Introduction
Legislative intent and scrutiny
Interpretation and application by courts
Comment


Introduction

Section 11 of the Arbitration and Conciliation Act 1996 (the Arbitration Act) has been subject to various interpretations and a couple of amendments in recent years. The Indian courts had maintained that the scope of inquiry, under section 11 of the Arbitration Act, is limited to the examination of the existence of an arbitration agreement. The scope of the judiciary to ascertain the details of the dispute, when approached under section 11 of the Arbitration Act, was well established as being limited to the prima facie identification of the arbitration agreement and the dispute. An application under section 11 restricts the courts intervention to examine whether:

  • there is a valid arbitration agreement between the parties; and
  • any dispute has arisen between them out of such agreement which may call for the appointment of an arbitrator to decide such disputes.

However, lately the courts have been reviewing the established principle. They have not only been identifying the arbitration agreement, but also examining it and determining related prima facie questions.

Legislative intent and scrutiny

The 176th Law Commission Report (the 176th LC Report) pointed out that divergent views have been expressed as to the stage at which jurisdictional issues could be decided. Divergent views have also been expressed as to whether orders of the Chief Justice of India or his nominee, or that of the Chief Justice of the High Court or his nominee, regarding appointing an arbitrator should be treated as administrative orders or judicial orders. Treating the orders under section 11 of the Arbitration Act as administrative has led to several writ petitions being filed before various high courts raising jurisdictional objections and, consequently, stay of arbitration proceedings being obtained. While discussing the above, the Law Commission also discussed whether the Chief Justice of India or the Chief Justice of the High Court are persona designata and whether the exclusion of remedy is available under article 226 of the Constitution of India 1950.

It was further pointed out that there are diverging views as to the mandatory nature of the timelines prescribed by sections 11(4) and (5) of the Arbitration Act. It was also stated that section 11(6) of the Arbitration Act does not stipulate any time limit. Besides discussing the advantages and disadvantages of an order under section 11 of the Arbitration Act to be an administrative or judicial order, the 176th LC Report also discussed the difficulties which arise if the preliminary issues are not decided under section 11 of the Arbitration Act. The 176th LC Report also held that preliminary issues are to be decided only if some conditions are satisfied.

Thereafter, the 246th Law Commission Report suggested that section 11 of the Arbitration Act be amended such that reference by the high court to any person or institution designated by it shall not be regarded as a delegation of judicial power. An affirmative judicial finding regarding the existence of arbitration agreement and the administrative act of appointing arbitrator are final and non-appealable.

It was also proposed that the high courts should be given liberty to frame their own rule in relation to the fees of the arbitration in accordance with the Sixth Schedule of the Arbitration Act.

In order to tackle the delay before the courts, the Arbitration and Conciliation (Amendment) Act, 2015 (the 2015 Amendment) amended section 11 so that the delegation of power of appointment would not be regarded as a judicial act. This was to substantially cut down the time taken at the threshold of the arbitration, arising from the failure of a party to appoint an arbitrator. Consequently, section 11(6A) was introduced to the Arbitration Act. However, owing to judicial precedent, the subsection did not stay for long and was omitted by the Arbitration and Conciliation (Amendment) Act 2019 (the 2019 Amendment).

Interpretation and application by courts

In Duro Felguera v Gangavaram Port Ltd(1) the Supreme Court of India (the Supreme Court) held that as per the section 11 of the Arbitration Act, the power of court is confined to examining the existence of the arbitration agreement. It was held that a bare reading of section 11(6) of the Arbitration Act clearly shows that the courts should only need to investigate one aspect – that is, the existence of an arbitration agreement. The Supreme Court further held that in making this determination, it needs to be established whether the agreement contains a clause which provides for arbitration pertaining to the disputes which have arisen between the parties to the agreement. It is relevant to note that despite the omission of section 11(6A) by the 2019 Amendment, the judicial intent behind the provision is still to be the guiding force for the courts while examining an application under section 11 of the Arbitration Act. Therefore, under section 11, the court's jurisdiction is confined to just identifying the existence of the arbitration agreement and an arbitral dispute.

The Supreme Court in Garware Wall Ropes Ltd. v Coastal Marine Constructions & Engg Ltd(2) held that a plain reading of section 11(6A) of the Arbitration Act, when read with section 7(2) of the Arbitration Act and section 2(h) of the Contract Act 1872, would make it clear that an arbitration clause in an agreement would not exist when it is not enforceable by law. This is also an indicator that the decision passed by the Supreme Court in SMS Tea Estates (P) Ltd v Chandmari Tea Co (P) Ltd(3) has, in no manner, been affected by the amendment of section 11(6A) of the Arbitration Act.

A revolutionary judgment passed by the Supreme Court declared unilateral appointments, notwithstanding an arbitration agreement between the concerned parties, to be bad law. While propounding the decision in the case of Perkins Eastman Architects DPC v HSCC (India) Ltd,(4) the Court held that a party to the agreement would not be entitled to make any appointment of an arbitrator on its own. This is because in a case where only one party has a right to appoint a sole arbitrator, the party to the agreement's choice will always have an element of exclusivity in determining or charting the course for dispute resolution. Such an exclusive and unilateral power of appointment is in contravention of the provisions of the Arbitration Act. As a result, an appointment made following such a procedure would be outside the Arbitration Act.

The existence of an arbitration agreement and the extent of judicial review necessary and essential therein has always been a conundrum under the Arbitration Act.

It has also been noted by the courts that the limitation period is normally a mixed question of fact and law, and hence should be left at the decision of the arbitral tribunal. In view thereof, it is a well-established proposition that the question of the limitation period should be left for the arbitral tribunal to ascertain. Consequently, the Supreme Court in BSNL v Nortel Networks (India) (P) Ltd(5) discussed the issue of limitation and held that the limitation is normally a mixed question of fact and law and would lie within the domain of the arbitral tribunal. The Court further distinguished between the jurisdictional and admissibility issues, stating that the jurisdictional issues include objections to the competence of the arbitrator or tribunal to hear a dispute, such as lack of consent, or a dispute falling outside the scope of the arbitration agreement. On the other hand, the admissibility issues relate to procedural requirements, such as a breach of pre-arbitration requirements – for instance, a mandatory requirement for mediation before the commencement of arbitration or a challenge to a claim or a part of the claim being either time-barred or prohibited, until some pre-condition has been fulfilled. An admissibility issue is not a challenge for the jurisdiction of the arbitrator to decide the claim.

However, the limitation period in case of issuing the notice invoking arbitration (NIA) begins when and whether the court can determine it to be barred by limitation and so forth. The courts, under section 11 of the Arbitration Act, do not have the power to determine the question of limitation or the validity of the NIA with respect to limitation period. The Court in Nortel Networks held that the issue of limitation which concerns the "admissibility" of the claim must be decided by the arbitral tribunal either as a preliminary issue, or at the final stage after evidence is led by the parties.

The recent decisions of the Supreme Court unambiguously expand the scope of power to be exercised by the courts under section 11 of the Arbitration Act. The Supreme Court has now categorically held that the courts are required to see whether the dispute in question correlates to the arbitration agreement between the parties, and where there is no correlation, the reference to arbitration can be rejected, even if there is a valid arbitration agreement between the parties.

In Vidya Drolia and Others v Durga Trading Corporation(6) the Supreme Court dealt with a question of the arbitrability of tenancy disputes. It observed that landlord-tenant disputes are not actions in rem but pertain to subordinate rights in personam that arise from rights in rem. Such actions normally would not affect third-party rights or have erga omnes effect or require centralised adjudication. An award passed deciding landlord-tenant disputes can be executed and enforced like a decree of the Civil Court. The Court further observed that it would be grossly irrational and completely wrong to mistrust and treat arbitration as a flawed and inferior adjudication procedure, thus marking a clear shift in judicial perception and its increasing faith in the process of arbitration. The Court ruled that tenancy disputes governed by the Transfer of Property Act 1882 are very much arbitrable and further laid down the following four-fold test to determine the arbitrability of the subject matter of dispute – namely:

  • when the cause of action and the subject matter of the dispute relate to actions in rem that do not pertain to subordinate rights in personam that arise from rights in rem;
  • when the cause of action and subject matter of the dispute affect third-party rights, have erga omnes effect and require centralised adjudication and where mutual adjudication would not be appropriate and enforceable;
  • when the cause of action and the subject matter of the dispute relate to inalienable sovereign and public interest functions of the state and, hence, mutual adjudication would be unenforceable; or
  • when the subject matter of the dispute is expressly or by necessary implication non-arbitrable as per mandatory statute(s).

It is pertinent to note that in certain cases, the prima facie examination may require a deeper consideration, the extent of which is left to the court's discretion when it would examine the prima facie case or exercise restraint. The Supreme Court further held that the courts cannot adopt an absolutely hands-off approach, and a limited, yet effective intervention will only affect the arbitration procedure.

In DLF Home Developers Limited v Rajapura Homes Private Limited(7) the Supreme Court of India widened the scope of examination of the arbitration agreement at the pre-arbitral stage to hold that the courts, while appointing an arbitrator, must not act mechanically and relegate the parties to arbitration. They must examine the arbitration agreement to ensure that the arbitration agreement correlates to the dispute at hand and the courts can decline the reference if there is no correlation.

In the present case the parties entered into a joint venture, wherein two share purchase agreements (SPAs) were signed. In both the SPAs, similar arbitration clauses providing for arbitration seated in Singapore in accordance with Singapore International Arbitration Centre Rules were present. Thereafter, under the SPAs, two construction management agreements (CMAs) were executed wherein both the CMAs, identical arbitration clauses providing for arbitration seated in Delhi in accordance with the Arbitration Act were present. Thus, disputes arose under the CMA agreements. A party invoked the arbitration in Delhi but was disputed, alleging that the dispute was covered under the SPAs and not the CMAs. Aggrieved by the denial, two separate petitions were filed under section 11(6) read with section 11(12) of the Arbitration Act. The Court, therefore, held that the arbitration clause mentioned in the CMAs would apply and the arbitration proceedings would take place accordingly. The Court observed that it would not be usurping the jurisdiction of the arbitrator but would be merely streamlining the process of arbitration.

The High Court of Delhi in Vijay Kumar Munjal v Pawan Munjal(8) had a fresh take on trademark-related disputes and arbitrations. Four brothers entered into two agreements – namely, the family agreement (FA) and the trademarks and name agreement (TMNA) – wherein they agreed to divide ownership and properties of the joint business. A trademark-related dispute arose among two of the four brothers and subsequently a petition under section 11 of the Arbitration Act was filed. The High Court of Delhi observed that the right asserted by the petitioners is not a right under the Trademarks Act 1999, but only a right arising from the contractual provisions. This is also not asserted against the world at large but only against the respondents. Further, the Court held that all disputes that arise out of the trademark's agreement are not outside the scope of arbitration. The disputes that deal solely with the interpretation of the terms of a trademark can be decided in arbitration.

The High Court of Delhi in Ecogreen Energy Gwalior Pvt Ltd v Commissioner of Municipal Corporation(9) dwelt upon the question of territorial jurisdiction in ascertaining the validity of the arbitration agreement. A dispute arose between the parties in connection with the concession agreement. The petitioner had issued a preliminary termination notice alleging that the agreement had been violated. The petitioner, thereafter, filed the petition under section 11 of the Arbitration Act. The Court observed that a plain reading of the arbitration clause in the agreement indicated that the parties had agreed that the place of arbitration would be Gwalior. However, the parties had also agreed that the arbitration would be conducted under the rules of the International Centre for Alternative Dispute Resolution, New Delhi. The Court observed that when the parties have expressly agreed on a place of arbitration, only the court at that place will have the jurisdiction to deal with matters arising out of the arbitration agreement. Stating that the parties had conferred jurisdiction to the courts at Gwalior, therefore, the High Court of Delhi did not have the territorial jurisdiction to appoint the arbitrator.

In the recent case of Swadesh Kumar Agarwal v Dinesh Kumar Agarwal & others,(10) the Supreme Court of India dwelt upon the situation of absence of written arbitration agreement and the powers of the High Court under section 11(6) of the Arbitration Act. One of the parties filed an application under section 11(6) with the High Court of Delhi to terminate the mandate of the sole arbitrator, who had been appointed with the consent of the parties. It was held that where there is no written agreement between the parties on the procedure for appointing an arbitrator(s), the parties are free to agree on a procedure by mutual consent or inclusive agreement and the dispute can be referred to an arbitrator(s) who can be appointed by mutual consent. In the event of a failure to arrive at an agreement, the matter can proceed as per section 11(2) or 11(5) of the Arbitration Act. It was further held and clarified that, in such a situation, the application for appointment of an arbitrator(s) shall be maintainable under section 11(5) of the Arbitration Act and not under section 11(6). The Court held that where there is a dispute on the mandate of the arbitrator being terminated on the ground(s) mentioned in section 14(1)(a), the dispute must be raised before the court, as defined under section 2(e) of the Arbitration Act. Such a dispute cannot be decided on an application filed under section 11(6) of the Arbitration Act.

Comment

It is important to note that the scope of an examination of the validity of an arbitration agreement includes an examination into whether the subject matter of the dispute is arbitrable – with the caveat that this examination is to be limited to rare occasions. The examination, from what can be inferred from recent trends, is limited to issues that are apparent on the surface and does not involve an in-depth analysis. The exercise and examination should be done in a manner that does not breach the well-established legislative intention and purpose of minimising the court intervention at the stage of appointing the arbitrator. Even though the parties are not expected to justify the claim or plead exhaustively in respect of limitation or the claim, the courts can certainly decline a plea for reference if the dispute does not correlate to the arbitration agreement between the parties. Thus, the courts will no more act in a mechanical manner by merely directing the parties to arbitration but have the right to conduct a preliminary examination within the defined confines.

For further information on this topic please contact Aseem Chaturvedi, Shivank Diddi or Natasha Syal at Khaitan & Co by telephone (+91 11 4151 5454) or email ([email protected], [email protected]‚Äč or [email protected]). The Khaitan & Co website can be accessed at www.khaitanco.com.

Endnotes

(1) [2017] 9 SCC 729.

(2) [2019] 9 SCC 209.

(3) [2011] 14 SCC 66.

(4) [2019] SCC Online SC 1517.

(5) [2021] 5 SCC 738.

(6) [2021] 2 SCC 1.

(7) [2021] SCC OnLine SC 781.

(8) [2022] SCC OnLine Del 499.

(9) [2022] SCC OnLine Del 787.

(10) CA 2935-38 of 2022.