In an important decision that resolves apparent tensions in previous case law, the Supreme Court in Arasmeta Captive Power Company Private Limited v Lafarge India Private Limited continued its recent trend of pro-arbitration decisions and restricted the extent to which courts could interfere and scrutinize the scope of the arbitration agreement when appointing an arbitrator under Section 11 of the Arbitration Act.

Background

The case concerned various disputes that had arisen between parties to a power purchase agreement. The issue in dispute was whether there were certain sums due and payable under the agreement. The power purchase agreement provided that where the dispute was in the nature of a 'billing dispute', it had to be submitted to an expert for determination; in all other cases, the dispute was to be decided by an arbitral tribunal.

The Appellant ("Arasmeta") contended that the dispute amounted to a billing dispute, and sought to appoint an expert to decide the issue, but the Respondent ("Lafarge") objected to such appointment, and approached the High Court under Section 11 of the Arbitration Act for appointment of an arbitrator. The High Court went into great detail to consider whether the claims made by the parties were in the nature of 'billing disputes' and, after careful consideration, decided in Lafarge's favour and appointed an arbitrator and referred the matter to arbitration. Arasmeta filed an appeal before the Supreme Court.

Decision of the Court

In the Supreme Court, Arasmeta requested the court to reconsider the decision of the High Court and hold that the dispute was in the nature of a 'billing dispute' and was therefore liable to be referred to an expert. Lafarge objected on the basis that the court should not determine whether the dispute was in the nature of a 'billing dispute', as the question of whether the dispute fell within the scope of the arbitration agreement had to be referred to an arbitrator for consideration.

It was common ground that the decision of the Supreme Court in the case of SBP & Co. v Patel Engineering ("Patel Engineering") dealt with the issue and was a binding precedent, but the parties disagreed as to the correct interpretation of that decision. Lafarge referred to the decisions in Chloro Controls India Private Ltd v Seven Trent Water Purification Inc ("Chloro Controls") and in National Insurance Company Ltd v Boghara Polyfab Pvt Ltd ("Boghara") in support of the view that, when considering an application under Section 11 of the Arbitration Act, courts should not consider whether a claim falls within the scope of the arbitration agreement. Arasmeta argued that the decisions in Chloro Controls and Boghara were inconsistent with the decision in Patel Engineering.

After a thorough consideration of the various decisions, the court affirmed the decision in Boghara and in particular affirmed the three-level categorisation set out in that case. The court held that in considering an application under Section 11 of the Arbitration Act:

  1. The court will have to decide:
  1. whether the party making the application has approached the appropriate High Court; and
  2. whether there is an arbitration agreement and whether the party who has applied under Section 11 of the Act is a party to such an agreement.
  1. The court may choose to decide (or leave to the decision of the arbitral tribunal):
  1. whether the claim is a dead, i.e. obviously time-barred, claim (although a recent Supreme Court decision makes clear that in most cases, limitation questions should be left to the arbitral tribunal); and
  2. whether the parties have concluded the contract/transaction by recording satisfaction of their mutual rights and obligation or by receiving the final payment without objection (on the question of whether discharging a substantive agreement amounts to terminating the the arbitration clause therein, see the recent decisions on separability of arbitration clauses covered elsewhere in this e-bulletin).
  1. The court should not decide on:
  1. Whether a claim made falls within the arbitration clause; and
  2. The merits or any claim involved in the arbitration.

The court observed that as regards the second category of cases above, in deciding whether to decide itself or remit the matter to an arbitral tribunal for consideration, the court should be guided by the object of the Act (i.e., to expedite the arbitration process with minimum judicial intervention).

Applying this approach to the facts of the case, the court held that the High Court had erred by determining the question of whether the claims raised by the parties fell within the definition of a 'billing dispute' , even if it ultimately reached the correct outcome by referring the matter to arbitration. The question of whether it was a 'billing dispute' or not fell to be determined by the arbitral tribunal, not the courts.

Comment

In the case of Patel Engineering, the Supreme Court had held that while appointing an arbitrator, the court was performing a judicial function, as opposed to an administrative function, and therefore the court had the power to consider the validity of an arbitration agreement before appointing an arbitrator. The court further held that a determination by the court under Section 11 of the Arbitration Act is binding on the arbitral tribunal. This decision was seen as opening the door for judicial intervention at the time of appointment of arbitrators and was widely criticised.

Several decisions since then have tried to reduce the practical impact of Patel Engineering. The decision in Boghara for instance, considers very narrowly the questions that the court can consider while appointing an arbitrator under Section 11 of the Arbitration Act. The decision in Arasmeta, by accepting this narrow approach, and by advocating minimal court interference even in respect of questions that the court has may decide itself, has taken another important step in the pro-arbitration direction.