REPORTED * IN THE HIGH COURT OF DELHI AT NEW DELHI RESERVED ON : February 27, 2008 DATE OF DECISION : April 1, 2008 + FAO(OS) 58/2002 and CM No.132/2002 S.N. MALHOTRA & SONS ..... Appellant Through: Mr. Kirti Uppal and Mr. Sanjeet Singh, Advocates versus AIRPORT AUTHORITY OF INDIA & ORS. ..... Respondents Through: Mr. S.K. Chandwani and Mr. N.S. Rahman, Advocates CORAM: HON'BLE THE CHIEF JUSTICE HON'BLE MS. JUSTICE REVA KHETRAPAL 1. Whether reporters of local papers may be allowed to see the judgment? 2. To be referred to the Reporter or not? 3. Whether judgment should be reported in Digest? : REVA KHETRAPAL, J. 1. Challenge raised in this appeal is to the judgment and order of the learned Single Judge dated December 12, 2001 passed in OMP No.1/2000 and 2/2000. 2. An agreement No.36/EE(C)/AMD-II/T-II/96-97 was entered into between the respondent herein (Airport Authority of India) and the appellant on 18.09.1996 pertaining to the work of special repairs to the terminal building at IGI Airport, Terminal-II. The amount settled was negotiated at Rs.9,01,797/- for certain renovations of a particular area in the aforesaid terminal building. The work was to commence on 31.08.1996 and it had to be completed on FAO(OS) 58/2002 Page 1 of 29 28.02.1997. After the final bill had been prepared, the appellant set up certain claims vide letter dated 30th June, 1998. Disputes arose regarding the aforesaid claims and certain counter-claims were raised by the respondent. By his letter dated 06.11.1998, the appellant invoked the arbitration clause and requested for reference of the said disputes to arbitration. Respondent No.2, Chief Engineer (Retd.), CPWD was appointed as sole arbitrator to decide and make his award regarding the claims raised by the appellant Contractor and the counter-claims by the respondent Airport Authority of India subject, however, to their admissibility under Clause 25 of the aforesaid agreement. The learned arbitrator submitted his award on 30th September, 1999, which was assailed before the learned Single Judge by both the appellant and the respondent by filing petitions under Section 34 of the Arbitration and Conciliation Act, 1996 (for short “the Act”). 3. The learned Single Judge after noticing that the primary issue involved is as to whether the respondent Airport Authority of India can raise the plea that the arbitrator acted without jurisdiction when such a plea was not taken before the arbitrator, took note of the contention of the appellant that in view of the clear language of Section 16 of the Act, the respondent was now debarred from raising such a plea. After referring to the relevant provisions of the Act, however, the learned Single Judge came to the conclusion that the appellant could be permitted to challenge the award and FAO(OS) 58/2002 Page 2 of 29 raise the aforesaid plea after the conclusion of the arbitral proceedings and was not debarred from doing so. Having come to the aforesaid conclusion, the learned Single Judge went on to hold that under Clause 25 of the Agreement, which contained the arbitration clause, certain disputes were taken out of the jurisdiction of the arbitrator, as was clear from the use of the opening words of Clause 25: “Except where otherwise provided in the contract”. In other words, certain disputes were to be treated as excepted matters. The dispute under Clause 2 of the Agreement [which stipulated that time was of the essence of the contract and laid down that the contractor shall pay as compensation an amount equal to 1% or such smaller amount as the Chief Engineer may decide on the amount of the estimated cost of the whole work as shown in the tender for everyday that the work remains uncommenced, or unfinished, after the proper dates], was one such dispute. On this premise, the learned Single Judge held that out of the total amount, the respondent would not be liable to pay a sum of Rs.34,664/- in OMP No.1/2000 and for similar reasons would not be liable to pay Rs.35,159/- in OMP No.2/2000. 4. We have heard the learned counsel for the parties and scrutinized the records. The principal contention of Mr. Kirti Uppal, the learned counsel for the appellant is that the judgment of the Single Judge is unsustainable as the award cannot be challenged for want of jurisdiction of the arbitral tribunal when no objection to the jurisdiction of the arbitral tribunal was taken under Section 16 of FAO(OS) 58/2002 Page 3 of 29 the Act before the arbitrator. He further contends that in such circumstances, the respondent must be deemed to have waived its right to object and reference in this context is made by him to a recent judgment of the Supreme Court in Krishna Bhagya Jala Nigam Ltd. vs. G. Harischandra Reddy & Anr. AIR 2007 SC 817. He also contends that it would be inequitable and indeed unjust to allow the respondent to raise objection to the jurisdiction of the arbitrator after the passing of the award, when no such objection or plea was sought to be raised at the relevant time. 5. Learned counsel for the respondent, on the contrary, sought to urge that the respondent was well within its rights to insist upon adherence to the agreement between the parties. He submits that it is trite law that the arbitrator is to arbitrate within the terms of the contract. He has no powers apart from those which the parties have given him under the contract. If he has travelled beyond the terms of the contract, he would be acting without jurisdiction whereas if he has remained within the parameters of the contract, his award cannot be questioned. Merely because the respondent did not challenge the action of the arbitrator in exceeding his jurisdiction does not mean that he cannot do so at a subsequent stage and, as a matter of fact, under Section 34(2)(iv) of the Act, it is always open to it to do so. The counsel further contends, relying upon the Constitution Bench judgment of the Supreme Court in Waverly Jute Mills Co. Ltd. vs. Raymon & Co. (India) (P) Ltd. AIR 1963 SC 90, that it is well established that consent cannot confer FAO(OS) 58/2002 Page 4 of 29 jurisdiction and this defect is not cured by the appearance of the parties in the proceedings, even if that is without protest. 6. Indubitably, the sole issue which arises for consideration in this appeal is as to whether any objection to the jurisdiction of the arbitrator as contained in Section 16, not raised before the arbitrator, could be permitted to be raised for the first time under Section 34. 7. For the purpose of addressing the aforesaid issue, it is deemed expedient to reproduce the provisions of Section 16 of the Act. The aforesaid Section is based on Article 16 of the United Nations Commission on International Trade Law (UNCITRAL) which adopted the Model Law on International Commercial Arbitration. Sub- Section (1) of Section 16 corresponds to Sub-Clause (1) of Article 16. Likewise, sub-Sections 2 and 3 of Section 16 of the Act correspond more or less to sub-clause 2 of Article 16 of the UNCITRAL Model Law. The preamble to the Act shows that this is so on account of the fact that it was considered “expedient to make law respecting arbitration and conciliation, taking into account the aforesaid model law and rules”. Section 16 reads as under: “16. Competence of arbitral tribunal to rule on its jurisdiction.–(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 FAO(OS) 58/2002 Page 5 of 29 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. (4) The arbitral tribunal may, in either of the cases referred to in sub-section (2) or sub-section (3), admit a later plea if it considers the delay justified. (5) The arbitral tribunal shall decide on a plea referred to in sub-section (2) or sub-section (3) and, where the arbitral tribunal takes a decision rejecting the 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.” 8. A bare perusal of Section 16(1) of the Act makes it abundantly clear that the arbitral tribunal has now been rendered competent by the legislature to rule on its own jurisdiction, including ruling on any objections with regard to the existence or validity of the arbitration agreement. 9. Sub-Section (2) to Sub-Section (6) of Section 16 are apposite for the purposes of deciding the present controversy and hence are being analysed in depth hereinafter. While sub-section (2) relates to a plea that the arbitral tribunal does not have jurisdiction, sub- section (3) relates to a plea that the arbitral tribunal has exceeded its jurisdiction. Both sub-section (2) and sub-section (3) categorically FAO(OS) 58/2002 Page 6 of 29 spell out the stage at which such a plea can be raised. Thus, sub- section (2) says that a plea that the arbitral tribunal does not have jurisdiction shall be raised at the earliest, i.e., not later than the submission of the statement of defence; and it further says that a party shall not be precluded from raising such a plea merely because he has appointed, or participated in the appointment of, an arbitrator. Plea under sub-section (3) that the arbitral tribunal is exceeding the scope of its jurisdiction shall be raised during the arbitral proceedings and that too, as soon as the matter alleged to be beyond the scope of its authority is raised before the arbitral tribunal. Both the aforesaid sub-sections thereby expressly lay down the precise point of time during the arbitral proceedings at which the plea shall be raised before the arbitral tribunal. 10. The limitation of time imposed by sub-section (2) and sub- section (3), however, is relaxed somewhat by the provisions of sub- section (4) of Section 16, which is really in the nature of a proviso to sub-sections (2) and (3). Sub-Section (4) stipulates that the arbitral tribunal may, in either of the cases referred to in sub-section (2) or sub-section (3), admit a later plea if it considers the delay justified. 11. Sub-Section (5) and sub-section (6) lay down the course of action to be followed by the arbitral tribunal upon a plea being raised either under sub-section (2) or under sub-section (3). Under sub-section (5), the arbitral tribunal has the obligation and duty to decide on a plea referred to in sub-section (2) or sub-section (3) and, where it takes a decision rejecting the plea, the arbitral FAO(OS) 58/2002 Page 7 of 29 tribunal shall continue with the arbitral proceedings and make an award. Sub-section (6) states that a party aggrieved by such an arbitral award may make an application for setting aside such an arbitral award in accordance with Section 34. 12. On an analysis of the provisions of Section 16(1) to (6), in our view, it is clear that the legislative intent was that a plea as to jurisdiction of the arbitral tribunal or as to exceeding of its authority must be raised at the threshold and cannot be entertained at a subsequent stage. In other words, a plea in terms of sub-section (2) or sub-section (3) of Section 16 of the Act not having been taken at the initial stage, must be deemed to be waived. Indications to show that the statutory mandate is that the plea should be raised at the earliest as culled out by us are set out hereunder: (i) The use of the words shall be raised not later than the submission of the statement of defence in sub-section (2) of Section 16. (ii) The use of the words “as soon as the matter alleged to be beyond the scope of its authority is raised during the arbitral proceedings” in sub-section (3) of Section 16. (iii) The discretion given to the arbitral tribunal under sub- section (4) of Section 16 to “admit a later plea” [in either of the cases referred to in sub-section (2) or Sub-Section (3)] “if it considers the delay justified.” In other words, the arbitral tribunal must, after examining the matter, rule that FAO(OS) 58/2002 Page 8 of 29 the delay in raising objection in terms of sub-section (2) or sub-section (3) is justified. If the delay is not justified in the view of the arbitral tribunal, the arbitral tribunal will be at liberty not to admit the objection with regard to its jurisdiction and/or the scope of its authority, by passing an order refusing to admit the plea on the ground that there was unjustified delay. (iv) A ruling of the arbitral tribunal on the acceptance or rejection of the objection to its jurisdiction/competency is mandatory as is evident from a reading of sub-section (5), and particularly by the use of the words “shall decide on a plea referred to in sub-section (2) or sub-section (3)”. (v) Where the arbitral tribunal rejects the plea and proceeds to make an award, the aggrieved party under sub- section (6) “may make an application for setting aside such an arbitral award” in accordance with Section 34. The use of words “such an arbitral award” are of significance. The legislative intent quite clearly is that the arbitrator will rule on the objection raised or the plea raised before the Arbitral Tribunal in terms of sub-section (2) or sub-section (3) and it is only “such an arbitral award” which can be set aside in accordance with Section 34. The words “such an arbitral award” thus have direct reference to an award rejecting the plea of want FAO(OS) 58/2002 Page 9 of 29 of jurisdiction of the arbitral tribunal or want of competency of the arbitral tribunal to deal with the matter. “Such an award” can only exist if the plea is raised before the arbitrator himself and not at any subsequent stage. The clear intent of the legislature thus appears to be that a plea subsequently raised as to the competence of the arbitral tribunal cannot be entertained. 13. In SBP & Co. vs. Patel Engineering Ltd. and Anr. reported in (2005) 8 SCC 618, a seven Judge Bench of the Supreme Court while noticing that a person aggrieved by the rejection of his objection by the Tribunal on its jurisdiction or the other matters referred to in that Section has to wait until the award is made to challenge that decision in an appeal against the Arbitral Tribunal in accordance with Section 34 of the Act, further noticed that an acceptance of the objection to jurisdiction or authority could be challenged then and there under Section 37 of the Act. In paragraph 12 of its judgment, the Supreme Court held as follows: “12. Section 16 of the Act only makes explicit what is even otherwise implicit, namely, that the Arbitral Tribunal constituted under the Act has the jurisdiction to rule on its own jurisdiction, including ruling on objections with respect to the existence or validity of the arbitration agreement. Sub-section (1) also directs that an arbitration clause which forms part of a contract shall be treated as an agreement independent of the other terms of the contract. It also clarifies that a decision by the Arbitral Tribunal that the contract is null and void shall not entail ipso jure the invalidity of the arbitration clause. Sub- section (2) of Section 16 enjoins that a party wanting FAO(OS) 58/2002 Page 10 of 29 to raise a plea that the Arbitral Tribunal does not have jurisdiction, has to raise that objection not later than the submission of the statement of defence, and that the party shall not be precluded from raising the plea of jurisdiction merely because he has appointed or participated in the appointment of an arbitrator. Sub-section (3) lays down that 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. When the Tribunal decides these two questions, namely, the question of jurisdiction and the question of exceeding the scope of authority or either of them, the same is open to immediate challenge in an appeal, when the objection is upheld and only in an appeal against the final award, when the objection is overruled. Sub-section (5) enjoins that if the Arbitral Tribunal overrules the objections under sub-section (2) or (3), it should continue with the arbitral proceedings and make an arbitral award. Sub-section (6) provides that a party aggrieved by such an arbitral award overruling the plea on lack of jurisdiction and the exceeding of the scope of authority, may make an application on these grounds for setting aside the award in accordance with Section 34 of the Act………………………………… ………………………..” 14. Sections 34 and 37, which are relevant for the present purpose, are extracted below: “34. Application for setting aside arbitral award.–(1) Recourse to a Court against an arbitral award may be made only by an application for setting aside such award in accordance with sub-section (2) and sub-section (3). (2) An arbitral award may be set aside by the Court only if– (a) the party making the application furnished proof that– (i) a party was under some incapacity, or (ii) the arbitration agreement is not valid under the law to which the parties have subjected it or, failing any indication thereon, under the law for the time FAO(OS) 58/2002 Page 11 of 29 being in force; or (iii) the party making the application was not given proper notice of the appointment of an arbitrator or of the arbitral proceedings or was otherwise unable to present his case; or (iv) the arbitral award deals with a dispute not contemplated by or not falling within the terms of the submission to arbitration, or it contains decisions on matters beyond the scope of the submission to arbitration: Provided that, if the decisions on matters submitted to arbitration can be separated from those not so submitted, only that part of the arbitral award which contains decisions on matters not submitted to arbitration may be set aside; or (v) the composition of the arbitral tribunal or the arbitral procedure was not in accordance with the agreement of the parties, unless such agreement was in conflict with a provision of this Part from which the parties cannot derogate, or, failing such agreement, was not in accordance with this Part; or (b) the Court finds that– (i) the subject matter of the dispute is not capable of settlement by arbitration under the law for the time being in force, or (ii) the arbitral award is in conflict with the public policy of India. Explanation.– Without prejudice to the generality of sub-clause (ii) it is hereby declared, for the avoidance of any doubt, that an award is in conflict with the public policy of India if the making of the award was induced or affected by fraud or corruption or was in violation of section 75 or section 81. (3) An application for setting aside may not be made after three months have elapsed from the date on which the party making that application had received the arbitral award or, if a request had been made under section 33, from the date on FAO(OS) 58/2002 Page 12 of 29 which that request had been disposed of by the arbitral tribunal: Provided that if the Court is satisfied that the applicant was prevented by sufficient cause from making the application within the said period of three months it may entertain the application within a further period of thirty days, but not thereafter. (4) On receipt of an application under sub- section (1), the Court may, where it is appropriate and it is so requested by a party, adjourn the proceedings for a period of time determined by it in order to give the arbitral tribunal an opportunity to resume the arbitral proceedings or to take such other action as in the opinion of arbitral tribunal will eliminate the grounds for setting aside the arbitral award. 37. Appealable orders.–(1) An appeal shall lie from the following orders (and from no others) to the Court authorized by law to hear appeals from original decrees of the Court passing the order, namely:- (a) granting or refusing to grant any measure under section 9; (b) setting aside or refusing to set aside an arbitral award under section 34. (2) An appeal shall also lie to a Court from an order of the arbitral tribunal.– (a) accepting the plea referred in sub-section (2) or sub-section (3) of section 16; or (b) granting or refusing to grant an interim measure under section 17. (3) No second appeal shall lie from an order passed in appeal under this section, but nothing in this section shall affect or take away any right to appeal to the Supreme Court.” 15. A conjoint reading of the aforesaid sections yields the following result. If the plea raised before the arbitral tribunal in terms of sub-section (2) or sub-section (3) of Section 16 is rejected by the arbitral tribunal and the arbitral tribunal proceeds to make an award, such an award can be challenged under Section 34 and an FAO(OS) 58/2002 Page 13 of 29 appeal from the said order shall lie under Section 37(1)(b) of the Act. In other words, an appeal from an order setting aside or refusing to set aside an arbitral award under Section 34 passed by the Single Judge shall lie to the Court authorized by law to hear appeals. In case, however, the arbitral tribunal accepts the objection with regard to its jurisdiction, an appeal shall lie to a Court therefrom under Section 37(2)(a) of the Act. But as clarified by sub- section (3) of Section 37, no second appeal shall lie from an order passed under Section 37(2)(a) (see Cref Finance Ltd. Vs. Puri Construction Ltd. AIR 2001 Delhi 414). 16. In a case where objection to the jurisdiction of the arbitral tribunal is not raised at all, Section 37(2)(a) will not be attracted at all. Insofar as Section 37(1)(b) is concerned, as held by the Constitution Bench in the case of Patel Engineering Ltd. (supra), an appeal against the final award will lie only when the objection to jurisdiction is overruled, meaning thereby that if no objection is raised at all before the arbitral tribunal and there is no decision of the arbitral tribunal as to its jurisdiction, there is no question of an appeal under Section 34 on that ground, i.e. on the ground of jurisdiction. 17. We are fortified in coming to the above conclusion by the provisions of Section 4 of the Act, which read as under: “4. Waiver of right to object.– A party who knows that– (a) any provision of this Part from which the FAO(OS) 58/2002 Page 14 of 29 parties may derogate, or (b) any requirement under the arbitration agreement, has not been complied with and yet proceeds with the arbitration without stating his objection to such non-compliance without undue delay or, if a time limit is