Scope of Judicial intervention at reference stage | Arbitration

The Arbitration and Conciliation Act, 1940 equipped courts with unbridled powers to supervise the arbitration proceedings inviting the ire of litigants who, in the search of an alternative forum, seeking speedy resolution of their disputes, found themselves in the conundrum of endless judicial interference in the realm of arbitration. The Arbitration and Conciliation Act, 1996 [“the Act”] was enacted with the primary objective of minimising judicial interference which is enshrined in Section 5 of the Act i.e. no judicial authority shall intervene except where so provided under the Act. However, the scope of judicial interference in arbitration proceedings, especially at reference stages of Section 8 and 11 of the Act, still remains a matter of great debate requiring clarification from courts on the subject. It is imperative to mention how the law qua the judicial interference has developed over the years before reaching a firm conclusion.

A Constitution bench of Supreme Court in the matter of SBP & Co vs Patel Engineering Ltd and Anr.¹ laid down the supervision that the Chief Justice must exercise when approached in an application under Section 11 of the Act inter alia as follows-

Whether he has the jurisdiction.
Whether there is an arbitration agreement as defined in the Act.
Whether the person making request before him is party to the Agreement.
Whether claim is a dead one or long barred that was sought to be resurrected.
Whether the parties have concluded the transaction by recording satisfaction of their mutual rights and obligations.

In order to form opinion on the aforesaid, the chief justice could proceed on the basis of affidavits or take such evidence as may be necessary.

The aforementioned ratio in Patel Engineering (supra) was affirmed by the Hon’ble Supreme Court in the matter of National Insurance Company v. Boghara Polyfab Private Ltd.² wherein the Hon’ble Court categorized the aforementioned list of scrutiny in Patel Engineering (supra) under the following heads namely-

Issues which the Chief Justice/his designate or his designate is bound to decide.
Issues which the Chief Justice/his designate may choose to decide (or leave them to the decision of the Arbitral Tribunal).
Issues which the Chief Justice/his designate should leave exclusively to the Arbitral Tribunal.

As seen from above, the Courts had wide judicial powers at the reference stage to decide various preliminary aspects instead of leaving them to the wisdom of the Arbitral Tribunal on the principle of komptenz-kompetenz enshrined in Section 16 of the Act which was felt to be antithetical to the credo and ethos of the Act. Therefore, the Act was amended by Act No.3 of 2016 i.e. Arbitration and Conciliation (Amendment) Act, 2015 [“the 2015 Amendment”] which inter alia inserted sub clause “6A” to Section 11 of the Act limiting the scope of judicial scrutiny at Section 11 stage to only “existence of an arbitration agreement”. The 2015 Amendment had the effect of legislatively overruling the law laid down in Patel Engineering and Boghara Polyfab (supra). The newly introduced Section 11(6A) was put to test before the Hon’ble Supreme Court in the matter of Duro Felguero, S.A. v. Gangavaram Port (2017) 9 SCC 729 wherein the Court strictly interpreted the import of Section 11(6A) and held that after the 2015, at Section 11 Stage, all that the Court has to see is whether an arbitration agreement exists nothing more, nothing less. The aforementioned ratio was later affirmed by a three judge bench of the Hon’ble Supreme Court in the case of Mayawati Trading Private Ltd. v. Pradyuat Deb Burman (2019) 8 SCC 714

Existence of Arbitration Agreement

At this juncture it is imperative to clarify what is “existence of an arbitration agreement”. A three judge bench of the Hon’ble Supreme Court in the matter of Vidya Drolia v. Durga Trading Corpn.³ had the occasion to delve into the subject of judicial scrutiny at reference stages of Section 8 and 11 of the Act. The Court held that existence of an arbitration agreement means an arbitration agreement that meets and satisfies the statutory requirements of both the Arbitration Act and the Contract Act. A constitution bench of the Hon’ble Supreme Court, in the matter of Interplay between Arbitration Agreements under the Arbitration and Conciliation Act, 1996 and the Indian Stamp Act⁴, further affirmed the aforesaid position, however, clarified that the authority empowered to adjudicate whether the requirements of the Contract Act are satisfied is the Arbitral Tribunal. In the said judgment, the Hon’ble Supreme Court also overruled NN Global Mercantile Pvt. Ltd. vs Indo Unique Flame Ltd. & Ors.⁵ which held that an arbitration agreement which is not stamped or insufficiently stamped cannot be acted upon in view of Section 35 Indian Stamp Act. The Hon’ble Supreme Court clarified that the issue of stamping is a jurisdictional issue and a curable defect which should be left to the wisdom of the Arbitral Tribunal on the principle of competence-competence.

Existence and Validity of Arbitration Agreement

It is noteworthy that Section 8 and Section 11 of the Act arms the court with different powers of scrutiny. Section 8 of the Act empowers the court to refer parties to arbitration unless it finds prima facie no valid arbitration agreement exist. While Section 11 of the Act limits the power of the court to confine itself to only examination of existence of an arbitration agreement. The Hon’ble Supreme Court in the aforementioned constitution bench judgment, overruling NN Global, clarified that the scope of examination under Section 11(6A) should be confined to the “existence” of an arbitration agreement on the basis of Section 7 of the Act. Similarly, the “validity” of an arbitration agreement in view of Section 7 should be restricted to the requirement of formal validity viz. the requirement that the agreement be in writing. The Court need not adjudicate more at the referral stage and only restrict their jurisdiction to prima facie test as laid down in Vidaya Drolia.

Prima facie test

Blacks Law Dictionary defines “Prima Facie” as follows-

“At first sight; on the first appearance; on the face of it; so far as can be judged from the first disclosure ; presumably. A litigating party is said to have a prima facie case when the evidence in his favor is sufficiently strong for his opponent to be called on to answer it”

In Vidya Drolia (supra) the Supreme Court cautioned the Courts to exercise their powers under Section 8 and 11 using the prima facie test. The Court held that the prima facie standard as mentioned in Section 8 of the Act, although missing from Section 11, would equally apply to Section 11 as well. The court further held that exercising limited prima facie review does not in any way interfere with the principle of Kompetence-Kompetence, on the other hand exercise of prima facie power to check existence of agreement would save costs. Only when it appears that prima facie review would be inconclusive, the matter should be referred to arbitration. When even a vestige of doubts remains over the existence or validity of the arbitration agreement, the Court ought to refer the same to the arbitral tribunal. As pointed by the Hon’ble Supreme Court in Vidya Drolia “When in doubt, do refer”

Non-Arbitrability

The Hon’ble Supreme Court in Vidya Drolia (supra) held that at reference stage, the Court can venture into the aspect of non-arbitrability of dispute, drawing exceptions carved out by the Supreme Court in the case of Booz Allen and Hilton Inc. v. SBI Home Finance Ltd.⁶ ⁷If prima facie, the court finds an arbitration agreement exists between the parties, then the court would be obligated to refer parties to arbitration, however, in the event an objection is raised qua the non-arbitrability of the dispute falling in exception carved out in Booz Allen (supra), and such non arbitrability of dispute is prima facie found to be sustainable, then the court would refuse to refer parties to arbitration. The Court further carved out the test of good arguability i.e. when the court finds that the aspect of non-arbitrability of dispute is debatable and parties have a good reasonable arguable case, then the court would refer the parties to arbitration as the arbitral tribunal has primary jurisdiction and authority to decide the dispute including the question of jurisdiction and non-arbitrability.

Conclusion

The following position of law emerges from the aforementioned judgements of the Hon’ble Supreme Court-

The court, at the reference stage of Section 8 and 11 must confine its examination to existence of arbitration agreement, Nothing more, nothing less.⁸
The Law laid down by the Supreme Court in Patel Engineering and Boghara Polyfab(supra) stands legislatively overruled pursuant to insertion of sub clause 6A to Section 11 of the act by the 2015 Amendment.⁹
“Existence of Arbitration agreement” means an arbitration agreement which is in conformity with the statutory requirement of the Arbitration Act and Contract Act. However, the authority empowered to adjudicate whether the requirements of the Contract Act are satisfied is the Arbitral Tribunal.¹⁰
An Objection as to stamping does not fall for determination under Section 8 or 11 of the Act. The concerned court must examine whether the arbitration agreement prima facie exists. The jurisdiction to examine objection qua stamp solely lies with the Arbitral Tribunal. ¹¹
Non arbitrability of dispute can be decided by the Court at the reference stage itself.¹²
When exercising jurisdiction under Section 8 and 11, the Court must restrict itself to the prima facie test. If validity of the Agreement cannot be determined on prima facie basis then the Court should refer the matter to Arbitral Tribunal. “When in doubt, do refer“¹³
The scope of the Court to examine prima facie vailidity of an arbitration agreement agreement includes only:
1. Whether the arbitration agreement was in writing?
2. Whether the arbitration agreement was contained in exchange of letters, telecommunication etc.
3. Whether the core contractual ingredients qua the arbitration agreement were fulfilled?¹⁴
When non arbitrability of dispute is debatable and the case appears to be a good arguable case, then the court must refer the dispute to arbitral tribunal.¹⁵
The Court can interfere at reference stage when it is clear that the Claims are ex-facie time barred and dead.¹⁶

By Daksh Pandit