M/s Eminent Colonizers Private Limited v. Rajasthan Housing Board and Ors.
Background
The appellant-contractor had construction disputes with the Rajasthan Housing Board over escalation costs on two building contracts. When the Board did not properly constitute the "Standing Committee" required by Clause 23 of the contracts to resolve disputes, the contractor obtained orders from a High Court Single Judge (in 2014, before the 2015 amendments to the Arbitration Act) appointing retired judges as sole arbitrators, treating Clause 23 as an arbitration clause. The arbitrators ruled in the contractor's favour and awarded compensation, but the Board later challenged the awards, arguing Clause 23 was never truly an arbitration clause at all, and the Commercial Court and the High Court agreed, setting the awards aside.
Decision Breakdown
The Supreme Court held that under the law as it stood when these arbitrators were appointed (the pre-2015 "SBP & Co. v. Patel Engineering" regime), a Section 11 court appointing an arbitrator was required to determine both the existence and validity of the arbitration clause, and since the Board never appealed those appointment orders, they became final and binding, operating as res judicata on the question of whether Clause 23 was a valid arbitration clause. The Commercial Court and High Court therefore erred in reopening that question years later while deciding challenges to the arbitral awards; they confused "precedent" with "res judicata." The Court set aside both High Court judgments and allowed the appeals, but since the Commercial Courts had not examined the Board's other objections to the awards, it remitted both matters back to the Commercial Court to decide those remaining objections within three months.
Lesson Learnt
An order appointing an arbitrator, if not appealed, becomes final and binds the parties at every later stage of the dispute, including any later attempt to set aside the resulting award, so a party wishing to contest whether an arbitration clause is valid must challenge that question at the appointment stage itself, not years later.