Section 11 of the Arbitration and Conciliation Act 1996 (1996 Act) provides the procedure for appointment of arbitrators.

Section 16 of the 1996 Act gives the arbitral tribunal authority to decide on its own jurisdiction.

Alva Aluminium Limited, Bangkok (Appellant) entered into a contract with Gabriel India Limited (Respondent) for the sale of aluminium alloy ingots (Contract). According to the terms and conditions of the Contract, the price of the goods was payable by a Letter of Credit (LC). The Contract contained an arbitration clause for the settlement of disputes.

Subsequently disputes arose between the Appellant and the Respondent regarding the opening of the LC. Despite the Appellant sending several reminders, the Respondent refused to make payments under the Contract and later claimed that it had not entered into the Contract.

The Appellant appointed an arbitrator but the Respondent refused to do so. The Appellant therefore applied to the Supreme Court for appointment of an arbitrator.

The question to be determined was whether the existence and/or validity of an arbitration agreement was to be decided by the court or its designate in an application for appointment of an arbitrator.

The Supreme Court, relying heavily on SBP & Co. v. Patel Engg. Ltd. and National Insurance Co. Ltd. v Boghara Polyfab (P) Ltd. (AIR 2009 SC 170), held that once the existence of the arbitration agreement is itself questioned, the issue has to be determined by the court or its designate.

On reviewing the facts of the case the Supreme Court held that the Respondent had not adduced sufficient evidence to prove that the signatures on the Contract were not obtained properly. On reaching the conclusion that the execution of the Contract was within the knowledge of the Respondent and that the Contract was executed with its consent, the Supreme Court upheld the validity of the arbitration agreement and referred the parties to arbitration.

This judgment reinforces the principle laid down in Supreme Court's decision in A.P. Tourism Development Corpn. Ltd. v Pampa Hotels (AIR 2010 SC 1806), in which the court held that when the issue of validity of the arbitration agreement is itself in dispute, the issue has to be finally determined by the courts. However, in the Pampa judgment the Supreme Court directed the arbitral tribunal to decide the issue of invalidity of the arbitration agreement (on technical grounds), unlike the present case where the Supreme Court decided the issue on the merits. While the Supreme Court did recognise the power of the arbitral tribunal to decide on such issues, they observed that such power could only be exercised by the arbitral tribunal when the issue of invalidity is raised before it. Such an approach severely dilutes the principle of kompetenz kompetenz. In effect it calls for a decision on merits by the court, which if adverse, leaves virtually nothing to be decided by the arbitral tribunal. However, that is how section 11 of the Act has been applied.