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Supreme Court holds that the Existence of an Arbitration Agreement cannot be challenged after the award is passed

Overview 

The present case revolves around one question i.e., whether the appointment of an arbitrator by the court can be challenged at a later stage when it is argued that there was absence of a valid arbitration agreement or clause.

The dispute was in regards to a construction agreement entered into between the parties, Clause 23 of which stated the appointment of a Standing Committee in case any disagreement arises. This was treated as an arbitration clause by the party invoking arbitration, whereas it was later argued that it was merely a clause for dispute resolution and not arbitration. The complexities arose because the arbitrator already appointed under Section 11 of the Arbitration and Conciliation Act, 1996, was challenged by the party raising issues later.

The Apex Court had to decide whether the issue of the existence of the arbitration clause was settled during the appointment of the arbitrator or if it could be re-examined later.

 

Facts

The parties entered into a construction agreement whereby the appellant, Eminent Colonizers was provided a construction contract by the respondent, the Rajasthan Housing Board on 8 July 2009. 

As per the appellant, the work was completed within the timeframe given. However, it claimed an increased payment due to inflated prices of labour and resources. Due to this, disputes arose between the parties and Clause 23 of the agreement was referred, which provided for referring any dispute arising between the parties to a Standing Committee. With no proper luck with the mechanism provided, the appellant approached the Rajasthan High Court under Section 11 of the Arbitration and Conciliation Act, 1996 for appointment of an arbitrator. On 23 May 2014, an arbitrator was appointed by the Rajasthan High Court. The arbitration proceedings moved forward and an award was passed in favour of the appellant, granting the amount claimed with proper interest.

This award was further challenged by the respondent through an application under Section 34 of the Act for setting it aside before the Commercial Court. The court analysed the arguments made by the counsel for the respondent as to the validity of Clause 23, which mentioned a Standing Committee when it comes to dispute resolution and not arbitration, and the award was set aside. Aggrieved by the same, the matter was moved to the High Court, which again upheld the decision of the Commercial Court. A similar matter arose under the same circumstances and again, the award was set aside on the ground and Clause 23 was not an arbitration clause. Both the matters were then brought up before the Supreme Court.

 

Legal Issues

  1. Whether the appointment of an arbitrator by the court under Section 11, inherently satisfies the requirement of existence of a valid arbitration agreement.
  2. Whether the appointment of an arbitrator can be challenged during proceedings under Section 34, if not questioned at an earlier stage.
  3. Whether the Commercial Court and the High Court were fair and reasonable while examining Clause 23 of the agreement.

 

Decision

The Supreme Court while referring to the case of SBP & Co. v. Patel Engineering Ltd., allowed the appeals filed by the contractor. In this case, the Apex Court held that the power under Section 11 of the Act was judicial, which meant that when a High Court appointed an arbitrator, it had to examine the existence of an arbitration agreement and the decision would be final. However, this was before the 2015 Amendment. 

In the present case, the appointment was in May 2014, therefore, the law settled in the above mentioned case would be applicable. The judgement of the High Court was set aside and it was clarified by the Apex Court that if a party believes that no valid arbitration clause or agreement exists, it must challenge it at an earlier stage and not when the award is passed in favour of the opposite party. 

By doing so, the Supreme Court reiterated the finality of judicial orders and solidified the foundation of the process of arbitration.

 

Case Reference :- Civil Appeal No. 753 of 2026 Arising Out of SLP(C) No. 8299 of 2021 With Civil Appeal No. 754 of 2026 (@ SLP (C) No. 8331 of 2021) Civil Appeal No. 753 of 2026 (@ SLP (C) No. 8299 of 2021) and Civil Appeal No. 754 of 2026 (@ SLP (C) No. 8331 of 2021) (2JB, J.B. Pardiwala and K.V. Viswanathan,  JJ.)