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A in Section 10 of the Contract Act, 1872 (‘Contract Act’), as contracts made by free consent of parties competent to contract, for a lawful consideration and with a lawful object, and are not thereby expressly declared to be void. An arbitration agreement should satisfy the mandate of Section 10 of the Contract Act, in addition to satisfying other requirements stipulated in the Section B 7 of the Arbitration Act. [Paras 10 and 11][1048-A-H; 1049-A-B] 1.3 Section 28 of the Contract Act states that agreements in restraint of legal proceedings are void, but Explanation (1) specifically saves contracts by which two or more persons agree that any dispute, or one which may arise between them, in respect C of any subject or class of subjects shall be referred to arbitration. Arbitration agreement must satisfy the objective mandates of the law of contract to qualify as an agreement. Clauses (g) and (h) of Section 2 of the Contract Act state that an agreement not enforceable in law is void and an agreement enforceable in law is D a contract. As a sequitur, it follows that an arbitration agreement that is not enforceable in law is void and not legally valid. [Para 11][1049-D-E] 1.4 Sub-section (1) to Section 7 of Arbitration Act ordains that the arbitration agreement should be in respect of disputes arising from a defined legal relationship, whether contractual or not. The expression ‘legal relationship’, again not defined in the Arbitration Act, means a relationship which gives rise to legal obligations and duties and, therefore, confers a right. These rights may be contractual or even non-contractual. Non-contractual disputes would require a separate or submission arbitration agreement based on the cause of action arising in tort, restitution, breach of statutory duty or some other non-contractual cause of action. [Para 12][1049-F-G; 1050-A] Russell on Arbitration, 24th Edition # 2-004 – referred to. G 1.5 Sub-section (2) to Section 7 states that an arbitration clause may be in the form of a separate agreement or form a part of the underlying or another contract. Clause (3) of Section 7 of the Arbitration Act states that the arbitration agreement shall be

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VIDYA DROLIA AND OTHERS v. 1005 DURGA TRADING CORPORATION in writing, that is, the agreement should be evidenced in writing. A By clause (4) the term ‘arbitration agreement in writing’ would include any agreement by exchange of letters, telegrams, electronic mails or communications which provide a record of the agreement or exchange of statements of claim and defence in which one party claims the existence of the agreement and the other party does not deny it. Sub-section (5) to Section 7 states that reference in a contract to a document containing an arbitration clause would constitute a valid arbitration agreement if the contract is in writing and reference is made to the arbitration clause that forms a part of the contract. [Para 13][1050-B-D] 1.6 Questions as to the existence of an arbitration agreement also arise when a party opposing the reference raises plea of novation of contract by entering into a new contract in substitution of the original or ‘accord and satisfaction’ by acceptance of modified obligations in discharge of the contract by performance or simple termination by express or implied consent. Similar plea of discharge can be raised opposing an application for reference on the ground that the claim is long barred and dead or there are no outstanding disputes as the parties have accepted part performance or have absolved the other side from performance, fully or partly, on account of frustration or otherwise. The contention being that once the original contract stands extinguished, abandoned, repudiated or substituted, the arbitration clause in the underlying/original contract perishes with it. [Para 14][1050-D-F] 1.7 Arbitration being a matter of contract, the parties are entitled to fix boundaries as to confer and limit the jurisdiction and legal authority of the arbitrator. An arbitration agreement can be comprehensive and broad to include any dispute or could be confined to specific disputes. The issue of scope of arbitrator’s jurisdiction invariably arises when the disputes that are arbitrable are enumerated or the arbitration agreement provides for exclusions as in case of ‘excepted matters’. The arbitration agreement may be valid, but the arbitral tribunal in view of the will of the parties expressed in the arbitration agreement, may

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A not have jurisdiction to adjudicate the dispute. The will of the parties as to the scope of arbitration is a subjective act and personal to the parties. [Para 15][1050-G-H; 1051-A] 1.8 A judgment is a formal expression of conclusive adjudication of the rights and liabilities of the parties. The B judgment may operate in two ways, in rem or in personam. A judgment in rem determines the status of a person or thing as distinct from the particular interest in it of a party to the litigation; and such a judgment is conclusive evidence for and against all persons whether parties, privies or strangers of the matter actually decided. Such a judgment “settles the destiny of the res itself” and binds all persons claiming an interest in the property inconsistent with the judgment even though pronounced in their absence. By contrast, a judgment in personam, “although it may concern a res, merely determines the rights of the litigants inter se to the res”. Distinction between judgments in rem and judgments in personam turns on their power as res judicata, i.e. judgment in rem would operate as res judicata against the world, and judgment in personam would operate as res judicata only against the parties in dispute. Use of expressions “rights in rem” and “rights in personam” may not be correct for determining non- arbitrability because of the inter-play between rights in rem and rights in personam. Many a times, a right in rem results in an enforceable right in personam. [Para 30][1061-D-E; 1062-B-E] G.C.Cheshire and P.M North, Private International Law by North and Fawcett (London:Butterworth’s) 1992 – referred to. F 1.9 Arbitration by necessary implication excludes actions in rem. Exclusion of actions in rem from arbitration, exposits the intrinsic limits of arbitration as a private dispute resolution mechanism, which is only binding on ‘the parties’ to the arbitration agreement. The courts established by law on the other hand enjoy G jurisdiction by default and do not require mutual agreement for conferring jurisdiction. The arbitral tribunals not being courts of law or established under the auspices of the State cannot act judicially so as to affect those who are not bound by the arbitration

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VIDYA DROLIA AND OTHERS v. 1007 DURGA TRADING CORPORATION clause. Arbitration is unsuitable when it has erga omnes effect, that is, it affects the rights and liabilities of persons who are not bound by the arbitration agreement. Equally arbitration as a decentralized mode of dispute resolution is unsuitable when the subject matter or a dispute in the factual background, requires collective adjudication before one court or forum. Certain disputes as a class, or sometimes the dispute in the given facts, can be efficiently resolved only through collective litigation proceedings. Contractual and consensual nature of arbitration underpins its ambit and scope. Authority and power being derived from an agreement cannot bind and is non-effective against non- signatories. An arbitration agreement between two or more parties would be limpid and inexpedient in situations when the subject matter or dispute affects the rights and interests of third parties or without presence of others, an effective and enforceable award is not possible. Prime objective of arbitration to secure just, fair and effective resolution of disputes, without unnecessary delay and with least expense, is crippled and mutilated when the rights and liabilities of persons who have not consented to arbitration are affected or the collective resolution of the disputes by including non-parties is required. Arbitration agreement as an alternative to public fora should not be enforced when it is futile, ineffective, and would be a no result exercise. [Para E 31][1062-G; 1063-A-E] Prof. Stavros Brekoulakis – ‘On Arbitrability: Persisting Misconceptions and New Areas of Concern’ – referred to. 1.10 Sovereign functions of the State being inalienable and non-delegable are non-arbitrable as the State alone has the exclusive right and duty to perform such functions. Correctness and validity of the State or sovereign functions cannot be made a direct subject matter of a private adjudicatory process. Sovereign functions for the purpose of Arbitration Act would extend to exercise of executive power in different fields including commerce and economic, legislation in all forms, taxation, eminent domain and police powers which includes maintenance of law and order, internal security, grant of pardon etc., as distinguished from

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A commercial activities, economic adventures and welfare activities. Similarly, decisions and adjudicatory functions of the State that have public interest element like the legitimacy of marriage, citizenship, winding up of companies, grant of patents, etc. are non-arbitrable, unless the statute in relation to a regulatory or adjudicatory mechanism either expressly or by clear B implication permits arbitration. In these matters the State enjoys monopoly in dispute resolution. [Para 32][1063-F-G; 1064-A-B] Common Cause v. Union of India, (1999) 6 SCC 667: [1999] 3 SCR 1279 ; Agricultural Produce Market Committee v. Ashok Harikuni & Another (2000) 8 SCC C 61: [2000] 3 Suppl. SCR 379 – relied on. Ajar Raib – Defining Contours of the Public Policy Exception – A New Test for Arbitrability – referred to. D 1.11 Implied legislative intention to exclude arbitration can be seen if it appears that the statute creates a special right or a liability and provides for determination of the right and liability to be dealt with by the specified courts or the tribunals specially constituted in that behalf and further lays down that all questions about the said right and liability shall be determined by the court or tribunals so empowered and vested with exclusive jurisdiction. Therefore, mere creation of a specific forum as a substitute for civil court or specifying the civil court, may not be enough to accept the inference of implicit non-arbitrability. Conferment of jurisdiction on a specific court or creation of a public forum though eminently significant, may not be the decisive test to answer and decide whether arbitrability is impliedly barred. Implicit non- arbitrability is established when by mandatory law the parties are quintessentially barred from contracting out and waiving the adjudication by the designated court or the specified public forum. There is no choice. The person who insists on the remedy must seek his remedy before the forum stated in the statute and before no other forum. [Paras 33 and 34][1065-C-F] Dhulabhai Etc. v. State of Madhya Pradesh and Another [1968] 3 SCR 662 – relied on.

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Wolverhampton New Waterworks Co. v. Hawkesford 9 A [1859] 6 C.B. (NS) 336 – referred to. 1.12 Doctrine of election to select arbitration as a dispute resolution mechanism by mutual agreement is available only if the law accepts existence of arbitration as an alternative remedy and freedom to choose is available. There should not be any inconsistency or repugnancy between the provisions of the mandatory law and arbitration as an alternative. Conversely and in a given case when there is repugnancy and inconsistency, the right of choice and election to arbitrate is denied. This requires examining the “text of the statute, the legislative history, and ‘inherent conflict’ between arbitration and the statute’s underlying purpose” with reference to the nature and type of special rights conferred and power and authority given to the courts or public forum to effectuate and enforce these rights and the orders passed. When arbitration cannot enforce and apply such rights or the award cannot be implemented and enforced in the manner as provided and mandated by law, the right of election to choose arbitration in preference to the courts or public forum is either completely denied or could be curtailed. In essence, it is necessary to examine if the statute creates a special right or liability and provides for the determination of each right or liability by the specified court or the public forum so constituted, and whether the remedies beyond the ordinary domain of the civil courts are prescribed. When the answer is affirmative, arbitration in the absence of special reason is contraindicated. The dispute is non-arbitrable. [Para 34][1066-E-H; 1067-A-B] Transcore v. Union of India and Another (2008) 1 SCC F 125:[2006] 9 Suppl. SCR 785; M.D. Frozen Foods Exports Private Limited and Others v. Hero Fincorp Limited (2017) 16 SCC 741: [2017] 13 SCR 800; Indiabulls Housing Finance Limited v. Deccan Chronicle Holdings Limited and Others (2018) 14 SCC 783: [2018] G 1 SCR 1096 – relied on. HDFC Bank Ltd. v. Satpal Singh Bakshi, 2013 (134) DRJ 566 (FB) – overruled

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A Jennifer L. Peresie, Reducing the Presumption of Arbitrability – referred to. 1.13 Section 34(2)(b) of the Arbitration Act consists of two sub-clauses both accrediting the court with the power to set aside an award. Under sub-clause (i) an award is liable to be set aside when the subject matter is not capable of settlement by arbitration under law for the time being in force. Under sub-clause (ii) an award can be set aside if it is in conflict with the public policy of India. As per Explanation No. 1, an award is in conflict with the public policy of India only if it was induced or affected by fraud, corruption, etc. or it is in contravention with the fundamental policy of Indian law or is in conflict with the most basic notions of morality or justice. Explanation 2 cautions the courts not to review on the merits of the case while examining the question whether an award is in contravention with the fundamental policy of law. Therefore, conflict with the public policy of India and a subject matter of dispute not capable of settlement by arbitration, are two separate and independent grounds on which the court can set aside the award. [Para 39][1072-B-D] 1.14 Public policy in the context of non-arbitrability refers to public policy as reflected in the enactment, that is, whether the enactment confers exclusive jurisdiction to the specified court or the special forum and prohibits recourse to arbitration. Public policy in the context of sub-clause(ii) to Section 34(2)(b) refers to the public policy of the enactment, defining and fixing rights and obligations, and application of those rights and obligations by the arbitrator. Statutes unfailingly have a public purpose or policy which is the basis and purpose behind the legislation. Application of mandatory law to the merits of the case do not imply that the right to arbitrate is taken away. Mandatory law may require a particular substantive rule to be applied, but this would not preclude arbitration. Implied non-arbitrability requires prohibition against waiver of jurisdiction, which happens when a statute gives special rights or obligations and creates or stipulates an exclusive forum for adjudication and enforcement. An arbitrator, like the court, is equally bound by the public policy behind the statute while examining the claim on merits. The public

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VIDYA DROLIA AND OTHERS v. 1011 DURGA TRADING CORPORATION policy in case of non-arbitrability would relate to conferment of exclusive jurisdiction on the court or the special forum set up by law for decision making. Non-arbitrability question cannot be answered by examining whether the statute has a public policy objective which invariably every statue would have. There is a general presumption in favour of arbitrability, which is not excluded simply because the dispute is permeated by applicability of mandatory law. Violation of public policy by the arbitrator could well result in setting aside the award on the ground of failure to follow the fundamental policy of law in India, but not on the ground that the subject matter of the dispute was non-arbitrable. [Para 39][1072-E-H; 1073-A-B] C 1.15 It would be grossly irrational and completely wrong to mistrust and treat arbitration as flawed and inferior adjudication procedure unfit to deal with the public policy aspects of a legislation. Arbitrators, like the courts, are equally bound to resolve and decide disputes in accordance with the public policy D of the law. Possibility of failure to abide by public policy consideration in a legislation, which otherwise does not expressly or by necessary implication exclude arbitration, cannot form the basis to overwrite and nullify the arbitration agreement. This would be contrary to and defeat the legislative intent reflected in the public policy objective behind the Arbitration Act. Arbitration E has considerable advantages as it gives freedom to the parties to choose an arbitrator of their choice, and it is informal, flexible and quick. Simplicity, informality and expedition are hallmarks of arbitration. Arbitrators are required to be impartial and independent, adhere to natural justice, and follow a fair and just procedure. Arbitrators are normally experts in the subject and perform their tasks by referring to facts, evidence, and relevant case law. Complexity is not sufficient to ward off arbitration. In terms of the mandate of Section 89 of the Civil Procedure Code and the object and purpose behind the Arbitration Act and the mandatory language of Sections 8 and 11, the mutually agreed arbitration clauses must be enforced. The language of Sections 8 and 11 of the Arbitration Act are peremptory in nature. Arbitration Act has been enacted to promote arbitration as a transparent,

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A fair, and just alternative to court adjudication. Public policy is to encourage and strengthen arbitration to resolve and settle economic, commercial and civil disputes. Amendments from time to time have addressed the issues and corrected the inadequacies and flaws in the arbitration procedure. It is for the stakeholders, including the arbitrators, to assure that the arbitration is as B impartial, just, and fair as court adjudication. It is also the duty of the courts at the post-award stage to selectively yet effectively exercise the limited jurisdiction, within the four corners of Section 34(2)(b)(ii) read with Explanation 1 and 2 and check any conflict with the fundamental policy of the applicable law. [Para 41][1074- C A-G] 1.16 A four-fold test for determining when the subject matter of a dispute in an arbitration agreement is not arbitrable is (1) when cause of action and subject matter of the dispute relates to actions in rem, that do not pertain to subordinate rights D in personam that arise from rights in rem. (2) when cause of action and subject matter of the dispute affects third party rights; have erga omnes effect; require centralized adjudication, and mutual adjudication would not be appropriate and enforceable. (3) When cause of action and subject matter of the dispute relates to inalienable sovereign and public interest functions of the State E and hence mutual adjudication would be unenforceable; (4) When the subject-matter of the dispute is expressly or by necessary implication non-arbitrable as per mandatory statute(s). These tests are not watertight compartments; they dovetail and overlap, albeit when applied holistically and pragmatically will help and assist in F determining and ascertaining with great degree of certainty when as per law in India, a dispute or subject matter is non-arbitrable. Only when the answer is affirmative that the subject matter of the dispute would be non-arbitrable. However, the aforesaid principles have to be applied with care and caution. [Para 45][1077- A-E] G 1.17 Applying the above principles to determine non- arbitrability, it is apparent that insolvency or intra-company disputes have to be addressed by a centralized forum, be the court or a special forum, which would be more efficient and has complete jurisdiction to efficaciously and fully dispose of the entire matter. They are also actions in rem. Similarly, grant and issue of

VIDYA DROLIA AND OTHERS v. 1013 DURGA TRADING CORPORATION patents and registration of trademarks are exclusive matters falling within the sovereign or government functions and have erga omnes effect. Such grants confer monopoly rights. They are non-arbitrable. Criminal cases again are not arbitrable as they relate to sovereign functions of the State. Further, violations of criminal law are offenses against the State and not just against the victim. Matrimonial disputes relating to the dissolution of marriage, restitution of conjugal rights etc. are not arbitrable as they fall within the ambit of sovereign functions and do not have any commercial and economic value. The decisions have erga omnes effect. Matters relating to probate, testamentary matter etc. are actions in rem and are a declaration to the world at large and hence are non-arbitrable. [Para 46][1077-G-H; 1078-A-C] 1.18 Landlord-tenant disputes governed by the Transfer of Property Act are arbitrable as they 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 affect or require centralized adjudication. An award passed deciding landlord-tenant disputes can be executed and enforced like a decree of the civil court. Landlord-tenant disputes do not relate to inalienable and sovereign functions of the State. The provisions of the Transfer of Property Act do not expressly or by necessary implication bar arbitration. Transfer E of Property Act, like all other Acts, has a public purpose, that is, to regulate landlord-tenant relationships and the arbitrator would be bound by the provisions, including provisions which enure and protect the tenants. Therefore landlord-tenant disputes are arbitrable as the Transfer of Property Act does not forbid or F foreclose arbitration. However, landlord-tenant disputes covered and governed by rent control legislation would not be arbitrable when specific court or forum has been given exclusive jurisdiction to apply and decide special rights and obligations. Such rights and obligations can only be adjudicated and enforced by the specified court/forum, and not through arbitration. [Paras 48 and G 49][1078-E-H; 1079-A-B] Chloro Controls India Private Ltd. v. Severn Trent Water Purification Inc., (2013) 1 SCC 641: [2012] 13

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A SCR 402; Natraj Studios (P) Ltd. v. Navrang Studios (1981) 1 SCC 523: [1981] 2 SCR 466; Booz Allen & Hamilton Inc. v. SBI Home Finance Ltd. (2011) 5 SCC 532; Olympus Superstructures Pvt. Ltd. v. Meena Vijay Khetan and Others (1999) 5 SCC 651: [1999] 3 SCR 490; Vimal Kishor Shah and Others v. Jayesh Dinesh B Shah and Other (2016) 8 SCC 788: [2016] 7 SCR 102 ; Emaar MGF Land Limited v. Aftab Singh (2019) 12 SCC 751:[2018] 14 SCR 791; A. Avyasamy v. A. Paramasivam and Others (2016) 10 SCC 386 : [2016] 11 SCR 521; Premier Automobiles Ltd. v. C Kamlekar Shantaram Wadke of Bombay and Others (1976) 1 SCC 496 : [1976] 1 SCR 427; V.H. Patel & Company and Others v. Hirubhai Himabhai Patel and Others (2000) 4 SCC 368: [2000] 3 SCR 113; Abdul Kadir Samshuddin Bubere v. Madhav Prabharkar Oak and Another AIR 1962 SC 406: [1962] SCR 702 ; Avitel D Post Studioz Limited v. HSBC PI Holdings (Mauritius) Limited 2021 (4) SCC 713; Rashid Raza v. Sadaf Akhthar (2019) 8 SCC 710 – relied on. Himangni Enterprises v. Kamaljeet Singh Ahluwalia (2017) 10 SCC 706: [2017] 10 SCR 139; N. E Radhakrishnan v. Maestro Engineers and Others, (2010) 1 SCC 72: [2009] 15 SCR 371 – overruled

2019 SCC OnLine SC 358; Sukanya Holdings (P) Ltd. v. Jayesh H. Pandya and Another (2003) 5 SCC 531: F [2003] 3 SCR 558; Deccan Paper Mills Co. Ltd. v. Regency Mahavir 2021 (4 ) SCC 786 – referred to. TELUS Communications Inc. v. Avraham Wellman (2019) SCC 19 (CanLII) Mitsubishi Motors Corp v. Soler Chrysler Plymouth Inc, 473 U.S. 614 S Ct 3346 (1985) G (U.S. Supreme Court, 2 July 1985) – referred to Vanderbilt Journal of Transnational Law, vol. 36, No.4, October 2003, p. 1115-1136 ‘Who Decides the Arbitrator’s Jurisdiction? Separability and Competence-

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Competence in Transnational Perspective’ by John J. A Barcelo III; Law and Practice of Commercial Arbitration in England (2nd Ed. 1989) by Mustill and Boyd; Redfer Hunteron International Arbitration and Gary B. Bornin International Commercial Arbitration; A Second Look at Arbitrability: Approaches to B Arbitration in the United States, Switzerland and Germany by Patrick M. Baron and Stefan Liniger; Conflict of Laws 98, 7th ed. 1974 by R.H. Graveson – referred to. 2.1 Issue of non-arbitrability can be raised at three stages. First, before the court on an application for reference under C Section 11 of the Arbitration Act or for stay of pending judicial proceedings and reference under Section 8 of the Arbitration Act; secondly, before the arbitral tribunal during the course of the arbitration proceedings; or thirdly, before the court at the stage of the challenge to the award or its enforcement. [Para 51][1079- D D-F] 2.2 Who decides the question of non-arbitrability? - a jurisdictional question is a technical legal issue, and requires clarity when applied to facts to avoid bootstrapping and confusion. The doubt as to who has the jurisdiction to decide could hinder, stray, and delay a many arbitration proceedings. To some extent, the answer depends on how much jurisdiction the enactment gives to the arbitrator to decide their own jurisdiction as well as the court’s jurisdiction at the reference stage and in the post-award proceedings. It also depends upon the jurisdiction bestowed by the enactment, viz. the facet of non-arbitrability in question, the scope of the arbitration agreement and authority conferred on the arbitrator. [Para 52][1079-F-H; 1080-A-B] 2.3 Under the Arbitration Act, 1940, the jurisdiction to settle and decide non-arbitrability issues relating to existence, validity, scope as well as whether the subject matter was capable of arbitration, with possible exception in case of termination, novation, frustration and ‘accord and satisfaction’ when contested on facts, was determined and decided at the first or at the reference stage by the courts. The principle being that the court H

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A should be satisfied about the existence of a valid arbitration agreement and that the disputes have arisen with regard to the subject matter of the arbitration agreement. At this stage, the court would be, however, not concerned with the merits or sustainability of the disputes. Despite best efforts to contain obstructive tactics, adjudication and final decision of non- B arbitrability issues at the reference stage would invariably stop, derail and thwart the proceedings in the courts for years. [Para 53][1080-A-D] 2.4 The Arbitration Act based upon the UNCITRAL Model Law introduced an entirely new regimen with the objective to promote arbitration in commercial and economic matters as an alternative dispute resolution mechanism that is fair, responsive and efficient to contemporary requirements. One of the primary objectives of the Arbitration Act is to reduce and minimize the supervisory role of courts. Accordingly, the statutory powers of the arbitral tribunal to deal with and decide jurisdictional issues of non-arbitrability were amplified and the principles of separation and competence-competence were incorporated, while the courts retained some power to have a ‘second look’ in the post-award challenge proceeding. On the jurisdiction of the court at the referral stage, views of this Court have differed and there have been statutory amendments to modify and obliterate the legal effect of the court decisions. [Para 54][1080-D-F] 2.5 Clauses (a) and (b) to sub-section (1) to Section 16 of the Arbitration Act, enact the principle of separation of the arbitration agreement from the underlying or container contract. F Clause (a), by legal fiction, gives an independent status to an arbitration clause as if it is a standalone agreement, even when it is only a clause and an integral part of the underlying or container contract. Clause (b) formulates a legal rule that a decision by the arbitral tribunal holding that the main contract is null and void G shall not ipso jure entail invalidity of the arbitration clause. Successful challenge to the existence or invalidity or rescission of the main contract does not necessarily embrace an identical finding as to the arbitration agreement, provided the court is satisfied that the arbitration clause had been agreed upon. The

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VIDYA DROLIA AND OTHERS v. 1017 DURGA TRADING CORPORATION arbitration agreement can be avoided only on the ground which relates directly to the arbitration agreement. Notwithstanding the challenge to the underlying or container contract, the arbitration clause in the underlying or container contract survives for determining the disputes. The principle prevents boot-strapping as it is primarily for the arbitral tribunal and not for the court to decide issues of existence, validity and rescission of the underlying contract. Principle of separation authorises an arbitral tribunal to rule and decide on the existence, validity or rescission of the underlying contract without an earlier adjudication of the questions by the referral court. [Para 81][1116-A-E] Damodar Valley Corporation v. K.K. Kar, (1974) 1 SCC C 141: [1974] 2 SCR 240 ; Union of India v. Kishorilal Gupta & Bros., AIR 1959 SC 1362: [1960] SCR 49 – referred to. Fiona Trust and Holding Corpn. v. Privalov (2007) 1 All ER (Comm) 891:2007 Bus LR 686 (CA); Buckeye D Check Cashing Inc. v. Cardegna 163 L Ed 2d 1038: 46 US 440 (2006) : 2006 SCC OnLine US SC 14; Prima Pain Corpn. v. Flood & Conklin Mfg. Co. L Ed 2nd 1270; 388 US 395 (1967):1967 SCC OnLine US SC 160; Southland Corpn. v. Keating, 1984 SCC OnLine E US SC 19 – referred to. On Arbitrability: Persisting Misconceptions and New Areas of Concern by Stavros Brekoulaki; Emmanuel Gaillard and Yas Banifatemi in Negative Effect of Competence-Competence: The Rule of Priority in F Favour of the Arbitrators; John J. Barcelo III, ;Paper titled ‘Who Decides the Arbitrator’s Jurisdiction? Separability and Competence-Competence in Transnational Perspective’, by Prof. Stephen J. Ware in Arbitration Law’s Separability Doctrine After Buckeye Check Cashing, Inc.- referred to. G 2.6 Principles of competence-competence have positive and negative connotations. As a positive implication, the arbitral tribunals are declared competent and authorised by law to rule

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A as to their jurisdiction and decide non-arbitrability questions. In case of expressed negative effect, the statute would govern and should be followed. Implied negative effect curtails and constrains interference by the court at the referral stage by necessary implication in order to allow the arbitral tribunal to rule as to their jurisdiction and decide non-arbitrability questions. As per the negative effect, courts at the referral stage are not to decide on merits, except when permitted by the legislation either expressly or by necessary implication, such questions of non- arbitrability. Such prioritisation of arbitral tribunal over the courts can be partial and limited when the legislation provides for some or restricted scrutiny at the ‘first look’ referral stage. [Para 83][1117-G-H; 1118-A-B] 2.7 Section 16(1) of the Arbitration Act accepts and empowers the arbitral tribunal to rule on its own jurisdiction including a ruling on the objections, with respect to all aspects of non-arbitrability including validity of the arbitration agreement. A party opposing arbitration, as per sub-section (2), should raise the objection to jurisdiction of the tribunal before the arbitral tribunal, not later than the submission of statement of defence. However, participation in the appointment procedure or appointing an arbitrator would not preclude and prejudice any party from raising an objection to the jurisdiction. Obviously, the intent is to curtail delay and expedite appointment of the arbitral tribunal. The clause also indirectly accepts that appointment of an arbitrator is different from the issue and question of jurisdiction and non-arbitrability. As per sub-section (3), any objection that the arbitral tribunal is exceeding the scope of its authority should be raised as soon as the matter arises. However, the arbitral tribunal, as per sub-section (4), is empowered to admit a plea regarding lack of jurisdiction beyond the periods specified in sub- section (2) and (3) if it considers that the delay is justified. As per the mandate of sub-section (5) when objections to the jurisdiction under sub-sections (2) and (3) are rejected, the arbitral tribunal can continue with the proceedings and pass the arbitration award. A party aggrieved is at liberty to file an application for setting aside such arbitral award under Section 34 of the

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Arbitration Act. Sub-section (3) to Section 8 in specific terms permits an arbitral tribunal to continue with the arbitration proceeding and make an award, even when an application under sub-section (1) to Section 8 is pending consideration of the court/ forum. Therefore, pendency of the judicial proceedings even before the court is not by itself a bar for the arbitral tribunal to proceed and make an award. [Para 84][1118-C-H] 2.8 Section 34 of the Act is applicable at the third stage post the award when an application is filed for setting aside the award. Under Section 34, an award can be set aside – (i) if the arbitration agreement is not valid as per law to which the party is subject; (ii) if the award deals with the disputes not contemplated by or not falling within the submission to arbitration, or contains a decision on the matter beyond the scope of submission to arbitration; and (iii) when the subject matter of the dispute is not capable of settlement by arbitration under the law for the time being in force. Thus, the competence - competence principle, in its negative effect, leaves the door open for the parties to challenge the findings of the arbitral tribunal on the three issues. The negative effect does not provide absolute authority, but only a priority to the arbitral tribunal to rule the jurisdiction on the three issues. The courts have a ‘second look’ on the three aspects under Section 34 of the Arbitration Act. [Para 85][1119-A-D] E

2.9 The courts at the referral stage do not perform ministerial functions. They exercise and perform judicial functions when they decide objections in terms of Sections 8 and 11 of the Arbitration Act. Section 8 prescribes the courts to refer the parties to arbitration, if the action brought is the subject of an arbitration agreement, unless it finds that prima facie no valid arbitration agreement exists. Prima facie case in the context of Section 8 is not to be confused with the merits of the case put up by the parties which has to be established before the arbitral tribunal. It is restricted to the subject matter of the suit being prima facie arbitrable under a valid arbitration agreement. Prima facie case means that the assertions on these aspects are bona fide. When read with the principles of separation and competence- competence and Section 34 of the Arbitration Act, referral court without getting bogged-down would compel the parties to abide H

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A unless there are good and substantial reasons to the contrary. [Para 86][1119-D-G; 1120-A-B] Nirmala J. Jhala v. State of Gujarat and Another (2013) 4 SCC 301: [2013] 5 SCR 2006 – relied on. 2.10 Prima facie examination is not full review but a primary first review to weed out manifestly and ex facie non-existent and invalid arbitration agreements and non-arbitrable disputes. The prima facie review at the reference stage is to cut the deadwood and trim off the side branches in straight forward cases where dismissal is barefaced and pellucid and when on the facts and law the litigation must stop at the first stage. Only when the court is certain that no valid arbitration agreement exists or the disputes/ subject matter are not arbitrable, the application under Section 8 would be rejected. At this stage, the court should not get lost in thickets and decide debatable questions of facts. Referral proceedings are preliminary and summary and not a mini trial. D This necessarily reflects on the nature of the jurisdiction exercised by the court. [Para 87][1120-B-D] NCC Ltd. v. Indian Oil Corporation Ltd., Arbitration Petition No. 115 of 2018 decided on 08.02.2019; Silver Dry Bulk Company Limited v. Homer Hulbert Maritime E Company Limited, (2017) EWHC 44 (Comm.) – referred to. Silver Dry Bulk Company Limited v. Homer Hulbert Maritime Company Limited (2017) EWHC 44 (Comm.) – referred to F 2.11 The nature and facet of non-arbitrability could also determine the level and nature of scrutiny by the court at the referral stage. The court can examine contractual aspects of arbitration agreement, at referral stage and jurisdictional aspects of arbitration agreement which he feels should be left to the G arbitral tribunal. The issue of non-arbitrability can be divided into procedural and substantive objections. The procedurals are ‘gateway questions’ which would presumptively be for the arbitrator to decide at least at the first stage. In the Indian context,

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VIDYA DROLIA AND OTHERS v. 1021 DURGA TRADING CORPORATION it can be divided into three categories. The first category of issues, namely, whether the party has approached the appropriate High Court, whether there is an arbitration agreement and whether the party who has applied for reference is party to such agreement would be subject to more thorough examination in comparison to the second and third categories/issues which are presumptively, save in exceptional cases, for the arbitrator to decide. The first category, would include the questions or issues relating to whether the cause of action relates to action in personam or rem; whether the subject matter of the dispute affects third party rights, have erga omnes effect, requires centralized adjudication; whether the subject matter relates to inalienable sovereign and public interest functions of the State; and whether the subject matter of dispute is expressly or by necessary implication non-arbitrable as per mandatory statue(s). Such questions arise rarely and, when they arise, are on most occasions questions of law. On the other hand, issues relating to contract formation, existence, validity and non-arbitrability would be connected and intertwined with the issues underlying the merits of the respective disputes/claims. They would be factual and disputed and for the arbitral tribunal to decide. The court may for legitimate reasons, to prevent wastage of public and private resources, can exercise judicial discretion to conduct an intense yet summary prima facie review while remaining conscious that it is to assist the arbitration procedure and not usurp jurisdiction of the arbitral tribunal. Undertaking a detailed full review or a long-drawn review at the referral stage would obstruct and cause delay undermining the integrity and efficacy of arbitration as a F dispute resolution mechanism. Conversely, if the court becomes too reluctant to intervene, it may undermine effectiveness of both the arbitration and the court. There are certain cases where the prima facie examination may require a deeper consideration. The court’s challenge is to find the right amount of and the context when it would examine the prima facie case or exercise restraint. G The legal order needs a right balance between avoiding arbitration obstructing tactics at referral stage and protecting parties from being forced to arbitrate when the matter is clearly non-arbitrable. [Para 88][1122-B-H; 1123-A-B] H

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A National Insurance Company Limited v. Boghara Polyfab Private Limited (2009) 1 SCC 267: [2008] 13 SCR 638 – relied on. Ozlem Susler – ‘The English Approach to Competence- Competence’ – referred to. B 2.12 Accordingly, when it appears that prima facie review would be inconclusive, or on consideration inadequate as it requires detailed examination, the matter should be left for final determination by the arbitral tribunal selected by the parties by consent. The underlying rationale being not to delay or defer and to discourage parties from using referral proceeding as a rue to delay and obstruct. In such cases a full review by the courts at this stage would encroach on the jurisdiction of the arbitral tribunal and violate the legislative scheme allocating jurisdiction between the courts and the arbitral tribunal. Centralisation of litigation with the arbitral tribunal as the primary and first adjudicator is beneficent as it helps in quicker and efficient resolution of disputes. [Para 89][1123-C-E] 2.13 The Court would exercise discretion and refer the disputes to arbitration when it is satisfied that the contest requires the arbitral tribunal should first decide the disputes and rule on non-arbitrability. Similarly, discretion should be exercised when the party opposing arbitration is adopting delaying tactics and impairing the referral proceedings. [Para 90][1123-E-F] Dell Computer Corporation v. Union des consommateurs and Olivier Dumoulin [2007] 2 S.C.R. 801; TELUS F Communications Inc. v. Avraham Wellman (2019) SCC 19 (CanLII) – referred to 2.14 Section 11(6) of Arbitration Act requires the court to appoint an arbitrator on an application made by a party. Section (6-A) to Section 11 stipulates that the court shall, at the stage of G appointment under sub-section (4), (5) or (6), confine itself to the examination of the existence of an arbitration agreement. Sub-section (6-A) was omitted by Act 33 of 2019, but the omission is in view of the introduction of a new regime of institutionalised

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VIDYA DROLIA AND OTHERS v. 1023 DURGA TRADING CORPORATION arbitration as per the report of the committee headed by Justice A B. N. Srikrishna, dated 30.07.2017. [Para 91][1124-D-E] 2.15 It would be wrong to accept that post omission of sub- section (6-A) to Section 11 the ratio in *Patel Engineering Ltd. would become applicable. *Patel Engineering Ltd. has been legislatively overruled and hence would not apply even post omission of sub-section (6-A) to Section 11 of the Arbitration Act. The omitted sub-section (6-A) to Section 11 of the Arbitration Act would continue to apply and guide the courts on its scope of jurisdiction at stage one, that is the pre-arbitration stage. Omission of sub-section (6-A) by Act 33 of 2019 was with the specific object and purpose and is relatable to by substitution of sub-sections (12), (13) and (14) to Section 11 of the Arbitration Act by Act 33 of 2019, which, vide sub-section (3A) stipulates that the High Court and this court shall have the power to designate the arbitral institutions which have been so graded by the Council under Section 43-I, provided where a graded arbitral institution is not available, the concerned High Court shall maintain a panel of arbitrators for discharging the function and thereupon the High Court shall perform the duty of an arbitral institution for reference to the arbitral tribunal. [Para 91][1124-G-H; 1125-B-E] Mayavati Trading Private Limited v. Pradyuat Deb E Burman (2019) 8 SCC 714:[2019] 12 SCR 123 65 – relied on. 2.16 On jurisprudentially and textualism it is possible to differentiate between existence of an arbitration agreement and validity of an arbitration agreement. Such interpretation can draw support from the plain meaning of the word “existence’ in s. 11 of the Arbitration Act. However, it is equally possible, jurisprudentially and on contextualism, to hold that an agreement has no existence if it is not enforceable and not binding. Existence of an arbitration agreement presupposes a valid agreement which would be enforced by the court by relegating the parties to arbitration. Legalistic and plain meaning interpretation would be contrary to the contextual background including the definition clause and would result in unpalatable consequences.

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A A reasonable and just interpretation of ‘existence’ requires understanding the context, the purpose and the relevant legal norms applicable for a binding and enforceable arbitration agreement. An agreement evidenced in writing has no meaning unless the parties can be compelled to adhere and abide by the terms. A party cannot sue and claim rights based on an unenforceable document. Thus, there are good reasons to hold that an arbitration agreement exists only when it is valid and legal. A void and unenforceable understanding is no agreement to do anything. 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 and when it is enforceable in law. [Para 92][1125-F-H; 1126-A-C] Garware Wall Ropes Limited v. Coastal Marine Constructions and Engineering Limited (2019) 9 SCC 209: [2019] 5 SCR 579 – relied on. D 2.17 The court at the reference stage exercises judicial powers. ‘Examination’, as an ordinary expression in common parlance, refers to an act of looking or considering something carefully in order to discover something. It requires the person to inspect closely, to test the condition of, or to inquire into carefully. It would be rather odd for the court to hold and say that the arbitration agreement exists, though ex facie and manifestly the arbitration agreement is invalid in law and the dispute in question is non-arbitrable. The court is not powerless and would not act beyond jurisdiction, if it rejects an application for reference, when the arbitration clause is admittedly or without doubt is with a minor, lunatic or the only claim seeks a probate of a Will. [Para 92 (ii)][1127-A-C] 2.18 Most scholars and jurists accept and agree that the existence and validity of an arbitration agreement are the same. Most jurisdictions accept and require prima facie review by the court on non-arbitrability aspects at the referral stage. [Para 92 (iii) and (iv)][1127-C-D] 2.19 Sections 8 and 11 of the Arbitration Act are complementary provisions as was held in *Patel Engineering Ltd.

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VIDYA DROLIA AND OTHERS v. 1025 DURGA TRADING CORPORATION

The object and purpose behind the two provisions is identical to compel and force parties to abide by their contractual understanding. This being so, the two provisions should be read as laying down similar standard and not as laying down different and separate parameters. Section 11 does not prescribe any standard of judicial review by the court for determining whether an arbitration agreement is in existence. Section 8 states that the judicial review at the stage of reference is prima facie and not final. Prima facie standard equally applies when the power of judicial review is exercised by the court under Section 11 of the Arbitration Act. Therefore, the mandate of valid arbitration agreement in Section 8 can be read into mandate of Section 11, C that is, ‘existence of an arbitration agreement’. [Para 92 (v)][1127- E-G] 2.20 Exercise of power of prima facie judicial review of existence as including validity is justified as a court is the first forum that examines and decides the request for the referral. D Absolute “hands off” approach would be counterproductive and harm arbitration, as an alternative dispute resolution mechanism. Limited, yet effective intervention is acceptable as it does not obstruct but effectuates arbitration. Exercise of the limited prima facie review does not in any way interfere with the principle of competence–competence and separation as to obstruct arbitration proceedings but ensures that vexatious and frivolous matters get over at the initial stage. [Para 92 (vi) and 92 (vii)][1127-G-H; 1128-A-B] 2.21 Exercise of prima facie power of judicial review as to the validity of the arbitration agreement would save costs and check harassment of objecting parties when there is clearly no justification and a good reason not to accept plea of non- arbitrability. [Para 92 (viii)][1128-B-C] Subrata Roy Sahara v. Union of India, (2014) 8 SCC 470: [2014] 12 SCR 573; Duro Felguera, S.A v. G Gangavaram Port Limited (2017) 9 SCC 729: [2017] 10 SCR 285; M.R. Engineers and Contractors Private Limited v. Som Datt Builders Limited (2009) 7 SCC 696:[2009] 10 SCR 373 – relied on. H

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A *SBP & Co. v. Patel Engineering Ltd., (2005) 8 SCC 618:[2005] 4 Suppl. SCR 688; National Insurance Company Limited v. Boghara Polyfab Private Limited (2009) 1 SCC 267: [2008] 13 SCR 638; Oriental Insurance Company Ltd. v. Narbheram Power and Steel Private Limited (2018) 6 SCC 534: [2018] 4 SCR 826; B Vulcan Insurance v. Maharaj Singh (1976) 1 SCC 943: [1976] 2 SCR 62; M/s. PSA Mumbai Investments PTE. Limited v. The Board of Trustees of the Jawaharlal Nehru Port Trust and Another 2018 (10) SCC 525 – referred to. C 2.22 The interpretation appropriately balances the allocation of the decision-making authority between the court at the referral stage and the arbitrators’ primary jurisdiction to decide disputes on merits. The court as the judicial forum of the first instance can exercise prima facie test jurisdiction to screen and knockdown D ex facie meritless, frivolous and dishonest litigation. Limited jurisdiction of the courts ensures expeditious, alacritous and efficient disposal when required at the referral stage. [Para 92 (xi)][1129-G-H] 2.23 Section 43(1) of the Arbitration Act states that the E Limitation Act, 1963 shall apply to arbitrations as it applies to court proceedings. Sub-section (2) states that for the purposes of the Arbitration Act and Limitation Act, arbitration shall be deemed to have commenced on the date referred to in Section

21. Limitation law is procedural and normally disputes, being factual, would be for the arbitrator to decide guided by the facts found and the law applicable. The court at the referral stage can interfere only when it is manifest that the claims are ex facie time barred and dead, or there is no subsisting dispute. All other cases should be referred to the arbitral tribunal for decision on merits. Similar would be the position in case of disputed ‘no claim certificate’ or defence on the plea of novation and ‘accord and satisfaction’. It is not to be expected that commercial men while entering transactions inter se would knowingly create a system which would require that the court should first decide whether the contract should be rectified or avoided or rescinded, as the

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VIDYA DROLIA AND OTHERS v. 1027 DURGA TRADING CORPORATION case may be, and then if the contract is held to be valid, it would A require the arbitrator to resolve the issues that have arisen. [Para 93][1130-A-D] Filli Shipping Co. Limited v. Premium Nafta Products Ltd. 2007 UKHL 40 : 2007 Bus LR 1719 (HL) – referred to. B 2.24 What is true and applicable for men of commerce and business may not be equally true and apply in case of laymen and to those who are not fully aware of the effect of an arbitration clause or had little option but to sign on the standard form contract. Broad or narrow interpretations of an arbitration agreement can, to a great extent, effect coverage of a retroactive arbitration agreement. Pro-arbitration broad interpretation, normally applied to international instruments, and commercial transactions is based upon the approach that the arbitration clause should be considered as per the true contractual language and what it says, but in case of doubt as to whether related or close disputes in the course of parties’ business relationship is covered by the clause, the assumption is that such disputes are encompassed by the agreement. The restrictive interpretation approach on the other hand states that in case of doubt the disputes shall not be treated as covered by the clause. Narrow approach is based on the reason that the arbitration should be viewed as an exception to the court or judicial system. The third approach is to avoid either broad or restrictive interpretation and instead the intention of the parties as to scope of the clause is understood by considering the strict language and circumstance of the case in hand. Terms like ‘all’, ‘any’, ‘in respect of’, ‘arising out of’ F etc. can expand the scope and ambit of the arbitration clause. Connected and incidental matters, unless the arbitration clause suggests to the contrary, would normally be covered. [Para 94][1131-B-E] Oriental Insurance Company Ltd. v. Narbheram Power G and Steel Private Limited (2018) 6 SCC 534: [2018] 4 SCR 826 – relied on. 2.25 Which approach as to interpretation of an arbitration agreement should be adopted in a particular case would depend H

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A upon various factors including the language, the parties, nature of relationship, the factual background in which the arbitration agreement was entered, etc. In case of pure commercial disputes, more appropriate principle of interpretation would be the one of liberal construction as there is a presumption in favour of one- stop adjudication. [Para 94][1131-F-G] B 2.26 Therefore, the expression ‘existence of an arbitration agreement’ in Section 11 of the Arbitration Act, would include aspect of validity of an arbitration agreement, albeit the court at the referral stage would apply the prima facie test on the basis of principles set out in this judgment. In cases of debatable and C disputable facts, and good reasonable arguable case, etc., the court would force the parties to abide by the arbitration agreement as the arbitral tribunal has primary jurisdiction and authority to decide the disputes including the question of jurisdiction and non- arbitrability. [Para 95][1131-G-H; 1132-A-B] D 2.27 Scope of judicial review and jurisdiction of the court under Section 8 and 11 of the Arbitration Act is identical but extremely limited and restricted. Ratio of the decision on the scope of judicial review by the court while deciding an application under Sections 8 or 11 of the Arbitration Act, post the E amendments by Act 3 of 2016 (with retrospective effect from 23.10.2015) and even post the amendments vide Act 33 of 2019 (with effect from 09.08.2019), is no longer applicable. [Para 96 (a) and (b)][1132-B-D] SBP & Co. v. Patel Engineering Ltd. (2005) 8 SCC 618: F [2005] 4 Suppl. SCR 688– held inapplicable. 2.28 The general rule and principle, in view of the legislative mandate clear from Act 3 of 2016 and Act 33 of 2019, and the principle of severability and competence-competence, is that the arbitral tribunal is the preferred first authority to determine and G decide all questions of non-arbitrability. The court has been conferred power of “second look” on aspects of non-arbitrability post the award in terms of sub-clauses (i), (ii) or (iv) of Section 34(2)(a) or sub-clause (i) of Section 34(2)(b) of the Arbitration Act. Rarely as a demurrer the court may interfere at the Section

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VIDYA DROLIA AND OTHERS v. 1029 DURGA TRADING CORPORATION

8 or 11 stage when it is manifestly and ex facie certain that the arbitration agreement is non-existent, invalid or the disputes are non-arbitrable, though the nature and facet of non-arbitrability would, to some extent, determine the level and nature of judicial scrutiny. The restricted and limited review is to check and protect parties from being forced to arbitrate when the matter is demonstrably ‘non-arbitrable’ and to cut off the deadwood. The court by default would refer the matter when contentions relating to non-arbitrability are plainly arguable; when consideration in summary proceedings would be insufficient and inconclusive; when facts are contested; when the party opposing arbitration adopts delaying tactics or impairs conduct of arbitration proceedings. This is not the stage for the court to enter into a mini trial or elaborate review so as to usurp the jurisdiction of the arbitral tribunal but to affirm and uphold integrity and efficacy of arbitration as an alternative dispute resolution mechanism. [Para 96 (c) and (d)][1132-D-H; 1133-A-B] D Arasmeta Captive Power Company Private Limited and Another v. Lafarge India Private Limited, (2013) 15 SCC 414: [2013] 17 SCR 496; Shin-Etsu Chemical Co. Ltd. v. Aksh Optifibre Ltd. and Another (2005) 7 SCC 234:[2005] 2 Suppl. SCR 699; United India Insurance Company Limited v. Hyundai Engineering and E Construction Company Limited & Ors. (2018) 17 SCC 607:[2018] 12 SCR 1085 – relied on. A. Ayysamy v. A. Paramsivam, (2016) 10 SCC 386:[2016] 11 SCR 521; Konkan Railway Corpn. Ltd. and Others v. Mehul Construction Co., (2000) 7 SCC F 201:[2000] 2 Suppl. SCR 563; Konkan Railway Construction Ltd. and Another v. Rani Construction Pvt. Ltd., (2002) 2 SCC 388: [2002] 1 SCR 728; Enercon (India) Ltd. v. Enercon GmbH (2014) 5 SCC 1:[2014] 2 SCR 855 68; Shree Ram Mills Ltd. v. Utility Premises G (P) Ltd., (2007) 4 SCC 599: [2007] 4 SCR 279; Chloro Controls India Private Ltd. v. Severn Trent Water Purification Inc., (2013) 1 SCC 641: [2012] 13 SCR 402 – referred to.

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A Per N. V. RAMANA, J. (Concurring):

1. Arbitration is a creature of consensus. It is completely dependent on party autonomy and the intention expressed in the agreement. A contract, having multiple clauses including arbitration agreements, can be divided into two parts. The clauses relating to the commercial relationship, i.e., the obligations and duties of each party, can be referred to as the ‘main contract’. The arbitration agreement so to say is a separate contract in itself. [Para 14][1137-E-F]

2. The separability of the arbitration agreement from the main contract, historically existed in Roman law. Since early times, arbitration was viewed with suspicion, which allowed for the development of separability. Ironically, the ‘pro-arbitration’ function of separability in the present day is a late 19th and 20th century development, traceable to Germanic and Swiss jurisprudence. [Para 15][1137-F-G] D

3. In India, arbitration was governed earlier by the Arbitration Act of 1899, and later 1940. Presently, arbitration is governed by the Act of 1996, with subsequent amendments. The intention of the legislature is to make the regime ‘pro-arbitration’. Whenever this Court has afforded a contrary view, there has been E a trend to undo the changes to bring it in line with the international standards. [Para 16][1137-G-H; 1138-A-B]

4. Under the old Arbitration Act, 1940, the Court had the discretion in referring the parties to arbitration, however such discretion is done away with after the coming into force of the F 1996 Act. The Arbitration and Conciliation Act, 1996 does not, in specific terms, exclude any category of disputes—civil or commercial—from arbitrability. Intrinsic legislative material is in fact to the contrary. Section 8 contains a mandate that where an action is brought before a judicial authority in a matter which G is the subject of an arbitration agreement, the parties shall be referred by it to arbitration, if a party to or a person claiming through a party to the arbitration agreement applies not later than the date of submitting the first statement on the substance of the dispute. The only exception is where the authority finds,

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VIDYA DROLIA AND OTHERS v. 1031 DURGA TRADING CORPORATION prima facie, that there is no valid arbitration agreement. Section A 8 contains a positive mandate and obligates the judicial authority to refer parties to arbitration in terms of the arbitration agreement. While dispensing with the element of judicial discretion, the statute imposes an affirmative obligation on every judicial authority to hold down parties to the terms of the agreement entered into between them to refer disputes to arbitration. Article 8 of the UNCITRAL Model Law enabled a court to decline to refer parties to arbitration if it is found that the arbitration agreement is null and void, inoperative or incapable of being performed. Section 8 of the Act has made a departure from the UNCITRAL law which is indicative of the wide reach and ambit of the statutory mandate. Section 8 uses the expansive expression “judicial authority” rather than “court” and the words “unless it finds that the agreement is null and void, inoperative and incapable of being performed” do not find place in Section 8. [Para 20][1140-A-F] D

5. The intention of the legislators to provide for Section 34 in its present form, is to have a limited review of the award instead of a full-fledged appeal process. A party intending to object to an award, is first required to file an application under Section 34 (1) indicating the objections along with the copy of an award and other necessary documents, which are required as proof to satisfy grounds provided under Section 34(2)(a) and (b) of the Act. Such complete petition is required to be filed within the time period prescribed under Section 34 (3) of the Act, failing which the appeal is rendered nugatory. The limitation prescribed under Section 34(3) is bound with the right to file objections itself. The objections filed under Section 34 must be relatable to the limited grounds provided under Section 34 (2) of the Act. It is the legislative intention to provide for numerous limitations under Section 34 of the Act, which are required to be strictly adhered to so as to make Indian arbitration time-bound and commercially prudent to opt for the same. Section 37 of the Act, provides for limited appeal against the Section 34 order, as well as against certain other specified orders. [Para 25][1151-G-H; 1152-A-C]

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A 6. The present structure of arbitration is such that Courts are to assist and support arbitration and leave the substantive part of adjudication to the arbitral tribunal. On a plain reading of the Act, whenever a dispute arises between parties, they are free to approach an appropriate judicial forum to get their dispute resolved. If the parties have contemplated an arbitration B agreement, then they can approach a tribunal for getting the matter resolved. Once they choose the non-judicial method, a party aggrieved by the award, has a chance to approach judicial institutions under Section 34 and 37 (appeal jurisdiction), if the award is violative of the grounds provided thereunder. [Paras 27 C and 28][1153-A-D]

7. The propositions, concerning Section 11 of the Act, are : First - Reference power under Section 11 of the Act is judicial and not administrative. Second - There was a wide discretion for judicial interference at the stage of reference under Section 11 of the Act, prior to the Arbitration Amendment Act of 2015. Third - Amendment in 2015 was brought into force to limit the power of judicial interference under Section 11 of the Act. These propositions are clear and binding. [Para 43][1166-D-F]

8. Section 8 of the Act applies, when a matter is brought by one of the parties before the Court, and the other party brings to the notice of the Court of existence of such arbitration agreement. Under these circumstances, the Court is obligated to refer a matter to arbitration, on satisfaction that a valid arbitration agreement exists between the parties. The 2015 amendment clarified that the test to be utilized by the Court is on a prima facie basis. The primary reason for the same, is the negative effect of Kompetenz Kompetenz under Section 16, which mandates that the arbitral tribunal is required to first look into any objections as to the jurisdiction of the tribunal itself. It is due to the fact that parties may abuse and protract the proceedings if there is no gatekeeping mechanism, that the legislature has found a balance, wherein the Court is required to examine the validity of an arbitration agreement on a prima facie basis. [Paras 44 and 45][1166-F-G]

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VIDYA DROLIA AND OTHERS v. 1033 DURGA TRADING CORPORATION

9. The ‘validity’ to be examined under Section 8(2) of the A Act, could be interpreted to mean formal validity as expressed under Section 7 of the Act. Such an interpretation would operate as a full application of the negative facet of Section 16, as the jurisdiction of the Court to step-in at the -reference stage would be limited. [Para 46][1167-B-C] B

10. Outside the United States of America, the term “arbitrability” has a reasonably precise and limited meaning, relating to whether specific classes of disputes are barred from arbitration because of national legislation or judicial authority. In the United States of America, arbitrability also refers to the complicated balance between courts and arbitrators regarding C who should be the initial decision-maker on issues such as the validity of the arbitration agreement. Out of the two meanings, this Court subscribes to the international flavor, which is one of the cherished legislative intentions, i.e., to bring the arbitration act in tune with the global march. [Para 48][1167-E-F] D

11. Even if a Tribunal comes to an understanding that there exists a valid arbitration agreement, still it does not mean that certain subject matters are arbitrable per se. This distinction is required to be kept in mind. [Para 49][1167-G-H]

12. Section 34(2)(b) provides the statutory basis for objecting E that an award which may not be capable of being settled by arbitration, or is against the public policy of India. The legislative intention of not arbitrating issues of public policy are intertwined with the fact that monopolies of the State activities should not be subject matter of a private tribunal, as the concerns of the State F cannot not be dealt effectively. Further, an award, which has an erga omnes effect on third parties, would not be in tune with the contractual nature of arbitration, which is binding on the consenting parties alone. However, this feature alone, does not explicitly mandate that the tribunal cannot first adjudicate a claim based on the public policy argument. Whether a subject matter can or G cannot be arbitrated should necessarily be dealt on a case to case basis, rather than a having a bold exposition that certain subject matters are incapable of arbitration. [Paras 50 and 51][1168-A- D] H

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A 13. However, the plea of public policy is required to be specifically identified, pleaded and shown with respect to how the award is contrary to the public policy. It may be possible that there may be certain claims abutting a restricted sphere, which may not be specifically hit by public policy or have erga omnes effect. If that be so, it would be too early at the stage of reference to determine the same as it would require complete examination of the issue at hand, which is more suited to be first dealt by the Tribunal and thereafter be looked into at the stage of enforcement. [Paras 51][1169-C-E]

14. An arbitration agreement would, as a necessary implication, carry with it a presumption of a one-stop mechanism. When parties decide to enter into an arbitration agreement, they agree to take all their disputes before arbitration. This presumption, is a rebuttable presumption. Therefore, Section 8 and 11 has to be interpreted with sufficient strictness, wherein the jurisdiction of the Court to decide issues should be limited to those expressly provided by the law. [Para 54][1170-B-C]

15. The Act itself does not exclude any category of disputes as being non-arbitrable. However, the Courts have used the ‘public policy’ reason to restrict arbitration with respect to certain subject matters. However, post the 2015 amendment, the structure of the Act was changed to bring it in tune with the pro- arbitration approach. Under the amended provision, the Court can only give prima facie opinion on the existence of a valid arbitration agreement. In line with the amended language and the statutory scheme, the examination of the subject matter arbitrability may not be appropriate at the stage of reference under Section 8 of the Arbitration Act. It is more appropriate to be taken up by the Court at the stage of enforcement under Section 34 of the Act. In clear cases where the subject matter arbitrability is clearly barred, the Court can cut the deadwood to preserve the efficacy of the arbitral process. [Paras 59 and 60][1172-G-H; 1173- A-B]

16. Arbitrators have been given jurisdiction to decide on the subject matter arbitrability. They are required to identify specific public policy in order to determine the subject matter H

VIDYA DROLIA AND OTHERS v. 1035 DURGA TRADING CORPORATION arbitrability. Merely because a matter verges on a prohibited territory, should not by itself stop the arbitrator from deciding the matter. He/she should be careful in considering the question of non-arbitrability. [Para 61][1173-B-C]

17. The meaning and scope of ‘prima facie’, as is required to determine the non-existence of a valid arbitration agreement under Section 8 of the Act has greatly varied in common law as well as the civil law systems. At least two meanings can be attributed to this term. First, it means a party is said to have established a prima facie case when he has satisfied his burden of producing evidence. The second meaning postulates that a party has established a prima facie case only when he has made such a strong showing that he is entitled to a presumption in his favor. Prima facie case is relatable to establishment of initial presumption, rather than an evidentiary standard. [Paras 62 and 63][1173-C-G]

18. The difference of statutory language provided under the amended Section 8, which states ‘refer the parties to arbitration unless it finds that prima facie no valid arbitration agreement exists’ in comparison with the amended Section 11(6A), creates disparities which need to be ironed out. While the Court in the *Shin-Etsu case and the **Duro Felguera case recommended for finding a valid arbitration agreement on a prima facie basis qua Section 11, however, the negative language used under the amended Section 8 mandates for referring a matter to arbitration unless the Court prima facie finds that no valid arbitration exists. A finding of non-existence of arbitration agreement is final subject to the appeal process only, without further scope for arbitration tribunal to decide anything as there can be no further reference. If that be the case, then the usage of phrase ‘prima facie’ stands at odds with the established precedents on prima facie standards. In this context, the Court can only stress on the requirement of quality legislative drafting protocols to eliminate such complications. [Para 65][1176-B-E]

19. Thus, the respondent/defendant has to establish a prima facie case of non-existence of valid arbitration agreement, wherein

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p. 1036

A it is to be summarily portrayed that a party is entitled to such a finding. If a party cannot satisfy the Court of the same on the basis of documents produced, and rather requires extensive examination of oral and documentary production, then the matter has to be necessarily referred to the Tribunal for full trial. Such limited jurisdiction vested with the Court, is necessary at the pre-reference stage to appropriately balance the power of the Tribunal with judicial interference. [Para 66][1176-E-G]

20. The amendment to the aforesaid provision was meant to cut the dead wood in extremely limited circumstances, wherein the respondent is able to ex-facie portray non-existence of valid arbitration agreement, on the documents and the pleadings produced by the parties. The prima facie view, which started its existence under Section 45 through *Shin-Etsu Case has been explicitly accommodated even under domestic arbitration by the 2015 amendment with appropriate modifications. [Para 67][1176- D G-H; 1177-A]

21. If the ‘good arguable case standard’ is integrated for a party requiring to show non-existence, then the same would amount to judicial activism. Such attempts to integrate alien formulations into the Act, which has already suffered sufficient judicial subjectivism, needs to be dissuaded. [Para 68][1177-B- C] Duro Felguera, S.A. v. Gangavaram Port, (2017) 9 SCC 729:[2017] 10 SCR 285 – relied on

22. The existence of arbitration agreement does not mean anything unless such agreement is contractually valid. A mere agreement is not legally binding, unless it satisfies the core contractual requirements, concerning consent, consideration, legal relationship, etc. Therefore, the scope of the Court to examine the prima facie validity of an arbitration agreement includes only the determination of the following: Whether the arbitration agreement was in writing? Or Whether the arbitration agreement was contained in exchange of letters, telecommunication, etc? Whether the core contractual ingredients qua the arbitration agreement were fulfilled? On rare occasions, whether the subject-matter of dispute is arbitrable? [Para H 69][1178-A-B]

VIDYA DROLIA AND OTHERS v. 1037 DURGA TRADING CORPORATION

Mayavati Trading Pvt. Ltd. v. Pradyuat Deb Burman, A (2019) 8 SCC 714 : [2019] 12 SCR 123; Garware Wall Ropes Ltd. v. Coastal Marine Construction and Engineering Ltd., [2019] 9 SCC 209: [2019] 5 SCR 579 – relied on.

23. The negative language used in the Section 8 is required B to be taken into consideration, while analyzing the Section. The Court should refer a matter if the validity of the arbitration agreement cannot be determined on a prima facie basis. Therefore, the rule for the Court is ‘when in doubt, do refer’. [Para 69][1178-C-D] C

24. Moreover, the amendment to Section 8 now rectifies the short-comings pointed out in the ***Chloro Control Case with respect to domestic arbitration. Jurisdictional issues concerning whether certain parties are bound by a particular arbitration, under group-company doctrine or good faith, etc., in a multi-party arbitration raises complicated factual questions, which are best left for the tribunal to handle. The amendment to Section 8 on this front also indicates the legislative intention to further reduce the judicial interference at the stage of reference. [Para 70][1178- D-F]

25. Courts, while analyzing a case under Section 8, may choose to identify the issues which require adjudication pertaining to the validity of the arbitration agreement. If the Court cannot rule on the invalidity of the arbitration agreement on a prima facie basis, then the Court should stop any further analysis and simply refer all the issues to arbitration to be settled. [Para F 71][1178-F-G]

26. The statutory language of Section 8 and 11 are different, however materially they do not vary and both Sections provide for limited judicial interference at reference stage. They have the same ambit with respect to judicial interference. Usually, G subject matter arbitrability cannot be decided at the stage of Sections 8 or 11 of the Act, unless it’s a clear case of deadwood. The Court, under Sections 8 and 11, has to refer a matter to arbitration or to appoint an arbitrator, as the case may be, unless a party has established a prima facie (summary findings) case of non-existence of valid arbitration agreement, by summarily H

p. 1038

A portraying a strong case that he is entitled to such a finding. [Paras 73 and 75][1179-B-H] ***Chloro Controls India Private Ltd. v. Severn Trent Water Purification Inc., (2013) 1 SCC 641: [2012] 13 SCR 402; **Duro Felguera, S.A. v. Gangavaram Port B (2017) 9 SCC 729: [2017] 10 SCR 285; Mayavati Trading Pvt. Ltd. v. Pradyuat Deb Burman (2019) 8 SCC 714: [2019] 12 SCR 123; Avitel Post Studioz Limited v. HSBC PI Holdings (Mauritius) Limited 2021 (4) SCC 713; Booz Allen and Hamilton Inc. v. SBI Home Finance Ltd. (2011) 5 SCC 532; A. Ayysamy v. A. C Paramsivam, (2016) 10 SCC 386:[2016] 11 SCR 521; Emaar MGF Land Limited v. Aftab Singh (2019) 12 SCC 751 : [2018] 14 SCR 791; Garware Wall Ropes Ltd. v. Coastal Marine Construction and Engineering Ltd., [2019] 9 SCC 209: [2019] 5 SCR 579 – relied on. D Himangni Enterprises v. Kamaljeet Singh Ahluwalia, (2017) 10 SCC 706[2017] 10 SCR 139; ICICI Bank Ltd. v. Sidco Leathers Ltd. (2006) 10 SCC 452:[2006] 1 Suppl. SCR 528; Konkan Railway Corpn. Ltd. v. Mehul Construction Co. : [2002] 1 SCR 728; Konkan E Railway Corporation Ltd. v. Rani Construction (P.) Ltd., (2002) 2 SCC 388:[2000] 2 Suppl. SCR 563; SBP & Co. v. Patel Engineering Ltd., (2005) 8 SCC 618 : [2005] 4 Suppl. SCR 688; *Shin-Etsu Chemical Co. Ltd. v. Aksh Optifibre Ltd.(2005) 7 SCC 234 : [2005] 2 Suppl. SCR 699 ; Shree Ram Mills Ltd. v. Utility Premises (P) F Ltd., (2007) 4 SCC 599 : [2007] 4 SCR 279; National Insurance Company Limited v. Boghara Polyfab Private Limited (2009) 1 SCC 267: [2008] 13 SCR 638; Arasmeta Captive Power Company Private Limited v. Lafarge India Pvt. Ltd., (2013) 15 SCC 414: [2013] G 17 SCR 496; Oriental Insurance Company Ltd. v. Narbheram Power and Steel Private Limited (2018) 6 SCC 534: [2018] 4 SCR 826; Vulcan Insurance v. Maharaj Singh (1976) 1 SCC 943: [1976] 2 SCR 62; United India Insurance Company Limited v. Hyundai

H

VIDYA DROLIA AND OTHERS v. 1039 DURGA TRADING CORPORATION

Engineering and Construction Company Limited & Ors. A (2018) 17 SCC 607 : [2018] 12 SCR 1085; United India Insurance Company Limited v. Antique Art Exports Private Limited (2019) 5 SCC 362:[2019] 5 SCR 521; New India Assurance Co. Ltd. v. Genus Power Infrastructure Ltd., (2015) 2 SCC 424: [2014] B 12 SCR 360 – referred to. The London Steamship Owners’ Mutual Insurance Association Ltd v The Kingdom of Spain and The French State [2015] EWCA Civ 333; Noble Denton Middle East v. Noble Denton International Ltd., [2010] EWHC 2574 (Comm.) – referred to. C

Commentary on the Law of Arbitration, Vol. I, 4th Ed., p. 317. by Justice Indu Malhotra; 246th Law Commission Report – referred to Case Law Reference D In the judgment of Sanjiv Khanna, J.: [2017] 10 SCR 139 overruled Para 1 [1981] 2 SCR 466 relied on Para 4 (2011) 5 SCC 532 relied on Para 4 E [2017] 10 SCR 285 relied on Para 5 [1999] 3 SCR 490 relied on Para 5 [2016] 7 SCR 102 relied on Para 5 [1968] 3 SCR 662 relied on Para 5 F [2018] 14 SCR 791 relied on Para 5 [2003] 3 SCR 558 referred to. Para 16 [2005] 4 Suppl. SCR 688 referred to. Para 17 held inapplicable Para 96 G

[2012] 13 SCR 402 relied on. Para 17 [2016] 11 SCR 521 relied on. Para 24 [1976] 1 SCR 427 relied on. Para 26 H

p. 1040

A [2000] 3 SCR 113 relied on. Para 28 [1999] 3 SCR 1279 relied on. Para 32 [2000] 3 Suppl. SCR 379 relied on. Para 32 [2006] 9 Suppl. SCR 785 relied on Para 34 B [2017] 13 SCR 800 relied on Para 35 [2018] 1 SCR 1096 relied on Para 35 2013 (134) DRJ 566 (FB) overruled Para 36 [2009] 15 SCR 371 overruled Para 37 C [1962] SCR 702 relied on Para 37 2021 (4) SCC 713 relied on Para 43 (2019) 8 SCC 710 relied on Para 43 2021 (4) SCC 786 relied on Para 44 D [2000] 2 Suppl. SCR 563 referred to Para 55 [2002] 1 SCR 728 referred to Para 55 [2008] 13 SCR 638 relied on Para 59 [2013] 17 SCR 496 relied on Para 62 E [2005] 2 Suppl. SCR 699 relied on Para 63 [2019] 12 SCR 123 relied on Para 65 [2019] 5 SCR 579 relied on Para 68

F [2014] 2 SCR 855 referred to Para 68 [2018] 12 SCR 1085 relied on Para 68 [2018] 4 SCR 826 referred to Para 68 [1976] 2 SCR 62 referred to Para 69 G 2018 (10) SCC 525 referred to Para 71 [1974] 2 SCR 240 referred to Para 82 [1960] SCR 49 referred to Para 82

H

VIDYA DROLIA AND OTHERS v. 1041 DURGA TRADING CORPORATION

[2013] 5 SCR 200 relied on Para 86 A [2014] 12 SCR 573 relied on Para 92 [2017] 10 SCR 285 relied on Para 92 [2009] 10 SCR 373 relied on Para 92 [2005] 4 Suppl. SCR 688 referred to Para 92 B In the judgment of N.V. Ramana, J.: [2017] 10 SCR 139 referred to Para 4 [2019] 12 SCR 123 relied on Para 11 C [2006] 1 Suppl. SCR 528 referred to Para 19 [2002] 1 SCR 728 referred to Para 29 [2000] 2 Suppl. SCR 563 referred to Para 29 [2005] 4 Suppl. SCR 688 referred to Para 30 D [2005] 2 Suppl. SCR 699 referred to Para 33 [2007] 4 SCR 279 referred to Para 34 [2008] 13 SCR 638 referred to Para 35 [2012] 13 SCR 402 relied on Para 36 E [2013] 17 SCR 496 referred to Para 37 [2017] 10 SCR 285 relied on Para 38 [2018] 4 SCR 826 referred to Para 39 [1976] 2 SCR 62 referred to Para 39 F [2018] 12 SCR 1085 referred to Para 40 [2019] 5 SCR 521 referred to Para 41 [2019] 12 SCR 123 relied on Para 42 2021 (4) SCC 713 relied on Para 52 G (2011) 5 SCC 532 relied on Para 55 [2016] 11 SCR 521 relied on Para 56

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p. 1042

A [2018] 14 SCR 791 relied on Para 57 [2014] 12 SCR 360 referred to Para 63 [2019] 5 SCR 579 relied on Para 69 CIVIL APPELLATE JURISDICTION : Civil Appeal No. 2402 of 2020. B From the Judgment and Order dated 07.09.2019 of the High Court of Calcutta in A.P. No. 286 of 2016. With Special Leave Petition (Civil) Nos. 5605-5606 of 2019 and Special Leave Petition No. 11877 of 2020. C Manoj Swarup, Sunit S. Shah, K.V.. Vishwanathan, Nakul Dewan, Maninder Singh, Sr. Advs., Debajyoti Basu, Ms. Soumya Dutta, Ajay Kumar, Pinakin M. Raval, Pathik Acharya, Neelmani Pant, Ms. Vidisha Swarup, Ashish Chaubey, Kumar Shivam, Rajith Kumar, Gopal Shankarnarayanan, Ashok Kumar Jain, Amar Dave, Pankaj Jain, Bijoy Kumar Jain, Amit Kasera, Vishal Sinha, Mukunda Rao, Raghav Shankar, D Pradhuman Gohil, Mrs. Taruna Singh Gohil, Ms. Ranu Purohit, Sambit Nanda, Rohan Naik, Bijal H. Chhatrapati, Anjali Anchayil, Ms. Avni Sharma, Prabhas Bajaj, Dheeraj Nair, Saurav Agarwal, Kunal Chatterji, P.C. Sharma, T. R. B. Sivakumar, Ansuman Choudhury, Pravar Veer Misra, Vibhu Anshuman, Ms. Aakriti Dawar, Advs. for the appearing parties. E