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Report No. 176

2.12.1 Section 16 -

Request for a right of appeal in section 37(2) against an interlocutory order of the arbitral tribunal rejecting the pleas under sub-sections (2) and (3) of section 16 - rejected:

Section 16 of the 1996 Act is based on Art.16 of the Model Law but certain aspects of Art.16 of the Model Law have been omitted in the 1996 Act. The debate is on the question of inclusion of those aspects in sec.16 so as to bring the section into conformity with Art.16 of the Model Law. 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) A plea that the arbitral tribunal does not have jurisdiction shall be raised not later than the submission of the statement of defence; however, a party shall not be precluded from raising such a plea merely because that he has appointed, or participated in the appointment of, an arbitrator.

(3) A plea that the arbitral tribunal is exceeding the scope of its authority shall be raised as soon as the matter alleged to be beyond the scope of its authority is raised during the arbitral proceedings.

(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 a plea 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."

The section is in two parts.

2.12.2 The first part relates to the power of the arbitral tribunal to rule on its own jurisdiction, including on any objections with respect to the existence or validity of the arbitration agreement. The second one is that the arbitration clause is to be independent of the main contract and even if the main contract becomes null and void, the arbitration clause survives. The arbitrator under the 1940 Act too enjoyed power to decide upon his own jurisdiction, but under that Act, this power was implied as being recognized by law though there was no specific provision there for.

2.12.3 So far as the second part of section 16 is concerned, it deals with the autonomy of the arbitration clause. The principle was somewhat accepted by the House of Lords in Heyman vs. Darwins 1942 AC 356 but the principle, more or less in terms of sec. 16(1) was accepted by the English Courts in Harbour Assurance Co. (UK) Ltd. vs. Kansa General International Insurance Co. Ltd. 1993 QB 701 as affirmed by the Court of Appeal in A............... Assurance Co. (........) Ltd. vs. K........... Geneal International Assurance Co. Ltd. 1993(3) All E.R. 897.

In the Model law, 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) 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 to the extent relevant to the present discussion :-

"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 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 request is pending, the arbitral tribunal may continue the arbitral proceedings and make an award."

The Indian Act of 1996 does not contain a similar provision. In section 16 enabling the arbitrators to decide the above issues as preliminary issues or for an immediate Court intervention if the plea is rejected, as in the Model Law. 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, though the Model Law provides an immediate remedy even in cases where such pleas are rejected.

2.12.4 Further, 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 to be filed under Sec.16(6), i.e., (in case of rejection of the plea of jurisdiction), there will be no discretion left with the arbitrators to proceed or not to proceed with the arbitration. This, it is said, again goes contrary to the corresponding provision in the Model Law in Art.16(3).

It is, therefore, suggested that it is necessary to further amend Sec.16(5) by using the words "it may" after the words "rejecting the plea" and before the words "continue with" It is, no doubt, true that the need for an immediate appeal was elaborately considered by the UN Commission in its Report on the adoption of the UNCITRAL Model (paras 157 to 163). It stated that the Commission adopted the principle that the competence of the arbitral tribunal to decide its own jurisdiction should be controlled by the Court.

But there were divergent views as to the extent of control and the stage at which control was to be imposed (para 157). One view was that the remedy should be only after the award as this 'would prevent abuse by a party for purposes of delay or obstruction of proceedings' (para 158). The other view was that there should be instant appeal, by requiring leave of the Court initially or to adopt the method in sec.13(3), namely, "short time-period, finality of decision (of court), discretion to continue the arbitral proceedings and to render an award" (para 159).

Yet another view was that, it was necessary to allow parties to instantly resort to the Court in order to obtain certainty on the important question of the arbitral tribunal's jurisdiction" (para 160). The UN Commission, "after deliberation", decided to provide for instant control in Art. 16(3) along the lines of the solution provided in Art. 13(3). One other interesting aspect may be noted here. The UN Commission felt that in case the arbitrators felt that they had no jurisdiction, there should be no further intervention by the Court and that Art. 5 would operate.

But, the Indian Act of 1996 has provided an appeal under sec. 37(2) against an order of the arbitrators accepting the plea that they have no jurisdiction. In contrast, it omitted to provide an appeal as done under the Model law in cases where the plea of absence of jurisdiction was rejected. Reliance is placed on the arbitration statutes of some other countries which provide an immediate appeal against an order rejecting a plea of want of jurisdiction of the arbitral tribunal under section 16.

It is pointed out that, 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. It has been pointed out by Alan Redfern & Martin Henry in their 'Law & Practice of International Commercial Arbitration' (1999) that the extent of court intervention permitted by various national laws varies in a large measure. The authors have expressed (para 9.36) as follows:

"The extent of Court intervention permitted by different states may be viewed as a spectrum. At one end of the spectrum are the states such as France, which exercise minimum control over international arbitral awards, and Switzerland, which allows non-Swiss parties to 'contract out' of controls altogether. In the middle of the scale, are grouped a considerable number of states that have adopted (either in full or with some modifications) the grounds of recourse laid down in the Model Law. At the other end of the spectrum are countries such as England, which operate a range of controls." They have referred (para 5.02), to the requirement of 'public policy' for such intervention which is as follows:

"On one view, it might be said that arbitrators should be given virtually unlimited powers, in order to encourage speed and effectiveness in the arbitral process; but the requirements of public policy, whether national or international, make some control necessary so as to ensure that the parties are not without recourse if there is wrongful conduct on the part of an arbitral tribunal. A single judge sitting in a court of first instance is usually subject to control by an appellate procedure.

Although the modern trend is to allow decisions of arbitral tribunals to go unchallenged, so that they are effectively final and binding upon the parties, the need for some control over the way in which these decisions are reached is recognized by most, if not quite all, systems of law. In particular, it is considered important to ensure that an arbitral tribunal gives the parties a fair hearing and that it decides only matters within its competence or jurisdiction)." The same authors further say that if an issue of jurisdiction is raised before the arbitral tribunal, it may pass an interim award (para 5.40):

"In many jurisdictions (England, Switzerland etc.), this interim award may be challenged immediately in the local courts. In some jurisdictions, a reluctant respondent can challenge the arbitral tribunal's jurisdiction in the courts before any award has been issued (sec.32 of English Act). By these means a final decision on the issue of jurisdiction may be obtained at an early stage in the arbitral proceedings. The system under which a national court is involved in the question of jurisdiction before the arbitral tribunal has issued a final award on the merits is known as 'concurrent control'.

The advantage of this system is that it enables the parties to know relatively quickly where they stand; and (unless the arbitral tribunal decides to continue with the proceedings pending a decision from the relevant court) they will save time and money if the arbitration proceedings prove to be groundless." It is true, as stated above, that if there is an immediate appeal as permitted by Model Law, such a procedure has its own advantages. The above authors point out that there are 'broadly two arguments against concurrent control'.

First, it is argued that recourse to the courts during the course of arbitral proceedings shall not be encouraged, since arbitral proceedings shall, so far as possible, be conducted without outside 'interference'.

Secondly, and more pragmatically, it is argued that to allow recourse to the courts during the course of an arbitration is likely to encourage delaying tactics on the part of a reluctant respondent. The authors say (5.40):

"This question was so much debated during the preparation of the Model Law. Finally, however, the solution of concurrent control was adopted" (Art.16) Thus, the Model Law ultimately provided for an appeal against the interlocutory order of the arbitral tribunal rejecting a plea of want of jurisdiction.



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