Annual Arbitration Review 2018

Lion Engineering Consultants v State of MP

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Judgment:  Lion Engineering Consultants v State of MP & Ors

 

Citation:(2018) 16 SCC 758

 

Court: The Supreme Court of India

 

Coram: AK Goel, Rohinton Fali Nariman and UU Lalit, JJ.

 

Date: March 22nd2018

 

Overview:

 

Issue:i) Whether there is a bar to plea of jurisdiction being raised in objection under section 34 of the Arbitration Act even if the same was not raised under Section 16.

  1. ii) Whether the expression “public policy of India” under Section 34 of the Act refers to State law or Central law.

 

Factual background:

A contractual dispute arose between M/s Lion Engineering Consultants (“Appellant“) and State of Madhya Pradesh (“Respondent“) which was referred to arbitration. The arbitral award which was passed by the Tribunal was challenged under Section 34 of the Arbitration and Conciliation Act, 1996 by the Respondent.

At the stage of hearing of challenge to the award, the Respondent sought to amend its objections after three years with regard to jurisdiction of the arbitral tribunal, which was rejected by the Trial Court. The High Court of Madhya Pradesh in a writ petition under Article 227 of the Constitution allowed the amendment. This judgment of the High Court was challenged by the Appellant before the Supreme Court of India by way of a Special Leave Petition.

Analysis:

Before the Supreme Court the Appellant contended that the challenge to jurisdiction had not been made in front of the arbitrator in the course of the arbitral proceeding under section 16(2), and thus the same cannot be allowed to be raised at the stage after the arbitration award.

The State of Madhya Pradesh on the other hand contended that a legal plea arising on undisputed facts is not precluded by section 34(2)(b) of the Act and further “even if an objection to jurisdiction is not raised under Section 16 of the Act, the same can be raised under Section 34 of the Act.” The Supreme Court, agreeing with the argument of the State, upheld the decision of the High Court. The result of this ruling was that the State was allowed to raise an objection to the jurisdiction of the arbitral tribunal for the first time at the setting aside stage.

Coming to the second issue of importance in this case i.e. public policy, it had been observed in MSP Infrastructures[1]that “public policy of India” refers to public policy of India as a whole and not merely the policy of an individual State. However, it depends on the context whether upholding of a State law would be part of “public policy of India” or not. The Court in MSP Infrastructures also held that in case of conflict between action under State law and Central law, “public policy of India” must be interpreted as policy of the Union.

The Court held that the above observations in MSP Infrastructures is bad law. It was held that the “public policy of India” refers to law in force in India including both State law and Central law. The Court overruled its observations to the contrary in MSP Infrastructures.

Conclusion:

The judgment widens the scope of challenge to an arbitral award under Section 34(2)(b)(ii) of the Act.  By overruling MSP Infrastructures, the Supreme Court has opened up space for raising all jurisdictional objections (including arbitrability of disputes) in challenge proceedings under Section 34 despite the jurisdictional objections not having been raised before the tribunal under Section 16 of the Act. This dilutes the effectiveness of Section 16(2) of the Act, which provides that the plea of jurisdiction has to be raised before the tribunal before submission of statement of defence.

 

With regard to the public policy argument, MSP Infrastructures had held that whether State law would be part of “public policy of India” must depend on the context. It had held that in case of conflict between action under State law and Central law, the “public policy” would refer to policy of the Union. This judgment, while overruling MSP Infrastructures, clarifies the ambit of “public policy” to include both State law and Central law.

[1]MSP Infrastructures Ltd. v. Madhya Pradesh Road Development Corporation Ltd, (2015) 13 SCC 713 (Paras 16 and 17).

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