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 that the Chief Justice must exercise the following supervision when approached in an application under Section 11 of the Act, 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 Supreme Court in the matter of National Insurance Company v. Boghara Polyfab Private Ltd.² wherein the 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 Amendment, 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 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 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 seven-judge bench of the 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 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 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.

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 “When in doubt, do refer”

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 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. This was further affirmed by a three judge bench judgment of the Supreme Court in SBI General Insurance vs Krish Spinning⁶.

Difference between Section 8 and 11 of the Act

The three judge bench of the Supreme Court in SBI General Insurance (supra) culled out the following differences between Section 8 and 11 of the Act-

While Section 8 empowers any ‘judicial authority’ to refer the parties to arbitration, under Section 11, the power to refer has been exclusively conferred upon the High Court and the Supreme Court.
Under Section 37, an appeal lies against the refusal of the judicial authority to refer the parties to arbitration, whereas no such provision for appeal exists for a. refusal under Section 11.
The standard of scrutiny provided under Section 8 is that of prima facie examination of the validity and existence of an arbitration agreement. Whereas, the standard of scrutiny under Section 11 is confined to the examination of the arbitration agreement.
During the pendency of an application under Section 8, arbitration may commence or continue and an award can be passed. On the other hand, under Section 11, one there is failure on the part of the parties in appointing the arbitrator as per the agreed procedure and an application is preferred, no arbitration proceedings can commence.

Whether the reference court has jurisdiction to interfere with ex facie time barred, frivolous claims, meritless dispute

Supreme Court in the matter of Duro Felguero (supra) held in categorical terms that pursuant to introduction of 2015 Amendment and insertion of sub clause 6A to Section 11 of the Act, at reference stage, all that the court has to see is whether an arbitration agreement exists nothing more, nothing less. This position of law was further affirmed by a three judge bench of the Supreme Court in Mayavati Trading (supra). However, after Mayavti Trading, the judgements of the Supreme Court have taken a trajectory of expanding the scope of interference at reference stage despite express limited scope envisaged under Section 11(6A) of the Act. The three judge bench of Supreme Court in Vidya Drolia (supra) recognised the limited scope of interference under Section 8 and 11 pursuant to introduction of Section 11(6A), however, held that the court at reference stage can interfere when it is manifest that the claims are ex facie time barred, frivolous or the disputes are non-arbitrable.

The aforesaid ratio of the Supreme Court in Vidya Drolia (supra) was followed by various subsequent judgements of the Supreme Court viz. BSNL vs Nortel Networks India Pvt. Ltd.⁷; DLF Home Developers Ltd. vs Rajpura Homes Pvt. Ltd.⁸; IOCL vs NCC⁹. In NTPC vs SPML Infra Ltd.¹⁰, the Supreme Court further introduced the ‘eye of the needle test’ which also recognised the limited scope of intervention however, drew sustenance from the ratio in Vidya Drolia (supra) and held that the court may reject claims at reference stage which are ex facie and manifestly non-arbitrable. It was predicated on the premise that it is the duty of the court to protect the parties from being forced to arbitrate when the matter is demonstrably non-arbitrable.

Subsequently, a seven judge bench of the Supreme Court in Re: Interplay (supra) expounded upon the position of law as follows-

“209.The above extract indicates that the Supreme Court or High Court at the stage of the appointment of an arbitrator shall “examine the existence of a prima facie arbitration agreement and “not other issues”. These other issues not only pertain to the validity of the arbitration agreement, but also include any other issues which are a consequence of unnecessary judicial interference in the arbitration proceedings.”

The aforesaid judgment of the Supreme Court categorically held that at reference stage, the jurisdiction of the court is only confined to existence of a prima facie examination of arbitration agreement and “not other issues”. The aforesaid judgment, however, failed to clarify whether the ratio laid down in Vidya Drolia and subsequently followed by the other judgments viz. at reference stage court can interfere with ex facie time barred or non arbitrable claims, would also fall in the category of “other issues” or not. Later, a three judge bench of the Supreme Court in SBI General Insurance (supra) had the occasion to go through the conspectus of all the aforementioned cases and clarified that in view of the decision of the seven-judge bench of the Supreme Court in Interplay (supra), the law laid down in Vidya Drolia pertaining to the test of ‘ex facie meritless’ which was subsequently followed by the other judgements and the test of ‘eye of the needle’ introduced by NTPC (supra) are no longer a good law. The jurisdiction of the Arbitral Tribunal at reference stage is only limited to existence and examination of the arbitration agreement.

Subsequently, another three judge bench of the Supreme Court in Goqui Technologies Pvt. Ltd. vs Socratic Technologies Pvt. Ltd.¹¹ quoted SBI (supra) with approval and referred the parties to arbitration. The Court further clarified that the limited jurisdiction of the referral courts must not be misused by the parties in order to force other parties to the arbitration agreement to participate in a time-consuming and costly arbitration process. In case a party is found to have abused the process of law and caused unnecessary harassment to the other party, then in that case the Arbitral Tribunal may direct that the costs of the arbitration shall be borne by the party which is found to have abused the process of law.

It is imperative to mention that the limitation pertaining to filing of an application under Section 11 of the Act and limitation pertaining to claims raised by the Applicant are two separate and distinct aspects and ought not to be confounded. An application u/s 11 of the Act is governed by Article 137 of the Limitation Act, 1963 which is to be filed within 3 years from the date the right to file accrues in favour of the Applicant. In Arif Azim Co Ltd. vs Aptech Ltd.¹², the Supreme Court held that the limitation period in terms of Article 137, for filing a Section 11 application can only commence once a valid notice invoking arbitration has been sent by the applicant to the other party and there has been a failure or refusal on part of the other party in complying with the requirements mentioned in the notice. This position of law was affirmed by the three judge bench of the Supreme Court in SBI (supra).

However, on the second issue, which was posed before the Supreme Court in Arif Azim (supra) viz. whether the court may decline to make a reference under Section 11 of the Act where claims are ex facie and hopelessly time barred, the three judge bench of the Supreme Court held that in view of the position of law laid down in interplay (supra) by the seven judge bench, the law laid down in Vidya Drolia (supra) and the subsequent judgments is no longer a good law. As a corollary, the Supreme Court held that that the referral courts, at the stage of deciding an application for appointment of arbitrator, must not conduct an intricate evidentiary enquiry into the question whether the claims raised by the applicant are time barred and should leave that question for determination by the arbitrator.

Therefore, the court at the reference stage, has the authority to adjudicate whether the application filed u/s 11 of the Act is within limitation or not. However, the court does not have the authority to the adjudicate whether the claims sought by the applicant against the respondent are time barred or not. The authority to adjudicate the same solely lies with the Arbitrator.

Conclusion

The 2015 Amendment limited the scope of judicial enquiry at the reference stage by inserting sub-clause 6A in Section 11 of the Act. However, the subsequent judgments of the Supreme Court in Vidya Drolia (supra) and NTPC (supra) expanded the scope of judicial enquiry at the reference stage by introducing two tests viz. ‘ex facie meritless’ and ‘eye of the needle test’. Such tests were introduced so as to weed out ex facie frivolous, time barred and meritless disputes and prevent a party from being subjected to frivolous arbitration proceedings. However, subsequently the Supreme Court in SBI (supra) again narrowed down the scope of judicial enquiry at the reference stage by stating that rules introduced by Vidya Drolia (supra) and NTPC (supra) would not apply in view of the judgment of Supreme Court in Interplay (supra) in which the Supreme Court categorically held that the scope of scrutiny at the stage of appointment of arbitrator is limited to prima facie existence of arbitration agreement and nothing else. Subsequently, another three judge bench of the Supreme Court in Goqui Technologies (supra) affirmed the aforesaid position of law.

Now, it appears that at Section 11 stage, the referral Court is handicapped to refer the dispute to arbitration if a prima facie arbitration agreement exists between the parties. This will result in undue harassment to the innocent parties who may be subjected to arbitration proceedings on the basis of ex facie frivolous, time barred and meritless claims and consequent wastage of precious judicial time. The Supreme Court in Goqui Technologies (supra) addressed the aforesaid aspect, however, in that case also the court referred the parties to arbitration and held that if a party is found to have abused the process of law then the Tribunal can direct costs of the arbitration be paid by the party which is found to have abused the process of law.

Therefore, 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.¹³
While exercising powers under Section 8 and 11 the Courts must apply the prima facie test. If prima facie review is inconclusive then the matter should be referred to arbitration. “When in doubt, do refer”¹⁴
“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.¹⁵
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. ¹⁶
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.¹⁷
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“¹⁸
In view of the observation of the Supreme Court in Interplay (supra), the observations made in Vidya Drolia (supra) and NTPC (supra) with respect to jurisdiction of the arbitral tribunal to weed out ex facie non-arbitrable and frivolous disputes, at reference stage, would not continue to apply.¹⁹
The question regarding “accord and satisfaction” is a mixed question of fact and law and comes within the exclusive jurisdiction of the arbtitral tribunal. The reference court cannot venture into the aspect of “accord and satisfaction”²⁰.
Tests like “eye of the needle” introduced by NTPC (supra) and “ex-facie meritless” introduced by Vidya Drolia (supra) require the referral court to examine contested facts and appreciate prima facie evidence which is not in conformity with the principles of modern arbitration which place arbitral tribunal autonomy and judicial non-interference on the highest pedestal²¹.
The aspects of ex-facie frivolity and dishonesty in litigation are aspects which the Arbitral Tribunal is capable to decide upon the appreciation of the evidence²².
The limited jurisdiction of the referral Courts under Section 11 must not be misused by parties to force other parties to the arbitration agreement to participate in a time-consuming and costly arbitration process. If a party is found to have abused the process of law and subjected the other party to unnecessary harassment then the Arbitral Tribunal may direct costs of the arbitration be paid by the party which is found to have abused the process of law.²³
At reference stage, the court can adjudicate whether the application filed under Section 11 is within the period of limitation as per Section 137 of the Limitation Act, 1963²⁴.
However, at reference stage, the court must not conduct an enquiry into the question whether the claims raised by the applicant are time barred and should leave that question for determination by the arbitrator²⁵.

By Daksh Pandit