This article is written by Vaibhvee Jangid, pursuing Certificate Course in Arbitration: Strategy, Procedure and Drafting from LawSikho. The article has been edited by Aatima Bhatia (Associate, LawSikho) and Dipshi Swara (Senior Associate, LawSikho).
In this case of Pravin Electricals vs. Galaxy Infra and Engineering Private Limited, the Supreme Court by a 3-judge bench has extensively examined the scope of prima facie review under Section 11 of the Arbitration and Conciliation Act, 1996 and made reference to the 246th Law Commission Report on the Arbitration Act. Through this, the court found the anomaly in Sections 8 and 11 of the Arbitration and Conciliation Act, 1996. This report had led to the amendment in the Act in the year 2015 but the anomaly still persists till date even after 2019 and 2021 amendments to the said act. What is prima facie review? What is the anomaly made reference above? What was decided in the Pravin Electricals vs. Galaxy Infra and Engineering Private Limited? All these questions will be answered through this article by analyzing the above-mentioned case law.
What is prima facie review under Section 11 of the Arbitration Act?
Prima facie review under Section 11 means a preliminary review to examine the existence and validity of the arbitration clause in the agreement. This power to examine is given to the Supreme Court in matters of international commercial arbitration and to the High court in matters other than international commercial arbitration.
Section 11 talks about the appointment of arbitrators in which Sub-section 11(6) sets out where “under an appointment procedure agreed upon by the parties:
- A party fails to act as required under the procedure; or
- The parties, or the two appointed arbitrators, fail to reach an agreement expected of them under that procedure; or
- A person, including an institution, fails to perform any function entrusted to him or it under that procedure,
Then, the appointment shall be made upon an application of the party by the arbitral institution designated by the Supreme Court in the cases of international commercial arbitrations and by the High Court in matters other than international commercial arbitrations, as the case may be to take necessary measures unless the agreement on appointment procedure provides other means for securing the appointment.”
Under this “prima facie” review, it is necessary for the court to ascertain the following aspects:
- Whether there is an arbitration agreement between the parties;
- Whether all the parties to the suit are also parties to the arbitration agreement;
- Whether the disputes which are the subject matter of the dispute fall within the scope of the arbitration agreement;
- Whether the arbitration agreement was in writing.
- Whether the arbitration agreement was contained in an exchange of letters, telecommunication, etc.
- Whether the core contractual ingredients of the arbitration agreement were fulfilled.
Background of the case
This case came to the Supreme Court through a special leave petition and arose out of the petition filed under Section 11(6) of the Arbitration and Conciliation Act, 1996 for the appointment of a sole arbitrator for deciding the disputes between the parties. The appellant is Pravin Electricals Pvt. Ltd. which is in the business of providing services for electrical supplies etc. And operates in key industrial and commercial sectors.
And the respondent is Galaxy Infra and Engineering Pvt. Ltd. is a company in Bihar and has a business of providing consultancy services.
On 26/05/2014, Chief Engineer, South Bihar Power Distribution Company Ltd. (SBPDCL) floated a tender for the execution of a scheme in Bihar on a turnkey basis for strengthening, improving and augmentation of distribution system capacities of 20 towns in Bihar.
Subsequently, the appellant submitted its bid and was declared as the winner and was awarded the work on 22/09/2014. According to the Respondent, the Appellant won the bid because of the efforts put up by the respondent under the Consultancy Agreement dated 07/07/2014 for which it would be getting the commission. It is also alleged that the appellant had sent an email on 15/07/2014 to the respondent with a draft of the agreement for any changes and comments. On the same day, the respondent had replied stating that certain conditions were not accepted. In the emails dated 22nd and 25th July, 2014 the final consultancy agreement was agreed upon.
Respondent then had raised several invoices for its commission but one thing that is important to note is that they were addressed to M/s. Process Construction and Technical Services Pvt. Ltd. (“Process”) and not to the Appellant. And those invoices made reference to the agreement between Process and the Respondent. After several invoices were raised, the Respondent finally sent a legal notice to the Appellant, but to the utter surprise, the Appellant denied the fact that any agreement was entered into between the Appellant and Respondent on 7/7/2014.
Pursuant to this the Respondent under Article 14 of the Consultancy agreement dated 7/7/2014 appointed Kameshwar Chowdhary as the sole arbitrator for adjudicating the dispute. Thereby the appellant denied it saying that when no agreement was entered into between them on July 7, 2014, then this Article cannot be invoked.
Thus on 7/09/2018, the Respondent filed an application under Section 11(6) of the act for appointing an arbitrator to resolve their dispute. The Delhi High Court directed the Respondent to produce the original agreement before the court and asked Mr. M.G.Stephen, the managing director of the appellant to obtain his specimen signatures to get a report as to whether the agreement actually has his signatures or not. The report was made by CFSL.
Thereafter on May 12, 2020, Delhi High Court gave its judgment, it held that the Consultancy agreement was executed between the parties by email on July 7th, 2014 on the basis of invoices, that the Department (SBPDCL) had sent the LOI to not just the Appellant but also to the Respondent, M/s. Process was the sub-contractor of the Appellant and regarding the signatures of Mr. M.G.Stephen, the court with the help of few case laws held that the arbitration agreement needs to be in writing and not necessarily be signed. And then accordingly Justice G.S.Sistani (former Delhi high court judge) was appointed as a sole arbitrator.
Issues in the case
- Whether the ambit of Section 8 and 11 are same in regard to the scope of judicial intervention?
- How to understand the term “prima facie review” under Section 11?
- Whether the alleged agreement dated 7/7/2014 is valid or not?
Arguments put forth
The council for the appellant argued that the agreement dated 7/7/2014 is a concocted agreement, he relied on the CFSL report that the signatures could not be matched. It held that as there was no agreement entered into between the parties, the arbitration clause also cannot be invoked. And said that the negotiations actually were held after the said date and after which an agreement was entered into between them so the alleged agreement does not exist.
He also argued that the agreement was notarized in Haryana whereas the parties belong to Mumbai and Bihar. And also the notary’s license had expired before the notarization that allegedly took place on 7/7/2014. It also said that the said invoices on which the Delhi high court heavily relied were addressed to M/s. Process and not to the Appellant and in the pleadings of the case the Process had been described by the Respondent first as a joint venture partner with the appellant, then as a private company having common directors with the appellant and during the written submissions then it was finally described as a subcontractor. Before the Supreme Court, it has been described as a lead partner of the appellant as well. For all this, the council of the appellant wanted that the case needs to be set aside.
The council for the respondent argued that even if the consultancy agreement dated 7/7/2014 is not relied upon, an arbitration clause existed in the agreement that was executed between them on 25th July, 2014. Then it argued that the SBPDCL had sent an email to the appellant for awarding the contract by marking the respondent in CC. It also said that the CFSL report should not be used to come to any conclusion because it is inconclusive. He finally argued that the ‘dramatis personae’ in the case clearly showed that the appellant would not have got the bid if the respondent would not have helped him.
The decision of the court
The first thing that the court took notice of was the CFSL report to check the questioned signatures on the consultancy agreement dated 7/7/2014. But the result of the report was inconclusive as the model of both signatures were different and thus technically could not be compared.
The court accepted the argument of the council of the appellant that there is no evidence of how the agreement dated 7/7/2014 was formed as no evidence of any negotiations prior to it were produced before the court. Also, there is evidence that the final agreement was entered on 25/07/2014 which reduces the credibility of the alleged agreement dated 7/7/2014.
There was no explanation provided as to why the notary was done in Haryana when both the parties are from Mumbai and Bihar. Also, the notary’s license had expired before the notary was done on the alleged agreement.
The Supreme Court held that the decision of the Delhi high court is incorrect as the invoices on which the high court based its decision were incorrect. And the invoices were raised to the Process and not to the appellant. Also regarding any agreement being made on 7/7/2014, this comes across as something which is not possible as the negotiations were held from 15th July, 2014 and after which a final agreement was entered into between the parties on 25th July, 2015- the evidence of it is available and not denied by the parties. This raises the question then why a final agreement was made when the alleged agreement was already made on 7/7/2014.
Various instances taken of M/S Process, which was finally identified as a subcontractor, were also contentious. And the stance of it being a subcontractor of the appellant is taken only during the written submissions. Also, the signature of Mr. M.G.Stephen is not necessary as the arbitration agreement needs to be in writing and not necessary to be signed. Thus the CFSL report was not used, also because the findings of it were inconclusive.
The draft agreement was for the first time exchanged via email between the parties on 15th July 2014 and not on 7th July 2014 based on the evidence produced before the court.
Though the court through an email ascertained that there was some correspondence between SBPDCL and the respondent which shows that there was some dealing between the appellant and the respondent but a contract was there or not, that could not be ascertained.
Therefore in regard to issue no. 3, the Supreme Court held that it cannot conclusively be held that a valid arbitration agreement exists between the parties and the deeper consideration should be left to the arbitral tribunal to decide. Thus the Supreme Court set aside the Delhi high court judgment as it had held that an arbitration agreement does exist between the parties. However, the court allowed Justice G.S.Sistani (who was appointed by the high court) to be the sole arbitrator.
Analysis of the case on the opinion of judges with case laws
Issue no. 1 and 2 are discussed in this part of the article. The case majorly revolves around Sections 8 and 11 of the Arbitration Act. These two sections have undergone amendments after the 246th report of the law commission on arbitration. The changes that were made in this report are reflected in a Supreme Court case of Mayavati Trading (P) Ltd. v.Pradyuat Deb Burman, (2019) 8 SCC 714:
- That the court has to check the existence of the arbitration clause in the agreement and should not deal with any preliminary issues.
- Konkan Railway Corpn. Ltd. v. Mehul Construction Co., (2000) 7 SCC 201 and in Konkan Railway Corpn. Ltd. v. Rani Construction (P) Ltd., (2002) 2 SCC 388 the same view was taken that the power of the chief justice to appoint the arbitrator is administrative in nature. But a contrary view was taken by a 7-judge bench in SBP & Co. v. Patel Engg. Ltd. (2005) 8 SCC 618, that it is judicial in nature.
- The same stance was taken in National Insurance Co. Ltd. v. Boghara Polyfab (P) Ltd.,(2009) 1 SCC 267 but in addition to that, the court also segregated and identified the preliminary issues that may arise in an application under Section 11 of the act. It divided the issues into three categories (i) which the chief justice (or his designate) is bound to decide; (ii) which he may choose to decide; and (iii) issues which should be left to the arbitral tribunal to decide. But this gave a very wide power to the courts to decide a large number of preliminary aspects which otherwise the arbitrator should decide. This led to a law commission report asking for amendments by adding Sub-section 11(6-A) that said that the “court needs to confine to the examination of the existence of an arbitration agreement.”
- In this case of Mayavati Trading (supra), the Supreme Court didn’t get to identify the real issue of Section 11 that is, about the scope and the limit of how much the court should intervene in a case as to determine the existence of an arbitration agreement. As the issue that was framed in the case was about whether the power of the courts to appoint an arbitrator is judicial or administrative in nature.
- Thereby the commission wanted that Sections 8 and 11 should have the same level of judicial intervention as Section 8 deals with power to refer the parties to arbitration where an arbitration agreement is there and Section 11 as discussed in detail above. In Shin-Etsu Chemical Co. Ltd. v. Aksh Optifibre Ltd., (2005) 7 SCC 234, Supreme Court held that the issues must be looked at only prima facie.
- The commission thus had suggested amendments to the sections so that the judicial authority can check whether an arbitration agreement exists or not and if it does then, shall refer the case to the arbitration where the arbitration would finally decide on the matter. However, if the court finds that the arbitration agreement does not exist then it is final and not prima facie. The commission also wanted that under Sections 8 and 11 when the parties are referred to an arbitral tribunal then that decision is final and non-appealable and an appeal can be made under Section 37 only when the parties are refused to refer to arbitration or refused to appoint an arbitrator.
- Pursuant to it Sub-section 11(6-A) was added. That the high court or the Supreme Court as the case may be must confine itself to examining the existence of the arbitration agreement and to leave all other preliminary issues to the arbitrator.
The most important case law that the Supreme Court referred was Vidya Drolia v. Durga Trading Corporation, (2021) 2 SCC 1, in this case, there were two issues namely (i) when can a subject matter be non-arbitrable and (ii) who decides the non-arbitrability, as to the court at the referral stage or the arbitral tribunal during the proceedings. And also the scope of intervention when the court would decide the arbitrability at the referral stage.
The bench then looked into the law commission report to understand the objective of amendments i.e., adding Sub-section 11 (6-A) in the Act. The commission wanted that the appointment shall not be done by the chief justice but the high court or the Supreme Court and they should delegate the power of the appointment and this power to be regarded as a non-judicial act. This further is clarified by the amendment act of 2015 which added Sub-section 11(6B).
To understand what the ‘prima facie’ means and what is its ambit, the court looked into Section 8, the court held that prima facie review means not doing a complete review or a complete trial but it is a primary review to ascertain and weed out the non-arbitrable disputes and invalid arbitral agreements. Thus the court should not convene itself as some kind of a trial but the court at the referral stage must just look at the preliminary issues. The court in Vimal Kishor Shah v. Jayesh Dinesh Shah, (2016) 8 SCC held that the test that should be applied at the referral stage by the courts is to understand whether there is “good arguable case” for the existence of the arbitration agreement. The court then examined the scope of the word ‘existence’ in 11(6-A) and held that the court just not have to look at the existence of an arbitration clause in the agreement but also to ascertain whether it is valid or not as an invalid arbitration agreement does not exist. Thus existence and validity go hand in hand.
The court then held that the prima facie review under Sections 8 and 11 are the same and not different. They both talk about the existence and the validity of the arbitration agreement and then accordingly have the power to refer the parties to arbitration (Section 8) and appoint an arbitrator (Section 11). The court also looked at the intention of the legislature while they had added Sub-section 11(6) to the Act. They clearly wanted that to reduce the burden of the cases on the courts and the arbitration should be an easy way to have a redressal to their disputes and also thus wanted that there should be a minimum amount of intervention by the courts as to not obfuscate the arbitral proceedings. It held that the scope of the courts is thus limited and restricted.
One thing that is extremely important to note is that the law commission had recommended an amendment under Section 37 which deals with the appeal that the appeal should be provided in cases when the court refuses the parties to refer to arbitration or when it does not appoint an arbitrator. However after the amendment Act of 2015, the appeal provision was extended only to Section 8 and not to Section 11 and it retained Sub-section 11(7) which made the applications under Section 11 non-appealable and thereby created an anomaly because these two provisions’ ambit is the same. Thus in the recent judgment of Vidya Drolia (supra), the court held that the appeal should be extended to Section 11 as well because in both the sections their ambit is the same. And also read that the prima facie test under these sections would also be the same. Thus this anomaly needs to be taken care of by the legislature to make both the provisions appealable. Though using the 2019 amendment to the act, Sub-sections 11(6A) and 11(7) were omitted, the position with regard to the aspect of the appeal is still unclear.
Thus through this case law, we understood the scope and the limit of judicial intervention when it decides the case at the referral stage. It also helped us to understand the anomaly between Section 8 and 11 when their power and ambit is the same, also the wordings as to the “examination or validity” of an arbitration agreement differ and also the provision of appeal is provided only under Section 8 and not under Section 11. This case law in addition to Vidya Drolia judgment makes a strong case for the legislature to make amendments to these sections and thereby bring parity to the provisions.
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