Supreme Court clarifies jurisdiction in Arbitration Cases: Lion Engineering Consultants vs. State of M.P. (22 March 2018)

Introduction

Date of the Judgment: 22 March 2018

Citation: (2018) INSC 214

Judges: Adarsh Kumar Goel, Rohinton Fali Nariman, and Uday Umesh Lalit, JJ.

Can a party raise an objection to the jurisdiction of an arbitrator during the challenge to an award, even if they didn’t raise it during the arbitration proceedings? The Supreme Court of India addressed this question in a case concerning a works contract dispute. The court clarified that objections to jurisdiction can indeed be raised under Section 34 of the Arbitration and Conciliation Act, 1996, even if not raised earlier under Section 16 of the same Act. This judgment has significant implications for arbitration proceedings in India.

Case Background

The dispute arose from a works contract between M/S Lion Engineering Consultants (the appellant) and the State of Madhya Pradesh (the respondent). After a disagreement, the matter was referred to arbitration by the High Court on 4 September 2008. The arbitrator issued an award in favor of the appellant on 10 July 2010. The respondent challenged this award under Section 34 of the Arbitration and Conciliation Act, 1996, before the Seventh Additional District Judge, Bhopal. The respondent later sought to amend its objections after three years, which was rejected by the trial court. The High Court, however, allowed the amendment in a petition under Article 227 of the Constitution of India.

Timeline

Legal Framework

The case primarily revolves around the interpretation of the Arbitration and Conciliation Act, 1996, specifically Sections 16 and 34.

• Section 16 of the Arbitration and Conciliation Act, 1996: Deals with the competence of the arbitral tribunal to rule on its own jurisdiction.
• Section 34 of the Arbitration and Conciliation Act, 1996: Allows a party to challenge an arbitral award before a court.

Arguments

Appellant’s Arguments (M/S Lion Engineering Consultants):

• The amendment sought by the respondent was beyond the period of limitation and affected the vested rights of the appellant.
• The objection regarding jurisdiction should have been raised under Section 16(2) of the Arbitration and Conciliation Act, 1996, before the arbitrator and cannot be raised under Section 34 of the same Act.
• The appellant relied on the judgment in MSP Infrastructure Ltd. vs. Madhya Pradesh Road Development Corporation Ltd. [(2015) 13 SCC 713], which stated that objections to jurisdiction must be raised under Section 16 before the arbitrator.

Respondent’s Arguments (State of M.P.):

• The amendment sought was formal and involved a legal plea arising from undisputed facts, which is not precluded by Section 34(2)(b) of the Arbitration and Conciliation Act, 1996.
• Even if an objection to jurisdiction was not raised under Section 16 of the Arbitration and Conciliation Act, 1996, it can still be raised under Section 34 of the same Act.
• It is not necessary to consider the application for amendment as it is a legal plea on admitted facts, which can be raised in any case.
• The observations in M/s MSP Infrastructure Ltd., particularly in Paragraphs 16 and 17, do not lay down the correct law.

Issues Framed by the Supreme Court

The primary issue before the Supreme Court was:

1. Whether a plea of jurisdiction can be raised by way of an objection under Section 34 of the Arbitration and Conciliation Act, 1996, even if no such objection was raised under Section 16 of the same Act?

Treatment of the Issue by the Court

Authorities

The following authorities were considered by the court:

Judgment

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

• The court overruled the observations in Paragraphs 16 and 17 of MSP Infrastructure Ltd. vs. Madhya Pradesh Road Development Corporation Ltd. [(2015) 13 SCC 713], stating that they do not lay down the correct law.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily driven by the need to ensure that all legal objections, including those related to jurisdiction, can be raised and considered at the appropriate stages of arbitration proceedings. The court emphasized that the stages under Section 16 and Section 34 of the Arbitration Act are independent, allowing parties to raise jurisdictional issues even if they were not raised earlier. This approach ensures a comprehensive review of the case and upholds the principles of natural justice.

The court’s reasoning was primarily based on legal interpretation, with a focus on the independent nature of the objection stages under the Arbitration Act. The factual aspects of the case were secondary to the legal principles being addressed.

The court reasoned that the stages under Section 16 and Section 34 are independent. This means that a party is not barred from raising a jurisdictional objection under Section 34 just because they did not raise it under Section 16. This ensures that all jurisdictional issues are properly addressed and that the principles of natural justice are upheld.

The court rejected the argument that the public policy of India does not refer to state law, stating that it refers to the law in force in India, whether state or central law. The court overruled the observations in MSP Infrastructure Ltd. that suggested otherwise.

The court stated, “We do not see any bar to plea of jurisdiction being raised by way of an objection under Section 34 of the Act even if no such objection was raised under Section 16.”

Further, the court observed, “Both stages are independent.”

The court also noted, “In our considered view, the public policy of India refers to law in force in India whether State law or Central law.”

Key Takeaways

• Objections to the jurisdiction of an arbitral tribunal can be raised under Section 34 of the Arbitration and Conciliation Act, 1996, even if they were not raised earlier under Section 16 of the same Act.
• The stages under Section 16 and Section 34 of the Arbitration Act are independent.
• The public policy of India includes both state and central laws.
• The observations in Paragraphs 16 and 17 of the judgment in MSP Infrastructure Ltd. were overruled.

Directions

The Supreme Court set aside the impugned order of the High Court and directed the trial court to consider the objections under Section 34 of the Arbitration and Conciliation Act, 1996. It allowed the respondents to argue that the Central Act was excluded by the M.P. Madhyastham Adhikaran Adhiniyam, 1983, even without a formal pleading. The appellant was also allowed to argue to the contrary.

Development of Law

The ratio decidendi of this case is that objections to the jurisdiction of an arbitral tribunal can be raised under Section 34 of the Arbitration and Conciliation Act, 1996, even if they were not raised earlier under Section 16 of the same Act. This clarifies the independent nature of these two stages in the arbitration process. The court also clarified that the public policy of India includes both state and central laws.

Conclusion

In conclusion, the Supreme Court’s judgment in M/S Lion Engineering Consultants vs. State of M.P. & Ors. clarifies that a party can raise a jurisdictional challenge under Section 34 of the Arbitration Act even if they did not do so under Section 16. The court emphasized the independent nature of these two sections and overruled previous observations that suggested otherwise. This decision ensures that all legal objections are properly considered, promoting fairness and justice in arbitration proceedings.