The Principle of Kompetenz-Kompetenz and the Shift Towards a Waiver-Based Approach: Analysing Gayatri Project Ltd. v. M.P. Road Development Corpn. Ltd.

Introduction

The Arbitration and Conciliation Act, 1996 (hereinafter referred to as the, “Act of 1996”)¹ is a revolutionary legislation that promotes settlement outside courts thus reducing the burden on the traditional courts. Although, the Act of 1996 is a remarkable piece of legislation, yet it has undergone several important amendments and judicial interpretations with the objective of upholding the primary principles of fairness, party autonomy and minimum judicial interference.

However, two complex doctrinal issues have persistently tested this pro-arbitration framework. The first concerns the interplay between the Act of 1996 and certain special State legislations, particularly the M.P. Madhyastham Adhikaran Adhiniyam, 1983 (hereinafter referred to as, “the State Act”)². The courts have consistently grappled with two key issues. The first concerns the determination of the governing law when a dispute arises out of a works contract involving the State. The second pertains to jurisdictional objections, specifically, whether a party that fails to raise such an objection before the Arbitral Tribunal can later invoke it at the stage of Section 34³ proceedings.

Recently, the Supreme Court of India was faced with such issues in Gayatri Project Ltd. v. M.P. Road Development Corpn. Ltd.⁴ wherein the issue regarding whether the jurisdiction of the Arbitral Tribunal can be challenged at the stage of Section 34 was considered and put to rest. While doing so, the Court went on to explore and analyse the judicial trends from M.P. Rural Road Development Authority v. L.G. Chaudhary Engineers & Contractors⁵, M.P. Rural Road Development Authority v. L.G. Chaudhary Engineers and Contractors⁶ and Lion Engg. Consultants v. State of M.P.⁷, amongst others to arrive at a plausible conclusion. This article analyses the shift in Indian jurisprudence from jurisdictional absolutism to a waiver-based approach.

The principle of kompetenz-kompetenz

Section 16⁸ of the Act of 1996 provides for the principle of “kompetenz-kompetenz” which means that the Tribunal is competent to rule on its own jurisdiction. Section 5⁹ read with Section 16 of the Act of 1996 bolsters the legislative intent of minimising judicial interference and ensure that the arbitral proceedings are not derailed by just preliminary objections. Further, Section 4¹⁰ of the Act of 1996 provides that if a party knows that a particular requirement under the Act or the agreement has not been complied with and still proceeds with the arbitral proceedings without raising any objections, that party is said to have waived its right to object later.

Moreover, Section 16(2) of the Act of 1996 provides that any objection to jurisdiction must not be raised after submission of the statement of defence. The insertion of Section 11(6-A)¹¹ by the 2015 Amendment¹² to the Act of 1996 curtailed the scope of judicial intervention at the stage of appointment, limiting the court’s examination strictly to the existence of an arbitration agreement, while leaving the issues of jurisdiction to be determined by the Arbitral Tribunal.

The Supreme Court in Uttarakhand Purv Sainik Kalyan Nigam Ltd. v. Northern Coal Field Ltd.¹³ while relying upon NTPC Ltd. v. Siemens Atkeingesellschaft¹⁴, affirmed the principle of kompetenz-kompetenz by observing that the Tribunal has the competence to rule on all jurisdictional matters as it involves mixed questions of facts and law. However, in cases where the arbitration agreement is vitiated by fraud or deception, the courts may intervene to prevent unwarranted arbitral proceedings. Thus, the principle of kompetenz-kompetenz establishes that the questions of jurisdiction must be raised before the Tribunal, empowering to rule on its own jurisdiction while allowing for minimum judicial interference where necessary.

Section 34 and the jurisdictional issue

Section 34 of the Act of 1996 provides for the parties aggrieved by an arbitral award to move an application for setting aside the award. The provision provides for various grounds to set aside an arbitral award such as the incapacity of the parties, invalid arbitration agreement, lack of prior notice, matters beyond the scope of arbitration, etc. However, the provision does not explicitly provide for an arbitral award to be challenged under Section 34 on the ground of lack of jurisdiction. Thus, it raises an important issue regarding whether the issue of jurisdiction could be raised at the stage of Section 34 when the same was not raised before the Tribunal. This issue came to be finally decided in Gayatri Project case¹⁵. However, the path to Gayatri Project case¹⁶ cannot be understood without retracing the doctrinal back-and-forth that preceded it.

Doctrinal evolution: From jurisdictional absolutism to a waiver-based approach

The Supreme Court in Gas Authority of India Ltd. v. Keti Construction (I) Ltd.¹⁷, observed that the plea regarding jurisdiction must be raised before the Arbitral Tribunal. In case, the jurisdictional plea is not raised before the Tribunal, then the party needs to make out a strong case at the stage of Section 34 explaining the reasons for not taking the plea of jurisdiction before the Tribunal.

Then in State of M.P. v. Anshuman Shukla¹⁸, the Supreme Court while deciding upon whether the Limitation Act, 1963¹⁹ is applicable to the State Act also went on to discuss the exclusion of the Arbitration Act, 1940²⁰ and Act of 1996 in lieu of the applicability of the State Act. It was observed that the State Act was enacted to arbitrate on disputes where the State Government or public undertaking is a party and the dispute involves a works contract. The Act of 1996 will have no applicability over the State Act, it being a specialised legislation. Thus, an award under the State Act cannot be challenged under Section 34 of the Act of 1996 on the ground of jurisdiction or otherwise.

In VA Tech Escher Wyass Flovel Ltd. v. M.P. SEB²¹, the Supreme Court addressed the conflict between the State Act and the Act of 1996. Section 7(1)²² of the State Act, provided that either party to a works contract must refer the dispute to the Tribunal constituted under the State Act irrespective of the fact whether the agreement contains an arbitration clause or not. The Court tried to harmonise both the legislations and held that the State Act applies only where there is no arbitration clause and in case there is an arbitration clause, the State Act stands impliedly repealed by the Act of 1996.

The Supreme Court then in Ravikant Bansal v. M.P. Rural Road Development Authority²³ had the occasion to clarify its earlier position in VA Tech case²⁴ and it was observed that where the arbitration clause itself mentions that the arbitration will be adjudicated by the Madhya Pradesh Arbitration Tribunal, then the Act of 1996 will be excluded.

In M.P. Rural Road Development Authority v. L.G. Chaudhary Engineers & Contractors (L.G. Chaudhary I)²⁵, the Supreme Court while reinstating the primacy of the State Act, held the law laid down by the Court in VA Tech case²⁶ to be per incuriam. This is because the judgment in VA Tech case²⁷ failed to take into consideration Section 2(4)²⁸ of the Act of 1996 which provided that Part I of the Act of 1996 will apply only insofar as its provisions are not inconsistent with the other enactments. Moreover, the Court failed to consider the decision of the Supreme Court in Anshuman Shukla case²⁹ that dealt with the inconsistencies between the Act of 1996 and the State Act comprehensively.

The Supreme Court in L.G. Chaudhary I³⁰ referred the matter to a larger Bench on the issue of whether a dispute arising from the cancellation, termination, or repudiation of a works contract would still fall within the scope of the State Act. Then the Court in M.P. Rural Road Development Authority v. L.G. Chaudhary Engineers and Contractors (L.G. Chaudhary II)³¹ confirmed the position of L.G. Chaudhary I³² that the State Act must prevail over the Central legislation in terms of Section 2(4) of the Act of 1996. However, the Court went on to observe that in case the party does not raise objection in terms of Section 16(2) of the Act of 1996 at the appropriate stage within the time stipulated, then the arbitral award cannot be annulled on jurisdictional grounds.

Then a three-Judge Bench of the Supreme Court in Lion Engg. Consultants case³³ took an unprecedented turn by holding that there is no bar to a plea of jurisdiction being raised by way of an objection under Section 34 of the Act of 1996 even if no such objection was raised under Section 16, as it involves a question of law. This case again led to an uncertainty, however the subsequent judgments reasserted the principle of waiver.

The Supreme Court in a series of cases including JMC Projects (India) Ltd. v. M.P. Road Development Corpn.³⁴, Sweta Construction v. Chhattisgarh State Power Generation Co. Ltd.³⁵, Modern Builders v. State of M.P.³⁶ and recently in AC Chokshi Share Broker (P) Ltd. v. Jatin Pratap Desai³⁷, observed that award should not be set aside on the ground of jurisdiction alone.

The doctrinal finality in Gayatri Project Ltd. v. M.P. Road Development Corpn. Ltd.

Facts of the case

The appellant, Gayatri Projects Limited entered into a works contract with the respondent Corporation in 2005. The works contract contained an arbitration clause that provided for the Act of 1996 and the rules thereunder to apply to the arbitration proceedings.

In 2010, a dispute arose between the parties, when the appellant sought reimbursement from the respondent Corporation in regards to the extra cost it had to bear due to a subsequent legislation that had increased the entry tax on high-speed diesel. Thus, a three-member Arbitral Tribunal was constituted to adjudicate the dispute between the parties.

In 2011, the Arbitral Tribunal passed a unanimous award in favour of the appellant, awarding a sum of Rs 1.04 crore along with future interest at the rate of 10% per annum from the date of the award till the actual date of payment. The respondent Corporation being aggrieved by the arbitral award filed an application under Section 34 of the Act of 1996, seeking to set aside the award. Initially, the respondent in its application under Section 34 did not raise the ground of jurisdiction, however, the same was belatedly raised in 2018 when a Full Bench of the Madhya Pradesh High Court in Viva Highways Ltd. v. M.P. Road Development Corpn. Ltd.³⁸, held that the State Act would apply to all work contracts in the State of Madhya Pradesh, even when such contracts already contained an arbitration agreement. Eventually, the arbitral award was set aside by the commercial court and upheld by the High Court on the ground that the Tribunal lacked jurisdiction in view of the State Act. Being aggrieved by the setting aside of the arbitral award, the appellant approached the Supreme Court of India.

The Supreme Court in Gayatri Project case³⁹, while laying emphasis on Section 16 of the Act of 1996 observed that the objection on jurisdiction need not be taken later than submission of the statement of defence. Further, silence or inaction in taking an objection on the jurisdiction leads to waiver of such right at the stage of Section 34 of the Act of 1996.

While observing the jurisprudential evolution on the subject, the Court noted that no direct conflict existed between the decisions in Lion Engg. Consultants case⁴⁰ and LG Chaudhary II⁴¹. In Lion Engg. Consultants case⁴² it was observed that the plea of jurisdiction can be raised by the parties even under Section 34 proceedings, however, LG Chaudhary II⁴³, clarified the position by carving out an exception with respect to the cases involving the State Act and observed that if the party has already filed its statement of defence or if the award has already been passed and no jurisdictional objection was taken before the Arbitral Tribunal, then such objection cannot be taken at the stage of Section 34 proceedings.

Section 16: A need for reform

Although, a catena of judicial pronouncements prescribes the waiver approach, yet the current Section 16 mechanism has its own inefficiencies. This is particularly evident when the Tribunal rejects an objection to jurisdiction raised by a party but the party has no remedy but to wait for the final award and challenge it under Section 34 of the Act of 1996. Thus, it is pertinent that a mechanism is adopted whereby rejection to the jurisdictional objection could be challenged by way of an appeal under Section 37⁴⁴ of the Act of 1996. Even the courts in Singapore apply the principle of “transnational issue estoppels”⁴⁵ that puts a bar on the parties from relitigating jurisdictional objections across different forums.

The Expert Committee on Arbitration Law, led by Dr T.K. Viswanathan⁴⁶ has proposed a significant reform by way of introduction of a limited statutory appeal under Section 37 of the Act of 1996, against an order rejecting a Section 16 application. By implementing such a change, the arbitral proceedings can reach a certainty. If the jurisdictional objection is confirmed then the proceedings could be terminated immediately. On the other hand, if the jurisdictional objection is denied, then the arbitral proceedings can continue with procedural certainty, free from the lingering threat of the arbitral proceedings being annulled at the stage of Section 34 on the ground of jurisdiction.

Conclusion

The Supreme Court’s ruling in Gayatri Project case⁴⁷ decisively resolves a long-standing doctrinal tension over jurisdictional objections. By embedding the principle of waiver into Indian arbitration law, the Court has clarified that jurisdiction is not an absolute trump card but a procedural right that must be exercised promptly or lost. This approach aligns Indian law with the United Nations Commission on International Trade Law (UNCITRAL) Model Law⁴⁸ and leading arbitral jurisdictions such as the UK, Singapore, and Hong Kong, where efficiency and finality are prioritised over belated challenges.

The judgment also balances federal considerations by recognising the continued relevance of special statutory regimes like the State Act while ensuring that the procedural discipline of Section 16 applies uniformly across arbitral practice.