“Ideally the handling of arbitrable disputes should resemble a relay race. In the initial stages, before the arbitrators are seized of the dispute, the baton is in the grasp of the court; for at that stage there is no other organisation which could take steps to prevent the arbitration agreement for being ineffectual. When the arbitrators take charge, they take over the baton and retain it until they have made an award. At this point, having no longer a function to fill, the arbitrator’s hand back the baton so that the court can in case of need lend its coercive powers to the enforcement of the award.” …
Lord Mustill on relationship between Courts and Arbitration.
Introduction
The Arbitration and Conciliation Act, 1996 (“Act”) was enacted with a view to consolidate and amend the law relating to domestic arbitration, international commercial arbitration, enforcement of foreign arbitral awards and the law relating to conciliation. One of the primary objectives of the Act is to reduce and minimize the supervisory role of Courts. The Act was amended by the Arbitration and Conciliation (Amendment) Act, 2015 (“2015 Amendment”), inter alia, to make arbitration process user friendly, cost effective and ensure speedy disposal and neutrality of arbitrators. By virtue of the 2015 Amendment, Section 11(6A) was introduced and earlier position as to the scope of the powers of a Court under Section 11 of the Act was confined to the examination of the existence of an arbitration agreement only notwithstanding any judgment, decree or order of any Court. Though, Section 11 (6A) has been omitted by Amendment Act 33 of 2019, however it is yet to be notified and therefore has not come into effect. As per the report of the committee headed by Justice B. N. Srikrishna, released on 30st July 2017, amendment to Section 11 (6A) has been done to promote institutionalised arbitration and reduce over burdening of Courts.
It is pertinent to note that at the time of deciding the application for appointment of Arbitrator, Courts are often faced with issues relating to existence, validity of the Agreement and arbitrability of the subject matter. While deciding the said issues on the jurisdiction of the Court at the referral stage, views of the Courts have differed from time to time. This article therefore seeks to analyse and examine certain judicial pronouncements to determine Court’s power to expound its intervention at the stage of appointment of arbitrator and to what extent.
Legal position: Pre-2015 Amendment
- A Constitution Bench of seven judges of Supreme Court (“SC”) in the matter of S.B.P & Co. v. Patel Engineering Ltd and Another overruled the judgment of SC in Konkan Railway Corpn. Ltd. and others v. Mehul Construction Co. and Konkan Railway Corpn. Ltd. & another v. Rani Construction Pvt. Ltd. to hold that the power to appoint an arbitrator under Section 11 (6) of the Act is a judicial power and not administrative. In this judgment, the SC had conferred wide powers to Court to analyse and decide on the issues pertaining to appointment of Arbitrator such as existence of a valid arbitration agreement, or of a live claim, the existence of the condition for the exercise of his power and on the qualifications of the Arbitrator or Arbitrators.
- This position was further clarified by two Judges Bench of SC in National Insurance Company Limited v. Boghara Polyfab Private Limited in which the SC identified and segregated the preliminary issues that may arise for consideration in an application under Section 11 of the Act into three categories, that is, (i) issues which the Chief Justice or his designate is bound to decide; (ii) issues which he can also decide, that is, issues which he may choose to decide or leave it to the arbitral tribunal to decide; and (iii) issues which should be left to the Arbitral Tribunal to decide.
Legal position – Post 2015 Amendment
- The scope of the power under Section 11 (6) of the Act was considerably wide in view of the decisions in SBP and Co. (supra) and National Insurance Co. Ltd. (supra). However, post the 2015 Amendment, the issue regarding Court’s power to expound its intervention at the referral stage was considered by the Supreme Court in case of Duro Felguera, S.A. v. Gangavaram Port Limitedin which the Court held that the prima facie validity of the agreement that post 2015 Amendment, the Court has to only see whether the arbitration agreement exists and nothing more.
- However, three Judge Bench of the SC in the matter of Oriental Insurance v. Narbheram Power and Steel Private Limited, while deciding an application under Section 11 of the Act, adopted a slightly different approach. They interpreted the language of the insurance policy and clarified that the Court cannot refer the parties to arbitration in case of a dispute if such dispute is not covered within the scope of the arbitration agreement. In this case the SC while deciding the existence of an Arbitration Agreement clarified that if a clause stipulates that under certain circumstances there can be no arbitration, and they are demonstrably clear then the controversy pertaining to the appointment of arbitrator has to be put to rest. This decision, though dated 2nd May 2018, did not refer to Section 11(6-A) of the Act and interpret the same. In this case, the SC rejected the application for appointment of arbitral tribunal at the referral stage and set a new precedent that the Court can exercise judicial power in a wider sense.
- Similarly, in United India Insurance v. Hyundai Engineering, the three Judge Bench of the SC was vested to decide “whether clause 7 of the subject Insurance Policy dated 5th September 2007 posits unequivocal expression of the intention of arbitration or is hedged with a conditionality”. While distinguishing the judgment of Duro Felguera (supra) andplacing reliance upon Oriental Insurance (supra), the SC rejected the plea for appointment of arbitrator as dispute in question was non-arbitrable.The SC held that that the arbitration clause has to be interpreted strictly. It is pertinent to note that in this case, reference was made to Section 11(6A) of the Act. It is, therefore, clear that on two occasions, in Narbheram Power and Steel Private Limited (supra) and Hyundai Engineering and Construction Company Limited (supra), a three Judges’ Bench of the Court affirmatively and in clear terms held that the question of non-arbitrability relating to the enquiry whether the dispute was governed by the arbitration clause, can be examined by the courts at the reference stage and may not be left unanswered to be examined and decided by the arbitral tribunal.
- Further, in United India Insurance v. Antique Art Exports (“Antique Arts”), the SC, in a proceeding under Section 11 of the Act, distinguished the holding in Duro Felgura (supra) on the grounds that the same was a mere general observation about the effect of the amended provisions and that the said decision was distinguishable on the facts of the case. The Court held that the power under Section 11 upon the Chief Justice/ his designates is a judicial power and not an administrative function, therefore leaving some degree of judicial intervention. The Court went on to hold that when it comes to examining the prima facie existence of an arbitration agreement, it is always necessary to ensure that the dispute resolution process does not become unnecessarily protracted.
- However, the aforesaid judgement in Antique Arts (supra) was overruled by three Judge Bench of the SC in the matter of Mayavti Trading Pvt. Ltd. v. Pradyuat Deb Burman which held that Court’s power in an application under Section 11 is confined only to the examination of the existence of a valid arbitration agreement and the Court cannot decide on the arbitrability of a dispute. Moreover, the Court upheld the narrow construction of Section 11(6A) as adopted in Duro Felguera (supra). The Court further referred to the legislative scheme of Section 11, different interpretations, and the Law Commission’s Reports, and held that the omitted Section 11(A) of the Act would continue to apply and guide the courts on its scope of jurisdiction at stage one, that is the pre-arbitration stage.
- Considering and relying upon the aforesaid judgments of SC, three Judge Bench of SC in the matter of Vidya Drolia and Ors. v. Durga Trading Corporation held thatthe scope of judicial review and jurisdiction of the court under Section 8 and 11 of the Arbitration Act is identical but extremely limited and restricted. The SC observed that referral proceedings are preliminary and summary and not a mini trial. The SC further held that the expression ‘existence of an arbitration agreement’ in Section 11 of the Act, would include aspect of validity of an arbitration agreement, albeit the court at the referral stage would apply the prima facie test on the basis of principles set out in this judgment. In cases of debatable and disputable facts, and good reasonable arguable case, etc., the court would force the parties to abide by the arbitration agreement as the arbitral tribunal has primary jurisdiction and authority to decide the disputes including the question of jurisdiction and non-arbitrability.
- The SC further clarified that the scope of the Court to examine the prima facie validity of an agreement includes only the determination of the following:
- whether the arbitration agreement between the parties was in writing?
- whether the arbitration agreement was contained within letters and telecommunications?
- whether the contractual ingredients of the agreement were satisfied?
- whether the subject matter concerning disputes is arbitrable?” (emphasis supplied)
Recent Development: a welcoming step
However, putting the aforesaid legal conundrum into rest and clearing the dust over the scope and extent of Courts while deciding an application for appointment of Arbitral Tribunal, three Judge Bench of SC in the matter of Sanjiv Prakash v. Seema Kukreja and Ors., recently held that the “court cannot, at the stage of appointment of Arbitrator, enter into a mini trial or elaborate review of the facts and law which would usurp the jurisdiction of the arbitral tribunal”. While setting aside the impugned judgment of the Hon’ble Delhi High Court, the SC held that the “The impugned judgment was wholly incorrect in deciding that the plea of doctrine of kompetenz-kompetenz and reliance on Section 11(6A) of the 1996 Act, as expounded in Duro Felguera (supra) and Mayavati Trading (supra) were not applicable to the case in hand”. The SC further made an important observation regarding issue pertaining to novation & validity of MOU and held that issue whether an agreement which contains an arbitration clause has or has not been novated, cannot be decided by the Courts at the Section 11 stage.
Conclusion
Considering the aforesaid judicial pronouncements and recent judgment of SC in the matter of Sanjiv Prakash (supra), it can be concluded that Courts judicial intervention at the referral stage is narrow and confined only to see existence of Arbitration Agreement and nothing else. However, the Courts at the referral stage are also required to protect parties from being forced to arbitrate, when the matter is clearly non-arbitrable. As stated, legislative intent is essentially to minimize the Court’s intervention at the stage of appointing the arbitrator and this intention is incorporated in Section 11 (6A). Additionally, by virtue of 2019 Amendment, which inter-alia seeks omission of section 11 (6A) of the Act and is yet to be notified, the legislature has tried to reduce Court’s burden by conferring that appointment of arbitrators is to be done institutionally, in which case the Supreme Court or the High Court under the 2015 amendment are no longer required to appoint arbitrators. Further scope of the judicial intervention of High Court and Supreme Court would also come to an end. However, given a situation it would be interesting to know as to how and to what extent the Courts and / or Arbitration Institution spread its wing to decide application for appointment of Arbitrator.