Image source: https://rb.gy/d0efbw

This article is written by Raina Jain, pursuing a Certificate Course in Arbitration: Strategy, Procedure and Drafting from LawSikho. This article has been edited by Aatima Bhatia (Associate, LawSikho) and Dipshi Swara (Senior Associate, LawSikho).

Introduction 

The recent judgment delivered by the Apex Court in Vidya Drolia v. Durga Trading Corporation (‘Vidya Drolia’), has finally settled a number of crucial aspects which were leading to an uncertain position of arbitration law in India. It has resolved and rectified a  host of issues pertaining to the system of domestic arbitration in India, including the prolonged controversy on the scope of judicial intervention to examine an arbitration agreement in the pre-arbitral stage. The court has significantly narrowed down the scope of court interference in this pre-arbitral stage. 

The court found that the scope of review of applications filed under both Section 8 and Section 11 of the Arbitration and Conciliation Act is more instructive in nature. The legal issues involved in the referral stage also included questions such as who must decide on matters of Arbitrability and up to what extent? Whether there exists parity in approach while dealing with the scope of inquiry under Sections 8 and 11? Whether the “existence” or rather “validity” of an arbitration agreement is to be examined? Whether courts/ judicial authorities should finally determine the case or just leave the matter with the prima facie review in this pre-arbitral stage? And, what would be the scope and test of prima facie? 

The present article will address the above-mentioned legal issues and throw light on the legal position of the scope of inquiry of judicial intervention in a pre-arbitral stage. It will look at the transition in the approach of the legislature and courts while analysing the recent amendments and the judicial pronouncements which connoted such a shift. 

Examination of an arbitration agreement at pre-arbitral stage. (under Sections 8 and 11.)

Section 8 of the Act, entitles a judicial body to refer parties to arbitration where there already exists a valid arbitration agreement, thereby honoring the parties (pre-dispute) pact. Similarly, Section 11 of the Act empowers the judicial body to assist parties in the appointment of the arbitrators for the commencement of the arbitration proceedings, which is subject to the existence of a valid arbitration agreement. As the above-said situations take place before the establishment of an arbitral tribunal, thus this stage is known as a “Pre-Arbitral/ Referral Stage”. 

Further, a similarity can be drawn in both the above-mentioned situations arising under Sections 8 and 11, which is that both the applications are subject to the scrutiny of the judicial authority in relation to their existence of the validity of the arbitration agreement. This act of scrutiny by the judicial authorities in the arbitration domain is where the grey area lies. Since this power of examination by the courts, there arises a very crucial question of what should be the scope of judicial intervention in this stage and where it ought to draw the line of demarcation. 

arbitration

Defeating the objectives of the Act : prior to the 2015 Amendment

The intention of the legislature behind introducing the arbitration and conciliation act, 1996 was to:   

  • Reduce the judicial intervention in the arbitration proceedings;
  • Make arbitration environment in India more responsive to contemporary demands and;
  • To expedite disposal of cases, thereby lessening the load of the overburdened judiciary.

However, while interpreting Section 11 prior to the 2015 Amendment Act, the Apex Court in the case of Boghara Polyfab Pvt. Ltd. v. National Insurance Company Ltd.,  relied on  SBP & Co. v. Patel Engineering Ltd and categorised the issues which can or cannot be decided by the concerned court while appointing the arbitrator under Section 11. Moreover, the aforementioned cases not only gave the power to judicial bodies to decide the existence of the arbitration agreement but stretched the power to even decide the preliminary issues involved therein.

Consequently, the Court’s role no longer remained that of a ‘facilitator’ leading to increased court interference in the arbitral procedure, and the Court’s extended involvement essentially means slow disposal of cases. Besides, the verdict to bestow power on courts to adjudicate primary or jurisdictional issues goes against the express mentioning of Section 16  of the Act which recognizes the Kompetenz-Kompetenz principle. 

Furthermore, while addressing Section 8 of the Act, the Supreme Court again in Booz Allen & Hamilton Inc. v. SBI Home Finance Ltd. and A. Ayyasamy v. A. Paramasivam and Others, held that a Court at the pre-arbitral stage itself should decide not merely the existence but also the validity of the arbitration agreement (including the arbitrability of the dispute), thereby overlooking the principle of Section 16 again.

Evidently, in the above-mentioned decisions, it can be seen that the scope of Sections 8 and 11 was widened by the court which has gone against the intention of the legislature, therefore thwarting the spirit of the Act.

The 2015 Amendment : an attempt to restrict the scope of judicial intervention

The Law Commission of India, in its 246th report, recommended amendments to Sections 8 of the Arbitration Act, with the aim to curb the scope of judicial interference at the pre-arbitral stage and stated that the courts need to only prima facie determine whether an arbitration agreement exists. Thus, making it obligatory for the court to refer the parties to arbitration, and leaving the ultimate decision of the existence and validity of an arbitration agreement to the arbitral tribunal under Section 16, thereby upholding the principle of Kompetenz-Kompetenz. On the other hand, if the judicial authority in its prima facie determination concludes that the arbitration agreement does not exist, then the judicial authority can take the final call, therefore, resulting in saving the time of the arbitral tribunal.

As a consequence of the 246th Law Commission report, through the 2015 Amendment Act, the Prima facie test was brought into force, which was also aimed at nullifying the effect of Booz Allen and Ayyasamy.

However, it is pertinent to note that the term “prima facie” was not inserted into Section 11 (6A) by virtue of the Law Commission’s recommendation. As a result, the applicability of the prima facie test was limited to only applications filed under Section 8. Hence, the legislature gave rise to chaos yet again by leaving a loophole as to what would be the scope of examination under Section 11. Also, it brought forth a significant shift to the controversy by raising another fundamental question of whether there exists parity in approach while dealing with the scope of inquiry under Sections 8 and 11? (As both in their essence was concerning the judicial intervention at the pre-arbitral stage.)

Aftermath of the 2015 Amendment

Despite the 2015 Amendment, the Supreme Court has been jumbled up between contrasting views with respect to the standards and scope of scrutiny that is to be adopted while addressing the issues of pre-arbitral stage i.e. with an application for appointment of an arbitrator or while referring parties to the arbitration. (Under Section 8 and 11)

In the beginning, it was stated in Duro Felguera v. Gangavaram Port Limited, (“Duro Felguera”), that the courts were compelled to see only the existence of an arbitration agreement – “nothing more, nothing less.” Herein, the court applied the literal interpretation rule to Section 11 (6A) to restrict the scope of examination to the ‘existence’ of an arbitration agreement and also laid down certain factors for deciding the same. The court held:

“From a reading of Section 11(6-A), the intention of the legislature is crystal clear i.e. the court should and need only into one aspect – the existence of an arbitration agreement. What are the factors for deciding as to whether there is an arbitration agreement is a next question. The resolution to that is simple – it needs to be seen if the agreement contains a clause which provides for arbitration pertaining to the disputes which have arisen between the parties to the agreement.”

Nevertheless, later in March 2019, the court in United India Insurance v. Hyundai Engg. & Construction Co. Ltd., while relying on Duro Felguera came up with different reasoning and held that the prerequisite for invoking arbitration was not met which rendered the arbitration clause ineffective and incapable of being enforced. On one side, many consider this approach to be in contravention with that in Duro Felguera, while others believe that it followed Duro’s verdict which included inquiry of ‘scope’ as a factor to determine existence. The court ruled:

“Suffice it to say that appointment of arbitrator is a judicial power and is not merely an administrative function leaving some degree of judicial intervention; when it comes to the question to examine the existence of a prima facie arbitration agreement, it is always necessary to ensure that the dispute resolution process does not become unnecessarily protracted.”

 Similarly, in Garware Wall Ropes Ltd. v. Coastal Marine Constructions & Engg. Ltd, while addressing a matter under Section 11 went on to determine whether the arbitration agreement was duly stamped i.e., it goes on to ascertain the validity of an arbitration agreement instead of its ‘existence.’ Concerning this, the court gave the reasoning that­­­­- “determination of existence included ‘de jure’ existence of the agreement.” In essence, the court appeared to have lost track and seems to be confused between ‘existence’ of an agreement and its validity. As a consequence, this added another substantial question (Whether the “existence” or rather “validity” of an arbitration agreement is to be examined) to the contentious debate of Scope of examination at the pre-arbitral stage.

United India Insurance was later overruled by Mayavati Trading Pvt Ltd v. Pradyuat Deb Burman, wherein the Supreme Court stated that courts were not supposed to go further than determining the existence of the arbitration agreement. Also, it reaffirmed that “Section 11(6-A) is confined to the examination of the existence of an arbitration agreement and is to be understood in the narrow sense as has been laid down in the judgment of Duro Felguera.” Nevertheless, the court missed addressing the issue of “scope” of such examination here as well. 

Thus, two circumstances emerged in the aftermath of the 2015 amendment:

  • The Supreme Court’s jurisprudence of Section 11 of the Act was inconsistent.
  • Continued judicial intervention in the arbitral proceedings as the courts seem to have disregarded the principle of Kompetenz-Kompetenz, therefore, overlooking the tribunal authority to rule on its own jurisdiction under Section 16.

Subsequently, the 2015 Amendment failed to achieve its objectives of minimal judicial interference and to India an arbitration-friendly jurisdiction.

 Repealing of Section 11 (6-A): 2019 Amendment Act

In an effort to make India’s reputation as an arbitration-friendly jurisdiction, the Indian Legislature came up with the 2019 Amendment Act to resolve and rectify the flaws. Through the amendment, sub-sections (6-A) and (7) have been repealed. Since the amendment focused on strengthening institutional arbitration in India, under the amended Section 11(6) of the Arbitration and Conciliation Act the appointment of arbitrators shall be done by the Arbitral Institutions as designated by the Apex Court and High courts. 

Vidya Drolia Judgment settles the controversy

Parity between Section 8 and 11

In the Vidya Drolia case, while realizing the need for parity between the two provisions, the Supreme Court ruled that the scope of review under both Section 8 and Section 11 is identical, despite the difference in language. For this reason, it further held that ‘prima facie’ standard applied equally to the power of judicial review under Section 11, thereby reading the ‘mandate of a valid arbitration agreement in Section 8 into the mandate of Section 11, that is, “the existence of an arbitration agreement”.

Existence or validity?

Additionally, while addressing the contradiction of ‘existence’ or ‘validity’ of an arbitration agreement, the Supreme Court reiterated that the existence and validity of an arbitration agreement are essentially intertwined with an invalid arbitration agreement not being capable of existing so that the exercise of a ‘prima facie’ judicial review of existence would therefore necessarily entail a determination of its validity.

To elaborate further on this, Section 8 of the Act requires a judicial authority to refer the parties to arbitration unless it finds that prima facie, no valid arbitration agreement exists. On a plain reading (of the now-deleted sub-section 6A) Section 11 limits the court’s powers to determining only the existence of an arbitration agreement. The court, however, holds that an agreement has no meaning unless it is enforceable in law, and an arbitration agreement that is not valid or not legally enforceable is not an agreement at all. Thus, even under Section 11, the court has the power to prima facie consider the validity of the arbitration agreement.

Existential crises of Section 11 (6-A) and matters of arbitrability

While settling the implication of Section 11 (6-A), the court accepted the view taken in Mayavati Trading, which reaffirmed that “Section 11(6-A) is confined to the examination of the ‘existence’ of an arbitration agreement and is to be understood in the narrow sense”. Moreover, the court stated that the subsequent deletion of Sub-section 6A does not alter this position.

Also, concerning the issues of arbitrability as faced by a court at the Referral Stage, the court has accepted and upheld the principles of the 3 Stages as laid down in the case of National Insurance Co. Ltd. v. Boghara Polyfab, Also, the court recognizes that in deciding these issues, “the referring court has to strike a balance between enforcement of arbitration agreements and protecting parties from being forced into arbitration where disputes are clearly non-arbitrable.”

Test of the Prima Facie Rule

The Supreme Court settles the fuss by upholding the 246th Law Commission Report and reiterating that, courts are required to only ‘prima facie’ determine whether an arbitration agreement exists. Therefore, making it imperative for courts to refer the parties to arbitration, and leaving the final determination of the existence and validity of an arbitration agreement to the arbitral tribunal.

This was clarified to mean a primary first review, aimed solely at “weeding out ex-facie, non-existent and invalid arbitration agreements, and non-arbitrable disputes.” The court elucidated that a prima facie case is relatable to the establishment of initial presumption, rather than an evidentiary standard. Only when the court is certain that no valid arbitration agreement exists, or that the disputes are not arbitrable, would an application under Section 8 be rejected.

This determination is not to be made through a mini-trial but must be ‘preliminary and summary’ in nature, on the basis of documents produced. In sum, a referring court would ordinarily compel parties to abide by the arbitration clause unless there were good and compelling reasons not to. Where questions related to the formation, existence, or validity of the contract and questions related to non-arbitrability are complex and intertwined with issues of fact, where they cannot be determined on the prima facie basis, the court has clarified that these should necessarily be left for the arbitral tribunal to adjudicate.

It also specifically clarifies that where there are jurisdictional issues or where a multi-party arbitration raises complicated factual questions, these must be left to the arbitral tribunal to handle. Further, it was also ruled in the case of Uttrakhand Kalyan Nigam v. Northern Coal Field Ltd. that all the other preliminary objections/questions are to be dealt with by the tribunal.

The above-said rule was also upheld by the Supreme Court while setting aside the Delhi HC decision and stating the arbitration agreement exists, hence confirming the appointment of an arbitrator in Pravin Electricals (P) Ltd. v. Galaxy Infra and Engg. (P) Ltd., wherein a lot of factual and evidentiary issues were involved which required a deeper examination. In short, the rule for the Court is ‘when in doubt, do refer’

Conclusion

The Supreme court in the Vidya Drolia has left to the discretion of the referring court the decision as to the intensity of the summary and prima facie review, by always keeping in mind that the ultimate purpose of the legislature was to make referring court act as a ‘facilitator’ and to mere assist the arbitration procedure and not usurp the jurisdiction of the arbitral tribunal in that regard.

However, it would not be incorrect to say that even after the landmark judgment of Vidya Drolia and the 2019 Amendment Act, the lack of clarity shall prevail longer. It is argued that there is still room left for debate as some pertinent questions remain unanswered by the Legislature or the Judiciary like, what shall be the scope of examination now by the arbitral institutions while entertaining an application for appointment of an arbitrator? Only time will tell.


Students of LawSikho courses regularly produce writing assignments and work on practical exercises as a part of their coursework and develop themselves in real-life practical skills.

LawSikho has created a telegram group for exchanging legal knowledge, referrals, and various opportunities. You can click on this link and join:

https://t.me/joinchat/J_0YrBa4IBSHdpuTfQO_sA

Follow us on Instagram and subscribe to our YouTube channel for more amazing legal content.

LEAVE A REPLY

Please enter your comment!
Please enter your name here