains the right to ask any Court having jurisdiction whether or not there is a binding arbitration agreement."

Similarly, Redfern and Hunter in their book on arbitration (para 5.34) opined on the same point as follows:

"When any question is raised as to the jurisdiction of the arbitral tribunal a two stage procedure is followed. At the first stage, if one of the parties raises "one or more pleas concerning the existence, validity or scope of the agreement to arbitrate", the ICC's Court must satisfy itself of the prima facie existence of such an agreement (ICC Arb. Rules 6(2).

If it is satisfied that such an agreement exists, the ICC's Court must allow the arbitration to proceed so that, at the second stage, any decision as to the jurisdiction of the Arbitral Tribunal shall be taken by the Arbitral Tribunal itself." Fouchard and others (1994) had also referred the same point in their book (para 854) as follows:

"Midway between those two views, a third interpretation is that in international arbitration, the Court should only verify that the clause is not patently void, as it would be unreasonable to require it to appoint an arbitrator where there is no indication that an arbitration clause exists. The Court should not be seen to automatically appoint arbitrators in cases where the arbitration clearly has no contractual basis and the award has no chance of being recognized in any jurisdiction."

It is, therefore, clear that the ICC Rules and the opinion of jurists support the view that at the stage of Sec. 11, it is permissible to decide preliminary issues. There are considerable advantages if such issues are decided at that stage, in as much as a decision at that stage saves time and expense for the parties. As pointed by Fouchard and others, there is no question of an 'automatic appointment' of arbitrators, whenever an application is made for an appointment of arbitrators.

The appointing authority normally considers if a case is made out for appointment of arbitrators and such a decision can be taken on undisputed facts available at that stage. The Commission proposes here to refer to another important aspect of arbitration in India. It is not as if delays in arbitration in India are only on account of intervention by courts before the stage of the award. In the view of the Commission, in most of the arbitrations in India, wherever there is delay before the award is passed, it is mostly because of delays on the part of the arbitrators and the counsel appearing in arbitrations.

Arbitrations are taking years to be completed even under the new Act. One can understand a complaint of delays due to court intervention after the stage of the award under the old Act of 1940, i.e., because of Sections 16, 30 and 31 of the 1940 Act. Delay in arbitration affecting the cost of arbitration. Another more important aspect is the huge expense in arbitrations. While the Judges who decide cases in courts are paid by the State, the case of arbitrators is different. Parties have to pay fee to arbitrators also. Lawyers' fee is anyway there whether before courts or before arbitrators.

These days fee payable to arbitrators is quite heavy. We have obtained the views of lawyers and arbitrators. But we have to take care of interest of the parties also. Further it needs to be considered what happens if the appointment of arbitrators is to be automatic and if the appointing authority under Section 11 should consider nothing else. The prevalent procedure before the arbitrators today is that at the first hearing, the claimant is directed to file his claim statement and documents in support thereof. At the second hearing, the opposite parties are directed to file their reply and documents.

Then, the claimant files his rejoinder at the third hearing. Normally at each of these stages, there are at least two or three adjournments. Sometimes, applications for interim directions are also filed. Thus, today, the first occasion for considering any question of jurisdiction does not normally arise till at least 6 adjournments have gone by. If the respondent is the State or a public sector undertaking, the number of adjournments are certainly more. Parties pay fees to the arbitrator s for each hearing running into thousands of rupees.

If indeed it is a party's plea that there is no dispute that can be referred to arbitration (because the contractor has given a 'no claims' letter) or if it is the plea that the dispute is 'excepted' from arbitration or if a person says, he is not a party to the arbitration, or that the arbitration agreement is not in existence, these issues can normally be taken up only after at least five or six adjournments have taken place. By that time, quite a large amount of money would become payable towards the arbitration fees or may have been paid.

Therefore, the cost factor is also important for the parties and cannot be left out of consideration. Lastly, if the Government or a public sector undertaking has clear documents to show that there is no dispute in existence or that the dispute relates to an 'excepted item', or if a person says, he is not a party to the arbitration agreement, there is no reason why an expensive procedure of arbitration should be invariably embarked upon.

These aspects were highlighted in Redfern and others and have been referred to in our discussion under Section 8 on a similar issue (para 2.4.1). Therefore, we have to see that these issues are decided without undue delay at sec. 11 stage or sec. 8 stage and the inquiry into these preliminary issues does not lead to delay in appointment of arbitrators. We shall presently go into with these aspects. In fact, arbitrations arise in three categories of cases:

(i) where parties on both sides agree upon the arbitrators or where the party authorized to unilaterally appoint an arbitrator, appoints an arbitrator under sec. 11;

(ii) where parties move the Chief Justice of India or the Chief Justice of High Court under Sec. 11 for appointment because the parties are not able to agree;

(iii) where in a pending suit or other proceeding, under sec. 8 the opposite party relies on an arbitration agreement. In the later two situations, i.e., (ii) and (iii), the application for appointment is, to be made before the Judge and, in the opinion of the Commission, it is advantageous (- as before the "ICC Court"), if those issues are straightaway decided as preliminary issues - provided they can be decided without much delay - so that it could save lot of expense for the parties. This aspect highlighted by Fouchard has been referred to in our discussion under Section 8 on a similar issue.

The Arbitration and Conciliation (Amendment) Bill, 2001 Back

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