The Principle of Competence-Competence & the Jurisdiction of Arbitral Tribunals

Introduction

Arbitral tribunals had no authority to determine the arbitration agreement's validity or their jurisdiction prior to the Arbitration and Conciliation Act of 1996; instead, the adjudication followed the rulings of the courts. This was because the courts had the final say and the aforementioned concerns, which were at the heart of the arbitration processes, could not be risked. This went against the fundamental goal of alternative dispute resolution (ADR), which is minimal judicial participation. However, they were already aware of English law. Therein, the arbitral tribunal was authorized to review their jurisdiction, primarily to satisfy themselves as a preliminary matter as to whether they needed to continue the proceedings or not. It was also found that the same could not be used to derive any legally binding conclusion for the parties. However, the UNCITRAL Model Law of 1985 altered the course of the story. Following the approval of the UNCITRAL Model Law in 1985, various countries, including India, tried to develop new legislation based on the Model Law while making the necessary amendments. The UNCITRAL Rules have had a significant impact on Indian arbitration as well.

According to Article 16 of the Model Law, the tribunal may rule on its own jurisdiction regarding any objection raised by either party to the existence or validity of the arbitration agreement. For this purpose, the primary contract is deemed different from the arbitration agreement/clause (Doctrine of Separability). Such a plea will be examined as a preliminary question or in a merit-based award.

Principle of Kompetenz-Kompetenz

The doctrine of competence-competence gives an arbitral tribunal the power to decide on its jurisdiction. Due to its German roots, investment tribunals have referred to the Competence-Competence concept as "Kompetenz-Kompetenz" or the "compétence de la compétence" principle. The jurisdictional principle known as "kompetenz-kompetenz" gives an adjudicating body the authority to decide on pleas contesting its own jurisdiction that are presented to it, i.e., jurisdictional disputes. According to Section 16(1) of the Arbitration and Conciliation Act, 1996, the arbitral tribunal has the authority to make decisions on subjects within its own jurisdiction, according to the ruling in Olympus Supertructures Pvt. Ltd. v. Meena Vijay Khetan & Ors[1]. Reducing the load on courts and resolving conflicts outside of court action were the main goals of the arbitration mechanism's creation. The foundation of the 1996 Arbitration and Conciliation Act is Section 16[2], which deals with the jurisdiction of an arbitral tribunal.

The following are the three main facets of the competency principle:

• The jurisdiction of judicial intervention can be determined by the arbitral tribunal.
• The tribunal has priority in determining jurisdictional objections before court involvement.
• If necessary, the courts' involvement must be limited to determining whether the parties have referred each other to arbitration and if the arbitration agreement is in effect.

Two essential tenets of Section 16 of the Arbitration and Conciliation Act, 1996 that direct this procedure are also included in the provision. It acknowledges, first and foremost, that an arbitration clause—a clause that designates arbitration as the means of settling disputes within a contract—must be regarded as a separate agreement from the other terms and conditions of the contract. This implies that the arbitration clause is still binding and that the Arbitral Tribunal may arbitrate the matters specified in it, even in the event that there are disagreements or objections to the contract as a whole.

Second clause states that the arbitration clause is not always deemed illegal even if the Arbitral Tribunal finds the entire contract to be void. Stated differently, the arbitration clause is not immediately rendered void by the contract's overall invalidity. This guarantees that disagreements about the entire contract and its arbitration clause can be resolved independently, and that the arbitration procedure can go forward even in the event that the contract is declared null and void. Section 16 of the Arbitration and Conciliation Act of 1996 empowers the arbitral tribunal to rule on objections presented by either party to the existence/validity of the arbitration clause/agreement. The tribunal's ability to rule on its own competency gave rise to the Principle of Kompetenz, often known as the Principle of competency.

The doctrine of kompetenz-kompetenz implies that the arbitral tribunal has the authority to decide and rule on its own jurisdiction, including objections with regard to the existence, validity, and scope of the arbitration agreement, the Supreme Court ruled in the recent N.N. Global Mercantile Pvt. Ltd. v. M/S Indo Unique Flame Ltd.[3] case. If necessary, the courts may later in the proceedings subject the same to judicial scrutiny. The foundation of the theory is the idea that the arbitration agreement exists independently of the actual contract it is a part of. The existence and enforceability of an arbitration agreement are also independent of the validity of the primary substantive contract.

When the party is not satisfied with the decisions of the Tribunal

The Arbitration and Conciliation Act of 1996 does not include a provision for making a preliminary award on jurisdiction. However, Section 16 of the Act provides that if the tribunal rejects the request of either of the parties within its jurisdiction, it may proceed with the arbitral proceedings and issue an arbitral award.

The High Court of Delhi in Union of India v. M/s. East Coast Boat Builders & Engineers Ltd[4] held that there is no appeal against the tribunal's findings to reject the plea that the arbitral tribunal lacks jurisdiction (Section 16(5)). The tribunal would thereafter complete the proceedings and issue the award without delay or interference from supervisory courts. The aggrieved party's only recourse is to file an application to set aside such an arbitral verdict, which can only be done after the final award is issued under Section 34[5] as held in Nav Sansad Vihar Coop. Group Housing Society Ltd. (Regd.) v. Ram Sharma and Associates[6]. However, the tribunal's decision to accept the parties' objections against its jurisdiction under Sections 16(2) and 16(3) is appealable under Section 37(2) as held in Pharmaceutical Products of India Ltd. v. Tata Finance Ltd[7]. To summarize, if the arbitral tribunal decides to reject a plea challenging its jurisdiction, the decision cannot be appealed; however, if the tribunal decides to accept the plea that it lacks jurisdiction to rule on that particular dispute, the order under Section 37(2)[8] is appealable.

These provisions plainly reveal the designers' aim, namely, that allowing parties to appeal the tribunal's decisions/jurisdiction before the courts at an early stage would undermine the purpose of the ADR process. The legislative goal of these parts seems to be to prevent undue delay and provide for as little interference by the courts as possible.

Limitation of the Principle of Competence Competence

Section 5 of the Arbitration and Conciliation Act restricts judicial intervention except where explicitly provided[9]. Accordingly, the principle of Kompetenz-kompetenz is upheld, as no judicial authority may interfere in the arbitration process unless specifically designated in the Act. However, this premise is also not absolute, as is always the case. The authority granted by Section 16 has been repeatedly curtailed as a result of multiple Court rulings.

(Sections 11(4), 11(5), and 11(6))[10] of the Act allow for court appointment of arbitrators only if parties fail to appoint per the agreement or statute. According to the regulations, the courts can appoint arbitrators in the following scenarios (upon the request of the party):

• If either party fails to appoint an arbitrator/arbitral tribunal within 30 days of receiving a request from the other side,
• If neither party follows the agreed-upon appointment procedure.
• The two chosen arbitrators fail to reach an agreement on the third arbitrator (presiding arbitrator/chairman) within 30 days of their appointment.
• The two appointed arbitrators are unable to agree on the third arbitrator (presiding arbitrator/chairman) in accordance with the appointment procedure that they agreed upon.
• The person/institution selected by the court fails to carry out the given functions.

Negative consequences of the Principle

The notion of competence has two sides, just like a coin does. In Chloro Controls(I) P. Ltd v. Severn Trent Water Purification[11], the Supreme Court noted the principle's detrimental consequences. As for them, the tribunal excludes the courts from their jurisdiction. A downside is that national courts cannot independently review the tribunal's jurisdictional rulings pre-award. In other words, the scenario violates a fundamental legal principle: “nemo judex in causa sua” which means “no one can be made a judge in their cause”. It prevents the higher authorities from issuing a definitive decision on the question of jurisdiction during the pre-award stages.

Conclusion

After the enactment of the 1996 Act, the arbitration took on new meaning and was given a suitable structure with the goal of making India an arbitration-friendly nation, and as the number of international conflicts increased, India felt compelled to match its laws with those followed globally. Even after the introduction of the 1996 amendment, there were still instances of undue judicial interference. The 2015 amendment provided India with the extra impetus it needed to minimize court interference in acknowledgment of the country's widespread litigation delays. The amendment to the Act is unquestionably the finest move toward making arbitration an effective, quick, and cost-effective remedy.

While the Kompetenz-Kompetenz principle is absolute in theory, courts have discretion based on case specifics. The courts considered that each case should be examined individually in order for the court to determine if the theory is relevant in all cases. Despite the Courts' intervention, the concept gained relevance following the 2015 amendment. The concept seeks to resolve issues as fast as feasible while also working to improve public policies. This philosophy aims to decrease the burden on courts and assist the public in resolving conflicts as quickly as feasible. In India, the philosophy has evolved throughout time and has no clear stance. However, in countries such as the United States, Switzerland, France, and Hong Kong, in these jurisdictions, arbitral tribunals are often granted broad autonomy to determine jurisdictional challenges without judicial interference; the arbitrators' power is accepted as absolute.

The notion of competence-competence is a very forward-thinking doctrine. In Indian law, Section 16 of the Arbitration Act firmly defines the notion of competence-competence, emphasizing the importance of arbitration agreements. Recent Supreme Court cases have provided crucial insights into the application of competence-competence, clarifying how the doctrine interacts with issues such as arbitral fees, restriction, unilateral nominations, claims of fraud, and subject-matter arbitrability. These verdicts sought to create a balance between party autonomy and public policy considerations, making arbitration a more effective and appealing way of conflict settlement in India's legal landscape.

[1] AIR 1999 SCC 2102.

[2] The Arbitration and Conciliation Act, 1996 (Act 26 of 1996), s.16.

[3] 2021 SCC OnLine SC 13.

[4] AIR 1999 DELHI 44.

[5] The Arbitration and Conciliation Act, 1996 (Act 26 of 1996), s.34.

[6] 1999 SCC OnLine Del 741.

[7] 2002 (6) BOMCR 168.

[8] The Arbitration and Conciliation Act, 1996 (Act 26 of 1996), s.37.

[9] Id. at s.5.

[10] Id. at s.11.

[11] (2013) 1 SCC 641.

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