Parties Cannot Challenge Arbitration Clause After Accepting Court-Appointed Arbitrator Under Pre-2015 Regime: Supreme Court

The Supreme Court on Wednesday (February 4) reaffirmed that parties who accept a court order appointing an arbitrator under the pre-2015 arbitration regime cannot later challenge the existence or validity of the arbitration clause while assailing the arbitral award.

The ruling was delivered by a bench comprising Justices J.B. Pardiwala and K.V. Viswanathan.

Under the law as it stood before the 2015 amendments, the Chief Justice or the designated judge exercising powers under Section 11 was required to undertake a judicial determination of jurisdictional issues, including whether a valid arbitration agreement existed.

That determination, the court reiterated, attained finality under Section 11(7) and bound the parties through all subsequent stages of the dispute, including challenges under Section 34.

The Court relied on the precedent in SBP & Co. v. Patel Engineering Ltd. (2005), which settled that once a Section 11 appointment is accepted, parties cannot later reopen questions surrounding the arbitration agreement's existence or validity before either the arbitral tribunal or the courts.

In contrast, the post-2015 regime significantly narrows judicial scrutiny at the referral stage. Following the insertion of Section 11(6A), courts are confined to examining only the existence of an arbitration agreement, on a prima facie examination, as reaffirmed by the Supreme Court in In Re: Interplay of Arbitration Clauses (2024).

The dispute in the present case arose from construction contracts involving claims for unpaid escalation costs. The contracts provided for dispute resolution by an “empowered Standing Committee” of government officials. When the Rajasthan Housing Board failed to constitute the committee in accordance with the contract, the contractor moved the Rajasthan High Court under Section 11.

In 2014, a single judge of the High Court appointed a sole arbitrator, noting non-compliance with the contractual dispute resolution mechanism. The Housing Board accepted the appointment without challenge.

After the arbitrator passed an award in favour of the contractor, the Housing Board sought to set it aside under Section 34, arguing for the first time that the contractual clause was not an arbitration agreement at all. The Commercial Court accepted this argument, and the High Court upheld that view.

Setting aside both orders, the Supreme Court held that the lower courts had exceeded their jurisdiction by reopening issues already settled at the Section 11 stage. The court observed that the order appointing the arbitrator had attained finality and that, having accepted that order, the respondents were precluded from questioning the existence or validity of the arbitration agreement at the Section 34 stage.

The judgment further clarified that findings recorded under Section 11 in pre-2015 cases bind parties not only before the arbitral tribunal but also during subsequent proceedings, including challenges under Sections 34 and 37.

Applying the law laid down in SBP & Co., the court observed that “Commercial Court and the High Court clearly erred in going into the existence and validity of Clause 23 and pronouncing that the said clause was not an arbitration clause.”

“In the present case, the order appointing the Arbitrator attained finality with no challenge being thrown. The respondents accepted the order and did not challenge the appointment in this Court…The fact that the respondents accepted the order and did not challenge it only puts the matter beyond any pale of controversy. The further finding of the Commercial Court in the Section 34 application that the order of the Section 11 court did not have any precedential value and hence the order will not be binding is in the teeth of the judgment in SBP (supra).”, the court observed.

The appeal was accordingly allowed.