No Immediate Challenge To Arbitrator's Rejection Of Jurisdiction Plea; Must Wait For Final Award: Supreme Court

The Supreme Court has recently held that when a claim is challenged as time-barred to question an arbitrator's jurisdiction, and the arbitrator rejects that objection, the party cannot challenge it midway and must wait until the final award.

A Division Bench of Justices Sanjay Kumar and K. Vinod Chandran observed that

"In that situation, there is no option for the party aggrieved by the decision of the arbitrator upon the application filed under Section 16 except to wait till the conclusion of the arbitral proceedings and then raise that issue by way of an application under Section 34 against the final award."

The ruling came in a dispute between MCM Worldwide Private Limited and the Construction Industry Development Council. It arose out of two Memoranda of Understanding dated March 2, 2006 and May 5, 2008, executed by the company in connection with an Employment Generation and Marketing Mission under the Department of Rural Development, Government of Andhra Pradesh.

MCM had initially filed a recovery suit in 2018 before a Delhi court seeking its alleged dues. The dispute was, however, referred to arbitration in view of the arbitration clause in the agreements. When the parties failed to agree on an arbitrator, the Delhi High Court appointed a sole arbitrator in September 2021.

During the arbitral proceedings, the Construction Industry Development Council raised a plea that MCM's claims were barred by limitation, treating it as a jurisdictional objection. The arbitrator rejected this plea and proceeded with the arbitration.

The Council first challenged this order before the District Court, but its initial challenge was rejected as not maintainable. It then filed a fresh challenge, which was entertained and dismissed on merits. The Council thereafter succeeded before the Delhi High Court in an appeal, with the High Court setting aside the District Court's order without examining whether such a challenge was maintainable at that stage.

MCM approached the Supreme Court, saying the challenge itself was premature and ran contrary to the scheme of the law governing arbitration. Its case was that once a jurisdictional objection is rejected, the arbitral process must continue, and any challenge to that decision can be raised only after the final award.

The court agreed. It said that where a tribunal rejects a plea of lack of jurisdiction, it must proceed with the arbitration, leaving the aggrieved party to question that decision only at the stage of challenge to the final award.

On the other side, the Development Council relied on Indian Farmers Fertilizer Cooperative Limited v. Bhadra Products to contend that such determinations could be treated as interim awards and tested immediately.

Rejecting this argument, the court clarified that its earlier ruling had been misunderstood and drew a distinction between limitation decided as a standalone issue and a limitation raised as a jurisdictional objection.

“The exclusion of an order passed by an arbitrator under Section 16(2), rejecting the plea of lack of jurisdiction is, therefore, manifest from the aforestated observations of this Court, but this decision has now been misunderstood to imply that, even the rejection of a plea under Section 16(2) of the Arbitration Act must be treated as an interim award and the same can be subjected to challenge under Section 34 of the Arbitration Act. This understanding on the part of the learned District Judge, which seems to have found favour with the Division Bench of the Delhi High Court, is erroneous and unsustainable.”

The court emphasised that allowing such mid-way challenges would disrupt the arbitral process and undermine the scheme of the law. It noted that immediate appeals are permitted only where an arbitrator accepts a jurisdictional objection and terminates the proceedings.

Holding that the challenge before the District Court itself was not maintainable, the Court set aside the Delhi High Court's judgment. It clarified that the respondent can raise its objections only after the final arbitral award.

For Petitioner (MCM Worldwide Private Limited): Advocate Mohini Priya.

For Respondent (Construction Industry Development Council): Advocate Anu Gupta.