India: Supreme Court States That There Is No Bar To Plea Of Jurisdiction Being Raised In Objection Under Section 34 Of The Arbitration Act Even If The Same Was Not Raised Under Section 16

BRIEF FACTS

The disputes between M/s Lion Engineering Consultants ("Appellant") and State of Madhya Pradesh ("Respondent") in relation to a works contract were referred to arbitration. The arbitral tribunal passed an award in July 2010, which was challenged under Section 34 of the Arbitration and Conciliation Act, 1996 ("Act") by the Respondent.

At the stage of hearing of challenge to the award, the Respondent sought to amend its objections after three years with regard to jurisdiction of the arbitral tribunal, which was rejected by the Trial Court. The High Court of Madhya Pradesh in a writ petition under Article 227 of the Constitution allowed the amendment.

The judgment of the High Court was challenged by the Appellant before the Supreme Court of India by way of a Special Leave Petition.

Issues

  1. Whether the objection to jurisdiction of the arbitral tribunal can be raised under Section 34 of the Act before the Court, if not raised earlier under Section 16 of the Act before the arbitral tribunal.
  2. Whether the expression "public policy of India" under Section 34 of the Act refers to State law or Central law.

JUDGMENT

Issue (i)

The Appellant contended that objection to jurisdiction was not raised by the Respondent under Section 16(2) of the Act before the arbitral tribunal and therefore, it could not be raised under Section 34 of the Act for the first time.

The Appellant relied on the judgment of the Supreme Court in MSP Infrastructures Ltd. v. Madhya Pradesh Road Development Corporation Ltd1, wherein it was observed that the phraseology used in Section 34, i.e., "the subject matter of dispute is not capable of settlement by arbitration" does not refer to objection to jurisdiction and only refers to a situation where a dispute by reason of its subject matter is not capable of settlement through arbitration. The Court in MSP Infrastructures mentioned the examples of non-arbitrable disputes referred in Booz Allen and Hamilton Inc. v. SBI Home Finance Limited2. The Court had observed that as per scheme of the Act, all objections to jurisdiction of whatsoever nature must be taken at the stage of submission of statement of defence, and must be dealt with under Section 16 of the Act. However, if a party contends that the subject matter of dispute cannot be dealt with by arbitration, it may be dealt with under Section 34 of the Act.

The Respondent contended that legal plea on undisputed facts is not precluded by Section 34(2) (b) of the Act and even if such objection is not raised under Section 16, the same can be raised under Section 34 of the Act. The Respondent also contended that the observations in MSP Infrastructures do not lay down the correct law.

After considering the contentions of both the parties, the Court held that there is no bar to the plea of jurisdiction being raised by way of objection under Section 34 of the Act even if no such objection was raised under Section 16. The Court also held that the observations in MSP Infrastructures do not lay down correct law.

Issue (ii)

The Court in MSP Infrastructures had observed that "public policy of India" refers to public policy of India as a whole and not merely the policy of an individual State. However, it depends on the context whether upholding of a State law would be part of "public policy of India" or not. The Court in MSP Infrastructures also held that in case of conflict between action under State law and Central law, "public policy of India" must be interpreted as policy of the Union.

The Court held that the above observations in MSP Infrastructures do not lay down correct law. The Court disagreed with the observation that "public policy of India" does not refer to a State law and refers only to an all India law. It was held that the "public policy of India" refers to law in force in India including both State law and Central law. The Court overruled its observations to the contrary in MSP Infrastructures.

ANALYSIS

The judgment widens the scope of challenge to an arbitral award under Section 34(2)(b)(ii) of the Act. MSP Infrastructures had differentiated 'arbitrability' of disputes from other jurisdictional objections. By overruling MSP Infrastructures, the Supreme Court has opened up space for raising all jurisdictional objections (including arbitrability of disputes) in challenge proceedings under Section 34 despite the jurisdictional objections not having been raised before the tribunal under Section 16 of the Act. This dilutes the effectiveness of Section 16(2) of the Act, which provides that the plea of jurisdiction has to be raised before the tribunal before submission of statement of defence.

MSP Infrastructures held that whether State law would be part of "public policy of India" must depend on the context. It had held that in case of conflict between action under State law and Central law, the "public policy" would refer to policy of the Union. This judgment, while overruling MSP Infrastructures, clarifies the ambit of "public policy" to include both State law and Central law.

Footnotes

1. (2015) 13 SCC 713 (Paras 16 and 17).

2. (2011) 5 SCC 532.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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