Supreme Court Constitution Bench Declares Appointment of Arbitrators by Chief Justice a Judicial Function, Overrules Earlier Views on Administrative Nature

Judgment mandates Chief Justices to decide jurisdictional facts and issue notice to affected parties under Section 11(6) of Arbitration and Conciliation Act, 1996, affirming finality of their decisions and limiting delegation to judicial officers only.

In a landmark judgment delivered on October 26, 2005, a seven-judge Constitutional Bench of the Supreme Court of India in M/s S.B.P. & Co. v. M/s Patel Engineering Ltd. has redefined the role of the Chief Justice of the High Court or the Chief Justice of India in appointing arbitrators under Section 11(6) of the Arbitration and Conciliation Act, 1996 (the Act). The bench overruled the earlier decisions that treated the appointment of arbitrators by the Chief Justice as a mere administrative act and held that it is, in fact, a judicial function.

Background:

The Arbitration and Conciliation Act, 1996, based on the UNCITRAL Model Law, provides a framework for arbitration in India. Section 11(6) empowers the Chief Justice of a High Court (or the Chief Justice of India in international commercial arbitration cases) to appoint an arbitrator when the agreed appointment procedure fails or a party defaults. Earlier, in the Konkan Railway cases (2000, 2002), the Supreme Court held that the Chief Justice’s role in appointing arbitrators was administrative, designed to facilitate quick constitution of arbitral tribunals and avoid delays.

Key Issues:

The bench was called upon to reconsider whether the Chief Justice’s function under Section 11(6) is judicial or administrative, the extent of judicial intervention permissible, and the validity of delegating this power to non-judicial bodies or district judges. It also examined the requirement of issuing notice to affected parties before appointing arbitrators and the interplay between Sections 11 and 16 of the Act regarding jurisdictional challenges.

Majority Findings:

1. Nature of Function - Judicial, not Administrative:

 The Court held that the power exercised by the Chief Justice under Section 11(6) is judicial in nature. This is because the Chief Justice must decide preliminary and contentious issues such as jurisdiction, existence of a valid arbitration agreement, whether the applicant is a party to the agreement, and whether a live claim exists. These decisions affect the rights of the parties and therefore require judicial adjudication.

2. Right to Hearing and Notice:

 Contrary to earlier views, the Court emphasized that natural justice demands the Chief Justice must issue notice and provide an opportunity of hearing to the opposite party likely to be affected before appointing an arbitrator. This requirement is fundamental to procedural fairness and cannot be dispensed with.

3. Delegation Restricted to Judicial Officers:

 The Court clarified that the Chief Justice can delegate the power under Section 11(6) only to another judge of the High Court or Supreme Court, as appropriate. Delegation to district judges or non-judicial bodies (such as Chambers of Commerce or other institutions) to exercise judicial functions is impermissible. Non-judicial institutions may only assist by recommending names but cannot decide jurisdiction or appoint arbitrators.

4. Finality and Appeals:

 Decisions of the Chief Justice under Section 11(6) are final and binding under Section 11(7). However, such judicial orders passed by the Chief Justice of the High Court or a judge designated by him can be challenged only by special leave petition to the Supreme Court under Article 136 of the Constitution. No further appeal lies against orders of the Chief Justice of India or the Supreme Court judge designated by him.

5. Interplay with Section 16 - Competence of Arbitral Tribunal:

 The Court recognized the doctrine of Kompetenz-Kompetenz (competence-competence) under Section 16, which empowers the arbitral tribunal to rule on its own jurisdiction. However, once the Chief Justice has appointed the tribunal after judicially deciding jurisdictional issues, the arbitral tribunal cannot question the Chief Justice’s jurisdictional decision. The tribunal’s jurisdictional rulings are subject to challenge only at the award setting aside stage or under Section 37 appeals.

6. Overruling of Earlier Decisions:

 The Court expressly overruled the earlier Konkan Railway decisions that had characterized the Chief Justice’s function as administrative and held that appointments made without notice were valid but prospective appointments must comply with the principle of fair hearing.

7. Non-Interference with Arbitral Tribunal Orders:

 The judgment cautioned against judicial interference with interlocutory orders of the arbitral tribunal during arbitration, reaffirming the limited scope of court intervention under the Act.

Minority Opinion:

Justice C.K. Thakker dissented, upholding the view that the Chief Justice’s function is purely administrative, not judicial or quasi-judicial. He argued that the Act allows the Chief Justice to designate any person or institution to exercise this power and that the Chief Justice is not required to issue notice or hold a hearing. He emphasized that the arbitral tribunal has the competence to decide jurisdictional issues and that judicial intervention should be minimal to avoid delays.

Significance:

This judgment clarifies the procedural safeguards and judicial nature of the Chief Justice’s role in appointing arbitrators under the Arbitration Act, ensuring that affected parties receive a fair hearing before arbitration is compelled. It limits delegation to judicial officers, thereby maintaining the integrity of the arbitral process. The ruling balances expeditious dispute resolution with fundamental principles of natural justice and judicial oversight, strengthening arbitration as an effective alternative dispute resolution mechanism in India.

The decision also provides finality to appointments under Section 11(6) while channeling challenges directly to the Supreme Court, thereby aiming to reduce protracted litigation and encourage resolution on merits by arbitral tribunals.

Statutory provisions:- Arbitration and Conciliation Act, 1996: Sections 5, 7, 8, 9, 10, 11(4), 11(5), 11(6), 11(7), 11(8), 11(9), 11(10), 11(11), 11(12), 12, 13, 14, 15, 16, 34, 37, 43; Constitution of India: Articles 136, 226, 227.

M/s S.B.P. & Co. v. M/s Patel Engineering Ltd., (SC)(Constitutional Bench) : Law Finder Doc Id # 86792